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

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 28^th. 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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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 1^st and 2^nd. 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.

Robeco Gathers 130 Industry Professionals at its Annual ‘2018 Kick-Off Masterclass Seminar’ in Palm Beach

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On the 1^st and 2^ndof February, Robeco held its annual ‘2018 Kick-Off Master class Seminar’ at the Four Seasons Hotel in Palm Beach. The meeting was attended by about 130 industry professionals, mainly from the US Offshore business, based in Florida, California, Texas and New York, but also directly from Latin American countries, namely, Colombia, Uruguay, Panama and Peru. A total of 15 companies from the wealth management, private banking, institutional clients, and pension plans sectors participated, including Citibank, UBS, Santander, Morgan Stanley and BBVA.

Welcoming attendees to the event, Jimmy Ly, Head of the Americas Sales team (US Offshore and LatAm), opened the conference. Next, Michael Mullaney, Director of Global Market Research at Boston Partners, reviewed the macroeconomic outlook: “Global economic growth has been very remarkable. The United States has reached its tenth year of recovery since the financial crisis broke out in 2008; however, many countries are still in the early stages of the cycle. That would be the case of emerging markets, which are presented as favorites, and it is probably an intelligent decision to seek exposure to them. According to the OECD, such good growth data had not been seen since 2006, basically all of the 45 countries studied by the OECD are currently undergoing an expansion point. While data from the International Monetary Fund, which studies192 countries, indicates that only four of them anticipate a contraction in 2019. It is the minimum number of countries in anticipation of a recession recorded in a single year,” he said.

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According to the expert from Robeco Boston Partners, China and India are the growth giants in global terms. China is decelerating its growth rate, transitioning from being an export-based economy with debt-based investment to a consumer economy, taking a more western profile. “We will not see a growth of 9% or 10% like that of a few years ago, but it will go from the present 6.5% to 5% in the coming years, being much more stable. However, growth in India is accelerating and will most likely become the next biggest contributor to GDP growth,” he said.

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Another indicator which points to good growth prospects is the Purchasing Managers Index (PMIs), which is somewhat below 50, a value that determines if an economy is contracting, only in Indonesia and South Korea, showing an extraordinary strength globally in terms of production. Likewise, the PMI service index and the Citigroup economic surprise index indicate that the global economy as a whole shows strong signs of recovery, expecting an overall growth of GDP between 3.5% and 4%.

In turn, the withdrawal of accommodative economic policy programs could be a risk factor for equity markets, the rise of which benefited in recent years from the excess liquidity injected by central banks. “The real interest rate of federal funds globally is currently 30 basis points. The United States has never entered recession with a real interest rate of federal funds at levels near or below zero, which is exactly where we are now. The prospects for recession are very low,” he said.
Meanwhile, inflation, which continues at very benign levels, has risen slightly with the rise in oil prices. On the other hand, if we take core inflation into account, discounting food and energy prices, it is still below the 2% that most central banks usually aim for to fight against deflation, a problem that has historically remained.

Regarding salaries and employment levels, the overall situation has improved markedly, from 9% unemployment in 2009 to 5.5% today. Despite this, salaries have been very poor. “In the United States there are three reasons why wages have not experienced a significant rise. First, the most senior workers have retired and have been replaced by younger workers with lower wages. Secondly, globalization has caused companies to look for production centers with lower costs, causing something similar to the “Amazon effect”, which seeks a low-cost solution. Finally, technology is replacing many of the tasks, reducing the cost structure for many countries. In particular, Japan is among the most advanced economies when it comes to integrating robotics into its economy,” he added.

Finally, referring to the fall of the dollar, Mullaney mentioned the purchasing power parity index, according to which the Euro remains relatively cheap with respect to the dollar, and the current account deficit, which in the United States is at a -3% and in Europe at + 4%. In addition, Europe also shows a better fiscal balance than the United States, reasons that favor a weaker dollar.

Subordinated debt of financial institutions

Next, David Hawa, Client Portfolio Manager, explained the reasons why it may be a good time to invest in subordinated debt of financial institutions, the so-called contingent convertible bonds (CoCo’s), as their conversion is subject to certain conditions established at the time of issue and in relation to certain levels of capital. “The economic outlook in Europe is more favorable, benefiting from the solid growth enjoyed by the global economy. Growth in Europe remains strong and enjoys a broad base, while the credit cycle in the United States is much more mature. Against this backdrop, European financial companies continue to offer value. Credit spreads are not as generous as they used to be, but the valuations of financial companies are still attractive,” he said.

