While the stock markets climbed to new record highs in the first half of the year, the first central banks also initiated a turnaround in monetary policy by cutting interest rates. Will the environment remain positive?

In the Funds exclusive series, the fund managers of selected funds look back on developments in the first half of 2024 and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance).

Fund & Performance

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.

Commentary by fund manager Matthias Hauser

How would you sum up the first half of the year?

The performance of ERSTE RESERVE CORPORATE in the first half of the year was very satisfactory for a short-term fund at 2.6% (as of 30 June 2024). The main drivers were the higher current income earned on the one hand and the narrowing credit risk premiums in 2024 on the other. (Note: Please note that an investment in securities entails risks in addition to the opportunities described.)

The year 2024 started out with a credit spread rally. The tighter spreads drove up the fund's performance in the first few months. The investment grade EUR corporate bond market was largely unaffected by macroeconomic events. Despite uncertainties regarding the path of inflation and economic growth, corporate bond spreads narrowed. We categorised bank bonds in particular as attractive and deliberately overweighted them, partly due to their relative attractiveness and partly due to their solid fundamental basis. A few cracks appeared in some areas of the market, particularly in commercial real estate. The fund was not invested in this segment and was therefore not affected by any market distortions.

The fund's short-term focus allowed it to adapt quickly to new market conditions. Now that interest rates have risen over the past year, bonds from the upper rating classes (A+, AA,...) have become more attractive again. As a result, the fund has increasingly focussed on companies in these rating classes, abandoning its clear focus  on BBB companies. As a result, the share of these high-quality bonds in the fund has risen slightly. The fund mainly purchased bonds with shorter remaining time to maturity in order to benefit from higher interest rates and the inverted yield curve.

This strategy will shift slightly again due to the anticipated fall in interest rates, as a result of which we will buy more bonds from the BBB segment again.

 

How have you positioned ERSTE RESERVE CORPORATE in this environment?

The proportion of variable-interest bonds was passively reduced through maturing and increasingly reinvested in fixed-interest bonds. Floating-rate securities had a cushioning effect during the phase of rising interest rates. On the one hand, losses were absorbed due to the low interest rate sensitivity and, on the other, it was possible to benefit quickly from the rise in interest rates. This dampening effect will no longer be as necessary in an environment of potentially falling interest rates.

 

What do you expect for the rest of 2024?

For the remainder of 2024, we expect interest rates at the short end to remain at a higher level, which is why we should be able to achieve a stable return. If market conditions remain the same, we will also continue to increase the interest rate sensitivity of the fund.

This will be done actively in the second half of 2024 by purchasing securities with longer remaining time to maturity. The fund will maintain its focus on European bank bonds. 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.

The adjustment in favour of high-quality bonds means that the fund is also very well positioned for possible economic downturn scenarios. At the same time, it is not under any pressure to sell should an issuer’s rating be downgraded.

High-yield bonds will be increasingly blended in in the second half of the year in order to continue generating 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. Prognoses are not a reliable indicator of 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.