Horizon Q4│2024 - Berenberg Insights

You have been with Berenberg for just over a year now. What characterises the Berenberg bond team and what makes it special?

The team is very diverse and complements each other well. Each person is responsible for a sub-area, so we can cover a lot of topics. We are also integrated into the multi-asset area and therefore benefit from synergies. Topics such as risk sentiment and the economy are developed jointly. Once an opinion has been established and justified, we have many degrees of freedom to implement active positioning decisions.

One thing that really surprised me was the widespread use of portfolio managers with programming skills and programmers. There are countless colleagues who are constantly trying to structure workflows, provide technical support and thus make them more efficient and, above all, more error-free. This gives us more time for portfolio management, fundamental analysis and specialised areas such as emerging markets or financial bonds.

Bonds offer attractive yields again. What does this mean for investors and how have you reacted to this in the bond team? What bond products does Berenberg offer its clients?

The higher interest rate environment means that investors are no longer reliant on equities to generate investment income above inflation. Berenberg is a house of short distances and new products have been created in response to the new environment. Last year, we launched the Berenberg Euro Target 2028 fund as well as various maturity and laddered strategies in asset management, which can be used to secure yield levels. This year, a pure bond strategy was launched in asset management.

What are the special features of the bond strategy euro asset management? What do you look for when selecting bonds?

The strategy has many degrees of freedom and is actively managed. The focus is on top-down decisions such as the management of duration, sector and country allocation and the opportunity-orientated selection of individual securities. It is offered from EUR5m to be able to diversify sensibly, as the majority of corporate bonds require a minimum investment of EUR100,000. ETFs and funds, on the other hand, are only used in individual cases (e.g. to avoid transaction costs when market liquidity is very low) and are limited to a maximum quota of 15%.

What are the differences between Asset Management Bond Strategy Euro and the broad bond fund Berenberg Euro Bonds, which also has an asset management character?

Both make investments on the basis of the investment committee's capital market opinion, apply both top-down and bottom-up analyses and operate in the same segments. There is no minimum investment volume for the fund and the interest rate positioning can be mapped via futures. Due to the minimum denomination of bonds, Berenberg Euro Bonds is also more diversified and also has a higher maximum quota for high-yield and subordinated investments.

What are the current yield opportunities for euro bonds and what risks are associated with them?

There are currently no signs worldwide of a return to a permanent low interest rate environment. Although interest rates are currently being lowered, structural factors such as demographic change or climate change should lead to higher (real) interest rates in the future. This should at least enable a return above inflation in many bond segments. The current yield on European government bonds is currently 2.8%, on investment grade euro bonds 3.5% and on high-yield euro bonds 6.4%.

Additional added value can be achieved through active management. For example, when fears of recession flare up, interest rates normally fall and risk premiums widen, leading to price losses for particularly risky bonds, while defensive bonds benefit. If we assume a recession, we would therefore favour a more balanced positioning with a higher proportion of covered bonds and government bonds. Active management should enable us to perform well in a variety of scenarios such as rising inflation, a stronger recession, trade wars or even stronger geopolitical risks.

Why should investors consider bond investments with longer maturities right now?

Due to the still inverted yield curve, yields on short maturities are currently higher than on longer maturities. At first it seems more attractive to buy two-year bonds. But after two years, the capital has to be reinvested and this at possibly lower interest rates. Most central banks have started to cut interest rates and the highs in yields are probably already behind us. A longer fixed interest period could therefore lead to a higher overall return. In addition to the current interest rate, however, price effects must also be taken into account. Although interest rates will probably fall more at the short end and we will return to a rising curve (historical average yields for 10 years are 80-100 bp higher than those for two years), bonds with a longer duration react more sensitively to interest rate changes, so you should position yourself in the maturity where the effect of lowering interest rates and duration is best. In our view, these are currently bonds with medium maturities of three to seven years.

You also manage term strategies. What is special about maturity strategies and maturity funds?

With maturity strategies, we only buy bonds that mature at a specific time. Our Berenberg Euro Target 2028 fund, for example, only holds bonds maturing in 2028, so the return is quite predictable because there is no reinvestment risk and default risks can also be minimised through consistent risk management. Such strategies only focus on the current interest rate and not on price effects. The prerequisite is holding to maturity. Our strategies are based on a ‘buy and maintain’ approach, i.e. we buy bonds with the aim of holding them to maturity. Changes are then made on the basis of risk management or if a more attractive bond with the same target maturity is issued or found.

Which bond segments do you currently consider to be the most attractive in the team?

We are fairly balanced in our positioning. Core investments that should deliver solid returns in different market phases are combined with individual securities offering attractive yields. Outside the eurozone, we consider local currency bonds from emerging markets to be attractive, as they offer a high current yield and most currencies are likely to appreciate against the US dollar due to the Fed's interest rate cuts.