Real Estate, Direct Lending and Private Debt are 3 legs of the alternative investment industry and over the past 10 years each of these legs have grown to have a much more profound impact on Main Street. FLAIA believes that perhaps these 3 legs have been the hardest hit part of the overall alternative investment industry.
To address this and other interesting topics the association is hosting a Series of Digital Real Estate, Direct Lending and Private Debt Webcasts.
Part IV is coming up next June 23rd and 24th.
“Today, because of the lack of real time liquidity and real time price discovery this Forum is the most important conversation for global investors to join. Most investors have exposure to real estate through equity and credit vehicles and amid a crisis, no one has all the answers today. We are determined to bring clarity, truth, facts and experience from the front line by the most talented investment managers.” They mention.
The stock market rebound from the March lows continued in May, as investors focused on the beginning of the end to COVID-19 induced lockdowns as well as advances in potential treatments or vaccines for the virus. Mega cap technology companies continue to lead the charge as society has relied on the emphasis of digital technology, from the comfort of their own homes.
The impacts of the virus have created unprecedented levels of disruption throughout the world. The current confrontational dynamics between the U.S. and China, election year uncertainties, and worries over a virus “second wave” will likely prevail through year-end. For now, the Phase One US-China trade deal remains intact despite social unrest in Hong Kong and President Trump’s accusations over the World Health Organization’s relationship with China. Time will tell if that stands.
Monetary and fiscal policy dynamics are in place to encourage more consumer spending and assist parts of the economy affecting the “BOTL” (banks, oil, travel, & leisure) stocks. U.S. political discussions continue on the topic of more coronavirus relief, as U.S. jobless claims exceeds 40 million.
Merger Arb returns in May were bolstered by deals that closed, progress on deals in the pipeline, and the continued normalization of merger spreads. Regulators and advisers around the world have successfully transitioned to working remotely and continue to advance and approve transactions, evidenced by approvals granted in May. Economies have begun the process of reopening and consumers are adapting to a “new normal.” While our focus remains on selecting current deals with the highest likelihood of success, we are seeing green shoots of future M&A activity, with numerous reports of companies evaluating acquisitions. Deals that closed in May totaled about 15% of the fund’s assets, and we were busy deploying the cash received in outstanding deals.
As economies begin to open, the uncertainties associated with the impacts of the virus will slowly surface. Ultimately, we believe that investors will reward strong companies with healthy balance sheets and positive free cash flows in order to lead the economic recovery.
Column by Gabelli Funds, written by Michael Gabelli
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To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
CC-BY-SA-2.0, FlickrPhoto: Thomas Wolter. Photo: Thomas Wolter
Private debt is one of the most attractive asset classes. The growth of private debt funds has been spectacular, with very attractive risk-adjusted returns for investors. The attractiveness of private debt has several reasons. Firstly, the post-crisis financial regulatory reforms have led banks to reduce their lending activities, particularly to small and medium-sized businesses. This has further intensified during the Covid-19 crisis. Secondly, the demand for credit from businesses has not fallen to the same degree, leading to unmet demand. And thirdly, the demand from institutional investors for debt that yields more than government debt remains robust. Historically, the private debt market consisted of specialized funds that provided mezzanine debt, which sits between equity and secured/senior debt in the capital structure, or distressed debt, which is owed by companies near bankruptcy. However, following the financial crisis, a third type of fund emerged. Known as direct lending funds, these funds extend credit directly to businesses or acquire debt issued by banks with the express purpose of selling it to investors.
Leading alternative asset managers have all expanded their product offerings to include private debt funds. They are joined by many specialized new firms. The strong demand by institutional investors has enabled these funds to expand rapidly in size. Collectively, more than 500 private equity style debt funds have been raised since 2009. The private debt industry has quadrupled surpassing $800 billion, according to the alternative data provider Preqin.
However, the private debt universe remains somewhat opaque. There are several types of private debt funds that can differ in terms of structure, risk and duration. For example, most private debt managers use closed-end fund structures with long investment horizons and very limited liquidity. Also, some funds invest in areas with equity type risk/return characteristics, such as mezzanine debt, subordinated loans, convertible loans or even equity components, including warrants and private equity co-investments.
