Discover the best fixed income index of the year and the last decade – 03/11/2023 – From Grain to Grain

Fixed income investors have two concerns: to beat the CDI and the IPCA. Most of the time, the main goal is to beat the first indexer. This objective is not wrong, as the CDI has only lost to the IPCA for two years in the last two decades. However, there is a strategy to beat the IPCA, as well as raise the possibility of also beating the CDI.

The term “index” is commonly used when talking about stocks. We are used to the Ibovespa, the main Brazilian stock index, or the S&P500, which is the American equivalent.

Although they are not much commented on, in fixed income, there are also some indices. One of these fixed income indices stands out in terms of return and risk.

The IMA-B5 is the index formed by federal government bonds referenced to the IPCA with maturities of less than five years.

Titles referenced to the IPCA have fallen into disbelief by investors since the middle of last year with the sharp drop in the IPCA. Also, the recent sharp rise in the CDI favored this index to the detriment of the inflation-linked indicator.

However, be careful when disregarding IPCA-referenced investments in your portfolio.

At the beginning of the year, the IMA-B5 has already appreciated by 3.5%, while the CDI has risen by only 2.4%. In the last decade, an investment that accompanies the IMA-B5 yielded the equivalent of 10.6% per year, while the CDI appreciated the equivalent of 8.8% per year.

Therefore, investments referenced to the IMA-B5 yielded 120% of the CDI in the last 10 years. In addition to having exceeded inflation, measured by the IPCA, by 176% in this period.

When the observation window starts in 2004, the IMA-B5 advantage is even greater.

It earned 143% of the CDI over the entire period of the last 19 years. In this period, only in 3 of the years did the IMA-B5 lose to the CDI. But, as we never invest exactly at the end of the year, we will analyze it in 52-week windows, that is, 12 months.

The chart above shows the evolution of the return on the CDI and the IMA-B5, in 52-week windows. There are 966 windows in total for the entire period since 2004.

Note that in just a few moments, the return of the IMA-B5 is lower than that of the CDI. Of the total mentioned above, only in 235 periods of 52 weeks was the IMA-B5 below the CDI. That is, in 75.67% of the times the index referenced to the IPCA beat the CDI.

But the best part comes now. We are right in a window of opportunity.

When the investment in the IMA-B5 is made at times when it is losing the CDI, the chances of earning a year ahead increase significantly. As can be seen in the graph, we are in just such a moment.

Many investors, discouraged by the worse relative return on investments referenced to the IPCA, end up wanting to get out of these when the chances of success become greater.

Investors who invested in the IMA-B5 in the 235 moments when the past seemed less favorable had a higher return than the CDI in the following 12 months in 83.17% of the times.

The result becomes even better when evaluating the investment over a 24-month horizon.

If the 24-month horizon is evaluated, 97.12% of the time, the investor who invested in the IMA-B5 won the CDI, when he invested at times like the current one, when IPCA-linked securities perform worse than the CDI in the 12 previous months.

When considering the return premium on private securities with FGC, such as CDBs, the scenario is even more favorable.

This perspective can be even better when taking advantage of investment in private securities exempt from IR. However, it should be considered that these are at greater risk. So your investment should be more diversified and in high quality companies.

The simplest way to invest in the IMA-B5 is through exchange-traded open-end or closed-end investment funds (ETFs) referenced in this index. Some of these funds have the additional advantage of being exempt from income tax.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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