Few asset classes offered protection in this market correction, but investors who chose bonds with shorter maturities were able to limit losses somewhat.
Faced with the highest inflation in decades, central bankers were forced to abandon the idea that inflation was only temporary. The Federal Reserve raised its policy rate by 75 basis points to 1.50-1.75 per cent earlier this month, and hinted that another adjustment of the same magnitude might take place at its next meeting. The Fed, meanwhile, has also begun to reduce its trillion-dollar balance sheet and, although these plans were announced well in advance, investors are unsure what the exact impact will be.
Shortly after the US rate decision, European Central Bank chairwoman Christine Lagarde announced her intention to raise interest rates next month for the first time in more than 11 years in a bid to control rising inflation in the eurozone. However, it remains a guess as to how many basis points the ECB will raise its policy rate by.
The bond-buying programme will also be halted, but new tools would be developed to contain borrowing costs for some member states such as Italy. The spread between Italian and German 10-year yields peaked at 500 basis points during the European debt crisis 10 years ago but rose again above 250 basis points last week.
Global recession risk grows
Now that central bankers have made their intentions and priorities clear, they risk tightening monetary policy too much and plunging the economy into recession, according to some market experts. In such a scenario, financial assets are likely to come under further pressure.
Short-term bonds fared better
Given this uncertainty, it is not surprising that investors are looking for assets that are less sensitive to interest-rate risk, such as shorter-term bonds. The Bloomberg Euro Aggregate 1-3 Year index recorded a year-to-date loss of 2.2 per cent in euro terms at the end of May 2022.
A relatively small loss compared to the nearly 20 per cent loss of the Bloomberg Euro Aggregate 10+ Year index. However, this did not prevent European investors from withdrawing some EUR 8.8 billion from the EUR Diversified Bond - Short Term Morningstar category year-to-date. However, funds within the EUR Government Bond - Short Term category did see an inflow of EUR 3.9 billion year-to-date. Over the first five months of 2022, both categories lost 2.8% and 3.9% in euro terms, respectively.
European investors pulled some EUR 57.4 billion from bond funds in total, most of it from the Global Flexible Bond - EUR Hedged, EUR Corporate Bond and RMD Bond - Onshore Morningstar categories. EUR Diversified Bond - Short Term was the fourth hardest hit category within bond funds.
Top 5
For this week’s Top 5, we look at mutual funds in the Morningstar Category EUR Diversified Bond - Short-Term of which a distribution fee-free fund class is available in the Netherlands. These five funds have shown the best performance based on their returns over the first five months of 2022.
At the top of the list is CapitalatWork Short Duration at Work. This strategy has been managed by CapitalatWork’s chief strategist Erwin Deseyn since its launch in May 2007. Paul Smets joined Deseyn on this strategy in January 2009 and together they also manage the Corporate Bond, Government Bond and Inflation at Work funds. Both men have been active for more than 20 years at CapitalatWork , an independent asset manager under the Luxembourg-based Foyer Group.
The fund is not only invested in government bonds, on the contrary, the portfolio is overweight in corporate bonds including those issued by Solvay, Publicis, ASML and Sanofi. The fund finished in the first quartile of its EUR Diversified Bond - Short Term Morningstar category over the past one, three and five years.
The runner-up is Ostrum Euro Bonds Opporunities 12 Months which has been managed by Dieudonne Djimi since 2015. This fund aims to outperform the EONIA Total Return Index benchmark by more than 0.75 per cent a year by actively investing in euro bonds issued by OECD countries.
In contrast to Short Duration at Work, there are no corporate bonds here, only government bonds. At the end of May 2022, the portfolio consisted of approximately 66 percent bonds with a duration of less than 1 year, while the duration was 0.2. Manager Djimi started his career in 1997 and joined Ostrum Asset Management, the subsidiary of Natixis Investment Managers, in 1999.
This article originally appeared on InvestmentOfficer.nl.