According to Nordea, the approach offers a “real” view of default risk and will strike a chord with investors who have become sceptical of ratings issued by CRAs, owing to the higher-than-expected risk of some AAA-rated debt securities exposed during the subprime crisis.
The Nordea 1 – European Low CDS Government Bond Fund aims to invest in the safest European government bonds, based on a three-month moving average of five-year CDS spreads, as quoted by Credit Market Analysis, a source of data on over-the-counter financial instruments.
Martti Forsberg, the fund’s manager, seeks to pick the bonds that offer the best risk/reward, from the five countries with the lowest CDS spreads. Forsberg is unconstrained in terms of portfolio duration and is able to invest in 16 European countries, seven of which are outside the eurozone.
In the event of a worsening eurozone crisis, Nordea says Forsberg is therefore able to move completely out of the single currency area. At the end of February, for example, his top ten holdings consisted only of bonds issued by Switzerland, Norway, the UK, Finland and Sweden.
Nordea says the five-year CDS market has daily liquidity but the portfolio is able to switch to using government bond yields as a measure of investment risk, if it becomes “illiquid, dysfunctional or does not reflect the pricing of the underlying market”.
The Luxembourg-domiciled fund, which hedges out 80-100% of currency risk, has retail and institutional share classes.
