Liontrust GF European Strategic Equity Fund

March 2020 review

The Fund’s A4 share class returned -12.5%* in euro terms in March, compared with the -14.4% return from the MSCI Europe Index and -9.8% return from the HFRX Equity Hedge EUR Index.


Financial markets experienced sharp declines reminiscent of the 2008 Global Financial Crisis (GFC) as coronavirus cases continued to escalate around the world. A number of countries entered lockdown and the human and economic costs of the virus began to mount. Trading was extremely volatile; the VIX “fear index” rose to its highest post-GFC level, sharp downward moves forced equity market circuit breakers into action and selling became indiscriminate.


In the MSCI Europe Index, the worst performing sectors were financials (-24.3%), real estate (-22.6%) and industrials (-20.2%), whilst the most resilient were health care (-1.92%) and consumer staples (-5.1%).


Meanwhile, the sharp decline in oil prices (Brent crude -55%, hitting its lowest level since March 2002) put an additional strain on equities. This resulted from a combination of reduced demand during the coronavirus crisis and Saudi Arabia’s decision to ramp up production after OPEC and its partners failed to agree on measures to restrict output.


Having learned lessons from the GFC, central banks were quick to introduce emergency measures, including interest rate cuts, quantitative easing and liquidity support. Governments soon followed with huge fiscal packages aimed at supporting health care systems, businesses which have been materially impacted by the outbreak and individuals. These policies did steady markets from their initial panic, but until lockdowns are eased and businesses are open to operate as normal again, investors are likely to remain on edge.


The Fund’s net exposure at the end of March fell significantly to c.37%, as markets entered a downtrend. Given the constructive nature of the signals we use to set the net exposure of the Fund before the sharp escalation of the virus (benign corporate behaviour, reasonable valuations and a market in an uptrend), the Fund was not well placed to weather the unique storm of a global pandemic.


Value strategies and small and medium sized companies suffered the most significant headwinds in the sell off. The underlying returns of both the long and the short book were in excess of -20% during the month. The extent of these falls does highlight the value of the hedged structure of the Fund in a way that is not immediately obvious when examining the returns to the large cap dominated MSCI Europe Index.


London-listed housebuilder Vistry Group (-56.1%) and masonry materials manufacturer Forterra (-47.3%) were two of the worst hit stocks in the long book as the UK government moved to bring the housing market to an effective standstill by stopping estate agents from marketing new properties and banks from lending mortgages.


Forterra added that it has halted all operations and suspended its 2019 dividend given the uncertain impact from Covid-19. However, the group highlighted a strong balance sheet with a net debt/EBITDA (earnings before interest, taxes, depreciation and amortisation) multiple of 0.6.


The series of lockdowns across the world also put pressure on books and stationery retailer WH Smith (-42.3%), which has a significant presence in airports and train stations. In a March update, the group warned that revenue in the year to end August 2020 would face a hit of £100m-£130m and underlying pre-tax profit would be £30m-£40m lower as a result of significantly less high street and travel footfall. As the crisis worsened through March, investors took the view that even these forecasts would prove too optimistic.


The travel sector is another which has suffered a severe setback from the containment measures. Carnival (-60.7%) and United Airlines (-48.6%) added to their February losses as lock down measures became more widespread. Carnival remained in the news as its Grand Princess cruise ship was held off the coast of California as passengers and its crew were tested for the virus.


The positive area for the long book was in the health care sector; Swiss pharmaceutical company Roche (+4.9%) and smaller Danish peer Novo Nordisk (+4.9%) were two of the portfolio’s top gainers. The former confirmed that it has initiated phase III trials of its coronavirus treatment and been given emergency use authorisation by the US Food & Drug Administration, which should significantly speed up tests.


The short book provided a strong contribution, with a number of consumer-focused stocks seeing significant declines amid the crisis with many businesses having to temporarily shut down while lock downs are in place. One US casino operator suffered further woes as a takeover deal fell behind schedule, costing the company in “ticking fees”.


Currently our 12 month outlook is positive. This may seem perverse given the unambiguously down-trending markets we now face. However, the sell-off has been so severe that it has propelled our equally weighted valuation measure of markets to very cheap levels both in Europe and the US. In markets where valuations have hit these extreme levels, historic analysis suggest that downtrends tend not to persist. Such a combination is in fact predictive of the best market returns – albeit with high volatility in returns.


In addition, we noted that the valuation measure of the best quintile of cash flow companies has sunk to levels last seen at the depths of the GFC and the tech bubble. Historically, this has subsequently generated the most attractive returns to the process we have in our records, as the valuations of attractive cash flow companies revert to more normal levels.


Performance since launch* (%)

LESEF Performance March 2020

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







Liontrust GF European Strategic Equity
A4 Acc EUR






MSCI Europe






HFRX Equity Hedge EUR TR in GB







*Source: Financial Express, as at 31.03.20, 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).


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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 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. 


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.

Thursday, April 23, 2020, 9:33 AM