Liontrust European Income Fund

December 2017 review

The Liontrust European Income Fund delivered a flat* return in sterling terms in December, compared with the 0.3% return from the MSCI Europe ex-UK Index.

Equity indices consolidated 2017 gains in December, the MSCI World Index of developed markets returning 1.4% and the MSCI Emerging Markets Index adding 3.7%. The FTSE 100 ended the year at an all-time high while a host of other indices, including the Nasdaq, S&P 500 and MSCI World, notched up record levels during the month.

 

US markets were boosted by the much-anticipated approval of President Trump’s tax reform package. Other key events included the US Federal Reserve raising rates from 1.25% to 1.5% as expected, the third hike of 2017. A further three increases are still scheduled for 2018, providing encouragement for our investment rationale behind the Fund’s high exposure to the rates-sensitive financials sector, and also demonstrating the increasing normalisation of the global economy.

 

Britain and the EU broke the deadlock over Brexit divorce bill that was preventing talks from proceeding, although a further twist was added when the May government was defeated on an amendment to the Brexit bill, with MPs voting to give parliament final approval of the EU withdrawal terms. That the MSCI Europe lagged the FTSE All-Share Index’s return has much to do with index constitution. In particular, the UK index has 7% and 13% exposure to mining and oil & gas, compared with 2.5% and 7% European weights.  Commodity prices rallied hard in December as US dollar weakness was extended and macro data showed robust Chinese demand.  The oil price rose 5% to just shy of US$67 per barrel while copper jumped 9% to US$3.3 a pound. These moves, if sustained, will add to inflationary pressures, and ensure that the outlook for interest rates remains positive.

 

From a macroeconomic perspective the European picture continues to improve steadily. This prompted the European Central Bank – while leaving policy rates unchanged – to upgrade its growth forecasts “substantially” from September’s level: taking the 2018 figure from 1.8% to 2.3%. Having lagged the US and UK (in aggregate) for so many years, the long-awaited recovery finally arrived in 2017, and seems likely to be reinforced in 2018. We should see pent up demand continue to feed through – capacity utilisation in the eurozone is now at 83.8%, having risen from a low of 69.5% in 2009, and is very close to the 2007 pre-crisis level. Parts of Europe indeed seem to be enjoying what might be termed an economic boom, certainly by the recent standards of anaemic growth.

 

At the corporate level, things were fairly subdued, with few announcements of note from Fund holdings. 

 

Statoil (+6.5%) was the Fund’s primary exposure to the oil price rally. The company also announced the acquisition of a 25% stake in Roncador, an oil field in the Campos Basin of Brazil, from Petrobras for an initial consideration of US$2.35bn with a further US$550m of contingent payments. The deal is expected to almost triple Statoil’s Brazilian production.

 

Nordic bus & rail operator Nobina (+8.5%) increased net sales by 3.5% year-on-year in the third quarter while operating profit increased by 27%. The announcement also included details of two new contract wins in Helsinki, covering 42 buses and worth SEK570m (split between a seven-year contract and one-year contract).  Nobina expects a busy period for tendering in 2018, and forecasts growing demand for electric buses. It already has electric bus projects scheduled in 208 in Malmo and Oslo, and will also operate a three-year pilot project for self-driving buses in Copenhagen.

 

Ryanair (-13.4%) was among the detractors from Fund performance after backtracking on pilot unions. Having previously had a long-standing policy of refusing to recognise these unions, the company decided to enact the volte-face in order to avoid costly strikes ahead of Christmas flights.

 

We added a new position to the Fund in December: Dustin, a reseller of IT products and provider of technical services in the Nordic region. The stock has a 2018 forecast yield of 3.7% and is expected to grow its distribution at c.10% for the next two years.

 

Positive contributors included:

Nobina (+8.5%), Drillisch (+8.4%) and Statoil (+6.5%).

 

Negative contributors included:

Ryanair (-13.4%), Terna (-5.8%) and Sanofi (-5.3%).

 

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

 

 

Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Liontrust European Income I Acc

12.3

15.1

10.8

0.7

26.2

MSCI Europe ex UK

15.8

18.6

5.1

-0.7

25.3

IA Europe Excluding UK

17.3

16.4

9.3

-0.9

26.1

Quartile

4

3

2

2

2

 

*Source: Financial Express, as at 31.12.17, total return (net of fees and income reinvested), bid-to-bid, institutional class.

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. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

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

This content 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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.
Monday, January 15, 2018, 3:39 PM