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. Black Tulip Asset Management Democratizes Access to Alternative Investments in the Entertainment Industry with FlexFunds
Black Tulip Asset Management, a Miami-based alternative asset management company exclusively focused on advising and structuring exchange-traded products (ETPs) for European capital markets, announces it is launching multiple ETPs with FlexFunds, a globally recognized service provider in asset securitization, allowing access to the entertainment industry.
Technology and a raft of new players in both entertainment production and distribution has forever changed the industry’s competitive landscape: Netflix, Apple, Alibaba, Tencent, Google, Hulu and Amazon. Traditional pay TV platforms have been forced to adapt.
The key is to capture the market with proven performers in the production arena, with a demonstrable track record of success and profitability. Rebel Way Entertainment and Empyre Media are good examples of production management teams and film financiers able to repeatedly achieve Internal Rates of Return in excess of 35%.
To address this market need, Black Tulip Asset Management has introduced Black Tulip Rebel Way Entertainment and Black Tulip Empyre Media Exchange-Traded Products (ETPs) arranged by the innovative asset securitization program offered by FlexFunds, which allows access to global investors.
The Black Tulip Empyre Media ETP offers the possibility of investing in a portfolio of three to six A-list Hollywood movies managed by Empyre Capital Management and advised by Empyre Media Ltd., a London-based media content financing and investment firm with over 50 years of experience in entertainment finance. Empyre Media management team has recently invested in 4 films that have generated more than $950 million in box office receipts and been nominated for 14 Academy Awards, four Golden Globes and eight BAFTAS.
The Black Rebel Way Entertainment fund is designed to invest in a slate of at least 10 low budget action and horror movies destined for streaming platforms and in some cases theatrical release. The principals have made over 350 films in this manner in the last four decades and the deal is an example of accessing valuable original content.
Lastly, Black Tulip Asset Management is also working with FlexFunds on a new $100 million content fund for women-empowered film, television and theatre.
Oliver Gilly, Managing Partner at Black Tulip Asset Management LLC, said: “We are delighted to continue working with the FlexFunds team and to be using their innovative securitization platform. The flexibility of FlexFunds’ model has allowed the issuance of the first ETP alternative uncorrelated notes to offer streamlined access to proven original content producers in Hollywood’s Second Golden Age, while the transparency of ETP securities enables global distribution, both privately and institutionally.”
Mario Rivero, FlexFunds’ CEO, said: “Through FlexFunds’ asset securitization program, we are capable of converting any asset into a listed security, allowing international investors to easily participate in any investment project. Black Tulip’s entertainment ETPs are a clear exhibit of how flexible asset securitization can be: from real estate assets to funds that invest in Hollywood movies, or any private equity project. Asset securitization plays a key role in allowing investors to participate in a wide array of opportunities at lower minimum investment levels, thus democratizing access to capital markets.”
Foto cedidaImage of the facilities at Streamsong Resort and Golf, in Florida, where the sixth edition of the Investments & Golf Summit organized by Funds Society was held. / Courtesy photo / Courtesy photo . Funds Society Investments & Golf Summit: Ideas on Global and Multi-Asset Fixed Income as a Source of Income
The sixth edition of the Investments & Golf Summit organized by Funds Society, and held at the Streamsong Resort and Golf, in Florida, left us with the best proposals of nine asset management companies in the field of equities, structured products and real estate, and also in fixed income and multi-asset funds.
Janus Henderson, RWC Partners, AXA IM, Thornburg IM, Participant Capital, Amundi, M&G, Allianz Global Investors and TwentyFour AM (Vontobel AM) were the participating management companies in an event which brought together over 50 fund selectors from the US Offshore market.
In the area of fixed income, Thornburg Investment Management and TwentyFour (Vontobel AM) took center stage. Danan Kirby, CFA, Portfolio Specialist at Thornburg Investment Management, spoke about the challenges faced by that particular asset and presented a flexible and multisector debt strategy. Among these challenges is the difficulty of predicting interest rates in an environment in which consensus seems to agree that rates are at very low levels and the cycle of increases has been “incredibly” slow, but in which investors should, nevertheless, avoid making comparisons with the past, since the path of these increases cannot be known. And experience shows that the market has been wrong many times. Also, among the challenges of investing in debt, the credit spreads, both in investment grade and in high yield, don’t compensate for risks taken and, in addition, they have improved after widening at first, following the Fed’s halt on the interest rate hikes cycle, due to low growth. What is real and what is not? The asset manager wonders.
Another challenge in fixed income is differentiation, since not all the names with a BBB rating, which makes up a large part of the investment grade universe, are the same: “Credits within the most defensive sectors with lower leverage should be better positioned while we approach the final phases of the credit cycle,” says the asset manager. And, as if that weren’t enough, global investors face a changing scenario in which they are forced to take more interest rate risks in so far as yields remain low. In this challenging environment, the asset manager proposes solutions: a flexible strategy with a relative value perspective to look for opportunities with a good risk / reward basis.
And this is the field of the Thornburg Strategic Income fund, focused on obtaining total returns through a portfolio which has the liberty to invest globally in all fixed income sectors, and which seeks a strong risk adjusted return by investing in the best relative value opportunities without benchmark restrictions. “When managing a scenario with volatility, investors need to incorporate a broader range of strategies that offer flexibility. A more complex global scenario and a greater frequency of risk off-risk on sentiment will create opportunities for flexible investors,” he adds. The asset manager explains that they are flexible and that they invest in bonds that offer attractive relative value as compared to the universe, have good fundamentals, and can add diversified exposure to risk. Currently, they invest in a variety of segments such as bank loans, common stocks, preferred stocks, foreign government bonds, domestic US treasury bonds, municipal bonds, investment grade and high yield (the highest positions) corporate debt, CMO, CMBS, Mortgage-pass through, agency bonds, ABS and liquidity.
The asset manager concludes that the market’s dynamic nature requires both experience and flexibility, and that a process of relative value provides opportunities to generate alpha, in all scenarios. “We only take risk where we are paid for it,” adds the expert, who explains that they do not use derivatives, use a bottom-up process, and analyze the capital structure of the companies in which they invest very carefully.
Global Fixed Income for Obtaining Income
TwentyFour AM, a boutique firm of the Vontobel AM group specializing in fixed income and working with Unicorn in the US Offshore market, also presented a global and multisector fixed income strategy for obtaining income (TwentyFour Strategic Income Strategy), the main focus of which is precisely to provide such income through the positive effect of diversification and a truly global investment. The idea is to provide an attractive level of income along with the opportunity for capital appreciation, although capital preservation is key. It’s benchmark agnostic, has high conviction (less than 200 individual positions) and seeks global relative value in the portfolio, with active risk management (duration and credit, but taking out currency) and that adds value with both asset selection, as well as with top-down proposals.
