High-net-worth Investors Have Large Cash Holdings and Could Miss Out on Market Opportunities

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The 78% of global high-net-worth (HNW) investors currently have relatively large cash holdings, according to a survey by Capital Group, the world’s largest active fund manager, with assets under management of more than US$2.5 trillion.

Reserved about getting invested, almost half (48%) of the HNW investors now consider bonds to be as risky as equities. Among the reasons cited for concern over the next 12 months include a fear of higher volatility (60%), faster inflation (56%) and rate increases (41%). 

“It’s easy to be parked in cash, but we believe that perhaps the biggest market risk today is holding excess cash. Cash rates historically decay quickly after the peak in central bank rates, hence for high-net-worth investors, having too much cash in a portfolio could hinder their long-term wealth generation”, comments Alexandra Haggard, Head of Asset Class Services, Europe and Asia, Capital Group. 

While geopolitics is seen as a major risk, causing 55% of investors to be increasingly uncertain about where to invest, there is longer-term optimism:

  • 63% plan to invest more in equities over the next 12 months, with one-third citing good value as a reason for the increase. 
  • Investors are considering increasing allocations to bonds (49%) within a year, with a bias towards higher quality fixed income. 
  • 90% of HNW investors favour government bonds, 85% favour high yield bonds and 84% veer towards investment grade corporate bonds.
  • Among the HNW investors surveyed, 58% expect fixed income and equities to be less risky than cash as they can beat inflation over the next ten years.

Scott Steele, Fixed Income Asset Class Lead, Europe and Asia, Capital Group, adds, “Despite the macro uncertainty, this environment still presents opportunities for long-term investors focused on fundamentals. Bonds play a central role in a well-diversified portfolio and the expansive global fixed income market presents broad sources of yield, risk factors, and returns. The return of income to fixed income means that investors can benefit from putting cash to work in high quality bonds with attractive yield for potential future income.”  

Fed Keeps Rates at 23-Year Highs

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The Fed culminated a new FOMC meeting on Wednesday with the announcement that the market was already predicting and kept interest rates in the range of 5.25% and 5.5% in order to control inflation.

“The Committee decided to maintain the target range for the federal funds rate between 5-1/4% and 5-1/2%,” the Fed said in its statement.

The monetary authority commented that recent indicators suggest that economic activity has continued to grow at a good pace, employment growth has remained strong and the unemployment rate has remained low. However, they qualified that inflation has declined over the past year, but remains elevated.

“In recent months, no further progress has been made toward the 2% inflation target set by the FOMC,” the Fed commented, adding that the economic outlook is uncertain.

As has become customary, the FOMC statement cautions that it will carefully evaluate economic parameters when considering any adjustment to the target range for the federal funds rate.

In addition, it will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in June, the Committee will slow the pace of decline in its securities holdings by reducing the monthly limit on Treasury securities redemptions from $60 billion to $25 billion.

The FOMC will maintain the monthly redemption limit on agency debt and agency mortgage-backed securities at $35 billion, and will reinvest any principal payments in excess of this limit into Treasury securities.

The market was already expecting this decision and analysts are assuming that the Fed will not lower rates until December of this year.

BBVA Officializes Merger Proposal to Banco Sabadell to “create a European leader”

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In a letter addressed to the Board of Directors of Banco Sabadell, BBVA states that merging the two entities would create the most compelling industrial project in European banking. In this sense, the firm highlights the benefits of the merger for both entities, their shareholders, employees, clients and the communities in which they operate.

Firstly, the new entity would create one of Europe’s largest and most robust financial entities, boasting over one trillion euros in assets and serving more than 100 million clients worldwide, with the ambition of becoming the largest bank by market capitalization of the Eurozone, the statement said.

The larger scale would allow the new entity to face the structural challenges of the sector in better conditions and reach a greater number of clients, efficiently addressing investment needs associated with digital transformation. The combined entity would be more solid and efficient, and a benchmark in the market by volume of assets, loans and deposits.

On the other hand, BBVA highlights the strategic fit and complementarity of both companies, with Banco Sabadell being the benchmark in Spain in the business segment and, like BBVA, a leading entity in digitalization and sustainability.

