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Family Businesses: Insights on an Attractive Investment Prospect

Pictet Asset Management has developed a new investment strategy that invests in publicly listed family businesses, companies that count founding families as major shareholders. Pictet-Family was repositioned on the 29^th May 2020 and has seen its investment universe change. It is managed by Alain Caffort and Cyril Benier. In this interview, they discuss the strategy’s guiding philosophy.

What exactly is a family business?

How you define a family business is a matter of interpretation. Sometimes it’s obvious, say when founders hold very large stakes in their own names. But the boundaries can sometimes be blurred. We take a systematic and rigorous approach to our definition. Family businesses that make up our investment universe are publicly listed companies in which an individual or family holds a minimum of 30 per cent of voting rights. The family can be by blood or marriage, the stake can be held through a foundation or some other vehicle. Such information is rarely freely available; unearthing it often requires painstaking research.

Why 30 per cent?

Research shows that active participation in the general assemblies of publicly listed companies averages around 60 per cent of share ownership. At 30 per cent, a shareholder (or group of closely tied shareholders) effectively has the casting vote and, thus, control.

Why focus on family businesses?

Family businesses are the lifeblood of our society and the backbone of the global economy. They contribute between 50 per cent and 70 per cent of countries’ gross domestic product and employ the majority of their workforces.

There’s a large body of research showing family businesses tend to outperform their peers – financially and in terms of shareholder returns.

Of course, as anyone with experience of families and family disputes knows, this type of ownership can also lead to a number of problems – which is why it is also crucial to take an active approach to investing in these companies. And that’s where we can make a difference – ensuring we avoid the pitfalls in this otherwise attractive investment landscape. Please read our related article on the universe for more about why it makes sense to invest in family businesses with an active approach.

This suggests corporate governance is a big focus for you, is that right?

Environmental, social and governance (ESG) factors are all important sources of investment performance. But when it comes to investing in family businesses, governance is key. That’s because governance is intrinsic to a company’s overall values and culture.

We use several bespoke indicators in order to draw out what’s acceptable and what isn’t. For example, we tolerate a lower degree of board independence from family companies – after all, the close alignment between the family’s and business’ fortunes is one of the reasons these companies do so well – but we’re much more stringent on the composition and approach of the company’s audit, remuneration and nomination committees.

What sorts of family businesses do you invest in?

We have no geographic or size preference – with the caveat that the shares have to have a fairly substantial minimum daily liquidity of USD5 million. We accept that this liquidity requirement keeps us from investing in some potentially interesting companies, but it also protects our clients from the worst effects of market dislocations such as we’ve recently seen.

Importantly, even after applying this stringent criteria, there are enough investable companies left – our universe is made up of 500 companies globally that operate across all sectors. It’s also worth noting that our liquidity limitation means that our strategy’s performance isn’t down to size effects. It’s not a case of trading performance for liquidity and thus volatility, as is the case with many small-cap funds. So we know that the outperformance of family businesses really is down to family effects.

So why do family businesses outperform?

We believe there are three primary reasons. First, the families tend to have most of their wealth and reputations invested in these companies, their interests are closely aligned. This, in turn, leads to the second reason, that family businesses often reinvest a larger proportion of their profits than their peers. Finally, stability of ownership also allows management to take a long-term view, rather than obsessing about the next quarter’s profits.

Are family firms weighted to certain countries and sectors?

Not in a way that narrows our investment options. Family companies operate across all sectors and industries. And we have a more balanced regional distribution than capitalisation-weighted global equity indices – for instance, 60 per cent of the MSCI All Country Index (ACWI) is based in North America, while our weighting is around 40 per cent.

But it is true we prefer some sectors to others. For example, Consumer Discretionary companies make up around 12 per cent of the MSCI ACWI but have nearly twice the weighting in our portfolio. And the majority of these companies are based in Europe, including some of the great luxury goods companies.

We’re also relatively heavily weighted towards Communication Services and Consumer Staples.

Why Pictet Asset Management?

Pictet-Family brings together the core capabilities of the Pictet group: Family businesses, Global funds, identification of winning market themes and a strong focus on ESG factors.

We know what the drivers of a successful family business are and what characteristics of a family business we are looking for. After all, we have a strong case study right at home: Pictet is a family business and a very successful one.

For more information on our Pictet-Family fund, please click here

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In Canada Pictet AM Inc is registered as Portfolio Managerr authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

Lombard International Expands its Institutional Solutions Practice

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architecture-2256489_1920 — Pixabay CC0 Public Domain. El coste de riesgo de la banca casi triplica los niveles anteriores a la pandemia

Lombard International Group announced the expansion of its Institutional Solutions Practice (Practice) globally. This will provide institutional investors, based across the globe, with more effective ways to invest in U.S. private markets. Also, “it will assist U.S. and non-U.S. investment managers to raise capital through compliant investment structures that can more efficiently enhance net returns”, stated the firm in a press release.

