A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) December 10, 2017
Myrna Rivera, CIMA®
Given the chance to speak at a listening session of the Financial Oversight and Management Board of Puerto Rico, I jumped on a plane to New York City to share my thoughts and ideas with them. I believe that an important key to our recovery is Puerto Rico’s emerging private capital eco-system, an industry segment that doesn’t get much attention, even after three years of the passage of Law 185. Over 10 years ago, we began to research how our clients could continue to pursue market rate returns while investing a portion of their portfolio in the very source of the assets being invested; our local economy. This is not a chimerical concept, but a common investing practice in the U.S. and around the world, called placed-based investing. We set out to identify debt and equity financing vehicles in this space and we found that “ground zero” was not zero. There are equity and debt financing options in the ecosystem, many brought forth by a new generation of local entrepreneurs who are highly educated and skilled and are committed to private investing. So where’s the investment capital? Everywhere. Puerto Rico’s universe of investable institutional assets stands today at around $30 billion. Private assets bring the aggregate to approximately $40 billion. Eureka! We have the means to be our own “first investor” in our recovery! Do we have deal flow? Yes. Puerto Rico has ripe “low hanging fruits” in various industry sectors; bio-pharma, information technology, agro-industry, financial services, tourism, among others. So, we have the main ingredients; a pipeline of potential “deals”, investment managers or deal-makers, business owners and entrepreneurs, and the financial wherewithal to generate jobs and secure revenues for Puerto Rico’s Treasury. So what’s missing? Why don’t we read or hear more news about this? We are missing Trust. Local investors lost over $50 billion of personal wealth investing in Puerto Rico between 2004 and 2014. They are not excited about investing in Puerto Rico, hence that money is invested elsewhere around the planet. How do we reverse this and move forward? We can start by providing a framework of fiduciary oversight which can help any prudent investor feel more confident about investing in Puerto Rico’s next generation, and make investment decisions that are defendable in any forum. For more ideas, recommendations and a broader explanation about the potential of private capital please listen to my deposition at the listening session.
Edmundo J. Garza
November, which marked the one-year anniversary of President Donald Trump’s U.S. election victory, was a month that saw the continuance of U.S. equities moving higher amid optimism that a favorable tax overhaul was on the way, and a backdrop of positive economic data. The second estimate of third-quarter GDP showed the U.S. economy grew at a 3.3% annualized rate, which was the strongest reading since the third quarter of 2014. The growth reading was above both the 3.2% expectation and October’s 3.0% advance reading. U.S. equity markets responded with a continued climb in November, with the major U.S. indices closing the month at or near record level territory. The S&P 500 Index, the Dow Jones Industrial Average (DJIA), and the NASDAQ Composite Index all closed the month at record levels. The DJIA advanced 4.2% for the month, and the S&P 500 and NASDAQ Composite climbed 3.1% and 2.3%, respectively. In terms of economic sectors, all sectors of the S&P 500 finished the month in positive territory. Telecommunications was the strongest performer (+6.0%) followed by Consumer Staples (+5.7%). Materials (+1.0%) and Information Technology (+1.2%) were the main laggards from a relative standpoint. While Information Technology trailed most other sectors in November, its year-to-date gain of 38.8% remains impressive, outpacing Healthcare (+22.9%) the second-best performing sector year-to-date by 15.9%. One non-traditional investment that was heavily discussed across the industry was the strong rise of the cryptocurrency Bitcoin. Bitcoin prices have surged roughly 10-fold since starting 2017 at $1,000, and surpassed $10,000 during November. While many debate its potential future use and the applicability of the block chain technology, others wonder if it is merely another bubble ready to burst.
(As of December 10, 2017)
CPI: 2.2% Chg. from yr. ago
CPI: 1.4% Chg. from yr. ago
CPI: 0.8% Chg. from yr. ago
Source: Moody’s Analytics
Puerto Rico (As of October 23):
CPI: 0.2% Chg. from yr. ago
Evangeline Dávila, CIMA®
Stocks: U.S. equity markets continued their move higher in November. The S&P 500 Index gained 3.1%, pushing its year-to-date return to +20.5%, while the NASDAQ Composite Index posted slightly weaker returns of +2.3%, albeit an improved year-to-date gain of +29.0%. . Large cap stocks slightly edged out small cap equities, as the Russell 1000 Index was up 3.1% and the Russell 2000 Index gained 2.9%. Mid cap stocks performed well, with the Russell Mid Cap Index gaining 3.4%. Growth and value stocks mostly traded in line with each other, with only 2 basis points separating the Russell 1000 Value Index’s return of +3.06% and the Russell 1000 Growth Index’s return of +3.04%. On a relative basis, most Non-U.S. equity markets slightly trailed the strong gains experienced by U.S. equities. The MSCI ACWI ex-U.S. Index increased by 0.8% for the month and is now up 24.4% year-to-date. International developed markets performance slightly slowed down in November, but Eurozone growth expectations remain high for both the fourth quarter and for 2018.
