TCPNX – Q3 2019 Commentary
Overview:
The Touchstone Impact Bond Fund slightly outperformed its benchmark during the quarter, yet underperformed YTD. This underperformance for the year has been heavily driven by the funds allocation to mortgages, including the funds’ underweight on agency single-family MBS, which underperformed agency multi-family MBS (fund is overweight here).
Market Overview:
– During 2019, long-duration bonds brought higher returns as international tariffs and uncertainty continued
– Regardless of the Fed and ECB easing, the Agg returned 2.3% for the quarter
§ 25bps reduction in July, 25bps reduction in September, 25bps reduction in October
– The S&P 500 total return was 1.7% during Q3 2019, yet large differences existed between sectors
§ YTD, the S&P 500 is up over 20%, gaining almost 3.5% in October
§ Utilities were up the most at 9.3% for the quarter, while Energy was down 6.2%
– U.S. equities and fixed income markets have outpaced the returns of both developed and emerging markets
§ Barclays Agg up 8.5% YTD
§ Investment grade corporates up 3.1% for quarter, 13.2% YTD
– The Fed is not planning on raising rates until inflation reaches a consistent level of 2%
Performance Review:
– In Q3 2019, TCPNX outperformed the Barclays U.S. Agg Index by 4bps
§ TCPNX returned 2.31%, while the Agg returned 2.27%
– YTD, TCPNX underperformed the benchmark (Barclays Agg) by 21bps, mainly due to the allocation across mortgages
– The fund’s overweight to Agency securities outperformed similar duration U.S. Treasuries, helping boost returns
– Overweight allocation to utilities in place of industrial bonds within investment grade credits also worked as a tailwind as industrials underperformed
– Largest sectors of contribution
§ Agency single-family MBS, taxable municipal debt, agency multi-family MBS
– Largest sectors of detraction
§ Structured settlement securities, small business administration development company participation certificates, small business investment company debentures
– Similar duration to the benchmark and consistent ESG vision (purchase of new green bond, 2 of 3 exploration and production corporates sold) has helped fund positioning as well
Market Outlook:
– Low rate environment could spur demand for securities with large spread and strong yield
– As the economy remains consistent, the outlook is that spread sectors will perform well due to higher yields, and demand will increase due to borrowers looking to make good on their debt obligations
§ Global negative yields could provide tailwind for TCPNX as international investors look towards securities with spread over low returning U.S. Treasuries
– Bottom-up fundamental analysis along with spread advantage will help fund be well positioned moving forward
Micah Weinstein
Research Analyst
Direct: 617.226.0032
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109