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Ulrich Gerhard (Insight Investment): “It Is Important to Stick to the Investment Principles of the Strategy, Regardless of the Circumstances in the Market”

Ulrich Gerhard, Senior Portfolio Manager of High Yield at Insight Investment, a BNY Mellon company, started his career in the investment industry in 1997. This is to say that he has seen many cycles, including several recessions, and he has seen companies go bankrupt. Something that, in his view, has been proven to be very helpful when managing high yield portfolios.

He joined Insight Investment in September 2011, as a senior credit analyst within the Fixed Income Group and he became a portfolio manager in June 2012, being responsible for the BNY Mellon Global Short-Dated High Yield Bond Fund.

This strategy was moved to the BNY Mellon platform because Insight Investment realized that it could help investors who were one decade away of retirement to make a smooth transition from working income to pension income. Insight Investment had its own distribution capabilities among institutional clients, but it did not have the capillarity on retail and high net worth clients that BNY Mellon offered.

“This strategy was settled in Insight Investment in 2009 for pension fund clients. It has an absolute return target, aiming to provide Libor plus 200 basis points. It was designed to deliver a lower volatility than a traditional high yield strategy and it is better able to withstand spread widening. Nothing has changed since the strategy was created,” said Ulrich.

As for today, Insight’s fund investors are still involved in the strategy as well as some pension funds in Italy and Spain and some savings banks. Additionally, there are some investors in Thailand, Taiwan and Mainland China, which gives the strategy a very well diversified portfolio of investors

The investment philosophy

According to Ulrich, to be successful in the high yield market it’s important to stick to the investment principles of the strategy, following the same pattern repeatedly with the team of fixed income analysts, regardless of the circumstances in the market. That was their strategy during the fourth quarter of 2018, when many managers experimented a big fall in their portfolios because of their hunt for yield. “The strategy sold off in the fourth quarter, but it did not sell off as much as many others. The fund remains positive in US dollars, while a lot of our competitors went negative last year,” he explained.

“It targets more defensive short-dated securities because, when we look at the cash flows of the companies, any forecast over 3 years becomes foggy. We can not estimate how much money a company will earn in 3 years-time, because many things can change in this period, the company may acquire or divest a business. Given that I can have a good visibility of cash flows over the next two years, maybe it is pretty good idea to lend money to companies in that time frame.”

“There are 2.500 companies in the high yield market universe, we are invested in 85, because those are the only ones that meet our criteria at this moment. These criteria discern companies with a good business model from the rest. For that purpose, we use fundamental research and cash flow analysis. The company’s business model needs to be predictable and the CFO of the company needs to understand the risks of liquidity. Stock picking is the key. For us, macro is 10% and bottom-up approach is 90% of what gives value of the portfolio. Because even if we get our top-down right, if we are not able to select the good credit, we will lose money. As simple as that. If we do credit selection right and we avoid defaults, the strategy gets the entire credit yield of spread as income. Since the fund was launched in 2012, we have had credit losses of about 20 basis points, while the market has lost around 200 basis points, as the market experimented a 2,5% default rate last year. We normally invest in companies with single B rating, and we are very cautious on CCC rated companies, since they usually have a risky business model,” he added.

Slowdown, but not recession

Global economy’s growth is slowing down as the growth in China, the Euro Zone and United Kingdom is decelerating. However, Insight Investment expects growth to remain stable in the US, Japan and the main emerging markets (namely Brazil, Russia and India).

In the US, where a 2,4% GDP growth rate is foreseen, the main concern for the economy could be a sudden rise in interest rates, still, in Ulrich’s opinion, this is something very unlikely to happen in this year.

“If the Fed raised interest rates too sudden, it would affect the US Economy and the housing market, and the market will probably go into recession. But I do not think we are there. I do not think that the Fed is going to hike. As long as we invest in companies where a 1% rise in interest rates will not destroy their business model, we are not that concerned about the Fed’s moves because we don’t lend to companies that exist because of financial engineering,” he said.

