The ECB’s July Meeting Arrives With No Forecast of Changes in Rates, Discourse, or Stance

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The European Central Bank (ECB) will hold its July monetary policy meeting tomorrow. According to asset managers, it is likely to proceed without major surprises and, most notably, without new interest rate cuts as market expectations suggest.

“The ECB’s July monetary policy meeting is likely to pass without incident. Similar to market expectations, we do not anticipate any interest rate cuts. Data dependency remains high, decisions are made meeting by meeting, and there is no prior commitment to a possible rate cut in September,” acknowledges Ulrike Kastens, economist for Europe at DWS.

This probable pause in July, according to Kevin Thozet, member of the investment committee at Carmignac, “will allow the institution to better assess the region’s inflation and growth trajectory and confirm that the path forward is as desired. However, the prospects of a new rate cut in September, along with the Fed, are high.”

Currently, data indicate that eurozone inflation fell to 2.5% year-on-year, while core inflation remained unchanged at 2.9%. In the opinion of Jean-Paul van Oudheusden, market analyst at eToro, as long as interest rates stay above 3%, it is likely that the ECB’s monetary policy will remain restrictive. “The current base interest rate is 4.25%, which provides room for further rate cuts despite the latest adjustment to interest rate expectations made by the central bank in June. Recently, the central bank has been cryptic about its interest rate path, but its goal is not to surprise the markets. Christine Lagarde could prepare the market for a rate cut in September or October in her press conference on Thursday,” comments van Oudheusden.

Regarding what to expect from tomorrow’s meeting, Germán García Mellado, fixed income manager at A&G, adds: “Regarding the reduction in bond purchase programs, no significant new developments are expected, since in July, reinvestments of the special program launched during the pandemic (PEPP) began to be reduced by 7.5 billion per month, with the aim of fully reducing reinvestments by 2025.”

Already stated by the ECB

In line with what the ECB has explained so far, given that there are no new growth and inflation projections, it is unlikely that the communication will change. According to Philipp E. Bärtschi, Chief Investment Officer of J. Safra Sarasin Sustainable AM, the ECB’s rate cut in June was accompanied by comments suggesting that the ECB will also cut its rates gradually rather than quickly. “However, due to the weaker growth momentum and the projected inflation path, we expect three more rate cuts in the eurozone this year,” notes E. Bärtschi.

“The messages issued in Sintra are consistent with previous communications, and barring surprises in the data, September is the preferred date for the next action by members. What is reaffirmed is the trend of rate cuts. This meeting will take place after the French elections, and although there is still some uncertainty around the composition of the next French government and the prospects for fiscal policy, we do not rule out seeing Lagarde addressing questions about what the ECB could do to protect French sovereign bonds and under what circumstances,” adds Guillermo Uriol, Investment Manager and Head of Investment Grade at Ibercaja Gestión.

Additionally, according to President Lagarde, the strength of the labor market allows the ECB to take time to gather new information. Consequently, in the opinion of Konstantin Veit, portfolio manager at PIMCO, the ECB is in no rush to cut rates further, decisions will continue to be made meeting by meeting, and the data flow in the coming months will determine the speed at which the ECB removes additional restrictions.

“Given the ECB’s reaction function, whose decisions are based on inflation outlooks, core inflation dynamics, and monetary policy transmission, we foresee that the ECB will continue cutting rates in expert projection meetings, and we expect the next rate cut to occur in September,” emphasizes Veit.

Forecast of new cuts

The market currently expects a 25 basis point rate cut in September and another in December/January. However, they identify that the ECB remains open to a slower rate cut process based on the data being published, with a meeting-by-meeting approach.

For their part, investment firms agree that the market is pricing in another 45 basis points of rate cuts for this year and consider that the current terminal rate, around 2.5%, above most estimates of a neutral interest rate for the eurozone, indicates a high concern about last-mile inflation. “Overall, the market valuation seems reasonable and broadly aligns with our baseline of three cuts for this year,” points out Veit.

On the possibility of rate cuts resuming in September, Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS Investment Management, argues that it is not yet fully priced in, which leaves some room for an uptick in the event of a 25 basis point cut at that meeting. “This keeps us optimistic about eurozone duration in the short and medium term. European government bond spreads remain relatively tight given the risk of events in France (which turned out to be relatively brief and more idiosyncratic than systemic). We see this as a possible topic to address in the press conference, but we doubt Lagarde will comment on France’s domestic political situation. Additionally, Lagarde is likely to affirm that monetary policy transmission has worked well,” explains Goves.

The ECB’s challenge

For Thomas Hempell, Head of Macro Analysis at Generali AM, part of the Generali Investments ecosystem, the ECB sticks to its data-dependent approach and stressed that wage data plays a crucial role. “On the other hand, official interest rates remain well above the neutral rate. We believe that with the slow downward trend in inflation, the ECB will initiate quarterly interest rate cuts until the deposit rate reaches 2.5%. This broadly aligns with market expectations,” comments Hempell.

