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Pictet Asset Management: Inflation Worries Overblown

The head of steam building up behind the global economy is becoming ever more evident. As vaccination programmes allow Covid-related restrictions to be lifted, growth looks set to jump, with the economy likely to recover much of last year’s losses.

Bond yields have risen on doubts about central banks’ ability and willingness to remain accommodative in the face of strong growth, the impact of President Joe Biden’s additional USD1.9 trillion stimulus package and because inflation expectations appear to be already broadly in line with official targets.

But we think these concerns are premature. Any overshooting of central bank’s inflation objectives is likely to be only temporary, given large amounts of spare capacity in the economy. We don’t see underlying inflation picking up for at least the coming year. All of which leads us to maintain our overweight bias on equities and our neutral stance on bonds.

Our business cycle indicators show that momentum remains strong, prompting our economists to once again raise their real GDP growth forecasts for 2021 . We now expect the global economy to grow by a real 6.4 per cent this year against a market consensus of 5.1 per cent, with emerging economies, spearheaded by China and India (seen growing by a respective 9.5 per cent and 13.1 per cent) leading the way.¹ But the US is also poised for a robust 6.5 per cent expansion, according to our forecasts, more than making up for last year’s 3.5 per cent contraction. That’s underpinned by a surge in retail sales – it looks like Americans are beginning to spend their stimulus cheques – and a robust response by industry to fill that demand.

Base effects are likely to push inflation temporarily higher. It’s worth remembering that oil prices were briefly negative a year ago – now they’re roughly back to where they were before the Covid crisis. Meanwhile, as economies open up, we think the services sector will respond quickly to absorb pent-up demand and we’re likely to see few of the bottlenecks that typically give rise to underlying price pressures. In the US, any inflationary overshoot caused by excessive stimulus isn’t likely to appear until 2022/23, which should allow the US Federal Reserve to avoid tightening policy for the next 12 months or so.

Our liquidity indicators show that the pace of monetary growth is slowing substantially. The rate at which money supply is rising is still above average, but well down from last year’s peaks. Over the near term, liquidity provision should continue to support riskier assets. In the US, for instance, money creation is off the chart, with the M1 money supply measure expanding 76 per cent on the year and M2 up 28 per cent. But on the other side of the Pacific, there are signs of restraint. The Bank of Japan is slowing its quantitative and qualitative easing programme, its yield curve control policy seems to have been relaxed somewhat. In China, the growth in the volume of credit flowing through the economy has slowed and the central bank has indicated a tightening bias.

Our valuation indicators show most riskier asset classes trading at or near record highs. Valuations for stocks in the MSCI World index are at their most expensive since 2008 according to our models, with the market pricing in a return to pre-Covid rates of economic growth but with permanently lower interest rates.

We expect around a 20 per cent fall in the global price-to-earnings multiple as real yields start to rise and excess liquidity begins to dissipate. However, we also see a big jump in earnings per share growth (see equities section and Fig. 2) as both sales and profit margins benefit from a normalisation of economic conditions and generous fiscal support. The combined effect suggests around a 10 per cent upside for US equities from here.

As for fixed income, the recent rise in yields means that government bonds aren’t trading far away from their fair value for this stage of the economic cycle. For the first time since the pandemic struck, US 30-year real yields are in positive territory. But that rise in yields also makes equities look a little more expensive.

Technical indicators remain supportive for riskier assets, but they also flag up warnings that conditions are looking frothy. Seasonal factors are positive for equities. But investor sentiment is extremely bullish and fund manager cash levels are at 14-year lows and flows into the market are surging – at some USD180 billion, they’re at record year-to-date levels.

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

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

Notes:

[1] Bloomberg consensus forecasts for 2021 as at 12.02.2021.

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

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

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

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Market Myopia

| For Fórmate a Fondo | 0 Comentarios

money-4418858_1920 — Pixabay CC0 Public Domain. Un mercado miope

Markets are never at a standstill. However, since bottoming out last year, they have been pretty much on auto-pilot. The reason is simple, the pandemic has been ravaging the economy, but wartime fiscal and monetary stimuli have provided enough oxygen to avoid collapse and buy time until the long-awaited vaccines began to arrive. With them, the countdown to normalization began, but also the return of anxiety to the markets.

In normal times, markets constantly assess the health of the economy by looking at a myriad of macroeconomic indicators; but doing this today is pointless. We are almost certain that, by the summer, a tsunami of pent-up demand will give a once-in-a-century boost to the economy.

The situation is so unusual that it seems impossible to see beyond that point. We are in the early stages of a new economic cycle; one that will start with growth rates not seen in decades, and whose outcome is unpredictable. In a way, we are suffering from macroeconomic myopia.

However, market participants do not give up trying to see what comes next, since investing is, after all, an anticipation game. The most obvious danger that one can conceive of today is an acceleration of inflation; since supply will surely struggle to cope with a surge in demand (this year you better book your holidays well in advance). This is how inflation expectations have taken hold, roiling bond markets and threatening to derail the equity bull market.

This way of thinking is very short-sighted. After the bonfire is lit, we will surely see a red-hot economy, but combustible material will progressively decline as the fiscal stimulus (probably not the monetary one) is phased out. Inflation will go from flames to smoke, and the market will inevitably become concerned about whether the fire can be sustained, or whether it will be extinguished in a recession. Or in other words, the market will go back to its normal calibration mode.

Financial markets are a complex dynamic system with many interrelated variables. It is very hard to grasp how (and to what extent) one variable influences another at any given time, or if causality is reversed. But we are human beings and we try to make sense of it all by compartmentalizing the system and building narratives around the parts.

The current storyline is more or less the following: it is widely accepted that, of all variables, interest rates are the most important; since they are the key to valuing any cash flow-producing asset, from bonds to stocks to real estate. On the other hand, interest rates are a function of inflation, which in turn depends on the growth of the economy.

So far, bond markets seem to be following this train of thought. Plentiful stimulus and consumers with savings in their pockets, implies runaway growth; ergo inflation will accelerate and interest rates will have to rise.

