From Luxembourg: The Strategic Role of Continuation Funds in European Real Estate – Bridging the Valuation Gap

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fondos de continuación inmobiliarios
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The Continuation Fund Mechanism

In a typical continuation transaction, the general partner (GP) proposes transferring one or more assets from a selling fund into a continuation vehicle, allowing existing limited partners (LPs) to choose whether to cash out, roll, or blend both options. This dual role—acting as both seller and buyer—inevitably introduces conflicts, which must be proactively managed through robust processes, clear documentation, and independent oversight.

From our perspective, we observe that seamless fund administration, depositary oversight, transfer agency, corporate secretarial, valuation governance, and transparent reporting form the backbone of any successful GP-led continuation transaction. Proper investor services provide the neutral structure that certifies net asset value (NAV) quality, evidences valuation independence, operates election mechanics, and maintains transparent, standards- aligned reporting. In our experience, these aspects convert perceived conflicts into demonstrable fairness, especially when valuations are already under scrutiny.

Governance Architecture and Conflict Management

Governance architecture is central to credibility. Early Limited Partner Advisory Committee (LPAC) engagement and clear conflict-management protocols are essential. The Institutional Limited Partners Association (ILPA) recommends addressing conflicts, managing recusals, and reviewing disclosure packages and process fairness. Practically, this means early briefings, disclosure of alternatives considered, and a documented rationale focused on maximizing value for all LPs, not solely for those electing liquidity.

Independent fairness or valuation opinions now form a best-practice standard. Even though the U.S. SEC's 2023 private-fund adviser reforms were vacated in June 2024, the regulatory signal is clear: adviser-led secondaries require independent price checks and transparent relationships with opinion providers. Many sponsors circulate such opinions with the election pack, alongside relationship disclosures—a good-governance habit that investors should deem as standard practice.

Valuation Governance Frameworks

Valuation governance becomes especially critical when dealing with assets subject to uneven price discovery—such as office buildings or niche retail properties. The updated INREV Property Valuation module (effective January 2024) provides a comprehensive framework for roles, responsibilities, and transparency that complements the INREV NAV and Reporting modules. Aligning policies to these standards ensures consistency in presenting economic NAV and reconciling it from IFRS, while also incorporating sustainability factors that can materially influence value.

At the asset level, valuations should comply with RICS Valuation – Global Standards (Red Book) and IVS 2025, emphasizing data quality, documentation, model governance, and ESG.

Operational Design and Execution

Operational design must reflect this complexity. Dedicated project tracking for rolled interests, new secondary capital, and any stapled commitments is essential. Equalisation rules must mirror the fund constitutional and governance documents, capturing fee holidays or preferred-return resets and preventing performance cross-contamination between legacy and continuation cohorts.

Investors should be mindful of model carry resets, accrual releases, and fee waivers for rolling investors, with full alignment to ILPA guidance on transaction-cost allocation between selling fund, continuation vehicle, and exiting investors.

Execution Playbook

A disciplined execution playbook transforms complex continuation processes into predictable operations. Early in the project, both the GP and fund administrator analyse the strategic options and define valuation scope, appraisal terms and candidate opinion providers.

During the go/no-go phase, investor services teams coordinate preparation of investor packages, including historical performance data, proposed price-setting methodology, conflict disclosures, fee and waterfall redlines, structural diagrams, and updated INREV reporting bridges.

Following LPAC review and LP’s consultation, at closing, asset transfers are executed, consideration settled, accounting journals posted, Annex IV reports updated, and the first continuation-vehicle reporting pack issued. Lessons learned are recorded in the governance log, converting a one-off transaction into a repeatable capability.

Common Pitfalls and Risk Mitigation

Common pitfalls—inconsistent valuation perimeters, unclear treatment of fees and expenses, weak election controls, and oversight delays—can undermine pricing integrity. Reconciling asset scopes early, coding fee allocations into the administration engine, enforcing two-person verification, and mapping depositary responsibilities mitigate these risks. In a valuation gap environment, process reliability is synonymous with value protection.

Ultimately, a well-run continuation fund enables every investor—whether rolling or exiting—to trace how pricing was determined, how conflicts were identified, addressed and managed, and how economic NAV reconciles across accounting and industry frameworks. ILPA-aligned transparency, RICS/IVS-compliant valuations, and INREV-consistent reporting, delivered through disciplined operations, build investor confidence that fairness has prevailed, even amid valuation uncertainty. 

Invesco Focuses on Family Offices to Grow in America

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super peso and the World Cup
Photo courtesyÍñigo Escudero, Head of Southern Europe & Latin America at Invesco

Invesco is driving its business in the Americas through two levers: a new structure and a strategic agreement with LarrainVial. Currently, the firm oversees $35 billion across the US Offshore and LatAm markets, with Íñigo Escudero, Head of Southern Europe & Latin America at Invesco, as its key figure in the region.

Initially, the firm managed the US Offshore and LatAm markets separately, but after expanding his responsibilities and being appointed head of the Southern Europe business as well, Escudero made a significant decision: to merge both regions. “It was a decision that made sense because the link between both markets is enormous. In US Offshore we have been operating for more than fifteen years and benefit from the great work that Rhett Baughan, Head of US Offshore Distribution at Invesco, has been doing. There, we have grown considerably over the past five years and have around $6 billion in US Liquidity, which possibly makes us the largest international asset manager in liquidity. For LatAm, we have Begoña Gómez, who until now was responsible for LatAm for Active, and will now also take on the US Offshore segment; as a result, Baughan will report directly to her. Finally, for the ETF segment, Laure Peyranne, Head of ETFs for Iberia, Latin America, and US Offshore, will continue to lead the business,” explains Escudero.

