Providing stability amidst volatile stock market conditions

What are your investment objectives with the PSM Investment Grade Bond fund?

The PSM Investment Grade Bond aims to generate a balanced return by investing in investment-grade bonds with maturities between 1 to 5 years. Bonds with ratings from AAA to BBB- as per Standard & Poor's and Fitch, or Baa3 according to Moody's rating scale, are considered suitable. Our in-house research team conducts comprehensive assessments of all bond issuers from a fundamental perspective. Both corporate and government bonds are only added to the fund portfolio if they demonstrate solid and credible balance sheets or have strong credit ratings. For corporate bonds, our research team places special emphasis on short-term liabilities and current assets, as well as liability coverage. The fund also has the flexibility to invest in US dollar-denominated securities, with foreign currency risks hedged as necessary. The maturity and duration of the bond portfolio are actively and flexibly managed based on the prevailing interest rate environment. To achieve its objective of balanced returns, the fund can adapt flexibly to interest rate changes through hedging transactions. With a total expense ratio of currently 0.46 percent, the PSM Investment Grade Bond is relatively cost-effective for an actively managed bond fund.

Which investors is this fund designed for?

The PSM Investment Grade Bond is well-suited for both conservative private investors and institutional investors. These investors are focused on capitalising on interest rates while also seeking to diversify risk significantly. The fund provides a compelling option compared to traditional bank deposits, which can harbor concentrated risks due to capped deposit insurance limits. Thanks to its wide-ranging diversification and active management approach, the fund provides compelling opportunities to participate in the bond markets.

The year 2022 is considered by many market participants to be the worst "bond year" since records began. How did market developments affect the PSM Investment Grade Bond fund?

In 2022, the PSM Investment Grade Bond fund performed well, achieving a positive return of 0.6 percent. This puts us in third place out of 208 European bond funds rated by Citywire for the entire year 2022. Over the past 12 months (from 31 March 2022, to 31 March 2023), we are currently leading with a return of 4.3 percent, while our peers had an average negative return of 12 percent in the previous year. By actively using hedging transactions, we were able to benefit from favorable changes in interest rates for the fund. Therefore, we expect a positive outcome for 2023.

What is your evaluation of the future trajectory of inflation and the strategies that central banks are likely to adopt?

In the US and eurozone, inflation is gradually declining, but it is expected to remain relatively high for the foreseeable future. Achieving the desired decline to the inflation target of two percent per year is likely to take some time. This can be attributed to factors such as extensive government stimulus programs, the ongoing recovery of the Chinese economy, and substantial increases in wages.

Considering the recent banking crises in March, including Silicon Valley Bank, Signature Bank, First Republic, and Credit Suisse, central banks are expected to exercise caution regarding further interest rate hikes. US banks currently face unrealised losses of approximately two trillion dollars due to the decline in long-term bond prices. Members of the Fed's Open Market Committee have indicated that the phase of interest rate hikes in the US may soon come to an end.

It is important to recognise that raising interest rates alone cannot resolve our current inflation problem. Higher energy prices resulting from conflicts and elevated food prices due to climate-related factors cannot be mitigated solely through interest rate adjustments. Moreover, with a staggering amount of global debt of over $340 trillion, the global economy is heavily reliant on central banks to maintain stability.

Given the significant uncertainty in the banking sector, there is concern about a potential credit crunch. This could lead banks to adopt a more restrictive lending approach to both companies and households in the near future. Concurrently, there is a heightened risk of loan defaults as a consequence of interest rate hikes, particularly for long-term and variable loans. If the global economy enters a recession, central banks may need to massively increase their bond purchases and provide substantial monetary support to financial markets, despite the presence of high inflation rates.

What are your expectations for the future bond market developments for the remainder of the year?

In 2023, we expect to see a significant trend towards investors shifting their focus from liquidity and equities towards bonds. This shift has already been observed among institutional investors in the first quarter, indicating a growing preference for bond markets. Looking at the entire year of 2023, we currently anticipate the presence of inverse yield curves in both the US and Europe. This implies that the yields on longer-term bonds are lower than those on shorter-term bonds.