This way of thinking assumes that it is the economy that determines the performance of financial markets. But the reality is much more complex. The direction of causality can quickly be reversed: higher rates can cause asset prices to tumble as well as financing costs to increase, that dents the wealth of households (particularly if it affects real estate prices) and the ability of corporates to borrow, threatening to bring the economy into a recession. The latter, lowers inflation expectations, and with it so decline interest rates; voilà!

The market is a kind of huge voting machine, where its participants constantly calibrate the different probabilities of the manifold variations of these two basic narratives. But the fact is that, after four decades with inflation and interest rates falling, thereby contributing to inflating asset prices, there is now enormous interdependence in the system. Therefore, a sudden big change in interest rates seems almost impossible.

Inflation has dimmed due to a combination of structural factors: demographics, excess debt, globalization and digitization. And the pandemic will only accentuate this trend. The only conceivable way to experience a sustained rise in inflation would be a sharp swing in taxation. One that causes a redistribution of wealth from capital to workers, as happened during the 70s. That episode coincided with another redistribution, from oil-importing countries to oil-exporting ones. It is highly unlikely that something like this will happen again, as the context has radically changed since then.

Communism collapsed spectacularly and globalization took off, thereby evaporating the bargaining power of workers. The market economy has been so dominant that even the Chinese economic miracle is explained by adopting it. No one can seriously argue today that the public sector can be the engine of growth. And when it comes to oil prices, renewable energies bring us ever closer to a scenario of full abundance.

Only very bad policies can drive the system into a higher inflation regime. But the deflationary forces are so strong that we would need much more than gargantuan budget deficits. We would have to see the United States becoming Venezuela. Or just as likely, discover that an asteroid is on a collision route with Earth in a few years, and we set out to spend everything we have.

If the current status-quo holds however, it is almost certain that the economy will keep growing, technology will continue transforming our daily lives, and market forces will prevail over political experiments. In this environment, we think that a combination of quality stocks to capture growth, and US Treasuries to protect us from the occasional recession, are currently the best possible combination.

However, if the current status quo is maintained, the economy will almost certainly continue to grow, technology will continue to transform (and cheapen) our daily lives, and market forces will prevail over political experiments. In this environment, we believe that a combination of quality stocks to capture growth and Treasuries to protect us from the occasional recession is currently the best possible combination.

An article by Fernando de Frutos, Chief Investment Officer at Boreal Capital Management

Should Investors Consider a Stand-Alone All-China Equity Allocation?

| For Beatriz Zúñiga | 0 Comentarios

dragon-872933_1920 — Pixabay CC0 Public Domain. ¿Deberían los inversionistas considerar una asignación independiente a la renta variable china?

As China’s weight within global equity indices increases and its markets mature, should investors consider a dedicated All-China allocation or continue gaining their Chinese equities exposure via international or emerging market (EM) allocations? Our research suggests that despite the growing opportunity, investors are typically under-exposed to Chinese equity.

Our analysis and history also suggest that concerns about US-China tensions—a key reason many investors are cautious on China—are on balance a manageable long-term risk that should not preclude investors from embracing this opportunity.

Chinese equity markets are rapidly changing. Whereas historically China’s economy was powered by State Owned Enterprises (SOEs), the modern economy is increasingly driven by small- and mid-size private companies, foreign investment, increasing capital supply and investment in biotech, artificial intelligence, 5G and other innovative sectors.

Five reasons for China optimism

As a result, we contend that All-China equity is the best way to take advantage of these trends. The market, from Hong Kong to A-share exchanges and the new Nasdaq-like STAR market, has matured and is evolving in five constructive ways:

1. China’s economy is no longer dominated by SOEs: SOEs have significantly reformed and the combination of the growing number of SOE privatizations and IPOs has overhauled the composition of Chinese equity indices (Exhibit 1), making markets more dynamic and efficient.

Gráfico 1

2. Corporate governance has improved: The reduced dominance of SOEs (often used as tools of government policy) and regulatory reforms that better align corporate interests with those of shareholders have changed the governance landscape.

3. Capital markets have developed: The development of China’s markets is illustrated by the number and market capitalization of listings in Shanghai, Shenzhen, Hong Kong and US-listed American Depositary Receipts (ADRs)— 5,333 companies worth $14.1 trillion at the end of June (Exhibit 2). That compares to the $7.8 trillion market capitalization of euro area equities.

gráfico 2

4. China’s benchmark weightings are rising: China’s increasing weight in key benchmarks,
such as the MSCI EM Index and the MSCI All Country World Index, is accelerating the institutionalization of its markets. At the same time, the still relatively high proportion of trading conducted by local individual investors (often funded by margin debt) creates inefficiencies that can be exploited by savvy investors to derive potential alpha.

5. China’s new consumer buys domestic: China’s middle-and upper-income consumers increasingly buy domestic products, eschewing once-favored global brands. The dynamic nature of China’s corporate universe is seen in the fact that China is the “youngest” market regionally in terms of listing years of index constituents (Exhibit 3).

gráfico 3

China is investing heavily in innovation

Beijing is also investing heavily in “new infrastructure”—technologies in which it wants to reduce its foreign reliance; artificial intelligence, 5G, cybersecurity, alternative energy, electric vehicles and semiconductors. Beijing is encouraging a startup culture it hopes can rival Silicon Valley while also attracting international investors. For example, China has filed one third of the world’s 5G patents (Exhibit 4).

Index tracking is a flawed approach to China investing

We believe that allocating to China by index tracking is the wrong approach because, among other reasons, MSCI ACWI weightings heavily favor large-cap firms with negligible exposure to faster-growing, domestic Chinese firms. In addition, MSCI’s EM Index (Exhibit 5) is similarly weighted toward offshore China at the expense of A-shares. So, allocating to China by tracking benchmarks is akin to gaining US equity exposure by overweighting mega-caps at the expense of everything else. An All-China equities allocation offers a more balanced approach and enhances the odds of capturing potential future returns.

Finally, investors should consider the alpha opportunity in Chinese equity markets, which still have inefficiencies that can exploited: Over the past decade, the median China A-shares strategy outperformed the MSCI China A Onshore index by 8.4%, annualized (Exhibit 6, see next page). Meanwhile, in global EM equities, the median manager only marginally outperformed while the median S&P 500 manager underperformed. So, for long-only equity investors, China offers a rare source of meaningful, sustainable alpha potential.

