MetWest Total Return slightly lagged the benchmark during the quarter but remains generally in line year to date. The team maintains its focus on higher quality, more defensive areas of the market with a relatively shorter duration profile. The fund continues to outperform on a risk adjusted basis.
Market Overview:
– Geopolitical and idiosyncratic risks continued to be hightened and severely discounted by investors in the third quarter
o Despite numerous macro issues, overarching theme was one of upward-tredning markets propogated by still-accomodative central banks
– Market volatility measures hovered near historical lows indicative of market complacency
– Corporate earnings have been resilient and modestly growing
o However, the team believes profit momentum has been sustained more by financial engineering than robust top line growth
– S&P 500 again touched a record high in the third quarter and returned approximately 4.5%
– Spread sectors in fixed income also posted solid performance of 0.85%
o Aided by continued dovish central bank policy
– Corporate credit outpaced the overall market given a supportive technical backdrop of strong inflows and overseas demand for yield
o High yield also benefited from the quest for spread product
– Non-agency MBS had a very strong quarter led by 2.6% returns in August
– Agency MBS was mixed within the coupon stack
o Overall sector cointued to recover from early year weakness
Performance Overview:
– MWTIX returned 0.8% during the quarter, performing in line with the benchmark
– Given the defensive duration positioning, the decline in U.S. Treasury rates in August weighed on returns
o This was reversed in September as Treasuries sold off leading to neutral performace on the quarter
– Underweight to credit remained the same, in favor of securitized products
o Rally in credit led to a relative underperformance for the fund
o Were helped by an emphasis in financial corporates
– Securitized products benefited returns
o Allocation to non-agency MBS gained 3.5% in the quarter and is up about 10% YTD
– An out of index position in ABS backed by floating rate governement guaranteed stedent loan receivables added incrementally to perofrmance
– Fund continued to see small contributions from position in Japanese Government T-bills
Market Outlook:
– With demand for yield continuing, technicals have generally superseded what the team believes to deteriorating credit fundamentals
o Corporate leverage levels unlikely to meaningfully improve in the near future
o Record debt issuance shows no sign of slowing
o View of credit remains particularly cautious
– Consumer ABS issuance continued at a robust pace iin the third quarter led by auto and credit card deals
– Risks remain with the Fed’s efforts to normalize rates despite all actions being well televised so far
o Other risk is that,up to five new Fed board members could be confirmed in the next year including a new Fed chair
– Fund remains true to its disciplined, value-based approach,
o This is reflected in a focus on higher quality, more defensive areas of the market and a relatively short duration profile