Liontrust Strategic Bond Fund

The Liontrust Strategic Bond Fund returned 1.7%* in sterling terms during June. The average return from the IA Sterling Strategic Bond sector, the Fund’s comparator benchmark, was 1.4%.

Market backdrop

June bore witness to various macroeconomic events, some with far-reaching consequences and others that were more ethereal in nature. Iran and Israel had a short war with each other, culminating in the US bombing some Iranian nuclear sites. Fortunately, there was rapid de-escalation after that. The revenge tax (Section 899) part of President Trump’s “One Big Beautiful Bill” was dropped after US Treasury Secretary Bessent reached agreement on tax rates with various other countries. Tariff negotiations continue to rumble on as we approach the 9^th July deadline for the 90-day suspension of reciprocal tariffs.

With such uncertainty around, it is affecting the pace at which major developed economy central banks trim rates, but the direction of policy easing is still clear. We received updates from the US Federal Reserve, European Central Bank (ECB), and Bank of England during June. 

The Federal Reserve's Federal Open Market Committee (FOMC) left interest rates on hold in the 4.25% to 4.50% range as was expected by everyone. Effectively, the Fed is in wait-and-see mode to assess the persistence of the inflation impulse arising from tariffs. There were minor changes to the statement, and the updated quarterly Summary of Economic Projections (SEP) where the dots showed two rate cuts predicted for 2025, but only just. 

There are now fewer participants thinking two rate cuts in 2025 is their central case; but the median has held, just, even with an increased number thinking there will be no change to US interest rates in 2025. For 2026 there is now one fewer rate cut forecast. During the press conference Fed Chair Powell was asked about the division in the rates forecasts on the FOMC, he played it down saying about the dot plot that "...no one holds these rate paths with a lot of conviction.” Powell also argued that the cost of tariffs will partly fall on the end consumer, with that coming they want to see further economic data before they "...make judgments prematurely.” 

Overall, this is a Fed in wait-and-see mode; no cajoling from President Trump is going to change that. The market is pricing for a rate cut to occur in either September or October, with just under two cuts priced in for this year.  So, for 2025, the Fed and the market is currently aligned on the path for interest rates; as economic data evolves, we will see how far reality strays from this path. My key focus remains the strength of the US labour market – this is due to the Fed's dual mandate and the transmission mechanism from the initial tariff inflationary impulse into something more, or less, sustained. 

The Bank of England's Monetary Policy Committee (MPC) also kept interest rates on hold (at 4.25%), the vote split 6-3 with the dissenters preferring a cut. The hold was expected and market consensus was for a 7-2 vote but it was always going to be a close call whether Ramsden moved into the dovish camp with Dhingra and Taylor. The MPC decision remains driven by those in the middle; for now, the "gradual and careful" approach to cutting rates remains intact. he gradual and careful language is interpreted as meaning one interest rate cut per quarter.

There were hints in the MPC statement about what might change this gradual and careful approach; the labour market has weakened and continues to soften, and the MPC wants to see this feed through into falling services inflation. Regarding the labour market, the Bank staff's analysis implies "...that slack was continuing to emerge in the labour market but there were no strong signs, as yet, that a more abrupt loosening was underway." The statement later on goes on to say that the MPC "...remained vigilant about the extent to which easing pay pressures would feed through to consumer price inflation." The increased labour market slack, if it starts accelerating (or in central bank parlance becomes "non-linear"), is likely to tip the centre of the committee into the dovish camp. However, the statement is only laying the foundations for a potential change in pace and it would need more deteriorating employment data to create a shift in stance. There are hawkish caveats too with discussion about the size of the output gap and the UK having an ongoing productivity problem. The MPC members all view monetary policy as being restrictive, however there is "... a range of views among members on the remaining degree of restrictiveness." Finally, there was an important reminder saying "...all members stressed that monetary policy was not on a pre-set path."

Rounding off on my highlights of monetary policy during June, the European Central Bank (ECB) cut interest rates by 25bps, to take its main deposit rate to 2.0% - in line with expectations. There were parts of the statement, press conference, and economic forecasts that would have appealed to doves and other bits for the hawks; on balance, I think the overall conclusion was more hawkish. 

Headline consumer price inflation (CPI) forecasts for the next two calendar years have been revised down by 0.3%, mainly reflecting “…lower assumptions for energy prices and a stronger euro.” However, there was little change to either 2026 or 2027 core CPI forecasts. The 2025 real GDP forecast was left unchanged, but this is due to the offsetting factors of higher growth than expected in Q1and lower prospects for the rest of year. For years further out there has been an introduction of an explicit mention of the fiscal boost: “…while the uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, rising government investment in defence and infrastructure will increasingly support growth over the medium term.” In the press conference, ECB President Lagarde implied some of the extra fiscal spending is embedded in 2026 GDP forecasts but it is mostly a 2027 story. The statement goes on to add: “…higher real incomes and a robust labour market will allow households to spend more. Together with more favourable financing conditions, this should make the economy more resilient to global shocks.”

Lagarde described the rate cut as leaving them “well positioned” to navigate the upcoming uncertain circumstances. She discussed having nearly completed a cycle of monetary policy that dealt with a series of shocks. When questioned about neutral rates the response was that the neutral rate is predicated on the absence of shocks, so it was not discussed. My interpretation of all this is that the ECB Governing Council is now split between those that want this to be the end of interest rate cuts and others who want to see further easing later in the year. I believe there is a high hurdle to cut again in July with a pause the most likely outcome. There is room for one more cut in September accompanying updated economic forecasts. Obviously, all of this assumes no significant deviation in economic data from its current trajectory.

Fund positioning and activity

Rates

Overall duration exposure was little changed during June. The Fund finished the month with 6.6 years of duration exposure, split between 3.7 years in the US, -0.5 years in Canada, 1.4 years in the Eurozone, 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 and Selection

Activity in credit markets was low during June. The investment grade credit weighting at the end of the month was 64%. High yield exposure is 17%, which is 22% in bonds minus a 5% risk reducing overlay. One 10-year maturity bond was purchased in US dollars, issued by the company Resolution Life; the bonds are cheap given the impending takeover of the company by higher rated Nippon Life.

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

*Source: Financial Express, as at 30.06.25, accumulation B share class, total return (net of fees and income reinvested).

**Source: Financial Express, as at 30.06.25, 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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