“The Only Way To Truly Stand-Out Is By Real Active Management, Uncorrelated To Market Indices”

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“La única opción posible de diferenciarse es hacer una gestión activa real y descorrelacionada de los índices de bolsa”
Quim Abril, Courtesy photo. "The Only Way To Truly Stand-Out Is By Real Active Management, Uncorrelated To Market Indices"

Independent asset management in Spain is currently booming and most of these newly-focused funds are either set up as UCITS or structured as hedge funds.  At the recent ForoMed Cap in Madrid, an annual event that brings together European investors and small and medium cap companies that are prime investment candidates for these independent funds, we caught up with Quim Abril, Founder and Hedge fund manager of the Global Quality Edge Fund, a project that just celebrated its 1st year anniversary.

In this interview with Funds Society, Quim Abril, Founder and PM takes a look back at his 1st year experience since launching the fund, the advantages it offers investors and the goals he has outlined for himself in the year ahead; including his on-going search for “extraordinary companies overlooked by the markets” and “growing the fund size to 10 million euros to start to attract institutional investors”.

The fund has recently celebrated its 1st year anniversary: What is your assessment of these months gone by and how has your fund performed?

I think my assessment could not be more positive. In the last 12 months, I successfully managed to set up and launch the fund, I have spoken to and met up with the senior management of our portfolio companies while also continued to raise funds by travelling in and out of Spain; visiting and privately talking to would-be investors in other main European capitals.  In terms of total return, the fund has grown by 6.6% since inception or 4.5% year-to-date – even though our strategy is aimed at mid-to-long term growth.

Why should an investor choose Global Quality Edge Fund?

Global Quality Edge fund offers some unique characteristics that are not common in other funds in Spain or in the rest of Europe, outside the UK market:  Firstly, Portfolio Concentration (UCITS do not allow for this); secondly, it invests in small companies overlooked by the market but nonetheless qualify as extraordinary investment opportunities; thirdly, it’s less correlated to equity market indices and lastly, we hedge our portfolio of shares when the economy begins to show signs of recession through tail hedging strategies.

Setting yourself apart from competition is one of your top priorities, why would you say this is even more relevant in today’s context?

ETFs have grown exponentially and their lower commissions are putting the banking sector under a lot of pressure; especially when the larger players sell passive-like management products under the impression that they are actively managed.  The only way to truly stand-out is by real active management, uncorrelated to market indices. This is what Global Quality Edge Fund has set out to propose.

Would you define yourself as a value investor?

I’m not sure if I am but what I would say is that quality companies with sustainable competitive advantages do not trade at a 7-8x price to earnings, let alone in today’s economic cycle.  Global Quality Edge fund therefore differentiates itself by buying true quality companies, below 15x its earnings in today’s environment and perhaps 10x during an economic recession.

In what type of companies do you invest? Why are the mostly small and mid cap?

The fund largely invests in extraordinary companies with solid and long-standing competitive advantages that are leaders in their niche markets with low or null competition threats, low broker analyst coverage, proven sound capital management, high ROIC and a clear interest alignment between the company and its shareholders.  In terms of size, we do mostly invest in micro&small and mid&cap stocks.  The reasoning behind this can be broken down into 10 points:

Firstly, 80% of the investable equity universe across the world is made up by companies with a market cap below 2.5 billion euros.  These businesses are easier to understand, analyze and monitor given the fact that they focus and operate in niche markets.  Thirdly, they are more approachable and you have a greater chance of speaking to their top and most senior management (the CEO) than you would do in a larger cap company.  They also offer higher earnings growth and longer term returns that don’t always have to be at the expense of higher volatility. Their lower or non-existent broker analyst coverage, their uncorrelated price performance against benchmark indices, their higher percentage of insider trading, their increased likelihood of being M&A targets and the positive effect they experienced from the recent U.S. tax reform are other reasons why we draw our attention to these companies.

You state you do not invest in all sectors, which of these do you leave out and what advantages does this decision bring to the fund?

Even though now some value investors have commodity-driven businesses in their portfolios, I can categorically state that Global Quality Edge Fund will not invest in them.  The reason behind it is because these companies are cyclical businesses, where the company has no control or pricing power on their products and services, since the supply and demand of these commodities (oil, copper, gold…) largely influences and dictates the companies’ performance.  The fund only invests in anti or low-cyclical companies, achieving a higher forecasting certainty when mapping out the evolution of future earnings and lower expected volatility.  The main goal is to be capable of analyzing the results of a company across an entire economic cycle, not only during current periods of bonanza.  Airlines and restaurants are other industries in which we do not foresee investing.

You have a concentrated portfolio of companies, would you say this is an advantage or an inconvenience in asset management?

Portfolio concentration is one of 2 reasons why we chose to operate as a hedge fund, ruling out the UCITS structure – a more commonly adopted approach in Spain.  To explain our reasoning, I always say that ‘a fund manager may have 5, 10 or 15 good investment ideas but never 50 or 60 good ideas. For that matter, you might as well choose an ETF’.  At the same time, a concentrated portfolio allows for a better understanding and knowledge of the companies in a fund, reducing the likelihood of mistakes, as well as volatility.  The American gurus in the business all have funds with 5 or 10 shares only but in Europe this level of concentration is hardly seen.  Global Quality Edge Fund will invest in up to 25 different shares and the top 10 and 20 holdings will represent more than 50% and 80% of the fund’s capital.   There are a number of academic papers that highlight how adding one more stock to a fund with more than 20 different investments [that do not necessarily have any sectorial correlation between them] does not substantially reduce the fund’s volatility.

You also insist on avoiding red accounting flags when investing, what are these red flags?

