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“China’s Growth Might be Slower, Albeit of Higher Quality and More Sustainable in the Years Ahead”

“Puede que China crezca menos, pero el crecimiento será de mayor calidad y más estable en los años venideros” — Winnie Chwang, Senior Analyst at Matthews Asia. "China’s Growth Might be Slower, Albeit of Higher Quality and More Sustainable in the Years Ahead”

Many consider China the main force behind the future of the global economy. Last year’s Third Plenary Session resulted in very important reforms which the government must implement to shift China from an export oriented economy to a domestic consumption country. This change may lead to slower growth in the future which is, in turn, one of the main issues for most economists regarding 2014. Winnie Chwang, Senior Analyst at Matthews Asia, answers Funds Society’s questions as a preview to her visit to Miami this week, in which she will discuss China as an investment opportunity with institutional and professional investors.

1. China’s growth is slowing – What is behind this lower growth?

China has sustained double-digit economic growth over the last two decades, driven by investments and exports. However, this pace is not likely to be sustainable going forward, and the government acknowledges a transition is taking place within the Chinese economy; where growth will increasingly be led by domestic consumption. It is widely accepted that this transition will translate to more moderated growth, albeit of higher quality, and more sustainable in the years ahead.

2. Where can we find the new sources of growth? What 3 main growth drivers would you highlight for the next 5 years?

At Matthews, we have been focused on the consumption story, which is one that continues to evolve with changing behavior amid rising income levels. The next decade should be no different, and we believe that increased domestic consumption will be a key theme for economic growth. In particular, we highlight consumer growth as the catalyst for a number of service-oriented industries. Three, in particular, are companies operating within tourism, information technology and health care; all of which are expanding on the back of increased consumer demand.

3. Which is, in your view, the most importanteconomic reform approved in the Third Plenary Session, whichtook place last November?

It would be difficult to pinpoint the most significant reform since there were numerous important initiatives that came out of the Third Plenary Session. However, the most important theme is clear—the government wants to continue to encourage a market economy and support the role of the private sector. This translates positively to a more efficient and market-driven economy, whichpromotes increased productivity and profitability for commercial enterprises in the long run.

4. Regarding valuation, where do you see the best pockets of value for the Chinese markets?

In the past two years, the consumer discretionary sector in China has seen meaningful corrections in light of an overall weaker macro economy as well as the initiation of the government’s anti-frugality campaign. As a result, valuations have trended down to a low double-digit level. However, our on-the-ground visits to China lead us to believe that underlying demand remains strong and once the macro sentiment turns, this will be a sector that stands to recover nicely.

One thing to point out here is that as with allour investments, we believe inthe value of bottom-up stock picking. We do not rely solely on valuations in our decision process. We continue to look for the best-run companies with solid business models that are positioned to excel over the long run.

5. What would be the main risk for an investor in Chinese equities?

The main risk for an investor in Chinese equities is policy risk. We tend to stay away from companies that are beholden to government policies, as they tend to change quickly. Instead, we focus on private companies that are able to operate successfully in a competitive market environment.

Certain industries, such as the banking sector, face impending scrutiny due to substantial quality concerns around off balance sheet exposure. We also remain concerned that future reforms for the financial services industry, such as interest rate deregulation, may not benefit these banks. As a result, we are generally cautious and underweight the banks in our portfolio as compared to the benchmark.

6. How important is corporate governance when investing in China?

As long-term investors, we consider corporate governance to be critical when assessing companies. Many of our investments span across three to five years—or longer. So it is important that we are confident that management demonstrates strong stewardship for our investments. Our process assesses the soundness of corporate structures as well as management’s governance ability over time. Our due diligence process emphasizes on-the-ground visits when examining potential investment ideas. We vet information we receive from managers with what we hear from their peers, customers, suppliers or other industry experts. Understanding the entire value chain helps us determine how much weight we can give to what managers tell us and what the true growth prospects are. Overall, we are encouraged to see corporate governance improving in China.

Can that Cool App I Created Make Me a Billionaire, Too?

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¿También yo me haré millonario con mi nuevo app? — Jan Koum, Whatsapp co-founder. Can that Cool App I Created Make Me a Billionaire, Too?