In addition, Banco Sabadell’s presence in the United Kingdom would add to BBVA’s global scale and its leadership in Mexico, Turkey and South America. For all these reasons, the merged entity would be the best financial partner for families and companies, with a better product offering and a greater global capacity to accompany companies in their international expansion.

Ultimately, the capacity of the new entity to provide credit to the real economy would be amplified – with an estimated future impact of an additional 5 billion euros per year – as such contributing significantly to the process of transformation, innovation and decarbonization of the society. The creation of a stronger and more profitable entity would further support the society in the form of greater contribution via taxes and increasing and attractive shareholders’ distributions.

BBVA also shows its commitment to preserving the best talent and culture of both entities, and proposes several key measures: i) Formation of an integration committee with representatives of both organizations, in order to design the best integration process, leveraging the talent of both entities; ii) Respect, in all cases, the principles of professional competence and merit in the integration of the workforce, without the adoption of traumatic measures that singularly affect employees of one of the two entities; iii) Configuration of the management team of the merged entity with executives from both banks, once again based on principles of professional competence and merit, seeking to maintain proportionality based on the relative weight of the businesses; iv) Creation of an advisory council for Spain that would have institutional and commercial relevance and would include current directors and executives of both entities.

Regarding the governing bodies of the merged entity, BBVA proposes the incorporation to the Board of Directors, as non-executive directors, of 3 members of the current Board of Directors of Banco Sabadell, selected by mutual agreement, with one of them occupying a vice presidency position.

On the other hand, while the company name and brand would be those of BBVA, the joint use of both brands would be maintained in those regions or businesses in which it may have a relevant commercial impact.

Financial terms of the proposal

In relation to the financial terms, the proposed exchange ratio is very attractive for Banco Sabadell shareholders: 1 newly issued BBVA share for every 4.83 Banco Sabadell shares, which represents a 30% premium over the closing prices of April 29th; 42% on the weighted average prices of the last month; or 50% of the weighted average prices of the last three months. After the merger, Banco Sabadell shareholders would have a 16% stake in the resulting entity, thus additionally benefiting from the value generated by the operation.

The proposed merger would also clearly create value for BBVA shareholders. According to BBVA estimates, this transaction is accretive in earnings per share (EPS) from the first year after the merger, achieving an EPS improvement of approximately 3.5% once the savings associated with the merger are materialized. These savings are estimated at approximately 850 million euros before taxes. Additionally, the tangible book value per share would increase around 1% on the date of the merger. The operation would offer a high return on investment (ROIC² close to 20% for BBVA shareholders). All of this with a limited impact on CET1 of approximately -30 basis points³ at the time of the merger, while maintaining BBVA’s attractive shareholder distributions’ policy.

 

 

Global M&A activity is booming, and the US plays the bigger role in it

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U.S. stocks were higher in March, with the S&P 500 recording its fifth consecutive monthly gain. Demonstrating remarkable resilience, the S&P 500 surged by 10.6% in the first quarter, marking its best performance at the start of a year since 2019. Notably, despite double-digit declines from two of the largest constituents, Apple (AAPL) and Tesla (TSLA), the index persevered. Amidst these fluctuations, the ‘Magnificent Seven’ cohort remained stalwarts of the market landscape. Companies such as Nvidia (NVDA), Meta Platforms (META), Microsoft (MSFT), and Amazon (AMZN) showcased exceptional strength, propelling the market forward and significantly contributing to the S&P 500’s overall performance.

These four companies alone accounted for an impressive 46% of the S&P 500’s gains, underscoring their influence and dominance within the index. On March 21, the Federal Reserve maintained interest rates at their current levels and reiterated its forecast for three interest rate cuts this year. The market continues to price a first rate cut to occur in June. Federal Reserve Chair Jerome Powell noted they will continue to seek confirmation that inflation is moving closer to the central bank’s 2% target, even after a recent spate of hotter inflation readings.

