Liontrust Macro Equity Income Fund

April 2020 review

The Liontrust Macro Equity Income Fund returned 8.8%* in April, The FTSE All Share Index comparator benchmark returned 4.9% and the average return of funds in the IA UK Equity Income sector, also a comparator benchmark, was 8.7%.

 

April’s performance was driven by the resurgence of companies that had borne the brunt of March’s sell-off. Whether short-covering, bargain-hunting, or plain old mean reversion, the result was spectacular month-on-month gains for some of the FTSE’s more cyclical constituencies. This effect was seen most clearly amongst the portfolio’s housebuilders, building materials businesses and select financials.

Share price gains were led by the portfolio’s UK housebuilders, with Vistry (+40.3%), Redrow (+28.3%), Taylor Wimpey (+25.2%) and Persimmon (+15.1%) all featuring in the vanguard. Although causation always seems clearer after the event, it’s not unreasonable to assume that this was partly a correction to the savage punishment of late-March dividend cuts and partly a response to news that certain housebuilders (Vistry, Taylor Wimpey, Redrow and Persimmon) would reopen some sites and recommence activity. As might be expected, this was a boon to supply chain businesses, and the portfolio’s brick makers – Forterra (+36.5%) and Ibstock (+32.6%) – rallied accordingly.

Of the Fund’s financials, Barclays (+12.5%) rose the most. Markets reacted favourably to its late-April Q1 earnings. The statement was distinguished by a strong performance in Investment Banking (fixed income and equities), solid capital ratios and prudent loan loss expectations. Significantly, the market’s enthusiasm ensured that Barclays share price absorbed the damage caused by April’s mandatory dividend cut and bounced appreciably. The share price multiple of just 0.4x tangible net asset value (TNAV) illustrates the enormous pessimism already baked into Barclays’ valuation.

Q1 earnings from fellow bank holding Lloyds (+0.8%), were received with less enthusiasm. Markets took exception to weaker pre-provision profits and the outlook for provisions implicit in Lloyds’ benign outlook. Lloyds trades at a discount of c.45% to TNAV, which seems harsh for a well-capitalised (14.2% CET1), profitable bank.

Happily, Lloyds’ travails proved the exception and not the rule for the Fund’s financials. Life Insurer Legal & General (+12.5%) also contributed strongly to returns. Outperformance followed a respectable ad hoc trading update and confirmation of final dividend, an outcome celebrated in an environment where dividend income remains a matter of acute uncertainty.

Security of dividend income also influenced which holdings underperformed.

Bloomsbury (-5.1%) a small-cap publisher, fell after scrapping its final dividend and announcing an £8m cash raise. Although the loss of dividend income is regrettable, it’s mitigated to some extent by a potential scrip substitute. Further, in scrapping the dividend and raising a modest amount of cash, Bloomsbury can invest in growth and smooth the weighting of cash flows to Christmas sales. Given current circumstances, we are supportive.

Markets and income investors suffered a more seismic jolt from the near two-third reduction of Royal Dutch Shell’s (-5.4%) quarterly dividend. Understandably, much has been made of Shell’s record of dividend continuity since World War Two and the near 20% contribution of the UK oil sector to FTSE 100 dividends. Less has been made of the fact that Shell generated US$2.9bn of net profits on the quarter and more than US$4bn of free cash flow; more than enough to finance dividend commitments. Clearly, Shell’s decision is informed by current quarter weakness and the extraordinary spectacle of negative oil prices. Whilst Shell will likely use this as an opportunity to permanently rebase its dividend policy, supply side restraint and economic recovery in 2021 should trigger higher oil prices, free cash flow and dividends. We are underweight Shell and UK oil majors.

The threat of dividend cancellations continued to loom large throughout April. In sum, a further 74 FTSE All Share businesses cancelled or deferred dividend payments. Added to March’s total, this means that 165 All Share constituents have omitted dividend payments. Approximately one third of these cuts have been made in just three sectors: support services, travel and leisure and general retailers. The fund is zero-weighted to such businesses and we hold this to be vindication of method.

