Wikimedia CommonsSpanish team, courtesy photo. Muzinich & Co Reaches Third Close on Pan-European Private Debt Fund
Muzinich & Co has made its third close of the Muzinich Pan-European Private Debt Fund at 460 million euros.
Focused on lending to the lower mid-market, or companies with EBITDA of between 5 and 25 million euros, the Fund is one of a suite of 6 private debt vehicles managed by the firm, which has been providing flexible financing solutions to small and medium-sized companies since 2014. Locally-based teams across Europe deliver on-the- ground deal sourcing and origination.
“We are one of very few private lenders in the lower middle market with a Pan-European offering,” said Kirsten Bode, Co-Head of Private Debt, Pan-Europe. “We have a large team of investment professionals and a local presence across Europe with offices in seven key markets. We believe this gives us a significant advantage in accessing a broad and diverse market in order to generate attractive IRRs for our investors.”
The Fund focuses on bespoke financing for growth capital opportunities for lower mid-market companies to fund acquisitions, expansions and transitions.
The final close of the Fund is expected later in 2018.
Wikimedia CommonsPhoto: Mark Mobius. Mark Mobius is Launching a New Asset Management Firm
Less than four months after leaving Franklin Templeton Investments, the legendary investor Mark Mobius has founded a new asset management firm that specializes in emerging and frontier markets.
According to Bloomberg, the new company would carry its name Mobius Capital Partners LLP and has Carlos Hardenberg and Greg Konieczny, other Franklin Templeton veterans, as main partners. Everything seems to indicate that its operations would start this June.
“I was not ready to retire and I was ready for something new after 30 years at Franklin Templeton,” the manager, who worked for more than 40 years investing in emerging markets, told Bloomberg on Wednesday.
The manager has yet to attract external investors and aims to raise about one billion dollars in the next two to three years. According to Bloomberg, Mobius would start with a concentrated portfolio of about 25 stocks that will invest in India, China, Latin America and frontier markets.
The Trump National Doral is the setting in which Funds Society celebrated its fifth Investment & Golf Summit on April 12th and 13th . Nine Proposals in Equities, Debt, Convertibles and Multi-Assets from the Investment & Golf Summit 2018 Organized by Funds Society in Miami
Janus Henderson, Thornburg, Vontobel, GAM, RWC, AXA IM, Schroders, Columbia Threadneedle and MFS: are the asset management companies that took part in the fifth edition of the Investment & Golf Summit 2018, organized by Funds Society and held in Miami on the 12th and 13th of April at the Blue Monster golf course, at the Trump National Doral. While golf was the main feature on the second day, throughout the first day the management companies captured all the attention of around 80 fund selectors, financial advisers, private bankers, and professionals involved in making investment decisions for non US resident clients who attended the conferences.
On Thursday, the management companies presented their best ideas for a more volatile environment in which all eyes are on US inflation and the pace of rate hikes by the Fed; a context in which profitability can be obtained with strategies, in equities (global, European, emerging…), in fixed income (dynamic high yield, convertible bonds, MBS, emerging debt…) and in multi-assets. In equities, the ideas came from Janus Henderson, Columbia Threadneedle Investments, and Thornburg, with their respective strategies in Chinese stock market, small caps, and global stock market.
In emerging equities, Charlie Awdry, manager of Janus Henderson, reviewed what investors can expect in 2018 and where he believes the best opportunities in Chinese equities are. The manager was critical of the elimination of the two term presidential limit -which reduces the distinction between the Communist Party and the State-, but stressed that, in politics, not everything is negative in that country, pointing to President Xi’s focus in reducing inequality and financial risks, and mainly, reforms (both socially and economically, which will lead to greater consolidation in some of the country’s heavy industries). And above all, he explained that the reforms in the SOEs (the companies in which the State has a participation greater than 50%) will be positive for shareholders: “The reforms in the SOEs will begin to stimulate better decisions of capital allocation, including greater dividends.”
The asset manager also pointed out how the country has gone from having a focus on growth, to shifting its focus to reforms, fighting corruption (improving business efficiency) and, since last year, deleveraging, so that debt will be lower than in the past. And growth also: Awdry talked about shorter economic cycles and a current peak, predicting a somewhat lower growth after the summer, but without reaching a hard landing, which will begin to recover by the end of the year. As a positive factor, he pointed to a better relationship between the dollar and the renmimbi, more favorable than in the past, and spoke of three additional risks: trade wars (there will be more friction and competition, which will force greater negotiations with the US), North Korea, and Taiwan.
But, beyond the economic and political context, he pointed out the opportunities offered by some Chinese companies: “Many think that companies are not good, because of their state-owned nature or because of their low quality, but there are very interesting spaces in which to invest,” he said, pointing out the Internet segment, where the country is very innovative. In its fund, its main position is Alibaba, listed in New York, with a high percentage of market share in e-commerce, and the second Tencent, listed in Hong Kong (with data that invites investment, as is the fact that a third of its users spend more than 4 hours a day in the app.). The problem of some securities which represent the new China (technology, health, or consumption) is its price, so that its portfolio is currently divided equally between these segments and the most characteristic of old China (energy, materials, industries , banks or utilities), which are currently cheaper. In fact, the asset manager argued for the great opportunity in the H shares of the country’s banks (and also in some companies held by the state), which he bought in Q2 last year for the improvement in their fundamentals, for their attractive valuations and, tactically, for the annual dividends of 5% -6% which they offer.
Its Chinese equity fund seeks to find the best opportunities in three markets: Hong Kong (where it sees attractive valuations and which occupies two thirds of its portfolio), A-shares (which still offer a discount and represent slightly less than 20% of the portfolio) and Chinese stocks listed in the US. (Now, with less attractive valuations and a peak in the market, which suggests that it is time to sell and is the reason why they have reduced their positions). On the A-shares, the asset manager pointed out the attractiveness of the liberalization of Chinese markets and the potential that MSCI expects to include these shares in emerging stock market indexes soon. As an opportunity, also the fact that investors’ positions are below the 2013 levels. “China is a very interesting bet at the moment, it is a volatile market but there are opportunities. Our strategy is to leave behind the beta and to think more and more about the selection of values and the generation of alpha “, concluded the manager.
Smallcaps Opportunities
Continuing with opportunities in equities, a presentation by Mark Heslop, Small- caps Manager for the European equity team at Columbia Threadneedle Investments and of the Global Smaller Companies strategy -launched four years ago-, focused on the potential of small capitalization companies. History shows that these firms can provide higher returns and faster growth than large-cap companies and the reasons are several: First, the proportion of businesses in which the managers are also the owners of the company is greater in the small-caps segment, which means that, when making investment decisions, they do so with a longer-term horizon. “Many large-caps are managed with a view to the results of the next quarter and do not focus so much on creating value in the medium and long term.” In addition, smaller firms have the “humility and flexibility” to change business if they see opportunities, compared to large ones. “These are the reasons that justify the faster growth of small-caps and I hope this trend continues,” said the manager. As additional reasons for their attractiveness, a greater investment universe, and with higher levels of inefficiency, or lower hedging of these securities, are the factors that represent great opportunities to generate alpha within this segment.
