Liontrust US Income Fund

Q3 2020 review

During the third quarter of 2020, the Liontrust US Income Fund returned 2.8%, versus the S&P 500 Index return of 4.0% and the IA North America sector average return of 4.3%*. The Fund ended the period with a yield of 1.52%.

 

US equities continued to recover from the sharp sell-off in the first quarter of the year and indeed surpassed previous highs that were seen in February before COVID-19 hit. The market continued to take solace from the supportive monetary and fiscal stimulus provided by the Federal Reserve and US government as the US economy gets back on its feet. The rally was also fuelled by the relatively contained rise in hospitalisations and fatalities despite a surge in new COVID cases in July in the Sunbelt states. This indicates firstly that virus treatments are becoming more effective but also importantly reduces the prospects of another full-scale shutdown should the US experience another wave of new cases. Other positive drivers in the quarter were progress on the vaccine front, with leading vaccine candidates generally reporting encouraging data and the US government continuing to commit billions of dollars to funding and pre-ordering doses as part of Operation Warp Speed, and US companies reporting much better than feared results alongside evidence that certain parts of the US economy are bouncing back strongly.

In terms of company results this was always going to be the quarter which bore the brunt of shutdown measures and we entered results season with consensus expecting S&P 500 earnings to decline by 44% in Q2. Instead, earnings fell by nearer 34% on a mean basis while the median company has seen earnings fall by just 14%. This is particularly impressive given that US economy shrank by a third in the quarter to June. 

Generally, the more cyclical sectors have led the rally since the bottom in March and this continued during the latest quarter. “Growth” as a style has continued to dominate “value” and has been helped by bond yields which have been rooted to low levels supporting valuation levels. The dominance of technology, particularly, amongst the mega caps remains inescapable. This handful of companies are seen to be beneficiaries of pandemic with many of the secular themes that have been in place for the last few years, including e-commerce and the shift to the cloud, only accentuated by shutdown measures.

With the election just around the corner and the passing of Ruth Bader Ginsburg, the US Supreme Court judge, US politics have been dominating headlines. Joe Biden, the Democrat Presidential candidate, extended his lead over Donald Trump in the polls and this accelerated towards the end of September. There has been increased talk of a Democrat sweep but the Senate is likely to remain a close battle.  While this would raise the prospect of higher tax rates the positives of a Biden presidency would likely be further fiscal stimulus and reduced geopolitical uncertainty which has been heightened over the last few years.

The Liontrust US Income Fund lagged the S&P 500 during the quarter, but performance was more 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 more 20% behind the S&P 500.  Much of this is due to the respective industry and style 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.

Stronger performers within the portfolio this quarter tended to be from the healthcare sector which benefited from the re-opening of US hospitals and elective procedures being restarted. Additionally, holdings that are exposed to the US housing market have been benefiting from a housing market that has been impressively resilient with consumers “nesting” at home.

In terms of portfolio activity, we have made relatively minor changes to the portfolio. 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.

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

 

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

 

 

Sep-20

Sep-19

Sep-18

Sep-17

Sep-16

Liontrust US Income C Acc GBP

-0.3

6.0

20.4

12.3

39.3

S&P 500

9.1

9.7

20.6

14.1

33.7

IA North America

9.1

7.4

19.3

14.6

30.1

Quartile

4

3

2

4

1

 

*Source: FE Analytics as at 30.09.20

 

**Source: FE Analytics as at 30.09.20



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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.

Wednesday, October 21, 2020, 8:59 AM