In its inaugural year, Amplus Fund closed 2020 up +18.61%. Portfolio manager Andrew James Labbad comments on the importance of steady, incremental gains, as well as his outlook on credit for the new year.
Happy New Year! What a year 2020 ended up being for us all. Is it possible to sum it up in one word or phrase? In a survey asked by The Washington Post, the best summation came from a 9-year-old child. He compares it to “looking both ways before crossing the street and then getting hit by a submarine.” Did you imagine most major financial indices ending up on the year?
Our latest update is excited to report Amplus Credit Income Fund closed up +1.63% for the month of December. After launching the fund on July 2nd, 2020, we ended the year up +19.02% after costs. The fund’s goal is to participate in the upside of the market while protecting investors from market risk. We have achieved our goal of consistent positive monthly returns since inception. What is the secret sauce behind our philosophy? A Chinese Proverb sums it up best:
“It is better to take many small steps in the right direction, than to make a great leap forward only to stumble backward.”
This has been a humbling lesson to follow in an environment of relentless momentum-chasing. We count every day as one step closer to our goal of compounding returns. In a time where Tesla and Bitcoin have experienced huge run-ups, we feel this investment thesis is more important than ever. If you have watched the recent blockbuster Wonder Woman 1984, a good lesson can be learned. Maxwell Lord, the villain and antagonist, is on a quest to become rich and powerful. He is never satisfied and he always wants more, no matter the sacrifice. This drives him to extreme actions; people get hurt and in the end he loses everything.
For the last couple of months, we have taken a defensive approach to investing. Security selection has been a key driver to our consistent positive performance. We have spoken about lucrative opportunities becoming more challenging to find not only in credit products, but in all asset classes. Thankfully our deep-dive credit analysis has proven successful at finding diamonds in the rough. We have been spending more time recently looking at preferred shares. With the hybrid-corporate bond market (a bond with preferred share features of options to extend the term) showing large institutional appetite of late, we feel more issuers will continue to take out their preferred shares in order to refinance their debt at more attractive levels in the institutionally favoured hybrid market. This in return should continue to create a technical bid for preferred shares. As each preferred share gets redeemed, indexers are forced to redistribute the proceeds into other preferred shares. Our ability to be nimble has allowed us to buy these more attractively-priced investment grade instruments.
As for credit, we believe monetary policy and vaccine rollouts will be the most important drivers of overall performance. With the Democrats now in full control of the U.S. government, we see more fiscal spending pushing yields higher, which in turn should be positive for spreads. Just days ago, Biden confirmed his administration’s economic package will be in the trillions. Combined with continued inflows in U.S. fixed income — $8.4 billion for the first days of January, and lower overall supply expectations from issuers in 2021, we remain positive on spreads. By hedging most of our interest rate exposures, this new era of government support becomes the perfect recipe for our Amplus credit portfolio to outperform.
We end this newsletter with a bit of sports trivia: which baseball team holds the record for most wins in a single season and which player was behind that team’s success? The answer: the Seattle Mariners hold the record for the most wins in a season with 116 in 2001. Ichiro Suzuki was at the forefront of this success. He was named American League MVP. Ichiro went on to lead the Majors in hits (242) as the primary leadoff hitter for the Seattle club and achieved this success not by hitting home runs, but by being a consistent hitter. What does this prove? Those steady, consistent positive returns being compounded over the long-term will bring major league success.