The return of Cathrine Foyn brings back 20 years of industry experience to Arctic Fund Management. Cathrine, one of the founders of the company, spent initially 5 years building up the Fixed Income team. Returning back home, she reflects on the current state of affairs – and why Arctic’s fixed income funds is a good place to be for anyone who wants predictability along with decent return.
Welcome back to one of Norway’s, perhaps Scandinavia’s, leading Fixed Income teams with in particular Arctic Return that for a long time has been the top performer in its category. Has Arctic Fund Management changed in the two years you have been away?
- Well thank you. Yes, the company has grown in both number of employees and total assets during my time away. The way the investment managers work has also changed with a much closer collaboration between analysts and managers across equity and fixed income. This truly gives all the teams a deeper insight into the various Nordic companies. It is incredibly inspiring to work with so many competent colleagues and not least colleagues who have an authentic passion for their field of expertise.
An elementary question perhaps, but why do people in general would want to put money into fixed income?
- Most investors wants a certain share of their total portfolio in low-risk and high-liquidity investments. Historically, many have used government bonds or the banking market for this purpose. However, with low interest rates in Europe, Denmark and Sweden and extremely low interest rates for Norway, low-risk fixed income funds now appear to be very good alternatives.
In a non-interest world, where does Arctic find performance?
- Long-term interest rates are at historically low levels and long-term investments do not provide an attractive return in relation to the risk / volatility of these investments. We therefore choose to keep the duration of the various interest rate portfolios low. An isolated increase in interest will be positive for our portfolios and the funds will be able to deliver a higher return immediately.
Therefore, we are currently using all our efforts to search look for good credit papers and are searching across the Nordic universe. This is a universe we know well through many years of experience in the market both within the interest rate team and within our equity team. We see that the credit premiums in the Nordic region are well above what we see in Europe. One of the reasons being the European Central Banks aggressive program buying both Government and Credit bonds in the market. Therefore, we still find good investment opportunities for our fixed income portfolios even though the underlying interest rate is low.
Fixed income is in reality buying and selling of debt to companies, and countries. What are the main challenges to the Fixed Income market in the years to come?
- Much has changed before and after the financial crises in 2008. For the somewhat advanced investor, you could say that in the pre-financial crisis world, central banks “ruled” the short end of the yield curve ie from 0-2 years by adjusting the key rate up or down.
After the financial crisis, central banks, in addition to putting the key rates extremely low and for some countries down to negative rates, also took control of the long end of the curve. They have done this by printing money to buy bonds in the market.
By doing this, they have also pushed long-term interest rates down to historically low levels, and in some countries we have seen 10-year national interest rates with negative interest rates. The domino effect has been that investors have moved out of government securities and into credit securities, which in turn have pushed down credit spreads.
The main challenge now is how to deal with these "doped" interest rates and what happens the day central banks begin to scale down their net purchases of bonds. How will this affect credit spreads?
The world has for years seen an unprecedented example of quantitative easing from the world’s central banks. Now the question remains: Will the world ever get rid of the mountains of national debt that has been built up over the last ten years?
- That is a very good question. Where we stand today, it may look difficult, and it will no matter what take a very long time. What is certain, however, is that the large debt burden will limit how far up and how fast the interest rates can arise.
To sum up, why should one invest in Arctics Fixed Income products?
- Arctic has an experienced Fixed Income team with strong return history and who has a genuine passion for the work that is carried out every day. The exchange of knowledge between the interest rate team and the equity team is incredibly important and unique, and leads to better decisions over time.
By investing with Arctic, you achieve a steady and good return over time that has historically been far higher than that achieved on your bank account. Our two Nordic low-risk interest rate fund Arctic Investment Grade and Arctic Return gave investors a return net of fees of 3.3% and 4% respectively in 2016. Both funds have delivered higher return than hit both 3 months Nibor and bank deposits without binding throughout their lifetime. The funds are well diversified across industries and countries in the Nordics countries and have a short maturity so that any increase in interest rates will be positive for the funds.
One should buy our interest funds for the part of the portfolio which is to be the safe haven and where you want a high degree of predictability and liquidity. The return has been 1-2 percentage points over 3 months Nibor and is therefore a much better alternative to using a bank account in today's low-income world.
There is room for more investors in our funds, so just contact us.
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Arctics Fixed Income Funds are managed by Trond Tømmerås, Philippe Sissener and Cathrine Foyn. The funds invest in Norwegian and Nordic bonds and the team works closely with Arctic's equity team in their credit analyzes of the individual companies. The Arctic Return Fund is ranked as the highest yield fund in the Norwegian market of all Norwegian short bond funds (Source Morningstar October 2017)
Historical returns in Arctic's Fixed Income funds are no guarantee for future returns. Future returns will depend, among other things, on market development, managerial skill, fund risk and management costs of the various share classes. The return may at times be negative as a result of price losses.