Just about everyone is entranced with the recent news out of Silicon Valley about billions of corporate dollars being used for acquisitions. Many of the buyouts we’re hearing about are software companies that were startups just a few years ago. There is almost an 1849 Gold Rush mentality now in California. Who can think of the next software application that can be sold to a big Internet company for billions of dollars? Basement and garage software entrepreneurs work feverishly, hoping their ideas can make it big.

But what do company takeovers and buyouts mean for those of us who invest in the market? The first question is always fundamental. Are we witnessing mergers and takeovers that add value? If most of the M&A activity is being undertaken to improve cash flow growth in the long run, everyone should be better off. Usually, however, this isn’t the case.

While many types of acquisitions can add to shareholder value, many others don’t. Some company transactions are deliberately designed to spread another revenue stream over a fixed cost base. If these transactions are executed well, shareholders stand to benefit from higher margins and higher returns on capital. One example of this might behorizontal integration — buying a similar company in a similar business and keeping the revenues but not duplicating the costs.

Another case might be vertical integration — buying another company along the supply chain to obtain ease of control. Some examples include a manufacturer acquiring a sales company, an energy extractor purchasing a gasoline refinery or an Internet retailer obtaining a money transfer firm to help control the financing aspect of selling goods and services online.

A third type of positive takeover could be carried out for diversification. Just as investors often seek to balance the risk in their portfolios by diversifying their holdings, companies may want do the same by diversifying their business lines. Buying other companies may be able to buffer the effects of the economic cycle, smoothing out earnings as one business does better while another is flagging.

All three of these fall into my category of legitimate or worthwhile motivations for M&A. How do we detect if the reasons to take over a company are not so legitimate?

First, look at the motivation behind the acquisition. When a company exhausts its own organic growth, or stalls in its internal growth, management may be tempted to reach out and buy growth. The academic literature suggests that these growth acquisitions often involve overpayment and widespread destruction of shareholder value. Other companies use acquisitions to take out the competition or to find ways of getting around investing in their own businesses. In these cases, the less than noble outcome is typically that management is enriched, but not shareholders.

Second, consider what companies are paying for their acquisitions. During typical cycles, the price paid to take over another company must involve a premium to get existing shareholders to willingly part with their shares. Again, academic research shows that in many buyouts and takeovers, the buyer pays too much and the result is grief for the shareholders of the acquiring firm. Typically the premium paid is 30% or 40% over the current market price.

These are things to look for when selecting individual companies.

In a broader sense, I like to watch M&A activity for its ability to indicate trouble ahead for the market or to confirm that a market peak is approaching. Looking back over history, we see that market peaks and recessions have frequently been preceded by periods of wild or excessive M&A transactions. Takeovers in these euphoric periods typically reach 7% of the names traded in the public marketplace. Now, takeovers are running at only 3% of publicly traded names.

We are definitely seeing some marquis takeovers and glittery deals, and most of them are taking place in the rapidly changing world of technology. There is a scramble across that sector to chase after global audiences for more advertising revenues.

Despite these high-priced deals, there is not yet a broad-based wave of mergers going on in the rest of the market. In fact, the rate of mergers is at or below historical averages. And on the valuation front, the current premium or buyout price paid for the average non-technology takeover is also below the historical norm.

We are watching this M&A trend, and right now it’s anyone’s guess if the cash-rich giants of Silicon Valley are making wise takeover decisions. But until the mania spreads — and we see high price tags in other sectors of the market, such as energy, consumer discretionary and staples — the time for worry hasn’t yet arrived. Based on historical averages, the M&A indicator is rising, but remains well below the danger threshold for the market as a whole.

Column by James Swanson, MFS Chief Investment Strategist

Are Gold and Gold Equities Showing Signs of Recovery?

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¿Es un buen momento para invertir en oro? — Photo: Covilha, Flickr, Creative Commons.. Are Gold and Gold Equities Showing Signs of Recovery?

Gold is up 10.5% this year and up 11.9% (1) since it bottomed in December 2013 following the US Federal Reserve’s (Fed) decision to begin tapering its quantitative easing (QE) program. Gold continues to rally despite the Fed announcing after its meeting in January that it will be reducing its QE program by another US$10 billion.

