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.

"Fundamentally speaking, most companies continue to be well positioned. Debt levels as well as profitability and liquidity remain good on average." 

Michiel van der Werf, fund manager ERSTE BOND EURO CORPORATE

Fund & Performance

ERSTE BOND EURO CORPORATE mainly invests in corporate bonds of European issuers with high to medium credit ratings, which are denominated in euros. The rating (creditworthiness) of the bonds in the fund is primarily in the investment grade area. Any foreign currency risks are mostly hedged. Ecological and social factors as well as corporate management factors are integrated into the investment process.

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 Michiel van der Werf

  • Most companies remain fundamentally well positioned
  • Positive on banking sector and still defensive on real estate bonds

 

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

The first quarter was a turbulent one, with significant volatility in March following the collapse of Silicon Valley Bank in the US. This caused uncertainty throughout the global banking system. Growing concerns about Credit Suisse led to the company being taken over by UBS with guarantees from the Swiss government. In spite of this market upheaval in March, the first quarter saw significant gains after the weakness in 2022, with positive performances delivered by equities, credit, government bonds, and emerging markets assets. The only major exception was the commodity sector, where oil prices lost ground in every month of the first quarter.

After a quiet start in the second quarter, volatility picked up again in May. The month was characterised by renewed concerns about regional banks, another rate hike by the Fed and the ECB, negotiations about the US debt ceiling, great excitement about the potential of Artificial Intelligence (AI), and some increasingly negative economic data outside the USA. Overall, most financial assets performed poorly over the second quarter. Only a few areas recorded significant levels of outperformance, such as equities in the technology sector, as investors were considering the impact of AI.

In June, volatility fell again after concerns about US banks had subsided and especially after the US Congress had agreed on raising the US debt ceiling.

Fundamentally speaking, most companies continue to be well positioned. Debt levels as well as profitability and liquidity remain good on average. Many companies have managed the higher interest rates well so far, and the revisions of credit ratings are more or less balanced between upgrades and downgrades.

At the sector level, however, we can see some differences: for banks, higher interest rates mean rising interest margins. These provide higher earnings potential, which became evident in 2023. Uncertainty about the banking system, as mentioned above, caused the entire financial sector to underperform.

Real estate was the sector most badly hit by rising interest rates due to its traditionally high leverage.

After both interest rates and yield spreads had remained almost unchanged over the first half of the year, the positive effect of the higher yield offered by corporate bonds with high credit ratings was clearly evident on the basis of their performance of about 2%. While an increased allocation to financial equities averaging over 35% in ERSTE BOND EURO CORPORATE had a negative effect for the time being, the low weighting in the real estate sector provided compensation.

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

We expect spreads to narrow in due course on the back of yield-driven demand. That being said, increasing growth uncertainties and subsequent recessions could lead to widening spreads in the fourth quarter. In any case, we expect the yields on bonds with high ratings, which remain above 4% to date, combined with potentially lower market interest rates and spreads, to continue generating demand for this bond segment. Together with the resulting inflows, this alone should be enough to drive spreads down.

We remain positive about the banking sector and maintain our defensive stance on real estate sector bonds. In the coming months, we will keep our residual maturities at neutral.

The fund's current yield of over 4% already translates into an attractive compensation amid good to very good credit ratings.

ERSTE BOND EURO CORPORATE

Important legal note:

Prognoses are not a reliable indicator for future performance.

Disclaimer

This document is an advertisement. Please refer to the prospectus of the UCITS or to the Information for Investors pursuant to Art 21 AIFMG of the alternative investment fund and the Key Information Document before making any final investment decisions. 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 Art  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 Art  21 AIFMG, and the Key Information Document can be viewed in their latest versions at the website 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 website 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 Art 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.