Pixabay CC0 Public DomainCarlos Noriega and Agustín Carstens at AforeMX. Carstens Says Mexican Pension Funds Could Learn From Behavioral Economics
Celebrating the 20th anniversary of the Mexican Pension funds, the Afores, Mexican financial authorities, OECD and IDB representatives along with international experts, specialists, academics and investors met in Mexico City for the Second Afores National Convention and the 15th FIAP international seminar.
In the event, Carlos Ramírez Fuentes, president of the Mexican Pension system regulator, Consar, said that this year has been of significant capital gains and a good level of collection, but that the discussion on commissions for 2018 is expected to be “complicated”. The participants also recognized that the contribution rate of Mexican workers is one of the lowest in the OECD.
In his speech, the Bank of Mexico’s Governor, Agustín Carstens, commented on “the virtuous circle that is produced thanks to the synergies that have been generated by the reform of the pension system and the autonomy of the Bank of Mexico, with its consequent impact on the savings in our country,” but he noted that the system faces enormous challenges that must be addressed in a coordinated manner. “The current pension system has a low coverage, to the first quarter of 2016 the contributors to social security in Mexico represented only 27% of the population of working age, which places our country below countries like Chile ( 40%), Costa Rica (41), Panama (47) and Uruguay (65),” he said.
Robert Kapito, president of BlackRock, said that Latin America offers investment opportunities because it has a large percentage of workers compared to the general population, but stresses the need to improve its performance and savings capacity, following the example of emerging Asia. In his opinion, this can be achieved through an improvement in financial education, an increase in women in the workforce, adjustments to policies and regulations, as well as an evolution of investment solutions. “Definitely if people in Latin America know more about their finances and their future financial needs, that would help economic growth,” he said.
Meanwhile, Guillermo Arthur, president of FIAP, warned that short-term solutions should not be sought in Mexico, since doing so could lead the country to face a crisis like the one currently experienced in Chile. While the Undersecretary of finance SHCP, Vanessa Rubio, said that “we must think of an increase to mandatory contributions, in voluntary contributions, in the possibility of giving incentives for this, and in perhaps gradually increasing the retirement age. ” However, Carstens stressed that “while establishing an increase in mandatory contributions could be reasonable, (…) this measure alone could generate incentives that would favor informal employment”, proposing the use of schemes such as 2017 Nobel Prize winner, Richard Thaler’s nudges, to automatically enroll workers in voluntary savings schemes. The central banker concluded that although there are still important challenges, he is convinced that “with the will and commitment of the institutions, the authorities and the employer and union sector, the necessary measures will be implemented for the benefit of the workers and the country as a whole. “
CC-BY-SA-2.0, FlickrPhoto: Eric Golub
. Why We Are In The Silver Era For Hedge Fund Strategies
Three years ago K2 Advisors, part of Franklin Templeton Investments, launched its first UCITS Liquid Alternatives fund, the Franklin K2 Alternatives Strategies Fund. At the time, some would have argued that the macroeconomic conditions were not favorable for certain hedge-fund strategies. While they haven’t for a number of years, but now this may be changing.
Monetary policy looks to be shifting in some countries, currencies are becoming more volatile and geopolitical risks have intensified of late.
“We think these fundamental elements could drive alpha opportunities for skilled hedge fund managers to capture. Many think that hedge-fund strategies are super-charged and high-octane. We would argue hedge-fund strategies are actually meant to be dull, with low volatility. But hedge-fund strategies can also provide diversification and long-term capital growth potential.” Says Brooks Ritchey, Senior Managing Director, Head of Portfolio Construction, K2 Advisors.
His team believes that low interest rates are often an overlooked factor in regard to hedge-fund strategy performance. Now, as US interest rates are making slow but steady strides upward from historic lows, they think certain hedge-fund strategies may be finding new opportunities to show their mettle.
“If the US Federal Reserve (Fed) continues to raise interest rates this year and next, we think it could cultivate an environment for certain hedge-fund strategies’ to flourish. Rising interest rates have historically been associated with lower cross asset correlations, creating more alpha opportunities for hedge funds,” adds Ritchey.
Additionally, K2 Advisors reminds us that rising interest rates have typically led to future periods of above average alpha, as represented by the Hedge Fund Research Index Fund Weighted Composite Index (HFRIFWI).
The illustration below shows a positive correlation between alpha and interest rates. The average level of alpha rose to the highest level at 14.07% during the measured period, where the US 10-year Treasury yield stood at 7.05%. Based on what we’ve seen in the past, they think hedge-fund managers could have the opportunity to capture that alpha, or outperformance, as US interest rates continue to rise.
