Thematic Equities as Impact Investments

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Pictet Asset Management
Pictet Asset Management. Pictet Asset Management

Impact investing is generally considered the purest form of responsible investment. Modelled on ideas developed in the 1970s by the social entrepreneur Muhammad Yunus, it has traditionally involved directing capital to specific ecological or socially-responsible projects.

The approach has twin aims: to generate financial returns and to deliver material environmental and social benefits.

The range of activities financed under the impact investing umbrella is wide. Recent examples include land rewilding, the construction of wind farms, the improvement of water networks and the development of orphan drugs.

It is the ethical focus of impact investing that explains why it tends to be seen as the preserve of private finance. Its moral orientation is widely deemed to be at odds with the principles of those who invest in – and construct portfolios containing – listed stocks. Yet recent developments in sustainable finance suggest this interpretation is in need of some revision.

Impact investing is, in any case, defined by its objectives not by the type of asset or transaction. According to the Global Impact Investment Network (GIIN) the primary aim of impact investing is to deliver a positive, measurable social and environmental impact alongside a financial return irrespective of whether that is through a public or private transaction. A key feature, therefore, is the explicit intention to contribute to positive societal or environmental outcomes.

Reinforcing that point is research by Kölbel et al. (2020)(1), which suggests positive impact can be generated in public markets across two fronts – by the issuer of securities (a company, for example) and by the investor.

These observations have important investment implications. They provide a roadmap indicating how investors can apply the concepts of impact to listed stocks. While investing with impact in publicly-traded companies might appear more challenging than via private markets, it is nevertheless vital given the scale of the problems the approach is seeking to address.

But impact investing via listed firms comes with several caveats. First, for the approach to work, it must target listed businesses with exceptionally positive environmental and societal credentials or firms with the potential to improve across those two fronts. Second, success also depends on what follows once investments are made. Portfolio managers that can exert an ongoing positive influence on the companies they invest in are better able achieve their financial and sustainability goals. Third, those positive, non-financial, contributions must be measurable.

While many conventional equity strategies claim to integrate environmental, social and governance (ESG) principles, few possess the characteristics that impact investors deem the most relevant to bring about change. Thematic equity portfolios with an environmental or societal orientation are a potential exception. Not only do such strategies focus on companies directly involved in the building of a sustainable, more equitable economy, but they also play a role in embedding responsible investment principles across the broader financial ecosystem.

 

Opinion written by Marc-Olivier Buffle, Senior Product Specialist, Sandy Wolf, Head of Impact and Analysis, and Steve Freedman, Head of Sustainability and Research, all members of Pictet Asset Management’s Thematic Equities team.

 

Download the report for more insights.

 

Notes:

(1) Kölbel et al. (2020)

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation.

The information and data presented in this document are not to be considered as an offer or sollicitation to buy, sell or subscribe to any securities or financial instruments or services. 

Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management (Europe) SA, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

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

Pictet Asset Management (USA) Corp (“Pictet AM USA Corp”) is responsible for effecting solicitation in the United States to promote the portfolio management services of Pictet Asset Management Limited (“Pictet AM Ltd”), Pictet Asset Management (Singapore) Pte Ltd (“PAM S”) and Pictet Asset Management SA (“Pictet AM SA”). Pictet AM (USA) Corp is registered as an SEC Investment Adviser and its activities are conducted in full compliance with SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref.17CFR275.206(4)-3.

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

In Canada Pictet AM Inc is registered as Portfolio Manager authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA.

 

Three Ukraine-Russia Scenarios and Bond Recovery Values for Ukraine, Russia, and Belarus

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Pixabay CC0 Public Domain. Tres escenarios para Ucrania-Rusia y valores de recuperación de los bonos para Ucrania, Rusia y Bielorrusia

In this article, we focus on what we think are the three most likely scenarios of how the war could end, while acknowledging that within each of these stylized scenarios there are also multiple variants. This framework allows us to think clearly of the potential recovery values for Russian, Ukrainian, and Belarusian bonds. As always, our subjective probabilities will be reassessed as the facts change on the ground. 

Scenario 1: Peace deal in the short-term (35% probability) 

Russia and Ukraine are currently engaged in negotiations for a peace deal. It appears that the involved parties are not yet ready for an immediate compromise, but a deal within the next two months appears plausible. The details are yet to be defined, but based on publicly available information, one could expect Russia to agree to withdraw its troops from Ukraine in exchange for the latter giving up its NATO membership ambitions, recognizing Crimea as part of Russia, and limiting the future size of its military. 

A kind of Minsk III agreement would be needed to resolve the struggle with Ukrainian separatists in Donetsk and Luhansk – a conflict that has been ongoing since 2014. Ukraine could potentially recognize the independent People’s Republics of Donetsk and Luhansk (DPR and LPR) under the protection of Russian peacekeepers. Alternatively, DPR and LPR could be granted some independence within Ukraine’s sovereignty. Either way, Ukraine would preserve most of its territorial integrity.

  • Ukraine avoids default or conducts a market-friendly restructuring. This would be possible on the back of significant financial assistance that is currently being provided by western partners that has, so far, allowed Ukraine to continue servicing its external debt. This large financial assistance will also allow for a quick rebuilding of the nation. For example: Iraq’s economy expanded by a cumulative 178% in 2003 and 2004 after the 2003 invasion, Kuwait’s rose by 147% in the two years following the 1991 invasion. The recovery value of Ukraine’s sovereign bonds could be between 70% and 100% depending on whether there’s a restructuring or not.
     
