Arcano: “Without Retrocession, the Absence of Conflict of Interest and Independence is Guaranteed, Something that Does Not Generally Happen in Private Banking”

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Arcano: “Sin retrocesiones se garantiza la ausencia de conflicto de interés y la independencia, algo que no ocurre de forma generalizada en las bancas privadas”
Wikimedia CommonsÍñigo Susaeta, courtesy photo. Arcano: "Without Retrocession, the Absence of Conflict of Interest and Independence is Guaranteed, Something that Does Not Generally Happen in Private Banking"

The market environment is still favorable but we will have to be cautious with the policies of the central banks. For 2018, Íñigo Susaeta, Managing Partner of Arcano Family Office, favors short-term assets such as floating loans, emerging local currency fixed income, inflation-linked assets and different alternative funds that can look for opportunities without depending on the directionality of the markets. In this interview with Funds Society, in addition to talking about markets, Susaeta explains the impact that MiFID II will have; it will change the distribution landscape in Spain and will promote services such as independent advice –which they offer- and the discretionary management of portfolios.

Under MiFID II, financial advice in Spain could adopt a new face. What are the main changes that the regulations will bring to the industry? Will there be a revolution in the advisory business in Spain?

MIFID II will undoubtedly lead to a change in the business of many advisors in Spain, and in Arcano’s case, and specifically in its Family Office service, it is a slap on the back for our model with which we have been leading the market for a decade and where we have always opted, as one of our differential factors, for independence and for receiving payments exclusively from our clients.

In general terms, MIFID II aims to strengthen investors’ protection and to improve the functioning of financial markets through greater transparency of prices, competition and market efficiency. Thus, for example, banks will find it more difficult to collect incentives for the sale of funds and they will have to increase the amount of funds from other management companies which they offer their clients, which is causing a change in the distribution model.

How have you prepared for the regulations? What kind of advice does Arcano offer, both from the EAFI and the family office?

In Arcano we offer independent advice. In fact, we were pioneers in incorporating this model in Spain more than a decade ago. Thus, we adapt the best practices of international multifamily offices to our firm, and time has proved us right, becoming one of the market leaders in Spain, advising over 20 HNW holdings with a combined volume exceeding 1.4 billion Euros In this regard, the adoption of MIFID II has only reinforced our model.

There is a major issue in MIFID II that I would like to point out: the collection of retrocession fees. since its foundation, Arcano has considered the non-collection of third party retrocessions in the provision of its services to clients as a fundamental aspect for the development of its Wealth Advisory services. It is our company’s philosophy, and we believe that the absence of conflict of interest and independence is guaranteed in this way, something that we think does not generally happen in private banking.

Will MIFID II provide an impulse to discretionary portfolio management, or to advisory activities?

We believe that to both, and it is an area that Arcano is already developing through its IICs manager. In fact, if we look at the implicit costs that banks apply to some of their services, many clients will opt for other alternatives, giving an impulse to both discretionary management and independent advice.”

What growth rates has the family office shown in recent years and what objectives do you set for the next ones?

As I pointed out, Arcano has become one of the market leaders in Spain with over 20 families or HNW holdings with a total volume of more than 1.4 billion Euros. Our goal is to continue to have the trust of those great holdings, which increasingly need value and quality services, with a 360-degree approach like the one we offer at Arcano, which is completely independent and customized.

Your portfolio construction model already holds a 10 year track record… what are its key factors and how has it evolved?

It is a very different risk-based asset allocation model, based on principles applied by some large institutional investors such as Bridgewater or the sovereign fund of Norway, among others. It seeks greater robustness in the different market scenarios by distributing the total risk of the portfolio into four factors: inflation, interest rates, credit and growth.

We believe that the real diversification it offers will be fundamental in the most uncertain and volatile environment that we will live through in the medium term. Even in the most stable context of the last seven years, if we look at the profitability obtained by the sicav managing entities that manage over 100 million Euros, Arcano would be the second in the ranking with an annualized return of 4.4% in its moderate profile portfolio.

As well, your group has provided room for alternative management … is including these vehicles in the portfolios now a key factor?

In a market context such as the current one, with low interest rates, it makes more sense than ever to have part of the portfolio in alternative assets, including illiquid ones such as private equity or real estate funds, among others. However, it is important to have a global vision of the assets and their objectives and assess which weight is the most appropriate to include these assets in the portfolio, as well as selecting the best managers and products.