The Practice focuses on improving global access to U.S. private markets for institutional investors such as pension funds, corporations, sovereign wealth funds, foundations, endowments and funds of funds, to enable their investment allocation to be “more efficient and effective”, says the wealth manager.

Operating across major global wealth hubs, the Practice is headed up by financial services veteran John Fischer, who leads a multi-disciplined team of senior executives. In the U.S., this includes Tom Wiese, Executive Managing Director; Sandy Geyelin, Executive Managing Director, and C. Penn Redpath, Senior Managing Director. Also, Jason Tsui, Managing Director, will lead the distribution strategy in Asia; Juan Job, Senior Managing Director, will be in charge of Latin American operations; and EMEA will be led by Peter Coates, who recently joined Lombard International as Global Director of Institutional Solutions.

“Institutional Solutions has been one of the key drivers of our growth. We’re excited to launch this internationally expanded Practice across the major global wealth hubs in Asia, Europe, LatAm and the U.S. Our team’s many decades of experience in combining insurance solutions and investment for optimized outcomes, as well as their subject matter expertise in alternative investments, means they are perfectly positioned to assist strategic partners and clients focused on U.S. private markets, which present attractive investment opportunities”, said Stuart Parkinson, Group Chief Executive Officer.

Michael Gordon, US CEO & Global COO, commented that, as markets remain volatile and uncertain, the institutional appetite for U.S. private markets is increasing. “Despite recent events, financial markets remain globally connected, and non-U.S. institutional investors in particular continue to be a key driver of asset flows into U.S. private equity, private debt and real assets. I’m delighted to spearhead the growth of this practice globally, to help institutions better achieve their unique investment objectives”, he added.

Meanwhile, Fischer, Executive Vice President and Head of Distribution, pointed out that their aim with this internationally expanded Practice is to truly make every basis point count. “We have created an effective global offering, using time-tested insurance structures which help investors reduce the friction associated with U.S. private assets, improving investment yields and reducing administrative burdens. Importantly, our solutions are cost-efficient, transparent and highly customizable to the unique needs of institutional investors”, he said.

Morgan Stanley to Acquire Eaton Vance for $7 Billion

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Morgan Stanley has entered a definitive agreement to acquire Eaton Vance, a provider of advanced investment strategies and wealth management solutions with over $500 billion in assets under management (AUM), for an equity value of approximately $7 billion.

The acquisition will make Morgan Stanley Investment Management (MSIM) a leading asset manager with approximately $1.2 trillion of AUM and over $5 billion of combined revenues. The asset manager stated in a press release that it avances its “strategic transformation” with three world-class businesses of scale: Institutional Securities, Wealth Management and Investment Management.

MSIM and Eaton Vance consider themselves “highly complementary” with limited overlap in investment and distribution capabilities. Eaton Vance is a market leader in key secular growth areas, including in individual separate accounts, customized investment solutions through Parametric, and responsible ESG investing through Calvert. “Eaton Vance fills product gaps and delivers quality scale to the MSIM franchise. The combination will also enhance client opportunities, by bringing Eaton Vance’s leading U.S. retail distribution together with MSIM’s international distribution”, points out the press release.

“Eaton Vance is a perfect fit for Morgan Stanley. This transaction further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class investment banking and institutional securities franchise. With the addition of Eaton Vance, Morgan Stanley will oversee $4.4 trillion of client assets and AUM across its Wealth Management and Investment Management segments”, said James P. Gorman, Chairman and Chief Executive Officer of Morgan Stanley.

Meanwhile, Thomas E. Faust, Jr., Chief Executive Officer of Eaton Vance stated that by joining Morgan Stanley, they will be able to further accelerate their growth by building upon their common values and strengths, which are focused on investment excellence, innovation and client service. “Bringing Eaton Vance’s leading brands and capabilities under Morgan Stanley creates a uniquely powerful set of investment solutions to serve both institutional and retail clients in the U.S. and internationally”, he added.

The details of the transaction

The firms point out that this transaction is attractive for shareholders and will deliver long-term financial benefits. “Both companies have demonstrated industry-leading organic growth and have strong cultural alignment”.

The combination will better position Morgan Stanley to generate attractive financial returns through increased scale, improved distribution, cost savings of $150MM – or 4% of MSIM and Eaton Vance expenses – and revenue opportunities.

Under the terms of the merger agreement, Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833x of Morgan Stanley common stock, representing a total consideration of approximately $56.50 per share. Based on the $56.50 per share, the aggregate consideration paid to holders of Eaton Vance’s common stock will consist of approximately 50% cash and 50% Morgan Stanley common stock.

