Mandatum’s Nordic High Yield fund [1] received an award in May for the best Europe high yield fund over three years. That is, over the same time period as coronavirus, inflation, high interest rates and war ravaged the world. The fund’s Senior Portfolio Manager, Juhani Lehtonen, reviews the last few years in this blog post.
Nordic High Yield fund’s Senior Portfolio Manager, Juhani Lehtonen
What, a global pandemic, my goodness, now the spreads will widen* properly! This was roughly my initial reaction, when coronavirus shut down economies in March 2020 and hit societies like a ton of bricks. In our fixed income funds, we moved to a so-called “raised readiness” with our Nordic High Yield fund at the forefront.
* A widening credit spread refers to an increase in the risk premium over base rates, usually when risk appetite decreases in the market
In the Nordic corporate bond market, things got really rocky for a while, when the pressure to sell began and our peers’ fixed income funds entered the market facing a lot of forced sales to cover redemptions. High yield, and even money market, funds were liquidated left and right, across Europe as well.
However, our situation was relatively stable in terms of outflows, and fortunately, capital also flowed into the fund. Our fund remained open on all bank days. We were able to opportunistically buy bonds at a big discount, when many in the market were, at the same time, forced sellers. The market environment of the financial crisis in 2008-2009 came vividly to mind, and this time, we made a few real “bullseye” purchases.
At the same time, Stockmann, a Finnish retailer, applied for protection from creditors, and we prepared ourselves for that. It was the only significant corporate restructuring case for our Nordic High Yield fund during the pandemic. The situation finally worked itself out as a result of long and a thorough process, where our secured bond was paid back with the funds obtained from the asset sale (i.e. the company’s real estate holdings were liquidated). Of course, with several months of negotiations in between.
Coronavirus was finally tackled globally with an unprecedented economic recovery. States synchronously presented a fiscal stimulus representing several percent of GDP and with the same ticking of the clock, the central banks pushed the “all-in stimulus” again. The market finally calmed down and the opportunistic buying window, reminiscent of the financial crisis, shut. But the next challenge was raised at the same time – inflation.
We had kept the amount of interest rate risk relatively low for years in the Nordic High Yield fund – in other words, the duration. For fixed income people, a duration of less than one year immediately indicates an interest rate risk sensitivity against rising interest rates, so we were in fact prepared for rising rates. We had considered negative interest rates a strange phenomenon, although we could wonder about it for a long time. We knew that at some point in the future those interest rates would rise, although the timing was uncertain. Now, we know.
Central banks strongly underestimated the persistence of inflation when prices rose in 2021. People talked about a passing phenomenon. It was everything else. Fortunately, central banks, led by the United States, turned the tables in December 2021 and decisively communicated a complete change in direction. After the war broke out in Europe in February 2022, interest rate hikes were in full swing in the spring in the United States and in July, the European Central Bank finally joined the anti-inflation talks. In the summer of 2022, the interest rate rapidly moved up along the yield curve and finally in the autumn, there was another hike. The short duration came in really handy.
The rise in interest rates was so fast and sharp that nothing like it had been seen in Europe for decades. The European high yield index decreased -8.5% in 2021-2022, but due to our successful positioning of the interest rate risk and the strong resilience of our Nordic portfolio companies, our Nordic High Yield fund returned 6.6% in the same time period*. We received the fund’s first Lipper award for Best Fund over 3 years in the Bond Europe High Yield category – essentially covering the period from the start of coronavirus to the rise of interest rates [2].
I can say with a clear conscious that these past three years have been one of the most intensive investment environments in my portfolio management career. So many different and revolutionary events have been packed in a very short time. Navigating through this environment requires a lot, but relying on our own investment process in such an environment is ultimately the be-all and end-all.
Whatever happens in the next three or ten years, it is certain that our shock resistance has been tested and proven to be strong.
* before management fees
[1] Mandatum SICAV-UCITS – Mandatum Nordic High Yield Total Return Fund is a Luxembourg UCITS fund managed by Mandatum Fund Management S.A. Mandatum Asset Management Ltd acts as the portfolio manager of the fund. The fund can be linked as an investment object to Mandatum Life Insurance Company Limited’s unit-linked insurance.
[2] The awards are based on the Lipper Leader for Consistent Return rating, which is an objective, quantitative, risk-adjusted performance measure calculated over 36, 60 and 120 months. Lipper Leaders fund ratings do not constitute and are not intended to constitute investment advice or an offer to sell or the solicitation of an offer to buy any security of any entity in any jurisdiction. For more information, see www.lipperfundawards.com.
Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. Potential investors should familiarize themselves with all the risks listed in the official product documentation. Investors should make their own investment decisions based upon their own financial objectives and financial resources and, if in any doubt, should seek advice from investment, legal and tax advisers. Risk is always inherent in investment activities. The value of the investment objects may increase or decrease. The past performance of the investment objects is not indicative of their future performance.