Liontrust European Enhanced Income Fund

June 2019 review

The Liontrust European Enhanced Income Fund returned 4.5%* in sterling terms in June, compared with the 6.4% sterling terms return and 4.8% local currency return from the MSCI Europe ex-UK Index.

 

The strong bounce back in European equities in June was fuelled by central bankers hinting at the resumption of monetary easing. As Mario Draghi entered the final few months at the helm of the European Central Bank (ECB), he used a speech in Sintra, Portugal to indicate the Bank was prepared to offer support to the eurozone economy as it struggles to maintain inflation at the ECB’s target.

 

Draghi and the ECB’s governing council had earlier in the month adjusted its policy statement to say that current interest rates will remain on hold through the first half of 2020, having previously indicated that they will be unchanged until the end of 2019. In his Sintra speech, Draghi said the outlook for the eurozone economy remains tilted to the downside, and additional stimulus would be required if there is no improvement.

 

This sentiment was echoed by the Federal Reserve, which delivered a more dovish outlook amid uncertainties in the global economy. The US has also been battling below target inflation and in June stated that it will act as appropriate to sustain the economy’s expansion. An interest rate cut in July is now fully priced in, marking the end of the current US rate rising cycle, and the first cut in a decade.

 

Interest rate cuts tend to have a negative effect on margins at banks and this was partly reflected in the performance of the financials sector. Though it registered a rise of 4.9%, this lagged the market where the biggest gainers were the consumer discretionary (+10.4%), industrials (+8.5%) and materials (+8.4%) sectors. 

 

Though the Fund has an overweight position in financials, its banks weighting is relatively small. Insurance and diversified financial holdings on the whole contributed positively to returns.

 

Finnish insurance group Sampo (+8.4%) was one of the positive financial holdings. It announced a special dividend comprising of one Nordea Bank share (Sampo owns c.21% of Nordea) for every 10 Sampo shares held. The logic of this is that it would take Sampo’s ownership of Nordea below 20% and as such, from a regulatory perspective, allow it to be deconsolidated from Sampo’s solvency calculation. As regulators continue to increase capital requirements for banks, this has led to a potential drag on Sampo’s own balance sheet. By distributing the shares to Sampo shareholders, the company neatly circumvents the need to hold extra capital against what is really a pure investment, rather than a key part of Sampo Group. Sampo thereby maintains its capital efficiency, with its usual rigorous commitment to maximise dividends for shareholders.

 

Nordic bus operator Nobina (+10.3%) announced a strong set of results, with profits c.12% better than market expectations. We met with the company’s management post results, and they provided a positive update on recent business developments, and how new acquisitions were performing.

 

Of interest was the company’s shift to a more active approach in utilising its green credentials – it was able to launch a heavily oversubscribed green bond at a cost of 1.5%, well below its typical debt finance cost of 2.6%. Currently 80% of its traffic is now CO2 neutral and the electric bus fleet has now increased to 50, from 15 last year; it is expected to be 100 by year end.

 

Nobina also became the first company in the world to launch an autonomous bus service, with these buses running alongside normal traffic in the Swedish region of Barkaby. Six small buses are currently in operation, with full size models expected next year. The only issue that they have encountered so far is that the GPS systems on these buses are almost too precise, and the Barkaby roads now have two tyre grooves worn into the asphalt.

 

Bpost (-4.1%) was one of the few holdings to end lower in June after a broker downgrade. Concerns were raised about the proportion of profit the Belgian postal operator generates from parcel handling amid a decline in letter volumes. Analysts said that rivals have a much better foothold in the parcel-delivery market.

 

We removed Norwegian investment bank ABG Sundal Collier from the portfolio in June, since we think it could find life more difficult as a niche investment bank, if capital markets were to deteriorate later in the cycle.

 

Positive contributors included:

Air Liquide (+11.7%), Deutsche Post (+10.9%) and Endesa (+5.9%).

 

Negative contributors included:

Bpost (-4.1%), Nexity (-2.6%) and Mowi (+0.2%).

 


The two covered calls written in May expired out of the money, as we hoped. Volatility fell again in June and we therefore withheld from writing any new options, due to the relatively unattractive prices offered.

 

This Fund’s primary share class is currency-hedged in order to provide insulation from movements in the value of the euro and other European currencies. The euro appreciated by 1.3% against sterling in June.



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

 

 

Jun-19

Jun-18

Jun-17

Jun-16

Jun-15

Liontrust European Enhanced
Income I Hedged Acc

2.1

0.7

17.7

-10.4

18.7

IA Europe Excluding UK

3.3

3.1

29.2

4.5

4.1

Quartile

3

4

4

4

1

 

*Source: Financial Express, as at 30.06.2019, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 03.07.2019, total return (net of fees and income reinvested), bid-to-bid, primary class.

 

For a comprehensive list of common financial words and terms, see our glossary here.

 

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, July 24, 2019, 2:59 PM