From Slogan to Numbers

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This week marks the beginning of the Q2 earnings reporting season in the U.S.

Approximately 42% of S&P 500 companies (213 in total) will report their performance by the end of the month. As usual, banks will be the first to report and are expected to detract the most from overall financial sector earnings growth (-10%), whereas excluding banks, the aggregate earnings per share (EPS) for insurance companies, capital markets, and other financial services firms would increase by ~15% (compared to the 4.3% estimated by consensus for the industry).

At first glance, the performance of banks (BAC, C, WFC, JPM) will likely be similar to the previous quarter. The yield curve remains inverted, long-term bond yields have increased by 0.17% during the period (compared to a 0.3% rise in the first three months of the year), loan growth continues to moderate, and while net interest income will also maintain a moderate growth rate, management teams might provide positive comments regarding a bottoming out of the margin. More clarity on the news reported by Reuters about comments on Basel III “Endgame” capital rules by the Fed would boost the share prices of major banks.

Broadening the perspective, according to S&P data, the consensus among analysts expects S&P 500 EPS to grow by 5.74% for the April-June quarter compared to the same quarter last year. Strategists and managers are betting on a positive EPS surprise below the average of recent quarters, placing this growth in the 7% – 8% range. The twenty companies that have pre-announced have reported ~+4% above consensus, justifying this bet.

The numbers are heavily skewed towards the contribution of the technology and communication services sectors. Earnings for Microsoft, Amazon, Apple, Meta, Nvidia, and Alphabet are expected to grow by 32%, while non-tech industries will only grow by ~2%. This starting point increases uncertainty regarding the outcome of the quarterly performance announcements because, on one hand, the EPS growth of these tech companies is slowing down (from 68% in Q4 2023 to 56% in Q1 this year). On the other hand, margins are unlikely to improve much further.

The consensus projects operating margins of 12.5% for the S&P (an increase of 5.3% from last year, still below the 2021 peak of 13.54%), with a 30.87% contribution from technology and communication services.

Therefore, it is important to pay attention to the comments from the management teams of hyperscalers regarding their plans to deploy around $200 billion in capital investments, with a significant portion associated with generative AI developments announced last quarter.

Everything has its limits, and while generative AI remains a priority for tech companies from an investment perspective, monetary commitments of this magnitude could negatively impact return on invested capital (ROIC) if not adequately monetized, and this is not simple or quick to achieve.

Nvidia’s cadence in launching new products helps build an AI offering more efficiently in the medium term, although in the short term, the price to pay starts to concern investors.

Blackwell, Nvidia’s new GPU chip, which will be marketed around 2025 and installed in the AI server GB200 NVL72, provides up to 30 times more performance than a rack configured using the same number (74) of Hopper GPUs (H100, the model preceding Blackwell) for large language model inference, while reducing energy consumption per computing unit (FLOP). The new system is also four times faster in training AI models than the previous version. However, these impressive improvements are not cheap. The price of two 16 GPU H100 systems is $400,000, and according to some analysts, the GB200 NVL72 could cost $3.8 million.

Nvidia is undoubtedly the clear winner in the AI leadership race, as demonstrated by its numbers. Analysts estimate more than $200 billion in revenues for the data center business by 2025, which generated $48 billion in 2023, translating to a compound annual growth rate of 63%. However, according to a Morgan Stanley survey of Chief Information Officers, AI investment momentum is slowing, and passing on such significant price increases to customers, despite efficiency improvements, may become more challenging.

Experts in the field expect continued spending on increasingly costly and complex large language models (LLM) development, which could cost between $10 billion and $100 billion by 2027, according to the CEO of Anthropic in this interview. And investors have no reason to doubt.

If Microsoft, Alphabet, Meta, or Amazon suggest slowing their investments or taking a more patient approach, these same investors might start to waver.

As explained earlier, the good performance and maintenance of guidance by tech companies are necessary for analysts to maintain their aggressive earnings growth targets, averaging 12.85% per quarter for the next five quarters. This is possible but increasingly challenging if, as mentioned last week, the recovery in industrial activity begins to cool.

Arguments in favor of a first rate cut in the U.S. in September are mounting after Thursday’s CPI and Jerome Powell’s comments: the Fed chair stated in his testimony this week that inflation “is not the only risk we face.” However, while the compression in public debt yields benefits the valuation of growth companies like software or semis, managers seem too focused on the return of disinflation but not enough on the slowing growth – which is becoming increasingly evident – and the volatility that the presidential campaign will bring starting in September.

Biden’s intervention at the NATO meeting was much more solid than his debate with Trump, and his intention is to run for re-election, although there are increasing domestic (both political and non-political) and international pressures for him to step down.

The aggregate polling provided by RealClearPolitics gives Donald Trump a 47.2% voting intention compared to 44.2% for Joe Biden. Although isolated polls like ABC News (46-46) or Reuters/Ipsos (40-40) show a more uncertain situation, Trump still has the electoral college count on his side, even if he loses the popular vote. Of the 10 states that could tip the balance – with results within 5 points – he would emerge victorious in 7 of them.

Jensen Huang, CEO of Nvidia, said at his developer conference in California that, despite the rising cost of their GPUs, “the more you buy, the more you save.”

The math is correct, but investor sentiment’s volatility and a less dynamic economic activity could suddenly shift investors’ focus from the slogan to the numbers.

Arguments in Favor of Local Currency Emerging Market Debt

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So far in 2024, local currency emerging market (EM) debt has generated a negative return; however, this should be viewed in the broader context of the prevailing interest rate and currency environment, says a Colchester report accessed by Funds Society.

A simple comparison of the standard index for local currency EM debt (the JP Morgan GBI-EM Global Diversified) with the FTSE World Government Bond index of investment-grade government debt shows that local currency EM debt has not underperformed in relative terms.

It is also worth considering the composition of the return of local currency EM debt, which can be broken down into the return from the local currency bond markets themselves, and the impact of currency changes. This breakdown demonstrates that the negative return so far in 2024 is entirely due to currency weakness.

The JP Morgan GBI-EM Global Diversified index return in local currency terms is positive year-to-date, while the return in USD-hedged terms is a reasonable 0.74%. This shows that EM currencies have, on average, declined against the US dollar, which has appreciated against most currencies during the period.

