Commentaries

More flexibility

13 February 2019

Gilles Pradère

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

January saw a strong rebound of risky assets, while safe havens such as U.S. Treasuries and German Bunds stabilized. This combination allowed strong performance of both equities and credits across the board, with a slight outperformance of emerging assets.

At its December meeting, the U.S. Fed’s Chairman gave the impression that its tightening policy was on autopilot, and with a U.S. economy at almost full employment, showed little concern about the various signs of stress. The violent down moves that ensued forced some policy review, and in January, Mr Powell showed more flexibility by signalling a pause in the hiking cycle and potentially a smaller shrinkage of the balance sheet.

With inflation contained, this risk management approach has provided a strong relief for risky assets, as prices embedded a significant probability of economic downturn at the end of last year. Although this approach increases the likelihood of an extended cycle thanks to a slower tightening of broad financial conditions, central banks cannot indefinitely inflate asset prices and fundamentals do indeed matter. Consequently, we continue to follow a disciplined approach in order to maintain a decent robustness of our portfolio.

Our portfolio benefitted from both duration and credit compression. Our USD portfolio, focused on quality, benefitted from its high-grade segment in developed and EM (+0.54%, gross of fees). We booked profits on spreads that have limited tightening potential, such as some banks’ senior exposures, and diversified in some sovereign EM. Our EUR portfolio, biased more towards the high beta, also benefitted (+0.41%, gross of fees). We have added a European high-grade exposure as the spread is finally back to compelling levels. Our traditional portfolio delivered +0.97% (gross of fees)

We have kept our curve steepener unchanged in the U.S. We have added to our long UST vs Swap as seasonals and levels are attractive.  Our non-traditional portfolio delivered +0.03% (gross of fees)

With USD strength likely capped under the current Fed risk management approach, we have taken the opportunity of some consolidation to add to our CAD exposure (+2,2% of assets). We have entered a long RUB exposure as it offers attractive valuation, fundamentals and carry (+0,9% of assets). We have kept our SEK exposure against EURO unchanged (+2.35% of assets). Our FX portfolio had a positive contribution of +0,11% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +1,02%* net of fees. Duration stands at 3.15 years years and the average credit quality was A.

 *Sources : RAM Active Investments