European high yield

While the European high yield market denominated in sterling pound is totally illiquid at this moment, the European high yield market may have temporary liquidity, although it does not mean that the bonds can be bought and sold at the portfolio managers discretion. “When looking at the investment universe, for the most part, bonds tend to follow bell-shaped distributions, while the European high yield bond universe looks a bit like the back of a camel, you have one bump on the left and another in the right, the one in the left will probably default and the one on the right is already expensive, because everybody owns it. So, from that perspective, investing in US high yield is more attractive. It offers a much diverse universe,” he concluded.

Aberdeen Standard Investments: “Frontier Markets will Generate Good Returns: The Headwinds they Faced in 2018 Have Disappeared”

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Aberdeen Standard Investments: “Los mercados frontera van a generar buenos retornos: han desaparecido los vientos en contra de 2018” — Wikimedia CommonsKevin Daly. Courtesy photo. Aberdeen Standard Investments: "Frontier Markets will Generate Good Returns: The Headwinds they Faced in 2018 Have Disappeared"

Aberdeen Standard Investments currently manages 13 billion dollars in debt from emerging countries. Of these, 195 million come from its border market strategy, which has been underway since September 2013. “There are attractive profitability opportunities in this product by structuring a diversified portfolio of corporate and sovereign bonds in hard currency and debt in local currency,” states Kevin Daly, the asset management company’s Senior Investment Manager in emerging market debt.

In an interview with Funds Society, he assures that this approach allows them to minimize the risks of losses, as they were able to do in 2018, and, at the same time, capture the upside risks, as they forecast for 2019. In that regard, since the beginning of the year, Daly is convinced that the frontier markets will generate good returns during the coming months, since “the headwinds they faced in 2018 have disappeared,” such as the strong growth of the United States, the Fed’s harshness, and concerns about the commercial war.

Daly supports this with the performance of the Aberdeen Standard SICAV I – Frontier Markets Bond Fund, a sicav fund registered in Luxembourg. “So far, everything is going well: it has delivered returns of about 6% so far this year.” The fund obtained a gross negative return of -3.50% in 2018, outperforming the emerging general debt “and most other types of assets.” That figure rises to 8.12% if the average returns since the fund’s creation are taken into account.

The management company points out the short duration of this type of asset and of the fund, with an average of 3.4 years. The fund’s main attraction for investors lies in its ability to generate high revenues: its yield at maturity is 10.1%.

“We manage it with a total-return approach, without comparing ourselves with any reference index and we are committed to a diversified portfolio, which has generated attractive risk- adjusted returns since its creation,” the asset manager points out. According to his account, by not resorting to any reference index, they are not overweight or underweight in countries or regions “per se” but have an allocation limit of 10% per country and another 3% for corporate issuers.

Therefore, the positions of “greater conviction” are those that are around 5% and that, at present, would be countries like Egypt, Nigeria and Ecuador. Daly reveals that the first two provide double-digit returns with stable currencies. Ecuador, meanwhile, “is our strongest debt position in hard currency, as we believe that the country will benefit from the International Monetary Fund’s new support program.” In his opinion, this should help reduce its dependence on market financing.

As for the companies, he points out that there is “great value” in Nigeria and Ukraine. All in all, the portfolio is composed of 68% for debt in hard currency, 14% for corporate debt and 32% in debt in local currency, such as Egypt’s or Nigeria’s. Daly is convinced that the three assets offer attractive value.

The fund is also a good diversification option for Latin American investors who have local individual bonds. For Aberdeen Standard Investments, it can help reduce the volatility of their portfolios and, at the same time, continue to offer high performance.

When asked about the risks faced by these markets, he points out that the largest of them is “idiosyncratic risk”, since frontier bonds and their currencies have historically had a low correlation with US Treasury securities. “Addressing country risk is key to the performance” of this product, says Daly, who says there is an “information gap” when investing in frontier markets.

