Liontrust Macro Equity Income Fund

May 2019 review

The Liontrust Macro Equity Income Fund returned -5.1%* in May, compared the FTSE All Share Index return of -3.0%.

 

May returns were dictated by a combination of macro influences which saw investors shun the value companies that populate the portfolio and covet nominal safe-havens.

 

In keeping with other major markets, UK equities performed poorly on the month. Notably, however, the FTSE All Share’s decline obscured an underlying dispersion of returns on grounds of market-cap. A size factor effect seemed clear from the fact that the FTSE Small-Cap (-1.7%) and AIM All-Share (-0.8%) indices outperformed both UK large and mid-caps; the margin of outperformance most obvious in comparison to the FTSE 250 (-4.0%). This was to the detriment of the portfolio, given our market-weighting to large-cap UK equities.

 

Whilst attributing causation can be slippery, it seems probable that Brexit developments exerted a bearing on the comparative strength of UK small-caps. In the volatile aftermath of 2016’s referendum result, small-cap equities outperformed UK mid-caps and UK-centric large-caps; an effect flowing from their characteristic illiquidity (what can’t be sold, doesn’t get sold) and the mechanical uplift to the valuation of these typically growth-style businesses that followed a slide in risk-free rates. The Brexit Party’s European election triumph and Prime Minister May’s resignation created a minor echo of 2016’s upheaval.

 

There was ample further evidence of a Brexit effect. May saw sterling decline against both the dollar and the euro while gilt yields fell sharply. The net impact on UK equities was general weakness amongst economically-sensitive, value-style businesses; and a strong showing from large-cap quality companies. In light of the Fund’s weighting to UK-centric, value stocks (life insurers, banks, housebuilders etc), this presented a stiff headwind to May returns. The effect was compounded by the portfolio’s lack of quality-style businesses on grounds of valuation; the ever-broadening valuation gap between cheap and expensive companies, arguing against their assumed defensive traits.

 

Oddly, the May softness of UK value, gilts and sterling, jarred with the tone of the Bank of England’s May rate decision and Inflation Report. Whilst few will have expected the Bank to hike in the absence of a Brexit settlement, many will have been surprised by the hawkish observation that market rate projections were “unequal to the task of meeting the MPC’s (inflation) remit”.

 

The Bank’s hawkishness was no doubt negated by a dovish Federal Reserve Bank. Rates were held as persistently soft inflation took precedence over “solid” economic activity and jobs growth. It’s probable that the escalation of US-China trade tensions and the implications for growth (although not inflation) informed the Fed’s decision.

 

The tit for tat exchange of tariffs had a direct bearing on portfolio performance. Broadly, the cyclical mining businesses of our Scarce Resource theme trailed benchmark on the easy assumption that tariffs are a brake on global economic growth. To be clear, this has little bearing on our belief that industry underinvestment will produce structurally higher commodity prices, earnings and shareholder returns. The May performance of Rio Tinto (+1.6%), a top ten holding, gave credibility to our argument, as the share price bucked broader sector weakness and rose more than 2%, on the strength of a rising iron ore price and the associated uplift to earnings.

 

May returns were not purely a function of macro events, with stock-specific factors also contributing.

 

Data Growth holding, BT (-15.4%), was May’s heaviest faller as broadly in-line Q4 earnings gave detractors cause to question free cash flow projections and dividend sustainability. Certainly, the statement flagged the accelerated rollout of fibre-optic broadband and an associated pick-up in capex, but we see this as sign of new CEO Philip Jansen’s intent to stabilise the top-line. Which says nothing of the as yet unrealised benefits of extensive cost-cuts.

 

Spread-better IG Group (+7.3%) led May’s gainers, as it rose more than 5% on an upbeat pre-close statement and strategy update. Importantly, IG offered clear guidance on initiatives to offset the revenue impact of European limits on retail trader leverage. The business remains cheap and its growth potential unacknowledged.

 

Macro-Theme Allocation (as at 31.05.19):

Liontrust Macro Equity Income Fund May 2019 Performance

Source: Liontrust, 31.05.19

 

Macro-Theme Changes [1]:

Battery Revolution

We increased our position in Johnson Matthey as a negative market reaction to a solid full-year update presented a buying opportunity. We believe that investor displeasure with soft free cash flow print gives little credit to short-lived underlying causes, while environmental legislation ensures continued growth in auto catalysts business and nascent battery cathodes division offers a play on growing electric vehicle demand.

 

Digital Economy

Bank note manufacturer De La Rue was added to the Fund as its record of operational disappointments leaves the company prone to acquisition or break-up. The truly cashless economy remains a distant prospect, with little immediate threat to the bank note printing business. The company’s Product Authentication and Testing division offers growth to offset operational difficulties.

 

Global Pharma

Abbvie was sold, consistent with asset allocation decision to reduce Fund exposure to US dollar assets.

 

Rising Rates

The position in Jupiter Fund Management was reduced as increasing breadth of fund outflows argues for less exposure.

 

A new position was opened in asset manager Man Group. The company’s single digit earnings multiple gives little recognition to its record of consistent asset growth, the stickiness of client assets and the progress made in diluting the importance of the AHL quantitative strategy.

 

Scarce Resource

Increased MCSI Index weighting created a temporary demand for shares in Anglo Pacific and presented alpha capture opportunity, which resulted in a reduction in the Fund’s holding.

 

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 31.05.2019, 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.


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.

Monday, June 17, 2019, 2:39 PM