Global M&A activity totalled $798 billion in the first quarter of 2024, an increase of 38% compared to 2023. The U.S. remained the dominant geography for dealmaking with $485 billion of new deals, which increased to 61% of global activity from 47% a year ago, making it the largest percentage for U.S. deal activity since the first quarter of 1989. Private Equity accounted for 19% of M&A activity in the first quarter as total value reached $154 billion, an increase of 13% compared to 2023. Energy & Power was the most active sector in the first quarter with total volume of $146 billion and accounting for 18% of overall value, followed by Technology at 16%, for $125 billion, and Financials at 13% for $105 billion. Merger Arb performance in March was bolstered by deal spreads that firmed broadly, as well as overbids and deal completions, including Karuna Therapeutics, Everbridge, and JSR Corp.

March was a strong month for the convertible market. Our portfolio participated as the broader equity markets moved higher, and a few company-specific drivers lead to outperformance relative to the convertible universe. New issuance was robust this month with many companies using converts to refinance upcoming maturities. The ability of these companies to issue paper at attractive terms has led to a consistent bid for convertibles that will mature over the next two years, a change from last year when many of these converts lagged the broader market. Generally, the new issuance has been attractive with higher coupons and a greater level of equity sensitivity, and it has largely performed well so far.

 

 

Opinion article by Michael Gabelli, managing director at Gabelli & Partners 

Vontobel Strengthens US Distribution Team With Two New Hires

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Vontobel has appointed Donald Gentile and Mariana Zubritski-Corovic as National RIA Sales and Consultant Relations Manager, respectively. These newly created roles support the firm’s client-focused commitment and expanded direct distribution efforts.

Donald Gentile will be responsible for building and strengthening client relationships, focused primarily on distributing Vontobel’s mutual fund and SMA offerings to the RIA market across the US. Prior to joining Vontobel, Gentile spent more than 20 years at Putnam Investments, where he held various senior roles in sales and marketing, including most recently as director of RIA sales.

Mariana Zubritski-Corovic will focus on strengthening the firm’s consultant engagements. With nearly 20 years of global institutional experience, Zubritski-Corovic joins Vontobel from Dimensional Fund Advisors, where she led several global consultant relationships. Previously, she was at Mercer Investment Consulting, where she worked in both the US and Canada in various roles including field consultant, as well as strategic research and investment analyst.

“Mariana and Donald have a strong track record working closely with clients to bring them tailored investment solutions, and share our client-centric and investment-led values,” said José Luis Ezcurra, Head Institutional Clients Americas. “At Vontobel, we are committed to enhancing our presence in the US with a solutions-oriented approach across asset classes, helping investors meet their long-term financial goals.”

These hires support Vontobel’s continued growth strategy in the US. On April 22, 2024, Vontobel launched a new addition to its mutual fund suite, further bolstering the firm’s direct distribution to US intermediaries.

The U.S. Economy Is Doing OK

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Brian McMahon, Vice-Chairman and Chief Investment Strategist at Thornburg

Brian McMahon, Vice-Chairman and Chief Investment Strategist at Thornburg, shared his market views for 2024 at the Thornburg Spring Due Diligence Conference in Santa Fe. These are some of the take outs of his presentation, which in a nutshell highlights that the US economy is basically doing OK. This is quite an affirmation, coming from McMahon, who is truly one of the who’s who professionals of investments having been in the market for over 40 years.

Likelihood of a Recession

McMahon noted that the consensus predicts a 35% chance of a recession in the next year, down from over 60% odds a year ago. He cited positive economic data like high job openings and low unemployment as reasons he doesn’t see the ingredients for a classic recession.

Demographics and Economic Growth

Demographics have played a significant role in US economic growth over the past few decades. McMahon pointed out that the US population has grown by 57 million people in the last 22 years, partly due to live births exceeding deaths but mostly due to immigration. This population growth, particularly immigrants, has been crucial for economic activity and job creation in the US.

Concerns about US Government Spending and Deficits

Brian McMahon raises concerns about the level of US government spending and deficits. He notes that government receipts have declined as a percentage of GDP while outlays have increased above 20% of GDP. For the politically minded, he also points out that the trailing 5-year growth rate of spending was 12% under the last Trump administration, compared to only 1% for receipts. With high deficits, the US is issuing significant amounts of new Treasury debt each year that investors need to absorb, now that the FED has stepped back from buying bonds. The investors are individuals, advised by financial advisors, and the new debt will be absorbed mostly through mutual funds and ETFs.

