Next October it will be 11 years since the first issuance of a CKD in the Mexican market. RCOCB_09 issued by Red de Carreteras del Occidente (infrastructure sector), was the first CKD that was placed on the Mexican Stock Exchange that gave institutional investors access to private equity through a public vehicle. RCOCB_09 presents a net IRR in pesos of 15.2% and if the inflows and outflows at the exchange rate of each movement are considered, the net IRR in dollars is 10.3% in accordance with own estimates prepared with public information from the issuer (august 31, 2020). These IRRs are good considering that the investment takes 11 years and that it will expire in April 2038, that is, in 18 more years.
Just as we have this success story for the 164 CKDs and CERPIs as of August 31, trying to assess the performance of an entire industry that is worth 31.538 million dollars in committed capital of which just over half has been called (57%) equivalent to 18.012 million dollars; The issue becomes more complex since when weighting all the CKDs and CERPIs, the net IRR in pesos does not reach two digits since the resource requirements and distributions are different and of course the valuation of the investments they generate in what individual issuers and the different sectors (7) to which they belong. In addition to the above, there is the problem that in the first three years (2009 to 2012), the CKDs were pre-funded at 100% (29 of the 164 CKDs and CERPIs).
So far only two CKDS have expired and another six are identified that could expire this year so these two CKDs and six to expire cannot tell the story of the 164 that there are. It cannot be ruled out that some of these CKDs exercise the possibility they have of postponing their expiration.
At an aggregate level, in the entire life of CKDs the best years have been 2009, 2013, 2014, 2018 and 2019, which present an IRR between 7 and 10% which has been improving as time passes. The years 2009 and 2013 practically already called 100% of the capital committed (100 and 96%), while in 2014 they are 71% and in 2018 and 2019 they are between 30 and 25% of the capital called, so as the new investments are made, the observed IRRs will be modified.
The sectors with the best IRR in pesos are the fund of funds, credit, infrastructure and real estate sectors as of August 31.
When reviewing the 15 highest sector IRRs per year from 2008 to date, we have IRRs that are between 8.0% and 16.5%. The infrastructure sector is the one that has had four very good years such as 2009, 2010, 2012 and 2015. The credit sector has had three good years (2012, 2014 and 2019), and with two good years are the real estate sectors , energy and private capital.
Although the IRRs shown are not yet outstanding in the averages, there are 36 CKDs (as of August 31) that present IRRs above 10% that represent 22% of the 164 CKDs. Another interesting fact is that only 46 CKDs have called 100% of the committed capital, which means 28% of the total supply of CKDs and CERPIs.
Several factors make CKDs underperform so far:
For the institutional investor (insurance companies and AFOREs, among others) to participate in private equity, it was necessary to create a public instrument that was listed on the stock market. This meant incurring issuance and placement expenses, among others, that a global private equity fund does not incur.
The money has not been called 100% so many of the investments are still in their initial phase. All CKDs and CERPIs are missing 9 years on average where 57 will begin to expire as of 2030.
There are 29 CKDs that were pre-funded (100% of the capital called in their placement).
The average supply of CKDs is 13 per year, where, for example, there was the case that 38 were placed in 2018. That year the offer was important since the CERPIs were allowed to invest 90% of their resources globally.
Of course, there are good and bad years; There are sectors that require more time to present results and it must also be recognized that there have been good and bad CKDs, but those can only be seen as they expire. The observed IRRs will continue to change and little by little results will be seen.
U.S. equities scored the best August since 1986 while setting a record high on Tuesday the 18th that made the thirty-three day coronavirus bear market of 2020, a 34% decline from February 19 – March 23, the shortest in market history. The new bull market is being fuelled by record fiscal and monetary stimulus, economic recovery and vaccine hopes and has rallied over 50% from the March low. What remains to be seen is if continued U.S. growth will suffice to end the current recession as one the sharpest and shortest on record as well.
In the fiscal cliff political arena, stimulus negotiations remain deadlocked with the Democrats recent rejection of the current $1.3 trillion Republican proposal. At month end, Evercore ISI’s economist Ed Hyman wrote in ‘Global V-Shaped Recovery’: Looking ahead, there are a number of factors that will lift US growth, eg, the surge in Consumer Net Worth, inventory rebuilding, the surge in vehicle production, the housing boom, reopening’s, and unprecedented global stimulus. A vaccine is likely…The US economy is starting a new expansion…The safest bet now is for a 5-year expansion with a 100% rally in the S&P. He may be right and we hope he is, but there will be some speed bumps along the way.
