Why The Energy Stock Selloff May Be Overdone

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¿Por qué las ventas en el sector energético pueden ser exageradas?
CC-BY-SA-2.0, FlickrPhoto: Tina Nord / Pexels CC0. Why The Energy Stock Selloff May Be Overdone

Unless oil prices collapse, energy stocks now appear to be cheap, Russ Koesterich, CFA, Portfolio Manager for the BGF Global Allocation Fund explains.

While much ink has been spilled this year on the rout in emerging markets, and, more recently, the fall from grace of technology stocks, natural resource shares are actually the worst performers year-to-date. The S&P Energy Sector Index is down more than 5%, underperforming the S&P 500 by approximately 900 basis points (bps, or nine percentage points).

More interestingly, although oil prices have dropped sharply in recent weeks, they have not collapsed, unlike in early 2016. West Texas Intermediate Crude (WTI) is flat year-to-date, but the global benchmark Brent is still up 6%. This suggests that either the recent collapse in energy shares looks overdone or oil prices have further to fall. Consider the following:

1.    Based on price-to-book (P/B) the energy sector is now trading at the largest discount to the S&P 500 since at least 1995 (see Chart 1). Energy stocks are currently trading at roughly a 50% discount to the broader market.

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2. The sector also appears unusually cheap on an absolute basis. At less than 1.7x earnings, the current valuation is the cheapest since early 2016 and is in the bottom 5% of all observations going back to 1995.

3. As you would expect, the valuation of the energy sector tends to move (roughly) in tandem with oil prices. When oil prices are lower, the sector’s relative value versus the market also tends to be lower. Since 1995, this relationship has explained approximately 20% of the relative multiple of the sector. Based on oil prices at $60/barrel, history would suggest that the sector should be trading at a 15% discount to the market, not a 50% one.

Valuations hard to justify

As I’ve discussed in many previous blogs, value is a poor market timing tool. Neither cheap relative or even absolute valuations guarantee a bottom. The comparisons against both the broader market and oil prices could simply mean that the S&P 500 and/or oil prices might be too expensive, rather than energy shares too cheap. That said, both the market and oil would have to fall a significant amount to justify today’s sector valuation. As a simple example, if the historical relationship between oil prices and relative valuation were too hold, oil prices could fall to $40/barrel, roughly where they bottomed in 2016, and the energy sector would still appear underpriced.

Finally, there may be another reason to consider raising the allocation to energy shares. Historically, energy stocks have been more resilient than the broader market during periods of rising interest rates and/or inflation. If part of what has dislocated the market this year is the prospect for higher rates and an overheating U.S. economy, energy stocks seem a logical hedge. All of which suggests that for investors sifting through the rubble searching for bargains: Consider U.S. energy companies.

Build on Insight is written by Russ Koesterich, CFA, is a Portfolio Manager for the BGF Global Allocation Fund at BlackRock

In Latin America and Iberia, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security and it is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of your relevant jurisdiction. If any funds are mentioned or inferred in this material, such funds may not been registered with the securities regulators of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain Uruguay or any other securities regulator in any Latin American or Iberian country and thus, may not be publicly offered in any such countries. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx. The securities regulators of any country within Latin America or Iberia have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America or Iberia. The contents of this material are strictly confidential and must not be passed to any third party.

Investing involves risks, including possible loss of principal.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. MKTG1218L-684166-2107904

 

Powell and China, Behind November’s Success

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Powell and China, Behind November's Success
CC-BY-SA-2.0, FlickrFoto: Federal Reserve. Powell y China, detrás del éxito de noviembre

U.S. stocks surged higher in late November as the pragmatic Fed Chair Powell, in an intriguing speech titled the Federal Reserve’s Framework for Monitoring Financial Stability at the New York Economic Club, hinted at a possible slowdown during 2019 in the Fed’s projected rate hike path when he said, interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.

Mr. Powell continued, we see no major asset class where valuations appear far in excess of standard benchmarks as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom, setting the stage for the best week for stocks in seven years, placing November in the plus column for the month.

That same day, Wednesday November 28, the Wall Street Journal ran a prescient story on the U.S. vs China trade war and the upcoming G20 meeting in Buenos Aries which also caught the stock market’s attention stating, officials from both countries are examining the possibility of delaying higher U.S. tariffs until the spring, and launching new talks about Chinese economic policy.

Using the metric of ‘cumulative equity value and number of deals,’ merger and acquisition activity for 2018 is running about twenty five percent above 2017 levels according to industry sources. M&A totals, using the metric of value, are tracking higher than pre-crisis 2007 levels and using the total number of deals puts 2018 about twenty five percent below 2007 levels. Deals in energy, financials, and technology are standouts compared to these sectors in 2017.

On the research front, the television industry is experiencing a tectonic shift of viewership from linear to on-demand viewing. Vertically integrated behemoths like Netflix and Amazon continue to grow with no end in sight. Despite this, we believe there is a place in the media ecosystem for traditional terrestrial broadcast companies.

