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 remain in a good position." 

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.

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

Performance since start of the fund. 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 Michiel van der Werf

How do you sum up the last year?

The first half of 2023 was a turbulent time in the markets, with significant volatility in March following the collapse of Silicon Valley Bank in the US. This caused uncertainty across the global banking system, and growing concerns over Credit Suisse led to the company being taken over by UBS with guarantees from the Swiss government.

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

After the markets had largely calmed down in Q2, volatility rose again in May. The month was dominated by new concerns about regional banks, a further interest rate hike by the Fed and ECB, negotiations on the US debt ceiling, great excitement about the potential of AI, and some increasingly negative economic data from outside the US.

Over the course of the summer, volatility subsided again after concerns about the US banks had calmed down and, above all, after the US Congress had agreed on increasing the US debt ceiling.

By September, calm had returned, and credit spreads were narrowing steadily. When US interest rates reached new highs in September, it triggered a further widening of spreads, although this had normalised again by the end of October. Indeed, we even experienced a sharp narrowing of spreads until the end of November.

 

How did ERSTE BOND EURO CORPORATE perform in this environment?

From a fundamental perspective, most companies remain in a good position. Leverage, profitability, and cash ratios remain good on average. Many companies have so far navigated the higher-interest rate environment well, and credit rating upgrades and downgrades are more or less balanced.

However, there are some differences at sector level. For banks, higher interest rates also mean rising interest margins and therefore higher earnings potential, which has also been demonstrated in 2023.

The real estate sector continued to be the most negatively affected by rising interest rates due to a traditionally high gearing.

The elevated share of financial securities averaging over 40% in ERSTE BOND EURO CORPORATE has therefore paid off, as did the low weighting in the property sector.

Note: In the context of active management, the portfolio positions mentioned may change at any time.

With both interest rates and spreads remaining virtually unchanged over 2023, the positive effect of higher yields on investment-grade corporate bonds is clearly evident, with a return of around 4% by the end of November.

 

What are your expectations for the new year 2024?

We continue to expect spreads to narrow in 2024 thanks to yield-driven demand. We expect investment grade EUR yields to remain above 4%, combined with potentially lower market rates and credit spreads to continue to generate demand for credit. Together with the associated cash inflows, this alone should be enough to drive credit spreads tighter.

We remain constructive on banks and defensive on real estate bonds, and will keep our duration (i.e. average capital commitment period) neutral for the coming months at least.

The fund's current yield of over 4% already includes attractive compensation, with a good to very good credit rating.

Note: Please note, that an investment in securities entails risks in addition to the opportunities described.

ERSTE BOND EURO CORPORATE

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.