High Income Bond Fund Accumulator

The Fund aims to maximise the total level of return for investors by investing, mainly in a diversified portfolio of bonds and other similar debt securities. In pursuing this objective, the Investment Manager shall invest primarily in a diversified portfolio of corporate & government bonds maturing in the medium term, with an average credit quality of “Ba3” by Moody’s or “BB-” by S&P, although individual bond holdings may have higher or lower ratings. The Fund can also invest up to 10% of its assets in Non-Rated bond issues.

The Fund is actively managed, not managed by reference to any index.

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

April 2022

Introduction
April, along the same route of the preceding three months and first quarter of the year proved negative for financial markets. Russia’s invasion in Ukraine, stringent Covid-19 policies in China once more prompting demand concerns and supply-chain disruptions, and expectations of a swift tightening in US monetary policy all weighed on sentiment. Credit markets came under pressure with investment grade and high-yield corporate credit delivering negative returns as treasury yields – pricing in the Fed’s hawkish stance – maintained the upward trajectory. Also, the positive correlation to US paper led European sovereign yields higher.  

Market environment and performance
The eurozone economy advanced by 0.2 per cent on quarter in the first three months of 2022, the least since the bloc exited a recession last year and below market expectations of a 0.3 per cent growth. Growth readings in Spain and Germany of 0.3 and 0.2 per cent respectively more than offset a contraction in Italy. Meanwhile the French economy stalled.

Forward looking indicators, notably Purchasing Managers Index (PMI) data painted a somewhat mixed picture as services – benefiting from loosened coronavirus restrictions – expanded while manufacturing contracted. Owing to such uptick in services, which offset the slowdown across the manufacturing sector, remaining susceptible to supply constraints and a slowdown in growth for new orders, the Eurozone Composite PMI increased to 55.8 from the previous months reading of 54.9.

In April, energy and food prices continued to contribute to a rise in annual inflation – a fresh record high at 7.5 per cent, in-line with expectations and marginally higher than the previous month reading of 7.4 per cent. Core inflation, which excludes transitory or temporary price volatility, rose to 3.5 per cent – the highest since available records began in January of 1997. The rate of inflation remains well above the European Central Bank (ECB) target of 2.0 per cent. Month-on-month, inflation increased by 0.6 per cent.

European sovereign yields furthered on the strong upward trajectory witnessed in March, heading to the highest in years on expectations of more aggressive interest rate increases by major central banks in spite of worsening sentiment due to China’s strict coronavirus curbs. Also, ECB president Christine Lagarde repeated the message that asset purchases will end early in Q3 and rates could rise this year, but affirmed that the governing council will maintain “optionality”. Meanwhile, incumbent French President Macron was re-elected with over 58 per cent of the votes against rival Marine Le Pen.

The yield on the 10-year German Bund, closed the month at 0.94 per cent, 39bps higher than the previous month end.  Bond yields of sovereigns within the bloc’s periphery, those which offer a premium over Germany’s negative yielding debt, moved in tandem, albeit rising at somewhat faster pace.

While outperforming their US counterparts, European investment grade and high yield credit closed the month negative registering a 2.81 and 2.78 per cent loss, respectively.

Fund performance
In the month of March, the CC Euro High Income Bond Fund lost 2.40 per cent, in line with the widening in spreads within European high yield corporate credit. Throughout the month the Manager continued to seek pockets of value by looking into attractive credit stories while maintaining adequate cash levels as yields continued to widen and keeping a low portfolio duration, this to reduce the funds sensitivity to changes in interest rates. During the month the fund reduced its exposure to financials, namely Unicredit SpA, while opening a position in the British multinational chemicals company Ineos Group on attractive valuations.

Market and investment outlook
Going forward the Manager believes that credit markets will largely remain conditioned by monetary decisions taken, thus far proving more hawkish than the economic outlook possibly warrants, altering benchmark yields, now revolving at notable highs. Such upward shift in yields, particularly at the longer-end of the yield curve – influenced by market participants – weighed on the performance of credit markets which on a year-to-date basis stand substantially negative. A prudent approach to tackling price pressures in the Euro area is more-than-ever imperative not to hinder growth, and thus worsen the economic situation of the bloc.

In terms of bond picking, the Manager will continue to monitor the current unprecedented environment and take opportunities in attractive credit stories which should continue to add value to the portfolio. The recent widening in corporate credit spreads may indeed pose an opportunity, presenting attractive entry points.