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Draghi: “An Ample Degree of Monetary Accommodation is Still Necessary”

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively.

According to a press release, “the Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term”.

However, on his opening statement, Draghi made it clear that loose policy is here to stay: “An ample degree of monetary accommodation is still necessary”.

The Governing Council also underlined “the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.

Aneeka Gupta, from WisdomTree said: “The ECB remains stubbornly stoic, falling short of market expectations. It has decided to leave the deposit rate unchanged at -0.40% but sets up the stage for a rate cut ahead at its meeting in September… European financials reacted positively to the possibility of tiering by the ECB. The markets were expecting to receive more stimulus at this meeting after the release of the weaker manufacturing PMI and IFO data from Europe and Germany respectively at the start of the week. The German bund yield fell to a record low of -41bps as the ECB opens up the option of further QE.”

Also today, the Governing Council of the ECB adopted an opinion on the recommendation from the Council of the European Union on the appointment of the future ECB President. It read: “The Governing Council has no objection to the proposed candidate, Christine Lagarde, who is a person of recognised standing and professional experience in monetary or banking matters.”

Anne Richards (Fidelity International): “The Shift that the Asset Management Industry Is Seeing Now Will Exclude a lot of Investors”

| For Meritxell Sedo | 0 Comentarios

During the celebration of the Fidelity International’s annual Media Forum in London, Anne Richards, CEO of the firm, shared her view on the challenges that the asset management industry will have to face in the next decade.

According to Richards, global regulations on pension funds and other long-term saving vehicles are directing the mass affluent investors to own public listed securities. Meanwhile, the amount of capital that has been allocated to private markets has increased and the returns in the private markets have been persistently higher than in the public listed markets.

“The number of public listed companies is falling around the world. Companies are increasingly looking to private markets to raise capital. Last year in the US, more money was raised in the private markets than it did in public listed markets. When I was the rookie on the desk, one of my tasks was to manually check the price of each holding that we owned across the business. The total number of listed companies that I had to check was 967 stocks. Today, the equivalent number is more than a third lower. On one hand, the regulators are pushing the mass affluent investors into funds that are typically concentrated in daily listed stocks, which is a market that is currently narrowing, and on the other hand, the asset management industry knows that the returns are higher in the private market. I think this is a deeply uncomfortable juxtaposition to have,” explained Richards.

“The main benefit of democratization of capital was to allow people without a lot of money to get some access to capital markets. The shift that the asset management industry is seeing now will exclude a lot of investors from obtaining attractive capital returns. The returns in private markets are being only directed to those who have the capacity to get exposure to that type of capital, categorized as professional investors. This may cause eventually an inequality issue, which is the heart of much of the unrest and political divergences that the world is facing right now. We have to come together as industry and think about ways of making sure that we can continue to offer a whole range of investment opportunities, regardless of the investment amount”, she added.

A shift towards more returns for society

Speaking about the responsibility that the asset management industry has over society, Richards mentioned the need to take into consideration not only the financial returns, but the long-term impact that every business has in the society.

“When you look after other people’s money, like the asset management industry does, you end up with an above average share of voice by collecting a lot of individual voices. Our business could make a meaningful difference on encouraging companies not take advantage of the work force or the environment, and to do things that are good for the broader society. Financials returns are important, but not enough. We need to think about the long-term impact of investments. This is important to us because our clients and employees are also asking for a responsible way of investment,” she said.

A family business

The fact that Fidelity Investments and Fidelity International are a family started business -the Johnson family owns a large part of the business, although there are other many shareholders and employees that are owners as well- makes the dynamic of the business very different.

“This characteristic gives Fidelity International a long multi-generational view. The mindset is not about maximizing the value of what we are doing today. Instead, the mindset is how you can build something better to handle it to the next generation, and that’s very special. It is a very refreshing mindset. In a listed company business, the decisions of the management are sometimes affected by the demands that the market imposes on the business and the volatility that can come from the pressure on quarterly earnings.

This is not to say that it does not matter to us running an efficient organization and taking care of the business that we inherited from the previous generation. But we do have an ability to take a through-cycle view of what we want to do and how we want to invest,” she stated.
Fidelity International has two distinctively separated business. Firstly, the investment management part of the business, where the firm engages directly with institutional clients, wholesale clients, private banks or larger financial institutions. And secondly, the platform business that can be used to help advisers to manage their part of the business.

“The dynamics of these two areas of the business are quite different. This gives us a good window on the landscape in the outside world and on what is wanting from us. This full capacity is very powerful and few of our competitors have it”, she mentioned.

