The Fed Could Afford to Be Patient

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We explained last week that more and more signs point to an acceleration in the cooling of the labor market, which would stimulate savings, discourage consumption, and later, investment.

As an immediate consequence, the nascent recovery in manufacturing activity experienced since the beginning of the year—largely due to the resilience of the U.S. consumer and the fiscal push from the Joe Biden administration—would be threatened.

Although GDP has been slowing since the third quarter of 2023 (4.9% vs. 1.3% for the first quarter of 2024), preliminary data from the S&P PMI indices indicate that the United States remains in the lead in June, despite investors betting on a globally synchronized GDP growth scenario. The composite indicator (manufacturing and services) for the eurozone, the UK, or Japan points in the opposite direction.

In fact, other surveys, both regional and national (ISM, LCMI), anticipate that the U.S. may end up following in the footsteps of those other economies.

Leading indicators of industrial activity, such as confidence in the residential property sector (NAHB), financial conditions and their effect on production costs, or sentiment in the semiconductor sector (measured by stock prices), are showing signs of fatigue. Similarly, the recovery cycle in the new orders subcomponent of the ISM survey takes an average of 18 months to travel from trough to peak, which is the time that has passed since the last valley to the most recent peak.

As we can see in our regression model, U.S. manufacturing momentum could begin to slow over the summer. Likewise, it is worth monitoring the situation in Europe: the German IFO (manufacturing), worse than expected, may be an early sign that the U.S. consumer push and fiscal support are beginning to fade. And although in Europe, unlike on the other side of the Atlantic, households still have a savings cushion, they are also more sensitive (especially in Italy or Spain) to interest rate hikes, which will increase the cost of about a third of the loans they are currently enjoying over the next few months.

The nascent signs of this weakness may explain the optimism of CEOs of large companies regarding the business environment their firms will face over the next 12 months, which would imply an increase in investment. Interestingly, the perspective of SME managers or that reflected by the sub-indices is quite different and points in the opposite direction. The tug-of-war between the restrictive monetary policy implemented by the Fed and the public spending expansion driven by the Democratic Party has an amplified effect on medium and small-sized companies, which are responsible for two-thirds of the new jobs created in the country. Lower-income households, but with a higher propensity to consume, are shown to be the most sensitive in this situation. In fact, recent news and behaviors from companies like NKE (Nike), KRUS (Kura Sushi), WBA (Walgreens), H&M, and L’Oreal suggest that consumers are beginning to suffer.

Meanwhile, Bloomberg’s macro surprise index has dropped to its lowest levels in the past five years, while Citi’s is one standard deviation below its 20-year average. Despite this, expectations for rate cuts remain stable and point to a 0.25% cut by the Fed on November 7 (with the U.S. presidential elections two days later?), and a 76% probability of an additional adjustment in December.

This perspective makes some sense given the Fed’s dependence on the publication of macro data, which sometimes reflect what has happened rather than what may happen, and a macro context—which, in our opinion, is quite uncertain—as evidenced by the distribution of “dots” among central bank members who only foresee one action before the end of the year, those who foresee two, and those who would not act until 2025 (7, 8, and 4 bankers, respectively).

Several governors and presidents of regional Federal Reserve banks have shared a range of scenarios regarding the evolution of the labor market and inflation in the coming months. Christopher Waller, for example, warned months ago of an increase in unemployment once job vacancies exceeded 4.5%. As shown in the graph, it is at 4.7%, and decreasing.

As we can see in the graph of the latest BofA survey among managers (FMS), the consensus remains a soft landing, although looking back, this is the least plausible alternative. Since 1965, the United States has experienced 12 monetary tightening cycles, resulting in 8 recessions and only one true “soft landing.”

With a gradual decline in inflation series but growth close to or slightly above trend, the Fed could afford to be patient in initiating the rate cut cycle.

However, the lack of consensus within the U.S. central bank is similar to that shown by the BofA report and reflects the lack of visibility in the macro environment we have been discussing from this column.

Recent comments from Mary Daly (San Francisco Fed), Patrick Harker (Philadelphia Fed), or Michelle Bowman show the weak conviction of their positioning: “In my view, we should consider possible scenarios that could unfold in determining how monetary policy decisions [of the Federal Open Market Committee] may evolve,” Bowman recently explained.

