Quarterly Unconstrained Bond Fund Update – Q1 2019

Product updates and commentary in response to key market developments.

Performance review

  • The Bloomberg Barclays Global Aggregate Bond Index increased 2.2% this quarter (USD). Global sovereign yields fell on the back of concerns over slowing economic growth. Moreover, the Federal Reserve (Fed) cemented its dovish position whilst the European Central Bank (ECB) brought back stimulus. The Bank of England meanwhile, continued to contend with Brexit. Over the period, the US dollar and oil prices also strengthened.
  • Global investment-grade (IG) credit spreads tightened by 26 bps to 115. In the US, a dovish Fed, strong oil prices and optimism over a trade accord between the US and China, boosted corporate high yield (-135 bps to 391) and IG credit (-30 bps to 113) returns. Across the pond however, the UK has been left to decide whether to seek a longer extension to Article 50 or leave the EU without a deal. This comes as Theresa May’s Brexit agreement was rejected for a third time in the House of Commons. Further headwinds in Europe came in the form of moderating economic data and upcoming elections in Spain. However, a supportive ECB bolstered European corporate high yield (-120 bps to 377) and IG credit (-22 bps to 106) spreads. In corporate bond market news, new issuance in the first quarter remained robust with Broadcom ($11 billion) and Altria Group ($11.5 billion) bringing some of the biggest deals thus far to the markets this year.
  • The Fund added to its inception-to-date outperformance. The core yield engine – namely Hermes and Post – drove outperformance in a quarter where credit and high yield spreads tightened. Allocation to Putnam’s opportunistic mortgage prepayment strategy also contributed in a positive period for mortgage credit. Meanwhile, the allocation to H2O’s long volatility strategy returned a small part of its longer-term outperformance in a less volatile period compared to the fourth quarter. In rates, the long positions to Australia and the US were positive. In FX, the short position to the Israeli shekel early in the quarter and the long position to the Japanese yen offset the gains from a short position to the Swiss franc.

Performance (%)

Average annualised returns

Russell Investments Unconstrained Bond Fund USD Performance (%) USD 1 month 3 months Year to date 12 months 3 years 5 years Since inception
Return Gross of Mgmt Fee (0.85) 0.6 3.0 3.0 4.5 - - 4.0
Return Net of Mgmt Fee 0.5 2.8 2.8 3.7 - - 3.1
Benchmark 0.2 0.7 0.7 2.5 - - 1.8

Source: Confluence. Data as at 31 March 2019. Inception: 6 September 2016. Any past performance figures are not necessarily a guide to future performance.

Discrete rolling 12-month performance (%)

Average annualised returns

Returns shown in USD Q1 2014 -
Q1 2015
Q1 2015 –
Q1 2016
Q1 2016 –
Q1 2017
Q1 2017 –
Q1 2018
Q1 2018 –
Q1 2019
Return Gross of Mgmt Fee (Class I Acc) - - - 3.4 4.5
Return Net of Mgmt Fee - - - 2.6 3.7
Benchmark - - - 1.5 2.5

Source: Confluence. Data as at 31 March 2019. Inception: 6 September 2016. Any past performance figures are not necessarily a guide to future performance.

Portfolio review

Asset allocation

UBF Quarterly Fund Performance
Source: Russell Investments. Data as at 31 March 2019.

  • Opportunistic Strategies (Manager): The Fund has maintained its already higher-than-strategic allocation to mortgage risk. The Putnam strategy exposes us to a unique combination of risk factors that have good return potential and excellent diversification characteristics. If rates rise, agency interest only strips (IO’s) should perform well. Commercial mortgage-backed securities (CMBS) offers decent value in a credit market that does not offer value in many places.
  • Core Yield engine (credit): Credit exposure rose closer to 50% at the beginning of the quarter, however given the rally since that time, this allocation has been decreased over the quarter back down to around 45%. Most of the reduction has occurred through a lower loans allocation.
  • Diversifiers (currency, real yield, volatility): Long volatility exposure has been maintained over the quarter as markets transitioned to a lower volatility environment. The Russell Investments currency positioning strategy remain below their strategic weights. The Global Real Rates strategy is also below its strategic weight. Overall both sets of Russell positioning strategies continue to play a key role in diversifying the Fund’s return profile.

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.