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Global interest rates always with opportunities

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Authors: Lutz Röhmeyer, Capitulum Asset Management

Date: 04. April 2022

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Lutz Röhmeyer Lutz Röhmeyer, Capitulum Asset Management Photograph: Hans Scherhaufer Source: Capitulum Asset Management

It is becoming increasingly difficult for investors to achieve positive returns in the bond market. In addition to the market’s meagre returns, there is now an increasing risk of price declines as interest rates rise. Nevertheless, it is still possible to achieve respectable returns using actively managed strategies.

Lutz Röhmeyer, Managing Director for Portfolio Management at Capitulum Asset Management, explains where opportunities arise for investors in the current market environment. Furthermore he illustrates where local currency bonds offer a solution and why the Capitulum Weltzins-Invest Universal fund could present a promising opportunity right now for investors (ISINs DE000A2H7NU1 (AK I), DE000A2H7NV9 (AK P)).

ChampionsNews: The interest rates have been problematic for investors performance for some time now. Which opportunities do investors have?

Lutz Röhmeyer: Finding attractive interest-bearing investments, especially in the euro area, was already difficult in recent years. While many savers were previously burdened by the custody fees on their accounts, holders of longer-term bonds are now suffering additionally from losses incurred by interest rates rising.

Even if higher-risk assets like equities remain attractive, even bonds still belong in every well-diversified portfolio as an overall stabiliser of returns due to their excellent low-correlation properties. However, to generate regularly income from these holdings, both institutional investors and smaller savers need to actively look for managed strategies that offer realistic opportunities in the investment environment we now face.

Do bonds in foreign currencies offer a solution?

We often observe home investment bias from investors who limit themselves exclusively to what their local bond market offers.

This is in contrast to their equity investments and it ignores the bond investment opportunities available globally. While high-quality German bonds are mostly negative yielding, the price gains they have historically delivered are probably no longer sustainable in the future. By contrast, attractive coupon income can still be found elsewhere in the global bond market. Some central banks have already raised headline interest rates at a faster pace than the ECB and offer positive real interest rates even after deducting inflation.

Investors in global bond markets should always keep an eye on the three essential factors: creditworthiness, duration and exchange rates.
Lutz Röhmeyer

What is special about Capitulum Asset Management's approach?

Investors in global bond markets should always keep an eye on the three essential factors: creditworthiness, duration and exchange rates.

We want to generate a carry, of about nine percent from our exposure in foreign currencies. If we hedged the currencies, we would immediately give them up again, so that we rely on a natural balance among them with a high diversification across around 70 different currencies.

This approach worked excellently last year. By contrast, we want to exclude the other two factors of creditworthiness and duration as much as possible. We want to avoid risks from poor credit quality by focusing on bonds from issuers with the best ratings. In particular, we prefer globally active development banks which moreover fulfil a sustainable purpose and have corresponding ESG ratings.

We aim to reduce fluctuations resulting from changes in individual interest rate levels through our maturity management through a laddered portfolio with an average remaining term of three years. Therefore, staggered maturities allow us to benefit even from rising interest rates when reinvesting. In a portfolio consisting of a total of about 500 bonds, there are regular redemptions, which are then rather anti-cyclically invested in new securities.

With your broad distribution around the globe, obviously you are also affected by regional crises. How have you responded to the conflict in Ukraine for example?

Despite our rather conservative investment approach, we are prompted by recurring events to make appropriate adjustments to the portfolio. The most important prerequisite, however, is to limit individual countries to no more than a 3 percent weighting. This by the way, is a clear deviation from the weightings usually found in sector indices.

We actually have very low exposure to default risks due to our exposure to supranational issuers with top credit ratings. These risks are reduced almost exclusively to the adjusted valuation of the currencies from those affected and the rapid onset of illiquidity in securities trading due to the war in Ukraine.

During the course of the subsequent normalisation of bond trading, the decision was made to what extent we want to invest in these markets in the future.

What advice do you give to investors who do not want or are not allowed to take currency risks?

Investors who are just allowed or want to invest exclusively in euros, have to take other or more risks for positive returns. First and foremost, this probably means cutting back on creditworthiness. Since the premiums paid for this are now increasingly difficult to assess, an actively managed product offers itself.

If investors want to avoid impending risks against a backdrop of capital market interest rates rising again, funds with a short duration are a good choice, such as the Capitulum Rentenstrategie optimiert Universal fund (ISINs DE000A2H7NS5 (AK I), DE000A2H7NT3 (AK P)).


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