Amplus Fund May Update
Despite inflation rising to levels not seen since August 2008, the Fed narrative is that this is simply “transitory”. PM Andrew James Labbad discusses why he disagrees with market sentiment in his latest commentary.
With CPI’s latest update showing price increases of 5% year-over-year, investors are digesting the effect of inflation on the economy. In our most recent update, we spoke about the great lengths people took to get their hands on the precious commodity of lumber. As prices continue to soar, hundreds of thousands of dollars worth of lumber have been stolen from home hardware stores and personal property. A family in Kitchener, Ontario was surprised to wake up to portions of their fence missing…
Speaking of side hustles, my four-year-old son, Mason, started a weed removal business this spring. His “momager” has been teaching him the importance of entrepreneurship and hard work. He has been selling his services to neighbours and family at a rate of five cents per dandelion. After suggesting that our son open a bank account, my wife was quick to dismiss the idea. She reminded me that current inflation may make saving money in cash an unwise financial decision. Her recommendation was to either allow Mason to purchase a toy that was meaningful to him, or to open an in-trust-for investment account and buy Amplus Credit Income Fund with his business profits. This personal, real-life example reminds me of the mindset displayed during hyper-inflationary periods.
As inflation rises, so should interest rates. Amplus Credit Income Fund specializes in hedging out unwanted interest rate risk. This allows our strategy to reward investors despite the volatility showcased this year in fixed income. Amplus Credit Income Fund closed up +1.46% in May. After launching the fund on July 2nd, 2020, cumulative returns are +26.10% after costs. During that same time frame, the two most relevant Canadian fixed-income indices are still down -4%.
Canadian credit spreads finished the month of May almost unchanged. New debt offerings also had trouble performing. The outperformance for Amplus can be attributed to our core positions. We highlighted CI Financial in the most recent piece from our Silver Linings blog, where we wrote about the attractiveness of the credit. Since then, the issuer raised $900 million in 30-year USD debt with use of proceeds to pay off their credit line of $235 million. This leaves plenty of extra cash to re-balance their debt stack and markets are now pricing the increasing likelihood of the company choosing to retire shorter-dated debt, which we own, sooner. Another core position is Sienna Senior Living, who came to market with a small debt offering which repriced their existing debt higher. We took this as an opportunity to add to the name. Finally, as the M&A market is hot on high valuations, we shy away from the “we will pay anything for growth” acquiring companies. Our underweight positions produced positive returns for investors.
We are of the view that inflation is not transitory, it is here to stay, and at high levels. May’s CPI report showed broad-based and persistent price increases, while also highlighting a labour shortage. Some of the largest corporations in the world are increasing wages at an alarming rate. Last month, McDonald’s announced their plan to increase wages by 10%, Bank of America is raising the minimum wage to $25/hr, and Amazon increased the starting wage to $17/hr. The Fed has $21 trillion reasons to still debate high inflation. The U.S. treasury market currently stands at $21.4 trillion, compared with just $2.9 trillion two decades ago, a +740% increase. Inflating ourselves out of this huge debt burden stowed upon us by governments only really works with the idea that the Fed and other central banks will step in if necessary; otherwise, investors will demand a higher premium to hold government debt. Eventually, central banks would like to get away from the zero-lower bound. But the fiscal reality suggests it cannot stray too far from it without risking the delicate equilibrium of investor sentiment with record amounts of stimulus still in the pipeline.
With our ability of hedging interest rates, we continue to see strong tailwinds in credit driving positive returns for our investors. Central banks pouring trillions of dollars into the economy, robust inflows in U.S. fixed income ($91 billion YTD) and a rising rate environment are all positive for credit spreads. We continue to invest in companies that should see an increase in asset growth and earnings power from either rising interest rates or inflation including banks, commodities, and real estate.
