Wikimedia CommonsFrédéric Lamotte, Photo Linkedin. Indosuez Wealth Management names new Chief Executive Officer for CA Indosuez Wealth (Miami) and Global Head of Americas
Frédéric Lamotte has been appointed Chief Executive Officer of CA Indosuez Wealth (Miami) and Global Head of Americas at Indosuez Wealth Management, the global wealth management brand of Crédit Agricole group. He assumed these roles at the beginning of this year and is based in Miami.
This appointment demonstrates Indosuez Wealth Management’s continued commitment to the Americas and the intention to further develop its wealth management activities in this key market.
Frédéric Lamotte had been Chief Investment Officer at Indosuez Wealth Management group since 2012.
His international experience and his extensive banking expertise will benefit the bank in developing synergies between all of Crédit Agricole group’s businesses in the region.
Frédéric joined Banque Indosuez in 1988 as a member of the ALM department of Saudi French Bank. He then moved to Crédit Agricole Indosuez’s Singapore subsidiary in 1993 as Head of Derivatives before becoming Head of Capital Markets and Derivatives for the Tokyo subsidiary. In 1997, he was appointed Head of Advisory and Structured Products at Crédit Agricole Suisse and later took over as Head of Markets and Investment Solutions at Indosuez Wealth Management Switzerland in 2007.
He is a graduate of Ecole Centrale de Paris and holds a Master’s in International Finance from HEC.
Foto cedidaCourtesy photo. Allfunds Hires Three Executives to Boost its International Expansion
European funds platform Allfunds has appointed three senior executives in a moved aimed at boosting its international expansion and further accelerate its development.
Luigi Lubelli, formerly Group Chief Financial Officer and member of the Group Management Committee of Assicurazioni Generali will become Allfunds’ new Chief Financial Officer. Having developed his management career at Mapfre, Morgan Stanley, Citibank and Banco Exterior de España (now BBVA), Lubelli will form part of the Allfunds Executive Committee and will focus on steering Allfunds towards its new value creation objectives, as well as on monitoring the achievement of its business goals.
George Yaryurais a strategic marketer with over 20 years’ experience in developing high impact product strategies, driving transformation and business growth for global tech brands. He joins as the new Chief Product Officer and will also serve on the Allfunds Executive Committee.
Jorge Calviño, appointed Chief People Officer, brings with him a wealth of experience in human resources having developed his career in different people roles with leading international businesses such as Gillette, Amadeus, L’Oréal, Microsoft, Beiersdorf and, most recently, Alain Afflelou. He will also be part of the Allfunds Executive Committee.
Allfunds’ CEO Juan Alcaraz said:”Allfunds is in the process of transformation, of constant change and expansion – enhancing our offering to both our distribution clients and the fund management industry. To maintain our focus and momentum, we must seek out the best people from around the world to ensure we continue on our path to become the leading wealth-tech company in the investment industry. I am therefore delighted to welcome Luigi, George and Jorge into these all-important roles.”
Photo: Abi Barber. Thornburg Investment Management Launches Two UCITS Funds
Thornburg Investment Management has now a suite of eight fixed income and equity strategies on Thornburg’s UCITS platform. It has recently added both the Thornburg Long / Short Equity Fund and the Thornburg Strategic Income Fund.
The Thornburg Long/Short Equity Fund is co-managed by Connor Browne and Bimal Shah. The fund applies a bottom-up, fundamental security selection approach that is focused, diversified, and based on high conviction. Its portfolio is concentrated, with typically 30 to 40 stocks in both the long and short portions of the portfolio. The fund, domiciled in Dublin, Ireland, is based on an investment strategy launched in 2008, currently available to investors through separately managed accounts and a U.S. mutual fund structure.
Connor Browne, co-portfolio manager of the Fund, said: “Recent market volatility highlights the need for investors to have a permanent allocation to alternatives in their investment portfolios. Our Fund provides traditional long/short equity, hedge- fund-like exposure in a vehicle with daily liquidity. Notably, we have added value on both the long and short sides of our investment book since inception, and this sets us apart from many of our competitors.”
Carter Sims, managing director and head of global distribution at Thornburg mentioned: “The recent spike in volatility provides investors with new entry points to tap into a top-performing U.S. long/short equity strategy and the resources of highly respected and successful portfolio managers.”
The Thornburg Strategic Income Fund is managed by Jason Brady, Lon Erickson, Christian Hoffmann, and Jeff Klingelhofer and supported by Thornburg’s 40-person investment team. The Fund’s diversified portfolio is constructed with income-producing, relative-value investments that exhibit strong underlying credit fundamentals.
According to Jason Brady, president and CEO at Thornburg and co-portfolio manager of the Fund: “This Fund expands upon our legacy of providing investors with a stable source of competitive return, and a disciplined and balanced allocation in changing market environments.”
