Liontrust SF Corporate Bond: February 2022 fund update

• This fund’s managed by an experienced team that’s passionate about sustainability
• They avoid ‘sin stocks’ and invest in bonds issued by companies making a positive environmental or social difference
• The fund’s done well over the long term, boosted by the managers’ ability to select bonds with strong prospects
• The fund was recently added to the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Liontrust Sustainable Future Corporate Bond fund aims to deliver a combination of income and capital growth over the long term by investing mostly in sterling-denominated, investment grade corporate bonds. The fund excludes areas some may find unethical, such as tobacco, coal and armaments and invests mostly in companies making a positive difference to the environment or society. This means the fund will perform differently to peers at times, so could offer some diversification to a traditional fixed income portfolio. It could also help to diversify a portfolio focused on other assets, such as company shares. More broadly, it could be considered for corporate bond exposure, but with a sustainability focus.

Manager

The fund’s managed by a team of four: Stuart Steven, Kenny Watson, Aitken Ross and Jack Willis. Steven leads the team as Head of Sustainable Future Fixed Income. He’s managed fixed income funds at a number of companies over the years, including Britannic Asset Management, Legal & General and Scottish Widows. He joined Alliance Trust Investments in 2009 and began managing the SF Corporate Bond fund in August 2012. Alliance Trust Investments was acquired by Liontrust in April 2017.

Co-manager Watson has 17 years’ experience managing fixed income funds, and Ross and Willis have researched and analysed fixed income investments since 2012 and 2016 respectively. Like Steven, the trio joined Liontrust when it acquired Alliance Trust. The four managers, and three other colleagues, form the small but focused Sustainable Future Fixed Income team.

Alongside this fund, the team also manages the Liontrust Monthly Income Bond fund and the Liontrust GF Sustainable Future European Corporate Bond fund, as well as the fixed income sleeves of a small number of multi-asset funds. We think this is a reasonable workload given the portfolios are similarly managed.

The team can also draw on an Independent Advisory Committee, which is an external panel of sustainability experts who provide feedback on the investment process, highlight areas for improvement and act as an additional level of oversight.

Process

The fund is part of Liontrust’s Sustainable Future range of funds. These funds aim to help create a cleaner, safer and healthier society for the future and generate attractive returns for investors. The managers believe investing in sustainable companies provides greater return potential, and less risk, than other companies, and that many other investors fail to value the sustainability of a business correctly.

Their investment process revolves around a quarterly strategic outlook meeting, where the managers form their views on the future direction of economic growth, interest rates and inflation. This helps shape the way they construct the fund, and how much risk they’re willing to take. The team also conducts more frequent meetings to review positioning, discuss new opportunities and identify new risks.

Sustainability and ESG analysis is fully integrated into the team’s investment process. They aim to identify bonds issued by high-quality companies whose core products or services make a positive contribution to society or the environment. This sustainability analysis is completed for every bond issuer in the fund.

The fund also employs negative screening. This means it won’t invest in any company that makes more than 5% of its revenues from alcohol, animal testing services, coal, oil & gas, gambling, intensive meat and fish farming, nuclear, ozone depleting substances, pornography, tobacco or weapons systems.

The fund’s four managers each have different specialisms. Steven focuses on portfolio construction and banks, Watson focuses on utilities, retail, household goods, travel and leisure, Ross looks at insurance and financial services, and Willis covers telecoms, property, healthcare, industrials and chemicals. Steven and Ross specialise in interest rate management, and Watson and Willis look after credit positioning. Steven has the final say over the portfolio’s overall risk positioning. There is a fair degree of coverage overlap, which leads to a good amount of discussion and challenge amongst the team.

Banks, utilities, insurance and telecoms are some of the fund’s largest sector exposures, but there’s a broad spread of investments across a variety of sectors to ensure diversification. The managers are currently running the fund with less sensitivity to interest rate rises (lower duration) than its benchmark, the iBoxx Sterling Corporate All Maturities Index, because of their view that interest rates are set to rise.

