Aberdeen Standard Investments: “Our Multi-Asset Strategy Allows Us To Add Value Through Diversification”

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Aberdeen Standard Investments: “Nuestra estrategia multiactivos permite sumar valor a través de la diversificación”
Pixabay CC0 Public Domain. Aberdeen Standard Investments: “Our Multi-Asset Strategy Allows Us To Add Value Through Diversification”

Given the current valuations, investors in traditional asset classes face a challenging environment for medium-term returns and available profitability. In addition, the most likely scenario is that volatility and the periods of stress experienced by the market in 2018 will continue this year. This is the vision of Aberdeen Standard Investments (ASI), which, in this situation, is committed to a flexible multi-asset solution that “adds value” through diversification.

This strategy is structured through the Aberdeen Standard SICAV I – Diversified Income Fund, a fund that invests in emerging debt (27.5%), listed equity (20%), infrastructure (11.2%) property (9.2%), high yield bonds, loans and litigation, among other asset classes. “The breadth of this universe allows us to fully harness the benefits of diversification and provides a solid foundation for delivering the strategy’s objectives,” says Becky Nichols, Multi Asset Specialist of ASI, in an interview with Funds Society.
 

By not being tied to a specific index nor forced to hold investments that they regard unattractive, the fund allows for “unconstrained and flexible” asset allocation. And it’s that flexibility which allows them to “add value by rotating asset allocation”, increasing the exposure of those offering better returns and reducing or selling those that are less attractively valued. This also enables them to provide some downside protection in times of stress.

The fund’s approach is to seek fundamentally attractive long-term investments through exposure to a wide variety of products, as, while the attractiveness of an asset may vary depending on the moment of the market cycle, the attraction of diversification “persists.”

With this in mind, the management company uses five-year return and risk estimates, they then refine them with the fund’s specific holdings and, finally, combine them with the volatility and correlation estimates.

All this incorporates qualitative judgement that includes capturing prospective risks and pragmatic issues that the process cannot incorporate (such as liquidity risk) and assessment of niche opportunities. “At the end of the process, we have a basic vision of where we believe the world is going, the implications for investment returns for the broad range of assets, and the indicative portfolios that result to achieve the fund’s objective,” says Nichols.

Their core belief is that there are several asset classes with attractive return prospects, but different return drivers, so that by combining them, returns can be more attractive than those of an isolated asset class. “It’s a robust approach in differing market conditions,” she adds before pointing out that a key aspect of this philosophy is the asset manager’s ability to “identify and access a broad range of asset classes in a liquid form.”

All in all, it’s a multi-asset solution for long-term investors looking to obtain a high, but sustainable, annual return combined with capital growth. The objective is to obtain volatility well below that of equities and a return of 4.5% per annum, which was reached in 2018.

The portfolio is fully global, but they are currently finding opportunities in emerging market bonds in local currency, mainly due to the attractive nominal and real yields they offer compared to developed countries. This is supported by cheap valuations of currencies and “decent” underlying fundamentals.

According to Nichols, the overall economic outlook for emerging markets is positive, as most are growing at a solid although unspectacular pace and inflation is under control, which supports investors’ optimism. She maintains that one of the risks is that the Chinese economy “will slow down significantly in the coming years, which would generate stress for those emerging governments which are more China-exposed”.

Another potential source of risk is, in his opinion, Donald Trump’s administration and economic policy, due to both possible protectionist measures and the fact that his fiscal and migratory policies may result in a stronger dollar, which would lead to a depreciation of the emerging currency.

Monica Mavignier and Alessandro Merjam Join HSBC in Miami

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Monica Mavignier and Alessandro Merjam Join HSBC in Miami
Alessandro Merjam, photo Linkedin. Monica Mavignier and Alessandro Merjam Join HSBC in Miami

HSBC Private Banking continues to strengthen its team serving Latin American clients from the United States. As confirmed to Funds Society, Monica Mavignier and Alessandro Merjam have joined the team led by George Moscoso.

“We are strongly committed to our clients based in Brazil, one of our four core markets in Latin America. As a key part of our growth strategy, we are investing in this team and are excited to welcome Alessandro Merjam and Monica Mavignier. We are focused on adding talent and building the best team to serve ultra-high net worth individuals and family offices based in Brazil.”

Moscoso, who last April became the leader of HSBC Private Banking for Latin America and the Southeast of the US, is tasked with growing the bank in LatAm, focusing its efforts in their four main markets: Brazil, Mexico, Argentina and Chile, as well as the southeastern United States.

Since his appointment, he has hired Samir Ahmad to serve Mexican clients from the New York office, as well as Mavignier and Merjam to serve Brazilian clients from Miami.

