Photo: Urbanrenewal. How Did the Top Private Banks Worldwide Fare in 2016 and Who Are They?
Scorpio Partnership’s latest edition of the highly anticipated Global Private Banking Benchmark shows a tale of two halves for the global wealth industry. The leading assessment of KPIs in wealth management highlighted that private banks successfully navigated regulatory and political upheaval in 2016, with assets under management rising by almost 4% on average.
The results, based on the publicly available information provided by over 200 wealth institutions, indicate that cost income ratios also fell below 80% for the first time since 2012, reflecting wealth managers concerted efforts to cut costs despite continued compliance pressures. Strong profitability growth masked the industry’s underlying struggle to improve revenues, with operating income rising just 0.04% on average.
“As advanced technology continues to reshape the wealth management industry, firms will be able to recognise cost savings through process optimisation,” said Caroline Burkart, Director at Scorpio Partnership. “The challenge going forward will be managing the revenue side of the profits equation. These firms are experiencing pricing pressure, driven by regulations, the trend for passive investing and the wave of lower-fee competitor models entering the market. Solving the equation will require increased focus on enhancing the proposition with advisory capabilities and improvements to the client experience,” she added.
This year the largest 25 firms in the Benchmark managed USD13.3 trillion of HNW AUM, representing a 63.2% market share. The list was lead by UBS, followed by Bank of America, Morgan Stanley, Wells Fargo and Royal Bank of Canada.
Of the top ten operators, seven had a North American focus. However, Asia’s private banks gained momentum in 2016. China Merchants Bank stands out in the ranking, having added over CNY400bn to AUM in 2016 as a result of enhanced customer acquisition efforts, as well as upgrading it’s private banking proposition. Another contender from Asia, Bank of China, entered the ranking this year, managing over CNY1 trillion on behalf of its wealth management and private banking customers.
By contrast, many of Europe’s key operators experienced negative AUM growth due to a combination of internal restructuring initiatives, decisions to scale back from non-core markets and reputational challenges.
As well as posting strong financial KPIs for 2016, wealth managers were also able to move the dial on client experience, with Scorpio’s annual client engagement tracker, which focuses on the three pillars of a wealth management relationship – Service, Proposition and Relationship, indicating an improvement of 5.72%. “Our research indicates that there a relationship between client perception of the firm and the AUM growth rate.” They added.
As evidenced by Figure 2, some firms faired better at converting enhanced quality of the client service into improved financial performance. North American banks are leading the ranks of wealth managers, with only one European bank among them in a top quadrant by CES vs AUM growth metrics.
“North American operators tend to have a more forensic approach to tracking, measuring and monitoring the client experience across multiple metrics. As such, we see them consistently move the dial on client engagement and, as a result, their financial results,” commented Caroline Burkart, Director at Scorpio Partnership. “The commitment to active listening to the needs of the clients will be imperative to a strong advice-led model.”
CC-BY-SA-2.0, FlickrLeon de Paul, courtesy photo. The Huge Opportunities for Private Equity in Mexico Create the Need to Strengthen Investment Teams
Facing impressive opportunities in private equity investments in Mexico, the Afores are seeking to increase their investments in alternative assets and the regulator, CONSAR, is preparing changes to the investment regime that will facilitate the process. Leon de Paul, Chief Risk Officer at Afore Citibanamex -the Afore with the largest investments in alternative assets, and according to the Institute of Sovereign Wealth Funds (SWFI), one of the best public investors in the world, spoke with Funds Society about its process, and expansion plans.
The investment team led by Leon is focused on the real assets and private equity side of alternative investments, such as real estate in its different sectors, infrastructure, energy and private loans. This is an asset class that the manager likes because “their returns can differentiate us from the rest of the managers and it can offer us higher risk-adjusted returns.” Citibanamex believes that private equity presents a great opportunity in Mexico for four reasons: Structural reforms, Regulatory changes – offering new investment vehicles, The appetite of foreign investors for participating in Mexican alternative assets and, mainly, Mexico’s demographics. “When you invest in an asset you want it to be profitable and have a market that demands it. Mexico is a very young country with an average age of 24 years. In 20 years, Mexico will need at least 60% more urban infrastructure, which means that we will need the assets. Someone has to built them and that someonehas to have a profit. In addition, with the current pensions’ structure, one of defined contributions, you can bring the assets to present value and invest in the long term to improve returns,” says the manager.
