Liontrust Macro UK Growth Fund

February 2019 review

The Liontrust Macro UK Growth Fund returned 1.4%* in February, compared with the FTSE All Share Index return of 2.3%.

 

February echoed January, with Brexit-sensitive, domestic cyclicals performing strongly. Once more, this seemed to correspond to the growing impression that a ‘no deal’ exit was increasingly unlikely.

 

As per last month’s commentary, we maintain that there’s little predictive value in obsessing over political chatter. There is a chasm between public utterance and underlying agendas, market causation often doesn’t flow in a straight line and valuations aren’t, in the long-run, driven by political agents.

 

To repeat January’s argument, it seems a more robust strategy is to focus on the concrete: the UK is cheap, we know that Brexit is short-dated and that clarity of one sort or another is coming.

 

Judging by February’s market attribution data, the penny has dropped. The Fund’s strongest performers comprised of banks, life insurers and housebuilders – businesses that have de-rated since the referendum of 2016, but that demonstrate increasing signs of life in 2019 to date.

 

Mid-tier UK bank CYBG (+12.0%) gave testament to this effect in rising more than 12% and leading the portfolio’s gainers. Clydesdale has suffered a severe de-rating on account of its UK-centric model and the assumption that its lack of low-cost, current account balances would prove an expensive hindrance to loan book growth. It seems clear that February’s share price advance was closely tied to the coming Brexit resolution; whilst gains were no doubt extended by a solid Q1 update that saw net interest margin guidance raised on the back of improved cost synergies from its acquisition of Virgin Money.

 

The other banks of our Rising Rates theme also contributed to performance. Full year earnings from Lloyds (+9.7%) showed clear progress on interest margins, cost targets and capital generation. The upshot for shareholders was bumper cash returns, with Lloyds delivering a 5% increase in its ordinary dividend and a consensus-busting £1.75bn buyback. This means Lloyds has returned nearly £12bn to shareholders since 2014, or more than a quarter of its present market-cap. This gives ample confirmation of our total return case.

 

Barclays’s (+6.3%) full-year earnings offered further encouragement. Measures of regulatory capital adequacy exceeded forecasts, reflecting the strength of its high-margin UK business and giving weight to an updated and confident dividend policy. Notwithstanding, Barclays continues to trade at a significant discount to book value and we have exploited this anomaly in adding to our overweight holding.

 

Results from the portfolio’s UK housebuilders delivered confirmation of our outlook. Both Barratt Developments (+11.2%) and Taylor Wimpey (+9.8%) announced higher volume, sales and profits, whilst committing to the maintenance of generous dividend policies. These companies have the security of net cash, whilst single-digit earnings multiples give little weight to the UK’s structural undersupply of new build housing. We remain comfortable in being overweight the sector.

 

In respect of headwinds to performance, online estate agent Purplebricks (-18.0%) fell heavily following a weak trading update. The company downgraded financial year 2019 revenue guidance by 20%, as UK transaction volume disappointed and the anticipated contribution from its ex-UK operations failed to materialize.  The bad news was exacerbated by the departure of the business’s UK and US CEOs. The holding is under review.

January addition, IG Group, fell 11% after peer CMC warned that limits on retail trader leverage would have a greater than expected impact on earnings. Whilst a decline of this order is always a concern, our holding size is small pending evidence that IG has negotiated the earnings dent from leverage limits. Which says nothing of the fact that IG would still look undervalued if earnings fell by the same degree as CMC’s and the remainder of its business were to go ex-growth overnight.

 

Macro-Theme Allocation (as at 28.02.19):

Macro UK Growth February 2019 Allocation

Macro-Theme Changes [1]:


Rising Rates

Positions in Barclays and Lloyds were increased as both UK-centric businesses offer gearing to benign Brexit. Barclays’s strong full year update showed clear operational momentum, capital build and management’s willingness to return surplus capital to shareholders. Similarly, Lloyds documented a well-capitalised and managed business, with progressive margins and the intent to return excess capital.

 

The HSBC weighting was decreased as unfavourable geographic mix offers less exposure to any upside resulting from Brexit resolution and operating metrics look weak relative to peer group.

 

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

 

 

Dec-18

Dec-17

Dec-16

Dec-15

Dec-14

Liontrust Macro UK Growth I Acc

-14.0

13.0

0.0

6.2

3.8

FTSE All Share Index

-9.5

13.1

16.8

1.0

1.2

IA UK All Companies

-11.2

14.0

10.8

4.9

0.6

Quartile

3

2

4

2

1

 

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

 

*Source: Financial Express, as at 28.02.2019, total return (net of fees and income reinvested), bid-to-bid, institutional class.

 

**Source: Financial Express, as at 31.12.2018, total return (net of fees and income reinvested), bid-to-bid, primary class.

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, March 19, 2019, 3:41 PM