Today is too early to tell, given the short life of both. CERPIs have barely two years investing globally and are barely in the investment phase. The CKDs, for their part, only invest in Mexico and only two have expired.
Although both instruments were issued in Mexico, it is very likely that the CERPIs present results in dollars to their investors, while the CKDs do so in pesos. However, the AFOREs will record the returns in pesos for the purpose of their portfolios. The IRR in dollars or pesos must be indifferent as long as they are compared in the same currency.
Out of a total of 146 CKDs and CERPIs, 107 (73% of the total) have a net IRR positive in pesos where 30 of them (21%) have a net IRR greater than 10% and 41 (28%) have a net IRR between 5 and 10% according to data as of April 30. Many of these results are due to the fact that the assets and investments made by them reflect the movement in the peso-dollar exchange rate. Only in the last 4 months (December 31 to April 30), the exchange rate has changed by 29.4%.
The IRR that the CKDs and CERPIs carry so far may change depending on the capital calls and distributions of each one, so they only reflect the results to date.
It is important to mention that 19 of these 107, are CERPIs who invest 90% of the resources globally and 10% invest it in Mexico. 10 CERPIs observe an IRR higher than 10% and were issued between 2018 and 2019, therefore, they have benefited from the depreciation of the peso. In total, 32 CERPIs have been placed and have a market value of $1.5 billion dollars and committed resources of $7.6 billion dollars, having only called 24% of the commitment so far. The 9 CERPIs that appear with the best IRR, for example, have only called 20% of the capital and were recently placed.
There are 114 CKDs issued as of April 2020 and have a market value of $10.5 billion, totaling $21.5 billion of committed resources and have made distributions of $4.2 billion according to their own estimates as of April 30.
When making the investments of the CERPIs globally, they will have a strong exchange component, which will force comparisons of results not only in pesos, but also in dollars, regardless of whether the exchange hedging is done.
When wanting to make comparisons of CKDs and CERPIs with respect to global private capital funds, IRRs must be calculated in dollars in order to make comparisons and this is done by converting each of the capital calls and distributions to the corresponding exchange rate at the date of each one of them.
When doing this exercise for the 146 CKDs (114) and CERPIs (32) we have that 33 of 146 (23%) have a positive net IRR in dollars, 10 exceed 5% and only 2 have an IRR greater than 10%. Interestingly, all those who have a positive IRR in dollars are CKDs.
Whether it is a TIR in pesos or in dollars, there will now be more competition for the resources of institutional investors in Mexico.
“Sheltering in place” is like the cocoon stage in the life cycle of a butterfly. I think we would all agree being inside a cocoon feels boring, disheartening, and simply unmotivating—it’s like being frozen in place.
Don’t be fooled. While in the cocoon the soon to be butterfly is burning the midnight oil. Its body is engaged in the hard work of metamorphosis that will allow it to emerge stronger and more beautiful than its larval form.
Cocooned in our homes during the COVID-19 crisis, it’s tempting to hit the “pause” button—switch on Netflix, and wait for the crisis to pass.
Not so! This intermission in our professional lives is the perfect time to prepare for the next act in our careers—more robust and fulfilling than the last. Now is the time to work more, not less! Now is the time to stop being a caterpillar and turn your business into a butterfly.
After a much-needed season of rest and reflection, here are four critical action steps to help your insurance business emerge from the coronavirus crisis stronger than ever.
1.Prepare For the Changes Coming to your Industry.
Like many of my colleagues, I have watched my international business come to a screeching halt, while U.S. business adapts quickly to digital platforms. Life insurance companies are open for business, but the industry is making adjustments to its product portfolio, underwriting guidelines, and implementation processes to keep bringing in new business.
While we are all accustomed to doing business a certain way, being forced to step out of your comfort zone can tap into unforeseen opportunities. Here’s how to turn this to your advantage …
Contact your underwriters and stay abreast of any product changes or limitations.
Reach out to leaders in the industry to understand their short, middle and long term strategies
Carefully analyze your pipeline and redirect your strategy and find viable solutions for each prospect.
2.Call Everyone!
Review every client folder, think about what they might need, and then start dialing! Check in on their health, their family, their morale in the face of shutdowns and quarantines. Your international clients may face much more strict lockdowns or dire healthcare conditions. Forget about making the sale and check that everyone is safe. By making the effort, you will stand out— a butterfly amid caterpillars.
I have spent my mandated shelter-in-place downtime calling every client on my list. Many of them are grateful for the outreach, and lo and behold: “I’m so glad you called.
This crisis has highlighted the fact that I absolutely need more insurance.” Win-win-win!
