You're listening to Strictly Business Podcast with Lindsay Williams.
Welcome.
And today we are in conversation with Adam Furlan, Portfolio Manager for the 91
Global Diversified
Income Fund.
I'm going to start this podcast in a slightly different way, Adam,
because I want to know about the Global Diversified Income Fund as an entity and
what it's trying to achieve
for investors.
And therefore, after that, you need to tell me who it's best suited to.
Thanks, Lindsay.
The Global Diversified Income Fund is a defensive global income fund.
It's what it says on the tin.
Its aim is to outperform US dollar cash rates by 1.5%.
But as an equal objective of the portfolio,
its aim is to protect capital and prevent negative returns for investors in this
portfolio over a rolling
12-month period.
It's best suited for investors with lazy cash in
dollars that are looking to enhance yield and have a sort of three to six month
investment horizon.
Moving out of dollar cash or a dollar money market product into the Global
Diversified Income Fund over that period is likely to,
you know, benefit you in terms of returns without taking too much additional risk in
a sort
of low cash type investment.
Also, a slightly different way of asking a question is not just the quarterly
performance.
that has just been completed, the quarter that is.
But also the fund from the beginning, because it's a very new fund, Adam.
It's just over 18 months old now.
So what has it done since inception?
And has that been meeting your expectations?
And then we go on to Q1.
Yeah, so since inception, the fund has delivered an annualized return of 6.3%.
And over that same period, cash has delivered...
just above 5% on an annualized basis.
So the portfolio has outperformed cash by 1.2%.
That is relatively in line with our expectations for this portfolio.
What we've seen over that period since inception is we've had an inverted yield
curve.
So the portfolio's government bond exposures actually yield less than what
you can get in cash market,
but you're obviously utilizing those investments to lock in yield for longer
periods than overnight cash.
And then on the other side of the portfolio,
its credit holdings serve to enhance yield through that additional yield you get
compensated for through investing
in high quality corporate credit.
On a shorter period, so over the first quarter of this year, the portfolio has
performed well.
We've outperformed cash by 30 basis points to deliver a return of 1.35%.
And that return was driven by a rally in bond yields over the first quarter.
We were quite active in our regional positioning in the portfolio, being
diversified outside of the U.S.
at the start of the year into Europe, U.K.
and New Zealand.
And we saw a significant outperformance of those markets relative to the U.S.
We then switched that a bit more heavily into the U.S.
and that retraced significantly.
So being active in the global regional markets, adding to returns.
And secondly, on the credit side of the portfolio,
we had income enhancement on that credit portfolio overcompensating us for, you
know,
the widening and spread risk that impacted returns marginally.
OK, we're going to have to inject a note of nastiness now in the podcast, Adam,
because we've got to talk about Trump's tariffs.
I mean, what have been the impact of Trump's tariffs on GDI and what do you
expect them to be in the future?
Tariffs that are implemented by Donald Trump, you know, At this point in time,
we've seen quite a few iterations of them.
And I think that speaks to just how uncertain it makes the economic
environment going forward.
You don't actually know what the tariff rate is going to be on which economy.
And that increases volatility.
So naturally, that makes us a little bit more risk averse in a portfolio trying to
protect capital.
So for GDI, we have concentrated our investments in lower risk, higher quality
credits.
and obviously defensive duration, not higher risk duration like emerging
markets.
So from that perspective, we have positioned the portfolio more defensive.
But as a result of the uncertainty in global markets, we have seen volatility in
credit spreads,
which impacted the portfolio negatively.
From an economic perspective, inflation and growth, you know, tariffs are
inflationary.
You know, there are attacks on imports of products that...
you know that makes it harder for central banks to cut rates in the face of the
impact that the
uncertainty as well as the tariff will have on demand impacts growth of various
economies around the world
the tariff impact is likely to be stagflationary add
to inflation detract from growth and for In that environment,
we think, you know, best to be positioned in income that is reliable,
high quality credit investments and defensive durations in a world of
portfolio globally.
What do you think if the Trump tariff thing does sort of blow over in whenever
it might be, whether it be in one month or six months,
you will then, of course, adjust the portfolio accordingly?
Yeah, most definitely.