According to Joe Abruzzo, Regional Head of HSBC Global Private Banking, Americas: “We have been investing in professionals with the unique talent to serve ultra-high net worth families from our core Latin American markets. Samir complements this team well and is a good example of the talent we will continue to add.”

Merjam comes from Itaú Private Bank in Miami and has more than 20 years of experience in asset management. Mavignier worked for a month at Morgan Stanley before joining HSBC, previously she was with Wells Fargo and has more than 10 years of experience in the asset management industry. Ahmad who before joining HSBC was at JPMorgan has more than 22 years of private banking and wealth management experience.

Katch Investment Group: A Rising Private Debt Boutique

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In the 10 years following the global financial crisis, the liquidity injections of major central banks have inflated traditional asset classes, particularly in the fixed income markets, thus decreasing the profitability of investors. Additionally, new regulations have reduced the willingness and ability of banks to lend to smaller businesses.

In response to those trends, Katch Investment Group, -a dynamic asset management boutique offering innovative tailor-made investment solutions-, focuses on short-term lending and financing opportunities within the private debt universe. In a constantly changing and challenging financial market environment, Katch Investment specializes in areas where capital supply is scarce that offer relatively high and stable returns for investors.

Who is Katch Investment Group?

The group combines in- depth financial market knowhow, asset management experience and strong analytical skills, with a deep understanding of the needs and tastes of private investors, particularly in Latin America. The group focuses on global opportunities, without any restriction, providing greater diversification and allowing greater potential to offer high returns.

The group is owned and managed by Laurent Jeanmart, Chairman, Stephane Prigent, Chief Executive Officer, and Pascal Rohner, Chief Investment Officer. All three hold the Chartered Financial Analyst accreditation, considered one of the most respected credentials within the financial industry.

As the chairman of the group, Laurent is responsible for the sourcing of new ideas, new business initiatives, due diligence of asset managers and the creation of strategic partnerships across the globe. Laurent is based in London, one of the most important financial centers in the world. He has more than 20 years of investment experience in alternative asset management. Laurent’s previous experiences include responsibilities at Fidelis Insurance Holdings Ltd., a London and Bermuda based insurance company where he was Group Chief Investment Officer managing $1.5 billion of assets. Previously, he was Global Head of Investment at Platinum Capital Management Ltd., a global asset management platform, where his responsibilities included overseeing the firm’s actively managed funds (hedge funds, equities, volatility, and commodities).

Stephane is the CEO of the group and therefore responsible for all day-to-day operations and the distribution. He has more than 20 years of experience in asset management in several locations around the world: Paris, Boston, NYC, London, and Panama City. He has worked in several banks, such as BNP Paribas, Lehman Brothers, State Street Capital, and Credit Andorra. His focus has been on the construction and management of portfolios for clients with a focus on alternative investments. In his previous experience at State Street London, Stephane was a Managing Director in his Global Head of Equity Sales Research position. He was a member of the European executive committee and oversaw 25 people located in New York City, London, and Hong Kong.

Finally, as the Chief Investment Officer, Pascal is responsible for the investment strategy, portfolio management, marketing and investment advisory for financial intermediaries. Pascal has more than 16 years of experience in financial market research, portfolio management, and investment advisory. He worked several years as a financial analyst, strategist and investment advisor for Credit Suisse in Zurich, New York and Panama. Before joining Katch Investment Group, he was the Chief Investment Officer of Credit Andorra and its Multi Family Office, Private Investment Management in Panama.

Pascal highlighted: “I have been working with private clients and advisors in Latina America for the last 7 years. Latin Americans tend to have a very conservative investment approach for their family savings, with a focus on wealth preservation and liquidity. However, they tend to take too much risk within their fixed income portfolios, because safe bonds don’t pay enough to cover inflation and the bankers’ commissions. And maybe they do not have enough time to analyze alternative solutions”.

“Speaking to institutional and private clients in the region, we noticed that there is a huge, unmet demand for relatively safe fixed income alternatives. That’s why we started to explore the whole investment universe to find conservative investment opportunities that can provide liquidity, income and stable returns, that are not correlated to traditional asset classes,” he added.

The backdrop

The investment environment is challenging around the globe, not only in Latin America. Equities are reaching the final phase of the bull market that is characterized by high volatility on the back of trade war and recession fears. And the safer fixed income areas, such as US Treasuries offer protection but little value after the recent drop in yields. Therefore, many investors and advisors have started to focus more on alternative asset classes, an area that has long been little explored by private investors, especially in Latin America.