  • Russia may also avoid default depending on potential sanction relief. Russia’s sovereign and corporates have been demonstrating their willingness and ability to avoid default so far, but current US sanctions would prevent bondholders from receiving sovereign bond repayments after 25 May, 2022 (see OFAC General License 9A). If the peace deal occurs before this date and it is acceptable for the US, then there’s a possibility that this and other economic sanctions could be eased allowing Russia’s sovereign to avoid default. This is far from granted though and up to the US to decide. If Russia manages to obtain sanctions relief to avoid default following a satisfactory peace deal, then we would expect Belarus to avoid default as well.
     
  • A large majority of Russia’s corporate issuers avoid default. Only a few corporate issuers that see their revenues severely disrupted could conduct market-friendly restructurings with high recovery values. 

Scenario 2: A prolonged war (45% probability) 

The war could go on for several months if the involved parties fail to reach a peace deal in the short-term. This would inflict much larger infrastructure and humanitarian damage on Ukraine. Russia would likely increase its territorial control of Ukraine, forcing the latter to give up a larger share of its territorial integrity. Some variants of this scenario could see Ukraine divided in two with Russia having control over eastern Ukraine and a legitimate democratic government controlling western Ukraine.

  • Ukraine restructures its external debt; the recovery is highly uncertain. The recovery of Ukraine sovereign bonds will depend on how much of Ukraine’s territorial integrity is preserved as well as on the length of the war, which will determine the degree of infrastructure damage as well as a likely large loss of human capital mainly due to migration.
     

    • In the most optimistic case within this scenario, Ukraine preserves most of its territorial integrity and large financial assistance from western partners allows a quick recovery. A market friendly restructuring sees a recovery between 50% and 70%. 
    • In the most pessimistic case within this scenario, Ukraine loses a large share of its territory. The lowest recovery of a sovereign restructuring in recent history was Iraq’s following the 2003 invasion, where Paris Club creditors accepted an 80% principal haircut. We see this as a lower bound for Ukraine.
       
  • Russia sovereign likely defaults after the 25 May. If the conflict continues for months, we think the US would be less inclined to extend the deadline imposed by General License 9A, which would prevent bondholders from receiving payments even if Russia remains willing and able to pay. Belarus is financially dependent on Russia, thus we see no reason for the former to avoid default if the latter is forced to stop paying.
     
  • No restructuring in sight. US sanctions on Russia’s Ministry of Finance, central bank, and national wealth fund would remain in place, which would prevent the sovereign from restructuring its debts in the foreseeable future. Venezuela’s sovereign bonds, which have been in a similar situation used to trade between 20 and 30 cents on the dollar following the November 2017 sovereign default. 
     
  • Deep recession but not a Venezuelan-style collapse. The Russian economy will inevitably fall into a deep recession this year but an economic collapse like those seen in Venezuela and Lebanon seems highly unlikely in an economy that until now had been well managed, with very low levels of debt and a twin surplus (fiscal and external). Thus, we think that this long default scenario has already been mostly priced in. 
     
  • Most Russian corporate issuers still avoid default. Economic sanctions will affect the revenues of Russia’s corporate issuers but given that most of them are exporters, have low leverage, and have assets abroad that could be seized by creditors, we believe that most of them will avoid default. Corporates with an important share of domestic revenues and those that see their exports severely curtailed by sanctions will have to restructure, but we expect market-friendly restructurings to prevail. 

Scenario 3: A Russia-controlled Ukraine (20% probability) 

The strong resistance from the Ukrainian military and population, and the constant military equipment provided by the west make a full conquest of Ukraine unlikely, yet it remains a possible outcome. In this worst-case scenario, Ukraine would be governed by an illegitimate pro-Russian government. Ukraine would thus become sanctioned and lose financial support from the west. All three sovereigns default and restructuring would only occur following regime change. The outlook for Russian corporates becomes more uncertain the longer strong economic sanctions remain. We would expect more corporate restructurings than in the previous scenarios.

Outlook

The situation on the ground in Ukraine is extremely fluid, so the scenarios outlined above will change as more information emerges, and international diplomacy continues. We note that the critical factor for bond investors will be policy decisions around sanctions, so we will continue to watch this closely. We are deeply saddened that a prolonged war seems to be the most likely outcome but remain hopeful that a peaceful outcome can be reached as quickly as possible.

Guest column by Carlos de Sousa, Emerging Markets Strategist, Vontobel AM.

The Rotation From Growth to Value May Now Gain Strength

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stock-g9900a72ff_1920_0

U.S. stocks closed lower for the month of February as inflation and monetary policy implications continued to be key fundamental risks for investors. Russia’s invasion of Ukraine sent shocks throughout global markets, marking an escalation to a conflict that began in 2014. This represented the largest military assault by one European state on another since World War II. Market volatility spiked as investors gage the economic impacts of war. Russia’s invasion of Ukraine is an unprecedented move of aggression by President Vladimir Putin, who is now plagued with a plethora of new sanctions from the U.S. and Europe aimed at restricting Russia’s economy. Despite Ukrainian resistance holding firm, Russia has intensified its assault.

