Liontrust US Income Fund

Q1 2020 review

During the first quarter of 2020, the Liontrust US Income Fund returned -15.7%, versus the S&P 500 Index return of 14.2% and the IA North America sector average return of 14.3%. The Fund ended the period with a yield of 1.73%.

 

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 coronavirus was not going to be contained in China and the world was facing a global pandemic. One of the fastest market sell-offs 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. At this stage, it is extremely uncertain as to how deep or for how long the recession will be and last. Markets will take comfort from COVID-19 case growth slowing in the coming weeks and months but are likely to remain vulnerable until it is proven the world can rescind shutdown measures without reigniting the virus or a vaccine becomes available. This could take some time.

More positively, we have been impressed by the speed and the scale of the US policy response. In just a three-week period the Fed moved from an emergency out-of-meeting rate cut to QE “unlimited.” Congress has also agreed a $2tn US fiscal package which amounts to almost 10% of US GDP. Should the US recession deepen the Fed and the government may well need to enhance stimulus measures to help the economy bounce back after the virus dissipates but it is clear that the US authorities are in “whatever it takes” mode.

There have been a number of notable characteristics determining which companies have suffered the least during the market correction. Some would have been predicted, given the market backdrop, others perhaps less so or at least to not to the degree that we have seen. More predictably, companies with leverage have suffered more, 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.  

Another more surprising feature is the degree of smaller company underperformance. The Russell 2000 has underperformed the S&P 500 by 11% this quarter. Some of this can be explained by fundamentals. Smaller caps have higher exposure to sectors that are more adversely affected by social distancing and more cyclicality (higher financials & energy weightings). Smaller caps also have higher levels of leverage. However, we also believe this is a reflection of more technical factors including the weight of passive/ETF money and liquidity. This has held us back because we have a higher weighting relative to much of our peer group but has also opened up good opportunities further down the market cap spectrum.

The Liontrust US Income Fund lagged the S&P 500 Index and the wider peer group during the quarter. There are three main reasons for this. The first being the sharp underperformance of smaller companies and the remarkable relative outperformance of the mega-cap technology stocks to which we have limited exposure given dividend yield restrictions. Secondly, the Fund’s more cyclical positioning (particularly within sectors) has been a hindrance. Some of this is because we feel we can find sufficient yield in more attractive, less-cyclical parts of the market and have been worried about valuations in more defensive parts (e.g. utilities, staples). Finally, some of the relative underperformance is due to sharp underperformance of dividend growth strategies as a whole, perhaps counterintuitively to their perceived defensiveness. This is likely to be a reflection of concerns about dividend sustainability.

We should prepare for news on dividend suspensions in the US in the coming months. We do not believe these 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. Importantly, we do not believe this alters the medium and long term potential for the US to become an increasingly important source of dividend income for UK investors. 

In terms of portfolio activity, we have made relatively minor changes to the portfolio but after extensive balance sheet testing, we have sold a couple of small positions where we believe the prospects of getting through these difficult times unscathed have been reduced.

 

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

 

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

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust US Income C Acc GBP

-6.2

16.0

-1.6

30.7

5.6

S&P 500

-2.8

17.2

1.0

33.8

4.4

IA North America

-4.0

15.7

0.0

33.2

-1.1

Quartile

3

2

3

4

1

 

*Source: FE Analytics as at 31.03.20

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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.

Tuesday, April 21, 2020, 2:32 PM