To understand this structural change at Invesco, it is necessary to consider its second growth lever: the expansion of its strategic agreement with LarrainVial. For more than 18 years, Invesco has collaborated with the Chilean asset manager on distribution throughout Latin America. Until last year, the agreement with LarrainVial included $9.2 billion in UCITS mutual funds and $15.6 billion in Invesco ETFs, but with the expansion of their alliance into the US Offshore channel for Invesco’s UCITS products, the growth potential is much greater.

“Many firms approached us to work together and grow in the US Offshore market, but we felt it was not yet the right time for us. However, following our growth in recent years and LarrainVial’s evolution, we saw that now was the ideal moment to expand our collaboration for several reasons: their expertise, their team of professionals, and our relationship of nearly twenty years,” Escudero highlights.

A structure for growth

These two decisions have resulted in a clear structure ready to generate growth across both active and passive segments. As Escudero clarifies, “Rhett will primarily be responsible for relationships with platforms in the US Offshore market; that is, he will focus on where fund selection decisions are made and will work to ensure that as many Invesco funds as possible are included on key lists. His work is complemented by that of LarrainVial, whose extensive experience and network will help us ‘unlock’ and deliver products to investors.”

The firm recognizes that the growth potential is greater in the US Offshore market, which—like the Latin American market—is expected to grow at faster rates than the rest of EMEA markets. “When discussing growth, it is important to note that US Offshore and LatAm are somewhat different markets,” Escudero explains: “As we are structured, LatAm is primarily institutional clients—pension funds, central banks, and authorities—while only 10% is represented by private banks and family offices. With our expanded distribution agreement with LarrainVial, we believe this will change and that we will be able to achieve significant growth in the family office and private banking segment. Moreover, many family offices also have a presence in US Offshore; and this is another segment where we want to grow. This growth would also bring significant business diversification, which is another of our objectives.”

The firm sees a significant growth opportunity in this segment, especially considering that the family office industry in Latin America is approaching $100 billion, of which more than 55% is invested in US Offshore products. “We are talking about between $55 billion and $60 billion in business. The nuance is that each country is different and has a distinct configuration, which is why local knowledge is so important. For example, in Mexico, 90% of US Offshore investments are in ETFs, whereas in Chile ETFs represent only 30%, in Colombia 10%, and in Peru 25%,” Escudero notes.

Regarding growth targets, Escudero avoids giving a specific figure but acknowledges that their outlook for LatAm and US Offshore is to grow “at higher rates than other similarly mature markets, such as Spain or Italy.” He adds: “For US Offshore, we aim to at least double assets over a five-year period.”

From advisory to the investor

Given the firm’s broad product range, the mantra for this growth, according to Escudero, will be “to continue offering the investment solution that best fits each investor, market, and country.” As he acknowledges, advisors are the key piece in aligning these investment solutions: “Unlike what we see in other European regions, in the Americas the decision about fund selection lies with private bankers, which requires a very strong and close commercial network.”

As for investor demand, he believes that despite trends, the essence has changed little. “We are dealing with clients who have fairly diversified portfolios and who quite like multi-asset funds, such as our Global Income strategy. Sometimes they prefer to build their own mix and combine fixed income and equity funds in their portfolios, or opt for model portfolios (MPS), which have recently become popular,” he notes.

Among the trends he observes in this market, Escudero highlights generational change. According to his experience, “new generations demand new communication channels, but they remain traditional investors who seek returns and security for their capital.”

Super Peso and the World: Short-Term Lull with Future Uncertainties

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arguments for emerging market debt
Pixabay CC0 Public DomainPhoto: AmarADestiempo. The Mexican peso gains ground despite Trump

The 2026 FIFA World Cup may influence the dynamics of the peso–dollar exchange rate through various macro-financial and microstructural channels; it is highly likely that for a month the Mexican currency will be immersed in a certain lull, but what happens afterward?

According to analysts, the key point is that the World Cup effect is not a long-term structural driver, but rather a transitory shock with potentially asymmetric effects, depending on the stage of the cycle and market positioning.

The Mexican peso is trading toward 17 units per dollar; so far this year it has recorded an appreciation of 4.05% despite a highly complex geopolitical context. The Mexican currency is once again being referred to as the “super peso,” and it is estimated that World Cup fever will keep it stable or lead to further appreciation.

The Football World Cup tends to generate a significant increase in aspects such as: revenue from international tourism (services account); spending by non-residents in Mexican territory; foreign currency inflows from events, sponsorships, and associated rights.

This implies a greater supply of dollars in the spot market, as well as potential marginal appreciation of the peso during the peak influx phase.

However, the impact is usually limited and short-lived, as part of the spending is channeled through international platforms (resulting in a smaller direct exchange-rate effect); in addition, there are offsetting effects from imports associated with the event.

USMCA in sight and geopolitics: the risks

The Football World Cup will last just over a month; afterward, everything will return to normal. The issue is that in the second half of the year, several factors will need to be considered in determining the trajectory of the most liquid emerging-market currency in global markets: the Mexican peso.

