Private Debt: A Resilient Asset in a Diversified Market

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Private debt has established itself as a resilient and diversified market, according to the latest report by Union Bancaire Privée (UBP).

“It is said that private debt emerged as an asset class following the global financial crisis. The contraction of bank lending, combined with quantitative easing and zero interest rate policy, created conditions where both borrowers and investors turned to private debt. This perspective of private debt, as a relatively new asset class associated with specific monetary policy conditions, raises questions about the sustainability of private debt and, in particular, how it will remain relevant for borrowers and investors now that interest rates have normalized,” they explain.

In this regard, their response is clear: the entity expects private debt to continue evolving and growing. “This growth will continue as long as there is an insufficient supply of bank financing and non-bank financial intermediaries, such as funds, to channel financing to potential borrowers. In particular, although the period of low interest rates spurred the growth of private debt, its continued growth does not depend on any specific monetary policy. Over the past decade, direct lending and, to a lesser extent, commercial real estate have been the dominant segments within private debt,” they explain in the report.

Additionally, they are convinced that investors will increasingly seek to diversify away from these segments and favor those that offer both resilience and attractive returns. “We believe that real economy sectors, such as residential real estate and asset-backed financing, meet these requirements and will attract investors. Origination will be an important differentiator among asset managers. The real economy is more fragmented than the world of private equity firms or commercial real estate. Originating transactions in the real economy will require origination capabilities through which asset managers will differentiate themselves,” they argue.

Delving into Assets

Interestingly, private debt has existed in various forms for over 4,000 years, thanks to its very nature: it is privately negotiated between the borrower and the lender. “The strength of private debt lies in its diversity of strategies and transactions. Its longevity is due to its flexibility and its ability to reinvent itself for new financing opportunities. The recent growth of private debt is due to the scarcity of bank loans and the evolution of non-bank financial intermediaries. We expect private debt to continue growing, particularly in strategies different from those that have been predominant in the last decade,” notes the UBP report.

In this regard, one of the report’s conclusions is that the increase in demand for private debt among borrowers is driven by a shift in the supply of credit from the banking system. “In the absence of a change in the supply of bank credit, which we believe is unlikely, the demand for private debt will continue to grow,” they insist. This has led to direct lending being the fastest-growing segment, according to Preqin data, followed by distressed debt, real estate debt, and mezzanine debt.

Another notable conclusion of the UBP report is that direct lending has dominated the narrative around private debt since the global financial crisis. “Private equity fund managers have been able to deploy a significant amount of capital for transaction financing, resulting in the origination of borrowers by private equity firms. Increasingly, according to the report, fund managers seek to diversify away from these sponsor-backed loans and towards other sectors, such as asset-backed financing,” they explain.

Furthermore, the report indicates that investors in direct lending funds likely have indirect exposure to the private equity sector. “We have observed recent reports of delays in private equity exits and an increase in loans within portfolio companies to finance private equity dividends and payments to their investors. These reports are likely short-term cyclical, but they serve as a reminder that transaction origination is a determinant of diversification,” they clarify.

The Demand for Private Credit

In UBP’s view, not all investors have the resilience needed to maintain their investment allocations during market downturns. “An allocation to private debt offers diversification relative to public debt markets. Within private debt, there are many opportunities for diversification, and the four major segments offer diversification among themselves and relative to public debt markets. Greater diversification can be found outside of sponsor-backed direct lending and commercial real estate financing. We believe that investors will increasingly be drawn to other strategies,” the report indicates.

Lastly, the report notes that the market’s expectation is that the transition to normalized interest rates is complete and that short-term rates have peaked. This implies that market commentary has shifted to when rates will begin to fall and how quickly they will do so, and, in response, bond markets have already moved. “Credit spreads have fallen significantly, anticipating better times ahead. However, some sectors still need to emerge from the transition and will likely continue to face headwinds. For highly leveraged borrowers, it is not enough that rates have peaked; they need rates to fall. In the commercial real estate sector, it could take several years to overcome the oversupply and financing gap. We believe it makes sense to invest now, entering a period of falling rates. However, we suggest it is better to choose strategies that do not depend on a rapid fall in rates, are less leveraged, and are not expected to face headwinds in the coming years,” they conclude from UBP.