In the opinion of Gilles Moëc, Chief Economist at AXA IM, it is paradoxical that central banks are being harshly criticized just as they are about to declare victory over inflation at a manageable cost to the real economy. In fact, he considers that the ECB started cutting rates in June, before clear signs of recession began to accumulate. “We believe it will be tight, but there is a possibility that the ECB will remove monetary restraint quickly enough to avoid a recession phase. We do not expect an emergency cut at this week’s meeting; we believe there would have been clear signals to this effect at the annual conference in Sintra,” he states.

According to his forecasts, the ECB Governing Council meeting should be the occasion to make it clearer that the June cut was only the beginning of a process. “We expect the next 25 basis point cut to occur in September. The market is now pricing an 87% probability of a cut then, and we would put it even higher. It is true that disinflation has stalled, but surveys converge to paint a sufficiently moderate picture of underlying price pressure for the ECB not to wait too long. In June, Christine Lagarde energetically avoided engaging in a discussion about what would be a path to removing restrictions. We expect greater openness this week, largely validating current market prices,” he concludes.

Francisco Tochetti (BFC Asesores): “The main trend in wealth planning is international transparency”

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Photo courtesyFrancisco Tochetti, Director of International Wealth Planning at BFC Asesores

Wealth management is a professional service offering exclusive financial advice to clients known as High Net Worth Individuals (HNWI). This discipline involves asset management with the aim of reducing expenses, diversifying investments, maximizing profitability, and increasing wealth.

Given the current context and the challenges that the asset and wealth management industry is facing, FlexFunds and Funds Society have launched an initiative to highlight the perspectives of influential leaders in the industry from various geographies.

Francisco Tochetti is a lawyer specializing in wealth and succession planning. With over 13 years of experience in the industry, he currently serves as the Director of International Wealth Planning at BFC Asesores (CDMX). Francisco is a TEP (Society of Trust Estate Practitioners) and holds various master’s degrees and postgraduate qualifications in International Taxation and Corporate Compliance (Centro de Estudios Garrigues Madrid, University of Montevideo Uruguay, among others). He is the author of various study works and a professor in the field.

As the Director of International Wealth Planning at BFC Asesores (a firm based in CDMX), Francisco faces challenges such as the need to be extremely diligent in a market like Mexico, where there are large and diversified sophisticated families. He mentions that another major challenge is building trust and maintaining close relationships with clients to provide effective and tailored advice, aspects he considers fundamental in his role. Finally, he considers technical knowledge in his field to be essential, as it requires understanding both local and international regulations on legal, tax, succession and compliance, etc.

How is the flow of investment funds in wealth planning in Mexico, given the political situation? where is Mexican money headed?

The Mexican market is very attractive for investment banking and for attracting capital to develop private projects. In cities like CDMX, Monterrey, Guadalajara, and Mérida (among others), there are large, well-qualified, and well-advised investors.

Like in other LATAM countries, when a family decides to invest outside of Mexico, liquid investments tend to go to Switzerland and the United States primarily, while there is also growing interest in private investment projects in Spain and other European countries.

After the 2024 Federal Elections, the whole world is paying attention to the direction the new government might take (continuation of the previous one but now with a majority in parliament). However, no significant capital movements have been seen in this regard.

Mexico is a very strong market, a country of great relevance to the world economy with very important commercial relationships. It will be essential to maintain legal security and thus continue to strengthen the confidence the country has globally. The upcoming elections in the USA are also very relevant for the country.

What are the main trends you see in the wealth planning sector?

The main trend in wealth planning is the increasing international transparency and the plurality of applicable regulations, which requires highly specialized advisors who are constantly training. Years ago, everything was simpler and more straightforward; wealth was not as diversified, and families lived in the same country. Today, there is a lot of local and international regulation to consider when planning wealth if we want to do it correctly.

How do you think the wealth management industry will grow?

The wealth management industry will grow significantly for three reasons: the endless investment opportunities available today, the increase in available capital worldwide, and technological advances that facilitate international investment.

The industry values advisors who can have a global business vision, advisors who analyze the issues in detail and collaborate with other experts internationally seeking excellence in results. Although this requires more work time and greater knowledge, I see a significant growth potential in the industry, especially in countries like Mexico.

Have you managed collective investment vehicles during your career?

I have structured various types of collective investment vehicles, often to securitize real economy assets and facilitate their investment. I have worked with notes like those issued by FlexFunds, SICAV Umbrella Funds, and SPVs. I have not directly managed the investments but have developed strategies for an asset manager or another person to handle the investment management.

What role do alternative assets play in wealth management?

Today, alternative assets play a fundamental role in designing investment strategies, not only for their potential profitability but also for the security some of these assets can offer.

However, it is important to note that these types of strategies are for clients with a long-term investment vision and who do not need immediate liquidity. Alternative assets are not ideal for all investment profiles.