3.Revamp your Online Presence
The insurance industry moves like molasses in response to technological advances, preferring to rely on handshakes and in-person meetings. Ironically, these are exactly the avenues of connection COVID-19 has cut off!
The COVID-19 interregnum is a perfect opportunity to get ahead of the pack in terms of your digital footprint:
Invest in a professional and accesible video conferencing software platform that will allow you to meet with your clients “face-to-face,” even if you can’t meet in person. PRO TIP: Don’t rely on the built-in webcam. A good camera and professional backdrop will enhance the meeting experience.
If your website is more than two years old, consider updating it. A sleek appearance and user interface will facilitate digital marketing and sales.
Bring your social media accounts into alignment with your brand across all channels (Facebook, Twitter, LinkedIn, Instagram, YouTube, etc.)
Invest in content! YouTube videos, photographs, blogs, social media content, etc. Online, robust content denotes authority.
Outsource anything and everything that you tend to procrastinate or that falls outside your realm of expertise … but consider getting in front of the camera yourself. You are the face of your brand. Get it out there!
4.Shift to a Digital Sales Approach
Insurance agencies also tend to lag behind other industries in the implementation of digital systems. This becomes a bottleneck, slowing their growth and (again) closing them off to underserved foreign markets. New opportunities.
Digital initiatives should include a:
New way to generate leads. You can only be at so many networking events at once … and right now, networking events are all on hold until further notice. Explore avenues of lead capture that don’t require your physical presence, like social media and content marketing. Make sure you have a targeted marketing strategy which allows to reach out to your contacts with valuable content that will capture their attention.
New way to organize your marketing strategy. A digital client relationship management (CRM) system and a marketing automation platform can supercharge your business, allowing you to manage more clients with less effort. These tools can help you keep track of where each client is in the buyers’ journey, and allow you to fire off proposals, and email communications with one click.
5. Prepare to Reopen
Many businesses operate on thin margins with minimal safety nets, and insurance agencies are no exception. We have all felt the branch creak during this crisis, which makes now a perfect time to address the reopening of your agency.
This may not even be the last time we face shutdowns this year if a second wave of COVID hits us. Now is the time to take a good long look at your continuity plan, including:
Provide a safe environment for your employees and engage with each of them personally.
Invest time in adjusting financial projections and prepare for the inevitable shortfalls. Protect your payroll.
As a leader, accept the new normal and embrace each day with enthusiasm and resilience.
——————————————————————————
I don’t want my business to inch and squirm back into the sunlight as coronavirus restrictions begin to lighten. I want to flex beautiful new wings and soar out of my cocoon, and I want the same for you! What steps can you take today to emerge from the pandemic stronger than before?
March was one of the worst months in stock market history, with the novel coronavirus that causes COVID-19 spreading rapidly around the globe, and societies everywhere responding with various forms of “social distancing” that escalated throughout the month, culminating with most of the global economy being effectively shut down.
Many questions about Covid-19 remain: Will it wane with warmer weather? Will it become endemic like the flu? When might effective treatments and a vaccine be developed? The data we do possess from China, South Korea and Italy unfortunately suggest cases in the US will continue to escalate sharply, but eventually moderate. Life in China, where the virus originated last fall, appears to be slowly returning to normal. The strain on the United States health care system will be severe and the death toll – currently estimated at 100,000-240,000 – will be massive, but two dynamics give us hope. First, technology should allow us to track, treat and defeat this virus faster than any in the past. Notably, technology has also offset some of the heavy burdens of quarantine – the citizenry of the Spanish Flu of 1918 did not benefit from ecommerce, remote working/learning or Disney+. Second, after some delay, all levels of government and most businesses and individuals are instituting the practices needed to flatten the infection curve, putting us on path to put Covid-19 behind us. Many private companies have already unveiled promising developments in terms of tests that provide rapid results, therapeutic treatments and even vaccines, though many of those will likely not likely be available until 2021 at the earliest.
The cost of closures and social distancing is considerable. The global economy has nearly ground to a halt triggering what will likely be a severe recession. While there will be significant pent-up demand on the other side of this crisis, fear will need calming, supply chains will require realignment, and balance sheets will demand repair. Government action – both monetary and fiscal – is crucial, and the CARES Act signed into law on March 27th is a good start in providing relief to both individuals and businesses. The Fed has slashed rates near zero, and is also buying securities in a number of asset classes –treasuries, mortgaged backed securities, asset backed securities, corporate credit, loans backed by the Small Business Administration – in order to stabilize markets and the economy. Further fiscal stimulus will likely be needed, and we expect legislation directed at more medium to long term measures that can actually drive spending and demand (e.g., a long overdue infrastructure bill) as opposed to simply providing more relief. Ultimately this recession, like all prior, will birth a new expansion. We currently expect a return to growth in Q3 after a sharp decline in Q2, though the pace of recovery will depend on the effectiveness of both measures to contain and combat the virus, as well as measures to keep individuals and businesses afloat for when the economy opens up again.
