Management company comment about ABLV open-end mutual funds in October

Riga, Latvia, November 6, 2015, 15:36 / Investments

October 2015 turned out to be the best month the world stock market experienced during past years. The market showed the best month performance ever since October 2011 and the seventh best result over the last 25 years.

Such a drastic variation in investor mood is hard to explain logically, apparently, the circumstances played the major role here. Let us remember that the market was under so strong negative influence in August and September, which led to a rather heavy correction (world stock index dropped by more than 10%), that the majority of participants probably decided it could not get any worse. As such news retained market decline, the further dropping was not expected which made it a good time for buying. Consequently, during first two weeks only S&P500 index demonstrated growth by almost 6%, which increased the level of optimism in almost all major stock markets.

Without doubts, many considered such growth as a technical ‘bounce-back’ after markets dropped in the third quarter, and future dynamics were to be outlined by quarterly corporate reports. The latter did not fail, although were not impressive either. Three quarter of 70% of US companies, which submitted their reports and comprised S&P500 index, demonstrated quarterly profits exceeding analyst expectations. Although, such ‘surprise’ appeared not to be significant, i. e. the companies gained profits which exceeded analyst expectations by 5% only at the average, and the total increase of profits was equal to inappreciable 4% (excluding the oil sector), it was enough to maintain positive dynamics in stock markets.

Europe reports presented even worse results where a half of 60% of big corporations, which submitted their reports, came short of expectations; however, the profit as such increased by 14% (excluding the oil sector). Nevertheless, rather discouraging reports did not stop the ‘rally’, as investors gradually switched their attention to world central bank activities. The first factor to additionally push forward the European market, which had already started to fall behind, was an ECB meeting. Although the ECB has not performed any actions yet, it confirmed its intention to expand the programme of quantitative easing by making a promise to revise it already in December. It means the level of market liquidity might get even higher; moreover, further possible decrease of the interest rate in the euro area is expected. On that very day, the National Bank of China decreased discount rates. At the end of the month, US FRS slightly clarified its position regarding possible increase of the rate upon the results of its meeting and demonstrated more optimistic attitude towards the world economy as it did in September. Besides, markets had stronger expectations concerning possible additional measures of the CB of Japan aimed at economy boosting.

The combination of all the above-mentioned factors led, for example, to S&P500 index growth by more than 10% from 28 September to the end of October, while its maximum daily decrease in that period was not more than 0.68%. It was 44 years ago, back in 1971, when such ‘rally’ was registered for the last time.

Another distinctive feature of October was growth in markets of emerging countries, which this year demonstrate the dynamics of falling back heavily. Although the growth of their stock indexes was not as significant as the one of advanced economies (excluding China), a correction in the currency market allowed MSCI EM index to increase by 7% (against 7.8% of the world stock index).

As to stock markets of the USA and Europe, all sectors indicated growth, including the oil sector. The results of corporate reports determined either outperformance or underperformance.

Stock funds managed by ABLV Asset Management, IPAS demonstrated profits equal to the market return. Let us remind our previous comment that the correction the global stock market experienced in August and September would not be prolonged, and growth of stock indexes would be resumed after lessening of nervousness in the markets, therefore, almost all funds were placed in ETFs at the end of September. Further events proved our assumptions to be right ensuring the growth of value of stock fund shares by 7.5–9% at the end of the month. Currently stock fund managers maintain keeping strategy, as the increase initiated in October, in our opinion, will turn out to be a midterm one.

Corporate bond markets and bond markets of emerging countries experienced a notable increase of prices. Uncertain dynamics of FRS rate, continued price decline in raw material markets, high volatility in the stock market put the world bond market under significant pressure over the past months causing increase of High Yield corporate bonds spreads to reach the level of 2011–2012 debt crisis in the euro area, which, in our opinion, does not give a completely adequate view of fundamental market conditions. Therefore, as soon as risk appetite appeared in world markets, investors started to show their interest in such financial instruments again. As a result, there was a notable reduction of spreads in bond markets in October leading to the increase of different indexes of corporate bonds and emerging economy bonds by 2-3%, while the spreads returned only 25-50% of their widening since the beginning of the year, which allows to forecast that October tendency will maintain in the midterm, provided no significant negative events take place.

Russian Eurobond market keeps looking strong. Yields are still high, at the same time the market experiences the shortage of bonds caused by the absence of new emissions, as well as bond-buy-back policy maintained by corporations in order to decrease their interest payment expenses or substitute foreign currency debts with rouble ones.

At the end of the month, the value of the majority of bond fund shares managed by ABLV Asset Management, IPAS indicated growth by 2-3%. A new ABLV Emerging Markets Corporate USD Fund demonstrated less impressive performance (+1.4%), which is due to the creation of its bond portfolio in October since the fund started its activity at the end of September only.

ABLV High Yield CIS RUB Bond Fund turned out to be the only looser as it lost 2% of value. The reason is a rather unexpected bankruptcy of Transaero, whose bonds are present in the fund portfolio. September highlighted Aeroflot intention to buy Transaero, which faced financial difficulties, as it applied for acquiring 90% of Transaero shares in the middle of September; however, the further events were quite mysterious and apparently someone somewhere has decided to drive the troubled operator to bankruptcy, which resulted in bond value reaching almost 0 and affecting the total value of the fund.

Keeping strategy is maintained in bond funds, as FRS very cautious policy regarding the interest rate and maintenance (or expansion?) of QE programme in Europe are obviously positive factors for the global bond market. Moreover, as it was already mentioned above, spreads are still high and have a narrowing potential.

Mutual funds’ return as at 31.10.2015:

the beginning
of 2015 (YTD)
2014 2013 2012 Annualised
return since
the inception
Government Bond Funds          
ABLV Emerging Markets USD Bond Fund 3,86% 2,75% -3,94% 15,63% 4,94%
ABLV Emerging Markets EUR Bond Fund 3,21% 1,83% 0,92% 15,88% 3,97%
Corporate Bond Funds          
ABLV High Yield CIS USD Bond Fund 26,09% -16,58% 2,20% 17,96% 5,13%
ABLV High Yield CIS RUB Bond Fund 17,03% -10,21% 7,00% - 4,90%
ABLV Global Corporate USD Bond Fund 0,81% 0,34% - - 1,31%
ABLV European Corporate EUR Bond Fund 1,87% 3,30% - - 3,70%
ABLV Emerging Markets Corporate USD Bond Fund - - - - 1,41%
Stock Funds          
ABLV Global USD Stock Index Fund -3,44% -0,26% 10,24% 9,33% 1,34%
ABLV Global EUR Stock Index Fund 3,36% 3,84% 3,26% 11,67% -0,17%
ABLV US Industry USD Equity Fund -0,09% 6,95% - - 5,14%
ABLV European Industry EUR Equity Fund 8,32% 2,09% - - 5,55%
Total Return Funds          
ABLV Multi-Asset Total Return USD Fund - - - - -3,67%

1 Except ABLV Multi-Asset Total Return USD Fund and ABLV Emerging Markets Corporate USD Bond Fund, for which return is calculated on funds’ period of operations.

Additional information is available at ABLV Bank home page in the section “ABLV Mutual Funds”.