Gianluca D'Avino

Volatility 📉 in markets comes at a bad time for private equity firms As the Financial Times Lex points out, the current bout of volatility is problematic for an industry already struggling to find successful exits to recycle ♻️ cash into new deals 💰: "Jon Gray has insisted for some time that Blackstone will not wait for the 'all-clear' in order to jump-start its investment. During last week’s earnings call, Blackstone said it had put $34bn to work in the most recent quarter. The group, along with KKR, Apollo Global Management, Inc. and Ares Management Corporation put $160bn to work in the period. That comes just as red lights 🚨start flashing. The S&P 500 is down a tenth since its July peak, hobbled by worries of a recession and capital markets volatility spreading across the world. Blackstone shares have lost roughly the same in that period. Private markets are supposed to be less erratic than their public equivalents, since those instruments are not traded on exchanges where valuations are marked constantly. It has been a running joke each quarter that when the listed private capital managers shared their returns, the rosy figures seemed unmoored from widely broadcast public market benchmarks. The signals now are mixed. Inflation has abated and central banks are going to ease monetary policy soon. But the economy may already be facing a slowdown; interest rates will not go back to zero. Apollo likes to say that 'purchase price matters.' A series of groups that specialise in leveraged buyouts, who rose to prominence in the zero-interest rate policy era of free money, are probably in big trouble. They paid high prices that simply won’t prove justifiable. As for Apollo itself, its current incarnation as insurance-based credit manager has been a huge success. Its market capitalisation hit $70bn in June. Unfortunately, in the last week it lost a fifth of that. In its latest earnings, Apollo disclosed that its riskiest bucket of investments, where annuity premiums are allocated, sharply missed its targeted return. That hit overall profits. And fuelled investors’ questions about a business model that remains untested through a credit cycle. 🔄 Still, the best investment returns are almost always sourced in the midst of turmoil. Debt spreads widen and valuation multiples contract. Conviction pays off. ⚠️But this bout of volatility is problematic for an industry already struggling to find successful exits to recycle cash into new deals. The real skill of private market funds has always been the ability to spin mediocre or worse returns into healthy enough future fundraising to live another day. Just a week ago, a quick unwinding seemed far fetched when the base case was a soft landing or smooth take-off. Give Jon Gray credit for admitting that his job is to put money at work as best he can and hope that it works out." (+++Opinions are my own. Not investment advice. Do your own research.+++)

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EU CLO Managers: Varying Prepayment Rates in the Post-Reinvestment Period (Post-RP) While each CLO deal is different, understanding the historical prepayment rates during the post-RP for each manager remains highly beneficial. Analysing these rates offers insights into the tendencies of different managers, highlighting those who consistently achieve lower prepayment rates and those who tend to experience higher rates in the post-reinvestment phase. To illustrate these trends, the following table in this article presents the average first-year, second-year, and third-year annualised prepayment rates for each manager, drawing on data from their seasoned deals. In particular, 12 EU #CLO managers have kept their annualised prepayment rates in the single digits for the first and second years post-RP. Among them, 5 managers have so far demonstrated the ability to keep annualised prepayment rates in the single digits for the first to third years post-RP. If you’re interested in learning about the pricing for premium content, please don’t hesitate to email me at [email protected]. https://lnkd.in/eNNGRuWs