In an interesting update since the G20 summit, on an event driven situation we have highlighted previously regarding NXP Semiconductors and Qualcomm, China and the U.S. have recently agreed to return to the negotiating table. Chinese leader Xi Jinping said he is now “open to approving” U.S. chip maker Qualcomm ’s $44 billion acquisition of Dutch chip maker NXP Semiconductors according to the official White House statement. The deal had fallen apart in July because Chinese regulators had sat on it for so long, seemingly ending a takeover saga that dragged on for almost two years. More to come on the subject as the ongoing trade rhetoric continues.

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.
 

ESG: Will It Become A Competitive Advantage?

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ESG: ¿Se convertirá en una ventaja competitiva?
CC-BY-SA-2.0, FlickrCourtesy photo. ESG: Will It Become A Competitive Advantage?

A few months ago, a great manager and friend, a faithful follower of the philosophy of value investing, told me that he had introduced ESG criteria into his analysis, and that he considered them a source of competitive advantage for certain companies. He even gave an example. It is the typical comment that you interpret as a justification to support a new trend, but as it came from this person, it made me think. Not only for listed companies where to invest, but for the very business of asset management.

There is no self-respecting conference on investments that does not discuss ESG, no institutional investor that does not show interest in adopting these criteria in new investments and no slide in strategic presentations of companies that does not mention it. They have started to create certificates in “ESG investing” and, of course, the regulator is surely not far behind wanting to define and assign universal ratings…

Obviously, it would be an unsustainable competitive advantage as it does not create a lasting entry barrier, but the speed of implementation may condition the feasibility of the business in the short term.

From the asset management perspective, it should go from being a specific type of asset to be part of the corporate investment philosophy. It will be a new risk factor to control. However, and still being an unstoppable trend, in the short term it faces certain difficulties:

  • It is currently in direct conflict with passive management, where there is no type of ESG filter in most indexes, and therefore in the funds that replicate them.
  • Most capital allocation decisions are made within the companies themselves, which makes it especially difficult to analyse the decisions and the impact on different factors such as supply chains or trade policies.

It definitely means a great risk for asset managers, not being able to access a growing client base with clients who are looking for it, or ultimately, lose them (a great French institutional manager recently mentioned in a conference that 50% of its new business is coming with ESG criteria). And it is also a great risk for listed companies to see reduced access to capital markets, which may (it has not happened yet) increase their cost of capital. In certain cases, if a case of corruption by a senior executive of a company comes out, it could trigger a wave of indiscriminate sales from these funds. And if corporate governance does not work well, it may compromise its cost of financing in a much more aggressive way than we are seeing recently. And the client will eventually demand a report where their manager’s performance is analysed and the impact achieved in certain cases.

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

How A First-Of-Its-Kind Credit ETF Became A Bond Market Stalwart

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Cómo un ETF de crédito, pionero en su tipo, se convirtió en un incondicional del mercado de bonos
CC-BY-SA-2.0, FlickrPhoto: Jeroen Berndsen. How A First-Of-Its-Kind Credit ETF Became A Bond Market Stalwart

A trio of 2018 milestones show that iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is now an indispensable investment tool.

Two decades ago few options were available to retail investors looking to assemble baskets of corporate bonds. One option was to call a broker, who in turn picked up the phone and worked orders through dealers on Wall Street.

This process was often difficult and expensive. And it could take weeks–sometimes longer–to build a diversified bond portfolio. Instead, most people paid active managers to trade and manage bonds for them in mutual funds.

Then came iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the first-ever exchange traded fund tied to corporate bonds. Credit ETFs trade heavily now, but looking back to 2002, it’s hard to appreciate how novel LQD was at the time. It tracked a well-known index of investment grade bonds, providing diversification and trading efficiency.

Suddenly, individual investors could access the broad corporate bond market. A mix of 100 corporate bonds could be purchased for just pennies in bid/ask spread and 0.15% per year in fund expenses.

Adoption borne from crisis

Many institutional investors became aware of LQD during the financial crisis. As bond markets seized up, LQD continued to trade on exchange throughout the day, providing real-time markets and price discovery–especially during the memorable week roughly one decade ago that Lehman Brothers declared bankruptcy.

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LQD’s trading volumes have climbed as investors recognized the fund’s utility. Liquidity, as measured by average daily volume, has grown steadily; liquidity spurred more liquidity, and encouraged additional adoption by institutional investors. The experience of LQD has been mirrored in other corners of the corporate debt market, where  iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has become a de facto proxy and trading instrument for the high-yield bond market. Indeed, HYG’s trading volume as a percentage of total daily volume in individual high-yield bonds rose to 19% in October, a record.[1]

Milestones abound

Sixteen years after the launch of LQD, the ETF has $34 billion in assets under management. It trades $725 million on average each day, up 38% from a year ago.[2] In stressed market conditions, it has traded even more, recently as much as $2.1 billion.[3] As volumes grow, investors can now use LQD to quickly obtain diversified exposure to more than 1,000 bonds with a single, on-exchange trade.