After reading and analyzing 10-Ks (ie: annual reports), you can clearly identify potential risks and creative accounting practices that could diminish or conceal the true earnings potential or the cash flow position of a company.  The difficulty lies in the fact that these filings are long and complex to understand and without a solid knowledge base in accounting, these could be overlooked. They, therefore, require a detailed and manual analysis to uncover them. To quote an example, one of the most common red flags is an impaired goodwill adjustment, when the company is forced by its auditor to recognize the loss on its income statement after the acquired asset or business failed to meet the company’s expectations.  In order to see if there is an underlying risk or red flag of this sort, we would have to determine if there is a direct high relation between ‘Goodwill’ and the company’s market cap.  If there is one, we would immediately refer ourselves to the company’s 10-K filing to read up on the Goodwill and estimate the value of the adjustment – for example – check to see how cash flow projections were calculated; how the business units are split and reported on; how the macro hypothesis are implicit in the cash flow forecasts; see if there are any changes in methodology and analyze the transaction price composition on their material recent transactions.

Some other accounting Red Flags could be: Delay the earnings report date, change from conservative accounting policies to a more aggressive ones, extend an asset’s depreciation period life or increase residual value, too much off-balance sheet assets and not computing off-balance sheet assets like operating lease as a real debt , aggressive revenue recognition policies, not taking in account restricted cash, capitalize cost to the balance sheet (interest cost, software development and inventory),not threat pension deficit as more debt, etc.

One of your differentiating factors is how you choose to hedge, could you explain how these work and the benefit?

The idea behind hedging through options is to protect the tail-risk of the market, a practice that is also known as Tail-hedging. Throughout history, most drops in equity indices above 20% have been recorded when the economy enters into recession.  Our most recent evidence of this is the dot-com bubble in 2000 and the financial crisis in 2008.  To avoid or diminish the drop, we buy out-of-the-money put options on market indices to protect our fund from market downturns greater than 20-25% whenever there is a significantly high chance of this occurring throw the reading of US Conference Board indicators (Leading, Coincident and Lagging indicators).

Reaching out to companies is key when deciding to add them to your portfolio, why would you say this is a necessary step and how many companies do you meet throughout the year?

The main reason behind getting in touch with companies is to get a deeper understanding of the business and a broader sense of their market.  In order to achieve this, you have to speak to the CEO; especially when a small cap sized company has low analyst coverage and information about their business is limited.   Once we make contact, we gather useful insights that are not widely known. We find that they tend to share more information about themselves than a larger and more guarded listed company would. The lower the market cap, the higher the chance we have to speak to the CEO.  However, reaching out to them requires preparation beforehand. We would only do this after running our own thorough analysis on the company’s numbers ensuring we make the most out of the call, listing a specific set of questions and doubts we may have come across.  In 2017, we spoke to 45 companies’ senior management teams and during the first half of 2018, we are slightly ahead, compared to last year, on a year to date period.

Would you be able to tell us about a company you have invested in your fund?

Victrex plc is a British specialty chemicals company and global leader in engineering thermoplastics. Their signature polymer solution, PEEK, is an essential value-added component and key material used in different manufacturing industries. Their competitive advantage could not be beaten with a 65% market share; well ahead of the second, third and even from the rest of the players (25%) that make us this fragmented market, allowing Victrex to continue growing organically and inorganically.   In terms of entry barriers, these come in the form of research and development investment (6% of Victrex’s total revenue) and, above all, high switching costs. Victrex’s clients would find it hard to replace PEEK with a substitute of lesser quality that would not compromise the quality of their own products. Their client retention is therefore very high helped by the fact that they personalize each of their products for their clients. To this day, Victrex continues to produce new products and uncover even more critical use cases where this material can prove essential for other industries.  This has led the company to increase their market share even further, particularly in those segments where margins are higher and price increases are not hard to deliver.   We bought Victrex at an average price of £18.5 in June last year and we sold it in January 2018 at £27, after reaching our target price and finding other investment opportunities with a higher safety margin.

Where and how to you find new investment ideas?

There are different ways to generate new investment ideas, from the most common approach by building out a screen and narrowing down to a list of companies to more interesting options like participating in investment forums and idea exchanges with other fund managers, especially those in the U.S.

In today’s environment, how do you deal with volatility and how do you react to it?

Our exposure to volatility is low, given the fact that our fund is made up of mostly small companies that are not as liquid and have low analyst coverage.  In terms of liquidity, whenever there is a correction in the market (a downturn less than 20%), fund managers tend to sell their most liquid stock because most of the time there are very few securities available in the market.  On the broker analyst front, earnings releases have little or no effect on the small companies’ share price, compared to larger listed companies that are exposed to higher volatility when broker estimates fail or exceed broker consensus expectations.  If we look at our fund, the last twelve month volatility is 7% and the downside risk is below 5; numbers that are ways below comparable funds in the global market.

There is always a ‘but’ and in this case, an economic recession hits smaller companies the hardest, making their share price drop even further than bigger listed companies.  Global Quality Edge Fund therefore uses Tail Hedging strategies to protect and preserve the total return of the fund compared to others that do not and find themselves immersed in significant losses during recession periods of the economy.

What are you objectives for next year?

Firstly, find extraordinary companies overlooked by the markets and the general public and patiently wait until they come across an adverse situation that temporarily drops their share price, making the point of entry of our investment more attractive with a reasonable margin of safety.  I will also continue holding private discussions with would-be Global Quality Edge Fund investors, highlighting the reasons why they should invest in our fund; not only under the current macro-environment but under our broader and longer term view full economic cycle. Thirdly, I want to grow the fund size to 10 million euros to start to attract institutional investors by the end of this year.

Convertible Bonds Gain Popularity Given Volatility’s Return

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Los bonos convertibles ganan popularidad gracias a la vuelta de la volatilidad
Pixabay CC0 Public DomainPhoto: Monsterkoi. Convertible Bonds Gain Popularity Given Volatility’s Return

During the first quarter of the year, convertible bonds were one of the most attractive assets, especially after seeing the first signs of the return of volatility to the market. In this second quarter of the year, this type of asset has continued to please investors.

As explained by Arnaud Brillois, Head of Convertibles at Lazard Asset Managementand and manager of its long-term convertibles, the main advantage of this asset is that it allows investing in attractive and volatile stocks, limiting risks.

