Liontrust European Income Fund

August 2018 review

The Liontrust European Income Fund returned -1.2%* in sterling terms in August, compared with the -1.4% return from the MSCI Europe ex-UK Index.

 

European markets slid against a backdrop of ongoing trade tensions – with President Trump again threatening further US tariffs on Chinese goods – and notable weakness in emerging markets, where Turkey and Argentina were the worst affected.

 

German telecoms operator 1&1 Drillisch (-14.0%) generated 15% pro-forma revenue growth from a 470,000 customer contract gain – to a total to 13.1m –figures which are flattered by the business combination between 1&1 and Drillisch. Although the company confirmed its forecasts for 2018, the shares succumbed to weakness in the European telecoms sector (the MSCI Europe ex-UK telecoms sector fell 5.9%). This also weighed on Swedish peer Telia (-6.7%), which issued no significant corporate news during the month.

 

After telecoms, the European financials sector was the next worst performing in August, and this too had an impact on the Fund. Featuring among the portfolio’s negative contributors were Intesa Sanpaolo (-19.0%) and ING (-8.8%). Intesa Sanpaolo’s Q2 net income of €927m was ahead of expectations (albeit down on Q1’s level), but this was seen as a low-quality beat due to its reliance on unpredictable capital gains on financial instruments (+35% year-on-year) rather than the more predictable and repeatable banking ‘bread-and-butter’ of net interest income (-2.7% year-on-year). The Italian financial sector was hit especially hard as Italian sovereign debt yields rose, as the various elements of the Italian coalition government vied to increase spending plans in the budget.

 

Despite this, we continue to see Intesa Sanpaolo as part of a sizeable portfolio financials allocation which stands to benefit in the long term from an outlook for rising interest rates and yields, partly through higher net interest income. Italian sovereigns have since regained most of the territory lost in August. ING did indeed grow net interest income in Q2, up 2.4% year-on-year to €3.4bn, but other income lines weakened, meaning that its total underlying income declined 1.1% to €4.4bn. Investors were probably alarmed by the bank’s exposure to Turkey, but at only c.2% of ING’s loan book, this is not in fact material.

 

Turning to the portfolio’s positive contributors, Komax Group (+21.2%) commented on a “very successful” first half of 2018 which exceeded its expectations as it grew more quickly than its automated wire processing market. The company saw a 22% increase in revenues to CHF237m, 14% uplift in order intake to CHF256m and 40% improvement in operating profit to CHF35.7m. Komax expects to replicate this strong performance in the second half of 2018, as prior investments now start to bear fruit.

 

Shares in Deutsche Post (+4.4%) firmed on the release of Q2 financials, despite lowering its guidance for full year profits. Revenue increased by 1.4% to more than €15bn – a 6.2% increase when adjusted for currency trends and changes to business units. There was a good showing from its DHL divisions, which more than compensated for further earnings erosion at its post operations. It now expects to generate operating profit of around €3.2bn in 2018, lower than previously forecast as a result of restructuring measures being taken within the post operations. It is hoped that this will improve the division’s earnings contribution in future years, and Deutsche Post is leaving its 2020 operating profit forecast unchanged at more than €5bn.

 

The Fund’s residual holding in German health and hospitals group Rhoen-Klinikum was sold, as the yield generation is now below target, and the ownership puzzle (whereby two rival groups own blocking stakes) seems unlikely to be resolved in the imminent future.

Positive contributors included:

Komax (+21.2%), Nobina (+7.5%) and Deutsche Post (+4.4%)

 

Negative contributors included:

Intesa Sanpaolo (-19.0%), 1&1 Drillisch (-14.0%) and Telia (-6.7%)

 

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

 

 

Jun-18

Jun-17

Jun-16

Jun-15

Jun-14

Liontrust European Income I Acc

-1.9

23.3

4.9

6.1

11.4

MSCI Europe ex UK

1.8

28.0

4.9

0.7

15.9

IA Europe Excluding UK

3.1

29.2

4.5

4.2

13.9

Quartile

4

4

2

2

3

 

*Source: Financial Express, as at 31.08.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.

 

**Source: Financial Express, as at 30.06.2018, 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, September 20, 2018, 3:07 PM