In Arcano’s case, however, it should be remembered that the advisory activity of large holdings is completely separate from the management activity of our management company’s alternative products.

Looking ahead to this year, do you expect more volatility? What assets do you favor?

The stock market cycle which began in 2009 is the second longest in history, which invites to proceed with a certain amount of prudence, also taking into account that central banks will jointly begin to withdraw liquidity from the markets by the end of this year. A rally in real rates faster or deeper than expected could lead to a repricing of risk assets. In this market moment, we favor short-term assets such as floating loans, emerging local currency fixed income, inflation-linked assets and different alternative funds that can seek opportunities without depending on the directionality of the markets.

Why has the Goldman Sachs Corporate Trading Desk Just Gone Through the Busiest Two Weeks of its History?

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¿Por qué la mesa de operaciones corporativas de Goldman Sachs acaba de atravesar las dos semanas más ocupadas de su historia?
CC-BY-SA-2.0, FlickrPhoto: Neil Kearns, Head of the Corporate Operations Department of the Securities Division at Goldman Sachs. Why has the Goldman Sachs Corporate Trading Desk Just Gone Through the Busiest Two Weeks of its History?

In the midst of market volatility, companies have been increasing their stock repurchase programs, providing unprecedented support for investors. Neil Kearns, Head of the Corporate Operations department of the Securities Division at Goldman Sachs, explains in an interview why 2018 is about to set a new share repurchase record.

Your department helps companies authorize and execute stock repurchase programs, what kind of activity are you seeing at your trading desk?

In the first two weeks of February, we recorded the most active period in the history of our trading desk, with executions (theoretical dollars spent) that increased 4.5 times our 2017 average. Authorizations to repurchase shares have increased by 100 % during the same period. To put this in perspective, it is the fastest start to the year in terms of repurchase authorizations. In fact, this indicates that we are likely to see the highest level of share buyback activity during 2018.

What are the factors that drive activity?

Certainly, the US tax reform and the corporate repatriation of cash that companies have outside the country are significant catalysts. When we analyze the last period of tax exemptions in 2004, for example, we see that the execution of repurchases of the S & P 500 increased by 84% that year and by 58% the next.

Companies are also operating in a business climate that has improved. The economy is strengthening, corporate profits are growing and companies are generating more free cash flow. In addition, any company that is not actively allocating its cash faces the wrath of shareholders who are dissatisfied with the management of capital and the possible unwanted attention of activists.

What other parts of the market will affect the repurchase of shares?

The share repurchase activity is highly correlated with the general volatility of the market, which is why many companies used the market correction of last month as an opportunity to gain an advantage over their repurchase targets for the year. In fact, our colleagues at Goldman Sachs Research recently raised their estimates for total cash spending of the S&P 500 in 2018 to $ 2.5 trillion, with a 23% increase in share repurchases, up to 650 billion dollars, due to the tax reform and the recent market correction.

What are the implications for investors and for the market?

Buy-side investors are very focused on what companies are doing in the market, particularly in response to stock volatility. Given that companies have been the largest net buyers of US stock since 2010, there is obviously a great interest in understanding their general sentiment in light of market fluctuations and commitment to their repurchase plans.

For example, since the 2008 financial crisis, the S&P 500 companies have repurchased about 4.25 trillion dollars of their own shares, which represents approximately 17% of the current market capitalization, situated at approximately $ 24.5 trillion.

Undoubtedly, we see greater interest in corporate behavior with respect to its repurchase programs when the markets are highly volatile. Based on both the pace of repurchase announcements and the actual repurchase activity, investors can take comfort in the fact that stock repurchase programs are very much alive.

Vanguard Lists Three UCITS ETFs in Mexico

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Vanguard lista tres ETFs UCITS en la bolsa de México
Wikimedia CommonsBMV. Vanguard Lists Three UCITS ETFs in Mexico

Vanguard has listed three new UCITS ETFs on the Mexican market. Currently there are 68 Vanguard ETFs in the Mexican Global Market, known as SIC.

