Kirstie Spence, courtesy photo. Kirstie Spence (Capital Group): “Se ha creado una tormenta perfecta en los mercados de deuda emergentes”
Emerging countries are also facing a health crisis due to COVID-19 with serious financial and economic consequences. In this context, debt in US dollars has fallen 13% and debt in local currency of emerging markets has decreased by 15% in terms of US dollars, so far this year. Kirstie Spence, portfolio manager at Capital Group, analyzes the emerging debt market in this interview.
How has emerging market debt fared in these volatile markets?
Emerging market (EM) countries are facing a health crisis, with severe global financial and economic implications. I’ve been through many crises in my career and this one is truly extraordinary. US dollar debt is down year-to-date as EM local currency debt is in US dollar terms, most the falls reflects weakness in EM exchange rates versus the US dollar.
Within US dollar debt, it is generally the higher yielding portion that has disproportionately weakened, while declines in EM investment grade bonds are much more in line with movements in US corporate investment grade bonds. Results have also been mixed in local currency debt, but actually some of the frontier markets have been more stable, which is probably due to a lack of liquidity and being under-owned. Meanwhile, many core markets – for example, South Africa – have underperformed. That might be due to large foreign ownership of the bonds, but also because of specific issues related to those markets.
How has liquidity been in EM debt markets?
Several factors have combined to create a perfect storm in EM debt markets. The virus spread created fear and resulted in a correlated sell-off, which was then followed by an oil-price shock which always tends to impact EM as a commodity related asset class.. At the same time, passive exchange-traded funds (ETFs) were being unwound in very large amounts; there was demand for US Treasuries and dollars that couldn’t be met, all while banks and intermediaries were impacted by the practicalities of working from home, including that of the role of intermediation, which was impeded by regulations against risk-taking activities outside of an authorised environment.
We have seen extraordinary measures taken by various central banks, which have helped ease the situation. Mortgage and Treasury markets are functioning better, and US investment grade credit issuance in March was the highest on record as companies seek to lock in liquidity. Because of the domestic buyer base and support from central and local banks, trading liquidity in EM local markets has also improved. Liquidity is choppy, but there is very little actually trading outside of local markets, although it feels like it is normalising. This week, more EM countries have moved into lockdown (South Africa, India, Argentina and some parts of Mexico), which has also created liquidity challenges, although we are starting to see these ease. Capital Group has been able to trade in this difficult time, thanks to our traders’ good relationships and persistence. However very few of the prices we see on the screens, especially the lower ones, we are able to execute at.
How important is China in the recovery of emerging markets?
China’s role in a global economic recovery is key, especially for EM. China’s recovery will likely be slow, because supply chains are blocked and the US and Europe are effectively shut down. However, we saw PMI numbers this week, which were more positive than expected, demonstrating some early recovery.
China has a lot of firepower in terms of additional policy stimulus, and strong political will to use it; the country needs economic growth for political stability.
China could also get involved in lending to countries; this would be more of a mediator role, if certain EM countries face refinancing difficulties further down the line.
What is your outlook for the asset class?
Clearly the global economic backdrop for EM, in fact for the whole world, is dramatically different to what it was even a month or two ago. Our base case going into 2020 was one of relatively benign interest rates and global growth, which would have been supportive for EM debt. We now expect a large contraction in global growth in the second and potentially third quarters of the year. I don’t expect a V shaped recovery because of the nature of the pandemic and the length of the economic shutdown. The oil price has fallen dramatically, as have other commodities, which is broadly negative for EM.
A worst-case scenario could be one where very large EM stimulus measures, such as those seen in DMs, cannot be refinanced due to a prolonged recession and we face a debt restructuring, say, 12 months down the road.
However, the probability of that is very low because we have also had a huge and unprecedented level of stimulus both through monetary policy to support financial markets and fiscal policy to support the broader economies. That has come both from individual EM countries at the domestic level as well as internationally.
