Multi family Office - Cluster Family Office

Is it worth holding on to an upgradeable investment in exchange for further deferring accumulated capital gains?

The simple and straightforward answer is NO. And to argue this, we will explain the calculations made by the platform below. InbestMe and that they have published in fundssociety.com. At Cluster Family Office we often see the reluctance of most investors to sell their current portfolios of funds or shares, in order to continue deferring the withholdings that would be applied to the capital gains accumulated in them over the years. On the face of it, this seems like a good decision, but it is not unless the portfolio's returns are at least minimally improvable. And that is the first surprise for the majority of investors hypnotised by the mediocrity of the funds sold by the big international fund managers in Spain, that there is life beyond the open architecture sales catalogues.

It is true that in Spain there is the possibility of transferring assets from one fund to another while maintaining tax deferral, with the corresponding registration with the CNMV, a minimum volume of unit-holders and that they are considered by the regulator as transferable. The disadvantage is that, as we have already explained in other articles such as «....«Investment Funds: There are still classes«The universe of investment funds registered in Spain is very limited compared to those existing worldwide. As limited as 10%, which means that because of the desire to take advantage of this tax deferral to infinity and beyond, investors are locked into an investment universe that ignores the 90% of existing funds worldwide. (The Spanish banks refuse to underwrite funds beyond their sales catalogue, for which we have also explained the solution in «...").«The advantages of investing from Luxembourg«). Let us now look at the example figures calculated by InbestMe:

For example, with an average annual return of 3.4% (return over the last 25 years), the difference in return between deferring capital gains to the end or taxing them every year is only one 4.2% cumulative over 20 years, or, in other words, a 0.21% APR. That is, if an investor is able to improve the performance of his portfolio by at least 0.21% per annum, by replacing mediocre funds with funds that consistently outperform their respective benchmarks in a clear and sustained manner, You should not mind the fact that the new funds are not transferable and you will have to pay tax on the capital gains on an annual basis. Here it is worth remembering that the tax cost of unrealised capital gains is money that is not ours but that we have borrowed from the Treasury and that has to be paid back sooner or later. Therefore, using the money we owe the Treasury to make a profit loses all sense if we use it in a mediocre way, condemning the rest of the money that is ours to mediocrity.

In the example above, improving returns by 0.21% per annum by being able to invest in 100% of existing funds and not just 10%, is not only perfectly possible but practically a must. In fact, the sooner you trade your bland investments for more powerful ones, the sooner you will recoup the withholding taxes on the sales of your mediocre portfolio. More importantly, once the sold portfolio is taxed, in addition to having the freedom to invest at a higher yield in any fund in the world, you will also be able to defer taxation forever if you have a Luxembourgish vehicle 300,000, even if you change funds or investments in the future and they are not transferable., as we have explained on other occasions.

So why so much fear of taxing latent capital gains if they are easily recoverable and surmountable with a portfolio of good funds that consistently outperform their indices? This is where Spanish banks come into play, of course. Firstly, no bank is going to propose to its client that he liquidate the funds it has sold him and take the money to another (Luxembourgish) entity in order to have an investment vehicle in which the best funds on the planet can fit - and be deferred indefinitely. And secondly, to avoid temptation, they warn their clients vehemently of the tax «axe» that they would get if they liquidate their positions. In this way they keep the investor captive in the institution, with mediocre portfolios that are perpetuated over time, with an enormous opportunity cost.

Certainly, the investor who has the capacity to invest beyond the 10% of funds registered in Spain to be marketed by Spanish banks would do well to seek to increase the quality of his portfolio and not be intimidated by his banker and his tax simulations. After all, just a few tenths of a point more return from higher quality funds will more than compensate you for the compound interest of the tax deferral. In other words, you would do well to stop deferring in order to invest better and return to defer indefinitely with a much stronger portfolio. Not doing so is bread for today and hunger for tomorrow, i.e. being trapped sine die in the mediocrity of the funds sold to you by the bank on the corner, very happy, of course, to be reinvesting. mediocrely the taxes owed to the tax authorities.

Which is preferable, a Spanish or a Luxembourg Investment Fund?

At last someone is speaking clearly and openly on the subject. And, of course, the information had to come from COBAS AM. Here is a summary of some of the paragraphs we consider most interesting from the article signed by Gema Martín Espinosa, which you will find below in this link to the Cobas blog. A bolg that you should certainly follow closely, and in which we have had the opportunity to publish some articles in which we talked about the differences between passive and active management (yes, now that ETFs are so fashionable).