What is the biggest challenge a wealth manager faces in capital raising or client acquisition?

From my perspective as a wealth planning advisor, I believe the biggest challenge for a wealth manager is establishing a close and trusting relationship with clients. However, today, it is no longer enough to offer investment advice; other areas closely related to investment, such as taxes, succession, wealth protection, privacy, etc., must be analyzed.

Providing a comprehensive service where wealth management is complemented by wealth planning adds significant value for the client. The key is not only to offer investment strategies but also to protect, optimize, and plan the client’s wealth, thinking about their future and that of their family.

What factors do clients prioritize when investing or selecting financial investments?

The main factor my clients prioritize when investing is security, especially after the post-COVID-19 market volatility, the market downturn in 2022, and the increase in US interest rates in recent years.

In LATAM, where political, social, and economic instability is common, investors seek to protect their capital by opting for safe and stable investments. Therefore, in both regions, investors are currently leaning towards conservative assets with predictable income, such as fixed income and bonds.

On a scale of 1 to 10, how important is the emotional management of the client in wealth management?

Emotional management of the client in wealth management plays a fundamental role: it is a 9 or a 10.

Francisco emphasizes that wealth planning addresses delicate issues such as structuring and protecting wealth, tax optimization, and inheritance planning during one’s lifetime. These topics can be emotionally difficult for clients; therefore, developing soft skills and understanding the emotions involved in wealth planning is crucial for building a solid and lasting relationship.

“Each client is unique, and there are no standard solutions. Solutions and strategies must be tailored to each case. First, it is crucial to understand the client’s situation and their particular goals. I always insist that we must adapt the strategy we design to the client’s needs and not adapt the client to the current strategy. The more information the client provides us about their short, medium, and long-term goals and needs, the better we can design an appropriate strategy”, he says.

Regarding technological advances, Francisco believes that artificial intelligence is beginning to play an important role in the wealth management sector by making work more efficient, obtaining a lot of information, analyzing financial assets, rebalancing portfolios, etc. However, he emphasizes that in the field of wealth planning, many soft skills are still required that artificial intelligence cannot yet match.

In the next 10 years, Francisco anticipates an evolution towards a much more sophisticated industry with regulatory changes and more advanced strategies supported by highly trained professionals. However, he does not foresee a radical change driven by technology but rather an integration that enhances advisors’ ability to better serve their clients.

Interview by Emilio Veiga Gil, Executive VP FlexFunds, in the context of the Key Trends Watch of FlexFunds and Funds Society.

Larry Fink Reaffirms BlackRock’s Commitment to Private Markets

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In the context of presenting the second quarter 2024 results, Larry Fink, Chairman and CEO of BlackRock, reiterated the company’s commitment to private markets. This commitment has been bolstered by the acquisition of Preqin earlier this month.

“BlackRock is leveraging the broadest set of opportunities we’ve seen in years, including private markets, Aladdin, and full portfolio solutions across both ETFs and active assets. At the same time, we are opening significant new growth markets for our clients and shareholders with our planned acquisitions of Global Infrastructure Partners and Preqin,” Fink stated.

In this regard, he highlighted that organic growth in this second quarter was driven by private markets, in addition to retail active fixed income and increasing flows into our ETFs, which had their best start to the year in history. “BlackRock generated nearly $140 billion in total net flows in the first half of 2024, including $82 billion in the second quarter, resulting in 3% organic growth in base fees. We are delivering growth at scale, reflected in a 12% increase in operating income and a 160 basis points expansion in margin,” he said regarding the results.

According to Fink, BlackRock’s extensive experience in engaging with companies and governments worldwide sets it apart as a capital partner in private markets, driving a unique deal flow for clients. “We have strong sourcing capabilities and are transforming our private markets platform to bring even more scale and technology benefits to our clients. We are on track to close our planned acquisition of Global Infrastructure Partners in the third quarter of 2024, which is expected to double the base fees of private markets and add approximately $100 billion in infrastructure assets under management. And just a few weeks ago, we announced our agreement to acquire Preqin, a leading provider of private market data,” he emphasized.

Finally, he insisted that “BlackRock is defining a unique and integrated approach to private markets, encompassing investment, technological workflows, and data. We believe this will deepen our client relationships and deliver value to our shareholders through premium and diversified organic revenue growth.”

Tax Cuts, Tariffs, and Immigration Are Three Key Points in the Event of a “Republican Wave”

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Estados Unidos (PX)

Polls for the U.S. presidential elections indicated a tie, but recent events have shifted momentum towards the Republican candidate, former President Donald Trump (2017-2021). Various hesitations by the current President and Democratic Party candidate, Joe Biden, along with an incident last Saturday where Trump was injured by a gunshot to the ear, have positioned the former president and magnate as the favorite in the race for the Oval Office.

The fixed income markets are reacting to this shift, as the implied volatility of Treasury bonds (measured by the ICE BofAML MOVE index) spiked following the presidential debate on June 27, according to a Morgan Stanley report.

