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An ETF to Capture the New Energy Revolution

gondolas-4741067_1920 — Pixabay CC0 Public Domain. Un ETF para capturar la revolución energética

The crowds of tourists vanished from Venice’s historic canals. Fish were seen swimming in the city’s normally murky waterways. Then, NASA published satellite images of Earth, showing a dramatic reduction in greenhouse gas emissions across all the major cities under lockdown.

For a moment, we saw what a future low-carbon world might look like.

Demand for new energy grew in 2020

During a turbulent 2020, demand for energy generated by coal and oil fell by 8.5% and 6.7% respectively. But demand for renewable energy rose by +1%.

Renewable energy demonstrated its reliability, even in a recession. The massive stimulus response from central banks created favourable financing conditions for both wind and photovoltaic (PV) solar projects. And some institutional investors even saw new energy as a safer-haven investment, as its returns can have lower correlation to more mainstream asset classes.

This progress was happening as fossil fuel demand plummeted to its lowest level in more than 70 years. At one point, oil futures were trading at negative prices due to a massive glut in supply.

The chart below from the IEA shows the global energy demand by source in 2020:

Misconceptions persist about renewable energy

Although demand for renewable energy remained positive during the pandemic and more people are carbon-aware than ever, there are still many misconceptions about it.

These misconceptions are gradually being debunked – and new energy sources could see a major increase in investment as a result. Let’s address three common concerns about renewables and new energy now:

Misconception #1: “Renewable energy is just hype”

Renewable energy is being adopted because it makes financial sense. Over half the coal plants operating today cost more to run than building new renewable energy infrastructure instead. Even cancelling new coal power station projects today could save more than half a trillion dollars globally.

The ‘levelised cost of energy’ (LCOE), which is directly linked to the costs to build and operate an energy generator, has fallen significantly for both wind and photovoltaic solar power. Across the globe, LCOE for wind, solar and battery storage has plummeted over the past decade, led by technological advances and increasing cumulative installed capacity, which have progressively reduced costs.

The cost of renewable energy and battery storage has plummeted

The chart below from BloombergNEF shows the Global LCOE benchmarks for PV, wind and batteries:

Misconception #2: “All fossil fuel-related financing is unsustainable”

The world needs energy to power the economic growth that makes the low-carbon transition possible. While directly financing fossil fuel plants is not sustainable, the financing of energy efficiency for fossil fuels does help us transition towards a more sustainable world. Rather than stopping all investment in fossil fuel-related companies, it would be more effective to improve the efficiency of the existing energy model, even as we manage the transition to the low-carbon model.

We want to – and must – move towards the new energy model. But in the meantime, we have fossil fuels to manage, and improving the energy efficiency existing fossil fuel plants is an important part of that.

Many energy companies have been moving towards ‘combined-cycle’ power plants that use both a gas and a steam turbine to produce energy. General Electric has estimated that up to 50% more electricity using the same fuel can be produced this way.

Natural gas is still a fossil fuel, but it is cleaner. Burning natural gas for energy results in lower emissions for nearly all types of air pollutants. It also complements new energy well, because combined-cycle turbines are cheap to get going and can provide power at short notice or when renewable energy is not available. The two technologies used in combination could drastically cut greenhouse gas emissions.

Misconception #3: “New energy is only viable because of subsidies”

The new energy market has developed to such an extent that subsidies are no longer needed in most parts of the world. For instance, the feed-in tariff system used by European countries to accelerate investment into new energy technology has largely come to an end.

It is being replaced by a more dynamic power purchase agreement market (PPAs), which are agreements to supply energy at a fixed price and quantity. The result is that energy companies get a guaranteed cash flow, and clients receive a guaranteed price and supply of energy.

None of this would be possible unless new energy was cheap, reliable and profitable to produce. Thanks to technical improvements and more competitive marginal costs – led by the ‘learning curve’ of renewable energy that reduces costs as more is produced – this sector needs less and less subsidy.

In our view, this is a structural shift, because the cost of renewables will decline over time. Fossil fuel costs will not decline over time – they may even increase over time, as most of the accessible sources have already been extracted. Now, fossil fuel Exploration & Production (E&P) companies must increasingly target controversial reserves that are harder to extract, such as those in the Arctic, tar sands, or shale gas.