“The greater the volatility of the underlying stock, the greater the value of the convertible bond. In addition, due to its main virtue, convexity, convertible bonds increase their exposure to equity with a rise in the underlying, and market exposure decreases with the fall of the underlying,” says Brillois.

Undoubtedly, the return of volatility and the investor’s certainty that it has come to stay, drives the popularity of this fixed income asset. According to RWC Partners, “the market has been assessing a level of volatility that is too low for the current level of stock valuations and the point in the economic cycle.”

Finally, Brillois points out as another positive characteristic of this asset that they have a short average life of 2.5 years and, consequently, “the impact of interest rate hikes is limited”.

More Issuances

Convertibles are among the very few asset classes that offer positive exposure at increasing levels of volatility. According to RWC Partners, this has also led to increased issuances within the convertible bond market.

“This increase in issuance is a trend now and is expected to continue as rates increase further. January 2018 saw spectacular increase of 120%, compared to the same period last year,” he says.

“The Quantum Revolution Fund”; The First European Investment Fund for the Quantum Technology Industry

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Llega The Quantum Revolution Fund: el primer fondo de inversión europeo de la industria tecnológica cuántica
Photo: Naro2, FLickr, Creative Commons. “The Quantum Revolution Fund"; The First European Investment Fund for the Quantum Technology Industry

Private Advisors VC has launched the Luxembourg based “The Quantum Revolution Fund” to invest in industrial applications of the second quantum mechanics revolution. It is the first private specialized, thematic, European VC fund for new applications of quantum technologies.

The fund invests in different stages of the quantum industry, from research to direct investment in new start-ups. It follows the model outlined by the European Commission for the quantum industry, that plans to invest 2 billion Euros in the next decade. Quantum is the next technology wave, but in fact there are already multiple examples of current applications of quantum physics in fields such as quantum chemistry; the pharmaceutical sector, with breakthroughs in the fight against diseases such as cancer; finance analytics with advances in quantitative analysis and the training of deep artificial neural networks; molecular simulation of new materials for aerospace design; optimization of scheduling problems for advanced logistics and flow management of people and goods; and finally advanced computing for disruptive cryptographic solutions side by side to truly private communications.

“Our professional and institutional clients will find the best specialized strategic investments focused on frontier scientific technology. We’ll look for long-term results that will place our investors in a privileged position in the context of the geopolitical and technological race that the main world powers are quietly undertaking. There is no doubt that applied quantum technologies will change the world as we know it today. Staying out of this race is not an option” says Jaume Torres, CEO of the promoter company.

The Quantum Revolution Fund is structured as a RAIF SICAV of Luxembourg exclusively directed to qualified investors (minimum ticket of 125K) and is managed by the ManCo (AIFM) Selectra Management. The fund’s promoter is the Barcelona based company Private Advisors VC, and the Investment Advisor is its subsidiary in London Quantum Ventures. There is a specialized investment committee of international experts under the coordination of economist Marta Areny and physics PhD Samuel Mugel. The fund is supported by professional partners KPMG, Amicorp and ING Bank and has a European commercialization passport.

According to the company, the Quantum Revolution Fund’s team has deep scientific expertise, proven industry knowhow and strong funding mechanisms credentials for innovative projects. It works with an extensive network of advisors and experts among which are José Ignacio Latorre, PhD and Professor of Physics at both the University of Barcelona and at the University of Singapore, and Víctor Canivell, MBA and  Physics PhD with a wide management experience in the international high tech industry. The objective is to raise 150M Euros to invest in new applications of quantum technologies without geographical restrictions, investing between 100K and 3.000K per project. “The approach is for our network of experts to work closely with the invested start-ups, whatever the stage of development they are in. Without a doubt, the future is quantum.” They conclude.

 

EMD in Local Currency Should Remain Resilient in the Coming Quarters

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La deuda emergente en moneda local debería seguir siendo resistente en los próximos trimestres
Photo: David Wheler. EMD in Local Currency Should Remain Resilient in the Coming Quarters

According to Daniel Wood, Senior Portfolio Manager EMD Local Currency at NN Investment Partners, after an eventful start of the year, it is a good time to review how Local Currency has performed both on a stand-alone basis and against the other sub-asset classes in emerging markets. In his view, this year can be divided in two sentiments: 

31 December – 25 January: an optimistic start to the year

Inflows into Emerging Markets Debt (EMD) were strong in this period. Optimism was high, driven by synchronized global growth and elevated investor appetite for EM exposure. During this period LB returned 5.1% in USD unhedged terms, compared with 3.3% for LC and 0.25% for HC. To him, two things stood out during this period:

  • LB yields were remarkably resilient even as US Treasury yields increased substantially. 
  • Narrowing spreads offset the rise in Treasury yields.

In a risk-on environment, LC enjoyed strong positive returns over the period, with the FX component of the return only narrowly lagging that of LB. “At this stage, investors in both LB and HC were not punished excessively for holding higher duration, in spite of rising developed markets (DM) rates risk signalled by the higher US Treasury yields across the curve.” He says.

26 January – 31 May: markets turn sour 

As market fears began to grow about rising trade and geopolitical risks and as economic surprise indices in both Europe and EM tracked lower, asset prices began to fall. During this period HC spreads widened from 263bp to 344bp, contributing to year-to-date total losses of 4.06% for the asset class. Having previously demonstrated strong resilience, yields on LB also tracked higher, rising by over 35bp to 6.41% at the end of May. From its 25 January peak, LB dropped more than 9%, bringing total year-to-date losses to 4.55%. Emerging market equities also registered heavy losses, falling more than 10% from their January peak. In contrast, LC ended May down only 1.81% year-to-date, again demonstrating resilience to a more volatile global market environment.

Why has LC been so resilient to recent market dislocations?

