Liontrust Sustainable Future Corporate Bond fund: February 2025 update

• This fund’s managed by an experienced team that’s passionate about sustainability

• They avoid ‘sin stocks’ and invest in bonds issued by companies they consider to be making a positive environmental or social difference

• There were some changes to the team that manage the fund in 2023

• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Liontrust Sustainable Future Corporate Bond fund aims to deliver a combination of income and capital growth over the long term by investing mostly in sterling-denominated, investment grade corporate bonds.

The fund excludes areas some may find unethical, such as tobacco, coal and armaments and invests mostly in companies making a positive difference to the environment or society with high levels of governance.

This sustainable tilt means the fund will perform differently to peers at times, so could offer some diversification to a traditional fixed income portfolio. It could also help to diversify a portfolio focused on other assets, such as company shares. More broadly, it could be considered for corporate bond exposure, but with a sustainability focus.

Manager

The fund’s run by a team of three investment managers: Kenny Watson, Aitken Ross and Jack Willis. Watson has managed the fund since October 2013, Ross since 2014 and Willis since in 2021. All three joined Liontrust when their previous employer, Alliance Trust, was acquired.

Watson began managing fixed income funds in 2004, and Ross and Willis have researched and analysed fixed income investments since 2012 and 2016 respectively.

Connor Godsell joined them in November 2023 to help run the fund. He joined from aberdeen group, where he worked for seven years focusing on bond investing. While he isn’t currently a named manager of the fund, he provides a lot of input into the team’s views on the economy and interest rate strategies. It’s expected that he will become a named manager in future.

The previous head of the team, Stuart Steven, left Liontrust in 2023. This caused some disruption and a rejig of responsibilities. However, we think the team are suitably experienced and resourced to continue to manage the fund well going forward. We like the addition of Godsell following Steven’s departure, given his greater level of experience compared to some of the analyst hires the team has made in recent years.

Alongside this fund, the team also manages the Liontrust Monthly Income Bond fund and the Liontrust GF Sustainable Future European Corporate Bond fund, as well as the fixed income part of a small number of multi-asset funds. We think this is a reasonable workload given the portfolios are similarly managed.

The team can also draw on an Independent Advisory Committee, which is an external panel of sustainability experts who provide feedback on the investment process, highlight areas for improvement and act as an additional level of oversight.

Meet the manager: Jack Willis

Process

The fund is part of Liontrust’s Sustainable Future range of funds. These funds aim to help create a cleaner, safer and healthier society for the future and generate attractive returns for investors. The managers believe investing in sustainable companies provides greater return potential, and less risk, than other companies, and that many other investors fail to value the sustainability of a business correctly.

Their investment process revolves around a quarterly strategic outlook meeting, where the managers form their views on the future direction of economic growth, interest rates and inflation. This helps shape the way they construct the fund, and how much risk they’re willing to take. The team also conducts more frequent meetings to review positioning, discuss new opportunities and identify new risks.

Sustainability and ESG analysis is fully integrated into the team’s investment process. They aim to identify bonds issued by high-quality companies whose core products or services make a positive contribution to society or the environment. This sustainability analysis is completed within the team for every bond issuer in the fund.

The fund also employs negative screening. This means it won’t invest in any company that makes more than 5% of its revenues from animal testing services, coal, oil & gas, gambling, intensive meat and fish farming, ozone depleting substances, pornography, tobacco or weapons systems. Nuclear and alcohol companies are screened according to strict criteria.

While the managers use this process to find high-quality companies, that doesn’t mean they only invest in bonds with very good credit ratings. Once the team find a high-quality company, they then consider all of the different bonds issued by the companies and invest in those which they believe will provide the best returns. This often leads the fund to have lots of investments in BBB rated bonds, which is the lower quality end of the investment grade category. This will sometimes result in the fund experiencing more ups and downs than the benchmark or peers, particularly over shorter-time periods.

The fund’s managers each have different specialisms. Watson focuses on telecoms, retail, high yield bonds and overall credit strategy. Ross looks at insurance, financial services, healthcare and has a focus on portfolio construction. Willis also covers financials and considers how the fund is positioned for interest rate changes. Godsell has joined the team more recently and has a focus on the interest rate strategy and how wider economic trends could impact the fund. There’s a fair degree of coverage overlap, which leads to a good amount of discussion and challenge amongst the team.

