Liontrust European Enhanced Income Fund

June 2020 review

The Liontrust European Enhanced Income Fund (hedged class) returned 3.0%* in sterling terms in June. The unhedged class returned 4.1% while the MSCI Europe ex-UK Index comparator benchmark returned 4.9% and the average return of funds in the IA Europe ex-UK sector, also a comparator benchmark, was 4.3%.


Markets continued their upwards trajectory, despite renewed fears over the spread of Covid-19 in the US, particularly in the southwestern states. Within Europe, there have been some tentative signs that the virus is losing virulence in Italy, while the media concern over the jump in the German R number proved mercifully short-lived.

With economic expectations having suffered a sharp and painful downward adjustment, there are now increasing signs of a pickup in activity as economies emerge from lockdown, and this is leading to an improvement in economic surprise indicators. The Citi Eurozone Economic Surprise Index troughed in mid-May at the lowest level in its 17-year history but has since rebounded, rising throughout June at a record pace. There are also some signs of stabilisation in European earnings estimates following a brutal quarter of cuts to consensus.

There has been a strong resumption in consumer spending; German retail sales for example surged 13.9% in June, to a total 3.6% higher than February. There is, however, a lot of pent-up demand so it isn’t yet clear if this is a sustainable trend.

Portfolio newsflow was reasonably light in July as we wait for the Q2 earnings season to begin in earnest.

Munich Re (+14%) issued a coronavirus statement in which it confirmed that it is no longer on course to meet its 2020 profit guidance of €2.8bn and that it will not be issuing new guidance. While it states that most of its business lines – including casualty insurance/business interruption – exclude pandemic risk from cover, the cancellation or postponement of large events are generating insured losses. It is also seeing losses in other business lines as a result of the economic downturn triggered by the pandemic. For its life and health insurance division, Munich Re states that it expects the mortality rate to be less dramatic than a theoretical “200-year event” pandemic it has modelled, which would generate claims similar to a mid-sized natural disaster. In any case, overall pricing now looks to be very strong going forward, while claims are manageable in the context of its strong balance sheet. Munich paid an increased dividend as planned in May.

Axa (+15%) also estimates a reasonably moderate claims cost from the pandemic. It issued an estimate of a €1.2bn claims cost in Property & Casualty: mainly from business interruption and event cancellation, offset somewhat by reduced motor claims. However, it has seen “no material deviation” in claims in its Life & Health business. Axa’s shares were also boosted by the decision to reduce rather than cancel its 2019 dividend payment. The company will pay €0.73 per share rather than the €1.43 originally proposed and may pay an additional amount of €0.70 in the fourth quarter as an exceptional distribution of reserves – if market conditions and the regulator allow it.

Axa’s reduced dividend payment brings the total Fund holdings paying a dividend – either as planned or with a Covid-19 reduction – to almost 70%. Only six holdings have cancelled their dividends, with a further 11 suspensions in response to the pandemic. For a number of these suspended dividends, we have already seen companies commenting that there is the possibility for the suspension to be lifted or a special distribution to be made later this year.

Inditex (-5.0%), the Spanish owner of the Zara retail chain, experienced only a 4.4% year-on-year fall in sales in the quarter to 30 April despite 90% of its stores being closed at some point due to lockdown measures. Online sales rose by 50% but it still recorded an operating loss of €250m. In addition, Inditex has decided to invest €2.7bn in its online business and upgrading digital infrastructure throughout its operations (e.g. inventories, distribution, etc.). The company is targeting an increase in online sales from 14% of the total in 2019 to over 25% by 2022.


Having rallied last month on the news of its US$380m acquisition of DEPObank, shares in Banca Farmafactoring (-4.3%) eased back as the deal completed in June.

Positive contributors included:

Deutsche Post (+18%), BE Semiconductor Industries (+17%) and Axa (+15%).


Negative contributors included:

Inditex (-5.0%), Dustin Group (-4.3%) and Banca Farmafactoring (-4.3%).


The Fund’s 12 month income yield was 4.1% at 31 May 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:







Liontrust European Enhanced Income
I Hedged Acc






MSCI Europe ex UK






IA Europe Excluding UK













*Source: Financial Express, as at 30.06.20, 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.


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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.

Thursday, July 16, 2020, 3:28 PM