What can we expect from fixed income investments next year?

Catella Avkastningsfond, our lowest risk fixed income fund, is up 1.14* percent so far this year. And this is with nearly half the portfolio invested in government and mortgage bonds, which actually yield negative rates in the current environment. Our strategy for making a positive contribution to returns is to actively work with both interest and credit durations. Another important factor is to identify the best value credit, where the bulk of the return comes from. The portfolio is also highly diversified in terms of industries and issuers. Catella Avkastningsfond has had around 10 percent in high yield, and given the active management Thomas Elofsson and Stefan Wigstrand have managed to demonstrate a good return.

Catella Nordic Corporate Bond Flex is our fund with a slightly higher risk. The managers have employed the same strategy, but the share of high yield has been larger, leading to a higher return. The fund is able to go as long as 10 years in interest duration and as short as -5 years, thus generating good opportunities irrespective of interest rate movements. The fund is up 4.61* percent this year.

Catella Credit Opportunity is our most flexible fixed income fund, with a mandate that allows us to invest the entire portfolio or nothing in high yield. This fund also allows the managers to go long or short in interest duration without limit. Based on the fixed income team's analysis and active decisions, the share of high yield has been significant through the year and unitholders have achieved a return of 6.29* percent.

How do things look for next year? Is debt still an attractive investment?
To answer that we first need to look back at what happened this year. At the beginning of 2017, a 10-year government bond yielded lower interest rates than today. Interest rates began to rise over the summer, partly following signals from central banks that the extreme monetary policy was beginning to come to an end. Rates rose quickly towards 1 percent. After the summer, the concept of a housing bubble started to gain ground in Sweden and both the media and real data showed that house prices in Sweden had started to fall, particularly in Stockholm. This caused bond yields to decrease again but, even though the debt market largely contains mortgage bonds, credits have generally done well during the autumn.

However, this is an important factor to keep track of in future. If the price decline is not halted in coming months things could very well get anxious in the credit market, particularly for companies in construction and real estate. We believe that the perception that the fall in prices is higher than it actually is has already impacted construction in Sweden, and this will be apparent in next year's GDP growth. Since housing investment has accounted for around one-third of GDP growth in recent years, we should expect the growth we have become used to in Sweden to be just a memory.

Catella Fonder began cutting the proportion of mortgage debt in all its fixed income funds at the end of 2016, and at the moment Catella Nordic Corporate Bond Flex has exposure of around 9 percent to "real estate". We still expect that 2018 will be favourable for credit in general since we do not believe that the economy is in downturn. Credit does well in all environments except recession. The ECB will continue to buy corporate bonds in 2018, which we have found to be beneficial for all credit in all risk categories.

The key to success remains having a well-analysed and diversified portfolio, and to be active in the choice of interest and credit duration. In order achieve this the manager must have to tools available. All of Catella's fixed income funds have this potential and we look forward confidently to 2018.

Do not hesitate to contact us if and when you have any questions.
Many thanks for your confidence in Catella. We would like to wish you all the best for the remainder of 2017!

*December 1, 2017 return after fees