Conversely, major stock indices have continued to rise to new all-time highs, suggesting that equity markets might be ignoring recent political developments.

Morgan Stanley’s Global Investment Committee warns, “Investors cannot afford to be complacent about potential political changes, especially at a time when U.S. debt sustainability is in question, the economy is slowing down, and the Federal Reserve is still looking for evidence that inflation is under control.”

According to analysis by Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, the current proposals of a Republican triumph, both in the executive and in Congress, could have significant implications in three areas:

Tax Cuts

If Republicans sweep the November elections, the Tax Cuts and Jobs Act of 2017—which reduced tax rates for businesses and individuals and is set to expire at the end of 2025—could be extended and potentially enhanced. The extension of the Act could add around $1.6 trillion to federal deficits over the next decade, according to calculations by Morgan Stanley’s expert team cited by Shalett.

Additional deficits are a critical issue with current interest rates, as the cost of servicing Treasury debt has nearly doubled in the last two years. As federal debt and deficits increase, inflation-adjusted interest rates rise, likely putting pressure on U.S. corporate profits and stock valuations.

Tariffs

Current proposals from the Republican Party include sweeping trade barriers, potentially against historical allies and partners such as Mexico, Canada, and the European Union.

Historically, tariffs have caused a one-time price increase and supply chain disruptions that distort short-term growth. As a result, tariffs could disrupt recent progress toward containing inflation, potentially exacerbating consumer pain and increasing the prospect of “stagflation,” meaning persistent inflation amid stagnant growth, the report adds.

Immigration

Morgan Stanley’s chief U.S. economist, Ellen Zentner, and other researchers have noted that the increase of more than 3 million immigrants to the United States in 2022 and 2023 has had a dual economic benefit: higher population growth and a positive labor supply. This has helped drive higher GDP growth, stabilize housing prices, and reduce wage costs, contributing to lower inflation.

The adoption of radical measures at the border, as suggested in some proposals, could slow the growth of the U.S. working-age population, which could drag down the economy and reignite wage-based inflation.

Investment Implications

Considering all these factors, portfolio adjustments may be necessary, warns Morgan Stanley.

Investors should consider adding what could be leaders in a Republican sweep scenario, such as energy, telecommunications, and utilities.

Additionally, they should consider positioning portfolios defensively, focusing on investments that offer growth at a reasonable price, in areas such as healthcare, industrials, aerospace and defense, certain energy generation and grid infrastructure, the financial sector, and residential real estate investment trusts.

Additional exposure to Japan, gold, hedge funds, and investment-grade credit may also be beneficial, concludes the report.

Financial Advisors Remain Hesitant About Crypto as Blockchain Mining Hits Historic Lows

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Financial advisors continue to show reluctance towards cryptocurrencies, and the current landscape does not seem to favor a change in this trend as the profitability of mining these assets is at its lowest in the last six years.

According to The Cerulli Edge-U.S. Monthly Product Trends, 13.7% of financial advisors use or discuss cryptocurrencies with their clients, of which only 2.6% make recommendations. Another 26.4% hope to discuss or use cryptocurrency investments with their clients in the future, meaning that more than half do not expect to ever do so.

The report, which analyzes mutual fund and exchange-traded fund (ETF) product trends as of May 2024, explores the adoption of cryptocurrencies by financial advisors.

With $19.4 trillion in assets, the mutual fund structure remains an industry giant (even if product development focuses elsewhere), growing 3.3% in May through strong market returns. U.S. ETFs closed May with $9 trillion in assets, a new record for the structure, gathering strong flows ($89 billion in May) across a range of exposures, increasingly including active products.

With fees mostly within a narrow margin, brand familiarity is the differentiating factor that decides winners in the passive digital asset product ecosystem, and the same should be expected for future products.

In general, spot-priced Ethereum ETFs are not expected to achieve the same success as spot-priced Bitcoin ETFs, given the lesser acceptance of futures-based products and the lower expected total return relative to direct ownership of staked digital assets.

However, Kurt Wuckert Jr., CEO and founder of Gorilla Pool, warned about a massive shift in the Bitcoin mining economy while speaking to an audience in Miami at the Crypto Connect Palm Beach event.

“I cannot in good conscience ask you to spend your money on blockchain assets or mining equipment due to what is happening in the background right now. SHA256 blockchain mining is near its lowest profitability in six years, even though the price of BTC is still hovering near all-time highs,” Wuckert commented.

For many years, there has been an idea in Bitcoin that the price follows its hash rate as a kind of leading indicator. This notion has especially prevailed among BTC proponents, who have long maintained that as more computational power is dedicated to mining, the price of BTC will naturally rise. However, recent events, especially those observed in BCH and BSV, have debunked this myth, revealing a more complex and (in some cases) manipulated relationship between price and hash rate.

