Portfolio Management 2024: What are the top 10 challenges for capital raising and client management?

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Portfolio management faces several complex challenges that require the constant attention of industry professionals. The 1st Annual Report of the Asset Securitization Sector, sponsored by FlexFunds, highlights the top 10 challenges facing portfolio managers when raising capital and acquiring clients.

Raising Capital and Acquiring Clients: A Competitive Battleground

Tightening regulations, which can increase costs and create barriers for new investors, is one of the first complications portfolio managers encounter. Intense competition to attract clients and capital adds to this challenge, especially when differentiation between financial products is minimal.

Lack of understanding on the part of investors and clients about investment strategies and financial products can generate fear and indecision, especially in environments of low returns or lack of liquidity.

However, market uncertainty, arising from volatility or structural factors, stands out as the most problematic factor for acquisition.

FlexFunds’ report studies the main trends in asset management, which included the participation of more than 80 companies from 15 countries in LATAM, the United States, and Europe. This report reveals that 68.1% of participants consider uncertainty the most significant challenge, followed by lack of liquidity (15.4%) and financial system insecurity (12.1%). These factors accounted for 95.6% of the responses.

 

Market volatility undermines investor confidence and increases risk aversion, delaying investment decisions. Overcoming these challenges requires tactics that address uncertainty and improve client understanding of investment strategies.

Difficulties in Client Portfolio Management

According to the FlexFunds’ report, investment portfolio management faces several complex challenges, the top 10 of which stand out:

  1. Client risk tolerance: Each client has a different risk tolerance, requiring careful balance in portfolio composition.
  2. Market volatility: Financial markets are inherently volatile, requiring frequent adjustments to maintain portfolio balance.
  3. Changes in economic conditions: Economic and market conditions impact asset returns, requiring adaptability in investment strategy.
  4. Proper diversification: Achieving optimal diversification can be challenging, requiring in-depth analysis and specialized knowledge.
  5. Asset selection and active management: Identifying strong asset investment strategies and actively managing the portfolio involves constant monitoring and informed decision-making.
  6. Costs and fees: Balancing costs with the quality of services and results is essential to maintaining the client’s net return.
  7. Effective communication: Clear and effective communication is crucial to understanding the client’s changing needs and ensuring trust over time.
  8. Compliance and regulation: Keeping compliant with regulations and ethical standards is essential for asset managers.
  9. Managing client emotions: Handling client emotions during volatility is crucial to avoid impulsive decisions.
  10. Relative performance and expectations: Addressing client expectations and explaining relative performance is vital to maintaining trust.

When industry professionals in more than 15 countries were asked, “What are the main difficulties you face in client portfolio management?” respondents identified reporting (37.4%), back-office (20.9%), front-office (17.6%), the accounting process (11%), and middle-office (7.7%) as the primary challenges in portfolio management.

Dive into a detailed analysis of the difficulties in portfolio management. From risk tolerance to emotional client management, FlexFunds’ 1st Annual Report of the Asset Securitization Sector reveals the daily complexities that portfolio managers face. Discover how industry leaders address market volatility, appropriate diversification, and regulatory challenges.

Download the full report to uncover innovative strategies, practical solutions, and exclusive insights on portfolio management in the competitive financial world 2024. Will the 60/40 model remain relevant? Which collective investment vehicles will be most utilized? What is the expected evolution of ETFs? What factors should be considered when building a portfolio? among others.

More than 50% of asset managers continue to bet on the 60/40 model

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Did the year 2022 destroy the relevance of the 60/40 model? Are portfolio managers willing to implement other options? What alternatives are available in the market for asset managers to facilitate portfolio diversification? According to FlexFunds, a leading company in the design and launch of investment vehicles (ETPs), uncertainty becomes the playing field, and adaptation becomes imperative.

FlexFunds, has taken the initiative to prepare the 1st Report of the Asset Securitization Sector: a study of the main trends of these financial instruments to raise capital in international markets. This report reveals that despite poor results in the last year, more than half of the surveyed asset managers continue to bet on the 60/40 portfolio diversification model (request this full report by sending an email to info@flexfunds.com).

The 60/40 portfolio management model is an asset allocation strategy that involves a 60% weighting of the portfolio in equities and a 40% in fixed-income assets. This approach is commonly used by portfolio managers as a way to diversify risk and ensure a certain level of return in an investment portfolio.

The year 2022 marked a dark milestone for 60/40 portfolios, worsening even the negative returns experienced during the economic crises of 2001 and 2008. Traditional recipes failed, and both the fixed-income and equity markets suffered significant losses. The war in Ukraine and the rapid rise in interest rates in the U.S. and the eurozone created a very complex scenario where the orthodoxy of the price relationship between stocks and bonds was not met.

To the question, “Do you think the 60/40 portfolio composition model worked in the last 12 months?” more than 68% of asset managers and investment experts answered that the 60/40 model did not work, while 15.4% believe it did. However, 16.5% of the sample does not have a clear opinion on the matter. It is worth noting that among those who believe it did not work, almost 75% think it was due to the rise in interest rates, while nearly 10% argue that it was due to the decrease in equities.

Amid the uncertainty, portfolio management becomes a delicate art. Diversification, a cornerstone, was challenged by the lack of correlation between fixed income and equities. Traditional strategies, such as the 60/40 model, faltered, revealing their vulnerability to the changing economic and financial paradigm.

However, despite the majority of respondents agreeing that the 60/40 model did not work, when asked, “Do you think the 60/40 model will remain relevant?” 59% of asset managers and investment experts believe that this strategy will continue to be relevant. This fact highlights two aspects: first, its future application will depend on how the markets and economic conditions evolve, and second, perhaps paradoxically, it contradicts the earlier assertion that most respondents believe it did not work in 2022, yet now there is a majority opinion that it will remain a relevant strategy.