Investors’ predilection for LQD continues to surface in notable ways. Last year was the first time that LQD’s average daily volumes surpassed that of the most liquid individual investment grade bonds, including Verizon and JP Morgan.[4]Adoption by insurance companies, whose portfolios rely on stable fixed income exposures, recently made LQD their most heavily owned ETF across industry portfolios.[5] Earlier this year, LQD broke the record for the single-largest “block” trade in bond ETF history, a signal that large, institutional investors are confident about their ability to trade and manage risk with LQD in size.[6]

What do investors get with LQD?

Beyond liquidity, LQD offers investors a highly diversified exposure to the investment grade corporate bond market across more than 1,000 bonds. LQD seeks to track a broad index, providing investors with access to bonds in all major sectors, including communications services and industrials. That makes the product potentially suitable for investors seeking broad exposure to the investment grade corporate bond market.

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For investors with more targeted views, the LQD family suite offers choices to access the investment grade corporate bond market more narrowly. The  iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) offers access to bonds with shorter maturities; the iShares 5-10 Year Investment Grade Corporate Bond ETF (MLQD) offers access to bonds with medium maturities; and the iShares 10+ Year Investment Grade Corporate Bond ETF (LLQD) offers access to bonds with longer maturities. The iShares Interest Rate Hedged Corporate Bond ETF (LQDH) allows investors to seek to mitigate interest rate risk and express a more direct view of bond issuers’ financial health, and the iShares Inflation Hedged Corporate Bond ETF (LQDI allows investors to specifically hedge against inflation risk while still owning LQD’s corporate bond exposure.

We believe that even more milestones lie ahead for LQD and bond ETFs in general as a growing chorus of investors recognize the benefits that bond ETFs provide in terms of access, efficiency and liquidity. Taken together, the iShares suite of investment grade bond ETFs are indispensable tools for investors of all types and sizes to access and manage risk in the investment grade bond market.

Build on Insight by BlackRock

[1] Bloomberg, BlackRock, FINRA TRACE; HYG’s one month rolling exchange volumes as percentage of high-yield cash bond volumes hit a record on Oct. 31, 2018; (HY OTC 144a volumes are included in the HY cash volumes).

[2] BlackRock as of Sept 28, 2018.

[3] BlackRock; Bloomberg (Daily notional trading volume hit a record Oct. 11, 2018)

[4] BlackRock, TRACE, as of 9/28/2018

[5] S&P Global Market Intelligence data compiled April 10, 2018.

[6] BlackRock, TRACE, as of 9/28/2018

In Latin America and Iberia: this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

The Fund is actively managed and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index. There is no guarantee that interest rate risk will be reduced or eliminated within the Fund.

LQDI: The Fund’s use of derivatives may reduce the Fund’s returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund’s hedging transactions will be effective.

Investing in long/short strategies presents the opportunity for significant losses, including the loss of your total investment. Such strategies have the potential for heightened volatility and in general, are not suitable for all investors.

The Fund’s use of inflation hedging instruments is intended solely to mitigate inflation risk and is not intended to mitigate credit risk, interest rate risk, or other factors influencing the price of investment-grade corporate bonds, which may have a greater impact on the bonds’ returns than inflation. There is no guarantee that the Fund’s positions in inflation hedging instruments will reduce or completely eliminate inflation risk within the fund.

LQDH: The Fund’s use of derivatives may reduce the Fund’s returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund’s hedging transactions will be effective.

Investment in a fund of funds is subject to the risks and expenses of the underlying funds.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Diversification and asset allocation may not protect against market risk or loss of principal. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited, nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with Markit Indices Limited.

©2018 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

MKTG1118L-677764-2089797

 

 

 

When Spreads Widen One Can Add to Existing Positions at Lower Prices to Earn Greater Returns

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When Spreads Widen One Can Add to Existing Positions at Lower Prices to Earn Greater Returns
Foto: Khantipol . Cuando los spreads crecen se puede aumentar las posiciones existentes a precios más bajos y obtener mayores rendimientos

M&A performance was crimped in October as market volatility caused most spreads to widen. This presented an opportunity to put cash to work by adding to existing positions at lower prices to earn greater returns. Since our first investment product dedicated to merger arbitrage in 1985, we have invested through periods of heightened market volatility. Our conservative investment discipline consisting of no leverage, position size limits and a preference for strategic, fully-financed transactions allows us to add to high-conviction positions at times of market stress to earn higher risk-adjusted returns. 

