Liontrust European Income Fund

March 2020 review

The Liontrust European Income Fund returned -12.9%* in sterling terms in March. For comparison, the MSCI Europe ex-UK Index returned -11.4% and the average return of funds in the IA Europe ex-UK sector was -12.2%.


The coronavirus crisis was officially declared a global pandemic in March. Restriction measures dramatically ramped up around the world, with large parts of Europe put on lockdown. Alongside this, governments and central banks have unlocked their war chests with unprecedented stimulus packages being announced. The lockdowns will likely contribute to a sudden deep recession in the near term, which will also compress corporate earnings. However, the considerable loosening of monetary policy, including further bouts of quantitative easing, and the high level of government economic intervention will help ready economies for the eventual bounce back when the worst of the virus has passed.


In some countries, the worst has already passed. In China, where the epidemic is essentially over, we do have some high frequency data points to assess how the economy is doing. Vehicles on roads for example have now doubled from a month ago to track higher than this time last year. Company data suggests supply chains are re-forming and economic normalisation is continuing.


Outside of China, we believe that the Italian situation is the best indicator of what other Western countries can expect as new cases there appear to have already peaked. We believe that once the virus exhausts itself – provided the Western experience proves not materially worse than China – the various state interventions should prove market friendly over the medium-to-long term.


The market reaction thus far has been erratic to say the least, with the VIX index of US stockmarket volatility hitting its highest ever closing level. Early on in March we saw trading circuit breakers triggered in US and European equity markets, largely on the downside, but also on some days on the upside. Bond markets saw volatility spike as well, but by month-end they displayed some semblance of normality. Currencies did not escape the extreme moves – sterling lost almost 10% against the euro by mid-month, although most of the losses were clawed back by month end.


As was the case in February, the sell-off was broad-based in the MSCI Europe ex-UK Index. The worst of rout was felt in the real estate (-23.3%), financials (-23.2%) and industrials (-17.4%) sectors, while health care (+0.8%) was the sole area to edge into positive territory.


In this environment it was almost impossible to make sense of individual share price movements. Sector trends are perhaps a more useful approach to illustrate the Fund’s performance. Its heavy exposure to financials was a headwind, as investors judged that banks and insurance companies could face difficulties amid the sharp economic slowdown and from record low interest rates, while asset managers’ exposure to falling financial markets hit their share prices.


While financial companies will no doubt come under pressure – alongside other sectors – it is worth noting that this crisis is unlikely to be a repeat of the 2008 financial crash. Banks are much better capitalised as a result of regulation that has been in place since then, and previous stress tests have prepared these institutions for substantial strain on their balance sheets. Furthermore, the early and practically unlimited support from central banks should go a long way to maintaining liquidity and avoiding the kind of lending freeze we saw in 2008.


In any event, our primary financials exposure is in the insurance sector, and even in 2008 the majority paid dividends, with only the Dutch EU names requiring any form of government assistance. We believe that the majority are ready and willing to pay their dividends, albeit perhaps later than would normally be the case.


Banks, the most regulated and politically-sensitive area of the market, are additionally coming under moral suasion from governments to suspend dividends to enable lending power to help the European economy rebound, as well as a direct order from the European Central Bank to suspend dividends until at least October. This is not just a phenomenon in the financial sector, however. During the month there were suspensions of buy-backs across the board, AGMs were pushed back, and dividend announcements with them, and there have already been some dividend cuts or postponements in many sectors.


We will no doubt see more, but this is not necessarily because companies do not have the cash (current dividends are based on last year’s earnings) but they remember the liquidity crisis of the Global Financial Crisis and wish to keep liquidity levels elevated just in case. We would therefore expect to see the majority of this money back again once the crisis abates.


One company to reduce its dividend was Nordic facilities company Coor Service Management (-40.2%). The company has withdrawn both its ordinary dividend, as well as its previously announced special dividend as a precautionary response to the coronavirus outbreak. The company noted that the economic effects of the virus will have a material impact on net sales and operating profit, in particular its food and drinks division which was c.15% of sales in 2019.


An area of positive attribution for the Fund was its health care exposure. Roche (+7.8%) was a standout performer as President Trump highlighted the Swiss pharmaceutical company as doing good work on the testing side, now producing millions of tests per month, and also having a potential Covid-19 treatment, Actemra, ready to go. The company confirmed that it has initiated Phase III trials of this treatment.


Fellow Swiss drug maker Novartis (+5.0%) was another holding to withstand the selling pressure. The company has supplied millions of doses of generic hydroxychloroquine to be used in clinical trials for coronavirus treatments.


Outside of health care, a significant gainer was Swedish food retailer Axfood (+16.1%). Demand for food around the world has spiked during the outbreak as people stock up on essential supplies.


Nexity (-30.9%) suffered alongside the wider real estate sector. The company updated investors that, following a strong start to the year, operations at its construction sites, searches for homes or offices for purchase or rental and buying decisions by its clients have all come to a standstill. However, the group maintained that it has a strong order book and cash levels and committed to paying a €2 per share dividend in the first half of 2020.


With markets moving so fast, we found little value in making significant changes to the portfolio. In order to support the Fund’s cash levels we trimmed some positions on up-days in names which may experience long-term economic impacts, such as airports.


Sentiment in markets at times bordered on hysteria, driven by wildly pessimistic worst-case mortality projections, that now thankfully look set to be averted. However, the lockdowns designed to slow the spread of the disease and mitigate the damage to health systems will undoubtedly cause severe short-term economic pain. How much of this translates into permanent economic damage remains to be seen but clearly the sooner the lockdowns can end, the better the chance of the global economy regaining its balance.


Positive contributors included:

Axfood (+16.1%), VAT Group (+6.3%) and Swisscom (+4.4%).


Negative contributors included:

Coor Service Management (-40.2%), Swedbank (-22.8%) and Endesa (-13.8%).


The Fund’s 12 month income yield was 4.6% at 29 February 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 targets an income level in excess of the yield on the MSCI Europe ex-UK Index. The index yielded 3.6% over the same period.


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 31.03.20, 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 31.03.20, 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.

Wednesday, April 8, 2020, 4:05 PM