Finally, the EU ‘Green Deal’ will also drive capital towards new energy companies, while the EU is thinking of significantly reducing fossil fuel subsidies as they undermine the efforts to reach carbon neutrality by 2050, as enshrined in the Paris Agreement.

While we at Lyxor talk a lot about the Paris-Aligned and Climate Transition benchmarks for net zero investing, these are not the only relevant strategies. Trends to be financed by green deal are broader than that, including sustainable mobility and smarter city infrastructure.

How to get investment exposure to new energy

One way to gain a targeted investment exposure to new energy is through the Lyxor New Energy (DR) UCITS ETF. It tracks the world’s 40 largest companies operating in three key areas of the new energy industry: renewables, distributed energy, and energy efficiency.

Ørsted – Renewable energy

Danish power company Ørsted (formerly DONG Energy) is a global leader in the offshore wind market. It is in a strong position to capitalise on the soaring demand for new energy needs in Europe due to the emission quotas defined in the Paris Agreement.

What’s fascinating about this company is that it was once fossil-fuel focused. In 2017, the group sold its oil and gas business to British chemicals company Ineos. More recently, it offloaded its liquefied natural gas operations to Glencore. Instead of returning the cash from the sale of these businesses to investors, the company chose to make a big push into offshore wind.

Ørsted was one of the first energy companies in the world to have a greenhouse gas emissions reduction target approved by the Science Based Targets initiative, and it estimates its target is 27 years ahead of schedule compared to the 2°C scenario for the energy sector as projected by the IEA.

Plug Power – Distributed energy

Distributed energy is the concept of global decentralised electricity production close to the point of consumption. Hydrogen is part of this, and green hydrogen in particular can be an extraordinary zero-carbon source of electricity.

As a result, an important area of development in new energy is storage – stationary storage stations, or onboard vehicles, vessels, planes, and so on. American company Plug Power develops hydrogen fuel cells to replace traditional batteries in electric vehicles and supplies these cells to major clients including Amazon and Walmart.

Distributed energy is what can bring resilience, contrary to hyper centralised production and grid systems. It’s also a game-changer for renewables, whose main drawback is that they are intermittent, and unable to – for example – provide 24/7 power to a hospital. With distributed energy systems, renewable energy can become a more stable energy source.

NIBE Industrier AB – Energy efficiency

Swedish company NIBE builds and sells solutions to reduce energy consumption and improve efficiency. It develops, manufactures and markets a range of energy-efficient solutions for climate comfort in all types of property, plus components and solutions for intelligent heating in industry and infrastructure.

This includes heat pumps and solar cells for private houses, the renovation of old buildings, public buildings, and even development of products for efficient energy utilisation in cars, such as elements for battery heaters and interior heaters that use sources such as braking energy.

NIBE’s heat pumps are being used in a new housing project in the Kortenoord district of Wageningen, The Netherlands, where around 1,000 homes are being built without a gas pipeline. The houses have optimum insulation and are equipped with energy-saving products such as heat pumps, solar panels and solar water heaters.

A megatrend in progress

New energy is part of a megatrend – one that will radically shape the society and business models of the future, underpinned by the global effort to achieve net zero by 2050.

This imperative explains the significant amount of investment flowing into the new energy industry. $282 billion of renewable energy capacity was financed in 2019, led by onshore and offshore wind with $138 billion, followed by solar at $131 billion.

And yet, this shift is just beginning. A revolution is underway in the energy market. It wasn’t started by the pandemic – this is a structural movement towards new energy that has developed over several years, backed by falling costs. It was recently accelerated by the events of 2020, that reduced demand for fossil fuels and related industries such as steel and cement.

Ultimately, renewable energies are on a declining cost trajectory, while fossil fuels have high and fixed costs. That cost trajectory implies that renewables will be cheaper than fossil fuels, which is already true in many cases, with or without disruptive global events.

The pandemic accelerated what was already happening in the new energy industry. It has acted as a catalyst for more rapid change. For investors, the Lyxor New Energy ETF, which recently passed $1 billion in assets under management, could be a great way to get involved in this change and become part of the new energy revolution.

