Return to flip book view

RMB Fund Commentary 03 2022

Page 1

Eurizon SLJ Bond Aggregate RMB (Renminbi) Fund Monthly Commentary March 2022

Page 2

For professional investors only Report Contents Performance and portfolio update ................................................................................... 2 Chart one: Strategy performance since inception .......................................................... 2 Fund characteristics ........................................................................................................... 2 Duration ............................................................................................................................... 3 Chart two: Duration & Maturity profile since inception .................................................... 3 Asset Allocation .................................................................................................................. 4 Chart three: Asset allocation since inception .................................................... 4 Currency .............................................................................................................................. 5 Chart four: Relative FX overlay since inception ................................................ 5 The National People’s Congress (NPC) meeting set a high growth target, implying aggressive easing polices for the year. ............................................................................ 6 Demand is yet to improve; the economy is facing downward pressure. ...................... 7 The compressed yield spread of the US and China will not undermine the attractiveness of Chinese assets and the RMB ................................................................. 8 Vice prime minister He Liu chairs State Council financial stability and development committee meeting on 16th March .................................................................................. 9 Bottom line ........................................................................................................................ 10 Strategy overview ............................................................................................................. 12 Key Risks ............................................................................................................................ 13

Page 3

For professional investors only Performance and portfolio update The fund performance in March was +1.73% net of fees, while the since inception return reached 17.19% on a net basis. Currency returns have driven performanc e during the month , with curve and duration strategies contributing to a lesser extent. Chart one: Strategy performance since inception Sourc e: Euri z on S LJ a nd Morni ngstar Dir ec t, t ot a l re tur n n e t of fee s i n GB P ter ms a s at 31 Ma rch 2022. Th e f un d ’ s i nc ep ti on da te i s 22 February 2021 an d benchmar k the Bl oomberg B a r clays Chin a Tre as u ry In de x . P e r fo r m an ce pri or to 2 2 February 20 21 i s exten de d p erf orm ance bas ed on th e p erformanc e of Euri zon F un d Bo n d Aggr ega te RMB Fun d Z EU R Acc , adj u st ed fo r currency a n d fee s. Track r ec ord extensi on p e r f or me d b y M o rnin g star. Fund characteristics Fund Benchmark Characteristics Duration 7.19 years 7.09 years Close to neutral duration # of Bonds 23 139 Focused on Liquidity Average Yield 2.98% 2.71% Higher Yield Average Rating A+ A+ Focused on Quality 30.6618.57-505101520253035Jan 18Mar 18May 18Jul 18Sep 18Nov 18Jan 19Mar 19May 19Jul 19Sep 19Nov 19Jan 20Mar 20May 20Jul 20Sep 20Nov 20Jan 21Mar 21May 21Jul 21Sep 21Nov 21Jan 22Mar 22% Total Return, GBP, Net of feesRelative Eurizon SLJ Bond Agg RMB I6 WS GBP Acc EAA Fund RMB Bond - Onshore

Page 4

For professional investors only Duration In March, bond yields moved in a volatile pattern, with a sharp initial plunge based on a weak TSF (total social financing) and a subsequent rebound due to the unchanged MLF (medium-term lending facility) and the redemption of the funds affected by the equity selling right after. Net-net, the change in the level of yields was modest, and the yield curve shifted slightly flatter. We reduced our duration furt her and maintained a duration that’s quite close to the benchmark to guard against the risk of a more aggressive simulative effort from the government and the PBOC. During the month our long duration was decreased to 7.19yrs from 7.85yrs, compared to 7. 09yrs for the benchmark. We slightly reduced our duration overweight and maintained a duration that’s quite close to the benchmark to guard against the risk of a mor e aggressive simulative effort from the government and the P eople’s Bank of China . Key view: • We will maintain a closer to benchmark duration to guard against the risk of a more aggressive simulative effort from the government and the People’s Bank of China. Chart two: Duration & Maturity profile since inception Sourc e: Euri z on S LJ C ap ital & Black rock Solutio n s a s a t 31 March 2 02 2. Portfolio c h a r acterist ic s and h oldin gs ar e subj ect t o c h a nge wi th out n oti ce. Thi s do e s n ot c on sti t ute an in vestmen t r e co mm end ati on . For informati on purpose s only, m et h od ol ogy a vai la ble on req ue st 66.577.588.50.0%20.0%40.0%60.0%80.0%100.0%Mar 21 Apr 21 May 21 Jun 21 Jul 21 Aug 21 Sep 21 Oct 21 Nov 21 Dec 21 Jan 22 Feb 22 Mar 220 to 1 1 to 3 3 to 55 to 7 7 to 10 10 to 1520 to 30 30 plus Fund (LH, yrs)Benchmark (LH, yrs)