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In that regard, the strategy dedicated to financial institutions’ bonds has the potential to achieve attractive spreads with an investment grade issuer risk. Spreads of subordinated financial debt are usually attractive compared to the rest of corporate debt, including high-yield debt. “Issuers of financial bonds tend to be predominantly corporate issuers with a high-grade rating within the investment grade. In addition, this type of asset serves as implicit hedging against rising interest rates, since it has a very low or low correlation with US Treasury bonds,” said Hawa.

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During his presentation, he pointed out the capabilities of the Robeco Credit Investment team: “Since the 70s, Robeco has a specialized credit team, in which each member has an average experience of 17 years and includes about 4 financial analysts working on a full-time basis. They also differentiate between the responsibilities of portfolio managers and those of the credit analysts; displaying a profound knowledge of the financial sector and equity securities. They select the best subordinated bonds for each category, with a higher risk-return binomial and use an internally developed risk model to monitor both the portfolio and the issuer risk”.

Trends Investment

At the following lecture, dedicated to investing in trends, Ed Verstappen, Client Portfolio Manager, reviewed the performance of growth stocks, after a year in which the FANG shares (Facebook, Amazon, Netflix and Google), together with their Eastern version, the BAT (Baidu, Alibaba and Tencent) have dominated the markets.

“The ‘winner-takes-it-all’ effect, in which a group of companies generate most of the market’s profits, is becoming stronger, accelerating even profit growth. Facebook generated an increase of 50% in revenue for 18 consecutive quarters. While Netflix obtained growth of 35% in more than 20 quarters. For its part, Google achieved 31 quarters with organic revenue growth of 20%. And, Amazon reached 60 quarters with 20% growth in the retail sector. It is estimated that, by 2025, it will be the first US retail company to sell $ 1 trillion annually in products and services, when the company reaches 30 years’ history. Finally, the AppStore achieved a new record on New Year’s Day, when users made purchases worth 300 million dollars in purchases,” commented Verstappen.

To avoid taking unnecessary risks, the Global Consumer Trends strategy team evaluates risks with a strategic approach and considers the impact of regulation and the increase in capital intensity. In addition, they continue to reduce exposure to major US technology firms to start betting on equivalent names in China.

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“This strategy identifies secular global trends with strong growth from the consumer’s perspective, such as the digital consumer, the emerging consumer, and the consolidated brands. Having a preference for investment in structural winners within each industry, with a focus on the 50-70 most attractive stocks, which offer higher quality and a higher growth profile,” he said.
Verstappen was also optimistic about the state of the economy: “The market is anticipating an improvement. The increase in consumer spending should benefit from low unemployment, higher wages, and high consumer confidence. It is expected that also in 2018, the markets will be driven by solid growth. The fundamental perspectives for large digital platforms (Google, Facebook and Amazon … etc.), are still very good. Emerging market shares can benefit from the prospects of improving global growth,” he added.

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Robeco has specialized in analyzing trends, which are understood to be a disruptive change that displaces the previous ‘status-quo’ and with a visible effect in the long term. Thus, a new trend would result in new challenges for players already present and opportunities for challengers.

This global management company of Dutch origin offers strategies based on the analysis of trends, from the consumer angle, from the financial angle, from the production side, and from a total perspective: “It is an attempt to anticipate the future. We believe in the power of disruption from the demographic, technological and regulatory changes. It is a commitment to the long term, because short-term horizons lead to a lower estimate of secular growth trends creating high-conviction portfolios that are agnostic with respect to their benchmark,” he explained.

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Concluding the morning conferences, Henk Grootveld, Managing Director of Trends Investment, explained the scope of the digitization of the financial sector. “In the next 10 years, payments made online will be adopted mostly, cash will become an exception. The digitization of the financial sector will allow 2 billion people to manage their assets; both China and India will establish themselves as the biggest players in FinTech, surpassing the rest of the world combined. Failure in the cyber security issue in the financial world means being out of the FinTech business,” he concluded.

Ann Steele (Columbia Threadneedle Investments): “There is a pocket of excellence in European technology”

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With synchronized global growth expected to continue for the rest of the year, there should be no reason why 2018 should not be a good year for European equities, says Ann Steele, senior portfolio manager of the Threadneedle Pan European strategy from Columbia Threadneedle Investments.

