The U.S. Economy Is Doing OK

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Brian McMahon, Vice-Chairman and Chief Investment Strategist at Thornburg

Brian McMahon, Vice-Chairman and Chief Investment Strategist at Thornburg, shared his market views for 2024 at the Thornburg Spring Due Diligence Conference in Santa Fe. These are some of the take outs of his presentation, which in a nutshell highlights that the US economy is basically doing OK. This is quite an affirmation, coming from McMahon, who is truly one of the who’s who professionals of investments having been in the market for over 40 years.

Likelihood of a Recession

McMahon noted that the consensus predicts a 35% chance of a recession in the next year, down from over 60% odds a year ago. He cited positive economic data like high job openings and low unemployment as reasons he doesn’t see the ingredients for a classic recession.

Demographics and Economic Growth

Demographics have played a significant role in US economic growth over the past few decades. McMahon pointed out that the US population has grown by 57 million people in the last 22 years, partly due to live births exceeding deaths but mostly due to immigration. This population growth, particularly immigrants, has been crucial for economic activity and job creation in the US.

Concerns about US Government Spending and Deficits

Brian McMahon raises concerns about the level of US government spending and deficits. He notes that government receipts have declined as a percentage of GDP while outlays have increased above 20% of GDP. For the politically minded, he also points out that the trailing 5-year growth rate of spending was 12% under the last Trump administration, compared to only 1% for receipts. With high deficits, the US is issuing significant amounts of new Treasury debt each year that investors need to absorb, now that the FED has stepped back from buying bonds. The investors are individuals, advised by financial advisors, and the new debt will be absorbed mostly through mutual funds and ETFs.

Composition of Ownership of Stocks in US

Households have consistently owned around 60% of US equities, though the composition has changed over time from direct ownership to mutual funds to now ETFs surpassing mutual funds. Pension funds have been net sellers of equities in recent decades as they have more retirees to pay out to and need to shift to less risky assets. Mutual funds have been small net sellers overall, with passive ETFs and index funds being big net buyers and active funds being large net sellers. And corporations, through share buybacks and mergers/acquisitions, have been the largest net buyers of equities. McMahon notes share buybacks have supported market returns, and they are a very good thing for investors.

Economic Indicators Suggesting Continued Strength in US Economy

Some of the economic indicators that currently suggest continued strength in the US economy include high levels of job openings relative to unemployment benefit recipients, wage growth trending above the 30-year average, positive retail sales growth in line with historical averages, strong employment levels that have surpassed pre-COVID highs, and double-digit expected earnings growth for the S&P 500 over the next two years.

In summary, McMahon’s presentation highlighted the continued strength of the US economy, with positive economic indicators and a low likelihood of a recession in the next year. However, he also raised concerns about US government spending and deficits, and the changing composition of ownership of stocks in the US.

Institutions and Wealth Managers Favour Fixed Income over Equities

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A new research from Managing Partners Group (MPG), the international fund management group, shows professional investors believe fixed income is becoming more attractive than equities over the next 12 months.

The 94% questioned in the global study with institutional investors and wealth managers holding assets of $114 billion under management say fixed income is more attractive with 17% saying it is becoming significantly more attractive.

The research by MPG found growing worries about a global recession and increased volatility in the equity markets plus increased correlation between bonds and risk assets is driving the shift in views.

US investment grade and European investment grade fixed income assets are likely to be the biggest beneficiaries of institutional investors and wealth managers increasing their exposure to fixed income but all asset classes will benefit as the table below shows.

Professional investors still believe there is a possibility of a bond rally if major economies slip into recession. Around 20% believe a bond rally is very likely in the next 12 months rising to 42% saying a bond rally is very likely over the next 24 months.

Around 79% think a bond rally is quite likely in the next 12 months while 57% believe it is quite likely over the next 24 months.

They have little or no correlation to equites or bonds and currently deliver an inflation busting yield of 12%. Also, MPG says alternative asset classes in general are set to benefit from increased diversification as investors look for reasonable returns while equities are set for a tough year ahead.

