A Strong Economy, Low Unemployment and an Accommodating Federal Reserve Have Led to Ripe Conditions for Accelerating M&A Activity

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MaxPixel CC0. Una economía fuerte, con un desempleo muy bajo y una Fed acomodaticia aceleran la actividad de fusiones y adquisiciones

While we are bottom-up stock pickers (and not stock market prognosticators or macro traders), we do note that despite the strong rally in the market so far this year, we continue to find many opportunities of stocks trading at significant discounts to our estimate of Private Market Value. Many of these are so-called “value” stocks including consumer staples, media and industrial companies.
 
The economy continues to be strong, with very low unemployment and now an accommodating Federal Reserve. This has led to ripe conditions for accelerating M&A activity, which, along with financial engineering, can cause undervalued stocks to close the valuation gap with over business values as Buffet and others typically describe.
 
Stocks have rallied into November first setting record highs as a solid October jobs report, improving China trade talks, easy central bank monetary policies, and the December UK election date agreement all fueled the advance.
 
After the FOMC statement release on October 30, Chairman Powell gave his assessment of the effect of recent rate reductions on the current state of the economy: “You are seeing strong durable goods sales. You are seeing housing now contributing to growth for the first time in a while. And you are seeing retail sales”…”More broadly, monetary policy is also supporting household spending and home buying by keeping the labor market strong, keeping workers incomes rising, and keeping consumer confidence at high levels.” Translation – rate pause. This all has benefits for the economy and value investing.
 
That said, it has seemed before that we are on the precipice of a trade deal with China, only to learn we are no closer and/or more tariffs are coming. So we wait and watch macroeconomic and political events closely, and seek a portfolio of companies that can withstand whatever economic conditions are before us. Furthermore, as we enter 2020 the market will surely be looking ahead to the November US Presidential election, with the market and specific sectors reacting accordingly which could help fuel further momentum for value stocks.
 
As always, we seek to buy high quality businesses trading at a discount to Private Market Value with Catalysts present to surface value.

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.

 

Julius Baer Appoints New Head of Corporate Sustainability and Responsible Investment

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Pixabay CC0 Public Domain. Julius Baer nombra a Yvonne Suter como su nueva directora de Sostenibilidad Corporativa e Inversión Responsable

Effective November 4th, 2019, Yvonne Suter took over as Head of Corporate Sustainability and Responsible Investment of Julius Baer. In this role, she is responsible for further developing the CSRI strategy of the Group across all business areas. She reports to both the CEO Office and the Bank’s Sustainability Board.   

Yvonne Suter joins Julius Baer from Credit Suisse, where she was Head of Sustainable Investment for the 5 past years and had held several leadership and management roles since 2005. She holds a Master in International Affairs and Governance from the University of St. Gallen.                  

Philipp Rickenbacher, CEO Julius Baer said: “I am delighted that we have been able to appoint Yvonne Suter, a proven expert, as the new Head of Corporate Sustainability and Responsible Investment. Thanks to her comprehensive knowledge and network, as well as her many years of experience, she has all the prerequisites for further developing Julius Baer in the areas of sustainability and responsible investment and expanding the Bank’s activities. This will further enable us to meet the ever-increasing demands in all aspects of sustainability: economic, social, as well as environmental.”

“After the Dotcom Bubble Burst Value Investing Enjoyed a Renaissance. We See No Reason Why History Will Not Once Again Repeat Itself”

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Foto cedidaLeft to right, Mark A. Boyar and Jonathan Boyar. boyar

New York based Boyar Asset Management recently signed an alliance with the Spanish manager Mapfre AM, to benefit from their mutual capabilities and which will boost their businesses. In this interview with Funds Society, Jonathan Boyar, President of Boyar Research – with 11 years of investment experience, and since 2008 relocated to Boyar, where he improves the analysis and management process, as well as being in charge of institutional sales for both the research area and the management service, explains the key points about this alliance and how to plan to make a foothold, with its particular investment style, in the portfolios of the Spanish investor. Above all, because he believes that value will have have its comeback, and will shine again.

You have recently signed an asset management alliance with Mapfre AM. What will Mapfre AM bring to Boyar AM and what will Boyar AM bring to Boyar AM after the agreement?

