Amplus Fund February 2022 Commentary

February saw the widest index spread levels since late October 2020. Senior Portfolio Manager, Andrew James Labbad, shares how Amplus Credit Income Fund continues to outperform credit benchmarks.

”Successful investing takes time, discipline and patience.” – Warren Buffett

To state the obvious, Warren Buffett is the greatest investor of all time. Many books describe in detail his stock valuation process, with little mention of his true secret sauce – time. Compounding returns over time produce exponential wealth, with the most important component being survival. A survival mentality is very important with money, as compounding only works if you can give an investment several years to grow.

Many have never heard of Ronald Read, a small-town person from Vermont. He lived a quiet life, spending 25 years as a mechanic at a local gas station and swept floors at JC Penney for 17 years. In 2014, Reid died at age 92, which is when he made international headlines. He died with $8 million in his name. That year, 2.8 million Americans died with only 0.05% of them having $8 million or more in savings. Naturally, we wonder if he had won the lottery, inherited money or had a side hustle. It turned out there was no secret. He simply saved what little he could and invested in stable companies, then waited decades on end for his tiny savings to compound into more than $8 million. Living to 92 was the most critical component.

The Amplus Credit Income Fund’s top priority is earning good and steady returns which can be repeated and interrupted for the longest period. With today’s geopolitical risks, elevated inflation, economic sanctions, there is much to be uncertain about. We have been successful with our approach in limiting drawdowns so far and remain committed to our disciplined investment style.

THE FUND

Amplus Credit Income Fund finished -0.07% in February after costs. Russia’s invasion of Ukraine in late February was the main risk-off event that caused Canadian credit spreads to widen by 16bps on the month, marking the widest index spread levels since late October 2020. The S&P 500 was down an additional -3.14% and Canadian fixed income indices were down roughly -1% as interest rates continued to rise.

Despite credit spreads becoming more attractive, we ended the month with the same overall risk in the portfolio. We are aware that March is traditionally one of the more active months for primary issuance. Current market dynamics have brought on higher-than-normal new issue concessions, causing existing debt to be repriced lower for companies issuing new bonds. Mindful of that, we rebalanced the portfolio and right-sized name specific exposures to ensure risk of large losses caused by future supply would be manageable.

The fund outperformed credit benchmarks for several reasons. First, we had zero exposure to European and Asian banks, which were more impacted by the Russian war. Second, we purchased Tamarak Energy’s inaugural 5-year debt deal in early February, which came at a healthy concession and traded very well to close out the month as it benefitted from higher WTI prices. We continue to see value in Tamarak Energy as they are one of the lowest-cost producers of oil in Canada. They remain committed to low leverage metrics, all while using free cash flow to prioritize further debt reduction. Finally, we benefitted from Bell Canada’s early redemption of existing 2023 debt.

GO FORWARD OUTLOOK

Currently, our portfolio is fully hedged from all interest rate risk, and we actively went short duration with the belief that interest rates will continue to rise for the foreseeable future. We believe that Russian and Ukraine tensions have significantly increased the chances of stagflation. Commodity prices have spiked. In addition, the largest companies in the world are cutting ties with Russia, impacting global economic growth.

On the flip side, credit has reached an inflection point; we see tremendous value in credit versus other asset classes. This is the most excited we have been to buy credit in over a year. We recently published a note to highlight this opportunity, specifically in high-quality senior bank debt.