THE GUARANTEED RETURN FUND US$ ANNUAL REPORT 2016 The Deposit Administration Fund generali-worldwide.com
INDEX 1 Global Economic back-drop & Macro Situation... 3 2 US Financial Markets... 4 3 The US Dollar Guaranteed Return Fund... 5 3.1. Performance comparison chart... 5 3.2. Asset distribution by sector... 6 3.3. Asset distribution by credit rating... 6 THE GUARANTEED RETURN FUND US$ ANNUAL REPORT 2016 Page 2 of 7
1 Global Economic back-drop & Macro Situation US economic growth disappointed during the first half of the year, with annualised growth of only 1.1% in the first quarter, growing modestly to 1.4% in the second quarter. Growth was impacted by a drop in the level of oil sector investment, due to the weak oil price. With capacity reduction ongoing, growth in the sector averaged only 1.5% throughout 2016. In contrast to the headline economic growth rate, consumer activity was relatively robust, supported by continued improvement in US employment. Looking at the US jobs market in more detail, earlier in the year we saw improved employment prospects increasing the participation rate. Whilst a larger workforce, with more people seeking the same number of job opportunities, can serve to increase the unemployment rate, we actually witnessed a gradual decline throughout 2016, ending the year at 4.7%. This served to highlight the underlying strength of the jobs market. Against this backdrop wages began to accelerate, albeit moderated by the changing composition of the workforce (eg. relatively well-paid Baby Boomers retiring). Moreover, subdued headline inflation moderated employees wage bargaining ability. Longer term, market expectations are that the expected further tightening of the labour market will eventually lead to accelerating wages, some evidence of which was seen towards the end of the year. Inflation, always a focus for Central Banks, was subdued in the US in the first half of the year. This was largely due to the decline in the Oil price, which remained under $40 a barrel for most of the first quarter. The low point for the US Consumer price index during 2016 was in August, when it hit 0.8%. As the impact of historical price declines disappeared from the data calculations, inflation quickly began to normalise, reaching 2.1% in December. As market commentators began to argue that the US Federal Open Market Committee could once again begin considering interest rate hikes, sentiment started to become denominated by political factors as the US Presidential elections approached. In November, a surprise conclusion to the election campaign for America s 45th President, saw Republican candidate, Donald Trump secure a victory with 304 electoral votes over Hillary Clinton s 227. Whilst he was victorious by a healthy margin he failed to gain the popular vote. Also of note was that the election gave the Republicans unified control of Congress and the Presidency for the first time in over a decade. The election of Trump ignited a reflation trade with optimism centring on; simplification of the US tax system (for both individuals and corporates), anticipated infrastructure spending and a general pro-business bias. Towards the end of the year, the summation of Economic data, sentiment indicators and fiscal tailwinds proved enough to warrant a US interest rate hike and towards the end of the year, we saw a 0.25% increase mid-december to 0.75% as the US continues its slow path to the normalisation of US interest rates. THE GUARANTEED RETURN FUND US$ ANNUAL REPORT 2016 Page 3 of 7
2 US Financial Markets In the US bond market, 2016 started with 5 year US Treasury yields at 1.76% and 10 year US Treasury yields at 2.27%. They end the year slightly higher at 1.93% and 2.44% respectively. With yields slightly higher at the end of the period, 3-7 year US Treasuries produced a total return of 1.25% vs. 2015 s +1.76%. Once again bond markets experienced a strong start to the year amid equity market turmoil. The beginning of the year saw the safe haven bid further supported by a more dovish stance by the Federal Reserve, implying a slower pace of US Interest rate hikes which steepened the US yield curve significantly. In the second quarter yields fell further, notably after the result of the UK referendum when the UK voted to leave the EU, referred to as Brexit. With Global markets concerned over the potential impact that this could have on both the UK and Europe, US Government Bond yields fell further as markets eliminated the 2016 rate hikes that had previously been priced in. At the extremes, the yield on intermediate dated bonds compressed by almost half as investors sought the safety of Treasuries over riskier equities. In the third quarter the trend changed, with US yields increasing slightly as riskier assets, particularly equities and corporate bonds, started to recover from the negative news flow of the first half of the year. Whilst talk re-emerged of possible interest rate hikes, the moves higher in bond yields were somewhat tempered by concerns over the impending US elections. In the fourth quarter the unexpected outcome of the US Presidential Elections saw the market radically change their expectations of both inflation and short term growth. With a significant fiscal stimulus expected and the potential for higher inflation and budget deficit, 10 year US Treasury yields surged by 0.8% to a high of 2.6%. With asset price volatility high and interest rates moving higher during the year, once again it was a good year for the US dollar. In 2016 the American currency strengthened against most major currencies. Where a dollar investor held overseas currencies, losses were again typically experienced. Holders of Euro s and Sterling cash deposits would have seen the value of them decline by 3.1% for Euros and 16.3% for Sterling (measured in Dollar terms). Bucking the trend, against the Japanese Yen the Dollar fell slightly by 3.1%. THE GUARANTEED RETURN FUND US$ ANNUAL REPORT 2016 Page 4 of 7
3 The US Dollar Guaranteed Return Fund As detailed in the following charts the declared rate on the US dollar Guaranteed Return Fund (Deposit Administration Fund) was 1.75% for 2016. This reflects another good performance by the fund, with the declared rate being higher than both the yield on shorter duration assets and many bond market indices. In terms of portfolio construction, the bonds backing the fund remain extremely high quality with 64% of the fund backed by AAA rated securities. The modified duration of the assets backing the Guaranteed Return Fund remains at 3 years, giving some protection from potential increases in bond yields. We continue to actively manage the assets within the fund to provide the best outcome possible in 2017. 3.1 PERFORMANCE COMPARISON CHART 16 14 12 5 year US Treasury Yield Cash Yield Deposit Administration Fund Yield 10 8 6 4 2 0 THE GUARANTEED RETURN FUND US$ ANNUAL REPORT 2016 Page 5 of 7
3.2 ASSET DISTRIBUTION BY SECTOR Government Banks Oil & Gas Software Cosmetics/Personal Care Diversified Financial Services Pharmaceuticals Food Computers Miscellaneous Manufacturing Cash Transportation 3.3 ASSET DISTRIBUTION BY CREDIT RATING AAA AA+ AA AA- A+ A THE GUARANTEED RETURN FUND US$ ANNUAL REPORT 2016 Page 6 of 7
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