LOM Fixed Income Fund Manager’s Report Q1 2017
By Bryan Dooley | April 7, 2017
Despite the Federal Reserve’s decidedly more hawkish tone since the end of 2016, exemplified by the sooner-than-expected rate increase at the March FOMC meeting, U.S. bond markets managed modest gains over the first quarter of 2017. The LOM Fixed Income Fund USD delivered a total return of 1.69% for the first three months of this year, outpacing its stated benchmark index which increased by 0.56%. The excess return on the Fund of 1.13% was net of all fees and expenses.
The ongoing global reflation trade, further encouraged by the new, pro-business U.S. government, caused longer term interest rates to begin climbing from Election Day in early November into mid-December of last year, and then again into early March of this year. Each time, bond markets sold the rumor and bought the news on the two most recent FOMC policy moves. Meanwhile, credit spreads remain tight after grinding lower throughout most of 2016. Firming spreads combined with strong security selection contributed to the positive relative performance of the Fund which is heavily tilted towards credit versus sovereign issues.
Over the past full year, the Fund has provided a net return of 2.84%, exceeding its stated benchmark by 2.24% and outperformed our local competitors. Comparative returns for three and five-year %me periods also stack up well against the benchmark and the universe of other funds with similar mandates.
Going forward, we continue to anticipate two more rate hikes for 2017 in accordance with the Fed’s stated ‘dot plot’ forecast. We see further interest rate policy normalization as the path of least resistance for the Fed as long as the U.S. remains on a path of improving economic growth. America has lately been seeing relatively strong employment gains while inflation has begun to approach the Fed’s two percent target, checking the relevant boxes with respect to the central bank’s stated mandate. Clearly, fiscal uncertainty remains a concern as the new government struggles with highly polarized sentiment on Capitol Hill and President Donald Trump attempts to navigate the steep learning curve of negotiating fiscal policy.
With credit spreads in the aggregate approaching fair value, we are focusing on select corporate bonds, attractive Euro-dollar issues and asset-backed securities (ABS) which meet our strict criteria. We remain on target for modestly reducing portfolio duration by increasing our positions in floating rate notes as protection against rising short term interest rates.