And although other colleagues of Jerome Powell (Lisa Cook or Alberto Musalem) skew their discourse towards a “no-landing” scenario that would again dust off the possibility of rate hikes, the fact is that the objectives for core inflation (PCE) and the unemployment rate for the end of 2024 outlined in the latest Summary of Economic Projections have already been reached, and the risk is that they will be exceeded in the coming months.

At the time of publishing this comment, we are still awaiting the release of the May figures for personal spending and income and core PCE inflation. The next Fed meeting, where they will update their forecasts, will be on September 17-18. There are three months of employment, inflation, and growth data between now and then, which, if they follow the trajectory of April and May, will undoubtedly result in a “dovish” surprise.

The divergence in the RSI of the weekly graph of the yield on the American bond, the macro surprise index, and the shift in speculative positions may continue to appreciate public debt.

Elections in France: Impact on the Market and Possible Scenarios

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From June 30 to July 7, France faces its early elections. The call for these general elections arises from the high degree of polarization and fragmentation in the country, as shown by the results of the European elections. According to experts, the outcome of this election could limit the French government’s ability to address its most urgent challenges, such as the rehabilitation of public finances.

Since the announcement of the dissolution of the National Assembly on June 9, the French market has experienced a notable decline compared to its European counterparts. “From June 10 to 13, the CAC 40 fell by 3.6%, compared to a 1.4% loss for the Stoxx Europe 600. In fixed income, the spread between the 10-year German bond and its French counterpart widened by almost 50%, rising from around 50 to 75 basis points. This level reflects 2017 conditions, which already included concerns related to the French presidential elections. If the spread between France and Germany surpasses this level, the comparison point would then be the eurozone crisis of 2011-2012, when there were concerns about the union’s survival. At that time, Greece was in default, and the National Front, the former name of the National Rally party, advocated for France’s exit from the common currency,” says Alexis Bienvenu, fund manager at La Financière de l’Echiquier.

However, could this retreat in French financial markets go much further? According to Bienvenu, it is impossible to know, as there are numerous political scenarios, and market surprises are uncontrollable in the short term. “The market could perfectly adapt to a situation where politics is not dictated by the stock exchanges, according to General de Gaulle’s quote. However, the Italian scenario shows that any policy of a heavily indebted state will increasingly depend on the market, despite its efforts to avoid this. Ignoring this reality means ultimately becoming even more dependent on it over time,” he comments.

According to analysts at Edmond de Rothschild AM, the spreads of French public debt with Germany could have widened by approximately 26 basis points in recent days, but a very pessimistic scenario has been ruled out for now. Additionally, spreads widened across Europe, from about 10 basis points in the strongest countries to around 20 basis points in some peripheral ones.

“Other risk assets also fell in recent days. High-yield spreads widened by 28 basis points, and European equity markets also declined, with France being the most affected country. The contrast with a buoyant Wall Street is revealing. The flight to quality supported 10-year German and US public debt, whose yields fell by 24 and 23 basis points respectively, leaving the absolute yields of French OATs virtually unchanged,” added analysts at Edmond Rothschild AM.

A Source of Reassurance

According to La Financière de l’Echiquier (LFDE), markets have already begun to reduce country-specific risk premiums. “Proof of this was the issuance of French public debt on June 20, which garnered reassuring subscription levels and issuance rates. The Paris Stock Exchange has also begun to recover part of the decline accumulated a week after the dissolution. Investors seem to see the horizon clearing gradually, although it remains uncertain,” they argue.

According to the asset manager’s analysis, the most costly measures are progressively disappearing from programs and could do so even more with the exercise of power. While electoral programs aim to seduce voters, the exercise of power may require realism and rigor to maintain it.

“The maxim borrowed by several French politicians, stating that promises only bind those who believe in them, seems not to have completely deceived financial markets. Political uncertainty is very present in France, undoubtedly, but as seen in recent elections in Mexico or India, it could automatically dissipate with a quick resolution starting July 8,” added La Financière de l’Echiquier.

And a Source of Instability

For Thomas Gillet and Brian Marly, analysts of sovereign countries and the public sector at Scope Ratings, “these elections will be crucial in determining President Macron’s ability to drive France’s fiscal agenda and reformist momentum ahead of the 2027 presidential elections.” However, they recognize that it is unclear to what extent French voters’ preferences in parliamentary elections will differ from European elections, “which typically favor protest votes with relatively low participation,” they explain.