More specifically, in October:

  • The spread on the Rockwell Collins (COL-NYSE) deal with United Technologies widened from about $5 to $12, despite winning approval from U.S. antitrust regulators. “Arbs” expected Chinese antitrust (SAMR) approval to come quickly after the DOJ, but the approval has not yet been received and the delay has resulted in a wider spread. On his October 23 earnings call, United Technologies CEO Greg Hayes said that SAMR approval had been delayed because the Chinese were waiting for U.S. clearance, which itself was delayed until early October.
  • NXP Semiconductors (NXPI-NASDAQ) traded lower given the market volatility and a decline in semiconductor stocks broadly. Although we made progress in reducing our position prior to the market selloff, our remaining position clipped performance in October. After reporting results after market hours on October 31, the stock rallied more than 10% to $83.

In October, we also realized gains on transactions that closed including Boeing’s $4 billion acquisition of aerospace supplier KLX Inc. and Conagra’s $11 billion acquisition of Pinnacle Foods. On October 30, WestRock received DOJ antitrust approval for its $5 billion acquisition of KapStone Paper and Packaging, and the deal subsequently closed on November 2. We are building our pipeline of deals with notable new transactions announced in October including:

  • Red Hat, Inc. (RHT-NYSE), a developer of software and services used to manage IT infrastructure, agreed to be acquired by IBM for $190 cash per share, or about $32 billion.
  • Endocyte, Inc. (ECYT-NASDAQ), a biopharmaceutical company developing therapies for the treatment of cancer and inflammatory diseases, agreed to be acquired by Swiss drugmaker Novartis for $24 cash per share, or about $2 billion.
  • Imperva, Inc. (IMPV-NASDAQ), which develops data center security software, agreed to be acquired by technology investor Thoma Bravo for $55.75 cash per share, or about $2 billion.

We continue to find attractive opportunities investing in announced mergers and expect future 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.
 

 

4 Potential Reasons for the Gold Rally

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Cuatro razones potenciales para el rally del oro
Pixabay CC0 Public DomainPhoto: Виталий Смолыгин CC0. 4 Potential Reasons for the Gold Rally
Written by Russ Koesterich, CFA, Portfolio Manager for BlackRock’s Global Allocation Team
Russ discusses why gold, not a popular asset class until recently, has become so as a hedge.

October was not kind to investors. Not only did stocks suffer their worst monthly draw-down in years, but traditional hedges, such as government bonds, did not rallied enough to offset the losses (see Chart 1). As a result, a typical 60/40 stock/bond portfolio experienced one of the worst draw-downs since the financial crisis.

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Interestingly, gold, largely left for dead, has rallied. Not only has gold bounced, but it has done so despite a steady dollar. Which raises the question: Why is gold rallying now? Here are four potential reasons:

1. Gold got “cheap.”

Over the very long term gold and the U.S. money supply, measured by M2, tend to move together. Changes in gold prices have roughly equaled changes in the money supply, with the ratio tending to mean-revert towards 1. By the end of September, this ratio had fallen to below 0.7, the lowest since 2005. When the ratio is low, defined as 25% below the long-term average, the average return during the subsequent 12-months is 15%.

2. The dollar has stabilized.

While the DXY Index is pushing against the upper end of its five-month range, the dollar has been relatively stable since May. This is important as a rapidly strengthening dollar, as we witnessed last spring, has historically been a headwind for gold. To the extent the dollar has stabilized, this removes one headwind.

3. Real rates also appear to have plateaued.

Besides the dollar, the biggest challenge for gold in 2018 has been rising real rates, i.e. interest rates after inflation. Higher real rates raise the opportunity cost of an asset that produces no income. Between January and early October, real 10-year yields advanced by 50 basis points. However, since then, real rates seem to have temporarily peaked near the levels reached in 2013.

4. The return of volatility.

While real rates and the dollar are key fundamental drivers for gold, demand for a hedge against volatility also drives gold prices. With the exception of the brief correction in February, that attribute has not been in demand until recently. Prior to the recent swoon, U.S. equities were well on their way towards another year of double-digit gains. Unfortunately, this pleasant trajectory has been interrupted. Equity market volatility, measured by the VIX Index, has doubled since early October. This is important, as gold has a history of performing best versus stocks when volatility is spiking. Historically, in months in which volatility rises by more than 20%, gold typically beats U.S. stocks by more than 5%.

Bottom Line

In short, whether or not gold can continue to rally will largely be driven by the direction of the dollar, real rates and market volatility. Another dollar rally will likely interrupt gold’s recent strength. That said, absent another leg up in the dollar, an environment of rising volatility, particularly one in which economic uncertainty is rising, has historically been exactly the environment when gold has proved its value as a hedge.

Russ Koesterich, CFA, is Portfolio Manager for BlackRock’s Global Allocation team.

