Liontrust SF Corporate Bond Fund

Q4 2020 review

The Fund returned 4.0% over the quarter, matching the iBoxx Sterling Corporate All Maturities Index and outperforming the IA Sterling Corporate Bond sector average of 3.3% (both of which are comparator benchmarks)*.

On the macro front, the final quarter of the year was dominated by positive news regarding vaccine developments, with hopes of a return to normality overshadowing record high infection rates, rising hospitalisations and tightening lockdown restrictions towards the end of the period. This drove an acceleration in the rally across risk assets, including credit, expanding to more economically and Covid-19 sensitive sectors that had previously lagged through the recovery.

Credit markets saw spreads continue to tighten, supported by strong technicals including low levels of issuance, enhanced monetary and fiscal support packages and rising demand for yield.

Against this constructive backdrop, the Fund’s overweight credit position delivered strong returns, as corporate bonds outperformed government counterparts in a risk-on period for the asset class. We had a particularly strong contribution from our exposure to the banking sector, as our subordinated holdings benefited from the risk-on environment: our USD-denominated holdings from the combination of positive vaccine news and Joe Biden’s presidential election victory, and our UK banks from news of a Brexit deal.

While banks proved the major factor in Fund returns, our overweight position in the insurance sector was also positive, particularly allocations to subordinated bonds, which performed well for the reasons outlined above. Vaccine news also resulted in particularly strong returns from some of our more Covid-exposed names, which we had added/topped-up on weakness earlier this year, such as student accommodation provider Unite Group and transport provider National Express. These contributions more than offset the drag from our more defensive allocation to gilts, as well as underweights to more cyclical sectors such as industrials, which obviously also performed well amid vaccine-fuelled optimism, as well as our underweight to utilities.

Duration positioning was a further positive, as government bond yields diverged greatly heading into the year end. US 10-year Treasury yields rose 23 basis points, ending 2020 at 0.91%, again driven by vaccine optimism and Biden’s Presidential victory. Meanwhile, UK 10-year gilt yields finished the period broadly unchanged at 0.20%, as vaccine optimism was tempered by lingering Brexit uncertainty and accelerating Covid-19 infections and stricter lockdown measures. In Europe, German 10-year Bund yields fell five basis points to -0.58%, curbed by the European Central Bank’s announcement of an expanded quantitative easing package.

As highlighted above, November’s vaccine announcements were the principal driver for markets over the quarter, as the inoculations being developed by Pfizer-BioNTech, Moderna and Oxford-AstraZeneca proved highly effective in protecting against Covid-19. The vaccines have also cleared the challenge of regulatory approval, granted to at least one of these in the UK, US and EU, leading to optimism the end of the pandemic is in sight. There remain considerable logistical hurdles to overcome regarding the manufacture, distribution and administration of these vaccines on a global scale, however, particularly given cold storage requirements.

In the meantime, the situation has deteriorated further, as Covid-19 cases have accelerated once more, reaching record highs since the start of the pandemic and ICU occupancy following suit. This has been attributed to new strains of the virus, notably in the UK, with the mutations seemingly more contagious although not believed to be more dangerous. These developments compelled governments to impose stricter lockdown measures in order to slow the spread, which will likely see economic activity suffer into Q1 2021.

In the US, investor sentiment was further boosted following Biden’s victory in the presidential election, with a less combative tenure than that of his predecessor widely anticipated. Given the Senate is likely to be divided with no clear majority for either side, the scope for aggressive reform is limited and that should result in a relatively benign policy environment, which is supportive for both credit and broader risk assets. Biden’s victory also paved the way for congress to approve a much needed $900 billion stimulus package, extending and expanding many of the programmes introduced earlier during the pandemic and providing additional support for economic recovery. Meanwhile, the Fed reiterated its commitment to supportive monetary policy, keeping interest rates unchanged and continuing with its quantitative easing (QE) programme until sufficient progress has been made towards employment and price stability goals.

The Bank of England also kept interest rates on hold, although rumours of a potential move to negative rates continued throughout the period. The central bank was another to expand its asset purchase program by a further £150 billion, to £875 billion in total, to support recovery, with additional support in the shape of fiscal stimulus measures, again extending and expanding existing Covid response programmes.

Despite much posturing from both sides in the build up to the 31 December deadline, the UK and Europe finally agreed a Brexit trade deal on Christmas Eve, which should allow markets and sterling to start 2021 on firmer footing and companies to plan ahead and invest for the future. Concerns around a no deal, with fishing rights apparently the sticking point, gnawed at sentiment for much of the quarter and after weeks of talk about an ‘Australia-style’ deal, it took a Canada-style arrangement to end the UK’s 47 years as part of the European Union. While there will obviously be a transition period as the UK diverges from the world’s largest trading bloc, the hope is that the country can finally move on to other things, whatever challenges we may face as a newly ‘sovereign’ nation – and top of the pile is obviously navigating our way out of Covid-19.

Elsewhere, European leaders finally agreed an unprecedented €1.8 trillion support package, including the €750 billion recovery fund, which had been the stumbling block in previous discussions. As part of the agreement, a sizable portion of these funds must be spent on sustainable and green projects, supporting the decision to accelerate the carbon emissions reduction goal to address the climate emergency. Monetary policy remains highly supportive, with the European Central Bank deciding to maintain interest rates and expand the Pandemic Emergency Purchase Program to €1.85 trillion and extend it until at least March 2022, as well as boosting several other Covid support measures, including TLTRO.