Funds Society spoke with Gabriela Soni, Head of Investment Strategies for Mexico at UBS, about the situation of the peso, especially for the second half of the year.

For the specialist, the renegotiation of USMCA as well as geopolitical risks are currently the factors most likely to determine the future trajectory of the currency.

“We see two main risks: a tightening of global financial conditions and uncertainty surrounding USMCA. In episodes of heightened risk aversion—in a context of elevated geopolitical tensions—exchange rate volatility, capital outflows, and pressure on the peso can arise. Even so, Mexico is better positioned than in previous episodes thanks to stronger domestic fundamentals. Regarding the USMCA review, although we expect the agreement to evolve rather than break down, the negotiation process could trigger episodes of volatility,” said the specialist.

According to Gabriela Soni, the peso strengthened in recent years thanks to a combination of idiosyncratic factors that differentiated it from other emerging markets: a highly favorable interest rate differential that attracted carry flows, the resilience of the U.S. economy that boosted exports and remittances, relatively solid macro fundamentals compared to its peers, and the nearshoring narrative. Together, these elements created an exceptionally favorable environment for the currency.

However, there are also other factors that could put pressure on the currency in the medium term; for example, the reduction of interest rates in Mexico, running counter to the global trend in a context of inflationary pressures.

“The room for Banxico to continue cutting rates exists, but it is increasingly limited and highly dependent on the environment. Banxico’s recent decision to resume the rate-cutting cycle reflects a delicate balance between a weak economy and an still complex inflationary environment,” the expert notes.

“Additionally, the interest rate differential with the U.S. has already narrowed significantly, which limits the support that carry had provided to the peso. In this context, although we anticipate that an additional cut could materialize, it will require clear evidence that inflationary pressures—including those derived from the oil shock—are transitory. Otherwise, the room for maneuver could quickly be exhausted, with implications for the exchange rate,” she says.

Regarding the imminent review (or renegotiation) of USMCA, Gabriela Soni explains: “In our view, trade disputes within the USMCA framework constitute the most likely risk today; although so far the peso has shown limited sensitivity to this uncertainty, supported by the strength of trade flows and the legal framework of the agreement itself, which guarantees its validity for ten additional years even in the absence of an extension agreement. In an extreme scenario—such as a threat of withdrawal by the U.S.—we would anticipate a short-term depreciation of the peso. However, we believe this movement would likely be transitory, as it could be interpreted as a negotiating tactic.”

For the UBS specialist, the peso will remain a resilient currency despite the periods of pressure that are anticipated.

“Our projections point to a gradual appreciation of the peso going forward, with levels of 17.7 by the end of the second quarter of 2026, 17.5 for the third, and 17.2 for both year-end and the first quarter of 2027. However, we anticipate a non-linear path, with episodes of volatility linked to both external and local factors, particularly around USMCA and monetary policy decisions in Mexico and the U.S.”

This year may not be another period of “super peso,” the UBS analyst believes: “The environment has changed: the interest rate differential between Mexico and the U.S. is smaller, the geopolitical context is more complex, and USMCA negotiations introduce a new source of uncertainty. Rather than a ‘super peso,’ 2026 is shaping up to be a period of relative stability with episodes of adjustment, where the currency could regain ground as global conditions stabilize,” she concludes.

Arguments in Favor of Emerging Market Debt in 7 Questions

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Photo courtesyCharles De Quinsonas and Carlos Carranza, from the Emerging Market Fixed Income Team at M&G Investments

2025 has been a good year for investors in emerging markets (EM). In an environment of geopolitical and macroeconomic unease, debt from this universe (EMD) has shown resilience: sovereign bonds denominated in both local currency and hard currency have posted double-digit gains year to date, and corporate debt has delivered an equally positive performance.

In this Q&A, Charles De Quinsonas and Carlos Carranza, from the Emerging Market Fixed Income Team at M&G Investments, share their perspectives on the drivers of returns in the region, the improvement in its fundamentals, and how M&G can capture opportunities in this evolving asset class.

What makes EMD an attractive asset class currently?

EMD is truly interesting right now. This segment already used to offer attractive yields to maturity (YTM), but in recent years its volatility has declined to levels much closer to those seen in developed markets. In addition to this significant change, we also see structural improvements such as lower debt-to-GDP ratios, credible monetary policies, and strong growth prospects. As a result, EMD has moved beyond being merely a tactical play and is becoming a strategic allocation for many investors.

 

What specific data point do you find most attractive at this moment?

In our opinion, the most notable metric right now is the real yield advantage. Many EM countries offer positive real yields, something uncommon in the developed universe. In Brazil, for example, the central bank chose to raise interest rates early and aggressively (well ahead of the U.S. Federal Reserve), allowing investors to obtain attractive real interest rates with inflation under control.

How is M&G positioned to take advantage of these opportunities?

Our EMD team applies a clearly bottom-up approach: we devote a great deal of time to the fundamental analysis of countries and issuers, combining quantitative models with qualitative insights with the aim of identifying inflection points and avoiding idiosyncratic risks. We analyze sovereign and corporate debt jointly, not as separate segments, and we use proprietary tools to determine their sustainability and assign internal ratings. Finally, we have one of the largest credit analysis teams in all of Europe, with more than 50 analysts with an average of 14 years of experience.

Do you see any individual country or sector as more promising than others?

