Pixabay CC0 Public DomainPhoto: PexelsCC0. Thornburg Funds Launch on Allfunds Platform
Thornburg Investment Management, a global investment firm with $44 billion in assets under management as of the end of Q119, is pleased to announce that its Ireland-domiciled range of UCITS funds have been added to the Allfunds platform, the world’s largest institutional fund distribution network and the largest European platform.
Thornburg has also widened its global distribution footprint in Europe. In addition to availability for investors in Ireland, Switzerland and the United Kingdom, Thornburg’s suite of eight UCITS funds are now accessible to investors in Denmark, Finland, Italy, the Netherlands, and Norway.
“Greater availability of our global equity, fixed income, multi-asset and alternative investment solutions, particularly across Europe, is an important step to making Thornburg’s investment strategies more accessible to investors,” said Carter Sims, global head of distribution at Thornburg. “We are excited to partner with Allfunds to offer our highly active and benchmark agnostic UCITS funds to intermediary and institutional investors across the globe.”
Thornburg’s range of UCITS funds available through Allfunds include:
Thornburg Investment Income Builder Fund is a globally oriented portfolio whose aim is to provide an attractive and growing income stream, with capital appreciation, over time. A dynamic blend of global dividend-paying stocks and bonds of virtually any type, this fund is broadly flexible in pursuit of its objectives.
Thornburg Global Opportunities Fund is a flexible and focused equity portfolio with holdings selected on a bottom-up basis via a disciplined, value-based framework.
Thornburg Global Quality Dividend Fund is a bottom-up, value-oriented, focused portfolio of dividend-paying stocks from around the world in a broad search for attractive dividend yield.
Thornburg International Equity Fund is a focused, diversified portfolio of leading, mostly large-cap international companies, selected via a fundamentally driven, bottom- up, valuation-sensitive process.
Thornburg Developing World Fund is a balanced approach to investing in emerging markets, built on a concentrated portfolio of leading companies at attractive valuations selected to manage risk while still pursuing a differentiated return.
Thornburg Limited Term Income Fund is a flexible, actively managed, core portfolio of high-quality U.S. dollar-denominated bonds.
Thornburg Strategic Income Fund is a global, income-oriented fund with a flexible mandate focused on paying an attractive, sustainable yield. The portfolio invests in a combination of income-producing securities with an emphasis on higher-yielding fixed income.
Thornburg Long/Short Equity Fund, a U.S. equity long/short fund that combines tenets of both growth and value investing to pursue long-term capital appreciation.
Thornburg Investment Management is a privately-owned global investment firm that offers a range of multi-strategy solutions for institutions and financial advisors. A recognized leader in fixed income, equity, and alternatives investing, the firm oversees $44 billion as of March 31, 2019 across mutual funds, institutional accounts, separate accounts for high-net-worth investors, and UCITS funds for non-U.S. investors. Thornburg was founded in 1982 and is headquartered in Santa Fe, New Mexico.
According to a company statement: “At Thornburg, we believe unconstrained investing leads to better outcomes for our clients. Our culture is collaborative, and our investment solutions are highly active, high conviction, and benchmark agnostic. When it comes to finding value for our clients, it’s more than what we do, it’s how we do it: how we think, how we invest, and how we’re structured.”
Looking at the number of years it took for different products and technologies to reach 50 million users, one can deduce that the pace of adoption by society has accelerated exponentially. For example, it took 46 years for electricity to be used by more than 50 million households, while Facebook reached the same number of users in 4 years, WeChat in 1 year, Fortnite in 4 months, and Apex Legends, a new Electronic Arts game, only took 1 month to reach 50 million users. But why this acceleration? According to Robert Almeida, global investment strategist at MFS Investment Management, in his presentation during the 2019 MFS Americas Advisor Investment Forum in Miami, this slowdown is due to the considerable reduction in the price of new technologies, which sometimes becomes free, in exchange for consumer data and information.
Thus, the manager assessed the sectors, industries and companies that have generated a profile of above-average margins that are not sustainable, because they have lost competitiveness and are only achieving growth in their profits through acquisitions and cost cutting.
Excess Supply of Content in the Media
An example of this type of companies are those belonging to the media, whose value proposition has changed significantly in recent years. “Today, Hollywood produces about 500 films a year, about 1,000 hours of film per week. While YouTube, which is a free channel with 2 billion users, produces 48 hours of content per minute. YouTube produces in 20 minutes the same length of content in hours as Hollywood produces in a year. Of course, quality is debatable, but when in economics you significantly increase the supply curve and there is no change in demand, prices decline. And it’s precisely these companies that are subject to price pressures that we want to avoid,” Almeida said.
