Courtesy photo. Amundi Pioneer: Trump Does Have a Path to Reelection
Donald Trump is facing a challenging re-election but is by no means out according to Paresh J. Upadhyaya from Amundi Pioneer.
Trump’s overall approval rating is stable, but at a net -11, is quite low. Meanwhile political betting sites are placing better odds in a democratic win. Despite all of that, Upadhyaya points out that there have been cases, like with Reagan in 83, where despite a negative nine point net approval rating, there was a win.
Moreover, he believes that “Trump’s low net approval rating does not mean loss, specially since there are many battleground states for 2020”. In his opinion, and considering that there are currently 10 states with less than 5 points difference, the bulk of the game will be decided in Arizona, Iowa, Wisconsin, Michigan and Pennsylvania.
“The most likely scenario is democratic house, republican senate” says Upadhyaya who thinks democrats have early edge to retaining House while GOP in Senate.
Path to reelection
According to a Pew Poll, the issues likely to dominate voter’s agendas in 2020 will be economy and healthcare, followed by education, while global trade comes in last.
“With a strong economy and low unemployment, Trump does have a path to reelection,” he mentions adding that using the Abramowitz Time for Change model with today’s numbers instead of waiting for Q2 2020, Trump would get 49.9% of the popular vote. Currently, “all the measures look fenomenal… I do not expect a recession next year but what the yield curve is telling us is that the economy will slow down.” However, “Trumps approval rating for jobs and economy is rock solid.“ So as long as the economy remains growing and jobs continue at good levels Upadhyaya believes he has a good chance to remain in power.
Without an opposition candidate in place yet, Upadhyaya also thinks that Trump will look to position himself as “the lesser of two evils. The election will become a race to the bottom even quicker than 2016.” He concludes.
In recent years, every now and then, parallels are made between Europe and Japan suggesting that Europe has entered a period of secular stagnation. Indeed, when the yield of the German Bund fell below 0% last quarter, some investors feared once again that Europe was turning Japanese.
Since 2008, growth has been tepid in Europe. Real private consumption is only 5% higher, equivalent to a yearly growth rate of 0.5% and investment is only now approaching the 2008 peak. The only bright spot has been net exports, which have doubled since then. In order to boost the economy, central banks reduce interest rates with the hope of spurring borrowing and therefore consumption. Twenty years ago, Japan first cut rates to 0% and since then, not only have official rates never exceeded 1% but they have hovered close to 0%. Growth, on the other hand, has generally remained anaemic. Likewise, the ECB has lowered official rates to 0% and, ten years after the crisis, any attempt at normalization has been kicked down the road. The fact is that low interest rates have had an indirect negative impact on the economy via the banking system. In both Europe and Japan, households and enterprises rely primarily on banks for their financing. This contrasts with the US where access to capital markets is more commonly used. The complicated situation of banks, due to falling net interest margins, stricter regulation, weak growth and political woes, has restrained both the old continent’s and Nippon’s banks from easily conceding loans.
Demographics is also a key similarity between both regions and probably the key structural problem explaining the low growth, interest rates and inflation. An ageing population and declining workforce has a direct impact on all these factors. As more and more people prepare for retirement, they tend to save more and, at the same time, labour supply diminishes, reducing growth and investment. Interest rates fall as savers chase fewer investment opportunities and in order to encourage borrowing. Another consequence is the negative impact on public deficits as governments are faced with increased healthcare costs for the elderly and less income from taxes.
Although Europe presents symptoms of the Japanese illness, there are a few relevant differences that point to a less critical situation in Europe and these differences may help it avoid a deflationary spiral. To begin with, in Europe, although inflation is still well below the ECB’s target of 2%, it is still positive, averaging 1% since 2012. This is a much better situation than in Japan where, despite 20 years of low interest rates and, more recently, a slew of unconventional policy tools, since 1999 inflation has been negative half the time. Japan is the only developed country where wages have fallen. Since 1996, inflation adjusted wages have dropped about 13%. The longer growth and inflation remain low, the more people are prone to save and postpone consumption. A decline in inflation also makes debt more burdensome and punishes borrowers. Of importance as well is the fact that the destruction of wealth in Japan after its twin real estate and financial asset bubbles burst was unique both in terms of scale and the impact on consumers. Counting the value of real estate and stock, Japan’s loss of wealth was equivalent to three years of its GDP. Moreover, the build-up of the debt overload in Japan before the crisis and its evolution thereafter was also very different to Europe. Credit growth in Japan reached 25% in 1990, whereas by 2008 in Europe, it was around 10%. Japan’s public debt-to-GDP has ballooned to almost 240% today, whereas in the euro zone, this ratio has dropped from 92% in 2014 to 86%.
That is not to say, however, that certain countries are not suffering a more complicated situation (for example, Italy with public debt at 130% of GDP). Finally, the ECB was also quicker to respond and address the problems.
Although Europe is suffering from low growth, interest rates and inflation, several important aspects are indicating a less dire situation than Japan. Monetary policy and other unconventional tools have, without a doubt, been necessary to support the economies of both regions, but their success in addressing the more structural problems has been limited. Going forward, Europe is still very dependent on external demand for growth and should perhaps try to attack its large current account surplus resulting from the northern bloc’s predisposition to save more that it invests. Combating Germany’s and other northern countries’ fiscal orthodoxy could give Europe another leg of growth and help it out of the doldrums.