Conclusion

While the specific All-China allocation for any specific investor depends on such factors such as risk appetite, we believe that typical current allocations to China do not reflect the country’s bright prospects and that investors should consider an All-China allocation beyond current benchmark levels, now 5.1% of the MSCI ACWI Index. Less benchmark-sensitive investors that share our strong conviction in China’s improving outlook could consider an even larger allocation.

Column by Anthony Wong, CFA, Portfolio Manager Hong Kong and China Equity; William Russell, Global Head of Product Specialists; and Christian McCormick, CFA, Senior Product Specialist in China Equity in Allianz Global Investors.

Calm After the Storm: Opportunities Ahead for Asian Fixed Income in 2021

| For Cecilia Prieto | 0 Comentarios

boy-1822614_640 — Pixabay CC0 Public DomainNiño con linterna. Emergentes

The COVID-19 pandemic caused a slowdown in many major economies and increased volatility in global capital markets, forcing governments around the world to implement a series of stimulus measures that have included trillions of dollars in financial aid to individuals and businesses, as well as record low interest rates to revive spending and investment.

That glut of liquidity on the back of COVID has had a big influence on global fixed income, with Asian credit markets impacted in much the same ways as other regions, with a decline in spreads and borrowing costs that helped them side-step what could have been an onslaught of defaults.

While that scenario has been good for investment grade names that are lowering their average funding costs, some companies are biding their time on a lifeline that isn’t going to last forever. The main concern with this whole dynamic is a potential reversal of flows and reversal of economic variables over the next 12 months, particularly inflation. Core rate pressure, steeper yield curves and higher growth make tight credit spreads unattractive, not to mention the fact that dividend yields relative to bond yields are the widest in history.

This outlook means investors are likely to remain very selective, holding more cash and venturing into opportunities where there’s value and good beta.

Opportunities ahead

While it might be hard to find many options in Asia Pacific high-yield corporate credit, there could be a lot of upside in lesser-known names if investors are discerning and understand the business. Focusing on cash flows and coverage, along with a flexible expenditure model to ensure that the company can navigate harsh times are key. There’s value in names in the region that are tied to the global commodity cycle because those risks are typically aligned with higher commodity prices and goods demand; for example, a ports operator who has solid take-or-pay contracts.

For investors who are comfortable with name, sovereigns, and geopolitics, it pays to layer on risk. Indonesia local sovereigns are a case in point, with a modest and closing fiscal deficit, rising reserves, improving terms of trade, and one of the steepest curves in emerging markets.

Looking at different industries, the technology space remains comfortable with large cash positions. Low leverage and awe-inspiring equity cushions benefit semiconductor makers in Taiwan and South Korea and ecommerce and social media companies in China. Yields on some of those names may not be great, but investors can’t expect outsized compensation for such high-quality names in that space.

The outlook for financials is trickier to read because non-performing loans (NPLs) have been held in check due to government measures to support the region’s economies. That’s an elephant in the room, making it hard to read how much the situation may decline and how good the debt coverage will be once that support is gone. Within that space, names that are closer to small- and medium-sized enterprises (SMEs) and state-owned enterprises (SOEs) might be better off than those with outsized retail exposure.

Macau gaming companies will also be interesting to watch as discussions around concession renewals scheduled for 2022 develop., as This year may also see a rebound of foot traffic and a possible increase in regulatory red tape, including less generous capex tax treatment, and distinction between offshore and onshore entities. Currently, the market isn’t differentiating between these points, but these concessions are a lifeline and can determine the success of a name for the next 20 years.

Higher returns in China

The biggest impact of recent government stimulus efforts in Asia and elsewhere around the world has been in financials. Lending schemes, interest deferrals and other measures have provided a lifeline to borrowers, which in turn has bolstered banks. This will have to change going forward and private banks that might not readily see government capitalization will probably be more impacted, while public sector lenders are in much better standing.

Governments will be more selective with spending over the next couple of years, so investors should make sure that they align with high priority initiatives, like import-export in India or China’s One Belt One Road project.

China stands out because it has both fiscal and monetary firepower. Where and what the leadership will spend it on and how investors can capture the upside is the most apparent unknown for the year ahead. The local debt market presents good opportunity. After the pork shortage, real yields look good given limited movement in the policy rate despite inflation falling. Foreign investors have taken heed, moving to 8% from 1% of the local market.

The renminbi is stable and managed. Nominal and real rates are elevated, while foreign investors such as sovereign wealth funds, pension funds, banks, insurers and other asset managers continue to demand local market debt. These investors benefit from a greater open market as they search for higher returns, while the lack of a major fiscal impulse means there won’t be paper indigestion like we have seen elsewhere.

Ayman Ahmed is a senior fixed income analyst for Thornburg Investment Management.

Founded in 1982, Thornburg Investment Management is a privately-owned global investment firm that offers a range of multi-strategy solutions for institutions and financial advisors around the world. A recognized leader in fixed income, equity, and alternatives investing, the firm oversees US$45 billion ($43.3 billion in assets under management and $1.8 billion in assets under advisement) as of 31 December 2020 across mutual funds, institutional accounts, separate accounts for high-net-worth investors, and UCITS funds for non-U.S. investors. Thornburg is headquartered in Santa Fe, New Mexico, USA, with additional offices in London, Hong Kong and Shanghai.

For more information, please visit www.thornburg.com

Post-Pandemic Emerging Markets Set to Snap Back Strongly in 2021

| For Cecilia Prieto | 0 Comentarios

C_Wilson — Foto cedidaCharles Wilson. Charles Wilson

A year ago, emerging market equities were well positioned for a strong 2020, but the pandemic threw global markets for a loop. Following the annus horribilis, though, emerging markets are now even more favorably positioned for the year ahead.

The structural drivers supporting emerging market stocks remain intact, while the cyclical tailwinds are stronger than they were prior to the COVID-19 black swan. The MSCI Emerging Markets (EM) Index performance over the last few months reflects the bullishness undergirding developing country stocks, but a look under the hood reveals that regional, sector and style rotations are underway. A balanced approach to value and growth factors can help to squeeze more out of a broad, if uneven, market upturn.