“For example, SpongeBob has been the most monetized children’s program in cartoon history.In the future, I don’t know if the kids will continue to attend this program, but if they do, they will do it through YouTube or Netflix, for $13 a month,” he added.
In this context, the main issue, according to the manager, is the selection of titles. There will be a number of companies that will not continue to add value and there will be another number of companies that will achieve greater value because of their scarcity. In the next decade, the current abundance of margins will not be such and those companies that cannot offer tangible value to society will decline and become extinct.
The Retail Sector
We all know that the disruption of e-commerce has had a strong effect on retailing, but that does not mean that department stores will be eliminated. In Almeida’s opinion, there will be shopping centres, but these will have to offer a value proposition or they will be dispensable.
“E-commerce is easier and more convenient, you don’t have to go to the mall, you don’t need a parking space to get there, with just one click, the purchase is done. But what happens when you introduce more offer in the market? A price war begins. The difference now is that retailers have realized the need to build an online sales platform similar to Amazon’s, so they are increasing their capital expenditures rather than their operating expenses to increase their sales. At that point are companies like Macys, Sears, JC Penny and ToysRUs. When will be the next time you go to RadioShack to buy a product? Probably never, you will make your purchase online,” he argued.
“The market tells us that there are survivors and dinosaurs. Among the survivors is Costco, whose profits are growing by 5% while other retailers are experiencing losses by the same percentage. That’s because even Amazon can’t compete with its price-based value proposition. On the other hand, Tiffany, LVMH or Nike are also offering a different value proposition. These companies have recognized brands, intellectual property and pricing power.
The Marijuana Value Proposition
Although only two countries have legalized the recreational use of cannabis, with Uruguay being the first country in 2014, followed by Canada in 2018. In the United States, the situation is somewhat complicated. In 10 states, medical and recreational use is allowed, while at the federal level it is illegal.
“Two-thirds of the U.S. population has access to medical marijuana and one-fifth has access to recreational marijuana. By regularly increasing the legal amount available, the adoption curve is being transformed from an S-shaped curve, as was the case with the electricity mentioned above, which took 46 years to be massively adopted, to a J-shaped curve, like Facebook, which took only 4 years to get 50 million users,” he said.
“Another point of view must also be considered: households have budgets. People often formulate a budget in relation to how much they can spend on vacations, shopping or meals during the week. If the cannabis adoption curve increases, what share of consumption will the budget take? What categories of products could be at risk if the cannabis market grows? In our opinion, the beer, wine and spirits sectors are the candidates to lose market share to marijuana. We are evaluating the model closely and examining the potential results. This does not change our view of Diageo, Philipp Morris or Altria, but it is something we are discussing and observing. That’s what active management is all about,” he concludes.
Pixabay CC0 Public DomainPhoto: U.S. Air Force by Senior Airman Joshua Eikren. SEC Approves 3 to 1 the New Regulation on Conflicts of Interest for Brokers
While the SEC has allowed for years that brokers call themselves financial advisors without requiring them to disclose all conflicts of interest or put the interests of the clients above their own financial rewards, those times are over.
This Wednesday, the SEC voted 3 to one in favor of the so-called “Regulation Best Interest”, a regulation that will require brokers to act in the best interest of investors and disclose more about conflicts of interest that may arise and potentially divert the advice they give.
The SEC said the new rule aims to provide investors with more information about complex payment incentives and other practices that can influence a broker’s advice, without upsetting Wall Street’s commission-based sales model.
The SEC did not impose brokers with a higher fiduciary duty than that applied to investment advisors, who, unlike brokers, receive a payment for managing assets on an ongoing basis.
Although the brokers and advisors will continue to be governed by two rules, SEC Chairman Jay Clayton said that the best interests rule brings brokers’ one closer to the one advisors have. “We elevate, improve and clarify these obligations in an integral way, this action was long overdue”.
The final regulation for brokers does not require that they recommend mutual funds or other types of lower cost products; Cost is just one of the factors that brokers must consider to ensure that advice meets the best interests of a customer.
This Thursday it is expected that the fiduciary obligation of investment advisers will be defined.
Pixabay CC0 Public Domain12019
. Black Tulip Asset Management Democratizes Access to Alternative Investments in the Entertainment Industry with FlexFunds
Black Tulip Asset Management, a Miami-based alternative asset management company exclusively focused on advising and structuring exchange-traded products (ETPs) for European capital markets, announces it is launching multiple ETPs with FlexFunds, a globally recognized service provider in asset securitization, allowing access to the entertainment industry.
Technology and a raft of new players in both entertainment production and distribution has forever changed the industry’s competitive landscape: Netflix, Apple, Alibaba, Tencent, Google, Hulu and Amazon. Traditional pay TV platforms have been forced to adapt.