Photo: waway. In Their First 10 Years, of a Total of 129, 86 CKDs Have Been Frequent Issuers
This year will be 10 years of the first issuance of the private Investment vehicle (CKD) listed on the Mexican stock exchange. The CKD in Mexico have allowed the Afores to venture into the financing of various infrastructure projects, energy, real estate, mezzanine debt, as well as prívate equity.
The four CKDs that were born in 2009 are: RCO of Red de Carreteras de Occidente (infrastructure sector, ticker RCOCB_09 and with a current market value of 959 million dollars), Wamex (private equity, MIFMXCK_09 and with a current market value of 64 million dollars), Macquire (infrastructure, FIMMCK_09 and with a current market value of 303 million dollars) and Discovery Atlas (private equity, DAIVCK_16 and with a current market value of 66 million dollars), however, only Macquiere was issued at 10 years. that all others have a term between 20 and 29 years.
Among the eight CKDs that were born in 2010, only six will expire next year (2020), which will begin to close the first cycles of CKDs with net returns and that will be an important promotion mechanism. The history of the CKDs was carried out in 2008 with the issuance of the instrument structured by Santa Genoveva (primary sector, AGSACB_08 and with a current market value of $ 135 million dollars) issued at 20 years.
The CKD issued by Capital I Reserve (CI3CK_11 of real estate and a market value of 55 md) in 2011 is also close to expire.
The CKDs that came out between 2009 and 2012 (20 in total including Santa Genoveva) came out with the prefunded modality. The first CKD with capital calls was Northgate (AGCCK_12) in the private equity and fund of funds segment, which set the tone for starting issues with capital calls. It should be noted that the structure of capital calls with punitive dilution has been the most used methodology among subsequent CKDs.
Today there is a total of 129 CKDs with a market value of 12,644 million dollars and the capital commitments amount to 22,170 million dollars according to information prepared with data from the Mexican Stock Exchange and the issuers as of March 21.
The CKDs participate in 7 sectors, where three stand out in number of funds, market value and capital committed: real estate, infrastructure and private equity. The capital committed are greater than 4,000 million dollars in each of these sectors. The CKDs that are fund of funds, energy and credit (mezzanine debt), the capital committed amounts are between 2,000 and 3,000 million dollars. The primary sector being the smallest amount (294 million dollars).
Between 2016 and 2017 the offer of CKDs increased by 15 per year respectively and by 2018 the number increased 150% to place a total of 38 CKDs. Of these, 18 came under the format of International and Private Investment Vehicles (CERPIs). This significant change in number and amount placed was due to the change in regulation where the CONSAR allowed the Afores to invest up to 90% of the resources internationally and at least 10% in Mexico. Several of these issues are tailored suits to some Afores.
In terms of capital committed, 2018 was the year with the most committed resources (6,869 of 22,170 million dollars in total). In the first three months of 2019 there have been three new CKDs including two CERPIs (one more from Blackstone to complete 4 and the first from Spruceview Mexico) and one CKD (ACON). Of the total 129 CKDs, 29 issuers can be identified that have jointly issued a total of 86 CKDs (almost three CKDs per issuer on average), so that 43 issuers have only one CKD in the market so far.
The 5 most important issuers in capital committed amount are:
Infraestructura Mexico with 4 CKDs (the tickers are: EXICK_14, EXICK_16-2, EXI2CK_17, EXICPI_18). Mexico Infrastructure Partners is an investment company specialized in investments in infrastructure and energy. It has capital calls of 288 million dollars and has capital commitments of 1,438 million dollars.
Credit Suisse with 3 credit CKDs, that is, mezzanine debt (CSCK_12, CS2CK_15, CSMRTCK_17). It has capital calls of 479 million dollars and has capital commitments for 1,250 million dollars.
Walton Streel Capital with 3 real estate CKDs (WSMXCK_13, WSMX2CK_16, WSMX2CK_18). It has capital calls of 212 million dollars and has capital commitments for 1,061 million dollars. In 2015 Walton also issued a CKD together with Finsa (FINWSCK_15) that has a market value of 243 million dollars.
Artha Capital with 7 real estate CKDs (ARTHACK_10, ARTCK_13, ARTCK_13-2, ARTH4CK_15, ARTH4CK_15-2, ARTH5CK_17, ARTH4CK_18). It has capital calls of 321 million dollars and has capital commitments for 974 million dollars.
BlackRock with 4 CKDs of which two of them are in CERPI format. The 4 CKDs participate in the energy sector, infraestructure and also have fund of funds (ICUADCK_10, ICUA2CK_14, BLKCPI_18, BLKAGPI_18D). It has capital calls of 298 million dollars and capital commitments for 921 million dollars
There is an initiative to allow private placement that, if authorized, would be highly likely to require secondary laws, which would take time to implement if applicable. This initiative is aimed to reducing issuer costs.
In what happens if it occurs, the maturities of the CKDs will start to have results that some will be good and another one not, given the nature of this type of investments where the important thing is diversification.
Foto cedidaPanoramic view of the facilities at Streamsong Resort and Golf, in Florida, where the sixth edition of the Investments & Golf Summit organized by the Funds Society is being held. / Courtesy Photo. Funds Society's Investments & Golf Summit: Some Proposals for Investing in the Late Stage of the Cycle
Three equity strategies, two fixed income, two multi-asset, structured products, and real estate investments, completed the proposals of the nine asset managers participating in the sixth edition of the Investments & Golf Summit organized by Funds Society, which was held in the Streamsong Resort and Golf, in Florida, and was attended by over 50 US Offshore market fund selection professionals.
