Going Digital

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Sejournet Pictet

Global lockdowns have proved a major catalyst for speeding up the digital revolution, opening up new opportunities in life and in investment.

  1. Focus on digital services: Our digital themed strategy invests in data-driven, web-based companies which provide interactive services through intelligent algorithms. These companies are the most disruptive and innovative digital businesses that are helping to develop faster and cheaper solutions for businesses and consumers globally, offering a better basis for decision making
  2. Bottom-up, high conviction approach: Our investment approach centres on pure stock picking, with no benchmark constraints.
  3. Expert insight: Together, our investment team have more than 60 years of experience. An Advisory Board of external experts provides guidance on industry developments and long-term prospects.

A morning yoga lesson, eight hours at the desk (with a break for lunchtime shopping), then a catch-up with friends over cocktails in the evening. Until quite recently, this normal working day would  have unfolded over several different locations across a town or city. Now, in the age of the coronavirus, such activities are taking place online. And it’s likely that these new digital habits will outlast the pandemic.

Indeed, whatever the vantage point, it’s clear we are living through an unprecedented expansion of our digital world. The experience has generated a thirst for even more and better tech – offering attractive opportunities for businesses who can deliver it.

During the lockdown, business growth has been phenomenal among providers of TV services, online video games, e-shopping, social networks, e-health, online education and more.

Netflix secured 16 million new accounts in the first quarter of 2020 – nearly double the number of the previous three months. China’s Tencent, meanwhile, saw a 31 per cent year-on-year jump in online game revenues as customers sought escapism in “Honor of Kings” and “Peacekeeper Elite”. Italians increased the time they spent on Facebook’s apps by 70 per cent.

As lockdowns are eased across the world, it would be natural to expect that growth fade over time. But the fundamentals paint a different picture. After all, so far only 59 per cent of the world’s population has access to the Internet. And as the so-called “Generation Hashtag” – the digital native group born between 1991 and 2005 – grows up and increases its economic power, demand for digital will grow. This demographic represents about 34 per cent of the total population today.

Pictet AM

The rollout of 5G networks will provide an added boost. Already making inroads in the US, China, Korean and other developed markets, 5G has the power to transmit data much faster than current phone networks, handle much higher volumes of information, and require much less battery power. Because the digital demands of the lockdown have put heavy pressure on existing capacity, it seems likely that the rollout of 5G will now proceed more rapidly. This, in turn, will fuel the expansion of the Internet of Things, opening up an almost endless set of digital possibilities.

Around the home,  for example, this could mean tomato plants that can ask for water, roofs that warn of weaknesses after extreme weather, jackets that keep parents updated on a child’s location, trash cans that ask to be emptied, and milk cartons that point out expiration dates. Moving around town, that could mean having a heads-up on open parking spaces, second-to-second data on surrounding traffic for driverless cars, local air-quality warnings, and much more.

Better connectivity will boost tech growth on a number of fronts. Three in particular stand out. All three had already been on the rise, but as a result of the pandemic, have now massively broadened their customer and client base. Now that more people have experienced what is possible, we expect strong momentum to continue.

To begin with, there’s e-commerce. The lockdown prompted millions of people to embrace online shopping for groceries and other goods, and we expect that many of them will have been won over by the convenience and competitive pricing, at least for some of their purchases. PayPal signed up an average of 250,000 new accounts per day in April, according to a recent trading update.

Software as a service (SaaS) is another area destined for strong growth. SaaS encompasses the technology that powers working from home platforms, online education, cloud storage and teleconferencing. Even when the lockdowns are fully lifted, we expect that both businesses and employees will embrace more flexible working practices than pre-pandemic. Education will change too – Cambridge University has already said that lectures will remain online until at least summer 2021.

Digital life is another key area. After work comes play, and the lockdown has shown how much of our leisure activities and socialising can be done with the help of digital. Here, meal-kit/food deliveries, streaming video services, and online games could be among the biggest beneficiaries. E-health is also booming – in the US alone, some 900 million patient visits will have been conducted by video this year – up 64 per cent on 2019, according to health research group Frost and Sullivan.