While this one has been especially painful due to its quickness and severity, we are reminded that bear markets, like recessions, are necessary to the capitalist system, cleansing its excesses. Over the four decade plus history of our firm, there have been 5 bear markets ranging in length from 3 to 30 months. We had been anticipating a correction for some time, though the trigger for and pace of the decline (one of the most rapid in history) took us by surprise. The market already quickly bounced into technical “bull market” status from its lows, though those lows may be re-tested as the case and death counts rise to alarming levels. Ever the world’s best discounting machine, the market will need clarity on a peak in cases and government fiscal action before a sustained rally. That could be anticipated at any point which is why an attempt to time the market could result in significant forgone profits.
We believe recent volatility, attributable in some measure to the popularity of algorithmic and passive trading, has laid the groundwork for investors to again focus on fundamental stock picking. Capital preservation is especially important in bear markets. The market is offering bargains unseen since 2008. Some are opportunities to add to companies already owned, others are in companies and industries whose prior valuations put them out-of-reach. We continue to emphasize the basics: Does a company’s business model remain sound? Does it have a strong enough balance sheet to withstand the short term pain? Is management focused on shareholder value? The situation changes daily, but we believe the best way to participate in the return of health and prosperity is to own a portfolio of excellent businesses.
Merger Arbitrage was not immune from market volatility either. During the month, mark-to market merger spreads widened as levered multi-strategy and quantitative hedge funds faced margin calls and sold stocks to delever and raise cash. We experienced similar instances of this dynamic before, for example, in the Crash of 1987 and in Long-Term Capital debacle in September 1998. It is important to note that none of the deals in our portfolio were terminated in March. The outcome is that we have an excellent opportunity to earn significant returns from existing deals which will close in the months ahead.
These market dislocations force arbitrage investors to reassess the standalone value of target companies, driving target company prices lower as comparable valuations decline. Our philosophy is to take advantage of these market dislocations by adding to positions at lower prices. This is what we are doing at present, with a selective focus on deals with short-term catalysts – tender offers, deals that are expected to close soon and strategic deals that have our highest level of conviction. We are continuously evaluating deal risks and outcomes. Globally, companies and government agencies have safety measures in place in response to COVID, allowing them to remain operational.
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.
Pixabay CC0 Public DomainGabor Molnar. Gabor Molnar
Thanks to the emergence of a thriving environmental products industry investing to safeguard the planet no longer means sacrificing returns.
When it comes to investing in rapidly-evolving industry such as environmental products and services, identifying the most promising opportunities isn’t straightforward.
That is why investment managers of our Global Environmental Opportunities (GEO) strategy have developed a process that deploys both a scientific, rule-based framework and traditional company-by-company research to build their portfolio.
The first step in the process is to identify firms with the strongest environmental credentials. These are companies that neither make excessive use of raw materials nor generate disproportionate amounts of waste. Then, from this group, we seek businesses that specialise in the development of products or services that mitigate environmental damage.
In order to identify firms with these characteristics, we perform an ecological audit that establishes the environmental footprint of more than 100 sub-industries. This audit incorporates two novel measurement tools – the Planetary Boundaries (PB) framework and Life Cycle Assessment (LCA).[1]
The PB is a model that defines the ecological “safe operating space” within which human activities should take place.[2]
Developed by a team of leading scientists and economists, the PB framework sets ecological thresholds for nine of the most damaging man-made environmental phenomena (see chart). The model quantifies a set of boundaries, which, if breached, would endanger the environmental conditions that have been instrumental to human prosperity over thousands of years. For example, if the world’s supplies of freshwater are to remain stable, humanity’s total consumption of water must remain below 5,000 to 6,000 cubic kilometres per year. Similarly, the PB states, if carbon dioxide emissions are to remain within acceptable levels, the proportion of CO2 in the atmosphere must not rise above 350 parts per million.
Fig. 1 planetary boundaries
Source: Stockholm Resilience Centre, Pictet Asset Management, as of 29.12.2019
The LCA, meanwhile, is a framework that is used to calculate the waste emissions and resource usage of each industry that makes up the global economy. The model analyses every activity in the production of a good or service: the extraction of raw materials, manufacturing processes, distribution and transport, product use, and disposal and recycling.[2]
In our process, we combine the LCA with the PB to construct a lens that can pinpoint industries with the smallest environmental footprint.