At the Investment Day, delegates had the opportunity to find out the visions of Janus Henderson, RWC Partners, AXA IM, Thornburg IM, Participant Capital, Amundi, M & G, Allianz Global Investors and TwentyFour AM (Vontobel AM), and their proposals and investment ideas to obtain returns in an environment marked by the threat of being close to the end of the cycle, although with uncertainties about when this time will come. In this article we inform you about five of those visions.
Precisely with the idea of increasing caution at a time when it is difficult to predict the end of the cycle, Janus Henderson presented its global equity strategy with a neutral market perspective, developed in the Janus Henderson Global Equity Market Neutral fund. Richard Brown, the entity’s Equity Team Manager, argued for the need to reduce risks while positioning oneself for enabling returns, in a late stage of an upward cycle of which its exact end cannot be predicted. “Neutral market structures can now be very useful in investors’ portfolios, at a time when, while we still don’t see a recession, there are some warning signs,” he said, presenting a strategy with a relatively short track record (from February 2017) but with good behavior and differentiation from its competition.
With regard to those warning signals that he observes, he indicated that we are only one month away from the greatest expansion in history and, once these levels have been reached, caution must be intensified, as well as the inversion of the curve, which helped to predict recessions in the past and now also provide a warning. China’s economic situation (with lower growth, higher debt and a reversal in its demography), or central banks’ policies, which have stopped normalization, and the thought of their lack of resources for fighting against the next potential crisis are some of the other red lights. But, despite all of the above, the investor cannot afford to be out of the market, when 2019 has been the S & P 500’s best start to the year of the post-crisis financial era, and bonds offer very low returns. So, according to the asset manager, part of the solution can be a neutral market strategy in equities, with low volatility – around 4% – and low correlation with the stock markets, the potential to create absolute returns and protection against falls in the turbulences and in which stock-picking strategies favor good fundamentals.
On their differentiation from the competition, Brown pointed out that the fund invests in 60-80 pair trades (ideas obtained through the proposals -both long and short- of different asset managers), with a strong diversification by geography (now the majority of the exposure is in North America and Europe, but without directional bets, that is, only because that’s where there are more winners and losers), themes, styles and sizes that helps to reduce the correlation with the market. “We can bet a stock against a sector or against an index, but most are stock versus stock,” he explains.
Risk management is embedded in the portfolio’s construction (so that each pair trade contributes to the risk equally) and has a gross exposure of around 250%, and 5% in net terms. Among the examples of their bets, the long on Balfour Beatty versus the short on Carillion (both UK construction firms); Palo Alto Networks versus FireEye (US cybersecurity companies) or Sabra Health Care against the short bet on Quality Care Properties (REITS).
Long-short in US stock market
RWC Partners, also with a long-short bet in equities, but this time in the US, and with a market exposure that has historically been around 20% (although it has more flexibility), presented the RWC US Absolute Alpha fund at the event, a fund which aims to offer investors a pure source of alpha, with a concentrated high conviction portfolio, “with real names, without ETFs or other structures, in the form of a traditional hedge fund and managed with a high conviction.” It’s a liquid and transparent structure of long-short US equities managed by a team exclusively focused on absolute return and that seeks to provide strong risk adjusted returns with significantly lower volatility than the S & P 500, and in which the selection of stocks by fundamentals determines the returns on both sides of the portfolio. Managers try to identify patterns of information that can be indicative of changes in the dynamics of a company or industry and actively manage the net and gross market exposure in order to protect capital and benefit from directional opportunities whenever possible.
Mike Corcell, the strategy’s manager for about 15 years, focuses on criteria such as valuations, returns and margins (ROIC above the cost of capital and strong cash generation in the long part and the opposite in the short), or on transparency (it invests in industries with regular data on its fundamentals and avoids leveraged financial companies with opaque balance sheets and health companies due to the regulatory issue) and favors industries with improvements in their pricing capacity or where supply and demand are below or above the historical patterns. “We try to obtain returns in the higher part of a digit, and we invest in traditional sectors such as consumption, industrial, technology and in large secular industries such as airlines. We have analyzed these areas for 15 years and obtained good returns; It may be boring, but we will not invest in something we don’t understand,” he explains.
Regarding the current market situation, he admits that, although he doesn’t see any signs of recession in the US, we are at a late stage in the economic cycle, so he expects the growth of profits and returns in shares to be more moderate, although he doesn’t see signs of inflation at a time when the Fed has stopped monetary normalization. “Despite the goldilocks scenario with monetary and fiscal stimuli, we are in a late phase of the cycle, after a very long economic and market expansion, and in general, we expect a somewhat harsher scenario, with higher valuations.” He explains that although opportunities can still be found, it’s harder to find ideas in some parts of the portfolio following the Fed’s halt, although he believes that, sooner or later, it will have to adjust its balance and raise rates, a situation that will allow alpha to be generated more easily and will enhance the differentiation between companies, something that has not happened in the last 10 years.