Page 5

For professional investors only Asset Allocation From an asset allocation perspective, we maintain ed our strategy of investing in the most liquid and highly rated part of the China onshore bond market. During the month our asset allocation was largely unchanged. Government bond allocation increased from 21.1% to 22.4%, Policy Bank bonds decreased from 49.6% to 49.4% and Corporate Bonds decreased from 26.4% to 26.3% as we further enhanced the liquidity of the portfolio . Key views: • We like Policy Bank bonds due to their tax advantage for foreign investors and their high credit worthiness. • We like Central ‘State Owned Enterprises’, within Corporate Bonds, due to their structural importance to the Chinese economy and their ownership s tructure. • We do not like Local Government Bonds due to their illiquidity. Chart thr e e: Ass et a ll oc a ti on si nc e in cep t ion Sourc e: Euri z on S LJ C ap ital & Black rock Solutio n s a s a t 31 March 2 02 2. Portfolio c h a r acterist ic s and h oldin gs ar e subj ect t o c h a nge wi th out n oti ce. Thi s do e s n ot c on sti t ute an in vestmen t r e co mm end ati on . For informati on purpose s only, m et h od ol ogy a vail a ble on req ue st . 22.40%49.40%26.30%0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%100.0%Mar 21 Apr 21 May 21 Jun 21 Jul 21 Aug 21 Sep 21 Oct 21 Nov 21 Dec 21 Jan 22 Feb 22 Mar 22Government Policy Bank Corporate Bond

Page 6

For professional investors only Currency Within our currency overlay, we maintained a short USDCNH position and added a long EURUSD position in expectation of a reflief rally from a prospective ceasefire in Ukraine . Key view: • We believe that the economy and policies in China will diverge from much of the rest of the world, and the CNY will remain strong. Chart four: Relative F X ov erl ay si n c e in ception Sourc e: Euri z on S LJ C ap ital & Black rock Solutio n s a s a t 31 March 2 02 2. Portfolio c h a r acterist ic s and h oldin gs ar e subj ect t o c h a nge wi th out n oti ce. Thi s do e s n ot c on sti t ute an in vestmen t r e co mm end ati on . For informati on purpose s only, a met hod ol ogy is avail ab l e on req ue st . -25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%30.0%Feb 21 Mar 21 Apr 21 May 21 Jun 21 Jul 21 Aug 21 Sep 21 Oct 21 Nov 21 Dec 21 Jan 22 Feb 22 Mar 22EUR CNY&CNH USD

Page 7

For professional investors only The National People’s Congress (NPC) meeting set a high growth target, implying aggressive easing polices for the year. In March, the crucial annual NPC meeting focused on the economy and policies, resulting in a 5.5% growth target being set for 2022. A somewhat more aggressive target than expected. The government explained that this ambitious target was necessary to form a basis of support for employment, improving livelihoods, and preventing macro risks. This target w as in line with the 2035 target for GDP per capita to reach the level of middle-income countries. Leaders indic ated that fiscal policy will be the main stimulus tool to meet this growth target. Despite the lower fiscal deficit of 2.8%, the large carryover of funds from the previous year will support fiscal expenditure. In terms of specific policy me asures, infras tructure investment, tax and fee cuts, and the transfer payments will be implemented in the rest of the year. The issuance of local government bonds has been front loaded this year. The quota was in line with 2021; thus, we do not expect a local bond supply shock. In the meantime, monetary policy will play a complementary role, setting an easy monetar y environment, we believe. Since the growth target is high, the greater the macro challenges, the more aggressive the easing policies will be, we believe. Against this backdrop, Chinese equites will likely benefit from the policy support and bonds will also likely perform under an easing monetary environment until the economy improves .

