Liontrust Russia Fund

The Liontrust Russia Fund returned 0.2% for the quarter, versus the MSCI Russia 10-40 Index return of 2.4%*.

Russian equities have been largely rangebound during the first quarter of 2021, with the MSCI Russia 10-40 Index returning 2.4% and modestly outperforming broader emerging markets.

On the positive side, vaccination roll out accelerated in many parts of the world and President Biden signed into law the $1.9tn stimulus package and began working on an infrastructure plan. This helped spur commodities higher with oil also supported by OPEC+ prolonging production cuts and delaying the return of spare capacity to the market. With OPEC+ hoping to keep oil prices closer to $70/bbl, US shale will be crucial to their success. Drilling activity has been rising steadily since September at a pace only slightly lower than the drilling boom of 2016. If oil prices remain above $60/bbl, the pace of drilling could well accelerate. Offsetting the positives were setbacks with vaccinations in Europe and a third wave seeing new restrictions put in place. The scale of US stimulus fuelled concerns about the potential for higher inflation with the yield curve steepening and the US 10-year yield reaching levels not seen since late 2019 before the pandemic hit.

Following the better-than-expected 2020 GDP figure of -3.1%, suggesting the output gap is closing faster than previously expected, the CBR confirmed that rates have bottomed. Contrary to expectations, the CBR hiked interest rates for the first time since 2018 and made it clear that further hikes were likely as inflation expectations have moved higher. While the non-banking businesses will become increasingly important for Sberbank in the coming years, a gradual normalisation of interest rates should aid profitability at its core banking business and provide additional capital for these new ventures

Different sectors showed material divergence in performance over the first quarter, with the energy sector leading the way (+11%) while food retailers lagged, falling 15%. Food retailers have benefited from the pandemic and their earnings proved resilient. This clearly puts them at risk as Russia’s vaccination program gains momentum and the economy reopens. Some changes, such as the material improvement in ecommerce offerings, will provide lasting benefits but even over the medium term the Russian government has made it clear that it is prioritising investment and corporate profits at the expense of real incomes. If sustainable inflation returns this could lead to margin pressure if companies are unable to pass through higher costs.

The Liontrust Russia Fund returned +0.2% during the quarter. Key positive contributions came from Novatek, TCS and Lukoil while the relative underperformance was due to being underweight in the energy sector. While the energy sector was a natural beneficiary of the rising oil price and rotation into value seen during the quarter, our concerns over capital allocation remain and we continue to have a preference for private companies Novatek and Lukoil over state-owned Gazprom and Rosneft.

The expectation is that 2021 will be a year of rapid recovery and that life will have more or less returned to normal by the end of the year. Although the prevailing view is that 2021 will bring us back to normality, some developments seen in 2020 will persist. Distinguishing between cyclical and structural changes is important in understanding the outlook for 2021 and beyond.

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

*Source: FE Analytics as at 31.03.21.

**Source: FE Analytics as at 31.03.21.

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.

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