Thematic equity and digital disruption
Also committed to equity, but with a more thematic vision dissociated from the economic cycle and focused on the economy of the future and digital disruption, the AXA IM experts participated in the Funds Society event. Matthew Lovatt, Global Head of AXA IM’s Framlington Equities, presented the investment themes which they focus on to position themselves in a changing economy, and an investment model that adapts to the new times. “When we invest, our challenge is to analyze changes in the world, in people and in the way we use technology, something that happens very fast, which is why businesses must adapt as well, and that’s what we analyze, how companies react to change. And our investment models must also change,” he explains. Therefore, they do not worry about whether there is economic growth or how GDP evolves: “We aren’t worried about GDP, but about secular, long-term issues that happen independently of the cycle and which will even accelerate considerably in a potential recession,” like online consumption. “People live longer, have more demands, and have increased their wealth, changing their consumption patterns. Therefore, many things are changing, and that’s why the way we see the world has also changed;” hence the idea of creating products to capture this new growth.
On concrete issues, he pointed out the transition of societies (social mobility, basic needs and urbanization), aging and life changes (welfare, prevention, health technology…), connected consumption (e-commerce and fintech, software and the cloud, artificial intelligence…), automation (robotics, Internet of things, energy efficiency), and clean technologies (sustainable resources, clean energies…). “There are big issues that will have great effects on wealth, such as the changes of wealth in the world, in societies in transition like the Asian ones, where a great shift is taking place. We also live longer and have more time to consume and companies will have to think about how to reach these consumers. On the other hand, the impact of technology on consumption is dramatic, and also key to the implementation of this technology in industries, in automation… Clean technology is perhaps the most powerful change: how we capture energy, store it, and use it in, for example, electric vehicles, is key, because it changes the way we consume energy,” he adds.
On the other hand, they remain oblivious to investment themes of the “old economy”, which suffers from margin pressures, such as traditional manufacturing, the retail business, or the scarcity of resources, and which evolve worse in the markets than new economy themes. In fact, for this asset manager, even the traditional sectorial exposure is no longer relevant, and they analyze each sector under the criteria of one of their five investment themes, or of the old economy. “The biggest disruptive change will be in the financial sector’s old economy,” he says, for example in the insurers of large financial groups whose business will change. On the other hand, within the sector, he’s interested in business related to wealth management. The disruption will also be strong in the “old part” of the energy sector, he argues.
In this context, the management company has modified its investment process, adding a thematic filter and ranking companies for their exposure to the themes they are betting on; also with changes in its analysis structure (focusing on these themes and selecting the best ideas) and the construction of the portfolios, which normally include 40-60 names with a large exposure to the themes. The management company has several strategies focused on each of these themes (transition of societies, longevity, digital economy, fintech, robotech and clean economy), although its core strategy, which invests in these five trends, overweight on those that are consumption and aging connected, is AXA WF Framlington Evolving Trends. In the presentation, the asset manager also pointed out their digital economy strategy, based on the fact that 9% of retail sales are now produced online but that is just the beginning of a great trend that in fact offers much higher figures in countries such as China, United Kingdom, USA or India. Positions which stand out in that strategy are Zendesk or the Argentinian Globant.
Real estate: Projects in Miami
During the conference, there was also room for more alternative proposals, such as real estate, presented by Participant Capital, a subsidiary of RPC Holdings, with a 40 year track record and 2.5 billion dollars in real estate projects under management, which offers Individual investors and entities access to real estate projects under development directly from the developer at cost price. Claudio Izquierdo, Participant Capital’s Global Distribution Managing Director, presented future projects such as the Miami Worldcenter, in Downtown Miami, which includes hotel rooms, retail and residences, and is financed with equity, deposits and credits; Dania Beach, which includes studios for rent; or the Mimomar Lakes golf and beach club, with villas and condominiums. And he also talked about other recent ones like Paramount Miami Worldcenter, Paramount Fort Lauderdale, Paramount Bay or Estero Oaks. The expert projects a very positive outlook on the opportunities offered by a city like Miami, with over 100 million visitors and 12.5 million hotel rooms sold per year, second only to New York and Honolulu, that is, the third most successful US city.
For its development, the firm has institutional partners, institutional and traditional lenders, and offers investors (through different formats such as international funds in Cayman, ETPs listed in Vienna or US structures) annualized returns of between 14% and 16%, the result of a 7% dividend or coupon during construction and an additional part after the subsequent sale or rent.
Structured products or how to boost alpha
One of the day’s most innovative proposals came from Allianz Global Investors, an active management company working with different asset classes, which is growing strongly, especially in the alternative field, and which has just opened an office in Miami. Greg Tournant, CIO US Structured Products and Portfolio Manager at Allianz GI presented his strategy Allianz GI Structured Return, an alpha generator which can work together with different beta strategies (fixed income, equities, absolute return…). The investment philosophy has three objectives: to outperform the market under normal conditions, hedge against declines, and navigate within the widest possible range of stock exchange scenarios. The portfolio, UCITS with daily liquidity, pursues an objective of annual outperformance of 500 basis points and uses listed options (never OTC) as instruments on equity and volatility indices (S & P 500, Russell 2000, Nasdaq 100, VXX and VIX) , with short and long positions, with an expected correlation with stocks and bonds of 0.3 or less. In fact, it has a risk profile similar to that of fixed income, but without exposure to credit or duration. “The goal is to make money regardless of market conditions. We do not try to find out the market’s direction or its volatility,” explains Tournant, who adds the importance of risk management: “We are, primarily, risk managers, followed by returns.”
