Liontrust Strategic Bond Fund

The Liontrust Strategic Bond Fund returned 1.7%* in sterling terms during February. The average return from the IA Sterling Strategic Bond sector, the Fund’s comparator benchmark, was 0.9%.

Market backdrop

February witnessed the opening act of what is going to be a long running saga of Trump’s tariffs. I’m not sure we learned very much – we already knew Trump is serious about using tariffs. What remains to be determined is to what extent tariffs are going to be used for negotiating leverage, protectionism or revenue raising. On the protectionism front, Trump is a fan of former President McKinley who served 1897-1901 and was a big proponent of tariffs. There is a genuine point that some countries over-consume and others over-produce and the backlash against this is one of the drivers of the rise in political popularism. However, Trump’s nostalgia for blue collar workers being in Midwest US states might still be a stretch too far, and the impact on the consumer (who ultimately end up effectively paying for a lot of tariffs) has not been spelled out. This saga will continue for months if not years; some tariffs will be implemented but how many remains the great unknown.

The policy uncertainty that Trump’s capriciousness creates has led to a fall in both business and consumer confidence. It is hard to formulate a business plan when one does not know what the rules and regulations are going to be. Coupled with this there was some demand pull forward towards the end of 2024 as both business and consumers sought to front run the tariffs. These factors, combined with some extreme winter weather, have led to a slowdown in US growth at the start of 2025. Headline growth will be even worse due to a surge in imports, partly gold reserves, but underlying activity rates have also decelerated. This helped to provide support to bond markets as attention shifted away from the inflationary nature of tariffs towards the growth drag caused by policy uncertainty.

In the UK the Bank of England’s Monetary Policy Committee (MPC) cut UK interest rates by 25bps to 4.50% in a 7-2 vote with the dissenters preferring a 50bps cut. The largest initial surprise was arch hawk Mann joining Dhingra in the dove camp, but in the statement Mann’s rationale was nuanced. Mann’s thesis seems to be to do one bigger cut now and then keep monetary policy restrictive for a long time afterwards. Mann argued that “…a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom” but “…monetary policy would need to remain restrictive for some time to anchor inflation expectations” and “…Bank Rate would likely stay high given structural persistence and macroeconomic volatility.”

Economic forecasts were updated in the quarterly Monetary Policy Report (MPR), with inflation up and growth down. One hawkish development is that a majority of the MPC members seem to be veering towards the inflation scenario where some economic slack will be required to bring consumer price inflation back down to target on a sustained basis. The issue here is that although the demand side of the equation has been revised down, so has the supply side as the UK has a chronic productivity problem, as the MPC states: “…productivity growth has been weaker than previously estimated, and the Committee judges that growth in the supply capacity of the economy has weakened.” A lower potential supply means that there is less economic slack so demand growth will need to fall more to get inflation to target. Restrictive monetary policy is not the only headwind for demand, but it is the one the MPC control. The Bank of England is having to deal with a period of very heightened uncertainty and try to balance wage inflation currently inconsistent with the inflation target and the risk that unemployment starts to accelerate. Given the various uncertainties abound, the MPC chose to insert an extra word, “careful,” into its outlook statement “…based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.”

My central case is that the gradual pace of rate cuts will continue for the first half of 2025, meaning the next cut will be in May. After that I expect the increase in unemployment to start to outweigh the inflationary drivers in the forward forecasts, with spot inflation starting to fall and the pace of rate cuts accelerating sometime in the second half of the year. The UK desperately needs some structural growth that boosts the supply side of the economy. There are numerous routes to achieving this but it will take some bolder political decisions to be made.

Fund positioning and activity

Rates

After the rally in bond yields, we trimmed some duration at the end of the month to take the Fund to 6.0 years of exposure. We want to maintain a strategic long duration but, with plenty of volatility around, a tactical trim seemed prudent. The geographic split of duration at the end of February was 3.1 years in the US, -0.5 years in Canada, 1.5 years in the Eurozone, and 1.9 years in the UK. As a reminder, we continue to think that yield curves will steepen further. The Fund’s net duration exposure in the 15+ year maturity bucket is zero; we prefer short-dated and medium-dated bonds.

Selection

After a strong rally in the bonds, we sold the Fund’s exposure to the high yield company SIG. On the other side we purchased a new issue from software company Sage – we find the recuring revenue nature of its business very attractive. We also topped up Medical Properties Trust whose bonds we had established a position in during January. Within the real estate sector we undertook a relative value trade, switching bonds issued by Castellum into those of Heimstaden Bostad.

Discrete years' performance (%) to previous quarter-end**:

*Source: Financial Express, as at 28.02.25, accumulation B share class, total return (net of fees and income reinvested).

**Source: Financial Express, as at 31.12.24, accumulation B share class, total return (net of fees and income reinvested).