Liontrust Macro Equity Income Fund

July 2020 review

The Liontrust Macro Equity Income Fund returned -3.5%* in July. The FTSE All-Share Index comparator benchmark returned -3.6% and the average return of funds in the IA UK Equity Income sector, also a comparator benchmark, was -3.0%.


Returns in July were focused at the individual stock level as Q2 earnings gave testimony to how well UK businesses were weathering the shock of Covid-19. The Fund’s experience offers a microcosm of this effect, with stock returns dictated by investors’ reaction to the incremental news contained in Q2 updates.


This seemed clearest with spread better and portfolio holding CMC Markets (+27%), July’s strongest performer and a rare example of a business that’s thrived in the shadow of coronavirus. CMC released an unscheduled trading update that detailed Q1 operating income ahead of last year’s first-half outcome and full-year guidance above the top end of sell-side forecasts. Given that only one quarter of CMC’s financial year has elapsed, this is an astonishing outcome. But it only serves to validate our argument that the myriad uncertainties of coronavirus (epidemiological, economic, political, societal, etc.) imply heightened market volatility and an increased appetite for CMC’s leveraged trading services.


Whilst talk of valuation seems embarrassingly quaint in the age of FAANGs, all things do have a price. In the space of our two-month holding period, CMC had returned c.65% and re-rated from 2x to 3x book value. At 3x book, CMC looked expensive by the standards of recent years. The impression of expensiveness is underscored by the inherent cyclicality of spread better revenues, typically rising during episodes of volatility and falling as calm is restored. To our minds, the risk of revenue mean reversion and a parallel contraction in valuation multiples was too great to ignore and profits were taken. We retain exposure to the sector through mid-cap peer IG Group.


Sabre Insurance Group (+15%), the mid-cap auto insurer, offered another instance of a portfolio company demonstrating resilience under Covid-19. Although interim profits fell 9% following April’s 40% slump in premium income, clear signs of recovery were seen in June/July’s 12% year-on-year growth. Numbers for the first half of the year also demonstrated that Sabre, along with other auto insurers, reaped a unique benefit from lockdown: less frequent car journeys, fewer accidents, lower claims and higher retention of premium income (Sabre’s loss ratio improving 9% year-on-year). Income investors were rewarded with the reinstatement of April’s deferred special dividend (5.2p) and further dividend for the interim period (4.3p).


Sabre wasn’t the only auto insurer to feature amongst July’s top Fund performers. Whilst lacking for a tangible trigger, large-cap Direct Line rose more than 9%. Notwithstanding the sector’s several virtues (defensive earnings, attractive dividend policies, lower Covid-19 claims), it’s probable that Direct Line’s advance reflected August’s looming interims and the anticipated reversal of April’s dividend moratorium (since confirmed).


No doubt, sentiment towards UK auto insurers was buoyed by news that mid-cap holding Hastings (+8.1%) had received a preliminary approach from Finnish insurer Sampo. Although Hastings’ July gain looks muted given the circumstances, it fails to capture the fact that Sampo’s interest drove a 25% share price advance from the intramonth lows. Shortly after month-end, an offer of 250p was confirmed; we welcome the bid, which is in line with our estimate of Hastings’ intrinsic value.


Publisher Bloomsbury (+5.8%) also warrants mention following a thoroughly respectable AGM trading update. Headline sales rose 18% year-on-year, thanks to growth in both its Children’s Trade (+28%) and Adult Trade (+29%) divisions. Surprisingly for a reporting period that covers the closure of UK retail, print sales grew by an impressive 9%; this achievement was attributed to the counter-cyclical nature of book sales. In combination with net cash of £35.5m and an untouched revolving credit facility, Bloomsbury’s impressive sales performance imparts enormous confidence and we remain happy holders.


Special mention is required of portfolio holding BAE Systems (+1.4%). Thanks to the strength of its US business, BAE issued a robust interim statement that exceeded consensus estimates across all metrics (earnings, dividends, free cash flow, net debt, order backlog). To our minds, however, the real highlight of this exceptional update was the reinstatement of the April-deferred dividend. Not only did BAE restore its interim distribution (9.4p), it also pledged to make a second interim (13.2p) payment in lieu of April’s missed final dividend. In sum, BAE’s two interim payments offer income investors a near 4.5% return and recompense for any uncertainty regarding future policy. More broadly, whilst we’d caution against viewing BAE’s reinstated dividend as a sign that more UK companies will shortly reverse Covid-19 dividend cuts, it does confirm the slowing pace of cancellations and hints at a crisis drawing closer to resolution.


Full year earnings from packaging business DS Smith (-20%) testified to the reluctance of many UK businesses to recommence payments. Despite strong free cash flow and ample liquidity, DS Smith blamed “current economic uncertainty” for passing on its final dividend. For us, this speaks of the psychological scars inflicted by the sudden-stop Covid-19 recession and the inevitable preference of many corporates for the comfort of cash. As July’s share price fall makes clear, however, this does little for investor sentiment. The omission of the full-year dividend is regrettable, but we remain holders in anticipation of its eventual resumption.


Small-cap brick manufacturer Forterra (-23%) was the Fund’s worst performer due to its £55m placing. It’s no surprise that the suddenness and severity of Covid-19 disruption has forced some UK businesses to buttress balance sheets and finance existing commitments with emergency cash raises. In this way, Forterra’s circumstances and the resultant share price reaction are typical. Whilst this means we have little visibility regarding near-term earnings, the UK’s structural undersupply of new build housing gives us confidence in Forterra’s medium-term prospects.


Housebuilder Taylor Wimpey declined 17% as investors penalised a half-year statement containing revised guidance on full year completions (-40% year-on-year). This seemed to neglect the unmistakeable rebound in current trading, with private sales per outlet rising appreciably from lockdown lows (0.7 vs 0.3 per week) and the order book strengthening in both volume (+14%) and cash terms (+20%). The statement offered further cause for optimism in reiterating Taylor Wimpey’s commitment to resuming dividends for its 2021 financial year. We remain holders in anticipation of this outcome.


Finally, the Fund’s large-cap UK banks, Lloyds (-16%) and Barclays (-12%), traded lower on Q2 updates that disappointed on additional loan loss provisions. There are, however, several key points to make in mitigation: increased bad debt reserves follow more prudent macroeconomic assumptions; provisions cover assumed, rather than actual loan losses and can be written back; regulatory capital buffers are substantial by the standards of history; and present valuations make these stocks look like bargains ahead of the potential resumption of dividends in its 2020/2021 financial year.


Macro-Theme Allocation (as at 31.07.20):


Liontrust Macro Equity Income Theme Allocation July 2020


Source: Liontrust


Macro-Theme Changes [1]:


Digital Economy

The position in Greggs was sold as its earnings recovery has been deferred by the effect of Covid-19 on both consumer behaviour and the accelerating trend for office workers to spend more time at home.


Financial Value

The sale of CMC Markets was an instance of profit capture discipline following a c.65% return over two month holding period.


Infrastructure Spending

We increased the position in PRS REIT as the company offers the attractive combination of defensive residential cashflows, a hedge against housebuilder cyclicality, and an opportunity to acquire an enterprise trading a material discount to NAV. The position in Redrow was sold in order to fund the PRS investment.


New Oil Equilibrium

Royal Dutch Shell was sold. Its investment case is obscured by dividend cut, balance sheet vulnerabilities and the advent of renewable and clean energy alternatives.


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:








Liontrust Macro Equity Income I Acc






FTSE All Share






IA UK Equity Income













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


*Source: Financial Express, as at 31.07.20, 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.


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.


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.

Thursday, August 13, 2020, 2:12 PM