 

BNY Mellon IM Changes its Brand to BNY Investments

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In celebration of the 240th anniversary of the creation of the Bank of New York, the entity has sought to project its innovative spirit through a rebranding. From now on, the commercial brand will be BNY, updating its name and logo, and Mellon IM will become BNY Investments.

According to the firm, to improve familiarity with who they are and what they do, they have updated their logo and simplified their brand to BNY, while the legal name will remain The Bank of New York Mellon Corporation. “The changes to the logo include a more modern, custom font, a simplified structure, and a distinctive teal color scheme for the arrow,” they note.

The new BNY brand and logo will be implemented across the company immediately, with updates continuing over the next 12 months.

“Under our new corporate brand, BNY Mellon Investment Management will also be abbreviated to BNY Investments. This abbreviated name better represents the variety of distribution and advisory services, beyond asset management, that we offer to our clients,” they add.

Finally, they clarify that BNY Mellon Wealth Management has also been abbreviated to BNY Wealth, and Pershing will become BNY Pershing “to maintain a unified visual identity.”

The SEC Initiates the Collection of Diversity Policies for Regulated Entities

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The SEC has begun its biennial collection of diversity self-assessment submissions from regulated entities.

“This initiative provides organizations with the opportunity to closely review their diversity and inclusion policies and practices in search of strengths, opportunities, risks, and vulnerabilities,” says the statement from the regulatory agency.

The SEC uses the data from the submissions to evaluate and report on progress and trends in the diversity-related activities of regulated entities.

“The participation of regulated entities in submitting diversity self-assessments is crucial for a more comprehensive understanding of the diversity practices and policies being implemented, as well as for sharing information on practices and identifying opportunities,” according to Nathaniel H. Benjamin, Director of the Office of Minority and Women Inclusion (OMWI).

Conducting and submitting diversity self-assessments is voluntary and is not part of the SEC’s examination process. SEC-regulated entities can use the Diversity Self-Assessment Tool (DSAT) to conduct a self-assessment.

Alternatively, regulated entities can submit diversity self-assessments in the format of their choice.

The Fed Maintains Rates Despite Inflation

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The FOMC announced Wednesday that it will maintain the target range for the federal funds rate between 5-1/4 and 5-1/2 percent, based on strong U.S. economic activity, despite positive signs in inflation.

“Recent indicators suggest that economic activity has continued to grow at a solid pace. Job gains have remained strong and the unemployment rate has stayed low. Inflation has decreased over the past year but remains elevated,” says the Fed’s statement.

While the Fed Committee was meeting, it was revealed that the consumer price index grew 3.3 percent compared to the same month in 2023, marking the smallest increase since October.

However, the monetary authority insisted that “in recent months, there has been modest progress toward the FOMC’s 2% inflation target.”

The Committee considers that the risks to achieving its employment and inflation goals have moved toward a better balance over the past year. However, economic outlooks remain uncertain, and the Committee remains highly attentive to inflation risks, the statement adds.

In support of its objectives, the FOMC decided to reduce its holdings of Treasury securities and agency debt and mortgage-backed securities.

Additionally, the Committee does not expect it to be appropriate to reduce the target range until there is greater confidence that inflation is moving sustainably toward 2 percent.

Expert Forecasts

Before the Fed’s resolution, experts from various management firms opined on the measures the monetary authority would take towards the end of the year.

For example, Blerina Uruci, Chief U.S. Economist at T. Rowe Price, said she expects the Fed to show only two cuts for 2024.

