High Income Bond Fund Accumulator (USD)

The Fund aims to maximise the total level of return for investors by investing, mainly in a diversified portfolio of bonds and other similar debt securities. In pursuing this objective, the Investment Manager shall invest primarily in a diversified portfolio of corporate & government bonds maturing in the medium term, with an average credit quality of “BB-” by S&P, although individual bond holdings may have higher or lower ratings. 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

March 2024

Introduction

The first quarter of 2024 defied some pre-existing expectations of a pronounced economic slowdown. Equity markets displayed continued strength, with the S&P 500 closing at a record high early in the period. However, credit markets experienced intermittent bouts of volatility, highlighting the inherent disconnect in risk pricing between asset classes. Notwithstanding headwinds faced, credit markets delivered positive returns, overall.

From a macroeconomic perspective, data remained generally supportive, proving particularly kind for central banks as developed economies maintained a positive growth momentum, avoiding a steeper downturn. Inflation, though persistent, showed nascent signs of peaking. The labour market, previously characterized by tightness, exhibited signs of easing, with wage growth decelerating. Economic activity continued at a healthy pace, albeit with some regional variations. European economies witnessed a near-stabilization of activity, with the tentative signs of a recovery observed at the start of the year carrying over. The pace however remains uncertain as the bloc’s largest economies struggled to turn the corner.

Market environment and performance

The Eurozone economy in March 2024 presented a picture of continued, albeit moderating, recovery. Eurostat’s preliminary estimates indicate Q1 2024 growth of 0.3% QoQ, a slight deceleration from the previous quarter’s 0.5% QoQ growth.

Indeed, the Euro area economy moved closer to stabilization in March, Purchasing Managers’ Index (PMI) survey showed, amid a modest recovery in services (reading 51.1 v 50.2), largely offsetting the weakening manufacturing segment (reading 45.7 v 46.5). Overall, new orders declined at the slowest rate in ten months, and backlogs of work were depleted at the weakest rate in nine months, while employment saw modest growth. On the price front, input cost inflation slowed to a three-month low, and selling price inflation cooled for the first time in five months. Finally, business confidence improved to its strongest level in a year.

Inflation, a key concern for policy makers, eased. Headline HICP inflation declined to 2.4% year-on-year in March, below expectations and down marginally from February’s 2.6%. The core rate, excluding volatile food and energy prices, also cooled to 2.9%, below forecasts and its lowest point since February 2022. Meanwhile, the Eurozone labor market displayed continued strength with unemployment rate (6.5%) holding steady near historical lows. However, the absence of wage growth data limits a full assessment of its inflationary impact.

The ECB Governing Council, in its March meeting, held the main refinancing operations rate steady at 4.5%, committing to a data-dependent approach to determine the appropriate level and duration of restriction. President Lagarde acknowledged a lack of clear conviction within the Council, indicating a need for “more evidence, more data”. Additionally, Lagarde remarks that governing council “will know a little more in April, but we will know a lot more in June”.

The U.S. economy continued to defy some earlier forecasts of a slowdown, displaying signs of continued strength. Consumer spending, business activity, and employment all indicated a healthy expansion to start the year, advancing on an upwardly revised 3.4% QoQ growth in Q4 2023. The labour market remained particularly robust, with the March jobs report showing a significant increase in nonfarm payroll jobs and sustained low unemployment rate. Meanwhile, wage growth eased, with average hourly earnings increasing by 4.1% YoY, following a 4.3% advance in the prior month and also matching market estimates. On the inflation front, data proved largely mixed with leading indicators offsetting worries of continued elevated price pressures. Notably, annual headline inflation accelerated for a second successive month to 3.5%, the highest since September 2023, compared to February’s 3.2% and forecasts of 3.4%. Core inflation, which excludes volatile items, stood at a near three-year low of 3.8%. Other price indicators, notably the leading producer prices MoM figure rose 0.2%, the smallest increase in three months. 

In March, Government bond yields fell, meaning prices rose as the market continued to anticipate interest rate cuts, as labour market tightness eased and inflation showed optimistic signs. Corporate credit, albeit varied across rating buckets, marginally outperformed. Investment grade ended the month higher, with European IG outperforming its US counterpart. Meanwhile, global high yield (+1.06%) – aided by the lower duration and easier financial conditions – was once again a positive contributor to the fixed income segment, generating positive returns.

Fund performance

The CC High Income Bond Fund closed the month higher (+0.55%) from the previous month’s close, amid a positive performance observed across credit markets.

The manager, in line with its mandate, maintained an active approach to managing the portfolio. Throughout the month, the manager – aiming to increase the portfolio’s duration in a gradual manner – continued to take advantage of selective opportunities, primarily by participating in initial offerings. Indeed, the month saw a number of market participants coming to market, with liquidity and appetite certainly increasing. Credit issuers which the CC High Income Bond Fund increased its exposure to include; Forvia SE, CIE Plastic Omnium SE, Teva Pharma, and Telefonica Europe.

In-line with the fund’s dividend policy, to distribute a dividend on a semi-annual basis, the Manager declared a distribution of 4.10% (annualised).

Market and investment outlook

Hopes for a rapid end to interest rate hikes faded in Q1 as central bankers reiterated their commitment to data-driven policy decisions and emphasized the continued threat of inflation. Despite reaching peak levels and inflation sustaining a downward trend, Fed Chair Jerome Powell stated that rate cuts in March were unlikely. Similarly, while acknowledging progress in “disinflation,” ECB President Christine Lagarde stressed that discussions of easing policy were as yet premature. A divergent tone was observed in the March’s meeting, with policy makers hinting at possible easing in June as data converges towards targets. The key challenge for policy makers currently is balancing continued high interest rates with supporting economic growth. The euro area, unlike its Western counterparts, faces an additional headwind whereby key economies, traditionally bolstering the single currency bloc, are now dragging down and offsetting a gathering upturn in the rest of the eurozone, pointing to an uneven economic picture.

Fixed income, for years losing its appeal – given the relatively low-yielding environment – has become more attractive. Indeed, locking in coupons at such comparably favorable levels, ahead of any policy easing, is key.  

That said, the manager will going forward continue to assess the market landscape and capitalize on appealing credit opportunities. Consistent with recent actions, the manager will continue to tailor the portfolio to match prevailing yield conditions while increasing the portfolio’s overall duration in a gradual manner. Optimism for the year ahead remains on the back of continued rate cut expectations.