Liontrust Macro UK Growth Fund

July 2019 review

The Liontrust Macro UK Growth Fund returned 0.0%* in July, compared with the FTSE All Share Index return of 2.0%.

 

July’s showing was determined by a combination of macro events and corporate earnings updates. Arguably the most critical of the former was Boris Johnson’s assumption of the Conservative Party leadership and his accession to the office of Prime Minister. Although politics can be an unreliable guide to financial market outcomes, in this instance there seemed an explicit correlation between both domains. Johnson’s intent to “get Brexit done”, a seemingly implacable negotiating strategy, and the Eurosceptic hue of his Cabinet all pointed to an increased probability of a no-deal exit from the EU. The effect was clearest in sterling’s heavy July losses, with the pound declining by 3.9% against the US dollar and 1.6% against the euro.

In consequence, the portfolio experienced a minor echo of 2016’s referendum result. UK-facing cyclicals like the banks of our Rising Rates theme and the life insurers of our Population Ageing theme were marked lower on the assumption that Brexit would pressure economic growth and ultimately earnings. Simultaneously, ostensibly defensive industries (beverages, personal care and tobaccos) to which the Fund has zero exposure were in demand as the clamour for non-sterling earnings overrode any reservations on grounds of valuation. The net result was a dent to relative Fund returns.

This July divergence in the performance of rate-sensitive financials and certain bond-proxy defensives, was no doubt compounded by dovish central bank rhetoric. Mario Draghi encouraged expectations of additional European Central Bank stimulus in warning of falling inflation expectations. Jay Powell’s Federal Reserve Bank delivered on guidance and cut the Fed Funds Rate by 25 basis points, an insufficiently dovish gesture for some, given market chatter of a 50 basis point reduction and Powell’s qualification that this should be regarded as a “mid-cycle adjustment to policy” and not the first in a series of cuts.

In view of the portfolio’s broad value tilt and the empirical connection between higher rates and value outperformance, the direction of rates has real import for Fund returns. On this count, welcome respite from ECB and Fed dovishness was given by the Bank of England’s Andy Haldane.  In a July speech, Haldane warned that it was overly-presumptive to expect lower rates UK rates, when “for the same output gap and a higher rate of inflation, the UK’s monetary stance is 2 percentage points looser than in the US”. This is our UK macro base case and in combination with the historic dispersion between the rating of value and growth businesses, it gives us confidence to stay the course in our weighting to value businesses.

Further and more explicit drivers of performance were found in July’s glut of earnings updates. 

Telecoms operate and Data Growth holding, Vodafone, rose 16% and was the Fund’s strongest performer. A pleasing Q1 update bucked negative sentiment in disclosing better organic revenue growth and unchanged sales guidance. Importantly, the company announced the sale of its tower infrastructure assets, with a view to cutting leverage and negating a key plank of the bear case.

GlaxoSmithKline (+8.0%), a top ten holding and constituent of our Global Pharma theme, was another positive contributor to July returns. Q2 earnings exceeded consensus estimates due to strength in its Pharma and Vaccines businesses. Notwithstanding sales disappointments in HIV and Respiratory, improved earnings guidance served to stoke investor enthusiasm.

Recent addition Man Group (+9.9%) rose more than 6% after reporting Q2 earnings that offered confirmation of our upbeat analysis. Q2 earnings per share exceeded analyst forecasts by 10% as Man’s quantitative strategies accrued performance fees that were materially ahead of consensus. This exemplifies Man’s virtues and makes the business look unsustainably cheap at only 11x 2019 earnings.

In respect of detractors, UK mid-cap bank CYBG fell more than 10% following a mixed Q3 update. Growth in unsecured credit card/lending balances and business current accounts was offset by a fall in mortgages balances and a Net Interest Margin (NIM) print that slipped beneath the H1 run rate. Investors took particular exception to NIM compression and the share price was punished in a weak month for domestic financials.  That said, the valuation remains undemanding and the growth opportunity remains for a mid-sized UK banks.

Finally, miner and Scarce Resource constituent, Anglo American (-9.2%), declined on news that a potential bidder had unwound their derivative exposure. This seems disproportionate, in light of the slim odds attributed to a bid materialising and fails to reflect Anglo’s decent July interims. Given weakness amongst other diversified miners, this is likely a consequence of shifting investor sentiment and bears little relation to the sector’s fundamental merits.

 

Macro-Theme Allocation (as at 31.07.19):

Macro UK Growth Allocation July 201

Source: Liontrust

 

Macro-Theme Changes [1]:

Data Growth

We completed the sales of AT&T and Verizon as part of a broader reordering of the portfolio focused on capturing the valuation disparity between US and UK equities

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

 

 

Jun-19

Jun-18

Jun -17

Jun -16

Jun -15

Liontrust Macro UK Growth I Inc

2.9

11.4

20.1

9.1

6.4

FTSE All Share Index

0.6

9.0

18.1

2.2

2.6

IA UK All Companies

-2.3

9.1

22.5

-4.1

7.0

Quartile

1

1

3

1

3


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


*Source: Financial Express, as at 31.07.2019, total return (net of fees and income reinvested), bid-to-bid, institutional class.


**Source: Financial Express, as at

30.06.2019, 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, August 13, 2019, 10:29 AM