And they also offer attractiveness from a quantitative point of view, risk adjusted profitability: “Some say that small-caps are a high-risk asset, but they are not, and it can be the same as when investing in large-caps. For a little more volatility, you can get double returns,” said the manager, who pointed out that if the returns of large companies at 20 years have been 4.1% with 15.2% volatility, those of small-caps have been 7.7% with a volatility of 17.6%.
The management company’s strategy in this segment is bottom-up and is focused on the quality of the companies, but also on growth (provided that this growth creates value for the shareholder). Due to its investment philosophy, the portfolio has structural underweights and overweights, depending on where they find high quality firms and good growth dynamics: They are overweight in industrials, a good area to find these firms, while on the other hand, it’s difficult to find names with these characteristics in financial or utilities, and in general, in highly regulated segments. By regions, the overweight is for Europe without the United Kingdom.
Beyond the small companies, in the global stock market, Josh Yafa, Director of Client Portfolio Management at Thornburg Investment Management, spoke of the opportunities in the asset, in his case also focusing the investment from a totally bottom-up perspective, although without losing sight of the macroeconomic situation, the analysis on the economic cycle and the valuations. In fact, the manager spoke of a positive economic context, with global PMIs expanding in the Q1 of the year, unemployment rates below the 1990-2017 average and other indicators that show that we are in a period of economic expansion.
On equity valuations, he pointed out that they are slightly below those of the end of 2006 (although above those at the end of 2008), and he stressed one positive factor: the net debt / EBITDA ratio, which, both at the end of 2008 and of 2006 was around 4.7 times, is now 1.8 times, a positive factor. The manager also spoke of a world in which, after the withdrawal of stimuli from the central banks, there will be more differentiation in the markets, which will benefit active managers, and also pointed out the fact that, according to the flows towards funds and ETFs, investors continue to show preference for bonds rather than for shares.
In this environment, Thournburg seeks to differentiate itself from other companies: Based in Santa Fe (New Mexico), it builds high conviction portfolios (its global equity portfolio has 30-40 names). “At Thornburg, we adopted a disciplined approach to the construction of portfolios, guided more by convictions than by conventions. Instead of using reference points as a starting point, we apply flexible and active management to find the best results for our clients,” added Yafa.
With a view focused on income, the entity also presented its global equity strategy that not only seeks capital appreciation but which also invests in firms willing to pay dividends, as well as a third multi-asset strategy, composed of equities – with about 50 names with a dividend yield of 3% – and fixed income (Investment Income Builder), and that it invests globally. “Companies that provide a higher payout ratio also tend to end up offering greater profit growth,” said the expert. The strategy, flexible in terms of geographical exposure and sectors, is positioned above all in segments such as financial and telecommunications companies and has low exposure in highly regulated firms such as utilities.
There are Still Opportunities in Fixed Income
There are still opportunities in fixed income, despite the dynamics of monetary normalization complicating this environment. Management companies such as Vontobel, GAM, AXA IM and Shroders, offered their ideas focused on obtaining income with a global focus, on the value that still exists in US high-yield, in emerging debt, or in the opportunity in the MBS.
Focused on obtaining income, and with its Strategic Income strategy -which aims to provide an attractive income level with capital growth as a second objective-, Mark Holman, CEO and manager of TwentyFour, a boutique of Vontobel AM, presented its strategy, which combines the best sources of income in the global debt segment in an unconstrained and unlevered portfolio, managed independently of the indices, with active management of interest rate and credit risks and focused in relative value and in liquidity. “2018 will be a tough year for fixed income: There is 85% of the market that I do not like but there’s still 15% that I do like,” he said.
If I had to buy a bond today, it would be in credit (not in the public debt area) and, given that the cycle and valuations are mature, it would have to be high-quality and well analyzed, to avoid the risks of default. In addition, it would have a short duration to avoid the risk of interest rates, but not too low, to be able to obtain “roll down” gains. And it would be in the currency of the country of origin, because currently said risk is too high. Such a bond would survive complicated market conditions, summarized the expert. Because this year is a year for caution, and their fund is better positioned to face it (it has a shorter duration than the index, 2.72 compared to almost 7, and a much higher yield, 5.24% as compared to 2.11%).
Within that 15% of the market where the asset manager sees value, by geographies he points out that there are more opportunities outside the US. – “an economy which is close to the end of the cycle” – that within the US, and has strong positions in Europe (29%) and especially in the United Kingdom (more than 30%), where it takes advantage of the Brexit premium. North America occupies 21% of the portfolio and the remaining 18% is mainly in Australian public bonds, “secure, because the country is not in a dynamic of rate increases”. By rating, it’s willing to take credit risk but avoiding the CCC segment, where many defaults are concentrated, and the B, while it’s positioned in the BBB and BB areas, more secure and with good returns. By sectors, it mainly focuses on banks… as the manager sees opportunities mainly in three segments: European CLOs, subordinated bank debt and emerging corporate debt in strong currency (the latter benefited from the coordinated global recovery that began last year). “The banking sector has never been as healthy as it is now, it has more capital than ever before,” he says.
As to what to avoid in 2018, he points out the interest rate risk, the sectors where the ECB focused its purchasing program, European public debt (especially the German Bunds), the British Gilts, the long-term investment grade credit and the CCC segment while it is willing to take credit risk, to take advantage of the “roll down” gains (favoring securities in the part of the curve from 3 to 4 years), stories with rating upside potential and the Brexit premium. In general, his watchword is that it’s a year to face credit risk (the end of the cycle is far away, and 2017 showed a scenario of global financial recovery), but taking care of the valuations (the markets are expensive, although the situation is justified by the fundamental forts, economic recovery and technical support). That is why its strategy is to gradually reduce this risk as the cycle progresses and focus on finding relative value by geographies, sectors and companies.
MBS & ABS Strategy
GAM’s idea in order to take advantage of this environment focuses on mortgage and asset-backed securities (MBS and ABS). Tom Mansley, Investment Director of GAM Investments and specialist in the analysis and management of these securities, argued for how these vehicles can offer a differentiated fixed income proposal for investors. A strategy that arises from the need to respond to two recent problems: One is correlation, because although in recent years the markets have been highly correlated in a positive way, the situation could change: “We are looking for something that provides diversification in the fixed income portfolios “. And the second is the lack of income and liquid income when investing in the asset. In response to these concerns, the entity has built a portfolio that invests in bonds backed by US mortgages, a market that has been growing in emissions in recent years, although with different dynamics depending on whether it is agencies’ MBS – with a majority of issues and considered lower risk -, CMBS or RMBS issued by other entities.
