Foto cedida Fernando Quiroz, courtesy photo. Aegon Launches an Asset Management Company in Mexico
Aegon NV and its subsidiary Transamerica have joined forces with Administradora Akaan to create an asset management company named Akaan Transamerica. Akaan Transamerica has recently received formal approval from the Mexican Banking and Securities Commission (CNBV) to initiate operations and go to market.
Akaan Transamerica will offer a wide variety of Mexican and International mutual funds as well as diversified global investment solutions. Akaan Transamerica has implemented Aladdin, BlackRock‘s trading and risk management system which combines leading-edge risk analytics with comprehensive portfolio management, trading and operations on a single platform.
Akaan Transamerica will leverage the extensive investment knowledge and experience from a highly skilled team of investment management professionals. Its product offering includes alternative investments, actively- and passively-managed funds, and bespoke investment strategies. In addition to the wide variety of investment products, Akaan Transamerica will offer integrated investment solutions for individuals and companies based on their financial needs. Akaan’s Chairman and Founder, Fernando Quiroz, was formerly CEO and Vice Chairman of Citigroup’s ICG Mexico and Latin America as well as Vice Chairman of the Board of Directors for Banco De Chile. Mr. Quiroz was also a Board member of Banamex, Grupo Financiero Banamex, Aeromexico and the Mexican Stock Exchange (BMV).
Mark Mullin, President and CEO of Transamerica, commented, “We are thrilled to form this partnership with the highly respected firm of Akaan and to benefit from the tremendous expertise of Fernando Quiroz. We are determined to help individuals and corporations in Mexico pursue wealth accumulation and growth as they work toward securing a sound financial future.”
Fernando Quiroz, commented, “We are delighted to have formed a JV and a strategic alliance with Aegon and Transamerica. Our teams worked extremely hard to set up a new asset management company, with a state-of-the-art technological platform and the most innovative financial solutions for our clients.”
Kent Callahan, President and CEO of Transamerica Latin America, added, “This unique combination of experienced professionals and cutting edge technology sets a new bar for customer service excellence in the asset management business in Mexico.”
Pixabay CC0 Public DomainPhoto: freephotos. Loomis Sayles & Company, JP Morgan Asset Management, and Alliance Bernstein Get 700 Million Dollars From Afore XXI Banorte's Mandate
Afore XXI Banorte, the largest pension fund in Mexico, successfully completed the funding of its third investment mandate. On this occasion it granted $700 million to three managers to actively invest in US equities. Alliance Bernstein received $250 million, JP Morgan Asset Management $150 million and Loomis Sayles & Company (owned by Natixis Global Asset Management) received $300 million.
To date, the pension fund administrator of Grupo Financiero Banorte and the Mexican Social Security Institute (IMSS), has funded three investment mandates; the first in European stock markets for approximately $1.1 billion, the second in the Asian market for approximately $1 billion and the latter with exposure to the United States for $700 million.
Mauricio Giordano, CEO of Natixis Global Asset Management Mexico, told Funds Society that “US equities are not normally considered to be alpha-generating, since the average manager does not beat the market, and what I tell the players is why to see the average if there are managers like Loomis who consistently present an overperformance.” The director added that the funding of this mandate came in only two months which is proof that “when you have well-structured teams with a very clear plan things can be done very fast.” Loomis will actively manage 3 segregated US Equity portfolios for Afore XXI Banorte. The Large Cap Growth accounts will be managed by seasoned US growth manager Aziz Hamzaogullari and his dedicated research team, using their proprietary bottom up research structured around quality, growth and valuation.
Aziz Hamzaogullari, VP and Portfolio Manager Loomis Sayles Growth Equity Strategies team, commented: “We are delighted that Afore XXI Banorte has chosen Loomis Sayles as a strategic partner. We believe in taking a long-term, private equity like approach to investing. Through fundamental research, we look to invest in those few high-quality businesses that we believe have sustainable competitive advantages and secular growth when they trade at a significant discount to intrinsic value”.