“Fixed income can work well with an active management perspective. If you like corporate bonds, there is a lot to choose from and through analysis you can find out where it’s most attractive to invest. With fixed income the benefits of active management can be proven,” explains David Norris, Head of the company’s US Credit team. Currently, around 30% of the portfolio has exposure to public debt (especially US debt, since it offers protection in a risk-off environment and also a decent return in an environment in which the macro vision indicates interest rate stability, with maturities of about five years) while the remaining 70% is in credit risk, mostly outside the US, with a lot of exposure in Europe and the United Kingdom (with names that pay more in the latter case due to the Brexit issue), but with shorter maturities, less than two years. “The cycle is getting old and although there is still value in credit it’s not like before, so we prefer not to take too much risk and therefore opt for short terms,” explains the asset manager. “It’s a reasonable environment for credit but we are cautious, and opportunities have been reduced compared to previous moments of the cycle,” he adds.
Banks weigh around a quarter of the portfolio, mainly due to the opportunities that the asset manager sees in Europe, with yields close to 7% with maturities of less than two years and a rating above BB. “The risk profile of banks is very attractive,” he says, and speaks of the large Spanish banks and some British that offer great value because they are not exposed to problem areas like Italy yet benefit from the premium provided by the Brexit issue. If analyzed with a global perspective, there are many areas that are attractive” he adds. As for emerging debt, they have some exposure, but this was reduced after the rally in recent months and only hold hard currency credit, since it’s in this segment that they show the greatest concerns. Also, as a risk, there is the possibility that commercial US banks do the tightening that the Fed doesn’t, causing the end of the credit cycle, although, theoretically, they don’t see any end of cycle signs in the US, nor of recession. In any case, they are vigilant, and the fund frequently shifts sectoral allocation if market prospects change.
Multi-assets: Winning Strategies
Also with a vision to generating income, but with a multi-asset perspective, Amundi Pioneer presented a solution for solving the income problem. “Traditional models of asset allocation oriented towards fixed income and equities can no longer produce the returns that investors need. Given the intervention of central banks, these figures will not return to historical levels. You have to find alternatives to debt in other assets in order to obtain more reasonable returns,” advised Howard Weiss, Portfolio Manager at Amundi Pioneer.
During the presentation he pointed out the attractiveness of Amundi Funds II-Pioneer Income Opportunities, originating in the US fund launched in 2012 aimed at obtaining income from a multi-asset perspective, as opposed to strategies, which tried to obtain income by focusing only on fixed income, because at that time it made sense (high-yield offered returns of 7%). But that compensation from the past has now disappeared: Over time, the spreads have been compressed, due to the continued interventions of central banks. Due to this lack of compensation, they have reduced their exposure to high yield in their strategy from over 44% in 2016, to around 13%. Equities offer a better value proposition for obtaining income: “We see conditions for the continuity of the economic expansion, for a longer cycle.” In order to create income from equities, and beyond dividends (in the case of these shares, they focus on the sustainability of the dividend, rather than on it’s being very high), they also opt for strategies such as equity linked notes. “Dividend strategies sometimes produce losses because cash flows are focused there, and the business deteriorates. We prefer to identify companies in difficulties, but that are in the process of rationalizing,” says the asset manager.
The strategy’s differential factor is the way in which the asset classes in which it invests are defined: At present, there are mortgage-backed securities, bank loans, emerging debt, US and international high yield, equity linked notes, bonds linked to events , MLPs, REITs (in Singapore and Europe…), emerging and developed world stock markets and hedging.
The objective of the strategy is to produce returns of around 4% and an appreciation of capital of 2%, so that annualized returns can reach 6%, although, even though it offers yearly income, capital appreciation will depend on the environment. “We only distribute what we produce, we will not consume capital,” says the asset manager.
Behavioral Finances
In multi-assets, M&G presented a strategy with a very differentiated approach: “There are two factors that move the market, fundamentals and economic beliefs, and these latter perceptions tend to change very quickly. In fact, sometimes the fundamentals don’t change, but the economic beliefs do,” explains Christophe Machu, Convertibles and Multi-Assets manager at the company. “Most of the time investors try to see where the benefits are going and try to make projections, but for this, you need better tools than those of your competitors and it’s difficult and arrogant to predict this data. That is why we focus much more on economic beliefs and their changes, that is, on investors’ perception,” he adds. Following these parameters, at the end of last year, for example, when the discussion wasn’t about whether a recession was coming or not (it will obviously come within the next two years, says the asset manager), but when it would come, they decided to take a contrarian vision and bet on shares, increasing their position, not because of the fundamentals but because of the change in the beliefs of the investors: it was a very good entry point, buying both US and foreign shares.
Thus, the strategy combines a framework of valuations with behavioral finances (episodes, events…), with tactical hedging, to establish its asset allocation and exploit irrational behaviors. As an example of the latter, explains the manager, volatility spikes tend to create opportunities for investment, helping long-term returns. One episode, he explains, has three characteristics: a rapid action on price, focusing on a single story, and presenting a price movement inconsistent with information flows: “It’s an opportunity where prices move for non-fundamental reasons,” explains the asset manager. In this way, without making predictions, and recognizing the importance of emotions, the strategy has managed to work well in different scenarios and market cycles: In optimism from 2000 to 2003, in the technology bubble, during which they cut back on equities and bet on bonds, in the subsequent crisis, and in the next period of compression of yields and recovery, in which they bet and benefited from the rally in all the assets… “We are now at a stage of compression in the risk premium of the shares, which means that the gap between the yield of the shares and the bonds is too wide,” says the manager.
With respect to their market vision, taking advantage of the pessimism of the end of last year, they increased equities, although they have subsequently reduced positions, due to the normalization of investor sentiment. “The last big change now has been the Fed, which has paralyzed rate hikes. If real rates remain at zero levels in the US, it will be good for emerging bonds, which have not moved much yet, and for stocks, especially outside the US. (in Asia, Japan and Europe). From a tactical perspective it is not as good as in December but from a strategic perspective it is.
The M&G Dynamic Allocation fund has an exposure of 41.8% to global equities, which means an overweight position, although it has been reduced and is centered outside the US. In fixed income, the bet focuses on emerging debt and is negative on public debt. “We prefer to take risk in stocks on credit,” assures the manager, who remembers that they are not stock pickers, and that they can make changes in asset allocation very quickly with index futures.
In recent years, every now and then, parallels are made between Europe and Japan suggesting that Europe has entered a period of secular stagnation. Indeed, when the yield of the German Bund fell below 0% last quarter, some investors feared once again that Europe was turning Japanese.
