Liontrust GF UK Growth Fund

Key highlights

• Portfolio bias towards mid and small caps and the quality style factor represented factor headwinds relative to FTSE All-Share during Q3.
• Global stock market exuberance is currently being driven by value stocks, but economic uncertainty remains elevated – suggesting that businesses with quality characteristics may be better placed to withstand any volatility.
• New positions in Cranswick and Foresight were added to the Fund.

Performance 

The Liontrust GF UK Growth Fund returned -0.8%* in Q3. The Fund’s comparator benchmark, the FTSE All-Share, returned 6.9%.

Commentary

In Q3, global equity markets continued to recover from April’s tariff-triggered sell-off. While US trade policy remained a feature for market commentators, the agreement of deals with Japan and the EU helped boost sentiment and investors were increasingly willing to set the trade tariff saga aside and focus on corporate updates.

Equity market gains were aided by a US rate cut, which was increasingly priced into markets in the wake of data showing weaker than expected jobs creation. The Fed opted to cut by a quarter percentage point, its fourth cut since rates peaked in 2023, but the first in nine months. The Bank of England reduced interest rates by 25 basis points to 4%, its fifth cut in 18 months

The Fund’s underperformance against the FTSE All-Share Index was again driven at a high level by ongoing headwinds stemming from its long-term, high-conviction bias towards mid and small caps and the quality style factor, as well as sector exposures resulting from consistent application of the Economic Advantage investment process.

UK index performance was once again driven by large cap stocks, with the FTSE 100 rising 7.5% in total return terms, outperforming the mid-cap FTSE 250 (+2.7%), FTSE Small Cap ex-Investment Companies (-0.1%) and FTSE AIM All-Share (+2.0% at a headline level, but -2.5% excluding the natural resources sectors, Basic Materials & Energy).

As around 30% of the Fund’s assets are invested in stocks below the FTSE 100, compared to just 13% of the FTSE All-Share, this represented a headwind during the quarter.

The Fund’s sector exposure is an output of its active, stockpicking style, and results from the consistent implementation of the investment process. It has remained relatively consistent over time, with a significant overweight to industrials, healthcare and technology versus the benchmark thanks to the sectors’ strong intellectual capital characteristics. By contrast, the fund managers have made a long-term, high-conviction decision not to invest in banks/insurance subsectors within financials due to the belief that historically they have proved themselves to be very poor compounders of capital, with low earnings quality given their elevated risk profile and inescapable dependence on interest rate movements which are outside of their control. Similarly, the Fund avoids miners due to their reliance on prices of tangible assets – a factor over which they have no influence– rather than the intangible assets the team believes can confer sustainable competitive advantage.

However, this stance represented an asset allocation headwind in Q3, with banks, insurance and basic materials all delivering a strong contribution to benchmark return during the quarter: collectively they represented +3.4% of the FTSE All Share’s +6.9% return.

The usual stock-specific factors also naturally contributed in both directions to performance during the quarter.

Starting with the positives, shares in AstraZeneca (+11%) were the top portfolio contributor over the quarter. The shares had been under some pressure over the last year due to increasing rhetoric from the US administration around the potential to compel drug price reductions. Solid results from the pharma group during July served as a timely reminder to investors of the high quality and globally diversified growth profile of the business. 

At GSK (+15%) investors welcomed the confirmation of leadership succession at the end of the quarter, with longstanding CCO Luke Miels announced as the successor to Emma Walmsley, as widely anticipated.

Meanwhile, having both fallen heavily in the aftermath of Trump’s early April announcement of Liberation Day trade tariffs – threatening to dampen global trade, growth and energy consumption – BP (+18%) and Shell (+4.7%) continued a steady share price recovery as both unveiled quarterly profits that were better than expected, with large share buyback programmes maintained. 

A year ago, Next 15 Group (+42%) issued a profit warning triggered by the loss of a significant contract – in the Mach49 agency – and a softening of client spending from its technology customers in particular. The fund managers subsequently engaged at length with the company to form a better understanding of the factors at play, as well as steps that would be taken to return the company to a solid trading footing. 

Interim results released in September show that although the backdrop for discretionary marketing spend remains tough, the company is making solid operational progress, with financials on track to meet market expectations for the full year. Next 15 also demonstrated progress on its strategic initiative to consolidate its operations, in order to achieve efficiencies and focus on areas with the strongest long-term profitability and growth potential. In the pursuit of this initiative, 22 businesses within the portfolio have already been reduced to 12. 

WH Smith (-37%) was the largest portfolio detractor. It fell sharply following the retailer’s announcement of a significant downgrade to its full-year profit outlook. The move came after the company uncovered an overstatement in profits at its US division, prompting the appointment of an independent auditor to investigate. 

Domino's Pizza Group (-21%) cut its annual core profit forecast, citing rising labour costs and subdued customer demand as key pressures on performance. While the short term macro-economic backdrop is undoubtedly unhelpful, we were encouraged by the company’s focus on operational improvements, automation and digitisation, relentless pursuit of best-in-class customer service, and – most importantly – evidence of market share gains. 

