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Tariffs, Treasuries, Taxes and Technology, the Four Ts Shaping the Second Half of 2018

Recent M&A News: As background, Akorn (AKRX-NASDAQ) agreed to be acquired by Fresenius SE & Co (FRE GY-Munich) for $34 cash per share in April 2017, valuing the deal at approximately $5 billion. Akorn competes in the $90 billion U.S. generic drug market as a developer and manufacturer of generic and branded prescription pharmaceuticals with a focus on injectables. On February 26, 2018, Fresenius announced that it was investigating Akorn’s alleged breaches of FDA data integrity requirements related to product development. Later, on April 23, 2018, Fresenius attempted to terminate the acquisition on the basis that Akorn had failed to fulfill several closing conditions, including a material breach of FDA data integrity requirements. Akorn responded by filing suit in Delaware Court seeking Specific Performance to enforce the merger agreement.

Akorn Inc. and Fresenius SE & Co. met in Delaware Court, from July 9-13, capping off a long and tumultuous back-and-forth between the two companies as Fresenius has attempted to terminate its acquisition of Akorn. A decision is expected to be handed down by Delaware Chancery Court Judge Travis Lester in the weeks following August 23rd.

In summary, Fresenius claims that Akorn did not operate in the ordinary course of business during the pendency of the merger, Akorn breached the Representations and Warranties as stated in the DMA, Akorn denied Fresenius access to certain information and Akorn suffered an MAE (Material Adverse Effect). While many believe Fresenius likely did not meet the historically high bar of proving an MAE or breach of reps and warranties, they were able to instill some doubt that Akorn operated in the ordinary course of business in the period after the DMA was signed. On the other hand, it has been said that Fresenius’s actions stemmed from buyer’s remorse given Akorn’s recent struggles due to direct competition to key products, supply disruptions, and pricing pressure.

While we still believe Akorn has slightly better odds than Fresenius in receiving a favorable court ruling, we will continue to monitor the situation due to the large potential downside in Akorn’s stock and the difficulty in handicapping how the judge will assess the ordinary course claim given limited precedent.

The Aftermath of a Major Deal Break:

As background, NXP agreed to be acquired by Qualcomm for $110 cash per share in October 2016. Under pressure from activists, the deal price was raised to $127.50 in February 2018.

It was announced last week that Qualcomm will no longer pursue its offer to acquire NXP Semiconductors as the deadline for the deal passed without receiving antitrust approval from China’s State Administration for Market Regulation (“SAMR”), which was the last regulatory approval needed to complete the transaction. Qualcomm reported earnings and subsequently announced a $30 billion share buyback program in the absence of receiving approval from SAMR. Ultimately, it is our view that the merger became a victim of the U.S.-China trade war.

Most investors owned NXP because like us they saw the deal as both strategically and financially compelling for Qualcomm. It would have diversified Qualcomm’s revenue base and been strongly accretive to EPS. While many did not view antitrust as a risk, we underestimated the impact that Sino-U.S. trade relations ultimately had on the fate of the deal.

With NXP now trading in the low $90s, many arbs and event managers have exited the position. There will be pressure on the stock, as most hedge funds may sell their positions, but there are several positives that may lend support to NXP going forward. Firstly, they will receive a $2 billion termination fee which translates to about $5.80/share. Secondly, management held a conference and their general tone was upbeat. The company also announced a $5 billion buyback, approximately 15% of the shares outstanding. Post buyback, NXP will have leverage below 1x EBITDA, less than it has historically had. NXP now trades at trough multiples, below 10x EBITDA, and derives over 40% of sales from the automotive segment, one of the fastest growing segments in the semiconductor space given the increase in electronic contents and shift toward hybrid and electric vehicles. According to Bloomberg consensus 2018 price targets for the stock range between $100-110 currently, though most of the comps are trading at 9-13x EBITDA multiple, we expect the stock to continue to trade lower post deal break, especially as investors unwind the position.

The Markets and the Economy in the Second Half of the Year:

Mario Gabelli who leads our firm recently gave GAMCO’s views on the economy and markets for the balance of the year. He believes the landscape will be shaped by four ”T’s”:

The first is Tariffs. Global GDP is $87 trillion with the U.S just over 23%, the EU about 22%, China 16% and Japan 6%. The U.S. has $20 trillion of GDP and a trade deficit of about $500 billion, including $350 billion with China. That means we are knocking 2.5% off our GDP and delivering money to China. The tariff spat is creating cost inflation at the industrial companies we own, but it is also creating investment opportunities among U.S. companies that serve the domestic market.

