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Should investors sell Liontrust Sustainable after a poor year?

09 May 2022

The fund has fallen 28.2 percentage points behind the MSCI United Kingdom benchmark over the past year following a decade of outperformance.

By Tom Aylott,

Reporter, Trustnet

Liontrust’s Sustainable UK Future Growth fund has been a top-quartile performer in the IA UK All Companies sector over the past decade, but the fund has not escaped the difficult period that many other environmental, social and governance (ESG) funds have had recently.

It has proven to be a popular fund, attracting £980.6m in assets under management, thanks to strong performance. It has returned 143% over the past decade, up 50.6 percentage point against the MSCI United Kingdom benchmark.

However, the past 12 months have been a sticky time. While the index is up 13.9% the fund has made a 14.2% loss, falling 28.2 percentage points behind the index.

Total return of fund vs sector and benchmark over the past year

Source: FE Analytics

The rapid drop from top to bottom quartile may leave some investors disappointed, especially considering other funds in the sector are performing better in this difficult environment, but Jason Hollands, managing director of Bestinvest urged those who hold it in their portfolio not to lose faith.

As you would expect from a sustainable fund, it does not have any holdings in oil and gas companies, something that has damaged the fund’s performance, according to Hollands.

Demand for oil has skyrocketed in recent months as the government imposed sanctions on Russia following its invasion of Ukraine. However, the price had already been on the rise as supply chain issues and the re-opening of the economy post lockdowns meant demand soared while supply remained steady.

British oil companies such as Shell and BP have thrived from this increased demand with their share prices up 63.5% and 36.1% respectively over the past year.

Share price of oil companies over the past year

Source: Google Finance

In response to higher inflation caused by the rising oil price, central banks have increased interest rates, boosting the margins banks can make from their loans.

However, while the Sustainable UK Future Growth fund top holdings are in financials (which make up 34.2% of sectoral allocations), its largest holdings have risen more modestly.

For example, the London Stock Exchange (5.2% of assets) was up 4.2% over the past year and 3i Group (3.7% of holdings) increased 4.2%.

In fact, the fund’s second largest holdings, Legal and General Group, which accounts for 4.9% of the portfolio, was down 13.3% in the past 12 months.

Share price of fund’s top three holdings over the past year

Source: FE Analytics

Hollands also pointed out that the fund is likely to have been hit significantly by the poor performance of technology stocks in recent months.

The UK market has just 1.1% exposure to technology compared to 15% in the Sustainable UK Future Growth fund, perhaps explaining its lag behind other funds in the sector.

Despite these drawbacks, Hollands has confidence in the Liontrust Sustainable Futures team but prefers another portfolio they run, the UK Ethical fund, which suffered a 13.6% loss over the past year.

Although he favours their other ESG fund, he said that it was not critical to sell out of Sustainable UK Future Growth to buy UK Ethical instead.

He added: “While the current environment is tough for the strategy, long-term investors should hold on and those wanting a sustainable strategy should certainly consider this fund.”

Andrew Cheung, investment analyst at EQ Investors, also praised the management team for not swaying from their investment strategy and chasing returns through lower quality or value stocks.

He added that this style has navigated the fund through difficult periods in the past and provided high returns over the long-term.

The team has taken the opportunity to add to their highest-conviction holdings while valuations are low, a move which Cheung anticipates will benefit future performance.

He said: “The companies in the portfolio are on course to deliver their expected earnings and the market should re-rate these valuations over time.”

The management’s strong track record for good stock picking was also the main appeal for Darius McDermott, managing director of Chelsea Financial Services.

He said that many funds with a quality-growth bias have been severely hit by the rotation to value over the past few months, “no more so than in the UK market”.

However, as ESG investing becomes increasingly popular, McDermott said that the Sustainable Futures team’s experience in this field gives them a unique advantage against many of the newer funds popping up in the ESG universe.

He said: “The team behind this fund and the rest of the Liontrust Sustainable range have worked together for over 20 years and have followed a disciplined process. This has placed them at the forefront of demand for sustainable funds from advisers and retail investors. We very much view this as a buy.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.