The strategy, which has a commission structure of 0-30% (zero management, and 30% on profitability, based entirely on the success achieved), except in some UCITS classes, bases its investment process on statistical analysis (with a historical analysis of the price movements of equity indices in a certain environment of volatility), but it’s not a 100% quantitative process: it is in two thirds, while for the rest the manager makes discretionary adjustments. Further on, three types of positions are constructed: range bound spreads, with short volatile positions designed to generate returns under normal market conditions; directional spreads, with long and short volatile positions to generate returns when equity indices rise or fall more than normal over a period of several weeks; and hedging positions, with long proposals in volatility, to protect the portfolio in the event of a market crash.
As explained by the portfolio manager, the best scenario for this portfolio is one of high volatility, although the idea is that it works in environments of all kinds and has low correlation with other assets in periods lasting several months, although short-term market distortions can cause correlations with equities. The greatest risk is related to market movements and volatility and is a scenario of low volatility and very rapid market movements. “The relationship between the market path and volatility is important for this strategy,” says Tournant.
Foto cedidaAlan Muschott, courtesy photo. For Convertibles, Franklin Templeton Likes Technology, Health Care, and Consumer Discretionary Spending
With a clear long-term focus and very selective and active management, Alan Muschott manages the Franklin Global Convertibles fund, the largest strategy for active management of convertible bonds in the United States. In this interview with Funds Society, Muschott explains the assets’ advantages.
Why can convertibles work well in this market environment? What characteristics does this environment have that are positive for the asset?
In our view, convertibles can be attractive during various types of market environments, including rising markets, due to the potential asymmetric price relationship with the underlying common stock. Often called “balanced” convertibles, those with deltas (a measure of their equity sensitivity) near the middle of the range from 0.0 to 1.0 can participate more with an issuer’s equity upside than they do with the downside. These are the types of convertibles we prefer, as we feel this is the most appealing aspect of the asset class. We believe this ability to adapt to a myriad market conditions can make convertibles an attractive vehicle for increasing a portfolio’s level of diversification.
Why can convertibles work well in an environment of rate increases? Are you protected against the interest rate risk?
Amid expectations that US interest rate increases could accelerate, many fixed income investors in particular have asked for our view on the prospects for convertible securities. It’s an understandable concern as bonds tend to lose value when interest rates rise. In our research, during prior periods of rising interest rates, convertibles have historically performed better than 10-year US Treasuries. Therefore, in a rising-rate environment, we think convertibles can be a favorable place for fixed income investors to be. That said, it’s a bit incomplete to compare the performance of convertibles to other fixed income investments given their characteristics. Convertibles are a unique asset class, offering investors features associated with bonds and the growth potential of common stocks.
Convertibles are generally structured as a form of debt (bonds, debentures) or preferred shares with an embedded option that allows conversion into common shares under predetermined conditions. That embedded conversion option provides capital appreciation when the underlying common stock rises. In a rising-rate environment where interest rates are rising for the “right” reasons—for example, strong economic and corporate earnings growth—equities tend to perform well. If the underlying common stock in a convertible security rises with the market, the convertible should also increase in value because of the conversion option.
Historically, convertibles typically have exhibited a low correlation to fixed income and demonstrated imperfect correlation with stocks. This creates the potential for an investor to help enhance portfolio diversification, dampen volatility and improve a portfolio’s overall risk profile. Note, diversification does not guarantee profit nor protect against risk of loss.
What do you expect from the central banks? It seems that the measures for the monetary restriction have stopped… how do you value it?
Many central banks have tempered growth expectations in recent weeks in the midst of continued uncertainties stemming from geopolitical factors and other regional challenges which weigh on economic sentiment. Within the US, the Federal Reserve has also indicated a more patient approach to future rate hikes in the current subdued inflation environment.
We don’t manage our strategy based on expectations of monetary policy shifts or other macro variables. Instead we evaluate investments on the basis of the fundamentals of the companies themselves, their respective industry growth profiles and competitive positioning. Our focus is on identifying investments which we believe offer long-term prospects for capital appreciation; by investing in convertibles, we aim to capture an attractive amount of the equity upside while mitigating downside risk, thus generating compelling risk-adjusted returns over time.
Why is volatility good for convertibles? How does it help the behavior of the asset?
Since the US stock market selloff in the fourth quarter of 2018, many investors have asked us how convertible securities performed during the upheaval. Issued by companies looking to raise capital, these hybrid investments are generally structured as some form of debt or preferred shares with an embedded option that allows conversion into common shares under predetermined conditions.
According to our analysis, convertible securities generally outperformed their underlying stocks during the fourth quarter when the US equity market saw its steepest declines. That’s no surprise to us considering that convertibles have tended to perform well during periods of above-average market volatility. Since the beginning of 2019, as markets have moved higher, so have convertibles, broadly speaking, given their performance link to the underlying equity prices. During periods where the overall stock market is declining, the fixed income component in convertible securities tends to provide some protection against erosion of value. Conversely, when a company’s common stock rises, the convertible security should participate in the rise in value because of the conversion option. As long-term investors, our overall view on convertible securities doesn’t change from quarter to quarter or during periods of market volatility.
Now, is it better to invest in a protection component and less exposure in the equity component, or just the opposite?
Ultimately, orienting toward protection or equity should be driven by an investor’s needs in the context of their specific investment goals. It is fair to say that our Fund is oriented to the equity component. Our view is that a company’s underlying equity appreciation will drive returns in the convertible. Generally speaking, convertibles do not increase as rapidly in value as stocks during rising markets; nor does their downside protection equal that of bonds during market declines. However, historically they have delivered attractive long-term risk-adjusted returns compared with both stocks and bonds.