Although Bitcoin was never designed to deal with arbitrage between multiple SHA256 chains that refuse to orphan each other, the BSV blockchain has provided clear evidence that not all hash behavior is directly speculative. The fallacy that price follows hash is being exposed, particularly under the scrutiny of regulators, who are increasingly adept at identifying market manipulation in this area, adds the firm.

Evidence of this is that the largest hash companies in the U.S. are now publicly traded, and the price of their shares is added to the calculation of the company’s total profitability. Additionally, the simple fact of being a large consumer of electricity through hashing also creates profit opportunities in energy arbitrage, curtailment deals, and things like carbon credits, severely muddying the waters of Bitcoin’s basic hash economy, Wuckert explained.

This year, 54% of all BTC blocks have been mined by just two mining pools: Foundry USA (29%) and AntPool (25%), while another 23% have been mined by the third and fourth pools. In other words, more than three-quarters of all BTC blocks can be attributed to four mining pools, concludes the Gorilla Pool report.

Ameris Converts One of Its Real Estate Debt Funds Into a Semi-Liquid Fund

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(cedida) Martín Figueroa, socio de Ameris

With six years of track record in the rearview mirror, the sixth real estate debt fund of the specialized manager Ameris Capital is entering a new stage. Taking advantage of market trends and aiming to expand its investor base, the Chilean investment boutique decided to convert the vehicle into a semi-liquid fund.

The vehicle in question, called Ameris Deuda Inmobiliaria VI – or ADI 6, as it is known at the firm – invests in financing real estate developers that require capital to carry out their projects under various structures. This includes preferred equity, mezzanine capital, cash flow advances, or any other structure with solid guarantees, as described to Funds Society by the firm’s partner, Martín Figueroa.

The fund, explains the executive, “had its contributions limited because the market conditions necessary to increase its assets were not present.” This led the manager to start reinvesting resources in new projects as previous ones matured. “Being a fund with a portfolio of 15 projects, in which it invests with different maturity dates and periodic cash flows, we were able to structure it to provide liquidity to investors,” he explains.

The key moment for the vehicle’s conversion came at the end of May this year, when the manager convened the fund’s investors – through an extraordinary shareholders’ meeting – to vote on extending the strategy’s term by four years and changing the regulations to provide liquidity. With the approval of the shareholders, these changes took effect on July 1st.

What prompted this decision? “The products demanded by investors have been changing, and we as an AGF must adapt to what investors demand. Today, interest rates are high, so the opportunity cost for investors is higher. If we don’t adapt, they will prefer other alternatives that, although yielding slightly less, offer liquidity,” he notes.

After over a decade of offering private debt investment alternatives, initially only to institutional and select private investors, Ameris is looking to expand the investor base for these strategies.

The Strategy

The ADI 6 vehicle aims to generate returns by supporting an industry that has been particularly impacted in recent years: real estate.

Its investment thesis, Figueroa explains, is based on the real estate market and its companies being in a state of stress, making it difficult for them to secure the necessary capital to develop their projects. “We want to help them continue developing their business in exchange for solid guarantees,” adds the Ameris partner.

Currently, the portfolio comprises 15 projects diversified across different geographical areas of Chile. “These are apartments that we believe will be sold without any issues because they are simple projects in good locations,” he explains.

The backdrop to this operation is a growing appetite for private debt funds, now that interest rates – and consequently, the returns on time deposits – have been declining. “Private debt was in high demand a few years ago, then it fell out of favor when deposits were paying 1% per month, and now that it has normalized, it is becoming attractive again,” Figueroa explains.

In this context, private debt is an area that Ameris Capital is keen to continue developing, not only for its role in the market and country’s development but also because “it is an asset that should be in every investment portfolio, just as it is in more developed countries,” according to the executive.

Blue Owl Capital Acquires Atalaya Capital Management’s Business

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EBW Capital and AIS Financial form strategic alliance

Blue Owl Capital announced on Tuesday the signing of a definitive agreement to acquire the business of alternative credit manager Atalaya Capital Management LP (“Atalaya”) for $450 million, according to a statement accessed by Funds Society.

The acquisition is expected to close in the second half of 2024, subject to regulatory conditions, and is anticipated to be accretive to Blue Owl in 2025.

The firm acquired by Blue Owl primarily focuses on asset-based credit investments in consumer and commercial financing, corporate and real estate assets, and manages over $10 billion in AUM as of June 30, 2024, the firm’s information adds.

Atalaya, founded in 2006 by Ivan Zinn, has deployed over $17 billion of capital, with nearly 70% of transaction flow coming directly from asset owners, originators, or joint venture partners.

Zinn, current founding partner and Chief Investment Officer of Atalaya, will join Blue Owl as Head of Alternative Credit and will report to Craig Packer, Head of Credit and Co-President of Blue Owl.

Atalaya is headquartered in New York and has approximately 115 employees, including over 50 investment professionals. After the acquisition closes, most of Atalaya’s employees are expected to join Blue Owl and continue managing Atalaya’s existing funds.

