Buffett is Looking for Deals in the UK and Europe

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Buffett is Looking for Deals in the UK and Europe
Foto: freeimage4life . Warren Buffett busca operaciones en Reino Unido y Europa

The U.S. stock rally continued in April topping off the best April return since 2009 while setting four record closing highs with three in a row at month end.

Despite political pressure to cut rates, ‘transitory’ below target inflation, and surging U.S. job growth, monetary policy remains on hold. The Fed’s dual mandate of maximum employment and stable prices is currently being met as the long-lived U.S. economic expansion and its reflective bull market rolls onward.

Global announced deals in April had a combined value of about $338 billion, the third highest in the last ten years, according to industry data. Total 2019 year to date M&A was $1.3 trillion compared to the record high of $1.6 trillion for the same period in 2018 when lots of mega merger-and-acquisition activity occurred. Takeovers of UK companies dropped sharply in April due to Brexit uncertainties.

On the M&A trail at the Berkshire Hathaway annual shareholders’ meeting in Omaha, Nebraska, Warren Buffett said “I would like to see Berkshire Hathaway better known in the UK and Europe…I would hope they would think of Berkshire more often when businesses are for sale…We’re hoping for a deal in the UK and or in Europe no matter how Brexit comes out.” Berkshire has been on the hunt for mega deals with its $100 billion plus in M&A cash…stay tuned.

Commenting on Berkshire’s flexibility to move quickly to commit on deals such as its April 30 controversial offer of $10 billion in financing for Occidental Petroleum’s proposed acquisition of Anadarko Petroleum, Mr. Buffett said “We’re very likely to get the call because we can do something that no other institution can do… If somebody wants a lot of certain money for a deal, they’ve seen I can get a call on a Friday afternoon, and Saturday they have a date with me, and Sunday it’s done.” BRK’s outsized Apple position may be a cash source. We see more deals globally on the horizon coupled with an election looming, corporates will likely become aggressive, and GAMCO’s risk arbitrage team will stand to take advantage of these opportunities and trends.

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 Road to an Effective Collateral Management Program

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El camino hacia un programa eficaz de collateral management
Pixabay CC0 Public Domain. The Road to an Effective Collateral Management Program

Collateral Management is becoming a strategic initiative for investment firms. Once exclusively a risk management and regulatory compliance effort, it is now also viewed as an opportunity to manage liquidity, avoid collateral drag, and realize returns from collateral transformations.

So far in Spain, Collateral Management has not really been the focus of much interest and investment, but with the Uncleared Margin Rules affecting more and more buy side entities in 2019 and 2020 this is likely to change.

When EMIR Variation Margin Rules came into force in 2017, financial institutions in Spain did review collateral management options available to them and most decided to manage their collateralization process in a fairly basic way, often using spreadsheets and a few resources working manually. It did the job given the relative simplicity of the function so far; using mainly cash collateral and often relying on the counterparty for margin call calculations.

As additional regulatory requirements are about to come into force for most of the Spanish entities, namely the Initial Margin (IM) requirements for certain non-centrally cleared derivatives, it is time to reconsider the collateral management programs and decide whether the manual process currently used are sustainable or this time it will be necessary to invest into efficient and scalable solutions, particularly for institutions that service underlying investment companies.

Until now, a relatively small number of firms have been affected by the Initial Margin requirement because of the high Average Aggregate Notional Amount threshold. However in 2020, this threshold drops from $750 billion to $8 billion. Many institutions will be impacted and although 2020 sounds far away, some market participants are realizing that time is running out given the complexity of the requirements that this phase of the regulation will impose on large sections of the market.. Failure to get ready by the deadline means that in-scope entities will not be able to trade non-centrally cleared derivatives. This could limit a firm’s access to the derivatives market and its ability to hedge risk while also potentially impacting liquidity.

Firms will need to look farther than the immediate necessity. What is needed and how to manage centrally, not only the collateral requirements, but also the risks and the liquidity in an efficient manner.

We need first to properly identify the inventory at group level, going over the silos that might exist internally between the different business lines. Once we have a clear picture, we then need to ensure that collateral is allocated on a “cheapest to deliver” basis, after evaluating its funding and opportunity cost. This centralized and integrated collateral management function can also identify opportunities to raise liquidity or enhance returns from transformation. This can be achieved by internalizing the search for collateral, collateral upgrade function, appropriate cash reinvestment as well as securities lending and Repos.

