‘Guaranteed funds are a more reasonable bet than Treasury bills’

 Beatriz Ranea, a fixed income manager at MAPFRE AM:

Fixed income experienced one of its worst years in history last year. How is 2023 shaping up?

Indeed, in 2022, central banks’ actions to control inflation led to sharp rises in interest rates. On the flip side, this also enabled fixed income to reclaim its traditional function in diversifying portfolios, yielding returns that are once more in competition with equities, following a decade of exceptionally loose monetary policies and “zero” or negative interest rates.

This year, alongside the inevitable volatility, the prevailing question has been whether inflation has reached its highest point, and consequently, whether interest rates will continue their ascent or remain at that level, and for how long before they start to drop.

How is this interest rate environment affecting fixed income? What is the best strategy in this environment?

During the first half of the year, fixed income assets, especially those with higher risk, recovered part of the losses of the previous year. This was despite the volatility caused by geopolitical factors and the turmoil in the banking sector last April. Consequently, we have seen instances of corporate debt outperforming comparable sovereign debt.

Yet, as the year draws to a close, with core inflation showing no signs of diminishing and macroeconomic data giving mixed signals for growth, we are facing further widening of yields.

In this changing environment, we would position ourselves around neutral durations and favor short to medium maturities, where there is more value now that yield curves are flat or inverted.

Within public debt, what is most attractive? What about corporate debt?

In public debt, I would look at core countries with lower debt-to-GDP ratios. In corporate debt, there is still value in financial entities, which suffered more than non-financial entities in 2022. The incident that occurred in April of this year, involving the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank in the US, and the resolution of Credit Suisse, illustrated that the likelihood of contagion is minimal. Since the 2008 financial crisis, balance sheet repair has been done well in many cases, regulators are more vigilant, and capital levels are adequate. Within non-financial entities, the tightening of financing conditions and the risk of an economic slowdown should take their toll. I would look for quality companies with strong balance sheets and the ability to generate stable earnings throughout the economic cycle.

As a result of the rise in interest rates, guaranteed funds have become attractive again. Are these an attractive option? If so, for what type of investor?

Yes, they are attractive. Investors who hold to maturity are assured not only of recovering the full amount of their initial investment but can also earn an additional fixed or variable return, depending on the product. At Mapfre, we work with both modalities, and we not only structure guaranteed investment funds, but also guaranteed pension funds, which are a good way to increase capital for savers who are close to retirement or who, even if they have time left, have less saving capacity or want to be more prudent.

While there is a notable enthusiasm for investing in Treasury bills, are guaranteed funds, money market funds, or short-term funds not genuine alternatives?

That is true. Investment in treasury bills has soared this year among individual investors. On the other hand, in my opinion, it makes more sense to secure these levels of return over longer terms, for example, by investing in a guaranteed fund. I do not believe that these rate levels can be sustained for a significant period of time, so now is a good time to invest in funds that lock in these rates.

MAPFRE is betting on guaranteed funds at attractive rates. Will we continue with this strategy? How is the product being received?

These products are very well received. We will certainly try to continue to meet this demand without neglecting our other funds, where we also have a very wide range available for our clients.

To close our conversation, what is your outlook for the bond market?

I think that rates may remain at high levels for some time, but not too long because this will undoubtedly weigh on the refinancing of both companies and governments. The landing ahead is likely to be less soft than central banks initially expected, and we should not forget that we are still in the midst of geopolitical risk. In an environment of economic slowdown, fixed income could perform better than other assets, but, as I mentioned before, I would continue to be selective both in terms of maturity and risk for now.