The AMCS Group Strengthens its Team with New Miami Based Hire

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The AMCS Group, the recently established, Miami-based third-party distribution firm, is pleased to announce the appointment of Fabiola Peñaloza as regional vice president. She joins the firm at an exciting time, just weeks after its launch announcement and confirmation of a new distribution relationship with Old Mutual Global Investors (OMGI).

Fabiola will report to Andres Munho, managing director and co-founder, who is also based in Miami. She will initially be tasked with supporting Andres in continuing to strengthen the firm’s position with private banks and wirehouses in Miami, as well as helping to develop a number of new and growing relationships in Colombia, a country where she has previously worked.

Ms. Peñaloza has more than 15 years of experience in the financial services industry in the United States and Latin America. She recently moved to Miami from Colombia, where she worked for six years in Credicorp Capital Colombia S.A in Bogotá, leading the UHNW segment of the company from the Asset Management division. Previously, she worked in both investments and trading for some of the leading private banks in Miami and New York, including Standard Chartered Bank International, Credit Agricole Private Bank, Bank Boston International and Morgan Stanley.

Andres Munho, managing director, the AMCS Group, comments: “We are delighted to have Fabiola join the Miami team here at the AMCS Group. Her experience in the industry, including portfolio management as well as sales, will fit perfectly with our investment centric approach to client development and servicing. We all look forward to her contributions to our ambitious growth plans.”

Fabiola Peñaloza, regional vice president, the AMCS Group, comments: “I have known Andres and the team for several years as a client and have always admired the quality of their service. During their tenure at Old Mutual, the team established a great reputation and strong position in the industry for OMGI and I look forward to helping continue this growth trajectory as part of the AMCS Group.”

The AMCS Group team details:

Chris Stapleton, co-founder and managing director, manages global key account relationships across the region, as well as advisor relationships in the Northeast and West Coast.

Andres Munho, co-founder and managing director, oversees all advisory and private banking relationships in Miami, as well as firms located in the Northern Cone of LatAm, including Mexico.

Santiago Sacias, senior vice president and partner in the firm, based in Montevideo, leads sales efforts in the Southern Cone region, which includes Argentina, Uruguay, Chile, Brazil and Peru.

Fabiola Peñaloza, newly appointed regional vice president, is responsible for select advisory and private banking relationships in Miami, as well as firms located in Colombia.

Francisco Rubio, regional vice president, is responsible for the Southwest region of the US, as well as independent advisory firms in South Florida and Panama.

The team is supported by Virginia Gabilondo, customer service manager.

BigSur Partners Invites Scott Galloway to Unveil the Secrets of Amazon, Apple, Facebook and Google

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During the last twenty years, four technological giants, have been able to generate an unprecedented source of wealth for their shareholders, creating products and services that have transformed society and which are deeply rooted in the daily life of billions of people. But, could the time have come to consider how much power in the business world we want to continue to give these innovation leaders? Scott Galloway, Professor of Marketing at NYU Stern University and author of the book “The Four: The Hidden DNA of Amazon, Apple, Facebook and Google”, argued for it during the celebration of an event organized by BigSur Partners, the multi-family office founded in 2007 by Ignacio Pakciarz, in collaboration with the NYU Stern University.

The event, which took place in Miami in early February, was the first of a series of presentations in which BigSur Partners aims to have leaders, experts, and academics across different sectors and industries participating in order to offer their clients the best investment ideas. “We are honored to be co-hosts of this event with NYU Stern given our commitment to collaborate with the best minds in our network. Internally, we created the “BigSur Intelligence Unit” in which we strive to find the best ideas in academia, industry experts, leading family offices and other counterparts interested in financial markets. We also believe that it is important to always look at the world from different angles and to listen carefully to innovative thinkers,” said Ignacio Pakciarz, economist, founder and CEO of BigSur Partners.

According to Galloway, Amazon, Apple, Facebook and Google target the most primitive human instincts, which are then reflected as a body organ: Google channels its efforts towards the brain, Facebook represents the heart, Amazon targets our digestive system and Apple would be the company that champions sexual attractiveness. As a result of their respective strategies, they have created enormous value for their shareholders.

Since the great recession, its stock market capitalization has grown exponentially and currently only four nations, the United States, China, Germany and Japan have a GDP higher than the capitalization accumulated by these four companies, which is close to 3 trillion dollars. “

After studying these companies for ten years and examining them thoroughly during the last 24 months, Galloway came to the conclusion that the four big technology companies have to be regulated because they have reached a scale that could stiffen the economy.

Facebook is the largest social network in the world with 2.07 billion active users, who connect at least once a month, and 1.4 billion people connecting daily and also owns 6 of the 10 most downloaded mobile applications. With applications WhatsApp, Facebook Messenger, Instagram, Facebook and Facebook Lite, any smartphone becomes a distribution vehicle for Facebook.

In turn, Amazon represents 44% of the electronic commerce in the United States -the fastest growing distribution channel in the world-. “55% of sales made on Black Friday were made through the firm. 62% of American households provide a recurring income to Amazon through their Amazon Prime service. As if this were not enough, Amazon also owns 70% of the market share of the voice business, through Amazon Echo, the new appliance that will transform society.”

Likewise, the revenues obtained by Google in advertising as of December 2017, of approximately 90.9 billion dollars, represent 92% of the totality of the advertising market in the United States.

After presenting his argument about the monopolies created by the four largest technology companies, Galloway suggested that the introduction of regulation does not necessarily restrict capitalism, but that it could actually revitalize the market.

Galloway concluded by mentioning the need to break these monopolies, not because of tax avoidance or the destruction of employment they incur, but by the need to increase the number of innovators in order to avoid that the only competitors of these four companies be themselves, or that when a potential competitor appears, it is acquired by one of the four at a price that fewer and fewer companies can afford. It is about creating an ecosystem with a greater participation of venture capital companies, with a more diversified source of employment, a broader tax base and greater competition among companies.

Once the event concluded, Ignacio Pakciarz showed his enthusiasm for the concepts expressed by Professor Galloway. “They are very interesting, and perhaps even radical for a technologist and defender of free markets. His idea of regulation as the only means by which to protect innovation is an interesting stand on the argument. As investors in the creative economy, we believe that this event is valuable to understand the cultures of these technological giants and how they operate, as well as the implications that regulation can have on the stock and venture capital markets,” he concluded.

