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Trying To Pick Winners Is Not Enough

Deciding on the most fitting vehicles to implement a strategy is no easy task. The investments we want to own in the portfolio can conflict with the investments we need to own. Human nature creates bias, which leads us to desire investments that have recently performed well, potentially hindering us when the market turns. These biases can also create concentrations that can leave the portfolio woefully off-balance at times, potentially limiting its ability to deliver the return goals we seek.

Investing should be about the windshield—not the rearview mirror. Everything you choose should ultimately be valued by its ability to enhance your portfolio’s potential performance against its benchmark (which should represent your return and risk targets). If it doesn’t raise the level of expected risk-adjusted return—either by enhancing future returns or reducing risk—then it shouldn’t go in your portfolio.

Important questions to ask

When evaluating an investment, investors should ask: (1) How does it align with your overall investment strategy and objectives? (2) What could cause it to gain or lose value, and by how much? and (3) How does it work with the other holdings in your portfolio? Finally, if you decide to include it in the portfolio, (4) How much of it should you own?

Assessing the choices

The selections are vast. Individual stocks may offer terrific upside, and individual bonds can offer permanence and definition, but both security types also bring security-specific risk that can be undiversifiable in a portfolio, and thus, tough to recover from if anything goes wrong. Owning a stock that doubles in price is terrific to share at cocktail parties, but remember that if the stock can go up a lot, it also has the ability to fall a lot. Just ask anyone that owned internet stocks in 2001 or energy stocks in 2015. Big winners can be great to brag about, but big losers can wreak havoc on a portfolio.

Examining mutual funds extends beyond looking up rankings and reading analysts’ reports. Evaluating each fund’s track record is important. However, don’t simply screen for top performers, but rather understand each fund’s performance, and how it was created. How have both the fund and its benchmark performed in a variety of market environments, in terms of both risk and return? What types of markets does the fund do well in (both absolute and relative to its peers/benchmark), and when does it lag?

If you’re considering exchange-traded funds (ETFs), many factors play a role in selection, but cost is usually a big determinant. In addition to fees, you should also consider implicit costs, including your cost of trading, and the ETF’s own rebalancing costs. Whether you seek a targeted or broad market exposure, ensure the ETF you choose provides what you’re looking for, without introducing additional market factors. In addition, examine the ETF’s liquidity and structure. Is it truly an ETF, or is it really structured like a unit investment trust in an ETF wrapper? This can be an inefficient way to track the index you’re seeking to mirror. Is the ETF connected to an index mutual fund? This will potentially cause it to lose some of its tax efficiency. These issues are easily avoided with a little research.

Whether you’re after mutual funds or ETFs, one common question should be, “Is the manager who runs this product any good at it?” Answering this question involves evaluating the manager’s tools, experience, process, and history. Two products could have similar returns over a five-year period. One delivered an amazing return for one of those years, combined with four so-so years, while the other delivered four years of above average performance and one year that was a little below. Which of these two would you rather own in the future?

Asking the right due diligence questions

Researching and choosing from the ever-growing number of options can be time consuming and confusing. A disciplined investment selection process helps a portfolio to potentially capture the returns the market offers, while limiting the decisions that either unintentionally lever bets or reduce diversification—either of which can negatively impact its ability to generate the return goal.

When adding something new to your portfolio, two key thoughts to consider: (1) Does it offer something unique that the portfolio doesn’t currently have, or is it increasing the bet on something I already own? And (2) What do I plan to sell in order to buy it, and what happens when I remove that security from the portfolio? You don’t automatically become better diversified simply because your list of “best ideas” gets longer.

Selecting the right investments is a lot more than choosing what you think will go up the most in the future. It also involves owning a few things that you likely aren’t happy to own—this is where real diversification comes from. At BlackRock, in-depth knowledge on every investment being considered is gleaned by putting each through rigorous analysis. It’s critical to devote the necessary time to this step in the portfolio construction process, or find ways to outsource it to a party capable of conducting the necessary, ongoing research.

Build on Insight, by BlackRock, written by Patrick Nolan, CFA

Investing involves risks, including possible loss of principal.
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 have not been registered with the securities regulators of 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 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.
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 September 2017 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.
©2017 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.
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How Could Individual Investors Outperform Institutional Investors?

| For Beatriz Zúñiga | 0 Comentarios

¿Cómo podrían los inversores individuales superar a los inversores institucionales? — C4_0010_shutterstock_540575218. How Could Individual Investors Outperform Institutional Investors?

Portfolio management is the art and science of making decisions about mixing investment with policy, matching investments to objectives. Within Crèdit Andorrà, the Advisory team is dedicated to portfolio construction and to guiding clients on capital markets.

There are two categories of investors in the financial markets: individual investors and institutional investors. The term institutional investors refers to just what the name implies: large institutions, such as banks, insurance companies, pension funds, and mutual funds.

Institutional investors outperform individual investors

Institutional clients usually use a benchmark to manage their portfolios, meaning that they have to follow defined rules of asset allocation that they cannot derive too much from. Those rules are hard constraints, with a defined level of active exposure (also called tracking error) that they can implement. Those hard constraints oblige them to own assets on which they have negative views, which is highly inefficient. More constraints are usually bad for portfolio management if you are talented, as you cannot completely implement your views on capital markets. As most of the portfolios from individual investors are not benchmarked, their portfolios’ returns should on average outperform the ones from institutional clients. However, we are seeing the opposite as institutional clients outperform individual clients by 1% per year on average. We explore the reasons behind this phenomena and what could be done to reduce this performance gap.