A column by Paloma Torres, Associate, ETF CRM and Sales for Iberia and Latam in Lyxor Asset Management

BNY Mellon IM Appoints Sasha Evers as Head of Retail Distribution for Europe and Ralph Elder as Head of Iberia and Latin America

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BNY Mellon Investment Management has announced this week changes in leadership roles at a global level, starting with the appointment of Sasha Evers as head of retail distribution for Europe. Based in Madrid, he will report to Matt Oomen, global head of distribution, and Ralph Elder will take over his role as head of Iberia and Latin America.

In this newly created role, Evers will be responsible for leading, defining and executing the firm’s distribution strategy in Europe’s retail segment. He will work closely with its investment firms, including Newton Investment Management, Insight Investment and Walter Scott, “to provide clients with high quality, relevant investment strategies that meet their needs and objectives”, the asset manager pointed out in a press release.

His appointment comes after Hilary Lopez, head of European intermediary distribution, announced that she has decided to leave the company after 11 years “to pursue other opportunities”.

Evers has been with BNY Mellon IM for more than 21 years and was most recently head of Iberia and Latin America. Now, Ralph Elder, formerly director of sales for the Iberian region, will assume the leadership of those businesses. Elder has been with the company two decades and has been key in the development of the Iberia business.

Strengthen European presence

“The retail market in Europe is a strategically important part of our business. Sasha has a proven track record of building successful businesses and teams, developing longstanding client relationships and growing assets. I am thrilled to be working more closely with him as we drive further growth in the segment and strengthen our presence across Europe”, said Matt Oomen, global head of distribution at BNY Mellon IM.

He also claimed to be “delighted” that Elder will lead the Iberia and Latin America businesses because he has played “an integral role” in building them alongside Evers over the past 20 years. “I would also like to thank Hilary for her many contributions to the firm and wish her the very best in her future endeavours”, he added.

Meanwhile, Evers commented: “I am very excited by this opportunity to lead our retail distribution strategy in Europe. I look forward to working with all our businesses across the Continent to drive further our growth in this key client segment. Ralph has been a key driver of our success in the Iberia region and I am delighted that he will lead our Iberia and Latin America businesses going forward.”

Santander Private Banking to Acquire Indosuez Wealth Management in Miami

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compra santander — Foto cedida. Santander Private Banking acuerda la compra del negocio de banca privada de Indosuez en Miami

Santander Private Banking has reached an agreement with Indosuez Wealth Management –the global wealth management brand of Crédit Agricole group– to purchase 4.3 billion dollars in client assets and liabilities. The firm has announced in a press release that the transaction is subject to regulatory approval and is expected to close by midyear 2021.

“This transaction, which leverages our geographic presence and our capabilities as a leading financial group, is another step toward our goal of becoming the best global private banking platform. We want to keep growing our business –especially in geographies where we see major commercial potential like the US– and elevate our position as a growth engine for Grupo Santander”, said the Global Head of Santander Wealth Management & Insurance, Víctor Matarranz.

Meanwhile, Jacques Prost, CEO at Indosuez, commented that, after close evaluation of a number of international bidders, Santander’s proposal for the Miami business stood out to Indosuez thanks to the bank’s high quality and strong reputation.

“We are confident that this is the right fit to meet the interests of our clients and our people in Miami, ensuring a smooth transition and building on Santander’s sizeable footprint and 42-year long experience in the region. Indosuez’s decision to leave the Miami market was carefully considered due to our longstanding presence in the region, but was made in line with Indosuez’s strategy of focusing and expanding its presence in its key markets”, he added.

Santander US CEO Tim Wennes also assessed the acquisition, pointing out that it is part of the growth strategy for Santander US, which includes organic and inorganic opportunities. “I am confident that the team will provide world-class services to our new clients from Indosuez”, he said.

The bank has explained that the transaction will be executed through Banco Santander International (BSI), part of Santander Private Banking, Grupo Santander’s business unit dedicated to the private banking segment. Santander Private Banking manages a volume of 230 billion euros in customer assets and liabilities. BSI is a wholly owned subsidiary of Santander Holdings USA, Inc., Banco Santander’s intermediate holding company in the U.S.

