Jack Willis explains why 2025 was a strong year for the Liontrust Sustainable Future Fixed Income strategies, the positive and negative impacts on performance and the team’s engagement with insurance companies.
Jack [00:00:11] Of the many words that have been used to describe 2025, uneventful is certainly not one which springs to mind. Markets had to contend with a number of competing forces alongside some unpredictable twists and turns as global events unfolded. Despite these challenges, 2025 was another fantastic year for our Sustainable Fixed Income strategies with both the Sustainable Future Monthly Income Bond Fund and Sustainable Futures Corporate Bond Fund delivering top quartile performance relative to the IA Stirling Corporate Bond peer group. Coming into the year, we believed that the asset class should perform strongly, delivering mid to high single digit returns, and that is largely how it played out with the Sterling Corporates Index returning 7.3%, although not necessarily in the way we had expected. 2025 proved to be the year that we saw a return to divergence in developed government bond markets, as investors were forced to weigh up the impacts of heightened geopolitical and fiscal uncertainty alongside mixed signals in economic fundamentals. US 10-year treasury yields fell over 40 basis points over the year, as the newly appointed Trump administration wasted little time in attempting to deliver on its campaign promises for bold policymaking, particularly with regards to trade tariffs. Although on what became known as 'Liberation Day', markets were still taken by surprise by the severity of tariff measures, causing significant volatility in both government and corporate bond markets amidst serious concerns over the impact on the global growth outlook and the end of US exceptionalism. However, ultimately, this volatility was short-lived as both President Trump and the widening in credit spreads backtracked quickly, with investors treating President Trump's subsequent regular threats of policy action over the rest of the year with a healthy dose of scepticism. Meanwhile, German Bund yields rose by 50 basis points following the historic relaxation of the German debt break, signifying a commitment to a substantial increase in fiscal spending by the newly formed coalition government. Political instability and uncertainty was also a regular feature in France with ongoing concerns over the fiscal deficit. In the UK, 10-year gilt yields were largely unchanged. The year was dominated by fiscal stability concerns driven by a heady combination of a lack of fiscal headroom, rebellious labour backbenchers, and the not so distant memories of 2024's looser than expected budget. However, despite market scepticism, policy leaks and U-turns in the build-up, Chancellor Reeves delivered an impressive balancing act with the November budget, seemingly keeping each of the market, electorate and bank benchers on side, increasing fiscal headroom without the need for aggressive tax hikes or fiscal consolidation. This fiscal uncertainty was offset by quarterly rate cuts from the Bank of England, albeit whilst maintaining a cautious approach given some mixed signals from the economic data. However, data appears to be pointing more consistently to further weakness, particularly with regards to falling inflation and a loosening of the labour market to support the case for further cuts in 2026. In stark contrast, global credit markets were very much singing from the same hymn sheet in 2025, with sterling, European and US corporate bond spreads all tightening over the course of the year. Outside of the short-lived post-Liberation Day sell-off, credit markets delivered a generally low-volatility, grind tighter in spreads, with credit fundamentals remaining robust, coupled with the ongoing strong technical demand for yield, providing strong underlying support for the asset class and performance. Against this backdrop, the Funds delivered another strong year of credit selection, which was the primary driver of strong outperformance, delivering 90-100 basis points of Alpha generation over the year. This was primarily driven by our overweight to subordinated financials, particularly within the insurance sector. Meanwhile, other higher beta parts of the portfolio, such as real estate, also delivered strong performance, as recession fears remained well constrained. Further broad-based positive contributions came from across the portfolios. Not only was it a significant contributor to performance, but the insurance section was also a key focus of our engagement efforts last year. We held discussions with all of the insurers held across the sustainable fund range in order to gain greater insight into their responsible investment policies and management of some of the largest investment portfolios in the world. This project saw positive outcomes with healthy discussions with all of our companies and our findings have reaffirmed our belief that the names we hold across the Sustainable Fund range prove to be amongst the market leaders and at the forefront of evolving and progressing responsible investment within the sector.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Sustainable Investment team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- Holds Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- Do not guarantee a level of income.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Investment team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
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It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
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