For Ritchey, global geopolitical risk is another element that should drive a change in the landscape for hedge-fund strategies. On the back of recent geopolitical tensions, major currency spreads have widened, and historically wider spreads have benefitted hedged strategies’ alpha. “This is particularly noticeable within the Group of Seven (G7) economies, since they coordinate and attempt to manage major exchange rates in a way that leaves their currencies closely linked. As a result, we might not yet be in the golden era for hedge-fund strategies—the most-ideal environment for managers to capture alpha—but we could be approaching the silver era, where favourable opportunities are starting to appear.” He notes.
Allocating Toward Market Themes
Not all hedge strategies will fair equally as conditions change. K2 Advisors expects that the event-driven hedge-fund space, for example, may face headwinds as central banks globally begin to normalize interest rates. Event-driven hedge funds often seek to profit from merger-and-acquisition (M&A) corporate activity, which, in their opinion, could be diminished as interest rates rise. Global macro strategies, however, may benefit from rising rates. The global- macro space has seen an increase in trading volume over the last two months, and the firm anticipates this trend will continue.
“We’ve seen evidence that the current market landscape could become a nurturing environment for certain hedge-fund strategies, but we’re only just at the beginning and believe more opportunities could crop up during this silver era.” He concludes.
Pixabay CC0 Public DomainJosé Antonio Llaneza, courtesy photo. Principal To Acquire MetLife’s Pension Fund Management Business in Mexico
Principal Financial Group has signed an agreement to acquire full ownership of MetLife Afore, MetLife’s pension fund management business in Mexico, subject to regulatory approval. After closing, Principal Afore will be the fifth largest pension provider in Mexico in terms of assets under management.
According to CONSAR, the Mexican regulator, the main differences in their portfolios are that Principal has a larger allocation to equities and structured instruments than Metlife, which favors fixed income.
“As the middle class in emerging markets continues to grow, there is increasing demand for long-term retirement and investing products that enable individuals to retire with the highest pension possible,” said Roberto Walker, president of Principal International in Latin America. “This acquisition strengthens our commitment to Mexico’s pension market.” Giving them “additional scale, a larger distribution network and the capacity to better support its customers in Mexico with innovative advice and customized tools that help them achieve their retirement goals.”
Jose Antonio Llaneza, country head for Principal Mexico, added: “This acquisition demonstrates our continued commitment to invest in Mexico. Our focus remains on providing superior performance and counsel, while helping to educate people on the importance of increasing their contribution rate to their pension accounts.”
The purchase agreement between Principal and MetLife will be reviewed by Mexican regulatory authorities before closing, which is anticipated during the first quarter of 2018.
“The divestiture of MetLife Afore will allow us to enhance our focus on growing our leading insurance business in Mexico, where we are the number one provider of life insurance,” said Oscar Schmidt, executive vice president and head of MetLife’s Latin America region. “We are confident that Principal will provide our Afore clients in Mexico with access to quality resources and capabilities to help them achieve their retirement goals.”
BNP Paribas Securities Corp. and Credit Suisse Securities (USA) LLC served as financial advisors on the transaction to Principal and MetLife, respectively. White & Case LLP served as legal counsel for Principal and Nader, Hayaux y Goebel, S.C. for MetLife.
Pixabay CC0 Public Domain. Is it Possible for Value Investors to Find Opportunities in the Banking Sector?
A lot of fund value investors tend to avoid the banking sector altogether due to a number of reasons: a difficulty in understanding it’s business, the prolonged low interest rate environment, the lack of growth seen in credit, a poor market capitalization and a bad operating earnings trend. Despite these perceptions we are going to prove how an investment idea is possible to find in this sector with some banks that do have clear and sustainable competitive advantages or ‘moats’; especially strengthened in an increasing interest rate environment in the U.S.
Investment idea – Bank of the Ozarks
What would you say if I told you there was a commercial bank that has increased their earnings per share and its total assets by more than 2,000% in the last 20 years? It also boasts the highest quality of assets in the US and we managed to buy its shares below 15x its last twelve month earnings in September 2017?
I discovered Bank of the Ozarks 5 years ago, on a business trip to London while reading the American Bankers Association magazine in J.P. Morgan’s reception. I was so impressed by what I read about the bank that I began doing additional research and also came across its success story in other magazines, like Bank Director. In August this year, Ozarks was awarded for a 5th time in a row and for the 7th time running the number 1 bank in the US.
Bank of the Ozarks is a regional American bank founded in 1903 in Jasper, Arkansas with a market cap of USD 5269 million and 251 offices spread across 9 States in the U.S. Its main business is in loans servicing commercial real-estate development, office construction and other similar projects under the RESG unit or Real Estate Specialty Group. This division represents 80% of its total loan book of $15 billion dollars and is financed entirely from capturing deposits. Until this point it may seem like any other mortgage lending bank but what really makes Bank of the Ozarks an extraordinary bank?
