Liontrust European Income Fund

February 2020 review

The Liontrust European Income Fund returned -7.1%* in sterling terms in February. For comparison, the MSCI Europe ex-UK Index returned -5.4% and the average return of funds in the IA Europe ex-UK sector was -6.2%.


The spread of Covid-19 beyond China’s borders has taken it near to pandemic status according to the World Health Organisation and had a massive negative impact on economic activity and investor sentiment. It is too early to quantify the macroeconomic impact of governments’ attempts to contain the coronavirus spread, but a mid-month guidance downgrade from Apple served an early and conspicuous warning of the negative impact of supply chain disruption and depressed consumption.


Financial markets reacted in classic risk-off fashion, pushing up the prices of safe havens like US government bonds (the US 10-year generic yield fell from 1.51% to 1.15%) and heavily marking down equity markets that had in some cases hit all-time highs during January. Only one sector of the MSCI Europe ex-UK Index ended in positive territory in sterling terms in February: utilities, up by only 0.5%. Given the backdrop of significant concern over the economic impact of coronavirus, it was no surprise that energy (-10.2%) and industrials (-7.3%) were the two worst hit areas.


The broad-based weakness fed through to the portfolio, with holdings across a number of sectors experiencing share price falls. The selling pressure was largely indiscriminate, but Deutsche Post (-12.1%) fell on the release of a trading update that explicitly addressed the coronavirus fallout. While 2019 operating profit rose by 30% to 4.1bn, Deutsche Post estimates a February operating profit hit of between 60m - 70m due to the outbreak, but states that the full year impact cannot yet be assessed. However, in a further update released after the end of the month, Deutsche Post (which operates the DHL parcels brand) noted that the situation in China was in fact getting better every day, and announced an improved dividend and enhanced cash flow guidance.


Shares in Novartis (-8.3%) fell on safety concerns over its Beovu eye drug after reports from the American Society of Retina Specialists of 15 cases of retinal vasculitis following its use. Novartis responded by commissioning an external safety review. AXA (-10.7%) was another prominent detractor as 2019 net income fell short of investors’ expectations, despite rising by 80% over the year.


Fourth quarter results from Nordea Bank (+2.3%) showed signs of delivery on cost cutting plans, trimming overheads by 5% year-on-year to take the cost-to-income ratio down to 57%. The company is targeting a 50% ratio by 2022. Net interest income of €1.11bn for Q4 was marginally ahead of analysts’ expectations. Total operating income of €2.29bn represented a 10% quarter-on-quarter improvement, and the shares reacted positively.


Earnings at Swiss telecom operator Sunrise Communications (+0.7%) were ahead of expectations for 2019, earnings of SFr668m exceeding consensus of SFr652m, and 2020 guidance was upbeat. The company forecasts 2020 earnings of SFr675m - SFr690m, comfortably ahead of analyst expectations of SFr672m. The company’s contract subscriber base grew 9.4%, an acceleration from 8.5% the previous year, but the prepaid base declined. Bundled offers supported 8.5% and 14.6% respective increase in internet and TV subscribers.


Markets now remain at the mercy of the interplay between the real or imagined virulence of Covid-19, the real economic effect of shutdowns and curfews, and the expansionary responses of central banks and fiscal authorities. It seems certain that interest rates will be cut where possible, and fiscal prudence largely abandoned in favour of stimulus packages to mitigate the inevitable slowdown, given that governments worldwide were pushing in this direction even before the coronavirus outbreak.


If, as now seems likely, China at least has brought the epidemic under control, then we hope the worst case scenarios posited in the media seem unlikely to materialise, although markets will probably remain under pressure until the number of new global cases definitively begins to decline.


Positive contributors included:

Banca Farmafactoring (+2.3%), Nordea Bank (+2.3%) and Sunrise Communications (+0.7%).


Negative contributors included:

Dustin Group (-13.1%), AXA (-10.7%) and Novartis (-8.3%).

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







Liontrust European Income I Acc






MSCI Europe ex UK






IA Europe Excluding UK












*Source: Financial Express, as at 29.02.20, 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 31.12.19, 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 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.


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.

Tuesday, March 17, 2020, 2:21 PM