The second T relates to the U.S. 10-year Treasury note. The yield was 2.44%-2.73% in January, rose to 3.11% and then fell back to 2.86%. Is the market’s current multiple of Ebitda (earnings before interest, taxes, depreciation, and amortization) sustainable? We don’t think so and expect inflation to pick up sending the 10-year yield back up over 3% by year end and higher next year.

Next are Taxes. The U.S. moved to a territorial tax system from a global system for corporations, which is good. A 21% corporate tax is a magnet for business to locate here. The write-off of capital expenditures drives new demand.

The fourth T is Technology. It is attracting a lot of attention in the stock market, and will continue to do so. The tariff situation is a surprise, but it does not bother us that much. Some of it is good since it creates volatility — the ‘old normal’ in markets. That allows investors to buy the value stocks at lower prices, and makes you look less dumb for not playing the momentum stock game.

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.

A Factor View on FAANGs

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Una visión factorial de los FAANGs — Courtesy photo. A Factor View on FAANGs

Earnings seasons can be volatile. Stock traders love it as an opportunity to position for an earnings beat. And when companies report an unexpectedly terrible miss, it can leave many investors holding the bag. This is what happened to an unsuspecting market on Wednesday when Facebook unexpectedly reported an earnings miss, and lowered guidance. The stock plunged nearly 19% on the day, and dragged growth fund managers disproportionately down with it (see chart below for the Facebook and total Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL) exposure).

Ampliar

Facebook is a prominent growth stock, widely held across active managers. Many investors turn to the growth category of the style box to help harness market trends, participate in positive investor sentiment, and seek financially stronger companies…those worth paying more for. A factor lens can help determine which stocks are worthy of a higher premium.

Momentum strategies track price trends, a measure of investor sentiment. Many breakout stocks across a variety of industries have earned exceptional returns over the last 6 to 12 months–the time frame generally employed by momentum strategies like the iShares Edge MSCI USA Momentum ETF (MTUM). Investors have seemingly been more skeptical of Facebook’s forward-looking prospects post privacy scandal, and while the stock earned positive returns in the first half of the year it lagged many of the truly breakout names that dominated market returns in 2018. As a result, MTUM[2] has no exposure to the stock.

For investors looking for exposure based on financial strength, or quality, factor strategies may screen on popular metrics like Return on Equity (ROE), Earnings Consistency, and leverage. Once again, even though it has low amounts of debt, Facebook doesn’t hit the mark relative to its peers in terms of consistency of earnings and ROE, and the iShares Edge MSCI USA Quality ETF (QUAL) has no holdings in FB as a result.
Factor investing takes a view towards the long-game in investing.

Momentum price trends play out over months, not days or weeks. And the strength of a company’s balance sheet is proven out over years, not one earnings report. Nevertheless, earnings season provides an opportunity for investors to take stock. It provides another data point around the consistency or inconsistency of a company’s ability to deliver earnings to its shareholders. It provides another look at investor sentiment in a stock, and a company’s forward-looking prospects. A factor lens can help to cut through the noise to find those stocks deserving of your confidence.

For a complete list of holdings for the iShares Edge MSCI USA Momentum Factor ETF click here.

For a complete list of holdings for the iShares Edge MSCI USA Quality Factor ETF click here.

Build on insight by BlackRock, written by Martin Small, Head of U.S. iShares.

The Evolution Of Value Investing

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La evolución de la inversión value — Courtesy photo. The Evolution Of Value Investing

The theory behind the value investing style is very straightforward. You buy stocks that are undervalued and then hold them until the market recognizes the inherent value and bids the share higher. Many of the most famous investors of all-time are known for their adherence to the value investing style. This group includes the likes of Benjamin Graham, John Templeton, Bill Miller, and of course, Warren Buffett. An extra twist to this method, as practiced by famed value investor Mario Gabelli, is to buy value stocks that have a catalyst. Gabelli and his team of analysts look for undervalued companies that have an upcoming potential event that will get the market to notice them.

Historically, value has outperformed growth, vindicating the chosen investment style of the aforementioned titans of finance. However, the last 11 years have been quite a different story as growth has far outpaced value.

What are the reasons for value’s long streak of underperformance?

Well, if we look back at the last decade, we can start with the Great Recession and the Federal Reserve’s actions during the recovery. First, the Fed lowered rates to near zero which effectively neutered one of the tenants of value investing: choose companies with a strong balance sheet. With companies able to raise debt at historically low rates, those that chose not to lever their balance sheets were penalized by investors. Companies that did lever up with cheap debt were able to invest in growth opportunities, both through organic expansion and acquisitions. The same thing can be said for investing in companies with a solid cash flow profile. Historically, value investors flocked to companies with a steady stream of cash flows, but again this attribute became diminished in the eyes of the market.

