High expectations

30 April 2019

Gilles Pradère

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

April has seen, again, a strong performance of risk assets, such as equities, high yield and high grade across both developed and emerging markets as spreads continued to grind tighter. Conversely, safe havens such as U.S. treasuries or German bunds stabilized at close to recent highs.

To some extent, this means that investors are having relatively high expectations on the ability of central banks to sustain the cycle, eventually by easing monetary conditions, with a risk of disappointments at some point. Growth, including in the U.S. where leading PMI’s point downwards, remains on a relatively subdued path. This helps dampen inflation, which has been flagged as low by central banks since the beginning of the year. Even if current pricing generates some volatility, the environment should remain overall supportive, and we continue to run a balanced portfolio between quality assets, easily manageable across all market conditions, and spreads that offers a good combination of carry and volatility, or attractive valuations.

We have taken advantage of the volatility in the Italian futures space to trade around our existing position as the instrument offers great liquidity. The Italian economy, although still vulnerable, is showing some signs of improvement and the spread to other Eurozone sovereigns includes a decent premium. Moreover, we perceive the risk of a new election, if it happens, as marginally positive. Over the course of the month we have completed our exposure, which explains the moderate increase of duration this month. Our Euro portfolio delivered +0.37% gross of fees. In USD, we booked profits on some agencies and corporate when either spreads or yields are less compelling, replacing them with new issue opportunities, or more liquid treasuries. Our USD portfolio delivered +0.15% gross of fees. Our traditional portfolio delivered +0.56% gross of fees.

As rate cuts expectations have increased, our USD curve steepener delivered +0.02% (gross of fees). Assets swaps also have had a positive marginal contribution. Our non-traditional portfolio delivered +0.03% gross of fees.

Our SEK long against EUR suffered as the Risbank announced a delay in their planned hiking path. The currency still offers some diversification, and an attractive valuation. The RUB exposure behaved well both on bonds and currency. As the USD, although rich, remain solid historically at this stage of the cycle, we remain cautious overall in expressing USD shorts. Our FX exposure delivered +0.06% gross of fees

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.57% net of fees. Duration stands at 4.4 years and the average credit quality was A.

 *Sources : RAM Active Investments