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Global Environmental Opportunities: Transforming Sustainable Investment

Gabor Molnar Bosco Verticale Milan Unsplash — Pixabay CC0 Public DomainGabor Molnar. Gabor Molnar

Thanks to the emergence of a thriving environmental products industry investing to safeguard the planet no longer means sacrificing returns.

When it comes to investing in rapidly-evolving industry such as environmental products and services, identifying the most promising opportunities isn’t straightforward.

That is why investment managers of our Global Environmental Opportunities (GEO) strategy have developed a process that deploys both a scientific, rule-based framework and traditional company-by-company research to build their portfolio.

The first step in the process is to identify firms with the strongest environmental credentials. These are companies that neither make excessive use of raw materials nor generate disproportionate amounts of waste. Then, from this group, we seek businesses that specialise in the development of products or services that mitigate environmental damage.

In order to identify firms with these characteristics, we perform an ecological audit that establishes the environmental footprint of more than 100 sub-industries. This audit incorporates two novel measurement tools – the Planetary Boundaries (PB) framework and Life Cycle Assessment (LCA).[1]

The PB is a model that defines the ecological “safe operating space” within which human activities should take place.[2]

Developed by a team of leading scientists and economists, the PB framework sets ecological thresholds for nine of the most damaging man-made environmental phenomena (see chart). The model quantifies a set of boundaries, which, if breached, would endanger the environmental conditions that have been instrumental to human prosperity over thousands of years. For example, if the world’s supplies of freshwater are to remain stable, humanity’s total consumption of water must remain below 5,000 to 6,000 cubic kilometres per year. Similarly, the PB states, if carbon dioxide emissions are to remain within acceptable levels, the proportion of CO2 in the atmosphere must not rise above 350 parts per million.

Fig. 1 planetary boundaries

Source: Stockholm Resilience Centre, Pictet Asset Management, as of 29.12.2019

The LCA, meanwhile, is a framework that is used to calculate the waste emissions and resource usage of each industry that makes up the global economy. The model analyses every activity in the production of a good or service: the extraction of raw materials, manufacturing processes, distribution and transport, product use, and disposal and recycling.[2]

In our process, we combine the LCA with the PB to construct a lens that can pinpoint industries with the smallest environmental footprint.

Here is an example of how the process works:

The planetary boundary states that the ozone layer should be 276 millimetres thick. For the ozone hole to begin to close, the world’s total emissions of ozone-depleting substances should remain below 6.6 billion tonnes per year. At the corporate level, this means that the threshold for the emission of such substances is set at 2.48 kg per USD1 million of revenue per year. Only companies whose entire LCA-based emissions stay within the Planetary Boundaries are eligible for inclusion in our investment universe.[3]

Such analysis is necessary because we believe most of the environmental reporting that is carried out today is too narrow or too subjective. The majority of environmental footprint models focus exclusively on manufacturing processes; they fail to take into account the wider ecological impact of, say, suppliers, or of the products and services over their entire lifespans. Take the car industry as an example. A car’s lifetime emissions are four to five times higher than those stemming from its manufacture alone. Just measuring the level of emissions during the car production process does not give a true assessment of automakers’ overall ecological footprint.

Once the LCA-PB audit is complete, the second phase of the process involves taking a deeper look at the core business of each company that is identified in step one. Here, our goal is to determine which firms are developing products and services that make a real difference in reversing environmental degradation. For each company we assign a proprietary “thematic purity” value, which indicates what proportion of a firm’s enterprise value (EV), revenue or EBITDA is derived from environmental products and services. For a company to qualify for inclusion in the portfolio, its purity value must be at least 20 per cent.[4}

These filters narrow down our investment universe to about 400 companies. Here, we then carry out an additional analysis to determine which companies in the universe meet the criteria defined by the PB. We then conduct detailed company-by-company research to identify firms with the most attractive risk-return characteristics. We use a proprietary scoring system, which takes into account the strength of the business model, management quality, valuation and operational momentum metrics. The ESG analysis is systematically integrated in this stage as well.

The result is a concentrated portfolio of around 50 stocks – each investment combining an attractive risk-return profile with a small ecological footprint.

