Federated Project and Trade Finance Tender Fund XPTFX

Product Type Asset Class Category
Closed-End Fund Alternative Trade Finance
As of 06-30-2018

Market Overview

In April, the World Trade Organization (WTO) published statistics for 2017 that saw the volume of world trade growing by 4.7% in 2017, from 1.8% in 2016, its largest increase in six years.  In value terms, merchandise exports grew by 10.7%, reflecting both the increase in volume and recovery in commodity prices.  The growth in world trade was broad based, driven by import demand across all regions but notably in Asia.  Developing economies recorded the largest gains in imports with an increase of 7.2% in the year, continuing the trend of developing economies capturing a greater share of world trade. 

The WTO predicts that trade will grow by 4.4% in 2018 and 4% in 2019. Indicators pointed to a strong start in first quarter of 2018, with expansion continuing but slowing into the second quarter and reflecting predictions for a broad recovery in global growth.  Risks to this forecast include faster tightening by central banks, which could trigger foreign exchange volatility and capital flows, geopolitical tensions and an escalation in restrictive policies culminating in a trade war.

On June 1, the U.S. implemented tariffs on steel and aluminum imports from Canada, Mexico and the EU, for national security reasons.  It also imposed quotas on imports from other economies.  The U.S. is scheduled to implement 25% tariffs on $50 billion of Chinese exports as of July 6 as well. These actions target value-added products of capital and intermediate nature.  China has responded by targeting products with a similar value from the Trump-supporting heartland, notably agricultural goods. Meanwhile, the EU, Canada, Mexico and India have also retaliated.  Recent rhetoric from the U.S. threatened tariffs on European car exports, and President Trump has threatened to withdraw from the WTO.

Bloomberg economists have been analyzing a wide range of eventual outcomes, from the current status of limited bilateral tariffs to the U.S. imposing a 10% all-import tariff and retaliation by the rest of the world. They concluded that if things should escalate, the U.S. would be particularly badly affected.  Their analysis suggested that the current situation will have negligible impact on U.S. GDP and 0.2% impact on China; however, in the event of a wider trade war, U.S. growth would be 0.8% lower compared to a 0.4% decline for China, resulting from China’s insulation from global financial markets and position in the value-added supply chain.

The portfolio continued to focus on trade between developing economies, so called “South to South” trade, and in low value-added primary goods.  The current set of tariffs involve higher value-added goods and are focused on U.S. imports and exports.  While a wider trade war is possible, we believe that it will have only marginal impact on investment opportunities for the portfolio because we focus on low value-added primary goods and South to South trade.

Looking Back

For the second quarter of 2018, the fund increased its regional allocations to Sub-Saharan Africa and Asia and Western Europe, while reducing allocations to the Middle East and North Africa and cash.  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 Western Europe and Asia.

Within sectors, the fund added exposure in the Chemicals and Metals/Mining sub-sectors of Basic Industry, and Finance.  The Energy weight declined as assets matured and cash was reduced.  The Energy sector continued to give the largest return contribution reflecting its largest weight; however the Foreign Sovereign, Services, Consumer Non-Cyclical and Basic Industry sectors all have higher average coupons.

Fund Performance

For the second quarter of 2018, Federated Project and Trade Finance Tender Fund returned 1.02% (net of all fees) compared to the U.S. ICE 1-Month Libor return of 0.49%.  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 Cameroon and the UAE, and withdrew from Morocco.  Exposure to Kenya and Tanzania was increased, while exposure to Ghana and Argentina was reduced as assets matured.  We continue to seek opportunities in assets that offer an attractive risk/reward profile.