Over 40% of Spanish mutual funds come with capital or performance guarantees, and parent banks and cajas are having to make good on their promises.
"You have to look at what they hold. A lot only have Spanish stuff and their own commercial paper," says Maria Gomez Vega of Lipper. BBVA has two large funds with total assets of €1.67bn. They mature in July and in September 2013. At the end of Q1, an Andalusian municipal bond made up more than one quarter of the BBVA Fondos Extra Tesoría fund.
Portfolios managers may face problems if they attempt to reorganise their portfolios mid-term. If they reshuffle portfolios now to avoid risks and potential defaults, they take a performance hit by selling positions in a deteriorating market. If they sit tight, they must hope individual bonds are paid in full and on time.
Garantizado sales are suffering on the back of press warnings and poor investor sentiment. Net outflows for fixed and variable rate guaranteed funds were €426m in May, according to Inverco, bringing the year-to-date total to over €1.1bn. Big outflows occur at maturity or in interim exit windows offered on funds If investors stay put until maturity, guarantors may face increased payouts if Spanish debt continues.
"Banks don't have other options than to face the guaranteed payment when this miss targets," says Javier Sáenz de Cenzano (pictured), director of fund analysis at Morningstar Spain.
Nevertheless, Sáenz de Cenzano maintains garantizados remain a lucrative business for distributing banks and cajas. But he adds: "For some investors they might be adequate, but the huge amount of money they attract does not make sense."