LO Funds
Global Climate Bond

MARKET UPDATE

Issuance in the impact bond market slowed down in February after a hectic start to the year. Bonds were issued from various entities across the maturity, rating, and currency spectrums. Governments are taking advantage of low borrowing costs and strong demand for sustainable debt. Saudi Arabia sold its first euro-denominated green bond to fund its ambitious economic-transformation plan, and it was well-received. China is also set to issue its first sovereign green bond this year. Additionally, the Republic of Uzbekistan and Basque Government both issued sustainable bonds last month.

Banks and utilities sectors showed particularly strong issuance, with key contributors including Lloyds, Credit Agricole, Enel and United Utilities. Several established names, such as Japan Housing, Agricultural Bank of China, Swedbank, Terna and NBN also came to the market last month. Banque Ouest Africaine de Developpement issued its first perpetual hybrid junior subordinated bond, paving the way for potential similar issuance from other supranational entities.

Fixed income markets were challenged in February amid growth concerns stemming from weaker data and tariff threats. As the month progressed bonds rallied alongside stocks after as an increase in PPI appeared to ease inflation concerns reignited by hawkish Fed rhetoric. As the month ended, markets were largely muted as investors analysed economic data, geopolitical developments and the latest volley of tariff threats.

Despite the barrage of tariff and policy-related headlines coming out of the new US, European credit remained resilient with spreads ending the month largely unchanged.

Elsewhere, in Japan the BoJ signalled a readiness to move ahead with rate hikes if inflation developments evolve; however, Policy Board members have recently turned more hawkish in their communications on the back of strong wage and price data.

Portfolio Positioning

The fund outperformed the benchmark over the month (1.54% vs. 1.43%), predominantly due to the security selection and the underweight weighted duration position in US dollar denominated bonds, bringing the since inception return if the portfolio to 0.56% vs. 0.50% for the benchmark. This decline was partially mitigated by individual security selection in Chinese renminbi bonds and curve positioning in US dollar denominated bonds. Additionally, the underweight position in euros had a negative impact on relative performance.

In bond market terms, we are slightly underweight the dollar bloc, underweight Asia, and overweight Europe, although the sizes of these positions have been reduced recently. The fund’s overall underweight duration position is focused predominantly in China, given the low level of yields in a global context and recent growth supportive economic measures. The fund is also slightly underweight US duration believing that the US economy is likely to remain more resilient than other global markets. Consistent with the resilient US view we reduced our US dollar underweight position and funded most currency positions against Euro.

Within Europe, we hold small overweight positions in the Norwegian krone and UK Sterling denominated bond markets. We slightly increased our weighting in UK sterling denominated bonds relative to euro bonds due to weakness in UK yields after the budget announcements. Within the dollar bloc, now underweight the Canadian bond market relative to the US.

During the course of the month we added some more green MBS, bringing our total exposure to above 8% for the first time. Earlier in the month we reduced exposure to the euro denominated bond market, selling into Australian dollar denominated bonds. We also added a small amount of exposure to South Africa using supranational issuance.

We took the opportunity to purchase a new sustainability bond in the primary market from Banque Ouest Africaine de Développement, a SPECTRUM aligned issuer. The proceeds of this security are going towards affordable energy, infrastructure and social projects. We added more green bonds in secondary in US dollars, including one green bond issued by American Water Works, and a green MBS from Freddie Mac.

Contributors

• Security selection in Chinese renminbi-denominated bonds

• Curve positioning in US dollar denominated bonds

• Curve positioning in euro denominated bonds

Detractors

• Underweight weighted duration position in US dollar denominated bonds

• Security selection in US dollar denominated bonds

• Underweight position in euro