Current investments include bonds issued by housing association Places for People. The company provides a key benefit to society through affordable housing and implements strict positive environmental policies on new building development.

The managers have the flexibility to invest in derivatives and emerging markets which, if used, adds risk.

Culture

Liontrust gives managers the freedom to manage their funds according to their own investment and market views. The company simply asks managers not to deviate from their investment processes. Each manager's funds are regularly checked by other senior managers at Liontrust to ensure they're staying true to their investment processes.

We like that all Liontrust fund managers invest a significant amount of their own money into the funds they run, and their incentivisation is tied to the performance of the funds they manage. We think these factors help to align their interests with those of investors.

The freedom afforded to fund managers at Liontrust means there are no top-down views imposed on managers, so the quality of ESG (Environmental, Social and Governance) integration varies across the firm. That said, the firm’s Sustainable Future range of equity and fixed income funds incorporate ESG analysis in a robust way. We like that individual managers have full responsibility for the investments under their coverage, undertaking the sustainability and ESG analysis, as well as the more traditional company analysis. The same manager also spearheads any engagement that takes place with the companies they cover – it’s not farmed out to a separate Stewardship team. It’s clear that the team regards sustainability and ESG as key parts of the investment process, and it’s considered with the same level of importance as the more traditional financial analysis.

The team produces regular insight articles, available via the Liontrust website. They also produce a detailed annual Engagement and Voting review, and a Sustainable Investment Annual Review, which explores the team’s views on a variety of sustainability-related issues.

Cost

This fund has an ongoing annual charge of 0.57%. The HL platform fee of up to 0.45% per year also applies.

Performance

The Sustainable Future Fixed Income team began managing the fund in August 2012 and since then it’s risen strongly, outperforming peers in the IA £ Corporate Bond sector. Our analysis suggests returns were boosted by the managers’ ability to invest in bonds issued by companies with strong prospects. The managers’ focus on high-quality bond issuers means we typically expect the fund to offer some shelter when markets fall, but lag when markets rise quickly. Remember, past performance is not a guide to the future. Like all funds, the value could fall as well as rise so investors could get back less than they invest.

Steven’s track record running fixed income funds prior to this one is positive, but less consistent than his record on the SF Corporate Bond fund. This is partly down to the relatively poor performance of the Scottish Widows Corporate Bond fund, which he managed from April 2008 to November 2009. He inherited the fund during the global financial crisis, when it was very difficult to sell bonds, which made it hard for him to invest the portfolio in line with his own investment process. That said, he was able to sell some bonds he believed were most at risk, and add to those he believed were significantly undervalued, and the fund recovered well when the market turned.

The Monthly Income Bond fund, which Steven started managing in June 2010 and still manages to this day, also experienced a bout of volatility early in his tenure. This was partly because the fund invested more in bonds issued by banks than its benchmark, and they performed poorly as some investors feared a repeat of the financial crisis. After reviewing every investment though, Steven was confident the banks were in a stronger financial position than in 2008 and added to his investments. The fund’s investments in banks later added a significant amount of value.

It’s worth noting his previous ventures didn’t have any exclusions, and didn’t invest in companies making a positive difference, so the SF Corporate Bond fund is a different proposition and will perform differently. This also means the fund will perform differently to peers in the IA £ Corporate Bond sector and the benchmark at times. When the excluded areas are out of favour and their prices fall, the fund could do well. When they perform well, the fund will miss out. We ultimately think the managers have the potential to reward those who are prepared to take a long-term approach, although there are no guarantees. Within the universe of responsible fixed income funds, we have conviction in this one, but there are also other Corporate Bond funds on the Wealth Shortlist without strict exclusion criteria that may offer superior performance potential.

At the time of writing, the fund pays a yield of 2.70%, although yields are variable, not guaranteed, and yields are not a reliable indicator of future income.

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2022

MORE ABOUT Liontrust SF Corporate Bond, INCLUDING CHARGES

Liontrust SF Corporate Bond Key Investor Information