The merger agreement also contains an election procedure allowing each Eaton Vance shareholder to seek all cash or all stock, subject to a proration and adjustment mechanism. In addition, Eaton Vance common shareholders will receive a one-time special cash dividend of $4.25 per share to be paid pre-closing by Eaton Vance to Eaton Vance common shareholders from existing balance sheet resources.

The transaction will not be taxable to Eaton Vance shareholders to the extent that they receive Morgan Stanley common stock as consideration. The transaction has been approved by the voting trust that holds all of the voting common stock of Eaton Vance, says the press release.

The acquisition is subject to customary closing conditions, and is expected to close in the second quarter of 2021.

iShares Launches the First Climate Risk-Adjusted Government Bond ETF

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ireland-1971997_1920 — Pixabay CC0 Public Domain. iShare amplía sus fondos sostenibles con el lanzamiento de un ETF UCITS de bonos climáticos

iShares has launched the first climate risk-adjusted government bond ETF in the market: the iShares € Govt Bond Climate UCITS ETF. The strategy tracks the FTSE Climate Risk-Adjusted European Monetary Union (EMU) Government Bond Index (Climate EGBI), launched by FTSE Russel last January.

The ETF offers access to Eurozone government bonds while seeking to provide a higher exposure to countries less exposed to climate change risks and a lower exposure to countries that are more exposed, explained FTSE Russel on a press release. As for the index, it is designed for investors with an increased focus on climate performance of their government bond portfolios and is the result of close collaboration with Blackrock’s team over recent months.

The Climate EGBI incorporates a tilting methodology that adjusts index weights according to each country’s relative exposure to climate risk, with respect to resilience and preparedness to the risks of climate change. This includes an assessment of the expected economic impact of transitioning to greenhouse gas emissions levels aligned with the Paris Accord target of less than 2°C by 2050, known as transition risk. An assessment of the physical risk of climate change such as sea level rises and the resiliency of countries to tackle these risks is also assessed.

“The decision by a leading investor and ETF provider such as Blackrock to license FTSE Russell’s Advanced Climate EGBI for an ETF listing marks an important juncture in climate themed investing in European fixed income markets. Both institutional and private asset owners are increasingly including climate objectives in their decision making and are adjusting fixed income portfolios based on climate concerns. We expect growing interest from investors in this area”, said Arne Staal, Global Head of Research and Product Management at FTSE Russell.

Meanwhile, Brett Olson, Head of iShares fixed income, EMEA, at BlackRock, pointed out that sovereign issuers are facing increasing pressure to meet sustainability criteria, as more investors consider the ESG profile of their fixed income portfolios. “Until today, investors have had very limited options for cost effective exposure to government bonds that incorporate climate risk. This launch is yet another example of our commitment to providing investors with more choice to build sustainable portfolios”, he added.

Stefano Caleffi Named New Head of ETF Sales for Southern Europe at HSBC Global AM

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HSBC Global Asset Management has expanded its ETF sales team with the appointment of Stefano Caleffi as Head of ETF Sales for Southern Europe, a newly created role.

Based in Milan, he will be responsible for driving HSBC Global AM’s ETF sales and business development efforts across Italy, Spain and Portugal. Caleffi will report to Olga de Tapia, Global Head of ETF Sales.

The asset manager announced in a press release that this appointment follows the ones of Phillip Knueppel as Head of ETF Sales for Austria, Germany and Switzerland and Marc Hall as Head of ETF Sales for Switzerland.

De Tapia commented that Caleffi’s appointment is another milestone in their plans to grow their ETF business in Europe. “His extensive client-facing and ETF industry experience make him the perfect candidate to drive our sales effort in Italy, Spain and Portugal”, she added.

Caleffi has over 15 years’ experience in the investment management industry. Most recently, he was Head of ETF Business Development Italy, Iberia and Israel at Invesco. Prior to that, he was responsible for Southern Europe distribution at Source. Before joining Source, he worked in the equities division of Credit Suisse First Boston.

Prima AFP Becomes the First Pension Fund in Perú to Adopt the CFA Institute Asset Manager Code

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Renzo Ricci 2_0 — Foto cedidaRenzo Rici, CEO Prima AFP. Prima AFP se convierte en la primera AFP en Perú en adoptar el Código de Gestor de inversiones (AMC) de CFA Institute

CFA Institute, the global association of investment professionals, announces that Prima AFP has become the first pension fund in Perú to claim compliance with the CFA Institute Asset Manager Code™. Prima AFP is the pension fund manager of Credicorp Group, the largest financial services holding company in Perú. The adoption marks another important milestone for the Asset Manager Code in Latin America, with Prima AFP joining other major pension funds and asset managers across the region and around the world.

