Liontrust European Enhanced Income Fund

July 2018 review

The Liontrust European Enhanced Income Fund returned 3.0% in July, compared with the 5.0% sterling terms return and 4.0% local currency return from the MSCI Europe ex-UK Index.

 

The key feature of July for global markets was the imposition of US tariffs on Chinese goods, together with the threat of more tariffs to come. However, European trade developments were more positive with European Commission president Jean-Claude Juncker’s trip to the US yielding an apparent agreement with President Trump to work towards a reduction in trade barriers.

 

As a raft of companies posted Q2 earnings, the MSCI Europe ex-UK Index sector breakdown was a sea of green in both cyclical – finance (+6.2%), industrials (+5.1%) – and defensive areas – health care (+7.7%), utilities (+6.1%).

 

While earnings season was also responsible for the majority of the Fund’s gains, its biggest riser followed bid interest. Mediaset teamed up with infrastructure investor F2i SGR in order to bid for the 60% of TV and phone-mast operator EI Towers (+21.2%) that it doesn’t already own. The offer was pitched at €57, and shares in the company immediately jumped to trade at small discount to the offer – reflecting the time value to completion of any deal and the low likelihood of any competing bid interest.

 

The Fund’s banks allocation made a strong contribution, led by Nordea Bank (+11.0%) and Swedbank (+8.6%), which both beat analyst earnings expectations.  Nordea Bank recorded operating profit growth of 31% year-on-year to €1.3bn as it commented on improving business momentum in its core markets while Swedbank grew operating profit by 12% year-on-year to SEK12.3bn.

 

There was a similarly strong showing from the pharma component of the portfolio, a sector which has been somewhat lack-lustre of late. Following sales growth of 7% in the first half of 2018 which included good results for both its pharmaceuticals and diagnostics divisions, Swiss pharma giant Roche (+11.0%) raised its full year sales growth guidance to a mid-single digit rate, while earnings per share is now expected to register a “mid-teen digits” rise. Shares in French peer Sanofi also rallied as it too raised 2018 profit guidance, albeit only marginally; business EPS growth of 3%-5% is now expected, up from a wider 2%-5% range previously. Novartis (+11.4%) merely reconfirmed guidance rather than upgrading it, but Q2 trends were solid enough to support share gains in the month. Core operating income rose 7%, following 5% net sales growth and higher gross margins.

 

The biggest portfolio casualty of quarterly results was BE Semiconductor Industries (-19.2%). The stock was the largest portfolio faller in absolute terms, but it did not feature among the listed negative contributors due to a relatively low portfolio weight of around 0.5%. The company blamed a drop in orders on reduced demand from high-end smart phone supply chains and noted that it suffered the cancellation at quarter end of a €28m order from a single customer in Asia. Nonetheless, we remain convinced in its long-term potential and view such over-reactions as opportunities to acquire a more meaningful position.

 

Other portfolio newsflow included: facilities management group Coor (+19.4%) revealing Q2 net sales of SEK2.38bn, beating consensus expectations of SEK2.23bn, split fairly evenly between organic growth and acquisitions; well-received results from Norwegian fish farming company Marine Harvest (+10.6%) which generated Q2 operating profit of €175m from total volumes of 78.5 thousand tonnes; and Nordic IT services company Dustin Group (+14.8%) recording Q3 net sales growth of 9% and 1.0ppt gross margin expansion to 16.1%.

 

Positive contributors included:

EI Towers (+21.2%), Marine Harvest (+10.6%) and Swedbank (+8.6%).

 

Negative contributors included:

Nobina (-8.9%), Elisa (-5.6%) and Thule (-5.5%).

 

We remain optimistic that conditions will soon be appropriate for the writing of covered calls at premium levels which are attractive. 

This Fund’s primary share class is currency-hedged to protect against falls in the value of the euro and other European currencies. The euro strengthened by 0.9% against sterling in July.

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

 

Jun-18

Jun-17

Jun-16

Jun-15

Jun-14

Liontrust European Enhanced
Income I Hedged Acc

0.7

17.7

-10.4

18.7

19.9

IA Europe Excluding UK

3.1

29.2

4.5

4.1

13.9


*Source: Financial Express, as at 31.07.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.


**
Source: Financial Express, as at 30.06.2018, total return (net of fees and income reinvested), bid-to-bid, primary class.


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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 European Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. Investment in the Liontrust European Enhanced Income Fund writes out of the money call options to generate additional income. These call options will be “covered”. Unitholders should note that potential capital growth of the Fund would be capped if these call options are exercised against the Fund and the Fund’s capital returns could therefore be lower than the market in periods of rapidly rising share prices.

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. 

Wednesday, August 15, 2018, 10:09 AM