Immediate Income Portfolio Update - Winter 2018
Fourth quarter performance analysis for the St. James's Place Immediate Income Portfolio.
The Immediate Income Portfolio lost some ground in the fourth quarter, having ended September close to where it began the year.
As investors looked away from risk assets, corporate bond spreads began to widen. (The gap between the yield on corporate bonds and government bonds increased.) This trend steered the Corporate Bond fund, managed by Invesco Perpetual, to post losses over the period. In Europe, the consumer goods sector was particularly hard-hit, while the transportation sector outperformed. In the US, the weakest credit sector was energy, which is highly sensitive to the oil price: Brent crude dropped by more than $30 a barrel over the quarter.
European worries also impacted the Investment Grade Corporate Bond fund, managed by Loomis Sayles. Credit selection in the banking sector detracted and worries over Italy’s budget contributed to broader European debt fears among investors. Overweight exposure to the life insurance and building materials sectors also proved expensive. The International Corporate Bond fund, co-managed by Capital Four and Oaktree, was likewise hit by European credit trends. Capital Four’s European bias in senior secured debt – a high-ranking form of corporate debt – pared fund returns. Energy, insurance and financial services were the sectors that most detracted from performance.
Indeed, across the corporate debt universe, high yield bonds underperformed investment grade bonds due to their more equity-like profile, and the consequent higher level of risk. The downturn for high yield bonds weighed on the performance of the Diversified Bond fund, a multi-manager mandate. Brigade, one of the co-managers on the fund, suffered from its exposure to US high yield; while TwentyFour was hit by widening spreads on European bank debt.
Conversely, government debt performed strongly over the period, not least in the UK. The Gilts fund, managed by Wellington, delivered positive performance over the quarter as a result. It was particularly boosted by its allocation to some of the longer-term maturities.
One of the features of the quarter on markets was a rise in volatility. The CBOE VIX index, which measures volatility on the S&P 500, rose sharply at the start of the quarter and has remained elevated ever since. The uptick in global volatility weighed on the Schroders sleeve of the Strategic Income fund; while the component managed by Bluebay suffered, in turn, from widening credit spreads.
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The price of funds and the income from them may go down as well as up. You may get back less than the amount invested.
Portfolio fund allocations are not rebalanced automatically. Thus Client Portfolios may not include all of the stocks mentioned in the commentary, as fund allocations may vary between clients, leading to different investment experiences.
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