Liontrust UK Ethical Fund

Key takeaways

• The Fund underperformed in a market dominated by large-cap, value-oriented stocks, with banks in particular performing strongly.
• Portfolio fundamentals remain strong, with robust growth, earnings ahead of expectations and attractive valuations, leaving us well positioned for improved returns.
• NatWest led performance following strong quarterly results and an upgrade to full-year earnings guidance. In contrast, AJ Bell and Telecom Plus lagged after reporting disappointing earnings.
• Trades during the quarter aimed to increase our exposure to companies with lower economic sensitivity. We added Lloyds, XPS and RS Group, while exiting Smurfit Westrock and PRS REIT.

Performance

The Fund returned -2.3% over the quarter versus the IA UK All Companies sector average of 3.9% and the MSCI UK Index’s 7.1% (both of which are comparator benchmarks)*.

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. 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 18% 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 NatWest (+25%), which 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.

Helios Towers (+10%), the Africa- and Middle East-focused telecom tower operator, reported third-quarter adjusted EBITDA of $120.1 million, ahead of its own $117.8 million guidance. The strong performance supported the announcement of a $75 million share buyback and a new commitment to return more than $400 million to shareholders over the next five years through a combination of buybacks and dividends. The company’s first $25 million dividend is expected to be paid in 2026.

With regards to the detractors, 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.

Telecom Plus (-26%) reported a near-30% fall in first-half adjusted earnings despite solid revenue growth, largely due to a shift in the timing of energy-related costs being spread more evenly across the year. Adjusted pre-tax profit dropped 29.5% to £32.5 million for the six months to 30 September, from £46.1 million a year earlier. The Utility Warehouse owner reported revenue of £744.5m, up 6.7% year-on-year, supported by a 19% rise in customer numbers to 1.39m, including broadband customers acquired from TalkTalk.

Management maintained full-year guidance, expecting customer growth of 25% for the year to 31 March 2026 and adjusted pre-tax profit of £132–£138 million, compared with £126.3 million last year.

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.

Trade activity

Trades during the quarter aimed to increase our exposure to companies with lower economic sensitivity. We added Lloyds Banking Group under our Financing housing theme. Lloyds Banking Group is the UK’s largest mortgage provider, with around 68% of lending in UK mortgages. We view mortgage financing as socially beneficial as it supports home ownership amid higher house prices, while helping customers build equity over time through cost-effective long-term borrowing. Lloyds is also the UK’s largest supporter of social housing, providing around £20 billion of funding since 2018 and working with over 200 housing associations. It also supports our Enabling SMEs theme, with SME lending comprising around 7% of the loan book, helping drive growth, jobs and innovation.

We also added XPS Pensions Group under our Saving for the future theme. XPS helps to ensure that pension schemes have enough money invested in the right way to provide for members. The company’s advice ensures that pensioners are paid the correct amount at the correct time, and that the schemes rectify any historic mistakes and adapt to new regulation.

Under our Improving the resource efficiency of industrial and agricultural processes theme, we added RS Group, a global distributor of industrial and electronic components that supports the electrification of the economy. Electrification is a key enabler of the energy transition – helping integrate more renewable power into the system and improving control, efficiency and precision across industrial processes. RS serves customers worldwide, providing dependable access to a catalogue of more than five million products.

We sold Smurfit Westrock as the downturn in cardboard packaging demand in the US and Europe looks more prolonged than we expected. While the long-term shift from plastic to paper-based packaging remains supportive, near-term conditions point to a weaker outlook, compounded by execution risk as the company integrates the Westrock acquisition. We may revisit the position if fundamentals improve.

We sold PRS REIT following shareholder support for the sale of the portfolio and the wind-up of the investment trust. The company executed well on its strategy, building a portfolio of over 5,000 high-quality rental homes that combined attractive returns with greater security of tenure for tenants, helping to address undersupply in family rental housing. However, with the vehicle moving to realise assets and return capital, we exited despite a preference for continuation.

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