Liontrust Sustainable Future Managed Performance Review

Key points

• Equity markets ended the year on a positive note, delivering a third consecutive year of strong global returns. Performance was driven by capital investment in AI infrastructure, which again proved a key engine of growth for the global economy.
• Alphabet led equity performance on strong results and AI momentum, while our healthcare overweight also contributed, with Thermo Fisher and Intuitive Surgical among the top performers.
• In Q4, we added Mastercard, Cintas, Monolithic Power Systems and Progressive; exited ASM International, Morningstar, Bright Horizons and Croda International.
• Broader economic growth should drive a widening of market leadership, with falling interest rates and stabilising momentum supporting improved performance from small- and mid-cap stocks.
• We remain constructive on the outlook for corporate bonds going into 2026, with returns likely to be driven predominantly by carry rather than further material spread compression.
   

Equity market review

Equity markets finished the year positively, delivering a third consecutive year of strong global equity market returns. The driver over the year was capital investment in AI infrastructure, and this was again the key driver for growth within the global economy. 

AI infrastructure and semiconductors again led equity markets over the quarter. Leadership within the sector shifted, with memory stocks, particularly in Asia, seeing a sharp improvement. Growing demand from AI data centres pushed memory pricing higher, broadening performance beyond the pure AI plays to a wider group of semiconductor names. There was also a shift in terms of leadership amongst the Magnificent 7, as Alphabet began to sell its own chips, creating competition for Nvidia’s GPU chips with the AI sector. Alphabet’s Gemini updated 3.0 model was also launched, which is proving itself to be the most sophisticated of the LLMs on the market. This has begun to challenge the leadership of both OpenAI and Nvidia.

Another area of the market that continued its strong performance into the final quarter was banks. The steepening yield curve over the year has been a major tailwind for banks, given that their profit margins are driven by the shape of the yield curve. Short-term rates have fallen as central banks have cut rates, with inflationary pressures abating and a weakening labour market supporting lower rates. At the same time, fiscal pressures on governments across the world have intensified, pushing long-term rates higher. This continued into the fourth quarter, with banks among the strongest areas of the market.

Mining was a standout sector in the last quarter of 2025. Gold has been a consistently strong performer, but strength broadened to other metals, with copper particularly strong. The broader momentum has been driven by a weaker US dollar, supply shortages following years of underinvestment in capacity, and incremental demand from areas of the new economy such as AI data centres.

Healthcare also performed well, as the sector’s turnaround, which began in the third quarter, continued through year-end. Demand across the global healthcare system continues to normalise after two years of destocking following the Covid pandemic. Political pressure in the US also eased, as several large pharmaceutical companies signed deals to build capacity within the US.

The manager expects market leadership to broaden over 2026, having been unusually narrow in recent years and driven by a handful of mega-cap technology stocks. They have also seen growing competition within the AI space, which should support a broader leadership profile. As the funding source for AI shifts beyond the balance sheets of the hyperscalers and becomes increasingly reliant on debt, the manager expects pressure to build to translate the technology’s enormous potential into economy-wide improvements in returns on investment.

The manager also expect economic momentum to broaden, with more sectors benefiting from looser monetary policy globally. This should, in turn, support small- and mid-cap stocks, which have struggled as the wider economy has weakened. The manager expects the broadening to extend to areas such as housing and non-residential construction, which have found it difficult to emerge from a multi-year downtrend driven by higher rates. The recent turnaround in the healthcare sector is encouraging, the manager believes this could be replicated across parts of the construction sector.

Overall, the manager expects broader economic growth to drive a broadening in stock market leadership as well as small- and mid-cap stocks to perform much better as interest rates continue to fall and economic momentum stabilises.

Fixed income market review

UK 

UK bonds began the quarter with strong outperformance as yields fell, supported by softer economic data and fiscal developments. A leaked report suggested the OBR would cut its productivity estimate by 0.3%, reducing the Chancellor’s fiscal headroom ahead of the Autumn Statement. Private sector wage growth undershot Bank of England estimates, while inflation surprised to the downside—particularly in services and food—providing further support to gilt markets.