The entire team at Boyar Asset Management is excited about entering this partnership. With Mapfre not only do we gain access to long-term patient capital allowing us to make equity investments for the long term, we will also be able to leverage their significant distribution capabilities. We are also looking forward to access to Mapfre’s expertise in both ESG investing and European equities which are two areas that interest us greatly.

Through this strategic partnership, Mapfre will gain access to our expertise in long-term catalyst driven value investing which we have been practicing since 1975. Mapfre will also gain from the knowledge of our team of seasoned investment professionals. 

Is Boyar AM looking for greater expertise in European equities thanks to Mapfre?

While we currently do not have plans to launch a European product, it is certainly something we are seriously considering as we grow. We look forward to beinging able to leverage Mapfre’s expertise in this area when the timing is right.

And are you also looking for ESG capabilities? Do you think it’s a trend with potential?

ESG is here to stay. It certainly is not a fad. Many well-respected money managers have adopted this practice and we look forward to benefiting from Mapfre’s already significant capabilities in this area.

With this alliance, will Boyar AM also seek to position itself in the Spanish market?

Absolutely. We plan on utilizing Mapre’s distribution network in Spain to target the Spanish market. We think this audience will embrace a long-term value-oriented investment style.

Boyar AM is a value asset manager and it will offer Mapfre its expertise in asset management in the US. What characteristics distinguish its investment style from other value houses, what characterizes its investment methodology in the US?

Boyar is quite different than most money managers as we take a private equity approach to public markets.  Since 1975, our flagship publication (which through another entity we sell on a subscription basis), Asset Analysis Focus (AAF), has been read regularly by some of the world’s most sophisticated investors. In keeping with AAF’s mandate of uncovering undervalued stocks, we use that same research to build and manage individualized portfolios for our money management clients. Many money management firms claim to do their own research—but we can prove it.

Based on that research, we invest in companies whose stock is trading significantly below what we believe the entire company is worth—believing that within a reasonable period of time, the stock market will reflect (or an acquirer will purchase the company for) its intrinsic value.

Unlike many value managers we are focused on identifying catalysts that we believe will help the stock ascend in value over a reasonable period of time. We believe by identifying these catalysts it helps us to avoid value traps.

Is it difficult now, with valuations at high levels in the US, to look for opportunities, undervalued companies? In this sense, what levels of liquidity do you have in your funds?

While the overall market is somewhat expensive by historical standards. We are finding many names in the small and mid-cap area that are selling at significant discounts to what we believe the company is truly worth. This market has been led by a handful of mostly mega cap technology shares, at some point the leadership will change and we believe investors like us that stick to their style through both  think and thin will be rewarded for their patience.

Value is not at its best… the performance has been bad compared to growth in recent times. Why and do you think this situation will change in the short term?

2019 has been yet another year when growth stocks have simply trounced value shares. The outperformance was consistent across all market capitalizations. The most expensive stocks continue to get more expensive, while the cheapest companies utilizing any acceptable metrics keep getting less expensive. At some point this trend will reverse course, as it always does. We just can’t predict the timing. On an absolute basis, value shares (just like prior to the dotcom crash) have posted respectable numbers but compared to growth stocks they significantly underperformed. Value investors were rewarded for their patience after the dotcom bubble burst and value investing enjoyed a renaissance. We see no reason why history will not once again repeat itself.

In Spain in recent years, managers have emerged with this style of investment and a lot of talent (Cobas AM, Magallanes, azValor, Horos AM …): do you know Spanish talent? Do you have any Spanish manager value among your references?

These are certainly people I know of by reputation and I have spoken at conferences where they have also presented, but I unfortunately do not know them personally. I would welcome the opportunity to meet some of them.

In an environment of increasing competition and polarisation in the asset management industry (and where scale matters more than ever)… do you believe that alliances are a good alternative to mergers between entities?

Anytime two smart organizations are able to share knowledge, ideas and best practices it is a win for everyone involved.

Do you think we will see a lot of M&A in the sector? Is a strong consolidation necessary? Or will we see more alliances and cooperation as a way of joining forces in this scenario?

I think due to compressing margins there will certainly be consolidation in the sector. Scale certainly matters, but I also think investors appreciate boutiques like ours that are able to invest outside of the mainstream. They understand as the great Sir. John Templeton once said, “If you buy the same securities everyone else is buying, you will have the same results as everyone else.