The Asset Manager Code clearly outlines the ethical and professional responsibilities of organizations that manage assets on behalf of their clients. For investors, the code provides a benchmark for the behavior that should be expected from asset managers and offers a higher level of confidence in the organizations that adopt the code.

Many organizations have their own conduct standards in place to guide their work, but it can be difficult for clients to compare different codes or understand the level of commitment toward protecting their interests. Clients can use the CFA Institute Asset Manager Code to identify organizations that commit to a common foundation of ethical principles.

“As the newly appointed Chair of the Board, I am pleased to see this exciting development in my home country of Perú,” said Daniel Gamba, CFA, Chair of the Board of Governors, CFA Institute. “The Asset Manager Code provides a common, globally recognized benchmark for pension funds to strive for and Prima AFP is leading the way. I look forward to seeing more adoptions by pension funds and other asset managers across the country and the region.”

“It is at the core of our mission to advance ethics, professional standards of practice, and market integrity in the investment management industry,” said Karyn Vincent, Senior Head, Global Industry Standards, CFA Institute. “We applaud Prima AFP, and all organizations that have adopted the code, for displaying a steadfast and tangible commitment to professional ethics and putting investors first. When we put investors at the heart of all we do, we can rebuild trust in the profession and benefit society at large.”

“Investors deserve the highest level of ethical and professional conduct from the firms and individuals with whom they trust their investments,” said Renzo Ricci, CEO of Prima AFP. “Adopting the Asset Manager Code is a demonstration of our commitment to our clients and a demonstration of how we protect their interests. We are proud to join the distinguished list of firms and pension funds worldwide that are committed to putting investor needs and interests first.”

The Asset Manager Code is grounded in the ethical principles of CFA Institute and the CFA® Program, and requires that managers commit to the following professional standards:

· To act in a professional and ethical manner at all times
· To act for the benefit of clients
· To act with independence and objectivity
· To act with skill, competence, and diligence
· To communicate with clients in a timely and accurate manner
· To uphold the rules governing capital markets

More than 1,000 firms worldwide claim compliance with the Code including Ariel Investments, BlackRock, Janus Capital Management, J.P. Morgan Asset Management, Afore XXI Banorte, BBVA Asset Management Mexico, Credicorp Capital Asset Management, Itaú Asset Management and Principal Afore.

Prima AFP has been Credicorp Group’s pension fund manager for the Peruvian market for 15 years. It currently manages the funds of 2.3 million people affiliated with the Private Pension System (SPP) of Perú, equivalent to 30.9% of the market. At the end of August, its portfolio was valued at more than 13 billion dollars

Alken Expands LatAm Presence Through Deal with AIS Financial Group

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puzzle-1261138_960_720 — Pixabay CC0 Public Domain. Alken expande su presencia en Latinoamérica gracias a la firma de un acuerdo con AIS Financial Group

The Alken Fund, managed by Alken AM, through its Luxembourg Manco, AFFM S.A. and Swiss AIS Financial Group, have announced the signing of a Strategic Agreement to benefit from AIS market presence in Latin America with the aim to expand the penetration of Alken funds in such region.

The deal will allow AIS Financial Group investor base to access a couple of Alken´s UCITS funds, including the Alken European Opportunities, managed by Nicolas Walewski and co-managed by Marc Festa, and the Alken Income Opportunities, managed by Antony Vallée and Robin Dunmall.

The Alken European Opportunities has a solid long track record in European Opportunities with a fundamental / bottom–up unconstrained, concentrated, low rotation approach. The Alken Income Opportunities invests in global corporate bonds, with a bottom-up approach including low-delta convertibles, straight bonds, hybrids, and any debt instrument issued by quoted companies. With a flexible breakdown High-Yield / Investment Grade, the fund aims to generate at least a 6% yield per annum.

AIS is an independent, client service oriented investment boutique, that provides advice on investment solutions with a special focus on structured products and funds. With this deal, AIS further strengthens its brand and reputation, enlarging its product and service offering.

All entities are enthusiastic for the opportunities this deal will entail, and look forward to a successful partnership.

A New World Order: the Sino-US Battle for Tech Supremacy

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One world, two systems? From semiconductors to artificial intelligence, China is loosening the US’s grip on the global technology industry. It is a development that investors view with a mixture of hope and trepidation.

Their worry is that an intensification of Sino-US rivalry could plunge the world into a tech Cold War, creating an entangled web of technological standards and ushering in a period of geopolitical instability.

But competition from China could deliver a positive outcome. History shows that rivalries can serve as a powerful spur for human ingenuity. Just as the US-Soviet space race in the 1970s led to numerous scientific and engineering breakthroughs, competition between the US and China could deliver a renewed burst of technological progress. That would be positive for global productivity.