In the asset class, which markets do you favor by geographies, sectors…etc?
With a focus on balanced convertibles, those that tend to demonstrate asymmetric reward/risk profiles relative to other segments of the convertible bond market, our strategy seeks to participate in more of a company’s underlying equity price appreciation than depreciation. Interestingly, many balanced convertibles can be found in the North American market, in growth-oriented industries, and across market capitalizations.
The average life of a convertible security is about five years before it converts, and we often will hold a convertible to maturity, regardless of market gyrations in the interim. We spend a great deal of time on fundamental research, as we take a long-term approach to our investments. We seek to differentiate ourselves from others in the market through our security selection.
Key themes that we have identified for inclusion in our portfolio are related to secular growth in areas like technology, health care, and consumer discretionary spending. We see technology as increasingly becoming a non-discretionary expense for a wide range of companies and industries. In particular, we like certain convertible securities within themes like on-demand software. Many companies often lack the expertise, personnel and resources to develop this technology in-house, which creates opportunities for firms in the cloud computing and software-as-a-service areas.
Elsewhere we continue to see opportunities among companies showing high levels of innovation in the health care space. With accommodating regulators and novel new drug delivery methods and targets, we see a continuing wave of innovation in the health space. These are sectors that have performed well in the equity markets and which have, in turn, contributed to the returns we’ve generated within our Fund.
How is the market in terms of supply? Will there be new issues this year or is the relationship between supply and demand adjusted?
With a value of over US$300 billion at the end of 2018, the global convertible securities market is a sizeable player in the world’s capital markets. The United States accounts for over half that amount, followed by the Europe, Middle East, Africa (EMEA) and Asia-Pacific regions, respectively. Perhaps more important is the ample room for growth.
Following a peak in 2007, issuance declined through 2011 as companies took advantage of low yields, a high equity risk premium relative to credit spreads and strong flows into the credit markets to issue straight debt rather than convertibles. The perception was that raising capital through straight debt was relatively cheap, even when convertible securities were issued at slightly lower rates due to the added concern of share dilution. Companies were also hesitant to issue convertible securities as equity valuations were inexpensive relative to historical levels.
Over the last few years, more robust issuance trends have been driven by better equity market performance, a rise in interest rates and higher spreads. Thus far in 2019, we’ve seen solid issuance trends as well. We believe the factors that drive convertibles issuance, particularly those related to cost-effective financing (lower cost than straight debt; equity valuations at robust levels for many issues), can continue to support a healthy marketplace for convertibles.
What returns can be expected from the asset in 2019?
Our approach is long-term in nature and we typically hold our securities for much of their (on average) five-year maturities; thus we don’t generally make predictions of price returns over calendar year periods. Our outlook for equities continues to be positive. We believe earnings growth can support further price appreciation from today’s levels in a number of equity sectors.
We do believe it’s important to be selective. As a group, convertibles have historically presented an attractive risk/reward profile, but within the group there is considerable variation in the level of risk, sensitivity to movements in the underlying stock, and upside participation potential. Because of this, we believe active management is an important element within convertibles investing.
In your fund, what is the selection criteria that you follow? How many names do you invest in? What is the delta of the portfolio? Please comment on the main characteristics of the fund
The Franklin Convertible Securities Team have utilized convertible securities to various degrees across a number of strategies throughout the years. We seek to take advantage of the compelling, asymmetric risk/reward profile offered by balanced convertibles. Balanced convertibles are those securities that tend to offer greater upside participation than downside potential, leading to an asymmetric return profile.
As a global firm with deep experience across asset classes, styles, and regions, Franklin Templeton possesses a strong potential to develop what we believe to be unparalleled insights in the convertibles market. Equity and credit research analysts usually meet with company management, then build valuation models and form an opinion of an issuer regardless of whether they have outstanding convertibles. Our portfolio managers continuously monitor the convertibles market and new issuance trends. When the team sees a new company come to market, they are typically already familiar with these businesses, their equity potential, and credit metrics.
We seek to offer pure convertibles exposure. We don’t buy common stock, and in case of conversion, seek to sell equity in our portfolio as soon as an attractive exit point presents itself. One can expect our portfolio delta to fall in the range of balanced convertibles (0.4-0.8); we will typically have 60-80 issues within the Fund; our preference is to reasonably equal-weight our holdings so that each has an opportunity to have impact on portfolio performance. Our credit quality, market cap, regional and sector exposures will typically reflect what we see in the broader balanced convertibles universe; where we seek to differentiate ourselves and the portfolio’s returns is through security selection.
Wikimedia CommonsPhoto: 1971markus. Three US Cities, Amongst the Best Ones to Live In
If you’re looking to live in a place with affordable housing, ample work opportunities and a reasonably pleasant environment, it’s time to pack your bags and move to London.
According to a global survey conducted by Resonance, a consulting group, London is the best city to reside in 2019. That’s thanks to having all the things mentioned above and more.
But if you want to stay in the United States, you’ll be happy to know that three cities in this country were included in the top 10.
While Miami ranked 26th worldwide, New York City came in third. Chicago and San Francisco ranked seventh and tenth respectively.
To reach its conclusion, Resonance described the profile of 100 of the cities with the best performance in the world based on 23 different factors, including the affordability of housing and employment opportunities, the quality of the environment (both natural and artificial), the quality of institutions, diversity, economic prosperity and the quality of culture, gastronomy and nightlife.