Katch investment group decided to focus only on the lowest risk areas in the private debt space around the globe. It is mainly active in senior secured lending, senior real estate debt and other niches in the direct lending area that combine a high level of seniority and real asset guarantees. What is more, the group focuses on short-term opportunities, where the competition from banks has decreased even more, as new regulations and bureaucratic processes have made banks slow in approving credits. Also, the high rotation in short-term loan books enable asset managers to provide liquidity to investors. The fund structures are typically open-ended with monthly or quarterly subscriptions and redemptions. This is a key advantage for investors that oftentimes struggle with capital calls and the illiquidity of closed-end funds.
One of the challenges in private debt has been the lack of benchmarks. Some investors are using the S&P/LSTA Leveraged Loan Index or the Bloomberg Barclays High Yields Bond, that both are a very bad proxy for the private debt asset class. The Cliffwater Private Debt index has more merits as it seeks to measure the unlevered, gross of fee performance of US middle market loan, as represented by the asset-weighted performance of the underlying assets of business development companies (BDCs). A BDC is the equivalent of a REIT (Real Estate) but for loans in the US.
However, this benchmark does not really reflect the investment approach of Katch in terms of its geographical exposure, duration and risk. This is why the group decided to create the Katch Open Ended Private Debt Index (KOEPI). The equal-weight index is designed to track the net of fees performance of short-term secured lending strategies, such as real estate bridge loans, trade finance, life insurance settlement, and other short-term asset backed lending strategies. The index starts in January 2017 and currently consists of 23 mutual funds. The index is rebalanced quarterly, since several funds only publish quarterly NAVs. The publication of each quarterly performance will take place between 75 and 90 calendar days after the respective valuation date.
Currently, the index includes funds in the areas of trade finance (33%), credit opportunities (28%), bridge loans (22%) and life insurance settlement (17%). Geographically, it is exposed to Europe (39%), North America (33%), Asia (11%), Africa (11%), Global (6%). The index combines some of the most important indexing requirements: It is unambiguous as the weight of each fund in the index is known, it is investable and the performance is easy to measure as the constituents NAVs are widely available and updated via financial data providers, such as Bloomberg.
However, investors should be aware of some biases and limitations. For example, since the index does not include funds that went out of business, there is a survivorship bias. This means that the historic performance of the KOEPI index might be overstated. In addition, Katch Investment Group is committed to increase the transparency and reporting standards in the private debt area. Even though the number of funds in the index is certainly representative for the space, it would be desirable that more funds can be included in the index in the future, once they improve their price dissemination practices.
Article by Stephane Prigent, CEO of Katch Investment Group.
The local currency emerging market debt asset class had a strong positive return in 2019. Despite the fears of a global slowdown part way through last year, investors in the asset class enjoyed a 13.5%[1] return in USD unhedged terms. The impact of Covid-19 however has negatively affected the asset class this year. Risk aversion and uncertainty have swept through markets as investors and policy makers have grappled with the short and long run consequences of the virus. Emerging markets have been caught up in that dislocation, prompting some to question the value on offer in this segment of the fixed income market. As the dust settles and the picture becomes clearer, we find an asset class with valuations near historic lows.
The local currency emerging market debt asset class suffered a large negative return in the first quarter of 2020. The -15.2% decline was the largest quarterly fall in the JP Morgan GBI-EM Global Diversified Index since its inception in 2003 (in USD unhedged terms). It is important to separate the sources of return when looking at local currency debt and differentiate between the return from bonds and that from currencies. Historically the separate bond and currency return streams have not been highly correlated, with a correlation of 0.55. The currency element is also more volatile than the underlying bond component. In this occasion as in previous episodes of volatility, emerging currencies were more affected by the correction than bonds which proved somewhat more defensive.
