Espa Bond Usa-High Yield
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ESPA BOND USA-HIGH YIELD Mutual Fund pursuant to § 20 InvFG Annual Report 2010/11 Financial Year 2010/11 Contents General Information about the Investment Firm ........................................................................................................ 2 Development of the Fund .............................................................................................................................................. 3 Asset Allocation ............................................................................................................................................................. 4 Comparative Overview (in EUR) .................................................................................................................................... 4 Dividend Disbursement/Payment ................................................................................................................................ 5 Income Statement and Changes in Fund Assets ....................................................................................................... 6 1. Value Development over the Financial Year (Fund Performance)........................................................................... 6 2. Fund Result ................................................................................................................................................................. 6 3. Changes in Fund Assets............................................................................................................................................. 7 4. Source of the Fund Result ......................................................................................................................................... 8 5. Use of the Fund Result............................................................................................................................................... 8 Fund Portfolio as of 31 July 2011 ................................................................................................................................ 9 Unqualified Auditor’s Opinion ....................................................................................................................................... 29 Fund Terms and Conditions........................................................................................................................................... 31 General Terms and Conditions ...................................................................................................................................... 31 Special Fund Terms and Conditions .............................................................................................................................. 33 Annex to the Special Fund Terms and Conditions ........................................................................................................ 38 2 ESPA BOND USA-HIGH YIELD General Information about the Investment Firm The company ERSTE-SPARINVEST Kapitalanlagegesellschaft m. b. H. Habsburgergasse 1a, A-1010 Vienna Telephone: +43 05 0100-19881, Fax: +43 05 0100-17102 Nominal capital EUR 4.50 million Shareholders Erste Asset Management GmbH (81.42%) DekaBank Deutsche Girozentrale (2.87%) Kärntner Sparkasse Aktiengesellschaft (2.87%) NÖ-Sparkassen Beteiligungsgesellschaft m. b. H. (1.37%) Salzburger Sparkasse Bank Aktiengesellschaft (2.87%) Sieben Tiroler Sparkassen Beteiligungsgesellschaft m. b. H. (2.87%) Steiermärkische Bank und Sparkassen Aktiengesellschaft (5.73%) Supervisory Board Wolfgang TRAINDL, Mag. (Chairman) Gerhard FABISCH, Mag. Dr. (Deputy Chairman) Wilhelm SCHULTZE, DI (Deputy Chairman) Christian AICHINGER, Dr. Alois HOCHEGGER, Mag. (until 23.2.2011) Michael MALZER, Mag. Dr. (until 23.2.2011) Birte QUITT, Dipl. BW. (FH) (from 24.2.2011) Franz RATZ Gabriele SEMMELROCK-WERZER (from 24.2.2011) Reinhard WALTL, Mag. (from 7.9.2010) Appointed by the Works Council: Regina HABERHAUER, Mag. (FH) Dieter KERSCHBAUM, Mag. Gerhard RAMBERGER, Mag. Herbert STEINDORFER Managing directors Heinz BEDNAR, Mag. Harald GASSER, Mag. Franz GSCHIEGL, Dr. Prokuristen (proxies) Achim ARNHOF, Mag. (from 24.2.2011) Winfried BUCHBAUER, Mag. Harald EGGER, Mag. Oskar ENTMAYR Dietmar JAROSCH, Dr. Günther MANDL Christian SCHÖN Paul A. SEVERIN, Mag. Jürgen SINGER, Mag. State commissioners Erwin GRUBER Michael MANHARD, HR Dr. Auditor ERNST & YOUNG WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT MBH Custodian bank Erste Group Bank AG 2 Financial Year 2010/11 Dear Shareholder, We are pleased to present you the following annual report for the ESPA BOND USA-HIGH YIELD mutual fund pursuant to § 20 InvFG for the period from 1 August 2010 to 31 July 2011. Development of the Fund High-yield bonds achieved