The top 10 is made up of:
London, United Kingdom
Paris, France
New York, USA
Tokyo, Japan
Barcelona, Spain
Moscow, Russia
Chicago, USA
Singapore, Singapore
Dubai, UAE
San Francisco, USA
If you’re thinking about making a change, or just want some inspiration to travel, check out the full list here.
Foto cedidaClaudio Izquierdo, courtesy photo. PARTICIPANT Capital will Share its View on Real Estate Assets During the Investment & Golf Summit
According to a major study called “The Return on Everything” that spanned more than 140 years, real estate has outperformed equities historically. During the sixth edition of the Investment & Golf Summit organized by Funds Society PARTICIPANT capital will present this asset class and explain its advantages and diversification properties within investment portfolios.
Real estate investments provide stability in volatile markets and increase portfolios’ risk-adjusted returns. In the past, only institutional investors had access to direct investing in real estate projects. The investment landscape, however, is changing, unlocking the opportunities of private real estate equity investing for individual investors.
According to modern portfolio theory, adding uncorrelated assets to a portfolio increases risk-adjusted returns. Private real estate funds are an ideal addition to the portfolios of long-term investors because they have a low correlation with stocks and bonds.
Individuals allocate an average of only 5 percent of their portfolios to alternative assets, including real estate. The optimal amount is 10 to 20 percent. As a result, institutional investors that have a diversified asset-class mix outperform their peers.
Claudio Izquierdo,Managing Director of Global distribution, will be presenting this asset class on behalf of PARTICIPANT during the event. Izquierdo brings all of his international business acumen and expertise to bear, allowing for strategic growth in the global development and investment space. Izquierdo’s strong history of success with Latin American investors and high net worth individuals provides insight and authenticity for the PARTICIPANT Capital Advisors team. Izquierdo is a graduate of Florida International University and earned a degree in finance.
As an affiliate of RPC Holdings, PARTICIPANT Capital offers investors opportunities to join in lucrative, private real estate development at an at-cost basis beginning with land acquisition to which RPC adds ongoing value through development, management, and monetization.
The sixth edition of the Investments & Golf Summit organized by Funds Society will take place between May 6 and 8 at the Streamsong Resort and Golf with the portfolio managers of the leading companies within the industry. For more information and to ensure your place, follow this link.
Foto cedidaRichard Brown. Janus Henderson Will Talk About Global Equities at the Investments & Golf Summit
Richard Brown will present Janus Henderson’s Global Equity Market Neutral Strategy during Funds Society’s2019 Investments & Golf Summit.
The Janus Henderson Global Equity Market Neutral Fund aims to generate a positive absolute return over rolling 12 month periods, in all market conditions. The Fund employs a market neutral approach through high conviction pair trades identified through fundamental analysis. The Fund is able to draw upon the stock picking ability of experienced senior investment professionals within Janus Henderson Investor’s equity division, thereby blending a range of investment styles and processes.
The Fund targets a low level of volatility and low drawdowns. The fund utilizes a systematic risk parity portfolio construction process to ensure the Fund is balanced and each pair trade contributes equally to target volatility. Portfolio construction is overseen by a dedicated portfolio manager, as well as independent risk teams. In addition our fund provides a diversified exposure across geography, sector and market cap.
Richard Brown is a Client Portfolio Manager of European equities at Janus Henderson Investors, a position he has held since 2015. Richard joined Henderson in 2007 as a product specialist and began working on the Pan-European equities team as an investment specialist in 2009. Richard graduated with a BSc degree (Hons) in mathematics with management studies from Sussex University. He holds the Chartered Financial Analyst designation and the Investment Management Certificate (IMC). Richard has 12 years of financial industry experience.
Janus Henderson has over 328 billion dollars in assets under management by its over 2,000 employees in 28 cities around the world.
The sixth edition of the Investments & Golf Summit organized by Funds Society will take place between May 6 and 8 at the Streamsong Resort and Golf with the portfolio managers of the leading companies within the industry. For more information and to ensure your place, follow this link.
Pixabay CC0 Public DomainFoto: SteenJepsen. Risk Control and Diverse Coupon Structures: ASG Capital’s approach to Investing in the Subordinated Debt Market
Controlling risk and opting for different coupon structures to manage monetary policy changes in the US and Europe are elements ASG Capital’s focuses on in order to successfully invest in subordinated debt. “We are experiencing unusual times: there has been a lot of intervention by the central banks, so we have to bank on a flexible strategy,” says Steven Groslin, Executive Member of the Board of Directors of this asset management company, where he also co-manages various funds.
In a webinar organized by SharingAlpha, Steven Groslin, together with Ygal Cohen, President, Executive Director and Founder of ASG Capital, delve into this instrument’s key points, and more specifically the strategy of its flagship fund: LFP ASG Dynamic Income Fund. They insist on the importance of managing risk, both general fixed income market risk, for example taking into account the recent monetary changes over the last few years in the US and Europe, and specific risks linked to this kind of instrument, the subordinated bond.
Groslin outlined how their focus is on “blue chip” corporations and on “systemic” entities. As a consequence, they invest mainly on investment grade issuers. At the same time, they are committed to maintaining a diversified portfolio with no more than 3% allocated one any one instrument. Currently, 90 positions are held in the fund.
According to him, the fund’s uniqueness comes from the different types of coupons held within their portfolio: fixed rate coupon (10,4%), floating rate coupon (22,4%) and, above all, fixed rate that become floating rate after a future call date (67,2%). The main advantage of being overweight in this last category is that it allows them to “optimize their positioning, based on the interest rates.”
