Liontrust Sustainable Future Cautious Managed Fund

• Markets experienced notable volatility in Q2 2025, driven by uncertainty around tariff policy and conflict in the Middle East
• Top equity performers for Q2 included Advantest, Spotify and TransMedics. Becton Dickinson and Thermo Fisher were among the detractors.
• We believe corporate bonds continue to offer attractive value, providing solid compensation relative to their underlying fundamentals.
• Over the quarter, we added under our Improving the resource efficiency of industrial and agricultural processes theme, while selling our position in TechnoPro.
• We have made the strategic decision to close the infrastructure asset class across our Managed Funds.

The Fund returned 5.0% over the quarter, versus the 3.9% IA Mixed Investment 40-85% Shares sector average (the comparator benchmark)*.

Market review

Markets experienced notable volatility in Q2 2025, driven by uncertainty around tariff policy and conflict in the Middle East. Despite these headwinds, most major asset classes ended the quarter with gains as worst-case scenarios were avoided and underlying economic data remained solid.

The announcement of tariffs on 2nd April, known as “Liberation Day”, triggered a sharp market selloff, with both equities and bonds reacting strongly. However, the US administration quickly moved to ease tensions by pausing tariffs for 90 days and outlining a trade agreement with China. This policy shift helped restore investor confidence, leading to a broad recovery in risk assets.

It was encouraging to see positive performance from our UK equity holdings over what was a highly volatile quarter, during which tariff concerns overshadowed the broader macroeconomic picture in April. The subsequent recovery was driven by robust financial results and optimistic outlook statements from many of our UK portfolio companies. We believe the UK domestic economy is poised for greater stability and modest growth. Companies exposed to this environment are well positioned to benefit from any return to more typical economic conditions.

Mega-cap tech stocks rebounded strongly, supported by renewed optimism and robust earnings. After a weak first quarter, the ‘Magnificent 7’ outperformed significantly. Encouragingly, the Fund delivered strong relative performance despite an underweight allocation to this group of stocks, which were a key driver to market returns.

Fixed income portfolio review

Recent data highlighted continued weakness in UK GDP growth, a loosening labour market, and subdued consumption trends. These developments have reinforced expectations for a more aggressive monetary easing cycle, leading to outperformance in UK government bonds during the quarter – 10-year gilt yields fell 19bps to 4.49%. At the start of the quarter, the Fund held a long duration position versus the benchmark, entirely expressed through UK exposure. Following a rally in 10-year gilts to around 4.40%, we trimmed this position, ending the quarter 0.5-years overweight.

Within corporate bonds, the financials sector was the strongest contributor, driven by our overweight in insurance and effective stock selection. Our allocation to the banking sector contributed positively to performance. We have reduced our exposure to banks and continued to move up the capital structure within financials. We still like the sector but as spreads have compressed close to fair value, the compensation from having a larger allocation to higher beta sectors has declined and therefore so has our position.

Equity portfolio review

The top performer in Q2 was Advantest (+61%), the Japanese manufacturer of semiconductor testing equipment and electronic measuring instruments, whose shares surged on the back of strong financial results and rapidly increasing demand for AI and high-performance computing (HPC) chips. The company posted a 60.3% increase in revenue to ¥779.7 billion and a 159% rise in net income to ¥161 billion, fuelled by a favourable product mix, a weaker yen, and an 80% jump in sales from its semiconductor test systems segment as chipmakers accelerated investments in advanced testing solutions.

We were particularly encouraged by Advantest’s strong performance this quarter following our recent decision to add the company to the portfolio as part of our strategy to increase exposure to the AI theme. We believe the company is well-positioned for continued growth into 2026 and beyond, with its market-leading role in semiconductor testing becoming increasingly valuable as chips grow more complex.

Spotify (+31%) continued its strong performance with Q1 2025 results reflecting robust user and subscriber growth, with monthly active users (MAUs) rising 10% year-over-year to 678 million and premium subscribers increasing 12% to 268 million. Revenue climbed 15% year-over-year to €4.2 billion. However, both earnings per share (EPS) and total revenue came in slightly below analyst expectations. Despite the shortfall, CEO Daniel Ek reiterated the platform’s resilience amid economic uncertainty and highlighted strong user engagement and retention as key strengths supporting long-term momentum.

Medical technology company TransMedics (+88%) rose sharply during the period. Held under our Enabling innovation in healthcare theme, TransMedics had a very poor second half of 2024 and there was a large amount of scepticism as to whether the company could reaccelerate revenue growth. In this light, its most recent results were extremely impressive: revenues grew 48% year-over-year and net income more than doubled to $26 million in the quarter.

Among the detractors was Becton Dickinson (-29%). c.$60 billion market capitalisation business in the healthcare sector, listed in the United States. The company’s products enhance medication management, patient safety, infection prevention, surgical procedures, drug delivery, anaesthesiology care, disease diagnosis, and cellular research

Becton Dickinson’s share price fall was confounding to us. Revenues missed consensus by 1.5% in the quarter but better-than-expected operating margins led to a 2% beat to earnings per share. Organic revenue growth for the full year 2025 was lowered from 4-4.5% to 3-3.5%. There are lots of headwinds facing the business at present, from weakness in China, to National Institutes of Health funding cuts in the US, to tariff headwinds, so we think a 1% cut to organic topline growth isn’t too bad in this context. The fall leaves the shares on less than 12x forward earnings, which for the quality and resilience of the business, is far too low in our opinion. A recent investment in the Fund, we are frustrated that we were a few months too early on our entry, but remain confident for the shares to perform well in the coming years from this low base.