Value vs. Growth Equities Performance Rotation Occurs Frequently in Emerging Markets

Source: Bloomberg

Rising incomes and an expanding middle class across the developing world are fueling increasingly powerful domestic consumption-led growth models. At the same time, expansionary global Purchasing Managers Indices reflect a rebound in economically sensitive cyclical sectors, including energy and materials, favoring emerging market exporters of raw materials and manufactured products amid world-wide inventory re-stocking.

Massive global liquidity injections, highly accommodative interest rates around the world, a weakening U.S. dollar, accelerating global growth and clearly the development and deployment of vaccines all bode well for emerging market stocks in the year ahead.

On the currency front, since the 2008 Global Financial Crisis, the greenback mostly gained ground. Europe grappled with its sovereign debt crisis from 2010 to 2012, so the U.S. Federal Reserve didn’t hint at tightening monetary policy until 2013, sparking the “taper tantrum.” The Fed began shrinking its balance sheet a few years later and in late 2016 started slowly lifting its key rate, which peaked at 2.5% in 2019. But the rate now sits near zero, where the Fed says it shall remain at least through 2023. The U.S. Dollar index has fallen about 13% from its March 2020 high to below the key 90 threshold, significantly mitigating the risk of EM currency depreciation for dollar-based investors.

In response to the pandemic’s deflationary impact, central banks in developed and developing countries have slashed their key rates. While many also engaged in fiscal stimulus, the developed economies pursued far greater deficit spending. Indeed, combined monetary and fiscal stimulus in the U.S. alone amounts to more than $10 trillion, nearly 50% of GDP. Because emerging economies don’t benefit from reserve currency status, they can’t afford deep fiscal deficits. But that means most entered the pandemic with smaller fiscal deficits and lighter debt loads, so they also don’t have to shoulder the heavy debt burdens weighing on advanced economies.

No doubt the globally synchronized monetary policy easing and gusher of fiscal stimulus create a powerful backdrop for global growth. But emerging markets are expected to rebound faster. According to Bloomberg consensus estimates, after shrinking 0.8% in 2020, emerging markets are poised to expand 5.1% in 2021, with China, the world’s second-largest economy, climbing 8.2%. Developed economies are set to advance 3.2% in the year ahead, not quite recovering from the estimated 3.5% contraction in 2020.

Earnings growth should prove robust globally in 2021, thanks, as noted, to the expected recovery in demand, re-stocking and extremely easy comparisons against prior-year numbers across most sectors. But earnings growth should be especially strong in emerging markets as the weaker dollar allows underlying local currency earnings to shine through, and in many instances exceed index earnings in advanced economies.

Estimated 2021 Earnings Growth for Most EM Countries Exceeds International Benchmarks

Based on Bloomberg estimated EPS (next annual) as of 12/18/2020

Source: Bloomberg

At the same time, structural reforms and productivity-enhancing investments that have been made in many emerging markets in recent years are material contributors to the recovery. India, for example, enacted a long-needed, sweeping goods and services tax reform; a crucial new Insolvency and Bankruptcy Code; a foreign direct investment liberalization; and a slew of financial inclusion initiatives. Brazil reformed its fiscally draining pension system and its deregulation drive reduced onerous business costs. China has reined in off-balance sheet, “shadow banking” and refrained from heavy debt-financed fixed investment “stimulus.”

Hundreds of millions of people in emerging markets will resume ascending into the middle class in 2021. Their ranks are estimated to grow 6% annually, if not more. Their demand for middle-class goods and services, from housing to white-line appliances to education and entertainment, has a far longer growth runway than that of mature, developed markets. Digitization means they can leap frog much costly infrastructure spending: wireless broadband over wireline, for example.

To be sure, sensible risk management, we believe, requires a fundamental, stock-by-stock approach that is diversified, stylistically balanced and disciplined. This provides downside protection whenever downturns or black swans appear. It then helps to compound off a higher base as recovery ensues and factor leadership shifts between growth and value, as it frequently does in emerging markets.

For more information, please visit www.thornburg.com

AFOREs Favor Global Alternative Investments Over Local Ones in 2020

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Screenshot 2021-01-28 145630 — Photo: PixaHive CC0. Foto:

In 2020, investments in alternative investments made by the AFOREs continued with their dynamism from previous years, with more attention going towards global allocations rather than local ones. While in 2020 investments in local private equity through the CKDs meant total commitments of 1.1 billion dollars; Global investments through CERPIs were practically double, reaching 2.1 billion dollars. In 2020, 5 CKDs and 17 CERPIs were issued.

Through 49 CERPIS the AFOREs ended 2020 with 9.7 billion dollars of committed capital, where only 25% have been called. In 2018, the year in which global alternative investments were authorized for the AFOREs, the committed capital reached almost five billion dollars; a year later (2019) another 2.4 billion dollars were added and in 2020 another 2.1 billion dollars were added, managing to maintain commitments above 2 billion dollars in the last two years.

The capital called barely reaches 2.4 billion dollars at the end of 2020 and its evolution has been gradual in recent years. In 2018 they were called 1.4 billion dollars; In 2019, 668 million dollars were added and in 2020 another 302 million dollars, so there would be still to call 7.3 billion dollars to channel them to global private equity projects.

These investments have been directed to the fund-of-funds sector, which represents 80% of the resources raised, followed by the private equity sector with 11% and the infrastructure sector with 7%. It is highly likely that the fund of funds sector has a diversity of sectors and projects, as this information is not public.

The assets under management of the AFOREs ended the year at 237 billion dollars, of which 5.7% are alternative investments, both local and global. Global investments barely mean 1% at market value or 4% if the committed resources are considered.

The assets under management of the AFOREs increased 12% in dollars in 2020, going from 211.8 to 237.2 billion dollars, which means 20.4% of GDP. It is interesting to observe that while in 2019 the local and global alternative investments of the AFOREs were 6.1%, a year later they had a slight decrease to end at 5.7%. Although there was a small decline from one year to the next, the growth in assets under management caused the percentage to drop and this is precisely what will give these investments greater dynamism by seeking competitive risk-adjusted options.

Preqin, the leading global private equity fund analyst, estimates the alternative asset industry will continue to grow and reach more than 17 trillion by 2025, which means registering a compound annual growth rate of 9.8% (CAGR rate) and a general increase of 60%.