Geographical spread

China is a massive market and opportunity. Population in China is aging and has more disposable income than the previous generations. Regulators and policy makers are starting to build the infrastructure to provide to each individual person the ability to have some sort of control over their financial future, as it has already happened in other countries around the world. China is about to build the first pillar to their pension system, but they still not have a third pillar of voluntary savings.

“As for now, we have been in investing in China over 20 years and we have been competing in the ground field around 14 years. In order to build up our capabilities in China, we have been a lot more patient than our competitors. Partly, because we have always felt we needed to be in control of culture, and partly because of the investment environment that our teams are operating in. In 2017, we had the opportunity to obtain a wholly owned investment license in China, which only allows to do business with high net worth individuals, not with the mass affluent market,” she explained.

Other strategic areas

Historically, Fidelity International tended to be known for its expertise and capabilities in both equities and fixed income. However, since the number of public listed companies is falling in many developed markets, Fidelity International considers very important to start building a broadest range of capabilities in the less liquid space of the investment universe. In that regard, the firm recently hired Andrew McCaffery, who will fill the newly created position of Chief Investment Officer for alternative assets.

“We want to build out our capabilities across the alternative investment space so that we can continue to offer innovative themes to our customer base as it evolves. So, it does not mean in anyway, that we are trenching our former heritage or our market expertise, particularly in the equity market and increasingly in the fixed income market, but that we need to enhance the offer the whole spectrum of capabilities”, she concluded.

Global Markets Seem to Have Priced In a July Cut

| For Gabriela Huerta | 0 Comentarios

Stocks rallied to all-time highs in June bolstered by hopes for progress in the global trade wars and in anticipation of a potential reduction in the Fed’s policy interest rate. At the June meeting, the FOMC signaled that it was prepared to cut rates this year stating that uncertainties have increased and “the Committee will closely monitor the implications of the incoming information…and will act as appropriate to sustain the expansion.” Global markets seem to have priced in a July cut.

Stocks finished June with the best gain for that month since 1955 to close an outstanding quarter and the best first half gain since 1997. Financial markets are now discounting a positive outcome of the trade talks between President Trump and Chinese President Xi Jinping at the G20 summit in Japan, which started on June 29.

On the deal front, a surge of M&A transactions and IPOs put the U.S. way ahead of Europe and Asia for the first half. The booming U.S stock market and relatively strong economy provided a solid backdrop for deal making activity. Activists lit the fuse in many cases as buy side catalysts versus their typical role of demanding that sellers get higher prices from acquirers. Antitrust push back created formidable obstacles to some deals such as Sprint Corp. / T Mobile and Spark Therapeutics / Roche.

Announced first half U.S. deal values jumped twenty percent from a year ago to a record $1.1 trillion, the first time to reach that level during those six months.

Prominent proposed U.S. mega deals – those over $10 billion – included the $121 billion merger of United Technologies’ aerospace division with defense contractor Raytheon, U.S. drug maker AbbVie’s $63 billion bid to acquire peer Allergan Plc and Occidental Petroleum’ $38 billion deal to buy Anadarko Petroleum.

We expect M&A activity to pick up for small and mid-sized companies during the second half of the year as strategic and private equity buyers take a closer look at the intrinsic values versus the market prices of these companies.

Column by Gabelli Funds, written by Michael Gabelli

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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.

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GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

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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.

Vishal Hindocha (MFS IM): “The Active Management Skill Is Probably the Best Diversifying Asset that Investors Can Buy Today”

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The current US equity market cycle is the longest bullish market on record, with 9 and a half years of history, with a small correction in the fourth quarter of last year, but already back on track in the first semester of the year. In terms of compounded wealth, is the second highest market cycle on record, with a compounded return over 330%. According to Vishal Hindocha, Director of the Investment Solutions Group at MFS Investment Management, this is an enormous volume of return that probably will not be seen again going forward.

Valuations in equity market are telling investors that we are about to enter to a more recessionary environment. Observing the forward annualized returns based on historical Shiller P/E ratios for the S&P 500 Index for one, three, five and ten years, it could be stated that valuation will play a key role in future equity returns.

“When the Shiller P/E ratio is less than 10, equity markets are cheap, and returns are pretty strong. But, when the Shiller P/E ratio is in a range greater than 40, then the forward annualized returns in equity markets are bearish from that point onward, particularly in in the five and ten-years return. Just think about the compounded impact of that in the client’s portfolios. The current Shiller P/E for the S&P 500 is around 32,5x. We are currently in the 30 to 40 times range, if the history is sort of guiding us, the 5 or 10-years returns expectations on equity are not looking attractive from this point onward,” explained Hindocha.

Valuations in bonds are also not promising. In bond markets, current yield to worst tends to be a good predictor of what returns should investors expect over the next five years. A starting yield to worst a little bit lower than 2% communicates that investors should expect a subsequent 5-year annualized return between 2% and 4% above the mentioned yield, which again is lower than expected returns in previous periods in history.

