February net performance was positive at 1.93% (USD Z). The portfolio had a good month for capturing alpha as markets priced in a greater level of uncertainty in a more volatile environment.
The source of the volatility was the Trump administration and its first full month of office which saw a record number of executive orders generated at an unrelenting pace. Tariffs vs Canada, Mexico and China were announced which unsettled economists, despite being rolled back to April. Geopolitical uncertainty came via disturbing speeches regarding potential US sovereignty over Canada, Greenland, Panama and Gaza. The increased unpredictability of US policy implementation led to the market pricing in an increased probability of recession and central bank cuts as a natural response to federal layoffs and frozen corporate investment plans.
The most worrying headline for Europe was a combative VP Vance hinting at a US extraction from NATO in all but name. Over the month the portfolio added four new strategies while one trade hit its target, and three trades were unwound. Cross Currency Interest Rate trades were by far the most profitable Risk Type within the portfolio for the month. Performance was led by short end rates for Canada reversing some of the recent negative wides versus the US. Another strong element was the US curve steepening relative to the UK and CAD. Additionally, Australian rates continued their recent compression vs NZD.
Spread trades were the next biggest positive contributors, with long end BTP’s outperforming shorter maturities on ASW. Canadian forward bond spreads also richened well over the month, with the French Inflation bonds continuing to cheapen benefitting our RV position. The only negative was a widening of Gilt spreads on fiscal concerns.
Curve trades continued to perform strongly, benefitting from the re-steepening of interest rate curves that the fund has exposure to, notably in US, UK and Australia. In addition, idiosyncratic relative value curve relationships have partially corrected over the month in UKT and NZGB bonds. FX, Duration and Volatility trades were modest positives over the month; however, these were mostly offset by a draw from our Inflation positions.
