Many investors are looking for an investment with attractive return, but they do not want to risk investing in shares. We talked to Gerhard Beulig, portfolio manager of the new ERSTE FIXED INCOME PLUS fund, on the topic of revenue opportunity in the bond market segment.

In times of European Central Bank (ECB) zero interest policy, many investors are looking for alternatives to deposit passbooks. Where do you think there are opportunities to achieve attractive returns without having to risk investing in shares? 

A few years ago, the European Central Bank (ECB), alongside the zero interest rate policy, also launched a bond purchase programme, responding to low economic growth in the eurozone and deflationary trends in the world. At the same time, it was purchasing mainly government bonds. The result is the current situation with extremely low yields. After taking into account the current inflation, returns often remain negative. This phase of low interest rates has already ended in the US and other parts of the world. It follows that the level of yields and interest rates in the US and in the various emerging countries of Latin America and Asia is higher. American corporate bonds offer attractive credit premiums. ERSTE FIXED INCOME PLUS also invests in this higher interest-yielding bond segment. The Fund may invest up to 100% of its assets in risk bonds, depending on the assessment of their attractiveness.  The relatively large difference in the level of interest rates on the money market between the US and the eurozone means that hedging of the currency risk is costly. The Fund may invest in foreign currencies max. up to 25% of the fund's assets, the currency risk of the remaining portion of the portfolio is secured.

In general, it is expected that the ECB, following the US Central Bank (Fed) will also say goodbye to its current monetary policy. What consequences will this have for investors? 

The change in monetary policy is mainly a result of the positive economic environment as well as the development of inflation that is consistent with the ECB's objective. In the event that the bond purchase programme would be suspended in this environment and consequently an increase in interest rates would be considered, the long-term interest rate would be somewhat higher. In the example of the US that has already gone through this phase it can be seen that a gradual transition is possible if market participants are ready in time for the interest rates increase. In the long run, such interest rates are considerably more attractive to investors, which also bring higher real yields (returns after deducting inflation). During a phase of rising yields, cautious attitude towards interest rate risk is in any case very advisable. By increasing the share of money market instruments, the new fund may, in anticipation of rising interest rates, reduce the dependency on interest rate developments and thus reduce interest rate risk.

ERSTE FIXED INCOME PLUS fund is very flexible in terms of the different weights of investment limits for each type of bond and money market instruments. What else makes this fund so exceptional?  

In my opinion, this exceptionality lies in the combination of flexible investment in all types of bond and money market funds, together with investments in absolute return funds (alternative funds). This type of strategy makes it possible to stabilize returns and thus the fund's risk rate can be reduced. The resulting diversification effect is therefore very positive. Also, the ability to manage interest rate risk independently of the market situation contributes to high flexibility.

What revenue opportunities does this new fund strategy offer?

By investing fully into highly profitable and, therefore  risky, bond markets, we expect significantly higher yields over the medium term than in the case of investments in European sovereign debt. In addition, the achievement of real returns is also an essential objective of the Fund. Targeted annual paid revenue is set at 2%. This yield will be regularly paid at a given level even in times of transient negative fund performance**. 

** applies to the fund’s A-tranche (distribution tranche) before tax. The yield payout depends on and can be paid according to market trends and may be lower. Revenues may also be paid out of the net asset value. Each payout reduces the value of the unit certificates. Please consider that investing in mutual funds is, in addition to the benefits, also associated with risk.

What do you consider to be the most significant risks in interest and bond markets today?

At present the risks are represented by the US expansive budgetary policy, the US inflation, which is higher than expected, as well as a possible deterioration of corporate creditworthiness (credit risk). During the phase of economic downturn or considerably higher interest rates, companies that have taken on debt at times of low interest rates to invest in their development or buy shares in their competitors' businesses, may find themselves under pressure.  The possible ending of the ECB's bond purchase programme is also a risk factor. However, the United States FED has shown how to handle a change in monetary policy without triggering major turbulence in the markets.

Original source of information: https://blog.de.erste-am.com/2018/05/08/renditechancen-mit-anleihen/