Furthermore, an efficient collateral management program should have the capacity to source required liquidity, such as High Quality Liquid Assets (HQLA) to meet margin calls in times of stress.

Those tasks are often made complicated due to the fact that legacy collateral management systems, in many case supported by spreadsheets, are unable to face the new need for real time information and dynamic analysis across a number of businesses, counterparties and systems.

Once we have envisaged all those new functions, we still have to take good care of the basics that include collateral matching and settlement, the ongoing calculations of margin exposures as well as addressing any discrepancies in positions.

It is therefore time to consider more efficient solutions that rely on robust but flexible technology and infrastructure. There are several ways to achieve this: insource, outsource or outsource certain modules or aspects of the collateral process that are not part of the Firm’s core competency.

Building in-house collateral management capable of achieving the more sophisticated functions described above in an efficient manner requires extensive collaboration throughout margin, treasury, funding, and trading teams with IT systems and governance to match. Only the largest firms are likely to fully insource and dedicate the required resources to this project.
Collateral Management outsourcing is a potentially valuable solution for firms looking to streamline a function that is not a core competency, giving priority in terms of resource allocation to their core business and to functions that directly impact business generation and client satisfaction.

A mix of insourcing and outsourcing can also be a good option depending on each firm’s objective and the level of control they want to maintain.

As firms select their optimal collateral management model, it is important to ensure the right organizational alignment to support an integrated and efficient collateral management function. The first step is to appoint a head of collateral management with a dedicated team that has a centralized, enterprise-wide view and can deploy a strategy to optimize available collateral, funding and liquidity. This is probably the key hurdle. Firms need to remove the internal silos to allow a holistic, firm-wide picture of globally available assets and obligations. It is also important to review the legal bandwidth, particularly to get ready for the Initial Margin requirement given the number of agreements that will have to be negotiated.

The capacity to manage properly the collateral requirements and comply with the regulation is dependent on many factors. In Spain, the collateral management function has been relatively under-developed so far. In turn this can be seen as an opportunity to draw an efficient model from the start and reach a highly effective way to manage collateral, funding and optimize liquidity, without having to rely on legacy systems and processes to do so. With the right support, Spanish entities have the opportunity to achieve this goal without distracting themselves from their core business. The main question is how shall a company best allocate the available resources. Which processes shall the company manage internally to better service the clients and for which ones is it best to look for a service provider that can deliver.

Column by Citi’s Benoit Dethier

MMT – Modern Monetary Theory. Should We Bear it in Mind? Implications for the Financial Markets

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Teoría Monetaria Moderna (MMT) y sus implicaciones para los mercados financieros: ¿hay que tenerla en cuenta?
Foto cedida. MMT – Modern Monetary Theory. Should We Bear it in Mind? Implications for the Financial Markets

This recent heterodox economic theory has many financial market participants spooked. I will try to explain what it entails (it takes some effort to understand) and the potential impact it could have on the various markets should it be put into practice, chiefly because it shifts our understanding of how the economy works (inflation, interest rates, debt, currencies, etc). Also, regardless of the fact that its strict implementation may turn out to be extremely complicated in real life, it is a good idea to try to understand what it is all about in the event that an attempt is made to partially adopt it. Fundamentally, it is an approach to economic management with no ideological basis. However, it is true that increasing numbers of economists with ties to the left are arguing in favour of putting it into practice.

MMT is based on two premises: 1) a country that issues its own currency can print money limitlessly without the risk of default; and 2) public spending is independent of financing and it has the ultimate goal of guaranteeing full employment.

The primary message being sent is that monetary policy makes little sense because it involves wasting real resources by associating it with high rates of unemployment throughout the cycle. Fiscal policy, therefore, is the centre of economic management for a country. Public spending should focus on maintaining full employment, while taxes should be used to slow the economy when necessary and to combat inflation. Furthermore, public debt would be used to manage money supply, interest rates and the level of capital investments. And this would all be with a floating exchange rate regime.

