12 June 2019

Gilles Pradère

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

After a strong beginning to the year, risk assets underperformed significantly during May, including U.S. assets, with equities and high yield delivering negative returns. On the other hand, high grade bonds delivered a positive performance thanks to a decline of benchmark yields.
One reason for that reversal could be high investor expectations that the cycle can be extended for many more quarters. More importantly, the complete twist at the beginning of the month in the discussions between the U.S. and China was totally unexpected augurs of troubled waters ahead. It seems reasonable to suggest that both their respective leaders do not have an interest in collapsing their own economies, but it seems equally difficult to see which would balk first without suffering a significant pain before. As this escalation occurs at a time of decelerating growth, it increases the risk that current low growth, the most likely outcome still, morphs into an outright recession.

We used the bond rally to take profits on our BBB and A-rated exposures as some spreads remained tight, lowering emerging risk, and have replaced them with AAA and AA exposures. Our USD portfolio gained 0.51% (gross of fees) with both Treasuries and High-grade contributing positively. Our Euro portfolio had a positive contribution (+0.08%, gross of fees) thanks to high grade and peripheral exposure that we continue to trade actively, while high yield exposure detracted. Our traditional portfolio delivered +0.64% (gross of fees).
The yield curve in the U.S. has experienced a parallel shift this month despite the decent rally, bringing no performance. U.S. asset swaps moved against us as Treasuries are likely suffering from the Chinese liquidation of some reserve assets. Due to attractive valuations where treasuries are yielding above swaps, and a favourable seasonality, we have built the position at attractive levels. Our non-traditional portfolio delivered -0.09% gross of fees.
As our FX positions are both against EUR and USD, they delivered a positive contribution of 0.13% (gross of fees). SEK outperformed EUR, while our various EM exposures were stable against USD but stronger against EUR. Our risk remains limited as the outlook is unclear.

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.63% net of fees.  Duration stands at 4 years and the average credit quality was A+.

 *Sources : RAM Active Investments