Henk Grootveld (Robeco): “The Digitalization of the World Has Led to the Introduction of Collaborative Robots”

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In his speech during the celebration of the “2018 Kick-Off Masterclass Seminar” in Palm Beach, Henk Grootveld, Head of Trends Investing at Robeco, compared two photographs of New York to explain the next wave of digitalization. The first one, was taken in the year 1901, at Fifth Avenue, and only one car was driving among a vast amount of horse carriages. The first internal combustion engine had been invented 20 years ago by Mr. Benz and his nephew, and the use of cars was far from extended. However, in twelve years’ time, in the same street and city, horse carriages became the exception and the first car models dominated the streets. New York went from one scenario to the other quite fast, simply because cars were cheaper than horses and easier to maintain.

In the same way, consumers went digital when Apple introduced its first iPhone in June 2007. The world has changed, and smartphones are a vital part of daily activities, a third of relationships between people and half of purchases are made through smartphones.  

Today, the digitalization of the world has led to the introduction of collaborative robots.  Rethink Robotics has created Sawyer and Baxter, ‘smart’ robots that can be taught new skills rather than being programmed and that can work together with humans, as they are full of sensors. Most of collaborative robots are used in the car’s industry, which is experimenting a high degree of transformation.

“In Germany, this process of transformation has been called the Industry 4.0, because it is the fourth attempt to become more efficient. The first industrial revolution started with the use of steam, the second one, brought manufacturing processes, the third, introduced computers and simple robots, and in the fourth revolution, robots can be connected and communicate with people through the internet of things. This new phase will radically change production in the next 10 years, in the same way as the smartphone introduced a change on how we think about consumption”, he said.  

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The rise in robot use is particularly pronounced in Asia, specifically in the countries that have a problem of demographic aging, like South Korea and Japan, whose working population has been shrinking in the last 6 years.

“China’s working population is also diminishing, there will be a huge need to replace labor for robots. Specifically, they are expecting to go from the current rate of 68 robots per 10.000 employees to 150 robots. It is possible that they could get this target sooner or that they overshoot it. It is my belief, that by 2022, China will be somewhere around 200 hundred robots per 10.000 employees, while in the United States, the current number of installed industrial robots per 10.000 employees is 190”, he added.  

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Automatization and digitalization are transforming all different sectors in the world and will definitively change the way people is related to reality. The Economist magazine has a very positive view, about robots, production of food and the idea that everything comes cheaper and is locally produced. However, The New Yorker, has a gloomier view, depicting a world in which robots will take all the jobs, showing two sides of the same coin. “Some estimates foretell that more than 50% of the known jobs in the world will disappear in the next 15 years. People will start to work in new companies”.  

According to the World Economic Forum, advanced technologies will increase efficiency and reduce costs by up to 30%. Moreover, they forecast that factories can shorten their production times by 20% to 50%.  They believe that globalization will become a trend of the past, production will become more local, transforming manufacturing into specialized and flexible production hubs able to be adjusted to the needs of consumer. “Adidas has already moved their manufacturing line from Thailand to Germany, where they are producing all their expensive running shoes as customers order them. They measure clients’ feet, in the shop or online, and within 24 hours, they produce the shoe and send it to customer’s door using smart manufacturing and 3D printing. Another example is Maserati, the Italian exclusive automaker, that has introduced a software in designing and production that has reduced the time-to-market by 50%, from 12 years to 6 years, by implementing technology related to the internet of things. At the same time, 3D printing technology is allowing huge advances and positive effects to the needs of every individual, for example, the technique of making 3D printed prosthetic limbs is very valuable in building prostheses for children, which are normally more complex due to their small size and constant growth”.

The electric self-driving car

At the same time, the artificial intelligent co-bots will change our society and the car industry. The introduction of electric self-driving cars will reduce accidents by roughly a 90% and will erase the need for repair shops or car insurance.

 “Electric cars will eliminate all nitrogen oxide fumes and fine particulate matter, as well as it will reduce smog. China has become one of the largest advocates of electric vehicles, Beijing will replace all its buses with electric engines in one year. Breathing Beijing’s air reduces 10 years the expected life of its population versus any other city in China”. 

The digital content per car will increase by 450% and will turn the car from hardware to software. “Two Swedish companies, Ericsson and Volvo, are working together to develop intelligent media streaming for self-driving cars. The idea is to adjust the journey to reduce the time in the car, but maximizing the time to watch content, allowing customers to choose routes and select content tailored to the length of their commute”.

Additionally, the introduction of robot taxi’s will improve mileage per car, dissolve traffic jams and make most parking spaces useless. “We normally only use a 5% of the time of our cars, and the other 95% is not used, while robo-taxis use the 43% of the time, gaining a huge efficiency and avoiding the need of parking lots. Waymo, Robo Taxi and Smart Nation Singapore are the leaders”. 

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Digital finance

When it comes to digital finance, emerging markets are in the lead. “During the Chinese New Year celebrations of 2017, about CNY 462 billion (approximately U$D 68 billion) were exchanged in online payments, representing 343 million transactions, a 48% year on year increase, and 760,000 hongbao’s per second – hongbaos are red envelopes with cash as a monetary gift, a Chinese tradition during Chinese New Year believed to symbolize good luck and ward off evil spirits-. China and India are set to become larger in listed FinTech than the rest of the world combined.  

In the next ten years, cash will become an exception and online payment methods will become mainstream. Digital finance will open the way to 2 billion people who currently do not manage their financial affairs.

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Cyber Insecurity

Finally, the lack of cybersecurity is the biggest threat to digitalization. In July 2017, global companies like Maersk, WPP, FedEx and Merck struggled to continue with their normal operations after being victims of a huge cyber-attack that compromised hundreds of computers, equipment and other technology. Some months before, the malware Wanacry had hit around 150 countries around the world, demanding ransom payments in the Bitcoin cryptocurrency. But far from being addressed, the problem will get worse in the future with the increase of cloud computing, which intensifies its vulnerability.   