November proved more volatile amid Budget speculation and heightened media commentary. The BoE voted 6–3 to keep rates unchanged, though remarks from some members, including Governor Bailey, suggested a rate cut could be forthcoming. Economic data remained soft: the labour market disappointed, Q3 GDP growth slowed, and inflation was broadly in line with expectations. The main surprise came from reports that income tax rises would not proceed following a better-than-expected OBR forecast. The fiscal event, inadvertently pre-trailed by an early OBR release, revealed £21.7bn of headroom under fiscal rules, which investors interpreted as relative fiscal discipline. As a result, 10-year gilt yields ended November around 4bps higher at 4.49%, having briefly reached 4.65%.

In December, attention returned to economic data and the BoE. Activity indicators remained weak, with October GDP contracting by 0.1% m/m versus expectations of modest growth. Labour market data was mixed: average earnings exceeded expectations, but private sector regular pay fell below 4% and unemployment rose to 5.1%. Inflation declined sharply, with headline CPI falling to 3.2% and services inflation to 4.4%, driven by clothing and food. Markets were confident of a 25bp rate cut, which the MPC delivered by a narrow 5–4 vote, accompanied by cautious guidance on persistent price and wage pressures. Ten-year gilts finished 2025 at 4.54%, marginally higher on the month and slightly below levels at the start of the year.

US

US bond markets in Q4 were shaped by political developments, data disruptions, and shifting rate expectations. In October, a US government shutdown delayed key data releases, while President Trump’s announcement of additional tariffs on China increased political uncertainty. When CPI data was eventually released, both headline and core inflation printed slightly below expectations at 3.0%, reinforcing expectations for a 25bp Fed cut, which was delivered. However, Chair Powell’s comments signalled that further easing was not guaranteed.

Subsequently, weaker data—including soft ISM manufacturing, declining consumer expectations, weak retail sales, and revised payrolls—supported rate cut expectations. No CPI data was published in November despite the shutdown ending, due to data collection issues. Expectations of a more dovish Fed Chair from 2026 also weighed on yields.

In December, the FOMC cut rates by a further 25bp, upgraded growth forecasts, and began Treasury bill purchases framed as reserve management. Backlogged data painted a mixed labour market picture, with job losses across most sectors and unemployment rising to 4.6%. The BLS reported two-month CPI changes, with headline and core inflation easing to 2.7% and 2.6%. Markets were muted amid uncertainty, though 10-year Treasuries ended December at 4.15%, around 40bps lower year-on-year.

Europe

Euro area bonds shifted from calm to cautious. October saw markets stabilise despite political turbulence in France and ratings pressure, supported by modest Q3 growth, inflation near target, and an ECB hold. Bund yields fell to 2.64%. In November, yields edged higher as inflation ticked up slightly and ECB rhetoric remained balanced. December brought a firmer tone as the ECB again held rates but upgraded growth and inflation projections, pushing 10-year Bund yields up to 2.87%, around 50bps higher year-to-date, while French spreads remained broadly stable.

Market Outlook

We expect 2026 to mark a shift away from the unusually narrow market leadership that has characterised recent years. Equity market performance has been dominated by a small number of mega-cap technology stocks, but growing competition within the artificial intelligence space should support a broader leadership profile. As funding for AI increasingly moves beyond hyperscaler balance sheets and becomes more reliant on debt markets, pressure is likely to build to translate AI’s significant potential into more widespread, economy-wide improvements in returns on investment.

This broadening in leadership is expected to coincide with a broadening in economic momentum, supported by looser global monetary policy. As interest rates continue to fall, more cyclical areas of the economy should benefit, particularly sectors that have struggled during the period of higher rates. We see scope for improved activity across areas such as housing and non-residential construction, following a prolonged downturn, and take encouragement from the recent recovery in healthcare, which could be mirrored elsewhere. In this environment, small- and mid-cap stocks, which have been most exposed to economic weakness, should perform meaningfully better as growth stabilises.