Following a major two-year review, Fed Chair Powell spoke at Jackson Hole on August 27th detailing the Fed’s conclusions for updating its monetary policy framework by moving to a flexible average inflation targeting (FAIT) approach.Bottom line: keep interest rates low to support a sustainable economic recovery. On August 19th, Barron’s financial writer Andrew Bary highlighted a G.research report on ViacomCBS (VIAC) by analyst John Tinker saying: ViacomCBS looks significantly undervalued based on the success of its streaming strategy and a potential sale of the company…Tinker’s view is that ViacomCBS is valued cheaply at just 6.5 times estimated 2020 earnings before interest, taxes, depreciation, and amortization (EBITDA). That compares with a price of 15 times Ebitda that Walt Disney (DIS) paid for Fox’s (FOXA) content assets in 2019 and a price of 13 times that AT&T (T) paid for Time Warner in 2018. Tinker’s ViacomCBS target equates to about eight times estimated 2021 EBITDA.
Since the March stock market low, value stocks, typically defined as cyclical or economically sensitive companies, have lagged growth stocks. We expect this to change as the economic recovery broadens and the value P/E discount narrows
Looking at the merger arb space, announced deals in July totaled $305 billion, a 60% increase from $189 billion in June, and essentially the same level of activity as July 2019. Sizeable M&A in July included Maxim Integrated’s acquisition by Analog Devices for $20 billion, Noble Energy’s acquisition by Chevron for $13 billion, and National General’s acquisition by Allstate Corp. for $4 billion.
Column by Gabelli Funds, written by Michael Gabelli
To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
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GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
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Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
Nikolay Markov, Pictet Asset Management. Nikolay Markov, Pictet Asset Management
In recent months, most major emerging market central banks have sharply cut their policy-rates to alleviate the negative economic shock of the pandemic. But is this sustainable and what can we expect going forward?
Estimating equilibrium
According to our proprietary calculations, four major EM central banks have cut their policy rates too aggressively: South Africa, India, Indonesia and, by some margin, Turkey.
Using our proprietary Taylor Rule model, we calculate the fair value for Turkey’s policy rate as 14 per cent, not 8.25 per cent. This is based on the recent upsurge in inflation and domestic currency depreciation. By contrast, the Bank of Russia and Bank of Korea appear to have made appropriate policy responses.
What about the next 12 months?
Fig.2 shows our expectations for policy-rate changes in the year ahead based on our fair value estimates. For most emerging markets the estimated policy-rate fair value is much higher in 2021. This shows that most central banks have no room to cut further and should gradually revert to higher rates as the economic shock of the pandemic subsides.
The most striking cases are in South Korea, South Africa and Russia. While we think these markets have appropriately cut their policy rates during the outbreak, we believe they will need to start raising rates more quickly in 2021 as their economies are expected to rebound at a stronger pace.
For other central banks however, it might be appropriate to keep their monetary policies broadly unchanged in 2021. This is particularly true in Mexico.
Turkey is once again an interesting case as our model calls for significant rate cuts in 2021, in sharp contrast with the policy recommendation for the current quarter.
This is explained by the significant disinflationary process and expected gradual recovery in economic growth which should take place in the coming year if the authorities take the appropriate policy measures to stabilise the lira, thus avoiding a full-blown balance of payments crisis. If this positive scenario materialises, it should be positive for Turkish risky assets in the coming year. Bottom line: it will get worse before it gets better.
Time to look beyond rates?
But if the scope to move EM policy-rates is increasingly limited, what about unconventional monetary tools to stimulate the economies?
The table below shows that only the central banks of South Africa, Indonesia and Poland have opted for an asset purchase program (QE) of government bonds in the secondary market (and in the case of Indonesia possibly covering corporate bonds).
Most of the major EM central banks (China, India, Korea, Turkey, Russia, Brazil and Mexico) do not have a proper QE program yet. Still, those countries have introduced different refinancing facility schemes to provide ample liquidity to the interbank market thus supporting bank credit activity and the real economy.
Close to half of the major EM central banks are expected to ease monetary policy further in the coming months. This is the case in China, Indonesia, Russia, Brazil and Mexico, suggesting that market participants and possibly even the central banks themselves do not think they have actually run out of ammunition. But as suggested by our model, we believe further monetary policy easing will be very challenging in particular for South Africa and Russia, as well as for Turkey in the near term.
For more information on Pictet AM’sFixed Income capabilities, please click here.
