{"id":1535,"date":"2011-12-11T12:24:24","date_gmt":"2011-12-11T10:24:24","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=1535"},"modified":"2011-12-11T12:24:24","modified_gmt":"2011-12-11T10:24:24","slug":"el-flight-to-quality-de-la-solvencia","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/el-flight-to-quality-de-la-solvencia\/","title":{"rendered":"The Flight to Quality in Solvency"},"content":{"rendered":"

\"\"We have already pointed this out in previous articles this year's<\/a> , by all means<\/a> y passively<\/a>, and also in 2010<\/a>, Solvency \u2013 that precious and increasingly scarce treasure that will preserve our wealth over time \u2013 has deserted the fixed-income markets of developed countries and companies. The big question is: if we can no longer trust the creditworthiness of European bonds or of companies on this side of the globe with debts as colossal as those of the very states to which they belong, then where on earth has creditworthiness gone?<\/p>\n

The answer would have seemed surreal just a few years ago, in the \u2018Old Normal\u2019, but today it is as real as it is unusual. The financial sector has undergone, and is still undergoing, a flight to quality towards certain corporate assets with robust fundamentals and little or no debt; and there is also scope for further growth in the debt of emerging markets and companies, given their low leverage and strong economic growth.<\/strong>. From there, <\/span> A little, just a tiny bit more. We will simply find ourselves surrounded by a minefield of a desert that is lethal to our wealth. Because investing in insolvent assets can lead to irrecoverable losses \u2013 precisely because that is the very nature of fixed-income investments and other deposits and products guaranteed by institutions whose solvency has vanished. \"\"It is solely the confidence \u2013 which still prevails amongst the majority \u2013 that keeps these \u2018zombies\u2019, once the epitome of security, alive. Let us recall the example of Argentine bondholders before and after the \u2018corralito\u2019, compared with stock market investors in the same country and period: the former are still, 10 years on, losing at least -80% of their investments, whilst the latter have now seen their investments appreciate by more than +1,000%, having invested solely in the Merval index in Buenos Aires; indeed, the comparison would be even more stark had they invested in companies that had outperformed that index, comme il faut<\/em>.<\/p>\n

Today, more than ever, our investments must seek the one guiding star that will steer us through present and future storms and crises, and that course is none other than that of Solvency<\/strong>. Only in this way can we preserve and enhance our wealth in the long term amidst this sea of debt and financial turmoil. What we cannot \u2013 and will never be able to \u2013 avoid are the ups and downs of the perfect storm in which we are already immersed, and that turmoil has a name feared by most fund managers: Volatility. It is something we will inevitably have to live with in this investment landscape, as both corporate asset prices (equities) and emerging market fixed-income prices are inherently volatile \u2013 and even more so in these times. But confusing Volatility with Risk is, today more than ever, fatal, as an obsession with avoiding that volatility would throw us directly and irreversibly into the hands of the worst enemy of our investments: Insolvency (guaranteed bank deposits and other secured products, developed-market sovereign and corporate debt, etc.).<\/p>\n

\"\"Some analysts are beginning to reflect (about time, too) on this flight to quality<\/em>, by labelling the shares of certain global companies as the new bonds of this New Age<\/strong>. Rana Foroohar, economics and business editor at TIME Business<\/a> online posted the following a couple of days ago: \u00ab(\u2026) Blue-chip shares have become the new bonds. The smartest investors have been selling government debt and buying up shares in large multinational franchise firms for some time now. After all, which would you rather own \u2013 soaring Eurobonds or dull T-bills that aren\u2019t even keeping pace with inflation, or the shares of a large global franchise firm growing rapidly in buoyant emerging markets and paying out a safe and predictable 3 per cent annual dividend in the meantime? (\u2026)<\/em>\u00ab. It\u2019s plain as day, and it\u2019s also in line with what we\u2019ve been warning about for years, isn\u2019t it? Foroohar also makes the following observation: \u00ab(\u2026) Whilst the investment case for blue-chip shares as the new bonds is clear, what is more interesting and less well understood are the political implications. What does it mean that multinational companies (and the people who run and invest in them<\/strong>) continue to fly high above the chaotic situation of the debt crisis and public protests unfolding across so much of the rich world? Does it matter that international companies and investors are getting richer even as individual countries are failing? (\u2026)<\/em>\u00ab. Undoubtedly, quality will not be the only thing that will be swept up by corporations, and we will see this in the exciting years ahead. Because this is the immediate future of our world. Various predictions by renowned visionaries were already speaking, years ago, of the global dominance that large corporations would exert to the detriment of governments. Personally, I always interpreted this shift in power between states and companies as resulting from a slow and gradual increase in the influence of large corporations over government decisions. But a couple of years or so ago, I realised that this transition \u2013 which amounts to a de facto corporate coup d\u2019\u00e9tat \u2013 would accelerate at a dizzying pace. Not so much, however, because of the growing power of global corporations, but essentially due to the collapse and financial downfall of states, caused by their irrational indebtedness and the resulting credit crunch.<\/p>\n

