Two headlines dominated the news recently: the U.S. election and Pfizer’s COVID vaccine, causing major swings in the market. Amplus Fund portfolio manager Andrew James Labbad discusses how he positioned the fund to weather the volatility.
We are excited to report that Amplus Credit Income Fund closed +0.76% for the month of October. Since fund inception earlier this year (July 2nd, 2020), year-to-date performance is up +13.7% after costs. Fixed income indices were down -0.5% to -1.1% for the month. On the one hand, credit performed extremely well, weathering the equity sell-off, and most credit indices showed spreads compressing on the month. On the other hand, overall yields moved higher, outpacing the credit gains. During that same time, the S&P 500 was down -2.77%.
In last month’s update, we remained cautiously optimistic on the market. While we were predicting volatility heading into the election, we were also navigating COVID-19 related lockdowns with cases rising globally, combined with lower commodity prices caused by economic slowdowns. We closed the month light on risk, but we made the conscious decision to shift our portfolio, adding energy names such as Suncor and commercial real-estate names that were pricing in pressure on retail. We felt that those sectors were oversold and represented opportunity.
While highlighting last month performance, we are always focused on the present and the future. A lot has changed in the first ten days of November: the US has voted into power President-elect Biden. The strong post-election rally in credit and other asset classes suggests that markets were most concerned about a “Blue Wave” sweep, and that there was a lot of cash waiting for the election to pass, no matter the outcome. This is a reminder that the technicals remain strong and that supportive monetary policy and the expectation of stronger growth ahead are the real drivers of market direction.
Days later, Pfizer announced the latest round of clinical trials showing that their vaccine prevents more than 90% of symptomatic infections. This is the most promising scientific advancement in the battle against COVID-19. This vaccine news was a real market driver, catapulting the markets to new 52-week highs. We have seen the S&P 500 rally +8.5% month-to-date, with investors shifting from tech and “work from home” related stocks, to more conventional names that have been negatively affected by the pandemic, for example: energy, banks, retail, leisure and travel stocks.
This played out very well in Canadian credit. With the lack of tech bonds in Canada, we saw the whole universe with few exceptions rally and compress on the news. So far this month, the Barclays Canada Aggregate Corporate Index shows spreads compressing 15 basis points (bps). Sectors that outperformed include retail, REITs, energy, infrastructure, and transportation. Despite being light on risk, our portfolio was positioned for this type of news: 33% invested in REITs, which outperformed the general market and now trade on average 30 bps tighter since the beginning of the month. Recently we have made small tweaks to the portfolio, lightening up on some of our winners and investing in names that still seem mispriced despite the recent vaccine headlines.
Going into year-end, uncertainty and volatility will remain in the market as Trump appears to refuse to give up power just yet. A seamless transition of power from Trump to Biden seems like a longshot with court battles likely to ensue until January 2021. The recent vaccine headlines are extremely important in the path towards a post-COVID world, hopefully in 2021. However, near term COVID-19 is getting worse quickly in the US, and more restrictions will likely happen before the vaccine will be widely available. Many European countries have already re-entered some form of increased lockdown. This raises an important question as to how much should markets overlook near-term economic headwinds when a more bullish path beyond them is in sight. For credit, this dynamic is in play as corporate issuers will be incentivized to fund more near-term borrowing to ensure that they are adequately prepared for any harsh outcomes this winter and are ready to invest and grow when the world moves beyond the COVID-19 headwinds. So far Canada has not seen much supply, but the US saw its busiest day in over one month on November 9th with close to $19 billion in supply.
We remain positive on credit for the remainder of the year as December is typically a positive month for spreads. Fiscal stimulus discussions may pick up given the resurgence of COVID-19 cases and with the election behind us. We end this update with an interesting fact and ongoing trend: last week, negative yielding debt globally hit a new yearly high at over $17 trillion, making the incentive to recycle overseas cash into USD and CAD fixed income higher. This will be an extremely important supporting driver to watch for credit spreads.