Outlook for the Asset Class

Regarding the outlook for the asset class, we analyze the two return drivers separately, i.e., the currency component and the underlying bond return (which in turn can be broken down into price return and interest yield). Previous Colchester analysis clearly shows that a rising US dollar environment tends to be difficult for local currency EM debt, and conversely, a weakening US dollar tends to coincide with relatively strong asset class returns.

The US Dollar Cycle

Historically, the direction of the US dollar has been closely linked to the performance of EM assets. When the dollar strengthens, this often coincides with a tightening of global financial conditions that pressures EM economies with weaker balance sheets, current account deficits, or foreign capital dependencies. It also tends to cause currency weakness among EM currencies, exerting upward pressure on EM inflation and deteriorating credit quality. This mechanism also unfolds to varying degrees in the developed world.

The last two decades have seen two distinct US dollar cycles: (i) depreciation in the first seven or eight years of this century, and (ii) significant appreciation from 2011 to 2022 (though upwardly extended). The dollar also went through a consolidation period between 2008 and 2011. These three periods can be seen in the following chart.

When observing the respective USD returns of local currency and hard currency EM bond classes during these periods, it is not surprising to see that they are highly correlated with the dollar’s direction. The hard currency index outperformed the local index when the dollar strengthened and underperformed when it weakened. In absolute terms, local currency debt produced attractive positive returns during both USD weakness and consolidation periods, but performed poorly during the USD strength period.

There are other elements in play, such as the widespread global inflation of 2021/22, but nonetheless, the following chart demonstrates a statistically significant relationship between US dollar movements and local currency EM debt index performance. Looking ahead, this raises the question of what the likely trend of the US dollar will be.

As a cornerstone of our currency valuation framework, we believe that the real exchange rate provides a useful metric for assessing relative currency value in the medium term. Our current assessment of the US dollar’s real value suggests that it may have peaked towards the end of 2022 and could be entering another depreciation cycle similar to the 2000s.

Colchester estimates that the dollar reached a real overvaluation of nearly 30% against a basket of five major developed world currencies at the end of 2022. While the dollar has weakened slightly since then, it has strengthened again in the first six months of this year, meaning it remains extremely overvalued according to our real exchange rate analysis. Relative purchasing power parity theory and empirical evidence suggest that the US dollar is more likely to weaken than strengthen in the medium to long term.

Turning points are notoriously difficult to identify ex-ante in all financial markets, and perhaps even more so in currency markets. Nonetheless, besides the extreme overvaluation of the real exchange rate, there are other indications that we may have seen the peak of the US dollar in this cycle. For one, the interest rate differential between the US and other major economies is no longer widening. Broad money growth (M2) in the US remains moderate, suggesting that absent a commodity price shock, inflationary pressures are not rising. Indeed, core inflation is likely to continue to decline gradually from current levels, and markets are once again contemplating the timing of potential Fed rate cuts.

Colchester’s outlook for the US dollar is not based on a forecast of monetary policy easing; in fact, we do not make official rate forecasts at all. However, we firmly believe that real exchange rates are a key factor in long-term exchange rate variations, and this indicates to us that the US dollar may be entering a period of depreciation.

EM Inflation and Real Yields

The second component of local currency EM debt returns is obviously the performance of the local bond markets themselves. In Colchester’s framework, prospective real yield is a value indicator, so we must consider inflation prospects in the EM universe and the level of real yield on offer.

Certainly, there was an increase in inflation in Latin America and Central Europe in response to post-pandemic supply chain disruptions, aggressive stimulus, and high food and energy prices. The experience in Asia was more varied, but upward inflationary pressure materialized in certain economies. However, it is noteworthy that as global inflationary pressures have subsided, inflation has decreased in EMs at a similar, if not faster, pace than in some developed markets. Particularly in Latin America, inflation has followed a clear downward trajectory after peaking in 2022 in economies like Brazil, Mexico, and Chile.

This disinflationary process in many major EMs is not surprising, given the pace and scale of monetary policy adjustments undertaken. Many EM central banks were not only more conservative than their developed market counterparts in response to the COVID-19 shock but also much more aggressive in tightening policies in the face of deteriorating inflation prospects. In Brazil and Colombia, for example, central banks began raising rates about 12 months ahead of the Fed.

As inflation has decreased, several EM central banks have begun easing cycles, but importantly, real interest rates remain relatively high. In Brazil, for example, the latest inflation figure was 3.9%, while the official rate remains 10.5%. In Colombia, inflation is 7.2%, and the policy rate is 11.25%, while in Hungary, the latest CPI was 4.0%, and the policy rate is 7%. Given Colchester’s inflation forecasts for most EMs imply stable or declining inflation, the level of prospective real yield across the curve remains significant. This makes these markets attractive both in absolute terms and relative to their developed world counterparts, including the US.

Valuation of Potential Real Yields

Colchester’s prospective real yield and real exchange rate valuation approach provides a framework within which to evaluate potential medium-term local currency debt returns. Both benchmark bond and currency exposures and Colchester’s program exposures can be translated into potential real yield by multiplying their respective weightings by the prospective real yield and real exchange rate on offer in each market. This provides a metric that can be assessed over time.

The current “value” on offer in both the JP Morgan GBI-EM Global Diversified index and Colchester’s local currency program is near historic highs. The attractive prospective real yields on offer across the opportunity set, combined with the undervaluation of EM currencies relative to the US dollar, make a compelling valuation case relative to history. Positive inflation prospects, along with high nominal yields on offer in many EMs, suggest a potential real bond return of over 3% in the benchmark index, and closer to 5% in the Colchester program. Similarly, the sustained undervaluation of EM currencies’ real exchange rate against the US dollar by about 18% in the benchmark, and around 22% in Colchester’s currency exposures, suggests another 3% and 4%, respectively, of intrinsic value on offer on the currency side.

Combining these suggests a potential real yield of around 7% in the benchmark index and around 9% in the Colchester program. As the following chart highlights, both compare favorably with an average of around 3% and around 5%, respectively, since the inception of the Colchester program in January 2009. A similar analysis in relation to the euro shows a similar picture. The value on offer is slightly lower in absolute terms, given the euro’s undervaluation against the US dollar, but the prospective real yield of the strategy remains a healthy 6.4% in euro terms.

Relative to its history, this metric (whether in USD or euro terms) suggests that local currency debt currently offers attractive value.

