Commentaries

Late stages of the cycle

14 November 2018

Gilles Pradère

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

 

October has proven to be a terrible month for financial assets, with all major asset classes delivering negative performances, including U.S. equities; thus far spared from the turmoil. Equities were down significantly, and credit spreads were slightly wider accordingly. Government bonds have not really benefitted, with the exceptions of German bunds and UK Gilts which saw a small yield decline over the month.

Diminishing returns for financial assets are not unusual in late stages of the cycle. Moreover, leading indicators across the world have delivered a picture of a world economy in positive tones, but clearly slower growth. Nevertheless, it is still early to conclude that economies are transitioning from growth to recession. It is likely at least a return to trend growth after a very strong 2017, eventually combined with idiosyncratic reasons such as the slowdown of the auto sector, as the ECB expects for the European economy. Next indicators will be key to conclude if this malaise deepens or not, with higher rates due to less accommodative monetary policies, China GDP slowdown and increased political risks amongst the main culprits.

In this environment, we keep our philosophy of maintaining a good quality and liquidity of our underlying portfolio. With at best stable credit fundamentals, spreads do not provide yet a cushion in an adverse growth scenario. As the transition to higher yields might not be complete we keep a moderate duration. In the meantime, we look for specific opportunities, and tactical exposures.

Our traditional portfolio delivered –0.03% (gross of fees). The USD portfolio, biased towards good quality, contributed positively. With more volatility generated by the Italian uncertainties, the EURO portfolio, more biased towards attractive yields and reduced duration contributed negatively.

Our exposure in peripheral countries, built during August, detracted from performance, after last month’s rally. We have tactically reduced them during market bounces, as a very positive outcome is less likely. We have added a long Germany-short France spread to our long Spain-short France spread as Spain suffered some contagion while France remain quite rich against Germany. Our steepener in the U.S. delivered a positive contribution. Our non-traditional portfolio delivered -0.04% (gross of fees).

Our FX portfolio contributed +0.05% (gross of fees) this month. In a reversal to last month’s positive contribution, Swedish Krona (2% of assets, vs Euro) and CAD (1% of asset) detracted some performance in the risk-off environment. The positive carry captured in our FX exposures compensated positively, allowing this bucket to contribute positively.

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.12%* net of fees. Duration stands at 2.9 years and the average credit quality was A+.

*Sources : RAM Active Investments