Liontrust SF Corporate Bond Fund

Q4 2019 review

The Fund returned 1.1% over the quarter, outperforming the -0.2% return from the iBoxx Sterling Corporate All Maturities Index and the IA Sterling Corporate Bond sector average of -0.1%*.


After another year of geopolitics dominating sentiment, the final three months of 2019 proved positive for global financial markets as we saw trade developments between the US and China, ongoing support from central banks and the Conservative victory in the UK General Election providing some Brexit clarity.

Against this backdrop, our underweight interest rate and overweight credit beta positions both contributed to the Fund’s strong relative performance.

Credit outperformed government bonds, as it did in Q3, and our stock selection and overweight positions in insurers and banks had the largest positive impact. We benefitted from subordinated bond holdings as their credit spreads tightened in the risk-on environment while domestically focused banks and building societies, such as Coventry Building Society and Nationwide, also performed strongly on the back of the election result. The underweight positioning to utilities was a detractor, however, as the sector rallied on reduced nationalisation worries.

Our underweight duration position also added to returns as government bond yields moved higher. UK 10-year Gilt yields climbed by over 30 basis points, finishing the year at 0.81%, German 10-year Bunds increased by 38bps, closing at -0.19%, and US 10-year yields rose 25bps, closing at 1.92%.

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 pass the new deal through Parliament. The government managed to pass a bill for a General Election for 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 financial markets, with parliament passing the European Union Withdrawal Bill in the following days. UK assets responded positively 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 was 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 further to stimulate the economy, and called for an increase in government spending across the eurozone.

Overall, there has been a sharp turnaround from twelve 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 participated in a number of these, including an inaugural sterling issue from Logicor. This is a real estate business focusing on warehouse and logistics, which benefits from the growth in e-commerce.

We also increased our exposure to National Express by participating in its new issue at attractive valuation levels. This is a longstanding holding within the portfolio and is strongly exposed to our Making transportation more efficient theme. The business continues to invest heavily in modern low-emission buses, which help reduce their environmental impact while easing congestion and offering a safer means of transport than travelling by car.

The portfolio established a holding in Scottish Power Transmission, which is owned by Iberdrola. The business owns the electricity transmission assets in Central and Southern Scotland and has invested heavily in its asset base over the last five years, improving the efficiency of its network, and is important in the growth of renewable energy being connected to the national grid.

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.

Towards the end of the period, we also reduced exposure to Direct Line following strong performance and switched out of our holding in US$ subordinated bonds into Vodafone £ seniors.

As for duration, we reduced the size of the short position over the quarter, from -2.25 to -1.5 years. Given the progress on Brexit and the Conservative election victory, we increased the UK position, ending the quarter at -1.0 years short, but reduced the US to neutral and European exposure to -0.5 years on relative valuation grounds.

Looking back on 2019, it has been a strong year for returns across financial markets in general, with corporate bonds delivering double-digit performance. Credit spreads have tightened, driven by supportive central bank action and positive geopolitical developments in the UK, Europe and the US.

We still believe the macroeconomic and technical backdrop for credit markets remains supportive. Global economic growth has slowed but remains positive: the US/China trade situation and uncertainty surrounding Brexit have clearly been an economic headwind and time will tell if recent developments on both fronts lead to the start of improving data. Concerns over a possible US recession have also reduced, reflected in the steepening in the yield curve, and employment data continues to be positive.

Meanwhile, central banks continue to be supportive and corporate credit fundamentals remain relatively strong, particularly within investment grade, typified by high interest coverage ratios, stable net leverage ratios and low levels of default.

We continue to believe government bonds are overvalued and expect yields to rise as macro concerns recede, although Brexit and trade will continue to generate some volatility. As such, we retain an underweight position to interest rate risk, spread across the UK and Germany, and will continue to actively manage this allocation.


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







Liontrust Sustainable Future Corporate
Bond 2 Inc






iBoxx Sterling Corporate All Maturities Index






IA Sterling Corporate Bond sector average













* 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.


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, 10:45 AM