 

DAVINCI TP Announces Strategic Alliance with Investec IM

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DAVINCI Trusted Partner (DAVINCI TP), a player in the distribution of third-party investment funds in Latin America, announces a strategic alliance for the private distribution of model portfolios managed by Investec in the US Offshore and Latin American territory.

The model portfolios managed by Investec are structured as Funds of funds registered in Luxembourg with a focus of identifying the best active asset managers for each asset class. This approach is achieved through a rigorous due diligence process of each Portfolio Manager and a high level of conviction in asset selection.

Investec, with more than 20 years of experience in managing investment strategies with an excellent track record, stands out for its active and client-oriented approach, backed by a team of highly trained and experienced professionals, the press release said.

Investec Investment Management is a subsidiary of Investec Limited, a financial institution with a global presence. The Group has a substantial market value, and has 7,400 employees and operates on five continents, reflecting its commitment to excellence and financial strength.

With this strategic alliance, DAVINCI TP strengthens its position in the segment of innovative investment solutions distribution across the region through regulated institutions. The model portfolios managed by Investec offer investors access to diversified strategies backed by solid expertise and a global presence, according the firm information.

Santiago Queirolo, Managing Partner of DAVINCI TP, commented on the collaboration: “Working in cooperation with Investec  represents a significant milestone for DAVINCI Trusted Partner. We are very excited to contribute with such an emblematic global firm as Investec is particularly recognized in our region and this will allow Davinci TP to provide the financial industry with access to high quality investment portfolios”.

Paul Deuchar, Head of Investec Investment Management, also expressed his enthusiasm: “We are pleased to collaborate with DAVINCI Trusted Partners to expand our presence in the US Offshore and Latin American markets. This strategy will strengthen our ability to serve a broader base of investors and provide investment solutions tailored to their needs.”

James Whitelaw, Managing Partner of DAVINCI TP, remarked: “We are excited about this new partnership, as it will provide us with a great opportunity to continue to introduce investment solutions with model portfolios. The model portfolios fund range of Investec offers key benefits for investors such as, daily liquidity and automatic rebalancing investing in leading fund managers, which will allow financial advisers to manage their clients relationship and portfolios more efficiently, as well as enhance their client experience with a firm like Investec.”

DAVINCI TP, already having successful experiences with prestigious firms such as Jupiter Asset Management and Allianz Global Investors in Latin America, reinforces its commitment to introduce the best global investment opportunities to the financial industry, the firm added.

SEC Publishes New Registered Fund Statistics Report

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The staff of the Securities and Exchange Commission today published a new report of Registered Fund Statistics, which is based on aggregated data reported by SEC-registered funds on Form N-PORT.

The new report, which will be updated on a quarterly basis, is designed to provide the public with a regular and detailed picture of the registered funds industry—with its more than 12,000 funds and more than $26 trillion in total net assets under management.

The report provides key industry statistics and shows trends over time, including information and trends related to portfolio holdings, flows and returns, interest rate risk, and other exposures across U.S. mutual funds, exchange-traded funds, closed-end funds, and other registered funds.

“Providing data to the public is one of the more consequential things a government agency does,” said SEC Chair Gary Gensler. “This new report will give the public a view into the registered fund industry. Investors, issuers, economists, academics, and the public at large benefit from such regularly published economic data.”

Registered Fund Statistics contains the first aggregated report that reflects both the public and non-public information filed on Form N-PORT, and most of the aggregated data in the more than 70 separate tables of the report is being made public for the first time. Also, the public may download the statistics reported in Registered Fund Statistics in a structured format, which will provide the historical statistical series of information with each publication of the report.

The Division of Investment Management has primary responsibility for administering the Investment Company Act of 1940 and Investment Advisers Act of 1940, including oversight of investment companies, such as mutual funds, money market funds, and ETFs, and for investment advisers, the statement concluded.

The report is available on the SEC’s website here.

Cyberattacks on the Financial Sector Increase by 53% in 2023

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Cyberattacks have become a real threat to the financial stability of countries. The banking sector has solidified its position as one of the main targets for cybercriminals due to its high potential for economic gains and access to confidential customer information.