Fixed income markets reflect this more balanced backdrop, with risks differing by region. In the UK, we expect modest growth, easing inflation and a softening labour market to lead to lower yields as the Bank of England delivers more easing than markets currently price, though domestic political developments may introduce volatility. US growth remains firmer, supported by fiscal stimulus and a resilient labour market, allowing the Federal Reserve to remain cautious amid ongoing geopolitical and policy risks. Europe appears relatively stable, with contained inflation and support from German fiscal spending, while Japan is likely to be an important driver of G10 bond markets as rising yields and potential fiscal loosening encourage greater domestic investment.

Within credit markets, we remain constructive. Returns are likely to be driven primarily by carry, with fundamentals modestly weaker but margins and balance sheets remaining resilient. As dispersion increases, credit selection will be increasingly important, and portfolios remain focused on high-quality issuers offering relative value.

Equity performance

Global equity portfolio

The top performer for the period was Alphabet (+29%). Held under our Providing education theme, Alphabet delivered a strong quarterly update, reporting revenue of approximately $102.4 billion, up around 16% year-on-year. The company also unveiled new AI software and announced additional AI-focused partnerships, including a chip collaboration with Anthropic, which helped reinforce confidence in its competitive positioning versus ChatGPT and other rivals. Encouragingly, demand is rising for Google’s specialised AI chips, which are emerging as one of the few credible alternatives to Nvidia’s dominant offering.

Japanese semiconductor test-equipment maker Advantest (+26%) raised its full-year operating profit forecast as demand tied to AI-related chip production continued to accelerate. The upgrade reflects a broader increase in testing requirements, driven by data-centre expansion, generative AI workloads, and rising chip complexity.

For the fiscal year ending March 2026, Advantest now expects operating profit of around ¥374 billion ($2.5 billion) – approximately 25% above its prior forecast. The company also delivered a strong July–September quarter, with operating profit up 71% year-on-year.

The Fund’s long-standing overweight to healthcare was a positive contributor as the sector showed initial signs of a recovery from a challenging post-Covid period. Thermo Fisher Scientific (+20%) and Intuitive Surgical (+27%), both held within our Enabling Innovation in healthcare theme, were among the period’s top performers.

Thermo Fisher, a provider of scientific instruments, consumables, software and services, beat market expectations in the third quarter of 2025, supported by technology partnerships and the launch of new diagnostic products.

Thermo Fisher delivered $11.1 billion of revenue (+5% YoY) and adjusted EPS of $5.79 (+10% YoY). Performance was supported by momentum in new diagnostic tests, particularly in oncology and neurodegenerative disease, alongside contributions from recent acquisitions that broadened the group’s capabilities. The company also highlighted its collaboration with OpenAI, signalling a greater focus on using AI to improve productivity and accelerate innovation.

Intuitive Surgical, the global leader in robotic surgery, beat expectations in the third quarter, delivering adjusted earnings-per-share of $2.40 and revenue of $2.5 billion (+23% yoy). The company also raised its full-year outlook, guiding to da Vinci procedure growth of 17%–17.5% and a gross margin of 67.0%–67.5%, both above prior ranges. Management attributed the revenue strength to higher procedure volumes, increased da Vinci system placements, and a growing installed base.

Leading the detractors, Spotify’s (-17%) shares fell despite a solid Q3 beat, as fourth-quarter guidance disappointed. The Swedish audio platform reported €4.3 billion of revenue (+12% YoY), ahead of consensus, while monthly active users rose to 713 million, also above expectations. However, Spotify guided to €4.5 billion of Q4 revenue, below forecasts, citing currency headwinds. Investor sentiment was further weighed by ongoing pressure on content costs, with recent renewals of major label licensing agreements adding to the expense base.

Trex (-32%) shares fell after the composite wood decking specialist reported underwhelming Q3 earnings and cut guidance for 2025 and 2026. Management lowered its Q4 outlook, citing continued weakness in repair-and-remodel demand and expected distributor destocking. Full-year revenue guidance was reduced to $1.15-$1.16 billion (from $1.21-$1.23 billion), and the company flagged a 250 basis point gross margin decline in 2026.

We sold our position in Trex due to concerns that fundamentals are deteriorating as competitive pressures in the decking industry intensify, while the end market remains challenged. Without an imminent rebound in the Repair & Remodel construction cycle, we believe Trex is likely to struggle to deliver meaningful revenue or earnings growth over the next two years, and we therefore reallocated capital to more attractive opportunities.

