CC-BY-SA-2.0, Flickr. The Uruguayan Bond Becomes One of Latin America’s Fixed Income Stars
The Uruguayan government is preparing a new bond issue, this time it will tender 775 million in Indexed Units (pesos indexed in inflation) with maturity in 2025. And as always, demand is expected to greatly exceed the supply: The Uruguayan bond is one of the shining stars of Latin American fixed income.
Last July, JP Morgan included the bond in Uruguayan pesos in its GBI-EM index, the index that consolidates emerging countries’ international issues in local currency. For the first time, the country’s population of 3.3 million people joined a club reserved for 18 countries.
Something exceptional had happened weeks before: for the first time in its history, Uruguay placed a global bond in pesos to five years. And demand was almost five times higher than supply. Financial advisors have not yet become accustomed to the new reality of a strong peso and a decoupled economy in the region, which has had almost twelve years of uninterrupted growth.
Juan José Varela, Gletir’s Commercial Manager, recalls the years that followed the financial crisis of 2002 and assures that “not even those who are the most optimistic could imagine an exchange rate at 28 pesos per dollar. JP Morgan’s GBI-EM index is “cheap rate assurance for Uruguay“.
The peso is a strong currency because of the amount of investments the country is receiving, the soybean revolution during the last fifteen years (thanks to Argentine technology), Argentina’s very closed markets, and furthermore, the installation of pulp mills, which are investments that impact the country’s GDP. If tourism, which is a very good element for Uruguay, is added to this, it generates very important currency strength. Many dollars come in and those dollars have to be sold to be applied to the national economy. “
Jerónimo Nin, Head Trader at Nobilis, coincided in Boston with authorities from Uruguay’s Ministry of Finance’s Debt Unit on the same day of that issue in pesos. Those officials had spent a week visiting funds around the world. “Investors were already looking for returns, at which point, the fears of Donald Trump’s policy toward emerging markets were dissipating. Then, the dollar began to weaken and the search for a bit more risk / return began,” explains Nin. At that time, Uruguay, an investment-grade country, was one of the few countries in the world to offer double-digit returns. The Central Bank’s anti-inflation policies began to bear fruit, and the government corrected the fiscal side, all of which brought confidence to the markets.
Jerónimo Nin points out that “it has gone very well for those who have bought, because the bonus came out at 10% yield, and currently is already operating at 8.25% or 8.30%.After fulfilling the authorities’ idea to enter the JP Morgan index and that drew in even more because it is a call for passive investors, those who follow strategies to replicate the index. Then those investors go out to buy in Uruguay.”
At Gaston Bengochea & Cia CB S.A, stockbrokers, they consider that the issue in pesos was a milestone, a maneuver attributed to the entry of young people to the Ministry of Finance. Diego Rodríguez, Director at Gastón Bengochea, affirmed that external factors played a fundamental role: “this issue is not only explained by Uruguay’s economic strength (which has been uninterrupted for 12 years) but also by the existence of a weak dollar since 2008. It’s clear, therefore, that, in the world, there is an appetite for currencies other than the dollar, and that has allowed many economies to issue in local currency. Brazil has issued in Reals, as have Mexico and Chile, amongst others.”
Photo: Terry Simpson, a multi-asset investment strategist at BlackRock / Courtesy. Terry Simpson: “We Continue to be Overweight in Equities Relative to Bonds, Even Eight and a Half Years into the Cycle”
In an environment where volatility levels are at a minimum, partly because of the widespread measures of QE by central banks and the low volatility of macroeconomic variables such as GDP, and the employment and inflation rates, the Black Rock Investment Institute is committed to maintaining current risk exposure, and even to increasing it. From here, the question that makes sense is: Given the present conditions, where do you take that risk within the capital markets? Terry Simpson, a multi-asset investment strategist, met in Miami in mid-July to resolve this issue and to share the firm’s expectations about the different markets.
Over the next five years, they expect US large-cap equities, as well as small- and medium-cap equities, to deliver an average return of 4 %. Also, for the same time horizon, they expect developed global equities, excluding US, to achieve an average yield of 6.2% and emerging market equities to reach 7%.
“These differences in returns are due to the high valuation levels in the US equity market, which are vulnerable to mean reversion. But we also believe there is an opportunity in the growth of global volatility within this economic cycle and we want to tilt our portfolios to where growth will emanate from. We know that the US economic cycle is much more mature than that of the Eurozone, emerging markets, or Japan, so these economies have scope for catch up,” said Terry Simpson.
