The Fund delivered a positive return in June despite fixed-income volatility.
Our stock picking in corporate bond issuers made a positive contribution to performance despite some rather adverse market conditions.
The Fund’s modified duration was stable during the month, the main change being a reduction in our short position on Japanese bonds.
We also increased our tactical hedging on credit indices during the European elections.
Global economies should hold firm over the coming months as stimulus remains high at a time of military and trade conflict.
This should underpin growth, suggesting that we should keep gross exposure to credit strategies high.
However, inflation’s return towards target levels could be a source of disappointment, and the market’s optimism justifies the continued use of inflation-linked instruments within the portfolio.
We are still convinced about the ability of short-term bonds to outperform given that real yields remain high and growth is robust.
Europe | 66.3 % |
North America | 11.3 % |
Latin America | 8.4 % |
Eastern Europe | 6.8 % |
Middle East | 3.1 % |
Africa | 2.4 % |
Asia | 1.5 % |
Asia-Pacific | 0.3 % |
Total % of bonds | 100.0 % |
Market environment
US inflationary pressure eased a little in June, with the rate falling to 3.3%, but momentum remained strong in the labour market and in services where activity picked up again.
At its FOMC meeting, the US Federal Reserve therefore left its interest rates unchanged, with members predicting a cut by the end of this year.
The ECB knocked 25 bps off its key interest rate at its monthly meeting, but reiterated that any future cuts will be data-dependent.
However, risk aversion was high as the political spectrum became more polarised in European elections, causing spreads on the Itraxx Xover index to widen by 23 bps.
The dissolution of France’s National Assembly and rise of opposition groups revived fears about public finances, pushing the spread between French and German bond yields above the 80 bps threshold.