While some individual countries were more exposed to their own unique and identifiable issues, the bond component of the JPM GBI-EM Global Diversified index declined by -1.4% in the first quarter of 2020 (in USD hedged terms). This was a particularly strong performance given the scale of the economic disruption caused by the crisis. It also stands in contrast to the -13.5%decline in the bond component of the global high yield index[2] and the -4.2% fall in the global investment grade corporate bond index[3] (both in USD hedged terms).
In contrast, emerging market currencies were negatively impacted by the “virus shock” in the first quarter, compounded in some instances by the sharp decline in oil and other commodity prices. In aggregate, the currency component of the local market debt index declined by -14.3%[4] versus the USD in the first quarter.
To assess the attractiveness of the asset class today, we can look at the real yield and real exchange rate valuations on offer in absolute terms and relative to history. Combining the two provides an assessment of the current potential of the asset class.
Colchester’s primary valuation metric for bonds is the prospective real yield (PRY), using an in-house inflation forecast rate which is discounted from that country’s nominal yield. We supplement this with an assessment of the country’s financial soundness. The virus induced adverse demand/supply shock and large decline in the price of oil (which fell two-thirds in the first quarter of 2020) and other commodities prompted us to revise our inflation forecasts lower within our emerging market universe. The large fall in the exchange rate in some countries tempered that revision, but the pass through to domestic inflation of such exchange rate depreciations has declined markedly over the past decade.
The resulting decline in our inflation forecasts and rise in nominal yields in some markets has seen an increase in the overall attractiveness of emerging market bonds on a prospective real yield which now sits around the average of the post Global Financial Crisis period.
Colchester’s primary valuation metric for currencies is an estimate of their real exchange rate – or purchasing power parity (PPP). We supplement this with an assessment of the country’s balance sheet, level of governance, social and environmental factors (ESG), and short-term real interest rate differentials (i.e. “real carry”). Emerging market currencies were already trading at attractive levels of valuation versus the US dollar according to our real exchange rate valuation estimates before the coronavirus crisis, the dislocation and uncertainty surrounding the pandemic has made them even more attractive for a USD based investor.
Combining the prospective real yield bond and the real exchange rate valuations together to produce an aggregate prospective real yield for the benchmark, suggests that we are now at levels only seen a few times historically. The value on offer in the local currency asset class today is on a par with that seen at the depths of the Global Financial Crisis in 2009 and most recently in 2015 when US dollar strength combined with some idiosyncratic country issues to produce compelling value in the space. The average benchmark total return in the two years following the three previous episodes of similar extreme valuation – June 2004, January 2009 and September 2015 – was +33.7%[5].
Valuations must be viewed within the context of the fundamentals. In other words, are the declines in currency values and increase in real yields occurring for justifiable reasons? In short, the answer would appear to be ‘no’ when looking at the emerging market universe in aggregate.
Going into the pandemic, emerging markets as a whole were arguably on a more stable footing than developed market peers on several metrics. Looking at debt-to-GDP ratios for example, shows that emerging markets had less than half as much debt as developed markets. Furthermore, the relatively lower increase in government debt in emerging markets over the last 10 years or so highlights their more cautious approach to macro-economic management and the widespread adoption of generally prudent and orthodox policies. The external position of many emerging markets also looks comparatively solid when one considers short- and long-term financing needs.
History also shows that countries with more overvalued currencies tend to be more exposed to an adjustment and reversal in capital flows. In simple terms, the greater the need for foreign capital and the more overvalued a country’s real exchange rate, the more exposed or vulnerable that country is. Most emerging markets are in the less vulnerable with undervalued exchange rates and little to no dependency on short term capital inflows.
The credit rating profile of the local currency emerging market debt asset class has remained at a healthy average of BBB+ for the past several years[6]. However, given the emergency Covid-19 fiscal packages and the associated growth slowdown, several rating agencies have recently acted quickly to downgrade several issuers in the universe such as Mexico, Colombia and South Africa. In contrast, countries in the developed world like the United States and the United Kingdom have not yet had their credit ratings altered[7] despite spending and pledging upwards of 11% and 19% of GDP respectively (to date, and counting) to help their economies weather the pandemic. In comparison, the Mexican and the South African government spending and support packages have amounted to a paltry 1.1% and 0.6% of GDP (to date).