Conclusion

Compelling prospective real yields, prudent monetary policy, greater macroeconomic stability across much of the local currency EM debt space, and significant real currency undervaluation provide a positive context for the asset class going forward. Local currency EM debt should perform well in this environment, especially if the US dollar remains stable or falls. Compared to its own history, Colchester’s assessment of the prospective real yield on offer in the local currency debt space is particularly attractive at this juncture.

Colchester Global warns that this article should not be considered a recommendation or investment advice. For more information and disclaimers, you can visit the following link.

Five Charts Explaining Investment Opportunities in European Private Credit

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The 99% of European companies have revenues below €10 million. Among large companies (those with revenues over €100 million), 96% are not publicly traded. According to Aramide Ogunlana, Head of Private Credit Investments at M&G, there is “a clear imbalance in funding sources,” providing additional data: only 4% of companies turn to private markets for financing, compared to 52% that issue bonds and 44% that are publicly traded. Ogunlana delivered a workshop during the recent European Media Day organized by M&G Investments in London.

Private markets have become a cornerstone of M&G Investments’ growth strategy in recent years. The firm is developing new vehicles to make these investments accessible to a broader range of investors. M&G has been investing in private credit since 1997, and its investment portfolio includes both liquid and illiquid corporate debt assets, amounting to €15 billion in private corporate credit and €35 billion in private debt as a broader asset class, including various strategies such as structured credit and real estate debt.

Ogunlana emphasizes the crucial importance of having a long investment history in these markets, as they are heavily relationship-driven: “Maintaining contact is very important, especially when aiming for the most illiquid parts of the market and acting as a sole lender. It’s also important to build relationships in the market to reach the companies you want to enter.” She also highlights the importance of having sufficient analytical capacity in-house to develop proprietary ratings. At M&G, the rating assignment process is conducted independently from the managers’ activities to ensure a neutral perspective. The firm focuses on segments rated B and BB and typically deals with over 200 liquid private companies and between 40 and 60 illiquid private companies.

Why Now?

According to Ogunlana, now is a particularly exciting time to delve into investment opportunities in the private debt market, noting the downward trend in the number of IPOs—the current levels are half of those recorded in the previous 20 years—along with the increase in delistings by companies wanting to return to private status to work more closely and flexibly with their funding sources (see chart).

The investment head notes that the potential is high, given that currently, 70% of European companies still finance themselves via traditional bank loans, compared to 22% of US companies. “This opportunity stands out particularly in Europe, although the global trend still points to high bank intermediation,” the expert notes. She adds that, historically, the European private credit market has outperformed the US in terms of returns (see chart).

As a result, the firm notes that new capital structures have emerged in recent years, and they also anticipate an increase in capital allocations to these market segments. Specifically, based on a survey conducted by Preqin in November 2023, they expect a 51% increase in private debt allocations (up from the current 9%), followed by a 32% increase in infrastructure and a 28% increase in private equity. The only category expected to see a reduction in allocations is hedge funds, which would drop from the current 23% to 19% (see chart).

According to similar data from a Cerulli study, the preferred vehicle for accessing these assets in the wholesale channel is ELTIFs and semi-liquid open-ended funds (37% and 36%, respectively), while co-investment is the least demanded option, with 12% of responses.

Misconceptions

Ogunlana also addressed a second set of perceptions that do not align with the reality of the size, liquidity, and returns currently offered by European markets. For example, she explained that, contrary to the perception that the high yield market is larger and more liquid than other private market segments, the reality in Europe is different (see chart).

Ogunlana demonstrates that the leveraged loan and floating rate note (FRN) market is worth €470 billion, compared to €350 billion for European high yield. “Seniority is very important for investing in these markets; we focus on finding the highest quality assets, at the top of the capital structure, and are very selective in our credit analysis because interest rates are still very high, so we need to calculate the principal recovery well,” she clarifies. She indicates that the recovery rate for syndicated loans is 73%, compared to 67% for senior secured debt.

The most illiquid part of the market is direct lending, with a size of €220 billion. This market is frequented by smaller companies (with EBITDA between €5 million and €75 million) and often each company has only one or very few financiers. It’s a market where “there is no room for error; we need a lot of investment analysis, and therefore our stance is very conservative,” the expert points out.

As a result of all these observations, the expert advocates for a review of the 60/40 model portfolio, noting that private credit offers diversification and decorrelation benefits compared to public markets. For example, Ogunlana states that direct lending behaves “almost like cash,” especially compared to high yield. Additionally, these assets offer a premium for complexity and illiquidity compared to other assets. For all these reasons, it would make sense for private markets to be considered not only as a distinct asset class when designing portfolios but also as part of the mix in more conventional fixed income and equity allocations (see chart).

The Return of Wealth Growth to 4.2% Offsets the 2022 Slump

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The global wealth growth rebounded in 2023 from the 3% contraction experienced the previous year, largely attributed to the monetary impact of the strong dollar. According to the latest UBS Global Wealth Report, wealth increased by 4.2% in 2023, making up for the losses of 2022 in both U.S. dollars and local currencies. This recovery was driven by growth in Europe, the Middle East, and Africa (EMEA), which saw a 4.8% increase, and the Asia-Pacific (APAC) region, which grew by 4.4%. With inflation slowing down, real growth outpaced nominal growth in 2023, with inflation-adjusted global wealth rising by nearly 8.4%.

The report highlights that wealth growth continues progressively worldwide, though at varying speeds. Since 2008, the proportion of individuals with the lowest wealth levels has decreased, while those with higher wealth levels have increased. The percentage of adults with wealth below $10,000 nearly halved from 2000 to 2023, with most moving up to the broader $10,000 to $100,000 range, which more than doubled. It is now three times more likely for wealth to exceed one million dollars.

On the other hand, the report explains that while inequality has been increasing over the years in rapidly growing markets, it has decreased in several mature developed economies. Globally, the number of adults in the lowest wealth bracket is experiencing a steady decline, while all other wealth brackets are consistently expanding.

Regional Wealth Insights

As the report indicates, this wealth recovery is driven by Europe, the Middle East, and Africa. According to the document, notably, while the global wealth decline in 2022 was mainly caused by the strength of the US dollar, last year wealth recovered above 2021 levels, even when measured in local currencies.

