Liontrust European Income Fund

April 2019 review

The Liontrust European Income Fund returned 3.5%* in sterling terms in April, compared with the 4.0% return from the MSCI Europe ex-UK Index.

 

Global events provided no reason to check equity markets’ 2019 advance. In fact, investors grew excited at the prospect of ‘goldilocks’ scenario of a US economy which is growing, but not running hot enough to cause the Federal Reserve to doubt its shift to a more patient approach to rate rises. This balance was nicely encapsulated by March payroll data which showed 196,000 jobs created – ahead of consensus forecasts of 177,000 – but wage inflation retreating from the previous month’s 3.4% pace.

The market continued to take a ‘no news is good news’ approach to the apparently interminable trade talks between the US and China, as the delay to the US’s threatened tariff increase was again extended.

The rise in European equities took on a significant cyclical tilt in April, with sectors such as IT (+9.0%), industrials (+7.5%), finance (+7.4%) and consumer discretionary (+6.9%) providing impetus. On the flip-side, health care (-2.3%) and real estate (-1.3%) were notable laggards.

The strong showing from European financials played to the Fund’s advantage due to its large sector allocation – almost a third of the portfolio.

Assets under management at French asset manager Amundi (+13.7%) rose 3.6% to €1.48tn in the first quarter of 2019. This reflected the impact of rising financial market levels (a €58.3bn positive effect), which offset a €6.9bn outflow. The company showed substantial operational gearing to the asset increase, with net revenues rising by 6.2% quarter-on-quarter and net income jumping 22%. The cost-to-income ratio dropped from 52.6% in Q4 2018 to 50.9% in Q1 2019.

 

Gjensidige Forsikring (+11.9%) recently completed the sale of its banking operations, leaving the group as a purer play on Nordic general insurance. The deal generated an exceptional gain of NKr1.6bn, which distorts the comparison of this year’s profits before tax of NKr3.0bn with last year’s NKr600m. Stripping this out, it is clear that the company’s ongoing insurance operations performed well. Earned premiums rose a modest 1.2%, but the underwriting result almost doubled to NKr798m as reflected in a combined ratio of 87 – down from 93 last year. The company implemented price rises across all its business lines and also benefitted from a lower loss ratio due to more favourable weather conditions. In April, the Fund received the company’s 2018 dividend of NKr7.1 a share, amounting to a 4.2% historic dividend yield.

 

Despite the Fund’s pharmaceuticals stocks all issuing Q1 results which confirmed or upgraded full-year 2019 guidance, their share prices slid as investors rotated away from defensive sectors. Sales at Roche (-4.7%) rose 8% at constant exchange rates in Q1 to SFr14.8bn, driven by newly launched pharmaceutical products such as the Ocrevus Multiple Sclerosis treatment and the Perjeta and Tecentriq cancer medicines. It upgraded 2019 full-year guidance to mid-single digit percentage sales growth.

 

Novartis (-4.3%) also nudged guidance higher within Q1 results; it now expects core operating income growth of high single digits. Core operating income rose 18% in Q1 after net sales increased 7% in constant currency terms. Sales growth was the result of 11 percentage points (ppt) of volume growth effect, offset by 3ppt decline in prices and 1ppt negative impact from generic competition.

 

During the month Novartis completed the spin-off of its Alcon eye care business. All Novartis investors, including this Fund, received one Alcon share for every five Novartis shares owned. Alcon intends to begin paying dividends from 2020, but with the company focusing on organic and acquisitive growth, we do not anticipate returns to shareholders meeting our threshold income level. We therefore disposed of the new shares in Alcon.

 

Sanofi’s (-2.0%) net sales rose 4.2% in constant currency terms to €8.4bn as large increases in Speciality Care franchise sales (particularly immunology and rare blood disorders) compensated for falling Primary Care franchise sales. Guidance of 3% - 5% earnings per share growth in 2019 was maintained.

 

Acquisitions helped Dustin Group (-4.9%) increase net sales 18% to SEK3.21bn, but its results for the quarter to 28 February 2019 fell short of investor expectations. The IT group commented that sales had been held back by low customer activity around Christmas/New Year and a limited supply of computers with Intel processors. In addition, profit margins fell as low-margin public contracts grew as a proportion of sales relative to higher margin projects. In the report’s outlook section, the company forecast a stabilisation of the underlying market following this weakness at the start of its financial year.

 

Shares in Swedbank (+14.3%) bounced following two months in which they were battered by money laundering allegations, but they remain well below their pre-scandal levels. However, we see the lack of any further major revelations as encouraging.

 

Positive contributors included:

Swedbank (+14.3%), Amundi (+13.7%) and Gjensidige Forsikring (+11.9%)

 

Negative contributors included:

Terna (-5.9%), Roche (-4.7%) and Novartis (-4.3%)

 

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

 

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust European Income I Acc

-2.0

3.1

17.5

-0.2

9.5

MSCI Europe ex UK

2.2

3.0

27.2

-5.3

7.0

IA Europe Excluding UK

-1.2

5.6

23.7

-1.8

6.9

Quartile

3

4

4

2

1

 

*Source: Financial Express, as at 31.03.2019, 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.

Friday, May 17, 2019, 12:21 PM