In March, the spread on the iBoxx Euro Corporate Index tightened by 5 basis points to 140 basis points above the government bond curve. The index earned an absolute return of +1.39%. German 10-year government bond yields closed March at -0.07%, a decline of 25 basis points compared to the end of February.

The sharp decrease in government bond yields in March was mainly driven by a combination of worse-than-expected economic data and signals from central banks that they are planning to loosen monetary policy.

Economic growth figures continue to be worse than expected, especially in Europe. Indicators for industrial activity in particular have displayed a downward trend for several months now. In Germany, for instance, the PMI figures for industrial production in the first quarter of 2019 averaged 47.1. This is significantly lower than the average of 51.8 in the fourth quarter of 2018. Although economic growth remains positive in Germany, mainly thanks to robust consumer spending, the situation in Italy is rather alarming. Economic indicators in Italy are pointing to a possible recession. It is worth noting that confidence among Italian businesses has already dropped to levels last seen in 2015.

In spite of the improved sentiment in the equity and corporate bond markets in the first two months of the year, the US central bank felt it was still necessary to convey an even stronger signal to investors that a further tightening of monetary policy is highly unlikely. The Fed will now stop reducing its balance sheet in September. Moreover, the Fed indicated that there would be no further interest rate hikes this year. The ECB has in turn announced a new TLTRO programme that allows banks to borrow from the central bank at very attractive rates. This will make banks, especially the smaller ones, less dependent on funding themselves in capital markets. At the same time, the ECB noted that it was aware of the negative impact that the extremely low interest rate environment is having on the profitability of the European banking system. The practical manner by which the ECB intends to boost the profitability of European banks remains unclear, however.

The decision by Anglo-Swedish pharmaceutical company AstraZeneca to issue shares worth GBP2.7 billion was the most recent example of a company proactively attempting to improve its creditworthiness in a bid to prevent Moody’s and S&P downgrading its ratings. Similarly, Fidelity National Information Systems plans to finance approximately 90% of its USD43 billion acquisition of Worldpay using shares, and in doing so maintain its BBB and Baa2 ratings from S&P and Moody’s respectively.

The supply of new bonds stood at EUR47 billion in March, a decrease of about 4% versus February, and almost the same as a year previously. Non-financial sector companies issued EUR30 billion in new bonds last month, while financial sector companies issued EUR17 billion in new bonds. New bonds totalling EUR146 billion were issued in the first three months of this year, about 13% higher than the same period last year.

The Fund aims to avoid investments that act in breach with the VFI Richtlijn Financieel Beheer Goede Doelen (VFI Directive Financial Management Charities). De VFI Directive consists of basic guidelines and additional guidelines. The basic guideline advises institutions to investigate investments on violations of among others human rights, corruption and protection of the environment. The additional guideline is developed for organisations that want to apply stricter sustainability criteria in the investment policy. This directive includes further exclusions of companies involved in for example nuclear power, alcohol, tobacco, laboratory animals, adult entertainment and genetic modification. Each quarter, the investment universe is screened for violation of the VFI Directive. This screening is conducted based on the MSCI ESG Research database.

During the month the portfolio’s sensitivity to market trends varied between 92% and 103%. The portfolio therefore held an underweight to neutral positioning in terms of market risk.

Our positioning in the industrial goods, healthcare and insurance sectors performed relatively well in March. In contrast, our positioning in the utilities, chemical and telecom sectors contributed negatively. Our liquidity position (in the shape of cash and government bonds) had a negative impact.

At individual company level, positive contributions came from the overweights in DS Smith, Medtronic, Atos, Sky, Terna and Booking Holdings. In contrast, the overweights in Huntsman Corporation and Alliander, as well as the underweights in ING Group and Banco Santander, contributed negatively to the return.

In March, the Fund participated in new bond issues by Medtronic, Telefonica, Danske Bank, Marsh & McLennan, Abertis, Schaeffler and CNH Industrial.

The industrial conglomerate CNH Industrial, mainly known as a manufacturer of agricultural tractors and combines under the New Holland, Case and Steyr brands, is viewed as the absolute ESG leader in its sector. This reflects both the emphasis it places on improving the safety of its personnel, as well as the reduction in VOC emissions and toxic waste in its manufacturing processes. The truck division of CNH Industrial, Iveco, also is a leader in the production of (bio) gas engines. These engines can significantly improve air pollution levels in urban areas compared to their diesel counterparts.

Outlook
The material tightening of spreads since the start of this year has led to a decrease in the number of interesting investment opportunities. Combined with our concerns about the slowdown in global economic growth, we will maintain our defensive positioning.