Liontrust Macro Equity Income Fund

August 2019 review

The Liontrust Macro Equity Income Fund returned -6.3%* in August, compared the FTSE All Share Index return of -3.6%.

 

The Fund’s most recent income distribution was announced on 31 July 2019, taking the Fund’s 12 month income yield to 5.5%. The Fund targets an income level of 110% the yield on the FTSE All-Share Index. The index yielded 4.2% over the same period.

 

Portfolio returns were less a consequence of stock-specifics and much more a product of macro influences and the extent to which these can buffet particular investment styles.

As income managers, we have a natural bias to companies with attractive dividend yields. Typically, such businesses are mature and tend to return cash to shareholders in lieu of retaining cash to finance growth opportunities. The corresponding lack of meaningful earnings growth means such companies tend to trade on lower multiples of earnings, cash flow, sales and book value. This affords ‘value’ status to many of the businesses we hold to be eligible for a portfolio of income stocks.

It is well understood that the share prices of such businesses are correlated with the direction of interest rates. Many value companies are cyclical enterprises, growing earnings and dividends as an economy expands and rates pick up. To pinch an expression from bond markets, this makes them short duration.

This relationship underlies the underperformance of value stocks relative to growth companies over the last decade. As economic growth has disappointed in the post-crisis era, central bank rates have been cut and risk-free rates have fallen. Courtesy of discounted cash flow models, this has inflated the present value of tomorrow’s earnings growth and the implied worth of ‘growth’ companies. Little wonder that value companies trade at a record valuation discount to growth businesses.

August’s events and performance should be understood through this lens. The combination of decelerating macro data and an escalating US-Sino trade spat served to depress risk-free rates and stoke market expectations of coming monetary stimulus. From a domestic perspective, Prime Minister Johnson’s more strident approach to Brexit negotiations was an incremental suppressant to gilt yields as markets bid up safe haven investments. Yield curves inverted, the global sum of negative yielding debt breached US$17tn and the yawning chasm between the valuation of growth and value stocks grew wider still.

The sum effect was a dent to portfolio returns. The Fund’s array of life insurers, banks, miners and oil producers underperformed the market. This was compounded by the relative strength of select non-holdings, but particularly companies with quality growth characteristics.  Whilst the steady and persistent earnings growth that defines quality growth businesses may offer ostensible refuge in episodes of market volatility, their outperformance is of a piece with the post-financial crisis divergence between growth and value shares and such companies seem inherently vulnerable to any upturn in global rates. Further, we see little merit in owning quality growth businesses trading on 20-25x forward earnings and yielding less than 3%; this point is thrown into sharp relief by the fact that the FTSE offers an abundance of financials and resource businesses with high single-digit earnings multiples and mid to high single digit dividend yields.

As intimated, stock-specific developments exerted less bearing on August returns. The life insurers of our Population Ageing theme were the portfolio’s weakest performers, with Prudential conspicuous in declining by nearly 20%. Such weakness is plainly inconsistent with Prudential’s decent August interims and the 18% earnings growth seen in the key Asian business. Similarly, top ten holding Legal & General declined by 14% in spite of an interim update that reported a healthy £7.2bn of pension risk transfer business and 16% growth in group operating profit. Although a matter of supposition, it seems probable that August weakness flowed from declining global rates and the negative impact this can exert on profitability and regulatory capital.

This is not to suggest that August lacked for positives. Hard landscaping business and Infrastructure Spending constituent, Marshalls, rose 9% on interims that boasted a 7.5% increase in like-for-like sales and an 18% hike in the in half-year dividend. Broadcaster and Digital Economy holding, ITV, rallied 5% as investors digested a late July trading update and anticipated the forthcoming Britbox paid-for streaming service. Fellow Digital Economy business and bookmaker, Flutter Entertainment, appreciated by 3% on the strength of August interims that exceeded market expectations.

 

Macro-Theme Allocation (as at 31.08.19):

Macro Equity Income Allocation 310819

Source: Liontrust

 

Macro-Theme Changes [1]:


Global Pharma

The position in GlaxoSmithKline was reduced in order to capture some profit. Summer macro uncertainty had stoked investor demand for defensive businesses like pharmaceuticals, driving a wedge between company fundamentals and buoyant share prices.

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

 

 

Jun-19

Jun-18

Jun-17

Jun-16

Jun-15

Liontrust Macro Equity Income I Acc

3.4

3.3

17.8

-6.7

8.2

FTSE All Share Index

0.6

9.0

18.1

2.2

2.6

IA UK Equity Income

-2.5

6.0

19.3

-1.8

7.0

Quartile

1

4

3

4

2

 

*Source: Financial Express, as at 31.08.2019, 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 30.06.2019, 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.

Tuesday, September 17, 2019, 4:15 PM