Annual Short Report 7 March 2018 Fund Manager s Report Alasdair Ross Performance of Class 1 Accumulation shares* Over the twelve months to 7 March 2018, the published share price of Class 1 Accumulation shares in the Threadneedle European Corporate Bond Fund has risen from 108.27p to 112.73p. Looking at performance within its peer group, the total return on the fund for the twelve months ending 28 February 2018, including net reinvested income, is +4.13%. The fund return equates approximately to +5.84% gross of tax and charges**. (For information the iboxx European All Corporate Bond Index gave a total return of +5.21% for the same period). Market Overview and Portfolio Activity Core European bonds struggled during the year in review, with the benchmark German 10-year bund yield roughly doubling to finish the period at around 0.66%. Corporate bonds fared somewhat better as a synchronised global economic recovery, coupled with strong company earnings and growing anticipation of US tax reform, buoyed sentiment on risk assets and drove credit spreads tighter. On the economic front, the eurozone was particularly strong. GDP for the region grew 2.5% in 2017, its best performance in over a decade, and a keenly watched measure of manufacturing and services activity hit a near-12- year high in January. Over the year as a whole, credit spreads in the European investment-grade market tightened by around 40 basis points (bps) to end at around 83 bps which is now well inside the long-run average. Despite the pro-risk sentiment that characterised the year, there were risk-off spells during which safe havens were more in demand. These were typically triggered by political developments. Early in the period, investors were unsettled by concern that populist, Euro-sceptic movements could gain power in Dutch and French elections (their failure to do so subsequently helped spreads tighten). Markets also had to contend with escalating US-North Korean tensions and fallout from the investigation into alleged links between President Trump s election campaign and Russia, which in turn raised doubts on Trump s ability to enact his policies. In the UK, the Conservative Party lost its outright majority at the snap general election in June; this caused market jitters, as did persistent rumours of a potential leadership challenge by proponents of a hard Brexit. The ongoing Brexit negotiations were a key focus for investors during the period. There was a breakthrough on the so called divorce bill in late November, but the Irish border question remains a thornier problem. Central banks garnered increasing attention as the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) moved closer to normalising their monetary *In pound Sterling and against UK peer group. **Gross performance is calculated in Factset using daily cash flows and daily global close valuations. policy. The Fed led the way, making three 25-bps hikes over the year. The ECB kept rates on hold but announced in October that it would halve its monthly stimulus purchases from January 2018. Meanwhile, in a bid to control inflation, the BoE raised interest rates in November for the first time in a decade. With each bank stressing a gradual tightening cycle, none of these moves fazed the market. However, core bonds had a tough start to 2018 as strong eurozone economic data prompted ECB policymakers to suggest that their monetary stimulus programme could be wound down more quickly than was currently expected. And in February 2018, spreads widened amid an equity sell-off as higher-than-forecast US wage growth stoked fears of higher inflation and, in turn, faster rate hikes by the Fed. During the period, the portfolio s duration (sensitivity to changes in the interest rates) was maintained at an average -0.3 year underweight relative to the index. Our credit-risk position began the review period broadly neutral versus the index, and was gradually reduced throughout 2017 to end the period at a modest underweight as we continued to position more defensively. Thematically, we increased our concentration in defensive sectors such as regulated utilities, where new positions included Alliander, Red Eléctrica, and Stedin; consumer goods, where we raised exposure to names including British American Tobacco, Fonterra Co-operative Group and Molson Coors; and in government-guaranteed bonds, where we increased the holding in German development bank KfW. We also added to favoured names within real estate, with notable transactions including purchases of Akelius Residential, Grand City Properties, SELP, Annington and Ado Properties. Against this, we exited a number of issuers including ABN Amro, Italgas, Thames Water, Nationwide Building Society, Fastighets AB