The key is to capture the market with proven performers in the production arena, with a demonstrable track record of success and profitability. Rebel Way Entertainment and Empyre Media are good examples of production management teams and film financiers able to repeatedly achieve Internal Rates of Return in excess of 35%.
To address this market need, Black Tulip Asset Management has introduced Black Tulip Rebel Way Entertainment and Black Tulip Empyre Media Exchange-Traded Products (ETPs) arranged by the innovative asset securitization program offered by FlexFunds, which allows access to global investors.
The Black Tulip Empyre Media ETP offers the possibility of investing in a portfolio of three to six A-list Hollywood movies managed by Empyre Capital Management and advised by Empyre Media Ltd., a London-based media content financing and investment firm with over 50 years of experience in entertainment finance. Empyre Media management team has recently invested in 4 films that have generated more than $950 million in box office receipts and been nominated for 14 Academy Awards, four Golden Globes and eight BAFTAS.
The Black Rebel Way Entertainment fund is designed to invest in a slate of at least 10 low budget action and horror movies destined for streaming platforms and in some cases theatrical release. The principals have made over 350 films in this manner in the last four decades and the deal is an example of accessing valuable original content.
Lastly, Black Tulip Asset Management is also working with FlexFunds on a new $100 million content fund for women-empowered film, television and theatre.
Oliver Gilly, Managing Partner at Black Tulip Asset Management LLC, said: “We are delighted to continue working with the FlexFunds team and to be using their innovative securitization platform. The flexibility of FlexFunds’ model has allowed the issuance of the first ETP alternative uncorrelated notes to offer streamlined access to proven original content producers in Hollywood’s Second Golden Age, while the transparency of ETP securities enables global distribution, both privately and institutionally.”
Mario Rivero, FlexFunds’ CEO, said: “Through FlexFunds’ asset securitization program, we are capable of converting any asset into a listed security, allowing international investors to easily participate in any investment project. Black Tulip’s entertainment ETPs are a clear exhibit of how flexible asset securitization can be: from real estate assets to funds that invest in Hollywood movies, or any private equity project. Asset securitization plays a key role in allowing investors to participate in a wide array of opportunities at lower minimum investment levels, thus democratizing access to capital markets.”
Foto cedida. In an Economic Slowdown, Improving the Credit Quality of Fixed Income Portfolios is Key
The pace of global growth is slowing and the financial community is divided between those who believe that it is the beginning of a recession and those who do not. Regardless of where you stand, for Malie Conway CIO Global Fixed Income of Allianz GI, the strategy to follow for fixed income portfolios at this time of uncertainty is clear: improve the credit quality of the portfolio, avoid idiosyncratic risk and be positioned at the 3-7 year range within the curve.
“In an environment where there is little visibility on the global outlook, you want as much visibility in the portfolio as possible” states Conway.
Risk is not rewarded
Thus, Conway explains that, in a global scenario of economic slowdown, “highly leveraged companies will not do well. If we look at the risk reward and risk adjusted return in leveraged loans or CCC companies, we really see that they do not compensate. So we are underweight in highly leveraged companies. Our theme is to upgrade the credit quality of our portfolio.”
Conway also stresses the importance of avoiding idiosyncratic risk and for this reason highlights the importance of robust credit analysis that identifies which sectors and industries do well in an environment of economic slowdown.
Positioning in the curve
The second decision to be made is positioning within the credit curve that is currently flat. “In our view there is no inflation; inflationary pressures are cyclical not structural in nature, so that keeps the long-end quite low and this is why the curve has flattened over the last year. In the end, we believe the economic fundamentals will win – growth has peaked and inflation is under control. We do not see any reason for the long-end to sell off, “states Conway.
However, they do not believe that investors are compensated for lending to companies within the credit curve, so they consider the 3-7 year range (belly of the curve) as the most interesting since “you get good carry from credit and you get very good yield relative to the wings of the curve”.
Allianz GI team believes that the Fed has stopped increasing interest rates at the right time compared to those who believe that the Fed is too late and, therefore, expect a more gradual slowdown, with growth below trend but they do not see an economic recession for the time being.
“But even so, if we are wrong and rates go down, the 3-7 year will do well, not as well as long-dated bonds, but still do very well. And if you have the highest credit quality, you will suffer a bit of a sell off, but not as much as lower-rated bonds, “says Conway.
Credit market outlook
As for the recent evolution of the corporate bond market, Conway acknowledges that the credit market was very expensive during most of 2018, “at best it was fair value,” adds Conway.
“In fact, we have the lowest beta to credit risk in our portfolio since March 2009. We are pretty neutral with respect to the market, with quite significant relative value views.” Specifically, she mentions that she prefers US financials versus European, short-term BB assets versus long-term BBBs and emerging market sovereign debt against peripheral Europe. “We are trying not to take directional trades, but we are focusing on as much relative value trades as possible; we think that directionality and beta is not where the most added value will be in 2019” concludes the expert.
