Liontrust Monthly Income Bond Fund

Q1 2019 review

The Fund returned 3.1% over the quarter, lagging the IA Sterling Bond sector average of 3.9% and the iBoxx Sterling Corporates 5-15 Years Index’s 4.5*.  

 

Credit markets posted strong returns as they recovered from widespread weakness in Q4 and a combination of economic slowdown and dovish central bank rhetoric saw corporate and government bonds both perform strongly.

This resurgence in government bonds led to a sharp drop in yields across developed markets, with 10-year US Treasury yields down 27 basis points (bps), 10-year UK Gilts down 28 bps and 10-year German Bunds down 31bps. The severity of yield moves resulted in an inverted US curve, with short-term yields above long term, highlighting concerns over the longer-term economic outlook. This resulted in underperformance from the portfolio’s underweight position to interest rate risk.

In contrast, corporate bond outperformance over the period meant our overweight in credit delivered a positive contribution and the Fund benefitted from strong stock selection, particularly within insurance, banks and telecoms. But while sector allocation to these core areas was also positive, this was largely offset by our exposure to UK gilts, which was a detractor versus the benchmark as government bonds underperformed corporates.

We also saw a negative contribution from the Fund’s net short high yield position, as this end of the credit market outperformed investment grade over the period.

On the macro front, global markets enjoyed a marked recovery over the first quarter following a difficult end to 2018. There were positive returns across almost every asset class as investors were buoyed by geopolitical developments and dovish central banks, which outweighed lingering concerns over a slowdown in global GDP growth.

Several of the issues that dogged sentiment last year saw signs of progress, with developments in the US-China trade dispute resulting in a decision to delay higher tariffs on Chinese goods.

Brexit continued to dominate headlines in the UK however, as the originally scheduled deadline of 29 March passed without resolution. Prime Minister Theresa May saw her withdrawal agreement rejected three times, continuing the stalemate despite garnering the support of some of the more outspoken Brexiteers in the most recent vote. Overall, the situation remains fluid and difficult to predict – with an extension now pushed out until October – but investors appear to have taken the diminishing likelihood of a no deal scenario as positive.

While political developments were generally encouraging over the quarter, economic data remained mixed and, as stated, concerns are growing over the apparent slowdown in growth. Data has been particularly weak across the eurozone, nowhere more so than in Italy, which slipped into technical recession following two successive quarters of negative economic growth. Germany was a further cause for concern, producing zero GDP growth and demonstrating continued weakness in Purchasing Managers Index (PMI) levels.

In response, the European Central Bank (ECB) appeased investors by taking a more dovish stance, keeping rates on hold and announcing there will be no rises until at least 2020, having previously only ruled out the possibility until this summer. The ECB also announced the reintroduction of Targeted Long-Term Refinancing Operations (TLTROs) to address concerns over the impact on the banking sector of an extended period of negative interest rates.

Continued economic weakness in the US drove a turnaround in commentary from the Federal Reserve, which grew also increasingly dovish over the period. Chair Jerome Powell stated the Bank has the "luxury of patience" in deciding whether to raise rates again, pointing in particular to sluggish inflation. Its decision to keep rates on hold resulted in the first quarter without a hike since Q3 2017, with the Fed dot plot now indicating no expectations of any rises this year. The Fed also revealed plans to stop its balance sheet reduction program earlier than expected in September and a downward revision in economic forecasts.

Meanwhile, despite UK data being generally positive, the Bank of England also continued to keep rates on hold as Brexit uncertainty outweighs underlying strength in the economy.

Against this backdrop, there was modest portfolio activity. Corporates took advantage of market conditions: new issuance was relatively high over the period and better absorbed by the market than initially anticipated, with premiums narrowing significantly as a result. We also took advantage, participating in some of these new issues at attractive valuations.

We established a position in Notting Hill Housing Trust, a housing association providing affordable and social accommodation. The new issue offered an attractive entry point to a high-quality issuer, rated A at the senior level.

We also participated in a new issue from Vodafone, switching out of some of our existing holding in the sterling hybrids to capture attractive relative value on offer in the new US dollar hybrid issue. This issuance was the last part of the funding required for the acquisition of Liberty Global’s central and eastern European assets. Elsewhere, we also increased exposure to HSBC, participating in a new issue offering relative value relative to the secondary curve.

As in the final quarter of last year, we also engaged in further repatriation of some US dollar holdings back into sterling or euro equivalents. As higher hedging costs continue to demand higher spread pick-ups to compensate, the incremental pick-ups on offer have generally compressed again after widening during the weakness seen in December 2018.

This drove a switch from US dollar to sterling within AT&T and Credit Agricole bonds and we also made relative value moves out of Standard Chartered USD bonds into Banco Santander GBP and out of Zurich USD into a number of existing sterling insurance holdings.

We continue to believe government bonds are overvalued and expect yields to rise as concerns over a no deal Brexit and global trade wars abate. As such, we maintained the Fund’s duration position at five years short relative to the benchmark, currently expressed through a three-year short to the UK, and a two-year short to the German market.

We increased the short to the UK as we continue to believe the Bank of England is keen to raise rates in the event of an orderly Brexit. While we see this as the most probable outcome, with recent events reducing the likelihood of a no-deal, the lack of any further clarity continues to temper our conviction in the short term so we continue to express a portion of the short through the German market.

We elected to reduce the German position during the period however, and close the short to the US, as commentary from both central banks became increasingly dovish and neither is expected to raise rates before 2020.

Looking to the rest of the year, we continue to believe the macro backdrop for credit markets remains positive, supported by solid economic growth, low default rates, loose monetary policy and positive trends in corporate earnings. While corporate bond valuations have recovered significantly from the lows seen in Q4 2018, we see scope for further improvements as technical and sentiment concerns subside, shifting market focus back to the relatively strong underlying macroeconomic and corporate fundamentals.

Our core sector preferences within insurance and telecoms are supported by attractive valuations and higher credit quality and remain unchanged over the longer term.

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

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust Monthly Income Bond B Gr Inc

1.1

4.2

13.3

-1.3

7.6

iBoxx Sterling Corporates 5-15 years

4.5

1.6

10.0

0.8

13.2

IA Sterling Corporate Bond

3.0

1.7

8.9

-1.0

10.6

Quartile

4

1

1

4

4


*
Source: Financial Express, as at 31.03.19, primary share class, total return, net of fees and interest reinvested.


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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 majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move 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.

 

Disclaimer

 

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.

Wednesday, April 24, 2019, 3:14 PM