Eric Vanraes (pictured) is the portfolio manager of the three fixed income funds of Geneva based asset manager EI Sturdza Investment Funds including the EI Sturdza Fixed Income Strategic Euro Bond Fund.
The strategy was launched in April 2009 and currently tallies €80m in assets under management (€300m including institutional mandates).
While further announcements of the European Central Bank regarding its asset purchase program are expected, he tells InvestmentEurope that as long as central banks remain credible in their announcements and policies, there will be no trouble for any asset class.
“But the day investors will stop believing them, we can expect some turmoil in the markets,” Vanraes foresees.
The EI Sturdza Strategic Euro Bond Fund is designed as a ‘safe’ fund and does not include corporate bonds from financials. Bonds picked are mostly investment grade with low risk. The bucket of BBB-rated bonds is up to 20% maximum.
The fund behaves like an “A-rated 2-year German bond,” the portfolio manager says.
Describing the ECB’s CSSP program as “incredible”, Vanraes argues it has split the European corporate bond market in two: the bonds that are eligible to the CSSP program and the others.
“We anticipated that in July 2015 by purchasing corporate bonds we were sure would be eligible for the program. Our strategy is to foresee what the ECB will be buying and buy it before.
“I mused during an investors’ presentation last July that Mario Draghi was the fund manager of my European bond fund,” he outlines.
“The main consequence of that split is that everyone wants to buy what the ECB is buying. For instance, RCI Banque is not eligible for the program but Renault, which recently passed to investment grade from junk, is. Renault’s spread is currently traded by 20bps less than RCI Banque.
“Without the ECB’s program, that would not happen as it makes no sense. But with a market maker buying for €80bn every month, liquidity is not a matter and everyone follows,” Vanraes highlights.
If the ECB’s corporate bond purchase program is extended, the bucket of eligible bonds will necessarily have to be enlarged, Vanraes believes, foreseeing it might buy BB-rated or step-up bonds.
“At some point, the ECB could also face an issue if it wants to fill its country quotas. In Italy, most of the eligible corporate bonds currently bought by the ECB are issued by companies from the construction industry but there is almost nothing else to buy.
“In Austria, the offer of eligible bonds is not big, the ECB might be obliged to buy some Telekom Austria bonds (rated BBB) at some point. The same will occur in Belgium with Proximus (currently rated A) and in Finland with Fortum (currently rated BBB+).”
Vanraes warns the ECB’s QE could never end. He observes that the institution looks more like the Bank of Japan than the Fed and that is “worrisome”.
“When we saw the Bank of Japan started to buy the Nikkei, we stressed it is not good news for European investors. Also growth and inflation rates in Europe are very similar to that of Japan,” he points out.
Vanraes assesses that central bankers act like politicians, probably having the right scenario over the short term but producing biaised long-term scenarios “because they rely on the fact their short-term scenario will succeed.”
“When the ECB says its objective of 2% inflation is to be reviewed, it is an implicit admission that the policy it currently implements does not work,” Vanraes underlines.
However, EI Sturdza Investment Funds’ portfolio manager compliments an “intelligent” action of the European Central Bank.
“Everybody commented negative yields or NPLs in Italy but a few experts have talked about the targeted longer-term refinancing operations (TLTROs), which are to me a cement of the ECB policy.
“If you look at the ECB’s asset purchase program, it does not buy debt from banks. I believe that the European banks, especially Italian ones, will be the next to be refinanced through an operation by the ECB,” Vanraes says.
Commenting on the Federal Reserve’s actions, Vanraes, who also manages the EI Sturdza Strategic Global Bond fund at EI Sturdza, believes the Fed’s quantitative easing has not ended.
He says that the real meaning of QE remains misconceived.
“QE is like increasing the size of a car’s fuel tank. The Fed has stopped increasing the size of the fuel tank but it still continues to fill it endlessly where normally it should let the fuel decrease.”
According to Vanraes, Yellen has been pushed into a corner by hawkish commentators and the only valuable reason for a rate hike would be the forthcoming recession in the US next year.
“The Fed could have risen its rates in Q4 2014 but they didn’t. They had the opportunity to do it at the beginning of summer because figures in the US were not totally bad. If they want to hike, they should do it now if it is not already too late. But actually, the real rise has already happened. The Libor 3 months rose to 0.85% from 0.60% during the summer. That says more than a Fed hike,” Vanraes observes.
He adds “recession could occur in the US next year and a fourth quantitative easing phase cannot be excluded. The Fed has to put itself in line with the movement we stressed on the Libor. The 3-month Libor is traded by 9 bps more than the 2-year Libor. That should be the opposite.”
Emerging markets and governements
Regarding emerging markets corporate bonds, Vanraes says that the EI Sturdza Strategic Quality Emerging Bond Fund he manages, launched in July, contains 80% of govies, state-controlled companies and agencies included.
“Over the 80 countries known as emerging markets, we pick the 25-30 best ones and we focus on investment grade bonds. It all depends on the way you consider emerging markets. Investors still look at that space like they were 15 years ago. The question is: Is a bond first emerging and then triple B or is it first triple B and then emerging? Bond issuers in the EM space are of good quality and yield is around 4%,” Vanraes explains.
Turkey’s failed coup in July has been a test for the fund. At that time, it was exposed to Turkey at 17%.
“We were holding two state-controlled corporates that we dropped after the Turkish failed coup and two companies that we kept because they were not impacted by geopolitical moves,” Vanraes comments.
The portfolio manager says the Geneva-based company has seen massive subscriptions to its EM bond fund with a rise in AUM to $50m from $35m.
“With that money, we bought new names from Poland, Romania and China as we anticipate a rally on the asset class in a very short time. We want to avoid crowded trades,” Vanraes concludes.