So let's look at the real reasons why many Spanish independent fund managers, all international fund managers and most investors shy away from the Spanish fund format for their investment vehicles:

«The essential thing for the investor to know is that when a fund manager offers both Luxembourg law funds and Spanish law funds, it is in fact the same product. In other words, the same management team, the same philosophy, the same investment process and the same portfolio.

The differences come from the other actors that a collective investment vehicle must necessarily have. In both cases a custodian bank is necessary, and some investors, faced with political uncertainty or instability in their country, choose to invest in a fund whose assets are deposited in a bank in Luxembourg rather than in a local bank (...)

With the European passport, it is true that you can choose to incorporate funds in Ireland, Malta or other EU countries, but over the years the Luxembourg brand has led the biggest flow of funds for cross-border distribution, not only in Europe, but also in Latin America and Asia.»

Here it should be noted that Spanish and Luxembourg funds are governed by the same directives, either the well-known UCIT (for plain vanilla vehicles) or the lesser known AIFM (for alternative or professional investor vehicles). The crux of the matter is that investors from outside Spain cannot invest in Spanish funds through omnibus accounts., The use of the new technologies, which are widely used in the rest of the world.

«What are omnibus accounts and why are they so relevant?

The holder of the omnibus account is the trading entity and not the final customer of the account. It allows the total of customer subscription and redemption orders to be transacted in a single transaction, without the customer's details being known or shared (...).

The financial institution issues a global order for each fund manager. Likewise, end customers do not open an account with other fund managers, but can access third-party funds through their marketing entity and from their own account.

Since Spanish funds are not marketed through omnibus accounts, the international investor must necessarily open an account with a marketing entity in Spain or with the fund manager itself in order to invest.

This operational barrier makes the Spanish fund very unattractive to international and institutional investors outside Spain, which is why several fund managers choose to manage the same fund in Luxembourg in order to give access to foreign clients.

These accesses are usually provided by international platforms, the vast majority of which do not contemplate operations with funds under Spanish law because they cannot comply with the requirements of transferring the details of the end investor in the operation. In addition to the platforms, European central depositories and custodians provide direct access to institutional clients by operating directly with the transfer agents or fund managers.

The lack of omnibus accounts in Spain also has a negative impact on Spanish fund managers when marketing their funds through other entities in Spain. And this is fundamentally for two reasons.

The first, and most powerful, is that the largest Spanish fund managers are part of banking groups with distribution networks (branches) where it would be impossible to think of them offering a competing product.

Secondly, even if the barrier of selling competing products were overcome, the fact that the marketing of a Spanish fund would necessarily involve transferring key data on unit-holders to the fund manager would come into play.

Although it is the fund manager who would receive this data and would be subject to the strictest confidentiality and non-use of the data, in general the fear of transferring client data tends to block definitively the marketing of Spanish funds by third parties in Spain.

For this reason, some Spanish independent fund managers choose to manage only Luxembourg funds, which are then marketed in Spain through third parties and cross-border through marketing agreements with platforms and distributors, thus resembling an international fund manager which, curiously, Spanish distribution networks do not perceive as “competitors”.

It is also important to dispel legends and myths. A Spanish fund is no better or worse than its Luxembourg brother.. Both are options that asset managers offer to respond to their clients as a whole, and have nothing to do with tax havens, high net worth or the “glamour” that is sometimes implied by their English names (...)».»

The advantages of investing from Luxembourg personal vehicles and banks is clear about doing it from traditional Spanish banks, with or without a sicav, but we have already discussed this at length in the article: «...".«The advantages of investing from Luxembourg«.

We hope that this post will finally help to clarify the issue. By the way, to differentiate at a glance between a Spanish fund and a Luxembourg fund, it is enough to look at the first two letters of its ISIN code: ES (Spain), LU (Luxembourg), IE (Ireland), FR (France), HK (Hong Kong), US (United States), etc.

The abuse of bricks and mortar in Spanish wealth

It is very curious to see how in Spain there is a very different mentality regarding the allocation of household assets to that of American households. As you can see in the interesting chart published by Inbestia and reproduced below, approx. 80% of Spaniards' assets are allocated to real estate, i.e. the main residence and additional real estate. Therefore, less than 20% are allocated to financial assets, such as shares (listed or unlisted), investment funds, pension funds, life insurance, deposits, etc.

