“The market message for the U.K. is valid for many countries.”
MAPFRE’s Group Chief Investment Officer, with overall responsibility for all of the insurance company’s asset and wealth management, as well as the firm's own portfolio, is cautious about the new situation that the normalization of interest rates will bring. He believes that governments will have to return to fiscal orthodoxy in order to balance public accounts and for investors to agree to maintain funding levels. The case of the United Kingdom has been, in his opinion, a canary in a coal mine, as he acknowledges in an interview with El Economista.
Conservative mixed portfolios are taking losses of close to 10% are taking across the board and fixed income is going through a historic year of losses.
We often have to take a broader time perspective into account to make investment decisions. We've gotten used to going into debt as a way of solving problems. And we’re in a historical moment right now where everything related to restructuring, globalization and liberalization would even appear to be counterproductive. Political time horizons seem to be unwilling to face certain global realities: the need for serious reforms, which appears to be incompatible with the short-term focus of politicians. There has effectively been no public sector reform. Perhaps the United Kingdom has been the first to understand this, because the market put it in its place, but this is something that has to happen in other countries as well. The Spanish bond may go to 5% or 7% instead of 3%. But if the debt isn’t brought under control, it’s going to be very difficult to resolve. Raising taxes to try to keep up with the level of spending can only go so far.
Do you think there is still more downside risk for the conservative investor then?
Interest rates may continue to rise, even though the market is pricing in a maximum, but it’s much more complex than it may first seem. What is a fact is that there’s less debt in the U.S. than in Spain, yet Spanish bonds pay less than U.S. bonds. Is that an anomaly? I’d like to think that something isn’t right. We’re probably going to have to return to a kind of fiscal orthodoxy, which is now being put on the long finger. We’ve been at a minimum level of structural reforms for a long time because these are complex issues. In the 2008 crisis or during the COVID-19 pandemic, companies curbed spending, but this hasn’t caught on among public authorities. So our position is very cautious. This is not the best of times. We think rates will continue to rise and inflation may, at some point, stall at 5% or 7%. And it shouldn’t be forgotten that this affects people who are most in need, so a greater focus should be placed on creating the conditions for job creation in the private sector. In the end, and this is the most difficult part of this crisis with very high deficits and debts, at some point the market may question whether this is all viable. When this happens, the ECB has mechanisms to defend economies, but we can’t assume that it can solve all problems. The message that the markets have given us in the British case is valid for many countries.
Will the ECB itself have to put pressure on countries to carry out these structural reforms?
No government wants to take on these structural reforms. But the market will at some point have to put a price on many things. There are certain measures that must be taken, which aren’t easy, but which will generate greater well-being in the future. Economic policy must improve the well-being of the population. When someone plants a tree, they don’t expect it to provide shade six months later. We're approaching another critical moment where there will have to be substantial changes for the better, but leaving our children a world that’s worse doesn’t seem right to me.
Will the ECB have to use, at some point, a scapegoat so that others will be persuaded to implement these reforms?
It's not the ECB’s job, it’s the market’s job. Suppose a central bank wants to defend the parity of a currency. However much they may want to do this, if the market is against it and investors don't buy it, it won't succeed. The ECB may buy debt to a certain extent, but no one can go against the market. So the responsibility doesn’t lie with the ECB, it’s not their responsibility. The United Kingdom, at a certain point, has seen that it was on the brink of the abyss, which led to the fall of a government, a tax hike and a tightening of public spending.
What are you doing in this environment?
As investors we’re taking advantage of the opportunities that the market is giving us. It’s been a long time since we’ve seen so many opportunities available on the stock market and in fixed income. A year ago, when we had to reinvest, we had to do so at a rate of -0.4%. Today that rate is 3%. If we take the profiled funds as a benchmark and make a comparison, our conservative portfolio has fallen by 5% compared to the average of 10%. Even in the most aggressive strategies, we’ve always fallen less than the market. We recommend others to do what we do ourselves in the insurance company. I can't recommend something I wouldn't do. We often come across investors who hold sustainability ratings and they then sell any asset type, sustainable or otherwise. And often the problem is that their way of measuring profitability is very short-term. MAPFRE's advantage is that we have 150 investment professionals in 26 countries, and we have eyes on what’s happening in the U.S., Latin America and Europe. We have a global overview of what’s going on. And we have a real knowledge of the economy because we’re insuring so many activities, which is a good barometer of what’s happening in one sector or another. We apply this to the investment world by trying to make money for ourselves and for our clients, but with the same strategy.
What assets are you now including in portfolios, by investor profile?
