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.

"Given the absolute yield levels for short-term bonds, we regard the current level attractive for short maturities."

Martin Cech, fund manager ERSTE RESPONSIBLE RESERVE

Fund & Performance

ERSTE RESPONSIBLE RESERVE is a bond fund with a short fixed interest rate and sustainable investment approach, which invests largely in short-dated bonds (maximum maturity 3 years), money market papers and "Pfandbriefe" from financial institutions, states, supranational issuers and companies in investment grade. The fund only invests in issuers that meet Erste AM's ESG criteria.

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 Martin Cech

  • Duration further shortened in the first half of the year
  • Caution among real estate issuers
  • Current level attractive for short maturities

 

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

The fund had gained around 1.3% (as of 4 July 2023) since the beginning of the year. The average yield to maturity is currently at 4.16% with a duration of 0.76 years. The cash portfolio is slightly longer at 0.86 years; during the market turbulence in March, we took out a small hedge via EUR Treasury futures as we continued to expect the ECB to pursue a hawkish central bank policy.

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

We reduced the duration further in the first half of 2023. Due to the inverted yield curve, our focus of purchases was on bonds with a maximum remaining time to maturity of 2Y, but many also with maturities of less than a year with redemptions in the ongoing year. We also increased the share of floating-rate notes, whose coupons benefit(ed) from increased money market rates, when opportunities arose. They currently account for slightly above 20% of assets under management.

Since December 2022, several hybrid bonds have been called on the initial call date (VW, Volvo, Telia). There have been no significant changes to the issuer structure. The diversification among issuers remains broad, and the share of subordinated bonds is currently just over 4%. These offer attractive yield premiums with short remaining time to maturity or the expectation of early call dates.

The fund management team is exercising restraint with regard to real estate issuers. Also, the fund had no Credit Suisse exposure, although bonds from other financial institutions were also affected to a lesser extent by the market turbulence and widening of spreads in March. We keep the cash balance in the fund low at currently less than 1%. The average rating of the fund is A-/BBB+, but we also hold BB+ bonds (1.5%) and 4.3% unrated bonds (4.3%) in the fund. This mix also contributes to our average current yield of 4.16%.

Positive contributions came from both senior and subordinated bonds with very short maturities and those that had already matured at par. The current high yield is also supportive. Negative contributions came from bonds with weaker credit ratings as well as real estate companies, although the trend has recently stabilised again.

What do you expect for the second half?

Given further rate hikes by the ECB (two further steps of 25bps each are expected) to combat inflation, which remains well above target, and the attractive spread and absolute yield levels for short-term bonds, we regard the current level attractive for short maturities.

As many bonds will be maturing in the next quarter, we will maintain the strategy of buying opportunities in both the primary and secondary markets. We will keep the duration below 1Y, and depending on inflation and other macro data, a further reduction in duration could be in the cards.

We expect the recently strong issue activity to slow down in the third quarter. That being said, we expect that good opportunities can also be found in the primary and secondary markets in the second half of the year. If necessary, we will continue to buy bonds with somewhat weaker credit ratings, subordinated bonds or, with a sense of commensurate caution, bonds with lower issue volumes in order to increase the current 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 RESERVE

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.