Why an active maturity management is so important with bond funds

At first glance, bonds seem simple: they provide an annual interest income that is paid out reliably. But when you take a closer look at their ongoing valuation, things get a bit more complicated. Precisely their maturities play a significant role, and they can vary from a few months to 10 years or often 30 years, in some cases even 100 years or some with an indefinite maturity (so-called "perpetual bonds"). Although government bonds in developed countries are said to be among the safest investments, there are still risks involved, with the interest rate risk being one of the most significant risks.

If you buy bonds as a private investor and hold them until maturity, you hardly notice any fluctuations or price risk. At most, you can complain that yields could have been higher if you had bought them a little later – i.e. when interest rates were rising. However, if you hold these securities in a fund as a fund manager or as a bank, you must carry out an evaluation on a daily basis. In this context, it is important to understand: the longer the maturities, the greater the decline in prices when interest rates rise. Therefore, it is an essential task for bond fund managers to manage these maturities well.

As an illustration, consider the example of Austria's very long-dated 100-year bond with a coupon of 2.1%, issued in September 2017 at a price of 100. By the end of 2020, the bond had a price of 248, but now it can be bought at around 75.

Thus, banks have recently followed the example of private investors and booked their bonds in a so-called hold-to-maturity (HTM) portfolio. The advantage of this is that a daily valuation of bonds is no longer necessary, and since these bonds have to be held to maturity, there is no longer any need to report "temporary" losses - although this approach does reduce liquidity. Bond fund managers cannot use this trick, so it is even more important to actively manage the maturities of the fund components.

At Kathrein, we pay special attention to maturity management and have refined the so-called duration management over many years. This has enabled us to manage the past year very well compared to the competition. We are therefore very pleased that our Euro government bond fund Kathrein Euro Bond was awarded with the best five-year performance by the Refinitiv Lipper Fund Awards Austria 2023.

When investing in securities, price fluctuations due to market changes are possible at any time. Kathrein Sustainable Euro Bond may invest more than 35% of the fund's assets in securities or money market instruments issued or guaranteed by Austria, Germany, Belgium, Finland, France, the Netherlands, Spain or Italy via individual investments and/or via investments in other investment funds, whereby the investment in one and the same issue may not exceed 30% of the fund's assets.