03.02.2026
Unique in Estonia, the LHV Euro Bond Fund recently celebrated its first birthday, offering investors a simple and affordable way to access one of the world’s most important financial markets. LHV Portfolio Manager Martin Möllits explains how the fund has performed, where investments are currently being made, what makes the fund special, and why it is worth taking a closer look.
What is the LHV Euro Bond Fund?
As the name suggests, it is a bond fund that primarily invests in strong European companies. This creates the premise that the value of an investor’s assets could grow relatively steadily over a long period, with fewer large fluctuations. However, the LHV Euro Bond Fund does take calculated market risks, which means that expected rates of return may also be higher than, for example, a bank deposit.
The fund is built on the principle of diversification. This means we look for attractive investment opportunities among both shorter-term and longer-term bonds, as well as among local European companies and those entering the market from elsewhere in the world. Investments in the fund are open-ended, meaning shares can be bought and sold daily. Moreover, the share price is only EUR 10, which helps overcome the entry barriers often associated with bonds. If someone unexpectedly needs funds for larger expenses, they can exit their position, and the money will reach their bank account within five (5) days. The LHV Euro Bond Fund can, for example, serve as a bridge solution for companies between two projects, but it can also be an alternative in a more conservative retail investor’s portfolio.
What does the word ‘Euro’ in the fund’s name mean?
Today, it primarily refers to the euro as a currency, because all the bonds in our portfolio are currently denominated in euros. The goal is to reduce currency risk. For example, the US dollar weakened significantly last year, and while it can be argued that US stocks had a good year, the rate of return may not be so favourable once currency effects are taken into account. In the future, we may consider making investments in other currencies as part of risk management.
For instance, our largest current position is in US banks that have issued their bonds in euros. So we do take on some risk outside of Europe, but it is still euro-denominated, i.e. the risk is linked to the euro, which we manage on a daily basis. We prefer when income and obligations are in the same currency. In this context, the word ‘Euro’ signifies internationality within Europe. Originally, the term ‘eurobond’, or a bond issued in euros, also implied cross-border issuance.
The euro bond market is growing very rapidly. Large companies constantly need funding to finance themselves. Namely, many large companies eventually face the problem of reaching the limit that a bank can provide them. At that point, they turn to the bond market, where they can raise a large amount of money at one time.
The concept of bonds can initially seem intimidating. Could you explain as simply as possible what a bond is?
In the simplest terms, bonds are nothing more than large loans to companies, governments or organisations. A bond is a loan that ‘lives’ on the market because it can be bought, sold, and traded. Essentially, a bond is a loan agreement. It has its own interest and a set repayment period. Income for the bond investor comes from two components. First, interest is paid according to the terms of the bond and second, returns can arise from changes in the market price.
The bonds included in the LHV Euro Bond Fund are issued by very strong European companies or banks, some of which are additionally collateralised. This effectively means that risks are mitigated. I do want to emphasise that the LHV Euro Bond Fund is not intended for quick enrichment, but rather aims to help preserve and grow the value of one’s assets over the long term, while mitigating the impact of inflation.
The LHV Euro Bond Fund recently celebrated its first birthday. How would you summarise the first year?
On a very positive note. We have delivered better rates of return than term deposits, which was our primary goal. In the first year of operation, we made a total of 35 investments. Today, the fund holds 32 different bonds, all of which have shown positive rates of return. It should also be noted that, compared to competitors, the LHV Euro Bond Fund did not start generating rates of return from day one. At that time, client funds had only just reached us to be directed into investments. Building the portfolio took about six (6) months. The money in the account earns a small amount of interest, but the main source of returns comes from investing it in bonds. As of now, the LHV Euro Bond Fund portfolio is strongly constructed. Naturally, we may make certain bond swaps at some point if the market offers good opportunities, but we are optimistic that the current portfolio will allow us to meet our objectives for the rate of return.
What makes the LHV Euro Bond Fund special in the local investment landscape?
The LHV Euro Bond Fund is unique in the Estonian market for several reasons. First of all, the Estonian bond market has recently been dominated by very risky bonds. The other alternative for a more conservative investor has been term deposits and there is a gap between these two asset classes. The drawback of term deposits is their rigidity. The interest rate is fixed for a certain period, and if one wants to access their money earlier, they will most likely have to abandon the thought of earning any interest.
With the LHV Euro Bond Fund, this concern does not exist. The interest earned is not paid out in the meantime. Instead, we use it to continuously buy new bonds, so the effect of interest is reflected in the fund’s share price. What makes our fund unique is that an investor can exit their position at a convenient time without losing earned interest.