This transaction gives Afore XXI Banorte the opportunity to take advantage of the conditions of the United States stock markets and actively manage the portfolio for the benefit of its clients. “With the funding of this mandate, Afore XXI Banorte confirms its commitment to affiliates, offering the best investment product for their retirement in Mexico under the management of specialized firms with extensive international experience. In addition to this, we used the services of a temporary administrator known as “transition manager” and a proven international custody model, all in order to enhance the performance of our portfolio for the benefit of our affiliates in the long term”, said Juan Manuel Valle, Chief Executive Officer at Afore XXI Banorte.
Sergio Méndez, Chief Investment Officer at the pension fund, commented: “With the funding of this mandate with exposure to the North American region we finalized the first phase of our plan on the outsourcing of investment services, maximizing the use of our investment regime, which places Afore XXI Banorte at the forefront in the local market.”
C4_0010_shutterstock_540575218. How Could Individual Investors Outperform Institutional Investors?
Portfolio management is the art and science of making decisions about mixing investment with policy, matching investments to objectives. Within Crèdit Andorrà, the Advisory team is dedicated to portfolio construction and to guiding clients on capital markets.
There are two categories of investors in the financial markets: individual investors and institutional investors. The term institutional investors refers to just what the name implies: large institutions, such as banks, insurance companies, pension funds, and mutual funds.
Institutional clients usually use a benchmark to manage their portfolios, meaning that they have to follow defined rules of asset allocation that they cannot derive too much from. Those rules are hard constraints, with a defined level of active exposure (also called tracking error) that they can implement. Those hard constraints oblige them to own assets on which they have negative views, which is highly inefficient. More constraints are usually bad for portfolio management if you are talented, as you cannot completely implement your views on capital markets. As most of the portfolios from individual investors are not benchmarked, their portfolios’ returns should on average outperform the ones from institutional clients. However, we are seeing the opposite as institutional clients outperform individual clients by 1% per year on average. We explore the reasons behind this phenomena and what could be done to reduce this performance gap.
Outperformance is less due to skills differential
One could think that this outperformance mostly comes from skills. Institutional money, which is also called “smart money”, is managed by professionals that not only have a lot of experience in managing money but also dedicate 100% of their time to this activity. On the other hand, individuals usually manage their portfolio when they have the time, mostly during weekends or at night, and they do not always have the technical background to do so.
However, most of the outperformance is not due to the difference in skills, but to basic mistakes coming from individual investors that could be easily corrected. Thanks to investment behavioural mistakes
For instance, we see patterns of investor behaviour biases that have a negative impact on portfolio returns. Most clients have a home bias, which is the natural tendency for investors to invest in large amounts in domestic markets because they are familiar with them. This results in an unnecessary concentration in assets and less portfolio diversification. In addition, many Latin clients look for assets that provide yields, as they perceive them as being less risky. This is not true, as the demand for this type of assets is high and, therefore, they end up being expensive from a valuation point of view. Finally, individuals have a bias towards loss aversion. Loss aversion refers to people’s tendency to strongly prefer avoiding losses rather than acquiring gains. As a result, investors keep assets in their portfolio with large losses for years even though those assets have very little probability of recovery.
We believe that individual investors could reduce the performance gap with institutional investors by simply focusing on three aspects of portfolio management:
#1 Focus on diversification by holding alternative assets
Everybody knows that diversification is key in portfolio management. But the reality is that few portfolios are well diversified within private banks. Many Latin American clients’ portfolios are only invested in US stocks and emerging market bonds, which is a strategy that has worked very well over the last 3 years. There are benefits to being exposed to direct names to reduce the cost of management fees; however, it is also primordial to use funds to benefit from diversification. Indeed, it is wiser to use funds in the following asset classes: high yield bonds, preferred shares, catastrophic bonds, small caps Equity, and emerging markets equities.
We believe that most portfolios should have an exposure to the alternative assets class. We define alternative assets as those assets that have a low correlation with equity and fixed income.
Those are strategies such as long/short equity, CTAs, Global Macro, Merger Arbitrage, Real Estate and Private Equity, for instance. Adding alternative assets allows portfolios to be more robust during phases of market correction; in other terms, they reduce downside risks.
