Technical conditions were supportive, particularly at the onset of the quarter. Increased capital market activity in October was met with inflows. New issue volume decreased in subsequent months; however, over 60% of the final quarter's primary market activity was rated B. This compares with the full year where 55% was in BB rated securities and with 49% from the previous year. In addition, the majority of annual activity was refinancing related, including the final quarter. According to J.P. Morgan, fourth-quarter bond supply was EUR €11.7 billion, a decrease from the previous period of EUR €14.1 billion. In 2016, EUR €58.9 billion came to market, which was also a decrease from the EUR €75.9 billion the previous year. Overall flow activity was relatively flat with outflows in November offsetting inflows from the other two months. Over the full year, retail funds tracked a small inflow. Overall retail fund inflows combined with limited new money issuance, which supported the euro high yield market. Euro high yield spreads tightened by 54 basis points to end the three-month period at 386 basis points. BB rated bonds underperformed every month over the quarter despite the higher-quality characteristics typically associated with that rating. Of particular note is the underperformance in November where structural issues weighed on BB rated bonds, pulling down the rest of the market. The euro high yield market is higher quality compared with its U.S. counterpart and particularly demarcated by credit quality as each rating reveals a stark contrast of characteristics. According to our benchmark, over 65% of the market is rated BB and yields less than 3%. This compares with approximately 30% in B rated issues yielding 5.5%. The carry from higher coupons afforded by single B rated securities alongside a shorter-duration profile helped drive outperformance in that segment. As such, market declines over the period were not credit-by-credit but rather curve-risk reaction.

Fundamental credit convictions drive industry allocation

Gaming is the top overweight allocation by industry driven by meaningful positions in Cirsa and Codere. Conversely, we are positioned with a longstanding significant underweight allocation to the automotive segment given its composition of low-yielding fallen angels.

Our allocation to cable and satellite TV remains our largest absolute weight by industry and second-highest relative weight. Altice, Liberty Global Group, and several of their subsidiaries remain top positions. The cable sector enjoys relatively defensive characteristics, including stable cash flow throughout the cycle, steady EBITDA growth based on wider offerings, and strong demand. Additionally, elevated mergers and acquisitions (M&A) activity in recent years is creating meaningful synergies within the industry.

Our significant underweight to wirelines helps offset the overweight to cable issuers. While both industries have some similar characteristics such as subscription-based business models, overall, wirelines have been in secular decline at the expense of cable and wireless companies.

Defensive stance helps during periods of volatility

The average rating of our portfolio is lower than that of our benchmark, mainly due to our significant overweight in B rated securities and corresponding underweight to BB rated credits. Our portfolio reflects bottom-up security selection with well-calculated risks without relying on the views of public rating agencies. We believe an underweight to BB rated bonds and focus on single B credits better compensates for the risk of a high yield rating while building a portfolio with a current yield advantage over our benchmark. Despite risks typically associated with greater yield, we believe our defensive stance is reflected through a higher-coupon profile positioned to withstand volatility over the long term. Indeed, since its inception, the SICAV has outperformed with less risk. With less primary issuance in the final quarter of 2016, most investment activity was adding to existing names with higher coupons. Our concentrated approach (90 issuers across 111 holdings compared with over 550 individual positions in the index) represents a high-conviction portfolio of medium- to long-term improving credit stories within an inefficient market. Our focused portfolio is made possible by strict discipline.

Sovereign research enhances country allocations

While our investment process is primarily driven by bottom-up credit selection, proprietary sovereign views serve as a key input in our overall risk assessment. The firm's sovereign analysts identify and convey top-down macro trends to help evaluate exogenous risks related to individual companies. An underweight exposure to peripheral eurozone countries, including Italy and Spain, is largely driven by bottom-up credit selection. Our holistic view of capital structures and our willingness to invest in holdings companies is reflected in an allocation to companies domiciled in Luxembourg.