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Why is there a difference in performance between the EUR and USD Funds

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  • January 2020
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  • Why is there a difference in performance between the EUR and USD Funds

Context: Different Interest rates levels and valuations of EUR vs USD sub debt result in an outperformance of the USD fund over the EUR fund

Impact for the fund:The USD fund outperforming EUR fund by 1.5% – 2% per annuum

The difference in performance between EUR and USD fund is mainly due to two key drivers: difference in income & valuations

• Difference in income – broadly 1.5%-2% per annum is due to interest rate levels
• Valuations, as prices of subordinated debt in EUR have not recovered to the same extent as in USD (see chart below)
.

 

What catalyst could make spreads for EUR securities converge toward USD one (i.e. which would mean EUR fund outperforming USD fund)? We feel that with Trade war concerns receded (Phase 1 deal signed) – economic activity is likely to pick up and PMIs (especially that of export-oriented economies such as Germany) are poised to improved, indicating a cyclical recovery for the Eurozone. In our view this would lead to EUR-denominated subordinated debt outperforming.

 

 

As an example, in 2017 – the EUR fund outperformed the USD fund (see chart below) despite lower income yields in EUR, reflecting the outperformance of EUR-denominated sub debt.
This was driven by an improving macro picture – with a strong improvement in manufacturing PMIs and GDP growth rising to 2.5%.

 

 

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