With the introduction of bank debit interest of the three largest Slovenian banks, which will in all probability be followed by others, the profitability of banking products is a very current topic. As not all Slovenian banks offer mutual funds, in this article we will focus on the bank’s offer of deposits and savings, and look at the profitability on these investments for the last 5 years. Money management is increasingly important for Slovenian investors, and financial literacy is still a challenge for many.
At the time of the negative interest rate on the marginal deposit of the European Central Bank (-0.50%), the pressure on the negative return on assets of commercial banks led to the transfer of the cost of banks to their customers. In addition to the excess liquidity caused, among other things, by the monetary policy of central banks during the last major financial crisis, lending rates to both households and companies are also at a very low level. An even more noticeable change in lower interest rates can be seen in deposits, where, according to the Bank of Slovenia, the interest rate on deposits over 1 year in the period 2011-2020 decreased from 2.15% to 0.13% on an annual basis. In another form of saving, savings accounts, interest rates are even lower. Most banks conclude them for a period of more than 1 year, with the annual interest rate at our largest Slovenian bank being 0.01%.
From the above, we can conclude that saving with savings accounts is among the least profitable and will not be considered in terms of investments. We will look more specifically at investing in a deposit for a period of 5 years. If we concluded a contract with a deposit in the amount of EUR 150,000 at the beginning of 2016 at a fixed annual interest rate of 0.30%, in the period of 5 years, ie at the end of 2020, we received the amount of EUR 152,282.50 or received € 2,282.50 interest. Of this amount, it is necessary to pay interest tax at the rate of 27.5% (for interest over EUR 1,000.00), which amounts to € 352.69, so that in the observed period we received EUR 1,929.81 or generated a 1.3% return in 5 years.
In the period of time, we must always take into account real returns and not just absolute ones, as the value of money is also affected by inflation, among other things. Inflation lowers the value of money in real terms and, consequently, real profitability is lower. According to the Statistical Office, the inflation rate in the last 10 years was 9.8%, and in our observed period (2016-2020) the inflation rate was 4.5%. In our case, we made a deposit in 2016, so we generated a negative real return of -3.2% over a period of 5 years.
From the example, we can conclude that a bank deposit is less suitable investment for enriching savings. So what is left for conservative investors, where Slovenians rank according to their investment profile? Slovenians have become well acquainted with savings in mutual funds in the past, where in the period of the financial crisis between 2008-09 the key problem was not negative returns, but mainly the liquidity of funds, as it was not possible to access funds in the desired time. In one of the previous articles, we found that investments in investment property, i.e. real estate for further lease, bring a gross annual return of between 3-5%, and taking inflation into account, we arrive at a real return of between 2.1-4.1%. Unfortunately, Slovenians are still not financially literate enough to enter the capital market directly, which is certainly due to the fact that the Slovenian capital market is practically illiquid and limited in scope (with shares available for investment).
Over the last 5 years, new forms of alternative investment have emerged, which are offered by managers. The Alternative Investment Fund Managers Act (Slovenian: ZUAIS), which has been in force since 23 May 2015, regulates the operation of alternative investment fund managers and the supervision exercised by the Securities Market Agency (Slovenian: ATVP). The aforementioned financial crisis has revealed the great vulnerability of the financial system and the weakness of the operation of supervisory mechanisms throughout the European Union, which has also shown the greater need to supervise the operations of such managers.
The group of alternative investments includes private equity and debt funds, as well as mezzanine funds, real estate funds (e.g. REITs), infrastructure funds, raw materials and commodity funds, purchase of receivables and other investments. Most are familiar with the purchase of receivables by banks and factoring companies, thus enabling the acquisition of liquid assets before the maturity of receivables. Less known are investments or funds that repurchase receivables in their investment policy. It is necessary to distinguish between receivables from companies and those from individuals. Receivables from companies are much more risky than receivables from individuals in terms of the possible deterioration of the liquidity position of companies. As a rule, the latter are in lower amounts and, crucially, natural persons guarantee with all their property. In addition, such receivables can also be insured with insurance companies, which further minimizes the risk. Superos d.o.o. is managed by the alternative investment fund Superos Stability Fund, which, according to its investment policy, invests the assets of well-informed investors exclusively in the claims of natural persons that are Slovenian citizens. The investment in this fund is diversified and consequently less risky and at the same time achieves a significantly higher annual return.