The Liontrust GF Strategic Bond Fund returned 1.5%*in US dollar terms in August. The average return from the EAA Fund Global Flexible Bond (Morningstar) sector, the Fund’s reference sector, was 1.2%.
Market backdrop
August got off to a dramatic start in financial markets with weak US employment data creating fears of an impending recession. It was an increase in unemployment that got economists excited, with the figure jumping from 4.1% to 4.3%; this triggered the Sahm rule. The Sahm rule states that if unemployment (three month moving average compared to the low of the prior 12 months) rises by 0.5% then this signals the start of a recession. Fed Chair Powell seems to be of the view that this is a statistical feature not a causal relationship, with this cycle seeing unemployment rise mainly due to growth in the labour force rather than job losses. Influential former Fed member Dudley has written recently saying labour force growth also happened in the 1970s and a recession still occurred. The next few months’ labour market reports will determine which central banker is correct.
These fears then abated during the month as other economic data was more robust, suggesting that July’s payrolls data was somewhat distorted. Putting aside any potential anomalous data, the trend over the last few months has been for many central bankers to adjust their focus from tackling inflation onto economic growth, particularly the strength of labour markets.
In the US the FOMC (Federal Open Markets Committee) meeting minutes pointed toward a September rate cut, with the “vast majority” of participants supportive provided economic data came in roughly as expected. This was then turned into a done deal by Fed Chair Powell’s speech at Jackson Hole; he said “…the time has come for policy to adjust.” In keeping with the changing focus of the Fed from inflation to growth, and specifically the US labour market, Powell went on to say “…we do not seek or welcome further cooling in labor market conditions.” So, we know the Fed will cut interest rates on 18th September – whether it is a 25bps or 50bps cut is still to be determined, Powell stated “…the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Looking beyond September’s rate cut, I believe that the emphasis on the softening in the US labour market means the Fed will seek to return to a more neutral policy stance at a fast pace. There is a huge debate about where the neutral Fed funds rate is – my opinion is somewhere in the 2.0% - 3.0% range with Fed participants’ views ranging from 2.4% - 3.8%. I anticipate a lot more focus on this neutral rate destination to occur once the journey to get there has started.
Fund positioning and activity
Rates
During the aforementioned turmoil at the start of August, sovereign bond markets rallied strongly; we took this opportunity to reduce duration by 0.5 years. The retracement was almost as rapid and so we added the duration back in when yields had backed up by 20 basis points. When there is bond market volatility it creates opportunities, such as this, to add extra value to the Fund.
Later on in the month, yields on government bonds fell again as confirmation of impending US rate cuts was given, this gave us the opportunity to reduce duration by 0.5 years again, finishing August at 6.5 years which is still two years above our neutral level. Regarding yield curve positioning, the Fund’s net duration exposure in the 15+ year maturity bucket is zero; we continue to prefer short-dated and medium-dated bonds. The geographic split is 2.5 years in the US, -0.5 years in Canada, 1.0 years in New Zealand, 1.7 years in the Eurozone, and 1.8 years in the UK.
Allocation and selection
As well as using the volatility to add value in the rates markets, we also took advantage of outsized moves in credit markets to generate extra performance. Specifically, credit default swap (CDS) indices reacted more to the early August recessionary fears than spreads on corporate bonds did. We used this dislocation in CDS indices to tactically remove the high yield overlay from the Fund, temporarily taking the weighting to a neutral level of 20%. As the month progressed CDS indices squeezed back in; once the credit spread on iTraxx Xover was below 300bps we re-introduced a 5% overlay, taking the net high yield exposure to 15% (20% in bonds minus the 5% overlay).
Investment grade exposure was effectively unchanged during August remaining at 40%, below our 50% neutral level as we await a better risk/return equation from valuations to increase the Fund’s weighting.
Key Features of the Liontrust GF Strategic Bond Fund
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
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.
The fund manager considers environmental, social and governance (""ESG"") characteristics of issuers when selecting investments for the Fund. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund can invest in derivatives. Derivatives are used to protect against currency, credit or interest rate moves 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 Fund uses derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash. The Fund invests in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the fund over the short term. The Fund may encounter liquidity constraints from time to time. Participation rates on advertised volumes could fall reflecting the less liquid nature of the current market conditions. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This 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. The investment being promoted is for units in a fund, not directly in the underlying assets. 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.
