Quarterly Multi-Asset Credit Fund Update – Q1 2019

Product updates and commentary in response to key market developments.

Performance review

The Fund delivered positive returns over the quarter, driven by the corporate high yield, loans and hard currency emerging market debt (EMD) positions.

  • Global sovereign yields fell on the back of concerns over slowing economic growth. Moreover, the Federal Reserve cemented its dovish position whilst the European Central Bank brought back stimulus. The Bank of England meanwhile, continued to contend with Brexit.
  • In the US, a dovish Fed, strong oil prices and optimism over a trade accord between the US and China, boosted corporate high yield and investment-grade (IG) credit returns. Across the pond, Brexit uncertainties and moderating economic data were headwinds, however a supportive ECB bolstered European corporate high yield and IG credit spreads.
  • In EMD, local EMD increased 2.9%. Hard currency EMD rose 6.6% and corporate EMD climbed 5.2% over the period (USD terms).

Performance (%)

Average annualised returns

Russell Investments Multi-Asset Credit Fund Performance (%) 1 month 3 MONTHS Year to date 1 YEAR  3 YEARS 5 years Since inception
Return Gross of Mgmt Fee  0.5 3.4 3.3 1.7 --- --- 2.3
Return Net of Mgmt Fee 0.4 3.2 3.2 1.0 --- --- 1.5
3M GBP LIBOR 0.1 0.2 0.2 0.8 --- --- 0.6

Source: Confluence. Data as at 31 March 2019. Inception: 31 May 2017. Any past performance figures are not necessarily a guide to future performance.

Portfolio review

Asset allocation

Sector Manager Q4 Weight Q1 Weight Style/Area of Expertise
Structured Credit TwentyFour 16.0% 15.6% European specialist; focusing on RMBS, CLOs and Consumer ABS
Voya 9.5% 9.3% Global specialist; specialising in CMBS, ABS, agency MBS and mortgage credit
High Yield DDJ 2.5% 3.2% US High Yield manager; focusing on issue selection in B/CCC areas
Barings 2.0% 3.0% Global High Yield manager; focusing on issue selection; benchmark aware
PIMCO 2.8% 3.7% Global High Yield manager; high quality bias; ability to rotate into other sectors
Hermes 3.5% 4.6% Global top-down approach. Emphasis on capital structure trades
Russell Investments 2.2% 2.1% US & European fallen angels, active currency and real yield systematic positioning strategies
Loans/CLO ICG 21.7% 21.4% Euro loans specialist; bottom-up focus, but will evolve the quality profile through the cycle
THL 15.0% 14.9% US Loans specialist. Value-driven research with proactive trading
EMD Hard DuPont 6.6% 6.5% Emerging Markets specialist. Value driven country selection, including local markets
Rothschild 3.7% 4.0% Emerging Markets specialist. Opportunistic total return
EMD Local MAN GLG 4.1% 3.5% Tactical trading approach; focus on currency and rates
Colchester 2.2% 1.9% Fundamental value-driven approach
Barings 2.7% 2.2% Value driven approach blending quant and qualitative inputs
Liquidity Russell Investments 5.5% 4.1% Fund-level liquidity reserve

Source: Russell Investments. Data as at 31 March 2019.

Personal Balance Sheet: US ABS (Voya) outperformed in tandem with other risk assets. A brief delay of Article 50 along with ECB support helped positions in UK MBS and CLOs – boosting European ABS (TwentyFour).

Corporate Balance Sheet: The greatest contributor to Fund returns was the high yield allocation which benefitted from both the spread narrowing and the move lower in bond yields.

Even though the US and European central banks struck a dovish tone on rates, US loans (THL) and European loans (ICG) – which are suited for higher rates – performed strongly, as risk assets rebounded on the central bank support and abating concerns of slowing global growth.

Sovereign Balance Sheet: The USD dollar proved to be relatively resilient through this risk-on period and hence EMD local currency returns were relatively subdued compared to the other multi-asset credit sectors. Hard currency EMD added to performance (DuPont), notably through an overweight to Venezuela.

Fund changes and positioning

  • At the beginning of Q1, the strategy reallocated exposure away from EMD local currency and cash. EMD local exposure proved to be resilient over the course of Q4 2018 and hence was pared back as we entered into 2019.
  • Exposure was also moderated lower in securitised and loan exposure, particularly in the European securitised.
  • This capital was primarily allocated towards high yield exposure given elevated levels of spreads at the beginning of the quarter.
  • The strategy also partially took profits on the long GBP exposure it had against the USD dollar.
  • The Fund now still is in a defensive posture versus the strategic benchmark, given the slight overweight to floating rate securities and cash, while having an underweight to high yield and EMD exposure.

Watch points: Further flattening of global yield curves, the Fed’s policy response function and its willingness to tolerate potentially higher inflation, China’s management of economic slowdown, Geopolitics (Trade wars, Russia, Middle East, N. Korea), Europe – populism, elections, ECB governor change.

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. Any forecast, projection or target is indicative only and not guaranteed in any way.

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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