#2 Focus on the right asset allocation instead of on picking securities
The second advice is to stop spending too much time on picking the right securities. What is important is asset allocation, where most of the portfolio performance will come from. A top down approach should be implemented to determine the right exposure to equity vs. fixed income, at the region level and sector level.
Indeed, what is important is not if you own Facebook instead of Google, but your exposure to technology vs. energy, as technology has been the best performing sector in the US this year and energy the worse one. Stocks within the same sector tend to be highly correlated in average.
A common mistake for individual investors is to do the opposite. They focus on trade ideas applying a bottom-up approach without taking the interconnection amongst all those ideas.
Worse, they usually cumulate all the trading ideas without having specific target returns and stop losses. If the ideas do well, they will sell it -most of the time too early. And if the ideas do not work, they will keep it until they recover their losses. This is a bad idea, as returns are auto correlated (following a negative return, an asset has a higher probability to go down than to go up).
#3 – Do not overreact by taking more risks than you can afford
Following a market correction, some individual investors start to feel nervous and prefer to sell their positions, basically selling at the worse time. This happens because they took more risks than they could afford.
The most important question investors should be able to answer is how much they can lose before they start selling their positions, basically knowing their capacity to lose investments. Once you know that the most you can lose is a 20% for instance, you can manage your risk exposure accordingly.
To manage your risk, you need to rebalance you portfolio on a regular basis. As equity usually tends to outperform fixed income, its weight in the portfolio increases over time. Rebalancing allows a reset of the portfolio to the initial portfolio weight.
Conclusion:
We saw that institutional money tends to be benchmarked, which adds constraints for portfolio management. Individuals, on the other hand, do not have all those constraints. By focusing on diversification, asset allocation, and risk tolerance, they can generate alpha and manage risks efficiently in the long term.
Pixabay CC0 Public DomainMexico City's financial district. Old Mutual Latam Launches Their Wealth Management Segment in Mexico
Old Mutual has decided to enter into the Wealth Management segment in Mexico. This new division is being led by Rodrigo Iñiguez, a professional with over 11 years in the group.
Mexico is the second largest market in the Latin American region, after Brazil, so Old Mutual expects that in the next 5 years this line of business will generate a high percentage of its sales for Mexico and complement that of Latin America. According to McKinsey Global Wealth Management, Mexicans have over 800 billion dollars in different financial institutions.
Agustín Queirolo, who is in charge of the Wealth Management segment for Latin America, said: “We will face this new challenge by leveraging our experience and the great acceptance we already have in countries such as Chile, Peru, Switzerland and the United States…We are sure that this new and innovative Mexican solution will help us in advising our clients in an integral way with a local and international vision. Our solution allows Mexican clients and residents in Mexico the possibility of guarding their investments both locally and abroad.”
Julio Méndez, Group CEO in Mexico, said: “The company has achieved significant growth in its different segments in recent years. We maintain a leading position in the Institutional business through the administration of Private Pension Plans and have managed to expand our distribution through more than 3,000 investment advisors across the country. The DNA of our Group is constantly pushing the creation of new investment solutions with a constant innovation in the creation of products and today we visualize great opportunities to enter the Wealth segment.”
Thinking of complementing Private Banks, Family Offices and Wealth Managers that advise affluent and high net worth Mexican families, they will be using a life insurance solution, with an investment component, as an asset planning tool, as well as other innovative instruments that fit the segment and its clients.
Pixabay CC0 Public DomainMatteo Dante Perruccio, courtesy photo. Jupiter Asset Management Teams up with Unicorn to Target Latin America
Jupiter Asset Management (Jupiter AM) reached an agreement with global distribution platform Unicorn Strategic Partners, a global third-party distribution platform which services clients through offices in Santiago de Chile, Montevideo, Buenos Aires, Miami and New York, to service key Latin American markets as well as US offshore hubs of New York and Miami.
The agreement will allow Jupiter AM to continue its international growth strategy based on a selective business expansion in the regions where the Company has identified potential client demand and provides Jupiter AM with access to potential clients in the region. According to Matteo Dante Perruccio, Head of Global Key Clients: “Our alliance with Unicorn offers us the opportunity to enter the region partnering with an exceptionally talented and experienced team of distribution professionals with an in-depth knowledge of the unique characteristics and requirements of the Latin American market.”