This is not to suggest that we are unaffected. The portfolio’s housebuilders and banks are subject to blanket dividend cancellations, whilst select insurers and other miscellaneous companies have suffered a similar fate. Per a recent blog, we have evolved a very simple taxonomy of dividend cuts to helps us decide which of these businesses to hold and which to sell.

Given the unique nature of the present economic shock and the necessary lag between stimulus and recovery, we would expect further dividend cuts. Anticipating which companies will be impacted lacks for precise science, because management are confronted by irreducible uncertainty. In many cases this has provoked a fight or flight reflex, or a defensive will to preserve cash that measures of dividend coverage are unable to predict. How else to explain dividend cuts from nominally quality, non-hold businesses (e.g. Associated British Foods, Compass, Next, Rightmove) with ostensibly well-covered payments? How else to explain the discrepancy between Royal Dutch Shell’s dividend cut and BP’s dividend maintenance?

But there is qualified good news. Whilst more dividend cuts are likely, the pace has slowed markedly. In the last five trading days of April, just five All Share companies cut, deferred, or reduced dividends. This is an enormous improvement on the 59 cancellations seen in late-March. What’s more, dividend cuts are now following the pattern of scheduled corporate earnings, instead of being rushed out with emergency Covid updates. A very small measure of normality is reasserting itself.

Most promisingly, however, many UK businesses are now confirming dividend distributions. April dividend confirmations were given by the following portfolio holdings: Chesnara, Tesco, Legal & General, Phoenix, Anglo-Pacific, Hastings, Man Group, Anglo-American, BP and Admiral. Although it would be wrong to suggest that the coronavirus crisis is anywhere near finished, it may be that the early, violent stages have passed.

Macro-Theme Allocation (as at 30.04.20):

Macro Equity Income Theme Allocation

Source: Liontrust

 

Macro-Theme Changes [1]:

Digital Economy

ITV was sold from the portfolio. It was an early dividend cutter with cyclical advertising revenues looking vulnerable to gathering recession and coronavirus likely to disrupt and delay production revenues. The position in Smurfit Kappa was also closed. It has cancelled its final dividend despite 2.5x historic cover and its e-commerce earnings uplift is likely to be unsustainable as recession takes hold. A new position was initiated in J.Sainsbury, whose defensive food earnings provide offset to macro uncertainty. A free cash flow yield of over 10% confirms the value opportunity while Sainsburys Bank FY20 loan loss guidance has positively surprised against market estimates.

New Oil Equilibrium

The position in Royal Dutch Shell B shares was reduced on mid-month news of a coordinated oil production cut, with the short-lived oil price spike offering an opportunity to mitigate risk ahead of April futures expiry and oil sector earnings.

 

Rising Rates

Holdings in Royal Bank of Scotland and Brewin Dolphin were both disposed of. As proven by the present crisis, majority public ownership makes RBS acutely vulnerable to political interference. A politically mandated dividend cut means that the business is over-capitalised with no means to return excess capital. Lower asset values mean lower fee income and dividend coverage for Brewin Dolphin while the Lloyds-Schroders wealth business threatens competition and fee disinflation.

Population Ageing

We trimmed exposure to Aviva as its dividend suspension removes a key plank of total return case and jars with 2019’s 2x dividend cover.

 

The Fund has an income target benchmark of 110% the yield on the FTSE All-Share Index. The Fund’s most recent income distribution was announced on 30 April 2020. Its distributions over the 12 months to 30 April 2020 – expressed relative to the Fund’s price on 30 April 2020 – give a 12 month yield of 4.5%. The FTSE All-Share Index yield on the same basis was 4. 0%.

 

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Macro Equity Income I Acc

-22.7

4.8

-1.6

14.3

-3.4

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

3

2

3

3

3

 

*Source: Financial Express, as at 30.04.20, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg

 

**Source: Financial Express, as at 30.04.20, total return (net of fees and income reinvested), bid-to-bid, primary class.

 

[1] The omission of a Macro-Theme expresses the absence of notable portfolio activity.

 

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 Macro Thematic team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the Liontrust Macro Equity Income Fund and is likely to be lower than its corresponding Master Fund due to additional fees and expenses.

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.

Friday, May 15, 2020, 10:59 AM