Day: 20 January 2025

Liontrust GF High Yield Bond Fund is manufactured by Liontrust Fund Partners LLP and represented in Malta by MeDirect Bank (Malta) plc.

The Fund (C5 sterling accumulation class) returned 1.7%* in sterling terms in Q4 2024 while the ICE Bank of America Merrill Lynch Global High Yield Index (GBP hedged) comparator benchmark returned 0.5% and the average return for the IA Sterling High Yield reference sector was 1.6%. The primary B5 US dollar share class returned 1.7%, while the ICE Bank of America Merrill Lynch Global High Yield Index (USD hedged) comparator benchmark returned 0.5% and the average return for the EAA Fund USD High Yield Bond (Morningstar) reference sector was -0.5%. 

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 Q4 and has now outperformed by almost seven percentage points since inception (June 2018).

The global high yield market returned 0.53% (US dollars) in the fourth quarter of 2024. Given the rise in interest rates during the period (e.g. US ten year yields are ~60 basis points (bps) higher than three months ago), it is unsurprising that lower quality bonds outperformed higher quality, in line with the trend of the last two to three years, where we have seen, in general, CCC returns being more resilient during periods of rising interest rates.

The US high yield market produced an anaemic 0.16% return, with the aforementioned rating trends dominating.  In Europe, where high yield has been less perturbed by rates volatility, the market returned 2.13% (US dollars), whilst BBs and Bs actually outperformed CCCs.

In the calendar year, global high yield produced a very decent 9.25% return. As we have noted in previous quarterly reports, CCC returns have been stellar, and generated 18.6% in the full year. This was most notable in the US (18.18%), though European CCC still returned over 11% in dollar terms. It’s worth highting that the CCC market is a much larger proportion of the market in the US. In our commentaries, we often frame CCC returns in the context of correlation to the direction of rates. This year also featured a number of stock specific refinancing events that helped drive such strong returns in the CCC rating band.

On a relative basis, US BB returns were unspectacular at 6.28%, while European BB produced a solid 10.13% (US dollars). European B produced very similar returns to their BB counterpart, while US B returned 7.55%. Overall, European high yield produced a dollar return of 10.34%, outperforming its US counterpart by more than 2%.

Fund performance

The Fund outperformed its index in both Q4 and over 2024. Given the Fund’s general bias away from lower quality parts of the market in a year when CCC returns were so strong, we are pleased with the strong relative performance of the Fund. Clearly this was helped by the European overweight, with some sector (i.e. real estate) and stock selection stories along the way.

The European overweight was a significant factor in the Fund’s outperformance in Q4. That being said, by far the biggest individual contributor was BB-rated USD holding, Brightline. The company, which has built rail track in Florida, has taken receipt of the first tranche of a new batch of rolling stock, which should lead to material revenue growth. We believe the underperformance of the bond since new issue was driven by a lack of good news, but this news wasn’t really expected, at least by us, in the immediate months after the refinance. We bought bonds in the secondary market, at prices of 95 and lower, and have seen the bond price gradually move back towards par, adding c.20bps of out-performance in the quarter, and it still offers close to 12% yield.

Elsewhere, very strong real estate returns have slowed, but the Fund’s holdings in Aroundtown and Heimstaden Bostad continued to do well, together providing c.20bps of outperformance in the quarter. Investment grade rated, Aroundtown still offers close to 7.5% in Euros.

During Q4, the market gained a little more comfort in European, particularly German, credits, which had under-performed in the general malaise towards the European economy. For example, Profine, a manufacturer of PVC window profiles, and Mahle, an auto parts supplier, both saw strength in their bond prices, contributing c.9bps and c.4bps of out-performance, respectively.

The Fund also benefitted from buying two ‘tap’ issues (when a company increases the size of a previously issued bond) that were on an attractive discount, namely German utility services company, Techem, and U.S packaging distributor, Veritiv, contributing around 7bps and 4bps, respectively.

In the quarter, there have been no material negative contributors to performance.

Trade activity

It is worth noting our sale of German pharma company Cheplapharm. This has been a holding for a few years, though we reduced the position size earlier in the year when it had been candid on some temporary margin deterioration later in the year. The Q3 results were clearly weak and the outlook suggested issues would be less temporary than initially hoped. We quickly sold out of the position at a favourable price, and the bond has since fallen a further 5-6 points.

We took new positions in Italian BB-rated technology business Almaviva; building materials distributor SIG Plc, a high coupon new issue where we had previously sold bonds on a combination of value and refinancing risk (we bought the new issue refinancing its cap structure); German chemicals producer Ask Chemicals (B- rated), another high coupon bond issued by which we believe has extracted enough cost out of the business to get through a difficult period; European lab services company Synlab, which we believe offers good short term carry as it looks to refinance this high coupon bond; and capital providing bonds issued by two investment grade rated companies in Bupa and Nationwide.

Outlook

We are all reading lots of commentary on what a second Trump administration might mean for the domestic and global economy. Arguably the most relevant unknown for the high yield market is around global trade, though perhaps more so for the European market over the US. This we will have to let play out.

In the meantime, rates markets have backed up, with the US economy continuing to motor and fears that many of Trump’s policies will be inflationary. Credit has remained highly resilient and, we continue to argue, is pricing in a favourable outcome to the major issues of the day.

From our perspective as credit investors, the proportion of yield provided by the underlying government bond yield as opposed to credit spreads is higher than we’d like.

While spreads are tight, that doesn’t make high yield a bad investment. For long term investors, 7% remains a decent yield and we believe tight credit spreads are more likely to be a predictor of credit volatility rather than outright defaults in this cycle.

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Liontrust Key risks & Disclaimers:

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital.

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.

Investment in the GF High Yield Bond Fund involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Fund may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility. The Fund may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative’s underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business.

This document 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. 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. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

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MeDirect Disclaimers:

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