During the last business cycle, European shares achieved lower returns compared to the rest of the global equities because they suffered the sovereign debt crisis in addition to the global financial crisis, delaying its recovery. On the European continent, the healing process did not really start until 2015, but there are several reasons to be optimistic. According to Steele, the market consensus expects that GDP growth for Europe will be between 2.5% and 2.6%. In addition, long-term unemployment in Europe is around 9%, while today the unemployment figure is 7% and in some countries, such as Germany it is around 3%. “The labor market has fueled the recovery, this is a positive issue for the world and certainly for Europe,” says Steele. “We had political problems, banking problems, but we feel that 2018 is going to be a good year for European equities. We can see a 12% to 15% increase in earnings growth, and European equities trade on P/E ratios of 14x and dividend yields of 3,2x, being cheaper than the multiples of other global areas. That’s why we think investors should overweight Europe.”

In recent published data, the PMI indicator (Purchasing Manager’s Index) reached levels of 58.6. Typically, cyclicals tend to overperform in a market in which the PMI indicators are raising until they reach levels of 60, and after that they stop outperforming. “We believe that there is still a lot of headroom for growth. We do not believe that a salary increase in Europe will be a massive problem in the region. In fact, in the United Kingdom, there is practically no salary increase. Although inflation is starting to increase, it will be a gradual and slow increase, because there is still capacity within the system. Until this excess capacity disappears, rampant inflation will not be seen,” she adds.

Positive on cyclical sectors

Given the current scenario of positive benefits, Steele believes that the cyclical sectors will continue to be very attractive and that they will continue to outperform. “I have the ability to run a portfolio with about 50 positions. This allows me to be quite aggressive in exposure to sectors within the strategy. Currently, the portfolio has 52 shares, with a strong position towards cyclical stocks. To begin with, we have an overweight in the whole financial sector, including banks, insurers and diversified financial companies. We believe that financial balances have improved significantly. Bank lending has started to pick up and with every cyclical recovery the financial sector will benefit.”

“In another area where we have an overweight position are industrials, which clearly are a play on a cyclical rally. Within this category would be, for example, companies such as Volvo. However, I have a more neutral position in energy, increasing the weight in the technological sector. There is a pocket of excellence in the European technology sector. For quite some time, I owned Arm Holdings in the portfolio, a semiconductor and software design multinational that was purchased by SoftBank Group,” she says.

According to Steele, one must be careful in the selection of growth companies in Europe, because they will not be bought up by the American technological giants. “We can see growth in stocks such as SAP or ASML Holding, which based in the Netherlands and is a chip supplier company. Among its main clients are Intel, Samsung or TSMC. The growth in the next three years will be spectacular for this company. If I can find real conviction ideas, they will be included in the portfolio. Specifically, ASML is the fourth largest position in my portfolio.”

The gap between Europe and the United States

European equities are about 25% cheaper than US equities and the business cycle is considerably lagging. The continuity of momentum in the United States cycle will depend on the infrastructure spending program of the Trump administration. “After the recent statements made in Davos, the dollar suddenly depreciated and the euro appreciated slightly. In fact, the Fed is raising rates in the United States, while the European Central Bank continues to maintain its program of quantitative easing. We believe that the dollar is overvalued and that it should return a bit. “

If the euro came to appreciate strongly this could be a problem for Europe, which is mainly an exporting area. “Draghi will remain the president of the European monetary authority until the end of 2019. The ECB is very pragmatic, if there was a threat to economic growth in Europe, which remains very fragile, he would most likely intervene with a supportive monetary policy.”

The political risks

One issue that could affect the performance of European equities is the political uncertainty that the region is still exposed to. “On March 4 there will be elections in Italy. There are parties that are very anti-Europe, which do not represent an immediate threat, but which will promise more generous pensions and greater spending to mobilize the vote and that is precisely what we do not want governments to do. We must be careful with overpromising and overdelivering.”

In addition, Angela Merkel continues to have problems forming a government. And, although the SPD party has sent the message that they will be happy to form a grand coalition, what happens now is that the votes will depend more on young people who recently joined the party, that are usually against that great coalition. “There may be an agreement before Easter and if they do not reach it, there will be new elections in Germany,” she says.

Of course, the Brexit negotiations will continue to create background noise. “In last year’s elections they did not win a clear mandate, going from hard Brexit stands to a soft Brexit stands, something that, in my opinion, will be better for the United Kingdom and Europe. The two parties should be more flexible. It will take between four and six years to negotiate the terms of business, so this discussion will go on for many years”.

As for Spain, Steele believes that the country is doing phenomenally well. “The problem in Catalonia is a noise that grumbles on the background, but at the end of the day people vote with their wallet. Being one of the main industrial areas, they need to keep their jobs, no matter how passionate they may feel about independence. When a crisis happens again, they will be happy to be part of largest Spain, ” she concludes.

