The funds betting all on Greek and Italian government bonds

A number of funds have been betting on the future direction of Greek and Italian government bonds, with a varying degree of success – or not – according to analysis published in Sweden.

Business daily Dagens Industri, reports that for example the Greek fund Alpha Domestic Bonds, which has 90% invested in Greek bonds, has returned -20% year to date, on top of a loss of -23.5% in 2010.

Compared to Eurobank EFG Greek Bond Fund, that return looks positively rosy – the Luxembourg based fund has shed -42% this year.

In Italy the Fideuram Rendimento, which as of 31 October had 100% of its capital in Italian sovereign debt, was down 9% year to date.

Gestielle BT Cedola, with about 90% of its money invested in the domestic Italian market, has done slightly better, down -5%.

“Greek paper fell last year, and while the Italian has gone down, it is by no means as dramatic. Italy is also a big bond market,” DI quotes Jonas Lindmark, chief analysts at Morningstar.

“Those who dare take the risk can get a big return. But, in an extreme environment the market can also take the view that it doesn’t matter how cheap a Greek bond is, it won’t buy it anyway.”

“Because the size of the [haircut] is unknown it is difficult to say what the yield may be today. That is part of the risk the investor has to take, and my impression is that there are few who are willing to do this.”

Another point for Swedish investors in particular is that it is actually difficult for them to access funds investing in individual crisis countries. The funds are not marketed in the Swedish market.

Morningstar lists 61 funds available to domestic investors in the category “sovereign bonds euro”, but they are mostly broader based bond funds, and the average return is about 1.63% year to date.

The best among these is from Pioneer Funds, with a return of 3.5%. The biggest holdings are spread across Italy, Germany, and Spain, and over five years the fund shows a return of 20.9%.

Worst in this category is a fund from WestLB, which is down -4.9% this year, with exposure to Germany and French sovereign debt. Over five years it has returned 4.7%, DI notes.

By comparison, bond funds that have invested in Swedish sovereign debt show an average return of 6.8% this year, while some of the larger funds in this category from AMF, Nordea and Skandia are up by more than 10%.


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