Distinguished client,
Two thousand twenty-four closed with satisfactory results for both bond and equity investors, thus building on an exceptional 2023 and assisting in the recovery of long-term profitability after an abysmal 2022, which saw the largest interest-rate hikes in four decades.
This letter’s Appendix details the results of the investment funds managed by EDM Asset Management (*) and those developed by EDM Wealth Management (*), whose management is delegated to third parties. (Note their performance relative to inflation.)
We steadfastly contend that anticipating market behaviour is an impossible task, as short-term trends are rooted in investor sentiment and expectation, both of which—naturally—are changeable and volatile.
Our approach to non-speculative investment, which can be summarised as “accompanying growth”, is one of sceptical optimism vis-à-vis the forecasts that flood the market these days. Nevertheless, I will try to address some of the questions frequently asked by our clients in recent weeks.
(*) EDM Gestión, S.A. SGIIC’s Asset Management and Wealth Management areas.
1. What can we expect from the new US administration?
Donald Trump’s election has been received favourably by markets and with overwhelming optimism in the US, reflected by an extraordinary flow of investments (Graph 1) at the expense of the remaining stock markets in other geographical areas.
Many economists, however, warn of certain medium-term adverse effects of the announced policies that could moderate or even negate the current euphoria. Table 1 summarises both the positive and negative impact of the policies announced by the president-elect.
While nothing is certain, it is possible that in my June letter we will view the US economy and its markets from a different perspective.
2. US “exceptionalism” and EU stagnation: the Trump effect?
In recent months, the idea has spread that the US is blessed with several factors (see Table 2) that are absent in Europe, which is currently mired in existential reflection.
As is evident, the profiles vary significantly. Regardless, in Europe there is a sense that, barring a change in direction on key issues, a reversal of current trends is impossible (Draghi & Letta reports). Ironically, we would arrive at a turning point, favoured and perhaps reinforced by the inauguration of Donald Trump. Moreover, pessimism about Europe is now widespread, which may precipitate positive surprises in 2025, propelled by interest-rate cuts (see next point) and a potential ceasefire in Ukraine.
3. Will interest rates continue to decline?
To address this question, we must distinguish between the situation in the US and that of the EU. In Europe, with sluggish, nearly stagnant growth, inflation is falling more decisively, so the answer is a definitive yes: rates will continue to decline.
In the US, the situation is more nuanced and the answer is less obvious, given:
- The strength of the economy and the labour market;
- The slower reduction of inflation;
- Donald Trump’s tendency toward inflationary policies.
The Fed recently expressed its reservations: Are we heading toward a battle of wills between the administration and the Federal Reserve? Undoubtedly, this will be a major issue in 2025, but the recent reaction of the debt market to chairman Powell’s statement leaves little room for doubt: investors are nervous. A loss of confidence in US debt would spell disaster for markets. We believe the incoming president will pay close attention to developments in this regard.
4. How to invest in bonds
In light of the highly-anticipated and publicised drop in official interest rates, many investors are racing to boost their exposure to bonds, or to increase durations. Volatility on the 10Y public debt market (10Y Treasury and Bund) has been considerable, in keeping with estimates about the timing and intensity of expected rate cuts.
In addition to the evolution of monetary policy, it is also crucial to assess other factors, such as the demand for Treasury funding, driven by the refinancing of maturing debt and the substantial needs of debt-financed investments (decarbonisation, defence), all of which suggest higher yields.
It should, therefore, come as no surprise that official rates, which depend on the central banks, and short-term (2Y) public debt yields are decreasing, while those on long-term debt are rebounding.
And exacerbating these circumstances are concerns about inflation.
5. The trajectory of government debt: how long?
Our clients with the most experience in the investment world have shared their concerns about the sizeable levels of debt in developed countries, the trajectories of which are simply unsustainable (Graph 2).
This does not mean we will see defaults on debt, but it does mean that lenders will demand higher yields to offset the seemingly unstoppable course of government debt.