Wood believes that the low duration of the LC benchmark would insulate the asset class from the growing risk of rising developed market bond yields and that the more favourable, higher quality currency composition of the LC benchmark would deliver strong returns in favourable market conditions while offering some protection to investors if risk sentiment deteriorated. This has been for three main reasons:

  • LC has a lower exposure to the twin deficit countries (Turkey and Argentina).
  • LC has a higher exposure to Asia.
  • The more representative nature of LC has added to its stronger risk adjusted returns.

“We continue to believe that the low duration and more favourable currency composition of LC will enable it to continue outperforming LB over the coming quarters. The sensitivity of both HC and LB duration risk to rising rates has picked up significantly in recent months as interest rate differentials with US Treasuries have narrowed. With upward inflation surprises in European data it is only a matter of time before the ECB begins to halt its QE program leading to higher bund yields, buttressing an upward trend in DM yields. Evidence of this year supports our case for strong returns in LC when risk appetite is positive and limited drawdowns when the risk environment shifts. With an estimated average rating of A-, a large benchmark weighted current account surplus, strong growth and a set of central banks generally looking to raise rates we believe the currency composition of LC will drive strong returns for investors over the coming quarters without the need to take duration risk.” Wood concludes.

Léa Dunand-Chatellet, New Head of Responsible Investment at DNCA Finance

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Léa Dunand-Chatellet, nombrada directora de inversión responsable de DNCA Finance
Léa Dunand-Chatellet, Courtesy photo. Léa Dunand-Chatellet, New Head of Responsible Investment at DNCA Finance

DNCA Finance – an affiliate of Natixis Investment Managers -recently created a Responsible Investment department, led by Léa Dunand-Chatellet. According to the company, and after the signing of the UN Principles for Responsible Investment (UNPRI) in 2017, this move clearly reflects DNCA Finance’s aim to take its responsible investment approach a step further.

She is tasked with setting up a Responsible and Sustainable Investment team as part of the broader portfolio management team, with the aim of providing in-house research for all fund managers, particularly for the SRI fund range, which will be available from September 2018.

“I am delighted to join this vibrant team and gain greater insight into the portfolio managers’ renowned expertise, as we work together to develop an exacting and pragmatic approach. We will aim to deliver high value-added extra-financial research, making it impactful for our portfolios and driving their performances” said Léa Dunand-Chatellet.

Eric Franc stated “We are very proud and pleased to welcome Léa to our team – responsible investment is one of DNCA Finance’s key strategic goals going forward”.

Léa Dunand-Chatellet, 35 years old, is a graduate of the École Normale Supérieure (ENS), with an agregation in economy and management (university highest-level competitive examination for teachers’ recruitment), and is also a member of various committees on the Paris financial market. She teaches courses on responsible investment in some of France’s major business schools and coauthored a key publication in 2014 “SRI and Responsible Investment” (published by Ellipse).

Léa started her career in 2005 at Oddo Securities’ extra-financial research department, and then became portfolio manager and Head of ESG research at Sycomore Asset Management in 2010. She spent five years at the company, setting up and managing a range of SRI funds with AUM of €700m, achieving a top AAA ranking from Citywire. Working within the investment management industry, she developed a pioneering extra-financial model that includes sustainable development issues in the fund management approach. In 2015, she joined Mirova as Equity CIO, managing a team of ten equity portfolio managers, with AUM of €3.5bn.

 

François Pienaar, the South African Rugby Legend and World Cup Champion, talks about leadership at Investec’s Inspirational Event in Miami

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Honoring its South African origins, Investec Asset Management invited François Pienaar, the South African Rugby Legend and World Cup Champion, to speak about leadership at their second “Investec Inspirational Event”, celebrated at the InterContinental hotel, in Miami, last June 5th.

Investec Asset Management business in the Americas region has grown exponentially since they opened their first office in New York, back in 2006. They started with 100 million dollars in asset under management, and now they are managing around 22 billion dollars. A “great journey” that according to Richard Garland, Managing Director of the firm, it’s worth celebrating. That’s the reason why Investec Asset Management brought together over one hundred investment professionals from the Latin American and US Offshore business to participate in an “out of the ordinary” inspirational talk.

Last year, they had the presence of Robert O’Neill, the Navy Seal who shot Bin Laden in May 2011, and this year, they invited François Pienaar, the South African Rugby player who was the captain of the Springboks from 1993 until 1996, who is best known for leading the South African team to a victory in the 1995 Rugby World Cup. An unexpected win that was later narrated on John Carlin’s book “Playing the Enemy: Nelson Mandela and the Game that Made a Nation” and then turned into the film “Invictus”, directed by Clint Eastwood.  

A national hero

François Pienaar was born on the 2nd of January of 1967 into a bad time in South Africa, in which the basic human rights of ordinary South Africans were brutally violated. He grew up in Vereeniging, a small town close to Johannesburg. As a kid, he went to school with white children and never really interacted with black people, except for the lady that normally came his house to do some of the cleaning.

“The kids were not allowed to sit at the table with the adults. So, whenever the adults got together, the kids were going away to play, and we played in the garden with folks that were seated there and would talk about two things, sports and politics. And when it came to politics, Nelson Mandela’s name came up regularly, followed by the word terrorism, and comments about his coming out of jail as a disaster for the country. There was no debate. Very sadly, everyone agreed on that view and no one, me included, said anything or questioned”, explained Pienaar.

From an early age, sports played an important role in his life. It was through rugby that he earned an athletic scholarship to study Law at the Rand Afrikaans University. “My family did not have much money. Sometimes I could not go to play rugby because my parents could not afford it. Sports were my way to getting out of the industrial belt where I grew up. I did well at rugby and I got a scholarship to study law at the University of Johannesburg. There I met people very different from what it was my own world:  people that did not believe in god, that had a different religion, people that spoke different languages, and that had strong views about politics”, he continued.