Column written by Nikolay Markov, Economist in the Fixed Income department at Pictet Asset Management.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
Important notes
This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
August 22 marked Earth Overshoot Day, the point in the calendar when humans used up a year’s worth of the planet’s natural resources. For the rest of 2020, humanity will run up an environmental debt, consuming more than the Earth can naturally replenish in a 12-month period, and drawing down on what will be available for future generations. Just as worrying, we will be producing waste such as carbon dioxide emissions as we do so.
Earth Overshoot Day has been calculated every year since the 1970s by the Global Footprint Network (GFN), a non-profit research group. Over that time, the overshoot has been found to occur earlier each year. This year saw a reversal of that trend. Thanks to coronavirus-induced lockdowns, there has been a drastic shrinkage in humanity’s ecological footprint. GFN estimates that the global carbon footprint, for instance, has fallen nearly 15 per cent from last year, while that for forest products is down by more than 8 per cent. The question now is whether the world can continue along this sustainable trajectory.
The pandemic has alerted us to a number of environmental issues which, left unchecked, could either aggravate the current health crisis or even sow seeds for future virus outbreaks. Take air pollution, which is estimated to kill 7 million people prematurely every year. Researchers have found that air pollution may have exacerbated the impact of the pandemic. Several studies have linked high levels of particulate matter in the air to elevated coronavirus mortality rates.
What is equally clear from the pandemic experience, however, is how quickly air pollution can be reduced. As road and air traffic ground to a halt and factories were shuttered, air quality improved dramatically. In China, concentrations of particulate matter, known as PM2.5, fell by as much as a third in early March from a year earlier.
Although there is a strong possibility that pollution will rise rapidly to pre-crisis levels as lockdowns ease – as is already the case in China – local and national governments are not letting this crisis go to waste.
The city of Milan is introducing one of Europe’s most ambitious schemes to reallocate street space from cars to pedestrians and cyclists. More streets in London and Paris will also become vehicle-free, while New York and Seattle are widening pavements and pedestrianising neighbourhoods.
But air pollution is just one of many pressing environmental problems the pandemic has highlighted. Biodiversity is another. A number of scientific studies – most recently conducted by University College London researchers – show that biodiversity loss increases the risk of disease pandemics. We expect safeguarding biodiversity to take centre stage in the public debate on how to prevent future pandemics and achieve better health outcomes.
More radical economic transformation needed
It has taken an unprecedented lockdown to make even limited progress in delaying Overshoot Day by a few weeks. This reveals the scale of the environmental problem we’re facing. Clearly, putting the brakes on economic activity is not a viable solution.What is needed is a much more determined transformation of our economic structures.
This is a challenge that requires an all-hands-on deck approach involving everyone — governments, businesses and individuals.
Investing to make a positive environmental impact
Our Global Environmental Opportunities(GEO) strategy invests exclusively in businesses providing innovative solutions to environmental challenges facing our planet, while at same time using resources efficiently, minimising their waste and limiting other adverse impacts on the environment. These companies are part of the thriving environmental products and services industry, already worth some USD 2.5 trillion and growing at 6 per cent per year.
Stocks in GEO have a significantly lower environmental footprint than those represented in the MSCI All-Country World equity index. Analysing the nine environmental dimensions of the Planetary Boundaries framework using a proprietary life-cycle assessment methodology, the GEO portfolio achieves a significantly more positive impact than that of a typical global equity strategy, particularly in climate change and biodiversity. This is how our strategy allows investors to safeguard the planet while retaining the prospect of long-term outperformance.
With a risk-return profile similar to that of a growth-oriented investment strategy, Pictet AM’s Global Environmental Opportunities can be used to complement an equity allocation within a global portfolio.
Tribune written by Steve Freedman, Senior Product Specialist at Pictet Asset Management.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
Important notes
This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
Photo: Nick Hayes, Head of Total Return & Fixed Income Asset Allocation, AXA Investment Managers. Photo: Nick Hayes, Head of Total Return & Fixed Income Asset Allocation, AXA Investment Managers
It is at the height of crisis periods such as the one experienced earlier this year that investors expect fixed income to prove its worth by providing the resilience needed to weather the storm. However, that is not all today’s diverse global fixed income universe has to offer.
In our view, unconstrained total return-focused fixed income strategies should be designed to use their flexibility to navigate the changing macro and market environment. That is not to say they will always be in positive territory, but the broad idea is a strategy which has the potential to deliver attractive risk-adjusted returns through an economic cycle.
Striking the right balance of different risk factors and potential opportunities is key to how we manage our Global Strategic Bond strategy. We want to ensure that we have enough ammunition, both to provide a degree of resilience when required, but also to participate as much as possible in recovery markets that inevitably follow market downturns.