“Thinking about valuations and rethinking asset allocations, we often get the question about the high valuations in financial markets, which is true whether you look across equities or you look across bonds. Bonds valuations are at historically high valuations. While equities also are at high historical valuations, they are not as expensive when compared to bonds. Thus, the key is relative value,” he added.
A Clear Commitment to Equities
The issue here is betting on relative value: If we invest in equities, how much premium are we offered in relation to investment in bonds? For the firm, these questions make more sense than to think about equities in absolute terms, as the vast majority of clients have positions in multi-asset portfolios. In addition, we are already eight and a half years into the cycle, so valuation levels are high: “If you compare the earnings yield of the S&P 500 index with the premium provided by equities- it can be calculated as the earnings yield of US Equities minus the real bond yield in the US markets- it can be seen that stock market valuations are high, but if the same yield is compared to bonds, one will see equities are still relatively cheap, and that is why we continue to maintain an overweight in equities in relation to bonds, even eight and a half years into the cycle.”
Another reason why the BlackRock Investment Institute favors equities is because earnings growth is now becoming a sustained part of this market: “We have long understood that this is a multiple expansion bull market, lacking an earnings growth recovery, yet we are at point of solid earnings growth. Q1 in 2017 was the first quarter since 2010, when all the major global regions recorded double digit positive EPS growth. So, it’s confusing that clients are taking money out of markets now that we are getting earnings growth. It is likely that growth in the first quarter of this year will not be recorded again because in some regions currencies have risen which may act as a headwind for earnings, but we still think that in Europe and Japan double digits earnings growth is feasible for Q2, while in the US we expect it to remain at the top end of single digits. In any case, this is a marked improvement from years past.”
Furthermore, one could consider Wall Street’s expectations, since there is a trend that began around 2010-2011. Since then, analysts broadcasted very high expectations in terms of earnings per share at the beginning of each year, yet as the year progressed, those expectations were adjusted downwards becoming more and more pessimistic. However, 2017 is the first year in which the expectations broadcasted at the beginning of the year remained practically flat, something that according to Terry Simpson should be interpreted as an encouraging fact, since it breaks with the previous pattern and in addition is being supported by an improvement in profit recovery.
Opportunities are Outside the US
At BlackRock, they began to think that there would be investment opportunities in the international markets at the tail end of last year, a position that at that time was identified as contrarian to market consensus. The rest of the market is now just getting on board, so their contrarian call is no longer contrarian. Will they adjust their position? Not quite yet.
“When we analyze the fundamentals of certain regions, our takeaway remains positive. For example, in Europe, the percentage of countries that have PMIs above their historical average is at its highest level since 2011”.
“Prior to 2009, EPS in European equity markets, excluding the UK, was virtually in line with that of the United States, as was earnings growth, obviously as a result of increased globalization. After the Great Financial Crisis, US earnings continued to increase somewhat, but in Europe they basically remained flat or declined. We think that the gap has potential to close as the global economy picks up. This is a fundamental story, there is an opportunity that Europe is going to catch up to the US”, he explained.
Regarding the need to protect and hedge the portfolio against currency risk, Simpson argued that it depends on risk tolerance and the client’s time horizon. “If you are looking for exposure to the European or Japanese equity market and the local currency is at a positive moment, you would be adding alpha to the portfolio with a direct exposure to currency risk, as is currently the case with the Euro and the Yen. Conversely, if the local currency is in a weak moment, as was the case during the past two years, it is convenient to opt for currency hedging strategies. With a high-risk tolerance and with a short time horizon, you can invest without currency hedging and take currency risk, but if the client does not want so much volatility in their portfolio, it is better to hedge the position. The same happens with the time horizon, over the course of 20-25 years, the effect of the local currency is washed out, there is basically no difference in terms of total return, but if you only want to invest for one or two years, it is better to hedge the risk”.
Finally, Simpson reviews the fundamentals that support investment in emerging markets. The differential between the growth of emerging and developed markets began to narrow in 2010. The growth of emerging markets started to converge with that of developed markets. It happened with China, which went from registering an annual growth of 10% to one of 6%, but this was also the case in Brazil and Russia. “In the last two quarters, we are seeing a rebound in the differential; emerging markets are restarting their growth. If this trend firms, we believe that EPS will grow and we will see better performance by emerging markets in relation to developed markets.”
