The Wells Fargo EUR Investment Grade Credit Fund, a sub-fund of the Wells Fargo Worldwide SICAV, is launching with “over €100m in assets”, the asset manager said. The big question is of course whether the fund will be able to grow this amount in any meaningful fashion, at a time when euro IG corporate bond spreads and yields are both close to all-time lows (see graph below).
Despite this challenging backdrop, European investment grade bond funds have actually seen rather strong net inflows year-to-date, according to Morningstar figures. This is despite average 10-year euro-denominated corporate bonds yielding hardly 1%.
But there is of course an asset class that offers even lower yields: government bonds. There has been a rotation from extremely low-yielding government bond funds to slightly less low-yielding corporate bond funds this year, and that’s a trend Wells Fargo is banking on.
“Low government bond yields have driven demand for higher yielding alternatives. This investment grade bond fund seeks to generate higher returns than would otherwise be available from the government bond markets,” said Henrietta Pacquement, head of investment-grade credit at ECM Asset Management, which will manage the fund on behalf of Wells Fargo AM.
But the question is of course whether the recent flows into investment-grade credit will continue, or whether investors will focus on higher-yielding, riskier bonds instead. When we polled fund buyers across Europe in spring, there was very little appetite to further increase allocation to the asset class: a third of respondents said they were looking to reduce exposure to IG corporate bonds over the next 12 months, while almost nobody planned to up their allocation.
Cash preference
Bart van de Ven of Accuro, a Belgian wealth manager, is one of those sceptical towards European corporate bonds. “There really is no yield anymore in this asset class,” he told Expert Investor. The weighted average yield-to-maturity of the benchmark Markit iBoxx iBoxx EUR Liquid Corporates Large Cap index is a measly 0.68%.
This yield has of course been pushed down by the ECB’s corporate bond-buying programme over the past year. “The day the ECB starts tapering, yield will shoot back up. You don’t get compensated for this risk at all, so I think European corporate bonds are a really hard sell these days,”, Van de Ven adds.
The Dutchman prefers his own version of a Barbell strategy, investing in high-yield bonds and equities and compensating for the additional risk this entails by maintaining higher cash holdings.
“I prefer having a 20% allocation to cash than to have investment-grade bonds. Having a lot of cash means an opportunity loss, but it also provides flexibility to take advantage of opportunities in the market.”
While admitting “the gradual phasing out of monetary stimulus” by the ECB is on the cards, the fund’s manager Henrietta Pacquement continues to see “extensive opportunities in the current climate of European credit markets”. “We believe ECM’s seasoned team is well-positioned to generate risk-adjusted returns for our investors,” she maintains.