Inflation is seen as a consequence of having reached the country’s maximum productive capacity and, therefore, it marks the theoretical limit of public spending. In this case, a reduction to public spending or a tax increase would be implemented.

Why is this theory growing in support? My feeling is that, on the one hand, the world has gotten used to a model of continuous stimuli and, on seeing that QE has reached breaking point (we need only look at the mess in which the markets found themselves in the last quarter of last year due to fears about QT), at such a late stage in the economic cycle, the debate about turning the screw from a fiscal policy perspective is necessary for the political class. And on the other hand, MMT directly targets one of the greatest negative impacts of QE, the growing inequality at certain levels of society – another handy argument for the political class.

To try to discern the impact that MMT could have on the financial markets (and this is by no means an exhaustive analysis), we could start by looking at the large increase in public spending to meet the mandate of achieving full employment. This is public spending financed by printing money, which lowers interest rates. In this scenario, capital and financial investments would surge. The beginnings of inflationary pressures would start to be felt and the government would begin increasing bond issues to raise the interest rates. At some point, interest expenditure would exceed nominal growth. In all likelihood, inflation would not fall, so few investors would want this debt. A good many investors would go abroad, which would speed up a sharp devaluation of the currency and bring about the need to print yet more money. Here is where we would begin to see massive hyperinflation. As Minsky said, anyone can create money, the problem lies in getting it accepted.

The effects on debt and the currency are clear, but what about equities? It is obvious that because equities are real assets, they would behave better than nominal assets. But it may be better to invest outside the country, also in real assets, bearing in mind that the government’s need to raise taxes could even come to be considered confiscatory.

As I mentioned, it is good to consider that the application of MMT would, to begin with, mean the creation of a tax authority (similar to a central bank) that is independent of the government, something that seems very difficult. But, in any case, we can see partial efforts being made to put the theory into practice, chiefly through fiscal stimulus policies that are partially or fully monetised. Here it will also be important to invest in real assets (due to inflation expectations), such as the stock market, but by carefully selecting the securities with pricing power capacity.

Column by Luis Buceta, CFA. CIO Banco Alcalá. Head of Equities Crèdit Andorrà Financial Group. Crèdit Andorrà Financial Group Research.

Interest Rate Differentials Increasingly Tight

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Los diferenciales de los tipos de interés, cada vez más ajustados
Pixabay CC0 Public Domain. Interest Rate Differentials Increasingly Tight

March 2019 saw 10-year bunds dipping into negative yield territory. The difference between German sovereign short-term rates (2 years) and the long-term ones (10 years) now stands at 0.50%, half the level of a year ago. A similar move can also be seen in US government debt over the same period.

Several factors lie behind these recent rate changes. Central bank monetary accommodation continues in certain parts of the world, notably in Europe and in Asia. In addition, there is a growing anticipation of slowing world economic activity which would indicate that future global interest rates are likely to remain low. With longer dated European government debt now at around 0%, these bonds join the already significant stock of Japanese sovereign instruments currently showing similar levels of yield.

European and Japanese bond returns are dwindling. As a consequence, more of the world’s savings pool could migrate towards US Dollar (USD) denominated debt assets in search of the positive yield these instruments still provide. If these capital flows were to rise significantly in the coming months, the effect would be to drive down US interest rates from their present levels.

In sum, both short- and long-term yields in Europe and Japan are converging towards 0%, while at the same time the differential in interest returns between large economic blocs is being reduced. In this kind of environment, US Dollar bond investors will have to seek out yield where they can find it.

This generalized ‘world hunt’ for yield could lead to a tightening of spreads between private sector debt and US government bonds. Subordinated dollar instruments (especially those of large systemic issuers) stand to benefit very favorably from this up and coming trend.  

Column by ASG Capital

If Things Take A Turn For The Worse, Are There Expansionary Measures To Follow Those Adopted By The Central Banks? Modern Monetary Theory

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Si las cosas empeoran, ¿existen medidas expansivas que sigan a las adoptadas por los bancos centrales?: la teoría monetaria moderna
Courtesy photo. If Things Take A Turn For The Worse, Are There Expansionary Measures To Follow Those Adopted By The Central Banks? Modern Monetary Theory

At the start of 2019, we saw a rally in risk assets thanks to the fact that investors have been focused on the more dovish signals coming from the central banks rather than on the weakening growth trend. Recently, the OECD warned that economic outlooks were now weaker in almost all G20 countries, particularly in the euro zone, with the heaviest negative impact being seen in Germany and Italy. The organisation also lowered global growth by -0.2% to 3.3%.