Since 2008, growth has been tepid in Europe. Real private consumption is only 5% higher, equivalent to a yearly growth rate of 0.5% and investment is only now approaching the 2008 peak. The only bright spot has been net exports, which have doubled since then. In order to boost the economy, central banks reduce interest rates with the hope of spurring borrowing and therefore consumption. Twenty years ago, Japan first cut rates to 0% and since then, not only have official rates never exceeded 1% but they have hovered close to 0%. Growth, on the other hand, has generally remained anaemic. Likewise, the ECB has lowered official rates to 0% and, ten years after the crisis, any attempt at normalization has been kicked down the road. The fact is that low interest rates have had an indirect negative impact on the economy via the banking system. In both Europe and Japan, households and enterprises rely primarily on banks for their financing. This contrasts with the US where access to capital markets is more commonly used. The complicated situation of banks, due to falling net interest margins, stricter regulation, weak growth and political woes, has restrained both the old continent’s and Nippon’s banks from easily conceding loans.
Demographics is also a key similarity between both regions and probably the key structural problem explaining the low growth, interest rates and inflation. An ageing population and declining workforce has a direct impact on all these factors. As more and more people prepare for retirement, they tend to save more and, at the same time, labour supply diminishes, reducing growth and investment. Interest rates fall as savers chase fewer investment opportunities and in order to encourage borrowing. Another consequence is the negative impact on public deficits as governments are faced with increased healthcare costs for the elderly and less income from taxes.
Although Europe presents symptoms of the Japanese illness, there are a few relevant differences that point to a less critical situation in Europe and these differences may help it avoid a deflationary spiral. To begin with, in Europe, although inflation is still well below the ECB’s target of 2%, it is still positive, averaging 1% since 2012. This is a much better situation than in Japan where, despite 20 years of low interest rates and, more recently, a slew of unconventional policy tools, since 1999 inflation has been negative half the time. Japan is the only developed country where wages have fallen. Since 1996, inflation adjusted wages have dropped about 13%. The longer growth and inflation remain low, the more people are prone to save and postpone consumption. A decline in inflation also makes debt more burdensome and punishes borrowers. Of importance as well is the fact that the destruction of wealth in Japan after its twin real estate and financial asset bubbles burst was unique both in terms of scale and the impact on consumers. Counting the value of real estate and stock, Japan’s loss of wealth was equivalent to three years of its GDP. Moreover, the build-up of the debt overload in Japan before the crisis and its evolution thereafter was also very different to Europe. Credit growth in Japan reached 25% in 1990, whereas by 2008 in Europe, it was around 10%. Japan’s public debt-to-GDP has ballooned to almost 240% today, whereas in the euro zone, this ratio has dropped from 92% in 2014 to 86%.
That is not to say, however, that certain countries are not suffering a more complicated situation (for example, Italy with public debt at 130% of GDP). Finally, the ECB was also quicker to respond and address the problems.
Although Europe is suffering from low growth, interest rates and inflation, several important aspects are indicating a less dire situation than Japan. Monetary policy and other unconventional tools have, without a doubt, been necessary to support the economies of both regions, but their success in addressing the more structural problems has been limited. Going forward, Europe is still very dependent on external demand for growth and should perhaps try to attack its large current account surplus resulting from the northern bloc’s predisposition to save more that it invests. Combating Germany’s and other northern countries’ fiscal orthodoxy could give Europe another leg of growth and help it out of the doldrums.
Foto cedidaPanoramic view of the facilities at Streamsong Resort and Golf, in Florida, where the sixth edition of the Investments & Golf Summit organized by the Funds Society is being held. / Courtesy Photo. Funds Society's Investments & Golf Summit: Some Proposals for Investing in the Late Stage of the Cycle
Three equity strategies, two fixed income, two multi-asset, structured products, and real estate investments, completed the proposals of the nine asset managers participating in the sixth edition of the Investments & Golf Summit organized by Funds Society, which was held in the Streamsong Resort and Golf, in Florida, and was attended by over 50 US Offshore market fund selection professionals.
At the Investment Day, delegates had the opportunity to find out the visions of Janus Henderson, RWC Partners, AXA IM, Thornburg IM, Participant Capital, Amundi, M & G, Allianz Global Investors and TwentyFour AM (Vontobel AM), and their proposals and investment ideas to obtain returns in an environment marked by the threat of being close to the end of the cycle, although with uncertainties about when this time will come. In this article we inform you about five of those visions.
Precisely with the idea of increasing caution at a time when it is difficult to predict the end of the cycle, Janus Henderson presented its global equity strategy with a neutral market perspective, developed in the Janus Henderson Global Equity Market Neutral fund. Richard Brown, the entity’s Equity Team Manager, argued for the need to reduce risks while positioning oneself for enabling returns, in a late stage of an upward cycle of which its exact end cannot be predicted. “Neutral market structures can now be very useful in investors’ portfolios, at a time when, while we still don’t see a recession, there are some warning signs,” he said, presenting a strategy with a relatively short track record (from February 2017) but with good behavior and differentiation from its competition.
With regard to those warning signals that he observes, he indicated that we are only one month away from the greatest expansion in history and, once these levels have been reached, caution must be intensified, as well as the inversion of the curve, which helped to predict recessions in the past and now also provide a warning. China’s economic situation (with lower growth, higher debt and a reversal in its demography), or central banks’ policies, which have stopped normalization, and the thought of their lack of resources for fighting against the next potential crisis are some of the other red lights. But, despite all of the above, the investor cannot afford to be out of the market, when 2019 has been the S & P 500’s best start to the year of the post-crisis financial era, and bonds offer very low returns. So, according to the asset manager, part of the solution can be a neutral market strategy in equities, with low volatility – around 4% – and low correlation with the stock markets, the potential to create absolute returns and protection against falls in the turbulences and in which stock-picking strategies favor good fundamentals.
On their differentiation from the competition, Brown pointed out that the fund invests in 60-80 pair trades (ideas obtained through the proposals -both long and short- of different asset managers), with a strong diversification by geography (now the majority of the exposure is in North America and Europe, but without directional bets, that is, only because that’s where there are more winners and losers), themes, styles and sizes that helps to reduce the correlation with the market. “We can bet a stock against a sector or against an index, but most are stock versus stock,” he explains.
Risk management is embedded in the portfolio’s construction (so that each pair trade contributes to the risk equally) and has a gross exposure of around 250%, and 5% in net terms. Among the examples of their bets, the long on Balfour Beatty versus the short on Carillion (both UK construction firms); Palo Alto Networks versus FireEye (US cybersecurity companies) or Sabra Health Care against the short bet on Quality Care Properties (REITS).
