We believe that this fund offers an attractive income and risk profile. This is a high conviction approach to credit investing, which provides the experienced management team much more flexibility than most of their peer group to actively manage the fund. Portfolio construction incorporates both bottom-up issuer selection and top-down macro positioning, with the bottom-up criteria including Liontrust's sustainability matrix, which scores companies based on the quality of their management and the sustainability of their products/services.
The investment process has two key stages; identifying superior bonds; constructing resilient portfolios and controlling risk. The process is a combination of top down (interest rate and credit beta) and bottom up (sector, credit quality, subordination).
Top down - quarterly strategy meetings determine long-term positioning. Weekly meetings are designed to implement and review positioning. Daily meetings to review market data & news. The key decision-marker in this regard is head of the desk, Stuart Steven, and this work features strongly in the asset allocation, interest rate positioning and credit rating exposure they seek when “identifying superior bonds”.
The bottom up process starts at idea generation (value screen, new issues) from a universe of 500 issuers. The fund managers then combine fundamental credit analysis (company’s ability to pay debt/ default risk, management team track record etc) with in-depth analysis of issuer specific factors, including ESG and macro-economic analysis. The process incorporates Liontrust's established sustainability matrix, which scores companies based on the quality of its management (1-5, 5 being worst) and the sustainability of its products/services (A-E, E being worst). In this fund issuers must score D3 or higher to be considered for portfolio inclusion but it has a weighted average score of B2.
Individual bonds are then analysed alongside asymmetric risks, before the team seek to value the bond on both an absolute and relative basis. Portfolio construction reflects stock selection, the managers’ long-term views of markets, and hedging strategies will be used, as appropriate, to reduce downside risk (interest rate positioning, cross-market & curve positions, volatility). From the available buy recommendations identified in stage 1, the team select the best combination of 50 to 100 bonds for inclusion in a focused portfolio that is constructed to safeguard against sustained downside risk.