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Charitable Giving to Maximize Your Tax Benefits

According to Raymond James & Associates SVP Lisa Detanna, the process of estate planning when it involves a gifting strategy is to give what you want, to whom you want, when you want, and how you want and if possible save on taxes and expenses.

Financial planners and investment advisors help families develop an estate plan with the client’s trusted accountant and estate lawyer that utilizes current gifting laws to be efficient when passing assets to the next generation and the charities that the individual or families are dear to.

Generally, they start with a cash flow model and retirement plan whereby they determine if the client and their family have enough to live like their highest earning income years throughout retirement. Then, they run these future cash flow models out to age 110 with rich assumptions on the expense side of the ledger and conservative assumptions on the asset to err on the side of caution.

When there is a surplus, they work with a client and their families to identify if there are heirs that the family wishes to inherit the wealth at their passing and how much. It is not an “all or none” answer and is different for every person with no right or wrong answers. If there are not for profits or charities that are important to the client, they then look at developing a gifting strategy that fits into the client’s wishes and maximizes the tax efficient benefits under current gifting laws.

There are 3 options in estate tax: Avoid the tax: give assets away before death; Pay the tax: sell assets or transfer assets; and Insure the tax: use discounted dollars to pay the tax, preserve assets and estate.

Like the slogan “death and taxes are inevitable,” estate taxes are due in cash within nine months of death and they are progressive.

Currently, one can gift US$14,000 maximum per beneficiary per year (called annual gift) without filing a gift tax return or it eating into one’s lifetime gift credit or estate tax exemption at death. In addition, one can pay educational expenses or medical expenses if directly paid to the provider. This is the simplest way to make a gift and many charities will accept highly appreciated stocks, bonds or real estate which can be tax friendly to the grantor.

If one is fortunate enough to have over the exemption gifting amount, this is where the estate planning begins. One can gift to bonafide 501(c)(3) charities the overage of the exemption amounts and if they utilize some estate planning techniques they may be able to get some tax benefits on those gift that they can benefit from while they are still alive. Of course one can also gift with any level of wealth and these gifts can be tax efficient. Always consult your accountant, financial advisor and attorney prior to making the gift so there can be a discussion on how best to do it.

“Charitable giving is important within wealthy families as it instills the concept of giving back as assets are passed from one generation to the next and helps prepare heirs to be good stewards of wealth. Involving heirs early on to prepare them to be able to handle how to help others and utilize the wealth as well as finding purpose in life by helping others through philanthropic efforts is key for a family in creating a meaningful legacy. In fact, there are a wealth of gifting strategies and changes in tax laws or regulations may occur at any time. Be sure to discuss any tax or legal matters with the appropriate professional. ” Detanna concludes.

Rebecca Crockett Joins Legg Mason as International Sales Director for Americas International

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Rebecca Crockett joined Legg Mason Global Asset Management in December as the International Sales Director for the Americas International team. Rebecca’s core responsibility will be to cover the clients in the Northeast region and she will report directly to Lars Jensen in Miami.

Prior to joining Legg Mason, Rebecca worked with Morgan Stanley for twelve years. During her time with Morgan Stanley, Rebecca held multiple sales positions within the Wealth Management and Investment Management divisions. Her previous experience includes roles as a business analyst and equity research associate covering Latin American companies. Rebecca received a Bachelor in Science from the Wake Forest University with a dual major in Spanish and Business. She holds her Masters of International Business Studies from the University of South Carolina.

Casellas, Bernal and Vilchis Join Vanguard Mexico

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Vanguard continues to grow in Mexico. The firm that last summer hired Juan Manuel Hernandez to lead its business in Mexico as the company expands its efforts to meet local investors’ needs for low-cost and broadly diversified investment products, has hired three new sales employees.

Denise Casellas joins as Sales Consultant, while Guillermo Vilchis and Pablo Bernal join as Sales Executives. Juan Manuel Hernandez told Funds Society: “I am delighted that Denise, Guillermo, and Pablo are joining Vanguard to bring the Vanguard way of investing to Mexican investors. Their deep knowledge and expertise will serve our clients well.”