Regarding their due diligence, the Afore with the highest percentage of its assets, and amount, invested in alternatives has sought since 2008 to learn from its partners and is focused on creating the best investment team in the sector. They currently have seven professionals dedicated to reviewing the processes and expertise of the GP teams and are constantly growing because, considering their assets’ growth – one which makes it so that every five years they double their AUM, to simply keep 10% of their assets in Alternatives, they must maintain a robust and constant pipeline. Only in the last year and a half the risk team has doubled in size and the alternatives’ team has been created, says Paul.
However, there is still a long way to go… Between 2015 and 2016, only in infrastructure and energy in Mexico, more than 90,000 million pesos (more than 5.1 billion dollars) were committed and, according to Paul, the Afores, despite their mandate to invest in the long run, did not even invest 1% of that. “We must grow our teams to have more operations, to be able to invest relevant amounts and approach the authorities to look for small regulatory changes so that, taking care of the interests of pensioners, we can allow access other investments with international partners.” He is certain that as the Afores further invest in this asset class, that will attract more foreign investment “which will translate into greater infrastructure and therefore greater growth and quality of life.” As an example of this, the manager highlights the discovery of an oil field in shallow waters off the coast of Tabasco, the first one in years and the result od a co-investment in energy that Afore Citibanamex forms part, while with the Shared Network, Mexico will guarantee access to the best wireless technology in the world, at competitive costs, to almost 92% of the population, using the 700 MHz band spectrum. But this, is just the beginning…
Pixabay CC0 Public DomainEPIC hotel @nadiesita. 3rd Annual Innovation in Corporate Cash Management in LatAm
On September 11th-13th, 2017, industry experts will gather at the EPIC hotel, in downtown Miami, for the 3rd Annual Innovation in Corporate Cash Management in LatAm.
This GFMI conference will help banks to develop and enhance their cash management products to stay competitive in the changing market. The event will present case studies on how different banks enhance their digital offerings and utilize new technology for comapnies. There will also be a strong focus on compliance with financial crime requirements and how companies find a balance between customer satisfaction and compliance. Finally, strategies to facilitate cooperation among banks to enhance cross- country payments and FX transactions will be presented.
With different case studies, the participants will learn about the use of virtual accounts in cash management, the latest initiatives to simplify the client on-boarding process, how to guarantee secure cross-border payments through blockchain technology, how to improve financial inclusion for SMEs across LatAm, and the innovation in cash management through the API Banking Technology.
Attending the conference will enable people to:
Enhance corporate cash management infrastructure across the region
Gain insight into the successful implementation of new technologies in cash management
Learn about the latest cash management solutions
Discuss the growing competition from Fintech in corporate cash management
Discover how to tackle financial crime to guarantee safer cross-border payments
For more information contact Deborah Sacal or get the agenda in the following link.
CC-BY-SA-2.0, FlickrAnabel Vidal and Jorge Rovira. Compass Promotes a New Co-Country Head and Regional PM
Jorge Rovira, who, until recently, led Compass‘ commercial effort in Colombia, assumed responsibility as Co-Country Head, along with Anabel Vidal, of Colombia and Panama.
In addition to this change, Anabel Vidal assumes the leadership of the regional PWM area, with the responsibility of deepening the process of integration, consolidation and growth of the firm’s offshore and services platforms for private clients in the region.
Before starting his career at Compass, Jorge worked at BlackRock where he led the Institutional / Retail business effort in Mexico, Central America and Colombia. He was also a Portfolio Manager for Global Strategies at GBM Mexico, Head of Investments for Corredores Asociados in Bogotá, and Head of Institutional Sales for Colombia and Peru in LarrainVial as well as Senior Strategist at BBVA Provida in Santiago de Chile.
Vidal has more than 19 years of experience in the financial industry. She joined Compass Group in 2007 and was Product Development Manager, in charge of Product Allocation and Portfolio Management for private clients at Compass Group in New York and Miami. Shortly after, she was in charge of the Miami offices and in the year 2015, also Panama and Colombia. Before joining the firm, she worked in the consulting area for the financial sector in Accenture and Procuradigital.
