Amplus 2024 Year End Commentary: Preparation, Discipline, and Opportunities Ahead

January tends to be one of my favourite months. Like many, I start the year energized and ready to tackle my 2025 personal goals, which is a tradition for my wife and I to write down each January. It’s also the time when the NFL playoffs kick off. The theme of 2025 for Amplus Credit Income Fund (ACIF) is inspired by a comment made a few days ago by Tom Brady, an announcer on Fox Sports, better known as the best NFL Quarterback of all-time. During last weekend’s football broadcast, he said ‘hope is not a strategy”, or in other words wishful thinking doesn’t achieve results. As with many of my personal goals in life, my wife, who leads by example, often reminds me that hard work, preparation, planning and commitment drive us closer to our goals. It’s a continuous process in which training is essential. Tom Brady’s metaphor reminds us of this. With that said, hope is important for insurmountable aspects of life, but when it comes to Amplus, hope is definitely not a strategy.

We are pleased to report in our latest update that the ACIF closed up +2.9% for the fourth quarter of 2024, and +12.5% for 2024. We finished 2024 with positive monthly returns throughout.

Since inception of July 2020, the fund is now up +78.8% after all costs, of which a major contribution to these returns come from the power of compounding re-invested capital over time. Our goal has always been to deliver strong and stable risk-adjusted returns to our investors, primarily through fixed income securities. For the second year in a row, ACIF was recognized for its performance, once again winning the best 3-yr sharpe ratio at the Canadian Hedge Fund Awards, among other accolades. This award highlights our best in-class risk-adjusted returns in credit markets.

RISK VS RETURN (3YR)

Source: Fundlibrary.com.

Here are some of the major contributors to the ACIF performance in 2024:

  1. A portfolio yielding close to 8% throughout the year.
  2. Canadian corporate bond credit spreads rallied close to 35bps for 2024. ACIF held a credit duration of 5.38 years, slightly below index-weight exposures throughout the year.
  3. Our active credit exposures generated significant outperformance:
    • Our overweight exposure to REITs with spreads in the sector tightening by an average of 76bps, over double the market average.
    • Owning high-coupon paying callable bonds as they were extended past their first call date.
    • Credit selection in names with asymmetric return profiles such as Quebecor (IG upgrade), CI Financial (take-out), Algonquin Power (redemption), Allied Properties (mispriced).
    • Aggressively participating and adding cheap new bond offerings from inaugural issuers (Coastal Gas and Wolf Midstream), which came with larger than normal concessions.
    • Allocating and rotating capital between the cheaper of Canadian and U.S. markets throughout the year, mainly in financials.
  4. Actively and opportunistically trading interest rates and interest rate volatility as a natural hedge for our credit exposures.

Forward Outlook

“The stock market is a no-called-strike [baseball] game. The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.”    – Warren Buffett

Earlier we highlighted preparation and discipline as the theme for 2025. As we enter the new year, ACIF’s playbook to investing is very well captured by Warren Buffett’s quote above. With market valuations extended more now than this time last year, patience and planning will be that much more important to achieving our long-term goals of strong positive returns.

With the market discounting the uncertainties including: Trump 2.0, low political support in many western nations, sticky inflation above target, slowing immigration, heightened geopolitical tensions and threats of high tariff on goods and services, we see a higher chance for volatility to pick up compared to what is currently priced by the market. In past commentaries, we shared the high correlation between credit spreads and volatility. Like our effective investment playbook in 2022, we are waiting for a better entry point, ‘our sweet spot’ as Buffet says, to put more capital to work. We can afford to be patient with a portfolio currently yielding 5.5% to 6% for our investors on existing positions. A lookback to 2022 shows +8.5% returns for our investors mostly from capturing opportunities when volatility picked up mid-year. Unlike many traditional long-only funds which were down that year, we can embrace volatility as a way of capturing better entry points and opportunities.

Below are a few themes that we are closely watching:

Increased Trade Restrictions: The desire for political and economic change could remain a driving force in 2025. We anticipate government emphasis on national economic and security priorities, possibly overshadowing other concerns. Additionally, the increased frequency of power transitions may drive governments to prioritize swift agenda implementation, potentially fostering greater short-term thinking. In this context, policymaking could become a source of disruption in an already fragile world, further exacerbated by heightened strategic competition between the U.S. and China.

BROADENING PROTECTIONISM

Source: BlackRock Investment Institute, IMF, globaltradealert.org (or with the data from globaltradealert.org), December 2024.

We are already seeing trade restrictions across the globe give rise to protectionism. Interestingly, the rise coincides with the onset of inflationary pressures. The question now becomes whether inflation is truly transitory or structural, especially with the threat of increased tariffs looming.

Aging Population: Combined with an aging world, where the proportion of population over 65 in developed economies is surging to record levels, while now reducing immigration targets, there is a true possibility of permanent structural changes. Centrals banks will be forced to be more reactive and unpredictable at each of their meetings.

PERCENTAGE OF WORLD POPULATION OVER THE AGE OF 65

Source: United Nations World Population Prospects 2024.

Increased Interest Rate Volatility: This is important for fixed income as we have seen heightened market sensitivity involving interest rates occurring alongside with economic data surprises. Any continued trade-war or geopolitical fragmentation will extend into interest rate volatility, benefitting long-short credit funds, and making ACIF a perfect part of an investor’s portfolio.

SENSITIVE TO SURPRISES

Source: BlackRock Investment Institute, with data from LSEG Datastream, December 2024.

