Federated Project and Trade Finance Tender Fund XPTFX

Product Type Asset Class Category
Closed-End Fund Alternative Trade Finance
As of 09-30-2018

Market Overview

According to their latest outlook indicator, the World Trade Organization (WTO) expected trade expansion to slow in the third quarter of 2018. The reading of 100.3, published in August, was below the previous value of 101.8 and only just above the baseline value of 100 for the index. It signaled an easing of trade growth in the coming months and is in line with medium-term trends. This loss of momentum reflected weakness in component indices including export orders and automobile production and sales, which appear to be responding to the ratcheting up of trade tensions. Other factors which make up the index, notably container port throughput and electronic component sectors, have remained strong.

Trade tensions between America and China have escalated with tit-for-tat actions and reactions. On September 24, the U.S.-imposed tariffs of 10% (rising to 25% in 2019) on $189 billion of Chinese exports and threatened further tariffs should the Chinese retaliate. The Chinese promised to do so with duties on $60 billion of U.S. goods. Fears of an escalation into a wider global trade war, however, seem unfounded.

Since the first round of limited tariffs came into effect on June 6, there have been few economic releases. Alarming headlines have caused market volatility but have not translated into economic weakness; indeed the effect of current and proposed tariffs is expected to be muted. Goldman Sachs estimate that the current 10% tariffs will raise U.S. inflation by just 0.03%, and the January 2019 25% tariffs by only 0.08%.

Recent PMI data has suggested a moderation in global growth but not a contraction as in August only four countries within the G20 posted PMIs of less than 50. Economists have revised down estimates of global GDP growth, with Fitch recently reducing their 2019 estimate by 0.1% to 3.1% and warned of further downside risks. The relationship between trade and gross domestic product is well researched, with the long-term elasticity of trade to GDP estimated at 1.5, so that we can expect global trade to grow at 1.5 times global GDP growth in the long term and therefore investment opportunities to persist.

Importantly, the portfolio continues to focus on trade between developing economies, so called “South to South” trade, these economies are both the drivers of global GDP growth and unconcerned with U.S.-China trade tensions.

Looking Back

Over the third quarter of 2018, the fund increased its regional allocations to Latin America and reduced them to Asia, Eastern Europe and the Middle East and North Africa. Sub-Saharan Africa and Western Europe were largely unchanged. The fund’s highest coupons were in the Eastern Europe and Sub-Saharan Africa regions, with the largest contribution to performance coming from Sub-Saharan Africa where the fund has its largest exposure. All regions provided a positive contribution, with the lowest contributions coming from Western Europe and Asia.

Within sectors, the fund added exposure to Telecoms, Basic Industry, Banking and Foreign Sovereign and reduced exposure to Energy and Consumer Non-Cyclical as assets matured. Cash increased over the quarter. The largest contribution to returns came from the Energy and Basic Industry sectors where the fund had its highest weights. All sectors provided a positive return.

Fund Performance

For the third quarter of 2018, Federated Project and Trade Finance Tender Fund returned 1.16% (net of all fees) compared to the U.S. ICE 1-Month Libor return of 0.54%. 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.

How We Are Positioned

The fund added positions in South Africa and Colombia and increased exposure to Brazil, Tunisia and Ghana. Exposure to Pakistan, Nigeria, and Egypt were reduced as short-term assets matured. We continue to seek opportunities in assets that offer an attractive risk/reward profile.