. Investec Launches an Investment Grade Corporate Debt Fund in Association with Compass Group
Compass Group is the sub-manager of the new Investec Latin American Investment Grade Corporate Debt Fund, recently launched in Luxembourg and included in Pershing.
The strategy is almost a year old and will be managed by Tomás Venezian and Mathew Claeson, who have more than 15 years of experience in the industry, and currently the portfolio is built through a bottom-up process of ‘best ideas’.
Latin America is at a turning point, where growth and inflation stabilize, which has allowed an expansive monetary policy in the region. On the business side, a process of deleveraging has begun to be observed since mid-2016, which should result in much lower default rates than those observed in recent years.
On the technical side, Compass Group experts expect a negative net bond offer in Latin America this year, in an environment in which demand for interest rates continues strong, and therefore, global investors have appetite for the region.
US investment grade debt spreads and emerging market spreads remain at attractive levels compared to their historical average. Latin America is the most attractive region in terms of spreads adjusted by risk classification, says Compass.
The fund’s objective is to generate income with the opportunity to obtain long-term capital gains by investing in Latin American fixed income assets rated as investment grade. The spectrum of bonds includes sovereign, quasi-sovereign and corporate, the latter having the greatest participation in the portfolio.
Compass Group LLC has a history spanning over 20 years, specializing in asset management in Latin America, where it has more than 40 specialists based in the main cities in the region.
Wikimedia CommonsSantiago de Chile. Larrainvial Answers Three Questions About the Progress of the Agreements with Vontobel and Columbia Threadneedle
LarrainVial Estrategia has been promoting its funds’ offer and currently maintains contacts with two new administrators. The Chilean firm responded to three questions from Funds Society about these negotiations:
1. At what stage are the discussions between Vontobel Asset Management and Columbia Threadneedle Investments?
We are constantly monitoring the market in search of managers to complement the 36 fund managing companies with whom we currently have an agreement, with the idea of improving our availability of products to incorporate our asset allocation through the best instruments for each asset class.
We do indeed have contacts, however, agreements must be approved by our Compliance area, which may take some time due to the exhaustiveness of the review process of the counterparts that is carried out, both by us, and by the aforementioned managing companies.
2. What are the main advantages of these funds and what do they contribute to LarrainVial’s existing offer?
In Vontobel’s case, what caught our attention was its consistency in funds related to emerging markets, especially in fixed income.
In Columbia Threadneedle’s case, what caught our attention was its diversified range of products globally, with interesting alternatives mainly in European equities, where they have various diverse strategies.
3. How does the work of LarrainVial Estrategia fit into the company’s regional expansion policy?
LarrainVial Estrategia was designed to be an easily scalable model for the rest of the region, with a team characterized by absolute independence, open architecture, ability to combine national and international investments, plus renowned experience in combining traditional investments with the most complete range of alternative investments.
If to all of the above we add a great commercial capacity to lower our vision, and recommendations to our financial advisors, so that these can in turn be transmitted in a consistent way to their clients, we can see the leading role in our area within LarrainVial’s general strategy.
All this is being highly valued by our financial advisors and their clients, which is reflected by the fruits that our work has started to reap. This is evident by the extreme loyalty to the company shown by our clients, due to the consistency of their portfolios and the cohesion of the discourse within the sales force.
CC-BY-SA-2.0, FlickrPhoto: Emilio García. Aberdeen AM: Asia and Latin America Harbour Opportunities in Equity Investments
According to the Aberdeen Global Equity Team, recent events – from the political to the economic – have conspired to test the mettle of even the most seasoned investors. Savers, particularly those using bond markets, have had their reserves eroded by a combination of inflation and a long period of very low interest rates. With the normalization of monetary policy (the U.S. Federal Reserve, or Fed, expects that rates will be increased “a few times a year” until the end of 2019, for example), they believe bond yields should rise. But while this is positive for those trying to generate an income using bonds, the consequences for global equities could be less positive, as stocks look less attractive to investors under such circumstances. “Although some equity markets, particularly those in the U.S., have surged in recent months, there seems to have been little real foundation for the gains. Instead, they have been built on bombast and political rhetoric.”
