LOM Fixed Income Fund Performance Q4 2016

• For 2016, Fund achieved +2.91% total return (net) versus benchmark return of 1.59% despite Q4 selloff.
• Exceeds the return on its benchmark and that of all local competitors over both one and three-year intervals.
• Morningstar five star (top) rating maintained.
• Note BIAS Short Duration fund is up only 0.09% per year over past three years.
• Fund has also more than doubled the net return on the Butterfield U.S. dollar bond Fund over the past year.

Despite a severe bond market selloff and a Fed rate hike during the last quarter of 2016, the LOM Fixed Income Fund USD managed to finish another relatively strong year. The Fund continues to outperform its stated benchmark and other local market competitors with similar mandates.

Interest rates rose sharply during the weeks immediately after the American election in early November as investors began to anticipate a U.S. reflation scenario initiated by the incoming Republican Party administration. While the jury is still out as to whether Washington’s new leaders will be able to resurrect economic growth and create an inflationary tailwind, markets are already anticipating a shift towards a new economic paradigm which could look quite different from what has occurred over the past decade.

For the 2016 year as a whole the Fixed Income Fund delivered a 2.91% net total return for investors which exceeded the return on its stated benchmark, the Citigroup 1-5 year Corporate/Government bond index by 1.31% (net of all fees and expenses.) On a gross return basis, the Fund exceeded the benchmark by approximately 2.41%. The Fixed Income Fund also compares favorably against local competitors and Morningstar rates it at five out of stars out of five stars.

Strategically, the Fixed Income Fund remains overweight the credit sector versus government bonds and thereby continues to benefit from ongoing spread tightening. In recent months, we have shortened duration modestly by adding to asset-backed securities, callable notes and floating rate issues. While we are not in full agreement with the reflation scenario hypothesis, given the numerous deflationary headwinds still in play, we do see a greater risk of further monetary policy tightening in 2017.

Notwithstanding the possibility of significant geopolitical disruptions which might cause the FOMC to dial back its plan for ‘normalizing’ rates, short term interest rates are likely to drift upwards at a measured pace over the course of the coming year. U.S. economic activity, although still sluggish, has picked up at the margin and the employment situation is looking more positive than it has for some time. Assuming economic data points continue to support at least a ‘muddle through’ growth scenario, the Fed can be expected to hike two or three times this year. We are inclined to reduce duration during bond market rallies and favor credit over interest rate risk while staying within our investment grade quality parameters.

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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.