Liontrust GF Short Dated Corporate Bond Fund

The Liontrust GF Global Short Dated Corporate Bond Fund (C5 share class) returned 1.6%* in sterling terms in Q2 2025, while the ICE BofA 1-3 Year Global Corporate Index (USD hedged) comparator benchmark returned 1.6%. The Fund’s primary US dollar share class (B5) returned 1.6%.

The yield carry on the Fund was the largest driver of the total return during the quarter. The overall market impact was low. Incremental performance was added through numerous positions; bond selection and allocation were positive, rates positions were mixed. 

Market backdrop

The quarter started with 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; even though 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 how these will impact economic activity in the next few quarters and whether there will be second order inflationary impacts from tariffs.

In the US, core good prices are where the inflationary impact of tariffs continues to slowly flow through. The Federal Reserve cares more about whether these goods price increases feed through to inflation expectations, including wage rises, and therefore impacts services inflation. Services remain the dominant part of the inflation basket with nominal wage inflation being highly correlated to the non-housing related categories within services.    The data so far is mildly supportive of the thesis that tariffs will mainly impact goods prices, and the second order impact will be limited. This thesis only works if a surge in wage inflation is avoided, which given the loosening in US labour market conditions looks set to be the case. It was a deterioration in the US labour market data that caused the Federal Reserve to resume cutting interest rates during the quarter.

Early in August weak US labour market data caused a reappraisal by the market of when the Federal Reserve would resume cutting interest rates. Not only were headline payrolls weak, but there were also significant downward revisions to past figures. The payrolls data released in early September remained subdued enough that a September interest rate cut in the US became a certainty.  

The Federal Open Markets Committee (FOMC) cut US interest rates by 25bps to take the Fed funds rate to the 4.0% to 4.25% range. The vote split was 11-1 with Trump’s recent appointee Miran voting for a larger 50bps cut. An interesting point about this meeting is that neither Waller nor Bowman, both of whom had previously voted for a cut when others had not, chose to vote for 50bps. We see this as a positive sign for Federal Reserve integrity – the odds of either of them being given the role of Chair have greatly decreased but they have put the institution’s needs ahead of their own ambition.  

The FOMC statement continues to describe economic growth as having moderated, and inflation as “somewhat elevated.” It is the labour market part of the calculation that tipped the Fed’s hand. Conditions have moved from being described as “solid” to a statement that “…job gains have slowed, and the unemployment rate has edged up but remains low.” It is the risks around the trajectory of labour market conditions that have garnered the Fed’s attention: “…the Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.” Thus, in the press conference Fed Chair Powell was keen to characterise this interest rate cut as one of “risk management.”

The European Central Bank (ECB) left interest rates unchanged at 2.0% throughout the third quarter. The Bank of England’s Monetary Policy Committee (MPC) cut interest rates once in August and then held them steady at 4.0% in September. The vote split was 7-2, with Dhingra and Taylor wanting to reduce interest rates by 25bps. The “gradual and careful” approach to withdrawing monetary policy restrictiveness was maintained; there was an outside chance that the MPC removed this language. Nevertheless, the caveat remains that “…the timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease.”  

It is worth noting that the MPC still expect inflation to peak for this year at around 4% in September largely due to food and services prices. For the two doves voting for a cut these inflationary pressures were seen as not being demand led and therefore “…a less restrictive policy path was warranted to insure against an increased risk of recession, below-target inflation and a further deterioration in supply capacity.” For those in the majority who voted for a hold there was a range of views with the conclusion that “…the key question for monetary policy remained whether upside risks to the continuing process of disinflation, from elevated inflation expectations and possible structural changes in price and wage-setting behaviour, could be outweighed by downside risks stemming from the potential for a more substantial weakening in demand.”

