Italian daily newspaper Libero Quotidiano and the right investment strategies: among other suggestions in the article is mentioned Banor’s Euro Absolute Return Bond.
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Shanghai has lost over 8%, the worst session since 2007, and is dragging Milan’s Piazza Affari down too, with a loss of nearly 3%. We offer some practical tips to create an “anti-panic” portfolio.
Yesterday was a bad day for the European stock markets (the Milan stock exchange, Piazza Affari, was the worst, down 2.97%). The intense selling on the Chinese stock exchange was the factor dragging them down: Shanghai lost 8.48%, its worst performance since 2007. The collapse was unexpected, after three positive weeks. The fears of a bubble in share prices in China (with investors going into debt to buy new stocks) seemed to have been averted by the action taken by the Chinese authorities and by the large-scale purchases on the markets by giant public companies. But the return to calmer waters was only an illusion and some negative figures on industrial profits (down 0.3% in June) were all that it took to see selling resume. With repercussions in Europe, where bank stocks suffered most. Investors are wondering how to steer their way through this new storm. “Libero” asked a number of experts in the sector: Riccardo Milan, Director at Capital Strategies Partners; Fabio Caiani, Italy Director at Nordea; Laura Nateri, Italy Director at Aberdeen AM; and Gabriele Roghi, Investment Adviser at Invest Banca.
RICCARDO MILAN, DIRECTOR, CAPITAL STRATEGIES PARTNERS
Have we seen the end of the Chinese and Greek crises?
“The Greek crisis and the Chinese bubble are two episodes which in our opinion are nowhere near the end”.
Investors who have stayed the course and still have some liquidity (between 100 and 150,000 euro) – what can they do?
“A properly constructed bond portfolio must be built from a perspective diametrically opposed to what normally happens. Today, being exposed to government securities implies an enormous volatility. We need only consider the movements of 10-year bunds, which went from a yield of 0.10 to nearly 1%, only to fall back again to 0.60. We prefer investment in funds that on the one hand are from more highly diversified areas and on the other provide absolute returns. To take the first type, investment in the emerging sovereign bond frontier markets is an interesting sphere since most of their debt is held by local and institutional investors who are largely uninfluenced by global tensions but much more dependent on their own countries. With a well-diversified fund it’s possible to obtain a return on maturity of about 9/10% with an average duration of around 3 years”. (Global Evolution Frontier Fixed Income R)
What other tips can you offer investors to further stabilise their portfolios?
“We advise them to look at segments that manage their positioning at the global level in euro in an opportunistic manner and invest in government securities, corporate bonds, high yield and emerging countries’ bonds while keeping their portfolios at investment grade level (Banor Euro Absolute Return Bond R Cap). Lastly, we’d suggest a segment that replaces liquidity with investment mainly in bank lending with maximum duration of 12 months and in selected corporate stocks, so as to provide high stability and a return of more than 1%”. (Aristea Sicav Enhanced Cash Fund R Cap Eur).
Something corporate?
“The convertible bonds of two companies: Compagnia della Ruota and True Energy Wind, which have excellent fundamentals and a very promising outlook. The first name operates in a sector that’s counter-cyclical to the crisis (it manages corporate crisis situations). The second operates in a sector undergoing strong expansion and regulated by incentives”. (CDR Advance Capital 6.5% 2014-2019 and TEW 6% 2013-2018)
FABIO CAIANI, ITALY DIRECTOR AT NORDEA
We have three products that we think investors should follow with interest. They are:
Nordea 1 – Flexible Fixed Income Fund. A good product for anyone looking for a flexible portfolio. The risk is controlled through an active management approach that dynamically balances performing instruments in rising periods with defensive securities that offer protection in “down” periods, in a risk-balancing strategy. The fund invests in a wide range of bonds, both defensive and high-yield, maintaining an average A+ rating and at the same time generating interesting returns.
