Liontrust Macro Equity Income Fund

January 2020 review

The Liontrust Macro Equity Income Fund returned -3.5%* in January, compared with the FTSE All Share Index return of -3.3% and the -2.6% average return made by funds in the IA UK Equity Income sector.

January returns were less the consequence of stock-specifics and much more the product of a combination of circumstances that favoured one style of company over another.


As with much of the post-global financial crisis era, this cleavage occurred between the performance of growth and value business. The size of this gap is clear from the comparison of representative indices: the MSCI UK Value index underperforming the MSCI UK Growth Index by 3.9%; and the S&P Value index lagging the S&P Growth index by close to 5%. This development inverted the trend of Q4 ’19 and acted as a check on our portfolio of value-rated UK income stocks.

This stylistic divergence was driven by three discrete factors, which, although of limited significance in isolation, in sum were enough to exert a powerful influence on short-term asset price movements.

The spectre of geopolitical risk loomed with the US assassination of Qassem Suleimani, commander of the Iranian Quds force. Although this triggered only a minor market wobble, it contributed to a sense of market unease that was most obvious in January’s sharp decline in risk-free rates.

Investor anxieties were stoked in short order by the outbreak of coronavirus in China’s Wuhan province. Presently, coronavirus seems like a typical example of a species of incident that arrives abruptly from leftfield, fleetingly captures the market’s skittish gaze and gives temporary cause for existence to a legion of talking heads and strategists. As ever, it seems moot whether the resultant deluge of commentary can offer much of lasting value in respect of portfolio management. Comparisons with SARS are superficially useful in gauging the economic and market fallout, but much has changed since 2003 and to put it plainly, coronavirus ain’t SARS.  Whilst we see no concrete cause to reorder the Fund, markets sold economically sensitive financials and resource businesses and bid up both quality and growth companies; a perverse reflex, given the typically rich rating of such companies and the speculative assumptions of earnings growth embedded in such valuations. This effect was to the detriment of performance.

Lastly and more parochially, expectations of a January UK rate cut served as a further headwind to our spread of short duration, value-style income stocks. Following dovish intimations from Governor Carney and a spate of disappointing data (industrial production, GDP, CPI, retail sales), the market-implied probability of a rate cut rose from 11% to 70%. Given that much of this data reflected pre-election uncertainty, our base case was that investors had been previous in assuming that a further cut was nailed on. Happily, a material bounce in January’s flash PMI data, a forward-looking estimate of economic activity, served to confirm our outlook. Undoubtedly, this informed the Monetary Policy Committee’s late-month decision to keep rates on hold tells us that a post-election economic bounce, however shallow, is presently underway. This bodes well for our value-rated UK banks, life insurers, housebuilders and building materials businesses.

Aside from January’s knot of market hindrances, stock-specifics made a more marginal contribution to returns.  The housebuilders of our Infrastructure Spending theme continued 2019’s run on the strength of well-received January trading updates. Persimmon returned 13% following a broadly in-line statement; Taylor Wimpey gained more than 11% after disclosing volumes ahead of guidance and a record order book; and Barratt Developments gained over 7% as it reported better revenues, underlying margin progression and upgraded guidance. These are high-margin, prudently managed businesses, that trade on attractive relative multiples.

Aerospace business and Rising Rates holding, BAE Systems (+11.8%), also featured amongst January’s gainers after the acquisition of Collins Aerospace, a military GPS business, triggered a wave of analyst upgrades. This was with good reason: the acquisition multiple is attractive, Collins offers a neat fit with BAE’s existing defence electronics business and the deal is immediately accretive to earnings and FCF.

January wasn’t without stock-specific detractors. BT (-16.4%) fell heavily following a poorly received Q3 statement; share price weakness reflecting a combination of uncertainty regarding cash generation and dividend maintenance, along with investors’ continued antipathy towards telecoms businesses. Recruitment business and Digital Economy position, Hays (-14.5%), sold off in the wake of a trading statement that disappointed with weaker like-for-likes and softer trading in select, key markets.

Macro-Theme Allocation (as at 31.01.20):

Macro Equity Income January 2020 Theme Allocation

Source: Liontrust

 

Macro-Theme Changes [1]:

Digital Economy

Paddy Power was sold due to a combination of domestic political/regulatory hostility and uncertain overseas growth which leave an expensive business susceptible to de-rating. Its modest dividend yield looks unattractive in comparison to UK income alternatives.

Infrastructure Spending

A new position was opened in UK housebuilder Bellway. The margin of Conservative electoral victory offers clarity regarding Brexit and the UK economy and counsels increased exposure to value-rated, UK cyclicals. The structural housing supply shortfall underpins long-term demand backdrop. Bellway is a high-margin, cash-generative housebuilder with net cash on balance sheet and a record of growing shareholder returns.

 

Vistry was also added on similar rational. Formed from the merger of Bovis Homes and Linden Homes, Vistry should benefit from coming divisional and procurement synergies. Its Partnerships division offers exposure to volume growth in affordable housing.

 

New theme holdings were also initiated in Eurocell, a manufacturer of PVC-U building products, and Vesuvius, the mid-cap foundry technology business. As with the UK housebuilders, Eurocell should benefit from the certainty conferred by a Conservative electoral majority while its modest rating jars with capex initiatives and likely growth trajectory of earnings. A macro-driven, November profit warning from Vesuvius presented the chance to buy an operationally solid business on a bonafide value rating.

 

Rising Rates

Jupiter Asset Management was sold. A high concentration of assets and sales means the business looks increasingly vulnerable to disappointment. Its rating appears rich when judged in terms of asset and earnings growth.

Scarce Resource

In the final instance of a wider portfolio reshuffle, Antofagasta was sold. It was a rump position with little utility to the broader portfolio.

 

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 31.01.20, 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, February 11, 2020, 2:44 PM