Liontrust European Enhanced Income Fund

November 2019 review

The Liontrust European Enhanced Income Fund returned 1.6%* in sterling terms in November. For comparison the MSCI Europe ex-UK Index returned 1.5% in sterling terms and 2.5% in local currency terms, while the average sterling terms return of funds in the IA Europe ex-UK sector was 2.3%.

 

The Fund’s most recent income distribution was announced on 30 November 2019, taking the Fund’s 12 month income yield to 4.7%. The Fund targets an income level of 1.25x the yield on the MSCI Europe ex-UK Index. The index yielded 3.7% over the same period.

 

Global equity markets rallied, as investors fatigued of the twists and turns in the US-China trade saga. In Europe, sector returns took on a cyclical tilt, with IT (+4.4%), industrials (+3.2%), materials (+1.9%) among the strongest areas.

 

November also saw the market’s growth bias reassert itself following the rally in value style stocks in September and October. The MSCI Europe ex-UK Growth Index returned 3.6%, outstripping the Value Index return of 1.3%. As detailed in previous commentaries, this Fund is positioned to benefit from a reversion in Value’s long-term underperformance, which we believe is long overdue but has been delayed by the last decade’s unprecedented fall in interest rates.

 

Shares in Italian asset manager ANIMA (+18.3%) rose throughout November after it released forecast-beating results for the first nine months of 2019. Assets under management rose 9% to 190bn. Performance fees rose 35% to €24.9m, helping boost total revenues by 4% to €255m after net commissions rose by only 1% to €212m. Profit before tax rose 4% to €141m, ahead of consensus forecasts for closer to €136m.

 

Nobina (+7.1%), the Nordic bus operator, had a contract with Malmo renewed for another three years. The contracts covers the operation of over 101 scheduled buses and is worth around SKr931m, and the shares approached year to date highs.

 

Novartis (+5.6%) announced a US$9.7bn acquisition of The Medicines Company at $85 a share, a 41% premium over the price in the month prior to the deal’s announcement. The Medicines Company recently successfully completed Phase III studies for inclisiran, a cholesterol-lowering therapy, which Novartis estimates could become one of its largest products by sales. Until it launches, investment in the drug will modestly dilute Novartis’ earnings. However, Novartis states that profit margins for the Innovative Medicines division (in which inclisiran will sit) are actually expected to expand overall. It predicts margins to reach mid-thirties in the near term and to hit high-thirties in the medium term once inclisiran is launched.

 

Danish facilities management group ISS (-12.2%) tumbled on a profit warning which reduced 2019 operating margin guidance from 5.0%-5.1% to “above 4.2%” and cut its free cash flow forecast from DKr1.8bn-DKr 2.2bn to Dkr0.6bn-DKr1.0bn. The company blamed a delay in operational improvements in France and underperforming individual contracts in Denmark and Hong Kong. Revenues were in-line with expectations, up 8.4% in Q3, half of which was the impact of a new contract with Deutsche Telekom, the largest in ISS’ history.

 

In the same sector, Coor Service Management’s (-6.0%) Q3 EBITDA (earnings before interest, tax, depreciation and amortisation) of SKr127m fell short of consensus expectations of SKr168m, but still represented a year-on-year increase of 25%. Overall, trading looked solid however. Net sales rose 5% to SKr2.49bn, of which 4% was organic growth and 1% beneficial currency moves. Profit margins rose as a result of efficiency-enhancement efforts, which tend to yield results as facilities management contracts are extended or newly initiated.

 

Swedbank (-6.9%) shares slipped further as allegations of involvement in money laundering intensified, although after nearly a year of intensive press speculation, very little material new information has been released. We believe that next year will see the hugely profitable characteristics of the bank reassert themselves.

 

Positive contributors included:

ANIMA (+18.3%), Nobina (+7.1%) and Novartis (+5.6%).

 

Negative contributors included:

ISS (-12.2%), Swedbank (-6.9%) and Coor Service Management (-6.0%).

 


 

The Fund’s covered call strategy remains on pause until more attractive premium rates present themselves.

The open-ended resumption of the European Central Bank’s quantitative easing in November, dubbed ‘QE infinity’, has served only to smother volatility.

 

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 1.1% against sterling in October.

 

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

 

 

Sep-19

Sep-18

Sep-17

Sep-16

Sep-15

Liontrust European Enhanced Income
I Hedged Acc

3.9

-1.5

18.0

-4.8

13.7

MSCI Europe ex UK

5.8

1.3

21.4

20.0

-1.6

IA Europe Excluding UK

2.2

1.9

21.9

18.4

3.6

Quartile

2

4

4

4

1

 

*Source: Financial Express, as at 30.11.2019, 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 30.09.2019, 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.

Wednesday, December 18, 2019, 4:17 PM