In the last meeting of the ECB, Draghi indicated a weak environment full of uncertainty: the rise in protectionism that has brought about a slowdown in trade and global production; political risk, with an emphasis on Brexit; and the vulnerability of the emerging markets, in particular China. In this regard, Draghi announced new measures. These included maintaining rates unchanged until at least the end of 2019 (in a previous address there had been talk of this going on until the summer. As it is, Draghi will be the first ECB president not to change rates as his mandate ends in October), and a further series of targeted longer-term refinancing operations (TLTRO-III), which would begin in September 2019 and run until March 2021 with a maturity of two years and with a view to facilitating the continued flow of credit in the economy.

The extraordinary measures implemented by the main central banks to overcome the financial crisis are set to take hold. The Fed, which had begun monetary normalization, stopped the expected rate hikes in their tracks and it intends to bring an end to its balance sheet reduction sooner than planned; the Bank of Japan is continuing with quantitative easing and has kept rates around 0% for the last 10 years; and the ECB is implementing new measures in the hope of making the euro zone economy more resistant. 

Although the central banks remain cautious in sticking to monetary normalisation, it seems that the available margin is smaller than when they began. Note the evolution of Draghi’s words, which have gone from his famous saying in 2012: “The ECB will do whatever it takes to preserve the euro, and believe me, it will be enough”, to his words in the last ECB meeting in March 2019 with reference to the economic context: “In a dark room you move with tiny steps. You don’t run, but you do move”. Can you see the difference? It was possible to run at the start, but now we can only take tiny steps.

Better coordination between fiscal and monetary policy would be helpful to the economy during a slowdown. In the US, Trump has already implemented an expansionist fiscal policy following years and economic growth and, in Europe, depending on the results of the European elections in May, there may be more pressure to adopt these fiscal benefits despite the mechanisms agreed to by European countries to contain the deficit and control the debt.

But nowadays the debate in the US focuses on the so-called Modern Monetary Theory, the greatest defenders of which come from within the Democratic party (Bernie sanders, who is leading the polls for the US presidency, and Alexandria Ocasio-Cortez, well-known activist and bright new star in Congress). They essentially propose printing money (or nowadays simply pressing a button) and, instead of buying bonds like during QE, using it to finance social, environmental and infrastructure projects and the like. Proponents of this theory argue that provided they borrow in their own currency and they can print money to cover their obligations, they cannot fail and the limit would depend on rising inflation.

In this scenario, in which fiscal spending would be injected directly into the real economy instead of using a more indirect QE route, inflation should rise. However, everything we know about macroeconomics is being called into question because, until now, the deficits have not caused out-of-control inflation or a flight from the bond markets. Even with this in mind, it seems reasonable that implementing these measures would mean higher debt, which would affect the solvency of countries. Also, with more debt, rates would move upwards and affect bonds and the assets that would predictably do better would be real estate and investments in infrastructure or commodities like gold.

Column by Josep Maria Pon, Director of Fixed Income and Monetary Assets at Crèdit Andorrà Asset Management. Crèdit Andorrà Financial Group Research.

“You Can Check Out Any Time You Like, But You Can Never Leave” (Hotel California, Eagles)

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La salida interminable
Photo: lucianalopezrec. “You Can Check Out Any Time You Like, But You Can Never Leave” (Hotel California, Eagles)

In our article of October 2018, we described the country’s history, the fighting spirit and the nation’s pragmatism to support the argument that a Brexit deal, or no deal, would not be an issue over the medium/longer term for the British people. As one observes the population go about its daily business, this comment is still pertinent today.

We also considered some kind of agreement past the Brexit deadline. With the possibility of an extension, this scenario is not totally off the table.