The new ETFs, with fees of 0.09%, 0.19%, and 0.29%, are:

  •     Vanguard FTSE 100 UCITS ETF – it looks to replicate the returns of the UK market
  •     Vanguard FTSE Japan UCITS ETF – it is focused on tracking the returns of medium-to-large cap Japanese firms
  •     Vanguard FTSE-All Word High Dividend Yield – it tracks the returns generated by the index of medium-to-large cap emerging and developed market companies that pay high dividends

Juan Hernández, Vanguard Mexico Country Head, said: ‘We are pleased to list our Ucits ETFs on the Mexican Stock Exchange, offering Mexican investors additional opportunities to create a balanced portfolio that meets their investment goals. We are committed to providing durable and effective solutions to Mexican investors, helping them achieve success in their investments.’

The ETFs grant exposure specific international themes that are not offered among its current US-domiciled ETF range. According to the firm, the UK and Japan ETFs offer exposure to two of the world’s most developed countries while the High Dividend Yield ETF combines a diversified stock portfolio with high income, at a competitive price.

Franklin Templeton Opens New Office in Santiago, Chile

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Franklin Templeton abre nueva oficina en Chile y nombra a Gonzalo Ramírez Correa vicepresident Sales
Santiago de Chile. Franklin Templeton Opens New Office in Santiago, Chile

Franklin Templeton Investments announced the opening of a new office in Santiago, Chile, to support the sales and client service needs in the country. The firm has also appointed Gonzalo Ramírez Correa as vice president, Sales. Based in the firm’s new Santiago office, he will work to develop tailored solutions for clients in Chile, leveraging the capabilities of Franklin Templeton’s various investment groups. He will report to Sergio Guerrien, director and country manager for South America ex-Brazil, who will oversee the Chile operation.

“We are very delighted that Gonzalo has joined our team in this period of growth in the Chilean market,” said Guerrien. “With the opening of this new office in Santiago, we are committed to strengthening our capabilities in the South American region as our clients look to us to solve their needs for specific investment outcomes while leveraging the comprehensive resources and broad expertise of Franklin Templeton.”

Ramírez Correa brings with him over 10 years of industry experience. Prior to joining Franklin Templeton, he was director of business development for Legg Mason Global Asset Management, focused on sales and based in Santiago. Before joining Legg Mason in 2015, he was an account manager and investment sales specialist for Latin America for Thomson Reuters. Earlier in his career, Ramírez Correa was with HMC Capital in institutional sales, where he was responsible for business relationships.

Franklin Templeton has been serving a wide array of local institutional investors, pension funds, private banks, retail distributors, mutual funds, insurance companies and family offices in Chile since 1995 and is among the top mutual fund providers to the Chilean pension system.

Franklin Templeton has been present in Latin America for over 20 years. The company opened its first office in the region in 1995, and today has a presence in Santiago, Buenos Aires, Bogota, Sao Paulo, Rio de Janeiro, Montevideo and Mexico City.

The New Law Against Money Laundering in Uruguay will Jeopardize the Offshore Industry

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La nueva ley contra el lavado de activos en Uruguay pondrá en jaque a la industria offshore
Marcelo Gutiérrez, Managing Partner for Invertax / Courtesy Photo. The New Law Against Money Laundering in Uruguay will Jeopardize the Offshore Industry

Uruguay has started the year with a new law against money laundering, a regulation that brings together all the provisions that were previously dispersed in different legal instruments. The reform places the country within international standards, in a global context of ever stricter regulations.

According to the new law, approved towards the end of 2017, tax offenses are considered predicate offences to money laundering, which entails a criminal process. Lawyers and accountants must report suspicious transactions, as well as banks, financial advisors, real estate agents, auctioneers, civil associations, casinos, foundations, political parties and NGOs.

After only a few months trajectory, the reform still raises a series of questions and doubts on the part of the taxpayers. What changes is this regulation generating in the Uruguayan financial industry? “The Uruguayan financial industry acquires the new requirement of ‘know your client’. From now on, tax compliance is mandatory,” explains Marcelo Gutiérrez, Managing Partner for Invertax.

“This change is not only occurring in Uruguay, but in many other countries, and is part of the new reality: more transparency, more information exchange. It was under discussion for a long time, but tax evasion is very difficult to support as a moral argument. The discussion on whether governments make good use or misuse of these resources is a different matter,” adds the expert on tax issues.