Sizing the environmental footprint: Planetary Boundary-Life Cycle Assessment

Source: Stockholm Resilience Centre, Pictet Asset Management

But our investment process does not end there. Our aim is to be an active owner of the companies we invest in. For this, we exercise voting rights through a proxy voting platform and engage with the companies to ensure they have the best possible governance structure in place. We believe this responsible form of capitalism not only mitigates risks but also leads to sustainable long-term capital returns.

Investors have long appreciated the need to protect the planet but also have harboured misgivings about the financial trade-offs that might involve. Now, thanks to emergence of thriving environmental products industry, those concerns should quickly fade. Protecting the environment and investing for capital gain can indeed go hand in hand.

Fig. 2 Actively engaging

Example of how we’ve engaged with a UK-based environmental utility company

Pictet AM

Source: Pictet Asset Management

Opinion by Luciano Diana, Senior Investment Manager in the Thematic Equities Team running the Pictet Global Environment Opportunities at Pictet Asset Management.

[1] We use Carnegie Mellon University’s Economic Input-Output Life Cycle Assessment (EIO-LCA) database to quantify the environmental impact of 157 corporate sub-industries, defined by MSCI and S and P Global with its Global Industry Classification Standard methodology. For more, see http://www.eiolca.net/ and https://www.sci.com/gics

[2] Steffen et al, Stockholm Resilience Centre, September 2009

[3] We remove companies that are on our “black list” – consisting of companies commercialising controversial weapons, such as anti-personnel mines, chemical or cluster munitions from the investment universe

[4] The portfolio has an average purity score of at least 60 per cent

Santander Launches “Overcome Together”, A Space Aimed to Help People and Businesses Deal With the Coronavirus Crisis

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Banco Santander has launched “Overcome Together”, an open and accessible space for individuals and companies, which contains information and resources to help support the fight against coronavirus (COVID-19). This resource center, which can be accessed by any person or company, whether or not a Santander customer, is adapted to local needs with country-specific websites with information from official sources and digital resources focused and updated to address the most critical local needs. It is already available in Spain, Portugal and Mexico, and will very soon be available in other European and American countries.

This initiative is part of Banco Santander’s global aid programme, called Santander All. Together. Now, which includes a fund of at least EUR 25 million for medical equipment and supplies, open to donations for the general public; liquidity facilities for businesses, and payment holidays to lessen the economic impact of the coronavirus.

The new space is accessible at http://superamosjuntos.com and includes a section with official information from governments and assistance programmes for households (e.g. help with rent, official health information, leisure and sports alternatives), businesses and self-employed professionals.

In the ‘How can we help’ section, there is a directory with a range of volunteering opportunities, with links to official platforms where people can collaborate or make donations.

In the ‘Life at home’ section, there are ideas for learning something new each day, entertainment and resources for the family (activities with children, cooking), as well as tips and collaborative tools to support teleworking. ‘Health and wellbeing’ provides links to official online diagnostic tests, recommendations for exercising at home and links to meditation and relaxation apps and professional healthcare services.

“Overcome Together” also includes a map with the closest healthcare facilities, pharmacies, supermarkets and bank branches or ATMs from any bank.

Performance that Doesn’t Have to Cost the Planet

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Sustainable investment not only protects the world for tomorrow’s generations. It can also provide superior returns for investors.

The move to safeguard the world’s natural resources will benefit companies that can provide solutions to the global environmental challenge.

With the Pictet-Global Environmental Opportunities (GEO) fund investors can capture investment opportunities from across the $2 trn environmental sector, a market which Pictet Asset Management expect to grow 6 per cent per year (1).

At a glance

Invest exclusively in companies solving global environmental challenges such as pollution control, water supply, renewable energy, waste management and sustainable agriculture. The fund is also a good option for those who don’t want to invest in sectors such as oil and gas or mining.
The fund invests in the world’s most environmentally-responsible public companies – those with a small environmental footprint and that are building products or services that have a positive impact on the environment.
Pictet Asset Management believes the fund could be a good alternative to traditional global equity funds for this portion of an investors’ portfolio, and for those who want to benefit the environment whilst investing.