From a purely ‘quantitative’ aspect, looking at some of the various balance sheet metrics, it is difficult to understand how some emerging countries can be rated lower than some of their developed market peers. Clearly you would expect the level of a sovereign’s debt to be a key factor. While there is a relationship between debt levels and ratings, there is a clear differentiation between developed markets and emerging markets. Emerging markets are currently rated lower at the same level of debt across the board, all else being the same.
One explanation for the difference lies amongst ‘qualitative’ factors. This encompasses things like a country’s historical precedent, the consistency of policy, the social-political willingness to undertake necessary adjustments and the level of governance, which includes things such as the control of corruption and rule of law. This traditionally is seen as a weakness by the rating agencies.
Overall however, despite the virus induced deterioration in the fiscal metrics, we believe that the balance sheets of most countries within the emerging market universe remain sound. Rating agencies may continue to downgrade across the sector, but the fundamentals are not pointing towards a meaningful increase in the risk of default. On the contrary, the benchmark is solidly “investment grade” and is likely to remain so in the absence of a further global melt-down.
While the real yields of emerging market bonds have returned to near their long-term average historical valuations, emerging market currencies are currently extremely undervalued in USD terms. This gives the asset class an added source of potential return. Historically this level of valuation has proved to be extremely attractive.
There remain some good reasons for the difference in credit ratings between the developed and emerging world. However, the differences may not be as large as some perceive and on balance, most countries within the emerging market universe should weather the Covid storm.
[1] JPM GBI-EM Global Diversified USD Unhedged Index
[3] ICE BofA Global Corporate Bond USD Hedged Index
[4] JPM GBI-EM Global Diversified FX Return in USD Index
[5] The total return on the JP Morgan GBI-EM Global Diversified Index (unhedged USD) between June 2004 and June 2006 was 27.7%, between January 2009 and January 2011 was 47.7% and between September 2015 and September 2017 was 25.6%.
Ricardo Soto has joined Norman Alex, an international consulting boutique providing executive search and corporate development services to clients within the financial services sector.
Soto, who is based out of Montevideo, will be in front of the company’s new Uruguayan office, covering the Latin American region and working closely with Norman Alex’ Miami office.
He has an extensive background in the financial services industry working for multinational banks. For the last three years he served as a Partner of a Swiss consulting and recruitment boutique based in Zurich and focused on wealth management.He also spent more than fifteen years at Citibank based in Montevideo and New York covering different areas but mostly private banking. He developed the wealth management activity in Uruguay managing a team of over thirty people and also led a project to implement credit sales teams throughout the region. Previously, he worked seven years for American Express Bank in several senior positions.
Soto speaks fluent English and Spanish (native language) and learnt French during a year in Geneva.
Established in 1997 in Monaco, Norman Alex has offices in Geneva, Paris, Luxembourg, London and Miami and they are looking to establish a presence in Singapore next year.
Pixabay CC0 Public Domain. La UE regula las plataformas de crowdfunding y crea un nuevo servicio de gestión de carteras de préstamos
Financial professionals, including investment advisers, wealth managers, broker/dealers, and financial planners, expect US stock returns to climb back from steep losses to finish the year down just 3.6%, according to findings of a survey published by Natixis Investment Managers. Despite seeing losses as high as -34% within the first few weeks of the crisis, financial professionals saw losses moderate to as little as -10% by the end of April.
The survey showed that 51% of financial professionals globally saw initial volatility caused by the coronavirus crisis as driven more by sentiment than by fundamentals. Optimistic the market will continue to right itself in the second half of the year, financial professionals’ main concern is the uncertainty of what happens next, including how investors handle it.
Between March 16 and April 24, 2020, Natixis surveyed 2,700 financial professionals in 16 countries, including 150 financial professionals in Mexico, and found that, globally, respondents forecast a loss of 7% for the S&P 500 and a loss of 7.3% for the MSCI World Index at year end. Their 2020 return expectations more closely resemble the modest declines seen in 2018 than in 2008, when the S&P plunged 37% and the MSCI posted a loss of 40.33%. In the US market, the outlook is more optimistic, but elsewhere, financial professionals are notably more pessimistic about stock performance in their own markets, with those in Hong Kong, Australia and Germany all projecting double digit losses for the year.