Balder, Babcock, Digital Euro, FCA Capital, Celanese, KBC Groupe and JAB Holdings. Broad-based macro-economic growth and strong corporate earnings continue to provide support for European investmentgrade markets. However, we are concerned that the benefits of these earnings are not accruing to debt holders in terms of stronger balance sheets. We are late in the credit cycle and both corporate and financial management teams are looking to reward shareholders. This may be rational given the current low cost of debt against equity, but is resulting in high overall leverage numbers. In addition, the incidence of industrial- and financial-sponsored Mergers and Acquisitions is high, with the resulting combinations being of lower credit quality. Although at the margin, central banks are slowly tightening monetary policy, very low cash rates continue to provide a technical support. Spread valuations are now inside the long run average; hence, we do not consider this to be a period in which to be aggressive with overall credit risk. Fund Facts Fund Accounting and Distribution Dates Accounting Dates Payment Dates 7 March 7 May 7 September 7 November
Ongoing Charges Figure The Ongoing Charges Figure (OCF) is the European standard method of disclosing the charges of a share class of a fund based on the financial year s expenses and may vary from year to year. It includes charges such as the fund s annual management charge, registration fee, custody fees and distribution cost but ordinarily excludes the costs of buying or selling assets for the fund (unless these assets are shares of another fund). Where published, the Key Investor Information Document (KIID) contains the current OCF. For a more detailed breakdown please visit columbiathreadneedle.com/fees. Share class 7 March 2018 7 March 2017 Class 1 Accumulation shares 1.18% 1.19% Class 1 Gross accumulation shares 1.18% 1.19% Class 2 Gross accumulation shares 0.57% 0.58% Class Z Accumulation shares 0.64% 0.65% Summary of Fund Performance Performance History (%) Share class 2018 1 2017 2016 2015 2014 2013 Class 1 Accumulation shares -0.96 +1.20 +5.87-1.68 +7.80 +1.72 Class 1 Gross accumulation shares -0.72 +1.82 +5.10-0.89 +7.88 +2.50 Class 2 Gross accumulation shares -0.62 +2.45 +5.75 +0.16 +9.07 +3.54 Class Z Accumulation shares 2-0.88 +1.75 +6.40-1.26 +8.25 +1.62 1 To 28 February 2018. 2 Commenced 26 September 2013. Source: Morningstar and Threadneedle. Bid to bid prices are quoted (i.e. not including any initial charge) with gross income reinvested. Performance data is quoted in Euros. You should not view past performance as an indication of performance in the future. Please remember that the value of investments and any income from them may fall as well as rise. The real value of that income may fall over time. Net Asset Value (NAV) As at Share class NAV ( ) NAV pence per share Number of shares in issue 7 March 2018 Class 1 Accumulation shares 66,430,788 112.55 59,025,494 7 March 2017 Class 1 Accumulation shares 57,527,886 108.03 53,252,845 7 March 2016 Class 1 Accumulation shares 49,576,118 92.36 53,674,429 7 March 2018 Class 1 Gross accumulation shares 9,400,805 122.23 7,691,023 7 March 2017 Class 1 Gross accumulation shares 13,158,389 117.32 11,215,485 7 March 2016 Class 1 Gross accumulation shares 5,869,125 100.25 5,854,482 7 March 2018 Class 2 Gross accumulation shares 98,232,382 150.09 65,449,313 7 March 2017 Class 2 Gross accumulation shares 121,386,557 143.19 84,775,988 7 March 2016 Class 2 Gross accumulation shares 13,515,752 121.59 11,115,569 7 March 2018 Class Z Accumulation shares 2,860,203 124.13 2,304,203 7 March 2017 Class Z Accumulation shares 1,982,919 118.51 1,673,208 7 March 2016 Class Z Accumulation shares 651,557 100.85 646,058 Only available to eligible investors. Distribution History/Share Price Range Year to Share class Pence per share Highest share price (pence) Lowest share price (pence) 7 March 2018 Class 1 Accumulation shares 0.2758 117.72 104.63 7 March 2017 Class 1 Accumulation shares 0.4586 113.44 92.33 7 March 2016 Class 1 Accumulation shares 0.6652 94.07 82.78 7 March 2018 Class 1 Gross accumulation shares 0.2995 127.85 113.63 7 March 2017 Class 1 Gross accumulation shares 0.5703 123.22 100.21 7 March 2016 Class 1 Gross accumulation shares 0.9020 102.10 89.74 7 March 2018 Class 2 Gross accumulation shares 1.2687 156.50 138.79 7 March 2017 Class 2 Gross accumulation shares 1.5358 150.00 121.55 7 March 2016 Class 2 Gross accumulation shares 2.0554 123.81 108.42 7 March 2018 Class Z Accumulation shares 0.9582 129.48 114.86 7 March 2017 Class Z Accumulation shares 1.0502 124.17 100.81 7 March 2016 Class Z Accumulation shares 1.0724 102.65 90.09 Past performance is not a guide to future performance.
