Dear client,
This quarterly letter marks the first I will write as CEO of EDM, following the recent changes approved by the General Shareholders Meeting.
I joined EDM’s Wealth Management team in 2015, and these last 10 years (the past two as Managing Director) have been extraordinary. I approach the years to come with the same zest and enthusiasm, based on the trust and loyalty of clients like you, who encourage us to continue improving our services every day.
Though a nearly impossible feat, it is my wish to meet each and every one of our more than 4,000 clients, the true force behind EDM’s success. I hope, with time and patience, I can make that happen.
AT THE Q1 2024 CLOSE: ARE WE IN A BUBBLE?
Managed or advised investment portfolios closed the quarter with largely positive results, continuing the rally that began in October 2023. These results are the upshot of the stock market momentum that EDM funds managed to capitalise on, once again outperforming the benchmark indices (see Appendices 1 and 2).
But the favourable performance of equities in 2024 has not been matched by bonds, which reflect ever-changing interest-rate projections. Recent inflation data has cooled the—perhaps—excessively optimistic expectations of seven cuts in the US this year!
Rising share prices have made it possible to reach and, in some cases, exceed 2021 highs, thus recovering from the terrible valuation declines of 2022, prompted by the most aggressive interest-rate hikes in a generation, an effort on the part of the central banks to curb inflation.
Before continuing, I would like to emphasise two concepts that are familiar to EDM clients but are worth reiterating:
- Valuation losses on listed markets are always transitory and reversible;
- It is extremely difficult to recover valuation losses by selling in moment of panic.
Graph 1 illustrates how the stock market recovers after years of poor results.
Many wonder how long the current upward trajectory of stock markets will last, especially in the US where valuation multiples (P/E ratios) are very high. As we’ve said before, no one knows how the market will perform in the short term.
For some, the current scenario of share indices at record levels is reminiscent of the dot.com bubble of 2000. Though P/E ratios are currently elevated, we are far from the valuations—and the euphoria—of that time. Nevertheless, this has not prevented our Asset Allocation Committee from issuing words of caution. Why?
They cite the following:
1. Economic progress has been positive in the US and Europe, as well as in Spain, but...
2. …looking forward, many investors are worried that:
- Inflation, though easing, is struggling to reach the central banks’ target level of 2%;
- Sooner or later, developed countries must take strides to correct public deficits, which are, frankly, unsustainable. Some believe this could trigger a recession (see Graph 2).
3. Surprisingly, the prospect of lower interest rates has prompted a frantic effort to lock down current yields, which would be very attractive if rates fall. This is especially evident in high-yield bonds, whose prices are vulnerable to economic deterioration and the associated defaults.
4. For our part, we are not fundamentally concerned about the progress of the companies in our portfolios, but we are concerned about their valuations, which—though justifiable considering expected profit growth—are vulnerable to shifts in market sentiment.
5. And shifts in sentiment can come at any time for any reason. For example, the climate of radicalised and populist electoral politics carries risks unimaginable just a few years ago.
WHAT CHANGES ARE WE INTRODUCING TO THE PORTFOLIOS?
You will have noticed that for some months we have been diversifying the asset classes of the portfolios. As explained at the most recent Investor Forum (November 2023), our portfolios include growth assets and defensive assets.
Our conviction is that quality stocks are one of the best assets for protecting wealth in the long term, particularly if, as we fear, inflation struggles to return permanently to the 2% target.
Why, then, do many investors prefer diversified portfolios? Share prices have more volatility than they can assume and, moreover, defensive assets are recommended; in our case, quality bonds with short maturities, available to readjust portfolios at moments of opportunity ... or pessimism!
ALL EQUITIES ARE NOT CREATED EQUAL
The trend of investing in index funds or ETFs is one of the reasons why big cap companies attract the lion’s share of investment. Among them are the major tech companies (the Magnificent Seven).
This omits a large segment of mid- and small-cap companies, currently at historically low valuations that, in our opinion, present a clear opportunity (see Graph 3).