The purchase price at the closing of the transaction, $450 million, consists of $350 million in Blue Owl shares and $100 million in cash. Additionally, there is the potential to earn up to $350 million in benefits in the form of shares, subject to certain adjustments and the achievement of future revenue targets, the statement explains.

Citigroup, MUFG Bank, Ltd., SMBC, and Wells Fargo are acting as co-financial advisors to Blue Owl in connection with the acquisition. Kirkland & Ellis LLP is serving as legal advisor to Blue Owl.

Mizuho, RBC, and Truist are acting as co-advisors to Atalaya. Cravath, Swaine & Moore LLP is serving as legal advisor to Atalaya.

Larger Funds, Private Markets, Active ETFs, and Long-Term Themes: What Thematics AM Has on Its Radar

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Thematics AM, an affiliate of Natixis IM, is celebrating its fifth anniversary. The asset manager, specialized in thematic investing, has focused on developing a range of global, actively managed, high-conviction thematic equity strategies. Currently, they manage €4 billion in assets and have grown from a founding team of six people to 24. We discussed the firm’s future plans and their perspectives on thematic investing in this interview with Karen Kharmandarian, the firm’s CIO and co-manager of the AI & Robotics strategy.

What is your assessment of the firm’s first five years?

Overall, very positive. Firstly, the company has grown in terms of products. We started with the Water, Safety, Artificial Intelligence & Robotics strategies, and our Meta fund, a multi-thematic product. Over time, we have added new products: Subscription Economy, Europe Selection, which is a multi-thematic strategy focused on European companies, and Climate Selection, also a multi-thematic fund, but focused on companies that comply with the Paris Agreement in terms of temperature trajectory. So, five years later, we have eight products. The first four we launched have reached between €400 million and €700 million, while the most recent ones are smaller, such as the Subscription Economy strategy, which is around €85 million. Looking ahead, our intention is for these funds to continue growing until they reach a critical size. This means we need to build trust in all of them.

What is your outlook for the next five years?

Assuming we continue generating good returns and trust, we want to keep identifying attractive investment themes while maintaining our DNA. That is, not just ‘trendy’ themes, but products that truly make sense from an investment perspective for clients, and that, in terms of investment, we have an investable universe that makes sense, allowing us to be exposed to different drivers, with diverse growth engines, offering regional and sector diversification, and where we can move with agility and flexibility to manage with a long-term vision. Our vision is to build thematic strategies where we can offer what we call ‘thematic alpha,’ where our active management adds value compared to the general market performance.

Are you considering taking this same vision and thematic strategies to the private market?

Not at the moment, although it is something we consider in the medium to long term. It would give us the opportunity to leverage our experience and identify companies that are growing rapidly in the unlisted space early on. It would require a different skill set and fully dedicated teams because you can’t cover the same number of companies as in the listed space. For now, we still see some opportunities in the listed space, especially in the middle ground between these two worlds, between the unlisted space and what we do on the listed side. Maybe in these earlier-stage companies, recently IPO or post-IPO, where we have some emerging trends appearing, but we don’t have an investable universe with too many companies. We could perhaps combine different emerging trends into a single strategy with highly promising, high-growth companies, dynamically managing these different themes within the same vehicle.

As active managers, do you find the active ETFs business attractive? Many asset managers indicate that it is a way to implement an active strategy in a more efficient vehicle. Is this something you consider for your business?

The ETF business is something we didn’t consider in the past because they were mainly passive and index strategies. But today, with these active ETF vehicles, you can do practically the same as we do in our UCITS funds, just using a different wrapper for the product. Having said that, we are quite indifferent to the vehicle itself; we can use a UCITS as we could an ETF. What matters to us is that the vehicle allows us to do exactly what we do in terms of how we manage the strategies: active management, conviction-based, fundamental stock selection, and truly having this long-term vision. As long as we can do that, if the client wants an ETF instead of a UCITS fund, we’ll do it. What matters to us is not altering our philosophy, our investment process, and the investment approach we apply to a specific theme. This offers us another potential growth opportunity and opens up a new set of clients who might not have been considering UCITS products. Perhaps this is also a sign of the times.

We have seen some investor disenchantment with thematic investing; why has it lost popularity?

We have seen tremendous growth in thematic strategies over the last, say, 10 years. The level of commercial traction and interest from all types of investors, from retail to institutional, has grown dramatically over the last 10 years. This is also a recognition of the current market reality, where sector classification or regional allocation makes less and less sense. With the success of thematic investing, new fund managers and asset managers also considered thematic strategies as a commercial hook for their products. A context was created where global equity products had become thematic strategies, but without really adopting the DNA of what a thematic strategy is and without generating very attractive returns. This disappointed the market.

In this regard, what is your approach?

For us, thematic investment strategies need to be based on long-term trends. We need to ensure that we have powerful trends that support superior growth for many years and that have enough depth and breadth of investable universe. Some of the requirements we have for our thematic strategies are: it must be enduring, it must have a significant impact, it must have a broad scope, and it must be responsible. These four criteria are really key to considering whether we see the theme as viable or not.

