United Income Focus Trust – Market Outlook and Performance

31 March 2020

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1. Market developments and outlook:

Following an initial bounce after the Federal Reserve (the Fed) and US Congress took positive steps towards supporting markets and the US economy, joining a number of other countries in providing significant support, the market appeared to run out of steam – at least for the short term. Global equities were flat over the past two weeks while credit markets gained following one of the most challenging months for credit investors ever. Presently, we see the most opportunity in credit markets – particularly investment grade credit which is favoured by the Fed in their corporate debt purchases and should weather any recession better than lower quality fixed income – and have been tilting the portfolio in credit’s favour over global equities and duration.

Despite some positive developments on the policy front and easing in market turbulence we think it is too early to assume we are out of the woods. Our expectation is that volatility remains as the fallout of the virus spread begins to show up in economic data and corporate earnings. During this period we intend to remain conservatively positioned to help protect client capital and our defensive posture as seen below in section 2 which should be beneficial in mitigating any further weakness. Conversely, if we do gain better visibility on the impact of the crisis or see some stability in global infections, and if markets stabilize, our investment process should also adapt quickly. When it arrives, we expect the recovery in financial markets to be swift and steep due to the extent of monetary and fiscal support currently provided by governments and central banks – even if the real economy takes a little longer. It is worth highlighting the highly dynamic nature of UIFT. Similar to the rapid reduction in risk as the crisis grew, we can equally re-risk by increasing our risk exposures to equities and credits as the crisis shows signs of receding.

2. Performance attribution and positioning:

3. Recent portfolio positioning and key changes:

Over the past week we made three key adjustments to portfolio positioning:

• Government bonds: Our focus has turned recently from managing equity risk to navigating duration exposures. Hence, we have been trimming our duration positioning, and have taken down duration from 4 years to 3.6 years. This is largely a valuation call based on a view that monetary easing should be largely priced in by markets now, limiting the value available from holding government bonds.
• Global equity: The second shift was a reduction in the physical exposure held within our Global Income Low Volatility strategy. We sold approximately 4% of equities when stock prices were climbing and subsequently reduced our hedge on global equities by adding +4% exposure – the result was net exposure remaining unchanged in equities. As it stands, we are not convinced just yet that the worst of the market volatility is behind us and that a conservative position in equities remains prudent. Selling equities allows us to raise cash for use elsewhere in the portfolio and to lower our exposure to dividend paying equities which have come under some pressure recently.
• Global credit: Finally, we reduced the hedges on our credit exposures following action from central banks to help with market functioning. While we expect credit volatility to remain elevated, we are focused on identifying inefficiencies in the pricing of credit risk, and continue to position the portfolio towards higher-quality issuers. Furthermore, these assets also received a boost from central bank intervention to help shore up liquidity and to ensure that higher quality companies can still access funding. We believe our investment grade credit exposure will benefit from this development.