The second problem was the Fed’s quantitative easing (i.e. flooding the market with cash), which caused investors to be much less discerning with their money. During the last decade, a lot of money has been chasing a finite number of investments, causing investors to stop worrying over valuation. If you don’t believe me, take a look at the valuation of a high flyer like Tesla or Netflix.

So maybe the problem is we’ve had a really long interest rate cycle?

Possibly, and both of the aforementioned problems are winding down as the Fed is raising rates and is no longer growing its balance sheet. Let’s not forget to mention that since 1928, value has outperformed growth every time rates have risen.

Related to the extended interest rate cycle is that financials has been the worst performing sector over the last decade, and unfortunately for value investors it is the sector with the largest weighting in value indices. Look at the top holdings of any large cap value fund and you will see some combination of JP Morgan, Wells Fargo, Citibank, and Bank of America. The third largest sector in most value indices is energy, and until recently, it had performed poorly for years. Financials and energy combine for a stunning 43% of the Russell 1000 Value Index. Technology, on the other hand, only accounts for 9% of the value index, but it is a third of the growth index.

Has value investing relinquished its throne or do we perhaps need to re-evaluate how we define it?

In 1992, Nobel Laureate Eugene Fama, who is commonly known as the ‘father of modern finance,’ and fellow professor Kenneth French created the Three-Factor Model which predicts that value stocks outperform growth stocks.

One of the key ratios used by Fama and French to discriminate between value and growth stocks is the Price-to-Book ratio (P/B). In this ratio, ‘price’ is simply the market value of the company, while ‘book’ is the assets minus liabilities. A low P/B ratio has historically been treated as an indicator of an undervalued company, but is that still true? The methodology used to select the constituents of the Russell 1000 Value Index is heavily weighted towards low P/B ratios. This is why the index is stuffed with financial companies and why it also overweighs old economy industrial companies that own many physical assets. Conversely, technology companies mostly get ignored, as they typically do not have many assets. A great example of this problem is Apple. The maker of the iPhone appears to be a value stock based on profitability, cash flow and balance sheet, among other metrics, but because of its relatively high P/B, it falls into the growth index. Warren Buffett would seem to agree that Apple is a value stock since he recently made it the largest holding at Berkshire Hathaway.

Perhaps value hasn’t really underperformed as badly as we had thought. Maybe we need to evolve our understanding of value investing just as Warren Buffett has.

Column by Charles Castillo, Senior Portfolio Manager at Beta Capital Wealth Management, Crèdit Andorrà Financial Group Research.

The Real Story About Growth in China

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China’s economy is undergoing a tricky transition. Recent economic data out of China have underwhelmed, while escalating trade tensions with the U.S. and elevated domestic debt levels have sparked concerns. Yet we see China’s near-term outlook as resilient.

We share our take in our new Global macro outlook China: Quality over quantity. The gist: The tit-for-tat rhetoric on U.S.-China trade may have a real economic impact, yet we see activity holding up in the short-run, with consumption accounting for an ever-greater share of gross domestic product (GDP).

Chinese economic activity

The moderation in Chinese economic activity in the first half of 2018 has been gradual. First-quarter GDP growth beat expectations, due in part to solid external demand. Our BlackRock China GPS points to activity holding steady going forward. Big data signals developed by BlackRock’s Systematic Active Equity teams are an important component of the China Growth GPS. They include earnings guidance from Chinese companies and references to China in global earnings calls. These signals paint a rosier picture about growth than what recent data suggest. This is illustrated in the Steady slowdown chart below by the difference between the now-cast (gray) and the GPS (green), which incorporates the big data signal.

Enlarge

This outlook could be undermined if trade tensions with the U.S. morph into a full-blown trade war. Our base case sees that scenario being averted, though we do anticipate an extended period of tensions ahead as the tit-for-tat rhetoric heats up between the U.S. and China.

Growth in China is expected to slow only slightly to 6.6% in 2018 from 6.8% last year, according to International Monetary Fund (IMF) forecasts as of April 2018. This comes against a backdrop of Beijing’s progress in implementing reforms, financial de-risking and slower credit growth. A moderate economic slowdown is welcome, in our view, as China shifts to a more sustainable pace of growth less reliant on credit.

