Liontrust European Enhanced Income Fund

October 2018 review

The Liontrust European Enhanced Income Fund returned -5.5%* in October, compared with the -6.1% sterling terms return and -5.6% local currency return from the MSCI Europe ex-UK Index.

 

October saw the heaviest monthly decline for the MSCI Europe ex UK Index since May 2012, when we were deep into the eurozone crisis and the index registered a -7.9%* decline in sterling terms. However, the economic backdrop in Europe is markedly different from 2012: unemployment in the eurozone is at its lowest level since November 2008, economic growth is positive and we are starting to see meaningful wage growth (a harbinger of inflation) returning.

 

The above factors are why the European Central Bank (ECB) has decided to remove its quantitative easing (QE) measures at the end of the year, which is part of the explanation of the decline in stocks and the return of volatility in markets. We recently wrote about how increasing volatility has allowed us to resume covered calls in the Fund. We think a large part of this is due to tightening global monetary policy, with the US Federal Reserve shrinking its balance sheet as well as raising interest rates. Once the ECB ends QE in December, the Bank of Japan will be the only remaining major central bank still engaging in QE.

 

This effect has also fed into bond markets, where the expectation of tighter monetary policy saw the US 10 year bond yield move higher, rising to a high of 3.23% from 3.06% at the end of September. We think this is part of a wider regime change which could spell then end of a bull run for bonds and ultimately benefit the unloved value sector in equities.

 

In October, the bias was to defensive sectors in the MSCI Europe ex-UK Index. Telecoms (+2.0%), consumer staples (-1.8%), health care (-3.3%) and utilities (-3.8%) were the most resilient to the sell-off. The worst affected were IT (-9.1%), materials (-8.7%) and industrials (-8.5%).

 

The Fund benefitted from its overweight positions in telecoms and utilities, with strong returns from Swedish telecoms group Telia (+3.0%). The company issued an upbeat third quarter report, which came ahead of analysts’ expectations.

 

Recruitment company Amadeus FiRe (+3.0%) also raised its guidance following stronger than expected third quarter numbers. In the first nine months of the year, EBITA (earnings before interest, taxes and amortisation) was 13.2% higher than the same period last year and management expects no material changes to supply and demand in the fourth quarter. Therefore, the company now expects an EBITA rise of at least 10% for 2018, compared to its previous forecast of 2%. The labour market remains extremely tight in Germany.

 

Despite rising bond yields, financials were nonetheless the biggest source of negative attribution for the Fund. Stocks such as Nordea Bank (-18.6%), French asset manager Amundi (-18.9%) and Italian asset manager Azimut Holding (-16.6%) weighed on returns.  In Nordea’s case, this was primarily the result of fears of being dragged into the Baltic money-laundering scandal, which has caused severe problems for rival Danske, but the Bank was quick to reassure investors that it was not under investigation by regulators. Amundi and the Italians suffered from continued fall-out from the Italian populist budgetary dispute with the European Commission, which seems likely to rumble on until European elections in May.

Italian credit ratings agency Cerved Group (-24.5%) fell after the unexpected resignation of its chief executive. In a short statement, the company stated that Marco Nespolo left Cerved to pursue new professional opportunities. 

 

Thule Group (-15.3%) is an example of a stock which got caught in the market sell-off, though fundamentals remained strong as demonstrated by the company’s third quarter numbers. The company, global leader in products such as roof and bike racks to use on cars and bicycle trailers, reported a 12.7% year-on-year rise in sales to SEK1.6bn versus the consensus estimate of SEK1.5bn. However, margins were squeezed as a result of marketing activity for major product launches and investment in product development which raised costs by about SEK25m in the quarter.

 

Positive contributors included:

Marine Harvest (+6.7%), Novartis (+3.4%) and Amadeus FiRe (+3.0%)

 

Negative contributors included:

Cerved Group (-24.5%), Nordea Bank (-18.6%) and Thule Group (-15.3%)

 


 

We reinitiated the covered call strategy in September on 10 holdings. As a result, we were able to generate a modest premium income for the portfolio as all the calls expired below their strike price. We again wrote another small selection of calls 13 in October and – due to an escalation in market volatility - the premium income generated for the portfolio almost doubled.

 

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 fell by 0.5% against sterling in October.

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

 

Sep-18

Sep-17

Sep-16

Sep-15

Sep-14

Liontrust European Enhanced Income
I Hedged Acc

-1.5

18.0

-4.8

13.7

14.7

IA Europe Excluding UK

1.9

21.9

18.4

3.6

4.0

Quartile

4

4

4

1

1

 

*Source: Financial Express, as at 31.10.2018, 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 30.09.2018, 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. 

Thursday, November 15, 2018, 5:40 PM