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Barça Bonds
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Barça Wins
While investing in the financial markets, as it is in the case of sports, past successes do not guarantee future success.
There are clear parallels between investing in Mutual funds and the football's team management. As a good manager, a coach must act proactively to ensure that his team always has the best players, the best market assets.
A few years ago we saw a similar case in Barça's team management made by coach Guardiola. Pep decided to get rid of Ronaldinho and leave the leadership of the team in the hands of a young Leo Messi. The coach, as a good manager, saw the changes necessary in order to improve the team's future performance.
The correct management of their players (assets), helped the club to reach the summit of the world of football.
Fixed Income Mutual Funds, as a baskets of bonds, have recently had a development almost as succesfull as FC Barcelona. A fund manager takes into consideration which are the bonds that must be integrated into each mutual fund to provide the best results.
A basic concept of each debt security:
Greater security of payment by the issuer = Lower profitability.
In the case of FC Barcelona, with those changes made by the coach, investors would see a safer future. So that the price of Barça Bonds would go up.
As one of the world's safest bonds, the German bond, Barça Bonds would offer lower returns at the end of the period.
How does it work?
As I said above, a Fixed Income Mutual Fund is a basket with multiple bonds. Bonds are one of the ways to materialise debt securities. They are used by private and governmental entities to finance themselves in the present, in exchange they will return the money in the future, with interest.
Operation of any type of debt:
Safer payment = Less risk = Bond's Price Rise = Lower profitability.
Example: 1 year bond.
Investors pay €100. One year later they will receive a coupon of €5 plus the initial capital, those €100. Thus we have a 5 percent bonus.
Bonus prices? Why Fixed Income is really variable.
After being issued, bonds will be traded in the market during a certain period (it can be one, five, 10 years). The owner of the bond can sell at any time.
Imagine you have a Spanish Government Bond with a value of €100, which pays a coupon of 5 percent per year. Then the interest rate will be that 5 percent. The state will pay those €5 at the end of the period.
So far so clear, but:
For example, consider what would happen if investors believe that there will be a rate cut by the ECB (or Barça hiring Iker Casillas). The demand for these bonds will increase and they will rise in price and will be worth (let's say) €110, so that those €5 of annual coupon won't represent 5 percent interest anymore, but 4.54 percent. It happened because investors prefer 5 percent bonds rather than the 4.5 percent of future bonds.
Thus, the following debt issues of the Bank of Spain will be made directly issuing bonds at €100 value with a coupon of €4.54 (which agrees with the market at that time). That represents a 4.54 percent interest. This will help state's coffers, already battered in times of crisis, to not empty more.
So we can say that Bond prices may be variable.
So, after those changes made by Guardiola, would you invest in the club?
If the club were to issue bonds, they would pay a very low interest rate. The entire club runs, wins titles, receives huge amounts of money from advertising due to its international success.
That would mean that security of paying their debt would be almost 100 percent.
If you do not want to take a risk, the answer is: YES.
More security = Lower risk = Lower interests. Barça would be a safe haven for investment.
Although we cannot actually invest in Barça Bonds, one of the possibilities with good potential worldwide are European Corporate Bonds.
Europe is in crisis, as was Barça before Joan Laporta was made president of the club. So Europe can also find a way out of it.
The European Central Bank is currently evaluating the possibility of lowering interest rates.
As investors, this is good news, and we can take advantage of this situation. We are seeing that outstanding bonds are currently more attractive than future ones, which will offer lower returns. This higher current interest favours the increase in value and, therefore, the increase in value of the Mutual Funds that invest in them.
Lluís Cònsul is the founder of Global Trader Investments, Ltd. He is an Independent Financial Analyst, Private Investment Manager and Blogger (click here to read his blog). He is a Graduate of Business Administration and Management, and PDD by IESE, and he is a Stock and Futures market expert across Europe, Asia and the US.
The views and opinions expressed above reflect those of the author. They are not intended as financial advice from Metropolitan nor do they necessarily express the views of the publisher.