Outperformance is less due to skills differential

One could think that this outperformance mostly comes from skills. Institutional money, which is also called “smart money”, is managed by professionals that not only have a lot of experience in managing money but also dedicate 100% of their time to this activity. On the other hand, individuals usually manage their portfolio when they have the time, mostly during weekends or at night, and they do not always have the technical background to do so.

However, most of the outperformance is not due to the difference in skills, but to basic mistakes coming from individual investors that could be easily corrected.
Thanks to investment behavioural mistakes

For instance, we see patterns of investor behaviour biases that have a negative impact on portfolio returns. Most clients have a home bias, which is the natural tendency for investors to invest in large amounts in domestic markets because they are familiar with them. This results in an unnecessary concentration in assets and less portfolio diversification. In addition, many Latin clients look for assets that provide yields, as they perceive them as being less risky. This is not true, as the demand for this type of assets is high and, therefore, they end up being expensive from a valuation point of view. Finally, individuals have a bias towards loss aversion. Loss aversion refers to people’s tendency to strongly prefer avoiding losses rather than acquiring gains. As a result, investors keep assets in their portfolio with large losses for years even though those assets have very little probability of recovery.

We believe that individual investors could reduce the performance gap with institutional investors by simply focusing on three aspects of portfolio management:

#1 Focus on diversification by holding alternative assets

Everybody knows that diversification is key in portfolio management. But the reality is that few portfolios are well diversified within private banks. Many Latin American clients’ portfolios are only invested in US stocks and emerging market bonds, which is a strategy that has worked very well over the last 3 years. There are benefits to being exposed to direct names to reduce the cost of management fees; however, it is also primordial to use funds to benefit from diversification. Indeed, it is wiser to use funds in the following asset classes: high yield bonds, preferred shares, catastrophic bonds, small caps Equity, and emerging markets equities.

We believe that most portfolios should have an exposure to the alternative assets class. We define alternative assets as those assets that have a low correlation with equity and fixed income.

Those are strategies such as long/short equity, CTAs, Global Macro, Merger Arbitrage, Real Estate and Private Equity, for instance. Adding alternative assets allows portfolios to be more robust during phases of market correction; in other terms, they reduce downside risks.

#2 Focus on the right asset allocation instead of on picking securities

The second advice is to stop spending too much time on picking the right securities. What is important is asset allocation, where most of the portfolio performance will come from. A top down approach should be implemented to determine the right exposure to equity vs. fixed income, at the region level and sector level.

Indeed, what is important is not if you own Facebook instead of Google, but your exposure to technology vs. energy, as technology has been the best performing sector in the US this year and energy the worse one. Stocks within the same sector tend to be highly correlated in average.

A common mistake for individual investors is to do the opposite. They focus on trade ideas applying a bottom-up approach without taking the interconnection amongst all those ideas.

Worse, they usually cumulate all the trading ideas without having specific target returns and stop losses. If the ideas do well, they will sell it -most of the time too early. And if the ideas do not work, they will keep it until they recover their losses. This is a bad idea, as returns are auto correlated (following a negative return, an asset has a higher probability to go down than to go up).

#3 – Do not overreact by taking more risks than you can afford

Following a market correction, some individual investors start to feel nervous and prefer to sell their positions, basically selling at the worse time. This happens because they took more risks than they could afford.

The most important question investors should be able to answer is how much they can lose before they start selling their positions, basically knowing their capacity to lose investments. Once you know that the most you can lose is a 20% for instance, you can manage your risk exposure accordingly.

To manage your risk, you need to rebalance you portfolio on a regular basis. As equity usually tends to outperform fixed income, its weight in the portfolio increases over time. Rebalancing allows a reset of the portfolio to the initial portfolio weight.

Conclusion:

We saw that institutional money tends to be benchmarked, which adds constraints for portfolio management. Individuals, on the other hand, do not have all those constraints. By focusing on diversification, asset allocation, and risk tolerance, they can generate alpha and manage risks efficiently in the long term.

Column by Stephane Prigent, Investment Advisor at Banco Crèdit Andorrà Panamá. Crèdit Andorrà Financial Group Research.

Surviving the Income Drought

| For Fórmate a Fondo | 0 Comentarios

Sobreviviendo en la sequía income — CC-BY-SA-2.0, FlickrPhoto: Marco Klapper. Surviving the Income Drought

Whether you are a private investor, a pension fund, an endowment or an insurer, you can be forgiven for sometimes feeling that the search for income is a lot like looking for a needle in a haystack. It doesn’t have to be that way, but it’s hard to deny the scale of the challenge or the impact of the drought.

As we entered 2017, more than $10 trillion of bonds offered only negative yields, according to the financial services company Tradeweb. The hangover from the financial crisis, approaching a full decade ago now, is clearly still lingering. Global growth remains sluggish, and central banks across the world have stepped in to help prop up economic activity, but the resulting financial repression has made income yield a scarce commodity.

A glance at developed market government finances makes for pretty ugly reading as well. Mounting pension and healthcare liabilities mean that the situation will only get worst. Aging Western populations will conspire to make the asset/liability equation much more challenging to solve. Consequently, governments will continue to need regular sources of funding or “income” to help meet their growing liabilities. At the other end of the spectrum, individuals’ thirst for yield will increase as they are forced to take ever increasing responsibility for securing and managing their own retirement incomes. Companies and institutions don’t escape either – none more so than an insurer who is faced with heightened regulatory capital requirements, at precisely the point where low yields would suggest they should be looking to alternative sources of income.

All this is intended to offer a frank assessment of where we are today and why income, such a key part of investor’s needs, is so elusive.
But not all is doom and gloom. Indeed, today there are more sources of income than ever before. For example, the emerging markets bond universe has doubled since 2007, now standing at US$10.3 trillion. Until recently, other asset classes, such as litigation finance and catastrophe bonds, hardly existed at all, and were accessible to only the most sophisticated investors.

