Pictet Asset Management: No Time to Buy?

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Luca Paolini Pictet AM

Expectations for tighter monetary policy are intensifying.

Central banks continue to lay the groundwork for a withdrawal of pandemic-era monetary stimulus in the face of rising inflation.

But higher interest rates are not the only concern for equity markets. Events in China are also worrying. Its strong recovery from the pandemic is now at risk as Beijing battles to avoid the collapse of its most indebted property company Evergrande.

We have reduced our forecasts for China’s economic growth by 1 percentage point for 2021-22 to 8.6 per cent as we expect the fallout from Evergrande debacle to spread throughout real estate sector. The country’s leading indicator is falling at a 5 per cent annualised rate, the same pace seen at the height of the Covid crisis in March 2020.

That shouldn’t come as a surprise considering real estate and related industries account for up to 30 per cent of Chinese GDP and property makes up more than two thirds of household wealth. Tighter monetary policy has led us to downgrade bonds to underweight while China’s troubles have convinced us to increase exposure to defensive equity sectors and upgrade cash to overweight.

Pictet AM

 

 

Business cycle analysis shows world economic activity is cooling. Our global leading indicators contracted in August for the first time since the start of the post-pandemic recovery. We cut our global GDP growth estimates for the third month in a row to 6.2 per cent for 2021 from 6.4 per cent last month, led by downgrades of the US and China.

While slowing, growth in the US is still significantly above potential and we expect the world’s biggest economy to remain firm as job gains and wage increases boost consumer spending in the coming quarters.

Labour and raw material shortages and a spike in oil and gas prices are keeping inflationary pressures high, although the pace of consumer price rises has slowed in the most recent month.

Europe remains a bright spot as the region’s leading index rose for the fourth month in a row, supported by a weaker euro, the European Central Bank’s generous monetary stimulus and a successful vaccine rollout.

Our liquidity analysis shows central banks are still providing ample stimulus for now, but at a slower rate.

The world’s five major central banks are pumping in just USD500 billion of liquidity on a three-month basis, the lowest in 18 months and compared with USD1.5 trillion during the peak of the pandemic.

That said, our calculations show the US Federal Reserve’s monetary tightening trajectory remains well behind the curve. The central bank’s “shadow rate”, adjusted for the effect of asset purchases, is about 500 basis points below its equilibrium levels.

That is despite Fed officials having taken a clear hawkish turn in their communications, suggesting a faster withdrawal of the central bank’s USD120 billion monthly bond buying and a more aggressive interest rate hike campaign that could start as early as end-2022.

Liquidity conditions in the euro zone remain the loosest in the world and the European Central Bank should continue to provide stimulus in excess of GDP next year – the only monetary authority to do so among major economies.

China’s central bank has stepped up net cash injections in response to a funding squeeze among real estate developers. We expect liquidity conditions to gradually loosen across the country in the coming months; the People’s Bank of China may cut its reserve requirement ratio for banks for the second time this year when its medium-term loans mature.

 

Pictet AM

Our valuation model supports our downgrade of bonds and neutral equity stance.

Despite a recent rise in yields, bonds remain below fair value and we expect a further correction in prices.

Equities have suffered their first weekly outflow of this year, of more than USD 24 billion (see Fig. 2).

Rising bond yields are likely to weigh on equity earnings multiples given the asset class’ expensive valuation. Another red flag is corporate profits.

Earnings momentum has peaked, with 12-month forward earning per share now rising at 20 per cent for MSCI All-Country World Index, compared with 60 per cent in June.

Our models suggest earnings growth will continue to decelerate significantly in the coming quarters as the pace of economic expansion slows.

Our technical indicators paint a positive picture for riskier assets, supported by seasonal factors as well as moderate investor sentiment.

 

Opinion written by Luca PaoliniPictet Asset Management’s Chief Strategist

 

Discover Pictet Asset Management’s macro and asset allocation views.

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation.

The information and data presented in this document are not to be considered as an offer or sollicitation to buy, sell or subscribe to any securities or financial instruments or services.  

Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management (Europe) SA, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management (USA) Corp (“Pictet AM USA Corp”) is responsible for effecting solicitation in the United States to promote the portfolio management services of Pictet Asset Management Limited (“Pictet AM Ltd”), Pictet Asset Management (Singapore) Pte Ltd (“PAM S”) and Pictet Asset Management SA (“Pictet AM SA”). Pictet AM (USA) Corp is registered as an SEC Investment Adviser and its activities are conducted in full compliance with SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref.17CFR275.206(4)-3.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in Canada to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In Canada Pictet AM Inc is registered as Portfolio Manager authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA.

 

 

 

Janus Henderson to Speak on Emerging Markets at Funds Society’s 2021 Investment Summit

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janus
Foto cedidaDaniel Graña, CFA, portfolio manager y Matthew Culley, assistant portfolio manager. Janus Henderson. Foto cedida

Emerging markets will be the focus that Janus Henderson will address in his presentation within the seventh edition of the Investment Summit & Golf of Funds Society.

During the event, which will be held on October 14th and 15th at the Ritz Carlton Golf Resort in Naples, the company will present “Emerging Market Equities” by Daniel J. Graña, CFA, portfolio manager of Emerging Markets who will be share the presentation with Matthew Culley, assistant portfolio manager, at the same team.

The Janus Henderson Emerging Markets Fund aims to provide a return, from a combination of capital growth and income over the long term. The Fund invests at least two-thirds of its assets in shares (equities) and equity-related securities of companies, of any size, in any industry, in emerging markets, according to the firm information.

For more information and/or to register for the Investments Summit 2021, follow this link.

Megatrends: How to invest in cybersecurity

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Cybersecurity services are more relevant than ever due to the adoption of interconnected technologies. Jeff Spiegel, our megatrends expert, delves into the new long-term investment opportunities as digitization continues to expand.

Over the past year or more, a shift from the office to remote work drove digitalization more than any previous year. Companies underwent a digital evolution overnight, fighting to stay competitive in the face of the global disruption caused by the COVID-19 pandemic. Among the biggest challenges was ensuring the security of enterprise networks. 

Today, hybrid work is here to stay, and cybersecurity is a big consideration for companies’ business plans. In 2020 alone, the demand for new digital products and services increased by 76% and is estimated to grow to 83% by the end of 20211. Online security and digitization issues are already part of companies’ growth plans, opening the door to long-term opportunities for investors. 

“The sector’s growth potential is driven by strong technology adoption globally. Global spending on information security and risk management technology is forecast to exceed $150 billion in 20212, up 12% from last year and 50 times more than four years ago3 – Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs

The hidden face of technological progress

Digitized companies were more resilient during the pandemic globally, and technology is expected to continue to be a growth driver moving forward.  It is estimated that companies using digital tools can expect their profit margins to increase, on average, by 12% to 20% globally4.

However, the adoption of digital technologies has also paved the way for the proliferation of cybercrime. In 2020 alone, malware attacks (malicious software) more than tripled as compared with 2019, and ransomware attacks (the virtual extortion of companies) more than quadrupled5

Any company, large or small, that uses servers to store information is at risk of cyber-attacks. Thus, the growing demand for cybersecurity services has resulted in a boom of companies offering this type of services.

Fad or trend?

The world is making great leaps and bounds towards a connected reality in both the organizational nature of companies and the habits of their employees. As more systems move to the cloud and rely on global networks, the need to ensure data security and privacy will continue to increase.

“Evidence of the impact of megatrends is all around us, reflected in products, services and movements with profound transformative potential. They are expected to reshape our personal and professional routines for decades to come. Identifying transformative investment themes offers the potential for significant long-term growth.” – Jeff Spiegel, Head of iShares Megatrend and International ETFs for the United States.

Investing in cybersecurity

The struggle to create a safer cyberspace is a global priority. The rise of cybersecurity, cloud security and information technology services companies is an opportunity to take advantage of the changes already materializing over the past year and a half. 

“Our megatrend Active and Index Funds are based on BlackRock’s conception of long-term trends that can change the trajectory of the global economy. These powerful transformative forces, from artificial intelligence to genomics to clean energy, are changing societal priorities, driving innovation and redefining business models.” – Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs

Investing in products nestled under the technological breakthrough megatrend functions as a portfolio diversifier that allows for greater resilience and exposure to long-term returns. 

