Pixabay CC0 Public Domain. PIMCO y GE Capital Aviation Services crean una plataforma de inversión en el sector de arrendamiento de aeronaves
PIMCO and GE Capital Aviation Services (GECAS), a business unit of GE, have reached a preliminary agreement to develop an aviation leasing platform to support up to $3 billion in aircraft asset financings. The firms announced in a press release that the transaction is subject to customary closing conditions and receipt of required regulatory approvals.
This strategic investment platform will enable GECAS and PIMCO-advised accounts to acquire “new and young fuel-efficient aircraft to meet the needs of a diverse set of global airlines over many years”, they explained. The platform looks to provide “much-needed financing” for airlines which are looking to upgrade their fleets.
The portfolio will initially focus on narrowbody aircraft while allowing flexibility to invest in attractive opportunities in the widebody market. PIMCO and GECAS will consider a range of investment criteria including an airline’s assets and credit quality and also geographic factors.
PIMCO is already one of the world’s largest investors in aviation-backed debt. Both firms think that its presence in aviation financing markets combined with GECAS’ leadership role in the aircraft-leasing segment will provide “enormous flexibility” to fund the global airline industry. GECAS will source transactions, act as servicer and provide asset management services for the platform.
Essential liquidity for a critical industry
“As the airline industry struggles with the effects of the COVID-19 pandemic, the PIMCO-GECAS platform will inject essential liquidity into this critical industry by providing financing solutions at a time when there are fewer traditional financing options for airlines,” said Dan Ivascyn, PIMCO’s Group Chief Investment Officer.
In his view, aircraft remain an attractive asset class in a critical infrastructure sector supported by solid long-term growth drivers. He also pointed out that GECAS’ expertise as a world class aircraft lessor aligns with PIMCO’s “longstanding investment strategy” in aviation finance.
Meanwhile, Greg Conlon, president and CEO of GECAS, claimed to be “delighted” to team up with a premier institutional investor such as PIMCO in this strategic relationship which he thinks will enable “opportunistic plays” to support airline customers around the globe.
“While GECAS maintains an industry-leading position, this platform will ensure we can continue providing our airline customers with the aircraft needed to sustain their franchises”, he added.
Pixabay CC0 Public Domain. La relación entre el Reino Unido y la UE después de diciembre y las implicaciones para sus respectivas industrias de fondos
With less than 100 days until the UK definitely leaves the European Union, it is worth reflecting on the practical impact of Brexit on the relationship between the UK and Luxembourg in the asset management and fund industry.
London and Luxembourg are long-standing partners. With 17.1% of AUM, UK asset managers represent the second largest group of initiators of Luxembourg funds. These investment funds (UCITS and AIFs) benefit from European marketing passports. They are distributed in the EU at large, including the UK, and beyond.
The UK is in fact a very important distribution market, with Luxembourg clearly a leader among overseas funds. Roughly 25% of funds distributed in the UK are overseas funds. As at 31 December 2019, there were 8,862 funds/sub-funds distributed in the UK. From this total, 4,341 are Luxembourg-domiciled, which thus represents 49% of all overseas funds registered in the UK.
The vast majority of UK asset managers (HSBC, Invesco, Schroders, Aberdeen, M&G, just to name a few) have established their own UCITS management company or AIFM in Luxembourg. This was already the case before Brexit, but some additional 30 firms have in the meantime set up their own operation in Luxembourg. This allows them to benefit from the European management passport once the UK will have left the EU. This was a logical move when considering that the UCITS Directive and AIFMD feature both a “product” passport, meaning the investment funds themselves, and a “management” passport for UCITS management companies and AIFMs managing these funds.
Another possible way of retaining access to distribution in the EU is to set up the fund in Luxembourg while appointing a third-party management company, should the UK asset manager not have its own operation in the EU.
By far and large, ALFI’s feedback from its members is that virtually all firms have taken the necessary steps to anticipate a hard Brexit: either setting up presence for those few that needed a presence in the EU as just mentioned, or re-domiciling UK funds to Luxembourg, and making the necessary adjustments in the allocation of assets.
Unlike in other segments of the financial sector such as the clearing of derivatives, trading venues or CSDs, the concept of equivalence plays little if no role when it comes to the management and marketing of EU and non-EU funds. Indeed, the UCITS directive and the AIFMD already offered pre-Brexit a relatively clear framework.
