Limited Duration Investment Grade Preferred Securities Fund Q2 2016 Commentary

Fund Highlights

  • Although U.S. economic growth appears to have rebounded with second-quarter real GDP currently tracking at around 2.5%, concerns about the durability of the expansion remained high amid global uncertainty. Strength in the household sector drove gains in consumption and housing, while trade continued to be held back by a sluggish global economy. Corporate earnings have stagnated, resulting in tepid business spending and reduced hiring. Importantly, gains in the U.S. labor market have tapered given the uncertainty of the economy and corporate earnings as well as a tighter labor market. Inflation, while moving slightly higher in response to recovering commodity prices, remained low and well below the Federal Reserve’s threshold. These factors caused the Fed to hold policy steady during the quarter, despite earlier forecasts for several rate hikes over the course of 2016.
  • The Barclays Corporate Financial Institutions Index, gained 2.45% during the second quarter of 2016, while the S&P 500 Financials Index gained 2.12%. The fund underperformed these two segments whereas it is typically expected that the preferred/hybrid market performs somewhere between these two segments given the hybrid nature of the asset class.
  • While investment performance was positive across all segments of the preferred/hybrid asset class during the quarter, securities of non-U.S. issuers generally lagged. U.S. interest rates fell significantly with the 10-year Treasury now down almost 80 basis points since the first of the year. Interest rates gapped lower in June due to the general flight to quality leading up to and following the Brexit vote. This outcome shook global markets as investors struggled to grasp the repercussions for the U.K., European and global economies, as well as for the European political landscape. That being said, preferred/hybrid valuations benefited from the decline in interest rates. Interestingly enough, credit spreads across most segments of the asset class narrowed during the period as well.

Market Commentary
This quarter, concerns over Brexit and uncertainty over the Federal Reserve’s interest rate policy outlook dominated global markets. The risk of potential events kept investors in a holding pattern ahead of the vote, prompting trading activity to move sideways in the months leading up to the U.K. referendum. The eventual decision to “leave” shocked the markets, which largely anticipated a “stay” vote in the preceding days. As a result, growth expectations for the Eurozone were lowered and the British Pound plunged as bond yields sank to multi-year lows. It also paved the way for possible additional exits from member countries which would exacerbate uncertainty for years to come.
In the U.S., the Feds’ path for another rate hike was shrouded in uncertainty. Therefore, the market had been priced in anticipation of multiple rate hikes this year. However, data that showed slowing employment, sluggish global growth and deflationary price pressures prompted Federal Reserve Chairman Janet Yellen to revert to a dovish stance.
Meanwhile, central banks in Europe and Japan initiated negative interest rate policies which accelerated a global hunt for assets with higher yields. The Canadian economy saw some slight upside surprises to GDP and jobs data. However, concerns over a housing bubble, and the expected drag to growth resulting from the Alberta wildfires in June dampened the country’s economic outlook for the remainder of the year.
Commodities rallied in general. Oil pushed through the $50 a barrel mark as supply and demand continued to adjust. Gold surged higher on safe haven flows and as a store of wealth in a negative yielding environment. Grains, specifically soybeans and corn, rallied as bad weather across South America and the U.S. negatively impacted the supply outlook.

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