Ongoing volatility remains the top risk to portfolio performance and market outlook. Two-thirds (69%) of professionals globally cite volatility as a top concern, followed closely by recession fears (67%). Almost half (47%) say uncertainty surrounding geopolitical events poses a risk to their portfolios. In a dramatic shift in risk concerns from previous years surveys, a fifth of respondents (19%) expressed concern about low yields, while liquidity issues were also cited by 17% of those surveyed.
Resetting expectations: Hard lessons and teachable moments
After a 12-year run in which the S&P 500 delivered average annual returns of nearly 13%, and fresh off record highs in January and February, the magnitude of losses caused by the coronavirus pandemic was swift and stunning. Never mind that nearly half of financial professionals (47%) agree that markets were overvalued at the time; eight in 10 (81%) believe the prolonged bull market had made investors generally complacent about risk. And as long as the markets are up, 49% of respondents say their clients resist portfolio rebalancing.
The survey found:
67% of financial professionals think individual investors were unprepared for a market downturn (63% in Mexico)
75% (72% in Mexico), suspect investors forgot that the longevity of the bull market was unprecedented, not the norm, historically
76% -67% in our country- think individual investors, in general, struggle to understand their own risk tolerance, and the same number say clients don’t actually recognise risk until it’s been realized
“The market downturn – and expected recovery – serves as a lesson in behavioural finance, even if learned the hard way through real losses and missed goals,” said Dave Goodsell, Executive Director of Natixis’ Center for Investor Insight. “Investors got a glimpse of what risk looks like again, and it’s a teachable moment. Financial professionals can show their value by talking with clients in real terms about risk and return expectations, helping them build resilient portfolios and how to keep emotions in check during market swings.”
Nearly eight in 10 financial professionals (79%) globally and in Mexico, believe the current environment is one that favours active management. For those who embrace volatility as a potential buying and rebalancing opportunity, it’s another teachable moment for portfolio positioning and active management. Almost seven in 10 advisers, both global and in Mexico, agree investors have a false sense of security in passive investments (68%) and don’t understand of the risks of investing in them (72%).
Financial professionals are responding to new challenges managing client investments, expectations and behaviour. Under regulatory, industry and market pressure, their approach is changing on all fronts: investment strategy, client servicing, practice management and education. In a series of upcoming reports, the Natixis Center for Investor Insight will explore in-depth how financial professionals are adapting.
The COVID-19 pandemic has caused extreme volatility in the financial markets this year, which represents additional challenges for Brazilian investors. Concerns about the impact of the novel coronavirus led the Brazilian government to bring down its projected growth this year from more than 2% to 4.7% contraction. Given these factors, where should investors in Brazil look to drive growth and outperformance during such a difficult time?
New opportunities from disruption
Many Brazilian investors have been forced to explore alternative options outside of their traditional fixed income portfolios, due to historically low interest rates. Despite attractive returns in the local equity index (IBOV) over the past 10 years, the Brazilian Reais exchange rate with the U.S. dollar went from 1.5 to 5.4. This leads many Brazilian equity investors to believe that they have missed opportunities abroad, and as a result, they are now looking for ways to diversify their portfolios.
Fortunately, the impact of technological advancements on the Brazilian economy is providing new opportunities for growth. For example, the COVID-19 pandemic has actually led to the push for greater accessibility and mobility with so many employees working from home. Even prior to the onslaught of the virus, smart phones in Brazil were becoming ubiquitous, more affordable and easier to use. Now, technology is continuing to facilitate a world on lockdown, with more connectivity tools to work from home, practice telemedicine and engage in e-commerce.
Given the critical nature of behind-the-scenes infrastructure to support these products and services, we are seeing companies, and even whole industries, being forced to either retool or fail. These are companies that work in sectors such as the cloud, cybersecurity, automation, semiconductors and robotics. Investors who look to equity strategies focused on technological disruption will be able to capture the benefits of long-term trends in these sectors.
