A 50% Increase is Possible. The Question is Where?

zsidayInflation is outpacing the interest paid on bank account deposits, making it hard to “get a return”. Realistic alternatives include: treasuries, real estate and mutual funds. The euro exchange rate could go below 300 HUF for a longer-lasting period. There is, however, an investment in which a 50% increase could be seen. Viktor Zsiday, the portfolio manager for the Citadella Fund, has sat down with Bankmonitor.hu to discuss what options savers have and, of course, the outstanding 14% half-year return of the fund.

Bankmonitor.hu: If someone wants to get a return above inflation, how difficult is his situation?
Viktor Zsiday: Very. It’s extremely difficult to beat inflation right now, and in the next couple of years, the story is going to be about finding the right investment that isn’t too risky, but at the same time provides a (real) return. It’s extremely difficult given the current environment, in which central banks are keeping interest rates at near zero. Investors don’t have many options: either treasuries or, with added risk, mutual funds or perhaps real estate.

You can beat inflation with treasuries?
For individual investors, retail securities (retail oriented government bonds) can provide a return that’s tough to beat. The best yields are paid by the Premium and Bonus Hungarian Government Bond. These treasuries are most likely to provide a return above inflation. You should note that treasuries with yields above inflation are hard to find even abroad.

The next step is investing in real estate, but that comes with risk…
Of course, as people won’t really have any other option. You can get a 1% return from the bank, while non-retail securities (ordinary government bonds) don’t provide a real return. Since money always looks for the best alternative, it starts to flow into real estate, which also gets additional support via cheap credit.

In the April 2014 Hungarian National Bank’s Financial Stability Report, a 20 percent price increase was suggested. Is that realistic in your opinion?
In my opinion we could see a potential 50% increase in the price of real estate in Budapest in five years’ time. The same cannot be said of the country as a whole, of course, but in Budapest’s most frequented areas this could easily come to fruition. In the past 1-2 years, we have already seen it as rents have risen, and following this we’ll see the price of flats go up, too. Currently you can count on a 7% (rental yield) return, and if we note the extremely favorable APR rate (4.5-6.0%) on mortgages, then it becomes obvious which way savers will go. If you can afford the down payment, why not take out a mortgage on a flat, and then rent it out? Or if you’ve been renting, then buy the flat, even if it means you have to take out a mortgage to do it.

There is danger involved, isn’t it? What happens if the interest rate on the mortgage rises?
Simply put, there are few alternative investing possibilities. It’s my experience that the average person is attuned to where the income generated by renting out a property exceeds the monthly mortgage payment. For example, if he can rent out his flat for 100 thousand HUF while his monthly mortgage amount is 90 thousand HUF, then he’ll do it. The interest risk, the risk of rising interest rates, is of course present, and will be present in the future, but I think the Hungarian National Bank will take that into consideration when it sets its interest rate policy in the future.

We haven’t discussed mutual funds yet. What’s your opinion of the markets?
If a saver is willing to take on additional risk, then investing in mutual funds is a logical decision. I am optimistic when it comes to the outlook of the developed countries’ markets. In Europe we could see serious growth as a result of the drop in the oil price, the weak euro, low interest rates and the end of austerity measures.
Similarly I expect good growth prospects in the US, although I still would prefer European stocks because of the dollar’s strength (as the weaker euro vis-à-vis the dollar provides support for the profits of European companies).
Among the emerging markets, I see bigger issues in Russia and other countries that export natural resources. In these places, after the initial shock, the problems caused by low prices settle on the economy, drawing out the recovery, which could cause a crisis in the banking sector.
As far as Hungary and the forint are concerned, I’m optimistic: I can picture the average annual EURHUF exchange staying below the 300 threshold. In the past 2-3 years the reason why the forint has weakened is that we have been consistently cutting interest rates. That process is now over, while in other countries it is still ongoing. This could make the forint more attractive, as our interest rate advantage could grow. 

How much does the current Greek situation influence your optimism for Europe?
After years of recession, Greece is once again growing. I can’t imagine the politicians interrupting the process, although if the Greeks can’t come to some agreement with the EU, the country will fall back into recession, which would cause a total societal collapse. The Greeks want only one thing (as do many other countries as well): they want to be able to relax the strict budgetary measures that the Germans have forced upon them. The country’s debt can be financed: Greece’s interest payments, proportionally in GDP terms, are lower than Hungary’s.

What do you think is the likelihood of Greece leaving the Eurozone?
10%.

And finally, let’s talk about the Citadella Fund, which is under your management. You’ve done very well (in the past six months the fund has generated a 14% return). How much of this positive result has the fund’s increased risk threshold played?
Not much, as a significant number of the holdings that have done well was opened earlier. Positions taken following the changes to the investing policy were made in accordance to the new guidelines, so the recent good performance was not a result of added risk. Rather it was because I had had a good understanding of what was then happening in the markets. I had taken positions that would profit if the oil price fell and/or the euro weakened vs. the dollar. I also assessed the CHF risk properly, so I had no exposure.

Compared to the newly specified maximum risk level, where does the Citadella Fund stand currently?
The most recently opened positions have increased the risk threshold, but even with this, it’s still only at the maximum 50%. Expiring positions are now at the right number, although I am still looking for long-term strategic opportunities. In my opinion, there haven’t been any market situations where we could buy long-term on the cheap.

For the average investor who’s thinking 3-5 years down the road, what percentage of his portfolio could the Citadella Fund potentially take up?
Because of the changes in investing policy, there will probably be times when the value of the fund falls 10% (or even 20%). So it depends on the individual investor; how much of a drop can he tolerate? For example, if someone can handle only a 2% drop, then he should put a maximum of 10% of his money in the Citadella Fund. Someone who can take a 10% swing, however, could put 50% of his money in it. Someone looking for absolute return should be considering portfolio holdings. Under no circumstances should someone put all of his savings into only one fund.

Original date of Hungarian publication: February 13th, 2015 in Alapblog.hu