Forstrong Global Strategist Income Fund
Manager commentary - Q4 2019
Series A units of Forstrong Global Strategist Income Fund returned 2.7% for the three-month period ending December 31, 2019. The Fund's benchmark, which is composed of the MSCI AC World Index (35%) and the Bloomberg Barclays Global Aggregate Bond Index (CAD) (65%), returned 1.9% for the same period. The Fund’s return calculation for all series includes fees and expenses, which are not applicable in generating a return for the benchmark.
Headline geopolitical risks receded in the fourth quarter of 2019 and risk assets performed strongly. In early October, U.S. and Chinese officials held a joint press conference in the Oval Office to announce their intention to secure a “phase one” trade deal that would avert further tariffs. While the specifics of the agreement remained somewhat murky, financial markets cheered the de-escalation. Chinese equities rallied sharply alongside trade-sensitive emerging market peers such as South Korea and Taiwan.
The Brexit deadline was extended until the end of January 2020 and Boris Johnson’s Conservative Party won a resounding victory in the December general election. British assets leapt higher as investors expected that the government should have the parliamentary support it requires to ratify a deal with the European Union and avoid a “no deal” crash exit. The European Central Bank leadership transition was somewhat of a non-event, as it was widely expected that the new president, Christine Lagarde, would seek to continue her predecessor Mario Draghi’s accommodative monetary stance for the foreseeable future.
Global bond yields reversed course and marched higher during the quarter, as leading indicators (including semiconductor sales and global Purchasing Managers’ Indexes) showed signs of forming a bottom and the encouraging geopolitical news flow helped alleviate pessimism towards global growth and inflation. Additionally, the U.S. Federal Reserve cut interest rates another 25 basis points to 1.75%, but signaled that further cuts at upcoming meetings would be unlikely.
Net asset mix positioning contributed positively to performance during the period, as overweight exposure to equities sharply outperformed fixed income. Short duration and overweight corporate issuer exposure within the fixed-income component of the portfolio added value as bond yields faced upward pressure and credit spreads tightened during the quarter. A high yielding position in U.S. mortgage real estate investment trusts (REITs) performed strongly as the U.S. yield curve re-steepened and economic expectations stabilized.
Despite the alleviation of trade tensions during the quarter, overweight exposure to developed Asian equities (which tend to be relatively sensitive to changes in the global trade outlook) modestly underperformed global equity indices. Additionally, a real estate sector overweight detracted from returns, as the inherent interest rate sensitivity hurt relative performance.
President Trump has revealed a “phase one” trade agreement with China before the scheduled December 15 tariff implementation, the British Conservative Party (pro-Brexit for the most part) won a landslide re-election, the United States-Mexico-Canada Agreement (USMCA) was finally ratified and equity markets around the world have experienced an apparent “melt-up”. Year-to-date, portfolio performance has been rewarding both for equity and fixed-income components.
As it was, many pension funds, economists and investment strategists had been expecting muted investment performance, attributable to slowing economic growth and low interest rates. Everyone understands that investment returns must be supported by sustainable fundamentals, at least eventually. So, it is surprising that market upside has occurred despite declining corporate profits (which are at levels not witnessed since 2013).
All the above factors are highly visible, but there are more profound trends and developments to consider.
President Trump is posturing for a second term. As such, he has been increasingly careful not to disturb investment sentiment, economic growth and trade volumes. This is part of the historic dynamic that has tended to stimulate economies and markets in the fourth year of the presidential cycle. That period may have run-room of another eight months.
Crucially, around the world, policymakers have revealed a spirit of “collective excess”. All major countries are acting in unison as far as their responses to financial and economic fragility. The three largest central banks are game-on with quantitative easing and its variously named equivalents. For the first time in a decade, the U.S. Federal Reserve is adding to reserves while the budget deficit is rising. Equity dividend yields around the world remain attractive relative to bond yields. We observe that both fiscal and monetary stimulus are occurring at equity market highs, rather than at a bottom. This likely indicates that winds are to the backs of financial markets for a time longer.
Populism is gaining momentum around the world. Why? Causes of wealth schisms globally show no signs of turning. It is therefore a reasonable expectation that mass discontent will continue. Protest uprisings are occurring virtually everywhere – Bolivia, Chile, Iraq, Iran, Lebanon and Spain, to mention a few. It therefore should be expected that the wave of stimulative policy actions around the world will continue (eventually triggering even lower interest rates and increases in fiscal spending). For a period, at least, such policies will be favorable for financial market valuations.
The reality is that investors face a state of “policy schizophrenia”. On the one hand, we continue to view the world through a traditional understanding of classical economic and monetary factors. Yet, the entire analytical edifice remains hostage to “wild card risk”. Difficult as it is, we must give due consideration to both perspectives in our investment process.
Foreign currency-denominated emerging market bond yields have diverged from their local currency-denominated counterparts, which have fallen sharply in recent months. With generally benign inflation, widespread emerging markets (EM) central bank rate cuts and an improving global growth outlook, we expect EM spreads to narrow from current levels.
Exposure to U.S. mortgage REITs remains a tactical holding in the portfolio to position for a re-steepening U.S. yield curve.
|Fund and benchmark performance as at December 31, 2019||1 year||3 year||Since Inception (Aug. 2016)|
|Forstrong Global Strategist Income Fund – Series A||6.5%||4.3%||3.8%|
|35% MSCI AC World Index1, 65% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged)||11.9%||6.4%||5.6%|
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1Source: MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. The Fund's strategy is to invest primarily through diversified investments in a balanced mix of ETFs ("exchange-traded funds") of multiple global asset classes. The performance data comparison presented is intended to illustrate the Fund’s historical performance as compared with historical performance of widely quoted market indices. There are various important differences that may exist between the Fund and the stated indices that may affect the performance of each. The benchmark is a blend of 35% MSCI AC World Index and 65% Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged). The blended benchmark presented is intended to provide a more realistic representation of the general asset classes in which the Fund invests. MSCI AC World Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International, and is comprised of stocks from both developed and emerging markets. Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged) is a measure of global investment grade debt from 24 local currency markets that includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The Fund's fixed income component can invest in both investment grade and high yield bonds while the benchmark has exposure only to investment grade bonds. The Fund’s geographic and sector exposure may differ from that of the benchmark. The Fund may have different currency risk exposure than the benchmark. The Fund may hold cash while the benchmark does not. Overall, the Fund's bond and equity exposure can differ, because the Fund does not use a fixed ratio similar to the benchmark. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance.