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

February 2020

Prior to the recent COVID-19 outbreak, the outlook for 2020 vis-à-vis economic growth, although limited, seemed positive. Economic data had started to improve whilst yields started to portray the possibility of a broad economic recovery.

The latter was indeed short-lived.

Fearing the economic damage from the fast-spreading pneumonia-like virus, investors, as a protectionist measure against economic downturn, shunned global equities, wiping out months of gains, and sought the relative safety of sovereigns, sending yields to panicky lows. Ensuing to the latter shift, and subsequent increased demand for safe assets, Europe’s mostly sought benchmark; the 10-year German Bund tumbled to -0.623 per cent, the lowest for the month of February. Similarly, the 2-year German Bund edged lower, closing off the month at -0.77 per cent, the lowest since September 2019.

From the data front, markets were also monitoring closely the direction of the European economy in order to have more clarity of any signs of improvement in economic data points.

In terms of growth figures from a European front, a second estimate, published in February showed that the Eurozone grew by only 0.1 per cent in the fourth quarter 2019, in-line with analyst’s expectations, and below the 0.3 per cent expansion reported in the previous three-month period. This, being the weakest pace of growth since a 0.4 per cent contraction in the first quarter of 2013. Similarly, Germany’s gross domestic product (GDP) unexpectedly flatlined in the fourth quarter, producing zero growth, a performance that was below analysts’ expectations and down from an upwardly revised 0.2 per cent growth in the previous quarter.

Meanwhile, the Euro Area’s Manufacturing PMI, pointing to the 13th straight month of contraction in factory activity, revised higher to 49.2 in February 2020, from a preliminary 49.1, and above January’s 47.9. Similarly, Euro Area’s services PMI edged slightly higher to 52.6 in February 2020, compared to January’s 52.5. Moreover, consumer confidence in the Euro Area remained unchanged in February at -6.6 per cent.

Within the HY asset space, yields reacted following the outbreak of the coronavirus with spreads widening in line with a risk-off mode. However, worth noting was the magnitude of spread widening which was less in Europe when compared to other counterparts, as risky assets in Europe continue to be supported by a more easing monetary policy.

The CC Euro High Income fund in line with widening in spreads following the outbreak of Covid-19 declined by 2.5 percent, however still outperforming in general HY European indices on a year-to-date basis. In line with the recent market movements, the Manger opted to raise cash levels in order to reduce downside risk. Going forward we believe that the need for fiscal stimulus is imperative and we believe that markets are awaiting anxiously the way forward in this regard.