With the strategy which, thanks to their attractive valuations, has been increasing the positions in these latter securities that have no government guarantee, the idea is to offer returns in the mid single-digits, with very low volatility: “It is not an overly exciting market, but in a context in which many financial assets are expensive, we can offer those returns with very low volatility – below the index and also high-yield and correlation,” and always with the idea of making money (in 2013 within the context of the Taper Tantrum, with a downward bonds market, their strategy rose). This low volatility is helped by the fact that investors aren’t retailers, but institutional: According to the expert, pension funds and insurers are very comfortable with the asset, because the credit is “very solid”.
And it’s solid because the real estate market in the US is going through a sweet moment: The ratio of empty houses is already at historically normal levels, around 1.5%; the offer of existing homes for sale is below the average levels (so that in three months all would be sold); the number of houses under construction is also below normal levels (around 500,000); the home ownership ratio is lower than that of the levels prior to the crisis and around the average of the last decades which was 64%… these factors, together with the greater capacity to pay for a home, serve as a basis for an appreciation in the price of it. “The index that compares the average income with the average mortgage payment, and that, taking that income into account, measures ease of payment, shows that current generations can buy a house cheaper than their parents”- by measuring the relationship between price and income-, both because the price is lower and because of the income growth, characteristics which are totally the opposite to those of a few years ago.
Dynamic High-yield
Although some prefer fixed income alternatives, some others continue committed to more classic segments, such as AXA IM, which highlighted the opportunities for investing in high-yield debt from a dynamic perspective. Robert Schumacher, Chief US Strategist and Client Portfolio Manager of Fixed Income at AXA Investment Managers, explained why it’s still a good time to bet on high-yield, dismantling stereotypes that keep some investors out of the assets. “If the argument for not investing in US high yield is that the cycle is coming to an end, you can lose a great opportunity to obtain income,” he said. In the first place, because nobody can know when a cycle is going to last – and it is not clear that it will end soon -, and also because, even if it were true, the work of the managers is, as in other assets, such as variable income, to look for inefficiencies in those environments. “The argument for not investing cannot be that,” he said. Also, in his opinion, “cycles do not die of old age, but due to political errors.”
According to the entity, the moment is still good for the asset, and it can be an attractive alternative for those reluctant to invest in equities but looking for correlated returns with stocks with lower volatility. The management company’s US high- yield strategy has positions concentrated on names of great conviction, with the selection of credit as the main source of alpha, a volatility in line with the market (but with higher returns) and the possibility of using leverage derived from the use of CDS (up to 150%) -with the objective of improving returns in neutral and bull markets-. However, entity sources explain, it’s not a distressed strategy or a neutral market or negative exposures. Last year, it beat the market thanks to the selection of securities in debt and also to positions in CDS -which are not the main catalysts of returns, but are also a source for achieving them-; it also did so in 2016, despite being underweight in energy and with limited exposure to very cheap commodity issuers whose prices rebounded strongly. Since its launch, it has managed to limit the falls in difficult markets and offer alpha in periods of positive returns.
Also in fixed income, Schroders‘ bet focuses on emerging debt. John Mensack, Senior Investment Manager Emerging Markets for the management company, was very constructive with the asset: “Emerging debt is a main asset class and one in which investors are underinvested,” and which already represents 18% of the market of negotiated bonds. In addition, considering the growth of public debt issues in local currency and corporate bonds in hard currency, traditional indices become obsolete, so that investment in assets “deserves a more sophisticated approach; It’s time to be more sophisticated.” In addition, in seven of the last 10 years, the difference between the returns of the most and least profitable debt segments has been greater than 7%: Hence the importance of looking for a professional who only invests where the value is and moves away from areas that are expensive.
And that is precisely Schroders’ perspective, which combines in its strategy sovereign debt in strong currency, sovereign debt in local currency, and credit in hard currency; the latter is a sector in which it sees great opportunities while being less exposed, for example, than the second one: “Debt in local currency usually offers 100 basis points more profitability than that in hard currency, but now there is only 30 points difference -6.1% against 5.8% -, so it makes no sense to overweight the currency now. There are good stories like South Africa or Indonesia, but when we look at these cases of relative value we tend to underweight the areas that we see more expensive, as is now the case with local currencies.” In fact, less than a third of its portfolio is exposed to sovereign debt in local currency (27%), while the rest is debt in hard currency – corporate debt weighs 28% and public debt in hard currency, 40% -. In any case, the idea is to have around one third of the portfolio in local currency, which works better than the 50/50 strategies. The opposite occurs with corporate debt in hard currency, where it sees opportunities, with more than double the returns for the same level of risk in duration as US credit, and focusing on “great national champions,” that can achieve rating increases and that are mainly in the investment grade segment. In general, Schroders’ fund positions are low in interest rate risk, it’s overweight in credit risk -because countries are doing well and credit is improving- and underweight in currency risk due to low differentials (and high valuations) of the debt in local currency).
All in a strategy that offers greater diversification (thanks to lower volatility and a greater set of opportunities), a better opportunity to obtain income globally with good credit quality and low correlation with US Treasury bonds, which reduces the interest rate risk (specifically, 24% correlation, so that the Fed rate hikes will not condition the portfolio). On the dollar, the expert argued that, at the current level or lower – something that could happen, in his opinion, due to the deterioration of some US data, which will cause investors to look for opportunities in other markets, such as emerging markets-, would be positive for their strategy. “During the period of Taper Tantrum the dollar rose a lot but that reality has already been left behind and we believe in its moderate weakening,” Mensack added.
The Opportunity in Convertibles
Halfway between fixed and variable income, convertibles are also a good idea in this environment, according to RWC. Davide Basile, Head of the Convertible Bond Strategy team and Manager of RWC Partners, explained the benefits of the asset, capable of capturing a large part of the increases in equities (with between half and a third of its volatility) and offering bearish protection at the same time. “At present, a strange world is combined with global growth, and convertibles offer the best of both worlds: An appreciation when there are increases in the markets with the security of a bond”, commented sources from the management company, with a focus on understanding both the credit part and the equity of the asset, “understanding each name, the different components, how they move…”
“The asset has an additional ally in this environment: The increase in volatility. Thus, since the end of 2016 and during 2017, and due to the low volatility, convertibles have participated less in the rise of equities, but that could change. “When the volatility is higher, they also participate more in equity returns thanks to the exposure to optionality, so in these scenarios they tend to do better, as compared to shares”, explained the experts. And a more volatile environment also favors the issue of convertibles.
