Portfolio Manager comment Coeli Nordic Corporate Bond Fund I-SEK March 2020
Nordic Corporate Bond Fund (Class I) declined during March with 12.97 percent. Since year-end, the NAV per share has consequently decreased by 13.18 percent. Developments in the corporate bond market were very weak in March. Like the equity markets, prices in both the investment grade and high yield segments were sent lower as a result of concerns over the financial consequences of the corona pandemic, which is likely to cause a recession for the global economy. The movement in the credit markets were unidirectional for the first three weeks, with consistent declines before stabilization and a modest recovery took place towards the end of the month.
Credit markets were greatly affected by large outflows from corporate bond funds. Managers affected by major outflows were forced to accept substantially depressed rates to obtain liquid funds in a situation where there were few willing buyers available. The development of events in the Nordic corporate bond market during March can therefore best be described as a liquidity crisis.
The crash that we witnessed in March is almost unmatched in terms of speed and also special to the extent that liquidity simultaneously dried up in more or less all segments of the credit market. Pricing of individual corporate bonds at the end of March is in many cases not considered to reflect the underlying credit risk of the respective issuer. During the last days of the month and a few days into April, the market has sobered and some new, perhaps opportunistic, investors have entered, while the central banks’ massive liquidity injections help to dissolve the worst liquidity nodes.
Given the turbulent events in the market, company-specific news in a month like this is of lesser importance. The vast majority of corporate bonds in the fund fell in value during March, with declines ranging between 2 percent and 30 percent. The worst performance was seen for bonds in the Norwegian submarket without official credit rating. The price declines were generally greater in Norway than in Sweden, as the Norwegian market was also clearly negatively affected by the large fall in oil prices and a significant decline for the Norwegian krone.
The underlying yield of the funds holdings, as a result of the depreciation that occurred during the month, has increased significantly and at the end of the month amounted to about 7.6 percent, which is the highest level ever for the fund. Despite the uncertain economic situation, which entails increased risks of credit losses, the expected return of corporate bonds is now higher than it has been for many years.
During the month, bonds were sold from Realkredit Danmark, United Camping, the IT consultant Crayon Group and the wind power company Arise. In the latter case, it was the company itself that chose to go out in the market and repurchase bonds. A new investment was made in Coor Service Management. Coor is considered to be a well-managed company with a business model and operations that should be able to perform well even in a marked recession. In addition, follow up investments were made in companies in defensive sectors, including Gjensidige, Tryg Forsikring and Stillfront.
The month of March was marked entirely by the Corona virus and its impact on the world economy. The virus transmission has happened at an alarming rate, from 84,000 cases by the end of February we now have over 1 million cases worldwide. This has to no surprise substantially affected the financial markets, where March has been an extreme month in the sense of volatility. S&P recorded a 12.5 percent decline and Dow Jones a 13.7 percent decline, making it the worst month since October 2008 for both indices. Worth noting, Dow Jones had its worst first quarter ever with a decline of 23.2 percent.
In the wake of the Corona virus, the world’s central banks have used their available tools to stimulate the economy through both quantitative easing and various interest rate cuts. The Federal Reserve (Fed) in the United States has implemented two “emergency cuts” during the month and now has a lower interval on its policy rate of 0 percent. At the same time, the Fed has made massive quantitative easing through asset purchases and a restart of the certificate program that supported the market in 2008/2009.
Like the Fed, the European Central Bank (ECB) has aimed at quantitative easing by increasing asset purchases. However, the ECB has chosen to address the banking system early by cutting down on liquidity and capital requirements for European banks.
The Swedish Riksbank has also introduced quantitative easing, to an extent of SEK 300 billion, which corresponds to 6 percent of GDP. These asset purchases focus on government-, municipal-, covered- and corporate bonds. The Riksbank also announced and completed the purchase of corporate certificates to provide short-term liquidity to the companies.
Besides the Corona virus the oil dependent Norwegian economy has had to deal with a sharp decline in oil price as Opec and Russia has significantly increased its oil production during the month. Bank of Norway responded by lowering its policy rate by 125 basis points to 0.25 percent. Also, the Ministry of Finance in Norway has announced asset purchases of NOK 100 billion in credit support, 50/50 split between bank guarantees and bond purchases. Regarding the bond purchases, the mandate stipulates the ability to purchase high yield bonds. This is significant support to the high yield segment in Norway, where NOK 50 billion corresponds to approximately 17 percent of the total Norwegian market for high yield credits.
The European and American credit markets showed sharply rising credit spreads in both the high-yield segment and the investment grade segment during the month. The Nordic market was no different with sharp increases in credit spreads. Stibor 3-month was noted at 0.31 percent, which is an increase of 17 basis points during the month. The Swedish 10-year government bond was listed at -0.15 percent at the end of the month and has thus risen 14 basis points during the month. The US 10-year government bond was listed at 0.60 percent at the end of the month and has continued to fall sharply during the month after being listed at 1.15 percent at the end of February.
Coeli Nordic Corporate Bond Fund R-SEK
|Performance in Share Class Currency||1 Mth||YTD||3 yrs||Since incep|
|Coeli Nordic Corporate Bond Fund – R SEK||-12.97%||-13.18%||-6.57%||3.16%|
DISCLAIMER. The information provided here does not constitute professional financial advice. Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested. The key investor information document (KIID) and prospectus are available at www.coeli.se.