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UBS Fixed Income Funds Monthly update

For qualified investors only
Swiss edition
Data as of 31st July, 2016

The month of July saw a recovery in investor sentiment following the negative impact of the surprise result of the UK’s EU referendum in late June. This was partly driven by a growing expectation of additional accommodative global central bank policy action to provide an offset to a now marginally more uncertain economic outlook. Near term investor nervousness regarding the fallout from Brexit was also somewhat mitigated by a swift UK PM leadership change that came with a commitment not to trigger the formal process of leaving the EU before 2017. Against this backdrop, credit markets performed strongly, especially EUR and US High Yield, the latter despite a 15% fall in oil prices. Key global treasury indices lagged credit equivalents but still delivered positive returns with the exception of Japan where yields managed to drift higher on the month. Despite the attempted coup in Turkey investor demand for emerging market fixed income assets has remained strong and broad based EMD indices all posted positive returns.

There remained much focus on the UK where the Bank of England surprised market participants by leaving monetary policy unchanged but gave a strong indication of policy easing to come in August. Gilt yields fell by up to an additional 18bps and sterling credit spreads more than recovered from the widening seen in June as investors assessed the possibility of a Bank of England engaging in an ECB like corporate bond purchase plan. On the month the sterling corporate bond index returned over 5% and the British pound stabilised to finish little changed on a trade weighted basis.

US Treasury yields fell at longer maturities in a month where better initial economic data and a moderately hawkish July FOMC statement was offset by a disappointing Q2 GDP report and inflation expectations remained checked by renewed falls in energy prices. In Japan expectations of a blockbuster stimulus package from the BOJ were dashed as in the event only a marginal increase in ETF purchases was announced and JGBs ended the month as one of the few fixed income sectors posting higher yields and consequently negative returns. In line with the improved investor sentiment peripheral eurozone sovereign bond markets outperformed German bunds. Focus in the eurozone was mainly on the economic and political consequences of plans to deal with Italian banks non-performing loan overhang especially in light of the EBA’s European bank stress tests due at month end. Results were broadly as expected but slightly better for Italian banks and bolstered by a last minute restructuring plan announced for the most troubled Monte dei Paschi.

In FX markets the strongest G10 currency was the Australian dollar supported by the RBA leaving bank rate unchanged and despite recent political deadlock contributing to a decision by Standard and Poor’s to place it’s AAA credit rating on negative watch. The largest G10 underperformer was the Swedish krona aided by a mildly dovish statement from the Riksbank and a disappointing GDP print.

List of funds

 

July

YTD

2015

Since launch on 31.05.2013

Performance (net of fees)

+1.7%

+1.4%

-0.9%

+2.0%

  • The month saw a recovery in investor sentiment following the negative impact of the surprise result of the UK’s EU referendum in late June. This was partly driven by a growing expectation of additional accommodative global central bank policy action to provide an offset to a now marginally more uncertain economic outlook. Near term investor nervousness regarding the fallout from Brexit was also somewhat mitigated by a swift UK PM leadership change that came with a commitment not to trigger the formal process of leaving the EU before 2017. Against this backdrop credit markets performed strongly, especially EUR and US high yield, the latter despite a 15% fall in oil prices. Key global treasury indices lagged credit equivalents but still delivered positive returns with the exception of Japan where yields managed to drift higher on the month. Despite the attempted coup in Turkey investor demand for emerging market fixed income assets has remained strong and broad based EMD indices all posted positive returns.
  • Exposure to credit and emerging market debt added to performance. Exposure to peripheral eurozone country markets also added to performance.
  • Positioning to benefit from a rise in UK bond yields and a weaker New Zealand dollar detracted from performance.

 

July

YTD

2015

Since launch on 11.04.2003

Performance (net of fees)

+2.0%

+6.1%

-1.7%

+52.6%

  • Tighter corporate over government bond spreads contributed positively to the European corporate bond market performance, whilst unchanged risk-free rates had a limited effect on performance. The ECB demand for corporate bonds under the CSPP (corporate sector purchase program) as well as limited supply of new issues during the month of July were supportive for spreads.
  • Longer dated and higher beta corporate bonds outperformed shorter dated and lower beta paper.
  • Our "long market beta" stance was positive and especially some single issuer overweights in the oil and commodity related sector added performance. Additionally our overweight positions in subordinated paper added value.
  • The fund is positioned to benefit from a higher return potential with only moderate additional risk in the lower investment grade rating segments (BBB) and selected subordinated (hybrid) bonds of high-quality financial and non-financial issuers. Our duration stance remains neutral.

