Liontrust Macro Equity Income Fund

June 2020 review

The Liontrust Macro Equity Income Fund returned 1.8%* in June. The FTSE All-Share Index comparator benchmark returned 1.5% and the average return of funds in the IA UK Equity Income sector, also a comparator benchmark, was 0.9%.

 

June’s Fund performance leaves it ahead of the FTSE All-Share Index return during Q2 and since the market low on 23 March.

June concluded the best quarter for global equities since Q2 1998 (source: Barclays). Whilst this is difficult to reconcile with the economic ill effects of Covid-19, it likely reflects the incredible scale and speed of the policy response, along with investor willingness to assume that the worst is now behind us. Certainly, this was the impression given by UK macro data. Following the unprecedented 25% collapse in UK GDP over March and April, June’s improving PMI and retail sales numbers cemented the impression that May’s lockdown easing is bearing economic fruit.

Sentiment towards UK equities, but particularly income stocks, was further buoyed by June’s visible improvement in the number of UK businesses forced to cancel or defer dividends in response to the impact of coronavirus. Just six FTSE All-Share companies were impelled to reduce dividends on the month, equating to a weekly run rate of around one-and-a-half cancellations. This marks significant progress on the 168 cancellations announced in March and April and the March to June run rate of 11.5 cancellations per week. We’d suggest that this offers persuasive evidence that spring’s spate of dividend cuts is now behind us. But to be clear, the severity of the Covid-19 recession suggests that more cuts are likely and that where cut, companies will be slow to resume payments.

To this point, June confirmed the burgeoning trend for UK corporates to raise emergency funds. Over the month, 31 quoted UK businesses raised a total of £4.5bn by selling equity at an average discount of 15.6%. Whilst the discount narrowed on May’s average 29%, June’s 31 cash raises is the highest monthly total for the crisis to date. Whilst some of the 93 cash raises have been undertaken to finance growth opportunities (more of which below), the majority have been initiated from a position of weakness and speak of the financial difficulties assailing many UK companies.

Beneath June’s headline market returns, there was an unmistakeable stylistic skew. As judged by MSCI data, UK value companies outperformed their growth peers by 3.7%. Value outperformance seems consistent with market assumptions that politicians and central bankers will successfully engineer global reflation. However, given that UK growth has outperformed UK value by 26% year-to-date, June’s value strength offers only very slight redress. This is not to suggest it was unwelcome. Our established bias to value meant the portfolio benefitted from June’s stylistic inflection. This was most clear amongst the life insurers of our Population Ageing theme and the miners of our Scarce Resource play.

In respect of life insurers, June outperformance gave respite from benchmark-relative weakness for the year to end-May. However, several stock-specific catalysts illustrate that this wasn’t purely mean reversion. Portfolio overweight Prudential (+16%) gained on news that it had sold 11% of its US operations; this established a reference value for the business, setting in motion its eventual float and offering the prospect of a time when Prudential might concentrate more profitably on its growing Asian business. Peer Legal & General (+11.3%) rose following an unscheduled trading update that disclosed strength in institutional pensions and investment management, along with a debt issue earmarked to finance growth opportunities.

The Fund’s miners also contributed to June returns. Anglo American (+9.9%) and Glencore (+14.3%) were the pick, but, unlike the Fund’s life insurers, both lacked for stock-specific catalysts. Most likely, the outperformance of UK miners issued from China’s National People’s Congress (29/5) and news of an US$853bn (6.1% GDP) stimulus aimed directly at infrastructure and urbanisation. In this way, we’re given a very clear sense of how miners offer a direct means to play Chinese demand and global reflation.

Spread better and Digital Economy holding CMC Markets (+35%) was June’s best performing position. In evidence of the link between market volatility and earnings, CMC released full-year numbers that revealed 93% year-on-year growth in net operating income and a 13p increase in dividends for the financial year (15p vs 2p). But the key incremental surprise was the company’s comment that current quarter income was “around double” last year. Such impressive earnings progression was hinted at by peer and fellow holding IG Group (+6.9%) in an early-June update and demonstrates that these businesses offer a means to exploit coronavirus volatility at reasonable valuations.

The counterpart to June’s strong showing from cyclical, value-style businesses was weakness amongst the market’s more defensive constituencies. In the case of non-holds like tobacco (-1.5%) and beverages (-3.2%), this was to the advantage of relative portfolio returns.

June’s worst performing holdings were our value style housebuilders. To some extent, this was an inevitable correction to the sector’s strong, benchmark-beating returns from the mid-March lows. But stock-specifics also played their part, with investors reacting to a series of market updates that balanced historic negatives with prospective cause for optimism. Redrow (-8.1%) was a weak performer following a full year trading statement that counterpoised a 37% fall in completions and a 36% decline in revenues with news of a record order book and the confident intent to repay government furlough funds. Similarly, Taylor Wimpey (-0.7%) offset news of a 40% fall in completions with improving operational trends (weekly sales per outlet, website enquiries, cancellation rates) and an opportunistic £500m cash raise with a view to exploiting land market weakness and enhancing measures of return.

Macro-Theme Allocation (as at 30.06.20):

Macro Equity Income Fund June 2020 Theme Allocation

Source: Liontrust

 

Macro-Theme Changes [1]:

 

Infrastructure Spending

Vistry was sold as we felt its balance sheet gearing makes the business vulnerable to a sustained coronavirus downturn, while measures of return compare unfavourably to other UK housebuilders;

We switched into PRS REIT, which increases portfolio exposure to the Private Rented Sector (PRS) asset class. The switch gives exposure to defensive residential rental income at the expense of cyclical housebuilder earnings. The defensive credentials are evident in May’s 97% rent collection rate. Its stable cashflows offer an attractive alternative to government debt’s negative real returns while the Covid-19 shock offered chance to buy shares at a significant discount to historic NAV.

New Oil Equilibrium

BP was sold out of the portfolio. Its 11% dividend yield looks untenable in the context of lower oil prices, Shell’s rebased dividend and June’s US$17.5bn asset write-off. The Covid-19 demand shock implies lower oil demand, earnings, and cashflow.

The position in Royal Dutch Shell was reduced on a similar rationale. A late-June Q2 update saw Shell lower oil price assumptions and write-down up to US$22bn of assets, both weakening the balance sheet and implying these assets are stranded and may never be exploited.

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 30 April 2020. Its distributions over the 12 months to 30 April 2020 – expressed relative to the Fund’s price on 30 April 2020 – give a 12 month yield of 4.5%. The FTSE All-Share Index yield on the same basis was 4.0%.

 

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 30.06.20, 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.

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.

Monday, July 13, 2020, 9:49 AM