In Latin America and Iberia: this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx.
Investing involves risks, including possible loss of principal.
Commodities’ prices may be highly volatile. Prices may be affected by various economic, financial, social and political factors, which may be unpredictable and may have a significant impact on the prices of precious metals. Concentrated investments in specific industries, sectors, markets or asset classes may under-perform or be more volatile than other industries, sectors, markets or asset classes and the general securities market. A significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. One or more of these institutions could sell in amounts large enough to cause a decline in world gold prices. Should there be an increase in the level of hedge activity of gold producing companies, it could cause a decline in world gold prices. Should the speculative community take a negative view towards gold, it could cause a decline in world gold prices.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. 651513

 

Play Cautiously with Vulnerable Markets

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Juega con cautela con los mercados vulnerables
Photo: Guma89. Play Cautiously with Vulnerable Markets

Written by Rick Rieder, BlackRock Chief Investment Officer of Global Fixed Income and portfolio manager for the BGF Fixed Income Global Opportunities Fund.  Rieder argues that monetary policy restrictiveness, fading fiscal stimulus, and growing economic uncertainties leave markets more vulnerable today, and these risks are not to be toyed with.

In the game of Jenga, players take turns removing one block at a time from a tower constructed of 54 blocks. Each block removed is then placed on top of the tower, creating a progressively taller, yet more unstable, structure. The game ends when the tower falls and the loser is the person who made it fall. To us, the 2018 investing regime is evolving much like a late-stage game of Jenga, with the Federal Reserve and Treasury clinically and methodically removing the blocks of stability from underneath the financial and real economy “towers.” Indeed, ongoing rate hikes, Fed balance sheet reductions, and massive amounts of Treasury issuance to finance fiscal deficits are leading to increasing vulnerabilities for both financial assets and the prospects for economic growth over coming quarters. In our view, this vulnerability is evidenced by the recent acute spike in market volatility.

Monetary Policy likely to differ from standard market narrative

The conventional market narrative today surrounds already realized robust U.S. growth and earnings, and an earnest belief that sufficient momentum exists to push a capacity-constrained economy into a mode of overheating that will force the Fed to seek a restrictive policy stance. Our base case monetary policy scenario is far more benign, as increasingly skittish financial markets, along with signs that previous tightening has already started to bite parts of the real economy, suggest to us that the tightening cycle is nearing its end. To be clear, though, we do not think the Fed will mistakenly become too restrictive.

To be sure, third quarter U.S. economic growth remains strong by most measures, but we think there are numerous yellow lights flashing ahead of investors today. For instance, while ‘present conditions’ components of high-frequency survey economic data remain solid, related measures of ‘forward expectations’ have become noticeably weaker. Moreover, the two largest (and most rate-sensitive) sectors of the tangible economy, the housing and auto markets, are showing demonstrable signs of softness. That weakening can be witnessed with declines in mortgage applications, housing turnover, and a reduced rate of home-price appreciation. It can also be seen in a notable decline in used car prices. Finally, the powerful influence of 2018 fiscal stimulus will become a growth headwind in 2019, as temporary measures roll off leaving only the related financing burden behind. As that process unfolds, it’s very likely that the Fed’s judgement of the strength of the economy and the need for further policy rate hikes also adjusts (see graph), an eventuality that markets are not properly discounting now.
 

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Meanwhile, inflation has moved begrudgingly toward the Fed’s desired target, but there is scant evidence of untethered economy-wide price increases. In fact, persistent “misses” in core inflation prints, relative to expectations, are widely brushed aside as “one-off” occurrences, but the reality is that the greatest cost revolution in history (due to technology and demographic forces) is combining with fat corporate profit margins that can handily absorb wage increases. That fact should mute consumer price increases, just as inflation expectations continue to make new generational lows.

And, with real economy vulnerabilities percolating, we see a more acute tightening of financial conditions (FC) than is broadly appreciated. While traditional metrics show that FC are approaching longer run averages, when adjusted for contracting forward equity multiples, a more pronounced tightening is evident. Also, rising yields are driving increased corporate borrowing costs, a late-cycle phenomenon that often leads reflexively to wider credit spreads that in turn risk exacerbating the phenomenon.

What tighter financial conditions mean for markets

Tighter financial conditions have already impacted the global economy as U.S. dollar strength, and declining global liquidity growth, has generated significant turmoil in emerging markets (EM) this year. Many EM countries have witnessed a ubiquitous, and unwanted, currency weakness that has forced onerous policy tightening by their central banks to restore stability. However, this creates yet another headwind to global growth, with worrying implications for non-U.S. developed market (DM) economies that rely on EM growth for economic resilience (such as a good deal of Europe). Indeed, just last week, the International Monetary Fund reduced its global growth forecast for the first time in years.

During October, nascent signs of global growth deceleration and tightening financial conditions have caused volatility to spike anew. Moreover, if price declines across asset classes proliferate further over coming weeks the risk of accelerating retail capital outflows from financial assets would be exacerbated by dangerously thinly traded financial markets. An important tail risk to greater equity market weakness is the potential to rapidly undo the progress that pension funds have made in closing their funding gaps in recent years. The early third quarter backdrop of higher rates and buoyant equities provided a window for pensions to lock in that progress, but the more recent equity selloff, should it persist, would suddenly jeopardize those gains.

