Liontrust GF High Yield Bond Fund is manufactured by Liontrust Fund Partners LLP and represented in Malta by MeDirect Bank (Malta) plc.
Quarter 4, 2019 – market review
After an already good year, the market was given the December gift of greater clarity on the progress of phase one of the China/US trade deal. This happened alongside mildly improving global economic data and, to the extent it impacts global markets, a Conservative majority in the UK election.
This meant, like risk assets in general, high yield ended the year in an entirely different manner to that of 2018. The 2.9% USD (2.45% GBP, 2.2% EUR) return in Q4 took global high yield market performance for 2019 to 14.5% (12.3% GBP, 11.1% EUR). This was the fourth-best return for the global market in the decade.
Until December, the theme of the year had been the persistent outperformance of higher quality and the continued underperformance of the energy sector. In December, this was flipped on its head with both US energy and global CCC sub-indices producing USD returns in excess of 5%. Clearly, cyclicals and lower quality had been suffering as a result of the trade uncertainty.
Liontrust GF High Yield Bond Fund
The Fund (A1 accumulation class) returned 1.8% in euro terms in Q4 against 2.2% from the ICE Bank of America Merrill Lynch Global High Yield Index (EUR hedged). Over 2019, the Fund produced a total return of 11.9% versus 11.1% for the index.
As we wrote in the last report, we were ‘dipping our toes’ in lower-quality credit in the autumn, although on a relative basis, we remained significantly light of low quality and what we describe as thematically cyclical risk, primarily US energy/commodity cyclicals in general. Our sector positioning was a drag on relative performance in the aforementioned year-end rally. For example, the light energy sector exposure ‘cost’ the Fund around 35bps of relative performance in Q4.
Of course, the ‘correct’ short-term exposure would have been to have our ankles wet. Yet, at this point in the cycle, we are not looking to scrape every last morsel of return out of the market by buying weaker credit. If that means a period of relative underperformance while there is an indiscriminate rally, then so be it. The asymmetric risk profile in fixed income means opportunity cost tends to be low, whereas default cost can be very high. Worry about what you hold for your clients, not what you don’t.
Our fund-level activity in Q4 was fairly limited when compared to previous quarters. The main theme in our trading has been to rotate into newer issues from some of our existing holdings. For example, we own a new issue from Biofuel producer Enviva, which replaces the bond it has now called. We switched from an expensive Level 3 (US telecom, CenturyLink) 2025 bond into a newly issued 2026. Likewise, we switched from a consumer autos finance company, Credit Acceptance 2023, into a newly issued 2024 bond.
At the end of December, the net underlying yield on the Fund was 3.04% (for classes A1, B1 and C1).
At a starting point of around 5% yield in USD terms (around 4% GBP), the global high yield market is less exciting to us than it was last year when it started at 7.5% in USD terms. However, with defaults likely to remain fairly moderate and yields low across most liquid assets (in which we include high yield), there is no obvious reason to shun high yield in 2020 – particularly given the resilience it persistently shows when compared to equities over the longer term.
The Liontrust Global Fixed Income team has been fairly sanguine on the developed market economic outlook since we launched funds and we have not materially changed our views. Global high yield valuations are, we believe, largely reflective of decent growth expectations alongside the view that the Federal Reserve and European Central Bank are unlikely to tighten monetary policy any time soon.
Obviously, any weaker-than-expected economic conditions can play a significant role in determining returns. The oddity of the last decade has been that sometimes ‘bad news’ is good for returns due to the perceived central bank put, and good news can be the opposite (see, for example, Q4 2018) if the market thinks accommodation is being taken away. What the next decade has in store for us we will have to wait and see. We continue to favour making good lending decisions and investing in decent businesses.
Liontrust Key risks and 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 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. 19/565
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