From a technical perspective, Simpson recalled what happened in 2013, in the episode known as the “Taper Tantrum.” Ben Bernanke was Fed Chairman at a time when yields in developed economies were depressed; a massive flow of funds had invested in emerging market equities seeking higher yields. “At that moment Bernanke told global investors that they had reached the peak in the influence of QE measures, and that it may be optimal to withdraw the stimulus. A miscommunication that saw investors respond with a strong exit from emerging markets. Money has returned to this asset class, but there is still a lot of money waiting on the sidelines to reenter emerging markets, another positive point for this asset class,” he concluded.
CC-BY-SA-2.0, FlickrPhoto: Casa Blanca. How will Trump's Immigration Bill affect the Offshore Industry?
Trump’s support for the Senate’s proposal to halve the number of ‘Green Cards’ issued annually as part of its campaign to reduce both legal and illegal immigration could greatly affect the offshore investment fund industry in which many foreigners work.
And, as many experts agree, if there is something important in this sector it’s that you have to understand where the client is coming from in order to offer solutions to match their needs. That is why a large number of bankers and Latin American professionals associated with this sector come to the United States through their company’s sponsorship program, which processes the L1 visa. This permit, which allows managers and executives of overseas companies to work in subsidiaries or branches in the United States, is amongst those that Trump wants to cut down on.
Martin Litwak, who specializes in investment funds and is a founding partner of Litwak & Partners, has already detected considerable concern among its clients. “This is negative for the industry, especially for those who serve Latin America, and who are accustomed to bankers and managers who speak their own language and come from their own culture. If implemented, it will certainly affect the arrival of bankers. Other places that might compete in the US Offshore segment, such as Panama or Switzerland, could eventually appear,” he points out.
Arrival of Talent
For the lawyer the measure would not be consistent with the Trump administration’s intention to strengthen the US financial system. “If the United States wants to continue capturing international savings, of which it’s one of the main recipients, I believe that applying this restriction to this industry does not make sense. It should continue to commit to attracting talent,” he adds.
For Sergio Álvarez-Mena, a partner at Partner Jones Day in Miami, the new law is a double-edged sword. He points out that, to begin with, there could be a big difference between what Trump says and what is ultimately legislated because the process ahead is long. “It still has to go through several committees and from there to the Senate and the House of Representatives, so what is contained in the present ruling may differ greatly from what will result after this process.”
Regarding how the law could affect the offshore industry, Alvarez-Mena recalls that the objective is set within a 10 year horizon and will give preference to people with higher levels of education. “It will help those who apply for either a H1B visa or an O visa because they are people either with special skills or who excel in their fields of competence, and that means that they are highly qualified and of course, that they speak English,” he explains.
Foto: Roberto Teperman, responsable de ventas de Legg Mason en Brazil / Foto cedida. Legg Mason refuerza sus planes en Latinoamérica con el lanzamiento de dos nuevos feeder funds en Brasil
Legg Mason continues to prove its strong commitment to Latin America, and especially to Brazil, the country where the asset management company recently decided to launch two new feeder funds, which are investment vehicles that allow local investors access to funds with UCITS format, registered in Dublin.
“We are presently living in times in which the political and economic situation has significantly helped Brazilian investors to start looking for new sources of return and diversification in their portfolios. To begin with, the Central Bank of Brazil has slashed its benchmark rate, from 14,25% on October 2016 down to 9.25%, a rate level which had not been seen since 2013. This has caused offshore products to start to seem more attractive to the local investor, as the yield on Brazilian debt is no longer as high when compared to the rest of the world. Another issue that must be taken into account is regulatory change. The Brazilian Securities and Exchange Commission changed its definition of qualified investor (proving investors with at least 1 million BRL, approximately 315,000 dollars), allowing the opening of the fund distribution business to mass affluent customers, greatly benefitting local feeder funds, vehicles that allow the investment of 100% of their assets in offshore funds platforms in Dublin. Finally, we should mention the country’s economic situation, strongly linked to the political scene. Brazil needs an urgent reform in its pension system in order to address its huge fiscal deficit, and it is very likely that this reform will be postponed until after the presidential elections of 2018. This uncertainty increases the search for opportunities outside the country,” says Roberto Teperman, Head of Sales at Legg Mason in Brazil.
