“We are Underweight US Financials, but the Pending Deregulation Could be an Interesting Catalyst”

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“Estamos infraponderados en el sector financiero en EE.UU. pero la desregulación podría ser un interesante catalizador”
Grant Cambridge, courtesy photo. “We are Underweight US Financials, but the Pending Deregulation Could be an Interesting Catalyst"

To avoid companies that are overvalued in a stock market such as the US, which since February 2009 has revalued 280%: is the goal of Grant Cambridge, fund manager at Capital Group, which explains in this interview with Funds Society its management keys. He says that this American strategy, which has recently been offered to European investors with the launch of its Luxembourg version, offers long-term returns through a fundamental analysis of companies. And that he is not afraid of the Fed, which he hopes will continue with his gradual upward path, and that it will remain as transparent as possible to avoid surprises.

1.    The first thing which nowadays comes to my mind when speaking about US equities is high valuations. Do you agree? If not, or at least partially not, in which sector valuations are still attractive?

When I think about the US, I actually don´t necessarily think about high valuations. Although there are companies in the US which are getting a tremendous amount of attention that do have high valuations. That´s why it is important to think about diversification through a fund like ICA and avoid areas that are overvalued.

If I had to guess what the best industries were over the last twenty years, they are a highly diverse set of sectors. This is to show that I can find in all sectors companies that are attractively valued. But I can also find in all sectors companies that are not attractively valued. The real objective is to try to avoid the names which are overvalued.

Right now, a lot of attention is put on large tech companies and the top five stocks right now, in terms of market cap, are equal to the bottom 250 stocks.  That speaks about how concentrated is the market. This fund can invest in growth, but also looks for growth and income. So we have the flexibility to invest in a company like Amazon, with no dividend income, but we also might invest in a company like Verizon, which has lower growth but a really attractive absolute yield, almost 5%. ICA provides a dividend yield of around 2.2%, which is better than the S&P 500.   Most of the companies we have in the fund are domestically domiciled and we can invest up to 15% outside the US. However, we actually get our exposure through US companies that have revenues and earnings around the world. 

2.    Which factors could support the continuation of the rally in the stocks you have in your portfolio? Will it come from earnings, from economic growth or from Trump fiscal policies?

Just to put in perspective, since February 2009, the US equity market is up 280%. So I look for companies that have reasonable earning growth, with that you need fundamental analysis to make sure you have that fundamental growth. In other words, I´m worry about the macro, I mean I can worry on the top down, but I build the portfolio on a bottom-up basis. One company at a time. And all of the companies that we invest in are analyzed on fundamental basis. Many times we meet with the companies. Many of them we have met with the companies in their local activities around the world. So, we are doing a true global fundamental research. This gives us the confidence to invest in those companies for a long term period. 

The turnover of ICA is around 25%. That means that 40% of the fund asset has been in companies we held of more than eight years.

3.    Based on your long experience, would you say macro or fundamentals are more important in the performance of your portfolio? What do you need to find in a company to invest in it?

I look for ethical management.  I look for reasonable valuations. I look for companies that have attractive capital allocation strategies and usually what it does mean is an orientation to return cash to shareholders through dividends or even better, dividends which are progressively growing over the time.

This fund is oriented towards larger caps companies.  What we do is we think about the objective of this fund and we orient our investment universe towards that.

4.    Are Fed rates hikes impacting on in any way in the equity market in general and in your portfolio in particular? What do you expect from the Fed? Will you implement any change in your portfolio accordingly?

For the Fed, I expect a continued measured pace of interest rates increases and I think up until now we have seen that. They have been increasing rates for the right reasons. The market has tolerated the increases in interest rates. And actually if you see interests rising for the right reasons is not a bad backdrop for equity markets.  So I expect the Fed to continue to be measured, to be as transparent as possible and to not have any surprises.

If you go back to 1994-1995 time frame, rates gone up very rapidly, there were a lot of surprises and impacted both the fixed income and the equity market. Right now I see the Fed ´patrons being very transparent; they are trying to give as much indication of direction as possible. 

In sum, I don´t expect interest rates to go up and up an up.

5.    What are the keys for being able to protect investors’ capital in down markets? For instance, in the current environment, is it better to have a more defensive bias or a more aggressive one? Why?

We have already talked about this, but for us, the key is the diversification. In our Capital System we do not only apply diversification within the portfolio but we have diversification of styles. We have eight portfolio managers in this fund; we have a variety of styles. We have been able to find general defensive sectors which in weak market, these kinds of companies have hold up very well. Two of our larger sectors now are consumer staples and consumer discretionary, both of which are defensive sectors overall.

For us this not only diversification per se, is diversification but with convictions. We do not add companies just for the purpose of diversifying. Every single position in the portfolio is a conviction. Our investment process involves more than one decision maker. We have eight portfolio managers assigned to this fund and we also have a research portfolio, which is managed by the specialists or industry analysts. The industry analysts are looking for high conviction ideas. They only make a small number of decisions per year and when they invest, the portfolio managers who are in the fund will also co-invest. This process is very transparent, it is granted in trust, in communication and in collaboration. 

6.    Which sectors do you like the most from a fundamental standpoint? Which ones are you currently overweighting?

We are slightly overweight energy. As said before, consumer staples, energy and telecommunication companies we are overweight relative to the S&P benchmark. We are underweight financials.

7.    Energy and financial sectors, which have been in trouble, are they an opportunity now?

Energy is a cyclical commodity and we have seen an ample amount of supply which offsets the demand. So, basically, as a result, the commodity has weakened. We don´t have a wide company view on oil. Each person has his own opinion. My opinion is it will take some time before the supply and demand comes back into balance. Demand has been fairly stable and supply has been ample. OPEC has shown they wanted to set a floor on price and the US is producing more energy, natural gas and oil than it has historically.

It was only a few years ago when we were worry about peak oil and we were discussing oil at $200 a barrel. So this goes to prove that this is a commodity cyclical and where there is more supply there is pressure on the commodity. One thing we are particularly interested in are the low cost providers and the companies that can earn their dividend thanks to this weakness of the commodity.

Concerning the financial sector, we have been underweight in ICA, there may be a general feeling that interest rates will be lower for longer and you really need interest rates to go up two-three hundred basis points to make a meaningful impact on earnings. So we haven´t had enough increase in interest rates to make a material impact to earnings. We also have a tremendous amount of regulation in the US and the new Trump Administration is talking a lot about deregulation and we will have to see whether or not it really ends up impacting, particularly the banks.

