Liontrust Income Fund

Q1 2020 review

The Liontrust Income Fund returned -24.7%* over the quarter, meaning it outperformed the FTSE All Share Index, which returned -25.1%. The Fund was also a top quartile performer in the IA UK Equity Income Sector, where the average return was -28.1%.

The first quarter of 2020 proved to be one of the most painful quarters on record for UK and global equity markets. The spread of the COVID-19 pandemic, and its impact on the global economy, caused significant sell-offs in February and March. The market appeared to find a floor towards the end of the quarter, largely thanks to the unusual yet arguably needed combination of both monetary and fiscal easing on the parts of global central banks and governments. The scale of the impact of the virus on economic activity was all too clear to see for UK equity income investors, with more than 150 FTSE-listed stocks either cutting or completely abandoning their dividends in the first quarter. These were initially limited to areas such as travel, leisure, industrials and retailers, but the likes of banks and utilities have since joined the list of dividend cutters. Popular stocks to have cut their dividend in 2020 so far include ITV, M&S, HSBC, Lloyds and Centrica.

The Fund’s outperformance was driven by a number of factors. Firstly, the Fund’s mega-cap bias was beneficial on a relative basis given the underperformance of mid and small-caps, while the Fund again was helped by its overseas exposure. The Fund’s overseas exposure is limited to the US and is primarily made up of technology-related stocks. As a team, we believe technological/digital disruption will be the single greatest theme within both the global economy and financial markets over the coming decade. Furthermore, large-cap tech stocks are now able to not only invest for growth but return an increasing amount to shareholders via dividends. However, it is difficult to invest in mature technology within the UK market, therefore we utilise our ability to invest in mega-cap tech stocks. Some of our strongest contributors included Microsoft, Visa and CME Group.

A key facet of the Fund’s investment process is a forensic focus on dividend cover. We screen for companies that have a forward dividend cover of at least 1x or more, as well as for stocks with strong balance sheets and sufficient short-term liquidity. This meant the Fund has been well insulated from the raft of dividend cuts, therefore helping performance on a relative basis given the average share price return of stocks that cut their dividends was c.-50%. Indeed, we only held one stock that announced a dividend cut, HSBC, which we sold immediately on the news. This is a company we like and will no doubt hold again in the future (having contributed strongly for the Fund and, in our view, only cut due to pressure from the regulator), but our key focus has been on protecting our investor’s income and capital so we exited the position. Other notable sells include Compass Group (again, a company we like that happens to operate in a very challenged industry), while notable buys include Sainsburys and British American Tobacco, both of which have very strong levels of dividend cover.

It remains a very challenging environment for UK equity income investors. We expect more companies to cut their dividends over the coming weeks and months, and while the market has seemingly found a floor over recent weeks, we expect volatility to persist as more data emerges surrounding the impact of the virus on the economy. Indeed, we would not be surprised to see another fall over the short-term. As such, it will be critical to focus on quality businesses with high dividend cover and low leverage. However, we remain positive on the portfolio, and are encouraged to note that the Fund’s Q1 2020 dividend is likely to be c.40% greater than the corresponding Q1 2019 dividend, while we remain optimistic that income generation over the coming quarter will be greater than last year.

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Income C Acc

-18.4

8.8

1.9

19.6

-2.2

FTSE All Share

-18.5

6.4

1.2

22.0

-3.9

IA UK Equity Income

-20.6

3.6

0.3

15.1

-1.2

Quartile

2

1

2

1

3

 

*Source: FE Analytics as at 31.03.20

 

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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, April 23, 2020, 3:46 PM