Liontrust Macro Equity Income Fund

November 2018 review

The Liontrust Macro Equity Income Fund returned 0.0%* in November, compared with the -1.6% return from the FTSE All Share Index.

 

November passed in encouraging fashion. Vodafones (+17.5%) resurgence offered a major contribution to Fund returns. Share price strength was driven by a November interim statement, which, whilst unremarkable in absolute terms, did enough to exceed rock-bottom expectations.  CEO Nick Read gave a bullish appraisal of Vodafone’s key European market, raised free cash flow guidance and – most critically – maintained the current level of dividend disbursements. This frustrated bearish assumptions of a dividend cut and triggered a material correction of year-to-date share price weakness.

Vodafone is cheap relative to its peer group and the market and we maintain that the discount will narrow as attention shifts to the obvious strength of its European portfolio. The Fund’s 5% weighting will allow us to capture this.  

November returns were boosted by our overweight in publisher and Digital Economy theme constituent Bloomsbury Publishing (+8.0%). Whilst the month lacked any catalyst adequate to account for the share price rise, investor enthusiasm no doubt followed October’s healthy interims. A 22% increase in adult fiction and cookery titles contributed to 13% earnings per share growth.

Fund performance was further assisted by a strong showing from Anglo-Pacific (+9.6%), a small-cap mining royalties business. Its share price gain came in the wake of a late October Q3 update and supportive broker commentary; both attesting to the company’s cash generative qualities and strategic exposure to commodities characterized by attractive market fundamentals.

From a sectoral perspective, our pharmaceutical overweight proved beneficial in November. Lacking any obvious, discrete reason for pharma’s outperformance, it seems fair to surmise that this was just an extension of the appetite for defensives stoked by October’s market violence. Gains for telecoms, distillers and personal goods business, offered support to this view.

To the Fund’s advantage, the tobacco sector was a conspicuous non-participant in wider defensive strength. Further vindication of our longstanding zero sector weighting was found in news of the US Food & Drug Administration’s intent to prohibit the US sale of menthol cigarettes. With 55% of US volumes and 25% of group profits at stake, British American Tobacco fell by c.20%.

November returns were tempered by weakness amongst the large-cap miners of our Scarce Resource theme. This was less a consequence of adverse company specific news flow and much more the product of general risk sentiment. Trade war anxieties and the assumed impact on global growth continue to pressure share prices. But the thematic case for higher spot prices remains intact and our miners are characterized by eye-catching valuations, strong cash-generation and attractive shareholder returns. This remains a conviction position.

The paper and packaging businesses of our Digital Economy theme also weighed on performance. DS Smith (-15.0%) and Smurfit Kappa (-17.2%) extended Q4 declines as markets priced overcapacity in the container board market. Both businesses have updated investors in recent weeks and it should be noted that operational positives and upbeat guidance bear no correspondence to the severity of any share price correction. We are holders.

Lastly, the portfolio’s UK housebuilders remained under pressure throughout November. The inferred impact of Brexit continues to cast its shadow, with bears anticipating a dent to consumer confidence and falling demand. Given that the Fund’s housebuilding contingent already trades on mid-single digit earnings multiples, we’d suggest that much Brexit gloom is already priced and little credence is given to the structural housing undersupply which informs our Infrastructure Spending theme.

Macro-Theme Allocation (as at 30.11.18):

 

Macro Equity Income November 2018 Theme Allocation.

Macro-Theme Changes [1]:


Global Pharma

Positions in Abbvie and Merck were tactically reduced. Strong Q4 share price performance presented a profit capture opportunity as part of a broader reduction in portfolio exposure to non-sterling assets.

 

Infrastructure Spending

Grainger was sold after it announced a dilutive, rights-funded acquisition of GRIP, a Private Rented Sector investment vehicle. The acquisition frustrates and defers our assumption of dividend growth. We also reduced exposure to Leg Immobilien, Tag Immobilien and Vonovia, a tactical portfolio management decision reflecting our profit-capture discipline and strategic call to reduce non-sterling exposure.

 

Rising Rates

A new position was initiated in Barclays, a cheaply-rated bank trading at a material discount to book value which should be a beneficiary of higher rates. It has a high-return UK retail business, while activist presence raises the likelihood of shareholder friendly outcomes. The holding in Prudential Financial was sold, consistent with the wider strategic effort to reduce non-sterling exposure.

 

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

 

 

Sep-18

Sep-17

Sep-16

Sep-15

Sep-14

Liontrust Macro Equity Income I Acc

1.4

9.6

8.0

3.9

10.0

FTSE All Share Index

5.9

11.9

16.8

-2.3

6.1

IA UK Equity Income

3.4

10.6

11.4

3.5

7.6

Quartile

4

3

4

2

1

 

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

 

*Source: Financial Express, as at 30.11.2018, 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 30.09.2018, 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.

Monday, December 10, 2018, 4:38 PM