Liontrust GF High Yield Bond Fund is manufactured by Liontrust Fund Partners LLP and represented in Malta by MeDirect Bank (Malta) plc.
The US high yield market produced a return of 0.7% in Q4. In Europe, returns were broadly flat (-0.02%) during the period. Global high yield produced a return -0.3, indicative of the impact of the small (in terms of index weight) but troubled Chinese property sector.
In a change to the trend we’ve seen for (almost entirely) the last two years, the US high yield market in Q4 saw BB and B bonds outperform CCCs, albeit the difference was relatively minor. That being said, US energy bonds continue to be seen as a safe haven and typically climbed back to pre-Omicron levels before year end, with tightness in the oil market keeping the oil price at relatively high levels. In terms of quality, the reverse was true in the European market, where CCCs continued to outperform higher quality, although again the difference was small.
The global high yield market in 2021 has been a story of thematic sectors. On the one hand, the energy sector, driven by the oil price, has produced very strong returns and has underpinned a marked outperformance, particularly in the US market, of lower quality bonds versus both BB & B rated. On the other hand, one of the big stories in Q4 has been the turbulence in the Chinese real estate sector, leading to large drawdowns and even a couple of high-profile defaults in an otherwise very mild global default environment.
Over the quarter, the Liontrust GF High Yield Bond Fund (A1, accumulation class, total return in euros) produced a return of -0.3% versus the ICE BAML Global High Yield index’s (euro hedged) -0.6%*.
Relative to index, the best performing sector in the Fund in Q4 was telecoms, but there was little dispersion amongst sectors outside of real estate. Real estate was the big positive driver of relative returns for the Fund as we do not own any Chinese real estate bonds.
Not owning leisure was a relative drag. The small number of holdings in energy performed well, but overall the sector underweight was a drag. The Fund’s low quality allocation was in general a drag and much of the CCC we own trades like higher quality, not producing double-digit returns in 2021. Other decent contributors to stock picking include UK Life companies, Rothesay and Phoenix, pharmaceutical company, Cheplapharm, travel and insurance company, Saga, and employment agency, House of HR.
Overall, given the very strong returns of a sector we were underweight (energy) and our bias towards higher quality during a period when lower quality was the performance hotspot, we are pleased with the returns generated by the fund in 2021, which is indicative of good stock-picking. Our short duration bias was also helpful and we remain shorter in duration than the Global High Yield Index going into 2022 (to read more on our thinking behind this, see the team’s recent strategy update).
During Q4, the fund participated in a number of new issues, introducing some new borrowers. This included UK-listed building materials company Sig, a company in a cyclical sector but with proven resilience and good governance characteristics. This is a B1/ B+ rated, euro denominated bond with 5.25% coupon.
We also purchased UK-based, newly private Aggreko, a company in the equipment rental sector. It was only taken private from a UK listing relatively recently (i.e. there is still plenty of available information) and is in a sector we know well. Although pollutive (a large % of its portfolio is diesel energy generators), it is committed to improving its energy mix in the years ahead and its equipment will play a role in the energy transition. This is a US dollar, B1/BB- rated bond with 6.125% coupon. We sold out of our remaining holding in oil producer, Enquest to fund this position.
We also purchased a couple of new holding company deals. The first is the holding company for a decent quality Swedish real estate business called Heimstaden. As part of a holding company structure, investors in this bond are not close to the physical assets, however the loan to value ratio is low at 20%, leaving plenty of cushion for asset price volatility. This is a euro denominated, BB- rated bond with a sizeable 6.75% coupon. Lastly, we participated in a bond issued by Iliad, the holding company for various telecom operating subsidiaries, including Ireland’s Eircom. This is a US dollar denominated, B/B+ rated bond with 7% coupon.
Not long after the Omicron headlines hit, we suggested that a 5%+ yield was a reasonable entry point, particularly given the Fund’s limited exposure to companies meaningfully impacted by lockdowns. Indeed, the Omicron sell-off was somewhat short-lived and the combination of the market rally in the second half of December and the rise in underlying interest rates take us to around a 4.5% yield for the sterling investor.
At this level, we remain enthused by the relative value offered by the Fund. Of course, both yields and spreads are below long-term averages. However, we believe defaults will remain mild in the 12-24 months ahead and, when framed in the context of the quality bias we have in the Fund, we believe we are in a good position to defend capital and harvest the income generation that is the key characteristic of our asset class. Despite a sanguine view on defaults, we have been and will continue to be reluctant to buy the lowest quality parts of the high yield market. For example, we have only 5% of the fund in CCCs and a low exposure to commodities, cyclicals and leisure.
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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
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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.
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