The problem is that many alternative assets are structurally unattractive. Commercial Real Estate is challenged by a strong trend towards online shopping and the rise of the “sharing” economy with big disruptions coming from innovative companies such as Amazon and Airbnb. Commodities are negatively affected by the trends towards alternative sources of energy, car sharing and China’s transformation from an export- and infrastructure-driven economy towards high-tech and domestic consumption. Finally, many hedge funds still suffer from the lack of transparency, the high complexity and image problems due to investors’ bad experiences in the past. Also, the 7% drop of the HFRI Hedge Fund Index in 2018 illustrates that many hedge funds remain highly correlated to other liquid assets, such as bonds and equities that had a very bad performance too last year.

The good news is that there is a new, emerging asset class that offers the most attractive risk/reward profile for investors, that is called Private Debt. The asset class started to flourish after the Great Financial Crisis. New regulations have reduced the banks’ desire and capability to lend to the real economy, especially to smaller businesses. Instead, banks helped to inflate the government bond market in their effort to accumulate reserves and strengthen their capital base.

The banks’ retreat from the loan market has left a gap that private institutions, such as private equity firms and other asset managers, have been eager to bridge. They have filled the lending vacuum to provide crucial financing to the real economy – and particularly to small and medium-sized enterprises, the backbone of our economies. Newly created investment vehicles have attracted substantial interest from institutional investors hungry for yield.

Following the financial crisis, the massive monetary stimulus has inflated the price of liquid assets, especially in fixed income markets, depressing yields for investors. At the same time, the lack of capital provided to smaller companies has kept yields for smaller loans at elevated levels. Typically, private loans pay interest rates between 5% and 15% without leverage, based upon a floating base rate (LIBOR) with very low market volatility (standard deviations below 2%). In addition, strong collaterals, personal guarantees, and relatively low nominal amounts favor low delinquency.

In summary, private lending funds generate attractive and stable returns for investors, with low volatility and low correlation to traditional asset classes. Katch Investment Group identified these trends and decided to launch open-ended investment vehicles that invest in short-term lending and financing opportunities.

 

Gregory Johnsen (MFS IM): “Valuation Looks Attractive for Emerging Markets Equity Relative to US Equity Market and Fundamentals Have Considerably Improved”

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The allocation to emerging market equity in global portfolios is becoming more strategic than ever. The MSCI All Country World Index has now around 10% to 12% in weight to the emerging markets. Global equity portfolios should consider having an allocation to emerging markets.

Since the global financial crisis, there has been an increasing gap between the Shiller P/E ratios in the US equity market and the Shiller P/E ratios in the emerging market equity. While the US Shiller P/E is currently about 32,5 x, the EM Shiller P/E is around 11 x. This gap in valuation could be explained by a period of over earnings in US companies and a period of under earnings in EM companies.  

While the regular price-earnings (P/E) ratio provides information about the valuation of a company by measuring its current share price relative to its per-share earnings, considering the previous year’s earnings or the forward-looking earnings on next year, the cyclically adjusted P/E or Shiller P/E is defined as current share price divided by the average of ten years of earnings adjusted for inflation.   

On the other hand, the free cash flow yield and other indicators of quality in fundamentals have considerably improved in emerging market equity relative to the same metrics in developed markets. “Looking at different periods of time in the last 20 years, we can see that the fundamentals of the emerging market equity have improved. Returns on assets and returns on invested capital are significantly looking better, especially when they are compared with the data of the year 2000, 2015 and more recently 2018. The asset class is getting more attractive levels in its fundamental metrics at good valuations. At this point in time, investors are getting a good dividend yield and the free cash flow yield is also more attractive from a valuation perspective”, explained Gregory Johnsen, Institutional Portfolio Manager at MFS Investment Management.

In the last two decades, the investment in infrastructure and property, plant and equipment in emerging markets relative to sales, the CAPEX/Sales ex-Financials ratio, has been higher in emerging market equity than the average in developed markets, ranging from 5% to 8%. However, in the last two years, the CAPEX to sales ratio in emerging markets has started to decline, this fact can be explained by an upward trend in net profit margin. “Once the CAPEX has been made, then the cost of goods sold starts to decline, allowing for greater profit margins, all things been equal. That is the sort of trend that is occurring in general in the emerging market index. From that perspective, there are some attractive metrics in the asset class”, he added. 

Long-term capital market expectations

According to MFS IM, the 10-year expected annualized return in emerging market equity is about 9,2%, that compares to roughly a 4,8% in global equity, showing one of the higher perspectives in terms of returns among asset classes. These higher expected returns are backed by a real sales growth estimate of 3,4%, based on the investment theme that consumer spending power is growing in emerging markets and brings the potential for sales growth.