Four Ways to Invest in the CleanTech Revolution

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Pixabay CC0 Public Domain. Cuatro formas de invertir en la revolución CleanTech 

As the impact of climate change takes its toll on the planet, consumers, governments and corporations are all assessing their environmental practices and developing new clean technologies, according to an analysis by Amanda O’Toole, a Senior Portfolio Manager of the AXA Investment Managers Framlington Clean Economy Strategy.

CleanTech refers to companies that seek to increase performance, productivity and efficiency by maximizing the positive effects on the environment. With the world’s population rapidly increasing and fixed resources in danger of running low, the need for CleanTech solutions has never been greater. In fact, demand is so strong, that the global CleanTech market is anticipated to reach US$3 trillion by 2025, significantly up from US$601bn in 2014.

What does this mean for investors?

O’Toole, who is also a thought-leader within AXA IM’s Thematic Equities team of investment experts mentions that there is a growing social awareness of the pressures on scarce natural resources and the need for greenhouse gas emission reduction. “Businesses that are prepared to respond to this paradigm shift in how we perceive our environment should enjoy a sustainable, competitive advantage by reducing their input costs over the long-term. These moves offer significant growth potential in the decades to come, along with exciting potential new opportunities for investors along the way.”

As a result of this changing dynamic, they have identified four key areas which they believe will provide innovative, new investment opportunities: sustainable transport, recycling and waste reduction, smart energy and responsible nutrition. “With this universe expanding at more than 10% per annum – a very attractive rate compared to other industries –the structural growth opportunities can be significant.”

Sustainable transport

Across the world, the demand for sustainable transport is increasing, providing investors with ample investment opportunities in electric vehicles, battery technologies and emission reduction systems.

“The benefit of investing in these companies is already evident. During the recent trade tensions, electrification as a secular trend outperformed the broader automotive industry and we believe this is on track to continue. Globally, electric vehicles are anticipated to grow at a rate of 33% by 2030 and with the cost of lithium-ion batteries falling by 35% over the past year, the potential for sustainable transport is on the rise.”

A stock they like in this area is Aptiv, a global technology company that develops safer, greener and more connected solutions. Headquartered in Dublin, Aptiv delivers the software capabilities, advanced computing platforms and networking architecture that makes mobility work.

Recycling and waste reduction

The plight caused by plastics and growing electronic waste has been dominating environmental headlines in recent years. With approximately 8 million metric tonnes of plastic entering the oceans each year and only an estimated 20% of electronic devices recycled per annum, consumers and governments are waking up to the need for change.

“This change is starting to take shape. In July 2018, Seattle became the first U.S. city to ban plastic utensils and straws, and its actions have now been followed by other cities such as San Diego, where Styrofoam food and drink containers have been banned. We believe that because of ongoing action, we are likely to see the investable universe for compostable materials continue to expand.” 

A stock they like in this space is Smurfit Kappa, a FTSE 100 company that is one of the world’s leading providers of paper-based packaging. Smurfit Kappa is perhaps best known for its Bag-in-Box products, which offer more sustainable packaging for many industries such as wine, juice, liquid eggs, dairy and non-food applications such as motor oil and chemicals.

Smart energy

The necessity and demand for greener homes is growing, helping to provide the impetus and resources for the development of energy efficient technologies. This is creating investment opportunities in renewables, greener homes and efficient factories.

Notably, there has been an acceleration of interest in offshore wind development in the U.S., which historically has lagged Europe in adopting this form of technology. Massachusetts, for instance, recently approved contracts for an 800 megawatt (MW) offshore wind project, while New York State announced in July it had reached an agreement for two large offshore wind projects off the coast of Long Island. Momentum in this area is clearly building.

Responsible nutrition

The impact of unsustainable food production has put the planet in a delicate position. However, as O’Toole mentions, attitudes are changing. Companies are exploring new ways to meet the growing demands of rising populations while limiting the use of scarce water and land.

This has led some experts to algae, with some believing it could soon become a major source of the world’s protein. Growing ten times faster than terrestrial plants, algae does not require fresh water, can provide more iron than beef, and does not compete with other crops for land. The potential for algae is still in its infancy, but with ongoing developments the algae products market is anticipated to reach $5.2bn by 2023.