Flashpoints in the Sino-American Rivalry: Whoever Controls the Taiwan Strait Controls the Global Economy

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taiwan-4743542_1920 — Pixabay CC0 Public Domain. Focos de tensión en la rivalidad sino-estadounidense: quien controle el estrecho de Taiwán controlará la economía mundial

Mainly playing out across the vast Pacific Ocean, the great power rivalry between the US and China is the dominant geopolitical conflict of our time. There are deep-rooted economic, demographic, and geographic forces at work, reshaping the world’s most important bilateral relationship. A unipolar world where the global hegemon, the US, had unmatched global capacity and influence is morphing into a balanced, multipolar world where various countries have an ever-increasing impact on global decision-making and action.

At the end of World War II, the US accounted for a far larger share of global GDP than would be warranted given its population. To be sure, some of this was due to the US economy’s unrivaled level of productivity and innovation. The US will always punch above its weight because of these factors. But the main reason why the US was the overwhelmingly dominant economic engine of the world was that most major economies lay in ruins after that devastating conflict. In a famous study authored by the British economist Angus Maddison, the US’ share of global GDP reached a zenith of almost 40% in the early 1950s.

Since then, our share of global GDP has been steadily waning. To paraphrase economist Herbert Stein, that which can’t go on won’t. The other component to this relative slide has been China’s rising economic heft. For most of its history, the Mainland’s share of global GDP hovered between 30% and 35%, according to this same seminal work. In other words, China’s rise is merely a return to its normal, baseline level of economic clout. The previous century was the anomaly. China’s rise should and will continue.

So, what does this tell us about the ensuing power struggle between the two countries? Is confrontation inevitable? Can we avoid Thucydides’ famous trap? When paradigms shift, there will always be friction. With tectonic shifts, you might not always get an earthquake, but there are usually a few tremors. The 2018/19 trade dispute was but the first truly global spat between these two rivals. One can expect many more to come with Taiwan being at the vanguard of potential flashpoints. It is not an exaggeration to say that the Republic of China, the official name for the island nation just off the Mainland, is quickly becoming the most important and most-watched nation on Earth.

Taiwan dominates sophisticated global chip manufacturing, and its comparative advantage should only increase. Earlier this year, the shutdowns in American and European auto manufacturing plants had less to do with Covid-19 and more to do with chip shortages in Asia. While these bottlenecks will sort themselves out in the near-term, they are emblematic of a broader problem: semiconductors are the new oil and Taiwan is the new Saudi Arabia. Worryingly, this market is even more concentrated than the oil market is because there are fewer producers. Whoever controls Taiwan can effectively influence the world’s global supply of microchips.

This is not hyperbole. Because the cost of achieving higher logic density has increased so exponentially, it means that new microchip technology entails massive capital investments that require producers to operate with a very high utilization rate. The barriers to entry are prohibitively high. Taiwan Semiconductor Manufacturing Company comprises half of the global semiconductor foundry market. Together with Taiwan’s other giant United Microelectronics Corporation and South Korea’s Samsung, the three companies account for 78% of global market share. In sum, the microprocessor market is highly and dangerously concentrated in Taiwan. From the West’s perspective, this is dangerous because China covets a reunification with Taiwan. Thanks to its actions in Hong Kong, everyone now knows what that would look like under Xi Jinping.

Every investor and policymaker worth their salt will have to account for the vulnerabilities inherent in a world should the situation across the Taiwan Strait deteriorate. An incident where chip production was disrupted or halted, or supply lines were permanently denied could be catastrophic for the global economy. If you think the US would not go to war over chip manufacturing in Taiwan, then you do not remember the US going to war in Kuwait over oil in the early 1990s. Of course, China would pack a stronger punch than Iraq ever could, and Taiwan’s importance means that all stakeholders around the world have incentives to de-escalate.