Performance that does not have to cost the planet

Investors don’t necessarily have to compromise on performance if they want to invest sustainably. As leaders in both thematic and responsible investing, we combine the two to deliver strong investment performance for our clients, as well as sustainable growth for the planet.

PICTET-Global Environmental Opportunities FUND

Source: Pictet Asset Management. Data as of 31.12.2019. Performance is for the I USD share class, net of fees. Past performance is not a guide to the future.

How can investors measure the environmental benefits of their investments?

Once a niche activity, environmental investing is now moving into the mainstream. The problem investors face is that there is no universally accepted method for measuring a company’s environmental footprint. So how do you know if your fund is delivering the environmental benefits it promised?

Our distinctive process is based on a scientific, rule-based framework. The Planetary Boundaries model was developed in 2009 by a group including scientists from the Stockholm Resilience Centre and identifies nine of the most critical environmental dimensions that are essential to maintain a stable biosphere required for human development and prosperity. These include carbon emissions or climate change, fresh water, land use, biodiversity and others.

The team use this framework to identify companies with the strongest environmental credentials across their entire value chain, from the extraction of raw materials and manufacturing processes, through to distribution and transport, product use, disposal and recycling.

Demonstrable impact…

Using the Planetary Boundaries framework to compare Pictet Global Environmental Opportunities versus MSCI World Index

Source: Pictet Asset Management, NEOSIS, 30.06.2019

As the chart above shows, the fund achieves a significantly more positive environmental impact than that of a typical global equity index across all nine dimensions, particularly in climate change. For example, as shown above in the top left chart, carbon dioxide emissions of companies in our portfolio stand at 454 tonnes of CO2 equivalent per million dollar of annual revenue (tCO2 eq/mn$), compared with 1,948 tonnes for the MSCI World index.

What are the risks?

Past performance is not a guide to future performance. The value and income of an investment can fall as well as rise and you may not get back the amount originally invested.
The fund may be invested in emerging markets. Investments in emerging markets can potentially be of higher risk and volatility than those in developed markets.
Investments are made in assets that are denominated in foreign currency and are not hedged back to the base currency of the fund. Changes in exchange rates may therefore affect the value of the investments.

Notes:

⁽¹⁾Source: Pictet Asset Management 2018.

Read more on our GEO strategy

Important notes

The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments or services.

Any index data referenced herein remains the property of the Data Vendor. Data Vendor Disclaimers are available on assetmanagement.pictet in the “Resources” section of the footer.

Wealth Planning In Times Of Coronavirus

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Captura de Pantalla 2020-04-07 a la(s) 15 — PXfuel. ,,

Personal wealth, especially in times of crisis, is subject to many types of risk, and those risks are numerous;

forfeiture;
devaluation;
double taxation;
information leakage and theft;
political unrest;
inflation;
lack of legal certainty;
information exchanges;
lawsuits and attacks from third parties;
inheritance issues; and
fiscal voracity.

Depending on the type of asset and most especially on the country of residence of the owner, some of these risks will be more prominent than others.

This is one of the reasons why wealth planning is a highly personal matter, which means that the same trust structure may be very efficient for a certain family and a bad choice for another.

At the same time, this is a very dynamic field and the need to be up-to-date is paramount: formerly efficient solutions may not be appropriate today.

Through efficient wealth planning, the impact of a number of these risks can be avoided or at least mitigated; hence its growing importance.

When we say wealth planning, what exactly do we mean?

In a nutshell, wealth planning consists of determining what is the most efficient way to own each of the assets composing a person’s or a family’s wealth and what is the most efficient way to transfer these assets to the next generations. Both of these actions will fulfill the goals of their original owner and go a long way to mitigating the risks mentioned above.

THE CURRENT SITUATION

We now live in extraordinary times. The COVID-19 crisis is exceptional and its impact on wealth planning is as great as it is on our everyday life.

Broadly speaking, crises situations tend to increase the probability of the risks we have mentioned, and they often amplify the magnitude of their consequences.