Pienaar attended the University in the late 80s, but there were already rumors that Mr. Mandela was going to be released out of Victor Verster Prison soon. And he was finally released in February of 1990. The negotiations to end Apartheid also had a direct impact on sports, national teams were allowed again to come back to the international arena. In 1992, the Springboks, who had been excluded from the first two world cups in 1987 and 1991, were then readmitted by the International Rugby Football Board (now, World Rugby), to international championship. One year later, the new South African team was announced on television, on the main news, the names scrolled down the screen and Pienaar’s name appeared, he would be the captain of the team.  

In 1994, Mr. Mandela is elected the first black President of South Africa. In that moment, he pronounces an unforgettable speech: “The time for the healing of wounds has come. The moment to bridge the chasms that divide us has come. The time to build is upon us […]. Never, never, and never again shall it be that this beautiful land will again experience the oppression of one by another and suffer the indignity of being the skunk of the world. Let freedom rein. The sun shall never set on so glorious a human achievement! God bless Africa”. At that moment, he made a promise to the nation and he delivered on his promise.

Meeting Mr. Mandela

A couple of months later, knowing that South Africa was set to host the 1995 Rugby World Cup, the first major sport event held in the country since the end of Apartheid, Mr. Mandela wanted to use the power that sport has to inspire and awaken hope to unite the nation. So, he asked his personal secretary to schedule a meeting with François Pienaar. When they finally met, they talked for an hour in which Mr. Mandela asked him about his family, the rugby sport and the Olympic Games in Barcelona. He also spoke about his imprisonment in Robben Island. Once the conversation ended Pienaar knew that the country was in the hands of a very wise leader and that he felt safe.  

Before the opening match against the Australia’s Wallabies, a team undefeated in the previous twelve months and the favorites to win the game. Mr. Mandela went to see the Springboks at the end of the training. His helicopter flew and landed on a field not far from where the team was playing. He went one by one greeting every member of the team. One of the players gave him his cap, and he immediately put the cap on. He wished them good luck, went back to the helicopter and left.  

When the first match was about to start, Mr. Mandela appeared in the stadium wearing the Springboks rugby cap, a symbol of the white elite that was detested by the black majority; he got booed by the crowds, but he answered: “This is our team. These are our boys that are playing for us”.

According to Pienaar, that was an incredible moment that boosted the morale of the team. They were able to win the match comfortably, with a phenomenal performance that drove them to the final of the Rugby World Cup.

The final

At the Ellis Park Stadium, the Springboks would have to play against one of the best rugby teams that the world has ever seen, the New Zealand’s All Blacks. This team had the first rugby global superstar and arguably the sport’s biggest name playing for them, Jonah Lomu, “120 kilograms of muscles that ran 100 meters in 11 seconds”, according to Pienaar.      

The support for the Springboks had grown during the championship. All the people in the country, independently of their race, were cheering for their rugby team. “The day before the final, there was a group of black kids that saw us, and they started chanting the names of the players, something that they would never have known before the World Cup. They started running next to us with their beautiful smiles”, said Pienaar. “We were receiving messages from kids all over the country, and the kids had pour their hearts on them and they were beautiful to read”, he added.   

On that Thursday night, their coach, Kitch Christie, walked to every room and he put a little piece of paper under each door, a poem written by Theodore Roosevelt that said: “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat”.

The following day, hours before the World Cup final, there were thousands of people waiting to cheer them around the bus that would drive them to the stadium. “There were about 50 motorcycles waiting to escort the bus to the final, and what it strucked me was how clean the motor cycles were. They must have been cleaned by the children the day before”, said Pienaar.  

The captain had a personal conversation with everyone in the team, asking them about their worries and how he could help to solve them. “Their rhetorical thinking led them to start wondering: What if I make a mistake? What if we miss a tackle? And my counter speech was: What if we don’t take our chances? What if we don’t give up our hope? What if we just play and come back without regrets?

Mr. Mandela came into the changing room with his Springboks’ cap and jersey on. With a beautiful smile he said to us: “Thank you for what you are doing for your country. Good luck”, and when he turned around, he was wearing my number on his back”, narrated Pienaar.

The team learnt to sing the national anthem together, understanding its lyrics, expressed in five languages: Africans, English, Xhosa, Zulu, and Sotho, to represent “one team, one country”, a chance to bridge the cultures and extend hands across a divided society. 

The final was an epic match. The Springboks missed their first tackle, but they got better and better, and the game went to the extra time. Pienaar reached the final minutes of the game with a calf strain that prevented him from running, but the coach insisted that he must stay on the field. “At the stadium, the people, mostly white South Africans, were chanting an African tribe song that means move forward. When I started hearing that song, I said to the team: “Live for your country, back each other, and we will be fine. This is the strategy to follow, let´s execute it”, and so we did”.

A drop goal from Joel Stransky led them to a three-point victory over the All Blacks. At the stadium everybody was chanting. At the streets everybody was celebrating and dancing. “I feel incredible blessed to have had the opportunity to experience how powerful sport is. When we won a reporter stuck a microphone next to my face and asked me: “François, tell us what was like to win in front of 65.000 people”, to what I replied: “We did not win in front of 65.000 people, we won for 43 million people. And the reason why I gave that reply was because we had already the feeling that the whole country was supporting the team. The gentleman who served us breakfast at the hotel was a Zulu, and he was concerned on whether we had eaten enough breakfast for the match. The lady who cleaned our room, was a Xhosa, and she asked if we needed extra pillows, so we could sleep better and rest. The trophy could never just be for the lucky few that got ticket to come to the game. As a team, we did win, because we wanted to make our country proud”, said Pienaar.  

“Mr. Mandela was one of the greatest politicians of his time, but he was also one of the greatest sportsman, in the sense that he gave us so much joy, which is the main power of a sportsman. He gave me a very clear instruction: “I want you to show love and passion”. When he passed away in December of 2013, the whole world stopped, he was in every newspaper. On the next 18th of July, it would had been his centenary. And we miss him. But we now have a new leader, Cyril Ramaphosa, who was one the one who held Nelson Mandela’s microphone when he was released from prison in Cape Town. He is now following Mandela’s footsteps. He is an extremely successful businessman who does not need to get involved in politics, he is doing it because he wants a better country”, he concluded.  