Porfolio managers Bradley George – Head of Commodities and Resources- and Scott Winship –Global Gold strategy-, at Investec Asset Management, answer some questions about the recent recovery of gold, and gold equities.

What has triggered gold’s rally?

We believe that the gold price has rallied because:

Tapering has started and the announcement of the tapering program on 18 December 2013 was orchestrated to maintain a stable market environment.
Exchange-traded fund (ETF) net outflows have stopped. There are now 56moz in global gold ETFs, and we are starting to see small net inflows.
Physical buying continues to be strong out of China — now the world’s largest gold consumer.
An article written by Simon Rabinovitch titled ‘China’s 500-tonne gold gap fuels talk of stockpiling’, which was published in the Financial Times on 11 February 2014 (2), also caused some interest.
There is talk that India might relax some of the import duties that it implemented in 2013 (they currently stand at 15%) on the back of suggestions that the gold trade is still alive and well, albeit through back channels.
US 10 year Treasury rates have moved lower to 2.7% from its starting point of 3% at the beginning of 2014. As illustrated by the chart below, the dislocation between real rates and the gold price is still extreme.

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US economic data in January and February has disappointed relative to expectations; non-farm payrolls, the ISM Manufacturing Index, retail sales and industrial production have all been poor. The obvious excuse is the weather — the US has been hit by snow storms and blizzards — so we will have to wait and see in the coming months if this was the case. With just about every analyst and forecaster expecting stellar US growth this year, better data must materialize.
US dollar weakness has also helped the gold price.
The precious metal sector has been a key underweight for long only funds and a short for hedge funds. Short covering is definitely occurring.

How are gold equities performing?

Gold equities are finally showing some beta to the upside. Gold equities this year are up 23%, which is just over 2x leverage, and more than the average 1.3-1.5x that we have seen recently. Coming from an undervalued position there was certainly ground to make up. Where we used to quote 30-40% upside for the equities, we now see 15-20%, so we believe there is still value to be had.

Fourth quarter results are currently being announced and the majority of companies are meeting forecasts and guiding positively. Production guidance is more or less in line with estimates, but importantly cost guidance is better. Currency tailwinds and general cutting of a fat cost base has helped return leverage to the bottom line. Capital discipline is much better than it once was.

Is now a good time to invest in gold?

These moves have been rapid, as the above factors have provided a good headwind for the metal. We have moved to $1335/oz in more or less a straight line, so there is an argument for a pause for reflection/correction. But technically gold has broken out (see the chart below) and has room to move. We believe that any retracement is a potential buying opportunity.

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Historically gold has offered diversification and inflation hedge benefits, and we believe it still does. The economic recovery, in our view, is finely balanced and there are still significant debt issues and associated risk. In particular, we would point to stubbornly higher oil prices and believe that there will come a time when the world economy is viewed in a less favorable light. Furthermore, the valuation anomaly that exists in gold equities has seldom presented investors with such an opportunity for gold equity exposure. The brief rally we have seen barely registers on the chart below showing gold equities relative to gold bullion.

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We believe gold companies that are disciplined with capital and focus on growing profitable production, not just ounces at any cost, will be rewarded in the long run. We continue to invest in these types of companies with approximately 30 high conviction holdings in the Investec Global Gold portfolios. The portfolio is further differentiated with its physically backed ETF positions in platinum and palladium. We believe that these metals not only provide diversification but have strong fundamentals as they are in deficit from a supply and demand perspective.

London is Top Global City for UHNWI, but New York Poised to Take Crown

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Nueva York, camino de destronar a Londres como la ciudad preferida por los UHNWI — Photo: Oscar Urdaneta. London is Top Global City for UHNWI, but New York Poised to Take Crown

New York will overtake London as the most important city for the ultra-wealthy by 2023, according to Knight Frank’s Wealth Report, an annual analysis of wealth flows and property investment around the world.The report shows that three of the top five most important cities by 2024 will be in Asia, knocking Geneva from the top 5. New York is followed by Miami, Washington D.C, San Francisco and Toronto in North America.