At Invertax they believe that the Uruguayan financial industry will encounter some difficulties: “As in the rest of the world, and with the end of banking secrecy, the offshore industry in Uruguay is on its way out. At present, only the United States offers traditional offshore services,” says Gutiérrez, Uruguay’s representative at the International Fiscal Association.

The new restrictions raise fears of a decrease in foreign investment, something that Marcelo Gutiérrez plays down: “It depends on what type of investment we are talking about, if we refer to Real Estate in Punta del Este, this new requirement will complicate things for many of the ’traditional’ investors. However, direct foreign investment, such as the pulp mills and other important ones already planned, will not be affected.”

Compass Investments, Scotia and Nafinsa, the Best Asset Managers in Mexico

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Compass Investments México, Scotia y Nafinsa, las mejores gestoras en México
CC-BY-SA-2.0, Flickr Morningstar 2018 Winners. Compass Investments, Scotia and Nafinsa, the Best Asset Managers in Mexico

During the sixth edition of the Morningstar Awards in Mexico, at the W Hotel in Mexico City, representatives of the best asset managers of the country gathered to recognize the three best firms and the six best funds of the year. At the event, Alejandro Ritch, Regional Director of Morningstar for Latin America, highlighted the positive transformation that is taking place in the sector.

He also noted that there is still a significant concentration in the sector: with 69% of the assets under management in the hands of the five leading firms. The executive also pointed to the growth of passive strategies and the consequences this has had on the fund market, mentioning that “the competition that the ETFs have created is real and the managers have lowered their commissions in response to this.”

In the category of Best Funds the winners were:

  • Short term debt Operadora Mifel
  • Medium term debt, Actinver
  • Long term debt, Intercam Fondos
  • Mixed fund, Principal
  • Global equities, Operadora de fondos Banamex (recently acquired by BlackRock)
  • Mexican equities, Compass Investments México

For Best Asset Manager the winners were:

  • Debt, Nafinsa
  • Equities, Scotia fondos
  • Global, Compass Investments México

Citi: The Latin American Industry Must Change its Value Proposition

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La industria latinaomericana debe cambiar su propuesta de valor, asegura el director de Citi Wealth Management Cono Sur
Rodolfo Castilla, Citi’s Head for the Southern Cone. Citi: The Latin American Industry Must Change its Value Proposition

Rodolfo Castilla returned to Uruguay less than a year ago, after working for several years as Global Head of Wealth Management Products and Platforms for Citi’s Consumer Bank in New York. It’s obvious that he feels at home in the lands of the River Plate, as Castilla already experienced a professionally intense stage in Montevideo, heading the International Personal Banking business (IPB US) for this same division for the Southern Cone from the Uruguayan capital since 2008.

In view of the winds of change shaking that region, the challenge facing Castilla as Head for the Wealth Management business of the Consumer Bank for LatAm’s Southern Cone, based in Citi IPB US’ offices in Uruguay, will not be any smaller. Citi’s Director met with Funds Society to discuss the future of the industry.

In the few months that you have been in Montevideo, how have you found the situation in Uruguay after five years’ absence?

My first thought is that, in terms of sales practices and the platforms that we and our competitors use, I found it relatively similar to what I left five years ago, before going to New York. And I think that all players face the risk of losing competitiveness because there are three things that are already happening in more developed markets, such as the United States or even in Asia, a region that was similar to Latin America in this dimension. Over there, business models are changing, as is the value proposition in anticipation of these changes, which, in general, I have seen happening here somewhat more slowly.

In my own personal opinion, there are three major drivers happening in our industry due to which we have the responsibility to rethink our value strategy in order to better serve our clients.

The first one is regulatory evolution at a global level, with two well defined aspects in the case of Consumer Wealth Management. The first is transparency, in portfolios as well as in investment decisions and, above all, in the costs of advising and transactionality. The example that I like to use is the difference in the allocation of portfolios for the US domestic market, where passive products have been widely surpassing asset flows very consistently in recent years. And if we look at our region, the allocation of passive products is much lower in comparison, which can be explained by many factors such as the average level of sophistication of the clients, and of bankers and advisers as well, since mathematically there are times when they are not optimizing risk / return for the client, based on the costs incurred.

