Liontrust Monthly Income Bond Fund

Q4 2019 review

The Fund returned 2.3% over the quarter, outperforming -0.1% from both the IA Sterling Corporate Bond sector and the iBoxx Sterling Corporates 5-15 Years Index*


Our underweight interest rate risk and overweight credit beta positions both contributed to strong relative performance, as trade developments between the US and China, ongoing support from central banks and the Conservative victory in the UK General Election provided a favourable market backdrop.

The underweight duration exposure was a significant positive as government bond yields rose across developed markets. UK 10-year Gilt yields climbed by over 30 basis points to finish the year at 0.82%, while German 10-year bund yields increased 39bps and US 10-year Treasury yields by 25bps to end 2019 at -0.19% and 1.92% respectively.

As we saw in Q3, corporate bonds outperformed government and the portfolio benefitted from its overweight credit position, with stock selection and overweight exposure to insurers and banks having the largest positive impact. Key contributors included subordinated bond holdings as their credit spreads tightened in the risk-on environment and our domestically focused banks and building societies, such as Coventry Building Society and Nationwide, also performed strongly on the back of the election result. Our underweight positioning to utilities was a detractor as the rallied on the back of nationalisation concerns receding following the Tory majority.

In October, UK Prime Minister Boris Johnson surprised markets by delivering on a Brexit deal but was forced to extend the deadline until the end of January 2020, after being unable to get the new deal through Parliament. The government managed to pass a bill for a General Election in December with Johnson hoping to win a majority in order to progress with his Brexit deal.

The resulting large majority for the Conservative party was positively received by markets, with parliament passing the European Union Withdrawal Bill in the following days. UK assets responded well to these developments, particularly domestic banks and utility companies given Labour’s stated policy of nationalisation for the latter. Sterling also strengthened on the back of the election result.

Despite the result, there remains much to be done during the transition phase and with Johnson maintaining the UK would not seek an extension to the end 2020 deadline, there is still a risk of a cliff-edge departure from the European Union at the end of the year.

In the US, there was positive news on the trade picture with China, with the announcement of a phase one deal stopping further tariffs due in December. In addition, President Trump announced there would be no tariff increases on the European automotive sector.

Meanwhile, the Federal Reserve announced a further 25 basis point rate reduction in Q4, making it three cuts in 2019. This was in response to softening economic data, particularly in relation to manufacturing and consumer confidence. Commenting at the time, Fed Chair Jerome Powell signalled the Bank had finished its monetary easing, subject to economic data developments.

Towards the end of the quarter, economic surveys improved and coupled with the positive trade developments, this resulted in a steepening of the US government bond yield curve. This has helped alleviate fears over a US recession, which increased earlier in 2019 due to the inversion in the curve.

In the UK, the Monetary Policy Committee kept interest rates on hold, although two members voted in favour of a cut. Economic data has slowed but the MPC is expecting an improvement following positive Brexit developments.

Finally, the European Central Bank restarted its Corporate Sector Purchase Programme in an attempt to support the eurozone economy. New ECB president Christine Lagarde echoed what her predecessor Mario Draghi had advocated, that fiscal spending is required to stimulate the economy, and called for an increase in government spending across the eurozone.

Overall, there has been a sharp turnaround from 12 months ago, with central banks pivoting from their tightening stance to injecting monetary policy stimulus to support growth.

There was a strong flow of new issuance in the final quarter of the year and the portfolio took advantage of the new issue premium on offer in an inaugural sterling issue from Logicor. This is a real estate business focusing on warehouse and logistics properties, which benefits from the growth in e-commerce.

We also took advantage of strong relative performance in some of the portfolio’s subordinated financial holdings where spreads had compressed to historic lows in relation to senior parts of their capital structure. Holdings such as Nationwide, Coventry Building Society and Scor were all reduced over the quarter as we lowered overall credit exposure.

Elsewhere, we looked to reduce risk in other areas of the portfolio following strong performance, including switching out of our holding in Vodafone hybrid bonds back into their senior equivalents. We reduced our spread duration in names such as Kelda Water, switching from longer to shorter maturity bonds.

On duration, we reduced the size of the interest rate short over the quarter from -5 to -4 years. Given the positive progress on Brexit and the Conservative victory in the General Election, we increased the UK position, ending the quarter at -3.0 years short. Against this, we reduced the US position from short to flat and the short to Europe to -1.0 years on relative valuation grounds.

Looking forward, we remain firm in our belief that the macro backdrop for credit markets is supportive. Notwithstanding the ongoing weakness in the global economy, we see three key factors that reinforce our belief.

First, despite the warning lights, the risk of a global and US recession is low. The service sector, the largest component of developed economies, remains strong, bolstered by low unemployment, positive real wages and robust housing markets.

Second, central banks continue to be supportive, with the US Federal Reserve cutting rates for the first time since 2008, and the ECB announcing a fresh stimulus package. Finally, corporate credit fundamentals remain relatively strong, particularly within investment grade, typified by high interest coverage ratios, stable net leverage ratios and low levels of defaults.

We also continue to believe government bonds are overvalued and expect yields to rise as macro concerns abate, although volatility is likely to persist over the short-term as some Brexit uncertainty and trade war concerns remain. As such, we retain an underweight position to interest rate risk, spread across the UK, Germany and the US, and will continue to actively manage this allocation.

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

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust Monthly Income Bond B Gr Inc

9.4

-3.0

8.9

9.4

1.4

iBoxx Sterling Corporates 5-15 Years Index

10.7

-1.7

5.7

10.8

1.2

IA Sterling Corporate Bond

9.5

-2.2

5.1

9.1

-0.3

Quartile

3

4

1

2

1

 

*Source: Financial Express, as at 31.12.19, primary share class, total return, net of fees and interest reinvested.

 

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.

Tuesday, January 21, 2020, 10:10 AM