Another potential headwind for equities they identify is the recent surge of populism in the political sphere. At the time of writing, it is unclear to what degree Donald Trump will implement the protectionist policies he touted during his election campaign, although he has not shied away from controversy in the early days of his presidency. In addition, we do not yet know the terms of the UK’s exit from the European Union (EU). A worldwide decline in free trade could have severe implications for corporate earnings.
There is also the conundrum presented by an environment of increasing inflation and low economic growth. Before the Brexit referendum, Mark Carney, governor of the Bank of England, warned that leaving the EU could create just such a scenario — sometimes known as “stagflation”— for the UK. He predicted that a Brexit-induced decline in sterling could push inflation higher. Since the vote, the pound has fallen sharply, and inflation in the UK recently touched its highest level since July 2014. “Although equities are sometimes viewed as a hedge against inflation, increasing consumer prices have the potential to drive volatility and put pressure on future cash flows. And the UK is not the only country at risk from the phenomenon; we are yet to see the effects of Mr. Trump’s policies on the U.S. economy, while political tensions in Europe remain high.” They state.
Collectively, these circumstances seem to paint a pessimistic picture for those looking to gain an income from investing in global equities. However, the team believes there is a potential upside: “we have become relative veterans of political instability and uncertainty; we have lived with bank bailouts, national recapitalizations and dramatic government change for ten years. Now, as in those times, we believe that a focus on high-quality businesses combined with discipline on valuation will put investors in good stead.” They are certain however that there are several important questions income investors should ask when building their portfolios:
Is this company likely to grow both its profits and its dividends?
Is the company located in a place where there is potential for interest rates to come down?
Where are corporate profits beating expectations?
The team believes that many of these opportunities can be found in Asia and Latin America. “Both regions have underperformed in recent years, but they have companies with strong balance sheets, good profitability and robust dividends.”
Emerging equity markets had a very strong 2016, but they warn investors to view this performance in the context of the last five years and net investment withdrawal from the region. “The rebound itself is unsurprising, given the depth of pessimism about the region at the beginning of 2016. There is scope for further improvement should the trend continue.”
In their opinion, dividends, it seems, go in and out of fashion, but they are always significant to individual investors. In some markets, however, they are ascribed little importance, and there may be an almost inherent opposition to returning value to shareholders in this manner. Markets such as the U.S and Japan tend to have this view. In other regions, however, dividend coverage has become stretched, and capital expenditure by companies has been very low.
“When looking for income from equity investments, it is important to select companies that not only have good cash flow and are investing for the future, but that also have surplus cash available to pay dividends. Balance sheet strength, as well as the desire and willingness to return cash to their shareholders, are other very important characteristics. Above all, in-depth research is key when to achieving the objective of earning a steady income stream from a diversified portfolio, even in the most difficult markets.” They conclude.
CC-BY-SA-2.0, FlickrMaria Ramos and Agustín Carstens. Agustín Carstens and Maria Ramos Join the Group of Thirty
The Group of Thirty (G30) announced that Agustín Carstens, Governor of the Banco de México, and Maria Ramos, Chief Executive Officer of Barclays Africa Ltd., have accepted invitations to join the membership of the G30.
Jacob A. Frenkel, Chairman of the Board of Trustees, stated: “The G30 is very pleased to welcome Agustín Carstens and Maria Ramos to membership and I look forward to their engagement in our program and projects in the years ahead.” Frenkel added: “I am delighted that Agustín is joining the Group. He brings decades of knowledge of international finance and economics to the G30, from his leadership of the Banco de México, as Chair of the IMFC of the International Monetary Fund, and from his previous work both as Minister of Finance of Mexico, and other roles. Maria will add diversity of perspective, and a strong and influential South African voice, to our deliberations. She has a breadth of private and public sector experience that will benefit our work and discussions, from her current positions as Chief Executive Officer of Barclays Africa, as Chair of the Banking Association of South Africa, and her prior role as Director General of South Africa’s National Treasury.”
Tharman Shanmugaratnam, Chairman of the G30, said: “Agustín and Maria are outstanding leaders. They each bring a wealth of understanding of the financial and economic challenges of the times, which the G30 seeks to address through our deliberations and ongoing work program of studies. The work of the G30 in international financial and economic thought leadership relies on its dynamic, engaged membership, drawn from across the globe and across public and private sectors. I very much look forward to Agustín and Maria’s contributions in the years ahead.”