“Megatrend indexes are less constrained in their inclusion criteria than traditional sectors, potentially allowing them to better keep pace with the rapidly changing boundaries of the global economy. This investment approach allows earlier exposure to potentially disruptive companies than conventional indexes, as they are organized around business activities, not growth stages.” – Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs

iShares megatrends ETFs within the technological breakthrough category provide exposure to companies that are developing technologies in the fields of cybersecurity, as well as to additional components of the megatrend such as digitization, smart infrastructure, telecommuting, automation and robotics.

As a US Offshore Investor, you can access Megatrends through Active and Index Solutions with BlackRock. See our Funds that provide exposure to CyberSecurity: 

iShares Digital Security UCITS ETF

iShares Digitalisation UCITS ETF

BBF FinTech Fund

BGF Next Generation Technology Fund

1Gartner. (October 2020). “Encuesta de Gartner de casi 2.000 CIOs revela que las empresas con mejor rendimiento priorizan la innovación digital durante la pandemia”. https://www.gartner.mx/es/sala-de-prensa/comunicados-de-prensa/2020-10-20-encuesta-de-gartner-de-casi-2000-cio-revela-que-las-empresas-con-mejor-rendimiento-priorizan-la-innovacion-digital-durante-la-pandemia

2 Gartner. (May 2021). “Gartner Forecasts Worldwide Security and Risk Management Spending to Exceed $150 Billion in 2021”. https://www.gartner.com/en/newsroom/press-releases/2021-05-17-gartner-forecasts-worldwide-security-and-risk-managem

3 Gartner. (August 2018). “Gartner Forecasts Worldwide Information Security Spending to Exceed $124 Billion in 2019”. https://www.gartner.com/en/newsroom/press-releases/2018-08-15-gartner-forecasts-worldwide-information-security-spending-to-exceed-124-billion-in-2019

4 Boston Consulting Group. “La transformación digital puede aumentar la rentabilidad de las empresas y construir resilencia”. https://www.bcg.com/en-cl/press/26july2020-digital-transformation-can-increase-business-profitability-and-build-resilience

5Deep Instinct, “Pandemic Chaos Releases Malware Disaster: 2020 Cyber Threat Landscape Report,” December 2020.

 

Disclaimer
In Latin America: this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds may not have been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx

©2021 BlackRock, Inc. All Rights Reserved. BLACKROCK and iSHARES are registered trademarks of BlackRock, Inc. All other trademarks are those of their respective owners.

MKTGH0921L/S-1849254

 

Fixed Income Will Be the Focus of Thornburg’s Participation in the Funds Society Investment Summit 2021

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Rob Costello - Copy
Foto cedidaRobert Costello, CFA, client portfolio manager at Thornburg Investment Management. Foto cedida

Thornburg will be featured at the Funds Society’s Seventh Investment Summit & Golf with a conference on “Bond Investing in a Low Yield Environment” by the client portfolio manager, Robert Costello, CFA.

At the event to be held October 14th and 15th at the Ritz Carlton Golf Resort in Naples, Costello will present both the Thornburg Limited Term and the Thornburg Strategic Income.

Thornburg Limited Term Income Fund is a flexible, actively managed, core portfolio of high-quality U.S. dollar-denominated bonds. This centerpiece investment-grade portfolio seeks a reasonable level of income and lower volatility than some peers, without overextending in the pursuit of yield.

Thornburg Strategic Income Fund is a global, income-oriented fund with a flexible mandate focused on paying an attractive, sustainable yield. The portfolio invests in a combination of income-producing securities with an emphasis on higher-yielding fixed income.

For more information and/or to register for the Investments Summit 2021, follow this link.

New Global GPs Launch CERPIs in 2021

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Screenshot 2021-09-28 125329
Wikimedia CommonsPhoto: Snapdragon66. Foto:

The new GPs that have come to Mexico to offer global private equity investments to institutional investors as of September 2021 have been: Stepstone Group (under the LOCK3PI ticker) and Oaktree Capital (OAKPI). Stepstone issued commitments for USD $400 million, while Oaktree for $224 million.

Among the recurring issuers for 2021 are: Walton Street Capital, General Atlantic, Thor Urbana and Lock. With these names, there are now 21 global and local GPs that have issued CERPIs.

Among the main issuers of CERPIs (listed by called capital) are: Harbourvest, Lock, Spruceview, General Atlantic, Blackrock and KKR.