It is highlighted that since 2008, wealth has grown faster in the Asia-Pacific region, apparently driven by debt. “In this region, wealth has grown the most – nearly 177% – since we published our first Global Wealth Report fifteen years ago. The Americas are in second place, with nearly 146%, while EMEA lags far behind with just 44%. The exceptional growth in Asia-Pacific wealth, both financial and non-financial, has notably been accompanied by a significant increase in debt. Total debt in this region has grown more than 192% since 2008 – more than twenty times that in EMEA and more than four times that in the Americas,” they note.

In the case of the United States, it remains one of the few markets where wealth growth has accelerated since 2010 compared to the previous decade. In the US, as well as in the UK, wealth has grown uniformly across all wealth categories. “Our analysis shows that wealth inequality has slightly decreased in the US since 2008; in 2023, it housed the largest number of US dollar millionaires,” they add.

Regarding Latin America, growth was strong, but inequality remains present. Specifically, average wealth per adult in Brazil has grown by more than 375% since the 2008 financial crisis, when measured in local currency. This is more than double the growth of Mexico, at just over 150%, and more than mainland China’s 366%. However, Brazil has the third highest rate of wealth inequality in our sample of 56 countries, behind Russia and South Africa.

Finally, EMEA enjoys the highest wealth per adult in US dollar terms, with just over $166,000, followed by APAC, with just over $156,000, and the Americas, with $146,000. “Growth in average wealth per adult since 2008, expressed in dollars, shows a different picture: EMEA ranks last with 41%, compared to 110% in the Americas and 122% in APAC,” they explain.

Wealth Transfer and Horizontal Mobility

One of the key trends highlighted in the report is that wealth mobility is more likely to be upward than downward. “Our analysis of household wealth over the past 30 years shows that a substantial portion of people in our sample markets move between wealth brackets throughout their lives. In every wealth band and over any time horizon, people are consistently more likely to move up the wealth scale than down. In fact, our analysis shows that approximately one in three people move to a higher wealth band over the course of a decade. And, although extreme moves up and down the scale are uncommon, they are not unknown. Even leaps from the bottom to the top are a reality for a portion of the population. However, the likelihood of becoming wealthier tends to decrease over time. Our analysis shows that the longer it takes adults to appreciably gain wealth, the slower their increase tends to be in future years,” the report states.

In this regard, UBS has detected that “a large horizontal wealth transfer is underway.” According to the document, in many couples, one spouse is younger than the other, and generally, women outlive men by just over four years on average, regardless of the average life expectancy of a given region. This means that intra-generational inheritance often occurs before inter-generational wealth transfer.

“As our analysis shows, the inheriting spouse can be expected to retain this wealth for an average of four years before passing it to the next generation. Our analysis also shows that $83.5 trillion of wealth will be transferred in the next 20-25 years. We estimate that $9 trillion of this amount will be transferred horizontally between spouses, mostly in the Americas. More than 10% of the total $83.5 trillion is likely to be transferred to the next generation by women,” the report concludes.

Millionaires

Another relevant conclusion is that the number of millionaires is set to continue growing. In 2023, millionaires already represented 1.5% of the adult population analyzed by UBS. Specifically, the United States had the highest number, with nearly 22 million people (or 38% of the total), while mainland China was in second place with just over six million, roughly double the number in the United Kingdom, which ranked third.

“By 2028, the number of adults with wealth of more than one million dollars will have increased in 52 of the 56 markets in our sample, according to our estimates. In at least one market, Taiwan, this increase could reach 50%. Two notable exceptions are expected: the United Kingdom and the Netherlands,” the report concludes.

Private Markets: An Accessible Promise of Profitability and Diversification for Private Banking Portfolios

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Private markets are one of the fastest-growing assets in recent times, driven by a complex environment in traditional markets, regulation allowing greater access for retail and private banking investors, and increasing financial education, which still requires significant focus. Investment opportunities are attractive in niches like private equity, and especially now in private debt, infrastructure, or real estate. This was a major topic of discussion among asset management, wealth management, and financial services firms at the IMPower Incorporating Fund Forum held in Monte Carlo, Monaco, last week.

Experts agreed on the growth potential offered by the so-called “democratization” of these markets, which have traditionally been exclusive to institutional investors and are now more accessible to wealth and retail channels through regulatory changes, innovations, and technology, as well as new vehicles like ELTIFs or semi-liquid structures.

Institutional investors have benefited from these opportunities for many years, even as public markets have declined and been battered by geopolitical volatility, argued Markus Egloff, MD, Head of KKR Global Wealth Solutions at KKR: “Many institutions have recognized the potential of these assets for years and have increased their allocations. Now, for the first time, thanks to innovation, these markets are more accessible,” he indicated.

“Retail clients deserve the right to invest in private markets as a way to generate consistent long-term results, just as institutional clients have done for many years,” added José Cosio, Managing Director, Head of Intermediary – Global ex US at Neuberger Berman. “It’s an effective way to diversify a portfolio without diluting long-term investment results, and choosing the right manager can really make a difference.”

Diversification, Volatility Management, and Profitability

These markets offer great opportunities for “new” investors in terms of returns, stability, and portfolio diversification: “It is critical to move beyond the traditional 60/40 portfolio to give clients access to value creation,” argued Marco Bizzozero, Head of International & Member of the Executive Committee at iCapital.

For Jan Marc Fergg, Global Head of ESG & Managed Solutions at HSBC Private Bank, the principle of diversification is at the “core” of investment, and it is necessary to move beyond equities and fixed income to add a broader set of opportunities to portfolios that contribute to profitability. “Private markets help in terms of diversification to manage volatility, more so than a traditional 60/40 proposal.”

Similarly, Romina Smith, Senior MD, Head of Continental Europe at Nuveen, explained the importance of going beyond these proposals: “Adding private markets leads to positive solutions, higher returns, and a more stable portfolio. The narrative needs to shift towards having a fixed allocation to private markets.”

“The public markets are undergoing a change: there is a lot of concentration in sources of return and the universe of listed companies is decreasing, a trend that will continue as the incentives for it are diminishing. The value proposition for private markets is on the table,” added Nicolo Foscari, CAIA-CIO, Global Head of Multi Asset Wealth Solutions at Amundi. He further stated: “There is an important change to consider: private markets should not represent a marginal allocation in asset allocation, but rather start thinking of it all together as a whole, like a mosaic, and conduct a top-down and risk concentration analysis in tandem.”

