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.

"Despite a turbulent first half of the year, global high-yield bonds performed well in the first half of 2023." 

Hannes Kusstatscher, fund manager ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD

Fund & Performance

The ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD is a bond fund whose investment universe is composed according ethical and sustainable criteria. Primarily, the fund invests in high-yield corporate bonds denominated in EUR, GBP or USD. Foreign currency risks are hedged on a strategic basis in most cases. The rating is primarily in the high-yield range (BB and lower). 

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. Due to the very short term, this presentation of the performance is not very meaningful.

Commentary by fund manager Hannes Kusstatscher

  • Good performance of global high-yield bonds
  • High yield bonds in euro preferred

 

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

Despite a turbulent first half of the year, global high-yield bonds performed well in the first half of 2023. The fund had gained about 3.9% (as of 4 July 2023), largely thanks to tighter credit spreads. In both euro and US dollar terms, spreads have narrowed by almost 50bps since the beginning of the year.

The year started with a rally in risky asset classes such as equities and corporate bonds, followed by strong jitters in March, when Silicon Valley Bank and other regional banks faltered in the USA. At the same time in Europe, Credit Suisse had to be rescued by a takeover from UBS. This led to a strong widening of credit spreads, especially for bank bonds. However, ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD was hardly invested in bank bonds. In May and June, the markets entered calmer waters again. The agreement on a new US debt limit provided support in June.

Given the turbulence in the banking sector and the declining inflation rates, central banks have become more cautious in their interest rate policies. The labour market remains strong, and economic growth is currently exceeding expectations. While the European Central Bank (ECB) is expected to raise interest rates two more times this year, the US Federal Reserve has only one rate hike priced in by the end of the year.

The high interest rates are likely to have an impact on the profitability of companies in the coming quarters as financing costs rise. That being said, most companies are still in good shape while paying attention to profitability and debt. In fact, there are currently more upgrades than downgrades when it comes to rating revisions. The share in the lowest rating sub-segment of the US investment grade segment (i.e. bonds with very good ratings) has even fallen from 17% to 13% since the beginning of the year. This reduces the danger of so-called fallen angels, i.e. companies that fall out of the investment grade segment into the high-yield segment if the economy weakens.

The market is also currently very open to new issues, and many companies are using this window to source fresh capital.

What do you expect for the second half in terms of global economy and trends, and how are you going to implement these expectations in the fund?

We expect default rates to increase in the second half of the year and in 2024. At the moment, though, the forecasts are only slightly above the historical average. The lowest rating sub-segment in the high-yield segment is already pricing in these higher default rates. In particular, companies in weak positions with a high share of floating-rate debt are currently running into problems. In recent months, some companies have therefore had to start a restructuring process. With regard to the positioning in the fund, this means that we are currently very cautious about companies that show even the slightest signs of faltering. This also makes active stock selection all the more important.

We remain cautious in the healthcare, media, and real estate sectors, as there are many companies with weak capitalisation and high leverage. Instead, we favour the consumer goods sector, especially the leisure and transport segment. Companies such as TUI, Cinemark, or Europcar have reported very good figures this year. We also continue to favour high-yield bonds denominated in euro, as their credit spreads are relatively attractive compared to US dollar bonds. Generally speaking, the credit quality of European high-yield bonds tends to be higher, even though the conflict in Ukraine continues to have a negative impact.

At a yield of around 7%, the asset class remains attractive. If we expect higher default rates in the coming quarters, this is for the most part already reflected in the yield.

 

Note: The companies listed here have been selected as examples and do not constitute investment recommendations. Any portfolio positions of funds disclosed in this document are based on market developments at the time of going to press. In the context of active management, the portfolio positions mentioned may change at any time.

ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD

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.