Gilles Moëc, chief economist at AXA Investment Managers, believes that the surprise legislative elections called by the French President have affected markets beyond French borders. In his opinion, “the uncertainty about the macro-financial outcome of July 7 is high, as the fiscally extravagant programs of both the far-right and the left-wing alliance compete with the more orthodox offer of the centrist majority in power. According to the limited available polls, the most likely scenario is a divided Parliament. France has much more capacity than the United States to avoid government shutdowns. However, a suitable majority is needed to implement the significant discretionary fiscal correction measures implied by the current French Stability Program.”

Moëc considers a thorny issue to be the role of the European Central Bank (ECB) if pressure on French and possibly peripheral bond markets increases. “At this time, given the absolute level of yields, there is no need for the ECB to intervene, but further widening cannot be ruled out in case of complete fiscal paralysis in Paris or if an administration led by the National Rally decides to adopt a very extravagant stance. The ECB’s tool to re-enter the bond market, the Transmission Protection Instrument, gives the Governing Council enormous leeway to decide whether to act, but the documentation still makes it clear that the recipient country must comply with the EU’s fiscal surveillance framework. This is where the problem could lie. Indeed, although the National Rally no longer questions the existence of the monetary union, it remains a sovereignist party, and its willingness to accept instructions from Brussels in the event of a financing crisis could be limited,” he warns.

Possible Scenarios

In the opinion of analysts at Edmond de Rothschild AM, the President is betting on the disorganization of opposition parties but has taken a significant risk and opened up a period of uncertainty. “The main hypothesis is that the National Rally (RN) only achieves a relative majority, especially after the left-wing parties managed to form a coalition, but the current momentum could still lead to an absolute majority. A Parliament without a majority cannot be ruled out: a non-partisan figure would be needed to lead a technocratic administration, as in Italy. Markets also bet that the RN will introduce significant changes to its program, especially to the most costly ideas. Again, like Georgia Meloni. The party has already indicated that this could happen: Jordan Bardella, from the RN, has said that the cancellation of the recent pension reform would be postponed to a later date to address emergencies,” they note.

Florian Spaete, fixed income strategist at Generali Investments, points out that although it is difficult to predict an outcome given France’s two-round electoral system, there are two main scenarios: “The far-right National Rally (RN) becomes the largest group but without an absolute majority in Parliament (stalemate), or the National Rally achieves an absolute majority (probably with the support of dissident center-right deputies), with Macron remaining President but having to cohabit with the new government.”

Additionally, he mentions other less likely scenarios, such as a majority left-wing coalition, which would probably have a negative impact on French assets, although this would be mitigated by the strong presence of social democrats (PS), who would likely oppose the radical left’s proposals. “Macron, and the markets, would dream of a national centrist coalition, but it is unlikely that the numbers would work, and both the Socialist Party and the Republicans would hesitate to enter such an unnatural alliance,” Spaete clarifies.

Americana Partners Launches Its International Division Focused on Latin American Clients

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Americana Partners, an independent registered investment advisor (RIA) with over $7 billion in assets under management, announced its expansion into the Latin American market with the launch of Americana Partners International, dedicated to providing family office services to ultra-high-net-worth individuals in the region.

Jorge Suárez-Vélez will serve as Executive Director and Founding Partner of Americana Partners International (API). As the former Managing Director of Allen & Company Investment Advisors, the RIA branch of investment bank Allen & Co, Suárez-Vélez brings to the firm over 20 years of industry experience, particularly deep expertise in Mexican political and economic issues.

“While many of the wealthiest Latin American families have ties and business dealings both in Latin America and the United States, especially as they grow into the third and fourth generation, we see an opportunity to offer our services, expertise, and relationships to these families, and we are excited to have Jorge leading this tremendous effort,” said Ason Fertitta, CEO and Partner of Americana Partners.

Americana Partners celebrated its fifth anniversary on April 26, 2024, and has grown rapidly since its launch in 2019. In February 2023, the company hired a $700 million team based in the Permian Basin in Texas.

With the addition of its new international clientele, Americana Partners will add Pershing Advisor Services as a custodian to its current custody relationships with Schwab and Fidelity.

“I look forward to bringing Americana Partners’ technology, portfolio management, and family office approach to the Latam clientele,” said Suárez-Vélez.

“We couldn’t be prouder of how far Americana Partners has come and we are excited and optimistic about our future. In five short years, we have more than tripled the size of our firm in nearly every meaningful metric, and yet we know we are just getting started,” reiterated Ron Thacker.