According to the latest figures, private wealth in Latin America will reach an estimated $7.5.9 trillion by the end of 2021, making it a significant and rapidly growing market. Chile, Uruguay and Argentina are strategic markets in the region.
With this alliance, Jupiter AM consolidates its global presence, with representation in UK, Spain, Germany, Switzerland, Austria, France, Hong Kong, Italy, Luxembourg, Portugal, Sweden and Singapore.
Active management and high conviction investment:
Jupiter AM is a UK asset manager founded in 1985 that believes in high quality, high conviction active management and in the independence of its managers as a key requirement to be able to add value. As such, there is no in-house macro-economic view or investment committee that produces lists of recommended stocks. Managers instead have the freedom to make investment decisions, albeit always working within strict risk parameters.
Jupiter AM is an established UK-listed asset management business. In recent years the company has expanded its footprint across Europe and Asia. It currently has more than $ 61.1 billion under management globally (as at June 30, 2017).
Joel Peña, Photo Linkedin. Joel Peña Joins DoubleLine to Lead Expansion in Latin America, Caribbean
Joel Peña has joined DoubleLine Capital LP as head of the firm’s institutional and intermediary investor relations in Latin America and the Caribbean. Peña comes to DoubleLine from international asset manager Robeco where he served as managing director for Latin America and U.S. Offshore.
In addition to heading DoubleLine’s institutional and private client relations in Latin America and the Caribbean, Peña will manage relations with overseas clients, advisors and distributors engaging the firm via its U.S. offshore platforms.
“Thanks to economic growth, a broadening middle class and rising standards of living, countries in Central and South America have seen growth in assets entrusted to pension funds, insurers and other fiduciaries. These institutional investors are looking beyond their local markets for investment opportunities and expertise,” said Ron Redell, executive vice president of DoubleLine. “My colleagues and I are delighted to welcome Joel into the DoubleLine team to sharpen our focus on the needs and objectives of institutional and private investors in Latin American and the Caribbean.”
“Navigating markets in today’s complex environment is far from easy. Very few firms have been as successful at it as DoubleLine,” Peña said. “I look forward to leading the expansion in Latin America within this organization, a company which is fully committed to always putting its clients’ needs first.”
Peña has 16 years of experience in asset management. Prior to Robeco, he served nearly six years as head of institutional clients in Latin America for fixed income manager PIMCO. He began his career in asset management at BBVA Bancomer in Houston and Miami before joining Bank Hapoalim as senior private banker. He holds an undergraduate degree in economics from Instituto Tecnológico y de Estudios Superiores de Monterrey , Tecnológico de Monterrey, Mexico, and an MBA from the Stern School of Business, New York University. He is a CFA and CAIA charter-holder.
Pixabay CC0 Public DomainPhoto: StockSnap. A New Order in the Oil Industry?
At the end of July, the UK government announced plans to ban the sale of new gasoline and diesel vehicles from 2040, being the fifth country, with Holland, Norway, India and France, to end the sale of cars with traditional internal combustion engines. Noting the rapid changes taking place in the industry, many of the major car manufacturers have in turn announced their plans to focus on electric powertrain technologies in developing their product plans and launches. What’s more, in Volvo’s case, it has been announced that from 2019 the vehicles released into the market will be either electric or hybrid.
However, while much of the market narrative focuses on electric vehicles, the destruction of demand and the end of the oil era, the energy team at Investec Asset Management believes that global demand for crude oil continues to grow at a decent rate.
The International Energy Agency continues to alter historical data, distorting the picture, but the projected growth rate of demand is at 1% to 1.5% per year and shows no signs of slowing down. With this in mind, we expect the price of oil to remain at between 10% and 15% of current prices in the short and medium term. Even more important, for the energy companies that we have in our portfolios, we have behind us four consecutive quarters (from June 30th, 2016 to June 30th, 2017) in which the price of a barrel of Brent has averaged $50. This gives us a good understanding of the company’s profitability in the new oil order. In fact, we can find companies that are in the process of becoming more profitable at this price level than they were at the highest peak of the last cycle: given cost cuts, in asset classes, debt reduction and strategic focus on ‘value over volume’, which is perhaps not surprising. The main gas and oil companies have historically had no difficulties in generating liquidity; their errors have been committed from a poor allocation of capital and a search for growth.”