The global trend in portfolio diversification with new asset classes such as real estate, crypto assets, and private equity offers divergent alternatives to the classic 60/40 model in the international market. FlexFunds, through its asset securitization program, provides investment managers with the flexibility to design a portfolio with multiple asset classes and repackage it for distribution through Euroclear to private banking platforms.

How should asset managers adapt? What investment vehicles do investment advisors prefer to diversify their portfolios? What are the industry’s biggest challenges for clients and capital acquisition? Discover all of these key trends and more in the 1st Report of the Asset Securitization Sector by FlexFunds, which gathers the opinions of more than 80 asset managers and investment experts from 15 countries in Latin America, the U.S., and Europe.

Request it by sending an email to: info@flexfunds.com

Securitization: Transforming Assets into Bankable Assets through ETPs

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Kanhaiya Sharma - Unsplash

In the dynamic world of finance, asset securitization has emerged as a valuable bridge to multiple private banking platforms, enabling the conversion of underlying assets into what is known as “bankable assets”. “Bankable assets” can be effectively distributed through various private banking platforms. This process has become even more powerful by incorporating exchange-traded products (ETPs) as key tools for transforming underlying assets into bankable assets, the FlexFunds team explains in an analysis:

Securitization: a path to liquidity

Securitization is a financial process that goes beyond merely converting liquid or illiquid assets into securities. It also uses ETPs as instruments for this transformation. This process can become quite complex, but thanks to FlexFunds’ solutions, it can be carried out in an agile, straightforward, and cost-effective manner.

FlexFunds’ securitization program is crucial in facilitating access to multiple private banking platforms by designing and launching investment vehicles, similar to traditional funds, that enable strategy management and global distribution to international investors.

Securitization for multiple asset classes

One of the most notable advantages of securitization is its flexibility. It is not limited to a specific class of asset, which means both liquid and illiquid assets can be securitized. Most importantly, private banking treats these operations as debt, streamlining the process of registering a FlexFunds ETP compared to the complex and lengthy verification procedures associated with traditional funds.

Advantages of the asset securitization process

Asset securitization offers multiple advantages that make it attractive to both financial advisors and investors:

  1. Improved liquidity and access to alternative sources of financing: Securitization converts illiquid assets into tradable securities, providing financial institutions with additional liquidity and access to alternative sources of financing.
  2. Customization of securitized assets: It allows institutions to structure securitized securities according to investors’ preferences and needs.
  3. Diversification of investments: Securitized securities can be backed by various types of assets, enabling investors to diversify their portfolios and reduce exposure to specific risks.

How are assets converted into Bankable Assets?

The process of converting assets into bankable assets through an ETP is relatively straightforward for FlexFunds’ clients. In five simple steps, they can bring their ETP to market, facilitating access to investors in the global capital markets:

  1. Design the investment strategy for your ETP.
  2. Sign the Engagement Letter.
  3. Conduct Due Diligence.
  4. Create the ETP.
  5. Issue the ETP.

Once this process is completed, advisors can market the product, which combines a series of assets into a single investment vehicle, simplifying the investment process for their clients.

The Role of ETPs in Modern Finance

ETPs are exchange-traded products that track the performance of underlying assets, such as indices or other financial instruments. They trade on exchanges similarly to stocks, which means their prices can fluctuate throughout the day. However, these prices fluctuate based on changes in the underlying assets.

Since the launch of the first ETF in 1993, these funds and other ETPs have grown significantly in size and popularity. According to ETFGI data, as of the end of July 2023, ETFs in the United States reached a record of $7.6 trillion in assets under management (AUM). Their low-cost structure has contributed greatly to their popularity, attracting assets away from actively managed funds, which typically have higher costs.

By the end of July, the U.S. ETF industry had 3,180 products totaling $7.6 trillion in assets, from 289 providers listed on three exchanges.

Trends Toward 2027

According to a report by Oliver Wyman, Exchange-Traded Funds (ETFs) are projected to account for 24% of total fund assets by 2027, up from the current 17%. As of December 2022, total ETF assets under management in the U.S. and Europe reached $6.7 trillion, experiencing steady growth with a compound annual growth rate (CAGR) of approximately 15% since 2010. This growth is nearly three times faster than that observed in traditional mutual funds.

Despite various trends, such as increased demand from retail investors, tax and cost advantages, favorable regulation, growing demand for thematic ETFs, and direct indexing, positively influencing the growth prospects of ETFs, their launches face various challenges. These challenges include the high costs associated with establishing infrastructure and significant risk of failure. These obstacles have given rise to white-label ETF providers, a relatively novel business model that allows fund providers to bring their strategies to market quickly and efficiently.

Additionally, there is anticipated strong focus on technologies like artificial intelligence and autonomous learning to gain competitive advantages and provide greater value to customers. These trends also open up opportunities for wealth managers to expand their business models, especially concerning non-bankable assets, which represent a significant and growing portion of individuals’ total wealth today.

Asset securitization through ETPs offers innovative financial solutions that enhance liquidity, expand financing options, and enable portfolio customization. These strategies align with future trends in the financial sector, which are moving towards personalized solutions and adopting advanced technologies. FlexFunds stands out as a leader in this transformative industry, providing advisors with unique opportunities in modern finance.