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Ed Verstappen (Robeco): “The “Winner-Takes-All” Effect is Increasingly Felt in the Technological Platform Segment”

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Of the three secular trends pursued by the Robeco Global ConsumerTrends strategy, the digitization of consumption was by far the strongest in 2017. Consumption through technology and consumption in emerging markets exceeded the consumption of famous brands. In his speech during the celebration of the ‘2018 Kick-Off Masterclass Seminar’ in Palm Beach, Ed Verstappen, Client Portfolio Manager, explained how end-of-year profits confirmed the strength of the digital consumer: “Technology companies such as PayPal, Amazon and MercadoLibre showed strong profits, while the US retail sector shows a general weakening. The commodity consumption sector was weakened in both the US and the European Union, but benefited from the start of new opportunities for mergers and acquisitions. In addition, there was an attractive recovery at the operating level in most companies in the luxury sector. We believe that much of what we have seen in 2017 will be developed in the same way in 2018.”

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Growth stocks dominated the markets. Both the FANG, (Facebook, Amazon, Netflix and Google), and its emerging version, the BAT (Baidu, Alibaba and Tencent), are the drivers for a relevant part of the market. Some of the risks that these stocks entail are valuation levels: “Shareholders tend to like companies that offer high levels of profitability, but they also ask themselves, ‘what will come next? Should I take my profits and leave the position, or do I feel that it will continue to grow later? In that case we take a strategic approach, even if it is our favorite company, with a correct trend, we make sure to sell what is showing a false growth, at least partially its exposure. An example would be Facebook; we have reduced its beta in the portfolio, replacing it with Chinese technology companies, which have provided the portfolio with greater benefits than its US counterparts. Facebook, which for a long time was among the top positions of the fund, may be affected by the increase in regulations. The benefits obtained in advertising were especially good, but we can see the problems that the current use that is being given to the Facebook platform can lead to. In contrast, Instagram, one of its subsidiaries, is in our opinion much more promising than the Facebook platform.”

The fundamentals of the largest internet platforms are very solid; in fact, Facebook has experienced 18 consecutive quarters with a profit growth of over 50% Google has reached 31 quarters with organic revenue growth of 20%, its stocks have risen, but the good news is that they are supported at a fundamental level by strong profits and a boost in revenue. Likewise, Microsoft has achieved a growth of its cloud computing business of more than 90% for ten consecutive quarters. “The ‘winner-takes-all’ effect is increasingly felt in the technological platform segment.The dominant companies in the internet sector take the entire market share. But to be honest, this is something that also happens in the luxury sector, where large companies have a good position and weaker companies do not have such a good position.”

The strategy’s investment process is based on finding secular trends that change the world in a disruptive way, but from the macroeconomic point of view, the current environment serves as support: a low unemployment rate, high consumer confidence, and potentially higher interest rates. The US leads in terms of consumption, something logical, as its economy has a greater consumption base. Although consumer confidence is strong, spending has been somewhat depressed, so there is still room for improvement, especially if wages start to rise.

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Secular Trends in Consumption

Within the digital consumer trend, Robeco’s strategy focuses less on advertising on mobile devices and more on the video game industry. Historically, the video game business had not had a continuity in profit flow, it was more a matter of hit-or-miss with games’ acceptance, but developers are now focusing on building franchises in the long term. Digital downloads have made the intermediary disappear, which has increased productivity in the industry. “There are new opportunities for monetization in the videogame industry, in which revenues from sales of virtual products or accessories for games, such as new levels, can be increased through micro-transactions. Mobile games offer developers a good opportunity to attract high margins in advertising. In addition, the so-called e-Sports are gaining followers; the retransmission of some finals has reached 36 million viewers. The platforms that distribute these events have seen their number of followers double. Specifically, Twitch.TV, the platform that Amazon owns, has registered more daily viewers than CNN.”

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The second trend within digital consumption is retransmissions of online video and through mobile devices. The competition for video diffusion has increased, with a greater number of competitors: YouTube, Facebook, Amazon Prime, etc., while the tendency is that Internet advertising exceeds television advertising. Search engines such as Google or Bing and social networks like Facebook, Instagram and Snapchat obtain more than 70% of their profits through online advertising.

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In addition, the third trend in digital consumption, the means-of-payment trend, shows that there is still a long way to go. Cash is still the dominant form of payment, but more and more forms of online payment are gaining ground. PayPal is currently the most used platform in e-commerce transactions. Meanwhile, small and medium enterprises benefit from their innovative payment offerings such as Square, a company that was founded by the creator of Twitter, or Apple Pay; however, the three main payment platforms continue to use the current payment infrastructure, which is why Visa and MasterCard continue to maintain a strong position.

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As for the emerging consumer trend, it is expected that, by the end of 2018, China’s retail distribution business will reach domestic sales of $5.8 trillion, the same figure expected for the US. The change in the behavior of the emerging consumer is determined mainly by the increase in the living standards of the Chinese population, which increases their spending on leisure, travel, and luxury goods. The anticorruption campaign carried out by the Chinese government led to a substantial decrease in the growth of the luxury sector, but little by little the sector is experiencing a rebound. The growth of China’s middle class should continue to drive growth in luxury purchases, along with a recovery in consumer confidence in mature markets.

The adoption of online commerce in China is much more advanced than in Western markets. The lack of a well-established physical infrastructure has accelerated the transition to online commerce. Alibaba broke its sales record on Singles Day with sales figures that exceeded those of 2016 by 42%.

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Finally, within well-known brands’ trends, companies that have a strong brand presence tend to outperform their competitors throughout the cycle. They usually enjoy a better perception of product performance, greater consumer loyalty, and a more inelastic consumer response in relation to price changes and higher profit margins.

Bjorn Forfang (CFA Institute): “FinTech is Going to Fundamentally Transform this Industry in the Next 5 to Ten Years, if Not Sooner”

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Every time Bjorn Forfang, Deputy Chief Executive Officer at CFA Institute, travels, he always gets asked the question of what could be his specific advice on how capital markets and how finance industry in certain countries should behave. His answer is always the same: “Although there are differences in financial markets, the very core of what we are trying to accomplish is exactly the same in every country around the world, and it comes down to trust, ethical and professional standards, and that is the core value proposition that exist whether you are in Brazil, Chile or Uruguay, or any other country in the world,” he stated at the “2018 Latin America Investment Conference,” an event jointly hosted by the CFA Institute and the CFA Society of Brazil in Rio de Janeiro.

