EDM Ahorro invests in short- and medium-term corporate and government bonds denominated in euros, mainly from European issuers. In the past it has held significant positions in government bonds, but more recently has been predominantly investing in high quality corporate bonds.
It is a highly conservative fund that looks for consistent returns without volatility, generated chiefly via coupon payments. The fund typically has a duration of between 1 and 2 years, meaning limited interest rate risk.
The fund mainly invests in high quality bonds, but may invest in somewhat lower quality bonds on an exceptional basis. Practically zero illiquid bonds are held in the portfolio, with no forex risk and no derivatives.
EDM Ahorro actively manages the fund’s maturity structure based on interest rate expectations and yield spreads according to company fundamentals. Its goal is to preserve capital and exceed inflation.
|Year||EDM Ahorro||Diversified Bonds||Average Performance|
- Objective: to preserve capital, above the rate of inflation.
- Rigorous analysis of solvency by issuer.
- Global issuers with no currency risk (100% Euro).
- Historical default rate: 0%.
- Short duration: from 1 to 3 years.
- Actively managing fund duration (current: 1.6 years).
- Widely diversified portfolio (85 issues).
- Investment Grade corporate credit predominates (80%).
- Limited exposure to government debt (highly diversified).
- Current portfolio returns of over 3.5%.
Limits on concentration
- Maximum weighting of Spain: 50%.
- Maximum weighting of the financial sector (including bonds): 30%.
- Maximum weighting of regional governments: 20%.
- Maximum high yield weighting: 10%.
- Maximum weighting of bank deposits: 10%.
- Maximum exposure to a single security: 5%.
History of the fund
EDM Ahorro invests in short and medium-term government and corporate euro-denominated bonds (mainly from European issuers). In the past the fund held a very significant position in government bonds, but more recently has invested mostly in stable and high-quality corporate bonds. Over the last year and a half the weighting of government bonds has grown, reaching up to 25% on occasions.
This is a highly conservative fund that seeks stable yields with no surprises, generated chiefly via coupon rates. The bond term is typically between 1 and 2 years (currently standing at 1.72 years). Interest risk is therefore confined. Bond durations are typically short, although they have stretched to 2.5 years on occasions.
The fund invests in high-quality bonds, although there have been exceptions of investments in lower quality bonds. Nearly 100% of the portfolio is “investment grade”, including BBB exposure of close to 45%. The portfolio has practically no illiquid securities, no currency risk and does not use derivatives.
Early in the 2000s, when there was a very flat debt curve but attractive interest rates (4.5% 2Y Spanish rate), the EDM Ahorro portfolio had a short term. As there was little carry, no risk was assumed. The portfolio’s short duration meant that we did not benefit from the sharp decline in interest rates seen in 2002-2003. During these years credit had a greater weighting in the portfolio than debt.
From early 2003 until late 2005, Spanish and other euro country sovereign bond yields were at record lows with flat yield curves. The particular sensitivity of long tranches with low interest rates led us to adopt a highly cautious approach to the yield curve, keeping the portfolio term very short. Meanwhile, credit spreads tightened to record lows in 2003 and then held stable until mid-2007. Due to this very low-risk premium, between 2004 and 2006 we gave a greater weighting to public debt, reaching 65% of the fund.
In 2006, amid a sharp spike in debt interest rates, the fund’s short duration led to good results. At the time numerous structured credit issuances were being made, such as CDOs (Collateralised Debt Obligations) and CDO-squared (CDOs of CDOs). Investors were driven towards profitable instruments such as CDOs thanks to very low debt interest rates and credit spreads. At EDM Asset Management, we invest only in assets that we fully understand. Therefore we opted not to invest in these instruments, which, initially appeared attractive. When the sub-prime crisis hit, most of these instruments suffered enormous losses.
In 2007 credit spreads began to rally. Several primary issues were made at attractive spreads and we saw a return to value from such assets. In 2007 we began to rotate our sovereign debt portfolio, where we identified growing risk on the credit side. In 2008 the portfolio was entirely comprised of credit with a duration of less than 1 year.
The following year, in 2009, the fund subscribed to several primary credit issuances from companies selected by EDM with highly attractive spreads. The duration of the portfolio grew as we acquired somewhat longer terms, but very attractive credit. The fund saw good results in 2009 thanks to its strong position in credit and a near complete absence of debt, as well as a longer yet still defensive term, all while corporate bond spreads were narrowing rapidly. Having no position in fixed income instruments was also very positive
In 2010 credit was again relatively expensive compared to debt. The debt crisis triggered significant growth in Spanish bond spreads compared to Central European bonds, making the former more attractive than credit and German bonds. We gradually began to increase the weighting of Spanish and similar debt (agencies and regions) in the portfolio, subscribing to certain primary issuances. Likewise, we began to invest modestly in financial entities via mortgage-backed securities.