In fact, during 2023, cyberattacks on the banking sector have increased by 53% compared to 2022. This is according to S21Sec, one of Europe’s leading cybersecurity service providers acquired by Thales Group in 2022, in its benchmark report, the Threat Landscape Report, which analyzes the evolution of cybercrime on a global scale.

As a result of the massive digitalization experienced by banking in recent years, cybercriminals have adapted their techniques to online banking systems, resulting in a total of 4,414 attacks on the financial sector globally in 2023, with 2,930 of them occurring in the second half of the year. This new online focus has caused a 40% decrease in attacks on ATMs in recent years.

Among the most commonly used attacks against the financial sector, S21Sec highlights the activity of malware, a type of malicious software designed to damage or exploit any network, device, or service. In the case of the banking industry, these attacks focus on collecting personal and banking information that could allow access to funds from accounts or even cryptocurrency wallets. Cybercriminals use various techniques to obtain this information, such as skimmers, web injections, malspam, or phishing emails.

Sonia Fernández, Head of the Threat Intelligence team at S21Sec, emphasizes the importance of the human factor in these types of attacks: “In most cases, it is people who click on the malicious link, allowing the cyberattacker to enter our device and start their operation. It is crucial to have global awareness around cybersecurity to ensure people’s financial stability, and the first step is to never access a URL without first contacting your bank,” the expert advises.

Danabot, ToinToin, and JanelaRAT: The Most Dangerous Active Malware for the Banking Sector

The company highlights the activity of one of the most active malware in the last six months of 2023, known as ‘Danabot’. This type of attack stands out for its use of web injections, a technique that allows the malware to modify or inject malicious code into the content of websites visited by users, often without their knowledge or consent. Danabot is frequently used for various activities, such as distributed denial-of-service (DDoS) attacks, spam distribution, password theft, cryptocurrency theft, and as a versatile bot for various purposes.

On the other hand, S21Sec highlights the presence of ‘JanelaRAT,’ a type of malware that primarily steals access credentials for banks and cryptocurrency wallets. The most significant credential-stealing features of this malware create fake forms when it detects a visited banking or cryptocurrency site, capturing mouse inputs, keystrokes, screenshots, and gathering system information to carry out the cyberattack. The distribution method used is emails containing a link that, once clicked, shows the user a fake page, automatically downloading the first phase of this malware, which will create a file through which it can remain on the device or website.

Another frequent attack has been the so-called ‘ToinToin,’ which is part of a sophisticated campaign that manages to distribute malware and achieve infection through several stages. The distribution of this type of attack is also carried out through emails containing a malicious URL from which a connection is established to start stealing information.

“Not investing in private markets means ignoring a very large part of the investable universe”

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Photo courtesyPhil Waller, en un momento de la entrevista.

Phil Waller has been working at JP Morgan AM for ten years, most of that time in private markets. He is currently the investment specialist leading the firm’s European team for alternative investment solutions, with a clear mission: to guide and support JP Morgan AM clients in building alternative allocations tailored to their needs, and to provide access to alternative strategies to increasingly diverse types of investors.

“The democratization of alternatives is a major goal for the industry and a major goal for us for the coming years,” he states emphatically. JP Morgan AM currently manages $213 billion in alternative assets.

At a forum recently organized by the firm in London, Funds Society had the opportunity to speak with Waller about his approach to alternatives, an asset class that, in the expert’s opinion, is too often used as a “catch-all” to define all those assets that are not fixed income or equities, but which actually encompasses a broad investment universe.

At JP Morgan AM, they have decided to focus on five major sub-asset groups: private equity, private credit, real assets (real estate, infrastructure, transport), hedge funds, and liquid alternatives. “These are major categories, and each behaves very differently, offering distinct qualities,” Waller points out, recommending those new to the world of alternatives “think about the set of opportunities they offer.”

Is there a real growing interest in alternative assets? How has the universe of alternatives evolved over the last year?