Investing without borders
The market environment has changed drastically, such that investors in Brazil who take a more globally diversified approach are more likely to reap previously untapped benefits. By investing outside of the country, they can take advantage of some of the more dynamic and fast-growing global sectors in this new environment, including those involving automation and digital economy strategies.
This is a new approach for Brazilian investors, who have historically maintained a very strong home bias and have had little to no need to diversify their investments abroad. But now, they can also look to opportunities in the global fixed income markets, where we’ve been in a historically low-rate environment for years. In particular, the U.S. high yield market has provided attractive relative levels of yield over the past 20 years, due in part to the strength of the U.S. economy. U.S. high yield has outperformed most other fixed income options and provided returns that compare favorably with the equity markets but with lower volatility.
In addition, it’s important for Brazilian investors to start looking more closely at global opportunities in tech-focused sectors that are seeing accelerated growth and disruption. These technologies are primarily produced in developed countries, and their value is in U.S. dollars. Previously, investors have accessed these spaces via direct individual equity investments or structured notes. Now the market is ripe for selective investment managers to help make these opportunities more attractive and accessible to a larger investor base in Brazil.
As an example, AXA Investment Managers and XP Investments recently partnered to offer Brazilian-based investors access to global equity and fixed income strategies through three local products focused on the digital economy, automation, and the U.S. high yield market. This provides local investors international opportunities with companies whose businesses are not in lockdown but are actually growing. As they look for better ways to reach higher performance, investors in Brazil should look out for vehicles such as these that provide them with easier access to strategies that can diversify their portfolios abroad.
We hope to see Brazil thrive once the pandemic recedes and investors become more comfortable accessing more unique and dynamic portfolio options. As the investment process is made simpler and more accessible, we anticipate seeing this goal accomplished.
Column by Rafael Tovar, director, US Offshore Distribution, AXA Investment Managers and Fabiano Cintra, Funds Specialist at XP Investments
John Surplice. John Surplice sustituirá a Jess Taylor como responsable de renta variable europea de Invesco
Invesco has announced that Jeff Taylor will retire from his role as Head of European Equities at the end of 2020, after almost 20 years in the role and 23 years at Invesco. Taylor will hand over leadership responsibilities to John Surplice, his co-manager on the Invesco European Equity Fund (UK).
John will work alongside Jeff for the rest of the year as co-head of the team and will assume the role of Head of European Equities from 1 January 2021. The investment strategy and process across the portfolio will remain unchanged.
Jeff Taylor said: “I’m fortunate to work with very talented and experienced investors who are all focused and committed to delivering the best outcomes for our clients. In planning for a successor, it was crucial to ensure consistency in our investment philosophy and process. John shares my vision for the portfolio and team and has a deep understanding of our clients’ ambitions, as well as strong leadership qualities. I look forward to working with John and the rest of the team for the remainder of the year.”
Stephanie Butcher, Chief Investment Officer said: “We would like to thank Jeff for his dedication to clients over the years and his role in building a team of highly talented and experienced investment professionals. He has always placed a huge amount of importance on nurturing talent and supporting career progression and his leadership has ensured that there is great strength and depth across the European Equities desk. I would like to add my personal thanks for all the support he has given me over the many years I have worked with him. John’s broad contribution to the team, his investment insights and strong relationships with clients make him a natural successor to Jeff, and I look forward to working with him in the leadership role in the future.”
John has been with Invesco for 24 years, as a core member of the European Equities team and has worked with Jeff for the majority of that time. He co-manages several funds, including the Invesco European Equity Fund (UK) with Jeff as well as the Invesco Pan European Equity Fund with Martin Walker.
Further strengthening the team
With John taking on additional responsibilities, Invesco also announces the appointment of James Rutland to the European Equities team. James joined Invesco as a fund manager in early June and will co-manage the Invesco European Opportunities Fund (UK) alongside John.
James joins Invesco after more than five years at Schroders, where he was a key member of the European Equities team and had co-managed successful European portfolios since 2016 (Schroders ISF European Alpha Focus and Schroder ISF European Opportunities). Previous to that he had worked on the sell side and in investment banking. He brings with him a total of 12 years of industry experience as an analyst and a fund manager.