“Our experience investing in them, which requires continuous diligence and frequent trips to these countries, allows us to take advantage of that gap when it comes to structuring the portfolios,” he says.

Amundi will Cover Multi Asset Income at Funds Society’s 2019 Investments & Golf Summit

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The sixth edition of Funds Society’s Investments & Golf Summit will take place on May 6th-8th at the Streamsong Resort and Golf.

On May 7th, at the Investment day, participants will be able to take the opportunity to discuss about Global Markets as well as the latest portfolio management strategies and investment ideas from top-performing Asset Managers.

Amogst them is a Multi Asset Income talk by Europe’s largest asset manager, Amundi. To them, Multi Asset Income is a potential solution for investors seeking both an attractive level of income and capital appreciation as a secondary objective. “This asset class provides a new way to seek returns and manage risk in uncertain times.”

At the event, both portfolio manager Howard Weiss and sales SVP Thomas Johnston will be present.

As a member of the portfolio management team, Howard works on the implementation of the Fund’s investments, including asset allocation and security selection. In addition, Howard has extensive experience working on the Fund’s derivative structures. Howard joined Amundi Pioneer in 2007.

Johnston is responsible for the distribution of Amundi Pioneer’s UCIT product range in the US Offshore market.

For more information and/or to register for the Investments & Golf Summit 2019, follow this link.

Vanguard is Preparing to Launch its First Mexican Domiciled ETF

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Vanguard se prepara para lanzar su primer ETF domiciliado en México — Foto cedidaPhoto BIVA. Vanguard is Preparing to Launch its First Mexican Domiciled ETF

Vanguard is seeking approval from local regulators to launch its first Mexican‐domiciled ETF that will seek to track the FTSE BIVA Index, providing investors access to a broad Mexican equity exposure.

This ETF will be the first local investment vehicle launched by Vanguard in Mexico and will complement their current ETF suite of international ETFs cross‐listed in the Mexican International Quotation System.

“The launch of this ETF reinforces Vanguard’s long‐term commitment to the Mexican market. Mexican equities are an important asset class in local portfolios and we strongly believe an ETF structure will enable our clients to efficiently access the local equity market. This product is unique as it seeks to track an inclusive and diversified index while maintaining a strong liquidity profile. Given its inclusiveness, this ETF will best serve investors – from large pension plans to individual investors ‐‐ who are looking to take a long‐term strategic allocation in Mexico.” said Juan Hernandez, Country Manager Vanguard México.

“This is a very exciting time for BIVA, as we are fulfilling our objective of contributing to the promotion, growth and modernization of the Mexican stock market. Receiving Vanguard along with their first local ETF, represents a great honor and reinforces our commitment towards providing investors with innovative products, as well as giving them exposure to companies of all sizes, not just the large ones, but medium and small as well.” Said María Ariza CEO BIVA.

The FTSE BIVA Index is designed to reflect the performance of liquid Mexican companies. The benchmark currently provides an unbiased representation of the Mexican equity universe, including FIBRAS (local REITs). All Mexican equity securities listed in the country are considered, allowing for new issues to be included as the local equity universe expands over time. This enables smaller companies to be part of the index contributing to a broader market liquidity.

BIVA, which is part of CENCOR, is considered among the most advanced stock exchanges due to its technology provided by NASDAQ who powers more than 70 markets worldwide, providing state‐of‐the‐ art standards. Its flagship index FSTE BIVA offers a modern, inclusive and representative benchmark of the Mexican market, comprised by companies of all sizes.

Vanguard has been conducting business in Mexico for more than 10 years. In 2017, the firm opened its first office in Mexico City to better support the Mexican Investors.Vanguard currently offers more than 70 US‐domiciled and UCITS ETFs cross‐listed in Mexico, and is the second largest ETF manager in the country.

RWC Partners Will Talk About US Equities at the 2019 Investments & Golf Summit

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RWC Partners, an independent asset manager, will talk about US equities at the 2019 Investments & Golf Summit organized by Funds Society.