Risk Control
Groslin points out that there is no additional risk over and above that which is inherent to the fixed income subordinated debt market: “there are no derivatives, there is no leverage and there are no repos.” If a currency risk appears, this is hedged so as to convert the master portfolio into a “pure USD” investment vehicle.
“Risk management is essential in order to be able to benefit from the attractiveness of this type of asset”, adds Cohen. He points to alternative investment solutions providing a similar level of returns, such as the emerging debt markets or high-yield debt market. He considers the level of risk of these two investment markets is “substantially higher” than the one proposed in their subordinated investment strategy.
He underscores the current average carried yield return of the fund at over 6%. In addition to this carried yield, there is a “capital gain component” for an additional potential return thus making the fund an attractive investment proposition.
Their investment approach is bottom-up. Issuers are selected for their strong economic fundamentals: “90% come from the investment grade space”, he states. Once a corporation has been selected as an investment target, ASG chooses the debt instrument with the best risk-reward ratio of this same issuer.
Cohen confirmed how they mainly invest in OECD market, preferring to stay away from the emerging space so as to avoid dealing “with potential geopolitical risks.” Their main geographical exposure is as follows: 37,1% of their issuers are based in Eurozone, 29,7% of them in European non-Eurozone countries, and 23,3% in North America.
According to Cohen, geographical diversification allows them to have access to a greater diversification in terms of different economic sectors. The financial sector represents (60,5%) of the fund, (banks are the main issuers of subordinated debt instruments), followed by an allocation to the asset management and insurance sector (20,2%), and the industrial sector further behind (5,8%).
As the fund is managed in USD, this allows them to have more investment opportunities than with any other competing currency. Another factor making their strategy “unique”. Few funds are specialized in this way in Europe and the US. Their investment solution meets the increasing need for yield of many investors such as: retail, family offices, private and institutional banks….
The strategic investment strengths outlined above are brought together to generate investment value over time. Their management of the Fixed Income assets follows their unique “prudent, flexible, and transatlantic” approach, concluded Ygal Cohen.
Foto cedida. MMT – Modern Monetary Theory. Should We Bear it in Mind? Implications for the Financial Markets
This recent heterodox economic theory has many financial market participants spooked. I will try to explain what it entails (it takes some effort to understand) and the potential impact it could have on the various markets should it be put into practice, chiefly because it shifts our understanding of how the economy works (inflation, interest rates, debt, currencies, etc). Also, regardless of the fact that its strict implementation may turn out to be extremely complicated in real life, it is a good idea to try to understand what it is all about in the event that an attempt is made to partially adopt it. Fundamentally, it is an approach to economic management with no ideological basis. However, it is true that increasing numbers of economists with ties to the left are arguing in favour of putting it into practice.
MMT is based on two premises: 1) a country that issues its own currency can print money limitlessly without the risk of default; and 2) public spending is independent of financing and it has the ultimate goal of guaranteeing full employment.
The primary message being sent is that monetary policy makes little sense because it involves wasting real resources by associating it with high rates of unemployment throughout the cycle. Fiscal policy, therefore, is the centre of economic management for a country. Public spending should focus on maintaining full employment, while taxes should be used to slow the economy when necessary and to combat inflation. Furthermore, public debt would be used to manage money supply, interest rates and the level of capital investments. And this would all be with a floating exchange rate regime.
Inflation is seen as a consequence of having reached the country’s maximum productive capacity and, therefore, it marks the theoretical limit of public spending. In this case, a reduction to public spending or a tax increase would be implemented.
Why is this theory growing in support? My feeling is that, on the one hand, the world has gotten used to a model of continuous stimuli and, on seeing that QE has reached breaking point (we need only look at the mess in which the markets found themselves in the last quarter of last year due to fears about QT), at such a late stage in the economic cycle, the debate about turning the screw from a fiscal policy perspective is necessary for the political class. And on the other hand, MMT directly targets one of the greatest negative impacts of QE, the growing inequality at certain levels of society – another handy argument for the political class.
To try to discern the impact that MMT could have on the financial markets (and this is by no means an exhaustive analysis), we could start by looking at the large increase in public spending to meet the mandate of achieving full employment. This is public spending financed by printing money, which lowers interest rates. In this scenario, capital and financial investments would surge. The beginnings of inflationary pressures would start to be felt and the government would begin increasing bond issues to raise the interest rates. At some point, interest expenditure would exceed nominal growth. In all likelihood, inflation would not fall, so few investors would want this debt. A good many investors would go abroad, which would speed up a sharp devaluation of the currency and bring about the need to print yet more money. Here is where we would begin to see massive hyperinflation. As Minsky said, anyone can create money, the problem lies in getting it accepted.
The effects on debt and the currency are clear, but what about equities? It is obvious that because equities are real assets, they would behave better than nominal assets. But it may be better to invest outside the country, also in real assets, bearing in mind that the government’s need to raise taxes could even come to be considered confiscatory.
As I mentioned, it is good to consider that the application of MMT would, to begin with, mean the creation of a tax authority (similar to a central bank) that is independent of the government, something that seems very difficult. But, in any case, we can see partial efforts being made to put the theory into practice, chiefly through fiscal stimulus policies that are partially or fully monetised. Here it will also be important to invest in real assets (due to inflation expectations), such as the stock market, but by carefully selecting the securities with pricing power capacity.
