Markets declined in February over concerns about interest rate hikes and the possibility that Federal Banks around the world, including the U.S. Federal Reserve, may dampen growth in an effort to suppress inflation. Towards the second half of the month, the Russian invasion of Ukraine further heightened the general sense of risk aversion and delivered a further hit to growth expectations. Energy and materials were the best performing sectors in equities, while communication services, consumer discretionary, and technology were the worst. The Global Aggregate bond index fell 1.2% over the month.
Commodities have been the only positive risk asset year-to-date. Elevated inflation data was further exacerbated by the inflationary catalyst of a Russia/ Ukraine war, which sent oil prices beyond $100 and wheat prices up to multi-year highs. Precious metals also rallied after a lacklustre 2021 as gold and palladium saw strong safe haven bids.
The ruble depreciated over 20% in currencies following restrictions on the Central Bank of Russia and economic sanctions on Russia. Usually, in times of stress, the U.S. dollar will rally on a flight to quality; however, so far this year, its moves have been relatively muted.
Fund Performance and Positioning
Purpose Diversified Real Asset Fund had a solid month lifted by a surge in commodity prices following Russia’s devastating invasion of Ukraine. Both countries are significant producers of essential commodities globally, including oil and gas, wheat, corn, aluminum, and platinum-group metals. The outbreak of war will require meaningful capacity replacement and price increases.
In terms of fund performance, direct commodities was the best performing sleeve last month. Our positions in corn and wheat performed strongly, as these commodities skyrocketed. Energies also contributed strongly, as oil prices rallied on fears that sanctions and SWIFT restrictions may also impact the Russian energy sector. Agricultural equities were another source of strength in the portfolio in February.
Energy and materials were the best performing sectors in equities.
Names such as Nutrien and Mosaic surged, as investors feared that the invasion of Ukraine might result in a disruption in the global supply of potash and nitrogen crop nutrients. Base metal equities rallied as well last month. Names such as Freeport McMoran and Nucor were lifted, as sanctions against Russia stoked worries about supply disruptions. Energy equities also had a positive month, as oil prices reached multiyear highs, lifting the whole sector. Our best performing positions were in Chevron and Canadian Natural Resources. Rising geopolitical risks also helped lift precious metals. Both bullion and mining equities in the sleeve benefitted.
Although it outperformed the broader market, the REIT sleeve was not immune to declining equities in February despite strong earnings in that sector. It dragged performance as investors were concerned about the impact of rising rates and were focused on reducing risk. During our rebalances last month in the Direct Commodity sleeve, we began to reduce our overweight in Grains and Meats and increased our overweight in base metals.
Our positions in corn and wheat performed strongly, as these commodities skyrocketed
1 Contribution to fund return for the period is calculated as the 1 month total return for the ETF Series of the Fund multiplied by the sector/ securityʼs average weight of the Fundʼs net asset value.
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