Top European funds are focusing on government bonds until the ECB cuts rates and corporate bonds start to gain favourGovernment bonds lead top funds
Top performing bond funds in Europe have focused their portfolios on investing in mainly government bonds.
One fund that has performed well over the year has been the Insinger Euro Bond fund, managed by Alexander Vanderspeld. He says: 'We mainly invest in government bonds and have a small percentage ' 15% ' in corporate debt.'
Vanderspeld adds: 'As economic growth has been deteriorating, it is not positive for corporate bonds until the ECB cut rates. It is a better environment for government bonds.'
The Insinger Euro Bond fund uses a combination of a top-down and bottom-up approach. As part of the top-down aspect, Vanderspeld consults with both equity and hedge fund managers to see the environment for bonds is good.
He compares countries and examines long and short durations in government bonds.
For corporate bonds Vanderspeld compares sectors, for example, food, energy and financials and once he decides, he starts looking at relative value. He recommends ING Barings as it has got high yields.
Another fund that has performed well over the year has been the RG Europe Bond USD managed by Kommer Vantrigt. He says: 'The fund is invested 65% in government bonds and the remainder is in corporates.'
In his fund, the investment universe is restricted to investment grade bonds with a minimum rating of BBB. In the portfolio, 55% is in AAA, 30% is in AA, 15% is in A and the remainder is in BBB.
The majority of the fund is invested in benchmarked European countries. However, a small amount is invested in off-benchmark positions, including Poland and Hungary.
Vantrigt says: 'We see them as convergence trades as both countries plan to join the EU. In these countries, interest rate levels are attractive and yield picks are good. The currency is expected to appreciate in the future and we have long-term positions.'
Investment strategy used for the RG Europe Bond USD is to look at duration and country allocation. He says: 'We try to forecast interest rate developments. For example, when interest rates are declining we increase the duration. We do this through qualitative analysis and a proprietary model. We look at current economic conditions, monetary policy, and sentiment indicators on a monthly basis forecast.'
For corporate bonds, Vantrigt uses an active issue selection strategy and tries to pick the right bonds within sectors. Vantrigt recommends the financial and industrial sectors as yield pick-ups are attractive.
In addition, the RG Europe Bond USD has a currency policy. Although denominated in US dollars, from time to time the fund takes euro positions if that currency looks strong. However, non-dollar exposure is not likely to exceed 10% of the fund.
Vantrigt explains the fund performed well because of good interest rate forecasts and long duration positions in the Eurozone.
However, Frank Achtersteraat, manager of the ABN AMRO Europe Bond fund, says his fund performed over the year because of corporate bonds. His portfolio is 50% invested in corporates and 50% in governments.
Achtersteraat explains: 'Corporate bonds performed well in the first half of the year because negative expectations had already been priced in and the swap spreads against governments diminished over expectations that the Fed and ECB would decrease interest rates.'
The ABN AMRO Europe Bond fund uses a combination of a top-down and bottom-up approach. The fund is invested in all kinds of corporate bonds to diversify risk in the portfolio. The fund is overweight financials and auto sectors because in these areas swap spreads have widened as the environment for credits has deteriorated.
Top European bond funds have focused their portfolios on government bonds.
As economic growth deterites, it is a better environment for government bonds than corporate bonds unitl the ECB cut rates.
Investment strategy will include interest rate forecasts and thorough qualitative analysis.
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