“Demand for diversified, relative value, fixed income portfolios continues to grow among global investors. The launch of Thornburg Strategic Income Fund signals our ommitment to providing our international partners access to Thornburg’s decades of fixed income experience,” added Sims.
Foto cedida. Andrea Orcel Will Not Become Banco Santander 's CEO
Following a board meeting on January 15th, the Grupo Santander Board announced that Andrea Orcel’s appointment to the role of Group CEO will not proceed.
The Board of Santander made the decision to appoint Andrea Orcel in September 2018. In light of his seniority, along with regulatory, legal and contractual considerations, an early announcement of the appointment was necessary, subject to the usual conditions, including a six-month garden leave.
At that time, the Board of Santander had agreed the terms of his annual remuneration in his future role at Santander, which were in line with that of José Antonio Álvarez. It was not, however, possible, to determine in advance the final cost of the Group’s share of compensating Orcel for the remuneration awards, made to him by his previous employer, that would have been foregone. The Board therefore proceeded with the appointment on the basis of a considered estimate of the likely cost to Santander, based on advice, precedent and expectations of mitigation, due to the nature of the relationship between the two organizations and the different activities carried out by each institution.
In recent months, discussions have been taking place over the terms of Orcel’s departure from his previous employer. It has now become clear that the cost to Santander of compensating Orcel for the deferred awards he has earned over the past seven years, and other benefits previously awarded to him, would be a sum significantly above the Board’s original expectations at the time of the appointment.
The Board considers that for Santander to pay this amount to facilitate the hiring of one individual, even one of the calibre and background of Orcel, would be unacceptable for a retail and commercial bank such as Santander. This is particularly so in light of Santander’s values and its responsibilities to its wider stakeholders and the societies in which it operates. As such, it has been decided by the Board that it would not be right to proceed with the appointment.
José Antonio Álvarez, who has remained in the role since the announcement and his anticipated transition in March to Chairman of Santander Spain, will continue to serve in this role without change. He will also serve as Vice Chairman of the Board.
Rodrigo Echenique, who is due to retire from his current role as Chairman of Santander Spain in March, will remain until a successor is named.
Ana Botin, Executive Chairman of the Board said: “Santander is a retail and commercial bank with significant responsibilities to the societies in which it operates. In making this decision we have had to balance the respect we have for all of our stakeholders – the millions of people, customers and shareholders we serve – with the very significant cost of hiring one individual, even one as talented as Andrea, by compensating for the loss of a significant proportion of seven years of his past remuneration. The Board and I are certain that this decision, although difficult to take, is the right one. “On a personal note, my colleagues and I were looking forward to working with Andrea. We all wish him every success in the future. We, as a Group, are fortunate to have José Antonio who has agreed to continue as CEO. I know we will work together as well as we have over the past four years, delivering profitable growth as more and more customers trust us to help them prosper. We will present our strategic update to the market together later this year in what we both believe is an exciting opportunity ahead of Santander.”
Wikimedia CommonsPhoto: Vanguard. John Clifton Bogle, Father of Indexing and Founder of The Vanguard Group, Has Died
John Clifton Bogle, founder of The Vanguard Group, died on January 16, 2018 in Bryn Mawr, Pennsylvania. He was 89.
Mr. Bogle had legendary status in the American investment community, largely because of two towering achievements: He introduced the first index mutual fund for investors and, in the face of skeptics, stood behind the concept until it gained widespread acceptance; and he drove down costs across the mutual fund industry by ceaselessly campaigning in the interests of investors. Vanguard, the company he founded to embody his philosophy, is now one of the largest investment management firms in the world.
“Jack Bogle made an impact on not only the entire investment industry, but more importantly, on the lives of countless individuals saving for their futures or their children’s futures,” said Vanguard CEO Tim Buckley. “He was a tremendously intelligent, driven, and talented visionary whose ideas completely changed the way we invest. We are honored to continue his legacy of giving every investor ‘a fair shake.’”
Mr. Bogle, a resident of Bryn Mawr, PA, began his career in 1951 after graduating magna cum laude in economics from Princeton University. His senior thesis on mutual funds had caught the eye of fellow Princeton alumnus Walter L. Morgan, who had founded Wellington Fund, the nation’s oldest balanced fund, in 1929 and was one of the deans of the mutual fund industry. Mr. Morgan hired the ambitious 22-year-old for his Philadelphia-based investment management firm, Wellington Management Company.
Mr. Bogle worked in several departments before becoming assistant to the president in 1955, the first in a series of executive positions he would hold at Wellington: 1962, administrative vice president; 1965, executive vice president; and 1967, president. Mr. Bogle became the driving force behind Wellington’s growth into a mutual fund family after he persuaded Mr. Morgan, in the late 1950s, to start an equity fund that would complement Wellington Fund. Windsor Fund, a value-oriented equity fund, debuted in 1958.