Diversify to survive₁

By allocating across a broader mix of asset classes (alternatives), beyond traditional equities, fixed income and property, and combining them together in an intelligent way, investors can reduce risk and increase expected returns because the correlations between them and more traditional sources of yield are often low.
Catastrophe bonds and other insurance-linked securities₂are good examples of these types of investments. The market for catastrophe bonds has grown from under $1 billion in value outstanding in 1997 to more than $25 billion today according to data provider Artemis. Typically for these instruments, the risk of non-payment is based on issues occurring in the natural world rather than in financial markets. They are certainly not “risk free” but clearly are exposed to a very different set of risks. Using some of these alternative asset classes should reduce the volatility of the overall portfolio. In fact, if the asset classes are fundamentally sound, the more types one uses, the lower the volatility – all other things being equal. Aircraft leasing, peer-to-peer lending and global loans are other compelling opportunities. Of course, as ever, due diligence in these areas is key.

To varying degrees, more traditional asset classes such as equities, fixed income and property still have an important role to play. A healthy and balanced portfolio can include steady and meaningful dividend payouts from equities, as well as the asset-backed, but more illiquid, returns from property and areas of the bond market that offer relatively attractive yields.

Liquidity is great, but you do pay for it

Outside of diversifying, which is a fairly well understood notion these days (although the strategies and approach can be nuanced), there is another important factor to consider as part of how to solve the income challenge, and one that many overlook far too quickly: liquidity.

In a technology-led age of instant access it is easy to see why we obsess over the importance of liquidity. Having ready access to funds is a genuine priority, and one that many investors are hesitant to give up. However, there is a cost associated with it. Sources of return, whether income or growth, require investors to take on a degree of risk, traditionally measured by volatility. Rarely is liquidity risk given the same prominence or depth of thought.

Liquidity risk, tailored effectively, is something to be explored and will suit different investors at different times. Ultimately, though, by taking a long-term view as defined benefit pension funds do, your portfolio has more chance to meet your overall objectives. On a deeper level than that, it makes sense to better coordinate short-, medium- and long-term cash flows, identifying when it is possible to accept some illiquidity within the overall portfolio, and thus harness the benefits associated with locking your money away for longer periods of time. It is worth taking the time to do so, as interesting asset classes such as private loans to infrastructure projects and to corporates can suddenly become available.

The message is not just an institutional one; even retail investors should take heed and consider whether they are prizing liquidity above everything else, including the likelihood of a decent return once markets recover. The exodus from UK property funds after Brexit is a good example. Investors who were quick to rush out of the door after the UK referendum vote on June 23 missed the bounce in returns that occurred almost immediately after. The Towers Watson Illiquidity Risk Premium Index, which covers all asset classes, estimates that investors who are prepared to accept some liquidity are typically rewarded with between about 75 and 175 basis points.

We cannot pretend that the market environment is easy, and that yield assets are easy to come by. What we can do, however, is readjust our expectations and mind-sets around some long-held misconceptions. Liquidity can be our friend, and unfamiliar does not necessarily equal risky.

For more on how Aberdeen can help meet the income needs of investors, visit this link.

Column by Aberdeen AM written by Gregg McClymont

1Diversification does not ensure a profit or protect against a loss in a declining market.
2Insurance-linked securities (ILS) are financial assets, the values for which are driven by insurance loss events.
Ref: 24533-010217-1

Gold Shines as Washington Stumbles

| For Gabriela Huerta | 0 Comentarios

One of the more unique aspects of this year’s market is that both risky assets as well as investments that seek to hedge those risks are advancing simultaneously. Despite last week’s selloff, the S&P 500 is up 8%, the tech-heavy Nasdaq Composite 15% and the MSCI Emerging Markets Index over 22%. Yet oddly, typical “safe-haven” hedges are also doing remarkably well, such as long-dated U.S. Treasuries and gold.

Gold’s performance, up 12% year-to-date, is particularly interesting. A hard-to-define asset, gold is often thought to perform best when either inflation and/or volatility is rising. This year has been notable for both falling inflation and record low volatility, raising the question: What is powering gold’s ascent and can it continue? Two trends stand out:

1. Real rates have flattened out

Gold is most correlated with real interest rates (in other words, the interest rate after inflation), not nominal rates or inflation. While real rates rose sharply during the back half of 2016, the trend came to an abrupt halt in early 2017. U.S.10-year real rates ended July exactly where they began the year, at 0.47%. The plateauing in real yields has taken pressure off of gold, which struggled in the post-election euphoria.

2. Political uncertainty has risen

Although market volatility has remained muted, albeit less so the past week, policy uncertainty has risen post-election (see the accompanying chart). This is important. Using the past 20 years of monthly data, policy uncertainty, as measured by the U.S. Economic Policy Uncertainty Index, has had a more statistically significant relationship with gold prices than financial market volatility. In fact, even after accounting for market volatility, policy uncertainty tends to drive gold prices.

Enlarge

To a large extent, both trends are related. Investors came into 2017 expecting a boost from Washington in the form of tax cuts and potentially infrastructure spending—resulting in the so-called “reflation” trade. Thus far neither has materialized. While economists can reasonably debate whether either is actually needed, lower odds for tax reform and stimulus have resulted in a modest drop in economic expectations. This, in turn, has caused a reversal in many reflation trades, a development that has allowed gold to rebound.