Banks, insurance, utilities and telecoms are currently some of the fund’s largest sector exposures, but there’s a broad spread of investments across a variety of sectors to ensure diversification. The fund currently has a higher level of duration than its benchmark. Duration is a measure of how sensitive the fund is to interest rate changes, the higher the duration value, the more sensitive the fund is to interest rate changes. The managers are invested this way because they think that over the long-term, interest rates and bond yields are likely to come down from current levels.

Over the last 12 months the sector positioning of the fund has remained broadly similar. In terms of credit ratings, the managers have reduced investments in BBB rated bonds from 73.08% to 64.63%. They have also increased those in A rated bonds, from 17.69% to 28.07%. BBB rated credit is the lowest rating within the investment grade category, so moving some of the investments into A rated bonds represents an improvement in the creditworthiness of the fund.

The managers have the flexibility to invest in derivatives and high yield bonds which add risk.

Culture

Liontrust gives managers the freedom to manage their funds according to their own investment and market views. The company simply asks managers not to deviate from their investment processes. Each manager's funds are regularly checked by other senior managers at Liontrust to ensure they're staying true to their investment processes.

We like that all Liontrust fund managers invest a significant amount of their own money into the funds they run, and their incentivisation is tied to the performance of the funds they manage. We think these factors help to align their interests with those of investors.

ESG Integration

The quality of ESG integration varies across Liontrust. The firm gives fund managers the freedom to run their portfolios according to their own investment and market views. The company simply asks managers not to deviate from their investment processes.

The firm’s Sustainable Future range of equity and fixed income funds do incorporate ESG analysis and invest to achieve positive change. Every team member is responsible for all aspects of financial and ESG analysis – ESG analysis is not farmed out to a separate team. The team produces regular insight articles, available via the Liontrust website. They also produce a Responsible Capitalism report, which explores the team’s views on a variety of sustainability-related issues.

The firm publicly discloses all voting decisions on a quarterly basis, although no rationales are provided.

From April 2025, the fund will adopt a Sustainability Focus label under the new Sustainability Disclosure Requirements set out by the Financial Conduct Authority.

However, our analysis suggests that this fund’s carbon intensity is higher than we would have expected given its sustainability credentials. Companies with higher carbon intensity could face increased scrutiny from investors and regulators in future. We are engaging with Liontrust on this topic.

Cost

This fund has an ongoing annual charge of 0.56%. The HL platform fee of up to 0.45% per year also applies, except in the HL Junior ISA, where no platform fee applies.

Please note that charges are taken from capital, which could boost the income, but reduces potential for capital growth.

Performance

The Sustainable Future Fixed Income team began managing the fund in August 2012. However, given the departure of Steven who had been head of the team, our focus is on performance since March 2014. This is the period that both Watson and Ross have been managers. Since then, it’s returned 36.80%* to the end of January 2025, compared to the average return of funds in the IA £ Corporate Bond sector of 33.95%. Remember, past performance is not a guide to the future. Like all funds, the value could fall as well as rise so investors could get back less than they invest.

Over the 12 months to the end of January 2025, the fund slightly underperformed the IA £ Corporate bond peer group average though. Over 2024, bond selection was a positive for the fund, with investments in banks and insurers particularly adding value. These are two of the larger sectors included in the benchmark, so it’s great to see the team picking bonds that have outperformed in these areas.

However, the management of duration was a negative. Over the year the managers tended to have a higher duration than their benchmark. Duration is a measure of how sensitive the fund is to interest rate changes, the higher the duration value, the more sensitive the fund is to interest rate changes. Towards the end of 2024, bond yields rose steeply, and this caused the fund to underperform versus peers.

It’s worth noting the fund’s ESG exclusion criteria means it’s a different proposition to many in its peer group. This means the fund will perform differently to peers in the IA £ Corporate Bond sector, and its benchmark, at times. When the excluded areas are out of favour and their prices fall, the fund could do well. When they perform well, the fund will miss out. We ultimately think the managers have the potential to reward those who are prepared to take a long-term approach, although there are no guarantees.

The fund was also more volatile than the average fund in the IA £ Corporate Bond sector over the 12 months to the end of January 2025. This has continued a broader theme for the fund over the last few years. Part of the reason for this was the higher level of duration compared to the benchmark.

Within the universe of responsible fixed income funds, we have conviction in this one. There are also other Corporate Bond funds on the Wealth Shortlist without strict exclusion criteria that may offer superior performance potential.

At the end of December 2024, the fund had a distribution yield of 4.45%, although yields are variable, and are not a reliable indicator of future income.