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

August 2020

Policymakers hoped that the Covid-19 pandemic would recede during the hotter summer months, instigating policymakers to gradually lift restrictions at the start of summer season in the northern hemisphere. However, even though record temperatures were registered in August, the virus has unfortunately continued to spread. There have now been over 25 million cases globally, up from 10 million at the start of July.

Even though the number of new daily cases in the US has started to decline, some regions, including Europe, are now facing a second wave where the daily increase in cases is back close to the levels seen at the height of the crisis in March and April. So far, better testing and tracing capacity has allowed European policymakers to treat this second wave with targeted measures, including travel restrictions or the requirement to wear a face mask in public, instead of national lockdowns. This was done in an effort to better balance public health policies with economic policies.

On the economic front, high-frequency data, such as travel and navigation app usage, point to continued global growth over the third quarter, albeit at a more moderate pace, particularly in the US, than in May and June. However, these challenges haven’t dented investors’ enthusiasm, which seems to have been lifted by a better-than-expected second-quarter earnings season and by the potential for a viable Covid-19 vaccine in the coming months. In this context, risk assets continued to rally while government bonds retreated.

European data showed continued signs of recovery despite the second wave, as economic activity continued to build on July’s initial expansion. Looking at Europe’s largest economy, Germany, PMIs indicated an expansion during the month of August, with Manufacturing PMI, increasing to 52.2, compared to a consensus estimate of 53.0, and a previousreading of 51.0. Services PMI also registered a solid 52.5 compared to expectations of 50.8, however lower than July’s reading of 55.6. Unemployment remained steady at 6.4%.

Consumer confidence remained weak, with leading indicators such as the Eurozone Consumer Confidence improving marginally to -14.7 from -15.0 in the previous month. Meanwhile, the Euro Area’s Manufacturing PMI indicated an expansion to 51.7 compared to 51.8 in the previous month. Euro Area’s services PMI remained in expansionary territory, albeit at a slower pace, at 50.5 in its latest reading. Unemployment edged upward to 7.9% from 7.7%. Collectively the indicators are suggesting that we are still at the very beginning of a fragile economic recovery.

European risk assets continued to benefit from the European Council agreement in July to establish a €750 billion European Union (EU) recovery fund, which has reassured investors about the future of the EU. European equity and bonds markets registered positive investor flows in July and August. In this context, the euro rose 1.1% versus the dollar.

Looking at sovereign yields on the 10-year German Bund, Europe’s mostly sought benchmark closed wider than the previous month at -0.398 compared to -0.531 at the end of last month, with most of the tightening occurring during the last week of August. The yield curve steepened, with a larger movement in the longer end of the curve largely attributed to more confidence about the speed of economic recovery. These moves were also experienced in European peripheral sovereigns.

Within the HY asset space, spreads in August generally tightened, following the risk on approach by the markets that is interpreting a much more swift economic recovery, following the re-opening of a number of economic sectors, in addition to continued supportive fiscal and monetary support measures in place.

The CC Euro High Income fund, bounced higher by 1.6 percent, in line with the upward market moves. On a year-to-date basis, the fund is slightly underperforming on a net basis due to the lower beta of the portfolio, albeit the volatility of the fund has been markedly lower than average. Throughout the month, the manager continued to selective high beta names, including the financial sector, which offered significant opportunities. Moving 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.