Liontrust European Income Fund

March 2018 review

The Liontrust European Income Fund returned -4.4%* in sterling terms in March, compared with the -3.3% return from the MSCI Europe ex-UK Index.

 

The primary investor focus was Donald Trump’s announcement of a range of import tariffs, many of them targeted at China, which sparked fears of retaliation and a trade war. Global equity markets’ adverse reaction to Trump’s trade offensive was dubbed the ‘Tariff Tantrum’, although we expect the long-term effects to be fairly minimal.

 

Momentum towards tightening of global monetary policy was maintained in March. While keeping interest rates unchanged as expected, the European Central Bank released an accompanying statement which contained a slight but significant change to its wording. Whereas previous statements had entertained the possibility of increasing or decreasing quantitative easing after its current programme ends in September 2018, the most recent instalment no longer indicates that it stands ready to increase purchases. As expected, the US Federal Reserve raised its target range by 25bp to 1.5%-1.75%. Although it left the 2018 ‘dot-plot’ of expected rate rises unchanged, it signalled a faster likely pace of tightening for 2019.

 

The Italian election saw populist parties such as the Five Star Movement and Northern League make big gains at the expense of Renzi’s Democratic Party, as expected, but none had a majority. With a coalition needed in order to form a government, negotiations still drag on. Bears will point to political instability but markets are likely to prove resilient. Merkel only formed a German government in March after months of talks, while Belgium once went 589 days without an elected government, which was barely noticed.

 

When it comes to Italian politics, a lot of justified scepticism already appears to be in the price. Italian equities have been trading on a valuation discount to Europe for a decade, which suggests it might take more than a hung parliament to perturb investors in the region.

 

Given the ongoing sell-off in government bonds, it was slightly counter-intuitive to see the European utilities sector (+3.3%) providing a pocket of market strength. With a bout of risk aversion leading equity markets lower, the sector’s defensive credentials appeared to have won out over its bond-proxy characteristics. The Fund benefited via its holdings in Endesa (+2.4% and Terna (+3.1%).

 

Having released 2017 results last month, Terna (+3.1%) released a new strategic plan covering 2018 to 2022. The plan outlined €5.3bn of investment in the energy grid, up 30% over its previous plan, taking the regulated asset base to €17.5bn. The company’s 2018 – 2020 dividend policy includes a target of 6% CAGR (compound annual growth rate), with 2021 and 2022 seeing a dividend payout ratio equivalent to 75% and no less than the 2020 level.

 

However, a few heavy falls in reaction to stock-specific news led the portfolio’s monthly decline to be deeper than that of the MSCI Europe ex-UK Index. The biggest drop came from Bpost (-34.8%) which, having rallied strongly in the second half of 2017, saw its shares sharply adjust lower as Q4 results disappointed. Overall Q4 revenues were up 38%, reflecting the impact of its late-2017 acquisition of US e-commerce logistics group Radial for a consideration of over US$800m.  An acceleration in parcels volumes - up 31% in Q4 - was not enough to cheer investors, who were alarmed by a bigger than expected deterioration in mail volumes (-6.4% in 2017) and rising costs. Chiefly though, a disappointing update on the new Radial business undermined confidence, and actually erased more value from the stock than Bpost had paid for the acquisition in total. We view this as a severe over-reaction, and remain holders.

 

Investors in AXA (-17.3%) were spooked by its plan to spend US$15.3bn on the acquisition of XL Group. While the move to expand its presence in property & casualty insurance/reinsurance at a time when premiums are firming is seen as a sound strategic step, the purchase price has caused some temporary concern. The cash consideration will be partly financed through the IPO of AXA’s existing US operations, and so far in April the stock has recovered strongly.

 

The merger of 1&1 and Drillisch led the combined group – 1&1 Drillisch (-14.6%) – to finish 2017 with 12.6m customer contracts. It is targeting 1.2m new contract additions this year. Shares in the company have strengthened substantially since the merger was announced, but the 2017 combined results appeared to disappoint on profitability, with the company missing the €630m to €640m range it had set in the aftermath of last year’s merger. However, we think the market has missed the impact of accounting changes and higher short-term investments, which promise better results to come.

 

Finishing our round-up on a more positive note, ENI (+3.1%) shares were lifted by both oil price strength (Brent up 5% to US$64.9 a barrel) and news of a deal with Abu Dhabi. The company paid US$875m for stakes of 5% and 10% respectively in two offshore fields, in concession agreements which will have a term of 40 years.

 

Positive contributors included:

ENI (+3.1%), Terna (+3.1%) and Endesa (+2.4%).

 

Negative contributors included:

Bpost (-34.8%), AXA (-17.3%) and 1&1 Drillisch (-14.6%).



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

 

Mar-18

Mar-17

Mar-16

Mar-15

Mar-14

Liontrust European Income I Acc

3.1

17.5

-0.2

9.5

15.3

MSCI Europe ex UK

3.0

27.2

-5.3

7.0

17.0

IA Europe Excluding UK

5.6

23.7

-1.8

6.9

17.4

Quartile

4

4

2

1

3

 

*Source: Financial Express, as at 31.03.18, total return (net of fees and income reinvested), bid-to-bid, institutional 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. 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 the Fund 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.

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.

Thursday, April 19, 2018, 5:17 PM