“Returns expectations of the most major asset classes are going to be lower going forward. In MFS IM, we think that alpha is going to need to play a much more important role in investors’ portfolios from today onward. The 100 or 200 bps that you can get from alpha are going to be disproportionally more valuable to investors than they have ever been in the past,” he added.

Leverage in the system

Ten years after the global financial crisis and the level of corporate indebtedness is in fact higher than the pre-crisis levels. The net debt to EBITDA ratios of the MSCI World Index, the MSCI AC World Index and the S&P 500 are well above the 1.6 x level of 2008.

“Leverage itself is not necessary a bad thing. But what it means is that investors need to be extremely careful about what they own. These higher levels of leverage can turn a good business into a stressed business very quickly. That’s the reason why selectivity is going to be much more important in the future. If the default cycle changes, leverage its going to hurt lower quality companies. The same trend repeats itself at the government level. Global government debt to GDP ratio is also generally higher than at the pre-crisis levels. Debt levels are continuing to climb again, and this fact, combined with a decline in the quality of the global corporate index and a decline in the liquidity, is embedding more risk into the system,” said Hindocha.

What can investors do in this environment?

In the last three decades, investing has become an increasingly complex puzzle. According to a model developed by Callan Associates in the US, 30 years ago, in 1989, to earn a 7.5% expected return, investors needed a portfolio that could be 75% invested in cash and 25% in US fixed income, only supporting a risk level of 3.1%.

15 years later, in 2004, to earn the same 7.5% expected return, investors needed to increase the complexity of the risk budget introducing new asset classes: 26% in large caps US equity, 6% in small caps, 18% in non-US equity and 50% in US fixed income, would nearly triple the portfolio volatility to 8.9%.

Fast forwarding to 2019, the pie chart is a lot of more complicated, the expected returns are the same, but now the risk level is six times higher than 30 years ago. Investors are now required to invest 96% of the portfolio in growth assets (34% large cap US equity, 8% small-mid caps, 24% non-US equity, 14% real estate and 16% private equity) and 4% in US fixed income to obtain a 7,5% expected return with a level of volatility of 18%.

“Investors, trustees and advisors are now beginning to question whether the amount of complexity added to the portfolios over the last 15 years has been paying off or if it has only increased the risk,” he argued.

Does diversification work?

In addition, there are clear evidences that diversification is not working as it used to. The paper “When diversification fails”, published by Sebastien Page and Robert A. Panariello in the Financial Analyst Journal in the third quarter of 2018, concludes that diversification seems to disappear when investors need it most. The paper distinguishes between the left tail scenario, where equity is performing extremely bad, and the right tail scenario, where equity is performing extremely well.

On the left tail, the correlation between equity and the major types of asset classes increase over 50%. The benefits of diversification, which are really resting on low correlation between the asset classes, disappear when investors really need them. If equities are performing negatively, all the other asset classes are also falling at the same time.

On the contrary, on the right tail, when equities are performing extremely well, suddenly, diversification works perfectly well. When investors would want unification, correlations remain below the 50% and, in some asset classes, it even becomes negative.

“Diversification is an important part of the tool kit. We just need to recognize the role that it plays and the types of market environments in which it may be more appropriate. Diversification should change the shape of the distribution, it should help on left tail environments, and potentially hold the portfolio a bit on the right tail environments.

Meanwhile, active management, if done correctly, can provide better than average outcomes. It can even change the skew of the return’s distribution. Investors should start viewing good quality active management as a good diversifying asset.

“Active management seems to be providing the trait that investors are expecting from alternative investments. It seems to be protecting investors when markets are down and to being able to keep up when equity markets are going upwards. The active management skill, particularly countercyclical skill, is probably the best diversifying asset that investors can buy today. We as active managers can play a powerful role to help protect client capital when they need it the most”, he concluded.

Facebook: The New Central Bank?

| For Beatriz Zúñiga | 0 Comentarios

Facebook: ¿el nuevo banco central? — Pixabay CC0 Public DomainCourtesy photo. Facebook: The New Central Bank?

Facebook has become an essential part of our social, cultural, economic and political spheres. Now it is looking to become our new global payment system. This was the announcement that came last week from the Libra Association (led by Facebook) along with a whitepaper about the creation of a new cryptocurrency called Libra and its accompanying digital wallet, Calibra.

The first digital currency, Bitcoin, was followed by many others: Ethereum, Dodgecoin, Litecoin, Ripple, XEM, Dash, Monero, Petro, etc. Apparently, we will now have one more as early as the first half of 2020. However, this is not going to be just “one more” as Libra looks more like a fiat currency than a cryptocurrency. In other words, with the gold standard consigned to the history books, along comes the all-powerful Facebook to create a digital currency backed by a basket of financial assets.