Notwithstanding the collapse of the Chinese stock market, there are still opportunities to generate interesting returns in this geographical region, even for more cautious investors. The Chinese bonds market actually lost less than 3 points in the last month, compared with a loss of 30% for shares. The high-yield bonds in renminbi or with renminbi currency cover in which the fund invests offer a more attractive potential return than European bonds (7.5% on maturity). The progressive opening up in the Chinese economic-financial sector and, in particular, the outlook for future growth in this asset class, together with an accommodating monetary policy and the promotion of the RMB to reserve currency make this a strategic product in the portfolio from a long-term perspective.
Nordea 1 – European Cross Credit Fund. This is a defensive product that is exposed to a range of single to triple B credits that can generate interesting returns by exploiting spread dispersion and shifting the focus from ratings. Considering the high transaction costs in the credit markets, the tendency is to reduce the rate of turnover in the portfolio by taking a defensive approach, with the initial goal of keeping the bonds until maturity. Only bonds deemed to have relatively strong fundamentals and value are included in the portfolio.
LAURA NATERI, ITALY DIRECTOR FOR ABERDEEN AM
After Greece and China, what opportunities do you see for small investors aiming for fixed rates?
“Investors should expand their horizons not just to the traditional bond markets – which not only do not pay a satisfactory premium on risk, but in most cases offer a negative real return – but to other markets where the yield content is interesting but above all allows for risk.
Are the emerging markets a risk or an opportunity?
“They’ve become too varied to be viewed as a uniform whole – that’s why investors need managers specialising in these markets. Emerging debt remains for us a structural component of any bond portfolio, still hardly represented in the benchmarks but destined to play an increasingly important role”.
And for investors who want to keep their risk low?
“We’d advise them to take an investment approach that looks further than the traditional benchmarks, built on the foundation of debt in circulation and not of the prospects and solidity of the governments under consideration”.
GABRIELE ROGHI, INVESTMENT DIRECTOR, INVEST BANCA
Is the bond market at risk of the bubble effect?
“The risk for bond investment is particularly high and difficult to interpret. The spasmodic quest for returns caused by the enormous liquidity issued by the central banks with the various quantitative easing (QE) operations has eliminated the differences in yields between issuers. And it has also eliminated the perception of risk, because it has pushed investors towards issuers with lower ratings and longer timescales that can offer returns that they view as adequate, without evaluating the risks inherent to the instrument”.
Should investors be thinking long term or short term?
“To find a return of around 4% a year with a low-medium dose of risk, investors are forced nowadays to select issuers with junk ratings and/or very long-term maturity (well over 20 years), which clearly poses risks relating to the duration of the investment. A risk that we have seen in recent weeks: the Btp 2046 issued in January 2015 at 100 rose to 133 in mid-March and then plummeted to 97 on 10 June. At closing time on Wednesday 22 July it was around 104.9, causing palpitations among investors who’d bought it in the first three months of the year”.
For investors looking for a structured portfolio, what sort of diversification do you have in mind?
“I’d suggest:
- 15% in Italian fixed rate government bonds with up to 10 years maturity. ISIN code: IT0005090318.
- 25% in BTP Italia 0 inflation. ISIN: IT0005012783;
- 25% in high-quality corporate bonds, including in American or Australian dollars, with maturity no more than 7/8 years (mixed-rate CDP issued recently, IT0005090995; Prysmian 2022, which offers about 2.85% on maturity, XS1214547777; Vodafone 2023 in US dollars, with a return of 2.95%, US92857WBC38; Banca IMI 2018 in Australian dollars, which offers 6.4%, IT0004938269);
- 20% in variable rate products (CCT or corporate floater/floaters), XS0735543653 or IT0004827439;
- 15% in emerging economy bonds in local currency to drive returns, better if through ETF specialising in the segment to obtain the most efficient diversification in terms of both issuer and currency, SEMLIMIE00B5M4 WH52 (iShares Barclays Emerging Markets Government Bond Ucits ETF in American dollars).
A portfolio of this type would have an expected return at one year of about 2.5-3%, with a medium-high volatility level but in line with the market supply for the period”.
Original article in Italian language, available here: Libero Quotidiano, July 28, 2015
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