 

July

YTD

2015

Since launch on 22.08.2003

Performance (net of fees)

+1.5%

+8.9%

-2.4%

+77.9%

  • The immediate aftermath post-Brexit led to a tightening of spreads in US investment grade corporates as the global demand for yield provided support for the asset class with strong inflows throughout the month. During the second half of July, spreads stalled out as corporate earnings season ended, new issuance supply remained light and trading activity diminished into the latter part of summer. Recent weakness in oil prices has put some pressure on the energy sector which led to spread widening late in the month. The option-adjusted spread (OAS) of the Barclays US Corporate Investment Grade Index tightened by 11 basis points to 145 basis points at month-end. The US Treasury yield curve flattened with 2-year yields increasing 7 basis points to 0.66%, while the 10-year yield declined 2 basis points to 1.45%.
  • Exposure to the transportation and communications sectors contributed positively to performance during the month.
  • Security selection and exposure to some names within the energy sector were the primary detractors from performance for July.
  • We continued to reduce exposure in the financial sector and favor the industrial and utility sectors from a top-down perspective. Near the end of the month, we reduced exposure to the energy sector with renewed weakness in oil prices.

 

July

YTD

2015

Since repositioning*

Performance (net of fees)

+0.3%

+1.0%

-0.4%

+24.7%

  • Tighter corporate over government bond spreads contributed positively to the European corporate bond market performance, whilst unchanged risk-free rates had a limited effect on performance. The ECB demand for corporate bonds under the CSPP (corporate sector purchase program) as well as limited supply of new issues during the month of July were supportive for spreads.
  • Longer dated and higher beta corporate bonds outperformed shorter dated and lower beta paper.
  • Our overweight positions in subordinated paper added value.
  • The fund is positioned to benefit from a higher return potential with only moderate additional risk in selected subordinated (hybrid) bonds of high-quality financial and non-financial issuers. Our duration stance remains neutral.

 

July

YTD

2015

Since repositioning*

Performance (net of fees)

+0.2%

+2.1%

+0.1%

+36.1%

  • As market expected, the Fed left its policy rate unchanged. A slightly more dovish Fed and predominantly a weaker than expected Q2 GDP number pushed the Fed fund futures to price out a rate hike until September 2017. Over the month, USD interest rate move up at the short end, while went slightly lower in 10yr+.
  • Credit spreads moved tighter, which had a positive impact on absolute performance.
  • Curve positioning had no impact while sector allocation contributed negatively. Main positive driver was issue selection within some financial names. Trading activity resulted in a positive performance contribution.
  • Our current positioning reflects our expectation of a flattening yield curve, and from a sector perspective, we have a rather defensive positioning, overweighting government related and collateralized bonds at the expense of corporate industrials and utilities names.

 

July

YTD

2015

Since launch on 15.05.1998

Performance (net of fees)

+2.1%

+3.3%

+1.0%

+86.7%

  • July started with a continuation of the ‘post-Brexit’ recovery in financial markets, helped by a more stable UK political situation following the appointment of a new Prime Minister.
  • On a reversal from the previous month our issue selection within banking was the main contributor to positive performance. Issue selection within the automotive sector was also a small positive contributor.
  • Our cautious stance to metals & mining and steels sectors was a drag on performance, as was our issue selection within services. During June, ahead of Brexit, we bought some protection on the iTraxx Crossover index, which we maintained during July. However, this was a detractor to performance as the market rallied during the period.

 

July

YTD

2015

Since launch on 28.11.1996

Performance (net of fees)

+2.5%

+9.3%

-4.4%

+156.5%

  • July started with a continuation of the ‘post-Brexit’ recovery in financial markets, helped by a more stable UK political situation following the appointment of a new Prime Minister.
  • On a reversal from previous months our cautious stance to energy was a key contributor to positive performance. Issue selection within the telecommunications and diverse financial services sectors was also a positive contributor.
  • Detractors to performance included our issue selection to broadcasting, metals & mining and utilities.

 

July

YTD

2015

Since launch on 18.02.2011

Performance (net of fees)

+0.7%

+2.7%

-0.6%

+14.7%

  • July started with a continuation of the ‘post-Brexit’ recovery in financial markets, helped by a more stable UK political situation following the appointment of a new Prime Minister.
  • Long-dated bonds generally outperformed short-dated bonds.
  • The fund maintains its better quality bias, focusing on BB and B rated bonds. At month-end, the option-adjusted duration was approximately 1.4 years.

 

July

YTD

2015

Since launch on 28.01.2010

Performance (net of fees)

+1.4%

+7.9%

+2.2%

+41.7%

  • The total return of the broad Asian USD bond market was strong in July, driven by tighter credit spreads and running yield.
  • Credit spreads tightened following last month's UK Referendum vote to exit the European Union, which has resulted in heightened growth concerns but increased expectations that central banks will act to further ease policy. This is supportive of continued investor demand for credit in their ongoing search for yield and income. High yield credit spreads tightened to a greater degree, compared to investment grade. 
  • The fund's return over the month was in line with underlying market performance and follows strongly positive total returns in the previous quarter and year-to-date, given underlying market performance and active portfolio management decisions.