Preqin believes that the private equity and private debt sectors will be responsible for driving the growth of alternative assets over the next five years, registering an increase in their assets under management of 16% and 11% annually. In fact, he points out that private equity will end up representing 53% of the alternative investment industry by 2025.

For 2021, AFOREs could be expected to maintain the dynamism of global investments at 2 billion dollars as seen in recent years.

Column by Arturo Hanono

Will Your Portfolio Become Artificially Intelligent?

| For Beatriz Zúñiga | 0 Comentarios

robot-4757878_1920 — Pixabay CC0 Public Domain. ¿Se volverá su cartera artificialmente inteligente?

Ever since the first computers were designed, people have envisioned machines working to serve humanity. Many fundamental obstacles to that vision today have been overcome through innovation, creating a society where artificial intelligence (AI) is increasingly integral to our lives. For investors, the question now is how to position their portfolios to benefit from what many are calling the Fourth Industrial Revolution.

AI is using machines to understand, learn, and act on inputs from data being generated by an ever-growing number of digital devices, from smart watches to sensors monitoring livestock. AI finds patterns that humans can turn into insights, creating a feedback loop so machines can learn. What does this mean to investors? In our view, it means that businesses will be more productive and profitable.

This creates, in our view, a significant opportunity for investors. Advances in digital technology, including AI, have been so great lately that economist Tyler Cowen, author of The Great Stagnation, has said that total factor productivity (TFP) could reach record highs in 2021 after a decade of stagnating. Cowen is not alone seeing a bright future. A World Economic Forum report published in October wrote, “As the economy and job markets evolve, 97 million new roles will emerge… (largely) in fourth industrial revolution technology industries like artificial intelligence.” The report said that the most successful firms will be those that “reskill and upskill” workers to leverage AI and other digital advances.

Investors seeking to find potential winners can start by grouping AI companies into three categories; firms advancing AI technologies that can be sold as platforms and/or services; firms deploying AI to give them a competitive advantage; and, companies that are using AI to disrupt entire industries.

AI is fundamentally about making sense of large volumes of data, a challenge that naturally favors some data-intensive industries. For example, the Information Technology and Communications sectors have embraced AI to develop personalized services. Manufacturers use AI to advance factory automation and financial services firms use algorithms to develop new products. Some financial firms use AI to assess corporate Environmental, Social and Governance actions, using the technology to improve risk management and, potentially, the performance of portfolios.

Investors can also find AI innovators within various investment themes. Smart City projects use AI to create solutions for such challenges as reducing congestion and crime. Within the Internet of Things theme, innovative firms are adding more and more computing form factors to gather the data, adding devices in everything from refrigerators to farming irrigation systems and manufacturing supply chains.

In 2020, AI became more important as companies embraced digital transformation, using AI-enabled cloud solutions to better engage their customers, especially remotely. Part of this digital evolution has involved advances in cybersecurity. AI could be called the “arms merchant” of cybersecurity; helping create solutions to protect firms against cyberattacks and being used by hackers to find vulnerabilities. As more economic value comes online, firms advancing AI-enabled cybersecurity solutions should benefit.

AI is also increasingly important in the medical and pharmaceuticals sectors. That was evident in 2020 as AI technology rapidly sequenced the COVID-19 virus, facilitating an efficacious vaccine in a matter of months rather that the decade such an effort could otherwise have taken.

As AI becomes ubiquitous, the lines between sectors are blurring. Whether a certain firm is considered an automaker or a tech company may be a question of perspective. These blurring lines expand the opportunity set for investors that are willing to identify the firms that are making smart investments in AI to differentiate their products in ways that could facilitate a growing profits and market share.

The leadership of individual firms is also crucial. Investors should seek to identify the leaders with the courage to make the financial and cultural investment needed to leverage AI to gain market share, shift profits higher and to increase their share of overall industry profits.

Investors should monitor some key risks. There is a growing consensus that regulations may be needed to slow fake news and hate speech that can undermine democratic institutions. However, such regulations could benefit social networks if those new rules held people propagating hate speech, or fake news, legally responsible for the damages caused by their actions. Such rules, coupled with algorithms promoting reputable content, could ultimately improve social media for the common good.

Similarly, as data proliferates, privacy is another concern that may become even more acute as new technologies such as facial recognition become commonplace, suggesting a need for more rules.

Developing the appropriate legal framework should help the industry grow by removing a key risk to the outlook. Meanwhile, many questions remain: Who should be responsible when an intelligent medical X-ray machine produces an erroneous diagnosis—the radiologist, the hospital or the maker of the X-ray machine’s software? Similar legal issues must be resolved with self-driving cars, an area where progress has been much faster pace than I expected.

Beyond its investment potential, AI can help take the robot out of ourselves by eliminating all manner of mundane tasks, in the end, leaving investors with more time to enjoy the fruits of their labor.

Column by Sebastian Thomas, Lead Portfolio Manager for Global Artificial Intelligence at Allianz Global Investors

Gamco Launches a Convertible Securities Fund

| For Cecilia Prieto | 0 Comentarios

frog-540812_640 — Pixabay CC0 Public DomainRana y mariposa. Rana y mariposa

GAMCO Investors, Inc. is pleased to announce the launch this month of the GAMCO Convertible Securities fund, a new sub-fund of GAMCO International SICAV (Luxembourg), managed by Gabelli Funds. The GAMCO Convertible Securities fund offers investors access to one of Gabelli’s core strategies within a UCITS compliant structure, providing daily liquidity via accumulating share classes and a distributing class. We are excited to bring an actively managed fund to the European and Global marketplace that will be dedicated to global convertible securities while factoring in ESG guidelines.

The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979. Multiple share classes will be available at launch and are tailored for Global institutional investors as well as select non-US retail investors. At the onset, the Fund will launch with an institutional founder’s class at a reduced fee.

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

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

What is going on in the convertible market?

Global converts, as represented by the ICE BofA G300 Global Convertibles Index, increased another 5.4% in December. Global CBs added 32.6% in 2020, the best year for global CBs since 2009 on an absolute total return basis, ahead of each global stocks, High Yield and IG bonds.