If we compare the allocation between Americans and Spaniards, we will see that the preference for companies in the world's leading economy is much greater than in Spain and most other countries (although it would be interesting to know the figures for the north of the EU, which we suspect must be closer to those of the US). The entrepreneurial culture of North Americans is much greater, and half of their assets are invested in both listed and unlisted shares (mostly in their own businesses or with partners), investment funds, pensions and life insurance.

Why are Americans more inclined to allocate their wealth and savings to companies in general? Do we in the rest of the world not like our money to work for ourselves? Haven't the real estate bubbles affected Americans as much or more than Spaniards? The answers are not simple, but rather an accumulation of factors that make up the difference between one financial allocation and the other. Let's look at some of these reasons:

The financial culture in which American society is growing up has an entrepreneurial tradition and the majority of the population is clear that the only engine that moves the country and that can lead them to well-being is to participate in one way or another in the creation of wealth achieved by companies. Either as employees seeking hierarchical job progression or as small entrepreneurs (franchisees or with small personal businesses). They expect little more financially from their state. By contrast, in Spain and much of the rest of the Western world, there is less of an entrepreneurial culture, and more reliance on state-dependent labour activities, which are generally a little less liberal and a little more interventionist than in the USA.

Another aspect that makes Spaniards more inclined to accumulate our wealth in real estate than Americans is precisely the unpleasantness that the financial sector has been giving us in recent decades. For our banks, even today, volatility is the demon from which they recommend their clients to flee. To this end, they offer them all kinds of products and structured products with the obsession to reduce volatility, a concept that they mistakenly consider to be synonymous with risk. And of course, when volatility is confused with risk, it is much easier for the banking sector to sell low-volatility products than high-volatility ones. What customer will not try to avoid a high-volatility product if they are told about high risk?

Therefore, the general opinion of Spanish savers is that it is much riskier to invest in the stock market than in less volatile banking products or in real estate. And here we come to the second derivative: How have the low-volatility banking products sold by banks in recent years been performing? Well, in the best of cases they have been mediocre, and in the worst of cases they have been abused or have been directly sentenced to court, as in the case of the preference shares. This unhappy end to many of the low volatility products has exacerbated Spanish investors' appetite for real estate, reaching the extremes in Spain that we have seen in the graph: almost 90% in real estate and assets of their own personal business, such as self-employment, etc.

The right balance of wealth should moderate real estate and boost financial investment to levels similar to those seen in the USA (not for nothing is it the society with the leading wealth and GDP per capita on the planet). Families should enjoy financial investments that work to generate wealth for their old age, as the state pension is not going to do this sufficiently (and even less so in Spain). In addition, the US regulator limits more and better the access of retail investors to structured products and other nonsense that Spanish banks sell with impunity to any retiree without financial knowledge. This limitation on the sale of complex products to retail clients in the USA also channels a good part of these small savers to ordinary equity funds, which are less afraid of volatility and more inclined to buy the idea of investing in companies.

And what about real estate - does it not also guarantee the generation of income for our old age? The answer is yes, but with some additional risks that need to be highlighted: By massively concentrating our assets in real estate, we will be at the mercy of geographical risk, local economic risk or country risk, and the risk that the real estate cycle will no longer be favourable to us when its growth becomes saturated. Not to mention the risk of non-payment, maintenance and rising taxes on property owners. The diversification and freedom of movement that comes from acquiring shares in good companies all over the world, creating wealth in the most diverse sectors and countries on the planet, is hard to achieve with real estate investment. And the capacity of the business world to adapt and overcome whatever the future circumstances of the economy may be in the coming decades will never be able to be achieved by the inert brick.

Finally, the common characteristic of new clients who come to Cluster Family Office has always been the overload of properties in their portfolio. A lack of diversification that many paid dearly for with the bursting of the real estate bubble after 2007. And one of the first things we do for new Clients is to replace real estate and rentals with financial investments through versatile and fiscally efficient vehicles. They should make their money work for the family, either by generating alternative income to rents by buying good alternative funds or by seeking to grow portfolios by buying good equity funds from around the world. The volatility - not risk - that can be assumed by each family and professional circumstance in the financial portfolio should determine the proportion of investments in company shares or in alternative strategies that generate more stable income.

