The opportunities in Swiss corporate bonds

investment viewpoints

The opportunities in Swiss corporate bonds

Markus Thöny - Head of Swiss Fixed Income

Markus Thöny

Head of Swiss Fixed Income
Philipp Burckhardt - Credit Analyst and Portfolio Manager

Philipp Burckhardt

Credit Analyst and Portfolio Manager

Good prospects for Swiss corporate bonds

 

Swiss bonds can provide attractive, risk-adjusted returns in the current, low yield environment, we believe. The opportunities available, however, require a specialist and dedicated approach.

Investors in Swiss bonds currently face extremely low or negative bond yields1, as well as receiving increasingly limited return from lengthening duration. Falling interest rates have been the main driver of performance in recent years for the Swiss bond market, and especially benefited passive investment solutions. Going forward, however, we see very limited scope for interest rates to drop further.

Bond investors could find better options in corporate bonds, where a highly-specialised investment approach can help them navigate the distinctive features of the Swiss market. There are compelling arguments for moving into Swiss corporate credit with shorter-dated exposure, rather than taking on the additional interest rate risk inherent in buying longer-dated bonds.

Over the past decade, there has been a significant increase in A to BBB-rated corporate bonds denominated in Swiss francs2. In our view, this creates more openings for specialists, and a bigger, more diversified universe in which to invest. 

The A to BBB segment in bonds could be a “sweet spot” in Swiss fixed income relative to other ratings categories. Debt from borrowers in this ratings area has shorter average duration – roughly 5-years -than the AAA-AA bracket, and derives more yield from the credit element3. Secondly, corporate bonds are technically-supported by negative net supply, meaning redemptions are greater than new issues4. Thirdly, in a low growth economic scenario, we believe that corporates would continue to manage their balance sheets more cautiously without substantially increasing their leverage.  This should mean the average credit quality of CHF bonds remains high5.

A case in point is a comparison of a bond from Swiss industrial equipment manufacturer, Oerlikon Corp, and a bond issued by the Swiss government. Oerlikon’s 5-year corporate bond, rated BBB/BBB-, and a Swiss Confederation 45-year bond, rated Aaa, are roughly equivalent in yield6.  But the Oerlikon bond achieves the yield from the credit element and for a much shorter duration than the government bond7. This mitigates the interest rate risk of the instrument relative to the much longer, and therefore more exposed, government bond. In this situation, we consider the lower volatility and duration profile of the Oerlikon bond present a convincing risk-adjusted return8.

 

A dedicated approach is key

 

A dedicated and disciplined investment approach is best-suited, in our view, to take advantage of the potential in Swiss bonds. In place since 2008, our investment method is an actively-managed, long-only fixed income strategy. Investment decisions are based on the principle of specialisation whereby different alpha portfolio managers have their own risk budgets. Using different skills and strategies helps them generate uncorrelated returns.

Our approach re-thinks classic benchmark thinking by identifying opportunities for alpha and separating that from simply replicating the benchmark. As such, after constructing our index, we undertake a top-down and bottom-up selection process, as well as on-going monitoring supported by a team of credit analysts. We look to generate additional performanc9 by developing investment strategies to take advantage of opportunities we identify. These strategies aim to address opportunities in the most efficient way, while taking into account client-specific constraints.

Taking a medium to long-term view, we see good prospects for investors in Swiss corporate bonds.

 

Please find key terms in the glossary

sources.

1 Yields are subject to change and can vary over time.
2 Source: LOIM, POINT, SIX Swiss Exchange. Calculated by LOIM.
3 Source: Bloomberg, as at 31 December 2018. Past performance is not an indicator of future results.
4 Source: SIX Swiss Exchange, Computed by LOIM, as at 31 December 2018.
5 Past performance is not an indicator of future results.
6 Source: Bloomberg, LOIM; Past returns are not an indicator of future performance. As at 31 January 2019. Refers to Oerlikon 2.625% maturing 17.06.2024 and Swiss Confederation 2% maturing 25.06.2064.
7 Source: Bloomberg, LOIM calculations based on monthly data from 31 December 2015 to 28 February 2019.
8 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. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document. The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment.
9 Target performance represents a portfolio construction goal. It does not represent past performance and may not be representative of actual future performance/risk.

important information.

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Important information on case studies
The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund’s past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
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