Pixabay CC0 Public DomainCourtesy photo. Aeromexico Launches Private Jet Card in Partnership with Delta Jets
Aeromexico Group has partnered with Aerolíneas Ejecutivas to launch Aeromexico Private Jets, an offering that will include a jet card product. For domestic U.S. flights, Aeromexico jet card customers will utilize Delta Private Jets aircraft and crews to avoid cabotage issues.
In a press release, Aeromexico said, “We are proud to present Aeroméxico Private Jets, a new private aviation service in conjunction with Aerolíneas Ejecutivas, which combines the best of both worlds: the experience and premium service of the Mexican flag carrier with the flexibility of Aerolíneas Ejecutivas, a leading aviation company private for more than 50 years.”
Aeromexico said the new product is aimed at corporate clients, entrepreneurs, and companies seeking personalized service at any time they need it. It notes, “The service will work through the Jet Card Aeromexico, a prepaid card where customers can make use of their flight hours in a private jet operated by Executive Airlines.”
Available jet types include the Hawker 400XP (8 passengers) and Beechcraft Premier A1 (6 passengers); Learjet 75/45 and Hawker 800XP (both 9 passengers), and Bombardier Challenger 605 (12 passengers).
Jet card users can also apply their balance for tickets on Aeromexico to more than 90 destinations the airline flies.
Pixabay CC0 Public DomainPhoto: U.S. Air Force by Senior Airman Joshua Eikren. SEC Approves 3 to 1 the New Regulation on Conflicts of Interest for Brokers
While the SEC has allowed for years that brokers call themselves financial advisors without requiring them to disclose all conflicts of interest or put the interests of the clients above their own financial rewards, those times are over.
This Wednesday, the SEC voted 3 to one in favor of the so-called “Regulation Best Interest”, a regulation that will require brokers to act in the best interest of investors and disclose more about conflicts of interest that may arise and potentially divert the advice they give.
The SEC said the new rule aims to provide investors with more information about complex payment incentives and other practices that can influence a broker’s advice, without upsetting Wall Street’s commission-based sales model.
The SEC did not impose brokers with a higher fiduciary duty than that applied to investment advisors, who, unlike brokers, receive a payment for managing assets on an ongoing basis.
Although the brokers and advisors will continue to be governed by two rules, SEC Chairman Jay Clayton said that the best interests rule brings brokers’ one closer to the one advisors have. “We elevate, improve and clarify these obligations in an integral way, this action was long overdue”.
The final regulation for brokers does not require that they recommend mutual funds or other types of lower cost products; Cost is just one of the factors that brokers must consider to ensure that advice meets the best interests of a customer.
This Thursday it is expected that the fiduciary obligation of investment advisers will be defined.
Pixabay CC0 Public DomainPhoto: PxHere CC0. Out of 129 CKDs, Only 15 Have had IIRs Above 10% so Far
The assets under management of the 10 AFOREs in Mexico amount to 186.771 million dollars at the end of April 2019, according to CONSAR. The AFOREs can invest 18% in CKDs and CERPIs as an average because each Siefore has his own limit.
The AFOREs at the end of April 2019, have investments in CKDS and CERPIs that represent 6.0% of their portfolio and have commitments that amount to approximately 5.5%, which establishes a potential market for investing 6.5% (10.272 billion dollars).
There is a total of 129 CKDs with a market value of 12.631 million dollars (md) according to the information prepared with data from the Mexican Stock Exchange and the issuers as of April 30.
Of these 129 CKDs 21 are CERPIs which have the characteristic that as of January 2018 they can invest 90% of the resources they manage abroad and 10% in Mexico. Currently the value of CERPIs is 791 million dollars of which 18 were issued in 2018 (81%); so far only 2 in 2019 and one in 2016.
Of the 21 CERPIS there are 11 fund of funds, 6 of Private equity, 3 of infrastructure and only 1 of real state that was born in 2016 before the changes of 2018.
Due to this change, 2018 is the year with the highest issuance of CKDs (38) and the highest amount committed in one year (6.869 million dollars).
As issuers of CERPIs we can find names like: Blackstone (4 CERPIs); KKR (3); BlackRock (2); General Atlantic (2); Lexington Partners (2); Spruceview (1); Partners Group (1); Glisco Discovery (1); Discovery Capital (1); Global Capital (1); Motal Engil (1); Mexico Infrastructure Partners (1) and MIRA Manager (1).
In the CKD universe, the sector with the largest amount committed is real state, which represents 25% of the total, followed by the infrastructure sector (19%); private capital (18%); fund of funds and energy (13% respectively); credit (11%) and the primary sector with 1% of the total issued.
The CKD performance is complex given that each one has its own characteristics (sector, economic cycle, year of issue, degree of advance of investments, leverage, among others), which makes comparisons difficult. Despite this, the comparisons open the conversation with the GP about their performance in the period being compared.
The comparisons must be made with public information since it allows equal circumstances.
The way to calculate the performance of the CKDs with public information is calculating the IRR of each one (inflows and outflows of money to the CKD in the time of life that it has). In the 10 years of life that CKDs have, it is important to mention that between 2009 and 2012 they were pre-funded and since 2012 they were allowed to make capital calls, leaving the first CKD under this modality in July 2012. Homero Elizondo expert in CKDs estimated that the change reduced the cost between 200 and 500 basis point.
If all the CKDs are grouped by year of issue, the years that stand out are:
The 4 CKDs that came out in 2009 have a IRR of 9.8% in simple average and unweighted to the assets under management of each CKDs;
The 8 CKDs that came out in 2010 have an IRR of 7.6% on average;
The 4 CKDs of 2013 have a IRR of 7.3%;
The 19 CKDs of 2015 have an average IRR of 6.3% and
The 5 of 2011 have a IRR of 5.9% to mention the most profitable years of the last decade.