One of the major developments in the last 12-18 months is, obviously, that the interest rate environment has changed significantly. The major impact of this is that investors now have more options when it comes to earning income. Thus, a more detailed conversation can be had about one of the benefits of alternatives. When it comes to income-oriented alternatives, the approach for investors now is that not all income is equal; they can value the various options more broadly across different asset classes.

At the same time, as interest rates are now higher, some asset classes have benefited, like private credit. What used to be an 8-9% return is now 12 to 13%.

Is there room for new types of investors in alternatives, including retail investors?

Yes, absolutely. Institutional investors have been allocating to alternatives for decades. That has not diminished after the financial crisis. In fact, many institutions are now allocating 20% of their assets within alternatives, some even closer to 50%, because they have longer-term horizons.

On the other hand, individual investors, particularly in Europe, have allocations to alternatives that are in the low single digits, excluding their properties. They are really not taking advantage of the long-term nature of this asset class. We think there is a great opportunity for asset managers like ours to create greater access and education and, ultimately, for individual investors to continue allocating part of their portfolios to alternatives. However, individual investors still need to consider alternatives as an illiquid and long-term allocation, and need their investment horizon to match that.

What kind of conversations do you have with your clients so they can understand the different types of alternatives and their characteristics and qualities?

When it comes to alternatives, some types of clients are very sophisticated, but others have great needs for financial education. Ultimately, we seek to talk to clients about what alternatives bring as opposed to what alternatives are. Are you looking for a stable level of income? Are you looking for inflation mitigation?

The other conversation revolves around the greater offering in private markets. Now, if I do not invest in private markets, I am ignoring a very large part of the investable universe. Companies used to stay private for an average of about four years, now they can remain for more than 12 years and often coincide with the fastest growth phase of their lifecycle. Therefore, gaining access to these companies at that time is a significant added value.

The way we communicate with investors is ensuring that they are goal-oriented, making sure it is done for the right reason, ensuring they understand the benefits, but also the risks of each asset class, given some of the complexities and the illiquidity that comes with these asset classes.

Do you think the model 60/40 portfolio should evolve to also include a structural allocation to alternative assets?

The alternative solutions team at J.P. Morgan AM has been assisting clients, but also building these diversified portfolios. Our view is that it should be a significant allocation for long-term investors. Now, whether it is 20% or 30% will depend very specifically on the investor’s requirements: investment horizon, risk profile, return expectations… What is really important is what is in that 20%. Getting the right mix between income and capital appreciation is really key within the allocation to alternatives in a portfolio. A more granular approach is needed to build it.

Where are you finding investment opportunities currently?

We have divided it into three major categories. The first covers markets that have experienced some dislocation, particularly those more sensitive to interest rates – such as in real estate – or that have experienced notable flows. One of the major trends we saw in 2022, and that has continued into this year, has been that some institutional investors were overweight in alternatives, especially in private equity and private credit and this has created a bit more supply in the secondary market; as they rotate their positions they have created the capacity to invest at a discount. And that has been attractive both for private equity and for private credit.

The second major category is disruption. A big area where this is happening is in private equity, with the emergence of new industries. We have also seen disruption in real estate, due to the boom in teleworking.

Finally, we are seeing that some of the more institutional investors are focusing a lot on the aspects of diversification of alternatives. Core allocations, such as infrastructure or transport, have been a major focus of interest, along with hedge funds.

How Long Can the Sweet Spot Last?

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Aegon Asset Management hosted a Day of presentations in Miami for Latin American and US Offshore investors. The day opened with a macro review and was followed by presentations on global bonds, high yield and dividend investing. In this article we addess the macro review and how should portfolios position themselves given the outlook for inflation, rates and the economy.

According to Frank Rybinski, CFA – Head of Macro Advisory, Aegon AM, inflation in the US is coming down faster than nominal wage growth, creating a gap that boosts real spending power and fuels consumption. He discussed charts showing accelerating real wage growth supporting consumption. However, this “sweet spot” is finite as nominal wages will continue falling. The Fed will need to cut rates to provide monetary support as inflation comes down and consumers become more price sensitive.