The discussion around the Trump Administration considering deregulation will be one that we will continue to watch because it could be an interesting catalyst after having a period in which regulation was put on the market since the financial crisis.

Deregulation is a theme which goes beyond the financial sector and that could impact a number of sectors. President Trump has talked about removing two regulations for everyone that is audited, that goes very broadly across the economy so we will have to wait and see which areas are most affected. We do a lot of research about regulation and right now it is too early to tell what could be his priorities. The financial regulation is one which seems to be a priority.  

8.    Why do you overweight large caps and underweight small caps? Does it help to the portfolio stability?

This is a conservative fund launched by our founder. This is a lower volatility, larger cap fund.  We refer it as core fund which invests in seasoned companies; companies which stability and which are leaders, many of them, in their fields. They are liquid companies and most of them have an income as contribution to total return. CGICA’s 83-year average return of 12% has proved rewarding for long term investors.

In other words, this fund, because of its nature, has been relatively conservative and is currently overweight large caps. Around 10% of the fund is in mid caps today. We do not have any small cap in the fund. It does help with portfolio stability and it also contributes to have liquidity in the company we invest in. Besides, it gives you exposure to earnings and revenues around the world.

We are managing the fund with a longer term horizon and our approach to investing in larger caps, stable, seasoned companies, as said before, helps to maintain a stable portfolio. Small and mid caps can go through dramatic changes, some times in the short term, some times in the long term and larger caps tend to be more stable. It does not mean they not move around, but generally they provide stability.

9.    Why active management and having a high active share are key factors when investing in US equities?  How does it help to long term results?

We look to focus on fundamental research into companies and consider their long term future prospects -their weighting within the index is not a primary consideration.

When we are investing we almost rarely use the words index, underweight and overweight. In our vocabulary, in our day to day jobs, we are not using them. But when we are sitting with advisors, we can describe the fund using these words despite this is not the way we describe it in our meetings internally. In other words, we are aware about the benchmark but don´t use it as a way to build our portfolios.

Apart from that I would like to highlight that because of we are looking for companies with dividend characteristics, we are many times invested in the higher dividend quintiles and that is an area which gives the stability of the fund ´returns. It also provides downside protection in the event of a correction.   

We tend to be in the upper quintile of our peer group for consistent risk-adjusted returns, but we are in the lower volatility category of our peer group. Actually, we are in the lowest quintile of volatility of our peer group.  What is exactly what we want to do for our long term shareholders: provide superior returns with lower volatility.  We must not forget our mission which is to improve people´s life through successful investing.  It is important also to bear in mind the investment management is our only business. We are focus on the long term interest of our clients. Finally, I would like to remember another key feature of CG is that portfolio managers invest their own capital in the funds they are managing.

10.    Finally, is the Luxembourg strategy being well received in Europe? What does it strategy offer to European investors?

Yes. It provides to European investors the same thing we have been providing to US investors for 83 years. It provides long term investment returns through fundamental analysis of companies.

Now European investors can access to one of the most successful strategies and it represents what they are looking for a US equity fund: it is a conservative, first quartile, low volatility, easy to understand fund. And more than proved, with 83 year track record.  
 

Emerging Within the Emerging: The Potential of the Asian Frontier Markets, According to Allianz GI

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Emergentes dentro de emergentes: el potencial de los mercados frontera asiáticos, según Allianz GI
CC-BY-SA-2.0, FlickrDennis Lai, Senior Manager at Allianz GI. Courtesy Photo. Emerging Within the Emerging: The Potential of the Asian Frontier Markets, According to Allianz GI

One of the core messages from the Asia forum recently held in Berlin by Allianz Global Investors is that investing in the Asian continent goes far beyond China. Although the Asian giant offers investment opportunities that cannot be ignored, and has risen strongly in recent months in tune with other markets such as India, a market which asset manager Siddharth Johri spoke about, or Korea, all of them revalued by about 30% in the last twelve months, there are also others that offer great potential.

Therefore, beyond the more developed Asian countries, there are emerging countries within the continent, emerging within the emerging, or frontier markets. Dennis Lai, Senior Manager at Allianz GI, spoke about the opportunities in Asian frontier markets, growing markets with very favorable demographic characteristics, consumption opportunities, infrastructure, and GDP growth.

Without taking into account the beneficial effects generated by China (and other more developed Asian countries) on some of these markets, the boom in development and research policies, and the improvement in their fundamentals and credit quality from an investment point of view (which improves the perception of risk).
The Allianz GI strategy that invests in emerging and frontier Asian markets harnesses the potential of these markets and focuses on growth segments (such as consumption, services, technology, and infrastructures, which are less present in the indices but will be gaining traction) and avoids the traditional ones (utilities, financial, health…), in a strategy with conviction that selects between 60 and 80 names.

And it is also based on themes: for example, the asset manager likes the investment in automation theme, and the fact that Asia is a fundamental part of the supply chain for Western robotics firms; also the sale of automotive components to the OECD industry theme; or the aerospace theme, as the continent also provides components to large Western firms.

According to the asset manager, Pakistan, Vietnam or Sri Lanka are some of the next economies that will be among the fastest growing.

The Allianz GI strategy invests in names that also bring great diversification to the portfolios by their decorrelation with other Asian markets, since their fundamentals and their cycle are at a different, earlier stage, than that of other more developed Asian markets.

In addition, they are little-known markets and emerging outflows affect much less:

“We are positive in Asia and in the smaller markets, where we see very interesting opportunities,” remarked the asset manager.

Asia’s Potential

Stefan Scheurer, Asia Pacific Economist at the asset management firm, also pointed out during the event that Asia is not just China, but a vast continent stretching from Japan to Australia and including many, and varied, markets. Between them, the population is larger than that of Europe plus America together, with 4 billion people, 60% of the world’s population, and accounting for more than 35% of the world’s GDP… a trend which is rising, as by 2020 it could account for 42%.

In this context, China has become one of the major standard-bearers and advocates of globalization, and despite Trump and his protectionist attempts, experts estimate that international trade (intra regional and interregional) will continue to grow, driven by TPP (of which the United States is not a party).