Redirection could be achieved by one of the following factors:
a) nominal growth of the economy (nominal GDP), outpacing interest rates, and perhaps…
b) …higher inflation, which increases tax revenue (VAT, personal and corporate income tax);
c) an increase in direct and indirect taxes;
d) a reduction in public spending.
You don’t have to be Javier Milei or Elon Musk to understand the difficulty of the task, which will have to be addressed sooner or later… perhaps when the warning from bondholders is sounded.
Given this context, it is not surprising that the price of gold rose sharply in 2024. Gold has no correlation to the evolution of inflation, but its uptick could be a response to widespread concerns about indebtedness.
6. What can we expect from artificial intelligence?
Artificial intelligence is a technological advance that will persist into the future. Whether it will be the driving force behind a recovery in productivity in the US and Europe—which has been scant in recent years—remains to be seen.
We have read informed but divergent opinions on this matter and it is difficult to say. However, what matters to us as investors is its positioning in equity portfolios. And, of course, the multi-million-dollar investments in companies to develop AI must still produce verifiable returns.
In previous technological revolutions, interestingly, the long-term winners have not been the manufacturers of the technology, but the users who benefited from it. Thus, our focus is on the benefit that AI brings to the outstanding companies in which we invest.
7. Will the Magnificent Seven continue to lead the market?
The shares of these seven US companies (1) represent 33% of the S&P 500’s capitalisation and 72% of its gains in 2024. This evolution reminds us of the 1970s, when the "Nifty Fifty" monopolised investor interest, before succumbing to two decades of lethargic performance after their meteoric rise.
Conceptually, the answer to this question is simple: it depends on future earnings growth. At the moment, with very high P/E multiples, investors (the market) hope the current growth will continue for decades. We know this is impossible and, as such, every day we inch closer to a downturn in their valuations.
It is essential, therefore, not to be swept up in the prevailing enthusiasm. Experience teaches us not to subscribe to the oft-repeated phrase, "This time it’s different”.
(1) Magnificent Seven: Nvidia, Microsoft, Meta, Tesla, Alphabet, Amazon, Apple.
8. Are shares pricey? Are we facing a potential bubble?
This is a recurring question and one that is always difficult to answer, since the applicable “it depends” is clearly an unsatisfactory response. We know the value of companies hinges on the expected growth of their future earnings and investors’ perception of how likely they are to achieve this growth. For that reason, EDM builds its portfolios with companies whose businesses have structural growth, meaning, highly probably or foreseeable EPS growth.
Table 3 contains some data that sheds light on the question and refers to EDM’s four equity funds that comprise many of our clients’ portfolios.
This Table illustrates:
- Confidence that businesses (EPS) will continue to register growth in 2025, in line with historical trends;
- That the valuations (P/E ratios) of top-quality companies are demanding, with the US susceptible to a change in investor sentiment given its over-valuation relative to the historical data;
- That small- and/or mid-cap companies, overlooked on the major indices, are affordable and have low valuation risk.
9. Will EDM introduce changes to its portfolios in 2025?
For months our Asset Allocation Committee (AAC) has been advocating for a moderate reduction in equity exposure, while restoring exposure to bonds, with a three-fold objective:
- To meet the regular provisions of clients who have agreed to this, once interest rates normalise;
- To moderate volatility in anticipation of a sudden change in sentiment and, consequently…
- …to secure treasuries and/or short-term fixed-income assets ("dry powder") to capitalise on significant corrections in equities, should they occur.
This policy may move forward if the current optimism prevails over the “fundamental” of valuation, since at present the consensus advises caution.
10. How should we view long-term portfolios? Is there a “new” 60/40?
Each discretionary portfolio management and/or advisory client has a specific mandate that reflects their long-term investment goals (see our recently published book, El Oficio de invertir, [The Craft of Investing]). Statistically speaking, however, the mandate of many clients closely resembles the classic 60/40 (equities/bonds) investment ratio, demonstrating that their basic objective is “to protect capital and beat inflation” over the long term (see Appendix).
