Dear Investors,
We are excited to share some great news with you. In June of this year, our company, FB Asset Management, having obtained all necessary approvals and agreements from the Financial Inspection of Estonia, launched a new bond fund, the FB Corporate Bond Fund, for the Baltic investment market. Starting in July, the fund began accepting its first investors and began operations.
Why did we create this fund?
During consultations with potential investors, we typically advise diversifying investments as follows:
- Up to 25% in cash (including bank accounts) – low risk.
- Up to 25% in bank deposits, across various banks (considering state-guaranteed protection) – low risk.
- Up to 25% in debt obligations (bond funds) – medium to slightly below medium risk.
- Up to 25% in higher-yield assets (equity funds, hedge funds) – high risk.
These percentages are indicative. The actual investment allocation may vary based on each investor’s risk tolerance, investment horizon, liquidity needs, and other factors discussed in advance during consultations.
By establishing the FB Corporate Bond Fund, our company can now offer investors two investment options from the list above: the average risk FB Corporate Bond Fund and the high-risk FB Opportunity Fund.
We also considered the current global economic situation. Given that inflation rates in major economies remain relatively high, leading to high central bank interest rates (mainly in Europe and the USA), corporate bond yields are currently more attractive than during periods when central bank rates were near zero.
What is the strategy of the FB Corporate Bond Fund?
The fund builds a portfolio of bonds with maturities of up to 10 years, primarily high-yield corporate bonds targeting annual yields of 7-9% (for the year 2024). The fund holds each bond until its maturity date.
The rating of these bonds is not lower than B3/B- (Moody’s/S&P). The bonds must be liquid and freely tradable on open market exchanges, focusing mainly on Europe, North America, and Asia, including bonds from enterprises the Baltics.
The fund operates in both euros and US dollars, with the NAV calculated in euros.
The fund generates income from bond coupon payments and by purchasing bonds at a discount from their face value.
What are the risks associated with the FB Corporate Bond Fund?
Investing into any instrument carries a certain level of risk and investing in bonds is no exception. These include default risk (issuer bankruptcy), interest rate risk, market price fluctuation risk, currency risk, liquidity risk (the inability to sell a bond quickly at a desirable price), volatility risk, asset valuation risk, irrational investor behavior risk, and other various risks detailed in section 3.3 of our fund’s rules.
In constructing the bond portfolio, we adhere to the following principles:
- Broad diversification across countries: 40% in the USA and Canada, 30% in Europe (EU), 30% in Asia (Japan, South Korea, India, Indonesia, China)
- Broad diversification across sectors (for example, 15% oil and gas, 15% banking/finance, 15% military-industrial complex, etc.)
These percentages are indicative. The exact allocation is always specified in the fund’s monthly communications and Fact Sheets. This strategy significantly reduces regional, sectoral, and currency risks.
Higher-rated bonds are selected for the portfolio, with B3/B- (Moody’s/S&P) specified as the lowest acceptable limit. Currency risks may be hedged using EUR/USD futures and index options. To hedge market risks, the fund may use bond futures (ZN, ZF, ZT) and options, as well as buy/sell bond ETFs (HYG, JNK) and their derivatives, such as IEAC (EUR).
We estimate the fund’s risk level to be 3-4 on a scale from 1 to 7, where 1 is the lowest and 7 is the highest risk. This corresponds to a medium or slightly below medium risk level.
Can the fund’s assets significantly decrease and why?
Normally, bonds are less susceptible to price fluctuations during typical market cycles, so the fund’s yield curve should be more stable. However, during economic crises or market crashes, when panic causes all asset prices to fall, corporate bond prices may also decline.
Regardless of the price at which the bond is traded (even if 10-20% below its par value), then at the time of the bond’s expiration, the issuer is obliged to pay its par value to the holder. The investor should take into account that if he leaves the fund before the bond’s expiration, he takes on (fixes) the loss incurred from the fluctuation in the bond’s value. This is why the fund has a recommended investment period.
Market downturns are also favorable times to purchase undervalued bonds, potentially earning an additional 10-20% on top of the coupon income. Unlike stocks, whose prices are unpredictable, bonds are redeemed at their nominal value on the maturity date.
Every month, FB Corporate Bond Fund publishes the following data that investors should pay attention to:
- Portfelli tootlus (ühes kuus) – The fund’s yield due to changes in the value of bonds and received coupons. The yield can be both positive and negative.
- Average annual fixed interest income – the average fixed interest income that the fund receives on bonds
- Average annual interest income – the average interest income of a bond, which takes into account the market value of the bond
- Average interest income (YTM) – the average interest income that the fund will receive if it holds the bond until maturity (the purchase price of the bond and the maturity price, as well as the fixed annual interest, are taken into account)
- Average annual interest income – the average term of the bonds in the fund’s portfolio
- FBCBF indikatiivne interest income (Yield) – the indicative income of a fund shareholder, which he receives twice a year as interest payments
What are the advantages of the FB Corporate Bond Fund?
- The fund pays out up to 50% of the received coupon income twice a year, with the remainder reinvested. Interest payments are made on June 15 and December 15 or close to those dates.
- Low entry threshold for the fund – EUR 10,000 (investment amounts can be higher, but must be multiples of EUR 1,000).
- One of the lowest management fees in Estonia/Europe at 0.79% per year.
- Good liquidity of the fund, allowing investors to enter/exit once a month.
- Very broad diversification of the fund’s portfolio across countries, sectors, currencies, and issuers with high market ratings.
- The fund also includes bonds from local issuers in Estonia.
- This fund brings more stability (stable predictable income) to an investor’s overall investment portfolio.
Disclaimer The material and figures in this letter are for reference only and should not be relied upon for making investment decisions. Before acting on this material, consider whether it is suitable for your specific circumstances and, if necessary, seek professional advice. We must inform you that the performance of the FB Corporate Bond Fund and the figures mentioned in this letter do not guarantee or promise future fund performance. Investments in the fund can result in both profit and loss. The return on investments depends on changes in financial markets, and the investor always assumes the accompanying investment risks. Taking on investment risk is the cost an investor bears for participating in investment returns.