Liontrust Sustainable Future Managed Fund

Key takeaways

• Global equities rose in Q3, driven by resilient economic data and optimism over interest rate cuts, with gains led by AI-focused technology stocks — creating a challenging environment for the Fund.
• The UK equity portfolio detracted from performance, with mid- and small-cap holdings trailing the wider market.
• Top performers for Q3 Alphabet, Cadence Design Systems and Advantest. London Stock Exchange Group and Morningstar were among the detractors.
• In Q3, we added a position in Cava, ServiceTitan and Zscaler, while selling our position in TransMedics.

Performance

The Liontrust Sustainable Future Managed Fund returned 2.3% over the quarter, versus the 5.3% IA Mixed Investment 40-85% Shares sector average. (the comparator benchmark)*.

Market review

Global equity markets delivered positive returns in the third quarter of 2025, supported by resilient economic data and growing optimism over potential interest rate cuts. Easing geopolitical tensions and reduced trade risks allowed investors to refocus on inflation trends, policy trajectories and fiscal dynamics. The technology sector led equity gains, with companies exposed to artificial intelligence continuing to attract strong investor enthusiasm. A small group of mega-cap names posted substantial gains on robust earnings and momentum around the AI theme, narrowing market leadership and making it harder for diversified portfolios to keep pace. 

In fixed income markets, inflation across major economies appeared contained to mixed, though political developments and institutional pressures often intersected with central bank communication. In the US, Treasury yields fluctuated amid shifting Federal Reserve expectations and fiscal concerns before ending the quarter firmer. UK gilts were volatile, influenced by a cautious Bank of England rate cut and a challenging fiscal backdrop, while German Bunds remained comparatively stable as Euro-area data hovered near target and French political uncertainty kept spread risk in focus. By quarter-end, 10-year yields stood around 4.13% in the US, 4.73% in the UK, and 2.71% in Germany.

Portfolio review

The Fund experienced a challenging third quarter of 2025, following a strong second-quarter rebound.

The two largest detractors over the period were data service providers London Stock Exchange Group (-20%) and Morningstar (-25%). These companies supply unique and essential datasets to financial market participants and remain well positioned to benefit from the long-term trend toward greater transparency and data-driven decision-making. However, LSEG’s share price weakness reflected investor concerns that its business model could face disruption from advances in AI. 

Earnings estimates for both companies have continued to be upgraded over the last two years, yet share prices have fallen sharply of late despite no material change in underlying expectations. This move appears to be driven by a narrative that large-language models (LLM) could create competing data providers at a fraction of the cost. We believe LSEG and Morningstar are more than “pure data” suppliers and that their products cannot be replicated by an LLM.

While we acknowledge these risks and continue to monitor them closely, we believe the market may be underestimating the ability of these firms to adapt. Both LSEG and Morningstar are deeply integrated into their clients’ workflows, and we view it as more likely that they will leverage AI to enhance their product offerings and efficiency rather than be displaced by it.

Elsewhere, healthcare continued to weigh on returns, both this year and in previous periods. We have been actively repositioning within the sector, and recent months have shown encouraging signs of progress. Nonetheless, the industry still faces headwinds, including subdued post-Covid investment, weak demand, and ongoing US regulatory uncertainty.

We remain confident in our long-term positioning, with approximately 18% of the portfolio allocated to healthcare – around 9% overweight relative to the benchmark. We believe current valuations represent a generational buying opportunity, particularly as the market has become increasingly short-term in its focus. 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.

On the positive side, given the broader market’s AI-fuelled gains, it’s no surprise that several of the Fund’s leading contributors this quarter were closely aligned with this theme, including: Alphabet (+41%), Advantest (+37%), Cadence Design Systems (+16%) and ASML (+25%).

With regards to corporate newsflow, Alphabet, which is held under our Providing education theme, posted double-digit revenue and profit growth as the integration of AI across its services began to yield results and demand for cloud computing surged. Earnings exceeded expectations, with net income rising 19% and core search and advertising revenues advancing 12%. The company also benefited from a favourable court ruling that eased antitrust concerns, providing an additional boost to investor sentiment.

Advantest’s shares gained after raising its full-year operating profit forecast by 24%, reflecting strong demand for semiconductor testing equipment used in AI applications. It now expects operating profit of ¥300 billion for the year to March 2026, up from a previous estimate of ¥242 billion. Held under our  Better monitoring of supply chains and quality control, Advantest provides equipment that tests semiconductors for defects, ensuring that electrical components meet strict safety requirements in applications such as automotive, as well as reducing waste in the semiconductor fabrication process.

Cadence Design Systems was a top performer after resolving legal proceedings with the US government and lifting its full-year outlook. Shares gained following second-quarter results showing revenue of $1.28 billion, a 20% year-over-year increase. The results included a $140.6 million one-time charge related to settlements with the US Department of Justice and Department of Commerce over operations in China. The company now projects 2025 revenue between $5.21-$5.27 billion, up from its previous estimate of $5.15-$5.23 billion.