In general, we like local currency bonds in Latin America, where countries with high real interest rates and strong fiscal discipline stand out, such as Brazil and Mexico. We also see many opportunities in Central Asia, in countries such as Uzbekistan, Kyrgyzstan, and Kazakhstan. As for corporate debt, EM companies with low leverage levels and high interest coverage appear attractive to us, especially considering that their spreads are wider than their fundamentals would justify.

How does M&G differentiate itself from other managers in this asset class?

We believe we do so in three areas: flexibility, depth of analysis, and experience. The absence of constraints in our strategy allows us to capture the team’s best ideas across sovereign, corporate, and local currency debt, and to do so in a very holistic way. Our analysis is truly bottom-up, focused on anticipating turning points and managing risk; this is one of the pillars of our activity, as we consider diversification and lack of concentration to be key elements of our investment philosophy.

What development do you believe will have the greatest impact on EM in the coming years?

There are several major themes. The first is the continued strengthening of monetary and fiscal frameworks in these regions, which could represent a decisive shift toward greater stability. The second is demographic trends: 85% of the world’s population lives in EM, and many of these countries have growing working-age populations, which can support long-term growth. Finally, a sustained rotation away from portfolios centered on the United States could occur, as investors question American exceptionalism and seek growth in other markets.

What is your outlook for EM fixed income markets?

EM debt inspires optimism in us. Carry is attractive, fundamentals are improving, and government policies have never been as credible as they are now. Hard currency bond spreads are appealing, although the investment-grade segment is beginning to look expensive. In our view, EMD offers income, growth, and diversification at a time when developed markets are facing increasing challenges. For investors seeking to build resilient portfolios, these bonds could be an interesting allocation.

What Would Adopting a Wealth Tax in the U.S. Entail?

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As the April tax filing deadline approaches, millions of Americans are preparing their returns and anticipating possible refunds. According to experts, this federal tax refund represents a significant financial boost. Notably, Florida, Texas, Wyoming, Nevada, and Louisiana are the five states with the highest average refunds, as identified by a report from Upgraded Points, based on data from the Internal Revenue Service (IRS).

In addition to differences by state, tax refunds vary significantly depending on income level. As the report notes, higher-income households receive larger refunds on average, but a smaller proportion of them receive one. For example, IRS data show that among taxpayers earning over $200,000, the average refund rose to $17,668. “However, only 35% of returns received a refund, and nearly a third of taxpayers with overpayments chose to apply it to the following year’s taxes,” the report adds.

Wealth tax: a theoretical exercise

However, advisors acknowledge that for HNWI and UHNWI profiles, tax filing is somewhat different, as they manage complex tax structures that must be considered in their financial planning and investments. Given that the U.S. does not have a wealth tax—that is, a tax on the value of assets net of liabilities—tax filing becomes a key moment. But what would be the implications of implementing one?

According to an analysis conducted by the Urban Institute & Brookings Institution, if all assets above $50 million ($25 million for unmarried taxpayers) were subject to a 1% tax, it would raise close to $2 trillion over a 10-year period, with approximately 86% of the burden falling on families in the top 1% of earners.

Additionally, the analysis indicates that increasing the tax rate to 2% for assets above $100 million ($50 million for unmarried taxpayers) or lowering the threshold to $30 million ($15 million) would increase the estimated revenue by approximately an additional $1 trillion. “Revenue estimates decrease by around 45% if the tax base excludes pension benefits, the value of housing above $1 million, and businesses in which the owner actively participates,” they note.

Political dimension

This is a theoretical exercise because, as seen this year, the Trump Administration has no intention of taxing high-net-worth individuals; in fact, its policy moves in the opposite direction: reducing taxes and the fiscal burden on large fortunes. By contrast, looking back, during the 2020 presidential campaign, several candidates proposed broad wealth taxes aimed at the wealthiest households.

“The goals of those proposals were primarily to address wealth inequality and to fund the expansion and creation of new spending programs and tax credits. Although Biden proposed other approaches to achieve those goals and it is unlikely that the Trump administration will raise taxes on the very wealthy, advocates of wealth taxes have continued to push for their adoption: Zucman has proposed a global wealth tax, while legislation has been considered in several states. In the future, interest in wealth taxes could resurface if federal debt and wealth inequality continue to rise,” explain the authors of the cited report.

The document suggests that when policymakers debate these proposals, they should consider four key factors: the tax base and how it may affect individuals’ investment decisions and their ability to avoid the tax; asset valuation and how easily taxpayers could avoid or evade the tax by undervaluing their assets; the threshold and rate of the wealth tax, as well as its interaction with the treatment of personal income tax applied to capital income; and the tax unit and opportunities for individuals to minimize their tax burden by transferring assets to family members.

J.P. Morgan Welcomes a New Banker and Managing Director

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Photo courtesy

The private bank of J.P. Morgan has a new executive among its ranks, who was recently hired as a banker and Managing Director. This is Pablo Artigas, a professional with more than 19 years of experience in the financial industry, holding a variety of roles between Santiago and New York.

According to the firm’s Managing Director, José María Fornasari, in a post on his professional LinkedIn network, Artigas joins the Latin America team in the Miami office of the U.S. investment bank, where he will serve ultra-high-net-worth clients.

The professional in question had already announced a week ago his departure from Santander Chile, where he held various roles, accumulating experience in global markets, derivatives, and corporate banking. “I move forward with full motivation, energy, and focus on learning, building, and contributing from day one,” he stated at the time.