If you wish to explore the benefits of asset securitization in greater depth, do not hesitate to contact our experts at info@flexfunds.com

abrdn Extends Wholesale and Institutional Foothold in Brazil with Capital Strategies Partnership

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The abrdn distribution team in charge of Brazil and Leonardo Lombardi, from CSP

Global asset manager abrdn announced today in Sao Paulo the completion of a new partnership with Capital Strategies Partners, the Madrid-based third party marketer firm, which will see Capital Strategies scale the delivery of abrdn funds in the Brazilian market, as well as bespoke solutions to pension funds and other institutional investors.

Working with Capital Strategies, abrdn will increase access to Brazil’s growing yet still underserved onshore market. Building on a wider push into South America’s largest wholesale market in 2023, the partnership follows the successful launch of two Brazilian Depository Receipts (BDRs) on B3 that mirror abrdn precious metal ETFs and will continue to drive interest in abrdn’s differentiated offerings from Brazilian accredited investors

The latest tie-up also builds on solid distribution foundation in South America, having secured a similar 2021 partnership in Spanish-speaking LatAm markets with Excel Capital supporting fund access in Argentina, Uruguay, Chile, Colombia and Peru. In combination, these partnerships now enable abrdn to cover a wide swath of the LatAm wholesale market and quickly and holistically address investor needs as they evolve.

“Capital Strategies has become well respected as a marketer leader in Latin America, especially in Brazil, and their platform delivers wide and efficient access to sophisticated investors and advisors,” said Menno de Vreeze, Head of Business Development for International Wealth Management – Brazil at abrdn. “abrdn’s capabilities are becoming well known in Latin America’s wealth circles, and as we further grow our presence, this is another big step that will add immediate scale and value. We’re very excited to discover the fruits of this relationship.”

Pedro Costa Felix, Partner at Capital Strategies, added: “We are now proud to be working with several of the world’s largest asset managers to deliver valuable exposure in Brazil, and are very pleased to add abrdn to that growing circle. Even as it continues to mature, it is clear that the Brazilian market already offers a compelling opportunity for abrdn and its funds, with their distinctive risk profile and specialization. We are keen to enable their successful growth in Brazil, helping to build regional reputation in LatAm and flowing in new global assets to their funds through these channels.”

SPVs vs. Investment Funds: Which One to Choose?

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Freepik

Innovation and adaptation are crucial in finance and business to tackle evolving challenges and seize opportunities. One of the most interesting and effective concepts in this area is the Special Purpose Vehicle (SPV), also known as a special purpose entity. These legal entities, operating under a specific focus, have proven to be an agile asset management tool in various contexts.

Understanding the SPV concept

Special Purpose Vehicles (SPVs) are entities with specific purposes. An SPV is a legal entity with its own assets and liabilities, separate from its parent company. Parent companies legally separate the special purpose entity mainly to isolate financial risk and ensure it can fulfill its obligations even if the parent company goes bankrupt.

An SPV is also a key channel for securitizing asset-backed financial products. In addition to attracting equity and debt investors through securitization, as a separate legal entity, an SPV is also used to raise capital, transfer specific assets that are generally hard to transfer and mitigate concentrated risk.

How do Special Purpose Vehicles work?

The SPV itself acts as an affiliate of a parent corporation. The SPV becomes an indirect source of financing for the original corporation by attracting independent equity investors to help purchase debt obligations. This is most useful for high-credit-risk elements, such as high-risk mortgages.

Not all SPVs are structured the same way. In the United States, SPVs are often limited liability companies (LLCs). Once the LLC purchases the high-risk assets from its parent company, it typically pools the assets into tranches and sells them to meet the specific credit risk preferences of different types of investors.

Companies generally use SPVs for the following purposes:

Asset Securitization: In securitization, an SPV is created to acquire financial assets, such as mortgages, loans, or receivables, from a company or originator. These assets are bundled and issued as asset-backed securities (such as mortgage-backed bonds). The SPV separates the assets from the originating company, which may reduce risk for investors.

Project Financing: SPVs are used in infrastructure or development projects involving multiple parties. The SPV can acquire and operate the project, raising funds from investors and issuing securities to finance it. This limits the risk and liability of the involved parties.

Mergers and Acquisitions: In acquisition or merger transactions, an SPV can be used to isolate the assets or liabilities of the target company, which can benefit risk management and the transaction’s financial structure.

Risk Management: Companies can use SPVs to separate certain risky assets or activities from their balance sheet, helping to mitigate the impact of potential financial issues on the entire organization.

Real Estate and Property Development: SPVs can be used in real estate projects to acquire and develop properties. This can facilitate investment from multiple partners or investors and provide a separate legal structure for the project.

Asset Financing: Companies can use SPVs to finance the purchase of specific assets, such as equipment, planes, ships, or other high-value goods.

Tax Optimization: In some cases, SPVs can be used to leverage specific tax benefits or favorable tax structures in certain jurisdictions.

Special Purpose Vehicles are used to create specific financial structures that help separate risks, facilitate investment, manage assets, and meet specific business objectives. These legal entities offer flexibility and opportunities for investors and companies in various financial and business situations.

At FlexFunds, we take care of all the necessary steps to make customized and innovative SPVs accessible to fund managers. Thanks to these investment vehicles, asset managers and financial advisors can expand the range of products they offer to their clients.

SPV vs. Investment Funds: different approaches for different needs

A Special Purpose Vehicle (SPV) and an investment fund are financial concepts used to structure and manage investments efficiently, but they are employed in different contexts and for different purposes.

Special Purpose Vehicle (SPV):

A special purpose vehicle is a standalone company created to disaggregate and isolate risks in underlying assets and allocate them to investors. These vehicles, also called special purpose entities (SPEs), have their own obligations, assets, and liabilities outside the parent company.