Composition of Ownership of Stocks in US

Households have consistently owned around 60% of US equities, though the composition has changed over time from direct ownership to mutual funds to now ETFs surpassing mutual funds. Pension funds have been net sellers of equities in recent decades as they have more retirees to pay out to and need to shift to less risky assets. Mutual funds have been small net sellers overall, with passive ETFs and index funds being big net buyers and active funds being large net sellers. And corporations, through share buybacks and mergers/acquisitions, have been the largest net buyers of equities. McMahon notes share buybacks have supported market returns, and they are a very good thing for investors.

Economic Indicators Suggesting Continued Strength in US Economy

Some of the economic indicators that currently suggest continued strength in the US economy include high levels of job openings relative to unemployment benefit recipients, wage growth trending above the 30-year average, positive retail sales growth in line with historical averages, strong employment levels that have surpassed pre-COVID highs, and double-digit expected earnings growth for the S&P 500 over the next two years.

In summary, McMahon’s presentation highlighted the continued strength of the US economy, with positive economic indicators and a low likelihood of a recession in the next year. However, he also raised concerns about US government spending and deficits, and the changing composition of ownership of stocks in the US.

Financial Advisor Practices that Embrace Technology Surge in Productivity and Efficiency

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Advisor practices that are more extensively incorporating the use of technology within their practice are growing at faster rates than practices that are not, according to The Cerulli Report—State of U.S. Wealth Management Technology 2024.

Cerulli’s research finds advisors considered heavy users of technology tend to outperform other practices in terms of new client growth rates and assets under management (AUM) growth rates. Nearly 30% of heavy technology users are identified as being higher-growth practices over the most recent three-year period, compared to just 9% of light users.

Enhanced efficiency and productivity are undeniable outcomes of technology usage. Cerulli data finds heavy technology users average materially better performance than light users across practice productivity metrics. These improved metrics include higher numbers of clients served per staff member across the practice—the number of clients per producing advisor, the number of clients served per professional staff, and the number of clients per senior advisor.

The tools advisors attribute most to improving operational efficiency include e-signature (65%), CRM (44%), and video conferencing (29%). These technologies also happen to be among the most frequently utilized within advisor practices, ranking first, second, and fourth most widely utilized technologies among advisors, respectively.

“When used effectively, technology is a valuable growth driver,” says Michael Rose, director. “However, more tech is not necessarily better for practices. Simply incorporating more technology within an advisor’s practice can have the opposite desired effect.”

According to Cerulli, the challenges to the effective use of technology that advisors most frequently identify are compliance restrictions that limit functionality or impose other limitations on advisors’ ability to use the technology (73%), followed by a lack of integration between tools/applications (71%) and insufficient time to learn and implement (70%).

“Advisor practices should use a technology strategy that closely aligns with the types of clients that they serve, the specific services they offer, and how they offer them,” says Rose.

“Understanding how to utilize the tools available to advisors in a way that is going to have the greatest positive impact on their practice is critical. Educating advisors on best practices and enabling them to collaborate and learn from their peers is likely to have as much, if not more of, an effect than rolling out the next generation of an existing set of tools and technologies.”

Institutions and Wealth Managers Favour Fixed Income over Equities

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A new research from Managing Partners Group (MPG), the international fund management group, shows professional investors believe fixed income is becoming more attractive than equities over the next 12 months.

The 94% questioned in the global study with institutional investors and wealth managers holding assets of $114 billion under management say fixed income is more attractive with 17% saying it is becoming significantly more attractive.

The research by MPG found growing worries about a global recession and increased volatility in the equity markets plus increased correlation between bonds and risk assets is driving the shift in views.

US investment grade and European investment grade fixed income assets are likely to be the biggest beneficiaries of institutional investors and wealth managers increasing their exposure to fixed income but all asset classes will benefit as the table below shows.

Professional investors still believe there is a possibility of a bond rally if major economies slip into recession. Around 20% believe a bond rally is very likely in the next 12 months rising to 42% saying a bond rally is very likely over the next 24 months.

Around 79% think a bond rally is quite likely in the next 12 months while 57% believe it is quite likely over the next 24 months.