The CFA Institute wants to globally lead the investment industry by globally promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of the society. And, as presumptuous at this may sound, they really mean to benefit of the society: “We simply believe firmly, that fair and free capital markets underpinned by strong ethical values and highest professional standards is critical for prosperity on the financial industry. The financial industry has contributed significantly to society, and I cannot think on how many countries could actually achieve prosperity in the long run and reduced poverty without free and fair capital markets. Financial markets are the intersection of capital and ideas. There are people that may have ideas but no capital, and there are people that have capital but no ideas, it is that intersection what creates prosperity for nations and that is what we believe, and that is why the benefit of society is such an important part of the value statement of what the CFA Institute stands for,” he added.

The CFA Program started out 60 years ago, mostly in US and Canada, but now is a global program, with a 45% of growth in the Asia Pacific region and a 33% of growth in the Americas region, where the growth of the mature markets is flatting as well, and most of the growth comes from Latin America, being one of the fastest areas of growth for CFA Charterholders. “Argentina and Uruguay had a combined society because Uruguay was not big enough by itself. But once Uruguay obtained more than 50 members and had a path to reach 100 members, the inside rule of the CFA Institute to create a CFA Society, they obtained the approval from their board and became a separate society. Colombia will be the next country to have a CFA Society in Latin America, they already have 80 members and 400 candidates.”

The CFA Societies of Latin America interact among them because they have similar issues. They are developing economies, they have a sort of immature capital markets when compared with some of the developed markets, and they cooperate on multiple levels. And they also share best practices when it comes to member and continuing education events. Moreover, the Latin American advocacy look forward to preserving best practices issues and concerns among capital markets challenges.

The lack of trust

According to Forfang, one of the biggest problems in the financial industry is the fundamental trust gap that has been widening for many years, between what the financial industry delivers and what the costumers and clients perceive are delivering. “The biggest problem is trust, we have conducted a survey all over the world, with 3,000 to 4,000 respondents from institutional and retail investors, released on March 28th. The survey asked about the concept of trust, about the quality of the financial advice that clients obtain and about attributes that the clients are looking for among other questions. In Brazil, there is a decent amount of people who still trust the industry. But Brazilians in this survey are also extremely skeptical, that trust is not something that they take for granted, is something that industry must deliver on, every single day, and that is a challenge for us, but is also an opportunity to seek for much higher professional standards in other to meet that challenges that we have, among our clients. The trust gap can be closed in a couple of ways, as trust is really about two things: credibility and professionalism, putting both together is a solution to narrow the trust gap.”

In the path of reestablishing the trust, Forfang believes that honesty and transparency are key. “Fees need to be transparent. Products, if they are complicated need to be fully explained so people who buy it understand exactly what it is that they are buying, and honest about expectations. There is a gap between how people think how they may live on retirement relative to what the actual reality is in every company of the world, and I think is up to us to be honest and explain what it does mean. There must be a commitment to put the client first when we are giving advice to a client, it interest must be ahead of our interest and that of our employers.”

The other challenges

There are other problems that the financial industry is facing: active management does not seem to be delivering value after fees, which is why you see the proliferation of passive moderate ETFs, quantitative strategies are reaping away alpha opportunities, replacing human beings with computers, and the result of all of that is margin compression. Also, the rising of markets for the last several years certainly have added a secular market compression to the industry, that leads to consolidation of asset management firms, as they are trying to build scale in distribution, technology and product offering.

Another challenge is fintech and its effect in the financial services industry. The CFA Institute firmly believes that Fintech is going to fundamentally transform this industry in the next 5 to ten years, if not sooner. Lastly, there is the regulatory scrutiny that the financial industry faces. These are the reasons why there is a need for full and complete commitment to lifelong learning by the professionals of the financial industry.

“There are topics in the curriculum of the CFA Program that are static that will always be, like the fundamental analysis, asset allocation, portfolio strategy, quantitative strategy and economics. Those things will always be in the curriculum. But then, in our continuing education program, professionals can rotate in and out topics that looks like they are going to come up, but not sure, like some aspects of fintech or blockchain. We want to make sure that our members are up to date with the latest thinking, but that is different than putting it into a curriculum,” he concluded.    

Serena Williams Headlines Amundi Pioneer’s Annual All Star Tennis Charity Event

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Serena Williams Headlines Amundi Pioneer’s Annual All Star Tennis Charity Event
Pixabay CC0 Public DomainFoto: Alex Huggan. Serena Williams encabeza el All Star Tennis Charity Event de Amundi Pioneer en Miami

Amundi Pioneer was proud to sponsor the Annual All Star Tennis Charity Event hosted by Cliff Drysdale on Tuesday, March 20th at the Ritz Carlton in Key Biscayne. Serena Williams, world-renowned tennis champion, headlined this year’s tournament, and was accompanied by tennis professionals: Simona Halep, Darren Cahill, Frances Tiafoe, and Nick Kyrgios.

2018 marks the 3rd year Amundi Pioneer has sponsored the event. This year the event benefitted ACEing Autism, a national non-profit organization that serves children with autism throughout the U.S. by enhancing their lives through tennis.

The round robin tournament gave the opportunity for 24 amateur players to interact, learn, and play with some of the best tennis players in the world. Select Amundi Pioneer representatives and U.S. offshore clients were invited to sit in the court-side VIP section at the tournament in support of the cause of the afternoon.

Richard Spurling, Executive Director & Founder at ACEing Autism, mentioned that his company services more than 1,000 autistic children nationwide every week and is working to expand to reach more children by enhancing their program offerings. Their plan is to reach 4,500 autistic children by the end of 2021.

According to Amundi Pioneer, “the event was a great success, and raised a grand total of $40,000 for an important charity.”

Please click here to view a video of the event. For any questions regarding this event, please contact Kasia Jablonski.

