September 2020: Retail Sales Growth Slowing

“August retail sales rose by 0.6% relative to July, marking the slowest monthly increase since April. Sales in sectors such as groceries and online retailers were boosted by stay-at-home restrictions and are above pre-pandemic levels. By contrast, while sales in restaurants and bars rose a strong 4.7% last month, reflecting a gradual resumption of their activities, they remained below levels seen in February. This suggests that the services sector is still under pressure from social distancing behavior. On a year-over-year basis, retail sales are up by 2.6%, but momentum slowed in August, coinciding with the expiration of the $600 extra weekly unemployment payments. Services spending will likely remain depressed until we see the widespread distribution of a vaccine. This should contribute to a general slowing of the economic recovery.”

ActiveAllocator Business Overview 2020

ActiveAllocator.com, is seeking to enter into an equity swap, revenue sharing or a partnering arrangement with an established financial services company. We now have the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. We help investors analyze existing allocations, discover inefficiencies and create bespoke portfolios in minutes. If you see complementary synergies and understand the Fintech space well, have decision steering authority, do email me in confidence at sameer.jain@activeallocator.com or call me on +1 312 498 1903, NY.
I explain our business in this short video.

 

ActiveAllocator Shelves Growth Plans to Preserve Status Quo

  • This week we have had to take the very difficult decision to put our growth plans on hold, while preserving what we have already painstakingly created. While nothing fundamental has changed in our business thesis, we have, like many other early stage firms, not been entirely immune to the effects of the coronacrisis.  Given the very high costs of ongoing data, technology infrastructure and talent needed to operate what we have built, we no longer have the funding and investment wherewithal to scale and invest in growth. We have had to part with some colleagues, while preserving the absolute minimum core team to sustain and resurrect when opportunity accords in the future.

  • Building and evolving a digital asset allocation platform with technology-enabled customized advice capabilities over four years has been a Herculean task. Our end to end system now includes an investments accounts aggregator, a securities to asset class mapper, a capital markets comparator, a preferences personalizer, a multi-asset optimizer and a trade executor. Over the years we have enhanced our technology infrastructure through proprietary methodology and data-sets to search, recognize, classify and instantly map more than four million traded and non-traded financial instruments to 50 asset sub-classes and optimize their allocation within portfolios. We now have simultaneous optimization capabilities across skills, market exposure, downside risk and illiquidity, scalable across +200,000 portfolios concurrently. We have also added specific country/ market asset allocation models, including customized adaptation for certain emerging markets. Over the years we have surpassed business development targets with around one billion dollars in total portfolio value analyzed, reallocated and monitored across affluent and ultra-high net worth investors. We have also increased market coverage as part of our global expansion. Our efforts have been met with industry & client recognition, over a dozen endorsements, and have been supported by a thoughtful and prestigious advisory board.

  • Our efforts in the months ahead will be directed to preserving the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. When we come out of this crisis we will continue to help investors analyze existing allocations, discover inefficiencies and create bespoke portfolios in minutes. In the days ahead we will continue to leverage our Wall Street experience and academic pedigree to provide unrivaled thought leadership to financial advisors, wealth managers, institutions and individual investors.

  • We thank our departing employees who have brought invaluable complementary asset and wealth management, investment banking and software development skills to our firm. We are grateful for their incredible hard work over the years and for their positive impact. We are also grateful to our product partners, complementary vendors who have enhanced our capabilities, clients, members of our board, supporters and so many others – for we have all created ActiveAllocator together.

 

Sameer Jain and Brian Jones

Cofounders of ActiveAllocator.com

 

 

 

 

 

 

 

Changes in Investment Management Industry to Create New Client Relationship Coverage Models

As  the investment, wealth and asset management industries navigate the fallout of coronacrisis they ought to be rethinking and reshaping their client coverage and distribution models. Here are my thoughts on how the investment management industry could protect and enhance client relationships, revenues and margins as well as adjust to a changing world.

5- client relationship coverage

Our Latest Regional Equity Valuation Model Captures Coronacrisis Recovery Differences

regional model 1

#ActiveAllocator develops state of art algorithms to capture different rates of coronacrisis recovery within countries and international equity markets. Here is the general design idea. We naturally also include multiple other proprietary dynamic factor drivers specific to coronavirus trackers, which are not shown here.

The objective is to rank the attractiveness of regional equity markets over a 12-month time frame

  • The ranks are based on a composite score
  • The composite score is a weighted average of individual ranks for various factors:
  • Valuation factors include Forward PE, PEG, Price to Book and Yield Gap
  • For each valuation factor we
    • Generate for each region a z-score (current level – 15 year historical average / standard deviation over that 15 year period) .
    • Rank the regions based on their z-scores, in other words based on how far the current valuation is from the historical norm (for most factors a low score ranks highest, but for Yield Gap a larger number ranks highest)
    • Momentum factors include earnings revision breadth and earnings revisions depth. Larger, positive numbers rank highest
    • Use different factors and different weights for developed markets and emerging markets

Anatomy of Ecuador Sovereign Debt Exchange Transaction

Download PDF:

Ecuador – 2000 Sovereign Debt Exchange Transaction Anatomy

 

Wall Street Journal, July 18, 2020 “ Funds Clash Over Deal on Ecuador “

To swap $18 billion bonds into new that pay lower interest with delayed maturity. Restructuring debt proposals create creditor – including Ashmore Group, BlackRock, T. Rowe Price, Contrarian Capital – differences in how different bonds are to be treated. New transactions being asked to linked to ESG goals.