 

July

YTD

2015

Since launch on 18.02.2011

Performance (net of fees)

+2.2%

+8.3%

-4.8%

+3.0%

  • Asian local currency bonds posted very strong returns overall for the month of July in USD terms. The returns were driven by lower bond yields and currency strength against the dollar across most of the Asian markets.
  • Asian local currency bonds and currencies benefited from very low policy rates in developed markets, an expanding universe of negative-yielding bonds and a wide yield differential between emerging and developed markets bonds.
  • In currency markets, the Korean won and Indonesian rupiah outperformed other Asian currencies, rising 2.8 and 0.9% respectively versus the US dollar. In Korea, the government expanded the size of the fiscal stimulus to around KRW 28tn, which includes KRW 11tn in the form of a supplementary budget. Against consensus expectations, Bank Negara Malaysia cut its policy rate by 25bps to 3%.

 

July

YTD

2015

Since launch on 17.02.2012

Performance (net of fees)

+1.2%

+10.6%

+2.4%

+34.9%

  • The Asian high yield bond market posted a strongly positive return over the month of July on the back of sharply tighter credit spreads and running yield.
  • Asian high yield credit spreads continued its tightening move post the UK Referendum vote in June, driven by positive investor sentiment which benefited higher beta markets. By quality, single-C and single-B outperformed double-B rated credit. By sector, sovereign outperformed quasi-sovereign and corporates over the month.
  • The underlying fund performance was in line with market return and was also positively impacted by relative portfolio positioning. Fund NAV return received a temporary boost in at the end of June due to swing pricing, although the effect was reversed on the following day at the beginning of July. As a result, the net impact of swing pricing on Fund NAV returns for the months of June and July combined was neutral due to the offsetting effects.

 

July

YTD

2015

Since launch on 26.04.2013

Performance (net of fees)

+1.4%

+9.5%

+1.6%

+8.6%

  • Emerging market corporate bond spreads have tightened in July and lead to the positive performance of the fund, while US treasury yields have widened and as such negatively impacted the performance.
  • Our exposure to Brazil, Mexico and Indonesia has contributed positively.
  • Our cautious stance towards mining companies in Zambia has detracted value.
  • We have left overall risk exposure unchanged during the month, but slightly reduced risk in Brazil, Russia and Mexico and increased risk in Turkey following the coup attempt.

 

July

YTD

2015

Since launch on 18.07.1995

Performance (net of fees)

-0.08%

+0.85%

+0.28%

+51.14%

  • Higher risk free rates across the curve up to 15 years reduced total return of the fund.
  • Narrower credit spreads were beneficial for total return and partially mitigated the negative impact from rising rates.
  • A flatter yield curve (stronger increase increase in medium maturities) was supportive of relative performance against benchmark thanks to our underweight in short and medium term maturities.
  • Positive issue selection also added to our outperformance.
  • We keep our current neutral duration stance and yield curve positioning and continue to selectively favour corporates over government related.

 

July

YTD

2015

Since launch on 13.11.1989

Performance (net of fees)

+0.05%

+2.17%

+1.02%

+165.24%

  • Higher risk free rates across the curve up to 15 years reduced total return of the fund.
  • Narrower credit spreads were beneficial for total return and mitigated the negative impact from rising rates.
  • A flatter yield curve (stronger increase in medium maturities) was supportive of relative performance against benchmark thanks to our underweight in short and medium term maturities.
  • Positive issue selection also added to our outperformance.
  • We keep our current neutral duration stance and yield curve positioning and continue to selectively favour corporates over government related.

 

July

YTD

2015

Since launch on 18.07.1995

Performance (net of fees)

+0.00%

+2.04%

+0.26%

+121.19%

  • As market expected, the Fed left its policy rate unchanged. A slightly more dovish Fed and predominantly a weaker than expected Q2 GDP number pushed the Fed fund futures to price out a rate hike until September 2017. Over the month, USD interest rate move up at the short end, while went slightly higher in 10yr+.
  • Credit spreads moved tighter, which had a positive impact on absolute performance.
  • Curve positioning had a slight positive impact on relative performance.
  • Main positive driver was sector allocation, mostly our overweight in corporate financials, while trading activity resulted in a 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

 

July

YTD

2015

Since launch on 21.10.2013

Performance (net of fees)

+0.2%

+3.0%

+5.0%

+7.6%

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

 

July

YTD

2015

Since launch on 21.03.2014
 

Performance (net of fees)
 

+0.4%

+4.9%

+4.0%

+9.6%

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

 

July

YTD

2015

Since launch on 04.04.2014
 

Performance (net of fees)
 

+0.5%

+6.1%

+5.1%

+9.1%

  • Emerging market debt spreads continued to tighten, with EMBI Global spreads tightening 14bps to 392bps during the month.
  • A strong technical environment driven by the global demand for yield has been a positive driver for emerging market spreads.
  • Additionally, uncertainty around global growth and geopolitics has signaled to markets that monetary policy will likely remain accommodative in the intermediate term.

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.