Zeina Latif (XP Investimentos): “Brazil Tends to Fail Managing Success, But it is Not that Bad Managing Crisis”

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According to Zeina Latif, Chief Economist at XP Investimentos, Brazil tends to fail in terms of managing success, but it is not that bad managing crisis. “If you take Cardoso’s or Lula’s first administration mandate, both started with huge challenges and they ended well, and we saw the reflection and the outcome of their policies. So, I think that ironically, the most serious fiscal crisis of Brazil’s recent history has a good side of the story, as it leads to force Brazil into rethink government intervention in economy and into eliminating those policies that are inefficient. It is really challenging, but the history tells us that we can do it. Our problem is that we cannot manage very well periods of success”, she stated at the “2018 Latin America Investment Conference”, an event jointly hosted by the CFA Institute and the CFA Society of Brazil in Rio de Janeiro.

Brazil suffered a significant draw on its productivity after being affected by the measures taken by former President Dilma Rousseff. The new government implemented a material shift in economic policies that are believed to be working, and that soon will bring some improvement in productivity as well. Unorthodox price policies that led to a high consumer inflation were removed, the new government understood that this issue was the first thing that needed to be tackled. “Regarding consumer inflation, we need to understand that the current decrease was not because the Central Bank was lucky, or because the forex exchange behaved favorably against other major currencies. We need to recognize that this low inflation is like the patient’s fever that is receding because the doctor was right on its diagnosis and on the treatment as well. This government understood the urge of the tackling fiscal prices and their strategy was correct”, Zeina added.  

What can be expected for the coming years in Brazil?

Brazil is facing one of the most serious fiscal crisis in its history. In October, voters will elect another president who will have to face significant challenges. “Brazil needs really bad to stabilize its debt to GDP ratio, otherwise, macroeconomic stability will not be possible. We have clearly a problem of sustainability of public debt and the pension reform is the bedrock of the fiscal adjustment. I do not have many doubts that the next president will need to remember that politicians always consider cost-benefits of their decisions. In terms of political ambitions, is not really a good idea for President Temer to approve a pension reform now. It would have a huge political cost and the benefits will be reflected in the mandate of next president. In a scenario in which markets were really concerned about this issue, there would be a significant benefit of doing the pension reform this year, but clearly this is not the case. Markets have given the benefit of the doubt and are expecting this reform to be accomplished for the next president. But, anyway, this is something critical, we will not be able to see sustainable growth in Brazil while there is macroeconomic instability”, she said.

Brazil needs to look forward and implement structural reforms, the good news is that the current administration has already started. Brazil needs higher productivity gains to compensate for the end of the demographic dividend, the gap between working force and people out of the labor force is going to decrease in the next five years, and it means lower growth potential for Brazil. The next government will need to accelerate reforms to prepare the country towards the end of the demographic bonds, otherwise potential growth in Brazil’s GDP will be 1% or 1,5%, a mediocre growth rate for an emerging economy. Other matter that will be crucial for Brazil will be to open the economy for international trade, as the country needs to increase competition. 

“I believe this is one of the most critical moments in Brazil history, but I also think there is a good chance of seeing good news in the next government. In my opinion, the risk of populism has decreased a lot. We see this more stable economic environment, in which unemployment rates and the fear of losing jobs still very high, but we are not seeing protests in the streets. We are seeing society that has calmed down”.

Economy is an important subject in Brazil, a country that has gone through two impeachment processes since its democratization and in both cases the processes were initiated following a collapse in the economy. “Now we have a president that has one digit of approval rate, but the streets are not asking for his ouster. All the possible candidates for presidency are looking for talented and renowned economists to be their finance minister. Politicians understand that there is no room for more mistake on the economic policy and they are trying to show their vision on the economy”. 

Finally, the golden rule, a constitutional rule established to avoid the issuance of new bonds by the government to finance current expending, acts as a cap. The next president elected will need to gain flexibilization on the golden rule. Also, there is a significant change in the economic debate. “We are now discussing structural reforms on macroeconomic policies and pensions, and it is something that really matters, because 10 years ago, when Fernando Henrique Cardoso tried to approve a pension reform neither the press nor the private sector supported him. They did not understand the need for a reform. Today, nobody is denying the need of reforms. Politicians in Brazil have become very pragmatic and they use cost-benefit analysis all the time. The discussion is whether the next president will be ambitious enough and will have political conditions to do something different. Today, the question is whether it is going to be a good reform or not, and it is a completely different question. Although the challenges are huge, Brazil is better positioned to tackle these obstacles. Our politicians are not ideological, they are pragmatic”, she concluded.

Mauro Miranda: “CFA Institute is Present in Brazil to Add Resources”

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CFA Institute and CFA Society Brazil jointly hosted the second edition of its “Latin America Investment Conference” on March 1st and 2nd. After having held its first edition in Cancun, Mexico, this time the city of Rio de Janeiro, Brazil, was chosen to bring together more than 240 investment professionals.

CFA Society Brazil, the local society of the CFA Institute in Brazil, was founded in 2004, has more than 1,000 members and expects to have an annual growth of 15% percent in the next four years, contributing to exceeding the figure of the 2,000 members in Latin America.

Mauro Miranda, CFA, an investment professional specialized in fixed income, including structured debt and private credit areas, is also the president of the CFA Society Brazil since 2016. During his two years in office he has managed to open an office in Sao Paulo for hosting the society’s activities, to make once again Rio a test center and to hold the annual investment conference in Latin America was held in this city.

In the last 14 years since the CFA Society Brazil was founded, with some 50 members, much has changed, both economically, in the political arena and in the development of markets.

“In 2004, the global economy was going through a period of growth and attractive prices for commodities, Brazil benefited from these circumstances and went through a promising period until 2007. Meanwhile, in the 2002 elections Lula won the presidency. During his mandates, there were no major changes in terms of economic policy. There were certain ups and downs, but these were the usual ones in any normal business cycle. Brazil was then affected by the crisis of 2008, obtaining a very negative GDP in that year, recovering later like many other economies. Later, we began the period in which Dilma Rousseff took the presidency, implementing very unorthodox economic measures. The GDP fell quarter after quarter, not recovering the path of growth until after its deposition.

In terms of capital markets, a much more robust regulation has been achieved. The Securities and Exchange Commission of Brazil (CVM) has issued several instructions that were very important to facilitate the establishment of banks and asset management institutions in Brazil at that time. As an emerging economy, Brazil is a country in progress. In July 1994, the Real Plan was implemented, the plan that introduced the current Brazilian currency and ended with a period of hyperinflation of 80% per month. Then, the regulatory agencies and certain economic policy measures were created that included greater fiscal austerity, such as the Fiscal Responsibility Law, signed in 2000, forcing municipalities, states and the federal government to comply with it. We have also seen a progression in the creation of elements that allow the development of capital markets in Brazil “.