While the lockdowns have been temporary, they have shown just how much digital progress can be achieved and how quickly. And the further we move down the road of digitisation, the more data we have to improve the experience and the process. Artificial intelligence will become more and more part of our everyday life with digital services based on its ultra-sophisticated algorithms.

 

    Opinion by Sylvie Séjournet, Senior Investment Manager at Pictet Asset Management.

    Please click here for more information on our thematic equity strategies.

     

    This article was first published in FT Adviser.

     

    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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    With IRR Greater Than 10%, Real Estate Ckds Dominate And Cerpis Fund Funds

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    Of the 114 CKDs that exist, 19 achieve an IRR greater than 10% net in pesos, while of the 32 CERPIs there are only 11 have an IRR greater than 10 percent. Together, it means that 21% of CKDs have IRRs greater than 10%, where 17% correspond to CKDs and 34% to CERPIs. These results are those we have, considering capital calls and distributions at the end of May 2020.

    These numbers are explained by the corresponding valuations where many of them, being valued in dollars, reflect the movement in the peso dollar exchange rate. As CKDs and CERPIs are private equity vehicles listed on the Mexican stock exchanges (BMV and BIVA), these gains are only book gains at the date of the analysis.

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    Of the $29,653 million dollars of committed capital, 74% are CKDs and 26% are CERPIs. The market value is $11,353 million dollars. For CKDs, the figures show that 70% of resources have been called while for CERPIs they barely reach 24%, so capital calls will change IRRs, just as distributions do.

    When reviewing the CKDs (private equity funds listed on the stock market that invest in Mexico) in amount and number, the real estate, infrastructure, energy, private equity and debt sectors stand out.

    With an IRR greater than 10% in pesos, the real estate, private equity and infrastructure sectors stand out with the highest number of CKDs. In the real estate CKDs (7), those of IGS (3), FINSA (1), FINSA / Walton (1), Artha (1) and Alignmex (1) stand out. Private equity (4) includes IGNIA (1), Dalus (1), Northgate (1) and ACON (1). In the Infrastructure CKDs (3) those of RCO (1), GBM Infrastructure (1), as well as Infrastructure Mexico (1) stand out.

    With the lowest number of CKDs with IRR greater than 10% in the energy sector (2) is one of BlackRock (1) and Artha Energía (1). Altum (2) is in the credit sector and PMIC Latam (1) is in the fund fund sector.

    Among the 32 CERPIs with an IRR higher than 10% are those of the fund of funds sector and those of private equity. Of the 21 CERPIs in the fund of funds sector, 10 of them have an IRR of more than 10% where those of BlackRock (8), Lexington Partners (1) and Blackstone (1) stand out. Among the 6 private equity funds, Glisco Discovery stands out. It is important to mention that the vast majority of these have barely called capital by 20% and the ones that have been the most are Lexington and Glisco Discovery (33 and 30% respectively).

    The two CKDs that have amortized so far (AMB Capital and Promecap) neither achieved an IRR higher than 10% net for the investor in pesos. Both CKDs were born in 2010. A total of six additional CKDs to these two will expire in the coming months where only in three cases their IRR is between 8 and 9%. These IRRs will continue to change with the independent quarterly valuations made by CKDs and CERPIs.

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    Column by Arturo Hanono

    Sustainable Success Stories

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    Historias sostenibles de éxito
    . Historias sostenibles de éxito

    Sometimes, setting goals is the easy bit. The hard task is actually implementing them. Over the last two years, we have been examining how to integrate Sustainable Development Goals (SDGs) into our investment-decision-making approach for listed markets. This work has taken place against the backdrop of broader efforts to set aspirations and targets for economic development, social inclusion and environmental sustainability around the world.

    Building on its previous Millennium Development Goals, the United Nations (UN) has set 17 SDGs, including Affordable and Clean Energy (SDG7), Climate Action (SDG13) and Good Health and Well-being (SDG3), the areas where the most prominent SDG investment opportunities are typically concentrated. Achieving them require governments, businesses, investors and civil society to join together in taking action.

    Unlike the predecessor framework of the UN’s Millennium Development Goals, the current SDG agenda explicitly calls on the private sector to deliver solutions. Many companies around the world have already started to incorporate sustainability into their business activities. The SDGs take this commitment further, calling on companies to incorporate the SDGs into their business models, innovations and investments.

