LOM Fixed Income Fund Manager’s Report Q3 2017

Market analysis

The LOM Fixed Income Fund USD provided a net total return of 0.64% for the third quarter, outpacing its stated benchmark, the Citigroup 1-5 year Government/Corporate index, which increased by 0.42% during the period. Year-to-date, the Fund has advanced by 3.58% versus a 2.44% return on the benchmark.

The Fixed Income Fund continues to outperform its stated index this year as we remain overweight credit securities versus sovereigns while spreads grind tighter and we see favorable price performance in key subsectors of the fixed income markets. Since last December, the U.S. Federal Reserve has increased interest rates three times in 0.25% increments. However, longer-term interest rates have not increased in sympathy, resulting in a flatting of the yield curve.

In this environment, we favor corporates on an issue specific basis but have also increased our weighting in asset-backed securities. Our positions in higher rated preferred issues has also contributed substantially to total return performance this year, but we used market strength as an opportunity to take some profits in this subsector over the summer months.

While our asset-backed securities position generally takes on incrementally more duration exposure, we have been offsetting this with new positions in floating-rate issues. Floating rate bonds, typically adjusting off quarterly LIBOR, provide additional protection against rising rates, although we see a dramatic spike in short term rates as a low probability event at this time. Currently, the modified duration on the bond portfolio is just 2.06 years providing adequate protection against another likely interest rate rise later in the year.

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