Although a more hawkish Fed has already been a main theme for markets this year, the rise in January’s U.S. Consumer Price Index may be an indication that the Fed could be more aggressive in raising rates than originally anticipated. The U.S. Consumer Price Index rose 7.5% year-on-year, leading to the largest annual increase in inflation in 40 years. The probability of a “stagflationary” outcome in the U.S. has likely risen.

COVID-19 trends improved during the month, with cases dropping ~90% from a pandemic record set just over a month ago during the spread of the Omicron variant. To date, 215 million Americans are fully vaccinated, representing ~65% of the population.

After several false starts, a rotation from Growth to Value may finally gain traction and provide a tailwind for the appreciation of the undervalued, cash generative entities we favor. As Value Investors, we continue to navigate the current market volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets, and are trading at discounted prices.

Merger Arb activity remained strong in February with many deals that closing or made considerable progress towards closing. Xilinx completed its deal to be acquired by AMD after the parties refiled for antitrust approval in the U.S., and IHS Markit was acquired by S&P Global after the companies received foreign antitrust approvals. We Newly announced deals in February included First Horizon’s $13 billion deal to be acquired by TD Bank, South Jersey Industry’s $8 billion deal to be acquired by IIF, and Tower Semiconductor’s $5 billion deal to be acquired by Intel.

Lastly looking toward the convertibles market, February was another difficult month. In the U.S., with inflation stubbornly high, much of the month was spent focused on the fed and how they will raise interest rates. This continued to weigh on growth equities and by extension had a negative impact on convertibles. As the month came to a close, the war in Ukraine upset markets further, adding to volatility. Convertibles have outperformed their underlying equities through this period, but the drawdown has been larger than we anticipated coming into the year. Issuance has been off to a slower start than last year but we are starting to see it pick up.

______________________________________

To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:

GAMCO MERGER ARBITRAGE

GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.

Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.

Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.

Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of  approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.

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GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise.  The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach:  free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

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GAMCO CONVERTIBLE SECURITIES

GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.

The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.

The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.

By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.

Class I USD          LU2264533006

Class I EUR          LU2264532966

Class A USD        LU2264532701

Class A EUR        LU2264532610

Class R USD         LU2264533345

Class R EUR         LU2264533261

Class F USD         LU2264533691

Class F EUR         LU2264533428 

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.

 

Why high yield bonds could be the next ESG frontier

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Los fondos sostenibles
Pixabay CC0 Public Domain. Los fondos sostenibles

Selecting high yield securities has always required heightened due diligence but when ESG factors are included, the analysis is even more challenging.

Potential developments such as prospective environmental regulations, carbon taxes, social change and pressure on corporate governance, disproportionately affect high yield companies. This is partly because their higher levels of leverage mean the effects of change can be magnified in asset valuations.

Investors today rely heavily on data, but disclosure and data linked to environmental, social and governance metrics can be less comprehensive in the high yield space than for other types of security.

However, this makes this area of the market arguably an untapped ESG opportunity, especially given the huge swathes of capital that have already flooded into mostly tech-driven equity ESG plays.

Drilling down

To invest in the high-yield market through an ESG lens involves sophisticated data harvesting and analysis.

This is increasingly the case given the rising supply of ESG or sustainability bonds being issued by high yield firms.

It’s crucial to isolate a firm’s ESG risks and consider what measures the issuer is putting in place to mitigate these and whether they are comprehensive enough to mitigate the potential downside.

One key element is how well a company’s senior leadership team can adapt to the new paradigm and recognise ESG factors in its pay, policies and performance indicators. These can be positive pointers for investors who are increasingly evaluating the wider costs and opportunities which different businesses and sectors face.

Some may already be sustainable, others may need to pivot, whilst some may be dinosaurs destined for terminal decline.

Making the journey

It’s vital to view sustainability as something that must be achieved rather than simply excluding any firm that doesn’t already have perfect ESG credentials.

One could make the argument that some companies with the most progress to make in respect of their ESG credentials could deliver the most outsized gains, as well as having the greatest marginal gain for society and the environment.

As these companies mature and become ESG leaders, their valuation metrics are likely to improve.

This notion is supported by studies which have shown that bonds from companies with higher ESG scores outperformed those with low ESG scores during the 2008/09 financial crisis.

So, doing well by doing good brings benefits during bad times as well as good.

Achieving equilibrium

It’s also vital for investors to balance their portfolio with securities from companies that have to, and importantly can, make big strides in terms of their sustainability credentials, with those that have already made them. 

Opportunities to invest in such companies will make ESG debt more compelling and encourage a significant capital reallocation into sustainable debt.

ESG assets under management hit $35 trillion globally in 2020, according to Bloomberg Intelligence, with ESG debt funds accounting for just $3 trillion of this.

However, ESG bonds are now widely viewed as one of the key growth areas in the sustainable investing space, with predictions that by 2025, they could account for $11 trillion of a total $50 trillion ESG fund market.

The momentum and sea change is already happening; investors may want to assess the opportunities now before the ESG debt space becomes as crowded as its ESG equity peer.

