Liontrust GF Strategic Bond Fund

October 2020 review

The Liontrust GF Strategic Bond Fund was flat* in US dollar terms in October. The average return from the EAA Fund Global Flexible Bond (Morningstar) sector, the Fund’s reference sector, was 0.2%.

 

Market backdrop

 

From a backward-looking perspective, it was hard for the US to pass a new fiscal stimulus bill ahead of such a bifurcating election. Risk markets oscillated on the will they/won’t they come to a compromise before then turning their attention to the latest battleground states’ polling data and the fight for the control of the Senate. The Liontrust Global Fixed Income Team held a webinar on Friday 6 November to share our views on the implications of the US election results.

The other large source of uncertainty for the markets remains the ongoing Covid-19 pandemic. Many western countries have had to tighten societal restrictions again to temper the spread of the virus; some of these policies are being described as second lockdowns, but very few are as restrictive as the lockdowns during the first wave. In the meantime, countries that have contained the virus more successfully have also seen better economic growth: the Chinese economy grew by 4.9% in Q3 2020, taking the year-to-date number to 0.7%. Achieving a positive growth rate in 2020 is no mean feat! Worldwide growth rates in 2021 will partly depend on when a vaccine is released. We are completely confident that there will be a vaccine; there are now 12 candidates in Phase 3 trials. What matters far more is the efficacy of the vaccines; the higher the efficacy, the greater the impact on the R number and the lower the percentage of the population that would need to be inoculated to achieve herd immunity.

One thing that is certain is an expansion of quantitative easing at the European Central Bank’s December meeting. It stated that once it has its new macroeconomic projections in December, “… the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation and to ensure that financing conditions remain favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path.”

Interestingly, the ECB is also continuing to encourage higher fiscal spending to counter the crisis, with loose monetary policy enabling governments to fund fiscal deficits very cheaply. Add to this the EU Recovery Fund and one can see numerous tailwinds for the European economy in 2021. With a bare-bones (goods only) post-Brexit trade deal likely to be agreed during November, the risks to the EU27 are further diminished. With the stage set for a great growth rebound in 2021, the yields on European government bonds are incredibly hard to justify even with the ECB buying.

Rates

The Fund has a duration of approximately 2.75 years, with a strong preference for US exposure over that in Europe. This strategic preference for US duration, viewed by us as the least worst value of the major developed government bond markets, has been hugely beneficial for the Fund over the last 2 years. However, it was costly during October with German Bunds rallying and US Treasury yields rising; the differential between the two at the 10-year tenor widening by 25 basis points. One of the advantages of owning US interest rate risk is that it does usually create a counterbalance to credit risk within the Fund; so even with Treasury yields rising, the Fund managed to eke out a marginal positive return for the month. 

During October we switched more of our longer dated US exposure into the “belly of the curve,” the 5 to 15-year maturity bucket. This leaves the Fund’s over 15-year duration contribution at about 0.75 years, half of which is in Treasury Inflation Protected Securities (TIPS). These continued to outperform their conventional cousins as markets looked toward a longer-term reflationary expansion.

Allocation

Credit started the month strongly, so we took advantage of the buoyant markets to trim our high yield overlay, the iTraxx Xover CDS Index. Intra-month this reduced the Fund’s high yield exposure from 27.5% down to 22.5%, just above our long-term neutral position of 20%. Market fears over the economic impact of a Covid-19 second wave then created a risk-off environment with equities falling and credit spreads widening. High yield spreads witnessed a proportionately higher impact than their investment grade cousins; we therefore reduced investment grade credit down to the 50% area, preferring to spend the Fund’s risk budget on taking high yield back up to 27.5%. Within high yield, we retain a focus on the better quality, listed issuers; we also note that due to survivor bias, the iTraxx Xover has significantly improved in quality since the roll into the new series in September.

Selection

During the reduction in investment grade risk from the 55% area down to 50% we took the opportunity to exit various bonds which we believed had become fully valued. Holdings in Constellation Brands, Bristol Myers Squibb, Takeda Pharmaceutical, AIA, Prudential, JP Morgan and Goldman Sachs were all sold.

On the relative value side, we switched the Fund’s holding in the Pershing Square 2022 maturity bonds into the new 2030 maturity issue. Similarly, we traded the 2024 Global Switch Bonds into the 2027s. Neither of these switches should make or break the Fund, but they should help generate incremental returns over time as we continue to focus on both quality and value within credit.

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

 

 

Sep-20

Sep-19

Liontrust GF Strategic Bond B5 Acc

6.4

7.4

EAA Fund Global Flexible Bond - USD Hedged

1.6

2.2

 

*Source Financial Express, as at 31.10.20, total return, B5 share class.

 

**Source Financial Express, as at 30.09.20, total return, B5 share class. 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.

 

Adjusted underlying duration is based on the correlation of the instruments as opposed to just the mathematical weighted average of cash flows. High yield companies' bonds exhibit less duration sensitivity as the credit risk has a bigger proportion of the total yield; the lower the credit quality, the less rate-sensitive the bond. Additionally, some subordinated financials also have low duration correlations and the bonds trade on a cash price rather than spread. 

 

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.

Monday, November 9, 2020, 11:09 AM