    In its 2017 “Better Business, Better World Report,” the 35 chief executives and civil-society members of the Business and Sustainable Development Commission identified 60 major market opportunities across the food and agriculture, urban-development, energy and materials, and health and well-being sectors.1 Examples of business opportunities are reducing food waste, new farm technologies, affordable housing, energy-efficient buildings and public transport.

    Which is all well and good, but how can such thinking be integrated into a coherent investment approach? Having done so for quite a while, we can tell you that it is by no means straightforward. Our work included research originally published in April 2018 outlining our proprietary methodology as to how best to invest through an SDG lens.2 During the current year, we have enhanced that methodology to deliver more granularity and asses not just issuers’ positive contributions but also their negative ones. With it, we believe that we can now deliver a more complete picture of an individual issuer’s overall net contribution to the SDGs.

    Our investment universe for this analysis is the MSCI AC World Index. Within this index, we assess where companies’ product and services are contributing the most to specific SDGs. We find that company activities are typically clustered around five SDGs, namely Climate Action (SDG 13), Quality Education (4), Good Health and Well-being (3) as well as Responsible Production & Consumption (12). However, within the sectors, the exposure to the different SDGs varies substantially.

    We start identifying companies with revenues positively linked to SDGs and they then face additional scrutiny through a risk-control layer designed to identify true leaders. Our analysis shows that most of the industries focus their efforts on contributing to SDG 13 (Climate Action). However, this reveals significant variations both within and across sectors.

    When examining the results from our in-depth analysis, we find that the sub-sectors that have the highest contribution to the SDGs are within healthcare, technology and real estate. By contrast, the sectors with the lowest share of “True SDG leaders” and “SDG leaders” are energy and communication services.

    In spite of norm violations in product safety which penalizes the SDG rating across the healthcare sector, both the sub-sectors of pharmaceuticals, biotechnology & life sciences and health care equipment & services have high proportions of “true SDG leaders” and “SDG leaders” (81% and 82% of the market cap in their sub-sectors respectively).

    In the IT sector, all three sub-sectors have a high proportion of SDG leaders. We find that IT products are typically deployed for energy-efficiency purposes and are associated with SDG13; the same also applies to certain devices in the semiconductor sub-sector.

    In the food and beverages sub-sector, we often observe a lower exposure to the SDGs than one might have expected. These companies are contributing to the SDGs, but nevertheless have disappointing ratings due to their net negative SDG contribution particularly to SDG 2 (Zero Hunger – Nutrition). This includes companies producing soft drinks, confectionary, desserts, red-meat-based products and highly processed foods products.

    Last but not least, most of the companies in the communication-services sector have little to no positive SDG revenue. As a result, and even though many companies may score highly in terms of ESG quality they will be marked down on an SDG basis, achieving an SDG rating of “D” at best. By contrast, SDG leaders are rated “A” or “B.”

    So, what does it all mean? Our analysis illustrates the usefulness of having a formal framework to assess issuers across consistent criteria sets in deriving our global outlook for our sector-allocation and security-selection processes. By including ESG information in general and SDG information in particular, we aim to reduce our investment risks, capture investment opportunities and facilitate efforts to improve environmental and social challenges faced by society.

    Column by Petra Pflaum, EMEA Co-Head of Equities & CIO for Responsible Investments in DWS

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    1. Business and sustainable Development Commission (January 2017). Better Business, Better World

    2. https://www.dws.com/insights/global-research-institute/Integrating-UN-sustainable-development-goals-into-investment-portfolios/

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    Private Investments Risk Part 5: “Allocate, Choose Well, Diversify”

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    Team up to achieve your best results.  I always advise clients that as a team we can achieve more together.   The client’s role is to be a disciplined, consistent, annual allocator, especially when markets are down and the world looks scary (opportunity to buy low).  The best clients don’t deviate and back away from their commitment budgets.   And their expert’s role is to help uncover the best strategies with potential to achieve one’s goals while taking the lowest possible risk.  Together, this kind of teamwork tends to produce better results than haphazardly committing to random funds.                             