Traditionally, our 60/40 portfolio consists of propriety- and delegated-management undertakings in collective investment (funds). The latter are managed by experts specialising in a given asset class (high-yield bonds) or region (US), provided EDM maintains visibility over their investments and confidence in their investment style.
This division will be accentuated in the future as we diversify portfolios with asset classes, geographies, and/or investment styles. In particular, we will include alternative assets in our portfolios to establish the presence of unlisted (illiquid) assets and incorporate them into the “new” 60/40. This is necessary due to the growing weight of private (unlisted) assets in relation to listed ones.
Finally, I want to let you know it is my intention to make our December/January correspondence slightly longer than the June/July letter. I hope you made this far to find out!
I would also like to remind you that, along with your portfolios, you receive our monthly "Opinion Flash", which summarises our insights on the economy and markets.
As we bid farewell to 2024, I want to personally thank you for your trust and wish you all the best in 2025.
Carlos Llamas
CEO
APPENDIX
LEGAL CONSIDERATIONS
1) This information is for advertising and information purposes only. It is not and cannot be considered investment advice or a legal opinion, is not intended to replace necessary investment advice and does not constitute an offer to sell or a request to buy.
2) All opinions and estimates provided are based on sources believed to be reliable. However, EDM Gestión, S.A., SGIIC cannot guarantee that these sources are accurate or complete, and assumes no liability whatsoever for any direct or indirect loss that may result from the use of the information provided in this document.
3) This information includes data referring to past performance of the products mentioned above. EDM Gestión, S.A., SGIIC warns that past performance is not a reliable indicator of future performance.
4) Investors should be aware that the products included in this document may not be suitable for their specific investment objectives, financial or equity position, or risk profile. Investors should therefore make their own decisions taking into account these circumstances and seek specialised tax, legal, financial, regulatory, accounting or other advice as necessary.
5) It is stated for the record that the instruments included in this information may be affected by various common causes such as:
- Market disruptions due to unforeseeable circumstances.
- Liquidity risks and other risks that alter the performance of the investment.
6) This documentation may include data based on currencies other than those used by the recipients of the documentation. Therefore, the possibility of any upward or downward change in the value of the currency and its impact on the results of the proposed products or instruments must be considered.
7) For each of the EDM Gestión, S.A., SGIIC Funds, a full prospectus, a key investor information document, periodic reports and the latest audited financial statements are available to the public and can be requested free of charge at the registered office of the Management Company or on the website www.edm.es.
8) EDM Gestión, S.A. SGIIC is a public company incorporated under Spanish law, registered in the Collective Investment Undertaking Management Companies Register of the Spanish National Securities Market Commission (CNMV) under number 49 and registered with the Commercial Registry of Madrid in volume 36,739, page 52, sheet M-658.326, with tax identification number A-58.217.175. It engages, among others, in the representation, management and administration of investment funds and investment firms domiciled in Spain and under Spanish law, and discretionary investment management.
DISCLAIMER
EDM Ahorro FI is an authorised investment fund regulated by the CNMV (registration no. 47) and managed by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a fund under Article 8 of the SFDR. It is a fund with a risk profile of 2 on a scale of 1 to 7. Over the last five years, Class L obtained the following annual returns: 2019: 4.78%; 2020: 0.38%; 2021: 1.58%; 2022: -4.08%; 2023: 5.34%.
EDM Renta FI is an authorised investment fund regulated by the CNMV (registration no. 530) and managed by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). It is a fund with a risk profile of 1 on a scale of 1 to 7. Over the last five years, Class L obtained the following annual returns: 2019: 0.61%; 2020: -0.3%; 2021: -0.11%; 2022: 0.07%; 2023: 3.20%.
EDM Credit Portfolio is a sub-fund of EDM International SICAV authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF) (registration no. 851). The Management Company is Waystone Management Company (Lux), S.A., which is subject to oversight by CSSF. The sub-fund is managed and marketed in Spain by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a sub-fund under Article 8 of the SFDR. It is a fund with a risk profile of 3 on a scale of 1 to 7. Since the inception of Class L on 19/01/2021 and until 31/12/2023, it obtained the following annual returns: 2022: -14.66%; 2023: 8.85%.