  • Ecuador seeking to restructure debt during coronacrisis, and lower oil prices given new liquidity and debt sustainability challenges
  • Oil dependent economy heavily reliant on external credit where external interest payments are 10% of current external receipts
  • For history of Ecuador Debt Restructuring we recommend: Feibelman, A. (2017). Ecuador’s 2008–2009 Debt Restructuring. In J. Bohoslavsky & K. Raffer (Eds.), Sovereign Debt Crises: What Have We Learned? (pp. 48-64). Cambridge: Cambridge University Press. doi:10.1017/9781108227001.004
  • We examine here the  anatomy of  Ecuador Debt Exchange Transactions — 2000 , the first instance of default in Brady Bonds

Develop Policy for Risk Allocation for Infrastructure Investing

4- risk reward policy

 

I very much welcome the final regulations for the NEPA rules governing environmental approvals for infrastructure projects.  Now the environmental review process will no longer take 15 years, and will be approved or denied within two years. With 500 shovel ready projects we now need to ASAP get moving. An impediment is that we don’t have a nation wide consensus on project risk sharing between federal, state and local governments and the private sector. Simple issues such as deciding between contracting out, PPP or just outright privatization result in mind numbing debates and drag on. The Trump administration should tackle this heads on.

Asia Real Estate, Especially China, has Come a Long Way Since 2008

The Wall Street Journal today Friday, July 17, 2020  has an article “The $52 Trillion Bubble : China Grapples With Epic Property Boom”

Asian Real Estate markets have come a long long way over the last decade plus. I remember tracking them way back in 2008 when they were beginning to take off just around the time of the global financial crisis.

Here is my research note of 2008 for download :

Asia Real Estate – CAI_Journal_Summer2008

Is the Blank – Check SPAC an Investor Friendly Structure ?

The Wall Street Journal today July 14, 2020, B10 has a story “Blank-Check Route to Listing Gets Boost From Virus”. Having discussed the SPAC is some length in our previous research notes we explore if the SPAC is an investor friendly structure? We think it may well be, for reasons we describe here.

8- investor friendly structure

 

Carl Icahn Case Study – VISX

Slide12

#ActiveAllocator Research – Companies are likely to become vulnerable to activist investors during the coronacrisis period. To explain transaction mechanics, activist hedge fund motives and criteria, we analyzed 15 Icahn transactions over the years. We present these in succinct case studies each day on our research blog.

Also, you can derive your own optimal portfolio allocation to activist and other hedge fund strategies on activeallocator.com.

Illustrative Timing of a SPAC Transaction – Multiplan Merges with Churchill Capital Corp. III in $ 11 billion Deal

Wall Street Journal July 13, Monday, 2020, B1 article ” Deal Takes Health Firm MultiPlan Public “. MultiPlan a healthcare services provider owned by  private equity firm Hellman  & Friedman is merging with a SPAC Churchill Capital Corp.III in $ 11 billion deal. We provide color on the mechanics and timeline for such transactions here.

9-illustrative timeline

Strategic Asset Allocation Improvement and Superior Implementation

#ActiveAllocator Research Case Study – We successfully demonstrated to the world’s perhaps most sophisticated Government Investment Fund that our proposed changes to their strategic portfolio could increase annual returns by over 60 bps, while holding risk constant. That’s a non-trivial returns enhancement when you are speaking about hundreds of billions of dollars. Never underestimate the power of Strategic Asset Allocation done correctly.  We further demonstrated concrete steps to enhance their portfolio by approximately 40 bps as described here. Here is a snapshot of one such portfolio sleeve by way of illustration (NDA prohibits us from disclosing specifics).

4-SAA Case Study continued

Recommended Changes in Strategic Asset Allocation Demonstrate Potential to Add Substantial Value

#ActiveAllocator Research Case Study – We successfully demonstrated to the world’s perhaps most sophisticated Government Investment Fund that our proposed changes to their strategic portfolio could increase annual returns by over 60 bps, while holding risk constant. That’s a non-trivial returns enhancement when you are speaking about hundreds of billions of dollars. Never underestimate the power of Strategic Asset Allocation done correctly. Here is a snapshot of one such portfolio sleeve by way of illustration (NDA prohibits us from disclosing specifics).

3- SAA case study

Benefits to Partnering with a SPAC to Become Public

6- Benefits to partnering with SPAC

 

ActiveAllocator Research ; After examining 18 Blank Check Company transactions we conclude that there are significant benefits to using the SPAC route to go public. These include a quicker and easier route to becoming a publicly-traded company compared to a traditional IPO. Also these often have greater ability to achieve higher cash monetization upfront, relative to an IPO or a spin-off, given their flexible transaction structure. Sellers are motivated for they can choose stock or cash as consideration. Valuations are easier to arrive at. Often, limited float provides favorable demand / supply balance to support trading and valuation, the usage of leverage tends to be lower and there are positive implications for tax efficiency.

