Liontrust Macro UK Growth Fund

April 2020 review

The Liontrust Macro UK Growth Fund returned 11.1%* in April. The FTSE All Share Index comparator benchmark returned 4.9% and the average return of funds in the IA UK All Companies sector, also a comparator benchmark, was 10.3%.

 

April’s performance was driven by the resurgence of companies that had borne the brunt of March’s sell-off. Whether short-covering, bargain-hunting, or plain old mean reversion, the result was spectacular month-on-month gains for some of the FTSE’s more cyclical constituencies. This effect was seen most clearly amongst the portfolio’s housebuilders, building materials businesses and select financials.

Share price gains were led by the portfolio’s UK housebuilders, with Redrow (+28.3%), Taylor Wimpey (+25.2%) and Persimmon (+15.1%) all featuring in the vanguard. Although causation always seems clearer after the event, it’s not unreasonable to assume that this was partly a correction to the savage punishment of late-March dividend cuts and partly a response to news that certain housebuilders (Taylor Wimpey, Redrow and Persimmon) would reopen some sites and recommence activity. As might be expected, this was a boon to supply chain businesses, and the portfolio’s brick makers – Forterra (+36.5%) and Ibstock (+32.6%) – rallied accordingly.

Mid-cap bank Virgin Money (+22.8%) was one of the Fund’s best performing financial stocks. Investors cheered Q1 numbers that exceeded consensus estimates on sales, earnings and capital. Trading on a depressed rating of just 0.3x Tangible Net Asset Value (TNAV), it shouldn’t take much for Virgin to exceed the ground level threshold of market expectations.

Barclays (+12.5%) also contributed on the strength of quarterly earnings. The statement was distinguished by a strong performance in Investment Banking (fixed income and equities), solid capital ratios and prudent loan loss expectations. Significantly, the market’s enthusiasm ensured that Barclays’ share price absorbed the damage caused by April’s mandatory dividend cut and bounced appreciably. The share price multiple of just 0.4x TNAV illustrates the enormous pessimism already baked into Barclays’ valuation.

The Fund’s life insurers featured too, with Legal & General (+12.5%) the pick. Outperformance followed a respectable ad hoc trading update and confirmation of final dividend, an outcome celebrated in an environment where dividend income remains a matter of acute uncertainty.

Dividend maintenance also underlay strong April returns from Anglo Pacific (+40.0%), the small-cap mining royalties business. Full year results were a modest beat on sell-side forecasts, but the company buoyed sentiment in reporting limited Covid impact and confirming its final dividend.

Unsurprisingly, April’s weakest holdings were those companies that joined the swelling ranks of UK dividend cutters.

Bloomsbury (-5.1%) a small-cap publisher, fell after scrapping its final dividend and announcing an £8m cash raise. Although the loss of dividend income is regrettable, it’s mitigated to some extent by a potential scrip substitute. Further, in scrapping the dividend and raising a modest amount of cash, Bloomsbury can invest in growth and smooth the weighting of cash flows to Christmas sales. Given current circumstances, we are supportive.

Markets and income investors suffered a more seismic jolt from the near two-third reduction of Royal Dutch Shell’s (-5.4%) quarterly dividend. Understandably, much has been made of Shell’s record of dividend continuity since World War Two and the near 20% contribution of the UK oil sector to FTSE 100 dividends. Less has been made of the fact that Shell generated US$2.9bn of net profits on the quarter and more than US$4bn of free cash flow; more than enough to finance dividend commitments. Clearly, Shell’s decision is informed by current quarter weakness and the extraordinary spectacle of negative oil prices. Whilst Shell will likely use this as an opportunity to permanently rebase its dividend policy, supply side restraint and economic recovery in 2021 should trigger higher oil prices, free cash flow and dividends. We are underweight Shell and UK oil majors.

Macro-Theme Allocation (as at 30.04.20):

Macro UK Growth Theme Allocation

Source: Liontrust

 

Macro-Theme Changes [1]:

Digital Economy

The position in Smurfit Kappa was closed. It has cancelled its final dividend despite 2.5x historic cover and its e-commerce earnings uplift is likely to be unsustainable as recession takes hold. A new position was initiated in J.Sainsbury, whose defensive food earnings provide offset to macro uncertainty. A free cash flow yield of over 10% confirms the value opportunity while Sainsburys Bank FY20 loan loss guidance has positively surprised against market estimates.

 

New Oil Equilibrium

The position in Royal Dutch Shell B shares was reduced on mid-month news of a coordinated oil production cut, with the short-lived oil price spike offering an opportunity to mitigate risk ahead of April futures expiry and oil sector earnings.

 

Rising Rates

The position in Brewin Dolphin was = disposed of. Lower asset values mean lower fee income and dividend coverage while the Lloyds-Schroders wealth business threatens competition and fee disinflation.

Population Ageing

We trimmed exposure to Aviva as its dividend suspension removes a key plank of total return case and jars with 2019’s 2x dividend cover.

 

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Macro UK Growth I Acc

-22.9

1.4

0.5

11.5

-6.2

FTSE All Share

-18.5

6.4

1.2

22.0

-3.9

IA UK All Companies

-19.2

2.9

2.7

17.9

-2.4

Quartile

4

3

3

4

4

 

*Source: Financial Express, as at 30.04.20, total return (net of fees and income reinvested), bid-to-bid, institutional class.


**Source: Financial Express, as at 31.03.20, 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.

Friday, May 15, 2020, 11:08 AM