Interest in FRN assets
Conway supervises a fund that invests in FRN assets that after just one year of life has already accumulated $540 million assets under management. Moreover, Conway emphasizes that since the Fed put on hold the prospect of further interest rate rises, the fund has raised $150 million. In Conway’s view, this is due to the fact that there are investors who are de-risking their portfolios: “some investors are re-risking, but others are saying this is a window of opportunity”. Thus, the manager explains that this fund is an excellent alternative to cash. From her point of view, if you are accumulating cash there are two options: “Either you buy money market funds at 2-2.5% which is good capital preservation or you invest in high yield or leveraged loans in which I think the market is over stretched and you are taking a lot of credit risk. Leveraged loans will yield 6-7% and this fund over time will yield 4% “, ” if you are not sure if there is going to be a recession, but are worried about the credit cycle, valuations and credit quality and do not want to give up too much yield, this is really a unique product, “concludes Conway.
At this point in the economic cycle and the market cycle, in the opinion of Robert M. Almeida, global investment strategist at MFS Investment Management, it is necessary to shift from an emphasis on performance to an emphasis on risk. According to the manager, in his presentation during the 2019 MFS Americas Advisor Investment Forum in Miami, the economic cycle of the last ten years has been characterized by being longer in length, but lower than the average growth magnitude. While the market cycle has been markedly higher than the average in magnitude of growth and certainly, it has also been longer in duration. These two premises are the starting point for understanding market expectations and valuations, as well as where to find alpha opportunities today.
Market Expectations
Universally, in all market sectors, a massive transition is being seen as technology is weakening the value proposition of companies at a hitherto unknown pace. This, Almeida said, is important because when a company stops producing or providing services in a competitive way, margins erode and stock prices tend to follow.
“From my point of view, there is only one important issue when valuing the price of an asset in the long term: free cash flows. And what do these cash flows depend on? It depends on the number of items and the price at which they are sold minus the cost of production. If a company cannot sell more items or the price of these items is decreasing because a competitor is doing something similar or cheaper, then current margin and free cash flow levels will erode. We try to avoid those companies that we think are overvalued, but not simply from the standpoint that market prices have risen by 300% in the last 10 years but because they have ceased to be useful to society and investor expectations of cash flows are too high. These companies have become dinosaurs, melting icebergs or cubes,” explained Almeida.
“By avoiding companies that suffer from the innovator’s dilemma, that close their eyes to the potential of technology and disruption, we create performance in the portfolio. In our industry we tend to think about creating alpha, but over the years, I believe that success in active management, like most aspects of life, comes not because of what you’ve done, but because of the mistakes you’ve been able to avoid,” he adds.
The manager then explained that we are facing a regime change, from a period with above-average returns driven by above-average margins, to a period with below-average returns, driven in turn by below-average margins. This translates into lower returns vs recent years or long-term averages.
In order to assess performance expectations over the next 10 years, MFS Investment Management uses an average reversal model with variables such as sales, pricing power, margins and valuations. In this model, the balanced global portfolio, with 60% equity and 40% fixed income allocation, yields an unsatisfactory return of 4%. This figure is difficult to explain for the pension plan community, advisors and trustees that make up the asset management industry.
The Level of Valuations
When examining the Shiller P/E ratio based on the average inflation-adjusted profits of the last 10 years, Almeida acknowledged that valuations do not usually predict returns, especially if the previous 12 months or 12 months ahead are taken into account, their level of prediction is almost nil.
However, an examination of the US Shiller P/E ratio shows that, at levels close to 30 times, this is the third highest Shiller ratio in US history. According to Almeida, this is due to the fact that, during this cycle, yields have exceeded the average, because margins have been above the average, but profit growth has remained below.
“To get out of the global financial crisis, companies laid off workers and refinanced their debt at lower interest rates, then saw the rehabilitation of the market structure. Then investment in fixed assets, consumer spending and the GDP of the economy should have improved, but they did not. I could talk about macroeconomic and political motives, but in my opinion, there is a simpler explanation, dematerialization,” Almeida explained.
The Effects of Dematerialization
As Almeida argued, advances in technology have allowed the world the opportunity to rent rather than own. “Companies that needed to increase their technological infrastructure to expand their business have rented it from Amazon, Google, Microsoft or Alibaba, instead of buying it. Instead of buying music, consumers have rented it from Spotify. Faced with the need to buy a car, consumers have used Uber’s services. And the same when buying a film, that consumers have chosen to rent it on Netflix. The shift from a property economy to a rental economy has had two fundamental consequences. The first is deflation of pricing power and the second has made the price of goods less expensive. From an accounting point of view it has been a shift from capital expenditures to operating expenses,” he added.
