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.)

Fund & Performance

The ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD is a bond fund whose investment universe is composed according ethical and sustainable criteria. Primarily, the fund invests in high-yield corporate bonds denominated in EUR, GBP or USD. Foreign currency risks are hedged on a strategic basis in most cases. The rating is primarily in the high-yield range (BB and lower). 

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

Performance since start of the fund (11.5.2020). 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 Hannes Kusstatscher

How would you sum up the market year 2023?

In 2023 ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD gained about 10%. After a negative performance in 2022 due to rising interest rates and increasing credit spreads, 2023 turned out more favourable. Although interest rates continued to rise in 2023, the higher basis acted as a buffer, while spreads narrowing at the same helped to generate a positive performance.

The year started with a risk-on rally and significantly tighter spreads in January and February. However, there was a sudden setback in March when Silicon Valley Bank and other regional banks in the USA began to falter. At the same time, Credit Suisse was bailed out in Europe by a takeover from UBS. Credit spreads briefly widened above the level we had seen the beginning of the year, but investors soon realised that the problems were no systemic risk. 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 normalised again by the end of October.

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

The still excessive but declining inflation figures and resilient growth, particularly in the US, remained the biggest drivers of the markets. Unemployment also remains very low, even if the first signs of a slight economic downturn are visible. The central banks' response to this interplay therefore remains in focus, even if it now looks as though interest rates have peaked, at least at the short end. The first interest rate cuts for 2024 are therefore already priced in from June.

 

How did the high-yield segment perform in this environment?

Most companies in the high-yield segment are still in a solid position. Even if sales are declining slightly in some cases and profit margins remain under pressure, many are able to pass on the price increases. The higher interest rates are forcing companies to pay more attention to their financial situation and reduce their debt, as is illustrated by the continued positive rating trend.

The default rate is again very low this year and is currently just over 2%, which is below the long-term average. Some research houses also expect default rates to be barely higher in 2024. The market remains open for new issues and many companies are using this opportunity to raise fresh capital.

 

What is you focus in the fund currently?

The banking crisis in March 2023 had little impact on the fund due to the low exposure to banks. We continued to prefer corporate bonds from Europe this year as they would offer attractive yields coupled with good fundamental data. We still favoured companies from the entertainment and travel sectors in particular. They performed positively; automotive shares and the consumer goods sector also contributed to the performance.

The fund was very selectively invested in the CCC segment. While BB and B spreads are currently close to their year-lows, companies in the weakest rating segment remain under pressure. Hybrid bonds were an interesting sub-segment that contributed significantly to our performance in 2023. Here we were able to acquire some attractive bonds at favourable prices, some of which have already been redeemed by the companies. We remain cautious in the healthcare, media, and real estate sectors, as they contain numerous companies with weak capitalisation and high levels of debt.

A a yield of around 7.2%, the fund remains attractive (Note: Please note that an investment in securities entails risks in addition to the opportunities described). Even rising interest rates or credit spreads are cushioned by the higher yield, while falling interest rates could have a positive impact. Fundamentally, things continue to look quite good, at least for the better-rated companies, and even if default rates were to rise slightly in 2024, it would already be largely priced in, especially in the CCC sector.

ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD

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.