Additionally, competing funds are usually very complex. They may contain 600–4,000 different bonds, making it difficult for investors to understand the fund’s contents. The LHV Euro Bond Fund currently holds 32 different securities, and its structure is easy to understand.
Furthermore, competing funds usually do not actively manage interest rate risk, meaning their exposure to changes in interest rates is significantly higher. In the LHV bond fund, we actively manage the average bond duration to reduce exposure to market fluctuations.
On the international stage, bond funds are becoming an increasingly popular alternative to term deposits. Where does this trend come from?
There is a strong correlation with the level of development of the country and the level of financial literacy. For example, in Finland, bond funds account for a significant share of the market, and many people keep their savings long-term specifically in bond funds. Over a long period, this has usually provided higher rates of return compared to deposits. This is because deposits are tied to base interest rates, i.e. movements in the Euribor. The same applies to bonds, but bonds also include the so-called corporate risk premium, which can result in a significant difference over the years. It is important to understand that term deposits and bond funds are not directly comparable; with bond funds, one must also take into account higher risks.
The LHV Euro Bond Fund is actively managed. What does that mean?
It means we monitor the markets and the companies in the portfolio on a daily basis. Essentially, we can always decide whether we want to replace certain investments, buy more or sell some off. We are fully engaged every day, keeping a strong hand on the wheel, and are seeking out investment opportunities with the best potential rates of return for our clients. This is especially important for bonds, where market momentum can be very short-lived; active management can be a game-changer. We can clearly see this with LHV pension funds as well.
One of the clearest examples I have personally encountered is a Volkswagen bond. It delivered double-digit annual rates of return in percentages, while at the same time, Volkswagen’s stock price fell. This demonstrates that even different instruments from the same company can move in opposite directions. In other words, if one can take advantage of momentum through active management, it can generate significantly more income than letting money be a passive companion.
Which bonds are included in the LHV Euro Bond Fund?
The largest portion today consists of bank bonds. The second block is covered bonds, which are like bank bonds but backed by local mortgage loans. The third category is bonds from large, strong, and stable companies. Overall, the current portfolio relies on these three pillars.
This structure is based on the fact that European banks showed very good rates of return last year on both bonds and stocks, and we see this trend continuing. Interest rates have already fallen slightly, which encourages companies to take loans. At the same time, the share of bad loans remains low.
Investors are interested in rates of return. For example, with a term deposit, the interest is known in advance. What kind of rate of return could an investor expect from the LHV Euro Bond Fund over a long period?
To answer this question, I would also bring in LHV pension funds, even though they are fundamentally different products. We have been investing in bonds in our pension funds for a couple of decades, and to some extent, we make similar business and strategic decisions in the LHV Euro Bond Fund as well. Based on this, I can say that over a long period, rates of return could remain around 4–5%. For context, when we started the fund a year ago, the average term deposit of up to one (1) year in Estonia was 2.5% in Q1 and 2.17% in Q2. Today, the corresponding figure has fallen to 1.8%.
The LHV Euro Bond Fund is very well structured today. Each bond has its own rating, or assessment of how risky the investment is considered to be. The average rating of the bonds in our fund, for example, is higher than that of Estonian government bonds. In other words, investing in Estonian government bonds today is riskier based on ratings than placing money in the LHV Euro Bond Fund. Our fund is characterised by significantly low risk, while its potential for rate of return is much higher than, for example, a bank deposit.
What role could the LHV Euro Bond Fund play in an investor’s portfolio?
This depends entirely on the type of investor. For someone who wants to sleep peacefully at night and achieve stable rates of return, it could be an alternative. For an investor who is more actively seeking higher-risk investments, the LHV Euro Bond Fund can serve as a bridge solution – free funds can be held there, potentially earning more than simply keeping money in a bank account or even in a term deposit.
One drawback of term deposits is rigidity. In contrast, the LHV Euro Bond Fund offers flexibility, making it suitable, for example, for real estate investors. If an investor sees that there is a gap of a year or two between projects, the LHV Euro Bond Fund is a good alternative to consider, as it is essentially a good liquidity management tool. However, we emphasise once again that term deposits and bond funds are not directly comparable; with bond funds, one must account for higher risks. Overall, it can be said that the LHV Euro Bond Fund could, at some point, fit into the portfolios of quite a few investors.
Check out LHV’s Euro Bond Fund
This is not investment advice. The investment service provider is AS LHV Pank. Read the terms and risks at lhv.ee and consult an expert.
The LHV Euro Bond Fund is managed by AS LHV Varahaldus. Review the fund prospectus and key information at lhv.ee and consult an expert.
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