According to the expert, the continent will continue to grow, driven by productivity and innovation in China’s or India’s case, with large amounts of patents; regarding the debt problem, he points out that there is potential to increase leverage, since it is a problem in China but not in other economies in the continent. In addition, the population and demographic profile is more favorable in countries such as India, Indonesia or the Philippines than in China, which leaves greater potential for growth in these economies. With all these factors, the expert predicts continued growth in Asia, above that of developed markets, and also driven by the continent’s status as a “relative winner of de-globalization”.

 

 

Interest Rates, Oil, and the Dollar: the Three Factors that Convert Emerging Debt Into an Investment Opportunity

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Tipos, petróleo y dólar: los tres factores que convierten la deuda emergente en una oportunidad de inversión
Federico García Zamora, Director of Emerging Markets at Standish (part of BNY Mellon) / Courtesy Photo. Interest Rates, Oil, and the Dollar: the Three Factors that Convert Emerging Debt Into an Investment Opportunity

In 2017 the return of investors towards emerging market debt after several years of inactivity has become evident. The drop in oil prices, lower growth in China, and political problems were behind this disillusionment, which this year has been almost completely wiped out.

The investment spirit in emerging debt “is blowing in the wind”, as Bob Dylan would say, however, any cautious analysis would lead us to consider whether this trend is sustainable in the medium term or if, on the contrary, it has an expiry date.

This is the first question we asked Federico García Zamora, Director of Emerging Markets at Standish, BNY Mellon, during this interview with Funds Society in Spain. His answer is clear: “The context has changed and will be maintained for at least the next 12 to 24 months due to three fundamental factors: interest rates, the oil price, and the Dollar.”

In his opinion, the Fed’s rate-hike strategy is already embedded in long-term bond prices. “It will not come as a surprise to anyone that interest rates continue rising and, therefore, it will be perfectly accepted,” says the expert.

As for the second fundamental factor, the price of oil and commodities in general, García Zamora explains how they are analyzing both from the production side (companies in the sector) and from the demand side. His forecast is that the price will be much more stable in the next 12 months, at around 40-60 dollars. “The price cannot rise again too far above 55 dollars because the supply of unconventional oil would rise a lot, while below 40 dollars, a lot of the supply would be destroyed,” he explains.

Despite admitting that for investment in emerging markets it would be better for the price of oil to rise, “stable oil is going to be very good without it having to rise. We will see good results with price stability,” he argues.

Good results that, in terms of profitability, translate into 7% -8% annual returns for emerging debt, “which is very attractive when compared to any other fixed income asset in which you can invest worldwide, if nothing changes regarding currency exchange rates.”

As a matter of fact, the third factor that supports this interest for emerging countries is the evolution of the Dollar and here the expert’s forecasts point to a fall of the dollar during the next two years. “This adds appeal to this asset class as opposed to a few years ago when the dollar kept rising,” he explains.

An upward trend that the expert explains as due to the rapid increase of interest rates while they were falling in the rest of the world, as a result of the European crisis, stimulus withdrawal by the Fed, the collapse of oil prices, and Donald Trump’s election. According to García Zamora, all these elements contributed to placing US currency at highest levels during the last five years, but now he is convinced that it will continue to be come down because “that’s how the Trump administration will solve the country’s high trade deficit. Depreciating the dollar has always been his intention, but it was easier to explain to the average American voter that he would solve the problem by raising customs fees.” His forecast is that the dollar will stand at 1.25 to1.30 Euros.

From Russia and Brazil to South Africa and Turkey

Asset allocation from a geographical point of view has varied in the last twelve months. During 2016, Russia and Brazil have been the darlings of the Standish emerging portfolio, in which Colombia has also had some weight, despite being slower in its recovery.

“Another country that we liked a lot is Argentina due to its change of government. Its crisis was self-inflicted with a government that shot itself in the foot as much as it could. With a much more reasonable policy and investment, the potential of the country has changed completely.” In this regard, Garcia Zamora says that they have already taken profits in Argentina and have rotated their portfolio towards other issuers like Mexico, South Africa and Turkey, which are “cheap.”

The investor’s main concern in emerging markets is volatility, which the expert puts between 8% and 12% depending on whether the investment is made in local currency, Euros or dollars. “It is true that these assets have gone up quite a bit, but if you are a long-term investor it remains attractive. The fall that some expect may not arrive and my recommendation is invest now and, if there is a fall, invest further,” he concludes.

Will the Fed (and Other Central Banks) Normalise Monetary Policies?

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¿Conseguirá la Fed, y el resto de bancos centrales, normalizar la política monetaria?
Pixabay CC0 Public DomainC3_0010_shutterstock. Will the Fed (and Other Central Banks) Normalise Monetary Policies?

In mid-2013, the then chairman of the Federal Reserve, Ben Bernanke, suggested that America’s central bank should start to cut back on the purchase of bonds that had started in 2008. The turmoil resulting from this announcement on all markets in general, but on emerging markets in particular, put a curb on his intentions.

The baton was passed on to Janet Yellen, who in December 2015 approved a rise of 25 basis points on interest rates that had remained at 0% for seven years. The last increase had taken place in 2006, but with scant resonance – Twitter was yet to come into its own. In just a little over a month, between 22 December 2015 and 28 January 2016, the Chinese stock market adjusted by just over 27%, and plans to normalise monetary policies had to be postponed once again.

This time around, it seems that not just the Fed, but other major central banks such as the European Central Bank, the Bank of England and the Bank of Canada, are willing to normalise monetary policies, following almost ten years of emergency policies.

Enlarge

The global economy is now more settled. The OECD expects the world’s GDP to grow in 2017 and 2018 to levels of 3.5% and 3.6%, respectively, in comparison with the average of 3.9% between 1987 and 2007. However, developed economies will grow at slower rates, nearer to 2%. The United States has grown by an average of 1.47% over the past eight years, as compared with 3.4% since the Second World War, and the annual real growth rate since the last recession was just 2.1%, in comparison with an average of 4.5% in previous recoveries. Based on figures published to date, it does not seem that growth will even reach 2% in the first half of 2017.

The Federal Reserve’s task is further complicated by two historical facts: since the Second World War, the Fed has triggered 13 cycles of rises in interest rates, ten of which took the economy into recession. Secondly, since Ulysses S. Grant (1869) all republican presidents have experienced a recession during their first term of office. Nevertheless, as athletes often say, if faced with a challenge backed by past results against winning, records are there to be broken.   

The desired rate of inflation (for the central bankers that govern us because, I do not know about you, but I like to buy things when they go down in price) closed at 1% in 2016 in developed economies and, unless there are new price rises in oil, it seems unlikely that the target of 2% will be reached.