Americana Partners is a member of the Dynasty Network of independent advisory firms. For over a decade, Dynasty has advocated for the benefits of independent wealth management for high and ultra-high-net-worth clients and has contributed to the movement of assets from traditional brokerage channels to independent wealth management channels.

Dynasty Investment Bank acted as exclusive financial advisor to Americana Partners and provided financing to help support the transaction.

JPMorgan Announces Growth Plan in Miami, Aiming to Capitalize on South Florida’s Wealth

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Miami has become a strategic point for investors from the United States and various parts of the world, to the extent that it has been dubbed the “Wall Street of the South.” In light of this, major financial institutions are keen to establish or consolidate their presence in the area, as demonstrated by JPMorgan Chase.

The largest banking institution in the United States, with financial assets around $2.4 trillion, daily operations of nearly $10 trillion in over 120 currencies and more than 160 countries, and safeguarding more than $32 trillion in assets, according to a letter sent last April by JPMorgan CEO Jamie Dimon, announced that it will increase its presence in Miami and South Florida with the intention of accommodating up to 400 employees in the coming months. With this expansion, the bank’s downtown Miami office will double in size.

According to a company statement, the office currently has over 500 employees across all JPMorgan Chase business lines and functions. This new two-year project will also renovate and expand the firm’s Miami Client Center to create a world-class meeting and function space for hosting client and employee events.

Additionally, the largest U.S. bank announced that it has leased 13,000 square feet for an office in West Palm Beach, while also planning to open three financial centers in South Florida early next year. The goal is to consolidate more than 60 employees from various business lines and functions who are currently spread across different locations in Palm Beach County.

JPMorgan and the Miami Economy: The Messi Factor

A recent independent study revealed that JPMorgan Chase contributes approximately $1.9 billion annually to the Miami economy and generates around 5,200 additional jobs in various local industries.

JPMorgan’s expansion in South Florida is expected to add an average of $151 million in economic activity to the region, as well as 380 construction jobs, according to the bank’s statement.

In his recent annual letter, Jamie Dimon highlighted JPMorgan’s commitment to driving economic growth throughout Florida. The bank has made over $46 million in philanthropic and business investments in South Florida and nearly $65 million statewide to increase homeownership opportunities.

JPMorgan is leaving nothing to chance. Earlier this year, it signed a naming rights agreement for the soccer stadium in Fort Lauderdale where Lionel Messi plays. The iconic Argentine world champion has become a significant attraction and sales and image force in the region by his mere presence.

Including Miami as an essential factor in its U.S. expansion, Dimon’s emphasis on the bank’s investments in this part of the country in his most recent annual report says it all.

Balanz’s Expansion in the U.S. Targets Both International and Resident Clients

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The Buenos Aires-based firm Grupo Balanz continues to grow regionally and aims to strengthen its presence in the USA, targeting both clients for its US Offshore business and residents in the North American giant, its executives told Funds Society.

“We are a company that started 20 years ago in Argentina. More than 5 years ago, we decided to expand the model towards Latam,” commented Julio Merlini, CEO of Balanz Argentina.

The executive reviewed the opening of offices in Panama, the United Kingdom, Uruguay, and the establishment of Balanz US in Miami.

With a new office in Coral Gables and under the leadership of Richard Ganter, the firm features a hybrid system between advisory and broker-dealer for both international and resident clients.

This model, which caters to both US residents and Latin Americans investing in the country who are tax-exempt, presents a “tremendous opportunity” for advisors seeking firms, particularly in Miami, added Ganter, CEO of Balanz US.

The CEO noted that the profile of advisors who best match the Argentine firm’s model are those with 15 to 20 years of experience in the business who want to continue growing.

“We believe it is very important for the advisor to know and feel that they are in an independent firm. Flexibility is a value in our proposal,” Ganter added.

He also emphasized the investment Balanz is making in building research and strategy teams to add value to their proposal.

Finally, Merlini responded that the group does not have a strategy to enter Private Equity because “for that, one must be prepared for both when the fund enters and especially when it exits. And that is something we do not want.”

The group employs more than 1,000 professionals and operates in three main sectors: Wealth Management, Asset Management, and Investment Banking.

Gold: What Could Trigger the Strongest Bull Market Since 1971?

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The price of gold has performed remarkably so far this year. To date, the value of the precious metal has increased by 12.58%, rising from $1,970 per ounce at the beginning of the year to $2,219 per ounce this week.