Due to their characteristics, experts recommend this asset, rather than as a substitute for shares, as an alternative to a debt market with already tight spreads – and with less potential for narrowing – and the risk of raising interest rates. In this segment, they would be a “good place for diversification, since they tend to have shorter durations” and protect them from these increases. “A few years ago convertibles offered lower returns than corporate debt, which can be explained by the cost of the option, but now the level of income they offer is comparable, so if you are comfortable with the characteristics of the convertibles, they could serve as substitutes for fixed income, in order to obtain a similar income level”. Even in a multi-active portfolio, its introduction does not usually involve surprises in terms of volatility, and provides diversification benefits.
Multi-asset: The Necessary Diversification
What all the experts agree on is that the environment makes portfolio diversification necessary, something that multi-asset strategies undoubtedly achieve. During this event, MFS was the management company that presented a strategy of this type to achieve diversification and a better performance adjusted to risk, in an environment of lower rates and in which, in order to achieve the same results as 20 years ago, greater diversification and taking more risk is required. The management company’s strategy has a historical allocation of approximately 60% in shares and 40% in fixed income, which facilitates the work of the managers, explained Gary C. Hampton, CFA, Product Specialist of MFS Investment Management. “The combination of stocks and bonds in a multi-asset portfolio offers investors diversification and the opportunity to achieve better risk-adjusted performance,” he explained.
Thus, the equity part focuses on investing in global companies and large businesses, selected from a value perspective (they must be global businesses, sustainable for years, generating cash flows, with strong balance sheets and that are well managed by good equipment, also with attractive valuations). Thus, their perspective of looking for high quality firms with attractive valuations is clearly differentiated from the so-called “deep value” managers, which look for highly undervalued firms, but which could belong to industries in difficult situations or have problems that justify those low prices.
In fixed income, the fund uses a top-down approach in the process of selecting countries and currencies, generally investing in investment-grade debt. “The correlation between high- yield and shares in bear markets is very high, so we think that the mix of equities with investment grade debt is a better mix for times of correction,” explained Hampton, recalling that in 2008, when the market fell by 40%, the fund only fell 15%. This perspective tends to cause overweight positions in the variable income sector and in sectors such as basic consumption, and underweight in technology, while in fixed income corporate credit is overweight and, for example, US public debt is underweight.
The management company also presented its MFS Meridian Funds-Prudent Capital Fund, with an exposure to global equities of between 50% and 90%, global credit of between 10% and 30% and up to 40% in liquidity, a concentrated portfolio in which preserving capital is key.
Pixabay CC0 Public DomainWalkerssk. China’s Risks on the Road to a Modern Economy
At present, there are three different world powers that dominate their respective regions in terms of trade and growth: the United States, the Eurozone and China. The first two, the United States and the Eurozone, are clear, but the last, China, arouses some uncertainty among investors and management companies, who are monitoring its economy.
Due to the size of its economy, China continues to be a key economy globally, and not just for emerging markets. According to market consensus, China will be fundamental player in the current synchronized global growth, although analysts warn that it could slow it down.
Among its main risks is its high level of indebtedness, both public and private. State companies combine high leverage levels and low productivity in sectors where excess capacity is extreme. “In the wake of the global financial crisis, credit to non-financial entities has gone from 100% of GDP to 165% at present. This government – driven massive injection of credit has stimulated the economy and explains to a large extent the solid economic performance of the last ten years. The high level of indebtedness and low productivity are currently considered a risk,” explains Yves Longchamp, Head of Research at Ethenea Independent Investors.
And its main challenge is to make the leap to a modern economy, a path that has already begun, after the National Congress of the Communist Party of China in October 2017. “The implementation of the structural reforms program once again became a priority. The objective of the Chinese authorities is to direct growth towards quality and not only towards quantity. This will imply a rebalancing that is expected to reduce traditional industries such as steel in favor of new activities such as electric cars and high technology. In the coming months, this strategic adjustment is expected to lead to a slight economic slowdown, as suggested by the recent slowdown in public spending and the tightening of monetary conditions. Should the deceleration become too marked, public authorities have the necessary resources to quickly adjust the approach,” explain sources from Banque de Luxembourg Investments.
Risks and Opportunities
In Longchamp‘s opinion, China lives in perpetual transition. Among reforms proposed by the country there are three that are very interesting for investors, according to Longchamp: “The restructuring and strengthening of state enterprises, the deleveraging of the financial system and the slowdown in inflation of housing prices ; and the eradication of poverty and the improvement of the quality of growth “. These three are national objectives and aim to determine the main economic weaknesses and the fragility of the financial system, as well as to improve the welfare of Chinese citizens. In addition, there is the Chinese government’s desire to control and reorganize some sectors, such as the industrial sector and real estate. Therefore, they are reforms that could open opportunities in very specific sectors, such as financial, industrial or real estate.
However, the management companies are cautious about China. The company Flossbach von Storch identifies the Asian giant as one of the potential risk factors within the equity market, given the country’s rate of indebtedness. “Despite this, we are confident that China’s central government has the muscle to counteract the effects in the case of a recession or crisis,” explainedsources from the management company.
Pixabay CC0 Public DomainCourtesy photo. Direct Lending: A New Alternative For Private Investors
Traditional asset classes have delivered robust returns over the last few years with exceptionally low volatilities. The outlook is less bright, however. The recent market turmoil is an indication that the high return/low volatility regime has most likely come to an end. This does not mean that the equity bull market has ended. The fundamental picture remains robust with strong earnings momentum and relatively low recession risks in major economies. Equities may well move higher in the next 2 years, but it is going to be a bumpy ride. Fixed income investors might even feel worse off. Rising yields from very low levels are putting downward pressure on prices of longer duration bonds. Credit spreads are very tight and should start to widen in the final stage of the economic expansion, driven by higher rates, rising default rates and increasing leverage.
The lack of value in fixed income assets and the rising volatility in equities has created renewed interest in alternative investments, which have become a key component of well-diversified investment portfolios. Initially, the asset class was mostly the realm of sophisticated investors, but it has developed into products now available to much smaller portfolios.
Nevertheless, private banking clients remain underexposed to alternatives. Despite the rising transparency and regulations, hedge funds continue to suffer from image problems due to some bad practices in the past. Private equity funds offer the most attractive risk/reward profile, but the lack of liquidity can be an obstacle for private investors that have uncertainties surrounding the adequate time horizon and risk profile. This is the main differentiator between private investors and big institutional investors such as endowments and sovereign wealth funds, which have a very consistent investment strategy based on long-term objectives. The most prominent example is the asset allocation of the Yale Endowment with 50% in illiquid assets and around 80% in alternatives overall, including liquid alternatives. Pension funds have also increased their exposure to alternatives from 5% in 1995 to around 25% now.