Finally, global debt, far from dropping, has continued to grow. By the close of the first quarter of 2017, it was 217 trillion dollars, which meant that it increased by more than half a trillion dollars, 46% higher than ten years ago. Developed economies have built up a total debt of 160.6 trillion dollars, 1.4% down on the previous year, whilst the debt of emerging countries reached 56.4 trillion dollars, up by 5.4%.

In light of positive economic growth, although perhaps not sufficiently sound to deal with potential upheavals, a controlled rate of inflation still way off target and higher debt levels in the economy, what has made central banks act like this now?

Even the chief economist of Bank for International Settlements highlighted in its annual report published last month that:
“Policy normalisation presents unprecedented challenges, given the current high debt levels and unusual uncertainty. A strategy of gradualism and transparency has clear benefits but is no panacea, as it may also encourage further risk-taking and slow down the build-up of policymakers’ room for manoeuvre.”

Perhaps central bankers have (at last) realised that inflation is in financial assets – the returns on the oldest bonds in history, those of the United Kingdom and the Netherlands, have seen the lowest in 322 and 500 years respectively, whilst the US had 10-year bond yields of 1.366%, the lowest since 1800. Maybe it has taken them too long to withdraw these measures that are now not only ineffective, but also encourage too much risk-taking, which puts financial stability at jeopardy. It could simply be that they are recharging their arsenal of weapons to shore up monetary policies should they need to use them in the near future. 

Whatever the reason, the reality is that the market has let them get away with this so far. The question is: will this go on like this? Will they stay on course if the market does not take this well? If they do not keep a steady hand, will faith be lost in the omnipotence of central banks? It should not be forgotten that low interest rates have been the main driver behind the upturn of financial markets.

If Ben Bernanke was right about the positive effects of rolling out quantitative easing, he should be equally right about the effects of withdrawing it. Without going into specifics, what is important is that markets believe so, and think that central banks are responsible for the positive performance of markets.

In response to the appearance of another financial crisis, Janet Yellen was clear in a recent interview: “Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”

Overall, the four big central banks have purchased around $13 trillion in bonds ($13,000,000,000,000). It goes without saying that divesting this portfolio without messing things up is not going to be an easy task…

Column by Alfredo Álvarez-Pickman chief economist at Banco Alcalá, part of Crèdit Andorrà Financial Group Research. 

Small- and Mid-Caps: Still Attractive Investments

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El atractivo de las small y midcaps como inversión a largo plazo
Pixabay CC0 Public Domain. Small- and Mid-Caps: Still Attractive Investments

Small- and mid-cap stocks in Europe, Switzerland and the US are being buoyed by solid fundamentals and the improving economic environment, and remain attractive as components of a long-term investment strategy.

Since the start of the year, equity markets have been supported by positive economic developments. Earnings are growing again: on aggregate, earnings per share (EPS) are expected to rise 13% this year as opposed to 2% in 2016. This positive environment is particularly beneficial for small- and mid-cap (“SMID-cap”) companies, although returns have varied between stocks in the US, Europe and Switzerland.

Fundamental strengths amplified by a supportive environment

In particular, SMID-caps currently have stronger balance sheets than large-cap stocks, with average net debt/EBITDA ratios of 1.1x and 3.9x respectively. These low debt levels, combined with the global economic upturn, mean that SMID-caps still have substantial growth potential, justifying valuations that may appear high in some cases. That growth potential is also underpinned on a long-term view by their impressive capacity for innovation and their ability to adjust to economic developments, which should deliver additional returns in the absence of any systemic risk.

SMID-caps also have other fundamental advantages. For example, many of them are family-owned companies, managed according to a philosophy that ensures the sustainability of their business. In addition, small companies are often driven by a highly entrepreneurial spirit, the effects of which can be seen most clearly when economic growth is accelerating.  

Performance drivers that vary between countries

In Europe in particular, SMID-caps are still offering good investment opportunities because they are attractively valued. European SMID-caps slightly underperformed large-caps in 2016, even though their earnings growth remained positive. Their valuation ratios are currently lower than those of the rest of the market, and lower than their historic averages.

Swiss SMID-caps have had to contend with a strong currency for more than two years now. They have managed to do so by focusing on their competitive advantages and on innovation, while keeping costs tightly under control, which has enabled them to improve profitability. They have also continued to expand successfully in emerging markets over the last few years. For investors, therefore, they offer the stability of a developed market together with indirect exposure to emerging-market growth.

In the USA, the renaissance of the manufacturing sector and the upturn in consumer spending should benefit domestic companies for a long time to come. Unlike Switzerland’s internationally oriented companies, US small-caps are mainly focusing on organic growth on their local market.

US corporate tax reforms should be particularly beneficial to SMID-caps, which tend to pay higher tax rates than large corporations. As a result, US small-caps should continue to fulfil their potential, particularly in more cyclical sectors and finance.

Although these stocks have already made significant gains in 2017, they are still attractive investments, particularly for those wanting to put together a balanced portfolio for the long term. On both sides of the Atlantic, the global economic recovery should both support and boost the earnings growth of these dynamic, entrepreneurial companies.

“The Long-Term Investment Opportunity in the Energy Sector in Brazil and Mexico is Enormous”

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"La oportunidad de inversión a largo plazo en el sector energético de Brasil y México es enorme”
Paul H. Rogers, courtesy photo. “The Long-Term Investment Opportunity in the Energy Sector in Brazil and Mexico is Enormous”

The improvement in economic fundamentals, in both emerging countries and companies, gives these countries the opportunity to grow faster than developed ones, and offer more returns for investors. That’s why they remain a long-term bet, despite the latest rally in their stock markets. This is maintained by Paul H. Rogers, Manager and Analyst of Lazard Asset Management, emerging stock market expert, in this interview with Funds Society, during which he discloses the main risks and opportunities for these markets.

How do you rate the current momentum for entering the emerging market?

Emerging markets have appreciated 20% during the year and we believe that thanks to the improvement of both, country and company fundamentals, they continue to be a good long term opportunity We see how companies’ balance sheets are stronger and the balances of the countries have also improved, leaving behind those bad years experienced between 2013 and 2015. This gives emerging markets the opportunity to grow faster than developed ones.

By price, where is it currently more attractive to invest?

