Liontrust European Enhanced Income Fund

December 2018 review

The Liontrust European Enhanced Income Fund returned -5.3%* in December, compared with the -4.8% sterling terms return and -6.0% local currency return from the MSCI Europe ex-UK Index.


A heavy sell-off in December closed a miserable fourth quarter for European, and global, equities. The MSCI Europe ex-UK Index ended the quarter 11.0% worse off in sterling terms and 11.8% lower in local currency due to concerns about the health of the global economy as well as tightening global monetary policy.


The latter was one of the main drivers behind the moves seen in December. The European Central Bank confirmed it will cease purchasing bonds, a move which it first announced in June. In the US, the Federal Reserve raised interest rates for the fourth time in 2018. The accompanying dot-plot of Fed member forecasts for interest rates nonetheless showed a downgrade to two increases in 2019, from three. This downgrade was not enough to soothe the market, which had hopes for an even greater indication of a slowdown in the pace of tightening.


We have on numerous occasions written about how we expect the withdrawal of ultra-loose monetary accommodation to result in the return of volatility to equity markets. December was evidence of that with the VSTOXX Index, which shows the implied volatility of the EURO STOXX 50 Index, spiking to its highest level since last February.


Adding to the volatility was the sharp decline in oil prices, which hit their lowest level since August 2017. A combination of a supply glut and concerns about the sustainability of demand fuelled the slide.


In the MSCI Europe ex-UK Index, it was a similar story to last month where defensive sectors of the market outperformed. Utilities (+3.0%) was the only sector to end higher in December, while communications services (-3.1%) was the next best performer. At the other end of the market were real estate (-7.8%), financials (-6.5%) and industrials (-5.4%).  


The Fund once again benefitted from overweight positions in utilities and telecoms. Holdings such as Spanish electricity provider Endesa (+6.5%), Swedish telecom operator Telia (+2.0%) and Finnish telecom operator Elisa Oyj (+3.4%) were all able to withstand the market rout.


Nordic public transport operator Nobina (+4.7%) was also one of the handful of Fund holdings to end higher in December, after reporting consensus beating third quarter results. Operating profit for the three months to end November 2018 was SEK243m, a 10% improvement from the same point in the prior year, and ahead of the market’s estimate of SEK231m. The company said this performance was driven by improved profitability in existing contracts and additional business won during the quarter.


However, most of the portfolio followed the market lower. bpost (-18.7%) was the biggest faller. The Belgian postal operator stated that it expects to face a number of challenges in 2019 as a result of higher labour costs following an agreement to end strikes and the need for a new distribution model which could cost around €10m-15m. bpost added that 2018 results are expected to be in line with its estimates.


The world’s biggest fashion retailer Inditex (-16.4%) missed market forecasts for its third quarter due to adverse currency movements (which damaged sales growth by 3.2% in the third quarter) and an unusually warm September. The company, which owns brands such as Zara and Massimo Dutti, stated like-for-like sales growth so far in the second half of its financial year was 3%, below the company’s expectations. Inditex’s results were consistent with the other European fashion retailers, which also reported a slowdown in a tough environment for retailers.


In December, we sold Italian asset manager Azimut Holding from the Fund, due to concerns over corporate strategy.


Positive contributors included:

Cerved Group (+7.2%), Endesa (+6.5%) and Nobina (+4.7%).


Negative contributors included:

bpost (-18.7%), Deutsche Post (-13.7%) and Amadeus Fire (-12.2%).



The covered call strategy added c.3 basis points to the Fund’s income yield, with all of the calls written in November expiring out of the money amid the December equity market rout. 


Despite the spike in volatility in December, we decided against writing any new calls, given the liquidity constraints that usually occur at the end of the year, and the threat of a Santa Rally. We expect to resume the strategy in January if conditions remain attractive.  


This Fund’s primary share class is currency-hedged in order to provide insulation from movements in the value of the euro and other European currencies. The euro rose by 1.3% against sterling in December.


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







Liontrust European Enhanced
Income I Hedged Acc






IA Europe Excluding UK













*Source: Financial Express, as at 31.12.2018, 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 31.12.2018, 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.
Wednesday, January 30, 2019, 10:22 AM