RWC’s team has invested long-short in US equities for over 16 years “and as fundamental stock pickers we look for investments that come from understanding changing company or industry dynamics. Our approach is based on a philosophy of protecting our client’s investment and patiently waiting for opportunities. Taking a long-short approach allows us to deliver a risk and return profile that is complementary to other assets including long-only US equity exposure.”

Managing its US Absolute Alpha Fund is Mike Corcell, Portfolio Manager, RWC US Equity. He joined RWC in 2009 to establish the US equity team, where he employs a similar approach to that which he successfully adopted in the past. Mike previously worked for SAC where he managed a US long/short equity fund based in London, and Threadneedle Investments. Mike joined Threadneedle in 2003 to launch and manage the US long/short “American Crescendo” strategy.

James Tollemache, who heads the RWC’s sales strategy wil also be present at the event, where on May 7th participants will be able to take the opportunity to discuss about Global Markets as well as the latest portfolio management strategies and investment ideas from top-performing Asset Managers.

Founded in 2000 and head quartered in London with 151 employees globally, RWC’s nine independent investment teams currently manage over 15 billion dollars on behalf of institutional and wholesale investors across the world. They specialise in providing strategies that enable their clients to invest in developed and emerging market equities, convertible bonds and income solutions that help them meet their long-term financial needs.

The sixth edition of Funds Society’s Investments & Golf Summit will take place on May 6th-8th at the Streamsong Resort and Golf. For more information and/or registration, follow this link.

Loomis Sayles’ Secret to Generating Alpha in Efficient Markets and Inflows in the Current Market

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Active investing has experienced large outflows during the last 6-7 years as investors have tilted towards ETFs and other index funds, which typically offer a way to get market exposure at far lower fees. The trend has been so strong that passive U.S. equity funds could soon overtake their active peers. However that is not the case for the Growth Equity Strategies team at Loomis Sayles, a Natixis affiliate, which has received over $25 billion dollars in the last 8 years. Their performance might be the reason of their popularity. How do they do it?

They are an active manager with a long-term, private equity approach to investing, that looks to invest in high-quality companies with secular, sustainable competitive advantages and profitable growth, “but we only want to buy them when they trade at a significant discount.” Says Hollie Briggs, vice-president and product manager at Loomis Sayles, in an interview with Funds Society.

Their process is not a normal one. With a bottom-up approach, each of their seven analysts looks at around five new names every year while also updating their, close to 150 names, library.

Briggs mentions that with around 2 months of research per new name, the analysts take a very deep dive into the company’s core. “Since we are dealing with public information, to have a different view you have to have a an independent insight.

In order to decide on a name to analyze, they start by looking at the global value chain analysis at each industry in order to identify the players that are generating the largest profits. Then they forget about the past and only look at what they think that is going to happen in order to create a 10-year forecast, taking into consideration the addressable market and growth expectations. With that in mind they look at what the present value should be, and act accordingly.

At Loomis Sayles, valuation drives timing. According to Briggs, “short term investors overreact to information” and when that happens, her team looks at the issue and asks key questions to see if the intrinsic value of the company changes on the long term. “We look at our models and reverse engineer what would have to be true for the value to be correct and if we disagree then we up our position.” She mentions.

In general, they prefer names that are current secular long-term drivers of growth, with high barriers to entry. Theirs is a long term game. One of their portfolio companies spent close to 5 years in their library and two years in the building its position phase.

Their team is also chosen carefully. In order to hire their last recruit the team went over 1200 resumes. More that what company the candidate has worked at or what school he or she went to, at Loomis Sayles they look for three main things: They want people that are passionate about investing, as well as independent thinkers that believe that their work is enhanced when they work as a team.