Commenting on his appointment John said: “I look forward to continue working with Jeff for the rest of the year and thank him for all his support during our time spent working together. The personal development of the team has always been high on his agenda and it will continue to be high on mine. I would also like to welcome James to the team, he has a thorough knowledge of European stocks which should benefit our clients and the team as it continues to strengthen its skillset and expertise.”
Pixabay CC0 Public Domain. Eaton Vance Management lanza Calvert ESG Leaders Strategies, una gama de fondos de renta variable para inversores institucionales y profesionales
Eaton Vance Management has launched Calvert ESG Leaders Strategies, a new series of equity separate account strategies for institutional and professional investors offered by Calvert Research and Management, a subsidiary of Eaton Vance.
The Calvert ESG Leaders Strategies are co-managed by Jade Huang and Chris Madden, vice presidents and portfolio managers at Calvert. The strategies invest in the common stocks of selected companies with leading environmental, social and governance (ESG) characteristics as determined by Calvert. Calvert serves as the investment adviser to the strategies.
Calvert ESG Leaders Strategies are:
Calvert U.S. ESG Leaders
Calvert Tax-Managed U.S. ESG Leaders
Calvert Global ex.-U.S. Developed Markets ESG Leaders
Calvert Tax-Managed Global ex-U.S. Developed Markets ESG Leaders
Calvert Global Developed Markets ESG Leaders
Calvert Tax-Managed Global Developed Markets ESG Leaders
Calvert Emerging Markets ESG Leaders
The Calvert ESG Leaders Strategies seek to invest in companies that are leaders or emerging leaders in ESG factors that Calvert believes are material to long-term performance. The investment process has three primary components: stock selection, portfolio optimization and corporate engagement. The strategies seek to use corporate engagement to strengthen how portfolio companies manage material environmental and social exposures and governance processes and to enhance investment returns.
“Calvert’s proprietary, industry-leading research system enables us to identify companies that are leading their peers in managing financially material ESG risks, and which may be poised to take advantage of business opportunities based on their knowledge of and commitment to meaningful ESG practices,” said John Streur, president and chief executive officer of Calvert. “Financial materiality is a critical component of ESG analysis. We believe understanding the connection between sustainability factors and business success sets these companies apart and positions them to maneuver efficiently and effectively in an evolving world.”
Calvert ESG Leaders Strategies employ a dynamic investment approach that leverages quantitative and qualitative analysis and a risk-managed portfolio construction process, while seeking to effect positive change.
“In developing the strategies, we conducted a quantitative review of ESG leaders’ past performance,” said Ms. Huang. “The results indicate that companies that achieved top ESG scores in financially material factors have historically produced stronger financial performance than those with weaker ESG scores. Additionally, we found that by optimizing the portfolios, we could position the strategies to achieve positive environmental and societal impact by increasing exposure to companies with healthier environmental footprints and better gender diversity.”
Pixabay CC0 Public DomainPhoto: Ludwig Friborg. Photo: Ludwig Friborg
The global health crisis triggered by the coronavirus pandemic has firmly put the spotlight on how well countries will be able to handle the burden of rescuing their economies from an unprecedented meltdown. The question fixed income investors face is which countries will weather the storm and will sovereign debt crises follow?
Government deficits are ballooning everywhere, driven by two forces. First, huge fiscal programmes have been instituted to support households and companies at a time when many have seen incomes and revenues plummet due to the global lockdown. And, second, governments’ tax revenues have been hit hard by the dearth of economic activity, both domestic and cross-border.