Sectors or Industries Most at Risk if the Labor Market Weakens Further

The sectors or industries that are most at risk if the US labor market weakens further would be the cyclical parts of the economy that make up over 70% of non-farm payrolls, excluding the smaller non-cyclical government and healthcare sectors that are currently leading job growth. Frank Rabinski noted that growth in the rest of the cyclical economy, which includes industries like manufacturing, retail, transportation and construction, is only around 1% annually. These cyclical sectors would be more vulnerable to slowing further or contracting if unemployment rises from current levels.

Impact of Divided Government on Fiscal Policy and the Federal Budget Deficit

A divided government following the midterm elections will result in less substantial changes to fiscal policy and reductions in the federal budget deficit. It means you won’t get massive spending bills passed or significant policy changes, as it will be difficult for either party to push their agenda alone. Rabynski also mentioned the current spending sequester will help curb the growth of spending over the next year. Overall, divided control of Congress and the White House is seen as a positive that would limit large fiscal programs and associated deficits going forward.

Credit Sectors Most/Least Attractive Given Corporate Borrowing Trends

Most attractive: Investment grade credit, as companies with stronger balance sheets still have access to debt markets. Technical support from lack of supply could also boost prices. Secured credit such as leveraged loans, as these have higher priority of repayment over unsecured bonds.

Least attractive: Lower-rated high yield bonds (CCC-rated or below), as these companies are more vulnerable to an economic slowdown or rising rates. Unsecured high yield bonds, which have lower recovery rates than secured loans in the event of default.

Rabynski also cautioned against overexposure to private credit markets given recent signs of weakness in underlying fundamentals that are less transparent than public debt markets.

Supply Chain Changes and Trade Policies Influence on Specific Industries

Manufacturing sectors in the US may see boosts as companies onshore production or diversify suppliers globally. Industries like semiconductors are already seeing large investments. Export-oriented industries could be impacted depending on how individual countries are positioned within new trade blocs forming between the US/Europe and Russia/China. Commodity producers may benefit if trade tensions increase demand for non-Chinese/Russian sources. Industries like metals and energy could see pricing support. Transportation and logistics will likely play a crucial role in adjusting to “global fractionalization” of supply chains. Shipping and warehousing demand could increase. Consumer goods that rely heavily on Chinese/other Asian imports may face headwinds or costs rises as companies reconfigure supply chains and inventory management.

How Should Investors Position Portfolios Given the Outlook for Rates, Inflation and the Economy?

Investors should maintain some exposure to equities given expectations for moderate economic growth and rate cuts supporting markets. They should also increase allocations to fixed income as yields have risen, offering more attractive alternatives than in recent years for yield and diversification. Favoring credit over sovereign bonds to pick up extra yield, but taking a cautious approach to lower-rated segments of the market, is also recommended. Consider overweighting high-yield bonds where spreads have widened significantly from a few years ago. Emphasizing diversification across asset classes now that the “fixed income buffet” has more options than the recent low yield environment is also important.

Schroders Capital partners with iCapital to widen access to semi-liquid global private equity strategy

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Schroders Capital and iCapital announce a strategic partnership that enables Schroders Capital to broaden access to the wealth management channel for its semi-liquid global private equity strategy. 

Through this collaboration, Schroders Capital will leverage iCapital’s cutting-edge technology platform and operating system to manage the investment and education experience at scale. 

By listing the Schroders Capital semi-liquid global private equity strategy on iCapital Marketplace, a one-stop-shop connecting wealth managers, financial advisors, and their clients to a wide selection of alternative investment opportunities offered by the world’s leading asset managers, Schroders Capital gains access to iCapital’s global network of wealth managers, enabling its distribution strategy to be efficiently expanded.  

With $93.7 billion in assets under management, Schroders Capital offers a broad range of private market investment opportunities to institutional investors and private wealth investors, including a series of semi-liquid funds. The partnership with iCapital, which initially focuses on markets in Latin America, Asia and Switzerland, is testament to Schroders Capitals’ aim to support access to private markets for private wealth clients. 

