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Well-positioned in front of positive market trends, the Stable Income Fund achieved a net total return of 11.66%, including dividends over the first half of 2019. This return exceeded that of the Fund’s stated benchmark by 4.14% as strong stock selection combined with profitable sector bets boosted both absolute and relative investment performance. Income-producing assets continued to win favor among investors throughout the period as interest rates fell and credit spreads remained relatively tight.
Both equity and credit markets continued their rally into the second quarter as the Fed maintained a dovish bent and the ongoing trade war between the U.S. and China began to show signs of progress. Risk appetite continued to key off international trade policies, however, and markets fell sharply in May when the trade negotiations appeared to have broken down. With the narrative reversing during the month of June, risk market finished the quarter on a positive note with the S&P 500 reaching a new all-time high and the S&P Preferred stock index touching a new high for 2019. Meanwhile, dividend-paying stocks remained well bid as the ten-year U.S. Treasury Note fell to 2.0% in the last week of the quarter.
The Fund’s current asset allocation at quarter end was approximately 48.2% equity and 51.3% fixed income, with the fixed income component focused primarily on hybrid securities which possess characteristics of both debt and equity instruments. Our hybrids, which include preferred stock, baby bonds and debt instruments have continued to benefit from both falling interest rates and relatively tight credit spreads.
Credit markets continued to rally over Q2 2109 as the Federal Reserve maintained their tilt towards more accommodative monetary policies. Based upon Fed fund futures and the inverted government yield curve, markets are predicting the Fed will cut interest rates at their upcoming July FOMC meeting.
While a July rate cut now appears likely, the current debate is about whether the Fed will cut by 0.25% or 0.50%. Clearly, a more dovish stance has been confirmed by Fed Chairman Jerome Powell and other Fed officials in recent communications. However, the ultimate direction and degree of change by the FOMC will remain ‘data dependent.’ As we enter into the early part of the U.S. election cycle, the Fed needs to maintain the perception of being politically neutral.
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.
