Alex studied Management Sciences with French at Nottingham University and has extensive experience in research and the broader financial industry. He has been with RBM Asset Management International for three years, joining the group from the JP Morgan Asset Management stable.Alex currently heads up the fixed income team in London and manages the international portfolio for RMB Unit Trusts. He has oversight for manager research across all fixed income asset classes and has a specialist knowledge of derivative overlay strategies.
Momentum International Income comment - Jun 14
The second quarter of 2014 rewarded investors with positive nominal returns across most global asset classes, the exception being UK breakevens, a measure of expected future inflation. Emerging markets performed strongly, both in debt and equity markets, as localised risks moderated, notably in the Ukraine and Russia, and currencies recovered some of the ground lost in the latter half of 2013. The quarter will perhaps be remembered as one of exceptionally low volatility across equity, rates, credit and foreign exchange markets, with record yield lows in some bond markets and record highs on some equity bourses as markets continued to be buoyed by global liquidity. What the US Federal Reserve has taken away, the Bank of Japan and European Central Bank (ECB) have replenished.
A succession of revisions to US GDP saw the economy eventually contract 2.9% in the first quarter, after initial positive estimates proved to be undone by 'the weather', a catchall that has been blamed for this seasonal blip, but has now been largely brushed aside. Jobs data remains positive and purchasing manager indices are trending higher, while wage pressure remains benign. These are conditions one might normally associate with the early to mid-stage of an economic recovery, although market prices suggest we are further along that path. In Europe, economic conditions are not as strong, but they are improving, with some positive growth and a primary surplus for the region as a whole, as efforts to tackle budget deficits bear fruit. This has led to more pronounced (but expected) ECB policy action, culminating in a negative deposit rate and programme of Targeted Longer Term Refinancing Operations (TLTROs) in an effort to spur lending to small and medium-sized businesses in Europe. In Japan, the central bank's efforts to induce inflation looked as though they had succeeded as consumer price inflation hit a 23-year high of 3.2% in May.
In the global LIBOR markets, rates remained low in line with the central bank base rates, illustrating the easy liquidity conditions for financial institutions across all major markets. The EUR three-month LIBOR fell back in response to the ECB's action, having spiked in the first quarter, and ended June at 0.21%. USD three-month LIBOR moved little, ending the quarter at 0.23%, while the GBP three-month LIBOR rate edged higher to 0.55%.
The main driver of absolute returns in the fund remains the ZAR exchange rate movements versus the basket of foreign currency denominated bonds the fund invests in. These currency movements are more volatile than the returns generated by the underlying bonds. This quarter, the rand weakened against the dollar by 1%, against the EUR by 0.3% and against the pound by 3.5%, which was very strong as investors priced in central bank rate hikes earlier than expected. The fund returned 0.42% over the quarter, 10.81% over one year, 15.41% per annum and 5.97% per annum over three and five years respectively.
Portfolio activity and positioning
The fund remains invested in bonds or bills of high credit quality, with low interest rate and credit spread durations. Credit quality at the end of June was AA-, with the fund invested in UK and Belgian treasury bills for liquidity and in short-dated investment-grade bonds, including the developmental European issuers EIB and KFW, as well as JP Morgan, Westpac and Morgan Stanley bonds. The AAA exposure has fallen back in favour of AA- rated bonds and bills. The duration of the fund remains relatively short, with interest rate and credit spread durations at 49 and 50 days respectively. The regional split remains neutral in terms of currency positioning, with the fund evenly invested across USD, GBP and EUR assets.
The fund is benchmarked against an equal weighted composite of 12-month USD Libor, Euribor and GBP Libor. It has the objective of generating a regular, reliable source of income, whilst aiming to generate marginal capital growth at a lower level of risk. This is achieved by being correctly positioned from a currency, duration and security specific point of view.