Liontrust Income Fund

Q3 2020 review

The Liontrust Income Fund returned -0.4% over the quarter, comfortably outperforming both the FTSE All Share Index and the IA UK Equity Income sector, which returned -2.9% and -3.2%, respectively. This means the Fund is outperforming the Index and is top quartile within the sector over the year-to-date, having beaten its average peer and benchmark in each discrete quarter in 2020*.

Following the strong rebound witnessed in the second quarter of 2020, Q3 proved to be considerably more volatile, with the UK equity market ending the period in negative territory. The summer months brought renewed optimism that, within the UK, the COVID-19 pandemic was becoming increasingly under control, with rates of infections, hospitalisations and deaths all falling considerably. From an income perspective, there was also a marked slowdown in the rate of dividend cuts, cancellations and deferrals, while a number of companies reinstated dividends as management teams gained a better understanding of the impact the virus was having on balance sheets. Combined, this therefore led to increased sentiment towards more domestic names, as the continued easing of lockdown measures was viewed a major positive for the UK consumer and economic output. However, as the rate of infections began to rise, fears of a “second wave” put paid to this positive sentiment, causing yet another sell-off within the equity market. Furthermore, there were further sources of uncertainty as a result of the upcoming US Presidential election, the looming Brexit deadline, the potential for negative rates in the UK as well as the generally affordability of any new lockdown measures.

The Fund, which is purely large and mega-cap, outperformed over the quarter despite the strong relative returns from the FTSE 250 and FTSE Small Cap indices relative to the FTSE 100 Index. The Fund’s outperformance was almost entirely driven by stock selection (90%). The Fund benefited once again from its overweight to technology, though stock selection within the sector was also additive. For example, Apple was the Fund’s largest individual contributor. The strongest driver of the Fund’s relative returns was stock selection within financials (the Fund, for example, has no exposure to banks). Strong contributors included 3i Group, which provided a positive update as it reassured the about the current trading majority of its portfolio, indicating some upside potential for its NAV forecasts, and Phoenix Group, which completed its acquisition of Reassure at the end of July, which was taken positively by the market.

The major detractors to performance were Aberdeen Standard (as a result of open-ended fund outflows) and Legal & General (thanks to concerns surrounding the potential for negative interest rates), while more generally the Fund’s 0% exposure to consumer discretionary dragged on its relative returns, with certain non-dividend paying stocks delivering strong returns early in the quarter.

There were minimal changes made to the portfolio over the quarter. The only addition was Admiral Group, which offers a well-covered dividend, low leverage and idiosyncratic drivers. In particular, its online business model is highly attractive, in terms of customer engagement, distribution and the data and analytics used in pricing. This led to the disposal of Prudential, which has witnessed a deterioration in its dividend sustainability thanks to exposure to Hong Kong and uncertainty surrounding its US spin off.

Clearly, with no vaccine to COVID-19 on the immediate horizon, it remains difficult to be a raging bull on equity markets at this juncture. Within the UK, the trend of dividend cuts is also not yet over, given extended pay-out ratios and the fact many companies simply deferred their dividends till later in the year. Our focus on stocks with high dividend cover and low leverage, along with the evenly weighted nature of portfolio, has been a major driver of the Liontrust Income Fund’s strong relative returns. Furthermore, despite all the negativity surrounding the sector, the UK market still remains an attractive destination for income investors – but we believe it is important follow a disciplined investment process in order to maximise the opportunity. For example, the underlying forward dividend cover of the portfolio is 2.3x and we are currently forecasting flat dividend growth for our unit holders in 2020, despite the dividend cuts seen across the market, leaving the Fund’s year-end yield at c5%.

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

 

 

Sep-20

Sep-19

Sep-18

Sep-17

Sep-16

Liontrust Income C Acc

-12.1

5.0

7.6

13.2

16.7

FTSE All Share

-16.6

2.7

5.9

11.9

16.8

IA UK Equity Income

-17.2

-0.2

3.4

10.6

11.4

Quartile

1

1

1

2

1

 

*Source: FE Analytics as at 30.09.20

 

**Source: FE Analytics as at 30.09.20

 

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 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.

Wednesday, October 21, 2020, 8:59 AM