Before moving to J.P. Morgan, Artigas served as Managing Director and Head of the Specialized Industries & Corporates area at the Spanish-headquartered firm. During his time at the Chilean bank, he also worked as Executive Director of Banking & Corporate Finance and Head of the Financial Institutions Group.

The executive’s career also includes a previous stint at J.P. Morgan, where he worked between 2006 and 2013 in the derivatives sales area for institutional clients in Chile, Peru, and Central America. In addition, he worked at Société Générale, in Cross Asset Solutions, selling to clients in Mexico, Chile, Peru, and Colombia.

J.P. Morgan’s private bank advises $2.7 trillion (millions of millions) in client assets, with 3,500 advisors working across more than 75 offices globally.

A Guide to U.S. Municipal Bonds for UCITS Investors

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The state of New York issued the first municipal bond in history in 1812 to finance the construction of a canal. More than two centuries later, this market exceeds $4 trillion, with more than 60,000 issuers and a very low default rate. With yields around 5% and strong exposure to infrastructure—most issuances finance public-use assets such as airports, hospitals, water systems, or universities—this asset class remains one of the least covered by international investors, who represent only 3% of the market.

The BNY Mellon US Municipal Infrastructure Debt fund marks nine years since the launch of its UCITS version. Over this period, it has outperformed the US Aggregate index, U.S. corporate debt, and even Treasuries. This performance reflects both the market’s higher structural carry and increased international demand.

Jeffrey Burger, one of the five co-managers of BNY’s municipal bond strategy—a firm with a presence in this market since 1933 and $40 billion under management in this segment—recently visited Spain to explain the potential of this asset class. “The municipal bond market is the primary mechanism for financing infrastructure in the United States, both historically and today,” he notes. It is also a public, transparent, and liquid market that offers “returns and risks typical of fixed income, compared with private credit.”

How does the municipal bond market differ from other U.S. public debt markets?

It is a result of the structure of the U.S. system of government, divided into three levels: federal, state, and local. Below the federal government—which includes Congress, the President, and the Supreme Court—there are 50 states and thousands of local entities, as well as nonprofit institutions such as universities. From its inception, the U.S. model sought to limit the role of the federal government and distribute responsibilities. By design, it does not assume most infrastructure investment.

Why is the private sector less involved in infrastructure in the U.S.?

The country’s size makes it difficult to achieve economies of scale and limits potential returns for the private sector. This is compounded by regulatory differences between states, as well as geographic, climatic, and social factors. In this context, municipal bonds tend to behave like natural monopolies, which contributes to their low default rate. Defaults are exceptional, such as the case of Detroit in 2013.

Why is this asset class under-researched outside the U.S.?

Until 1986, all municipal bonds were tax-exempt for U.S. investors, which reduced their appeal for foreign investors. After that year’s tax reform, some became taxable. The tax treatment depends on how the funds are used: issuances for public services are typically tax-exempt, while those with economic return potential may be taxable. For international investors, this creates an opportunity: bonds with the same credit quality can offer higher yields in their taxable version, with no tax impact for foreign investors.

How do municipal bonds compare with Treasuries?

High federal debt—$38 trillion—has led some investors to seek alternatives within U.S. public debt. In this regard, municipal bonds offer higher spreads, better credit quality, and diversification. Unlike the federal government, states cannot run budget deficits. In addition, municipal bonds primarily finance infrastructure tied to revenue-generating assets, not current spending. Another key difference is amortization: municipal bonds typically repay both interest and principal, whereas federal debt is regularly refinanced. This fiscal discipline reduces default risk. Currently, they offer around 85 basis points of spread (OAS) and, with similar duration to Treasuries, yields comparable to corporate debt with lower credit risk.

What is the bond selection process like?

The team consists of 23 professionals, including 10 analysts specialized in municipal credit. Their objective is to identify relative value, detecting bonds that are undervalued or overvalued based on their fundamentals. This analysis allows them to generate alpha versus the index. The historically low default rate in investment grade reinforces this approach. The team is complemented by five senior managers and a specialized trading group. Exclusive specialization in this segment is one of the main differentiators of the platform.

How is the strategy currently positioned?

The fund maintains a duration of seven years, but with a beta of between 0.65 and 0.70, implying lower volatility than the index. This is partly due to the investor profile, mainly high-net-worth U.S. investors with buy-and-hold strategies, and the presence of call options, which reduce effective duration. The strategy prioritizes revenue bonds, backed by specific income streams from assets such as airports, water systems, or educational institutions, with mechanisms that ensure debt service coverage.

The portfolio has significant exposure to education and healthcare, particularly in high-quality issuances. In higher education, uncertainty around international students has increased yields. In healthcare, reduced subsidies have pressured the sector, creating opportunities in hospitals less dependent on public support, located in higher-income areas or playing an essential role in their communities.

Infrastructure, ‘Oshikatsu,’ and Defense: Three Themes for Continuing to Invest in Japan

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temáticas para invertir en Japón
Photo courtesySimon Morton-Grant, Client Portfolio Manager of the CT (Lux) Japan Equities Fund at Columbia Threadneedle Investments

Japan has shifted from behaving like an equity market where investors focused on companies with low margins and high capex to one centered on efficiency and return on capital, where governance has become the cornerstone of this transformation. “The underlying story in Japan is extremely attractive,” says Simon Morton-Grant, Client Portfolio Manager of the CT (Lux) Japan Equities fund at Columbia Threadneedle Investments.