According to Mauro, in Brazil there was a clear crowding out effect in the economy when the government was paying a 15% annually. Investors stopped investing in the private sector because they incurred in greater risk for a not-so-great spread. “Thanks to the fact that inflation levels were controlled, the Central Bank of Brazil was able to lower its Selic rate. This was the prerequisite for many investors to begun to see other opportunities. The data from the National Superintendency of Complementary Social Security (PREVIC) indicates that only a 0.2% of the assets in the pension plans are invested in foreign assets and the reason is precisely the high interest rates that the government was paying up to a couple of years. Now the pension funds should start looking for new opportunities, which can be in foreign investment in stocks or bonds or investment in local shares and corporate bonds, subject to credit risk, creating the need for more investment instruments to be available to investors. Companies can now seek financing in a range slightly above 6.75% of the Selic rate for those projects that were forgotten in the drawer and can now be profitable. While investors can now look for opportunities in the private corporate sector “

Having taken control of inflation and lowered the level of interest rates, there is a need for the government to implement the pension reform to reduce the current fiscal deficit. “The current pension system causes a fiscal deficit that is not sustainable over time. Either the next Brazilian government becomes aware of this reality or the rating agencies will not revise upwards their forecasts on Brazil. The international investors will choose other countries in the region to invest, such as Peru, Colombia, Mexico or Argentina.”

The presence of the CFA Institute in Brazil

One of the issues on which the CFA Institute focuses is on increasing the qualification standards of investment professionals. This is accomplished through university associations, scholarships, global competitions in the field of economic research -CFA Research Challenge- and of course, through the CFA Program, a rigorous program of three annual exams, for which the CFA Society of Brazil has launched the first edition of a preparation course in Sao Paulo.

“We still have many professionals to be trained in the market and the CFA Program is very well recognized worldwide. Brazilians like the challenge of preparing it, of seeking excellence. It is very hard, but it offers a high reward for our members, who can opt for better job opportunities when they are CFA Charterholders. In addition, it is a global passport that is recognized throughout the world.”

To contribute to the advancement of professional excellence, there are services that promote activities that help members find opportunities in the workplace, with a job board both locally and globally with the CFA Institute. “Many companies seek CFA Charterholders when they are looking to hire someone, it is a guarantee that that person is well qualified and completed a rigorous financial curriculum and also gained experience before joining their firms.”

Also, the establishment of standards and ethics in the profession is probably one of the most important areas for the CFA Institute and local societies. “Especially in Brazil and in the Latin American region, after everything that has happened in recent years, we believe it is very important. As well as having integrity in the markets, an area that we will continue to defend from now on, we have certain goals and standards that we would like asset managers and banks to take as theirs to increase their commitment to the industry.”

Another important area they focus on is the development of financial markets. To this end, they encourage debate among industry members, publishing recommendations on policies and procedures, as well as research studies on equity markets, fixed income and pension plans. “Last year we launched the first monograph contest on financial innovation. We had a total of 21 participants who managed to publish their research papers, with a similar approach to the monograph awards made by the Central Bank of Brazil. Considering the success obtained, we repeat again this year, “said Mauro Miranda.

Relations with regulatory bodies are too an important point for the CFA Society Brazil, which has strengthened its advocacy area, expanding the dialogue with the Securities Commission of Brazil (CVM) and the National Superintendence of Complementary Social Security (PREVIC) to obtain the recognition of the CFA Charter as necessary accreditation for the performance of certain functions in the financial markets. “Our voice has a greater relevance in the markets in terms of influencing the new regulations, but always having the investor’s interest in mind, always from an ethical and transparent perspective. We have sent our comments to the CVM, basically when there has been a public consultation, about 4 or 5 per year, and that is how we maintain the course of our relationship and communicate the opinions of our members and participants in our working groups.”

Finally, Mauro Miranda stressed that the CFA Institute’s commitment to Brazil is unwavering, its investment in the country has been very strong and will continue to be in the future. “This affects the members and our work with regulators in improving capital markets. We sell ideas and ideals and talk about best practices in the markets. CFA Institute is present in Brazil to add resources.”

GFG CAPITAL: A Value Proposition to Channel Change from Private Banking to Family Offices

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The story of the Gruener brothers, Eduardo and Mauricio, is the story of a family establishing a multi-family office in Miami in July 2003. Like most of their clients, they are from Mexico, and both wished to treat their clients as they themselves would like to be served by a wealth management firm. “One family at a time, that’s how I can summarize the culture of the group. We see the client as an extension of our own family, and that’s how we also consider the professionals who work with us,” explains Eduardo Gruener.

GFG Capital started almost 15 years ago. Mauricio was then working for Credit Suisse, in its wealth management division, after having worked for Republic National Bank of New York and for Lehman Brothers. Eduardo’s curriculum is equally outstanding, but in his case always in the area of investment banking; first in Bankers Trust, and later in Deutsche Bank.

When they decided to launch GFG Capital, their combined knowledge was perfectly complementary. “Between the two of us, we covered two important parts of banking, private banking and investment banking, and we decided that we wanted to start this business together, with the philosophy of sitting on the same side of the table as our clients and eliminating the conflicts of interest inherent to private banking. From the beginning, we knew that we wanted to launch a wealth management area and an investment banking area. Real Estate, our third area of expertise, came later. These three divisions make up the group today, although we started with the multi-family office, GFG Capital,” says Eduardo.

The firm now has another office in San Diego, California, from where they serve both international and domestic clients. “We are a dynamic team of 18 people, within a very family-like environment. We manage close to 900 million dollars for our family office clients. We are registered with the SEC. I would say that 60% of our clients are families in Latin America and 40% are US residents.”

Eduardo tells us that the profile of their main clients is that of self-made entrepreneurs. “They are families that started businesses, which have done very well and grew up with us. Part of the organic growth of the group is because we serve many families of this type. Obviously we also have other types of clients, such as second generations, but I would say that our ‘core’ is this. The highest percentage of our families is Mexican, followed by families from the US and Colombia, in that order.”