Investment Funds:

Investment funds are collective investment vehicles where investors contribute their money to a common fund managed by financial professionals called fund managers. These funds pool money from various investors and are used to invest in various assets, such as stocks, bonds, real estate, or other financial instruments.

So, a Special Purpose Vehicle (SPV) is used to structure specific transactions and separate risks, while an investment fund is a collective vehicle that allows investors to pool resources to invest in a broader range of assets. Both concepts play an important role in the financial field, but their focus and purpose are different.

There’s no definitive answer as to which instrument is better, as their utility depends on each individual or entity’s specific investment goals and circumstances. Each has its own advantages and disadvantages, and the choice will depend on factors such as the investment purpose, the level of risk the client is willing to take, the investment duration, and personal preferences.

Some Advantages and Disadvantages of SPVs:

Advantages:

Special tax benefits: Some SPV assets are exempt from direct taxation if established in specific geographic locations.

Spread the risk among many investors: Assets held in an SPV are financed with debt and equity investments, spreading the risk of the assets among many investors, and limiting the risk for each investor.

Cost-efficient: It often requires a meager cost depending on where you created the SPV. In addition, little or no government authorization is needed to establish the entity.

Corporations can isolate risks from the parent company: Corporations benefit from isolating certain risks from the parent company. For example, if assets were to experience a substantial loss in value, it would not directly affect the parent company.

Disadvantages:

They can become complex: Some SPVs may have many layers of securitized assets. This complexity can make it challenging to monitor the level of risk involved.

Regulatory differences: Regulatory rules that apply to the parent do not necessarily apply to the assets held in the SPV, which may represent an indirect risk for the company and investors.

Does not entirely avoid reputational risk for the parent company: In cases where the performance of assets within the SPV is worse than expected.

Market-making ability: If the assets in the SPV do not perform well, it will be difficult for investors and the parent company to sell the assets back into the open market.

 Some Advantages and Disadvantages of Investment Funds:

Advantages:

Investment funds offer instant diversification by allowing investors to access a diversified asset portfolio managed by professionals.

They offer greater liquidity than some SPVs, as investors can buy or sell fund shares anytime.

Investment funds are more suitable for investors seeking a broader exposure to financial markets without actively managing their investments.

Disadvantages:

Investment funds can have management fees and associated expenses, which can reduce returns for investors.

Investment funds are designed for a wider group of investors and may not offer the same specific structure required in some complex transactions.

Ultimately, choosing between an SPV and an investment fund will depend on your needs and goals. With over a decade of experience, FlexFunds makes setting up an SPV straightforward for its clients, facilitating distribution and capital raising for their investment strategy, achieving this at half the cost and time of any other market alternative.

The future of Wealth Management is changing: How to grow as Wealth Managers

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Foto de Cai Fang en Unsplash

Achieving a portfolio under management of USD 500 million of high-net-worth families in a short period of time is not easy, considering the aggressive competition among firms and colleagues visiting the same clients and offering the same products. The elements that can differentiate us are what determine success or failure.

Over the years, we have overcome international and regional crises that have made us experts in how to protect and increase wealth in the face of changes that occur.

But now, the challenge is greater, because we not only have to face the post-pandemic economic changes, including changes in consumer behavior, but also the management of the inflationary phenomena and global interest rate hikes.

Additionally, we are facing a change in our industry, not only due to the arrival of AI (Artificial Intelligence), but also because major firms are migrating their strategies, and advisors are caught amid this chaos.

Therefore, we must make decisions thinking about our plan for the next 10 years, both for ourselves and for our clients.

Analyzing the situation:

a) Many large firms have shifted their focus from “putting their clients first” to ceasing service to those who are not their primary market… without prior notice, or clear future expectations.

b) There are many parameters to analyze, and everything is based on who your clients are: individual or institutional, country, size, sophistication in investments, with or without banking services (credit cards, transfers, loans); and whether your approach is comprehensive, supporting your clients with their assets and efficient planning and organization of their wealth, or if you prefer to only focus on their investments.

c) Clients demand personalized, flexible, and prompt attention; many “large” firms become bureaucratic and when their focus is not on the client, they lose their responsiveness, either relying on machines or on newly advisors focused on promoting “combo” portfolios that often do not meet the complex profile and needs of the client.

d) Advisors understand the clients’ “preservation profile“: strong jurisdictions in which to diversify with properties and financial assets held in well capitalized firms, with diversified portfolios seeking high income and capital growth, taking advantage of market opportunities within their profile (which is generally more conservative than established… when corrections occur) and therefore managing their assets accordingly, as trusted individuals with whom we have weathered various storms together. Our clients seek captains who know how to navigate and reach the destination.

e) We know where their money comes from, and it truly gives us a unique opportunity to respect their work, admire their achievements, and understand the dynamics of our clients, their families, and businesses in order to plan for intangibles – what is more important: the potential 20% market correction which generally recovers over time, or a family going through a divorce and “losing” 50% of their assets? Or an international client in the US with a personal investment account potentially losing up to 40% of their portfolio above USD 60,000 in US securities due to inheritance taxes? (*IRS info). It is part of our work, along with other professionals, to plan with companies, trusts, and other tax-efficient structures.

f) To preserve wealth, we involve future heirs so that they are aware that investment accounts are the funds generated and not spent over many years by their predecessors, along with the compounding effect (* Rule of 72 info), e.g., a portfolio doubles at 7.2% annual rate every 10 years). This way, when they receive them, they don’t “gamble” with them or spend them with their “new” friends.

g) Providing tools is always more educational than giving away, and for this purpose, there are strategies such as borrowing against the family portfolio (so they develop their projects with the discipline of having the obligation to repay); a strategy that is also used to acquire properties in a tax-efficient manner or support local businesses while maintaining the medium to long-term investment portfolio. It is also good for them to learn how it works because diversification and “time in the markets” are the only secrets to financial success.

