Tariff-driven volatility and a sharp market sell-off early in the quarter gave way to a strong recovery, enabling both Funds to outperform their respective benchmarks. Long-duration positioning was the key driver of returns, while selective additions such as Orsted added value, reinforcing a positive outlook for high-quality issuers.
Nancy The quarter began with sweeping tariffs that triggered a sharp market sell-off and heightened volatility. However, investor sentiment stabilised later in April following the Trump administration decision to pause implementation for 90 days. This was further supported by the successful negotiation of trade deals which ultimately delivered more favourable terms than initially anticipated.
Nancy In the UK, softer economic data, early in the quarter, particularly labour data, prompted a 25-basis point rate cut from the Bank of England. But as the quarter progressed, concerns over a cooling economy offset by stubborn inflation led the BOE to hold rates steady in June. Meanwhile, political pressure over fiscal reforms brought government spending back into focus. The UK's debt to GDP ratio is rising; the deficit is higher than the average for advanced economies, while it is facing the third highest borrowing cost of any advanced economy. This has raised questions about the government's ability to fund the gap and the potential for increased borrowing that would lead to higher borrowing costs and yields. Despite these developments, both the Monthly Income Bond Fund and the Sustainable Future Corporate Bond Fund have delivered strong performance, outperforming their benchmark and securing a top-quartile ranking in the quarter and year-to-date. Despite the rate's volatility, the long-duration position was the standout contributor. UK 10-year yields ended the quarter 20 basis points lower, outperforming their US and German counterparts. Expectations over a German fiscal stimulus and the potential of inflationary effects of US tariffs kept yields higher in those economies. Credit was more mixed. Our marginal spread duration underweight, detracted from performance as spreads tightened by 10 basis points in the period. The escalation in trade tensions, particularly delays or softening of tariff threats, improved investor sentiment and supported tighter credit spreads. Our overweight to financials, particularly insurance, was a bright spot.
Deepesh We were selective in our trading activity this quarter. Early on, market uncertainty kept issuance subdued, but as sentiment stabilised, we saw opportunities emerge. We participated in attractively priced new issues from BT and Blend Funding. We also added Orsted into the Monthly Income Bond Fund, which is a name that has been held across the other Funds and is synonymous with the energy transition, and for good reason. Back in 2009 85% of its energy came from fossil fuels. Today that number is less than 1%. It is now the world's largest developer of offshore wind and is a clear leader in renewable energy. That kind of transformation, delivered 21 years ahead of their original target, has made Orsted a compelling story within Sustainable Fixed Income strategies. More recently, however, the company's bonds have come under pressure, reflecting the macroeconomic headwinds facing offshore wind, particularly in the US where high rates, supply chain delays and an unfriendly new administration have created challenges. But following a review, we believe the long-term resilience is still in place. Orsted has responded appropriately under its new CEO, prioritising balance sheet strength. This includes pausing or abandoning uneconomical projects, improving capital discipline and accelerating asset sales. These actions are all bondholder friendly. They enhance credit strength, improve liquidity, and support key leverage metrics. From a sustainability perspective, Orsted remains best in class. It's science-based, net zero aligned, and is already setting standards on oft-disregarded areas like biodiversity that will only become more relevant as the regulation evolves. In short, while the market may be focusing on the short-term noise, we see an opportunity to increase exposure to a global sustainability champion at attractive levels, with improving fundamentals and driven by the inevitable move to increasingly more cost-effective renewables. Our focus on sustainability is not always prompted by changes in valuation. Following our commitment to drive UK water companies to better make operational improvements to the benefit of their own resilience, as well as to the consumers they serve, we are again meeting with each of our holdings in their sector. A lot has happened, with the release of the final determination by the industry regulator Ofwat and the recent actions from the government review, which will involve disbanding the regulator and creating a new one. We find these conversations productive in pushing these companies to make systemic change and evaluating progress. It is also worthwhile to note their difficulties with things like regulation and population growth and the ways in which they are working around them. Regulators have made a number of changes to try and improve the credibility of the sector, like the recent bans on bonuses. Our holdings had refreshing responses in favour of this type of change, with all committing to the spirit of the ban and not finding workarounds like those in the wake of 2014's banker bonus cap.
Nancy Overall, we remain constructive on corporate bonds. All-in yields above 5% remain attractive, and we've used recent spread tightening to move up in credit quality and reduce spread duration, as valuations are closer to their tightest point. While credit fundamentals have softened somewhat, they remain robust. We expect Alpha to be increasingly driven by credit selection, and our portfolio is positioned towards high-quality issuers offering compelling relative value and resilience against any meaningful deterioration. We continue to favour a long duration stance. With signs of a softening labour market and deteriorating economic sentiment, we expect yields to end 2025 lower than where they began, benefiting our current portfolio positioning and generating another year of strong returns.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Sustainable Investment team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that 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 a Fund.
- May hold Bonds. 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.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and 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 use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. 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. The use of 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.
- Do not guarantee a level of income.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Investment team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
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.
DISCLAIMER
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It 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.
This information and analysis 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, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. 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.
