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Ninepoint Diversified Bond Fund

March 2018 commentary

As discussed in our February commentary, trade wars and political instability accelerated in March. We saw a worsening of the NAFTA rhetoric, the exit of moderate presidential advisors such as Gary Cohn and Rex Tillerson, and most importantly, the clearest manifestation yet of significant trade actions against China.

Evidently, this spooked investors and drove a significant flight to safety; government bonds rallied while credit spreads widened and equity markets sold off. While we were expecting a negative market reaction from the amplified trade pressures, the magnitude and velocity of the move was somewhat surprising. Given our fund’s positioning, we suffered a 14bps loss during the month, while the Bloomberg Barclays Canadian Bond index rallied 80bps (Figure 1 below shows our YTD performance against the index).

Source: Bloomberg

Most of the index gains were driven by long term government bonds (i.e flight to safety), where we have almost no exposure. In the fund, gains in our investment grade (IG) bonds were offset by mark to market losses in our high yield (HY) and preferred share portfolios. In HY, as discussed last month, the portfolio is defensively positioned (2 years duration), so we expect these mark-to-market losses to be reversed in future months as these bonds pull to par (i.e. get closer to maturity and hence par value of $100). In our (small) preferred share portfolio, we are positioned to benefit from higher interest rates, so losses were driven by both lower rates and higher credit spreads. Reflected in our month-end duration of 2.3 years (see the Portfolio Characteristics Table below) is a small defensive option position in TLT (long duration US government bond ETF), which was closed for a profit early in April. The current duration of the fund is 1.7 years.

All things considered, we see no reason to change our stance; rates, while volatile in times of market stress, are going up. We got further evidence of this urge to raise interest rates at Jerome Powell’s first FED meeting as FOMC Chair. While they are still signaling a total of three rate hikes this year, the Fed raised its forecast for 2019 (3 hikes) and 2020 (2 hikes), taking the Federal Funds Rate to 3.5% by 2020. Interestingly, their own assessment of the long term neutral rate of interest is 3%; so this forecast implies that by 2020, they will be effectively pulling the brakes on the economy, just as the fiscal stimulus tapers off. Given this backdrop, our best guess remains for a recession in 2020.

In the meantime, global growth is strong but moderating. Risks of trade wars remain the biggest unknown this year, but in our view this recent sell-off in markets means it has been factored in. At this juncture, a resolution (at least in principle) on NAFTA seems possible by the end of April. Moreover, the U.S. and China are in discussions on trade and the actual implementation of tariffs seems a long way off. If recent actions are any guide, the Trump administration barks loudly on trade to satisfy its political base, but seems intent on negotiating reasonable trade deals. At least for the near future, we expect risk assets to pay less attention to trade rhetoric out of Washington.

So where does that leave us? We continue to add to IG, let HY mature and sell longer dated holdings on rallies. We are happy with our current preferred shares holdings; while only ~6% of the fund, they yield over 5.5%, have duration of -3.3 years and are well laddered this year and next. Finally, with an overall yield to maturity of 3.7% and about 15% of the fund invested in Floating Rate Notes (FRNs), we feel well positioned for further increases in interest rates.

Until next month,

The Bond Team: Mark, Etienne and Chris

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at March 30, 2018; e) 2010 annual returns are from 08/05/10 to 12/31/10. 

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: capital depletion risk (Series T, Series FT, Series PT, Series PFT, Series QT, and Series QFT units only); concentration risk; credit risk; currency risk; cybersecurity risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; interest rate risk; regulatory risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; substantial unitholder risk; tax risk.

Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), other charges and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. The indicated rate of return for series F units of the Fund for the period ended March 30, 2018 is based on the historical annual compounded total return including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners LP is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

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