Facebook is not alone in this endeavour. Companies like Visa, Mastercard, PayPal, Spotify, eBay, Vodafone, Booking, Mercado Pago and Thrive Capital are among the 28 founding members of the Libra Association that will govern Libra. The goal is to reach 100 members before the official launch of the digital currency. Besides the sheer weight of the consortium of businesses backing the currency, if we add into the equation the 2.32 billion active users enjoyed by Facebook each month (one third of the world’s population), it is not hard to image the potential reach of this new cryptocurrency.

In many respects, the use of blockchain technology for Libra is quite different from the other digital currencies we know about today. Quite the opposite, in fact. The Libra whitepaper rejects the idea of anonymity and secrecy in transactions and the Libra Association has already confirmed its collaboration with financial regulators to prevent money laundering and tax avoidance.

A further crucial difference with Libra is the backing of a reserve of low volatility assets including bank deposits and short-term government debt in stable currencies like the dollar, euro, Swiss franc and yen. That said, we will need to have faith that the Libra Association will maintain these assets, record transactions and that Libra itself will be fungible, etc. Ultimately, this is the same faith we currently have in the central banks, except for a couple of important distinctions: Facebook is a private entity but it will hold some underlying assets, whereas central banks are public bodies but they do not hold assets that fully support currency issuance.

Of course, misgivings and controversies are already springing up regarding matters like data protection and the use of information in such a high-profile project. Let us not forget that Facebook possesses a vast archive of personal data from its users, about whom it knows practically everything. Many of us have not forgotten about the fines imposed on Facebook by the European Union for controversies like this and the scandal surrounding Cambridge Analytica, the consulting firm that unlawfully used information gathered from 87 million Facebook users.

Following the announcement of Libra’s creation, it is inevitable that the reflections that have been floating around for some time regarding cryptocurrencies come to the forefront once again. For example, questions are being asked about the implications for central banks and monetary policy in the event of the widespread use of a payment system like Libra, which employs blockchain technology although with a different objective to other digital currencies like Bitcoin. At first glance, it may look like an attempt to undermine the power of central banks. But curiously, as one analyst has already pointed out, in the context of a financial crisis, it could reinforce the impact of negative interest rates as it would eliminate the possibility of hoarding physical currency and other means of avoiding negative rates.

According to the whitepaper on the creation of Libra, it is “a simple global currency and financial infrastructure that empowers billions of people”. For now it is just a fledgling project, but it is certainly an interesting one.

Column by Meritxell Pons, Director of Asset Management at Beta Capital Wealth Management, Crèdit Andorrà Financial Group Research.

Katch Investment Group: A Rising Private Debt Boutique

| For Meritxell Sedo | 0 Comentarios

In the 10 years following the global financial crisis, the liquidity injections of major central banks have inflated traditional asset classes, particularly in the fixed income markets, thus decreasing the profitability of investors. Additionally, new regulations have reduced the willingness and ability of banks to lend to smaller businesses.

In response to those trends, Katch Investment Group, -a dynamic asset management boutique offering innovative tailor-made investment solutions-, focuses on short-term lending and financing opportunities within the private debt universe. In a constantly changing and challenging financial market environment, Katch Investment specializes in areas where capital supply is scarce that offer relatively high and stable returns for investors.

Who is Katch Investment Group?

The group combines in- depth financial market knowhow, asset management experience and strong analytical skills, with a deep understanding of the needs and tastes of private investors, particularly in Latin America. The group focuses on global opportunities, without any restriction, providing greater diversification and allowing greater potential to offer high returns.

The group is owned and managed by Laurent Jeanmart, Chairman, Stephane Prigent, Chief Executive Officer, and Pascal Rohner, Chief Investment Officer. All three hold the Chartered Financial Analyst accreditation, considered one of the most respected credentials within the financial industry.

As the chairman of the group, Laurent is responsible for the sourcing of new ideas, new business initiatives, due diligence of asset managers and the creation of strategic partnerships across the globe. Laurent is based in London, one of the most important financial centers in the world. He has more than 20 years of investment experience in alternative asset management. Laurent’s previous experiences include responsibilities at Fidelis Insurance Holdings Ltd., a London and Bermuda based insurance company where he was Group Chief Investment Officer managing $1.5 billion of assets. Previously, he was Global Head of Investment at Platinum Capital Management Ltd., a global asset management platform, where his responsibilities included overseeing the firm’s actively managed funds (hedge funds, equities, volatility, and commodities).

