Solid Future Defensive Fund

The Fund aims to deliver a positive total return in any three year period from a flexibly managed portfolio of global assets whilst maintaining a monthly VaR with a 99% confidence interval at or below 5% at all times. The Investment Manager shall invest primarily in a diversified portfolio across a wide spectrum of industries and sectors primarily via bonds, equities and eligible ETFs. Investment in these asset classes either directly or indirectly through UCITS Funds and/ or eligible non UCITS Funds.

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

September 2024

Introduction

September was a month of low and high in financial markets. It started with renewed fears on the health of the ongoing economic growth, but ended on a high propped up by the jumbo interest rate cut delivered by the FED, and also by hopes that Chinese central authorities are gathering credibility about reviving the second largest economy in the world from its post pandemic funk. This has been genuinely surprising as September is statistically a negative month for financial markets, while geopolitical tensions in the Middle East at their high in the last year of renewed conflict have almost disappeared from the radar of market participants. Other events such as the downward trend in oil prices (in spite of the above said geopolitical tensions) or the dis inversion of the US yield curve, both potentially negative signs according to text books, have not deterred markets’ resilience. Not even the continuous deterioration of leading macro indicators failed to put a dent on market participants’ optimism, making more questionable the fundamental reasons for such market behaviour. The momentous rally in Chinese stocks because of heightened domestic growth expectations from aggressive mostly monetary policies (yet), as well as the European stocks rally response as a second derivative to the above, might prove a point. Before any fundamental conviction is validated by actual proof on the effectiveness of measures taken, investors rush in a clear fear-of-missing-out action pattern. What this leaves us with in the end is different geographies experiencing clearly different economic fortunes, but posting rather similar market returns. While markets may be highly inefficient in the short term, they tend to erase inefficiencies over the longer periods. Investors should always remain mindful of this beyond the temporary sugar rush currently on offer.

From the monetary front, the FED lowered its key overnight borrowing rate by 50 basis points amid signs that inflation was moderating and the labour market was weakening. This took the markets by surprise, as the FED delivered more than markets were expecting. In addition to this, the FOMC indicated through its “dot plot” the equivalent of 50 more basis points of cuts by the end of the year. In the Euro zone, during its monthly meeting the ECB also delivered a 25basis point interest rate cut after a period of sluggish economic growth and cooling inflation. This was quite in line with market expectations, the big question now being what will the interest rate path be into the year-end. Finally, the Bank of Japan kept its benchmark interest rate steady during its monthly meeting, as it strives to normalize monetary policy without hurting economic growth. While this was along market expectations, economists do see another rate hike by the end of the year.

In equity markets, the “rotation trade” from previous large cap winners in the AI space into laggard value sectors like real estate, consumer staples and utilities has continued into the month. However, the highest volatility in equity markets has been recorded in Chinese markets that have achieved 25% returns in the span of a week. While at the surface the fundamental basis for such rally has been the announcement of the very much expected public measures to support the banking sector as well as equity markets, actual market moves have most likely been the result of short positioning squeeze of institutional investors. Notwithstanding the special nature of Chinese markets where the retail segment behaviour reminds more of casino gambling than sound investing, the fact that overseas money is pouring into Chinese stocks again is in total contrast with the “non-investable” label previously attached to these markets. This is just another example why it pays out having a flexible approach on own convictions vis-à-vis markets. In the words of John Maynard Keynes, “when information changes, one should alter his own conclusions”.

Market Environment and Performance

In September, the Euro area economy has consistently shown signs of weakening, as the private sector activity decreased for the first time since February. Overall, services slowed (51.4 vs 52.9 in the previous month), whilst the manufacturing contraction deepened (45 vs 45.8 in the previous month) as demand for Euro area goods and services fell at the quickest pace in eight months. Headline inflation, consequent to the base effect, particularly on energy, fell to 1.8% from 2.2% in the previous month, while core inflation eased marginally to 2.7%.

The US economy portrayed nascent signs of cooling. Manufacturing (reading 47.3 v 47.9 in the previous month) pointed to a deterioration in business conditions, while services (reading 55.2 v 55.7 in the previous month) continued to note a modest growth. New business in services rose solidly outweighing a decline in manufacturing, whereas employment levels were down for the first time in three months. On the pricing front, disinflationary trends sustained. The latest inflation release showed a modest slowing, as headline inflation fell for a sixth straight month to 2.4% in September, yet above forecasts of 2.3%. Core inflation, which excludes volatile items such as food and energy, edged higher to 3.3% in September of 2024 from the three-year low of 3.2% recorded in the two previous months.