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𝗜𝘀 𝗧𝗵𝗲𝗿𝗲 𝗥𝗲𝗮𝗹𝗹𝘆 𝗡𝗼 𝗡𝗲𝗲𝗱 𝗳𝗼𝗿 𝗔𝗹𝘁𝗲𝗿𝗻𝗮𝘁𝗶𝘃𝗲𝘀 𝗡𝗼𝘄 𝗧𝗵𝗮𝘁 𝗕𝗼𝗻𝗱 𝗬𝗶𝗲𝗹𝗱𝘀 𝗔𝗿𝗲 𝗛𝗶𝗴𝗵𝗲𝗿? A piece from David Thorpe at the Financial Times suggests some UK multi-asset investors now view alternatives less favourably, with some arguing there's "no need" for them because higher bond yields are providing better returns and potential diversification for equities if a recession hits. While it is certainly true that expected returns from fixed income are higher now, there remains a strong case for allocating to alternatives, especially liquid diversifying strategies. Here's why: 𝗥𝗶𝘀𝗸 𝗼𝗳 𝗦𝘂𝗽𝗽𝗹𝘆 𝗦𝗵𝗼𝗰𝗸𝘀 𝗮𝗻𝗱 𝗦𝘁𝗮𝗴𝗳𝗹𝗮𝘁𝗶𝗼𝗻: While bonds may diversify equities in a recession driven by falling demand, there's still a risk of supply shocks or stagflationary episodes. The significant bond sell-off in the 1970s occurred during the second wave of higher inflation. 𝗗𝗶𝘃𝗲𝗿𝘀𝗶𝗳𝗶𝗰𝗮𝘁𝗶𝗼𝗻 𝗟𝗶𝗺𝗶𝘁𝗮𝘁𝗶𝗼𝗻𝘀: Yes, government bonds have historically diversified equities in demand-driven recessions, but other fixed income instruments like credit and high yield bonds tend to become more correlated with equities during major downturns, making them less effective as portfolio diversifiers. 𝗛𝗶𝗴𝗵𝗲𝗿 𝗘𝘅𝗽𝗲𝗰𝘁𝗲𝗱 𝗥𝗲𝘁𝘂𝗿𝗻𝘀 𝗳𝗼𝗿 𝗔𝗹𝘁𝗲𝗿𝗻𝗮𝘁𝗶𝘃𝗲𝘀: Many alternative investment strategies, such as managed futures and global macro, hold substantial levels of cash and use derivatives for exposure. The higher cash rates now also boost the expected returns for these strategies. 𝗘𝗾𝘂𝗶𝘁𝘆-𝗹𝗶𝗸𝗲 𝗥𝗲𝘁𝘂𝗿𝗻𝘀 𝘄𝗶𝘁𝗵 𝗟𝗼𝘄 𝗖𝗼𝗿𝗿𝗲𝗹𝗮𝘁𝗶𝗼𝗻: In a higher rate environment, many alternative strategies, particularly those running at higher levels of volatility, may generate equity-like returns with low correlation to equities. Adding them to a portfolio can result in smoother overall portfolio performance.

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10 year Treasury Yield above 4% However you look at it, last month’s employment report demonstrated a labour market in strong shape. Payroll growth came in at 254,000, exceeding forecasts by over 100,000, while the unemployment rate fell to 4.1%, and annual wage growth rose to 4%. The strong data hit the Treasury market hard, reducing expectations for Fed rate cuts by a quarter point through the end of next year, and helping the dollar achieve its best performance in two years. 10-year Treasury yields jumped by more than 20 basis points, surpassing 4% for the first time in two months, with 2-year yields approaching the same level, flattening the yield curve between 2-year and 10-year Treasuries nearly to zero. In SOFR futures markets, the likelihood of a half-point rate cut next month has been completely removed. Moreover, scepticism is emerging about any rate cuts in November, with only 23 basis points priced in and no more than 50 basis points anticipated for the remainder of the year. Despite comments from the previous FOMC meeting where they implied there would be two further 25bp cuts by year end, just weeks ago, markets were pricing in a 50 basis point cut for November alone at around 65%. With various Fed speakers this week followed by US CPI and Initial Jobless on Thursday we have an interesting week ahead. #Fed #InterestRates #Trading

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Excellent that Phoenix and Schroders are partnering to create a huge new fund to channel money directly into fast growing private companies, as reported by the FT. "The world is shifting from public to private" and "The UK's private companies are an untapped universe of investment opportunity" according to Schroders CEO. This is fantastic news for the UK Middle Market space where entrepreneurialism is abundant in highly motivated Board rooms up and down the UK. Investment managers will likely struggle to generate market leading returns if the middle market space is absent from their strategy given the high growth nature of this market segment. It bodes well for middle market M&A advisors and sellers with more buyers now in town and means some niche advisors, if they haven't already, need to turn to private company advisory to remain in the game in the context of advisor consolidation over the last couple of years. #corporatefinance #investmentbanking #privateequity

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Euro-area Growth Concerns ECBspeak last week continued to underscore adverse growth concerns, with Rehn saying “rate cuts would not hurt the eurozone's fragile growth and subdued investments which I am concerned about” (source: Bloomberg). The theme of adverse growth concerns will continue with activity surveys likely to show persistent weakness in Germany. Note that we are below consensus for the August German ZEW. Any weakness will push the euro area’s business cycle clock further into recession territory, amplifying concerns that central banks have left policy too restrictive for too long, and underscoring the ECB's shift to adverse growth concerns and away from sticky services inflation. Final estimates for July inflation from France and Spain should further confirm the ECB’s shift away from sticky services inflation. German data last week showed core services inflation has slowed to its weakest pace since December 2023. Moreover, note that fixings have HICPxt below 2% for seven of the next 11 months, illustrating that inflation is increasingly becoming a secondary concern in the euro area.

