The bank locks the client into funds with a yield of 2% at lower rates | Financial markets

Target return funds were one of banking’s star products last year and will also appear on the banking storefront in early 2024. Therefore, now is the time for clients to try to secure the highest possible profitability before the rewards for their savings diminish.

In this sense,…

Target return funds were one of banking’s star products last year and will also appear on the banking storefront in early 2024. Therefore, now is the time for clients to try to secure the highest possible profitability before the rewards for their savings diminish.

In this sense, target return funds offer a non-guaranteed expectation of profitability, which serves as a hedge against the volatility that may arise in the market (as the coupon of the bonds in which it is invested expires, but it also leaves the investor in the dark about potential returns. that fixed income can bring.

Target return funds ended 2023 with assets of €20.557 million, up 83% for the year, according to industry association Inverco. To a large extent, they were a banking alternative to the rise of Treasury bills, a way to attract clients to funds at a time when interest rates were rising and attractive expectations of profitability could be offered before expiration.

2024 starts at the opposite point, with interest rates expected to fall. In this scenario, new offerings of funds of this type offer returns of just over 2% per annum for a period of more than two years.

Santander offers 2.5% APR for 11 months, while Sabadell offers 2.23% APR for almost three years.

Such is the case with the target return funds that Santander and Sabadell registered this month, albeit with different maturities. Santander has launched a fund of this type for a term of 10 months with a guaranteed annual interest rate of 2.75% and another for an eleven month term with an uninsured annual interest rate of 2.5%.

Currently, the yield on one-year Treasury bills is above 3.3%. In investment funds, this non-guaranteed return must be deducted from the costs of the vehicle, including management fees, which in the case of Santander products are estimated at 0.58% and 0.64% respectively.

Subscribing to a target return fund will allow you, at maturity, to lock in the performance of the assets you invest in after deducting fees. Investors should note that current yields on fixed income assets are expected to decline in the coming months as the market’s expected lower interest rate scenario materializes. Now is the time to secure the highest possible profit before such a reduction occurs.

But in addition, the prospect of lower rates will also allow the fixed income investor to take advantage of the subsequent rise in prices, which will bring with it potential capital gains that cannot be achieved in target return funds, where the profit is indicated by the reward when the bond in which the fund invested is redeemed, without further ceremonies.

Thus, investing in long-term fixed income will require taking into account the expected effect of rising bond prices in a falling interest rate market, making the decision to invest in an income fund more delicate.

Banco Sabadel offers a target return fund with a maturity date of November 2026 and a non-guaranteed return of 2.23% per annum. The investor could record the capital gains that would have been realized over the life of the fund if he had paid them out in advance. But these types of funds are not open ended, they are designed to stay until maturity. They have liquidity windows – the 20th of every three months in the case of the Sabadell fund – during which there are no redemption fees.

Outside of this time, the organization applies a 2% chargeback fee, which virtually eliminates the profit from the product. Sources at the bank acknowledge that target return funds will be a fringe commercial offering this year and that the strategy will focus on targeting clients with medium-term fixed income funds that can squeeze income potential to a greater extent. From Santander AM they note that “given expectations of rate cuts throughout this year, the trend throughout the year will be to lengthen the time frame to achieve these efficiencies and offer our clients attractive rates of return over a longer period.” time.”

Managers also warn that the market is expecting rate cuts to be too aggressive and that if they are not met with the expected intensity, a correction could occur that could lead to some losses. Targeted return funds will only be a commercial option in the first half of the year until the rate cut horizon becomes clearer.

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