Quarterly Multi-Asset Credit Fund Update – Q2 2018

Product updates and commentary in response to key market developments.

Performance review

Geopolitics, a higher rates environment (Fed raised rates, BoE and ECB more hawkish) and trade tensions kept investors on edge.

In emerging market debt (EMD), the fear of trade wars and a stronger US dollar weighed heavily on performance. Local currency EMD declined 10.4%. Hard currency EMD fell 3.5% and corporate EMD lost 1.8%. Market volatility led to the notable widening of credit spreads.

Global investment-grade (IG) credit spreads widened by 16 basis points to 115, led by EU IG (+24 bps to 105) and US IG (+13 bps to 116). US corporate high yield spreads widened by 9 bps to 363, whilst European high yield spreads widened by a stark 80 bps to 393.

The Fund delivered negative returns over the quarter. This was driven primarily by the negative sentiment that swept over the Fund’s emerging market exposures, with emerging hard currency spreads widening and EM local currencies weakening. Additionally, high yield spreads continued to widen, particularly in Europe. Loans were not immune from selloff in credit.

Despite all this, the exposure to securitised assets continued to be robust, marginally offsetting the negative performance in other sectors. The underweight to high yield and EM exposure and into floating rate securities served to dampen the effect of negative credit performance.

Performance (%)

Average annualised returns

Russell Investments Multi-Asset Credit Fund Performance (%) 1 month 3 months Year to date 12 months 3 years 5 years Since inception
Return Gross of Mgmt Fee (0.85) -0.4 -0.9 -0.2 1.5 --- --- 1.7
Return Net of Mgmt Fee -0.5 -1.2 -0.7 0.5 --- --- 0.7
Benchmark 0.1 0.2 0.3 0.5 --- --- 0.5

Source: Confluence. Data as at 30 June 2018

Portfolio review

Asset allocation 

EMEA MACF Asset Allocation

Source: Russell Investments. Data as at 30 June 2018.

Personal Balance Sheet: Positions in UK MBS and CLOs boosted European ABS manager TwentyFour, while in the US the growing economy and still-solid housing sector supported residential mortgage credit (Voya Investment Management).

Corporate Balance Sheet: Increased geopolitical volatility widened credit and high yield spreads over the period, weighing heavily on underlying manager DDJ.
Loans faced some headwinds in the US (THL) and more so in Europe (ICG), as the credit sector became volatile on political risk.

Sovereign Balance Sheet: Local EMD was weighed down by a stronger US dollar, however manager MAN GLG drove performance for the Fund. Hard EMD faced headwinds and Rothschild’s and Dupont’s allocation to Venezuela and Argentina detracted from performance over the period. Venezuelan bonds came under renewed pressure over the period, after the re-election of socialist President Nicolas Maduro faced criticism at home and abroad and the US imposed new sanctions on the country. Meanwhile, Argentina was affected by a flight by investors to safe-haven assets after the US Federal Reserve hiked interest rates.

Current positioning

Rates: Central banks are expected to continue to move away from their ultra-supportive monetary stance. We expect the Fed to deliver another one to two rate hikes this year. The ECB is expected to end their bond purchases at the end of the year and hike rates in late 2019. The BoE seems poised to hike rates in coming months. We believe that slightly higher inflation should manifest over the next year. We expect 10-year yields to edge higher in Europe and Japan but US rates are close to fair value.

Credit: Strong global economic growth and demand for yield are supportive for credit but valuation is negative and volatility may increase further. Spreads are expected to drift marginally higher from current levels over the next year. Issue selection is increasingly important. Caution is warranted in higher beta sectors of the credit market. We see better value away from corporates in non-agency mortgages and emerging market debt.

Currency: We look for the USD rally to stall and expect many EM currencies to recover. In developed markets we favour EUR, JPY and GBP versus AUD and NZD.

Watch points: US wage/inflation risk, Fed mistake triggers a recession, Geo-politics (Trade wars, Russia, Middle East, N. Korea), Brexit uncertainty, China deleveraging risk, Election/political risks (US mid-terms, Brazil).

The value of investments and the income from them can fall as well as rise and is not guaranteed.

You may not get back the amount originally invested. Any past performance figures are not necessarily a guide to future performance.

Potential investors in Emerging Markets should be aware that investment in these markets can involve a higher degree of risk.

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