This Week's Focus: The risk of following the herd

This Week's Focus: The risk of following the herd


The risk of following the herd
At the peak of the crisis in the Euro, in 2012, the risk premium of government bond stood at 600 basis points and Spain had serious difficulties in placing their debt in the market. It was then speculated a bailout.

Spanish banks were forced to remunerate deposits high interest rates because they could not be financed in the capital markets normally and resources still needed in the process of restructuring and deleveraging.

After the "bank bailout" concentrations institutions, clearing balances under the FROB, the austerity measures and to have touched ground, the Spanish economy has not worsened. These circumstances favored by ultra loose monetary policy by the ECB, have returned interest rates to well below 2012 levels, have enabled debt issuance in the market at more favorable prices and terms to both Spain banks and capital requirements for institutions have reduced lending and consequently the need to attract more deposits.

The transfer of deposit funds in Spain
Since 2009, the Spanish banks have lost nearly half a billion euros in deposits.

As the deposits made in 2012, very profitable for the saver in relative terms, have been coming to maturity, the investor is faced with a dilemma: keep deposits at very low pay, below 1% or become investor and take more risk in exchange for a higher expected return.

Where has gone much of this money?

The assets in Spanish investment funds, that is, in the hands of national managers, has increased by more than 100,000 million from 2012 to the present. Specifically, since January 2013 there has been net subscriptions for more than 78,000 million euros.

Therefore, it seems clear that there is a transfer of money from bank deposits to funds, representing a greater assumption of risk by the more conservative investor.

So far this year, according to data available on Inverco, until May 2015 the fund categories that capture more money are mixed fixed income (Euro and International) with 16.407 million euros.

It is also noted that the categories of more conservative funds suffered net redemptions, so the shift to greater risk is notorious.

The bond funds mixed, as rated by Inverco, are those that can have up to a 30% equity exposure, plus up to 30% on currency risk in the case of mixed international fixed income.

Reasons that drive change
In addition to a search for higher returns for the investor who is not satisfied with the performance of deposits, also it shows that institutions may have some interest in this cash flow.

The costs of management and custody, and other expenses incurred by the participant, are high given the expected return of such funds. Obviously, given the low margins generated at present the traditional banking business of taking deposits for granting loans, the temptation to generate commissions via the conversion of savings in funds linked to the managing own banks is high. So it is not surprising that over 70% of net uptake accumulate 5 banking groups CaixaBank being who builds a quarter of new business generated in the year.

The 5 funds have attracted more money in the categories Mixed fixed income (both Euro and international), have largely cost ratios exceed 1.25% per annum. The following tables illustrate the cost and performance in the month.

Is it possible to stumble again with the same stone?
Negative returns in April of most funds Top 10 in terms of attracting savings, highlight the volatility that many of these quite averse investors face, although it seems contradictory, at risk. Surprisingly, while noting negative returns for the month, which could be a warning for their future behavior in a more volatile environment for fixed income and equity valuations demanding, they continued to receive significant deposits.

Of these 10 funds, only one ended the month with positive returns.

It is true that today pay little or no liquidity, but still does not give liquidity and losses. Taking positions in riskier investments, when the objective is only higher return, must be made aware that you are comfortable when the risk emerges. If not, better to be honest with yourself and keep deposits or fixed income assets in the short term, although profitability is poor. Do you remember the preference? I do, and 1994 when many Spaniards signed savers bond funds found that can get lost.