Here is an example of how the process works:
The planetary boundary states that the ozone layer should be 276 millimetres thick. For the ozone hole to begin to close, the world’s total emissions of ozone-depleting substances should remain below 6.6 billion tonnes per year. At the corporate level, this means that the threshold for the emission of such substances is set at 2.48 kg per USD1 million of revenue per year. Only companies whose entire LCA-based emissions stay within the Planetary Boundaries are eligible for inclusion in our investment universe.[3]
Such analysis is necessary because we believe most of the environmental reporting that is carried out today is too narrow or too subjective. The majority of environmental footprint models focus exclusively on manufacturing processes; they fail to take into account the wider ecological impact of, say, suppliers, or of the products and services over their entire lifespans. Take the car industry as an example. A car’s lifetime emissions are four to five times higher than those stemming from its manufacture alone. Just measuring the level of emissions during the car production process does not give a true assessment of automakers’ overall ecological footprint.
Once the LCA-PB audit is complete, the second phase of the process involves taking a deeper look at the core business of each company that is identified in step one. Here, our goal is to determine which firms are developing products and services that make a real difference in reversing environmental degradation. For each company we assign a proprietary “thematic purity” value, which indicates what proportion of a firm’s enterprise value (EV), revenue or EBITDA is derived from environmental products and services. For a company to qualify for inclusion in the portfolio, its purity value must be at least 20 per cent.[4}
These filters narrow down our investment universe to about 400 companies. Here, we then carry out an additional analysis to determine which companies in the universe meet the criteria defined by the PB. We then conduct detailed company-by-company research to identify firms with the most attractive risk-return characteristics. We use a proprietary scoring system, which takes into account the strength of the business model, management quality, valuation and operational momentum metrics. The ESG analysis is systematically integrated in this stage as well.
The result is a concentrated portfolio of around 50 stocks – each investment combining an attractive risk-return profile with a small ecological footprint.
Sizing the environmental footprint: Planetary Boundary-Life Cycle Assessment
Source: Stockholm Resilience Centre, Pictet Asset Management
But our investment process does not end there. Our aim is to be an active owner of the companies we invest in. For this, we exercise voting rights through a proxy voting platform and engage with the companies to ensure they have the best possible governance structure in place. We believe this responsible form of capitalism not only mitigates risks but also leads to sustainable long-term capital returns.
Investors have long appreciated the need to protect the planet but also have harboured misgivings about the financial trade-offs that might involve. Now, thanks to emergence of thriving environmental products industry, those concerns should quickly fade. Protecting the environment and investing for capital gain can indeed go hand in hand.
Fig. 2 Actively engaging
Example of how we’ve engaged with a UK-based environmental utility company
Source: Pictet Asset Management
Opinion by Luciano Diana, Senior Investment Manager in the Thematic Equities Team running the Pictet Global Environment Opportunities at Pictet Asset Management.
[1] We use Carnegie Mellon University’s Economic Input-Output Life Cycle Assessment (EIO-LCA) database to quantify the environmental impact of 157 corporate sub-industries, defined by MSCI and S and P Global with its Global Industry Classification Standard methodology. For more, see http://www.eiolca.net/ and https://www.sci.com/gics
[2] Steffen et al, Stockholm Resilience Centre, September 2009
[3] We remove companies that are on our “black list” – consisting of companies commercialising controversial weapons, such as anti-personnel mines, chemical or cluster munitions from the investment universe
[4] The portfolio has an average purity score of at least 60 per cent
This marketing material is issued by Pictet Asset Management (Europe) S.A.. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet or at Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg.
The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments or services.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management (Europe) S.A. has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
Any index data referenced herein remains the property of the Data Vendor. Data Vendor Disclaimers are available on assetmanagement.pictet in the “Resources” section of the footer.
This document is a marketing communication issued by Pictet Asset Management and is not in scope for any MiFID II/MiFIR requirements specifically related to investment research. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any products or services offered or distributed by Pictet Asset Management.
Personal wealth, especially in times of crisis, is subject to many types of risk, and those risks are numerous;
forfeiture;
devaluation;
double taxation;
information leakage and theft;
political unrest;
inflation;
lack of legal certainty;
information exchanges;
lawsuits and attacks from third parties;
inheritance issues; and
fiscal voracity.
Depending on the type of asset and most especially on the country of residence of the owner, some of these risks will be more prominent than others.
This is one of the reasons why wealth planning is a highly personal matter, which means that the same trust structure may be very efficient for a certain family and a bad choice for another.
At the same time, this is a very dynamic field and the need to be up-to-date is paramount: formerly efficient solutions may not be appropriate today.
Through efficient wealth planning, the impact of a number of these risks can be avoided or at least mitigated; hence its growing importance.
When we say wealth planning, what exactly do we mean?
