Pedro GF received money from an inheritance at the beginning of 2021 and decided to go to his usual bank to see what he could do with it. He only set one condition: invest it in some very conservative product. At the office, and after passing the mandatory suitability test, they recommended the Bankia Soy Así Cauto fund. It was an investment vehicle that, in theory, only had very safe assets in its portfolio. He put 130,000 euros into the fund in June 2021. A year later, his investment was worth less than 100,000 euros and, even today, it has not reached the original valuation. “I feel like I’ve been fooled,” he summarizes.
Their story is that of hundreds of thousands of small investors who in 2021 had their savings in products that they thought would give them peace of mind. These were funds that invested most of their portfolio in sovereign public debt. And what happened to derail those investments? Inflation passed. An inflation that had not been seen in 40 years and that forced central banks to intervene and raise interest rates. That depreciated old bond issues and led to losses for thousands of funds around the world.
It was just three years ago when inflation began to run wild in the United States. The Federal Reserve (the central bank of the North American country) erred in its analysis by ensuring that it was “a temporary price increase” caused by the breakdown of supply chains after the pandemic. In June 2021, the increase in the price of goods was 5% year-on-year, but a year later the rate of increase was 8.6%. Furthermore, the problem crossed the Atlantic and spread throughout Europe. We had to act. The only way to combat it was to cool the economy by raising the official price of money. Between 2022 and 2023 the intervention rates went from 0% to 5.25% in the US and from 0% to 4.5% in the euro zone.
This restrictive monetary policy was felt even before it began to be implemented. When the managers began to be clear that rates were going to rise sharply, the reflection that spread was: who wanted to continue investing in bonds issued in previous years and that offered coupons of 0.25% or 0.5%? All fixed income, whether sovereign debt or corporate and banking debt, recorded a sharp drop in valuation. In 2022 there were more than 80,000 million euros invested in fixed income funds in Spain. One of the theoretically safest categories. During the year, the value of those funds fell about 8%. Something never seen. Already in 2023 they recovered 5%, but they are still below the levels of 2021.
The fund mentioned at the beginning of the article, now renamed CaixaBank Soy Así Cauto (after the absorption of Bankia by CaixaBank), had more than 5,000 million euros, but many of the investors left after the losses. However, the vehicle is still owned by 90,000 people, with more than 2.7 billion euros invested. In specialized internet forums people wonder what to do with it. “My father has had it for years and there is no way to recover the investment. I don’t know if it is better to sell it and take out a deposit,” explains user Romasi.
Still ‘underwater’
The Indexa Capital securities agency prepares a series of indices that synthesize the evolution of all funds registered in Spain. According to their calculations, the most conservative funds (1 out of 10 in risk level) are still 1.6% below the level they had three years ago. In the slang it is said that “they are under water.” The same happens with categories with a little more risk in the portfolio. Only from a risk level of 4 out of 10 do we begin to see a recovery, thanks to the fact that they are vehicles that have a part in the stock market, an asset that has done very well in the last 18 months. Unai Ansejo is CEO of Indexa Capital and co-founder of the firm. In his opinion, “there is still time for all conservative funds to return to maximum levels.”
The impact of the rate increases was especially felt by funds that were invested in longer-term fixed income. In some cases, they lost more than 10% from their peak levels. In the case of corporate debt funds, the correction exceeded 14%.
Within each category, logically, there are some products that have recovered the levels of 2021. This is the case of Mutuafondo (from the Mutua Madrileña manager), which has earned 0.95% annually in the last three years. Or the Buy & Hold Bonds vehicle, which has returned 1.91% on average in this period. The manager of the latter, Rafael Valera, does not believe that there has been a problem with the marketing of funds. “No, that hasn’t been. They were clients who did not want to see variable income even in paint. The problem has been that many products have been managed very poorly,” he summarizes.
The cognitive dissonance that conservative investors have suffered is that while they saw how the fund in which they were invested did not raise its head, fixed income became the fashionable asset. With interest rates rising, banks, insurers and fund managers have launched many new bond funds, offering investors returns of between 2.5% and 4% APR. But of course, that profitability is for new money.
Valera, who in addition to being a manager is CEO and founder of the Buy & Hold firm, considers that the prospects for fixed income in the coming months “are generally good.” Central banks are going to start lowering interest rates, and that will benefit bond portfolios. Now, “we will not see most funds of this type return to maximum levels until at least mid-2025.” That is, in total it will take four years for conservative investors to recover the money they put in before interest rates began to rise.
Four years, if the forecasts for rate cuts starting next month are met. However, it would not be the first time that the calculations fail. Already in 2022 there were those who said that the change in monetary policy was imminent, but stickier inflation than expected has caused experts to delay their reduction schedule on numerous occasions. If things get complicated, some may not get all their money back until 2026.
The most dramatic thing about this situation is that, although the profitability data has completely gone down the drain since mid-2021, the previous years were also difficult. It must be remembered that before the pandemic, at least in Europe, we lived in the age of zero rates, so conservative funds earned practically nothing. Thus, the BBVA Quality Inversión Conservadora fund has not earned anything in the last decade. According to data from Inverco, the Spanish association of fund managers, over the last 10 years, long-term European fixed income funds (one of the most important categories) have returned only 0.32% on average. annually (4% in 10 years), a return that is light years ahead of the accumulated inflation in this period, of 22.4%. All in all, a lost decade for the conservative investor.
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