Liontrust European Income Fund

July 2020 review

The Liontrust European Income Fund returned 0.3%* in sterling terms in July. The MSCI Europe ex-UK Index comparator benchmark returned -1.6% and the average return of funds in the IA Europe ex-UK sector, also a comparator benchmark, was -0.1%.


The increasing rate of coronavirus cases, particularly in the US, saw equity markets take a step back in July. Europe saw a slight increase in cases from very low levels, most notably in Catalonia in Spain. However, they remained a long way from the peak of the first wave.


The first estimates of Q2 GDP numbers were also published across the continent. This gave the first real insight into the economic impact of lockdown measures. The eurozone economy shrank 12% quarter-on-quarter, the sharpest downturn on record, Germany saw a 10% fall, while France and Italy saw 14% and 12% declines respectively. 


The big news from a policy perspective in Europe was the landmark €750bn stimulus package announced by the European Commission after a lengthy debate by member states. While the headline number is significant, the main takeaway was the precedent that the EU can issue debt in a crisis. We think this would now be the EU’s default response in future crises.


July was a busy period for corporate reporting. On the whole, results from the Fund’s holdings have been positive considering the economic background. Surprisingly, defensive names have suffered more so far in reporting season compared to more cyclical stocks.


Among the highlights were Nordic banks Swedbank (+19%) and Nordea (+5.6%). Swedbank’s net interest income of SKr6.9bn came in ahead of consensus estimates of SKr6.7bn, while loan losses were 20% below market forecasts. Loss provisions has become a keenly watched measure during this banking earnings season, and Swedbank reported a lower credit impairment related to the effects of Covid-19 than the market expected. Swedbank will decide on the 2019 dividend payment once the Covid-19 risks abate and for now the dividend policy for 2020 remains unchanged.


Nordea’s management took a different approach by front loading loss provisions with the expectation that they would be materially lower going forward. Operationally, the company saw net interest income fall 2% quarter-on-quarter, while operating expense fell 13%. Management stated that it is ready to pay a dividend but is just waiting on clarity from the European Central Bank to proceed.


Away from financials, Nordic power-reseller Fjordkraft’s (+2.8%) announcement of its purchase of Innlandskraft for NKr1.4bn was well received by the market. The deal values Innlandskraft at a 31% discount to Fjordkraft’s valuation multiples and the integration should see an uplift in earnings before interest and taxes (EBIT) of c.29% and a 36% increase in its customer base customers.


Outdoor equipment supplier Thule Group (+11%) reported Q2 sales and EBIT ahead of consensus estimates. Both sales and earnings saw sharp declines resulting from Covid-19 restrictions, but the company said there have been improvements in trading in some countries which reopened their sport and leisure sectors.  The bike category of products stood out strongly in the quarter and could potentially be a strong performer for the company in a post Covid-19 world, with higher outdoor leisure activities, less public transport commuting and less air travel.


The current restrictions on air travel took a toll on French construction and infrastructure concessions group Vinci (-12%). EBITDA (earnings before interest, taxes, depreciation and amortisation) halved in the first half of 2020, with all business lines impacted by the Covid-19 lockdown, particularly in France. The global restrictions to air travel saw a 96% fall in passenger numbers at Vinci Airports in the second quarter. There was a small improvement in June as domestic flights resumed in some countries, but passenger levels still remained 94% below June 2019 levels. The extent of the economic upturn in the second half of the year remains uncertain and the group expects a decline in revenue, but this should be less pronounced than the first half (-15%).


One of the Fund’s defensive names which underperformed was Swiss pharmaceutical company Novartis (-10%). The company reduced its sales outlook for 2020 to mid-single digit growth, from high-single digit, reflecting reduced demand for its drugs, particularly its Lucentis eye care and mature ophthalmology treatments.


Positive contributors included:

Swedbank (+19%), Thule Group (+11%) and Endesa (+8.7%).


Negative contributors included:

Vinci (-12%), Mowi (-10%) and Novartis (-10%).


The Fund’s 12 month income yield was 4.0% at 31 May 2020. The yield is calculated using the sum of all net distributions in the accounting period divided by the unit price at the start of the period. The Fund’s income target benchmark is the yield on the MSCI Europe ex-UK Index. The index yielded 2.3% over the same period.


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








Liontrust European Enhanced Income
I Hedged Acc






MSCI Europe ex UK






IA Europe Excluding UK












*Source: Financial Express, as at 30.06.20, 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 30.06.20, 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.

Friday, August 14, 2020, 2:44 PM