Amplus Q2 2025 Commentary - 5 Years of Compound Consistency
Amplus Credit Income Fund (ACIF) produced +2.96% for the first half of 2025 and +1.07% for the Q2 2025. We take this time to thank our investors for their ongoing support, as ACIF celebrates its 5-year track record, with +84.12% returns since inception after all costs. These returns were generated almost entirely using Investment Grade (IG) fixed-income securities. As an asset class, fixed income went through one of the toughest periods of a generation. Known to be a conservative asset class for risk-averse investors, it generated double digit losses in 2022, with an exceptionally high-correlation to equity returns. This reinforces the merit of our modern-day balanced fund across all three strategies at Wealhouse: Amplus, Lions Bay and Voyager. Backtested since inception, these three strategies have consistently outperformed their respective benchmarks with low correlation to each other.
Looking back to 2020, the fund started when overnight interest rates on Canadian government debt were close to 0%, peaking at 5% in 2022 and sitting at 2.75% today. Of the approximately 250 bond offerings still outstanding issued between July 2020 and December 2021, only about 10 are trading above water, most of which are about to mature or were issued as floating rate notes. Still, around 20% of the deals are trading at or below 90 cents on the dollar, 4-5 years later. With record levels of debt in the world, larger government deficits yet to come, the value proposition could not be greater with ACIF’s ability of going long-short.
I spent this past weekend under the 35-degree sun cheering my son’s baseball team, as they were competing in Etobicoke’s yearly baseball tournament. Their division reminded me of the MLB American League (AL) East Division – it was the strongest division of the tournament. They placed second in their division and did not move on. Any other division would have been a breeze for them. Living and breathing the sport multiple times a week has made me appreciate professional baseball that much more. It helps that the Blue Jays are on a 9-game winning streak, atop of their own division – the AL East. When looking at the Blue Jays team stats for 2025, we quickly noticed (again) the recipe for success in winning baseball games. In a league of 30 teams, the Blue Jays are 4th in batting average, 6th in total hits and 17th in homeruns. We have preached this before: consistent hitting, with frequent base hits result in wins. Home runs alone aren’t enough. This ties well with the ACIF strategic mindset of finding opportunities that generate steady, consistent positive returns being compounded over the long-term to achieve major league success. With that, we wanted to provide more insights on how we managed our exposures in April 2025, actively rotated our positions and ultimately made the decision not to aggressively add credit during that time. Our goal will always be to participate in market-upside, balance risk-reward while prioritizing capital preservation.
Credit Market Update
Q2 started with equities selling off close to 20% from their February highs and interest rates rallying into what was named “Liberation Day”. Trump shocked the world with tariffs that were much higher than market participants expected, only to dial them back with a 90-day negotiation extension set to expire on July 9th. During the frenzy, high-yield (HY) securities traded 4-5% lower, while IG credit spreads held in relatively well, widening by only 20-30 basis points in Canada, outperforming the U.S. which widened 30-40bps. In the past, we’ve used the highly-correlated VIX index as a barometer to gauge value in credit. Naturally, being long credit is being short volatility. The risk-reward in owning credit at the time was insufficient to add meaningful exposure. We felt more pain was to come with investors rotating out of IG credit into either HY or equities. The last time the VIX was at similar levels for a similar period of time (COVID pandemic), we saw IG spreads move 125bps wider. Even before some of the recent risk-off events of 2022 with Russia/Ukraine and 2023 with the collapse of Credit Suisse, spreads were wider going into those events. Our internal models provided us with comfort in viewing the risk-reward as insufficient in adding credit.
Despite this, opportunities arose to re-balance the portfolio to better generate alpha for our investors. Canada (blue-line) had outperformed the U.S. (gold-line) during the April selloff. We chose to rotate some of our investments into the cheaper U.S. market by selling CAD denominated debt from the same issuer. Those trades generated close to 100bps of additional spread compression, by simply keeping track of corporate debt currency relationships. I cannot say this enough: having Mike join the Amplus team, in Spring 2023, has been a huge benefit for our investors. His expertise and visibility into the U.S. markets and his relationship with the U.S. dealer community gives us an edge.
