Liontrust Special Situations Fund

June 2020 review

The Liontrust Special Situations Fund returned -1.7%* in June.  The FTSE All-Share Index comparator benchmark returned 1.5% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 0.5%.

 

The market’s rebound from its Covid-19 losses stretched into the early days of June as investors continued to look beyond the immediate impact of the pandemic towards an economic recovery. This optimism was dented mid-month by a sober assessment of the situation by the US Federal Reserve, which is forecasting a 6.5% contraction in the US economy this year and no scope for interest rate rises until the end of 2022 at the earliest. The IMF added to the economic gloom, downgrading its estimate for 2020 global economic growth from -3.0% to -4.9%.

 

Investor unease was further deepened by news of spikes in US Covid-19 infection rates and a new outbreak in China. Despite this, the FTSE All-Share was able to retain some of its early-month gains. The Fund was unable to replicate the market’s positive return; this can be partially attributed to its lack of any bank holdings and low overall financials sector exposure. While this positioning has been a tailwind to relative returns so far this year, with the banks sub-sector returning -43% in the first five months while financials overall registered -27%, it reversed in June as banks rose 3.8% and financials as a whole gained 4.2%. The absence from the Fund of any miners, up 6.9% in June, was also a negative influence on relative returns.

 

Companies have now been operating within the new social and economic parameters presented by Covid-19 for a few months. As such, their updates to the stockmarket – while still characterised by huge uncertainties over the short-term outlook – have been able to provide more detail on the nature of trading during the pandemic than those issued in previous weeks.

 

For example, Rotork (+5.3%) was able to give a very welcome degree of detail on current trading. The actuator manufacturer saw production heavily disrupted in April, but its production facilities are now all open with reconfigured processes to allow for employee distancing. Revenues over April and May were around 14% lower year-on-year and the company expects the decline to be only marginally smaller over the six months to 30 September – assuming no resurgence in Covid-19 disruption. Based on recent trading it is also able to forecast a 16%-18% reduction in order intake over the six months, with oil & gas orders falling more heavily while water & power orders show resilience. 

 

Domino’s Pizza Group (-13.7%) has been one of the companies seen as best able to cope with the ‘new normal’ and its shares have been strong since a late-March trading update confirmed an acceleration in sales. Although its delivery capabilities have allowed sales to prove very resilient during lockdown, a June AGM trading update revealed that it has also incurred costs which have pushed earnings down slightly year-on-year. Costs incurred included a change in supply chain shift patterns and routes, payment of salary premiums, and provision of contact-free delivery boxes and face masks to franchisees. From the start of the year to 22 March, like-for-like sales grew by 3.5%; from this point to 14 June, growth accelerated to 6.1%. Collections had in 2019 accounted for 21% of sales and 31% of orders. This sales method ceased during lockdown, but an increase in higher-value delivery sales more than compensated.

Engineer Weir Group (+10.1%) issued a trading statement that included an update on liquidity as it sought to refinance a revolving credit facility. The facility of US$950m was refinanced from its original expiry date of September 2021 through to June 2023 at an interest cost that is only slightly higher than previous levels. It also extended an existing £200m loan through to March 2022 and commented that it has approval to access up to £300m via the government’s Covid Corporate Financing Facility.

Weir Group states that it continues to be highly cash generative, even in its Oil & Gas division, which has experienced a significant drop in activity levels in Q2. The division remains earmarked for sale. Minerals, Weir’s largest business unit, has experienced more resilient demand, with Q2 aftermarket and original equipment orders at a similar level to Q1 despite the impact of Covid-19. Its ESCO business, a specialist in surface mining ground engaging tools, has seen reasonable demand from the mining industry but its construction sales have been disrupted by industry shutdowns in North America and Europe.

Interim results from Caretech Holdings (+7.4%) covering the six months to 31 March delivered a financial performance that was in line with market expectations: an 8% increase in revenues to £209m and 25% improvement in underlying profit before tax to £25.9m. The operator of homes for “high acuity” patients and specialist children’s education services has been able to keep its facilities open during the Covid-19 crisis and has continued to receive funding from local authorities, the NHS and Public Health England.

Shares in Brooks Macdonald Group (+9.2%) moved higher over the course of June. Towards the end of the month, it announced the £9.6m acquisition of Lloyds Bank’s Channel Islands wealth management and funds business. The deal is expected to add around £1bn of assets split evenly between private client portfolios and unitised funds, implying a purchase price of only 1% of assets (if they can be fully retained post-acquisition). This deal comes relatively soon after its acquisition of Cornelian Asset Managers that completed in February, as the company looks to bolster growth inorganically in what is a consolidating sector.

 

The fall in RWS Holdings’ (-7.4%) shares followed substantial gains in April and May as it participated strongly in the market’s recovery and issued a reassuring trading statement. In June, it delivered interim results to 31 March showing that the initial Covid-19 impact was fairly limited, restricting revenues to £170m – a 1.6% fall year-on-year. The intellectual property and life sciences translation specialist describes subsequent sales in April and May as “very strong” and “strong” respectively and says that it is currently seeing a limited demand impact from Covid-19. This confident statement is backed up by the announcement of an interim dividend payment and the investment of around US$40m in two acquisitions: Iconic Translation Machines, a machine translation and artificial intelligence company, and Webdunia, a provider of translation, localization and technology services with strong footprint in India and Asia Pacific. The deals are consistent with RWS Holding’s acquisitive growth strategy.

We added a position in Bunzl to the Fund. The FTSE 100 constituent provides outsourced procurement and distribution of essential everyday items for customers that operate on a local, regional, national or international scale. Its possession of a core Economic Advantage intangible asset comes in the form of its distribution network, which stretches to over 30 countries and comprises 3,000 sales specialists and 2,600 customer services specialists. The company specialises in providing sectors with goods that are not for resale such as packaging, labels, cleaning & hygiene products and personal protection equipment.

 

Alpha FX was recently added to the Fund on the strength of its intellectual property. The company provides consultancy services and technologies to corporates and institutions looking to manage their currency exposures, with a particular focus on risk management, international payments and collections. The fund managers had been monitoring Alpha FX for over a year, and a recent fund raising provided the opportunity to initiate a position in the stock.

Positive contributors included:

Robert Walters (+15.9%), Weir Group (+10.1%), Caretech Holdings (+7.4%), Rotork (+5.3%) and YouGov (+4.8%).

 

Negative contributors included:

PayPoint (-18.6%), IntegraFin (-14.0%), Domino’s Pizza Group (-13.7%), IG Design (-12.8%) and Hargreaves Lansdown (-11.2%).

 

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust Special Situations I Inc

-7.7

6.5

15.3

23.0

6.9

FTSE All Share

-13.0

0.6

9.0

18.1

2.2

IA UK All Companies

-11.0

-2.2

9.1

22.5

-4.1

Quartile

2

1

1

2

1

 

*Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested), bid-to-bid, primary class.

 

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. Some of the Funds managed by the Economic Advantage team invest primarily in smaller companies and companies traded on the Alternative Investment Market.  These stocks may be less liquid and the price swings greater than those in, for example, larger companies. The performance of the GF UK Growth Fund may differ from the performance of the UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.

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, July 10, 2020, 3:20 PM