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KEY TAKEAWAY: Ferrari of Modena has built a $90 billion market cap company by leveraging its brand much more effectively than its competitors. The difference is evident in growth, pricing, margins and stock trading multiples. _____________________________________ As referenced in the Hermès and LVMH posts, luxury brands can be successful in weaker economic times than premium brands, and are less harmed by inflation than budget brands. More so than Porsche and Lamborghini, Ferrari has positioned itself to customers and investors as an ultra-exclusive brand, whose value is even greater than the functionality and aesthetics of its vehicles. Both Porsche and Lamborghini cars have been acclaimed for their performance and aesthetics. Ferrari's gross margin in the 50% range, is almost double Porsche's 25% to 30%. While both Lamborghini and Ferrari's standard models are in the $200,000 to $500,000 range, and their numbers of cars sold in 2023 were similar - 10,000 for Lamborghini and 13,000 for Ferrari, Ferrari's revenues were more than double Lamborghini's - $6.4 billion vs. $2.9 billion. Ferrari's revenues per car sold were $470,000, or $220,000 more than the price of its most basic model, Roma. Lamborghini's revenue per car sold were $280,000, just $40,000 more than its most basic model, Urus. When Lamborghini, owned by Audi, introduced the Urus SUV in December 2017, it was selling 3,000 to 4,000 cars per year. Urus has become its best selling model, with over 6,000 annual sales. Lamborghini made a decision to increase car sales by emphasizing the lower end of their product line. Meanwhile in 2017 Ferrari continued its focus on the ultra-luxury market. It introduced the 812 line whose average price is in the $500,000 range, and increased the emphasis on personalization. Its messaging featured its Tailor Made program, whereby an exclusive group of buyers can design an almost bespoke car. Beyond car sales, 10% to 15% of Ferrari revenues are derived from sponsorships for their Formula One racing team, notably from Banco Santander, as well as from merchandise such as apparel and mugs. Its Ristorante Cavallino was redesigned by Mahdavi and its menu was reimagined by Massimo Bottura. Investors are giving Ferrari credit for its strategy emphasizing ultra-luxury branding over functionality or aesthetics. Porsche has a market cap of $30 billion, or $220,000 per car sold. Ferrari's $90 billion market cap is over $6 million per car sold. It is about the same as Porsche and Mercedes-Benz combined. Ferrari stock trades at over 60x trailing 12 months earnings, similar to Hermès, Tesla and BYD, while Mercedes-Benz, BMW, Audi and Porsche trade at less than 20x. Investors may believe that, as an ultra-luxury brand, Ferrari is better positioned to compete in a future dominated by electric cars. Next up a Chinese tech giant not in the S&P 500. Sources: classic.com, Car and Driver Magazine, Ferrari, AUDI AG, Statista Michael Binetti Tom Narayan

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Euribor.... on Eurex. Another uptick in the growth of Eurex's offering. Still small pickings at just 2.7% of market share vs ICE but could that continue to grow? Only a few years ago Curve Global launched a play to try and take on the long reigning heavyweight champ of ICE, at one point they managed to reach 10% of mkt share, only to slowly die out perhaps limited by only having a few of the major banks onboard. Could Eurex with its larger reach present a bigger challenge? Please note, the upper part of the chart has axis to the left and right. ICE is by far the major player with over 4 million contracts of open interest vs Eurex 111k lots. Posts are only to highlight potential developments in Futures and Options mkts for those interested in this space. Comments, questions and DM's always most welcome. #ice #eurex #markets #futures #options

