Why ‘dead cert’ fonds en euros no longer a good bet
When it comes to where to put your hard-earned savings, the options look “challenging”.
They say “cash is king” but the current central bank interest rate stands at 0.0%, so returns are hardly royal. Given inflation is now around 1.85%, significant long-term losses are assured, losing around one-fifth of your buying power in the next 10 years.
You could always venture into the stock market and pick a few “dead cert” winners (to me, that is gambling – not financial planning).
There is a middle ground, to also buy some bonds, though long-term bonds hardly look attractive, with more government debt attracting negative yields (you pay them).
In France, however, there is another option, known as the fonds en euros, literally funds in euros. Unsurprisingly, this started as the fonds en francs and its origins are traceable back to 1818, when funds using assurance vie were endorsed by the state counsel.
These funds have stood the test of time, providing highly secure returns, above bank rates over the long term, since their inception.
So, how do the fonds en euros work?
Interestingly, they invest mostly in debt, be it government or corporate. That being the case, what makes them so very different to a typical bond fund, to the point where the provider is happy to underwrite the capital with its own assets? What is the secret magic?
Like most brilliant ideas, the answer is deliciously simple: never sell, ever, no matter what.
Essentially, there is no actual management of the fund, merely choosing what debt to buy and when. The only exit strategy is to wait until the debt reaches maturity – ie. the borrowers repay the debts – collecting the coupon/interest on the way. Naturally, the spread is very wide, thus any defaults have minimal impact.
This simple genius exists in few places in the world. Its simplicity means that assessing the future income is very straightforward, making them a great financial planning tool.
All we need to do to see the future is to look at bond yields and interest rates. Are you getting that sinking feeling yet? If not, refer back to the start of this article on interest rates and bond yields.
It is a mathematical certainty that these funds will go below water (charges on the fund will exceed the returns) at some point within the next few years.
The fonds en euros are not dead yet, but we should certainly be planning for their demise (at least a temporary one, as they will undoubtedly rise like a phoenix in future).
What, then, should you be doing now?
My opinion is no one with a long-term investment outlook should have all of their money invested this way. By that, I mean up to 10 years.
If you have all your money in this fund, it is probably because you worry about market volatility and would prefer to avoid it.
Until the last couple of years, this has been fine, but now that inflation is beating returns, it makes sense to do something else with at least some of the money. This means putting up with a certain amount of volatility.
Those with a long-term view are much less likely to sell when markets fall, realising losses, than those with a short-term view and this is absolutely essential to investment success.
I believe income should never be drawn from market-based investments, because markets will always bounce around.
Markets were volatile before Donald Trump started making market-moving statements and they will continue when he leaves office.
This means taking a long-term view. Ensuring forward years of income, in the form of guaranteed capital, still has a place, so the fonds en euros still have a use and may do for the next few years.
Their use, however, needs to be limited.
Doing a proper investment risk profile analysis is essential, working out what volatility levels you can tolerate to create a strategy ensuring that you have enough guaranteed capital to be relaxed.
The key to reducing volatility and avoiding risk of capital loss is to ensure that any market exposure is heavily diversified.
We have seen advisers push their clients out of the fonds en euros and fully into the markets with little in the way of planning.
Do not let anyone do this to you. No matter what anyone’s suggestion might be, never do anything that causes you to lose sleep at night. It is your money and your peace of mind that are at stake.
Given that you have, most likely, moved to France to improve your quality of life, it is worth ensuring that you hold on to both.
This column was written by Robert Kent of Kentingtons financial advisers. See www.kentingtons.com