Liontrust Income Fund

The Liontrust Income Fund returned 5.2% over the first quarter of 2021, in-line with the FTSE All Share Index, however the Fund lagged the more value-orientated IA UK Equity Income sector average, which returned 6.8% (both comparator benchmarks)*.

UK equities continued their strong performance during the first quarter of the year, a rally which began in November 2020 following the news of multiple Covid-19 vaccines. Generally, the market was driven by more cyclical areas, effectively those that were worst hit last year during the peak of the pandemic. These areas, including materials, energy and domestic cyclicals, were buoyed by the expectations of improved economic growth as a result of the easing in social distancing measures and government stimulus measures. Related to this trend, bond yields rose sharply over the quarter as expectations for inflation and growth improved, driving the outperformance of the value style, while growth stocks (or those with longer duration cashflows) lagged considerably. At a market capitalisation level, smaller companies generally outperformed their larger counterparts over the quarter, due largely to the fact that the FTSE Small Cap and FTSE 250 indices are home to greater number of domestically focused, often cyclical, businesses. 

Thanks to our three-silo approach, whereby we aim to nullify any major style bias across the portfolio, we expected the Fund to deliver more muted relative returns during a quarter where value stocks dominated (certainly relative to the IA UK Equity Income sector, which is inherently more value-orientated than the Fund). Nevertheless, while clearly disappointing to underperform versus our peers, we were very encouraged by the Fund’s marginal outperformance relative to the FTSE benchmark. The Fund faced a number of headwinds over the quarter, including the considerable underperformance of technology stocks (which were largely hurt by rising bond yields and, in our view, a high degree of profit taking following the sector’s stellar 2020 returns). For example, the largest detractors to returns were largely stocks within our Steady Eddies silo, including Apple, Visa and Mastercard. Furthermore, the Fund’s 0% exposure to UK stocks outside of the FTSE 100 was a detractor to returns. Another major headwind, which is a continuation from Q4 2020, is the strong performance of stocks that, due to the Covid-19 pandemic and poor levels of dividend cover and high leverage going into it, cancelled their dividend last year. Many of these stocks have yet to resume their dividends, and given our ‘Enduring Income’ stocks must pay a dividend or be very likely to in the imminent future, we have had 0% exposure to these types of companies (e.g. Restaurant Group, Card Factory and TUI).At a stock specific level, the funds exposure to LSE and Avast were both drags. The former, we took the opportunity to top up as we believe the long-term benefits from the company’s transition to data driven revenues outweigh the higher-than-expected integration costs from the Refinitiv acquisition. However, we became less convinced in Avast’s ability to execute on their transition away from anti-virus products and exited the stock. 

On a positive note, the Fund’s performance was largely driven by our Economic Recovery and Hidden Fruit’s silo, which are home to the Fund’s more cyclical and value exposures, respectively. In particular, the Fund’s exposure to materials stocks was particularly beneficial. The strongest contributors to returns included Johnson Matthey, Anglo American and Antofagasta. Johnson Matthey, the producer of catalytic converters, recovered more quickly than many expected on accelerating auto production in China.We also saw strong returns from selected financials such as Aviva, whose CEO executed strongly on her restructuring plans, and our energy names likes BP, which benefited from a strong oil price driven by reopening demand and OPEC’s decision not to increase production.

There remains a hot debate among investors in terms of inflation expectations, and we believe this will be a key changing macro variable over next year. We are seeing costs creeping in through global supply chains and, as such, we continue hold on companies with pricing power thanks to our focus on Enduring Income stocks.

It is clear that Government measures will remain stimulative and therefore the economy is well positioned for a post-pandemic recovery, especially as UK consumer spend is now likely to increase as the UK “re-opens”, which in turn could lead to more companies re-initiating their dividends this year. Furthermore, the UK’s vaccine progress, combined with the fact Brexit uncertainty is somewhat behind us, could see the UK attract greater investor attention, given it is comparatively cheap relative to global markets (particularly the large cap space, where the FTSE 100 is currently trading on its largest discount to the FTSE 250 of 40%).

Nevertheless, we believe investors must remain vigilant. All of our holdings within the Liontrust Income Fund continue to pay a dividend and we expect (and have already seen in some cases) many to be able to grow their distributions this year. Finally, we expect delivery against earnings in Q2 to separate the “everything opening up” names from those that will emerge stronger from the pandemic and take market share (i.e. the next earnings season will give us a much clearer picture of those companies that have benefited from improved sentiment from those stocks that have actually generated strong sales and cashflows).

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

*Source: FE Analytics as at 31.03.21

**Source: FE Analytics as at 31.03.21. Quartiles generated on 13.04.21.

KEY RISKS

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

DISCLAIMER

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.