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UBS Fixed Income Funds Monthly update

For qualified investors only
Swiss edition
Data as of 30th September, 2016

Global fixed income markets posted lackluster returns through the month of September. Sovereign bond market yields were little changed, but yields curves marginally steepened following a flurry of central bank activity and announcements. An outlier and key underperformer was the UK, where a firming in consensus expectations of the timeline and course towards BREXIT reignited investor concerns, helping to send longer dated gilt yields over 20bps higher on the month and leading sterling to finish the weakest of the G10 currencies. In credit markets, both EUR and US investment grade spreads finished the month slightly wider, but European markets lagged by more, in part driven by a weaker financial sector following negative news-flow surrounding Deutsche Bank’s capital position. In high yield markets, a sudden surge in oil prices that followed a surprise agreement in principle by OPEC to cut production helped the US high yield index outperform and post a marginally positive return. Emerging market local currency bond indices also posted positive returns. In G10 currency markets, thanks to a more hawkish stance from the Norges Bank and the rally in oil prices, the Norwegian krone was the clear outperformer appreciating over 4% versus the USD.

In the US, the Fed left rates unchanged, albeit with three dissenting voices calling for an immediate rate hike, but acknowledged that the case for an increase had strengthened, leaving market expectations of a hike before year end intact. Investor concerns around a repeat taper tantrum given near term rate rise prospects were mitigated by a further lowering in the Fed’s long term rate expectations. US inflation expectations rose on the month, aided by a faster than expected rise in August core CPI and helping US TIPS post positive returns and outperform equivalent maturity US Treasuries.

In Japan, following its comprehensive monetary policy review, the BoJ announced an overhaul to its policy framework with a commitment to keep 10 year JGB yields close to 0% and to continue easing until its exceeds the price stability target of 2% CPI in a stable manner. The new framework was described as yield curve control designed to improve the sustainability of monetary easing. It served as an additional factor keeping the lid on global sovereign bonds yields and supressing sovereign bond market volatility further.

The ECB made no change to policy and disappointed those expecting an extension announcement to the current QE program. When questioned, president Draghi stated that there had been no discussion of a QE extension at this meeting and made a point of saying that current policies were working in transmitting lower lending rates and improving lending growth and that the transmission of monetary policy “has never worked better”. In all, the outcome was seen as less dovish than expected and initially led to a bear steepening of the bund curve on fears of QE tapering, but these fears appeared short lived. There was mixed performance from peripheral European bond markets with Spain outperforming despite the political uncertainty, and Italy underperforming amidst ongoing concerns regarding the referendum on institutional reform announced to take place on December 4th.

List of funds

 

September

YTD

2015

Since launch on 31.05.2013

Performance (net of fees)

-0.7%

+2.1%

-0.9%

+2.7%

  • Sovereign bond market yields were little changed, but yields curves marginally steepened following a flurry of central bank activity and announcements. An outlier and key underperformer was the UK where a firming in consensus expectations of the timeline and course towards BREXIT reignited investor concerns. In credit markets, both EUR and US investment grade spreads finished the month slightly wider, but European markets lagged by more, in part driven by a weaker financials sector following negative news-flow surrounding Deutsche Bank’s capital position. In high yield markets, a sudden surge in oil prices that followed a surprise agreement in principle by OPEC to cut production helped the US high yield index outperform and post a marginally positive return. Emerging market local currency bond indices also posted positive returns.
  • In G10 currency markets, thanks to a more hawkish stance from the Norges Bank and the rally in oil prices, the Norwegian krone was the clear outperformer.
  • The fund's exposure to New Zealand government bonds as well as the positioning to benefit from a rise in UK bond yields detracted from performance. Exposure to Norwegian Krone contributed positively to performance.

 

September

YTD

2015

Since launch on 11.04.2003

Performance (net of fees)

-0.2%

+6.3%

-1.7%

+52.8%

  • After a quite summer period, September broke the peace in style with the Fed and BoJ meetings, Brexit-related headlines, European banks concerns, the US presidential debate and also the OPEC side meeting all providing plenty of news flow. EUR corporate bond spreads widened slightly, although total returns were only marginally negative as they were cushioned by a drop in risk-free rates.
  • Over the last month, we have started to reduce the active risk in the fund but continue to keep an overweight in the subordinated sector. This sector overweight was the main driver for the slightly negative performance.
  • The fund is positioned to benefit from a higher return potential with only moderate additional risk mainly through an overweight in selected subordinated (hybrid) bonds of high-quality financial and non-financial issuers. Our duration stance remains neutral.