In a nutshell, wealth planning consists of determining what is the most efficient way to own each of the assets composing a person’s or a family’s wealth and what is the most efficient way to transfer these assets to the next generations. Both of these actions will fulfill the goals of their original owner and go a long way to mitigating the risks mentioned above.
THE CURRENT SITUATION
We now live in extraordinary times. The COVID-19 crisis is exceptional and its impact on wealth planning is as great as it is on our everyday life.
Broadly speaking, crises situations tend to increase the probability of the risks we have mentioned, and they often amplify the magnitude of their consequences.
For example, there is no country (with the exception of Venezuela) that is considering a rise in taxes and there are many, in fact, which have reduced them or extended their maturity.
Nonetheless, in my opinion it is highly likely that, once the COVID 19 threat has been resolved, many countries facing unprecedented economic crisis will be forced to take pro-active measures with regard to taxation.
Another troubling consequence in times of crisis is the restriction of personal freedom.
In the case of wealth planning, this could come about through new regulations enacted by the state on individual privacy, much like what we saw enacted in the wake of 9/11. I would not be surprised at all to see this happen once more.
Finally, every economic crisis (especially a global one) creates unemployment and an increase in street violence, which amounts to a clear threat to wealth, especially in regions which were already prone to violence before the pandemic (such as several Latin American countries).
At first glance, it is impossible to deny that the current crisis raises considerably the importance of efficient wealth planning, and since most of us have more free time than before the outbreak, I would like to suggest that this topic should go onto your “to do” list while you are in quarantine.
WHAT ARE THE RICH DOING?
My experience shows that the wealthiest have been the first to adapt their behavior to this current situation.
From a strictly financial point of view, decision-making in this type of families have been focused on:
rebalancing investment portfolios;
taking advantage of investment opportunities (or get ready to do so); and/or
preserving assets in the long term.
From the point of view of wealth planning, they have:
used this opportunity to transfer wealth to the next generation or to trust structures;
revised and updated their trust structures; and/or
worked on pending issues (among others, family protocols or business succession planning).
WEALTH PLANNING OPTIONS FOR ALL
While not all wealth planning tools are available to all people (as occurs with any other good or service), the truth is that all of us can take actions to protect our legacy.
It should be noted that wealth planning can be done not only through the establishment of various types of legal vehicles but also through the purchase of a certain type of asset.
If, for example, a person’s objectives are exclusively related to tax, wealth planning could be based on the acquisition of tax-exempt financial assets.
If, on the contrary, a greater degree of privacy were pursued, an investment could be made in non-financial assets, not subject to information exchange between countries (i.e. real estate, jewelry, vintage cars, works of art and/or cryptocurrency).
Naturally, there are times when the main goal is to seek greater legal certainty or address matters of inheritance or asset protection. In these cases, wealth planning will necessarily require the creation of one or more legal structures.
In this last scenario, the key is to choose the right structures, jurisdictions and providers.
The legal tools available for wealth planning go from the simple drafting of a will to international relocation, or the creation of companies, trusts, foundations and family investment funds and/or purchasing life insurance.
Some of these tools allow for a more orderly inheritance, while others go further, offering clear tax advantages. Such is the case of irrevocable discretionary trusts, which in most countries of this region allow the individual to postpone income taxes and avoid wealth taxes; or the case of family investment funds, typically permitting a postponement of income taxes and eventually a lower payment when retrieving funds.
The most important aspect in determining the best wealth structure for an inidivdual client is to know their objectives and needs, to analyze the risks they are facing and to study in depth the laws of their country of fiscal residence.
And, to close the loop, in matters of international wealth planning, it is always critical that solutions should adapt themselves to planning and not the other way around.
Opportunity: Merger arbitrage investments represent the most attractive opportunity set in decades as a result of levered arbitrage funds facing margin calls, and multi-strategy funds exiting merger investments entirely. We have been approached by other institutional investors to establish a special purpose fund to take advantage of wide spreads caused by the market dislocation. We agree with these clients that now is a great time to add cash to merger arbitrage investments.
At the end of March, merger arbitrage spreads had “baked-in returns” of approximately 10%+ gross (before annualizing) when deals close over the coming months. The opportunity within these portfolios would be greater than 10% in addition to the new investment opportunities that currently exist at materially larger spreads because of the market dislocation. We expect more than 60% of the positions in the portfolio should be completed in the first half of this year, allowing us to harvest gains and reinvest the capital in additional attractive investments. In the last couple of weeks alone, more than 4 acquisitions have been completed after receiving regulatory approvals, shareholder approvals, or the expiration of tender offers. The acquisition price for TerraForm Power was actually increased earlier in March, which highlights buyers’ commitment to consummating acquisitions and is further evidence the deal market continues to present attractive opportunities. There are additional deals in the fund that are on the finish line, which will result in near-term realized gains.