An important transition is taking place

Private consumption is making up an ever-greater share of activity relative to investment, as the focus of China’s government moves to quality (sustainability of growth) from quantity (GDP targets). Greater reliance on consumption and a move to quality of growth from quantity should put the world’s second largest economy on a more sustainable path.

Sectors dependent on consumer spending are expected to take the reins of the economy from the long dominant old economy state-owned enterprises (SOEs). Government policy in China could further tilt the economy toward consumption. Consumption is about 40% of GDP, according to data from the World Bank, compared with more than 60% of GDP across developed economies.

China does face constraints in making the shift to a consumption-driven economy. Achieving a smooth handoff to households and consumers is not easy after decades of investment-led growth. Demographics also stack up against China. An aging population lacks a sufficient safety net, explaining China’s high savings rate. Improved productivity, higher incomes and government policies that strengthen social security must support the transition to a more consumer-based economy.

Finally, China’s financial vulnerabilities–including the buildup of leverage in the country’s large and opaque financial system–represent the biggest risks over the medium term. Unresolved, these could lead to a large shock. Yet government steps to curb credit growth are underway. The creation of the Financial Stability and Development Committee and work towards a unified regulatory framework have put authorities in a better position to address financial stability risks.

Bottom line

China’s near-term outlook appears solid, but rising U.S.-China trade frictions are raising concerns. Additionally, consumption’s share of the economy needs to increase further if China is to pull off the balancing act of reining in credit, sustaining GDP growth and shifting away from export- led and investment-led growth. The trend on these fronts is good–yet much more progress is needed.

Build on Insight, by BlackRock, written by Jean Boivin and Tara Rice

Despite Wall Street’s ‘Old Normal’, U.S. Equities Continue in A Global Sweet Spot

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The U.S. stock market closed higher for June and the second quarter. Rising volatility, part of what we call Wall Street’s ‘Old Normal’, reflected uncertainty over the eventual outcome of the aggressive trade actions taken by the Trump administration aimed at lowering the protectionist barriers of other countries. A relatively strong economy continues to position U.S. equities in the global sweet spot versus non-US stocks. The Fed is signaling higher rates ahead and this is keeping the dollar strong, emerging markets weak, and inflation in focus. Migration related political risks in Germany are stress testing European unity.

Second quarter earnings reports will start soon and are expected to rise in line with first quarter gains and to fuel deals, capex, dividends and share buybacks. Allocation of capital and financial engineering driven by strategic decisions made by company boards and managements continues to be an area of focus and opportunity for short and long term catalysts we have identified in the businesses we have researched as sound long term investments.

Global merger and acquisition activity set a record high in the first half of 2018 as the value of announced deals spiked to a new high of $2.5 trillion year to date, an increase of 61% compared to the first half of 2017. Cross-border deal making had its best quarter since 2007, totaling $1 trillion in the first half, or 41% of total M&A. Media company deals featuring Twenty-First Century Fox led the charge across the global headlines while deal making in the Energy and Power sector reached an all-time high in the first half of 2018.

One positive development during the second quarter for M&A occurred on June 12th when U.S. District Court Judge Richard Leon issued his decision which denied the Department of Justice’s request to block AT&T’s acquisition of Time Warner. Judge Leon put no conditions on the deal and said the government failed to make its case the merger would lead to higher prices for the consumer. The DOJ’s chose not to seek a stay preventing the merger from closing on appeal, and the deal was subsequently completed on June 15. After Time Warner withstood the government challenge, spreads on other outstanding vertical mergers firmed in response, including CVS’s acquisition of Aetna (AET-NYSE) for $70 billion and Cigna’s acquisition of Express Scripts (ESRX-NASDAQ) for $65 billion.

Research and investment areas that are of high interest for us include the U.S. Pet Population, Live Entertainment, Defense, and Equipment Rental. We continue to analyze major demographic trends in the growing world population. U.S. millennial and baby boomer preferences are of high interest. However, Generation Z is comprised of 1.9 billion people born between 1995 and 2009 and is a larger group than the Millennials born between 1980 and 1994. By 2020, Gen Z consumers are projected by Booz Co to represent about forty percent of the markets in the U.S., Europe, China, India, Russia and Brazil. There will be lots of fundamental investment dynamics ahead and rising deal activity.

In conclusion, the U.S. economy remains upbeat and as always, we are watching world economic and political developments as they may impact financial markets and opportunities.

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.

Spring Planting: Bloom Off The Rose?

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The economic conditions that have supported markets over the last year are still flourishing, but this year has seen a variety of factors weighing on investor sentiment. Concerns around interest rate hikes, stock valuations (despite strong earnings), as well as potential trade disruptions and new tech regulations, all have led to higher volatility in 2018. Still, opportunities exist in this market for those with focus and discipline.