“There is a discussion in the market about whether profit margin is peaking in the US equity market or in the global equity markets. Maybe, there is a chance that there would be a reversion to the mean in these markets. Different consultant groups that do their own capital market assumptions see a similar type of outcome in emerging market equity, where this asset class tends to be higher in return, but obviously higher in risk than the other asset classes”, said Johnsen.

Emerging market fundamentals

Emerging market public finances remain relatively strong despite fiscal weakening in some countries. Historically, public debt as a percentage of GDP has been in most emerging countries lower than in developed markets, operating in the 40% to 50% range versus the range over 100% in which developed markets operate.  

Another way to look at the improvement of fundamentals in emerging markets is to analyze the real interest rate and the current account balances of the “fragile five” countries. The fragile five refers to Brazil, Indonesia, India, Turkey and South Africa, countries which produced weak economic and currency data back in 2013, when there was the “taper tantrum” episode.

“The Federal Reserve started talking about bringing interest rates up in the US on the second quarter of 2013, when the countries with the higher current account deficit conditions were highlighted to be potentially susceptible to higher interest rates in the US. Today, these countries have lower current account deficits and offer higher real interest rates, they are in better shape in terms of that metrics that back in 2013” he added. 

Margaret Franklin Becomes First Woman to Lead the CFA Institute

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Margaret Franklin se convierte en la primera mujer en liderar el CFA Institute
Margaret Franklin, courtesy photo. Margaret Franklin Becomes First Woman to Lead the CFA Institute

CFA Institute, the global association of investment professionals, has appointed Margaret Franklin, CFA, as its new CEO and President, the first woman to hold the position in its 73-year history. She will assume the role on September 2, 2019, taking over from Paul Smith.

Marg Franklin has been a leader in the investment management industry for 28 years, most recently as President of BNY Mellon Wealth Management in Canada and head of International Wealth Management in North America. Her deep practitioner experience has been gained at firms ranging from large, global asset managers to start ups, including Marret Private Wealth, State Street Global Advisors and Barclays Global Investors. Her work has included advising individuals, families, pension plans, endowments, foundations and government agencies.

Marg’s experience with CFA Institute also runs deep. In 2011, Ms. Franklin was chair of the Board of Governors of CFA Institute, which is a volunteer position, and is a member of CFA Society Toronto, where she has also served on its board. She is a founding member of the CFA Institute Women in Investment Initiative, a past recipient of its Alfred C. Morley Distinguished Service Award in 2014, and a member of its Future of Finance Content Council.

Franklin said: “I am honored to assume the leadership of CFA Institute whose mission to promote the highest standards of ethics, education, and professional excellence is more important than ever as our industry faces disruption from many quarters. I look forward to applying my wide-ranging experience as a practitioner and extensive knowledge of the organization in the service of its mission and members.”

“Marg joins CFA Institute at a time when candidate growth and our global society network are at all-time highs,” said Heather Brilliant, CFA, chair of the board of governors of CFA Institute. “We thank Paul for his work to promote the CFA charter and fair and functioning markets all over the world. He leaves a strong organization ready to address the challenges of markets and economies in flux, passing the baton to Marg Franklin, a proven leader.”

Franklin will join the organization on September 2. Smith, who previously announced his departure at the end of 2019, will remain in an advisory capacity to the CEO until December 31, 2019.

Nations and Corporations can Address Climate Change by Transferring Weather Risks to Investors

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Nations and Corporations can Address Climate Change by Transferring Weather Risks to Investors
Foto: Tumisu. Las naciones y corporaciones pueden abordar el cambio climático transfiriendo sus riesgos a los inversionistas

A new report examines how public and private entities, including those in developing nations, are mitigating the financial impacts of extreme weather events and supporting climate change adaptation by transferring risk to private insurance and capital markets.

“Using Risk Transfer to Achieve Climate Change Resilience” is one of the first reports to comprehensively examine how governments, water utilities, transit agencies, corporations and small farmers are using risk transfer instruments—such as catastrophe bonds and weather risk transfer contracts—to adapt to climate change. The report discusses opportunities to expand the use of risk transfer for adaptation and details key challenges in this still emergent market.

