Monthly comment

May was a stable month for the securities held within our portfolio. At the beginning of the month, concerns about inflation created volatility across financial markets. However, those concerns eased following comments from central bankers. In our view, a key question is whether the inflation is temporary or whether it is set to be more permanent. Irrespective of the answer, we believe our holdings should not be affected by any potential increase in interest rates. This year, and numerous times in the past, our fund has shown resilience to such moves as it has low sensitivity to interest rates. Spreads within our securities stayed stable during May, but are still wider than pre-Covid-19. This is despite the fact that the financial sector demonstrated its strong health during the real-life stress test of the global pandemic. As such, we believe that our holdings should benefit from the continued accommodative stance by central banks, combined with the gradual reopening of European economies.

Q1 earnings have been coming to an end and results from financials have been strong to date. This is due to the continuation of robust pre-provision income, combined with significantly lower provisions than initially expected, and even provision releases in some cases (ie provisions made for expected losses which have not materialised and hence are written back into the profits). Therefore, from a credit quality standpoint, we believe that financials are in a strong position, as they have large amounts of excess capital, combined with strong earnings, low cost of risk and in some cases excess provisions for expected credit losses.

In conclusion, the fund continues to generate relatively high income. The strong credit quality of our holdings ensures that we have good visibility on this high income. Moreover, valuations remain attractive. Finally, with our low sensitivity to interest rates, we believe our holdings are well-positioned to benefit from the current environment.

 

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