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Closet Benchmarking Among UK Equity Funds? In the ever-evolving landscape of UK equity funds, it’s important to identify which funds are truly active versus those more aligned with the benchmark. Our latest research, visualized in the scatter chart below, sheds light on where funds fall on this spectrum, with the X-axis showing stock active share and the Y-axis displaying a blend of country and industry-level active share, compared to the FTSE All Share index. We observe a wide spread of results, showing the diversity in fund strategies, from highly independent stock-pickers to those with a more benchmark-aligned approach. We highlight 4 funds with the greatest independence from the benchmark: • Lindsell Train UK Equity • Finsbury Growth & Income Trust • Aviva UK Listed Equity • Castlebay UK Equity What do they have in common? Low to zero allocations to sectors like Energy, Health Care, and Materials - proving their differentiated approach from the FTSE All Share index. However, it's crucial to note that while 'closet benchmarking' can suggest a lack of transparency, that might not be the case here. Many of the funds with lower active shares fall into specific categories, such as ‘tilt,’ ‘enhanced index,’ or ‘beta plus’. These approaches are deliberate and part of a well-defined fund strategy to remain aligned to benchmark indices. In terms of performance, the inset chart shows that high active share funds have outperformed their lower active share peers over time. Since April 2012, high active share funds have returned 164% on average, compared to 131.6% for low active share, 126.2% for medium active share, and 134.5% for the benchmark FTSE All Share ETF. What do you think about active investing with benchmark constraints? Is true independence from the benchmark the key to success, or do defined strategies with low active share still have a place in the market? #UKEquity #ActiveManagement #FundResearch #Investing #PortfolioManagement #assetmanagement #stocks

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With the help of Nicola Zanetti in our quantitative advisory team, we try to estimate how holding a quota of MA funds can enhance risk-return metrics for asset allocators. We analyze how for a portfolio investing passively 75% in ETF Euro Aggregate and 25% ETF MSCI ACWI reacts while adding incremental quotas of a basket of large EUR MA Global conservative **** funds, without changing the overall allocation. The evidence we get over last 4 years shows a reduction of volatility and drawdowns while enhancing alpha. The reasons are mainly two: 1) adding an extra level of diversification ( skills) given macro and geopolitical scenarios often unpredictable 2) allowing also for a second layer of diversification (duration management, steepeners, inflation linkers, sector rotation, fx relative value, commodities, stock selection etc) not obvious for asset allocators. So we think MA funds can cover an important role as diversification boosters also for investors who love implementing directly asset allocation decisions with flexible and efficient tools as ETF.

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Following a 25 bps drop in August—the first in more than four years—the Bank of England maintained the Bank Rate at 5% during its meeting in September 2024. Though one member supported a further 0.25 percentage point decrease to 4.75%, this decision met market expectations. August's annual inflation was 2.2%, and when last year's drops in energy costs are removed from the yearly comparison, it is expected to rise to about 2.5% by the end of the year. In August, consumer price inflation for services remained high at 5.6%. In the three months leading up to July, the regular weekly earnings of private sector growth fell to 4.9%. Meanwhile, it is anticipated that in the second half of the year, headline GDP growth will resume at its underlying rate of roughly 0.3% per quarter. The Committee also resolved, with unanimous consent, to trim its holdings of UK government bonds by £100 billion over the following year, to £558 billion. Smart move by the MPC- as the much-anticipated budget by the new Labour government is set to be unveiled on 30th October 2024. By all accounts, the budget will likely slow down an already stagnating economy. MPC, in November, will be in a much better position to assess the situation following the budget and make necessary decisions. An uptick in the service inflation will be monitored closely as the UK is in danger of a resurgence in inflation, especially on the services side. GBPUSD: 1.3292 GB10Y: 3.884% FTSE100: 8,332.35 Source: Bank of England, Koyfin, Barchart, Yahoo Finance.

