Liontrust Monthly Income Bond Fund

Q1 2018 review

The Fund returned -1.1% over the quarter, outperforming the IA Sterling Bond sector average of -1.3% and the iBoxx Sterling Corporates 5-15 Years Index’s -1.7%*.

 

A widespread resurgence of volatility resulted in a testing period across equity and fixed income markets, despite a strong start to the year. The sell-off was fuelled by fears of rising inflation and potentially faster-than-expected policy tightening, before being exacerbated by growing geopolitical tensions amid the threat of a global trade war.

Our underweight position to interest rate risk was the main contributor to performance over Q1: this benefited from rising government bond yields, reflecting increasing market expectations of higher inflation and interest rates.

This was despite a late March rally in government bonds as investors looked for safe havens in the wake of renewed geopolitical uncertainty.

The UK saw a flattening of the curve over the period as the rise in yields was sharper at the shorter end of the market, with two- and five-year yields up 38 and 39 basis points (bps) respectively while 10-year yield rose 16bps. We saw more modest flattening in the US, although yields still rose significantly across the curve, while the rise was less pronounced in Europe, with 10-year bund yields up just 7 basis points.

Against a backdrop of underperforming credit, stock selection still proved a significant contributor to returns as holdings within our core sectors, particularly telecommunications and insurance, outperformed the broader market. Sector allocation was a slight drawback overall, however, with our overweight in financials, among the worst-performing sectors over the period, a detractor.

Trade tensions between the US and China escalated over the quarter, with the US and China both announcing potential tariffs on billions of imports. While these initial exchanges have been relatively insignificant in the context of their respective economies, investors have recognised the potential impact of further escalation and a protracted period of uncertainty on the global economy.

While markets have endured a tumultuous start to the year, underlying economic fundamentals have remained strong throughout, with data releases continuing to be broadly positive. This strength has not gone unnoticed by Central Banks and the Federal Reserve cited it as a key component in the decision to raise interest rates another 25 basis points at Jerome Powell’s first meeting as Chair in March.

The Bank remained fairly dovish however, maintaining their outlook for three more rate rises this year, and this calmed market fears of an accelerated hiking cycle to some extent.

In the UK, despite the decision to keep rates on hold in March, the Bank of England also appears to be accelerating policy tightening, indicating a second rate rise in six months is a distinct possibility when the Monetary Policy Committee (MPC) reconvenes in May. This was further supported by ongoing progress in Brexit negotiations, as a transition deal has now been agreed.

Moving to Europe, the European Central Bank also acknowledged the broad-based strength of the economy, revising up its GDP forecasts for 2019, and Mario Draghi delivered an unusually hawkish message suggesting the end of the quantitative easing (QE) programme is drawing nearer.

There was moderate trading activity over the first quarter as the Fund invested strong inflows and in the latter stages, we looked to take advantage of recent weakness in credit markets and exploit value opportunities.

Over Q1, we increased exposure to the housing association sector, where we see good value opportunities at current levels in names with strong credit profiles. One such example saw the fund establish a position in Places for People Homes, which builds new and renovates existing properties as well as leisure facilities.

We also executed several relative value switches within financials following underperformance, participating in new issues from HSBC and Nationwide as both came to market at attractive valuations and also taking opportunities in existing holdings such as Axa.

Despite a turbulent start to the year, the robustness of the underlying economic fundamentals continues to reinforce our outlook, which remains in line with previous quarters. As such, we maintain a preference for corporate bonds and hence remain overweight credit risk within the portfolio, seeing recent market weakness as an opportunity as corporate fundamentals remain strong. 

The expected acceleration of central bank policy tightening and rising inflation supports our belief that government bond yields will rise. In order to exploit this, our short interest rate risk position is currently expressed through the UK, US and German markets and we will continue to actively manage this allocation between markets where we see value opportunities.

At a sector level, we are comfortable to remain overweight insurance, financial services and telecoms, which are supported by attractive valuations and higher credit quality. This is consistent with our positive view on credit markets given the favourable economic backdrop and supportive technical factors.

 

Against this, we are underweight industrials, oil & gas and utilities, due to an unfavourable risk/reward profile. We are also cautious on the consumer sector following a raft of profit warnings combined with a challenging operating outlook.

 

 

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

 

Mar-18

Mar-17

Mar-16

Mar-15

Mar-14

Liontrust Monthly Income Bond B Gr Inc

4.2

13.3

-1.3

7.6

3.0

iBoxx Sterling Corporates 5-15 years

1.6

10.0

0.8

13.2

2.5

IA Sterling Corporate Bond

1.7

8.9

-1.0

10.6

1.3

Quartile

1

1

3

4

1


*
Source: Financial Express, as at 31.03.18, 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.

Tuesday, April 24, 2018, 3:37 PM