Patrick Nielsen: “The risk of a bubble in listed assets has diminished substantially”
What is your day-to-day role at MAPFRE AM?
My team focuses on multi-asset management and US equities. In addition, I coordinate our Asset Allocation, which is especially important for our mixed funds.
At MAPFRE AM, teamwork is a reality. Financial markets are interconnected; news that can impact asset prices can appear in any corner of the world at any time. We have to be able to implement our strategies at the most opportune time. A crucial part of my day-to-day work is coordination.
You studied in Paris and started your professional career in Stockholm. How and why did you end up at MAPFRE AM?
I started my career at Banque Indosuez, and after an initial phase, the HR department there offered me several opportunities in investment banking at the head office in Paris. They were very interesting, very technical roles: loan syndication, project finance, new issues, etc. But my manager in Sweden advised me to take a radically different path and to participate in a new project in Spain, launched by Victor Bultó, a person my boss held in high esteem at the time. He convinced me! Besides, having Spanish blood (my mother is Spanish, from Benavente) and a lot of family in Spain, there was a personal logic behind it.
You have been studying and applying mathematical techniques and statistical learning to the decision-making process for years. Could you elaborate more on what this consists of?
From a very young age, I have been interested in science in general — particularly mathematics — and finance. I think teaching is more flexible now, but forty years ago, when I was considering my academic career, I had to choose: science or finance. I chose finance, but I always wanted to deepen my knowledge of mathematics. So, in the mid-90s, I began to study mathematics to the extent that a full-time job and, later, the joy of becoming a father could afford me. After a few years, towards the end of the 90s, I became convinced that the convergence of advances in computing power, communication, data availability, and statistical theory were going to have a profound impact. I became a close collaborator and friend with academics, and they quickly confirmed my intuition.
Financial markets are well suited to these techniques because there is a lot of data to process quickly before the information (either intrinsic, i.e., a possible price mismatch, or exogenous, e.g., a piece of news) is fully discounted.
What differentiates MAPFRE AM from other asset managers, i.e., what value does MAPFRE's asset manager provide for its unitholders?
Since the beginning of the management company, and with the accumulated experience of more than 35 years working in the financial management sector, I have been able to observe many cycles, both bullish and bearish. In these cycles, there have been alternating periods of euphoria and fear, even panic. MAPFRE AM has always maintained a steady course in these cycles and markets, avoiding extremes and, consequently, avoiding the most virulent market crashes (excessive leverage, fraud, bubbles, etc.). I believe that this "common sense" brings value to the unitholder. We bring innovation and differentiated products, but this more intangible element seems especially relevant.
We find ourselves in a new environment of rate hikes and withdrawal of extraordinary liquidity measures by central banks. How might this affect the markets?
We need to go back a bit and put it in context: rate hikes and liquidity withdrawals correspond to a desire to fight inflation. But what are the origins of this inflation? The increase in inflation was very abrupt and very sharp. In all likelihood, several factors came together: while the war in Ukraine explains some of the inflationary pressure, leading many analysts to believe that it is essentially an external shock, it is important to stress that the balance of supply and demand had been thrown out of order by pandemic-induced disruptions. However, I believe that monetary and fiscal policies have also played an important role that is difficult to identify accurately. Monetary policies have been too lax for too long, anesthetizing warning sings in financial markets, namely credit markets. It is a bit like a faulty reservoir. You could see some cracks that you didn't pay attention to, and suddenly the dam broke, and inflationary pressures were unleashed. Once the destructive wave has passed, we will see the real flow of inflation, which will probably be much, much lower.
Which sectors are the best performers in this context?
We have had many years where markets were worried about deflation. In fact, many investors today have not experienced times of inflation in their professional experience. Having started in the financial markets in 1987, I have seen monetary decisions aimed at fighting excessive inflationary pressure, particularly in Spain when Mariano Rubio and Luis Angel Rojo were Governors of the Bank of Spain. While there are lessons from these times that can be applied, the economy has changed a great deal since then. What is obvious is that companies that can defend their margins will benefit. This can be achieved with the agility to control costs and the ability to raise prices. In other words, management flexibility and dynamism along with a good brand image. We are talking about quality companies. There is a potential trap here: it is precisely these companies that are highly valued and, because of the dynamics of discounted cash flows, are the ones that suffer most from a rise in interest rates.