For much of 2019 and 2020, we have positioned ourselves across three main themes: own duration, be selectively long credit and maintain portfolio hedges. As markets now evolve from crisis period to recovery, the relative emphasis that we place on each of these themes may be shifting, but our convictions remain steadfast.
Rotating from resilience to recovery
The foundation of our unconstrained strategy is a simple, transparent framework which breaks the fixed income universe down into three categories: Defensive, Intermediate and Aggressive. Figure 1 shows the split between these categories as at the end of July 2020, in comparison to March 2020, highlighting how we are now shifting the strategy to focus on the recovery.
Figure 1 shows that our strategy came into 2020 relatively defensively positioned based on our observations indicating that we were approaching the end of the investment cycle. It also shows that by the summer we had meaningfully rotated the portfolio more towards the intermediate and aggressive assets which have been benefitting from the recovery.
The shift in relative emphasis of our three key themes is explained below:
Carrying quality duration: Coming into 2020, mainstream government bonds yields were low, but we believed they could go even lower with the end of the cycle approaching. Although we have brought exposure down quite a bit since March, we still think that always maintaining some portion of the portfolio at the more defensive end of the spectrum to offset some of the more ‘exciting’ assets provides the best means of delivering the potential profile investors expect from their core fixed income allocation.
Selectively long credit: With that said, an unconstrained total return strategy attracts investors seeking to use fixed income as a growth asset, so whilst capital preservation is key, it is equally vital to have exposure to a diverse pool of return-seeking assets. We had been cautious on spread risk for much of 2019 and the early part of 2020, preferring to own smaller pockets of value. Post crisis, we are now starting to turn more opportunistic on cheaper valuations in developed market credit and emerging markets. Since March we have also participated in some new issuance in investment grade credit at attractive spreads.
Portfolio hedges: We believe having elevated levels of cash is important in periods of uncertainty. While there is no yield, there is also no risk. Cash levels have come down somewhat during the recovery as we rotate the portfolio towards higher beta opportunities. We continue to use Credit Default Swaps to tactically dial risk up and down in high yield, which we believe will remain an important feature as we do not expect the recovery to occur in a straight line.
Although the strategy lost value when the crisis hit its peak in March, we were able to mitigate the drawdown compared to both peers and the market, recovering our losses relatively swiftly. Equally important is that strategy performance has turned materially positive, returning over 4.5% for the year-to-date*. It is worth re-emphasising that, generally speaking, investors in total return strategies do have some appetite for drawdown, in the knowledge that risk assets are typically the first to recover following a crisis and any recovery has the potential to be highly profitable.
This focus on flexibly rotating the portfolio to position as appropriate for resilience or recovery is at the heart of the strategy’s approach. It is interesting to highlight the strategy’s performance during past turbulent periods over the last three years, to demonstrate how we aim to participate as much as possible in both resilience and recovery periods.
Figure 2 shows the strategy’s performance during 2018 in a turbulent year for markets, stoked by fears of slowing global growth and tightening monetary policy, followed by the market recovery in the first half of 2019. During the “resilience” phase (01/05/2019 – 31/12/2019), the strategy generated a total return of +0.68%, outperforming its Morningstar Peer Group which returned -1.13% over the same period. In the ensuing “recovery” phase which occurred in the first half of 2019 (01/01/2019 – 30/06/2019), the strategy also managed to outperform its Peer Group, returning +6.95% and +6.37% respectively.
However, Figure 3 teaches us that outperforming in both “resilience” and “recovery” phases is not straightforward, since strategies which suffer greater drawdowns are more likely to rebound quicker. The ongoing COVID-19 fallout demonstrates this well: during the real crisis period of March and early April (when central bank stimulus stepped in), our strategy suffered a drawdown of -6.45%, compared to -11.02% for the Peer Group – thereby significantly outperforming during the “resilience” phase. That said, as demonstrated in Figure 3, since early April the recovery has so far been sharper in the Peer Group, given that the bottom reached in March was that much greater – most likely due to the greater average concentration of credit risk held by the Peer Group. Most importantly, however, taking both “resilience” and “recovery” phases (09/03/2020 – 23/07/2020), our strategy has returned +1.51% compared to +0.59% for the Peer Group.
While past performance is not a guide to future performance, it is helpful to view performance during the first half of 2020 in this context – in other words to consider not only the relative resilience at the height of the crisis, but the potential to participate in the recovery over the period ahead, to which we are now turning our attention.
