Liontrust Macro UK Growth Fund

May 2020 review

The Liontrust Macro UK Growth Fund returned 0.3%* in May. The FTSE All Share Index comparator benchmark returned 3.4% and the average return of funds in the IA UK All Companies sector, also a comparator benchmark, was 2.9%.

 

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 BTs (+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.

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 disappointments, it’s likely that such businesses will trade at a premium. Presently, the theme consists of utilities Severn Trent and United Utilities.

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.

In evidence of our case for financial value, Virgin Money (+17.1%) was among the Fund’s best May performers. Trading on a just 0.3x tangible book value, the mid-cap bank rallied on the strength interim numbers that were distinguished by a robust capital print.

The impression of value amongst UK banks was further cemented by the Bank of England’s May Financial Stability Report. Subjecting UK bank balance sheets to its exacting “boot strap” stress test, the Bank concluded that UK banks were sufficiently well-capitalised to weather the shock of Covid-19 without dilutive cash raises.

Vodafone (+18.6%) was another key contributor to May returns. Share price strength followed well-received numbers that beat at the revenue line and reassured on both dividends and the long-anticipated sale of tower assets.

In respect of May’s losers, the portfolio’s brick manufacturers, Forterra (-19.1%) and Ibstock (-8.9%), both disappointed. May weakness lacked for discrete cause and, in all probability, was little more than a correction to the exuberance of April.

Equiniti (-22.2%), the financial support services business, also featured amongst May’s laggards. Again, there was no specific cause for May’s decline, but it should be reasonably clear that Covid-19 will act as a near term check on both interest income and commission earnings

Macro-Theme Allocation (as at 31.05.20):

Liontrust Macro UK Growth Theme 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.

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.

Security of Earnings

New positions were initiated in Severn Trent and United Utilities. Stable earnings and dividends insulate the portfolio against the lingering effects of the Covid-19 recession and cement the total return case. Lower-for-longer rates ensure lower cost of finance and higher measures of return. Whilst not outright value, both stocks look cheap in market-relative terms.

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

 

[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.

 

**Source: Financial Express, as at 31.03.20, 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, 1:16 PM