For example, there is no country (with the exception of Venezuela) that is considering a rise in taxes and there are many, in fact, which have reduced them or extended their maturity.

Nonetheless, in my opinion it is highly likely that, once the COVID 19 threat has been resolved, many countries facing unprecedented economic crisis will be forced to take pro-active measures with regard to taxation.

Another troubling consequence in times of crisis is the restriction of personal freedom.

In the case of wealth planning, this could come about through new regulations enacted by the state on individual privacy, much like what we saw enacted in the wake of 9/11. I would not be surprised at all to see this happen once more.

Finally, every economic crisis (especially a global one) creates unemployment and an increase in street violence, which amounts to a clear threat to wealth, especially in regions which were already prone to violence before the pandemic (such as several Latin American countries).

At first glance, it is impossible to deny that the current crisis raises considerably the importance of efficient wealth planning, and since most of us have more free time than before the outbreak, I would like to suggest that this topic should go onto your “to do” list while you are in quarantine.

WHAT ARE THE RICH DOING?

My experience shows that the wealthiest have been the first to adapt their behavior to this current situation.

From a strictly financial point of view, decision-making in this type of families have been focused on:

rebalancing investment portfolios;
taking advantage of investment opportunities (or get ready to do so); and/or
preserving assets in the long term.

From the point of view of wealth planning, they have:

used this opportunity to transfer wealth to the next generation or to trust structures;
revised and updated their trust structures; and/or
worked on pending issues (among others, family protocols or business succession planning).

WEALTH PLANNING OPTIONS FOR ALL

While not all wealth planning tools are available to all people (as occurs with any other good or service), the truth is that all of us can take actions to protect our legacy.

It should be noted that wealth planning can be done not only through the establishment of various types of legal vehicles but also through the purchase of a certain type of asset.

If, for example, a person’s objectives are exclusively related to tax, wealth planning could be based on the acquisition of tax-exempt financial assets.

If, on the contrary, a greater degree of privacy were pursued, an investment could be made in non-financial assets, not subject to information exchange between countries (i.e. real estate, jewelry, vintage cars, works of art and/or cryptocurrency).

Naturally, there are times when the main goal is to seek greater legal certainty or address matters of inheritance or asset protection. In these cases, wealth planning will necessarily require the creation of one or more legal structures.

In this last scenario, the key is to choose the right structures, jurisdictions and providers.

The legal tools available for wealth planning go from the simple drafting of a will to international relocation, or the creation of companies, trusts, foundations and family investment funds and/or purchasing life insurance.

Some of these tools allow for a more orderly inheritance, while others go further, offering clear tax advantages. Such is the case of irrevocable discretionary trusts, which in most countries of this region allow the individual to postpone income taxes and avoid wealth taxes; or the case of family investment funds, typically permitting a postponement of income taxes and eventually a lower payment when retrieving funds.

The most important aspect in determining the best wealth structure for an inidivdual client is to know their objectives and needs, to analyze the risks they are facing and to study in depth the laws of their country of fiscal residence.

And, to close the loop, in matters of international wealth planning, it is always critical that solutions should adapt themselves to planning and not the other way around.

Column by Martín Litwak

Funds Society Will Continue to be With its Readers… Holding On!

| For Beatriz Zúñiga | 0 Comentarios

Ressitire FS con subtitulos_Moment` — . Campaña

From Miami, Montevideo, Mexico City, Oslo and Madrid, Funds Society and Futuro a Fondo’s teams have not let our guard down and we continued workiong, from home, to offer our readers the best information and analysis on the fund industry, yes, with great smile and with a lot of rhythm.

With this video we wanted to join the numerous social media campaigns in favor of staying home to resist and defeat COVID-19. In these hard days of confinement, uncertainty and grief, we want our spirit of struggle, resistance and joy to accompany you, alongside the information.

The management, marketing and writing teams opened the doors of our houses to be closer to our readers and convey the meaning of this song, which has become a hymn against the coronavirus.

Together we will overcome this pandemic and return to work, meet and live. But in the meantime, Funds Society will continue to stand by its readers, from all corners of the world… As we say in Spanish, “Resisitiendo,” or holding on!