As long as the authorities stay ahead of the curve in terms of liquidity provision and a fiscal response to try and support growth, then I think that would be a relatively supportive backdrop for EM debt. I also think investors will continue to look for higher yielding assets with traditional portfolios of investment grade assets offering low yields, which will support EM debt issuance. It is very difficult to time the bottom of the market, but we are incrementally repositioning portfolios, rotating positions without making big portfolio shifts, expecting these to bear fruit over a time horizon of 12-18 months.
Pixabay CC0 Public Domain. Países Bajos, Suecia y el Reino Unido, los mercados más favorables para los inversores en términos de regulación e impuestos
The main conclusion of Morningstar’s Global Study of Regulation and Taxation in the Fund Industry, is clear: Regulation is adequate, but not always proactive. The Netherlands, Sweden, and the United Kingdom earned Top grades, while Australia, Canada, China, Japan, New Zealand, and the United States received Below Average grades.
The second chapter of Mornigstar’s biannual Global Investor Experience (GIE) report, now in its sixth edition, assesses the experiences of mutual fund investors in 26 markets across North America, Europe, Asia, and Africa. The “Regulation and Taxation” chapter evaluates the regulatory and tax frameworks that mutual fund investors face, assigning grades of Top, Above Average, Average, Below Average, and Bottom to each market.
Morningstar gave Top grades to the Netherlands, Sweden, and the U.K., denoting these as the most investor-friendly markets in terms of regulation and taxation. Conversely, Morningstar assigned Below Average grades to Australia, Canada, China, Japan, New Zealand, and the U.S., as fund markets where the regulatory and tax schemes need to improve. Morningstar did not assign a Bottom grade to any market, as every market in the study provides basic protections for investors.
“When it comes to regulation and taxation in the fund industry, we are looking for policy that ultimately empowers investor success, like tax incentives that encourage individual investment and effective regulation of funds that promotes transparency and limits misleading statements and conflicts of interest,” said Aron Szapiro, head of policy research at Morningstar and a co-author of the study. “We found that regulators in the U.S. and Canada are generally running efficient systems. However, the pace of reform there hasn’t kept up with the rest of the world, explaining why the U.S. and Canada continued to receive a Below Average grade for regulation and taxation in our study.”
“Since our last report in 2017, the trend towards strong regulation that protects mutual fund investors has remained intact. We’re seeing more markets take steps to motivate citizens of all backgrounds to invest for their futures through special tax incentives or regulations that encourage lower fees, like mandatory disclosures,” said Andy Pettit, Morningstar’s director of policy research, EMEA, and co-author of the study.
Highlights include:
The Netherlands, Sweden, and the U.K. earned top grades in part because they provide strong incentives for ordinary people to invest, although none of the countries offer the overall best tax systems for ordinary investors. The U.K. continued the expansion of its auto-enrollment program and together with the Netherlands stood out for banning embedded commissions on most sales, and Sweden stood out for having strong governance and being a frontrunner in ESG disclosures.
Every European country covered by the MiFID II regulations earned at least an average grade as the regulation spurred needed reforms in areas like soft dollar commissions and increased transparency.
Australia, Canada, New Zealand, and the United States lagged other markets, as they have in previous studies. These countries have adequate regulation around mutual fund operations and distribution, meeting basic standards, and the experience for investors can be quite good. Despite that, they fall short of the standard set by other markets that govern conflicts of interest and incentivize investing. In addition, Australia, Canada, and the U.S. all lag on tax policy compared with other markets in the study, creating distortions and disincentives to invest.
Japan fell to Below Average despite making some positive strides. Japan fell to Below Average from Average mainly due to Morningstar’s revised methodology putting more emphasis on mutual fund operations and distribution policies, an area where other markets have taken major steps to shore up their regulations in recent years. Japan doesn’t mandate disclosure of third-party research costs or distribution costs paid out of fund assets, and there is no requirement to disclose advisors’ or distributors’ conflicts of interests.
China falls short in encouraging people to save for retirement and opening fund markets to promote greater choice. China only has a state-managed pension scheme and no other mandated supplementary defined contribution system. Additionally, the regulation of third-party research cost disclosure and soft dollars is weak. Although China has made efforts to further open up its capital market, fund choices are mostly limited to locally domiciled funds.