 

September

YTD

2015

Since launch on 22.08.2003

Performance (net of fees)

-0.3%

+8.7%

-2.4%

+77.6%

  • Heavy new issuance supply and concerns over a possible September rate hike from the Fed led to spread widening to begin the month. Dovish global central bank policy including a Fed on hold renewed the “reach for yield” with inflows resuming into US investment grade corporate credit. A production deal from OPEC late in the month led to an increase in energy prices which provided support for spreads in the corporate energy sector. The option-adjusted spread (OAS) of the Barclays US Corporate Investment Grade Index widened by 3 basis points to 138 basis points at month-end. The US treasury yield curve steepened, with 2-year treasuries finishing the month 4bps lower at 0.76%, while 10-year treasuries finished the month 1bp higher at 1.59%.
  • Total returns for US investment grade corporates were negative due to slightly wider spreads and a modest increase in longer-term treasury yields. A rise in oil prices led to tighter spreads in energy sectors. Exposure to the energy sector contributed positively to performance.
  • We increased overall US investment grade corporate credit risk near the end of the month due to near-term central bank accommodation and lower forecasted new issuance supply for the fourth quarter. We also added back energy sector exposure throughout the month.

 

September

YTD

2015

Since repositioning*

Performance (net of fees)

-0.1%

+0.9%

-0.4%

+11.2%

  • After a quite summer period, September broke the peace in style with the Fed and BoJ meetings, Brexit-related headlines, European banks concerns, the US presidential debate and also the OPEC side meeting all providing plenty of news flow. EUR corporate bond spreads widened slightly, although total returns were only marginally negative as they were cushioned by a drop in risk-free rates.
  • Over the last month, we have started to reduce the active risk in the fund but continue to keep an overweight in the subordinated sector. This sector overweight was the main driver for the slightly negative performance.
  • The fund is positioned to benefit from a higher return potential with only moderate additional risk mainly through an overweight in selected subordinated (hybrid) bonds of high-quality financial and non-financial issuers. Our duration stance remains neutral.

 

September

YTD

2015

Since repositioning*

Performance (net of fees)

-0.1%

+2.0%

+0.1%

+10.7%

  • The Fed left the benchmark rates unchanged at 0.25 to 0.5 percent, while still signalling a rate hike later this year (likely in December). Long-term interest rate expectations were also lowered to 2.9% from 3% while the inflation target of 2% is expected to be achieved in 2018. Nevertheless, US treasuries yield only changed marginally MoM. Broader market (investment grade range) credit spreads also moved sideways, leading to an (almost) flat absolute performance.
  • The main negative performance driver was sector allocation and issue selection, mostly due to our overweight (duration wise) in financials. Trading activity also resulted in a negative performance contribution, while curve positioning had a slightly positive impact.
  • Our current positioning reflects our expectation of a yield curve flattening, and from a sector perspective, we have a rather defensive positioning, keeping an overweight in government related and collateralized bonds at the expense of an underweight in corporate industrial and utility names.

 

September

YTD

2015

Since launch on 15.05.1998

Performance (net of fees)

-0.5%

+5.0%

+1.0%

+89.7%

  • After a strong start to the month, high yield showed some weakness mid-month in light of nervousness from investors ahead of key central bank meetings. Subsequently the market recovered, in particularly post the OPEC meeting where they unexpectedly committed to cut production.
  • Our issue selection within services and homebuilders/real estate were small detractors to performance.

 

September

YTD

2015

Since launch on 28.11.1996

Performance (net of fees)

+0.3%

+11.8%

-4.4%

+162.3%

  • After a strong start to the month, high yield showed some weakness mid-month in light of nervousness from investors ahead of key central bank meetings. Subsequently the market recovered, in particularly post the OPEC meeting where they unexpectedly committed to cut production. The US high yield market in particular benefitted from this, as it has a larger exposure to commodity related sectors.
  • Our issue selection and underweight position within the energy sector were a drag on performance. Issue selection within technology, chemicals and leisure also contributed negatively.
  • Our issue selection within healthcare was a small positive contributor to performance.

 

September

YTD

2015

Since launch on 18.02.2011

Performance (net of fees)

+0.2%

+3.2%

-0.6%

+15.2%

  • After a strong start to the month, high yield showed some weakness mid-month in light of nervousness from investors ahead of key central bank meetings. Subsequently the market recovered, in particularly post the OPEC meeting where they unexpectedly committed to cut production. The US high yield market in particular benefitted from this as it has a larger exposure to commodity related sectors. Medium-term bonds generally underperformed short and long-dated bonds.
  • US high yield credit spread tightening contributed positively to performance.
  • The fund maintains its better quality bias, focusing on BB and B rated bonds. At month-end, the option-adjusted duration was approximately 1.5 years.

 

September

YTD

2015

Since launch on 28.01.2010

Performance (net of fees)

-0.1%

+8.5%

+2.2%

+42.5%

  • The total return of the broad Asian USD bond market was slightly positive, due to running yield. All-in yields on an overall basis were higher, with credit spread widening partially offset by a fall in US treasury yields. Spreads widened with heavy primary market issuance impacting on secondary market demand and supply dynamics.
  • In terms of spread performance, high yield underperformed investment grade and by sector, corporates underperformed sovereign and quasi-sovereign.
  • Active positioning detracted from performance over the month.

