Monthly comment

The end of February was all about rising interest rates and the impact on financial markets. This has not been a significant concern for our fund, as it is positioned to have low sensitivity to interest rates, notably through the exposure to fixed-to-floater and floater securities. Moreover, subordinated debt, especially subordinated debt issued by the financial sector, tends to benefit from a rising rate environment. This is because the profitability of financials increases with interest rates, and therefore this should lead to tighter spreads for our securities. We also believe, that despite the moves we have witnessed, central banks will remain accommodative. Furthermore we have seen slightly more positive news surrounding Covid-19 and the reopening of European countries. At the same time, we are capturing spreads of circa 400 bps within the subordinated debt of financials. Valuations on these securities are still significantly wider than pre-Covid-19. Following the release of the bulk of Q4 earnings, financials overall have been resilient and exceeded expectations in this regard. We have seen a gradual path to normalisation, with less provisioning for expected credit losses. Additionally, capital remains a bright spot, with the average common equity tier one (CET1) ratio increasing to 14.2% from 13.4% pre-Covid-19. We believe the financial sector should be able to remain resilient even in a prolonged Covid-19 scenario. Moreover, due to our exposure to fixed-to-floater and floater securities, we believe the fund is well positioned for a period of rising rates. Finally, subordinated debt of financials remains one of the rare areas where valuations are significantly wider than pre-Covid-19.

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