“This is a very consensual forecast, as most FOMC members, including (Jerome) Powell, want the September meeting to be optional. If the economy continues to hold up and inflation remains stable, the market can discount the price of September as data evolves,” she commented.

However, the expert warned that it is expected to be a very tight decision for many participants, given the resilience of the labor market, and for this reason, she believes the risks tilt in an aggressive direction, meaning there could be only one cut this year.

On the other hand, Charlotte Daughtrey, Equity Investment Specialist at Federated Hermes Limited, stated that U.S. inflation was well received by the market. However, Daughtrey warned that this would not be a strong signal to extrapolate this single data point and “would expect the Fed to continue acting cautiously, with the prospect of limited rate cuts for the remainder of the year.”

From the Olympics to the Taylor Swift Tour: A Summer Full of Growth Opportunities for Major European Brands

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Alan Edington, part of the BNY Mellon Long-Term European Equity Fund team, believes that summer will bring numerous opportunities for European companies. The celebration of the Olympic Games in Paris, various festivals and concerts, and other sporting events beyond the Champions League can drive company growth. “A summer of sports, music, and celebrations—hooray for summer and for Europe’s leading brands,” says Edington.

Starting with the Olympics, Edington notes that, aside from the negative news it will generate (noise, dirt, traffic, etc.), Paris’s preparation to host the Games has been an impressive feat, particularly in terms of infrastructure. “Although it remains to be seen if the Seine’s water will meet the strict safety standards for competition, the fact that swimming in the river is even being considered is, in itself, an achievement, following an unprecedented €1.4 million investment in a project that has set several engineering milestones. Despite the typical European reluctance to celebrate successes, in this case, it seems we can openly talk about a success,” he states.

He explains that, just as Parisians complain, investors often lament that Europe lacks leading companies in key global growth areas. However, Edington believes that “during the Paris Olympics and other events this summer, numerous European brands with global reach and positioning will not only gain great visibility but will also greatly benefit.” While he acknowledges that Europe is unlikely to top the Olympic medal table, the continent can boast of being home to many of the world’s best brands, which will be prominently featured at the Games.

“An example is Adidas, which is not an official sponsor but is well-positioned to maximize the promotional potential of the Olympics. In April, the company launched new sports footwear models for 41 Olympic disciplines. When Bjørn Gulden took over as CEO last year, his plans for Adidas included returning to its roots as a sports brand, so the launch of the Olympic series is closely aligned with this strategy to expand the number of sports it represents and increase its presence in some of the fastest-growing sports worldwide,” says Edington.

The Experience Economy

In his view, events like the Olympic Games are not only an opportunity for consumer brands but also for the leisure sector. It is estimated that sports tourism already accounts for 10% of global tourism spending, and projections identify it as one of the fastest-growing areas in this market. Alongside this leisure segment, Edington sees great potential in another area: music tourism. “Although estimates of the market size vary, the growth forecasts and spending propensity of these tourists leave no doubt. In early May, the musical and media phenomenon Taylor Swift kicked off the European leg of The Eras Tour in Paris. This tour, like many others and countless festivals, attracts thousands of fans who are not only willing to travel but also to spend,” he notes.

He acknowledges that capturing these “superfans” was one of the topics BNY Mellon discussed with Universal Music Group—whose record labels represent Taylor Swift and six of the ten most acclaimed artists on Spotify in 2023—during a meeting in March. “This audience is a strategic priority for the company, which plans to monetize the demand from these superfans through personalized streaming services with priority access to new albums, exclusive content, and limited edition vinyl records, promotional material, and other collectibles,” he states.

When discussing standout companies, Edington points to CTS Eventim, considering it well-positioned to take advantage of the increased demand for concerts and shows. “With over 300 million tickets sold annually through its systems, the company, which holds the top position in Europe in the ticketing and live events segment, and the second globally, reported a 32% EBITDA growth in the last fiscal year, with results published in March. The results also confirm a year-on-year growth of 32% in ticket sales revenue and 19% in live events,” he comments.

