Liontrust GF Sustainable Future European Corporate Bond Fund

The Fund returned 1.9%* in euro terms over the quarter, compared with the 1.7% return from the Markit iBoxx Euro Corporates Index comparator benchmark.

Market commentary

The second quarter of the year was a mix of global policy tensions, geopolitical flashpoints, and macroeconomic uncertainty, with investors shifting focus between all three. Having begun with heavy market disruption from US-imposed tariffs, the quarter then moved towards geopolitical tensions in the Middle East, closing with a return of focus to the ongoing fiscal risks. Despite risk sentiment moving throughout, the underlying themes of inflation, the pace of monetary easing, and persistent macro pressures remained constant.

Europe started Q2 under the shadow of US trade policy. Diplomacy with the US over de-escalation and the European Central Bank’s (ECB) rate cut in April did offer brief stability. Confidence around further cuts supported Bunds and helped compress peripheral spreads. However, later in the quarter volatility was renewed, with Bund yields rising amid tariff-related rhetoric. However, relative fiscal discipline in southern Europe helped maintain stable spreads. The ECB cut again in June, bringing the deposit rate to 2.00%, though commentary suggested the end of the easing cycle may be near. Despite inflation surprising to the downside at 1.9%, rising budget spending in Germany edged Bund yields higher, mirroring fiscal concerns elsewhere.

In the US, the quarter began with the reintroduction of sweeping tariffs, prompting an initial market sell-off and increased volatility. However, President Trump’s administration’s 90-day pause on implementation helped calm investor nerves later in April. Economic indicators were more mixed. Consumer and business sentiment weakened, approaching pandemic-era levels, though the temporary resolution in trade policy steadied markets. May shifted concerns and brought attention back to fiscal concerns, with markets spooked by the administration’s tax and spending plans. Sovereign yields spiked before partially retracing. The Fed, now under political pressure to increase their pace of cuts, maintained its target rate at 4.25–4.5% in June, making it six months since the last cut. Policymakers are still projecting two cuts for the year, albeit with growing division among the committee.

The UK mirrored global developments, with April’s weaker PMIs and falling inflation pushing gilt yields lower, though volatility persisted. In May, inflation rebounded modestly and GDP growth surprised to the upside, prompting the Bank of England (BoE) to deliver a 25 basis point cut. However, the dovishness was tempered by an MPC vote split. Things were more subdued as the quarter progressed. Labour market indicators softened notably, and despite headline CPI surprising marginally on the upside, services inflation – which the BoE watches closely – cooled. The Bank then chose to hold rates steady in June, citing dual concerns over a cooling economy and stubborn inflation. Fiscal questions returned to the forefront late in the quarters, as internal political pressures mounted over welfare reforms and raised questions of where the current government could deliver savings.

Performance

Duration

We started the quarter with an overall duration position of +0.75 years relative to the benchmark, expressed as +0.50 years long through the UK and +0.25 long through Germany. Halfway through the quarter, we removed 0.25 years from our long UK position as 10-year yields had rallied to around 4.40%. The overall duration is now +0.50 years split equally between UK and Germany. Performance from our duration positioning was in line with the benchmark.

Credit

During the quarter, sector allocation added value, though this was largely offset by the impact of individual security selection. The Fund’s overweight exposure to spread duration proved beneficial, as credit spreads tightened over the period. The European corporate index narrowed by five basis points, reaching its tightest levels in over two years.

The strongest contribution to sector allocation came from our positioning in banks, followed by insurance, with additional support from other preferred sectors. Security selection however detracted from performance. Majority of underperformance came from banks, industrials and real estate.

Outside of financials, two of our largest contributing names to performance were Severn Trent and Vonovia. Their outperformance is supported by their strong sustainability credentials, which puts them in a comfortable position versus peers. Severn Trent is one of the few UK water companies to still receive the highest score from the government’s Environment Agency. With this it outperforms on the regulator’s incentive rewards scheme which then bolsters its finances. The majority of the sector pay penalties on this scheme, impressing the need to improve your environmental impact. Vonovia also outperformed peers. Accrediting Science Based targets and a commitment to net neutral housing stock by 2045 means it is frontrunning potential regulatory headwinds that are starting to come in place.

Trading activity

There was a quiet start to trading activity this quarter, as ongoing trade disputes and geopolitical uncertainty caused issuers to delay coming to market. As concerns subsided and trade agreements were signed, activity then increased as the quarter progressed.

Early in the quarter we did participate in one new issue, from Alphabet. Given market volatility this was an opportunity to add a higher credit quality name at an attractive level. As the quarter progressed we also participated in new issues from Roche, Visa and Natwest Group, all coming at attractive valuations.

Despite a quieter quarter, we were still active within financials. We sold out of position in Generali, taking profit from the bond’s recent tightening and rotated the proceeds into other names across our favoured sectors. We also performed relative value switches within financials. We made switches between Credit Agricole bonds and Société Générale bonds. In both we moved up the capital structure for a minimal drop in spread. With spreads compressing following the “Liberation Day” weakness now is a compelling time to take risk out of the portfolio, especially as many of the fiscal risks remain.

Outlook

We remain reasonably constructive on the outlook for corporate bonds based on attractive all-in yields and the carry from spread currently on offer. We are cognisant of the tightening we have seen over from the wides over the last couple of years, and as such have been taking opportunities to increase credit quality and reduce spread duration. Recent political developments and trade policies have led to a decompression in spreads and have caused volatility in the markets. We think that many of our high-quality corporates have solid fundamentals, and may take the opportunity to add to credit exposure again on any further repricing, but remain wary of the volatile backdrop.

There has been a moderation in overall credit fundamentals, such as interest cover metrics, as increasing all-in cost of new financing has resulted in an upward trend in blended funding costs and a corresponding reduction in interest cover. Leverage has returned to long run averages, reflecting an increase in debt levels alongside lower EBITDA growth, due to a combination of lower revenue growth and rising costs. However, both of these metrics remain at healthy levels.

We therefore think that additional performance will be generated from credit selection, an area where we have delivered outperformance over recent years. We are exposed to high quality names that on a relative basis offer attractive value and good exposure to the asset class. This is reflected in our overweight positioning to financials through both the banks and insurance sectors, overweight telcos which we view as a high-quality resilient sector. We expect there to be potential for additional capital upside from declining government bond yields and the Fund retains its long interest rate position.

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

*Source: FE Analytics, as at 30.06.25, A5 share class, in euros, total return (net of fees and income reinvested). Discrete data is not available for 10 full 12-month periods due to the launch date of the portfolio.