Considering this description of the context, we must ask ourselves:

At what point in your life are you…

Do you have the resilience to be a “soldier of your firm”, following orders to “close your clients’ accounts” in exchange for receiving the clients of the colleague who dares to take the step, or to retire? Or do you have the energy to be loyal to your clients to do all the work of establishing their accounts again and understand that there will be surprises along the way with the clients themselves, your colleagues, or the new firm or structure you choose?

Think about the future and try to understand who you want to work for in the next 10 to 15 years: a firm, your own firm, or clients? Your current clients or those who take the step with you (and truly value you)? New clients, markets, team, or strategic alliances?

The feeling that is generated when a partner or client accompanies you is tremendous and generous; they are there for you, just as you have been there for them… and naturally, you will take care of them, their children, and referrals.

It would be expected that the relationships built on years of effort and hard work surpass temporary separations of months (due to compliance with protocols and sector-specific rules).

According to a Wealth-X report, high net worth clients often follow their investment advisors when they decide to switch firms. This is due to the trust and experience that they have developed with their advisor over the years. The report also highlights that client loyalty to the investment advisor outweighs loyalty to the firm itself. Additionally, a survey conducted by PwC reveals that 64% of high-net-worth clients consider the personal relationship with their financial advisor as an important factor when choosing a wealth management firm. 

Speaking of motivation, if one is recognized in the industry, besides choosing wisely and going where one feels better, you can “capitalize” on the change, and the work is very well rewarded…

A very personal article, as a Portfolio Manager, a market researcher, and with my own convictions… the same beliefs that led me to enter 2022 with over 30% of my clients’ USD 500 million in cash because I anticipated interest rate hikes and cash along with a small proportion in alternative investments (properties) was the only thing that could protect them.

And, as someone dedicated to my clients, recognized by Forbes, Working Mother, Women We Admire-Miami, and even being congratulated in Times Square… now, anticipating the events and adapting to the new reality, I have stepped out of my comfort zone to search, compare, and find the best place for my clients, a “boutique-style within one of the best capitalized financial institutions in USA with extensive resources,” or as my clients say, “we went from Rolex to Patek Philippe.”

Therefore, considering the question “should I stay, or should I go?”, and in order to grow, check the following points:

  1. The significant growth in wealth management by boutique firms, as indicated in the Wealth-X report, also highlights that boutique firms have been successful in attracting high-profile clients such as successful business owners, institutional investors, and affluent families. This is due to their ability to quickly adapt to the changing needs of these clients, offering tailored solutions and high-quality personalized service, particularly in markets emerging and growing economies.
  1. The increasing demand for online financial services and mobile applications by clients.
  1. The increase in investment in North American firms. Additionally, the importance of understanding tax and legal regulations in both countries and properly preserving money in an efficient tax structure.
  1. The search for estate planning services and investment in real estate in the United States.
  1. Clients’ preference for responsible investment and strong personal relationships based on trust and tailored to cultural needs.
  1. And, I will share my thoughts on strategy at this moment: position your cash… remember that in the last two decades there have only been high interest rates a couple of times, and therefore, considering the decrease in inflation, among many other variables, I believe that interest rates will decrease in the coming years; based on that, I suggest increasing the fixed income investments in your portfolio’s asset allocation, targeting yields of at least 5% with a conservative mix of securities such as fixed-term deposits – CDs (FDIC-insured certificates of deposit), as well as investment-grade bonds. It’s also time to extend the duration and increase maturities to maintain high cash flows and potential appreciation (you can stagger maturities for liquidity if needed). For additional income, growth, and currency diversification, consider including funds & ETFs (Exchange Traded Funds), which for emerging markets (bonds and stocks) are a good way to better protect principal, thanks to diversification and tax efficiency – at least, ‘offshore’ offer to international clients.

In conclusion, taking into account these considerations supported by reliable reports and sources, remember the words of Warren Buffett: ‘It takes 20 years to build a reputation and only 5 minutes to ruin it,’ as it will help you make the right decision.

Whether it’s staying with your current firm, moving to another firm, becoming independent, changing sectors, or even taking a break or retiring… It’s time to make that decision with courage, conviction, and triumph. Keep soaring high and enjoy the journey while continuing to be the best version of yourself.

Wishing you great success on your path!

 

Eva Marina Ovejero, Managing Director at Alex. Brown, a Division of Raymond James

How to select an investment vehicle? 6 Key Aspects

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The Natixis IM survey reveals that portfolio managers’ most significant concern continues to be the increasing inflation rate (70%), followed by a sustained rise in interest rate (63%). Despite this outlook, investment advisors remain optimistic.

According to the same source, asset funds, sustainable investments, and private assets are the focus of portfolio managers for the remainder of 2023.

In this regard, investment fund managers see potential opportunities in the rising interest rates that accompany inflation, making fixed-income instruments a significant player during 2023.

However, the returns offered by these instruments in some Latin American countries are favorable for attracting investors through offshore investment vehicles, helping to increase their distribution in international private banking.

Several alternatives in the market allow for securitizing a fixed-income investment strategy or any portfolio with diverse underlying assets. When making a choice, it is essential to consider the following aspects:

Cost: There are two main costs associated with an investment vehicle. The first is related to the structuring and launch of the investment vehicle, and the second refers to the expenses related to its daily maintenance. Both cost elements are crucial when selecting a suitable investment vehicle to avoid penalizing investors with high structural costs impacting their returns.

