September 2018 Portfolio Manager Review
During September, both long-term yields and short-term yields rebounded compared with the month’s performance while the yield curve continues to flatten. Fortunately, underlying business fundamentals such as corporate earnings and macroeconomic indicators remain positive while the Fed implemented another interest rate hike.
FWDB outperformed its benchmark, Bloomberg Barclays US Aggregate Bond Index, in September with a return of -0.11% in NAV while the benchmark returned -0.64%.
FWDB provides exposure to thousands of bonds across the investable bond universe. To understand the driving factors, it is important to recognize broader macroeconomic factors that affect bonds to understand the attribution behind performance.
Convertible bonds have attributes of both bonds and common shares and in a high rate environment, convertibles can at times profit amidst uncertainty. This is due, in part by, the nature of rising interest rates lowering bond value, which incentivizes Corporations to buy back issued bonds at a discount before issuing newer bonds to take advantage of this fundamental relationship. Through August, the portfolio’s holdings in convertibles drug down FWDB’s performance with a return for investors of -0.48% NAV return.
Emerging markets rebounded from the previous month with a return of 1.13%. This is due in part by oil prices reaching its highest price since 2014.
|FWDB Holdings (as of 9/30/18)||Portfolio Weight||Sept. Return (NAV)|
|PowerShares Fundamental InvGr CorpBd ETF (PFIG)||17.67%||-0.32%|
|SPDR® Blmbg Barclays Convert Secs ETF (CWB)||12.90%||-0.48%|
|Peritus High Yield ETF (HYLD)||11.80%||0.58%|
|WisdomTree Emerging Markets Corp Bd ETF (EMCB)||11.77%||1.13%|
|PowerShares Financial Preferred ETF (PGF)||11.55%||-1.14%|
|PowerShares Senior Loan Portfolio (BKLN)||7.93%||0.73%|
|PowerShares Variable Rate Preferred ETF (VRP)||7.84%||-0.43%|
|iShares Floating Rate (FLOT)||3.95%||0.18%|
|Vanguard Mortgage-Backed Secs ETF (VMBS)||3.91%||-0.55%|
|Vanguard Short-Term Government (VGSH)||2.95%||-0.13%|
|Invesco Global Short-Term High Yield (PGHY)||2.94%||0.44%|
|PowerShares National AMT-Free MuniBd ETF (NASDAQ: PZA)||2.90%||-0.85%|
For the month of September, no significant trades or reallocation were made to FWDB.
Looking forward, we expect the Fed to carry out its plan 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 over this time warrants genuine worries of impending recession, but we are also watching to see if future economic activity may be slowed because 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