Looking ahead
Covid-19 has been a huge shock to the world and a huge amount of uncertainty remains around the virus itself and the ongoing economic and market impact. For us, it will be as important as ever to stick to positioning the portfolio with the potential to deliver the sort of outcomes our investors expect.
In terms of what we can observe today, we see an ongoing battle between fundamentals and technicals. We expect a weak fundamental macroeconomic backdrop for some time, but this is so far being outweighed by strong technicals supported by policy around the world. Against this background, sentiment and valuations are mixed.
Parts of high yield credit and emerging markets are attractively-priced but we expect defaults to rise. So, we see opportunities to go yield-hunting but we would not be maximum bullish on credit in this environment and still see merit in balancing the risks with mainstream government bonds which even at low levels of yield offer potential defensive properties. Especially considering what profile a strategy like ours should offer investors.
Importantly, we do not believe the recovery will come in a straight line and volatility will persist. We intend to play that by employing our strategy’s flexibility to pick up assets which become priced to offer potentially good returns over the next 12 months. However, we will still use cash and portfolio hedges to do so cautiously.
Overall, we believe a low yield/high volatility environment calls for unconstrained, flexible strategies. It will be important to maintain focus on transparency and risk management as global fixed income is a broad spectrum with plenty of pitfalls. In our view, the key to navigating whatever comes next is actively managed and diversified asset allocation combined with high conviction security selection, ultimately aiming to deliver attractive risk-adjusted returns.
*Source: AXA IM and Morningstar. Performance is shown on a net of fee basis for a representative account from the Global Strategic Bond strategy (base currency USD).
(*) Source: AXA IM and Morningstar. Performance is shown on a net of fee basis for a representative account from the Global Strategic Bond strategy (base currency USD).
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Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors. AXA WF Global Strategic Bonds is a sub-fund of AXA World Funds. AXA WORLD FUNDS ‘s registered office is 49, avenue J.F Kennedy L-1885 Luxembourg. The Company is registered under the number B. 63.116 at the “Registre de Commerce et des Sociétés” The Company is a Luxembourg SICAV UCITS IV approved by the CSSF and managed by AXA Funds Management, a société anonyme organized under the laws of Luxembourg with the Luxembourg Register Number B 32 223RC, and whose registered office is located at 49, Avenue J.F. Kennedy L-1885 Luxembourg. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX.
Of a total of 114 CKDs that have been issued since 2009 to date, 80 have been capital calls, 29 pre-funded and 5 direct investments in the 11-year life of the CKDs.
The resources committed to the CKDs with capital calls amount to 16.468 million dollars (md), which represents 75% of the total (80 CKDs), 4.708 million dollars were in pre-funded instruments (22%) and 721 md in direct investments (3%). In total, the 114 CKDs have committed capital of 21.897 md, while the CERPIs 8.426 million dollars as of June 30.
The initial mechanism of the CKDs at its birth in 2009 was pre-funding. In mid-2012, CKDs began to be seen with capital calls, as is the international practice in private capital. The pre-funding stopped the development of the CKDs in the beginning since only those projects that were visualized that could overcome the negative carry were those that were placed, so when the capital calls began, this asset class began to have a higher dynamism.
According to estimates by Homero Elizondo, an expert in CKDs and CERPIs, he considers that the cost of pre-funded CKDs is between 300 and 500 basis points depending on the speed at which the administrator (GP) manages to invest the amount committed by the investors. This without considering the issuance, legal and operational expenses among others.
Of the 29 pre-funded CKDs, 22 were issued between 2009 and 2012 and 7 between 2014 and 2016.
Since 2016, the appearance of joint venture CKDs has been seen, where resources are channeled to specific projects that in many cases are already pre-funded because the money is used immediately.
Of the 29 pre-funded CKDs, two closed the cycle during 2020. Four CKDs have generated an IRR greater than 10% and five have until June 2020 an IRR between 8% and 9%. The real result will be obtained when each CKD concludes its divestment cycle.
Regarding the expiration dates of the pre-funded: 6 pre-funded expire in 2020 (2 have already expired); 8 in 2021 and 15 will expire between 2024 and 2040. As the pre-funded CKDs expire, it will be possible to see if their IRRs were competitive.
The market for green bonds has been booming. Demand for investments with an environmentally-friendly pedigree has increased hand in hand with a growing awareness of the need to control climate change and pollution, to prevent the erosion of biodiversity and ensure a sustainable future.
But as with every new asset class that takes off, investors need to be wary of the pitfalls.