ETFs’ continued growth has given investors more choice in most markets, though distributors still have more incentive to offer open-end funds in some markets. In addition, the tax treatment of ETFs can vary. For example, in the U.S., the choice is distorted by differing tax treatments that are advantageous to ETFs, while, in New Zealand, ETFs are tax-disadvantageous for lower earners.
While funds in many markets continue to levy distribution fees through a fund’s expense ratio, there have been some positive steps to reduce this practice. For instance, commissions have been banned in Australia, the Netherlands, and the U.K. In Hong Kong, intermediaries that receive monetary or nonmonetary benefits from fund issuers can no longer refer to themselves as independent.
Of the 26 markets, only Singapore and Hong Kong do not tax fund investors at all. Many markets exempt fund investors from capital gains while they hold a fund but tax at least some of the fund’s income. The U.S. and Australia are notable exceptions where taxes are due on capital gains incurred by the fund, regardless of whether an investor has sold the fund or not.
Christian McCormick, Senior Product Specialist de Allianz China A-Shares Strategy. Christian McCormick: “Las acciones A de China ofrecen a la cartera de los inversiones diversificación y alfa”
According to Christian McCormick, Senior Product Specialist on the Allianz China A-Shares Strategy, so far this year, China's onshore equity markets are outperforming the China’s offshore equity markets, some developed markets and most emerging markets. In this interview, McCormick answers the key questions about what to expect from the China A-Shares market.
Q. In your point of view, are Chinese regulators in a better position to respond to the challenges of the current environment compared to other developed economies?
A. China’s current fiscal and monetary response has been significantly smaller in scope (about 3% of its GDP) than its response to the 2008 financial crisis (about 13% of its GDP) and the US’ current response (about 25% of its 2019 GDP). China’s economy remains in a better position today than it was during the financial crisis, with greater economic prospects, access to capital markets and a lower budget deficit forecast than developed nations. Chinese policymakers have also shown more restraint in responding to the pandemic. We estimate China would need stimulus of about 4.5% of its GDP to offset the economic damage from the pandemic, leaving potential stimulus on the table should the global economic fallout prove to be more dramatic than anticipated, or should the country have to mitigate a second wave of local infections.
Q. What has burdened the performance of Chinese equities compared to other regions such as the United States or other emerging countries?
A. We believe this disconnect has been driven by the historically ever-changing structure and youth of the domestic equity market. In addition, locally listed A-shares have a smaller foreign investor base than other equity markets and are underrepresented in global indices. Foreign institutional investors were first permitted to own onshore Chinese stocks in 2001, but access to local Chinese equities has expanded more recently.
Q. What relevant steps have been taken recently for foreign investors to have access to the China A-Shares?
A. In 2018, MSCI added China A-shares to its Emerging Market Index and will gradually increase its weighting to eventually represent its true global market cap weighting of approximately 8%. We think this increased representation will help drive higher investor demand globally for China A-shares, potentially narrowing the disconnect between A-share market performance and the country’s economic growth potential.
Q. From a beta perspective, what can favour the growth of China A-Shares?
A. Secular growth areas like consumer discretionary, technology and health care are far better represented in the China A-share market than in offshore Chinese listings, creating an attractive opportunity set for investors. Additionally, there is a high degree of private sector participation in these secular growth areas rather than state-owned enterprises. In this way, two relevant aspects are: government continues to work to Internal transform its economy from an emerging to a developed one and also it works to make public companies more competitive with respect to their foreign counterparts.
Q. What role can China A-stocks play in an investor's portfolio?
A. We believe China A-shares offer substantial potential to generate alpha while also providing attractive diversification. The onshore China A-share market is dominated by small- and mid-cap companies (85% of the market), whereas the offshore H-share market is dominated by large-cap companies (53% of the market). In our view, this broader opportunity set of small- and mid-size companies creates a greater potential for outperformance than offshore H-shares. From both a price/earnings and price/book perspective, China A-shares are currently trading well below their historical 10-year averages, and they trade at attractive valuations relative to developed markets and other emerging markets.