The impact on UK and Luxembourg
What does this mean in practice for UK funds? Any fund that is not a UCITS is by definition and from a European perspective an AIF. Those UK-domiciled UCITS will lose their UCITS label. They will qualify as non-EU AIFs as from 1 January 2021. They may still be marketed to European investors subject to the conditions set out in the AIFMD, which are obviously more restrictive. Non-EU AIFs can indeed only be placed subject to the terms of the National Private Placement Regimes, if any, of each individual EU Member State. They will no longer benefit from a marketing passport as the AIFMD 3rd country passport has not been activated.
And for Luxembourg? Any Luxembourg UCITS that is today marketed in the UK will similarly no longer be viewed by the UK as a UCITS from 2021 onwards. That said, there is wide consensus among policymakers and asset managers that it is key, from an investor choice’s perspective, to keep the UK market open to overseas funds, especially when considering that UCITS are retail products with a high degree of investor protection. Today, most money market funds and ETFs marketed in the UK are overseas funds, almost invariably domiciled in Luxembourg or Dublin.
To avoid any disruption, the UK government and the FCA implemented a Temporary Permissions Regime (TPR) which enables relevant firms and funds which passport into the UK, to continue operating in the UK when the passporting regime ceases to exist on 31 December 2020. All Luxembourg investment funds registered for distribution have made use of the TPR mechanism.
The TPR is obviously a short-term facility to bridge the gap until new legislation is passed and effectively implemented in the UK. It is expected that this will take two or three more years from now.
2021 and beyond
From January 2021 onwards, the UK will become a 3rd country. The legislator may impose additional requirements on overseas funds like this is currently the case with EU funds distributed in other 3rd countries such as Switzerland, Hong Kong etc.
The UK Government (HM Treasury) launched a Public Consultation on the Overseas Funds Regime (OFR) post Brexit, to which ALFI responded in early May. ALFI generally agrees on the approach taken, in particular the concepts of outcomes-based equivalence set out in this Consultation. The main challenge for overseas funds will obviously lie in the additional requirements (such as the requirement to comply with FCA PS18/8 on the Assessment of Value) that the UK legislator, being no longer bound by EU legislation, may impose on overseas funds. It may trigger additional costs hence each overseas fund will need to weigh the costs and benefit of continuing marketing in the UK.
Delegating management
A major point of attention in the relationship between the UK and the EU post Brexit is the delegation of portfolio management. Delegation is explicitly permitted in the UCITS Directive and AIFMD. Cooperation agreements between EU Member States and third countries must be in place in case of delegation, which will be the case.
The designation of delegates in and outside the EU is subject to strict requirements of initial and ongoing due diligence, and oversight of delegates. A framework with the required protections and safeguards is already in place. As a result, there is a wide consensus in the industry that they are no reasonable grounds to revisit the delegation framework in the context of the reviews of the AIFMD and UCITS Directive.
Supriya Menon, Senior Multi-Asset Strategist at Pictet Asset Management.. Supriya Menon, Senior Multi-Asset Strategist at Pictet Asset Management.
Two powerful forces have shaped the global equity landscape in recent years – passive investing and private equity (PE). A broad range of investors have turned to index-tracking funds for low-cost exposure to the broader market. Meanwhile, a somewhat smaller but growing group have gravitated towards PE, attracted to its potentially higher returns and diversification benefits.
The growth of passive and private investment has been such that, together, the assets under management of the ‘two Ps’ have quadrupled over the past decade to some USD 12 trillion, overtaking the traditional active equity market (at USD 11 trillion).
In our view, passive and private investing might take different paths over the next five years.
When it comes to passive funds, their best days may now be behind them. Investors and regulators are becoming increasingly aware of – and concerned by – the risks that come with the expansion of index trackers. Research shows passive investing poses threats to market stability and sustainable investing.
The prospects for PE look brighter, though whether it can continue to grow its share of the pie is contingent on it becoming more widely accessible and less opaque.
Investors have gravitated towards PE, attracted to its potentially higher returns and diversification benefits
Historically, PE has been considered too much of a risk for all but the most experienced, professional investors. But that is no longer the case. One reason is the sheer size of the market. Because private equity-owned companies are proliferating while the number of listed firms is falling, the arguments for opening up PE to individual investors have become too loud to ignore. This speaks to the democratisation of finance.
