The Long Winter of Conservative Investors: Three Years of Waiting to Get Their Money Back | Financial markets

Pedro GF inherited money at the beginning of 2021 and decided to go to his usual bank to see what he could do with it. He set only one condition: to invest them in some very conservative product. The office, after passing the mandatory aptitude test, recommended the Bankia Soy Así Cauto fund. It was an investment vehicle that theoretically had only very safe assets in its portfolio. In June 2021, he invested €130,000 into the fund. A year later, his investment was worth less than 100,000 euros and even today has not reached its original valuation. “I feel…

Pedro GF inherited money at the beginning of 2021 and decided to go to his usual bank to see what he could do with it. He set only one condition: to invest them in some very conservative product. The office, after passing the mandatory aptitude test, recommended the Bankia Soy Así Cauto fund. It was an investment vehicle that theoretically had only very safe assets in its portfolio. In June 2021, he invested €130,000 into the fund. A year later, his investment was worth less than 100,000 euros and even today has not reached its original valuation. “I feel like I’ve been deceived,” he sums up.

Their story is the story of hundreds of thousands of small investors who in 2021 put their savings into products they felt gave them peace of mind. These were funds that invested the majority of their portfolio in sovereign debt. And what happened that derailed these investments? Inflation has passed. Inflation that had not occurred for 40 years forced central banks to intervene and raise interest rates. This rendered old bond issues worthless and led to losses for thousands of funds around the world.

Just three years ago, inflation in the United States began to skyrocket. The Federal Reserve (the North American country’s central bank) was wrong in its analysis, claiming that this was a “temporary price increase” caused by supply chain disruptions in the wake of the pandemic. In June 2021, commodity price growth was 5% year-on-year, but a year later the growth rate was 8.6%. Moreover, the problem crossed the Atlantic and spread throughout Europe. We had to act. The only way to combat this was to cool the economy by increasing the official price of money. Between 2022 and 2023, intervention rates increased from 0% to 5.25% in the US and from 0% to 4.5% in the eurozone.

This restrictive monetary policy was felt even before it was implemented. When it became clear to managers that rates would rise sharply, the spread was as follows: Who wanted to continue investing in bonds issued in previous years that offered coupons of 0.25% or 0.5%? All fixed income, be it sovereign debt or corporate and bank debt, fell sharply in value. In 2022, more than €80 billion was invested in fixed income funds in Spain. One of the theoretically safest categories. Over the year, the value of these funds fell by about 8%. Something never seen before. Already in 2023 they recovered by 5%, but still below the 2021 level.

The fund mentioned at the beginning of the article, now renamed CaixaBank Soy Así Cauto (after the takeover of Bankia CaixaBank), had more than 5 billion euros, but many investors left after losses. However, the car is still owned by 90,000 people, with more than 2.7 billion euros invested in it. On specialized Internet forums, people are wondering what to do about it. “My father has owned it for many years and there is no way to get back the investment. I don’t know if it’s better to sell and take a deposit,” explains user Romasi.

Still “underwater”

The securities agency Indexa Capital is preparing a series of indices that synthesize the dynamics of all funds registered in Spain. According to their calculations, the most conservative funds (1 in 10 by risk level) are still 1.6% below the level they were three years ago. The slang is that “they’re underwater.” The same thing happens with slightly higher risk categories in the portfolio. It is only from the risk level of 4 out of 10 that we start to see a recovery due to the fact that these are funds participating in the stock market, an asset that has performed very well over the last 18 months. Unai Ansejo is the CEO of Indexa Capital and co-founder of the company. In his opinion, “all conservative funds still have time to return to their highs.”

The impact of rising rates was particularly felt by funds invested in long-term fixed income bonds. In some cases they have lost more than 10% from their peak levels. In the case of corporate debt funds, the correction exceeded 14%.

It makes sense that within each category there are several products that have returned to 2021 levels. This is the case of Mutuafondo (from the manager of Mutua Madrileña), which has earned 0.95% annually over the past three years. Or the Buy & Hold Bonds instrument, whose return during this period averaged 1.91%. The latter’s manager, Rafael Valera, does not believe that there is a problem with the sale of funds. “No, that didn’t happen. These were clients who did not want to see variable income even in paint. The problem was that many products were managed very poorly,” he concludes.

The cognitive dissonance facing conservative investors is that while they have seen the fund they were invested in not rear its head, fixed income has become a fashionable asset. With interest rates rising, banks, insurers and fund managers have launched a slew of new bond funds, offering investors returns ranging from 2.5% to 4% per annum. But, of course, this profitability comes with new money.

Valera, who in addition to being a manager is CEO and founder of Buy & Hold firm, believes the outlook for fixed income in the coming months is “generally good.” Central banks are about to start cutting interest rates, and this will benefit bond portfolios. Now, “we won’t see most funds of this type returning to maximum levels until at least mid-2025.” That means, in total, it will take conservative investors four years to get their money back before interest rates start to rise.

Four years, if forecasts for rate cuts come true, starting next month. However, this is not the first time that calculations have failed. As early as 2022, there were those who said a change in monetary policy was inevitable, but higher-than-expected inflation led experts to repeatedly delay the tapering schedule. If things get complicated, some may not get all their money back until 2026.

The most dramatic thing about this situation is that, although profitability data has completely disappeared since mid-2021, previous years were also difficult. We must remember that before the pandemic, at least in Europe, we lived in an era of zero rates, so conservative funds earned practically nothing. Thus, the BBVA Quality Inversión Conservadora fund has earned nothing over the past decade. Over the past 10 years, long-term European fixed income funds (one of the most important categories) have returned on average just 0.32% per annum (4% over 10 years), according to Inverco, the Spanish association of fund managers. , a return that is light years ahead of the accumulated inflation of 22.4% over this period. All in all, a lost decade for the conservative investor.

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