1) Ultraconservative mortgage awarding policies.
The Real Estate Specialty Group (RESG) is made up of an experienced team of 107 employees of which 40 of them are in charge of origination. RESG works in the nonrecourse loans with a higher risk. In case of default, the bank only has collateral on the value of the property and the yield it generates to recover the loan. In exchange, these non-recourse loans are priced at a higher rate than the market.
So what does make Bank of the Ozarks different from other commercial banks?
It’s team of bankers in charge of origination are probably one of the main reasons with George Gleason, CEO since 1979, also heading the team and signing off each of the loans for the past 14 years. The bank is also very selective financing only certain properties and constructions in prime locations catering only to experienced customers with strong a solvency record. They even have the ability to almost transform a nonrecourse loan into one with recourse with their bad-boy carve-outs T&Cs in the event of default. Their experience and track record serve as testament to all these attributes. In the last 14 years, for example, they’ve only experienced losses on 2 loans (in 2009 and 2011) worth up to $ 10 million dollars from a total loan book of $15 billion! On top of this, the bank is always the only borrower in the senior trench of the deal, meaning they’re the least exposed in the capital structure of the loan and the borrower must ALWAYS put forward 50% of capital in advance. Another interesting fact working to the bank’s advantage can be seen in their average Loan to Value and Loan to Cost ratios. In the last few years, Loan to Value has declined to 42% and Loan to Cost to 49% after seeing highs of almost 70% around the time of the credit crunch. In today’s landscape, this could well be the most conservative loan book across the country. In June this year, George Gleason announced that he would dedicate approximately 75% of his time to the RESG division for the next two years, shortly before announcing the departure of Dan Thomas, longstanding RESG Chief Lending Officer.
Lastly, the conservative credit provision policy is clearly reflected in the quality ratios of their assets not only in their most recent filing but also consistently across their recent reporting history. As of 30th September 2017:
Allowance for LLS as % T.Loans = 0,55%
Non-performing loans as % T.Loans = 0,11%
Allowance for LLS as % NPLs = 650%
Loans and Leases past due 30days = 0,12%
Net charge-off = 0,09%
2) Seeking opportunity in its loan provision strategy for Commercial Real Estate and Construction – The Arkansas-based bank has only gone after niche markets that have experimented recent problems or difficulties where supply and demand is unbalanced. They therefore come against very few competitors in real estate lending projects ranging from condos, offices and hotels. Their most notable success can be seen in New York City where the bank has been capable of growing their volume of transactions very quickly from 2012, making it account for roughly 20% of the bank’s total loan book. This strategy has lead Ozarks to see a higher than market credit yield, as their interest margin increases at a faster pace than competition. Even the CEO himself defines their strategy the following way:
“What we have tried to do is sort of ignore the headlines to a great extent, I mean certainly you to have to take larger macroeconomic and market themes into account. But we have really tried to not let that drive our decisions, but instead to look at the supply demand metrics of each sub-market market and macro market and the relative competitive position of each product in the market and do a much deeper level of analysis on projects”.
3) Strong growth in Real Estate lending volumes.
Gleason expects to double the RESG business in the next 3 to 4 years and twofold in the following 7 to 8 years. It’s ambitions cover not only commercial real estate but also the expansion of other sectors including marine, SMEs and leasing. Their ambition is supported by their strong organic growth in a sector that is unlikely to grow organically.
In addition to this, there is also a strong inorganic component behind it’s success, after completing over 15 transactions from 2010. Each transaction has been accretive during the 1st year not only in terms of tangible value per share but also in their earnings per share.
The most interesting aspect of their organic and inorganic growth has been their unbeatable efficiency margin close to 30%, unseen in any other competitor, neither in the U.S. nor in Europe.
4) George Gleason, Bank of the Ozarks’ Chief Executive Officer (CEO). Management’s commitment and aligned interest to the company’s performance is exemplified in it’s CEO history. He bought a controlling stake in the bank in 1979 at a time when the total number of employees was 12, assets were $28 million and he was only 25 years of age. In 2003, he set up the RESG division with Dan Thomas commanding the team. Since 2010, Ozarks has completed 15 acquisitions becoming the largest bank in Arkansas and never allocate more than 50% of total purchase price to goodwill. Any investor, who would have co-invested with Gleason in the 1979 IPO, would have obtained a compound annual return of 22% including dividends when the average competitor has only seen a 4% return and the S&P 400 Mid Cap, a 10%. George harnessed his parents experience and began working at the early age of 5, when he was already in charge of set tasks within his father different businesses. Once he joined the bank, he founded and fostered a culture to motivate employees on a continual path of year-on-year performance, making sure they always felt were part of the company and also carried a sense of holding a stake in it. During this time and until today, George has managed to grow the profit in compound interest towards 19%, with a total return over its own funds and efficiency at the top of the sector.
