Which is better: IPCA+6% or 115% of CDI? – 06/17/2023 – From Grain to Grain

When we evaluate the last 12 months, the return of IPCA+6% per year accumulated a return equivalent to 76.5% of the CDI. This result has led many investors to prefer the CDI. However, this preference can prove to be a big mistake in the long run. I explain how the myopic gaze can make investors miss a great opportunity.

Before explaining let’s go to our poll. In 12-month windows, how much do you think the IPCA+6% yielded on average as a proportion of the CDI since 2010?
a) 115% of the CDI
b) 120% of the CDI
c) 125% of the CDI
d) 130% of the CDI
e) 135% of the CDI

In the second half of last year, we had a period of artificially low inflation. This effect resulted mainly from tax reduction measures implemented by the government.

Thus, the CDI, which is equal to the Selic rate, ended up showing a higher than normal result in relation to the IPCA.

When we evaluate over a longer horizon, for example, over the last 20 years, the CDI yield was equivalent to only CDI + 5% per year. In a more recent period, that is, in the last 10 years, the CDI returned even lower and equivalent to IPCA + 2.78% per year.

The chart below shows the return in 12-month windows of an asset that yields IPCA+6% per year as a proportion of the CDI, since 2010.

Note that only during 2017, a return of IPCA+6% per year lost the CDI. Note that whoever invested in IPCA+6% per annum in this “bad” period was very successful in the following periods.

Since 2010, the return in 12-month windows of a profitability of IPCA+6% per year represented, on average, a return of 135.2% of the CDI. This average is represented by the orange line in the graph above.

However, investors did not always have the return of IPCA+6% pa available for investment. This means that if you didn’t take advantage of it and stuck for a long time, you had to settle for less.

It is expected that the CDI and the Selic will fall from the next semester and present an average return in 2024, 2025, 2026, 2027, 2028 and 2029 of 10.5%, 8.5%, 8.0%, 7.5 %, 7.0% and 7.0%, respectively.

This means that investors who now take advantage of returns of IPCA+6% per year should have a return equivalent to 123.5% of the CDI by 2029. For longer terms, this return should grow even more.

However, make no mistake. This return that you find today in CDBs and private bonds above IPCA+6% a year should no longer exist from next year.

Therefore, be careful when looking at the last 12 months to make decisions about long-term investments. You can pass up a great opportunity to earn high returns for a long time just for the whim of beating the CDI in the short term.

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

Talk directly to me via email.

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