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07 Apr 2022

Markets in a nutshell — March 2022

Developed market equities posted their first monthly gain this year. Hopes of a Russia/Ukraine war ceasefire provided some lift to market sentiment after a decidedly tetchy start to the year. Persistent US and global inflation and the US Federal Reserve forecasting up to eight interest rate increases for 2022 remain headwinds. Emerging markets lagged after Russian equities were removed from most global indices at a zero value and Chinese bourses struggled on further zero-COVID policy lockdowns.

Developed market bond yields rose markedly on expectations that rising global inflation may not be as transitory as first believed. The Fed raised rates by 0.25%, initiating the long-anticipated rising rates cycle. It also indicated that the termination of its bond buying program and additional rate increases will happen quicker than previously guided. The US 10-year government bonds sold off as markets eventually started to price in higher inflation and the more hawkish Fed language started to take effect.

The zero allocation to foreign bonds protected investor capital as the asset class delivered negative returns. However, the managers in the Foord International Fund latterly took a small yield-enhancing position in two-year US Treasuries as the gap between cash rates and the short end of the bond curve continued to widen.

Industrial and soft commodities increased on supply concerns following Russia’s invasion of Ukraine. In addition to Russia being a major exporter of fossil fuels, Russia and Ukraine combined account for one-third of global wheat production. Rising global food inflation now seems almost certain in the coming months, adding fuel to the fire of the managers’ base case for inflation expectations rising further than is currently factored in. Precious metals gold and silver rose amid the increased volatility and rising geopolitical uncertainty, living up to their billing as important diversifiers and alternative stores of value.

The US dollar strengthened against all major currencies, benefiting from the Fed’s hawkish tilt and its safe-haven status as a global reserve currency.

The Foord International Fund delivered another month of solid absolute returns. Year-to-date performance is +5.5% against -5.2% for the MSCI World Global Equity Index and -4.9% for its Morningstar peer group.  The fund continues to demonstrate its conservative, safety-first approach. Importantly, there has been no binary-risk market timing activity, with the average equity allocation of the fund just above 50% over the three months.

In March, performance of the Foord International Fund was driven by equity security selection with holdings in leading agricultural chemicals companies FMC and Bayer contributing the most to performance on buoyant agricultural commodities prices. The S&P 500 hedges materially protected capital during January and February but detracted in March after US equities reversed their declines.

The Foord Global Equity Fund underperformed in March but remains approximately 1.5% ahead of the benchmark year to date. March performance was driven by allocations to materials companies Nutrien and Pan American Silver as well as energy holding TGS ASA. Chinese consumer discretionary holdings including JD.Com and YUM China were the largest detractors as stringent COVID-19 lockdowns were reimposed in some major cities.

The managers anticipate further volatility in the months ahead as central banks walk the tightrope between reigning in rising inflation expectations without pushing economies into recession. The second-round global inflationary consequences of the conflict between Russia and Ukraine has made this tightrope tighter.

The funds have been well positioned for this environment, given our long-held views on the (arguably) unintended market consequences of a decade old bout of unprecedented monetary and fiscal stimulus. Foord’s “safety first” mantra is serving investors well through this period of elevated risk.

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