In the UK, monetary policy is not the largest driving force for its sovereign bond yields at present – the fiscal side of the equation matters more. Other countries such as France, the US, and Japan also have strained public finances that the bond market is losing patience with. Focusing on the UK, the attractive valuations on offer in gilts need to be weighed against the erosion of confidence in the UK’s creditworthiness. The incoming Labour government was dealt a tough hand of cards by the prior incumbents; nonetheless,, they are playing them really badly. By leaving just under a £10 billion buffer, and back end loading fiscal consolidation, Chancellor Reeves pushed the limits of credibility.  

The UK, like many countries, needs to maintain access to the bond markets to refinance existing debt as it matures and provide the funding for the shortfall between taxes raised and government spending undertaken. The problem is that it is nigh on impossible to tax your way to growth. The UK’s fiscal deficit needs to be dealt with by having serious conversations about what the state can and cannot provide given the UK’s rapidly aging demographics.   

There is however good news: the UK can still control its own destiny. Stronger growth than the current lacklustre numbers, or a surge in productivity, would quickly ease the fiscal strains. The UK does have many leading industries and world class research, cutting red tape and freeing up trade could help capitalise on these.  Furthermore, any gain in credibility that leads to lower gilt yields creates a virtuous circle of reduced interest costs to be borne on the UK’s debt over the longer term.

Gilts are cheap for myriad reasons but do offer great value for those willing to tolerate volatility over the coming months. This is a global developed market bond fund and for the first time in many years we do find UK duration exposure compelling, and we retain room to buy more given the risks involved. It is up to Chancellor Reeves and the Labour Party, on the 26th of November, to deliver a budget with both some reality and some hope.

Fund performance

Short dated corporate bonds

We split the Fund into those bonds which qualify for our strict criteria as short dated corporate bonds, namely less than five years to legal maturity for bonds issued by corporate issuers and less than three years for financial, and three additional performance sources. However, it is worth emphasising we manage the Fund’s positioning and risk in its entirety. 

The yield carry on the Fund was – as is the case whenever volatility is not elevated – the largest driver of the total return during the quarter. Incremental performance was added through bond selection.

Alpha sources

Rates

Being long duration, relative to our neutral of 1.5 years of exposure, was beneficial with the Fund spending the quarter having between 2.0 and 2.25 years of exposure. US Treasury yields at the short-dated end of the market were a little lower in the quarter, with those on German and UK sovereign bonds both higher; the net effects cancelling each other out. It was the yield carry that created the benefit. The Fund finished the quarter with 2.2 years of duration split between 0.9 years each in the US and Europe, and 0.4 years in the UK.

Allocation

The Fund retains its decompression trade between two European credit default swap indices. We are long risk (have sold protection) iTraxx Europe, which is the broad 125 name index including some financials, and short risk iTraxx senior financials, which is the 30 name pure financials index at the senior attachment point. Within credit, financials tend to be higher beta (they have done since the financial crisis) given the systemic nature of the sector and the high bond index weightings. This cheap insurance against any deterioration in market sentiment had a two basis points cost during the quarter, with credit spreads at such tight levels we maintain the position given its attractive risk/reward profile. 

Selection

The biggest contributors to performance emanated from those bonds that count as Selection. Standard Chartered’s bonds did well during the quarter, and we continue to believe these are a tender candidate. Resolution Life’s bonds also performed strongly with the Nippon Life impending takeover likely to lead to a credit rating upgrade. Worldpay’s bonds added value and these were sold as we believed the upside from the takeover by an investment grade company had already manifested itself in the bond’s pricing. The one short-dated carry bond that added a little extra performance was Aroundtown. These bonds were tendered for, with completion occurring after quarter end. A new bond with just over 5 years maturity was bought to replace them; it will not count as carry due to the strict criteria until January next year. Other turnover with inthe Fund was mainly based upon refreshing existing positions – both NBN and America Movil’s bonds were switched into new issues with 2030 maturities.

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

Past performance does not predict future returns

*Source: Financial Express, as at 30.09.25, total return (net of fees and interest reinvested), C5 class. Discrete data is not available for ten full 12-month periods due to the launch date of the portfolio.