Denise Casellas joins Vanguard most recently from SURA Asset Management where she spent the last year as a Product Specialist. Before SURA, she spent almost 4 years at Santander Asset Management and earlier in her career, she worked for UBS Wealth Management and Prudential Financial. Denise holds a BS in Finance from ITESM, has a Banking and Finance Diploma from IEB Spain and is a Certified Financial Advisor per the Mexican AMIB.

Guillermo Vilchis joins Vanguard most recently from Citigroup´s Mexico broker dealer, Citibanamex where he spent the last 4 years as an equity sales trader. Previously, he spent 7 years at Bank of America Merrill Lynch. Guillermo holds a BS in Industrial Engineering from Universidad Iberoamericana and an MBA from ITAM. He is also a certified Mexican stock exchange trader and holds FINRA Series 7 Certification.

Pablo Bernal joins Vanguard from Sherpa Capital, a boutique asset management firm specialized in Mexican equities where he spent the last 5 years as an Associate Portfolio Manager. Previously, Pablo worked at BlackRock´s iShares, the United Nations, and Deloitte. Pablo holds a BA in Public Accounting and Finance from ITAM and is a CFA Chart holder.

Vanguard, the world’s second-largest ETF provider, offers 65 US-domiciled ETFs in Mexico.

Beamonte Investments Committed 1 Billion Mexican Pesos to Axman Holdings

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Beamonte Investments, has committed 1 billion mexican pesos over the next two years to Axman Holdings, a diversified company focused on manufacturing investments in Canada and Mexico.

Axman Holdings is a new company looking to take advantage of the arbitrage of NAFTA with the current geo-political situation focusing on distressed manufacturing companies in Canada and Mexico. Axman will be headquartered in Mexico City with offices in Toronto, Ontario.

Eliminating the North American Free Trade Agreement (NAFTA), which was crafted by former President Bill Clinton and enacted in 1994, was a frequent Trump campaign promise. The deal was intended to eliminate most trade tariffs between the three nations, increase investment, and tighten protection and enforcement of intellectual property. U.S. manufacturing exports to Canada and Mexico, the United States’ two largest export markets, increased 258 percent under the agreement.

“Building on Beamonte’s expertise in analyzing and managing performance risk, we believe Axman Holdings will offer many incumbents the ability to modernize their plant operations and equipment in order to become more institutional, efficient and Profitable,” said Luis Felipe Trevino, Senior Managing Director at Beamonte Investments and Chairman of the Board of Axman Holdings.

What Sanctions Would the 5 Latin America and the Caribbean Countries Included in the EU’s Tax- Haven Blacklist Face?

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¿A qué sanciones se enfrentan los 5 países de América Latina y el Caribe que la UE ha incluido en su lista negra de paraísos fiscales? — CC-BY-SA-2.0, FlickrPhoto: Walter . What Sanctions Would the 5 Latin America and the Caribbean Countries Included in the EU's Tax- Haven Blacklist Face?

After two years of negotiations, the Finance Ministers of the EU Member States approved in Brussels, the first list of jurisdictions that do not cooperate in tax matters.

Of the 17 states included in this list of tax havens, there are five from Latin America and the Caribbean: Barbados, Panama, Grenada, Saint Lucia and Trinidad and Tobago. All have been singled out for not making sufficient efforts in the fight against tax evasion and they are also included in the list that the OECD produces each year.

These five are joined by 12 other countries: American Samoa, Bahrain, Guam, South Korea, Macao, the Marshall Islands, Mongolia, Namibia, Palau, Samoa, Tunisia and the United Arab Emirates.

The Bahamas and the British and United States Virgin Islands were supposed to be blacklisted, as were Anguilla, Antigua and Barbuda or Dominica, but the European Union has postponed the analysis until 2018 so that these small Caribbean islands have time to recover from the devastating hurricane season.

In addition, 47 countries have committed to address the deficiencies in their tax systems and meet the required criteria. Uruguay is on this gray list. This is due to its legislation on Free Zones indicated this year as a “harmful legal incentive” by the OECD.

The parliamentary procedure of a reform of the Free Zones Law that subjects companies to greater controls, should finish removing Uruguay from the zone of doubt.

What does it mean to be included in this list?

Recognition of the countries that encourage abusive tax practices, according to the European Commission, should have a real impact on the affected countries, thanks to the new EU legislative measures.