Ease on down the road

The Federal Reserve (Fed) is continuing on its path of interest rate hikes this year. Still, although financial conditions have moderately tightened, they remain relatively easy, at least by historical standards. In this environment, the financial sector is a particularly interesting one to monitor. The prospects could brighten if the yield curve, which has flattened since the start of the year, steepens. In that case, the best offense is a good defense. Volatility has climbed higher, but in an era of rising rates what constitutes an effective portfolio hedge is changing. Rather than high-dividend “bond proxies,” which could do more harm than good in an era of higher rates and inflation in the U.S., we would advocate an allocation to quality companies.

Against a backdrop of moderately tighter financial conditions—but still relatively easy by historical standards—we continue to prefer growthgeared sectors, namely technology and financial companies, as well as the momentum factor. In order to achieve this, an investor may want to consider using ETFs such as the iShares U.S. Financial Services ETF (IYG), the iShares North American Tech ETF (IGM) and/or the iShares Edge MSCI USA Momentum Factor ETF (MTUM).

Given the current economic backdrop, we also continue to favor the momentum factor, that could be appreciated by the iShares Edge MSCI USA Momentum Factor ETF (MTUM). However, investors may want to consider an allocation to quality as well. Consider the iShares Edge MSCI USA Quality Factor ETF (QUAL).

Emerging markets: China A-shares inclusion update

This June, an important market event occurs: MSCI will begin including China’s Shanghai-traded A-shares in its key indexes, amplifying the importance of China in key benchmarks. Economic and reform prospects have us constructive on Chinese equities, but the MSCI event has important implications for investors and the way they think about emerging markets.

The inclusion of China A-shares occurs at a time when we are constructive on Chinese equities. We see U.S. protectionist threats as largely negotiating tactics, while Chinese reforms, a stable growth environment and a solid earnings outlook may support equities. That is reflected in ETFs such as the iShares MSCI China ETF (MCHI), the iShares MSCI China A ETF (CNYA), the iShares MSCI China LargeCap ETF (FXI) and/or the iShares MSCI China SmallCap ETF (ECNS).

Opportunities within investment grade bonds

Although we are underweight fixed income, and neutral investment grade bonds within the asset class, spreads have widened and current levels present reasonable value from an overall portfolio diversification perspective. We would consider opportunities in floating rate notes, shorter-maturity fixed rate exposure or interest rate-hedged positions.

It’s a difficult environment for bonds, but we believe investment grade credit may now offer reasonable value in the overall context of portfolio diversification. A way to achieve it would be using ETFs like the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the iShares 1-3 Year Credit Bond ETF (CSJ), the iShares Floating Rate Bond ETF (FLOT), and/or the iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD.

The commodity rally

Commodities are off to a strong start to the year, outperforming the S&P 500 Index by nearly 10%. At this point, energy equities may have more room to run than the commodities themselves in the short term, but investors looking to diversify risk or protect against inflation might consider exposure to commodities.

Historically, commodities have offered some protection against inflation and provided diversification benefits. If looking to include or increase commodity exposure, one might consider the iShares U.S. Energy ETF (IYE).

More information can be found in the iShares by BlackRock’s Spring commentary.

Build on Insight, by BlackRock, written by Chris Dhanraj

Mexico is Under Pressure to Raise Rates as the Mexican Peso Loses its Shine

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On June 21 the Board of Governors of the Central Bank of Mexico will meet to decide the fate of the policy rate, we now expect them to hike +25 bps. In our view, the balance of risks to inflation deteriorated from the last meeting, pressuring Banxico to increase the policy rate to 7.75%, as MXN has been losing its shine. Last Friday we learned from the CME that the long peso non-commercial positions change to negative after peaking this year on April at 18 pesos per dollar (see Chart 1).

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The right policy tool is a hike in rates compared to an outright intervention in the FX market. We judged that the current level of the MXN at 20.7 is fully explained by the general depreciation of emerging market currencies, and the increase in the size of the deviation between MXN and its peers relates to the recent rise in NAFTA and trade tariffs jitters (see Chart 2). In this context, an FX intervention will only be warranted if MXN level was out of context with current risks due to a speculative attack which is not the case.

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The recent rout in emerging market currencies has proven to be more aggressive (and less temporary than previously thought) with those currencies perceived as their Central Banks being behind the curve. Standing out the Turkish Lira and the Argentine Peso, where their Central Banks were forced to hike since May to date 900 and 975 bps respectively. Also, India, Indonesia, and Philippines have hiked 25, 50 and 25 bps respectively. The market could well be starting to re-price the beginning of the year scenario of balance global growth benefiting emerging markets, to one where only the US growth is standing out. If this is the case, Mexico’s recent weak industrial production performance puts us at a disadvantage.