According to Bank of America’s latest report, gold could reach $3,000 in the next 12-18 months. Expectations of changes in the monetary policies of major central banks, the slow decline and control of inflation, and the ongoing demand as a safe-haven asset amid current geopolitical uncertainty are some of the reasons for its rise.

“We believe gold can reach $3,000 an ounce in the next 12-18 months, although current flows do not justify that price level for now. Achieving this would require non-commercial demand to increase from current levels, which in turn would need a reduction in the Fed’s rate. A flow into physically-backed ETFs and an increase in LBMA clearing volumes would be an encouraging first sign. Continued central bank purchases are also important, and a push to reduce the proportion of dollars in currency portfolios is likely to trigger more gold purchases by central banks,” states Bank of America in its latest report.

According to James Luke, a fund manager specializing in commodities at Schroders, gold has easily surpassed previous all-time highs and is currently trading above $2,300 an ounce, despite nearly uninterrupted sales by Western investors during 2023 and 2024. “Western liquidations have been offset by central bank, investor, and household purchases in the East. This shifting dynamic has been led by China but has not been limited to that country; demand increases have also occurred in the Middle East and elsewhere,” he notes.

Gold Equities

In his view, geopolitical and fiscal fragility today combine to forge a path toward a sustained and multi-faceted global push for gold supplies. “In our opinion, this could trigger one of the strongest bull markets since President Nixon closed the gold window in November 1971, ending the convertibility of the US dollar into gold,” adds Luke.

One nuance the Schroders manager adds is that, although gold prices have risen, gold equities have lagged behind the price of bullion. Luke explains that despite solid financial fundamentals driven by this gold bull market led by the East, valuations are nearing 40-year lows due to the poor Western view of gold and the poor operational results of some sector “leaders.” What could change this situation?

“It is no exaggeration to say that the gold mining sector could rise by 50% and still seem cheap. With a total market capitalization of $300 billion, the gold equity sector has been largely ignored, but we believe that is about to change. If there has ever been a time to include gold equities in a multi-year precious metals allocation, we believe it is now,” he explains.

Central Banks, Demand, and Gold

A relevant factor in the evolution of the gold price is the demand from central banks. According to BofA in its report, “encouragingly,” the latest World Gold Council Central Bank Survey confirmed that monetary authorities are looking to increase their gold purchases. “Long-term store of value/inflation hedge, performance during times of crisis, effective portfolio diversifier, and default risk absence make gold attractive. Although central banks’ motivations for holding gold may vary, they tend to have something in common: the proportion of dollars in their portfolios has been decreasing,” the entity notes.

In this regard, it adds that central banks have had various reasons for reducing their proportion of dollars, “including the realignment of currency denominations in reserves with the currencies with which countries actually trade and moving towards a multipolar world.”

Specifically, central banks—China, Singapore, and Poland, the largest in 2023—have been listening, although record purchases have only increased gold reserves from representing 12.9% of total reserves at the end of 2021 to 15.3% at the end of 2023.

When discussing gold demand, Luke notes that it is increasing among Chinese investors as the luster of the real estate sector fades. “Chinese households, who added trillions to a record excess savings in 2022 and 2023, are one of those players. The end of the thirty-year real estate bull market has been key to triggering a massive shift in attitude towards gold. The increase in investor preference for gold has mirrored the decline in the real estate sector. We doubt that the increased gold demand from households is a temporary phenomenon,” he argues.

Polarization and Gold

Finally, the Schroders manager highlights that the strength of gold reflects the shift towards a more polarized world, making it stronger as a safe-haven asset. Undoubtedly, the tightening tension between the United States and China, and the sanctions imposed on Russia following the invasion of Ukraine in 2022, have driven record central bank gold purchases as a monetary reserve asset.

“From a long-term perspective, central bank purchases well reflect the evolution of global geopolitical and monetary/fiscal dynamics. Between 1989 and 2007, Western central banks sold all the gold they practically could, as they were limited by the gold agreements reached by central banks to maintain order in sales after 1999. In that post-Berlin Wall and Soviet Union world, where US-led liberal democracy was booming, globalization was accelerating, and US debt indicators were frankly quaint compared to today’s, the demonetization of gold as a reserve asset seemed entirely logical,” argues Luke.

