Liontrust GF Strategic Bond Fund

May 2018 review

The Liontrust Strategic Global Bond Fund was launched in April 2018. The track record is less than one year; regulatory restrictions prevent presentation of performance data in this report.

May 2018 was a month of high volatility in bond markets, both corporate and sovereign. The two most market-moving events were Italian politics and the threat of US-inspired global trade wars. Ultimately G7 sovereign bonds, ex-Italy, posted positive returns. High yield pricing was generally a little negative and investment grade somewhere in the middle. Despite a late month rally, Italian debt fared particularly poorly.

Early May – not too hot, not too cold

In the more mundane world of economic data, most economies started to see a significant Q2 rebound in growth and inflation following a weaker-than-expected Q1. The early part of the month continued the year-to-date trend of yields moving modestly higher. Indeed, the US 10 year yield moved above 3% and then quickly toward 3.2%, causing a moment’s concern for risk assets. Commentators focused on whether the US Federal Reserve would raise rates 3 or 4 times, whether the European Central Bank (ECB) would end quantitative easing (QE) in September. From launch your fund retained a lower than average beta position, which was helpful under the circumstances.

Late May – Goldilocks leaves the building

We then had the spectre of a rabidly anti-EU Italian government taking power at the same time as President Trump was lambasting his former best friends over their trading practices. Italian bond yields rose above 3%; more importantly the spread to German Bunds rose above 2.5%. The Fund’s lack of Italian risk and its general low credit beta helped enormously – and of course it also gave us the flexibility to add a little risk at a level we had not seen for several years! A nice position to be in, and one we had been waiting for.

We had long been nervous that European politics could create volatility. A cheap way to play that was to short the French bond market against Germany. The relative yield between the two nation’s bonds was at a decade low of 22 basis points. As the Italian situation deteriorated, that relationship widened to 40 basis points – a 2% gain on our position. We decided to halve our size from 10% to 5% of the portfolio as we felt it was a case of the market moving too fast too quickly.

End of May – She had just popped out for a cigarette

Toward month end, news of a compromise between potential government parties and the Italian president stabilised financial markets. Although German/French spreads remained well above 2%, in the short term the worst appeared to be over. Meanwhile, Mr Trump introduced a range of tariffs on Canadian, Mexican and European exports, primarily relating to metals. Goldman Sachs estimated that these tariffs alone could add up to 0.5% to US inflation. Should the Federal Reserve have needed a reason to hike further, this could have been it.

Of course the US dollar rose in value. The “good news” from Italy had lifted investment grade and high yield prices, areas in which we had added. However, the stronger dollar and protectionist stance from Trump hampered emerging market (EM) prices. Thankfully we had been able to use the recent volatility to increase the size of our emerging market short to around 15% of portfolio value (to offset our high yield preference). By month end this was working nicely.

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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.

Tuesday, June 19, 2018, 11:31 AM