The results of the first three years of life of the CKDs is likely that are due to the fact that they are the ones that have lived the longest (between 7 and 10 years of life). When reviewing by sectors you can see:
In the case of real state, the CKDs that were born between 2010 and 2013 bring average IRR per year between 6% and almost 9%.
For the infrastructure CKDs, two-digit average IRRs can be seen in at least three years: 2012 (21.9%), 2009 (11.5%) and 2015 (10.0%).
In the energy sector, although the average IRR of the 3 CKDs in 2015 is 10.3%, the case of the CKD that was issued in 2012 have a negative IRR of 57.8% stands out.
For private equity CKDs, there are two years with IRR slightly above 9% (2010 and 2012).
For credit CKDs, 2010 and 2012 stand out with IRRs of 8.0% and 10.0% respectively.
In the CKDs that are fund of funds, the highest TIR is 2012 with 4.3%.
In the primary sector where there are only 2 CKDs, only the 2008 issue is the one with an IRR of 4.4%.
Only 15 of a total of 129 CKDs, are identified with a greater IRR than 10% as of April 30.
In real state the two CKDs of Grupo Inmobiliario MEXIGS (IGSCK_11 and IGSCK_11-2) and FINSA (FINSACK_12) have a IRR higher of 10%.
Pixabay CC0 Public Domain12019
. Black Tulip Asset Management Democratizes Access to Alternative Investments in the Entertainment Industry with FlexFunds
Black Tulip Asset Management, a Miami-based alternative asset management company exclusively focused on advising and structuring exchange-traded products (ETPs) for European capital markets, announces it is launching multiple ETPs with FlexFunds, a globally recognized service provider in asset securitization, allowing access to the entertainment industry.
Technology and a raft of new players in both entertainment production and distribution has forever changed the industry’s competitive landscape: Netflix, Apple, Alibaba, Tencent, Google, Hulu and Amazon. Traditional pay TV platforms have been forced to adapt.
The key is to capture the market with proven performers in the production arena, with a demonstrable track record of success and profitability. Rebel Way Entertainment and Empyre Media are good examples of production management teams and film financiers able to repeatedly achieve Internal Rates of Return in excess of 35%.
To address this market need, Black Tulip Asset Management has introduced Black Tulip Rebel Way Entertainment and Black Tulip Empyre Media Exchange-Traded Products (ETPs) arranged by the innovative asset securitization program offered by FlexFunds, which allows access to global investors.
The Black Tulip Empyre Media ETP offers the possibility of investing in a portfolio of three to six A-list Hollywood movies managed by Empyre Capital Management and advised by Empyre Media Ltd., a London-based media content financing and investment firm with over 50 years of experience in entertainment finance. Empyre Media management team has recently invested in 4 films that have generated more than $950 million in box office receipts and been nominated for 14 Academy Awards, four Golden Globes and eight BAFTAS.
The Black Rebel Way Entertainment fund is designed to invest in a slate of at least 10 low budget action and horror movies destined for streaming platforms and in some cases theatrical release. The principals have made over 350 films in this manner in the last four decades and the deal is an example of accessing valuable original content.
Lastly, Black Tulip Asset Management is also working with FlexFunds on a new $100 million content fund for women-empowered film, television and theatre.
Oliver Gilly, Managing Partner at Black Tulip Asset Management LLC, said: “We are delighted to continue working with the FlexFunds team and to be using their innovative securitization platform. The flexibility of FlexFunds’ model has allowed the issuance of the first ETP alternative uncorrelated notes to offer streamlined access to proven original content producers in Hollywood’s Second Golden Age, while the transparency of ETP securities enables global distribution, both privately and institutionally.”
Mario Rivero, FlexFunds’ CEO, said: “Through FlexFunds’ asset securitization program, we are capable of converting any asset into a listed security, allowing international investors to easily participate in any investment project. Black Tulip’s entertainment ETPs are a clear exhibit of how flexible asset securitization can be: from real estate assets to funds that invest in Hollywood movies, or any private equity project. Asset securitization plays a key role in allowing investors to participate in a wide array of opportunities at lower minimum investment levels, thus democratizing access to capital markets.”
Foto cedida. In an Economic Slowdown, Improving the Credit Quality of Fixed Income Portfolios is Key
The pace of global growth is slowing and the financial community is divided between those who believe that it is the beginning of a recession and those who do not. Regardless of where you stand, for Malie Conway CIO Global Fixed Income of Allianz GI, the strategy to follow for fixed income portfolios at this time of uncertainty is clear: improve the credit quality of the portfolio, avoid idiosyncratic risk and be positioned at the 3-7 year range within the curve.
“In an environment where there is little visibility on the global outlook, you want as much visibility in the portfolio as possible” states Conway.
Risk is not rewarded
Thus, Conway explains that, in a global scenario of economic slowdown, “highly leveraged companies will not do well. If we look at the risk reward and risk adjusted return in leveraged loans or CCC companies, we really see that they do not compensate. So we are underweight in highly leveraged companies. Our theme is to upgrade the credit quality of our portfolio.”
Conway also stresses the importance of avoiding idiosyncratic risk and for this reason highlights the importance of robust credit analysis that identifies which sectors and industries do well in an environment of economic slowdown.
Positioning in the curve
The second decision to be made is positioning within the credit curve that is currently flat. “In our view there is no inflation; inflationary pressures are cyclical not structural in nature, so that keeps the long-end quite low and this is why the curve has flattened over the last year. In the end, we believe the economic fundamentals will win – growth has peaked and inflation is under control. We do not see any reason for the long-end to sell off, “states Conway.
However, they do not believe that investors are compensated for lending to companies within the credit curve, so they consider the 3-7 year range (belly of the curve) as the most interesting since “you get good carry from credit and you get very good yield relative to the wings of the curve”.
