Liontrust European Enhanced Income Fund

May 2020 review

The Liontrust European Enhanced Income Fund (hedged class) returned 2.9%* in sterling terms in May. The unhedged class returned 7.3% while the MSCI Europe ex-UK Index comparator benchmark returned 7.8% and the average return of funds in the IA Europe ex-UK sector, also a comparator benchmark, was 8.0%.

 

May-released economic data gave new meaning to the phrase ‘off the charts’. A decade’s worth of US job creation was vaporised in a single quarter. Q1 GDP estimates showed sharp contractions even though the period only included the early stages of lockdown. Purchasing Manager Indices fell to well below previous recessionary levels, although there were some tentative signs of a recovery in sentiment.

 

Given the state of economic data, one might expect financial markets to be more severely traumatised than they were: May continued April’s equity market rebound as investors were focussed on the easing of lockdowns and further stimulus measures. Germany has been the poster child for the pandemic response so far with coronavirus cases continuing to drop even as it allowed restaurants and schools to open. Other European nations such as Spain, France and Denmark also lifted their strictest restrictions.

 

Investors were also encouraged by further stimulus hopes after the European Commission proposed a €750bn recovery fund. If approved – and it has to be unanimous – the EU will essentially have centralised taxes and bond-raising powers in a major way for the first time. The measures are theoretically ‘zero cost’ upfront but will encounter severe opposition from the ‘frugal four’ of Denmark, Austria, Sweden and the Netherlands, not to mention eastern Europe, which was not as badly affected by Covid and therefore benefits less from the proposed package. Nonetheless, the idea has been described as a potential ‘Hamilton’* moment for Europe.

 

A number of the Fund’s financials holdings were among the highlights in May. Italy’s Banca Farmafactoring (+17.4%) announced the acquisition from private equity of DEPObank, a deposit bank, for US$380m. The market reacted well to the deal, which was priced very reasonably and will enable BFF to access cheaper funding rates. BFF also announced that the health emergency had increased demands for its services.

 

Dutch lender ING Groep (+20.1%) reported resilient first quarter earnings showing net fee income growth of 16% to €783m, ahead of consensus expectations of €639m. Although the business had performed well in Q1, it hiked its loan loss provisions to €661m compared to €207m a year ago in order to manage the risks associated with the pandemic prudently. However, this provision was less than investors’ forecast of €798m.

 

Away from financial companies, Italian electricity grid operator Terna (+10.0%) stated it is still assessing the impact of Covid-19 on its business but does not expect to see any direct effects. In the first quarter of 2020, the company saw revenue grow 5.7% and net profit remain stable, both results in line with consensus estimates. The group also approved a final dividend of 16.5 cents.

 

Deutsche Post (+6.8%) stated that all five of its divisions reported an operating profit during the first quarter of the year, displaying its resilience during the current crisis. However, given the uncertain outlook, the German delivery company withdrew its guidance for 2020, but retained its medium-term guidance of at least €5.3bn in earnings before interest and taxes (EBIT) by 2022.

 

Belgian peer Bpost’s (-9.6%) Q1 results were less positive. EBIT declined 21% as the company saw a €16.7m hit from Covid-19 related issues. The company refrained from giving guidance on 2020 earnings and the current dividend; due to this uncertainty, we decided to exit the Fund’s position in the company.

 

Positive contributors included:

Thule Group (+24.4%), Banca Farmafactoring (+17.4%) and Endesa (+9.3%).

 

Negative contributors included:

Bpost (-9.6%), Coor Service Management (-4.9%) and BE Semiconductor Industries (-3.0%).

 


 

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.

 

The heightened volatility in equity markets saw premium pricing improve but we felt that the risk-reward from writing covered calls was unfavourable given the possibility of a sharp bounce in market levels.

 

*In 1790, the first US Treasury Secretary Alexander Hamilton directed the Federal Government to assume the debts of individual states incurred during the War of Independence, thereby establishing a clear local benefit to having a strong central authority.

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust European Enhanced Income
I Hedged Acc

-12.8

-1.5

4.8

8.2

-6.1

MSCI Europe ex UK

-8.3

2.2

3.0

27.2

-5.3

IA Europe Excluding UK

-9.4

-1.2

5.6

23.7

-1.8

Quartile

3

3

3

4

4

 

*Source: Financial Express, as at 31.05.20, 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 31.03.20, 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, June 18, 2020, 4:01 PM