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 2021

The worldwide rollout of the vaccines remained a key topic through the month of February. At the end of February, the Food & Drug Administration approved Johnson & Johnson single use coronavirus vaccine for emergency use in the U.S. Along with increasing production of the Pfizer and Moderna vaccines, the supply of vaccines is expected to grow significantly by spring.

The U.S. has been averaging 1.7 million vaccines administered by the end of February. In the U.S., more individuals have received at least one dose than have tested positive for COVID. As of the end of February, approximately 50 million Americans, which equates to around 15% of the population, had received the first shot with approximately 25 million having received the second as well.

Over in Europe, the UK has lead the vaccination charge in terms of percentage of population inoculated. The region as a whole remains under restricted conditions as it looks to increase the rate of vaccination in order to relax measures by April. During the month the ex-head of the ECB, Mario Draghi, put together a unity government of the main political parties in Italy, following the collapse of the last administration last month. The Euro zone economy as a whole contracted less than expected in the fourth quarter (-0.7%) amid pandemic-induced lockdowns. For 2020 as a whole, the GDP of the 19 countries fell by 6.8%.

The re-opening and reflation talk gathered pace with markets increasingly worried by the rise in inflation expectations putting upward pressure on yields, particularly in the longer end of the curve. The US 10-year benchmark reached 1.53% from 1.079% at the beginning of February as the curve steepened significantly, sending risk assets spinning on tapering concerns. The US 5-year yield reached 0.80%, reflecting revised policy rate expectations. Nevertheless, US breakevens suggest that investors expect core PCE inflation to approach 2%. UK Gilt and German Bund yields were back to their pre-pandemic levels.

Christine Lagarde said that the central bank would maintain important stimulus measures but that government should continue fiscal spending to protect an economy hit by the health crisis. The president of the ECB expressed confidence in the recovery in the euro zone this year despite the pandemic. The monetary institution expects 3.9% growth in 2021. She declared that debt cancellation is unthinkable because it would violate the European Treaty.

With core yields drifting up, investment grade underperformed the high yield spectrum. Spreads tightened, mostly on the high beta names. Demands from investors for income-bearing bonds helped the European high-yield market to set a number of records in terms of issuance. Supermarket Asda sold the largest ever sterling corporate bonds (£2.75bn) and Ardagh Metal offered the biggest ever green high yield note ($2.8bn). EG Group brought the largest private placement. Yields of the riskiest junk bonds and lower ranking bank debt are back to pre-pandemic levels, which is quite remarkable.

Data has largely reflected the mood within markets and unfolded as expected. In February, Europe’s largest economy; Germany reported better than expected PMI data for both manufacturing – the driver behind a two-sped recovery and services. Germany’s manufacturing PMI posted a level of 60.7 from an a previous figure of 57.1. The reading pointed to robust growth in factory activity, amid further gains in output and new orders. Services remained under pressure due to the physical constraints, posting a disappointing reading of 45.7 compared to 46.7 in the previous month.

Eurozone’s manufacturing PMI was stronger, at 57.9 compared to 54.8 in January. Meanwhile, services PMI of the single currency bloc fell to 45.7 in February from 45.4 in the previous month, above expectations of 44.7. Consumer confidence – a metric that the level of consumer confidence in economic activity in the euro area, increased to -14.8 points in February from -15.5 points a month earlier.

Despite the ECB maintaining is accommodative stance bond yields rose in tandem with the movement in US Treasury securities, albeit at a lower magnitude. We continue to believe that the pace of economic recovery in Europe will be different to that in the US, therefore we will tactfully time the exiting from European sovereigns with caution.

Yields on Europe’s most sought after benchmark; the 10-year German Bund, closed higher than the previous month at -0.257 per cent compared to -0.513 percent at the beginning of February. Similarly, Italy’s 10-year sovereign yield closed the month 15bps higher at 0.771 per cent, despite the premium to the German Bund tightened as Italy welcomed Mario Draghi.

The CC Euro High Income Bond Fund increased by 0.09 per cent throughout the month. Throughout the month the Manager continued to seek pockets of value by looking into attractive credit stories, primarily within the financial and telecoms industry.

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 which should continue to add value to the portfolio.