Global High Income Bond Fund Accumulator

The CC Global 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

October 2021

Consequent to an increased level of money supply through unprecedented monetary stimulus, an uptick in inflation was theoretically warranted. Thus far, current inflation levels proved to be supply rather than consumer driven, and to this extent this tends to trigger more uncertainty on the next moves monetary politicians should take. Whether such price increases are transitory or else persistent, however, is yet an outcome ought to be determined.

The sustainability of inflationary pressures has in October continued to be quite a debate. Largely, investors are of the view that temporary price pressures could well be embedded in more long-term expectations and last even as the growth from reopening fades away. A surge in energy prices, due to an increase in both demand and limited capacity, have made matters worse, amplifying fears around longer-lasting inflationary pressures.

Theoretically, sustainability in price increases is maintained through a continuous rise in demand, and not through overall price rises resultant to a higher cost of production. Supply bottlenecks – in our view the key source to inflationary pressures, is a phenomenon we’ve been witnessing in 2021. Disruptions worsened by a second coronavirus wave, a blockage in the Suez Canal earlier in March, port closures in China, and capacity limitations, are seemingly persisting. Supply issues along with increased demand for goods, led to higher input costs, which were ultimately translated onto customers.

In the month, inflationary pressures have led markets to price in a faster pace of policy tightening from central banks across the world. Notably, the U.S. 10-year benchmark Treasury yield hit a high of 1.7 per cent over the month of October. Larger increases in shorter-dated yields caused interest rate curves to flatten.

From an economic viewpoint, the path towards a full recovery has all-in-all proved bumpier than previously anticipated. A vaccination drive taking long to pick-up speed along with a more severe wave of infections, lessened the pace of the recovery, giving rise to doubts about the sustainability of economic growth. Economic data is now showing stronger signs. Albeit earlier witnessing a slight deceleration in the pace of expansion, data points are seemingly maintaining the recent pace. Leading economic indicators continue to revolve in expansionary territory while inflation data remains on an upward trajectory.

U.S. manufacturing PMI stood at 58.4, downwardly revised from a preliminary estimate of 59.2, and down from 60.7 in September. Although the pace of expansion slowed to the weakest for ten months due to smallest increase in production levels since July 2020 amid capacity constraints including material shortages, October’s reading pointed to a sharp improvement in the health of the US manufacturing sector. Notably, backlogs of new work and employment increased at solid rates. On the price front, input cost inflation remained among the highest on record, with firms continuing to partially pass on the increased costs onto their consumers.

Services PMI, previously showing signs of weakening, was in October revised higher to 58.7, from a preliminary estimate of 58.2, and 54.90 in the previous month. The expansion proved to be the sharpest and quickest since July 2021. Also, the upturn was faster than the series average, with firms linking the increase to rising client demand and rise in new business.

Annual inflation rate in the U.S. surged to 6.2 per cent in October, above forecasts of 5.8 per cent, and higher from 5.4 per cent in the previous month. Upward pressure was broad-based, with energy costs recording the biggest gain. In 2021, inflation has largely been on the rise amid low base effects from an unprecedented 2020 and as the economic recovery picks up, restrictions ease, and demand surges.

In regards to the labour market, the US economy added 531,000 jobs in October of 2021, the highest in 3 months and above market expectations of 450,000. Job gains occurred in leisure and hospitality, professional and business services, manufacturing, and transportation and warehousing. Meanwhile, employment continued to decline in public education.

U.S. Treasury yields have over the month of October continued to retrace some of the significant downward moves witnessed in recent months, then influenced by investors beginning to doubt whether economic data, notably the upticks in inflationary figures would continue to advance or else prove transitory. As the market’s focus turned to rising inflation and the prospect of the withdrawal of monetary policy support, yields rose back to similar levels seen at the first half of the year. In October, investors awaited the Federal Reserve (Fed) November meeting and its policy direction going forward. Investors expected Fed Chair Jay Powell to announce a reduction in bond purchases. Earlier, the Fed suggested that stimulus, notably asset purchases could start being reduced as early as November and possibly be wound up by mid-2022, earlier than initially anticipated.

The benchmark U.S. 10-year Treasury yield, closed the month 6bps higher at 1.55 per cent. The figure remains below high’s witnessed earlier this year, revolving above the 1.70 per cent levels.

Throughout the month of September, the CC Global High Income Bond Fund dropped by 0.29 per cent, with a year to date outperformance over the internal comparable benchmark.

Albeit downside risks, specifically related to the health crisis remain as coronavirus cases prop-up, the manager remains constructive within the high yield space. Going forward, the manager believes that credit markets will continue to be supported by the actions taken by the Federal Reserve – seemingly willing to gradually unwind its stimulus programme.