Like the pandemic, no credits were left untouched during the volatility seen in April. Certain credits saw unwarranted selloffs which created opportunities for Amplus. We actively added or increased exposure in names that we saw as immune to tariffs, with some also benefitting from this new world order. Grocers were an obvious place to invest without having to deal with tariff headlines. We chose to aggressively add to Loblaws, Metro and Choice properties with bonds trading 40bps wider than recently issued levels of last year. Bonds were also trading flat to senior bank debt, having underperformed by 10bps a sector much more susceptible to an economic slowdown. One name we were very familiar with, stood out as a beneficiary from tariffs — Gildan Activewear — the leading vertically-integrated low-cost producer of apparel with most of their manufacturing in Central America while sourcing close to 90% of their cotton from the U.S. With most of their growth capex behind them, Gildan stood to also benefit from lower tariffs compared to other clothing manufacturers that had greater exposures to countries with higher tariffs. Prior to tariff risks, most of their competitors were already struggling with debt-heavy balance sheets. We saw Gildan in a clear position to take up market share and increase margins. We anticipate that more apparel brands would be forced to reach out to Gildan for sourcing product so that they can better manage their own gross margins.
As the markets recovered and interest rates went higher, our insurance-like hedges dragged on performance throughout the quarter. Ultimately, by actively managing our positions, we were still able to generate +1.1% of positive returns for the quarter.
Forward Outlook
Looking forward to the rest of the year, the Amplus team is encouraged by the multiple potential entry points to deploy our nimble, active trading approach. Global interest rate levels are very topical as continued tariff effects are starting to make its way through the general economy and through monetary and fiscal policy decisions. We think elevated uncertainty and volatility will continue into the second half, and the entry point to deploy tail-risk hedges could not be better.
While the FOMC continues to be on hold until it has further clarity on tariff impacts, some of the comments made by Fed Chairman Powell are worth re-highlighting given their importance to the market and influence on our investment decisions:
- “As long as the U.S. economy is in solid shape, the prudent thing to do is to wait and learn more and see what the effect might be”
- “We haven’t seen effects much from tariffs, and we didn’t expect to by now. We have always said the timing, amount and persistence would be highly uncertain.”
- “We’re watching. We expect to see over the summer some higher readings,” Powell expects the impact of tariffs to show up in data of the upcoming months.
- He added that the import taxes’ ultimate impact on the economy could wind up being either greater or less than currently anticipated. He clearly views tariffs as taxation.
With that said, we are already seeing weak real spending data this year, leading us to believe it will impact other parts of the economy over time.
WEAK CONSUMPTION THIS YEAR
We are eagerly looking forward to this upcoming earnings season which is set to begin shortly as most companies will have gone through a full quarter of tariff uncertainties. And as Powell highlighted, the next few rounds of economic data will also be a better tell on how the economy is faring. So far, NFP employment data in the U.S. has come in better than feared, but there are cracks seen underneath the surface. In the most recent June report, half of the overall payroll growth came from government hiring – not all that bullish.
In addition, we have been watching the following new developments that increase volatility in interest rates and credit spreads:
- Trump’s “Big Beautiful Bill” has seen pushback
- Musk’s new political party
- Debt ceiling talk back on the table
- Trump talking 250 bps of cuts as debt maturities loom
- Geopolitical risks with Russia/Ukraine and in the Middle East
As for Canada, we have gone through an election, and we worry that the new Liberal government will be more of the same. Continued divergence in economies when compared to the U.S. is our baseline assumption. The increased unemployment rate at 7% (highest since 2021), increased deficit spending, lower oil prices are all reasons to remain cautious. A stronger Canadian dollar gives central banks the leverage to reduce the overnight rate even further, if need be, and we see value in being long short-dated rates because of that.
CANADA UNEMPLOYMENT RATE (%)
When looking at the fiscal deficit forecast, before Carney won the elections, fiscal year (2025/26) plans were to run a $42.2 billion deficit. The Carney government now plans to increase that deficit to $62.3 billion or close to 50% more. Trudeau’s most recent fiscal plan forecasted annual deficits from 2025/26 to 2028/29 representing a cumulative $131.4 billion in federal government borrowing. Over that same period, the Carney government now plans to borrow a cumulative $224.8 billion. The Carney government’s fiscal plan does include a number of tax changes that are expected to lower revenues in years to come. However, if one were to exclude these factors, the Carney government plans to borrow $52.9bn more over the next four years. As such, we think that long-term interest rates in Canada will become much more volatile as the marginal buyer of Canadian sovereign debt will be much more cautious and prudent, leading to higher term premiums over time.
BUDGETARY BALANCE PROJECTIONS
All these points above combined with a normally quiet summer period, are reasons to believe that Amplus will be able to actively pounce on short-term opportunities yet to come. Amplus continues to benefit from a portfolio yielding mid-single digits while we patiently wait for the market to come our way.
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.