SPAC Structure With Tontine Variant Characteristic

ActiveAllocator Research – The Wall Street Journal Friday, July 10, BI article ” ‘Blank Check’ IPO Brings Ackman Back on Stage”.  Here is what a simple SPAC may look like. It can even have variants to bring in elements of a tontine.

A Bloomberg article  suggests that ” — Pershing Square Tontine Holdings Ltd. — will reward investors who hang on to their shares after an acquisition is selected by giving them a fixed number of warrants. When shareholders cash out, those who remain receive more warrants, giving them an incentive to stay.”

Here the analogy is to mortality. When shareholders cash out, the economic effect is similar to mortality in insurance. In this variant the remaining shareholders receive those residual warrants and their payoff will increase – hence perhaps the term tontine in the SPAC vehicle.

4-SPAC Structure

 

 

Carl Icahn Case Study – USX

Slide11

#ActiveAllocator Research – Companies are likely to become vulnerable to activist investors during the coronacrisis period. To explain transaction mechanics, activist hedge fund motives and criteria, we analyzed 15 Icahn transactions over the years. We present these in succinct case studies each day on our research blog.

Also, you can derive your own optimal portfolio allocation to activist and other hedge fund strategies on activeallocator.com.

What is a Blank Check Company or a SPAC?

The Wall Street Journal Friday, July 10, BI ” ‘Blank Check’ IPO Brings Ackman Bank on Stage.  Looks like Pershing Square’s Bill Ackman is coming out with a SPAC.

  • Special purpose acquisition corporations (SPACs) are newly formed public companies with a mandate to acquire or merge with an operating company within a prescribed time-frame (usually 24 months from the IPO). SPACs raised $13.6 billion in 59 IPOs in 2019 and around 70 are actively seeking targets. Many of the acquisitions have been structured as reverse mergers where the seller receives cash and stock from the SPAC. The SPAC often represents a quicker and easier way of going public than IPO. Several private equity firms have sold portfolio companies to SPACs. Here is how I visualize it.

1- What is SPAC

 

Insurance Risk – Contingent Capital Options During 2020

contingent capital insurance1

 

#ActiveAllocator Research – The Wall Street Journal today Thursday July 9, has two interesting articles on insurance. “KKR Buys Insurer to Build Asset Pool” announcing intent to acquire Global Atlantic Financial Group for $4.4 Billion and ” Allstate Buys Rival (NGH) for $4 Billion”. Clearly we are seeing some M&A activity in this sector.

Insurers are exposed to event risk from a variety of causes: Natural Catastrophes, Investment Market Disruptions and of course now, Pandemic – death claims, morbidity losses, investment losses, operations risk. Historically, many insurance firms have responded to such events by raising equity capital after the event – at depressed prices. None anticipated the specific triggering event, but all recognized the potential for tail events. I observe that all were required to raise capital at highly depressed values in order to survive, to maintain ratings or even solvency.

We recommend Contingent Capital options. Contingent Capital provides guaranteed access to capital at a pre-determined price when most needed. This can supplement available capacity, enhance financial flexibility and diversify capital sources. To catalyze creative thought, we explain its potential applicability along with ramifications in this visual.

 

Carl Icahn Case Study – TWA

Slide10

#ActiveAllocator Research – Companies are likely to become vulnerable to activist investors during the coronacrisis period. To explain transaction mechanics, activist hedge fund motives and criteria, we analyzed 15 Icahn transactions over the years. We present these in succinct case studies each day on our research blog.

Also, you can derive your own optimal portfolio allocation to activist and other hedge fund strategies on activeallocator.com.

Argentina Sovereign Debt Case Study – Bonds Rise On New Debt Deal

The Wall Street Journal, July 8, 2020  reports” Argentina Bonds Rise On New Debt Deal ” : Average recoveries around $53.50, swaps existing bonds to newer lower interest paying, delayed maturity..

Earlier on May 23,  2020 The Wall Street Journal reported  ” Argentina Defaults on Sovereign Debt Amid Coronavirus Crisis – The country is struggling with economic contraction, runaway inflation and a hard-currency squeeze”

Argentina defaulted on sovereign debt for the ninth time in its history, as Latin America’s third-biggest economy grapples with a new cycle of economic contraction, runaway inflation and a hard-currency squeeze exacerbated by the coronavirus pandemic. The cash-strapped country officially entered into default on Friday after failing to make a $500 million interest payment on foreign debt. The…

We examine here the  anatomy of historical instances of Argentina Debt Exchange Transactions — February and June 2001

–Argentina Reverse Dutch Auction exchange – February 2001 when the Republic successfully exchanged over $8.0 billion of international and domestic securities

–Argentina “Mega Debt Exchange”—June 2001 when the Republic successfully executed a $29.5 billion debt exchange of 46 eligible international and domestic debt securities

Download PDF:

Argentina -Sovereign Debt Exchange Transactions 2001 Anatomy