    As early as 2012, in executing my role as a team player, I attended an exploratory manager meeting with a well-known mega fund to understand how they create value.  The senior partner sitting across the table from me explained that the main way their teams created value in their mega funds was via their purchasing savings efforts at their portfolio companies (think buying pens and pencils cheaper).  I thought he was joking and I almost burst out laughing.  But he was serious and I realized I had to keep my composure.   This episode was one of several that alerted me something was terribly wrong with the large buyout space.   These mega buyout managers were running out of ways to create value in their portfolio companies outside of using financial engineering, so they were getting very creative with their answers to my questions.

    Since 2012, mega funds kept paying up for companies they acquired (the data doesn’t lie) most likely via a competitive bidding process.   Yet in 2019, another record was set for fundraising.  And again large institutional investors allocated most of their billions to these well-marketed mega funds.     

    As discussed in earlier articles, when you scratch beneath the surface a bit, you will realize that this is private investing at its worst.  Risk is just casually explained away and not deeply considered.   Alignment of interest is ignored.  Recognized fund house brand names are chosen as they offer a (false) sense of security.  Yet of the more than 8,000 fund managers in our universe, there are still dozens and even maybe a hundred who never lost focus on meaningful value creation and deserve our investment consideration.  Shifting their focus to raising larger funds at all costs did not tempt them. 

    Once your expert and you find these managers and check their strategies to your satisfaction, you need to decide how to properly allocate to the space.
    Depending on your tolerance for a period of illiquidity and ability to set aside a portion of your portfolio for up to a decade, you should consider allocating 10-40% of your portfolio/net worth to what can be a very rewarding asset class (if approached properly).  This allocation range is in line with many endowments, respected family offices with experienced professionals dedicated to this effort, and other thoughtful institutional investors.  You should budget your commitments over a period of years, understanding that each commitment will take 2-5 years to fully deploy before distributions begin and your allocation starts to diminish again.  At that point, an investor needs to remember to keep committing to the asset class to maintain their allocation % target.      

    And so to achieve your allocation % target, front-end loading your commitment budget makes sense (as much as 40% of your target allocation should be committed in year 1) versus just using straight-line commitments (20% per year) over the initial 5 years.   By front-end loading your commitments, you are able to reach your allocation % target within 4-5 years versus never with a pure straight-line approach.  

    And of course, do not forget to properly diversify without over-diversifying each year’s commitments.   Maintain strict discipline in committing to the asset class each year.   This is especially important when markets become shaky or enter recessions.  Often the best vintage years are those that experience recessions when managers have better pricing power in making their investments.   In any one vintage year, a disciplined investor should commit to between 3 and 5 complementary fund strategies.          

    There is a better way to approach this asset class.   As an aspiring or existing asset class investor, partner with an experienced expert to help you ask the right questions and make a better decision.   And importantly, maintain your investment discipline via your allocation and diversification strategy.   Following this advice will help you achieve consistently above average results in this appealing, yet potentially confusing asset class.  Team up with a capable expert and make it work. 

    Column by Alex Gregory

    Economies Have Begun the Process of Reopening and Consumers Are Adapting to a “New Normal”

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    Wallpaper Flare CC0. Wallpaper Flare

    The stock market rebound from the March lows continued in May, as investors focused on the beginning of the end to COVID-19 induced lockdowns as well as advances in potential treatments or vaccines for the virus.  Mega cap technology companies continue to lead the charge as society has relied on the emphasis of digital technology, from the comfort of their own homes.
     
    The impacts of the virus have created unprecedented levels of disruption throughout the world. The current confrontational dynamics between the U.S. and China, election year uncertainties, and worries over a virus “second wave” will likely prevail through year-end. For now, the Phase One US-China trade deal remains intact despite social unrest in Hong Kong and President Trump’s accusations over the World Health Organization’s relationship with China. Time will tell if that stands.
     
    Monetary and fiscal policy dynamics are in place to encourage more consumer spending and assist parts of the economy affecting the “BOTL” (banks, oil, travel, & leisure) stocks. U.S. political discussions continue on the topic of more coronavirus relief, as U.S. jobless claims exceeds 40 million.
     
