Liontrust GF High Yield Bond Fund

The Fund (C5 sterling accumulation class) returned 1.3%* in sterling terms in Q1 2021 while the ICE Bank of America Merrill Lynch Global High Yield Index (GBP hedged) comparator benchmark returned 0.7% and the average return for the IA Sterling High Yield reference sector was 1.2%. The primary B5 US dollar share class returned 1.3% while the ICE Bank of America Merrill Lynch Global High Yield Index (USD hedged) comparator benchmark returned 0.7% and the average return for the EAA Fund USD High Yield Bond (Morningstar) reference sector was 0.7%.

We also compare the Fund’s performance to a leading Global High Yield ETF (seeking to outperform by 1.5% a year) ^†. The Fund’s C5 sterling shares class outperformed the return of the ETF in the quarter and has now outperformed it by around 4.9 percentage points since inception (June 2018).

The Market

Lower quality bonds again continue to dominate returns in the market, materially so in the first quarter. The global high yield market produced a return of 0.71% (US dollar terms) with BBs registering a small negative return (-0.18%) and CCCs producing close to 5%. Single Bs returned 1.18%.

A dominant theme in the strong performance of bonds with low credit ratings has been their relatively low interest rate sensitivity. For example, the small negative return from BBs is illustrative of the interest rate risk that exists in this cohort, whilst the strong performance of CCCs shows that lending to such companies is entirely down to credit risk. That being said, with yields on 10-year treasuries around 0.65% higher than at the start of the year, indicative of capital losses of around 4.5%, the returns from BB bonds have been OK in our view given the adjustment to higher rates we’ve seen in the market. We are, after all, only talking about a three month period.

Sectors performed along the lines of their duration and credit quality profiles, with the likes of energy, which makes up a decent proportion of CCCs, performing well, and media, where longer duration bonds are well represented, lagging.

The Fund

Good stock-picking in the energy sector played a meaningful role in our Q1 outperformance. For example, long-term holding, North Sea producer Enquest, which lagged many of its US equivalents in 2020, has seen its bonds produce strong returns in 2021 to-date, with the market apparently coming around to its merits, generating ~27% return, when energy in general produced ~3.5%.

An attribution of the Fund’s returns in Q1 also shows some of our longer-dated telecom, media and healthcare bonds acting as a drag on performance. For example, the combination of Charter, DaVita, Level 3, Virgin Media and Ziggo, all longer-dated, higher-quality bonds, ‘cost’ the Fund ~27bps on a relative basis during the quarter. However, we were conscious of the duration characteristics of these bonds and increased our short duration hedges. Hedges made a positive contribution of ~20bps during the quarter.

During the quarter, we participated in new issues from Ahlstrom, a fibre-based materials (packaging) company, Brundage-Bone, a construction services business, and Burford, a specialist financier in the litigation finance niche. Two out of three are listed companies and the one non-listed is a combination of private equity and family ownership.

We also purchased bonds issued by rigid plastic packaging company Kloeckner Pentaplast a few weeks after the new issue launch. Although broadly liking the business, we had some doubts over the highly levered capital structure combined with very weak contractual protections, therefore did not buy the bonds at launch. However, the bonds sold off considerably in the first few weeks of their existence for no obvious fundamental reason, and we decided to take a small holding with bonds yielding ~8.25% (issued at 6.5%).

We exited each of Progroup (small holding, little yield/upside), Colfax (same), OSB (acquired by investment grade-rated peer) and United Rentals. The latter was a relatively higher-duration bond with unattractive relative value. We also reduced holdings in Charter, Level 3 and DaVita for similar reasons. The rise in yields has squeezed the spread compensation offered by these bonds, making them less attractive. To reiterate, our short-duration hedges cushioned some of the impact higher rates had on the value of these bonds.

Outlook

We continue to view Fund returns of around 5% as our base case. Note this is in the context of a quality bias and an avoidance of cyclical, thematic sectors that can so often come with concentrated default risk.

High yield has proven itself resilient to rising interest rates, particularly so at the lower quality end of the market. In our view, removing duration risk by investing heavily in the lower-quality end of the market is akin to jumping out of the frying pan and into the fire. Of course, the economic outlook looks pretty good, but surprises usually come to remind us that risk assets come with volatility and risk of capital loss. Although volatility is a reality of the high yield market, we believe the Fund has a relatively low risk of material capital loss due to the aforementioned quality bias and lack of thematic cyclicals. We are not going to chase the low-quality end of the high yield market. Frankly, our clients would be better buying value equities, in our view. We like the 5% return outlook for the Fund, given these characteristics.

Discrete 12 month performance to last quarter end (%)**:

Discrete data is not available for five full 12 month periods due to the launch date of the portfolio.

Fund positioning data sources: UBS Delta, Liontrust.

*Source: Financial Express, as at 31.03.21, total return (net of fees and interest reinvested).

**Source: Financial Express, C5 share class, total return, net of fees and interest reinvested. As at 31.03.21.

The primary share class for this Fund is in US dollars (B5) but we are showing the C5 sterling-hedged class to compare against the IA Sterling High Yield sector.

^†While the managers of the Fund seek to outperform a leading Global High Yield ETF by 1.5% a year net of fees over rolling three years, this is not a formal objective. There can be no guarantees this will be achieved over the stated time period. The formal objective of the Fund can be found in the Prospectus.

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 Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

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.