We have to think in general terms. Our investment process is based on the selection of companies, not countries, but the relative valuations of emerging markets versus developed markets point to discounts of 13%, with equity returns of around 25%. That is, we believe that there is a possibility of obtaining higher returns than in the developed markets.

Where in Asia: do you see more opportunities?

We are currently underweight in China, while we are overweight in South Korea and Taiwan. Asia represents 72% of the benchmark and 75% of MSCI EM benefits. That is, it’s the bulk of the emerging market. Other smaller markets, such as Indonesia or the Philippines offer investment opportunities, although they have to be evaluated. company by company.

Is China a risk to be taken into account?

We believe that China’s risk is concentrated in its high debt levels. Its debt to GDP ratio stands at 250%, while growth has begun to slow down. Nonetheless, we believe that the country will be able to manage this risk during President Xi Jimping’s five-year term by carrying out serious structural reforms.

Latin America: Do you see opportunities in this region?

In Latin America we are currently slightly overweight in Mexico and Brazil, where we see good prospects for their companies. Thanks to the improvement of macro factors and the process of stabilizing the price of raw materials, we believe that Brazil can continue to grow, and that companies’ profits should improve. In fact, if we look at the macro factors, it seems more likely that companies generate profits at current prices. We believe that the long-term investment opportunity in the energy sector in Brazil and Mexico is enormous.

Brazil: Despite the recent corruption scandals, do you think that low prices and falls should be an incentive for investment?

It is a country that for many years has demonstrated its ability to overcome political difficulties. Brazil is very attractive at these levels, although Brazil should be approached as a long-term investment.

Which are Mexico’s strengths?

Mexico is going to benefit from the economic strengthening of the US, since many companies have exposure to the American market. Its situation in NAFTA is going to mature and I think it will reach a good agreement with the USA. Both economies are likely to negotiate and improve their relationships. In Mexico, the elections will be held in 2018 and a more populist candidate could be elected. Volatility will surround the electoral process over the next year.

If you had to choose companies from other more modest markets, which markets offer the best fundamentals and prices?

No, we generally do not see great opportunities in these smaller markets, although in Chile and Colombia we see an incredible opportunity for the banking sector to expand and increase its profits.

What will be the impact of higher interest rates by the Fed on Latin American stocks?

I think the US is going to carry out a gradual increase in rates, consistent with the economic growth of the country, which will keep the dollar stable and, therefore, stability within the currency market.

Will other Latin Central Banks follow the Fed’s path?

Each central bank is very independent in its monetary policy, depending on the inflationary situation of each country. In fact, Brazil has to continue to reduce its interest rates, while Mexico is in a cycle of rate hikes.

What are the main challenges and risks for the Latin American stock market during the coming months?

The most significant risks are political, for example, in Mexico, the next presidential elections, and Brazil is pending resolution of the corruption scandals and the final decision on President Temer’s future. These events will generate short-term volatility.

The currency risk: is it better to hedge against it or to assume it when investing in the Latin American stock market?

We take the currency risk into account when investing in a company, although we do not expressly hedge the portfolio. In addition, we have invested in a significant number of companies that generate income and profits in dollars, since they have a large part of their business in the US, and this helps us to somehow hedge against exposure to local currencies.

When investing in Latin American stock market… do you also invest in European or Spanish companies with exposure to LatAm?

Not at present. We have been invested in banks with Spanish holding company and local businesses, but we prefer to invest in companies with at least 50% of their assets or their income in emerging countries

Risk Taking will Require Active Management to Control the Periods of Volatility Which May Arise

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"Si no asumes riesgo, no tendrás retorno, pero eso requerirá de una gestión activa para controlar los periodos de volatilidad”
Neil Dwane, courtesy photo. Risk Taking will Require Active Management to Control the Periods of Volatility Which May Arise

For the second half of the year, with global growth dull, and interest rates staying low for longer, Beta returns will remain low and thus clients should remain confident that active management can deliver good returns that meet the needs for income and capital gain according to Neil Dwane, Global Strategist with Allianz Global Investors, in his latest interview with Funds Society.

What is your vision/forecast for the markets in the second half of the year? Will there be volatility or will calm predominate, as in these last months?

In general we see little upside in many asset classes after a strong H1. The US equity market is now expensively valued with little dividend support and is desperate for Trump tax reform and fiscal stimulus. Also, the US is seeing dull economic growth and faces a Federal Reserve intent on raising rates.

Asia offers more growth opportunities as India and Indonesia capitalise on their modernising new Governments whilst we expect China to be stable ahead of the Party Congress in November. Longer term, Asia offers the opportunity of 4bn new consumers for whom the “American Dream” is alive and well.

Europe looks attractively valued as the political risks following Brexit fade and the new positive momentum from Macron could energise the “journey to the United States of Europe” in 2018, though actual policies seem unclear as yet. With interest rates likely to stay very low, Euro investors face the continuing conundrum of holding return-free bonds or switching into equities which offer either an attractive dividend or good industry exposure to the world’s opportunities.

“If you take no risk, you will earn no return” remains our mantra and thus taking some risk will require active management to control the periods of volatility which may arise.

What will be the main sources of uncertainty?

For many global investors, the key generator of uncertainty remains the policy directions from President Trump who may yet become trade protectionist with Asia and NAFTA and may or may not actually achieve any tax reforms which can sustain the US economy.

Geopolitics in the Middle East and other areas related to the energy sector may also continue to unnerve investors as an oil supply shock is not priced into the current price of oil. Clearly this would hurt most oil importing economies and tax global activity.

More difficult to assess, is the troubling situation with North Korea where pressure from the US and China is not yet showing any substantial progress but which could be easily inflamed by a diplomatic mistake or misinterpretation.

At geopolitical level, the negotiations of the Brexit will begin … how do you foresee that they will develop and what impact will there be on the markets, especially in Europe? Will the UK shares and the pound be the only ones harmed?

Brexit presents a period of great uncertainty, made worse by the recent result of the June UK elections. We think it very unlikely that a deal can be negotiated by 2019 and transition arrangements will be necessary. All European companies will hope that economic and business sense prevails and that the broad regulatory and trade processes used today are maintained. The UK will endure a significant period of economic uncertainty and weakness now, which may weaken Sterling further, whilst the EU may make better progress as Macron rejuvenates policy.

Both the Euro and Sterling are undervalued against the US Dollar, and we would expect Euro to strengthen from here first and further.

Also at the geopolitical level, there will be elections in September in Germany. After what happened in Holland and France, could it be said that populism has been banished in Europe or do we still have to wait?