The report provides three key takeaways:

  1. With support from development banks and donor countries, many developing nations are incorporating risk transfer into their adaptation strategies. Buyers range from sovereign governments such as Mexico and the Philippines that have secured hundreds of millions of dollars in protection annually, to small farmers in Kenya, Senegal and other African countries who are becoming more resilient to climate risks by purchasing small insurance policies. Yet, the report finds that many public and private entities still require subsidies from donor countries, and that the use of risk transfer is constrained in some regions by lack of weather data. The report explores solutions including new business models for risk transfer, cost-sharing strategies and advances in remote sensing and weather data analytics.
  2. More infrastructure managers are using risk transfer. Public infrastructure organizations, such as water utilities and transit agencies, are particularly susceptible to extreme weather events such as droughts, wildfires, severe storms and floods. As a result, some are on the leading edge of using catastrophe and weather risk transfer instruments to reduce their risk exposure. For example, since Hurricane Sandy, Amtrak and the New York Metropolitan Transit Agency have purchased hundreds of millions of dollars in catastrophe protection to mitigate their risks from flooding. This report examines the opportunities and challenges to transit agencies and water utilities seeking to use risk transfer to improve their resilience to extreme weather and climate change.
  3. Many corporations are considering risk transfer for climate change adaptation. Many publicly held corporations are being asked by regulators and investors to assess, disclose and mitigate the climate change risks that could negatively impact their earnings and long-term growth. The report explores how corporations in a wide range of industry sectors could mitigate their climate risks with weather risk transfer contracts—a strategy already in use by corporations in highly weather-sensitive industries such as energy and agriculture. A recent example occurred in Australia, where agribusiness GrainCorp announced in April 2019 that it would transfer weather risks to reinsurance investors in order to reduce the impacts of volatile weather on earnings.

“Using Risk Transfer to Achieve Climate Change Resilience” fills a knowledge gap in the increasingly urgent public dialogue around weather and catastrophe risk in a world with a changing climate.  So far, media coverage of this topic has largely missed a key strategic consideration for addressing climate change: risk transfer,” said Barney Schauble, chairman of Nephila Climate. “Innovative weather and catastrophe risk transfer coverage mechanisms have evolved over the last 20 years and are now viable tools for confronting climate change in both developing and mature economies.”

Sponsored by Nephila and written by Jim Hight, an independent environmental journalist and communications consultant, the report draws on published research and interviews from development organizations, insurers and reinsurers, catastrophe risk modelers, weather and climate risk analysts, climate change consultants, transit agencies, water utility associations and others.

Nephila sponsored the report in order to provide a thorough examination of the opportunities and challenges to using weather and catastrophe risk transfer mechanisms to support climate change adaptation. Nephila is a pioneer in creating weather risk transfer vehicles and today is the largest investment manager in that market.

Download the report here.
 

Block Asset Management Believes Portfolios Should Hold Crypto Assets

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The emergence of the Crypto asset class has been largely driven by the increasing awareness amongst investors that Crypto assets are indeed a credible alternative to fiat currencies, as they allow for more efficient payments at virtually no cost but also create significant operational cost savings and efficiencies for ownership updates and verification purposes. 

While doubts clearly arose earlier this year due to the collapse of crypto asset prices, the confirmation that several high profile projects would be implemented by leading banks such as JP Morgan or social network giants such as Facebook (and many others) confirmed the view that cryptos are here to stay, and are going to become the back-bone of the financial and e-commerce sectors, thus favouring a major adoption from market participants over the next couple of years.

The emergence of crypto asset class is not a random event.

It is the result, in Block Asset Management’s opinion, of global imbalances building-up and accelerating since the last financial crisis. Global Private debt has sky-rocketed while the major Central banks have been happy to keep interest rates at generational lows, supporting the expansion of monetary basis aggregates way beyond economic output. Such a behaviour has no precedent, at least at this scale. As a consequence, Global market debt has grown over 250 trillions, setting global debt/GDP ratio at levels above 300%, a threshold which is clearly not sustainable in the long run. “It is therefore likely that existing debts will never be paid back or paid in worthless fiat currency, which in the end is equivalent to a significant loss of value (lower purchasing power). Countries such as Argentina provide a clear roadmap of what follows next: investors are harmed, savings are lost, the economy is disrupted, and capital controls are implemented. In this environment, alternative investments such as Gold or Silver tend to outperform,” they mention.

Do Precious metals really provide an effective hedge in this environment?

Precious metals tend to benefit from market/economic shocks, since they have tangible value and a limited output as well. However, they cannot be used for payments, leaving them highly vulnerable to any lasting liquidity event. Precious metals are not cash. You cannot pay for services in Gold or Silver. The cost of holding Precious Metals is high too. While clearly able to capitalize on a liquidity crisis in its early stages, Precious metals do not prove to be a reliable safe-haven during lasting a liquidity crisis. Indeed, they might be the last investments to be sold to raise cash. This is exactly what happened during the last crisis.