But as World War I showed us, rational actors can stumble into a conflict through a series of miscalculations after the assassination of an Archduke. Incidentally, World War I was the last time a rising, regional hegemon (Germany) confronted the entrenched global hegemon (the UK). To be sure, I am not saying that the result of this great power rivalry will be a third world war. I am also not precluding it from turning out that way either if the wrong policy mix makes us stumble in that direction. Certainly, Taiwan’s importance to the global economy means that all stakeholders, which in the extreme means all nations, are incentivized to cooperate, and maintain stability. Elementary game theory teaches how that decision-making process can go awry, and behavioral economics similarly suggests that not all decisions, even at the state-level, are rational and motivated by self-interest.

What are investors and market participants to do? Do we run to the proverbial risk bunker and wait out the coming conflict? Again, history provides a clear answer – an emphatic “no”. During the Cold War, broadly defined as 1947 till 1991, the S&P 500 rose 2,708% (7.70% annualized) despite enough missiles being pointed at each other to wipe out humanity many times over. Lest we forget, the world stood at the brink of doomsday several times during this now quickly receding era: The Berlin Airlift, the Korean War, the Soviet Invasion of Hungary, and the Cuban Missile Crisis. That was our conflict with the ideological and militant Soviets. Conflicts with the capitalist Chinese may turn out a tad less unnerving.

We must learn how to interpret the decisions and actions of these two great nations within the framework of this great power rivalry: the US wants to maintain the status quo, its place at the center of the post-WWII order, while China wants to regain its historical place and displace said order. From the American side, you will see intensifying economic pressure, and support of borderland states like Taiwan as an attempt to limit China to the first island chain. One will see the US trying to encircle the Chinese through alliances and balance of power moves allowing Japanese remilitarization and an Indian rapprochement.

For China’s part, it must ensure that it can keep delivering the economic growth that its masses have come to expect and that underpin the government’s credibility. To that end, we will see attempts to bypass the global commons, the oceans that the ubiquitous US Navy still dominates. The Chinese have reconnected with the Russians, as a unified Eurasian landmass will better counter the seagoing Americans. There will be other, yet to be determined, manifestations of this global conflict. It is important that we recognize them when they arrive. The markets will have to learn how to discount this risk premium, and, as they have done in earlier eras of shifting paradigms, they will adjust to the new reality.

iM Global Partner Acquires Litman Gregory and Enters the U.S. Wealth Management Business

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Philippe_Couvrecelle_horizontal — Foto cedidaPhilippe Couvrecelle, consejero delegado y fundador de iM Global Partner.. Philippe Couvrecelle, consejero delegado y fundador de iM Global Partner

iM Global Partner has entered a definitive agreement to acquire Litman Gregory, a wealth and asset management boutique with 4 billion dollars in assets under management and 2.2 billion dollars of assets under advisory.

Philippe Couvrecelle, CEO and founder of iM Global Partner, declared that the purchase is “a major step forward” as they continue their U.S. expansion. “This strategic operation allows us to add wealth management as a new key activity. Our clients will benefit from the synergies that result when like-minded organizations leverage their talents and resources to enhance the client experience”, he added in a joint press release.

The group expects the transaction, once completed, to bring assets under management to over 24 billion dollars (from 20 billion as at end of December 2020) and to enhance distribution capabilities in the U.S.. It also believes that it demonstrates its “commitment to continued cross-border growth in serving the needs of sophisticated investors”.

The operation is still subject to the approval of the SEC, but it’s expected to close in the second quarter of 2021. When this happens, iM Global Partner will double the number of employees and it plans to operate Litman Gregory Wealth Management as a separate business unit to preserve the “recognition, independence and expertise” that it has built over many decades with its cross-generational clients.

Steve Savage, CEO of Litman Gregory, said that they are “excited” to become a part of the group as it improves their ability to deliver on their mission to excel for their clients: “iM Global Partner brings complementary global research resources and strong alignment on total client focus. The combination of our organizations is a natural fit because of our shared research DNA, commitment to independent thinking, integrity and total client focus.”

All in all, the joint press release highlighted that combining Litman Gregory’s capabilities with iM Global Partner creates a “uniquely powerful set of high-quality investment solutions” to serve both institutional and private clients in the U.S. and internationally.

iM Global Partner intends to continue to grow in its priority markets -the United States and Europe- as well as Asia, where it plans to open and begin local distribution in 2022.