Arbitrage vs. Equities: Returns in equities will be beta-driven, however we believe to be in a better position to generate alpha and returns in merger arbitrage. Equity buybacks will slow dramatically and volatility will persist. Equity exposure could be achieved more effectively by adjusting overlays and hedges.
Arbitrage vs. Investment Grade Credit (“IG”): Investing in the higher-quality end of IG would likely generate mid-single digit annualized returns assuming credit spreads normalize. A merger arbitrage portfolio should generate higher returns.
Investing in lower-quality IG would likely generate high single-digit/low double-digit annualized returns, still less than in a merger arbitrage portfolio. With lower-quality IG you also run the risk of investing in “fallen angels” that have not yet been downgraded to high yield, which would result in further bond price deterioration. There is a perception in IG credit that defaults do not occur, but if and when there are defaults it will have a broad impact on spreads and bond prices. Additionally, investing in IG Credit will dramatically change the liquidity profile of a portfolio. Credit liquidity is the worst in decades and wide bid/ask spreads could mean returns in credit could be illusory if managers are unable to source supply.
On a separate note, we would like to highlight that the cost of carry when hedging USD exposures for the non-USD currency classes has decreased, which is a benefit to these shareholders. This decrease has been primarily driven down / caused by the tightening of USD interest rate spreads to Europe’s already low (negative) rates. At the current rates, we forecast the cost of carry to equate to approximately 1.40% annualized.
We will continue to monitor the current deals in the market and anticipate market opportunities tracking the global environment, with a keen eye globally on deal terms and market factors.
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.
The global pandemic, low oil prices and the resulting economic environment will put virtually all sectors of the economy to the test. This will imply opportunities and challenges for private equity funds that invest in Mexico and global ones under the figure of CKDs and CERPIs, respectively. Additionally, the economic damage, the loss of jobs and the new way of interacting, will change our consumption habits.
Recovery will be as fast or slow as the contagion stops. Hence, the concern of governments to curb the infection, inject resources into the economy and find the solution to the pandemic.
The crisis we are experiencing generates a great opportunity to acquire companies with low valuations for those young CKDs and CERPIs, while for those funds that have already passed their investment phase they will have the challenge of finding the best way out even extending the closing date.
Of the 114 CKDs and 32 CERPIs at the end of February 2020, only 9 CKDs will amortize in 2020. They have committed resources of $ 1.381 million dollars, representing 7% of the total CKDs or 5% if all CKDs and CERPIs are considered. Of these, 4 have so far, an IRR between 8 and 10% while the rest have a lower yield. Until they amortize, this performance cannot be considered as the definitive one.
Among the interesting points to mention from the reading we find the following:
PitchBook data shows that funds raised immediately before a recession tend to underperform, while funds starting to invest at the lowest point in the market tend to perform better.
The best-yielding vintage tend to be those that invest at the lowest point of a recession and in the initial recovery stage, when inflow multiples are lower, competition declines, and portfolio companies benefit from the winds. macro.
Specialist private equity funds and large and diversified asset managers tend to outperform.
In times of great market difficulties, they consider it important to emphasize two central components to value a business: the free cash flow projections and the weighted average cost of capital.
LPs will likely focus on managers who have provided consistent returns in the past.
The main obstacle appears to be the possibility of a long parenthesis of face-to-face meetings, which could delay approval processes that are critical to consummating a commitment of funds.
In the case of CKDs and CERPIs, each sector in which they invest has its own problem. For all CKDs, 61% of the committed resources have been called, 30% of the called resources have been distributed and in the case of CERPIs only 24% of the committed resources have been called. The amount distributed is adequate due to the period since the closing of the CERPIs (highlighting that the initial closing implies an initial call of 20%).
Based on the vintage of the CKDs and CERPIs, it can be seen that those who placed their CKDs between 2008 and 2015 have more than 70% of the money called, which would mean that it is already invested and are already in the divestment phase.
To date, we have two CKDs that have expired (CI3CK_11 and ADMEXCK_09) and have postponed their expiration following the provisions of prospectuses. On the other hand, we have two other CKDs that have already amortized (AMBCK_10 and PMCPCK_10) where it highlights that the net IRR did not reach double digits basically because these CKDs were pre-funded where the investment time of the resources caused a negative carry. Another factor to consider was the issuance and maintenance expenses that did not help the net IRR.
Out of a total of 114 CKDs, 96 will expire in the next 10 years (2030), as well as 2 of 32 CERPIs according to an analysis of their own as of February 28.