When will these undervaluations be corrected? It’s impossible to know, but these are undoubtedly among the most attractive segments today given their low valuation risk. Our EDM Inversión FI/EDM Spanish Equity and EDM Pointer SIL funds include our quality selection in this segment (see Appendices 3 and 4).
WHY CHOOSE EDM FUNDS?
As you know, EDM provides discretionary portfolio management and/or advisory through self-managed investment vehicles (collective investment schemes) and a small selection of funds managed by third parties.
This approach, unique in the Spanish market, allows us to understand and monitor the quality of the underlying assets and, thus, explain with absolute transparency where the money entrusted to us is invested.
This style, which we sometimes call “common sense investment”, enables us to obtain results that exceed inflation, even in very difficult periods, like the last five years. Our track record, illustrated in Appendices 1 and 2, demonstrates how this strategy is not only reliable and comprehensible, but also profitable.
Finally, I want to thank you again for the trust you place in EDM, and I would like to take this opportunity to make myself entirely available to address any questions or concerns you may have.
Sincerely,
Carlos Llamas
CEO
APPENDIX 1
EDM fund results at 31 March 2024
APPENDIX 2
EDM fund ranking
Diario Expansión at 31 March 2024
APPENDIX 3
EDM Inversión L FI since inception vs. benchmark at 31 March 2024
APPENDIX 4
EDM Pointer SIL since inception vs. benchmark at 31 March 2024
LEGAL CONSIDERATIONS
1) This information, which constitutes EDM advertising, is intended for informational purposes only in accordance with the rules of conduct applicable to investment services in Spain, and is therefore sufficient and understandable for any potential recipient. The information may refer to or entail additional, separate documentation, which you may request from EDM. If this information contains offers of products, financial instruments, or services, recipients may avail themselves to any complementary or additional documentation that enables them to comply with the terms and conditions of the offer in question.
2) EDM Gestión, S.A. SGIIC is a limited liability company under Spanish law registered in the CNMV’s Special Registry of Collective Investment Scheme Management Companies (Registro Especial de Sociedades Gestoras de Instituciones de Inversión Colectiva) no. 49, and in the Commercial Registry of Madrid, under volume 36,739, sheet 52, page M-658.326, with tax identification no.: A-58.217.175. Its activity includes the representation, management, and administration of Funds and Investment Companies located in Spain and subject to Spanish law, in addition to discretionary portfolio management.
3) Recipients of this information must take into account the fact that any result or data provided may be subject to fees, commissions, taxes, and expenses, which may decrease or alter the gross result, depending on the nature of each case.
4) The instruments included in this information are subject to the potential effects of several common causes, including:
. Market fluctuations due to unforeseen circumstances.
. Liquidity risk and other risks that alter the evolution of the investment.
5) This information contains data that reflect the past performance of the cited products. The data is a reference or record used to reach a conclusion, but is in no way an indisputable indicator of future performance.
6) This documentation may contain data based on currencies foreign to the recipient. Therefore, the possibility of an upward or downward fluctuation in the value of the currency and its effect on the results of the proposed product or instrument should be taken into account.
7) To ensure discretionary portfolio management services are provided within the scope of suitability, MiFID regulations require EDM to collect the necessary information regarding its clients’ investment goals, financial capacity, and investment experience and knowledge. To that end, EDM will obtain the information needed to create an investment profile of each client, consistent with their particular circumstances. Regulation does not permit EDM to render discretionary portfolio management services without the information necessary to assess the suitability of its clients.
8) To obtain the mandatory legal information, please visit the website of the management company, EDM Gestión SA SGIIC, at www.edm.es. You may also obtain a hard copy of this information upon request, free of charge.
9) All the opinions and estimates provided are based on sources considered reliable. Nevertheless, EDM Gestión, SA, SGIIC cannot guarantee their accuracy or integrity, and does not assume liability for any direct or indirect loss that may result from the use of the information provided in this document.
10) The content of this document is intended for informational and advertising purposes only. It is not and cannot be considered investment advice or legal opinion, nor is it intended to substitute the necessary counsel in this regard or constitute an offer to sell or buy. EDM Gestión, SA, SGIIC advises that past returns are not a reliable indicator of future profitability.
