Performance

Inflation worries, the ongoing US public debt ceiling talks, third quarter earnings reports and Chinese property sector debt crisis have been drawing markets’ closest attention during the month of October. The US 10-year Treasury yield has demonstrated slight volatility throughout the month, closing the month at 1.55%, 9 basis points higher than a month ago. Hence the negative performance of -0.5%* that our fund has registered for October, which has translated in +0.1% year-to-date net return*. Inflation concerns resurfaced at the beginning of the month, with breakeven rates along the curve surging to decade-long levels. Third-quarter earnings reports, which have been published since mid-October, demonstrated an above-expectations trend, thus slightly balancing out the inflation worries. By the end of the month, 2-year US benchmark yields have risen significantly, reflecting the view that the rise in interest rates may come earlier and more abruptly than what is being told by the Fed. By the end of the month, the focus of market’s attention shifted from inflation to economic growth concerns. The situation with the Chinese developer Evergrande has improved by the end of October, when Evergrande announced that the coupon payment which was missed in September would be paid out. The government has ensured investors that it will act to prevent the crisis spillover, thus calming markets down a bit. Brazil will very likely undergo further complications with its public debt as the country’s president is pushing an increase in spending. Hence we are witnessing the widening of the Brazilian bonds’ spreads. The total weight of Brazilian corporate bonds in our fund is less than 5% and we didn’t change it as we believe that it could be early to increase exposure. At the same time, we maintain our positive outlook on the corporates financials. Turkey has negatively surprised the markets with higher-than-expected policy rate cut. The local currency has suffered the major blow, while the move in the corporate eurobonds prices was limited, as markets have already partially priced in a rate cut. Moreover, most Turkish companies have their revenues hedged from local currency depreciation. Our portfolios were also protected by short duration of Turkish bonds that we have. This month, we have acquired new bonds by Chilean Banco de Credito e Inversiones (A-/A2), Banco Santander Chile (A-/A1), Russian gold-miner Polyus (BB+/Baa3), Russian metals and mining companies Metalloinvest (BBB-/BBB-) and Norilsk Nickel (BBB-), as well as Russian leasing company GTLK (BB+/Ba2). We received allocations in Asian bonds by Malaysian IOI Investment (Baa2), Indonesian Tower Bersam Infrastructure (BBB-) and Dah Sing Bank from Hong Kong (BBB-/Baa1). We keep duration at around 5 years and continue to monitor long-dated issuers we like for acquiring when they reach our price targets. Our fund has closed the month of October with average duration of 5.4 years, average yield-to-worse of 3.1% and leverage of -22.1%.