Quarantine disruption

14 February 2020

Gilles Pradère

RAM (Lux) Tactical Funds - Global Bond Total Return fund - Gilles Pradère Senior Fund Manager, Fixed Income

January has been characterized by various exogenous schocks that had limited impact until the sanitary risks of the new coronavirus became clear. The damages were initially contained to EM equities, then selling pressures intensified on DM equities at the end of the month. Safe government bonds performed, with a limited impact on credit spreads.

With a higher contagion risk than in previous outbreaks, the situation is very fluid, and Chinese authorities have taken drastic measures by putting millions of people into quarantine. If the situation persists, the disruption to the economy could be significant in the coming weeks, putting at risk the recent stabilization of the global economy.

With limited corrections, valuations remain on the tight side, and we keep our duration balanced between quality and attractive spreads. During the month, we took advantage of a moderate widening in EM bonds to invest some of our cash and added U.S. Treasuries. In Euro, where yields backed up to more attractive levels, we have added some 10-year Spain, while maintaining our Italian exposure in the 4-year area. Overall, the portfolio performed across both Euro and USD, mostly thanks to its increased duration, with a smaller positive contribution from spreads. Our traditional portfolio delivered +1.10% (gross of fees).

The U.S. curve experienced a modest flattening, and Treasuries underperformed swaps slightly, detracting some performance. We took advantage of the underperformance of Spain vs France to re-enter some compression spread. Our non-traditional portfolio delivered –0.11% (gross of fees).

Having reduced our USD underweight in December, we took advantage of renewed USD strength to sell it against NOK and EUR, reducing our EUR short in the process. Overall, we remain long SEK, NOK, and PLN vs Euro, and keep a reduced strategy of long high yielding EM currencies vs USD. Our Fx portfolio delivered –0.07% (gross of fees)

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.85% net of fees. Duration stood at 4.5 years and the average credit quality was AA-.

*Source: RAM Active Investments