Trading Hours and Operations: Some European investment vehicles may not offer operational and tradable hours fully compatible with those in the Americas. This is particularly important when the investment strategy requires quick execution of subscription and redemption orders by the trading desk.

Distribution and Custody Capacity: One of the main criteria for selecting an investment vehicle should be its potential for future distribution. Nowadays, registering investment funds on certain private banking platforms can be a costly, lengthy, and tedious process.

Transparency and Disclosure: Ensuring the investment vehicle provides clear and detailed information about its investment strategy, underlying assets, and associated risks. Transparency and proper disclosure are fundamental for investors to make informed decisions.

Flexibility and Diversification Capability: It is especially important to consider whether the investment vehicle is flexible enough to package multiple asset classes. This will allow for portfolio diversification and the application of hedging and covered call strategies.

Launch Time: The timing and synchronization between the vehicle’s launch and capital raising is usually crucial for asset managers. It is not only about the structure having an agile “time to market” but also about coordinating inflows from investors promptly.

In this context, the following is a comparative analysis between the Active Management Certificate (AMC) and FlexFunds‘ FlexPortfolio, where you can learn about the advantages and disadvantages of each:

AMCs present themselves as a flexible alternative with the capacity to solve the scalability issue. Due to their nature as structured products, they may be more complex and may not share many of the advantages offered by ETPs (Exchange Traded Products).

On the other hand, the FlexPortfolio is an internationally recognized solution for asset managers seeking a quick and efficient structure to launch various investment strategies. It is an investment vehicle that allows for the securitization of multiple listed asset classes.

It transforms an investment strategy into a negotiable security listed on a stock exchange and distributable through Euroclear. This way, asset managers can significantly expand the distribution of their portfolios.

Among the main advantages offered by the FlexPortfolio are:

Flexibility:

The FlexPortfolio offers broad flexibility in the underlying assets that can be repackaged

Ease of distribution:

Investors can access the investment strategy you design directly from their own brokerage accounts. It is a simple securities purchase operation with an ISIN-CUSIP number.

The FlexPortfolio is a Eurocleable investment vehicle. Therefore, your investment strategy can be distributed globally.

Operational Capacity:

There is little or no restriction concerning rebalancing or trading the underlying FlexPortfolio’s account.

The manager can perform all trades directly in the brokerage account without the involvement of third parties.

FlexPortfolio allows direct access and trading of your brokerage account 24 hours a day, 7 days a week, regardless of the time zone.

Security of issuance:

The investment strategy is backed by the underlying assets and utterly independent of the promoter’s activities.

Possibility of leverage:

Leverage can be available for many strategies. At FlexFunds, through Interactive Brokers, we offer you the possibility to trade on margin.

Competitive Costs:

The FlexPortfolio can have no set-up or maintenance cost, making it a very cost-efficient investment vehicle.

Speed of launch:

The setup and launch of the FlexPortfolio usually take between 6 and 8 weeks. This can be less than half the time required by other alternatives in the market.

In summary, the selection of an investment vehicle will depend, among other factors, on the underlying assets you wish to repackage, the available time and cost, future distribution needs, and operational requirements.

The FlexPortfolio offers a simple, flexible, agile, and cost-efficient solution for asset managers. Consider our FlexPortfolio when evaluating an AMC or any other investment vehicle. You can contact FlexFunds through the following email address info@flexfunds.com, and one of our representatives will contact you to assess the solution that best suits your needs and investment strategy.

Emilio Veiga Gil , Executive Vice President and Chief Marketing Officer for FlexFunds.

The 10 most common mistakes made when investing in an ETF

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The team at FlexFunds, a fund manager specialising in the creation and launch of customised investment vehicles (ETPs), discusses in the following article the advantages of ETFs for an investor, as well as the most common mistakes that are often made and how they can be avoided:

What are ETFs, and how do they work?

One of the possibilities for investing in the stock market when you have little experience and fundamental knowledge is to do so through passive management funds, since they are usually characterized by their greater diversification and lower risk, in addition to having lower commissions.

An ETF is a publicly traded investment vehicle comprising a basket of assets such as stocks, bonds, and commodities. Its operation is simple, and the most common replicate indices, such as the S&P 500 and NASDAQ-100, metals such as gold, or sets of shares, are grouped by sectors such as biotechnology, information technology, or geographic markets.

Advantages of ETFs: liquidity, transparency, and lower volatility

In addition to lower volatility, their main advantages include being listed on the stock exchange, which enables them to be traded like shares, improving their liquidity. Additionally, their commissions are low, as the vast majority of them are passive management products, and their great transparency, as the assets that make up the ETF portfolio and their net asset value are published daily. If, in addition, as numerous studies have shown, the managers of actively managed investment funds are not usually able to outperform the indexes they replicate, their high fees are unjustified, which improves the attractiveness of ETFs for investors.

Although ETFs are an excellent investment vehicle, their high demand among beginners and experienced investors has encouraged the design of different types, from traditional to synthetic, inverse to leveraged, and different variations that can be created in a portfolio. But sometimes, the product is not known, and mistakes and misinterpretations can be made, leading to unpleasant surprises. For this reason, FlexFunds has a specialized team that can guide you through the process of structuring investment vehicles similar to ETFs, allowing you to expand access to international investors for any investment strategy you design.

