Liontrust GF High Yield Bond Fund

Q3 2020 review

The Fund (C5 sterling accumulation class) returned 3.7%* in sterling terms in Q3 2020 while the ICE Bank of America Merrill Lynch Global High Yield Index (GBP hedged) comparator benchmark returned 3.8% and the average return for the IA Sterling High Yield reference sector was 3.3%. The primary B5 US dollar share class returned 3.8% while the ICE Bank of America Merrill Lynch Global High Yield Index (USD hedged) comparator benchmark returned 4.1% and the average return for the EAA Fund USD High Yield Bond (Morningstar) reference sector was 4.2%.

 

We also compare the Fund’s performance to a leading Global High Yield ETF (seeking to outperform by 1.5% a year). The Fund’s C5 sterling shares class beat the return of the ETF in the quarter and has now outperformed it by around 4% since inception (June 2018).

 

The Market

After a summer of steady, decent high yield returns and plenty of new issuance, September saw a return of some volatility, ending the grind lower in credit spreads that prevailed in the summer months. It was the type of small-scale volatility we’ve gotten used to in recent years that is better described as mild ETF indigestion. In such a market dynamic, the price action is led by the actions of the passive funds, which seem to have flightier capital than the typical mutual fund.

When ETFs face, or fear facing, outflows, they seem to sell what’s easiest first, with the impact being more liquid bonds leading a downturn. For example, a BB-rated telecom may be seen as higher beta than B or even CCC rated bonds from cyclical sectors, certainly over short periods. One broker comment I read last week described Virgin Media (UK cable and broadband provider) as a cyclical. I believe this illustrates a dynamic within the market where fear of liquidity and volatility drives thinking on actual default risk. I’ve often thought this to be the case with the rise of ETFs and indeed the popularity, in some circles, of short duration High Yield Funds.

In Q3, the global high yield market produced a return of 3.8% in sterling terms, after a -1.1% return in September. The US high yield market outperformed its European counterpart during the quarter, producing a return of 4.3% in sterling, whilst Europe produced a return of 2.7%. The strong performance of US high yield has played out most clearly in CCC-rated bonds, the lower quality end of the market, which produced a return of 7.7% in Q3 (sterling). As mentioned, in the September market sell-off, lower quality bonds did not particularly underperform.

The Fund

The Fund’s Q3 performance was similar to that of the global high yield market, and performance since launch remains very good, with the Fund in the first decile of the peer group.

At a sector level, the stand-out performer was banking, where our handful of major US bank (Goldman Sachs, JP Morgan, Citigroup) perpetual bonds produced strong returns. There were no major negative marks on the portfolio, though the biggest detractor to performance was our stock picking within the energy sector. Energy, where we are underweight, produced returns in line with the market, but our holding in Enquest saw a fall in price of c.10% in the quarter. Enquest, a 0.8% holding, is a UK-based oil company where our thesis remains that the company will refinance debt in the short to medium term. Although this is substantially the riskiest holding in the Fund, we are not overly concerned by its underperformance in Q3, during which it announced good operating results.

The Fund continues to have low turnover. Given the environment we are in, this is a good illustration of the robustness of our process, where we focus on quality and avoiding accumulations of thematic risk.

The Fund participated in a selection of new issues, with a number of them being existing holdings. This included Czech real estate business CPI Property; Davita, a kidney-focussed healthcare company; and French electricity generator EDF. One brand new holding taken through the new issue market is PaymentSense. This is a fast growing, UK-based provider of payment equipment and services to the SME sector. Its growth profile and disruptive nature, whilst also in a competitive space, made this feel close to an equity-like investment case, but came with a sizeable 8% coupon. As a higher risk proposition, this holding is less than 1% of the Fund. 

Outlook

The global high yield market started October with a credit spread of slightly above 5.5%. The spread excluding CCC & energy is also a useful measure of value, given we are unlikely to invest the marginal dollar in these areas; this spread began the month at 4.3%. Based on the long-term history of the asset class, this is decent value in our asset class.

However, as cases rise and versions of lockdown persist, further damage to the economy feels inevitable, particularly in specific areas. It is therefore right to question how much of the yield will be eroded by defaults. Our bias towards high quality and our avoidance of accumulations of thematic, cyclical risk, as well as our light exposure to particularly Covid-sensitive sectors, leaves us sanguine on the default risk within the portfolio.

With all this uncertainty, our concrete convictions rest in the companies we lend to and the idiosyncratic nature of the Fund we have constructed for you. We believe this should provide resilience to defaults in addition to a decent source of income and returns, even if we experience volatility in the coming weeks and months.

At the end of September, the gross redemption yield on the Liontrust High Yield B5 class was 5.5%. We believe our high-quality high yield fund continues to represent good long-term value to our clients in a world of very low yields and uncertainty around equity dividends.

Discrete 12 month performance to last quarter end (%)*:

 

 

Jun-20

Jun-19

Liontrust GF High Yield Bond C5 Acc

-1.3

7.1

ICE BofAML Global High Yield Hedge GBP

-1.6

6.5

IA Sterling High Yield

-2.3

5.2

Quartile

2

1

 

Discrete data is not available for five full 12 month periods due to the launch date of the portfolio.

Fund positioning data sources: UBS Delta, Liontrust.

 

*Source: Financial Express, as at 30.09.20, total return (net of fees and interest reinvested).

 

**Source: Financial Express, C5 share class, total return, net of fees and interest reinvested. As at 30.09.20. The primary share class for this Fund is in US dollars (B5) but we are showing the C5 sterling-hedged class to compare against the IA Sterling High Yield sector.

 

While the managers of the Fund seek to outperform a leading Global High Yield ETF by 1.5% a year net of fees over rolling three years, this is not a formal objective. There can be no guarantees this will be achieved over the stated time period. The formal objective of the Fund can be found in the Prospectus.

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. 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

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, October 14, 2020, 12:35 PM