Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.
If you do not yet drive an electric vehicle then a visit to a petrol station to fill up could be enough to prompt you to think again. The rapid increase in the cost of energy has been one of the key drivers behind the return of rising inflation. The UK’s rate of inflation, for example, rose from 2.9% in July to 3.1% in August while the US rate held steady at 3.4%. This not only exacerbates cost of living pressures but also has implications for investors.
Higher inflation can create challenges for fixed income as investors usually demand a higher return to compensate them. As a result, bond yields rise and bond prices fall (bond yields being the annual return an investor earns, expressed as a percentage). We are positive, however, about the role that fixed income can play in client portfolios.
Government bond yields have been drifting upwards during the course of 2026. This is primarily being driven by concerns about government debt as well as higher rates of inflation than had been anticipated. It does seem that many governments are now wedded to the idea that continuously borrowing more can enable them to consistently spend more as well. The scale of this is shown by the fact that outstanding US national debt hit $40 trillion in August.
The yield on 10-year UK gilts has been around 5% and between 4.5% and 5% on 10-year treasuries in the US. There is a significant cost of servicing debt but what does it mean for investors? While the total return from UK gilts is a negative of around 2.5% since the start of 2026 because of the rise in yields, investors have received an attractive income of about 2.5% to mitigate the loss in capital.
The Liontrust Multi-Asset team have recently increased the Tactical Asset Allocation (TAA) rating on UK gilts from a neutral three to a positive four, which is the highest rating we have had on this asset class for many years. This moves UK gilts into line with our view of the global government bond market.
While the rise in yields on government debt shows that other investors are selling them, we are more positive for two reasons. First, the attractive level of income available from certain government bonds means that investors are being paid in excess of inflation to hold this asset class while they wait for prices to potentially rise. Second, if there are periods of market stress and yields fall then investors will benefit from both capital appreciation and diversification away from the impact on equities within their portfolios.
Investment grade markets have seen a commensurate rise in yields but as they are priced off government bonds this is caused by the overall increase in yields rather than concerns over creditworthiness. Spreads – the measure of deemed risk above government bonds – have increased modestly for investment grade debt and have actually narrowed slightly for high yield bonds in 2026. The market is saying it is slightly more positive about high yield bonds than at the start of the year. We invest in high yield bonds because of the attractive total return – income and capital appreciation – they offer. We also believe that the income on high yield also provides some protection against a future increase in default rates.
Today’s fixed income markets look very different from the ones investors faced before 2022. While capital values have been under some pressure, the income that bonds generate has helped offset much of that weakness. Our view is that investors can now earn significantly more from bonds than they could a few years ago. More importantly, bonds have continued to do one of the jobs that investors rely on them for: behaving differently from equities.
Stock market indices have remained relatively unaffected in the face of higher energy prices, the prospect of rising interest rates and a downturn in consumer confidence. One reason for this is that corporate earnings have generally continued to deliver.
This top-level view of stock markets, however, does not tell the whole story. Beneath the surface, there has been a great deal of volatility at the stock and sector levels. This has contributed to markets not having a clear direction in recent months and acting as a reminder that diversification remains one of the most effective tools available to investors. Spreading investments across asset classes, regions, sectors and investment styles can help to reduce risk and make portfolios more resilient if markets do suddenly head in a new direction.
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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 and Model Portfolios managed by the Multi-Asset team may be exposed to the following risks:
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Credit Risk: There is a risk that an investment will fail to make required payments and this may reduce the income paid to the fund, or its capital value;
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Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss;
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Liquidity Risk: If underlying funds suspend or defer the payment of redemption proceeds, the Fund's ability to meet redemption requests may also be affected;
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Interest Rate Risk: Fluctuations in interest rates may affect the value of the Fund and your investment. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result;
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Derivatives Risk: Some of the underlying funds may invest in derivatives, which can, in some circumstances, create wider fluctuations in their prices over time;
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Emerging Markets: The Fund may invest in less economically developed markets (emerging markets) which can involve greater risks than well developed economies;
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Currency Risk: The Fund invests in overseas markets and the value of the Fund may fall or rise as a result of changes in exchange rates;
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Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices.
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ESG Risk: there may be limitations to the availability, completeness or accuracy of ESG information from third-party providers, or inconsistencies in the consideration of ESG factors across different third party data providers, given the evolving nature of ESG.
The risks detailed above are reflective of the full range of Funds managed by the Multi-Asset 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
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
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.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
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