Lyxor ETF Plans to Double its ESG Assets and Become a Leader in Climate and Thematic ETFs

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Foto cedidaArnaud Llinas, responsable de Lyxor ETF e Indexación en Lyxor Asset Management. Lyxor ETF quiere duplicar sus activos ESG y ser líder en ETFs climáticos y temáticos

In 2021, Lyxor ETF plans to accelerate its efforts to expand its range on three key ETF product pillars: ESG and Climate, Thematics and Core. In a press release, the firm explained that this will help meet “the long-term needs of the wealth management segment as ETF usage in Europe expands among individuals and to support its institutional client base”.

To achieve this, the asset manager has made building assets in these three key areas a strategic priority for 2021. As such, it aims to double the ESG ETF assets it had in 2020 to 10 billion euros by the end of 2021. To achieve this, Lyxor ETF plans to expand its ESG offering by switching several of its existing ETFs to equivalent ESG indices, thereby offering a simple alternative to traditional market capitalizations to meet its clients’ needs. Lyxor also continues to implement its program of fund labelling and intends to obtain the “SRI Label” for its entire thirty ESG ETF range by the end of the year. At the end of February, its ESG ETF assets under management totaled 6.5 billion euros.

As a pioneer in passive fund management, last year it became the first ETF provider in the world to launch an extensive ecosystem of ETFs in line with the Paris Agreement and carbon neutrality by 2050. In this sense, the asset manager believes interest in climate indices appears set to grow: “We are already seeing evidence of this in the flows towards regional (notably European and US equities) and global indices from various types of institutional investors (insurers, pension funds, asset managers), in part because of increasingly stringent regulations in Europe”, they said.

This year, Lyxor ETF intends to bolster its range of climate ETFs by extending it to certain fixed income segments and expanding its range of Green Bond ETFs. In total, it now manages close to 1.5 billion euros in climate-focused ETFs.

An enhanced and increased ETF range

Also, it plans to increase its Thematic ETF range to capture new global post-Covid trends. Following the success of its megatrend ETF range last year –over 700 million euros in net new assets collected in less than a year– Lyxor seeks to offer wealth managers in particular more ways to invest in the companies set to benefit from significant and lasting changes in the post-pandemic world. Having launched five Thematic ETFs in partnership with MSCI in 2020 –on Digital Economy, Disruptive Technology, Future Mobility, Smart Cities and consumer habits of Millennials– it is looking to offer investors exposure to rapid innovation in sectors such as healthcare and Clean Tech and in specific geographies.

The firm also wants to further enhance its Core range, which, since it was launched in 2017, has become a cornerstone of the firm’s product offering. In this sense, it has a raft of initiatives planned for 2021, notably within fixed income, where inflation products are key priorities with central banks and governments around the world spending freely to fuel a post pandemic recovery. “This builds on the success of the Lyxor Core ETF on US TIPS, which now totals 3.6 billion euros in AUM after a very strong 2020. Regional and single country allocations are also key areas of interest”, they explained.

In support of its repositioning around these three key pillars, Lyxor also plans to adapt and streamline the rest of its range to ensure it better reflects clients’ long-term investment and savings goals.

“Having started as tactical allocation building blocks for institutional investors, ETFs have since become long-term savings instruments for a much wider range of investors including in the wealth management segment. That is only going to accelerate. Our shift in focus aims at addressing investors’ long-term concerns -aiding the transition to a low-carbon economy, capturing new themes in a post-Covid world and ensuring maximum efficiency for their investments– and as such reflects the profound change in nature of the ETF market”, stated Arnaud Llinas, Head of Lyxor ETFs and Indexing at Lyxor Asset Management.

Market Myopia

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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

Morgan Stanley Closes the Acquisition of Eaton Vance

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1519796500693 — Foto cedida. Morgan Stanley completa la compra de Eaton Vance

Morgan Stanley has completed this week the acquisition of Eaton Vance, a stock and cash transaction announced last August for an equity value of approximately 7 billion dollars.

