LOM Fixed Income Fund Manager’s Report Q4 2019

Over Q4, the LOM USD Fixed Income Fund achieved a net total return of 0.78% while its stated benchmark, the FTSE U.S. Investment Grade Government/Credit Bond Index returned 0.52%. The Fund gained 6.47% for the year of 2019, exceeding its benchmark by 147 basis points.

Following concern over slowing economic growth during the late summer months, the U.S. economy managed to finish 2019 on an uptick. Positive economic data included an improvement in factory utilization, industrial production, housing starts and building permits. Importantly, Personal consumption, which represents approximately 70% of America’s gross domestic product (GDP) celebrated accelerating wage gains as the record-length business expansion stayed on course.

Market sentiment also improved further in December as the U.S. and China made progress on their closely watched trade talks. Both countries announced plan to suspend tariffs due on December 15th and reduce some existing tariffs. This was the first major breakthrough since the trade war started two years ago. The two parties are arranging the formal signing of the phase one deal in January. An improving economic outlook combined with global trade progress reduced recession fears and helped move longer term bond yields higher.

As investor sentiment improved, the spread between ten-year BBB corporate bonds and ten-year Treasuries contracted over the last quarter, leading to better bids on most corporate bonds. This risk premium ended the year close to its lowest point of 2019 at 130 basis points. During the latest quarter, the Treasury yield curve became increasingly un-inverted as investors sentiment improved. Yields below one year dropped, with the 30-day Treasury yield declining from 1.86% at the end of Q3 to 1.45% by year-end. The ten-year Treasury yield increased from 1.66% to 1.92% over the same period. After the Federal Reserve cuts its target benchmark rate for the third time last year in the October meeting, officials announced plans to hold off on further cuts unless economic conditions demanded otherwise.

In addition to better bids on many of our existing corporate bond issues, the Fixed Income Fund also benefited from rising prices in the preferred sector. As the long-term “pref” prices appreciated due to greater investment appetite for risk, we proceeded to selectively sell securities and lock in profits. Overall, the Fund has also been upgrading credit quality by reducing lower quality “pref” issues and buying high quality asset-backed securities. Meanwhile, we continue to improve the portfolio’s total return potential by swapping into higher yielding newly issued securities while selling lowering yielding securities, from the same issuer.

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.