In 1967, Mr. Bogle led the merger of Wellington Management Company with the Boston investment firm Thorndike, Doran, Paine & Lewis (TDPL). Seven years later, a management dispute with the principals of TDPL led Mr. Bogle to form Vanguard in September 1974 to handle the administrative functions of Wellington’s funds, while TDPL/Wellington Management would retain the investment management and distribution duties. The Vanguard Group of Investment Companies commenced operations on May 1, 1975.
To describe his new venture, Mr. Bogle coined the term “The Vanguard Experiment.” It was an experiment in which mutual funds would operate at cost and independently, with their own directors, officers, and staff—a radical change from the traditional mutual fund corporate structure, whereby an external management company ran a fund’s affairs on a for-profit basis.
“Our challenge at the time,” Mr. Bogle recalled a decade later, “was to build, out of the ashes of major corporate conflict, a new and better way of running a mutual fund complex. The Vanguard Experiment was designed to prove that mutual funds could operate independently, and do so in a manner that would directly benefit their shareholders.”
In 1976, Vanguard introduced the first index mutual fund—First Index Investment Trust—for individual investors. Ridiculed by others in the industry as “un-American” and “a sure path to mediocrity,” the fund collected a mere $11 million during its initial underwriting. Now known as Vanguard 500 Index Fund, it has grown to be one of the industry’s largest, with more than $441 billion in assets (the sister fund, Vanguard Institutional Index Fund, has $221.5 billion in assets). Today, index funds account for more than 70% of Vanguard’s $4.9 trillion in assets under management; they are offered by many other fund companies as well and they make up most exchange-traded funds (ETFs). For his pioneering of the index concept for individual investors, Mr. Bogle was often called the “father of indexing.”
Mr. Bogle and Vanguard again broke from industry tradition in 1977, when Vanguard ceased to market its funds through brokers and instead offered them directly to investors. The company eliminated sales charges and became a pure no-load mutual fund complex—a move that would save shareholders hundreds of millions of dollars in sales commissions. This was a theme for Mr. Bogle and his successors: Vanguard is known today for maintaining investment costs among the lowest in the industry.
A champion of the individual investor, Mr. Bogle is widely credited with helping to bring increased disclosure about mutual fund costs and performance to the public. His commitment to safeguarding investors’ interests often prompted him to speak out against practices that were common among his peers in other mutual fund organizations. “We are more than a mere industry,” he insisted in a 1987 speech before the National Investment Company Services Association. “We must hold ourselves to higher standards, standards of trust and fiduciary duty. Change we must—in our communications, our pricing structure, our product, and our promotional techniques.”
Mr. Bogle spoke frequently before industry professionals and the public. He liked to write his own speeches. He also responded personally to many of the letters written to him by Vanguard shareholders, and he wrote many reports, sometimes as long as 25 pages, to Vanguard employees—whom he called “crew members” in light of Vanguard’s nautical theme. (Mr. Bogle named the company after Admiral Horatio Nelson’s flagship at the Battle of the Nile in 1798; he thought the name “Vanguard” resonated with the themes of leadership and progress.)
In January 1996, Mr. Bogle passed the reins of Vanguard to his hand-picked successor, John J. Brennan, who joined the company in 1982 as Mr. Bogle’s assistant. The following month, Mr. Bogle underwent heart transplant surgery. A few months later, he was back in the office, writing and speaking about issues of importance to mutual fund investors.
In December 1999, he stepped down from the Vanguard board of directors and created the Bogle Financial Markets Resource Center, a Vanguard-supported venture. Mr. Bogle worked as the center’s president—analyzing issues affecting the financial markets, mutual funds, and investors through books, articles, and public speeches—until his death. Mr. Bogle wrote 12 books, selling over 1.1 million copies worldwide.
Industry accomplishments
Mr. Bogle was active in the investment industry. Early on, he served as chairman of the board of governors of the Investment Company Institute from 1969 to 1970. He also served as chairman of the Investment Companies Committee of the National Association of Securities Dealers Inc. (now FINRA) from 1972 to 1974. In 1997, he was appointed by then-SEC Chairman Arthur Levitt to serve on the Independence Standards Board.
Awards
In 2004, Time magazine named Mr. Bogle one of “the world’s 100 most powerful and influential people” and Institutional Investor magazine presented him with its Lifetime Achievement Award. In 2010, Forbes magazine described him as the person who “has done more good for investors than any other financier of the past century.” Fortune magazine designated him one of the investment industry’s four “Giants of the 20th Century” in 1999. In January 2012, some of the nation’s most respected financial leaders celebrated his career at the John C. Bogle Legacy Forum. Among his numerous other awards and honors were:
Pennsylvania Society Gold Medal for Distinguished Achievement, 2016
EY Entrepreneur Of The Year Lifetime Achievement Award, 2016
FUSE Research Network Award for Lifetime Impact and Commitment to Investors and Investment Management Consultants Association Richard J. Davis Ethics Award, 2010.
