Plus Sole 24 Ore 09/08/2022

IN PORTFOLIO
Give time to the choices made, if they are consistent they will help to recover

Hold or sell? There is no doubt about what to do for those who have bond instruments in their portfolio, whether they are securities or, alternatively, managed savings instruments such as mutual funds. The answer, according to the experts consulted on the subject, is the same: hold. In particular, remain faithful to your positions and investment choices if they were made respecting your investment profile and, above all, the right investment time horizon.

"Because, now more than ever," suggests Marco Galli, independent financial advisor, "the golden rule of holding bond securities to maturity must be respected, as only in this way does the invested capital remain absolutely protected. Of course, with low yields as we have seen and inflation rising again, there is a loss. But what is very important, especially for a retail investor, is to respect the consistency between the duration of the securities or funds in the portfolio and the investment horizon. If this is the case, I suggest making no changes and maintaining positions, otherwise the loss is certain." Of course, looking at the performance of bond funds since the beginning of the year (see the table on the page), the results for most categories are decidedly disappointing. Both products linked to government securities and those to corporate bonds only in very rare cases have shown a positive sign since the beginning of the year. This is the case for global bond funds, where the freedom of maneuver has allowed managers to remain in positive territory, probably by playing with currency and duration choices.

The reason?

For bond markets, the first half of 2022 was one of the worst semesters in history. First of all, extremely low valuations: yields at the end of 2021, declining for a decade, were at historically very low levels in all segments of the bond market, and the change in central bank monetary policies, which had to radically change the ultra-expansive policy of the previous decade (low rates and quantitative easing). The persistence of inflation (originating from Covid and amplified by the conflict between Russia and Ukraine) led central banks to change their communication, signaling their determination to do whatever it takes to bring prices under control; markets then began to price in a cycle of significant and rapid rate hikes.

"In general, for those holding instruments (bonds, ETFs, or funds) that invest in the bond market," emphasizes Francesco Messina, independent financial advisor, "it is currently appropriate to maintain your investments for three reasons. First of all, compared to the recent past, valuations are much more attractive; rates have risen significantly across the entire yield curve and in all major currency areas. There has also been a significant widening of credit spreads, so the premium you receive for investing in the corporate bond segment is now at historically attractive levels."

The second reason Messina highlights concerns the contribution of bonds in terms of diversification. Compared to 2021, when correlations between stocks and bonds were very high, in recent weeks high-quality bonds are returning to perform the diversification function they have historically had in portfolios. "In an environment that is beginning to fear recession much more than inflation," Messina adds, "yields on high-quality long-term bonds are starting to stabilize and in some cases to fall." Finally, the third reason is that signs are beginning to appear that the much-hoped-for inflation peak has already been reached. "Fears of a recession have already caused a collapse in commodities (from industrial metals to agricultural commodities and even oil)," Messina continues, "and markets are already pricing in that inflation will fall. As a result, the urgency to raise interest rates may diminish. All this could allow bonds (and therefore also bond funds, ed.) to recover ground."

For funds, one aspect should not be overlooked: they are instruments that often have high costs that reduce returns. Another precaution to follow is to be very selective about the instruments in the portfolio. The greatest risk is credit risk. That is why it is useful to avoid focusing on single issuers, as the probability of default will increase compared to the past, favoring diversified instruments that can benefit from the wide range of opportunities that the current context has created.

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