Liontrust Sustainable Investment Annual Review 2023 - Flipbook - Page 5
levels, while also facing a lower demand ahead of what looked to
be an impending recession.
This normalisation process was painful but it’s not going to last
forever and, in the meantime, it provided the chance to add to some
fantastic companies at very attractive valuations.
Longer term, we believe the small-mid cap underperformance and
historically low valuations will mean revert and destocking by
healthcare and consumer companies will normalise. Our themes
focusing on a cleaner, healthier and safer economy remain
undiminished and our companies are trading historically cheaply for
their growth and quality.
Overall, we are confident about the outlook for our sustainable
investment strategies and believe they will build on their long-term
positive track record as we back those businesses which are growing
profitability while delivering solutions to critical environmental and
social problems.
Businesses which are providing these solutions will potentially access
vast growth opportunities. In many cases, the speed and scale of this
growth is likely to be underestimated in the valuation of their shares.
This is where the opportunity lies – finding great companies that are
helping to solve challenges we face as a society and world, whose
prospects are undervalued.
While the future of sustainable investment has been questioned by a
number of different parties recently, we are more excited about the
prospects for the sustainable themes and stocks we invest in than we
have been for many years.
Fixed Income performance 2023
2023 was supposed to be ‘The Year of Fixed Income’, as the
level of yields on offer looked incredibly attractive, both outright
on a long-term basis and relative to history, following a period of
heightened volatility in bonds.
This was a view that we largely agreed with, and while this opinion
certainly didn’t go unchallenged by developments over the course
of 2023, we maintained our conviction. It did indeed prove to be
a successful year for our sustainable fixed income strategies, with
very strong absolute and relative performance.
The Sustainable Future Monthly Income Bond Fund1 and
Sustainable Future Corporate Bond Fund2 were particularly strong,
delivering net returns of 13% and finishing the year as the second
and third best performing funds in the IA Sterling Corporate Bond
sector peer group (a comparator benchmark).*
However, stepping back in time shows some of the obstacles that
needed to be surmounted during the year.
Government bond yields rose for much of the year through to
October as economic data and inflation continued to surprise to
the upside. Looking at the underlying picture, however, especially
in the UK, we continued to believe that the domestic economy
would struggle with these higher rates. As a result, we incrementally
added back interest rate risk to the portfolios as yields rose between
March and October, firmly believing that the economy would start
to eventually show signs of strain over the second half of the year.
While there had been ongoing strength, particularly in US data,
going into the fourth quarter cracks were beginning to appear.
The eurozone in particular looked to be slowing rapidly, with
Purchasing Managers’ Index (PMI) readings declining, inflation
coming off sharply, and growth faltering.
Economic data also started to consistently surprise to the downside
in the UK and to a lesser extent, the US – albeit not as starkly as
Europe. This coincided with large inflation misses across each of
the US, UK and Europe, leading markets to reprice interest rate
expectations sharply lower.
While January 2023 got off to a good start and supported our
belief that the impact of the fastest rate hiking cycle in decades
would result in a tightening of financial conditions, the relatively
uneventful start to the year was followed in March by the US
banking crisis, which led to the collapse of Silicon Valley Bank,
Signature Bank, and First Republic. This was swiftly followed by
the failure of Credit Suisse. This saw our overweight position to
financials, and particularly higher beta subordinated financials,
detract from performance.
Having attempted to push back somewhat on the market moves the
week before its meeting, the Federal Reserve surprised the market
by changing tack with more interest rate cuts included in its dotplot of Federal Open Market Committee members’ interest rate
projections. Somewhat surprisingly, it was the Bank of England and
the European Central Bank (ECB) which maintained the consistent
message that rates would have to stay higher for longer to tame
inflation and stamp out the threat of persistence.
Despite this, after reviewing our credit portfolio, we remained
confident in the high quality, sustainable issuers held, with
European and UK banks in a far greater position of strength
than their US counterparts. Likewise, we viewed the issue with
Credit Suisse AT1s as contained to the Swiss market, with wider
European and UK banking regulators subsequently announcing
their support for the asset class. This ultimately proved to be the
correct decision as sterling financial bonds’ spreads tightened
over the remainder of the year.
Expectations for sooner than anticipated easing in monetary policy and
broader financial conditions also buoyed credit markets, with sterling
credit spreads tightening markedly into the year end. This drove strong
credit performance across the funds, with our overweight to financials
outperforming, coupled with strong bond selection across our core sectors,
including banks, insurance and telecommunications. The combination of
all these factors, alongside the courage of our convictions behind our
views and positioning, ultimately resulted in one of the strongest ever years
for total returns for the Sustainable Future fixed income strategies.
1
https://www.liontrust.co.uk/funds/sustainable-future-monthly-income-bond-fund
2
https://www.liontrust.co.uk/funds/sustainablefuture-corporate-bond-fund
Liontrust Sustainable Investment: Annual Review 2023 - 5