They need someone “that cannot be swayed by market consensus, because we are buying when everyone is selling it takes someone that is comfortable being different,” Hollie mentions, adding that at Loomis Sayles, in order to add a name to the portfolio there also has to be a team discussion. Analysts there are a true team, not competing with each other but with other asset managers since compensation there does not depend on how well each analysts’ names perform in the portfolio, but according to Hollie, on a single number “and that is TOTAL portfolio performance.” She concludes.

FlexFunds Appoints Alex Contreras as Head of Global Sales

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FlexFunds has recently announced the appointment of Alex Contreras as Head of Global Sales.

“Alex is in charge of leading new business development, has been a pioneer in developing business strategies addressed to strengthening growth in every market where FlexFunds is present, as well as consolidating the relationship with current clients. He is also in charge of providing support to the offices located in the Americas, Asia and Europe, and supporting the project for the opening of new locations worldwide, in line with FlexFunds’ sustained growth.” Said the company in a press release.

Before joining FlexFunds, Alex had multiple responsibilities, not only in driving the overall performance of the business units in which he was involved, but also in ventures in the US. He has experience in several areas, such as real estate, financial and mortgage services as well as international banking in renowned companies, such as Blackhawk Capital Group and UBS.

“Alex’s contribution within FlexFunds’ structure is essential to support the company’s business strategy and the development of our vision to be positioned as a world leader in asset securitization. We count on his valuable experience in leading and developing business to conduct the implementation of our global expansion strategy,” said Mario Rivero, CEO of FlexFunds.

He got his degree of Bachelor in Economics and Business at UCLA and has an MBA from the UCLA Anderson School of Management in Los Angeles, USA.

The Fed Will Stop Reducing its Balance in September

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La Fed dejará de reducir los activos en su balance a finales de septiembre — Wikimedia CommonsPhoto: koka_sexton. The Fed Will Stop Reducing its Balance in September

The Federal Reserve on Wednesday left rates unchanged and lowered its economic forecasts. Moving from a 2.3% GDP growth estimate to a 2.1%, as well as upping unemployment numbers from 3.5% to the still low 3.7%. It also signaled it was done hiking rates for the year.

“Growth is slowing somewhat more than expected,” Fed Chair Jerome H. Powell said at a news conference. “While the U.S. economy showed little evidence of a slowdown through the end of 2018, the limited data we have so far this year have been somewhat more mixed.”

Most importantly, the Fed also announced it would stop reducing its balance by September.

According to Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income: “The Committee also re-iterated its intention to run a larger balance sheet going forward than previously assumed, which we would agree with. That approach is more sensitive to the banking and broader financial system, which arguably has become a much larger part of the economy than ever before, but this is not necessarily a dangerous dynamic at all. It just requires regulation and moderate policy adjustment over long periods of time. Reducing mortgage holdings as part of the balance sheet adjustment and running a shorter weighted-average maturity of its Treasury holdings allows the Fed to run a larger balance sheet, but with less duration and a less “credit-heavy” character over time.”

LatAm Institutional Investors Embrace ETFs As Instrument Of Choice For Volatile Times

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Los inversionistas internacionales de América Latina apuestan por los ETFs — Wikimedia CommonsPhoto: Steven Depolo. LatAm Institutional Investors Embrace ETFs As Instrument Of Choice For Volatile Times

Latin American institutions continue to adopt ETFs at record levels according to the third annual Latin American Exchange-Traded Funds Study from Greenwich Associates, with ETF allocation now 18% of total assets in 2018. This is up from 13% in 2017 and just 8% in 2016.

The Greenwich Associates study, entitled “ETFs: Instruments of Choice for Latin American Portfolios” surveyed 50 institutional investors throughout Latin America on how they are utilizing and implementing ETFs within their portfolios. Latin American institutions are applying the funds to a growing list of applications across asset classes, resulting in ETFs becoming more mainstream components of investor’s portfolios.

