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Ninepoint Diversified Bond Fund

October 2018 Commentary

After ignoring the fixed income carnage of September, in October the equity market finally got spooked by higher rates; equities went down globally, lead by the U.S. What was most surprising to us was the muted reaction across credit, commodities and foreign exchange. Typically, a risk off event such as the ~10% S&P 500 drawdown that we saw in October elicits a more violent reaction in other asset classes. For example, High Yield, which traditionally moves in unison with equities, only realized half of its usual beta.

The reasons cited for this selloff are varied, but they coalesce around a few themes. First, and most importantly, weak earnings (or weaker than expected future earnings) were a catalyst for the U.S. market to finally price in slower global growth, something the rest of the world had already realized this past spring with the Emerging Markets selloff. So, in a way, it was the U.S. equity market that had yet to catch up. Second, the market is finally pricing in a Federal Funds rate that is in line with the Fed dot plots (rates around 3.25% by the end of 2019); making the risk-free asset increasingly more attractive, particularly with the prospect of slower growth. Finally, after the October FOMC meeting, it is more and more clear that the Fed under Chair Powell will be less data dependent, more aggressive and less predictable. All else equal, this means more volatile financial asset prices, particularly long-term interest rates.

In the fund, although we maintain a low duration & higher quality bias, we were not spared by the global sell-off. As the table below shows, the Diversified Bond Fund (F) was down 38bps in October, taking our year-to-date performance to 46bps. While the fund’s performance in October was below our expectations, it pales in comparison with the shellacking suffered by the major benchmarks. For example, the Canadian broad bond ETF XBB was down 72bps, while US Investment Grade and High Yield ETFs were both down 2%.

 

October

Return

Year-to-date Performance

Ninepoint Diversified Bond Fund (F)

-0.38%

0.46%

XBB (iShares Core Canadian Universe)

-0.72%

-1.15%

LQD (iShares US Investment grade)

-2.05%

-5.14%

HYG (iShares US High Yield)

-1.98%

1.05%

Source: Bloomberg, Ninepoint Calculations

This month’s underperformance, relative to our expectations, come mostly from our preferred shares holdings, which detracted 13bps from performance. While it is a small weight (~5%), price action was very disorderly and as a result the overall preferred share market declined by much more than its usual relationship with equities and rates. At this juncture, the market has rebounded from the lows, but still not as much as equities. Ironically, early in October we had started the process of reducing our preferred shares positions. We managed to close two positions before the selloff started. Our strategy at this point is to be patient, wait for better price levels and continue our progressive exit from the asset class; we do not want to own preferred shares going into what we think are the last innings of this economic expansion.

With interest rates now up meaningfully and credit spreads mildly higher, we are now reinvesting at much more attractive all-in-yields. For example, our investment grade holdings have a yield of 3.9% with duration of only 3 years. In the coming months, we intend to continue to migrate the portfolio towards low duration, higher quality investment grade bonds. Although we think recession is still some ways away, we are getting to the point where adding some government bond exposure might be prudent.

Until next month,
The Bond Team: Mark, Etienne and Chris

Diversified Bond Fund Portfolio Characteristics:

Current Net Foreign Currency Exposure: 0%

Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund -0.4% 0.5% -0.2% 0.1% 0.6% 3.3% 3.9% 4.5%

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 October 31, 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 October 31, 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.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: RBC Investor & Treasury Services: Tel: 416.955.5885; Toll Free: 1.877.874.0899