National Council on Economic Education Visionary Award, 2007.
Center for Corporate Excellence Exemplary Leader Award, 2006.
Yale School of Management, Legends of Leadership, 2003.
Barron’s Investment Hall of Fame, 1999.
Woodrow Wilson Award from Princeton University for “distinguished achievement in the nation’s service,” 1999.
Fixed Income Analysts Society’ Hall of Fame, 1999.
Award for Professional Excellence from the Association for Investment Management and Research, 1998.
No-Load Mutual Fund Association’s first Outstanding Achievement Award, 1986.
Civic work
An avid booster of Philadelphia and the surrounding area, Mr. Bogle was active in civic affairs. “I loved Philadelphia, my adopted city that had been so good to me. I established my roots there, finding even more unimaginable diamonds,” he wrote in one of his books.
His civic work extended to organizations involved in education, leadership, and public affairs. He served as the first chairman of the board of trustees and chairman emeritus for the National Constitution Center. He was a member of the American Philosophical Society, American Academy of Arts and Sciences, The Conference Board’s Commission on Public Trust and Private Enterprise, and the investment committee of the Phi Beta Kappa Society. He served as a trustee of the American Indian College Fund, The American College, and Blair Academy.
Corporate board memberships
Mr. Bogle was sought after in the corporate community. He served as a director of Instinet Corporation, Chris-Craft Industries, Mead Corporation, The General Accident Group of Insurance Companies, Meritor Financial Group, Inc., and Bryn Mawr Hospital. He was a trustee for the American Indian College Fund and The American College.
Academic recognition
The academic community recognized Mr. Bogle’s for his accomplishments. He received honorary doctorate degrees from Villanova University, Trinity College, Georgetown University, Princeton University, the University of Delaware, University of Rochester, New School University, Susquehanna University, Eastern University, Widener University, Albright College, The Pennsylvania State University, Drexel University, and Immaculata University.
Author and speaker
Mr. Bogle was a best-selling author, beginning with Bogle on Mutual Funds: New Perspectives for the Intelligent Investor in 1993. He followed that with Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (1999); John Bogle on Investing: The First 50 Years (2000); Character Counts: The Creation and Building of The Vanguard Group (2002); Battle for the Soul of Capitalism (2005); The Little Book of Common Sense Investing (2007); Enough. True Measures of Money, Business, and Life (2008); Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition (2009); Don’t Count on It! Reflections on Investment Illusions, Capitalism, “Mutual” Funds, Indexing, Entrepreneurship, Idealism, and Heroes (2011); The Clash of the Cultures: Investment vs. Speculation (2012); The Little Book of Common Sense Investing: 10th Anniversary Edition (2017), and, Stay the Course: The Story of Vanguard and the Index Revolution (2018).
Mr. Bogle also wrote numerous articles and commentaries for trade and business publications.
Personal information
Mr. Bogle was born May 8, 1929, in Montclair, New Jersey. He worked his way through Blair Academy and Princeton University as a waiter and also managed Princeton’s athletic ticket office.
A tall, athletic man who sported a crew cut for most of his life, Mr. Bogle played squash, tennis, and golf, and also enjoyed sailing. He was often described as a “fierce competitor” on the court and course, a demeanor he also maintained on the job. Reading was among his pleasures, as was The New York Times crossword puzzle, which he often completed in less than 20 minutes.
He married Eve Sherrerd in 1956. They had six children: daughters Barbara Bogle Renninger, Jean Bogle, Nancy Bogle St. John, and Sandra Bogle Marucci, and sons John C. Bogle Jr. and Andrew Armstrong Bogle. They had 12 grandchildren and six great-grandchildren.
Foto cedidaPer Wehrmann. Head European High Yield DWS. DWS: “Despite uncertainty in Europe, weak economic growth, financial crisis, the European high yield market has had a lower default rate than the US "
At a time when the threats of Brexit and Italian finances are flying over the European economy, Per Wehrmann CFA, Head of European High yield in DWS, is confident that Europe will not enter into a recession although he expects a period of lower growth.
Lower growth but not a recession
As such, in an interview with Funds Society during his recent visit to Santiago de Chile, Wehrmann confirms that he expects a GDP growth for the Euro area of 2% for 2018 and a moderate slowdown during 2019 to 1,8%. The main risk drivers for Wehrmann are Brexit and the situation in Italy.
Regarding Brexit , specifically about UK’s exit terms for leaving Europe, he expects that the deal agreed with the European Union, that implies a broader free trade zone will be approved as it has limited impact in the economic relationship. For Wehrmann: “Clearly UK needs this deal more than the other way around, as it is dependent on having access to the European markets. At the end, and even if we expect some volatility and headline risk, we expect the most important terms of the deal to be agreed upon.”
