Liontrust Strategic Bond Fund

The Liontrust Strategic Bond Fund -1.4%* in sterling terms during December. The average return from the IA Sterling Strategic Bond sector, the Fund’s comparator benchmark, was -0.4%.

Market backdrop

Both the Federal Reserve (Fed) and European Central Bank (ECB) cut interest rates during December, but it was the hawkish commentary surrounding the Fed’s cut that was the bigger driver of bond markets. 

The Fed’s interest rate cut of 25 basis points (bps) to take the Fed funds rate range to 4.25% to 4.50% was anticipated by economists and market pricing. 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 for 2025, using its preferred PCE measure, 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.

Moving on to the European Central Bank, which cut deposit rates by 25bps to 3.0% in line with expectations. Progress has been made on tackling inflation but domestic inflation is still viewed as being too high “…mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay.” The ECB’s confidence has partly grown due to its longer-term inflation projections being close to 2% for the last six set of staff forecasts. At the press conference, President Lagarde pointed out that profit margins are absorbing some wage increases and during 2025 wage growth should fall to a level consistent with the inflation target. Importantly, the risks to inflation are now viewed as being two sided.

This has led to the deletion of one of the key sentences that appeared in prior statements regarding keeping monetary policy restrictive (“…It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim”). The December statement acknowledges that “…monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit.” The obvious implication is that the ECB will now rapidly move towards a neutral rate. 

The interplay between the fiscal and monetary parts of public policy will be a key driver for bond markets in 2025. In the US the market consensus is that Trump will run an even larger fiscal deficit than last year’s 6.3%; while this looks likely for 2025, future years might finally start to see some restraint on the spending side of the ledger. In Europe, France has an unsustainable budget deficit, but economic upside could arise depending how much Germany eases its “debt brake” by after the election in February. 

Fund positioning and activity

Rates

The Fund’s headline duration was unchanged during December, finishing the year at 7.5 years of exposure.  Underneath this headline number there was a change in the geographic split of the duration exposure as profits were taken on the cross-market position of being long New Zealand duration versus that in the US. The geographic split of duration at the end of December was 4.0 years in the US, -0.7 years in Canada, 1.6 years in the Eurozone, and 2.6 years in the UK. As a reminder we continue to think that yield curves will steepen further. The Fund’s net duration exposure in the 15+ year maturity bucket is zero and we prefer short-dated and medium-dated bonds. 

Allocation and selection

December was, as is often seasonally the case in credit markets, a very quiet month for turnover in corporate bonds in the Fund. Bonds in Cheplapharm were sold at a good price level after the company warned of problems surrounding integrating acquisitions. The Fund also undertook a relative value switch in Virgin Media debt, selling existing 2029 maturity bonds and buying a new 2032 maturity issue for a decent increase in both credit spread and yield. 

Credit spreads remain expensive by historic standards. The Fund is underweight with 48% in investment grade (55% in bonds minus a 7% overlay) and 12% in high yield (18% in bonds minus a 6% overlay), compared to neutral levels of 50% and 20% respectively. Credit fundamentals remain robust – we are just awaiting a better valuation opportunity to increase exposure.

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

*Source: Financial Express, as at 31.12.24, accumulation B share class, total return (net of fees and income reinvested).**Source: Financial Express, as at 31.12.24, accumulation B share class, total return (net of fees and income reinvested).

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.

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