Page 8

For professional investors only Demand is yet to improve; the economy is facing downward pressure. After the very strong TSF print of January, the TSF of February was surprisingly low, and missed the market’s consensus. In line with our previous anticipation, the high growth of TSF and new loans have not been sustained due to weak financing demand of both ente rprises and the households. Property companies, the primary source of financ ing demand, continue to face refinancing difficulties. At the same time, households’ financing demand and willingness to spend remain capped by income levels and the high leverag e. In the meantime, China had the worst domestic resurgence of COVID since the outbreak in early-2020, covering vast regions including the key financial hubs, Shanghai and Shenzhen. Although we expect the number of new COVID infections to peak soon, due to the zero COVID policy, the economic impact of the current COVID outbreak will likely be significant and will pose further headwinds for the economy. Against this backdrop, additional easing and stimulative packages might be required, in our view, to ac hieve the planned GDP target.

Page 9

For professional investors only The compressed yield spread of the US and China will not undermine the attractiveness of Chinese assets and the RMB. Due to high inflation, the expectations of aggressive Fed tightening, and the easing expectations in China, bond yields in the US and China have been converging rapidly. In turn, this has raised concerns about capital outflows from China and depr eciation of the RM B. We do not share this view. China’s priority in 2022 is to support economic growth through supportive policies. A stable and sound economy will in turn support a stable currency. In addition, the still -healthy current account surplus will also support the RMB. Moreover, the fallout of the financial sanctions imposed on Russia over Ukraine should enco urage Beijing to place more weight on currency stability to promote the international use of the RMB, rather than using the RMB as a mercantilis t tool. In sum, we believe Chinese assets remain attractive. Regarding RMB bonds specifically, in spite of the converging nominal bond yields of the US and China, the real bond yields spread is still very wide, with logical implications for asset prices.

Page 10

For professional investors only Vice prime minister He Liu chairs State Council financial stability and development committee meeting on 16th March. The news was released during the midday market break and the market rebounded a lot after the re -start of the afternoon session. The SHSZ 300 index surged by 4.32% and the ChiNext was up by 5.20% by the end of the day, leading the US listed Chinese sto cks and Heng Seng index to a substantial recovery. The State Council meeting was remarkable and covered all the weakest links of the current Chinese economic system, which demonstrated the willingness of the current government to stabilize the financial m arket and address the macro challenges. The key points of He Liu’s statement included: bolster the economy; monetary policy should take the initiative to help alleviate stresses; new bank loans should maintain an appropriate growth path; prevent and resolve major risks to the property sector; communicate with US regula tors to devise a concrete plan for the US -lis ted Chinese companies; set both a “red light” and a “green light” for platform economy. The meeting emphasized economic development as the central focus. Hence, more stimulative policies are likely to be rolled out to stabilize the economy and achieve the ambitious GDP growth target of 5.5%. Als o, this meeting has meaningfully reduced the regulatory shocks for Chinese assets and put financial sta bility as the priority of any new policies.

Page 11

For professional investors only Bottom line In March, Chinese bonds traded actively, but yields remained in a range. As we look ahead, further accommodative policies on all fronts are expected, given the weakness in domestic demand, which will be further complicated from the resurgence of covid. We look to maintain a relatively neutral duration position, to guard against any large fiscal stimulus. And we will seek to improve the liqu idity of the portfolio, in order to remain flexible. On the currency ri sk, we continue to believe the CNY will outperform, and we are tactically positive on EURUSD, as we see near term risks as being skewed to the topside.