There was moderate portfolio activity over the final quarter of the year and while new issuance levels remained relatively low, we took advantage of a number of attractive opportunities during the period. We participated in a hybrid issue from National Express for example, which  offered an attractive yield pick-up versus the company’s senior bonds. While the business has been heavily impacted by Covid-19, a combination of management actions, the high percentage of contractual business and using government support schemes means it is well positioned to benefit when social restrictions are lifted.

Elsewhere, we added two names to the portfolio through participating in new issues from European towers companies Cellnex and Inwit. We like these companies from a sustainability perspective as their infrastructure assets enable telecom operators to offer telecommunication services, connecting people and enabling the digital economy, with the Covid pandemic exemplifying how invaluable these assets are to modern society. Against these additions, we switched out of Orange on relative value grounds, after performing well over the year.

We also increased exposure to existing favoured issuers within the portfolio, Bunzl and London & Quadrant Housing Trust, both of which brought new issues to the market at attractive valuations. We added to our position in student accommodation provider Student Finance PLC, taking advantage of recent weakness to increase exposure to a name and industry we believe to be robust over the long term.

Further to this, Lloyds opted to call a legacy subordinated bond held in our portfolio, which benefited from a fixed for life coupon of 6.85%, offering attractive income and risk-adjusted returns. We reinvested the proceeds from this call in a newly issued subordinated bond, which gave us an attractive re-entry point in the name relative to existing secondary securities.

Outside of new issues, our activity was largely limited to risk reduction trades as we looked to capitalise on recent strong performance. We reduced exposure to subordinated bonds from Coventry and Nationwide Building Societies following particularly strong returns, re-investing in bonds higher up the capital structure by topping up an existing holding in Yorkshire Building Society. We also rotated out of our holding in Direct Line RT1 bonds, again recycling the proceeds into bonds higher up the structure in favoured insurance names such as Legal & General on relative value grounds. We reduced exposure to M&G, switching into bonds from HSBC and Axa as they offered better value.

On duration, we maintained the short at 1.5 years relative to the benchmark over the period but this is now expressed via one year to the UK and 0.5 to the German market. We opted to rotate 0.5 years of the position out of Germany and back into the UK following the move lower in yields on Brexit uncertainty and tightening lockdown measures, with yields having trended back down to the lower end of our expected 0.2%-0.8% range.

Many of the challenges of 2020 are clearly set to continue into 2021, with rising Covid infection rates and the re-introduction of national lockdowns inevitably hampering global economic recovery. However, markets continue to look through near-term volatility, with companies better prepared to manage these difficulties and vaccine rollouts taking shape, alongside reduced political headwinds following the US presidential election and confirmation of a Brexit trade agreement.


We remain constructive on investment grade credit, as we expect company focus to continue shifting towards improving fundamentals. Corporate fundamentals have deteriorated further, fuelled by the collapse in earnings combined with growing debt issuance, but within investment grade, issuance has predominantly been defensive in nature to bolster liquidity buffers. This is reflected in high levels of cash on company balance sheets, keeping net leverage levels broadly flat, while we saw issuance drop off towards the end of the year as expected, with liquidity now at robust levels.

While further deterioration is likely in the near term as more periods of depressed earnings are factored into leverage calculations, we continue to expect that, having weathered the initial storm, focus will shift towards creditor-friendly debt reduction and balance sheet repair, supported by a rebound in corporate earnings. Credit should also continue to be supported by strong technicals, with expanded central bank corporate bond purchase programs, low supply given robust liquidity, extended fiscal support measures and rising demand for corporate bonds as a rare source of yield for investors.

We remain committed to our high-quality portfolio, which we believe is well positioned to withstand the economic impacts as a result of the pandemic, and do not view any of our holdings as exposed to a credit event. From a sector perspective, we continue to favour insurance, telecoms and banks, with cyclical non-financials generally over-owned, expensive and/or more heavily exposed to Covid-related uncertainty.

Our outlook regarding interest rates also remains relatively unchanged, with government bonds still vulnerable to unprecedented supply and reflation risks. Moreover, with government bond yields continuing to be close to zero (or below in several countries, including Germany), they offer limited ability to dampen portfolio volatility and actually provide meaningful downside risk during bouts of market weakness or volatility, supporting our longstanding short duration position.

To reiterate our view, we believe 10-year gilt yields will remain in a relatively tight trading range of between 0.2% and 0.8%, as the Bank of England continues to use QE to limit any rises in gilt yields while remaining reluctant to introduce negative rates in the near-term. Given 10-year gilt yields are currently languishing towards the lower end of this range, we believe there is scope for them to rise modestly as the magnitude of fiscal impact on gilt issuance hits the market, and we will look to increase duration in the portfolio as yields trend towards the higher end of our range.

Longer term, we believe there is a risk gilt yields rise and/or the curve steepens without continued buying from the Bank of England purchase program, combined with rising inflation and strengthening economic recovery, again supporting our preference to retain a short position.

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







Liontrust Sustainable Future Corporate Bond
2 Inc






iBoxx Sterling Corporate All Maturities






IA Sterling Corporate Bond













* Source: Financial Express, as at 31.12.20, primary share class, total return, net of fees and interest reinvested.

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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.

Wednesday, January 20, 2021, 3:59 PM