Liontrust GF Sustainable Future European Corporate Bond Fund

Key takeaways

• As geopolitical tensions eased and trade risks declined, markets refocused on inflation, policy paths and fiscal challenges, while politics and institutional pressures continued to influence central-bank signalling.
• The Fund delivered strong performance from credit over the quarter, primarily driven by successful sector allocation. The largest contributions came from Banks and REITs, both of which continued to see spreads tighten.
• We remain positive on the outlook for corporate bonds, supported by attractive all-in yields and the carry available at current spread levels.

Performance

The Fund returned 1.0%* in euro terms over the quarter, compared with the 0.9% return from the Markit iBoxx Euro Corporates Index comparator benchmark.

Market commentary

The quarter opened with geopolitical heat fading and trade risks easing, which let markets refocus on inflation, policy paths and mounting fiscal questions. Across major economies, inflation was mixed, while politics and institutional pressures repeatedly intersected with central-bank signalling. US Treasury yields initially moved higher amid shifting Federal Reserve (Fed) expectations and fiscal worries, before finishing stronger; gilt yields moved higher on a cautious Bank of England (BoE) cut and concerns over the fiscal backdrop; Bunds were comparatively steady as Euro-area data hovered near target and French politics kept spread risk in view. By quarter-end, 10-year yields sat near 4.13% (US), 4.73% (UK), and 2.71% (Germany). 

United States: Early in the period, progress in US-EU trade talks lowered tail risks and data showed resilience even as wage momentum cooled; headline CPI printed around 2.7% with core near 2.9%, and the Fed held at 4.25–4.50% amid two dovish dissents and fresh fiscal expansion via a large spending bill that nudged Treasury yields higher. As the quarter wore on, the policy narrative was dominated by pressure on the Fed – including public attacks on officials and the removal of the Bureau of Labor Statistics chief – alongside historic negative payroll revisions that softened the three-month hiring rate and lifted unemployment to 4.2%. Chair Powell’s Jackson Hole tone pivoted towards concerns over the labour market and growth risks, pulling the 10-year yield lower into month-end. Subsequent releases brought a modest +22k payrolls print, a 0.5ppt upward revision to Q2 GDP to 3.8% quarter-on-quarter on stronger consumption, and a brief sub-4% yield dip before Treasuries drifting higher to 4.13% at quarter-end. 

United Kingdom: signals from the UK macro backdrop were mixed throughout the quarter. Labour indicators softened and vacancies cooled, while inflation was generally firmer than expected and BoE speakers suggested a wary stance over price risks. The BoE then cut 25 basis points to 4.00% but paired it with a notably hawkish message and an unusually split vote, prompting markets to price out further near-term easing. Growth and inflation beats owed more to public spending and volatile components than private demand, while persistent fiscal debate weighed on the long end. Having risen around 25bps in July and August, gilt yields subsided somewhat into quarter-end, with 10-year yields broadly unchanged over September at around ~4.73%, as inflation stabilised  and the Monetary Policy Committee (MPC) reiterated caution. 

Eurozone: The bloc delivered a reassuring but unspectacular mix in Q3: Harmonised Index of Consumer Prices held at the ECB’s 2% target and core near 2.3%, while growth was fairly lacklustre. After June’s cut to a 2.00% deposit rate, the ECB paused and suggested it was near the end of the easing cycle, helping keep Bunds comparatively range-bound. Political risk re-emerged in France as budget gridlock led to a confidence vote and spread widening; later, a new prime minister arrived but markets remained cautious on reform prospects. Bunds ended near ~2.71%, with French spreads a little better behaved by quarter-end, though fiscal uncertainty lingers. 

Performance

Duration

Throughout the quarter, we consistently maintained an overweight duration position of +0.5 years versus the benchmark, with this exposure evenly allocated between Germany and the UK. 

Performance from a duration point of view was marginally negative, as 10 year Bund yields widened by 10 basis points over the period. 

Credit

European credit spreads had another strong quarter, remaining broadly stable over the three-month period. July was particularly strong, with spreads tightening significantly and the European corporate index reaching a spread of 78. This strength was partially reversed in August due to political uncertainty in France and anticipated new issuance, which led to a modest widening of spreads. However, September saw renewed demand for credit, with spreads tightening again and the index returning to a level of 78 – right where it began at the start of July.

The Fund delivered strong performance from credit over the quarter, primarily driven by successful sector allocation. The largest contributions came from Banks and REITs, both of which continued to see spreads tighten. Additional, though smaller, incremental gains were made in the insurance and utilities sectors. Following tight valuations in some areas, we have trimmed positions that appeared expensive, particularly within the telecoms space.

Trading activity 

Across the Fund, trading activity was muted. We participated in a new issue from London Stock Exchange. It was selected for its high quality and alignment with our sustainability theme, particularly its role in promoting transparency in financial markets. We also participated in a new issue from Societe Generale, moving from an existing slightly shorter maturity into the new issue for an attractive spread pick up.

Lastly, we sold out of our position in Deutsche Telecom, following strong spread tightening.

Outlook 

We remain positive on the outlook for corporate bonds, supported by attractive all-in yields and the carry available at current spread levels. While spreads have narrowed considerably from their recent wides, we have used this environment to upgrade credit quality and reduce spread duration within the portfolio.

Recent political events and shifting trade policies have contributed to increased market volatility. Despite this, we believe our high-quality corporate holdings remain fundamentally robust. If valuations become more attractive, we may look to selectively add credit exposure, though we remain prudent given the uncertain backdrop.

Credit fundamentals have softened somewhat, with interest coverage ratios declining as higher financing costs have pushed up overall funding expenses. Leverage has also returned to long-term averages, reflecting both increased debt and slower EBITDA growth due to weaker revenues and rising costs. Nevertheless, these metrics remain at healthy levels.

We expect that outperformance will increasingly be driven by credit selection, an area where we have a strong track record. Our portfolio is tilted towards high-quality issuers offering relative value, with a notable overweight to financials—particularly banks and insurers—and resilient names in the telecoms sector.

We also see potential for capital gains should government bond yields fall, and we continue to maintain a long duration stance. Combining current credit spreads with elevated gilt yields, all-in yields above 3% remain compelling; the fund’s gross redemption yield currently stands at 3.4%, reflecting its high-quality investment-grade focus.

For the remainder of 2025, we anticipate a low-growth environment. While inflation remains persistent and the “higher for longer” narrative prevails, we believe the UK economy may underperform market expectations. With signs of a softening labour market and weakening sentiment, we expect yields to end 2025 lower, and foresee a longer-term decline in gilt yields as the UK’s economic vulnerabilities become more apparent.

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

*Source: FE Analytics, as at 30.09.25, 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.