______________________________________

Lila Fekih & Mark Remington, Co-Portfolio Managers, New Capital Sustainable World High-Yield Bond Fund

EFG Asset Management (EFGAM) is an international provider of actively managed investment products and services to financial intermediaries and institutional investors around the world. 

EFGAM’s New Capital funds and strategies offer a focused range of actively managed, specialist strategies across equity, fixed income, alternative and multi-asset within both developed and emerging markets. The strategies are available in a variety of structures including AIFs, CITs, SMAs and UCITS, and are available through vehicles domiciled in Ireland, Luxembourg, Switzerland, Hong Kong and the United States.

EFGAM manages approximately USD 32 billion (as of December 2021) on behalf of clients.

For professional investors / trade press only.  Not to be used with or distributed to retail clients. 

Past performance is not indicative of future results. The opinions herein are those of EFG Asset Management (“EFGAM”) as of the date of this article and are subject to change at any time due to market or economic conditions.

Pictet Asset Management: When Conflicts Erupt, Calm Reflection Trumps Evasive Action

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Luca Paolini Pictet AM

Just as the Covid crisis has begun to fade, a conflict in Ukraine is erupting. The question investors now face is the degree to which Russia’s invasion will undermine the global economic recovery. The next few weeks will offer some clarity.

Even so, as long as Russia’s invasion doesn’t result in a drawn-out conflict, any consequences to global markets are likely to be manageable. Neither the Ukraine crisis nor the spike in oil prices is enough to derail what continues to be robust global growth. 

Both countries make up only a small proportion of world GDP and, apart from Russian energy exports to Europe alongside some other commodities, have fairly modest roles to play in global trade. Some global industries will be potentially affected – apart from commodities: car manufacturers, food producers, steelmaking and chipmaking – but it is the second-round effects on European inflation and consumer confidence that need to be monitored.

Pictet AM

The conflict might prove concerning enough to stay some of the more hawkish elements at the world’s major central banks, not least the US Federal Reserve. So while the trend clearly remains towards monetary tightening, it could be at a slower pace than the markets have been pricing recently.

With all that in mind, in the very short term, it makes sense for investors to show some caution. Which is why we have taken a few risk mitigation measures within our equity positioning. But overall, our main asset allocations – overweight equities, underweight bonds – remain unchanged. 

Our business cycle indicators point to a positive outlook for the global economy during the next year, with all major economies expected to grow at between 3 per cent and 5 per cent. World retail sales may have peaked, but they remain above  trend. Industrial production and exports are accelerating. And services affected by Covid are poised to boom – not least travel and mass events. 

The US economy, which is least likely to be affected by Ukraine, shows strong underlying consumer demand and a resilient housing sector. Europe is vulnerable to its reliance on Russian gas, but the overall trend is towards recovery and monetary policy is likely to remain supportive. And China is starting to recover. 

Meanwhile, even with the latest spike in oil prices, inflation should peak towards the end of the first quarter or early in the second across all major regions.

PictetAM

Our liquidity indicators offer mixed signals. Set against a the vast pool of global liquidity that has been built up during the Covid pandemic, central banks are starting not only to turn off the taps, but to drain some of the excess – we expect a net contraction of central bank liquidity this year to reach 3 per cent of global GDP. The Fed is poised to undertake a quadruple tightening – exiting quantitative easing, starting quantitative tightening and hiking rates even as inflation peaks and starts to slow. Offsetting this, however, is growth in the provision of credit from private sector banks. And central banks might find it prudent to talk down some of the markets’ excess hawkishness, particularly in light of global events.

Our short-term valuation indicators show that both equities and bonds are trading at close to fair value, with only commodities looking expensive among the major asset classes. For the first time in a long time equity markets do not exhibit extreme relative valuation readings in either regions or sectors. The US remains the most expensive stock market, but only moderately so. The upward move in real rates was behind the recent outperformance of value stocks over growth – future earnings are worth less today as rates head higher – but that trade might be running its course. And while there may be further downward pressure on price to earnings (P/E) ratios, a 20 per cent decline in 12 month P/Es since September 2020 suggests there’s limited scope for further contraction in stocks’ earnings multiples for the rest of this year – so, for instance, our model suggests P/E ratios will stabilise over the coming year (see Fig. 2).

Our technical indicators suggest that equities are oversold – particularly after the Ukraine-inspired drops. But there are no real signs of market panic. US equity sentiment is particularly gloomy, a bearish shift that’s been confirmed by the latest Bank of America fund manager survey. To us, this indicates the scope for a further sharp decline in US stocks is limited.

 

 

Opinion written by Luca Paolini, Pictet Asset Management’s Chief Strategist.

 

Discover Pictet Asset Management’s macro and asset allocation views.

 

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation.

The information and data presented in this document are not to be considered as an offer or sollicitation to buy, sell or subscribe to any securities or financial instruments or services. 

Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management (Europe) SA, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

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

Pictet Asset Management (USA) Corp (“Pictet AM USA Corp”) is responsible for effecting solicitation in the United States to promote the portfolio management services of Pictet Asset Management Limited (“Pictet AM Ltd”), Pictet Asset Management (Singapore) Pte Ltd (“PAM S”) and Pictet Asset Management SA (“Pictet AM SA”). Pictet AM (USA) Corp is registered as an SEC Investment Adviser and its activities are conducted in full compliance with SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref.17CFR275.206(4)-3.

