Malta High Income Fund Distributor

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

September 2023

Introduction

A widely acknowledged “higher rates for longer” view, drove yields notably higher in the third quarter. Albeit at times 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 and thus a retraction, yields overall remained elevated. Maintaining an upward trajectory.

In September’s policy meeting, the European Central Bank (ECB) hiked interest rates for a tenth consecutive time, yet signaled that it is likely done tightening policy as inflation has started to decline but it is still expected to remain “too high for too long”. Consequently, setting the main refinancing operations rate at 4.5%, a 22-year high.

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

Market environment and performance

Concerns of a potential recession, which had been somewhat dismissed earlier in the year due to the resilience of economic activity, have now reemerged. The downward revision of the Q2 GDP growth rate, mainly attributed to weak exports and stagnant domestic consumption, has contributed to these worries. The ongoing decline in private sector activity has further cast doubt on the likelihood of a positive Q3 growth rate figure.

Purchasing Managers’ Index (PMI) indicators continued to show signs of weakness amid a second successive contraction in services (reading 48.7 v a previous month reading of 47.9) for 2023 and a continued downturn in manufacturing (reading 43.4 v a previous month reading of 43.5). Overall, new orders dropped while backlogs of work experienced the largest decline since June 2020. The rate of job creation was the joint second-slowest in the current 32-month sequence of growth. From an inflationary front, input prices accelerated to a four-month high, while selling prices rose the least in over a year consequent to a weak demand environment.

Despite a notable increase in oil prices, there were positive developments on the inflation front, as year-on-year core measures showed signs of easing in the majority of economies. Annual inflation rate in the Euro Area declined to 4.3%, reaching its lowest level since October 2021 and below market estimates of 4.5%. Prices increased at a slower pace for services, non-energy industrial goods, and food, alcohol & tobacco. Core inflation – a highly monitored figured by the ECB – eased, dropping to 4.5% from 5.3% in the previous month.

In the month, Germany’s benchmark 10-year yield widened notably as it approached the 3% mark, at 2.84%. Yields of sovereigns within the Euro area’s periphery too widened, with Italy’s and Greece’s heading substantially north, closing the quarter at 4.78% and 4.34%, 66bps and 57bps higher, respectively.

Fund performance

In September, the Malta High Income Fund registered a loss of 0.53% for the month, outperforming its internally compared benchmark which only registered a marginal positive performance of 0.13% – as equities overall were in the red.

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.