In December 2020 CB issuance maintained its record pace as $12.6bn was priced globally, well-above the historical average for the month of December. While all regions were active last month, the US primary market saw the most volume as $8.1bn was priced, topped by the $2.0bn offering from Dish Network and $1.15bn offering from Uber. As of year-end, $158.6bn of new CB paper was launched globally, the most in a year since 2007 when nearly $163bn came to market. Of this, the US saw $105.8bn, just shy of 2001’s $106.4bn record, while Europe, Asia, and Japan saw $31.1bn (the most since 2009), just under $20.0bn (the most since 2007), and $1.7bn, respectively.

With the surge in net-new issuance discussed above and the impact of very strong CB performance last year, the global market ended 2020 with a $509bn market value, the most it’s been since May 2008. Regionally, the US has reached $351bn, also its largest size since 2008, with Europe at $89bn, Asia $54bn, and Japan $15bn. Europe’s size is now its largest since 2014, while Asia’s is its best since 2008. In contrast, given its lackluster returns and negative net-new supply, Japan was the only region to contract in 2020.

Top-performing pockets of the global CB market in 2020 were generally high growth, high delta, large-cap, tech, and consumer discretionary, mostly in the US and Asia. Overall, Asian equity alternatives (deltas above 0.8) were the top-performing regional bucket with a 199% gain, followed by US consumer discretionary (+195%), Asia discretionary (+120%), US HY (+115%), and Asia tech (+104%). As noted earlier, these segments of the market benefitted from the pandemic-driven rally in work-from-home names.

On the other side, the leading underperformers for 2020 included mostly lower-delta energy, transportation, and small-caps, mainly from Japan and Europe, though notably US energy was the biggest underperformer overall driven by the likes of Chesapeake and Nabors. Behind US energy (-30%) was European energy (-18%), Japan transportation names (-5%), European industrials (-4%), and Japan materials (-4%).

In our analysis it is clear that a handful of issuers dominated 2020’s large returns, mostly in the US and Asia. In the US, Tesla’s three tranches of CBs contribute about 41% of the US benchmark’s top-line performance, while Microchip, Zillow, Square, and Wayfair made up about 3%, 3%, 3%, and 2%, respectively. In fact the top ten issuers comprised about 61% of the index’s total return. In Asia, the single-issuer trend was even more pronounced as the top three names (the Sea, NIO, and Pinduoduo ADRs) made up 78% of the Asia benchmark’s performance. At the global level, the top CB names in 2020 were Tesla, Sea, NIO, Microchip, and Pinduoduo, which comprised 33%, 6%, 3%, 3%, and 3% of year-to-date returns, respectively.

The portfolio team is concerned that growth names may be a headwind in 2021 if the cyclical shift plays out the way we see hints of in the marketplace. We think that the CB market’s high concentration of growth and tech names, which proved to be a tailwind to performance in 2020 especially in the US and Asia, may become a headwind in 2021 if a cyclical rotation from growth to value persists. We think there is a likelihood of this happening if the economy reopens faster-than-expected and the vaccine optimism endures. Overall we believe the Global Convertible market performance will still achieve the asymmetrical returns we have seen in the past few years.

What should we expect from 2021?

U.S. equities closed 2020 with a December and fourth quarter rally as many stock indices continued to set multiple record highs. All of 2020’s net S&P 500 gain occurred during the second half as the upbeat economic outlook, Covid-19 vaccines, hope for more fiscal stimulus, and the Fed’s big monetary policy easy outweighed the resurgent pandemic. U.S. Senate control and Biden’s agenda prospects await the final outcomes of the two January 5 Georgia runoff elections.

Shares of small cap cyclically sensitive companies should benefit in 2021 as well as companies that will benefit from a long overdue focus on U.S. infrastructure.

The Gabelli stock selection process for researching and investing globally in various ‘Green Energy Wave’ companies and industries is centered on the ‘Environmental’ (E) aspect of the Environmental, Social, and Governance (ESG) framework that is being increasingly applied to companies worldwide. Our Green Team’s belief is that ‘our planet and people’ are essential to the future of Planet Earth. Our ‘Love Our Planet & People’ (LOPP) equity research methodology uses social screens and a holistic “E” overlay that have the potential to deliver enhanced returns by awarding relatively high ratings to selected companies that prioritize environmental sustainability. Low financing costs and improving economics should produce multiple clean energy winners, including select utility stocks, renewable developers, and clean energy equipment suppliers. We expect to see advancements in battery storage technology, grid modernization, green hydrogen, electric-vehicles and charging ports, rooftop solar, and energy efficiency. Substantial amounts of investment capital are needed to transition the global power industry toward a 100% renewable and net zero carbon goal. This is likely to provide long-term revenue and earnings growth for clean energy companies.

GAMCO’s risk arbitrage team expects 2021 merger and acquisition activity to continue the rising trend that started in the second half of 2020. Deals will likely include friendly and hostile, local, cross border, mega and bolt on transactions. Catalysts for industry consolidations and SPAC related deals should set the pace.

______________________________________________________

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

GAMCO MERGER ARBITRAGE

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

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

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

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

Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476

GAMCO ALL CAP VALUE

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

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

Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155

GAMCO CONVERTIBLE SECURITIES

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

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

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

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

Class I USD LU2264533006

Class I EUR LU2264532966

Class A USD LU2264532701

Class A EUR LU2264532610

Class R USD LU2264533345

Class R EUR LU2264533261

Class F USD LU2264533691

Class F EUR LU2264533428

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to ﬁnd out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reﬂect the manager’s current view of future events, economic developments and ﬁnancial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

Private Investments Risk Part 6: Look Around, What Do You See?

| For Gabriela Huerta | 0 Comentarios

Screenshot 2020-12-18 114033 — Wikimedia CommonsFoto: clinkey70. Foto:

Has it all worked out for you? Wake up, take stock, be honest.

Are you a gambler? Do you own real estate funds with office and hotel portfolios that were exposed to the Covid-19 lockdowns? Too bad. Do you own private equity funds that use leverage exceeding 7x cashflows for companies struggling during this crisis? Too bad. Are you invested in early-stage venture backed companies with no sure path to liquidity? Too bad! It really is too bad when investors gamble with risk.