In conclusion, Edington highlights that in the letter accompanying Adidas’s annual results, published in March, Bjørn Gulden wrote that 2024 will also be a great year to showcase our brand at the Olympic Games, Paralympics, EURO 24, Champions League, and many other sporting events. “I believe that many people around the world are looking forward to sports celebrations… and this will also support our business,” he concludes.

The Global Population With Significant Wealth Reached Record Levels in 2023

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The number of high net worth individuals (HNWIs) and their wealth reached unprecedented levels in 2023, driven by a recovery in global economic outlooks, according to the latest edition of the Capgemini Research Institute’s World Wealth Report 2024.

The document reveals that the global wealth of HNWIs grew by 4.7% in 2023, reaching $86.8 trillion, and the HNWI population grew by 5.1% to 22.8 million worldwide, despite market instability. “This upward trend offsets the previous year’s decline and puts HNWI trends back on a growth trajectory,” the report explains.

By region, North America recorded the largest recovery in HNWIs worldwide, with a year-on-year growth of 7.2% in wealth and 7.1% in population. According to the report, strong economic resilience, cooling inflationary pressures, and the formidable recovery of the U.S. equity market drove the growth.

This trend continues in most markets for both wealth and population, but to a lesser extent. The report shows that the HNWI segment in Asia-Pacific (4.2% and 4.8%) and Europe (3.9% and 4.0%) experienced more modest growth in wealth and population. Additionally, Latin America and the Middle East recorded moderate HNWI growth, with wealth increases of 2.3% and 2.9%, and population increases of 2.7% and 2.1%, respectively. Finally, Africa was the only region where HNWI wealth (1.0%) and population (0.1%) declined due to falling commodity prices and foreign investment.

The Case of Spain

The report details that in Spain, the number of high net worth individuals (HNWIs) rose from 237,400 in 2022 to 250,600 in 2023, an increase of 5.6%, above the global average of 5.1%, positioning the country at 15th in the ranking of the top 25 countries by HNWI population. Spain also aligns with the global trend of increasing wealth value, with wealth rising by 5.7%, corresponding to $39.2 billion (from $687.2 billion in 2022 to $726.4 billion in 2023).

Finally, the report notes that the main factors driving this widespread increase have been the rise in stock market capitalization, the decline in general inflation, and the surge in housing prices. Thus, all Western European countries have seen their wealth increase, with Italy and France leading (growth of 8.5% and 6.5%, respectively), partly benefiting from a record year for tourism, strong luxury sector data, and a rebound in exports. Countries such as Switzerland (5.6%), Denmark (4.5%), the United Kingdom (2.9%), and Germany (2.2%) are below Spain.

Regarding Spain’s macroeconomic context, the report details that real GDP grew by 2.5% in 2023 after experiencing 5.7% growth in 2022. The positive GDP is mainly explained by the faster-than-expected fading of the energy crisis, as well as the good performance of the Spanish external sector, closely linked to both tourism and non-tourism services. Additionally, in terms of savings, the report explains that national savings as a percentage of GDP slightly increased to 22.4% in 2023, up from 21% in 2022. Nominal private consumption reached $879.4 billion, representing a 9% increase in 2023; and nominal public consumption reached $315.9 billion, constituting a 9% increase in 2023.

Asset Allocation

As HNWI growth prospers, asset allocations are beginning to shift from wealth preservation to growth. Early data from 2024 suggests a normalization of trends regarding cash and equivalents (deposits, money market funds, etc.) to 25% of the total portfolio, a marked contrast to the 34% observed in January 2023. The report indicates that two out of three HNWIs plan to invest more in private equity during 2024 to take advantage of potential future growth opportunities.