However, what we could not have imagined, was the extent of the political mess Brexit is causing in the House of Commons. As the UK parliament refuses the current proposal put forward by Prime Minister May, it confirms not wishing to leave the European Union (EU) without a deal of some sort at the same time. The actions of British Politicians are making them ‘all just prisoners here … of their own device’ (Hotel California, Eagles). In effect, they have manœuvred themselves into a corner with nowhere to go. They can no longer close the divorce process with the EU weeks before the deadline, nor can they accept a new deal, as there is none on offer (yet).  

On the economic front, the Finance industry has already organized itself to maintain access to the European financial market, with passporting ‘put throughs’ via Luxembourg and Ireland. The ‘City’ is well prepared for any outcome. For trade however, the organizational logistics are becoming a nightmare. This is likely to disrupt exchanges with the EU, a large exporter to the UK.  In addition, the sorry sight of a disorderly British Parliament and local media bashing of an imminent end of the world for its people post Brexit, are likely to weigh on the consumer sentiment moving forward. Not good for business either side of the channel.

‘Muddling through’, ‘Fudging’ a deal or ‘Kicking the can down the road’ have been traditional ways politicians sort out problems. However, the times today are so grave and the decisions of such consequence that these approaches are no longer appropriate. To top it all, the population is now divided and feed up with the whole Brexit issue. A new referendum or general election might not even provide a clear answer as to what way to go. As deadlock looms pending a new deal (if ever there is one), the UK could end up just being ‘unable to leave’ after having triggered Article 50 to ‘check out’ of the EU. 

Column by ASG Capital’s Steven Groslin
 

We Currently Have a Robust M&A Market

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We Currently Have a Robust M&A Market
Foto: PxHere CC0. Ahora tenemos un sólido mercado de fusiones y adquisiciones

M&A activity is off to a strong start thus far in 2019, and we are finding attractive opportunities to deploy capital including the below newly announced transactions:‎

  • Spark Therapeutics (ONCE-NASDAQ), which develops gene therapy products for genetic diseases, agreed to be acquired by Roche Holding for $114.50 cash per share, or about $5 billion.
  • Ultimate Software Group (ULTI-NASDAQ), a cloud-based human resources software provider, agreed to be acquired by Hellman & Friedman Group for $331.50 cash per share, or about $11 billion.
  • Scout24 AG (G24 GY-Frankfurt), a software company that specializes in the real estate and automotive sectors, agreed to be acquired by a group led by Blackstone for €46.00 cash per share, or about €6 billion.‎

In February, a number of deals were completed, while other deals made progress towards receiving regulatory and shareholder approvals, notably:

  • Orbotech, Ltd. (ORBK-NASDAQ), a designer and manufacturer of optical components used in various technology applications, received Chinese SAMR antitrust approval, which was the final condition of its acquisition by KLA-Tencor. When the deal closed on February 20, Orbotech shareholders received $38.86 cash and 0.25 shares of KLATencor common stock, which valued the transaction at approximately $3 billion.
  • Aspen Insurance Holdings (AHL-NYSE), which provides property and casualty insurance and reinsurance products, received the final clearances required to complete its acquisition by Apollo Global Holdings. Aspen shareholders received $42.75 cash per share, or about $3 billion when the deal closed on February 15.
  • NxStage Medical, Inc. (NXTM-NASDAQ), a medical device company that develops kidney dialysis systems for use in patient homes, received antitrust clearance from the U.S. FTC after they agreed to divest NxStage’s bloodlines business. Fresenius Medical Care agreed to acquire NxStage for $30 cash per share, or about $2 billion in August 2017, and the deal closed on February 22.
  • Twenty-First Century Fox (FOX-$50.16-NYSE) continued to make progress towards receiving the remaining regulatory approvals for its acquisition by Disney, including the approval by the Brazilian antitrust regulator, CADE at the end of February. The deal is expected to close in March, when Fox shareholders will receive $38 in cash and Disney stock, as well as 1 share of New Fox.

 Thanks to a robust market place, we expect ongoing deal activity will provide further prospects to generate returns uncorrelated to the market.

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 U.S. Economy is Doing Just Fine And There are Many Possibilities Globally

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The U.S. Economy is Doing Just Fine And There are Many Possibilities Globally
Wikimedia CommonsFoto: MaxPixel CC0. La economía de los EE.UU. está bien y hay muchas posibilidades a nivel mundial

U.S. stocks gained in February extending the best January rally since 1987, and the best first two month return since 1991. This strong start sets up 2019 with a high probability for a positive annual return based on historical data since 1928. U.S. stocks are near a 70 year high relative to Developed Market equities and March 6, 2019 is the tenth anniversary of the S&P 500’s intraday bear market low of 666 in 2009 that marked the end of the 2007-9 Global Financial Crises.

