Amplus Credit Income Fund officially launched at the beginning of July. In his first commentary, portfolio Manager Andrew James Labbad, CFA discusses how he has been capitalizing on central bank actions and outperforming coming out of the gate.
Since launching the fund on July 2nd, Amplus is off to a very good start. We have been able to produce returns of +6.58% for the month before costs. As a reference, 30-year Government of Canada bonds yield just over 0.9%.
It is flabbergasting to think that interest rates will remain this low for the next 30 years. If we think back 30 years ago, in 1990, interest rates on 30-year Government of Canada bonds yielded just over 10%. Said differently, we live in a time where $100 invested today would be worth $25 (75% less) in a year’s time if 30-year yields would retrace back to their levels from 1990. This is not to say we will be seeing yields of that kind anytime soon. In fact, central banks globally have reassured the markets that interest rates would likely hover near rock-bottom levels for years to come, waiting until full employment and meaningful inflation before raising them again. Given this new landscape that we live in, what is an investor to do? How will most traditional fixed income managers be able to reproduce the returns they have enjoyed over the last decade in a lowering rate environment?
As traditional fixed income investors have a harder and harder time facing this new reality of ultra low rates and finding assets that provide any meaningful yield, a number of investment opportunities tend to look even more attractive in times like these: corporate bonds (both investment grade and high-yield). We at Wealhouse Capital Management, are not only relentlessly searching for value, but we have a deep understanding of the dynamics of our marketplace and the psychology behind many investment decisions.
Currently, the average additional spread (yield) of investing in credit product makes up over 75% of the overall yield for a bond. The 5-yr average has seen credit spreads making up approximately 50% of the overall yield. This makes it very difficult to ignore high-grade bonds when yields are this low, which further validates our view to remain long credit.
Some may say that we’ve retraced most of the downturn of March and April, but in reality, central banks remain fully committed to supporting the financial markets, with programs in place ready to deploy billions, if not trillions, into the market. At the latest U.S. Fed meetings which took place late July, an extension of the Primary (PMCCF) and Secondary (SMCCF) bond buying programs were extended three months, from this upcoming September 30th to December 31st of 2020. This is an arsenal of about $750 billion combined that has yet to be used. Further to this, Chairman Powell was able to confirm that the Fed will utilize its “full range of tools” in order to support the economy. In order to avoid over-promising and under delivering, the Fed highlighted the importance of fiscal stimulus too, as monetary measures are not able to bolster the economy on a standalone basis. The same can be said for Canada, where the bond buying programs have plenty of capacity still available.
A final thought and theme we are seeing that further reinforces our views is to “follow the money”. Despite overall yields at record lows and spreads at post-COVID lows, we continue to see huge inflows into fixed income. In the US alone, $7.6 billion of inflows into fixed income were seen in the last week of July – the strongest week for flows since early June. Flows ultimately dictate a lot of the moves we see in fixed income, as investors are having an even more difficult time sourcing bonds and deploy cash. What makes things more difficult is that the market is expecting a very light supply calendar for August which would have helped fix that problem of deploying cash. We are absolutely aware that these trends can change very rapidly and therefore we remain long credit while actively making a decision to increase the credit quality of our portfolio overall, shifting from cyclical plays to essential-service type investments.
I hope everyone is enjoying the end of summer and adapting to the ever-changing way of life. I look forward to chatting with you next month. Please do not hesitate to drop us a line.