Implications for Asset Allocation

All things considered, we’re increasingly convinced that the Fed will not allow the Jenga tower to topple. Instead, we see a looming slowdown in the march toward “normalization” and a subsequent victory declaration regarding the Fed’s dogged pursuit of policy neutrality. Accordingly, we reiterate our enthusiasm for convex, high-quality, front-end rate expressions with immensely attractive carry (such as the 2-Year U.S. Treasury), as these assets have already priced in excessive incremental tightening and provide a portfolio hedge against the unlikely event of a policy mistake. We’ll gradually increase exposure to the belly of the curve (5-Year U.S. Treasury) on a moderate backup from here for an optimal mix of attractive carry breakeven and duration, just as the recent favorable shifts in cross-currency swaps make DM sovereigns expressed in USD newly enticing (note, the USD still remains one of our favored left-tail risk hedges).

We continue to like beta exposures through investment-grade credit expressions; for the combination of attractive all-in yield and satisfactory market liquidity, and also like short duration securitized assets, for their stable and secure cash flows. Finally, U.S. equities are increasingly attractive to own outright at ever cheaper valuations, just as corporate buybacks are set to resume after the third quarter earnings season ends. And for the first time all year, we think that elevated levels of implied volatility are creating tactical opportunities to sell options for incremental portfolio carry. Investors today must remain on guard against the market vulnerabilities we outlined, but at the same time, these very vulnerabilities provide opportunity. After all, no matter how precariously the Jenga tower is leaning, a player can’t win unless they remove a block and carefully place it on top.

Build on Insight, by BlackRock written by Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Global Fixed Income and portfolio manager for the BGF Fixed Income Global Opportunities Fund

In Latin America and Iberia: this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx.

Investing involves risks, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Learn more about how consistent investment performance and low fees are critical to achieving your fixed income goals in today’s environment.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

Prepared by BlackRock Investments, LLC, member Finra

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States or elsewhere. All other marks are the property of their respective owners. MKTG1118L-649595-2015110

October Spooked Market Participants Universally But The U.S. Economy is Still on a Roll

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Si bien octubre pareció asustar a los inversores, los mercados siguen en buena racha
Pixabay CC0 Public DomainPhoto: Alexas_Fotos. October Spooked Market Participants Universally But The U.S. Economy is Still on a Roll

October spooked market participants universally with US stocks enduring their worst month since the financial crisis. Issues at hand circle around concerns about peak earnings and growth, tighter financial conditions, fears of a Fed policy mistake, a potential credit bubble and selling pressure in crowded trades. Tensions have been further compounded by geopolitical worries, including ongoing trade tensions with China and deteriorating Chinese/US relations; Italy’s budget chaos and fears of a recession; uncertainty regarding the upcoming US congressional elections; and Brazil’s election of Jair Bolsonaro, joining the growing ranks of populists across the world.

The U.S. economy is still on a roll and this is reflected by the outperformance of U.S. equities versus foreign stock markets. More broadly, payrolls are increasing, wages are growing at the fastest rate since 2009, and unemployment is at a 49 year low. Consumer spending is doing well and should get a boost from falling oil prices while global investors continue to be attracted by America’s low tax rate, economic strength, corporate profit growth, and ongoing efforts to achieve less regulation.

There are undoubtedly countless factors that could go wrong with the equity market. With that in mind, much could still go right. Earnings growth rates may be peaking, but earnings are still strong; outcomes in the US midterm elections will be known November 6th, removing the angst over potential outcomes; and the world could be pleasantly surprised following a meeting between Presidents Trump and Xi at the upcoming G-20 summit, easing concerns over escalating challenges between two of the world’s superpowers. With no compass to turn to, we continue to orient ourselves by looking at valuations, which for global stocks look to be at attractive levels not seen for over two years.

One specific investment dynamic I would like to highlight is in regards to the music industry, which are changing fast with Sony continuing to strategically position itself to the benefit of shareholders.  After gaining European Commission approval in late October, Sony will acquire EMI Music Publishing in a $2.3 billion deal without conditions. The EMI acquisition will make Sony the global industry leader with a market share of about 26 percent. Universal Music Group and Warner Music Group are the major competitors in an industry that has now been revitalized by digital streaming services. As a copyright manager, Sony can earn revenues from direct deals with Spottily, Apple Music, Google Play, SoundCloud and YouTube. At the end of October, returning to the creative roots of its original Sony Walkman TPS-L2 in 1979 and as a logical extension of the music business, Sony audio announced that it aimed to regain its leadership position in headphones.

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.
 

 

Speaking of Investments, Which Afores Stand Out?