The Covid-19 crisis exposed risk most investors never anticipated in owning leveraged office and hotel portfolios that will take years to recover, if they survive the financial pressures imposed by the crisis. Most investors never anticipated that their highly leveraged portfolio companies would see their revenues disappear during such a time. Investors never imagined that early-stage venture backed companies they liked would be scrambling for cash to survive over the last 12 months.

Conversely, those investors who cared about risk management and chose strategies that minimized use of leverage are feeling much more secure and hopeful. While GDP driven investment themes are cyclical and struggle during recessions, downturns, and global pandemics, we advised our clients to ignore temptations and instead commit to disciplined managers who create real value, avoiding unnecessary risk.

Over the last two years, we shared the following with our clients and these themes have served them well. Why? Because all of them have one thing in common. That is, they are all strategies that consider risk first and are mitigated.

Do you think proven, innovative biotech treatments will lead us to revolutionary outcomes? We do.

Do you think demographically driven real estate opportunities present less cyclical risk? We do.

Do you think proven pre-IPO growth companies have a chance to capture value that leveraged buyout transactions can’t? We do.

Do you think niche, sector specific, high quality private credit without much competition deserves our attention? We do.

Do you think a highly disruptive alternative to secondary liquidity providers deserve investment? We do.

Do you think owning minority stakes in a portfolio of large and growing private investment management firms is a good thing? We do.

So, we hope it has worked out for you! We hope you discovered a better way to invest in private investment funds by thoroughly understanding their risk profiles and choosing lower risk options. How many more shocks do we need to experience before we wake up and start taking risk considerations more seriously? Hopefully we are all aware now of how to invest by paying more attention to underlying risk because 2020 has been a needed wake up call for many private equity investors.

Column by Alex Gregory, founder of Better Way, LLC

Portfolio Manager Diary: How Do We Contrast the Information Obtained when We Analyze a Company?

| For Alicia Miguel | 0 Comentarios

lupabuena — Pixabay CC0 Public Domain. lupa

At the beginning of last September, I met by video conference with the Grifols (GRF) Investor Relations Team. We talked about accelerating immunoglobulin sales in developed markets such as the US, Canada, and some European countries. GRF produces and sells immunoglobulins for intravenous and subcutaneous administration, and they are used in part to treat diseases of patients with Primary Immunodeficiency (PIDD).

During the last week of September, I conversed with an American hedge fund manager, as we are both research contributors to Seeking Alpha (SA). In that conversation, the manager recommended Koru Medical Systems (KRMD), highly penalized by the market, but the underlying business was excellent. KRMD is an American manufacturer of low-price subcutaneous infusion devices for delivering immunoglobulin therapies in chronic diseases such as primary immunodeficiencies (PIDD), chronic inflammatory demyelinating polyneuropathy (CIDP), and others.

PIDD is a diverse group of genetic disorders caused when some immune system components (especially cells and proteins) do not work correctly.

Does it sound familiar? I repeat, patients with PIDD

Thanks to the investment in GRF and the good prospects for the immunoglobulin business, I decided to do more research on KRMD.

Its business model is very attractive due to its high recurring income component, a consequence of the fact that on many occasions, a patient with PIDD must treat for all life. Also, the maintenance and the purchase of accessories generate recurring income and high switch costs, a consequence of the fact that a machine can often only use spare parts of the same brand.

So what are the main drivers of future growth?

1. Diagnose more PIDD and SID patients

PIDD (primary immunodeficiencies) is a group of more than 400 rare genetic diseases that cause a malfunction of the immune system. These diseases affect one in every 2,000 people, 60% of cases diagnosed during childhood, and up to 10% detected at birth in countries with the corresponding screening program. According to different academic studies, globally, there are 650,000 people diagnosed and 6M who have not yet been.

Most of the people diagnosed with PIDD are in the US, specifically 500,000 of whom 130,000 receive some immunoglobulin (Ig) therapy. Of these 130,000, 35,000 are receiving subcutaneous Immunoglobulin (SCIg); therefore, there is the possibility of converting 95,000 patients from intravenous (IVIg) to subcutaneous (SCIg). PIDD therapies represent an annual recurring income per patient of $ 750, according to data from Koru Medical.

Sometimes due to external factors (those that are not caused by genetics), people develop what is known as secondary immunodeficiency (SID). As a result, patients can undergo repeated rounds of antibiotics and hospitalization for treatment. SIDs are much more common than primary (genetic) immunodeficiencies.

Chronic inflammatory demyelinating polyneuropathy (CIDP) is a rare neurological disorder that causes inflammation of the body’s nerves. Although your immune system generally keeps you healthy by fighting germs, your immune system does not recognize parts of your nerves and attacks them. Over time, this can cause gradual weakness, numbness, and loss of feeling in the arms and legs. If left untreated, CIDP can cause permanent nerve damage. CIDP therapies represent an annual recurring income per patient of $ 1,500, according to data from Koru Medical.

2. Increased adoption of subcutaneous therapies

Many reasons explain the preference for subcutaneous vs. intravenous, both by patients and doctors. Some of them are: 1) It can be self-administered at home without the help of a nurse, 2) fewer side effects in a patient with low blood pressure, 3) flexibility in scheduling injections, 4) gradual adsorption of the Immunoglobulin, 5) does not require premedication, 6) the patient can continue to perform their tasks while injecting and 7) higher frequency of administration (weekly) in SGIg.

Although SCIg therapy is more expensive in terms of price per gram than IVIg, some studies indicate that over a year, a patient generates an average savings of $ 10,000.

3. Medical devices and self home administration

There are three different SCIg infusion systems, mechanical, electronic, elastomeric, and push. Mechanics are the cheapest, and this is the segment where Koru Medical operates. The electronics inject a constant flow. They are programmable, but their sale price is higher, and they require batteries and some previous training from the patient. We will analyze in more detail the mechanical pumps and a semi-electronic one.

3.1) FREEDOM60 from Koru Medical Systems: Completely portable syringe infusion system, without the need for electricity or batteries and operates at a constant and safe pressure. The FREEDOM60 pump could use for almost any subcutaneous or intravenous administration in a standard 60 ml syringe.

