The H Fund (USD) produced a return of +2.57% for the month, bringing the total return year to date to +3.14% and the 12 month rolling return to +18.93%.
Five out of seven themes made money in March.
The spread on the Merrill Lynch US HY index tightened from 660bps over to 585bps over, while High Yield bond funds received inflows of $1.8bn in March. Investment grade bond spreads are back to the levels last seen in November 2007. In the first quarter, indices of defaulted US bonds and loans are up 25% and 8% respectively. Credit Spreads in Transition was the top performing theme in the portfolio.
Net investment flows into the Asian region in the first quarter are estimated to have totalled $10bn, compared with a bit over $50bn for the whole of 2009. Yet the contribution that the Asian Consumer Power theme made in March was driven by favourable news at the operating level in many companies held by the funds involved. It is encouraging that the managers report a continuing flow of new stock ideas at attractive valuations.
Our Energy Market Opportunities theme was the third largest contributor to March returns. Crude oil broke out of the $70-80 range in which it had been stuck. This move was accompanied by a fall in volatility and, less surprisingly, by a decline in inventories both in the crude market and in certain refined products. It was also significant that oil rose against a background of dollar strength. The optionality built into the fund of our oil trading manager benefitted from these developments. The equity specialists in the theme had a mixed month.
Japan Corporate Event Opportunities had its best result in some months.
During March, Australian rates rose another 25bps, making a rise of 100bps since October. Malaysia became the first emerging Asian jurisdiction in which rates rose; India followed soon after. The posture of Central Banks in Canada, Sweden and Switzerland also changed. We do not expect the major manufacturing and service economies to raise rates now or in the near future, but natural resource based countries are experiencing different pressures and must adjust policy accordingly. Traditional relationships between commodity demand, inventories and prices are weaker today than they have been historically. This may reflect new demand patterns, the increasing influence of the financial investor or something completely different. But it represents another potential source of volatility in the macro picture. Relative Sovereign Opportunities made money in the month and we added a fourth manager at the beginning of April so increasing the theme weighting to 22.25%.
Global Financial Sector Dislocation lost money. We have submitted redemption notices for two of the three managers in the theme. In one case, this followed a change in key personnel. The second fund has maintained an exposure to small and midsized US Banks expecting weakness in their loan books to be reflected in stock price weakness. It is a perfectly logical expedient for the FDIC to broker deals for the absorption of failing Banks into less vulnerable neighbours. However, the timing of these moves is hard to forecast and shareholders often get a premium for their co-operation. This makes for a treacherous and unappealing investment environment for a manager with a short bias.