Fairtree Global Flexible Income Plus Fund Q2 2026 commentary

Rising yields, resilient income

The great repricing: yields reset higher

The defining feature of the quarter was a synchronised move higher in global bond yields. In Europe, the European Central Bank (ECB) ended its easing cycle and delivered its first hike of the cycle on 17 June 2026, lifting the deposit facility rate from 2.00% to 2.25% and the main refinancing rate to 2.40%, as services inflation proved stickier than the market had assumed. In the United States, the Federal Reserve held its target range at 3.50%–3.75% through the first half, but firmer inflation data pushed investors to price out further cuts and to weigh the risk of renewed hikes.

The repricing was most visible in sovereign markets. US Treasuries came under sustained pressure: the 2-year yield rose roughly 35 basis points to 4.14% while the 10-year climbed from 4.30% to 4.44%, the curve bear-flattening as the front end led. The move was global in nature. Japanese government bond yields pushed to multi-decade highs, with the 10-year Japanese Government Bond approaching 2.7% and the long end steepening further, confirming that the era of ultra-low Japanese yields has decisively ended.

The crossover spread rally: a sharp reversal of the Q1 shock

The single most powerful driver of the quarter’s return was the rally in credit spreads. The Fund’s benchmark spread index, the iTraxx Crossover (5-year), entered the quarter at elevated levels: it had widened sharply through the first quarter, spiking to a year-to-date peak of roughly 362 basis points on 27 March as the outbreak of conflict in the Middle East triggered a broad flight from risk and a repricing of credit. That stress proved to be a spike rather than a trend. Over the second quarter, the geopolitical risk premium unwound decisively and the index rallied hard, tightening by more than 100 basis points to close the quarter at approximately 245 basis points, back towards its year-to-date tights (a low of around 241 basis points was set on 9 February, against a year-to-date average near 272 basis points).

This reversal matters because spread tightening is a direct tailwind to a credit total-return strategy: as the market re-rated the diversified crossover universe, the mark-to-market value of the Fund’s credit exposure rose alongside the carry it was already earning. Critically, this credit rally ran directly counter to the sell-off in government bonds. That divergence, rising sovereign base rates alongside tightening credit spreads, is precisely the environment in which the Fund is engineered to perform: its floating-rate instruments reset higher with base rates, while its diversified credit book captured the spread compression. The result was a quarter in which both of the Fund’s core return engines pulled in the same direction.

Performance: turning higher yields into return

The Fund returned +6.32% over the second quarter, closely tracking its benchmark, the iTraxx Crossover Total Return Index (+6.58%), while comfortably outpacing investment-grade credit (iTraxx Main, +1.62%) and cash (+0.57%). This lifted the first-half return to +3.24%. As in prior quarters, the Fund tracked its benchmark closely but with materially broader diversification, a deliberate trade-off that gives up a little upside in exchange for greater protection against idiosyncratic default risk.

Table 1: Cumulative performance comparison

Source: Bloomberg, Fairtree, 30 June 2026

Table 2: Annualised performance comparison

Source: Bloomberg, Fairtree, 30 June 2026. Past performance is not a reliable indicator of future results.

A top-decile quarter in historical context

The scale of the second-quarter rally is best appreciated against history. Measured across 77 historic quarters, the Fund’s benchmark iTraxx Crossover posted a total return of 6.58%, its 10th-strongest quarter in almost two decades, placing it comfortably within the top 15% of all quarters on record. The backdrop was one of phenomenal performance from global equities as the post-conflict relief rally took hold: the Nasdaq recorded its second-best quarter in history, the S&P 500 and Dow Jones their fourth, and the DAX and Euro Stoxx 50 (SX5E) their fifth. Table 3 sets out where the quarter ranks for each major index.

Table 3: Q2 2026 total return and historical rank (of 77 quarters)

Source: Bloomberg, 30 June 2026. iTraxx Crossover (2×) reflects a notional two-times exposure to the index. Rank of 1 = strongest quarter in the 77-quarter history.

Such an exceptional quarter is, by definition, rare; a further reason we do not expect the third quarter to reproduce these returns.

