- Fixed income sectors posted mixed results versus government bonds as sovereign yields drifted higher. Fading vaccine efficacy amid new COVID-19 restrictions and lurking delta variant reinforced global growth concerns.
- US economic data remained steady though consumer sentiment grew bleak fueled by trepidations of rising COVID-19 delta variant cases. University of Michigan’s consumer sentiment index plunged to a decade low, and NFIB small business optimism index also declined. Headline CPI printed slightly below expectations, on moderated used car prices. Meanwhile, retail sales waned amid ongoing supply concerns. The labor market continued to make strides as nonfarm payrolls advanced and the unemployment rate dipped.
- Major central banks reassessed their asset tapering plans while still maintaining accommodative policy overall. Fed Chair Powell reaffirmed the 2021 taper intention at Jackson Hole with no urgency to raise rates. The RBA stuck to the September taper plan, the RBNZ delayed the asset taper, and the Norges Bank flagged the first rate hike ‘most likely’ in September. All other major central banks kept their policy rates unchanged.
- Most global sovereign yields rose and US Treasury yields increased ahead of the inflation print and the Jackson Hole Symposium. Fed Chair Powell struck a balanced tone and affirmed the economy had met the Fed's precondition for asset tapering, but he did not suggest it would begin any sooner than year-end.
- Global credit bonds slightly outperformed duration-equivalent government bonds. High yield generated positive total returns and outperformed duration equivalent Treasuries buoyed by passage of US infrastructure bill, improving economic data, and relatively dovish comments from the Fed. Agency MBS underperformed duration-equivalent Treasuries. The US dollar ended mixed versus most major currencies.
Performance and attribution
- The Fund’s total returns over the month were driven by positive contributions from Market Neutral and Tactical return drivers.
- Strategic Sector positions were flat over the month, as negative performance within our Activist Governments theme offset positive performance within Core Challenges. Within Activist Governments, exposures to inflation-linked bonds tied to the US, Canada, Germany, and New Zealand detracted as inflation breakeven rates narrowed on the back of rising interest rates. Within Core Challenges, long exposures to Australian and Israeli Government bonds as well as the Chinese Renminbi benefitted performance. Australian 10yr rates rallied 3bps over the month following renewed lockdowns. The Chinese renminbi gained 0.1% versus the US Dollar over the month.
- Market Neutral positions were positive over the month led by strong performance within credit strategies. Short exposures to European credit derivative indices drove positive performance as spreads came under modest pressure following a decline in consumer confidence across the Eurozone in August. Latest economic releases reflect decreasing household intentions to make major purchases and waning expectations about the general economic situation. Currency strategies were flat over the month as the US dollar ended mixed versus most major currencies. More broadly, the Norwegian krone was the top performer within the G10, while the pound-sterling and euro weakened amid underwhelming economic data and renewed virus fears.
- Tactical positions benefitted performance in August, primarily because of long exposures to select Emerging Market issuers in Asia and LATAM, short exposure to investment-grade credit derivative indices, and long exposures to bank loans.
Positioning and outlook
- We continue to focus on global assets that we feel still present attractive total return potential in a world of low yields. For example, we have been adding to the Emerging Market Opportunities theme that features a combination of exposures to emerging markets external and local debt.
- In August, we also added to our Activist Governments theme particularly through agency MBS whose spreads are wider relative to earlier in the year. Mortgages faced some pressure in August amid an uptick in supply that finally made its way into the market following the rate rally seen in prior months. Fed Chair Powell’s Jackson Hole speech contained no surprises; it reaffirmed expectations that the Fed is likely to taper its asset purchases later this year, but not sooner and not disproportionately with Treasuries – reducing a potential a tail risk for agency MBS.
- Market neutral strategies continue to be an important facet of the Fund as volatility continues to present attractive relative value opportunities in rates and currency.
- We continue to believe we’ve entered a new macro era of higher and more volatile nominal growth and higher and more persistent inflation, underpinned by forces that are unique to this new business cycle. We also believe the Opportunistic Fixed Income strategy is well positioned to take advantage of opportunities in this type of environment.
- We also believe EM local bonds and FX should be the biggest beneficiary of a stabilization in U.S. term premia and continue to have exposure to external and local debt, primarily LATAM and AsiaPac.
- Our strategy continues to reflect a more positive outlook for the global cycle through holdings in inflation linked bonds, consumer-linked structured credit, and bank loans.
Wellington is an unaffiliated subadvisor to the Sun Life Financial OFI Fund. For professional and accredited investor use only. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND AN INVESTMENT CAN LOSE VALUE.
Not intended for reproduction or use with the public. Any views expressed herein are those of the author(s), are based on available information at the timing of writing, and are subject to change without notice. Any forward-looking statements apply only as of the date they are made, and Wellington Management assumes no duty to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. This should not be construed as investment advice or a recommendation to buy or sell any specific security. Certain data provided is that of a third party. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness.
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