In September equity markets surprised once again on the upside upsetting every analyst’ negative forecast based on seasonality factor or macroeconomic consideration. Running alike the previous month, markets have first shown signs of weakness to recover again on the back of the initial FED interest rate cut followed by the positive surprise of Chinese stimulus program. The same main theme of rotation from large-cap techs to value sectors have carried the markets, as the overall positive sentiment on the real economy has taken over. While developed markets have posted a normal growth month, emerging markets have clearly outperformed led by China which managed the strongest rally since the GFC. The S&P 500 index gained 1.12% as all sectors except energy contributed to growth. European markets unexpectedly outperformed at the finish line propelled by their constituents’ exposure to the Chinese markets as the EuroStoxx50 and the DAX gained 0.9% and 2.2% respectively.

On the credit front, U.S. Treasury yields fell substantially over the quarter, with 2-year yields leading the way, falling 111 bps, as the yield curve steepened to reflect the outlook for lower interest rate policy.  In Europe, the European Central Bank (ECB) also eased monetary policy by cutting interest rates by 25 bps. German and French 10-year government bond yields declined over the quarter (meaning prices rose) but underperformed relative to Italy and Spain, which were among the strongest performers in Europe.

In fixed income, sovereign yields fell with 2-year yields leading the way, as the yield curve steepened to reflect the outlook for lower interest rate policy.  Meanwhile, on the corporate bond front, U.S. investment-grade bonds performed well, benefiting from the lower interest rate environment. However, global high yield bonds continued to outperform, as investors sought higher returns from riskier assets.

Fund Performance

In the month of September the Solid Future Defensive Fund registered a 1.04 per cent gain. On the equity allocation, the Fund’s allocation has been readjusted, as the Manager made some tactical moves in response to recent market developments. New conviction name Salesforce has been added based on a strong business model and balance sheet compounded by a very compelling fair value generated by our in-house valuation. We also added on the Fund’s Microsoft, Amazon, Meta Platforms, Airbnb Inc and Bristol Myers Squibb holdings, as we believe that the gradual constructive sentiment seen in the markets will ultimately constitute a tailwind for these convictions. As well, the exposure to the Amundi MSCI EM ex China UCITS ETF has been increased based on the fundamental conviction that a weakening US dollar will constitute a positive for emerging markets. Positions in KLA Corp and iShares Core S&P UCITS ETF have been liquidated for cash management purposes. From the fixed income front, the manager switched out the 3% Takeda Pharmaceutical 2030 bond for the 4.25% IGT Lottery Holdings BV 2030 bond. This move was made to capture a higher potential return, as the Takeda bond’s upside was limited, in addition to locking in a higher coupon rate before potential policy changes which will inevitably push income returns lower. This decision aligns with the overall investment strategy.

Market and Investment Outlook

Going forward, the Manager believes that the latest monthly job report in the US has been providing material soothing as regards worries of a rapidly declining global economic growth. Adding to these the public stimuli program just announced by the Chinese Central Bank, expected to be complemented by further such active measures from the fiscal side, there are some solid ground to bring about some positive expectations as regards the macro fundamentals, at least over the short term. While the inflation challenge has been generally dealt with at this point, the focus lies now on the health of the consumer and his willingness to spend. While there is no consensus as regards the phase in the economic cycle we are currently experiencing, the earnings season almost upon us and the US elections are the main factors expected to materially deviate the still strongly bullish market momentum.

From the equity front, the Manager has become more positive over the short term, while overall remaining prudent regarding equity markets. The Fund continues having a diversified allocation with a focus on quality companies and business models benefitting from secular growth trends agnostic to particular macroeconomic developments. Nevertheless, the Manager is more willing to invest in specific sectors where the overriding sentiment warrants a more attractive upside potential over the shorter timeframe. Cash levels have been materially decreased in order to fully benefit from markets momentum. Meanwhile, in fixed income, the anticipation of additional interest rate cuts fosters a positive outlook for the global bond market. We continue to believe that locking in current attractive coupon levels is prudent before any signs of continued policy easing.