Stephane is the CEO of the group and therefore responsible for all day-to-day operations and the distribution. He has more than 20 years of experience in asset management in several locations around the world: Paris, Boston, NYC, London, and Panama City. He has worked in several banks, such as BNP Paribas, Lehman Brothers, State Street Capital, and Credit Andorra. His focus has been on the construction and management of portfolios for clients with a focus on alternative investments. In his previous experience at State Street London, Stephane was a Managing Director in his Global Head of Equity Sales Research position. He was a member of the European executive committee and oversaw 25 people located in New York City, London, and Hong Kong.

Finally, as the Chief Investment Officer, Pascal is responsible for the investment strategy, portfolio management, marketing and investment advisory for financial intermediaries. Pascal has more than 16 years of experience in financial market research, portfolio management, and investment advisory. He worked several years as a financial analyst, strategist and investment advisor for Credit Suisse in Zurich, New York and Panama. Before joining Katch Investment Group, he was the Chief Investment Officer of Credit Andorra and its Multi Family Office, Private Investment Management in Panama.

Pascal highlighted: “I have been working with private clients and advisors in Latina America for the last 7 years. Latin Americans tend to have a very conservative investment approach for their family savings, with a focus on wealth preservation and liquidity. However, they tend to take too much risk within their fixed income portfolios, because safe bonds don’t pay enough to cover inflation and the bankers’ commissions. And maybe they do not have enough time to analyze alternative solutions”.

“Speaking to institutional and private clients in the region, we noticed that there is a huge, unmet demand for relatively safe fixed income alternatives. That’s why we started to explore the whole investment universe to find conservative investment opportunities that can provide liquidity, income and stable returns, that are not correlated to traditional asset classes,” he added.

The backdrop

The investment environment is challenging around the globe, not only in Latin America. Equities are reaching the final phase of the bull market that is characterized by high volatility on the back of trade war and recession fears. And the safer fixed income areas, such as US Treasuries offer protection but little value after the recent drop in yields. Therefore, many investors and advisors have started to focus more on alternative asset classes, an area that has long been little explored by private investors, especially in Latin America.

The problem is that many alternative assets are structurally unattractive. Commercial Real Estate is challenged by a strong trend towards online shopping and the rise of the “sharing” economy with big disruptions coming from innovative companies such as Amazon and Airbnb. Commodities are negatively affected by the trends towards alternative sources of energy, car sharing and China’s transformation from an export- and infrastructure-driven economy towards high-tech and domestic consumption. Finally, many hedge funds still suffer from the lack of transparency, the high complexity and image problems due to investors’ bad experiences in the past. Also, the 7% drop of the HFRI Hedge Fund Index in 2018 illustrates that many hedge funds remain highly correlated to other liquid assets, such as bonds and equities that had a very bad performance too last year.

The good news is that there is a new, emerging asset class that offers the most attractive risk/reward profile for investors, that is called Private Debt. The asset class started to flourish after the Great Financial Crisis. New regulations have reduced the banks’ desire and capability to lend to the real economy, especially to smaller businesses. Instead, banks helped to inflate the government bond market in their effort to accumulate reserves and strengthen their capital base.

The banks’ retreat from the loan market has left a gap that private institutions, such as private equity firms and other asset managers, have been eager to bridge. They have filled the lending vacuum to provide crucial financing to the real economy – and particularly to small and medium-sized enterprises, the backbone of our economies. Newly created investment vehicles have attracted substantial interest from institutional investors hungry for yield.

Following the financial crisis, the massive monetary stimulus has inﬂated the price of liquid assets, especially in fixed income markets, depressing yields for investors. At the same time, the lack of capital provided to smaller companies has kept yields for smaller loans at elevated levels. Typically, private loans pay interest rates between 5% and 15% without leverage, based upon a ﬂoating base rate (LIBOR) with very low market volatility (standard deviations below 2%). In addition, strong collaterals, personal guarantees, and relatively low nominal amounts favor low delinquency.

In summary, private lending funds generate attractive and stable returns for investors, with low volatility and low correlation to traditional asset classes. Katch Investment Group identified these trends and decided to launch open-ended investment vehicles that invest in short-term lending and financing opportunities.

Gregory Johnsen (MFS IM): “Valuation Looks Attractive for Emerging Markets Equity Relative to US Equity Market and Fundamentals Have Considerably Improved”

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The allocation to emerging market equity in global portfolios is becoming more strategic than ever. The MSCI All Country World Index has now around 10% to 12% in weight to the emerging markets. Global equity portfolios should consider having an allocation to emerging markets.

Since the global financial crisis, there has been an increasing gap between the Shiller P/E ratios in the US equity market and the Shiller P/E ratios in the emerging market equity. While the US Shiller P/E is currently about 32,5 x, the EM Shiller P/E is around 11 x. This gap in valuation could be explained by a period of over earnings in US companies and a period of under earnings in EM companies.

