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Liontrust GF Strategic Bond Fund

August 2021 review

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.

The Liontrust GF Strategic Bond Fund returned -0.2% in US dollar terms in August. The average return from the EAA Fund Global Flexible Bond (Morningstar) sector, the Fund’s reference sector, was 0.2%.

 

Market backdrop

We have talked a lot this year about the economic recovery from the pandemic being very uneven in nature. It is uneven by sector and, of course, by country; developing nations have been struggling to access vaccination doses. The other privilege that developed nations take advantage of is having a hard currency, particularly those with the luxury of controlling a global reserve currency. Thus, we have seen rising interest rates across swathes of Latin America and central/eastern Europe whilst the US and eurozone debate remains over when to slow the pace of printing money. Or maybe developing nation central bankers just take inflation more seriously? In fairness, there is little choice and only the privilege of a hard currency can buy you the time to see if current inflation is indeed transitory in nature.

At the virtual Jackson Hole meeting, Fed Chair Jay Powell reiterated his view that most of the inflationary impulse in the US will wane. We believe that price pressures are diverse enough for inflation to be sticky, driven by ongoing strong consumption, and that a retreat from the 5.4% year-on-year CPI rate will head towards 3% not 2%. To a certain extent, Powell doesn’t care, and that is one of the advantages of flexible average inflation targeting – his main focus presently is on employment. In that regard the recovery continues, and so Powell effectively flagged that tapering was likely to be announced this year. This delaying of the inevitable should, at the margin, lead to yield curve steepening and we continue to avoid longer dated (over 15-year) duration exposure.

Meanwhile in Europe, the ECB hawks have been making a concerted effort to point out that the E in PEPP stands for emergency. The current higher pace of quantitative easing-based bond purchases is harder to justify with economies recovering and high vaccination rates. A slowing of the pace from approximately €80 billion a month to the prior €55 billion is likely to happen, and the PEPP looks set to expire in March. This does not preclude other QE occurring, it merely removes one excuse for monetary debasing.

Some of the need for monetary stimulus will be alleviated if the fiscal side of the equation continues to take up the slack. We have seen the first disbursements from the EU recovery funds and only heard the faintest of whispers of reintroducing fiscal rules across the euro currency bloc somewhere down the line. The fiscal side may also be boosted if a more left-leaning coalition ends up forming after September’s German elections. It can take months for a possible three-way coalition to be formed so don’t get too excited; besides, the constitutional balanced budget will prevail during normal times. 

One thing to get excited about is that the Fund is now categorised as Article 8 under SFDR. There were minimal changes to our investment process as we have always had ESG factors embedded within analysis.

Rates

 

The Fund finished August with a duration of 2.5 years. We took advantage of the volatility to add a few basis points of performance, mainly focussed on the US ultra-Treasury future. The overall duration shape of the Fund saw a small increase to exposure reflecting the rise in bond yields during the month. This increase is very much at the margin; the strategic position remains that government bonds are fundamentally overvalued. The 2.5-year duration exposure reflects a low beta approach – around half of our 4.5-year neutral exposure and 5 years below the Bloomberg Barclays Global Aggregate’s 7.5 years of interest rate risk.

One new cross-market alpha position was established this month, namely long Swiss 10-year bonds against the German Bund future. The yield differential had got to 10 basis points and we would target equal yields to take profits. To fund this position, we sold some 6-year US Treasuries and replaced the duration exposure with the 5-year US Treasury future.

Allocation

There was no change to the investment grade weighting during August: the Fund holds approximately 41% net in investment grade credit, split between 47% in physical holdings and a 6% risk-reducing overlay. We deem 50% to be a neutral weighting. The one part of the credit markets we still see value in is high quality high yield. The Fund has a 23% weighting in high yield, slightly above the neutral positioning of 20%. We are still avoiding the worst segments of the market by sector and rating; the Fund has zero exposure to CCC (and below) rated credit.

Selection

In last month’s commentary we mentioned our intention to pick up a bargain or two in the quiet August markets and we did manage to find three decent new opportunities. To call these bargains might be stretching things a little, but they are certainly cheap corporate bonds compared to the market and should add value over time. 

Starting in investment grade, we bought 20-year debt in Becton Dickinson, a US medical devices company. As its credit metrics improve and ratings agencies deliver anticipated upgrades over the next few quarters, we anticipate spread tightening from its current 160 basis point level.

Next, we have Castellum, a Nordic real estate company which is mid-BBB rated. The Fund invested in its inaugural euro hybrid debt issue which creeps into the high yield rating category due to its subordination in the capital structure; obviously the bond is still senior to equity. We believe the yield of 3.125% is compelling but are always wary about taking too much risk in this type of bond. We sold AIG hybrid bonds to avoid adding to the subordinated bond weighting within the Fund.

Finally, in traditional high yield we bought bonds issued by Altice. This single B rated cable telecommunications company is very well known to bond investors and is a regular issuer into the market. It is rare for it to leave value on the table, but a spread of 490 basis points for its 8-year secured debt compensates investors very well for the risk of aggressive corporate financing that Altice sometimes undertakes.

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

 

Jun-21

Jun-20

Liontrust GF Strategic Bond B5 Acc

5.5

7.5

EAA Fund Global Flexible Bond - USD Hedged

6.4

2.7

 

*Source Financial Express, as at 31.08.21, total return, B5 share class.

 

**Source Financial Express, as at 30.06.21, total return, B5 share class. 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.

 

Adjusted underlying duration is based on the correlation of the instruments as opposed to just the mathematical weighted average of cash flows. High yield companies' bonds exhibit less duration sensitivity as the credit risk has a bigger proportion of the total yield; the lower the credit quality, the less rate-sensitive the bond. Additionally, some subordinated financials also have low duration correlations and the bonds trade on a cash price rather than spread.

Understand common financial words and terms See our glossary
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 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 which may have the effect of increasing volatility. 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.

 

Disclaimer
 
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
 
This 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 

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