Ivy Pictet Targeted Return Bond Fund
Commentary as of March 27, 2020
After two weeks of relentless selling and negative risk sentiment in the markets despite various support measures taken in different countries, major governments announced broader economic support packages sufficient enough to give markets comfort that appropriate measures are being taken to weather the economic downturn. The range of support varied widely at the country level as a percentage of GDP, with Singapore’s package the relative largest at 11% of GDP. The U.S. announced a $1.5 trillion fiscal package (ex-loan guarantees) representing 7% of U.S. GDP, for a total global fiscal support announced so far representing 3.2% of world GDP. These measures are in addition to previously announced monetary responses in the form of rate cuts and expanded asset purchase programs. While these measures were welcomed, markets are still not fully functioning yet, and the economic impact of the virus is still too early to gauge. Signs of economic slowdown globally appeared in the weaker PMIs in both manufacturing and services, and higher unemployment data, including the historically-high U.S. jobless claims.
Trading in credit remained fragmented, as secondary market trading was difficult but primary issuance of high quality corporates were well-supported after being on hold in prior weeks. Risk appetite did return, breaking the strong U.S. dollar and U.S. Treasury streak, but not sufficient to fully reverse the underperformance in the Fund earlier in the month.
Impact on the Fund as of March 27
Rates: Positive on the week
The improved risk sentiment slowed the buying momentum seen in U.S. Treasuries, but U.S. duration was still positive. While Germany announced a series of fiscal measures, a joint, coordinated fiscal response from the EU has yet to occur. Our long bund and curve flattener lagged in performance. Peripheral governments were supported by the expanded purchase program by the ECB, the €750 billion Pandemic Emergency Purchase Program (PEPP). Our BTPs position outperformed, while our short France vs. Germany detracted. We had reduced our short France slightly but will keep the position as a hedge to our European credit positions. Our JGB and U.K. Gilts curve positions were positive on the week, while Canada, which has yet to announce QE, underperformed on the week, relative to U.S. Treasuries.
Spread: Positive on the week
While trading activity in credit has still to normalize, contribution from our spread holdings in both developed and emerging markets was positive. The announcement on the size and scope of the expanded asset purchase schemes provided some relief to the markets over the week but spreads remained much wider over the month. All sectors performed better but high yield both in Europe and the U.S. were the worst performers. Selling pressure in credit still continued, primarily in Europe, although at a slower pace than prior weeks. Markets are beginning to differentiate among credits, among those eligible for the purchase schemes as well as among those better prepared to weather the economic downturn, both from cash flow and leverage perspectives. Emerging Markets saw a better risk tone, led by Latin America, with Colombia outperforming following its surprise QE announcement. Oil producers continued to lag. We added perceived high quality defensive issuers in developed markets via the primary market, specifically consumer non-cyclicals, so those sectors in demand and less sensitive to market slowdowns
FX: Small negative on the week
The U.S. dollar traded weaker, breaking a strong trend. The Norwegian krone outperformed over the week but remained an underperformer over the month. Safe-haven currencies, such as the Japanese yen and Swiss franc also had a softer week, while select emerging market currencies had a better week though remained underperformers on the month. Our short emerging market positions performed well. We reduced our short to the Russian ruble and Israeli new shekel positions slightly. Our short Indonesian rupiah and Mexican peso as well as long Norwegian krone performed well on the week, but FX performance was pulled down by our long U.S. dollar exposure.
Our focus hasn’t changed as we continue monitor the Fund to make sure we have a balance between risk-on and risk-off positions, through difficult illiquid markets. We will concentrate on the liquid sectors, namely rates and FX, in our trading activity. In rates, we will concentrate on U.S. Treasuries, as we prefer to own debt in the market with the largest balance sheet, which we believe is liquid and represents high quality collateral. In spread, specifically corporates, we will selectively add to perceived high-quality defensive names which offer value. In line with our process, we will look to take profit in markets that have performed well or close shorts that have been profitable.
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.
Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 27, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds.
The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund's performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/ or less stringent financial reporting standards.
Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk and extension risk.
The Fund employs investment management techniques that differ from those often used by traditional bond funds, including a targeted return strategy, and may not always perform in line with the performance of the bond markets. The Fund is also non-diversified and may hold fewer securities than other funds and a decline in the value of these holdings would cause the Fund's overall value to decline to a greater degree than a more diversified fund. The Fund expects to use derivatives in pursuing its investment objective. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative's value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. These and other risks are more fully described in the Fund's prospectus.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.