You know, the volatility that we're currently experiencing, things.
does present us opportunities.
And when we do feel like we have a bit more certainty on the economic
environment,
or we do feel like there is too much risk priced into certain economies or certain
credit
markets, we would definitely use those opportunities to enhance yield on the
portfolio,
whilst always bearing in mind we do have a capital protection bias on the portfolio,
so don't over-risk in an uncertain environment.
Why is it so important, from your point of view, for investors to lock in longer
dated instruments in this current environment.
Can you explain that, please?
Yeah, so we are actually late cycle in the global economic cycle.
We've had a period of very strong growth and that is starting to slow.
We're seeing labor markets coming back into balance.
We've seen inflation come off the highs.
We're seeing the sequential growth starting to slow.
We're late cycle.
And late in the economic cycle, it's also very uncertain with what's happening in
our economic environment.
But we may be in a position where cash rates could fall quite quickly over the
next 6 to 12 months.
It's not our base case.
We think the uncertainty keeps central banks a bit more cautious in reducing
interest rates.
However, if we do see a big growth shock, we can see US dollar cash rates fall from
their current
4.3%. Quite quickly, you could be at 3.3%.
So if you haven't locked in your cash, your income investments into longer-dated
assets,
you will be detrimented immediately in a cash investment.
And that's why we are proponents of locking in cash for a little bit longer to
enhance income over an uncertain
environment.
Reading the blurb around the Global Diversified Income Fund, Adam, I came
across a new acronym.
I know FOMO, but I didn't know FOMI, fear of missing income.
What's your view on FOMI?
Yeah, it's exactly as I've explained, Lindsay.
We're in a position in the...
In the global fixed income universe where, you know, we have 4% cash rates in U.S.
dollars yields on, you know, your 10-year treasury is above 4%.
Globally, we are being offered levels of income that we haven't really seen before
in pretty
low-risk investments.
So, you know, massive sovereign bond markets are offering you very attractive
levels of income.
So the fear of missing income is, you know, should we see an economic slowdown,
these yields will fall very quickly.
Fear of missing out on the current levels of income is what we refer to when talking
about FOMI.
Got you on that one now.
Now, I've noticed that you have a differentiation in your bond market
exposure in the portfolio.
I mean, everywhere from New Zealand and to the United Kingdom and points around and
points in between.
It's not just a case of having a look at the world map and saying, right, that's
it.
Interest rates are going to come down.
Let's just buy good quality liquid bonds.
stick them in the portfolio.
It's not quite as easy as that, is it?
Because there are so many differentiations between the economy of New Zealand and
America and Argentina,
whatever it is.
Can you sort of elaborate on your investment thinking when it comes to
bonds?
Yeah, most definitely.
I think, you know, firstly, from a diversification perspective,
I think what we learned over the start of April is that, you know, the US bond
market has behaved.
it has been quite volatile, and we've seen a big dispersion in returns across
sovereign bond markets, across the developed market space.
So, you know, having diversification across DM rates markets is very important.
And at 91, our developed market macro process, you know,
we have regional specialists covering each of these regions, each of these economies,
you know, quite thoroughly.
And in that process, I think we look to New Zealand.
and the United Kingdom to be our preferred areas for duration, for sovereign bond
investments.
And, you know, that is the thesis that those economies, you know, have had high
levels of rates.
They're currently in a restrictive policy setting.
And what you see in terms of what the market is pricing in.
is actually quite a shallow rate-cutting cycle.
And we actually saw the Central Bank of New Zealand cutting rates earlier this
week.
And we expect that, you know, those two economies will slow enough that will allow
the Central Bank of New Zealand
as well as the Bank of England the
room to cut rates a bit more aggressively than the likes of the Fed or even the ECB.
And for that reason, you know, you're likely to earn, you know, firstly,
you're currently earning more attractive yields in those economies relative to the
US, relative to Europe.
And secondly, if the market does, you know, eventually realize that these
economies are going to slow and these central banks will react,
you will earn, you know, handsome capital returns as a result of that.
Adam, thanks so much for that.
I really wish you all the success in these very turbulent times.
Adam Furlan is Portfolio Manager for the 91 Global Diversified Income Fund.
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