Carstens stated: “I thank Jacob, Tharman, and the G30 members for the invitation to join the Group’s membership. I am honored to join the organization and look forward to participating in its discussions and activities.”
Ramos stated: “It is a pleasure to join the G30, which does such key work on international economics and governance. I look forward to working together on projects of common concern and to supporting the Group’s mission.”
The Group of Thirty was founded in 1978. The Group is a private, nonprofit, international body composed of senior participants from the private and public sectors and academia. The Group The Group is led by Jacob A. Frenkel, Chairman of its Board of Trustees, and Tharman Shanmugaratnam, Chairman of the G30. Amongst its members are Jean-Claude Trichet, Paul A. Volcker, Ben Bernanke, Mario Draghi, Timothy Geithner, Paul Krugman, Haruhiko Kuroda, and Jaime Caruana.
CC-BY-SA-2.0, FlickrFoto: Lunita Lu. ¿Se van a mantener los tipos eternamente bajos?
In his latest monthly outlook, titled Curveball,Bill Gross mentioned that to his mind, free will is the key to our unique position among life’s animals. Without it, this business of living is reduced to a meaningless game.
He also makes the case that monetary policy in the post-Lehman era has resembled the gluttony of long departed umpire John McSherry – they can’t seem to stop buying bonds, although as compulsive eaters and drinkers frequently promise, sobriety is just around the corner. In his opinion, “The adherence of Yellen, Bernanke, Draghi, and Kuroda, among others, to standard historical models such as the Taylor Rule and the Phillips curve has distorted capitalism as we once knew it, with unknown consequences lurking in the shadows of future years.”
“But the reliance on historical models in an era of extraordinary monetary policy should suggest caution. Logically, (a concept seemingly foreign to central bank staffs) in a domestic and global economy that is increasingly higher and higher levered, the cost of short term finance should not have to rise to the level of a 10-year Treasury note to produce recession.” And notes that commonsensically, a more highly levered economy is more growth sensitive to using short term interest rates and a flat yield curve, which historically has coincided with the onset of a recession.
“Just as logically, there should be some “proportionality” to yield curve tightening. While today’s yield curve would require only an 85 basis increase in 3-month Treasuries to “flatten” the yield curve shown in Chart 1, an 85 basis point increase in today’s interest rate world would represent a near doubling of the cost of short term finance. The same increase prior to the 1991, 2000 and 2007-2009 recessions would have produced only a 10-20% rise in short rates. The relative “proportionality” in today’s near zero interest rate environment therefore, argues for much less of an increase in short rates and ergo – a much steeper and therefore “less flat” curve to signal the beginning of a possible economic reversal.
How flat? I don’t know – but at least my analysis shows me that the current curve has flattened by nearly 300 basis points since the peak of Fed easing in 2011/2012. Today’s highly levered domestic and global economies which have “feasted” on the easy monetary policies of recent years can likely not stand anywhere close to the flat yield curves witnessed in prior decades. Central bankers and indeed investors should view additional tightening and “normalizing” of short term rates with caution” he concludes.
Grant Cambridge, courtesy photo. “We are Underweight US Financials, but the Pending Deregulation Could be an Interesting Catalyst"
To avoid companies that are overvalued in a stock market such as the US, which since February 2009 has revalued 280%: is the goal of Grant Cambridge, fund manager at Capital Group, which explains in this interview with Funds Society its management keys. He says that this American strategy, which has recently been offered to European investors with the launch of its Luxembourg version, offers long-term returns through a fundamental analysis of companies. And that he is not afraid of the Fed, which he hopes will continue with his gradual upward path, and that it will remain as transparent as possible to avoid surprises.
1. The first thing which nowadays comes to my mind when speaking about US equities is high valuations. Do you agree? If not, or at least partially not, in which sector valuations are still attractive?
When I think about the US, I actually don´t necessarily think about high valuations. Although there are companies in the US which are getting a tremendous amount of attention that do have high valuations. That´s why it is important to think about diversification through a fund like ICA and avoid areas that are overvalued.