Two years ago, we embarked on a highly defensive strategy, with very low durations. When COVID-19 blew up, we adopted an even more defensive strategy for the first two weeks. We as a company had a very low corporate risk exposure, about half that of other European insurers. Conversely, our exposure to debt is mostly sovereign and we’ve increased the weight of semi-core and core over the last two years. We’re now seeing many opportunities also in very solvent corporate issuers and at levels that were unthinkable a few months ago. It was very difficult to be conservative when we had negative rates and a lot of people were going to extremes to get some return. We decided not to be swayed by siren songs and we’re now beginning to reap the rewards of this quite conservative strategy. On the alternative assets side, with committed assets in excess of 1.3 billion euros, we’ve done things that make a lot of sense.
Can you give an example?
Many co-investments in buildings with top-level partners such as Swiss Life or Munich Re in the main European capitals; with Macquaire in the real estate and infrastructure sector. On the private equity side we’ve set up one of the most conservative funds designed for insurance companies, the first evergreen fund in Spain. We’re also active in renewable energies, with a strategic agreement with Iberdrola, the world's leading expert in this field. I don't know if we’ll earn 4% or 8%, but I do know that it’s tremendously conservative and that it pays off. We prefer a 6% return with a 99% probability to a 20% return with a 90% probability. For us, the definition of risk is losing money, which is why we’re one of the most conservative investors out there. We’ve also generated a lot of guaranteed product. We’ve sold 300 million euros worth of this type of product in recent months. It’s something that clients understand very well.
Isn't it contradictory for you to sell guranteed funds in view of this historic opportunity to build a portfolio?
Most of those who criticize guaranteed bonds are companies that have never sold them. I'm not going to criticize investment banking because I don't do it. My mother doesn’t want to depend on the ability of a manager to get it right: she prefers to know, as a conservative profile, that if she puts in 100 euros, she’ll get 111 back. We also have the option of discretionary portfolio management and unit-linked, which are often better than other products because of the protection they offer, especially now that the taxation of individual pension plans has changed. This component of financial wealth protection is well understood in northern Europe, where most insurance is provided through unit-linked insurance.
Where are you seeing investor flows going?
Many investors are taking a wait-and-see attitude. This is at a time when banks don't want to pay for deposits, and they’re not likely to pay much, so there’s a lot of money that will go to guaranteed and targeted return products. And if at some point stability sets in, such as a ceasefire in Ukraine, the stock market will be a component to consider. There are opportunities to invest in good companies that are cheap. We aren’t losing sight of sectors because of the structural changes they undergo. ASML was tremendously cheap because China accounts for 60% of its sales. They’re still producing more than pre-COVID, but the market isn’t recognizing this, even though everything has a chip in it nowadays.
On the alternative side, are you thinking of launching any products?
We’re looking at some options and, seeing the success we’ve had with our various vehicles so far, next year we’ll probably launch a fund or two in assets that are worthwhile, comprising things we already have, such as real estate, infrastructure, renewable energy, private debt. We don't do venture capital. It offers very high returns but can also lead to very high losses, so it’s not appropriate for an insurance company.
Will they be accessible at 10,000 euros?
We want to see the details to evaluate it. It's an advance, but at this time of market correction, liquidity is an asset that’s worth a lot. Many investors have gone into alternatives to get a 2%, 3% or 4% return, and today you can get it in listed debt, which is also liquid. It’s worth remembering Austria’s 100-year bond, which paid 2%. But today it’s losing 80% by price. If there’s one thing insurers know about, it’s prudence. We know how to manage risk.
How is the agreement with Abante going?
It’s going great. They’re the best partner in the Spanish market. I’m certain that Abante will be the largest asset manager in Spain. It has a very interesting business model because it’s based on financial planning. Since we signed the agreement, it’s tripled in size. They’re seeing double-digit growth every year. They've done three transactions in this time and there are many firms that are interested in partnering with them. In the wealth management sector, consolidation will continue. Especially with all the regulation we have to contend with, and with more to come. We’re investing millions of euros every year in technology, research, etc. It’s a scalable business and not everyone can do it, it requires specialization. Not even us, as big as we are. We do what we think we can do well.
But wouldn’t Abante grow more with MAPFRE as the majority shareholder?
We haven’t talked about it. There are many ways to fund this growth. But they have enough capacity to do it. Particularly when you have partners who believe so much in your project and the data backs them up year after year. You don't see that in any other company.
How well does the business of MAPFRE Gestión Patrimonial fit in with Abante?
They’re not competition, they’re complementary. We have 3,000 branches across Spain and we’re the second largest financial institution in terms of proximity to customers. We have a large capacity with retail customers and Abante has more private banking clients.