The first of the funds, the Legg Mason Rare Infrastructure Value, is an equity fund that invests 100% of its assets in global listed shares of companies that develop long-term infrastructure projects,such as gas and electricity distribution and transmission networks, water supply and wastewater, airports, toll roads, railways, ports or communication networks. This strategy seeks to achieve a target yield of G7 inflation rate + 5.5% and offers very low correlation with the local equity market given its exposure to global alternative assets.
The second one, the Brandywine Global Credit Opportunities, is a fixed income fund that, using a top-down approach, invests in alternative credit in the global bond markets across the credit spectrum, including exposure to debt opportunities in emerging markets that the fund’s manager finds most attractive. In addition, the fund may use long and short positions through the use of derivative instruments, mortgage-backed debt instruments (MBS), high-yield debt and investment-grade debt.
These two strategies are in addition to the two feeder funds that the asset management firm already distributes in the Brazilian market, the Legg Mason Western Asset Macro Opportunities Bond and the Clear Bridge Global Equity.
“We try to launch fixed income and equity feeder funds in order not to focus on just one asset class. The decision to launch the Brandywine Global Credit Opportunities feeder fund was determined by the high demand for fixed income assets with high yields in Brazilian investors’ portfolios. In this regard, the Brandywine Global strategy offers a unique approach to investing in fixed income, uses a top-down process, and its average annual volatility fluctuates around 4%. However, the Legg Mason Western Asset Macro Opportunities Bond tries to leverage the opportunities that may arise in terms of duration in the yield curve, using a bottom-up approach in portfolio construction that uses relative strategies in credit, and usually has an average annual volatility close to 7% or 8%, with a limit of 10%,” adds Teperman.
Finally, Lars Jensen, Head of Legg Mason Americas International commented that the launch represents Legg Mason’s commitment to the region. “We intend to launch new feeder funds in Brazil before the end of the year. At some point, the hope is to have all our Investment Managers represented in Brazil.”
Photo: Urbanrenewal. How Did the Top Private Banks Worldwide Fare in 2016 and Who Are They?
Scorpio Partnership’s latest edition of the highly anticipated Global Private Banking Benchmark shows a tale of two halves for the global wealth industry. The leading assessment of KPIs in wealth management highlighted that private banks successfully navigated regulatory and political upheaval in 2016, with assets under management rising by almost 4% on average.
The results, based on the publicly available information provided by over 200 wealth institutions, indicate that cost income ratios also fell below 80% for the first time since 2012, reflecting wealth managers concerted efforts to cut costs despite continued compliance pressures. Strong profitability growth masked the industry’s underlying struggle to improve revenues, with operating income rising just 0.04% on average.
“As advanced technology continues to reshape the wealth management industry, firms will be able to recognise cost savings through process optimisation,” said Caroline Burkart, Director at Scorpio Partnership. “The challenge going forward will be managing the revenue side of the profits equation. These firms are experiencing pricing pressure, driven by regulations, the trend for passive investing and the wave of lower-fee competitor models entering the market. Solving the equation will require increased focus on enhancing the proposition with advisory capabilities and improvements to the client experience,” she added.
This year the largest 25 firms in the Benchmark managed USD13.3 trillion of HNW AUM, representing a 63.2% market share. The list was lead by UBS, followed by Bank of America, Morgan Stanley, Wells Fargo and Royal Bank of Canada.
Of the top ten operators, seven had a North American focus. However, Asia’s private banks gained momentum in 2016. China Merchants Bank stands out in the ranking, having added over CNY400bn to AUM in 2016 as a result of enhanced customer acquisition efforts, as well as upgrading it’s private banking proposition. Another contender from Asia, Bank of China, entered the ranking this year, managing over CNY1 trillion on behalf of its wealth management and private banking customers.
By contrast, many of Europe’s key operators experienced negative AUM growth due to a combination of internal restructuring initiatives, decisions to scale back from non-core markets and reputational challenges.
As well as posting strong financial KPIs for 2016, wealth managers were also able to move the dial on client experience, with Scorpio’s annual client engagement tracker, which focuses on the three pillars of a wealth management relationship – Service, Proposition and Relationship, indicating an improvement of 5.72%. “Our research indicates that there a relationship between client perception of the firm and the AUM growth rate.” They added.
