Liontrust European Growth Fund

November 2018 review

The Fund returned -5.7%* in sterling terms in November, compared with the -0.5% return from the MSCI Europe ex-UK index.


October’s European stock market weakness carried over into November, with the investor rotation from cyclicals into defensives once again providing a headwind to the Fund’s positioning. The best performing sectors were communications services (+7.9%, recently renamed from telecoms), utilities (+5.2%), consumer staples (+2.7%) and health care (+1.9%) while energy (-6.3%), materials (-5.5%), consumer discretionary (-3.4%) and IT (-3.3%) again suffered falls. The oil price tumbled more than 20% to US$58.7/barrel, not helped by Donald Trump’s public criticism of Saudi Arabia’s mooted plan to cut production.


US stocks took some impetus towards month-end from Federal Reserve Chairman Jerome Powell’s comments that US rates were closing in on a neutral level. Earlier in the month it had kept rates on hold at 2%-2.25%. European markets, however, were unable to avoid finishing in negative territory for the month as long-running macroeconomic concerns overshadowed the month’s major events.


The Fund’s cyclical tilt includes double-digit percentage exposures to energy, materials and IT, all of which represent overweight positions relative to the MSCI Europe Index. In addition, the market cap return profile of the market was unhelpful, with small and mid-caps bearing the brunt of market weakness. The MSCI Europe Large Cap Index returned -0.3% in November compared with the -2.7% and -3.4% respective returns from the mid and small cap indices.


Furthermore, in addition to a tough backdrop of weak investor sentiment, a selection of holdings suffered negative newsflow. For example, Swedish Match’s (-23.3%) defensive qualities should otherwise have seen its shares receive support in November, but instead it tumbled following moves by the US Food & Drug Administration to crack down on the tobacco industry. Although proposals to limit sales of flavoured e-cigarettes and menthol cigarettes don’t impact snus and moist snuff manufacturer Swedish Match directly, the global listed tobacco sector took a heavy hit.


Ence Energia Y Cellulosa (-24.9%) extended last month’s fall as the biomass power producer tracked energy prices lower; the company also downgraded its 2018 EBITDA forecast from €300m to a range of €290m - €300m.


Simcorp’s (-17.2%) vulnerability to widespread weakness in the IT sector was worsened by nine month results which disappointed on profitability. Revenue rose 14% year-on-year in local currency terms to €254m, of which 8.2 percentage points can be attributed to organic growth and 5.5 percentage points the result of the acquisition of an Italian business. EBIT (earnings before interest and tax) rose 22% to €52.5m as constant currency margins rose to 21.5%. With 2018 targets of an EBIT margin in the 24.5% - 27.5% range and revenue growth of 10% - 15%, the company needs a strong Q4 in order to hit its own guidance and investors marked the shares down accordingly.


Better newsflow came from Danish drinks company Royal Unibrew (+2.1%), which released Q3 results including upgrades to full year guidance. A “historically warm summer” contributed to 10% growth in adjusted net revenue, with profit margins expanding to 19.4%, compared with 17.7% a year earlier. As a result, the company upgraded its 2018 net revenue to a range of DKK7.2bn - DKK7.3bn, up from DKK7.0bn - DKK7.2bn and raised its EBIT forecast to DKK1.32bn - DKK 1.34bn from DKK1.2bn - DKK1.34bn.


Spanish manufacturer of rail systems Construcciones y Auxiliar de Ferrocarriles (+4.3%) also issued strong results. Revenues increased 30% to €1.27bn in the first nine months of 2018 due to the “intense pace” of rail vehicle manufacture, which encompasses over 40 projects globally. The company expects profit growth in future years to be driven by higher activity volumes, stable order intake ratios, solid conversion of its backlog and cost management efforts.


While Fund returns in October and November have been disappointing, we continue to apply the Cashflow Solution investment process in a disciplined and consistent manner. Within the materials and energy sectors we still see value as corporate aggression levels are low and valuation spreads are still above normal. Moreover, the relative performance of defensive stocks compared with more cyclical areas now looks quite extreme, at nearly 2 standard deviations above average. On this basis, a reversion could reasonably be expected.

Positive contributors to performance included:

MedioBanca (+7.2%), Roche (+6.8%) and Elisa (+0.8%).


Negative contributors to performance included:

Ence Energia Y Cellulosa (-24.9%), Swedish Match (-23.3%) and Simcorp (-17.2%).


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 30.11.2018, 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 30.09.2018, 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 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, December 7, 2018, 4:33 PM