Allianz GI team believes that the Fed has stopped increasing interest rates at the right time compared to those who believe that the Fed is too late and, therefore, expect a more gradual slowdown, with growth below trend but they do not see an economic recession for the time being.
“But even so, if we are wrong and rates go down, the 3-7 year will do well, not as well as long-dated bonds, but still do very well. And if you have the highest credit quality, you will suffer a bit of a sell off, but not as much as lower-rated bonds, “says Conway.
Credit market outlook
As for the recent evolution of the corporate bond market, Conway acknowledges that the credit market was very expensive during most of 2018, “at best it was fair value,” adds Conway.
“In fact, we have the lowest beta to credit risk in our portfolio since March 2009. We are pretty neutral with respect to the market, with quite significant relative value views.” Specifically, she mentions that she prefers US financials versus European, short-term BB assets versus long-term BBBs and emerging market sovereign debt against peripheral Europe. “We are trying not to take directional trades, but we are focusing on as much relative value trades as possible; we think that directionality and beta is not where the most added value will be in 2019” concludes the expert.
Interest in FRN assets
Conway supervises a fund that invests in FRN assets that after just one year of life has already accumulated $540 million assets under management. Moreover, Conway emphasizes that since the Fed put on hold the prospect of further interest rate rises, the fund has raised $150 million. In Conway’s view, this is due to the fact that there are investors who are de-risking their portfolios: “some investors are re-risking, but others are saying this is a window of opportunity”. Thus, the manager explains that this fund is an excellent alternative to cash. From her point of view, if you are accumulating cash there are two options: “Either you buy money market funds at 2-2.5% which is good capital preservation or you invest in high yield or leveraged loans in which I think the market is over stretched and you are taking a lot of credit risk. Leveraged loans will yield 6-7% and this fund over time will yield 4% “, ” if you are not sure if there is going to be a recession, but are worried about the credit cycle, valuations and credit quality and do not want to give up too much yield, this is really a unique product, “concludes Conway.
Foto cedidaImage of the facilities at Streamsong Resort and Golf, in Florida, where the sixth edition of the Investments & Golf Summit organized by Funds Society was held. / Courtesy photo / Courtesy photo . Funds Society Investments & Golf Summit: Ideas on Global and Multi-Asset Fixed Income as a Source of Income
The sixth edition of the Investments & Golf Summit organized by Funds Society, and held at the Streamsong Resort and Golf, in Florida, left us with the best proposals of nine asset management companies in the field of equities, structured products and real estate, and also in fixed income and multi-asset funds.
Janus Henderson, RWC Partners, AXA IM, Thornburg IM, Participant Capital, Amundi, M&G, Allianz Global Investors and TwentyFour AM (Vontobel AM) were the participating management companies in an event which brought together over 50 fund selectors from the US Offshore market.
In the area of fixed income, Thornburg Investment Management and TwentyFour (Vontobel AM) took center stage. Danan Kirby, CFA, Portfolio Specialist at Thornburg Investment Management, spoke about the challenges faced by that particular asset and presented a flexible and multisector debt strategy. Among these challenges is the difficulty of predicting interest rates in an environment in which consensus seems to agree that rates are at very low levels and the cycle of increases has been “incredibly” slow, but in which investors should, nevertheless, avoid making comparisons with the past, since the path of these increases cannot be known. And experience shows that the market has been wrong many times. Also, among the challenges of investing in debt, the credit spreads, both in investment grade and in high yield, don’t compensate for risks taken and, in addition, they have improved after widening at first, following the Fed’s halt on the interest rate hikes cycle, due to low growth. What is real and what is not? The asset manager wonders.
Another challenge in fixed income is differentiation, since not all the names with a BBB rating, which makes up a large part of the investment grade universe, are the same: “Credits within the most defensive sectors with lower leverage should be better positioned while we approach the final phases of the credit cycle,” says the asset manager. And, as if that weren’t enough, global investors face a changing scenario in which they are forced to take more interest rate risks in so far as yields remain low. In this challenging environment, the asset manager proposes solutions: a flexible strategy with a relative value perspective to look for opportunities with a good risk / reward basis.
And this is the field of the Thornburg Strategic Income fund, focused on obtaining total returns through a portfolio which has the liberty to invest globally in all fixed income sectors, and which seeks a strong risk adjusted return by investing in the best relative value opportunities without benchmark restrictions. “When managing a scenario with volatility, investors need to incorporate a broader range of strategies that offer flexibility. A more complex global scenario and a greater frequency of risk off-risk on sentiment will create opportunities for flexible investors,” he adds. The asset manager explains that they are flexible and that they invest in bonds that offer attractive relative value as compared to the universe, have good fundamentals, and can add diversified exposure to risk. Currently, they invest in a variety of segments such as bank loans, common stocks, preferred stocks, foreign government bonds, domestic US treasury bonds, municipal bonds, investment grade and high yield (the highest positions) corporate debt, CMO, CMBS, Mortgage-pass through, agency bonds, ABS and liquidity.
The asset manager concludes that the market’s dynamic nature requires both experience and flexibility, and that a process of relative value provides opportunities to generate alpha, in all scenarios. “We only take risk where we are paid for it,” adds the expert, who explains that they do not use derivatives, use a bottom-up process, and analyze the capital structure of the companies in which they invest very carefully.
Global Fixed Income for Obtaining Income
TwentyFour AM, a boutique firm of the Vontobel AM group specializing in fixed income and working with Unicorn in the US Offshore market, also presented a global and multisector fixed income strategy for obtaining income (TwentyFour Strategic Income Strategy), the main focus of which is precisely to provide such income through the positive effect of diversification and a truly global investment. The idea is to provide an attractive level of income along with the opportunity for capital appreciation, although capital preservation is key. It’s benchmark agnostic, has high conviction (less than 200 individual positions) and seeks global relative value in the portfolio, with active risk management (duration and credit, but taking out currency) and that adds value with both asset selection, as well as with top-down proposals.