Even though we have argued that if something Banxico has been ahead of the curve, they will not want to miss an opportunity like this one to reaffirm their position. This is specially true when other risks particular to Mexico have increased, including the likelihood of the next administration negotiating NAFTA, the recently imposed tariffs on Steel and Aluminum, and the threat of the trade war escalating with direct consequences to inflation.

We believe Banxico will not miss this opportunity to reaffirm its ahead of the curve stance when the market is already pricing in the TIIE curve with more than 90% probability a 25 bps move in June. Also, the market is pricing +38 bps by August. With a +25 bps hike in June, Banxico will put itself in a better position to cover the new risks and the ones they have been more worried about related to a post-electoral dispute in case of a close outcome.

Column by Finamex, written by Guillermo Aboumrad, Chief Economist

During May, Worldwide Deal Making Values Spiked to a New Record

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The U.S. stock market rallied in May with the best return since January and the best for the month of May since 2009. Political uncertainties in Europe are rising as a Eurosceptic government is forming in Italy and a newly elected government is taking over in Spain. The Atlanta Federal Reserve bumped its second quarter U.S. GDP estimate to 4.7 percent at the end of the month, up from 4.0 percent previously. The robust economy is tightening the job market and wages and inflation are center stage.

The Trump Administration has levied tariffs on aluminium and steel imports from Europe, Canada and Mexico and is moving ahead with protectionist actions on China. These moves are based on the idea that trade wars can be won since foreign economies depend on U.S. buyers. President Trump’s unpredictable communication and decision-making style has added a new variable to data gathering and investment analysis. A new agenda item in process now includes the possibility of a multi-front trade war. Retaliatory moves may be on the way.

Corporate earnings posted strong first-quarter gains in aggregate but so far this has not been reflected in proportionally higher stock prices. A determined U.S. Federal Reserve remains on track to normalize interest rates with continued policy rate hikes and a shrinking balance sheet during 2018 and through 2019.

Merger and acquisition activity moved sharply higher on ‘Merger Monday’ May 21, as announced deals spiked worldwide deal making values to a new record above $2 trillion year to date. Previous records for the same time frames were set in 2007 and 2000 at $1.8 and $1.5 trillion respectively. The spreads on deals subject to Chinese review firmed in May, including Cavium (CAVM -NASDAQ), which is being acquired by Marvell Technology; Rockwell Collins (COL-NYSE), which is being acquired by United Technologies; and, Qualcomm’s purchase of NXP Semiconductor (NXPI-NASDAQ). In addition:

On May 15, Microchip Technology announced it received antitrust approval in China for its acquisition of Microsemi Corp. (MSCC-NASDAQ), a piece of good news given the recent slowdown of Chinese reviews. The deal was subsequently completed on May 29.
Monsanto (MON-NYSE) shares traded higher after Bayer reached an agreement with the U.S. Department of Justice (DOJ) to divest assets to BASF that satisfied the DOJ’s competitive concerns. In May 2016, Monsanto agreed to be acquired by Bayer for $128 cash per share, or about $66 billion. The transaction has recently closed.
Biopharmaceutical developer Avexis (AVXS-NASDAQ) was acquired by Novartis on May 15 for $218 cash per share, or about $8 billion.

May was another active month for M&A with new deals that included:

Shire plc (SHPG -NASDAQ), a biopharmaceutical company focused on treatments for rare diseases, agreed to be acquired by Takeda Pharmaceutical Co. for $30.33 cash and 0.839 shares of Takeda common stock for each share of Shire, or about $80 billion.
Grammercy Property Trust (GPT-NYSE), a REIT focused on managing commercial real estate, agreed to be acquired by Blackstone for $27.50 cash per share, or about $7 billion.
KLX Inc. (KLXI-NASDAQ) announced it would spin off its Energy Services business, and sell its aerospace distribution and services business to Boeing for $63 cash per share. The transactions value KLX at approximately $5 billion.

We remain well positioned to take advantage of the ongoing opportunities we are seeing in 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
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Class R USD – LU1453360825
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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.

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.

Rising Rates Series: The Ups and Downs of Bond Ladders

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Maturity ETFs can make laddering simpler and more diversified. For example, instead of buying a single five-year bond and holding it to maturity, you could build a five-year ladder with bonds that mature each June for the next five years. When one bond matures, you can purchase a new five-year bond with the proceeds (see illustration). The draw for investors is that it provides stable cash flow: each year, you have new money to reinvest from a maturing bond as well as the semi-annual coupon payments from the bonds.

