Cautious and Competitive: How Merill High Income Fund Is Navigating Volatility Without Sacrificing Returns
Dr Mark Azzopardi, Chairman of the Investment Committee for Merill SICAV plc and Portfolio Manager for the Merill Funds discusses its performance and how political uncertainty, currency movements, and cautious positioning are shaping the portfolio’s direction.
What kind of returns have the Merill High Income Fund delivered over the past two years?
Over the past two financial years, the Merill High Income Fund delivered a combined return of 13.29%, which translates to a 6.44% annualised return as at 31st July 2025. These results came from a carefully managed portfolio of investment-grade bonds, diversified across geographies and sectors. The past 12 months alone returned 4.86% as at 31st July 2025, following a strong year before that. Importantly, this performance was achieved despite the euro’s sharp appreciation against major currencies like the dollar and sterling, which would typically weigh on foreign asset values.
Why has the euro appreciated so much, and what effect has that had on performance?
The euro’s appreciation—12.2% against the dollar and around 5–6% against sterling—was largely unexpected, especially since the ECB had begun cutting interest rates while the US held firm. But investor demand for European assets surged, driven by a reallocation from underweight positions after years of pessimism about Europe, particularly following the war in Ukraine. As international capital flowed in, the euro strengthened. While this dented returns slightly, it’s worth noting that the Merill High Income Fund still posted solid gains. If the euro were to weaken again, there’s a significant potential upside in the portfolio’s foreign holdings.
How did the fund manage to maintain income and improve credit quality at the same time?
That’s something we’re quite proud of. Over the past three years, the income generated by the portfolio increased by about one percentage point—moving from around 4% to just over 5%as at 31st July 2025. Usually, higher income comes at the expense of credit quality, meaning you need to go further into high yield territory. But we took a more conservative route, improving the overall credit profile while still delivering more income. This was achieved by locking in higher coupon bonds as interest rates peaked, rolling maturing positions into better-yielding instruments without extending duration too aggressively.
With ongoing market volatility and political risk, how are you managing the funds going forward?
We’re approaching this in three ways. First, we’re actively managing duration in our investment-grade bond exposure, adjusting our positions tactically depending on where we see spikes in yields. Second, we’re being highly selective with high-yield bonds—choosing only those we’re comfortable holding to maturity, to limit credit risk. And third, we’re applying active currency management to exploit pricing mismatches, averaging down where appropriate and positioning for potential gains.
Beyond the technical aspects, we’re also factoring in geopolitical risks—particularly the growing political interference in central banking. Events like attempts to discredit or remove US Federal Reserve governors add a layer of instability. This could affect both inflation control and monetary policy independence. As a result, we’re holding dollar assets more cautiously and avoiding extreme duration exposure in those segments. We’re also reassessing whether the term and risk premiums offered by US assets adequately compensate for the political risk now embedded in the system.
How does Merill High Income Fund achieve geographical diversification?
Diversification is a key component of the Fund’s structure. As of the end of July 2025, the portfolio included 56% in Europe, 32% in the US, and 5% in Asia Pacific, with the remainder allocated to Supranationals and Emerging markets.
This diversification across regions provides the fund with exposure to various credit cycles and monetary policy environments. When certain markets are experiencing challenges, others may offer opportunities, which helps manage volatility. The Fund also has access to new issues in niche markets, such as the Nordic Markets, which are sometimes not available to retail investors; these investments offer additional exposures that can contribute to the Fund’s income and stability.
Overall, this layered approach—encompassing geography, credit quality, duration, and currency—supports the Merill High Income Fund in maintaining balance and seeking returns, while navigating global risks.
How do you see the next few months shaping up for markets, and what are you watching most closely?
We think political risk will remain a key driver. While inflation has eased, the instability surrounding US monetary policy is a growing concern. If political interference escalates, it could erode confidence in the Fed’s ability to act independently, which would weigh on both bond and equity markets. We’re also watching for currency reversals—if the euro gives back some of its gains, that could provide a strong tailwind for our portfolios.
On the fixed-income side, most of our expected returns going forward will come from income rather than capital appreciation. That’s fine with us—we’ve locked in higher coupons, and even as rates continue to fall in Europe, we don’t anticipate much erosion in income. As always, our focus remains on risk-adjusted returns, not just chasing yield.
This press release has been issued by Merill SICAV plc, a diversified investment fund based in Malta, offering a range of investment opportunities across different asset classes. Dr Mark Azzopardi is a director at Jesmond Mizzi Financial Advisors, delegated portfolio management company of Merill SICAV plc. The Company is licensed to conduct investment services by the MFSA, under the Investment Services Act. Merill SICAV plc is incorporated and licensed by the MFSA as an open-ended collective investment scheme, registered in Malta, qualifying as a Maltese UCITS in terms of the UCITS Directive, with effect from the 16th of October 2015. This interview does not intend to give investment advice and the contents therein should not be construed as such. Investors should remember that past performance is no guarantee of future performance, and the income and capital are not guaranteed. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]