As per the situation in Italy, whose government has already confirmed a disappointing third quarter growth figure, they expect that eventually an agreement will be reached with the EU, although there are chances that the actual government will not succeeded and new elections taking place in the near future are highly likely. Nonetheless, “ at some point we will see some improvement there and less uncertainty”, declares Wehrmann.
Germany is another country that has had a negative impact in the European economy, showing a negative growth during the 3rd quarter, due mainly because of the auto industry. “The auto industry has had problems to bring cars to the market because there is a new way to measure the consumption and pollution that have caused bottlenecks”, explains Wehrmann although he specifies that this impact is less important than the future of the Chinese economy : “More serious is of course the situation in China, we have seen a slowdown in autos and that is something that could have a negative impact on the auto industry.”
On a positive note, he mentioned that the German economy is rebalancing, towards a greater contribution of the domestic investment expending, thanks to mainly the construction sector, making it less dependent on trade balances.
He also points out, as a positive aspect, the role that Spain is playing, that to his view, has “changed the camp”: Previously it was a low growth country camp and now it is in the fast growing country camp” and adds “when we have seen Italian government spreads widen significantly, Spanish and Portuguese spreads were not much affected by it. So much less contagion effect to what you saw in 2011”
European high yield market: Lower growth since 2015
“The European high yield market is a relatively young market that has grown significantly in the last years and specially since Lehman crisis due to the “falling angels,” in other words, companies that have been downgraded from the Investment grade spectrum, explains Wehrmann. Another important factor in the evolution of this market, has been the downgrade of subordinated bank debt and its inclusion in the high yield market, that implied that 25% of the benchmark came from financials when it represented zero up until that moment.
Since then, it has had an stable growth up until 2015 but, “ =in the last two years we have seen a decline in the market volume because of the part of the cycle we are in, and as the economy has recovered we have seen more raising stars, companies upgraded from high yield to IG, than the other way around in Europe,” explains Wehrmann that stated that the size of the market is currently aprox. 1 billion euros.
In regards to the geographical exposure of the high yield issuers, Italy is the predominant country although countries as France, Germany, UK and US also have a significance presence in the European high yield market.
As per sectors is concerned, the European high yield market it is broadly diversified and it includes sectors such as: the basic industry sector, which includes chemicals, paper packaging, raw materials, steel companies; TMT; capital goods, or services.
In terms of the financial sector, Wehrmann points out that when the financial issues started being part of the benchmark they decided not to invest in financials. As such they don’t invest in banks or insurance companies, although they can invest in financial services, so their portfolios are maid mainly corporates.
European High Yield more stable than the US High yield market
If compared to the US High yield market, Wehrmann states that the European one has mostly been more stable after 2011. “Despite uncertainty in Europe, weak economic growth, financial crisis, the European high yield market has had every year a lower default rate than the US high yield market,” that is currently situated at 1% versus 2.5% of the American market. In addition, he adds that the credit quality of the European market has improved significantly and states that: “ European High yield market is very much dominated by BB ratings which may add up to 70% of the European High yield market. To put it into comparison with the US high yield market it has less than 50%.”
For Wehrmann the main reason for the lower volatility are the smaller exposure of the European High yield to the energy and commodities sector and the better average credit quality which is reflected in the lower default rate and the better average rating. The US high yield market on the other hand still benefits from the more stable investor base which is more value orientated and which is willing to enter the market when spreads widen.
Positive outlook for 2019
In terms of the market outlook, in DWS they are positive from a fundamental point of view although they remain cautious in credits with significant exposure to Italy, Brexit related risk as well as some cyclical sectors, such as automotive or construction. In DWS view, “as dispersion across credits increases credit selection becomes more important.”
From a market momentum and valuation point of view, the recent spread widening observed during the last few months, implies it is a good moment to overweight the European high yield asset class bearing in mind its high average rating quality.
As per rating preference, DWS prefer B rated credits over BB as tend to show lower interest rate sensitivity and they expect these issuers to benefit from a more positive market environment. In regards to maturities DWS prefer short term maturities from solid credits as their market risk is lower.
Pixabay CC0 Public Domain. 43% of Worldwide AUM Are Managed by 20 Companies
Total assets under management (AuM) of the world’s largest 500 managers grew to $93.8 trillion in 2017, representing a rise of 15.6% on the previous year, according to the latest Global 500 research from leading global advisory, broking and solutions company Willis Towers Watson’s Thinking Ahead Institute. In addition, the concentration of assets managed by the 20 largest managers reached the highest level since inception (in 2000) and now account for over 43% of the top 500 managers’ total AuM.