In his opinion, the more than 1,000 tons of gold (20% of global demand) bought by central banks in 2022 and 2023, a pace that continued in the first quarter of 2024, is potentially seismic. It seems entirely plausible that the current tense dynamic of established power/emerging power, combined with fiscal fragility looming not only over the US-issued reserve currency but over the entire developed economic bloc, could trigger a sustained move towards gold. “Bluntly put, the gold market is not large enough to absorb such a sustained move without prices rising significantly, especially if other global players also try to enter more or less at the same time,” concludes the Schroders manager.

Chilean Pension Funds (AFP) Purchase Over 3 Billion Dollars in Foreign Equities

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In 2024, Chilean pension funds have been increasing their positions in international equity funds. According to figures compiled by HMC Capital, they have acquired approximately 3.172 billion dollars net in the first five months of 2024, with a significant bias towards the U.S. and Asia, particularly South Korea and Japan.

Among purchases and sales, the fund managers have allocated 1.824 billion dollars to strategies focused on the U.S. stock market. Within this category, the preferred asset class is Large Cap Blend strategies, where they have allocated 1.729 billion dollars net. This is followed by Large Cap Growth with a net investment of 630 million dollars, and sector strategies with 168 million dollars.

Another area of interest for Chilean pension funds this year is Asia. The net investment in the region (excluding Japan) reached 838 million dollars as of May, with South Korea being the main destination. Investment funds injected 1.004 billion dollars into South Korean equity funds, in addition to allocating 420 million dollars to Indian strategies and 196 million dollars to Taiwanese equity.

Japanese equity strategies received a net inflow of 603 million dollars, mainly in the Large Cap segment (650 million dollars), according to the HMC report.

On the opposite side, net divestments have been concentrated in Latin America. Among the sales of Latin American and Small Cap strategies, investment funds recorded a net divestment of 408 million dollars in the region between January and May. In Brazilian equities, in particular, 229 million dollars were sold during this period.

The only exception is Mexico, where penson funds have allocated about 248 million dollars in 2024.

Debt Portfolio

The flows recorded during the first five months of the year in debt portfolios have been more moderate. Considering all types of fixed-income vehicles, pension funds have sold 61 million dollars net.

The largest sales have been concentrated in investment-grade strategies, with a net divestment of 589 million dollars, driven by sales in U.S. and global bond vehicles.

Convertible debt funds also saw outflows of 52 million dollars, according to HMC figures.

In contrast, the largest net investments were focused on emerging market debt, with 421 million dollars—particularly in local currency strategies, where they allocated 239 million dollars; financial bonds, with 96 million dollars; and high yield, with 49 million dollars.

Additionally, pension funds slightly increased their positions in money market funds, investing 188 million dollars net between January and May.

Preferred Investment Managers

Regarding the fund managers that received the most flows from Chilean pension funds in the first five months of the year, passive management firms have shone, receiving a total of 2.482 billion dollars net.

The main recipients have been iShares and Vanguard, capturing 1.545 billion dollars and 1.215 billion dollars, respectively. This brought the total AUM in iShares strategies to 11.5 billion dollars and Vanguard’s to 8.447 billion dollars.

In the case of active managers, Man Group has taken the crown, managing equity, credit, multi-asset, and real asset funds. As of May, HMC data shows that the seven pension funds in the Chilean system have allocated 1.047 billion dollars to the firm’s funds.

Other active managers that have seen significant flows in 2024 include Goldman Sachs, with a net investment of 875 million dollars; Baillie Gifford, with 633 million dollars; and Janus Hnderson, with 438 million dollars.

Assets Invested in the U.S. ETF Industry Reach 9 Trillion Dollars

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The global ETF industry continues to consolidate, especially in the world’s largest market, the United States.

That is why it is no coincidence that the largest ETFs in the world belong to the market of the leading global power; according to data from MarketScreener based on Bloomberg figures, the three largest ETFs in the world replicate the performance of the S&P 500.

The first is the SPDR S&P 500 ETF Trust, which was the first ETF listed in the U.S. in 1993. Its managed assets recently exceeded 500 billion dollars. Among its top holdings are Microsoft (7%), Apple (5.6%), Nvidia (5%), Amazon (3.7%), Alphabet (2%), Meta Platforms (2.4%), Berkshire Hathaway (1.7%), Eli Lilly (1.4%), and Broadcom (1.3%). Its fees are 0.09%.

The other two giants are the iShares Core S&P 500 ETF and the Vanguard S&P 500 ETF. The former has managed assets of 421 billion dollars, and the latter 404 billion dollars.

