The Eurozone bond market has delivered strong absolute returns over the past 12 months, as evidenced by the 8.9% return of the Morningstar EUR Diversified Bond category over the period.
Markets have reacted positively to the ECB’s monetary policy activism, and in particular to its January 2015 announcement of a QE programme involving the purchase of €60 billion of government bonds – a larger amount than initially expected – until at least September 2016. The ECB’s key interest rate is at an absolute low of 0.05% since September 2014, while the deposit rate is in negative terrain at -0.2%, with an apparent commitment to keep these ultra-loose policy settings for an extended period.
Furthermore, GDP forecasts for 2015 and 2016 in the Eurozone are on an upward trend, as the combined effect of a weaker Euro and the fall in oil prices are seen as key factors allowing for an improved performance of domestic demand.
While the standoff between the Greek government and the Eurozone has brought episodic volatility in 2014, bond markets do not appear overly concerned with the potential of contagion to other regions. Finally, investor demand remains very strong as evidenced by strong inflows for the asset class throughout 2014, both on the government and the corporate bond universe.
Which are the Best Euro Bond Funds?
In this context, Pioneer Funds Euro Aggregate Bond, which has a Morningstar Analyst Rating of Silver, outperformed its peers by 1.4 percentage points in 2014. The fund continues to rank in the category’s top half over the first quarter of 2015. Experienced lead managers Tanguy le Saout and Cosimo Marasciulo have worked together at Pioneer for almost 15 years and have led this strategy since inception.
Their approach is based on a number of diversified strategies; ranging from duration positioning to momentum, volatility, inflation and marginal foreign currency exposure. These strategies’ contribution to the overall portfolio depends on the team’s macro scenario. In 2014, as interest rates trended lower, the fund benefitted from its longer duration positioning compared to peers.
Against its benchmark, the main positive contributors were exposure to quasi-sovereign bonds and interest rate positioning in Scandinavia of long two-year Swedish rates.
Candriam Bonds Euro, which holds a Morningstar Analyst Rating of Neutral, also outperformed 70% of its peers in 2014. The fund benefitted from a fairly aggressive country allocation in the sovereign bond pocket, being overweight on Italian and Spanish government bonds.
The strategy is managed through a collegial approach by Candriam’s Global Bond team, which is led since 2013 by Nicolas Forest. Despite some recent changes to the team, we consider it to be reasonably stable and its size to be sufficient. However, we do not believe that this fund has an edge over its competitors, either in terms of its team or its process. Its long-term results have also been middling, as the fund has performed in line with the category on a risk-adjusted basis, but lagged its benchmark index over three and five years up to end of February 2015.
Mara Dobrescu’s ‘Morningstar View’ piece originally appeared in Professional Wealth Management magazine
