High Income Bond Fund Accumulator Institutional

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
• The fund may not carry out uncovered sales (naked short-selling) of securities or other financial instruments

January 2025

Introduction

The global government bond market experienced contrasting trends in January.  A weak start, driven by rising US Treasury yields following the return of the former president Trump to office (which fuelled expectations of fiscal expansion and persistent inflation), gave way to a strong rebound, largely due to a weaker-than-anticipated inflation report.  Ultimately, the US 10-year Treasury yield finished the month lower, at 4.55%.  In Europe, government bond yields rose, with German Bunds climbing to 2.46% (prices move inversely to yields).

A key market theme in January was the former president’s inauguration and its potential policy implications, particularly regarding anticipated tariff changes and their effects on US and global markets. Despite pressure to lower rates, the Federal Reserve maintained its independence, holding rates steady in the 4.255-4.5% range. The Fed stated that policymakers will continue to carefully evaluate incoming data, the evolving outlook, and the balance of risks when considering further adjustments to borrowing costs. Conversely, the ECB, as expected, cut rates by 25 basis points, lowering the benchmark interest rate to 2.75%.

January was a positive month for corporate bonds. Investment-grade bonds saw gains, with European and US credit returning 0.09% and 0.76%, respectively, although they underperformed lower-rated bonds. US credit, particularly high-yield, outperformed, posting a 1.38% gain.  While US investment-grade corporate credit spreads remained relatively stable, high-yield spreads tightened considerably, driven by strong investor demand stemming from a healthy economy, robust corporate earnings, and attractive yields.

Market environment and performance

The US economy maintains a steady growth trajectory, bolstered by positive leading indicators, particularly the recent Purchasing Managers’ Index (PMI) figures.  In Europe, the economic picture is brightening after stagnation in Q4 2024.  Eurozone private sector activity expanded for the first time since August 2024, driven by a resurgent services sector that offset continued weakness in manufacturing.  Despite this improvement, growth remains uneven, concentrated outside the Eurozone’s largest economies, which continue to struggle.  Overall demand remains soft.

Inflation, previously noting a substantial decline due to base effects (particularly on energy), rose for a fourth straight month to 2.5% in January 2025, the highest since July. Core inflation remained steady at 2.7% while services inflation edged lower to 3.9% from 4.0% in the previous month. The labour market, a beacon of hope for the Eurozone, remained healthy, with the unemployment rate revolving at notable lows (6.3% in December), and significantly below a 20-year average of 9.3%.

The US economy’s 2.3% annualized growth in Q4, fell short of the 2.6% forecast and marked a slowdown from Q3’s 3.1% expansion.  However, this seemingly weaker performance was primarily driven by a substantial drawdown in inventories, masking robust consumer spending.  Personal consumption, a key contributor to growth, surged by 4.2%, the largest increase since Q1 2023, demonstrating continued consumer resilience.

Leading indicators continued to point towards continued overall economic expansion.  However, the S&P Global US Composite PMI dipped in January 2025, indicating the slowest private sector growth in nine months. While manufacturing saw a return to growth, the service sector’s expansion continued at a slower, though sustained, pace.

On the price front, despite headline inflation’s continued rise to 2.9% in December 2024, the disinflationary trend held somewhat. Core inflation (excluding food and energy) eased to 3.2% from 3.3% in November whilst the Federal Reserve’s preferred measure of underlying inflation remained steady at 2.8% annually, unchanged for the third consecutive month. A robust labour market, adding 256k jobs in December (the most in nine months), and a falling unemployment rate of 4.1% further supported the Federal Reserve’s policy stance.

Fund performance

The CC High Income Bond Fund rose 0.24% in January, reflecting the moves observed across credit markets.

In January, the portfolio manager actively managed the fund in accordance with its mandate, gradually increasing duration by adding European exposure while reducing dollar-denominated debt. This strategy reflects the European Central Bank’s advanced stage in its rate-cutting cycle, contrasting with the US Federal Reserve’s stance of holding rates steady, despite pressure from the new administration.  Seeking to boost income generation ahead of anticipated further easing, the manager increased its exposure (amongst others) to Flutter Entertainment, Accorinvest, and Societe Generale, while also establishing new exposures, namely: La Poste and Matterhorn Telecom.  Conversely, the fund decreased its holdings in US dollar-denominated companies like Occidental Petroleum, Apple, and Braskem.

Market and investment outlook

The credit market narrative at the start of the year remained largely unchanged, with investor attention focused on the dynamic political landscape, central bank policies, and economic data.

Economic indicators, both leading and lagging, continue to emphasize a regional divergence. Despite the Federal Reserve’s “higher for longer” approach, the US maintains broad-based strength, with consumer demand staying robust. In mainland Europe, growth appears stagnant overall. However, this does mask stark regional divergences. As Spain continues to out-grow its regional peers, the German economy remains an underperformer with its labour market on the verge of deteriorating. As a result, there is clearly scope for the ECB to ease policy further.

In credit markets, the growth momentum in the US, robust employment, and limited progress on disinflation suggest caution regarding long duration positions; a neutral duration stance seems more appropriate. With respect to the trajectory of the yield curve, uncertainty prevails, though further steepening (particularly in the US) appears plausible. Should the latter prevail, it will create an opportunity to secure attractive coupon rates, especially for credit issuers with strong fundamentals.

Our preference remains Europe, based on its earlier stage in the credit cycle and the potential for the ECB to lead global rate cuts. We will continue to position our portfolio accordingly, while actively managing the overall duration.