Persistently high inflation and the restrictive course of the central banks continued to dominate the first half of the year. In this series, Funds exclusive, our fund managers look back on the performance of selected funds and explain their view with regard to the second half of the year.

"We are dealing with an environment where fundamental analysis plays a crucial role."

Péter Varga, fund manager ERSTE BOND EM CORPORATE

Fund & Performance

ERSTE BOND EM CORPORATE invests in corporate bonds from emerging countries. The fund invests worldwide and enables investors to participate in the growth opportunities of these emerging markets. Foreign currency risks against the euro are mostly hedged.

The performance is calculated in accordance with the OeKB method. The management fee as well as any performance-related remuneration is already included. The issue premium which might be applicable on purchase and as well as any individual transaction specific costs or ongoing costs that reduce earnings (e.g. account- and deposit fees) have not been taken into account in this presentation. Past performance is not a reliable indicator of the future performance of a fund.

Performance since start of the fund
Note: Past performance is not a reliable indicator for future performance.

Commentary by fund manager Péter Varga

  • Fundamental analysis plays a major role in the current environment
  • Strategy remains to achieve a relatively high and secure current yield

 

How did the fund perform in the first half of 2023??

The sentiment was good on the bond markets at the beginning of the year. All investment banks and research houses had ranked bonds as asset class very high in their research for 2023. This positive assessment was based on the expectation that global yields had already peaked. In such an environment, investors can earn good current yields that can also offset any further increases in yields if they are within limits. For example, emerging market bonds recorded an inflow of several billion US dollars of new money in the first two months of the year. The aforementioned positive sentiment was fuelled by the euphoria over the revival of the Chinese economy after the Covid-19 lockdowns.

In the past two months, rather mixed figures have come out of China that did not live up to expectations. Figures from the manufacturing sectors were weaker than anticipated, and only the services sector surprised positively – as it did in the developed markets, too. In such an environment, where the purchasing managers' indices for the manufacturing sector are signalling a recession (i.e. below 50), companies in these sectors will find it challenging to report good figures. As we know, many emerging markets companies operate in these sectors. In recent months, we have seen a deterioration of fundamentals in the mining, steel, chemicals, and paper sectors. Spreads have soared in some cases. We are dealing with an environment where fundamental analysis plays a crucial role.

Overall, the market has become more illiquid, which makes active management more difficult. In the first five months of the year, ERSTE BOND EM CORPORATE was somewhat less sensitive to interest rates than its benchmark, which made it lose out on some gains it could have otherwise achieved.

What was the focus of the fund in the first half?

The fund increased the portion of euro-denominated bonds as these were traded at similar yields as comparable bonds in US dollars but did not create hedging costs, which were 2-3% during this period. We tended to focus on bonds with short remaining time to maturity, as the US yield curve is inverted, and we preferred to keep our credit risk low (see previous paragraph).

What do you expect for the second half in terms of global economy and trends?

A look at historical data indicates that the economy should cool down in the coming months based on indicators such as bank lending, interest rates, and purchasing managers' indices. Direct dialogue with various companies does not suggest any improvement in the coming quarterly figures either.

What are your priorities in the fund, based on your expectations?

Our strategy is to achieve a relatively high and safe (!) current yield. Based on our expectations, we will slightly increase interest rate sensitivity on weaker days, continue to pay attention to fundamentals, and maintain our strategy of active allocation. Cyclically sensitive companies could soon reach yield levels that would represent very good entry points, should the economy turn upwards at some point.

Important legal note:

Prognoses are not a reliable indicator for future performance.

Disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site www.erste-am.com within the section mandatory publications  or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com. A summary of investor rights is available in German and English on the website www.erste-am.com/investor-rights as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.