Slashing fees
But even a fund that will perfectly limit drawdowns and outperform its benchmark consistently with low volatility could be ineligible, especially if it invests in government bonds. “With bond yields having come down this much, we are evaluating our fixed income investments to see whether we should continue to invest in these funds and, where possible, we try to lower the fees,” he says.
Martín Sauto recently considered investing in an active short-duration government bond fund with “a global asset manager”. He liked the fund but there was one obstacle: the manager was charging a fee of 35 basis points, which not so long ago would have looked reasonable. “But with bond yields this low, we told them we couldn’t buy the fund for that fee. We entered into a discussion and agreed in the end to pay just eight basis points for a specific amount of money we committed to the fund.”
Fees have become key for the Spaniard, because most short-duration government bonds have negative or only marginally positive yields these days, meaning fund fees impact disproportionately on returns.
Another way one can respond to this is by switching to exchange-traded funds. Bankia has invested some money in fixed income index trackers, but only up to 10% of the total portfolio. After all, allocating money to bond trackers might bring down costs, but it doesn’t solve the core problem of low yields. “The investment-grade index we track [the Lyxor Euro MTS 35/57] is yielding negative at the moment,” he says.
And ETFs are not Martín Sauto’s cup of tea anyway. “We only use ETFs in markets where there are not a lot of active managers available, such as a very specific equity index. Or we use it for tactical allocation purposes if we want exposure to a specific index. But we primarily execute our asset allocation view through active managers.”
A measure of last resort
The Spaniard is contemplating holding more money in cash, but he has not yet done so. “We prefer to hold client money in current accounts than with active managers who invest in bonds with a negative yield,” he says. As the ECB’s deposit rate is currently negative, institutional investors tend to be charged to deposit cash, but Martín Sauto luckily avoids this problem.
“Bankia doesn’t charge us anything for depositing cash, treating us as if we were retail investors,” he says. “If we were to deposit our money in another bank, we would probably be charged.”
Having mitigated the adverse impact of negative rates, Martín Sauto is focusing on the immediate challenge of educating his clients to shoulder more risk. And he is confident his mission will succeed. “Our clients will realise in six months that they are not making any money with their [risk-free] garantizados, and they will want to come back into the market.”
