CFM Institutional Systematic Diversified (PIM0034AU) Report & Performance

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CFM Institutional Systematic Diversified Fund Commentary December 31, 2020

Risk assets finished the year in positive territory – global developed markets posted a 4.5% gain in December, as per the Morningstar Developed Markets index, while emerging markets gained 7.6%. The two indices ended 16.3% and 19.6% higher for the year respectively. Ample liquidity, an overtly dovish Fed, and optimism about the roll-out of Covid vaccines all supported investor sentiment and risk appetite.

With a higher level of confidence about economic growth, as well as a continued slump in the greenback, commodity markets rallied. Energy markets especially had a good month, with Brent gaining 8.9%. Oil reached a 9-month high, and broke through $50 per barrel for the first time since March. The vaccine roll-out and stimulus package negotiated in the US providing support. Industrial metals, especially owing to the substantial fiscal stimulus brought to bear by China, made noticeable gains. The US Treasury yield curve steepened. The Fed maintained its dovish rhetoric at its December FOMC meeting. Brexit negotiations made it to the 11th hour before a deal was struck. The US dollar continued to trend lower. The DXY index lost 2.1%, ending nearly 13% lower than the March 2020 peak.

Equity & Credit Indices
Net long exposure in equity indices realised positive returns as global markets ticked higher. Investors found optimism in a bevy of positive news: a new stimulus package agreed in the US, the Federal Reserve asserting its very accommodative policy position, and a roll-out of Covid-19 vaccines kicking off. The S&P 500 rallied through new record highs, closing 3.8% higher over the month. ). Consequently, the strategy’s long position in the Russellmini realised the most gains. Emerging markets, however, fared even better – especially Asian bourses, as institutional buyers rushed back into the asset class (capital flows into the asset class as per the IFF showed a substantial uptick as risk improved, commodity prices and tourist numbers climbed, while an ultra-dovish Fed is keeping a lid on any interest rate hikes that might otherwise be dollar positive). Consequently, the strategy’s long position in the Kospi realised significant gains, the Korean benchmark also having found favour among foreign buyers and closing 12.8% higher. A short position in the AEX, however, was a key detractor. The Dutch benchmark gained 5.4% along with most European bourses on guarded optimism about an imminent vaccination program, and the finalisation of the UK-EU Brexit negotiations.

Interest Rates
Aggregate net long exposure in Bonds contributed positively as benchmark yields on G7 (ex-US) economies, for the most part, ended the month lower. The US Fed kept rates unchanged during its meeting on 15-16 December and reiterated its commitment to bond purchases until its mandate is reached. Longer-dated yields subsequently rose, and the US curve steepened over the month, the longer end having lifted, while the short end moved slightly lower. The US 10-year rose 7.5 basis points, while the longer-dated T-Bonds rose close to and above 8 basis points. The strategy’s short exposure to the US T-Bond contract fared best. The strategy’s long exposure in Eurex Euro-Bobl future dragged the performance.

FX
FX returns from a near-neutral US dollar position were flat. The US dollar – having trickled lower against most major global currencies since March – lost another 2.1% this month. The DXY Index fell below 90 points for the first time since April 2018. A dovish Fed, rising fiscal and current account deficits as the US government increases spending to tackle coronavirus related business shutdowns, along with a risk-on sentiment in global markets, put pressure on the greenback. The long position in the Swiss franc stood out and realised positive gains. Investors have been seeking out the safe-haven franc as financial markets remain vulnerable to the economically damaging effects of Covid-19. The franc rallied 2.7% against the dollar, this despite the Swiss National Bank (SNB) having kept interest rates at negative 0.75% – one of the lowest in the world. Moreover, attempts by the SNB to steady the franc by hoovering up US dollars prompted the US Treasury to label the country a currency manipulator – the franc made further gains on 16 December following the announcement. Amongst the losses, a short Singapore dollar position fared worst as the Asian country’s currency gained 1.6%. The Singapore dollar notched-up a second consecutive month of gains as the economic prospects of the nation improved – retail sales, for instance, showed an increase of 7.3% in November

Short Volatility: +0.12%
The Short Volatility strategy delivered positive returns, with delta hedged options on all asset classes ending either flat or better. Market volatility moved, for the most part, mostly sideways, bar a brief spike in volatilities on 21 December as Congress was about to pass a $900bn Covid relief package. The CBOE VIX index averaged ~26 points over the period, but touched a high of 33 points on 21 December. Delta hedged options in Equity Indices, as a result, delivered positive PnL with those options in the Japanese Nikkei the most positive. Delta hedged options in FX also ended in positive territory, with most currency pairs realising gains. Delta hedged options in the USD-euro pair, booked minor losses. The euro breached the 1.2 level for the first time since Q2 2018 on strong euro zone survey figures, as well as a final agreement reached on Brexit. Meanwhile, 1-month at-the-money implied volatility on most currency pairs also moved sideways, bar the pound as Brexit negotiations went down to the wire.