Liontrust GF European Strategic Equity Fund

November 2018 review

The Fund’s A4 share class returned -6.3%* in euro terms in November (A3 share class -6.3%), compared with the -0.9% return from the MSCI Europe Index and -1.1% return from the HFRX Equity Hedge EUR Index.

 

European markets were unable to stem losses following October’s correction, as long-running macroeconomic concerns overshadowed the month’s major events. US mid-term elections resulted in the Republican Party losing control of the House of Representatives but extend its majority in the Senate. The result was in line with expectations and was interpreted as broadly neutral for markets.

 

In Europe, Brexit newsflow was once again to the fore as the UK and EU agreed terms on a draft exit treaty which, having received approval from May’s cabinet, will now proceed to a parliamentary vote in December.

 

US stocks took some impetus towards month-end from Federal Reserve Chairman Jerome Powell’s comments that US rates were closing in on a neutral level. Earlier in the month the Fed had kept rates on hold at 2%-2.25%. European markets, however, were unable to avoid finishing in negative territory for the month.

 

Last month’s pattern of sector returns extended into November, with cyclical areas being punished. Energy (-5.9%) was again the weakest area of the MSCI Europe Index, not helped by Donald Trump’s public criticism of Saudi Arabia’s mooted plan to cut production.

 

The Fund’s performance in November reflected a continuation of the headwinds experienced in October. Despite heading into this market downturn with a reduced net exposure – 31% as at 30 November – the Fund has proven vulnerable to market weakness. The Fund’s short book has contributed positively to performance as one would expect against this market backdrop, but performance has been adversely affected by poor returns in the long book.

 

We continue to implement the Cashflow Solution process in the usual disciplined manner. We have been able to identify a number of factors that have contributed to this bout of poor short-term performance, none of which gives us cause to deviate from the consistent application of the investment process.

Our analysis shows that the secondary scores we use when making stock selections within the top quintile have not added value over the last two months. Over the longer term, they have made a significant positive contribution since introduction in 2015. Our equally weighted approach to long book construction has also weighed on returns during a period when larger-cap stocks have outperformed: the MSCI Europe Large Cap Index returned -0.4% in November compared with -2.7% from the MSCI Europe Mid Cap Index and -3.4% from the MSCI Europe Small Cap Index.

A selection of additional headwinds have conspired to undermine long-book performance: (i) energy sector weakness (ii) cyclical exposure and (iii) stock-specific setbacks.

  1. Having peaked at around US$85 a barrel in September, the Brent crude oil price has fallen dramatically towards US$60. This has put pressure on oil stocks, which account for 9% of the Fund’s net exposure. With low levels of corporate aggression in the sector and valuation spreads still above normal, we still see value in the sector.

  2. Concerns over slowing global economic growth and the impact of trade tension has contributed to a risk-off environment that is very apparent through the market’s sector return profile.

    So far in Q4, materials (-12.3%), IT (-11.7%), energy (-11.7%), industrials (-9.7%), consumer discretionary (-8.3%) – all cyclical sectors – have fallen heavily. By contrast, defensive sectors such as telecoms (+8.1%), utilities (+2.7%), consumer staples (-1.8%) and health care (-2.6%) have shown relative strength. The Fund has high relative exposure to these sectors; materials accounts for 18% of net exposure and consumer discretionary 10%.

    The relative performance of defensive stocks now looks quite extreme, at nearly 2 standard deviations above average (see lower chart series below). On this basis, a reversion could reasonably be expected according to the empirical data we have in the US and Europe. Strong defensive performance of this magnitude tends to be sharply mean reverting.

  3. Negative stock-specific developments include profit-taking in previously strongly performing stocks such as Moncler and Kardex, regulatory headwinds for Swedish Match, a highly dilutive potential acquisition by Restaurant Group and disappointing Q3 earnings updates from Covestro and Simcorp. We are monitoring our cash flow screens and individual stock scores.

We continue to see the outlook for equity markets as uncertain. Markets have tentatively entered a downtrend and there are signs that investors have recently become less complacent about the growth outlook. Market valuations remain elevated relative to history but have become less expensive of late. Meanwhile our measure of aggressive corporate behaviour shows that complacency is picking up. We are closely monitoring this rising trend, but our indicator has not yet reached worrying levels.  

Overall, our data show that this investor, corporate and valuation backdrop could imply greater volatility in markets including the potential for further equity market losses. In this context, we think the longer-term simulated returns from the application of the Cashflow Solution flexible long/short process is very encouraging. While the range of outcomes over a very short-term perspective can be very wide, the distribution of returns over longer time periods is clearly positively skewed. So shorter-term periods of volatile returns from the strategy are still consistent with good longer-term outcomes.

Distribution of average monthly returns - Liontrust European Strategic Equity Fund

Performance since launch* (%)

Liontrust European Strategic Equity Fund performance since launch
 

Discrete monthly returns (A4 share class)*

1yr since 25/04/14
Fund -5.8% 13.4%
MSCI Europe -4.6% 20.8%
2018
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Fund 0.7% 1.1% -1.7% 1.5% 1.2% -2.6% 2.0% -2.0% 1.8% -4.2% -6.3%
MSCI Europe 1.6% -3.9% -2.0% 4.6% 0.1% -0.7% 3.1% -2.3% 0.5% -5.3% -0.9%
2017
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Fund 1.5% 2.0% 0.5% 1.4% -2.1% -2.0% -0.2% 1.6% 0.8% 1.1% -3.3% 3.0%
MSCI Europe -0.4% 2.9% 3.3% 1.7% 1.5% -2.5% -0.4% -0.8% 3.9% 2.0% -2.1% 0.8%
2016
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Fund -0.6% -0.2% -0.8% -0.7% 0.9% 2.3% 1.1% -1.5% 2.7% 2.7% -2.2% 1.2%
MSCI Europe -6.2% -2.2% 1.3% 1.9% 2.3% -4.3% 3.5% 0.7% 0.0% -0.8% 1.1% 5.8%
2015
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Fund 1.7% 2.4% 1.5% -1.6% 1.3% -1.3% 3.9% -1.6% 2.2% -3.4% 0.8% 0.2%
MSCI Europe 7.2% 6.9% 1.7% 0.0% 1.4% -4.6% 4.0% -8.4% -4.3% 8.3% 2.7% -5.3%
2014 (subsequent to April's change to fund name and objective)
May Jun Jul Aug Sep Oct Nov Dec
Fund 0.2% 0.0% 1.2% -0.2% -0.5% 1.9% 2.4% 0.9%
MSCI Europe 2.5% -0.4% -1.5% 2.0% 0.4% -1.8% 3.2% -1.4%

 

 

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

 

 

Sep-18

Sep-17

Sep-16

Sep-15

Liontrust GF European Strategic Equity A4 Acc EUR

2.6

5.2

0.7

14.5

 

Discrete data is not available for five full 12 month periods due to the launch date of the portfolio.

 

*Source: Financial Express, as at 30.11.2018, total return (income reinvested and net of fees). Non fund-related return data sourced from Bloomberg.


**Source: Financial Express, as at 30.09.2018, total return (income reinvested and net of fees).


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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 Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Liontrust European Growth Fund holds a concentrated portfolio of stocks, if the price of one of these stocks should move significantly, this may have a notable effect on the value of the respective portfolio. The Liontrust Global Income Fund's expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation.  

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, December 6, 2018, 1:20 PM