Liontrust European Enhanced Income Fund

May 2019 review

The Liontrust European Enhanced Income Fund returned -4.6%* in sterling terms in May, compared with the -2.0% sterling terms return and -5.1% local currency return from the MSCI Europe ex-UK Index.

 

Geopolitical events were once again the main drivers for markets. The first real slip for European equities in 2019 came as trade tensions between the US and China flared up once again. Negotiations between the two superpowers broke down and President Trump subsequently signed off tariffs of 25% on US$200bn worth of Chinese imports and threatened similar tariffs on another US$325bn. The President escalated the situation further by signing an executive order banning Chinese tech group Huawei from selling its technology in the US market.

 

China duly retaliated with tariffs of its own, resuming the trade war which had been kept at bay for most of the year. Inevitably, questions about the global economy came to the fore as investors weighed up the impact of protectionist measures from the US and China on the global growth outlook. Preference for safe havens in this environment was displayed by demand for US 10-year government bonds which saw yields fall to their lowest level since the third quarter of 2017. This also indicated the market’s expectation for interest rate cuts by the Federal Reserve, as Trump renewed pressure on Chair Jerome Powell to support the US in the trade war, a very different picture to that of the interest rate rises expected last year.

 

In equity markets, there was a reversal of April’s trends with cyclical sectors falling out of favour and defensive sectors such as utilities (+4.0%), consumer staples (+3.3%), health care (+1.8%) and communication services (+1.2%) leading the gainers list in the MSCI Europe ex-UK Index.

 

Given the Fund’s largely overweight positioning to defensive sectors, this trend was positive. There were solid returns for Spanish electricity provider Endesa (+3.2), and Italian national grid company Terna (+5.2%), which both recovered from a slight hit to shares after first quarter results from the two companies came in a touch below the market’s expectations. 

 

Though the Fund’s telecoms holdings also gained on the whole, 1&1 Drillisch (-15.3%) was an outlier. The German company stated revenue in the first quarter edged 0.9% higher to €912.1m, which was lower than the consensus forecast for €933.8m. Revenue was weighted down by hardware sales, which fell 8.5% during the period. Trading remains dominated by the company’s participation in the German 5G spectrum auction however, which should conclude shortly, providing clarity as to the company’s capex requirements.

 

There were more positive results for Swiss telecom company Sunrise Communications (+8.0%), which raised its 2019 earnings guidance. The company now expects adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) to be between SFr613m-SFr628m from SFr608m-SFr623m, due to a strong start to the year. In the first quarter, Sunrise recorded its strongest ever performance in subscriber additions since 2010, helping adjusted EBITDA grow 5.0% and gross profit rise 4.2%.

 

Away from telecoms, the Fund’s overweight allocation to financials (-4.9%) detracted from performance. Among the heaviest hit was Italian asset manager Anima Holding (-16.9%). Its first quarter numbers showed negative net inflows of around €100m as a result of cautious retail investors, though the group noted that assets under management of €177.7bn was the highest in its history. Pre-tax profit, meanwhile, fell 33% year-on-year as a result of a reduction in contribution from performance fees (€4.1m versus €15.1m in Q1 2018).

 

German chemicals supergiant BASF (-12.4%) stated that growth in EBIT excluding special items is to be at the lower end of its previous 1%-10% range. In the first quarter EBIT declined 24% from the same period in 2018 due to lower contributions from the Materials and Chemicals division and the Nutrition & Care segment.

 

Two of the Fund’s Norwegian holdings – Orkla (+14.0%) and Mowi (+12.0%) – both saw their share prices rise following better than expected results. Branded consumer goods group Orkla saw adjusted EBIT grow 14% to NKr1.02bn, outstripping the market’s forecast of NKr979m. The strong performance was driven by improvements in the company’s Food and Confectionary & Snacks businesses.

 

Seafood company Mowi’s first quarter net income of €194m was 31% higher than the consensus forecast. Chief Executive Alf-Helge Aarskog cited strong demand for its products which resulted in high prices in all markets. It allowed the company to declare a first quarter dividend of NKr2.60 per share, in line with market expectations.

 

During May, we initiated a position in Fortum, a Finnish clean power generator. The structure of the carbon credit market in Europe is changing, from oversupply to shortage, which implies long-term higher power prices. Clean generators such as Fortum benefit from this trend, as they do not have to buy carbon permits in the market to cover generation emissions, and hence margins can expand.

 

We also sold Intesa Sanpaolo, as the Italian budget situation once again threatened to take centre stage, with the probability of an excessive deficit procedure being initiated by the European Commission against the Italian government. This will likely lead to some kind of political showdown with Italy later in the year, which might offer better entry points.

 

Positive contributors included:

Orkla (+14.0%), Mowi (+12.0%) and Novartis (+8.7%).

 

Negative contributors included:

1&1 Drillisch (-15.3%), Daimler (-12.6%) and ING Groep (-12.3%).

 


 

Volatility spiked higher in May as trade tensions flared up. This meant premium rates for the Fund’s covered call strategy became somewhat more attractive once again and we initiated two call options. 

 

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 2.8% against sterling in May.

 

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

 

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust European Enhanced
Income I Hedged Acc

-1.5

4.8

8.2

-6.1

21.1

IA Europe Excluding UK

-1.2

5.6

23.7

-1.8

6.9

Quartile

2

2

4

4

1

 

*Source: Financial Express, as at 31.05.2019, 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 31.03.2019, 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.

Monday, June 17, 2019, 11:53 AM