First, following the Commission’s proposals, the EU list is now linked to funding in the context of the European Sustainable Development Fund (EFSF), the European Fund for Strategic Investment (EFSI) and the External Loan Mandate (ELM). Their funds can not be channeled through entities in the listed countries. Only direct investment in these countries (that is, financing of projects on the ground) will be allowed in order to to preserve development and sustainability objectives.

Second, the Commission has proposed that multinationals with activities in these jurisdictions be required to have much stricter reporting requirements. In addition, any fiscal scheme that includes operations in any of the countries included in the EU list will be automatically reported to the tax authorities.

Finally, the Commission has already taken steps for Member States to impose coordinated sanctions on these countries that include measures such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions.

The EU’s reasons

These 17 countries on the blacklist have been identified after finding out that they do not comply with international transparency standards on automatic exchange of information or encourage unfair tax competition.

“Those countries that choose not to have a business tax or to offer a zero rate should ensure that this does not encourage artificial offshore structures without real economic activity,” the Commission explains in its statement.

How will Trump’s Fiscal Reform Affect Different Asset Classes?

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Así impactará la reforma fiscal de Trump en los diferentes activos — CC-BY-SA-2.0, FlickrPhoto: White House. How will Trump's Fiscal Reform Affect Different Asset Classes?

After passing 51-49 in the Senate Trump’s tax reform is one step further towards becoming a reality, which is expected to provide a moderate boost to US growth.

According to a survey of 51 analysts conducted by the National Association of Business Economics, around half of economists expect that changes in fiscal policy will increase the growth of the world’s leading economy by between 0.28 and 0.39 percentage points next year.

“We believe that the success of a package of fiscal measures will probably be accompanied by a slight rise in prices in the short term, of a magnitude practically similar to the setback that would result from a legislative failure,” explained Mark Burgess, Deputy Global Chief Investment Officer at Columbia Threadneedle Investments.

Small caps, consumption and finance

In general, the impact is expected to be limited, but small caps, consumer-related stocks and financial securities will be the most benefited according to Patrik Lang, Head Equity Research at Julius Baer.

“The final result will still be subject to some changes, but now it seems increasingly likely that the tax reform will take effect in the coming weeks. We maintain our opinion that the direct impact on the S&P 500 will be limited, while small caps and the consumer and finance sectors will be the most favored by the reform”.

Equities

For Peter Garnry, Head of Equity Strategy at Saxo Bank, the tax rebates will especially benefit companies with a more national orientation, as it will be positive in terms of cash flow available after taxes. With the corporate tax rate decreasing from 35% to 20%, net operating profits will increase by 20% nationwide.

“Among the sectors that are being targeted by the US tax reform is the technological sector, since a repatriation tax of 12% could be imposed. This tax would encourage companies with money abroad to return to the US. It is estimated that around $2.5 trillion in cash are abroad and that around 50% of this money would go back home and be used for the repurchase of shares,” he estimates.

High yield debt market

The tax rates high yield debt issuers pay in the United States are, on average, 28%, recalls SKY Harbor Capital Management, so with everything else equal, the proposed tax cuts will modestly improve the free cash flow for issuers.

In addition, they explain, the issuers of lower rating and with greater leverage will be negatively affected by the reform, since a reduced tax shield will offset the benefits of a reduced tax rate. And on the other hand, issuers of higher quality and investment grade will be te ones that benefit the most of repatriation.

For the firm, sectors with high average tax rates, high interest coverage rates and capital intensive operating models should be the main beneficiaries of the tax reform.

Gold waiting for political events

The tax reform should have a more lasting impact on the gold market, since it is likely to reactivate optimism regarding a higher growth rate in the United States, support the idea of rate increases and encourage a rebound of the US dollar.

“The sustainable rise in gold should materialize once growth concerns creep into the financial markets and reactivate investor demand for gold as a safe haven,” says Carsten Menke, Commodity Analyst at Julius Baer.

BlackRock Expands Asian Equity Range with High Conviction China Fund

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BlackRock has expanded its Asian equity fund range by launching the BlackRock Global Funds (BGF) China Flexible Equity Fund. The Fund is designed to enable a growing number of investors seeking to access opportunities in both onshore (A-shares) and offshore (H-shares, Red-chips, P-chips, American Depositary Receipts [ADRs], etc.) Chinese equity markets without having the need to allocate to two separate strategies.

