Ninepoint Fixed Income Strategy

January 2020 Commentary

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

Macro

2020 started on a bullish tone, with equities making new highs and credit rallying strongly. Economic data for December came in better than expected, with strong PMIs in the US and Europe stabilizing, albeit at low levels of activity. In short, the positive tone from late 2019 seemed to be at last vindicated. However, the Coronavirus epidemic that started late January and quickly spread through China has now put the cyclical recovery on pause.

The Chinese authorities have reacted promptly and forcefully to this threat, shutting down entire cities in the hope of controlling the spread of the virus. Unfortunately, we now know that the virus is transmissible even in patients that exhibit no symptoms at all, making it very difficult to stop its progression. This probably means that the containment efforts will last a lot longer than previous epidemics. The economic costs of these efforts will be important; the entire country is in a state of lockdown and several nations have announced travel restrictions to and from China. This has resulted in important supply chain disruptions, flights cancellations and store closings. For example, Starbucks and McDonalds have announced temporary restaurant closures in China, and Hyundai has suspended operation at a plant in South Korea for lack of parts coming from China. Because of the size and interconnectedness of China in the world economy, we should expect the economic impact of this virus to be global.

Initially, the market reaction to these events was as expected, with a risk off tone in credit and equities, and a flight to safety in government bonds. However, while the daily number of cases continues to grow (delaying a return to normal), we have seen a rapid snap back of risk assets to all time highs. While we are by no means infectious disease experts, it seems a bit early to celebrate victory. Government bonds are taking a more cautious approach., with both real and nominal yields drifting back to their August/September 2019 lows, appropriately reflecting the economic uncertainty stemming from the virus outbreak.

So, while the US/China trade deal and the monetary impulses of 2019 were starting to push global growth higher, we now find ourselves with the Coronavirus containment efforts gumming up the engine. We thus expect data for the first quarter of 2020 to come in weaker than was originally anticipated. No one know how long that weakness will last, but it certainly doesn’t feel like its all over already.

Credit

While credit spreads have widened modestly due to the Coronavirus fears, they remain near or at cycle lows. Figure 1 below shows credit spreads, normalized for duration, for US and Canadian BBB corporates; in the post crisis world, credit is at its most expensive point, completely ignoring the macroeconomic risks mentioned above. So, at the risk of sounding like a broken record, we do not feel like we are being properly compensated to take a lot of credit risk right now, so we prefer to stay up in quality and wait for a better entry point.

Diversified Bond Fund (DBF)

As discussed last month, the green shoots in the global economy led us to gradually reduce our government bond exposure (and duration). Of course, little did we know that the US would strike Iran and assassinate one of its leaders and that the Coronavirus would appear in China. Since then global rates have declined significantly, benefiting high duration exposure. While our duration was pared back ahead of these events, we still benefited somewhat from the rally in government bonds. Once it became apparent that the epidemic in China would have potentially grave economic consequences, we initiated a long position in US 30-year government bonds through the TLT ETF along with an option overlay. Given all the uncertainty, we think that exposure to government bonds in this manner offers a better risk/reward.

Astute readers will also notice that our allocation to investment grade corporate bonds increased to 73%, from 58% at year end 2019. This is primarily due to us redeploying the proceeds from the sale of our government bonds into short dated corporate bonds.



Credit Income Opportunities Fund (Credit Opps)

There were a few minor changes to the portfolio in January. First, several maturities at year end and proceeds from a commercial paper issue that was not rolled were reinvested into short term corporate bonds. Leverage also declined, as we took profits on some 2019Q4 new issues that performed particularly well in the past few months.

Second, we participated in a new private loan, taking our overall weight to this asset class to 4%, still well within our risk appetite. This new, one-year loan is to a small, public natural resource company. It carries an expected total return of 14% and is secured by substantially all the assets of the company.


Conclusion

This new year has already surprised everyone with geopolitics/war (Iran) and public health issues (Wuhan Coronavirus). With credit valuations as high as they currently are, staying defensive is an easier decision than usual.

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

Ninepoint Partners

Ninepoint Diversified Bond Class - Compounded Returns¹
as of January 31, 2020 (Series F NPP221)

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 1.3% 1.3% 0.7% 1.6% 4.6% 3.4% 3.1% 4.6%

Ninepoint Diversified Bond Fund - Compounded Returns¹
as of January 31, 2020 (Series F NPP118)

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 1.3% 1.3% 0.7% 1.6% 4.8% 3.6% 3.2% 4.5%

Ninepoint Credit Income Opportunities Fund - Compounded Returns¹
as of January 31, 2020 (Series A NPP506)

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund 0.6% 0.6% 1.1% 1.3% 5.1% 3.4% 4.1% 4.8%

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 January 31, 2020 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 January 31, 2020.

The Risks associated worth investing in a Fund depend on the securities and assets in which the Funds invests, based upon the Fund's particular objectives. There is no assurance that any Fund will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Fund will be returned to you. The Funds are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Fund's prospectus or offering memorandum before investing.

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 January 31, 2020 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: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540

Historical Commentary