Over the last year, the global response to the financial crisis continued to boost property markets in many parts of the world. The latest results from The Wealth Report’s Prime International Residential Index (PIRI) confirm that Asian markets, led by Jakarta, experienced the biggest price growth in 2013, followed by Auckland, Bali, Christchurch and Dublin.

Liam Bailey said: “History, location and their long-established wealth mean that London and New York’s positions look unassailable, at least for now. It is further down our leader board that the real city wars are being waged. The main battleground is Asia, where a handful of locations are slugging it out in the hope of establishing a clear lead as the region’s alpha urban hub”.

“By region, the Middle East top five includes Istanbul and Abu Dhabi, two centres from our “hotspots” list – cities that are set to rapidly increase their influence on Ultra High Net Worth Individuals* (UHWNI) – close behind Dubai in prime position. One legacy of the Arab Spring is the enhanced status of Turkey as a safe haven location for investors from the Gulf and North Africa.

“Although it still trails some way behind the top four cities in Asia-Pacific, Sydney is steadily growing in importance as a wealth hub for the region. Despite its geographical remoteness, it comes in as the fifth placed hotspot. Sao Paulo heads the current Latin American top five list -with Río, Buenos Aires, Mexico City and Santiago-. Current trends suggest that the city is also set to see its UHNWI population ranking rise from 11th to 8th position globally by 2023.”

In terms of property performance, locations that were hardest hit by the downturn, like Dubai, Dublin and now Madrid, are also bouncing back strongly.

The report also examines wealth creation across the world, finding that the number of ultra-wealthy individuals across the world rose by three per cent last year, despite continued economic turbulence. Exclusive data prepared for the Wealth Report, shows that the number of Ultra High Net Worth Individuals (UHNWIs) in 2023, who have $30m or more in net assets is set to grow by nearly 30% over the next decade.

Data from Wealth Insight, the global wealth intelligence firm, shows that while Europe will remain home to most UHNWIs, the biggest growth will be in Africa. The number of people with $30 million or more in assets will climb by 53% by 2023, underpinned by a 92 per cent rise in Nigeria and a 74 per cent rise in Kenya.

“The growth of UHNWIs in China and India coupled with an eye-catching 144 per cent increase in Indonesia and a stellar 166 per cent hike in Vietnam will help push the total number of UHWNIs up by 43 per cent t0 2023,” explained Liam Bailey.

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BNY Mellon to Acquire Full Ownership of HedgeMark International

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BNY Mellon, a global firm of investment management and investment services, announced that it has signed an agreement to acquire the remaining 65% interest of HedgeMark International, LLC, a current affiliate and a provider of hedge fund managed account and risk analytic services.

The deal is expected to close in the second quarter, subject to regulatory approval. Financial terms of the transaction were not disclosed. BNY Mellon has held a 35% ownership stake in HedgeMark since 2011.

Founded in 2009 and headquartered New York, HedgeMark assists in the structuring, oversight, and risk monitoring of hedge funds, specifically dedicated managed accounts. More and more, institutional investors globally are using dedicated managed accounts – single investor funds – as a way to invest in hedge funds that allow for greater customization, transparency, liquidity and control.

“As institutional clients continue their shift into alternatives, especially hedge funds, this acquisition will enable us to better meet demands for improved governance, risk reporting, and transparency,” said Samir Pandiri, BNY Mellon executive vice president and CEO of Asset Servicing. “We’ll be able to integrate HedgeMark’s capabilities with our Global Risk Solutions offerings to set a new industry benchmark on risk and transparency. It marks the next step in our strategy to provide sharper insight into hedge fund investments and enterprise risk across a client’s entire portfolio”.

Ken Phillips, HedgeMark’s founder and CEO, has announced his intention to retire when the transaction is completed. HedgeMark’s board of directors will appoint Andrew Lapkin, current president, as its new CEO. Lapkin will help supervise the transition and report to Pandiri after the closing.

“HedgeMark has collaborated closely with BNY Mellon‘s investment services business these last three years to deliver client- and market-driven solutions for the alternatives industry,” said Lapkin.