Q. How does ESG analysis factor into evaluating China A-share opportunities?
A. We find ESG analysis extremely valuable when assessing company opportunities in the China A-share market. In addition to analyzing a host of environmental and social factors, we emphasize governance factors as the market as a whole is still ramping up to the level of sophistication of other developed markets. We seek to understand corporate board and management structures, executive incentives, the relationship a company has with its local and central governments and the alignment of interests between management and its various stakeholders, including its workforce and shareholders
Pixabay CC0 Public Domain. BlackRock lanza su primer fondo de inversión de impacto que contempla los Objetivos de Desarrollo Sostenible de Naciones Unidas
BlackRock announces the launch of a high-conviction active equity impact strategy with its BlackRock Global Impact Fund. The new Fund gives investors the opportunity to direct their investments toward companies helping to address major world challenges. The addition of the impact strategy forms part of BlackRock’s continued efforts to expand its sustainable investment platform as it delivers against its commitment to make sustainability its standard for investing.
The Fund’s impact is achieved by investing in companies which contribute to the advancement of the United Nations Sustainable Development Goals (SDGs) and targets. The portfolio is comprised of companies that map back to the firm’s proprietary impact themes including increasing access to quality education and affordable housing, advancing healthcare innovation to help with societal challenges such as the current COVID-19 pandemic, expanding financial and digital inclusion, preventing climate change, reversing environmental degradation, and increasing efficiencies in water usage and deployment.
The Fund is managed through BlackRock’s Active Equities Impact Investing team which recently formed under the leadership of Eric Rice, who joined the firm in October 2019. Eric will draw upon his 30 years of industry experience, most recently exclusively developing and managing impact strategies, and including his prior experience working for the World Bank as a development economist and as a U.S. diplomat in Rwanda.
Rachel Lord, Head of Europe, Middle East and Africa for BlackRock commented, “Eric joined BlackRock with a strong track record in developing alpha-seeking impact strategies and his expertise will lead our impact investing efforts during this challenging time and beyond. While launching the Global Impact Fund during a global pandemic is coincidental, it does highlight that the opportunity inherent in investing in companies committed to doing good is enduring, and is of increasing relevance to the world today.”
Alongside the impact goals, the Fund seeks to maximise long-term total return and to outperform the MSCI All Country World Index (ACWI). To achieve the Fund’s objectives, the team has set stringent impact criteria for the portfolio companies including:
materiality – whereby a majority of revenues or business activity advances one or more of the SDGs or targets;
additionality – defined as delivering a new technology or innovation to market, serving an underserved population, or operating in an unaddressed market; and
measurability – in that the impact must be quantifiable.
“Impact investing is becoming more and more attractive as investors increasingly require their investment targets to advance their sustainability objectives,” said Eric Rice, Portfolio Manager of the BlackRock Global Impact Fund and Head of Active Equities Impact Investing at BlackRock. “Launching the Fund during the COVID-19 pandemic has further highlighted the important role companies play in society. COVID-19 is one of the greatest societal challenges the world faces right now, and we see impact investing playing a meaningful role in how we overcome it. Capital from the Fund will be put toward the search for alpha by investing in companies focused on medical diagnostic tools and vaccines to combat the crisis, as well as crisis mass notification systems and microloans, amongst others.”
The team intends to run a low-turnover, long-term buy and hold concentrated portfolio strategy and use active dialogue and partnership with companies to drive improvement towards impact outcomes, alongside long-term value creation. The Fund is USD-denominated and available for investors located across Europe.
Impact investments are designed to generate positive, measurable impact alongside a financial return. The Fund uses the World Bank’s IFC Operating Principles to ensure impact considerations are integrated throughout the investment lifecycle. Reporting plays an integral role of the investment offering where clients will receive regular updates and reports on the positive environmental or social impact that Fund companies are achieving.
BlackRock’s active equities impact offering will sit alongside existing impact strategies in the fixed income and alternatives business areas. The Active Equities group manages USD $316bn * of assets on behalf of its clients and has managed Environmental, Social and Governance (ESG) investment strategies for over four years.
The Fund forms a part of BlackRock’s Sustainable Investing platform which manages USD $107bn* in dedicated sustainable strategies, comprising of ESG outcome oriented, sustainable thematic and impact funds. Sustainable investment options may have the potential to offer clients better outcomes and is integral to the way BlackRock manages risk, constructs portfolios, designs products and engages with companies.