1

At less than three months before the end of 2021, the committed capital of the 24 new CKDs (6) and CERPIs (18) is USD $2,543M of which USD $406M corresponds to investments in local private capital (CKDs) and USD $2,137M in global investments (CERPIs). The called capital is USD $120M for local investments vs USD $154M for global investments.

When comparing the issuances of the CKDs vs the CERPIs of 2021, it is worth highlighting:

  • In the CKDs, committed capital is less than one fifth of the amount of CERPIs (USD $406M vs USD $2,137M), showing the greater interest for global private capital investments versus local.
  • The initial capital call of CERPIS have been remarkably lower than that of the CKDs in 2021 (7% vs 30%). CERPIs have been shown to call the minimum necessary, while CKDs have not been so prudent.
  • In the CERPIs, the figures as of September show that the total committed capital is already higher than the previous year (USD $2,137M in September vs USD $1,924M in 2020). In 2019, CERPI issuances reached USD $2,668M, while in 2018 it was USD $5,017M which represents the maximum level reached by the CERPIs (and first year institutional LPs invested in the structures).

2

Highlights from the local and global GPs of 2021:

  • Local issuers of recurring CKDs (FINSA, Walton Street Capital, Infraestructura México and Grupo Renovables Agrícolas).
  • Global issuers of recurring CERPIs (General Atlantic and Lock).
  • Local issuers that open their existing portfolio to global private equity investments using CERPIs (Thor Urbana, Walton Street Capital).
  • New global issuers of CERPIs that bring their global strategy (Stepstone with ticker symbol LOCK3PI, as well as Oaktree Capital).

3

In the list of potential issuers, that are in application and process of issuance there are two new local issuers of CKDs seeking to issue (DD3 and Finpro), while the potential issuers of CERPIs are Walton Street and Lock.

4

Everything indicates that 2021 will be an important year in the structuring and fundraising of vehicles for global private equity investments, and that new global issuers will continue to arrive to Mexico.

Column by Arturo Hanono

BroadSpan Strengthens its Footprint in Latin America through an Office in Mexico

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Captura de Pantalla 2021-09-28 a la(s) 11
Wikimedia CommonsCiudad de México. ,,

BroadSpan Capital has announced the expansion of its operations in Latin America through the establishment of a presence in Mexico City and the hiring of senior banker Luis Camarena as Managing Director and Head of Mexico.

In a press release, the firm has revealed that, through these efforts, it will expand its capacity to deliver its core Restructuring Advisory and M&A Advisory services to clients in Mexico as well as further facilitate cross border transactions for clients based in other markets.

Prior to joining BroadSpan, Camarena headed the Mexico operations of European investment banking firm Alantra for three years. Before that, he was a Director of Rothschild’s Mexico team for over eight years where he led numerous successful restructurings and M&A transactions. Camarena also worked at both Lehman Brothers and JP Morgan in the Investment Banking groups in Mexico City, Monterrey, and New York.

“We are delighted to bring Luis into the BroadSpan structure. It is rare to find a banker of his caliber that has not only the proven restructuring and M&A track record, but also successful experience working in both the bulge bracket and boutique environments. A fantastic fit for all parties,” said Mike Gerrard, BroadSpan’s CEO.

Meanwhile, Camarena claimed to be excited to join a team of bankers with “an unmatched level” of experience and track record that has successfully built a true US-Latin American IB platform. “BroadSpan’s top ranked restructuring practice and longstanding leadership in cross border M&A will bring significant value to our clients as we expand in what is the second largest economy in Latin America”, he added.

Founded in 2001, BroadSpan Capital is an independent investment banking firm that provides corporations, partnerships and government institutions with advice related to mergers & acquisitions and financial restructuring in Latin America and the Caribbean. It has offices in Miami, Rio de Janeiro, São Paulo, Mexico City and Bogota and through affiliate offices located in 30 countries around the world. 

Jupiter Expands its US Credit Team with New York Office Opening

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Pixabay CC0 Public Domain. Jupiter amplía su equipo de crédito estadounidense con la apertura de una oficina en Nueva York

Jupiter Asset Management has announced the launch of a new, New York-based US credit hub, increasing the research capacity of its 13 billion dollars’ global unconstrained fixed income strategy and deepening analytical coverage of the world’s largest, most liquid market.