Going forward, gold’s performance may be most closely linked with what happens in D.C. Absent fiscal stimulus, the U.S. economy appears to be in a state of equilibrium: modest but stable growth. In this environment, gold should continue to be supported by historically low real rates and continued political uncertainty. Alternatively, if Congress does manage to enact a tax cut or other stimulus, we are likely to see some, albeit temporary, reassessment of growth and a corresponding backup in real rates, a scenario almost certainly negative for gold.

While I won’t pretend to have any special insight into the Greek drama that is modern day Washington, for now my bias would be to stick with gold. Most risk estimates still suggest gold has a low to negative correlation with most asset classes, suggesting a mid-single digit allocation in most portfolios. Yes, a positive surprise out of Washington would arguably hurt gold. But for now I would prefer to bet on gold’s diversifying properties rather than political stability.

Build on Insight, by BlackRock written by Russ Koesterich, CFA

Investing involves risks, including possible loss of principal. Investments in natural resources can be significantly affected by events in the commodities markets.

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 August 2017 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.

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 have not been registered with the securities regulators of 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 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.

©2017 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.

248359

Think Outside the Style Box

| For Gabriela Huerta | 0 Comentarios

According to the Fall 2017 Pantone Fashion Color report for New York, this season is all about Grenadine red and tawny Autumn Maple. I like a pop of color, but I’m still keeping my traditional black and navy staples. If you are a traditional style box investor, can smart beta exchange traded funds (ETFs) refresh the style in your portfolio?

The investment universe was traditionally carved up between growth and value, and large and small securities. Several decades ago, Morningstar introduced the now-ubiquitous nine-box matrix known as the style box, providing a framework to evaluate funds against peers with similar investment styles.

Today, technological improvements and better access to data have democratized style investing beyond simple value and size screens to target historically rewarded style factors in a cost effective way.

The evolution of style

Style box investing began with actively managed style exposure funds and moved on to style-tilted index funds weighted by market cap. The industry is now turning to factor exposures that more directly screen for attributes traditionally sought by active funds—cheap, trending, high quality, more stable and smaller names—weighted by the strength of these metrics.

Style factor investing with ETFs takes the concepts introduced with the nine-box grid and modernizes them. Just as investors combined blend, growth and value funds in a portfolio, they now have the ability to combine momentum, quality and value factor exposures—more directly targeting these broad, historically persistent drivers of return.

Investors can consider a few ways to update their style:

1. Swap growth for momentum

Traditional growth investing seeks capital appreciation by investing in companies that have high expected earnings and may steadily increase in value. Similarly, the momentum factor targets stocks that are trending up in price. In other words, the term “momentum” is a new way to describe what many growth managers have historically tried to deliver.

Momentum factor investing tends to be highly cyclical and focused on a concentrated portfolio of stocks displaying stronger price appreciation than their peers. This exposure directly maps to the investment characteristic that has driven returns for active growth managers in the past.

2. Upgrade blend to quality

Blend investments have traditionally provided broad exposure that’s neither strongly growth nor strongly value. Many active managers in the blend section of the style box enhance their performance over the long run by looking for securities that have strong earnings and a reasonable price.

In the same way, quality investing focuses on buying bellwether firms with strong balance sheets and stable earnings. Investors in this style have typically been rewarded in the later stages of the economic cycle, including downturns, as companies with resilient business models and attractive return on equity may offer defensive protection in the portfolio.

Quality factor indexes can potentially provide a more appropriate benchmark to help investors evaluate blend managers. These indexes more closely align with the active investment process than broad market cap-weighted indexes.

3. Deepen your value

Value investing draws on the idea of buying companies that are priced inexpensively relative to their fundamentals. Value investors invest in companies with pro-cyclical business models that tend to be rewarded in market booms and over longer holding periods.

Value factor investing tends to have more concentrated style exposure and stronger factor weighting than the average active value fund or market cap-weighted value index, residing on the far left-hand side of that Morningstar style box. ETFs with this focused exposure to value can be a low-cost way to target inexpensive names, which have historically fared well when interest rates are rising.

Smart beta ETFs

Smart beta ETFs take advantage of time-tested investment ideas and today’s advances in data and technology, providing a lower-cost alternative to mutual funds. But that doesn’t mean you have to remake your portfolio: Smart beta ETFs can refresh the traditional style box framework. Investors may consider complementing or replacing existing active strategies to help reduce average costs or seek to improve overall performance.

In LatAm, style-savvy smart beta strategies to build a balanced U.S. portfolio include iShares Edge MSCI USA Momentum Factor ETF (MTUM), iShares Edge MSCI USA Quality Factor ETF (QUAL) and iShares Edge MSCI USA Value Factor ETF (VLUE) While in Spain they include the iShares Edge MSCI USA Momentum Factor UCITS ETF (IUMO), iShares Edge MSCI Europe Quality Factor UCITS ETF (IEQU) and iShares Edge MSCI World Value Factor UCITS ETF (IWVL).

Build on Insight, by BlackRock’s column written by Sara Shores

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 the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.Investing involves risk, including possible loss of principal.
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 be registered with the securities regulators of 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 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.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision. Diversification and asset allocation may not protect against market risk.
The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), India Index Services & Products Limited, JPMorgan Chase & Co., MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell Investment Group or S&P Dow Jones Indices LLC, nor are they sponsored, endorsed or issued by Barclays Capital Inc. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.
Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate 50 Index, FTSE NAREIT Residential Plus Capped Index, FTSE NAREIT Industrial/Office Capped Index or FTSE NAREIT All Mortgage Capped Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed Real Estate ex-US Index, FTSE EPRA/NAREIT Developed Europe Index, FTSE EPRA/NAREIT Global REIT Index or FTSE EPRA/NAREIT Developed Asia Index; all rights vest in FTSE, NAREIT and EPRA. “FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license. ©2017 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ALADDIN, iSHARES, iBONDS, iSHARES CONNECT, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, CoRI and the CoRI logo are registered and unregistered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

SRI Investing Strategies

| For Gabriela Huerta | 0 Comentarios

I am often asked “What is SRI?” or variations such as ESG Investing, Sustainable Investing, Mission-based Investing, Responsible Investing, Ethical Investing, Green Investing, Impact Investing or Socially Responsible Investing. Whatever the name, SRI is an approach to investing that recognizes the generation of long-term sustainable returns is dependent on sustainable companies and capital markets. More importantly, SRI explicitly acknowledges the relevance of environmental, social and governance (ESG) factors to financial returns.