A decade ago, the market for corporate green bonds barely existed. By the end of April 2020, it was worth USD 347 billion.
In a nutshell, green bonds are debt raised to finance specific environment-related projects. Part of their investment appeal is driven by regulation: governments keen to encourage green projects often offer tax breaks for holding these instruments. But they’re also attractive because they signal the sort of management farsightedness that tends to equate with long-run corporate success.
For firms, the benefits are that demand for these bonds tends to diversify their investor base. And data suggest green bond investors tend to be more committed and hold the instruments longer than they do conventional debt.
Green bonds shoot for the stars
Size of corporate and government green bond market, ICE Bank of America Merrill Lynch Green Bond Index, USD bn
Source: ICE Bank of America Merrill Lynch Green Bond Index. Data as at 30.04.2020.
One attraction for issuers is these bonds’ longer maturities, which means refinancing can be less frequent. For example, green bonds (corporate and government) have an average duration of just under 8 years, compared to 7.2 years for global investment grade corporate debt, perhaps reflecting the fact that environmental projects have long time horizons.
And recently, issuance has been broadening along the credit spectrum. Although corporate green bonds are mostly rated investment grade, high yield issuers like recycling and waste management company Paprec, wind turbine manufacturer Nordex and glass manufacturer O-I Packaging Group have also made forays into the market. And more could find themselves there. Fallout from the Covid pandemic could see some of the 44 per cent of the green bonds that are rated BBB – a smaller proportion than the wider corporate debt markets – become fallen angels by dropping into high yield territory.
The risk facing investors is of confusing bonds that exist out of a company’s genuine desire to push forward a green programme with those that are little more than greenwashing. That’s to say, companies issuing debt as green bonds, but then using the money raised for other purposes, such as to refinance existing debt.
There’s no clear demarcation between where the one ends and the other starts. Partly, this is because green bonds aren’t necessarily ring-fenced project financing, but rather tend to sit on the issuing company’s balance sheet and thus are part of the total mix of assets – which is why green bonds are generally assigned the company’s credit rating. But rating agencies could still downgrade green bonds on environmental, social or governance (ESG) considerations as they increasingly factor these into their analysis.
For instance, Italian electricity producer Enel was accused of greenwashing when it issued a bond linked to its commitment to increasing its use of renewables. Failure to meet targets would force the company to pay a higher coupon on the bond. That’s ostensibly green, but critics argued that in fact it was little more than an option to produce dirty power.(1)
Or take Teekay Shuttle Tankers, owner of one of the world’s largest fleets of oil tankers which set out to raise at least USD 150 million to build four new fuel-efficient ships with a green bond. It fell short, in part because investors questioned how green even a fuel-efficient oil tanker could possibly be.(2)
Grey areas in green bonds
Complicating matters is how some issuers are further slicing up this class of securities, for instance ‘blue’ bonds that are related to investment in water, or ‘transition’ bonds that promote the shift to a lower-carbon economy. Meanwhile, ‘social’ bonds that promise wider societal impact have seen renewed interest following the global coronavirus epidemic.
Sometimes it makes sense to look past the green label and to invest in ordinary securities issued by a truly green company. Some firms with a strong environmental pedigree have shied away from issuing green bonds because of the still small size of the market and its specialised nature, or because they calculate they are not being compensated for the additional compliance costs associated with green bond.
So, for instance, only three car companies have so far issued a green bond, and Tesla, leader in the field of electric vehicles, isn’t one of them. And that’s notwithstanding the sector’s wider push into green transport, particularly electrification. Indeed, the green bond market is still relatively concentrated with more than 70 per cent of issuance by financials and utilities.
But for all the grey areas in green bonds, matters are improving. Some of that improvement comes from best practice, some comes from industry bodies, and some from regulators.
For instance, having issued three sustainable bonds, culminating with a USD 1 billion debt raising in 2019, American coffee chain Starbucks has created a template for other companies to follow. Its aims of shifting the sourcing of its coffee beans to sustainable producers and making its retail operations greener attracted widespread investor support.(3) The company, in turn, became an information resource for other firms seeking to raise green finance.
A voluntary industry code determines what qualifies as a green bond, which is verified by an approved party certified by the Climate Bonds Standard and Certification Scheme. This, in turn, is reinforced by a second opinion from independent external agencies, such as Sustainalytics, that review the greenness of the bond.