“Fixed income can work well with an active management perspective. If you like corporate bonds, there is a lot to choose from and through analysis you can find out where it’s most attractive to invest. With fixed income the benefits of active management can be proven,” explains David Norris, Head of the company’s US Credit team. Currently, around 30% of the portfolio has exposure to public debt (especially US debt, since it offers protection in a risk-off environment and also a decent return in an environment in which the macro vision indicates interest rate stability, with maturities of about five years) while the remaining 70% is in credit risk, mostly outside the US, with a lot of exposure in Europe and the United Kingdom (with names that pay more in the latter case due to the Brexit issue), but with shorter maturities, less than two years. “The cycle is getting old and although there is still value in credit it’s not like before, so we prefer not to take too much risk and therefore opt for short terms,” explains the asset manager. “It’s a reasonable environment for credit but we are cautious, and opportunities have been reduced compared to previous moments of the cycle,” he adds.
Banks weigh around a quarter of the portfolio, mainly due to the opportunities that the asset manager sees in Europe, with yields close to 7% with maturities of less than two years and a rating above BB. “The risk profile of banks is very attractive,” he says, and speaks of the large Spanish banks and some British that offer great value because they are not exposed to problem areas like Italy yet benefit from the premium provided by the Brexit issue. If analyzed with a global perspective, there are many areas that are attractive” he adds. As for emerging debt, they have some exposure, but this was reduced after the rally in recent months and only hold hard currency credit, since it’s in this segment that they show the greatest concerns. Also, as a risk, there is the possibility that commercial US banks do the tightening that the Fed doesn’t, causing the end of the credit cycle, although, theoretically, they don’t see any end of cycle signs in the US, nor of recession. In any case, they are vigilant, and the fund frequently shifts sectoral allocation if market prospects change.
Multi-assets: Winning Strategies
Also with a vision to generating income, but with a multi-asset perspective, Amundi Pioneer presented a solution for solving the income problem. “Traditional models of asset allocation oriented towards fixed income and equities can no longer produce the returns that investors need. Given the intervention of central banks, these figures will not return to historical levels. You have to find alternatives to debt in other assets in order to obtain more reasonable returns,” advised Howard Weiss, Portfolio Manager at Amundi Pioneer.
During the presentation he pointed out the attractiveness of Amundi Funds II-Pioneer Income Opportunities, originating in the US fund launched in 2012 aimed at obtaining income from a multi-asset perspective, as opposed to strategies, which tried to obtain income by focusing only on fixed income, because at that time it made sense (high-yield offered returns of 7%). But that compensation from the past has now disappeared: Over time, the spreads have been compressed, due to the continued interventions of central banks. Due to this lack of compensation, they have reduced their exposure to high yield in their strategy from over 44% in 2016, to around 13%. Equities offer a better value proposition for obtaining income: “We see conditions for the continuity of the economic expansion, for a longer cycle.” In order to create income from equities, and beyond dividends (in the case of these shares, they focus on the sustainability of the dividend, rather than on it’s being very high), they also opt for strategies such as equity linked notes. “Dividend strategies sometimes produce losses because cash flows are focused there, and the business deteriorates. We prefer to identify companies in difficulties, but that are in the process of rationalizing,” says the asset manager.
The strategy’s differential factor is the way in which the asset classes in which it invests are defined: At present, there are mortgage-backed securities, bank loans, emerging debt, US and international high yield, equity linked notes, bonds linked to events , MLPs, REITs (in Singapore and Europe…), emerging and developed world stock markets and hedging.
The objective of the strategy is to produce returns of around 4% and an appreciation of capital of 2%, so that annualized returns can reach 6%, although, even though it offers yearly income, capital appreciation will depend on the environment. “We only distribute what we produce, we will not consume capital,” says the asset manager.
Behavioral Finances
In multi-assets, M&G presented a strategy with a very differentiated approach: “There are two factors that move the market, fundamentals and economic beliefs, and these latter perceptions tend to change very quickly. In fact, sometimes the fundamentals don’t change, but the economic beliefs do,” explains Christophe Machu, Convertibles and Multi-Assets manager at the company. “Most of the time investors try to see where the benefits are going and try to make projections, but for this, you need better tools than those of your competitors and it’s difficult and arrogant to predict this data. That is why we focus much more on economic beliefs and their changes, that is, on investors’ perception,” he adds. Following these parameters, at the end of last year, for example, when the discussion wasn’t about whether a recession was coming or not (it will obviously come within the next two years, says the asset manager), but when it would come, they decided to take a contrarian vision and bet on shares, increasing their position, not because of the fundamentals but because of the change in the beliefs of the investors: it was a very good entry point, buying both US and foreign shares.
Thus, the strategy combines a framework of valuations with behavioral finances (episodes, events…), with tactical hedging, to establish its asset allocation and exploit irrational behaviors. As an example of the latter, explains the manager, volatility spikes tend to create opportunities for investment, helping long-term returns. One episode, he explains, has three characteristics: a rapid action on price, focusing on a single story, and presenting a price movement inconsistent with information flows: “It’s an opportunity where prices move for non-fundamental reasons,” explains the asset manager. In this way, without making predictions, and recognizing the importance of emotions, the strategy has managed to work well in different scenarios and market cycles: In optimism from 2000 to 2003, in the technology bubble, during which they cut back on equities and bet on bonds, in the subsequent crisis, and in the next period of compression of yields and recovery, in which they bet and benefited from the rally in all the assets… “We are now at a stage of compression in the risk premium of the shares, which means that the gap between the yield of the shares and the bonds is too wide,” says the manager.