However, there are new segments in the alternatives space that could help to overcome the (sentimental) hurdles that discourage private investors from investing. For example, investors have recently begun to expand into providing debt to businesses, an area traditionally dominated by banks. The disintermediation process is part of a broader global trend known as shadow banking or shadow lending, whereby non-bank actors seek to provide credit to companies. The growth of private debt funds has been dramatic with very attractive risk-adjusted returns for investors. The trend is driven by three factors: Firstly, the post-crisis financial regulatory reforms have led banks to reduce their lending activities, particularly to small and medium-sized businesses. Secondly, the demand for credit from businesses has not fallen to the same degree, leading to unmet demand. And thirdly, the demand from institutional investors for debt that yields more than government debt remains robust. Historically, the private debt market consisted of specialized funds that provided mezzanine debt, which sits between equity and secured/senior debt in the capital structure, or distressed debt, which is owed by companies near bankruptcy. Following the financial crisis, a third type of fund emerged. Known as direct lending funds, these funds extend credit directly to businesses or acquire debt issued by banks with the express purpose of selling it to investors.
Leading alternative investors have all expanded their product offerings to include private debt funds. They are joined by many specialized new firms. The strong demand by institutional investors has enabled these funds to expand rapidly in size. Collectively, more than 500 private equity style debt funds have been raised since 2009. The private debt industry has grown its assets three-fold in the last ten years, hitting a record last year of $638 billion despite increased distributions to investors, with 25% of that coming from direct lending funds.
Direct lending funds are highly suitable for private investors. There is a wide range of strategies such as real estate bridge loans, equipment leasing, trade finance, consumer loans, just to name a few. The generally offer high single digit returns with strong collaterals, low volatility and very low correlation to traditional asset classes. There are specialized funds that offer monthly or quarterly liquidity. However, these are also more complex and sophisticated, so an adequate analysis and good advice are presented as essential to make the right decisions and not take unnecessary risks.
CC-BY-SA-2.0, FlickrRafael Valera and Julián Pascual, courtesy photo. Buy & Hold Compared to Other Value Managers: The Six Differences
In recent years, various management projects based on value investing have emerged in Spain. However, in a meeting with journalists this morning, Rafael Valera, CEO of Buy & Hold, pointed out the six points that distinguish their entity from the competition.
Consequently, he spoke of the application of that investment philosophy, not just to equities, but also to fixed income; the fact of being open to any investor (from 10 Euros); their low commissions (even in their class A funds they refund their commission if the investor loses money); its profitability objectives (unlike other managers seeking 15% -20%, the idea is to beat the Eurostoxx index by 2-3 points); the refusal to launch any other products beyond their three funds (fixed income, flexible mixed, and European equities, strategies that are also reflected in their 9 sicavs and in their pension fund), with the idea of channeling greater volumes of investment , as other management companies are doing – although Valera admits that when they reach levels they cannot manage, they will close the funds; and the firm commitment not to charge the cost of the analysis to investors under MiFID II.
This last decision is firm, even though regulations pertaining to this matter have not yet been transposed and the costs of the analysis are as yet unknown; and this differentiates them from other entities, such as azValor, Bankinter Gestión de Activos or Bankia Fondos, which in the past few days have announced an opposite decision. In fact, Valera explains that in recent times brokering and execution fees have been reduced to one third of their previous cost, which is something that can help achieve profitability objectives more easily. “If previously they charged 20-30 basis points for the execution and now they charge 4-5, with a portfolio rotation of 30%, the annual savings can be 12-15 basis points in the portfolio,” he explains.
But, in his opinion, even though the above does count, more than this decision on the analysis or the reduction of the execution fees, the key to achieving profitability is to invest in funds with low commissions, and they boast of having the lowest fees in Spanish value management… and even in active management (from 0.65 to 0.95 in management and a success rate of between 3% and 7%).
The entity, which has 1,200 clients, a figure they intend to “double and triple”, as with its assets (around 171 million Euros), explains that it does not seek to be a company managing billions of Euros, and that it will close the funds when the time comes and the management is complicated: although as yet they don’t have a clear figure, its president Julián Pascual pointed to 1 billion as being a high figure. All in all, Valera acknowledged that a management company like theirs “has a hard time becoming trendy”, because investors are very short-term minded and the Buy & Hold philosophy looks to the long term, to 2028, and the idea is to make money, but “with tranquility ” and without big oscillations.
Along this line of beating the indexes by 2-3 points a year (if at 10 years the index has managed to earn 259% at compound interest, the Rex Royal Blue sicav has risen 81 points higher, with dividends), Valera explains that, unlike those who seek returns of 20% and greatly concentrate their portfolios in order to do so, they are committed to diversification: “We don’t see 80% of opportunities as being very clear, we’re navigating the haze, and that is why diversification is key,” he adds.
Changes in the portfolio
For example, they don’t see the opportunities in commodities as clear, in that journey through the markets in which clear differences with other value competitors also arise. “A lot of the demand comes from China and we don’t see it clearly. In addition, the price has recovered, it’s no longer at minimums,” says Pascual. Where they do see opportunities that they have recently taken advantage of is in renewable energy and the financial and advertising sectors: in light of this, they have taken advantage of recent movements in the stock market to make changes in its portfolio, composed of 40 national and international companies. Among the most significant investments of the firm, which analyzes the entire capital structure of a company, is the purchase of shares of the Italian investment fund manager Azimut, which has very high returns on capital, a double-digit annual dividend, and a very consolidated business in Italy; with growth opportunities in emerging countries. “There are three types of managers: those of ETFs, those that provide added value (few are quoted) and a third group, in which Azimut belongs, with an average product but a large distribution capacity through a strong agency channel that receives half of the funds’ commissions – which are on average 2%, which explains their sales incentives – and opens offices in niche places, such as Turkey, Miami or Monaco.”
In addition, Buy & Hold has raised positions in the digital advertising sector (Alphabet and Facebook), as well as in agencies (Publicis and WPP). “We believe that at these prices companies have lived through all the worst predictions in the sector,” explains Pascual. He predicts similar opportunities are in wind power, where it has taken positions in Vestas and Siemens-Gamesa for its funds BH Acciones (equities) and BH Flexible (mixed fixed income and equities). “Both companies have suffered in recent months, with drops of 50%, remaining at attractive prices. In the case of Siemens-Gamesa, we see synergies not only in costs, but also in their capacity to win large tenders”, adds Pascual, who has obtained annual returns of more than 10% in the vehicles he has managed during the last 13 years.
Winning with the Catalan bond
In the fixed income part, the firm has also shown movements in the portfolio. The most prominent is the sale of subordinated bonds and CoCos of large-cap financial entities, “where we consider that prices have risen excessively,” says Valera. They have increased positions in subordinated debt of smaller banks, such as bonds issued by Cajamar, the largest Spanish rural bank. In the same way, it has bought bonds from the Galician construction company Copasa and the Portuguese Mota Engil.