It is indeed in the interests of China and the US to find common ground. The two economies are too interconnected: total traded goods between them – imports and exports – are worth more than half a trillion US dollars.

But even under this more positive scenario, not everyone stands to benefit. China’s inevitable rise will bring an end to US tech hegemony and the exceptional profitability that American tech firms have enjoyed in the past decade.

This will have implications for investors. Capitalising on the tech industry’s next phase of growth will require venturing beyond Silicon Valley. A little less US, a little more Asia.

Technonationalism: inching closer

The tech battle has been brewing for some time. In 2015, China unveiled an ambitious blueprint to develop high-tech industries to reduce its dependence on foreign – and especially US – technology.

Under what was previously known as its “Made in China 2025” programme it hopes to become 70 per cent self-sufficient in several tech-related industries, such as electric cars, next-generation information technology and telecommunications, advanced robotics and artificial intelligence.

Yet it is China’s ambition in semiconductors that worries the US most. Not only do US chip firms employ more than 200,000 Americans, but they also wield enormous market power. Their semiconductors are the backbone of every electronic device – from laptops and smart phones to electric cars and factory robots.

Currently, US chip firms have a 47 per cent share of the global market. By contrast, China accounts for about 60 per cent of world demand while its homegrown suppliers can barely meet a third of what it needs.

But the landscape is changing fast. When combined, the market share of China, Taiwan and Korea now stands at 30 per cent, compared with just over 20 per cent a decade ago [1].

China recognises that chip self-sufficiency will not come cheap. It understands that investing heavily in research and development is essential if it is to produce state-of-the-art semiconductor components. That is why it has unveiled a new USD 29 billion investment programme to develop the domestic chip industry.

The surge in semiconductor-related R&D testifies to the benefits of competition. Rivalries are, after all, an essential element of a dynamic economy. The challenger, armed with a strategic vision, brings much-needed investment and confronts lazy thinking. The incumbent, meanwhile, is forced to address long-neglected problems and increase research budgets, too.

The semiconductor industry is not the only market where China is asking difficult questions of its rivals.

China’s R&D expenditure – a good proxy for tech-related spending – has more than tripled in the last 20 years to 2.1 per cent of GDP in 2018 [2].

On a purchasing power parity basis, its R&D spending is almost on a par with that of the US.

The US is beginning to mount its response, but it has to move aggressively, and quickly. Federal research spending has declined to 0.8 per cent of GDP from 1.2 per cent in the late 1980s, when the government gave generously to institutions like Stanford University to help build Silicon Valley.

If the US raised R&D investment to a level that matched China’s, that would be a welcome development for a world economy whose productivity is suffering as its working-age population dwindles.

Academic studies have found that the benefits of R&D investment extend well beyond both the firms and industries that incurred such expenditure in the first place. A discovery made by one firm, sector or country can lead to new avenues of research, inspire new projects or find new applications. The social rate of return can be as much as seven times as large as the return on investment in equipment and services that support R&D [3].

R&D spending can boost productivity by improving the quality of existing goods or reducing production costs. Another benefit is the spill-over effect. Studies show that other countries can also boost their productivity by trading with those that have large “stocks of knowledge” from their cumulative R&D activities [4].

Tech race: key battlegrounds

Thanks to China’s world-changing ambitions, competition is intensifying in several key areas of the tech industry:

5G: Next-generation mobile phone networks are the new frontline in the battle to control global information technology infrastructure and set international standards. With pandemic-induced lockdowns stretching data capacity to its limits, 5G tech has taken on greater global importance. China’s Huawei, which has a 30 per cent share of world telecoms equipment, has taken the lead in the global roll-out, but has since faced a clampdown in the US. In response, Huawei is developing an alternative supply chain with rival firms such as Taiwan’s MediaTek.

Cloud computing: This market is growing nearly 20 per cent annually to be worth USD 661 billion by 2024: Behemoths such as Amazon, Google, Alibaba, Tencent and Microsoft are vying for dominance [5]. Each sees Asia as the main engine of growth. In aggregate, they have increased their data centre footprint in the region by almost 70 per cent over the past three years [6].

E-commerce: The COVID lockdown encouraged millions of people to embrace online shopping. That was especially the case in China, where e-commerce represents more than half of total retail sales, compared with just over 10 per cent in the US [7]. China is said to be “a good four or five years” ahead of where the West is in terms of logistics and digital commerce and retail [8]. China’s advantage here lies in the sheer scale of the mobile ecosystem – a population of 1.4 billion – which integrates everything from online shopping, messaging, gaming and digital payments in one app. What is more, Chinese firms are better positioned than their peers in the US and Europe, where growing concerns about misuse of personal data and anticompetitive practices could lead to greater regulation.