Bonds: Fixed-income markets traded mostly lower for the month, as yields moved higher. The yield on the 10-Year Treasury note closed out November at 2.41%, adding 4 basis points from 2.37% at the end of October. The Bloomberg U.S. Aggregate Bond Index fell by 0.1% for the month, and is now up 3.1% year-to-date. Municipal bonds posted slight losses comparable to their taxable peers, losing 0.5%, and are now up 4.4% year-to-date. High yield fixed income posted weaker results than the Bloomberg U.S. Aggregate Bond Index, with a loss of 0.3%. Albeit this loss, high yield bonds have maintained their dominance year-to-date gaining 7.2%. Non-U.S. fixed income continued their outperformance of U.S. bonds, as the Bloomberg Global Aggregate ex-U.S. Index gained 2.1%, and is now up 10.2% year-to-date. However, similar to equities, emerging market debt posted a minimal gain of 0.1% in November, taking a breather from an already very strong year. Year-to-date, the JP Morgan Emerging Markets Bond Index (Global Diversified) has gained 7.2%.
Alternatives: Energy prices rose, but metals were mostly lower, leading the Bloomberg Commodity Index to finish negatively at 0.5% in November, and is now down 1.2% year-to-date. Meanwhile, the FTSE NAREIT Equity REIT Index gained 2.7% for the month and is up 5.5% year-to-date. Hedge strategies extended 2017 gains through November, driven by ongoing U.S. economic growth and significant merger and acquisition (M&A) activity . The HFRI Fund Weighted Composite Index® gained 0.5% in November, led by Equity Hedge (+1.1%) and Event-Driven Special Situations (+1.5%) funds, marking the 13th consecutive monthly advance and bringing year-to-date performance to +7.6%. The gain extends the record Index Value for the HFRI to 13,926. Fixed income-based Relative Value Arbitrage (+0.1%) and Macro (-0.2%) strategies posted mixed performance for the month.
(See the returns table below)
Sources: Callan Associates, Bloomberg, S&P-DJ, MSCI, FTSE-Russell, Citigroup, Credit Suisse, Hedge Fund Research
Ernesto Villarini Baquero
In January 2016, the United Nations launched a three year project to end the debate on whether fiduciary duty is a legitimate barrier to the integration of environmental, social and governance issues in investment practice and decision-making. Fiduciary duties exist to ensure that those who manage other people’s money act in their beneficiaries' interests, rather than serving their own interests. The manner in which fiduciary duty is defined has profound implications. Some institutional investors believe that environmental, social and governance (ESG) issues are not relevant to portfolio value, and were therefore not consistent with their fiduciary duties. This assumption is no longer supported. The Fiduciary Duty in the 21st Century program shows that decisions made by fiduciaries cascade down the investment chain affecting decision-making processes, ownership practices, and ultimately, the way in which companies are managed and valued. This project contributes an extensive evidence base to end the debate on whether fiduciary duty is a legitimate barrier to the integration of environmental, social and governance issues in investment practice and decision-making. Additionally, it provides recommendations to fully embed the consideration of ESG factors in the fiduciary duties of investors across eight capital markets. Far from being a barrier, there are positive duties to integrate environmental, social and governance factors in investment processes. However, despite significant progress from the UN and the Responsible Investment community, too many investors are not yet considering ESG issues in their investment research and decision-making. Even those investors that recognize they should consider ESG issues in their investment processes show variable implementation. There is still a lot of work ahead. You can learn more about this program at http://www.fiduciaryduty21.org/.
November, which marked the one-year anniversary of President Donald Trump’s U.S. election victory, was a month that saw the continuance of U.S. equities moving higher amid a backdrop of positive economic data and optimism that a tax overhaul was on the way. Eurozone growth expectations remain high for both the fourth quarter and for 2018. Eurozone companies have also increased hiring at the fastest pace in 17 years, as economic data and the overall sentiment has continued to improve. However, U.S. foreign relations continue to keep us watchful of developments and effects into 2018. Amid an uncertain scenario we continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount.
Consultiva Internacional Inc. (Consultiva) is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.