Liontrust Sustainable Future Corporate Bond Fund

Performance

The Liontrust Sustainable Future Corporate Bond Fund returned 0.6%* over the quarter, versus the 0.9% sector average of the IA Sterling Corporate Bond Index and the 0.9% return of the iBoxx Sterling Corporate All Maturities Index, both of which are comparator benchmarks.

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 looked contained to mixed, but politics and institutional pressures repeatedly intersected with central-bank signalling. US Treasury yields proved to be volatile with shifting Federal Reserve (Fed) expectations and fiscal worries before finishing stronger; gilt yields moved higher on a cautious Bank of England (BoE) cut and heavy 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 pulse and lifted unemployment to 4.2%. Chair Powell’s Jackson Hole tone pivoted toward labour and growth risks, pulling the 10-year 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 settled firmer into quarter-end. 

United Kingdom: The UK’s signal was mixed throughout the quarter. Labour indicators softened and vacancies cooled, while inflation surprised higher (headline ~3.6%) and BoE speakers kept a wary line on 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, and persistent fiscal debate weighed on the long end. Into quarter-end, gilt volatility subsided with 10-year yields broadly unchanged around ~4.73% as inflation stabilised  and the Monetary Policy Committee (MPC) reiterated caution. 

Eurozone: The bloc delivered a “reassuring but unspectacular” mix: Harmonised Index of Consumer Prices held at the ECB’s 2% target and core near 2.3%, while growth ticked along at about +0.1% quarter-on-quarter. 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 stayed cautious on reform prospects. Bunds ended near ~2.71%, with French spreads a little better behaved by quarter-end, though fiscal uncertainty lingered. 

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. 

Duration

Throughout the third quarter, we maintained a strategic long duration position, implemented exclusively through UK gilts. This meant that the Fund underperformed the benchmark as UK 10-year gilt yields rose 20 basis points. 

At the end of July, we reduced our duration overweight by 0.25 years, taking the Fund to 1.0 year long relative to the benchmark, in response to ongoing fiscal uncertainty. In August, as 10-year gilt yields approached 4.75% – near the top of their year-to-date range – we tactically added 0.25 years, bringing the duration overweight back to 1.25 years. For the remainder of the quarter, we maintained this 1.25-year duration overweight, with the gilt market remaining range-bound and 10-year yields only marginally lower compared to the previous month. No further adjustments were made to our duration stance as market conditions remained stable.

Credit 

Overall, Q3 was marked by a favourable technical environment for credit, with healthy corporate fundamentals and low default risk expectations supporting spreads, even as political and fiscal uncertainties occasionally weighed on sentiment.

Credit markets continued to perform strongly throughout the third quarter, with spreads tightening further and investor demand for corporate bonds remaining robust. In July, investment-grade credit spreads tightened by about 8bps, driven by limited new issuance and steady inflows into credit funds. This technical backdrop – characterised by muted supply and ample demand – pushed sterling and euro investment-grade indices to multi-year lows in spread, benefiting credit portfolios.

August saw a more subdued performance, with spreads stabilising after consecutive months of tightening. While spreads initially moved tighter, they retreated towards month-end amid expectations of increased new issuance and heightened political uncertainty in France. Despite this, investor appetite for corporate bonds persisted, supported by low issuance and strong subscription levels.

September brought another leg of spread tightening, with the sterling corporate index falling from 91 to 82 – levels last seen in 2007. The ongoing trend was underpinned by limited primary issuance and sustained investor demand, providing strong technical support and driving persistent spread compression.

The Fund delivered strong outperformance relative to the benchmark in the third quarter, driven primarily by strong security selection. The insurance sector stood out as a key contributor, with our overweight position and careful issuer selection capturing much of the quarter’s gains as riskier assets from high-quality issuers continued to tighten.

Trading activity 

Trading activity over the quarter included selective participation in new primary market deals. In July, we added Supermarket Income REIT to the portfolio – a defensive investment with strong ESG credentials, underpinned by long-term, inflation-linked leases to major UK supermarkets. In August, we took part in a new issue from Anglian Water, a favoured high-quality name, which lately has been supported by recent equity injections and improved sector clarity. Anglian, in conjunction with shareholders’ support, became the first water company to change their company constitution to lock public interest into the way they run their business. 

We participated in a new issue from Welsh Water, a company we like due to its public ownership. This results in profits being reinvested into infrastructure and environmental improvements rather than paid out as dividends. 

Another new addition came from the London Stock Exchange, which was selected for its high quality and alignment with our sustainability theme, particularly its role in promoting transparency in financial markets.

Several relative value switches were executed to enhance spread, manage duration, and optimize sector exposures. In July, we switched from Compass to Blend Funding, both high-quality defensive A-rated names, for a material pick-up in spread. We also moved slightly down the curve in Legal & General (from 50s into 48s). 

We executed several switches aimed at picking up spread for marginal extension of duration in Societe Generale, British Telecom, and HSBC. 

Furthermore, in order to reduce our underweight in duration at the long end of the curve, we added longer-dated bonds from Blend Funding and the University of Cambridge. We benefitted from being underweight the longer end of the credit market, as yield curves have steepened.  We have reduced the underweight position relative to the benchmark lower the risk if this reverses and to lock in gains. 

Regarding cross currency trades, we performed a cross-currency switch within Motability, selling out of euro-denominated bonds into a similar maturity sterling bond as the initial spread advantage compressed.

Finally, we sold out of the perpetual Standard Chartered bond in July. The bank’s sizeable exposure to China and recent company actions reduced our conviction in a bondholder-friendly outcome, especially given ongoing geopolitical tensions and global economic headwinds.

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.

Fundamentals have weakened, mainly due to commodity sector pressures and cash erosion, but margins remain robust at near decade highs with defensive sectors showing resilience. Continued pressure on interest coverage is expected as refinancings continue and net interest costs increase. About 30% of the IG market’s debt matures by 2027, and refinancings will occur at higher rates. Net leverage has slightly increased, however still remains mid-range compared to the past decade. 

It is becoming more evident 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 5% remain compelling; the fund’s gross redemption yield currently stands at 5.30%, 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.