So far governments have announced fiscal stimulus programmes in response to the coronavirus crisis worth 4.1 per cent of potential global GDP, nearly half of which will come from the US alone. Across the euro zone, the stimulus programmes are worth 3 per cent of GDP, while in Japan it’s 10 per cent. This spending necessitates huge volumes of government debt issuance. Central banks in the best-placed countries like the US, which benefits from reserve currency status, can absorb most, if not all, of this new debt through their asset purchase programmes. The US Federal Reserve’s balance sheet has expanded from USD4 trillion to USD6.5 trillion over the past couple of months alone and we expect it to peak at around USD8 trillion by the end of the year. In the UK, the Bank of England is pursuing an even more aggressive form of asset purchases by buying bonds directly from the Treasury in a form of debt monetisation – a policy that for long has been taboo.
But if the lockdowns last more than two quarters, a new set of fiscal measures will have to be adopted, which could mean solvency problems for some already highly indebted countries. We estimate US debt will have risen from 108 per cent of GDP to between 133 per cent and 145 per cent following its massive stimulus programme, worth some 7 per cent of GDP, depending on how sharply the economy bounces back. In the worst case, it could hit 165 per cent of GDP by the end of 2022. Elsewhere, higher debt levels are likely to ring alarm bells – it’s worth remembering that during the euro zone’s sovereign debt crisis, Greece flirted with ejection from the single currency as its debt breached 150 per cent of GDP.
Who’s at greatest risk?
Pictet Asset Management’s sovereign risk scores show which countries were most vulnerable to dangerous debt dynamics coming into the coronavirus crisis. The metric is based on how countries stand relative to each other and to their own historic trend on three dimensions – how affordable their existing debt is, how well they’re able to finance it and the degree to which the debt will fall naturally as their economies grow.
Our analysis shows that Greece had by far the poorest state of debt sustainability at the end of 2019 among developed countries, followed by Italy, Japan, Belgium and the UK. At the other end of the scale, Switzerland, the Netherlands and Ireland were in the most enviable positions.
Mapping countries’ short-term debt situations against their structural scores confirms that Greece, Italy and Japan exhibit the worst debt dynamics, though France is also a worry. By contrast, other northern European and Scandinavian countries are in a good position.
Among emerging economies, the countries that faced the biggest risks to their sovereign debt at the start of the crisis were Brazil, South Africa, Egypt and Argentina. In terms of debt dynamics relative to short-term debt situations, South Africa, Egypt and Ukraine are of greatest concern. Those likely to be most resilient were Russia and Korea.
Flashpoint
Italy was a flashpoint during the euro zone crisis and it could prove to be one again. Italian government debt could potentially hit 150 per cent of GDP by the end of this year. The European Central Bank already owns Italian bonds worth some 22 per cent of Italy’s GDP and, as such, it has a big role in the sustainability of the country’s debt. The ECB has already said it would take a flexible approach to purchases of member states’ bonds and will be absorbing some 90 per cent of net new issuance by the single currency region’s governments this year.
Those purchases by the ECB come against the backdrop of northern European concerns about creeping debt mutualisation. But ultimately, if the euro zone is to be kept together, some sort of debt pooling will be necessary – extend and pretend can only be supported for so long before the market tests the region’s political resolve. We expect that there will be moves in the direction of mutualisation, which ensure that yields on Italian bonds stay contained.
The ECB, however, faces a fine balancing act in how it navigates the coming months and will have to be deft in how it applies game theory. It wants to prevent another sovereign debt crisis. But it also doesn’t want to entirely remove pressure on euro zone politicians to reach agreement on some sort of debt mutualisation. If the central bank is too accommodative and compresses southern European government bond spreads too much, this would lessen the need for euro zone governments to agree on how to move forward.
An even more immediate concern is that some emerging market economies have already run out of monetary headroom. Inflation won’t be an issue for some time in developed economies as depressed demand and weak oil prices drag down consumer prices overall, notwithstanding aggressive central bank action. In some emerging economies, however, central bank policies are already acting to drag down their currencies in what could turn out to be another devaluation/inflation cycle. Worryingly some large developing economies – Turkey, Brazil, South Africa – are heading in this direction.
The global pandemic is likely to expose strains that already exist in the global economy as well as throwing up new problems. How governments came into the crisis will play a big role in how they emerge.
Opinion by Andrés Sánchez Balcazar, Head of Global Bonds, and Sabrina Khanniche, Senior Economist, at Pictet Asset Management.
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