Liontrust Macro Equity Income Fund

February 2020 review

The Liontrust Macro Equity Income Fund returned -10.6%* in February, compared with the FTSE All Share Index return of -8.9% and the -9.7% average return made by funds in the IA UK Equity Income sector.

 

The Fund endured a disappointing February, underperforming the FTSE All-Share. February’s market events were dictated by the unfolding Covid-19 crisis. Certainly, the disease made rapid headway. China’s death toll surpassed the 2002-3 SARS epidemic, Africa reported its maiden case, disease incidence increased throughout the Middle East and Italy cancelled public events in a bid to arrest contagion.

 

Seemingly, it was Italy’s actions which forced the realisation that coronavirus was becoming a far larger problem than had been originally anticipated, February’s late and violent sell-off coinciding with news of Italy’s pre-emptive measures.

 

Over several panicked days, the FTSE All Share ceded more than 8% and finished the month nearly 9% beneath January’s closing level. As a gauge of investor alarm, selling was broadly indiscriminate and no strata of the market, whether large- or small-cap, escaped unscathed.

 

Equally, few market sectors remained untouched by February’s disarray. While the portfolio gained from the weakness of non-holds like food producers (-12.0%), tobacco (-10.4%) and travel & leisure (-11.4%), any advantage was offset by the underperformance of overweights in economically sensitive oil producers (-14.2%) and miners (-11.9%).

 

Investor aversion to cyclicals was similarly clear from the relative strength of UK utilities. Taking their cue from demand for government debt, bond-like utilities benefitted as investors sought safe havens. Fund utilities exposure is limited, but performance was given a comparative fillip by top-ten holding and Battery Revolution stock, National Grid (-2.3%).

 

From a stylistic vantage, February’s bout of risk aversion had a negative bearing on the portfolio’s bias to value-style dividend payers. At root, our value exposure is a strategic call on the tension between value’s unusual discount to growth-style stocks and value’s record of superior historic returns. This still holds. However, during episodes of risk aversion, value’s more cyclical constituency can suffer disproportionately. This came to pass in February, with the MSCI UK Value Index underperforming the MSCI UK Index by 1 percentage point and the MSCI UK Growth Index by 2.9 percentage points. That said, given the speculative assumption of future earnings growth implicit in the rating of any growth business, we see little reason for growth stocks to outperform during episodes of market panic.

 

February’s market tumult was, however, of benefit to portfolio holding IG Group. Remarkably, given February’s broad weakness, spread better IG rose by 1.5%. This follows the well-worn rule of thumb that market volatility is an incentive to retail trading activity, on grounds of the further opportunities it presents. No doubt, sentiment was also buoyed by January’s respectable interim numbers, along with upbeat statements from non-hold peers CMC and Plus500.

 

Paper and packaging business Smurfit Kappa (-1.2%), a Digital Economy business, issued full year earnings that documented both margin expansion and 12% dividend growth.

 

In respect of the largest single stock detractors, small-cap mining royalties business Anglo Pacific fell 25%. Whilst there is no single, concrete, company-specific reason for such weakness, this was likely a function of illiquidity and the assumed impact of coronavirus disruption on royalty income. This is disappointing, but any ill effects are presently unfounded and should entail the deferral, rather than the permanent loss of royalty income.

 

Rising Rates holding Royal Bank Scotland (-18.2%) was a further notable detractor. Weakness issued from soft Q4 earnings, wherein RBS disclosed ongoing net interest margin pressure, a £200m regulatory penalty in Personal Banking, higher rundown costs in its Markets business and a lower full year dividend. That said, capital buffers remain robust and looking through short-term noise, we believe this remains a cheaply-rated capital return story.

 

Lastly, life insurer and top ten holding, Legal and General (-14.9%), featured amongst February’s largest fallers. Again, there was no discrete, company specific development that might account for share price weakness. Our assumption must be that this a consequence of the credit risk associated with Legal and General’s annuity book and the assumption of rising defaults in the midst of a coronavirus cashflow crunch. In mitigation, we would point to Legal and General’s £3.2bn credit default reserve, limited default experience during the global financial crisis and bias to bonds rated A or better. This is a cheaply-rated business that’s positioned to grow earnings and dividends.

 

Macro-Theme Allocation (as at 29.02.20):

Macro Equity Income February 2020 Allocation

Source: Liontrust

 

Macro-Theme Changes [1]:

Battery Revolution

The position in National Grid was reduced in order to capture some profits. The business has re-rated to multi-year highs following a benign election outcome while its large US presence now appears less attractive given expected sterling strength.

Infrastructure Spending

Redrow was added as a new position, consistent with the theme’s existing housebuilder exposure. The longstanding UK housing supply shortfall points to material unmet demand. Coming Brexit clarity should bolster consumer confidence and transactional volumes. Redrow’s combination of a discount to peer group and high margins make for an attractive value opportunity.

Population Ageing

The position in Legal and General was trimmed after its share price returned to December’s highs. This left the business trading close to our estimate of intrinsic value and warranted modestly reducing the position.

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 January 2020. Its distributions over the 12 months to 31 January 2020 – expressed relative to the Fund’s price on 31 January 2020 – give a 12 month yield of 5.8%. The FTSE All-Share Index yield on the same basis was 4.5%.

 

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

 

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust Macro Equity Income I Acc

21.7

-12.1

10.0

7.0

5.5

FTSE All Share

19.2

-9.5

13.1

16.8

1.0

IA UK All Companies

22.3

-11.2

14.0

10.8

4.9

Quartile

2

3

3

3

3

 

*Source: Financial Express, as at 29.02.20, 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 31.12.19, 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, March 17, 2020, 12:27 PM