Funds investing in China often focus solely on offshore equities, with onshore Chinese equities – namely China A-Shares – severely under-owned by global investors due to historic market restrictions on foreign investment.

The BGF China Flexible Equity Fund is managed under a flexible approach, and invests across A-Shares and Chinese offshore equities, market capitalisation, sectors and factors. It seeks to take advantage of the nuances in the Chinese equity markets, including valuation differences between markets, factors which work favourably in different market cycles, or sector specific opportunities. The Fund is a long-only, fundamentals-driven and concentrated portfolio, investing in between 20 and 50 companies from a universe of over 3,300 onshore and 1,000 offshore stocks.

The BGF China Flexible Equity Fund is managed by Helen Zhu, Head of Chinese Equities at BlackRock, and is supported by a team of 10 dedicated China-focused research analysts based in Hong Kong and Shanghai.

Zhu said: “Chinese equities have been demonstrating higher sector return dispersions, offering active stock pickers a rich investment universe. Dynamic, vibrant and now more accessible than ever before, we believe Chinese equities offer investors an attractive opportunity to invest in the transformation of this huge country. The Fund aims to blend the best opportunities, taking advantage of the nuances in the Chinese equity markets. Through flexible allocation, the Fund can invest across the full range of market capitalization and Chinese stocks listed globally, whether they are listed in mainland China, Hong Kong, the US or elsewhere.”

Michael Gruener, Head of EMEA Retail at BlackRock, added: “Backed by the world’s largest population, the second largest economy and an increasingly sustainable growth path, Chinese equity markets are a rich hunting ground for investors. Most funds investing in China still tend to focus solely on offshore equities, meaning investors are missing out on hundreds of potential investments. Through this fund, we are giving clients the opportunity to access both mainland and offshore Chinese equity markets with one flexible strategy.”

As Rules Regarding the Creation of Synthetic ETFs Become More Stringent, They Could Have an Impact on Growth

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"La regulación más estricta sobre ETFs sintéticos podría impactar en el crecimiento y la velocidad de convergencia entre el mercado de ETFs en Europa y EE.UU." — Agnieszka Gehringer and Kai Lehmann, courtesy photos. As Rules Regarding the Creation of Synthetic ETFs Become More Stringent, They Could Have an Impact on Growth

According to Agnieszka Gehringer and Kai Lehmann, members of the Research Institute of Flossbach von Storch, ETFs go beyond passive investment, due to their hyper trading activity and the latest innovations in the field of smart beta. In this interview with Funds Society, the experts also warn of the uncertain behavior of ETFs in turbulent periods, something not yet tested, and are confident of the industry’s potential for growth in Europe, although, they are aware the stricter rules on the creation of synthetic products could be a drag on its development.

What do you intend when you doubt that ETFs are passive?

The ETF are often put in the context of passive investment, based on the fact that they follow the performance of a certain index. This is exactly the idea staying behind the traditional index funds – an invention of Jack Bogle dating back to 1976. But Bogle aimed at providing an instrument for a long-term investment in stock market by simply following the index. To the contrary, ETF investors are very much short-term focused. They trade ETF shares very actively, indeed hyper-actively. This is what we find in our analysis based on the three biggest equity ETFs tracking respectively the German DAX, the US S&P 500 and the FTSE 100 in the UK. The volume of the ETF shares traded on average every day is four times higher than the traded stocks of the underlying indices. This hyper-activity brings the idea of passive investment ad absurdum.

Has the innovation propagated the creation of ETFs which can be called active? Isn’t it a contradiction? How does the passive and active investing complement one another in an ETF?

Besides the traditional ETF there is indeed a growing interest in the so called smart beta ETFs. Whereas the traditional ETF are supposed to reconstruct 1:1 the index performance based on the market caps of the index constituents, smart beta ETFs weight the basket of the underlying securities based on alternative criteria, called factors. In this way, they aim at performing better than the market and thus better than traditional ETFs. These factors may relate to some kind of assessment of accounting metrics of the index constituents, like book value, dividends, or cash flows, or to still other factors, such as low volatility, undervaluation or expected momentum. In this sense, smart beta ETFs add an active layer with respect to traditional ones: they are not only actively traded, but render the underlying investment choice active as well. Is it a contradiction? I wouldn’t say so – it is more an enhancement on the activity scale. But the important thing to note is that such “active” choices are not comparable with the investment decision made by an active asset manager who thoroughly analyse the entire business model of a company in order to assess its intrinsic value. Smart beta strategies are focused on fast-track, partial, rather than thorough, and more quantitative, rather than qualitative assessment of companies.