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

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Transition Risks and Opportunities for Sovereigns

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Pixabay CC0 Public DomainTransición ecológica . Transición ecológica

As average global temperatures continue to rise apace, the scientific consensus is that human activity is the main cause of long-term changes to temperatures and weather patterns – largely due to greenhouse gas emissions. It is now widely acknowledged that climate transition is not only an environmental imperative, but also increasingly an economic one. As sovereign bond investors, we need to be cognisant of these risks and seek to incorporate them into our investment analysis, recognising that climate-related risks are significant as are the costs to transition to a low-carbon, more sustainable future.

Furthermore, we believe a country’s stage of economic development, quality of governance standards, and its willingness and ability to mitigate climate change events are particularly important when assessing financial stability. At Colchester, we primarily assess a country’s vulnerability to climate change through two channels, namely physical risk and transition risk. Whilst physical risk takes account of a country’s vulnerability to changes in weather, climate and natural disasters; transition risk is a forward-looking assessment associated with a country’s transition pathway to a lower carbon economy.

The recent United Nations (UN) climate conference in 2021, COP26, focused the world’s attention on the urgent need to tackle climate change. The final agreement, the Glasgow Climate Pact, calls for countries to reduce coal use and fossil fuel subsidies and urges governments to submit more ambitious emissions reduction targets by the end of 2022 in order to keep the 1.5°C goal alive. A clear implication is that given the expected decline in demand for fossil fuels over the coming decades, major fossil fuel resource producers may eventually face a loss of revenue from these commodities and will need to diversify into other economic sectors. Some of the economies most exposed to fossil fuels within our investment universe are shown in the chart.

However, it is worth highlighting that the risks surrounding heavy fossil fuel reliance can be mitigated through strong governance and well-considered policy choices. For example, Norway’s disciplined approach to managing oil revenues (which is invested in its $1.36 trillion sovereign wealth fund and governed by a strong fiscal framework, data as end of 2021) cushions its fiscal position and provide resources to support the country’s transition to a more sustainable economic path over the longer term. Furthermore, advances in technology are reducing the cost of alternative sources of energy where, for example, Norway’s electricity and heating is now largely covered.

Gráfico 1

Source: World Bank Indicators, Colchester, as of 2019. Note: “Oil or Coal or Natural gas rents are the difference between the value of crude oil or coal or natural gas production at regional prices and total costs of production,” as defined by the World Bank for the purposes of this data source.

 

Climate-related risk exposures vary greatly across countries, and we note that many lower-income and fossil fuel producing countries are more vulnerable. For example, India’s Prime Minster Narendra Modi has argued that poorer countries should be given a longer transition period including a period of rising emissions as they develop and move up the income curve. Nevertheless, India’s announcement that it aims to reach net zero emissions by 2070 and to meet fifty percent of its electricity requirements from renewable energy sources by 2030 is very ambitious. Coal and oil have supported India’s economic growth to date and the rapid growth in fossil energy consumption has meant India is now the fourth largest CO2 emitter in the world. However, going forward, India has the opportunity to pioneer a model of further economic development that avoids carbon-intensive approaches. According to the IEA, renewable electricity is growing at a faster rate in India than any other major economy, with new capacity additions on track to double by 2026. Despite India’s target, challenges remain, not least in terms of the financing cost. India has called for $1 trillion in climate finance from developed countries to help accelerate the shift to clean energy, arguing that developing countries have historically contributed less than advanced economies to emissions and yet are being asked to shoulder a larger burden in the net-zero transition.

Colchester’s assessment of climate-related risks is a work in progress. Our analysis will become more fine-tuned as more data sources, applicable measures, frameworks and analysis that are more directly relevant to an assessment of a sovereign are developed. We are also an active participant in industry efforts to devise appropriate frameworks within which to assess sovereign assets. An example of this industry framework development is the collaborative industry initiative ‘Assessing Sovereign Climate-related Opportunities and Risk Project’ – known as “ASCOR”. Colchester has joined as a member of the Advisory Committee and the initiative aims to provide a common lens and framework to understand sovereign exposure to climate risk and how governments plan to transition to a low-carbon economy.

 

This article should not be relied on as a recommendation or investment advice. Colchester Global Investors Limited is regulated by the UK Financial Conduct Authority, and only deals with professional clients. https://www.colchesterglobal.com for more information and disclaimers.

Emerging Market Equities Present an Attractive Opportunity in 2022

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Pixabay CC0 Public DomainChina . China

After a strong rally alongside developed market equities in 2020, 2021 was a difficult period for emerging markets investors. Last year, the MSCI EM Index trailed it’s developed market counterpart, the MSCI World Index, by nearly 25%– the largest spread between the two indices in nearly a decade. Hampered by a lack of vaccine availability, many emerging economies reopened  in fit and starts, often lagging the pace of restart in developed markets. Implications of inflation, and the overhang of expected monetary tightening, were points of consternation. In China and Brazil, the first and third largest economies in EM, regulatory uncertainty and geopolitical tensions roiled local stock markets. 

Despite these challenges we believe there’s a lot of positive energy stored up in emerging markets right now, and that investors may be overlooking a potential opportunity in 2022.