The asset management industry is reaching maturity. It currently manages close to 100 trillion dollars in investable assets, with a much higher positioning in risk assets than what was necessary a few years ago in order to obtain similar returns. 80% of these assets are managed by institutional investors: Sovereign funds, pension funds and mutual funds, while this percentage was only 35% 25 years ago. In addition, the asset management chain is now much longer, the proportion of investors purchasing direct stock is much smaller than in the past. These are some of the conclusions that Carol Geremia, President of MFS Investment Management and Head of the company’s Global Distribution Division, shared during the 2019 MFS Americas Advisor Investment Forum in Miami. She also spoke about the need to align asset managers’ and advisors’ interests with those of the investors, and about the dangers of a short-term mindset.
The Misalignment
The business is now highly intermediated by asset managers, advisors, consultants or institutional investors, but despite the professionalization of the industry, investors feel that there is a disconnect between their interests and those of their asset managers.
“I’m in contact with many investors from different markets at global level, from the large pension funds to sovereign funds, and with advisors. The market has matured and has become a global market which, as we hear daily on the news, is certainly facing a large number of threats. But I believe this is where we are losing sight of something important. Firstly, investors are not syncing with active management. The debate between passive and active management is certainly not very relevant and opportunities to talk with investors about the misalignment of interests are being lost. We have lost our bearings. What’s really important is the result in the long term, and yet, we have only measured the data in the short term, giving a false sense of comfort, when in reality, risks are increasing and the gap with responsible investment is widening,” explained Geremia.
“We need to change our tune and stop dealing independently with the importance of ESG factors and sustainability. It’s all connected, and linked to the future of investment management,” she added.
In that regard, Geremia argued that many opportunities are being lost due to a lack of communication and dialogue to avoid misalignment. But how did that happen? There are many different reasons and many parts of the industry are involved, starting with the market’s low interest rates. But perhaps the most obvious example of disconnection is the lack of alignment between asset managers’ time horizon and that of investors.
“Measured from peak to peak or valley to valley, the industry usually defines a complete market cycle as 3 or 5 years, but in fact, we can state that, after conducting several studies, it has been observed that this estimate is actually half of a market cycle. If we look at the last 100 years, a complete market cycle is defined in a range of between 7 and 10 years. Most investors usually say that a cycle is set at between 7 and 10 years, but their tolerance to below-index returns is set at 3 years.”
The dangers of a short-term mindset
In Carol Geremia’s opinion, the short-termism adopted by the markets is a terrifying issue for investors. In the past, an annual yield of around 7.5% could be obtained with a balanced fund. Currently, investors must take 7 times the same amount of risk in order to obtain that return, not to mention the complexity of the vehicles needed to obtain it.
“Because interest rates have been at very low levels for a long time, all investors have sought a higher return on riskier assets. But we have forgotten that when you take a risk, the best way to manage it is by understanding its time horizon. In conversations with clients, we talk about the need to have a long-term mindset, but nobody defines it correctly.”
Asset allocation
In the current environment where all players are undertaking more risk and adopting greater complexity in their investments, having a conversation with investors about the allocation of their assets is not an easy task. Thus, Geremia presented four baskets of risk. The first is the “bulk” beta basket, which includes the ETFs, the indexed funds, and factor investment funds, that is, passive investment. A second basket contains liquid alpha vehicles, which includes mutual funds and traditional active management. A third, with alpha illiquid vehicles, including private equity, investment in infrastructure, real estate and hedge funds. Finally, a fourth basket contains the ESG investment, with long-term responsible investment vehicles.
“Most investors tell me that the reason why they opt for passive versus active investment, apart from the price of commissions, is that they are not allowed the sufficient time required in order to obtain a good performance in the markets,” she said.
On the other hand, and in view of increasing diversification, investment in alternative assets has also increased enormously, but the expert from MFS reminds us to bear in mind that alternative assets are an illiquid alpha.
“Alternative assets are a way to extend the investment horizon, renouncing liquidity in return, which is why there is a yield premium. If these points are not discussed with investors there will be huge disappointment in the future, both for having renounced the superior returns of traditional active management, and for having underestimated the importance of liquidity,” she explained.
“Finally, it’s essential to have a conversation about sustainable investment with institutional investors. Clients will stop asking how much money has been obtained to ask how it has been obtained,” she concluded.
. Compensación, Propiedad y Organización, las razones principales tras las migraciones desde las wirehouses al modelo independiente
Bolton Global Capital feels confident that the migration of FA to Regionals and Independents will continue. Both their assets under management and revenue have been growing steadily while the market share of the four major Wire-houses has seen important decreases over the last 10 years. Ray Grenier, CEO of Bolton Global pointed out at the firm’s annual advisor conference in Miami that investors are more and more looking at the independent business model to the point that independent’s AUM are almost the same as those of major wire-houses.