Within the entire HNWI segment, ultra-high-net-worth individuals (UHNWIs), who represent about 1% of the total segment but concentrate 34% of the segment’s wealth, prove to be the most lucrative for wealth management entities. It is estimated that over the next two decades, older generations will transfer more than $80 trillion, driving interest in both financial (investment management and tax planning) and non-financial (philanthropy, concierge services, passion investments, and networking opportunities) value-added services, which represent a lucrative opportunity for wealth management companies.

Additionally, the report reveals that 78% of UHNWIs consider value-added services (both financial and non-financial) essential when choosing a wealth management or private banking firm, and more than 77% rely on their wealth management firm to help with their generational wealth transfer needs. As HNWIs seek guidance for wealth management, 65% express concern about the lack of personalized advice tailored to their changing financial situation.

“Clients are demanding more from their wealth managers as challenges have never been greater. There are active measures firms can take to attract and retain clients and offer a personalized and omnichannel experience as wealth transfer occurs and HNWI growth continues. While the traditional way of profiling clients is ubiquitous, the application of behavior-driven finance tools powered by AI, using psychographic data, should be considered. They can offer a competitive edge by understanding individuals’ decision-making to offer greater client intimacy. Creating real-time communication channels will be crucial in managing biases that may trigger sudden and volatile market movements,” explains Nilesh Vaidya, global head of the retail banking and wealth management sector at Capgemini.

Investment Decisions

More than 65% of HNWIs confess that biases influence their investment decisions, especially during significant life events such as marriage, divorce, and retirement. As a result, 79% of HNWIs want guidance from relationship managers (RMs) to help manage these unknown biases. By integrating behavior-driven client finance with artificial intelligence, wealth management firms can assess how clients react to market fluctuations and make data-driven decisions less susceptible to emotional or cognitive biases. The report highlights that AI-based systems can analyze data and detect patterns that may be difficult for humans to recognize, enabling managers to take proactive measures to advise clients.

According to the report, UHNWIs have increased the number of relationships they maintain with a wealth management firm from three in 2020 to seven in 2023. This trend indicates that the sector is struggling to provide the range and quality of services demanded by this segment. Conversely, single-family offices, which serve only one family, have grown by 200% over the past decade. To better serve HNWI and UHNWI segments, wealth management firms must find a balance between competition and collaboration with family offices. One in two UHNWIs (52%) wants to create a family office and seeks advice from their primary wealth management entity to do so.

Adapting Portfolios for Uncertain Times: Natixis Investment Forum

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More than a hundred financial professionals from the Latin America and U.S. Offshore community gathered in Houston, Texas May 15-17, to take part in Natixis Investment Managers’ 2024 Investment Forum. With a central theme of taking on smart risk for a world in flux, attendees learned firsthand from economists, portfolio managers, global macro strategists, research specialists, and a former NASA astronaut guest speaker, strategies for adapting to succeed. Philippe Setbon, CEO Natixis Investment Managers, kicked off the event by highlighting the growing complexity in the asset management industry. This environment he believes will increase demand for a diversified solutions-oriented active manager.

Knowing financial professionals have a lot of factors to contend with, from lingering high inflation and interest rates, to escalating geopolitical tensions, and the Magnificent 7’s market runup, Sophie del Campo, Executive Managing Director, Southern Europe, Latam & U.S. Offshore, Natixis Investment Managers, said providing them with direct access to unique insights, ideas, and solutions is imperative. “We believe it is more critical than ever to take on smart risk – and to rely on in-depth research and portfolio analysis to rationalize every investment decision,” said del Campo.

To support this, investment experts from DNCA, Loomis Sayles, Harris Associates, Mirova, Ossiam, Vaughan Nelson, Thematics, WCM, and Natixis IM Solutions – all part of Natixis’ global asset management network – engaged with attendees on ways to build more resilient, risk-efficient portfolios. Active participation was further promoted via a panel hosted by Natixis Investment Managers Global Head of Client Sustainable Investing Laura Kaliszewski, who interviewed two industry-leading clients on methods for implementing sustainability in their investment process.

How might inflation, rates and growth impact portfolios?

