Fixed Income Strategy

• Danske Obligationer have good portfolio qualities
  A principal task of Sparinvest is to offer reliable fixed income products for capital conservation or risk diversification. The fund Korte Obligationer (short-dated bonds) cater for investors with a short investment horizon aiming for some capital conservation, or investors with low risk tolerance aiming for minor fluctuations in returns. The fund Lange obligationer (long-dated bonds) often perform well when equities struggle, and this fund is therefore attractive for portfolios with a high equity allocation.
• Continuous adjustment of interest rate risk profile
  We want our fixed income funds to be considered reliable portfolio components, and investors should have the expected exposure to the bond market. The primary risk is interest rate risk. Contrary to investing in bonds with a gradually reducing interest rate risk for each day passing, we keep it stable over time in our fixed income funds.
• Good return opportunities in Danish covered bonds
  We maintain a basic exposure to Danish covered bonds offering a higher yield than corresponding government bonds. Moreover, based on an ongoing analysis of the risk/reward relationship, we will adjust the covered bond exposure upwards or downwards depending on the rewards for accepting exposure to covered bonds and thus the performance outlook.

The fund Danske Obligationer explained

Sparinvest offers funds with short-, medium- and long-dated Danish bonds where interest rate risk is the primary risk exposure. The fund's returns will therefore depend on the movements in Danish government and covered bond yields. The interest rate risk is also referred to as duration, which is a measure of a bond's sensitivity to interest rate changes. Each of the Danish fixed income funds have a fixed duration range. The higher a bond's duration, the greater its price sensitivity, and therefore returns will fluctuate concurrently with interest rates increase or decrease. The duration of the individual funds will always remain within the fixed range and is otherwise very stable. The duration of the fund Korte obligationer (short-dated bonds) is around 2.5, of the fund Mellemlange obligationer (medium-dated bonds) around 4.5 and of the fund Lange obligationer (long-dated bonds) around 6.25.

Additional return potential of Danish covered bonds

Denmark's mortgage market is unique because of its many different loan types and the match funding principle where bonds issued in the bond market to fund mortgage loans must have the same characteristics as the underlying loan. The Danish mortgage market is one of the largest, oldest and best regulated mortgage markets in the world. This gives investors in the Danish bond market both attractive return and portfolio diversification opportunities.

When bond funds invest in covered bonds, in addition to interest rate risk, they become exposed to spread risk, ie the risk that the yield spread between government and covered bonds widen or tighten when mortgage rates move differently than government bond rates. Investments specifically in callable covered bonds will expose the fund to prepayment risk, as the borrower may opt to refinance (prepay) the underlying loan. However, the borrower pays a higher interest rate for this prepayment option, often rewarded by higher returns to the investor for assuming such risk.

Sparinvest regularly evaluates the return potential of assuming spread and prepayment risk, and we will accept a higher risk at the prospect of high rewards and thus an attractive return potential. But we always maintain a basic exposure to Danish covered bonds, as they generally offer a higher yield than corresponding government bonds.