EDM Renta Fija Horizonte 5 años FI is an investment fund authorised and regulated by the National Securities Market Commission (CNMV) (registration number 5806) and managed by EDM Gestión S.A., S.G.I.I.C. (CNMV registration number 49). It is a fund with a risk profile of 2 on a scale of 1 to 7. Since its launch on 6/10/2023, there are no complete periods to report on its annual profitability.
Fixed-income investments made by the fund would incur losses if interest rates rise, so redemptions made before maturity may entail losses for the investor.
Any redemption made before maturity will bear a 3% commission, unless it is ordered on any of the 9 specifically provided dates: 20/06 and 20/12 of 2024; 20/06 and 20/12 of 2025; 20/06 and 20/12 of 2026; 20/06 and 20/12 of 2027 and 20/06/2028 or the next business day, respectively.
Please note that the estimated return of the fund does not protect investors from the effect of inflation during the period until maturity, so the actual return (i.e. discounted for inflation) could be lower or even negative.
EDM Renta Fija Horizonte 2.5 años, FI: Investment fund managed by EDM Gestión S.A., S.G.I.I.C. and registered with the CNMV under number 5867. It is a euro fixed-income category fund with a risk profile of 2 on a scale of 1 to 7. Since its launch on 05/17/2024, there are no complete periods to report on its annual profitability.
EDM Cartera FI is an authorised investment fund regulated by the CNMV (registration no. 4043) and managed by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a fund under Article 8 of the SFDR. It is a fund with a risk profile of 3 on a scale of 1 to 7. Over the last five years, Class L obtained the following annual returns: 2019: 16.12%; 2020: 3.87%; 2021: 12.98%; 2022: -16.28%; 2023: 17.51%.
EDM Renta Variable Internacional FI is an investment fund authorised and regulated by the National Securities Market Commission (CNMV) (registration no. 4604) and managed by EDM Gestión S.A., S.G.I.I.C. (CNMV registration no. 49). It is a fund with a risk profile of 4 on a scale of 1 to 7. Over the last five years, the L class has obtained the following annual returns: 2019: 29.20%; 2020: 8.03%; 2021: 28.38%; 2022: -23.00%; 2023: 28.47%.
EDM Inversión/Spanish Equity Fund is a sub-fund of EDM International SICAV authorised in Luxembourg and regulated by the CSSF (registration no. 851). The Management Company is Waystone Management Company (Lux), S.A., which is subject to oversight by CSSF. The sub-fund is managed and marketed in Spain by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a sub-fund under Article 8 of the SFDR. It is a fund with a risk profile of 5 on a scale of 1 to 7. Over the last five years, Class L obtained the following annual returns: 2019: 12.36%; 2020: -10.18%; 2021: 14.52%; 2022: -12.69%; 2023: 17.28%.
EDM Strategy Fund is a sub-fund of EDM International SICAV authorised in Luxembourg and regulated by the CSSF (registration no. 851). The Management Company is Waystone Management Company (Lux), S.A., which is subject to oversight by CSSF. The sub-fund is managed and marketed in Spain by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a sub-fund under Article 8 of the SFDR. It is a fund with a risk profile of 4 on a scale of 1 to 7. Over the last five years, Class L obtained the following annual returns: 2019: 30.42%; 2020: 0.28%; 2021: 29.23%; 2022: -17.81%; 2023: 26.01%.
EDM Global Equity Impact Fund is a sub-fund of EDM International SICAV authorised in Luxembourg and regulated by the CSSF (registration no. 851). The Management Company is Waystone Management Company (Lux), S.A., which is subject to oversight by CSSF. The sub-fund is managed and marketed in Spain by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a sub-fund under Article 8 of the SFDR. It is a fund with a risk profile of 4 on a scale of 1 to 7. Since its launch on 30/05/2022 and until 31/12/2023, Class L obtained the following annual returns: 2023: 21.24%.