Pixabay CC0 Public Domain. Morningstar se hace con el 100% de Sustainalytics
Morningstar has reached an agreement to acquire Sustainalytics, a globally recognized leader in environmental, social, and governance (ESG) ratings and research. Morningstar currently owns an approximate 40% ownership stake in the firm, first acquired in 2017, and will purchase the remaining approximate 60% of Sustainalytics shares upon closing of the transaction.
The transaction consideration includes a cash payment at closing of approximately EUR 55 million (subject to certain potential adjustments) and additional cash payments in 2021 and 2022 based on a multiple of Sustainalytics’ 2020 and 2021 fiscal year revenues. Based on the upfront consideration, Morningstar estimates the enterprise value of Sustainalytics to be EUR 170 million. The closing of the transaction is subject to customary closing conditions and is expected to occur early in the third quarter of 2020.
“Modern investors in public and private markets are demanding ESG data, research, ratings, and solutions in order to make informed, meaningful investing decisions. From climate change to supply-chain practices, the nature of the investment process is evolving and shining a spotlight on demand for stakeholder capitalism. Whether assessing the durability of a company’s economic moat or the stability of its credit rating, this is the future of long-term investing,” said Morningstar Chief Executive Officer Kunal Kapoor. “By coming together, Morningstar and Sustainalytics will fast track our ability to put independent, sustainable investing analytics at every level – from a single security through to a portfolio view – in the hands of all investors. Morningstar helped democratize investing, and we will do even more to extend Sustainalytics’ mission of contributing to a more just and sustainable global economy.”
For more than 25 years, Sustainalytics has been ahead of the curve, recognizing the need to provide ESG solutions to investors, banks, and companies worldwide. The firm is widely known for its security-level ESG Risk Ratings – which are integrated into institutional investment processes and underpin numerous indexes and sustainable investment products – as well as serving an ever-increasing number of use cases across the emerging sustainable finance landscape. Sustainalytics offers data on 40,000 companies worldwide and ratings on 20,000 companies and on 172 countries.
Since 2016, Morningstar and Sustainalytics have teamed up to supply investors around the world with new analytics, including: the industry’s first sustainability rating for funds, rooted in Sustainalytics’ company-level ESG ratings; a global sustainability index family; and a large span of sustainable portfolio analytics that includes carbon metrics and controversial product involvement data. With this acquisition, Morningstar plans to continue to invest in Sustainalytics’ existing business while also further integrating ESG data and insights across Morningstar’s existing research and solutions for all segments, including individual investors, advisors, private equity firms, asset managers and owners, plan sponsors, and credit issuers.
“Sustainalytics welcomes the opportunity to join the Morningstar family. Our collaboration over the past several years has helped to extend the understanding and use of ESG insights and strategies to a multitude of investors, advisors, asset owners and managers across the globe,” said Sustainalytics Chief Executive Officer Michael Jantzi. “This new ownership structure will amplify our ability to bring meaningful ESG insights, products, and services to the global investment community and to companies around the world. Importantly, I am thrilled that my colleagues and I are joining a firm with a belief in our mission and intent to help us further expand our reach.”
Dutch-domiciled Sustainalytics has a global business that includes more than 650 employees worldwide spanning 16 locations, and all are planned to join the Morningstar family under the existing Sustainalytics leadership team. Morningstar intends to fund the transaction with a mix of cash and debt. The transaction is expected to have minimal dilution to net income per share post-closing, excluding any impacts of purchase accounting and deal-related expenses, as the company expects to incur costs to integrate certain capabilities and fund growth opportunities.
Bjoern Jesch, courtesy photo. Bjoern Jesch se une a DWS para reforzar el área Multi Asset
Bjoern Jesch will join DWS on July 1, 2020 as Global Head of Multi Asset & Solutions. He joins the firm from Credit Suisse, where he was Global Head of Investment Management within the International Wealth Management division. Bjoern will succeed Christian Hille, who has decided to leave DWS for personal reasons after 13 years with the firm.
