Liontrust Macro Equity Income Fund

August 2020 review

The Liontrust Macro Equity Income Fund returned 1.5%* in August. The FTSE All-Share Index comparator benchmark returned 2.4% and the average return of funds in the IA UK Equity Income sector, also a comparator benchmark, was 2.1%.

Notwithstanding August underperformance, the portfolio remains ahead of benchmark from the March market lows.

In view of the Fund’s established tilt to value-style dividend payers, it could seem remiss that the portfolio lagged benchmark in a month where UK value-style equities outperformed their growth counterparts.  However, this would be to ignore the several peculiarities of UK value’s relative August strength. Firstly, it’s noteworthy that the performance of UK value didn’t correspond to gains for value as a broader asset class. To this end, the S&P 500 Value Index returned 3.5%, lagged the S&P 500 Growth Index’s 9.5% return, a disparity writ large in the Nasdaq 100’s August advance of 11% and outsized returns for growth bellwethers like Tesla (+74%) and Apple (+22%).

Secondly, some of the largest gains amongst cheaply rated UK stocks were seen amongst Covid-impacted, consumer discretionary businesses. Notably, the FTSE All-Share Travel & Leisure Index rose by 17% and UK Airlines (IAG, easyJet) appreciated by around to 30%. To put it plainly, this isn’t our type of value and whilst this may sound vaguely like Network Rail lamenting the wrong kind of leaves or snow, our lack of exposure is grounded in our thematic investment process and the precept that prudent investing entails more than just a discounted cashflow calculation.

Further, not owning these companies has been to the benefit of unitholders. Prior to the start of August, the FTSE All-Share Travel & Leisure sector had collapsed 43% over 2020; and the FTSE Industrial Transportation by 33%. On a three-year horizon, Travel and Leisure ranks 32nd out of 41 FTSE All-Share’s sectors in performance terms while Industrial Transportation is 34th worst. Moreover, these are sectors that have been disproportionately impacted by the March/April wave of dividend cancellations, with 100% of Industrial Transport stocks scrapping, or deferring dividends and 65% of Travel & Leisure businesses. In sum, whilst it’s disappointing to trail a UK value rally over one month, the relaxation of Covid restrictions was always going to provoke a short-lived bounce in such companies and our near zero weighting has been to the Fund’s long-term advantage.

All this is not to imply that the Fund didn’t participate in UK value’s August outperformance. The Fund’s banks, diversified financials and insurers all made conspicuous contributions to returns. Whilst much of this lacked for concrete catalysts and seemingly followed general, stylistic trends, the performance of our insurers was driven by more tangible developments.

Mid-cap auto insurer Hastings was August’s best performer. The company rallied 21% on news of a 250p bid from the consortium of Finnish insurer Sampo and investor RMI. July’s preliminary approach was formalised with an offer that valued Hastings at a 50% premium to recent lows. The buyers are paying a comparatively modest multiple of 19x historic earnings for a business that offers digital underwriting capabilities and a ready-made UK footprint. The sellers are receiving a cash offer that approximates Hasting’s intrinsic value and gives entitlement to October’s interim dividend. Whilst M&A was never part of our investment case, we’re gratified to see our impression of value shared by institutional investors of substance. The holding was sold upon Hastings trading to a bid price premium.

Disposal proceeds were recycled into Direct Line (+6.5%), the large-cap general insurer. August saw Direct Line release interim earnings that were distinguished by an impressive bottom-line beat. In common with other auto insurers, this followed a sharp fall in motor claims frequency under conditions of Covid-19 lockdown. Critically for income investors, this permitted Direct Line to reverse April’s dividend cancellation and reinstate distributions with both interim and special interim payments. Some detractors might suggest that lower claims frequency is a one-off Covid-19 windfall, but this underplays the reassurance offered by resuming dividends. This vindicates our decision to retain our shareholding in the thick of pandemic uncertainty and affirms our earlier argument that, where cancelled, insurers would be quick to resume dividends.

H1 earnings from peer Admiral (+9.9%) told a similar story. Again, lower lockdown claims frequency produced a better than anticipated outcome in UK Motor. The real upshot was a 12% year-on-year increase in the interim dividend (55p ordinary; 15.5p special) and, tellingly, an additional 20.7p in lieu of 2019’s cancelled special dividend. Admiral’s interims attest to the defensive virtues of UK motor premiums under conditions of macro duress, fully explain August share price strength and offer a broader tell on the creeping normalisation of UK dividends.