With respect to their market vision, taking advantage of the pessimism of the end of last year, they increased equities, although they have subsequently reduced positions, due to the normalization of investor sentiment. “The last big change now has been the Fed, which has paralyzed rate hikes. If real rates remain at zero levels in the US, it will be good for emerging bonds, which have not moved much yet, and for stocks, especially outside the US. (in Asia, Japan and Europe). From a tactical perspective it is not as good as in December but from a strategic perspective it is.
The M&G Dynamic Allocation fund has an exposure of 41.8% to global equities, which means an overweight position, although it has been reduced and is centered outside the US. In fixed income, the bet focuses on emerging debt and is negative on public debt. “We prefer to take risk in stocks on credit,” assures the manager, who remembers that they are not stock pickers, and that they can make changes in asset allocation very quickly with index futures.
Courtesy photo. Amundi Pioneer: Trump Does Have a Path to Reelection
Donald Trump is facing a challenging re-election but is by no means out according to Paresh J. Upadhyaya from Amundi Pioneer.
Trump’s overall approval rating is stable, but at a net -11, is quite low. Meanwhile political betting sites are placing better odds in a democratic win. Despite all of that, Upadhyaya points out that there have been cases, like with Reagan in 83, where despite a negative nine point net approval rating, there was a win.
Moreover, he believes that “Trump’s low net approval rating does not mean loss, specially since there are many battleground states for 2020”. In his opinion, and considering that there are currently 10 states with less than 5 points difference, the bulk of the game will be decided in Arizona, Iowa, Wisconsin, Michigan and Pennsylvania.
“The most likely scenario is democratic house, republican senate” says Upadhyaya who thinks democrats have early edge to retaining House while GOP in Senate.
Path to reelection
According to a Pew Poll, the issues likely to dominate voter’s agendas in 2020 will be economy and healthcare, followed by education, while global trade comes in last.
“With a strong economy and low unemployment, Trump does have a path to reelection,” he mentions adding that using the Abramowitz Time for Change model with today’s numbers instead of waiting for Q2 2020, Trump would get 49.9% of the popular vote. Currently, “all the measures look fenomenal… I do not expect a recession next year but what the yield curve is telling us is that the economy will slow down.” However, “Trumps approval rating for jobs and economy is rock solid.“ So as long as the economy remains growing and jobs continue at good levels Upadhyaya believes he has a good chance to remain in power.
Without an opposition candidate in place yet, Upadhyaya also thinks that Trump will look to position himself as “the lesser of two evils. The election will become a race to the bottom even quicker than 2016.” He concludes.
In recent years, every now and then, parallels are made between Europe and Japan suggesting that Europe has entered a period of secular stagnation. Indeed, when the yield of the German Bund fell below 0% last quarter, some investors feared once again that Europe was turning Japanese.
Since 2008, growth has been tepid in Europe. Real private consumption is only 5% higher, equivalent to a yearly growth rate of 0.5% and investment is only now approaching the 2008 peak. The only bright spot has been net exports, which have doubled since then. In order to boost the economy, central banks reduce interest rates with the hope of spurring borrowing and therefore consumption. Twenty years ago, Japan first cut rates to 0% and since then, not only have official rates never exceeded 1% but they have hovered close to 0%. Growth, on the other hand, has generally remained anaemic. Likewise, the ECB has lowered official rates to 0% and, ten years after the crisis, any attempt at normalization has been kicked down the road. The fact is that low interest rates have had an indirect negative impact on the economy via the banking system. In both Europe and Japan, households and enterprises rely primarily on banks for their financing. This contrasts with the US where access to capital markets is more commonly used. The complicated situation of banks, due to falling net interest margins, stricter regulation, weak growth and political woes, has restrained both the old continent’s and Nippon’s banks from easily conceding loans.
Demographics is also a key similarity between both regions and probably the key structural problem explaining the low growth, interest rates and inflation. An ageing population and declining workforce has a direct impact on all these factors. As more and more people prepare for retirement, they tend to save more and, at the same time, labour supply diminishes, reducing growth and investment. Interest rates fall as savers chase fewer investment opportunities and in order to encourage borrowing. Another consequence is the negative impact on public deficits as governments are faced with increased healthcare costs for the elderly and less income from taxes.
Although Europe presents symptoms of the Japanese illness, there are a few relevant differences that point to a less critical situation in Europe and these differences may help it avoid a deflationary spiral. To begin with, in Europe, although inflation is still well below the ECB’s target of 2%, it is still positive, averaging 1% since 2012. This is a much better situation than in Japan where, despite 20 years of low interest rates and, more recently, a slew of unconventional policy tools, since 1999 inflation has been negative half the time. Japan is the only developed country where wages have fallen. Since 1996, inflation adjusted wages have dropped about 13%. The longer growth and inflation remain low, the more people are prone to save and postpone consumption. A decline in inflation also makes debt more burdensome and punishes borrowers. Of importance as well is the fact that the destruction of wealth in Japan after its twin real estate and financial asset bubbles burst was unique both in terms of scale and the impact on consumers. Counting the value of real estate and stock, Japan’s loss of wealth was equivalent to three years of its GDP. Moreover, the build-up of the debt overload in Japan before the crisis and its evolution thereafter was also very different to Europe. Credit growth in Japan reached 25% in 1990, whereas by 2008 in Europe, it was around 10%. Japan’s public debt-to-GDP has ballooned to almost 240% today, whereas in the euro zone, this ratio has dropped from 92% in 2014 to 86%.
That is not to say, however, that certain countries are not suffering a more complicated situation (for example, Italy with public debt at 130% of GDP). Finally, the ECB was also quicker to respond and address the problems.
