Liontrust European Enhanced Income Fund

January 2020 review

The Liontrust European Enhanced Income Fund returned 0.6%* in sterling terms in January. For comparison the MSCI Europe ex-UK Index returned -1.6% in sterling terms and -1.0% in local currency terms, while the average sterling terms return of funds in the IA Europe ex-UK sector was -1.7%.

 

After a strong start to 2020 European equity indices, like their global peers, sold off in the second half of the month due to fears about the outbreak of coronavirus in China. Authorities moved to contain the virus, restricting movement of people in the Chinese city of Wuhan where it originated, while airline operators halted flights to the region. From a markets perspective, investors anticipated a negative impact on Chinese economic activity with consumption and production all likely to see a marked decrease. Given China’s global importance in both world demand and the global supply chain, stock markets around the world felt the effect – as did commodity prices. Brent oil declined 12%, having initially traded higher at the beginning of the month after geopolitical tensions flared once again between the US and Iran.

 

Bond yields also fell as investors retreated to safer havens, with German yields retreating from almost nine-month highs in mid-January to below -0.4% once again. Gold also soared as the default home for nervous money. As Brexit day finally came and went without incident, sterling strengthened somewhat against the Euro, marking six positive monthly gains in a row.

 

The MSCI Europe ex-UK Index displayed a clear defensive bias. Utilities was the best performer (+8.8%), with health care (+1.8%) and real estate (+1.2%) also registering gains. Reflecting the decline in commodity prices energy (-8.3%) and materials (-5.2%) were among the worst performing sectors, with consumer discretionary (-5.9%) also declined as airlines and travel companies were hit.

 

The Fund has an overweight allocation to utilities with holdings Endesa (+3.3%) and Terna (+5.0%) both ending the month higher. Perhaps a surprise contributor amid a risk off market was BE Semiconductor Industries (+10.6%), which outpaced the IT sector (-1.0%).

 

Among the biggest fallers in the portfolio was German car manufacturer Daimler (-16.8%), which declined alongside other consumer discretionary stocks. China is the largest car market in the world, and the European marques are very active in the region. Even as US electric car maker Tesla soared, investors perhaps overlooked the huge investments in electric cars made by the European manufacturers.

 

A sluggish car industry also caused issues for automated wire processing specialist Komax Group (-17.5%). The group published preliminary full year results highlighting a challenging 2019. Order intake fell 18% and revenue was 13% lower to SFr415m, below the consensus estimate of SFr424m. Komax said that unexpected expenses and customer-specific problems meant that its predicted growth in the second half became impossible to meet.

 

Fish farmer Mowi (-8.3%) also saw its shares decline on weaker trading numbers. In a fourth quarter update, the company revealed that operating profit was c.165m, down from €213m in the same period in 2018. The main source of the weakness was its Canadian operations.

 

Positive contributors included:

BE Semiconductor Industries (+10.6%), Nobina (+9.1%) and Terna (+5.0%).

 

Negative contributors included:

Komax Holding (-17.5%), Daimler (-16.8%) and Mowi (-8.3%).

 

The Fund has an income Target Benchmark of 125% the yield on the MSCI Europe ex-UK Index. The Fund’s most recent income distribution was announced on 30 November 2019. Its distributions over the 12 months to 30 November 2019 – expressed relative to the Fund’s price on 30 November 2018 – give a 12 month yield of 4.7%. The MSCI Europe ex-UK Index yield on the same basis was 3.7%.

 

Following the run up in markets in early January, we judged the risk reward to favour covered-call writing once again, and initiated calls on a small selection of just 3 names. We anticipate further call-writing opportunities as volatility returns to the market.

 

The 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 depreciated by 0.8% against sterling in January.

 

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

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust European Enhanced 

Income I Hedged Acc

22.0

-12.4

12.4

-3.0

16.8

MSCI Europe ex UK

20.0

-9.9

15.8

18.6

5.1

IA Europe Excluding UK

20.3

-12.2

17.3

16.4

9.3

Quartile

2

3

4

4

1

 

*Source: Financial Express, as at 31.01.20, 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 31.12.19, 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.

Thursday, February 13, 2020, 3:37 PM