Raiffeisen-ESG-Euro-Rendite boasts high flexibility

Raiffeisen-ESG-Euro-Rendite (issued under the name Raiffeisen-Euro-Rendite) is a result of the euro crisis and the subsequent extremely low capital market yields in the past ten years. This bond fund was launched with the goal of generating attractive returns for investors with manageable levels of fluctuation and risks both in unusual environments such as this and in “normal” times. In order to achieve this, the fund management is afforded great flexibility on numerous levels and works within a framework aimed at ensuring good risk control and a solid long-term strategic orientation.

Thanks to the switch to a sustainable investment approach based on ESG criteria as of 6 June 2024, investors can also contribute to promoting responsible business practices with their investments in Raiffeisen-ESG-Euro-Rendite.

What exactly does high flexibility mean?

The fund management can operate on a very active basis on three essential investment levels within a carefully selected framework:

• in the selection of maturities (duration),

• in the selection of bond classes and the creditworthiness of the issuers, and

• in the selection of countries, sectors, and individual securities.

In terms of duration, the average maturity of the bonds in Raiffeisen-ESG-Euro-Rendite can range between minus 2 years and plus 4.5 years. For the most part, the investment experts at Raiffeisen KAG can freely select between government bonds, state-affiliated and government-guaranteed issuers, supranational borrowers, covered bonds, and corporate bonds. At the moment (and for quite some time now), the fund has hardly contained any government bonds, but is predominantly made up of corporate bonds because they offer a much better risk-return ratio.

The average credit rating in the fund must be in the investment grade segment, i.e. bonds from issuers with good and very good ratings. As long as this requirement is met, Raiffeisen-ESG-Euro-Rendite can also hold a significant share of assets with lower ratings. At present (as of June 2024), this share is fairly close to the fund management’s upper limit, at just under 20%.

One key factor in generating returns in the past has been the selection of individual securities. Naturally, the high level of flexibility given to the fund management in this regard is generally very beneficial in this context.

Many options in the selection of maturities

Maturities of 4.5 years fall into the lower medium-term maturity segment of the bond markets . A negative duration would allow Raiffeisen-ESG-Euro-Rendite to generate positive returns even when the bond markets are falling. This option is a result of the fact that the fund was originally launched during the period of extremely low interest rates and will likely no longer come into effect for the foreseeable future. However, it is a very interesting possibility for emergencies that very few bond funds have. The average portfolio duration generally ranges between two and three years. At the moment, it is roughly 2.2 years.

Target: Risk-adjusted additional returns

One core element of the fund concept is to always keep an eye on risk when it comes to the returns. Maximising earnings at (virtually) any cost is explicitly not the goal. Although this approach would be very successful in a bond market that is generally on the rise, it would very likely lead to disaster in the event of major corrections or a downturn. Instead, the fund strives to achieve a manageable range of fluctuation and nevertheless generate attractive returns. (Note: This goal cannot be guaranteed.)

Current market situation: Bond markets torn between hope and fear

Over the past five months, the bulk of the interest rate cut expectations prevailing at the turn of the year have been priced out of the markets again. A rate cut by the European Central Bank (ECB) in June largely appears certain. However, market participants have very different opinions about how things will proceed after that. The monetary policy of the ECB is generally considered to be quite expansive, but this by no means has to take the form of significant rate cuts, especially because the European central banks do not act in a vacuum. A more pronounced decoupling from US monetary policy could weaken the euro, for example, and generate new inflation risks by way of imports.

Speaking of inflation: The downward trend in inflation is generally intact. However, the pace will likely slow further, and upward countermovements are completely possible, at least temporarily.

More on the topic of bonds and on the capital markets.

Positioning of Raiffeisen-ESG-Euro-Rendite

In light of all this, the fund management currently feels quite comfortable with a somewhat more defensive (below average) duration. In this context, the fact that the interest rate structure on the euro bond markets is still inverted – meaning that short maturities are currently offering higher yields than longer maturities – must be highlighted. Normally, the opposite is true, however. At the moment, this situation makes it possible to operate with lower duration without suffering yield disadvantages. However, the current, slightly more defensive stance would result in a somewhat lower return in the event of significant yield declines across the maturity segment. If more pronounced signs of such a situation emerge, the investment experts at Raiffeisen KAG can switch to a more offensive stance at any time.

In any case, the somewhat more cautious positioning has paid off in recent months, as has the strong focus on investment grade corporate bonds and the relatively high supplemental holdings in high yield bonds. Although the spreads on corporate bonds have now narrowed to a level below the long-term average, the yield disadvantage of government bonds is still substantial enough that they only make up a negligible share of the portfolio at the moment.

Related articles:
Are the prospects still rosy for corporate bonds?
A good time to enter the high yield bond market?

The investment strategy permits the fund to predominantly (relative to the associated risk) invest in derivatives.

The Fund Regulations of the Raiffeisen ESG Euro Return have been approved by the FMA. The Raiffeisen ESG Euro Return may invest more than 35 % of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Belgium, Finland, Germany.