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Merill Funds 2022 Q2 Commentary
Merill SICAV - 16.07.2022

Merill SICAV plc

Q2 Funds Update – April to June 2022

Quarterly markets review:

Due to the current economic phenomenon of stagflation, characterised by high inflation rates and slowing economic growth, both share and bond markets globally were under pressure in the second quarter as investors moved to price in further interest rate hikes and an increased risk of recession. Inflation continued to move higher in many major economies during the quarter as both the US and the EU registered a rate of 8.6%. Among equities, the MSCI Value index outperformed the MSCI World Growth index but both saw sharp falls of 16.2% and 21.2%, respectively. Chinese shares proved a bright spot as prolonged lockdowns due to Covid-19 were lifted in some major cities.  

US equities fell in Q2. Investor focus was trained on inflation and the policy response from the Fed for much of the period. The Fed enacted its initial rate hikes of 0.75%, targeting a rate of 1.5% to 1.75% during the quarter and signalled that there would be more to come. Even so, the Central Bank admitted the task of bringing inflation down without triggering a recession would be challenging. Financial managers argued that the Fed is behind the curve to achieve a soft landing and should have incrementally raised interest rates early last year with emerging signs of inflation rather than stimulating the economy with 0% interest rates and ongoing monthly bond purchasing. Declines affected all sectors although consumer staples and utilities were comparatively resilient. There were dramatic declines for some stocks, most notably in the media & entertainment and auto sectors. 

Eurozone shares saw further steep declines in Q2 as the war in Ukraine continued and concerns mounted over potential gas shortages. Higher inflation is also denting consumer confidence, as the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting with a further rise likely in September. Top performing sectors included energy and communication services while information technology and real estate experienced sharp falls. Concerns over the higher cost of living and possibility of recession saw the European Commission’s consumer confidence reading fall to -23.6 in June, the lowest level since the early stages of the pandemic in April 2020. Continued disruption to gas supplies due to the war in Ukraine saw Germany move to phase two of its emergency energy plan. The next phase would involve rationing gas to industrial users, and potentially households as well. A flash estimate from Eurostat signalled inflation at 8.6% in June, up from 8.1% in May, with energy the biggest contributor to the rise.

Bonds continued to sell off sharply, with yields markedly higher amid still elevated inflation data, hawkish Central Banks and rising interest rates. Bonds rallied into quarter-end amid rising growth concerns, slightly curtailing the negative returns. European yields were volatile as the Central Bank indicated it would end asset purchases early in Q3 and raise rates soon after. The Bank of England implemented further rate hikes, bringing the total to five in the current cycle, raising its inflation forecast to 11%. The UK 10-year yield increased from 1.61% to 2.24% and the two-year rose from 1.36% to 1.88%.
 
Merill Total Return Income Fund    
As at 30 June 2022, the Fund had €39.35 million in assets under management.   This quarter, we took a more defensive stance, reducing our equity exposure while increasing our cash position. Despite such an adverse quarter, there were equities such as Healthcare and Telecom companies that traded at all-time highs, and it was in these stocks that we reduced our equity exposure, resulting in a profit.  We purchased a number of short-term bonds with an attractive yield to maturity. These bonds should contribute to greater price stability within the bond component in the event of increased volatility due to inflation expectations, while also increasing income distribution in the future. 
 
Merill High Income Fund
As at 30 June 2022, the Fund had €59.06 million in assets under management.   Due to the rapid tightening by Central Banks in developed countries, investment grade yields provided an entry opportunity from a risk-reward standpoint. With this in mind, any bonds that matured or were called early were deployed in the investment grade space, which offered an interesting risk-return profile.  Despite the fact that cash was still held at unusually high levels, we invested selectively in bonds, primarily investment grade bonds with yields in excess of 4%. The latter cash deployment improved the overall portfolio's credit rating profile.
 
Merill Global Equity Income Fund
As at 30 June 2022, the Fund had €19.95 million in assets under management. Similarly to the previous quarter, the excess cash proved useful again this quarter, particularly in June. Our defensive strategy is allowing us to access certain equity holdings at much more appealing prices. We continued to add to specific stocks, particularly in the healthcare and insurance sectors. The cash position remains relatively high as at the end of the quarter, which will be used when company valuations become more appealing.
 
Merill Strategic Balanced Fund
As at 30 June 2022, the Fund had $25.88 million in assets under management. We maintained our defensive stance and continued to reduce equity exposure in the growth sector while retaining defensive sectors. We also continued to add to our holdings of US treasuries while reducing our exposure to duration risk. The overall credit rating profile has also improved.
 
 

Share Class

30 Jun

30 Mar

Share Class

30 Jun

30 Mar

Share Class

30 Jun

30 Mar

Share Class

30 Jun

30 Mar

A1 Accumulator (EUR)

0.4969

0.5406

Accumulator (EUR)

0.4787

0.5100

Accumulator (EUR)

0.5612

0.6131

Accumulator (USD)

0.8835

0.9916

A2 Accumulator (EUR)

0.4601

0.5003

I Distributor (EUR)

0.4063

0.4362

Distributor (EUR)

0.5422

0.5941

 

 

 

Distributor (EUR)

0.4580

0.4998

C Distributor Inc (EUR)

0.4316

0.4649

 

 

 

 

 

 

 

 

 

GBP Hedged Distributor (GBP)

0.4423

0.4741

 

 

 

 

 

 

 
 
This document is issued by Jesmond Mizzi Financial Advisors Limited (JMFA) as Managers of Merill SICAV plc. JMFA (IS30176) of 67, Level 3, South Street, Valletta, VLT 1105 is licensed to conduct investment services business under the Investments Services Act by the MFSA of Triq l-Imdina, Zone 1, Central Business District, Birkirkara, Malta and is a member firm of the Malta Stock Exchange. Merill SICAV plc is incorporated and licenced as an open ended collective investment scheme, registered in Malta, qualifying as a Maltese UCITS with effect from the 16th October 2015. This document does not intend to give investment advice and the contents therein should not be construed as such. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this document. Past performance is no guide to future performance and the value of investments may fall as well as rise.

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