The 10 most common mistakes when investing in ETFs

Among the most common mistakes, made by those who invest in ETFs, are those that are due to the lack of attention to certain key factors such as:

  1. ETF Investment Strategy

Not analyzing the investment strategy of the ETF or its composition is one of the most common mistakes since it is essential to understand what underlying the ETF follows to see if it adapts to the investor’s objectives. On the other hand, knowing what you are investing in and understanding it is decisive. It must be analyzed to what extent the return of the ETF is close to that of the index that it replicates and how consistent the monitoring is.

  1. Buyer Investment Plan

Not having a long-term investment plan, which allows the roadmap and the objectives to be pursued, as well as the risks to be assumed to be designed, can lead to making decisions based on emotions, impulsive, and not very rational. Having a roadmap and setting goals for the future, along with a contingency plan, can be a good idea to avoid disappointment.

  1. Monitor the portfolio and its evolution

Not monitoring the portfolio regularly and thinking everything will be fine is a bad decision. A certain majority of listed ETFs have a high probability of underperforming and disappearing. Portfolio monitoring is key to avoiding upsets and making the necessary adjustments.

  1. Associated expenses and commissions

Buying and selling too frequently can lead to higher-than-expected expenses, eroding profitability. Readjusting an investor’s ETF portfolio means facing sales commissions, purchase commissions for the new ETF, and taxing capital gains. The associated expenses erode the returns obtained and the gap compared to those expected.

  1. Liquidity

Not analyzing the liquidity of the ETF can generate losses or problems when it comes to recovering the money in the sale. Suppose the values that make up the index that replicates the ETF are not negotiable or are not very liquid. In that case, the ETF can be listed at a premium, in the purchase, or at a discount in the sale; the range of purchase and sale prices will be wider. It may be listed at a premium when the price is higher than the net asset value or at a discount in sales operations when the price is below said value. In these cases, buying or selling orders should be limited instead of at market prices.

  1. Structure and internal functioning

ETFs have a structure and operation that is important to know before investing because it can impact your level of risk, commissions, and losses. Assessing it in depth allows you to understand how it follows the index you want to replicate and what assets can form it, which affects risk and cost. It can be a full replica ETF (investing in the same assets as the index) or synthetic, supported by futures and derivatives issued by a third party, increasing risk exposure for both the underlying and the third party.

  1. Profitability

Assuming that the past performance of the ETF is going to be transferred to the future tends to occur in less seasoned investors since, many times, they are attracted by the announced historical performance without taking into account the period of time where it has been reached and if it has been done continuously or punctually. The consistency of this aspect in the long term should be one of the criteria to consider since if the announced return is similar to the average of the last five years, the probability of being faced with a good choice will increase. However, this does not guarantee that any change in the environment won’t affect negatively.

  1. Changes in volatility

Many times, an ETF is bought without considering the factors that drive its greater volatility, which may be derived from the volatility of the underlying or the lack of liquidity of the ETF itself. In both cases, the consequence is a widening of the price range, which can be detrimental. Another similar situation is their operation when the price variation is greater, such as during the first and last minutes of the opening and closing of the market where they are listed, respectively. Thus, avoiding trading in these time intervals helps to deal with less volatility and, therefore, less risk.

  1. The ETF Market

Care must be taken with the geographic exposure of the ETF since it can focus on a specific market that may not adapt to the investor’s interests or not mitigate the risk due to overexposure to a certain market. The net asset value of an ETF is calculated at the close of the local market, which can cause problems if you wish to operate when the associated underlying market has different hours than the market on which the ETF is listed. The latter is listed at a value other than the net asset value, therefore, increasing the premium or discount, due to the existing divergence between the prices. Therefore, it is advisable to diversify geographically and by asset class.

  1. Taxation

As with investing in other financial products, you must always take into account their taxation and the tax obligations that it entails since failure to comply with some of them can bring significant sanctions that dilute the final profitability of the ETF. In some countries, unlike index funds, transfers from one ETF to another are not exempt from tax. On the other hand, if the broker has the depository abroad, likely, it will not notify the treasury of the country where the holder resides, neither the yields nor the capital gains generated and, therefore, it is the investor himself who must make the corresponding informative declarations, being able to carry a sanction if it does not do so.

Although many other risks are associated with ETF trading, those detailed above are often the most common. Therefore, great attention should be paid to all of them, especially by those investors who could be blinded by the benefits of this product and make inappropriate decisions for their profile.

For more information on the setup and issuance of investment vehicles similar to ETFs, please get in touch with our specialists at info@flexfunds.com.

The Market Feels Like it is Waiting for an Inevitable Recession

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U.S. equities were mixed during the month of May. While mega-cap tech stocks benefited from a wave of optimism fueled by advancements in artificial intelligence (AI), the current Federal debt crisis loomed large, dominating the headlines and affecting market sentiment. The first quarter earnings season concluded and while the “better than feared” label can describe the past few earnings seasons quite well, the general increase to 2023 guidance is an encouraging sign for companies overall. After tense negotiations between the White House and Republican House Speaker Kevin McCarthy, the House of Representatives passed legislation to suspend the debt ceiling and set federal spending limits in an effort to avoid a potential economic catastrophe. The bill was sent to the Senate, which finally passed it on June 1st, so the nation’s new debt limit has been extended through January 1, 2025.

On May 3, the Federal Reserve announced another 25bps rate hike at the end of its two-day policy meeting, bringing the targeted federal funds rate to 5.00-5.25%. During his press conference, Fed Chair Jerome Powell noted that inflation has moderated somewhat since the middle of last year and that the process of getting inflation back down to 2% has a long way to go.

Mega-cap tech stocks have been the prime beneficiaries of the recent positive momentum regarding artificial intelligence, with NVIDIA (NVDA), Microsoft (MSFT) and Amazon (AMZN) as the top three contributors to the Russell 1000’s performance for the month of May.