Then why has its share price dropped by almost 30% from March’s all-time highs? There are 2 reasons behind this:
1) Muddy Waters Capital’s Short Selling note and skepticism over it’s Commercial Real Estate line of business. Muddy expressed concerned over the banks provision for loan losses, assuming it did not have enough cash to cover itself in the event of rising non-performing loans. It also believed it’s total off-balance sheet liabilities were becoming unsustainably high.
Answer 1) the provisions calculated by any bank are based on the quality of its assets. In Ozarks’ case, we are talking about one of the most high quality loan books, made evident by only experiencing losses on 2 of their transactions during the recent credit crunch. It’s average LTC and LTV of are healthily positioned at around 45%. What this means is that if a borrower would like to apply for a $100 million dollar credit, Ozarks
Answer 2) Even though the off-balance sheet liabilities add up to $11 billion dollars, mainly from their RESG side of business, most of these loans are senior, meaning Ozarks would be the last to provide funding for credit but the first to receive any repayment. The bank also demands collateral against the loan worth up to 2x the value of the credit. Tim Hicks, Chief Administrative Officer, showed no qualms when openly admitting that 92% of loan applications it receives are surprisingly rejected!
2) Dan Thomas quits as Chief Lending Officer of Ozarks’ RESG division. On the 28th July, Dan Thomas suddenly announced his departure from the firm forcing the share price into a sharp 12% decline.
Answer 3) Even though the longstanding Chief didn’t reveal his true motives behind leaving the company and despite the fact he was one of the masterminds behind the growth and the bank’s spectacular track record during his tenure, it may seem that George Gleason’s earlier decision and public announcement to commit a larger part of his time to overseeing the day to day operations of the RESG unit was not well-received by Dan. Despite these changes in senior management, we still believe the RESG unit is staffed with experienced, independent and long-serving employees equally capable of continuing on with the business alongside the CEO. For us, it would be far more worrying if we were to see the CEO suddenly leave. And how much have we paid for this extraordinary franchise? The average price paid was $43 per share and approximately 14-15x it last twelve month earnings. We estimate its intrinsic value at $66 per share, after applying a 21x price to earnings multiple for the next twelve months against a 15,5x observed multiple for the sector in the US.
And how much have we paid for this extraordinary franchise?
The average price paid was $43 per share and approximately 14-15x it last twelve month earnings. We estimate its intrinsic value at $66 per share, after applying a 21x price to earnings multiple for the next twelve months against a 15,5x observed multiple for the sector in the US.
As of today, we see a low probability in there being a recession in the US economy (at least within the next quarters) but despite this we would still apply a conservative approach and calculate an intrinsic value assuming that scenario were to take place. The resulting intrinsic value would therefore be $35 per share, placing it 18% lower than our average price paid. If it does happen to reach these levels, we would seek to increase are holding in this company. As a reminder, it is important to not only buy extraordinary companies but also not making a mistake in overpaying for them. Coca-Cola’s case in 1998 should serve as a reminder.
Appendix: Ratio definitions and quality of assets chart.
Allowance for LLS as % T.Loans are the provisions made to face any future losses.
Non-performing loans as % T.Loans are the unpaid loans with more than 90 overdue, where neither capital nor interest is paid off.
Allowance for LLS as % NPLs is the coverage ratio.
Net charge-off is the total unpaid debt by the company minus any recovered payments.
Pixabay CC0 Public DomainMarcos Ramírez Miguel, courtesy photo. Banorte Buys Interacciones Becoming Second Biggest Bank in Mexico
Grupo Financiero Banorte (GFNorte) has agreed to buy Grupo Financiero Interacciones (GFInter) in a cash-and-share deal. The merger would position Banorte as the largest infrastructure lender in Mexico and the second largest bank in the country.
Banorte would pay 13.7 billion pesos ($719.39 million) in cash and 109.7 million of its shares. In order to do so, the Mexican bank would issue about 4% of new shares. The advisors are BofA Merril Lynch, Morgan Stanle, White & Case, and FTI Consulting.
The operation is expected to close in the second quarter of next year, pending regulatory and compliance authorizations.
“With this deal, Banorte positions itself as a leader in the financing of the enormous infrastructure necessities of our country, which represents a unique opportunity to propel competitiveness, attract investment and improve quality of life for Mexican families,” said Marcos Ramirez Miguel, chief executive officer of Banorte.
