Liontrust GF European Strategic Equity Fund

April 2020 review

The Fund’s A4 share class returned -0.5%* in euro terms in April. The Fund’s comparator benchmarks, the MSCI Europe Index and HFRX Equity Hedge EUR Index, returned 6.1% and 4.4% respectively.

 

European equity markets recovered some ground as the Covid-19 pandemic showed signs of having passed its peak in new cases and deaths in some of the worst hit European countries such as Spain and Italy.

 

Lockdown restrictions largely remained in place, extending the nosedive in economic activity. Because the duration of these measures remains unknown, the scale of the macroeconomic setback is also uncertain, but Q1 GDP releases gave a taste of what is to come. April data releases showed quarter-on-quarter economic contractions of 9.8%, 4.8% and 3.8% in China, the US and eurozone respectively. For most regions, current restrictions were only in place for the latter stages of the quarter so the slowdown is sharper than these figures show.

 

The oil market gave perhaps the clearest illustration of this immediate slump in activity, with the US WTI contract for physical delivery in May entering negative territory (falling as low as -US$40 a barrel) as it approached expiry in mid-April. The lack of demand or inventory storage capacity only had such an extraordinary effect on the very short end of the oil futures curve; as the one-month contract rolled into June delivery, the price recovered to US$18.8 a barrel by month end.

 

The market’s rebound pulled most sectors into positive territory for the month, with only energy (-3.6%) losing ground.

 

The Fund’s net exposure should have given it participation in the market rally but the good long book performance was offset by losses resulting from some sizeable risers in the short book. The largest detractors in the short book include some e-commerce stocks that have performed strongly during the current Covid-19 crisis and companies in healthcare and consumer staples sectors.

 

Specifically, a US-listed online marketplace for handmade and craft goods shot higher on a trading update that detailed 30%+ year-on-year growth in Q1 despite a massive drop-off in mid-March. A US nutraceutical also group rose substantially in April after two pieces of positive newsflow. Firstly, it benefitted from a positive ruling on a rival company’s challenge to one of its patents and, secondly, it announced pre-clinical research suggesting its product could help support immunity to coronaviruses.

 

The long book performed well in isolation but was diluted by the losses on the short book.

 

William Hill (+72.1%) was the largest gainer in the long book. The stock had fallen sharply during March’s market rout, as the cancellation of sporting events hit its revenue outlook. It had an additional setback as DS Smith’s finance director reneged on an agreement to join the company due to the Covid-19 disruption. Shares in William Hill bounced back swiftly in April and it was also able to make new CFO and COO appointments.

 

Some of the worst hit stocks in March showed greatest participation in April’s bounce. Housebuilder Vistry Group (+43.0%) was one of these. A Covid-19 update outlined that it has suspended all discretionary land spend in order to protect its cash position, while work in its Housing division is focused on watertight properties with visibility of completion and cash realisation. The majority of its staff are furloughed but it has begun to resume activity at its Partnerships sites, with work commencing at around 90% of sites. Similarly, building materials group Forterra (+39.1%) recovered from March’s lows as building sites gradually reopen. Having suspended operations in March, Forterra announced at the end of April that it will restart production at one of its brick manufacturing facilities and gradually increase activity.

 

BW Offshore (+64.7%) has also recovered from its lows, helped by last month’s news of a five year extension to a rig lease and operation contract from MP Gulf of Mexico which is expected to generate around US$350m of EBITDA. The operator of floating production storage and offloading vessels has also responded to Covid-19 by deferring around US$60m of planned capex on its inactive fleet.

 

Ahead of the release of Q1 results, Lundin Energy (+34.0%) announced details of US$340m in extra credit facilities secured to provide a buffer against current oil market uncertainty. The results themselves gave more positive news on liquidity, showing US$400m free cash flow generation and a reduction in net debt to US$3.7bn from US$4.0bn at the end of 2019. The company increased its full year production guidance by about 6% to a range of 160 – 170 million barrels of oil equivalent per day. This is primarily due to faster than expected ramp up at its Johan Sverdrup field.

 

One of the weaker long book positions was market research group Ipsos (-7.4%). It published Q1 results showing a decline in demand for research on consumers, customers and employees as organisations responded to the pandemic in March. There was some increase in demand from public authorities in relation to Covid-19, but this was only enough to ensure flat year-on-year organic revenue and could not prevent a 100bp contraction in profit margins. The company also warned that net order intake is down around 40% on last year’s levels.

 

Although the Fund was not well positioned for the market impact of Covid-19 this year – given the nature of our signals which are ill-equipped to cope with an unusual shock of this nature – we think that the environment for our long/short strategy could be very rewarding over the next 12 months. There are three reasons for this. First our signals would suggest that a downtrend in the context of the prevailing low valuations that are in evidence usually points to a very positive market outlook, albeit with high levels of volatility. The fund is positioned to capture this development with net market exposure of 52% and gross exposure of 173%. Secondly, our research tells us that we are in an environment where the rewards to value-oriented strategies could be explosive. As a result of this we have orientated the long book more to our value based secondary scores (a set of quantitative stocks that help us to select stocks from the top quintile of cashflow). Simultaneously, on the short side we have ensured the short book is exposed to bad cash flow stocks that are also expensive on other yardsticks of value. Finally, measurements of the valuation of the top quintile of cash flow relative to our history reveals that the top quintile is extremely cheap. Historically this has created the platform for the strategy to deliver some of the best returns we have seen in our records – irrespective of which geography one examines.

 

One of the reasons that we did not participate in the market recovery in April was due to the continued underperformance of value strategies – particularly on the short side. Recently, two distinguished members of the investment community – Clifford Asness of AQR and Rob Arnott of Research Affiliates – have separately published research pointing to the once-in-a-generation opportunity for value-based strategies. Value as a strategy has underperformed the market for many years culminating in very poor results in the first quarter of this year when the sell-off of value stocks was particularly extreme. As a result, the strategy has become historically extremely cheap when measured against average valuations. Indeed, Cliff Asness has shown how almost any way that you look at the strategy, it resides in the cheapest percentile of its historic valuation. Work by Asness and Arnott is confirmed by our own internal research which shows that today investors are being paid a historically high premium to accept the risk of a value-based strategy. Our own measures point to a similar scale of opportunity highlighted by Asness and Arnott. We know that historically not just the cash flow ratios but also our secondary scores – particularly the more value orientated secondary scores – deliver very strong performance when our measures become this extreme. Whilst the returns of the fund so far this year have obviously been disappointing, we are optimistic about the fund’s outlook and have positioned the portfolio to take advantage of what we view as a tremendous investment opportunity that is unfolding.

 

Performance since launch* (%)


Liontrust European Strategic Equity Performance Since Lauch 04.20

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust GF European Strategic Equity
A4 Acc EUR

-13.9

4.2

0.3

10.7

-1.1

MSCI Europe

-13.5

5.5

-0.4

16.9

-13.7

HFRX Equity Hedge EUR

-11.3

-7.8

5.8

4.0

-8.2

 

*Source: Financial Express, as at 30.04.20, total return (income reinvested and net of fees). Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 31.03.20, total return (income reinvested and net of fees).

 

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 Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Liontrust European Growth Fund holds a concentrated portfolio of stocks, if the price of one of these stocks should move significantly, this may have a notable effect on the value of the respective portfolio. The Liontrust Global Income Fund's expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 

Disclaimer

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, May 15, 2020, 11:44 AM