Global High Income Bond Fund Accumulator

The Fund aims to maximise the total level of return for investors through investment, primarily, in a diversified portfolio of debt securities and other fixed income or interest bearing securities. In pursuing this objective, the Investment Manager shall invest primarily in a diversified portfolio of intermediate term, corporate & government bonds with maturities of 10 years and less, rated at the time of investment “BBB+” to “CCC+” by S&P, or in bonds determined to be of comparable quality. 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 US economy unexpectedly contracted by an annualized 1.4 per cent on quarter in the first three months of 2022 against expectations of a 1.1 per cent expansion, and following a 6.9 per cent growth in Q4 2021. A record trade deficit and a decline in inventory investment have seemingly weighed on.

In April, aggregate business activity in the US continued to signal an expansion across the private sector. Such expansion, reading at 56, however proved slightly slower than the upturn at the end of Q1, as softer data in the service sector offset the faster expansion in manufacturing.  US services PMI, albeit revised higher from a preliminary of 54.7 to 55.6, came in lower than the previous months reading of 58. Meanwhile, manufacturing PMI headed higher to 59.2 from 58.8 in March, pointing to the strongest growth in factory activity in seven months.

Annual inflation rate in the US slowed to 8.3 per cent in April, from 8.5 per cent in the previous month, yet exceeding market expectations of 8.1 per cent. The reading marked the 14th consecutive month that inflation is above the Fed’s 2 per cent target as energy costs and food prices weigh. Similarly, core inflation, which excludes transitory or temporary price volatility, slowed to 6.2 per cent from 6.5 per cent a month earlier.

In regards to the labour market, the US economy added 428,000 jobs in April 2022, above market estimates of 391,000 yet lower than February’s notable 714,000 gain, amid an increasingly tight labour market. Job gains were widespread, with the highest noted in the leisure and hospitality, and manufacturing.                                         

US Treasury yields furthered on the strong upward trajectory witnessed in March, heading to highest in years on expectations of a more aggressive interest rate increase and in spite of worsening sentiment due to China’s stringent coronavirus curbs. Notably, Chair of the Fed Jerome Powell signalled that a 50-basis point hike would take place in May to step-up the Fed’s efforts against inflationary pressures.  Overall, the yield on the benchmark 10-year Treasury closed the month 60bps higher than the previous month end, at 2.93 per cent.

Global high yield corporate credit, for a fourth-month running saw total negative returns of 3.24 per cent.

Fund performance
In the month of April, the Global High-Income Bond Fund registered a loss of 2.42 per cent, in line with the spread widening across 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. In the month, as IG bonds had a rough ride, the Manager increased its exposure to higher credit quality issuers, namely; Kraft Heinz and American multinational oil and gas corporation Exxon Mobil on attractive entry levels.

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 is more-than-ever imperative not to hinder growth, and thus worsen the economic situation.

Albeit economic data showed signs of weakening, inflationary pressures continued to prompt the Fed into a more aggressive path of interest rate hikes. That being said, the Fed will remain mindful that inflation may in Q3 ease should supply disruptions, a prime source of inflation, largely abate.

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.