CFA Institute and CFA Society Brazil celebrate their “2018 Latin America Investment Conference” in Rio de Janeiro

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Investors with exposure to Latin American assets have a must-attend event at the “2018 Latin America Investment Conference” in Rio de Janeiro. On the 1^st and 2^nd of March, at the Belmond Copacabana Palace, CFA Institute, the Global Association of Investment Professionals, together with CFA Society Brazil, will welcome internationally acclaimed speakers who will address a wide range of topics and perspectives to shape investment strategies in Latin American markets.

The event is comprised of several practitioner-oriented educational conferences that will focus on Latin American economies and capital markets, as well as on global issues relevant to investors worldwide to discuss macroeconomic trends, innovations affecting financial services, and investment opportunities in the region.

The conference will be opened by the welcoming remarks and opening address of Andrew T. Campbell, CFA, Conference Chair, followed by Mauro Miranda, CFA, President at CFA Society Brazil, and Bjorn Forfang, Deputy CEO at CFA Institute. It will continue with a panel on Brazilian pension funds, with the participation of Fábio Coelho, Managing Director for PREVIC “Superintendência Nacional de Previdência Complementar”.

Finally, Marcelo Barbosa, Chairman of the Securities and Exchange Commission of Brazil, will close the first day’s events.

On the second day, Zeina Latif, Chief Economist at XP Investments, will talk about the challenges facing economic policy in Brazil in the short and medium term. Next, a first panel comprised by Daniel Cancel, Managing Editor for Latin America at Bloomberg, Andrea Murta, Director of Business US for the JOTA publication, and Matias Spektor, Associate Professor of International Relations at FGV “Fundação Getulio Vargas,” will discuss the implications for investors of the political situation in Latin America;to be followed by a second panel comprised by Alberto J. Bernal-León, Chief Strategist at XP Securities, Carl Ross, Sovereign Analyst for Emerging Country Debt at GMO, and Lisa M. Schineller, Managing Director of Sovereign and International Public Finance Ratings at S&P Global Ratings.

Following lunch, Roberto Rigobon, Professor of Applied Economics at the Sloan School of Management at MIT, will talk about how Big Data can affect the region’s future.
In the afternoon, Mary Bobbitt, Director of Society Advocacy Engagement for the Americas region at CFA Institute, will review the regulatory scenario in Latin America; to be followed by a new panel on trends in debt markets in Latin America, in which Daniel R. Kastholm, CFA, Regional Group Head for Latin American Corporate Ratings at Fitch Ratings, Alexei G. Remizov, Managing Director at HSBC Securities USA, Marianna Waltz, CFA, Managing Director and Regional Head of the Latin American Corporate Finance Team at Moody’s Investor Services, and Flavio Papelbaum, CFA, Manager for the Capital Markets Division at BNDES will participate.

Next, Axel Christensen, Managing Director and Chief Investment Officer and Portfolio Manager at Onyx Equity Management, and Sonia Villalobos, CFA, Founding Partner of Villalobos Consultoria Ltda, will discuss the opportunities and challenges when investing in Latin America.

In the afternoon, Brian D. Singer, CFA, Partner and Head of Dynamic Allocation strategies at William Blair & Company, will explain how to implement dynamic allocation strategies and the evolution of top-down investment. Carlos Viana de Carvalho from the Central Bank of Brazil will be the closing keynote. The conference will close with a farewell reception.

For further information, please visit this link.

Funds Society Organizes its Fifth Investments & Golf Summit

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Funds Society is proud to announce that it will host its Investments & Golf Summit 2018 on April 12th and 13th at the Trump National Doral in Miami.

Sponsors include Janus Henderson Investors, RWC Partners, Thornburg Investment Management, Vontobel Asset Management, GAM Investments and AXA Investment Managers.

On April 12th, at the Investment day, sponsored also by Schroders Investment Management, Columbia Threadneedle Investments and MFS Investment Management, participants will be able to take the opportunity to discuss about Global Markets as well as the latest portfolio management strategies and investment ideas from top-performing Asset Managers from the nine sponsors, followed by a networking reception. If desired, we are providing complementary accommodation at the Trump National Hotel.

Funds Society’s V Golf Tournament will take place at the Blue Monster in Trump National Doral Club Golf, host of the prestigious PGA TOUR events for the past 55 years. The famous 18th hole was ranked by GOLF Magazine as one of the Top 100 Holes in the World.

Spots are limited for the Tournament so please register at your earliest convenience. Non-player guests can learn golf in our clinic or simply enjoy the academic day and dinner.