Liontrust Macro Equity Income Fund

February 2019 review

The Liontrust Macro Equity Income Fund returned 2.4%* in February, compared the FTSE All Share Index return of 2.3%.

 

February echoed January, with Brexit-sensitive, domestic cyclicals performing strongly. Once more, this seemed to correspond to the growing impression that a ‘no deal’ exit was increasingly unlikely.

 

As per last month’s commentary, we maintain that there’s little predictive value in obsessing over political chatter. There is a chasm between public utterance and underlying agendas, market causation often doesn’t flow in a straight line and valuations aren’t, in the long-run, driven by political agents.

 

To repeat January’s argument, it seems a more robust strategy is to focus on the concrete: the UK is cheap, we know that Brexit is short-dated and that clarity of one sort or another is coming.

 

Judging by February’s market attribution data, the penny has dropped. The Fund’s strongest performers comprised of banks, life insurers and housebuilders – businesses that have de-rated since the referendum of 2016, but that demonstrate increasing signs of life in 2019 to date.

 

This effect was accelerated by a spate of solid earnings updates that gave little obvious sign of the Brexit dread that continues to grip some investors. The banks of our Rising Rates theme delivered strong full year numbers. UK-facing Lloyds (+9.7%) was conspicuous in demonstrating its ability to progress interest margins, meet cost targets and generate surplus regulatory capital. The upshot for shareholders was bumper cash returns, with Lloyds delivering a 5% increase in its ordinary dividend and a consensus-busting £1.75bn buyback. This means Lloyds has returned nearly £12bn to shareholders since 2014, or more than a quarter of its present market-cap.

 

Barclays’s (+6.3%) full-year earnings offered further encouragement. Measures of regulatory capital adequacy exceeded forecasts, reflecting the strength of its UK business and giving weight to an updated and confident dividend policy, which spoke of both progression and buybacks. Notwithstanding, Barclays continues to trade at a significant discount to book value and we have exploited this anomaly in adding to our overweight holding.

 

Results from the portfolio’s UK housebuilders delivered confirmation of our outlook. Both Barratt Developments (+11.2%) and Taylor Wimpey (+9.8%) announced higher volume, sales and profits, whilst committing to the maintenance of generous dividend policies. These companies have the security of net cash, whilst single-digit earnings multiples give little weight to the UK’s structural undersupply of new build housing.

 

Scarce Resource holding Rio Tinto (+3.6%) warrants special mention. Although February returns were only modestly better than the index, Rio’s final results saw the business reward shareholders with a US$4bn special dividend and a 70% payout ratio in the second half of 2018. This means Rio Tinto has returned US$13.5bn in 2018, or 14% of its current market-cap. This speaks of the capex-discipline and cash return potential that motivates our investment, but does little to explain why the business continues to trade on a meagre, single-digit earnings multiple. This remains a top-ten positon.

 

February portfolio negatives exerted a more modest impact on returns and tended to be more stock-specific. January addition, IG Group, fell 11% after peer CMC warned that limits on retail trader leverage would have a greater than expected impact on earnings. Whilst a decline of this order is always a concern, our holding size is small pending evidence that IG has negotiated the earnings dent from leverage limits. Which says nothing of the fact that IG would still look undervalued if earnings fell by the same degree as CMC’s and the remainder of its business were to go ex-growth overnight.

 

Lastly, Data Growth holding BT (-7.6%) continued its decline from the November highs. This seemed to have little to do with late-January’s unexceptional Q3 trading update and more to do with a sell-side downgrade from a former advocate of the company. BT remains cheap, the performance of its Consumer division is strong and it remains characterized by the stability of cash flows and dividends that many income investors find attractive.

 

Macro-Theme Allocation (as at 28.02.19):

Macro Equity Income February 2019 Allocation

Macro-Theme Changes [1]: 

Rising Rates

Positions in Barclays and Lloyds were increased as both UK-centric businesses offer gearing to benign Brexit. Barclays’s strong full year update showed clear operational momentum, capital build and management’s willingness to return surplus capital to shareholders. Similarly, Lloyds documented a well-capitalised and managed business, with progressive margins and the intent to return excess capital.

 

The HSBC weighting was decreased as unfavourable geographic mix offers less exposure to any upside resulting from Brexit resolution and operating metrics look weak relative to peer group.

 

Scarce Resource

The holding in Anglo Pacific was reduced as an instance of portfolio management discipline. Year-to-date share price strength presented a profit capture opportunity in a comparatively illiquid, smaller company. However, given the elevated, near-term cash flows from its Kestrel coal mine and the scope this offers for higher dividends and the acquisition of resource royalties, the position remains a firm hold.

 

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

 

 

Dec-18

Dec-17

Dec-16

Dec-15

Dec-14

Liontrust Macro Equity Income I Acc

-12.1

10.0

7.0

5.5

3.7

FTSE All Share Index

-9.5

13.1

16.8

1.0

1.2

IA UK Equity Income

-10.5

11.3

8.8

6.2

3.2

Quartile

3

3

3

3

3

 

[1] The omission of a Macro-Theme expresses the absence of notable portfolio activity.

 

*Source: Financial Express, as at 28.02.2019, 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 31.12.2018, total return (net of fees and income reinvested), bid-to-bid, primary class.

 

This review has been prepared for the Liontrust Macro Equity Income Fund but is also representative of the Liontrust GF Macro Equity Income (the Feeder Fund). The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the Liontrust Macro Equity Income Fund (the Master Fund) and will typically be lower due to additional fees and expenses.

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 Macro Thematic 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. The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the Liontrust Macro Equity Income Fund and is likely to be lower than its corresponding Master Fund due to additional fees and expenses.

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.

Tuesday, March 19, 2019, 3:48 PM