Thermo Fisher (-23%) was also among the detractors as the life-science industry continues to be in recovery mode following the post-pandemic issues with inventory, as well as ongoing weakness from China. While many of these issues are beginning to pass, the incremental headwind for its core pharmaceutical and biotechnology customer base from the Most Favoured Nation (MFN) legislation led to a multiple derating over the quarter. Thermo is a high quality business, and we remain confident it can again grow its revenue and earnings, but the market has lost patience with it and the wider Life Science group.

Over the quarter, we added Ingersoll Rand under our Improving the resource efficiency of industrial and agricultural processes theme. The company sells energy-efficient industrial equipment that are crucial for a wide range of end markets. Compressors are ubiquitous to manufacturing, and uptime of equipment is crucial for efficient industrial processes. Compressors also account for 10% or more of electricity expense in the manufacturing sector, with the opportunity to reduce over 40% of that by identifying inefficiencies in equipment and wider air systems.

With regards to exits, TechnoPro has been a lower-conviction holding over the past 12 months, following an underwhelming meeting with management in Tokyo last June. The core business has faced challenges retaining staff at the margins, as wage increases among Japan’s blue-chip companies have begun luring employees back. Additionally, its acquisition of Robosoft, a fully outsourced IT consulting firm in India, has underperformed amid a broader slowdown in demand for IT consulting services.

We remained patient in identifying an appropriate exit point, and shares surged by 20% last month on rumours that the management team may take the business private. This provided an opportunity to exit the position closer to our long-term valuation target.

Asset allocation

We have made the strategic decision to close the infrastructure asset class across our Managed funds.

In the context of a higher interest rate environment, infrastructure assets offer limited relative value. At the same time, we are identifying more compelling opportunities in both government and corporate bonds, where we continue to diversify beyond the UK market.

Given its small size within the overall portfolio and diminishing strategic relevance, infrastructure no longer warrants a dedicated asset class designation.

We remain cautious about the fiscal outlook in developed market economies, especially regarding long-duration bonds, so have reduced exposure to the long end. In the UK, we’re comfortable with our duration overweight based on economic trends and interest rate expectations, but remain mindful of fiscal risks, particularly given developments in Germany and the US.

Credit spreads have tightened, surpassing pre-'Liberation Day' levels. As such, this feels a sensible time to reduce exposure. While we see no major issues in sterling or euro credit, the relative upside appears limited versus other asset classes – prompting a shift to a neutral stance.

Proceeds from reducing cash, government bonds, and credit overweights will be reallocated to global and UK equities.

We are more positive on equity markets over the second half of 2025. While growth remains somewhat subdued, the risk of an economic shock from a policy error from the Trump administration on tariffs is now minimal. We see earnings support from falling costs and operating leverage, and feel equities are the most attractive asset class.

Outlook

2024 presented severe headwinds for mid-cap investors, with the asset class facing a challenging backdrop due to macroeconomic uncertainty and shifting market sentiment. However, we believe these headwinds are now beginning to reverse. In our view, small and mid-cap areas of the market continue to offer some of the most compelling long-term investment opportunities, and we believe we are currently positioned at a very attractive entry point.

This conviction is further supported by current valuations, which remain well below historical norms. Many stocks within this cohort are trading at substantial discounts relative to their 20-year averages, offering a favourable risk-reward profile for long-term investors.

The same valuation opportunity is evident within our equity portfolio. A significant proportion of our holdings are trading at meaningful discounts to their five-year average valuations. This has resulted in an overall portfolio valuation that is materially below its five-year average, despite the fact that our holdings are delivering stronger revenue and earnings growth, alongside significantly higher return on equity.

Within fixed income, we continue to hold a strategic long duration stance, reflecting our expectation of declining yields amid weakening economic data and anticipated rate cuts from the Bank of England. While the near-term focus remains on fiscal policy and debt sustainability ahead of the Autumn budget, which could introduce volatility, our longer-term outlook anticipates more rate cuts than currently priced, justifying our overweight duration position.

While we believe corporate bonds continue to offer attractive value, providing solid compensation relative to their underlying fundamentals, further spread compression appears limited. Credit spreads, which had previously widened due to volatility stemming from US tariff policy, have since tightened and now trade close to fair value. Despite this, healthy fundamentals across the asset class – especially within the high-quality bonds held in the portfolio – mean that credit still provides a meaningful yield premium over gilts. We continue to identify selective opportunities within the market and are using these to move up in credit quality across the portfolio.

As we’ve highlighted on multiple occasions, the primary driver of the equity portfolio continues to be the global transition toward a more sustainable economy. This structural shift is underpinned by enduring economic, environmental, and societal imperatives that extend well beyond short-term market volatility or political developments—whether in the US or elsewhere.

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

*Source: FE Analytics, as at 30.06.25, total return, net of fees and income & interest reinvested.

**Source: FE Analytics, as at 30.06.25, primary share class, total return, net of fees and income & interest reinvested.