Security software specialist Zscaler (-25%) delivered a solid fiscal Q1 2026 update, beating expectations and raising full-year guidance, but the shares fell as the results failed to exceed elevated investor expectations. Revenue and recurring revenues both grew strongly year-on-year, reflecting continued demand for its cloud security platform. However, the market focused on ongoing profitability pressures, including a small net loss and a modest decline in gross margin, which weighed on sentiment. 

UK equity portfolio

The dispersion in performance reflects a highly unusual market environment over the past year, with benchmark returns driven by a small number of the largest constituents. In particular, HSBC, Rolls-Royce, AstraZeneca, Barclays and British American Tobacco dominated index performance.

Our long-term approach focuses on companies we believe can deliver sustained growth while making a meaningful positive impact for people and the planet. As a result, of the five stocks listed above we hold only AstraZeneca – and even then at an underweight position relative to its 8.8% index weight. We remain confident this is the right strategy over the long term, but it proved a significant headwind in 2025.

That said, the underlying fundamentals of the portfolio are encouraging. Growth has been strong, and most holdings exceeded market expectations for sales and earnings. Valuations also look attractive: on average, portfolio companies trade at a 13% discount to their five-year history. In our view, this leaves the portfolio well positioned for stronger future returns.

The Fund’s top performer for the period was Molten Ventures (+31%), a long term holding which invests in a portfolio of high growth technology, software and financial companies. Held under our Enabling SMEs theme, Molten Ventures reported  “continuing strong momentum” for the six months to 30 September. The company guided to net asset value (NAV) per share of around 719p, up 7.2% year-on-year, supported in part by its share buyback programme, which has contributed 13p to NAV per share since 31 March. 

Molten Ventures has traded at a discount for many years, but this has narrowed as the company has sold stakes in several holdings at prices in line with, or above, carrying values. It is encouraging to see our patience begin to pay off.

NatWest (+25%) upgraded its full-year earnings guidance after a strong quarter, supported by steady customer activity, stable deposit balances and improved cost control. Attributable profit rose to £1.6 billion for the three months to end-September, while income increased to £4.2 billion. Return on tangible equity, a key measure of profitability, reached 22.3%, well ahead of the bank’s medium-term target.. Management now expects full-year income of approximately £16.3 billion in 2025 (previously £16.0 billion) and lifted its full-year return on tangible equity target to above 18%, citing strong capital generation and continued cost focus.

AstraZeneca (+23%) shares were boosted early in the period after the company announced plans to list its ordinary shares on the New York Stock Exchange, aimed at broadening its US investor base, where it generates almost half of its revenue. Later in the quarter, AstraZeneca, held within our Enabling innovation in healthcare them, reaffirmed its guidance for high single-digit revenue growth and low double-digit growth in core EPS, citing continued momentum across the business.

We believe the AstraZeneca has an exceptional record of innovation and drug development which help to continue to extend the long term trend of improving cancer survival rates.

Shares in UK private equity firm 3i Group (-19%) fell after it reported slowing growth at discount retailer Action. In its interim results, 3i noted that Action’s sales momentum softened in October, with France — which accounts for roughly a third of revenues — showing particular weakness. The company cautioned that Action’s full-year like-for-like sales growth may come in below its previous 6.1% guidance. We expect the unexpected reduction in sales growth to be a short-lived effect, and remain confident in 3i’s long-term growth outlook.

AJ Bell (-19%) fell after full-year results, while solid, came in slightly below expectations, with investors focused on higher costs and margin guidance. Pre-tax profit rose 22% to £137.8 million and revenue increased 18% to £317.8 million, but administrative expenses climbed 18% to £184.7 million, driven by higher distribution spend (mainly advertising and marketing) and a 17% rise in technology costs to £55.1 million. We take a different view to the market on the increase in marketing spend and believe the returns will be beneficial, strengthening the company’s investment outlook rather than weakening it.

