Liontrust European Enhanced Income Fund

June 2018 review

The Liontrust European Enhanced Income Fund returned -0.8%* in June, compared with the 0.2% sterling terms return and -0.3% local currency return from the MSCI Europe ex-UK Index.


A number of geopolitical events competed with central bank policy moves for investor’s attention. June saw the Singapore summit between President Trump and Kim Jong-un, the acrimonious end to the G7 meeting, and confirmation that the US would be imposing the first round of threatened tariffs on Chinese goods.


In Europe, the stabilisation in the Italian political scene allowed focus to switch to the expected announcement of an end to the European Central Bank’s quantitative easing programme. The ECB delivered on this front, but balanced the move with a commitment to keeping rates on hold through to summer 2019. QE will be tapered down from €30bn to €15bn in monthly purchases from September this year, with the programme terminating by the end of 2018.


The US Federal Reserve’s latest move was more unambiguously in a hawkish direction, increasing rates by 25bp and commenting on the strength of economic expansion.


Faced with trade tensions and the prospect of tighter monetary policy, there was some evidence of risk aversion in the sector return profile of the MSCI Europe ex-UK Index. Utilities (+3.0% in sterling terms) and consumer staples (+2.3%) were towards the top of the leader board while consumer discretionary (-4.6%) and industrials (-1.1%) experienced weakness.


This pattern of strength in defensives failed to show through in the Fund’s portfolio, where telecoms company 1&1 Drillisch (-17.0%) fell on a broker downgrade and Deutsche Post (-13.2%) extended its share price slide.


Daimler (-9.9%) also fell foul of global trade tensions, cutting its 2018 earnings forecasts due to the import tariffs on US vehicles entering the Chinese market. It now expects lower SUV sales and higher costs. The tariffs cannot be blamed for all of Daimler’s troubles though; its downgrade is also motivated by the recall of diesel vehicles, declining bus demand in Latin America and the new WLTP (Worldwide Harmonized Light Vehicles Test Procedure) certification process.


On a more positive note, investors in Nordic public transport operator Nobina (+22.0%) welcomed the release of a robust set of Q1 numbers. Growth of 7% year-on-year took net sales to SEK2.36bn in the three months to 31 May and ahead of the SEK2.30bn consensus analyst forecast. The rise reflected contractual revenue increases, traffic growth and currency gains. The company is currently in what it describes as a period of “high tender volumes”; it secured SEK6.4bn in contract renewals in the quarter. Since quarter-end the company has signed a 10 year contract worth around SEK500m to provide bus services in Ale. It has also announced the acquisition of Samtrans, a provider of transport in Stockholm for users with special needs. The deal involves a fixed consideration of SEK225m with a further SEK225m in contingent payments.


Nexity (+15.1%) announced an ambitious set of business targets for the period 2018 – 2021 which includes a doubling in order intake from commercial clients and a 3 percentage point market share gain for its residential unit. Investors were also impressed by its financial goals of 10% compound annual growth in revenue and earnings.

Fashion retailer Inditex (+9.2%) grew net sales by 2% to 5.7bn in the quarter to 30 April. Sales were 7% higher in local currency terms. Gross margin edged 68 basis points higher to 58.9%. Inditex now has a global network of 7,448 stores, including the Zara and Pull&Bear brands. The company’s second quarter has begun strongly, with 9% local currency sales growth through to 11 June, and overly pessimistic retailer narratives have proven overdone, as the share price continues to move up from March lows.

Positive contributors included:

Nobina (+22.0%), Nexity (+15.1%) and Endesa (+4.7%).


Negative contributors included:

1&1 Drillisch (-17.0%), Deutsche Post (-13.2%) and Daimler (-9.9%)


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. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in the Fund involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.The 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 are likely to be lower than the market in periods of rapidly rising share prices. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation.


This content 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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, July 17, 2018, 8:34 AM