Macro Backdrop

  • It is an interesting time to be running portfolios given the amount of uncertainty out there.
    • As investors, we understand how severe the COVID-19 virus is and we are monitoring it on a daily basis. What is difficult is to try and get a sense of what the impact will be to the economy. Entire industries have shut down, restaurants, hospitality and airlines, and natural resource pricing have significantly declined.
    • When calculating GDP estimates, it starts with the labor market. In tomorrow’s jobless claims report, we are going to see some pretty bad figures for initial claims and that will be the beginning of a cascade of terrible high frequency macro data.
    • Our macro team believes that Q2 GDP will be down roughly 5%, a 20% annualized rate of decline give or take a couple of percentage points. Europe will also decline at a similar rate and pace with China also showing a slowdown.
Fixed Income Component of Portfolio
  • Going into this downturn, the fixed income component had been very conservatively positioned with an unusually high percentage of US Treasury bills, allowing us plenty of purchasing power, which we have been utilizing to take advantage of price and liquidity dislocations.
    • We tactically and opportunistically took advantage of dislocations in EM and Asia by shifting some money from the US fixed income to the non-US fixed component of the fund and started to add credit spread.
Equity Component of Portfolio
  • Coming into March, the fund’s targeted equity allocation was in the high 60s with fixed income equally split between US and non-US fixed income. As we moved into early March, and markets started to decline, we increased our targeted equity allocation to 70%, shifting assets out of US fixed income. Subsequent to that move, we slightly decreased our US fixed income allocation to 11%, shifting that capital into the non-US fixed component.
  • Going into crisis, we had zero exposure to the energy and utilities sectors and were underweight the financial services sector.
  • Liquidity is fine on the equity side. We have been in the markets, deploying capital from the allocation shift. We’re introducing some new businesses into the portfolio, as well as recycled capital within existing businesses where we have see valuation gaps and spreads that we believe are unwarranted.
  • This is one of those opportunities in history where there is a significant correction during a short period of time. While there is uncertainty to how long this may continue, there are wonderful businesses that we own whose valuation have improved substantially and there are a number of companies that we have been monitoring for the appropriate entry point and we now have been offered that window of opportunity to bring them into the portfolio.
Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity. Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets. Below investment grade fixed income securities may be subject to greater risks (including the risk of default) than other fixed income securities. Currency exchange rates between the US dollar and foreign currencies may cause the value of the Fund's investments to decline.

The index information contained herein is derived from third parties and is provided on an “as is” basis. The user of this information assumes the entire risk of use of this information. Each of the third party entities involved in compiling, computing or creating index information disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to such information.

This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed are as of March 25, 2020 and may change based on market and other conditions.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. Visit im.natixis.com or call 800-225-5478 for a prospectus or a summary prospectus containing this and other information. Read it carefully.

Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.

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