Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.
The SpaceX IPO captured headlines beyond the financial pages, both for the scale of the business and for the paper wealth it created for its founder, Elon Musk. We want to explain here why the Sustainable Future funds did not participate in the IPO.
We believe investing is founded on forecasting the future earnings and cashflows of businesses. If we can find share prices that are materially lower than the sum of these future earnings, discounted to account for the time value of money, then that makes a sensible investment.
Forecasting the future is difficult. There are a wide range of factors and outcomes that can affect even the best businesses, so we have to use our judgement to assess the likelihood of different forecasts. To help us, we look to history and identify well-trodden trends within economic development. These are encapsulated in our themes: 22 areas of consistent growth as our world develops to become cleaner, healthier and safer. These are areas where one tends to find growth ahead of market expectations.
We also look at the characteristics of businesses that tend to result in better outcomes for shareholders: their governance structures, their culture and their relationships with suppliers and customers. Generally, companies with good governance structures, strong rights for all shareholders and a culture aligned with long-term value creation make for better investments.
So how did SpaceX look from this perspective?
The forecasting of its future revenues is incredibly difficult, let alone its earnings. Yes, it has a dominant space launch system that is likely to have few rivals for years to come; and yes, Starlink is a fast-growing communications system. But the bulk of the projected value is meant to hang on its AI capabilities and space-based data centres. Both of these are risky, highly capital-intensive ventures with more competitive threats. They could be immensely successful, but this is a long way from certain. The Starlink communications business fits with our theme of Connecting people, but the rest, and vast majority, of the business does not fit any of our themes.
Then we look to see if the share price materially undervalues these prospects, and it is hard to say it does. The price-to-revenues ratio for next year is more than 100x, which is about 30 times the prevailing multiple of the S&P 500. It will have to be the most extraordinary trajectory of growth for this already enormous company for the valuation to make sense. Maybe it will, but it would be without precedent.
And finally, we come to the company structure. As a sustainable investment strategy, an investment in SpaceX would be highly unlikely and, in fact, it is a company we would actively avoid. Our concerns are primarily driven by environmental and governance considerations. From an environmental perspective, SpaceX’s operations involve significant carbon emissions and a continued reliance on fossil fuels. From a governance standpoint, we see a number of red flags, particularly relating to the conduct and leadership style of its founder and CEO. For context, we do not currently invest in Tesla due to governance concerns, despite the company being considerably more attractive from an environmental perspective.
In addition, there is the history of IPOs themselves. They tend to occur when market actors are well primed and incentivised to get the deal away successfully. Generally, they have not made great bets. Indeed, a recent analysis of the last 15 years of large IPOs shows a median 30% decline in value over one year. The odds are against you here too.
All these factors together, I hope, explain why we sat on the sidelines for this extraordinary financial market event.
There are likely to be two more big IPOs this year, OpenAI and Anthropic. We will take the same approach to assessing these.
Read, watch and listen to more insights from Liontrust fund managers here >
Key risks
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Sustainable Investment team:
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Are expected to conform to our social and environmental criteria.
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May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
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May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
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May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
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May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
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May, in certain circumstances, invest in derivatives but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.
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Do not guarantee a level of income.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Investment team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Disclaimer
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
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