At inbestMe, we currently offer a full range of Bond Portfolios. By this we mean a portfolio that is made up of 100% fixed-income instruments. Previously, bonds were used in our portfolios primarily to diversify equity risks and a 100% bond portfolio was allocated only to very conservative investors.
Following the rise in official interest rates and yields in recent years, we have seen renewed interest in investing in bonds from our clients, and not just from those who are very risk-averse. This has prompted us to complete our bond portfolio offering.
In November 2022, we launched savings portfolios that are built with money market instruments and have proven to be a perfect instrument for parking liquidity when rates rise without having to incur price declines, as happens with other bonds. When interest rates rise, bond prices fall and, the longer the bond maturity, the greater the loss in terms of prices. This does not happen with money market funds because they have an extremely short duration.
As interest rates began to stabilise, we introduced a Conservative Bond Portfolio as a new alternative for the more prudent investor, composed entirely of high credit quality bonds, which allowed the client to invest in instruments with a slightly longer duration, but with a still very low risk.
We then added a Aggressive Bond Portfolio, designed for investors who prefer fixed income but are willing to take on greater risk. With a longer duration and higher expected return, this portfolio offers a more dynamic alternative within the fixed income universe.
In summary, we now have three portfolios made up of fixed-income instruments:
- Savings Portfolio: designed to maintain liquidity or an emergency fund and obtain a return close to official rates, with extremely low volatility.
- Conservative Bond Portfolio: to invest in bonds with short maturities and limited interest rate risk.
- Aggressive Bond Portfolio: to invest in bonds with more risk, but with a higher expected return.
Investors should expect very different performance from these portfolios.
In the Savings Portfolio, interest accrues at a rate almost equal to the official interest rates set by central banks. Movements are very gradual and volatility is extremely limited. The “risk” is that these rates will fall and interest will accrue more slowly, but there is no price risk, given the inverse relationship between yields and prices.
The Conservative Bond Portfolio shows higher volatility than the Savings Portfolio, although it is contained, while the Bold Bond Portfolio is for investors who can tolerate higher volatility (but still lower than that of stocks). For this greater risk assumed, they are rewarded with a higher expected return in the long term.
The different price behavior is clearly shown in the following charts, which show the evolution of the three types of portfolios, in euros and in US dollars, from 09/15/2023 to 12/31/2024:
Why should an investor invest in the Aggressive Bond Portfolio, which is more volatile in price?
Essentially, higher risk means higher expected returns. Moreover, now that central banks have started to lower policy rates, this more daring portfolio has a longer duration and will benefit more if yields fall in the future. If, on the other hand, yields rise, the interest received annually will provide a kind of buffer against price losses.
Returns of Bond Portfolios
The year 2024 has been a difficult period for long-dated bonds. It has been better for short-term bonds. Despite this, all our portfolios ended the year in positive territory, as can be seen in the following table with returns for the Euro portfolios in the year of 3.4% (Conservative Bonds) and 4.3% (Aggressive Bonds) with interesting historical CAGRs of 4.3% and 6.5%, accumulating 5.7% and 8.5% respectively:
In dollars, returns this year have been 4.6% (Conservative Bonds) and 2.2% (Aggressive Bonds) with historical CAGRs of 5.4% and 6.6%, accumulating 7.1% and 8.6% respectively.
Apéndice: breve explicación de las métricas de la tabla
- Cumulative return: total return obtained in the mentioned time interval.
- APR: total return obtained in the mentioned time interval in annual terms.
- YTD return: return obtained so far in 2024.
- Volatility: annual volatility of daily returns.
- APR/Volatility: expresses the annual return per unit of risk.
- IRR: internal rate of return. In English it is known as Yield To Maturity (YTM). It is the weighted average return of the bonds contained in the portfolio, on a specific date.
- Duration: sensitivity of the portfolio to the variation in returns. The duration shows approximately what the variation in the price of the fund would be for a 1% variation in returns. The higher the number, the more sensitive the value of the fund will be to movements in returns.