Long-short in US stock market
RWC Partners, also with a long-short bet in equities, but this time in the US, and with a market exposure that has historically been around 20% (although it has more flexibility), presented the RWC US Absolute Alpha fund at the event, a fund which aims to offer investors a pure source of alpha, with a concentrated high conviction portfolio, “with real names, without ETFs or other structures, in the form of a traditional hedge fund and managed with a high conviction.” It’s a liquid and transparent structure of long-short US equities managed by a team exclusively focused on absolute return and that seeks to provide strong risk adjusted returns with significantly lower volatility than the S & P 500, and in which the selection of stocks by fundamentals determines the returns on both sides of the portfolio. Managers try to identify patterns of information that can be indicative of changes in the dynamics of a company or industry and actively manage the net and gross market exposure in order to protect capital and benefit from directional opportunities whenever possible.
Mike Corcell, the strategy’s manager for about 15 years, focuses on criteria such as valuations, returns and margins (ROIC above the cost of capital and strong cash generation in the long part and the opposite in the short), or on transparency (it invests in industries with regular data on its fundamentals and avoids leveraged financial companies with opaque balance sheets and health companies due to the regulatory issue) and favors industries with improvements in their pricing capacity or where supply and demand are below or above the historical patterns. “We try to obtain returns in the higher part of a digit, and we invest in traditional sectors such as consumption, industrial, technology and in large secular industries such as airlines. We have analyzed these areas for 15 years and obtained good returns; It may be boring, but we will not invest in something we don’t understand,” he explains.
Regarding the current market situation, he admits that, although he doesn’t see any signs of recession in the US, we are at a late stage in the economic cycle, so he expects the growth of profits and returns in shares to be more moderate, although he doesn’t see signs of inflation at a time when the Fed has stopped monetary normalization. “Despite the goldilocks scenario with monetary and fiscal stimuli, we are in a late phase of the cycle, after a very long economic and market expansion, and in general, we expect a somewhat harsher scenario, with higher valuations.” He explains that although opportunities can still be found, it’s harder to find ideas in some parts of the portfolio following the Fed’s halt, although he believes that, sooner or later, it will have to adjust its balance and raise rates, a situation that will allow alpha to be generated more easily and will enhance the differentiation between companies, something that has not happened in the last 10 years.
Thematic equity and digital disruption
Also committed to equity, but with a more thematic vision dissociated from the economic cycle and focused on the economy of the future and digital disruption, the AXA IM experts participated in the Funds Society event. Matthew Lovatt, Global Head of AXA IM’s Framlington Equities, presented the investment themes which they focus on to position themselves in a changing economy, and an investment model that adapts to the new times. “When we invest, our challenge is to analyze changes in the world, in people and in the way we use technology, something that happens very fast, which is why businesses must adapt as well, and that’s what we analyze, how companies react to change. And our investment models must also change,” he explains. Therefore, they do not worry about whether there is economic growth or how GDP evolves: “We aren’t worried about GDP, but about secular, long-term issues that happen independently of the cycle and which will even accelerate considerably in a potential recession,” like online consumption. “People live longer, have more demands, and have increased their wealth, changing their consumption patterns. Therefore, many things are changing, and that’s why the way we see the world has also changed;” hence the idea of creating products to capture this new growth.
On concrete issues, he pointed out the transition of societies (social mobility, basic needs and urbanization), aging and life changes (welfare, prevention, health technology…), connected consumption (e-commerce and fintech, software and the cloud, artificial intelligence…), automation (robotics, Internet of things, energy efficiency), and clean technologies (sustainable resources, clean energies…). “There are big issues that will have great effects on wealth, such as the changes of wealth in the world, in societies in transition like the Asian ones, where a great shift is taking place. We also live longer and have more time to consume and companies will have to think about how to reach these consumers. On the other hand, the impact of technology on consumption is dramatic, and also key to the implementation of this technology in industries, in automation… Clean technology is perhaps the most powerful change: how we capture energy, store it, and use it in, for example, electric vehicles, is key, because it changes the way we consume energy,” he adds.
On the other hand, they remain oblivious to investment themes of the “old economy”, which suffers from margin pressures, such as traditional manufacturing, the retail business, or the scarcity of resources, and which evolve worse in the markets than new economy themes. In fact, for this asset manager, even the traditional sectorial exposure is no longer relevant, and they analyze each sector under the criteria of one of their five investment themes, or of the old economy. “The biggest disruptive change will be in the financial sector’s old economy,” he says, for example in the insurers of large financial groups whose business will change. On the other hand, within the sector, he’s interested in business related to wealth management. The disruption will also be strong in the “old part” of the energy sector, he argues.
In this context, the management company has modified its investment process, adding a thematic filter and ranking companies for their exposure to the themes they are betting on; also with changes in its analysis structure (focusing on these themes and selecting the best ideas) and the construction of the portfolios, which normally include 40-60 names with a large exposure to the themes. The management company has several strategies focused on each of these themes (transition of societies, longevity, digital economy, fintech, robotech and clean economy), although its core strategy, which invests in these five trends, overweight on those that are consumption and aging connected, is AXA WF Framlington Evolving Trends. In the presentation, the asset manager also pointed out their digital economy strategy, based on the fact that 9% of retail sales are now produced online but that is just the beginning of a great trend that in fact offers much higher figures in countries such as China, United Kingdom, USA or India. Positions which stand out in that strategy are Zendesk or the Argentinian Globant.
Real estate: Projects in Miami
During the conference, there was also room for more alternative proposals, such as real estate, presented by Participant Capital, a subsidiary of RPC Holdings, with a 40 year track record and 2.5 billion dollars in real estate projects under management, which offers Individual investors and entities access to real estate projects under development directly from the developer at cost price. Claudio Izquierdo, Participant Capital’s Global Distribution Managing Director, presented future projects such as the Miami Worldcenter, in Downtown Miami, which includes hotel rooms, retail and residences, and is financed with equity, deposits and credits; Dania Beach, which includes studios for rent; or the Mimomar Lakes golf and beach club, with villas and condominiums. And he also talked about other recent ones like Paramount Miami Worldcenter, Paramount Fort Lauderdale, Paramount Bay or Estero Oaks. The expert projects a very positive outlook on the opportunities offered by a city like Miami, with over 100 million visitors and 12.5 million hotel rooms sold per year, second only to New York and Honolulu, that is, the third most successful US city.
For its development, the firm has institutional partners, institutional and traditional lenders, and offers investors (through different formats such as international funds in Cayman, ETPs listed in Vienna or US structures) annualized returns of between 14% and 16%, the result of a 7% dividend or coupon during construction and an additional part after the subsequent sale or rent.