The research shows North America-based managers represent the majority of assets (58.1%), though their share fell slightly in 2017, the first fall since 2008. European managers represent 31.8% of assets managed (the U.K. being 7.4%), Japan 4.8% and the rest of the world 5.2%. Assets in each region grew in 2017. While the majority of assets (77.6%) are managed actively, the share of passive assets has grown from 19.5% to 22.4% in the last five years. In 2017 passive assets grew 25%.
BlackRock remains the largest asset manager in the rankings, a position it has held since 2008; Vanguard and State Street complete the top three for the fourth successive year.
“Once again, total assets have increased; the rate of growth in 2017 is the biggest since 2009,” said Bob Collie, head of Research at the Thinking Ahead Institute. “The names at the top of the ranking are familiar ones. There’s greater concentration in the biggest names. On the surface, the numbers might appear to tell a story of steady growth and stability. But when you look at broader developments within and beyond the industry, there are signs the industry is facing significant change.”
In an indication of future areas of focus, more than four out of five (81%) managers surveyed reported an increase in client interest in sustainable investing, including voting, while nearly three-quarters (74%) increased resources deployed to deal with technology and big data. Nearly two-thirds of firms surveyed had increased the number of product offerings during 2017, while 60% reported an increase in the level of regulatory oversight according to the research.
“It’s not just a focus on technology. There is a confluence of global trends — including demographic, economic, environmental and social pressures — that are combining to create a period of potentially massive disruption for the industry. The implications go well beyond the investment process. These changes affect business models, people models, operating models and distribution models. They will be felt in every corner of the organization.”
“Firms will choose to respond to these challenges in different ways. Successfully responding to these new industry realities may prove to be as much a test of character and culture as it is a test of traditional business and investment skills,” added Collie.
Pixabay CC0 Public DomainNietjuh
. Trade, Treasuries and Trump: Three Keys for Growth in 2019
For most of the last decade we have lived in what has often been termed a “Goldilocks economy.” Much as the fair-haired, home-invading subject of the children’s story found one bowl of porridge to be “just right,” economic growth and inflation have been neither too hot nor too cold1. During this time, coordinated action by the world’s central banks kept interest rates near zero and the prices of nearly all asset classes high. The US economy is in its 113th month of expansion, seven months short of the record. Notwithstanding a recent stumble, US equities are 119 months into the longest-ever bull market, led mostly by growth stocks riding a global wave of technological innovation and expanding prosperity. Except for growth scares in 2011, 2015 and perhaps one day in November 2016, market volatility has been low and its upward trajectory largely uninterrupted. There are signs, however, that the narrative may be changing as a turn in the aging business cycle may be accompanied by a wholesale shift in socio-political regimes from globalism to nationalism and capital to labor. Populism is on the march around the world with long-term effects that are unclear, but unlikely to be positive for equities. As in the story, the bears will eventually return home; their timing and mood is uncertain, as is how much of this eventuality the market has already discounted. Against this backdrop we believe bottom-up, fundamental stock selection of the type we have practiced for over forty years remains more important than ever.
The Political Economy of 2018
The most salient issue for the market is growth – with corporate tax cuts behind us and little slack left in the economy, growth will almost certainly slow from the 3-4% posted in 2018. That does not necessarily imply a recession, defined as two consecutive quarters of contraction, is on the immediate horizon. How far above or below the approximately 2% real growth that population and productivity gains suggest is “just right” depends on many factors including what we have described variously as Three T’s: Trade, Treasuries and Trump.
Trade
President Trump made “fair trade” the centerpiece of his election campaign and he has thus far made good on his promise to challenge the prevailing post-war “free trade” orthodoxy (however illusory that reality might have been). Hope for a trade deal with China rose when the administration renegotiated NAFTA, now called USMCA (the initials of its US, Mexican and Canadian signatories). The market understandably zags with each hint that a China deal could emerge since China accounts for over half of the US’ $600 billion trade deficit and remains our third largest export destination. The situation takes on even greater significance due to China’s role as an engine for global growth. China is slowing as it faces domestic structural imbalances. Pressure from President Trump exacerbates those issues, but a deal is unlikely to solve them or heal the lasting damage done to the Sino-American symbiosis.
Treasuries
Also critical to the outlook for the economy and stocks are the level and trajectory of interest rates. Since the Federal Reserve began its taper four years ago in October 2014, the ten-year Treasury rate breached 3% this year for the first time since 2013, standing now just below that level. Higher interest rates have real world impacts – they make the purchases of new homes, cars, capital equipment, companies and the US deficit more expensive to finance. All else equal, higher rates reduce the value of risk assets by making the alternative home for capital, “riskless” Treasuries, more attractive. The term structure of interest rates (aka the yield curve) has also been ascribed predictive powers. Inverted curves – situations in which the ten-year yield exceeds the two-year yield – have predicted all nine recessions since 1955, albeit with two false positives and a wide variation in timing. The virtually flat yield curve today thus worries some observers.
