Short duration corporate bonds best bet, says Swiss Rock
Good quality corporate bonds with a very short duration are the best bet in the current investment climate, says Swiss Rock Asset Management.
Executive director Roman von Ah says: “Economics define results, not a clairvoyant type of asset management. The biggest unrecognised problem right now is the low level of interest rates, which makes it very difficult to create conservative investments.”
The firm’s answer is to go for corporate bonds with a short duration of no more than two years to mitigate the risk inherent in the current market environment.
Von Ah says: “We are keen on sophisticated bonds with a broadly diversified credit risk. At the end of the day, the underlying economic source of return is the interest spread.”
In terms of geographies, Von Ah picks out Northern Europe and some Eastern European countries. In the latter region Poland is of particular interest.
Polish government bond yields have been falling this month, suggesting lower inflation expectations. At the same time, 10 year government bonds are still yielding around 4.5% – triple the yield of Germany’s 10 year Bunds, for example.
In an uncertain global inflationary environment, this yield coupled with a more upbeat inflation outlook makes Poland an attractive proposition for investors.
But Swiss Rock prefers to avoid government debt altogether. Von Ah quotes market practitioners saying that “government bonds used to be returns without risks, but now they offer risks without returns.”
The firm tries to avoid these risks at all costs. This is reflected in its sector outlook, too.
It does not go for corporate bonds in the banking sector, for example. In Von Ah’s view, this is too closely tied to government risk in the Eurozone.
Switzerland has particularly suffered from negative headlines concerning the banking sector in the last few years, causing the local public to lose trust in the industry.
This has even rubbed off on the asset management sector. The asset management arms of large local banking corporations, such as UBS and Credit Suisse, have not seen nearly as much cash flowing into the business this year as the smaller, independent local asset managers, according to Swiss Fund Data.
Swiss Rock’s founding partners anticipated this issue back in 2007, at the very onset of the financial crisis. They realised bank-affiliated asset managers were often simply creating products to achieve high margins, rather than as client oriented solutions.
As a result, they created the firm in the form of a family office to ensure the interest of the founders and managers was at the heart of the business. At the same time, they made their management solutions available to external investors.
Their approach puts the client first and seeks to select an appropriate individual solution for him. Only then comes the income component.
As a boutique business, Swiss Rock services clients in the German-speaking region only. With assets under management at around CHF1bn, the firm prefers to keep its activity within the region it understands well, instead of venturing into unknown global territory.
Its client base is very diverse, however. It includes institutions such as pension funds and insurance companies, family offices and high net worth individuals, as well as cooperation with distribution companies offering their products on the retail market.
Recently, clients have shown particular interest in the Swiss Rock Absolute Return Bond Plus product – a strategy that invests in short duration bonds with a rating between B and AAA, with an overweight of BB bonds.
Von Ah calls this strategy a “conservative way of optimising additional income” and suggests it could be an answer to compensate inflationary pressures, bringing negative real yields into positive territory.
The inflationary risk is mitigated through the short duration approach, which is attracting “quite a bit of interest” from clients at the moment.
The yields to maturity of the bonds in the absolute return portfolio are 3.5%, which is above inflation in the Eurozone, currently at around 2.5%. The total return of the product this year to date is around 5.5%-6%.
Despite the difficult environment, the firm has attracted net new money this year, which acts as proof that its strategies are a fitting response to what investors are looking for.