For now it would seem that populism has peaked after the Brexit vote. However, it should still be noted that anti-EU parties received 40% of votes in recent elections and possibly, even in France, only half the electorate voted for Macron. Shorter term, Italy becomes the last fault line of significant political risk for Europe as nearly 60% currently favour anti-EU parties but at least we have until May 2018 to assess progress further. Thus, populism may slumber and awaken in the next electoral cycle if Europe’s policies do not share its wealth, growth and opportunities better.

Do you see political risks in markets like Italy or even Spain?

Italy is of concern as above. Spain seems to us to offer little political risk to Europe given its short history as a democracy and the Catalan question may be addressed through further local economic empowerment in due course.

On monetary policies: Do you see a clear distinction between the US and Europe? What do you expect from the Fed?

Yes, we have entered a period of monetary policy divergence with the ECB remaining accommodative and the Fed now raising rates and considering how to reduce its balance sheet. Financial conditions in the US remain quite loose so we expect the Fed to continue to raise rates in H2. Global monetary accommodation is peaking and the consequences for many asset classes from QE will now beginning to manifest themselves, especially in the overvaluation of sovereign bonds.

When will the ECB act? In this sense, how can monetary policies impact global equity markets and investor flows?

We expect the ECB to finish tapering QE in 2018 and to then raise rates albeit slowly in 2019, dependent on the strength of the economy then. This should support the mid-cycle economic expansion we see today.

Regulation, such as MIFID II: impact on industry and markets

We expect MIFID 2 to offer better transparency and thus better investment solutions to clients as it will force all managers and distributors / advisers to explain what services they are providing to their clients and at what costs. This could be very disruptive. It will thus force new business models and new relationships to be forged with clients but it will change the current financial services landscape. Brexit too, will shake up the industry as it remains unclear if being equivalent will mean the same as it does now for many European banks and insurers.

At the market level … what assets do you see more opportunities for the second half of the year and why?

Taking risk to earn a return, and managing client nervousness to headline shocks and uncertainty, leaves us with high conviction over the “hunt for income” where clients can find attractive levels of yield from US High Yield and Emerging Market Debt as well as European equities. With global growth dull, interest rates staying low for longer, Beta returns will remain low and thus clients should remain confident that active management can deliver good returns that meet the needs for income and capital gain.

Koesterich: There are Very Few Bargains Across Major Asset Classes. In Order to Find Value, One Must Get More Creative

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Koesterich: "Hay muy pocas gangas en las principales clases de activos y para encontrar valor uno debe volverse más creativo"
Russ Koesterich. Koesterich: There are Very Few Bargains Across Major Asset Classes. In Order to Find Value, One Must Get More Creative

It’s been over a year since Russ Koesterich, Portofolio Manager of BlackRock‘s BGF Global Allocation Fund joined the Global Allocation team. In this interview he talks about his investment process, asset allocation, the market, reflation, factor investing, volatility, and the key economic data points that his team is monitoring.

Tell us about the work that you and the team have been doing to evolve the investment process.

Since the inception of the strategy in 1989, Global Allocation has been a story of evolution as the investment opportunity set has grown, technology has improved and team resources have expanded. We have continued that evolution and made some enhancements to the investment process which we believe harness the competitive advantages of the Global Allocation platform. These include: a greater dedication of risk budget to our higher conviction ideas from our bottom-up security selectors, position sizing by the portfolio managers and the adoption of more robust portfolio optimisation tools that allow us to better calibrate our top-down asset allocation decisions.

What has not changed about Global Allocation is our mission to deliver returns competitive with global stocks, over a full market cycle, at a lower level of volatility. We also remain keenly focused on managing risk, maintaining flexibility, and being value-oriented in our investment decisions. We do, however, expect recent enhancements to allow for more deliberate risk taking in the portfolio and believe that they provide a competitive advantage relative to other multi-asset funds given our focus on both bottom-up security selection and top-down asset allocation. While it is still early days since initiating these enhancements, we are encouraged by the improvement in relative performance and in particular would note the contributions to performance that we have seen from both security selection and asset allocation.

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You talk about the ability for Global Allocation to deliver a higher breadth investment solution at a time when there are few cheap traditional asset classes. What do you mean by that?

Higher breadth refers to a portfolio that is well diversified, with lots of relatively small, uncorrelated bets. Having the opportunity to work on the BGF Global Allocation Fund with its flexible mandate and a highly experienced, fundamentally driven, multi-asset investment team was very compelling to me. It is uncommon for multi-asset funds to have both bottom- up and top-down expertise within one captive team. This depth of expertise allows for multiple ways to generate alpha relative to a standard 60/40 benchmark and allows for more differentiation versus a portfolio of all ETFs.

Looking at valuations, the challenge for many investors is that broad betas are generally expensive. That is certainly the case in developed market government bonds and US equities. In fact, US equities and US bonds have never both been as expensive at the same time as they are today. In short, there are very few bargains when looking across at major asset classes. In order to find value, one has to look a little deeper, beneath the surface of the index, and get more creative in order to isolate opportunities.
 

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This is where we can build a portfolio of more bespoke ideas. This includes the work we are doing to focus more of our risk budget on the idiosyncratic ideas derived by our fundamental investors. In addition, we have capabilities to build customised baskets of securities that seek to capitalise on a particular theme that we feel strongly about, such as dividends in emerging markets or low-volatility stocks that possess less interest rate sensitivity. The fund’s ability to utilise derivatives such as options, also allows us to move opportunistically when we identify an attractive opportunity and build an asymmetric payout into the portfolio. This was on display last summer when we bought long-dated, out-of-the-money call options on US financial stocks shortly after the UK referendum. It is flexibility like this that allows for more varied ways to generate alpha at a time when broad betas have enjoyed a phenomenal market rally.

The ‘reflation rally’ that began in mid- 2016 stalled out in the first quarter of 2017. What do you think is driving this change in asset class performance and how has the fund performed as a result?

The exact cause of the change in asset class performance is tough to pinpoint, but it is likely to be a combination of investors adjusting their views on global growth in the short-term and asset price movements. On the latter point, the asset classes most likely to benefit from a period of reflation moved a good deal from the summer of 2016 as global growth expectations improved. In many respects, it is not unusual to see these market trends reverse, even if for only a brief period, as investors seek to rebalance their portfolios. Within the BGF Global Allocation Fund, we too made a number of rebalancing decisions in Q1 in response to this change in asset prices. These included: reducing the fund’s financials weighting; adding to US dollar (USD) duration as yields backed up; reducing the fund’s USD weighting and adding to gold-related securities. These rebalancing decisions, along with a few others, have allowed the Fund to maintain a strong start to the year despite shifts in asset class leadership.