Although Europe is suffering from low growth, interest rates and inflation, several important aspects are indicating a less dire situation than Japan. Monetary policy and other unconventional tools have, without a doubt, been necessary to support the economies of both regions, but their success in addressing the more structural problems has been limited. Going forward, Europe is still very dependent on external demand for growth and should perhaps try to attack its large current account surplus resulting from the northern bloc’s predisposition to save more that it invests. Combating Germany’s and other northern countries’ fiscal orthodoxy could give Europe another leg of growth and help it out of the doldrums.
Photo: waway. In Their First 10 Years, of a Total of 129, 86 CKDs Have Been Frequent Issuers
This year will be 10 years of the first issuance of the private Investment vehicle (CKD) listed on the Mexican stock exchange. The CKD in Mexico have allowed the Afores to venture into the financing of various infrastructure projects, energy, real estate, mezzanine debt, as well as prívate equity.
The four CKDs that were born in 2009 are: RCO of Red de Carreteras de Occidente (infrastructure sector, ticker RCOCB_09 and with a current market value of 959 million dollars), Wamex (private equity, MIFMXCK_09 and with a current market value of 64 million dollars), Macquire (infrastructure, FIMMCK_09 and with a current market value of 303 million dollars) and Discovery Atlas (private equity, DAIVCK_16 and with a current market value of 66 million dollars), however, only Macquiere was issued at 10 years. that all others have a term between 20 and 29 years.
Among the eight CKDs that were born in 2010, only six will expire next year (2020), which will begin to close the first cycles of CKDs with net returns and that will be an important promotion mechanism. The history of the CKDs was carried out in 2008 with the issuance of the instrument structured by Santa Genoveva (primary sector, AGSACB_08 and with a current market value of $ 135 million dollars) issued at 20 years.
The CKD issued by Capital I Reserve (CI3CK_11 of real estate and a market value of 55 md) in 2011 is also close to expire.
The CKDs that came out between 2009 and 2012 (20 in total including Santa Genoveva) came out with the prefunded modality. The first CKD with capital calls was Northgate (AGCCK_12) in the private equity and fund of funds segment, which set the tone for starting issues with capital calls. It should be noted that the structure of capital calls with punitive dilution has been the most used methodology among subsequent CKDs.
Today there is a total of 129 CKDs with a market value of 12,644 million dollars and the capital commitments amount to 22,170 million dollars according to information prepared with data from the Mexican Stock Exchange and the issuers as of March 21.
The CKDs participate in 7 sectors, where three stand out in number of funds, market value and capital committed: real estate, infrastructure and private equity. The capital committed are greater than 4,000 million dollars in each of these sectors. The CKDs that are fund of funds, energy and credit (mezzanine debt), the capital committed amounts are between 2,000 and 3,000 million dollars. The primary sector being the smallest amount (294 million dollars).
Between 2016 and 2017 the offer of CKDs increased by 15 per year respectively and by 2018 the number increased 150% to place a total of 38 CKDs. Of these, 18 came under the format of International and Private Investment Vehicles (CERPIs). This significant change in number and amount placed was due to the change in regulation where the CONSAR allowed the Afores to invest up to 90% of the resources internationally and at least 10% in Mexico. Several of these issues are tailored suits to some Afores.
In terms of capital committed, 2018 was the year with the most committed resources (6,869 of 22,170 million dollars in total). In the first three months of 2019 there have been three new CKDs including two CERPIs (one more from Blackstone to complete 4 and the first from Spruceview Mexico) and one CKD (ACON). Of the total 129 CKDs, 29 issuers can be identified that have jointly issued a total of 86 CKDs (almost three CKDs per issuer on average), so that 43 issuers have only one CKD in the market so far.
The 5 most important issuers in capital committed amount are:
Infraestructura Mexico with 4 CKDs (the tickers are: EXICK_14, EXICK_16-2, EXI2CK_17, EXICPI_18). Mexico Infrastructure Partners is an investment company specialized in investments in infrastructure and energy. It has capital calls of 288 million dollars and has capital commitments of 1,438 million dollars.
Credit Suisse with 3 credit CKDs, that is, mezzanine debt (CSCK_12, CS2CK_15, CSMRTCK_17). It has capital calls of 479 million dollars and has capital commitments for 1,250 million dollars.
Walton Streel Capital with 3 real estate CKDs (WSMXCK_13, WSMX2CK_16, WSMX2CK_18). It has capital calls of 212 million dollars and has capital commitments for 1,061 million dollars. In 2015 Walton also issued a CKD together with Finsa (FINWSCK_15) that has a market value of 243 million dollars.
Artha Capital with 7 real estate CKDs (ARTHACK_10, ARTCK_13, ARTCK_13-2, ARTH4CK_15, ARTH4CK_15-2, ARTH5CK_17, ARTH4CK_18). It has capital calls of 321 million dollars and has capital commitments for 974 million dollars.
BlackRock with 4 CKDs of which two of them are in CERPI format. The 4 CKDs participate in the energy sector, infraestructure and also have fund of funds (ICUADCK_10, ICUA2CK_14, BLKCPI_18, BLKAGPI_18D). It has capital calls of 298 million dollars and capital commitments for 921 million dollars
There is an initiative to allow private placement that, if authorized, would be highly likely to require secondary laws, which would take time to implement if applicable. This initiative is aimed to reducing issuer costs.
In what happens if it occurs, the maturities of the CKDs will start to have results that some will be good and another one not, given the nature of this type of investments where the important thing is diversification.
Foto cedidaPanoramic view of the facilities at Streamsong Resort and Golf, in Florida, where the sixth edition of the Investments & Golf Summit organized by the Funds Society is being held. / Courtesy Photo. Funds Society's Investments & Golf Summit: Some Proposals for Investing in the Late Stage of the Cycle
Three equity strategies, two fixed income, two multi-asset, structured products, and real estate investments, completed the proposals of the nine asset managers participating in the sixth edition of the Investments & Golf Summit organized by Funds Society, which was held in the Streamsong Resort and Golf, in Florida, and was attended by over 50 US Offshore market fund selection professionals.
