The Liontrust GF Absolute Return Bond Fund (C5 share class) returned 1.6%* in sterling terms in Q1 2025. The Fund’s primary US dollar share class (B5) also returned 1.6%.
The yield carry on the Fund was the largest driver of the total return during the quarter. The overall market impact was low, and incremental performance was added through numerous positions
Market backdrop
The main factor impacting bond markets during the first quarter was the overhang of President Trump’s impending tariff announcements in early April. The policy uncertainty that Trump’s capriciousness creates has led to a fall in both business and consumer confidence. It is hard to formulate a business plan when one does not know what the rules and regulations are going to be. Coupled with this, there was some demand pull forward towards the end of 2024 as both business and consumers sought to front run the tariffs.
There has been a dichotomy between hard and soft economic data. Most current economic activity indicators based on official data, hard data, have been robust in the US and not deteriorating in Europe. However, the forward-looking indicators using surveys point toward an impending US slowdown and heightened fears in Europe.
With such elevated uncertainty, and solid historic economic data, the US Federal Reserve kept interest rates on hold during the quarter. The two most interesting developments from the March Federal Open Markets Committee (FOMC) were the reduction in the pace of quantitative tightening (QT) and the changes to the economic forecasts in the updated quarterly Summary of Economic Projections (SEP). There has been a 0.4% reduction in the real growth forecast for 2025; years further out have been trimmed by less. At 2.8%, the core PCE deflator inflationary measure is now forecast to be 0.3% higher than in the prior SEP forecasting round; core inflation forecasts for future years were left untouched. As Federal Reserve Chair Powell has stated “…we do not need to be in a hurry to adjust our policy stance.” With so much uncertainty around trade policy, as well as an optically robust labour market, the Fed can afford to be patient until the economic data changes. Monetary policy is still deemed to be “meaningfully restrictive” so there is plenty of room for the Fed to cut when the facts change.
The Bank of England continued its quarterly pace of rate cuts with a 25bps reduction in February to 4.50%. The Bank of England is having to deal with a period of very heightened uncertainty and try to balance wage inflation currently inconsistent with the inflation target and the risk that unemployment starts to accelerate. By the March meeting the monetary policy committee’s (MPC) 8-1 vote split was a little more hawkish than consensus with only Dhingra voting for an interest rate reduction. The other hawkish development was the extra sentence that the eight members voting for a hold inserted into the MPC minutes: “…There was no presumption that monetary policy was on a pre-set path over the next few meetings.” The MPC members retain their “…gradual and careful approach to the further withdrawal of monetary policy restraint” which is taken to read as one interest rate cut per quarter provided the economic data is not misbehaving. The new sentence adds a little uncertainty into the mix as to whether the quarterly pace will be maintained.
Finally, the European Central Bank (ECB) cut the deposit rate by 25bps twice during the quarter to finish the period at 2.50% in line with expectations. The most recent statement noted that monetary policy is becoming meaningfully less restrictive. A pause in rate cuts is likely after the April or June ECB meetings and the timing largely depends on geopolitical developments.
The most significant development in Europe was in March regarding the fiscal side of the equation. It was widely anticipated that after the German elections on 23rd February there would be some easing of the debt brake. Rather than an easing, Chancellor-elect Merz of the CDU chose to get out the proverbial fiscal bazooka. Partly this was in recognition of the recent changing political landscape and the need for Europe to be able to unilaterally defend ourselves in a more polarised world where the US cannot presently be relied on (in fairness to the US and Trump, most of the rest of the western world has had a few decades of free ride from America’s dominance and been able to take advantage of the “peace dividend”). Merz had a deliberate use of the English language, saying “whatever it takes” in an echo of Draghi’s response to the Eurozone sovereign bond crisis.
There are three strands to Merz’s proposals:
- There is €500 billion pledged for public investment over the next 10 years including infrastructure, digitalisation, power grids and education.
- The current debt brake of 0.35%, representing the maximum structural net borrowing, is raised to 0.70% with the extra 0.35% allocated at the state level (a little over €15 billion annually at current GDP levels).
- Any defence spending above 1% of GDP is exempt from the debt brake as Germany seeks to rebuild its military strength.
There are obstacles to this all being delivered over the coming years, but in principle this fiscal package is seismic in nature. There is a signalling impact to the rest of Europe from the nation that traditionally has blocked large spending plans, a strong commitment to strengthen the German military, and a huge fiscal boost from one of the few countries that can easily afford it.
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 overall movement in bond yields during the quarter was not a large driver for Fund returns; short -dated US Treasury yields were lower but credit spreads wider with the converse occurring in the Eurozone. The largest driver of the total return for the Fund was the yield carry that investing in short-dated corporate bonds naturally provides. In addition to the yield carry, there was incremental performance added across a range of positions ion the Fund:
Alpha sources
Rates
Cross market rates positions were additive during the quarter. During February, the Fund undertook a position being short duration in Canadian bonds via government bond futures, with a corresponding long duration in the US. In just under two weeks the yield differential on the two narrowed from 157bps to 138bps, the Fund generating just under 10bps of incremental performance.