Structured products or how to boost alpha
One of the day’s most innovative proposals came from Allianz Global Investors, an active management company working with different asset classes, which is growing strongly, especially in the alternative field, and which has just opened an office in Miami. Greg Tournant, CIO US Structured Products and Portfolio Manager at Allianz GI presented his strategy Allianz GI Structured Return, an alpha generator which can work together with different beta strategies (fixed income, equities, absolute return…). The investment philosophy has three objectives: to outperform the market under normal conditions, hedge against declines, and navigate within the widest possible range of stock exchange scenarios. The portfolio, UCITS with daily liquidity, pursues an objective of annual outperformance of 500 basis points and uses listed options (never OTC) as instruments on equity and volatility indices (S & P 500, Russell 2000, Nasdaq 100, VXX and VIX) , with short and long positions, with an expected correlation with stocks and bonds of 0.3 or less. In fact, it has a risk profile similar to that of fixed income, but without exposure to credit or duration. “The goal is to make money regardless of market conditions. We do not try to find out the market’s direction or its volatility,” explains Tournant, who adds the importance of risk management: “We are, primarily, risk managers, followed by returns.”
The strategy, which has a commission structure of 0-30% (zero management, and 30% on profitability, based entirely on the success achieved), except in some UCITS classes, bases its investment process on statistical analysis (with a historical analysis of the price movements of equity indices in a certain environment of volatility), but it’s not a 100% quantitative process: it is in two thirds, while for the rest the manager makes discretionary adjustments. Further on, three types of positions are constructed: range bound spreads, with short volatile positions designed to generate returns under normal market conditions; directional spreads, with long and short volatile positions to generate returns when equity indices rise or fall more than normal over a period of several weeks; and hedging positions, with long proposals in volatility, to protect the portfolio in the event of a market crash.
As explained by the portfolio manager, the best scenario for this portfolio is one of high volatility, although the idea is that it works in environments of all kinds and has low correlation with other assets in periods lasting several months, although short-term market distortions can cause correlations with equities. The greatest risk is related to market movements and volatility and is a scenario of low volatility and very rapid market movements. “The relationship between the market path and volatility is important for this strategy,” says Tournant.
Pixabay CC0 Public Domain. The Road to an Effective Collateral Management Program
Collateral Management is becoming a strategic initiative for investment firms. Once exclusively a risk management and regulatory compliance effort, it is now also viewed as an opportunity to manage liquidity, avoid collateral drag, and realize returns from collateral transformations.
So far in Spain, Collateral Management has not really been the focus of much interest and investment, but with the Uncleared Margin Rules affecting more and more buy side entities in 2019 and 2020 this is likely to change.
When EMIR Variation Margin Rules came into force in 2017, financial institutions in Spain did review collateral management options available to them and most decided to manage their collateralization process in a fairly basic way, often using spreadsheets and a few resources working manually. It did the job given the relative simplicity of the function so far; using mainly cash collateral and often relying on the counterparty for margin call calculations.
As additional regulatory requirements are about to come into force for most of the Spanish entities, namely the Initial Margin (IM) requirements for certain non-centrally cleared derivatives, it is time to reconsider the collateral management programs and decide whether the manual process currently used are sustainable or this time it will be necessary to invest into efficient and scalable solutions, particularly for institutions that service underlying investment companies.
Until now, a relatively small number of firms have been affected by the Initial Margin requirement because of the high Average Aggregate Notional Amount threshold. However in 2020, this threshold drops from $750 billion to $8 billion. Many institutions will be impacted and although 2020 sounds far away, some market participants are realizing that time is running out given the complexity of the requirements that this phase of the regulation will impose on large sections of the market.. Failure to get ready by the deadline means that in-scope entities will not be able to trade non-centrally cleared derivatives. This could limit a firm’s access to the derivatives market and its ability to hedge risk while also potentially impacting liquidity.
Firms will need to look farther than the immediate necessity. What is needed and how to manage centrally, not only the collateral requirements, but also the risks and the liquidity in an efficient manner.
We need first to properly identify the inventory at group level, going over the silos that might exist internally between the different business lines. Once we have a clear picture, we then need to ensure that collateral is allocated on a “cheapest to deliver” basis, after evaluating its funding and opportunity cost. This centralized and integrated collateral management function can also identify opportunities to raise liquidity or enhance returns from transformation. This can be achieved by internalizing the search for collateral, collateral upgrade function, appropriate cash reinvestment as well as securities lending and Repos.
Furthermore, an efficient collateral management program should have the capacity to source required liquidity, such as High Quality Liquid Assets (HQLA) to meet margin calls in times of stress.
Those tasks are often made complicated due to the fact that legacy collateral management systems, in many case supported by spreadsheets, are unable to face the new need for real time information and dynamic analysis across a number of businesses, counterparties and systems.
Once we have envisaged all those new functions, we still have to take good care of the basics that include collateral matching and settlement, the ongoing calculations of margin exposures as well as addressing any discrepancies in positions.
It is therefore time to consider more efficient solutions that rely on robust but flexible technology and infrastructure. There are several ways to achieve this: insource, outsource or outsource certain modules or aspects of the collateral process that are not part of the Firm’s core competency.
Building in-house collateral management capable of achieving the more sophisticated functions described above in an efficient manner requires extensive collaboration throughout margin, treasury, funding, and trading teams with IT systems and governance to match. Only the largest firms are likely to fully insource and dedicate the required resources to this project. Collateral Management outsourcing is a potentially valuable solution for firms looking to streamline a function that is not a core competency, giving priority in terms of resource allocation to their core business and to functions that directly impact business generation and client satisfaction.
A mix of insourcing and outsourcing can also be a good option depending on each firm’s objective and the level of control they want to maintain.
As firms select their optimal collateral management model, it is important to ensure the right organizational alignment to support an integrated and efficient collateral management function. The first step is to appoint a head of collateral management with a dedicated team that has a centralized, enterprise-wide view and can deploy a strategy to optimize available collateral, funding and liquidity. This is probably the key hurdle. Firms need to remove the internal silos to allow a holistic, firm-wide picture of globally available assets and obligations. It is also important to review the legal bandwidth, particularly to get ready for the Initial Margin requirement given the number of agreements that will have to be negotiated.
The capacity to manage properly the collateral requirements and comply with the regulation is dependent on many factors. In Spain, the collateral management function has been relatively under-developed so far. In turn this can be seen as an opportunity to draw an efficient model from the start and reach a highly effective way to manage collateral, funding and optimize liquidity, without having to rely on legacy systems and processes to do so. With the right support, Spanish entities have the opportunity to achieve this goal without distracting themselves from their core business. The main question is how shall a company best allocate the available resources. Which processes shall the company manage internally to better service the clients and for which ones is it best to look for a service provider that can deliver.
