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Alpha hunters: Miami's fund selectors stalk the markets

Where are investors finding alpha in today’s market environment? Are alternative investments the answer? Samantha Muratori asked fund selectors in Miami what tools they have been using in their hunt for returns.

While the East Coast was being blasted by a ‘bomb cyclone’ in early January, I was hiding out in Miami, where I met with the city’s independent investment elite. Most investors have been selecting products based on the staggeringly low interest rates, as well as the potential for a rise in inflation. Overall, investors were fairly happy as last year ended strongly, but few are anticipating the same bountiful returns throughout 2018.

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While the East Coast was being blasted by a ‘bomb cyclone’ in early January, I was hiding out in Miami, where I met with the city’s independent investment elite. Most investors have been selecting products based on the staggeringly low interest rates, as well as the potential for a rise in inflation. Overall, investors were fairly happy as last year ended strongly, but few are anticipating the same bountiful returns throughout 2018.

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Tapping the craftsmen

David Storch, Rose Capital

My first stop was South Beach to meet Rose Capital investment analyst David Storch. He told me that a good relationship with a manager is far more important for him than a big brand name, even though most firms naturally tend to favor the latter.

‘Our approach to portfolio construction is to create “all-weather” portfolios that include both liquid and illiquid asset classes.

While we are generally optimistic on the global economy and overall market performance, the public markets – traditional equities and fixed income – are not cheap.’

Storch said that those investors who can access and deal with the relative illiquidity are well-positioned to take advantage of better alpha-generating opportunities in alternative sectors such as private equity, real estate and private credit. His group tends to allocate to niche middle-market managers, with whom they have long-standing personal relationships, rather than to large generalist funds that are widely distributed across many different platforms and channels.

‘We have developed a relationship with a private equity firm spun out of a well-known single-family office, and have co-invested with them in one of the largest and fastest-growing craft breweries in the US. We began allocating capital to our New York-based real estate partner back in 2005 and they have now completed more than $500 million worth of transactions.

‘Our private credit manager is a 25-year Wall Street veteran and fixed income specialist who broke away from a top-tier investment bank. Restrictions on traditional lending channels have created an ideal environment for structured direct lending and senior secured asset-based financing, secured by consumer loans, commercial account receivables, real estate holdings, fine art and other forms of cash-flowing collateral.’

 

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Latam debt bet

Andre Algranti and Alberto Bernal, XP Securities

Next, I made my way to Brickell Avenue to meet with XP Securities’ chief executive Andre Algranti and chief emerging market and global strategist Alberto Bernal. They explained why they remain bullish on Latin American high yield, and also why they anticipate emerging markets will continue to outperform US equities.

‘2017 was a banner year for traditional assets,’ Bernal said. ‘Just to present two examples, the MSCI EM Index delivered investors a USD return of 34.3% year-on-year, and the S&P 500 paid investors 19.4% year-on-year, ex ante dividends.’

Bernal called the performance nothing short of outstanding, particularly given that the world’s risk-free rate remained close to 2% nominal. He noted that it will prove very hard to replicate these levels of returns in 2018, at least in traditional assets. XP Securities believes that holding on to assets that have an inverse relationship to the value of the US dollar should pay off if the dollar stays weak this year.

‘We expect emerging markets to deliver around a 15% return this year. We remain bullish on high yield Latin America USD-denominated bonds, for example, as we believe that US inflation fundamentals will continue to underwhelm the consensus.’

For those willing to accept more risk, Bernal believes local debt in Mexico and Argentina continues to look quite attractive.

‘We expect to see Mexican and Argentinian local debt paying investors close to 20% in USD terms next year, thanks to material disinflation. Lingering good growth impulses around the world will also help to keep commodity prices supported – a development that will also help emerging market assets.’

XP also expects more attractive relative valuations to allow Europe and Japan to outperform US equity markets this year.

 

 

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Value trade

Emmanuel Casuscelli, UCAP Asset Management

After being introduced to UCAP Asset Management’s directors in New York last year, my trip to Miami gave me the chance to meet the group’s portfolio management and trading team. Emmanuel Casuscelli, who constructs the quant model portfolios for the team, believes the market upswing will not last too much longer and suspects that the market has underestimated the potential inflation risks.

‘Given a global environment with both strong macroeconomic and market trends, we continue to find alpha in traditional cross-asset momentum plays, particularly in risk assets such as equities, credit and commodities,’ he said.

‘However, given high valuations, historically low rates, risk premiums and volatility, as well as incipient signs of excess such as the recent cryptocurrency
phenomenon, we believe this uptrend is much closer to its end than to its infancy. We see central bank overestimation of the actual neutral real interest rate and market underestimation of inflation risk as potential threats to the current cycle, all in a world aggressively relying on cheap money to finance
consumption, investment and – most importantly – debt rollovers.’

Recently, UCAP has been overweighting relative value trades at the expense of momentum. The team is now prepared to radically switch most exposure to
cash and US Treasuries once the quantitative market signals call for it.

‘In addition, we complement our tactical multiasset investments with low-volatility alternative fund managers and deep barrier reverse convertible notes, with the aim of capturing alpha on the downside as well,’ Casuscelli added.

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Alternative credit play

Miguel Sosa, Premia Global Advisors

I concluded my trip in Coral Gables, where I met Premia Global Advisors founder Miguel Sosa. The former Merrill Lynch advisor launched Premia at the end of 2016 as an independent wealth management firm, with a focus on offshore clients and socially responsible investing. He said that while today’s market appears challenging for traditional asset classes such as equity, fixed income and cash, there are opportunities to enhance the return of a traditional portfolio by incorporating non-traditional investment ideas.

‘One area we at Premia Global Advisors have been using to help clients regain some yield while diversifying their portfolios has been alternative credit strategies. These strategies and funds gain access to higher yields through non-traditional sources of income,’ he said.

Some of these funds invest in fintech-type lending in areas such as consumer lending, small business loans and real estate short-term or bridge loans. 

‘Here you’ll find yields that range from 5% to over 10%, depending on the level of risk, the liquidity of the underlying loans and the fund’s liquidity requirements. It should be noted that these funds or strategies do have an inherently higher level of risk or illiquidity. However, for clients that consider the fixed income portion of their investment portfolio to be long-term, these investments may have a place.’

In most cases, Premia Global Advisors combines various types of funds or strategies to gain greater diversification. 

‘So depending on the needs, risk characteristics and time horizons of each individual client, you may be able to achieve and improve income and/or return by looking at alternative credit strategies,’ Sosa said.

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Final thoughts

After these meetings, it was clear to me that there is a pattern emerging among offshore fund selectors. As we have seen in the push toward alternatives in the Chilean pension industry, the thriving economy has driven investors toward riskier investment products such as convertible notes, structured products and private credit.

Many ex-wirehouse independents have been happy to engage with the riskier alternative managers that they were unable to work with at the bigger firms.

As long as the end client is willing to make an illiquid commitment, these advisors have found that making the alternatives leap has been generating worthwhile returns.

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