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

October 2020

October saw a sharp decline in risk sentiment across financial markets from the post-Covid highs of late summer, as case counts rose to new highs across Europe and the US. Market performance remains inextricably correlated to the evolution of the virus, as it dictates the actions of governments worldwide.

Up until October, better testing and tracing capacity had allowed European policymakers to treat this second wave with targeted measures, including travel restrictions or the requirement to wear a facemask in public, instead of national lockdowns. These measures however were deemed to be insufficient in the face of record-breaking virus cases, and more aggressive action was taken by most European governments, with the aim of possibly decreasing them in time for the Christmas period. Policy makers are relying on the arrival of a viable vaccine in the first half of 2021.

With partial national shutdowns announced in the two largest European economies and further restrictions across the continent in the face of quickly rising Covid-19 cases, and similar reports across the Atlantic, most financial markets were significantly impacted, recording their worst performance since March.

Expectedly, data is becoming a very sensitive element for market participants as it depicts the strength of the recovery, particularly in light of the announcements of further restrictions throughout the month. Economic data confirmed that the pace of recovery stalled over the summer and momentum remains tentative in Europe.

Looking at Europe’s largest economy, Germany’s PMIs indicated an expansion during the month of October, with Manufacturing PMI, increasing to 58.2, compared to a consensus estimate of 58.0, and a previous reading of 58.0. Services PMIs were less impressive, coming in at 49.5, signaling a contraction, compared to 50.6 in the previous month. Meanwhile, the Euro Area’s Manufacturing PMIs indicated an expansion to 54.8, slightly above expectations, while services PMIs deteriorated further to 46.9 from a previous reading of 48.0. Output has shown signs of recovery, but remained well-below pre-pandemic levels, with significant divergence form the largest economies.

Furthermore, both lagging and leading indicators showed some weakness with unemployment within the Eurozone area inching upwards to 8.3% on a revised estimate. Moreover, consumer confidence remained stagnant, with readings coming in at -15.5. Collectively, despite some positive signs, indicators are suggesting that we are still at the very beginning of a fragile economic recovery.

Looking at sovereign yields on the 10-year German Bund, Europe’s most sought benchmark closed tighter than the previous month at -0.625 compared to -0.521 at the end of last month, with most of the tightening occurring during the last week of October, in parallel with the new restrictions. The yield curve experienced a parallel shift downwards, in line with the increased volatility in the marketplace during October. These moves were also experienced in European peripheral sovereigns.

October saw the most issuance in speculative grade bonds in Europe since July. There is just not enough supply to satiate demand and the recent European Union SURE deal has been a good illustration. There is still a lot of cash in the market to be invested, which should act as a strong bid for credit as an asset class.

Within the HY asset space, risk assets remained under pressure, closing off the month of October with a negative 0.27 percent return. The said moves were correlated to the sentiment surrounding equity markets, which were more pronounced as the challenging situation takes hold.

The CC Euro High Income fund increased by 0.07 percent, more than the general market with an outperformance of circa 32bps for the month. On a year-to-date basis, the fund is slightly underperforming on a net basis due to the lower beta of the portfolio and the subsequent market recovery; albeit the volatility of the fund has been markedly lower than average. Throughout the month, the Manager continued to adjust the portfolio into attractive undervalued credit stories, primary within the AT1 space.

Going forward the Managers believe that credit markets will continue to be aided by the support of primarily monetary politicians, creating a positive technical environment. In terms of bond picking, the Managers will continue to monitor the current environment and take opportunities in attractive credit stories.