Ninepoint Diversified Bond Fund

January 2019 Commentary

Following a rather challenging end of 2018, equity and credit markets rebounded strongly to start 2019. As discussed last month, fears of a looming global recession in 2019 were overblown and recent policy actions by central banks (particularly the Fed) and fiscal authorities (additional Chinese stimulus, end of US government shutdown) have finally calmed markets. Additionally, 2018Q4 earnings and the associated 2019 guidance by large corporations were generally good, lending additional support to the idea that global growth is not about to take another leg down.

Front and center this month was the January FOMC meeting, which strongly cemented the view that the Fed is on pause for the foreseeable future, with large upside surprises in inflation the only thing that could drive additional rate increases. In a dovish turn of events, Fed Chair Jerome Powell also surprised markets by announcing that the Fed balance sheet shrinkage (or the reversal of QE) would stop sooner than expected and that its ultimate size would be “much bigger” than they had originally anticipated. While details of this transition should emerge in the next few months, this development is definitely a positive for sentiment and risk assets.

All these factors combined drove the first month of significant credit spread tightening in 12 months (Figure 1), which helped drive good performance in the fund (78bps). New bond issue activity was sparse, and very well subscribed for, indicating to us that the market is very starved for credit right now. Some of the higher beta credit that we bought in the middle of last year’s turmoil has outperformed significantly (e.g. GE), adding credence to the notion that being nimble and active in those markets can make a big difference.

Source: Bloomberg, Ninepoint Partners

While government bond yields continued to decline in January (between 5 and 10bps on the Canadian and US 10-Year Notes), we continue to be of the view that the decline is overdone. Looking across asset classes, the outperformance of cyclical equities (industrials, energy, financials), commodities and emerging markets all suggest to us that the recent behaviour of yields is inconsistent with this “reflation” narrative. In the absence of global recession, an increase in energy prices and with that higher inflation expectations, we believe long term interest rates will drift higher. As such, we expect the yield curve will steepen from its currently depressed level (Figure 2a). Consequently, we see less likelihood of a recession in 2019 (Figure 2b).

Source: Bloomberg, Ninepoint Partners

For the portfolio, that means (paradoxically) being “defensively opportunistic”:

• Defensive on interest rate risk, keeping duration short, so that if we are right and the curve steepens from here, we do not get hurt holding longer dated securities.
• Opportunistic on credit, taking advantage of the dislocations and illiquidity in the secondary market, buying investment grade bonds at high yield like prices, while keeping them very short in duration.

Good risk management, for us, is about managing the risks for and against one’s base case. If the curve keeps flattening from here, fears of a global slowdown return, interest rates decline, and credit widens. But, our short-dated investment grade securities will still mature in a few years, having captured a higher yield for our investors with less volatility. If we are right and the curve steepens, our credit positions continue to perform well, and we won’t get hurt by rising long term yields.

Until next month,

The Bond Team: Mark, Etienne and Chris

Diversified Bond Fund Portfolio Characteristics:

Current Net Foreign Currency Exposure: 0%

Source: Ninepoint Partners

 

Ninepoint Diversified Bond Fund - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 0.3% 2.3% 1.5% 2.2% 2.3% 4.1% 3.5% 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 January 31, 2019; 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 January 31, 2019 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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