Wise (-14%) shares fell after the cross-border payments firm reported slower revenue growth in its first-half FY26 results. Underlying income rose 13% year-on-year to £749.5 million, while underlying profit before tax was £122 million. Although this sits at the top end of Wise’s 13-16% medium-term margin target range, it was down from 22.2% a year earlier. Cross-border volumes grew 24% to £84.9 billion, but cross-border revenue rose just 5% as the take rate fell 10 basis points to 52bp, reflecting lower pricing to support long-term customer growth and retention.

Fixed income performance

Throughout the fourth quarter, we maintained a strategic long duration position, implemented exclusively through UK gilts. This contributed positively to performance as UK 10-year gilt yields fell around 20 basis points over this period. Gilts had generally traded in a 4.40-4.80% range over the course of 2025, but performed strongly in Q4 as fears around the Budget were reduced after the Chancellor left more headroom than anticipated. Economic data was also generally lacklustre, raising expectations of MPC rate cuts and allowing gilts to rally.

Credit markets remained resilient through Q4, despite occasional pressure from political and fiscal uncertainty. Supportive technical conditions, strong corporate fundamentals, and low global default expectations helped keep spreads contained. The sterling corporate index ended the year just below 80, around 5 basis points from its historical low.

Our underweight position in spread duration meant credit slightly detracted from returns as spreads tightened further during the quarter. Security selection modestly detracted from performance, driven primarily by positions in Utilities, Banks, and Financial Services. This was partly attributable to volatility in our position in Orsted, and also from outperformance in uninvestible names like EDF and Southern Water.

European corporates also saw a small grind tighter in spreads over the quarter, ending 2025 at a similar spread level to their UK counterparts. However, the total return from European bonds was lower over the period, so our allocation to the asset class detracted from returns in Q4.

Asset allocation

We made changes to our asset allocation in December following another strong year for risk assets in 2025. We entered the quarter with a sizeable overweight to both UK and global equities, a position we had held since June. We believe economic momentum remains supportive for equities, reinforced by easing monetary and fiscal policy. However, the growing importance of AI infrastructure investment to market performance increases the risk of disappointment in early 2026. As a result, we reduced our overweight to both global and UK equities.

We redeployed the proceeds by moving the UK credit portfolio to a modest overweight. In our view, weak economic growth is already priced in, while inflation and interest rates are likely to fall through 2026. We also modestly reduced our underweight positions in cash and gilts, which both remain underweight.

Trade activity

Buys

• Mastercard (Enhancing digital security): One of the world’s largest payment networks, supporting transactions for c.150 million merchants globally. Value-Added Services now represent around 40% of revenues, with a significant portion linked to fraud prevention and online security. Defensive business model with strong visibility, double-digit revenue and earnings growth potential, and an attractive entry point below long-term average valuation.
• Cintas (Delivering a circular materials economy): Market-leading US uniform rental provider with a clear scale and cost advantage. The reuse-based rental model embeds lifecycle management and circularity, while strong service quality supports expansion into adjacent facilities and safety services. Added following a valuation derating.
• Monolithic Power Systems (Improving the efficiency of energy use): Designer of highly efficient power semiconductors that reduce electrical losses across data centres, automotive and industrial applications. Benefiting from sustained AI infrastructure demand and a growing automotive opportunity driven by electrification and ADAS content.
• Progressive (Insuring a sustainable economy): Market-leading US insurer with a long track record of innovation, operating discipline and superior returns on capital. Advanced digital capabilities continue to drive scale benefits and competitive advantage relative to peers.

Sells

• ASM International (Improving the efficiency of energy use): Sold on competition-for-capital grounds as we refined semiconductor exposure toward areas more directly aligned with AI infrastructure investment.
• Morningstar (Transparency in financial markets): Exited amid signs of deteriorating fundamentals and rising competitive pressure, particularly from AI-enabled alternatives. Concerns around pricing power, margins and the company’s response to emerging threats drove our decision.
• Bright Horizons (Providing education): Sold as enrolment growth in the core childcare business has plateaued, with occupancy recovery likely to be gradual due to shifting demand toward home-based provision and greater reliance on back-up care.
• Croda International (Enabling healthier lifestyles): Exited during a challenging industry downturn, with concerns around the sustainability of historically high margins through the cycle despite attractive end-market exposure.

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