MARKET ENVIRONMENT
The securities held within the fund performed well during the second quarter. Concerns over the nature of inflation, on whether it is temporary or enduring, created interest rate volatility. This has not been a significant concern for the fund, as it is positioned to have low sensitivity to interest rates, notably through the exposure to fixed-to-floaters and floating rate notes. 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 as interest rates rise, and this should lead to tighter spreads for the securities held within the fund. This is exactly what we saw during the first half of 2021. Therefore, the fund performed well once again during a period of rising interest rates. Moreover, valuations of the securities we hold still remain wider than pre-Covid-19, despite strong fundamentals. We are capturing spreads of close to 330 bps, highlighting the attractiveness of our asset class. On the Covid-19 front, we have seen vaccines rollout going on well in Europe. As such, economies have been reopening. Therefore, we believe the fund is well positioned to benefit in the second half of 2021.
We continued seeing positive developments on legacy securities, with a number of securities being called or tendered at premiums to market levels. We expect similar outcomes on other legacy securities going forward.
Q1 bank earnings were released during Q2 and demonstrated once again the resilience of European financials. This was one of the strongest earnings seasons we have seen in the last decade, as indicated by liquidity and solvency ratios of European banks, which are at an all-time high, despite the real-life stress test of the Covid-19 pandemic.
