Stockholm (NordSIP) – Having previously considered the performance of international (non-Nordic-based) fixed income funds classified as Article 9 under the EU’s Sustainable Finance Disclosures Regulation (SFDR) in the first half of 2023, NordSIP turned its attention to the performance of their Nordic counterparts during the second quarter of the year.
Feedback from asset managers suggests that both the drivers as well as the actual performance in the Nordics was very similar to the experiences of international investors, with inflation and interest rates dominating investors’ considerations. However, fund managers also noted developments in the green bond market, real estate and duration as drivers of performance.
Source: fund managers, NordSIP
Macro Considerations – Rising Inflation and Central Bank Policy
Consistent with the general perception, inflation was the dominant theme in the market during the second quarter of the year. “The theme of the market was centered around inflation and when and where central banks would pause the rate hiking cycle. The excess performance from Q1 reversed slightly during Q2,” Stefan Ericson, portfolio manager of the Pareto ESG Global Corporate Bond fund, told NordSIP.
“The period has been characterized by continued high inflation and rising interest rates. Much suggests that the underlying inflationary pressures have peaked and that the interest rate hikes have had some effect, but at the same time, we see signs that inflation is more persistent than expected and that the decline in core inflation may be sluggish. We believe that interest rate cuts are still some way off and assess that they may become relevant only in the second half of 2024,” Julia Stålbro, portfolio manager of the Öhman Grön Obligationsfond argued.
Gustaf Tegell, portfolio manager of the Enter Klimatfokus Ränta A 2023Q2 fund, agreed, arguing that “increased interest rates and pretty resilient earning reports from corporates” were dominating themes during the second quarter of 2023. “Bonds from issuers in all sectors contributed to the performance and demand for high quality bonds was strong in the second quarter after the market digested the turmoil in March,” Tegell added.
However, quarterly performance is sensitive to short term fluctuations. “Under the first two months in the second quarter interest rates were down but in June were they increasing. Relatively high volatility during the quarter,” said Sebastian Uddén, portfolio manager of the Norron Sustainable Preserve R fund.
Compressing Greenium and SLBs
Developments in green bond bond markets were another theme that was highlighted by Nordic fixed income article 9 SFDR fund managers.
“The market has been relatively strong with lot of new issues despite the banking crisis in the US and discussions about the debt ceiling. Europe continues to be the market that grows relative to the rest of the world in volume in green bonds. There continues to be a lot of discussions in general about Sustainability-linked bonds and it will probably continue. But it is good to see that the market for SLB is diversifying in terms of rating, sector and type of issuer,” said Karin Göranson, portfolio manager of the Handelsbanken Global Obligationer A1 fund.
“Global green bond issuance is strong and may was one of the most active may months on record according to Bloomberg. This could mean that the global green bond market issuance is on track to break the sales record of 2021,” Gustav Linnell, portfolio manager of the Storebrand Grön Obligation A fund explained.
According to Jyri Suonpää, portfolio manager of the Ålandsbanken Green Bond ESG fund, the greenium played an important role. “The first half of 2023 witnessed record issuance (€69 billion). Moreover, the share of Green Bonds in investment grade (IG) index increased to slightly over 11 %. GSS-labelled (Green, Social, Sustainability) returns beat non GSS IG. Although this excess was marginal, it can’t be explained by duration or quality. The reason was the compression of the green discount (greenium) by 10 basis points. At the same time, the correlation to IG (non GSS) dropped to 50% from 95%,” Ålandsbanken’s Suonpää added.
One issue that might be driving this conpression going forward is the decreased demand for (green) bonds by the Europea Central Bank (ECB), according to Kristian Rønde Hefting, portfolio manager of the Danske Bank Eur Corp Sust Bond fund. “With the banking having been contained for now focus shifted over to the still high inflation and strong labour market which helped interest rates tick higher in the quarter. The quarter marked the end of the majority of ECB’s bond buying. As of end-June ECB is no longer reinvesting maturing bonds under it’s Asset Purchase Programme. This means that a large buyer have left the market and also that the greening of the ECB balance sheet that the ECB announced back in September 2022 have effectively stopped. We are yet to see whether the ECB will start to actively sell “brown” bonds in the market to achieve the greening,” Hefting said.
Shorter Duration
Duration was an important consideration for fund managers, who noted a drag. “What contributed mainly to performance was our choice of names in the fund, but what dragged performance down was our duration positions. We bought duration to early and June´s massive rise in short interest rates contributed negatively to the funds return,” Handelsbanken’s Göranson explained.
“The fund performance compared to its benchmark can be attributed to the shorter duration of the fund compared to the benchmark and ok performance of the funds corporate bonds,” Storebrand’s Linnell agreed.
Credit Spreads and Real Estate Market
Credit spreads also appear to have been an crucial determinant of performance. “The reason why our fund underperformed its benchmark during the quarter was that credit spreads in the Swedish market rose a lot, especially for the real estate companies in which foreign investors have lost confidence. This affects the fund negatively. At the same time, the corresponding credit spreads in Europe decreased, which is positive for the development of the index. In addition to that, the interest rate in Sweden has risen more than its counterpart in Europe, which also negatively affects the fund’s development relative to its index,” Captor’s Myrgård continued.
Öhman’s Stålbro echoed this view. “The credit market has recovered during the period, and we currently have lower global and Swedish credit premiums compared to the beginning of the year. However, the period has been volatile and marked by banking concerns and other financial turbulence. The credit market has recovered during the period, and we currently have lower global and Swedish credit premiums compared to the beginning of the year. The Swedish primary market has seen higher activity during the period compared to the end of 2022. While many companies have been well-received when entering the primary market, there is also some caution in lending capital to certain types of companies, which is most evident in the real estate sector. Several real estate companies have received credit downgrades during the period, which have negatively impacted the whole sector,” Stålbro explained.
“Swedish real estate companies continue to raise concerns in the Swedish credit market. The reason is that it is such a large part of Sweden’s total economy and high interest rates create problems for highly leveraged companies. Furthermore, inflation continues to be the highest in Europe and it is slow to bring it down, which keeps interest levels up in Sweden,” said Cecilia Dahlstedt Myrgård, portfolio manager of the Captor Dahlia Green Bond A
“Negative attribution was mainly driven by idiosyncratic risks, especially in Swedish real estate companies, which are indeed reflected in the industry in general,” Ålandsbanken’s Suonpää agreed.
However, Danske Bank’s Hefting argues that more trouble could be brewing in the corporate market. “We also saw a material amount of profit warnings in chemical sector in the quarter which we believe can be an early indicator of a general deterioration in corporate fundamentals,” Hefting warned.
