Morgan (pictured) says the fund’s macro approach, whereby it seeks to find companies that are profiting from thematic changes in the economy, makes it a good diversifier away from the typical, bottom-up equity income funds. "Keeping a close eye on the important global trends likely to shape the coming decades is an important part of investing. Yet making predictions is fraught with difficulty," Morgan said.
"Perhaps this is why many fund managers emphasise a bottom-up approach, focusing on the characteristics of specific companies rather than the bigger picture."
"However, one fund that has successfully invested according to key long-term trends is Liontrust Macro Equity Income, managed by Stephen Bailey and Jan Luthman."
"Like other equity income managers, they target companies providing high and sustainable dividend yields."
"Yet, somewhat unusually, their starting point is social, political and economic themes rather than company 'fundamentals' such as dividend yield or balance sheet characteristics."
"Mr Bailey and Mr Luthman believe this strategy is particularly pertinent for the coming decade, in which we face unprecedented major trends: globalisation, growing wealth in emerging markets, the proliferation of electronic communication, climate change, ageing populations and many more."
"As these factors evolve and interact, the consequences for businesses and markets are vast."
"At the same time, Mr Bailey and Mr Luthman argue companies (especially larger ones) are so well-studied that it is hard to gain an informational edge over other investors."
"In order to outperform, they believe it is better to gain a thorough understanding of what is happening in the world to identify the future winners and losers – and which companies can keep on increasing their dividends."
Data from FE Analytics shows the fund has beaten the average IMA UK Equity Income fund over five years, returning 40.87 per cent while the sector has made 34.69 per cent. It is currently yielding 2.97 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
However, performance has been weaker in recent years: the fund has marginally underperformed its sector average over three- and one-year periods.
This is largely down to a poor 2012, when its returns of 6.28 per cent put it 96th out of 97 funds in the sector; the average return was 14.01 per cent.
Luthman and Bailey also run the Liontrust Macro UK Growth fund, which applies the same process to growth rather than income stocks.
The fund also suffered in 2012, returning just 5.04 per cent while the IMA UK All Companies sector made 15.05 per cent.
However, it has performed in line with its sector average over five years and beaten it substantially over the past decade, returning 187.26 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Luthman says that he and Bailey look for companies that derive the majority of their earnings overseas, as these parts of the world are favoured by economic themes.
"I think there are two issues or two sectors that are behaving very differently: one of those is the domestic one, where earnings and wages are declining in real terms, tax rates, particularly on the middle area of the population, are rising, and that’s squeezing consumer spending lower and the outlook for corporate earnings is weak," he said.
"The other sector of the market is exporters: something like 70 per cent of the FTSE All Share earnings come from outside the UK, so when I look at the opportunities in the market itself, I think the outlook for that part of the market is bullish."
Luthman says that the slowdown in UK consumer spending is the key threat to corporate earnings in this country, but it has left long-term investors some opportunities.
"The high street failures that we have all heard about like Jessops, Woolwich and Curry’s, that’s reflective of the tough trading conditions, but this will leave those that survive much bigger shares of the market. Longer-term, that market will start to expand again."
The manager explains that he thinks there is one under-appreciated factor that could be supportive of the UK domestic economy in the short-run.
"The ray of sunshine, and one which might turn out to be large, could be the Help to Buy scheme."
"The scheme extends up to people who have already got a house, and we think we will see lots of remortgaging."
"What we might see is a whole slew of refinancing going on come January next year at a lower rate. If that happens, that’s a large boost to the consumer spending."
"If you refinance a 5 per cent loan at 3 per cent, that’s significant extra money to spend."
Morgan explains the key themes in the equity income portfolio.
"The most significant theme in the portfolio currently is pharmaceuticals. The market perceives the industry as mature with low growth and little control over pricing," he said.
"Mr Bailey and Mr Luthman believe that rather like the tobacco industry in the early 2000s, firms will respond to these challenges by turning to emerging markets."
"Firms could also benefit from ageing populations in the developed world and an overhaul of their research operations to make them less costly and lower risk."
"Exposure in the fund is via overseas stocks including Merck and Pfizer as well as UK stocks such as GlaxoSmithKline."
"Conversely, the pair are avoiding banks, feeling that prevailing trends are not on their side."
"They are sceptical that profits can be rebuilt in an environment of austerity, low growth and regulation across the industry, and believe there is more writing down of debts to be done than is generally accepted."
"However, they are positive on equity valuations generally and are aiming to harness continued recovery through asset management companies instead of banks."
"Aberdeen Asset Management, Close Brothers and spread-betting operator IG Index are all constituents of the portfolio and could benefit from rising equity prices or greater investor activity."
Luthman says that he remains focused on companies with overseas earnings, although Morgan points out that the team is also sensitive to valuations.
"Whilst they would normally be happy to own consumer stocks exposed to faster-growing emerging markets, the managers are wary of valuations."
"Pepsi and Kimberley Clark have been sold from the portfolio, but they retain others whose yields remain relatively compelling such as Reckitt Benckiser, a company well known for household products such as Finish, Harpic and Vanish."
"Areas they are avoiding altogether include UK consumer stocks as well as utilities, which they deem to be highly priced and overly dependent on low interest rates to fund borrowing."
Morgan says that the managers’ original approach could make it an interesting addition to a portfolio.
"Overall, the fund's performance has been strong versus its peer group and I believe it is a high quality fund."
"For those looking for exposure to high-yielding equities, it is worth considering."
