Liontrust Income Fund

Q2 2021 review

The Liontrust Income Fund returned 5.5% over the second quarter of 2021, versus the FTSE All-Share Index’s 5.6% and 5.0% from the IA UK Equity Income sector average (both comparator benchmarks)*.

UK equities rose in the second quarter of the year, though underlying stock drivers changed during the period. Domestic cyclicals were in favour in April and May on optimism surrounding the re-opening of the UK economy; this gave way in June to more defensively positioned stocks in healthcare, consumer staples and tech as rising Covid-19 cases prompted concerns surrounding the pace of economic recovery. Having rallied considerably in the first quarter of the year, bond yields retreated in the second quarter, leading financials – predominantly banks and insurance – to underperform.

The dominant market debate continued to centre on inflation. Following the reopening of parts of the UK economy such as hospitality in May, the rebound in economic activity (and ensuing supply-chain bottlenecks) has put a broad-based upwards pressure on prices. UK inflation reached its highest level since July 2019 in May, exceeding economist expectations, with the CPI increasing 2.1%, up from 1.5% in April. This has provoked unease among market participants who, despite assurance from the Bank of England that inflation will be transitory and supply disruptions short-lived, are weighing up the possibility of tighter monetary policy if inflation continues to run above target a negative for equities.

Dividend resumptions quietly continued during the period as companies had better line of sight of earnings. The bigger news, however, was the IA’s late-June decision to resume the UK Equity Income sector’s income requirements as of September of this year. This means that these requirements will have effectively been suspended for over a year, though suggests that the IA is confident that funds in the sector should have the capacity to resume appropriate pay-outs to clients as the income landscape improves.

The ‘three silo approach’ we use to construct the Fund means we expect each silo to perform at different times across the market cycle, as evidenced in our second quarter performance. Against an increasingly uncertain macro backdrop, our Steady Eddie silo (more defensive, long term cash compounders), including the likes of AstraZeneca, Diageo and Microsoft, performed strongly, surpassing our value-oriented Hidden Fruits and cyclically driven Economic Recovery silos as the quarter went on.

On a sector basis, tech and healthcare led the charge. We benefited from our exposure to US mega cap tech as sentiment returned to safer havens of Microsoft and Apple. This trend extended to our UK tech holdings, with Halma and Sage displaying characteristic resilience. In healthcare, we saw a revival in GSK’s performance and were encouraged by the new strategy laid out by CEO Emma Walmsley.

At the other end of the spectrum, our mining exposure was a primary detractor from Q2 performance. Chinese policy attempting to keep a lid on inflation has fuelled commodity price volatility, while potential Chilean constitutional reform has negatively impacted our holding in Antofagasta – a company which has a near monopoly on copper mining operations in the region. Nonetheless, we are confident the structural growth drivers for our mining stocks remain intact, particularly given the highly metal intensive process of renewable energy generation.

It is obviously difficult to make many assertions about the near future given the tenacious nature of Covid-19 in its varied forms. Nonetheless, the macro environment is certainly improving, as evidenced by the Bank of England raising their 2021 GDP growth target to 7.25%. We expect inflationary pressures to keep rising across recovering markets, apparent thus far in the rising costs of labour and materials. Whilst a headwind for margins, this should prove favourable to companies with strong pricing power (i.e. those that are able to pass costs on to consumers) -- a factor we look for in our stock selection process.

Though we expect dividend resumptions to continue in the sector, the pace of this resumption has not proven linear nor all encompassing; companies with strong balance sheets and market leadership positions remain in our view best placed to generate dependable shareholder returns.

The broader resumption of dividends in the sector has been accompanied by an increase in shareholder returns by companies who maintained their dividends in 2020 (such as Phoenix Group, Berkeley Group, M&G, and Unilever among stocks we hold), a trend we expect to continue. This sets a favourable scene for the UK equity income sector as a whole given the relative undervaluation of the UK compared to other global markets, the expansion of our investable universe as dividends return, and prospects for dividend growth emerging.

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

 

 

Jun-21

Jun-20

Jun-19

Jun-18

Jun-17

Liontrust Income C Acc

19.0

-13.1

6.5

9.6

22.4

FTSE All Share

21.5

-13.0

0.6

9.0

18.1

IA UK Equity Income

25.4

-13.6

-2.5

6.0

19.3

Quartile

4

2

1

1

1

 

*Source: FE Analytics as at 30.06.21

 

**Source: FE Analytics as at 30.06.21. Quartiles generated on 07.07.21


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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 29, 2021, 10:09 AM