Liontrust Macro Equity Income Fund

January 2018 review

The Liontrust Macro Equity Income Fund returned -1.6%* in January, ahead of the -1.9% return from the FTSE All Share Index.

 

Key to the modest measure of outperformance was the month’s sharp sell-off in government bond markets. January saw benchmark yields rise steeply, with the 10 year gilt yield adding 32bps to close the month at 1.51%, more than 1% above the post-referendum lows and the highest closing level for more than 12 months. Bond market luminaries (Gundlach, Gross et al) queued up to call the end of the ageing bull market in government debt.

 

We read rising yields as evidence of gathering economic normalisation, after the moribund decade that followed the Global Financial Crisis. This explains why the portfolio is materially overweight rate-sensitive life insurers and has a significant presence in cyclical diversified miners. If anything, January gave some proof of logic as both the life insurance (-0.2%) and mining (+1.6%) sectors exceeded benchmark returns and contributed to the Fund’s relative performance.

 

Our conviction that ongoing economic recovery brings higher policy and market rates also saw us add Lloyds Banking Group and BAE Systems to our Rising Rates theme. As per other large-cap UK banks, Lloyds is a business we’ve avoided for reasons of regulatory redress and rising capital standards. However, the prospect of higher rates and the accompanying expansion in margins, along with the UK’s unanticipated economic resilience, offers abundant cyclical reprieve for a bank with such a strong domestic focus. BAE is one of several FTSE companies conspicuous by the scale of their defined benefit liabilities. It seems clear that rising yields and a higher discount rate, not to mention the slowdown in mortality improvements, will mitigate this burden. Leave aside the company’s obvious valuation disparity to global peers.

 

The obverse of this was January weakness in FTSE sectors with bond-proxy characteristics. Utilities (-5.9%), food producers (-5.6%) and tobacco (-4.9%) declined sharply, as investors adjusted to the idea that the decade-long era of low growth, inflation and rates was passing. Given the absence of such businesses from the portfolio, this was a source of positive attribution for the Fund.

 

Bond-proxy weakness was likely compounded by the US dollar sales exposure of many of these businesses. The translational benefit of US revenues was diminished as the pound gained 5% against the dollar and the broader trade-weighted Dollar Spot Index slipped 3.3%. Such moves were likely driven by the growing understanding that the US Federal Reserve wasn’t the only central bank with a bias to tighten rates.

 

January’s performance was pared back by several instances of stock-specific weakness. Most notably, Micro Focus International fell sharply on interims that disclosed weaker than anticipated trading at the newly acquired HP Enterprise business. Given the scale of the HP purchase and its importance to the combined business, this is of concern and the holding is under review.

Macro-Theme Allocation:

Liontrust Macro Equity Income Fund January 2018 review

 

Macro-Theme Changes[1]:

 

Rising Rates

We initiated new positions in Lloyds Banking Group and BAE Systems. Lloyds’ capital and regulatory issues are offset in the interim by its sensitivity to rising rates and the uplift to earnings entailed. It offers a proxy for the UK economy at a point when consensus estimates of UK GDP growth are being revised higher. BAE Systems’ unfunded pension liabilities offer excellent gearing to rising yields with a higher discount rate mitigating the deficit position. Its sizeable valuation discount to global peers confers ‘value’ status at point when investors are looking for it. We also increased the exposure to Jupiter Fund Management as a modest correction presented an opportunity to top-up ahead of February final results and the accompanying special cash dividend. The company’s prior year flow data implies scope for dividend growth.

 

The holding in Schroders was sold as we exploited an arbitrage opportunity by reallocating towards the position in Schroders Non-Voting shares, which trade at a historically wide discount to the ordinary share class and offer the further benefit of a sizeable dividend yield pick-up.

We reduced the position in Hargreaves Lansdown, which is a quality business trading on a rich rating. With January’s move higher in yields potentially encouraging investors to chase more cyclical value names we moved to capture alpha.

Population Ageing

Allianz was added, complementing the portfolio’s existing weighting to life insurers. The stock offers gearing to European economic growth and the accompanying pick-up in yields while trading on an undemanding valuation. We also increased the position in Prudential, taking advantage of a modest pullback in the shares. The current valuation offers little credit to the business’ attractive growth prospects.

Consumer Spending

Having reduced the Fund’s holding in Cineworld last month following its bid for US cinema operator Regal Operators, we exited the position entirely during January. Our investment case is compromised by a deal which we view as unattractive on a number of levels: post-deal leverage, management’s lack of US experience and corporate governance issues.

Infrastructure Spending

Telford Homes’ London exposure looks increasingly unattractive, with its reliance on foreign investment buyers leaving the company increasingly prone to changing investor taste. We reduced the position.

 

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

 

 

Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Liontrust Macro Equity Income I Acc

10.0

7.0

5.5

3.7

30.4

FTSE All Share Index

13.1

16.8

1.0

1.2

20.8

IA UK Equity Income

11.3

8.8

6.2

3.2

25.2

Quartile

3

3

3

3

1

 

*Source: Financial Express, as at 31.01.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.

 

This review has been prepared for the Liontrust Macro Equity Income Fund but is also representative of the Liontrust GF Macro Equity Income (the Feeder Fund). The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the Liontrust Macro Equity Income Fund (the Master Fund) and will typically be lower due to additional fees and expenses.

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

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. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

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

This content 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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, February 12, 2018, 4:00 PM