MacKay Shields Unconstrained Bond (AAP0020AU) Report & Performance

Fund performance for August 2022 was -1.35% (net of fees) versus the benchmark return of +0.11%, as measured by the BofA Merrill Lynch 3-Month LIBOR Constant Maturity Index (AUD). The key driver of return came from our positioning in Credit Risk Transfer. Positioning within Investment-Grade Corporate, High Yield Corporate and Preferred Stock detracted during the month.

Fund performance for July 2022 was +2.39% (net of fees) versus the benchmark return of +0.10%, as measured by the BofA Merrill Lynch 3-Month LIBOR Constant Maturity Index (AUD). The key drivers of return came from our positioning in High Yield Corporate, Investment-Grade Corporate, EMD Sovereign and Preferred bonds. Positioning within CMO’s and Bank Loans detracted during the month.

Fund performance for the quarter ending June 2022 was -4.84% (net of fees) versus the benchmark return of -0.14%, as measured by the BofA Merrill Lynch 3-Month LIBOR Constant Maturity Index (AUD

With few exceptions, most major economies face the sting of both elevated inflation and slowing growth, leaving central banks in a challenging position. Focusing on price stability amid faltering growth risks a recession before long. Alternatively, pivoting to address increasing risks to growth could lead to a de-anchoring of inflation expectations and a more persistent inflation problem. Thus far, central banks are much more focused on price stability and preserving hard-won inflation-fighting credibility, even at the cost of an end to the current expansion. The Federal Reserve is a case in point, with the Great Inflation of the mid-1960s through early 1980s and Paul Volcker’s eventual victory over inflation serving as a guidepost for sound policy today. The implications are clear – the central bank is now intent on weakening aggregate demand and the labour market, with the ultimate goal of returning inflation closer to the two percent objective in the years ahead. Unfortunately, history reveals that tight policy and economic expansions do not go hand-in-hand for long. And with the policy stance (interest rates and quantitative tightening) turning restrictive in the months ahead, recession risks over the next year are now extremely elevated. Even if a recession does not start until next year, the remainder of 2022 will increasingly feel recessionary, with slow overall growth, falling labour demand, and weak consumer spending.

Fund performance for May 2022 was -0.06% (net of fees) versus the benchmark return of -0.03%, as measured by the BofA Merrill Lynch 3-Month LIBOR Constant Maturity Index (AUD). Our positioning in Investment-Grade Corporate, EMD Sovereign and High Yield Corporate added to performance. Positioning in Preferred Stock, Bank Loan and Credit Risk Transfer detracted from results.

The month of May saw a continued tug of war over expectations for monetary policy, with investors weighing the prospects for a pause in tightening later in the year against hawkish commentary from key policy-makers. On the one hand, reports of excess inventory at some large retailers, a moderation in wage and job growth, and less eye-popping inflation prints have all fuelled a narrative that the Federal Reserve may not need to target an overly restrictive policy stance. This narrative supported risk assets intermittently during the month, but on net, these bouts of optimism were outweighed by hawkish commentary from both Chair Powell and Vice Chair Brainard. The Chair noted that the Fed was unlikely to back off from tightening until the Committee saw “clear and convincing evidence” that inflation is moderating, while the Vice Chair stated that the case for a pause in rate increases in the fall was “very hard” to see. Indeed, by the fall the policy debate is much more likely to focus on the choice between a 25 or 50 basis point rate increase, rather than on whether to pause. Monthly inflation prints may have cooled off a bit recently, and the same can be said of wage gains. However, with a tight labor market and a significant amount of excess savings in the hands of consumers, underlying strength in the economy is unlikely any time soon to produce inflation at the Committee’s two percent objective on a sustained basis. More restrictive policy remains the base case, and with it, so does market volatility, especially for risk assets.

Fund performance for the quarter ending March 2022 was -2.79% (net of fees) versus the benchmark return of -0.01%, as measured by the BofA Merrill Lynch 3-Month LIBOR Constant Maturity Index (AUD).

During the first quarter of 2022, the Fund declined by 279 bps (in AUD terms). The following are the key drivers of return. Positioning in Credit Risk Transfer and Bank Loan contributed to performance. Positioning in Investment-Grade Corporate, High Yield Corporate, and emerging markets detracted from results.

In addition to the ongoing war in Ukraine, perhaps the defining occurrence of the first quarter was the rapid repricing of expectations for global monetary policy, especially in the United States. Coming into this year, short-term interest rate markets priced in around 75 basis points of expected policy tightening by the Federal Reserve this year, and a peak rate this cycle of just 1.5 percent. At time of writing, markets are now discounting a year-end policy rate of 2.5 percent, and a peak rate of around 3.25 percent by the middle of next year. The Federal Reserve also appears likely to start the process of running down its balance sheet after their May meeting. Clearly, after under-appreciating the durability of inflation pressures last year, the Committee is now focused on achieving price stability in the years ahead and restoring its inflation-fighting credibility.

Fund performance for the quarter ending March 2022 was -2.79% (net of fees) versus the benchmark return of -0.01%, as measured by the BofA Merrill Lynch 3-Month LIBOR Constant Maturity Index (AUD).

During the first quarter of 2022, the Fund declined by 279 bps (in AUD terms). The following are the key drivers of return. Positioning in Credit Risk Transfer and Bank Loan contributed to performance. Positioning in Investment-Grade Corporate, High Yield Corporate, and emerging markets detracted from results.

In addition to the ongoing war in Ukraine, perhaps the defining occurrence of the first quarter was the rapid repricing of expectations for global monetary policy, especially in the United States. Coming into this year, short-term interest rate markets priced in around 75 basis points of expected policy tightening by the Federal Reserve this year, and a peak rate this cycle of just 1.5 percent. At time of writing, markets are now discounting a year-end policy rate of 2.5 percent, and a peak rate of around 3.25 percent by the middle of next year. The Federal Reserve also appears likely to start the process of running down its balance sheet after their May meeting. Clearly, after under-appreciating the durability of inflation pressures last year, the Committee is now focused on achieving price stability in the years ahead and restoring its inflation-fighting credibility.