We interviewed Diego Martinez-Burcazo, Chief Investment Strategist at MB Inversiones for the Fixed Income Investment Strategies, Europe 2017 report, sponsored by Quoniam;
Interviewer: Ben McNamara, Producer, Clear Path Analysis
Interviewee: Diego Martinez-Burcazo, Chief Investment Strategist, MB Inversiones
Ben McNamara: How are you defining ‘Factor Investing’ and to what extent is a factor strategy applicable to global economies?
Diego Martinez-Burcazo: When I look at the whole world I find a very unique characteristic, no matter which country we are talking about, and that is the lack of financial education in order to protect investors savings. In the beginning I thought this was a main characteristic of developing markets or countries but, as time has gone on, I found this characteristic true for developed markets as well.
When you are talking about Factor Investing, you need to think about not only the period of time that you are investing but also taking care of your profile risk. This is why financial education is a central factor to succeed and invest your savings in the best way you can.
When we look at what is happening in global economies during the last decade, traditional investments were not the better options for your portfolio (traditional and real estate investments didn’t do well when you compared against financial markets like equity and Fixed Income).
If you didn’t have financial education, you couldn’t achieve success for your savings and so that is why it is key, and people should care about this not only for the present but for the future.
It is very important to manage your savings in the best way that you can to achieve the goals that you intend in the beginning. We should see Factor Investing as a financial education issue.
Ben: To what extent are factors (like value, size, or momentum) transferable to Fixed Income in a Global context?
Diego: Nowadays, every investor in the world can access all the financial markets, this was due to technological improvement and is good for creating diversification within the savings.
When you are talking about diversification the value, size, and momentum of every financial asset is very important. For instance, when you try to make a Fixed Income portfolio, you should take care of the risk/ return relation in each financial asset, as well as the history of the issuer of that Fixed Income asset.
Track records can give us a key rate history about the profile of the debtor, but we also have to take care of the future perspectives as past returns don’t guarantee future returns.
We have to have a forward-looking view as an investor and should know the risks. One important issue for Fixed Income is the risk mark that they receive from the creditors. The investor should care about those risks in order to not miss investments in riskier assets that they want to have.
The liquidity, risk/ return relationship, and the track record, are the three main characteristics that every investor should look at when they are trying to configure or consider Fixed Income portfolio strategies.
Ben: On this point you mention about riskier assets and liquidity, this is potentially where investors are looking to match their cash flow requirements. In terms of global economies and various opportunities, where do you see that opportunity for investors to match their cash flow requirements?
Diego: When you look at Fixed Income investments, cash flow is very important and should match your cash-flow requirements. There is an important relationship between the cashflow, the duration, and the interest rate.
If you started investing between five and seven years ago you are accustomed to a very low interest rate environment. Those conditions are changing and the behaviour that you might have had in the past may not be the same as what you need in the future, because of the hike in interest rates.
If you need short term cashflow you are more likely to invest in short- term bonds knowing that the interest rates there are very low. If you want more return you should take more risk and consider that the central banks all over the world are now rising their interest rates.
The cash flow you are taking care of should be combined with the good relations between that, the interest rate and the duration of any Fixed Income asset.
Ben: On the issue of rate rises, investors are concerned about multiple rate rises and their frequency. How much should investors change their strategies based the rate rises that are occurring in market-leading economies?
Diego: This scenario is a new challenge for investors if they were accustomed to investing in a low rate environment, as they now have to switch their minds to a different scenario.
I do not feel that the hike in interest rates will be as fast as it may have been in the past. This is because inflation remains low all around the world, but imagine that if this starts to become an issue then it could accelerate the hike in interest, rates although this isn’t my best-case scenario.
We will likely see maybe one interest rate hike by years end from the Federal Reserve. In Europe I expect two or three hikes in movement during 2018, and investors should pay attention to this in order to be better positioned in the right assets.
Taking into considering these prospects, local currency emerging market debt could face several challenges, so I recommend to investors to move to a currency debt (not in domestic currency debt because devaluation for emerging currencies could be a big constraint for the Fixed Income strategy building).
Countries that have a higher growth-rate could deliver higher returns for investors, so this is the other thing you should take care of. If one country is growing faster than previously expected, the capacity of governments to have the ability to repay all the debts in an environment (which will be characterized by the tightening of the monetary policy) will be better than other countries.
Ben: For those who are trying to navigate market uncertainties, what lessons can we learn from previous market corrections and cycles that are applicable to a Fixed Income strategy?
Diego: Being over confident could damage your savings, as investing in a low interest rate environment could be easier than the environment that we will be facing in the future, so being over confident is not a good tool to use in your Fixed Income portfolio.
Don’t minimize risk; be cautious and use a diversification strategy, as (not only within countries but currencies) Central banks have different speeds of monetary policy tightening, so this should have an impact in currency-values, so you must take care of this.
If we face any type of market correction in the future you have to keep durational basis as strong as you can, in order to get the good investments. When markets become irrational the best opportunities can arise, so you have to take care of your behaviour and emotions to try and be the most rational as you can in these events, in order to take advantage of market corrections.
It is not about bull markets, we are now standing on one of the biggest bull markets (not only in equities but in Fixed Income history), and you can have good investment opportunities when the markets turn around. You have to be respectful about the market, cautious, and always apply a diversification strategy.
Ben: Thank you for sharing your thoughts on this topic.