Since taking a defensive view at the beginning of the month, Amplus was up +2.36% in September, bringing YTD total to +12.82%. Portfolio manager Andrew James Labbad, CFA explains his thesis and his outlook for the election season.
In our last update, we were feeling cautious going into September, predicting volatility ahead and positioned ourselves accordingly. The flexibility of our fund allowed us to hedge out market risk, while holding onto investments that remain valuable, despite short-term market headwinds. To close the month, we increased our credit quality, with 99% of the portfolio now in investment-grade securities.
The month of September proved to be a difficult month for most asset classes, as volatility ramped up globally. Most of the heartaches was caused by the equity market: a strong sell-off in tech stocks, renewed fears of a lockdown stemming from increasing cases of COVID-19, and the upcoming US elections. Equities underperformed most asset classes with the S&P 500 down -3.92% on the month.
Fixed income indices closed on either side of flat. On one hand, most of their gains came from overall yields moving lower. On the other hand, credit spreads widened by 5-7 basis points, depending on the index, offsetting those gains. This was the first time in six months that credits spreads widened.
We feel uncertainty and volatility will remain as the market continues to focus on the impact of very different political agendas between Biden and Trump for the upcoming US elections. Increase in taxes, energy investments (clean vs. conventional), renewed COVID-19 related lockdowns, and stimulus-support are all main topics of debate that can swing investor sentiment. As we speak, negotiations are still underway on the size and nature of an additional virus-related stimulus that currently sees both parties apart by close to $1 trillion dollars.
As defensive as we have been, our view remains cautiously optimistic. We do not expect to see a repeat of March 2020 anytime soon. The Fed and BoC both remain committed to supporting the financial markets. An arsenal of billions, if not trillions, is ready to be deployed with facilities already in place to do so. To this day, the Fed has used only 2% of its bandwidth in the corporate bond market, while the Bank of Canada has used only 1.5% of theirs. This clearly shows how much capacity is left to be used despite the sharp reversal in market performance from March lows. Flows also remain supportive of the fixed-income markets, with inflows and maturities digesting the roughly $180 billion in supply for the month of September across the US and Canada. As for the last three months of the calendar year, markets expect maturities and additional investments in fixed-income to outweigh any remaining supply for the year, as many issuers have either pre-funded their CapEx or have already strengthened their balance sheet liquidity earlier in the year.