Liontrust US Income Fund

H1 2020 review

The Liontrust US Income Fund returned -3.2*% over the first half of the year, compared to the S&P 500 Index return of 3.6% and the IA North America sector average return of 3.4%. The Fund ended the period with a yield of 1.52%.

 

US equities started 2020 on a strong footing with reduced trade tensions between the US and China culminating in an announcement of the signing of “Phase 1” deal. However, towards the end of February it became increasingly clear that COVID-19 was not going to be contained in China and the world was facing a global pandemic. One of the fastest market selloffs on record ensued. Nations around the world have looked to contain the transmission of the virus by shutting down their economies to enable social distancing propelling the world into a deep recession.  After a torrid first quarter, US markets staged a strong recovery in the second quarter. The combination of an impressive policy response from both the Federal Reserve and the US government as well as evidence that the US economy was bouncing back quicker than most had expected helped markets recover much of the lost ground.

The speed and the scale of the US policy response has been impressive and helped contain credit market damage. In just a three-week period, the Fed moved from an emergency out-of-meeting rate cut to QE “unlimited.” Congress also quickly agreed a $2tn US fiscal package amounting to almost 10% of US GDP. The US authorities made it clear they are in “whatever it takes” mode.

The second quarter recovery was helped by slowing growth in COVID-19 case count. Additionally, markets were buoyed by incremental news about more effective treatments for COVID-19, including Remdesivir and Dexamethasone, which have helped to reduce fatality rates as well as prospects for a vaccine. According to the WHO, there are over 100 vaccines in preclinical evaluation. This significant volume of research and momentum raises the prospects of a vaccine arriving sooner than the "12-18 months" guidance given by many health experts. However it should be noted that towards the end of half year period it was becoming clear that the Sunbelt states which had escaped the worst of the initial spike in US cases were showing a surge in cases likely as a result of relaxing social distancing measures after relatively short periods of lockdown in a global context. This has seen a pause and in some cases reversal of re-opening efforts which will inevitably slow the momentum in the US recovery. 

There have been some overriding characteristics determining which companies suffered the worst during the market correction. Some would have been more predictable than others. More predictably, companies with leverage have suffered most, with a direct relationship between the amount of leverage and relative performance. This is akin to the 2008 sell-off. Less predictably, the highest valuation or multiple companies have fared the best. This stands in contrast to 2008. Back then, both the highest and lowest multiple companies performed least well during the market slump. However this time around, it has been the lowest multiple companies that have led the correction while the highest multiple companies have actually performed the best. We believe this once again demonstrates the pervasiveness of our central “disruption” theme.  

The other notable development during the period was rise of Joe Biden, the Democrat Presidential candidate, in the polls. According to Predictit.com, having been neck and neck at the end of May the implied probability of Biden beating Trump to the White House in November was 60% by the end of the quarter. This raises the prospect of corporate tax rates being hiked from the current level of 21% having been cut from 35% cut under Trump’s presidency.

The Liontrust US Income Fund lagged the S&P 500 during the period, but performance was essentially in-line with its US Income peers. Income strategies in the US have lagged the wider market this year in general as evidenced by the Dow Jones US Select Dividend index being close to 20% behind the S&P 500.  Much of this is due to the respective industry exposure of income strategies and the S&P.  Tech, and particularly mega cap tech, has significantly outperformed. Income strategies, including ours, struggle to own these non-paying or low-paying dividend companies. Additionally, traditionally dividend rich sub-sectors have been some of the most impacted by the COVID-19 crisis and the subsequent social distancing policies.

We also believe income strategies have come under pressure due to concerns over dividend sustainability. Importantly, we don’t believe dividend cuts will be on the same scale as we are witnessing in the UK. The US is coming from a considerably better starting point with lower pre-crisis dividend payout ratios and short term cash flow pressures are lessened by the predominance of quarterly rather than bi-annual dividend payments.

The Fund’s turnover remained low during the first half of the year and we remain focused on finding dividend stocks with latency potential and where we believe the outlook for dividend growth has room to improve in the medium term. We continue to believe that our central theme of disruption will be a key determinant of those companies which can get back to sustainable growing dividends and those that can’t.

†Yield quoted on C Income share class. The yield on other share classes may differ.

 

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust US Income C Acc GBP

0.5

10.7

11.8

21.9

20.1

S&P 500

10.1

13.9

11.9

20.6

21.5

IA North America

8.4

11.3

12.0

23.8

12.7

Quartile

4

3

3

3

1

 

*Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested). Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested), 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 Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

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.

Thursday, July 16, 2020, 3:28 PM