The offer of bonds on the Czech market is wide and completely confusing for the retail investor. Therefore, those who are considering investing in bonds have the opportunity to do so through bond funds, which is probably the most acceptable form. However, the vast majority of bond funds denominated in Czech crowns have posted negative returns over the past year, which is exacerbated by high inflation. Those who bet on a fixed-term deposit at this time have probably been better off, although even in this case rates are well below inflation.
On the other hand, we may be on the cusp of a time when investing in koruna bonds will be attractive, as the new composition of the CNB's bank board suggests that rates in the Czech Republic could stabilise and perhaps even fall in a few months' time. How do bond funds actually work? Like any fund, a bond fund is an instrument of so-called collective investment. This means that the saver does not put his money directly into the asset (i.e. he does not buy the bond directly), but into a fund that then buys the bonds on his behalf. This has several advantages, such as the ability to invest even small amounts, or a certain amount of carelessness because the fund does everything for you.
On the other hand, you need to monitor how the value of your bond fund holding is evolving from time to time. It determines whether the amount you invest appreciates (i.e. whether your investment grows) or depreciates (i.e. whether you lose money). This depends on many factors. First and foremost, the development of interest rates in the economy, which are mainly influenced by the central bank. If rates rise, bond prices in the market fall, and so does the value of the fund you have invested in. If rates rise, the opposite is true.
That is, in the short term. In the long term, another factor plays a role, namely the yield on the bonds (i.e. the interest paid by the bond issuer) held in the fund's portfolio. And this increases as interest rates rise.
The easiest way to invest in a bond fund is through one of the banks. In fact, most of them manage such a fund. You can invest in the fund as a one-off or on a regular basis. And depending on the type of fund, you should also set the time horizon for which you are investing. For conservative bond funds, it is better to allow for a horizon of a few years, as these funds invest in lower risk bonds (usually government bonds), so the annual return will also be lower. The opposite, of course, applies for funds investing in corporate or high-yield (speculative) bonds.
In any case, it is up to you when you want to sell your shares in the fund. The bank you bought them from will buy them back from you. The difference between the sale price and the purchase price is then your profit or loss.
You will also pay a fee for arranging the purchase. This is based on the tariff of each bank offering this type of trade, and the fee is usually between 1 and 1.5 percent for bond funds. If you require brokerage for an investment in funds not managed by your chosen bank, the fee is higher. If you invest regularly, such as monthly, the fees are reduced accordingly.
To describe the current situation on the bond market, we have selected the offer of koruna bond funds of the four largest banks on the domestic market: Česká spořitelna, ČSOB, Komerční banka and the banking house Moneta Money Bank. Only two of them had at least one koruna bond fund that would have brought a positive return to the investor in the last year. However, the vast majority of these funds carry a "minus" sign in front of their rate of return. If inflation is taken into account, none of these funds has been able to secure an appreciation of the amount invested. In all cases, therefore, the nominal appreciation (or depreciation) is shown, and this is without bank charges.
Overview of yields of selected bond funds
The largest domestic bank (in terms of number of clients) offers a total of 11 koruna bond funds. Only one of them showed a positive appreciation, but only since the beginning of this year, namely 0.49 percent. It is a Sporoinvest fund that invests in very short-term assets. If we take into account the profitability for the past year, Sporotinvest is again the best, but it already shows a yield of -0.36 percent. The worst investment was the Erste Bond Danubia VT fund, which reported a return of -22.56 percent since the beginning of the year and -28.38 percent* over the past year.
The second-largest banking house on the Czech market has 6 koruna bond funds on offer. In the last 12 months, two of them have managed to earn positive interest. The ČSOB Premiere fund performed best with an annual yield of 1.55 percent. This was followed by the ČSOB Short-term fund, with a yield of 0.96 percent. Since the beginning of the year, ČSOB Premiere has appreciated by 1.3, ČSOB Short-term by 0.88 percent. On the other hand, KBC Renta Czechrenta and KBC Renta Czechrenta DIV had the worst performance with a yield of -14.48 percent. *
Komerční banka has the largest offer of koruna bond funds among the four largest banking houses in the Czech Republic. It is possible to invest in a total of 18 funds. However, none of them managed to bring its investors a positive return in the past year. Amundi Funds Euro High Yield Short Term Bond performed the best, with a return of -1.62 percent over the past year. Although it has appreciated by more than one percent in the last month, it has been down 2.34 percent since the beginning of the year. The worst performer was the Amundi Funds Emerging Markets Local Currency Bond, whose annual return over the past 12 months was -15.82 percent. Year-to-date this year, it is -8.28 percent and +2.58 percent* over the past month.
Moneta Money Bank
The fourth-largest bank in the domestic market offers eight bond funds. The best appreciation for the past year was reported by the Generali Fund conservative, at -3.37 percent. Since the beginning of this year, investment in this fund has "shrunk" by 1.54 percent. At the other end of the scale is NN (L) International Czech Bond, which invests mainly in Czech government bonds. Over the past year, its value has fallen by 17.17 percent, and it has lost 11.45 percent* since the beginning of the year.
Tomas Kolomaznik, financial analyst of BCM company
* Past performance is no guarantee of future results.Go back
The content of this material constitutes marketing communication and should not be considered as any type of investment advice and/or investment research and/or a solicitation for any transactions. This material was prepared for informational/educational purposes only and does not imply an obligation to perform investment transactions nor does it guarantee or predict future performance. BCM Begin Capital Markets Cy Ltd and its relevant persons including affiliates, agents, directors, or employees do not guarantee the accuracy, validity, timeliness, or completeness of any information/data provided by third parties and assume no liability for any loss arising from any investment made based on the said information/data. Past performance is no guarantee of future results.