The merged entity will become second in assets, loans and deposits:
Pixabay CC0 Public DomainPhoto: stevepb. The Case For Fixed Income In The Core Of A Portfolio, Despite Low Rates
Bonds have long played an essential role as a foundational holding at the core of investors’ portfolios. Bonds and bond ETFs have the potential to offer income and stable returns that can offset volatility from a portfolio’s stocks.
But, in recent years, investors have struggled to achieve their investment goals amid low bond yields, especially from government bonds. The main cause? In response to the 2008 financial crisis, the U.S. Federal Reserve (and other central banks around the world) slashed interest rates to encourage economic growth.
While the Fed has since started to raise interest rates, they are still below historical averages. A low yield environment could be with us for some time because of several factors, including demographics (aging baby boomers have greater demand for bonds, potentially keeping interest rates low).
Beyond providing income potential it is important to emphasize that bonds and bond ETFs can play multiple roles in a portfolio.
These roles may include:
Recurring Income Stream No matter if an investor is looking to grow wealth or save for retirement, generating income in a portfolio can help get an individual closer to reaching an investment goal. Investors can receive interest payments at a regular cadence, typically monthly, quarterly or annually, potentially providing stable income and strengthening total return in their portfolio.
Stability of Principal In addition to receiving an income stream, bond investors receive the bond’s principal at maturity, assuming the bond is held to maturity and does not default. Repayment of the bond’s principal (a fixed amount) at a fixed time helps provide an investor with stability in their portfolio.
Potential hedge against risk Bonds and bond ETFs can offer a potential hedge against increased equity market volatility. Historically, bonds have been more likely to move in the opposite direction to stocks. For example, fixed income investors have increased their allocations to U.S. Treasuries during equity market sell-offs as a potential safe haven investment.1
Despite challenges that bond and bond ETF investors may face with yield and income in the short term, it is important to remember that fixed income investments can play a vital role as a foundational, long term holding, at the core of a portfolio.
While there are similarities between bonds and bond ETFs, there are also differences between the two investments. Investors should be diligent when researching the best investment vehicles for their portfolios. For example, individual bonds have set maturity dates while traditional bond ETFs do not. Bonds and bond ETFs may have different distribution schedules, despite tracking the same asset class, this may result in different income streams for investors. Individual bonds trade over-the-counter while bond ETFs trade on an exchange. Additionally, bonds and bond ETFs may create different tax liabilities and therefore investors may be subject to a variety of federal, local and/or capital gains taxes. Cost of ownership is another area where individual bonds and bond ETFs differ, bond investors may face a transaction and brokerage cost at the time of purchase whereas a bond ETF investor will likely pay both an expense ratio and transaction cost.
Get started building the core or your portfolio in Spain or LatAm.
Foto cedidaPhoto: Ned Naylor-Leyland, portfolio manager Old Mutual Gold and Silver fund . OMGI: “Blockchain is paving the way for gold to rebound as global currency”
What does the present moment in this cycle have in common with the 70’s? For Ned Naylor-Leyland, fund manager for Old Mutual Gold and Silver fund, there are several factors in the current economic situation that bear strong similarities to what happened at the end of that decade: rising inflation, a disenchanted working class, new tensions in the Middle East and the extinction of a monetary system.
Beginning with inflation, the asset manager comments on two terms which must be taken into account: ‘stagflation’ and the inflation camouflaged under the same price, but with less product in supermarket products, known as ‘shrinkflation’. “In the United Kingdom, especially in the last two weeks, the word stagflation has reappeared in the press, referring to a situation where there is lower growth in the economy, but there is inflation, which is the best possible environment for investing in gold. The main reason is that gold is a natural hedge for the loss of consumer purchasing power. There is a curious controversy on this issue. As the monetary authorities continue to say that we need more inflation, the Bank of England’s own workers are threatening to call a strike because their wages are not growing at the same rate as the cost of life”.
Another issue to keep in mind is when manufacturing companies maintain the prices of their products, but reduce quantity, quality, or both, to hide the increase in spending and inflation, something that is known as shrinkflation. “In the United Kingdom, the Toblerone chocolate is quite popular, its size was reduced leaving the same price and consumers wondering what had happened. This has not only happened with food and is something important to keep in mind, as statistics do not reflect actual inflation. This phenomenon is also experienced in jobs, which are categorized in ways very different to those previously used to categorize them, affecting the results of employment statistics. So I recommend being skeptical and keeping abreast of what is really happening in the real world.”