Furthermore, they believe that companies that are innovating to help support sustainable business practices – such as specialist ingredients firms that are shifting towards more natural ingredients and reducing the use of artificial products – are in an optimal position to perform well, despite the broader economic slowdown.

“We live in an uncertain world which gives investors little confidence from a macro or geopolitical perspective. Against this backdrop, it gives us comfort to invest in high quality businesses that benefit from clear structural growth trends within the Clean Economy.” O’Toole concludes.

 

 

Private Investments Risk (Part 2): “Asset Aggregator or Value Creator?“

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CC-BY-SA-2.0, FlickrFoto: Sheila Sund . Private Investments Risk (Part 2): “Asset Aggregator or Value Creator?“

Which would you choose to add to your portfolio of private investments – an asset aggregator’s latest fund or a value creator’s fund?  It is an important question that deserves deep thought.  And it matters because too often, investors make the wrong choices, thereby increasing their risk profiles and undermining their odds for achieving decent returns when things do not go according to plan.

As private investments become an increasingly important part of any diversified asset allocation, representing anywhere between 10% and 40% for high net worth families as well as institutions, private investment managers respond in one of two ways.  Certain managers choose to collect as many commitments as possible, focusing their energies on expanding the size of their AUMs and also expanding the variety of fund strategies they offer.  Other managers continue to focus substantially all of their energies on value creation and to stick to what they are good at.  Despite claiming they can achieve both objectives, very few managers do so.

Why is it so difficult to successfully focus on both aggregating maximum available AUMs for your strategies, while prolifically expanding the number of strategies offered, and continuing to successfully focus on true value creation within each strategy without sacrificing performance and without increasing risk profiles?  The answer is – incentives.  Incentives drive behavior and these objectives have competing paths to riches.  

Before managers raised mega funds, their overwhelming priority and incentive was to generate a meaningful profit so that they could earn their 15-20% carry (their share of the profit).  If they succeeded at creating value (which means not competing for the same deals and overpaying, not using excessive leverage or piling on other forms of risk, applying disciplined growth plans, and selling to a strategic acquirer after ~5 years of value creation efforts), they raised another fund (maybe of same size or slightly larger), and with consistent focus over time created meaningful personal wealth for their investors and themselves.  

As the asset class became more popular and moneys flowed to it, managers who adopted the asset-aggregator-above-all-else-approach did so because the 1.5-2% annual management fees on a much larger pool of assets was an easier and quicker path to riches. 1.5% per annum of a $10 billion fund generates $1.5 billion in management fees over 10-12 years (that’s much more than is needed to pay for basic salaries and office space).  And as more money flowed to these asset aggregators who built their brands initially using true value creation approaches, their businesses became more competitive and they felt more pressure to quickly put their capital to work, allowing them then to raise more AUM.  Driven by these incentives, underwriting standards dropped as a result.  Their pitches shifted from ‘we target a 20% IRR’, to ‘we now target a 15% IRR’, to ‘you should thank us for delivering a 10-12% IRR’ (while not drawing attention to the fact that many of their risk profiles increased in the process).

When you review your recent investment choices, take a look at your managers’ incentives and how well they are personally aligned with your objective.  Don’t be afraid to drill down deeper to get your answers.  Have their business models changed? If so, how?  Is the risk profile greater?  If so, why?  Are they personally committing a meaningful amount of their net worth to the same fund or is their firm subsidizing their commitment? How does their underwriting model compare to previous funds?  How has their competitive landscape changed?  How has their focus changed? It is possible to do better and to find alignment. It just takes more effort.

Column by Alex Gregory

Schroders Sells its Stake in RWC Partners

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Foto: Pxhere CC0. Schroders vende su participación en RWC Partners

RWC Partners announced that it has signed a definitive agreement for Schroders to sell their equity in RWC back to the Company and to RWC’s new long-term partner, Lincoln Peak Capital.  Subject to regulatory approval, the transaction will see Schroders completely exit their equity stake in RWC Partners.

