Published on February 6, 2020
The 2019 Treasury rally continued into January as the Coronavirus spread through China and cases began to be reported globally.
January 2020 Review:
- The rally of 2019 continued in January, largely paced by a flight to quality bid for Treasuries as the novel Wuhan Coronavirus spread rapidly through China and saw some cases reported globally. Investors likened the outbreak to SARS from late 2002-early 2003, which also featured a strong rally in Treasuries. The fear of a resulting global slowdown forced the 10-year Treasury yield lower by 40 basis points, from 1.92% to 1.52%. Treasuries returned 2.44%.
- Unsurprisingly, mortgage and corporate spreads widened. The mortgage sector delivered 53 basis point of negative performance versus duration-matched Treasuries, while corporates underperformed duration-matched Treasuries by 80 basis points. However, both still delivered positive absolute returns (0.70% and 2.34% respectively).
- We sold our TIPS when the price of oil spiked during the flight to quality after the Iranian bombing of the Iraqi base in early January. We replaced these with shorter duration Treasuries.
- The portfolio (+0.36%) underperformed the Bloomberg Barclays U.S. Aggregate Bond Index (+1.92%) primarily due to its reduced duration exposure and its underweight in Treasury securities relative to the benchmark.
Standardized performance can be viewed here: Monthly and Quarter End Performance
Chief Investment Officer – Total Return
The Fund was rated 4 Stars against 270 funds Overall, 4 Stars against 270 funds over 3 Years in the Nontraditional Bond category based on total returns as of 3/31/21.
The Morningstar Rating™ for funds, or “star rating,” is calculated for mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period has the greatest impact because it is included in all three rating periods.
© 2021 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance does not guarantee future results.
Opinions expressed are those of the author, are subject to change at any time, are not guaranteed and should not be considered investment advice.
Performance data quoted represent past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be higher or lower than the performance quoted. Performance data current to the most recent month end may be obtained by calling shareholder services toll free at (866) 236-0050.
FOMC refers to the Federal Open Market Committee.
The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) is an unmanaged index which is widely regarded as the standard for measuring U.S. investment grade bond market performance. This index does not incur expenses and is not available for investment. The index includes reinvestment of dividends and/or interest income.
Sector returns above are those of the Bloomberg Barclays U.S. Aggregate Bond Index.
Mutual fund investing involves risk. Principal loss is possible. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities.”
A basis point is a unit that is equal to 1/100th of 1%.
TIPS refer to Treasury Inflation Protected Securities.
Investment grade bonds are bonds with high and medium credit quality assigned by a rating agency. For Standard and Poor’s, investment grade bonds include BBB ratings or higher. For Moody’s, the cutoff is Baa.
A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
Duration measures the sensitivity of a fixed income security’s price (or the aggregate market value of a portfolio of fixed income securities) to changes in interest rates. Fixed income securities with longer durations generally have more volatile prices than those of comparable quality with shorter durations.
The Federal Funds Rate is the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis.
In the money is a term used to indicate that an option has a strike price that is favorable in comparison to the prevailing market price of the underlying asset.
Out the money is a term used to indicate that an option has a strike price that is unfavorable in comparison to the prevailing market price of the underlying asset.
The Osterweis Funds are available by prospectus only. The Funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectuses contain this and other important information about the Funds. You may obtain a summary or statutory prospectus by calling toll free at (866) 236-0050, or by visiting www.osterweis.com/statpro. Please read the prospectus carefully before investing to ensure the Fund is appropriate for your goals and risk tolerance.
Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC.