Quarterly Unconstrained Bond Fund Update – Q2 2018

Product updates and commentary in response to key market developments.

Performance review

The Bloomberg Barclays Global Aggregate Bond Index increased 0.2% (USDH) in the second quarter. Geopolitics, a higher rates environment and trade tensions kept investors on edge. Meanwhile, the Federal Reserve (Fed) raised rates and the Bank of England (BoE) and European Central Bank (ECB) engendered a more hawkish stance despite keeping their monetary policies on hold. Over the period, the US dollar strengthened and oil prices increased.

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. In corporate bond market news, new issuance picked up this quarter with companies such as Bayer ($15 billion) and Walmart ($16 billion) bringing major deals to the markets.

The Fund continued its positive performance through the second quarter, largely driven by the allocation to the mortgage prepayment strategy managed by Putnam, one of our opportunistic strategies. Elsewhere, the allocation to the long volatility strategy managed by H2O also was rewarded. In FX, whilst an underweight to both the Norwegian krone and Swiss franc contributed, an overweight to the British pound, the euro and the Japanese yen detracted from performance. Rates positioning held back further gains over the quarter.

Performance (%)

Average annualised returns as of 30/06/18

Russell Investments [Unconstrained Bond Fund USD] Performance (%) 1 month 3 months Year to date 12 months 3 years 5 years Since inception
Return Gross of Mgmt Fee (0.85) 0.3 0.9 1.9 3.0 2.6 2.3 1.9
Return Net of Mgmt Fee 0.2 0.7 1.5 2.1 1.7 1.4 1.1
Benchmark 0.2 0.6 1.1 1.8 1.1 0.8 0.7

Source: Confluence. Data as at 30 June 2018

Discrete rolling 12-month performance (%)

Average annualised returns as of 30/06/18

Returns shown in USD Q2 2013 - Q2 2014 Q2 2014 - Q2 2015 Q2 2015 - Q2 2016 Q2 2016 - Q2 2017 Q2 2017 - Q2 2018
Return Gross of Mgmt Fee (0.85) 2.1 1.4 0.0 4.9 3.0
Return Net of Mgmt Fee 1.2 0.5 -0.9 4.0 2.1
Benchmark 0.2 0.3 0.5 1.0 1.8

Source: Confluence. Data as at 30 June 2018

Portfolio review

Asset allocation

UBF Quarterly Fund Performance


Opportunistic Strategies (High Yield, Local and Hard Currency Emerging Market Debt): The Fund maintains a strategic allocation to mortgage risk. Putnam's strategy exposes us to a unique combination of risk factors that have good return potential and excellent diversification characteristics. As rates rise agency interest only strips (IO's) should perform well. CMBS offers decent value in a market that does not offer value in many places.

Core Yield engine (credit): We have slightly increased our high yield exposure, which pushed up the core yield engine exposure in the Fund to about 46.0%. This was off the back of rising interest rates and spreads in the high yield sector. The synchronised global growth backdrop continues to be a supportive environment for credit. However, given the lower-than-long-term spreads we see in this sector, we remain underweight the strategic target weight of 50%.

Diversifiers (currency real yield, volatility): Given the large positive return from the long volatility exposure via the manifestation of an optimal environment for this strategy, we have marginally dialled back this exposure. We slightly pared back the weight to Russell Investments' Currency strategies, but overall, we remain confident that both Real Yield and the Russell Investments' Currency strategies continue to play a strong role in diversifying the core yield engine.

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.

Some investments/bonds may not be liquid and therefore may not be sold instantly. If these investments must be sold on short notice, you might suffer a loss.

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