Acre Fixed Income Note Full Year 2020 - Acre Capital

Performance for Full Year 2020

The aggregated Acre fixed income portfolios across all advisory clients are up +18.6% in the Full Year of 2020. This compares very well vs the IBoxx Asia High Yield Index at +5% and Fidelity Asia High yield Fund at +7%.

Covid Led to Acre’s Outperformance vs Underperformance of Funds

The massive redemptions in March 2020 led to fixed income funds selling their positions at the worst possible time to raise cash while Acre’s clients have already derisked by February 2020. This led to our ability to redeploy cash at market lows, creating large capital gains as well as locking in attractive yields for our clients for the next few years.

One example was buying CS 7.5% Perp at 87.18 or 14% yield to call over the next 4 years (Figure 1). The client also enjoyed a +25% capital gain on a high-quality perp over the next 9 months.

Figure 1: Bought CS 7.5% Perp at 87.18, yielding 14% YTC

Finding Yield in RMB fixed income

Another main contributor to Acre’s performance is the early rotation to RMB fixed income in August 2020, to counter the intense hunt for yield and the continued depreciation of the USD.

Clients bought quasi-sovereign policy banks like ADBCH 3.8 30’ at par which led to +3.4% of capital gains over one quarter (Figure 2). Moreover, the RMB has been strengthening against the USD which led to an additional FX gain of +7% (Figure 3). These resulted a quick and significant triple-win in terms of capital gains, yield and FX appreciation.

Figure 2: ADBCH 3.8% 30’ for +3.4% capital gain plus 3.8% coupon

Figure 3: RMB strengthening against the USD, adding 7% of FX gains

REITs as Long Duration Play

Lastly with interest rates coming off aggressively in 2020, we invested in REITs that are quasi long duration bonds that also benefitted from the subsequent economic recovery. Our largest REIT positions include Frasers Logistics and Commercial Trust bought in May which locked in a >8% dividend yield as well as enjoying +44% capital gains in the next 6 months (Figure 4).

Figure 4: Frasers Logistics and Commercial Trust up 44% from entry price + >8% dividend yield

Outlook for 2021: Higher Interest Rates

With the distribution of the Covid vaccine and continued stimulus by governments, interest rates are coming off the lows made in 2020 (Figure 5). This poses a threat to investment-grade, long duration bonds which have done well in the last two years. As such entering into the new year, our clients have been divesting away from those and entering into the High Yield space.

Not only does the High Yield/Investment Grade spreads have the potential to compress further (Figure 6), but they are also low in duration and therefore not as exposed to interest rate risks. Credit risks should be mitigated with the economic recovery as well.

Figure 5: US 10 Year Rates going up on economic recovery expectations

Figure 6: There is still room for High Yield – Investment Grade Spread to compress

High Dividend Equities with Growth Potential 

In a seeming paradox, the environment in 2020 was actually very conducive for fixed income investing. 2021 however would be more challenging as most of the low-hanging fruits have been harvested and one needs to contend with increasing interest rates. This logically leads to a strong case for some allocation to high dividend equities with some growth potential, even for purely fixed income mandates. This is where Acre will concentrate our investment capabilities on in 2021.

 

Regards,

Vincent

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