Cartica Capital Urges CorpBanca to Reconsider its Approval of the Merger with Itaú

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Corpbanca e Itaú se topan con una piedra en el camino de su fusión — Photo: Felipe Burgos Álvarez. Cartica Capital Urges CorpBanca to Reconsider its Approval of the Merger with Itaú

In response to inquiries following news reports, Cartica Capital confirmed today that it has delivered a letter to the Board of Directors of CorpBanca S.A. In the letter, Cartica urges the Board to immediately reconsider its approval of the proposed merger with Itaú Unibanco Holding and take appropriate steps to commence an auction process that maximizes value for all shareholders, consistent with the Board’s fiduciary duties.

Cartica believes that the proposed transaction with Itaú as currently structured greatly undercompensates the Bank’s minority shareholders, while securing valuable benefits exclusively for CorpBanca’s controlling shareholder, the Alvaro Saieh-controlled CorpGroup Holding. Cartica previously advised Mr. Saieh privately of its concerns.

With in excess of US$2 billion under management, Cartica Capital manages a concentrated long-only portfolio of publicly-traded equities in Emerging Markets. Cartica engages with companies in a constructive and cooperative manner to influence the direction of each company to improve performance, unlock value, and increase market valuations.

The full text of the letter to CorpBanca’s Board follows: March 3, 2014

Re: Fairness of proposed CorpBanca / Itaú transaction

Dear Members of the Board:

We are writing to inform the Board of our conviction, previously communicated to the Bank’s controlling shareholder, Mr. Álvaro Saieh, that the proposed transaction between CorpBanca SA (the “Bank”) and Itaú greatly undercompensates the Bank’s minority shareholders and extends disproportionate consideration to Mr. Saieh and his affiliates. As one of the Bank’s largest minority shareholders, we believe that the decision to approve the transaction as currently structured constitutes a failure of the Board to discharge its fiduciary duties to all shareholders. Accordingly, we request that you reconsider moving forward with the transaction and instead take immediate steps to oversee a fully transparent process for the sale of the Bank that maximizes value for all shareholders, as your fiduciary duties require.

As you are aware, the Bank confirmed its intention to seek a “combination” with a larger regional institution in a disclosure (hecho esencial) issued on November 29, 2013. Soon thereafter, the financial media reported that Mr. Saieh intended to select the eventual partner based on which suitor offered the greatest degree of influence in the post- merger institution to him and CorpGroup, the holding company through which the Saieh family exercises control over the Bank. In a letter to Mr. Saieh dated December 20, 2013, we insisted that price should be the sole criteria for selecting among the Bank’s suitors and that any arrangement that avoided a tender offer would amount to inequitable treatment of minority shareholders. We also spoke by telephone and met in person with Mr. Saieh in December 2013 to impress on him the fiduciary duty of the Board and its controlling shareholder not to compromise on the value of the deal for all shareholders in exchange for securing special benefits for Mr. Saieh and CorpGroup.

Disregarding the best interests of minority shareholders, Mr. Saieh and the Bank nonetheless agreed to a transaction that will, if completed as currently structured, provide Itaú with effective control of the Bank while conferring numerous valuable benefits to Mr. Saieh and CorpGroup. The market swiftly repudiated the deal: the Bank’s shares dropped precipitously in the days following the announcement, erasing more than US$700 million in shareholder value.1

While the full details of the transaction agreement and the shareholders agreement to which the Bank, Itaú and CorpGroup are parties have not been disclosed, the incomplete and inadequate disclosures that have been made so far clearly reveal that Mr. Saieh and CorpGroup will receive an array of special benefits not shared with other shareholders, including at least the following:

The purchase by the post-merger bank of CorpGroup’s 12.38% interest in CorpBanca Colombia for US$329 million and of CorpGroup’s co-investors’ interest in such unlisted and illiquid entity for an additional US$565 million at a price significantly higher than fair market value or the value that would be received in an arm’s-length transaction. This purchase of the minority interest in CorpBanca Colombia represents a transfer of value from the Bank’s shareholders to CorpGroup and its co-investors in CorpBanca Colombia.
A US$950mm credit line to be provided by Itaú to CorpGroup, which provides no benefit to the Bank’s minority shareholders.
CorpGroup’s rights under the proposed shareholder agreement to appoint the Chairman of the post-merger bank (reported to be the Bank’s current Chairman, Mr. Jorge Saieh) and members of its Board (reported to include Mr. Fernando Massú, the Bank’s current CEO), to veto senior management appointments, and to otherwise influence the structure and composition of the senior management team.
Tag-along rights and rights of first offer.
A share liquidity mechanism for the sole benefit of CorpGroup.
An agreement to give CorpGroup the option to co-invest with Itaú in a regional alliance of banking businesses outside the geographic range of the merged bank.