3.2) Crono S-PID 50 from IntraPump: The newest, high volume ambulatory infusion pump for subcutaneous drug therapies always with a prescription. It combines high technology with an innovative design. It’s small and light, accurate, and has the flexibility to change flow rates during an infusion with ease, making it ideal for home therapy. Its use with 50 ml dedicated syringe. There is also a Crono Super PID pump designed for pediatrics with reliable 10, 20, and 100ml syringes.

3.3) EMED Technologies SCIg60 Self-Powered Pump: Utilizes a reusable constant pressure mechanical pump monitored by the VersaRate flow controller. This disposable device allows the physician and patient to adjust the inflow flow better. Today, this device is still pending clearance from the FDA.

In mid-November, and after speaking with the company’s management, it was clear that Koru Medical was present in a business with excellent growth potential and located in the right segment (subcutaneous immunoglobulins). However, I still had three questions to answer:

A. Was there a margin of safety?

B. What is the best medical device for administering SCIg?

C. Is the business model scalable outside the US?

To answer the first and most straightforward of the three questions, we must make a rough assessment of the business. We know that Koru Medical’s strategic plan is to reach $ 50M in sales by 2022, a gross margin of 70%, and organic and annual sales growth of + 20%. We propose the fundamental valuation based on two methods, and for simplicity, we do not include the clinical trials and international segments (Less than 20% of total sales).

1) Company guidance

Growth of 15% for 2020, 20% for 2021 and 25% for 2022, less than company guidance. In the gross margin, we started from 68% in 2020 to 70% in 2022. We think the company will reduce its salary cost to 40% of total revenue, which implies an Ebit margin of 23% in 2022. To estimate the target value, we applied 5x sales or 25x profits to reach a theoretical value of 6.35 dollars. At the current trading price (3.90 dollars on November 11), we obtained an upside potential of over 60% for estimates below the company’s target.

2) Total addressable market (TAM) in the US

FREEDOM60 use in 35,000 subcutaneous patients, but there are 130,000 intravenous patients. Therefore, Koru Medical has the opportunity to convert an additional 95,000 patients. If we perform the same calculation for CIDP, we see the possibility of converting 4,750 patients. If we estimate that Koru Medical will capture 30% of the market opportunity in PIDD and 15% in CIDP, we achieved target sales of 51.3 million dollars, a figure very much in line with the company’s strategic plan. Applying the valuation multiples above, we obtained a target price of 7.65 dollars or a potential upside of 96%.

Because of the assessment achieved, there is no doubt that we obtained a sufficient margin of safety, but we still had to answer two more questions. Most fundamental analyzes end at this point or much earlier. Even at DRACO GLOBAL, we go one step further, and we need to contrast the information we have obtained from the company, analysts, or colleagues.

Information Contrast

At DRACO GLOBAL, we do not make an act of faith. We believe what the company, a report, or an analyst tells us; Instead, we contrast the information with those who best know your product or service (Clients, suppliers, distributors, etc.). On this occasion, we got in touch with BarcelonaPID Foundation and we talk to your president and pediatric immunologist, Pere Soler Palacín.

The PID Foundation is a non-profit organization founded in 2014 as the initiative of a group of professionals dedicated to pediatric patients with Primary Immunodeficiencies (PID) and their families. Its objective is to promote the knowledge, study, research, and dissemination of PIDs and the complications derived from these diseases.

As president of the foundation and with more than 25 years of experience in IDPs, Dr. Soler extended information to our study with the following words:

• There is a wide variety of PID diseases, and some are more or less common and more or less serious.

• More typical in children, but it can also occur in adults.

• Treatment for PIDs can reduce the number and severity of conditions and help children and adults lead as everyday lives as possible.

• Immunoglobulin treatment is the essential treatment for many of these PIDD, helping protect against a wide range of infections and reduce autoimmune symptoms.

• Dr. Soler confirms that they mostly use the subcutaneous route due to: less need for injections, self-administration at home with prior instruction to the patient, faster administration, fewer side effects, and lower QoL.

• Artificial plasma could be a very long-term option, but today it is not possible in any case.

• SIDs (secondary) is also an exciting opportunity, although there is still a lot of work.

While talking to Dr. Soler, I convinced that I had found a great investment idea, but when I asked him about existing medical devices, his answer left me blank.

• From 2006 to 2009, they used the typical low-cost mechanical pump called the Infusa T1 from Physan. In his experience, the infusion pump did not generate a constant flow. It was easily clogged and made it difficult to administer medication. In 2009, they chose to change their supplier to InterPump, the company that owns the Crono S-PID 50 device. This device significantly reduced the problems related to tube occlusion and drug inlet fluidity. Its size is smaller, and its design is lighter, making it ideal for home therapy and providing complete freedom for the patient to administer medications at any time of the day without interrupting daily life or leisure activities.

After this revelation, I went to the InterPump website and began to read testimonial comments that had used both devices and just confirmed everything that Dr. Soler told me.

Finally, I asked Dr. Soler if there was any explanation why FREEDOM60 used more than Crono S-PID 50 in the US, and according to his opinion:

• The fact that healthcare is private and expensive encourages you to buy low-cost devices like FREEDOM60. On the other hand, healthcare subsidies in Europe and Spain and the cost is not the main problem.

Finally, I understood that the investment thesis could be valid in the US as long as the current health system continues but not in Europe. A part of Koru Medical’s future growth is international expansion, Europe included. Still, after Dr. Soler’s revelation, my opinion changed radically to the point that I am rethinking my investment in Koru Medical Systems.

There is always the possibility that Koru Medical will consolidate the market and buy another company, and why not one of its best competitors. InterPump (Crono) is a small Italian company and does not trade on the stock exchange. You never know if the owner would be willing to sell it. In the release of the 3Q20 results, the CEO of Koru Medical spoke that they are always attentive to the M&A possibilities offered by the market and that after the June capital increase, they could use the $ 32M they have in the box.

In this article, I wanted to show how we analyze and contrast the DRACO GLOBAL information before investing, especially in small companies. Unfortunately, it is not a common practice in the sector, but in DRACO GLOBAL we try to do it.

PS: I want to publicly thank Dr. Soler for his time, his kindness and encourage people to read this article and go to the PID Foundation website.

Column by Quim Abril, President and Portfolio Manager of Draco Global Sicav at Gesiuris AM.