Liontrust Macro UK Growth Fund

January 2018 review

The Liontrust Macro UK Growth Fund returned -0.8%* in January, outperforming the FTSE All Share Index return of -1.9%.

Key to the Fund’s outperformance was the month’s sharp sell-off in government bond markets. January saw benchmark yields rise steeply, with the 10 year gilt yield adding 32bps to close the month at 1.51%; more than 1% above the post-Referendum lows and the highest closing level for more than 12 months. Bond market luminaries (Gundlach, Gross et al) queued up to call the end of the ageing bull market in government debt.

We read rising yields as evidence of gathering economic normalisation, after the moribund decade that followed the Global Financial Crisis. This explains why the portfolio is materially overweight rate-sensitive life insurers and has a significant presence in cyclical diversified miners. If anything, January gave some proof of logic as both the life insurance (-0.2%) and mining (+1.6%) sectors exceeded benchmark returns and contributed to the Fund’s relative performance.

 

Our conviction that ongoing economic recovery brings higher policy and market rates also saw us add HSBC to our Rising Rates theme. In view of its global operational reach, HSBC is the only UK-listed bank offering full exposure to the present, broad based economic upturn. The mismatch between loans and deposits on its balance sheet should allow it to makes hay as rates rise; loans repricing more and faster than deposits.

The obverse of this was January weakness in FTSE sectors with bond-proxy characteristics. Utilities (-5.9%), food producers (-5.6%) and tobacco (-4.9%) declined sharply, as investors adjusted to the idea that the decade-long era of low growth, inflation and rates was passing. Given the absence of such businesses from the portfolio, this was a source of positive attribution for the Fund.

 

Bond-proxy weakness was likely compounded by the US dollar sales exposure of many of these businesses. The translational benefit of US revenues was diminished as the pound gained 5% against the dollar and the broader trade-weighted Dollar Spot Index slipped 3.3%. Such moves were likely driven by the growing understanding that the US Federal Reserve wasn’t the only central bank with a bias to tighten rates.

 

Fund returns were also assisted by assorted stock-specific developments. Battery Revolution business Johnson Matthey gained 12.5% on news of a partnership with US engine maker Cummins, which hinted at commercial validation of its eLNO electric vehicle cathode material. Rising Rate constituent Close Brothers added over 8% on a positive interim management statement that disclosed 7.3% year-on-year loan book growth. Digital Economy members Purple Bricks and On the Beach rose on operational newsflow and broker appraisal respectively. 

January’s performance was pared back by several instances of stock-specific weakness. Most notably, Micro Focus International fell sharply on interims that disclosed weaker than anticipated trading at the newly acquired HP Enterprise business. Given the scale of the HP purchase and its importance to the combined business, this is of concern and the holding is under review.

Macro-Theme Allocations:


Liontrust Macro UK Growth Fund January 2018 review

Macro-Theme Changes[1]:

 

Rising Rates

We added HSBC to the Fund. It is a global bank exposed to synchronous global growth with US and Hong Kong businesses giving it explicit gearing to US curve steepening and the margin expansion this permits. We also closed the position in Schroders, switching into a new position in Schroders Non-Voting to exploit an arbitrage opportunity given its historically wide discount to the ordinary share class.

We reduced the position in Hargreaves Lansdown, which is a quality business trading on a rich rating. With January’s move higher in yields potentially encouraging investors to chase more cyclical value names we moved to capture alpha.

Infrastructure Spending

We reduced Glencore to capture alpha given the share price’s vulnerability to any rate-driven measure of US dollar mean reversion; December’s sharp rally had flowed directly from US dollar weakness.

Consumer Spending

Having reduced the Fund’s holding in Cineworld last month following its bid for US cinema operator Regal Operators, we exited the position entirely during January. Our investment case is compromised by a deal which we view as unattractive on a number of levels; post-deal leverage, management’s lack of US experience and corporate governance issues giving substantive reason for reappraisal.

 

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

 

 

Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Liontrust Macro UK Growth I Acc

13.0

0.0

6.2

3.8

30.7

FTSE All Share Index

13.1

16.8

1.0

1.2

20.8

IA UK All Companies

14.0

10.8

4.9

0.6

26.2

Quartile

2

4

2

1

2

 

*Source: Financial Express, as at 31.01.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.


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

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, February 12, 2018, 4:30 PM