The expert, who recently visited Spain, highlighted the multiple growth catalysts his firm currently sees in this market: first, efforts to continue increasing shareholder returns (ROE) remain in place, with a new record for share buybacks in 2025; second, the country is once again posting positive growth, and after deep reforms in recent years, the TOPIX index has become a reflection of that growth; third, Japanese household savings amount to around $14 trillion, and half of that money is held in cash, leading the firm to expect—in a context of rising inflation—that part of those savings will flow into equity markets to avoid loss of purchasing power; fourth, the expert highlights the willingness of the new government to continue deep political and economic reforms to further stimulate national growth. For these reasons, the expert is clear: “Any point of weakness from here on could be a good entry point to invest in Japan’s long-term structural growth story.”

Is the rise in geopolitical risk due to the Iran conflict affecting the Japanese stock market in any way?

We want to make it clear to our clients that disruptions around the Strait of Hormuz have the potential to impact the global economy. Japan imports more than 90% of its crude oil from the Middle East, although it makes virtually no direct imports from Iran. We believe that, for now, this situation remains contained in Japan’s case, as it has several measures to mitigate these effects. First, it has oil reserves equivalent to 245 days—one of the highest coverages among developed economies, roughly eight months—which provides a short-term buffer. Second, Japanese authorities have estimated that oil prices would need to reach and remain at $175 per barrel for a prolonged period for Japan to enter a recession; currently, we are far from that level. Even if it were reached, it would need to be sustained for some time.

This is therefore a risk that must be monitored. However, the team has just returned from Japan and, in meetings with companies—at a time when this situation was already beginning to unfold—firms believed they could pass on increased costs to consumers without materially affecting margins. It is an evolving conflict and should be closely watched for changes, but at current levels we do not see a cause for excessive concern.

Can movements in the Japanese yen significantly impact Japanese companies, especially exporters?

It should be noted that we are not macroeconomic specialists. That said, we believe that if the yen were to exceed 160 against the dollar, the government or the Bank of Japan could intervene. Within the 140–160 range, the environment remains relatively comfortable for Japanese equities. Moreover, the historical correlation between a rising Japanese stock market and a weakening yen has diminished in recent years. Japan is no longer necessarily a bet on a weak yen. The economy now has more growth drivers: domestic companies are contributing to earnings growth and, therefore, to index performance, something that was not the case 10–15 years ago, when exporters were the main engine. In the portfolio, we have a natural hedging mechanism: a weak yen benefits exporters, while a strong yen favors domestic businesses.

Sanae Takaichi plans to deepen Abenomics. How could this affect your asset class?

We do not usually pay much attention to changes in prime minister, but in this case it is relevant. She is a potentially transformative figure who breaks with the traditional profile of Japanese political leadership and maintains a strong pro-growth focus. She is an heir to Shinzo Abe’s legacy: expansionary fiscal policy, accommodative monetary policy, and significant fiscal stimulus. We believe her economic and reform agenda could boost the market and open a new phase of growth in Japan. In addition, the new governing coalition has a clear pro-growth bias and supports decentralization, shifting part of the economic weight from Tokyo to other regions such as Osaka. This could increase the value of land and assets in those regions and foster greater economic dynamism.

Another key element is her industrial policy and the associated investment opportunities. Takaichi prioritizes increased spending on artificial intelligence, semiconductors, nuclear reactivation, defense, and economic security. These areas form a new universe of opportunities under the current administration. She has also managed to unify the party, attract younger support, and consolidate a stable political base—crucial for implementing meaningful reforms.

Where do valuations currently stand?

Compared to historical averages, valuations have increased slightly over the past year. However, the higher multiples often highlighted in the media are heavily influenced by large-cap and more expensive stocks. Looking at the TOPIX index, around 35% trades below book value, indicating that many attractive opportunities still exist. In relative terms, while U.S. valuations are above their historical average, Japan remains cheaper, especially in a context of rotation away from U.S. exceptionalism.

Where are you finding opportunities?

Historically, Japan has been associated with automation, a highly sought-after sector. However, following a recent visit, the team has identified new areas of interest. First, infrastructure renewal. Two growth drivers coexist: on one hand, more visible sectors such as artificial intelligence or electric vehicles, with strong demand but higher cyclical sensitivity; on the other, the replacement of infrastructure built during the late-1980s bubble. The latter represents structural, stable, long-term demand, especially in construction.

Second, the so-called “oshikatsu” economy, or fandom economy, where consumers follow athletes, actors, or content creators. This phenomenon, particularly relevant among Generation Z, creates opportunities in merchandising and digital platforms. Third, economic security and defense. The new government is adopting a firmer foreign policy stance, and increased defense spending as a share of GDP opens opportunities in shipbuilding, cybersecurity, and other segments.

Of course, we remain exposed to companies linked to robotics, a structural trend in Japan, which accounts for approximately 50% of the global industry.

What risks are you monitoring?

One of the main focuses is public debt. Although the debt-to-GDP ratio is around 200%, 90% of the bonds are held domestically, which provides stability. In addition, high tax pressure and a near-zero deficit reinforce sustainability. By comparison, the U.S. or China have deficits of around -6%. The second risk is geopolitical, particularly in the relationship between Japan and China. While tensions exist, we do not anticipate structural deterioration, given the significant global impact it would have. Finally, the Middle East remains the main short-term risk. Oil price developments will be key, as they could trigger inflationary or energy tensions in Japan.