Fred Fromm, an analyst and Portfolio Manager at Franklin Natural Resources, a Franklin Equity Group fund, argues that while a small number of countries have announced plans to eliminate sales of internal combustion vehicles, given a time frame, which is often measured in decades, they do not see an impact in the oil markets. “These goals are long term and aspirational, with little foresight given the physical limits and practical implications of that shift. In the medium and short term, there simply is not enough infrastructure to facilitate a complete shift towards electric vehicles, while gasoline-powered vehicles have decades of infrastructure to withstand them, even with increased electric vehicle penetration, it will take years, if not decades, before the global base of vehicles, and therefore the demand for oil, is significantly affected,” says Fromm.
“The move to electric vehicles will require an upgrade of the existing electricity grid, the creation of new public recharging stations, the refurbishment of homes to equip them with charging capacity, and an increase in the production of batteries and associated minerals. While we see the increase in electric vehicle usage as a long-term trend, we do not think it is so short-term as to threaten global demand for crude oil. In any case, the Franklin Natural Resources fund is a diversified portfolio, with significant exposure to the energy sector, but which also invests in diversified metals and mining companies, so that it can invest in companies positioned to benefit from growth in demand for electric vehicles. In addition, the fund’s energy investment is spread among several sub-sectors and among oil and natural gas producers, the latter is likely to benefit, as it is a cleaner fuel in generating the electricity needed to recharge electric vehicles. While part of this potential increase in demand for electricity can be met from renewable sources of energy, such as wind and solar energy, these alone will not be sufficient and will depend on battery technology and large capacity storage solutions,” he adds.
Likewise, Pieter Schop, Lead Manager of the NN (L) Energy fund, agrees that the impact of the electric vehicle on the demand for oil is exaggerated. “Demand for crude oil is expected to continue to grow at around 1.5 million barrels per day for the next few years, reaching peak demand within a decade or two. Demand for gas-powered passenger vehicles in the developed world will be affected, but growth in demand will come from China and other emerging countries. There are still 3 billion people without access to a car, and the first vehicle they are going to buy is probably not a Tesla. Secondly, the other half of the demand for transport comes from demand for aircraft, trucks and buses, where it is much more difficult to switch to electric motors. Industrial and residential demand is also expected to be more resilient.”
According to Eric McLaughling, senior investment specialist at BNP Paribas Asset Management Boston, while he is aware of the forecasts for the long-term demand for fossil fuels, short-term prospects for oil prices are positive. Lower investment by oil producers will weaken supply growth throughout the latter part of this decade. “Through the lens of our investment horizon, the gradual introduction of the electric vehicle does not alter our valuation thesis.”
When it rains, it pours
In an industry that has been affected by the volatility and uncertainty surrounding oil and energy prices, a negative sentiment persists despite the fact that Brent’s average price so far this year is US$ 52 per barrel, surpassing the US$ 45 per barrel average of 2016; the devastation caused by Hurricane Harvey in Texas and adjacent states is now the immediate focus of investors. “There are numerous repercussions in refineries, as well as in the upstream and midstream sectors, however, we believe that the impact will be transitory, given past experiences, and the operational strength and resilience of these sectors and businesses,” the team at Investec Asset Management comments.
In that regard, Schop, Manager at NN IP claims that the direct effects of the storm are limited. “The affected refineries will suffer cuts for a limited period of time and afterwards will continue production. We have seen some weakening in the price of WTI, but the Brent has not been impacted. This has resulted in an expansion of the spread between the WTI and Brent barrel. For most European oil companies, Brent is more important. The indirect effect of the storm is that it can result in lower GDP growth in the United States as damage costs are expected to exceed $ 10 billion. In turn, lower GDP results in lower demand for oil.”
