Liontrust Sustainable Future European Growth Fund

Key takeaways

• The third quarter saw European equities advance as sentiment improved and policymakers maintained low rates
• Our healthcare holdings continued to weigh on returns amid weak post-Covid demand and US regulatory uncertainty. We remain confident in our long-term positioning.
• ASML, ICON and Vestas Wind Systems were among the top performers, with CTS Eventim, Alcon and Lifco among the fallers.

Performance

The Fund returned -2.9% over the quarter, compared with the 4.8% return from the MSCI Europe ex-UK Index and the 3.0% IA Europe ex-UK sector average (both of which are comparator benchmarks)*.

Commentary

The third quarter saw European equities advance as sentiment improved and policymakers continued to provide reassurance. The European Central Bank kept rates unchanged at 2% and revised its growth expectations higher, signalling confidence in the region’s recovery. Meanwhile, the Federal Reserve’s decision to lower rates and hint at further easing added to the sense of optimism in global markets.

Our healthcare allocation has weighed on returns, both this year and in previous periods. The industry still faces headwinds, including subdued post-Covid investment, weak demand, and ongoing US regulatory uncertainty. 

Despite these near-term headwinds, we remain confident in our long-term positioning – driven by innovation and ageing demographics. We believe current valuations represent a generational buying opportunity, particularly as the market has become increasingly short-term in its focus – and we have selectively added to a few positions with the most attractive risk adjusted upside. Encouragingly, summer earnings revealed early signs of improvement, though sentiment toward the sector remains muted, especially given the policy direction of the current US administration.

We are also seeing positive momentum in life sciences. We continue to believe that pharmaceutical and biotechnology companies must invest heavily to replenish their pipelines, positioning them well for long-term growth.

The financials sector made a meaningful contribution to benchmark returns during the quarter. Although the Fund holds a modest position in the sector, it is  underweight versus the benchmark. European banking stocks have performed incredibly well over the year and quarter. Whilst we own three banks, these are the highest quality in terms of earnings and balance sheet strength and the market is currently rewarding those banks with the greatest earnings revisions related to higher-for-longer interest rates. We believe that, as a long-term owner of banks (+10 years typically), it pays to be in the highest quality banks rather than chasing near-term momentum.

With regards to stock specifics, CTS Eventim (-19%), the live entertainment and ticketing company reported that adjusted earnings before interest, tax, depreciation and amortization (EBITDA) declined marginally in the first half, slipping 0.8% to €200.5 million. Held under our Encouraging sustainable leisure theme, CTS Eventim noted that the slight decrease reflected higher cost pressures within its live entertainment operations, alongside integration expenses related to the recent acquisitions of See Tickets and France Billet. Q2 is a seasonal lows within the industry, which is more H2 and specifically Q4 weighted, as often tickets for live events are gifted during the Christmas break. We therefore believe that the higher acquisition-related integration costs and the slow quarter does not change the long-term outlook for the business. We have added to our position on this weakness.

American-Swiss medicaldevice specialist Alcon’s (-14%) share price declined following the release of weaker-than-expected second-quarter results and a downward revision to 2025 guidance. Held under our Enabling innovation in healthcare theme, the specialist in ophthalmology and eye surgery reported softer earnings momentum, citing the anticipated impact of tariffs and ongoing cost pressures.

Shares in Swedish dental and industrial equipment specialist Lifco (-14%) dropped after the company reported a 3.8% year-on-year decline in second-quarter net profit to SEK880 million, as margin pressures and slower organic growth outweighed the positive impact of recent acquisitions. Exposed to our Enabling healthier lifestyles theme, Lifco uses its scale manufacturing to reduce the turnaround times for dentists and patients to get the dental prosthetics. The company wins share with superior customer service, product quality and price. This is in contrast to the traditional model of small slow local labs making prosthetics and distributors carrying a small range of dental supplies at uncompetitive prices.

Turning to the positives, ASML (+25%) emerged as the strongest performer this quarter, benefiting from the renewed enthusiasm for AI-related names in the closing stages of the quarter.

ASML remains at the forefront of improving semiconductor fabrication through EUV development and holistic lithography. Smaller process nodes mean more chips per wafer in manufacture and smaller, cheaper, more reliable, more energy efficient and more powerful end products. These advances in semiconductor manufacturing underpin improvements in logic chips and the ever-greater processing power of our computers, which in turn drives almost every aspect of our technological, scientific and commercial breakthroughs.

Icon (+22%), a global clinical research organisation held under our Enabling innovation in healthcare, saw its shares rise after posting stronger-than-expected second-quarter earnings and raising full-year guidance. Adjusted earnings of $3.26 per share beat analyst estimates, while full-year 2025 revenue guidance was lifted to $7.85–$8.15 billion, up $50 million at the midpoint.

Within renewables, a lot has been made of President Trump’s potential impact on the energy sector, with investors wary of policy uncertainty. However, Vestas Wind Systems’ (+28%) shares surged after new guidance from US government agencies provided long-awaited clarity on how clean energy projects will qualify for tax credits. The rules proved to be more straightforward and less restrictive than expected, easing investor concerns and paving the way for increased investment in renewable energy projects, including wind. We added to the position at the start of the year, again with a longer-term view, and the subsequent announcement has validated this conviction. The clearer policy framework is expected to stimulate new turbine orders, driving optimism around Vestas’ growth prospects and lifting the shares sharply higher.