During liquidity crisis, cash is king… but Cash loses real value in the long term or when central banks step in to increase liquidity. And monetization destroys cash value’s in the long run.
That is where Crypto assets are unique and enhance a portfolio risk/return profile. They combine safe haven benefits (like Precious Metals) but also provide its users with liquidity. Contrary to Precious Metals, Crypto assets can be used to purchase real good and services or proceed with transfers of money at laser speed. And Crypto assets’ trend has been positive in the long run (due to crypto assets adoption

Therefore, how to get a smart exposure to Crypto assets?

While some investors might just find it convenient to use crypto exchanges to invest directly in single crypto assets, the amount lost on several platforms (due to cryptos being hacked an stolen) or the disappearance of several cryptos suggests that a single investment is very risky compared to investments in more traditional asset classes. In other words, aiming at reducing tail risk (in case of liquidity crisis) while having its capital at risk does not make sense.

For those reasons, Block Asset Management has created several investment eligible solutions for investors willing to build exposure and diversifying into crypto, but wary of losing their capital (crypto assets being hacked or a single crypto asset/fund manager going bust).

Block Asset Management is now managing several investment products that address those concerns. The flagship Blockchain Strategies Fund offers exposure to the world’ s first fund of funds. The Block Asset Management Actively managed certificate offers simple and direct exposure to the Blockchain Strategies Fund through a note that can be purchased more easily via a brokerage account.

Pivotal Planning Group Joins Dynasty Financial Partners

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Dynasty Financial Partners announced that they have partnered with leading independent advisory firm Pivotal Planning Group.  Based on Long Island, NY and in Norfolk, Virginia, Pivotal Planning Group, manages $275 million in individual and 401(k) assets.

Pivotal Planning Group, has a total of seven professionals including four advisers:

John Marchisotta, CFP®, ChFC, AIFA® is the Managing Partner of Pivotal Planning Group, LLC. He has over 25 years of experience providing Personal Financial Planning & Investment advice to families and Retirement Plan Consulting services to the Trustees of retirement plans. He began his career as a tax accountant with the firm’s Parent Company, Satty, Levine & Ciacco, CPAs, P.C. in 1991. Mr. Marchisotta is the Chairman of the firm’s Investment Policy Committee.

Michael Kelly, CFP® is the Director of the Firm’s Norfolk, VA Office. He is a Senior Financial Adviser & member of the Firm’s Investment Policy Committee. 

Michael J. Desmond CIMA®, AIF®  is The Director of the Firms Retirement Plan Services Division. He is a Senior Financial Adviser & member of the Firm’s Investment Policy Committee. 

James P. Diver, CFP® is the Director of Technology and Operations at the firm.  He is a Senior Financial Planner, Investment Adviser & member of the Firm’s Investment Policy Committee.

“The need for unbiased advice across the country has grown significantly and both clients and advisors need a solution that is free from conflict and is based on always placing the clients’ best interests first,’” according to Mr. Marchisotta. “We selected Dynasty to tap their industry expertise and leverage the size and scale of their multi-billion dollar network of independent firms.  Our clients receive all the benefits of a large institution with a boutique client experience. We continue to improve the advice we provide with access to institutional solutions for technology, investments and back office operations.”

According to a press release, Pivotal Planning Group plans to expand their footprint via strategic acquisitions with like-minded advisors. In addition, the firm plans to open a Florida office later this year and, over the next five years, continue the expansion with multiple new offices. 

Pivotal Planning Group has been a fiduciary advisory firm for nearly 20 years. The firm has two distinct service groups: 

  • One group serves high net-worth families seeking comprehensive financial planning and investment management including retirement planning, tax planning, cash flow planning, estate planning, risk management and family office services. 
  • The other group serves small to mid-sized businesses with less than 1000 employees where Pivotal acts as a fiduciary advisor to their company retirement plan. 

Shirl Penney, CEO of Dynasty Financial Partners, said, “With their long experience as a successful independent advisory firm and their deep expertise in tax planning and 401(k) plans, John and the team at Pivotal Planning Group are well positioned to scale their business, expand their 401k consulting and grow through M&A.  We welcome them to the Dynasty Network!”

Pivotal Planning Group, LLC is a SEC Registered Investment Advisor and Fiduciary to 401(k) and Retirement Plans. The firm is dedicated to helping individuals, plan sponsors and trustees achieve their goals through education, prudent planning and unbiased advice.  Pivotal Planning Group, LLC was originally formed in 2000 to provide Financial Planning & Investment Advisory Services to the clients of Satty, Levine & Ciacco, CPAs, P.C. (SL&C).