In a press release, the firm revealed that Eaton Vance common stockholders were offered 0.5833 Morgan Stanley common shares and 28.25 dollars per share in cash for each Eaton Vance common share, and had the opportunity to elect to receive the merger consideration all in cash or all in stock, subject to proration and adjustment. As provided under the merger agreement, Eaton Vance shareholders also received a special dividend of 4.25 dollars per share, which was paid last December 18 to shareholders of record on December 4.

“This acquisition further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class, integrated investment bank. With the addition of Eaton Vance, Morgan Stanley will oversee 5.4 trillion dollars of client assets across its Wealth Management and Investment Management segments. The Morgan Stanley Investment Management and Eaton Vance businesses are delivering strong growth and their complementary investment and distribution capabilities will deliver significant incremental value to our investment management clients,” said James P. Gorman, Chairman and Chief Executive Officer of the company.

Thomas E. Faust, Chairman and Chief Executive Officer of Eaton Vance, will become Chairman of Morgan Stanley Investment Management and will join the Morgan Stanley Management Committee. “We are pleased to join Morgan Stanley to begin the work of building the world’s premier asset management organization. On a combined basis, Morgan Stanley Investment Management and Eaton Vance have unrivaled investment capabilities, distribution reach and client relationships around the globe“, he commented.

Lastly, Dan Simkowitz, Head of Morgan Stanley Investment Management, claimed to be excited to welcome Eaton Vance: “Our combined organization is exceptionally well positioned to deliver differentiated value to our clients and growth opportunities for our employees”.

Mediolanum International Funds Seeds New Equity Mandates for SGA and NZS Capital

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cake-pops-684163_1920 — Pixabay CC0 Public Domain. Mediolanum International Funds otorga a SGA y NZS Capital sendos mandatos de renta variable

Mediolanum International Funds (MIFL) has announced two new equity mandates with SGA and NZS Capital as the firm looks to expand its footprint with boutiques in the United States.

In a press release, the European asset management platform revealed that the agreement with SGA, a Connecticut based independent investment boutique, will see MIFL providing capital of 80 million to seed the SGA Emerging Markets equity strategy, which adopts the same investment approach that made the firm known for the quality of their flagship global equity strategy. The initial investment is expected to grow over the next 5 years.

“We are very excited to work with Mediolanum International Funds and offer our Emerging Market Growth portfolio to European investors at a time when many are seeking EM exposure in a bid to participate in the wealth creation of growing middle classes. This partnership will give us privileged and timely access to European distribution across different countries through MIFL’s local ties to distribution networks in Italy and Spain, and strong partnerships in Germany within the IFA business”, Rob Rohn, Founding Principal at SGA, commented.

MIFL will also back NZS Capital’s Technology strategy, with a 300 million euros mandate. Based in Denver, the investment boutique has a unique philosophy known as Complex Investing which identifies companies that best adapt to unpredictable outcomes. It is minority owned by Jupiter Asset Management which acts as the firm’s exclusive global distribution partner and introduced MIFL to the investment opportunity.

Brinton Johns, Co-Founder of NZS Capital, said that partnering with Mediolanum International Funds is a great step in the firm’s evolution: “This Sub advisory mandate offers European clients access to a portfolio of companies that we believe is best equipped to handle the accelerating pace of change in the global economy. The focus on innovation and disruption is a long-term trend an investment perspective, and one that is especially relevant in today’s environment”.

A 5-year plan

MIFL highlighted that its multi manager approach, which combines funds and mandates, is the engine of several mutual funds and customised investment solutions and services for insurance products and banking services distributed across Italy, Spain, and Germany. “We are delighted to have both SGA and NZS Capital LLC on board. Both managers have proven to generate great value over the time for their investors and by partnering with them in these new strategies we expect our clients to benefit as well”, pointed out Furio Pietribiasi, CEO of the platform.

He also revealed that their objective in the next 5 years is to invest at least one third of all their equity and fixed income assets externally managed in partnership with boutiques with strong track record by seeding new strategies or investing in existing ones. In his view, the evolution of the industry globally is offering “a unique opportunity” and they believe they are well positioned to take advantage due to their entrepreneurial culture and 23 years plus experience in multi management.

“We are looking to collaborate with boutiques where we can add value to their overall business. We think that the AUM in breadth of strategies we have, plus our flexibility and unique entrepreneurial culture is fundamental to success We already have a proven track record in helping start-ups or small asset managers to grow, it is now time to scale it up”, he concluded.

