Liontrust European Growth Fund

April 2020 review

The Fund returned 5.6%* in sterling terms in April. The MSCI Europe ex-UK index comparator benchmark returned 4.4% and the average return made by funds in the IA Europe ex-UK sector, also a comparator benchmark, was 7.2%.


European equity markets recovered some ground as the Covid-19 pandemic showed signs of having passed its peak in new cases and deaths in some of the worst hit European countries such as Spain and Italy.


Lockdown restrictions largely remained in place, extending the nosedive in economic activity. Because the duration of these measures remains unknown, the scale of the macroeconomic setback is also uncertain, but Q1 GDP releases gave a taste of what is to come. April data releases showed quarter-on-quarter economic contractions of 9.8%, 4.8% and 3.8% in China, the US and eurozone respectively. For most regions, current restrictions were only in place for the latter stages of the quarter so the slowdown is sharper than these figures show.


The oil market gave perhaps the clearest illustration of this immediate slump in activity, with the US WTI contract for physical delivery in May entering negative territory (falling as low as -US$40 a barrel) as it approached expiry in mid-April. The lack of demand or inventory storage capacity only had such an extraordinary effect on the very short end of the oil futures curve; as the one-month contract rolled into June delivery, the price recovered to US$18.8 a barrel by month end.


The market’s rebound pulled most sectors into positive territory for the month, with only energy (-3.1%) losing ground. Nevertheless, the sector was home to the Fund’s top riser for the month: Lundin Energy (+34.1%). Ahead of the release of Q1 results, the oil and gas exploration and production company announced details of US$340m in extra credit facilities secured to provide a buffer against current oil market uncertainty. The results themselves gave more positive news on liquidity, showing US$400m free cash flow generation and a reduction in net debt to US$3.7bn from US$4.0bn at the end of 2019. The company increased its full year production guidance by about 6% to a range of 160 – 170 million barrels of oil equivalent per day. This is primarily due to faster than expected ramp up at its Johan Sverdrup field.


The rise in Lundin Energy helped compensate for declines in Total (-8.9%) and Neste (-6.4%) and ensured the Fund’s overweight allocation to the sector relative to the index avoided negative attribution. Total has recently

outlined its resilience to weak oil prices via a breakeven price of around US$25 a barrel and its low gearing ratio of 16%. In March, with oil prices dropping to around US$30, it had moved to protect free cash flow by scaling back capex plans by 20%, trimming operating costs and suspending its share buyback programme.


The resilience in demand for technology products and services during the Covid-19 pandemic has led IT to be one of the strongest stockmarket sectors this year. In March it topped the sector breakdown, rising by 9.6%. The Fund’s sector exposure includes Dutch group ASML (+10.0%), which makes lithography machines needed by the semiconductor industry. In a mid-month release of Q1 results, the company commented that it has seen no change in demand for its products. Sales were lower at €2.44bn compared with €4.04bn in Q4 2019, but ASML attributes this to supply chain issues resulting from Covid-19. These issues have now been resolved and it expects to recoup lost Q1 revenue during the remainder of 2020. Net bookings during Q1 rose 28% quarter-on-quarter to €3.09bn


This year’s fall in the price of industrial commodities has affected Swedish metals miner and smelter Boliden (+12.8%). Q1 operating profit at its mines dropped 75% to SKr318m. Some of the fall was offset by a 30% rise in smelting due to higher volumes and improved prices. However, April saw some recovery in metals prices – copper was 8% higher – which was mirrored in Boliden’s share price.


The Cashflow Solution investment process involves the forensic analysis of historic cash flows and balance sheet developments in companies’ in their annual report and accounts. As a large proportion of the European company universe have December year ends and release the corresponding reports in March or April, we tend to make a number of portfolio changes around this period in order to reflect the latest cash flow analysis.


Measured by our cash flow yard stick, market valuations remain low on an equally weighted basis. Low valuations in the context of a down-trending market tend historically to point to very positive future returns on a 12 month view. Simultaneously, we have noted that investor anxiety is very high, pointing to the attractiveness of value strategies at this point. Value strategies have of late underperformed dramatically and relative to history it is clear investors are being paid a high premium to accept the risk of the strategy. As a consequence, our annual review has seen a shift to emphasise the more value-orientated of the secondary scores. We use these scores to highlight the best opportunities available within the top quintile of cash flow stocks. Historically, the portfolio has tended to have a negative exposure to value risk factors but this is not the case today. The portfolio changes implemented in April included the sale of Cembra Money Bank, Energias de Portugal Kering, Neste, Peab and Telenor and the purchase of Bank of Ireland, Bekaert, BNP Paribas, ISS, Pandora, Peugeot, Publicis Groupe and Randstad.


Positive contributors to performance included:

Lundin Energy (+34.0%), Merlin Properties (+20.8%) and Boliden (+12.8%).


Negative contributors to performance included:

Total (-8.9%), Societe Generale (-8.8%) and Peab (-8.4%).


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








Liontrust European Growth I Inc






MSCI Europe ex UK






IA Europe Excluding UK













*Source: Financial Express, as at 30.04.20, 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 Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Liontrust European Growth Fund holds a concentrated portfolio of stocks, if the price of one of these stocks should move significantly, this may have a notable effect on the value of the respective portfolio. The Liontrust Global Income Fund's expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 


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.

Friday, May 15, 2020, 11:57 AM