Month: March 2022

Eaton Vance Floating-Rate Fund Commentary – Q4 2021

Thesis

EIBLX (yielding 3.15%) is a large floating rate fund that has strong historical returns and a tenured management team. By investing purely in senior bank loans, EIBLX further increases our potential upside gain, reduces our duration-risk, and decreases our interest rate risk. We like that the fund utilizes a bottom-up investment process through proprietary framework analysis, avoids high-yield corporate bonds, and allocates to relatively higher-rated securities within the floating rate security space.

 

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Overview

In the fourth quarter of 2021, EIBLX underperformed the benchmark (S&P/LSTA Leveraged Loan Index) by 26bps. Loan markets in general saw prices ease on October and November, but a strong and quick rally in December as Omicron fears started to fade and interest rate hike talks made headlines. Q4 2021 was also a record quarter for supply and demand which helped drive strong performance – CLOs specifically broke records. Credit also remained healthy with the default rate ending the year near a record low.

 

Q4 2021 Summary

• EIBLX returned 0.51%, while the Leveraged Loan Index returned 0.77%
• Quarter-end effective duration for EIBLX was 0.36 and 0.12 for the Leveraged Loan Index
• Largest contributors
• Overweight to a specialty chemicals company and out-of-benchmark holding in a recovering metals/mining issuer
• Largest detractors
• Overweight holding in an energy company and overweight to a radio & television credit

 

 

 

 

 

 

 

 

 

2021 Performance Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Fidelity Advisor Floating Rate Fund Commentary – Q4 2021

Thesis

FIQSX (yielding 3.26%) is a large, floating rate fund that has strong historical returns and a tenured management team. By investing purely in senior bank loans, FIQSX further increases our potential upside gain, reduces our duration-risk, and decreases our interest rate risk. We like that the fund utilizes a bottom-up investment process through proprietary framework analysis, avoids high-yield corporate bonds, and allocates to relatively higher-rated securities within the floating rate security space.

 

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Overview

In the fourth quarter of 2021, FIQSX performed roughly in line with the benchmark (S&P/LSTA Leveraged Loan Index). In general, loans saw stronger performance than high-yield corporate bonds, IG corporate credit, and other broad-based IG markets. Issuance reached an all-time high in October which was matched by high demand from CLOs and retail funds. November then saw a slight drop, but a strong rebound in December largely due to Omicron concerns. Headlines around rising interest rates also sparked demand for floating rate securities which helped drive performance.

 

Q4 2021 Summary

• FIQSX returned 0.79%, while the Leveraged Loan Index returned 0.77%
• Quarter-end effective duration for FIQSX was 0.16 and 0.12 for the Leveraged Loan Index
• Largest contributors
• Murray Energy (coal mining), Rivian Automotive (EV manufacturer), not owning Envision Healthcare (health-care service provider)
• Largest detractors
• Out-of-benchmark holding in TNT Crane & Rigging (crane service provider), Sinclair Broadcast Group (TV station operator), Rodan & Fields (skin case company)

 

 

 

 

 

 

2021 Performance Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

DoubleLine Total Return Bond Fund Commentary – Q4 2021

Thesis

DBLTX (yielding 3.24%) utilizes a top-down, bottom-up process that focuses on MBS and Agency bonds. When compared to the benchmark (Barclays U.S. AGG), the holdings have lower duration and exposure to corporate bonds, reducing their sensitivity to interest rate movements and credit spreads. We expect attractive risk-adjusted return characteristics over the long term from DBLTX, especially during periods when corporate bonds’ spread increase and the yield curve steepens.

 

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Overview

In the fourth quarter of 2021, DBLTX outperformed the benchmark (Barclays U.S. AGG) by 19bps, largely due to the fund’s shorter duration – Fed monetary policy expectations caused the curve to begin to flatten: 2-year rates began to rise, and 30-year rates slightly dropped. A strong housing market and floating-rate coupons contributed to performance, though.