EDM American Growth Fund is a sub-fund of EDM International SICAV authorised in Luxembourg and regulated by the CSSF (registration no. 851). The Management Company is Waystone Management Company (Lux), S.A., which is subject to oversight by CSSF. The sub-fund is managed and marketed in Spain by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a sub-fund under Article 8 of the SFDR. It is a fund with a risk profile of 5 on a scale of 1 to 7. Since the inception of Class L on 18/01/2021 and until 31/12/2023, it obtained the following annual returns: 2022: -43.38%; 2023: 34.92%.
EDM Latin American Equity Fund is a sub-fund of EDM International SICAV authorised in Luxembourg and regulated by the CSSF (registration no. 851). The Management Company is Waystone Management Company (Lux), S.A., which is subject to oversight by CSSF. The sub-fund is managed and marketed in Spain by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a sub-fund under Article 8 of the SFDR. It is a fund with a risk profile of 5 on a scale of 1 to 7. Over the last five years, Class L obtained the following annual returns: 2019: 22.32%; 2020: -28.51%; 2021: -19.03%; 2022: 11.17%; 2023: 24.91%.
EDM International Equities FI is an authorised investment fund regulated by the CNMV (registration no. 2817) and managed by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). This is a fund under Article 8 of the SFDR. It is a fund with a risk profile of 4 on a scale of 1 to 7. Over the last five years, Class L obtained the following annual returns: 2019: 6.68%; 2020: 1.95%; 2021: 5.07%; 2022: -14.98%; 2023: 24.40%. There were significant changes in policy in 2022. The data prior to 2022 are not representative under the current investment policy.
EDM Pointer SA SIL is an authorised hedge fund regulated by the CNMV (registration no. 26) and managed by EDM Gestión, S.A., S.G.I.I.C. (CNMV registration no. 49). It is a fund with a risk profile of 4 on a scale of 1 to 7. Since its launch on 26/11/2021 and until 31/12/2023, Class A obtained the following annual returns: 2022: -7.96% and 2023: 13.16%.
EDM High Yield Short Duration is a sub-fund of EDM International SICAV authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF) (registration no. 851). The Management Company is Waystone Management Company (Lux) S.A subject to the supervision of the CSSF. The sub-fund is managed and marketed in Spain by EDM Gestión S.A., S.G.I.I.C. (CNMV registration no. 49). This is an art. 8 SFDR sub-fund. It is a fund with a risk profile of 2 on a scale of 1 to 7. Since the creation of class L on 08/01/2021 and until 31/12/2023, it has obtained the following annual returns: 2022: -7.18%; 2023: 5.35%.
Fondomutua Pensions UNO, FP is an authorised pension fund regulated by the Directorate General of Insurance and Pension Funds (DGSFP) (registration no. F2154). Mutuactivos Pensiones, S.A.U., S.G.F.P. (DGSFP registration no. G0135) is the Fund Manager and EDM Gestión, S.A., SGIIC (CNMV registration no. 49) is the Delegated Manager and Promoter of the EDM PENSIONES RENTA FIJA Pension Plan, P.P., assigned to the fund. It is a fund with a risk profile of 2 on a scale of 1 to 7. Over the last five years, it obtained the following annual returns: 2019: 3.79%; 2020: -0.67%; 2021: 1.57%; 2022: -8.16%; 2023: 4.44%.
Fondomutua Pensions DOS, FP is an authorised pension fund regulated by the Directorate General of Insurance and Pension Funds (DGSFP) (registration no. F2155). Mutuactivos Pensiones, S.A.U., S.G.F.P. (DGSFP registration no. G0135) is the Fund Manager and EDM Gestión, S.A., SGIIC (CNMV registration no. 49) is the Delegated Manager and Promoter of the EDM PENSIONES RENTA VARIABLE Pension Plan, P.P., assigned to the fund. It is a fund with a risk profile of 4 on a scale of 1 to 7. Over the last five years, it obtained the following annual returns: 2019: 23.67%; 2020: 5.66%; 2021: 22.05%; 2022: -20.56%; 2023: 29.98%.