Aberdeen Standard Investment Is Celebrating its 20th Anniversary in the Latin American Institutional Business

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20 years have passed since Aberdeen Standard Investments (ASI) landed in the Latin American Institutional business. Back then, the asset management firm started visiting Chile to register their funds with the Chilean Superintendency of Pensions (SP) and made them available for Pension Fund Administrators (AFP) to invest. In those days, the team was formed by Bev Hendry, Chairman of Americas for Aberdeen Standard Investments, Silvana Barrenechea, currently relocated to the UK office and Linda Cartusciello, Senior Institutional Business Development Manager for the Latin American business.

In 2010, ASI established a partnership with Celfin Capital, a Chilean investment bank and asset manager with an important market share on the institutional distribution business for international asset managers. In 2013, Celfin Capital was acquired by BTG Pactual. However, in 2015, the original partners and executives that were in charge of the distribution business decided to continue working independently in a new firm named Excel Capital, which has maintained its relationship with ASI until today.  

In 2013, during the emerging market bull cycle, Aberdeen Standard Investments’ expertise in that asset class led to a peak of 6 billion dollars in assets under management, involving several pure equity and emerging market strategies for institutional clients in Chile, Colombia and Peru, always counting on Excel Capital International as their local distribution branch for the institutional business. Nowadays, ASI’s Latin American business totals 5 billion dollars in assets under management, belonging two third of the assets to the institutional business and one third to the wealth management business.

Aberdeen Standard Investments’ presence in the Americas region

Enlarge

Seated, from left to right: Rocío Hernández, Client Manager, Linda Cartusciello, Senior Institutional Business Development Manager, Erika Gucfa, Investment Manager & Private Markets. Standing, from left to right: Bev Hendry, Chairman of the Americas, Jeff Klepacki, Head of Distribution, David Blackwood, Business Management. (All of them, from Aberdeen Standard Investments).

In August 2017, the merger between Standard Life and Aberdeen Asset Management was completed. The group’s combined investment business, Aberdeen Standard Investments, with over 1.000 investment professionals, and 778 billion dollars in combined assets under management as December 2017, is now one of the largest asset management firms globally.

Campbell Fleming, Global Head of Distribution, leads the Asia-Pacific, EMEA-UK and Americas regions, and Jeff Klepacki, Head of Distribution of Americas, supervises the Canadian, the US and Latin American markets. In Canada, ASI has an office in Toronto, where they hold a sales team, a distribution team and a compliance team. In the US, they have offices in Philadelphia, Boston, New York, Stanford, Los Angeles and Miami, where Menno de Vreeze, Head of Business Development for the US offshore Business, will be soon relocating to cover Latin American retail business. Whereas, in the domestic Latin America-ex-Brazil region, Linda Cartusciello covers the institutional business, the Pension funds, AGFs & State Entities and the partnership with Excel Capital International in the Andean region, Rocio Hernandez is in charge of the Client Service from the Madrid office, and George Kerr, director of Aberdeen Standard Investments’ Brazil office, covers the distribution business for pension funds, wealth management firms and family offices within Brazil.

In terms of assets under managements, the Americas region represents 80 billion dollars, most of this volume is the institutional business of United States and Canada, but they also hold around 15 billion dollars in domestic mutual funds (40 Act) and for the Latin American business, including institutional and offshore business, about 5 billion dollars.

“The merger has given us scale, now we are the second largest asset management in Europe and one of the largest in the world. It is also giving us a more diverse range of products. To be fair, Aberdeen Asset Management, and mostly in Latin America, was best known for its pure equity strategies, investing either on emerging or Asian-Pacific markets, but now, Aberdeen Standards Investments can offer a full range of investment strategies, including alternative investment products,” said Bev Hendry.   

“What may work in Europe, may not work for Latin American investors, especially in those countries in where there are very high interest rates. In developed economies, interest rates are next to nothing and investors are in a constant search for yield. On the other hand, investors from Brazil or Argentina may not be searching as much for yield, but for diversification. In Brazil, we have set out a couple of local products. Right now, they are small in volume, but we are seeing a good improvement in the economy and we trust that the country will recover from the crisis. So, we are expecting good results in Brazil on the next year. We have two interesting things going on, firstly, the external investors are looking to invest in Latin America and secondly, Latin American investors have now the confidence to invest in their own region,” he added.  

“The Latin American business was not particularly affected by the merger because Standard Life did not have a distribution plan in place yet. They have registered about 15 to 20 mutual funds in Luxembourg, but they did not have a designated distribution team, something that has worked great for us, as the Latin American distribution team now has more product to distribute,” continued Jeff Klepacki.  

“We try to listen to our clients first, and really get an understanding of what their needs are for investing. As they become older and more reliant on their pensions, they do get more conservative, with a longer term in their investment approach. That is why we are having success with products like frontier bonds or Indian fixed income strategies, because the offer an attractive yield. We have also seen a restored appetite for China A Shares, Japanese and Latin American equities. We like to make sure we understand what the Latin American Institutional clients’ needs are, and we do that by working with Excel Capital, as they provide us a good handle on the market. We also want to educate clients on our new firm and what new capabilities we are gaining. For pension plans, we will hold the institutional conference in London, in November, and as always, we will invite some of our clients from Latin America. There, they will get to meet our portfolio managers and get to hear our outlook around the world. It is a good chance to stay connected to our clients in Latin America, because their risk appetite is very different, we have to make sure we have the right products to suit their needs,” he said.

“Although 95% of the assets that we manage for Latin American institutional investors are invested in equity strategies, Aberdeen Standard Investments’ equity franchise is opened to do new things, with structural changes and re-evaluating new opportunities. For example, before we did not invest directly in China, only through Hong Kong listed companies,  today we have  significant investments in China A shares.  Additionally, our exposure to sectors, which used to be a direct consequence of our bottom-up investment approach, now we have a dedicated research that provides macroeconomic insights and its outlook by sectors, like Technology” commented Linda Cartusciello.  

