Five years after its inception, the portfolio management of the mutual fund Bantleon Select Corporate Hybrids can report successful interim results: the fund, which invests in subordinated bonds of industrial companies (corporate hybrids), has achieved a performance of 5.85%* (share class »IA«, LU2038754953) since its inception on 9 October 2019 – despite the massive interest rate increase by the ECB, which led to the largest drawdown on the bond markets in 50 years. After two severe crises in the bond market, the fund has returned 14.10% over the past 12 months thanks to high coupons and strong price recovery.
Active management has paid off
The basis for the good result was very active management: in the first year of the pandemic, the portfolio management limited the drawdown by increasing cash holdings. In the crisis year 2022 – when equities and bond markets both collapsed – the fund outperformed senior corporate bonds and government bonds thanks to shortened duration and higher yields. In total, the fund has a particularly good risk-return profile within its peer group.
The strict exclusion of subordinated financial bonds has also proven its worth – especially in 2023, when Credit Suisse's subordinated bonds defaulted, resulting in a total loss for investors. Bantleon Select Corporate Hybrids performed well that year with a very low drawdown of 3.5%, while financial hybrids suffered a 20% drawdown as measured by the »ICE BofA Large Cap Contingent Capital Index«. At the time, many investors realised that there are important differences between corporate hybrids and financial hybrids: While the yield is very attractive in both segments due to the subordination – corporate hybrids from investment-grade issuers currently offer more than 5% – the supervisory authorities can order that the bond capital of financial hybrids be used to rescue financial institutions. The same applies if the core capital ratio falls below a certain level. In contrast, the nominal value of corporate hybrids is only at risk in the event of bankruptcy.
Sweet spot in the bond market
»For risk-conscious investors, corporate hybrids are a perfect alternative to high-yield bonds and thus the sweet spot in the bond market«, says Stephan Kuhnke, Head of Asset Management. »Many of our customers are now taking advantage of this asset class and our risk-averse investment process, propelling our corporate hybrids strategy AUM to already more than €850 million, including more than €345 million in Bantleon Select Corporate Hybrids.«
At more than 5.04%, the yield on these subordinated bonds is currently almost the same as the yield on high-yield bonds. However, default rates of high-yield bonds were over 12% during periods of financial market stress, while the issuers of corporate hybrids had no defaults due to their solid investment-grade ratings. In the past, the recovery periods after price slumps have also been shorter. Corporate hybrids not only offer a yield advantage over conventional bonds, they are also a more solid alternative to the high-yield segment. Despite their similar performance, they are usually issued by issuers with investment-grade ratings – the subordinated bonds themselves are usually two rating levels below.
»After the extremely encouraging results of the past two years, we are looking to the future with optimism thanks to the high yields, which will protect us better from market disruptions in the future than it did in the low interest rate environment before 2022«, says Kuhnke. »In line with our economic outlook, we expect significant price gains due to falling interest rates and only a moderate rise in risk premiums – in addition to the currently attractive yield.«
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* 9 October 2019 – 9 October 2020: 1.50%; 9 October 2020 – 8 October 2021: 4.73%; 9 October 2021 – 9 October 2022: -16.89%; 9 October 2022 – 9 October 2023: +5.00%; 9 October 2023 – 7 October 2024: +14.10%
