Amplus Fund January Update
GameStop, Reddit, Robinhood: all buzzwords in the month of January. In an environment of momentum-chasing, portfolio manager Andrew James Labbad talks about how he continues to generate consistent returns by sticking to discipline.
Who would have thought that living in Canada right now would be more enjoyable, weather-wise, than Texas? We have much to be thankful for, including an electric grid that can handle usage spikes. Over the weekend, the spot price of Texas electricity makes GameStop’s recent rally look tame. Spot prices for wholesale electricity on the Texas power grid spiked more than 18,000% on February 15th amid the deep freeze across the state and rolling outages among power producers. What normally cost $50 per megawatt-hour was going for more than $9,000.
We highlighted last month our conviction in staying disciplined in an environment of relentless momentum-chasing. We count every day as one step closer to our goal of compounding returns. Our strategy paid off handsomely despite the short-term spike in volatility seen in the last days of January. Amplus Credit Income Fund closed up for the month of January. By comparison equity and fixed-income indices closed down -1 to -2% in January. The main reason that fixed income traded down is associated with higher interest rates, pushing bond prices lower. After launching the fund on July 2nd, 2020, cumulative returns stand at after costs.
Some of this yield action can be explained by the graph below. With U.S. money-printing presses working around the clock, US M1 money supply has increased 55% from this time last year, with 35% more U.S. dollars in circulation now than 10 months ago.
When investors look at this, naturally their expectations on inflation should be moving higher. To cope with the expectations, investors will require more bang for their buck, eventually stalling bond purchases. Interest rates will follow and start to rise.
Even though we think interest rates will close higher by year’s end, predicting the overall direction of interest rates is exceedingly difficult. On top of all the economic factors, central banks have more tools at their disposal to control overall yield curves than ever before. The question is: will central banks try to curb inflation? We believe this will become a more prevailing concern going forward. By hedging most of our interest rate exposures, Amplus is in the ideal position to invest in the economic recovery trade while protecting investors from further moves higher in interest rates.
Currently, our portfolio is positioned to benefit from inflation and the global reopening trade. Amplus has recently added more exposure to banks, insurance companies and commodities — all of which should benefit from a steeper yield curve and higher inflation.
Preferred shares were discussed briefly last month as an undervalued asset class. As of this update, the Solactive Laddered Canadian Preferred Share Index is up +6.97% year to date. Our view played out wonderfully for our investors. The hybrid-corporate bond market (a bond with preferred share features of options to extend the term) has seen 3 hybrid new issues since our last monthly update. This supply was cheered on by institutional fixed income investors welcoming higher yielding securities to their universe. Issuers have been able to redeem their preferred shares by refinancing their debt at more attractive levels in the institutionally favoured hybrid market. This has forced the preferred share market to reprice higher, with yields now reaching proper valuations. Despite the big move higher, we still see opportunities in preferred shares.
Overall, our view remains intact for 2021. Tailwinds in credit remain strong. Monetary and fiscal policies continue to be extremely accommodating, lower overall supply expectations from issuers in 2021, and robust inflows in U.S. fixed income (to the tune of $27 billion for January alone) are all positive for credit spreads. The Amplus strategy is in an ideal situation to perform.
Andrew James Labbad, CFA is the portfolio manager of Amplus Credit Income Fund. Mr. Labbad was previously a director of Credit Trading at TD Securities. He received his Master of Business Administration from John Molson School of Business at Concordia University and Bachelor of Engineering from McGill University.