Valuations are Supportive

On a forward-looking earnings basis, the MSCI EM Index is trading at a 42% discount relative to the S&P 500 Index. This represents a significant increase in the pre-COVID spread between the markets— as U.S. valuations have expanded by 17% over the past two-years while EM valuations have contracted by 3%.

Valuation’s differentials are even more stark on a historical basis. Over the past decade, forward looking valuations for the S&P 500 Index have stretched by nearly 75% while emerging market valuations have expanded less than 25%. As we look forward to a more normal post-pandemic market environment, where elevated levels of economic uncertainty begin to dissipate, the prospect of a valuation re-rate provide opportunity for EM relative performance.  

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EM’s Relative Growth Potential is Attractively Priced

While growth expectations in 2022 are above long-term trend for both developed and emerging markets, the IMF forecasts that EM economies will continue to see strong post-COVID growth over the next five years. On the other hand, developed economies are expected to return to sub 2% real growth following 2022. While widening spreads between valuation estimates would seem to support a narrowing of the EM vs. DM growth spread, markets are anticipating an acceleration of the relative growth gap between developed and emerging economies.

Coupling relative valuation estimates with growth forecasts, emerging market equities appear to have priced in a healthy degree of caution and reflect an attractive longer-term relative value.

Gráfico 2

EM is Ahead of the Curve on Monetary Tightening

Inflationary pressure mounted globally as supply-and-demand mismatches were driven by COVID disruptions and exacerbated by the record amount of government stimulus deployed to avoid a deep global recession. While a cycle of policy rate tightening is expected to begin soon across many developed markets, with the Federal Reserve signaling its first rate hike in March, nearly half of the central banks represented in the MSCI EM Index, including South Korea, Mexico and Brazil, have already began raising rates in an attempt to contain rising prices.

With a head start at combating inflation, and generally less burdened by the aggressive stimulus measure out of developed markets like the U.S. and Europe, EM central banks may be able to turn dovish at an earlier pace than many advanced economies.

EM Laggards may be Poised to Bounce Back in 2022

Brazil saw significant deterioration in its macro outlook during the second half of 2021, as political tensions related to upcoming election, and economic uncertainty driven by COVID stimulus, both accelerated. To manage surging inflation, (which was up 11% YoY) the Brazilian Central Bank has had to raise their target rate to 10,75% (from only 2,75% in March 2021). The increasing likelihood of a more centrist president, coupled with aggressive rate raising aimed at stabilizing the currency and inflation, should be a positive catalyst for 2022.

As a result of these issues, the MSCI Brazil Index is trading at a Forward 12mo P/E of 7X. For context, Brazil was trading at 14X (12mo fwd) entering 2020. While not free of problems, the substantial valuation de-rate seems to be compensating for heightened uncertainty and may presents a strong buying opportunity in 2022 and beyond.

Similar to Brazil, China was major drag on EM performance during the second half of 2021. Regulatory tightening measures, especially on property and technology sectors, caused a lot of heartburn. From an economic perspective, China’s twenty year history of unprecedented growth  should garner the benefit of the doubt from investors. Additionally, we  have seen some positive policy signs recently which should provide an increased level of investor confidence. During December’s Central Economic Work Conference, an annual meeting where the CCP sets 2022’s economic agenda, policymakers stressed the importance of stabilizing growth and the potential for regulatory easing to support the property sector. Despite 2021 headwinds, China is still looking at ~5% GDP growth in 2022 and better-than-expected reflationary efforts out of Beijing could lead to an overshooting of that target.

Prior to 2021, the last yearly period where we saw China underperform EM by a double-digit margin was 2016. There were some similarities in 2016 to what we saw in 2021. Most notably, a lack of clarity around regulatory policy that pushed investors for the doors. As investor uncertainty faded, China led a strong rebound for emerging markets in 2017—posting a return of 54% and outpacing the MSCI World Index by more than 30%. The MSCI EM Index as a whole beat the MSCI World Index by ~15%.

While we are not necessarily calling for a repeat of 2016 in 2022, it’s important to remember that following periods when sentiment towards EM has waned, it’s often be a great entry point for investing in EM equities.

 

Thornburg is a global investment firm delivering on strategy for institutions, financial professionals and investors worldwide. The privately held firm, founded in 1982, is an active, high-conviction manager of fixed income, equities, multi-asset solutions and sustainable investments. With $49 billion in client assets ($47 billion AUM and $1.9 billion AUA as of December 31, 2021) the firm offers mutual funds, closed-end funds, institutional accounts, separate accounts for high-net-worth investors and UCITS funds for non-U.S. investors. Thornburg’s U.S. headquarters is in Santa Fe, New Mexico with offices in London, Hong Kong and Shanghai. For more information, please visit www.thornburg.com.

 

For more information, please visit www.thornburg.com

 

Investing for Impact on the Road to Net Zero

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Pixabay CC0 Public Domain. Invertir para conseguir un impacto en el camino hacia el Net Zero

The 2021 Glasgow Climate Pact has had one indisputable positive outcome: a greater acceptance by governments globally to accelerate efforts to keep temperatures from rising more than 1.5 degrees Celsius by 2050 because actual progress toward earlier commitments has not been good enough.