In the fourth quarter of 2024 the Fund went long UK duration versus German duration and it finished the year offside. However, the yield differential narrowed during the first quarter and this catalysed us to take profits – capital upside since implementation generated the Fund approximately 6bps of extra performance.
Allocation
During the fourth quarter of 2024 the Fund implemented a cross-market allocation position 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 valuation argument prevailed, with European high yield outperforming their US cousins during the period. We took profits during the first quarter of 2025; the position generated just under 10bps of performance for the Fund.
Towards the end of the quarter we entered into a decompression trade between two European credit default swap indices. We have gone long risk (sold protection) iTraxx Europe, which is the broad 125-name index including some financials and short risk iTraxx senior financials which is the 30-name pure financials index at the senior attachment point. Within credit, financials tend to be higher beta (they have done since the financial crisis) given the systemic nature of the sector and the high bond index weightings. This is a way of buying insurance against any deterioration in market sentiment whilst said insurance is very cheap. Given the fairly low volatility in most times between the two indices we have sized the position such that a 1 basis point move in the differential generates 2bps of fund performance, so about 40% notional on each side.
Selection
Stock selection was a positive contributor to performance during the quarter. Within both Selection and the Carry Component credit spread movements were subdued. There was a benefit from some individual spread tightening but no standout bonds that contributed more than 2bps of excess return.
Within Selection a new investment was made into legacy capital issued by French bank BNP. We expect the company to tender for the bonds at some stage with a few percentage points of upside when it does.
The Fund grew during the quarter and we took the opportunity to undertake a small increase in the diversity within the Carry Component. New positions, which included a re-entry into some issuers whose bonds have previously matured, included: Carlsberg, Singtel Optus, LKQ, Veralto, Nasdaq, Synposys, Motability, Fairfax, Paypal, Eurofins, Smith & Nephew, Investec, Zimmer Biomet, Bupa, Aberdeen, UPM, Fresenius, SIG Combibloc, Kyndryl, Weir, AIB Videotron, Sage, Enel, and Phoenix.
Key Features of the Liontrust GF Absolute Return Bond Fund
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The investment objective of the Fund is to generate positive absolute returns over a rolling 12 month period, irrespective of market conditions. There is no guarantee the investment objective will be achieved over this or any other time period. The Fund aims to achieve its investment objective through investment in corporate and government fixed income markets worldwide, including developed and emerging markets. In achieving its objective, the Fund also aims to minimise volatility and reduce the possibility of a significant drawdown (i.e. a period where the Fund is worth less than the initial investment at the start of a 12 month period). The Fund invests in a wide range of bonds issued by companies and governments, from investment grade through to high yield. The Fund invests in developed and emerging markets, with a maximum of 20% of its net assets invested in emerging markets. Investments are made in US Dollar denominated assets or non-US Dollar denominated assets that are predominately hedged back into US Dollar. Up to 10% of the Fund's currency exposure may not be hedged (i.e. the Fund may be exposed to the risks of investing in another currency for up to 10% of its assets). The Fund may invest both directly, and through the use of derivatives. The use of derivatives may generate market leverage (i.e. where the Fund takes market exposure in excess of the value of its assets). The Fund has both Hedged and Unhedged share classes available. The Hedged share classes use forward foreign exchange contracts to protect returns in the base currency of the Fund. The fund manager considers environmental, social and governance ("ESG") characteristics of issuers when selecting investments for the Fund. |
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5 years or more |
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2 |
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Active |
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The Fund is actively managed without reference to any benchmark meaning that the Investment Adviser has full discretion over the composition of the Fund's portfolio, subject to the stated investment objectives and policies. |
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The Fund is a financial product subject to Article 8 of the Sustainable Finance Disclosure Regulation (SFDR). |
Notes: 1. As specified in the PRIIP KID of the fund; 2. SRI = Summary Risk Indicator. Please refer to the PRIIP KID for further detail on how this is calculated.
Discrete years' performance (%) to previous quarter-end:
Past performance does not predict future returns
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Mar-25 |
Mar-24 |
Mar-23 |
Mar-22 |
Mar-21 |
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Liontrust GF Absolute Return Bond C5 Acc GBP |
5.9% |
6.2% |
-1.5% |
-1.9% |
6.4% |
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IA Targeted Absolute Return |
4.7% |
6.3% |
0.3% |
2.5% |
10.1% |
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Mar-20 |
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Liontrust GF Absolute Return Bond C5 Acc GBP |
-2.5% |
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IA Targeted Absolute Return |
-3.3% |
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*Source: Financial Express, as at 31.03.25, 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 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.