As evidenced by Figure 2, some firms faired better at converting enhanced quality of the client service into improved financial performance. North American banks are leading the ranks of wealth managers, with only one European bank among them in a top quadrant by CES vs AUM growth metrics.
“North American operators tend to have a more forensic approach to tracking, measuring and monitoring the client experience across multiple metrics. As such, we see them consistently move the dial on client engagement and, as a result, their financial results,” commented Caroline Burkart, Director at Scorpio Partnership. “The commitment to active listening to the needs of the clients will be imperative to a strong advice-led model.”
CC-BY-SA-2.0, FlickrLeon de Paul, courtesy photo. The Huge Opportunities for Private Equity in Mexico Create the Need to Strengthen Investment Teams
Facing impressive opportunities in private equity investments in Mexico, the Afores are seeking to increase their investments in alternative assets and the regulator, CONSAR, is preparing changes to the investment regime that will facilitate the process. Leon de Paul, Chief Risk Officer at Afore Citibanamex -the Afore with the largest investments in alternative assets, and according to the Institute of Sovereign Wealth Funds (SWFI), one of the best public investors in the world, spoke with Funds Society about its process, and expansion plans.
The investment team led by Leon is focused on the real assets and private equity side of alternative investments, such as real estate in its different sectors, infrastructure, energy and private loans. This is an asset class that the manager likes because “their returns can differentiate us from the rest of the managers and it can offer us higher risk-adjusted returns.” Citibanamex believes that private equity presents a great opportunity in Mexico for four reasons: Structural reforms, Regulatory changes – offering new investment vehicles, The appetite of foreign investors for participating in Mexican alternative assets and, mainly, Mexico’s demographics. “When you invest in an asset you want it to be profitable and have a market that demands it. Mexico is a very young country with an average age of 24 years. In 20 years, Mexico will need at least 60% more urban infrastructure, which means that we will need the assets. Someone has to built them and that someonehas to have a profit. In addition, with the current pensions’ structure, one of defined contributions, you can bring the assets to present value and invest in the long term to improve returns,” says the manager.
Regarding their due diligence, the Afore with the highest percentage of its assets, and amount, invested in alternatives has sought since 2008 to learn from its partners and is focused on creating the best investment team in the sector. They currently have seven professionals dedicated to reviewing the processes and expertise of the GP teams and are constantly growing because, considering their assets’ growth – one which makes it so that every five years they double their AUM, to simply keep 10% of their assets in Alternatives, they must maintain a robust and constant pipeline. Only in the last year and a half the risk team has doubled in size and the alternatives’ team has been created, says Paul.
However, there is still a long way to go… Between 2015 and 2016, only in infrastructure and energy in Mexico, more than 90,000 million pesos (more than 5.1 billion dollars) were committed and, according to Paul, the Afores, despite their mandate to invest in the long run, did not even invest 1% of that. “We must grow our teams to have more operations, to be able to invest relevant amounts and approach the authorities to look for small regulatory changes so that, taking care of the interests of pensioners, we can allow access other investments with international partners.” He is certain that as the Afores further invest in this asset class, that will attract more foreign investment “which will translate into greater infrastructure and therefore greater growth and quality of life.” As an example of this, the manager highlights the discovery of an oil field in shallow waters off the coast of Tabasco, the first one in years and the result od a co-investment in energy that Afore Citibanamex forms part, while with the Shared Network, Mexico will guarantee access to the best wireless technology in the world, at competitive costs, to almost 92% of the population, using the 700 MHz band spectrum. But this, is just the beginning…
CC-BY-SA-2.0, FlickrAnabel Vidal and Jorge Rovira. Compass Promotes a New Co-Country Head and Regional PM
Jorge Rovira, who, until recently, led Compass‘ commercial effort in Colombia, assumed responsibility as Co-Country Head, along with Anabel Vidal, of Colombia and Panama.
In addition to this change, Anabel Vidal assumes the leadership of the regional PWM area, with the responsibility of deepening the process of integration, consolidation and growth of the firm’s offshore and services platforms for private clients in the region.
Before starting his career at Compass, Jorge worked at BlackRock where he led the Institutional / Retail business effort in Mexico, Central America and Colombia. He was also a Portfolio Manager for Global Strategies at GBM Mexico, Head of Investments for Corredores Asociados in Bogotá, and Head of Institutional Sales for Colombia and Peru in LarrainVial as well as Senior Strategist at BBVA Provida in Santiago de Chile.