If I had to guess what the best industries were over the last twenty years, they are a highly diverse set of sectors. This is to show that I can find in all sectors companies that are attractively valued. But I can also find in all sectors companies that are not attractively valued. The real objective is to try to avoid the names which are overvalued.
Right now, a lot of attention is put on large tech companies and the top five stocks right now, in terms of market cap, are equal to the bottom 250 stocks. That speaks about how concentrated is the market. This fund can invest in growth, but also looks for growth and income. So we have the flexibility to invest in a company like Amazon, with no dividend income, but we also might invest in a company like Verizon, which has lower growth but a really attractive absolute yield, almost 5%. ICA provides a dividend yield of around 2.2%, which is better than the S&P 500. Most of the companies we have in the fund are domestically domiciled and we can invest up to 15% outside the US. However, we actually get our exposure through US companies that have revenues and earnings around the world.
2. Which factors could support the continuation of the rally in the stocks you have in your portfolio? Will it come from earnings, from economic growth or from Trump fiscal policies?
Just to put in perspective, since February 2009, the US equity market is up 280%. So I look for companies that have reasonable earning growth, with that you need fundamental analysis to make sure you have that fundamental growth. In other words, I´m worry about the macro, I mean I can worry on the top down, but I build the portfolio on a bottom-up basis. One company at a time. And all of the companies that we invest in are analyzed on fundamental basis. Many times we meet with the companies. Many of them we have met with the companies in their local activities around the world. So, we are doing a true global fundamental research. This gives us the confidence to invest in those companies for a long term period.
The turnover of ICA is around 25%. That means that 40% of the fund asset has been in companies we held of more than eight years.
3. Based on your long experience, would you say macro or fundamentals are more important in the performance of your portfolio? What do you need to find in a company to invest in it?
I look for ethical management. I look for reasonable valuations. I look for companies that have attractive capital allocation strategies and usually what it does mean is an orientation to return cash to shareholders through dividends or even better, dividends which are progressively growing over the time.
This fund is oriented towards larger caps companies. What we do is we think about the objective of this fund and we orient our investment universe towards that.
4. Are Fed rates hikes impacting on in any way in the equity market in general and in your portfolio in particular? What do you expect from the Fed? Will you implement any change in your portfolio accordingly?
For the Fed, I expect a continued measured pace of interest rates increases and I think up until now we have seen that. They have been increasing rates for the right reasons. The market has tolerated the increases in interest rates. And actually if you see interests rising for the right reasons is not a bad backdrop for equity markets. So I expect the Fed to continue to be measured, to be as transparent as possible and to not have any surprises.
If you go back to 1994-1995 time frame, rates gone up very rapidly, there were a lot of surprises and impacted both the fixed income and the equity market. Right now I see the Fed ´patrons being very transparent; they are trying to give as much indication of direction as possible.
In sum, I don´t expect interest rates to go up and up an up.
5. What are the keys for being able to protect investors’ capital in down markets? For instance, in the current environment, is it better to have a more defensive bias or a more aggressive one? Why?
We have already talked about this, but for us, the key is the diversification. In our Capital System we do not only apply diversification within the portfolio but we have diversification of styles. We have eight portfolio managers in this fund; we have a variety of styles. We have been able to find general defensive sectors which in weak market, these kinds of companies have hold up very well. Two of our larger sectors now are consumer staples and consumer discretionary, both of which are defensive sectors overall.
For us this not only diversification per se, is diversification but with convictions. We do not add companies just for the purpose of diversifying. Every single position in the portfolio is a conviction. Our investment process involves more than one decision maker. We have eight portfolio managers assigned to this fund and we also have a research portfolio, which is managed by the specialists or industry analysts. The industry analysts are looking for high conviction ideas. They only make a small number of decisions per year and when they invest, the portfolio managers who are in the fund will also co-invest. This process is very transparent, it is granted in trust, in communication and in collaboration.
6. Which sectors do you like the most from a fundamental standpoint? Which ones are you currently overweighting?
We are slightly overweight energy. As said before, consumer staples, energy and telecommunication companies we are overweight relative to the S&P benchmark. We are underweight financials.