Trump
While there has always been a healthy interplay between markets and political figures, President Trump’s twitter habit, unpredictability and the potential legal challenges to his presidency have made him more “center row orchestra” than past leaders. Among the concerns for the next two years is how a Democratic Congress with no interest in helping Trump get re-elected approves the USMCA, a debt ceiling extension and further fiscal stimulus, especially when the ask may be a tweak to the tax cuts. Interestingly, the War on Tech (i.e. privacy and anti-trust investigations of Facebook, Google, Amazon and others) seems to be one of the few issues with bipartisan support and is worth watching in 2019. Geopolitical disruption is not unique to the US: if and how the UK exits the European Union, the precarious positions of leaders in Germany, France and Italy, not to mention the typical entanglements in the Middle East, also remain a focus.
Skeptics Could Be Wrong If Things Go Right
Not all news – whether real or fake – is bad of course. In fact, many economic indicators are quite strong, with 3.7% unemployment the lowest since the tumult of 1969, record consumer net worth ($109 trillion) and interest rates and inflation that, viewed over a longer time frame, remain quite tame. The Federal Reserve and the President are probably not past the point of no return and still have not lost policy control: President Trump, who possesses a keen sensitivity to the stock market, could resolve the trade war and the Fed could blink on 2019 rate hikes. That would leave reason to believe the expansion could continue and that the current state of the market is the pause, like the previous ones in this cycle, that refreshes.
Mr. Market
Causation, Correlation or Neither
The S&P 500 is down 6% and the small capitalization Russell 2000 index is down 13% to date, with each off 16% and 24% from the peaks in those indices in September and August, respectively. For most of the year, the performance of the S&P 500, dominated by six technology stocks (Facebook, Amazon, Netflix, Google, Apple and Microsoft – the “FANGMA”) that comprise 15% of its weight, masked the more significant declines posted by a broader group of stocks. Approximately two-thirds of stocks in the S&P 500 are negative this year with one-third down more than 20%. Even the vaunted FANGMA is now 25% off its highs, adding credence to the notion that the global growth trend may be broken. “Buy the Dip” has morphed to “Sell the Rip.”
Market declines of this magnitude could be expected to impart a negative wealth effect, i.e. consumers with slimmer brokerage statements feeling less inclined to make discretionary purchases, which could exacerbate an economic slowdown, but market declines are more often simply a precursor, not a trigger, of recessions. Since 1929, there have been sixteen bear markets with most, though not all, pacing a recession by approximately one year (the recession-less crash of October 1987 a notable exception). It is also worth stating that the market does not equal the economy. Just as some have suggested Wall St. prospered without much of Main St. over the last decade, the reverse could conceivably prove true.
Valuation Today vs. Five Years Out
In any case, stocks are already pricing a slowdown and/or higher rates. A flat year-to-date equity market compared with estimated EPS gains of 22% in 2018 and 8% in 2019, implies a contraction in forward multiples from 18x at the end of 2017 to roughly 15x today. That is at the low end of historical multiples during periods with inflation in the 0-3% area. This suggests that the market as a whole does not appear expensive. We do not buy the “market,” but we are finding a lot of bargains in individual stocks recently.
Deals, Deals & More Deals
Deal activity slowed through the year as political uncertainty weighed, but the underpinnings for mergers (low interest rates and a lack of organic growth opportunities) remain and the potentially waning days of the present administration may encourage activity sooner rather than later. Spin-offs rebounded in 2018 (twenty-six by our count), including two by Honeywell and one pre-takeover spin-off by KLX. Notable upcoming announced separations include Madison Square Garden’s spin of its sports teams, 21st Century Fox’s pre-deal spin of its news and broadcast assets, and three-way spins by DowDuPont and United Technologies. As discussed in the past, we like spin-offs because they not only tend to surface value but often serve as the source of new ideas.
Conclusion
Last year, we expressed surprise that a strong market was overlooking what seemed to be mounting risks late in the economic cycle. As many of those challenges – trade disputes, higher interest rates, political discord – play out, we wonder if the market is now ignoring what continue to be decent corporate fundamentals. Ultimately our job is to do the work on the microeconomic elements of each company and industry we cover, examine how the changing macroeconomic environment impacts those variables and make buy and sell decisions that balance the resulting opportunities and risks. Since the bears inevitably come home in each cycle, we have always erred on the side of capital preservation and that will especially be the case going forward. Children’s stories don’t always have happy endings but they serve as cautionary examples that we have heeded well.
““Goldilocks and the Three Bears” was an old tale first recorded by poet Robert Southey in 1837. Market commentator use of the analogy dates to at least the late-1990s expansion.
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.