The month of February ended with an annual return of 2.5% for the company’s pure fixed income fund, BH Renta Fija, when other debt funds are in losses. Among the success stories, he pointed out the purchase of bonds from the Generalitat de Catalunya in October, with which they have earned 20% in just five months, even though they represented only 5% of the portfolio. The position is not yet sold, but neither have they bought more for lack of paper. Another success story is Provident, the leading financial institution in loans and credit cards to subprime clients in the United Kingdom, of which the management company holds both bonds and shares. “We bought the bonds with yields higher than 10%, and they are currently in environments of 4% with a maturity of two years,” explains Valera. “This has meant a revaluation of more than 13% only in fixed income, while the revaluation of the shares has been 70%,” he adds. The firm still sees potential in value so it continues to maintain both positions in the portfolio.
Forum to improve investments
The management company also informed of the birth of the Buy & Hold forum, an encounter with ‘influencers’ from the financial sector that seeks to contribute to improving the investment decisions of Spanish families. The investment firm plans to hold two meetings a year in this forum to share ideas, practices or success stories of value investment. The objective is “to ensure that Spanish families are able to invest increasingly better,” said Valera.
For this, in a first meeting, the Spanish management company brought together 13 leaders in the field. “This first forum gave us the opportunity to meet personally. We are all connected and we read each other in different blogs and social networks, but we have never had the opportunity to meet in a place to talk about what we are passionate about: the world of investment,” Pascual points out. The forum is a measure adopted by the management company in order to be close to Spanish families, and adds to the financial training courses that Antonio Aspas, partner of Buy & Hold, has begun to teach. The dynamics of the forums will be an informal meeting in which the guests can share their experience, their point of view, or some success stories in order to understand other perspectives. “We have realized that many of the ideas that are shared are those that our management company tries to transmit, such as how to consistently beat the European stock indexes with dividends,” adds Aspas.
The firm’s partners agree that it’s a way to know the opinions of those people with a passion for saving, and what they think of this type of investment. “Thanks to these meetings, we know what’s on their mind, what worries them, what companies they have found interesting, and we get to know them better in order to help them. We don’t want to be a management company which isolates itself in its figures or research,” says the company’s CEO.
CC-BY-SA-2.0, FlickrSid Choraria, courtesy photo. Value Investing in Asia: "The Best Value Opportunities are When You Buy Growth Without Paying for It"
Amiral Gestion applies its value investing philosophy to investments around the world, including Asia. Sid Choraria, head of Analysis of Amiral Research in Singapore, explains in this interview with Funds Society the peculiarities of the Asian market, in which the importance of analysis is key to reduce the information gap that exists with respect to companies in other markets. The company recently opened an office in Singapore, with a local team of seven analysts, tasked with exploring the many opportunities of a heterogeneous market, and in which the universe of listed companies will multiply in the coming years, without forgetting that the potential sources of volatility, such as China or North Korea, can be a value investor’s best friend.
When investing in Asia with a “value” approach, what particularities do you find against other regions?
The specific pecularities that global investors must appreciate are differences in corporate governance, accounting standards, market regulations, liquidity, language and culture across Asia which can create some barriers to entry for far-away foreign investors. In Asia, for instance, relying overly on reported financial statements or secondary research like sell side analysts can be a pitfall. The importance of scuttlebutt research and doing your own work is even more important in Asia. By this we mean, learning as much about a company’s ecosystem – its competitors, customers, suppliers, distributors, products, hiring processes, technology, etc which helps to bridge the information gap. The quality of people behind the Asian company is paramount – in developed markets perhaps you can go by the reported financials, but in Asia, appreciating where the incentives lie is of paramount importance as many small mid caps are majority owned by families. I like to very clearly understand what it will take for a company to go from where they are today to where they want to be.
Even within Asia, one cannot paint all markets with the same brush. There are many differences between each market which value investors must appreciate. In China, 80% of investors are retail investors who focus on anything but fundamentals, and this leads to speculation and short-term trading. Even institutions in China have very high portfolio turnover which means stocks will deviate far more often from intrinsic value of the business. This is a advantage for the long-term investor. As China transforms itself it is important to appreciate the nuances of state policies and government reforms, as it can make or break an investment. In parts of Asia, there is still information assymetry unlike the West – for example companies in Japan, sometimes IR documents are not available real-time in English on the website, and visiting small mid cap companies in person can help bridge this gap. India tends to be more of a GARP (growth at a reasonable price) market and investors looking for “deep value” are likely going to miss out on great businesses and compounding stories. Of course, such opportunities can emerge during periods of financial crisis. Countries like South Korea and Taiwan offer value in the traditional sense, but it´s very important to pay attention to minority shareholder friendliness, cross shareholdings, capital allocation, etc as they can differ significantly from company to company.
Are there undervalued companies to a greater extent than in other markets?
Asia is a fertile fishing ground for long-term, disciplined investors as markets and companies in the Asian region are still at more nascent stages than developed markets in the US and Europe. This creates inefficiency that value investors in Asia can systematically uncover. The size of the opportunity set is also huge, for instance below the 2 billion market cap there are an astounding 16,000 Asian companies, many of which are not actively covered in a serious manner. This universe will only multiply over the next 15-20 years, as companies go public for the first time in growth economies like China and India. So, by definition, this should afford more mispriced stocks than other regions and we see this with the valuations too on a global context. Currently our global equity fund, Sextant Autour du Monde, has a 40% exposure in Asia. Some of our best ideas come by meeting companies and competitors in the Asian small mid cap space. To build a local team, we recently opened a research office in Singapore and grown to 6-7 analysts in Asia. With Singapore being 2-4 hours by plane to most companies, we are able to kick the tyres in real-time.
For example, in Japan there are lots of undervalued companies to a greater extent than other markets, with more than 50% of companies with net cash balance sheets! We like companies like Toyota Industries and Daiwa Industries. In Korea, the preferred stocks trade at a significant discount, not justified relative to the common and here we like for example LG H&H. In India, there are companies that we find that present both asset value plus earnings growth, for example NESCO, which runs India’s largest private exhibition business in Mumbai. In Hong Kong, there are many cheap companies, but one needs to know the players, their reputations etc. We like HK listed companies like JNBY which is a niche fashion brand in China with strong management. Finally, Taiwan offers some of the highest dividends in the region and companies with reasonable valuations. Here we like companies like Taiwan Sakura, HiM International Music.
Many times, when investing in emerging markets (as the Asians), “growth” is the keyword and investors look for a “growth” approach. What can a “value approach” provide when investing in Asia?
The best value opportunities are when you buy growth without paying for the growth. What we mean is identifying a company that is able to reliably grow earnings and cash flow, without deploying much capital, so its returns are attractive, but yet is not yet fully recognized by the market. So, this is the twin engines which is growth in earnings as well as Mr. Market re-rating the multiple. Value investing is not just buying cigar butts – but identifying misunderstood stories, where the stock market has overlooked the earnings growth potential of a company.