According to US SIF, SRI Investing continues to grow with $8.72 trillion assets under management as of the beginning of 2016. A decade ago there was less than $1 tillion invested in SRI strategies. There are several trends behind this significant growth, certainly in the last few years. Investment Advisors, Multi-Family Offices and Institutional Investors are increasingly incorporating SRI and ESG factors into their investments analysis and portfolio construction. Recently, firms like Goldman Sachs and BlackRock launched major product initiatives in this field which has led to a greater awareness on Wall Street of the importance and client demand for increased SRI engagement. Another reason has been due to the growth of the UN Principles for Responsible Investment (PRI). The PRI initiative is an international network of investors working together to put the six Principles for Responsible Investment into practice. As of today, there are over 1’700 signatories which include asset owners, investment managers and service providers.

There are 6 key SRI strategies which include:

Negative Screening: the exclusion of assets based on ESG criteria
Positive Screening: the inclusion of best-in-class assets based on ESG criteria
ESG Integration: the systematic and explicit inclusion of ESG data into investment decisions
Impact Investing: targeted investments aimed at solving social or environmental problems
Engagement: which is active engagement with company management around ESG issues (selective or overlay)
Thematic Investing: the selection of assets based on their categorization under certain sustainability themes (e.g. renewables).

Negative Screening is the traditional and most common approach which excludes individual companies or entire industries from portfolios if their areas of activity conflict with an investor’s values. This process can be quite flexible as it can rely either on standard sets of exclusion criteria or be tailored to investor preferences. For instance, investors may wish to exclude companies with sales generated from alcohol, weapons, tobacco, adult entertainment or gambling – so-called “sin stocks.” Some faith-based investors also exclude companies involved in contraception and abortion-related activities.

In the case of government bonds, investors may seek to avoid an entire country based on the sovereign’s compliance with select international standards (e.g. human rights or labor standards). In general, one of the major criticisms of this approach is that it reduces the investable universe.

Positive screening seeks to identify companies working towards social or environmental good. This screening uses ESG performance criteria and financial characteristics to select the best companies within an industry or sector, usually relying on a sustainability rating framework. This is usually a more knowledge-intensive process than exclusionary screening because it requires understanding which factors are relevant for each industry and evaluating individual issuers on each of these factors.

ESG integration, unlike positive screening, seeks to incorporate material ESG risks and growth opportunities directly into traditional security valuation (e.g., through inputs such as earnings, growth or discount rates) and portfolio construction. This approach has gained traction in recent years and is based on the premise that additional ESG information not covered by traditional analysis could have an impact on the long-term financial performance of a company. ESG integration involves understanding how companies handle social, environmental and governance risks that could damage their reputations and whether they are positioned to capture ESG opportunities that could give them a competitive edge.

Impact investing explicitly seeks to generate a positive social or environmental impact alongside a financial return, unlike other SRI approaches, where progress on social and environmental issues may be a by-product of financial enterprise. The niche market of impact investing is growing fast. Examples include community investing, variants of microfinance, as well as private equity-like deals investing in such sectors as education, healthcare, basic infrastructure and clean energy.

Shareholder Engagement recognizes that as a shareholder of a company, investors have the ability to take an active part in the governance and activity a company employs. Shareholder influence attempts to shift corporate behavior toward greater compliance with ESG principles. Influence can be exerted by investors through direct communication with corporate management or by filing shareholder proposals and proxy voting. The influence of shareholder engagement on ESG issues has risen in recent years. The majority of the proposals filed have been focused on political activities of corporations, the environment, human rights/diversity, and governance.
Thematic Investing targets specific themes such as climate change, water, human rights or gender lens investing. For instance, using a gender lens to empower women would evaluate companies and investment opportunities based on women’s leadership, women’s access to capital, products and services beneficial to women and girls and workplace equity.

A common concern about SRI investing is that there is a premium to be paid for making responsible investments that would naturally diminish investment returns. For instance, by applying an exclusionary screen the available investable universe is reduced and thus this could have a negative impact on returns. Given that there are many different SRI strategies, making comparisons becomes more challenging. For example, shareholder engagement in single stocks might create long-term value but what benchmark would this be compared to?

Thus, an investor may choose to add value(s) to investing in order to achieve a positive environmental or social impact alongside financial returns; align investments with values and core beliefs; and improve portfolio risk/return characteristics by factoring sustainability into investment decisions. The way an investor can implement this objective would be to:

Develop a beliefs statement regarding ESG integration and sustainability
Update Investment Policy with ESG Policy
Develop asset allocation strategy in line with the ESG Policy
Implement changes in the portfolio
Manage and monitor the portfolio.

SRI investing does raise strong emotions and disputes from both sides of the debate. Opponents to SRI are opposed to anything other than financial factors affecting the value of a security. Likewise, some advocates for SRI have such deep moral convictions that they cannot imagine the possibility that the integration of ESG factors could have anything but a positive effect on investment returns. The challenge therefore is to ignore the emotion based in pre-conceived beliefs coming from these opposing views and rather focus on the facts.