On February 28, Chairman Powell addressed the Fed’s dual mandate of maximum employment and stable prices: “I am pleased to say that, judged against these goals, the economy is in a good place. The current economic expansion has been under way for almost 10 years. This long period of growth has pushed the unemployment rate down near historic lows.”   We agree. In sum, the U.S. economy is doing just fine and the Fed will be “patient” with regard to future rate changes as well as review its balance sheet size target soon. With the ECB and the PBOC in monetary easing mode and some progress on the complex trade wars and Brexit fronts, stocks may continue to add to recent gains.

A burst of Merger and Acquisition activity kicked off on Merger Monday, February 25th with the following deals – General Electric said it would sell its biopharma business to Danaher Corp (DHR) for about $21.4 billion boosting DHR’s s drug development market capability and driving DHR’s stock higher – Swiss drug giant Roche Holding AG is buying Philadelphia based Spark Therapeutics (ONCE) in an all cash $4.3 billion gene therapy deal – Canadian miner Barrick Gold offered to buy U.S. rival Newmont Mining (NEM) in a hostile $18 billion all-stock deal creating a giant global gold miner – and Cincinnati based Multi-Color Corp (LABL)  announced a $2.5 billion merger to be acquired by private equity firm Platinum Equity LLC for $50 a share in cash.

Value investor Warren Buffett hinted in his 2018 letter to Berkshire Hathaway Shareholders that his next major acquisition may be overseas.  We see many potential merger possibilities ahead of us this year as a number of other catalysts materialize within businesses globally, couple that with the focus on the 2020 elections in the U.S., and companies will have to continue to strongly examine M&A as a viable option within the more comfortable confines of today’s corporate environment.

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 CERPI Boom in Mexico Should Continue in 2019

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La colocación de CERPIs probablemente seguirá creciendo en México
Wikimedia CommonsInterior del Palacio de Bellas Artes de México. The CERPI Boom in Mexico Should Continue in 2019

The total assets under management of the Mexican Pension Funds, AFOREs, reached 179.274 million dollars in January 2019, of which 10.774 million dollars belong to structured investments in just over 100 instruments, that is, 6.01% of the resources are invested in Development Fiduciary Securitization Certificates (CKDs) and Investment Project Fiduciary Securitization Certificates (CERPIs) that reached 741 million dollars through 19 issues at the end of January 2019. In the accumulated of the year (to February 22), two more were added raising 48 million dollars.

The potential amount of these CERPIs can reach 5.776 million dollars considering the maximum amount of the series A issue (capital calls) and the maximum amount of the issuance of additional series contemplated by CERPIs.

The CKD has allowed the Afores to participate in private equity through a mechanism listed on the stock exchange since 2009.

The AFOREs through the CKDs and the CERPIs, have participated in infrastructure projects, energy, real estate developments, forestry projects, private equity investment in companies, as well as financing.

The CERPIs emerged in 2016 as a complement to the CKDs that allow resources to be collected from funds and companies to invest in a wide range of projects.

The CERPI seeks to solve many of the limitations of the CKD, to have:

  1. A more flexible capital call structure,
  2. Most appropriate corporate governance requirements (the technical committee does not have to approve investments), and
  3. Minor disclosure requirements.

Between 2016 and February 22, 2019, 21 CERPIs have been placed. In 2016, the first CERPI was born, the MIRA issuer, a real estate company focused on the development of mixed uses in Mexico. In 2018 there were 18 CERPIs and in the first two months of the year (until February 22) two more were added (Blackstone and Spruceview).
The boom observed since 2018 is due to the fact that in January 2018 the regulation was relaxed to allow investment in CERPIs that finance projects outside the national territory in up to 90% of the issue.