    Merger Arb returns in May were bolstered by deals that closed, progress on deals in the pipeline, and the continued normalization of merger spreads. Regulators and advisers around the world have successfully transitioned to working remotely and continue to advance and approve transactions, evidenced by approvals granted in May. Economies have begun the process of reopening and consumers are adapting to a “new normal.” While our focus remains on selecting current deals with the highest likelihood of success, we are seeing green shoots of future M&A activity, with numerous reports of companies evaluating acquisitions. Deals that closed in May totaled about 15% of the fund’s assets, and we were busy deploying the cash received in outstanding deals.
     
    As economies begin to open, the uncertainties associated with the impacts of the virus will slowly surface. Ultimately, we believe that investors will reward strong companies with healthy balance sheets and positive free cash flows in order to lead the economic recovery.

    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.

    Katch Launches KOEPI, a New Private Debt Index

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    ThomasWolter Measuring tape metro
    CC-BY-SA-2.0, FlickrPhoto: Thomas Wolter. Photo: Thomas Wolter

    Private debt is one of the most attractive asset classes. The growth of private debt funds has been spectacular, with very attractive risk-adjusted returns for investors. The attractiveness of private debt has several reasons. Firstly, the post-crisis financial regulatory reforms have led banks to reduce their lending activities, particularly to small and medium-sized businesses. This has further intensified during the Covid-19 crisis. Secondly, the demand for credit from businesses has not fallen to the same degree, leading to unmet demand. And thirdly, the demand from institutional investors for debt that yields more than government debt remains robust. Historically, the private debt market consisted of specialized funds that provided mezzanine debt, which sits between equity and secured/senior debt in the capital structure, or distressed debt, which is owed by companies near bankruptcy. However, following the financial crisis, a third type of fund emerged. Known as direct lending funds, these funds extend credit directly to businesses or acquire debt issued by banks with the express purpose of selling it to investors.

    Leading alternative asset managers have all expanded their product offerings to include private debt funds. They are joined by many specialized new firms. The strong demand by institutional investors has enabled these funds to expand rapidly in size. Collectively, more than 500 private equity style debt funds have been raised since 2009. The private debt industry has quadrupled surpassing $800 billion, according to the alternative data provider Preqin.

    However, the private debt universe remains somewhat opaque. There are several types of private debt funds that can differ in terms of structure, risk and duration. For example, most private debt managers use closed-end fund structures with long investment horizons and very limited liquidity. Also, some funds invest in areas with equity type risk/return characteristics, such as mezzanine debt, subordinated loans, convertible loans or even equity components, including warrants and private equity co-investments.

    Katch investment group decided to focus only on the lowest risk areas in the private debt space around the globe. It is mainly active in senior secured lending, senior real estate debt and other niches in the direct lending area that combine a high level of seniority and real asset guarantees. What is more, the group focuses on short-term opportunities, where the competition from banks has decreased even more, as new regulations and bureaucratic processes have made banks slow in approving credits. Also, the high rotation in short-term loan books enable asset managers to provide liquidity to investors. The fund structures are typically open-ended with monthly or quarterly subscriptions and redemptions. This is a key advantage for investors that oftentimes struggle with capital calls and the illiquidity of closed-end funds.

    One of the challenges in private debt has been the lack of benchmarks. Some investors are using the S&P/LSTA Leveraged Loan Index or the Bloomberg Barclays High Yields Bond, that both are a very bad proxy for the private debt asset class. The Cliffwater Private Debt index has more merits as it seeks to measure the unlevered, gross of fee performance of US middle market loan, as represented by the asset-weighted performance of the underlying assets of business development companies (BDCs). A BDC is the equivalent of a REIT (Real Estate) but for loans in the US.

    However, this benchmark does not really reflect the investment approach of Katch in terms of its geographical exposure, duration and risk. This is why the group decided to create the Katch Open Ended Private Debt Index (KOEPI). The equal-weight index is designed to track the net of fees performance of short-term secured lending strategies, such as real estate bridge loans, trade finance, life insurance settlement, and other short-term asset backed lending strategies. The index starts in January 2017 and currently consists of 23 mutual funds. The index is rebalanced quarterly, since several funds only publish quarterly NAVs. The publication of each quarterly performance will take place between 75 and 90 calendar days after the respective valuation date.