Foto cedidaAlan Muschott, courtesy photo. For Convertibles, Franklin Templeton Likes Technology, Health Care, and Consumer Discretionary Spending
With a clear long-term focus and very selective and active management, Alan Muschott manages the Franklin Global Convertibles fund, the largest strategy for active management of convertible bonds in the United States. In this interview with Funds Society, Muschott explains the assets’ advantages.
Why can convertibles work well in this market environment? What characteristics does this environment have that are positive for the asset?
In our view, convertibles can be attractive during various types of market environments, including rising markets, due to the potential asymmetric price relationship with the underlying common stock. Often called “balanced” convertibles, those with deltas (a measure of their equity sensitivity) near the middle of the range from 0.0 to 1.0 can participate more with an issuer’s equity upside than they do with the downside. These are the types of convertibles we prefer, as we feel this is the most appealing aspect of the asset class. We believe this ability to adapt to a myriad market conditions can make convertibles an attractive vehicle for increasing a portfolio’s level of diversification.
Why can convertibles work well in an environment of rate increases? Are you protected against the interest rate risk?
Amid expectations that US interest rate increases could accelerate, many fixed income investors in particular have asked for our view on the prospects for convertible securities. It’s an understandable concern as bonds tend to lose value when interest rates rise. In our research, during prior periods of rising interest rates, convertibles have historically performed better than 10-year US Treasuries. Therefore, in a rising-rate environment, we think convertibles can be a favorable place for fixed income investors to be. That said, it’s a bit incomplete to compare the performance of convertibles to other fixed income investments given their characteristics. Convertibles are a unique asset class, offering investors features associated with bonds and the growth potential of common stocks.
Convertibles are generally structured as a form of debt (bonds, debentures) or preferred shares with an embedded option that allows conversion into common shares under predetermined conditions. That embedded conversion option provides capital appreciation when the underlying common stock rises. In a rising-rate environment where interest rates are rising for the “right” reasons—for example, strong economic and corporate earnings growth—equities tend to perform well. If the underlying common stock in a convertible security rises with the market, the convertible should also increase in value because of the conversion option.
Historically, convertibles typically have exhibited a low correlation to fixed income and demonstrated imperfect correlation with stocks. This creates the potential for an investor to help enhance portfolio diversification, dampen volatility and improve a portfolio’s overall risk profile. Note, diversification does not guarantee profit nor protect against risk of loss.
What do you expect from the central banks? It seems that the measures for the monetary restriction have stopped… how do you value it?
Many central banks have tempered growth expectations in recent weeks in the midst of continued uncertainties stemming from geopolitical factors and other regional challenges which weigh on economic sentiment. Within the US, the Federal Reserve has also indicated a more patient approach to future rate hikes in the current subdued inflation environment.
We don’t manage our strategy based on expectations of monetary policy shifts or other macro variables. Instead we evaluate investments on the basis of the fundamentals of the companies themselves, their respective industry growth profiles and competitive positioning. Our focus is on identifying investments which we believe offer long-term prospects for capital appreciation; by investing in convertibles, we aim to capture an attractive amount of the equity upside while mitigating downside risk, thus generating compelling risk-adjusted returns over time.
Why is volatility good for convertibles? How does it help the behavior of the asset?
Since the US stock market selloff in the fourth quarter of 2018, many investors have asked us how convertible securities performed during the upheaval. Issued by companies looking to raise capital, these hybrid investments are generally structured as some form of debt or preferred shares with an embedded option that allows conversion into common shares under predetermined conditions.
According to our analysis, convertible securities generally outperformed their underlying stocks during the fourth quarter when the US equity market saw its steepest declines. That’s no surprise to us considering that convertibles have tended to perform well during periods of above-average market volatility. Since the beginning of 2019, as markets have moved higher, so have convertibles, broadly speaking, given their performance link to the underlying equity prices. During periods where the overall stock market is declining, the fixed income component in convertible securities tends to provide some protection against erosion of value. Conversely, when a company’s common stock rises, the convertible security should participate in the rise in value because of the conversion option. As long-term investors, our overall view on convertible securities doesn’t change from quarter to quarter or during periods of market volatility.
Now, is it better to invest in a protection component and less exposure in the equity component, or just the opposite?
Ultimately, orienting toward protection or equity should be driven by an investor’s needs in the context of their specific investment goals. It is fair to say that our Fund is oriented to the equity component. Our view is that a company’s underlying equity appreciation will drive returns in the convertible. Generally speaking, convertibles do not increase as rapidly in value as stocks during rising markets; nor does their downside protection equal that of bonds during market declines. However, historically they have delivered attractive long-term risk-adjusted returns compared with both stocks and bonds.
In the asset class, which markets do you favor by geographies, sectors…etc?
With a focus on balanced convertibles, those that tend to demonstrate asymmetric reward/risk profiles relative to other segments of the convertible bond market, our strategy seeks to participate in more of a company’s underlying equity price appreciation than depreciation. Interestingly, many balanced convertibles can be found in the North American market, in growth-oriented industries, and across market capitalizations.
The average life of a convertible security is about five years before it converts, and we often will hold a convertible to maturity, regardless of market gyrations in the interim. We spend a great deal of time on fundamental research, as we take a long-term approach to our investments. We seek to differentiate ourselves from others in the market through our security selection.
Key themes that we have identified for inclusion in our portfolio are related to secular growth in areas like technology, health care, and consumer discretionary spending. We see technology as increasingly becoming a non-discretionary expense for a wide range of companies and industries. In particular, we like certain convertible securities within themes like on-demand software. Many companies often lack the expertise, personnel and resources to develop this technology in-house, which creates opportunities for firms in the cloud computing and software-as-a-service areas.
Elsewhere we continue to see opportunities among companies showing high levels of innovation in the health care space. With accommodating regulators and novel new drug delivery methods and targets, we see a continuing wave of innovation in the health space. These are sectors that have performed well in the equity markets and which have, in turn, contributed to the returns we’ve generated within our Fund.
How is the market in terms of supply? Will there be new issues this year or is the relationship between supply and demand adjusted?
With a value of over US$300 billion at the end of 2018, the global convertible securities market is a sizeable player in the world’s capital markets. The United States accounts for over half that amount, followed by the Europe, Middle East, Africa (EMEA) and Asia-Pacific regions, respectively. Perhaps more important is the ample room for growth.
Following a peak in 2007, issuance declined through 2011 as companies took advantage of low yields, a high equity risk premium relative to credit spreads and strong flows into the credit markets to issue straight debt rather than convertibles. The perception was that raising capital through straight debt was relatively cheap, even when convertible securities were issued at slightly lower rates due to the added concern of share dilution. Companies were also hesitant to issue convertible securities as equity valuations were inexpensive relative to historical levels.
