Performance

The month of September launched in a full risk-on mood and bonds continued their rally. However, starting with the second week of September, credit spreads were seen widening, mostly on the high yield segment of the markets. Nevertheless, for the most part of the bond universe, spreads are already close to the long-term average levels. The turn to risk-off was mainly due to the uncertainty brought on by the US elections and fears that a second wave of coronavirus new cases would impede economic recovery. Our fund drawdown was limited due to the high credit quality of our portfolio, registering a negative performance of 0.2% this month. Economic data has painted a mixed picture, as there have been signs that the recovery was losing momentum. Economic activity in the US continued to expand in September, however at a slower pace. Federal Reserve held its regular policy meeting this month. The dot-plot projections show that, for now, no interest rate hikes are expected at least until 2024. With the scope of monetary stimulus approaching its limits in the US and elsewhere, the key to supporting economic recovery going forward lies in the hands of governments. In Washington, stimulus discussions have been showing no progress so far. The likelihood that a deal will be approved before the presidential elections is low and this poses a significant risk for the economic recovery. However, we believe a stimulus package will be approved thereafter, no matter who wins the elections. While the valuations were stretched in the beginning of the month, we fixed profit on several emerging market bonds. We also reduced our holdings in some Turkish corporate bonds due to the negative economic outlook of the country as it is facing a balance-of-payments crisis. A sell-off in Turkish government debt, once the economic situation deteriorates further, may spill over to Turkish corporates. We favour primary markets when making new investments where a premium to the secondary markets is offered. This month we received an allocation in new issues by the Brazilian retailer Lojas Americanas (BB) and the Mexican gold-mining company Fresnillo (BBB/Baa2). Going forward, we believe the positive interest rate environment will continue supporting markets. However, we expect the volatility to increase as we approach the US elections. This can provide an attractive buying opportunity. Our fund closed the month with 20.4% leverage, average duration of 4.6 years and average yield-to-worse of 3.2%.