Do you expect a rebound in inflation in Japan?

It is possible in the current context, but levels remain manageable. The Bank of Japan postponed a rate hike initially expected in March, likely to April or May. Even if rates reach 1% or 1.25%, monetary policy would remain accommodative. We believe the Bank of Japan is in a normalization process, not a tightening cycle. At current inflation levels, companies can pass costs on to consumers without significant impact. This reflects a structural shift in Japan toward a virtuous cycle of wage growth and inflation, which could be positive for the economy, economic policy, and markets.

The New Wave of ETFs Points to the Formation of Small Bubbles

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scale in hedge funds
Pixabay CC0 Public Domain

Exchange-traded funds have transformed the world of investing. The number of ETF launches reached a record in 2025, with more than 1,000 new funds coming to market. However, recent launches have become “more specialized, less diversified, and more expensive,” according to a Morningstar analysis.

According to the firm, the growing number of these specialized ETFs has revealed a “concerning” trend: rather than solving real problems, many are simply riding dominant trends.

This often happens after the underlying stocks have already delivered strong short-term returns, according to Morningstar, which adds that “the irony is that these ETFs tend to come to market at, or near, the peak of a narrative, when valuations are inflated and return expectations are less optimistic.”

The result is that investors end up holding speculative portfolios with high fees. These ETFs “amplify the hype around underlying themes and can contribute to the formation of small bubbles.”

Historically, similar ETF launches have clustered in periods when specific themes performed well, often accompanied by narratives about how those themes would “change the future.” One example is ESG-focused ETFs, which went through this phase in 2021. ETFs linked to artificial intelligence and cryptocurrencies have taken center stage since 2025.

Rather than being grounded in solid investment principles, most of these launches have been timed to capitalize on the enthusiasm surrounding a particular theme.

The Performance Problem

Because many thematic ETFs are launched near market highs, they often face a difficult path from day one. Years of analysis across multiple market cycles show that thematic ETFs tend to lag the broader global equity market after launch, largely because “they are expensive and their valuations at inception are already inflated,” the firm notes.

Morningstar observes this pattern in several recent periods. In 2021, 38 new ESG-focused ETFs were launched following a strong 2020. As of February 2026, only 21 of those 38 vehicles remain. “This high closure rate could be attributed to inconsistent or disappointing performance, an inability to attract new investors, or both factors.”

In 2025, 70 new ETFs focused on digital assets and cryptocurrencies were launched. Some simply track the price of cryptocurrencies such as bitcoin, solana, XRP, ethereum, or dogecoin. Others take already “inherently volatile” cryptocurrencies and add leverage or options that alter their risk/return profile.

The firm notes that these launches followed a couple of exceptional years for cryptocurrencies: bitcoin surged 150% in 2023 and 125% in 2024. However, “investors in more recently launched ETFs in this theme were unable to replicate those spectacular returns,” as bitcoin reached its peak in October 2025 and has since fallen by nearly 50%.

Meanwhile, diversified benchmark indices continued to post steady gains. “In the long term, the combination of poor timing, volatility, high fees, and lack of diversification tends to result in underperformance compared to ETFs that track the broader market,” the firm states.

Concentration and Limited Diversification

Although thematic ETFs may appear diversified at first glance, they are often far more concentrated than investors realize. Most of these vehicles include only a handful of stocks, compared with broad market indices that contain between 500 and more than 5,000 securities, according to Morningstar.

Of the 1,117 ETFs launched in 2025, only 182 had more than 100 holdings in their portfolios. This means that approximately 84% of newly launched ETFs are considerably more concentrated than many investors believe. In addition, nearly 46% of the 1,117 ETFs launched in 2025 held fewer than 10 securities.

“Concentrated portfolios magnify the impact of stock-specific risk and make fund performance disproportionately dependent on a small group of volatile stocks,” the firm notes. It also points out that thematic ETFs with many holdings “may have achieved that diversification by including stocks that have little connection to the concept being marketed to investors.” As a result, the concept can become too diluted, and the ETF may not actually provide the exposure it claims.

Higher Fees and “Mini-Bubbles”

Fees have also started to move in the “wrong direction”: ETFs launched in 2025 had, on average, higher expense ratios than more established funds. Moreover, the firm finds no evidence that these higher costs translate into benefits for end investors.

The rise in expense ratios is largely due to the growth of actively managed ETFs. Of the 1,117 ETFs launched in 2025, 943 do not track any index and would be considered actively managed. The equal-weighted average expense ratio for this group stood at 76 basis points. The common denominator among these recent launches appears to be “high fees, limited diversification, and unjustified complexity.”

When the enthusiasm surrounding these products fades, the correction can be swift and severe. Valuations begin to normalize, triggering sharp declines in the underlying stocks. ETFs focused on small, speculative securities can exacerbate these price drops as fear and selling pressure increase. This often coincides with a wave of ETF closures, as funds that once attracted investors during the boom struggle to remain economically viable once performance weakens.

Ultimately, many investors are left with losses that could have been avoided had they focused on sound principles rather than chasing returns. Ironically, trying to get rich quickly is often the slowest way to build wealth.

What Investors Should Do

Narrative-driven cycles are nothing new, according to Morningstar, as markets have experienced them before and continued to thrive. The keys to long-term success have not changed: diversification remains the first line of defense, helping to reduce stock-specific risks inherent in narrow themes.