Multi Asset & Solutions is one of DWS’ three targeted growth areas: With net inflows of EUR 7.2 billion, Multi Asset was a significant driver for the firm’s flow turnaround in 2019. Globally, Bjoern will be responsible for a team of 82 investment professionals and AuM of EUR 58 billion (as of 31 December 2019).
Stefan Kreuzkamp, DWS’ Chief Investment Officer and Co-Head of the Investment Group says: “We are very happy that Bjoern has decided to join DWS. He enjoys an excellent reputation across the asset management industry and the market as a top notch investor and thought-leader. Multi Asset & Solutions is a crucial part of our business, now more than ever. In a volatile market it can truly differentiate itself for investors“.
Bjoern Jesch adds: “In times of extremely low interest rates and simultaneously high levels of volatility Multi Asset is the differentiating investment strategy for one of the biggest fiduciary asset managers in the market. I look forward to tackling this challenge along with the outstanding investment team at DWS”.
Over the course of his career spanning three decades Bjoern has held senior positions at Union Investment, where he served as Chief Investment Officer and Head of Portfolio Management, Deutsche Bank and Citibank. At DWS, he will report to Stefan Kreuzkamp. He will be a member of DWS’ CIO Management Committee.
March was one of the worst months in stock market history, with the novel coronavirus that causes COVID-19 spreading rapidly around the globe, and societies everywhere responding with various forms of “social distancing” that escalated throughout the month, culminating with most of the global economy being effectively shut down.
Many questions about Covid-19 remain: Will it wane with warmer weather? Will it become endemic like the flu? When might effective treatments and a vaccine be developed? The data we do possess from China, South Korea and Italy unfortunately suggest cases in the US will continue to escalate sharply, but eventually moderate. Life in China, where the virus originated last fall, appears to be slowly returning to normal. The strain on the United States health care system will be severe and the death toll – currently estimated at 100,000-240,000 – will be massive, but two dynamics give us hope. First, technology should allow us to track, treat and defeat this virus faster than any in the past. Notably, technology has also offset some of the heavy burdens of quarantine – the citizenry of the Spanish Flu of 1918 did not benefit from ecommerce, remote working/learning or Disney+. Second, after some delay, all levels of government and most businesses and individuals are instituting the practices needed to flatten the infection curve, putting us on path to put Covid-19 behind us. Many private companies have already unveiled promising developments in terms of tests that provide rapid results, therapeutic treatments and even vaccines, though many of those will likely not likely be available until 2021 at the earliest.
The cost of closures and social distancing is considerable. The global economy has nearly ground to a halt triggering what will likely be a severe recession. While there will be significant pent-up demand on the other side of this crisis, fear will need calming, supply chains will require realignment, and balance sheets will demand repair. Government action – both monetary and fiscal – is crucial, and the CARES Act signed into law on March 27th is a good start in providing relief to both individuals and businesses. The Fed has slashed rates near zero, and is also buying securities in a number of asset classes –treasuries, mortgaged backed securities, asset backed securities, corporate credit, loans backed by the Small Business Administration – in order to stabilize markets and the economy. Further fiscal stimulus will likely be needed, and we expect legislation directed at more medium to long term measures that can actually drive spending and demand (e.g., a long overdue infrastructure bill) as opposed to simply providing more relief. Ultimately this recession, like all prior, will birth a new expansion. We currently expect a return to growth in Q3 after a sharp decline in Q2, though the pace of recovery will depend on the effectiveness of both measures to contain and combat the virus, as well as measures to keep individuals and businesses afloat for when the economy opens up again.
While this one has been especially painful due to its quickness and severity, we are reminded that bear markets, like recessions, are necessary to the capitalist system, cleansing its excesses. Over the four decade plus history of our firm, there have been 5 bear markets ranging in length from 3 to 30 months. We had been anticipating a correction for some time, though the trigger for and pace of the decline (one of the most rapid in history) took us by surprise. The market already quickly bounced into technical “bull market” status from its lows, though those lows may be re-tested as the case and death counts rise to alarming levels. Ever the world’s best discounting machine, the market will need clarity on a peak in cases and government fiscal action before a sustained rally. That could be anticipated at any point which is why an attempt to time the market could result in significant forgone profits.
