Rising economic confidence among businesses and individuals helped fuel positive market sentiment toward most global risk assets during the quarter. The Federal Reserve (Fed) raised rates in March, a widely anticipated move that acknowledged the strengthening U.S. economy. The Bank of Japan (BOJ), the Bank of England (BOE) and the European Central Bank (ECB) continued to expand their balance sheets, though the ECB will reduce its purchases to €60 billion per month in April. The euro zone avoided a political upset on March 15 when the Dutch elected incumbent Prime Minister Mark Rutte.
The U.S. dollar weakened during the period as fundamentals beyond U.S. borders improved and the Fed signaled a measured, gradual approach to interest rate normalization. As evidenced by failed progress on healthcare reform, the policy ambitions of the new Trump administration may prove challenging to implement. The Mexican peso ended the quarter as one of the top-performing currencies, rallying as the Trump administration backed off its negative trade rhetoric.
Corporate credit continued to outpace government bonds, and investor demand proved sufficient to absorb heavy U.S. market and moderating European market supply from investment grade issuers. The ECB’s bond buying program continued to support euro credit, despite political uncertainty that pressured sovereign bonds outside of Germany and expectations of a conclusion to the ECB program. Financials benefited from the prospect of higher rates and improved balance sheets. High yield credit was one of the leading asset classes, though spreads widened somewhat in the last weeks of the quarter due in part to softening energy prices.
Emerging market performance was broadly positive, aided by positive risk sentiment, improving global growth forecasts, a weaker U.S. dollar and limited near-term risks.
The Fund outperformed its benchmark, the BBG Barclays Global Aggregate Corporate Bond Index (CAD Hedged), by 10 basis points. The Fund returned 1.24% gross of fees (0.83% net of fees) during the period versus 1.13% for the benchmark. The Fund’s outperformance was largely due to sector allocation and security-specific benefits.
From a sector allocation viewpoint, the Fund’s overweights to communications, capital goods, and banking contributed positively. Allocation to government-owned sectors also helped deliver outperformance. Underweights to basic industry, technology, and insurance sectors held back performance slightly.
Security selection was another positive source of excess returns over the quarter. Bond selection among consumer non cyclical and technology were additive. However, issuer selection among real estate investment trusts (REIT) and capital goods sectors detracted from performance.
Duration (price sensitivity to interest rate changes) and yield curve (a curve that shows the relationship
between bond yields across the maturity spectrum) positioning was also helpful during the quarter. Our allocation to the belly of the USD pay yield curve proved beneficial as the yield flattened throughout the quarter.
Geopolitical and economic events did not impact credit spreads significantly during the first quarter, and we anticipate spreads will remain stable over the near term. Geopolitics, policy challenges in the U.S., French elections and tough Brexit negotiations could produce bouts of volatility in the coming months. However, stable and slightly improving global growth, the cautious mindset of G-3 central banks, and a favorable earnings outlook should reassure credit investors. The global growth and inflation trajectory does support modest steps toward monetary policy normalization across the developed world, and in turn makes for a meager outlook for high-quality government bond total returns.
Though U.S. business sentiment and consumer confidence have improved, we do not think new fiscal policies would meaningfully enhance U.S. GDP until 2018 at the earliest. Key U.S. policies such as tax reform will likely reflect a middle ground less profound than Trump’s pre-election rhetoric, but all eyes will remain on Washington.
We believe increasing summer demand for oil will reduce inventory levels, which should support oil prices. OPEC continues to display solidarity, and will likely extend its production agreement until the end of 2017.
In our view, higher U.S. interest rates could potentially pressure emerging market spreads and dampen risk sentiment. Higher U.S. yields may also drive modest U.S. dollar strength, weakening emerging market foreign exchange. Despite these risks, we expect continued resilience in emerging markets aided by improving global growth, stabilizing world trade volume and country fundamentals such as inflation and current accounts.
For more information about Loomis Sayles Global Diversified Corporate Bond Funds*, please contact your financial advisor.
All data is as of March 31, 2016. Performance for the Loomis Sayles Global Diversified Corporate Bond Tax Managed Fund, Capital Gains Class, Front End Load Regular Series — 1 month: -0.3%; 3 months: 0.9%; 6 months: -2.2%; 1 year: 1.3%; and Since Inception*: 1.3%. Performance for the Loomis Sayles Global Diversified Corporate Bond Registered Fund, Front End Load Regular Series — 1 month: -0.3%; 3 months: 0.8%; 6 months: -2.2%; 1 year: 1.3%; and Since Inception*: 1.4%. *Inception Date: June 1, 2012.
* On October 17, 2016, the NexGen Corporate Bond Fund and NexGen Corporate Bond Tax Managed Fund changed their names to Loomis Sayles Global Diversified Corporate Bond Fund and Loomis Sayles Global Diversified Corporate Tax Managed Bond Fund respectively. Also at that time, the sub-advisor for the fund was changed from Baker Gilmore & Associates Inc., to Loomis Sayles & Company, L.P. Changes in the investment strategies of the Corporate Bond Funds were made because of the sub-advisor change.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in share value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
Information contained here is believed to be accurate and reliable at the date of printing, however, NGAM Canada LP cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and NGAM Canada LP cannot be held liable for the use of or reliance upon the information contained here.
NGAM Canada LP is the Manager of the Natixis Family of funds, and an affiliate of Natixis Global Asset Management S.A.
© NGAM Canada LP, 2017