Dan Mannix, CEO of RWC commented: “We would like to thank Schroders for the support they have shown our organisation over the last 9 years.  In Lincoln Peak, we welcome a new shareholder to RWC who we have known for many years.  Lincoln Peak is a very attractive partner for us who has committed to our organisation for the next decade and beyond.  Our priority has been to secure a shareholder who supports the commitments we have to our clients and investment teams.  We are proud to differentiate our organisation through being independent, private and owned by very long-term shareholders who define success by the quality of services we provide to our clients and fulfilling responsibilities to our other stakeholders.”

Tony Leness, Co-Founder and Managing Partner of Lincoln Peak commented: “We feel very fortunate to have the opportunity to partner with RWC shareholders and RWC’s exceptional investment teams, management and staff. Our long-term relationship with the Company provided us with a unique window to understand  RWC’s culture and future potential, allowing us to play an active role in assisting the key stakeholders to effect this transaction in a manner that will allow RWC to retain its independence and successful trajectory.”

Seth Brennan, Co-Founder and Managing Partner of Lincoln Peak added: “We believe that RWC’s entrepreneurial culture and commitment to providing its talented investment teams with clear incentives, world-class support and the independence to focus on client outcomes is designed to deliver exceptional, long-term results for clients. This transaction and commitments made by various parties preserves RWC’s successful business model and improves the alignment between all of RWC’s stakeholders, positioning the Company for long-term stability and continued success.”

Based in London, Miami and Singapore RWC Partners is a privately owned, independent asset management organization with 18 billion in assets under management. 

Boston-based Lincoln Peak Capital is a private organisation that specialises in making long-term, minority investments in high quality asset managers.  Founded in 2008, Lincoln Peak facilitates ownership transitions in a manner that aligns the interests of a firm’s key constituents and positions it for long-term stability and success.
 

Jane Fraser Named President of Citi and Head of Global Consumer Banking

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Jane Fraser, courtesy photo. Jane Fraser

Citi CEO Michael Corbat announced that he “asked Jane Fraser to serve as President of Citi, a role that has been open since earlier this year. Stephen Bird has informed me of his decision to leave Citi to pursue an opportunity outside our firm, so Jane will also become CEO of Global Consumer Banking. Stephen will be available over the next few weeks to ensure a smooth transition.”

Ernesto Torres Cantu, currently CEO of Citibanamex, will succeed Jane as CEO of Latin America.  “Ernesto is well prepared to take on the role of CEO of the region.” Corbat added. According to him, an announcement about the leadership in Mexico will be made in the near future.

Jane has been at Citi for 15 years, since she joined from McKinsey to run Client Strategy in the Corporate and Investment Bank. “During the financial crisis, she led our Corporate Strategy and M&A group and, in many ways, Jane helped shape the company we are today. She subsequently ran two of our businesses, the Global Private Bank followed by U.S. Consumer and Commercial Banking & Mortgages”.

Most recently, Jane served as CEO of Latin America, where she and Ernesto have been overseeing Citi’s substantial investment in Citibanamex, which has strengthened their franchise as well as improved our products and services.

Ernesto is a 30-year veteran of Citi, having joined as a corporate banker in 1989. He was appointed CEO of Citibanamex in 2014. He has an excellent track record of driving business results while also prioritizing our culture and controls.

“Working together, we have made tremendous progress. I remain committed to leading our firm in the coming years and look forward to working even more closely with Jane in her new roles. We will continue to execute our strategy so we can deliver the results our stakeholders expect and deserve.” Corbat concluded.

Global Interest Rates: How Low Can You Go?

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Pixabay CC0 Public Domain. Tipos de interés globales: ¿Cómo de bajo puedes ir?

Central banks are rushing to provide additional support as the economic outlook darkens. However, there are growing fears that policy loosening might be doing more harm than good at present, warns Aberdeen Standard Investments in its recent “Macroscope”.

This so-called ‘reversal rate’ at which rate cuts become counterproductive is seen as working through a number of channels, including weak bank profitability; credit misallocation; softer household and corporate confidence; and low returns on saving. “But although there are some justifiable concerns over the unintended consequences of lower rates, we need to take into account the whole picture”, says the asset manager.

Indeed, most empirical evidence does not suggest that the costs of lower interest rates are outweighing their benefits, suggesting that policymakers have not reached a reversal rate (yet). This debate is a symptom of how much pressure is being put on monetary policy.