In a press release, the firm has revealed that three Jupiter employees, including two newly appointed team members, will be based in the office, evolving the firm’s US credit coverage from its current focused and selective approach to a deeper and more extensive analytical cover. “With the office designed as an idea-generation hub for Jupiter’s UK-based fixed income strategy, the team will have no initial requirement for order raising or trading capability”, they add.

Dedicated US credit research team

The New York-based team will be led by experienced US Credit Analyst and US national Joel Ojdana, who joined the company in London in July 2018 and moved back to the United States with the opening of Jupiter’s Denver office in October 2020. With over thirteen years’ experience in fixed income investing, the asset manager believes that Ojdana has made “a meaningful contribution” to the firm’s US credit research – an important pillar of Jupiter’s unconstrained bond offering, led by Head of Strategy, Fixed Income, Ariel Bezalel.

With Ojdana in the credit hub will be David Rowe and Jordan Sonnenberg, who have joined the company as Credit Analysts this month. Rowe joins Jupiter from JP Morgan where he has worked as an Analyst on the Leveraged Loans & High Yield Credit Trading Desk for the last two years, while Sonnenberg joins from Deutsche Bank, where he has spent five years on the company’s High Yield Credit Research team, most recently as a High Yield Credit Research Associate covering the industrials, paper & packaging and chemicals sectors.

In their new roles, both will work closely with Jupiter’s 10-strong London-based credit research team, including Credit Analyst Charlie Spelina, who joined Jupiter in 2017 to spearhead the company’s US credit research. Besides, they will report into Ojdana and to Luca Evangelisti, Jupiter’s UK-based Head of Credit Research.

Jupiter AM has pointed out that the team will focus on high-yield credit research, feeding into the idea generation process for its global unconstrained bond offering, including the flagship Jupiter Dynamic Bond (SICAV). In addition, their work will also feed into the research process across Jupiter’s broader fixed income strategy, including the Jupiter Global High Yield Fund, with a longer-term scope for evolving the company’s product range in this area.

“Independent fundamental credit research has been a cornerstone of this strategy from the start. The opening of a New York-based credit research hub is an important step in the expansion of Jupiter’s credit research capabilities and one that will have a valuable impact across Jupiter’s entire fixed income offering. We look forward to working with the team to generate fresh and exciting investment ideas for the strategy”, commented Ariel Bezalel, Head of Strategy, Fixed Income.

Meanwhile, Stephen Pearson, CIO, added that as Jupiter’s Fixed Income strategy continues to go from strength to strength, it is “vitally important” to invest in their people and infrastructure. “David and Jordan’s experience in the US credit market make them the ideal candidates to further expand the team’s wealth of regional expertise, building on the meaningful contribution Joel’s work in the US has already made to the team’s investment process”, he concluded.

Franklin Templeton to Acquire Investment Grade Credit Team from Aviva Investors

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Pixabay CC0 Public DomainAutor: Alexas_Photos. Franklin Templeton compra el equipo de Crédito Investment Grade de Aviva Investors

Franklin Templeton has announced the talent acquisition of Aviva Investors’ US-based Investment Grade Credit team. This means that senior portfolio managers Josh Lohmeier and Michael Cho will join Franklin Templeton Fixed Income (FTFI). In addition, Tom Meyers, previously Aviva’s Head of Americas Client Solutions, will join FTFI in a newly created role as SVP, Senior Director of Investments and Strategy Development, Fixed Income.

In a press release, the asset manager has revealed that Meyers, Lohmeier and the full investment team are expected to join by the end of 2021. Lohmeier and Meyers will report to Sonal Desai, CIO at FTFI, and the investment team will continue to report to Lohmeier.

The Investment Grade Credit team currently manages over 7.5 billion dollars in institutional assets under management at Aviva, across its suite of investment grade credit strategies, including US Investment Grade Credit, US Long Duration Credit, US Long Duration Government/Credit, and US Intermediate Credit, with additional customized versions of each strategy for various institutional clients. The asset manager has clarified that Aviva clients in these strategies will have the opportunity to continue to have the team manage their assets at Franklin Templeton.

“Bringing this experienced team aboard will complement our existing credit capabilities by further deepening our expertise in investment grade credit, strengthening our research and analysis resources, and expanding our strategy offerings and capabilities further into the institutional marketplace, with a special focus on defined benefit and liability-driven investing,” said Desai.

