3 December 2019, Sweden | News
Investments in fund units are associated with risk. Past performance is no guarantee for future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation.
The fixed income market is in a historic position after an unusually long period of low interest rates. Interest rates that were previously regarded as a temporary aberration have now become normalised. Zero yields or even negative yields on Swedish and European government bonds are challenging for investors looking for low risk investment opportunities. There are some fixed income investments that provide opportunities for better returns and that can deliver around 5 percent. But this requires you as an investor, figuratively speaking, to climb a long way out on the branches of the risk tree to reach these levels.
This type of investment is made in corporate bonds in the high yield segment. The potential returns are greater, but so are the risks. This also means that the variation in the return, or spread, the difference between the return on secured government bonds and high-risk bonds, increases. The current situation, where investments in government bonds essentially yield no return, has meant that the interest in investing in bonds with higher risk and thus higher returns has increased significantly. As interest rates have fallen over the past 10 years, the inflow of capital has shifted from low risk bonds to higher risk bonds. One consequence of this is that the spread between the two types of fixed income investments has dropped to a historically low level.
High yield with low risk, how does that work?
Many of the high yield fixed income funds offered on the market in recent years have had low volatility, which means that the risk in the funds, according to the calculations of the European Securities and Markets Authority (ESMA), has fallen. Nowadays we find almost all high yield funds in ESMA class 2. The funds in class 2 have a standard deviation of 0.5–2 percent. They simply have a low risk.
Looks can be deceptive!
But looks can be deceptive. It is important to be aware that when the fixed income market becomes more troubled in weaker times, the risk in high yield changes very quickly. During the 2000s, we saw several examples when volatility, as standard deviation, in European high yield bonds rose rapidly to over 15 percent. This kind of volatility is fully comparable to the risk of investing in equities.
So, what should an investor do? Totally avoid investing in high yield?
Not at all. What you should do is to take advantage of the opportunity to generate returns using this segment. But in order to do so, it is important to choose a fund where the managers have the mandate and flexibility to be able to choose when it is time to reduce or increase the risk.
With the Catella Credit Opportunity fund, the managers have complete flexibility to choose for themselves whether to invest entirely in government bonds, entirely in high yield bonds or in a mix. The duration mandate is also completely flexible and, right now, the fund has a negative duration, which means it will benefit if interest rates rise. Within this mandate, Catella Credit Opportunity’s managers are very active, and decisions regarding duration are made from a macro perspective while the individual credit selections are made from a fundamental micro perspective.
How has Catella Credit Opportunity performed?
Although historical returns are no guarantee and say nothing about future returns, Morningstar has awarded Catella Credit Opportunity a top rating of 5 stars. This means that Catella Credit Opportunity is one of the best performing funds over both three and five years in the corporate bond fund category.
Risk information
Investments in fund units are associated with risk. Past performance is no guarantee of future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation. The Catella Balanserad, Catella Credit Opportunity and Catella Hedgefond funds are special funds under the Swedish Alternative Investment Fund Managers Act (SFS 2013:561) (AIFM). Catella Sverige Aktiv Hållbarhet and Catella Småbolagsfond may use derivatives, and the value of the funds may vary significantly over time. The value of Catella Sverige Hållbart Beta may vary significantly over time. Catella Avkastningsfond may use derivatives and may have a larger proportion of the fund invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds, in accordance with Chapter 5, Article 8 of the Swedish Investment Funds Act (SFS 2004:46). Catella Nordic Corporate Bond Flex may use derivatives and may have a greater proportion of the funds invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds. For more details, complete prospectuses, key investor information, and annual and half-yearly reports, please refer to our website at catella.com/funds or phone +46 8 614 25 00.