Liontrust Income Fund

Q4 2020 review

The Liontrust Income Fund returned 7.6% over the quarter, versus the FTSE All Share Index and IA UK Equity Income sector’s respective gains of 12.6% and 15.6%.*

It was a very strong quarter for UK equities, with markets rallying strongly as news of various vaccines emerged. As a result, investor sentiment improved markedly, with most turning their attention to lowly-rated companies that had suffered the most during the first three quarters of the year. This in turn led to a change in market leadership during the final months of the year, with quality defensives (which had driven markets throughout the year) underperforming and cyclical/value stocks leading the charge. Tied to this dynamic, the FTSE 250 and FTSE Small Cap Indices considerably outperformed the FTSE 100, reversing the trend seen during the first nine months of the year. Indeed, our analysis shows that the strongest performing stocks were largely cyclical companies that, earlier in the year, had cut or completely cancelled their dividends. This was therefore a clear example of mean reversion in action.

The Fund’s underperformance during the quarter was driven by the two interrelated factors of size and cyclicality. The Fund has a 0% exposure to FTSE 250 and FTSE Small Cap stocks, which saw strong outperformance relative to their larger cap peers as markets rebounded. This was largely due to the fact that these smaller-cap indices are more heavily weighted to domestic cyclicals (e.g. FTSE 250 is c.65% in cyclical sectors), which outperformed in the quarter as was reflected in the performance of the silos.

For example, while the Fund’s Steady Eddie silo performed very strongly during the first few nine months of the year, it understandably lagged the wider market as investors turned to companies that had endured the worst of the Covid-19 pandemic and the consequences of the Government’s lockdown measures. This was shown by the fact the Fund’s overweight to technology stocks (including US mega-caps such as Apple and Microsoft) was a key detractor to the portfolio’s relative returns. However, we were encouraged by the Fund’s Hidden Fruit silo (which is our value with a catalyst stock positions), which delivered very strong returns over the quarter as we would have expected given the market conditions. That being said, many of the strongest performers were companies that no longer pay a dividend, having cancelled or suspended them during the peak of the COVID-19 crisis, which was a major headwind to performance given all of our stocks must be paying a dividend (or we have strong reasons to believe they will do so over the coming 12 months).

The Fund has always maintained a bias towards large and mega-caps and will continue to going forward, though is working to improve cyclical exposure in other ways. For example, following a review of the portfolio in late November, we made a number of changes to our Economic Recovery silo to introduce a greater level of cyclicality to the portfolio, adding the likes of Antofagasta and Persimmon. Over the quarter, the largest detractors to the Fund included previously strong performers such as Sage Group, AstraZeneca and Reckitt Benckiser, while the strongest contributors included more value-orientated names such as Royal Dutch Shell, L&G and Anglo American.

Clearly, the UK and many of western nations remain in strict lockdown conditions. Furthermore, the true long-term economic cost of the pandemic remains difficult to fathom at this stage. As such, we believe it is vital investors remain vigilant and we expect volatility to be a key feature of the months ahead. Nevertheless, we do believe this is a time to be cautiously optimistic. Firstly, we expect economic output within the UK to improve markedly in the second half of the year as more of the population is vaccinated and we return to some degree of normality. On top of this, we believe it is highly unlikely we see a repeat of the widespread dividend cuts witnessed last year. With dividend cuts being so poorly received by investors, any company that had a potential risk to their distribution to shareholders last year used the fact that so many companies were being forced to cut their dividends as an opportunity to be among the crowd and reset their dividend policy by either cutting, cancelling or suspending their payouts. This safety in numbers approach means dividend cover levels among UK companies are now far healthier and we expect strong dividend growth not only for the Liontrust Income Fund this year, but also the wider market.

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








Liontrust Income C Acc






FTSE All Share






IA UK Equity Income













*Source: FE Analytics as at 31.12.20


**Source: FE Analytics as at 31.12.20


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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.


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.


Monday, January 25, 2021, 3:54 PM