    Katch Investment Group

    Currently, the index includes funds in the areas of trade finance (33%), credit opportunities (28%), bridge loans (22%) and life insurance settlement (17%). Geographically, it is exposed to Europe (39%), North America (33%), Asia (11%), Africa (11%), Global (6%). The index combines some of the most important indexing requirements: It is unambiguous as the weight of each fund in the index is known, it is investable and the performance is easy to measure as the constituents NAVs are widely available and updated via financial data providers, such as Bloomberg.

    However, investors should be aware of some biases and limitations. For example, since the index does not include funds that went out of business, there is a survivorship bias. This means that the historic performance of the KOEPI index might be overstated. In addition, Katch Investment Group is committed to increase the transparency and reporting standards in the private debt area. Even though the number of funds in the index is certainly representative for the space, it would be desirable that more funds can be included in the index in the future, once they improve their price dissemination practices.

     

     

    Article by Stephane Prigent, CEO of Katch Investment Group.

    If you want more information, you can contact him through this email: sprigent@katchinvest.com

     

     

    Sovereign Debt Risk After the Virus

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    Ludwig Friborg norway Unsplash
    Pixabay CC0 Public DomainPhoto: Ludwig Friborg. Photo: Ludwig Friborg

    The global health crisis triggered by the coronavirus pandemic has firmly put the spotlight on how well countries will be able to handle the burden of rescuing their economies from an unprecedented meltdown. The question fixed income investors face is which countries will weather the storm and will sovereign debt crises follow?

    Government deficits are ballooning everywhere, driven by two forces. First, huge fiscal programmes have been instituted to support households and companies at a time when many have seen incomes and revenues plummet due to the global lockdown. And, second, governments’ tax revenues have been hit hard by the dearth of economic activity, both domestic and cross-border.

    So far governments have announced fiscal stimulus programmes in response to the coronavirus crisis worth 4.1 per cent of potential global GDP, nearly half of which will come from the US alone. Across the euro zone, the stimulus programmes are worth 3 per cent of GDP, while in Japan it’s 10 per cent. This spending necessitates huge volumes of government debt issuance. Central banks in the best-placed countries like the US, which benefits from reserve currency status, can absorb most, if not all, of this new debt through their asset purchase programmes. The US Federal Reserve’s balance sheet has expanded from USD4 trillion to USD6.5 trillion over the past couple of months alone and we expect it to peak at around USD8 trillion by the end of the year. In the UK, the Bank of England is pursuing an even more aggressive form of asset purchases by buying bonds directly from the Treasury in a form of debt monetisation – a policy that for long has been taboo.

    But if the lockdowns last more than two quarters, a new set of fiscal measures will have to be adopted, which could mean solvency problems for some already highly indebted countries. We estimate US debt will have risen from 108 per cent of GDP to between 133 per cent and 145 per cent following its massive stimulus programme, worth some 7 per cent of GDP,  depending on how sharply the economy bounces back. In the worst case, it could hit 165 per cent of GDP by the end of 2022. Elsewhere, higher debt levels are likely to ring alarm bells – it’s worth remembering that during the euro zone’s sovereign debt crisis, Greece flirted with ejection from the single currency as its debt breached 150 per cent of GDP.

    Who’s at greatest risk?

    Pictet Asset Management’s sovereign risk scores show which countries were most vulnerable to dangerous debt dynamics coming into the coronavirus crisis. The metric is based on how countries stand relative to each other and to their own historic trend on three dimensions – how affordable their existing debt is, how well they’re able to finance it and the degree to which the debt will fall naturally as their economies grow.

    Pictet AM

    Our analysis shows that Greece had by far the poorest state of debt sustainability at the end of 2019 among developed countries, followed by Italy, Japan, Belgium and the UK. At the other end of the scale, Switzerland, the Netherlands and Ireland were in the most enviable positions.
    Mapping countries’ short-term debt situations against their structural scores confirms that Greece, Italy and Japan exhibit the worst debt dynamics, though France is also a worry. By contrast, other northern European and Scandinavian countries are in a good position.