During the conference, Greiner mentioned that Compensation, Ownership, and Organization are the main reasons why wirehouse migrations will continue. Given Bolton’s strong value proposition with a premium brand, customized solutions, global capabilities and higher compensation models, he is certain more and more FA will join their model where “everyday we have to win your business”.
The conference was held at the Four Seasons Hotel in Miami, where Bolton will be moving its Miami headquarters within in the next 12 months. The event included close to 100 advisor attendees with representation from Uruguay, Argentina, Brazil, Panama, New York, Florida, Texas, Massachusetts and Maine. Guests were treated to a lively economics discussion during the Portfolio Strategist Panel, which featured Claus te Wildt, Senior VP, Capital Markets Strategy, Fidelity Institutional Asset Management, Paresh Upadhyaya, Director of Currency Strategy, Amundi/Pioneer, Antonio Miranda, Head of Asset Management and CIO, Compass Group, Investec, Carlos Asilis, Co-Founder and CIO, Glovista Investments and moderator Oscar Isoba, Senior Vice President and Regional Head, Nuveen Investments.
Later in the afternoon, Sergio Alvarez-Mena, Partner, Jones Day outlined the regulatory, compliance and tax landscape. Matt Beals, Chief Operating Officer, Kathy Sargent, Managing Director of Transitions and Business Development at Bolton, and Sean Power, Customer Success Manager, Agreement Express reviewed several new products and technologies being rolled out by Bolton. These include an end-to-end e-signature and document management system, Envestnet’s SMA platform and Latam ConsultUs Research.
The evening ended with cocktails and hors d’oeuvres, followed by an elegant dinner at the Four Seasons.
On Friday, attendees enjoyed a breakfast event followed by technical sessions with Bolton Staff and the conference’s many sponsors.
Foto cedidaImage of the facilities at Streamsong Resort and Golf, in Florida, where the sixth edition of the Investments & Golf Summit organized by Funds Society was held. / Courtesy photo / Courtesy photo . Funds Society Investments & Golf Summit: Ideas on Global and Multi-Asset Fixed Income as a Source of Income
The sixth edition of the Investments & Golf Summit organized by Funds Society, and held at the Streamsong Resort and Golf, in Florida, left us with the best proposals of nine asset management companies in the field of equities, structured products and real estate, and also in fixed income and multi-asset funds.
Janus Henderson, RWC Partners, AXA IM, Thornburg IM, Participant Capital, Amundi, M&G, Allianz Global Investors and TwentyFour AM (Vontobel AM) were the participating management companies in an event which brought together over 50 fund selectors from the US Offshore market.
In the area of fixed income, Thornburg Investment Management and TwentyFour (Vontobel AM) took center stage. Danan Kirby, CFA, Portfolio Specialist at Thornburg Investment Management, spoke about the challenges faced by that particular asset and presented a flexible and multisector debt strategy. Among these challenges is the difficulty of predicting interest rates in an environment in which consensus seems to agree that rates are at very low levels and the cycle of increases has been “incredibly” slow, but in which investors should, nevertheless, avoid making comparisons with the past, since the path of these increases cannot be known. And experience shows that the market has been wrong many times. Also, among the challenges of investing in debt, the credit spreads, both in investment grade and in high yield, don’t compensate for risks taken and, in addition, they have improved after widening at first, following the Fed’s halt on the interest rate hikes cycle, due to low growth. What is real and what is not? The asset manager wonders.
Another challenge in fixed income is differentiation, since not all the names with a BBB rating, which makes up a large part of the investment grade universe, are the same: “Credits within the most defensive sectors with lower leverage should be better positioned while we approach the final phases of the credit cycle,” says the asset manager. And, as if that weren’t enough, global investors face a changing scenario in which they are forced to take more interest rate risks in so far as yields remain low. In this challenging environment, the asset manager proposes solutions: a flexible strategy with a relative value perspective to look for opportunities with a good risk / reward basis.
And this is the field of the Thornburg Strategic Income fund, focused on obtaining total returns through a portfolio which has the liberty to invest globally in all fixed income sectors, and which seeks a strong risk adjusted return by investing in the best relative value opportunities without benchmark restrictions. “When managing a scenario with volatility, investors need to incorporate a broader range of strategies that offer flexibility. A more complex global scenario and a greater frequency of risk off-risk on sentiment will create opportunities for flexible investors,” he adds. The asset manager explains that they are flexible and that they invest in bonds that offer attractive relative value as compared to the universe, have good fundamentals, and can add diversified exposure to risk. Currently, they invest in a variety of segments such as bank loans, common stocks, preferred stocks, foreign government bonds, domestic US treasury bonds, municipal bonds, investment grade and high yield (the highest positions) corporate debt, CMO, CMBS, Mortgage-pass through, agency bonds, ABS and liquidity.
