In the past couple of years, Alvaro Martín Sauto has not just been busy riding the waves of the markets and picking the best funds; he has also spent a great deal of time trying to convince his clients to move away from government bonds towards investments with greater volatility and better long-term return prospects.
“We have been telling our clients for a year now that they should be cutting investments in sovereign yields in Europe, and they have done that to some extent,” he says.
|Alvaro Martín Sauto began his career as a private banker at Barclays in 1997, before starting to manage portfolios himself. He switched to the funds of funds side when moving to Caja Madrid in 2002. In 2011, he was appointed head of funds of funds and absolute return at Bankia. Martín Sauto is also responsible for third-party fund selection, managing a total of €4.5bn in assets. He is also a member of Bankia’s asset allocation committee.|
But unfortunately for the Spaniard, government bonds have performed incredibly well this year. “Our clients came back to tell us we were wrong. They have convinced themselves that government bonds are good investments. But clients don’t realise they are now much more exposed to duration risk because there is no yield left to act as a cushion when rates rise.”
Following the increased market volatility at the start of the year, the cautious diversification efforts of Martín Sauto’s clients have come to a premature halt. In 2015, they had been shifting money to multi-asset funds. But these flows have reversed this year, as Spanish investors now prefer short-duration bond funds.
“The garantizados have been the real blockbusters this year,” says Martín Sauto. These products are fixed-term deposits with a guaranteed return, and are usually invested heavily in government bonds. They offer high, guaranteed interest rates and consequently became incredibly popular with risk-averse Spanish investors.
Steep learning curve
“Until 2013, clients were used to deposits yielding 4% without any volatility. But since government bond yields have come down so much, they will now only earn 0.2% or 0.3% for seven years,” he says.
“The learning curve for our clients has been steep over the past year, as they were coming from deposits. But it has been a good year for them to learn how markets can evolve, and one that came without the cost of another ‘2008 experience’. Their mentality is changing, and I’m positive about this.”