Ultimately, I believe there is an important value added in helping our clients identify the core values that are important to them and creating an investment strategy that empowers those values.

Column by Philip Carey

Factor Investing – A Wide Highway Ahead?

| For Gabriela Huerta | 0 Comentarios

As investors continue to add factor-based strategies to their portfolios, industry watchers have wondered: are factor strategies getting too popular?

I hate waiting in traffic. I don’t like the stops and starts, the feeling of crawling along, and just all that crowding. As any driver knows, it’s not just the total number of cars that matter, but also the size of the road itself: the same amount of traffic on a freeway versus a winding single-lane road makes all the difference between a smooth journey and a traffic jam.

More than $18 billion flowed into U.S.-listed smart beta ETFs in the first half of 2017, following the $43 billion invested in 2016.1 These numbers sound impressive, so not surprisingly, some investors have wondered if factor strategies have become crowded, eroding their potential gains. But in the broader context: are factor strategies a highway or a backcountry road? Have factor strategies reached their capacity? Let’s start by citing some important facts and figures.

How much is invested in factor strategies today?

Currently, assets in factor strategies are simply dwarfed by the assets invested in traditional vehicles, such as passive and active funds. As one example, consider smart beta funds that invest in S&P 500 Index constituents. The S&P 500 Index represented $19.2 trillion in market value as of December 31, 2016. Of the $8.7 trillion in assets indexed or benchmarked to the S&P 500, actively managed mutual funds accounted for $5.7 trillion. In comparison, U.S.-listed, U.S. equity smart beta ETFs represented approximately $224 billion, or less than 1.2% of the market capitalization of the S&P 500 Index. The current amount invested in smart beta funds is tiny!

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Unlike some strategies prone to capacity constraints such as micro-cap stocks or active strategies that traffic in thinly traded names, factor strategies have generally tended to invest in more liquid securities trading in deep markets. Factor funds may be more able to invest new fund flows without unduly affecting the prices of securities, giving them the potential to accommodate large flows.

Trillions of dollars in active funds already follow factors

While the amount directly invested in smart beta strategies is miniscule, many institutions are already factor investors, even though they might not explicitly allocate to smart beta or factor strategies. Our research decomposed active mutual fund returns into three components: factors, time-varying components and security selection. Of the trillions of dollars in U.S. active mutual funds, we believe that the first component, static factor exposures, may represent well over $2 trillion of assets under management. In other words, money is already following these factor strategies; what is changing is the way investors are accessing those factors.

Measuring the capacity of factor strategies

There are several ways to estimate the capacity of factor-based strategies, including asset ownership, capital flows and transaction costs. Let’s consider transaction cost estimates, which may not provide definitive measures of capacity, but are certainly informative measures of real-world trading experienced by investors.

Each incremental investment into a factor-based strategy incurs an additional transaction cost. There is a breakeven point where all investors’ new flows are eaten up by transaction costs, offsetting the historical smart beta premiums. How far away are we from that breakeven point for assets under management, which indicates that there is no additional capacity?

To address the capacity question, we used Blackrock’s proprietary transaction cost model, which covers tens of thousands of securities, including more than 50,000 equities. The model is used by BlackRock investment teams on a daily basis and incorporates turnover, volume, market-wide and stock-specific risk, commissions, taxes and spreads and other inputs. The model is used for trading across all of our portfolios — not just the securities within smart beta strategies.

What do transaction costs tell us about the potential capacity of factor strategies?

With a five-day trading horizon, which is appropriate for large trades, value, momentum, quality, size and minimum volatility factors each show capacity potential in the hundreds of billions. Some factors, like minimum volatility, may have capacity well over $1 trillion. For comparison, the iShares Edge MSCI Min Vol USA ETF had $13.6 billion in assets as of June 30, 2017. The momentum factor has the highest turnover and volatility relative to the other style factors, and accordingly, should have the smallest capacity. Yet, even for momentum, our estimate of capacity exceeds $320 billion. As of June 30, 2017, the iShares Edge MSCI USA Momentum Factor ETF had assets of $3.1 billion. For the majority of the factors, the breakeven point for transaction costs indicates a capacity that far outstrips the assets currently invested in those style factors.

What about crowding and valuation?

Crowding, or a crowded trade, presents a risk of investors who hold large and similar positions exiting those positions simultaneously. Crowding may manifest in short-term trends and high, short-term valuations. These are important concerns, but they are different from long-term capacity considerations.

All assets undergo periods of upward or downward trends and high or low valuations. A skillful investor might be able to use relative strength and valuation metrics to tilt factor positions gradually over time. Other signals useful in a factor-tilting framework might include dispersion and the economic regime. Read my recent post on factor tilting for more on how tilts may help improve returns and check the outlook for our latest views on factor over- and underweights.

Ample room on the road

So, what about the naysayers claiming that factor strategies are at capacity? We’ve done the research and it suggests there is large capacity potential in smart beta and factor strategies. We believe capacity could be at least hundreds of billions and, in many cases, trillions of dollars of assets — more than 100 or 1000 times more than what is invested in factor strategies today — for capacity to be reached. Factor strategies appear to have a wide highway ahead.

Column by BlackRock written by Andrew Ang

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 visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
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 have not been registered with the securities regulators of 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 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.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.
The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.
The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.
This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
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Will the Fed (and Other Central Banks) Normalise Monetary Policies?

| For Beatriz Zúñiga | 0 Comentarios

¿Conseguirá la Fed, y el resto de bancos centrales, normalizar la política monetaria? — Pixabay CC0 Public DomainC3_0010_shutterstock. Will the Fed (and Other Central Banks) Normalise Monetary Policies?