Cadence, a long-term holding, saw some weakness earlier in 2025, but its software tools remain integral to customers at the forefront of technological innovation. As the adoption of AI accelerates, demand for Cadence’s design solutions continues to grow, reinforcing their critical role in enabling next-generation semiconductor development.

Away from the AI-driven rally, TopBuild’s (+23%) share price was supported by resilient second-quarter results, which demonstrated the company’s ability to sustain strong profitability despite a softer construction backdrop. Revenue growth remained steady, underpinned by robust pricing and continued demand in commercial and industrial end markets, while cost efficiencies and disciplined execution helped deliver an adjusted EBITDA margin of around 20%.

Elsewhere, the UK portfolio was a source of underperformance in a market dominated by large-cap, value-oriented stocks, with banks among the strongest performers. While the broader UK equity market has risen sharply, our mid- and small-cap holdings lagged.

A key factor has been the domestic focus of UK mid and small caps, which have struggled as the UK economy continues to disappoint. Nevertheless, valuations across the UK market – particularly in the segments where we invest – remain attractive, offering compelling long-term opportunities. Although economic momentum remains weak, lower interest rates could act as a catalyst to revive activity and support a turnaround in portfolio performance.

Fixed income review

Credit was the main driver of performance. Markets continued to perform strongly throughout the quarter, with healthy corporate fundamentals and low default-risk expectations supporting spreads, even as political and fiscal uncertainties occasionally weighed on sentiment. Investor demand for corporate bonds remained robust, and spreads tightened further over the period. The Fund benefited from strong sector allocation, with banks and REITs making significant contributions as spreads continued to narrow. Insurance and utilities also added incremental gains. Given tighter valuations in some areas, we trimmed exposure to more expensive telecom issuers to preserve flexibility.

Credit fundamentals have softened somewhat, with interest coverage ratios declining as higher financing costs have pushed up overall funding expenses. Leverage has also returned to long-term averages, reflecting both increased debt and slower EBITDA growth due to weaker revenues and rising costs. Nevertheless, these metrics remain at healthy levels. We expect that outperformance will increasingly be driven by credit selection, an area where we have a strong track record.

Asset allocation

Our asset allocation positioning remained unchanged over the quarter. We maintain overweight positions in both global and UK equities, and underweight positions in cash and government bonds. We remain neutral on UK and European corporate bonds.

We believe broader global economic activity is nearing an inflection point, despite sluggish growth outside sectors benefiting from the ongoing AI infrastructure build-out. Equity markets have also been supported by interest rate cuts implemented during 2025. While credit remains fundamentally attractive, concerns about the impact of fiscal pressures in the UK on gilt yields lead us to retain a neutral stance on credit and an underweight position in gilts.

Trading activity

We sold our position in TransMedics over the quarter. This was driven by a combination of factors that together undermined our conviction in the stock. Initially, we accepted the somewhat aggressive style of management given the strength and impact of the company’s product, but over the past year our concerns have grown about the implications of this approach to the business more generally.

At the same time, competitive pressures from normothermic regional perfusion (NRP) have become more significant than we first anticipated, as its cost advantages represent a greater risk despite ongoing ethical debates and the continued need for the organ care system (OCS). Finally, there is the potential for political risk, particularly if US policy were to challenge the cost-plus model for organ transplants, which could expose TransMedics’ revenue model to scrutiny.

After a terrible run into the end of 2024 the shares went on to more than double in 2025 and so we took the opportunity to exit the position. We sold TransMedics to create capacity for Cava, which we view as a higher-conviction holding despite both companies being volatile investments. Given our limited ability to allocate to such positions, this decision reflects our discipline in prioritising opportunities where we see the strongest long-term potential.

Cava operates a rapidly expanding network of restaurants across the US, offering fresh and healthy Mediterranean cuisine. Its model combines speed and convenience with quality, allowing customers to build their own meals from a selection of freshly prepared vegetables and proteins at a walk-through counter. By focusing on minimally processed, whole-food ingredients, Cava is enabling healthier eating habits in a country where nearly 75% of adults are overweight or obese.

We added ServiceTitan under our Enabling SMEs theme. The company provides a software platform designed for tradespeople such as plumbers and electricians – an underserved segment – helping them operate more efficiently, scale faster, and build resilience. Founded by sons of tradesmen to reduce administrative burdens, the co-founders continue to lead the business today.

We also purchased Zscaler, a leader in Secure Access Service Edge (SASE) solutions that offer more efficient and secure protection than traditional firewalls. Benefiting from rising cloud adoption, Zscaler processes over 500 billion transactions daily, blocks 150 million+ threats, and delivers 250,000 security updates per day across 160+ data centres. All revenues align with our Enhancing digital security theme.

Outlook

Looking ahead, we expect a broadening of economic growth to catalyse the next phase of market leadership beyond the “Magnificent Seven.” The current concentration of returns within the index rivals levels last seen during the dot-com bubble. We anticipate an upcoming shift in market leadership that should align well with our investment process and provide renewed support for mid-cap stocks.

We remain positive on the outlook for corporate bonds, supported by attractive all-in yields and the carry available at current spread levels. While spreads have narrowed considerably from their recent wides, we have used this environment to upgrade credit quality and reduce spread duration within the portfolio.