The asset manager concludes that the market’s dynamic nature requires both experience and flexibility, and that a process of relative value provides opportunities to generate alpha, in all scenarios. “We only take risk where we are paid for it,” adds the expert, who explains that they do not use derivatives, use a bottom-up process, and analyze the capital structure of the companies in which they invest very carefully.
Global Fixed Income for Obtaining Income
TwentyFour AM, a boutique firm of the Vontobel AM group specializing in fixed income and working with Unicorn in the US Offshore market, also presented a global and multisector fixed income strategy for obtaining income (TwentyFour Strategic Income Strategy), the main focus of which is precisely to provide such income through the positive effect of diversification and a truly global investment. The idea is to provide an attractive level of income along with the opportunity for capital appreciation, although capital preservation is key. It’s benchmark agnostic, has high conviction (less than 200 individual positions) and seeks global relative value in the portfolio, with active risk management (duration and credit, but taking out currency) and that adds value with both asset selection, as well as with top-down proposals.
“Fixed income can work well with an active management perspective. If you like corporate bonds, there is a lot to choose from and through analysis you can find out where it’s most attractive to invest. With fixed income the benefits of active management can be proven,” explains David Norris, Head of the company’s US Credit team. Currently, around 30% of the portfolio has exposure to public debt (especially US debt, since it offers protection in a risk-off environment and also a decent return in an environment in which the macro vision indicates interest rate stability, with maturities of about five years) while the remaining 70% is in credit risk, mostly outside the US, with a lot of exposure in Europe and the United Kingdom (with names that pay more in the latter case due to the Brexit issue), but with shorter maturities, less than two years. “The cycle is getting old and although there is still value in credit it’s not like before, so we prefer not to take too much risk and therefore opt for short terms,” explains the asset manager. “It’s a reasonable environment for credit but we are cautious, and opportunities have been reduced compared to previous moments of the cycle,” he adds.
Banks weigh around a quarter of the portfolio, mainly due to the opportunities that the asset manager sees in Europe, with yields close to 7% with maturities of less than two years and a rating above BB. “The risk profile of banks is very attractive,” he says, and speaks of the large Spanish banks and some British that offer great value because they are not exposed to problem areas like Italy yet benefit from the premium provided by the Brexit issue. If analyzed with a global perspective, there are many areas that are attractive” he adds. As for emerging debt, they have some exposure, but this was reduced after the rally in recent months and only hold hard currency credit, since it’s in this segment that they show the greatest concerns. Also, as a risk, there is the possibility that commercial US banks do the tightening that the Fed doesn’t, causing the end of the credit cycle, although, theoretically, they don’t see any end of cycle signs in the US, nor of recession. In any case, they are vigilant, and the fund frequently shifts sectoral allocation if market prospects change.
Multi-assets: Winning Strategies
Also with a vision to generating income, but with a multi-asset perspective, Amundi Pioneer presented a solution for solving the income problem. “Traditional models of asset allocation oriented towards fixed income and equities can no longer produce the returns that investors need. Given the intervention of central banks, these figures will not return to historical levels. You have to find alternatives to debt in other assets in order to obtain more reasonable returns,” advised Howard Weiss, Portfolio Manager at Amundi Pioneer.
During the presentation he pointed out the attractiveness of Amundi Funds II-Pioneer Income Opportunities, originating in the US fund launched in 2012 aimed at obtaining income from a multi-asset perspective, as opposed to strategies, which tried to obtain income by focusing only on fixed income, because at that time it made sense (high-yield offered returns of 7%). But that compensation from the past has now disappeared: Over time, the spreads have been compressed, due to the continued interventions of central banks. Due to this lack of compensation, they have reduced their exposure to high yield in their strategy from over 44% in 2016, to around 13%. Equities offer a better value proposition for obtaining income: “We see conditions for the continuity of the economic expansion, for a longer cycle.” In order to create income from equities, and beyond dividends (in the case of these shares, they focus on the sustainability of the dividend, rather than on it’s being very high), they also opt for strategies such as equity linked notes. “Dividend strategies sometimes produce losses because cash flows are focused there, and the business deteriorates. We prefer to identify companies in difficulties, but that are in the process of rationalizing,” says the asset manager.
The strategy’s differential factor is the way in which the asset classes in which it invests are defined: At present, there are mortgage-backed securities, bank loans, emerging debt, US and international high yield, equity linked notes, bonds linked to events , MLPs, REITs (in Singapore and Europe…), emerging and developed world stock markets and hedging.