Luca Paolini (Pictet Asset Management): “The US Job Market Is Deteriorating at a Rate 10 Time Faster Than in The Great Financial Crisis”

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According to Luca Paolini, Pictet Asset Management’s (Pictet AM) Chief Strategist, we are living in unprecedented times and this is consequently an unprecedented bear market. To put things in perspective, the cease of economic activity to prevent the spread of the coronavirus has already destroyed 6.6 million jobs in the US economy in the week ending on March 28^th. At the peak of the Great Financial Crisis there were 600.000 jobs destroyed, this means the US job market is deteriorating at a rate 10 times faster than in the 2008 -2009 period.

There is a general feeling that the market is overacting, that investors are panicking, but in Paolini’s view, the market is behaving rationally. The market reaction is aligned with the decline in growth experienced by the economy. Approximately, 35% of the world’s population is not allowed to work, an unprecedented territory in which markets are incredibly difficult to navigate.

The performance of different asset classes, measured from market’s peak to month’s end, has revealed some unexpected results. At some point in the sell-off, Global Equities (measured by the MSCI ACWI index) experienced a decline of 35%. Unpredictably, the equity markets that have done the best were Japan and China, with a drop of only 13.6% and 13.8%, respectively. These two markets are the ones that tend to suffer the most when there is a global recession. Conversely, the US stock market, a defensive market by nature, has not performed exceptionally well, suffering a 22.6% drop.

By carefully looking at Global Equity sectors, most of the traditional defensive sectors did well. Additionally, some sectors considered more cyclically, like IT or Mining, did not perform so badly considering the depth of the actual recession.

The comparison of this bear market with any of the previous ones is unfair because the nature of the shock is completely different. The decline in Global GDP, which is of epic proportions, could be potentially close to 20% for the first quarter. The market is already pricing this decline not only in the United States, but also globally.

The good news is that there are already unprecedented monetary and fiscal stimulus in place. The net liquidity injection implemented by G5 central banks is around 10% of nominal global GDP, while the sum of the actual and the announced global fiscal policy stimulus represents a 3.2% of GDP. Basically, the stimulus is 50% greater than that executed during the Great Financial Crisis. A large part of the stimulus is coming from the fiscal side, something that Paolini considers a correct stimulus, since it is not a financial crisis but rather a decline in economic growth.

When will the trough be reached?

This is a health crisis and will continue until the virus is under control, therefore, the key variable to consider is the global infection rate. It is also important to determine who has already passed the virus and now is immunized, as this could help governments to discern which people can return to work and resume normal lives.

The decline in earnings for American companies will be bad but not catastrophic. Pictet AM expects a 30% drop in United States profits, which is roughly the same decline that was experienced between 2008 and 2009.

“The data that will be critical here is the duration of the lockdown. An additional month of global lockdown represents roughly a 10% decrease in corporate earnings. But, for some companies, this drop may be vital. In terms of dividends, the annual growth in dividend per share is implicit in the price of the dividend future and the market is assessing a 35% decrease in dividends worldwide -a drop of 54% and 22% in Europe and United States, respectively”, said Paolini.

It is very difficult to determine when equity markets will hit their lowest point in this bear market. However, from a macroeconomic point of view, almost all the preconditions for a market trough have already been met. The missing elements for the bear market to finally bottom are perhaps more shocking numbers in the US economy, a steeper bond yield curve, and of course, an improvement in the rate of the coronavirus infection. When all these requirements are met, it will be time to return to equities strategically thinking for a five-year horizon, in which US stocks could yield a real return of 5% or 6%.

For now, Pictet AM maintains a cautious stance. Defensive sectors such as pharmaceuticals are overweight, with long positions in gold and Swiss francs. In the fixed income space, after the great widening of the spreads that have occurred, they closed the short position they held in investment grade bonds and decreased their exposure in high yield debt, as a potential and significant increase in default rates is expected.

Possible scenarios of recovery

One possible scenario is a V-shaped recovery in which the coronavirus outbreak will be over in the next 3 – 4 months. However, even in this optimistic scenario, there will be some long-term implications, as there are not many companies and sectors that have strong enough balance sheets to survive in an environment like this.