Due to this innovation, could ETFs push the active strategies aside?

Given the current popularity of ETFs, be it traditional or smart, it wouldn’t be surprising to see further rise in the relative share of ETF-managed funds. At the same time I would doubt whether it is in the interest of ETF investors to fully eliminate active investment strategy. In the end ETFs freeride on the contribution which active managers deliver to the efficient price building on capital markets. By the same token, we can’t exclude that upon the attainment of a certain critical mass on capital markets by ETFs, the price building process might get into difficulties.

It is often stated that both types of investment strategies would survive. What would be the role played by the one and the other?

It is plausible to expect that both ETFs and active management will coexist. On the side of ETFs, they have been surely attractive so far, given the positive past performance on capital markets and their warranty of obtaining the performance of the underlying index. They could be thus appropriate for investors willing to simply follow the market. At the same time, not much is known so far about ETFs’ performance under difficult weathering conditions on capital markets. Only when markets enter more turbulent waters will we be able to assess the true performance of ETFs. For now ETF investors should keep this uncertainty in mind. On the side of active managers, and especially of those following a consistent and well-founded investment strategy, they will continue to play a role in enhancing the price setting on markets, especially when we see some market turmoil.

In your opinion, which was the major innovation in the world of ETFs during the last years?

The original idea of following the market in order to enjoy the long-term positive return at a rock-bottom cost is quite revolutionary. Their invention may have helped to get in touch with capital markets. But today there is not much left out of this. To the contrary, the hyper-activity of ETF trading and allegedly “smart” investment choices of smart beta ETFs could pose more risks than benefits, should capital markets experience turmoil in the future.

In launching of novelties (smart beta, currency hedging (?), …), where could the next innovations go in the world of ETF?

Given the past creativity in the field of ETFs, the innovation could go anywhere. Just think of the different kinds of thematic or even esoteric ETFs, like for instance “biblically responsible” ETFs… If this trend continues, the question will be increasingly about the risk-reward balance of less diversification and less market liquidity versus chances to pick up an index performing better than the others. All in all, there seem to be less and less well-founded investment choices.

Is the use of ETFs changing – from tactic to strategic positioning? Does this generalization in the use regard all types of investors?

This seems to be particularly the case for institutional investors. In the past, they were using ETF for cash equalization and transition management. But now the growing use for core exposure can be observed.

Comparing the markets, the European with the US market, Europe is lagging behind, but could still catch up. How much could the European industry grow?

The size of the ETF market in Europe is indeed significantly smaller than in the US. Precisely, the total assets held by US-ETFs now add up to about 3.3 bn. USD whereas its European counterparts are currently approaching the roof of 1 bn. USD. There is surely catching up potential for Europe. At the same time, there are some important regulatory changes applying next year, which could decelerate the process. Precisely, rules regarding the creation of the so called synthetic ETFs become more stringent. Accordingly, given the current non-negligible share of synthetic ETFs in Europe, this could have an impact on growth and the speed of convergence between the European and US ETF market.

Could the regulation have an impact on the use of ETFs and why?

As mentioned above, the regulation is already having an impact on the use of – in this specific case synthetic – ETFs. But more generally, given that ETFs can still be considered as relatively new to the financial market reality, the regulators have to gather information and experience regarding the functioning of ETFs. This task is not easy and regulators could lack the necessary information to set up well-functioning rules. And the past teaches us that unfortunately sometimes it needs an external shock to discover the loopholes in the system. Hopefully this time is different.

Pictet AM: “Tech Stock Valuations Still Offer Room to Invest”

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The new disruptive technologies are experiencing exponential growth and should be measured in terms of the power of transformation of their technology. It is more than a revolution, something that has to do with the potential to completely change the way societies live and work; a turning point from everything else before it.
For investors who do not want to be left behind in this revolution Pictet offers three thematic strategies. The most recent, Pictet Robotics, was launched in 2015 and invests in companies that provide an automated solution and in all technologies that allow this type of solutions (such as artificial intelligence, sensors, and semiconductors). The strategy has been so successful that it is only available to current investors that are already invested in the fund.