That is why I think that when these regulations oriented towards total transparency in returns, risk, and costs are approved and impact our region, (and in my opinion, following the trend in other regions such as Europe, the question is when, and not if, it will happen) I believe that there are many products present today in portfolios that will no longer be the first choice, forcing the entire industry to rethink and articulate a different value proposition.

The second aspect is what is happening with the DOL in the United States for retirement accounts, referred to the concept of “Fiduciary Standard”.In general, our industry currently works broadly with a suitability standard: our obligation is that the product / portfolio that we advise a client on, appropriately corresponds with the client’s risk profile. And that is a valid model which for many years drove our industry, whose controls are also automated in most of the current platforms at the level of each transaction and of the total portfolio.

The potential new standard, a fiduciary one, proposes an evolution that, in my opinion, is more than conceptually correct, where we will have to demonstrate not only alignment with the risk profile, but also be able to demonstrate at all times that we are making the best decision for a client. So when, for example, in order to express a market view, we are facing three similar products – a basket of individual bonds, an active bond fund, or a bond ETF -, we will not only have to check whether it corresponds to the risk profile, but we’ll also have to know why we choose one option or another, including the cost / benefit ratio. Something that, again in my opinion, is absolutely healthy, since it’s in line with what we always strive for in Citi: looking for the best solution for our clients.

Are clients in Latin America really going to demand that?

I believe that those players who opt for investing in educating clients on these issues of costs, performance, risks … that we will gain an important part of the market in the future, since this is an irreversible global trend. In my opinion, this is a model that may impact the short-term financial margin, but which is undoubtedly the right one, and that whoever manages to carry out a value proposal with these elements will gain volume share because the client will eventually realize the difference in value.

And now we move on to the second driver of change, global and also regional, which has to do with the Tax Amnesties that are happening in Latin American countries. When you think of Argentina, you also think of Brazil, and on what lies ahead for Peru and on what already happened in Chile, it is a regional context but immersed in a search for transparency that is also global. Our industry is going to be even more transparent than it is today, both towards clients and Institutions, which again is very positive.

As an example of the largest offshore market in the Southern Cone, Argentina, private studies show that a large majority of Argentine savings are abroad, and we have just witnessed the largest tax amnesty in that country’s modern history. That also changes the market because this significant volume of assets adds a third player: client, banker and now the local accountant. And there is an element in the conversation that is the tax optimization of the investment strategy, very important in many markets and with different models for the different players regarding the permitted level of direct tax advice. The obvious conclusion is that we must all have a varied offer of tax efficient products in our value proposition.

Many players in the industry believe that, whatever the regulatory evolution, the weight of the local market will increase anyway: What is your opinion on that?

It will inevitably increase the local market, because governments are creating the conditions for the development of local capital markets, very healthy and also important to generate new attractive investment opportunities for clients.
In Argentina’s case, I believe that there will be an offshore and onshore mix that will enhance the value proposal. Even more so with these changes; in my opinion I believe more than ever that we must upgrade the value proposal, that in Citi’s case we open an institutional discussion based on proprietary Asset Allocation models, where there is a global investment committee sharing decision making with analysts in 4 continents, and which following all this decision making, ends in an offer with certain asset classes that optimize the return / risk / cost ratio, after which we just have to follow with the security selection of products. At Citi, we are now in a position to offer all the elements of this value chain.

I point out the difference because, for many years, our industry talked directly about products (this fund or this bonus), and that is no longer an optimal value proposition for the client. It has been widely demonstrated that individual selection of the product is 20 or 30% of the final performance, well below the correct selection of asset classes, regions, sectors, etc…

Along these lines, I think we should invest in Technology, as is already done in Asia and part of the US domestic market. We should create more intuitive platforms that allow for guiding the conversation towards understanding and solving the financial objectives of the client, instead of towards buying or selling products.

In Citi’s case in other regions, we have invested in one of those platforms that allow us to have several portfolios, one per client’s objective, each one with its risk profile and suitability controls. For example: “This is the money for my children’s university, I want to be conservative with this. And this is for my retirement, I will need it in 20 years, and I also have this 10% with which I can be more aggressive because I don’t need it in the short term and can assume greater risk”. Then, the platform allows you to build an asset location for each of these life goals, in a very intuitive way. And then comes the institutional proposal, backed by units of Due Diligence, Research, and Analysts in 4 continents calculating what the maximization of risk and return is. And, finally, it’s clearly a more efficient model also for bankers.

