Amplus Credit Income Fund May 2022 Commentary
Amplus Credit Income Fund continues to benefit from Senior Portfolio Manager, Andrew James Labbad‘s experience and discipline in active trading in any market environment, especially in today’s volatile markets. This commentary breaks down the main reasons the fund, currently yielding 8.5%, is able to outperform credit benchmarks with continued positive returns.
“The future is coming so fast; we can’t possibly predict it; we can only learn to respond quickly.” – Steve Kerr, Head Coach of Golden State Warriors
The Golden State Warriors reclaimed the throne, earning their fourth NBA championship in eight years and cementing themselves amongst the greatest dynasties of all time. Before the 2021-22 season, the Golden State Warriors had missed the playoffs in two consecutive seasons. Injuries to their star players, and a loss of talent to free agency derailed the dynasty after they fell in the 2019 finals. According to ESPN, oddsmakers gave them 0.1% chance of winning the 2022 title before the season even began.
They faced adversity head on. The Warriors owner Joe Jacob put it by saying, “We immediately had a strategy to deal with all this […] We didn’t just sit around and sulk.” And so, as the clock hit 0 in Game 6 of the NBA finals, Curry did not pump his fist in the air with determination; instead, he got all teary, and dropped to the floor in a sign of appreciation for all the hard work in fighting hardship. This win meant a lot more to him. Believing in the process and remaining determined got them back to the top. Patience and confidence were key contributors to the turnaround.
These principles transfer well in today’s volatile markets, where all asset classes and companies are being grouped together and revalued lower. Despite that, we continue to benefit from our experience and discipline in trading wisely and actively in any market environment, especially during periods of extreme volatility. Like Curry, our valued clients appreciate our strategy’s outperformance in down markets that much more as it’s a testament to the process.
Amplus Credit Income Fund finished May with 2022 year-to-date growth of +1.09%. Higher than expected inflation and its underlying impact to interest rates continue to negatively impact fixed income markets. Canadian fixed income indices are down on average -10% so far this year. Since its inception in July 2020, Amplus has now outpaced the FTSE Canadian Corporate Bond Index by close to +40%. The value of an interest-rated hedge fixed income alternative continues to demonstrate its value to investors.
With the ongoing war in Ukraine causing elevated energy and food prices, inflation continues to creep higher. Central banks globally are making it a top priority to nip inflation in the bud at risk of derailing the economy. Over the last month, we have seen an unprecedented 50bp hike by the Bank of Canada, followed by a 75bp hike by the U.S. Fed. Having made the wrong judgement on transitory inflation last year, central banks are quickly and aggressively tightening monetary policies to get control over inflation.
May saw credit spreads widen 7bps in Canada, reaching their widest levels this year. As earnings rolled out, banks who were no longer in blackout, wasted no time coming to market issuing senior bank paper. In the first 5 months of the year, banks have now issued the same amount of debt domestically compared to all of 2021, to the tune of $37bn.
The fund beat credit benchmarks and finished with positive returns for four main reasons:
- Amplus benefits from a portfolio yielding over 8.5%, creating a larger margin of safety for market swings.
- Our hedges continue to produce outsized returns, as we took tactical positions on rates and volatility.
- Our long-term positioning in short-dated bonds benefited from four corporate issuers choosing to redeem and/or refinance debt early: Metro, Sobeys, Fortis and Cenovus. We owned positions in Sobeys and Cenovus which both traded significantly higher on the news.
- 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.
GO FORWARD OUTLOOK
As interest rates continue to move higher, the market is now pricing in 8.5 hikes of 0.25% by the end of the year. We view these hikes as priced into the market and not a future threat. We continue to add interest rate duration to the portfolio taking advantage of much more attractive all-in yields. We do get concerned that the Bank of Canada will have to change their hawkish tone sooner than later as many Canadians are starting to face the challenges of rising rates and mortgage payments. As much as CPI is the main metric for inflation, as a lagging indicator it fails to consider some of the real-time impacts from rising interest rates on consumer sentiment. With that said, central banks only started hiking rates recently with much more to come.
We continue to see tremendous value in high-quality credit versus other asset classes. 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.