New Capital Wealthy Nations Bond Fund

30 April 2024

Marketing Communication

Executive Summary

Key events in market

Fixed income markets were broadly lower as stronger jobs and inflation data in the US pushed up Treasury yields. Markets pushed back rate cut expectations on more positive economic data, helping credit spreads to continue to compress. Outside the US, there looks to be room for divergence of monetary policy. Although tensions in the Middle East escalated dramatically, there were limited repercussions in the fixed income markets.

Key performance & positioning updates

The main detractor to the Fund was the exposure to the rise in US Treasury yields. Credit spreads tightened more modestly in April, positively contributing to performance, but given the large move in treasuries were insufficient to offset the price impact. The Fund's higher exposure to credit relative to the benchmark helped to offset the relative drag from an overweight in duration.

Market Update

The global stock market rally suffered a setback in April. The MSCI World All Countries Index total return was -3.3% for the month, reducing year-to-date gains to +4.8% . Government bonds also suffered, and 10-year Treasury yields rose temporarily above 4.70%. The US dollar strengthened further, especially against the Japanese yen, supported by the prospect that the Federal Reserve will not cut interest rates before the November presidential election. Finally, commodity prices, including gold, oil and industrial metals, rose in response to geopolitical tensions.

The risk of escalation of tensions in the Middle East has characterised the last few weeks. Despite the improvement in the last few days, the situation remains fluid and must be monitored closely. The same is true of the developments of the war in Ukraine and also in relation to the US presidential election. The other driving factors for the markets are linked to the revisions of monetary policy expectations and the tentative signs of recovery in China. The strength of US growth and inflation suggest that the Federal Reserve will wait to reduce interest rates. Conversely, the faster than expected decline in inflation in Europe points to possible rate cuts during the summer. In Japan, the central bank has begun the exit from the ultra-expansionary policies of the last thirty years but seems willing to proceed with caution.

The Chinese economy has shown some momentum after a long period of relatively weak growth. In the first quarter of 2024, GDP grew more than analysts’ expectations and several indicators point to a continuation of the recovery for the rest of the year, a factor which has probably supported the prices of industrial metals.

Finally, in early 2024, corporate earnings had a good performance, driven, once again, by large US technology companies and financial firms.

Fund Performance & Positioning

April was a tough month for fixed income assets as a sequence of upside surprises in employment and inflation numbers pushed US bond yields higher. This proved to be the primary driver of returns in the asset class, lifting yields elsewhere too. Macro drivers remain by far the greatest driver of volatility both in the market and for the Fund. An outsized 47bps move in US bond yields led to a -3.37% return from the 10-year treasury, and a -2.73% impact on the Fund. This move was partially offset by further tightening in spreads, and income generated over the month. With yields in the region of 6%, income return now provides a buffer. At a bottom up level, it was perhaps unsurprising that the main sources of outperformance were short duration, lower quality allocations such as subordinated debt, whilst the majority of drag on the portfolio came from longer dated, higher quality bonds where spread moves had limited room to compress and counterbalance the move in “risk free” government equivalents. From an attribution perspective our exposure to names such as EIG Pearl, InterChile and PIF benefited from excess tightening vs. their respective risk buckets. Whilst we had 1.8% exposure to Israeli credits, the impact of escalating tensions with Iran was limited to -1bps in spread from an attribution perspective. We cut exposure to the sovereign as Israel continues to look to enter Rafah and the cost of an elongated crisis has greater potential to weigh on fiscal and growth dynamics. Overall exposure to Israel has outperformed exposure in the benchmark and generated a positive return since October.

Within the Fund we continue to look to primarily manage the credit risk. Credit spreads tightened further in BBB rated securities and spreads are now with the bottom decile of observations over the last 25 years. As a consequence we are continuing to look for opportunities to reduce longer duration exposure to BBB, in favour of retaining duration in the single-A or better ratings buckets. A downgrade to Peru by S&P from BBB+ to BBB in the final days of the month however meant that a number of government related entities’ ratings were also cut, pushing up exposure to BBB- rated securities. We continued to reduce exposure to European financials, which have now compressed relative to Emerging Market peers.