Young CKDs and CERPIs (basically from 2016 to 2019 have called between 25 and 50% of capital, so they still have resources to make investments in their sectors at new market prices. In 2020, only issued 2 CKDs of which there is the case of EXI3CK_20 which is a co-investment vehicle which has already been called 100% of the capital. Due to this situation, the called capital data increases to 69.3% in 2020 (see graph).
We will have to see how CKDs and CERPIs take advantage of this opportunity.
The global pandemic COVID -19 has, in a few short weeks, altered our life as we knew it. This is true for our younger population being homeschooled; for parents working from home; and especially for the many who have tested positive and are recovering or have lost their lives to this invisible enemy.
As we watch the hourly updates with great concern and borderline panic, current and potential life insurance policyholders all over the world, afraid for their own lives and the security of their families, are wondering—what impact could the outbreak of COVID-19 coronavirus have on my life insurance policy or am I still eligible to purchase a life insurance policy in the midst of this chaos?
Feel free to cheat and scroll down for the Top 3 Frequently Asked Question!
If You Already Have Life Insurance…
If you already have life insurance, you don’t need to worry about COVID-19 coronavirus affecting your existing life insurance policy. Having said that, you should be concerned about catching the virus or spreading it. Therefore, by all means keep washing your hands and abide by expert advice about social distancing and restricted travel.
But in the universe of worries ushered in by COVID-19 coronavirus, including plummeting stocks, limited resources and an alarming economic outlook, threats to your life insurance policy can be crossed off of your worry list.
In the words of Ana Gomez, President of American Fidelity International Ltd:
“A life insurance policy is designed to offer us peace of mind and provide protection to our loved ones at the time of our death. Our life insurance product portfolio is designed to offer a death benefit to the designated beneficiaries in the policy, in the event of the insured’s death, even if the death is caused by a virus such as Coronavirus (2019-nCoV).”
Global pandemics do not void your death benefit, even if you reside in, work in, or intend to travel to COVID-19 hotspots. Life insurance is underwritten prior to issuance. The terms and conditions of the policy are locked in and no subsequent event can alter them.
Although COVID-19 coronavirus is a reason to worry over your health, it is definitely not a reason to worry about the health of your life insurance policy. Even if the worst happens, your beneficiaries will be taken care of.
If You Are Considering Buying Life Insurance…
If you’re considering buying a new policy in the midst of the outbreak, both U.S. and international insurance companies are accepting new applications and you should be able to acquire a highly rated, competitively priced life insurance policy. As this situation evolves, however, it may become more challenging to be underwritten under the same terms within a reasonable time frame.
As of now rates and conditions remain the same specifically in the term life space. It is important to note that life insurance underwriters set policy terms based on a risk assessment. The factors that affect this risk assessment include your health, lifestyle, and age relative to the average life expectancy.
The COVID-19 pandemic has added uncertainty to the risk assessment equation, which insurance underwriters hate. Major insurers have already taken steps to reduce the number of coronavirus fatalities that end up as liabilities on their balance sheet.
Lincoln Financial Group (LNC) just announced a 30-day waiting period on applications submitted by applicants who have traveled into pandemic “hot” zones like China and Italy. American International Group (AIG) has similarly held all applications for recent hot-zone travelers until 30 days after their return from the US. Other companies have added a short COVID-19 coronavirus questionnaire to their application package.
Residents of Latin America or the U.S.A. considering the purchase of a new life insurance policy should not hesitate to contact their insurance advisors before the acceptance applications close off altogether.
————————————————————————— TOP 3 Frequently Asked Questions
Question #1: Does my life insurance policy cover death from a global pandemic like COVID-19 novel coronavirus?
Answer: Yes. No exclusions apply to global pandemics. Valid life insurance policies cover beneficiaries even in the event of the policy holder’s death in a global pandemic like COVID-19.
Question #2: I have not visited China, Europe or other country heavily impacted by the COVID-19 coronavirus pandemic. Can I still get life insurance?
Answer: Absolutely, but you should act quickly since other variables may impact the process of working
Question #3: Will the COVID-19 global pandemic undermine my insurer’s ability to pay out claims?
Answer: Not with a reputable insurer. Top-rated insurers earn such ratings by maintaining substantial liquidity and re-insurance, safeguarding their ability to pay their claims liabilities.