On June 1st, Pivotal Planning Group moved its headquarters to 534 Broadhollow Road in Melville, NY.   Pivotal Planning Group has partnered with Dynasty Financial Partners to leverage Dynasty’s wealth management services, people and leading technology.  The firm will be using Dynasty’s award-winning integrated Core Services platform for independent advisors and the firm’s turn key asset management platform (TAMP).  They will have access to leading technology, including Dynasty’s proprietary advisor desktop, in-house specialists, home office support, and will benefit from the firm’s significant scale in the industry.

Among its other resource partners, Pivotal Planning Group, LLC has selected Schwab to provide custody services for its clients’ assets and Black Diamond for consolidated asset and performance reporting.

Legg Mason and Actinver Announce Strategic Alliance in Mexico

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Actinver lanza tres fondos con subadvisory de Legg Mason
Pixabay CC0 Public DomainPhoto: Actinver. Legg Mason and Actinver Announce Strategic Alliance in Mexico

Legg Mason and Corporación Actinver announced the signing of a strategic alliance agreement that will allow Actinver to manage and make available to its clients in Mexico funds using investment advice provided by Legg Mason-affiliated asset managers.

Based in Mexico City, Actinver is a fully integrated financial services firm providing private and wealth banking, asset management, wealth management and investment banking services. It’s Mexico’s largest private bank in terms of number of clients and the second largest in terms of number of branches.

“This exclusive agreement provides Mexican investors with a robust lineup of funds featuring investment strategies designed and maintained by world-class investment managers,” said Alonso Madero, CEO of Actinver’s Asset Management Unit. “By expanding access to international markets, we’re enhancing opportunities for diversification.”

Funds that are managed by Actinver using investment models provided by three Legg Mason affiliates — ClearBridge Investments, Martin Currie and Western Asset — are now available to retail investors in Mexico.

“With the population of Mexico as well as the number of people accessing banking services expected to increase over the next 20 years, we see substantial growth potential in the country,” said Lars Jensen, Legg Mason’s Head of Americas International. “We’re thrilled to partner with Actinver, and we’ll continue to develop additional solutions for the Mexican investor together.”
 
The funds available via Actinver are as follows:

  • SALUD, which is designed to deliver long-term capital appreciation through investments in companies involved in all aspects of healthcare and the life sciences. In managing the fund, Actinver is advised by New York-based ClearBridge Investments. With a legacy dating back over 50 years, ClearBridge is a leading global equity manager committed to delivering differentiated long-term results through authentic active management.
  • ESFERA, which seeks to achieve long-term capital appreciation through the active management of a portfolio of global companies, taking a long-term, unconstrained investment approach, with an expected low portfolio turnover and investment horizon of five years or more. In managing the fund, Actinver is advised by Martin Currie of Edinburgh, Scotland. Martin Currie builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships.
  • ESCALA, which is designed to preserve capital and reduce interest-rate risk while delivering income opportunities by investing in laddered, short-term, U.S. dollar-denominated, investment-grade corporate bonds. In managing the fund, Actinver is advised by Western Asset, one of the world’s leading global fixed-income managers. Founded in 1971, Western Asset has been recognized for its team-based approach, intensive proprietary research and robust risk management.

“We are delighted with the Actinver partnership which we are entering into with Legg Mason,” said Julian Ide, Chief Executive Officer of Martin Currie. “This is a strong validation of the power of Martin Currie’s investment capabilities and Legg Mason’s distribution relationships.”

“The Mexican asset management industry is still under-developed compared to those in other countries so the opportunities are enormous,” added Actinver’s Madero. “By working together, Actinver and Legg Mason are encouraging the development of the market and, by extension, helping with the economic development of the country.”

Brad Rutan (MFS IM): “Some Believe Over 300 Billion US Dollar of BBB Rated Debt Could be Downgraded to High Yield”

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The key to navigating the credit cycle, according to Brad Rutan, Investment Product Specialist at MFS Investment Management, is anticipating inflections, repositioning early and being patient. As the credit cycle ages, the lending conditions loosen, the leverage rises and there is a tight dispersion in spreads across sectors and rating tier. It is getting late in the credit cycle, and investors should be reducing their risk exposure before there is a cycle contraction and the liquidity dries up.

