The fixed income market has benefited from a flight to safety over the month. Government bonds remained in demand in the UK, Switzerland and Germany where two year yields hit new all-time lows of around -0.95%. This was partly in anticipation of further European Central Bank (ECB) monetisation but also was considered to reflect fears of rising political uncertainty ahead of the European elections in the Netherlands and France this year. In the US, however, yields saw a modest increase, particularly at the short end, as investors became more confident that the US Federal Reserve (the Fed) would move rates up in March and make three rate hikes over the year. US 10 year Treasury yields declined from 2.45% to 2.36%. In the UK, the move was more extreme, with yields dropping from 1.42% to 1.07%, the lowest yield since October 2016 despite CPI inflation hitting 1.8%, the highest since 2014.
Against this backdrop, our recommended funds made good progress. The M&G Corporate Bond Fund rose 1.9% over the month with the Royal London Corporate Bond Fund, which has a greater level of duration, rising 2.1%.
Gold continued its strong performance this year, rising 4.43% to its highest level since November 2016 and closing the month above $1,250/ounce. It benefited from increased political uncertainty and low real yields, despite an increased likelihood of an interest rate hike in the US in March. We still believe that some exposure is important in portfolios in order to provide diversification. We saw better returns from our preferred total return funds. The Newton Real Return fund gained 1.5% and Troy Trojan 1.8%, both helped by gold exposure and strength in the bond market. The Troy Trojan fund is more exposed to index linked bonds whereas the Newton fund is more heavily weighted to US Treasuries. Both funds remain defensively positioned and are poised to reinvest on any sustained weakness in the equity market. The JP Morgan Global Macro Opportunities fund fell 2.2%. The fund has chased performance in some of the better performing areas of the US market, such as construction and financials. Performance is likely to improve if the US dollar were to see further appreciation. That said, we view the fund as riskier in comparison to the Newton and Troy offerings. Infrastructure funds performed well over the month, unsurprisingly because bond yields declined, enhancing the sector’s strong income characteristics. HICL Infrastructure, our recommended holding in the sector, gained 3% on the month, although it was up 5% at best.
The M&G Property Fund added 0.2% on the month. The F&C Commercial Property Trust edged up 1.9% on the month with the shares now trading at a modest premium to Net Asset Value. Whilst confidence has been coming back to the market, some uncertainties remain, in particular within the central London market, ahead of Brexit. UK regions have continued to outperform. Although confidence in the sector was initially undermined by Brexit, on the other hand, the weaker pound has made property more attractive to overseas buyers, in particular from the US, China and Japan. As a result, we have seen support for both commercial and residential property; we expect this trend to continue in the medium term.
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