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The Robeco Financial Institutions Bonds fund invests mainly in subordinated financial. The market for subordinated financials opened lower this morning, in line with other risky assets like equity. Throughout the morning prices started to recover a bit and we have seen buyers in the market. Market weakness was well spread, though obviously UK names underperformed.
Price declines in Banking Tier 2 bonds are on average between 1 and 2%, insurance debt is trading around 2% lower. The weakest performance can be found in Additional Tier 1 CoCo’s, where the average price drop was 4%. The fund only has a 13% allocation to CoCo’s.
The Robeco Financial Institutions Bonds fund has an overweight beta positioning, as we believe that spreads have tightening potential. Subordinated financials have lagged the performance of non-financials while the overall banking sector is in a structural deleveraging trend. We anticipated a Bremain outcome. The beta overweight is not helping the performance in today’s market. However we still feel comfortable with this positioning, as we think that there are structural reasons to be overweight.
We acknowledge that political risks have increased, not only in the UK but also in the rest of Europe. We believe that those risks are compensated by higher spreads.
The same can be said about our positioning in UK banks. The fund has an overweight in UK banks, though we have reduced the overweight slightly in the last week. Currently our allocation to UK banks is around 9%. UK bank debt is trading at a clear discount to European bank debt. Leaving the European Union might have a negative impact on economic growth in the UK. We think that UK banks are able to deal with this worsened economic outlook. We will make sure that all our UK positions offer an additional spread versus non-UK positions.
The biggest part of the fund (84%) is denominated in Euro. The exposure in Sterling is 3%, this exposure is hedged to the Euro.
The yield of the portfolio has increased by today’s spread widening to a level of approximately 3.8%. This yield consists almost exclusively of credit spread, as underlying government bond yields are zero. We think that subordinated financials offer an attractive investment alternative in a world where more and more fixed income products are yielding (close to) 0%.