“Even the Fed has claimed that 25% of small-cap companies in the United States could go out of business if the situation continues for two more weeks. Conversely, there are some incredibly strong names in the tech sector, as the recession has been very favorable to technology, as more online services are consumed during the lockdown. In addition, technology companies have incredibly solid balance sheets”, explained Paolini.

The risk here is that some sectors such as the deep cyclicals (energy, banks or industrials), which normally tend to do well once the recession is over, will have received strong support from the government and the government will probably ask for something in return. A possible dilution of shareholders and nationalization is expected. Dividends, share buybacks and CEO compensation will be under scrutiny.

Finally, if the recovery is U or L-shaped, which Paolini believes is a very likely and fair assumption, investors will take the opportunity to buy very good names at a discount price. In this case, sectors like the pharmaceutical industry and other industries within quality growth will continue to perform well.

“Pharmaceutical stocks are not at very expensive levels, but there is also a risk that the government could impose restrictions if the situation worsens. Online services, internet providers, food producers and the retail sector are the most obvious winners in this bear market. There has already been a market move. However, it is not about choosing sectors, but how solid and resilient a company is. For now, we are maintaining a defensive bias. Depending on how the economic recovery turns out, we will look for deep cyclical or quality growth stocks. Hopefully, the health crisis can be overcome in a few weeks, rather than in the coming months. But it is too early to say”, concluded Paolini.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation.

Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

Gundlach: “The Biggest Winner Out of All of This May Be the American Economy”

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Screen Shot 2020-04-06 at 1 — Jeffrey Gundlach. two sinks

The selloff caused by the COVID-19 outbreak has further to go, and U.S. financial markets are not likely to see a bottom until later in April, said DoubleLine Capital CEO Jeffrey Gundlach in a webcast meant to address the economic effects of the coronavirus pandemic.

During the webcast called “Tale of Two Sinks,” a reference to the 2008 financial crisis and the current one, as well as the “kitchen sink” approach to stimulus taken by fiscal policy makers and the Fed, Gundlach said the economy and financial markets will never be the same, and the worst is yet to come.

The so called new bond king believes the coronavirus sell-off is not over yet and the market will hit a more “enduring” bottom after taking out the March low. “I think we are going to get something that resembles that panicky feeling again during the month of April.”

He also said that the market was acting “somewhat dysfunctionally” and that banks’ projections of a “v-shaped” US economic recovery were highly optimistic. Instead, he said that this year’s market declines might resemble those from the 1929 stock market crash, where the financial markets held their low levels for nearly a year before worsening again.

“I don’t think it will be back to where it was prior for a long time, particularly on a real basis,” he said.

Gundlach argued that financial markets are behaving dysfunctionally, in part because of the ongoing affect of monetary and fiscal stimulus packages.

The Fed’s monetary stimulus is choosing “winners and losers” in fixed-income markets, which are not functioning as a safe haven in the current environment, but creating irrational disparities in performance between different asset classes, “and at some point “another sink” will be necessary to restore some rationality to financial markets,” said Gundlach.

But in time, he believes that “the U.S. economy may actually be in a “better place” as the recovery is likely to focus on a more resilient economy with more manufacturing and self-sufficiency in the U.S. and less emphasis on the American consumer,” Gundlach said.

“The biggest winner out of all of this may be the American economy, once we get past a rough patch,” he said.

Gundlach also said that the Fed’s monetary stimulus has already eclipsed all of its accommodative interest rate and quantitative easing polices used during the 2008-2009 global financial crisis and “Great Recession,” while Congress’s $2.2 trillion fiscal stimulus is equally unprecedented.

INTL FCStone: “In the Current Environment, It Is Very Tough to Look at Fundamentals”

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Screen Shot 2020-04-02 at 12 — Pixabay CC0 Public DomainIira 116. INTL FCStone's Vision 20/20: Global Markets Outlook Conference

Since the Covid-19 outbreak first emerged in January, the primary concern among economists and investors revolved around how a temporary paralysis of the Chinese economy — the world’s second largest — would affect global supply chains.