“90% of returns in the public equity markets, such as the S&P500, come from 10 stocks, so the concentration risk is very real, and in fixed income, there is more illiquidity than recognized,” added Stephanie Drescher, Partner, CPS and Global Head of Wealth Management at Apollo. In her opinion, “we have reached a critical point where the industry recognizes that the perception of public markets being safe and private markets being risky is changing. Both simultaneously entail risks and are safe, and it all depends on selection and their complementarity in portfolios, which requires education. There should be a healthier dialogue about this topic.”

The Importance of Education and More Flexible Structures

In this regard, Bizzozero agreed that there is an inflection point around this perception between public and private markets and highlighted the value of financial education to bridge the gap between different investors. George Szemere, Head of Alternatives EMEA Wealth Management at Franklin Templeton, also emphasized education to bridge the investor gap on both sides of the Atlantic: “We must recognize that we are in the early stages of adopting private markets, especially in Europe compared to the U.S. (…) As diversification, liquidity management, etc., goals are achieved and understood, alternative investments will increase. Education is key to this.”

Because “it is an asset not suitable for everyone and must be understood. Democratization is underway but requires a lot of education,” stressed Egloff, warning of the existence of some less scalable strategies that are not as easy to access outside the institutional world.

Precisely to allow greater access to private markets, several structures have been proposed in recent years, from ELTIFs to pure illiquid funds or semi-liquid funds (open-ended or evergreen). Jan Marc Fergg of HSBC Private Bank made clear the coexistence of different structures, more or less liquid, to respond to the demand of different investors: “Open-ended structures also allow for diversifying portfolios and facilitating exposure to private markets; open and closed structures are there for clients and will complement each other,” he argued.

Pablo Martín Pascual, Head of Quality Funds at BBVA, also argued for incorporating private markets into clients’ portfolios via semi-liquid funds, ELTIF 2.0, or Spanish semi-liquid funds. But with a warning: “Semi-liquid funds are the elephant in the room. As an industry, we must be responsible to avoid past disasters – like those in Spain with evergreen real estate funds in 2008 – and it is therefore crucial to perform good selection and due diligence, choose the most prudent funds, and educate private banking.”

Business and Technology

Beyond the benefits for investors, Romina Smith (Nuveen) focused on the opportunities this opening presents for asset managers: “Institutional investors have been leading the demand for private markets, while private banks have been underexposed; but greater product availability and increased education are opening up the space for these latter investors, which means more opportunities for the industry.”

Many also agreed that technology could play a key role in bringing private markets closer to the wealth and retail worlds and in making investment more efficient. “The way wealth investors interact with managers is different from how institutional investors do. Technology simplifies and makes the interaction between LPs (limited partners) and GPs (general partners) more efficient,” added Szemere.

“The demand is still far off: we have a long way to go, although there is a lot of innovation that will make this journey much easier,” said Drescher.

Opportunities on the Table

At the event, experts spoke in various roundtables and conferences about opportunities in private assets, including private equity, private debt, real estate, and infrastructure. They debated the percentage these should occupy in portfolios, always depending on the investor’s profile. From Amundi, they highlighted the importance of looking not only at the percentage but also at what lies beneath, as it’s not the same to invest in assets aimed at generating “income,” like private debt, as it is to invest in capital, like private equity: “Both considerations should go hand in hand: a macro analysis must be conducted, but also look very carefully at what’s beneath,” said Foscari.

Egloff from KKR reminded attendees of the benefits of private equity, but emphasized the importance of selection: “Private equity has outperformed public markets over the past 25 years, especially in times of stress, among other things because allocating capital long-term offers better entry points. But not all managers can weather the storms: in the U.S., there are more private equity managers than McDonald’s branches,” he compared.

While it always depends on the risk profile, HSBC mentioned opportunities in Real Estate and Infrastructure, as they offer stable incomes tied to inflation and infrastructure is linked to key themes such as digitization or data centers, according to Fergg.

For Romina Smith from Nuveen, there are opportunities in private equity, always with the premise of selecting a good manager. Other two attractive segments are real estate, which offers good diversification, high returns compared to other assets and can benefit from macroeconomic stabilization and increased demand, and real assets, such as agriculture and forestry, which offer inflation hedging and are strong diversifiers.

Thomas Friedberger, Deputy CEO & Co-CIO at Tikehau Capital, highlighted opportunities in private credit, private equity, and real estate: “We see opportunities especially in private credit, with a very attractive risk-return ratio, always selectively. We are more cautious about capital investment and bet on megatrends such as energy transition. We also see opportunities in real estate, a sector that has been quiet in recent years but now could be an opportunity to buy at a discount.”

In the realm of liquid alternatives – already outside private markets – Philippe Uzan, Deputy CEO, CIO Global Asset Management at IM Global Partner, highlighted the opportunity in vehicles with liquidity as the basis: “The most important change in recent times is the fact that cash has returned and offers more attractiveness than some bonds. We see opportunities in products that use cash as the basis, such as some liquid alternatives: they could be attractive to generate diversification and absolute returns tactically,” he added.

The Momentum of Private Credit

Returning to private markets, many speakers highlighted the opportunity that private credit investment represents now. “There is a lot of growth potential in everything related to private credit: it only accounts for 12% of these markets,” said Foscari from Amundi. He defended the benefits of private markets for improving portfolio diversification and as sources of alpha, capturing the illiquidity premium, taking advantage of and managing different stages of the cycle, and exposure to different managers. In a higher interest rate scenario, he showed his bet on opportunities in private credit and infrastructure.

“The momentum for private credit is very good for several reasons: while I don’t think returns will be as strong this year as in the past, they can still offer double-digit yields,” also recalled Gaetan Aversano, MD, Deputy Head, Private Markets Group at Union Bancaire Privée, UBP. The expert mentioned the advantages of this asset, which in his opinion faces better times than traditional fixed income, with higher volatility. “There is room for both assets, but private credit is experiencing stronger momentum than a few years ago,” he added.

José María Martínez-Sanjuán, Global Head of Fund Selection at Santander Private Banking, also described an attractive environment. He cited a Preqin survey, according to which 50% of investors seek to increase their allocation to the asset, and 35% want to maintain their positions, showing the strength of demand, which can be explained by attractive yields offered – higher than other fixed income assets –, stable spreads over time, or diversification (allowing exposure to sectors not represented in traditional indices), among other factors such as restrictions on lending activity by banks following Basel IV.