The objective of the strategy is to produce returns of around 4% and an appreciation of capital of 2%, so that annualized returns can reach 6%, although, even though it offers yearly income, capital appreciation will depend on the environment. “We only distribute what we produce, we will not consume capital,” says the asset manager.
Behavioral Finances
In multi-assets, M&G presented a strategy with a very differentiated approach: “There are two factors that move the market, fundamentals and economic beliefs, and these latter perceptions tend to change very quickly. In fact, sometimes the fundamentals don’t change, but the economic beliefs do,” explains Christophe Machu, Convertibles and Multi-Assets manager at the company. “Most of the time investors try to see where the benefits are going and try to make projections, but for this, you need better tools than those of your competitors and it’s difficult and arrogant to predict this data. That is why we focus much more on economic beliefs and their changes, that is, on investors’ perception,” he adds. Following these parameters, at the end of last year, for example, when the discussion wasn’t about whether a recession was coming or not (it will obviously come within the next two years, says the asset manager), but when it would come, they decided to take a contrarian vision and bet on shares, increasing their position, not because of the fundamentals but because of the change in the beliefs of the investors: it was a very good entry point, buying both US and foreign shares.
Thus, the strategy combines a framework of valuations with behavioral finances (episodes, events…), with tactical hedging, to establish its asset allocation and exploit irrational behaviors. As an example of the latter, explains the manager, volatility spikes tend to create opportunities for investment, helping long-term returns. One episode, he explains, has three characteristics: a rapid action on price, focusing on a single story, and presenting a price movement inconsistent with information flows: “It’s an opportunity where prices move for non-fundamental reasons,” explains the asset manager. In this way, without making predictions, and recognizing the importance of emotions, the strategy has managed to work well in different scenarios and market cycles: In optimism from 2000 to 2003, in the technology bubble, during which they cut back on equities and bet on bonds, in the subsequent crisis, and in the next period of compression of yields and recovery, in which they bet and benefited from the rally in all the assets… “We are now at a stage of compression in the risk premium of the shares, which means that the gap between the yield of the shares and the bonds is too wide,” says the manager.
With respect to their market vision, taking advantage of the pessimism of the end of last year, they increased equities, although they have subsequently reduced positions, due to the normalization of investor sentiment. “The last big change now has been the Fed, which has paralyzed rate hikes. If real rates remain at zero levels in the US, it will be good for emerging bonds, which have not moved much yet, and for stocks, especially outside the US. (in Asia, Japan and Europe). From a tactical perspective it is not as good as in December but from a strategic perspective it is.
The M&G Dynamic Allocation fund has an exposure of 41.8% to global equities, which means an overweight position, although it has been reduced and is centered outside the US. In fixed income, the bet focuses on emerging debt and is negative on public debt. “We prefer to take risk in stocks on credit,” assures the manager, who remembers that they are not stock pickers, and that they can make changes in asset allocation very quickly with index futures.
Courtesy photo. Amundi Pioneer: Trump Does Have a Path to Reelection
Donald Trump is facing a challenging re-election but is by no means out according to Paresh J. Upadhyaya from Amundi Pioneer.
Trump’s overall approval rating is stable, but at a net -11, is quite low. Meanwhile political betting sites are placing better odds in a democratic win. Despite all of that, Upadhyaya points out that there have been cases, like with Reagan in 83, where despite a negative nine point net approval rating, there was a win.
Moreover, he believes that “Trump’s low net approval rating does not mean loss, specially since there are many battleground states for 2020”. In his opinion, and considering that there are currently 10 states with less than 5 points difference, the bulk of the game will be decided in Arizona, Iowa, Wisconsin, Michigan and Pennsylvania.
“The most likely scenario is democratic house, republican senate” says Upadhyaya who thinks democrats have early edge to retaining House while GOP in Senate.
Path to reelection
According to a Pew Poll, the issues likely to dominate voter’s agendas in 2020 will be economy and healthcare, followed by education, while global trade comes in last.
“With a strong economy and low unemployment, Trump does have a path to reelection,” he mentions adding that using the Abramowitz Time for Change model with today’s numbers instead of waiting for Q2 2020, Trump would get 49.9% of the popular vote. Currently, “all the measures look fenomenal… I do not expect a recession next year but what the yield curve is telling us is that the economy will slow down.” However, “Trumps approval rating for jobs and economy is rock solid.“ So as long as the economy remains growing and jobs continue at good levels Upadhyaya believes he has a good chance to remain in power.
Without an opposition candidate in place yet, Upadhyaya also thinks that Trump will look to position himself as “the lesser of two evils. The election will become a race to the bottom even quicker than 2016.” He concludes.