In this context, ETFGI, a leading independent research and consulting firm covering trends in the global ETF ecosystem, reported that at the end of May, assets invested in the U.S. ETF industry reached a new record of 9 trillion dollars.

The growth rate of the industry is another highlighted factor in the report; ETFGI notes that the most recent record was 8.87 trillion dollars, recorded just in March of this year. The evolution of assets in 2024 is very positive, as figures show that assets increased by 10.9% so far in 2024, rising from 8.11 trillion at the end of 2023 to the recent 9 trillion.

In May alone, the U.S. ETF industry recorded net inflows of 90.57 billion dollars, bringing the year-to-date total to 358.17 billion dollars, according to ETFGI’s U.S. ETF and ETP industry outlook report.

The net inflows mentioned above, totaling 358.17 billion dollars, are the second highest on record after the 399.1 billion dollars reported in the same period of 2021. Additionally, the report notes that the U.S. industry has reported 25 consecutive months, over two years, of positive net inflows.

This boom in the U.S. ETF market partly explains the surge in equity markets; at the end of May, the S&P 500 index rose 4.96% in May and 11.30% year-to-date in 2024. Excluding the U.S. index, developed markets reported a gain of 3.62% in May and 6.09% year-to-date.

At the end of May, the U.S. ETF industry had 3,531 products from 330 providers listed on three exchanges. ETFGI explains that the substantial inflows into the U.S. market can be attributed to the top 20 ETFs by new net assets, which collectively raised 49.62 billion dollars during May. SPDR S&P 500 ETF Trust (SPY US) raised 8.99 billion dollars, the largest individual net inflow.

Principal Puts Chile at the Heart of Its Wealth Management Strategy in Latam

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(cedida) Rocío Silva, gerente de Desarrollo de Negocios y Servicios Digitales de Asset Management de Principal Chile
Photo courtesy

Although gaining more prominence now, the existence of independent investment advisors is not new in Chile. At Principal AGF, the local asset management branch of the financial group of the same name, they have been working with this market segment for over 20 years. Moreover, after a structural change that left the Wealth Management business in Latin America operating as a unit, the Chilean branch is leading the regional wealth management strategy.

“We have always sought to continue positioning this type of advisors,” says Rocío Silva, Manager of Business Development and Digital Services for Asset Management at Principal Chile, in an interview with Funds Society. In addition to their network of proprietary advisors, the firm has a network of independent advisors.

This unit, explains Silva, is part of Principal AGF, which encompasses the asset management business in the Andean country. This firm includes a commercial team dedicated to investment advisors, led by Ariel Teplizky, Commercial Manager for Santiago, and Felipe Prieto, Commercial Manager in charge of other regions of the country.

Four years ago, they named the network of independent advisors Principal Global Advisors, but this month saw significant changes. A few weeks ago, the company revamped the platform, adding commercial standard and ethics pillars aligned with regulatory requirements. This comes at a time when the Financial Market Commission (CMF) is beginning to oversee the industry, establishing new rules to operate as a financial services provider.

But the change goes beyond that, according to Silva. They also consolidated it with the entire Latin American platform of the U.S.-based firm.

“Principal changed its operating structure,” narrates Silva. Although the firm remains a global platform, it formalized that the unit would operate at a Latin American level. “Not as Brazil, Mexico, and Chile, but as a regional unit with a local presence in different countries,” she explains.

Although Brazil is more advanced in this business than the Andean country, its way of interacting with advisors is different, mediated through a platform. For this reason, Silva points out that the firm decided to lead the entire Wealth Management strategy and the “wealth management concept through our investment advisors, with local market knowledge” from Santiago.

The Firm’s Strategy

“Of these countries, Chile is the one with the most knowledge of the Wealth Management segment and the independent advisor industry,” notes the professional.

Principal AGF’s strategy in this market is to provide a variety of tools to their advisors and a support team dedicated exclusively to serving this segment.

“For us, independent advisors or service providers are crucial for the growth of our market share and capturing clients,” explains Silva, adding that this is part of the firm’s “diversified business strategy” for asset management.

It’s a market that “will grow,” according to Silva, and they already have a share of around 25%, based on the 1,200 accredited advisors registered at the time of this interview.

A significant part of the firm’s value proposition in this segment is technology. The digital platform Averta is aimed exclusively at advisors and concentrates the technological tools offered to independent advisors.

This need, adds Silva, became even more prevalent in the post-pandemic world, which boosted the use of digital solutions.