Something else they have in common is the disenchantment of the working class, which obviously manifests itself in the strikes, but which has also had repercussions on politics. “In the late 1970s, a B-series actor arrives at the White House without a previous political career, with the support of the middle and lower-middle working class of the United States, using a direct campaign directed at the male electorate at a time in which people were much more outraged than at present. Very similar motivations are what lead Trump to the presidency of the United States.” In addition, the new tensions in the Middle East coupled with the extinction of the current monetary system are themes that were already lived more than four decades ago, with the OPEC crisis and the collapse of the system adopted in Bretton Woods which meant the unilateral cancellation of direct international convertibility of the dollar to gold.
“The two moments of greatest monetary easing in our recent history are the quantitative easing program known as QE and the ‘Nixon shock’, when President Nixon reported on television that the convertibility of the dollar to gold was suspended, thus ceasing its exchanges of $ 35 per ounce and abandoning the gold standard established after World War II for international transactions. The direct reaction of the investors in both cases was to think that there would be a strong loss in the purchasing power of the money and went in to buy gold. Although the answer was correct, monetary transmission mechanisms are not immediate. Both with the beginning of QE and in 1971, the price of gold increased very fast for about two or three years, and then corrected by about 50%. Between 1974 and 76, consumers perceived that they were losing a lot of purchasing power, gold spiked 700% to 800%. Returning to the current situation with the arrival of the QE, we can see that so far gold has repeated the same behavior as in the 70’s, with an initial rise and a new correction of 50%, being able to be in the ante-room of a strong climb “.
The Return of Gold
To put the current situation into context, Ned Naylor pointed out that after abandoning the gold standard, Nixon visited the king of Saudi Arabia and agreed to provide military protection in exchange for the dollar becoming the sole currency in oil trading and that profits would be reinvested in Treasury bonds. “Two years later, the entire oil market operated in US currency, and this created a system that operated on a petrodollars basis, which has been in place since the 1970s. That’s currently threatened, however, particularly by China’s performance, circumventing the system. All that has been seen in terms of geopolitics is related to this point, the loss of control of the petrodollars system. Until just 3 years ago, the world was still only using the dollar as a trading mechanism for crude oil and gas sales globally, but this has begun to change and will not return to the previous point. There are three possible outcomes to this changing environment in which they all involve gold, the Eastern solution, the Western solution and the global solution.”
To explain the Eastern solution, the asset manager focused on the Shanghai International Gold Exchange to explain how the gold standard system is returning to China and the role that Russia, Iran, Qatar and Saudi Arabia are playing as crude producers. These countries are selling part of their oil in renminbis to later convert this currency into physical gold in the Shanghai International Gold Exchange. “It is something that is happening now rather substantially way and represents a huge change with respect to the global monetary system. Do not expect to see news in the big newspapers about it because it is a very important strategic turn on the question of power and it is a return to a point in history where we have been before. It’s not something new; it’s the same pattern that was agreed upon after World War II.”
The Western solution consists of having more than 25% of the central banks’ total reserves in gold, being the second largest asset on its balance sheet, being supported by gold, although not explicitly backed by gold. “Gold is the only asset that does not represent an obligation for the counterpart. The euro has a huge amount of gold backing its assets, as it was designed about 15-20 years ago by central bankers in a context where only paper was used as a monetary instrument. In particular, Germany, Italy, France and Greece have more than 60% gold reserves.”
Lastly, the overall solution will most likely take into account gold. Last year, the International Monetary Fund admitted the renminbi as an accepted currency within Special Drawing Units (SDR), generating more global money, which reduces friction and transaction costs, improving the surveillance capacity of countries. Again, Naylor explains the importance of gold in this model: “This model would not work if gold were not acting as arbiter in the middle of this contest, establishing discipline and making the model work properly. This inclination for gold is happening mostly in Asia and Europe it is also going in that direction. It’s possible that the period from 1971 to today is only an exception.”
The arrival of cryptocurrencies
On the front cover of the January 1988 issue of “The Economist”, the magazine predicted the arrival of a global currency, illustrated by a phoenix with a gold coin hanging from its neck, resurfacing from the ashes of paper money, forecasting that the issue date would be 2018, and with a cryptographic symbol, frequently used in hacker culture, in the center of the coin. According to Ned Naylor, those people who don’t believe that the arrival of cryptocurrencies is not a revolution do not fully understand what’s happening. “Bitcoin and Blockchain are changing the entire payment system, promoting a huge disintermediation in the financial system, particularly in Asia, where the application of Blockchain and Bitcoin technology has accelerated, which is likely to have disinflationary consequences.”