The engine room of resilience

The Fund holds 45 positions across 363 underlying obligors spanning a wide range of global and European sectors, diversifying away company-specific risk. By keeping each individual exposure small, the portfolio does not depend on the survival of any single borrower, a “safety in numbers” approach that provides a structural layer of protection that stock-picking and directional income funds often lack. During the quarter, this deep diversification ensured that idiosyncratic credit events remained largely immaterial to overall fund performance. The benchmark itself, the iTraxx Crossover (currently Series 45, launched in March 2026), comprises just 75 equally weighted names, so the Fund’s exposure to 363 obligors provides materially broader defence against defaults within the index.

Harvesting the credit risk premium: return at half the volatility

A core objective of the Fund is to harvest a highly diversified credit risk premium while eliminating the volatility typically found in concentrated credit or directional interest-rate bets. The long-run evidence is compelling. Over the same 77-quarter history, the iTraxx Crossover has delivered an annualised return of 5.63% at an annualised risk of just 9.05%, less than half the volatility of the major equity indices, which typically ranged between 14% and 20%. On a return-per-unit-of-risk basis its coefficient of 0.62 is competitive with, or better than, most equity markets despite far lower risk, and materially ahead of the major continental European bourses (SX5E 0.32, CAC 40 0.31, DAX 0.34). Applying a notional two-times exposure to the crossover lifts the annualised return to 10.01%, broadly in line with the Dow Jones, while retaining a comparable risk profile. This confirms our long-held view that a diversified credit risk premium can serve as the cornerstone of a portfolio built for long-term, risk-adjusted wealth creation.

Table 4: Long-run annualised return and risk, Q2 2007 – Q2 2026 (77 quarters)

Source: Bloomberg, 30 June 2026. Return / Risk = annualised return divided by annualised risk (standard deviation). iTraxx Crossover (2×) reflects a notional two-times exposure to the index.

Strategic insulation

The Fund’s resilience through the Q2 repricing was underpinned by two structural features: its low duration, which insulated it from the government-bond sell-off that weighed on traditional fixed income, and its low beta to equity markets. As government yields have risen, the managers have actively recycled capital into higher-yielding paper, lifting the portfolio’s forward income. The Fund’s yield spread now stands at approximately 3.61% (361 basis points) over 3-month EURIBOR, which, with the reference rate sitting at 2.45%, equates to a pro-forma total yield of roughly 6.06% NACQ. As floating-rate instruments continue to reset at these higher levels, the Fund is well positioned to deliver an enhanced and stable income stream.

Conclusions and outlook

Two themes frame our outlook for the remainder of 2026. The first is increased global uncertainty. The Middle East conflict that drove the first-quarter spike in credit spreads is a reminder that geopolitical risk remains elevated and can reprice markets quickly, while the policy path itself has become less predictable: the ECB has turned to tightening, the Fed is on hold with the risk of renewed hikes, and the disinflation that markets had relied upon can no longer be assumed. Heightened uncertainty argues for precisely the qualities this fund is built around, broad diversification, low duration and a low beta to equities. Should volatility flare again as it did in the first quarter, the Fund is positioned to recycle capital into wider spreads rather than be forced out of them.

The second theme is the potential for a continued sell-off in bonds. Sticky inflation, hawkish central banks, elevated fiscal deficits and the ongoing normalisation of Japanese yields all point to persistent upward pressure on global sovereign yields. For a traditional, duration-heavy bond fund this is a headwind; for this fund it is closer to a tailwind. Because the portfolio is floating-rate and carries minimal duration, higher base rates reset the income it earns upward rather than eroding its capital. With a pro-forma total yield of roughly 6.06% NACQ, the Fund is well placed to convert a higher-for-longer rate environment into a durable and growing income stream.

We are, however, realistic about the near term. Having rallied more than 100 basis points, credit spreads have returned to the tighter end of their year-to-date range, and from these levels they may well come under renewed pressure should global uncertainty resurface. We therefore do not expect the third quarter to repeat the stellar performance of the second: with spreads already compressed, returns are more likely to be driven by the Fund’s carry than by further capital appreciation. Crucially, the managers view any such sell-off as an opportunity rather than a threat, the strategy is positioned to add risk into weakness, increasing exposure when the market pays a wider premium for bearing diversified credit risk. We remain confident that the Fund will continue to serve as a defensive cornerstone for investors, turning a higher-yield world into a lasting income advantage, and delivering outsized returns per unit of risk relative to other risk assets.