a good performance over the past 12 months, with a total return of 12.85% (as of 31 July 2011, benchmark: Merrill Lynch High Yield Master II Constrained Index, Euro-hedged). Returns on the high-yield market improved by an additional 123 bp and ended the period at 7.12%. The spreads, which widened by 106 bp compared to the previous financial year to reach +579 bp, are still more than 300 bp above their historical low, which in turn leaves room for further spread narrowing. All sectors in the high-yield segment posted positive returns in the reporting period thanks to industries with higher beta such as technology, gambling and chemicals, which drove the market even higher. A number of defensive sectors also saw positive developments in the reporting period, for example, the food and energy sectors. Financials continued their strong performance. Following a record of USD 46 billion in issues in May, activity on the primary market slowed considerably in May. Numerous issuers even withdrew their offers because buyers were demanding higher spreads in order to conclude contracts. Despite the latest decline, the high-yield market has already seen 425 new issues worth USD 200 billion this year. This is even more than the record high from the previous year, which set a fast pace in terms of the dollar volume and the number of contracts. The demand for high-yield bonds remained stable in 2011, but took a drastically negative turn in June, when risk appetite waned among investors. According to Lipper, domestic high-yield retail funds lost more than USD 6 billion in one month, including a record outflow of USD 3.4 billion in one week. Demand returned in July when market sentiment improved again. For the year as a whole, high yields saw net inflows of USD 3.7 billion. During the reporting period (31 July 2010–31 July 2011), ESPA BOND USA-HIGH YIELD was 68 bp worse than its benchmark, Merrill Lynch High Yield Master II Constrained Index, Euro-hedged. An average cash position of 4% cost the portfolio nearly 55 bp when the high-yield market recovered. The negative effects on performance were the result of an overweight position in the media and entertainment sector (-19 bp) and an underweight position in financials (-15 bp), accompanied by an FX position in the portfolio (-10 bp). At the same time, the underweighting of the building materials and construction sector and the overweighting of the gambling sector made up for part of the losses resulting from other sectors, at +10 bp and + 3 bp, respectively. Individual overweighted issuers that made a positive contribution to the performance of the portfolio included Texas Energy Future Holdings (electronics), Fortescue Metals Group (metals), Univision Communications (media/entertainment) and Freescale Holdings (technology). Issuers that had a negative influence on the portfolio included Dex One Corporation (media), Opti Canada Inc. (energy) and First Data Holdings (technology). Due to the current higher spread levels, we believe that high-yield bonds are now more attractive than they were at the beginning of the year, especially since the fundamental data have remained stable. Corporate turnover continues to grow in a number of industries. Many issuers did indeed improve their liquidity, extend their terms and lower their interest expenditures. This should lead to less credit defaults, even if economic growth slows down. The markets were extremely volatile recently. In the US, the problem of agreeing to a higher debt ceiling, the debate about the deficit and the rating downgrade for US Treasuries to AA+ on 5 August 2011 by S&P were the main factors that raised concerns about a double dip and led to increased risk aversion among investors. We believe that the fundamental data in lending business for the fixed income market will remain in good condition. The wider spreads currently being traded on the market offer a good opportunity to add these to the preferred issuers and structures. Our general strategy has not changed. We continue to favour global bonds that profit from growth in Asia and the emerging markets. We prefer shorter-term issues and issues with a stable B and low BB rating over issues with better ratings and longer-term bonds that could be subject to interest rate risk. Our focus is on issuers that can profit from secular, non-cyclical growth, and we avoid LBOs with excessively high leverage. 3 ESPA BOND USA-HIGH YIELD Asset Allocation 31 July 2011 31 July 2010 EUR millions % EUR millions % Equities denominated in USD 0.0 0.01 0.1 0.21 Bonds denominated in GBP 1.5 1.47 - - EUR 7.6 7.39 4.6 6.73 USD* 87.8 85.36 58.8 86.02 Securities 97.0 94.23 63.5 92.96 Forward exchange agreements - 0.6 - 0.58 0.1 0.10 Cash in banks 4.5 4.36 3.4 4.99 Interest entitlements 2.0 1.99 1.3 1.95 Other deferred items - 0.0 - 0.00 - - Fund