But COP26, as the climate summit was known, also had uncertain outcomes, including the specific roles of government, regulations, and public and private enterprises. Another uncertainty: How to finance the transition and its economic impact on the world economy? The answers to these questions and the behavior of investors as stewards of capital will determine how turbulent the road to Net Zero will be.  That’s why we believe that investing for impact should be a primary concern for investors today.

But what does “investing for impact” really mean?

First, it means taking a broad view of Sustainability, one that encompasses Climate Change, Planetary Boundaries, and Inclusive Capitalism. Second, it involves taking a long-term view that focuses on the structural changes the global economy will likely experience over the next 30 years and beyond.

Taking a holistic view of sustainable investing

Investing for positive impact on emissions starts by accepting that Net Zero does not mean that the use of fossil fuels should be zero or that investors should divest completely from all oil and gas.

While renewables (such as wind and solar) are forecast to represent an increasing part of the energy mix, both oil and natural gas will still play a crucial role in producing a steady supply of energy. “Even when the world achieves net-zero emissions, it will hardly mean the end of fossil fuels,” two academics—co-founding Dean of the Columbia Climate School Jason Bordoff and Harvard Kennedy School Professor Meghan O’Sullivan—write in Foreign Affairs. “A landmark report published in 2021 by the International Energy Agency (IEA) projected that if the world reached net zero by 2050 … it would still be using nearly half as much natural gas as today and about one-quarter as much oil.”

Reducing gross greenhouse gas emissions will not be enough. We also need to remove what is already in the atmosphere—called carbon sequestration—and evaluate nascent technologies that can facilitate such mitigations. Taken as a whole, these areas can create ample opportunities around investing for impact.

Thinking in terms of planetary boundaries allows investors to take a more holistic view of investing with a sustainability lens. For example, the two major carbon sinks our planet has are oceans and forests, so ensuring they remain healthy will be crucial in limiting global warming to 1.5-degrees Celsius. Additionally, oceans and forests also impact food, water, and human health, which are core to our livelihoods. Managing the impact of biodiversity loss is another example where investors will find plenty of opportunity to make a positive impact with their capital.

Inclusive capitalism is also a major “investing for impact” theme, one that advances a “just transition,” where all stakeholders are considered. For example: If the global population expands to nine billion people, there will be constraints that will make it difficult to produce the required number of calories to sustain that population. However, creating solutions that ensure such constraints will not exacerbate hunger or cause social unrest would create many investment opportunities.

Augmenting access to credit is another area that can advance a more just transition and should also produce many investment opportunities. Diversity and inclusion in the workplace, often cited as a starting point for inclusive capitalism, also offers opportunities, given research from firms like McKinsey & Co. showing that firms with greater diversity tend to outperform their less diverse peers.

Taking the long (term) road to Net Zero

Investing for impact requires a long-term view that takes account of the structural changes needed for the global economy as well as the considerable macroeconomic implications of climate change. It also entails adopting a broad, climate-aware, risk-management framework. For example: Climate change can impact the economy gradually (i.e., rising sea levels or changes in rainfall patterns) or abruptly (i.e., more extreme weather events, such as droughts, wildfires, and floods.)

It will also impact inflation, as many costs that had been externalized—in other words, taken out of the product level and absorbed elsewhere—will likely have to be internalized back into the production process.  Examples of costs that have been externalized include the environmental toll of unincumbered gross emissions, the over-exploitation of the commons (such as oceans and forests,) and labor costs being driven lower by globalization. Climate change can also produce exogenous shocks that can affect the supply (and consequently the cost) of key commodities.

Daunting as all this may sound, it is our firmly held belief that the challenges we face on the road to Net Zero will be equally met with solutions that, in turn, will generate potentially attractive investment opportunities. Adopting an investing for impact mindset will not only help us successfully reach our Net Zero destination, it may also provide a less bumpy ride for investor portfolios.

(Matt Christensen is Global Head of Sustainable and Impact Investing for Allianz Global Investors, based in Paris, Mark Wade is Head of Sustainability Research and Stewardship for Allianz Global Investors, based in London.)

 

Gold and Silver Protect against Stock Market Tumbles, but…

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Screenshot 2022-02-28 135232
Pxhere CC0. foto

Precious metals can serve as a hedge against stock market tumbles, although in the medium term, they can reverse gains and cause significant losses. We should try to sell them opportunely.

Some of the falls or rises of the S&P 500 index, gold and silver, during 22 years, from January 2000, to February 2022, are outlined below. In the graph, the ones with the highest proportion are marked and numbered.

