(Bloomberg) -- Jose Godoy, head of asset management at Banco Itau Chile, oversees the best performing fixed-income fund in Chile over both the past year and past five years. The trick? Derivatives rather than risk, he says.

The portfolio of the $320 million Fondo Mutuo Itau Dinamico reads like a list of Chile’s most stable, blue-chip companies —- including Banco de Chile SA and Cervecerias Unidas SA — plus sovereign bonds. They are not the sort of high-risk bets that would normally propel a fund to outperform peers in any given year. And yet, that is what Itau Dinamico does, year after year.

The fund has returned 9.7% in the last 12 months, compared with the 5.7% average return of its 84 peers, and 40% over the past five years, against and industry average of 22.2%. Other Itau funds with similar characteristics have also outperformed peers, with Fondo Mutuo Itau Dinamico Plus posting the best returns in the past three years. Both funds use instruments such as interest rate swaps that are less common among their peers. 

“We use way more derivatives to arbitrate, lower the risk and increase returns,” Godoy said in an interview. “The fund does not seek credit and liquidity risk, but rather we play with market risk.”

It focuses on interest rate derivatives and sporadically uses peso forwards to hedge dollar investments, he said, adding that it was not “very leveraged.” He declined to give further details on their strategy in derivatives.

The policy “has allowed the fund to have constant returns despite high levels of volatility in the past couple of years,” he said. The goal is to have a return of 2.1 percentage points above the central bank’s benchmark rate, which currently stands at 7.25%.

According to data from the country’s central bank, there were just $752 million in outstanding interest rate derivatives at the end of 2023 in Chile, growing from $535 million in the first three months of 2022. 

Chile’s central bank lowered borrowing costs by one point last month, speeding up monetary easing for the second consecutive meeting. The pace of future rate cuts will now depend on the US Federal Reserve and macro data, Godoy said. A monthly Bloomberg survey showed that most traders and analysts expect the Fed to be the main driver for local yields in February. 


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