High Income Bond Fund - Distributor GBP

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

February 2025

Introduction

Following a turbulent start to the year, where resurgent US Treasury yields, driven by anticipated fiscal expansion and inflation concerns stemming from a change in administration, created significant market volatility, credit markets demonstrated a strong rebound. This positive trend continued into February.

Despite persistent inflationary risks, including the potential impact of tariffs and stronger-than-anticipated inflation data, global bond markets reacted positively to weakening US sentiment indicators and escalating growth concerns. Consequently, the US 10-year Treasury yield experienced a 33bps decline, concluding the month at 4.21%.

In Europe, improved growth prospects, fuelled by increasing optimism regarding a resolution to the Russia-Ukraine conflict, were counterbalanced by concerns over increased government borrowing for defence initiatives. This resulted in a more modest reduction in European sovereign yields compared to the US. Specifically, the yield on the benchmark 10-year German Bund declined by 5bps to 2.41%.

Central bank policy action remained pivotal. The Federal Reserve, after holding interest rates steady in January, indicated they see no immediate need for further adjustments, citing a strong economy and a less restrictive policy stance. They emphasized the need to balance inflation control with economic growth. In contrast, the European Central Bank (ECB), despite encouraging inflation trends and an additional 25bps cut in January, signalled it’s too early to discuss further reductions, prioritizing continued inflation convergence.

February witnessed continued positive performance across corporate bond markets, albeit with varying regional dynamics. European high yield bonds exhibited a 1.04% gain, surpassing investment grade performance. In the US, a combination of slight spread widening and shorter duration resulted in US high yield underperforming, posting returns of 0.65%. The weakening US dollar provided tailwinds for emerging market debt, which recorded a 1.34% return.

Market environment and performance

The US economy exhibited signs of emerging growth concerns, driven by potential tariff impacts and persistent inflationary pressures. Leading indicators, specifically the February composite PMI, sharply declined to 50.4 from 52.7, signaling near-stagnation in private sector activity. This marked the slowest expansion since September 2023, with a renewed contraction in services output. Business optimism for the coming year reached its lowest point since December 2022 (excluding September), reflecting anxieties over federal spending cuts, tariffs, heightened price pressures, and geopolitical uncertainties.

Inflationary pressures intensified, with headline inflation rising to 3.0% in January, exceeding forecasts and the previous month’s 2.9%, indicating stalled progress. Core inflation climbed to 3.3% from 3.2%, surpassing market expectations. The labour market presented a mixed picture: job growth fell below expectations, while the unemployment rate dipped to 4.0%. Critically, average hourly earnings rose by 4.1%, matching the revised prior month and exceeding forecasts, signaling potential for continued wage-driven inflation.

In Europe, the economic picture is brightening after stagnation in Q4 2024. February’s PMI reading remaining steady at 50.2, unchanged from the previous month, and indicating a marginal economic growth in the bloc. Spain led the expansion with a strong and accelerating rise in business activity, while Ireland also saw faster growth, and Italy returned to expansion for the first time in four months. In contrast, Germany experienced only modest growth, and France’s activity continued to decline.

On the price front, Inflation eased to 2.4%, down from a six-month high of 2.5% but slightly above market expectations of 2.3%, as price growth slowed for services and energy. Core inflation which excludes volatile energy, food, alcohol & tobacco prices, fell to 2.6% in February, the lowest since January 2022. The labour market, remained healthy, with the unemployment rate revolving at notable lows (6.2% in January), and significantly below the 20-year average.

Fund performance

The CC High Income Bond Fund rose 0.85% in February, reflecting the moves observed across credit markets.

In February, the portfolio manager continued to actively manage the fund in-line 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 Loxam, Unicredit, and Matterhorn Telecom, while also establishing new exposures, namely: Credit Agricole and HSBC.  Conversely, the fund decreased its holdings in US dollar-denominated companies like Nemak and JPMorgan Chase.

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. The US, despite the Federal Reserve’s “higher for longer” stance, continues to demonstrate resilient broad-based strength, underpinned by a robust labour market that has thus far supported consumer spending. Meanwhile, Europe has shown tentative signs of growth acceleration following a Q4 2024 stagnation, with private sector activity in expansionary territory for the second consecutive month.

In credit markets, the combination of a resilient labour market in the US and persistent inflationary pressures dictates a prudent, neutral duration strategy, especially as the yield curve’s trajectory remains highly uncertain.

Our current preference leans towards European credit, underpinned by the prospects of continued monetary easing by the ECB. Nevertheless, the dynamic nature of the current environment, particularly the constantly evolving geopolitical tensions, require a highly proactive and adaptive management style to navigate potential risks and capitalize on emerging opportunities.