While the regular price-earnings (P/E) ratio provides information about the valuation of a company by measuring its current share price relative to its per-share earnings, considering the previous year’s earnings or the forward-looking earnings on next year, the cyclically adjusted P/E or Shiller P/E is defined as current share price divided by the average of ten years of earnings adjusted for inflation.

On the other hand, the free cash flow yield and other indicators of quality in fundamentals have considerably improved in emerging market equity relative to the same metrics in developed markets. “Looking at different periods of time in the last 20 years, we can see that the fundamentals of the emerging market equity have improved. Returns on assets and returns on invested capital are significantly looking better, especially when they are compared with the data of the year 2000, 2015 and more recently 2018. The asset class is getting more attractive levels in its fundamental metrics at good valuations. At this point in time, investors are getting a good dividend yield and the free cash flow yield is also more attractive from a valuation perspective”, explained Gregory Johnsen, Institutional Portfolio Manager at MFS Investment Management.

In the last two decades, the investment in infrastructure and property, plant and equipment in emerging markets relative to sales, the CAPEX/Sales ex-Financials ratio, has been higher in emerging market equity than the average in developed markets, ranging from 5% to 8%. However, in the last two years, the CAPEX to sales ratio in emerging markets has started to decline, this fact can be explained by an upward trend in net profit margin. “Once the CAPEX has been made, then the cost of goods sold starts to decline, allowing for greater profit margins, all things been equal. That is the sort of trend that is occurring in general in the emerging market index. From that perspective, there are some attractive metrics in the asset class”, he added.

Long-term capital market expectations

According to MFS IM, the 10-year expected annualized return in emerging market equity is about 9,2%, that compares to roughly a 4,8% in global equity, showing one of the higher perspectives in terms of returns among asset classes. These higher expected returns are backed by a real sales growth estimate of 3,4%, based on the investment theme that consumer spending power is growing in emerging markets and brings the potential for sales growth.

“There is a discussion in the market about whether profit margin is peaking in the US equity market or in the global equity markets. Maybe, there is a chance that there would be a reversion to the mean in these markets. Different consultant groups that do their own capital market assumptions see a similar type of outcome in emerging market equity, where this asset class tends to be higher in return, but obviously higher in risk than the other asset classes”, said Johnsen.

Emerging market fundamentals

Emerging market public finances remain relatively strong despite fiscal weakening in some countries. Historically, public debt as a percentage of GDP has been in most emerging countries lower than in developed markets, operating in the 40% to 50% range versus the range over 100% in which developed markets operate.

Another way to look at the improvement of fundamentals in emerging markets is to analyze the real interest rate and the current account balances of the “fragile five” countries. The fragile five refers to Brazil, Indonesia, India, Turkey and South Africa, countries which produced weak economic and currency data back in 2013, when there was the “taper tantrum” episode.

“The Federal Reserve started talking about bringing interest rates up in the US on the second quarter of 2013, when the countries with the higher current account deficit conditions were highlighted to be potentially susceptible to higher interest rates in the US. Today, these countries have lower current account deficits and offer higher real interest rates, they are in better shape in terms of that metrics that back in 2013” he added.

Nations and Corporations can Address Climate Change by Transferring Weather Risks to Investors

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A new report examines how public and private entities, including those in developing nations, are mitigating the financial impacts of extreme weather events and supporting climate change adaptation by transferring risk to private insurance and capital markets.

“Using Risk Transfer to Achieve Climate Change Resilience” is one of the first reports to comprehensively examine how governments, water utilities, transit agencies, corporations and small farmers are using risk transfer instruments—such as catastrophe bonds and weather risk transfer contracts—to adapt to climate change. The report discusses opportunities to expand the use of risk transfer for adaptation and details key challenges in this still emergent market.

The report provides three key takeaways:

