After a difficult year of 2022 on the markets, many asset classes saw rebounding performances in 2023. While the central banks' turnaround on interest rates ensured a “return to normality” on the bond market, the focus on the equity market was primarily on technology companies. In the Funds exclusive series, the fund managers of selected funds look back on developments of the previous year and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance.)

"From a fundamental perspective, most companies are still quite well positioned."

Roman Swaton, fund manager ERSTE BOND CORPORATE PLUS

Fund & Performance

ERSTE BOND CORPORATE PLUS mainly invests in subordinated bonds with an investment grade rating. The focus is on hybrid bonds denominated in euros from the non-financial sector. Subordinated emissions from financial institutions are added. 

Note: Past performance is not a reliable indicator of future performance.

Performance since start of the fund (12.12.2016). 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.

Commentary by fund manager Roman Swaton

How do you sum up the last year?

Thanks to the decline in yields on German government bonds since the beginning of October 2023 and the recent narrowing of spreads on hybrid corporate bonds (hybrids), hybrids are now offering yields slightly below those at the beginning of the year. Yields on subordinated bank bonds (LT2) and insurance bonds have not yet reached the levels seen at the start of the year.

The events surrounding Credit Suisse, Silicon Valley Bank, Signature Bank, and First Republic Bank this spring led to higher risk premiums (spreads) for financials, some of which are still in place. In the fund, we were not affected by the write-downs on Credit Suisse's AT1 securities because the fund does not acquire AT1s (CoCos), preference shares, profit participation certificates, convertible bonds, credit linked notes, or securitisations (ABS, ...).

Note: The companies listed here have been selected as examples and do not constitute an investment recommendation.

Chart 1 shows a comparison of the yields of various fixed income asset classes at present and at the end of 2022.

Grafik: Yields (%) of various fixed income asset classes (EUR unhedged). Source: ICE BofA Indizes as of 24. November 2023. Note: Past performance is not a reliable indicator of future performance of a fund.

Subordinated corporate bonds, where the issues themselves still hold an investment grade rating, are labelled “Hybrids IG” in the chart, where “IG” stands for investment grade (i.e. bonds with good and very good credit ratings), and “hybrids” denotes the asset’s hybrid position between debt and equity.

As of 24 November 2023, the corresponding index offered a yield (effective) of 5.73% with a manageable interest rate risk as illustrated by a duration of 3.4 years. Compared with an EMU government bond index (“Euro Govt” in Chart 1), for example, where the yield is 3.12%, this is no small spread. This spread appears higher still if the significantly higher interest rate risk of EMU government bonds with a duration (= average capital commitment) of 7.1 years is also taken into account.

From a fundamental perspective, most companies are still quite well positioned. Leverage, sales growth, and profitability margins do not necessarily indicate a technical recession in the Eurozone. The number of credit rating upgrades also exceeded the number of rating downgrades. The European high-yield market is also not pricing in a recession, given its distressed ratio is below the long-term average. The distressed ratio reflects the proportion of issuers with a traded spread of over 1000bp. So far, only individual companies have been viewed critically by the capital market. These are concentrated in the property sector.

 

What priorities have you set for the fund?

In the ERSTE BOND CORPORATE PLUS fund, bank and insurance bonds are also strategically added to complement corporate bonds (non-financials) for reasons of diversification, amounting to 35% of assets under management. Of the 15 largest hybrid issuers, five issuers are no longer investable for ESG reasons (VW, Total, Repsol, Enel, and Engie) and six issuers (Bayer, EDF, Vodafone, Veolia, EDP, Telefónica) may no longer be actively purchased because the second-best rating of their subordinated issues is already in the BB range (N.B. their senior rating is in the investment grade range). The four remaining issuers are Iberdrola, Orange, Eni, and BP.

Note: The companies listed here have been selected as examples and do not constitute an investment recommendation. In the context of active management, the portfolio positions mentioned may change at any time. There is no guarantee that securities will be permanently included in the portfolio.

The largest country weighting is France (EDF, Orange, Danone, Arkema, and various banks) followed by the UK (BP, SSE, and various banks). In terms of duration contribution, the banking, healthcare and telecommunications sectors are overweighted, while insurance, utilities, and transportation are underweighted. The average EAM ESG score of 70.4 is higher than that of the universe of 64.0.

Chart 3 shows the current spreads on government bonds from various credit markets in the Eurozone by rating. The dotted ellipse in turquoise colour highlights where the fund is invested, i.e. investment grade asset classes that offer the relatively highest spreads within the respective rating category (Additional Tier 1 bonds, these are subordinated debt securities issued by banks that are included in the equity of the credit institutions and are subordinated to all other liabilities of the issuing bank, excluded).

Graph: spread curves of selected corporate credit classes in EUR. Source: ICE BofA Indizes as of 24. November 2023. Note: Past performance is not a reliable indicator of future performance.

ERSTE BOND CORPORATE PLUS

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.