Commentary —

Amplus Credit Income Fund June 2022 Commentary

Andrew James Labbad

Andrew James Labbad

Sr Portfolio Manager


The value of an interest-rated hedge fixed income alternative continues to demonstrate its value to investors. Senior Portfolio Manager, Andrew James Labbad, breaks down how Amplus continues to beat credit benchmarks with positive returns.

“In order to outperform by definition you have to depart from the crowd, you have to hold a different position and you have to have the resolve to do it.” – Howard Marks

As we mark the 2nd anniversary of the fund, Amplus Credit Income Fund (ACIF) finished +32.21% after cost to investors. We are pleased with these results and thankful to our investors and partners for their continued trust and confidence in ACIF. As we celebrate a truly exceptional two years of steady positive returns, we are increasingly pleased that our unique approach allowed us to outperform. The same cannot be said about fixed income and credit benchmarks which are both down since the fund’s inception. We continue to remain focused on the present-day investment climate and our goal to continue to grow your wealth while protecting it from market risk.

GROWTH OF $100,000 INVESTED SINCE INCEPTION

Performance is calculated from July 2, 2020 – June 30, 2022
Founders Class Series Performance


THE FUND

Our June performance was up +0.74%, with 2022 year-to-date growth of +1.84%. As global inflation continues to dominate headlines, central banks are taking necessary steps, although a bit late, to slow down the economy. Combined, central banks around the world have now hiked more than twice as many times than any other economic cycle since the start of the century. And while inflation remains stubbornly above 7% for most developed nations, we do not expect this trend to end anytime soon.

Source: BofA Global Investment Strategy, BofA Global Research, Bloomberg.
*Note: July ’22 is extrapolated based on MTD data


As interest rates continued to put pressure on bonds, fixed income benchmarks continued their slide lower – down on average an additional -2% for June. The value of an interest-rated hedge fixed income alternative continues to demonstrate its value to investors. Risk off sentiment, pushed the TSX down about -8.7% and Canadian credit spreads 3bps wider. Although Canadian spreads widened, USD credits widened about 9x more or 27bps relative to May. Our limited exposure to USD credits helped our overall performance.

The fund beat credit benchmarks and finished with positive returns for many of the same reasons as last month:

  1. Amplus benefits from a portfolio yielding over 8%, creating a larger margin of safety for market swings.
  2. Our hedges continue to produce outsized returns, as we took tactical positions on rates and volatility.
  3. Our overweight exposure to energy producers generated positive gains with the overall sector tightening 6bps on the month.
  4. Amplus continues to benefit from its flexible strategy: our capital structure trade relating to the Rogers acquisition of Shaw benefitted from the Competition Bureau opposing the deal.

In July, the Bank of Canada’s super sized hike of 100bps caused markets to reconsider the growth trajectory of the economy. Interest rates are in fact lower since the announcement. The market echoed our concerns with rising rates and its challenges on the household debt for most Canadians. In addition, energy-related commodities have come off their recent highs, comforting investors that peak inflation may be behind us. We continue to actively manage rate duration, taking advantage of volatility and much more attractive all-in yields.

GO FORWARD OUTLOOK

So far July has brought a welcomed reprieve from the bear market of 2022. That said, we are mindful of continued broader macroeconomic dynamics:

  1. Many central banks are tightening monetary policy to combat inflation, and the resulting tighter financial conditions are moderating economic growth.
  2. The political environment has seen two influential leaders in Boris Johnson and Mario Draghi resign.
  3. The ongoing war in Ukraine/Russia continues to impact food and energy shortages.
  4. Q2 Earnings are upon us. Forward guidance will be an important read-through. Earnings will encompass the first full quarter since risk took a turn lower.

On the flip side, overall economic and market sentiment is so bearish and positioned for further downside that we may in fact have these risks fully priced at current levels. As such, a strong debate can be made that this is the perfect time to add risk to the overall portfolio.

  • Recession is now consensus.
  • Global Profit optimism is at all-time lows.
  • Portfolio cash levels are at the highest levels since 2001.
  • Exposure to equity is at its lowest since 2008.
Source: BofA Global Fund Manager Survey


We continue to see tremendous value in high-quality credit versus other asset classes. Historically wide credit spreads and elevated yields provide us with a large margin of safety. Our portfolio currently holds many companies that stand to benefit from elevated interest rates and strong commodity prices. We remain excited about credit and future return potential.

Amplus

Amplus

Historic low rates and unprecedented quantitative easing from central banks have created ample opportunities of market spreads divergence globally. Amplus Credit Income Fund aims to maximize positive risk-adjusted returns in a rising market, while protecting investors from market risk in a downturn. By employing a diverse arsenal of investment strategies, Amplus is designed to capitalize on market inefficiencies and mispricing while minimizing interest rate exposures.

Amplus Credit Income Fund subscribes to a flexible investment style with primarily debt securities such as bonds, preferred shares, and convertible notes. We have the global relationships to invest in different currencies, taking advantage of the best value.

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