Georg Wunderlin, Global Head Private Assets, Schroders Capital, said: “The partnership between Schroders Capital and iCapital is an important step in our strategic priority of ensuring we are a leading partner for wealth managers and private banks to better access private markets. The Schroders Capital semi-liquid global private equity strategy provides an even broader set of investors with the means to invest in some of the most established global private equity open-ended funds worldwide. With a multi-year track record and a strong focus on small-mid buyouts in Europe and North America and growth investments in Asia, this sets it apart from many other comparable private equity funds in the market.” 

Gonzalo Binello, Head of Latin America, Schroders, said: “During the last decade or so we have seen the Private Assets investment market growing in demand and evolving in its pipeline to new heights. Latin America has not been an exception to this global trend, and we have seen this growth evidenced in the strong demand from the region for our global private equity ‘evergreen’ Luxembourg-based strategy two years ago, especially from countries such as Chile, Costa Rica, Peru, Mexico and the US market. Schroders Capital has been building a compelling range of next generation ‘evergreen’ private assets strategies, that we have the intention to bring to Latin America in due course to continue working for our client’s benefit.”

Marco Bizzozero, Head of International at iCapital, said: “We are delighted to partner with Schroders Capital, a leading private markets manager with over 25 years of private equity investment experience, to support them in their mission to be at the forefront of unlocking new private markets investment opportunities to the wealth management channel. 

 

BofA’s AI Assitant Surpasses 2 Billion Interactions

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Bank of America’s virtual financial assistant, Erica, has surpassed 2 billion interactions since its launch in 2018. The advanced and widely available virtual assistant has become a personal concierge and mission control for Bank of America’s clients.

Erica’s capabilities have expanded over the past six years to support individual and corporate clients across the company, including within Merrill, Benefits OnLine, and the award-winning CashPro platform.

Erica is a great example of applied innovation in language processing and predictive analytics to deliver a valuable and empowering customer experience.

Erica has responded to 800 million inquiries from more than 42 million customers and provided personalized information and guidance more than 1.2 billion times.

Like Bank of America’s 213,000 teammates, fostering a personal relationship with customers is a priority for Erica.

Bank of America’s data science team has made more than 50,000 performance updates to Erica since its launch, fine-tuning, expanding, and refining natural language understanding capabilities. This ensures that answers and insights remain timely and relevant.

Regional Markets, Credit and Cash on the Move in Focus

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In Q1 2024, global equity markets rose by 8% in USD terms, continuing their strong performance from 2023.

In contrast, developed-market sovereign bonds declined just over 2% due to persistent inflation concerns, eroding much of the previous year’s gains. With continued uncertainty around the speed and timing of central banks’ interest-rate pivots, and because substantial capital has remained on the sidelines in money-market funds, a potential shift of cash into riskier assets, such as longer-duration bonds, corporate credit and equities, could be in scope over the balance of the year.

In last quarter’s edition of Markets in Focus, the report explored the changing relationship between government bonds and equities. In this quarter’s post, we focus on the relationship between corporate bonds and equities. Considering the continued bull market in stocks, MSCI examine the prevailing risks in the U.S. markets and the implications for investors choosing to move out of cash positions in 2024. This quarter also marks the start of our integrating fixed-income commentary into this quarterly analysis, to provide a comprehensive view into public markets.

Diminished diversification benefits from credit carried into Q1

Current conditions in global credit markets have been shaped by the tailwinds of high coupons, the possibility of impending rate cuts and growing confidence in a U.S. “soft-landing.” We believe vigilance is warranted, however, given the lingering effects of shocks related to the COVID-19 pandemic, the report said.

MSCI’s head of portfolio management research, Andy Sparks, discusses the relationships within the bond markets across the credit spectrum, as well as between bond and equity markets, in the four years leading up to 2024 and during the first quarter of the year.

Using the MSCI Multi-Asset Class Risk Model, its observed that correlations between corporate spreads and government bonds remain elevated, suggesting a continuation of diminished diversification benefits from debt investments. Around the world, both investment-grade and high-yield credit markets have become more closely coupled to equity markets.