Artificial Intelligence: AI represents one of the biggest commercial opportunities, poised to provide USD 15.7 trillion of global economic growth by 2030 [10]. Already home to the world’s largest AI companies, Baidu, Tencent and Alibaba, China filed more than 30,000 public patents for AI in 2018, a roughly 10-fold jump in five years and about 2.5 times more than the US [9]. The US, meanwhile, is doubling its AI R&D spending in the next two years from the current USD 974 million.

Europe should not be written off as a mere observer in the global tech race – the region also vies for a slice of the pie. Specifically, Europe is launching Gaia-X, a new joint cloud initiative among some 100 leading companies and organisations to challenge the likes of Amazon and Alibaba on data infrastructure. The UK is also home to big chip companies such as ARM.

If China and the US find a way to co-exist as global tech powers, the next decade promises genuinely exciting technological advances.

Tech may seem ubiquitous to those who live in the digitalised world, but less than 60 per cent of the world’s population has access to the Internet. What is more, cloud penetration stands at a paltry 20 per cent, while only 12 per cent of the global consumer spending of USD 24 trillion takes place online.

For investors, this new world order will throw up new challenges. To capitalise on tech’s long-term growth potential they will need to look further afield. They should cast their net beyond the familiar – and increasingly expensive – companies in Silicon Valley and allocate more of their capital to rapidly growing businesses in other hotspots, such as Asia.

For Pictet AM’s Secular Outlook report, detailing key market trends and investment insights for the next five years, download here

Notes:

[1] Semiconductor Industry Association 2020 Factbook
[2] European Commission
[3] Lichtenberg, F., R&D Investment and International Productivity Differences, NBER Working Paper No. w4161
[4] Hall, BH., Mairesse, J., Mohnen, P., Measuring the returns to R&D, Handbook of the Economics of Innovation, vol. 2
[5] Compound Annual Growth Rate between 2019 and 2024. Source: GlobalData
[6] FT, Synergy Research
[7] Marketer
[8] Michael Zakkour, New Retail: Born in China Going Global
[9] Nikkei Asian Review
[10] PwC

Important notes

The Inflation Debate: What to Expect in an Economy Emerging from the Pandemic

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Jupiter Big Series Event2 — “The Big Picture Series”, Jupiter Asset Management. “The Big Picture Series”, Jupiter Asset Management

Jupiter Asset Management is organizing its first virtual event, “The Big Picture Series” for September, October and November, during which the management company will be bringing together experts from various investment disciplines to discuss current financial issues.

At the opening of the event, the first conference was delivered by Andrew Formica, the company’s CEO, who reflected on the unprecedented scale of globally disruptive effects of the pandemic and spoke of his belief in “the power of active minds” to meet the challenges of the currently irrational markets.

Afterwards, Richard Buxton, Head of the UK Alpha strategy and former CEO of Merian Global Investors, and Edward Bonham Carter, Vice Chairman of Jupiter Asset Management, spoke about the process of unifying both firms and the possible headwinds in the markets: the US presidential elections, the failure to reach an a Brexit agreement and the implications of the coronavirus crisis.

Then, on the panel discussion, Katharine Dryer, Deputy Chief Investment Officer, moderated a discussion that addressed inflation in a world that is still emerging from the pandemic. The panel included Ariel Bezalel, fund manager and Head of strategy for the fixed income team at Jupiter AM, Mark Richards, strategist with the Multi Asset team, Chi Kit Chai, Head of capital markets and CIO at Ping An Asset Management (Hong Kong), and Ned Naylor-Leyland, fund manager and Head of the Gold & Silver team.

In response to the crisis caused by the pandemic, central banks and governments have taken a major policy shift with a new wave of accommodative measures. As markets adapt to these new conditions, the debate centers on whether an inflationary or deflationary environment will occur. Beginning the round of responses, Ariel Bezalel, reviewed the evolution of inflation in the last decades, and argued that, in his opinion, what we are facing is structural deflation.

“In the 1980s, central banks, led by the efforts of Paul Volcker as Chairman of the U.S. Federal Reserve, focused their efforts on fighting inflation. Then, the decade of the 90s was marked by a period of moderate inflation. While, at present, deflation or disinflation seems to be gradually enveloping the world. In reality, it is really a growing concern for the major central banks. Over the last decade, we have been experiencing a deflationary environment that has been expressed in our portfolios with a high weighting of medium and long duration securities issued by some of the AAA rated sovereign issuers,” explained the manager.

“In the Euro zone, 60% of the economies are experiencing deflation. On average, if you look at the situation in developed economies, inflation is close to 0%. While in emerging markets, where traditionally higher inflation levels have been experienced, inflation levels have been seen to decrease, reaching an average of 2%, year-on-year,” he added.