In mid-2013, the then chairman of the Federal Reserve, Ben Bernanke, suggested that America’s central bank should start to cut back on the purchase of bonds that had started in 2008. The turmoil resulting from this announcement on all markets in general, but on emerging markets in particular, put a curb on his intentions.

The baton was passed on to Janet Yellen, who in December 2015 approved a rise of 25 basis points on interest rates that had remained at 0% for seven years. The last increase had taken place in 2006, but with scant resonance – Twitter was yet to come into its own. In just a little over a month, between 22 December 2015 and 28 January 2016, the Chinese stock market adjusted by just over 27%, and plans to normalise monetary policies had to be postponed once again.

This time around, it seems that not just the Fed, but other major central banks such as the European Central Bank, the Bank of England and the Bank of Canada, are willing to normalise monetary policies, following almost ten years of emergency policies.

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The global economy is now more settled. The OECD expects the world’s GDP to grow in 2017 and 2018 to levels of 3.5% and 3.6%, respectively, in comparison with the average of 3.9% between 1987 and 2007. However, developed economies will grow at slower rates, nearer to 2%. The United States has grown by an average of 1.47% over the past eight years, as compared with 3.4% since the Second World War, and the annual real growth rate since the last recession was just 2.1%, in comparison with an average of 4.5% in previous recoveries. Based on figures published to date, it does not seem that growth will even reach 2% in the first half of 2017.

The Federal Reserve’s task is further complicated by two historical facts: since the Second World War, the Fed has triggered 13 cycles of rises in interest rates, ten of which took the economy into recession. Secondly, since Ulysses S. Grant (1869) all republican presidents have experienced a recession during their first term of office. Nevertheless, as athletes often say, if faced with a challenge backed by past results against winning, records are there to be broken.

The desired rate of inflation (for the central bankers that govern us because, I do not know about you, but I like to buy things when they go down in price) closed at 1% in 2016 in developed economies and, unless there are new price rises in oil, it seems unlikely that the target of 2% will be reached.

Finally, global debt, far from dropping, has continued to grow. By the close of the first quarter of 2017, it was 217 trillion dollars, which meant that it increased by more than half a trillion dollars, 46% higher than ten years ago. Developed economies have built up a total debt of 160.6 trillion dollars, 1.4% down on the previous year, whilst the debt of emerging countries reached 56.4 trillion dollars, up by 5.4%.

In light of positive economic growth, although perhaps not sufficiently sound to deal with potential upheavals, a controlled rate of inflation still way off target and higher debt levels in the economy, what has made central banks act like this now?

Even the chief economist of Bank for International Settlements highlighted in its annual report published last month that:
“Policy normalisation presents unprecedented challenges, given the current high debt levels and unusual uncertainty. A strategy of gradualism and transparency has clear benefits but is no panacea, as it may also encourage further risk-taking and slow down the build-up of policymakers’ room for manoeuvre.”

Perhaps central bankers have (at last) realised that inflation is in financial assets – the returns on the oldest bonds in history, those of the United Kingdom and the Netherlands, have seen the lowest in 322 and 500 years respectively, whilst the US had 10-year bond yields of 1.366%, the lowest since 1800. Maybe it has taken them too long to withdraw these measures that are now not only ineffective, but also encourage too much risk-taking, which puts financial stability at jeopardy. It could simply be that they are recharging their arsenal of weapons to shore up monetary policies should they need to use them in the near future.

Whatever the reason, the reality is that the market has let them get away with this so far. The question is: will this go on like this? Will they stay on course if the market does not take this well? If they do not keep a steady hand, will faith be lost in the omnipotence of central banks? It should not be forgotten that low interest rates have been the main driver behind the upturn of financial markets.

If Ben Bernanke was right about the positive effects of rolling out quantitative easing, he should be equally right about the effects of withdrawing it. Without going into specifics, what is important is that markets believe so, and think that central banks are responsible for the positive performance of markets.

In response to the appearance of another financial crisis, Janet Yellen was clear in a recent interview: “Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”

Overall, the four big central banks have purchased around $13 trillion in bonds ($13,000,000,000,000). It goes without saying that divesting this portfolio without messing things up is not going to be an easy task…

Column by Alfredo Álvarez-Pickman chief economist at Banco Alcalá, part of Crèdit Andorrà Financial Group Research.

Small- and Mid-Caps: Still Attractive Investments

| For Magdalena Martínez | 0 Comentarios

El atractivo de las small y midcaps como inversión a largo plazo — Pixabay CC0 Public Domain. Small- and Mid-Caps: Still Attractive Investments

Small- and mid-cap stocks in Europe, Switzerland and the US are being buoyed by solid fundamentals and the improving economic environment, and remain attractive as components of a long-term investment strategy.

Since the start of the year, equity markets have been supported by positive economic developments. Earnings are growing again: on aggregate, earnings per share (EPS) are expected to rise 13% this year as opposed to 2% in 2016. This positive environment is particularly beneficial for small- and mid-cap (“SMID-cap”) companies, although returns have varied between stocks in the US, Europe and Switzerland.

Fundamental strengths amplified by a supportive environment

In particular, SMID-caps currently have stronger balance sheets than large-cap stocks, with average net debt/EBITDA ratios of 1.1x and 3.9x respectively. These low debt levels, combined with the global economic upturn, mean that SMID-caps still have substantial growth potential, justifying valuations that may appear high in some cases. That growth potential is also underpinned on a long-term view by their impressive capacity for innovation and their ability to adjust to economic developments, which should deliver additional returns in the absence of any systemic risk.