Classification of Investments 7 March 2018 2017 vs 7 March 2017 2016 24% 19% 7 March 2018 7 March 2017 14% 9% 4% -1% United Kingdom Germany Netherlands United States of America Portfolio Information Top Five Holdings as at 7 March 2018 France Luxembourg Australia Sweden Norway Belgium Italy Spain Switzerland Republic of Ireland % of Fund KFW 0.375% 22/07/2019 4.84 Bundesrepublik Deutschland 2.5% 15/08/2046 2.26 KFW FRN 11/09/2019 1.89 AT&T 3.4% 14/08/2024 1.81 Deutsche Telekom FRN 03/04/2020 1.78 Bermuda British Virgin Islands New Zealand Finland Mexico Iceland Jersey Denmark Austria Singapore Portugal Cayman Islands Guernsey Canada Derivatives Net other assets Top Five Holdings as at 7 March 2017 % of Fund Bundesrepublik Deutschland 0% 08/10/2021 4.42 KFW FRN 11/09/2019 2.58 Deutsche Telekom FRN 03/04/2020 1.57 Bundesrepublik Deutschland 0% 15/08/2026 1.48 FMS Wertmanagement 0.125% 16/04/2020 1.40 Investment Objective and Policy To achieve total return. The ACD s investment policy is to invest the assets of the Fund in a managed portfolio of fixed interest securities which are primarily Euro denominated. The portfolio will consist primarily of a broad range of investment grade corporate fixed interest investments in companies domiciled in Europe or which have significant European operations. From time to time, it may also invest in securities issued by investment grade sovereign and supranational borrowers. However, it is intended that the portfolio will not be more than 25% invested in securities rated AAA (Standard & Poor s) or equivalent rating by another leading rating agency. A maximum of 10% of the portfolio can be invested in below investment grade securities. Where securities are non-euro denominated it is intended that they will typically be hedged into Euro. For information regarding the definition of below investment grade refer to the section Investment objectives, policies and other details of the Funds. Key Investor Information Document (KIID) Subscription requirements The KIID is a pre-contractual document and investors have to confirm that they have read the latest KIID before making a subscription. Threadneedle has the right to reject a subscription if the investor does not confirm that they have read the latest KIID at the time of application. Investors can obtain the latest KIID from columbiathreadneedle.com. Changes to the management of the ACD The following changes have been made to the directors of the ACD: Resignation of Mr Tim Gillbanks on 31 March 2017; Resignation of Mr Don Jordison on 1 May 2018; Appointment of Michelle Scrimgeour on 14 August 2017. Changes to the Prospectus During the period from 8 March 2017 to 7 March 2018 the following changes were made to the Prospectus of the Threadneedle Investment Funds ICVC (the Company): Introduction of co-management for the Japan Fund, and changes to the investment policy of the fund, effective from 1 November 2017; Introduction of a compulsory conversion clause effective from 1 February 2018; Change of the name of the transfer agent and the legal advisors for the Company; Reduction of fees for certain share classes from 1 February 2018; Inclusion of a definition of near cash ; Disclosures required as a result of changes to COLL as a result of the Markets in Financial Instruments Directive (MiFID II), including amendment to the description of Class 2 Shares and Class Z Shares; Disclosures relating to the UK s decision to leave the European Union ( Brexit ); Updates to include changes to the COLL rules (including PRN, changes regarding short reports, eligible markets); Updates to reflect changes being made to UK tax on distributions (gross vs net shares, as well as tax changes more generally);
Updates to the list of funds managed by the ACD and the directors of the ACD; Enhanced disclosures regarding hedged share classes and performance fee calculations; Updates to performance, dilution adjustments and available share classes; Miscellaneous changes including address of the Financial Services Ombudsman, clarification on privacy statement, clarification of dividend payment dates, addresses of paying agents. Changes to the Instrument of Incorporation During the period from 8 March 2017 to 7 March 2018, the instrument of incorporation of the Company has been updated to include a compulsory conversion clause effective 1 February 2018. Brexit In June 2016 the United Kingdom voted to leave the European Union. While negotiations progress, there is significant uncertainty relating to the UK s withdrawal from the EU, the potential consequences and precise timeframe. It is expected that the UK will exit from the EU on 29 March 2019. Depending on the outcome of the UK s negotiations with the European Union, and the existence or otherwise of any formal implementation period, it is possible that the Funds may no longer be eligible to enjoy the rights set out in the UCITS Directive. Ceasing to be so eligible may affect the ability of non-uk domiciled investors to make new investments in the Company. The ACD is monitoring the situation and will keep shareholders informed. Key