Explosive yield increases and strong price volatility

A decade of ultra-low interest rates with unprecedented measures by the central banks was followed by explosive yield increases in 2022 and 2023. Over the past 12 months, the bond markets repeatedly priced in and then priced out rate hikes, recessions, and rate cuts, leading to hefty price fluctuations. In this environment, the anticyclical investment strategy of Raiffeisen-Nachhaltigkeit-Rent once again proved its worth. Bond positions were purchased (and/or increased) in the case of price declines due to yield increases (or in the case of spread widening for corporate bonds). In response to price increases, the fund management reduced appropriate positions and took profits. The fund management had already responded to the yield increases (i.e. falling bond prices) by increasing duration in 2022, and continued this strategy in 2023. This particularly paid off in the fourth quarter of 2023, as bond prices increased markedly. In turn, positions were reduced somewhat as this sharp uptrend was under way and have been increased again in recent months.

Raiffeisen-Nachhaltigkeit-Rent as a rock of stability

How is the fund positioned at the moment?

With a current portfolio duration of around 7.6, the fund is positioned very well to profit from potential renewed yield declines. At the turn of the year, the financial markets were still pricing in numerous, rapid interest rate cuts for this year, but these expectations have largely been priced out again in recent months. Nevertheless, the scenario of rate cuts in the USA and Europe is fundamentally intact. This will likely lead to falling yields and rising bond prices in general. At the same time, however, this still gives the fund management ample freedom to continue purchasing bonds and/or increasing duration. Therefore, potential stress situations on the market could be exploited on an opportunistic basis to buy bonds at very attractive risk-return profiles in sell-off situations, for example.

Raiffeisen-Nachhaltigkeit-Rent currently (as of early May 2024) has just under two thirds of its assets invested in bonds issued by governments or quasi-sovereign issuers and roughly one third in corporate bonds. The average portfolio yield for the fund amounts to roughly 4.3 % p.a. at the moment. Naturally, however, this average yield for the fund portfolio cannot be equated with the expected annual return, which can be lower or higher than this figure.

Raiffeisen-Nachhaltigkeit-Rent has generally proven to be very resilient amidst the difficult market conditions in recent years. Naturally, it has not been entirely immune to the price declines on the bond markets, but it has usually fared much better than euro government bonds or euro corporate bonds, for example, in these phases. In peer group comparisons, the fund is among the top performers over various investment horizons. It has been able to make the most of its strengths and strategic advantages, which also make it a very attractive alternative for bond investors – especially right now.

What are the strengths and strategic advantages of Raiffeisen-Nachhaltigkeit-Rent?

Raiffeisen-Nachhaltigkeit-Rent follows a long-term strategy (over five years) and operates on an anticyclical, flexible, and valuation-oriented basis. The fund strives to invest in bonds with a relatively high expected long-term return and an above-average Raiffeisen sustainability score. Long-term volatility of 4 to 6% is targeted. The fund management can invest worldwide in virtually every bond sub-asset class on a very flexible and opportunistic basis because there is no stipulated investment structure and no benchmark. In the extreme low-interest environment prior to 2021, the investment experts at Raiffeisen KAG kept the duration in the fund portfolio very low, namely at the lower end of the strategic range, which stretches from roughly two to ten years.

Finding and taking advantage of opportunities

In practice, this means that the fund management tends to go against the general market trend. For example, it scales back bond holdings and/or reduces the interest rate risk in the fund portfolio when bond prices are rising and makes purchases again (accepts greater interest rate risk) when prices are on the decline, but only when certain conditions are met. The most important conditions in this context are valuations and earnings expectations. In other words, purchases are not automatically made when bonds are falling, but rather only if they reach attractive valuations and earnings levels in the process. In the extreme low-interest environment prior to 2021, which was marked by decidedly unfavourable earnings expectations for bonds, the investment specialists at Raiffeisen KAG thus kept the interest rate risk in the fund portfolio very low, at the bottom end of the strategic range.

What are potential disadvantages/risks?

Naturally, the concept also involves risks. If the fund management is incorrect in its assessment, it may make purchases too early. Generally speaking, cheap or attractive assets can always become even cheaper/more attractive. Waiting for opportune times to invest by no means offers protection against price losses, but it does at least reduce these risks or their probability somewhat. This of course applies to the current situation, as well. Naturally, the fund management may also be overambitious and wait in vain for more favourable opportunities to enter the market. Although this would not result in any loss of value for the fund, it could lead to generally lower earnings from advantageous market movements.

*The Raiffeisen Kapitalanlage-Gesellschaft m.b.H. continually analyses companies and countries with the help of internal and external research providers. Together with an overall ESG assessment including an ESG risk assessment, the results of the sustainability research are converted into the so-called Raiffeisen ESG Indicator, which is based on a scale of 0 - 100. The assessment is made in consideration of the company’s respective branch of business.

The investment strategy permits the fund to predominantly (relative to the associated risk) invest in derivatives. The Fund Regulations of the Raiffeisen Sustainable Bonds have been approved by the FMA. The Raiffeisen Sustainable Bonds may invest more than 35 % of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Italy, United Kingdom, Sweden, Switzerland, Spain, Belgium, United States, Canada, Japan, Australia, Finland, Germany.