To conclude, the Old Mutual expert speaks about the positive part of Bitcoin’s irruption and of Blockchain’s block chain, reminding people of what money should be: a value depositor, a unit of account and a method of value exchange. “Before 1971, gold performed the three functions, but was replaced by paper money, which is not a deposit of value, because it is not an asset in itself. At the same time, Blockchain solves part of the problems of gold, its portability, its visibility and the facility with which it allows transactions, which is why Blockchain is paving the way so that gold resurfaces in the financial system formally as global currency. The next monetary system will be gold powered by cryptography. Changing to this type of currencies provides a huge reward for the system, with total supervision of the payments”.
Pixabay CC0 Public DomainShutterstock. Argentina: 116/583
Regularization / situation correction / normalization / tax pardon / repatriation / externalization of assets / fiscal disclosure / amnesty. Different names that mean essentially the same thing.
This is not an issue relating solely to Latin America. In the past, countries like Australia, Belgium, Colombia, Ecuador, Spain, the Philippines, France, Honduras, India, Ireland, Italy and Panama have implemented some kind of tax pardon/ amnesty program. Other countries, such as Denmark, Finland, Greece, Mexico, New Zealand, Norway, Peru, Portugal and Sweden, at one time or another, have also instituted relief schemes to normalize fiscal conditions.
Argentina concluded its own asset amnesty program in late 2016. Of a GDP of $583 billion, $116 billion worth of assets have been disclosed. The amnesty means an increase of approximately 12% of GDP to the economy’s tax base.
In the last 60 years, the country has sanctioned and carried out 20 of these amnesty programs with differing results. It is worth pointing out that they were all “for one time only”.
For many years, some citizens have sought a safe-haven for their capital abroad due to political, financial or security reasons. The results of this diversification, particularly in developing countries, could negatively impact the economy and increase the cost of private and sovereign financing. The effects of reduced tax collections are generally compensated by an increased tax burden with possible consequences for the country’s economic development.
I believe this repatriation of capital will have short, medium and long-term impacts. For now, the effects are unseen by most but they will become much more obvious in 2017 and beyond.
The immediate effects include: reduced debt cost, increased tax revenue, tax deficit reduction and possible credit risk improvements not only for the sovereign but also for private entities that need to access the local credit market and markets in stronger currencies than the peso. With this multitude of potential investments, building a capital market that allows financing in the local currency will be easier.
To be eligible for amnesty / repatriation, individuals must not only pay a special tax but they must also make payments on earnings from what they have declared so far. For example, 35% on earnings generated by their investments (excluding certain Argentinian assets, Brazilian and Bolivian sovereign debt). The way to avoid this cost is to have a portfolio invested in Argentinian bonds or sovereign bonds from the countries mentioned above or Argentinian provincial bonds that are also exempt.
In any case, there are side effects. For example, Argentinian bond portfolios are over exposed to local debt issuances making the portfolios undiversified.
In fairness, this success has been achieved in the midst of severe restrictions on non-declared assets abroad, with a local government managing to generate investor confidence, multiple business opportunities in Argentina and very low portfolio returns internationally (let’s recall that $8 trillion worth of bonds are operating at negative rates).
The challenge we are facing is to get these portfolios to a level of diversification and return that brings peace of mind to our clients and bankers.
Foto cedidaRichard Halle, courtesy photo. M&G: "The Valuation Gap Currently Between Value and Growth Stocks is Almost as Wide as it Has Ever Been"
Richard Halle, portfolio manager of the M&G European Strategic Value Fund believes that the context is favorable for value investing in equities. In his interview with Funds Society, he explains that the economic recovery environment in Europe, together with the reduction of political and macroeconomic uncertainty and the increase in interest rates, should turn the situation and prove beneficial to this style of investment.
What are the main arguments in favour of investing in European equities?
European equities look attractively valued, in our view, both in absolute and relative terms, particularly compared to US stocks. In addition, European companies should benefit from the region’s economic recovery which should support earnings growth. Economic growth has picked up, unemployment rates have fallen across the eurozone and inflation has started to rise. The European Central Bank has arguably provided the necessary support to revive the eurozone and investors are now focusing on how the stimulus measures will be withdrawn.
You apply a value investing approach…how easy (or hard) is it to find undervalued companies in Europe?
While the overall market has risen this year, we think there are still plenty of opportunities for selective value investors. In our view, value stocks are attractively valued on both a relative and absolute basis.
Value as a style has been out of favour for several years as investors have favoured growth stocks with reliable earnings and ‘bond proxies’ offering steady income payments. The value recovery in 2016 proved to be short-lived and investors have preferred growth stocks this year. As a result of this prolonged underperformance, the valuation gap currently between value and growth stocks is almost as wide as it has ever been. If this gap were to narrow we think the potential rewards could be significant.
More recently, we have been finding value opportunities right across the market, rather than concentrated in particular sectors.
Is it necessary to hold cash in case better opportunities arise?