Risks Investment Risk: The value of investments can fall as well as rise and investors might not get back the sum originally invested. Currency Risk: Where investments are in assets that are denominated in multiple currencies, or currencies other than your own, changes in exchange rates may affect the value of the investments. Issuer Risk: The Fund invests in securities whose value would be significantly affected if the issuer refused, was unable to or was perceived to be unable to pay. Liquidity Risk: The fund holds assets which could prove difficult to sell. The fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities. Inflation Risk: Most bond and cash funds offer limited capital growth potential and an income that is not linked to inflation. Inflation is likely to affect the value of capital and income over time. Interest Rate Risk: Changes in interest rates are likely to affect the fund s value. In general, as interest rates rise, the price of a fixed rate bond will fall, and vice versa. Derivatives for EPM/Hedging Risk: The investment policy of the fund allows it to invest in derivatives for the purposes of reducing risk or minimising the cost of transactions. Further risks applicable to the fund can be found in the Prospectus. Risk and Reward Profile As at 7 March 2018 the figure for the risk and reward profile disclosed in the most recent KIID representing this fund is 4. The fund is in this specific category because historically it has shown a medium level of volatility (how much the value of the fund went up and down compared to other categories). It is based on past performance data in pound sterling. If your investment in the fund is not in pound sterling, please check the figure for the risk and reward profile disclosed on our website (columbiathreadneedle.com) according to the currency of your investment in the fund.
General Information The information in this report is designed to enable shareholders to make an informed judgement on the activities of the fund during the period it covers and the results of those activities at the end of the period. For further information, please contact Threadneedle Investment Services Limited. The Long Form Report and Financial Statements is available free of charge on request from the ACD and on our website. For more information about the activities and performance of the Company during the period and previous periods, please contact the ACD at the administration address noted below, or visit our website at columbiathreadneedle.com. Contacts: Registered Office Cannon Place 78 Cannon Street London EC4N 6AG Authorised Corporate Director (ACD) Threadneedle Investment Services Limited Cannon Place 78 Cannon Street London EC4N 6AG Registrar Threadneedle Investment Services Limited Delegated to: DST Financial Services Europe Limited** Authorised and regulated by the Financial Conduct Authority (FCA) St Nicholas Lane Basildon Essex SS15 5FS Investment Manager Threadneedle Asset Management Limited Cannon Place 78 Cannon Street London EC4N 6AG Authorised Corporate Director Client Services Details UK Investors Address: Threadneedle Investment Services Limited PO Box 10033 Chelmsford Essex CM99 2AL Telephone (dealing & customer enquiries): 0800 953 0134* Fax (dealing): 0845 113 0274 Email (enquiries): questions@service.columbiathreadneedle.co.uk Asian Investors Address: Threadneedle Investment Services Limited International Financial Data Services 47, avenue JF Kennedy L-1855 Luxembourg Telephone (dealing & customer enquiries): +352 2452 9817* Fax (dealing): +352 2452 9807 Email (enquiries): threadneedleenquiries@statestreet.com All Other Investors Address: Threadneedle Investment Services Limited International Financial Data Services 47, avenue JF Kennedy L-1855 Luxembourg Telephone (dealing & customer enquiries): +352 464 010 7020* Fax (dealing): +352 2452 9807 Email (enquiries): questions@service.columbiathreadneedle.co.uk Website: columbiathreadneedle.com Depositary Citibank Europe plc, UK branch (Authorised by the Prudential Regulatory Authority (PRA) and regulated by the FCA and PRA) Citigroup Centre 33 Canada Square Canary Wharf London E14 5LB Legal Advisers Eversheds Sutherland (International) LLP One Wood Street London EC2V 7WS Baum Financial Services Law Team Grosser Burstah 42 20457 Hamburg Germany Independent Auditor PricewaterhouseCoopers LLP Atria One 144 Morrison Street Edinburgh EH3 8EX Paying and Information Agent in Belgium CACEIS Belgium S.A Avenue du Port 86C B320 1000 Brussels Belgium Representative and Paying Agent in Switzerland BNP Paribas Securities Services, Paris, Succursale de Zurich Selnaustrasse 16 8002 Zurich Switzerland * Calls will be recorded. ** International Financial Data Services (UK) Limited changed its name to DST Financial Services Europe Limited on 15 August 2017.
To find out more visit columbiathreadneedle.com Threadneedle Investment Services Limited, ISA Manager, Authorised Corporate Director and Unit Trust Manager. Registered No. 3701768. Registered in England and Wales. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com 225094