LOM Balanced Fund Manager’s Report Q3 2018

The third quarter was characterized by lower volatility in the equity markets and rising interest rates in the fixed income markets. The Balanced Fund modestly underperformed the benchmark in this period, gaining 1.65% while the benchmark gained 3.09%. The offshore peer group earned 0.64% during the same period.

The fixed income portion of the portfolio continued to benefit from its tactical over weighted allocation in floating rate securities as the Federal Reserve continued its policy of normalizing interest rates. When rates rise, financial instruments with fixed interest rates tend to underperform. Floating rate securities help protect us against that risk by periodically adjusting the interest rate. Rising interests have hit vanilla fixed income securities and preferred shares. We are not immune from that. Preferred shares (approximated 8.69% of the portfolio as of 09/28/18) have been affected, declining by 0.07% during the period. We benefitted both from being underweight fixed income and having our holdings outperform the benchmark.

The equity portion of the portfolio gained 4.88% while the benchmark gained 5.09%, representing slight underperformance. However, the sector a whole outperformed other asset classes by a wide margin, contributing to the overall strength of the portfolio.

Going forward, the Balance Fund continues to maintain its position in emerging market equities as a core component of its overall equity exposure. Although this subsector has recently been impacted by the ongoing trade war, rising interest rates and a strong U.S. dollar, we believe the longer-term prospects for EM growth and market performance remain intact. We see the EM markets, trading at historically cheap levels to the S&P 500, as a compelling opportunity over the next three to five years.

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The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.