Then, how low can you go?

Historically, there have been concerns that a move into negative rates would prompt deposit flight from banks. However, says ASI, there have been few signs of an explosion in cash under mattresses. Instead, the fear has shifted to bank profitability: “banks have been unwilling (or legally unable) to fully pass on negative interest rates to depositors, providing a squeeze on net interest margins and profits”.

The fear is that this could undermine capital positions in the sector, leading to a reduced capacity to lend and driving a tightening in credit conditions. Besides, according to the asset manager, rate cuts beyond certain levels could sap confidence, as households and businesses see these as a sign of economic malaise.

“In economies with high domestic savings rates the lower return on these could encourage even more cautious activity”. Finally, the BIS has been keen to highlight the risks of credit misallocation as interest rates fall ever lower.ai

Ever-lower interest rates may well generate unintended negative consequences, but ASI points out that there are mitigating forces at play that need to be taken into account. For example, the squeeze on bank margins might be offset by higher lending, not to mention a boost from asset holdings.

Indeed, while the overall evidence is mixed, most credible studies do not support the conclusion that interest rates have fallen to a level at which the unintended consequences outweigh the benefits. “However, the fact that these exist adds to the case for fiscal policy to take more of the strain. Sadly, it does not feel as if governments are stepping up to the plate”, says ASI.

Another problem for banks

On the banks’ front, the fear is that lower interest rates could weigh on net interest margins and in extremis push deposits out of the sector. This might limit banks’ ability to pass through lower interest rates to the real economy and in some cases even force them to contract their balance sheets, lowering credit availability.

What banks need most in order to maximise the effectiveness of lower policy rates is 1) demand for credit, 2) an ability to lend at high leverage ratios and 3) for that the lending to be done at higher net interest margins – where curve steepness helps a great deal.

According to ASI, our starting point is that many banking systems, particularly those in Europe, are already struggling for profitability a decade on from the financial crisis and not just because of crimped margins. Post-crisis regulatory capital requirements more than quadrupled in some cases and banks needed to raise and retain substantial levels of new capital in order to comply.

Lending is now done at much lower multiples that require higher margins to maintain profitability. “However, weak growth, economic uncertainty, ageing populations and already high levels of debt have been drivers of lower demand for credit through the cycle”.

Reduced profitability since the crisis has affected banks worlwide. However, the problems have been most acute outside the US. The asset manager thinks that bond yields are a useful measure of market expectations for long-term growth and inflation, so it is no surprise that as European bond yields moved deeply negative, bank stocks continued to underperform other equities. “The cocktail of low growth, inflation and rates is clearly an unpalatable one for this sector”.

Bonos europeos

Gillian Tiltman, Neuberger Berman: “The Real Estate Sector is The First to Respond to Changes in The Way People Live and Work”

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Pixabay CC0 Public Domain. Gillian Tiltman, Neuberger Berman: “El sector inmobiliario es el primero en responder a los cambios en la forma de vivir y trabajar de las personas”

Gillian Tiltman, portfolio manager of the two Neuberger Berman REITS strategies is convinced that the listed real estate sector is the first to react to the social and demographic themes that are changing the world. Thus, in an exclusive interview for Funds Society, the manager explains the strong potential that they expect in the non-core sectors in the listed real estate investment segment (REITS).

“We think that real estate is the first sector to respond on how people are living and working”, explains Tiltman.

Among others, data storage is one of the main new industries that they are taking advantage of. “If you think about cell towers, there are our largest holdings in both our global and us funds, the expanding global broadband usage requires robust cell tower infrastructure and this next generation 5G technology build out is already very much underway.”, affirms the expert.

Tiltman also highlights the expected growth rates close to 40% in data consumption in the United States until 2023. “ It is not just about people having more and more devices, is the amount of data that they are using. When we are thinking about cell towers, we are leasing space in the air, the more the data usage the more you need to lease. Is 0,02 megabites to send a mail is 11.000 times that to watch a 30 min TV show in Netflix”, explains the portfolio manager.