The paucity of detail on the transaction provided by the Bank’s management thus far means we may not even know the full extent of the disproportionate consideration to be accorded Mr. Saieh and CorpGroup, or that the particulars of these benefits have been accurately reported. Given the special benefits received by Mr. Saieh and his affiliates, we reject the Bank’s assertion that the structure of the transaction as a share-for-share merger means that all shareholders will receive the same treatment. To the contrary, we believe that it is patently evident that the tortured legal structure adopted by Mr. Saieh for the transaction was selected precisely to deprive minority shareholders of the opportunity to have their shares acquired in a tender offer for fair value. And, of course, CorpGroup and its co- investors will be receiving cash, not shares, for their interests in CorpBanca Colombia.

In a letter to Mr. Saieh dated January 31, 2014, we rejected the characterization of the transaction as fair to minority shareholders and asserted our belief that Mr. Saieh and the Bank’s management had negotiated merger terms disadvantageous to the Bank’s minority shareholders in return for special benefits accruing to Mr. Saieh and CorpGroup. We expressed our hope for a constructive dialogue with Mr. Saieh to seek equal treatment for all shareholders. Instead, we were referred to the Bank’s counsel, who dismissed our concerns and asserted that the Bank would provide shareholders with no further information about the transaction.

Faced with the refusal of Mr. Saieh and CorpGroup to engage with us over our objections to the proposed transaction, we now call upon you, the Board of Directors of the Bank, to rectify this situation consistent with your fiduciary duties. We know you understand that your fiduciary duties require you to act in the best interests of all shareholders rather than simply endorsing and implementing the will of the Bank’s controlling shareholder. We believe the best way to maximize value for all shareholders is to conduct an open auction for the Bank without regard to the continuing benefits Mr. Saieh stated would be a key element of any transaction. In addition, the Bank should immediately disclose all the terms, contracts, agreements, understandings and plans for the proposed transaction so that all shareholders may assess for themselves its merits.

As members of the Board of Directors of CorpBanca you are stewards of the Bank and fiduciaries of all shareholders. The affiliated private investment funds managed by Cartica Management, LLC (collectively, the “Cartica Funds”)2 have been shareholders of CorpBanca SA since October 2012 and currently collectively own 10,971,557,595 shares including both common shares and ADRs. These holdings represent approximately 3.22% of the Bank’s outstanding shares. We urge you to take immediate steps to do what is right for all shareholders and run a full and transparent process to maximize shareholder value. We believe that an open and constructive dialogue between the Board and shareholders can contribute to a resolution of the issues raised in this letter and we remain open to such dialogue. However, consistent with our duties as fiduciaries for the investors who have entrusted their capital to Cartica, we are prepared to pursue any and all avenues and remedies available to us to protect the interests of the Cartica Funds as CorpBanca shareholders.

Sincerely, Teresa Barger

Senior Managing Director
Cartica Capital

¹ In fact, between November 29, 2013 (the day after CorpBanca announced that it had retained Goldman Sachs and Bank of America) and January 28, 2014 (the day before the announcement of the Itaú transaction), CorpBanca shares traded at a Volume Weighted Average Price (“VWAP”) of CLP 7.163. On January 29, 2014, the day of the announcement, the shares closed at CLP 6.067, a drop of more than 15% from the VWAP .

² The Cartica Funds are: Cartica Corporate Governance Fund, LP; Cartica Investors, LP; Cartica Capital Partners Master, LP; and Cartica Investors II, LP.

Argentina through the Eyes of Bonds

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There has been much speculation this year when it comes to the future of the Argentine economy. Many on wide side believe the country is heading towards another major financial crisis while many others believe it is just business as usual.

One of the major investment vehicles in the country is bonds, so what do they have to say about the state of the nation?