    Pictet AM

    Among emerging economies, the countries that faced the biggest risks to their sovereign debt at the start of the crisis were Brazil, South Africa, Egypt and Argentina. In terms of debt dynamics relative to short-term debt situations, South Africa, Egypt and Ukraine are of greatest concern. Those likely to be most resilient were Russia and Korea.

    Flashpoint

    Italy was a flashpoint during the euro zone crisis and it could prove to be one again. Italian government debt could potentially hit 150 per cent of GDP by the end of this year. The European Central Bank already owns Italian bonds worth some 22 per cent of Italy’s GDP and, as such, it has a big role in the sustainability of the country’s debt. The ECB has already said it would take a flexible approach to purchases of member states’ bonds and will be absorbing some 90 per cent of net new issuance by the single currency region’s governments this year.

    Those purchases by the ECB come against the backdrop of northern European concerns about creeping debt mutualisation. But ultimately, if the euro zone is to be kept together, some sort of debt pooling will be necessary – extend and pretend can only be supported for so long before the market tests the region’s political resolve. We expect that there will be moves in the direction of mutualisation, which ensure that yields on Italian bonds stay contained.

    The ECB, however, faces a fine balancing act in how it navigates the coming months and will have to be deft in how it applies game theory. It wants to prevent another sovereign debt crisis. But it also doesn’t want to entirely remove pressure on euro zone politicians to reach agreement on some sort of debt mutualisation. If the central bank is too accommodative and compresses southern European government bond spreads too much, this would lessen the need for euro zone governments to agree on how to move forward.

    An even more immediate concern is that some emerging market economies have already run out of monetary headroom. Inflation won’t be an issue for some time in developed economies as depressed demand and weak oil prices drag down consumer prices overall, notwithstanding aggressive central bank action. In some emerging economies, however, central bank policies are already acting to drag down their currencies in what could turn out to be another devaluation/inflation cycle. Worryingly some large developing economies – Turkey, Brazil, South Africa – are heading in this direction. 

    The global pandemic is likely to expose strains that already exist in the global economy as well as throwing up new problems. How governments came into the crisis will play a big role in how they emerge.

     

    Opinion by Andrés Sánchez Balcazar, Head of Global Bonds, and Sabrina Khanniche, Senior Economist, at Pictet Asset Management. 

     

    More information on Pictet Asset Management’s fixed income capabilities is provided in this link. 

     

    Important Information:

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

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

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

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

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

    Uncertainties will Likely Prevail Through Year End…

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    Screen Shot 2020-06-03 at 12
    Needpix CC0. Needpix CC0

    The U.S. spring stock market rally extended with a solid gain in May as a gradual ending of various virus lockdowns, a nascent world economic recovery, and rising expectations for a COVID-19 vaccine remedy fueled the advance.  The unprecedented U.S. and world fiscal and monetary policy backdrop, confrontational dynamics between the U.S. and China, bankruptcies, presidential election year uncertainties, worries over a virus ‘second wave’ in the U.S., and Hong Kong social unrest will likely prevail through year end. We expect government spending initiatives on infrastructure and transportation soon.
     
    Monetary (hypersonic) and fiscal policy dynamics are largely in place to jump start consumer spending and the hardest hit parts of the economy as reflected by the BOTL stocks (Banks, Oil, Travel and Leisure), which have paced the recent market surge. We echo, “how bad is bad, how long will bad last, how good will good get” and “which stocks have discounted the bad and have a bright future?”  For our value investing, we use the Gabelli Private Market Value (PMV) with a Catalyst™ stock selection process to spot stocks selling below intrinsic value.
     
    First quarter earnings season is in the books and second quarter numbers are now becoming more visible every day with July starting the second quarter earnings season. So far, stocks have rallied sharply from the March lows with the U.S. markets leading the way over foreign stock indices. However, the overall stock market appears to be discounting current monetary and fiscal policies.  Though deal activity has been suppressed by recent events, we expect M&A to pick up for small, mid-sized and microcap companies as the economy progresses.  As oil prices crashed so did the related stocks.  Potential deals await – stay tuned.
     
