Euro High Income Bond Fund Accumulator

The CC Euro High Income Bond Fund Accumulator aims to maximise the total level of return for investors through investment in a diversified portfolio of Bonds. To achieve this objective, the Investment Manager invests primarily in a diversified portfolio of over 65 intermediate term, corporate & government bonds with maturities of 10 years and less.

The Investment Manager of the CC High Income Bond Funds – EUR and USD has the duty to ensure that the underlying investments of the funds are well diversified. According to the prospectus, the investment manager has to abide by a number of investment restrictions to safeguard the value of the assets

• The fund may not invest more than 10% of its assets in the same company
• The fund may not keep more than 10% of its assets on deposit with any one credit institution. This limit may be increased to 30% in respect of deposits with an Approved Institution
• The fund may not invest more than 20% of its assets in any other other fund
• The fund may not carry out uncovered sales (naked short-selling) of securities or other financial instruments

March 2020

Risk assets have rallied throughout the month of April as the fear and panic associated with the outbreak of the COVID-19 virus, which lead to black-swan events in March eased by government policy interventions. In our view, the propagation of the shock to financial markets due to the virus outbreak is directly linked to the evolution of the virus and the duration of the containment measures. 

Indeed the swift actions taken primarily by Federal Reserve (Fed), emerged crucial in calming waters across the credit space. Despite that, initially markets unimpressed by actions taken by major central banks, the decision taken by the Fed on the 9th of April, in which it expanded its list of eligible bonds, was a clear signal that monetary politicians will do whatever it takes. The move eased both market and corporate liquidity tensions. In fact, following the announcement we have seen healthier liquidity in secondary markets, while the primary market re-opened following a standstill month in March. 

In Europe, EU leaders agreed on the need for an emergency fund of at least 1 trillion euros. However, as opposed to the more agile actions in the U.S., dissent from countries such as Germany on the mechanics of such aid, continued to weigh on investors sentiment. To this end, many continue to question the feasibility of the Union going forward, with Italy in primis being at the forefront

From the data front, Europe commenced feeling the pinch of covid-19 with economic numbers showing sharp reversions in March and April. Looking at Europe’s largest economy, Germany, PMIs continued their downward trend reflecting the weak economic conditions brought about by covid-19. For the month of April Manufacturing PMI, dwindled lower to 34.4 from a consensus estimate of 39, and lower from the previous 45.4, thus way below the 50 expansionary level. Meanwhile, unemployment ticked higher to 5.8%, while leading indicators such as the German business expectations also pointed to lower levels of 69.4 from a consensus level of 75. 

Meanwhile, the Euro Area’s Manufacturing PMI, pointing to a continued contraction in factory activity, with preliminary survey estimates of 38.0 compared to 44.5, far below February’s one year high of 49.2. Similarly, Euro Area’s services PMI was revised lower to 26.4 in its latest reading, with a preliminary estimate of 22.8 for the next release, and well below February’s 52.6. Moreover, consumer confidence within the Euro area continued deteriorating to -22.7 from -11.6 in the previous month. Led by an exceptionally strong fall in expectations concerning the general economic situation, the decline was the largest on record. Unemployment continued its upward trajectory to 7.4% from 7.3%, with many economists expecting further deterioration.

Yields on Europe’s mostly sought benchmark, the 10-year German Bund, closed tighter than the previous month at -0.588 compared to -0.473 at the end of last month. Yields across all of the curve tightened, largely attributed to ECB policy action, which seems that it will continue to do what ever it takes to combat the current unprecedented scenario.  Within the HY asset space, yields in April generally tightened, following the announced monetary intervention with Europe outperforming the US.

The CC Euro High Income fund, bounced higher by 4.7 percent, in line with the upward market moves. While on a year-to-date basis, the fund is slightly underperforming on a net basis due to the lower beta of the portfolio. Throughout the month, the manager reduced the portfolio’s sovereign exposure, while opened an exposure into the more senior notes of Nidda Healthcare, a German generic drug maker. Going forward the Manager believes that further stimulus will be enacted and this should further ease market liquidity issues and be supportive for credit markets. We continue to believe that at this juncture liquidity assessment is crucial given the circumstances.