Alternative investments

Aberdeen Standard Investments has capabilities in quantitative investment and smart beta strategies. They can apply different factors to indices, depending on investors’ concern about volatility, dividend yield or price momentum, putting all these factors into an investment strategy they are developing a retail smart beta strategy, aiming to outperform the market.  They also use ESG factors embedded in their investment process to measure companies’ carbon footprint and have a carbon fund strategy to help with the environment. 

But, their most recent development in alternative investments is the strategic partnership that a couple of years ago was formed between Aberdeen Standard Investments’ Infrastructure team and a Colombian boutique advisory company, LQA Funds SAS. Together they have launched a first fund of 250 million dollars that are hoping to invest over the next 3 or 4 years, in about 10 to 12 projects in Chile, Colombia, Mexico, Peru and Uruguay. 

“We are currently fund raising now for an Andean Infrastructure project that invest in public and private placements. We would partner with a local government as an outside investor to help to build for a hospital or schools. The product is managed from Bogota, Colombia, where we partner with a local fund called LQA Funds. They are the local real estate experts, they find the projects and help on the due diligence to determine whether we want to bid for the project or not and we do the fund raising and the portfolio management,” explained Mr. Klepacki.

New opportunities in Mexico

Regarding the recent change in the Mexican pension funds regulation, which will allow Afores to invest in international mutual funds, Linda Cartusciello commented that they are speaking directly with the CONSAR (the Mexican National Commission for the Retirement Savings System).

“We are thrilled to launch a successful institutional business in Mexico. Throughout these 20 years of developing business in the region, we count with a deeper knowledge and wider experience, we are better organized working with our colleagues based in Luxembourg, Singapore, London and USA offices. We have selected the right people with the right training. All of us are highly committed to serve the Latin American market. I am very proud of our achievements and very grateful with the unconditional support from the Management Team in our group”, concluded Ms. Cartusciello.

Europe Still Has Upside

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Investec considera que Europa todavía tiene potencial
Photo: Nasa. Europe Still Has Upside

As we approach the middle of the year, with sluggish stockmarket returns so far in 2018, Investec believes that it makes sense to assess where we are with regard to the investment case for European equities. In their opinion, a volatile year so far for European equities hasn’t put a stop to the region’s fundamental equity drivers and each of the 4Factors on which they analyze stocks are showing encouraging signs for the region: earnings growth, fundamentally sound profitability, attractive valuation and technical momentum.

“Despite this recent moderation, we believe the current environment still offers plenty of scope to continue the strategy that has served our investors so well in recent years: finding areas of the market where earnings recovery is evidenced but not yet priced in.” Says Ken Hsia, Portfolio Manager, Investec European Equity Fund.

Looking at their 4Factors, Investec continues to see plenty of attractive opportunities in Europe. “Our experience on the ground shows that Europe’s earnings recovery is still very much under way. Analyst consensus still expects 8% EPS growth for 2018 and 2019 in Europe. Return on equity continues to improve with several drivers playing their part –revenue growth, margin expansion, financial deleveraging/share buybacks and some tax cuts. As some parts of the world are already seeing margins peak, this would indicate that Europe’s current business cycle still has room to run.”

Besides, they believe that Europe’s monetary policy will deliver a similar situation to the US, where the pace of recovery has been more gradual over a longer period of time than previous cycles. “As we are less than two years into the most recent uptrend– compared with over four years for the US – we believe there is room for European corporate revenues to recover further.”

In their opinion, the key risks are around global geopolitics. The Brexit negotiations continue to drive uncertainty for UK businesses and individuals – but that hasn’t stopped UK companies from investing for growth. 

The ongoing talk of a global trade war also loomed large over the market, especially in the commodities sector. “However, as bottom-up stock-pickers, we will approach this on a company-by-company basis. This holds true for both the direct impact of the trade tensions, as well as indirect effects, such as decreases in commodity or metal prices if tariffs tilt supplies towards Europe”. 

Their process is also showing positive improvements on the strategy front, where they focus in on companies that can generate shareholder wealth above and beyond the cost of invested capital. “As it currently stands, European companies have been delivering improving returns on equity, due in part to the improving revenue trends and the resulting operational leverage. All the while, improved capital discipline and cost cutting exercises undertaken during the previous earnings downturn are also starting to bear fruit.” 

Looking at sectors, they believe the materials one is benefiting from higher commodities prices, as well as a newfound capital discipline. Meanwhile in financials – more specifically banks – they currently see good opportunities to invest “in a sector that is starting to recover from a decade of structural regulatory and economic headwinds. With the uncertainty around Basel IV regulation now resolved, banks have the possibility to use the excess capital sitting on their balance sheets to lend, creating additional revenues that can further fuel returns.” They also like the recent Strategy improvement in the UK food retail and are currently seeing some weakness in telecoms,healthcare and retail, which Investec believes are all at the low end of their historical profitability ranges. 

As ever with equities, positive earnings momentum and solid profitability don’t necessarily guarantee returns as this often increases the risk of overpaying. However, Investec believes that although we have seen European equities trade more richly over the last 18 months, European equities do not look overvalued and technicals are showing no cause for concern.

“In summary, we continue to be constructive on European equities due to our investment thesis: that earnings and returns are benefiting from the economic recovery and the recent round of self-help measures undertaken by companies. Meanwhile, valuations do not reflect the full extent of the earnings recovery. Downside risks are common to equities, but we remain focused on the upside potential, especially if European banks are able to show lending growth.” Hsia concludes.

The Time for Global Desynchronization in Monetary Policy, Taxation and Growth has Arrived

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Llegó la hora de la desincronización global en la política monetaria, la fiscalidad y el crecimiento
Erick Muller, Head of Strategy at Muzinich. The Time for Global Desynchronization in Monetary Policy, Taxation and Growth has Arrived

Much has been said about the unique phenomenon of global synchronized growth, the unanimity of a lax monetary policy, and the objective of having common fiscal policies by geographical regions. But what if all this had come to an end?