Pictet Security and Pictet Digital strategies had been launched previously, the first strategy invests in companies that develop security solutions to protect the integrity of governments, companies, and individuals. Meanwhile, the second strategy invests in disruptive companies that offer interactive business models through web-based applications and software.

In an interview with Funds Society, Alexandre Mouthon, Senior Client Portfolio Manager at Pictet Asset Management, presented the multiple examples of disruptive technologies that can already among us, and those that are yet to come, such as autonomous vehicles, artificial intelligence, robotics or process automation, as well as the internet of things.

“In the future, all electronic devices will be connected through sensors, being able to be linked effectively through the internet of things. The IoT is a very broad concept in which everything can be interconnected. It will be possible to create and manage infrastructures, cities and smart homes. An example could be effective control over traffic signals or even the vehicles themselves will be connected.”

Is it still a good time to invest in technology?

In a market in which the main technology stocks have experienced a rise above 35%, many investors are asking if it is still a good time to enter this sector or if instead it has risen to stratospheric levels. In that regard, Mouthon explains that he does not believe that tecnology stocks are experiencing a bubble like the one that occurred in 2000, since the price/earnings ratio of the MSCI World Technology index have recently traded at levels close to 18.4 xs.

“The MSCI World Technology Index reached a price/earnings ratio of 44.2x during the course of the internet bubble in the year 2000, then it was deflated by the correction of the market, and since then a lateral evolution has been seen, therefore, based on history, we can say that there is still room in these valuation levels.”

According to Mouthon, since 2010, earnings in the technology sector have been very positive. About 90% of the movement in the index could be explained by a very positive momentum; while the remaining 10% could be explained by a lower expansion of the ratio. “There is a slight expansion in the ratio levels, but with a positive momentum. This means that most of the yield is due to positive returns with very strong fundamentals. “

Technology companies’ balance sheets are solid. Especially when comparing Amazon’s, Ebay’s and Priceline’s December 1999 ratios with those obtained in September of 2017.

“At the end of 1999, Amazon’s enterprise value-sales (EV/S) ratio was 9.8 xs. While it currently stands at about 2.2x times. These companies are now generating much greater earnings, with much more cash. They are much more profitable than 17 years ago. The vast majority have much stronger balance sheets than in the year 2000. This does not mean that if companies were examined on a one-by-one basis, we wouldn’t find that some of them are not properly valued.”

Pictet manages between 40 and 70 stocks in its strategies, having the opportunity to diversify and arbitrate between those companies with the highest valuation and those that still maintain attractive levels of valuation.”It can be managed very effectively. At present, ratios in the portfolio are in line with or below the global equity market. Although the valuations are attractive, it is possible that there is a correction in the market. It’s something that we’ve been expecting for months, but that has not happened yet. It’s possible that it will happen shortly, but it will not be a total reversion of the market”.

The investment universe

The strategies are agnostic with respect to the index. To determine the investment universe of each of the strategies, the management team determines the thematic purity of these companies. In this way, the team seeks that at least 20% of the sales of the companies in which it invests a certain strategy has its origin in the theme of the fund. For example, in the Pictet Digital strategy, at least 20% of the sales of the companies in which the fund invests come from the internet or from a web-based activity.

“In the Digital strategy we are investing fundamentally in internet or software companies. Of course, the FANG, Facebook, Amazon, Netflix and Google shares, or their oriental versions, BAT, Baidu, Alibaba or Tencent, are part of the universe in which it is invested, and so are many of the internet or software participants such as Medidata, Athenal Health, and Zendesk. We are global investors by definition, as long as we find companies that dedicate 20% of their sales to internet services and software, whether in the United States, Europe or Asia, they may potentially qualify to be included in the strategy. Naturally, there is a bias towards the United States, due to the natural leadership of its companies in the Internet sector “.
Likewise, in the Pictet Security strategy, 20% of sales come from activity in cyber security, security in transportation, security in food processing companies, and in the Pictet Robotics strategy, these come from companies dedicated to automation of processes and artificial intelligence.