Over the last few years, more robust issuance trends have been driven by better equity market performance, a rise in interest rates and higher spreads. Thus far in 2019, we’ve seen solid issuance trends as well. We believe the factors that drive convertibles issuance, particularly those related to cost-effective financing (lower cost than straight debt; equity valuations at robust levels for many issues), can continue to support a healthy marketplace for convertibles.
What returns can be expected from the asset in 2019?
Our approach is long-term in nature and we typically hold our securities for much of their (on average) five-year maturities; thus we don’t generally make predictions of price returns over calendar year periods. Our outlook for equities continues to be positive. We believe earnings growth can support further price appreciation from today’s levels in a number of equity sectors.
We do believe it’s important to be selective. As a group, convertibles have historically presented an attractive risk/reward profile, but within the group there is considerable variation in the level of risk, sensitivity to movements in the underlying stock, and upside participation potential. Because of this, we believe active management is an important element within convertibles investing.
In your fund, what is the selection criteria that you follow? How many names do you invest in? What is the delta of the portfolio? Please comment on the main characteristics of the fund
The Franklin Convertible Securities Team have utilized convertible securities to various degrees across a number of strategies throughout the years. We seek to take advantage of the compelling, asymmetric risk/reward profile offered by balanced convertibles. Balanced convertibles are those securities that tend to offer greater upside participation than downside potential, leading to an asymmetric return profile.
As a global firm with deep experience across asset classes, styles, and regions, Franklin Templeton possesses a strong potential to develop what we believe to be unparalleled insights in the convertibles market. Equity and credit research analysts usually meet with company management, then build valuation models and form an opinion of an issuer regardless of whether they have outstanding convertibles. Our portfolio managers continuously monitor the convertibles market and new issuance trends. When the team sees a new company come to market, they are typically already familiar with these businesses, their equity potential, and credit metrics.
We seek to offer pure convertibles exposure. We don’t buy common stock, and in case of conversion, seek to sell equity in our portfolio as soon as an attractive exit point presents itself. One can expect our portfolio delta to fall in the range of balanced convertibles (0.4-0.8); we will typically have 60-80 issues within the Fund; our preference is to reasonably equal-weight our holdings so that each has an opportunity to have impact on portfolio performance. Our credit quality, market cap, regional and sector exposures will typically reflect what we see in the broader balanced convertibles universe; where we seek to differentiate ourselves and the portfolio’s returns is through security selection.
Wikimedia CommonsPhoto: 1971markus. Three US Cities, Amongst the Best Ones to Live In
If you’re looking to live in a place with affordable housing, ample work opportunities and a reasonably pleasant environment, it’s time to pack your bags and move to London.
According to a global survey conducted by Resonance, a consulting group, London is the best city to reside in 2019. That’s thanks to having all the things mentioned above and more.
But if you want to stay in the United States, you’ll be happy to know that three cities in this country were included in the top 10.
While Miami ranked 26th worldwide, New York City came in third. Chicago and San Francisco ranked seventh and tenth respectively.
To reach its conclusion, Resonance described the profile of 100 of the cities with the best performance in the world based on 23 different factors, including the affordability of housing and employment opportunities, the quality of the environment (both natural and artificial), the quality of institutions, diversity, economic prosperity and the quality of culture, gastronomy and nightlife.
The top 10 is made up of:
London, United Kingdom
Paris, France
New York, USA
Tokyo, Japan
Barcelona, Spain
Moscow, Russia
Chicago, USA
Singapore, Singapore
Dubai, UAE
San Francisco, USA
If you’re thinking about making a change, or just want some inspiration to travel, check out the full list here.
Foto cedida. MMT – Modern Monetary Theory. Should We Bear it in Mind? Implications for the Financial Markets
This recent heterodox economic theory has many financial market participants spooked. I will try to explain what it entails (it takes some effort to understand) and the potential impact it could have on the various markets should it be put into practice, chiefly because it shifts our understanding of how the economy works (inflation, interest rates, debt, currencies, etc). Also, regardless of the fact that its strict implementation may turn out to be extremely complicated in real life, it is a good idea to try to understand what it is all about in the event that an attempt is made to partially adopt it. Fundamentally, it is an approach to economic management with no ideological basis. However, it is true that increasing numbers of economists with ties to the left are arguing in favour of putting it into practice.
MMT is based on two premises: 1) a country that issues its own currency can print money limitlessly without the risk of default; and 2) public spending is independent of financing and it has the ultimate goal of guaranteeing full employment.
The primary message being sent is that monetary policy makes little sense because it involves wasting real resources by associating it with high rates of unemployment throughout the cycle. Fiscal policy, therefore, is the centre of economic management for a country. Public spending should focus on maintaining full employment, while taxes should be used to slow the economy when necessary and to combat inflation. Furthermore, public debt would be used to manage money supply, interest rates and the level of capital investments. And this would all be with a floating exchange rate regime.
Inflation is seen as a consequence of having reached the country’s maximum productive capacity and, therefore, it marks the theoretical limit of public spending. In this case, a reduction to public spending or a tax increase would be implemented.
Why is this theory growing in support? My feeling is that, on the one hand, the world has gotten used to a model of continuous stimuli and, on seeing that QE has reached breaking point (we need only look at the mess in which the markets found themselves in the last quarter of last year due to fears about QT), at such a late stage in the economic cycle, the debate about turning the screw from a fiscal policy perspective is necessary for the political class. And on the other hand, MMT directly targets one of the greatest negative impacts of QE, the growing inequality at certain levels of society – another handy argument for the political class.
To try to discern the impact that MMT could have on the financial markets (and this is by no means an exhaustive analysis), we could start by looking at the large increase in public spending to meet the mandate of achieving full employment. This is public spending financed by printing money, which lowers interest rates. In this scenario, capital and financial investments would surge. The beginnings of inflationary pressures would start to be felt and the government would begin increasing bond issues to raise the interest rates. At some point, interest expenditure would exceed nominal growth. In all likelihood, inflation would not fall, so few investors would want this debt. A good many investors would go abroad, which would speed up a sharp devaluation of the currency and bring about the need to print yet more money. Here is where we would begin to see massive hyperinflation. As Minsky said, anyone can create money, the problem lies in getting it accepted.
The effects on debt and the currency are clear, but what about equities? It is obvious that because equities are real assets, they would behave better than nominal assets. But it may be better to invest outside the country, also in real assets, bearing in mind that the government’s need to raise taxes could even come to be considered confiscatory.