That is not to say passive investment will go into reverse, just that the pace of expansion may slow as investors and regulators discover that passive strategies, while cheap and easy to access, are far from risk free.
Re-pricing risks and benefits
While passive’s low fees might look attractive in an era of post-pandemic belt tightening, that comes at a price: index trackers follow the entire market, rather than picking the best bits at any one time. That is a problem because the mispricing that has occurred during recent bouts of volatility has created fertile ground for stock pickers. The gap between winning and losing stocks will only widen as companies that embrace innovation and technology thrive and the strength of balance sheets becomes ever more important.
More generally, the rise of passive investing threatens efficient market pricing. The stock market relies on active investors to determine an equilibrium value. Yet under index-tracking, the shares of companies with large weightings attract more capital irrespective of their financial performance. So, if the system is dominated by passive investing, the price of a security ceases to function as a gauge of a firm’s underlying prospects, leading to capital misallocation. Potentially making matters worse is the concentration of the passive market. There are growing concerns that as index-tracker funds continue to accumulate assets, the lion’s share of that money will flow to the three large asset managers that control the passive industry. Already, the big three passive fund houses collectively own more than 20 per cent of US large-cap stocks; they also hold 80 per cent of all indexed money. Should those proportions continue to rise, the resulting concentration of shareholdings – known as common ownership – could reduce competition and threaten the efficient functioning of markets. There is a growing body of research attesting to these negative effects. A 2018 study (1), for instance, found that when big institutional investors were large shareholders in firms producing both brand-name and generic drugs, the generic manufacturers were less likely to produce non-branded versions. This increased prices for consumers. Similar trends have been documented in other industries where common ownership is high, such as airlines and the banking sector. This is causing alarm among regulators in Europe and the US – the Federal Trade Commission and the US Securities and Exchange Commission have both said they are monitoring developments closely.
Passive investing does not necessarily aid the development of responsible capitalism, either. Passive funds, by their nature, do not choose the companies they invest in. That reduces the potential for investors to engage with the companies and to encourage them to embrace responsible and sustainable business models aligned to environmental, social and governance (ESG) principles. Passive portfolios tend to invest in so many companies as to make direct engagement with them impractical, and the small share of each holding within the portfolio reduces the incentive on an individual company basis.
Private equity, of course, is also far from risk free, but we would argue that many of its issues may be better understood and reflected in pricing.
First, there is the problem of transparency. PE has a patchy track record on ESG, for instance, and the requirements for transparency and disclosure for privately held firms are far less stringent even if a few are now trying to change that.
Then, there is debt. PE also has high leverage (just under 80 per cent of buyout deals in 2019 were carried out at over six times EBITDA relative to roughly 60 per cent at the prior peak by this measure in 2007) (2). PE investments are also primarily in small and mid-sized firms, whose business models are less well established. These factors could weigh on PE returns in a period of pandemic-induced economic weakness. Furthermore, PE-owned businesses are excluded from some government bailout schemes, while those that are available tend to come with complex conditions that may relegate them to a last resort.
In the longer term, though, the PE sector can help to finance businesses in a period when public markets may be less open. We may see more public companies taken private, as well as PE funds gaining minority stakes in listed companies, with an eye to increasing these later.
Dry powder
Crucially, PE has plenty of dry powder, some USD1.46 trillion according to latest available data (3). That can be used to shore up balance sheets and, later, to make new investments, supplemented by additional money that major investors have signalled they would like to allocate to PE. (The reported gap between actual and intentioned allocations stands at over 2 per cent of private sector pension funds’ total assets) (4).
A potential game changer will be the drive to democratise finance. Historically, PE has been the preserve of institutions and the ultra-wealthy – a disparity that regulators are now looking to fix by opening up the market to individual investors. The US has led the way, laying the foundations for ordinary savers to invest in PE funds through employer-sponsored 401(k) retirement accounts, which analysts forecast could bring in USD400 billion of fresh cash (5). The US Labor Department, meanwhile, sanctions the use of PE in professionally managed multi-asset-class investment vehicles, such as target-date, target-risk, or balanced funds. Other countries, including the UK, are considering similar moves.
Potential attractions for current and future PE investors include diversification benefits and a broader opportunity set – not because PE companies are somehow inherently better, but because they tend to have different characteristics to listed equities.