Shares of Auction Technology Group (-29%)also fell following a profit warning.  Tariff uncertainty and a weak macroeconomic backdrop continue to impact auction transaction volumes, while profit margin guidance was downgraded on both organic mix effect (with higher shipping revenues carrying lower margin) and on the integration of an acquisition, which will be dilutive to group margin until planned synergies are realised. We topped up our holding on the share price weakness, reflecting a longer-term positive view of the growth runway (ex cyclicality), strong network effects, >40% EBITDA margins and attractive cash generation characteristics. 

Convatec (-19%) weakened as two separate pressures related to US government focus on reducing America’s cost of healthcare combined to hit sentiment. Convatec is a provider of medical products designed to help patients manage chronic conditions, including advanced wound care dressings, ostomy care devices, continence care products and infusion sets for diabetic insulin pumps.

We remain confident in the longer-term prospects for Convatec, which exhibits strong barriers to competition in the form of its intellectual property, with high levels of patents, R&D innovation and category know-how. It also enjoys market leadership positions in its core categories and has a significant strength in distribution, providing products and services in almost 100 countries around the world from nine manufacturing locations. However, the regulatory uncertainty provides an overhang to sentiment in the short term.

In terms of portfolio activity, Spectris exited the portfolio in August ahead of the completion of a takeover. The offer level from private equity group KKR was at a 96% premium to Spectris’s undisturbed share price – the latest clear signal of the latent value stored across many Fund holdings, and the UK stock market more generally. With the shares subsequently trading at a narrow discount to agreed terms, the decision was taken to reinvest the capital elsewhere. 

An exit was also completed from the de minimis residual position in Synthomer. Ongoing heightened difficulties in the macroeconomic backdrop have prolonged the period of uncomfortable balance sheet stretch for the company, which elevates the short-term risk profile. With much stronger compounding potential across the other stocks in the portfolio, we made the decision to exit. 

Two new holdings were initiated for the Fund: 

• Cranswick is a leading UK food producer, specialising in premium, innovative, and high-quality fresh and added-value food products, particularly in pork and poultry. A mid-cap stock towards the larger end of the FTSE250, Cranswick has been a staple of the London market for decades. Its track record of compounding growth is exemplary, having delivered 35 years of unbroken dividend growth and an annualised total return of over 18% during its time on the market. Its key intangible asset strength under the investment process lies in distribution, with a very high level of vertical integration in the form of ownership of feed mills, pig and poultry farms and 23 production facilities across the country. It also boasts deep, long-term strategic customer relationships with the large supermarkets, with a partnership approach to developing resilient supply chains, dedicated facilities and innovation for category growth. Cash flow returns on capital delivered by the business are notably strong and stable (currently around 12.0%)

• Foresight Group is a FTSE 250 alternative investment management business focusing on infrastructure ‘real assets’ and private equity investing. Its infrastructure division, which contributes approximately two thirds of the group’s profitability, caters to both institutional and retail clients looking for exposure to the energy transition, natural capital and core infrastructure. The high-margin private equity division has a network of offices across the UK investing in growth private equity, venture capital and private credit assets. Foresight enjoys a high level of recurring revenue, predominantly derived from management fees on long-term investment structures, which is currently running at 87% of total revenue, comfortably in excess of the 70% recurring revenue threshold required to count as a top-tier Economic Advantage asset under the investment process. The company boasts a very strong return on capital profile, with current CFROC of 33.8% (well ahead of the Fund’s average of 14.5% and wider UK universe average of 6.9%). Its medium-long term growth prospects are well underpinned by the structural growth tailwinds of the sustainable energy transition and strong flows into private market assets – prospects which are not reflected in current valuation multiples at a significant discount to both the wider market and the range of recent comparable peer transaction.

The portfolio’s companies continue to display the key hallmarks of quality that have underpinned strong long-term alpha generation from portfolios managed by the Economic Advantage team. 

Despite a prolonged period of underperformance of the Quality factor in recent years, the managers retain their high conviction in the ability of the portfolio’s companies – with high returns on invested capital, high margins, abundant free cash generation and strong balance sheet solvency – to outperform over the long term via consistent compounding of earnings growth.

Meanwhile, share prices across the portfolio are supported by modest valuations, both in comparison to global peers and their own long run average.

It is worth noting that the current exuberance in global stock markets (in particular in the US) and traditional Value sectors are belied by notable uncertainty across the global economy, from geopolitical conflicts and rising trade tensions to political upheaval and pressures on consumer spending.

Companies with strong Quality characteristics often prove their worth most clearly in times of elevated macroeconomic uncertainty, when resilient businesses with clear competitive advantage, pricing power and robust business models frequently demonstrate a superior ability to withstand exogenous shocks.

Taken together, these attributes give us the courage of conviction in the investment process and stylistic footprint that we believe stand the portfolio in good stead for future long-term outperformance.

Positive contributors included:

Renishaw (+25%), BP (+18%), GSK (+15%), AstraZeneca (+11%) and Shell (+4.7%).

Negative contributors included:

WH Smith (-37%), Auction Technology Group (-29%), Domino’s Pizza Group (-21%), ConvaTec Group (-19%) and RELX (-9.2%).

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