Liontrust GF Absolute Return Bond Fund

Q4 2018 review

The Fund’s carry component contributed positively in Q4. The alpha sources cancelled each other out this month: selection was a small negative due to spread widening, rates was flat and allocation a mild positive.


Carry Component

We maintain our strong preference for US dollar denominated carry in the Fund at the moment, due to the steeper short end of the yield curve in the US. The duration contribution of the Fund’s carry component is expected to average approximately 1.5 years through the cycle; given the current backdrop the Fund has been recently running nearer 1.3 years to help protect against mark-to-market losses.


Alpha Sources


(i) Rates

The Fund maintained its short Canadian government bond futures versus a long in the US; this was offside during Q4 but did not trigger the 10 basis points sell discipline. The Fund locked in the rest of the profit in US 5-year inflation breakevens, captured via US 5-year Treasury Inflation-Protected Securities (TIPS) having already halved the position in the third quarter. Norwegian government bonds were also sold with the position having a small capital loss but a gain from the additional yield carry, leaving a flat exit point from an attribution perspective. 


Within a narrow range of overall Fund duration of 1-2 years we have also actively managed the total interest rate of the portfolio. Early in Q4 the US Treasury market was oversold, so we moved duration to the top end of the range and made a relatively fast profit. Towards the end of 2018 rates had become far too expensive so we sold 5 year German BOBL futures to take the overall Fund duration back down to 1 year.


(ii) Selection

Selection was a mild negative (single digit basis points) as even floating rate notes (FRNs) from bellwether names such as JP Morgan and Anheuser Busch exhibited spread widening. Both positions have been maintained with the latter now approaching the stage where it rolls down into the carry component. The Fund only has one high yield investment, namely senior secured debt in Reynolds the packaging company; this suffered a small fall in price over the quarter but the impact was mitigated by continued strength in Rabobank’s bonds.


(iii) Allocation

A new relative value trade was implemented during December. The spread differential between emerging market hard currency sovereign debt and US dollar high yield has become far too wide. Both asset classes perform better during times of “risk on,” are correlated to global growth and have some energy exposure. Yet whilst high yield has sold off, emerging market debt has been steadfast. We have therefore gone long risk high yield versus an offsetting short in emerging markets, both legs using liquid credit default swap indices; we have implemented the relative value trade in an approximately 1:2 ratio to account for the different betas of the respective two indices.


*source: 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. 


The Liontrust GF Absolute Return Bond Fund was launched in June 2018. As its track record is less than one year, regulatory restrictions prevent presentation of performance data in this review.

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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.




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.

Tuesday, January 15, 2019, 4:43 PM