How did the fund develop on the first half of the year?

The fund performed positively both in absolute terms and relative to its investment universe. In view of the 0.85% rise in yields on the underlying German yield curve, for example in the 7Y maturity range, the positive increase in value of 2.61% in the first five months was only possible because the spreads for subordinated corporate bonds fell by 0.60% and those for subordinated bank bonds by 0.50%, which led to corresponding price gains.

What was your focus in terms of fund management?

The gains are due to the following positive performance drivers:

• The fund had a slightly shorter interest duration, which absorbed parts of the losses (due to higher yields).
• Overweight in reinsurers such as Münchner Rück und Hannover Rück.
• Overweight in real estate, where companies such as Aroundtown and Grand City Properties performed better due to exchange offers.

The underweighting of the index heavyweight VW, on the other hand, cost some performance. However, in view of various allegations of further human rights violations in China, it is uncertain whether VW will fulfil the UN Global Compact initiative in the long term and remain investable.

The mixed-in contingent of subordinated bank bonds accounted for 35% of assets under management; behind them, utilities commanded the largest sector weightings within the subordinated corporate bonds at about 22% and energy at 18%. The largest country weightings were Germany, France, and Spain.

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

What are your expectations for the rest of the year?

The global economy is expected to grow below potential and the disinflation trend will continue. However, the inflation rate will remain above the central banks' price stability targets (2%) for some time to come, meaning that key-lending rates will only be cut occasionally, and no rate cut cycles are likely to be initiated.

If the volatility of the underlying yield curve remains low and there are no negative economic surprises, subordinated corporate and bank bonds should remain supported, i.e. we do not see any significant widening of spreads. The rating drift for corporate bonds is positive, i.e. there are more upgrades than downgrades. The being said, the potential and resulting expectation of further price increases from converging spreads is diminishing with every month that we get closer to the lows. Technically, the asset class remains supported because only a few new issues are currently coming onto the market.

What is your main focus based on these expectations?

We are thinking about extending the maturities in the fund in order to benefit from possible interest rate cuts with higher gains. In the short term, the cash ratio could be increased for tactical reasons in order to reduce the risk of diverging spreads. In view of the already very narrow spreads on Italian government bonds, investments in Italy will be frozen or even reduced from the current 6.7% in the event of intense budget negotiations in autumn. We participate opportunistically in new issues on the primary market only in order to realise new issue premiums.

ERSTE BOND CORPORATE PLUS