Jack Janasiewicz, Lead Portfolio Strategist and Portfolio Manager with Natixis Investment Managers Solutions – U.S., and Mabrouk Chetouane, Head of Global Market Strategy for Natixis Investment Managers Solutions – International, expect inflation to drift lower, major central banks to commence interest rate cuts, and slower growth. But depending on the region there will be measurable differences.

“As inflation continues to come down in 2024 this will allow the U.S. Federal Reserve to cut rates. Maybe in September or December. And hikes are done,” said Janasiewicz. In Europe, inflation remains sticky, with wage increases, especially in Germany, continuing to feed inflation, according to Chetouane. Energy prices are also inflationary for this region which imports most of its energy. Having already signaled a 25-basis point rate cut in June, Chetouane expects another one in the fall from the ECB. “At the beginning of the year, the market was expecting six rate cuts from the ECB, that is now down to two cuts,” said Chetouane.

They believe Latin America should benefit from U.S. growth. Also, central banks in the region have demonstrated their ability to manage the inflation cycle coming out of the pandemic. The U.S. economy is fairly robust and that should flow over into Mexico and Latin America markets,” said Janasiewicz. Also, U.S. corporate earnings remained healthy for the Q1 earnings season, with the final tally approaching nearly 6% growth for the quarter.

With this backdrop, Janasiewicz favors equities with a tilt to U.S. stocks and market weight International Developed. Large caps and SMID within U.S. equities, especially in quality cyclical value, are attractive to him. Also, he thinks lower rates may lead to down-in-cap participation with SMID playing catch-up later in the year. Chetouane also sees areas of value in Europe and small cap opportunities.

Asset allocation trends: Anything but cash
Cash redeployment is a big theme with investors in 2024, says James Beaumont, Head of Natixis Investment Managers Solutions. His Portfolio Clarity team, which analyzes advisors’ portfolios for asset allocation trends, has tracked a sizeable flow from money markets back into stocks and bonds. “Many investors missed the rally and are looking for opportunities. Fixed income and small caps are two favored areas,” said Beaumont. He added that higher rates and increasing dispersion within asset classes is once again driving opportunities for active managers and alpha generation.

A few actively managed strategies highlighted for adapting portfolios in uncertain markets include:
Flexible fixed income: DNCA Alpha Bonds strategy can take short and long positions on the markets and tends to have low to negative correlation with major fixed income asset classes.
Flexible growth: Loomis Sayles Sakorum Long Short Growth Equity focuses on alpha generation from long-term exposure to high quality businesses with sustainable growth prospects – as well as shorts exposure to generate alpha and provide downside protection.
Global diversification: Loomis Sayles Global Allocation takes an opportunistic, best ideas approach, leveraging  the firms’ renowned global research platform across equity and fixed income markets. Fixed income is used as an alpha driver and not just to provide ballast.

For more insights and ideas, visit Latin America or US Offshore.

Towards a New Gold Rush?

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The price of gold has risen more than 17% since the beginning of the year, making it one of the best-performing assets this year. After fluctuating between $1,800 and $2,000 in 2023, the price of gold surged in March and April of 2024, quickly reaching $2,400.

This behavior has been widely discussed. Historic in its scale and speed of movement, it is especially notable because it contravenes the historically observed relationship between gold and other asset classes. The rise in gold occurred at a time when real interest rates were rising, the US dollar was strengthening, and risk assets continued their ascent early in the year.

The link between real interest rates and gold has been broken since early 2022. Historically, the price of gold has been inversely correlated with changes in US real interest rates, and this relationship has worked well at least since 2006. From a fundamental point of view, this is due to the fact that, being a real asset that does not generate yield, holding gold becomes more costly as positive real rates rise.