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En materia de inversiones, ¿en qué son buenas las Afores?
CC-BY-SA-2.0, FlickrPhoto: Lindsey Turner. Speaking of Investments, Which Afores Stand Out?

To be the best Afore in terms of yields, they have to be good in several asset classes and that allows them to diversify the portfolios. The 4 most profitable Afores for the period 2012-2018 in order of importance are: Profuturo, Coppel, Sura and Citibanamex.

The 10 Afores that exist in Mexico, manage 180 billion dollars that represent 15% of Mexico’s GDP.

The 4 most profitable Afores are characterized by having between 8 and 9 asset classes in which they stand out from a total of 19 assets in which they invest in accordance with CONSAR (page 4).

Afore Profuturo that presents the best weighted performance of its Siefores had 7.60% between December 2012 and July 2018. It stood out for its performance attribution in foreign equity; mexican TIP´s (Udibonos); corporates; mexican treasurye bills (Cetes); foreign debt; Brems and Bondes D; derivatives and other underlying assets, as well as amortization and trading. The specialization that Afore Profuturo has in these asset classes allows it to differentiate itself and stand out among the 10 Afores that exist today. It is important to mention that these asset classes generate value for their portfolios in different weightings as can be seen in the following table:

Enlarge

Afore Coppel is in the second position with a yield of 7.19%, highlighting in its performance attribution in: foreign equity; mexican TIP´s (Udibonos); corporate bonds; local equity; repo; securitized; Brems and Bondes D; derivatives and other underlying assets, as well as amortization and trading.

CONSAR identifies 19 asset classes in its performance attribution report that in order of importance for its contribution to performance are:

  1. Foreign equity (5 Afores stand out for their results in this asset class)
  2. Mexican TIP´s, Udibonos (4)
  3. Corporates (5)
  4. M Bonos (5)
  5. Local equity (4)
  6. Mandates (2)
  7. Mexican treasury bill, Cetes (4)
  8. Structured (5)
  9. UMS (2)
  10. Repo (7)
  11. Securitized (3)
  12. Foreign debt (3)
  13. Brems and Bondes D (4)
  14. Bondes 182 y BPAs (2)
  15. Commodities (1)
  16. IPAB (3)
  17. Mexican REITS, fibras (1)
  18. Derivates and others underlying (2)
  19. Amortization and trading (8)

These 19 asset classes, the first 4 asset classes account for 85% of the performance of the system, however it is not enough to be good at these asset classes to be the best in returns.

The asset with the highest profitability has been the foreign equity (36% of the weighted yield) which has a limit of 20%. The following three assets are: Mexican TIP´s (Udibonos); corporates and M bonds that each contributed between 16 and 17% to average yield of all the Afore.

It is interesting to note the case of Afore PensiónISSSTE who is good in 7 asset classes and is in 5th place in terms of returns, so seeking to improve their results in one or two more asset classes would help improve their results. In a similar situation is Afore Azteca who is good in 5 asset classes and is in 6th place in yields.

Afore Inbursa is good in 7 asset classes but it is not enough to be placed in the first places since the asset classes in which it is good are not those that provide the highest returns.

The investment teams of the Afores should be strengthened and sophisticated to improve their specialization in the different asset classes to maintain and attract affiliated workers.

Column by Arturo Hanono

Adapting To Markets That Change At The Speed Of Moore’s Law

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Adaptarse a mercados que cambian a la velocidad de la Ley de Moore...
Wikimedia CommonsFoto: Pxhere CC0. Adapting To Markets That Change At The Speed Of Moore’s Law

Written by Rick Rieder, BlackRock Chief Investment Officer of Global Fixed Income and Portfolio Manager of the BGF Fixed Income Global Opportunities Fund

Published September 26, 2018

Rieder and Brownback argue that today investors are confronted by massive shifts in the nature of the economy, alongside cyclical and policy uncertainties; making sense of it all is critically important.

Moore’s Law, which states that computer processing speeds should double roughly every two years, proved to be true for a generation and helped to catalyze historical, technological, and social change, as well as remarkable productivity and economic growth. Today, however, new processing-intensive operations have challenged the law’s durability. Fortunately, the revolutionary emergence of parallel-processing chips has created a vast new dimension of computing capability – essentially computer chips that can now multi-task. Thus, simultaneous processing of massive and differentiated data inputs is possible, which has colossally accelerated the evolution of numerous cutting-edge innovations, such as artificial intelligence and autonomous driving, to name but a couple of the higher-profile examples. Similarly, successful investing today requires an ability to look past simple hyperbolic headlines and concurrently process and prioritize numerous thematic influences, many of which are historically unprecedented and are likely underappreciated by conventional wisdom.

