Know to the manager of Loriga sicav
Francisco Javier Serrano Roldán
Senior manager of SICAVs in Bankia Fondos
He has 19 years' experience in Financial Markets, the last ten managing absolute return mandates in Bankia.
Javier started his career path as an auditor at Deloitte. In 1996 he joined the Analysis Department of Urquijo Bolsa SVB, subsequently becoming its head. In 2005 he began his career at Bankia as head of the treasury portfolio invested in equities. Since 2013 he has been the Senior Manager of SICAVs in Bankia Fondos, specialising in multi-asset management with absolute return goals and strict risk control.
Historical performance of the SICAV
I would like to illustrate the steps which have been taken recently in LORIGA 2015 SICAV with regard to the challenge that the Catalan issue has posed for the markets and to try to shed some light on what might be around the corner. As at the close of 21 December, the portfolio's return for the year to date (YTD) is +5.37%, when situating the liquidative one in 0.9596 euros. As a point of reference, on the same date, the returns of the main equity indices stand at around +8%/9%, while sovereign debt in Europe has not provided any return. Our SICAV has achieved this return while maintaining an annualised volatility of 3.5%, which is barely a quarter of the volatility shown by the IBEX 35.
The philosophy of diversification and active management of hedges which has always guided this SICAV allowed us to maintain the same rate of return from May through to August, when risk assets were under significant pressure due to the valuations they had reached previously and, above all, due to factors almost always unrelated to the market itself: instability in the Trump administration, uncertainty surrounding the future measures of the central banks, tensions with North Korea, the impact of the hurricane season, etc.
However, the most significant challenge of 2017 has been managing the separatist risk in Catalonia. Up until August, this risk was almost entirely ignored by the market, but starting from September, the IBEX 35 began to perform worse than the Eurostoxx 50. Specifically, it lost 4.3 percentage points in that month in relative terms. Nevertheless, that did not stop the SICAV from continuing to achieve growth. In fact, September was the SICAV's best month in the whole of 2017 (+2.01%). There are several reasons for this good performance:
- The portfolio is more focused on the European market and, for these purposes, we treat Spain as just another country of the EMU.
- We did not have investments in any company with a strong presence in the Catalan market, except for Merlin Properties.
- And the most significant reason: using derivatives, we placed a bet on the relative value of the indices, whereby we held long (buy) positions on the Eurostoxx 50 and short (sell) positions on the IBEX 35. We intensified this bet even more by taking out hedges on the Spanish index, instead of using the European index as we usually do.
What do we think can happen from this point on? The election result of the 21D returned to give absolute majority to the pro-independence parties, although the training of government is not guaranteed because of the differences between the three parties of the above-mentioned bloique and to the situation judiacial of its leaders. Despite this result, we still think that it is impossible for a unilateral declaration of independence to be applied in practice in any region belonging to the EMU. The new independent country would not have any international recognition and would be economically unviable due to it being excluded from the euro and not having control over its taxes or financial system. In any case, it seems clear that the political instability is set to continue over the next few months and the possibility of new elections in Catalonia before the summer cannot be ruled out.
The market's initial reaction to the election results has not been particularly negative, although things could get complicated if the results were to jeopardise the stability of the central government and its ability to continue to implement reforms. We cannot, therefore, rule out the possibility of a motion of no-confidence in the government, nor of state elections being brought forward. We will have to wait and see to what extent the complication of the political landscape will affect the positive period of the economic cycle which the Spanish economy is currently going through, with GDP growth above 3% for 2017. Confidence, investment, external demand and job creation indices continue to show high levels of growth, at least for now.
In the following chart, we can see the strong performance of the Eurostoxx 50 in comparison to the IBEX 35 since the beginning of September. The chart also shows how this gap peaked at the same levels as those seen in July 2012, which was at the height of the euro crisis when there was speculation about a possible intervention in the Spanish economy.
Clearly, the current situation is not comparable to that of 2012, although the fixed-income market would appear to indicate otherwise. In the following chart, we can see how the Spanish risk premium has barely increased over the last few weeks.
In our view, although we are unlikely to see situations of extreme pessimism like the one we saw in early October, it is also highly unlikely that the IBEX 35 will be able to make up the ground it has lost against the other indices, given the multiple risks which the election results of 21 December have left open.
Apart from the Catalan issue, our outlook for the beginning of 2018 is reasonably optimistic. We believe that, given the synchronisation of the positive macroeconomic situation we are witnessing at a global level, risk assets deserve to have higher valuations than they currently do. If such valuations have not been achieved in recent months, it has been due to the prominence of external factors (tensions with North Korea, hurricanes in the Caribbean, hurdles encountered in the US tax reform, the question of Catalan independence, etc.). As investors become more comfortable about these matters and the future behaviour of the central banks becomes clearer, the market should return to a certain normality. That bullish stock market movement ought to be accompanied by an appreciation of the dollar and, most likely, of commodities as well. This, in turn, should revive certain inflationary expectations, which should lead to declines in fixed-income assets, since they would also lose their status as safe-haven assets in a more benign environment. It is for that scenario that we are currently positioned, with a 35% net exposure to equities.