Similarly, a stronger dollar usually penalizes dollar-denominated commodities (including gold) because it makes them more expensive for non-US investors (most of whom are gold investors). The rise in the dollar index by more than 4% this year has also not been an obstacle for gold’s advance. Finally, gold is often perceived as a safe haven and tends to perform well in times of stress, which has not been the case this year: US equity volatility has returned to its lows (VIX index close to 12) and credit spreads have tightened significantly. So, how can the exceptional performance of gold be explained? And, more importantly, is it sustainable?

The Demand from Central Banks

Global demand for gold by central banks has doubled since 2022, from 11% of total gold demand in 2021 to 23% in 2023. This trend continued in the first quarter of this year. Investments in bars and coins, as well as ETFs, which had increased significantly in 2020 (the year of Covid-19), have since decreased significantly. China, being the world’s largest gold producer (10% of mining production), is also the largest importer (20% of demand). The People’s Bank of China (PBOC) increased its gold reserves in 2022-2023, although the total amount remains uncertain, as it is not required to transparently publish all its gold purchases. Similarly, Chinese consumers appear to have channeled part of their savings into gold purchases, although the exact amount is unknown.

Overall, if all central banks in emerging countries reached a minimum of 10% of their reserves in gold, global gold demand would grow by more than 75%. This structural factor seems likely to continue. When surveyed in 2023, 23% of central banks intended to increase their gold reserves in the next 12 months. This impetus to diversify central bank reserves accelerated after Covid-19 and the start of the war in Ukraine. It is probably due to the perception of increased financial risk, linked, on the one hand, to the rise in the US deficit and, on the other, to the sanctions unilaterally decided by the United States against Russia (including the freezing of $300 billion in reserves).

Outlook for Gold

On the supply side, the trend is relatively stable, with annual production hovering around 3,000 tons each year, but demand prospects seem quite good. We anticipate a slightly more favorable macroeconomic context. Real interest rates are likely to remain stable at best, or even decline slightly due to the economic slowdown and the Fed’s initial rate cuts, which should support the price of gold. Additionally, the risk of a return of inflation in the opposite scenario is also favorable for gold, as a real asset, it protects against excessive inflation.

The more structural factors that have driven the increase in central bank purchases, especially in emerging countries, will persist. Geopolitical risks remain present, and the US deficit shows no signs of reducing.

However, as illustrated by the previous chart, central bank demand for gold has historically been quite volatile, as has investment (including ETFs). These two types of demand could accelerate (increasing central bank gold reserves and attracting financial investors to gold), which is our preferred scenario, but visibility on their short-term evolution remains limited. In the medium and long term, the upward trends in gold demand seem more clearly positive.

In a multi-asset portfolio, our simulations show that gold is interesting in terms of diversification, as it has little correlation with the performance of equity or fixed income. Gold also reacts positively to market tensions. A structural portfolio exposure of 3 to 5% to gold, along with other alternative assets, improves the risk/return profile of diversified funds.

Good Management of Advisor Teams Is Crucial for Growth

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In the wealth management industry, the concept of teamwork has become a central component for achieving scale and generating business value for advisory practices, according to new research from Cerulli Associates and Osaic.

The study, titled “Top-Performing Teams: Exploring the Benefits and Approaches of Building a Team-Based Advisory,” found that team-based practices achieve better results in key measures, including assets under management (AUM), services offered, and productivity.

According to Cerulli, nearly half of advisors currently work in a team structure. The trend towards teamwork is even more pronounced among larger advisory practices: 94.5% of practices with over $500 million in managed assets operate in a team-based structure, compared to only 5.5% that operate solo.

Teams benefit from optimized resources, processes, and services, and typically operate with higher levels of productivity compared to individual practices.

The research found that team-based practices have an average of $100 million in AUM per advisor, compared to $72 million among individual practices.

“One of the key benefits of multi-advisor teams is the diversity of skills, experience, and complementary knowledge. Combining the expertise of each team member allows practices to leverage their individual strengths and provide specialized services, including lending, estate planning, and tax services,” says Asher Cheses, director at Cerulli Associates.

