The fund returned a gain of 0.74% in July due to gains in commodities and equities.
Global equity indexes finished July higher with only a few exceptions. In the U.S., over 80% of companies beat analysts’ expectations for the second quarter. This caused U.S. equities to end the month nearly 4% higher. Elsewhere, China finished July nearly 3% lower due to ongoing trade tensions.
Commodity returns were positive for the month as gains in precious metals, meats and softs more than offset losses in grains and energies. Precious metals profited from general weakness in the sector, as gold made new twelve-month lows following Federal Reserve Chairman Powell’s testimony resulting in a stronger U.S. dollar. On the other hand, the energy sector posted losses due to oversupply concerns stemming from a surge in US oil stocks and concerns that Saudi Arabia and Russia may increase production.
Yields rallied in July and ultimately settled towards the high end of the range with the U.S 10-year yield trading just under 3% at month end. Headlines about President Trump’s dissatisfaction with higher rates caused the U.S. dollar to sell off somewhat mid-month. However, Chair Powell’s view that the best path to maintain a strong economy, with inflation near the Fed’s target, and near full employment is to gradually raise rates. This caused the US dollar to rebound and yields to settle close to 3%.Performance (as of 7/31/2018)
July was the first month where trade tensions moved from threats to actions with the first round of tariffs being implemented. The long-term impact will take many quarters to be seen, but the U.S. Federal Reserve does not seem overwhelmingly concerned. Their commitment to a well telegraphed and consistent gradual tightening has allowed markets to remain calm for the time being. More so, the equity markets continue to look resilient and buoyed by positive earnings.
However, strength in the U.S. dollar leads to more questions than answers and may prove to be a headwind. The relative outperformance of the greenback is likely to have a tightening effect on financial conditions. The sustainability of a tightening Fed, rising equities, and strengthening dollar is unknown. New equity highs in August could provide a negative sentiment for the rest of the year, yet it has not paid to bet against stocks. Broad commodity exposure has the potential to benefit from independent market trends that are less reliant on a clear macro picture. While uncertainties abound, we remain committed to robust risk management and capturing long term trends wherever they may develop.
Equities broadly strengthened during the period with the U.S. outperforming other countries due to continued outperformance of earnings. In the U.K., ongoing Brexit ramifications caused the British equity market to underperform. In Asia, China struggled to shake off trade tensions and ended the month down more than 2%.
We closed a long position in the Topix index and opened new long positions in Asian equity indexes in China and Taiwan. These changes caused our overall exposure to equities to increase slightly during July.
U.S. 10-year yields traded towards the high end of the current range and ended the month just under 3%. Concerns that the Bank of Japan was considering a strategy alteration during their end of month meeting caused global yields to rally. In Europe, political resignations and concerns of a no-confidence vote in the U.K. led concerns that the Bank of England would not hike interest and caused rates to fall for a short period of time before rebounding ahead of the August 2nd meeting.
We had no fixed income position changes during the month and our overall exposure to the sector remained fairly stable during July. July.
The U.S. dollar ended the month nearly unchanged versus its major counterparts. The greenback outperformed versus the Japanese yen, but underperformed versus the, Swiss franc, Australian and New Zealand dollars.
Our only currency position change was in Japanese yen versus the U.S. dollar. We initiated a new short position in yen, adding to our long U.S. dollar exposure in the greenback. This minor change saw our overall currency exposure remain fairly stable during the month.
Performance in agricultural commodities was mixed during the month with short positions in lean hogs and sugar adding nearly 1% of gains to the portfolio during July. Meanwhile, short grain positions were adversely effected by rallies in beans, corn and wheat. The energy complex generally weakened during the month and long positions in oil detracted from performance. Oil prices fell sharply during the first half of the month on the heels of increased supply expectations. Brent crude ended the month nearly 7% lower after rebounding slightly in the last week due to ongoing geopolitical tensions. In precious metals, gold fell sharply in line with a stronger U.S. dollar and ended the month more than 2% lower.
We opened new short positions in gold and silver and closed a long position in aluminum. In agriculturals, we opened a new long position in milling wheat and closed a short position in rapeseed. These changes caused our overall commodity exposure to decrease slightly, yet it remains our largest risk allocation for the time being.