Spain’s Top-Ranked Money Manager Buys Long-Maturity Bonds on QE

By Macarena Munoz and Todd White

Spain’s best-performing fund with more than 500 million euros ($579 million) under management is buying longer-maturity bonds of Iberian governments to prosper from potential European Central Bank purchases.
Francisco J. Simon, the 36-year-old money manager at Santander Asset Management Espana in Madrid, is veering from his benchmark to incorporate 15-year Spanish and Portuguese sovereign debt. After his fund’s returns beat all peers in 2014, his strategy for 2015 is to bet ECB quantitative easing will boost those securities more than shorter-dated notes.
“Where I see the most potential profit from QE is especially in Spanish seven- to 10-year bonds, as well as in 12s, 15s and up to 30s,” Simon, who runs the Santander Renta Fija mutual fund, said in an interview in Madrid. He sees yields on euro-area peripheral bonds converging with those on government debt of core euro-area countries.
Money managers are taking positions before
the ECB’s policy meeting on Thursday, when the central bank will announce plans to buy sovereign bonds, according to 93 percent of economists surveyed by Bloomberg News. President Mario Draghi will signal purchases of 550 billion euros, according to the median estimate of respondents.
The Banco Santander SA (SAN) product had the highest return in Spain among the largest mutual funds, including stocks, last year, according to data from Spanish fund association Inverco. It earned investors 9.6 percent in 2014, after fees, in its retail class, and has almost 2.4 billion euros in assets in the five classes it has for various types of investors.

Convergence Process

Simon’s purchases go beyond the benchmark that he uses to monitor performance, the Bank of America Merrill Lynch 1-10 Year Spain Government Index. He sees the extra yield investors demand to hold 30-year Spanish bonds instead of 10-year debt narrowing to 100 basis points, or 1 percentage point, this year, from 131 basis points currently. It will shrink toward the corresponding spread for Germany’s bonds, he forecast.
Last year, Spanish government debt maturing in 10 years and longer returned 35 percent, beating the 11 percent return of Simon’s benchmark, according to Bank of America Merrill Lynch indexes.
“This convergence process is here to stay,” he said in the interview on Jan. 16. “The ECB goal is that the result of its decisions would be the same in all countries.”
Spanish 10-year yields were little changed at 1.51 percent as of 9:22 a.m. London time, after touching a record-low 1.47 percent on Jan. 19. The price of the 2.75 percent bond due in October 2024 was at 111.175 percent of face value.

Yield Spread

The additional yield investors demand to hold Spanish 10-year debt over equivalent-maturity German bunds was 107 basis points. The yield spread narrowed to 97 basis points on Jan. 2, the least since May 2010.
Spain is selling benchmark 10-year bonds via banks to yield about 94 basis points above the midswap rate, according to a person familiar with the matter, who asked not to be identified because they weren’t authorized to speak publicly.
Simon sees Portugal also benefiting from the ECB programs and says the possibility of Greece leaving the euro after elections on Jan. 25 is very low.
“Greece affects less and less the market,” he said. “There can be volatility, but a catastrophic scenario has very low probability. The train is not going to derail.”
When all Spanish funds, including those managing less than 500 million euros, are taken into account, the best performer last year was Banco Cooperativo Espanol SA’s Rural Tecnologico Renta Variable (RURTECR), with a 33 percent return, followed by the Privat Salud, with 31 percent, according to Inverco’s data.