From the perspective of clients and investors, how do they use these strategies in their portfolios?

It depends a lot. There are common characteristics among all investors, and then there are specific objectives or requirements of some clients. Initially, we saw that thematic strategies started with retail clients, as a response to a matter of convictions and also because they are easy-to-understand products. Now we have detected that it has spread to private bankers, family offices, and institutional investors. This profile considers thematic strategies as a ‘satellite’ within their core investment portfolio and also as a bet on a specific theme to drive and diversify their performance. Progressively, we have also seen that clients are becoming more sophisticated and have moved towards thematic strategies as part of their overall allocation.

Which themes are investors most interested in now?

I would say, without a doubt, that AI and robotics are very much on the clients’ radar today because they see how their daily lives are being radically changed by AI, generative AI, OpenAI, etc., and how this can bring significant changes in the way they interact with technology. Water is also becoming a relevant theme again. Although it seems like a mature theme that has been around for many years, we see that people realize that with climate change, it is gaining new momentum. And I would also mention safety, which is regaining relevance in a context of geopolitical tensions and wars.

Cocoa: The Price Volatility Does Not Diminish the Appeal of This Agricultural Commodity

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In the course of 2024, the price of cocoa has doubled, making one of the greatest pleasures we know, chocolate, more expensive. Specifically, in April, the price of cocoa on the New York Stock Exchange reached its historical maximum at $11,500 per ton, then moderated and slightly decreased in the following months. After reaching these historical peaks, prices reversed the trend and fell by 15%, but it seems they will surge again and continue to grow over time after this correction.

Investors recognize that this agricultural commodity has great long-term appeal, despite the price volatility driven by drought and climate change affecting production. According to Bank of America, it is likely that cocoa price volatility will continue in the short term. The uncertainty around supply and its implications for spot and future cocoa contracts is the main topic of discussion with their clients. According to their latest report, cocoa harvests for 2023/2024 are expected to decrease by 25% to 30% in West Africa, a region that represents half of the global supply.

In fact, the situation has even led the government of Côte d’Ivoire to limit the delivery of cocoa supplies during the mid-crop (May-July, approximately 20% of annual production) to companies with local grinding capacity. In this regard, Bank of America analysts consider that price and futures volatility for cocoa will continue until the end of August, when projections for the main 2024/2025 crop become clearer.

Better harvest production could translate into a price increase for final products such as chocolate. Bank of America believes that major cocoa and chocolate brands will increase their prices by double digits to compensate for cocoa inflation during this period, considering a future cocoa price of approximately $6,000 per ton by 2025. “Reflecting cocoa price inflation, the impact of chocolate price increases on volume (elasticity) and mix (shift to more affordable products) will be key. However, the current price waves occur after two years of double-digit price increases, questioning historical elasticity patterns, especially in the U.S. market, which has been weak so far,” Bank of America points out in its report.

According to NielsenIQ data in the U.S., chocolate market sales have been weak so far this year, with volume down approximately 5% (and value up about 1%), clearly showing some cracks on the elasticity side. In BARN’s opinion, the main culprit remains the structure of the U.S. chocolate market, which is overrepresented in the mass market. The low representation of private labels and value brands (4% and 10% of volume, respectively) means there is a limited supply of low-priced products to prevent consumers from “abandoning” the category. In Western Europe, chocolate market sales have been resilient, with volume down about -2% (and value up about +8%). The main strength of the European market, according to BARN, is its more balanced nature compared to the U.S.

In Bank of America’s view, one of the risks for BARN is the possibility that some of its clients might reformulate their recipes to reduce cocoa content, especially in the U.S. market, to limit their own cost inflation. Although BARN has reformulation capabilities, this would be a volume obstacle as it would cannibalize sales or lead to a net revenue loss if not recovered.

As seen in the first half of 2024 results, Barry’s balance sheet is very sensitive to cocoa price movements, predominantly affecting working capital through the margin call on their short cocoa futures (reflecting the forward purchase agreement). Although the pressure on free cash flow will be intense in FY24 (BofAe: CHF -1.4bn), BARN has the necessary liquidity to face it with: 1) CHF 700 million bonds issued on June 10; 2) CHF 730 million bonds issued on May 5, 2024; 3) a CHF 500 million RCF available; and 4) approximately CHF 430 million in cash available in the first half of 2024 results.

Although it may take time to rebalance the supply and demand of cocoa, this will happen eventually, according to the report. Beyond the positive volume elasticity in the chocolate category resulting from a deflationary environment, in our opinion, the key positive for Lindt will be its ability to retain price increases, which will imply a tailwind for gross margin, likely translating into increased spending on advertising and promotion to continue nurturing brand value. Conversely, Bank of America estimates the impact will be less beneficial for BARN beyond the positive elasticity of the category, as prices will mathematically decrease for them considering the cost-plus model structure.