For a start, they are younger. The median age of a company going public in the US has risen from an average of seven years in the 1980s to 11 years between 2010 and 2018. The private market also includes a large number of small but rapidly growing companies with significant intangible assets. Typically such firms do not want to disclose their early stage research publicly and therefore favour a closed group of shareholders. What is more, in the US at least, the pool of private investments is deepening. Private companies are proliferating while listed ones are in decline. Since 2000, the number of listed companies has fallen to 4,000 from 7,000.
PE also offers the possibility of benefiting from operational improvements in the way businesses are run. When executed well, this can lead to impressive returns.
However, choosing the right PE investments is far from straightforward. The fees are relatively high and investment structures are complex. Moreover the sector lacks transparency, so opening it up to less experienced individual investors (such as 401(K) holders) presents challenges for regulators. Indeed, the US Security and Exchange Commission has recently rebuked PE and hedge fund managers for charging excessive fees and appearing to favour some clients over others (6). There are calls for reform of the fee structure to make the industry more sustainable, and a few firms have already started to move in that direction (7).
Due diligence is much more important in PE than in public markets
Due diligence is much more important in PE than in public markets. According to our research, in 2018 the difference in performance between the 5th and 95th best-performing funds was 60 per cent in the US PE universe, versus just 8.5 per cent for US small/mid-cap equity funds. Studies also suggest the high persistence of manager returns, which was a feature of private equity – has declined, meaning yesterday’s winners are now less likely to top the tables tomorrow.
Due diligence is paramount: there are some signs in the US that, in aggregate, the returns gap between listed and private equity is starting to narrow. Indeed, over the next five years, we forecast global private equity returns of 10.3 per cent per annum in dollar terms, which represents a premium of just 2.8 percentage points over public equities, almost half its long-term historical average. That’s partly because of the sheer weight of capital chasing potential opportunities. Of course, the high dispersion means that some will do much better while others fare much worse. And, at a time when bond yields are very low, even a lower-than-average excess return may be attractive to many.
PE has the potential to continue to capture an ever-growing share of the equity market – as long as it succeeds in opening up to a wider range of investors and proves its potential to add value. Passive equity has already shown what can be achieved with a democratic approach and will continue to do well, but, having grown faster and for longer and attracting greater scrutiny from regulators, it may now be nearer its natural plateau as a proportion of equity AUM.
Column written by Supriya Menon, Senior Multi-Asset Strategist at Pictet Asset Management.
For more information on Pictet AM’s Secular Outlook report, detailing key market trends and investment insights for the next five years, please download here
Notes:
[1] ‘Common Ownership and Market Entry: Evidence from the pharmaceutical industry, Newham, M., Seldeslachts, J.,Banal Estanol, A., 2018 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3194394
[2] Bain Private Equity Report 2020
[3] Preqin, as of June 2019
[4] McKinsey Global Institute, “A new decade for private markets”
[5] Evercore
[6] SEC, June 2020
[7] “An inconvenient fact: private equity returns & the billionaire factory”, L. Phalippou, 2020
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
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Pixabay CC0 Public Domain. Credit Suisse AM lanza un fondo para invertir en bonos corporativos de corta duración de mercados emergentes
The AMCS Group, a third-party distribution agency, announced in a press release that “effective immediately” it will represent the Jupiter Group, as introducer for its combined UCITS offering across both Jupiter and Merian branded funds. This follows Jupiter’s acquisition of Merian Global Investors on July 1st.
Central to the strategy will be several of Jupiter’s flagship products, including Jupiter Dynamic Bond ($16.9 billion assets under management), managed by Ariel Bezalel and Harry Richards; Jupiter European Growth ($9.2 billion AUM), managed by Mark Nichols and Mark Heslop; and the Merian Gold and Silver Fund ($945 million AUM), managed by Ned Naylor-Leyland.
“AMCS will be focusing its efforts for Jupiter exclusively in the US Offshore market, targeting global private banks, US wirehouses, regional broker dealers and independent advisory firms”, said the firm. It will be partnering closely with William Lopez, Jupiter’s Head of Latin America and US Offshore, in its effort to expand the reach of Jupiter Group funds across its targeted segments and clients.
AMCS pointed out that they were closely involved with Merian Global Investors prior to its acquisition by Jupiter. Its partners developed Merian’s footprint in the Americas region from 2013 to 2018 as employees of the Old Mutual Group. When Merian, formerly Old Mutual Global Investors’ Single Strategy business, was spun out of its UK parent in a 2018 management buyout, Andres Munho and Chris Stapleton formed the AMCS Group to serve as introducer for its UCITS funds in the Americas.
