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.

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.

How would you sum up the last year?

At +4.3% in 2023, the performance of ERSTE RESERVE CORPORATE has been very satisfying, given its short-term structuring. The year 2023 started with a rally in credit spreads. The tighter spreads were driving the fund's performance up rapidly in the first two months. A short-term crisis in the banking sector and the rescue of Credit Suisse by UBS then put a damper on performance at the beginning of March. As a result, risk premiums rose, especially for banks.

This was also reflected in the fund's performance, although this setback was short-lived and the market recovered quickly. Since then, credit spreads for the European investment grade (i.e. good and very good credit rating) market have been on a slightly positive trend towards narrower spreads.

One topic that has been with the market throughout the year was the central banks' interest rate policy. In Europe and the USA, interest rates were raised in 2023 to new highs since the 2008 financial crisis. Towards the end of the year, however, it became apparent that interest rates seemed to have peaked for the time being.

The fund's short-term focus allowed it to adapt quickly to the new market conditions. With interest rates up over the past year, assets from the higher rating classes (A+, AA,...) have become more attractive again. The fund has therefore increasingly focussed on companies in these rating classes and no longer mainly on BBB companies. As a result, the portion of these high-quality assets in the fund has risen slightly. In general, we purchased mainly securities with shorter remaining time to maturity in order to benefit from higher interest rates and the inverted yield curve.

The portion of floating-rate assets was passively reduced through maturing and increasingly reinvested in fixed-rate securities. Floating-rate assets had a cushioning effect during the phase of rising interest rates. On the one hand, losses were cushioned due to the low interest rate sensitivity and, on the other hand, it was possible to benefit quickly from the rise in interest rates. The market no longer expects interest rates to continue rising sharply (Note: Prognoses are not a reliable indicator of future performance). The cushioning effect of floating rate notes is therefore no longer as necessary.

Since the banking crisis in Q1 2023, credit spreads for bank bonds have remained slightly elevated and offer more attractive levels compared to other companies. In addition, banks have done their homework since the financial crisis and are more resilient in order to absorb the impact of a possible increase in credit default rates.

How have you positioned ERSTE RESERVE CORPORATE in this environment?

We have not changed the focus per se but have nevertheless slightly shifted our strategy in the BB rating area (high yield). The BB rating class has become more attractive relative to the BBB segment. Although we kept the fund's high-yield ratio constant, we still found good opportunities to buy in this area.

The fund's anti-focus has been on the property sector for some time, with very low exposure for years.

What do you expect for the new market year 2024?

We expect interest rates at the short end to remain elevated in 2024, possibly facilitating a stable return. By reducing hedging transactions against higher interest rates in the fourth quarter of this year, the fund should be well positioned for a scenario of both stable and lower interest rates (Note: Please not that an investment in securities entails risks in addition to the opportunities described). In addition, the fund's interest rate sensitivity has been and will continue to be increased. We will be doing so actively in 2024 by purchasing securities with longer remaining time to maturity.

What will be your focus in this environment?

The fund will continue to maintain its focus on European bank shares. This is partly due to the continued slight increase in spreads and partly due to fundamental considerations such as stable and improved bank balance sheets.

By adjusting towards high quality assets, the fund is also very well positioned for possible economic downturn scenarios. At the same time, the fund is not under any pressure to sell, should an issuer be downgraded.

The selective addition of high-yield assets will continue to generate a higher return than a pure short-term investment grade fund.

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

ERSTE RESERVE CORPORATE