Finally, government agencies have been getting involved. The European Union has led the way in December 2019 by establishing rules governing which financial products qualify as “green” or “sustainable”. These rules require firms to fully disclose what proportion of their investments is environmentally friendly or sustainable. A mere 17 per cent of the market value of the green bonds held in the MSCI Green Bond Index would meet the requirements of EU Green Bond Standard (EU GBS)
But quantifying what are often qualitative aspects of operations is a challenge and the field is still new. Agencies that rate companies on environmental, social and governance criteria can provide wildly differing assessments, depending on the weights they give to various factors, such as industry, operating region and management intentions.
Given all the complexities involved, investors need to take a careful, analytical approach. Some green bonds are greener than others. Some ordinary corporate bonds issued by green companies will be greener than green bonds. And sometimes, ordinary debt finance raised by companies in dirty industries will be put towards environmentally worthy investments – especially when the firm is looking to fundamentally change the nature of its operations. Balancing environmental credentials with social factors demands taking a broad view of the market. No single green bond should be assessed in isolation of the issuing company’s overall strategy towards a greener more sustainable business model.
Column written by Stéphane Rüegg, Client Portfolio Manager at Pictet Asset Management.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
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U.S. equities moved higher in July against the daunting backdrop of renewed Coronavirus surges that are raising risks for the nascent U.S. economic recovery. During the J.P. Morgan second quarter conference call, CEO Jamie Dimon said, “You’re going to have a much murkier economic environment going forward than you had in May and June, and you have to be prepared for that.” Investor confidence that monetary policy and another fiscal stimulus package will continue to backstop the U.S. economy and markets provides major support for stock prices.
GAMCO expects to see more mergers, some facilitated by SPACs (special-purpose acquisition companies), private equity, or corporations looking to grow. Amazon may decide buy a filmed-entertainment company to gain new content.The outlook for deals and financial engineering brightened during the Honeywell International earnings call when CEO Darius Adamczyk said, “the balance sheet is very strong and well-protected, well-funded. So in short, we’re very much open for business, both from an M&A perspective, as well as potential buyback perspective… the M&A environment is just a little bit slower just because everybody is focused on battling the crisis. But we think that that may open up a little bit more here in the second half, and we hope to be active.”
Among GAMCO’s Private Market Value (PMV) with a Catalyst™ stock research ideas highlighted as ‘stock picks’ during BARRON’S 2020 Midyear Roundtable, published in the July 13 issue, were: NextEra Energy Partners (NEP), which manages renewable-energy projects, Maple Leaf Foods (MFI), equipment rental supplier Herc Holdings (HRI), Vivendi (VIV), Sony (SNE) and GCP Applied Technologies (GCP), a specialty construction chemicals, building materials, and packaging sealants producer. Catalyst Starboard Value, an activist investor, recently won eight board seats.
The recent Coronavirus spike slowed the rally in value, small cap stocks, and the U.S. dollar as economic slowdown fears resurfaced. A weaker dollar will make the U.S more competitive in global trade.
Column by Gabelli Funds, written by Michael Gabelli
To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
Stocks moved slightly higher in June as investors remain optimistic over the benefits of a reopening economy. However, a growing number of COVID-19 hotspots in several US states has threatened the momentum of a recovering economy and created concern over the potential resurgence in recovering states. Information technology stocks continued their success from previous months and consumer discretionary companies benefited from encouraging data from auto suppliers and homebuilders.
Tensions continued to rise between the relationship of the United States & China. Uncertainty exists between key Chinese diplomats and US officials over their trade-agreement commitments. Investor attention is increasingly turning to the upcoming US presidential election between President Trump and the presumptive Democratic nominee, Joe Biden.
The Fed had signaled their objective to continue supporting an economic recovery. Both Congress & the White House expressed their intentions for another round of stimulus funding. The potential for expanded unemployment benefits, tax cuts or industry-specific stimulus could provide direct aid to households and help jumpstart the economy.
As investors eagerly wait for more news in regard to a vaccination, markets have been volatile and fragile during this bumpy recovery. We continue to use this volatility as an opportunity to buy attractive companies, which have positive free cash flows and healthy balances sheets, at discounted prices, and seek companies that can both withstand continued economic fallout from the pandemic as well as thrive when it ends.
In the Merger Arbitrage world, returns in June were largely driven by completed deals, as well as continued progress on deals in the pipeline. Notably, we have seen some spreads revert to pre-COVID levels. We are retaining some dry powder, but we continue to deploy capital in situations that present the highest likelihood of success and certainty of value.
