I have been investing in inflation-linked bonds for a long time. I sometimes and selectively use this as a hedge if the inflation rate I expect in the relevant future (e.g. the next three years) is above the so-called equilibrium inflation rate for this period.

You can only be successful with inflation-indexed bonds if inflation is higher than what the market has already priced in at the time of purchase. In general, I don't want to make money with bonuses; I do it with stocks and real estate. For me, bonds are an anchor of security and the way I store money because I would never trust a bank with more than a few hundred thousand euros.

How inflation-indexed bonds work

However, most investors don't understand how inflation-indexed bonds work, and apparently Deka, which is affiliated with savings banks, doesn't either. The problem: When inflation rises, nominal interest rates often rise as well. However, increases in interest rates cause price losses, not only for traditional bonds, but also for inflation-indexed bonds. These price losses are greater the longer the remaining term of the bonds in question.

I invested several million euros directly in inflation-indexed bonds or in a fund mentioned below, but I did so at a time when inflation was still very low and, above all, discounted inflation expectations were low. Because of price risk, I sometimes invested in bonds with a remaining term of one year and sometimes up to three years. However, most funds invest in bonds with much longer maturities. And that's exactly where the problem lies.

This also applies to the mentioned Deka-Fonds RentenReal. “The investment objective of the fund,” it says on the website, “is to generate a regular return in euros protected against inflation. This yield is measured by the real interest rate, that is, the nominal interest rate adjusted to the inflation rate. The objective is to achieve the highest possible profitability while maintaining an appropriate level of risk for this asset class.” That's the theory.

Absurd reasoning of the consultant

About ten years ago I invested 14,000 euros in this Deka RentenReal fund and at that time I didn't know enough about this asset class. While with my direct investments in bonds with a remaining term of 1 to 3 years at most I am in the red everywhere, the Deka fund is now more than 30 percent in the red, i.e. 14,000 euros have become less than 10,000 euros in ten years. . Here you can see what happens when fund managers apparently do not adequately understand the functionality and risks of inflation-indexed bonds and underestimate the risk of long-term bonds in phases of rising interest rates.

I admit that the only reason I didn't sell this fund was out of convenience, because it was a relatively small amount to invest in inflation-linked bonds. But I found it funny that the Savings Bank called me and urgently recommended that I (and all the other clients) sell the fund after (!) it had lost more than 30 percent. My response over the phone: “I know the fund sucks and, above all, I know why. But the fact that I am now recommending selling the fund is like recommending a homeowner take out fire insurance after the house has already burned down.” I keep the fund as a reminder and a constant reminder in my portfolio summary. the stupid ones The mistakes you can make can be made when investing – you should never forget that.

What was especially absurd was the advisor's justification for why the fund should be sold, namely because inflation expectations had fallen. This means they apparently didn't understand why the background was so stained. If based solely on inflation, the fund would have been a good investment in recent years. But the fund's poor performance had nothing to do with lower inflation expectations, but rather was the result of falling bond prices due to rising interest rates.

This investment paid off for me.

I suspect the fund was sold to savings bank customers as a safe hedge against inflation. But the correlation of annual returns between conventional short-term bonds and inflation is even higher than the corresponding correlation for long-term inflation linkers.

One fund demonstrates that there is another way to resolve the risk described above (rising inflation is associated with rising interest rates and falling prices) as follows: The Lyxor EUR 2-10Y Inflation Expectations ETF UCITS combines a long position in France and Germany and a short position in French and German conventional government bonds with adjacent maturities. This investment was worth it for me. In recent years, while the Deka fund has suffered massive losses, this fund has made double-digit gains. Luckily, I only had 14,000 euros invested in the catastrophe fund, but more than a hundred times that amount in the smart fund.

That does not mean that I recommend this investment to others, because when it comes to this topic it is absolutely crucial when purchasing. At the time of purchase he feared higher inflation and at the same time a drop in prices due to higher interest rates, and since both things happened, he was right. You see, these topics are very complex; I just gave a simple introduction to financial topics in my master class.