Teams serve a broader core market, with an average client size of $1.6 million, compared to $1 million for individual practices.

Advisors seeking to move upmarket or enter a new client segment have succeeded by forming teams to expand their service offerings to include more financial planning and high-net-worth (HNW) services.

“Teams can accelerate their growth by better leveraging platform resources, such as financial planning, advisory, and high-net-worth solutions, as well as business development resources and capital solutions,” says Kristen Kimmell, executive vice president of business development at Osaic.

Fixed Income and Technology: Alternatives to a Strong Economy That Delays Interest Rate Cuts

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From left to right: Tiago Forte Vaz, María Camacho and David Hayon | photo: Funds Society

The Rise of Artificial Intelligence and Central Bank Rates in the U.S. and Europe open opportunities for investments in both technology and Fixed Income, said experts from Pictet and Edmond de Rothschild at an event in Montevideo.

The experts, Tiago Forte Vaz, CFA, Head of Intermediaries at Pictet for Uruguay, Brazil, Portugal, and Argentina, and David Hayon, Head of Sales Latam at Edmond de Rothschild Asset Management, commented on the macroeconomic scenario, agreeing that the U.S. economy is strong, which is delaying interest rate cuts.

“The resilience of the U.S. economy is noteworthy. Even Fed members weren’t this optimistic. There was talk of a recession. Rate cuts were expected, and everyone was wrong,” commented Hayon.

Forte also emphasized that inflation is the most important issue to address and noted, “The year started optimistically, but central banks didn’t adjust until September.” The expert added that this is a significant risk as the Fed “lost credibility and is willing to tolerate a greater slowdown to avoid inflation.”

Hayon, for his part, supplemented the comment by explaining that Europe has more control over inflation but will try to align rate cuts with the U.S. to avoid generating inflation.

Geopolitical Risks

Both experts said that “it is impossible not to talk about geopolitical risks.” It is a latent conflict that could escalate, commented Forte.

However, Hayon tempered this by stating that they do not believe Europe will intervene militarily in the conflict. “We don’t imagine French troops in Ukraine,” said Hayon, adding that it is believed “the conflict will be played out in negotiations to achieve an end to the conflict and avoid escalation.”

Another geopolitical risk is that 70% of the population will have elections this year. Among the most notable countries are the U.S., India, Mexico, and Russia. “This environment creates tension and uncertainty that is difficult to diversify at the portfolio level,” added Forte.

The event, moderated by María Camacho, founding partner and director of strategy at LATAM ConsultUS, also included time for strategy presentations.

Pictet: Artificial Intelligence, Bubble or Opportunity?

Forte began by asking the audience, consisting of financial advisors from the Montevideo industry, whether it is still a good time to invest in Artificial Intelligence (AI).

The regional representative emphasized the concept that technology is overvalued in the present and undervalued in the future. Forte added that it is expected that spending on technology as a percentage of GDP will double.

He also noted that although the world has already been revolutionized by AI technologies, they are still in an early stage. However, “it is growing at an exponential rate.”

Regarding investment challenges, he mentioned the tension over semiconductors between China and Taiwan and “sufficient opportunities” in public markets for these strategies.

Edmond de Rothschild: Fixed Income Still Attractive

From Edmond de Rothschild, Hayon highlighted the importance of fixed income, especially in developed markets.

The expert pointed out that although spreads have narrowed significantly, total returns are good due to high rates and warned, based on the rate context explained, that there is still time to invest in these assets and achieve very good returns.

He also commented on the benefits of subordinated fixed income. Hayon emphasized the possibility of buying hybrid bonds, where the investor buys bonds with the security of investment grade but with the yield of high yield. “Buying subordinated debt from banks and insurers will pay well,” he elaborated.

During the presentation of the EDR SICAV Millesima select 2028 investment strategy, the expert highlighted the high risk of losing reinvestment when in cash.

Today, rates can provide good returns over a year, but fixed income exceeds that return over four years.