Malta High Income Fund Accumulator

The Fund aims to maximise the total level of return through investment, primarily in debt securities and money market instruments issued by the Government of Malta, and equities and corporate bonds issued and listed on the MSE.

The Investment Manager may also invest directly or indirectly up to 15% of its assets in “Non- Maltese Assets”. The Investment Manager will maintain an exposure to local debt securities of at least 55% of the value of the Net Assets of the Fund.

The Fund is actively managed, not managed by reference to any index.

The Fund is classified under Article 6 of the SFDR meaning that the investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.

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 Investment Manager may invest up to 10% of the net assets of the Sub-Fund in un-listed Maltese and/or Non-Maltese Assets. As far as the “Non-Maltese Assets” segment of the Sub-Fund is concerned, the Investment Manager will not be targeting any international debt securities of any particular duration or coupon. However, the Sub-Fund is generally not expected to hold investments that, at the time of investment, are rated below “B3” by Moody’s or below “B-“ by S&P or in bonds determined to be of comparable quality by the Investment Manager.
• The Investment Manager will not be targeting any local debt securities (debt securities and money market instruments issued or guaranteed by the Government of Malta and/or local corporate bonds issued and listed on the Malta Stock Exchange) of any particular duration or coupon.
• The Investment Manager will, at all times, maintain a direct exposure to local debt securities (debt securities and money market instruments issued or guaranteed by the Government of Malta and/or issued and listed on the Malta Stock Exchange) of at least 55% of the value of the Net Assets of the Sub-Fund.
• The Sub-Fund may also invest in term deposits held with credit institutions regulated in Malta and other EU, EEA and OECD Member States.
• This Sub-Fund shall not invest, in the aggregate, more than 10% of the Net Assets of the Sub-Fund in units or shares of other UCITS or other CISs.

August 2023

Introduction

A widely acknowledged “higher rates for longer” view, drove yields notably higher at mid-August. Such notable uptick was however short-lived as a contraction of private-sector activity in the euro area intensified, leading investors to bet that the ECB will pause its campaign of interest-rate hikes. The European Central Bank (ECB), albeit expecting inflation “to remain too high for too long”, opted not to provide forward guidance. A “data-dependent approach” was maintained.

From a performance standpoint, government bond yields of European sovereigns marginally fell (meaning prices rose), still underperforming riskier assets.

Market environment and performance

The Eurozone economy grew by 0.1% in Q2 2023 as a recovery in demand, compared to the previous quarter, was witnessed. Likely bolstered by a moderation in inflationary pressures. Higher interest rates and waning confidence however continued to weigh on the bloc’s economy. Among the bloc’s biggest economies, Germany’s economy stagnated while Italy unexpectedly experienced a 0.4% contraction.

Adding to doubts about the possibility of a positive Q3 growth rate figure is the deepening downturn in private-sector activity. Purchasing Managers’ Index (PMI) indicators, following a brief growth revival recorded in spring, continued to show signs of weakness amid a first contraction in services (reading 47.9 v a preliminary estimate of 48.3 and previous month reading of 50.9) for 2023 and a continued downturn in manufacturing (reading 43.5 v a previous month reading of 42.7). Overall, new orders dropped, leading to companies completing outstanding work at the fastest rate in over three years, resulting in one of the softest 12-month outlook in 2023 so far. Jobs growth nearly stalled, with private sector employment rising at the slowest rate in over 2 years. From an inflationary front, input prices surprisingly picked up, putting the perspective of rapidly decreasing inflation into question. Wages, not necessarily in sync with the business cycle given their often-longer term nature, a prime suspect.

Annual inflation rate in the Euro Area remained steady at 5.3%, significantly above the ECB’s goal and market consensus of 5.1%, a preliminary estimate showed. Energy prices decreased at a slower pace (-3.3% v -6.1%). On the other hand, inflation slowed for food, alcohol, and tobacco inflation (9.8% v 10.8%), as well as non-energy industrial goods and services. Core inflation – a highly monitored figured by the ECB – eased, dropping to 5.3% from 5.5% in the previous month.

In the month, Germany’s benchmark 10-year yield marginally tightened, falling to 2.46% from 2.49% in the previous month. Yields of sovereigns within the Euro area’s periphery proved mixed, with Italy’s and Greece’s heading north, closing the quarter at 4.12% and 3.77%, 2bps and 3bps higher, respectively. Spain’s 10-year yield meanwhile tightened, only marginally.

Fund performance

In August, the Malta High Income Fund registered a loss of 0.21% for the month, outperforming its internally compared benchmark which registered a negative performance of 0.87%.

Market and investment outlook

Moving forward, the Managers believe in maintaining a somewhat cautious stance given the current economic climate, albeit showing signs of improvement. Sustained price pressures, which may have well filtered through services, may continue to leave a negative impact on the Maltese economy, possibly hindering consumption and the forecasted pace of recovery. Such pace remains highly dependent on inbounds of tourism. A record number of visitors have indeed proved optimistic from a demand perspective, yet possibly negatively from a pricing standpoint, abetting inflationary pressures to become more embedded.