The most disruptive tendencies

Every minute, 500 hours of YouTube videos are uploaded to the internet; 3.3 million comments are posted on Facebook; 29 million messages are exchanged through WhatsApp, and 3.8 million searches are made on Google. Access to the Internet from any device is, according to a study carried out by the McKinsey Global Institute, the most disruptive technology of the coming years. This report points out 12 technologies that will completely change the current way of living and working. Specifically, six of them are expected to have a strong economic impact: automation and the introduction of robotics, mobile internet, the cloud, the internet of things and autonomous vehicles. “What we have tried is to establish a map with our strategies, integrating these six important disruptive technologies, to which we have added Fintech, which is also expected to change the financial industry and how we currently know it. This mapping is helping investors to realize how our three-disruptive technology fund are complementary in covering these 7 trends among the technology space and the coverage, through the 3 strategies is almost perfect. These seven technologies should benefit from a high growth environment, so they should grow in excess of the global GDP growth, and above of global spending on information technologies. These technologies are tending to grow exponentially and they interact with each other. The artificial intelligence market can be very significant, from 5 to 6 billion at present, and could reach 120 billion in 2025. This will happen when software and hardware applications are combined. You can invest in artificial intelligence through software, investing in the digital strategy, while investing in artificial intelligence through the hardware side is an exposure to robotics. Therefore, artificial intelligence is present in the two strategies.”

The effect of technology on employment

Both artificial intelligence and robotics will have a strong impact on the economy. In general, we talk about the negative effect that technology will have on the labor market, but we underestimate how these new technologies will open the door to new types of jobs that are not yet known.

“As in the internet revolution in the year 2000, when nobody expected that companies like Google could employ so many people, nobody has expected the emergence of companies like Salesforce or Zendesk nowdays, or the large number of companies that are benefiting from the internet revolution. Very likely, the same will happen with the robot revolution or the artificial intelligence revolution, where new jobs will be created from the digital revolution. The main issue is that artificial intelligence and robotics not only affect one sector of the economy, but they are affecting all sectors of the economy at the same time. It is a revolution that moves at a great speed and its growth is exponential. At some point, we will begin to see certain regulations coming into force that will try to slow down the adoption pace of automatic or robotic solutions, giving more time to the workforce to adapt and probably to learn new jobs,” concludes Mouthon.

Robert Spector (MFS): “We Expect a Flattening US Yield Curve and a Steeper One in Europe”

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In an environment in which interest rates are historically low after eight years of expansive monetary policies, Robert Spector, who along with Pilar Gómez-Bravo and Richard Hawkins is one of the lead managers for MFS Investment Management’s MFS Meridian Funds Global Opportunistic Bond strategy, believes that there are still attractive, or relatively attractive opportunities, in which you can get good returns.

During a recent conference in Miami, the asset manager pointed out that the strategy seeks to provide consistent returns and transparency: “We want to provide investors with a fixed income experience, regardless of whether we buy high yield debt or emerging market bonds. When there is an event in the market in which investors lose appetite for risk, we don’t want this fund to behave as if it were an equity fund.”

According to Jed Koenigsberg, Institutional Portfolio Manager, who also participated in the event, some of the funds that compete in the same Morningstar category have a 30% or 40% correlation with the variable income universe. The search for predictability in returns is the differentiating characteristic of this strategy relative to competitors: “When stock prices fall, you don’t want your fixed income exposure to go down as well”.

Where are the fixed income opportunities?

The current macroeconomic environment indicates that many global regions are showing more broad-based, sustained growth, something that had not been seen since the global financial crisis. With this growth, it is very likely that rates will start to rise, albeit gradually, with very different responses depending on each of the regions.

A year ago, there was genuine concern in the markets that China, and potentially the United States, could fall into recession. Today, the risk of an impending recession is very low. While fundamentals remain strong enough to support exposure to riskier assets, MFS suggests a note of caution because of credit spread levels and higher valuations. With this scenario, MFS sees value in the higher-quality part of high-yield market and in some investment grade bonds, especially in those sectors that are increasing their leverage.

For six or nine months, the MFS Global Multi-Sector strategy managers have emphasized emerging market debt within its high-yield allocation, where they have found greater value. Investment in emerging market debt began to make sense with the noise created by President Trump when he signaled that he was going to pull the US out of certain international treaties, and with the improvement of global growth.