In 2011 deteriorating financial forecasts, along with a sluggish political response to the European sovereign debt crisis, caused panic to sweep the markets, triggering a slump in Spanish government debt prices on at least two occasions. As we saw no insolvency problems for the country, we decided to significantly increase the fund’s exposure to Spanish sovereign debt (at highly attractive returns) when this occurred. The first occasion came in July when the possibility of recession began to loom larger, triggering a risk-off period in the markets and causing heavy declines in peripheral European debt. On 8 August, following S&P’s decision to downgrade its U.S. credit rating, the ECB began buying up Spanish and Italian bonds on the market and lowered debt rates by a further 100bp to 5%. On that very day we reduced our exposure to debt from 30% to 18%.
The second occasion came in November, when the markets were again swept by panic. On this occasion we increased our exposure to peripheral government bonds (mostly Spanish) to nearly 40%, to subsequently reduce this exposure by more than half in December when the ECB’s 3-year liquidity auction, as well as other support measures for the financial system, returned calm and confidence to the markets.
Late in the year, with confidence returning to the markets, the primary corporate credit market improved and we took up several non-peripheral, non-financial credit issuances, aimed at diversifying the portfolio in terms of core / peripheral exposure.
In 2011, as prospects of a recession going forward began to look stronger, with no inflationary pressure and a sharper yield curve, we decided to extend the duration of the fund, investing in somewhat longer term corporate bonds, most of which were bought in the primary market. Thus the duration of the bond portfolio at year-end stood at slightly over 2 years.
In early 2012 the duration of the bond portfolio increased somewhat. At the beginning of March the portfolio duration stood at over 2.3 years, although a strong influx of money into the fund over the last week meant an exceptionally high level of cash and put the term at less than 2 years.
More attractive non-financial corporate bonds were issued in January, in which we took positions, but a sharp rally in corporate bond prices (and narrowing spreads) in January and February made it increasingly difficult to identify high-quality corporate bonds with attractive yields.
There are, however, certain sectors within investment grade bonds where we do see value. These include regional government debt. Despite the financing difficulties that some regional governments are facing, Spain’s central government has shown a clear intention of providing support. Firstly, it stated that no regional government would be allowed to fail, and secondly, it has adopted specific measures to help the most indebted regions to refinance their debt. The credit facilities made available to pay off regional debt and government suppliers are an indication of this. The regions with the worst problems may also be allowed to issue some kind of sovereign guarantee on the markets (hispabonds). Given these circumstances and the high yields offered by some regional debt, we have acquired such bonds with short maturities.
Other investments of interest made in 2011 included the purchase of high-quality senior financial entity securities (Santander and BBVA) in the form of very short-term floating bonds with yields of over 5%. These rallied significantly in price in the second half of the year thanks to the December liquidity auction, when we took the opportunity to reduce some of our positions.
Turning to financial entities, we have not held subordinated bonds in recent years, but price slumps in late 2011 and early 2012 saw us take small positions in good-quality subordinated bonds from banks such as BBVA and Santander.
Bonds have performed spectacularly well in the first two months of 2012, largely thanks to liquidity injections from the ECB and progress towards a solution for the Greek debt crisis. Both corporate credit and peripheral sovereign debt prices have rallied significantly and yields have fallen. Despite this, we expect to see further episodes of panic sweeping the markets. We are therefore in no hurry to invest the fund’s cash at any price. Our intention is to take advantage of market corrections to further build the portfolio, both in credit and government bonds, at more attractive yields and spreads than currently available.
Premio Expansión 2011. Mejor Gestor Renta Fija C/P
Premio Morningstar 2012 Mejor Fondo Renta Fija C/P
Rating Morningstar 3Y:
★ ★ ★ ★ ★
Rating Morningstar 5Y:
★ ★ ★ ★ ★
Rating Interactive Data:
★ ★ ★ ★ ★
|FUND MANAGER||Karina Sirkia|
|MANAGEMENT FIRM||EDM Gestión SGIIC|
|AUDITOR||KPMG Auditores, S.L.|
|LEGAL STRUCTURE||ES & PT - FI|
|LIQUIDITY||D + 3|
|REGISTERED FOR SALE ON|