At the Investment Day, delegates had the opportunity to find out the visions of Janus Henderson, RWC Partners, AXA IM, Thornburg IM, Participant Capital, Amundi, M & G, Allianz Global Investors and TwentyFour AM (Vontobel AM), and their proposals and investment ideas to obtain returns in an environment marked by the threat of being close to the end of the cycle, although with uncertainties about when this time will come. In this article we inform you about five of those visions.
Precisely with the idea of increasing caution at a time when it is difficult to predict the end of the cycle, Janus Henderson presented its global equity strategy with a neutral market perspective, developed in the Janus Henderson Global Equity Market Neutral fund. Richard Brown, the entity’s Equity Team Manager, argued for the need to reduce risks while positioning oneself for enabling returns, in a late stage of an upward cycle of which its exact end cannot be predicted. “Neutral market structures can now be very useful in investors’ portfolios, at a time when, while we still don’t see a recession, there are some warning signs,” he said, presenting a strategy with a relatively short track record (from February 2017) but with good behavior and differentiation from its competition.
With regard to those warning signals that he observes, he indicated that we are only one month away from the greatest expansion in history and, once these levels have been reached, caution must be intensified, as well as the inversion of the curve, which helped to predict recessions in the past and now also provide a warning. China’s economic situation (with lower growth, higher debt and a reversal in its demography), or central banks’ policies, which have stopped normalization, and the thought of their lack of resources for fighting against the next potential crisis are some of the other red lights. But, despite all of the above, the investor cannot afford to be out of the market, when 2019 has been the S & P 500’s best start to the year of the post-crisis financial era, and bonds offer very low returns. So, according to the asset manager, part of the solution can be a neutral market strategy in equities, with low volatility – around 4% – and low correlation with the stock markets, the potential to create absolute returns and protection against falls in the turbulences and in which stock-picking strategies favor good fundamentals.
On their differentiation from the competition, Brown pointed out that the fund invests in 60-80 pair trades (ideas obtained through the proposals -both long and short- of different asset managers), with a strong diversification by geography (now the majority of the exposure is in North America and Europe, but without directional bets, that is, only because that’s where there are more winners and losers), themes, styles and sizes that helps to reduce the correlation with the market. “We can bet a stock against a sector or against an index, but most are stock versus stock,” he explains.
Risk management is embedded in the portfolio’s construction (so that each pair trade contributes to the risk equally) and has a gross exposure of around 250%, and 5% in net terms. Among the examples of their bets, the long on Balfour Beatty versus the short on Carillion (both UK construction firms); Palo Alto Networks versus FireEye (US cybersecurity companies) or Sabra Health Care against the short bet on Quality Care Properties (REITS).
Long-short in US stock market
RWC Partners, also with a long-short bet in equities, but this time in the US, and with a market exposure that has historically been around 20% (although it has more flexibility), presented the RWC US Absolute Alpha fund at the event, a fund which aims to offer investors a pure source of alpha, with a concentrated high conviction portfolio, “with real names, without ETFs or other structures, in the form of a traditional hedge fund and managed with a high conviction.” It’s a liquid and transparent structure of long-short US equities managed by a team exclusively focused on absolute return and that seeks to provide strong risk adjusted returns with significantly lower volatility than the S & P 500, and in which the selection of stocks by fundamentals determines the returns on both sides of the portfolio. Managers try to identify patterns of information that can be indicative of changes in the dynamics of a company or industry and actively manage the net and gross market exposure in order to protect capital and benefit from directional opportunities whenever possible.
Mike Corcell, the strategy’s manager for about 15 years, focuses on criteria such as valuations, returns and margins (ROIC above the cost of capital and strong cash generation in the long part and the opposite in the short), or on transparency (it invests in industries with regular data on its fundamentals and avoids leveraged financial companies with opaque balance sheets and health companies due to the regulatory issue) and favors industries with improvements in their pricing capacity or where supply and demand are below or above the historical patterns. “We try to obtain returns in the higher part of a digit, and we invest in traditional sectors such as consumption, industrial, technology and in large secular industries such as airlines. We have analyzed these areas for 15 years and obtained good returns; It may be boring, but we will not invest in something we don’t understand,” he explains.
Regarding the current market situation, he admits that, although he doesn’t see any signs of recession in the US, we are at a late stage in the economic cycle, so he expects the growth of profits and returns in shares to be more moderate, although he doesn’t see signs of inflation at a time when the Fed has stopped monetary normalization. “Despite the goldilocks scenario with monetary and fiscal stimuli, we are in a late phase of the cycle, after a very long economic and market expansion, and in general, we expect a somewhat harsher scenario, with higher valuations.” He explains that although opportunities can still be found, it’s harder to find ideas in some parts of the portfolio following the Fed’s halt, although he believes that, sooner or later, it will have to adjust its balance and raise rates, a situation that will allow alpha to be generated more easily and will enhance the differentiation between companies, something that has not happened in the last 10 years.
Thematic equity and digital disruption
Also committed to equity, but with a more thematic vision dissociated from the economic cycle and focused on the economy of the future and digital disruption, the AXA IM experts participated in the Funds Society event. Matthew Lovatt, Global Head of AXA IM’s Framlington Equities, presented the investment themes which they focus on to position themselves in a changing economy, and an investment model that adapts to the new times. “When we invest, our challenge is to analyze changes in the world, in people and in the way we use technology, something that happens very fast, which is why businesses must adapt as well, and that’s what we analyze, how companies react to change. And our investment models must also change,” he explains. Therefore, they do not worry about whether there is economic growth or how GDP evolves: “We aren’t worried about GDP, but about secular, long-term issues that happen independently of the cycle and which will even accelerate considerably in a potential recession,” like online consumption. “People live longer, have more demands, and have increased their wealth, changing their consumption patterns. Therefore, many things are changing, and that’s why the way we see the world has also changed;” hence the idea of creating products to capture this new growth.