Enlarge

The possibility of co-investing with the AFOREs in national and international projects has attracted internationally recognized firms such as:

  • Blackrock. Investment management company established in 1988 and is the largest asset management company in the world with 5,315.409 million euros according to the firm Investment & Pensions Europe, IPE 
  • Blackstone. He was born in 1985. He manages assets for 361.000 million euros (place 49 in 2018 according to IPE).
  • KKR. American firm with more than 40 years of experience and with managed assets exceeding 140.622 million euros (place 131).
  • Partners Group. Founded in Switzerland in 1996. It manages 61.936 million euros (place 174).
  • Lexington Partners. He is one of the largest independent administrators in the world focused on secondary transactions of private capital and co-investments. Since 1990, Lexington has raised more than 38.000 million dollars according to the placement prospectus (page 172), among others.

In addition to the diversification there is a transfer of knowledge from global investment managers to the AFOREs for their joint participation in investment projects.
Among the CERPIs that are in the approval process of the financial authorities are:

  • Acon LATAM Holdings which is a diversified investment fund of private capital that operates in the United States, Mexico, Brazil and Colombia;
  • Paladin Realty Administrador (PALADINCPI) a trust owned by Paladin Realty Management, a private equity fund manager focused on real estate investments;
  • HarbourVest Partners Mexico a subsidiary of the fund manager that was created in 1982; HarbourVest Partners.
  • Grupo Agricultura, Agua y Ambiente, a subsidiary of Renewable Resources Group (RRG), an asset management company with a focus on agriculture and other sustainable resources; among others that are in process according to information from the Mexican Stock Exchange.

It can be expected that this boom will continue in 2019.

Column by Arturo Hanono

Over Seven Million Delinquencies

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Más de siete millones de morosos
Wikimedia CommonsCourtesy photo. Over Seven Million Delinquencies

A decade ago, during the financial crisis of 2008-2009, more than 5.5 million Americans were unable to pay their car loan instalments and were more than 90 days late with their payments. Now there are more than seven million people in the United States who can’t pay their car loans, seemingly illogical in the current situation of economic growth and very low unemployment (4% compared to 10% in 2009).

Around 86% of Americans use a private car to get to work. This gives you an idea of how important it is to have a car in most parts of the United States and why most people prioritise payment of their car loans over their mortgage.

As a result, some economists warn that these loan default figures published by the New York Federal Reserve Bank could be just the tip of the iceberg when it comes to problems in the economy and that we could find ourselves in a situation similar to that of the subprime mortgage crisis.

Some significant data: 90% of the value of new vehicle sales is paid through a financial instrument (a loan or a lease); The total outstanding car loans in the USA is more than a trillion; the number of new loans for vehicle purchases in 2018 was $584 billion (the highest nominal figure in 19 years); according to sector reports, the average price of a new car is approaching $36,000, while the average family income in 2018 was $62,000; the average length of a vehicle purchase loan has grown to 64 months.

At first sight, all these figures can sound alarming and reminiscent of the 2008-2009 financial crisis. However, as with any statistical data, we need to put them in the appropriate context and look at the whole picture. To do this, it is important to emphasise that, despite the fact that the absolute number of defaults has increased, the non-performing loan ratio ended 2018 at 4.5%, below the 5.3% peak reached in 2009. Another key factor in evaluating the situation of vehicle loan debt is the quality of the creditors: new loans were mainly granted to people with a higher credit score, which means that 30% of outstanding car purchase loans were given to borrowers with the highest credit score.

Neither should we ignore the fact that the increase in the absolute number of loans is due to the good health of the economy and has gone hand-in-hand with an increase in car sales, meaning that the percentage of financed purchases has remained relatively stable. Finally, we need to put into the context the size of the vehicle purchase loan market (just over a trillion dollars) by comparing it to the mortgage debt market ($12 trillion).

It is undeniable that, by analysing all the figures in-depth, we can reach conclusions on the unequal access to economic growth for certain population sectors (for example, the increase in non-performing loans in the population under 30, a sector also overburdened by student loans) or on the need for infrastructure to facilitate public transportation. However, it seems unreasonable to assert that an increase in non-performing vehicle loans is leading us to the threshold of a global financial crisis such as that of 2008-2009 caused by the selling of subprime mortgages.

Column by Meritxell Pons, Director of Asset Management at Beta Capital Wealth Management, Crèdit Andorrà Financial Group Research.