With these intuitive platforms, client education occurs naturally, by sitting with the client with an iPad, it is all quite simple and easy. The dialogue with the client is not based on choosing a fund or a bond but on making sure that we are fulfilling their financial objectives; that should be our common objective.

How much longer before we see this in Latin America?

While I cannot assure time-frames in Citi’s case, I can tell you that it is a global priority that is reaching our region. In the case of other important players, I do not have enough information to give my opinion about it. Our technological model at Citi is designed to complement the banker, although we think that it will never replace the banker because face to face is important, and that trust, relationship, and understanding the model and the family balance sheet will never be able to be replaced by an algorithm in certain market segments.

Are we already talking about a near- horizon in Latin America, is it possible to talk about what will happen within a ten-year period?

I reaffirm my opinion: I believe that it will be a transparent business where clients will know exactly what their objectives are, their returns, the risks assumed, what they are charged and why they are charged, in a much simpler and more intuitive way than at present.

It will be very easy to demonstrate whether the banker or adviser is doing things right or not, any client regardless of their sophistication will be able to understand that, and that will result in that only those of us who improve our value proposition will be able to maintain a leadership position.

There will be flows between onshore and offshore, with a much greater onshore allocation, because I believe in the region and believe in local markets. And if macroeconomic conditions improve, the enormous wealth generation of our countries can be channeled, instead of being consumed or absorbed by inflation. Latin America, and the Southern Cone in particular, is an area with enormous growth potential in the coming years, so whoever adjusts the value proposition faster in order to do the best for their clients, will gain a greater share of this growth.

David Hawa (Robeco): “We Use Tactical Allocation in Contingent Convertible Bonds”

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In today’s credit markets, it is essential to have a defined roadmap, in which you can establish where you are in the economic cycle, how much risk you want to take and what you want to invest in, said David Hawa, Client Portfolio Manager of the Robeco Financial Institutions Bonds strategy, during the “2018 Kick-off Master class Seminar” that the asset management company of Dutch origin held in Palm Beach.

Fundamentals

In order to prepare its roadmap, Robeco analyzes the credit markets from three different perspectives, taking into account the fundamental, valuation, and technical factors.

Beginning with fundamentals, the 10-year US Treasury bond ended the year at 2.43%, the same performance level as it began the year. There was no volatility in the US sovereign bond market, nor was there any for German or Japanese bonds.

About inflation, in the United States the only component in the US with price growth is Owner Equivalent Rent. A trend that they hope will be reversed as inflation begins to gain relevance. Meanwhile, in Europe, all the components of the European GDP are growing, which, according to Robeco, is very positive because it means that loan default levels are decreasing.

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“With the European Central Bank’s official rate at levels of -0.4% and the German two-year bond also in negative territory, investors have to pay to be holders of these bonds. When GDP growth was in deflation and there was no growth in Europe, it could be argued that these levels were going to be maintained, but with growth at between 2 and 2.5%, it’s logical to believe that normalization of interest rates in Europe is close, even without inflation. That’s why we believe that interest rates will increase. Comparing the German bond and the 2-year Treasury bond, the spread between the two has widened since the Federal Reserve began its cycle of increases. Sooner or later Draghi and his team will also have to begin to raise rates, let’s not forget that quantitative easing measures were launched in Europe due to the fear of deflation and now we have passed that phase. The fact that rates are going to start rising is good news for the income statements of European insurers and banks, whose margins are suffering in an environment of negative interest rates.”

In the case of the United States, if the level of unemployment continues to decline, inflation will be seen in wages: “If inflation returns in wages, the Fed could be pressured to accelerate the rate of interest rate hikes, something we particularly take into account as a potential risk. “

Valuations

In general terms, the aggregate of credit market valuations is much lower than its average. The behavior of European investment-grade corporate debt -excluding financials- was better than that of US corporate debt with BBB rating -also excluding financials-. That is why Robeco is committed to European credit as, with lower levels of leverage, it’s more attractive than US credit, especially now that the volatility seen in 2016 has disappeared.

“Taking into account the valuations presented by the different levels of subordination of the financial debt, some of the issues of contingent convertible bonds, the so-called CoCo’s, offer an adequate spread for their level of risk.

