7 September 2015, Stockholm, Sweden | News
The return at the end of August this year, of 0.45 percent after fees, was below the forecast of 1.5 percent after fees that we set at the start of the year. Our target return, which is based on the yield of the fund, currently 2.15 percent before fees, will be hard to achieve. It is worth reiterating that our forecasts are based on the fund's yield and do not take into account changes in interest rates or changes to the risk premium on corporate bonds.
What has happened?
The period January to April was rather undramatic, and this was reflected in the fund's consistent returns. During the period from May to June, we saw a sharp rise in market interest rates (a medium-term bond index with government and mortgage bonds dropped 1.5 percent during the same period), while the risk premium on corporate bonds and mortgage bonds rose sharply. The underlying factors were mainly to be found in the Greek crisis and expectations that the US Fed will start to raise interest rates. From the relative calm in July, volatility then increased dramatically again as worries intensified about growth in the Chinese economy.
Since the Catella Avkastningsfond fund is a long only fund, which means it does not hedge against interest rate risk or credit risk, these market forces had a negative impact, especially in June when the fund backed 0.41 percent, and to a lesser extent in August when the unit value fell by 0.09 percent. Subordinated debts issued by Scandinavian banks make up 15 percent of the fund's assets, and these were hit particularly hard, explaining a large part of the decline in value since these fell by 2-4 percentage points during the period.
The fund's positioning at the end of August was as follows:
Cash: 4 %
Treasury bills: 1 %
Government bonds: 1 %
Mortgage bonds: 13 %
Corporate bonds with high credit ratings: 73 %
Corporate bonds with low credit ratings: 8 %
This results in a yield of 2.15 percent before fees and a duration of 0.85 years. Fund assets amounted to SEK 14 billion.
How do we see the future?
Our assessment is that the return will be low over the next 12-18 months, given the fund's risk profile. We base this on the Swedish Riksbank's very clear inflation target of 2 percent. Considering that inflation and inflation expectations are below the Riksbank's target, the current repo rate of -0.35 percent could be cut slightly further by year-end. As the repo rate correlates with STIBOR, which in turn governs the pricing of the fund's holdings of FRN debt, this limits the potential returns. Additionally, there is unlikely to be any meaningful contribution from falling market interest rates since these are already at extremely low levels. Treasury bills at -0.5 percent and a 5-year government bond yielding 0 percent in expected annual return further underline the extreme circumstances in the fixed income market today. Our best forecast for the return in the next 12 months is in the range of 1-1.3 percent after fees.
Catella Avkastningsfond has long focused on raising the return in the fund through investments in fixed income securities that yield more than traditional treasury bills and government and mortgage bonds. We believe this is the right path to achieving some kind of meaningful return without increasing the risk dramatically. Our current assessment is that the fund is well placed to be a competitive alternative to bank deposits and traditional short-term and long-term fixed income funds.
Our interest assessment/strategy today for 6-12 months forward:
• Low or lower repo rate well into 2016
• Unchanged or higher market interest rates => steeper yield curve
• Stable or slightly higher prices on corporate bonds with a high credit rating
• Stable but more volatile prices on corporate bonds with a low credit rating
• The fund's duration will be kept short, in the range 0.5-1 year
• The proportion of corporate bonds with low credit ratings will be < 10 percent of the fund assets
For further information about the Catella Avkastningsfond fund, please contact your account manager or the fund manager, Magnus Nilsson, on +46 8 614 25 63