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The ability to manage exposures on a yearly basis can be especially beneficial in a rising rate environment. As interest rates change over the period, each bond in the ladder will have a similar total return as the average yield at the time of purchase. By locking in a yield at the beginning, the ladder helps insulate the bond buyer from price losses if the investor holds to maturity.

As with a lot of things, however, this strategy is simple in theory but more complicated in practice. For many people, managing a portfolio of individual bonds is no picnic.

Small fish in a big sea

The first challenge is selecting the bonds. Should you go only to an issuer that you know? The highest-yielding bond? Or the one with the best credit rating? Researching the credit quality of the issuer requires access to information and the know-how to evaluate relative value between bonds. Even for experienced investors, this can be daunting.

Once you’ve decided to purchase a bond, transaction costs can be high. The average retail investor pays about 0.90% in bid-offer spread on municipal and 0.64% on corporate bonds, according to S&P1. Many bonds have minimum bond sizes to buy and trade. If you don’t have a large amount of money to invest, the ability to diversify and spread credit risk across multiple issuers can be difficult. As a result, you might end up with a concentrated portfolio from just a handful of bond issuers.

Finally, liquidity, or the ability to convert the bond into cash, can be challenging for individual securities. If you want to sell a bond prior to maturity, you’ll need to find another buyer in the over-the-counter bond market, which might take time. And if your bond has a call feature, you could get repaid early if the issuer decides to refinance its debt. In that case, you’re facing reinvestment at lower yields.

Laddering with defined-maturity bond ETFs

Many investors use mutual funds and exchange traded funds (ETFs) to overcome some of these hurdles. Traditional funds usually hold a diversified portfolio of bonds and have a portfolio manager who oversees and manages the fund. The one downside is that because traditional funds don’t have maturity dates, the investor would need to sell a portion of the fund if they wanted to take money out of the strategy.

Defined-maturity bond ETFs, such as iShares iBonds, can help build efficient bond ladders by combining the reinvestment control of individual bonds with the convenience of an ETF. In a single transaction, investors gain access to:

A known maturity: All the bonds mature during the calendar year in the fund’s name. For example, the bonds in the iShares iBonds Dec 2021 Term Corporate ETF (IBDM) mature between January 1st and December 1, 2021. When the last bond matures, the fund returns its final net asset value to shareholders in cash.
Monthly distributions: Defined-maturity bond funds make monthly distributions of income, which can be smoother than the lumpy coupon payments of a bond ladder. Monthly distributions can be variable depending on changes in market yields and fund assets.
Diversification: Each ETF holds hundreds of investment-grade bonds.
Tradability: While individual bonds are traded in the over-the-counter bond market, defined-maturity ETFs can be traded throughout the day on the exchange at a known price.
Low cost: ETFs may be more cost-efficient that buying a portfolio of over-the-counter bonds. For example, iShares municipal and corporate iBonds have management fees of 0.18% and 0.10%, respectively.

Going back to our example of the five-year bond ladder, an investor could purchase just five defined-maturity ETFs and gain exposure to hundreds of underlying bonds with known maturity dates, a monthly income stream—and an overall experience that’s vastly simpler than do-it-yourself.

Build on Insight, by BlackRock written by Karen Schenone, CFA

Investing involves risks, including possible loss of principal.

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.

When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds. Buying and selling shares of iShares Funds will result in brokerage commissions.

There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.

The iShares® iBonds® will terminate in March, September or December of the year in each Fund’s name. An investment in the iShares® iBonds® ETFs (“Funds”) is not guaranteed, and an investor may experience losses, including near or at the termination date. Unlike a direct investment in a bond that has a level coupon payment and a fixed payment at maturity, the Fund(s) will make distributions of income that vary over time. In the final months of each Fund’s operation, as the bonds it holds mature, its portfolio will transition to cash and cash-like instruments. As a result, its yield will tend to move toward prevailing money market rates (or, in the case of the municipal iBonds, tax-exempt money market rates) and may be lower than the yields of the bonds previously held by the Fund and lower than prevailing yields in the bond market.

Following the Fund’s termination date, the Fund will distribute substantially all of its net assets, after deduction of any liabilities, to then-current investors without further notice and will no longer be listed or traded. The Funds’ distributions and liquidation proceeds are not predictable at the time of investment and the Funds do not seek to return any predetermined amount.

