Liontrust Macro UK Growth Fund

October 2018 review

The Liontrust Macro UK Growth Fund returned -7.8%* in October, compared with the FTSE All Share Index return of 5.2%.


The proximate cause of October’s market tumult was Fed Chair Jerome Powell’s observation that “interest rates are… moving to a place where they will be neutral. We may go past neutral. But we’re a long way from neutral”


For the uninitiated, Powell’s fixation with neutrality flows from the concept of R*, or the equilibrium real rate of interest. Put plainly, this is the real short-term interest rate that prevails in an economy where the jobs market is in equilibrium and inflation is running at, or around the central bank’s target. As such, a policy rate lower than R* is expansionary; and one higher than R* must be contractionary.


This no doubt sounds abstract and dry to the point of aridity, particularly given that R* is conceptual and unobservable, but it has concrete implications for asset prices. In this case, Powell’s remarks gave clear warning to markets that short rates will continue to rise, that they may reach contractionary levels and, by insinuation, that the broader level of financial assets (the Greenspan/Bernanke Put) is a secondary consideration.


It should be of little surprise that sovereign debt markets were quick to take their cue; gilt and treasury yields advancing by c.20bps in the week following Powell’s address.  Equities were not immune and headline indices declined by c.5% across the piece. The scale of this drawdown is far less remarkable, however, than the fact that losses were greater for those stocks most closely identified with the ‘growth’ trade.


Why should this be the case and what do growth investors have to fear? Higher rates equate to a higher cost of capital, which in turn requires that we apply a bigger denominator when discounting a company’s future cash flows; an effect that cuts the sum of these cash flows, or the present value of the business. This effect is amplified for growth companies, because a bigger share of their worth resides in future periods.


In these terms, October’s growth sell-off is simply a mechanical adjustment. But the risk for growth investors has got to be that Jerome Powell’s R* is meaningfully above present levels and that any subsequent spike in rates will further depress the ratings of such companies.


This is a view that we have held for some time and that continues to inform the Fund’s longstanding ‘value’ bias. We maintain that our weighting to financials, materials businesses, telecoms, and domestic cyclicals offers investors a short duration portfolio with less vulnerability to rate normalisation.


At the beginning of October the Fund outperformed on the strength of a strong absolute showing from our telecoms holdings and the relative contribution of our broader financials weighting. Performance suffered, however, as markets stabilised from mid-October onwards. For the remainder of the month investors coveted nominally defensive businesses (distillers, utilities, personal goods etc.) to which the Fund has no exposure. Whilst the Fund’s pharma overweight offered some offset, this was insufficient to check the wider impact on relative returns.


It is this experience which underlies the October reordering of the portfolio.


We remain convinced that rates have registered a secular bottom, that they will rise as economies normalise further in the post-crisis era and that short duration, value companies offer the best means to capture this trade.


The scope, speed and severity of October’s sell-off has strengthened our conviction in the portfolio’s value tilt. With a view to seizing this opportunity, we decided to broaden our exposure to keenly priced companies. The upshot is that two longstanding non-hold themes – Avoiding Utilities and Avoiding Oil & Gas – were terminated. While the avoidance of utilities has contributed positively to Fund performance – particularly in the last 18 months as bond proxies de-rated – the oil & gas underweight has been a performance headwind over its two-year life. Our longer-term thesis that viable energy alternatives pose a significant challenge to fossil fuel majors remains intact. But on a short-to-medium-term horizon, it seems remiss to ignore the ratcheting of geopolitical tensions, the support this affords to the price of oil and the accompanying chance for oil producers to capture and deploy rising free cash flow.


Macro-Theme Allocation (as at 31.10.18):

Macro UK Growth Theme Allocation 10.18

Macro-Theme Changes [1]:

Ageing Population

We reduced portfolio exposure to Aviva, Legal and General, Prudential Plc and St James Place. Thematic exposure was reduced as the first strand of a wider portfolio reordering in October. Valuations are attractive, the gearing to rising rates remains and we still subscribe to the argument that ageing drives earnings and dividend growth. But the violence of October’s market moves likely heralds a change in market bias and demands smaller, more defensive positions and greater diversity of Fund holding.


Battery Revolution

A new position was opened in National Grid, the portfolio’s first utility holding since 2012. The advent of electric vehicles and the implications for increased power usage may reverse efficiency-driven declines in electricity demand. The risk of a future Labour government intent on nationalisation is already factored into its valuation.

Geopolitical Risk

This new theme consists of oil majors BP and Royal Dutch Shell. Political populism is in the ascendant, foreign policy agendas are more nationalistic and the probability of international conflict is higher than for some time. Such circumstances imply an interim floor to the price of crude oil and some risk of an event-driven spike. This presents oil producers with a window of opportunity. We anticipate rising free cash flow, de-gearing of balance sheets and higher dividends.

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








Liontrust Macro UK Growth I Acc






FTSE All Share Index






IA UK All Companies













*Source: Financial Express, as at 31.10.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.


**Source: Financial Express, as at 30.09.2018, 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.


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, November 13, 2018, 12:00 PM