Good morning!

I am no stranger to the local aversion towards investment funds as for many (potential) investors the word “fund” has negative connotations. Although admittedly I am not an objective writer I have to say that in the current environment such misconceptions warrant a review and that concerns could be to some degree alleviated by opting for investment funds that comply to the European hallmark Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive. Such funds are subject to a series of strict restrictions such as permissible investments, maximum exposures to single names, risk monitoring and reporting amongst many others.

There are many reasons for which I think that given the extraordinary central banks policies there is increasing scope for resorting to investment funds rather than managing a portfolio of single bonds/equities. Let’s start with an example. As it was widely motivated, while the yields for the Investment Grade (IG) are apparently unappealing, the bond buying programme initiated by the European Central Bank (ECB) is likely to trigger a decline in yield (increase in prices) resulting ina scenario whereby investors will benefit from capital gains.

However, for retail investors the commissions associated with buying IG bonds can be dissuading, particularly if one is not fully convinced about the possibility of significant price appreciation. To take an example, investing in the German 10 year bond, currently yielding less than 0.3%, could a prima facie look like quite a risky transaction for an investor paying 0.5-1% commission. The cost of gaining exposure to IG bonds is however lower if the investor chooses a fund; if one is, for instance investing in an exchange traded fund (ETF) the costs are as low as the ones of trading an equity. In this case the investor would also have the advantage of easily achievable and low-cost diversification as his/her investment would in fact be like a portfolio of bonds. There are plenty such funds on the market, out of which I mention the Lyxor Eurozone Government ETFs targeting different maturities 5-7 years (MTC FP), 7-10 years (MTD FP) or 10-15 years (MTE FP).

Other IG oriented funds which, in contrast to ETFs, do not replicate IG indices should nevertheless not be omitted by investors. The skills of investment managers are particularly relevant in the current environment because they should be in a better position to optimally choose the maturity and country allocations and, hence, enhance their returns. Furthermore, the fund managers will be expected to closely monitor the economic developments and preempt when yields have reached a bottom. As sizable as the impact of ECB intervention might be for yields, if this also lifts inflation expectations later on this year, we could see a rebound in yields. In such a scenario, the skilful fund managers could increase their allocation to floating rate securities or inflation-indexed securities to take advantage of the shift in sentiment.

Funds could also have tax-advantages. One example that I deem relevant at the moment is the opportunity created by ECB in the peripheral (Spain, Italy, Portugal and Ireland) government bonds. Italian bonds for instance have in my opinion further room for tightening, raising the prospect of additional capital gains but retail investors are to some degree put off by the withholding tax. However, this disadvantage can be circumvented by investing in funds which focus on Italian bonds such as the Ishares Italy Government Bond ETF (IITB IM).

The skills of high yield investment managers are also increasing in relevance. Given the prevailing uncertainty around the economic implications (growth/inflation) of the ECB measures, ‘’picking’’ the right European names, sectors and rating buckets is of utmost importance as the era of widespread price increases came to an abrupt halt in H2 2014.

For the US focused high yield investors forecasting the timing of the first rate hike is critical at the moment and this should be an easier job for the financial professionals. For example, the weakness in the US high yield market over the last two weeks was in my opinion the consequence of worries for a June rate hike after what was a strong employment report. Thus, those investment managers who, like us, found such expectations as unrealistic probably saw this period as a buying opportunity and were vindicated on Wednesday evening when markets embraced the reality.

The challenging conditions in the commodity and emerging markets also call for increasing due diligence and professional expertise.

Finally, for equity investors, the exuberance saw lately in the European markets makes a case for diversification and puts funds at an advantage over single stocks. Meanwhile, when investing in the US stock market investors have to be aware of the expectations of a change in monetary policy and this challenging task, as I said earlier, should probably be delegated to fund managers.

We are witnessing exceptional macro and market conditions and it is wise to acknowledge that a multifaceted, adaptive, dynamic and global view should be adopted for successful investments; investment funds are hence becoming increasingly appealing.

Have a nice day!