Chris Stapleton, co-founder and managing partner at the AMCS Group said that they are “delighted” to have the opportunity to partner with Lopez and the wider Jupiter team to further solidify the firm’s position in the US Offshore market. “We believe there is an opportunity to leverage some of the existing relationships and framework we have developed with Merian to fast track Jupiter’s growth in this important market segment”, he added.
Meanwhile, Andres Munho, co-founder and managing partner at the AMCS Group, commented: “We are very pleased with the breadth of high-quality investment capability our partnership with Jupiter will enable us to deliver to our clients. Jupiter’s excellence in a number of fixed income sectors, including its flagship Dynamic Bond, provide an excellent addition to what we have historically offered through Merian.”
The AMCS Group’s Miami based team focused on the Jupiter effort
Stapleton will be overseeing global key account relationships across the region, as well as advisory and private banking relationships in the Northeast; and Munho will be overseeing all advisory and private banking relationships in Florida. Meanwhile, Francisco Rubio, regional vice president at AMCS, will be responsible for the Southwest and West Coast regions of the US, as well as private banks and independent advisory firms in Miami.
The team will be supported by Alvaro Palenga, sales associate and Virginia Gabilondo, client services manager.
US equities were lower during the month of September, ending a streak of five consecutive months of gains. Investors sold shares as a reaction to the news of a resurgence of coronavirus cases in Europe. The “Big 5” tech companies as well as other growth/momentum stocks contributed to the weakness for US equities over concerns of crowded positioning and stretched valuations.
Fears are intensifying over a resurgence of COVID-19 from students going back to school, colder weather and the start of influenza season. However, increased optimism about the progress of a vaccine and treatment trials have investors hopeful that the economy will not endure another global shutdown.
While dialogue has remained open for a bipartisan deal for additional coronavirus stimulus, political tensions have made negotiations difficult and unclear. The upcoming presidential election has added more volatility to the markets as well as the political uncertainty associated with a potential delay of declaring a winner due to mail-in ballots and likely litigation.
While technology stocks have been the primary beneficiaries during COVID-19, other areas of the economy (including housing, retail consumer spending, business capital expenditures, and government-backed infrastructure related spending) will likely lead in a recovery. As stock pickers, we can use the current volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets and are trading at discounted prices.
Merger activity in the third quarter topped $1 trillion, an increase of 94% compared to the second quarter and the strongest quarter for dealmaking since the second quarter of 2018. Worldwide M&A now totals $2.3 trillion year-to-date, a decrease of 18% from 2019 levels. Technology, Financials and Energy & Power were the most active sectors accounting for 43% of all dealmaking. Europe and Asia Pacific have remained bright spots for M&A, increasing 15% and 19% respectively, while dealmaking in the U.S. has declined in 2020 by 42% to $815 billion. Global deals valued between $5 and $10 billion have increased 23% over 2019, while mega deals (deals valued over $10 billion) have declined 33%.
Column by Gabelli Funds, written by Michael Gabelli
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GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
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GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
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Alantra AM has announced in a press release the acquisition of a 49% stake in Indigo Capital SAS, a pan-European private debt asset manager.
Based in Paris, Indigo is an independent, established player in the alternative finance market specializing in the financing of small and medium-sized European businesses worth between €20-300 million through a combination of private bonds and preferred equity. Since inception, the firm’s 7 investment professionals have completed over 50 investments for a total value of more than €800 million across France, Italy, the Netherlands, Switzerland, and the UK.
“The investment in Indigo Capital represents yet another step in the growth plan of Alantra AM, and follows the incorporation of Grupo Mutua as its strategic partner to support the firm’s ambition of building a diversified pan-European asset management business”, said the firm in the press release.
Through its existing teams and the strategic stake in Indigo Capital, Alantra and its affiliates will have over €1 billion of assets under management covering different private debt strategies, including senior debt, unitranche and private bond solutions to corporates and long-term flexible financing for real estate companies.
The different teams actively cover 7 European markets.
Pixabay CC0 Public DomainJana Vukomanovic. Jana Vukomanovic
As global markets attempt to recover their poise in the relentless shadow of COVID-19, one hot topic has perhaps challenged economists more than any other: What will be the pandemic’s effect on inflation? We believe the inflation rate will be between zero and 1%, and this is already priced in the market. But the picture for 2021 is only now starting to clear, presenting a new landscape of opportunities for investors in the inflation-linked bond market.