	New Capital Wealthy Nations Bond Fund	ICE BofAML Eurodollar Index	Difference
1 Month	-2.51%	-2.23%	-0.28%
3 Month	-1.68%	-2.51%	+0.83%
6 Month	+8.16%	+6.55%	+1.61%
YTD	-2.35%	-2.46%	+0.11%
1Yr	+0.74%	+1.05%	-0.31%
3Yr Annualized	-5.58%	-2.71%	-2.87%
5Yr Annualized	-0.82%	+0.89%	-1.71%
Since inception annualized	+3.55%	+3.06%	+0.49%
Since inception 18.09.2009	+66.59%	+55.29%	+11.3%

Past performance is not necessarily a guide to the future. The value of your investments and the income from them may fall as well as rise as a result of market as well as currency fluctuations and you may not get back the full amount invested. Fund performance is net of fees and representative of the USD I Inc Share Class and shows a maximum of five previous calendar years and current year to date (computed on a NAV to NAV basis). Where share class inception begins prior to the five previous years the chart has been rebased to 100. Where the Fund has fewer than five full years of performance, returns are shown from the inception date. Source: EFG Asset Management, Bloomberg. As at 30 Apr 2024.

Outlook

Fixed Income markets remain volatile and investors continue to bear the scars of 2022 and the swings in yields over recent months. Clearly markets are feeling far more optimistic around the growth outlook and this has led to spreads tightening to levels which are comparatively expensive versus history. Having said this, real rates are near their peak and there are signs that the labour market in the US is more balanced, whilst the European Central Bank (ECB) and other European monetary policymakers have had a bias to ease policy as activity has been far more sluggish and inflation nears target. As a consequence the asymmetry of the payoff from quality bonds appears to be more in investors favour. So bonds to our mind continue to offer an attractive yield with the risks skewed to lower yields should inflation or growth slow. On the other side of the equation credit spreads remain tight, so whilst credit offers a boost to yield and return in a base scenario of a stable to slowing economic outlook, spreads widening in a downside scenario could weigh on comparative returns. As a consequence we continue to see lower credit quality bonds as offering attractive carry, but limited capital upside. Whilst there are always idiosyncratic opportunities to boost yield with steeper credit curves and wider spreads, out positioning is comparatively underweight duration in the long end of the BBB space. Instead we prefer to use our duration exposure to focus on higher quality opportunities, where we see less risk of spread widening. At the macro level, there has been a strong rally in credits, which we believe has led to lower credit quality names often being overpriced for their fundamental risk in a downside scenario. Many lower credit quality countries have benefited from peak rates and renewed growth expectations. Should the goldilocks environment change, we believe that given valuations, investors might look to trim risk here first. As such we believe that the Fund is well positioned for downside risks, whilst generating an attractive yield in a “sideways” environment.

Fund Managers

Michael Leithead

Senior Portfolio Manager and Head of Fixed Income
London

Fixed income

Detail

Camila Astaburuaga

Senior Portfolio Manager
London

Fixed income

Detail

Find out more

Disclaimer

MARKETING COMMUNICATION

For professional clients, qualified investors and accredited investors only. The value of investments and the income derived from them can fall as well as rise, your capital is at risk. Note: Past performance is not a guide to the future. Returns may increase or decrease as a result of currency fluctuations.

All sources: EFG Asset Management (UK) Limited ("EFGAM"), Factset, Bloomberg, Morningstar as at end of the month. Any other sources as applicable.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG International ("EFG Group" or "EFG") worldwide subsidiaries and affiliates within the EFG Group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389736. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.

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For Professional, Institutional and Wholesale Investors Only. This document has been prepared and issued by EFG Asset Management (UK) Limited, a private limited company with registered number 7389736 and with its registered office address at Park House, Park Street, London W1K 6AP (telephone number +44 (0)20 7491 9111). EFG Asset Management (UK) Limited is regulated and authorized by the Financial Conduct Authority No. 536771. EFG Asset Management (UK) Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the United Kingdom (FCA Registration No. 536771) under the laws of the United Kingdom which differ from Australian laws. This document is personnal and intended solely for the use of the person to whom it is given or sent and may not be reproduced, in whole or in part, to any other person.
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