Photo; NeedPix CC0
. silver lining of the COVID-19 crisis for the U.S. economy and markets
The U.S. stock market shrugged off several weeks of developing adverse China related coronavirus (COVID-19) news and rallied to a record closing high on February 19th…
Then news of an increase in cases outside of China ignited a volatile market sell-off that resulted in the worst week for world stocks since the Global Financial Crisis of 2008. COVID-19 is creating major concerns over global supply and consumer spending, and this increased uncertainty and impact on earnings is unfolding at a time the overall market has a limited margin of safety. The fear of the virus alone could lower consumer confidence in the U.S. and this could have a dampening effect on the economy. Some additional factors that have negatively impacted stocks include: no uptick rule (reinstatement would have powerful positive effect), Algos, Momos, Quants, hedging, and leveraged ETFs. We are finding more stocks selling below net, nets (cash ,working capital /- all debt.. the classic Graham Dodd definition), and intrinsic value.
So far oil and other energy prices have declined sharply, a potential boost to U.S. consumer spending (about seventy percent of U.S. GDP). Low gasoline prices at the pump helps workers and low interest rates help refinancing and home builders. The silver lining of the COVID-19 crisis for the U.S. economy and markets is that it will likely bring overseas manufacturing and supply chain jobs back home.
On the merger arbitrage front, markets sold off broadly in February and into early March over concerns related to COVID-19 and a significant decline in oil prices and its impact on credit markets. Market volatility spilled into merger arbitrage investments, causing mark-to-market declines in our portfolio. It is important to note that no deals were terminated due to the market decline. Furthermore, we are well positioned to take advantage of dislocations in the market, with a focus on short-dated deals. We are able to opportunistically deploy capital in significantly de-risked deals at lower prices that will generate greater returns when the deals close.
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.
Pixabay CC0 Public DomainFoto: miezekieze. miezekieze
A lemming is a creature that instinctively follows its fellow creatures. Unfortunately, lemmings have been known to follow their fellow lemmings off a cliff, falling to their deaths. Rational behavior is not programmed into their DNA, at least when it comes to overriding bad decisions that can lead to their demise.
Unfortunately, we see this behavior across the investing landscape. Rational behavior would instruct us to buy for a low price and then later to sell for a higher price. In reality, emotions mostly drive investors. Investors buy after they see so many others buying, often when prices are driven higher. And they sell when they observe so many others selling, often when there is bad economic news and prices are driven lower. Buying high and selling low is their reality, often driven by strong emotions and the need to follow others in justifying their decisions. Professional investors attribute this very human behavior to emotionally driven decision making – similar to lemmings.
The majority of private investing is no different. Rational behavior instructs fund managers we hire to buy low and later, to sell high. That would generally mean a fund manager buying companies reasonably by paying 7 times company cash flows, working to create value in those companies over a period of years, and then exiting their investments for higher outcomes. In reality, we observe many managers buying high, then hoping to create value so that they can sell higher, but as a result the risk of actually exiting at a loss emerges, especially on highly leveraged investments.
So why does this behavior occur in private investing? The answer starts with the fact that too many investors behave like lemmings. When a reputable pension fund like CalPers announces (as they did again in 2018) that they are doubling down on private investments with the goal of lifting their otherwise low single digit portfolio returns, most of the investment community notices and acts similarly. And when one examines the incentives of most institutions’ investment staff, who are not likely to be aligned with their beneficiaries, one notices perverse decision-making. The primary goal of many pension investors is to enhance their resumes and not get fired in the process. They begin to gain a false sense of security by relying on the largest brand name managers who do a fantastic job of marketing their branded funds to grow their ever-increasing billions in AUMs (2019 was a record year for fund raising and available cash on hand to invest).
In turn, these large funds grow larger, as do their largest competitors. These funds struggle to find inefficient opportunities in which to deploy their billions. They compete for almost every deal they fund. And they drive the purchase price multiples much too high, into the 11-13 times cash flows range and beyond. Yet these mega funds have to still deliver some sort of return that justifies the fees and illiquidity for which their investors sign up.
Value creation is difficult to implement in large companies over relatively short periods. And all too often, mega fund managers turn to the excessive use of leverage to enhance otherwise unworthy returns. In 2018 alone, roughly 15% of leveraged buy-outs used 7 times cash flows in leverage to artificially enhance their potential outcomes. This behavior may be fine in a low interest rate, non-recessionary environment, but downturns are unpredictable and interest rates do rise, making the risk of a bust very real. Even in normal economic times, Toys-R-Us type bankruptcies should be a wake up call to investors who commit to funds employing such risky behavior. Despite this observable fact pattern, many investors continue to send their billions to the mega funds, even during the late stages of our current economic cycle.
There is a better way to invest, even in this environment. Just say no to becoming a lemming investor. Don’t accept the unnecessary risk. Don’t follow the crowd off a cliff. Of the more than 8000 private managers, there are a fair number who invest appropriately and mitigate their risk. As discussed in my prior articles, do the work, ask the questions, seek alignment, and do your best to avoid truly unnecessary risk.