Photo: spencer hickman. Over Half Of Fine Art Collectors Have Purchased A Piece Online Sight Unseen
UBS Global Wealth Management released a report that unveils the majority of art collectors are going online and using social platforms to stay at the forefront of the art market year round. Released during Art Basel in Miami Beach, this special Investor Watch Pulse Report, titled “Art in Motion,” studies the attitudes and behaviors of fine art collectors in the U.S. with at least $5m+ in investable assets. The percentage of art collectors who have purchased art online before they’ve seen it in person has more than doubled in the past year (26 percent in 2017 vs. 58 percent in 2018), while 63 percent of collectors polled have gone on the internet to participate in an online auction.
What’s more, art collectors are beginning to feel the pull of social media, using it as a resource to help them follow the art market closely. Among the collectors, 67 percent follow an artist on social media, while 65 percent have seriously considered buying art after first seeing it through their social media platforms.
“The technological trends changing the economy are increasingly changing the art market,” said Karl Ruppert, Market Head of Florida Private Wealth Management at UBS Global Wealth Management. “There are potential opportunities presented through future growth of the online art market to attract new buyers at different price levels, which is beneficial to the health of the overall market. For gallerists, fairs, auction houses, artists and collectors, digital tools will be a key area of growth over the next five years.”
Women artists on the rise, and so are the investments in them
Women artists are increasingly being recognized for their standout contributions along with breaking their sales records — which hasn’t gone unnoticed among collectors. Almost three-in-five collectors see the artist’s gender as a determining factor when purchasing a piece, and 70% plan on purchasing works by women in the next year.
“While male artists continue to lead overall sales within the market, we found clients are increasingly recognizing that women artists are undervalued,” said Ruppert.
Collectors ready to buy, but cautious to sell
Collectors are eager to grow their art collection with half stating they’re always looking to add new pieces, and 34 percent are opportunisitically searching. Moreover, 58 percent are ready to make an addition in the upcoming calendar year, while 64 percent of fine art collectors are gearing up to spend more than $100k on their new additions in 2019.
More than half (58 percent) of these wealthy art enthusiasts view their collections as their most prized possessions. Not surprisingly, collectors are only willing to sell up to a third of their collection.
Passing along the passion: Concerns for art inheritance
When it comes to passing along their passion pursuit to the next generation, 58 percent of art collectors are worried their heirs won’t know how to care for the collection and 57 percent are concerned about taxes when passing on to the next generation.
Pixabay CC0 Public DomainPhoto: leninscape. Looking Back on 2018 and Looking Forward to 2019
2018 has been one of the most difficult years for bonds over the last 10 years. The reasons behind this underperformance are different to those upsetting the financial markets of 2008. At that time, the health of the banking system was at the heart of many concerns. Since then, the banking industry has been streamlined and consolidated. Banks have improved their Capital footprint, reduced their risk profile, and improved their profitability.
The source of today’s financial uncertainty lies elsewhere.
Three predominant factors have weighed on Bond markets in 2018
The reorganization of international trade following trade barriers imposed by the American administration.
Capital flows following the change in monetary policy in the United States.
Geopolitcal events destabilizing Europe and the Emerging World.
As a result, the bonds issued by European names in USD have been adversely affected after having benefited from a strong performance in 2017.
With a continuing discord between the European Union and the UK or Italy for example, European subordinated bonds denominated in USD now provide some of the highest yield returns in the world in this currency (between 7% to 9% per annum) and stand out when compared to those of equivalent sized North American institutions. In a financially interconnected world, this discrepancy does not seem justified to us. In the coming months, we expect investors to reconsider their outlook on the dollar denominated debt of European household names, if only for the step up in yield that these bonds provide.
Outlook 2019
To face uncertain times, it is preferable to remain exposed to financially sound large household names. The USD subordinated instruments of these same issuers provide some of the highest yield returns, in a world of historically low interest rates.
As bilateral trade agreements are put in place, the current cycle of tariff disputes should progressively come to an end.
It was announced by the Federal Reserve (Fed.) that their interest rate increase cycle, initiated in 2015, would terminate by 2020 at the latest. This should stabilize the USD Fixed Income market moving forward.
The USD Fixed Income market is the largest in the world. Through a dollar denominated portfolio, investors can benefit from the widest investment opportunities available to the subordinated asset class, only through this currency.
For the Fund’s USD and Euro (hedged) tranches, investors can avoid being exposed to monetary changes projected for the Euro Fixed Income investment space.
In Europe, political arrangements look to be on horizon for the Italian Budget and the Brexit process. These issues have plagued the performance of USD European bond assets over the last few months.
Finally, world capital is looking for decent yield returns. The overall supply of subordinated instruments is limited relative to the potentially demand from this global liquidity. World investors have been and still are desperately looking for returns on invested capital.
Column by Ygal Cohen and Steven Groslin, of ASG Capital