May was a challenging month for merger arbitrage investing as First Horizon (FHN) and Toronto-Dominion Bank (TD) walked away from their deal, and the U.S. FTC sued to block Amgen’s (AMGN) $27 billion acquisition of Horizon Therapeutics (HZNP). Spreads on other deals widened in sympathy, however, we view this as an opportunity to add to positions at wider spreads despite the setbacks. The market has appropriately begun pricing in more concerns around regulatory scrutiny and risk, which has resulted in wider spreads that have negatively impacted performance. New deal activity is creating opportunities for investors to deploy capital in deals where we believe arbitrageurs can be appropriately compensated, and believe that over time will continue to generate absolute returns.

The convertible market was essentially flat in May, as fears of a recession and the US debt ceiling impasse weighed on the market while mixed economic data and company guidance gave some optimistic investors hope. Equity market breadth is quite low with only a few names driving performance. On balance the market feels like it is waiting for an inevitable recession. We recognize the importance that these macro factors have on a convertible portfolio, but believe the market currently offers an opportunity for favourable risk adjusted performance relative to underlying equities in this environment.

The unique opportunity in convertibles currently comes from fixed income equivalent issues that are trading at attractive yields to maturity in excess of our long term expected return. These are often convertibles within a few years of maturity that we expect to accrete to par over that time. While this is not the profile we have focused on historically, we find it to be attractive for the fund in this environment. These convertibles should have limited downside from here and we expect them to outperform equities in a flat, down, or volatile market.

 

 

 

Fixed-income in the Spotlight?

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In this new global context: rising interest rates and inflationary pressures triggered mainly by the expansionary monetary policies applied by central banks during the pandemic, together with a new geopolitical reality, investors’ and portfolio managers’ appetite for fixed income has been reawakened. Relegated in recent years due to low-interest rates, this asset class is now a tool for protecting purchasing power in the face of inflation.

The recent bankruptcy of Silicon Valley Bank (SVB) in March reverberated across markets, raising concerns about the impact on the financial sector in general and global monetary policy, reinforcing investment in fixed-income instruments as an exciting option for investors.

The US financial multinational Morgan Stanley is betting on bonds. It ranks them as the potential big winners of 2023. “This will be particularly true for high-quality bonds, which have historically performed well after the Federal Reserve (Fed) stops raising interest rates, even when a recession follows,” explained Andrew Sheets, chief strategist at Morgan Stanley Research.

For the first time since 2007, nearly 90% of the bond market yields above 4%. As BlackRock explains, the rate hike has brought the highest returns the US bond market has seen in over a decade.

The return offered by some fixed-income instruments in certain Latin American countries provides a unique opportunity to attract local or international investors through securitization tools and the creation of offshore investment vehicles or ETPs (Exchange-Traded Products), which allow increasing their distribution exponentially.

At FlexFunds, we can confirm that the creation of ETPs with this strategy has increased during the last year. Focusing mainly on Latin American investors, these instruments seek to offer:

1. Stability: Fixed-income investments are usually considered stable and low-risk compared to existing portfolio options. The fixed income is an instrument that offers a fixed interest rate paid periodically, which provides a constant and recurring source of income.

2. Income predictability: Since fixed-income investments offer interest at a predefined rate, it is feasible to project the amount and timing of the investor’s income. This is especially useful for those seeking steady sources of income to plan their budget.

3. Inflation protection: this is a key benefit of fixed-income bonds. Typically, these bonds come with an interest rate higher than the inflation rate, which means that the investor is protected against the erosion of the purchasing power of their money.

4. Diversification: This asset class can be a valuable tool for diversifying an investment portfolio and reducing downside risk. Since the return on a fixed income is not related directly to the performance of stock markets, it can be an effective way to have a balanced and diversified portfolio.

In the current environment, to take advantage of the opportunity that fixed income is bringing to the table, and after evaluating various alternatives in the market, many asset managers have found FlexFunds‘ FlexPortfolio an efficient solution for the management and distribution of fixed income strategies because it allows them:

1. Flexibility: FlexPortfolio is an instrument tailored to the manager’s needs. The manager can choose and trade the assets they wish to invest and adjust their allocation according to the proposed strategy’s conditions.

2. Accessibility: Managers can expand their access to investors globally. The FlexPortfolio can be purchased from existing brokerage accounts simply as it has an ISIN number, with settlement through Euroclear/Clearstream.

3. Lower costs: The cost of setting up a FlexPortfolio can be half that of other alternatives in the market. Managers benefit from economies of scale and structural and back-office cost savings.

4. Transparency: FlexPortfolios offer complete transparency to the investor compared to other investment vehicles, as the underlying assets and their returns are always visible.

5. Versatility: One of the main advantages of the FlexPortfolio is that it allows a tailor-made combination of assets to be designed and executed in a single investment. A FlexPortfolio can include various assets: stocks, bonds, commodities, and currencies.

6. Liquidity: FlexPortfolios offer high liquidity because investors can subscribe and redeem their holdings in the portfolio more quickly, compared to buying and selling the underlying assets individually. The liquidity of this investment vehicle is directly proportional to the liquidity of its underlying assets.

In conclusion, in the current economic environment, fixed income can provide stability and security to investors due to its ability to offer fixed and relatively predictable income. However, as with any investment, it is essential to evaluate it carefully and have the right advice to weigh its pros and cons before making an investment decision. When establishing an investment vehicle that allows you to design and distribute a fixed-income strategy, FlexFunds‘ FlexPortfolio may be an alternative.

Pablo Gegalian serves as Regional Director of Southern Cone for FlexFunds .