Another of the non-core sectors with a lot of potential is the industrial segment that has been developed in response to the rise of e-commerce. Strong sales in e-commerce have negatively impacted the traditional real estate sector due to shop closures and bankruptcies in the real economy, but, nevertheless, it has caused the development of the industrial segment to meet the last mile distribution needs, in which the Neuberger Berman REITS funds have also invested.

On the other hand, the socio-demographic changes of the millennial generation and the ageing of the population have resulted in an overweight of the US residential sector: “Getting married used to be a real driver of the US residential market to buy a single family home. Now people are getting married later and later or not getting married at all and even when they do so, this is not going to be the catalyst to buy a home. They want flexibility, they don’t necessarily want that to be tied down to home ownership.”, comments Tiltman.

In this sense, a bigger demand in professional rental services from the new generations stands out “What we are seeing now is that when people do get married, or having children and they want access to school and they want to live in little more suburban environment they still want to rent. But they want to do that in a professional way. They don’t want to rent just from a person, they want to rent from a company and that is why we are overweight in single family rentals.”.

The segment of manufactured housing is another one that is overweight in its portfolio, due to its popularity among more senior population and for being “one of the bastions of affordable housing still the United States, ” says Tiltman

Although the development of the non-core segments has mainly focused on the United States, sectors such as student residences and personal storage are non-core sectors in the United Kingdom, which have helped alleviate the lower growth and uncertainty generated by Brexit. “There is still robust demand for universities from UK nationals and non- EU foreigners and that is what we are concentrating on”, declares Tiltman.

As for the impact of the macro moment, Tiltman questions the idea that the real estate sector can be considered cyclical and highlights the importance of investing globally. “When you invest globally the cycle stops mattering that much because there are so many different so called cycle to investing. In our global fund, for example, if you think on San Francisco offices is a total different cycle than NY offices, to Miami hotels so we believe that it can be an evergreen asset class”.

As per the advantages offered by this asset class in the composition of the portfolios, Tiltman highlights three: liquidity, performance and exposure. “It is an asset class to hold in a portfolio alongside bonds, alongside global equities, alongside physical real estate as well.”, affirms. In terms of correlation with equities  it is high because they are listed securities, but their current levels are at pre-crisis levels close to 0.5.

At this regard, the manager adds: “The longer you hold the securities the more direct real estate like you are going to became so that is why we take the view that understanding the true value of the asset is key and that is our investment style”.

Another advantage of this asset class is that listed real estate investments are required to pay to pay 90% of their capital income as dividends “this means they have to have a very good capital disciplineand  they are never forced buyers are private real estates companies might be.”, explains the expert.,

Finally, Tiltman is optimistic about the outlook for this asset category despite the strong returns already recorded. “There is plenty of earnings growth coming in different sectors, REITS are trading at low multiple versus equities, we have seen great signs to show how REITS have been resilient late cycle and also in recession”, concluded the portfolio manager.

Asian Equities Remain Very Attractive… The Structural Growth Stories Are Still There

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Rahul Chadha, CIO at Mirae Asset Global Investments.. mirae

Growth around the world is slowing down, but in Asia we can still find many stories of structural growth that make a case for equity investments in the region. This is explained by Rahul Chadha, CIO of Mirae Asset Global Investments in this interview with Funds Society. He acknowledges that the trade war between China and the US can cause some pain, but he believes that the measures that some countries are taking can alleviate the situation and even benefit some markets.

The world is slowing its growth… what are the perspectives for the Asian region?

Indeed global growth momentum is slowing; however, we believe that policymakers have the necessary tools at their disposal to support growth should downside risks arise. Our current base case is that we will see a gradual growth recovery as policy support filters through to the real economy.  Along with stimulus measures including further infrastructure spending boosts, monetary easing and fiscal stimulus, we expect  China  to  push  forward  with  further  opening-up of domestic  industries  (in  particular  financial  sectors)  and  capital markets  and implement more structural reforms. In India, the government has recently made a major move to boost growth and sentiment by announcing a substantial cut in corporate tax rates. Corporate income tax rates will reduce from 34.3% to 25.17%, effective this current financial year. Furthermore, for new manufacturing companies setting up after 1 October 2019, the corporate income tax rate is further reduced to 17%, which should help attract more Foreign Direct Investment (FDI)

What macro consequences will the U.S.-China trade war bring to the region? Which countries will be the most affected or which ones will be benefited from substituting China instead of the U.S. as a trading partner?