PIMCO Names Giovanni Onate Senior Vice President and Kimberley Stafford Global Head of the Product Strategy Group

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PIMCO_Stafford_Kim_770x340 — Foto cedidaKimberley Stafford, nueva directora global del Grupo de Estrategia de Producto de PIMCO.. PIMCO nombra a Kimberley Stafford directora global del Grupo de Estrategia de Producto y a Alec Kersman director de Asia-Pacífico

In the last few days, PIMCO has announced numerous changes in its executive positions. As it confirmed this week to Funds Society, Giovanni Onate will be joining them in Miami in the position of Senior Vice President. Also, in a press release, the asset manager revealed that Kimberley Stafford, currently Head of Asia-Pacific, will become Global Head of its Product Strategy Group.

Onate will be leading business development efforts in Mexico as the firm continues to expand its presence in Latin America and the Caribbean. He will report directly to Barbara Clancy, Executive Vice President and Head of Latin America and the Caribbean for PIMCO. Onate had been leading BlackRock’s Mexico institutional client business for more than a decade and will now be replaced by Horacio Gil, who joined the firm in 2019.

Stafford will return to PIMCO’s Newport Beach office in the middle of this year to take up the new role, overseeing traditional strategies and alternatives, which include PIMCO’s private strategies and hedge funds. Consequently, Alec Kersman, currently Head of Strategic Accounts in U.S. Global Wealth Management, will become the new Head of Asia-Pacific. Both will report to Emmanuel Roman, Managing Director and PIMCO’s Chief Executive Officer.

Stafford has been a member of PIMCO’s Executive Committee for five years and will also serve as a Trustee on the Board of PIMCO Funds, alongside Peter Strelow, Co-Chief Operating Officer and Chairman of PIMCO Funds. Stafford has led the Asia-Pacific region since 2017 and, during her 21 years at the asset manager, she has held various positions including Head of the Consultant Relations Group, oversight of U.S. institutional sales and alternatives marketing teams, Head of Human Resources and Talent Management and Head of Global Sustainability Initiatives and Account Manager in the Consultant Relations Group.

“Kim has served in almost every facet of our business during her two decades working for PIMCO. She is a strategic thinker and a natural leader who motivates, mentors and develops employees. Her expertise in managing client relationships will be invaluable as we continue to evolve our products and strategies for investors in traditional and private strategies”, said Roman.

Regarding Kersman, the firm highlights that he drove the growth of the Latin America business over more than a decade and, more recently, has played a major role in bringing his client relationship expertise to U.S. GWM: “With his deep understanding of the regulatory environment and proven strategic leadership, Alec will build on the excellent work that Kim and the team have delivered over the past four years driving our expansion in Asia-Pacific,” added Roman.

Kersman will be supported in Asia-Pacific by PIMCO’s regional leadership team and deep bench of investment professionals. In addition, John Studzinski, Vice Chairman of PIMCO’s Executive Office, will continue playing a key role in broadening relationships in Asia-Pacific with leaders in business, finance, government and NGOs.

Other appointments

The firm also announced other key leadership roles: David Fisher, currently Head of Traditional Product Strategies, will become Co-Head of U.S. GWM Strategic Accounts alongside Eric Sutherland, President of PIMCO Investments LLC. Fisher, who has spent 13 years as a leader in the Product Strategy Group and also serves as a trustee of PIMCO Closed End Funds, will relocate to the New York office. He and Sutherland will report to Gregory Hall, Head of U.S. GWM. Ryan Korinke, Head of Hedge Fund and Quantitative Strategies, based in Hong Kong, will join PIMCO’s Executive Office in Newport Beach, where he will report to Roman.

Commenting on Korinke’s role in the Executive Office, Roman pointed out that his understanding of hedge fund strategies and the role they play for clients, together with his “detail-oriented and thoughtful approach” have helped deepen many of their relationships with hedge fund investors around the world. “He is a creative and analytical thinker and widely admired by PIMCO colleagues as an executive who embodies PIMCO’s culture”, he concluded.