Performance

Bond markets have continued their rally in August, on the back of supportive interest rate environment and the ensuing risk-on. Our fund has registered a monthly gross return of 1.3% thus bringing the YTD performance to 12.7%. Contributing to the positive mood on the markets was better-than-expected second quarter corporate earnings reports. On the one hand, the surpassing of expectations was due to overly negative forecasts, on the other hand, due to companies taking rigorous steps to preserve cash. Economic data has also surprised on the upside, but the recovery path is getting flatter. We believe there is still much uncertainty, and for many industries the road to pre-crisis level recovery will be long and hurdlesome. The wave of defaults will continue and fallen angel risks are weighing on many low-investment grade issuers. However, we have recently cut the most vulnerable positions in our portfolio, therefore increasing the credit quality even further. In August we have sold bonds of Mexican Pemex, South-African Sasol, sovereign bonds of South Africa and Bahrain, which have all gained in price due the overall risk-on mood and for which we believe that many existing risks are not currently priced in. The weight of investment-grade issuers stands at 74%, as of month-end. The yield curve has seen some steepening, with yields on maturities higher than 5 years increasing slightly. For example, 10-Year US Treasury note yield increased from 0.53% to 0.71% over the month of August. Credit spreads tightened across all segments of the market, but they still didn’t reach the pre-crisis level. We believe the valuation on some riskier segments are stretched, as markets are currently pricing in the best scenario of economic recovery and any shock may ensue a correction on the market in the near future. Nevertheless, we do not expect a correction of the magnitude we saw in March. In any case, we have achieved a low duration and high credit profile of our fund portfolio which will be able to withstand bouts of volatility. Turkey has made negative headlines recently, due to a deterioration of its economic outlook. Last year, our strong conviction for Turkish bonds has proved successful, being among top 2019 performers. In the current situation, we revised our view on Turkey and sold our small position in Turkish sovereign bonds we held, as we expect a strong devaluation of the currency will result in a sell-off of sovereigns. But we continue to hold some Turkish corporates which are either export-oriented corporates or senior financial bonds for which we have a positive view. The delay in the approval of the fiscal package in the US and the US-China tensions continued providing source of worry. The reaction of the markets to these events were rather muted for now but may gradually rise. In addition, the approach of US elections will mostly likely lead to increased volatility in the following months. But for now, policy support is the key driving force on the markets. Recently, Fed’s Chairman outlined US Central Bank’s new monetary policy approach of allowing inflation overshoots over official target of 2%, which confirmed our view that it will take years before Fed will even think about raising interest rates. Our fund closed the month with 29.1% leverage, average duration of 4.7 years and average yield-to-worse of 2.9%.