Liontrust European Enhanced Income Fund

April 2020 review

The Liontrust European Enhanced Income Fund (hedged class) returned 8.2%* in sterling terms in April. The unhedged class returned 7.1% while the MSCI Europe ex-UK Index comparator benchmark returned 4.4% and the average return of funds in the IA Europe ex-UK sector, also a comparator benchmark, was 7.2%.


April saw stability return to equity markets. Investors calmed after the initial panic which accompanied March’s escalation in the coronavirus crisis and lockdowns around the world, with the VIX Index of US stock market volatility coming sharply off its March highs. In Europe, the focus was now on the measures to ease lockdowns as countries passed the peak of virus infections. Germany, France, Italy and Spain had targeted early-to-mid May for a managed reopening of their economies.


Meanwhile, economic data throughout the month showed the devastating effects that containment measures have had on economies. The Q1 GDP figure for France (-5.4%) represented its biggest year-on-year contraction since World War II, while the eurozone as a whole declined 3.3%, which was worse than at any point during the 2012 eurozone crisis.


In the MSCI Europe ex-UK Index, the rebound was led by the IT (+7.7%), materials (+6.7%) and health care (+6.3%) sectors. The only sector to end the month in negative territory was energy (-3.1%), following a collapse in the oil price. WTI, the US benchmark for oil futures, fell into negative territory for the first time ever as the contract for May delivery reached expiry. It returned to positive territory soon after, but this episode displayed the considerable short-term supply and demand imbalance in the oil market.


Within the Fund’s energy holdings, Equinor (+10.5%) bucked the sector trend, ending the month strongly higher. However, Norway’s biggest crude producer announced that it will cut its dividend for the first time since listing, becoming the first oil major to do so during the pandemic. The company cited unprecedented market conditions and uncertainties going forward. Although its balance sheet is very strong, we think that its majority Norwegian state ownership probably played a part in the decision as well.


Given the busy reporting schedule in April, there were a number of dividend announcements from our holdings. So far since the onset of the pandemic we have seen 18 companies pay dividends as originally planned, 7 announce reduced dividends, 14 suspend dividend payments and 4 cancel payments.

Deutsche Post (+7.5%) and BASF (+6.2%) were two holdings which said they will maintain dividend payments. The former, which owns parcel delivery brand DHL, has been relatively resilient during the crisis. It noted that the closure of retail outlets has led to significantly higher parcel volume, but its postal business continued to suffer from secular decline. The group added that the business situation in China has started recovering, while after month end the group also announced they had seen a tentative inflection in European Express and German postal volumes.


Chemicals giant BASF stated that its diverse customer base has given it a degree of resilience, with pharma, food and cleaner companies seeing greater demand in the current circumstances. This has helped offset some of impact on the transport and automotive sector. Overall, BASF expects a significant decline in sales volume in the second quarter before a slow recovery in the third and fourth quarter. However, the group stood by its progressive dividend policy, and will pay its dividend in full in June


VAT Group (+17.1%) reported that the pandemic had a limited effect on trading in the first quarter. The company, which manufacturers and supplies high-performance vacuum valves used by the semiconductor and solar panel industries, said demand for semiconductors showed an improvement in the early part of 2020 compared to 2019. Despite the uncertainty going forward, particularly in relation to supply chain disruption, it said that demand for semiconductors should remain stable given its system-critical designation.


Evidence of the robust demand for semiconductors was also displayed in the first quarter update by BESI Semiconductor Industries (+32.6%). On the back of strong year-on-year growth in Q1, the company said it expects further growth of 5% - 25% in Q2 despite the impact of the pandemic. The company added that it is difficult to forecast into the second half of the year (though this is typical visibility for the company), and it is confident about its longer-term prospects as the world continues to move to a digital society.


During April, we added Norwegian power supplier Fjordkraft and reinsurance company Swiss Re. Fjordkraft is the largest electricity retailer in Norway. Operational efficiency programmes put in place by management over the last five years has created a best in class operator with highly cash generative operations, as well as top line growth and margins well ahead of major competitors. The company has built significant economies of scale as the business has grown and now looks set to benefit from consolidation in the market while offering an attractive dividend yield in excess of 4% that is safe in the current climate.


Swiss Re was also added to our insurance holdings. During this crisis, German and Swiss insurance names have established a quality premium for themselves by committing to pay dividends as usual, despite advice from the European Insurance and Occupational Pensions Authority (EIOPA) not to do so at this time. Managements have taken the courageous stance that since they have ample financial strength to return money to shareholders, they should do so. As a sector, insurance companies models include pandemic risks, stressed to a much more severe outturn than the current outbreak, and although losses from event cancellations will be heavy, few carry any material exposure to pandemic-related business interruption underwriting.


We also sold Komax and Deutsche Beteiligungs during the month. These decisions were made given concerns around the impact of the coronavirus crisis on both the auto supplier sector as well as the German Mittelstand, and the proceeds from these sales were put to use in the new fund investments.


Positive contributors included:

BE Semiconductor Industries (+32.6%), Coor Service Management (+32.5%) and VAT Group (+17.1%).


Negative contributors included:

Total (-8.9%), Zurich Insurance Group (-8.0%) and Komax (-6.9%).



The Fund’s 12 month income yield was 4.5% at 29 February 2020. The yield is calculated using the sum of all net distributions in the accounting period divided by the unit price at the start of the period. The Fund’s income target benchmark is 1.25x the yield on the MSCI Europe ex-UK Index. With the index yielding 3.6% over the same period, the Fund met its objective.


The heightened volatility in equity markets saw premium pricing improve but we felt that the risk-reward from writing covered calls, given the possibility of a sharp bounce in market levels, was unfavourable.


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








Liontrust European Enhanced Income
I Hedged Acc






MSCI Europe ex UK






IA Europe Excluding UK













*Source: Financial Express, as at 30.04.20, 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 31.03.20, total return (net of fees and income reinvested), bid-to-bid, primary class.


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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 European Income 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. Investment in the Liontrust European Enhanced Income Fund writes out of the money call options to generate additional income. These call options will be “covered”. Unitholders should note that potential capital growth of the Fund would be capped if these call options are exercised against the Fund and the Fund’s capital returns could therefore be lower than the market in periods of rapidly rising share prices.


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, May 18, 2020, 11:05 AM