However, Yousef Abbasi, Global Market Strategist at INTL FCStone Financial Inc. – Broker-Dealer Division pointed out during INTL FCStone’s Vision 20/20: Global Markets Outlook Conference, that as the disease moved toward the west, “at this point the market is resigning itself to the fact that the impact of the coronavirus is going to be well beyond China and the first quarter of 2020.”

“When you start to impact Western Europe and when you start to impact the United States, now you’re impacting the global economy way more significantly because you’re impacting these demand markets,” Abbasi said emphasizing on the fact that the pandemic is no longer impacting only the supply side of the equation. In his opinion, it is very important to “asses how the demand side is going to be impacted while the virus is spreading in the west.”

The strategist believes that given the current environment, “it is very tough to look at fundamentals,” mainly because there is very little clarity as to how long will this outbreak last, or when the economy can restart, and also because of the fact that when the curve does start to flatten, that doesn’t mean we can return to normal behavior. “If we do return to normal human and economic behavior, we risk the chance the curve goes parabolic again. Just from the perspective of how long this potentially can last, there’s still a great deal of uncertainty,” he said.

Other things to look at this year are the 2020 Elections, which could be a “potential catalyst,” and the Fed’s guidance regarding inflation.

Merger Arbitrage Investments Represent the Most Attractive Opportunity Set in Decades

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Screen Shot 2020-04-02 at 7 — Wallpaper Flare CC0. Wallpaper Flare

Opportunity: Merger arbitrage investments represent the most attractive opportunity set in decades as a result of levered arbitrage funds facing margin calls, and multi-strategy funds exiting merger investments entirely. We have been approached by other institutional investors to establish a special purpose fund to take advantage of wide spreads caused by the market dislocation. We agree with these clients that now is a great time to add cash to merger arbitrage investments.

At the end of March, merger arbitrage spreads had “baked-in returns” of approximately 10%+ gross (before annualizing) when deals close over the coming months. The opportunity within these portfolios would be greater than 10% in addition to the new investment opportunities that currently exist at materially larger spreads because of the market dislocation. We expect more than 60% of the positions in the portfolio should be completed in the first half of this year, allowing us to harvest gains and reinvest the capital in additional attractive investments. In the last couple of weeks alone, more than 4 acquisitions have been completed after receiving regulatory approvals, shareholder approvals, or the expiration of tender offers. The acquisition price for TerraForm Power was actually increased earlier in March, which highlights buyers’ commitment to consummating acquisitions and is further evidence the deal market continues to present attractive opportunities. There are additional deals in the fund that are on the finish line, which will result in near-term realized gains.

Arbitrage vs. Equities: Returns in equities will be beta-driven, however we believe to be in a better position to generate alpha and returns in merger arbitrage. Equity buybacks will slow dramatically and volatility will persist. Equity exposure could be achieved more effectively by adjusting overlays and hedges.

Arbitrage vs. Investment Grade Credit (“IG”): Investing in the higher-quality end of IG would likely generate mid-single digit annualized returns assuming credit spreads normalize. A merger arbitrage portfolio should generate higher returns.

Investing in lower-quality IG would likely generate high single-digit/low double-digit annualized returns, still less than in a merger arbitrage portfolio. With lower-quality IG you also run the risk of investing in “fallen angels” that have not yet been downgraded to high yield, which would result in further bond price deterioration. There is a perception in IG credit that defaults do not occur, but if and when there are defaults it will have a broad impact on spreads and bond prices. Additionally, investing in IG Credit will dramatically change the liquidity profile of a portfolio. Credit liquidity is the worst in decades and wide bid/ask spreads could mean returns in credit could be illusory if managers are unable to source supply.

On a separate note, we would like to highlight that the cost of carry when hedging USD exposures for the non-USD currency classes has decreased, which is a benefit to these shareholders. This decrease has been primarily driven down / caused by the tightening of USD interest rate spreads to Europe’s already low (negative) rates. At the current rates, we forecast the cost of carry to equate to approximately 1.40% annualized.

We will continue to monitor the current deals in the market and anticipate market opportunities tracking the global environment, with a keen eye globally on deal terms and market factors.

