Purpose Premium Yield Fund June 2016 Commentary

Fund Highlights

  • The Fund was slightly negative this quarter as volatility from the Brexit vote and uncertainty around the Fed rate hike caused large swings across the portfolio.
  • Value holdings across airlines and retailers saw significant declines and spikes in volatility. This resulted in the Fund getting put on roughly 5% of underlying names.
  • The Fund wrote cash covered puts on 46 names and covered calls on 11 names during the quarter.
  • Volatility became more elevated due to the increase in macroeconomic event risk while global uncertainty has made volatile selling attractive.
  • The Fund navigated its way through a fairly difficult period and still realized bond-like volatility of under 6%.
  • Many of the value names in the portfolio also look attractive, trading at significant discounts to broader markets.

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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