“This late in the credit cycle, if investors wait to reduce risk until spreads start to dramatically widen, there will be no buyers for their risk. During a cycle contraction, the credit availability tightens, the refinancing risk increases, and the default rates spike. There is a “flight to quality” in credit and the weaker credits underperform, if not incur in default. Investors need to have their fixed income portfolios prepared for that event,” explained Rutan.
Over the past decade, while high yield corporate spreads have been declining, spread widening events have been smaller and shorter in length. In 2011, spreads reached a peak during the European debt crisis, in 2015 and 2016, spreads widened when commodity prices fell apart, and more recently, in the summer of 2018, spreads peaked again. Despite these mini-cycles have created opportunities for active managers, in each of these mini-cycles, the high yield corporate spreads have been peaking at a lower point, confirming the declining trend in spreads and indicating that the cycle is “running out of gas”.  

Where are the risks at this point in the cycle?

There have been significant changes in the composition and quality of the investment grade universe of bonds. In the last two decades, the credit quality composition of the Bloomberg Barclays US Credit Index has changed dramatically.

“Over the last 20 years, the AA debt universe has been cut in half, from 20% to 10%, the single A debt universe dropped by 8 percentage points, from 44% to 36%, the BBB debt universe has grown 15 percentage points, from 30% to 45%. Why is the BBB debt universe so big today? Looking at the AA and A debt universes, one can see that there has been a massive downgrade cycle as companies have increased their debt levels. US companies have been playing the game with rating agencies, knowing how much debt they can accrue and what promises they can make to not to get downgraded to the next step below BBB, which is high yield bonds. Some investors believe over 300 billion US dollar of BBB rated debt could be downgraded to high yield, but they are not being downgraded because, normally, the rating agencies are very reluctant to downgrade at this last step to BB debt”, described Rutan.  

By sectors, Telecom companies accrue the largest amount of BBB debt that were previously rated as single A or higher, followed by Health Care companies and Utilities.

“The high yield market is already worth a trillion US dollar. If, eventually, this 300 billion US dollar of BBB rated debt is downgraded to high yield, it will be adding a 30% of bonds supply to a market already illiquid, probably implying a very messy price discovery process”, he added.  
On top of that, during the last six years and unlike previous periods, there has been a big disconnection between the high yield spreads, the compensation of high yield over Treasuries, and the corporate debt levels, measured by the corporate debt to GDP ratio. 

“Since 2012, corporate debt levels have been growing steadily, being now over the last peaks set in the last previous recessions of 2001 – 2002 and 2008 – 2009. Meanwhile, the high yield spreads are moving in the opposite direction. Spreads should be above their current levels and getting to the point they should be is going to be an ugly process.”

Are investors compensated for high yield risk today? 

When the risk of default is considered, reducing the spreads of the CCC rated high yield debt over Treasuries by the expected losses, the loss-adjusted spread is negative. That is the reason why MFS IM has sold all their positions with CCC rating in their total return bond strategy. 
Also, the search of yield and higher rates have increased the demand for banks loans, but this asset class is not as attractive as many investors think it is. Their quality has been declining, they offer less protection to the creditors and they have lowered their projected recoveries.

“Bank loan’s attractiveness lies on that they are floating rate instruments and they provide a great hedge against rising rates. They also sit above bonds in the capital structure of a company, if the company defaults, the bond investor should take the first hit and the bank loan investor should have a buffer against losses. But, unfortunately, 60% of high yield companies have a loan-only capital structure, therefore, there are no bonds to act as a buffer. Regarding credit quality, the percentage of issuers that are rated single B or lower has risen over 65% in 2018 from 48% in 2006. In addition, about 75% of the bank loan market lacks sufficient covenants which diminishes the protection of creditors and the projected rates of recovery are below the average historical recovery rates.”

Why investors should be positioned ahead of volatility?

Credit spreads across asset classes and geographies are low, investors are getting lower compensations for the same amount of risk and it is getting much more difficult for asset managers to identify and properly risk bonds.

Moreover, the market has grown in size, but less participants are willing to make a market. Since the Dodd-Frank reform was enacted on July 2010, the inventories of the primary dealers have decreased by 90%. The assets of corporate bond mutual fund and ETFs have grown by 136% and the average trading volume per year has increased by 85%, but the primary dealers have gone, and this may represent a liquidity problem in the case of a stressed credit event.

Where are the opportunities?

At the short end of corporate curve, investors can better withstand higher yields before they incur in losses. The breakeven yield is currently higher at the short end part of the curve. That is where investors have the best protection against raising rates and where they are more compensated for the risk that they are taking.

Also, the diversification benefits have been more pronounced in traditional fixed income sectors. Investment grade corporate bonds, municipal bonds, and the Bloomberg Barclays US Aggregate Bond Index have had a lower correlation with equity in the last five years than high yield bonds, bank loans and emerging market debt. A lower correlation with equity translates into higher average returns whenever the equity market experiences a pullback of 5% of greater.