Column by Gabelli Funds, written by Michael Gabelli

__________________________________

To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:

GAMCO MERGER ARBITRAGE

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.

Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476

GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

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.

Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to ﬁnd out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reﬂect the manager’s current view of future events, economic developments and ﬁnancial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

David Page: “The Fed and Congress Are Trying to Plug the Hole the Coronavirus Will Leave in the US Economy”

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David Page Axa IM — Foto cedidaFoto: David Page, economista sénior de AXA Investment Managers. Foto: David Page, economista sénior de AXA Investment Managers

After a couple of weeks’ of battling, Congress fagreed on a stimulus package thought to total $2trn (9.2% of GDP). This is an unprecedented stimulus, which according to David Page, Head of Macro Research at AXA Investment Managers, represents 9.2% of GDP.

The package began as a Senate Republican proposal estimated at around $850 bn, but over the ensuing time has morphed into a package that is estimated to more than double the combined GFC packages – the Economic Stimulus Act 2008 and the American Recovery and Reinvestment Act (2009). Senate Democrats had resisted earlier passage of the bill because it was not sufficiently focused on households, state or local governments. Democrats also wanted sufficient oversight of how a large portion of the package, to support larger businesses, was distributed. On Wednesday night 25, the Senate approved the measure with a unanimous vote of 96-0 and the House of Representatives voted out loud on Friday 27, with which the stimulus plan was approved.

The stimulus package contains

$500bn in bank loans and direct assistance to US companies, states and local governments affected by the virus (including $75bn to large corporates including airlines).
$377bn to small businesses (sub-500) to help fund payrolls in coming months. These payments will be structured as up to $10m interest free loans to businesses, but will be ‘forgiven’ proportionate to the number of workers kept on payrolls.
$250bn in direct checks to US individuals ($1200 per person, $500 per child).
$260bn in expanded unemployment insurance, raising payments by $600 per week and extending coverage duration by four months.
$150bn funding for states
$340bn additional Federal government spending

US Treasury Secretary Mnuchin stated that these payments would come quickly. He stated that loans to small businesses would be made next week and that individual payments would be paid within three weeks. Democrats secured more precise oversight for the distribution of stimulus funds to large corporates after accusations surrounding the distribution of TARP over a decade ago. An independent Inspector General will be appointed who will work with a panel of five members picked by Congress. A weekly report on the disbursement of funds will be produced.

While eye-watering in scale and a complement to the range of measures enacted by the Federal Reserve, questions remain about whether even this will prove sufficient. Governors from Maryland and New York have suggested that there is insufficient aid to states most affected by the virus. In combination, the Fed and Congress are trying to help US households and businesses plug the significant hole that the coronavirus will leave in the economy over the coming months. The problem is no one can be sure how big that hole will be. The median estimate for jobless claims (released today) is to rise to 1.64m, although some estimate more than double that. St Louis Fed President Bullard recently said unemployment could rise to 30% in Q2. Such a sharp rise would suggest a double-digit fall in real disposable incomes in Q2, which would in turn exacerbate a sharp fall in domestic spending not just in Q2, but over the coming quarters. The stimulus package is designed to prevent such a deterioration, particularly by providing direct support to firms and incentivising them keep workers on payrolls, and to individuals through direct payments. This complements the Fed’s actions to facilitate lending to businesses to keep afloat while the virus-related drop in demand passes. But only the coming weeks will show how successful these measures will prove.

The stimulus package approved by Congress is also in part designed to bolster confidence, particularly for financial markets. To that extent, it has proved successful with the S&P 500 index rising by 10.5% as certainty over the passage of the stimulus rose. This easing in financial conditions in part offsets the material tightening over recent weeks which has provided an additional headwind to activity. Broader market moves saw the impact of the stimulus mix with ongoing efforts to curb liquidity issues in USD markets. 2-year yields have fallen by 10 bps to 0.30% over recent sessions, while 10 year yields have fallen by around 7 bps over a similar timeframe to 0.79%. The dollar has fallen by 2.4% against a basket of currencies this week as dollar liquidity scarcity has started to ease.