Adaptive measures for a jumpy market
Bonds are back in vogue and fund managers are introducing innovative products to meet burgeoning European demand.
Europe’s product manufacturers have been reporting significant outflows from equity funds during these uncertain times.
Italian investors alone sold E2bn worth of equity products in February, their largest mass redemption since September 2001, according to data compiled by Citigroup. Average allocations show investors across France, Germany, Italy, Spain and the UK are currently weighted 34.5 per cent in bonds, still short of the 38 per cent they held at the end of 1997. Not surprisingly, a flurry of fixed income funds has been launched to take up the slack. The Parvest European Bond Opportunities fund from BNP Paribas Asset Management focuses on so-called “Fallen Angels”. These are household name companies. But due to the economic cycle, costly acquisitions or financial scandals, their bond issues have been downgraded. Now they are being bought up by the fund, in the hope that their ratings and value will improve. Examples include French media group Vivendi Universal, which faces a legal challenge in New York alleging fraud from its former chief executive. At fellow “fallen angel” Ericsson, the Swedish telecommunications group, new chief executive Carl-Henric Svanberg has hinted at job cuts to improve efficiency. Analysts at BNP Paribas say such issuers currently account for 42 per cent of high yield bonds. But despite the perceived safety of fixed income, this is a volatile investment. Bond boffins at Credit Suisse Asset Management (CSAM) have developed a different strategy. Their Target Return fund is designed as a core product, rather than an opportunistic investment. Aiming for returns of US$Libor plus 300 basis points, their fund selects from a huge universe of bonds. Each asset class, including government bonds and high grade credit is limited to between 20 and 35 per cent of the total portfolio. The action is currently expected from investment grade convertibles and emerging debt. A similar product launched by CSAM in Zurich collected E2bn in just six months. The marketing story is always an alluring one. But BNP Paribas performance figures for high yield bond management have been below par. And over the last year, according to S&P, all of CSAM’s European bond funds, with the notable exception of the Emerging Europe bond fund, have underperformed their benchmarks. In CSAM’s favour, it has successfully managed a $25m low volatility, outperforming target return portfolio for an institutional client in Europe since August 2000. And in the current climate, there are few diversified alternatives.