Many experts predicted the global coronavirus lockdown would be disinflationary – and they were right. The fall in activity did have a clear effect on prices for a variety of reasons. At AXA IM, we now forecast 2020 inflation to average 0.4% in the Eurozone, 1.0% in the US and 0.7% (1) in the UK – rising to 0.7%, 1.4% and 1.5% respectively for 2021. The impact, however, has not been a one-way street – we are already starting to see signs of higher pricing in some sectors which could suggest market expectations are too low.
One factor that has served to depress core inflation has been the inclusion of more online pricing into the data, an understandable measure given the impact of the lockdown on consumer behavior. However, we believe several other factors are having the opposite effect. Food prices, for example, have tended to climb during this period, as have telecoms prices after a long period of decline.
Hidden effects
In some areas we are still assessing the longer-term trend, although there does appear to be some evidence that education and health prices could continue to rise, alongside some localized trends in leisure and tourism services where consumers are no longer travelling to cheaper destinations. Inflation surveys could have a difficult job adapting to new realities in consumption patterns.
More fundamentally, there is evidence that the post-lockdown response from consumers has pushed some economies towards a more aggressive rebound than had been feared, accompanied by a parallel rise in prices. Figure 1 below shows that recent inflation numbers in the US have been the most solid seen in years, and that the rebound has been broad-based. In addition, as we move into 2021, inflation numbers worldwide will reflect a negative base effect from oil prices, which slumped as the pandemic spread.
From a more macro perspective, we see a medium-term risk that the COVID-19 outbreak could exacerbate tensions in the current model of globalization. Pre-pandemic – alongside US President Donald Trump’s ‘America First’ approach to trade – there had already been a shift towards a more protectionist tone in global markets. Now the virus has forced countries and businesses to re-assess the flow of goods, services and people across borders.
Hedging into view
These observations mean we believe there is a general risk to the upside for inflation as we move into 2021. And it is a risk that we believe has not been adequately reflected in market expectations.
One way to gauge how markets expect inflation trends to evolve is to look at inflation swaps. The chart below (Figure 2) shows that realized inflation since June is consistent with the top-end outlooks for inflation. The inflation swap market, however, is still pricing in the lower end, particularly in Europe but also to some extent in the US. Our expectation is for a potential aggressive rebound of inflation at the beginning of 2021, and we believe investors should consider preparing for that eventuality.
Naturally, these factors to the upside are encouraging more investors to explore ways they can hedge inflation risk and is having a tangible impact on the inflation bonds market, already underpinned by active monetary policy and supportive fiscal policy. Consumer behavior, the rise of protectionism and the possibility of regulatory price effects (for example through green policies) will be central to the potential uptick in prices – but central banks will also do what they can to push inflation higher from this point.
Column written by Jonathan Baltora, Head of Sovereign, Inflation and FX – Core at AXA IM.
To learn more about this topic, please contact Rafael Tovar, Director of Wholesale/US Offshore Distribution, AXA IM atRafael.Tovar@axa-im.com.
Notes:
[1] AXA IM estimates as of September 2020
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Pictet Asset Management has developed a new investment strategy that invests in publicly listed family businesses, companies that count founding families as major shareholders. Pictet-Family was repositioned on the 29th May 2020 and has seen its investment universe change. It is managed by Alain Caffort and Cyril Benier. In this interview, they discuss the strategy’s guiding philosophy.
What exactly is a family business?
How you define a family business is a matter of interpretation. Sometimes it’s obvious, say when founders hold very large stakes in their own names. But the boundaries can sometimes be blurred. We take a systematic and rigorous approach to our definition. Family businesses that make up our investment universe are publicly listed companies in which an individual or family holds a minimum of 30 per cent of voting rights. The family can be by blood or marriage, the stake can be held through a foundation or some other vehicle. Such information is rarely freely available; unearthing it often requires painstaking research.
Why 30 per cent?
Research shows that active participation in the general assemblies of publicly listed companies averages around 60 per cent of share ownership. At 30 per cent, a shareholder (or group of closely tied shareholders) effectively has the casting vote and, thus, control.
Why focus on family businesses?
Family businesses are the lifeblood of our society and the backbone of the global economy. They contribute between 50 per cent and 70 per cent of countries’ gross domestic product and employ the majority of their workforces.
