The Core Plus strategy returned 3.19%, outperforming the BB US Aggregate Index by 0.11% during the quarter. Interest rate positioning outperformed, primarily due to long positions in global rates. A steeper US curve and favorable country spread positions also contributed.
- The Core Plus strategy returned 3.19%, outperforming the BB US Aggregate Index by 0.11% during the quarter.
- Interest rate positioning outperformed, primarily due to long positions in global rates. A steeper US curve and favorable country spread positions also contributed.
- Securitized positions added value. ABS tightened across most sub-sectors. Re-performing loan MBS outperformed most fixed income sectors.
- IG corporates broke even as tightening in US 30YR positions was offset by underperformance from short positions in European and Australian credit.
- HY underperformed in the quarter. We were long in May when spreads were widening.
- FX positions were positive, buoyed by Yen strengthening due to a trade concern related flight to quality. NOK appreciated as the Norges Bank raised the policy rate despite dovish monetary policy almost everywhere else.
Returns (Gross of fees)
Fixed Income Commentary for the period ending June 30, 2019
- Interest rates fell around the globe. Australia continues to outperform global bond markets with its 10YR yield declining 46 bps to 1.32%, a new all-time low. The US was not far behind with its 10YR yield falling 40 bps to 2.01%. German 10 YR yields set a new all-time low at -0.33%. UK yields declined 17 bps to 0.83% as Brexit remains unresolved. Japan stands out globally for its low volatility but its 8 bp decline to -0.16% is consistent with global trends.
- The global economy has been slowing in general. The bigger concern are what trade tensions may do to exacerbate a slowdown. The move lower in rates was precipitated by the collapse in the US/China trade talks in early May. The US/China dialogue was more constructive at the G20 meeting in late June but underlying issues remain unsolved. Meanwhile tensions between Japan and South Korea escalated at the G20. Brexit supporter Boris Johnson is expected to become the new prime minister, increasing the likelihood the UK will leave the EU on October 31 without a withdrawal agreement.
- Spread sectors were volatile during the quarter. Spreads generally tightened in April, widened in May, and tightened again in June. The end result was slightly tighter spreads overall. US IG corporates tightened 4 bps to +115. IG corporate bond spreads are not far below their average for the last 6 years. This is in contrast to IG CDX at +53 which is not far from its January 2018 low. HY tightened 14 bps, following the same monthly pattern. HY corporate bonds and HY CDX are both midway between their average and low points over the last 6 years. The CMBS and EM sectors behaved similarly. Interest rate volatility bounced off all-time lows set in March.
- Global monetary policy took a substantial dovish turn during the quarter, particularly in June. Australia led the way with the RBA cutting rates in June. RBA comments prepared the market for an additional cut in July, which would be the first back to back cuts by the RBA since 2012. ECB President Draghi’s dovish speech on June 17 was a pivotal moment. He gave a higher sense of urgency for further monetary easing, pointing to more deposit rate cuts and the possibility of reopening the asset purchasing program. The market forced the Fed’s hand regarding policy easing. Market pricing in April and May indicated a 20% chance of a July rate cut. By mid-June, market pricing indicated 100% chance of a July cut, including a 15% chance of a 50 bp cut. Fed President Powell stopped equivocating, using the June FOMC meeting to firmly commit towards an easier monetary policy path.
Portfolio Summary: Interest Rates
- Interest rate positioning contributed +24 bps to the Core Plus strategy during the quarter.
- Long positions in US, Australian, and UK rates added value. Yield curve steepener positioning in the US was positive as the 2-10 curve appears to have bottomed.
- Country spread positioning was favorable with the US outperforming Canada, the US outperforming Germany, and the UK outperforming Germany. We took a small loss when Italy tightened vs Germany in April.
- Our long position in US breakevens produced a small loss. Energy was a key inflation driver with oil prices -16.5% in May before recovering +9.0% in June.
- Financing costs associated with long future positions creates a small persistent drag in performance but creates space to overweight desirable sectors.
Developed Markets Duration Exposure
Source: First State Investments
- Currency positioning contributed +5 bps to the Core Plus strategy during the quarter.
- Our long Yen position gained as trade concerns produced a flight to quality.
- Increased speculation of FED Fund cuts led to a slight weakening of the US dollar (-1%) over the quarter, and a bounce in the Euro from its lows. NOK appreciated as the Norges Bank raised the policy rate despite dovish monetary policy almost everywhere else.
- IG corporate positioning contributed -1 bps to the Core Plus strategy during the quarter.
- Long positions in US IG hurt the fund in May as spreads widened. This was offset by tighter spreads and favorable name selection in June when easier monetary policy expectations produced tighter spreads.
- Overweight positions in 30YR US IG holdings outperformed in June.
- Short positions in European and Australian corporates underperformed a spreads tightened.
Active Spread Duration
Source: First State Investments
- Securitized positioning contributed +9 bps to the Core Plus strategy during the quarter.
- Our ABS holdings tightened across most sub-sectors. Re-performing loan MBS outperformed most fixed income sectors. Short positions in agency MBS net detracted from performance.
- Short positions in low coupon agency MBS benefited performance as interest rate volatility rose off historical low levels but this was overwhelmed by good performance by the high coupon bonds held in the index.
Market Value Allocation
- HY corporate positioning contributed -17 bps to the Core Plus strategy during the quarter.
- Long positions in HY hurt the fund in May as spreads widened in general and our holdings underperformed. Performance partially recovered in June as HY spreads recovered.
- We increased the granularity of our HY holdings in June to minimize the impact from individual bonds.
Active Spread Duration
First State Investments Core Fixed Income Composite. Past Performance is not indicative of future performance. Composite returns do not reflect the deduction of investment advisory fees. A client’s return will be reduced by the investment fees. If a client placed $100,000 under management and a hypothetical gross return of 5% were achieved, the investment assets before fees would have grown to $162,889 in 10 years. However, if an advisory fee of 0.4% were charged, investment assets would have grown to $156,490, or an annual compounded rate of 4.6%.
This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940, as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933, and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors in any jurisdiction whatsoever.
This document is issued by First State Investments (US) LLC (“FSI” or “First State Investments”). The information included within this presentation is furnished on a confidential basis and should not be copied, reproduced or redistributed without the prior written consent of FSI or any of its affiliates. Any investment with First State Investments should form part of a diversified portfolio and be considered a long term investment. Prospective investors should be aware that returns over the short term may not match potential long term returns. Investors should always seek independent financial advice before making any investment decision. The value of an investment and any income from it may go down as well as up. An investor may not get back the amount invested and past performance information is not a guide to future performance, which is not guaranteed.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
The comparative benchmarks or indices referred to herein are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First State Investments.
Performance objectives and target returns are solely intended to express an objective or target for a return on your investment and represents a forward-looking statement. It does not represent and should not be construed as a guarantee, promise or assurance of a specific return on your investment. Actual returns may differ materially from the performance objective, and there are no guarantees that you will achieve such returns. We cannot and do not warrant the accuracy or the validity of the performance objective and are not liable if actual returns differ in any way from such performance objective. You are cautioned not to place undue reliance on the performance objective in making your decision to invest with First State Investments. Actual returns can be affected by many factors, including, but not limited to, inaccurate assumptions, known or unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements to be materially different.
For more information please visit www.firststateinvestments.com. Telephone calls with FSI may be recorded.