Witnesses to industry changes

“14 or 15 years ago this business was not as we know it today. We started with the wealth management division and, especially in the Latin American part, we noticed that when we talked to people about what a multi-family office is, it was a very little known concept. Families, even the largest ones, operated at that time with private banking and when we told them why it was important to have a family office with their own interests and capable of designing a global and coordinated strategy, it was difficult for them to understand it”, recalls Mauricio.

Perhaps the key to the whole issue was explaining that diversification was not about opening different private banking accounts in different banks, but based on analyzing the portfolio in a global way, he explains.

From private banking to family office

“At the end of the day, the bank earned money from the product it sold, but we apply a ‘fee’ for the assets managed and for designing a strategy aligned with the objectives of the entire family and with its risk tolerance. We eradicate the source of conflict of interests that private banking has. Fifteen years ago, this that is now so common was actually a very innovative concept. This was an important part of the group’s success. At present, the large families of Latin America attend to their financial needs with a multi-family office and I would say that, in fact, many do not even have a private bank anymore. This has been one of the most radical changes in the industry in the last decade.”

It‘s true that it didn’t happen overnight, it was a gradual transformation, he clarifies. “Things in our countries are a little slower than in other markets,” laughs Eduardo; adding later, in a more serious note: “At the end of the day, what counts is the model of multifamily office that we have and the benefits that we can offer”.

He also explains the benefits that this structure adds. “The feedback we receive from our clients is that the possibility of managing multiple custodians is a very interesting value-added service. When you are with a private bank it’s that one bank and that’s it. But from GFG Capital, we help our families to manage and supervise all their relationships, either in one or in many banks,” says the youngest of the Grueners.

“Our investment philosophy is active and most of the work is done through asset managers, but at the same time there are certain strategies where there is not as much possibility of generating alpha, where we use ETFs. However, for us it is more of a product to complement the portfolio”, he adds when talking about the investment instruments they use in their day-to-day.

Client profile in Mexico

When asked about what their Mexican families are asking for, both brothers agree that this type of client is becoming more and more sophisticated. The proximity to the United States and the high exposure to international markets are making the market less local and more global.

“The Mexican client is increasingly more like the American in terms of the type of strategies he seeks in order to manage his assets and the type of products he wants to access. We must also bear in mind that the Mexican market has grown a lot, it’s a market with very high liquidity, and the number of issuers in its stock markets has increased exponentially. At present, the Mexican family, or Mexican wealth, feels very comfortable in local markets, but it delves a lot into international markets. This segment is where GFG Capital has more second generations.”

Eduardo firmly states that what this type of client asks for is “to interact with people as little as possible”, to be able to consult by themselves the movements, performance, the portfolio’s risk statistics, previous operations, or the duration of the fixed income, for example.

“This level of transparency and accessibility is one of the things that differentiate us significantly. We have invested a lot in technology. We have just launched an interactive platform for mobile, web and tablet, which allows the client to get into their profile and manage the information. Having the information when they want it is something that is very important for millennials.”

He adds: “Since in other areas of the business we also do investment banking and a lot of real estate, this is a perfect complement to the family office and allows us to really give global solutions where we attend to everything that has to do with your finances. This is much more comfortable than having to rely on many different providers.”

Families who migrate to the United States

Another area of knowledge of the GFG Capital team concerns migration to the US and the previous steps a family can take to leverage some tax advantages. “We advise on how to manage your pre and post-transfer investments, always in the good hands of a tax-consultancy office,” they explain.

“What these families must know when they migrate to the United States,” Mauricio explains, “is that regardless of their immigration status, whatever the type of visa, or even if they don’t come with any, several things can be done to prepare their assets for the moment they become US residents for tax purposes.”

The example he provides is the creation of a trust to avoid inheritance tax. “If we deposit the family’s capital in a trust where the beneficiaries of that money are the next generation, the inheritance tax is eliminated. It is a way to generate a lot of fiscal efficiency. But you have to do it before you arrive. The planning and execution of a scheme of these characteristics has to go hand-in-hand with the financial part. That’s the part we play.”

Trump’s tax reform

Obviously, in this regard, Trump’s tax reform is going to create many changes in the US. The Gruener brothers agree in that, while in principle this reform will only affect families in the US, there are channels for foreigners with investments, which is something that generates revenue for the country, to benefit.

If you’re a foreign owner of rental property in the US, you must pay 35% tax on ‘ordinary income’ and from 15% to 20% on ‘capital gains’. With the tax reform, if the ‘corporate tax’ is reduced to 20%, many of these families could channel their investments through companies and reduce their income tax to 20% rather than 35%. As we see it, tax reform will not only encourage companies in the US to be more competitive, but will also attract foreign investment,” concludes Eduardo.

David Hawa (Robeco): “We Use Tactical Allocation in Contingent Convertible Bonds”

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In today’s credit markets, it is essential to have a defined roadmap, in which you can establish where you are in the economic cycle, how much risk you want to take and what you want to invest in, said David Hawa, Client Portfolio Manager of the Robeco Financial Institutions Bonds strategy, during the “2018 Kick-off Master class Seminar” that the asset management company of Dutch origin held in Palm Beach.

Fundamentals

In order to prepare its roadmap, Robeco analyzes the credit markets from three different perspectives, taking into account the fundamental, valuation, and technical factors.

Beginning with fundamentals, the 10-year US Treasury bond ended the year at 2.43%, the same performance level as it began the year. There was no volatility in the US sovereign bond market, nor was there any for German or Japanese bonds.

About inflation, in the United States the only component in the US with price growth is Owner Equivalent Rent. A trend that they hope will be reversed as inflation begins to gain relevance. Meanwhile, in Europe, all the components of the European GDP are growing, which, according to Robeco, is very positive because it means that loan default levels are decreasing.

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“With the European Central Bank’s official rate at levels of -0.4% and the German two-year bond also in negative territory, investors have to pay to be holders of these bonds. When GDP growth was in deflation and there was no growth in Europe, it could be argued that these levels were going to be maintained, but with growth at between 2 and 2.5%, it’s logical to believe that normalization of interest rates in Europe is close, even without inflation. That’s why we believe that interest rates will increase. Comparing the German bond and the 2-year Treasury bond, the spread between the two has widened since the Federal Reserve began its cycle of increases. Sooner or later Draghi and his team will also have to begin to raise rates, let’s not forget that quantitative easing measures were launched in Europe due to the fear of deflation and now we have passed that phase. The fact that rates are going to start rising is good news for the income statements of European insurers and banks, whose margins are suffering in an environment of negative interest rates.”