Moreover, our value investment process is heavily dependent on having interaction with the company particularly when it comes to small and mid caps. We have met with over 150 Asian companies in the last 12 months.Here, the key aspect is being able to meet management who can illustrate to us in a 45-minute meeting their business model and why are they good at it. To clearly understand what differentiates companies, whether price, cost structure, management, etc is key. We look for companies that are able to elucidate in a logical fashion what it would take for the company to double their sales and operating profits in a 3 year period. So, we want to understand simply what are the building blocks that need to be put in place to achieve those goals – in a clear and simple manner. As Asian economies are growing, infact, we like companies that can predictably grow earnings, but where we are paying bargain prices, i.e. not paying much at all for the growth. In general, we emphasize cash flow and balance sheet analysis in valuing a business and study at least 10 years or longer if possible to understand where the value lies. Management can produce the set of accounting earnings that they want you to see. Price to earnings ratio is probably the most abused metric in valuation.
In Europe, some “value” experts talk about opportunities in the banking and in the energy sectors. In what other sectors do you find opportunities in Asia?
Our ideas come from the bottom-up and not thematic. Therefore, we are flexible and unconstrained on the type of industries we invest in. There are some industries that just do not lead to prudent public markets investing, so I can discuss what we like to avoid. These are, generally speaking, i) industries requiring high capital intensity, ii) industries where the barriers of entry are low and iii) where there is a high degree of government regulations, since emerging markets are fraught with political risk.
Regarding Asian markets in general, ¿are you worried about the risk that China poses? ¿Are you worried about North Korea? What is the main risk you see in Asia?
In general, we do not attempt to forecast macro-economic direction or interest rates, as at least the stock market may perform very differently to what the macro suggests. This being said, countries are like companies too and we may try our best to learn as much as we can about the key factors that impact businesses we invest in. As value investors, we see volatility as a friend of a long-term investor, and indeed short-term price fluctuations allow us better opportunities, as long as the fundamentals of the company and thesis in question do not change.
Is Asia vulnerable to the normalization of the monetary policies in the USA and Europe?
Sure. There are some areas of the market that are more expensive, and this has had to do with low interest rates, so investors have justified taking more risk in certain areas of the market to chase yield.
Do you think that markets will face higher volatility this year than in 2017?
We think so. Volatility is the best friend of value investors, and this is where some of the best opportunities arise from.
Foto cedidaCourtesy photo. Old Mutual Sold 100% of its LatAm Operations to CMIG International
CMIG International, a Singapore-based holding company, has signed a contract with the South African group Old Mutual to acquire 100% of its business in Latin America. The operation, which is still pending approval by the corresponding authorities, would include, as it has transpired, the companies Old Mutual Mexico, Old Mutual Colombia and the Latin American investment adviser Aiva. It is also speculated if Old Mutual plans to sell its business in China.
The buyer, China Minsheng Investment Group International (CMIG), is a private investment holding company founded in August 2014 with 59 companies and with a registered capital of 50,000 million yuan. CMIG focuses on emerging sectors and actively promotes industrial modernization and economic transformation. The price of the transaction was not disclosed but according to international media, CMIG would have paid close to 400 million dollars in this operation.
The executive president of CMIG International, Kevin E. Lee, wanted to emphasize that “Old Mutual Latin America is a well-managed company with constant and sustained growth. It has always prioritized the interests of its clients, which is aligned with our values as a company. At CMIG International, we have a long-term commitment to strengthen and grow the company in the region. The acquisition of Old Mutual Latin America is an excellent platform for CMIG International and its entry into the regional market, which has great potential.”
In this regard, Lee added that, after carefully analyzing Old Mutual Latin America, “we are very excited about the prospect of becoming its shareholders. Our investment thesis is to find good assets, managed by exceptional teams, in such a way that we can guarantee the continuity of the business.”
According to the firm, Old Mutual’s decision to sell its business in Latin America follows a strategic review of its business, which concluded with the decision to concentrate on its operations in Africa. The presence of the firm in Latin America dates back to 1959 in Mexico, where it began to operate as a reinsurer under the Skandia brand. Subsequently, the company was established as an insurer and an operator and distributor of investment funds under the same Skandia brand; which had a very important growth in Mexico. Now this brand, recognized in the institutional field, will come back to represent the business in the region.
David Buenfil, CEO of Old Mutual for Latin America and Asia, said that “we are very proud to have an international investor of the stature of CMIG International, who believes in the growth potential of our region. This is a well-known company in Asia, and with a very good reputation. We are also very excited to know that they value our much-loved Skandia brand, and that they plan to return it to the market once the transaction is closed.”
Old Mutual Latin America includes pensions, life insurance, mutual funds, a broker-dealer, and an investment advisory with assets under management of over 13.5 billion dollars.
According to Julio César Méndez Ávalos, CEO of Old Mutual Mexico, “this is great news for all our clients, employees, advisors and strategic allies. CMIG International is a company that has valued our great potential and is committed to a continuity of our business model, as well as our human capital and management team, all our clients can rest assured with their investments and products because they will continue under the professional management that has distinguished us in these almost 25 years that we have participated in the Mexican market.”
In late February, President Trump promoted trade policy adviser Peter Navarro to assistant to the President. As a trade policy adviser, Mr. Navarro reported directly to White House Economic Adviser Gary Cohn. It is well known that Mr. Navarro (a Harvard-trained economist who wrote a book titled Death by China) has very protectionist ideals in regards to trade, while Mr. Cohn (the former President of Goldman Sachs) is a proponent of free trade. Effectively, Mr. Cohn served as a buffer between Mr. Navarro and President Trump. However, once Mr. Navarro was placed in a position where he could advise the President directly, we felt that some more extreme trade policies were on the horizon.
In less than a month, Mr. Navarro’s influence on President Trump was plain for all to see. Furthermore, Mr. Cohn resigned from his position following his futile attempt to convince President Trump not to go through with the tariffs. The equity markets suffered an immediate pullback on the announcement of Mr. Cohn’s resignation due to fears that the US would become even more protectionist without the influence of his globalist views. Fortunately for the market, Mr. Cohn’s replacement is CNBC commentator Larry Kudlow. Before embarking on a television career, Mr. Kudlow had been the chief economist at Bear Stearns and is known for having a very globalist view on trade. We believe the market will draw comfort from the appointment of Mr. Kudlow as Economic Adviser rather than Mr. Navarro.
This has happened before
In 2002, the administration of George W. Bush placed tariffs on steel products ranging from 15 to 30% in an effort to save the US steel industry. Back then, several steel producers had declared bankruptcy amidst a surge in steel imports. The government decided it needed to protect the companies of the steel industry for a period of three years to give time to restructure and emerge as more competitive players. Just like now, Canada and Mexico (thanks to NAFTA) were excluded from the tariffs of 2002.