This type of debt supports a higher level of risk: if the Tier 1 capital level of the financial institution’s balance falls below the minimum pre-established by the issue, the bond is automatically converted into shares. But, some issues of these CoCo’s also reward the risk incurred with attractive spreads. It takes a very high level of experience in both transactional analysis and credit analysis to enter this market,” said Hawa.

According to Robeco, the valuations of European financial debt have greater attractiveness than European investment-grade corporate bonds. Specifically, subordinated debt issued by insurance companies offers a spread of 200 basis points, and Tier 2 bank debt a spread close to 120 to 130 basis points, as compared to less than 100 basis points offered by European investment-grade fixed income when excluding the finance sector.

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“The CSPP (Corporate Sector Purchase Program), the quantitative easing program established by the European Central Bank, can buy corporate bonds, but cannot buy bonds from financial institutions. Having earmarked public money to help financial institutions after the 2008 crisis, there was a popular clamor for the ECB’s money not to be reinvested back into banks. Therefore, there is a gap between the valuations of investment-grade European corporate bonds and European debt issued by financial institutions.”

Technical Factors

Central Banks’ monetary stimulus programs, which for years have been injecting a lot of liquidity into the market, are being phased out. The Fed has been working on that for some time, Bernanke was the first president who indicated his intention to withdraw the quantitative easing program in 2013. With the arrival of economic growth in Europe, Draghi should also initiate the rate hike, something that Robeco does not expect to happen until 2019.

“Another interesting issue for US investors is that, given the asymmetry created between the Fed’s rate hike and the ECB, the cost of hedging for non-US investors has increased due to the existing spreads between short-term rates in Europe and the US. Many of the Asian investors who bought US corporate bonds are now looking for greater exposure to corporate debt and European financial debt because of the high price of hedging costs. Another point in favor of the Robeco Financial Institutions Bonds strategy.”

The Assett Classes Invested in

Most issuers in which the strategy invests have an investment grade rating. However, as the risk increases, the specific ratings of some of those issues decrease, which is why at Robeco they have a highly experienced team of managers and analysts, where 90% of the professionals have over 17 years experience, having dealt successfully with both bullish and bearish markets.

As contrarian investors, they believe that the credit markets are inefficient and that they usually incur a higher or lower valuation than what actually corresponds to an issue according to its fundamentals.

As an example of this investment philosophy, Hawa cited the purchase of subordinated debt from financial institutions when it increases market volatility. “Following the Brexit referendum, bank spreads in the United Kingdom skyrocketed, but in terms of fundamentals there were new opportunities, on that occasion we bought Barclays issues. Another example was what happened in Catalonia. On this occasion, with the increase in political risk, we increased our bets in Sabadell and Caixabank, which have solid financial balances. We have also bought other national champions among European banks such as Santander, Nordea and Credit Agricole.”

Recently, the strategy has increased its allocation to insurance company bonds, which are achieving greater spreads than issues by national banking entities. Some examples would be Aviva, NN, Generali, Swiss Re, as well as other less known names such as the Dutch company Delta Lloyd, the Belgian company, Belfius, and the British company, Direct Line Group, totaling some 70 issuers, which maintain the fund’s quality bias.

“The quality of insurance companies and the banking sector has improved in terms of fundamentals, with the progression of deleveraging of the balance sheets after the implementation of Basel III and the European Central Bank forcing banks to redistribute their financial balances to prevent what happened in 2008. Loan default levels and risk asset volume has decreased, so that banks’ balance sheets have been strengthened, but it is important to know which names should not be included in the strategy. As the level of subordination and risk increases, a greater spread is obtained, but whether or not the risk incurred is being compensated, must be taken into account. We can obtain better spreads betting on Tier 2 issues from insurers and banks, than for some of the credits with additional Tier 1 subordination level. That is our responsibility, to search for how we are being compensated for the risk we are taking in the strategy,” Hawa said.

Regarding investment in contingent convertibles, despite having investment-grade at the issuer level, it is possible that the issue has a much lower rating. That is why the Robeco Financial Institutions Bonds strategy limits its position in CoCo’s. “We want the strategy to always maintain the degree of investment in aggregate terms, so we use a tactical allocation in contingent convertible bonds, not founding the achievement of a good performance on this type of asset. Since the launch of the strategy in 2014, we have always maintained the percentage of investment in CoCo’s below 15%, allowing us to keep the investment grade in an aggregate manner “.

