Liontrust Macro Equity Income Fund

May 2020 review

The Liontrust Macro Equity Income Fund returned 0.6%* in May. The FTSE All Share Index comparator benchmark returned 3.4% and the average return of funds in the IA UK Equity Income sector, also a comparator benchmark, was 1.3%.

 

The portfolio underperformed the FTSE All Share Index in May.  It should be noted, however, that the Fund’s performance was strong in the second half of the month and is now ahead of the index for Q2 so far.

The upturn in Fund performance corresponds to the broader pick up in value-style companies, relative to both benchmark and growth styles. This stylistic inflection underlies the May strength of the portfolio’s miners, telecoms operators and banks. Investors’ renewed appetite for value follows several months of marked underperformance, wherein such businesses were penalised relative to other investment factors (quality, growth, momentum etc). No doubt this was a consequence of value’s large cyclical constituency and the threat to earnings and dividends posed by the ‘sudden stop’ Covid-19 recession. But just as economic contraction can punish value, so expansion stirs demand for these companies and the market’s prevailing assumption is now that April marks the low point of the Covid-19 economic shock. We are doubtful that the pace of recovery will justify investor enthusiasm, but we are convinced that value’s unprecedented discount to growth warrants continued exposure.

It’s probable that the slowing pace of dividend cancellations contributed to May’s pick-up in sentiment. Just 13 FTSE All Share companies cancelled, deferred, or rebased dividends on the month. That this marks progress should be clear from the fact that May’s total compares with April’s 83 and March’s 95. The portfolio went largely unscathed by May’s cuts, but it did suffer BT’s (+0.2%) cancellation of its ‘19/’20 final and all dividends for the financial year ‘20/’21. This is disappointing from our total return vantage, but we’re supportive of the fact that proceeds have been earmarked for the earnings accretive build out of BT’s fibre broadband network; a point not lost on markets as the shares rallied in the second half of the month. BT’s example also demonstrates that although the pace of dividend cuts has slowed, some affected companies are extending cancellations to include future dividend payments. We refer to this as dividend cut deepening and we’d suggest that it speaks of the absolute uncertainty that most companies are presently faced with. Given that a V-shaped economic recovery seems improbable, we’d argue that deepening could affect an increasing number of companies.

With visibility of earnings in mind, we have initiated Security of Earnings as our latest macro-theme. Given the market trauma of March and April, the thesis is simply to make the portfolio more robust in the event of further Covid-related setbacks. Mindful of both capital preservation and our total return mandate, we have concentrated on businesses where stability of historic earnings permits some reasonable expectation of a business’s earnings power, or typical earnings. This serves as a powerful counterweight to the portfolio’s cyclical constituencies. Further, if we’re correct in our expectation that the recovery will be fraught with continued earnings and dividend disappointments, it’s likely that such businesses will trade at a premium. Presently, the theme consists of utilities Severn Trent and United Utilities along with ingredients business Tate and Lyle.

On a matter of housekeeping, our Rising Rates theme has been rechristened as Financial Value. Our argument has always been that there is an obvious asymmetry to low rates and that the circumstances which have produced them (ageing, excess savings, deficient demand, etc.) would eventually be reversed. We argued that Brexit had exerted a similar, suppressive effect on UK rates (market and policy) and that a definitive outcome would also serve to correct this. Typically, higher rates are a boon to businesses like banks which depend on bond income. It’s now clear, however, that the jolt of Covid-19 (and any ameliorative monetary measures), have postponed this outcome and the associated re-rating of UK financials. Rising rates are still likely, chiefly due to the inflationary implications of the present increase in government spending; it’s simply that we must wait. What hasn’t changed is the abundant value opportunities amongst UK financials, businesses like Barclays and Lloyds, which trade on historically depressed valuations despite the enormous operational progress and financial repair that’s been accomplished over the last decade. In this way, we remain overweight Financial Value.

Macro-Theme Allocation (as at 31.05.20):

Liontrust Macro Equity Income Thme Allocation May 2020

Source: Liontrust

 

Macro-Theme Changes [1]:

New Oil Equilibrium

The positions in BP and Royal Dutch Shell were both reduced. BP’s unsustainable 10% dividend yield means company is prone to an eventual cut and resultant share price weakness. Although it is a cheaply-rated business which might be expected to participate in any broader value rally, this is limited by the advent of ESG investing. Royal Dutch Shell’s total return case has already been diluted by its April dividend cut and it too is limited by the growth of ESG investing.

Security of Earnings

New positions were added in Severn Trent and United Utilities. Both offer stable earnings and dividends that could insulate the portfolio against the lingering effects of the Covid recession. Dividend persistence is a scarce commodity in a market where 1/3 of income stocks have cut payments. Divided growth of RPI+4% for Severn Trent and in line with CPI (inc. housing) for United Utilities look even more attractive in a market where dividend growth is absent. Whilst not outright value, these stocks look cheap in relative terms.

We also bought into Tate & Lyle, the mid-cap ingredients business. In May’s full year numbers it confirmed payment of a dividend that is amply covered by statutory earnings (1.8x) and free cash flow (2x). The business has quality characteristics (low leverage, return on capital over cost of capital) but its shares trade on a value rating of 13x earnings.

Financial Value

HSBC was sold as its investment case has been weakened by slowing Asian growth, April’s dividend suspension and China’s tightening control of Hong Kong.

CMC Markets was added to the Fund. The spread-betting company has acyclical online revenues that insulate the business against the ‘sudden stop’ recession of the COVID lockdown. Results release in April demonstrate the strong link between market volatility and earnings and the company affirmed its 50% dividend payout ratio, in a market where one third of UK dividend payers have cut disbursements.

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:

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Macro Equity Income I Acc

-22.7

4.8

-1.6

14.3

-3.4

FTSE All Share

-18.5

6.4

1.2

22.0

-3.9

IA UK Equity Income

-20.6

3.6

0.3

15.1

-1.2

Quartile

3

2

3

3

3

 

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

*Source: Financial Express, as at 31.05.20, 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 30.04.20, 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.

Friday, June 12, 2020, 12:51 PM