The arguments and investment possibilities favor private credit, something the expert sees in his institution, with direct lending as one of the favorite strategies. “At Santander, we have $3.1 billion in the alternative business, which has experienced strong growth in recent years at a rate of 23%-25%, but the penetration ratio is only 1%, leaving much room for growth,” he recalled. “Almost 35% of our clients are invested in private credit, and 80% of that volume – around 800 million euros – is invested in direct lending, the most popular and senior strategy within the asset, offering advantages such as not having to navigate a company’s capital structure to achieve attractive returns, similar to equity but with more seniority,” he explained at the Fund Forum in Monaco.

Among the asset’s risks, Gaetan mentioned a higher interest rate scenario for a longer time, which could put some companies under pressure and increase defaults, raising dispersion and the importance of manager selection.

Private Credit in a Fixed Income Allocation

For Candriam experts, private credit is also a favorite in their fixed income allocation: “It makes sense to invest across the entire credit market spectrum, with a particular conviction in IG but also opportunities in assets like private credit. With good asset allocation and stock selection, you can achieve good levels of yield and diversification,” defended Nicolas Forest, CIO of the manager, at the forum.

At the firm, they maintain their conviction in investment grade credit in Europe, which has become a “core” asset in portfolios, as it offers stable returns and provides diversification; they bet on global high yield in the long term, benefiting from improved quality and technical factors (excluding U.S. HY, because it is expensive); and they highlight the diversification potential offered by private credit in Europe, also benefiting from increased mergers and acquisitions activity. Their private credit fund – in collaboration with manager Kartesia – invests, through primary and secondary markets, in small and medium-sized European companies and has provided a solid track record of risk-adjusted returns over time.

Is Donald Trump Inflationary?

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Is Donald Trump Inflationary? A group of 16 Nobel laureates signed a letter stating that Trump’s return would bring higher prices. “Many Americans are concerned about inflation, and there is, rightly, the question of whether Trump will reignite it due to his fiscally irresponsible budgets,” they said in the letter.

Among the signatories are George A. Akerlof, Sir Angus Deaton, Claudia Goldin, Sir Oliver Hart, Eric S. Maskin, Daniel L. McFadden, Paul R. Milgrom, Roger B. Myerson, and Edmund S. Phelps.

Some Data from Trump’s First Term

Donald Trump became the 45th president of the United States in January 2017, the year in which the U.S. gross domestic product (GDP) grew by 2.3%.

For the second year of his term, the GDP grew by 3% and advanced by 2.2% in 2019, according to data from the Bureau of Economic Analysis, leading to an average of 2.5% during his administration after the 3.5% decline in 2020 due to the coronavirus pandemic, the largest drop since 1946.

During 2017, his first full year in office, the Consumer Price Index (CPI) was at 2.5% annually and reached a peak of 2.9% in June and July 2018, according to the Bureau of Labor Statistics.

In 2019, the index fell below the Fed’s target range, reaching 1.5% in February, before rebounding as previously noted.

The pandemic caused a downward trend in inflation in 2020, reaching 0.1% in May and 0.3% in April. It finally closed with an annual variation of 1.4%, the lowest rate in five years.

Tariff Surge and Tax Cuts

Returning to the letter, the signatories specifically reference a study by the Peterson Institute, which explains that the tariff surge and tax cuts proposed by Trump would be some of the keys to higher inflation in a potential Republican presidency.

“Eliminating the federal income tax and replacing it with revenue from high tariffs would cost jobs, increase the federal deficit, and lead to a recession with an inflationary spike,” they stated.

One key point is that tariff increases would directly strengthen the dollar, which would be counterproductive, as the appreciation of the dollar after a generalized increase in U.S. tariffs is necessary to maintain balance in global goods markets; this phenomenon would cause an excess supply of foreign goods and more inflation.

For the experts who signed the letter warning about the risks of more inflation with Donald Trump, the global dominance of the dollar would lead to a counterintuitive situation, where a revaluation of the currency would not help combat inflation from imports.

The effect is clear because, unlike most countries that benefit from lower import prices when experiencing a currency appreciation, the United States does not enjoy that advantage because almost all its imports are billed in its own currency.

Due to this, the U.S. price index would not benefit from a sharp and immediate drop in import-related prices resulting from the strength of the dollar, so the inflationary impact of a significant increase in tariffs would be severe, especially since the United States is currently at full employment.

Other Approaches and Analyses

However, other analysts are more optimistic and expect that if Trump returns to the White House, he will not fulfill his promise of a 10% universal tariff on all countries. Nevertheless, they also warn that an average tariff increase from the current 2.5% to 4.3% would have clear implications for prices.

Additionally, a tax cut process with a massive budget deficit could reignite inflation, and according to experts from the German bank Allianz, this combination of lower taxes and higher tariffs would force the Federal Reserve to pause its easing cycle in 2025, with U.S. 10-year bond yields remaining above 4%.

Regarding immigration, the policy outlined so far by Trump, which he would apply in his administration, could also further pressure inflation: the tight U.S. labor market is one of the major factors explaining the resilience of the CPI.

According to the Federal Congressional Office, the United States recorded net immigration of 3.3 million people in 2023, with similar projections for 2024. The increase in the workforce through immigration has allowed employment to grow without increasing inflationary pressures, and lower migration figures could have the opposite effect.

“Higher tariffs and the possible deportation of immigrants would be negative for U.S. economic growth,” analysts from Morgan Stanley told the Spanish newspaper El Economista.

“This blow to the economy would likely encourage the Federal Reserve to cut interest rates, reducing short-term yields, explaining a longer path to price stability,” they said.

“If Trump increases tariffs as proposed, the economy would likely suffer a recession shortly after,” said Mark Zandi, chief economist at Moody’s, according to reports in the Spanish newspaper.

The credit agency even warns of a scenario with interest rate hikes by the Fed to curb a potential inflationary escalation. It is clear that there are fears of an inflationary Trump for the United States and the world.

The Scenario of EdR AM for the Second Half of the Year: “Nearly Ideal” Economic Environment and New Political Obstacles

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Edmond de Rothschild AM unveiled in its investment outlook for the second half of 2024 that the scenario investors will face in the latter half of the year will be marked by a “nearly ideal” economic environment but also by new political obstacles.