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“In January 2016, Deustche Bank experienced a series of problems: the price of shares declined and there was a real concern that its issuance of Tier 1 contingent convertible bonds was unable to pay its coupon due to the ECB’s impositions. At that time, the spreads of UBS, Barclays, Erste Group or Raiffeisen Bank skyrocketed due to the fear of contagion. On the other hand, at Robeco we decided to buy those names whose fundamentals were attractive to us, based on transactional and liquidity risk. After this, spreads were strongly compressed, and we were rewarded for the risk of having these CoCo’s in position.

Currently, the total exposure to contingent convertible bonds exceeds 10% slightly, with a 9% exposure in the Tier 1 subordinated class and 2% in Tier 2,” concluded Hawa.

BBVA Bancomer Becomes the First Asset Management Company in Mexico to Adopt the CFA Institute’s Code

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BBVA Bancomer se convierte en el primer asset manager de México en adoptar el Código del CFA Institute
CC-BY-SA-2.0, FlickrPhoto: Funds Society. BBVA Bancomer Becomes the First Asset Management Company in Mexico to Adopt the CFA Institute's Code

Mexico’s largest banking institution is latest global firm to pledge ethical behavior to shape a more trustworthy financial industry. CFA Institute, the global association of investment professionals that sets the standard for professional excellence, has added BBVA Bancomer Asset Management to the growing list of investment firms that claim compliance with its Asset Manager Code. BBVA Bancomer Asset Management, with 20% market share in Mexico, is now one of the more than 1,400 companies around the world that claim compliance with the code.

The Asset Manager Code clearly outlines the ethical and professional responsibilities of firms 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 firms that adopt the code. The initiative was started by Jorge Unda, CIO at BBVA Bancomer and one of the first CFA’s in the country. Currently 40% of his team holds the designation and the rest is working towards getting it. 

“Investors should expect and receive the highest level of professional conduct in the firms and individuals with whom they entrust their investments” said Jaime Lázaro, CFA, director of BBVA Bancomer Asset Management. “BBVA Bancomer once again shows its leadership in the Mexican financial system and the adoption of the Asset Manager Code reinforces our commitment to make the customer our priority in every decision.”

When Unda and Lázaro first started the program, 15 years ago, there were 30 CFAs in Mexico, nowadays, over 200.

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 

“Building trust in the investment profession is central to the CFA Institute mission, and to strengthen and ensure the future vitality of the global financial system,” said Bjorn Forfang, deputy CEO at CFA Institute. “We applaud BBVA Bancomer Asset Management, and all firms that have adopted the code, for displaying a resolute and tangible commitment to professional ethics and helping to build a better world for investors.”

BBVA Bancomer Asset Management is the largest asset management firm in Mexico, and the first asset manager and second company after Tempest Capital to adopt the CFA Institute Asset Manager Code in Mexico. 

Denise Desaulniers Joins Bulltick’s Wealth Management Team in Miami

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El equipo de wealth management de Bulltick incorpora en Miami a Denise Desaulniers
CC-BY-SA-2.0, FlickrPhoto: Twitter. Denise Desaulniers Joins Bulltick's Wealth Management Team in Miami

Bulltick confirmed to Funds Society that Denise Desaulniers, has officially joined the firm this week as Head of Structured Products.

She will be based out of the Miami office. Bulltick’s team has seven bankers and close to 1 billion dollars in AUM.

According to the firm: “Denise brings extensive experience, know-how and relationships in both the production and buy sides of structured notes and derivatives, along with a broad securities trading and advising career. She was most recently with Banco Santander International (Miami) where she spent over 15 years, serving UHNWI clients with a focus on assisting in meeting their exposure demands through structured products. Denise worked previously with Banco de Sabadell in Miami and Societe Generale in New York. She holds various FINRA licenses, including general securities and options principals licenses, among others. She is a graduate of New York University, is fluent in Spanish and French and has been a serious competitor in triathlon and Ironman competitions.”

Humberto Bañuelos, managing director at Bulltick Capital Markets, added: “Bulltick is at a very interesting fgrowth stage and Denise is a key piece in this process.”