Liontrust Macro Equity Income Fund

March 2018 review

The Liontrust Macro Equity Income Fund returned -2.2%* in March, compared with the -1.8% return from the FTSE All Share Index.

 

The Fund lagged the FTSE by c.0.4%, leaving its return broadly in-line with the index for Q1 2018.

 

Notably, March returns were impacted by a soft showing from the bank constituents of the Rising Rates theme; HSBC (-7.2%), Close Brothers (-7.2%) and Lloyds (-6.0%) all featured amongst the month’s weakest performers.

 

It seemed clear that bank stock underperformance flowed from softness in sovereign yields and the assumed, mechanical bearing on bank margins and earnings. Benchmark bond yields fell more than 10bps, as investors sheltered from the resumption of the equity market sell-off and the no-doubt connected threat of a Sino-American trade war.

 

The effect was compounded by the Fund’s overweight exposure to other rate-sensitive businesses, principally life insurers, along with a strong March showing from select bond-proxies which the Fund avoids (utilities, some consumer staples).

 

A measure of respite from this effect was found in the performance of the German real estate holdings. Forming part of the Infrastructure Spending theme and a direct play upon Germany’s demographics and dearth of quality rental accommodation, these businesses are often bracketed as beneficiaries of low, or falling yields. Tag Immoblien and Vonovia were both among the Fund’s best performers.

 

More generally, we remain relaxed about the pullback in yields. To our minds, this is less a bond market verdict on global economic activity and more a reflexive response to the equity market drawdown. We remain constructive on the global economy and continue to position the Fund to profit from higher rates.

 

From a stock-specific vantage, paper packaging business and Digital Economy constituent Smurfit Kappa rose 13% in the month after receiving an approach from International Paper. We like Smurfit’s exposure to e-commerce trends and note that IP’s approach is pitched at a negligible premium to its recent prospective earnings multiple; it seems a better offer is needed to wrest control of this asset.

 

Brick manufacturer and Infrastructure Spending holding Ibstock was another standout performer following a pleasing full-year update. A 9% year-on-year increase in group profit and a new supplementary dividend policy were ample evidence of the UK new build market’s underlying health. With a prospective earnings multiple of 13x and a 2018 dividend yield of close to 6%, the rating looks undemanding.

 

The performance of the Fund’s Global Pharma companies was more mixed. AbbVie fell almost 20% in sterling terms on news that the company would not seek accelerated approval for cancer prospect Rova-T. Whilst the news is modestly disappointing, it seems the share price reaction more closely reflects investor positioning and the near euphoria that has met news of patent victories and a lower effective tax rate. Conversely, GlaxoSmithKline staunched months of disappointment in reaffirming its dividend policy, passing on Pfizer’s consumer health care arm and buying the 36.5% rump of its consumer JV with Novartis. The deal is accretive to earnings and Glaxo rallied nearly 7% on the month.

 

Macro-Theme Allocation (as at 31.03.18):

Macro Equity Income Fund March 2018: Macro-Theme Allocation (as at 31.03.18)

Macro-Theme Changes[1]:

Population Ageing

We added St James Place to the theme. It is a scalable, cash-generative business with the intent to return cash. The pensions advice gap delivers a structural growth tailwind.

 

Saga and Carnival were sold. For Saga, this was the culmination of an exit process going back to December’s profit warnings which undermined our confidence in management and the merits of the strategic shift. We feel that Carnival is fully valued versus the peer group. We prefer life insurers and providers of retirement solutions as more focused plays on population ageing.

 

Infrastructure Spending

A new position was opened in Antofagasta, the Chilean copper miner. Demand for copper is underpinned by infrastructure expenditure and the advent of electric vehicles. The company is cash generative with capacity to de-gear and grow dividends while a clear capex discipline signals a focus on shareholder returns.

Rising Rates

Hargreaves Lansdown was sold in order to lock in gains in view of a full rating.

 

Digital Economy

We added a position in DS Smith. International Paper’s approach for Smurfit Kappa suggests the sector is consolidating. DS Smith stands to be a beneficiary of e-commerce trends. Its record of growth and margin progression is belied by sub-market earnings multiple. We also increased the Fund’s position in Smurfit Kappa with the share trading at discount to implied offer terms.

 

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

 

Mar-18

Mar-17

Mar-16

Mar-15

Mar-14

Liontrust Macro Equity Income I Acc

-1.6

14.3

-3.4

9.3

16.5

FTSE All Share Index

1.2

22.0

-3.9

6.6

8.8

IA UK Equity Income

0.3

15.1

-1.2

8.4

14.0

Quartile

3

3

4

2

2

 

*Source: Financial Express, as at 31.03.2018, 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.

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. 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, April 16, 2018, 2:23 PM