Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree
Higher yields are boosting financial credits

Higher yields are boosting financial credits

21-12-2016 | Insight

The recent rise in yields has boosted the performance of financial credits, the subordinated segment in particular. The insurance sector in particular can act as a great hedge for further rising yields, if and when this occurs.

  • Jan Willem de Moor
    Jan Willem
    de Moor
    Senior Portfolio Manager Credit

Speed read

  • Higher interest rates and steeper curves benefit financials
  • Earnings outlook for banks and insurers has distinctly improved
  • European financials likely to follow the move tighter in the US

Sentiment towards the financial sector has clearly improved since the summer of this year. Since then, financials have outperformed corporates. One of the key reasons financials continue to trade so well is the increase in interest rates and the steepening of the yield curve. This improves the earnings outlook for both banks and insurance companies, as they can benefit from higher margins. Robeco Financial Institutions Bonds has an overweight in both. Around a third of the portfolio is invested in bonds issued by insurance companies with the remainder being invested in banks.

CoCos have also performed well over the past few weeks. A driver of their positive returns is that some banks have now disclosed their Maximum Distributable Amount (MDA) trigger levels for next year. These are the levels at which coupons have to be canceled. The levels for next year are lower than the current levels, lowering the risk of coupon cancelation. For example, the trigger level for ING changed from 10.25% to 9% for next year, for BBVA from 10% to 7.625% and BNP from 10% to 8%. Although this was to some extent reflected in valuations, the actuals still made Cocos outperform. As per the end of November, we have an allocation to this category of around 9% (approximately 5% in AT1 CoCos and some 4% in tier-2 CoCos). This percentage has slightly declined as we have taken profit on some holdings after the recent strong performance.

With limited primary issuance in the past few weeks we have seen positive price performance in the secondary market, benefiting the total return of this sector and the fund.

Given the improved prospects for insurance companies, we have further increased our weight in this segment. We bought Aegon, for example, which has good exposure to the US. In this country, interest rates have risen more than in Europe, benefiting US banks and insurance companies. We further expanded our US exposure by participating in two USD issues of US banks. We expect that European financials will follow the move tighter that we saw in US financials.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Outlook

As the interest rate environment is becoming more favorable for the financial sector, we remain optimistic on the return outlook, even after the recent outperformance. Steeper curves will benefit banks and higher long-term yields will be good for insurers. The insurance sector in particular can act as a great hedge for further rising yields, if and when this occurs.

The fact that third-quarter earnings for the sector were generally better than anticipated reflects the good environment for loan quality in most countries, although specific issues still exist in countries such as Portugal and Italy. Finally, regulatory pressure for banks seems to be easing, which is good for the subordinated segment in which we invest.

Subjects related to this article are: