Liontrust European Income Fund

January 2019 review

The Liontrust European Income Fund returned 1.9%* in sterling terms in January, compared with the 3.0% return from the MSCI Europe ex-UK Index.


The bright start to 2019 made by European and global equities was underpinned by a softening of tone by the US Federal Reserve. In the lead up to the central bank’s monetary policy announcement at the end of the month, the market began pricing in a slower pace of policy tightening as weak economic data from the US and the rest of world continued to concern investors.


The Fed, it appeared, agreed with the market view. FOMC (Federal Open Market Committee) members stated that they will be “patient” with further adjustments to its target for the Federal Funds rate as a result of muted inflationary pressures and adverse global economic and financial developments. Perhaps a bigger surprise to the market was the adjustment the central bank made to its quantitative tightening scheme. Jerome Powell, the Fed Chair, had previously said earlier in January that the winding down of the Fed’s balance sheet will run on “autopilot”, with expiring bonds not being bought back. In the Fed’s policy statement, it changed its stance to suggest that the FOMC is now prepared to adjust balance sheet normalisation as a result of the economic and financial headwinds.


While this may prop up global central bank asset flows for longer than expected, we still maintain our view that the gradual withdrawal of emergency level monetary policy will lead to greater volatility in stock markets and will be a boon to the value segment.


Markets responded favourably to the Fed’s statement. Almost all sectors in the MSCI Europe ex-UK Index ended higher with only communication services (-3.6%) finishing lower. This was unfortunately a headwind to the Fund’s performance, which has an overweight allocation to the sector. 1&1 Drillisch (-21.0%) was the biggest detractor amid concerns about slowing growth in 2019 ahead of Germany’s 5G spectrum auction. The company announced its intention to participate in the auction and build a standalone fourth network, and the shares appear to have priced in the large capex undertaking. Time will tell whether this is a credible threat or simply a method of securing more favourable terms on their current network roaming contract with Telefónica Deutschland that is up for renewal, a scenario we see as the more plausible outcome.


Swedish telecom company Telia (-10.0%) also fell sharply after its fourth quarter results disappointed against analyst expectations. Adjusted earnings before interest, taxes, depreciation and amortisation was SEK6.74bn, compared to the consensus forecast of SEK7.05bn. The company stated that delays in its transformation programme caused a challenging end to 2018, which are expected to continue in 2019.


However, it was a positive month for the majority of Fund holdings, which participated in the widespread bounce. Nordic insurance group Gjensidige Forsikring (+7.6%) was one of the few to release news. Its fourth quarter update beat the market estimate on the pre-tax profit and earnings-per-share level. Profit was improved by run-off gains of NOK1.4bn, which followed a review of its claim reserves. The company has built up a large amount of excess capital from the sale of its banking operations last year which management have stated could be paid out this year in the absence of any merger and acquisition opportunities.


Swiss automated wire processing company Komax Group (+9.6%) also rose on the back of a strong trading update, which showed a 10% increase in order intake in 2018 and a 17% increase in revenue. Komax stated that there is increasing pressure on companies to increase automation in wire processing and this trend is likely to continue in 2019 even if there was a slowdown in the automotive industry.


Scor (-9.5%) suffered a fall after Covea dropped plans to acquire the French reinsurer. Covea’s mooted takeover of Scor has caused a lot of controversy since the approach was first made in September. The move to abandon the deal came as a surprise to Scor, which added that it will be pursuing legal action against Covea and Chief Executive Thierry Derez. Despite this recent pullback in the share price, the company continues to progress well with January renewals growth holding strong, and the shares are currently trading higher than pre-Covea announcement price.


Positive contributors included:

Daimler (+9.0%), Banca Farmafactoring (+8.4%) and Endesa (+5.3%).


Negative contributors included:

1&1 Drillisch (-21.0%), Telia (-10.0%) and Scor (-9.5%).


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 31.01.2019, 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 31.12.2018, 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.




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.

Monday, February 25, 2019, 9:32 AM