Stop-loss in actively managed funds?

As Machado said, only a fool confuses value and price. From the point of view of the long-term investor, who buys shares in good companies at attractive prices relative to their present and future earnings multiples, it would already be absurd and foolhardy to buy and sell these shares in the short term without associating these decisions with the value of the respective businesses. But it would be even more absurd to do so. short term trading in a portfolio of actively managed mutual funds, The investor can also set up tempting automatic buy and stop-loss (sic) orders, with portfolios at the free will of their respective managers.

That is what ING offers to their clients, with the consequent benefit to the bank for this service, obviously. But as it is not as simple operationally to automatically buy and sell a fund at a pre-established price as it is for a share, what they offer their clients is a «warning» service when the fund's price reaches the marked price. It is then that the client will decide whether or not to sign a buy-sell-transfer order for these funds, which will usually take a couple of days to execute. Oh, and of course, this «service» is only available for ING brand funds, which means that everything stays at home.

In a review of the practice of share trading (including stop-loss), we have to say that it is the usual modus operandi of savers who are less qualified as investors. In other words, those who move away from long term investment by buying businesses whose good value/price ratio they know, and instead approach the mere bet on any ticker listed, regardless of the good or bad performance of the listed company's business. They are even oblivious to whether there are prospects and an adjusted valuation of a company's business, a commodity, an index or any derivative behind that ticker. For most of them, it is enough to have a ticker or a changing price to bet on more or less frantically, conveniently dressing up this practice with all kinds of trading courses, technical analysis and macros that disguise their gambling with a patina of expert investment.

However, generally speaking, an investor who knows the value of the companies in his portfolio will be more interested in buying them the more the price of their shares falls. Conversely, the more expensive the shares are in relation to the value of the company, the more interested he/she will be in selling them. In contrast, short-term stock trading is associated with completely ignoring the real value of the company. This is why technical analysis and other trading methods usually recommend buying stocks when prices are rising and selling them when they are falling. (Here we could make the exception of the very few quantitative hedge funds that have been making money for decades, but they would be the exception that proves the rule and would only be the exception that proves the rule. accessible to well-informed investors and with capital in excess of 300.000′- euro).

As we said, ING is now tempting its clients to carry out this trading practice also in their portfolios of actively managed funds. Active management is so called because the manager of each fund actively makes decisions by buying and selling stocks or bonds. From there, the net asset value of the fund will be the -usually- daily quotation of the entire portfolio at market price, after deducting the commissions and expenses of the active management itself and of the fund (on active and passive management you will be interested in the article that Cluster Family Office recently published on the website of COBAS AM, the manager of Francisco García Paramés: «Passive Management, Active Management»). Therefore, it makes even less sense for the saver to make decisions to buy or sell the fund when, not only does he not know the value of the businesses bought, he does not even know which businesses he has bought and sold. The manager of such a fund or the liquidity it accumulates on a daily basis. It would also not allow you to benefit from one of the key investment drivers that every value manager strives to achieve: co buy low and sell high, since such trading and stop-losses would completely detract from good active management.. Moreover, as fund trading is an absurd and rare practice, the saver would not even have the possibility to benefit from the self-fulfilling prophecy that technical analysis sometimes offers.

In short, yet another brainstorming strategy of the Machiavellian marketing department on duty, whose priority has never been and never will be the customer's benefit, but that of the financial institution itself. More wood to keep savers away from the right investment path.

Adapting our investments to the new economic era.

It should not escape anyone's notice that the world of finance and investment as we knew it before the debt crisis - a decade ago now - was very different. Back then it was enough to invest in good, well-priced listed companies (equities) for those looking for reasonable returns over the long term. And all the part of the capital that was not tolerant of high volatility could be «parked» in fixed income by sitting on bonds of developed issuers that paid a few percentage points above the price of money, although not always above real inflation. At that time, money had a reasonable price, and therefore everyone who borrowed it had to make very good use of it if they wanted to amortise that cost and not get their fingers caught in inefficient adventures.

About 7-8 years ago, after the bursting of the real estate and debt bubble, central banks started to muddle through by showering the world with new money. And free money not only generates its inefficient use, rewarding those who owe more and are less competitive, but also penalising those who have it. It is the jungle where the law of the strongest prevails, and with the debt bubble of 2007 that we are still dragging along, the law that has prevailed is that of the debtor.