On concrete issues, he pointed out the transition of societies (social mobility, basic needs and urbanization), aging and life changes (welfare, prevention, health technology…), connected consumption (e-commerce and fintech, software and the cloud, artificial intelligence…), automation (robotics, Internet of things, energy efficiency), and clean technologies (sustainable resources, clean energies…). “There are big issues that will have great effects on wealth, such as the changes of wealth in the world, in societies in transition like the Asian ones, where a great shift is taking place. We also live longer and have more time to consume and companies will have to think about how to reach these consumers. On the other hand, the impact of technology on consumption is dramatic, and also key to the implementation of this technology in industries, in automation… Clean technology is perhaps the most powerful change: how we capture energy, store it, and use it in, for example, electric vehicles, is key, because it changes the way we consume energy,” he adds.
On the other hand, they remain oblivious to investment themes of the “old economy”, which suffers from margin pressures, such as traditional manufacturing, the retail business, or the scarcity of resources, and which evolve worse in the markets than new economy themes. In fact, for this asset manager, even the traditional sectorial exposure is no longer relevant, and they analyze each sector under the criteria of one of their five investment themes, or of the old economy. “The biggest disruptive change will be in the financial sector’s old economy,” he says, for example in the insurers of large financial groups whose business will change. On the other hand, within the sector, he’s interested in business related to wealth management. The disruption will also be strong in the “old part” of the energy sector, he argues.
In this context, the management company has modified its investment process, adding a thematic filter and ranking companies for their exposure to the themes they are betting on; also with changes in its analysis structure (focusing on these themes and selecting the best ideas) and the construction of the portfolios, which normally include 40-60 names with a large exposure to the themes. The management company has several strategies focused on each of these themes (transition of societies, longevity, digital economy, fintech, robotech and clean economy), although its core strategy, which invests in these five trends, overweight on those that are consumption and aging connected, is AXA WF Framlington Evolving Trends. In the presentation, the asset manager also pointed out their digital economy strategy, based on the fact that 9% of retail sales are now produced online but that is just the beginning of a great trend that in fact offers much higher figures in countries such as China, United Kingdom, USA or India. Positions which stand out in that strategy are Zendesk or the Argentinian Globant.
Real estate: Projects in Miami
During the conference, there was also room for more alternative proposals, such as real estate, presented by Participant Capital, a subsidiary of RPC Holdings, with a 40 year track record and 2.5 billion dollars in real estate projects under management, which offers Individual investors and entities access to real estate projects under development directly from the developer at cost price. Claudio Izquierdo, Participant Capital’s Global Distribution Managing Director, presented future projects such as the Miami Worldcenter, in Downtown Miami, which includes hotel rooms, retail and residences, and is financed with equity, deposits and credits; Dania Beach, which includes studios for rent; or the Mimomar Lakes golf and beach club, with villas and condominiums. And he also talked about other recent ones like Paramount Miami Worldcenter, Paramount Fort Lauderdale, Paramount Bay or Estero Oaks. The expert projects a very positive outlook on the opportunities offered by a city like Miami, with over 100 million visitors and 12.5 million hotel rooms sold per year, second only to New York and Honolulu, that is, the third most successful US city.
For its development, the firm has institutional partners, institutional and traditional lenders, and offers investors (through different formats such as international funds in Cayman, ETPs listed in Vienna or US structures) annualized returns of between 14% and 16%, the result of a 7% dividend or coupon during construction and an additional part after the subsequent sale or rent.
Structured products or how to boost alpha
One of the day’s most innovative proposals came from Allianz Global Investors, an active management company working with different asset classes, which is growing strongly, especially in the alternative field, and which has just opened an office in Miami. Greg Tournant, CIO US Structured Products and Portfolio Manager at Allianz GI presented his strategy Allianz GI Structured Return, an alpha generator which can work together with different beta strategies (fixed income, equities, absolute return…). The investment philosophy has three objectives: to outperform the market under normal conditions, hedge against declines, and navigate within the widest possible range of stock exchange scenarios. The portfolio, UCITS with daily liquidity, pursues an objective of annual outperformance of 500 basis points and uses listed options (never OTC) as instruments on equity and volatility indices (S & P 500, Russell 2000, Nasdaq 100, VXX and VIX) , with short and long positions, with an expected correlation with stocks and bonds of 0.3 or less. In fact, it has a risk profile similar to that of fixed income, but without exposure to credit or duration. “The goal is to make money regardless of market conditions. We do not try to find out the market’s direction or its volatility,” explains Tournant, who adds the importance of risk management: “We are, primarily, risk managers, followed by returns.”
The strategy, which has a commission structure of 0-30% (zero management, and 30% on profitability, based entirely on the success achieved), except in some UCITS classes, bases its investment process on statistical analysis (with a historical analysis of the price movements of equity indices in a certain environment of volatility), but it’s not a 100% quantitative process: it is in two thirds, while for the rest the manager makes discretionary adjustments. Further on, three types of positions are constructed: range bound spreads, with short volatile positions designed to generate returns under normal market conditions; directional spreads, with long and short volatile positions to generate returns when equity indices rise or fall more than normal over a period of several weeks; and hedging positions, with long proposals in volatility, to protect the portfolio in the event of a market crash.
As explained by the portfolio manager, the best scenario for this portfolio is one of high volatility, although the idea is that it works in environments of all kinds and has low correlation with other assets in periods lasting several months, although short-term market distortions can cause correlations with equities. The greatest risk is related to market movements and volatility and is a scenario of low volatility and very rapid market movements. “The relationship between the market path and volatility is important for this strategy,” says Tournant.