The problem arises when, in such a risky scenario, investors are unable to identify and invest in solvent assets whose value is much higher than their price<\/strong> current share price. Because investing in companies in a mediocre manner \u2013 even if one manages to match the benchmark indices (through the ever-reliable yet run-of-the-mill ETFs) \u2013 will condemn investors to falling prey to inflation, stock market crashes, and even permanent losses caused by the poor quality of the assets in which they have invested. Because Only certain companies, at specific prices, are suitable as a wealth haven for preserving and growing our fortune appropriately<\/strong>.<\/p>\n

\"\"<\/p>\n

As private investors \u2013 and this also applies to countless institutional investors \u2013 we can never hope to understand and interpret the current and potential real value of the companies in which we invest our money as accurately and comprehensively as the very best fund managers do. This is because, to give just a few examples, this select group of star fund managers \u2013 who have stood head and shoulders above the rest for decades \u2013 have private jets that enable them to visit, in person and on a regular basis, the companies and management teams in which they invest their own money and that of their clients. In this way, they regularly review business plans, future strategies and all manner of corporate decisions, which go far beyond the thorough analysis of balance sheets carried out at the fund managers\u2019 headquarters. To give readers an idea of the scale of what we are discussing, one particular fund manager carried out 2,500 in-person visits to various companies last year, as part of its standard routine in prospecting and conducting an exhaustive analysis of the businesses in which it is, or may become, a partner. Because, as the head of the Institutional Department at one of the world\u2019s leading asset management firms recently told me, in their case they even have full-time analysts hired specifically for this purpose in China, without even having invested in a single company in that country! Simply to detect, at an early stage, the emergence of Chinese companies that might in future compete with any of the business areas of the European and American companies in which they are actually investing! This is the level of excellence achieved by the world\u2019s best fund managers \u2013 obviously light years ahead of the methods and analysis employed by the average investor.<\/p>\n

\"\"Selecting these funds on a global scale is an art in itself, and we must carry out as thorough a due diligence process as possible on these fund managers: their track records, personal backgrounds, teams of analysts, strategies, responses to past periods of market stress, portfolio management, and so on, including visits to those management firms and face-to-face interviews with those elite teams<\/strong>. And it is this type of management \u2013 rather than the remaining 99.9%, which does not even rise above the mediocrity of the benchmark indices \u2013 that we can entrust with the preservation of our wealth. Today, more than ever, expert guidance is vital for survival as an investor. Because not only is the meticulous selection and monitoring of these top-tier fund managers beyond the reach of the private investor, but also regulatory and tax constraints, minimum investment thresholds and the commercial interests of financial institutions, make investing in most of these funds practically unfeasible, and mean that expert advice is absolutely essential in order to do so<\/strong>.<\/p>\n

Returning to the \u00abflight to quality\u00bb in terms of solvency that we are already experiencing in this \u2018New Normal\u2019, and for those sceptics who still interpret the current reality using outdated criteria from the \u2018Old Normal\u2019, I would simply like to offer a thought that should undoubtedly give them cause for serious concern: The Basel Committee on Banking Supervision is currently considering the possibility that shares and other types of corporate debt might form part of the \u2018highest-quality assets\u2019 taken into account when measuring nothing less than the banking sector\u2019s liquidity ratio! (Bloomberg). Yet further proof that solvency has moved away from the assets traditionally regarded as the safest by the system, and that balance-sheet stability must now be sought \u2013 even officially \u2013 through meticulous selection of shares and corporate debt. Yet another warning to investors\u2026<\/p>\n

Now it is the turn of the corporations, for better or for worse. Governments have had their chance over the past century and in the first decade of this one. And not only have they squandered it, but they have also plunged the world into unsustainable public debt and the most spectacular bankruptcy. That is what happens when you leave the economy that governs the planet in the hands of politicians with no financial training, whose sole obsession is power. It is certainly a bit of a chilling thought to imagine a world governed by companies, and \u2018Politics\u2019 with a capital \u2018P\u2019 should curb their abuses. But we must acknowledge that, to date, global companies have been doing a better job than most governments. Welcome to the world of corporations.<\/p>","protected":false},"excerpt":{"rendered":"

Lo hemos advertido ya en anteriores art\u00edculos de este a\u00f1o , por activa y por pasiva, y tambi\u00e9n en el pasado 2010, la Solvencia, ese preciado y cada vez m\u00e1s escaso tesoro que preservar\u00e1 nuestros patrimonios a lo largo del tiempo, ha abandonado la renta fija de pa\u00edses y empresas desarrolladas. La gran pregunta es: […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[38,51,45,41,42,40,37,48],"tags":[],"class_list":["post-1535","post","type-post","status-publish","format-standard","hentry","category-actualidad","category-banca","category-asesoramiento-deportistas-artistas","category-economia-y-finanzas","category-estrategia","category-gestion-financiera","category-reflexion","category-asesoramiento-patrimonial-multi-family-office-crear-mi-propio-family-offices"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/1535","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=1535"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/1535\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=1535"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=1535"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=1535"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}