Additionally, the firm is also using technology for the strategic support aspect of advisors. Together with its specialized team focused on the segment, Principal AGF is preparing to launch its first AI-powered chatbot next month. This tool—exclusive for advisors—will be able to resolve queries about the platform and certain product topics.

Regulatory Burden

One of the leading topics in the independent advisor industry in Chile currently is the new regulation governing the industry, which imposes new requirements to operate as financial service providers under CMF supervision.

In this context, the Manager of Business Development and Digital Services for Asset Management at Principal Chile highlights the importance of providing resources to independent advisors to navigate regulatory demands.

“Service providers working with us have found it quite easy to gather the information,” notes Silva, thanks to the tools grouped in Averta. These include all the advisory services they have provided, legal notices for end clients—for example, warnings about investments outside their risk profile—cybersecurity, compliance, data handling, and accreditation education, among others.

“The support they have with us will enable them to comply with the regulation,” says Silva, adding that “this facilitates their connection with the regulator” for independent advisors.

In any case, Principal has a positive view of the industry’s formalization. “It’s a very good thing for the industry,” Silva comments, as it raises standards on the requirements to be a financial service provider and allows them to form a group capable of participating more formally in the industry.

An example of this, she adds, is the formation of the first trade association of advisors, the Chilean Association of Investment Advisors (ACHAI), recently established.

“For them, formalizing is very powerful because they will have a voice in the financial asset industry. Previously, they didn’t have it because they were ungrouped,” she indicates.

Special Purpose Vehicle (SPV): An Advantage or a Disadvantage When Investing in Private Markets?

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According to a survey conducted by CSC among professionals working in private markets, 29% believe that the necessary conditions are in place for an increase in investments and deals. Additionally, 46% think that the market context will improve in the next two to five years, which will lead to an increase in special purpose vehicles (SPVs), also known as special purpose entities.

The study, whose authors assert that SPVs play a fundamental role in optimizing investments in private markets, provides a geographical perspective. For instance, respondents in the Asia-Pacific region are the most cautious, with only 16% believing that market conditions will improve within a year or are already improving. This contrasts with North America and Europe, where 37% and 33%, respectively, already see improvements or expect improvements within a year.

Among other key findings of this survey is the significant role that SPVs and private debt are playing in increasing investment in private markets. Specifically, 67% of debt professionals believe that market conditions will improve in the next two to five years.

“Our study has found a much more optimistic sentiment among senior professionals in private markets after years of significant market volatility, which bodes well for the broader investment sector and the global economy. Private debt professionals were much more optimistic than their colleagues in other sectors. This supports the trend we are seeing more generally in the market, which is leaning towards private debt,” says Thijs van Ingen, Global Market Head of CSC Corporate and Legal Solutions.

CSC’s study comes at a time when private markets have begun to recover after significant volatility and headwinds in recent years. The firm notes that the use of SPVs, critical structures at the heart of the global investment system, has also grown, but so has the complexity faced by managers due to increased multi-jurisdictional regulation, stricter reporting requirements, and the need for richer levels of data granularity.

According to Delphine Jones, Managing Director of CSC Client Solutions, SPVs have become increasingly complex and involve more management work. “The SPV ecosystem has also become relatively inefficient, with a lot of unnecessary complexity. It is in this environment that outsourcing to specialized SPV administrators is also growing,” Jones comments.

This complexity has led many firms investing in private markets to opt for outsourcing part of the management of these special vehicles. In this regard, the CSC survey shows that the main criterion for outsourcing is “finding a good administrator,” according to 66% of respondents. Other criteria mentioned, in order of relevance, include finding a reputable administrator, technology and data and reporting capabilities, and access to a sophisticated technology platform. Additionally, respondents involved in real assets like private equity and debt indicated that they would like technology to provide a centralized portal for a single view of all SPVs (57% and 59% respectively).

“Many cited technology as an important factor when selecting their SPV administrator, highlighting the importance of technology in SPV management. This includes optimizing deal sourcing, investment, helping portfolio performance, and many other areas. Regardless of the strategy, fund managers aim to have a technology-enabled approach and seek to achieve an all-in-one administrative solution as much as possible. While it may seem advantageous to use multiple outsourcing partners, having too many partners can actually make processes even more complex. Consolidating their SPV administration to a single global outsourcing partner helps to optimize their processes,” concludes Thijs van Ingen.