Liontrust GF European Strategic Equity Fund August 2021 review | Insights

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

The Fund’s A4 share class returned -1.0%* in euro terms in August. The Fund’s comparator benchmarks, the MSCI Europe Index and HFRX Equity Hedge EUR Index, returned 2.0% and 1.3% respectively.

Nothing changed in the macroeconomic backdrop during August to disturb the steady uptrend in equity markets that stretches back to March 2020. Global Covid-19 cases continue to rise, posing a threat to the economic recovery from last year’s lockdown measures, and central banks remain in the spotlight as commentators speculate as to when the pickup in inflation might prompt some tightening of policy.

On the latter front, the biggest talking point was the speech given by Federal Reserve Chair Jay Powell to the Jackson Hole economic symposium, staged as an online-only event this year. While suggesting that the Fed is on course to reduce its monthly asset purchases by the end of the year, he also noted that this tapering should be viewed independently of interest rate rises, the timing of which will be dependent on separate criteria. Investors digested this message without any noticeable damage to the prevailing bullish sentiment.

Equity market strength was fairly broad-based. Of the MSCI Europe Index’s 11 industries, only consumer discretionary (-2.6%) finished in negative territory in euro terms. IT (+6.9%), utilities (+4.1%) and healthcare (+3.5%) were the largest risers. This widespread price inflation is at odds with the conditions we have positioned the Fund to benefit from: we believe that the market rally has pushed a large number of stocks to extreme, unjustified valuations, and we expect valuations to revert soon – presenting an exciting opportunity for the short book.

During August, however, the short book suffered from the indiscriminate nature of gains. A large number of positions saw solid share price gains that translated to small negative contributions to Fund performance. The biggest short book detractors were an online gaming company that agreed to a takeover approach and a Dutch immune-oncology company that released strong Q2 results. Among August’s better performing short-book positions were a US online car retailer that recorded a net loss in Q2 and forecast a net loss for Q3 which was worse than analysts’ expectations and a UK consumer self-care company that reported tumbling sales of its hand sanitizing gel after panic buying and overstocking boosted demand last year.

Whilst August was a difficult month for the short book it remains the case that the value dislocations we observe today are by far the most extreme we have seen in our dataset which stretches back to the 1980s. Never have the valuations of unattractive stocks on our process – companies with poor cash flow control that are expensive and suffering poor business momentum – looked as expensive as they are today when compared to stocks the process finds attractive. We know from our own empirical work across markets all over the world that the single most powerful forward predictor of factor performance is whether a factor is cheap or expensive relative to history. This suggests that there is now significant potential for the short book to perform well in future months.

In the Fund’s long book, Bank of Ireland (+19%) reported on a strong recovery in business performance which saw operating profit of €465m in the first half of the year, up 72% on last year’s level and 7% higher than 2019. The result reflects increases in net interest income and business income, a reduction in costs, and a negligible net impairment charge after minimal loan losses. The outlook for the rest of the year is bright with 5% income growth expected in the second half compared to the first six months.

A higher oil price (up 28% compared with Q1) and lower operating expenses allowed Tethys Oil (-11%) to record large increases in Q2 EBITDA and free cash flow, but relatively muted production levels and a disappointing key drilling update dampened the tone of the update. Net daily production fell from 11,585 barrels per day in Q1 to 11,030 in Q2. The results of its Thameen-1 exploration well in Block 49 in Oman recorded no flows, despite promising earlier assessments.

Shares in Pandora (-6.5%) slid despite a Q2 update which showed more progression of positive trends, possibly indicating some profit taking following a very strong run. Organic sales growth was 84% compared with 2020 and 13% versus 2019. On average 15% of physical stores were temporarily closed during the quarter, falling to 8% by August. Sales growth has been led by its US and online operations.

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

	Jun-21	Jun-20	Jun-19	Jun-18	Jun-17
Liontrust GF European Strategic Equity A4 Acc EUR	36.9%	-15.5%	2.5%	3.0%	5.3%
MSCI Europe	27.9%	-5.5%	4.5%	2.8%	18.0%
HFRX Equity Hedge EUR	19.0%	-4.5%	-6.3%	3.5%	6.0%

*Source: Financial Express, as at 31.08.21, total return (income reinvested and net of fees). Non fund-related return data sourced from Bloomberg.

**Source: Financial Express, as at 30.06.21, total return (income reinvested and net of fees).

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Key Risks

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Some of the Funds may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. Some of the funds may hold a concentrated portfolio of stocks. If the price of one of these stocks should move significantly, this may have a notable effect on the value of the respective portfolio.

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