Manager commentary - Q4 2019

The rally in credit spreads continued in September and October and even accelerated in December as the U.S. moved closer to a phase one trade deal with China and investors looked past an earnings trough this quarter into next year where results are expected to rebound. Notably, for below investment grade segments, this year’s trend of performance by rating tier reversed course towards the end of the quarter with lower quality segments outperforming by a relatively large margin.

Earlier in 2019, both the loan market and the high-yield market diverged into two distinct segments. Large and liquid BB-rated credits were trading at or near post-crisis tights while smaller and generally more cyclical B-rated names continued to trade relatively wide. However, in December, the differentials in performance narrowed between BB, B and even CCC. Also notable was the outperformance of generally more cyclical and commodity-related energy and metals and mining areas.

Non-investment grade CLO debt tranches and local currency emerging markets sovereign debt also rallied sharply in December as investors extended their search for yield and the U.S. dollar weakened. Treasury rates pushed towards the top end of recent trading ranges while the Federal Open Market Committee refreshed its dot plot, signaling no action in 2020 and the potential for one hike in 2021.

The Fund benefitted most from allocations to higher-spread areas during the quarter as the rally in risk assets continued and intensified. From an asset allocation standpoint, allocations to European contingent convertibles and bank loans were the top contributors. Allocations to higher-quality asset classes such as ABS, European investment grade credit and investment grade corporate floaters still produced positive total returns during the period, but did not maintain pace with higher-yielding asset classes. A hedged duration profile, in the form of a short 10-year Treasury futures position, contributed a modest amount during the quarter.

Developed market central banks reversed course in 2019 and engaged in additional stimulus. The European Central Bank reintroduced its asset purchases, along with a rate cut, while the U.S. Federal Reserve (Fed) enacted its ‘mid-cycle adjustment’ of three 25 basis point rate cuts. Despite concerns relating to economic weakness and absence of inflation, we believe that central banks will still prefer to refrain from any additional rate cuts as long as currency levels remain stable and political risks are kept in check. Following its three cuts, the Fed appears to be setting a higher threshold for 2020 in terms of cuts or hikes, with a strong bias towards maintaining current levels. This sets the stage for government bond rates in developed markets to remain range-bound for 2020, but with tail risks that are primarily policy related.

Overall, the base case of a still accommodative central bank backdrop and no recession is supportive of credit spread assets. Despite recent strong performance, when we reflect on 2019 overall, the demand aversion to lower-quality and more cyclical areas of high yield has resulted in attractive opportunities in the single-B space. We remain constructive on middle rating tiers as well as higher- and lower-quality credits that stand to benefit from improving fundamental profiles and a supportive technical environment.

Fund and benchmark performance as at December 31, 20191 yearSince inception
(Oct. 2017)
IA Clarington Global Bond Fund – Series A5.9%0.6%
Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged)7.4%4.1%

 

Learn more about IA Clarington Global Bond Fund

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 the Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged) which 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 geographic, sector and credit quality exposure may differ from that of the benchmark. The Fund may hold cash while the benchmark does not. It is not possible to invest directly in market indices. The performance comparison is for illustrative purposes only and does not imply future performance.