Federated Project and Trade Finance Tender Fund XPTFX

Product Type Asset Class Category
Closed-End Fund Alternative Trade Finance
As of 03-31-2018

Market Overview

In February, the World Trade Organization’s World Trade Outlook Indicator suggested that the recovery of trade in 2017 was set to continue into 2018 with particularly strong performance in the Container and Air Freight sectors. This followed the World Trade Organization upgrade of its estimate for the growth in volume of world trade to 3.6% for 2017.  These reports pre-date the tariff and trade war headlines. 

The question in the minds of investors is whether trade finance will be adversely affected. Financial markets have seen volatility, with the S&P currently off 10% from its highs, but so far there has been no impact on the real economy.

Trade will always continue, and Bloomberg Economics indicates that the global economy will suffer the worst of a trade war around 2020. The study estimates that global trade will be just 3.7% lower relative to a baseline of no change in tariffs.

The behavior of trade and trade finance during the financial crisis provides some context. Before the financial crisis, the value of global merchandise trade grew from $12.1 trillion in 2006 to $16.2 trillion in 2008; it sub sequentially fell to a low $12.6 trillion in 2009. Following 2008, the perception of risk increased and spreads on trade finance widened.

Tariffs and the anticipated counter tariffs will introduce greater inefficiency into global trade with the usual unintended counterproductive consequences. A wider global tariff war is considered unlikely, and it is important to note that trade between economies other than the U.S. will only be affected by ripple effects from the disruption of U.S. trade, including commodity price volatility and market substitution.  The portfolio’s focus has been on trade between emerging economies, so called “south-to-south” trade.  As many regional and bilateral trade agreements are already in place, we expect south-to-south trade will not be particularly affected; indeed, initiatives like the recently signed Comprehensive Progressive agreement for the Trans-Pacific Partnership (CPTPP) and China’s Belt and Road Initiative (BRI) will accelerate the growth of these south-to-south trade flows.

Looking Back

During the first quarter of 2018, regional allocations changed with investments maturing in Asia, Eastern Europe and Middle East and North Africa, and an increase in portfolio weights in Sub-Saharan Africa and Latin America. The Sub-Saharan African exposure continues to enjoy the highest coupon and has the largest portfolio exposure and therefore was the largest contributor to performance for the quarter. All regions provided a positive contribution, with the lowest contributions coming from Latin America and Asia.

Within sectors, the portfolio added exposure in the Utility and Consumer Non-Cyclical sectors, and saw a reduction in the Banking sector as positions matured. The Energy sector provided the largest return contribution; however the Foreign Sovereign and Services sectors both had higher average coupons, but lower overall portfolio weights.

How We Are Positioned

The fund currently has exposure to 29 countries and has recently added positions in Ukraine and Nigeria. Exposure to Turkey was reduced as assets within the Banking sector have matured.  We continue to seek opportunities in assets that offer an attractive risk/reward profile.

Fund Performance

For the first quarter of 2018, Federated Project and Trade Finance Tender Fund returned 1.08% (net of all fees) compared to U.S. 1-Month Libor return of 0.41%. The fund’s performance was primarily driven by the income earned on its assets. There were no other significant drivers to performance during the reporting period.