Increased tariffs will likely negatively affect growth; however, we believe that further easing policies will be able to mitigate some of these effects.  In terms of the medium to longer term opportunities that these trade shifts could create, a number of   Asian countries including India, Vietnam and other parts of Southeast Asia will be key beneficiaries. Multinational companies have already begun to explore shifting production facilities outside of China. These economies will benefit if their governments can build up the capacity to capture export share, which would attract higher foreign direct investments and create jobs. As mentioned earlier, the Indian government has lowered its corporate income tax rate to 17% for new manufacturing companies, which is a rate lowest among peers.

What will be the consequences in the markets? Do you fear a shock if the situation worsens?

US-China trade remains a key area to watch for markets and a meaningful escalation is a tail risk. Despite trade talks resuming,  a near-term resolution for US-China trade appears unlikely at this stage, we expect the current dynamic to remain until one or both sides begins to feel the full impact of additional tariffs. Having said that, we believe both parties will continue to work towards an eventual trade deal.

In general, in Asian markets, what are the main risks for the coming months?

We expect that in the near term, markets will probably continue to see periods of higher volatility as investors grapple with the current key issues – temporary US-China trade truce, slowing global growth and synchronized central bank easing.  Amidst some market volatility, we continue to focus on strong business models, which are more resilient from the impact of disruption and uncertainty, and prefer names that have reasonable, not high, implied growth expectations.

Even so, does investment in Asian equities represent a good opportunity? What returns can be expected for 2020?

We believe Asian equities remain very attractive. Despite some slowdown and macro uncertainty, the structural growth stories are still there. Importantly, Asia ex-Japan valuations are currently at an attractive level, and we see potential compelling risk-reward opportunities. Our base case for 2020 is that we see a gradual recovery on the back of policy support measures and if there is a resolution of trade tensions, then we could see a stronger recovery as it removes the overhang of uncertainty and boost corporate confidence.

Which markets have the best prospects? The big ones or the peripheral ones and why?

China remains an attractive structural story, despite the headline risks. While policy support is set to continue as trade uncertainties persist, the Chinese government still has many levers it can utilize to stimulate the economy, particularly given that the stimulus, thus far, has been very measured. A-share inclusion factor increasing on MSCI indices is also another positive. Since the initial inclusion of A-shares in June 2018, foreign investors have been increasing their exposure to China’s onshore market. At the end of 2018, foreign investors accounted for approximately 6.7% of the free-float market cap of the onshore equity market. This level is still low compared to other major markets in the region such as Taiwan, South Korea and Japan, where foreign ownership is in the 20%–35% range. We have been researching opportunities in the China A-share market since the Stock Connect program was first launched in November 2014, and we seek to further deepen and expand our capabilities in this space going forward.
                        
In India, Prime Minister Modi’s re-election win gives him another five year term, which should be positive for the Indian equity market, as it provides stability and continuity for his development agenda. The recent corporate tax cuts will provide a boost to the economy. Near term growth is likely to remain softer as policy support measures will take some time to filter to the real economy. However, the fact remains that over the medium term, India is a very powerful story and the economy is at a cyclical bottom.

By sectors, do you have any preferences?

Our portfolios’ sector/country allocations are the end-result of bottom up stock selection. Irrespective of sector, we prefer companies with strong business models and leaders in technology/digitization, utilizing big data, as we believe they will be the stronger performers over the long run. Healthcare is an overweight position in the portfolio, we prefer leading private hospitals and innovative pharma companies, particularly those developing treatment for chronic diseases such as diabetes, cancer. Insurance is another area where we see very attractive opportunities as penetration remains very low across most Asian countries. We like industry leaders with strong brand, solid agency force/distribution.

How can central banks help Asian markets? How are central banks behaving in Asia?

Amid a more dovish stance from the US Fed, most central banks in Asia have embarke on easing of some sort and more is likely to come. For example, the Reserve Bank of India has been on a rate cutting cycle this year, the repo rate is now at a 9-year low. Additionally, Asian policy rates and currencies have normalized to a greater degree since 2013. This provides Asian central banks and policymakers with some room to confront potential downside risks to growth.