Fees also deserve close attention: higher expense ratios require stronger performance to justify the cost. Thematic ETFs have a weak track record, and most fail to outperform the global market.

It is advisable to maintain a healthy degree of skepticism when certain themes dominate headlines: trends that capture media attention and then become the target of a new ETF often signal that the narrative has already been fully priced into the market.

In conclusion, the firm notes that the growing variety of ETFs demands greater scrutiny than ever from investors. “They must look beyond the ‘ETF’ label and evaluate what they are actually buying.”

They also recommend considering the number of holdings in the portfolio, the economic fundamentals behind the narrative, the fees relative to alternatives, and whether recent performance reflects solid fundamentals or temporary enthusiasm. “The idea is to avoid the pitfalls of narrative-driven ETFs and focus on strategies with a solid foundation,” as “ETFs remain powerful tools when used with the same care and discipline that defined their initial success.”

Therefore, in a market environment where innovation is abundant and enthusiasm spreads quickly, “thoughtful decision-making remains the most reliable safeguard.”

The Great Scale in Hedge Funds: A Blessing for Some, a Problem for Others

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Ignacio Villanueva en Singular Bank
Pixabay CC0 Public Domain

Without much incentive to communicate their strategies and internal developments, it is difficult to obtain complete information on hedge fund performance. However, a detailed analysis by alternative investment services firm Canoe Intelligence, backed by Goldman Sachs in its latest funding round, points to the differences that arise within the hedge fund space.

The dilemma, according to the entity in a report, is that performance benchmarks for the segment do not provide the full picture, as they tend not to include the vehicles that actually dominate institutional allocations. As a result, the firm decided to analyze hedge fund performance using aggregated data drawn directly from account statements, investor letters, and fund reports from more than 500 institutional investors and over 18,000 limited partners.

From this exercise, some trends emerge when looking at the most relevant hedge funds, which Canoe classifies as “VIP.” Within this segment, the firm observed trends related to different strategies and how size appears to work for or against various structures.

Specifically, multi-manager hedge funds seem to benefit from greater size, while relative value and arbitrage vehicles are a more fertile ground for smaller firms.

Pod Shops: The Advantage of Scale

Breaking down the different categories, the report highlights that there is one type of hedge fund that proves more effective at capital preservation: multi-manager hedge funds.

These platforms, known as “pod shops”—as they consist of different teams, each with their own investment philosophies, actively managing their allocated portions of the portfolio—have demonstrated the ability to navigate market volatility with limited drawdowns and rapid recoveries.

The most relevant multi-manager hedge funds within institutional portfolios, the VIPs, the report notes, “showed the smallest drawdowns of any segment analyzed, including VIP quantitative and arbitrage strategies.”

For example, during the market turmoil of October 2023, VIP pod shops recorded virtually no losses, according to the firm’s estimates, while the broader VIP hedge fund segment experienced a 3% contraction. This occurred while the adjusted S&P 500 fell by 5% over the same period. Similarly, in April 2025, multi-manager vehicles posted declines of 0.5%, compared to 2.7% for VIP hedge funds and 4.5% for the U.S. equity market.

What explains this behavior? According to Canoe, as highlighted in its report, size works in favor of these hedge funds. “Large multi-manager platforms have built risk mitigation strategies to absorb market dislocations—across sectors and strategies—without a material impact on the portfolio,” they noted.

Since each portion of the multi-manager vehicle—each “pod”—has a different risk/return profile and relationship with the broader market, gains and losses across the platform can offset one another.

Relative Value and Arbitrage: The Reward for Agility

While there are many contexts in which size benefits investment funds, in the case of hedge funds, relative value and arbitrage strategies were identified as areas where it is better not to grow too large.

In this segment of the market, agility is what is rewarded, according to Canoe’s data. On an absolute basis, looking at the past three years, relative value hedge funds overall have delivered an 8% annual return with 2.6% annualized volatility, while the VIP segment—comprising larger hedge funds—within relative value and arbitrage strategies posted a 6% return with 1.4% volatility.

This means that smaller vehicles achieved better performance, accepting greater turbulence in the process.

In this case, larger size is no longer a comparative advantage, as it is with pod shops. “Relative value and arbitrage strategies are fundamentally about speed and agility,” Canoe explains, as they focus on exploiting pricing inefficiencies that may disappear within hours or days.

“At scale, the ability to execute quickly enough to capture those opportunities becomes structurally more difficult,” they explained in the report. For example, larger positions may impact the market, or decision-making agility may be reduced due to more complex approval chains.

The Hedge Fund Benchmark Dilemma

The financial services firm’s study aims to capture dynamics that traditional hedge fund benchmarks fail to reflect, given how they are constructed.

Most, they noted, are based on information voluntarily provided by managers. As a result, there is a bias toward firms that are actively raising capital, while larger and more successful firms, those with little marketing incentive to report and many reasons to keep their performance private, are underrepresented.

“The result is an index shaped more by who participates than by where institutional capital actually resides. This is a contribution bias and has skewed published benchmarks toward smaller managers that are in capital-raising mode,” they stated in the report.

This leaves out large segments of the hedge fund industry from standard metrics, such as multi-manager platforms, quantitative investing giants, and “global macro legends”—investment firms managing hundreds of billions of dollars in assets.