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Both equity and credit markets plunged during the fourth quarter of 2018 as investors hit the panic button. This is a regular pattern we have seen reoccurring almost few years over the past two decades. The Q4 “risk off” move pushed credit spreads higher across all types of bonds, dropping prices for most hybrid securities despite falling Treasury yields. On the equity side, even high-dividend paying issues were not spared.
Despite the challenging markets for hybrid and equity securities in Q4, the LOM Stable Income Fund managed to outperform its benchmark, declining by 7.59% compared to the return of negative 9.11% on the index. For the 2018 year as a whole, the Fund outperformed its benchmark by 3.43% even though falling markets made the net total returns negative for the period.
The Fund’s current asset allocation is approximately 47% equity and 53% fixed income. The fixed income component is focused mainly on so-called hybrid securities possessing characteristics of both debt and equity instruments. Generally, bonds hold up better than riskier assets when Treasury yields decline. However, the indiscriminate selling of risk assets during the fourth quarter took prices of most bonds lower. In December, technical market factors such as year-end tax harvesting caused another leg down.
Towards year-end, we 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.
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. Already, risk markets are perking up in the New Year and we are seeing substantially stronger bids on both hybrid securities and many of our high-dividend paying equities.
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.
