Liontrust Sustainable Future Monthly Income Bond Fund

The Liontrust Sustainable Future Monthly Income Bond Fund returned 3.2%* over the quarter, placing it in the first quartile of the IA Sterling Corporate Bond sector (a comparator benchmark), where the average return was 2.7%. The Markit iBoxx GBP Corporates Index, also a comparator benchmark, returned 3.1% over the period.

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.

The quarter began with the reintroduction of sweeping tariffs, prompting an initial market sell-off and increased volatility. However, the Trump 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 its 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 BoE 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.

Similar to the UK, Europe started Q2 under the shadow of US trade policy. Diplomacy with the US over de-escalation and the ECB’s rate cut in April offered brief stability. Confidence around further cuts supported Bunds and helped compress peripheral spreads. 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.

Performance

Duration

At the start of the quarter, the Fund held a duration position 1.5 years longer than the benchmark, entirely expressed through UK exposure. Following a rally in 10-year gilts to around 4.40%, we trimmed this position by 0.25 years, ending the quarter with a 1.25-year overweight. Despite this adjustment, we continue to hold a strategic long duration stance, reflecting our expectation of declining yields amid weakening economic data and anticipated rate cuts from the Bank of England. The Fund benefitted from its long interest rate positioning and generated the majority of its relative outperformance from duration, as yields ended 20 basis points lower than the start of the quarter.

Credit

During the quarter, sector and security selection had a slightly negative impact, which was anticipated given the tightening of spreads and the Fund’s shorter spread duration relative to the benchmark. The sterling corporate index tightened by 10 basis points (bps) over the period. During the previous quarter, we had proactively reduced our spread duration throughout Q1, as valuations approached historically tight levels. This positioning benefited us when spreads widened following “Liberation Day”, though we slightly lagged the benchmark when the market rallied and spreads returned to their tightest levels.

The financials sector was the strongest contributor, driven by our overweight in insurance and effective stock selection. Our allocation to the banking sector contributed positively to performance. However, this was partially offset by the underperformance of our perpetual bond holding in Standard Chartered. The issuer was likely affected by ongoing geopolitical tensions – particularly the reciprocal trade tariffs between the US and China – and broader global economic headwinds. Given Standard Chartered’s relatively high exposure to China compared to peers, this helps explain its weaker performance during the period.

Conversely, our underweight in utilities detracted from performance as the sector rebounded after underperforming during the Q1 spread rally. Stock selection in telecommunications also weighed on returns. While our positioning in this defensive sector was intended to provide downside protection in the event of spread widening, its tighter valuations limited upside during the rally.

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.

While issuers stepped back in April, those that came in May saw volatility lead to increased premium demanded by investors. This let us participate in attractively valued new issues from Sage, RAC Group and British Telecom.

Later in the quarter, we participated in a new issue from Blend Funding, which came at an appealing level for single A risk. We funded this from Credit Agricole, picking up spread and reducing beta while keeping the same rating. 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.

We also added Orsted to the Fund. We are happy with the operational strength of the existing asset base, and, while cost pressures are affecting the pipeline, Orsted is taking credit-friendly actions to shore up its balance sheet making this an attractive entry point. We funded this from short dated Welsh Water paper that had outperformed this year’s volatility.

Outside of trading, we maintained pressure on companies we hold to make improvements that better support a sustainable transition, meeting with Orange to discuss auditing its supply chain and Santander to discuss its financing. Separately, we also continued our engagement with water companies, aiming to meet each of our holdings again. As this progresses, we have been pleased to see progress has been made, but acknowledge there is much further to go amid a confluence of shifting regulators, political pressure and a review led by Sir John Cunliffe. The number of improvements and openness these companies have had with us has steadily improved since we first started engagement in 2022.

Outlook

We maintain a constructive outlook on corporate bonds, supported by attractive all-in yields and the carry available from current spread levels. While spreads have tightened significantly from their wides over the past couple of years, we have used this as an opportunity to enhance credit quality and reduce spread duration. Recent political developments and evolving trade policies have introduced greater market volatility. Despite this, we believe many of our high-quality corporate holdings remain fundamentally sound. Should valuations adjust further, we may look to selectively increase credit exposure, though we remain cautious given the uncertain backdrop.

Credit fundamentals have moderated somewhat. Interest cover ratios have declined as higher all-in financing costs have pushed up blended funding costs. At the same time, leverage has returned to long-term averages, reflecting increased debt levels and slower earnings growth – driven by a combination of weaker revenue and rising costs. Nonetheless, both metrics remain at healthy levels.

We believe that alpha will increasingly be driven by credit selection – an area where we have consistently delivered outperformance. Our portfolio is tilted towards high-quality issuers offering relative value and strong exposure to the asset class. This is reflected in our overweight to financials, particularly banks and insurers, as well as our positioning in the telecoms sector, which we view as resilient and high quality.

We also see potential for capital gains should government bond yields decline, and the Fund continues to hold a long duration stance. When combining current credit spreads with still-elevated gilt yields, all-in yields above 5% remain compelling. At present, the Fund’s gross redemption yield stands at 5.30%, driven by high-quality investment-grade credit.

Looking ahead to 2025, we anticipate a low-growth economic environment. While inflation has proven persistent and the narrative of “higher for longer” remains, we believe the UK economy may weaken more than markets currently expect. With signs of a softening labour market and deteriorating economic sentiment, we expect yields to end 2025 lower than where they began. Over the longer term, we foresee a decline in gilt yields as the UK’s underlying economic fragilities become more apparent.

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

*Source: FE Analytics, as at 30.06.25, B share class, total return, net of fees and interest reinvested.

**Source: FE Analytics, as at 30.06.25, primary share class, total return, net of fees and interest reinvested.