Finally, from Franklin, they point out that in terms of impact on global markets, changes in production on the Texas and Louisiana Gulf Coast have resulted in a shift in trade flows, where Latin American markets have sought to import products from Europe and Asia to replace those typically received from the United States, and recent exports have also suggested that refineries in Asia are looking to secure US crude because of the discount at which it trades against Brent. “Although changes in production are the primary impetus that has led to the expansion of the differential, this was expected to occur at some point given the growth in US production, the limited ability of US refineries to expand their processing capacity in the short and medium term, and the need to encourage a decrease in net imports (through lower imports and higher exports).”
CC-BY-SA-2.0, FlickrIgnacio Fuenzalida, courtesy photo. Chile’s Pension Reform and Savings in Peru and Colombia: An Interview with AllianceBerstein's Ignacio Fuenzalida
Ignacio Fuenzalida has just been appointed as AllianceBerstein’s Regional Director for Chile, Peru, and Colombia. His incorporation coincides with the opening of an office in Chile, which reinforces the firm’s presence in Latin America. Fuenzalida spoke with Funds Society about the region’s situation and AB’s projects.
What challenge does heading the Andean zone (Chile, Peru and Colombia) for AllianceBerstein pose for you? “I’ve been entrusted with the task of making AB grow in this region. I believe we have a range of products which is capable of satisfying different types of clients in this region. And I think I have the tools to overcome that challenge. We have both institutional and retail clients and I believe that the diversification of the market is quite relevant. The number of players is very relevant. “
Chile is in the process of reforming its pension system, with some changes already known and others that are underway. What impact will these innovations have and how are they appraised? The reform bill is still being discussed, but I think the reform takes care of emerging needs. We believe it’s important to increase future pensioners’ contributions and savings. And we hope that in the future we can satisfy those savings with adequate investments that allow pensioners’ returns to grow.”
Do you see it as a restriction or as an opportunity? “We see that we are in line with other developed countries, which seek an increase in savings, and we believe that this increase will always mean a greater opportunity for us, as we have good products and focus on satisfying the client”.
The reform proposed by the Chilean government includes the creation of a state entity to manage part of the contributions: Will there be room in this sector for players like you? “That remains to be seen, but at AllianceBerstein we are investment tool suppliers, and I am sure that, with our returns and variety, some of them will adjust to the needs of how these pensions are managed in future “.
The operations of two countries that are doing well economically, Peru and Colombia, are centralized in Chile: What are AB’s perspectives for these countries? “We think they are countries that have good economic data, which have a fairly stable and sustained growth over time. We believe that this will continue and that the economies of Colombia and Peru (and also of Chile), will increase their rates of savings over time. And as these savings rates increase, the amount available for investing will grow. That is why we believe that we are going to be a very relevant player in the region, both for pensions and for the voluntary savings of non-pensioners. All the countries of the Andean region share similarities, the pension systems are quite uniform and their somewhat conservative investment practices are similar. That’s what poses a significant challenge.”
It is often pointed out that there is little tendency to save in Latin America, but you describe a future with an increase in savings in homes and institutions. “This has to do with what we have seen that has happened in other countries. At present, the savings to income ratio is quite low, and is almost nil in some segments of the population. Fortunately, in these countries we have pensions as mandatory savings, and we believe we are heading towards an increase in the mandatory rate. But also, as countries grow and per capita incomes increase, we believe that the most basic needs are being met, and then we can move on to savings. Savings will be one of the things that are going to happen, because in these countries there are also idiosyncrasies of a certain order and both mandatory and voluntary savings will increase gradually.
Could you tell us about AB’s funds’ range? “Perhaps AllianceBerstein was initially known for fixed income products, and there were quite traditional products such as High Yield and American Income (with a more conservative and a more aggressive part), which together have worked very well during the fund’s 22 year history. But its share of equity is presently very strong; we currently have about 30 funds which are ranked very well, with the highest rating and also four stars. Presently, I feel that I have several funds, more than ten, that I can offer clients because they adjust to their needs. “
AllianceBerstein, based in New York, is currently present in 21 countries, including Brazil, Argentina and Mexico. Globally, the firm has about $ 517 billion in assets under management.
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.