According to Erick Muller, Head of Strategy at Muzinich, an asset management company specializing in corporate fixed-income or credit, this may be the next market reality. Muller believes that a new macroeconomic environment is emerging in which the European and North American economy begin to take different paths. “2017 marked a new turning point since the great financial crisis as it brought about a scenario characterized by synchronized growth between emerging and developed countries, a stronger banking sector, very positive and growing corporate results, and a lower unemployment rate. Since then three things have changed: monetary policies, fiscal policies and the pace of global growth,” says Muller.

In Muller’s opinion, these three trends are the ones that are breaking the great synchronization that we had until now. Analyzing each one of them, Muller firstly points out the fiscal policy undertaken by the US and its announcement of tax cuts. In this regard, he stressed that these measures are not succeeding in making the US economy any more efficient; however, it could cause an increase in the budget instead.

“Donald Trump’s decision to redesign trade policy in order to benefit the US, could produce a certain shock in the market or short-term uncertainty in the business sector,” Muller points out, and points to protectionist policies as the clear difference with other economies. In this regard, he acknowledges that growth has slowed down, especially in developed countries, but it isn’t alarming because global and fundamental indicators are positive.

Finally, Muller refers to the fact that this desynchronization is more evident when it comes to talking about the monetary policies of central banks. “Inflation is not rising at the rate expected by central banks, which has a clear effect on the rate hikes they plan to make. The Fed has already started more firmly along this rate hike path, while the ECB is delaying the rate hike and lengthening the cuts to its asset purchasing program,” explained Muller.

Opportunities on the horizon

In this context of “desynchronization”, he sees investment opportunities in corporate bonds, mainly denominated in Euros. “We are convinced that the focus is on short duration and on being very selective, we believe that floating bonds, syndicated loans and private debt are interesting, although the latter has less liquidity,” says Muller, who explains that they have seen a growing interest in private debt by institutional investors.

When talking about geographical areas, Muller admits that they prefer Europe over the US. “It’s true that US high-yield can offer somewhat higher interest, but the currency exchange hurts it,” he concludes. In terms of emerging markets, he points out their attractive yields, especially in short durations.

Finally, Muller points to flexible strategies as the type of strategy that best adapts to an environment like the current one; In this regard, he also acknowledges that strategies of short durations and absolute return are among the most demanded, especially by conservative profiles. Instead, institutional investors have become more sophisticated, he added.
 

In a context of high demand, Ardian has confidence in Latin America

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En un contexto de fuerte demanda, Ardian apuesta por Latinoamérica
To the left Vladimir Colas, Member of Ardian’s Executive Committee and Co-Head of Ardian USA. To the right Nicolás Gazitua Senior Investor Relations Manager for Ardian . In a context of high demand, Ardian has confidence in Latin America

After the announcement of the opening of their first office in Latin America in Chile, Funds Society had the occasion to discuss the details of Ardian’s strategy in the region during an exclusive interview with Vladimir Colas, Member of Ardian’s Executive Committee and Co-Head of Ardian USA, and Nicolás Gazitua, leader of Chilean office and currently Senior Investor Relations Manager for Ardian in New York.

The election of Chile as the first country to establish is not only because of the stable economic and political environment but also because of the continued interest of the investors and clients in the country. “The growing demand of our LPs (pension funds, insurance companies, and family offices) in the region, particularly in Chile, Colombia Peru, has been the main reason for us to choose Santiago. Additionally, though our focus is to build stronger relationships with investors in these countries, we have seen significant interest from Brazil and Mexico to diversify their holdings outside of Latin America. We will be looking to fulfill that demand as well”, explain Gazitua.

When asked if the approval of the new investment act that expands alternative assets for pension funds has been a key drive in their decision, Gazitua states: “The internal decision was taken before the new regulation was approved. That being said, there is no doubt that the new regulation is a great push”

Ardian has since 2015 a distribution agreement with Volcom capital. In regards to the consequences that the new office might have in their relationship with the distributor, Colas explains: “We are extremely satisfied with our relationship with Volcom. The opening of Santiago will not change our agreement, it will strengthen and enlarge our collaboration”

Direct investment in Infrastructure

The immediate objective of the Chilean office, that will be led by Nicolás Gazitua, is to support the investor and LP relations across the region. Their view is that, due to both the improvement of foreign investment and the domestic economies, interest in infrastructure investment will increase, and as such, in the medium term, they are considering the possibility of managing direct investment from the Santiago office enlarging the team with the resources and expertise required.

Vladimir Colas explains: “our added valued lays in sharing with our investors and LPs, information, knowledge and strategies. We want to be close to the interests that our LPs and clients have in the region.”

Ardian is an approved asset manager for private equity and infrastructure assets by the Chilean risk rating commission (CCR), which makes them potentially eligible within the investment universe of the Chilean pension funds. Ardian is the sole foreign asset manager approved by the CCR for the infrastructure segment.

Interest in the Private debt segment

Gazitua stated that in the short term they will seek of authorization for the Private debt segment. Regarding the Real Estate segment, Gazitua adds “the requirements needed to gain the approval are demanding and we are considering asking for it once we are ready to meet them”. Colas adds that they have recently closed a fund that invest in European Real Estate assets with investor from the region, stating that there is evidence of   real interest for this asset class.

Both executives end the interview by pointing out their competitive advantages versus local companies that already established in the local markets. Colas states: “We are a global and multilocal company, offering a wide variety of products (fund of funds, direct investments, infrastructure, private debt) with a significant expertise and business knowledge. We accompany our clients in their decision making process sharing our knowledge, experience and information of the different sectors.”

Gazitua adds: “Our main differentiating service is the possibility to offer our clients customized investment programs. Some investors are looking for a private equity solution where, rather than committing to a particular fund, they can invest in a number of fund and strategies combined over several years—and we have the ability to provide that solution.”