Liontrust Macro UK Growth Fund

August 2019 review

The Liontrust Macro UK Growth Fund returned -6.3%* in August, compared with the FTSE All Share Index return of -3.6%.

 

Portfolio returns were less a consequence of stock-specifics and much more a product of macro influences and the extent to which these can buffet particular investment styles.

Our very particular take on growth investing entails a strong valuation discipline. Although high sales, or earnings growth are the hallmarks of an attractive growth business, our view is that companies with such attributes should only ever be acquired for the right price. In the decade since the end of the Great Financial Crisis, as low and falling rates have fed discounted cash flow models and inflated the present value of tomorrow’s earnings growth, fewer ‘growth’ companies have satisfied this exacting criteria. In consequence, we have sought sales and earnings growth amongst businesses trading on ‘value’ ratings.

As suggested, the share prices of value businesses are correlated with the direction of interest rates. Many value companies are cyclical enterprises, growing earnings as an economy expands and rates pick up. To pinch an expression from bond markets, this makes them short duration.

This relationship underlies the underperformance of value stocks relative to growth companies over the last decade. Sub-trend economic growth, cuts to central banks and falling risk-free rates have combined to broaden the record valuation gap between growth and value investments.

August’s events and performance should be understood through this lens. The combination of decelerating macro data and an escalating US-Sino trade spat served to depress risk-free rates and stoke market expectations of coming monetary stimulus. From a domestic perspective, Prime Minister Johnson’s more strident approach to Brexit negotiations was an incremental suppressant to gilt yields as markets bid up safe haven investments. Yield curves inverted, the global sum of negative yielding debt breached US$17trn and the yawning chasm between the valuation of growth and value stocks grew wider still.

The sum effect was a dent to portfolio returns. The Fund’s array of life insurers, banks, miners and oil producers underperformed the market. This was compounded by the relative strength of select non-holdings, but particularly companies with quality growth characteristics.  Whilst the steady and persistent earnings growth that defines quality growth businesses may offer ostensible refuge in episodes of market volatility, their outperformance is of a piece with the post-financial crisis divergence between growth and value shares and such companies seem inherently vulnerable to any upturn in global rates. Further, we see little merit in owning quality growth businesses trading on 20-25x forward earnings and offering low-single digit sales growth; this point is thrown into sharp relief by the FTSE’s wealth of financials and resource businesses with more attractive valuations and growth profiles.

As intimated, stock-specific developments exerted less bearing on August returns. Canadian Copper miner and Scarce Resource business, First Quantum Minerals (-33.3%) led the decliners by falling heavily on little more than its inherent cyclicality in the midst of August’s growth panic. The life insurers of our Population Ageing basket – Prudential (-18.5%), Legal & General (-14.3%) and Aviva (-10.5%) fell heavily, as investors ignored the profit growth and operational progress evidenced in August’s spate of interim updates and focused instead on the toll that declining rates can exert on profitability and regulatory capital.

This is not to suggest that August lacked for positives. Hard landscaping business and Infrastructure Spending constituent, Marshalls, rose 9% on interims that boasted a 7.5% increase in like-for-like sales and confident guidance. Fellow Infrastructure Spending position and build-to-rent business Grainger (+7.4%) appreciated as investors coveted bond-proxy equities against a backdrop of sliding risk-free rates. Broadcaster and Digital Economy holding ITV rallied 4.5% on the strength of a late July trading update and gathering anticipation of its forthcoming paid-for TV streaming service.

Macro-Theme Allocation (as at 31.08.19):

Macro UK Growth Allocation 310819

Source: Liontrust

 

Macro-Theme Changes [1]:

Global Pharma

The position in GlaxoSmithKline was reduced in order to capture some profit. Summer macro uncertainty had stoked investor demand for defensive businesses like pharmaceuticals, driving a wedge between company fundamentals and buoyant share prices.

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

 

 

Jun-19

Jun-18

Jun -17

Jun -16

Jun -15

Liontrust Macro UK Growth I Inc

2.9

11.4

20.1

9.1

6.4

FTSE All Share Index

0.6

9.0

18.1

2.2

2.6

IA UK All Companies

-2.3

9.1

22.5

-4.1

7.0

Quartile

1

1

3

1

3

 

*Source: Financial Express, as at 31.08.2019, total return (net of fees and income reinvested), bid-to-bid, institutional class.

 

**Source: Financial Express, as at 30.06.2019, 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.

Tuesday, September 17, 2019, 4:11 PM