Liontrust European Enhanced Income Fund

August 2020 review

The Liontrust European Enhanced Income Fund (hedged class) returned 2.9%* in sterling terms in August. The unhedged class returned 2.3% while the MSCI Europe ex-UK Index comparator benchmark returned 2.2% and the average return of funds in the IA Europe ex-UK sector, also a comparator benchmark, was 2.5%.

 

August saw equity markets resume their upwards trajectory from the trough of the coronavirus crisis. The US Federal Reserve gave investors further reassurance that the current ultraloose monetary policy was going to remain in place for some time, as Chair Jerome Powell said the central bank will pursue a flexible average inflation target. This means the Fed would allow the US economy to run “hot” for a period of time, leading inflation to rise above the 2% target, before acting to tighten policy.

 

While this was reassuring for equity investors, it extended the US dollar’s recent weakness and corresponding euro strength. The trade-weighted euro hit its highest level in almost two years and could prove to be concerning for the European Central Bank.

 

There was a fair amount of corporate news during August as well. Sunrise Communications Group (+25%) was the biggest riser following an acquisition approach by Liberty Global. The Swiss telecom company’s board recommended the SFr110 per share offer by US-listed Liberty Global, which was a 28% premium to the share price at the time. We had expected consolidation in the Swiss telco sector involving Sunrise for some time and believe the acquisition by Liberty to be a better deal than the previous proposal of a merger with Liberty’s Swiss unit UPC that collapsed towards the end of last year.

 

Given the shock to stock prices during the Covid crisis, it is unsurprising that M&A has become a theme in recent months. Two other portfolio holdings – Sampo (+9.0%) and Sanofi (-5.0%) – were also involved in acquisitions.

 

Finnish insurer Sampo confirmed its recommended cash offer for UK property and casualty (P&C) insurer Hastings Group of £1.66bn. The group has been pursuing a strategy of diversifying from its core Nordic insurance business and the purchase of Hastings is a significant step towards that. Sampo believes that the UK has one of the biggest P&C markets globally, while Hastings’ other businesses such as motor and home insurance offer further exposure to the non-life insurance segment.

 

French pharma company Sanofi announced a US$3.68bn deal to acquire Principa, a late-stage biopharmaceutical company focused on developing treatments for immune-mediated diseases. The deal enhances Sanofi’s R&D capabilities, particularly for BTK inhibitors for use in oncology.

 

Away from M&A, ING Groep’s (+14%) second quarter results showed a sharp increase in loan loss provisions to 1.34bn from €209m in the same period last year. This reflects the group’s assessment of the current Covid-impaired macro-economic outlook. More positively, group net interest income was resilient, falling only 1.2% year-on-year while the company’s capital position remained healthy with a CET1 ratio of 15%. Additionally, management commented that the bulk of risk costs have been incurred in the second quarter and this will go down in the second half of the year.

 

Deutsche Post’s (+13%) second quarter results came in ahead of market expectations. The German logistics company said that, despite the impact of Covid-19, revenue rose 3.1% to €16.0bn – coming in ahead of the consensus estimate of €14.7bn. The main driver of revenue was the strong growth in e-commerce. The company reiterated its 2020 earnings before interest and taxes (EBIT) forecast of €3.5bn-€3.8bn.

 

Positive contributors included:

Sunrise Communications (+25%), Deutsche Post (+13%) and Daimler (+13%).

 

Negative contributors included:

NOS (-10%), Kaufman & Broad (-9.7%) and Endesa (-4.2%).

 


The Fund’s 12 month income yield was 3.6% as at 31 August 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 2.3% over the same period, the Fund met its objective.

 

No covered calls were written for the fund this month. While volatility has increased and premiums are in a more favourable position, we view the risk of being called as currently too high. We therefore do not believe that we have reached the right balance in terms of risk vs reward to engage in call writing at present.

 

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust European Enhanced Income
I Hedged Acc

-3.2

2.1

0.7

17.7

-10.4

MSCI Europe ex UK

0.0

7.3

1.8

28.0

4.9

IA Europe Excluding UK

0.9

3.3

3.1

29.2

4.5

Quartile

3

3

4

4

4

 

*Source: Financial Express, as at 31.08.20, 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 30.06.20, 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 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.

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.

Friday, September 18, 2020, 1:23 PM