With support from development banks and donor countries, many developing nations are incorporating risk transfer into their adaptation strategies. Buyers range from sovereign governments such as Mexico and the Philippines that have secured hundreds of millions of dollars in protection annually, to small farmers in Kenya, Senegal and other African countries who are becoming more resilient to climate risks by purchasing small insurance policies. Yet, the report finds that many public and private entities still require subsidies from donor countries, and that the use of risk transfer is constrained in some regions by lack of weather data. The report explores solutions including new business models for risk transfer, cost-sharing strategies and advances in remote sensing and weather data analytics.
More infrastructure managers are using risk transfer. Public infrastructure organizations, such as water utilities and transit agencies, are particularly susceptible to extreme weather events such as droughts, wildfires, severe storms and floods. As a result, some are on the leading edge of using catastrophe and weather risk transfer instruments to reduce their risk exposure. For example, since Hurricane Sandy, Amtrak and the New York Metropolitan Transit Agency have purchased hundreds of millions of dollars in catastrophe protection to mitigate their risks from flooding. This report examines the opportunities and challenges to transit agencies and water utilities seeking to use risk transfer to improve their resilience to extreme weather and climate change.
Many corporations are considering risk transfer for climate change adaptation. Many publicly held corporations are being asked by regulators and investors to assess, disclose and mitigate the climate change risks that could negatively impact their earnings and long-term growth. The report explores how corporations in a wide range of industry sectors could mitigate their climate risks with weather risk transfer contracts—a strategy already in use by corporations in highly weather-sensitive industries such as energy and agriculture. A recent example occurred in Australia, where agribusiness GrainCorp announced in April 2019 that it would transfer weather risks to reinsurance investors in order to reduce the impacts of volatile weather on earnings.

“Using Risk Transfer to Achieve Climate Change Resilience” fills a knowledge gap in the increasingly urgent public dialogue around weather and catastrophe risk in a world with a changing climate. So far, media coverage of this topic has largely missed a key strategic consideration for addressing climate change: risk transfer,” said Barney Schauble, chairman of Nephila Climate. “Innovative weather and catastrophe risk transfer coverage mechanisms have evolved over the last 20 years and are now viable tools for confronting climate change in both developing and mature economies.”

Sponsored by Nephila and written by Jim Hight, an independent environmental journalist and communications consultant, the report draws on published research and interviews from development organizations, insurers and reinsurers, catastrophe risk modelers, weather and climate risk analysts, climate change consultants, transit agencies, water utility associations and others.

Nephila sponsored the report in order to provide a thorough examination of the opportunities and challenges to using weather and catastrophe risk transfer mechanisms to support climate change adaptation. Nephila is a pioneer in creating weather risk transfer vehicles and today is the largest investment manager in that market.

Download the report here.

Block Asset Management Believes Portfolios Should Hold Crypto Assets

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The emergence of the Crypto asset class has been largely driven by the increasing awareness amongst investors that Crypto assets are indeed a credible alternative to fiat currencies, as they allow for more efficient payments at virtually no cost but also create significant operational cost savings and efficiencies for ownership updates and verification purposes.

While doubts clearly arose earlier this year due to the collapse of crypto asset prices, the confirmation that several high profile projects would be implemented by leading banks such as JP Morgan or social network giants such as Facebook (and many others) confirmed the view that cryptos are here to stay, and are going to become the back-bone of the financial and e-commerce sectors, thus favouring a major adoption from market participants over the next couple of years.

The emergence of crypto asset class is not a random event.

It is the result, in Block Asset Management’s opinion, of global imbalances building-up and accelerating since the last financial crisis. Global Private debt has sky-rocketed while the major Central banks have been happy to keep interest rates at generational lows, supporting the expansion of monetary basis aggregates way beyond economic output. Such a behaviour has no precedent, at least at this scale. As a consequence, Global market debt has grown over 250 trillions, setting global debt/GDP ratio at levels above 300%, a threshold which is clearly not sustainable in the long run. “It is therefore likely that existing debts will never be paid back or paid in worthless fiat currency, which in the end is equivalent to a significant loss of value (lower purchasing power). Countries such as Argentina provide a clear roadmap of what follows next: investors are harmed, savings are lost, the economy is disrupted, and capital controls are implemented. In this environment, alternative investments such as Gold or Silver tend to outperform,” they mention.

Do Precious metals really provide an effective hedge in this environment?

Precious metals tend to benefit from market/economic shocks, since they have tangible value and a limited output as well. However, they cannot be used for payments, leaving them highly vulnerable to any lasting liquidity event. Precious metals are not cash. You cannot pay for services in Gold or Silver. The cost of holding Precious Metals is high too. While clearly able to capitalize on a liquidity crisis in its early stages, Precious metals do not prove to be a reliable safe-haven during lasting a liquidity crisis. Indeed, they might be the last investments to be sold to raise cash. This is exactly what happened during the last crisis.

During liquidity crisis, cash is king… but Cash loses real value in the long term or when central banks step in to increase liquidity. And monetization destroys cash value’s in the long run.
That is where Crypto assets are unique and enhance a portfolio risk/return profile. They combine safe haven benefits (like Precious Metals) but also provide its users with liquidity. Contrary to Precious Metals, Crypto assets can be used to purchase real good and services or proceed with transfers of money at laser speed. And Crypto assets’ trend has been positive in the long run (due to crypto assets adoption

Therefore, how to get a smart exposure to Crypto assets?