At the sector level, the oil sector is currently performing well, due to the sharp rise in energy prices and because investors have reassessed the strategic importance of a stable supply, despite ESG concerns. Banks also occasionally do somewhat better. But I think it is dangerous to extrapolate uniformly to a sector. The rule that applies at the moment is that the further back in time the financial flows are, the more the company is penalized. Companies that are going to be able to maintain and expand their revenues in the coming years should do well. The long term is always crucial, but perhaps investors are going to look more closely at the company's performance in the short to medium term.
Do you see signs of a bubble in some assets, or could the central banks' backtracking contain them?
With the declines recorded since the beginning of the year, as well as the interest rate hikes we have seen, I believe that the risk of a bubble in listed assets has diminished substantially. Not completely, but it should no longer represent a systemic risk. However, in my view, the long period of low rates has pushed a lot of investment into alternative assets. I believe that not only will they be hurt by the mere discounted flow exercise, but that investors will again have to value the liquidity of an asset as a positive attribute and not as a handicap, as is currently the case.
Do you think that it is in difficult times like the present that the virtues of a good fund manager really come to the fore?
People tend to have an intrinsic bias: positive or negative. The very cautious person will tend to stand out in bear markets, while the optimist will take more advantage of favorable periods. That is why it is important and healthy to work as a team to incorporate different points of view, as long as the dessert is not mixed with the appetizers. In other words, the key is to build an original vision based on different points of view. Clearly, this is a particularly difficult exercise when there is low visibility, high risk, and high volatility.
What decisions have you made lately as a manager to adapt to this environment, i.e., has there been a change in strategy?
Geographically, in the wake of the Ukraine invasion, we have emphasized the US in our multi-asset funds to the detriment of Europe. We are aware that European valuations are more attractive and note that concerns in Europe are widespread and are therefore likely to be reflected in share prices. But this crisis shows that there are strategic unknowns in Europe that add a great deal of uncertainty: energy policy and defense are two of the most immediate, but technological leadership should also be mentioned.
At the level of interest rate risk and inflation evolution, our stance has been cautious since before the pandemic, and we maintain that approach.
For asset valuation, we are putting a little more weight on the short and medium term. We want to identify as soon as possible the companies, sectors, or countries that benefit from the current environment and those that suffer from it.
MAPFRE AM has a commitment to ESG among its pillars. Do you think that with the coming recession, the war, inflation, and, above all, the energy crisis, this issue will continue to be at the forefront?
Several assets with excellent ESG ratings were trading at a significant premium and have suffered from rising rates. Perhaps also because that premium was excessive. Another element is the sharp rise in energy prices and the paradigm shift brought about by doubts about Russian supply. It is still too early to have a clear idea of the long-term impact of the current crisis on the energy market. But, at present, the sharp rise in all energy sources has benefited energy producers. Many ESG funds were out of those stocks; this was an "easy" decision, as they had been performing negatively for years. In my opinion, our ESG commitment makes perfect sense, because it serves precisely to incorporate extra-financial elements in the decision-making process. I believe that this is a maturation phase in ESG investment. ESG investment should identify and support the most innovative companies, not be a rigid guardian of a position.
Do you believe that asset management is really the one to bring value in dealing with these uncertainties that we face? In short, are you among the detractors of passive management and why?
Investors have a very important role and responsibility: to identify and support companies with innovative products and solutions. Symmetrically, capital must be taken from those companies whose contributions to society as a whole, in its broadest definition, are below average. This process is tremendously complex, and the "market" process, which incorporates a lot of information processed by many different parties, seems particularly well suited to solve it. At least, to date it has been the "least bad" process. Passive management puts limits on the scope of this process, and this is dangerous. However, it does have certain advantages. It is a question of balance.
I have many hobbies, and the number keeps growing! I like to study physics and mathematics. I try to learn programming. I am passionate about astronomy, and I do astrophotography (photographs of galaxies and nebulae). I am also an aquarist. I practice yoga daily, and I love walking. I read assiduously, especially popular science books.
I don’t particularly like gourmet food. I’ll stick with Gazpacho.
A city / country?
I really like European historic cities, but there are so many of them that I don't know how to choose. So, I'll go with something different: New York, which I find fascinating due to the energy it transmits. As for a country: Sweden.
My musical taste is becoming more and more classic and diverse. The great baroque composers, medieval music, romantic composers, recent composers. I also listened to a lot of rock in my youth (I was in a band and participated in a radio show in the eighties), so for nostalgia's sake I'm going to mention Joy Division because it had a huge impact on me.