In the case of the United States, if the level of unemployment continues to decline, inflation will be seen in wages: “If inflation returns in wages, the Fed could be pressured to accelerate the rate of interest rate hikes, something we particularly take into account as a potential risk. “

Valuations

In general terms, the aggregate of credit market valuations is much lower than its average. The behavior of European investment-grade corporate debt -excluding financials- was better than that of US corporate debt with BBB rating -also excluding financials-. That is why Robeco is committed to European credit as, with lower levels of leverage, it’s more attractive than US credit, especially now that the volatility seen in 2016 has disappeared.

“Taking into account the valuations presented by the different levels of subordination of the financial debt, some of the issues of contingent convertible bonds, the so-called CoCo’s, offer an adequate spread for their level of risk.

This type of debt supports a higher level of risk: if the Tier 1 capital level of the financial institution’s balance falls below the minimum pre-established by the issue, the bond is automatically converted into shares. But, some issues of these CoCo’s also reward the risk incurred with attractive spreads. It takes a very high level of experience in both transactional analysis and credit analysis to enter this market,” said Hawa.

According to Robeco, the valuations of European financial debt have greater attractiveness than European investment-grade corporate bonds. Specifically, subordinated debt issued by insurance companies offers a spread of 200 basis points, and Tier 2 bank debt a spread close to 120 to 130 basis points, as compared to less than 100 basis points offered by European investment-grade fixed income when excluding the finance sector.

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“The CSPP (Corporate Sector Purchase Program), the quantitative easing program established by the European Central Bank, can buy corporate bonds, but cannot buy bonds from financial institutions. Having earmarked public money to help financial institutions after the 2008 crisis, there was a popular clamor for the ECB’s money not to be reinvested back into banks. Therefore, there is a gap between the valuations of investment-grade European corporate bonds and European debt issued by financial institutions.”

Technical Factors

Central Banks’ monetary stimulus programs, which for years have been injecting a lot of liquidity into the market, are being phased out. The Fed has been working on that for some time, Bernanke was the first president who indicated his intention to withdraw the quantitative easing program in 2013. With the arrival of economic growth in Europe, Draghi should also initiate the rate hike, something that Robeco does not expect to happen until 2019.

“Another interesting issue for US investors is that, given the asymmetry created between the Fed’s rate hike and the ECB, the cost of hedging for non-US investors has increased due to the existing spreads between short-term rates in Europe and the US. Many of the Asian investors who bought US corporate bonds are now looking for greater exposure to corporate debt and European financial debt because of the high price of hedging costs. Another point in favor of the Robeco Financial Institutions Bonds strategy.”

The Assett Classes Invested in

Most issuers in which the strategy invests have an investment grade rating. However, as the risk increases, the specific ratings of some of those issues decrease, which is why at Robeco they have a highly experienced team of managers and analysts, where 90% of the professionals have over 17 years experience, having dealt successfully with both bullish and bearish markets.

As contrarian investors, they believe that the credit markets are inefficient and that they usually incur a higher or lower valuation than what actually corresponds to an issue according to its fundamentals.

As an example of this investment philosophy, Hawa cited the purchase of subordinated debt from financial institutions when it increases market volatility. “Following the Brexit referendum, bank spreads in the United Kingdom skyrocketed, but in terms of fundamentals there were new opportunities, on that occasion we bought Barclays issues. Another example was what happened in Catalonia. On this occasion, with the increase in political risk, we increased our bets in Sabadell and Caixabank, which have solid financial balances. We have also bought other national champions among European banks such as Santander, Nordea and Credit Agricole.”

Recently, the strategy has increased its allocation to insurance company bonds, which are achieving greater spreads than issues by national banking entities. Some examples would be Aviva, NN, Generali, Swiss Re, as well as other less known names such as the Dutch company Delta Lloyd, the Belgian company, Belfius, and the British company, Direct Line Group, totaling some 70 issuers, which maintain the fund’s quality bias.

“The quality of insurance companies and the banking sector has improved in terms of fundamentals, with the progression of deleveraging of the balance sheets after the implementation of Basel III and the European Central Bank forcing banks to redistribute their financial balances to prevent what happened in 2008. Loan default levels and risk asset volume has decreased, so that banks’ balance sheets have been strengthened, but it is important to know which names should not be included in the strategy. As the level of subordination and risk increases, a greater spread is obtained, but whether or not the risk incurred is being compensated, must be taken into account. We can obtain better spreads betting on Tier 2 issues from insurers and banks, than for some of the credits with additional Tier 1 subordination level. That is our responsibility, to search for how we are being compensated for the risk we are taking in the strategy,” Hawa said.

Regarding investment in contingent convertibles, despite having investment-grade at the issuer level, it is possible that the issue has a much lower rating. That is why the Robeco Financial Institutions Bonds strategy limits its position in CoCo’s. “We want the strategy to always maintain the degree of investment in aggregate terms, so we use a tactical allocation in contingent convertible bonds, not founding the achievement of a good performance on this type of asset. Since the launch of the strategy in 2014, we have always maintained the percentage of investment in CoCo’s below 15%, allowing us to keep the investment grade in an aggregate manner “.

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“In January 2016, Deustche Bank experienced a series of problems: the price of shares declined and there was a real concern that its issuance of Tier 1 contingent convertible bonds was unable to pay its coupon due to the ECB’s impositions. At that time, the spreads of UBS, Barclays, Erste Group or Raiffeisen Bank skyrocketed due to the fear of contagion. On the other hand, at Robeco we decided to buy those names whose fundamentals were attractive to us, based on transactional and liquidity risk. After this, spreads were strongly compressed, and we were rewarded for the risk of having these CoCo’s in position.

Currently, the total exposure to contingent convertible bonds exceeds 10% slightly, with a 9% exposure in the Tier 1 subordinated class and 2% in Tier 2,” concluded Hawa.