 

Q4 2021 Summary

• DBLTX returned (0.18%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for DBLTX was 4.82 and 6.60 for the U.S. AGG
• Top performing sectors included non-Agency residential mortgage-backed securities and CLOs
• Worst performing sectors included non-Agency commercial mortgage-backed securities, asset-backed securities, and Agency MBS

 

 

 

 

 

 

 

 

 

2021 Performance Comparison

 

[Category Mutual Fund Commentary]

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

MetWest Total Return Bond Fund Commentary – Q4 2021

Thesis

MWTIX (yielding 1.34%) is an actively managed fund that provides a sector-based strategy while still maintaining fundamental research driven through issue selection. When compared to the benchmark (Barclays U.S. AGG), the holdings have similar duration and exposure, yet selection is focused around areas where other managers are not looking. Through sector rotation and active weighting, we expect MWTIX to generate alpha over time.

 

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Overview

In the fourth quarter of 2021, MWTIX slightly underperformed the benchmark (Barclays U.S. AGG) by 8bps which was mainly caused by poor selection in corporate credit. Duration positioning (underweight to the long end of the curve) also acted as a headwind. Yet, the fund did see some positive performance due to its underweight to corporate credit and strong selection in the RMBS (including agency MBS TBAs and legacy non-agency MBS) space.

 

Q4 2021 Summary

• MWTIX returned (0.09%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for MWTIX was 6.32 and 6.6 for the U.S. AGG
• Top performing sectors included Industrials, Health Care, midstream companies, finance and life insurance names, and RMBS holdings
• Top detractors included RMBS and agency MBS holdings

 

 

 

 

 

 

 

2021 Performance Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Touchstone Impact Bond Fund Commentary – Q4 2021

Thesis

TCPNX (yielding 1.79%) is a smaller fund that does not have as many assets under management compared to our other core mangers, enabling them to make more nimble and tactical decisions. By making small allocations to undervalued “riskier” asset classes (high-yield and non-dollar denominated debt), TCPNX diversifies our fixed income portfolio and generates superior returns to the benchmark (Barclays U.S. AGG). We like that the fund utilizes a bottom-up investment process through proprietary framework analysis, fundamental security review, and portfolio risk management.

 

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Overview

In the fourth quarter of 2021, TCPNX underperformed the benchmark (Barclays U.S. AGG) by 10bps primarily due to the overweight in spread products, which saw widening during the quarter. An underweight to Treasuries, which saw strong performance, also detracted from returns. As for duration, the fund continues to have a neutral approach which had minimal to no effect on performance.

 

Q4 2021 Summary

• TCPNX returned (0.11%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for TCPNX was 6.3 and 6.6 for the U.S. AGG
• Three largest contributors
• Build America Bonds, U.S. Treasuries, and U.S. Small Business Administration (SBA) securities
• Three largest detractors
• Exposure to banks, insurance companies, and Ginnie Mae Project Loans (ie. CMBS)

 

 

 

 

 

 

 

2021 Performance Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Western Asset Core Bond Fund Commentary – Q4 2021

Thesis

WATFX (yielding 1.72%) is an actively managed fund that finds overlooked areas of the market that can go against consensus views and add value. Through internal macro, credit, and fundamental research WATFX identifies undervalued securities and takes on more credit exposure to generate alpha over time. Through a diversified approach to interest rate duration, yield curve, sector allocation, and security selection, the fund dampens exposure to volatility.

 

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Overview

In the fourth quarter of 2021, WATFX underperformed the benchmark (Barclays U.S. AGG) by 17bps largely due to the fund’s longer duration and exposure to EM debt. The news of the Omicron variant caused risk assets to weaken at first, but they soon rebounded upon news that this variant would cause less sever symptoms compared to past variants. Inflation continued to increase which caused the FOMC to consider increasing the pace and amount of tapering needed to combat a possible longer than expected increase in prices. The fund continues to position itself to benefit from a global recovery but may see volatile times for now.

