Language | 
English
Spanish
Credit prices fell as investors hit the panic button during the fourth quarter of 2018. This is a regular pattern we have seen reoccurring every few years over the past two decades. The Q4 risk off move created wider credit spreads on all types of bonds, taking prices lower for most fixed income securities with the exception of some U.S. Treasury Notes.
Despite challenging credit markets, the LOM Fixed Income Fund USD held up better than its peers posting a flat return compared to the return of –4.96% for the index of comparable offshore mutual funds with similar mandates over the 2018 year. Over the past three-year period, the Fund provided a net total return of +7.00% which exceeded the offshore benchmark return of 5.14% by 1.86%.
The Fund continues to maintain its strategic overweighting to the corporate fixed income sector and has been opportunistically increasing its exposure to asset-backed securities (ABS). We see value in select ABS bonds as credit spreads blow out, while the underlying collateral for the securities we own remains stable or even improves in some cases.
In December, we also saw a unique opportunity to buy longer-dated “baby bonds” at fire sale prices as retail investors dumped positions. For example, we bought invest grade $25 par issues yielding around six percent, more than twice the yield available on long-term Treasury bonds. Some of our positions include strong credits such as electric utility bonds which we expect to remain financially resilient in the event of an economic downturn.
Despite the recent addition of some longer-dated fixed income issues, the overall portfolio duration remains relatively short, providing protection against the possibility of rising interest rates. The current modified duration of the fund is 2.39 years and the option-adjusted portfolio duration presently sits at just 1.83 years. Despite the relatively low average duration and the portfolio’s high credit quality at A-, the yield-to-maturity of the portfolio is an attractive 4.36%. The underlying portfolio therefore offers a yield of over 130 basis points above the 30-year U.S. Treasury and with much less expected volatility.
Looking ahead, we anticipate one or two more U.S. rates hikes in 2019 before the Fed backs off. While the December hike in the face of a slowing economy likely represents another FOMC policy mistake, recent commentary from Fed Chairman, Jerome Powell indicates the Fed may ultimately do less damage than they have in past cycles. In any event, the yield curve is essentially flat from two to ten years and we see little reason to extend the fund’s duration, except in special situations such as we have outlined in the foregoing.
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.
