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.

"The volatility in the interest rate markets remains elevated this year due to uncertainty about inflation, possible interest rate hikes, and the fear of recession."

Matthias Hauser, fund manager ERSTE RESERVE CORPORATE

Fund & Performance

ERSTE RESERVE CORPORATE is a bond fund with a short fixed interest rate. It invests globally in corporate bonds. The emissions are primarily denominated in euros. Any foreign currency risk is usually hedged. The fund mainly invests in bonds with an investment grade rating. The target range of interest rate duration ranges from 0 to 1 years. Changes in the creditworthiness or risk premiums of the bonds can lead to larger price fluctuations.

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 Matthias Hauser

  • High fluctuations in interest rate markets due to uncertainty
  • Fluctuations were cushioned by the share of floating-rate bonds

 

How would you sum up the market year so far?

The year started with wider credit spreads, which narrowed rapidly in the first two months and created good sentiment on the corporate bond market. The calm did not last this year either and was promptly cut short by the collapse of Silicon Valley Bank in the US. The sentiment in the banking system tilted, with fears of possible bank running rampant. These fears materialised, and Credit Suisse had to be taken over by UBS. Credit spreads shot up but had calmed down again by the end of May.

Since then, credit spreads have moved sideways in a narrow range, with bank bonds continuing to offer slightly higher risk premiums. The volatility in the interest rate markets remains elevated this year due to uncertainty about inflation, possible interest rate hikes, and the fear of recession.

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

The performance is very satisfactory for a fund invested in short-term bonds. The crucial factor was the option to reinvest at higher yields as well as at spreads. The increased fluctuations on the interest rate markets were cushioned by the share of floating-rate bonds and notes in the fund. The flexibility of the fund also allowed us to take advantage of short-term opportunities on the market. The only fly in the ointment in the first half of the year was the investment in Credit Suisse. Here, we managed to reduce our holdings at prices above expectations through skilful action. Due to the de facto absence of any exposure to the real estate sector, the fund was spared any negative impact from that angle.

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

With the rising rates last year, bonds from the higher rating classes (A, AA) became positiver again. In the fund, we increasingly focused on companies from the A and AA rating classes in addition to BBB companies.

Since the banking crisis, the credit spreads for banks on the bond market have remained elevated, offering positiver yields when compared to other companies. Here, too, we invested opportunistically.

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

The cycle of interest rate hikes is probably not quite done yet, but it will continue at a lower velocity than last year. We still expect to reach the plateau of rate hikes in developed markets this year. Interest rates at the short end could decline somewhat, but still remain at elevated levels. Credit spreads should remain supported in the short term. As recession risks increase, spreads could be widening in the fourth quarter of 2023.

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

Due to the short fixed-interest period of ERSTE RESERVE CORPORATE, our premise is that the fund can continue to reinvest at positiv interest rates. Possible increased volatility should only have a minor impact due to the low interest rate sensitivity of the fund. We expect to gradually reduce the  share of floating rate notes, as the cushioning effect against rising interest rates is no longer needed as much as it was. If interest rates decrease slightly, we will switch to fixed-rate bonds that offer higher interest rates. In the high-yield segment, we will be even more selective and focus on the short end in view of possible recession risks.

ERSTE RESERVE 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.