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Patrick Peters3 MIN READING TIME2018-11-19

Fixed Income: In search of the pearls of the middle class

Ongoing distributions are still an important aspect of investing for many investors. It's getting harder but it's not impossible. But the instruments are changing, for example to bonds from companies in the second series.

Fixed income securities were once standard in all custody accounts. Older people will remember the days when federal bonds generated six, seven or eight percent a year. Sure, inflation at the time was often higher, but interest rates flowed and increased wealth, at least in absolute terms. And in addition: These papers were also very safe, from a insolvency of the Federal Republic was never to go out. These times seem to be sinking in the fog of history. Although the insolvency risk of Germany is still zero, interest rates on German government bonds are just as good. The current yield is just over 20 basis points in mid-November. Incidentally, this year's low was six basis points in June, or 0.06 percent.

"A similar picture can be seen for corporate bonds, in the past traditionally the second safe yield enhancer, especially for conservative savers. Today, the average yield on high-quality bonds is about 0.6 percent for five-year maturities, to reach more than two percent, investors must look for bonds in the BB segment, ie in the so-called "non-investmentgrade" or speculative area , According to the Federal Statistical Office, annual inflation climbed to 2.5 percent in October. If one expects only the loss in value of money against the return, even bonds with an increased risk are no longer sufficient to avoid a loss of purchasing power ", states Thilo Stadler, portfolio manager at the independent asset management company ICM in Mannheim and Neuss. For comparison: At the beginning of the crisis in 2008, the average yield on five-year A-bonds was more than five percent.

Despite everything, he still recognizes the desire of many investors to bet on fixed income securities. Semi-institutional investors in particular are driven by the search for ongoing dividends to meet their obligations, be they foundations or pension funds. "You have to remember: 'There is no free lunch', there is no risk-free return as current numbers show. But of course, there are also enough opportunities for stable coupon payments in the bond market, "says Stadler. In his focus: Papers from reliable and solvent companies that are less in the focus of public attention because of their size and / or their business than the usual suspects that everyone knows. Incidentally, the notorious "Mittelstandsanleihen", which in recent years have often had serious problems, are not explicitly meant by this. But stable companies with a traceable and future-oriented business model.

Two examples: The recently issued bearer debenture of DIC Asset AG (a German listed property company with a focus on commercial real estate) has a coupon of 3.5 percent (ISIN: DE000A2NBZG9). Over the past three years, DIC Asset AG's share price has risen by 24 percent, demonstrating the company's stable growth. Or the 2017 K + S bond (ISIN: XS1591416679): The annual coupon is 2.625 percent and the price is currently 102.85 percent. If this continues, according to Thilo Stadler, with regard to the term until 2023, from about 2020, a sale would also be considered in order to realize the price gain. This may well be higher than the accumulated coupon of the remaining years.

The Dusseldorf asset manager Thomas Hünicke (WBS Hünicke) calls these bonds "pearls of the middle class". He also knows that names like Escada, Zamek and Co. have damaged the reputation of medium-sized entrepreneurs. For him that does not mean - and is therefore in line with Thilo Stadler - that investors should always make a big turn.

There are some such pearls in the German economy, for example only Helma Eigenheimbau, the supplier SAF Holland or the DIY chain Hornbach. These companies have issued very good bonds, which have nothing to do with the "bad" SME bonds.

According to Thomas Hünicke, however, all bond investments are valid: these should not be made without detailed prior analysis. It is worthwhile to use back analyzes of external partners as well as your own observations. This means: "Before a SME investment, asset managers talk intensively to the management and look at the business development and the strategy to draw a picture of the future. The investment decision then depends on these results. "

The investment process should also be firmly defined for bonds, and investors should only buy SME bonds if they meet all previously defined criteria. Thomas Hünicke emphasizes: "In our opinion, bond investments should not exceed a quota of five percent. Bonds are a small building block in a comprehensive strategic allocation - no more, no less. "

The Krefelder fund consultant Rolf Klein ("Target European L / S") points out the price risk of bonds, which can spoil the fun of the current distributions a little. "Rising interest rates traditionally lead to falling bond prices. Investors should keep this in mind, especially with their pension and mixed funds. These have produced good results for many years, but that is sure to change. Responding to this is the task of strategically thinking investors. "

As a fixed income alternative, Rolf Klein therefore advances, for example, high-dividend equity funds, which invest in a broad diversification into growth and dividend stocks, also in the small and mid-cap sector, and at the same time protect assets through hedging instruments and even in weak times a certain amount Generate return.