Liontrust GF High Yield Bond Fund is manufactured by Liontrust Fund Partners LLP and represented in Malta by MeDirect Bank (Malta) plc.
Quarter 1, 2019 – market review
The Global High Yield market produced its third-best first quarter on record with a return of 6.1% in euros, quite a turnaround considering the negative sentiment that prevailed in December. In a blistering start to 2019, well over half of the return came in January.
Since then, the market has gradually risen higher, with modest volatility along the way. The US market has outperformed its European counterpart over the period. New issuance in both markets has been relatively light, which is perhaps surprising given the backdrop.
We looked at one new issue in particular detail – Power Solutions. The bond eventually priced with a yield 1% lower than when the deal was announced, illustrating how the power is currently in the hands of issuers and their bankers, and we took our order out of the book build.
Early in Q1, the market was reacting to the excellent valuation opportunity created by the late 2018 sell-off. Positive sentiment was then boosted by central bank actions, which quelled expectations of interest rate rises and boosted sentiment around market support and ongoing liquidity.
In this environment, one might have thought lower-quality bonds would significantly outperform, as is often the case during periods of strong sentiment. In Q1 2019 however, there was a mere 1% difference in total return between the highest and lowest-quality parts of the market. If you were to risk adjust returns by credit risk, the higher-quality bonds have significantly outperformed.
Personally, I see this as an encouraging sign that the leveraged finance market is more discerning and less in bubble territory than commentators believe. Of course, if lower-quality bonds remain relatively unloved then that has implications for the existing base of bonds and future market-level default rate.
Liontrust Global High Yield Fund
This is the last quarterly report where we are prohibited under Mifid II to discuss performance. We added bonds to the portfolio in the last days of December and early part of January, to the point where we had little cash in the Fund.
Over the course of Q1, we sold bonds and ended the quarter with cash in the region of 9%. This is a high level for our strategy, and a reflection of the strength of the market year to date.
While all of the Fund’s larger holdings rallied well, within our bucket of smaller, riskier holdings, we suffered a default during the period. Wind Turbine manufacturer Senvion is going through a debt restructuring following operational challenges, which led to liquidity issues. We reduced the holding by 50% at a distressed price as, in addition to its near-term liquidity problems, we see a risk that recent turmoil could impact its brand and reputation and therefore the sustainability of its franchise. If it can navigate its current problems without too much damage, the bonds should be worth considerably more than they are today.
More positively, transport logistics company Direct ChassisLink was acquired by a private equity company, which led to a jump in the bond price.
During the quarter, we initiated new holdings including French equipment rental company Loxam, gaming machine manufacturer IGT, closed-ended investment trust Pershing Square and UK-regulated electricity distributor North West Electricity.
Despite the strong market rally, we believe High Yield has merits in a long-term portfolio based on the yield cushion and the long-term income-generating and value-replenishing characteristics of the market we have discussed in the past.
That said, High Yield is an asset class that, in volatility terms, is closer to equities than to government bonds. Our general view is that, in the coming years, risk assets will see greater volatility and it makes sense to have ‘dry powder’ to take advantage of opportunities when risk sentiment is weaker.
At the end of March 2019, the net underlying yield on the GF High Yield Bond Fund was 4.34% (for classes A1, B1 and C1).
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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