Bonds steal spotlight from once popular stock funds

Following the subprime crisis, capital markets worldwide have tossed and turned, went up and down and then further down, but most have finally picked up and are now busy making up for the losses.
At the Bucharest Stock Exchange (BSE) headquarters, the first half of 2008 is a reenactment of its poorest half-year performance back in 2000. Electronic boards gleam with red, indexes have fallen by as much as 40 percent since the beginning of the year, the capitalization is down EUR 7 billion and a comeback is nowhere in sight. Not this year, at least.
All this bad news is good news to the ears of bond funds’ administrators. Bullish risk-loving investors who used to put all their money into stocks or stock funds are now moving their sights onto less-risky bond funds. Few have made the switch completely and many have made it to balance their investments on BSE and diversify their now frail portfolios.
“We are actually dealing with a rebalancing between different kinds of funds and their corresponding risk levels. The years 2006 and 2007 have been marked by the growth in the importance of diversified funds and stock funds. This year is adding up to the low to medium-risk area, more precisely to monetary and bond funds,” said Dragos Neacsu, General Manager of BCR Asset Management.
He said BCR AM’s bond fund attracted some 1,500 investors in the second quarter of 2008 and now posts a bigger net assets value than the value posted by the entire bond funds segment at the end of 2007.
“The choice between stock and bond funds is currently influenced by the general reluctance toward the stock exchange, which has suffered significant losses. Unfortunately for investors, many of them return on the buy-side after the upward trend has settled in again and consolidated. They are thus losing part of the growth potential they would benefit from should they invest now, at attractive prices,” said Mihail Ion, President & CEO of Raiffeisen Asset Management, on local investors’ present behavior.
He added that factors external to the stock exchange also contribute to its fall-out with investors.
“The level of interest rates banks pay for deposits has grown a lot. This only accentuates investors’ preference for deposits to the detriment of shares or stock funds,” said Ion.
He referred to the fact that Romania's National Bank (NBR) upped the key rate for the seventh time over the past seven months to a “psychological” level of 10 percent. Faster than ever before, banks reacted to the central bank’s decision and upped interest rates on deposits by as much as a whopping 3.75 percent.
Interest rates on RON-denominated deposits for individual clients grew by several percentages, while interest rates on RON-denominated loans grew by a mere 0.1 – 0.2 percent in the quarter ending March this year.
Combined, market conditions and the stock exchange state of affairs widened the gap between stock funds and the new most-
popular of the mutual funds: bond funds.
In January, bond funds posted net cash inflows totaling RON 5.9 million, while stock funds reported net outflows of RON 5.3 million.
End-of-February yields have proven investors right. Bond funds posted positive results of up to 4.5 percent, while stock funds plunged as much as 20 percent. Looking at mutual funds’ market results, monetary and bond funds are top performers leaving their competitors under a thick layer of dust.
Stock funds are now at some 40-45 percent distance from bond and monetary funds as regards profits. Over the past six months, only two of the 14 stock funds have managed to stay under the minus 25 percent limit in losses. The hardest-hit, Raiffeisen Romania Actiuni, plunged over 40 percent over the same time-frame.
These significant drops in yields have caused investments in mutual funds in general to post negative results. Mutual funds have had an average negative yield of almost 15 percent in the past 12 months, according to data from broker Intercapital Invest.
Their negative performance is mainly caused by the average half-year yield posted by stock funds – minus 30 percent. This steep drop mostly parallels the plunge seen in BSE indexes, especially in the stock of the five once-money-making SIFs (financial investment companies).
Their index, BET-FI plunged by approximately 40 percent since the beginning of the year, while the entire BSE portfolio measured by the BET-C index lost close to 30 percent.
Fund managers and market analysts are pessimistic about the chances that stock funds will return atop the zero mark this year. Their doubt stems from the limited hopes of seeing BSE’s performance go up.
“The evolution of the local stock market is closely dependant on international evolutions, which will most likely be positive toward the end of the year. However, the chances of seeing positive yields for the entire year 2008 are very slim for shares and stock funds,” said Ion.
As a direct consequence of that, investment fund managers are restructuring their portfolios to illustrate investors’ new found interest in less riskier instruments.
“At present, our portfolios have a smaller percentage of stocks in order to mitigate the losses.
This time last summer, shares’ weight in our portfolios was above our long-term target to the detriment of deposits in order to capitalize on the (BSE) growths,” said Ion. He added that Raiffeisen funds have also started to rely more on investments on external markets which outperformed the internal market. “Our investments are channeled to emerging markets which were widely supported by positive corrections in the price of raw materials (like oil), gold, etc.,” said the RAM president.
Ion noted that investments on the secondary market Rasdaq have a limited importance in the company’s funds, as liquidity conditions do not favor such exposures.
Furthermore, blue-chips post attractive prices right now which are hard to pass by, especially since the risks attached to large caps are smaller.

By Ana Maria David