June 2018 Portfolio Manager Review
In June, long-term yields fell while short-term yields rose as the Federal Reserve raised rates despite inflation receding in what is known as a flattening yield curve. While this instance of flattening may not indicate impending recession, it may well signal that the Fed may be raising rates in excess to the point where it may threaten economic growth. However, underlying business fundamentals such as corporate earnings and macroeconomic indicators continued to remain strong.
For the month of June, FWDB outperformed its benchmark, the Bloomberg Barclays US Aggregate Bond Index, with a return of 0.01 % in NAV while the benchmark returned -0.12%.
FWDB provides exposure to thousands of bonds across the investable bond universe, it is important to recognize broader macroeconomic factors that affect bonds to understand the attribution behind performance.
Convertible bonds have attributes of bonds and both common shares, and in a high rate environment, convertibles can at times profit amidst uncertainty. However, this month our holdings in convertibles closed in red with CWB, 13.1% of our portfolio, returned with a -0.35% NAV return as global trade tensions continued.
Emerging markets took a hit this month, as a selloff in emerging markets was prompted by higher U.S. rates, a stronger dollar, and heightening trade tensions around the world. Our holdings in EMCB, 11.5% of the portfolio, and PCY, 2.8% of the portfolio weighed down returns on account of these macro factors.
|FWDB Holdings (as of 6/30/18)||Portfolio Weight||June Return (NAV)|
|PowerShares Fundamental InvGr CorpBd ETF (NYSE ARCA: PFIG)||17.70%||-0.32%|
|SPDR® Blmbg Barclays Convert Secs ETF (NYSE ARCA: CWB)||13.11%||-0.35%|
|PowerShares Financial Preferred ETF (NYSE ARCA: PGF)||11.86%||0.82%|
|AdvisorShares Peritus High Yield ETF (NYSE ARCA: HYLD)||11.74%||0.60%|
|WisdomTree Emerging Markets Corp Bd ETF (NASDAQ: EMCB)||11.53%||-0.24%|
|PowerShares Senior Loan portfolio (NASDAQ: BKLN)||7.80%||0.04%|
|Vanguard Mortgage-Backed Secs ETF (NASDAQ: VMBS)||6.92%||0.08%|
|PowerShares Variable Rate Preferred ETF (NYSE ARCA: VRP)||4.88%||0.40%|
|PowerShares Taxable Municipal Bond ETF (NYSE ARCA: BAB)||3.93%||0.22%|
|Vanguard Interm-Term Trs ETF (NASDAQ: VGIT)||2.97%||0.07%|
|PowerShares National AMT-Free MuniBd ETF (NASDAQ: PZA)||2.96%||0.03%|
|PowerShares Emerging Markets Sov Dbt ETF (NYSE ARCA: PCY)||2.83%||-1.44%|
For the month of June, no trades were made to reallocate the FWDB portfolio
Looking forward, we expect the Fed to carry out its plans of gradual rate hikes. With continued strength in corporate earnings across the board, we project further appreciation in FWDB in the months to come despite risks of the Fed’s rate action running into potentially excessive territory. We do not believe the flattening yield curve of this month warrants genuine worries of impending recession, but we are also watching to see if future economic activity may be slowed as a result of rate activity. It is our intent that exposure to large segments of the investable bond universe will give suitable exposure and diversification that investors can benefit from in the months to come, and we are excited for future growth within our portfolio.
The Madrona Funds Portfolio Management Team
Portfolio Manager of FWDB