Fixed Income Investments

Why Fixed Income corporate bonds belong in every portfolio

The charging of interest on time deposits as well as on federal bonds and other types of bonds with excellent credit ratings has been significantly reduced in recent years. However, bonds belong in every portfolio. Where conservative investors are concerned, bonds should for various reasons even make up the main part of their securities.

Attractive returns

With time deposits and federal securities, the inflation rate can scarcely be compensated for in the current market environment and real growth in assets is practically impossible. Conversely, with a professional selection, Genève Invest has achieved proven annualized returns of over 8 per cent with corporate bonds over the last seven years (KPMG Performance Results). This is possible as a result of high coupon payments linked to price gains in bonds purchased below their nominal value.

A high degree of profit stability

Thanks to regular interest payments and clearly defined repayment schedules, it is easy to predict the expected yield from corporate bonds in a portfolio. This is why investors and managers know when they can count on particular payments. The bottom line is that it is even possible to align the portfolio with the specified amounts where regular payments are concerned.

Comparatively low investment risks

Thanks to broad diversification (as a rule 10 to 60 bonds from different companies), a high degree of planning security, sound analysis and the use of professional security tools, the bond portfolios we manage have comparatively low risks for investors. The fluctuations in value are much lower than those for share portfolios.

Permanent availability with a high degree of transparency

In contrast to banks’ savings bonds and time deposits, the money invested in the purchase of corporate bonds is not tied up for a specific period of time. Instead the bonds can be sold via the stock exchange at the market price at any time. By means of an online access our customers additionally have the option to find out about the current performance and sales value of their portfolio positions at any time.


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Stable returns: Success factors in relation to corporate bond investments

In the current low-interest environment, it is now practically impossible to fulfil the expectations of demanding fixed-interest investors with the traditional type of advice provided by banks and with their products, most of which are in-house. As an independent Swiss asset manager and specialist in the area of fixed-interest investment types, the Genève Invest Group was able to generate proven annualized returns of 8 per cent over the past seven years by purchasing corporate bonds listed on the stock exchange (KPMG Performance Results). In this respect, 7 specific factors (security pillars) are very decisive for sustained success and our customers’ resultant satisfaction.

Professional analysis

When selecting attractive corporate bonds and putting together efficient portfolios we use professional databases and modern analytical tools. In this respect, the focus of our selection process is well-founded financial data analysis of potential issuers and possible guarantors whom we as a rule meet before structuring a large bond portfolio so that we can obtain a better impression of how each company in question is managed. However, the decisive factors where bond selection is concerned are also the previous market and country assessments. The technical analysis is used in particular to determine the exact timing of purchases and sales.

Continuous monitoring

During the bond’s ownership period, all relevant factors are monitored continuously. In addition to developing important balance sheet and yield key performance indicators such as the debt level, the operating profit and the cash flow, this includes changes typical within the branch such as how to deal with direct competitors.

Broad distribution

We distribute an investment across the largest possible number of bonds so that the risk of individual portfolios failing is kept low.

A high degree of seniority

When constructing our portfolios we pay attention to a high degree of seniority. This means that we are mostly high up in the ranking of debtors and, in case of insolvency, we are awarded a high recovery rate. For a portfolio of 30 different bonds (and more) as well as an average repayment rate of 50 per cent for senior bonds (in the case of a default), the potential default risk of one single bond in relation to the whole portfolio is less than 1.7 per cent.

High interest coupons

The bonds’ high interest coupons provide additional security. They ensure that during the term a part of the invested capital flows back to the creditor.

Additional income by full use of the interest curve effect

The returns on Fixed Income securities are typically reduced when the residual term decreases. As a rule, this effect is stronger with respect to corporate bonds than with regard to government bonds. For example, if a corporate bond with a six-year residual term yields a return of six per cent, investors are often satisfied with half this amount two years before maturity if the other conditions remain unchanged. The result of this is a price increase from 100 to almost 106 per cent. Because we do not retain most of our bonds until the repayment date, we can use this interest curve effect in order to generate additional yields.

Beneficial purchase in accordance with the value principle

As a rule, we focus on undervalued bonds. As candidates for purchases, only bonds with a particularly good risk-reward ratio come into question. This means that each of the bonds should offer a higher yield than the securities from similar issuers with a comparable risk or that they must have a lower risk if the return is the same. When an adjustment is made to the market average, price gains are automatic. We also systematically use valuation shifts, which can be seen more and more in the corporate bond market, switching from one issuer to another in the same industry. This works particularly well during stressed market periods with increased price fluctuations.

Has our bond portfolio management concept convinced you? Then please contact us today to receive a free consultation.

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S&P Credit Ratings and Research provided by S&P Capital IQ

Insights


Archived News
Ten reasons that argue against an interest rate hike

Ten reasons that argue against an interest rate hike

For some time now, the ECB prime rate has been at a historic low, leaving investors in the fixed income sector with only a small return on many investments. Thus, both investors and borrowers are interested in the future development of interest rates. There are currently several reasons why it is unlikely that the ECB’s key interest rates will rise in the near future.

An insight to the seniority of corporate bond issues

An insight to the seniority of corporate bond issues

Holding a corporate bond is a bit like holding an IOU (“I owe you” – it signifies an outstanding debt) from a trusted friend. At the time the money is handed over it seems inconceivable that anything could go wrong. However, if you have enough IOUs with enough friends, eventually one of them will struggle to repay their debt. It may only happen once every hundred IOUs you hold but when it does occur, where do you stand? In the line of people who are owed money, are you are the start of the line, or all the way at the back?

An insight into the maturity and duration of bonds

An insight into the maturity and duration of bonds

A bond is a security which can be purchased by private as well as institutional investors. A certain term (maturity term) is set and the bond has to be repaid once the bond matures. Interests are usually paid at regular intervals (quarterly, semi-annually or annually) during its maturity term. The extent of these interest payments are generally specified in advance, which is why bonds are also referred to as Fixed Income securities.

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