  • The economic recession that began in 2000 caused the 49% drop in the index①. Gold (gold line) and silver (blue line) mantained levels. S&P (white line) began to stabilize in 2003. By 2004, precious metals accumulated gains of 68%.
  • By mid-2006, the S&P 500 was up 64% from its 2002 low. Gold and silver extended gains to 234%, before falling 35% and 20%, respectively.
  • From that lowest level in mid-2006, and prior to the great crisis of 2008, silver rebounded 117% and gold 70%②, while S&P rose 25%.
  • The financial crisis of 2008 – 2009 produced huge losses across the board: S&P, -57%③; Silver, -56%; Gold, -25%
  • Thereafter, as equity markets compensate some of the losses, silver soared 441% to hit its all-time high of US$48, and gold surged 173%④.
  • Over the years, as the economy and stock markets improved, metals lost their shine. As of December 2015, silver accumulated losses of 72% and gold, 45%, from the highs of 2011.
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  • Also at the end of 2015, the S&P lost steam with a drop of 13.50%. Gold and silver served as hedges, rallying 47% and 29%.
  • And again, during 2016, while the index rose, metals turned lower. Towards September 2018 and from the highest prices, gold lost 13%; silver, 31%. On this occasion, the drop in metals was anticipated to the 21% drop that the index would have.
  • From then until before the outbreak of the pandemic, the S&P rose 44%. It was a good period also for metals: silver, +44%; gold, +32%.
  • The start of the pandemic diminshed the index 36% and silver 29%. Gold resisted ⑤.
  • During the hard days of the pandemic, silver skyrocketed 141%. Gold rose 40%, to a new all-time high.
  • Still within the period of the pandemic, gold fell as much as 20%; silver, 25%.
  • While metals lost strength and fell, the index continued to climb to accumulate 114% until the first days of January 2022 ⑥.
  • And during this last phase in which the stock markets were affected by the mix of taking profits and the nervousness about the Russia-Ukraine war, the index has lost 12.50%, while silver and gold have risen a maximum of 9.3% and 6.7%, respectively. The reaction of precious metals has not been as good as on previous occasions; have not yet fully compensated for the losses the index, although it is true that the fall of the S&P 500 cannot yet be considered a crash.

In sum, beginning in 2000, the extraordinary gains in precious metals reversed the declines in the S&P 500, but over time, the improving economy and bullish markets meant the opposite.

For illustrative purposes only, the different percentages are shown in different time periods.

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Column by Arturo Rueda

 

The Taper Tantrum 2022 is Underway

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Pixabay CC0 Public DomainDólares estadounidenses . Taper Tantrum

The U.S. stock market started 2022 with the S&P 500 hitting an intraday record high on January 4 as the Omicron variant’s disease severity was downgraded. The next day, when the minutes of the December 15 FOMC meeting revealed a tightening bias that included the “run off” of the Fed’s $9 trillion balance sheet, the financial markets turned negative abruptly. Stocks declined sharply and the ten-year U.S. Note yield spiked higher. ‘Taper Tantrum’ 2022 was underway.

 

So far, how does the May 2013 Bernanke quantitative tightening surprise compare? To date 2022, the S&P 500 is down 5.6% vs 4.9% in 2013 and the ten-year U.S. Treasury yield is 27% higher vs 35% in 2013. In 1955, Fed Chairman Martin said the Fed’s job is ‘to take away the punch bowl just as the party gets going.’  How will Jerome Powell compare to Paul Volcker? On Saturday, Oct. 6, 1979, Fed Chairman Volcker held an impromptu evening news conference, dubbed the ‘Saturday Night Massacre.’ Mr. Volcker declared war on inflation and announced the Fed’s monetary policy would now control interest rates by targeting the money supply, with markets setting interest rates. The post-war Keynesian era of big government run economic policy was fading.

 Job creation estimates for the January U.S. payrolls report released on February 4 were far below the actual data as the labor market recovery strengthened and the Omicron surge slowed. Bottom line: the U.S. job market is tight and wages are rising. The FOMC’s December 15 minutes also said the job market is ‘very tight.’ The next inflation data release is the CPI estimated to have annualized at 7.3%, the largest rise since 1982 when Mr. Volcker was ‘slaying the inflationary dragon.’

Market volatility remained throughout the month of January, with the S&P 500 declining as much as 11.5% for the month, while the technology-heavy Nasdaq slid as much as 16%. The volatility spilled over into merger arbitrage markets where spreads widened as investors’ risk appetites were tested, and downsides recalibrated. Despite volatility in markets, widened merger arbitrage spreads, and regulatory setbacks, we come out of a challenging month optimistic about the opportunities ahead. M&A activity remains robust in 2022 including the announced acquisition of Activision by Microsoft for $74 billion, and the acquisition of Citrix Systems by Vista Equity for $17 billion.

January was a difficult month across the markets and convertibles were no exception. With growth multiples moving lower, many equity sensitive convertibles moved lower with stocks. Additionally, with interest rates rising, the fixed income equivalents in the market trended lower as well. While this hurt performance for the month, we believe it presents an opportunity as there are now some convertibles trading at more attractive levels than they have in some time, and underlying equity valuations have become more reasonable.

We are of the mind that security selection will be key to performance this year. Typically convertibles do well in a rising interest rate environment, but there are two factors that could cause things to be somewhat different this time. First is the large amount of convertibles with 0 yield and high premium. Most of these are trading below par and are now considered a fixed income equivalent. These will be weak in a rising interest rate environment as investors demand greater yield to maturity. Additionally, given the majority of convert issuers are growth oriented, a continued re-rating of growth stock multiples could weigh on the equity sensitive side of the market. Given that backdrop our focus remains on total return convertibles with some high conviction equity sensitive names.

 

______________________________________

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

GAMCO CONVERTIBLE SECURITIES

GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.

The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.

The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.

By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.

Class I USD          LU2264533006

Class I EUR          LU2264532966

Class A USD        LU2264532701

Class A EUR        LU2264532610

Class R USD         LU2264533345

Class R EUR         LU2264533261

Class F USD         LU2264533691

Class F EUR         LU2264533428 

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.