LOM Fixed Income Fund Manager’s Report Q3 2018

Market analysis

The LOM Fixed Income Fund USD posted a positive return over Q3 2018 while outperforming its stated benchmark, even as US interest rates continued to rise on back of America’s record-setting economic recovery. For the quarter, the Fund returned +0.42% compared to a return of +0.25% on the benchmark Citigroup 1-5 Year Government/Corporate Bond Index. Over the past one-year period, the Fund provided a net total return of +0.88% which exceeded the benchmark return of -0.36% by 1.24%.

The Fund continues to maintain an overweight to the corporate bond sector and underweight to sovereign debt – a strategy we continue to favor in light of our view for an extended US economic recovery. America’s fiscal stimulus plan, primarily in the form of a large corporate tax cut, has paved the way for positive GDP growth and strong corporate earnings for the balance of this year and into the first half of 2019. For new bond purchases in the Fund we have been maintaining our focus on shorter-duration securities such as LIBOR-based floating-rate notes as we have for the past several months.

While at times we have selectively added to our longer-term fixed income securities, the overall portfolio duration remains well below the benchmark index. The current option-adjust portfolio duration presently sits at just 1.88 years compared to 2.56 years on the benchmark. Despite the lower average duration and the relatively high credit quality of the portfolio, the weighted average yield-to-maturity of the portfolio is 143 basis points above the yield on the benchmark Index.

Looking ahead, we anticipate one more Federal Reserve rate in December of this year following last month’s 0.25% increase. With the long end of the yield curve holding under 3.5%, we expect the curve to remain relatively flat. Ongoing low interest rates in non-U.S. developed regions, a relatively benign inflation outlook and heightened geopolitical volatility should continue to keep a lid on longer-term yields, in our view. Nevertheless, we believe the immediate path for short-term US interest rates is higher and we therefore plan to stay short duration while looking for above-market yield opportunities in the corporate, hybrid and asset backed securities (ABS) sectors.

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