Page 12

For professional investors only Further information Useful links Visit our website for more insights & details about our strategies www.eurizoncapital.com/UK Further information Useful links Sales & Business Development Matt Jones, Head of Distribution Email: matthew.jones@eurizonslj.com Mobile: 07716 639835 Business address Eurizon SLJ Asset Management 90 Queen Street London EC4N 1SA Fund Information Umbrella Name Eurizon Funds ICVC Fund Name Eurizon SLJ Bond Aggregate RMB (Renminbi) Objective The objective of the Sub-fund is to provide capital growth by achieving a return after fees in excess of the return of the Bloomberg Barclays China Treasury Total Return Index over any five-year period. Benchmark Bloomberg Barclays China Treasury Total Return Index. The Sub-fund’s investment process is not constrained by the Index and the composition of the Sub-fund’s portfolio may deviate from the Index in a significant way. Accordingly, the Sub-fund’s returns could be similar to or different from the Index. Regulatory Status UK UCITS Fund Managers Monica Wang, Stephen Jen Share Class Information ISIN Currency Acc/Inc OCF Minimum Investment Wholesale GB00BMY78T53 GBP Acc 0.65% £1,000,000 Institutional GB00BLN8SH09 GBP Acc 0.50% £10,000,000 Founder GB00BMY78V75 GBP Acc 0.40% £1,000,000 Founder GB00BMY78W82 EUR Acc 0.40% £1,000,000

Page 13

For professional investors only Strategy overview The fund offers exposure to the world’s second largest bond market. It invests in a divers ified set of Renminbi -denominated debt instruments traded on the China Interbank Bond Market or in other regulated markets in China and Hong Kong. Key points: We focus on the most liquid and highly rated bonds in our universe. Our risk aware approach aims to deliver growth over the medium to long term. Our diverse team have a deep understanding of the culture, policies and market they invest in. All team members, whilst based in London, are Mandarin speakers having l ived and worked in China. We have a research led approach which is based on our original macroeconomic research. Our understanding of economic mega trends, currencies and the place China has in global markets is complimented by our active bottom up analys is. The RMB Strategies team The Investment, Advisory & Research team share a strong collaboration ethic. This allows a constant stream of information on macro, economic and monetary themes leading to interesting investment ideas and opportunities. Based in London, our team is extremely diverse in terms of cultural and professiona l background. Most of our portfolio managers are originally from the emerging markets and speak local languages, having lived and worked in these countries. This provides us with the unique combination of being able to understand the local culture, whilst also applying the globa l context of how the outside world views these markets.

Page 14

For professional investors only Key Risks Charges from capital The fund charges are taken from capital invested. Taking charges from capital has the effect of increasing the yield, whilst also negatively effecting the growth potential of the investment. Chinese securities The fund invests in financial instruments dealt in on the local Chinese markets, including on the CIBM, and denominated in Renminbi may imply specific regulatory, exchange rate, repatriation and tax risks are detailed in section 5.40 of the Prospectus. Counterparty risk The fund carries the risk that a third-party with which the Sub-fund entered into contracts in order to perform some operations may default on its obligations. Credit risk The risk that the issuer of debt instruments fails to pay to the Sub-fund interests and principal, even only in part. Liquidity risk The risk that the sale of the financial instruments in which the Sub-fund invests may be difficult depending on the features of these instruments themselves and/or on the market conditions when the sale is to be executed or on the lack of a sufficient number of potential buyers. The selling price may then be less than the value of a financial instrument. Geopolitical risk The risk related to the investments in geographic areas that may be sensitive to any event of economic, geopolitical or regulatory nature or any other events beyond the control of the Management Company that could expose the Sub-fund to losses. Exchange rate risk Changes in currency exchange rates may affect the value of your investment. Concentration risk The price of funds that invest in a reduced number of holdings, sectors, or geographical areas may be more heavily affected by events that influence markets and increase volatility. Past performance is not a reliable indicator of future returns. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. For professional clients only. This is a financial promotion and is not investment advice. The Eurizon SLJ Bond Aggregate RMB (Renminbi) fund is a sub-fund of Eurizon Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds. The Company is an investment company with variable capital incorporated with limited liability and registered in England and Wales under registered number IC027300. It is a UCITS scheme as defined in COLL and an umbrella company for the purposes of the OEIC Regulations. The Authorised Corporate Director (ACD) is Eurizon SLJ Capital Limited, authorised and regulated by the Financial Conduct Authority, with firm reference 736926. For more information on the fund, or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant fund information page on www.eurizonsljcapital.com/rmb-bond-fund/ Issued in May 2021 by Eurizon SLJ Capital Limited, 90 Queen Street, London, EC4N 1SA. Authorised and regulated by the Financial Conduct Authority, with firm reference 736926. ESLJ-070422-FC1

Page 15

For professional investors only

Page 16

For professional investors only