Let’s take a look at the development of the BODEN (Bonos Optativos del Estado Nacional) Elective Government Bonds, known by their acronym in Spanish, which are the dollar denominated bonds regulated entirely in Argentina and backed by the Argentine Central Bank.

BODEN RG12 was the bond series launched in 2002 after the financial crisis.

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It carried a coupon payment of 12.50% and was being traded at a median performance of 17.99%, which was an adequate performance in relationship to the dividend payments. When the Government made their last payment in 2012 to investors, everyone praised it as a significant movement away from crisis. About 80% of investors were foreigners, and it surely gave them confidence about the future outlook of Argentina.

The next big test for the BODEN series will be the R015 expiring on October 3rd, 2015.

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The bond has an average performance of 18% after the peso devaluation and it is causing concern in the markets, considering it carries a fixed coupon payment of 7% and a payment date just around the corner.

I will trust the bonds to give us more input this year in the upcoming state of the Argentine economy.

Argentina must make payments on the BODEN bonds in dollars, which in turn must come from the Central Bank reserves. Argentina uses these same reserves to resist downward pressure on the peso, and to pay for imported goods.

As the BODEN is a dollar-denominated instrument however, it demonstrates that contrary to common misrepresentation, Argentina can indeed access international capital markets, at least to some extent. Furthermore, the BODEN’s consistent value and trading value over time shows that international investors and markets continue to seek exposure to Argentina.

Argentina has demonstrated both a commitment to and indeed the prioritization of honoring this commitment; however, their continued ability to do so will depend on the bond closing prices, as well as on reserve levels in the upcoming year.

*BODEN trends and statistics provided by www.puertofinanzas.com

Article by Jonathan Rivas, Managing Partner, DCDB Group

Legg Mason Acquieres QS Investors

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Legg Mason has announced a definitive agreement to acquire QS Investors, a leading customized solutions and global quantitative equities provider based in New York, with $4.1 billion in assets under management and nearly $100 billion in assets under advisory.

Legg Mason’s existing quantitative equity platform, Batterymarch Financial Management, and Legg Mason Global Asset Allocation, its existing solutions platform, will be integrated over time into QS Investors as a result of this transaction. The combined platform will be a world-class retail and institutional solutions and global quantitative equity provider with compelling investment strategies and strong consultant relationships.

The expanded platform will be branded under the QS Investors name, and headed by Janet Campagna as Chief Executive Officer and Rosemary Macedo as Chief Investment Officer. Key investment professionals from Batterymarch and LMGAA will join the existing QS team as senior members.

The acquisition is expected to close in the first fiscal quarter of FY 2015. The acquisition and combination transaction is expected, excluding restructuring and transition costs, to be modestly accretive to Legg Mason’s earnings in the first year. In connection with the combination of the businesses, Legg Mason expects to incur restructuring and transition costs of approximately $35 million, including $3 million in the March 2014 quarter and $30 million in fiscal year 2015. Terms of the transaction were not disclosed.

The combined business will remain committed to delivering alpha for clients. This transaction strongly positions Legg Mason within the rapidly growing global client demand for customized solutions, liquid alternatives and smart beta strategies with: a scalable and distinct investment process and key capabilities in Custom Solutions, Liquid Alternatives, Global Quantitative Equities (including a 12-year track record in Smart Beta), and Multi-Manager Asset Allocation; a research-driven process with a strong track record in combining fundamental research, quantitative models and insights from behavioral finance to dynamically shift investment exposure based on changing market conditions and opportunities. Also, with significantly enhanced capabilities and operational efficiencies to deliver outcome-oriented products and strategies, compelling investment performance, a world-class technology platform and strong relationships across the consultant community and a broad institutional client base of public and private pension funds, endowments, sovereign wealth funds and financial institutions.

Post transaction, Legg Mason will leverage this enhanced solutions platform together with Legg Mason’s other investment affiliates and global distribution network for future growth in the institutional marketplace as well as with retail clients, where demand for customized solutions is increasing.