We believe recent volatility, attributable in some measure to the popularity of algorithmic and passive trading, has laid the groundwork for investors to again focus on fundamental stock picking. Capital preservation is especially important in bear markets. The market is offering bargains unseen since 2008. Some are opportunities to add to companies already owned, others are in companies and industries whose prior valuations put them out-of-reach. We continue to emphasize the basics: Does a company’s business model remain sound? Does it have a strong enough balance sheet to withstand the short term pain? Is management focused on shareholder value? The situation changes daily, but we believe the best way to participate in the return of health and prosperity is to own a portfolio of excellent businesses.
Merger Arbitrage was not immune from market volatility either. During the month, mark-to market merger spreads widened as levered multi-strategy and quantitative hedge funds faced margin calls and sold stocks to delever and raise cash. We experienced similar instances of this dynamic before, for example, in the Crash of 1987 and in Long-Term Capital debacle in September 1998. It is important to note that none of the deals in our portfolio were terminated in March. The outcome is that we have an excellent opportunity to earn significant returns from existing deals which will close in the months ahead.
These market dislocations force arbitrage investors to reassess the standalone value of target companies, driving target company prices lower as comparable valuations decline. Our philosophy is to take advantage of these market dislocations by adding to positions at lower prices. This is what we are doing at present, with a selective focus on deals with short-term catalysts – tender offers, deals that are expected to close soon and strategic deals that have our highest level of conviction. We are continuously evaluating deal risks and outcomes. Globally, companies and government agencies have safety measures in place in response to COVID, allowing them to remain operational.
Column by Gabelli Funds, written by Michael Gabelli
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To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
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GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
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Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
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Opportunity: Merger arbitrage investments represent the most attractive opportunity set in decades as a result of levered arbitrage funds facing margin calls, and multi-strategy funds exiting merger investments entirely. We have been approached by other institutional investors to establish a special purpose fund to take advantage of wide spreads caused by the market dislocation. We agree with these clients that now is a great time to add cash to merger arbitrage investments.
At the end of March, merger arbitrage spreads had “baked-in returns” of approximately 10%+ gross (before annualizing) when deals close over the coming months. The opportunity within these portfolios would be greater than 10% in addition to the new investment opportunities that currently exist at materially larger spreads because of the market dislocation. We expect more than 60% of the positions in the portfolio should be completed in the first half of this year, allowing us to harvest gains and reinvest the capital in additional attractive investments. In the last couple of weeks alone, more than 4 acquisitions have been completed after receiving regulatory approvals, shareholder approvals, or the expiration of tender offers. The acquisition price for TerraForm Power was actually increased earlier in March, which highlights buyers’ commitment to consummating acquisitions and is further evidence the deal market continues to present attractive opportunities. There are additional deals in the fund that are on the finish line, which will result in near-term realized gains.
Arbitrage vs. Equities: Returns in equities will be beta-driven, however we believe to be in a better position to generate alpha and returns in merger arbitrage. Equity buybacks will slow dramatically and volatility will persist. Equity exposure could be achieved more effectively by adjusting overlays and hedges.
Arbitrage vs. Investment Grade Credit (“IG”): Investing in the higher-quality end of IG would likely generate mid-single digit annualized returns assuming credit spreads normalize. A merger arbitrage portfolio should generate higher returns.
Investing in lower-quality IG would likely generate high single-digit/low double-digit annualized returns, still less than in a merger arbitrage portfolio. With lower-quality IG you also run the risk of investing in “fallen angels” that have not yet been downgraded to high yield, which would result in further bond price deterioration. There is a perception in IG credit that defaults do not occur, but if and when there are defaults it will have a broad impact on spreads and bond prices. Additionally, investing in IG Credit will dramatically change the liquidity profile of a portfolio. Credit liquidity is the worst in decades and wide bid/ask spreads could mean returns in credit could be illusory if managers are unable to source supply.