 

September

YTD

2015

Since launch on 18.02.2011

Performance (net of fees)

+0.1%

+8.0%

-4.8%

+2.7%

  • Asian local currency bonds posted a slightly positive return overall in USD terms on the back of running yield. Asian bond yields and currencies were broadly unchanged on an overall basis.
  • The Indonesian rupiah and bond markets were positively impacted by monetary policy easing from Bank Indonesia, which cut key policy rates in its bid to further support economic growth. In the Philippines, the peso and bonds fell, with a sequence of provocative comments by the country's President weighing on investor sentiment towards the country.
  • Portfolio positioning over the month detracted from performance.

 

September

YTD

2015

Since launch on 17.02.2012

Performance (net of fees)

+0.4%

+11.4%

+2.4%

+35.8%

  • The Asian high yield bond market posted a positive return on the back of strong running yield, offsetting the impact of credit spread widening.
  • Asian high yield spreads widened on an overall basis, as market flows and investor activity focused on the significant amount of primary market issuance over the month.
  • By quality, single-B issuers outperformed double-B and by sector, sovereign and quasi-sovereign outperformed corporates.

 

September

YTD

2015

Since launch on 26.04.2013

Performance (net of fees)

-0.1%

+10.9%

+1.6%

+9.9%

  • Emerging market corporate bond spreads widened modestly while the US treasury yield curve steepened with short-term yields declining and longer-term yields increasing. Inflows into emerging market corporate debt continued, as investors seek yield while emerging market corporate supply was elevated in the APAC region.
  • Exposure to Argentina, Brazil and Russia contributed positively to performance, whilst exposure to Jamaica and Mexico was a drag on performance. Turkish issuers were among the weaker names as well given the downgrade of the country to High Yield.
  • We modestly increased our overall risk exposure to emerging market corporate bonds following the Federal Reserve’s decision to remain on hold and other accommodative global monetary policy.

 

September

YTD

2015

Since launch on 18.07.1995

Performance (net of fees)

-0.04%

+0.87%

+0.28%

+51.16%

  • Higher risk free rates across the yield curve reduced total return of the fund.
  • Narrower credit spreads were beneficial for total return and outpaced the negative impact from rising rates.
  • A steeper yield curve hurt given the overweight in the 5 to 7 year maturity bucket.
  • The overweigh in corporate bonds and positive issue selection were the main driver for our relative outperformance.
  • We keep our current neutral duration stance and yield curve positioning and continue to selectively favour corporates over government related.

 

September

YTD

2015

Since launch on 18.07.1995

Performance (net of fees)

+0.04%

+1.83%

+0.26%

+120.73%

  • In September, the Fed left the benchmark rates unchanged at 0.25 to 0.5 percent while still signalling a rate hike later this year (likely in December). Long-term interest rate expectations were also lowered to 2.9% from 3% while the inflation target of 2% is expected to be achieved in 2018. Nevertheless, US treasuries yield only changed marginally MoM.
  • Broader market (investment grade range) credit spreads also moved sideways, leading to an (almost) flat absolute performance.
  • Curve positioning had a slightly positive impact while sector allocation and issue selection had overall positive impact on relative performance. Trading activity resulted in a slightly negative performance contribution.
  • Our current positioning reflects our expectation of a flattening yield curve, and from a sector perspective, we have a cautious overweight in collateralized and corporate bonds at the expense of government related, in particular US agency names.

Please note that our fixed maturity funds are constructed based on a buy-and-hold approach, i.e. neither the distribution pay-out nor the capital invested are negatively impacted by the negative performance of the NAV as long as there is no significant default in the portfolio. We do not intend to re-structure the portfolio during the lifetime of the funds as it would negatively impact the yield/pay-out profile of the funds, unless we anticipate a default as the base case scenario.

UBS (Lux) Bond SICAV – Emerging Markets Bonds 2017 (USD) P-acc

 

September

YTD

2015

Since launch on 21.10.2013

Performance (net of fees)

-0.2%

+3.2%

+5.0%

+7.8%

UBS (Lux) Bond SICAV – Emerging Markets Bonds 2018 (USD) P-acc

 

September

YTD

2015

Since launch on 21.03.2014
 

Performance (net of fees)
 

+0.3%

+5.6%

+4.0%

+10.2%

UBS (Lux) Bond SICAV – Emerging Markets High Yield Bonds 2018 (USD) P-acc

 

September

YTD

2015

Since launch on 04.04.2014
 

Performance (net of fees)
 

+0.5%

+6.9%

+5.1%

+9.8%

  • Emerging market debt spreads tightened modestly, with EMBI Global spreads tightening 1 basis point to 360bps during the month.
  • Emerging market debt experienced volatility during the month, as uncertainty around global central bank monetary policy led to yield curve steepening in developed markets, which pressured hard currency debt before reversing course following relative inaction from the European Central Bank, Bank of Japan and the Fed.
  • A surprise production freeze from OPEC and continued strong inflows into the asset class also provided support for emerging market spreads during the month.

Past performance of investments is not necessarily an indicator of future results. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming units.