 Joseph A. Sullivan, President and CEO of Legg Mason, said: “Optimizing and expanding our portfolio of investment products has been a top priority for our senior management team. The combination of QS Investors’ highly regarded investment capabilities and thought leadership with our existing investment teams creates a powerful offering in an area of the market that is expected to experience significant growth in the coming decade. When we marry that with our global distribution platform, we believe we will be well positioned to bring compelling products to retail and institutional investors in markets around the world.“

 Janet Campagna, CEO of QS Investors, said: “QS Investors and Legg Mason share a ‘client first’ culture committed to transparency that will allow us to focus on investment strategies and serving our clients, and this unique combination will allow us to leverage Legg Mason’s global retail distribution platform, build and further strengthen our talented research and portfolio management teams, and continue to be at the forefront of innovative product development. Our objective over the next year is to integrate Batterymarch and LMGAA with our platform to leverage the best ideas from each group much like we’ve successfully adapted and efficiently integrated ideas both within and across asset classes for clients for over 14 years. We are confident in our ability to execute against this plan and especially pleased that our entire team continues to be focused on the long term success of our clients and business.”

 Legg Mason was advised by Dechert, LLP and QS Investors was advised by RBC Capital Markets and Paul, Weiss, Rifkind, Wharton & Garrison LLP.

The Shanghai Free Trade Zone Is Now a Focal Point for Financial and Economic Reforms

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La zona de libre comercio de Shanghai llevará a China a una nueva fase de liberalización económica — Photo: Mstyslav Chernov. The Shanghai Free Trade Zone Is Now a Focal Point for Financial and Economic Reforms

Victoria Mio – CIO China, Co-head Asia Pacific Equities and Fund Manager of Robeco Chinese Equities – came back from her last macro research trip to China with more confidence on cyclical recovery and reform momentum.

Different from Japan or Korea, which are small in comparison and urbanized very quickly, China remains relatively poor after 30 years of unprecedented growth. Although the coastal regions have reached an advanced stage in their development, the central/western regions are still underdeveloped. That provides a lot of room for growth. China is still an ‘adolescent’, yet to reach ‘adulthood’.

The Shanghai free-trade-zone pilot scheme was approved by the State Council on 22 August 2013. The most innovative part of the plan lies in promoting renewal in the financial sector and allowing market forces to work. Investors, points out Victoria Mio, are getting very excited by these new initiatives.

It is anticipated that the FTZ government may abolish many approval procedures and replace them with a registration process, and will allow foreign companies located in the FTZ to conduct currency conversion more freely. The FTZ may also be an important step for China to move towards joining the negotiation for a Trans Pacific Partnership (TPP), which requires all member countries to provide the same policy environment for companies, regardless of ownership. In this sense, the FTZ will lead China’s next phase of economic liberalization to drive economic growth for many years to come. Once proven successful, it will be rolled out on a nationwide basis.

Figure 1 shows the Shanghai Free Trade Zone, which includes A) Waigaoqiao Free Trade Zone, B) Pudong Airport Free Trade Zone and C) Yangshan Free Trade Port Area (land/harbor). The total area combined is 28.8 sq km, or 2.6% of Hong Kong (1,103 sq km) and 0.45% of Shanghai (6,340 sq km).

Pudong area in Shanghai

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Given the new leadership’s reform initiatives, Robeco therefore focuses on the following major themes in the China portfolio:

1) Urbanization (intra-city transportation and property);

2) Alternative energy (natural-gas distribution and wind power);

3) Health-care reform (pharmaceutical);

4) Income growth and distribution (auto and household appliances);

5) Environmental protection (waste and air-pollution management);

6) Technology and innovation (Internet and social media);

7) Manufacturing upgrade (high-end-equipment manufacturers).

Conchita Calderon is Appointed Executive Director for JP Morgan in Mexico

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Conchita Calderón ficha como directora ejecutiva para JP Morgan en México — Conchita Calderón. Photo: Linkedin. Conchita Calderon is Appointed Executive Director for JP Morgan in Mexico

Conchita Calderon has been appointed by JP Morgan as executive director of New Business Development for Mexico, according to information supplied to Funds Society by sources familiar with the appointment.

Calderon has worked to date as the partner responsible for the Mexican market at Canepa Management, a company which participates in Azora’s capital.

With over 14 years experience in the financial and wealth management sectors, Calderon has spent most of her career between Miami and Mexico specializing in ultra-high-net worth (UHNW) clients of the Private Banking division of Banco Santander.