Euro credits fund: Celebrating 15 years of outperformance in a row
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Article Type
Insights
Topic
Credit
Published
April 02, 2024
Read time
10 mins
Author
Aegon Asset Management
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Institutional investors have long benefited from our strategy which not only has constantly outperformed, but is also an ideal solution to match their liabilities and, more recently, help them integrate sustainability considerations in their portfolios.

 

Cumulative performance

 

Figure 1: Aegon Euro credits fund and Benchmark (Barclays Capital Euro-Aggregate Corporate Bond Index). Net returns in Euro. Source: Aegon AM, as at 29-February-2024.

 

Experienced and dedicated team: The basis for a stable and strong track record

 

The Aegon Euro Credits Fund, established in 1998, has consistently outperformed the market with low tracking error. Over the past 15 years, it has consistently surpassed its benchmark, showcasing its ability to deliver superior performance with controlled risk. This outperformance has been demonstrated even during volatile periods in financial markets such as the Eurozone crisis, the Covid-19 crisis, the zero rate environment as well as a sharp rising rate environment.

 

Led by four experienced portfolio managers and supported by a dedicated global credit research team of 30 analysts, the fund's rigorous research ensures informed investment decisions.1 Utilizing a meticulous bottom-up approach, the team strategically allocates resources across sectors to maximize returns while mitigating risk.

 

Ideal matching solution for liabilities-driven investors

 

For institutional investors such as pension funds and insurance companies, the matching portfolio is crucial as its primary goal is to hedge future liabilities. Assets in this portfolio are selected for their strong correlation with swap rates, against which future liabilities cash flows are discounted. This ensures that when interest rates rise, the present value of future liabilities falls, aligning with the matching portfolio's value. Quality is paramount here; assets must be investment-grade or higher to maintain portfolio stability and reduce tracking error.

 

Investment-grade credits are excellent instruments for hedging interest rates on the short end of the curve. With an average duration of 5 - 7 years, these instruments offer an attractive yield, making them a compelling addition to the matching portfolio. Currently, investment-grade credits yield 83 basis points higher than swaps and 115 basis points higher than government bonds of a AAA-rated country with similar maturity.2

 

Further strengthening our Euro credits strategy

 

During the recent spread rally (2024) we increased our focus on reducing ESG risk to make our portfolio more resilient in case the spread trend reverses. We also looked into climate risks taking into account our Climate Transition methodology, of which the coverage is still quite low. In addition we focused on companies that have a credible strategy to reduce emissions to net zero in 2050. Having science based approved targets (SBTi) is an important element. The percentage of holdings in companies that have approved targets from SBTi has increased only in 2024. However, it is still well below the average of the benchmark.

 

In case the case the market trend reverses and spreads widen from the tights, it is most important that at that point we have minimized supply risk, avoided the crowded trades (consensus overweights) and that we have increased the quality of our portfolio.

 

Our short-term expectations

 

We expect a favorable year for Euro Investment-grade corporate bonds in general. Although economic growth, particularly in Europe, is expected to be quite low, disinflation trends probably continue at a slower pace, overall credit quality is expected to remain stable. We expect technical support for credit to remain strong as the supply outlook has improved from last year and current yields - most attractive yields since the European sovereign crisis should continue to attract buyers of euro investment-grade credit. The prospect of interest rate cuts in the second-half of this year, increases the attractiveness of asset class from a total return perspective. We therefore started the year with a modest risk overweight positioning.

 

1 As at 27 March 2024

2 Source: Bloomberg and Aegon Asset Management. Z- spread and g-spreads as at 26 March 2024

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Aegon Asset Management

We are active global investors. In a complex world we think and act across traditional boundaries. We organize our teams globally by asset class, to bring the breadth and depth of our investment and research capabilities together for clients across the world. 

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