Liontrust Macro Equity Income Fund

March 2019 review

The Liontrust Macro Equity Income Fund returned 2.5%* in March, compared the FTSE All Share Index return of 2.7%.

 

March performance was dictated by two largely discrete macro forces: the trajectory of global rates and the maddening convolutions of the UK’s exit from the EU.

 

In respect of global rates, key central banks surprised markets with the dovish tenor of March rate decisions. The European Central Bank (ECB) initiated proceedings with an early month meeting that saw them stand pat on rates, defer the unwind of quantitative easing (QE) and restart the financial crisis initiative of cheap long-term loans to banks (Targeted Long-Term Refinancing Operations, or TLTRO). Whilst this may reflect the recent softness of EU macro data, this is a clear reversal of the modestly hawkish guidance given at the ECB’s December meeting and highlights the difficulties central banks have had in normalising monetary policy.

 

This was writ large in the Federal Reserve Bank’s March rate decision. After undertaking four quarter point rate hikes in 2018 and giving December guidance of two more in 2019, the Fed downgraded its growth estimates for the US economy and called time on tightening. Superficially, the Fed’s volte face followed a run of weak US macro data, but its underlying concern seems to be the lack of inflationary pressure and the extent to which this means that real rates stay tight even as nominal rates are cut.

 

Significantly, in the wake of the March Fed decision the US yield curve continued to flatten and invert. As most will know, an inverted yield curve is a widely followed predictor of recession; coming economic weakness signalled by the fact that long-term debt yields less than short-term. But some scepticism is warranted in respect of the yield curve’s prophetic meaning. A decade of low rates and QE has artificially suppressed long rates and muddied the yield curve’s predictive import. It may be that inversion is meaningless in this instance.

 

Certainly, we remain convinced that rates have bottomed and will move higher in time. This is the broad case for our Rising Rates theme and its assorted bank holdings. Whilst the events of March may suggest otherwise, they do nothing to address the obvious asymmetry of low rates, leave aside the assorted structural, demographic and political factors that may push rates higher over time.

 

In market terms, the promise of ongoing easy money drove global equity indices higher. But from a UK perspective, market gains were noticeably lop-sided. Given the import of yield curve inversion, leadership was assumed by defensives and quality; tobaccos, distillers and food producers in the vanguard. We are zero-weighted to these sectors on grounds of theme (tobacco) and valuation (distillers, food producers) and this was to the detriment of March returns. However, the impact was cushioned to some extent by the defensive telecoms overweight of our Data Growth theme.

 

The second macro force affecting portfolio performance was the as yet unresolved Brexit saga. The UK’s scheduled end-March departure date looked increasingly unfeasible as March progressed. Theresa May’s deal was rejected twice, the EU granted an Article 50 extension and Parliament proved laughably incapable of agreeing an alternative to the government’s Brexit plan.

 

This pared portfolio returns. Domestic facing cyclicals, businesses sensitive to a well-executed Brexit, were under pressure throughout March. This was most clear amongst certain of the Fund’s housebuilders, building materials companies, life insurers and banks. Part of the case for such companies is that Brexit has punished them with an unwarranted discount. To be clear, the events of March don’t change this and simply defer its closure. Happily, weakness amongst the Fund’s UK-centric holdings was partially offset by the continued outperformance of the dollar earning miners that comprise our Scarce Resource theme.

 

March also saw full year updates from the life insurers that populate our largest theme: Population Ageing. Top-ten holding Legal & General (-1.9%) warrants mention due its strong record of profit and dividend progression. Underlying earnings increased 10% on 2017, whilst the dividend grew by 7%. This means earnings have grown at an impressive compound rate of 11% since 2011 and dividends at 14%. The engine of this success is Legal & General’s retirement operations and the finals gave abundant evidence to this effect; the company reporting £9.8bn of annuity premiums and a potential annuity pipeline of up to £20bn. Perplexingly, the company continues to trade on a mouth-watering single-digit earnings multiple.

 

Finally, March’s best performer was Infrastructure Spending holding and building materials business Marshalls (+14.0%). March strength issued from an excellent full year update that saw profits and margins exceed market forecasts. The company has more than doubled in value since we initiated the position in Q4 2016. Although certainly not cheap at more than 20x prospective earnings, Marshalls’ record of compound earnings growth makes it a hold.

 

Macro-Theme Allocation (as at 31.03.19):

 

Macro Equity Income March Allocation

Macro-Theme Changes [1]:

Data Growth

Holdings in AT&T and Verizon were reduced in order to limit non-sterling exposure in anticipation of Brexit resolution and the subsequent repricing of UK assets.

Global Pharma

Positions in Merck and Pfizer were also scaled back in order to manage non-sterling exposure.

Infrastructure Spending

Holdings in Leg Immobilien, Tag Immobilien and Vonovia were sold to capture profit in a rump position. This move is consistent with the Fund’s reduced US weighting and strategic call on Brexit clarity and any resultant uplift to sterling-denominated assets.

Scarce Resource

Anglo American, BHP Group and Rio Tinto were all reduced. This is an instance of portfolio management discipline within what remains a high-conviction theme; these companies traded ex-dividend and recent share price strength presented a profit capture opportunity;

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

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust Macro Equity Income I Acc

4.8

-1.6

14.3

-3.4

9.3

FTSE All Share Index

6.4

1.2

22.0

-3.9

6.6

IA UK Equity Income

3.6

0.3

15.1

-1.2

8.4

Quartile

2

3

3

3

2

 

*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.


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


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, April 16, 2019, 10:47 AM