Mag. Andrei Diakonov: "After the recovery phase of 2009 some uncertainty returned to the markets due to unsustainably high budget deficits in several developed markets. Some EU-members were among the hardest hit. Furthermore European stocks underperformed their US peers on average. Convertibles followed the sideways trend of the stock markets with moderately positive returns. Downtrends were used as opportunities to acquire slightly riskier convertibles."
Performance Review 2011
Mag. Andrei Diakonov: "The next phase of the budget deficit crisis led to sharp stock market declines during the second part of 2011. The initial upside phase was used to reduce or exit some of the better performing positions. However, fund holdings moved down significantly due to an increase in perceived credit risk and moderate equity return sensitivity."
Performance since 2007
Mag. Andrei Diakonov (fund manager since 1. December 2009): "Overall the last 5 years were certainly disappointing in terms of absolute performance. Convertibles did outperform stocks, as expected in a downtrend. However, the outperformance was not nearly as high as one would normally expect from this asset class given significantly reduced stock market sensitivity. Extraordinary increases in credit risk spreads as well as temporary liquidity constraints, especially in 2008, were the causes of this unexpected shortfall. Investors should not expect many similar situations in the future."
Investment Process and Strategy – How does the Fund Manager Invest?
Mag. Andrei Diakonov: "Volksbank-Convertible-Bond-Fund is currently subject to a discretionary investment management process.
The primary goal is to provide appropriate access to European convertible bond market returns and to seek opportunities for active return enhancement through changes in bond holdings while avoiding significant changes in the risk profile.
Active returns are sought through rebalancing based on changes in relative valuation of investible convertible bonds as well as slight adjustments in equity or credit risk exposure.
Using relative valuation we seek to discover mispriced convertibles either regarding the prospects for the underlying stock or the perception of credit risk. Balanced convertibles are preferred unless either increased equity participation or a yield enhancement seems necessary due to current market conditions.
Equity or credit risk mispricing are evaluated using comparative analysis of historical and expected fundamentals. Technical and news flow analysis are key criteria for market timing decisions."
Mag. Andrei Diakonov: "In a highly uncertain macroeconomic environment, as it is currently the case, convertible bonds have the advantages of a moderate participation in stock market returns, significant interest income and convexity.
The current credit risk of European companies is on average perceived to be relatively high, and this situation had a significant negative impact on the performance of convertible bonds in 2011. This situation creates an opportunity for additional returns in case of a more profound economic recovery.
If equity markets move lower or sideways due to continuing economic uncertainty we can expect convertible bonds to have a relatively better performance compared to stocks due to the aforementioned properties."