Unfortunately, most investors - and therefore creditors of the debtor universe - have not realised the radical change in the rules of the game imposed by the central banks with the excuse of «saving the financial system». And they continue to invest their money under the old rules and guidelines of obsolete bankers and advisors: in the stock market the part that withstands volatility and in fixed income the part that does not.

As for the stock market, they are not aware that most listed companies have had access to free money for a decade, and that this allows the survival of inefficient companies that should be extinguished under normal money price conditions. This leads them to find an infinite number of companies in bad shape, in very bad shape and trading at high, very high prices. But the unconscious investor continues to buy mediocre equity investment funds (as he always did with acceptable results), mistakenly thinking that the managers of these funds will know how to discriminate the interesting companies from the uninteresting ones. Just as in a fishing contest when the lake is full of fish (good companies in an economic environment with money at a fair price), where both good and not so good fishermen get a decent haul. But what if the fishing contest takes place in a place where the waters are polluted and the fish are scarce? Then the mediocre fishermen will be left in the lurch, and if you want to dine on fish every night, you will have to trust only the best fishermen in the area and make do with more modest catches than in the old days, when the waters were crystal clear and teeming with life.

This is the current situation for stock market investors. They will only achieve acceptable returns if they rely on the best managers who know how to select the few good companies at good prices in the polluted waters of expensive stock markets and inefficient and unhealthy companies.

If this scenario depresses you, I regret to announce that what is happening with fixed income is even worse. Zero or negative interest rates and the intervention of the world's major central banks, with their quantitative easing as never before seen in human economic history, have turned fixed income into a debt dump from which one can only emerge stinking and wounded. Most of the debt in circulation is insolvent - a direct consequence of free money - and also trades at stratospheric prices, crushing its yield to ridiculously low or even negative levels if there is any solvency in its issuer. There is no way to invest in traditional fixed income without taking a risk of permanent losses, i.e. not recoverable in less than 5-7 years without the help of inflation. As we said in «The Silence of the Conservatives».» last year, investors have traditionally conservatives are taking risks they cannot even imagine. Many have followed the guidelines of managers and advisors who simply do not know of conservative alternatives beyond traditional fixed income. Others, however, knowing the risk of global insolvency, have continued to buy assets subsidised directly or indirectly by central banks for fear of going against the grain, of going against those who have the power to make money. All of them have taken, and are taking, a fundamental risk that combines insolvency with political (in)decisions. It is true that so far the gamble has worked out well for them, as the bonds of insolvent countries and companies have risen in price to aberrant levels. And this has brought them additional profits on top of the coupons, which the central banks have religiously ensured that they can pay. But this investor profile, drifting with the currents of central banks and the market in general, cannot be described as conservative simply because they do not invest in the volatile stock market and have done well so far. The lower volatility of traditional fixed income does not imply lower risk, proving once again that volatility and risk are very different concepts, although much of the financial sector confuses them.

It is true that we have been in this situation for several years now and that reckless traditional bond and expensive stock market investors have had reasonable returns and little unpleasantness to date. But we should not confuse bets, which may temporarily be winners, with investments. to grow our assets over the long term, without permanent losses along the way.

Adapting our investments to the new era of equities is not easy without the right advice. Investors need to refine more than ever the selection of international investment fund managers and embrace more exotic markets where economic growth still has a long way to go (which is easier said than done). There are some that are marketed in Spain, but not in the bank around the corner, unfortunately, and the range is very limited. On the other hand, adapting our investments in non-equity, i.e. the equivalent of traditional fixed income, is even more complicated: we have to dig into very diverse strategies and hedge funds that are not marketed in Spain, not even in UCITs format in most cases. You have to look for them in international banks and underwrite them from personal investment vehicles. which are only accessible to well-informed, medium-sized or institutional investors. (from 300.ooo or 400.000 eur).

This difficulty in adapting the investments of small savers to the new era is an injustice that condemns them to leave their 50 or 100 thousand euros in the bank around the corner, assuming enormous risks in the coming years. In other words, it condemns them to buy the products and funds sold to them by commercial banks, investing in expensive and inefficient companies through mediocre equity fund managers, and investing in bonds and fixed income funds full of expensive and insolvent wet paper such as has never been seen in the history of finance. Regrettable and unfair, but they are inevitable fodder for the permanent losses to come in the years ahead.