Evli Green Corporate Bond

The aim is to achieve a return that, in the long term, exceeds the benchmark return. The expected return and risk of Evli Green Corporate Bond are higher than those of a fund that invests solely in government bonds.

The credit risk arising from individual issuers is reduced by diversifying the investments among dozens of different issuers. The average repayment term (duration) of the fund's fixed income investments may be ± 3 years compared to the interest rate risk of the benchmark index.

The fund’s investments carry a credit risk

Credit risk originates from a bond issuer’s ability to repay the bond’s coupons and capital on the maturity date. In the fund’s investments, the default risk arising from an individual issuer is reduced by diversifying the investments among various issuers. The risk premium (credit margin) required by investors varies during the bonds’ exercise period according to the market conditions and factors related to individual issuers. As the credit risk grows, the values of the bonds in the portfolio decrease and vice versa. Poorer credit-rated High Yield bonds, in particular, carry a significant credit risk.

The fund’s value is affected by interest rate risk

A decrease in interest rates raises the value of the fund, while an increase reduces the value of the fund. Interest rate risk may be measured with the average remaining exercise period (duration). Interest rate risk indicates how sensitive the value of the fund is to changes in interest rates. Long-term fixed income funds are much more sensitive to interest rate movements than money market funds. The value of the fund may fluctuate heavily if there are substantial changes in interest rates. 

October started with a positive tone in the markets, but towards the middle of the month, equity markets started to wobble as a result of an intensifying second wave of Covid-19 in Europe. The credit market resisted the softness in equities surprisingly well in the beginning until the shield started to crack – especially in high yield – in late October. The green corporate bond market, however, remained bid only although spreads widened somewhat during the latter part of the month.

The fund returned 0.35% in October. The portfolio is still very much in the construction phase given the poor liquidity in the secondary market. As a result, we continue to take the advantage of the primary market efficiently. While the sentiment cooled and Q3 reporting season blackout periods started, the new issue market was substantially less active in October than in September. We added from the primary market new BFCM, Tornator, Arkema and BNP green bonds.

Demand for green corporate bonds has been very strong during the second half of the year and we expect an ever growing share of investors to add to their green bond allocation in the next 12 months. One major add to green bond demand would be if the ECB follows the QE critics’ lead and increases the green bond share of purchases. Also, issuers are increasingly interested about green bonds as a financing instrument and we anticipate the rest of the year will introduce many new issuers into the green bond market, further diversifying the sector allocation.