Mild correction amid continued support

12 October 2020

Clement Perrette

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

Riskier assets corrected in September, contrasting with the positive trend in place since March 2020. With no agreement for a new fiscal impulse, underperformance was more pronounced in USD equities relative to European ones. Accordingly, credit spreads widened slightly more in USD than in Euro, while EM bonds traded heavily as the dollar rebounded during this episode. Despite low yields, quality assets benefitted from this risk-off environment.

This mild correction was not totally undue as expectations were relatively optimistic at the end of August. At that time, inflation expectations reached a level comparable to February, before the Covid-19 slowdown. The main trigger seems to have been the absence of an agreement between US politicians to deliver a supplementary package, potentially delaying it to after the elections, assuming there will be a clear majority to vote it. This correction remains relatively modest though, despite a significant increase in Covid-19 cases in Europe notably, and the most likely outcome is still that support from both fiscal and monetary policies will remain.

With range-bound rates and equities tone soft, we closed USD rates swaps we entered at the end of July to reduce our duration, looking to reinitiate some hedges at lower yield levels. We used the widening of spreads to moderately increase our exposure on US IG, as well as on HY. Overall, our USD portfolio detracted some performance as rates positive contribution did not offset the credit spreads widening. With more stable spreads and duration, the Euro portfolio contributed positively, as well as our CAD rates exposure. Our traditional portfolio delivered -0.01% (gross of fees).

With little action on European spreads, the non traditional portfolio was flat (gross of fees. Our main risk remains a long Austria 100y against Germany 30y, which offers an interesting convexity.

As the USD corrected quickly at the end of September, the Nordics (NOK and SEK) currencies underperformed this month, even against Euro. Despite robust countries balance sheet, they behaved as a leveraged play on growth, often considered as more cyclical than others. As we view their valuations as attractive, we still own them against both USD and Euro. Our Fx portfolio delivered -0.21% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.29% net of fees. The duration stood at 4.8 years and the average credit quality was A.

Source: RAM Active Investments.