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

Riga, Latvia, June 7, 2016, 10:10 / Investments

In May, the global stock market was still in a consolidation phase which started in April. Given the absence of some notable events, the main capital market indexes fluctuated between 3-5%. At the beginning of the month, some players tried once again to test the validity of the expression ‘Sell in May and go away’, due to which many stock markets experienced the pressure from sellers in the first half of the month. However, wide range of investors did not support this ‘initiative’, which added to the market recovery by the end of the month.

The main event of the month can be said to be the reassessment of the time and probability of a rate increase by the US FRS, which was facilitated by published minutes of the FRS April session and the number of statements made by several members of the Committee, in which they hinted quite clearly at the FRS intention to proceed according to its own plans, the more so because of good macroeconomic data in the USA released during the month. Consequently, in April and the beginning of May the market did not have high expectations of a rate hike taking place before autumn, yet the general opinion changed in the middle of May when a rate hike was expected as early as June-July.

As odd as it may seem, such events caused a positive surge in the markets. The concerns regarding an earlier rate increase were substituted by optimism about the US economy. If the FRS is not afraid of tightening the monetary policy, everything is good for the economy, and thus improvements at micro-level can be expected. Consequently, over the second half of the month the capital markets of the USA and Europe not just compensated the losses of previous weeks but also managed to demonstrate small growth as of month-end. The growth leaders in the USA were the stocks of the companies of financial, technology, and healthcare sectors. The stocks of the companies operating in the sectors of natural resources mining and processing (due to a price correction in the metals industry), as well as stocks of retail trade companies, which experienced the pressure following the depressing quarter reports and forecasts, underperformed the market.

At European venues, stocks of the companies operating in the natural resources mining and processing sector underperformed the market as well. Those were accompanied by the index representing the chemical industry. The largest German chemical conglomerate Bayer (the weight of which in the respective index amounts to more than 21%), trying to acquire the US company Monsanto, consistently increases the amount of its offer, which has a negative effect on the company’s stocks and causes a strong pressure on the whole index. In general, as of month-end, the US index S&P500 grew by 1.5%, and  the European Eurostoxx600 – by 1.75%. The same results were demonstrated by respective stock funds managed by ABLV Asset Management, IPAS.

The situation was worse at the markets of emerging countries. Overall stock index of emerging countries (MSCI EM) fell by 3.9% over the month, and the decrease even reached 7% within the month. The main reason for such fluctuations was the resumed drop of local currencies against the US dollar. Although majority of capital market indexes performed similarly to those of US and European markets, the drop in currency rates (by 4-5% on the average) produced a strong negative impact on the overall return. The growing expectations of an interest rate hike in the following FRS session has a negative effect on these markets, since in a rapidly rising interest rate environment fund outflows from the emerging markets can be expected, which is feared by the investors.

Since global stock funds managed by ABLV Asset Management, IPAS include virtually no ETF’s on indexes of emerging countries, these funds were able to demonstrate positive returns as of month-end.

The markets of corporate bonds and bonds of emerging countries continued to demonstrate high resistance to external factors. The negative performance in equity markets and the commodities’ sector at the beginning of the month caused just a small correction, after which the markets entered in to a consolidation phase following the rapid growth observed during the previous months. Published minutes of the FRS April session and the respective change in the forecasts regarding the rates caused a short-term surge of sales, which was mostly concentrated in the segment of long-term high-grade bonds – the ones most sensitive to fluctuations in the US treasuries market. Whereas high-yield bonds, especially those with low duration, performed pretty well, especially after resumed growth at the stock markets.

Since profit under the most volatile bonds having high duration was partly taken, as we noted in our previous comment, and this allowed both decreasing the general duration of portfolios and increasing the share of cash, the bond funds and total return fund performed relatively well as of month-end, given the current market situation.

In the short term we keep following the defensive strategy. Relatively high share of cash is retained in all funds, since we consider the risk of correction to remain high on both the bond market and stock markets, and therefore the positions are planned to be recovered either at more attractive levels or in case of significant changes in the market trends.

Mutual funds’ return as at 31.05.2016:

  Since the beginning
of 2016 (YTD)
20151 2014 2013 2012 Annualised return
since the inception
Government Bond Funds            
ABLV Emerging Markets USD Bond Fund 5,40% 2,05% 2,75% -3,94% 15,63% 5,02%
ABLV Emerging Markets EUR Bond Fund 4,60% 2,31% 1,83% 0,92% 15,88% 4,13%
Corporate Bond Funds            
ABLV High Yield CIS USD Bond Fund 6,13% 25,30% -16,58% 2,20% 17,96% 5,41%
ABLV High Yield CIS RUB Bond Fund 6,86% 13,78% -10,21% 7,00% - 5,15%
ABLV Global Corporate USD Bond Fund 6,26% -1,58% 0,34% - - 2,30%
ABLV European Corporate EUR Bond Fund 4,52% 1,47% 3,30% - - 4,36%
ABLV Emerging Markets Corporate USD Bond Fund 5,95% 0,09% - - - 8,80%
Total Return Funds            
ABLV Multi-Asset Total Return USD Fund 1,28% -7,07% - - - -4,60%
Stock Funds            
ABLV Global USD Stock Index Fund -6,76% -6,78% -0,26% 10,24% 9,33% 0,09%
ABLV Global EUR Stock Index Fund -9,56% 0,86% 3,84% 3,26% 11,67% -1,57%
ABLV US Industry USD Equity Fund -3,78% -1,03% 6,95% - - 2,02%
ABLV European Industry EUR Equity Fund -6,87% 5,21% 2,09% - - 0,27%

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”.