From manufacturing to services; Tangible to intangible

High atop our thematic list is the evolving dominance of the “intangible economy” that has radically altered global consumption and investment behaviors, and which is fascinatingly depicted in the recent work by Jonathan Haskel and Stian Westlake, Capitalism Without Capital: The Rise of the Intangible Economy(Princeton, 2017). Ubiquitous human connectivity has dramatically elevated the relevance of digital intangible assets (data, applications, brands, etc.) and given rise to a frenzied corporate focus on their aggregation and monetization. In turn, this is engendering massive amounts of research and development spending, and investment in intangible assets, like social media platforms, apps, etc. that cater to consumers and in many cases hold transformational impacts on the global economy. At the same time, tangible asset investment has long been in decline (see graph).
 

 

Ampliar

Attempting to value the “capital stock” of digital intangible assets is an imprecise endeavor because the specific pecuniary impacts are difficult to quantify. Consumers are just beginning to understand that data created from their use of intangible products has realizable intrinsic value. For companies, the value of intangible assets are only reflected on balance sheets via acquisitions, or by backing them out from market capitalizations. But the overall societal benefits of proliferating intangible assets are unambiguous. Many corporations now generate enormous cash flows with a stock of ever fewer physically tangible assets. Systemic inventory management has become highly efficient, which reduces the amplitude of the macro economic cycle. Moreover, pervasive connectivity fosters intense price competition that places a secular downward pressure on global inflation rates, a broad and vital positive for the household sector.

Inflation, The Fed and the U.S. Dollar

Another theme worth monitoring is the muddled cyclical inflation outlook and possible policy responses. Specifically, weighty components to the Consumer Price Index, such as energy and shelter, face headwinds associated with steep base effects. Conversely, widespread tariffs would produce an obvious cyclical inflationary shock, just as many industries already face onerous capacity constraints that risk evolving into cost-push type price increases. In total, while markets are fearful of accelerating inflation, we think the Federal Reserve will look through the cyclical noise in deference to longer-term secular constraints.

Instead, we think policy makers will rightly focus on rate hike ramifications for real-economy activity while seeking a nebulous policy neutrality. With solid U.S. growth momentum, the risk of a tightening-induced recession is low at this point, but collateral damage from excessive tightening is very possible. Already, some debt-financed sectors like housing are showing nascent signs of diminished activity. Moreover, the prominent loan market will become exposed to rates that rise above the preset floors embedded into most outstanding loans. Finally, as the U.S. economy becomes more dominated by rate-insensitive, intangible-heavy businesses, extreme Fed rate adjustments away from neutral (up or down) will unfairly penalize very specific economic constituents, like savers and homeowners.

An underappreciated corollary to persistent Fed tightening is U.S. dollar strength (USD), especially when such hawkishness runs counter to the policy stance of other developed market (DM) central banks, as is the case today. Generally speaking, a stronger USD can disrupt the global financial system by tightening USD funding and reflexively lowering non-U.S. economic growth. And, when global liquidity growth slows sharply, as it has this year, U.S. dollar strength exacerbates the onerous consequences already accruing to liquidity-dependent global borrowers. That phenomenon has been visibly evident during 2018, with rolling emerging market (EM) crises posing a widening risk of broader contagion.

Asset Allocation amid growing uncertainty

Divergent financial market influences are equally complex. First, investor conviction has plummeted, severely diminishing market liquidity just as persistent volatility short selling is driving DM implied volatility to new lows. Combined, those two factors represent a systemic vulnerability with potential for forced unwinds into precariously thinly-traded markets. Simultaneously, credit spreads reside at cyclical tights, reflecting robust cash flow-driven leverage metrics. But the emergence of intangible assets means any cyclical decline in systemic cash flows can dent credit metrics rather faster than historical experience, since there are fewer tangible assets to serve as a collateral cushion. Another evolving dynamic is the efficacy of duration as a reliable risk hedge. While historically dependable, hedging with duration has been a counterproductive tool so far this year, but we think that the resumption of disinflationary forces and a full market pricing of near-term rate hikes suggest that risk parity, via short- and medium-dated U.S. Treasuries can be useful again for the remainder of 2018.

In sum, we find that while the range of potential forward scenarios has widened this quarter, the likelihood of a negative outcome has risen meaningfully. Accordingly, we are exploiting highly attractive short-dated fixed-income assets for carry and convex duration, specifically U.S. Treasuries, securitized assets, investment-grade credit, and DM sovereigns swapped to U.S. dollars. We’re staying exposed to equities though cheap upside gamma. Moreover, given the carnage witnessed in recent months in EM debt markets, we’re also layering in hard-currency expressions, and remain long the U.S. dollar as a systemic hedge. Investors today must understand the massive long-term changes taking place in the economy, alongside the cyclical economic fluctuations within them. They must also contend with an increasingly opaque monetary policy path for the year ahead, so we think maintaining a fair degree of caution makes sense, and it positions one well to take advantage of future opportunities.

Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Global Fixed Income and Portfolio Manager of the BGF Fixed Income Global Opportunities Fund.

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