SMID-caps also have other fundamental advantages. For example, many of them are family-owned companies, managed according to a philosophy that ensures the sustainability of their business. In addition, small companies are often driven by a highly entrepreneurial spirit, the effects of which can be seen most clearly when economic growth is accelerating.

Performance drivers that vary between countries

In Europe in particular, SMID-caps are still offering good investment opportunities because they are attractively valued. European SMID-caps slightly underperformed large-caps in 2016, even though their earnings growth remained positive. Their valuation ratios are currently lower than those of the rest of the market, and lower than their historic averages.

Swiss SMID-caps have had to contend with a strong currency for more than two years now. They have managed to do so by focusing on their competitive advantages and on innovation, while keeping costs tightly under control, which has enabled them to improve profitability. They have also continued to expand successfully in emerging markets over the last few years. For investors, therefore, they offer the stability of a developed market together with indirect exposure to emerging-market growth.

In the USA, the renaissance of the manufacturing sector and the upturn in consumer spending should benefit domestic companies for a long time to come. Unlike Switzerland’s internationally oriented companies, US small-caps are mainly focusing on organic growth on their local market.

US corporate tax reforms should be particularly beneficial to SMID-caps, which tend to pay higher tax rates than large corporations. As a result, US small-caps should continue to fulfil their potential, particularly in more cyclical sectors and finance.

Although these stocks have already made significant gains in 2017, they are still attractive investments, particularly for those wanting to put together a balanced portfolio for the long term. On both sides of the Atlantic, the global economic recovery should both support and boost the earnings growth of these dynamic, entrepreneurial companies.

Bright Future for Big-Cap Tech

| For Beatriz Zúñiga | 0 Comentarios

Un futuro prometedor para las grandes tecnologías — Pixabay CC0 Public DomainLoboStudioHamburg. Bright Future for Big-Cap Tech

Equity investors have enjoyed a solid continuation of the bull market in the first half of 2017. It is notable, though, that a handful of large-cap stocks have clearly driven the market. Journalists and analysts have been playing around with different acronyms to select and describe the current tech high-flyers. For the first time in 2013, CNBC’s “Mad Money” host Jim Cramer propagated the term FANG, which stands for Facebook, Amazon, Netflix and Google (now Alphabet). Recently, reporters included another “A” to include Apple and an “M” to include Microsoft in the acronym, sometimes replacing the Netflix’ “N”, depending whether the story’s focus is “growth” or “dominance”.

Currently, an impressive headline is that FAAMG (Facebook, Amazon, Apple, Microsoft and Google) comprise 12% of the S&P 500 Index and have contributed 28% of the index’s year-to-date returns with a market-cap weighted combined return of 25%. If we look at the NASDAQ 100, FAAMG has accounted for more than 50% of the return in 2017. What is more, until recently, the trend has been remarkably solid with a very low volatility. However, on Friday June 9, the tech started to sell off without any fundamental reason. The following Monday morning, the NASDAQ showed a loss of 4.5% from the Friday high, driven by heavy losses of the FANG and FAAMG groups wiping out a market capitalization more than 200 billion in these six companies. Suddenly, the financial press started to draw analogies between today and the dotcom bubble. Obviously, this comparison is far-fetched.

The most important difference is valuation. In the first months of 2000, the S&P 500 Technology Index reached a 12-month forward Price/Earnings Ratio of 60, which was more than twice the valuation of the S&P 500. Today, the tech sector is trading at a multiple of around 19, just narrowly above the market’s valuation. It is true that the valuation has gone up in the last years and the valuation is not cheap anymore, but it is certainly not in bubble territory.

More importantly, today’s tech giants have much stronger fundamentals with solid growth prospects. They still sit on a $ 700 billion cash pile, but started to invest huge amount of cash in their infrastructures and new growth areas. Today, the FAAMG companies have leading positions in at

least one of the most promising investment trends, such as cloud computing, artificial intelligence & machine learning, virtual reality & augmented reality and big data. They all benefit from a secular shift to online spending. For example, Amazon Web Services (AWS) accounts for more than one third of the global cloud infrastructure market generating $ 12 billion a year from nothing five years ago. This segment is expected to grow more than 15% annually. Amazon’s scale and leading IT and logistics infrastructure is highly disruptive for traditional retailers, especially as it enters the traditional bricks-and-mortar retail segment (best illustrated by the announced Whole Foods acquisition). Facebook has increased its monthly active users from 1.4 to an impressive 1.9 billion and more than doubled its revenues in the last two years. The company is ramping up its investments in research & development including video content and augmented reality, which should help to main profit growth north of 20% for several years. Alphabet has consolidated its leadership in mobile search ads and strengthened its positioning in video (YouTube), the cloud and Google Play. There might be interesting start-ups in these high-growth areas, but the difference in scale and resources compared to the leaders has never been so vast.

So if valuations are reasonable and fundamentals strong, what has caused the mini sell-off? Most analysts are pointing to an increasing dependence of algorithmic trading. JPMorgan estimates that only 10% of US stock trading comes from traditional traders. The machines are taking over. Before the correction, the positioning in the FAAMG stocks was extreme. Fund managers were overweight and the machines were long, following the strong momentum of growth stocks. Also the untypical low volatile of these stocks attracted the machines. The trigger for the sell-off is not really clear. Many point to a cautious Goldman Sachs research report published on Friday, June 9 that might have caused some selling pressure. Once the short-term trend was broken and the volatility spoke up, the machines took over and continued liquidating positions. The good news is that the sell-off stopped after only two days and that the pressures from quantitative traders has probably played out. The bad news is that investors that want to benefit from the strong long-term prospects of these tech companies should get used to higher volatility again. But the tech leadership is most likely here to stay.

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Column by Crèdit Andorrà Financial Group’s Pascal Rohner