*Harvests begin in October.

LarrainVial AM Expands Perspectives on the Chilean Economy at Its Seminar

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(cedida) XX Seminario LarrainVial Asset Management

How to get back on the growth path? This is a frequent question in Chile, and LarrainVial Asset Management, one of the leading investment houses in the Andean country, made it the central focus of the latest edition of its annual seminar. To address this, the event—celebrating the 90th anniversary of the investment house’s founding—offered a variety of perspectives, including reflections on the economy, society, and culture in the country.

After a welcome speech from Ladislao Larraín, the general manager of the firm, and an introduction by José Manuel Silva, partner and investment director of the firm, the audience at the W Hotel in Santiago received Sergio Urzúa, economist and professor at the University of Maryland and Clapes UC; María Olivia Recart, economist, former undersecretary of state at the Ministry of Finance and President of Comunidad Mujer; and Cristián Warnken, professor of literature, writer, and communicator.

The three guests at the event analyzed the factors explaining the weak performance of the Chilean economy in recent years and the measures that can be taken in response.

Lost Time

“We must hurry in the search for lost time,” warned Sergio Urzúa in his presentation, calling for “awareness” about the local economy’s situation and the “squandering” the country has done with it, in his view.

The deterioration of the economic momentum in the Andean country, the economist noted in his presentation, began in 2014 and is “a local phenomenon,” not a global one. Additionally, he pointed out, there has been a significant “institutional deterioration.” A reflection of this, he indicated, is the gradual reduction in the country’s credit rating.

What happened? “Anxiety is what played against Chile,” he said, referring to a change in the population’s mindset that led the economy “from jaguar to polar bear,” according to the economist’s analogy.

Some particular variables, he asserted, constitute “silent tax reforms”: the burden on human capital, with various factors impacting potential growth; organized crime, which is becoming a sort of tax equivalent to around 5% of GDP; and the “tax agreement in the living room,” where the fall in real income and the rise in the price per square meter have led 35% of people aged 25 to 35 to live with their parents or in-laws.

Looking ahead, the economist called for “accepting the loss,” acknowledging the lost economic dynamism to bring about change. Additionally, Urzúa urged focusing on three key factors: investment, employment, and education.

We must act now, in the economist’s view, noting that only 5% of countries that have had similar “economic slowdowns” to Chile have managed to reverse them. “Let’s start acting. Let’s set goals,” he indicated.

The Distribution Problem

“To grow again, we need to improve income distribution,” said María Olivia Recart as she took the stage. The issue of equity, she assured, is fundamental to achieving sustainable economic growth.

In this sense, the economist indicated that while it is necessary to address the issue of slow permits in the country, the business sector also has a role to play. “It’s not just about unlocking public policies,” she commented, but companies also need to have a long-term vision to prepare for future threats.

Regarding work, the professional emphasized that there is a “huge gap” in women’s labor participation, with career paths diverging from men’s after having children due to the burden of childcare. “We need universal daycare,” urged the professional.

Additionally, she noted, there is an education problem that goes beyond the public sector. “Our training systems are in crisis,” the economist indicated, adding that “it’s the system. Not just public education.”

Regarding the productivity problem in the country, Recart said that “we must start from the micro and go to the macro.” It’s not just about modernizing the state, she commented, but there are also shortcomings in business management. Especially considering the contextual factors on the table, such as climate change, artificial intelligence, labor market informality, and the deterioration of democracy worldwide.

What remains to be done in the short term, then? For Recart, five key points are: focusing on things that directly affect people, such as service quality in companies and ease of procedures; creating social value; more dynamic public policies; impacts on specific groups; and looking at resilience variables, such as water usage.

The Cultural Factor

The diversity of the panel was expanded by the participation of Chilean intellectual Cristián Warnken, who replaced PowerPoint presentations with a selective pile of books and opened his presentation with a quote from “The Divine Comedy” by Italian poet Dante Alighieri.

The writer and communicator used the protests that marked a long period of political turbulence in Chile, known locally as the “social outbreak,” as an illustrative case. “There is a relaxation of the elites,” he indicated at the LarrainVial event, emphasizing that the elites have “responsibility” in the upheavals.

For the thinker, in addition to a relaxation of “ethical barriers”—with notorious cases of collusion and corruption, for example—the disconnection of the ruling social classes meant that no one could foresee the advent of the protests. And the interpretations were also disparate in the political sphere: while the left saw the process as a demand for revolution, the right chose to deny the existence of popular discontent.

“We are left without a narrative, we are left without leaders,” Warnken said, adding that “crises are not just political and economic” but also spiritual and cultural. In this sense, the thinker assured that Chilean society is currently seeing the effects of phenomena such as the impoverishment of education and the deterioration of civic culture.

What comes next? For the literary figure, “we need order,” but one that is “framed within another order.” In this vein, he called for caution against authoritarianism: “We don’t need a Bukele. Get that out of your heads.”