Sun Life Core Advantage Credit Private Pool

Fund commentary | Q4 2023

Opinions and commentary provided by sub-advisor SLC Management

Market Review

Global economy switching to a lower gear

Over the last 18 months, most economists warned that a major global setback was right around the corner. The alarm was defensible. As central banks hiked interest rates at an historic pace, the reflex view has been that it will cause a disruption in financial markets. But the big surprise has been the resilience of the world economy. Households and corporations are still in good shape. Jobs are plentiful and wages remain high. Rising rates are having little effect on companies and mortgage holders who locked in low interest rates. 

The gross domestic product (GDP) outlook has now shifted from recession scenarios to one of modest growth. The lagged effects from rate hikes are expected to cool activity and pinch expansion plans. North America had a standout economy last year but is expected to downshift and deliver 1% GDP growth this year.

Meanwhile the Euro zone avoided a recession last year as it managed its energy supply dislocations well. This year will feature some of the same challenges but improvements in real wages and household incomes are expected to help deliver modest growth.

China suffered its worst housing downturn last year but still posted average growth as economic activity bottomed over the summer. It is entering 2024 with more momentum as government economic policy has turned more friendly.

 

Unsynchronized sector adjustments

When looking ahead to understand the current economic cycle, particularly in the U.S., we see what looks like a series of unsynchronized sector adjustments or a “rolling recession.” We characterize this as a version of a soft landing with pockets of economic weakness but not a systematic downturn.

For instance, a major correction in the technology sector in 2022 led to job losses. But jobs in the sector recovered as enthusiasm for artificial intelligence picked up. Housing prices dropped from cycle highs, but recovered on the back of lower inventory. U.S. manufacturing has been in contraction territory for over a year but is edging up from last summer’s lows. And regional banks, after recent failures, are shoring up their balance sheets as new regulatory capital requirements are proposed.

 

Central banks close to peak rates

The fight to bring down inflation recently stalled in Canada due to a tight labour market and wage gains. But hiring in Canada has started to slow and hours worked has dropped. Strong immigration has also boosted labour supply.

Europe’s inflation picture also improved. Headline and core inflation dropped to its lowest levels in over two years. The fall in inflation has been broad-based. Goods and services inflation have fallen and wage pressure has slowed. Rate hikes from the European Central Bank’s (ECB) helped rein in borrowing and demand.

 

Central bank policy to remain a critical market driver

While major central banks still warn the world that inflation is a threat, traders are ramping up bets that rate cuts will begin in 2024. It is surprising how quickly and consistently this shift has happened. Markets expect that the U.S. Federal Reserve (the Fed), Bank of Canada (BoC), Bank of England and European Central Bank will each cut rates by 100 basis points or more this year.

The market is convinced that the cumulative effects of central bank rate hikes will fully kick in this year. This could weigh on economic activity and labour markets and urge central banks to be accommodative.

 

Market Outlook

In a year that saw many central banks finally put a cap on their interest rate hiking activities, the Canadian and the U.S. economies ended 2023 looking resilient. Inflation seemed to be on the decline globally. Canadian growth, while clearly impacted by the BoC’s hiking cycle, avoided a recession as employment remained relatively robust. Canadian bond markets showed unexpected strength in Q4 2023. On the rates side, there was a reversal of the Q3 2023 selloff as markets rallied towards the end of the year. Canadian five-year bonds were the top performer with yields dropping 110 bps in Q4 2023, as investors anticipated rate cuts even as inflation hovered above the BoC’s inflation targets. 

On the credit side, the recession that never came was very positive for markets. Relatively steady economic fundamentals and slower new corporate issuance supply in Q4 2023 helped Canadian corporate credit spreads to tighten by 15 bps for the quarter and 29 bps for the year, according to the Bloomberg Canada Aggregate Corporate Index. 

 

Fund Review

Sun Life Core Advantage Credit Private Pool (the “Fund”), Series F, outperformed its benchmark, the FTSE Canada Universe Bond Index in Q4 2023, due to credit positioning. Within public credit, returns on the Fund’s U.S. corporate bonds led the way on performance in Q4 2023 as U.S. credit spreads outperformed and the Fund’s associated hedges also outperformed. U.S. corporate credit spreads were 22 basis points tighter in Q4 2023 versus 15 basis points of tightening in Canadian corporate credit. The Fund’s U.S. corporate bond hedges further supported active returns mostly due to long Canadian swap spreads moving 15 bps tighter in Q4 2023. Rates positioning was relatively neutral to active returns during the quarter. The Fund’s long-term strategic holding in the SLC Management Short Term Private Fixed Income Plus Fund detracted from active returns as credit spread compression in private debt lagged the credit spread rally in the public corporate bond markets.

Early in Q4 2023, the Fund’s corporate bond trades focused on rolling back from long-dated credit into the 10-year term to take advantage of the very flat credit curves in both the U.S. and Canada. New issue concessions in corporate bonds were limited so they were mostly involved in secondary trading during Q4 2023.

Performance

Compound Returns %¹
Since Inception 10 Year 5 Year 3 Year 1 Year Q4
Sun Life Core Advantage Credit Private Pool - Series A -1.0 -- -- -2.8 7.1 8.4
Sun Life Core Advantage Credit Private Pool - Series F  -0.4 -- -- -2.3 7.7 8.6
FTSE Canada Universe Bond Index -0.8 -- -- -2.8 6.7 8.3

1Source: SLGI as of December 31, 2023.

Inception date February 25, 2020

Sun Life Core Advantage Credit Private Pool Monthly snapshot:

Series A Series F

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Views expressed are those of SLC Management, sub-advisor to Sun Life Core Advantage Credit Private Pool for which SLGI Asset Management Inc. acts as portfolio manager. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are subject to change and are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. This commentary is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this commentary has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy

This commentary may contain forward-looking statements about the economy and markets, their future performance, strategies or prospects or events and are subject to uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

The indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or other optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

While Series A and Series F securities have the same reference portfolio, any difference in performance between these series is due primarily to differences in management fees and operating fees. The management fee for Series A securities also includes the trailing commission, while Series F securities does not. Series A securities of the fund are available for purchase to all investors, while Series F securities are only available to investors in an eligible fee-based or wrap program with their registered dealer. Investors in Series F securities may pay a separate fee-based account fee that is negotiated with and payable to their registered dealer.