The rate of Fund distribution payments may adversely affect the tax characterization of an investor’s returns from an investment in the Fund relative to a direct investment in bonds. If the amount an investor receives as liquidation proceeds upon the Fund’s termination is higher or lower than the investor’s cost basis, the investor may experience a gain or loss for tax purposes.

Investment in the iShares® iBonds® Corporate ETFs is subject to the risks of the other funds and ETFs (underlying funds) in which it invests. The iShares® iBonds® Corporate ETFs will incur acquired fund fees and expenses associated with its investments in the underlying funds and additional fees associated with turnover in the underlying funds that are not included in the acquired fund fees and expenses.

Diversification and asset allocation may not protect against market risk or loss of principal.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

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

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 May 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.

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While Mexican Presidential Candidates Propose Nothing To Amend The Pension System, Fundamental Improvements Are Required

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Los candidatos presidenciales en México no hablan sobre enmiendas al sistema de pensiones. ¿Qué se requiere? — Pixabay CC0 Public DomainSecond Presidential Debate. While Mexican Presidential Candidates Propose Nothing To Amend The Pension System, Fundamental Improvements Are Required

In countries with less sensitive problems because of low pensions, presidential aspirants usually propose improvement measures, general reforms to mitigate disadvantages for former workers, and modifications aimed to avoid poverty for those who are still active. In Mexico, candidates to executive power have not expressed their proposal, if they have it, to rectify the expected retirement conditions of affiliates to the local pension system, SAR.

Insufficient pensions for current workers are expected, even with higher contribution

What do we have to ask to candidates? In some opportunities it has been repeated that with current mandatory contribution (CR) and applying composed profitability, the pretended replacement rate (RR) of workers could be as higher as 26%, clearly exiguous to lead a decent life. If the CR were to be increased now to 14% –a net rate of 13.0% after fees– and the annual weighted average profitability were 4%*, those who began their working life along with the SAR and accumulate uninterrupted contributions and returns in 21 years could consider their pension will be equivalent to around 45.5% of their last salary (or 53% if we assume annual returns of 5% instead of 4%). The 45.5% of RR is the consequence that half of the active life of these affiliates has already gone (so, 0.5% of active life over 26% of expected RR = 13%), and of taking into account that the new quota plus the next profitability would only influence the remaining years of work, provided that they do not go through periods of unemployment (so, 0.5% over RR of 65.0%= 32.5%).

If we start from the basis that the reform to the Chilean system was proposed by the fact that the RR of retirees did not reach the 80% projection of their last salary, this supposed increase in the CR of the SAR would be clearly insufficient for the Mexican workers’ pension to meet the necessary expenses in their retirement. Under these parameters, those who have few time of affiliation could aspire to higher pension tan 45.5%. In its case, the expectation of RR of 65% (through annual returns of 4%) or 80% (through returns of 5%) could only be reached by the new affiliates, those who began to work together with the application of the new CR.

With this simple thought –and the mirror of the Chilean model–, it can be realized that the increase of 115% of the contribution, from 6.5% today, without other complementary measures, would not solve the trouble of those who already have a working path. Assuming that the pension equivalent to 65% of salary, trough returns of 4% it would be taken as adequate by the future affiliates then it is clear that two kind of measures have to be determined; if that were not the case, there would be more problems and more solutions would have to be demanded.

Inquire to candidates in the remainder of the campaign

In the way that it is worrisome the candidates have not spoken, it baffles that those affected, nor the media, have demanded proposals or ideas for amendment. In other countries, a large proportion of voters decide according to pensions.

It would be believed that the man who was minister of Finance (in two six-year terms) would be able to make proposals or outlines of corrective projects; not just because his technical career but also because the influence he had over Comisión Nacional de Ahorro para el Retiro: the head of Finance is member of the Governing Board of the Commission, which in turn is attached to the ministry as a decentralized body. Even with that he has not made a single allusion to SAR.

That does not exempt the other aspirants, that considering they do not have experience in the sector are supported by teams that know the issues and worrying aspects of the country, and could be sensitive to the problem and commit to amend it.

The insufficiency of the RR is one of the concerns, but not the only one, about the pension system. There are other pending. Is exposed because it is the core, which will constitute the pension itself, the amount on which the sustenance will depends since retirement. In the remainder of the campaign, it is desirable that workers, media and academics inquire about it to the candidates.

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* Please see “Aumento en la Contribución del Sistema de Retiro en Chile: Beneficios e Implicaciones”, Fitch Ratings. October 16, 2017.

Column by Arturo Rueda. English version by the author