Sophie MONNIER, CFA, is a Product Specialist for Asset Allocation & Fixed Income at ODDO BHF AM, a financial group specialising in asset management. She discusses the opportunities arising from stabilising interest rates and future prospects.
The upcoming interest rate cuts are eagerly awaited. What is your take on that?
Interest rate cuts are indeed high in investors’ minds. The market has priced in cuts of between 75 and 150 basis points over the next 12 months. But the exact amount is actually very hard to predict. We are being careful not to indulge in hasty or complacent projections, as rate cuts are data-dependent. The factors in play include inflation, unemployment and growth, to say nothing of potential exogenous events. That being said, after rate hikes that were historic in both their extent and speed, we have clearly reached a pivot. The good news in the normalisation of interest rates is the carry trade and potentially attractive bond yields.
How should savers adjust?
The best possible advice is to diversify, in order to exploit new opportunities and to smooth over risks. Two years ago, the watchword was “TINA”, i.e., “there is no alternative” to investing in equities, as bonds no longer offered premiums, and yields were very low and even negative. But now, there are new alternatives to equities out there for diversifying one’s investments, now that the bond market outlook, in our view, is once again clear and attractive. Sadly, savers lacking information, knowledge or explanations are afraid to take the plunge, and are missing out on significant returns. They shouldn’t hesitate to find out more and to seek out professional assistance to guide their investment choices.
Fixed-maturity bond funds made lots of sense in the market conditions of 2023. What about now, in 2024?
It is important to point out that the main attraction of such funds is the carry trade, i.e., the overall return on offer now on the bond markets. Not since 2011 had we seen yields this high, with the very brief exception of March 2020. This is why bond funds are attractive once again, fixed-maturity funds in particular. Fixed-maturity funds also offer the advantage of clear visibility over the life of the product. Fixed-maturity funds work somewhat like a vanilla bond, but with the added benefit of the diversification of a traditional bond fund. Take ODDO BHF Global Target 2028, for example. Its target maturity is 2028, and we can invest in bonds having a contractual maximum final maturity of June 2029, which excludes perpetual debt and hybrid debt. Keep in mind, however, that this fund incurs a risk of loss of capital and a risk of default arising from investments in high-yield bonds.
Since we’re on the subject, how is your ODDO BHF Global Target 2028 fund invested?
ODDO BHF Global Target 2028 was launched on 22 November 2022. The management team aims to optimise carry with as little volatility as possible. The team of nine fund managers/analysts based in Düsseldorf, Germany, has opted for a relatively conservative approach, in order to minimise the risk arising from a corporate default as much as possible. That’s why ODDO BHF Global Target 2028 invests in non-financial high-yield corporate bonds. We have lots of granularity in the portfolio, with more than 100 issuing companies.
How do you decide which companies to invest in?
The corporate debt market consists of two types of issuers: investment grade and high yield. Companies are classified into one of these two groups based on how solid their balance sheets are. Investment grade companies are the highest-rated, with a lower risk of default but are also lower-yielding. High yield bonds are issued by more speculative companies, but they are also higher-yielding to remunerate this greater risk of default. As we try to optimise carry in ODDO BHF Global Target 2028, we invest in high yield bonds but select the instruments with great care. We steer clear of the most heavily indebted companies that have no clear path to deleveraging, or opaque and unstable governance. We overweight profitable companies with controlled debt levels and transparent communication, and that in our view offer attractive premiums in the current context. We also invest in international companies but without taking on currency risk. Keep in mind, however, that past performances are not a reliable indicator of future performances and are not constant over time.
What are the risks with this type of fund?
The main one nowadays is the risk of default. Keep in mind that on both an international and European scale, default rate prospects are not a cause for alarm. They are even below their historical averages. For 2024, Moody’s expects and projects default rates of 3.3% in Europe and 4.1% in the US. However, there is a considerable amount of dispersion between sectors. Sectors such as real estate and construction have been especially hard hit. In these segments, we take a very conservative approach, in accordance with our DNA and our investment philosophy. Bottom line: ODDO BHF Global Target 2028 draws on the strengths of our European group. We avail our clients of the top experts, based in Düsseldorf, for quality-based selection of high yield bonds.
