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The Liontrust GF High Yield Bond Fund: A Double-Digit Dividend Yield
Investment Strategy
The Liontrust GF High Yield Bond fund offers retail investors across Europe access to a rare opportunity: a 10% dividend yield. While the fund primarily focuses on high-yield corporate bonds, it also invests in investment-grade corporate bonds, government bonds, cash, and liquid assets. The fund maintains a portfolio of corporate bonds with an average rating of "BB," just below investment grade. This credit rating is considered high-quality and reflects the overall risk of the portfolio. The top 10 holdings of the fund are indicative of its conservative approach, including bonds issued by Fortescue Metals, which pays out 6.125% in semiannual coupon payments.
Opportunities in Mispriced Bonds
In addition to holding conservative assets, the Liontrust GF High Yield Bond fund also includes bonds that are considered riskier by credit rating agencies. One example is German manufacturer CeramTec, which produces ceramic components used in medical devices. Despite being rated "CCC" by agencies, indicating potential default, the fund manager believes these bonds are mispriced. CeramTec has a strong balance sheet, steady cash flow, and solid margins, which support its ability to handle its level of leverage. The fund views these bonds as an attractive investment opportunity in an evolving and profitable market.
Capitalizing on Trade Timing
The fund manager, Donald Phillips, attributes approximately 85% of the fund's income to its underlying long-term holdings. However, he also acknowledges the influence of trade timing on profitability. During a U.S. government standoff over the debt limit, Phillips seized an opportunity to capitalize on the steep rise in yields for short-term government bonds and the increase in credit default swap spreads. By adding the yield on the January 2024 Treasury bill to the spread on the CDX index, the fund was able to achieve a yield of 10.5%. This trade timing decision contributed to the fund's impressive dividend yield.
Managing Challenges and Outlook
Phillips recognizes the challenges that lie ahead, particularly regarding credit deterioration. However, he believes the fund is resilient enough to handle such a scenario. He predicts a potential recession on the horizon but does not anticipate it being as severe as the 2008-2009 financial crisis. The fund has carefully selected investments in companies that have demonstrated resilience in previous economic downturns. This positioning aims to mitigate the impact of a potential recession when monetary policy measures begin to take effect.
Active Management and Lower Fees
Phillips highlights the value of active management compared to index-tracking ETFs. The Liontrust GF High Yield Bond fund has consistently delivered higher returns for investors while charging lower net fees compared to similar index ETFs. The fund charges an annual net fee of 0.47%, which is lower than the iShares iBoxx $ High Yield Corporate Bond ETF at 0.49%. Additionally, the fund's dividend yield of 10% outperforms the ETF's 8.16%. Over time, the fund aims to further widen this performance gap and deliver even greater value to investors.
Conclusion: A Game-changer for New Businesses?
The Liontrust GF High Yield Bond fund presents a unique investment opportunity, particularly for new businesses seeking to maximize their potential yields. With its impressive double-digit dividend yield of 10%, this fund offers an attractive option for retail investors across Europe.
The fund's investment strategy focuses on a mix of high-yield corporate bonds, investment-grade corporate bonds, government bonds, cash, and liquid assets. This diversified approach ensures both stability and potential growth for investors. Additionally, the fund maintains a portfolio of conservative assets with an average rating of "BB," minimizing the risk associated with its holdings.
One intriguing aspect of this fund is its ability to identify mispriced bonds. By investing in companies like CeramTec, which are considered riskier by credit rating agencies but have solid financials, the fund manager believes in capitalizing on undervalued opportunities. For new businesses looking for higher returns, this approach could prove beneficial in an evolving and profitable market.
Timing is another critical factor that contributes to the fund's success. By taking advantage of trade timing during specific market events, such as the U.S. government standoff over the debt limit, the fund manager has been able to achieve even higher yields. For new businesses, recognizing the potential impacts of such events and making well-timed investment decisions can help maximize profits.
While challenges may arise, including potential credit deterioration and an anticipated recession, the fund's conservative positioning and careful selection of investments in resilient companies are designed to mitigate risks. This makes it an appealing option for new businesses seeking stability and profitability even in uncertain economic times.
Moreover, the Liontrust GF High Yield Bond fund's active management approach stands out from index-tracking ETFs. Not only has the fund consistently delivered higher returns, but it also charges lower net fees, providing additional value to investors. For new businesses looking to optimize their investment returns while minimizing costs, this fund's performance and fee structure may be highly appealing.
In conclusion, the Liontrust GF High Yield Bond fund offers a compelling investment opportunity for new businesses, with its double-digit dividend yield, diverse asset portfolio, and skilled active management. By taking advantage of mispriced bonds, strategic trade timing, and carefully managing potential challenges, this fund aims to provide sustained growth and value to investors in the long run.
Article First Published at: https://www.cnbc.com/2023/07/14/this-high-yield-bond-fund-with-conservative-assets-offers-10percent-in-dividends.html.svg)