Trump Tariffs = negative GDP for Canada: If Canada were to be slapped with Trump tariffs, we will see a high likelihood of market volatility. Many different scenarios are possible for credit spreads and interest rates. Preparing ahead of time and remaining defensive ensure we are ready for the turmoil ahead. The Canadian government has already threatened retaliatory tariffs, which would see negative GDP, possibly higher interest rates and higher inflation in the short term.

Source: Scotiabank Economics.

Companies are clearly taking the threat of a tariff war very seriously: through rhetoric and actions.

TRADE TARIFFS ON EXECUTIVES LIPS’ MORE

Source: Bloomberg, Barclays Private Bank, October 2024.

RISING SHIPPING COSTS: DRIVEN BY PRE-EMPTIVE MOVES AHEAD OF ANTICIPATES TRUMP TARIFFS?

Source: Scotiabank Economics, Drewry World Container Index, Shanghai Shipping Exchange, Bloomberg.

Oh Canada? Canada’s economic picture is seeing slowing productivity since the 1980s, combined with lower real GDP per capital, raising additional concern of the unknowns ahead for Canada’s growth.

CANADA’S PRODUCTIVITY RELATIVE TO THE U.S. HAS BEEN FALLING SINCE THE 1980S

Source: Organisation for Economic Co-operation and Development, RBC Economics; purchasing power parity (PPP) adjusted, GDP in 2015 U.S. Canada.

Current inflation and central bank trends: Amidst the unknowns, inflation has clearly slowed down globally.  Reaching 2-3.5% for most developed nations. With close to 75% of central banks easing, coupled with record levels of cash in money market funds, we can see a scenario of supportive economic growth globally.

INFLATION HAS RETURNED TO TARGET

Source: Source: Bank of International Settlements, Australian Bureau of Statistics, Bureau of Economic Analysis, China National Bureau of Statistics, Haver Analytics. Data as of September 30, 2024.

27 OF THE 37 CENTRAL BANKS THAT WE TRACK ARE NOW LOWERING INTEREST RATES

Note: This analysis includes 37 central banks.
Source: Individual central banks, FactSet. Data as of October 25, 2024.

Tail-winds for Fixed Income: As cash and treasury bill yields decline, many investors will seek alternative sources of income. Historical trends suggest that between USD 600 billion and USD 2.2 trillion in money market fund assets could be redirected. Core fixed income, including investment-grade sovereign, municipal, and corporate debt, remains a key area to explore for yield opportunities compared to asset classes. Investment-grade corporate bonds in the U.S. currently offer yields above 5%. While credit spreads are narrow, they are supported by strong credit quality and minimal downgrade risk. Continued inflows in fixed income have supported this underlying thesis.

UP TO $2 TRILLION IN CASH COULD FIND A NEW HOME

Source: Bloomberg Finance L.P. Data as of September 30, 2024.

We are already seeing signs of credit outperforming equities in recent weeks. As seen below, the correlation of the U.S. Investment grade ETF (LQD) and 10-year U.S. rates is almost completely the inverse of S&P 500 and 10-year U.S. rates. In short, credit can act as a complimentary hedge to investors’ portfolios in 2025.

CREDIT BALANCING EQUITY WEAKNESS VS. MORE ATTRACTIVE YIELDS

Note: 1-month rolling correlations on daily spread and yield change, stock returns.
Source: Bloomberg, TD Securities.

Strong U.S. consumer: An interesting take on the resilience of the consumer can be seen in the chart below. Younger generations are wealthier today than prior generations, despite elevated interest rates and inflation naturally impacting them more.

MILLENIALS HAVE HIGHER NET WEALTH THAN BOOMBERS AND GEN X AT THE SAME AGE

Note: Real worth per household measured in 2017 dollars, adjusting using CPI. The blue bars measure wealth when each generation was 23-38 years old. The golden bars reflect wealth when each generation was 28-43 years old.
Source: Federal Reserve, Bureau of Labor Statistics, Rubinson Research. Data as of June 30, 2024.

To conclude, we are fortunate to be led by our founder and CIO, Scott Morrison, who has navigated numerous economic cycles throughout his career. He often reminds us that, “we don’t know what we don’t know”; reinforcing preparation and being one-step ahead of possible investment outcomes as critical.  

With many unknowns to start the new year, we are proactively positioning for the many possible outcomes ahead. Across all Wealhouse strategies, including Lions Bay, Voyager, and Amplus, having agile and nimble funds allow us to adjust our game plan quickly to best serve our investors over the long term.

Amplus is patiently waiting for that ‘perfect pitch’ to add more risk to the portfolio and earn those singles, while collecting interest as we wait.

Disclaimer

This Commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Wealhouse has no duty or obligation to update the information contained herein. This Commentary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Wealhouse believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

Amplus

Amplus, an innovative and flexible fixed-income strategy, is the place to be during good times and bad. It aims to protect investors during a downturn and maximize returns in a rising market. We invest in high-quality companies that are raising debt to invest in the growth of their businesses. We support their mission by purchasing bonds, preferred shares, and convertible notes, increasing our investment when the time is right. A small and agile fund combined with active trading, we can take full advantage of market volatility. Because Wealhouse’s goal is to make as much money for our investors as possible, we do not have layers of bureaucracy that hinder time-sensitive trades. During a sell-off, we can buy quickly. And during a market rally, we can sell just as fast.

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