Several trends are contributing to that growth:

Risk management: Latin American institutions view risk management as their top priority for the year ahead, with approximately 70% of study respondents name “managing risk-return that is in line with objectives/outcome” as their primary 2019 objective. Latin American institutions are increasingly using ETFs to strategically and tactically position their portfolios against the looming risk of trade wars, economic recession and renewed market volatility.
Rise of indexing: Like their counterparts in the United States, Europe and Asia, Latin American institutions continue to move assets from active management to index strategies. In fact, 88% of study participants named ETFs as their preferred wrapper for index exposures and 45% have used ETFs to replace other vehicles, primarily active mutual funds and individual stocks. This transition of portfolio assets remains one of the biggest and most consistent sources of ETF demand.
Strategic Exposures: Latin American institutions continue to adopt ETFs for strategic purposes such as exposure to fixed-income, international diversification, and tax efficiency—with the last achieved through the use of European UCITS due to preferential withholding or estate tax rates for non-U.S. investors. 68% of respondent institutions label ETFs as strategic, with 40% of respondents reporting average ETF holding periods of longer than one year.
Appetite for Smart Beta: ETFs have also emerged as institutions’ vehicle of choice for smart beta strategies. Sustained appetite for factor-based approaches could actually accelerate demand for ETFs in 2019. More than 60% of current investors in smart beta ETFs plan to increase allocations to the funds in the coming year. This increase is partly being driven by more sophisticated use of factor-based strategies. 57% of institutions report having developed investment views on specific factors that they want to implement in their portfolios, and can do so using ETFs.

“As these and other developments make ETFs more mainstream components of institutional portfolios, Latin American institutions are applying the funds to a growing list of applications across asset classes,” says Greenwich Associates Managing Director Andrew McCollum and author of Repositioning Portfolios, Latin American Institutions Up Their Use of ETFs. “This proliferation of uses is fueling fast expansion—especially in equity portfolios, where half of current ETF investors are planning to expand allocations in 2019, with many of these institutions anticipating increases in excess of 10%.”

“The ETF discussion is no longer about active versus passive, it is about making active investment decisions utilizing ETFs. What we are seeing today around the world and in Latin America are active investors using ETFs as efficient building blocks for their active portfolios. We are also seeing increased interest and understanding from investors about the importance of diversifying their portfolios and gaining a larger exposure to international markets.” says Nicolas Gomez, Head of iShares for Latin America.

BigSur Partners’ Event with Aswath Damodaran: A Total Success

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Todo un éxito, la jornada de BigSur Partners con Aswath Damodaran — Wikimedia CommonsIgnacio Pakciarz, Aswath Damodaran, & Jerry Cohen. BigSur Partners' Event with Aswath Damodaran: A Total Success

BigSur Partners – a global investment and wealth management company headquartered in South Florida with more than $1B in assets under management and a provider of investment advising services throughout Latin America, the United States and globally – alongside NYU Stern School of Business, welcomed more than 100 business executives, community leaders, clients and NYU alumni to the private conference with “Wall Street’s Dean of Valuation” NYU Stern Professor Aswath Damodaran, at the East Miami Hotel in Brickell Avenue, Miami Florida.

During his presentation, Damodaran spoke on equity valuation and strategies that lead to increased investment sentiment for successes in business. Discussing topics from his recent book, Narrative and Numbers: The Value of Stories in Business, as well as giving meaningful insight to investor sentiment.

Ignacio Pakciarz, Founding Partner and CEO at Bigsur Partners, as well as Stern Board of Overseers member told Funds Society: “We were delighted to see so many guests from BigSur and from NYU Stern. We are also very honored to have Professor Damodaran as our main speaker; his views on valuation are truly compelling: an asset’s value is based not only on metrics, but also on its story! We hope we can host many successful events like this one in the future, where we can share ideas from leaders, experts, and academics across different sectors and industries with our community.”

The BigSur Event Series was created with the goal of finding the best ideas in academia, industry experts, leading family offices and other counterparts interested in financial markets to present to the firm’s valued clients for ongoing industry insights.