What are the key economic data points that your team is monitoring and do you believe that the world economy has shifted into a higher-growth, higher-inflation regime? How is the portfolio positioned in light of this?

While there has undoubtedly been an improvement in the global economy since early 2016, the jury is still out on whether we have shifted into a higher-growth, higher-inflation regime. Like many investors, we are very focused on the divergence between the consumer and business survey data (i.e. soft data) and the transactional data such as GDP, retail sales and things like auto sales (i.e. hard data). In short, the global economy is not performing as well as the survey data would suggest. We have seen episodes like these in the post-financial crisis era, whereby risk assets have appreciated given expectations for monetary and/or fiscal stimulus; when those expectations prove to be too optimistic or when the stimulus starts to fade, risk assets can become vulnerable to the downside. In the near-term, we need to see firmer evidence, especially in the US, that confidence is translating into activity.

Therefore, I would characterise the portfolio as still constructive on the economic outlook over the intermediate term and as a result, still constructive on equities, especially in Japan and Europe vis-à-vis the US. We have, however, made a number of small adjustments to the fund’s sector positioning, fixed income duration, gold exposure and currency positioning as potential hedges in the event that global growth expectations start to deteriorate more rapidly.

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Equity market volatility is at a historical low despite policy uncertainty and geopolitical risks increasing. How do you guard against the possibility of increases in market volatility while still pursuing your high conviction views?

This is the essence of portfolio construction and something that I think we do well and that we have been able to evolve over the past year. The possibility that equity market volatility could increase should not prevent us from pursuing our higher conviction views. Rather, it should cause us to think about what we want to own in conjunction with those higher conviction ideas in order to effectively manage our risk, both in absolute and relative terms. Unfortunately, what we see from many end investors over time is a tendency to construct a portfolio based purely on their best ideas without any thoughtful consideration to correlations and how things interrelate. The risk is that the investor ends up with a portfolio of correlated ideas at the wrong time in a market cycle.

We have the ability to look at the fund through multiple prisms, which allows us to understand not only sector or regional exposures, but also something like our factor exposures. To what extent are we more exposed to quality or momentum and how can we manage that if we believe volatility could spike? We can also look at recent asset class correlations and then change our correlation assumptions in order to stress test the portfolio under a different market regime. To what extent is gold helping to diversify equity risk today versus previous years? The answers to these questions can provide us with important insights so that we persist with our high conviction ideas, remain well diversified in the event of a change in volatility and seek to deliver a return that is competitive with global stocks over a full market cycle at a lower level of volatility.
 

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Dubreuil: “The ECB Should Lag the Fed in Hiking Interest Rates by at Least Another Year”

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Dubreuil: “El BCE se retrasará al menos un año con respecto a la Fed en comenzar su ciclo de subida de tipos”
Photo: Pascal Dubreuil, Portfolio Manager, at H2O Asset Management, an affiliate of Natixis Global Asset Management / Courtesy. Dubreuil: “The ECB Should Lag the Fed in Hiking Interest Rates by at Least Another Year”

Almost two years ago, after a long career in the asset management industry, Pascal Dubreuil joined the global fixed income and currency team, as Portfolio Manager, at H2O Asset Management, an affiliate of Natixis Global Asset Management, which specializes in Global macro management and alternative strategies of fixed income.

Since then, Dubreuil has been the main investment decision maker of the H2O Multi Aggregate fund, a flexible global fixed income fund actively embracing all debt and currency markets. It can invest globally, with a high degree of granularity, in the widest possible set of liquid fixed income securities ranging from all the investment grade securities featuring in its benchmark, the Bloomberg Barclays Global Aggregate index (BBGA), to high yield securities, issued both by governments and corporations. The currency exposure of the fund is also actively managed according to directional and relative value strategies designed to optimally translate their macroeconomic scenario into global asset allocation.

The Base Scenario in Macroeconomic Terms

According to Dubreuil, the business cycle of developed countries has further to go, as private leverage is not extended enough yet. “Within this group, the US is leading the Eurozone by one to two years, while the UK is beginning to feel the economic cost of Brexit. In contrast with most developed countries, growth in emerging countries is structurally impaired. Commodity producers (most of Latin America and the Middle East) have barely recovered from their recession and are pulled down by bloated balance sheets inherited from the past,” he said.

Furthermore, he believes that growth of manufacturing exporters, mostly from the Asian region, has fared better, but it has over-extended through an increasing and unsustainable leverage. “Growth in emerging countries is either poor in quantity or in quality. Like in the late 90s, the global business cycle is not synchronized across regions. To express these macroeconomic views in H2O Multi Aggregate, we inter alia use currencies, e.g. implementing a long USD position versus a short exposure to Asian and commodity currencies like AUD and NZD.”

Dubreuil maintains that, the excess leverage of manufactured products’ exporting countries has resulted in core inflation in the US becoming the other main macro risk. “The tightness of the US labor market should increase further as the business cycle continues. Pressure on wages and inflation should eventually recover from the recent soft patch. When it does, dollar funding would get tighter which would present a key challenge to de facto dollar-zone countries, some of which also exhibit excessive leverage (e.g. China, Northern Asia, Canada, and Australia). Fixed income markets would not perform well in this rising US core inflation scenario, but the extent depends on how prepared investors are for a rising yield environment.”

How is the portfolio positioned?

The H2O Multi Aggregate strategy’s investment process is designed to implement relative value strategies across the main Sovereign Developed debt markets in order to benefit from rising divergences in monetary policies. “We also slice and dice the H2O Multi Aggregate’s benchmark, the BBGA, and implement strategies aiming at exploiting its strengths and weaknesses. To benefit from the normalization of interest rates initiated by the Fed, we underweight the duration of the fund in the US compared to the benchmark, with a particular emphasis on the 5-year segment of the US curve, as we expect the US interest curve to continue to flatten between the 5-year and 30-year pillars,” Dubreuil commented.

He also believes that the valuation of government bonds issued by European peripheral countries compelling: “The core and the periphery are converging economically; political risk is receding, while the ECB should lag the Fed in hiking interest rates by at least another year.”

