Liontrust SF Corporate Bond Fund

Q1 2018 review

The Fund returned -1.8% over the first quarter, lagging the IA Sterling Corporate Bond sector average of -1.3% and the iBoxx Sterling Corporate Index’s -1.5%*.


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.

Credit underperformed in these conditions although the Fund’s overweight position was actually a positive contributor to returns, primarily through our allocations to telecoms and banks. While financials were among the worst-performing sectors over the period, we also benefited from stock selection within insurance and financial services following recent trades to move up the capital structure into more senior bond issues.

Our underweight position to interest rate risk was also a positive over the quarter, with government bond yields rising across major developed markets as a reflection of increasing expectations of higher inflation and rates. This trend reversed later in March as geopolitical uncertainty spiked.

The combined positive effect of these allocations was offset by stock-specific issues however, namely our holding in Dignity after the company announced a profit warning for 2018. Increased competition, combined with the growth of price comparison websites for funerals, has resulted in Dignity losing market share and price cuts implemented to counter this led to reduced profit expectations for 2018.

This led to a downgrade by S&P to BB from BBB but we continue to hold our position as we feel the market overreacted to the news as one of the company’s primary drivers, the crematoriums business, continues to perform strongly.

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

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 key in the decision to raise interest rates another 25 basis points in March. The Bank remained fairly dovish however, maintaining its outlook for three more rate rises this year, and this calmed 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 tightening, indicating a rise 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.

In terms of activity over the period, new issue supply has continued to be strong and the Fund has taken full advantage by investing in several new names. We added Dwr Cymru (Welsh Water) after it came to the market with bonds offering attractive value: it has the highest credit rating among companies in the water utilities sector, in part due to its not-for shareholder dividend model. We also participated in new issues from Nationwide Building Society and Southern Gas Networks, who came to the market with senior issues at attractive valuations.

During the period, we have been increasing exposure to the housing association sector, where we see good value opportunities at current levels in names with both strong credit and sustainability profiles. Companies in this sector have a strong social mission in providing affordable housing and other social-mobility related assistance to their residents, and as such are strongly exposed to our Building better homes theme.

Over the quarter, we initiated positions in Places for People Homes, which builds new and renovates existing properties as well as leisure facilities, and took part in a new issue from London and Quadrant Housing Trust.

Towards the end of the period, we looked to take advantage of the recent weakness in credit markets and exploit value opportunities. This was particularly prevalent in the insurance sector as we added to positions in Cloverie (Zurich Insurance) and AXA. Against this, we reduced our exposure to the consumer sector where we are cautious following a raft of profit warnings amid challenging operating conditions.

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 remain overweight credit risk, seeing recent market weakness as an opportunity to find additional value 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.

At 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 technicals. Against this, we are underweight industrials, oil & gas and utilities, due to our SRI analysis coupled with 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 Sustainable Future Corporate Bond 2 Inc

2.6

12.3

-1.8

11.1

2.6

iBoxx Sterling Corporate

1.6

10.7

0.1

13.4

2.5

IA Sterling Corporate Bond

1.7

8.9

-1.0

10.6

1.3

Quartile

1

1

4

3

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 Distribution Yield is also the Underlying Yield for this fund.

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, 4:07 PM