They have little or no correlation to equites or bonds and currently deliver an inflation busting yield of 12%. Also, MPG says alternative asset classes in general are set to benefit from increased diversification as investors look for reasonable returns while equities are set for a tough year ahead.

 

DAVINCI TP Announces Strategic Alliance with Investec IM

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DAVINCI Trusted Partner (DAVINCI TP), a player in the distribution of third-party investment funds in Latin America, announces a strategic alliance for the private distribution of model portfolios managed by Investec in the US Offshore and Latin American territory.

The model portfolios managed by Investec are structured as Funds of funds registered in Luxembourg with a focus of identifying the best active asset managers for each asset class. This approach is achieved through a rigorous due diligence process of each Portfolio Manager and a high level of conviction in asset selection.

Investec, with more than 20 years of experience in managing investment strategies with an excellent track record, stands out for its active and client-oriented approach, backed by a team of highly trained and experienced professionals, the press release said.

Investec Investment Management is a subsidiary of Investec Limited, a financial institution with a global presence. The Group has a substantial market value, and has 7,400 employees and operates on five continents, reflecting its commitment to excellence and financial strength.

With this strategic alliance, DAVINCI TP strengthens its position in the segment of innovative investment solutions distribution across the region through regulated institutions. The model portfolios managed by Investec offer investors access to diversified strategies backed by solid expertise and a global presence, according the firm information.

Santiago Queirolo, Managing Partner of DAVINCI TP, commented on the collaboration: “Working in cooperation with Investec  represents a significant milestone for DAVINCI Trusted Partner. We are very excited to contribute with such an emblematic global firm as Investec is particularly recognized in our region and this will allow Davinci TP to provide the financial industry with access to high quality investment portfolios”.

Paul Deuchar, Head of Investec Investment Management, also expressed his enthusiasm: “We are pleased to collaborate with DAVINCI Trusted Partners to expand our presence in the US Offshore and Latin American markets. This strategy will strengthen our ability to serve a broader base of investors and provide investment solutions tailored to their needs.”

James Whitelaw, Managing Partner of DAVINCI TP, remarked: “We are excited about this new partnership, as it will provide us with a great opportunity to continue to introduce investment solutions with model portfolios. The model portfolios fund range of Investec offers key benefits for investors such as, daily liquidity and automatic rebalancing investing in leading fund managers, which will allow financial advisers to manage their clients relationship and portfolios more efficiently, as well as enhance their client experience with a firm like Investec.”

DAVINCI TP, already having successful experiences with prestigious firms such as Jupiter Asset Management and Allianz Global Investors in Latin America, reinforces its commitment to introduce the best global investment opportunities to the financial industry, the firm added.

SEC Publishes New Registered Fund Statistics Report

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The staff of the Securities and Exchange Commission today published a new report of Registered Fund Statistics, which is based on aggregated data reported by SEC-registered funds on Form N-PORT.

The new report, which will be updated on a quarterly basis, is designed to provide the public with a regular and detailed picture of the registered funds industry—with its more than 12,000 funds and more than $26 trillion in total net assets under management.

The report provides key industry statistics and shows trends over time, including information and trends related to portfolio holdings, flows and returns, interest rate risk, and other exposures across U.S. mutual funds, exchange-traded funds, closed-end funds, and other registered funds.

“Providing data to the public is one of the more consequential things a government agency does,” said SEC Chair Gary Gensler. “This new report will give the public a view into the registered fund industry. Investors, issuers, economists, academics, and the public at large benefit from such regularly published economic data.”

Registered Fund Statistics contains the first aggregated report that reflects both the public and non-public information filed on Form N-PORT, and most of the aggregated data in the more than 70 separate tables of the report is being made public for the first time. Also, the public may download the statistics reported in Registered Fund Statistics in a structured format, which will provide the historical statistical series of information with each publication of the report.

The Division of Investment Management has primary responsibility for administering the Investment Company Act of 1940 and Investment Advisers Act of 1940, including oversight of investment companies, such as mutual funds, money market funds, and ETFs, and for investment advisers, the statement concluded.

The report is available on the SEC’s website here.