Almost immediately, the European Union imposed tariffs and filed a case with the WTO. Several other countries filed similar cases and the WTO eventually ruled against the US. Following the international backlash and disappointing results for the economy, President Bush rescinded the tariffs only 18 months after their implementation.
“I don’t think it was smart policy to do it…The results were not what we anticipated in terms of its impact on the economy or jobs.” Andrew Card Jr., White House Chief of Staff under George W. Bush
Back in 2002, one of the actions considered by the EU was to place tariffs on oranges from Florida. For those not familiar with US regional politics, Florida is considered to be a swing state and President Bush won the state (and the overall election) by the narrowest of margins in 2000. The EU does not blindly select products on which to place tariffs; it wisely chooses products produced in politically sensitive states.
This time around, the EU is targeting Harley Davidson, which has manufacturing plants in Pennsylvania and Wisconsin, states that were important to Trump’s victory. Furthermore, Wisconsin is the home state of Speaker of the House Paul Ryan. Another product being targeted is Kentucky Bourbon which is made in the home state of Senate Majority Leader Mitch McConnell. The immediate economic impact seems mild but might only be the tip of the iceberg.
To be fair, steel and aluminum represent less than 2% of the country’s imports. Considering solely these two products, the overall impact to global trade should be modest. Unfortunately, these tariffs are not occurring in a vacuum and they might only be the tip of the iceberg as we await the outcome of the pending Section 301 investigation.
The investigation is focused on determining whether China’s actions relating to intellectual property and the forced transfer of technology discriminate against the US. The White House has signaled that there could be an announcement in regards to the investigation within a few weeks. Media reports are already speculating that the White House is considering imposing several new tariffs on $60 billion of Chinese products due to disagreements on intellectual property rights.
In fact, indirect actions against China may have already started. President Trump recently ordered Broadcom to “immediately and permanently abandon” the acquisition of Qualcomm for reasons of national security. The government did not disclose the details of why it is in the interest of national security for Qualcomm to stay independent, but Wall Street analysts are speculating that there was a fear that Broadcom would cut the R&D budget at Qualcomm, allowing Chinese telecommunication equipment company Huawei take the lead in the development of 5G wireless technology.
Wikimedia CommonsÍñigo Susaeta, courtesy photo. Arcano: "Without Retrocession, the Absence of Conflict of Interest and Independence is Guaranteed, Something that Does Not Generally Happen in Private Banking"
The market environment is still favorable but we will have to be cautious with the policies of the central banks. For 2018, Íñigo Susaeta, Managing Partner of Arcano Family Office, favors short-term assets such as floating loans, emerging local currency fixed income, inflation-linked assets and different alternative funds that can look for opportunities without depending on the directionality of the markets. In this interview with Funds Society, in addition to talking about markets, Susaeta explains the impact that MiFID II will have; it will change the distribution landscape in Spain and will promote services such as independent advice –which they offer- and the discretionary management of portfolios.
Under MiFID II, financial advice in Spain could adopt a new face. What are the main changes that the regulations will bring to the industry? Will there be a revolution in the advisory business in Spain?
MIFID II will undoubtedly lead to a change in the business of many advisors in Spain, and in Arcano’s case, and specifically in its Family Office service, it is a slap on the back for our model with which we have been leading the market for a decade and where we have always opted, as one of our differential factors, for independence and for receiving payments exclusively from our clients.
In general terms, MIFID II aims to strengthen investors’ protection and to improve the functioning of financial markets through greater transparency of prices, competition and market efficiency. Thus, for example, banks will find it more difficult to collect incentives for the sale of funds and they will have to increase the amount of funds from other management companies which they offer their clients, which is causing a change in the distribution model.
How have you prepared for the regulations? What kind of advice does Arcano offer, both from the EAFI and the family office?
In Arcano we offer independent advice. In fact, we were pioneers in incorporating this model in Spain more than a decade ago. Thus, we adapt the best practices of international multifamily offices to our firm, and time has proved us right, becoming one of the market leaders in Spain, advising over 20 HNW holdings with a combined volume exceeding 1.4 billion Euros In this regard, the adoption of MIFID II has only reinforced our model.
There is a major issue in MIFID II that I would like to point out: the collection of retrocession fees. since its foundation, Arcano has considered the non-collection of third party retrocessions in the provision of its services to clients as a fundamental aspect for the development of its Wealth Advisory services. It is our company’s philosophy, and we believe that the absence of conflict of interest and independence is guaranteed in this way, something that we think does not generally happen in private banking.
Will MIFID II provide an impulse to discretionary portfolio management, or to advisory activities?
We believe that to both, and it is an area that Arcano is already developing through its IICs manager. In fact, if we look at the implicit costs that banks apply to some of their services, many clients will opt for other alternatives, giving an impulse to both discretionary management and independent advice.”
What growth rates has the family office shown in recent years and what objectives do you set for the next ones?
As I pointed out, Arcano has become one of the market leaders in Spain with over 20 families or HNW holdings with a total volume of more than 1.4 billion Euros. Our goal is to continue to have the trust of those great holdings, which increasingly need value and quality services, with a 360-degree approach like the one we offer at Arcano, which is completely independent and customized.
Your portfolio construction model already holds a 10 year track record… what are its key factors and how has it evolved?
It is a very different risk-based asset allocation model, based on principles applied by some large institutional investors such as Bridgewater or the sovereign fund of Norway, among others. It seeks greater robustness in the different market scenarios by distributing the total risk of the portfolio into four factors: inflation, interest rates, credit and growth.
We believe that the real diversification it offers will be fundamental in the most uncertain and volatile environment that we will live through in the medium term. Even in the most stable context of the last seven years, if we look at the profitability obtained by the sicav managing entities that manage over 100 million Euros, Arcano would be the second in the ranking with an annualized return of 4.4% in its moderate profile portfolio.
As well, your group has provided room for alternative management … is including these vehicles in the portfolios now a key factor?
In a market context such as the current one, with low interest rates, it makes more sense than ever to have part of the portfolio in alternative assets, including illiquid ones such as private equity or real estate funds, among others. However, it is important to have a global vision of the assets and their objectives and assess which weight is the most appropriate to include these assets in the portfolio, as well as selecting the best managers and products.
In Arcano’s case, however, it should be remembered that the advisory activity of large holdings is completely separate from the management activity of our management company’s alternative products.
Looking ahead to this year, do you expect more volatility? What assets do you favor?
The stock market cycle which began in 2009 is the second longest in history, which invites to proceed with a certain amount of prudence, also taking into account that central banks will jointly begin to withdraw liquidity from the markets by the end of this year. A rally in real rates faster or deeper than expected could lead to a repricing of risk assets. In this market moment, we favor short-term assets such as floating loans, emerging local currency fixed income, inflation-linked assets and different alternative funds that can seek opportunities without depending on the directionality of the markets.
