Liontrust GF High Yield Bond Fund

The Fund (C5 sterling accumulation class) returned 4.2%* in sterling terms in Q3 2024 while the ICE Bank of America Merrill Lynch Global High Yield Index (GBP hedged) comparator benchmark returned 4.8% and the average return for the IA Sterling High Yield reference sector was 3.5%. The primary B5 US dollar share class returned 4.4%, while the ICE Bank of America Merrill Lynch Global High Yield Index (USD hedged) comparator benchmark returned 5.0% and the average return for the EAA Fund USD High Yield Bond (Morningstar) reference sector was 4.5%.

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 ahead of the ETF in Q3 and has now outperformed by almost six percentage points since inception (June 2018).

The global high yield market returned an impressive 4.98% (US dollar terms) in the third quarter of 2024, with lower quality bonds in particular driving the pace of the market as the prospect of a soft landing in the US was increasingly baked into credit valuations. The US high yield market produced a return of 5.27%; in Europe the market returned 3.97%. 

The return of US CCC-rated bonds was stellar at 11.55%, the best quarterly return for this lowest quality cohort since Q4 2020, and outperforming BBs by more than seven percentage points in the period. The chart below illustrates the yield spread between CCCs and BBs in the US over the last three years. Because CCC-rated bonds are of lower credit quality and represent a higher risk, they have a higher yield on average. However, the strong recent performance of CCCs has driven this yield premium, or spread, down to just over six percentage points, compared with a little under eight points at the start of the quarter. 

Yield spread: US CCCs-BBs

Source: Bloomberg, Liontrust, ICE BofA. As at 30.09.24.

Fund performance

As you might expect given the quality skew of our process and philosophy, the marked outperformance of lower quality bonds explains the relative underperformance versus index. In other words, it’s what we didn’t own in the quarter explaining the deviation. 

There were a limited number of individual bonds driving the strong absolute return of the Fund in the quarter. Real estate has continued to be a strong theme. We did reduce fund exposure to real estate in the early part of the summer, which with the benefit of hindsight was too soon. That being said, we saw strong performance from Aroundtown and, to a lesser extent, Castellum. Overall, real estate continued to be a positive contributor to Fund performance. 

Less positively, two relatively recent additions, Brightline and Mahle, were the main negative contributors. With Brightline, we believe the market is showing impatience with its slow ramp up, but the company is scheduled to take delivery of rolling stock in Q4 and it should be an impressive 2025 growth story. Mahle, as a Europe-based auto supplier, is likely to have some tough quarters ahead as more and more auto equipment manufacturers issue profit warnings. Neither bond cost the Fund more than 5bps and both offer good compensation for the uncertainty.

Trade activity

We took new positions in Wilsonart (CCC), a US based producer of worktops; Arcosa (BB), a company making various infrastructure-related products; French optical retailer, Alain Afflelou; and Bubbles (B), an Italian value retailer with an impressive growth trajectory. 

Outlook

The high yield market has, in our view, moved a long way towards pricing in a soft landing. That being said, having outperformed BBs by over 7% in the quarter, it is feasible – if we do see a soft landing – that it could do the same again in the coming months. That is based on spreads between BB and CCC getting back to the QE-fuelled tights of 2021 (see previous chart). We are prepared to accept this opportunity cost as, by definition, any obstacles to the soft landing narrative will likely be most keenly felt in the CCC space. 

The global high yield market has a yield to maturity a little over 7% (US dollar terms) and spread of around 320 basis points. If you view the market as a cousin of the equity market and use if for its long-term return potential, this 7% remains an interesting opportunity, in our view. If you view high yield within the fixed income complex and use it to make occasional total return gains versus government bonds, spreads are arguably on the tight side.

On the subject of long-term high yield returns, the table below (with data to 31.08.24) gives a great overview. This shows calendar year of initial investment across the top, with the subsequent annualised compound returns dropping down vertically beneath it, with a maximum investment period of 27 years (including 2024 year-to-date) since 1998.

Over the full 27-year dataset, an investor buying into high yield bonds at the start of 1998 would have received a compound annual return of 6.3%, without their investment ever dipping into the red. Of the 27 calendar years, only six investment returns were negative: 2000, 2002, 2008, 2015, 2018 and 2022.

Click here to enlarge image.

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

*Source: Financial Express, C5 share class, total return, net of fees and interest reinvested. As at 30.06.24. The primary share class for this Fund is in US dollars (B5) but we are showing the C5 sterling-hedged class to compare against the IA Sterling High Yield sector. Discrete data is not available for ten full 12-month periods due to the launch date of the portfolio.

^†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 Features of the Liontrust GF High Yield 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. Low rated (high yield) or equivalent unrated debt securities of the type in which the Fund will invest generally offer a higher return than higher rated debt securities, but also are subject to greater risks that the issuer will default. 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.