Robeco Financial Institutions Bonds Feeder Fund - zero duration IH USD

Jan Willem de Moor is Co-Head Portfolio Management Investment Grade in the Credit team. Prior to joining Robeco in 2005, he worked at the Dutch Medical professionals’ pension fund as an Equity Portfolio Manager and at SNS Asset Management as an Equity Portfolio Manager. Jan Willem has been active in the industry since 1994. He holds a Master's in Economics from Tilburg University. The Robeco Financial Institutions Bonds fund is managed within Robeco’s credit team, which consists of nine portfolio managers and twenty-three credit analysts (of which four financials analysts). The portfolio managers are responsible for the construction and management of the credit portfolios, whereas the analysts cover the team’s fundamental research. Our analysts have long term experience in their respective sectors which they cover globally. Each analyst covers both investment grade and high yield, providing them an information advantage and benefiting from inefficiencies that traditionally exist between the two segmented markets. Furthermore, the credit team is supported by dedicated quantitative researchers and fixed income traders. On average, the members of the credit team have an experience in the asset management industry of seventeen years, of which eight years with Robeco.

The fund is established in Luxembourg and is subject to the Luxembourg tax laws and regulations. The fund is not liable to pay any corporation, income, dividend or capital gains tax in Luxembourg. The fund is subject to an annual subscription tax ('tax d'abonnement') in Luxembourg, which amounts to 0.01% of the net asset value of the fund. This tax is included in the net asset value of the fund. The fund can in principle use the Luxembourg treaty network to partially recover any withholding tax on its income.

Investors who are not subject to (exempt from) Dutch corporate-income tax (e.g. pension funds) are not taxed on the achieved result. Investors who are subject to Dutch corporate-income tax can be taxed for the result achieved on their investment in the fund. Dutch bodies that are subject to corporate-income tax are obligated to declare interest and dividend income, as well as capital gains in their tax return. Investors residing outside the Netherlands are subject to their respective national tax regime applying to foreign investment funds. We advise individual investors to consult their financial or tax adviser about the tax consequences of an investment in this fund in their specific circumstances before deciding to invest in the fund.

The fund incorporates sustainability in the investment process via exclusions, ESG integration, a minimum allocation to ESG-labeled bonds, and engagement. The fund does not invest in credit issuers that are in breach of international norms or where activities have been deemed detrimental to society following Robeco's exclusion policy. Financially material ESG factors are integrated in the bottom-up security analysis to assess the impact on the issuer's fundamental credit quality. In the credit selection the fund limits exposure to issuers with an elevated sustainability risk profile. Furthermore, the fund invests at least 5% in green, social, sustainable, and/or sustainability-linked bonds. Lastly, where issuers are flagged for breaching international standards in the ongoing monitoring, the issuer will become subject to engagement.

European credit markets started the month strongly with a continuation of the spread rally that we also saw in January. However, sentiment changed after the first week and spreads widened during the subsequent weeks of February. The average index spread still ended the month at a slightly lower level than at the end of January. Underlying government bond yields moved up quite a bit during the month and this was also the main driver for the weaker sentiment in credit markets in the second half of the month. Macro data were the biggest driver for markets this month. Stronger-than-anticipated labor markets in the US, higher-than-expected inflation numbers across the globe and therefore hawkish central bank rhetoric were driving government bond yields higher. Market expectations for future rate hikes have gone up; in the US another 75 bps in rate hikes is now discounted, while in Europe another 150 bps in rate hikes is priced in. The market reaction in equities and credit to this worsened rates outlook can be called relatively calm. A few new deals were issued in February. We participated in new Tier 2 issues of NatWest Group and Sabadell.

Based on transaction prices, the fund's return was 0.35%. The portfolio posted a return that was negative in February. Higher underlying government bond yields were the driver for this negative return. The average index spread ended the month at 256 basis points, which is 2 basis points lower than at the end of January. The index excess return of subordinated bonds over underlying government bonds was therefore positive, at 0.5%. The performance of the portfolio was lower than that of the index. The portfolio had a beta overweight position during the month (circa 1.1). The contribution of this overweight was positive. Issuer selection contributed negatively though. An important factor for this negative contribution was the recovery in spreads for real estate names, where the fund holds an underweight position. Bank and insurance CoCos underperformed on a risk-adjusted basis, which contributed negatively too. The portfolio lost in relative terms through the underweight in Aroundtown and Grand City Properties, and through the overweight in Raiffeisen Bank. Spreads of the latter bank widened after the US asked for more information about the bank's Russia-related business.

A hiking cycle often ends in a recession with rates typically peaking before credit spreads do. Rates have started to come down and may have peaked in some markets, while inflation is now easing. Our base case is that the US as well as Europe will experience a recession in 2023. The US is likely to experience a classic boom-bust cycle, whereas the European recession will be driven largely by an energy supply shock. European swap spreads are still at elevated levels, with 5-year spreads at 65 bps. With increased issuance of sovereign paper and the prospect of quantitative tightening (QT) next year, we expect a further normalization of swap spreads towards long-term average levels of 40 bps. This is helpful for euro investment grade since swap spreads are a large component of the total spread versus governments. Within euro investment grade, financials screen relatively cheap. In past cycles, financials were often seen as high beta since they are a leveraged bet on the economy. This time around, we see banks as less vulnerable since capital buffers have greatly improved and banks are benefiting from an interest rate environment that has finally normalized.