“I look forward to working with Josh and the team to bolster and differentiate our investment grade credit offerings, and with Tom to bring this messaging to our clients and consultants, especially in the institutional arena”, she added.

Excess returns through all market cycles

Franklin Templeton has highlighted that this Investment Grade Credit team uses a differentiated portfolio construction process that breaks down and analyzes credit markets in distinctive ways in order to uncover additional opportunities for alpha and risk reduction for clients. Utilizing a custom risk framework and allocation system, the team aims to consistently deliver positive and uncorrelated excess returns through all market cycles, regardless of the direction of credit spreads, with a focus on downside protection.

Lohmeier claimed to be “thrilled” to continue to grow the substantial client interest they have seen in their investment grade credit strategy, now with Franklin Templeton. “Portfolio construction sets the strategy apart from its peers and is a key driver of its non-correlation. Our time-tested process is designed to add value by creating a more efficient portfolio and allocating to the best credit ideas”, he said.

Franklin Templeton believes that the team’s approach and expertise are complementary to its existing active quant investment process, which combines fundamental research-based active management with quantitative analysis and data science. In addition, the team’s investment philosophy and culture, built on the belief that a quantitative enhancement to fundamental research leads to more consistent and repeatable alpha generation, strongly aligns with FTFI’s existing culture.

“In the current environment, and especially within fixed income, we believe clients are looking for crisp differentiation and consistency,” said Meyers. “I look forward to working with Josh to continue to articulate the benefits of the investment grade credit strategies, and with the broader Franklin Templeton Fixed Income team in connecting clients with investment strategies that meet their diverse needs.”

Franklin Templeton Fixed Income has 156 billion dollars in assets under management, with approximately 13 billion of that in corporate credit strategies, as of August 31, 2021. The firm’s existing Corporate Credit Research Team comprises 31 investment professionals, organized by region.

The US Market Appears to Have Already Discounted a Cautionary Re-opening Scenario

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Pixabay CC0 Public DomainAutor: Free-Photos. Reapertura de EE. UU.

U.S. equities marched higher in August as the S&P 500 logged its seventh consecutive monthly gain. Markets responded favorably to a strong earnings season, stable central bank monetary policy, and robust infrastructure spending. Despite the positive headlines, investors remain cautious over inflation dampening profit margins and companies’ passing those higher prices to consumers.

Although 53% of Americans are fully vaccinated, concerns remain over the impact of the Delta variant on the unvaccinated portion of the population. Efforts to administer a booster shot have received FDA approval, which aim to bolster the efficacy of those vaccinated earlier this year. Additional shutdowns remain unlikely and the market appears to have already discounted a cautionary re-opening scenario with travel and leisure stocks shedding some of their gains.

Continued focus remains on the Fed and their stance on monetary policy in response to higher inflation rates. Although recent discussions of potential implementation of tapering have been non-material, the market remains cognizant of potential action being taken by the Fed should these concerns persist.

Although our approach to picking stocks always evolves – we still often video conference with management teams even though we are back in the office – we remain true to the founding fundamental research process and PMV with a Catalyst™ methodology of our firm. As Value Investors, we will continue to use the current market volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets and are trading at discounted prices.

Mergers and acquisitions activity remained vibrant in August with $480 billion in announced deals, an increase of 44% compared to 2020. 

The global convertible market bounced back in August with positive returns and an uptick in issuance.  Returns were mostly driven by positive underlying equity performance for the month. The return of issuance was also a positive development after a relatively slow July. Pricing improved and we anticipate  the pace of issuance to accelerate through the fall. The fundamental reasons for increased convertible issuance are still quite intact with low interest rates, increasing equity prices, and favorable tax environments available to most potential issuers.

 

_________________________________________

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GAMCO MERGER ARBITRAGE

GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.

Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.

Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.

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GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise.  The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach:  free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155

GAMCO CONVERTIBLE SECURITIES

GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.

The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.

The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.

By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.

Class I USD          LU2264533006

Class I EUR          LU2264532966

Class A USD        LU2264532701

Class A EUR        LU2264532610

Class R USD         LU2264533345

Class R EUR         LU2264533261

Class F USD         LU2264533691

Class F EUR         LU2264533428 

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to nd out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reect the manager’s current view of future events, economic developments and nancial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

 

The Trouble with Yields

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Pixabay CC0 Public DomainBajos rendimientos de la renta fija. Bajos rendimientos de la renta fija

As investors look across the world for opportunity and challenges within the fixed income asset class, it’s important to note that real yields are at historic lows in high quality fixed income markets.

