High Income Bond Fund Distributor - 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 securities listed by the same body
• 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 fund

July 2024

Introduction

July was a positive month for global bond markets. Government bond yields, which move inversely to prices, declined across major markets, propelled by expected interest rate cuts as inflationary pressures moderated. European and US investment grade (IG) credit too benefited from such prospect (of a lower interest rate environment), outperforming the more speculative segment.

The potential start of a rate-cutting cycle meant that Central bank policy took centre stage once again. The Federal Reserve, buoyed by consecutive subdued core inflation readings and signs of economic deceleration, signalled a potential rate cut at its September meeting. Although the Federal Open Market Committee (FOMC) held rates steady in July, Chair Powell’s dovish commentary ignited a rally in Treasuries. Similarly, the European Central Bank appeared poised to embark on a rate-cutting cycle, with market expectations largely unaffected by a slightly hotter-than-anticipated July flash eurozone core inflation print.

French government bonds, previously pressured by elevated political uncertainties, rebounded. Investors interpreted the inconclusive election results as mitigating the risk of extreme fiscal measures.

Market environment and performance

The previously pronounced economic disparity between the US and the Eurozone has shown signs of narrowing. While the US economy, once demonstrating exceptional resilience, is now exhibiting signs of cooling, the Eurozone has maintained a relatively steady economic trajectory, as evidenced by recent Purchasing Managers’ Index (PMI) data. The Eurozone Composite PMI for July experienced a slight upward revision to 50.2 from the preliminary 50.1, signaling minimal economic growth. This marked a deceleration from June’s reading and represented the weakest expansion since the upturn began in March. While services (reading 51.9 v 52.8 in June) continued to drive overall growth, it did so at a subdued pace. Conversely, manufacturing (stable overall at 45.8) saw output contracting sharply, resulting in a loss of momentum for the broader private sector economy.

Headline inflation unexpectedly edged up to 2.6% in July 2024 from 2.5% in the previous month, while core inflation held steady at 2.9%.

The US economy, while still demonstrating notable resilience, portrayed nascent signs of cooling. Manufacturing (reading 49.6 v 55.3 in the previous month) pointed to a deterioration in business conditions, while services (reading 55 v 51.6 in the previous month) noted a modest growth, albeit at a softer pace. New business saw an increase, with services outweighing the dip in manufacturing orders. Export orders decreased slightly. Employment levels continued to rise for the second consecutive month, although work backlogs persisted.

In the US, disinflationary trends sustained, with the more recent data proving supportive for a first rate cut towards year-end. Indeed, the latest inflation release showed a modest slowing, as headline inflation fell for a fourth straight month to 2.9% in July 2024, the lowest since March 2021, compared to forecasts and June’s reading of 3.0%. Core inflation too eased to an over three-year low at 3.2%. On the unemployment front, a long-awaited cooling began to materialize. On the employment front, the labour market exhibited signs of cooling, as evidenced by an increase in unemployment (reading 4.3% v 4.1% in June), and jobless claims. Meanwhile, the US economy added 114k jobs, lower than; estimates, previous month reading of 179k, and a monthly average of 215k over the previous 12 months.

Global credit markets extended their positive momentum from the latter part of Q2 2024. Government bonds, particularly those with a 7-10 year maturity, exhibited strong performance, with European and US sovereigns generating total returns of 2.51% and 2.89%, respectively. In tandem with the tightening observed in government bonds, investment-grade credit also displayed robust performance, with the US outpacing its European counterpart. Meanwhile, high yield credit maintained its upward trajectory, delivering returns of c. 1.25% and 1.96% for European and US high yield corporates, respectively.

Fund performance

The CC High Income Bond Fund closed the month higher (1.29%) 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, locking in coupons prior to continued easing, and exposure to European exposure – continued to take advantage of selective opportunities, primarily by participating in initial offerings.

Credit issuers which the CC High Income Bond Fund increased its exposure to include; Softbank Group, BE Semiconductor, Ineos, Freeport McMoran, Rabobank, Lottomatica, and French shipping and logistics company CMA CGM.

Market and investment outlook

The narrative for credit markets remained largely unchanged in July, with investor focus centered on central bank policy. While maintaining a restrictive bias, policymakers exhibited a subtle shift towards a more dovish tone. Both the ECB and Fed have emphasized data dependency, albeit with distinct priorities. The ECB is closely monitoring inflation, particularly within the services sector, anticipating a continued decline. Conversely, the Federal Reserve, satisfied with inflation progress, is increasingly attentive to labour market resilience and its potential impact on economic sustainability. A weakening job market could provide the Fed with greater policy flexibility but risks dampening consumer spending and thus hamper the economy at large.

That said, the anticipation of year-end interest rate cuts fosters a positive outlook for the global bond market. We believe locking in current attractive coupon levels is prudent before potential policy easing.

Going forward, we will continue to actively assess market conditions and capitalize on compelling credit opportunities. In line with recent portfolio adjustments, we will continue to gradually increase the portfolio duration and exposure to European credit. This strategic shift is underpinned by Europe’s earlier stage in the credit cycle, offering potential upside, and the prospect of the ECB leading global rate cuts.