As value investors who are looking for mispriced opportunities to arise we tend to have a slightly elevated level of cash in the portfolio. This is so we are able to take advantage of short-term volatility and mispriced stocks.
What is the potential upside of your current portfolio? With the recent stock market rally…has this figure decreased?
We think there are plenty of stocks in the portfolio whose prospects are being significantly undervalued. While a number of our cyclical holdings have performed well recently as investors have become more optimistic about the outlook for the European economy, we continue to believe that the portfolio still has several cheap stocks that are being mispriced. In terms of valuation, the fund is trading at a significant discount to the MSCI Europe Index (on both price to book and price to earnings metrics).
Are you expecting a market correction in the medium or long term that could benefit your strategy?
In recent years, value has underperformed as investors have sought defensive ‘bond proxies’ amid uncertainty, volatility and ultra-low rates. Looking ahead, we believe the continued recovery in Europe, a reduction in uncertainty (both political and macro) and rising interest rates should be beneficial for a value approach.
How do you harness volatility episodes in your management strategy, such as the recent French elections of the future elections in Germany?
As long-term investors, we see uncertainty and the volatility it can generate as a source of opportunity rather than something to be feared. When sentiment rather than fundamentals drives markets, stocks can often become mispriced. As long-term bottom-up stockpickers we would try to take advantage of any valuation opportunities that present themselves in these situations.
Sectors and names: how are you positioning your fund now? Which sectors are you overweighting and why?
The fund’s sector allocation is an outcome of our bottom-up stock selection process rather than top-down views. Nor do we take high-conviction positions in individual stocks. The fund is limited to a 3% weight in stocks relative to the MSCI Europe Index. As a value fund, the value style is expected to be the main driver of fund performance rather than bets on particular stocks or sectors.
Having said that, we have been focusing lately on finding attractively valued opportunities that could benefit from the European recovery. We have been adding to a number of our more cyclical holdings, including Bilfinger, a German engineering and construction company, and Randstad, a Dutch recruitment firm. We have also invested in Wereldhave, a Dutch real estate company that invests in shopping centres.
At the sector level we have overweights in consumer discretionary, industrials and energy. In contrast, we have underweights in consumer staples (an area that we believe is expensive as investors have sought the perceived safety of defensives in recent years), financials and materials.
Even though we have a below-index position in materials, we have been adding to our holdings in stainless steel makers Aperam and Outokumpu, which we believe have attractive prospects given potential demand for steel.
Banking sector: many fund managers are staying on the sidelines. Are you following the same strategy or not? Why?
We have an underweight in financials which is due to an underweight in insurers – we think the current environment is difficult for them to grow their earnings.
However, we have been investing in individual banking stocks lately. For instance we have a holding in Bank of Ireland, which we believe is well positioned to benefit from the improving economic situation in Ireland. Another recent purchase holding is Erste Bank, Austria’s largest bank by market value. In our view, Erste Bank has strengthened its balance sheet recently and is arguably now well placed to benefit from stronger economic growth in Europe.
Foto cedidaPhoto: Anthony Creek. Mexican Pension Plans Can Now Invest in 11 First Trust ETFs
The Mexican pension funds investment regulator, la Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR), has approved four additional First Trust ETFs for sale to Mexican funded pensions, known as AFORES, they are:
First Trust Health Care AlphaDEX® Fund (Ticker: FXH)
First Trust NYSE Arca Biotechnology Index Fund (Ticker: FBT)
First Trust US Equity Opportunities ETF (Ticker: FPX)
First Trust Rising Dividend Achievers ETF (Ticker: RDVY)
“The evolution of the Mexico pension system has been remarkable to watch: it seems not so long ago when the AFORES first started to incorporate ETFs to diversify their stock positions,” said Codie Sanchez, Head of First Trust Latin America Investment Distribution. “We are excited to add four additional ETFs approved for use by the Mexican AFORES due to client demand. As always, we’re incredibly thankful to our clients in Mexico, the CONSAR and the AMAFORE who continue to allow us to grow right alongside them. As we say in Spanish, Adelante! Or, forward together.”
Back in NOvember, 2014 two First Trust ETFs received such approval, they were the First Trust Large Cap Value AlphaDEX Fund with ticker FTA and the First Trust Large Cap Core AlphaDEX Fund, with ticker FEX. Since then, other five vehicles had been approved, totalling 11 First Trust ETFs in which the AFORES can invest. The other five are:
First Trust STOXX® European Select Dividend Index Fund (Ticker: FDD)
First Trust Dow Jones Internet Index Fund (Ticker: FDN)
First Trust Financials AlphaDEX® Fund (Ticker: FXO)
First Trust Morningstar Dividend Leaders Index Fund (Ticker: FDL)
