For Evli, Nordic corporate bonds offer an attractive risk-return profile

A unique investment universe

The Nordic corporate bond market is composed of almost 500 issuing companies, roughly the same as that of Euro High Yield companies, and its market size amounts to approximately EUR 225 billion. Around 54 per cent of issuers and 29 per cent of volumes are unrated, which translates into 262 issuers and EUR 65 billion in respective volume. With that, the Nordics are home to one of Europe’s largest markets for unrated issuers, offering a wealth of investment opportunities. Furthermore, unrated Nordic bonds offer excess returns of approximately 50-150 bps compared to officially-rated Euro corporate bonds with a similar risk level. Although usually perceived riskier, it appears that the Nordic bond market is sometimes less affected when other European markets are in turmoil, such as last November.

This outperformance can be attributed to the fact that Nordic bonds have shorter maturities and companies are in good financial health. Another important factor is that ETFs, which tend to have a very cyclical investor base, are not present in the Nordic countries.The Nordic bond market therefore has a more stable investor base. Indeed, the majority of Nordic unrated bonds are held by local Nordic institutions. These tend to be very much ‘buy-and-hold’ investors, which leads to very low relative volatility levels. Therefore, the diversification effect by allocating into Nordic corporate bonds can enhance risk-return metrics in Pan-European fixed income portfolios.

A thorough knowledge of the universe is necessary

To invest in this market without a benchmark and where the majority of securities are not rated and thus avoid unpleasant surprises, local expertise is required. "The work does not stop with just selecting the right obligation. It is necessary to have a good allocation and a well-balanced weighting, which is only possible with strong skills and experience," says Petter von Bonsdorff, Director of International Business Development at Evli.

Evli has been investing in the bond market for more than 20 years, with the launch of the Evli Corporate Bond Fund in 1999, and has a good knowledge of the local companies that make up the Nordic corporate bond market. Evli seeks to identify the best risk/return profiles through an active management approach that focuses on true credit quality rather than index composition. "The track record is important here, because the figures can’t lie. It also establishes a climate of trust, a valuable element in such a market where almost everything depends on it," concludes Petter von Bonsdorff.