According to Ariel Bezalel, most of the arguments on deflation are grounded on worldwide labor price. In a world with a massive increase in debt, an aging population, and enormous disruption by technology and globalization, the incorporation of cheaper labor from emerging economies into the global economy has been key to increasing deflationary pressures.

Another factor that has also been seen over the last few decades is how capital has gained an increasing share of the pie in the face of the bargaining power of the workforce. Since the pandemic began, some of these trends have accelerated – in particular the creation of more debt to try to rescue the global economy. But, for Bezalel, the concern is not so much the increase in debt as the utility of the debt. The manager pointed out that, during this year, a large part of the increase in fiscal deficits has been dedicated to rescuing the corporate sector and supporting people who have lost their jobs; unproductive debt that has not led to progress in infrastructure investment.

Mark Richards, on the other hand, maintained a slightly different vision, with a slightly more inflationary scenario. The strategist of the Jupiter AM Multi Asset team argues that some of the structural forces of recent decades have set a trend, but that for the first time in the last 30 or 40 years one can see a coherent narrative on inflation based on a greater tendency of economies to deglobalization.

In the late 1990s and early 2000s, the impact of China’s entry into the global economic scene increased the world’s labor supply. Today, however, we are witnessing a reverse process, which is reflected in the strained trade relations between the United States and China. The way in which the post-VIDC era is moving towards a de-globalization of the economy would explain a possible increase in inflation. More money must be spent on redirecting supply chains, representing a greater cost to the system.

Furthermore, it should be taken into account that, at the global level, monetary policies are giving way to fiscal policies. During the last decade, the monetary policy of the main central banks has been expansive. At present, both fiscal and monetary policies are moving in the same direction after a very long time. According to Richards, the main difference in the response of the authorities to this crisis as compared to previous ones is that the liquidity that is flowing in the system is going to those areas which are less prone to consumption, so the argument of the speed of money is beginning to be more convincing.

Central banks are abandoning inflation targets set 30 or 40 years ago, admitting that they are not capable of modeling inflation. Instead of projecting inflation into the future, central banks decide to wait and keep interest rates close to zero for longer. This angle on monetary policy together with expectations, are the elements by which Richards defends an inflationary economic scenario.

According to Chi Kit Chai, however, there are two opposing forces at play. On the one hand, there are the loosening monetary and fiscal policies that have been implemented to counteract the effect of the pandemic. On the other hand, there is also the process of deglobalization that the economy is undergoing.

In recent decades, globalization has kept the prices of tradable goods low and has also represented a source of cheap labor. At this time, with tensions created by the US and China, there could also be a disruption in supply chains, and a potential relocation of these, contributing to inflationary pressure. In addition, the Fed has recently signaled its intention to tolerate higher price levels by modifying its inflation target.

In Chi Kit Chai’s opinion, there is an argument that we may be at the end of a secular disinflationary cycle spanning several decades, but there are also deflationary pressures exerted by the pandemic and the economic recession. At this time, it is not known if the pandemic is under control, if further waves will occur, or if the vaccine will arrive soon. Therefore, uncertainty in the markets is high. Deflationary forces remain strong because, although governments have acted against the loss of revenue from the most affected sectors, consumer spending has not recovered.

The near-zero interest rate environment also has implications for financial markets. According to Chi Kit Chai, we are in a high volatility and low yield environment in which debt has lost its traditional role of generating income and diversifying portfolios.

The negative correlation between equities and bonds breaks down when interest rates approach zero. Consequently, the risk/reward profile becomes asymmetrical: while the upside is limited, the downside can be significant if interest rates rise. This creates many challenges for investors, so they should not only take into account inflation, but this whole environment of near-zero interest rates.

In a similar vein, Ned Naylor-Leyland pointed out that, from his perspective, the market is exposed to both inflationary and deflationary pressures and that both will persist over time. According to the head of the Gold & Silver team, deflation exists in the monetary sphere. It is the result of some 40 years of accommodating monetary policies that have, in turn, created structural problems in the financial markets, and more specifically in the corporate debt market, where there is an excess supply that will not disappear soon.

But, Naylor-Leyland also challenges the perception that the cost of living has not increased. Evidence of inflationary trends can be seen in food prices, especially since the pandemic began.

“Inflation used to be a measure of the cost of living and the ability to maintain a constant standard of living. But adjustments to official inflation measures means that at a consumer level inflation has been rising in an uncontrolled fashion, unrecognized by policy makers, and that has contributed to the rise of populism,” he said.

From a conventional market point of view, said Naylor-Leyland, there are individual asset classes from which returns can be achieved, regardless of the type of inflation environment. For the manager, returns can be generated on an individual asset class by taking virtually opposite positions depending on the area the investor is focusing on.