Moreover, valuations of Emerging Debt Markets are less attractive since the sharp rally they have experienced since early 2016. “China’s cyclical recovery is likely to fade out, leading to headwinds for commodities, which are key for Emerging Markets. Therefore, we have a selective allocation, focused on core value trades like Mexican local sovereign bonds, offering a high yield and a clear disinflation path ahead. We also see opportunities in frontier markets like Iraq and Zambia, both benefiting from their carry and IMF’s involvement that anchors both policies and investors’ expectations.”

As regards corporate credit exposure, the team at H20 favors subordinated bonds from European financials and non-financial issuers exhibiting strong fundamentals. “They still offer attractive credit spreads and benefit from strong technical factors as the volume of new issuance of the credit markets we favor, is expected to remain moderate in the coming months.”

To conclude, Dubreuil sums-up H2O Multi Aggregate’s directional strategies by asset class, “The fund is underweighted in duration and overweighted in credit versus the benchmark, and long USD versus other currencies. The main relative value strategies as far as rates, currencies, and credit are concerned, are respectively: underweight in US duration versus the EMU duration; long MXN vs. Asian currencies; overweight European credit vs. US credit.

Why, According to Aberdeen AM, Diversification is the Key to Creating Robust Multi-Asset Portfolios in the Long Term

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Por qué la diversificación es la clave para crear carteras multiactivo robustas a largo plazo, según Aberdeen AM
Foto cedidaSimon Fox, courtesy photo. Why, According to Aberdeen AM, Diversification is the Key to Creating Robust Multi-Asset Portfolios in the Long Term

For many years now, asset managers have been responding to financial challenges through multi-asset strategies that seek to adapt to different market contexts, and they always seek the most appropriate sources of profitability and protection for portfolios. But the current environment is different from the past, and the challenges it poses are more acute, so it’s necessary to seek more creative solutions and go beyond traditional portfolios – which move within a framework composed of 60% fixed income and 40% equities. For Simon Fox, Senior Investment Specialist at Aberdeen Asset Management, these strategies “will no longer serve to build robust portfolios in the future,” he explained in a recent interview with Funds Society.

The motives? Investors will not only have to face a much more volatile environment, (marked by short-term problems such as Brexit, and long-term, with structural problems for growth such as demography, adjustment in China or de-globalization) but will also be faced with the fact that traditional assets, such as fixed income and equities, will offer much lower returns than in the past, within a framework of lower global growth. “Investors will have to face strong short-term volatility, but there are also structural hurdles: stock markets will no longer provide returns as high as at other times in history, and bonds, which have also provided strong returns in portfolios in the last decades, have much lower yields,” he explains. And in many cases, the latter do not even offer protection. In conclusion, with the traditional mix between equities and fixed income, future returns will be reduced inexorably.

In order to deal with this situation there is no other option than to look for creative solutions. Some opt for more active management that regulates the exposure to equity and debt based on the market situation, that is, they choose to do market timing. For Fox, this solution is very difficult, because “the markets are very difficult to predict.” On the other hand, there are also professionals who, in order to navigate this environment, are opting for strategies based on the use of derivatives to boost returns and increase hedging, but which may be more complex to implement and highly dependent on the capabilities of asset managers and the success of their bets. Faced with these alternatives, Fox has no doubts and opts for diversification.

Therefore, the search for opportunities in new market segments, and research into new assets capable of enriching portfolios, is AberdeenAM’s commitment to its multi-asset flagship strategies (one focused on growth, Aberdeen Global-Multi Asset Growth Fund, and another in dividends, Aberdeen Global-Multi Asset Income Fund). The portfolios, which were traditionally positioned one-third in equities, another third in fixed income and the remaining third in diversifying assets, have evolved over time to a situation which, since the end of 2014, is much more diversified and with alternatives to those assets in which the asset managers do not see value.

For example, there is no exposure to public debt or investment-grade credit, because asset managers believe that they currently offer neither return nor hedging. Instead, these assets have been replaced by other segments of the universe of fixed income with more possibilities (emerging market debt, asset backed securities, loans, high yield…) and also with real assets. Therefore, segments such as private equity, real estate, and especially infrastructures, have gained strong positions in the portfolio, in an environment where traditional assets yield less, including equities, with positions of around 25%.

In total, the portfolios have hundreds of positions, implemented, in the case of equities. from a quantitative perspective and focused on low volatility. And it has been shown that the most diversified portfolios can provide value: they offer greater protection in case of problems and, as a result, better results than their comparable ones.

Long Term Vision

The idea of building these portfolios is not based on market timing or short-term analysis: According to Fox, their construction is based on a long-term global vision (5-10 years) carried out by a group of analysts who make forecasts with this horizon, and with whom the multi-asset management team works very closely within the management company. Therefore, the positions do not change overnight depending on the markets, but they work to find diversifying solutions that bring added value.

For example, the vision is that inflation will end up rising, but it will not do so abruptly in the coming months: hence the inclusion in the portfolio of assets such as floating rate bonds and, above all, the infrastructures to play this story of price hikes – while eliminating the risk of duration by renouncing to public debt in the portfolios.

New Assets

Creativity is key in this context, and at Aberdeen AM they point out some of the latest additions and newest strategies, or the assets with the biggest appeal to offer returns. “There are now many more opportunities than in the past,” Fox says, and that leads us to talk about not multi-assets, but multi-multi assets.

As examples in this regard, Fox points out the bonds in India with high investment grade calification (which can offer annual returns above 7% and is a market that benefits from the improvement in fundamentals – in fact, the asset management company has a fund focused on this asset-), or access to equity through a smart beta perspective (focusing on low volatility or earning income, something they apply to funds). The alternative spectrum also opens up new opportunities, such as aircraft leasing (which can offer returns of close to 10%),insurance-linked securities, or royalties on health companies, options which are available to the asset management company thanks to its global character and its size. At the moment, they do not use ETFs, although they could do so.

All of this, at a time when the traditional barriers to diversification (such as transparency, illiquidity, regulation, commissions…) are dissolving, therefore “currently, diversification is easier thanks to the size and globality gained by asset managers and by the greater exposure and access to different assets,” explains Fox.

Solutions for Retirement

These types of solutions are suitable for retirement because they offer a low risk profile and provide benefits of diversification, returns and profitability, so that demand is very strong in both Europe and Latin America, as well as in the US offshore market.