Liontrust Strategic Bond Fund

The Liontrust Strategic Bond Fund returned 0.5%* in sterling terms during July. The average return from the IA Sterling Strategic Bond sector, the Fund’s comparator benchmark, was 0.7%.

Market backdrop

July saw progress being made on provisional trade deals between the US and various other countries as the world adjusts to the new order of the US having significant trade tariffs. From a global economic perspective, the most important deal was the one between the US and EU, with the latter paying 15% on most exports into the US. In reality it will be mainly the US consumer that pays; despite the fact that President Trump hates VAT (value added tax), he is effectively introducing a bespoke form of it into the US. Although we are starting to get some clarity on trade deals, there is still heightened uncertainty about whether there will be second order inflationary impacts from tariffs, how much trade will be diverted, and what the economic downside is for export-led countries. This leaves central banks in a bit of a quandary.  

Starting with the Federal Open Markets Committee (FOMC), which held US interest rates steady in the 4.25% to 4.50% range. There were two dissenters calling for a 25bps cut (Bowman and Waller) which is the first time there have been two dissenters since 1993. There were two marginal changes to the statement which, due to the economic activity description, erred on the dovish side. Firstly, the July statement now says “…recent indicators suggest that growth of economic activity moderated in the first half of the year,” compared to the June description of activity expanding at a solid pace. Secondly, in June the FOMC said that uncertainty had diminished but remains elevated; in July, the diminished reference has been removed, and we are back to “…uncertainty about the economic outlook remains elevated.”

Fed Chair Powell had a more hawkish stance at the press conference; my interpretation is that most of the FOMC members need more evidence before they would be persuaded of the case for a rate cut. Regarding the inflationary effects of tariffs Powell stated “… a reasonable base case is that the effects on inflation could be short-lived, reflecting a one-time shift in the price level, but it is also possible that the inflationary effects could instead be more persistent.” Hence, there is a desire to see more inflation data before altering rates. The debate on the secondary inflationary impacts of tariffs is unlikely to be resolved by mid-September, so the strength of the labour market is the key to whether the Fed will cut rates. Weak US employment data released on the 1st of August does bring the September FOMC meeting firmly back into play.  

The European Central Bank (ECB) left interest rates unchanged as was widely anticipated, with the deposit rate remaining at 2.0%. The ECB Governing Council clearly contains a range of opinions; in this instance the decision was unanimous. The statement was mercifully short – now that inflation is at 2%, it was repeated that the ECB is “…determined to ensure that inflation stabilises at its 2% target in the medium term.” There was an obvious big caveat about the elephant in the economic room, “…the environment remains exceptionally uncertain, especially because of trade disputes.” The ECB is now in a watch-and-wait mode and continues to follow “…a data-dependent and meeting-by-meeting approach” with no predetermined rate path.

At the accompanying press conference, President Lagarde mentioned that the ECB forecast is for an inflation undershoot in 2026, but it is not going to be moved by a minor deviation. Lagarde stressed that policy will be based on the medium-term target of 2%. There was an admission from Lagarde that a strong euro creates downward pressure on inflation: “…stronger euro could damp inflation more than expected.” On tariffs, Lagarde raised the point that there is not just the direct impact, tariffs could also lead to trade re-routing. Furthermore, there might also be some supply chain bottle necks; so, there is no definite conclusion yet which force will prevail.  Lagarde emphasised that the ECB is in a good place to hold and to “wait and watch” how these risks develop over the next few months. Ongoing data and forecasts will determine the monetary policy stance. The next ECB staff economic forecasts are out for the meeting in September. In my opinion if these show inflation below 2% towards the end of the forecast period, then the ECB will act. This would move beyond the “minor deviation” thesis in 2026 that Lagarde was not worried about. 

Fund positioning and activity

Rates

Duration exposure was maintained in the vicinity of 6.5 years during July. The Fund finished the month with 6.4 years of duration exposure split between 3.7 years in the US, -0.5 years in Canada, 1.4 years in the Eurozone, and 1.8 years in the UK. As a reminder, on the yield curve front with a total 15+ years maturity bucket exposure of 0.9 years, the Fund is still underweight relative to indices but no longer has zero exposure having added in April.

Allocation and Selection

Activity in credit markets was low during July. The investment grade credit weighting at the end of the month was 64%. High yield exposure is 18%, which is 23% in bonds minus a 5% risk reducing overlay. We await a period of higher volatility in credit markets to rotate holdings into new value opportunities and increase exposure overall.

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

*Source: Financial Express, as at 31.07.25, accumulation B share class, total return (net of fees and income reinvested).**Source: Financial Express, as at 30.06.25, accumulation B share class, total return (net of fees and income reinvested).