Liontrust Macro Equity Income Fund

June 2019 review

The Liontrust Macro Equity Income Fund returned 4.3%* in June, compared the FTSE All Share Index return of 3.7%.

 

The month’s key market pivot was the Federal Reserve’s increasingly dovish bias. Faced with a deceleration in macro-economic momentum and the overlapping fallout from the gathering Sino-US tariff spat, Fed Governor Powell spoke early-month of his intent to “act as appropriate to sustain (the) expansion”. This was given more formal expression in the June Fed meeting, wherein members effected a dovish dot-plot shift; cuts to inflation and interest-rate projections, signalling a more fundamental shift in outlook than is ostensibly warranted by trade concerns.

 

Understandably, markets recalibrated their US rate expectations, with the implied probability of a July cut rising from 15.8% at the end of May, to 100% by end of June. Treasury yields moved lower and the dollar spot index, a measure of the dollar’s value relative to a basket of other currencies, declined by 1.6%.

 

These developments informed July portfolio activity. Incipient dollar weakness heralds a shift in financial market status quo. The Fed’s intent to prolong the economic cycle puts it at loggerheads with Mario Draghi and his June pledge to extend European Central Bank (ECB) monetary stimulus in the absence of inflationary pressures. This suggests we are on the cusp of further competitive devaluations and ongoing dollar weakness; something signalled in President Trump’s tweet that ECB monetary stimulus has “dropped the euro against the dollar… (and makes) it… easier for them to compete against the USA”. In combination with relative valuation and the risk of mean reversion that follows sustained outperformance, this gave us sufficient cause to accelerate the sale of our US positions and exit holdings in pharmaceuticals Pfizer and Merck.

 

Absent an abrupt, disorderly Brexit, however, it’s less clear that the Bank of England is as keen to maintain the present degree of monetary accommodation. A tight UK job market is stoking average earnings growth and it’s probable that measures of inflation will catch up. This implies that UK rates may rise faster than consensus anticipates, that sterling will strengthen and that rate-sensitive UK value stocks will outperform. In broad, stylistic terms, this explains the June addition of new portfolio holdings RBS, Tesco and ITV.

 

June’s dollar weakness was also a material contributor to portfolio returns. Current market narratives treat dollar depreciation as reflationary, to the extent that it eases the debt-servicing costs of emerging market borrowers with dollar-denominated obligations. At the same time, dollar weakness is held as a condition of commodity price strength; dollar-denominated commodities appreciating, as non-dollar buyers get more bang for their (non) buck.  The combination of a reflationary impulse and higher commodity prices is typically good news for the earnings of cyclical resource businesses. This no doubt underlies the marked June strength of the miners that comprise our Scarce Resource theme; Anglo-American (+18.4%) conspicuous in appreciating more than 18%.

 

Dollar softness no doubt contributed to the June strength of life insurer and Population Ageing theme constituent, Prudential (+8.8%). Commonly regarded as a China-proxy, Prudential benefitted as Asian equities bounced on the reflationary import of dollar depreciation. The forthcoming de-merger of Prudential’s UK business, M&G Prudential, with all its promise of unlocking latent shareholder value, must have contributed.

 

Away from the dollar, June returns were enhanced by a strong showing from Digital Economy holdings DS Smith (+14.7%) and Hastings (+8.6%). Packaging business DS Smith outperformed on a mixed full year statement that was celebrated for evidence of margin progression and company guidance that shareholders should expect more. Whilst non-life insurer Hastings, long shunned for its disciplined growth strategy, gained on a broker note which discussed signs of an increase in motor premium pricing and the associated suggestion of earnings growth to come.

 

Macro-Theme Allocation (as at 30.06.19):

 Macro Equity Income Theme Allocation 

 

Source: Liontrust

 

Macro-Theme Changes [1]:

Digital Economy

A new position was added in non-life insurer Admiral. Q2 data points to a recovery in pricing and higher future earnings, while prudent reserving policy implies scope for further cash returns. It is inexpensive compared with its historic rating.

 

We also added a new position in recruitment and HR group Hays. A technologically adept business, it is alive to the commercial potential of data analytics and its current discount to average historic valuation presents a buying opportunity. Hays’ conservative approach to its ordinary dividend (3x covered by statutory Earnings Per Share (EPS)) reassures us on its sustainability, whilst a prudent special dividend policy allows shareholders to participate in operational delivery.

 

Another new holding for the fund this month was ITV, thanks largely to its forthcoming video on demand JV. Britbox promises earnings accretion through sticky subscription revenues, while a benign Brexit is likely to buoy business confidence and boost advertising revenue. The investment case is supported by a bounce in audience share from 2015 lows, and the company is trading cheap relative to its own history.

Tesco was another new addition thanks to its data analytics subsidiary, Dunhumby, which demonstrates how businesses are increasingly using customer data to grow. Its sub-market earnings multiple fails to reflect the success of its turnaround in terms of sales stabilisation, deleveraging, margin progression and growth initiatives, while dividend coverage guidance signals uplift in shareholder returns.

 

Global Pharma

We made two outright sales in the period under this theme, of Pfizer and Merck. This concludes our exit from dollar-denominated, US quoted businesses, motivated by a combination of the comparative cheapness of UK equities and our expectation that a benign Brexit leads to relative sterling strength.

 

Rising Rates

We added RBS to the portfolio this month, complimenting existing holdings in Lloyds and Barclays. Its position of excess regulatory capital offers the prospect of bumper dividends and a consequent uplift in measures of return, while its value rating already discounts a Brexit recession and ascribes little prospect of an equally probable benign outcome.

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

 

 

Jun-19

Jun-18

Jun-17

Jun-16

Jun-15

Liontrust Macro Equity Income I Acc

3.4

3.3

17.8

-6.7

8.2

FTSE All Share Index

0.6

9.0

18.1

2.2

2.6

IA UK Equity Income

-2.5

6.0

19.3

-1.8

7.0

Quartile

1

4

3

4

2

 

*Source: Financial Express, as at 30.06.2019, 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 30.06.2019, total return (net of fees and income reinvested), bid-to-bid, primary class.


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


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 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.

Wednesday, July 24, 2019, 2:15 PM