Growth with Quality and Managing Wealth as if it Were a Company: The ‘We Family Offices’ Approach

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Boasting over 20 years in the international financial sector and with $11 billion in assets under management, We Family Offices is one of the gems of the wealth management sector, both in the international and in the U.S. domestic markets. Santiago Ulloa, Founder and Managing Partner of the Miami and New York based firm, tells us about the specialized work they carry out for their clients. This interview was published in the last printed number of Funds Society America’s magazine for readers of the US Offshore market.

The current environment forces us to be swift in our decision making and to adapt to a future that does not necessarily have to be negative, but that will probably be different. In this unusual year of 2020, We Family Offices is maintaining its agenda: focusing on a comprehensive wealth vision for the families it serves.

“In addition to investments, we address how decisions are made, family governance, that is: we manage family wealth as if it were a company, using strategy, planning, controls, minutes of meetings, among other things,” explains Ulloa.

These months of lockdown and forced social distancing have been an opportunity to have a closer relationship with clients: “We have realized that traveling is not absolutely essential and that in fact you are able to talk with all the family members at once more often.”

We Family Offices is a small company in terms of client numbers, but important in terms of assets: “We currently work with approximately 80 families, but we advise, or provide support to, investable assets in excess of $11 billion,” says Ulloa.

Latin America has a clear potential for attracting high income clients, due to the complex political situation in many countries and the families wanting to organize and sort themselves out. “We are more focused on providing an excellent service than on growing. Fortunately, we always acquire new clients each year, but if there are more than 5, that´s already too many,” says WE’s managing partner.

“We focus on organic growth and are currently not seeing any purchases. We see the opportunity of independent advisors who understand the challenge of serving their clients from a small structure, but, in any case, the most important thing for us is to have a common culture and vision. If that doesn’t work, we prefer to let that opportunity go,” he adds.

The Future of the Wealth Management Industry

If one were to cite a key factor of change in the wealth management industry, Ulloa would highlight the consolidation of entities due to a more complex regulatory framework and high operating costs. But the biggest challenge in the sector is transparency, since currently, “there are no gray areas, it’s all either black or white”.

The firm mainly serves clients in the U.S. domestic market and families throughout the Spanish-speaking region, but also serves the European and Asian zone. First and second generation businessmen “with a long term vision and a desire to do things right” are part of the company’s profile.

Ulloa believes that the Latin American offshore industry “will always exist because many families do not trust the governments of their countries and always want to diversify their assets in secure environments. What will continue to change is the way in which this is approached. In general, the region is suffering a significant geopolitical deterioration, with poverty growing and with populist models based on that difference in income. You can do good for these countries by helping them grow, educating and giving opportunities to those at the bottom. If they don’t, they will be contributing to the demise of the ruling classes”.

ESG Factors and Investment in Alternatives

In its quest for excellence, We Family Offices also has the means to be at the forefront of investment policy. Thus, the team has been working for over five years to integrate ESG factors into portfolios, “an approach of alignment with family values” that goes through a complex and detailed process of dialogue. “It is possible to have well-made portfolios, both in public and private markets, that do as well or better than those that do not apply ESG factors. There are not many institutions that do this, but we have committed to team building and seeking out opportunities and it is working very well,” explains Ulloa.

The Financier believes that the number of independent advisors supporting the families will continue to increase: “We have been saying for more than a decade that we must separate the factory from the product, from the distribution and from the advice. You can’t have everything in the one basket because it creates conflict”.

The WE team is currently managing the demand for alternative assets, such as private equity, real estate or hedge funds “with a lot of patience and by reviewing hundreds of options that come to us all the time, you end up being able to identify what you are really interested in and spend time on those opportunities in order to get to know them in depth and, if it makes sense, invest in them”, explains Ulloa.

Roboadvisors have a place for the firm’s small clients, but in the case of large estates, a much broader global vision is needed, which involves fiscal planning, succession, and issues such as governance in decision making.

Investing in Technology and Human Capital

For Santiago Ulloa, the difference between We Family Offices and its competitors is its human team, “both in the investment area, as well as the family advisors with a wealth of experience, the legal and fiscal support team, administration, consolidation and quality control. It is a unit which operates in a coordinated manner, under a common culture of service and of always putting the client’s interests ahead of ours”.

Currently, the company’s greatest investment in effort and money is its investment in technology and in the improvement of the team, which consists of 47 people distributed between the Miami and New York offices.

Ulloa believes that the client wants transparency and access to good investment opportunities with a minimum conflict of interest. They want advisors they can trust and who will not be perceived as suggesting or recommending anything in their own interest.

In the coming years, tax increases are most likely to occur and it is important to be prepared in this respect: “In the United States, analysts agree that regardless of who wins, there will be tax increases, although perhaps that change will be faster with the Democrats,” says WE’s founder.

Whatever the scenario, being prepared, being flexible and staying on course on the essentials is the way forward for We Family Offices.