On a separate note, we would like to highlight that the cost of carry when hedging USD exposures for the non-USD currency classes has decreased, which is a benefit to these shareholders. This decrease has been primarily driven down / caused by the tightening of USD interest rate spreads to Europe’s already low (negative) rates. At the current rates, we forecast the cost of carry to equate to approximately 1.40% annualized.
We will continue to monitor the current deals in the market and anticipate market opportunities tracking the global environment, with a keen eye globally on deal terms and market factors.
Column by Gabelli Funds, written by Michael Gabelli
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To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
Foto cedidaFoto: David Page, economista sénior de AXA Investment Managers. Foto: David Page, economista sénior de AXA Investment Managers
After a couple of weeks’ of battling, Congress fagreed on a stimulus package thought to total $2trn (9.2% of GDP). This is an unprecedented stimulus, which according to David Page, Head of Macro Research at AXA Investment Managers, represents 9.2% of GDP.
The package began as a Senate Republican proposal estimated at around $850 bn, but over the ensuing time has morphed into a package that is estimated to more than double the combined GFC packages – the Economic Stimulus Act 2008 and the American Recovery and Reinvestment Act (2009). Senate Democrats had resisted earlier passage of the bill because it was not sufficiently focused on households, state or local governments. Democrats also wanted sufficient oversight of how a large portion of the package, to support larger businesses, was distributed. On Wednesday night 25, the Senate approved the measure with a unanimous vote of 96-0 and the House of Representatives voted out loud on Friday 27, with which the stimulus plan was approved.
The stimulus package contains
$500bn in bank loans and direct assistance to US companies, states and local governments affected by the virus (including $75bn to large corporates including airlines).
$377bn to small businesses (sub-500) to help fund payrolls in coming months. These payments will be structured as up to $10m interest free loans to businesses, but will be ‘forgiven’ proportionate to the number of workers kept on payrolls.
$250bn in direct checks to US individuals ($1200 per person, $500 per child).
$260bn in expanded unemployment insurance, raising payments by $600 per week and extending coverage duration by four months.
$150bn funding for states
$340bn additional Federal government spending
US Treasury Secretary Mnuchin stated that these payments would come quickly. He stated that loans to small businesses would be made next week and that individual payments would be paid within three weeks. Democrats secured more precise oversight for the distribution of stimulus funds to large corporates after accusations surrounding the distribution of TARP over a decade ago. An independent Inspector General will be appointed who will work with a panel of five members picked by Congress. A weekly report on the disbursement of funds will be produced.
While eye-watering in scale and a complement to the range of measures enacted by the Federal Reserve, questions remain about whether even this will prove sufficient. Governors from Maryland and New York have suggested that there is insufficient aid to states most affected by the virus. In combination, the Fed and Congress are trying to help US households and businesses plug the significant hole that the coronavirus will leave in the economy over the coming months. The problem is no one can be sure how big that hole will be. The median estimate for jobless claims (released today) is to rise to 1.64m, although some estimate more than double that. St Louis Fed President Bullard recently said unemployment could rise to 30% in Q2. Such a sharp rise would suggest a double-digit fall in real disposable incomes in Q2, which would in turn exacerbate a sharp fall in domestic spending not just in Q2, but over the coming quarters. The stimulus package is designed to prevent such a deterioration, particularly by providing direct support to firms and incentivising them keep workers on payrolls, and to individuals through direct payments. This complements the Fed’s actions to facilitate lending to businesses to keep afloat while the virus-related drop in demand passes. But only the coming weeks will show how successful these measures will prove.
The stimulus package approved by Congress is also in part designed to bolster confidence, particularly for financial markets. To that extent, it has proved successful with the S&P 500 index rising by 10.5% as certainty over the passage of the stimulus rose. This easing in financial conditions in part offsets the material tightening over recent weeks which has provided an additional headwind to activity. Broader market moves saw the impact of the stimulus mix with ongoing efforts to curb liquidity issues in USD markets. 2-year yields have fallen by 10 bps to 0.30% over recent sessions, while 10 year yields have fallen by around 7 bps over a similar timeframe to 0.79%. The dollar has fallen by 2.4% against a basket of currencies this week as dollar liquidity scarcity has started to ease.
