Liontrust European Income Fund

November 2018 review

The Liontrust European Income Fund returned 1.5%* in sterling terms in November, compared with the -0.5% return from the MSCI Europe ex-UK Index.

 

European equities stabilised somewhat after October’s sell-off. Investors continued to favour defensive sectors however, as the ongoing US-China trade war and concerns about global growth deterred investors from adding risk. Communications services (+7.9%), utilities (+5.2%) and consumer staples (+2.7%) were the best performing sectors in the MSCI Europe ex-UK Index.

 

The Fund, therefore, benefitted from a strong performance from its two utility holdings: Terna (+10.0%) and Endesa (+6.6%). As well as rising due to its defensive qualities, Spanish electricity company Endesa also released pleasing third quarter numbers. Revenue for the first nine months of the year rose 4% from the same period last year, while earnings before interest and taxes (EBIT) were 11% higher. The group benefited from its significant renewable capacity as the price of carbon permits rose throughout the review period. The results prompted some analyst upgrades for 2018 results.  

 

Telecoms (which forms part of the communications services sector) was another area of positive attribution for the Fund. Within this space Germany’s 1&1 Drillisch (+12.7%) was the best performer following analyst positivity about the company’s market position ahead of the German 5G auction.

 

As well as defensive sectors, it was another month of outperformance for value areas of the market, with the MSCI Europe ex-UK Value Index declining only 0.1% in sterling terms compared to the MSCI Europe ex-UK Growth Index’s fall of 0.8%. After months of underperformance, we believe that there is potentially an inflection for value versus growth and the Fund is positioned to benefit from this. One of the ways we have done this is through a significant overweight position in financial stocks, which this month contributed to the Fund’s outperformance.

 

Among the strong performers was Italian bank Intesa Sanpaolo (+4.9%) following solid third quarter numbers. Net income of €833m in Q3 came in ahead of the market consensus of €791m as the company overcame turbulence in the Italian government bond market. The company’s shares also received a boost from reports suggesting that the Italian government could be prepared to compromise in its proposed budget. The country has been at loggerheads with the European Union over the size of its proposed budget deficit, which although relatively modest, represents a fiscal expansion over previous plans.

 

Bpost (-14.8%) was the Fund’s biggest decliner. The Belgian postal operator’s third quarter earnings before interest, taxes, depreciation and amortisation (EBITDA) came in below the company’s forecast of €78.9m compared to €112.4m. The company said that this was due to the absence of one-off gains which occurred last year and higher organic costs. Bpost stated that it expect a continued rise in costs related to transport, consolidation of acquired businesses and higher salaries. The group confirmed that its 2018 EBITDA is likely to be at the lower end of its €560m-600m projected range and dividend will be at least the same level as in 2017.

 

The fall in oil prices hit shares in Equinor (-9.4%) and Eni (-9.2%). Crude prices slid as a result of concerns about oversupply and a lack of cohesion between major producing nations about whether output cuts are necessary to stem the rout.

 

There were two changes to the Fund’s holdings in November. We exited the position in Unibail-Rodamco-Westfield,  given the prospect next year of rising rates and the concomitant potential impact on property valuations. We added to our holding in Dustin Group, an IT intermediary company in Sweden, via a well-received rights issue designed to give extra firepower for acquisitions.

 

Positive contributors included:

1&1 Drillisch (+12.7%), Terna (+10.0%) and Endesa (+6.6%)

 

Negative contributors included:

Bpost (-14.8%), Equinor (-9.4%) and Eni (-9.2%)

 

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

 

Sep-18

Sep-17

Sep-16

Sep-15

Sep-14

Liontrust European Income I Acc

-2.1

19.1

12.4

7.3

5.5

MSCI Europe ex UK

1.3

21.4

20.0

-1.6

5.6

IA Europe Excluding UK

1.9

21.9

18.4

3.6

4.0

Quartile

4

4

4

1

2

 

*Source: Financial Express, as at 30.11.2018, 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.
Monday, December 17, 2018, 10:23 AM