Liontrust SF Corporate Bond Fund

Q4 2017 review

Following a strong first three quarters of 2017, the Fund again outperformed its benchmark in Q4, registering returns of 2.4% against 2.0% from the iBoxx Sterling Corporate Index*.

As has been the case all year, stock selection within financial services, banks, telecoms and utilities was a key driver of returns.

Our underweight duration position had a negative impact in Q4 – we are underweight long-dated maturities, which outperformed over the quarter – but sector positioning remained a positive, particularly our overweights in insurance and telecoms and underweight in utilities.

Looking at credit markets more generally, several established positives remain in place, namely favourable technicals, a supportive economic backdrop (particularly the ongoing recovery in Europe and low default rates), healthy corporate balance sheets, and the attractions of yield in a low-yield environment.

Over the quarter, we remained short duration although reduced the size of this position in December for tactical reasons given ongoing uncertainty about Brexit developments.

We also continued to move up the capital structure within subordinated banks and insurance names, added to our telecoms exposure and participated in new issues from names including Bunzl and student accommodation provider Liberty Living.

On the macro front, the Bank of England announced its first rate hike in a decade during the period (as widely expected), although this was accompanied by dovish commentary that took the market by surprise. Elsewhere, Brexit progress stalled in December and Conservative Party turmoil continued.

Days of talks between UK and European negotiators eventually ended in what Theresa May called a hard won agreement to move things to the next stage although months of debate on citizens’ rights, the cost of the divorce bill and issues such as borders with Ireland are still to come. As ever with Brexit, the Prime Minister’s so-called victory was followed shortly by setback, with Conservative rebels in the Commons defeating the Government in a key vote. MPs backed an amendment giving them a legal guarantee of a vote on the final Brexit deal struck with Brussels.

In the US, the Federal Reserve also announced a rate rise in Q4, its third of 2017, which the Bank said underscores solid gains in the US economy. Data continues to strengthen and the last days of the year saw positive progress as President Trump managed to pass his tax bill.

Moving to Europe, the European Central Bank’s meeting in October was more dovish than expected, with policymakers reducing the size of the quantitative easing programme but extending its length.

As we move into 2018, our outlook remains consistent with previous quarters, in line with long established factors such as negative real rates from nominal bonds in the UK and the low absolute level of government bond yields.

 

Against such a backdrop, we are bearish on rates as central bank policies increasingly move to a tightening bias but remain constructive on corporate bonds based on strong fundamentals and technicals. Economic survey data in the US and Europe supports a positive outlook, although the UK is clouded by Brexit uncertainty in the near term.

 

At portfolio level, we are comfortable to remain overweight insurance and telecoms and underweight utilities.

 

Discrete years' performance* (%)

 


Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Liontrust Sustainable Future Corporate Bond 2 Inc

7.2

10.5

0.5

9.8

1.8

iBoxx Sterling Corporate

5.0

11.8

0.6

12.3

1.9

IA Sterling Corporate Bond

5.1

9.1

-0.3

9.8

0.6

Quartile

1

1

1

3

1

 

* Source: Financial Express, primary share class, total return (net of fees and interest reinvested), to 31.12.17

 

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 Funds managed by the Sustainable Future 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. The Monthly Income Bond Fund has a Distribution Yield which 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. The Distribution Yield and the Underlying Yield is the same for the SF Corporate Bond 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.

Thursday, January 25, 2018, 4:27 PM