According to Robert Spector, although the market continues to price in the continuation of Fed rate hikes, the risks incurred in fixed income when entering a more restrictive cycle are not being correctly evaluated. By reducing its balance sheet and interest rates at the same time, the Fed is accelerating the rate at which the monetary cycle is being restricted. Although the US central bank has informed investors that it is a gradual and automatic withdrawal, Spector believes that the combination of both measures will have a material effect in the coming year.

“The balance sheet rose from US$ 7.15 billion to US$ 3 trillion, which significantly helped the economy and served as support for risk assets. A reduction in this balance sheet should have the opposite effect. In the first phases, in which the balance sheet decreases, there will be no significant changes, but later it will have a material effect. In its economic projections and ‘dot plot,’ the Fed places the rate hike for the coming years at 2.75%, but it is likely that, if the balance sheet reduction takes place, the Fed will end up at a significantly lower rate, not above 2%. Even if the Fed stops its rate hike sometime next year, it is very likely that the US yield curve will continue to flatten. At the same time, the European Central Bank has announced that it will withdraw its quantitative easing program, although it will keep interest rates in negative territory. This has already caused the yield curves in Europe to begin to steepen. We are positioning the portfolio accordingly, remaining with steep positions in Europe and with flat positions in the United States.”

For Spector and the MFS team, the sovereign debt of core European countries is widely overvalued. “Yields on German 10-year bonds are around 50 basis points. Bond yields in countries such as Austria, Finland, the Netherlands, Belgium and France keep their interest rate below 0.75%. In a world in which Europe is growing at a rate of about 2% and inflation is between 1% and 1.5%, we see a historical gap between returns and the economy. These are signs of a significant overvaluation, which is why we have eliminated most of our duration risk outside that European core, especially in the short end of the curve.”

Performance of the rest of the central banks, such as the Bank of Japan and the Bank of England, should also be considered. Put another way, global liquidity carries as much weight as the Fed’s performance in its unwinding. “This experiment has not been done before, so the final result of quantitative easing will most likely be different from the expectations that have been generated with the models of the main central banks.”

Other opportunities detected by the MFS Global Multi-Sector Fixed Income team are structured products, which represent an attractive valuation opportunity as an alternative to high-quality fixed income, where the spreads are really significant. “We have found opportunities in commercial mortgage-backed securities (CMBS) not issued by government agencies, select asset-backed securities (ABS) and collateralized loan obligations (CLOs), as well as Freddie Mac bonds, which can be a good alternative to treasury bonds. Through this type of exposure, we are able to find excellent liquidity which is roughly equivalent to that of more expensive high-quality corporate debt.

Investment philosophy and alpha sources

The MFS team emphasizes the need for a diversified approach in fixed income, especially in an environment like this one. The team’s approach is to incorporate multiple alpha sources across different categories within fixed income to find attractively valued securities, paired with active risk management. Investment opportunities vary with changes in market conditions, so they require an integrated analysis between the different fixed income disciplines at MFS: global credit, global high-yield debt, emerging market debt, collateralized securities and municipal securities and currency. Furthermore, where MFS differentiates itself is in the selection of securities. “At this point in the cycle, where spreads are so compressed, it is more important than ever to focus on debt securities that are truly appropriate for the portfolio. There are always inefficiencies along the entire cycle and throughout the cycle. And these inefficiencies are not only in the sectors, but they are in regions, in credit quality, in currencies, and in duration. Our job is to have a team that finds these inefficiencies and then integrates these multiple perspectives within the analyst team, which then leads us to finding good ideas to position within the portfolio.”

Finally, the MFS Meridian Funds Global Opportunistic Bond generates alpha from a number of sources within the portfolio: between 40% and 60% from asset allocation, between 15% and 25% from duration and country exposure, with security selection accounting for 15% to 20% and currency between 5% and 15%. “We expect to obtain returns from several sources. The most important item for us is the asset allocation, moving in and out of different sectors, but the duration, the country, and the yield curve are also very important contributors. The selection of securities is an important part of who we are, applying a bottom-up approach. We hope that this is a determining factor that drives performance,” concludes Spector.