We are seeing early signs of a return to deal making as we move beyond the air pocket created by COVID-19. The Federal Reserve and other central banks have unleashed unprecedented liquidity that should provide an accommodative market for new issuances and M&A. CEOs and Boards of Directors continue to seek ways to create shareholder value in an increasingly global marketplace, while competing with disruptors and a consumer base that is shifting online at an increased pace. This includes both M&A and financial engineering, which can spur deal activity. We previously mentioned that Grubhub and Uber were in deal discussions, which led to two separate transactions in the food delivery space, propelled by the evolving consumer environment: Grubhub/JustEat and Uber/Postmates.
Column by Gabelli Funds, written by Michael Gabelli
To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
2020 continues to be a challenging year. The investment outlook remains cloudy, as many economies have started to recover only slowly from the economic paralysis caused by the COVID-19 epidemic. Nevertheless, stock markets have rebounded sharply, driven by massive fiscal and monetary stimulus. Equity valuation levels have reached record highs, offering only limited upside potential for investors. At the same time, traditional fixed income areas remain unattractive, given the persisting low interest rate environment. Therefore, investors continue to explore new, innovative investment opportunities that offer more attractive risk-adjusted returns.
For conservative investors, private debt remains the asset class with the most attractive risk-reward profile. The direct lending area continues to benefit from the lack of funding by traditional banks to small and medium-sized enterprises. Numerous private lending funds have been launched in the aftermath of the Great Financial Crisis to fill the funding vacuum that was caused by stricter banking regulations. The growth of the private debt area has been spectacular. According to the leading alternative information provider Preqin, assets under management have grown consistently each year and, as of June 2019, reached a record of $812bn. The BlackRock Investment Institute estimates annual gross returns of 10.4% for the direct lending asset class in the next seven year, based on data as of 13 April, 2020. Only private equity has a higher expected return (10.8% per year). However, while private debt returns are relatively stable, private equity interquartile returns range from -1.8% to +24.8%, which implies a completely different risk profile.
Private debt includes a wide range of strategies with different risk-return characteristics. Some areas, such asventure debt, subordinated loans and mezzanine are not without risk. Conservative investors should focus on opportunities in the senior-secured lending area where they benefit from the strongest protection. The UK real estate bridge lending market is one of the most attractive niches that perfectly illustrates the attractiveness of private lending. Real estate bridge loans are short-term loans, fully backed by the value of a property. The UK is by far the biggest bridging market in Europe with a well-established legal framework and strong lender protection. According to the Association of Short Term Lenders (ASTL), the UK bridging loan books grew 19.7% to GBP 4.5 billion in 2019, which is more than the combined market size of all other European countries. At the same time, the UK bridging market is less crowded than the US market, offering higher yields and lower default rates. Average monthly interest rates are close to 0.9% per month, or more than 11% annualized, a sharp contrast to the Bank of England’s key bank rate that was reduced to a record low of 0.1% during the COVID-19 epidemic.
What are the reasons real estate developers are willing to pay such high rates? The short answer is the lack of funding by traditional banks. It is not surprising that in a recently conducted survey by Ernst & Young, the key consideration when choosing a bridge lender, is the speed of execution. The most important purpose for bridge loans are refurbishment projects with a relatively short duration. Another reason is an acquisition bridge to complete the necessary down payment within 30 days after purchasing a property at an auction. Developers might also seek bridge funding to start a development before replacing the bridge loan with a cheaper construction loan or mortgage by a bank. Sometimes, a partial construction or a certain level of pre-sales help to get a more favorable long-term bank loan, which more than offsets the temporary high rates for a bridge.
Investors also benefit from the short duration of the bridge loans with clear exit strategies. The average loan duration is only 9 to 12 months. More importantly, bridge loans are fully secured by the value of the property that exceeds the loan size significantly. In the UK, the average loan-to-value (LTV) is around 60%. This means that even if property prices drop 40%, there would be no impairment. Importantly, investors can count on best-in-class valuation companies that ensure a fair, current appraisal of the properties. Interestingly, property prices, especially on the low- and middle-class residential segments outside London, have remained very stable, even after Brexit and during the Covid-19 recession. This is mainly because of the severe housing deficit that has existed for many years, as the supply of new housing has not met the rising demand from population growth.
The Great Financial Crisis was the main catalyst for the rise of the private debt market, as private investors and fund managers started to seize the opportunity to replace traditional banks in providing the much-needed funding to small and medium-sized enterprises. The impressive growth of the UK bridging market is an excellent example of this trend. Investors can take advantage of this attractive investment opportunity via the Katch Real Estate Lending Fund that offers high transparency and superior risk-adjusted returns, compared to other asset classes.
