Liontrust Strategic Bond Fund

The Liontrust Strategic Bond Fund returned -0.1%* in sterling terms during May. The average return from the IA Sterling Strategic Bond sector, the Fund’s comparator benchmark, was 0.1%.

Market backdrop

May saw a continuation of the theme of headlines and negotiations surrounding tariffs. There was a ruling by the US Court of International Trade declaring that various of President Trump’s tariffs issued under the IEEPA (International Economic Emergency Powers Act) were unlawful. This was not a political ruling; one of the three judges was previously appointed by Trump. Specifically, the fentanyl related tariffs (trafficking), worldwide tariffs, and retaliatory tariffs are beyond the President’s statutory authority under the IEEPA. The ruling neither impacts tariffs from Trump’s first term as president nor the sectoral tariffs. The government filed an appeal and the Court of Appeals granted a temporary reprieve whilst it considers the motion papers.

For those looking at the various legal sections of different acts, the sectoral tariffs are under Section 232. There are other levers that President Trump’s team could pull: under Section 122 (of the 1974 Trade Act) tariffs of up to 15% for 150 days can be applied to help address a large and serious trade deficit. Next there is Section 338 (of the 1930 Trade Act) which allows for 50% tariffs on countries discriminating against US. Finally, there is Section 301 (1974 Trade Act) which deals with unfair trade practices; unlimited tariffs can be applied after the completion of any investigations.

In the short-term, countries negotiating with the US are incentivised to delay reaching final agreements until the new landscape becomes clearer. In the longer term I believe this ruling means a delay to the conclusion of tariff negotiations, but there are enough legal levers for Trump’s team to pull that mean the ruling is unlikely to materially impact what the final outcomes look like.

Tariffs are set to raise $200 billion in revenue for the US government this year under their current proposals.  Every positive cent counts as Trump’s “big beautiful bill” (his words) on tax and spending makes its way through US congress. Fiscal profligacy continues to be of great concern to the bond markets – many countries have an unsustainable debt path and populism is only making matters worse. There will continue to be tensions as “bond vigilantes” (a term coined to describe the bond market pushing back against fiscal largesse by demanding higher yields) remind authorities that unsustainable fiscal deficits cannot last forever.

Moving on to the monetary side of the equation, the Federal Reserve kept interest rates on hold. At the press conference Fed Chair Powell emphasised that it is in a wait and see mode, with monetary policy described as being “well positioned” to deal with and adjust to the upcoming risks. 

The minutes from the Federal Open Market Committee (FOMC) meeting showed that staff forecasts for real GDP growth were weaker “…as announced trade policies implied a larger drag on real activity relative to the policies that the staff had assumed in their previous forecast.” Furthermore, “…the staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast.” FOMC participants highlighted elevated uncertainty; they “…judged that downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases.” Regarding monetary policy it is still deemed “moderately restrictive” with the FOMC saying they are well positioned to wait for further clarity.  They are going to “…take a cautious approach until the net economic effects of the array of changes to government policies become clearer,” i.e. this is a Fed in no hurry to cut interest rates until the economic data forces them to.

On this side of the Atlantic the Bank of England’s Monetary Policy Committee (MPC) cut interest rates by 25bps to 4.25% as was widely anticipated. The voting split of the MPC members did not conform to expectations with two (Mann, Pill) opting for a hold, five (Bailey, Breeden, Greene, Lombardelli, Ramsden) wanting a 25bps cut, and two (Dhingra, Taylor) voting for a 50bps rate reduction. For most of those voting for the 25bps cut the decision was “finely balanced,” with the global trade news persuading them to enact a rate reduction. Other members of the 25bps cut camp, which I assume means two of the five, wanted to ease policy anyway given that “…underlying domestic disinflation was progressing as expected and monetary policy restrictiveness was bearing down on activity.” The two voting for holding interest rates steady argued that “…indicators pointed to continued inflation persistence owing in part to structural rigidities on the supply side of the economy.” Finally, the two doves wanting a larger interest rate cut have concerns about a larger output gap forming over the forecast period so, due to the balance of risks, wanted a less restrictive policy path.

The most important sentence in the MPC’s statement was retained: “…based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.” The key words are gradual and careful, meaning that the Bank of England’s central case remains a pace of one 25bps cut per quarter; the retention of this sentence is a strong signal that the MPC does not want back-to-back cuts (yet).

Fund positioning and activity

Rates

During the period of bond turmoil in May caused by heightened fiscal concerns we added 0.5 years back to duration. The Fund finished the month with 6.5 years of duration exposure split between 3.7 years in the US, 1.4 years in the Eurozone, -0.5 years in Canada, and 1.9 years in the UK. As a reminder, on the yield curve front, with a total 15+ years maturity bucket exposure of 1.0 years, the Fund is still underweight relative to indices but no longer has zero exposure having added in April.

Allocation

After having added to the Fund’s high yield allocation in April we took some risk off post the rally in May. This was mainly implemented by buying protection on the iTraxx Xover credit default swap (CDS) index. The Fund’s net high yield exposure is 15%, with 20% in bonds and a 5% risk reducing overlay. The investment grade credit weighting in the Fund finished May at 63%.

Selection

Within investment grade rated credit we switched an existing Axa bond into an attractively priced new issue.  Two new purchases were made: Fairfax Financial, a large Canadian insurance company, and Woodside Energy a leading Australian energy company.

On the high yield front we reviewed our position in Brightline East and decided to exit until balance sheet improvements are made. Attractively priced primary issuance enabled us to add to Aggreko exposure.

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

*Source: Financial Express, as at 31.03.25, accumulation B share class, total return (net of fees and income reinvested).

**Source: Financial Express, as at 31.03.25, accumulation B share class, total return (net of fees and income reinvested).

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.

The fund manager considers environmental, social and governance (""ESG"") characteristics of issuers when selecting investments for the Fund. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund can invest in derivatives. Derivatives are used to protect against currency, credit or interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The Fund uses derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash. The Fund invests in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the fund over the short term. The Fund may encounter liquidity constraints from time to time. Participation rates on advertised volumes could fall reflecting the less liquid nature of the current market conditions. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.

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