 

Q4 2021 Summary

• WATFX returned (0.16%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for WATFX was 7.5 and 6.6 for the U.S. AGG
• Added exposure to short-term yields and trimmed intermediate to long-term yields
• Sold out of remaining TIPS exposure
• Increased allocation to investment-grade credit
• Continued to trim agency MBS exposure, furthering its underweight relative to the benchmark

 

 

 

 

 

 

 

2021 Return Comparison

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Current Price: $210          Price Target: $320

Position size: 3%                TTM Performance: +11%

 

Key Points:

• Beat expectations – Reported a top and bottom line beat and increased FY23 revenue guidance (+21% YoY) and saw record levels of revenue, margin and cash flow.
• Attrition improved – in Q3 they drove attrition rate to below 8% for the first time in company history…and ended Q4 w/ attrition between 1-7.5%
• Seeing solid margin expansion – op margins should be up >100bps this year. Mgmt. continually reiterated their focus on cost discipline and efficient growth.
• Extremely positive demand commentary – saw strong demand across all of their products, regions and customer sizes. Sales cloud growth accelerated to 15% YoY, service cloud growth has accelerated to 23% and industry cloud growth was 58% (~$2B ARR, but an increasing part of the mix).
• Contracted revenues underscore demand strength and provide visibility – Remaining performance obligation (RPOs), representing all future revenue under contract, ended Q4 at ~$44B, +21% YoY. And Current RPOs or cRPO (all future revenue under contract that is expected to be recognized as revenue in the next 12 months) was ~$22B, up 24% YoY.

 

• Quotes from the call
• “we don’t see any demand pull-forward”…this has been pointed to by bears as a concern saying that there has been a pull forward in demand w/ covid and that growth would slow in enterprise software…the rest of the quotes (along w/ their guidance and RPOs) also run counter to this argument…
• “The dynamics we’re seeing in customer engagement is absolutely fantastic. Just over the past few months I’ve done more than 75 meetings with C-suite executives and the accessibility, that sense of urgency and interest from the highest levels of companies is incredible and shows no signs of slowing down. What’s clear is there is a tremendous appetite for digital transformation and we fully expect that to continue.”
• “…despite inflation, the crisis, the supply chain, the conflict in Europe…the problems that we solve for our customers are as urgent as ever”…” it’s not just sales opportunity management anymore, it’s really every aspect of the customer experience. And it means that we’re starting conversations in every department of every single one of our customers and have the opportunity to expand really…”
• “Our progress in the enterprise continues with our largest deals getting even larger. The number of seven-figure deals signed in Q4 grew 34% year-over-year and in Q4 the number of eight-figure deals more than doubled.”
• “Our customers, it doesn’t really matter by geography or by industry, are very deeply committed to their digital transformation to their businesses. I think that if the pandemic put a light on anything for them it was that their businesses were not going to have a future, if they did not go through a digital transformation. And that these digital transformations as I said in my comments, we’re going to begin and end with the customer.”
• CRM is coming up on their 23^rd anniversary…at 23 years old, their inaugural product, their Sales Cloud is ~$6B in annual revenue, close to ¼ of revenue and still growing at 17% which is amazing.
• ESG comments…
• They’ve progressed from being a “net zero company” to being “fully renewable.”
• “A lot of the companies that I met with [recently] were mostly Fortune 100 CEOs, they crave to have that same net zero and renewable profile, which is very exciting to see the world having this kind of sustainability focus.”
• Companies are using salesforce’s sustainability cloud to track their carbon footprint and other climate related initiatives.
• Reasonable valuation & strong balance sheet
• Expect CapEx to be ~2% of revenue in FY ’23 resulting in FCF growth of ~25% to 26%, an acceleration from last year.
• Net leverage ratio <2x. In August they issued $8 billion of senior notes (to fund Slack deal) with a weighted average interest rate of 2.25 % and weighted-average maturity of 20 years. Concurrent with that, S&P upgraded their credit rating to A+.
• Trading at a big discount to peers at <7x calendar ’23 revenue. Inexpensive for a high-quality, high moat company w/ a large TAM and multiple secular tailwinds, driving double-digit top line growth at scale.

 

Investment Thesis:

• Strong moat – dominant front office software that is mission critical and productivity enhancing to customers with high switching costs and an ecosystem advantage
• Solid long-term secular growth drivers – digital transformation, multi-cloud, industry verticals and international expansion
• Improving unit economics – growth strategy should yield higher quality (lower attrition) and higher recurring revenue cohorts which should improve margins over time and support their multiple
• Reasonably valued – high quality franchise, growing double-digits and trading at a discount to peers

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com