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In addition, spreads are at some of the lowest levels that we’ve seen in history. This is not a time to take undue risk within fixed income. At the same time, it’s important to see that the role of fixed income in asset allocators’ portfolios is changing. Because those real yields are so low, and yet because the opportunity in markets from a volatility perspective is rising, an investor must be significantly nimbler these days than to merely clip a coupon.

In the current market environment, we’re generally positioning our fixed income portfolios to take less risk given low real yields and low spreads. There are still areas of opportunity. As is often true in investing, investors continually fight the last war. Consumer balance sheets, particularly in the United States, are overlooked by some. To the contrary, we believe consumer balance sheets in the United States are quite strong. The real challenges are consumer balance sheets outside the United States and the corporate and sovereign bonds that are exposed to that weakness.

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Outside of the U.S., we have seen an incredible penchant for spending, most notably on the sovereign front where government expenditures rose precipitously with Covid-related social spending programs. Of course, this is coming at a time when government revenues are at record lows due to lack of tax revenues with subdued economic activity. As with corporates, the recipe of a higher debt load with a lower P&L is not a comfortable dynamic, especially if prolonged.

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Investors gave governments the benefit of the doubt through 2020 with the hope that 2021 would bring some austerity. That has not been the case. We are now left with a larger public sector deficit and a higher debt load. Therefore, we are not surprised that we have seen the largest number of sovereign rating downgrades in the 21st century by nearly 200% (captured below).

 

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When Will the Fed Move?

One interesting development in markets over the course of the past quarter has been that rates have fallen, not just in the United States, but in many places across the globe. This is at odds with high inflation and high growth prints, as well as an improving labor market. A remarkable instance of the market trying to outguess the Federal Reserve.

Despite questions around the Fed’s commitment to keeping rates lower for longer, investors have seen that they have been very clear and resolute. The Fed’s plan to raise rates and taper bond purchases is on schedule for later this year.

Although the Fed is still active in markets, the economic bump in the road due to the Delta variant makes it apparent that rates cannot rise monotonically towards 2 or 3+ percent. However, as we look at the intermediate term, and we see incredible amounts of fiscal and monetary stimulus still in the system, growth should continue to be good and curves should continue to steepen. While the Fed and other central banks are anchoring rates at the front end, the long end can rise especially as that taper gets closer and closer.

No Global Lock-Step Market Movements Likely

As we look across the globe, there are a variety of different situations and potential opportunities. Emerging markets is a varied landscape: from China which has a significant virus lockdown and has seen an early cycle growth stage, earlier than other countries; to places like Brazil, where vaccination rates are much more challenging and resulting growth has been pushed into the future. At some point, we’re going to see vaccines continue to take hold, and that should be a boost for growth. But is there an opportunity today before we see restored domestic demand, particularly in a healthier local consumer?

Outside the U.S., we cannot apply a blanket policy to risk. Corporate bonds offer a glimmer of hope. There are many corporates in EM who benefit from the global cycle vs domestic demand. In other words, they are exposed to the aforementioned healthy consumer/corporates we have in the United States. Because of this, we have seen leverage, interest coverage, and cashflow generation improve with global reflation.  

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The key in EM is making sure there are built-in hedges to the business (input costs, currency, interest rate) that can help weather global economic swings or offer defensive narratives. With these, we can capture EM spread levels which have lagged both U.S. and the Euro area (see below) while limiting our exposure to typical EM dynamics like cyclicality, currency depreciation and earnings volatility.

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With that in mind, we have continued to move our portfolios to a risk-off stance but with a focus on the strength of consumer and corporate balance sheets and the underwriting of fixed income in those sectors.

One last note is we need to look at the market every day, and do, because we never know what day volatility will rear its head. These are times when a nimble and wholistic approach to fixed income management really comes into its own.

 

Jason Brady, CFA, is President and CEO at Thornburg Investment Management.

Ayman Ahmed is a Senior Fixed Income Analyst at Thornburg Investment Management.

 

 

 

Important Information

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This is not a solicitation or offer for any product or service. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein.

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