While some investors might just find it convenient to use crypto exchanges to invest directly in single crypto assets, the amount lost on several platforms (due to cryptos being hacked an stolen) or the disappearance of several cryptos suggests that a single investment is very risky compared to investments in more traditional asset classes. In other words, aiming at reducing tail risk (in case of liquidity crisis) while having its capital at risk does not make sense.

For those reasons, Block Asset Management has created several investment eligible solutions for investors willing to build exposure and diversifying into crypto, but wary of losing their capital (crypto assets being hacked or a single crypto asset/fund manager going bust).

Block Asset Management is now managing several investment products that address those concerns. The flagship Blockchain Strategies Fund offers exposure to the world’ s first fund of funds. The Block Asset Management Actively managed certificate offers simple and direct exposure to the Blockchain Strategies Fund through a note that can be purchased more easily via a brokerage account.

Pivotal Planning Group Joins Dynasty Financial Partners

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Dynasty Financial Partners announced that they have partnered with leading independent advisory firm Pivotal Planning Group. Based on Long Island, NY and in Norfolk, Virginia, Pivotal Planning Group, manages $275 million in individual and 401(k) assets.

Pivotal Planning Group, has a total of seven professionals including four advisers:

John Marchisotta, CFP®, ChFC, AIFA® is the Managing Partner of Pivotal Planning Group, LLC. He has over 25 years of experience providing Personal Financial Planning & Investment advice to families and Retirement Plan Consulting services to the Trustees of retirement plans. He began his career as a tax accountant with the firm’s Parent Company, Satty, Levine & Ciacco, CPAs, P.C. in 1991. Mr. Marchisotta is the Chairman of the firm’s Investment Policy Committee.

Michael Kelly, CFP® is the Director of the Firm’s Norfolk, VA Office. He is a Senior Financial Adviser & member of the Firm’s Investment Policy Committee.

Michael J. Desmond CIMA®, AIF® is The Director of the Firms Retirement Plan Services Division. He is a Senior Financial Adviser & member of the Firm’s Investment Policy Committee.

James P. Diver, CFP® is the Director of Technology and Operations at the firm. He is a Senior Financial Planner, Investment Adviser & member of the Firm’s Investment Policy Committee.

“The need for unbiased advice across the country has grown significantly and both clients and advisors need a solution that is free from conflict and is based on always placing the clients’ best interests first,’” according to Mr. Marchisotta. “We selected Dynasty to tap their industry expertise and leverage the size and scale of their multi-billion dollar network of independent firms. Our clients receive all the benefits of a large institution with a boutique client experience. We continue to improve the advice we provide with access to institutional solutions for technology, investments and back office operations.”

According to a press release, Pivotal Planning Group plans to expand their footprint via strategic acquisitions with like-minded advisors. In addition, the firm plans to open a Florida office later this year and, over the next five years, continue the expansion with multiple new offices.

Pivotal Planning Group has been a fiduciary advisory firm for nearly 20 years. The firm has two distinct service groups:

One group serves high net-worth families seeking comprehensive financial planning and investment management including retirement planning, tax planning, cash flow planning, estate planning, risk management and family office services.
The other group serves small to mid-sized businesses with less than 1000 employees where Pivotal acts as a fiduciary advisor to their company retirement plan.

Shirl Penney, CEO of Dynasty Financial Partners, said, “With their long experience as a successful independent advisory firm and their deep expertise in tax planning and 401(k) plans, John and the team at Pivotal Planning Group are well positioned to scale their business, expand their 401k consulting and grow through M&A. We welcome them to the Dynasty Network!”

Pivotal Planning Group, LLC is a SEC Registered Investment Advisor and Fiduciary to 401(k) and Retirement Plans. The firm is dedicated to helping individuals, plan sponsors and trustees achieve their goals through education, prudent planning and unbiased advice. Pivotal Planning Group, LLC was originally formed in 2000 to provide Financial Planning & Investment Advisory Services to the clients of Satty, Levine & Ciacco, CPAs, P.C. (SL&C).

On June 1st, Pivotal Planning Group moved its headquarters to 534 Broadhollow Road in Melville, NY. Pivotal Planning Group has partnered with Dynasty Financial Partners to leverage Dynasty’s wealth management services, people and leading technology. The firm will be using Dynasty’s award-winning integrated Core Services platform for independent advisors and the firm’s turn key asset management platform (TAMP). They will have access to leading technology, including Dynasty’s proprietary advisor desktop, in-house specialists, home office support, and will benefit from the firm’s significant scale in the industry.

Among its other resource partners, Pivotal Planning Group, LLC has selected Schwab to provide custody services for its clients’ assets and Black Diamond for consolidated asset and performance reporting.