Liontrust Monthly Income Bond Fund

Q2 2018 review

The Fund returned -1.1% over the quarter, lagging the IA Sterling Bond sector average of -0.2% and the iBoxx Sterling Corporates 5-15 Years Index’s 0.0%*.


Both our overweight credit position, both sector and stock selection, and underweight to interest rate risk contributed negatively over the period.

Rising geopolitical tensions dominated headlines as well as markets over the quarter, particularly in Europe and the US, offsetting ongoing resilience in underlying economies and corporate earnings data.

In Europe, the Italian election saw a coalition formed between the populist Five Star Movement and the League, sparking fears over the country’s future membership of the EU. This triggered a sell-off in Italian assets and corporate bonds more broadly came under pressure, particularly within the financial sector where the Fund is overweight.

Global trade tensions also continued to escalate, particularly between the US and China, as the Trump administration took a more aggressive stance on imposing import tariffs. The fallout has not been limited to China however, with emerging markets significantly affected and European concerns growing over tariffs being extended to car imports.

While markets attempted to weigh the impact of these geopolitical pressures against underlying economic strength, the Federal Reserve had no such reservations, raising interest rates a further 0.25% in June. It also signalled another two hikes are likely over the remainder of 2018, with three more in 2019.

The disparity between the US and Europe on this front appears to be growing, as the European Central Bank (ECB) pledged not to raise rates before next summer although it is anticipating an end to the quantitative easing (QE) programme as 2018 comes to a close.

There was a similar story in the UK where economic momentum appears to have stalled, resulting in a drop in GDP growth forecasts. This led the Bank of England to decide against a widely expected interest rate hike at the May meeting.

Against this backdrop, investment grade credit spreads widened and our overweight in credit was a negative. The US market underperformed both the UK and Europe, which led to a negative stock selection impact from our US dollar denominated holdings. As stated, financials was among the worst-affected areas, particularly insurance, and our overweight position hit returns over the quarter.

Despite rising initially, UK Gilt and German Bund yields fell over the period in the wake of a flight to safe haven assets post the Italian election. This combination of moves saw our underweight interest rate risk position act as a further drag on performance.

Q2 was a modest period in terms of portfolio activity as we added a position in insurance firm SCOR and re-initiated a position in Allianz. We had sold the latter when we felt the bonds had reached fair value but recent market movements have resulted in fixed-for-life bonds underperforming, offering attractive value and yield relative to other parts of the market.

These purchases were part funded by the disposal of Phoenix Group on relative value grounds.

Elsewhere, we also established a small position in Telecom Italia following the outcome of the recent board shake up, which we believe is a positive for credit investors. The company has reiterated its commitment to a deleveraging plan, with the ultimate goal to regain investment grade status, and is on track to achieve this over the next 12 months owing to continued stable operating performance, improving free cash flow and potential asset sales.

We also established positions in Motability, Severn Trent and GlaxoSmithKline during the period, taking advantage of recent market weakness to secure exposure to established high-quality companies with strong fundamentals at attractive valuation levels.

On the interest rate risk front, our position was broadly unchanged over the period, remaining 4.75 years short relative to the benchmark. The allocation between markets has changed slightly however, as we moved 0.5 years of the position from the UK to the German market on a relative value basis, with the Fund now 2.25 years short the UK, two years short the German market and 0.5 years short the US.

We varied the allocation between these markets over the quarter, closing the US position in April following significant underperformance in US Treasuries and re-opening it as the bonds benefitted from the flight to safe haven assets late in the period.

Looking to the rest of 2018, while growing geopolitical uncertainty has been a headwind over the quarter, supportive economic conditions and continued positive momentum in corporate earnings leave our outlook broadly unchanged.

We remain bearish on rates as the Federal Reserve continues on the policy tightening path, the ECB ends its QE program, and the UK looks set to raise rates before the end of the year having recovered from a temporary blip in economic momentum. We continue to express our underweight interest rate risk position through the UK, US and German markets and will manage this allocation where we see value opportunities.

From a credit perspective, we maintain our overweight beta position through sector preferences within insurance, financial services and telecoms, supported by attractive valuations and higher credit quality.

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

 

Jun-18

Jun-17

Jun-16

Jun-15

Jun-14

Liontrust Monthly Income Bond B Gr Inc

0.1

14.4

3.2

2.8

8.4

iBoxx Sterling Corporates 5-15 years

0.7

7.1

8.6

6.4

8.2

IA Sterling Corporate Bond

0.6

6.4

6.1

4.3

6.5

Quartile

4

1

4

4

1

 

*Source: Financial Express, as at 30.06.18, primary share class, total return, net of fees and interest reinvested.

 

For a comprehensive list of common financial words and terms, see our glossary here.

 

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 the Fund 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. The Distribution Yield is higher than the Underlying Yield because the fund distributes coupon income and the fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining the fund’s capital appreciation.

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.

Monday, July 23, 2018, 10:57 AM