Summary – March 19, 2020

 

Gretchen Amidon

  • While we did not anticipate the market impact of COVID-19 or the oil price shock, the IA Clarington Loomis Global Equity Opportunities Fund and the equity sleeve of IA Clarington Global Allocation Fund were relatively well positioned in advance.
    • Our concentrated portfolio of global equities includes no energy stocks, which have been hit hard.
    • We have long been underweight banks and have a more diversified exposure to financial services.
    • We had already sold off our position in Booking Holdings, an online travel agency, months ago.
  • The COVID-19 situation has resulted in only very limited changes to our long-term thesis on our holdings.
  • We have taken the opportunity over the last week or so to initiate three new equity positions and eliminate one holding.
  • We have also added to some existing positions and trimmed others.
  • Overall, the equity team sees current volatility as an opportunity and intends to be opportunistic.
  • As always, we are being very selective – we’re not buying airlines or travel industry companies.
  • We’re looking for companies that exhibit our three alpha drivers: quality, intrinsic value growth and attractive valuation.
  • It’s difficult to judge the long-term effects on human behaviour of the COVID-19 fallout.
    • We do think it’s likely that it will accelerate an existing trend that’s seeing companies streamline their supply chains and become more vertically integrated.

 

David Rolley

  • On the fixed-income side, we’ve moved some money into the international sleeve of the portfolio on account of price discontinuities we’ve observed.
  • Liquidity has been extremely poor and we’ve seen very significant price drops for some bonds as a result of forced selling.
  • We’ve been buying some U.S. dollar pay emerging market sovereign bonds at 8–9% yields, which is quite amazing and not an opportunity you see every day.
  • We expect the low interest rate environment to last a long time.
    • We don’t think the federal funds rate will drop below 0%, but we think the current rate of 0–0.25% will last through the end of the year at a minimum, and probably for longer.
    • The U.S. Federal Reserve (Fed) is probably targeting 1% for the 10-year and 1.5% for the 30-year.
    • Fed balance sheet expansionary capacity is essentially unlimited amid a deflationary shock, and this is true for the Eurozone as well.
    • We think the central banks have the market’s back in treasury fixed income.
    • In our view, the positive correlations between equity and fixed income that we’ve seen, where equities and the 30-year are both selling off, will be quite temporary.
  • We’re adding relatively high-yielding long spread duration paper to IA Clarington Global Allocation Fund.
    • I have a lot of conviction that our position is going to be very beneficial for investors for the next several years.
  • We are expecting spectacular, hair-raising declines in high-frequency economic indicators for March and April.
  • We’re looking for companies that exhibit our three alpha drivers: quality, intrinsic value growth and attractive valuation.
    • But we expect it to be V-shaped because there are no barriers to liquidity provision and fiscal stimulus.
    • For sovereigns and companies that can pay their bills, spread duration is a temporary buying opportunity; once things settle down and the economy is recovering, we’ll see a massive renormalization of spreads and massive future price appreciation.
  • A key lesson we learned from 2008–2009 is that central bank balance sheet expansion has a negligible future impact on inflation – it does not generate inflation.
  • We think there are compelling opportunities in both fixed income and equity, and our unique, research- driven approach makes us especially well equipped to take advantage of those opportunities, in our view.

 

Learn more about Loomis, Sayles & Company, L.P. and the Funds they manage.

 

Definition of terms: Alpha – An investment return that exceeds the return of the benchmark. Balance sheet expansion – Typically refers to the U.S. Federal Reserve’s asset purchases in the wake of the financial crisis of 2008 to stabilize the financial system and economy. Concentrated portfolio – A portfolio that consists of a relatively small number of securities selected after very thorough and rigorous analysis. Correlation – A measure of how two investments perform in relation to each another. A high positive correlation means the two investments perform very similar to each other (when one goes up, the other goes up to a similar degree, and vice versa), while a high negative correlation means they perform very differently (when one goes up, the other goes down to a similar degree, and vice versa). Federal funds rate – Refers to the interest rate set by the U.S. Federal Reserve. Fiscal stimulus – A government action or policy designed to stimulate economic activity. Forced selling – The requirement to sell securities to adhere to an investment mandate or accommodate redemption requests. Intrinsic value – The market price that reflects a company's true worth. Liquidity (central bank) – Refers to economic conditions, resulting from central bank policy, in which credit is plentiful and easily accessible. Liquidity (market) – Financial conditions in which securities can be readily bought and sold. Sleeve – A segment of a mutual fund portfolio. Sovereign bonds – Bonds issued by a government. Spread – The yield difference between two types of fixed-income or credit instrument, typically expressed in percentage points or basis points. A tight spread means the yield difference is small, while a wide spread means the difference is comparatively large. Spread duration – Refers to the degree to which a bond’s price changes relative to a change in its spread. Treasury – A debt security issued by a government; typically refers to U.S. government Treasuries when an upper-case “T” is used. Underweight – Allocating less to an asset class, sector, geographic region or other category than the benchmark weighting. Valuation – A measurement of how much an investment is worth. It is determined by analyzing a variety of factors, including financial statements and industry statistics. Yield – The income earned from a security.