Liontrust GF High Yield Bond Fund

Launch to end-June review

On 8 June we were delighted to launch the Liontrust GF High Yield Bond Fund. Going forward, in addition to any adhoc queries you may have, we intend for you to hear from us on a quarterly basis with a review of the Fund and the general market environment. However, in these early days, we thought it useful to provide a review of our thinking and how that translates into the shape of your Fund.

 

As we prepared to launch the Fund, we were planning to own a large proportion of dollar-denominated bonds. This reflects our view on the proximity of different high yield sub-markets (e.g. US and pan-Europe) to ‘fair value’. In June and May in particular, European high yield has underperformed, leading us at the margin to increase the exposure to pan-European high yield bonds. For context, at the end of June, the Fund held around 35% of its assets this side of the Atlantic, which is 5-10% higher than we had been planning a couple of months ago.

 

From the 8 June starting point, we think this slightly higher exposure to European high yield will have cost the Fund modestly in terms of relative performance. However, we believe the sense of buying bonds issued by high quality, listed, growing, global businesses on higher spreads than in US dollars will show itself over longer periods.

 

The global nature of our market is illustrated by the fact 80% of the global high yield market is dollar-denominated, but around 53% of bonds in the index are issued by US companies. We like this diversity and, ultimately, we can and do hedge all of the currency risk. Our over-arching view that dollar-denominated assets are preferable based on proximity to ‘fair value’ continues to be expressed through the 65% exposure to dollar-denominated high yield bonds.

 

The weaker performance in the European high yield market has been driven by BBs, i.e. higher quality credit. Anecdotal market commentary from bond trading desks suggests this is down to BBs being in the hands of shorter-term holders of the asset class, such as investment grade funds. In addition, BBs tend to be more liquid, so those looking to trim risk may well find it easier to sell their BB holdings before lower-rated bonds. Both of these recent influences can be categorised under the ‘Technicals’ part of our FVT framework (with Fundamentals and Valuations).

 

As long-term stock-pickers in high yield, we view the ‘F’ and ‘V’ as the dominant sources of value. We have invested in companies we believe have strong credit characteristics and, at the time of writing, the difference in ‘spread’ between BB and B bonds is close to the tight end of the range of the last 10 years. Whilst on the topic, we think CCCs – based on the level of spread premia versus default risk – offer poor value.

 

Post-launch, we participated in the new issue of bonds issued by German auto giant, Volkswagen. With its very healthy balance sheet and above-average margins, VW has its arms around the problems caused by the notorious diesel scandal and has the resilience to deal with the global trading uncertainty created by President Trump (N.America was 17% of 2017 sales). The bonds in question are relatively junior in terms of priority within the VW capital structure, yet still hold an investment grade rating. We are happy to buy investment grade bonds when they represent a good opportunity versus high yield, and in this instance the bonds offered an additional 1% of yield over the average BB bond. This was a ‘spread’ of 3.8% and a coupon of 4.625% (in euros).

 

At the portfolio level, we are closely managing exposure to cyclical and thematic sectors. However, where we are taking risk in this type of sector, high quality and resilient companies like VW meet our investment criteria.

 

Starting our first full month, the gross redemption yield on the portfolio in US dollar terms is 6.3%*. The Fund has an underlying duration of 4.25*, which is very close to the Global High Yield Index. There are 51 issuers, with a marginally higher number of lines. The Fund has a quality bias, is avoiding cyclicality unless the company is strong from a bottom-up perspective and maintains a preference for dollar-denominated bonds, albeit reducing. In summary, we are very happy with the shape and diversity of the Fund. Please don’t hesitate to contact us with any questions you may have. Moreover, please help make this as useful a commentary as possible to you by providing us feedback on what you would like to see more or less of.


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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. 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 and in financial derivative instruments, both of which may have the effect of increasing volatility.

Disclaimer

This content 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.  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, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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.

Friday, July 6, 2018, 12:17 PM