    Chairman Powell and the Fed have done a terrific job responding to the complex pandemic. One tool used by other central banks the Fed has not used is a negative policy interest rate, so we were encouraged to hear New York Fed President John Williams say on May 28th, at Stony Brook University in Long Island, “I don’t think negative rates is something that makes sense given the situation we’re in because we have these other tools that can be used…that I think are more effective and more powerful to stimulate the economy.”

    Column from 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.

    The Sharpest and Shortest Recession on Record?

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    Lifeofbreath Noria Fair Ferris Wheel Pixabay
    Pixabay CC0 Public DomainLifeofbreath. Lifeofbreath

    U.S. equities took a roller coaster ride on economic recovery hopes vs a second wave of virus fears during June that ended on the plus side for both the month and the second quarter, which scored the best return since the 4th quarter of 1998.  

    On June 8th, the National Bureau of Economic Research, a private economic research group recognized as the arbiter for determining the start and end dates of U.S. business cycles, announced that its Business Cycle Dating Committee “has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854.” 

    Fed Chair Powell concluded his June 30 testimony saying: “We understand that the work of the Federal Reserve touches communities, families, and businesses across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible.”

    If U.S. growth continues to recover from here, the current recession may turn out to be one the sharpest and shortest on record. Some of the near term catalysts that will likely determine whether the U.S. economy has entered a sustainable expansion include the sequence of results during the second quarter (June better than May better than April), the leading indicators traceable to the all-important service sector, the phase 4 stimulus bill estimated at one trillion dollars, infrastructure spending, employment dynamics, a COVID-19 second wave and vaccine progress, China’s economy, and November U.S. Presidential Election dynamics with a focus on corporate and individual tax rates.

    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.

    Only Time Will Tell Whether the Revival in the Market is Too Optimistic and How Severe Any “Second Wave” of COVID-19 May Be

      |   For  |  0 Comentarios

    underwater_sunbeams_ocean_sea-745632
    Pxhere CC0. Pxhere CC0

    After one of the worst months in stock market history, equities rebounded sharply in April, with the S&P 500 posting its largest monthly gain since January 1987 as it began to discount a phased-in reopening the economy, the massive monetary and fiscal policy response, and some encouraging COVID-19 treatment developments. The snap-back in the market is, however, fairly concentrated, with mega cap technology stocks being the prime beneficiaries.  Most small capitalization companies and businesses with any exposure to “BOTL” (banks, oil, travel & leisure) continue to trade at prices significantly lower than pre-crisis levels.

    The impact of COVID-19 continues to take its toll on the US economy. Since mid-March, over 30 million Americans have filed for unemployment. The continued economic shutdown has pressured more companies to lay off or furlough employees. The ramifications of strict stay-at-home orders from state officials has forced many companies to suspend financial guidance for 2020 as they reassess their businesses. As lockdown measures ease, government officials and economists are hopeful that a large portion of these temporary unemployed Americans will be able to quickly return to paid employment.

    The Fed has responded by expanding its balance sheet, with estimates that it could exceed $12 trillion by the end of the year. Congress continues to fund the coronavirus support package in order to replenish money for the Paycheck Protection Program (PPP) as well as ramp up testing for COVID-19.

    Only time will tell whether the revival in the market is too optimistic and how severe any “second wave” of COVID-19 may be. In these unusual times, we remain hopeful that advancements in COVID-19 testing and treatments (and eventually a vaccine) will allow the economy to at least partially recover and operate in a greater capacity in the near-term. We continue to believe that strong companies with healthy balance sheets and positive free cash flows will be able to withstand these times of economic uncertainty.

    Looking specifically at merger arbitrage for April, closed deals bolstered performance and other transactions made significant progress towards closing. These positive dynamics spurred investor confidence across the current pipeline of deals. While pending deal spreads remain wider than pre-COVID levels, they have narrowed from levels experienced in March. We are still encountering attractive opportunities to selectively deploy capital where there are clear paths to closing and we are highly confident of a deal’s success. While April was an expectedly quiet month for new deal activity, a number of new deals were announced in May, including Alexion’s acquisition of Portola Pharmaceuticals for $1.4 billion and A Menarini’s acquisition of Stemline Therapeutics for $700 million.

    Column from 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.