Liontrust Macro Equity Income Fund

October 2019 review

The Liontrust Macro Equity Income Fund returned 0.4%* in October, compared the FTSE All Share Index return of -1.4% and the flat average return made by funds in the IA UK Equity Income sector.

 

The Fund’s most recent income distribution was announced on 31 July 2019, taking the Fund’s 12 month income yield to 5.5%. The Fund targets an income level of 110% the yield on the FTSE All-Share Index. The index yielded 4.2% over the same period.

 

In keeping with September’s strength, performance was driven by the Fund’s pronounced skew to ‘value’ companies: businesses trading on historically depressed ratings, or material discounts to their intrinsic value. 

 

That said, October differed from September in one key respect: portfolio outperformance flowed exclusively from our array of UK-centric holdings. This followed the solidifying impression that a ‘no deal’ would be averted and Boris Johnson’s subsequent and renegotiated Brexit agreement. Sterling, and select UK equities, were bid higher as investors redressed longstanding underweights. The Fund’s overweight to UK life insurance was a notable source of alpha, as top-ten holding Legal & General gained 6.2%. Similarly, the banks of our Rising Rates theme were in demand, with Barclays appreciating by 11.6% and Lloyds by 5.0%.

 

The effect on relative portfolio returns was amplified by the comparative underperformance of the UK’s ‘quality growth’ cohort. These are established non-holds on grounds of their characteristically unattractive valuations and dividend yields. Income sector bellwethers, such as Unilever (-5.5%) and Diageo (-5.1%), trailed October’s FTSE leaders by an appreciable margin. In sum, this enacted a partial unwind of the fallout from 2016’s referendum wherein cyclical or mature UK value companies were penalised and quality growth businessesparticularly those with non-sterling revenues – re-rated.

 

As we’ve discussed elsewhere, the collective events of September and October permit a far more significant inference. Namely, the record difference between the valuation of growth and value companies has made buyers of growth uniquely prone to such episodes of underperformance and capital drawdown. At the same time, historically cheap value companies are offering unprecedented buying opportunities, which in our opinion entail limited downside when compared with growth companies. This asymmetry of risk and reward is beautifully captured in the words of value investor Mohnish Pabrai: “heads I win; tails I don’t lose much”. We couldn’t agree more.

 

Quarterly earnings also contributed to September returns. UK telecoms operator and Data Growth holding BT led the month’s winners in rallying 14.6%, with a solidly dull Q2 update offering the kind of reassurances that have sometimes been lacking in the last few years. Barclays’ (+11.6%) gain was partly due to a Q3 statement that evidenced growing market share in investment banking and improving measures of shareholder return. Life insure St James Place (+6.3%), a Population Ageing constituent, rose after issuing a Q3 statement that saw client flows exceed consensus analyst estimates.

 

Happily, October’s negatives were scarcer. The obverse of sharp sterling gains and buoyant UK-centric equities was softness amongst the portfolio’s US dollar earners. Although the large-cap miners and oil producers of our Scarce Resource and New Oil Equilibrium buckets performed poorly, this is an entirely understandable side-effect of rapid FX adjustment. We do, however, draw solace from their shared characteristics of attractive valuations, free cash flow and dividends. This is more than may be said for the FTSE’s array of quality growth companies with meaningful non-sterling revenues.

 

Asset manager and Rising Rates stock Man Group declined by 17.9%. This followed a Q3 statement that disclosed larger than expected outflows and signs of margin compression. This is disappointing but we note Man’s undemanding rating, the confidence implicit in a fresh US$100m share buyback and the prospect of H2 performance fees.

 

Macro-Theme Allocation (as at 31.10.19):

Macro-Theme Allocation (as at 31.10.19)

Source: Liontrust

 

Macro-Theme Changes[1]:

Rising Rates

New Position, M&G Plc, UK focused asset manager spun out of portfolio holding Prudential Plc; Brexit angst and Asia-bias of existing Prudential shareholders, creates temporary selling pressure and presents intrinsic value opportunity.

 

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

 

Sep-19

Sep-18

Sep-17

Sep-16

Sep-15

Liontrust Macro Equity Income I Acc

2.6

1.4

9.6

8.0

3.9

FTSE All Share

2.7

5.9

11.9

16.8

-2.3

IA UK Equity Income

-0.1

3.4

10.6

11.4

3.5

Quartile

1

4

3

4

2

*Source: Financial Express, as at 31.10.2019, 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 30.09.2019, 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 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.

Thursday, November 14, 2019, 3:25 PM