The Fund’s life insurers were also under the earnings spotlight and whilst August returns were mixed, H1 updates offered ample cause for optimism.

Top ten holding Legal & General (+3.7%) surpassed analyst forecasts in reporting H1 operating profit of £946m. The earning beat was driven by a better than anticipated showing from Legal & General Retirement, with £3.4bn of bulk annuity business written across 29 separate deals. This means that Legal & General has grown retirement earnings at a ten-year compound rate of 14%. Judged in terms of mature and putatively stolid UK large caps, this is a blistering pace of earnings growth and attests to the willing of corporates to purge balance sheets of defined benefit pension liabilities. Given such an attractive backdrop, we remain surprised that the business trades on a meagre, single-digit earnings multiple and yields 8.8%.

The unsated demand for corporate pension de-risking was also clear from the £3.1bn of bulk annuity sales reported by peer Aviva (+9.4%). Whilst it’s important to remember that bulk annuities are an inherently lumpy revenue line, this equates to a 258% increase on H1 2019. Such an impressive outcome contributed to group operating earnings of £1.2bn, or an 11% beat vis a vis consensus estimates. There was also the promise of a coming change in strategy and the alluring prospect of shareholder value creation, as new CEO Amanda Blanc promised to re-focus on the growth axis of the UK, Ireland and Canada. No doubt contingent on the detail of this strategy, Aviva promised to review its dividend policy at FY20/21 and paid a second interim dividend in lieu of April’s cancelled final. Whilst we expect a lower payout ratio in the interests of balancing growth and balance sheet leverage, the resumption of dividends is an unequivocal positive and offers further evidence of the incremental normalisation of UK income.

Lastly, fellow life insurer Prudential rose 11% and featured amongst August’s best performers. This followed an interim update distinguished by strong group earnings and welcome clarity on the company’s plans to separate US business, Jackson Life. The corollary of this, however, was a rebased dividend policy, entailing a pledge to disburse 16.1 US cents of annual dividends. Whilst we welcome and understand the company’s decision to prioritise the capital needs of growth in Asian and African markets, the implied dividend yield of c.1% makes it difficult to justify Prudential’s continued top ten holding status. We remain overweight but have reduced our position in recognition of our income mandate.

Macro-Theme Allocation (as at 31.08.20):

Liontrust Macro Equity Income Theme Allocation August 2020

Source: Liontrust

 

Macro-Theme Changes [1]:

 

Digital Economy

Hastings was sold after its share price traded at a premium to the 250p offer price from RMI and Sampo. This allowed us to capture our estimate of intrinsic value and the greater part of the forthcoming interim dividend.

The proceeds were used to increase the Fund’s position in Direct Line. This maintains portfolio exposure to the earnings resilience of UK auto insurers. The August dividend resumption effaces April’s unnecessary cut and rewards shareholders with two interim disbursements totalling 21.8p; a 6.5% interim dividend offers investors a material total return cushion.

Financial Value

The position in M&G was increased while exposure to Prudential was trimmed; the switch offers a 6% pick up in dividend yield. August interims offer ample financial (operating profit, underlying capital generation) and operational positives for M&G while dividend maintenance under conditions of Covid-stress suggest a business intent on honouring income obligations.

Population Ageing

Prudential was trimmed after its dividend policy was revised in the wake of M&G demerger and it took the decision to sell US arm Jackson Life. Whilst the remaining Asian business is a compelling growth prospect, Prudential is less attractive from an income vantage and no longer warrants top-ten holding status.

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 31 July 2020. Its distributions over the 12 months to 31 July 2020 – expressed relative to the Fund’s price on 31 July 2019 – give a 12 month yield of 4.4%. The FTSE All-Share Index yield on the same basis was 3.8%.

 

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust Macro Equity Income I Acc

-16.6

3.4

3.3

17.8

-6.7

FTSE All Share

-13.0

0.6

9.0

18.1

2.2

IA UK Equity Income

-13.6

-2.5

6.0

19.3

-1.8

Quartile

3

1

4

3

4

 

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

 

*Source: Financial Express, as at 31.08.20, 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 30.06.20, total return (net of fees and income reinvested), bid-to-bid, primary class.

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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 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, September 11, 2020, 3:40 PM