As I mentioned, it is good to consider that the application of MMT would, to begin with, mean the creation of a tax authority (similar to a central bank) that is independent of the government, something that seems very difficult. But, in any case, we can see partial efforts being made to put the theory into practice, chiefly through fiscal stimulus policies that are partially or fully monetised. Here it will also be important to invest in real assets (due to inflation expectations), such as the stock market, but by carefully selecting the securities with pricing power capacity.
Courtesy photo. If Things Take A Turn For The Worse, Are There Expansionary Measures To Follow Those Adopted By The Central Banks? Modern Monetary Theory
At the start of 2019, we saw a rally in risk assets thanks to the fact that investors have been focused on the more dovish signals coming from the central banks rather than on the weakening growth trend. Recently, the OECD warned that economic outlooks were now weaker in almost all G20 countries, particularly in the euro zone, with the heaviest negative impact being seen in Germany and Italy. The organisation also lowered global growth by -0.2% to 3.3%.
In the last meeting of the ECB, Draghi indicated a weak environment full of uncertainty: the rise in protectionism that has brought about a slowdown in trade and global production; political risk, with an emphasis on Brexit; and the vulnerability of the emerging markets, in particular China. In this regard, Draghi announced new measures. These included maintaining rates unchanged until at least the end of 2019 (in a previous address there had been talk of this going on until the summer. As it is, Draghi will be the first ECB president not to change rates as his mandate ends in October), and a further series of targeted longer-term refinancing operations (TLTRO-III), which would begin in September 2019 and run until March 2021 with a maturity of two years and with a view to facilitating the continued flow of credit in the economy.
The extraordinary measures implemented by the main central banks to overcome the financial crisis are set to take hold. The Fed, which had begun monetary normalization, stopped the expected rate hikes in their tracks and it intends to bring an end to its balance sheet reduction sooner than planned; the Bank of Japan is continuing with quantitative easing and has kept rates around 0% for the last 10 years; and the ECB is implementing new measures in the hope of making the euro zone economy more resistant.
Although the central banks remain cautious in sticking to monetary normalisation, it seems that the available margin is smaller than when they began. Note the evolution of Draghi’s words, which have gone from his famous saying in 2012: “The ECB will do whatever it takes to preserve the euro, and believe me, it will be enough”, to his words in the last ECB meeting in March 2019 with reference to the economic context: “In a dark room you move with tiny steps. You don’t run, but you do move”. Can you see the difference? It was possible to run at the start, but now we can only take tiny steps.
Better coordination between fiscal and monetary policy would be helpful to the economy during a slowdown. In the US, Trump has already implemented an expansionist fiscal policy following years and economic growth and, in Europe, depending on the results of the European elections in May, there may be more pressure to adopt these fiscal benefits despite the mechanisms agreed to by European countries to contain the deficit and control the debt.
But nowadays the debate in the US focuses on the so-called Modern Monetary Theory, the greatest defenders of which come from within the Democratic party (Bernie sanders, who is leading the polls for the US presidency, and Alexandria Ocasio-Cortez, well-known activist and bright new star in Congress). They essentially propose printing money (or nowadays simply pressing a button) and, instead of buying bonds like during QE, using it to finance social, environmental and infrastructure projects and the like. Proponents of this theory argue that provided they borrow in their own currency and they can print money to cover their obligations, they cannot fail and the limit would depend on rising inflation.
In this scenario, in which fiscal spending would be injected directly into the real economy instead of using a more indirect QE route, inflation should rise. However, everything we know about macroeconomics is being called into question because, until now, the deficits have not caused out-of-control inflation or a flight from the bond markets. Even with this in mind, it seems reasonable that implementing these measures would mean higher debt, which would affect the solvency of countries. Also, with more debt, rates would move upwards and affect bonds and the assets that would predictably do better would be real estate and investments in infrastructure or commodities like gold.
Didier Saint Georges, Managing Director and Member of Carmignac’s Investment Committee. / Courtesy Photo . Didier Saint Georges (Carmignac): “My Greatest Fear is What will Happen to Debt Once Economic Growth Slows Down”
In mid-2018, the IMF warned that, for the first time in history, global debt had reached 225% of world GDP. Due to central banks’ QE, global debt is today more than three times higher than the level of 20 years ago. The staggering level of debt is not a minor issue, as was pointed out by Didier Saint Georges, Carmignac’s Managing Director and member of its Investment Committee, during an informative meeting in Paris. “My greatest fear is what both public and private debt will do when economic growth slows down.”
In his opinion, the main difference today between strong countries and weak countries is precisely that: their debt. In the US, for example, private debt is low, but public debt is very high. In total, 72 trillion dollars, which is not only a record amount, but which surprises considering the country’s continued economic growth and its very low unemployment rate. But Saint Georges warns: “The problem is global, and the cycle is changing.”
From this perspective, sovereign bonds have become safe-haven assets for Carmignac, with priority over the Asian and European debt against the US bond. Meanwhile, corporate debt markets continue to be penalized, especially in the high-yield segment. “In developed country bonds, we have a history of convergence and the spread is reflected by the risk undertaken by the investor,” explains Saint Georges.
In fixed income investment, however, there is an asset that has become especially relevant in recent times: Liquidity. “Cash” trades bullish while waiting for better opportunities in the market, but the expert acknowledges that this also comes at a price. “We are concerned about the cost of liquidity and growth,” he says.
Is there opportunity in Italian Bonds?
In Italy, investors are faced with the dilemma of undertaking political and economic risk in exchange for a high return potential. For some it’s worth it, for others, not so much. According to Saint Georges, “there is nothing to worry about in the short term, in bonds of short durations, but we should be more cautious with those with long durations. The issue with Italy is not political, it’s purely economic.”
The big issue, however, is if the market starts to fear a recession. “The economy’s current performance doesn’t warrant that fear, except for the high debt. The markets, however, may be sensitive to a recession,” he adds.
Brexit and globalization
According to Saint Georges, “Brexit will be bad for everyone even if a negotiated agreement is reached” and, in the case of a “hard” option, he believes that the potential victims are Germany and France. “The referendum voters forgot to think about their pocket and made an emotional decision,” he says. Investors, he adds, are quite worried and have started 2019 thinking just the opposite than they did in early 2018, in panic mode.
The backdrop is rebellion towards globalization, which according to Saint Georges, is what has made China grow strong and has benefited Italy, France and Germany. However, “even though globalization is facing more and more difficulties at the political level, as an economic catalyst it is too strong to retreat from. There is a certain rejection against globalization. My fear of that is that it was globalization which drove China’s strong growth, in turn benefitting Italy, France and Germany. However, it is too strong to retreat from now.” He concludes.