The economic environment is more favorable than expected for capital markets for three reasons, according to the firm. Firstly, disinflation continues its course, despite its non-linear trajectory and the fact that the last phase of disinflation normalization is the most challenging to execute. Additionally, labor shortages in the United States have finally begun to ease, supported by a significant influx of immigrants. Lastly, the economic scenario is influenced by interest rate cuts that have begun in Switzerland, Canada, and Europe. Edmond de Rothschild AM assures that “they should start before the end of summer in the United States, knowing that the Federal Reserve, despite all the surprises in terms of inflation, has ruled out the option of another rate hike.”

In this environment, experts remind us that historically, equity markets have recorded positive – and often solid – returns during economic landing periods preceding a first rate cut in the United States. The prospect of monetary easing, starting from decent levels, continues to suggest that the Fed will effectively manage the slowdown and avoid a recession.

Benjamin Melman, Global CIO of Edmond de Rothschild AM, states that observing the returns recorded so far this year, “it seems that history repeats itself, which reinforces our conviction that, given the strength of the global economy, it makes sense to remain well-exposed to equities.” The expert admits that since the beginning of the year, he has been tactically oscillating between neutrality and overexposure, but also that when the Fed first lowers its benchmark rates, “we will have time to review the economic outlook and adjust our main allocation decisions,” though for now, “confidence prevails.”

Can Political Turmoil in France Become a European Financial Crisis?

If the “Rassemblement National” party wins or in the case of a “fragmented Parliament,” it is possible – though unlikely – that the new French government will embark on a spending program that expands the deficit, according to EdR AM. They emphasize that this situation “will not prevent Brussels from opening an Excessive Deficit Procedure,” and that “credit agencies could continue downgrading France’s rating.”

The OAT-Bund spread could widen a bit more, according to the firm, “but a major crisis seems avoidable, especially if the prospect of reducing the deficit is postponed and not buried if Brussels and Paris reach a mid-term agreement.” A favorable scenario could even be imagined in the case of a “fragmented Parliament” and a new political reshuffle, which could lead to an alliance between “governmental” parties of the left, center, and right, allowing the country to continue its initial commitment to reducing the public deficit.

So far, European assets have benefited from an increasingly favorable combination of factors: a stronger-than-expected economy, ongoing disinflation, and a European Central Bank that has taken the reins of monetary policy. Furthermore, the proximity of the U.S. elections is causing a wait-and-see attitude across the Atlantic. However, Edmond de Rothschild AM’s investment teams have chosen not to overweight European assets, waiting for the unstable political balance in France to become clearer, with its implications for Europe.

U.S. Presidential Elections

While the re-election of President Joe Biden would not have significant repercussions on capital markets, the return of Donald Trump to the White House is expected to have implications, according to the firm. Firstly, it would be negative for long-term sovereign bonds due to an inflationary policy involving crackdowns on immigration and plans to deport 11 million undocumented immigrants, as well as new import taxes and a fiscal policy that would not reduce but rather increase the country’s significant public deficit.

However, it would be positive for equities, “especially thanks to the return of a deregulation policy and plans to renew the tax cuts he initiated in 2016, including a possible reduction in corporate tax.” However, the firm notes that while it is difficult to assess the pressure that would be exerted on long-term rates, if long-term yields were to rise too quickly, “it would have adverse effects on equity markets.”

Investment Policy for the Second Half of the Year

Melman recalled that a year ago, the economy posed many questions, “as disinflation remained timid and in the United States, a recession was feared.” However, he now admits that political difficulties were quite contained at that time. “Since then, the issues have reversed. While the economic environment now seems quite promising, it is being overshadowed by political problems. The only constant has been the continued deterioration of the geopolitical environment. This means that there may be some volatility, triggered by French political turmoil or the potential return of Trump to the White House. The good news is that markets can sometimes overreact to political crises, and this can create some attractive opportunities.”

Consequently, Edmond de Rothschild AM’s investment teams are confident in both equities and fixed income. Regarding the latter, they are considering reducing their exposure to long maturities, but as late as possible, to take into account the U.S. elections. In fact, if the economic slowdown materializes quickly in the United States, “all fixed income markets would benefit.”

Within equity markets, while major geographical decisions (United States vs. Europe) will be largely determined by the aforementioned political issues, the investment teams have a preference for Big Data and Health, and for European small-cap companies, which trade at very attractive valuations given the more favorable economic environment and the monetary easing that has already begun.

In fixed income, Edmond de Rothschild AM continues to favor carry strategies and hybrid debt (both corporate and financial) and plans to increase its exposure to emerging debt once the Fed’s pivot signal is strong enough.

Manutara Ventures Invests in the Expansion of Proptech BuildLovers to Latin America

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(cedida) José Manuel Martínez, CEO y cofundador de BuildLovers

In a bid to drive technological transformation in the construction industry, venture capital fund Manutara Ventures participated in the latest funding round for the startup BuildLovers. This investment aims to boost the technological development of the proptech and kickstart its operations in Chile.

According to a statement, the early-stage specialized vehicle – originating in Chile and operating in Silicon Valley and Miami – invested 300,000 dollars in the firm. This represents half of the capital raised in the round, they added.

The company aims for greater autonomy through technology, the initiation of operations, and sales growth in Chile and Spain. In the future, they are considering expanding operations throughout Latin America or the United States from Chile, they detailed.

“In the short term, our main objective is to establish a solid presence in Chile, using this market as a starting point or hub for our future expansion. In the long term, we aim to consolidate our position in the Latin American market and continue innovating in the industrialized and customized housing construction sector,” said José Manuel Martínez, CEO and Co-Founder of BuildLovers, in the statement.

The focus is also on how to reach clients once the platform is launched and on building alliances with financial entities. The digital platform, which already operates in Spain, has sold more than 20 homes since its launch and has over 75 projects in the pipeline.

Thus, the proptech joins Manutara’s portfolio, which includes several recognized startups such as Xepelin, ETpay, and OpenCasa. Overall, the total valuation of the portfolio exceeds 1 billion dollars, reaching a value more than ten times the initial investment.

Investment Story

The connection between the two entities in the entrepreneurial ecosystem was established when the startup made the first approach, according to the venture capital fund’s statement.

“On our part, we observed, thanks to an investment in Fund I, that there is a certain difficulty in acquiring homes at a reasonable price and within an appropriate timeframe, a problem that BuildLovers helps to solve. Additionally, the construction industry has seen very little technological innovation from a client perspective,” said Nicolás Moreno, Portfolio Manager of Manutara Ventures.