There’s a large body of research showing family businesses tend to outperform their peers – financially and in terms of shareholder returns.
Of course, as anyone with experience of families and family disputes knows, this type of ownership can also lead to a number of problems – which is why it is also crucial to take an active approach to investing in these companies. And that’s where we can make a difference – ensuring we avoid the pitfalls in this otherwise attractive investment landscape. Please read our related article on the universe for more about why it makes sense to invest in family businesses with an active approach.
This suggests corporate governance is a big focus for you, is that right?
Environmental, social and governance (ESG) factors are all important sources of investment performance. But when it comes to investing in family businesses, governance is key. That’s because governance is intrinsic to a company’s overall values and culture.
We use several bespoke indicators in order to draw out what’s acceptable and what isn’t. For example, we tolerate a lower degree of board independence from family companies – after all, the close alignment between the family’s and business’ fortunes is one of the reasons these companies do so well – but we’re much more stringent on the composition and approach of the company’s audit, remuneration and nomination committees.
What sorts of family businesses do you invest in?
We have no geographic or size preference – with the caveat that the shares have to have a fairly substantial minimum daily liquidity of USD5 million. We accept that this liquidity requirement keeps us from investing in some potentially interesting companies, but it also protects our clients from the worst effects of market dislocations such as we’ve recently seen.
Importantly, even after applying this stringent criteria, there are enough investable companies left – our universe is made up of 500 companies globally that operate across all sectors. It’s also worth noting that our liquidity limitation means that our strategy’s performance isn’t down to size effects. It’s not a case of trading performance for liquidity and thus volatility, as is the case with many small-cap funds. So we know that the outperformance of family businesses really is down to family effects.
So why do family businesses outperform?
We believe there are three primary reasons. First, the families tend to have most of their wealth and reputations invested in these companies, their interests are closely aligned. This, in turn, leads to the second reason, that family businesses often reinvest a larger proportion of their profits than their peers. Finally, stability of ownership also allows management to take a long-term view, rather than obsessing about the next quarter’s profits.
Are family firms weighted to certain countries and sectors?
Not in a way that narrows our investment options. Family companies operate across all sectors and industries. And we have a more balanced regional distribution than capitalisation-weighted global equity indices – for instance, 60 per cent of the MSCI All Country Index (ACWI) is based in North America, while our weighting is around 40 per cent.
But it is true we prefer some sectors to others. For example, Consumer Discretionary companies make up around 12 per cent of the MSCI ACWI but have nearly twice the weighting in our portfolio. And the majority of these companies are based in Europe, including some of the great luxury goods companies.
We’re also relatively heavily weighted towards Communication Services and Consumer Staples.
Why Pictet Asset Management?
Pictet-Family brings together the core capabilities of the Pictet group: Family businesses, Global funds, identification of winning market themes and a strong focus on ESG factors.
We know what the drivers of a successful family business are and what characteristics of a family business we are looking for. After all, we have a strong case study right at home: Pictet is a family business and a very successful one.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
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Pixabay CC0 Public Domain. El coste de riesgo de la banca casi triplica los niveles anteriores a la pandemia
Lombard International Group announced the expansion of its Institutional Solutions Practice (Practice) globally. This will provide institutional investors, based across the globe, with more effective ways to invest in U.S. private markets. Also, “it will assist U.S. and non-U.S. investment managers to raise capital through compliant investment structures that can more efficiently enhance net returns”, stated the firm in a press release.
The Practice focuses on improving global access to U.S. private markets for institutional investors such as pension funds, corporations, sovereign wealth funds, foundations, endowments and funds of funds, to enable their investment allocation to be “more efficient and effective”, says the wealth manager.
Operating across major global wealth hubs, the Practice is headed up by financial services veteran John Fischer, who leads a multi-disciplined team of senior executives. In the U.S., this includes Tom Wiese, Executive Managing Director; Sandy Geyelin, Executive Managing Director, and C. Penn Redpath, Senior Managing Director. Also, Jason Tsui, Managing Director, will lead the distribution strategy in Asia; Juan Job, Senior Managing Director, will be in charge of Latin American operations; and EMEA will be led by Peter Coates, who recently joined Lombard International as Global Director of Institutional Solutions.
