Liontrust Income Fund

H1 2020 review

The Liontrust Income Fund returned -14.7% over the first half of 2020, meaning it outperformed both the IA UK Equity Income sector and FTSE All Share Index, which returned -20.2% and -17.5%, respectively*. The Fund outperformed the sector and Index in both the first and second quarter.

2020 has so far proven to be one of the most turbulent periods for UK equity markets in living memory. The year has been dominated by the impact of the global COVID-19 crisis, with markets falling very sharply during first quarter as fears mounted about the spread of the virus around the world and the economic impact of governments implementing strict lockdown measures to control it. UK Equity income investors had very few places to hide, with some 180 FTSE All Share companies having to cut, cancel or suspend their dividend payments so far this year as a result of the lockdown and social distancing measures. This equals some £31bn of dividends, with the list of cutters including household names such as HSBC, Royal Dutch Shell, Lloyds, ITV and M&S. During the second quarter, investors have enjoyed a period of respite as dividend cut announcements have dried up, while markets have recovered strongly thanks to the response from governments in terms of fiscal measures, central bank interventions and the fact the curve appears to have flattened.

Over the first half of 2020, large-caps have outperformed small and mid-caps, while more growth orientated stocks have outperformed their value counterparts. That being said, it has so far been very much a year of two halves, with smaller companies and more cyclical stocks rallying back strongly since mid-March.

The Fund’s outperformance in 2020 so far has been driven by a number of factors. Firstly, the Fund’s large and mega-cap bias has been additive, with the portfolio’s UK exposure over the year limited to purely FTSE 100 stocks. Secondly, the Fund’s three-silo approach, which nullifies style risk and allows us to run a style-agnostic portfolio, has been a very important driver. For example, the Fund’s exposure to Steady Eddies (stocks in this silo include our US mature technology names, with US/dollar exposure more generally acting as a boon to performance, as well as consumer staples) meant the Fund proved more resilient during the Q1 sell-off, while our exposure to Hidden Fruits and Economic Recovery stocks (which includes asset managers, mining stocks and real estate names) allowed the Fund to rebound more strongly than the wider market in Q2.

Another key facet to the Fund’s outperformance has been our focus on companies with high levels of dividend cover and low leverage relative to their peers. Leverage has been an important reason behind the raft of dividend cuts across the UK market indeed our analysis on dividend coverage and leverage in 2019 meant we felt many UK stocks would have to cut their dividend this year despite the COVID-19 crisis. Therefore, our focus on companies with forward dividend cover of more than 1x and stocks with strong balance sheets and sufficient short-term liquidity has ensured the Fund has managed to emerge from this period of dividend cuts relatively unscathed. This is shown by the fact the Fund has paid out more in dividends to investors in H1 2020 than during the corresponding period last year. Strongest contributors this year have included Microsoft, Apple, Segro (which we added in March), Reckitt Benckiser and BHP Group (another addition this year). On the other hand, key detractors have included Smiths Group, Compass Group and RSA Insurance – all of which have been sold.

Our focus remains on delivering an attractive yield, but importantly a sustainable level of income and capital preservation. Despite the strong rebound in the UK market since March and the fact the news of companies’ cutting their dividends has subsided, it is imperative we remain vigilant. Payout ratios across the UK market remain very stretched and we do not believe this trend of dividend cuts is yet over. As such, we continue to focus on the shield of dividend cover and the long sword of balance sheet strength. With this in mind, we are confident in the underlying portfolio (given the weighted average forward dividend cover across the portfolio is more than 2x) and our current estimates for the Fund’s year-end yield are c.5% (which would represent a similar, if not greater, level of income paid to our investors relative to 2019).

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust Income C Acc

-13.1

6.5

9.6

22.4

-0.2

FTSE All Share

-13.0

0.6

9.0

18.1

2.2

IA UK Equity Income

-13.6

-2.5

6.0

19.3

-1.8

Quartile

2

1

2

1

3

 

*Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested). Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested), 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 Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

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.

Thursday, July 16, 2020, 3:28 PM