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Informative midyear report from ETFGI Thanks to Deborah Fuhr, CFA fellow and Margareta Hricova ETFGI reports assets invested in the global ETFs industry reached a new record high of US$13.14 trillion at the end of June https://lnkd.in/es53YZAM LONDON — July 17, 2024 — ETFGI, a leading independent research and consultancy firm covering trends in the global ETFs ecosystem, reported today the global ETFs industry gathered US$136.17 billion in net inflows in June 2024, bringing year to date net inflows to a record US$730.36 billion, according to ETFGI's June 2024 global ETFs and ETPs industry landscape insights report, the monthly report which is part of an annual paid-for research subscription service. (All dollar values in USD unless otherwise noted)   Highlights We expect 2024 to be a record year for net inflows and for assets invested in the global ETFs industry Assets invested in the global ETFs industry reached a new record of $13.14 Tn at the end of June beating the previous record of $12.89 Tn at the end of May 2024. Assets have increased 12.9% YTD in 2024, going from $11.63 Tn at end of 2023 to $13.14 Tn. Net inflows of $136.17 Bn during June. YTD net inflows of $730.36 Bn is the highest on record, while the second highest recorded YTD net inflows was of $658.86 Bn in 2021 and the third highest recorded YTD net inflows of 462.53 Bn in 2022. 61st month of consecutive net inflows.   “The S&P 500 index increased 3.59% in June and is up 15.29% YTD in 2024. The developed markets excluding the US index decreased by 1.40% in June while it is up 4.60% YTD in 2024. France (down 7.88%) and Portugal (down 6.39%) saw the largest decreases amongst the developed markets in June. The emerging markets index increased by 2.97% during June and is up 8.09% YTD in 2024. Taiwan (up 10.09%) and South Africa (up 9.91%) saw the largest increases amongst emerging markets in June,” according to Deborah Fuhr, managing partner, founder, and owner of ETFGI.

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In our latest "Top of Mind" article, Head of Multi-Asset Strategy @Adam Berger and Portfolio Manager @Peter Carpi discuss factors that could help small-cap stocks rebound and the search for winners in this inefficient segment of the market.

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The deallocation from UK equities is well documented. But some asset allocators may be missing the point. The UK's LACK of correlation with global equities (compared to the US' HIGH correlation with global equities) makes a UK allocation a VERY powerful diversifier (in the true, risk-based, definition of the word). It wasn't always so - UK equity correlation only started to decouple from 2015... 1. Read the article https://lnkd.in/eSJwh4MQ 2. Watch our 3q24 Outlook: World in Transition https://lnkd.in/ef-U9Ady 3. For UK advisers seeking support for their investment proposition, please contact us: https://ow.ly/V83e50QyetY #elston #multiasset #investmentsolutions

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The deallocation from UK equities is well documented. But some asset allocators may be missing the point. The UK's LACK of correlation with global equities (compared to the US' HIGH correlation with global equities) makes a UK allocation a VERY powerful diversifier (in the true, risk-based, definition of the word). It wasn't always so - UK equity correlation only started to decouple from 2015... 1. Read the article https://lnkd.in/eSJwh4MQ 2. Watch our 3q24 Outlook: World in Transition https://lnkd.in/ef-U9Ady 3. For UK advisers seeking support for their investment proposition, please contact us: https://ow.ly/V83e50QyetY #elston #multiasset #investmentsolutions

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A Broadening Out of Sector Returns Drives Value Stocks Higher in July Last month, the ALPS Sector Dividend Dogs ETF (SDOG), a deep-value portfolio of high-yielding large-cap stocks, outperformed the S&P 500 Index by over 600 basis points (bps) as mega-cap stocks continued to pull back on expensive valuations and slowing expected earnings growth. Notably, SDOG saw nine of its ten sector allocations provide positive relative performance in July against the S&P 500 on a broadening out of sector returns amidst a strong market rotation from expensive tech stocks into value stocks.  Additional details can be found here: https://lnkd.in/e8yXAe2s Performance data quoted represents past performance. Past performance is no guarantee of future results so that shares, when redeemed, may be worth more or less than their original cost. The investment return and principal value will fluctuate. Current performance may be higher or lower than the performance quoted. For current month-end performance call me, connect with me on LinkedIn or visit www.alpsfunds.com. Performance includes reinvested distributions and capital gains. #valuestocks #valueinvesting #etfs

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In our latest "Top of Mind" article, Head of Multi-Asset Strategy @Adam Berger and Portfolio Manager @Peter Carpi discuss factors that could help small-cap stocks rebound and the search for winners in this inefficient segment of the market.

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EML updated summary: - All regulatory matters resolved - Sentenial sale to complete within 3-4 months - Management 💯 focused on growth now!! Cap is $380m with $45m net cash (post Sentenial) EV $345m and consensus is $60m Ebitda ($30m FCF) in FY2025 Trading on 5.75x 💰💰💰 We think the stock can double next 12 months as company shows growth, and margin expansion from core biz

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