Liontrust Strategic Bond Fund

The Liontrust Strategic Bond Fund returned -0.4%* in sterling terms during March. The average return from the IA Sterling Strategic Bond sector, the Fund’s comparator benchmark, was -0.6%.

Market backdrop

March saw a continuation of 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 survey-based indicators point toward an impending US slowdown and heightened fears in Europe. This is logical ahead of Trump’s big tariff announcements in April – uncertainty is the name of the game.

The Federal Reserve, Bank of England, and Bank of Japan all held interest rates steady during March. The key behind these hold stances is a heightened level of uncertainty caused by Trump’s tariff capriciousness. For example, in the Bank of England minutes the word uncertain featured 17 times compared to only 8 times in the prior month.  

The two most interesting developments from the 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.  

The Bank of England’s monetary policy committee (MPC) 8-1 vote split was a little more hawkish than consensus with only Dhingra voting for an interest rate reduction. The shift to 8-1 from a consensus of 7-2 was one of the two slightly hawkish developments.  The other one was the extra sentence that the 8 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 on the central banking front, the ECB cut interest rates but 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 March was on 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 positioning and activity

Rates

There were minimal changes to duration positioning during March. The Fund finished the month with just under 6.0 years of exposure. The geographic split of duration at the end of March was 3.0 years in the US, -0.5 years in Canada, 1.5 years in the Eurozone, and 1.9 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; we prefer short-dated and medium-dated bonds.  

Allocation

We have 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

We started to add to some cheap lower tier 2 exposure within bank debt, purchasing positions in Citigroup, Morgan Stanley, and Barclays. We also established a position in Aviva’s restricted tier 1 bonds. On the corporate exposure front we participated in a new bond issue from the packaging company SIG Combibloc. These purchases were funded by talking profits in Metlife’s subordinated bonds, high yield issuer Kier, and crossover name FMG Resources. 

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

*Source: Financial Express, as at 31.03.25, accumulation B share class, total return (net of fees and income reinvested).**Source: Financial Express, as at 31.03.25, 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.

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.