Vidal has more than 19 years of experience in the financial industry. She joined Compass Group in 2007 and was Product Development Manager, in charge of Product Allocation and Portfolio Management for private clients at Compass Group in New York and Miami. Shortly after, she was in charge of the Miami offices and in the year 2015, also Panama and Colombia. Before joining the firm, she worked in the consulting area for the financial sector in Accenture and Procuradigital.
The global economy is moving towards more sustained economic expansion, and is still far from an inflationary environment. Although the Fed has begun its normalization process, there are still many questions surrounding the policies of the European Central Bank, the Bank of Japan, the Bank of England, and even the Bank of Canada, which recently decided to increase its reference rate by 25 basis points, the first-rate increase in seven years. Structurally, the economic environment is one of low growth and low interest rates, but what do these conditions mean for returns? Where can they be found in this environment? Terry Simpson, Multi-Asset Investment Strategist at the Black Rock Investment Institute, answered these, as well as other questions, during his visit to Miami for the presentation of the firm’s strategic vision for the second half of the year to their clients.
Simpson, who joined BlackRock in 2004, explained that they use various tools to be able to identify economic growth that is not captured by traditional economic indicators, such as capex, employment, or industrial production. In addition to estimating the growth of the G-7, the seven major world economies through advanced economic indicators using an econometric technique called Nowcasting, they also use Big Data technology to continue to innovate in their internal forecasting elements. “There are household spending patterns and business developments that you cannot capture with traditional economic variables, and we believe our differentiated approach gives us a competitive advantage over the data analyzed by the market consensus on the street,” he says.
In this way, BlackRock establishes that the G-7 12-month forward growth forecasts are shaping up to be 2% over the next 3 months, between 25 and 30 basis points above the market consensus, a difference that may seem small, but in which a low growth environment can be sufficient to influence asset allocation decisions and investor sentiment. “We are seeing that the improvement in global economic growth is in a synchronized trend. The United States’ economic cycle is ahead, but the rest of the G-7 economies are now catching up.” Last year all the improvement came from the US economy, but now there is significant improvement in Germany, Canada, Japan and France, which is very important to increasing global growth.” Continuing with the theme of sustained economic expansion in the United States, Terry Simpson addressed a frequent question about the duration of the cycle. “The United States is now eight and a half years into this economic cycle, this is the third longest economic expansion in US history, and many expect it to end soon. This is erroneous. They are just thinking about it from the wrong perspective. By our analysis, we can see that, since the last cycle, we are still far from reaching what we call the potential in the economy, which still argues that this cycle has room to run and this cycle should be measured in years, not quarters.”
Next, Simpson referred to the more aggressive tone from central banks in the early part of the summer, beginning with statements by Mario Draghi at the Sintra symposium in late June during the European Central Bank Forum, where the market interpreted that the European authority on monetary policy is prepared to be more aggressive in withdrawing its economic stimulus measures. The FOMC then continued with its third-rate hike in 6 months. But this should not divert investors’ attention, who should nevertheless bear in mind that most central banks aim to keep inflation close to their target: “Since 2015, core inflation in the US, the Eurozone and Japan has remained very stable and flat, if anything we have recently seen a decline in US inflation, which has raised much concern. The reality is that Central Banks really have not been hitting their inflation targets, so it is very likely that they are not going to be aggressive while removing their expansionary policies and that is one thing that markets misinterpreted, and structurally, we believe that we are going to be in this low-growth, low- interest rate environment for the foreseeable future.” Most central banks are mandated to manage around an inflation target. Some banks have a dual mandate, like the Fed with full employment as their second mandate, but the vast majority of them conduct their monetary policy in relation to an inflation target, projections on GDP and developments on the output gap. In any case, in Europe inflation is around 1%, while the inflation target is 2%. “If Draghi announced the tapering of the QE program this year, we think it would be a very gradual wind down.”
China is another frequent concern for investors. BlackRock uses economic data to evaluate the trend for China’s PMI, a leading indicator for the country’s economic prospects. The current data remains high by recent historical standards, the highest of the last three years, so they do not believe that a hard landing is as automatic as some think. “Policy makers have identified the imbalances in the economy and are starting to address them; and that is a good thing. This doesn’t necessarily mean it’s going to be a smooth ride, but at least they recognized the importance and potential impact on the economy,” adds Simpson.
