Posted inAnalysisEmerging MarketsFixed Income

ANALYSIS: Fixed maturity funds – Has the opportunity passed?

Credit Suisse launched its first fixed maturity fund at the end of 2015, followed by another one in April last year. The latter fund mainly invests in bonds issued by EM companies and has “a weighted average investment-grade exposure”. It has been particularly successful, seeing net inflows in excess of €3bn. 

“Fixed maturity bond funds have worked extremely well for us. I have been actively recommending them to my clients,” says Omar Gadsby, head of fixed income fund selection at Credit Suisse’s private banking division. The bulk of the €3bn committed to the Credit Suisse Fixed Maturity Bond Fund 2019 indeed came from internal clients.  

 

Spread compressionEarly 2016 was a perfect time to launch a fixed maturity bond fund, explains Gadsby. “Credit spreads were very attractive back then.” 

But that’s no longer the case: the US high yield bond spread, for example, has narrowed from more than 800 bps in February 2016 to less than 400 bps now. And emerging market (corporate) debt spreads have been on a similar trajectory. 

“Spreads are now below the five-year average,” says Gadsby (pictured). “The spread of the JP Morgan EMBI Index has narrowed from 538 bps in February 2016 to 329 points now. Valuations are starting to raise some questions.”

For this reason, it doesn’t really make sense to invest in fixed maturity funds at this moment, says Jaap Bouma, senior portfolio manager at the Dutch wealth manager Optimix. 

“In principle, such strategies are interesting, but why would we lock in yields at such low levels? In these circumstances, with risk-free rates and credit spreads both at very low levels, active management is the way to go,” he says. 

“Just last month we halved our position in US high yield bonds in favour of a volatility arbitrage fund. I consider fixed maturity products more of a buy-and-hold product, and that’s just not an interesting proposition right now.” 

But the fixed maturity fund launches just keep coming. Gadsby is planning one in April, again focusing on emerging market debt, and AXA IM just launched another European high-yield fixed maturity fund. 

The fund, which launched only a couple of weeks ago, has seen inflows of €29m so far, says its manager, Yves Berger. That may look like small beer compared to the flows attracted by the aforementioned Credit Suisse fund, but a similar fund launched by Berger last year racked in close to €700m, according to Morningstar data. 

And the Frenchman disputes Bouma’s notion that fixed maturity funds are more or less buy-and-hold strategies.

“It’s a high-yield fund, and you need to actively manage that. In fact, in the fixed maturity high-yield fund I have been managing since last year I have been trading a lot. The market has been driven by refinancing, with companies trying to profit from interest rates being at such low levels,” he explains.  

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