Ninepoint Fixed Income Strategy

August 2019 Commentary

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Monthly commentary discusses recent developments across both the Diversified Bond and Credit Income Opportunities Funds.

Macro

Trade tensions continue to be top of mind. As of September 1st, about half of the proposed tariffs on the last $300bn of Chinese exports to the U.S. have been imposed, with the rest deferred to December 15th, a goodwill gesture by President Trump to limit impacts on Christmas shopping. An interesting volte-face given he has always argued that the Chinese were bearing the bulk of the tariff’s costs. As expected, the Chinese have retaliated to this escalation, triggering another off-the-cuff retaliation by Trump, threatening to raise all existing tariffs from 25% to 30% by October 1st 2019. These latest developments are a perfect example of how trade wars can quickly get out of control.


Obviously, all this negative news flow had a strong impact on markets; global government bond yields declined precipitously (the U.S. 30-year government bond yield made a new all-time low of 1.9%) and risk assets declined violently. Our U.S. recession model (Figure 1 above) now indicates a 57% chance of recession in the summer of 2020.

Since then, principals from China and the U.S. have signalled that they would hold new talks “sometime in October”, which has seemed to ease market participant’s nerves. Equity markets and bond yields have since rebounded a bit, with the S&P 500 close to its all-time high. But, by our count, this will be the 13th time that they have held such talks, and thus far the direction of travel for U.S. tariffs has been consistently upward. As we discussed in previous commentaries, market reactions to the trade war developments will continue to be volatile, but we are not holding our breadth for a meaningful resolution. The damage from the trade war has already been done; business confidence has been declining since the start of 2018 (Figure 2) and consumers are finally taking notice, as evidenced by the largest drop in the University of Michigan Consumer Sentiment Index since the taper tantrum of 2012.

Credit

At the risk of sounding like a broken record, credit remains expensive. Through all the trade headlines, spreads widened somewhat in August (particularly High Yield), but have since recovered most of the lost ground. September is usually a very busy month for new issues, so we expect to be active recycling maturities and inflows into new issues with decent concessions. For now, we are maintaining our conservative positioning with higher quality, lower duration credit.
 
Diversified Bond Fund (DBF)

August was a solid month for the DBF, returning 1.89%, driven mostly by the strong rally in government bonds. We now have a 30% weight in government bonds, up from only 2% a year ago. We expect this weighting to continue to drift modestly higher in the coming months. Apart from the recent increase in government bonds, the portfolio has remained quite stable.



Credit Income Opportunities Fund (Credit Opps)

The Credit Opps returned 32bps in August. Weakness in credit was more than offset by strength in our newly acquired U.S. 10-year treasuries. Otherwise, the portfolio’s composition has been relatively stable. Leverage remains low at 0.78x and is mostly composed of short dated investment grade bonds. Given our views on the economic cycle, we expect overall credit exposure to remain modest until we see very attractive opportunities. Still, with the fund returning 5.59% year-to-date and the portfolio yielding 5.29%, we expect 2019 to be a good year for investors.

Conclusion

September will be an important month for interest rates, with several central bank meetings on the docket (ECB on the 12th and the Federal Reserve on the 18th). Both are expected to ease, but the devil will be in the details of the releases, new macroeconomic forecasts and press conferences. Particularly at the Fed, we will be watching for signs of a further dovish shift towards an easing cycle (as opposed to “insurance cuts”).

Until next month,

The Bond Team: Mark, Etienne and Chris

1 All Ninepoint Diversified Bond Fund 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 August 30, 2019 1 All Ninepoint Credit Income Opportunities Fund returns and fund details are a) based on Class A units (closed to subscriptions); b) net of fees; c) annualized if period is greater than one year; d) as at August 30, 2019.

The Ninepoint Diversified Bond 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 shares only); Capital gains risk; Class risk; Concentration risk; Credit risk; Currency risk; Cybersecurity risk; Derivatives risk; Exchange traded funds risk; Foreign investment risk; Inflation risk; Interest rate risk; Liquidity risk; Regulatory risk; Securities lending, repurchase and reverse repurchase transactions risk; Series risk; Short selling risk; Specific issuer risk; Tax risk; Tracking risk.

 

The Ninepoint Credit Income Opportunities Fund is generally exposed to the following risks. See the offering memorandum of the Fund for a description of these risks: General Economic and Market Conditions; Assessment of the Market; Not a Public Mutual Fund; Limited Operating History for the Fund; Class Risk; Charges to the Fund; Changes in Investment Objective, Strategies and Restrictions; Unitholders not Entitled to Participate in Management; Dependence of the Manager on Key Personnel; Reliance on the Manager; Resale Restrictions; Illiquidity; Possible Effect of Redemptions; Liability of Unitholders; Potential Indemnification Obligations; Lack of Independent Experts Representing Unitholders; No Involvement of Unaffiliated Selling Agent; Valuation of the Fund’s Investments; Concentration; Foreign Investment Risk; Illiquidity of Underlying Investments; Tax; Litigation; Fixed Income Securities; Equity Securities; Idle Cash; Currency Risk; Suspension of Trading.

Ninepoint Credit Income Opportunities Fund is offered on a private placement basis pursuant to an offering memorandum and are only available to investors who meet certain eligibility or minimum purchase amount requirements under applicable securities legislation. The offering memorandum contains important information about the Funds, including their investment objective and strategies, purchase options, applicable management fees, performance fees, other charges and expenses, and should be read carefully before investing in the Funds. Performance data represents past performance of the Fund and is not indicative of future performance. Data based on performance history of less than five years may not give prospective investors enough information to base investment decisions on. Please contact your own personal advisor on your particular circumstance. This communication does not constitute an offer to sell or solicitation to purchase securities of the Fund. 

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 August 30, 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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Investment Team

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