Rethinking Risk
At a time when volatility levels are at a minimum, it is important to ask about the likelihood of a shift to a high volatility regime. According to BlackRock, if we are currently in a low volatility regime like the present one, there is a 90% probability that we will be in the same regime one year forward and a 70% probability that the same regime will be maintained over a three-year period. This is an important fact, since most clients are de-risking their portfolios because they believe that such low volatility is not normal. “Volatility is at such low levels because of conventional and unconventional monetary policy measures of recent years. However, there are other reasons at the macroeconomic level: GDP, unemployment, and inflation volatilities are at levels below their historical rates. It is consistent that if you have low macroeconomic volatility, you will have low financial volatility, so we do not expect volatility to mean revert.”
It may rise from the current levels, but it would take a geopolitical shock or economic shock to shift us into high volatility regime. In other words, investors should maintain their current exposure to risk, or even increase it. “This is a contrarian call as investors are pairing risk exposure back and taking profit. We still like equities and high quality credit fixed income” he said.
. Investec Launches an Investment Grade Corporate Debt Fund in Association with Compass Group
Compass Group is the sub-manager of the new Investec Latin American Investment Grade Corporate Debt Fund, recently launched in Luxembourg and included in Pershing.
The strategy is almost a year old and will be managed by Tomás Venezian and Mathew Claeson, who have more than 15 years of experience in the industry, and currently the portfolio is built through a bottom-up process of ‘best ideas’.
Latin America is at a turning point, where growth and inflation stabilize, which has allowed an expansive monetary policy in the region. On the business side, a process of deleveraging has begun to be observed since mid-2016, which should result in much lower default rates than those observed in recent years.
On the technical side, Compass Group experts expect a negative net bond offer in Latin America this year, in an environment in which demand for interest rates continues strong, and therefore, global investors have appetite for the region.
US investment grade debt spreads and emerging market spreads remain at attractive levels compared to their historical average. Latin America is the most attractive region in terms of spreads adjusted by risk classification, says Compass.
The fund’s objective is to generate income with the opportunity to obtain long-term capital gains by investing in Latin American fixed income assets rated as investment grade. The spectrum of bonds includes sovereign, quasi-sovereign and corporate, the latter having the greatest participation in the portfolio.
Compass Group LLC has a history spanning over 20 years, specializing in asset management in Latin America, where it has more than 40 specialists based in the main cities in the region.
Wikimedia CommonsSantiago de Chile. Larrainvial Answers Three Questions About the Progress of the Agreements with Vontobel and Columbia Threadneedle
LarrainVial Estrategia has been promoting its funds’ offer and currently maintains contacts with two new administrators. The Chilean firm responded to three questions from Funds Society about these negotiations:
1. At what stage are the discussions between Vontobel Asset Management and Columbia Threadneedle Investments?
We are constantly monitoring the market in search of managers to complement the 36 fund managing companies with whom we currently have an agreement, with the idea of improving our availability of products to incorporate our asset allocation through the best instruments for each asset class.
We do indeed have contacts, however, agreements must be approved by our Compliance area, which may take some time due to the exhaustiveness of the review process of the counterparts that is carried out, both by us, and by the aforementioned managing companies.
2. What are the main advantages of these funds and what do they contribute to LarrainVial’s existing offer?
In Vontobel’s case, what caught our attention was its consistency in funds related to emerging markets, especially in fixed income.
In Columbia Threadneedle’s case, what caught our attention was its diversified range of products globally, with interesting alternatives mainly in European equities, where they have various diverse strategies.
3. How does the work of LarrainVial Estrategia fit into the company’s regional expansion policy?
LarrainVial Estrategia was designed to be an easily scalable model for the rest of the region, with a team characterized by absolute independence, open architecture, ability to combine national and international investments, plus renowned experience in combining traditional investments with the most complete range of alternative investments.
If to all of the above we add a great commercial capacity to lower our vision, and recommendations to our financial advisors, so that these can in turn be transmitted in a consistent way to their clients, we can see the leading role in our area within LarrainVial’s general strategy.
All this is being highly valued by our financial advisors and their clients, which is reflected by the fruits that our work has started to reap. This is evident by the extreme loyalty to the company shown by our clients, due to the consistency of their portfolios and the cohesion of the discourse within the sales force.
