Liontrust GF High Yield Bond Fund is manufactured by Liontrust Fund Partners LLP and represented in Malta by MeDirect Bank (Malta) plc.
Quarter 2, 2020 - market review
Over Q2, the high yield market, fuelled by the actions of central banks, produced its best quarterly return since Q3 2009. This was quite the turnaround after the alarm and panic of March, which you will remember brought the worst quarterly return since Q4 2008.
The European high yield market significantly outperformed its US counterpart during the quarter: US high yield produced a return of around 9.5% in sterling, while European high yield returned around 11.5%.
The strong performance of European high yield has played out most clearly in single B & CCC rated bonds. For the global market, lower quality bonds produced big returns, particularly in the second half of the period. For example, CCC and lower-rated bonds produced a return of around 12% in May and June combined, versus 6.5% for the global high yield market as a whole.
The Liontrust GF High Yield Bond Fund (A1 accumulation class) returned 11.2% in euro terms in Q2 against 10.8% from the ICE Bank of America Merrill Lynch Global High Yield Index (EUR hedged). Our performance versus peers since inception remains good, solidly in the first quartile. In the more recent comprehensive rally, we have lost some ground to peers, with many clearly having a greater exposure to lower-quality credit.
At the end of June, the net underlying yield on the Fund was 4.7% (for classes A1, B1 and C1).
During the quarter, we have exited very few of the holdings we held at the start of the period. Given the environment we are in, this is a good illustration of the robustness of our process, where we focus on quality and avoiding accumulations of thematic risk.
In the areas where we tend to have low exposure, energy and lower quality, we have purchased, and subsequently sold at decent profit, two exploration and production companies, EQT and Occidental. We also purchased and sold CCC rated Diebold, a manufacturer of ATMs. These were each relatively small positions. We also purchased and subsequently sold bonds from data centre company Equinix. This was a bigger position size, around 1.5%, which we sold post the company being upgraded to investment grade and the valuation moving to reflect this.
We also have added a number of new ideas that we expect to be more typical, longer-term holdings. AMS, for example, is a sensors business that has borrowed money to acquire the majority of a peer. AMS is arguably over-exposed to Apple in its consumer business, whereas the acquired business is particularly exposed to the cyclical autos sector. We believe the clear diversification benefits provide industrial logic to this merger. To part fund the purchase of AMS, we sold the small residual holding in a similar company, Sensata.
We continue to have low exposure to thematic, cyclical sectors (such as energy, retail and mining) and CCC rated bonds (less than 5%).
Looking back at the Great Financial Crisis, by Q3 2009 the ‘bazookas’ thrown at financial markets had helped foster some semblance of economic stability, which played out positively in the sales and cash flows of borrowing companies; an excellent backdrop for a strong rebound out of crisis.Today, we are seeing some positive signs that looser lockdowns and the extraordinary central bank actions are clawing back economic activity. Nowhere has that been more evident than in high yield bond issuance: the first half of 2020 has seen US high yield supply of $203bn, which is already only 23% lower than full-year 2019 and 19% higher than full-year 2018.
Yet the clear difficulty in containing virus cases in large parts of the US, combined with the spectre of fresh outbreaks globally, means summer 2020 feels a lot more uncertain than the later months of 2009. We also don’t know what the long-term effects of this crisis on various sectors could be.
In that context, it is perhaps surprising just how strong high yield returns have been in Q2, particularly the very strong outperformance of the weakest bonds/sectors towards the end of the period. Despite this recent dynamic, we are not being seduced by higher yields from weaker companies in order to sustain those high returns. If that means a period of underperformance relative to peers and index awaits us should the more vulnerable credit risk continue to outperform, then so be it.
With all this uncertainty, our concrete convictions rest in the companies we lend to and the idiosyncratic nature of the Fund we have constructed. We believe that provides a resilience to defaults in addition to a decent source of income and returns, even if we experience volatility in the coming weeks and months. For a yield of around 5%, we believe our high-quality high yield Fund continues to represent good long-term value to our clients in a world of very low yields and equity dividend uncertainty.
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.
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
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performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest
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