Liontrust GF Absolute Return Bond Fund

The Liontrust GF Absolute Return Bond Fund (C5 share class) returned 0.8%* in sterling terms in Q4 2024 and the IA Targeted Absolute Return, the Fund’s reference sector, returned -0.7%. The Fund’s primary US dollar share class (B5) returned 0.7%.

The sell off in underlying sovereign bond markets was a drag on total return during the quarter but the yield carry on the Fund comfortably offset this to lead to the quarterly gain. Alpha generation was positive with stock selection outweighing small negatives in rates and allocation.

Market backdrop

The biggest event for financial markets in the quarter was the US election. There has been so much written on the subject already and Trump has not even taken power yet. We think it is folly to make exact predictions given the capricious nature of Trump and uncertainty over how much influence his key policymakers will have.  However, while one cannot predict exactly what Trump v2.0 will look like; we can examine his campaign promises and previous presidency to give some guidance about potential outcomes.

Trump says his favourite word is tariffs and we think it is prudent to believe him on this. Tit-for-tat US/European tariffs would raise inflation and hurt growth but impact Europe more severely than the US. An increase on tariffs to 10% for all imports would, if there was full pass through to the consumer, add about 0.8% to US inflation. This would be mostly felt in H2 2025 and H1 2026 due to legal lags in implementation. In the longer term, tariffs create a headwind to global growth – trade is not a zero-sum game.

Regarding net immigration into the US, this is already slowing after a few bumper years. A faster deceleration would now be our central case with the knock-on impacts on the supply to the US labour market, leading to higher inflation and lower overall economic activity levels. 

With the Republican clean sweep and Trump at its helm there is control of the US budget. This could be a mixed blessing as the debt ceiling moratorium expired on 1 January 2025; it doesn’t become instantly binding, but the clock starts ticking. For the first year or two the Republican clean sweep would likely increase the fiscal deficit further; the cutting taxes side of the equation is a certainty. Note though that Trump’s previous TCJA (Tax Cuts and Jobs Act) is due to expire on 31 December 2025 and is already included in the run rate of the current 6.3% fiscal deficit so a renewal of this in 2025 would not be incremental fiscal loosening. However, the small state mentality of many Republicans is likely to lead to a strong pushback against relentless spending and continual raising of the debt ceiling. 

While proposed policies on both tariffs and immigration are inflationary but bad for long-term economic growth, tax cuts are the one policy that supports growth. The cumulative effect of some implementation on these three policy fronts means that interest rates in the US will be cut by less than previously envisaged in 2025. The flip side is that with restrictive monetary policy being maintained for longer the chance of an economic accident occurring increases, so the probability of needing loose monetary policy goes up in years beyond 2025. 

The Federal Reserve (Fed) did still feel comfortable cutting interest rates in December by 25 basis points (bps) to take the Fed funds rate range to 4.25% to 4.50%. Accompanying the rate cut were three hawkish developments. Firstly, there was a small change in the Fed’s statement that hints strongly towards a pause in the rate cutting cycle; previously the Fed talked about “…considering additional adjustments to the target range for the federal funds rate” this was changed to “…considering the extent and timing of additional adjustments to the target range for the federal funds rate.” The other two hawkish developments were both changes in forecasts in the quarterly Summary of Economic Projections (SEP). The Fed’s forecast for core inflation, using its preferred PCE measure, for 2025 was revised up from 2.2% to 2.5% with inflation not returning to target until 2027. Unsurprisingly given these changes to inflation forecasts, the dot plot of Federal Open Market Committee (FOMC) members’ rate projections was also adjusted; the median dots now have only two rate cuts predicted in 2025. Uncertainty surrounding incoming President Trump’s implementation of trade tariffs will have helped to make the FOMC more reticent to cut interest rates.

With so much uncertainty we expect the levels of volatility in sovereign bond markets to remain elevated. Valuations are cheap and you are well rewarded for being invested in the market even with delayed rate cuts.  For credit spreads the outlook is benign for the foreseeable future but with risks further out on the horizon. We are focused on investing in debt issued by companies that can easily ride out any storm that Trump’s policies create.

Fund performance

We split the Fund into the Carry Component and three Alpha Sources for clarity in reporting, but it is worth emphasising we manage the Fund’s positioning and risk in its entirety. As a reminder, the Carry Component invests in investment grade bonds with <5 years to maturity. Within this there is a strong preference for investing in the more defensive sectors of the economy. 

The sell off in underlying sovereign bond markets was a drag on total return during the quarter but the yield carry on the Fund comfortably offset this to lead to a quarterly gain. Alpha generation was positive with stock selection outweighing small negatives in rates and allocation.

Alpha sources

Rates

The Fund’s permitted duration range is 0 to 3 years with a neutral level of 1.5 years. The Fund started the fourth quarter with a duration of 2.0 years. Given the selloff in sovereign bonds during the period we increased the exposure to end the year at 2.25 years. The duration split at the end of December was 1.0 years in the US, 0.35 years in Europe, and 0.9 years in the UK. 

Cross-market rates selection was a small negative during the quarter. Profits were taken on the very successful position of being long New Zealand sovereign bonds relative to duration exposure in the US. On the flipside, being short Canadian duration versus the US approached our sell discipline level of losing 10 basis points so we cut the position. After a suitable cooling off period, we will re-examine whether to enter this pair trade at a more attractive level. The Fund also has gone long UK duration relative to German duration in 0.25 years each side at a differential close to 200bps; this was a little offside at year end.

Allocation

The weighting in the Carry Component has been in the vicinity of 90% throughout the quarter due to the compelling yield on short-dated defensive investment grade bonds. As credit spreads are expensive, we have only a low exposure to other credit in Selection of 5%. 

The Fund has implemented a new cross-market allocation position during the quarter, going long risk European high yield via the iTraxx Xover credit default swap (CDS) index and short risk US high yield via the CDX HY credit default swap index. The two positions’ sizes offset each other, so it is the differential between the two that will drive any performance. Historically, the European CDS index has had a tighter spread than the US one due to having a higher average credit quality amongst its constituents. Economic fundamentals are more attractive in the US than Europe but the spreads of the two indices more than reflect this and we expect some mean reversion from the year end level of close to no differential. Since implementation the position is a couple of basis points offside but we anticipate gains to filter through over the coming quarter.

Selection

Stock selection was a positive contributor to performance during the quarter. Within Selection, Standard Chartered, Global Switch, and Aroundtown each added approximately 5 basis points of excess return. In the Carry Component, credit spread movements were much more subdued – there was a benefit from aggregate spread tightening but no individual standout bonds. 

Within the Carry Component there were various bond maturities during the quarter including BNY, Equinix, Abbvie, Asahi, and Deutsche Bank. On valuation grounds a few sales were made including Berkshire Hathaway, Coca Cola, CAF, Morgan Stanley, and Siemens.  Purchases included Heimstaden Bostad, Informa, Pershing Squared, Rothesay Life, NBN, and DSV.

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

*Source: Financial Express, as at 31.12.24, total return (net of fees and interest reinvested), C5 class. Discrete data is not available for ten full 12-month periods due to the launch date of the portfolio.

Key Features of the Liontrust GF Absolute Return 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. 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.  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. 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. There is no guarantee that an absolute return will be generated over a rolling 12 month period or any other time period.

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.