Liontrust GF High Yield Bond Fund

The Fund (C5 sterling accumulation class) returned 1.8%* in sterling terms in Q2 2021 while the ICE Bank of America Merrill Lynch Global High Yield Index (GBP hedged) comparator benchmark returned 2.4% and the average return for the IA Sterling High Yield reference sector was 2.2%. The primary B5 US dollar share class returned 1.9% while the ICE Bank of America Merrill Lynch Global High Yield Index (USD hedged) comparator benchmark returned 2.4% and the average return for the EAA Fund USD High Yield Bond (Morningstar) reference sector was 2.4%.

We also compare the Fund’s performance to a leading Global High Yield ETF (seeking to outperform by 1.5% a year) ^†. The Fund’s C5 sterling shares class return was slightly behind that of the ETF in Q2 but has now outperformed it by almost five percentage points since inception (June 2018).

The Market

A consistent theme in the last four quarters has been the outperformance of low-quality bonds. This trend continued in Q2, as CCCs produced an average return of 4.5%, whilst the market in general produced a return of 2.4%, with US high yield returning 2.8% and Europe returning 1.6% (all in US dollars).

Boosted by a healthy and stable oil market in recent months, the energy sector was the biggest contributor to index returns with, for example, the US energy sector producing a return of 6.1% in the quarter. The energy sector is a much higher proportion of US high yield than its European counterpart, which helps to explain the US outperformance.

The outperformance of lower quality high yield continued right up to the end of the quarter, when equity markets were selling off on variant concerns and the strong bid for treasuries continued. Are we living in strange times?

The Fund

The main drag on relative performance was simply not owning enough energy-related bonds. Although the Fund’s two holdings, Enquest and Neptune, contributed positively, good returns from these bonds were not enough make up for our large underweight to this sector. As a reminder, we seek to avoid large accumulations of risk in thematic, cyclical sectors, regardless of the index. Therefore, it is to be expected that relative performance will be impacted when the energy sector is the standout.

The next biggest detractor on both a relative and absolute basis was the Fund’s holdings in Bausch Health. Bausch surprised the market by announcing a more aggressive attitude towards debt in its forthcoming reorganisation, which led to its various bonds selling off in the range of 6-7 percentage points, a meaningful amount given the stable returns and lack of volatility in the wider market. Although not ideal, we believe Bausch will seek to quickly reduce debt following the reorganisation, which includes selling its eyecare business, and we are happy to hold on to the position with the bonds yielding ~6%.

More positively, the Fund benefitted from good performance from bonds we’ve added in the relatively recent past such as travel and insurance company Saga, packaging company Kloeckner and specialist financer Burford. Meanwhile, high conviction holdings such as Ardagh (packaging), AMS (sensors), Cheplapharm (pharma) and IMA (packaging machinery) were amongst the highest individual positive contributors to returns. 

We view a return of nearly 2% return in the quarter and over 3% year to date, as a pretty good performance from the Fund and asset class in the wider context of bond returns so far in 2021. Of course, high yield is largely about credit risk rather than interest rate risk, providing a resilience in a world which has the spectre of inflation.

To the extent that there is interest rate risk in the high yield market, we’ve managed the Fund with some hedges in place since the start of the year in order to protect returns in the event of a rising interest rate environment. In Q2, these hedges cost the Fund around 0.11%, with US interest rates in particular lower than they were three months ago.

During the quarter, portfolio activity has been relatively modest. We participated in new issues from telecoms giant Vodafone, listed US payments technology company Paysafe and a blood plasma-specialist pharma company called Kedrion.

At the margin, despite high yields being ever harder to come by, we have reduced exposure to some of our riskier, higher yielding holdings. For example, we reduced the holding in oil producer Enquest from 1.75% to 1.25% and have cut CCC rated Kloeckner to 0.5% from 0.75%, taking profits.

Outlook

With yields and spreads compressed, we view carry as the main source of returns in the second half of the year. We remain reluctant to chase yield and, as noted, at the margin have reduced exposure to companies that would be most vulnerable if economic conditions were to worsen. Of course, that is not our base case as economic conditions are improving – heating up even – as the increasingly vaccinated population tiptoes back to normality. Rather, the extra compensation for lending to less resilient companies is now wafer thin, and we would rather not take outsized risks with clients’ money for an extra 1-2% yield.

The yield on the Fund is low by historical standards but reasonable compared to the current available, liquid alternatives. Rest assured that we are sticking to our process and philosophy and quality bias. The Fund has recently reached the milestone of its three-year anniversary. We would like to take this opportunity to thank clients for supporting the Fund. As ever, we seek to continue to produce good investment performance and do so in a manner consistent with our process and philosophy.

Discrete 12 month performance to last quarter end (%)**:

Discrete data is not available for five full 12 month periods due to the launch date of the portfolio.

Fund positioning data sources: UBS Delta, Liontrust.

*Source: Financial Express, as at 30.06.21, total return (net of fees and interest reinvested).

**Source: Financial Express, C share class, total return, net of fees and interest reinvested. As at 30.06.21. The primary share class for this Fund is in US dollars (B5) but we are showing the C sterling-hedged class to compare against the IA Sterling High Yield sector.

^†While the managers of the Fund seek to outperform a leading Global High Yield ETF by 1.5% a year net of fees over rolling three years, this is not a formal objective. There can be no guarantees this will be achieved over the stated time period. The formal objective of the Fund can be found in the Prospectus.

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. Investment in Funds managed by the Global 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. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

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.