Liontrust UK Mid Cap Fund

Q4 2019 review

The Liontrust UK Mid Cap Fund returned 15.2%* over the fourth quarter of 2019. By comparison, the FTSE All-Share and FTSE 250 (excluding investment trusts) indices returned 4.2% and 11.6% respectively, while the IA UK All Companies sector average return was 7.0%. This performance saw the Fund rank 14th out of 256 competitors for the quarter, placing it in the first quartile of the peer group.

 

Market Overview

 

The broad UK market continued its good performance for the year into the fourth quarter. Both the Mid Cap index and the Small Cap index outperformed a rising market as markets anticipated positive outcomes to domestic and global political concerns. It was particularly pleasing to see strong UK markets at the same time as trade-weighted sterling appreciated. The obvious reason for such strong performance was the result of the general election which saw a sizable majority for the Conservative party and a rejection of Jeremy Corbyn’s political agenda. Notwithstanding the positive reaction of risk assets to the election outcome, we continue to believe it is important to focus on economic risk (i.e. capital preservation) rather than benchmark risk at this stage in the cycle. There remains significant potential for corporate margin pressure to build in coming years – whether in the form of increased wages, taxation or financing costs.

 

Portfolio Attribution

 

Strong performance over the quarter came from a long-term holding, Consort Medical, which announced it had been approached to be bought at a significant premium by Recipharm, a Swedish competitor. We believe there is still potential for an improved offer to be made but, nonetheless, it was pleasing to see a trade buyer validate the Global Equity team’s secular industry and company-specific work. Strong performance also came from SThree, the recruitment specialist, as the market belatedly recognised many of the long-term drivers of its end market, as well as company specific valuation. EasyJet was another strong performer for the Fund as our investment thesis regarding improved pricing for the industry came to fruition. However, we sold the position in full as it was announced the stock would enter the FTSE 100 index. A drag on performance over the quarter came from Equiniti, the financial outsourcing business, as it announced that Brexit-related uncertainty had impacted its end markets. We are confident that subsequent resolution of this uncertainty will lead to improved financial performance.

 

Outlook

 

It remains to be seen how long the positive glow of the election result will remain. Whilst the result removed some of the worst fears of the market, there remains considerable political uncertainty around the outcome of Brexit negotiations. We believe that this uncertainty is unlikely to disappear soon. We therefore remain underweight the more domestically orientated parts of the market such as retailers. The Fund’s limited exposure to UK-focused companies primarily targets stocks with structural earnings drivers and predictable earnings pipelines.

 

We remain confident in the prospects for selective UK mid- and small-cap companies, primarily because of attractive company-specific valuations but also due to the potential for further M&A activity. The Fund continues to make use of its ability to invest in large small-cap companies and we see exciting opportunities to invest in undervalued companies in this part of the market.

 

We continue to focus on maximising risk-adjusted performance over the business cycle by way of our style agnostic approach, structuring the Fund around the three silos of economic recovery, steady eddies and hidden fruits. While we are somewhat cautious of elevated valuations in the market, we believe that the current environment in selective mid- and small-caps continues to offer material opportunities for alpha generation.  We are excited by the investment opportunities in 2020 and believe there is significant potential for outperformance in the coming months and years.

 

Discrete years' performance** (%), to previous quarter-end:

 

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust UK Mid Cap C Acc GBP

18.8

-18.7

14.5

3.9

14.1

FTSE 250 (ex ITs) Index

30.8

-15.2

18.2

5.1

12.0

IA UK All Companies

22.3

-11.2

14.0

10.8

4.9

Quartile

3

4

2

4

1

 

*Source: Financial Express, as at 31.12.2019, total return (net of fees and income reinvested)

 

**Source: Financial Express, as at 31.12.2019, total return (net of fees and income reinvested)

 

For a comprehensive list of common financial words and terms, see our glossary here.

  

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, January 24, 2020, 10:45 AM