7. Energy and financial sectors, which have been in trouble, are they an opportunity now?
Energy is a cyclical commodity and we have seen an ample amount of supply which offsets the demand. So, basically, as a result, the commodity has weakened. We don´t have a wide company view on oil. Each person has his own opinion. My opinion is it will take some time before the supply and demand comes back into balance. Demand has been fairly stable and supply has been ample. OPEC has shown they wanted to set a floor on price and the US is producing more energy, natural gas and oil than it has historically.
It was only a few years ago when we were worry about peak oil and we were discussing oil at $200 a barrel. So this goes to prove that this is a commodity cyclical and where there is more supply there is pressure on the commodity. One thing we are particularly interested in are the low cost providers and the companies that can earn their dividend thanks to this weakness of the commodity.
Concerning the financial sector, we have been underweight in ICA, there may be a general feeling that interest rates will be lower for longer and you really need interest rates to go up two-three hundred basis points to make a meaningful impact on earnings. So we haven´t had enough increase in interest rates to make a material impact to earnings. We also have a tremendous amount of regulation in the US and the new Trump Administration is talking a lot about deregulation and we will have to see whether or not it really ends up impacting, particularly the banks.
The discussion around the Trump Administration considering deregulation will be one that we will continue to watch because it could be an interesting catalyst after having a period in which regulation was put on the market since the financial crisis.
Deregulation is a theme which goes beyond the financial sector and that could impact a number of sectors. President Trump has talked about removing two regulations for everyone that is audited, that goes very broadly across the economy so we will have to wait and see which areas are most affected. We do a lot of research about regulation and right now it is too early to tell what could be his priorities. The financial regulation is one which seems to be a priority.
8. Why do you overweight large caps and underweight small caps? Does it help to the portfolio stability?
This is a conservative fund launched by our founder. This is a lower volatility, larger cap fund. We refer it as core fund which invests in seasoned companies; companies which stability and which are leaders, many of them, in their fields. They are liquid companies and most of them have an income as contribution to total return. CGICA’s 83-year average return of 12% has proved rewarding for long term investors.
In other words, this fund, because of its nature, has been relatively conservative and is currently overweight large caps. Around 10% of the fund is in mid caps today. We do not have any small cap in the fund. It does help with portfolio stability and it also contributes to have liquidity in the company we invest in. Besides, it gives you exposure to earnings and revenues around the world.
We are managing the fund with a longer term horizon and our approach to investing in larger caps, stable, seasoned companies, as said before, helps to maintain a stable portfolio. Small and mid caps can go through dramatic changes, some times in the short term, some times in the long term and larger caps tend to be more stable. It does not mean they not move around, but generally they provide stability.
9. Why active management and having a high active share are key factors when investing in US equities? How does it help to long term results?
We look to focus on fundamental research into companies and consider their long term future prospects -their weighting within the index is not a primary consideration.
When we are investing we almost rarely use the words index, underweight and overweight. In our vocabulary, in our day to day jobs, we are not using them. But when we are sitting with advisors, we can describe the fund using these words despite this is not the way we describe it in our meetings internally. In other words, we are aware about the benchmark but don´t use it as a way to build our portfolios.
Apart from that I would like to highlight that because of we are looking for companies with dividend characteristics, we are many times invested in the higher dividend quintiles and that is an area which gives the stability of the fund ´returns. It also provides downside protection in the event of a correction.
We tend to be in the upper quintile of our peer group for consistent risk-adjusted returns, but we are in the lower volatility category of our peer group. Actually, we are in the lowest quintile of volatility of our peer group. What is exactly what we want to do for our long term shareholders: provide superior returns with lower volatility. We must not forget our mission which is to improve people´s life through successful investing. It is important also to bear in mind the investment management is our only business. We are focus on the long term interest of our clients. Finally, I would like to remember another key feature of CG is that portfolio managers invest their own capital in the funds they are managing.
10. Finally, is the Luxembourg strategy being well received in Europe? What does it strategy offer to European investors?
Yes. It provides to European investors the same thing we have been providing to US investors for 83 years. It provides long term investment returns through fundamental analysis of companies.
Now European investors can access to one of the most successful strategies and it represents what they are looking for a US equity fund: it is a conservative, first quartile, low volatility, easy to understand fund. And more than proved, with 83 year track record.