Martínez, on the other hand, highlights the fund’s “solid reputation in supporting innovative projects and visionary entrepreneurs” from Chile.

What factors ultimately led them to invest in BuildLovers? The portfolio manager emphasizes that “the team is fundamental to any investment” and assures that the founding team of the startup has “what it takes to take this startup to the next level.”

Furthermore, the investment firm highlights that “model validation is very relevant, as this fund seeks to invest in more mature companies, which goes hand in hand with the traction achieved to date. The traction was quite promising, considering that the technology was in its MVP (minimum viable product) stage to validate the model. Having the model validated at the time of investment is very positive for us,” adds Moreno.

Assets in UCITS and AIF Funds Doubled Over the Last Decade to Reach €20.7 Trillion

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The European Fund and Asset Management Association (EFAMA) has published its annual Fact Book on the behavior and main trends of the European investment fund industry, as well as a general review of regulatory developments in the 29 European countries. One of its main conclusions is that in the last decade, assets in UCITS and AIFs (alternative investment funds) have doubled, reaching €20.7 trillion, demonstrating the industry’s robustness.

“This year’s Fact Book shows that UCITS are delivering good returns with declining costs, attracting both European and foreign investors. While this is good news for the financial well-being of those investors, there are still too many European households not reaping the benefits of investing in capital markets. This is a crucial year of change within EU institutions, with a clear recognition by lawmakers that we need to further encourage retail investment to address the pension gap and support economic growth. To achieve this, we need decisive actions that simplify investment, reduce bureaucracy, and bring us closer to a Savings and Investment Union,” says Tanguy van de Werve, Director General of EFAMA.

Among the data collected in the report, it is noted that net sales of fixed-income UCITS in 2023 were greatly influenced by the evolution of interest rates. Net inflows were driven by the pause in central bank rate hikes and expectations of rate cuts in 2024. It also highlights that inflows into money market funds were mainly driven by short-term interest rates. In contrast, multi-asset UCITS funds experienced their first net outflows in ten years.

One of the trends identified in the report regarding UCITS funds is that large vehicles are gaining more importance in the European market. “UCITS funds with less than €100 million represented less than 4% of the total net assets of UCITS in 2023, with a market share that is gradually decreasing. At the same time, the share of funds with more than €1 billion in net assets is increasing,” the report indicates.

According to the document, the share of US equities in the allocation of equity UCITS has increased significantly. Specifically, it doubled from 22% to 44% in the last decade. EFAMA explains, “This is because US equity markets outperformed Europe, particularly large US tech stocks.”

The Appeal of UCITS Funds

One reason European market funds are attractive is their costs, which, according to EFAMA’s report, have been gradually decreasing. In fact, between 2019-2023, the average cost of long-term active UCITS decreased from 1.16% to 1.06%, while UCITS ETFs dropped from 0.23% to 0.21%. “This trend is expected to continue, driven by greater transparency in fund fees and intensified competition among asset managers,” they indicate.

According to EFAMA, foreign investors are an increasingly significant group of EU fund buyers. Evidence of this is that, in the past five years, foreign investors purchased an annual average of €276 billion in EU investment funds. In comparison, €174 billion were sold cross-border within the EU, and €196 billion were bought domestically.

Additionally, EU retail investors continued to buy funds in 2023 but shifted their focus to bonds. “Given the reluctance of banks to increase interest rates on savings accounts, national governments in countries like Italy and Belgium successfully attracted domestic retail savers by offering bond issues with higher yields,” the report indicates.

In general terms, the average annual performance of all major types of UCITS was positive. Equity UCITS delivered an average of 14.2%, multi-asset UCITS generated 8.7%, bond UCITS 5.7%, and money market funds 3.3%. “With an EU inflation rate of 3.4% for the year, most UCITS proved to be an excellent investment option in 2023,” EFAMA adds.

Sustainable Investment

Something that caught EFAMA’s attention is that sales of sustainable funds slowed down. “Net sales of dark green Article 9 SFDR funds declined compared to 2022. Conversely, Article 6 funds (without a sustainability focus) saw a shift, attracting €41 billion in net inflows. These trends were mainly driven by the growing popularity of ETFs, as most ETFs are Article 6,” the report indicates.

Thornburg Signs William “Billy” Rogers and Jodan Ledford

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Thornburg has added William “Billy” Rogers as the new Chief Operating Officer (COO) and Jodan Ledford as Head of Institutional to its team, according to a statement obtained by Funds Society this Thursday.

The new hires arrived a few months after the hiring of Richard Kuhn as head of product and Jonathan Schuman as head of international, as previously reported by Funds Society.

Billy Rogers, as the new COO of Thornburg, will determine the strategic direction of technology and operations and drive interdepartmental initiatives to ensure the organization’s continued success and growth, the statement adds.

Before joining Thornburg in 2024, Rogers worked at PIMCO for 12 years in various roles, including product management, compliance officer, and head of regional operations and advisory. In 2010, he left PIMCO to join Janus Henderson, where he spent eight years as a fixed income trader and four years leading their global unconstrained macro office.

Subsequently, Rogers spent three years as an executive consultant, helping to integrate and lead a large West Coast retail SMA business. Additionally, he has participated in numerous fintech startups throughout his career.

He holds a BBA in business administration from the Anderson School of Management at the University of New Mexico and an MBA from the Marshall School of Business at the University of Southern California.

Jodan Ledford will be responsible for developing and executing sales strategies, building and maintaining high-level relationships, and representing the company within the institutional investment community, according to the information obtained by Funds Society.

Before joining Thornburg in 2024, Ledford was CEO of Smart USA, a retirement fintech provider. Previously, he was managing director of clients at Legal & General Investment Management America, where he led a team in sales, marketing, investment solutions, product strategy, and portfolio management.

Earlier, Ledford was an executive director at UBS Global Asset Management, where he developed investment solutions and risk management strategies for large institutional clients and led a mid-market initiative for medium-sized US corporate pension plans.

He also worked as an associate in the investment banking division of J.P. Morgan, developing risk management strategies for companies with large pension plans. Ledford began his career as an actuarial analyst at Watson Wyatt Worldwide.

He holds a master’s degree in applied statistics from the University of Miami and a bachelor’s degree in mathematics from Emory University.