“Institutional Solutions has been one of the key drivers of our growth. We’re excited to launch this internationally expanded Practice across the major global wealth hubs in Asia, Europe, LatAm and the U.S. Our team’s many decades of experience in combining insurance solutions and investment for optimized outcomes, as well as their subject matter expertise in alternative investments, means they are perfectly positioned to assist strategic partners and clients focused on U.S. private markets, which present attractive investment opportunities”, said Stuart Parkinson, Group Chief Executive Officer.
Michael Gordon, US CEO & Global COO, commentedthat, as markets remain volatile and uncertain, the institutional appetite for U.S. private markets is increasing. “Despite recent events, financial markets remain globally connected, and non-U.S. institutional investors in particular continue to be a key driver of asset flows into U.S. private equity, private debt and real assets. I’m delighted to spearhead the growth of this practice globally, to help institutions better achieve their unique investment objectives”, he added.
Meanwhile, Fischer, Executive Vice President and Head of Distribution,pointed out that their aim with this internationally expanded Practice is to truly make every basis point count. “We have created an effective global offering, using time-tested insurance structures which help investors reduce the friction associated with U.S. private assets, improving investment yields and reducing administrative burdens. Importantly, our solutions are cost-efficient, transparent and highly customizable to the unique needs of institutional investors”, he said.
Foto cedida. Morgan Stanley cierra un acuerdo para adquirir Eaton Vance por 7.000 millones de dólares
Morgan Stanley has entered a definitive agreement to acquire Eaton Vance, a provider of advanced investment strategies and wealth management solutions with over $500 billion in assets under management (AUM), for an equity value of approximately $7 billion.
The acquisition will make Morgan Stanley Investment Management (MSIM) a leading asset manager with approximately $1.2 trillion of AUM and over $5 billion of combined revenues. The asset manager stated in a press release that it avances its “strategic transformation” with three world-class businesses of scale: Institutional Securities, Wealth Management and Investment Management.
MSIM and Eaton Vance consider themselves “highly complementary” with limited overlap in investment and distribution capabilities. Eaton Vance is a market leader in key secular growth areas, including in individual separate accounts, customized investment solutions through Parametric, and responsible ESG investing through Calvert. “Eaton Vance fills product gaps and delivers quality scale to the MSIM franchise. The combination will also enhance client opportunities, by bringing Eaton Vance’s leading U.S. retail distribution together with MSIM’s international distribution”, points out the press release.
“Eaton Vance is a perfect fit for Morgan Stanley. This transaction further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class investment banking and institutional securities franchise. With the addition of Eaton Vance, Morgan Stanley will oversee $4.4 trillion of client assets and AUM across its Wealth Management and Investment Management segments”, said James P. Gorman, Chairman and Chief Executive Officer of Morgan Stanley.
Meanwhile, Thomas E. Faust, Jr., Chief Executive Officer of Eaton Vance stated that by joining Morgan Stanley, they will be able to further accelerate their growth by building upon their common values and strengths, which are focused on investment excellence, innovation and client service. “Bringing Eaton Vance’s leading brands and capabilities under Morgan Stanley creates a uniquely powerful set of investment solutions to serve both institutional and retail clients in the U.S. and internationally”, he added.
The details of the transaction
The firms point out that this transaction is attractive for shareholders and will deliver long-term financial benefits. “Both companies have demonstrated industry-leading organic growth and have strong cultural alignment”.
The combination will better position Morgan Stanley to generate attractive financial returns through increased scale, improved distribution, cost savings of $150MM – or 4% of MSIM and Eaton Vance expenses – and revenue opportunities.
Under the terms of the merger agreement, Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833x of Morgan Stanley common stock, representing a total consideration of approximately $56.50 per share. Based on the $56.50 per share, the aggregate consideration paid to holders of Eaton Vance’s common stock will consist of approximately 50% cash and 50% Morgan Stanley common stock.
The merger agreement also contains an election procedure allowing each Eaton Vance shareholder to seek all cash or all stock, subject to a proration and adjustment mechanism. In addition, Eaton Vance common shareholders will receive a one-time special cash dividend of $4.25 per share to be paid pre-closing by Eaton Vance to Eaton Vance common shareholders from existing balance sheet resources.
The transaction will not be taxable to Eaton Vance shareholders to the extent that they receive Morgan Stanley common stock as consideration. The transaction has been approved by the voting trust that holds all of the voting common stock of Eaton Vance, says the press release.
The acquisition is subject to customary closing conditions, and is expected to close in the second quarter of 2021.
