Liontrust US Opportunities Fund

Q4 2019 review

In the fourth quarter of 2019, the Liontrust US Opportunities Fund returned 1.4%*, versus the S&P 500 Index’s return of 1.3% and the IA North America peer group average return of 1.2%.

 

Portfolio Attribution

Performance over the quarter was helped by many of our holdings in the healthcare sector which lead the strong market rally (albeit reduced for sterling-based investors due to strength of the pound as a result of the Conservative general election victory). The rally was mostly cyclical in nature, helped by the US-China trade deal announcement and evidence of improving global macro momentum with PMIs bottoming. Furthermore, healthcare bounced impressively due to lower perceived risk of a Medicare for All, an NHS-type system, becoming a reality in the US. Elizabeth Warren, a Democrat presidential candidate, and key proponent of Medicare for All saw her impressive momentum in the polls stall during the quarter. This helped stocks including UnitedHealth, the health insurer, and HCA Healthcare, the hospital operator, to make up for a lacklustre 2019. In addition, our strongest performer was Horizon Therapeutics, a biopharma company, which reported strong take-up of Krystexxa, its gout treatment drug and towards the end of the quarter a favourable outcome from a FDA panel enhancing the outlook for its thyroid eye disease drug teprotumumab (tepro).

 

The biggest drags on performance came from the Fund’s technology exposure. The worst performers included Twilio and 8x8. Twilio reported a set of results that disappointed the market’s high growth expectations and mentioned billing process errors that have since been corrected. 8x8 suffered on the announcement that one of its major peers, RingCentral, had formed a partnership with Avaya, a more legacy communications provider, but with strong prospects to convert many of Avaya’s customers to RingCentral’s platform. This looks to have strong strategic merit and furthers RingCentral’s leadership position in the UCaaS market. We believe 8x8’s relative valuation to RingCentral more than reflects this and the market growth will bring significant opportunities for both companies. We continue to see both of these companies as “disruptor” companies benefiting from our central digital disruption theme which is driving a wide stake between the haves and have nots. The disrupters and their embracers are growing at the expense of the disrupted. This disruption dynamic is at the forefront of our minds in this Fund.

 

Outlook

We are concerned over what investors may be relying on as ‘safe assets’ ‒ especially in the consumer staples space – that are anything but. Low growth, high leverage and changing consumer preferences do not suggest ‘defensive assets’ in our view. Many of the companies that fall into this bracket have outperformed their fundamentals year to date, in our view, benefiting from Fed’s dovish pivot, marking an about turn in monetary policy, that has led to the sharp fall in the 10-year bond yield.

 

We instead manage the Fund using a clear process which emphasises research at the company level. We do not take large sector or factor bets, but we do take meaningful positions (up to ~5% of the Fund) in companies and management teams in which we believe for the long run. The portfolio is fairly concentrated (40-60 positions) and turnover remains low. Investors have repeatedly underestimated the power of network effects and the sustainability of historically ‘supernormal’ returns (seen mainly in the technology industry). The economy is becoming more concentrated as three-quarters of US industries have seen an increase in the concentration of wealth over the past two decades (source: Brookings Institute). We think this potentially offers higher sustainability of returns on capital and can underpin reasonable real returns for investors.

 

Our deepest-held conviction is that the US will – at some point – see a sustained and meaningful increase in productivity owing to innovation and the application of new technologies to less productive industries. Three out of four US workers have seen almost no increase in the productivity of their labour since 2000 – whereas 1 in 4 (concentrated in more digitised industries) has seen more than 50% improvement. This ultimately underpins our optimistic outlook on the US economy over the long term.

 

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

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust US Opportunities C Acc GBP

28.2

1.1

17.4

17.5

4.6

S&P 500

25.7

1.0

10.6

32.7

6.6

IA North America

24.4

-1.4

10.5

29.3

4.2

Quartile

1

2

1

4

3

 

*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, 11:00 AM