First Quarter 2024 Commentary | Tactical Sovereign Bond Fund

Market Commentary

During the first quarter of 2024, major U.S. stock indices advanced to record highs, paralleled by a historic peak in gold prices. Notable strength was also observed in the price of metals and crude oil. At the time of writing, the U.S. GDP Now projection, a model estimate for real GDP growth, stood at 2.4%, substantially surpassing the anticipated 'trend growth' rate. Furthermore, headline inflation exhibited a consistent acceleration for the third consecutive month in 2024. Both core and 'Super Core' measures (core services excluding shelter), showed escalating upward trends. Personal spending was markedly robust.

Consequently, given the prevailing levels of the Federal Funds Rate, the Federal Reserve's (“Fed”) stance cannot be deemed restrictive. The consensus view, which previously skewed towards unrealistic expectations of rate cuts, is now undergoing a recalibration. The Federal Reserve finds itself in a precarious position where it appears less inclined to combat inflation, especially amidst robust growth indicators and resurging price pressures.

The rationale behind the 'Powell Pivot,' speculated by some to be politically motivated, now faces a multitude of challenges, rendering rate cuts increasingly difficult to justify. Nonetheless, the market continues to factor in approximately 60 basis points (“bps”) of cuts by the Fed this year. This represents a significant reduction from the previously anticipated 175 bps in rate cuts, and in contrast to the Fed's own forecast of 75 bps in cuts.

This disparity between market expectations and the macroeconomic environment is exacerbated by extravagant spending by the Administration, fueling a growing inclination to diversify away from the U.S. dollar. Consequently, gold and other commodities are experiencing a rally, further contributing to inflationary pressures in the near future.

This scenario, characterized as a 'no landing' situation as opposed to a 'soft landing' or 'hard landing,' will persist until economic indicators suggest otherwise. With the U.S. economy continuing to expand at or above trend levels, inflation is expected to remain persistent or even escalate until substantial shifts occur. Consequently, investors are likely to demand higher yields in the longer end of the U.S. bond market.

Comparatively, the Canadian economy exhibits relative weakness in relation to the U.S., although it has yet to slide into recession. Despite certain vulnerabilities within the Canadian economy, overall growth remains positive, likely buoyed by the stronger performance of its U.S. counterpart. Unlike the Fed, the Bank of Canada has not hinted at potential interest rate cuts. The inversion of the Canadian yield curve, akin to the U.S., suggests an eventual upward pressure on yields, albeit in a more subdued manner.

Fund Positioning

The Tactical Sovereign Bond Fund outperformed its benchmark in the first quarter of 2024 (“Q4”), with a return of 0.42% vs a return on the Index of -1.12%. Effective Duration of the Fund at the end of Q4 was 0.1 years.

Performance through the quarter was primarily attributable to its short duration strategy and participation in tradable rallies within the bond market. This strategy is expected to persist into Q2 and beyond, contingent upon shifts in macroeconomic data or the emergence of geopolitical events or financial disruptions. While capital preservation remains a key tenet of the Fund’s strategy, the Fund benefits from its ability to capitalize on evolving market dynamics within bond and currency markets.

1Series F, total return CAD terms
2Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. A fixed income security (or fund) with a higher (longer) duration would indicate a higher sensitivity to interest rates and thus, higher interest rate risk.

Company 1 Year 3 Year Since Reorganization3
(August 27, 2018)
5 Year Since Inception
(July 25, 2016)
Caldwell Tactical Sovereign Bond Fund Series F 5.1% -0.2% 0.8% 1.1% 0.2%
S&P Canadian Sovereign Bond Total Return Index 4.8% -2.3% 0.9% 0.6% 0.3%

3The Fund, following a security holder vote, changed its fundamental investment objective August 27, 2018 and also reclassified former Series I units to the current Series F. For more information refer to the Simplified Prospectus of the Fund.

The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Rates of returns, unless otherwise indicated, are the historical annual compounded returns including changes in unit value and reinvestment of all distributions and do not take
into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.

Publication date: January 22, 2024.

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