Summary
- Market Overview: Q2 bond markets were largely unchanged, with yields modestly higher and investment-grade spreads 4 bps wider; the Bloomberg Aggregate returned +0.07%.
- Performance: The Johnson Core Fixed Income Strategy gained +0.32% net, outperforming the benchmark in a flat market environment.
- Primary Drivers: Excess returns were led by credit positioning, particularly an overweight to Financials, the best-performing credit sector.
- Curve & Duration: Avoidance of long-duration credit added value, as short- and intermediate-duration corporates outperformed the long end.
- Sector Allocation: Strong Agency MBS selection, with an emphasis on stable-duration bonds, further supported performance.
- Outlook & Positioning: With economic indicators softening and credit spreads historically tight, the portfolio remains defensively positioned—reducing credit exposure, increasing government holdings, and maintaining a modest duration overweight versus the index.
Video Transcript
Hello, I’m Brandon Zureick, Managing Director and Portfolio Manager at Johnson Asset Management.
The bond market was essentially unchanged during the second quarter, with rates up very modestly across the yield curve and investment grade credit spreads 4 basis points wider.
As a result, the Bloomberg Aggregate Index was essentially flat, closing q2 up just 0.07%.
The Johnson Core Fixed Income Strategy had a good quarter, finishing up 32 bps net of fees.
The strategy benefited from a number of tailwinds during the past three months.
The positioning of the credit portfolio was the primary driver of excess returns.
From a sector standpoint, our above benchmark weight in financials was beneficial as bank and finance bonds were the best performing sector.
Also, our avoidance of long-duration credit was an added benefit as short and intermediate duration corporates outperformed the long end of credit curves.
The strategy has also benefitted from selection in the Agency MBS space, as our discipline of emphasizing stable duration bonds has led to solid outperformance in the sector.
Going forward, we continue to position the portfolio defensively.
While leading indicators have been sending early warning signs on the economy for over a year, there’s growing evidence that restrictive policy is starting to take a bite out activity.
For example, the unemployment rate is up 0.6% from it’s cycle low and closed the first half of the year above 4% for the first time since 2021.
Credit spreads also remain historically tight, so we’ve reduced credit weight, added government exposure and remain modestly longer duration that the Index.
Published 07/23/2024
Johnson Asset Management (JAM) is a division of Johnson Investment Counsel, Inc. (“JIC”), an independent and privately owned Midwestern based investment advisory firm registered with the Securities and Exchange Commission. Johnson Asset Management manages institutional separate account portfolios for a variety of for-profit and nonprofit organizations, public agencies, public and private retirement plans, and personal trusts of all sizes. It may also serve as sub-adviser for mutual funds. JIC’s fees are available upon request and may be found in our Form ADV Part 2A. Performance data quoted herein represents past performance. Past performance does not guarantee or indicate future results. All data is current as of June 30, 2024 unless otherwise noted. Returns and net asset value will fluctuate. To determine if this strategy is appropriate for you, carefully consider the investment objectives, risk factors, and expenses before investing. Individual account management and construction will vary depending on each client's investment needs and objectives. Investments employing JIC’s strategies are NOT insured by the FDIC or by any other Federal Government Agency, are NOT Bank deposits, are NOT guaranteed by any Bank or any Bank affiliate, and MAY lose value, including possible loss of principal. Johnson Asset Management claims compliance with the Global Investment Performance Standards. The Institutional Core composite includes all fee paying, fully discretionary, actively managed institutional fixed income portfolios with a minimum value of $500,000 and an investment objective of broad investment grade, taxable fixed income, benchmarked against the Bloomberg U.S. Aggregate Index. The US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market.
JAM’s policies for valuing portfolios, calculating performance and preparing compliant presentations, as well as a complete list of composite descriptions are available upon request. Please contact our office at 513.389.2770 or 3777 West Fork Road, Cincinnati, OH 45247. All returns reflect the reinvestment of investment income (dividends and/or interest) and capital gains. Valuations and returns are stated in U.S. dollars. Trade date accounting is used. Portfolio returns are calculated using time weighed return methodology on a monthly basis. Net returns shown reflect gross performance less the highest fee schedule for this strategy. Actual client returns would also be reduced by brokerage commissions, custodial fees, and other client paid expenses detailed in JIC’s Form ADV Part 2A.
