Liontrust European Enhanced Income Fund

March 2019 review

The Liontrust European Enhanced Income Fund returned 0.9%* in sterling terms in March, compared with the 2.5% sterling terms return and 1.5% local currency return from the MSCI Europe ex-UK Index.


The US and China continued to make positive noises around a trade deal and new US tariffs on imports from China remain indefinitely postponed while talks continue. In the UK, despite a number of parliamentary votes – on both Theresa May’s preferred deal and a range of indicative options – Brexit remained in stasis, which eventually required another deadline extension from 29 March to be granted by the EU.


The US Federal Reserve’s confirmation of a rates outlook U-turn had the biggest impact during March. Its shift to a more “patient” approach was cemented as its ‘dot plot’ of future interest rates suggested that 2019 would see no rate hikes, compared with its previous prediction of two rises. It also confirmed that it will pause the unwinding of its quantitative easing programme (a move which itself was dubbed ‘quantitative tightening’). The European Central Bank also lowered its 2019 growth forecast from 1.7% to 1.1% and announced its own stimulus revival in the form of TLTRO – targeted longer-term refinancing operations – for the banking sector.


Global government bond yields dipped lower as a result of these moves; the 10 year German bund finished the month on a negative yield to maturity. In this environment, the European equity market’s defensive and ‘bond-proxy’ sectors performed well: consumer staples (+7.0%), health care (+5.5%) and utilities (+5.3%) were among the strongest areas. Financials (-1.9%) was the only sector in negative territory in sterling terms over the month, a significant headwind to the Fund given its c.10% overweight position relative to the index. It will be interesting to observe if the Fed once again reverses stance if equity markets continue to be strong.


Swiss pharmaceuticals company Novartis (+11.1%) announced a 9 April effective date for its much anticipated spin-off of its Alcon eye care business. The spin-off sees Novartis shareholders receive one Alcon share for every 5 Novartis shares they own. Alcon itself announced an acquisition of US-based PowerVision for an initial cash consideration of US$285m and further contingent payments through to 2023. PowerVision is developing a fluid-based intraocular lens implants which would help treat conditions such as cataracts.


During March, Amadeus Fire (+12.1%) confirmed the 2018 financials which it had announced on a preliminary basis in February. The recruiter recorded a 12% sales increase to €206m and a 16% rise in EBITDA (earnings before interest tax, depreciation and amortisation) to €38m. The company has proposed am 18% increase in the full year dividend to €4.7 a share.


With the healthcare sector experiencing general strength, the Fund’s holdings in Roche (+4.4%) and Sanofi (+7.8%) made positive contributions in March. Utility stocks were also a portfolio highlight, with Endesa (+3.3%) and Italian electricity grid operator Terna (+4.0%) both making gains. Deutsche Post (+6.8%) and bPost (+20.7%) both continued to recover from pretty dire share price performances in 2018.


The telecoms sector also made a positive contribution to Fund returns, despite 1&1 Drillisch (-8.1%) losing ground. Having increased revenue by 13% and EBITDA by 14% in 2019, the company’s respective 2019 growth targets of 4% and 10% were viewed as somewhat lacklustre by investors. Over 2018, the German telecoms operator added 970,000 customer contracts, taking the total to 13.5m. Drillisch is currently embroiled in the ongoing German 5G spectrum auction, which should be concluded in the next few months, removing a large source of uncertainty over its capex plans. Elisa (+9.7%), Sunrise Communications (+1.2%), Telenor (+4.9%) and Telia (+6.2%) performed rather better.


The money laundering scandal that has engulfed Swedbank (-13.0%) amongst others intensified in March. This resulted in Swedbank parting ways with its CEO as key investors accused her of having comprehensively mishandled the situation. The added uncertainty spiked the shares down into month end, but they have since recovered strongly as no further material allegations seem to have surfaced.


Komax Group (-14.7%), the specialist in automated wire processing, announced 2018 revenue growth of 17% to CHF480m, while order intake was 10% higher at CHF497m and operating profit rose 22% to CHF67m. However, order intake dipped slightly towards the end of the year and Komax stated that 2019 is “set to be a very challenging year”. Economic and political uncertainty have caused uncertainty in the automotive industry, responsible for over 80% of Komax’s sales. An unexpectedly weak order intake in the first two months of 2019 mean that the company now expects to record financial results in the first half of the year which are “markedly lower” than the 2018 levels. Although the shares sold off in March, they too have recovered strongly so far in April.


During March we disposed of the Fund’s residual position in Oriflame, the Swedish cosmetic retailer, on sales concerns. We also sold Correios de Portugal - CTT due to a sustained inability to capitalise on the burgeoning parcels market seen elsewhere in Europe, combined with unhelpful government regulation. We added a new Portuguese holding in NOS, one of Portugal’s largest domestic telecoms and media groups which was created through the merger of ZON and Optimus. The company has 4.8 million mobile customers, 1.6 million pay-TV subscribers and supplies broadband to 1.4 million households. NOS offers a substantial yield and benefits from a relatively benign competitive situation.


Positive contributors included:

Amadeus Fire (+12.1%), Novartis (+11.1%) and Elisa (+9.7%)


Negative contributors included:

Komax Holding (-14.6%), Swedbank (-13.0%) and 1&1 Drillisch (-8.1%).



The ten covered calls written during February were set at an average of 10% out of the money. Despite the relative caution of the strike prices, three expired modestly in the money – Telenor, Deutsche Post and Elisa.


Central bank action during the month has, for the time being, put paid to hopes that market volatility would return to more typical levels as monetary policy normalises. We chose not to write any new calls in March due to this environment of unattractive option premia and the ever-lurking prospect of a Brexit solution which might lead equity markets to spike suddenly.


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 appreciated by 0.7% against sterling in March.


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







Liontrust European Enhanced
Income I Hedged Acc






IA Europe Excluding UK












*Source: Financial Express, as at 31.03.2019, 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 31.03.2019, 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, April 24, 2019, 2:08 PM