After two years of strong inflows of individual investors, incentivized debenture funds have begun to show signs of exhaustion. The industry's profitability has fallen below that of government bonds. This movement is already beginning to be reflected in flows, with the first net redemptions of the year.
The inflow, which was positive at R$ 94 billion until the end of November, turned negative in the last days of the month. In December, up to the 8th (latest available data), infrastructure funds accumulated net redemptions of R$ 2 billion, according to calculations by Sparta Investimentos based on data from the Securities and Exchange Commission (CVM). According to Anbima, the total assets of the industry amount to approximately R$ 200 billion.
The increase in redemptions comes after a prolonged period of pressured profitability. In October, the widening of spreads – the difference between the return demanded by the market and that of government bonds – penalized the shares.
During the month, almost none of the major funds managed to outperform the CDI (Brazilian interbank deposit rate), while some even recorded negative returns. This movement also cooled the issuance market, and several offerings ended up not materializing.
According to Caio Palma, infrastructure fund manager at Sparta, the correction was a direct consequence of the price distortion created in previous months.
“The movement was a reflection of Provisional Measure 1303 , which provided for the taxation of incentivized funds starting next year. This generated a rush to take advantage of the exemption window, further narrowing the spreads,” says Palma.
With the expiration of the provisional measure, the incentive to hold the bonds at those price levels disappeared. "Managers started selling because it didn't make sense to keep those bonds with such compressed spreads," says the manager at Sparta.
The sale in the secondary market caused spreads to widen in October and, consequently, a drop in fund profitability after months of appreciation in share prices.
Data from Drys Capital 's Credit Guide shows that, at the height of the rush for tax exemption in mid-October, incentivized debentures were trading with returns 0.75 percentage points (pp) below NTN-Bs, the government bonds indexed to inflation. In less than 15 days, spreads widened by about 0.50 pp and have remained around 0.25 pp below NTN-Bs since the end of October.
“It was a gold rush that all funds took advantage of. But the situation tends to be more challenging going forward,” says Miguel Ferreira, CEO and founder of Bocaina .
With spreads still in negative territory and 0.38 percentage points below the level observed 12 months ago, Ferreira sees little room for the industry to generate significant returns in the short term.
Considering the rates of the bonds currently in the portfolio and the management fees charged by the funds, Ferreira estimates that the industry should deliver, on average, about 80% of the CDI (Brazilian interbank deposit rate) over the next year.
"That is, if there is no further widening of spreads. If there is, this return could fall to something close to 60% of the CDI," says the CEO of Bocaina.
According to Palma's assessment, net inflows into incentivized funds are expected to remain negative in the short term. One of the factors is the mismatch between redemption requests and the actual outflow of funds, due to valuation and settlement periods, which vary from one day to 60 days or more.
"Funds are entering their third consecutive month of returns below the CDI rate, and this tends to generate more redemptions," says the manager at Sparta.
Michelle Lauande, infrastructure fund manager at Santander Asset Management, believes this trend should continue at least until January.
"Historically, this is a period that sees a higher concentration of redemptions due to vacations and the payment of the thirteenth salary. If performance weakens again in December, these flows could accelerate," says Lauande.
However, some factors can help limit a further deterioration of spreads. One of them is the seasonality of emissions, which tend to decrease at the end and beginning of the year.
“With fewer primary offerings, funds that need to allocate resources can turn to the secondary market, which helps to sustain spread levels,” says Palma.
Another relevant element is the regulatory framework for newer funds, which need to maintain at least 67% of their assets in incentivized debentures after six months of operation and 85% after two years. "There is a significant portion of the industry that needs to be brought into compliance in the first quarter," says Lauande.
According to the asset manager, of the R$15 billion it manages in infrastructure funds, between 10% and 20% of its portfolio will need to be brought into compliance at the beginning of next year.
“If redemptions don’t accelerate, this effect could even lead to further compression of spreads, especially if there aren’t many primary issuances, which is the most likely scenario,” says the Santander expert.
Given this environment, asset managers have been seeking to adjust their strategies. At Sparta, the option has been to concentrate the majority of the portfolio in shorter- duration bonds, which are less sensitive to widening spreads.
Raising cash reserves is not as viable an alternative as with traditional credit funds, since incentivized funds need to maintain a high minimum percentage of their portfolio allocated to infrastructure debentures.
According to Ferreira, from Bocaina, the ability to originate its own credit tends to become even more relevant in a scenario of compressed spreads. “I go to Pará to visit a sugar mill, study the project, and originate the credit. This allows us to bring in securities with spreads higher than those traded in the secondary market,” he states.
In his assessment, the current level of spreads is the main risk for next year. "They should be at least 0.6 percentage points higher than they are today to return to healthier levels," says Ferreira.
Although he sees greater difficulty for funds to reach the profitability levels observed in previous years by 2026, Ferreira sees a more favorable window for infrastructure funds linked to inflation.
These products, which are not hedged by the CDI (Brazilian interbank deposit rate), could benefit from a potential closing of NTN-Bs (Brazilian Treasury Notes linked to inflation), currently yielding close to IPCA (Brazilian inflation index) + 7.50%.
According to him, the trigger for this movement could be the expected drop in the Selic rate starting next year. If confirmed, the appreciation of inflation-indexed government bonds is likely to be reflected in fund quotas as well. "This could generate a migration from infrastructure funds linked to the CDI to inflation-linked funds," he says.
Palma also expects this movement. “In the next six to twelve months, asset managers who have this type of fund should benefit. But it is most likely that the migration will only occur when the investor looks at the history and sees the improvement in the share price. Today, these funds still lose badly to products linked to the CDI (Brazilian interbank deposit rate).”
