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Mexico is fast emerging as an attractive destination for global investors. Although the country plays host to sound economic fundamentals and ample liquidity, Mexico’s financial services sector is suffering from a lack of focus, as well as an overreliance on short-term gains ahead of long-term prosperity.
In answer to the country’s shortfalls in investment management, some firms are beginning to hone in and take advantage of the many opportunities that exist in what remains a hospitable marketplace for investors. We spoke to Salvador Galindo Cuspinera, CIO of SURA Investment Management Mexico, about the country’s investment landscape and how the firm has managed to differentiate its services from its competitors’.
What do investors expect when looking at Mexico? Is the country proving to be an attractive destination for global investors?
The Mexican market (like many other emerging markets) has benefited from ample liquidity stemming from those in more developed markets seeking more attractive rates.
Mexico has very good macroeconomic fundamentals and, on top of that, offers a very positive outlook for future growth by remaining closely linked to the US, principally in the areas of trade (see Fig. 1) and energy, and by implementing much-needed structural reforms. The US shale boom and on-going talks on the Trans-Pacific Partnership, combined with good demographics, also reinforce the prospect of higher growth in the coming years. Low labour costs and a cheap currency provide global investors with an attractive investment destination. However, the massive flow of capital has made the Mexican market expensive – especially the stock market – so we expect the Mexican stock market to provide a stable outlook but to underperform against international equity markets.
Elsewhere, the bond market seems to have a bit more space to over-perform against international debt markets, especially considering that the central bank has room to lower short-term rates. However, we believe that long-term rates are not compensating for the risks to which they are exposed. Although they still offer a significant spread to other markets, we prefer to remain invested in the short end, anticipating an increase in global bond rates.
The Mexican peso is still fundamentally cheap, as it offers an overnight rate much higher than its major counterparts, with better growth prospects and stable inflation differentials. We believe that interest rate differentials, better growth prospects and limited inflation risks will lead to a continued appreciation of the peso.
How does SURA differ from other Mexican asset managers?
Most asset managers in Mexico are part of a financial group with different business units, such as a brokerage house, a corporate and investment bank, or both, making them a one-stop shop that offers a variety of services. These are simply financial supermarkets with diverse clientele but without any special area of competency or specific focus.
SURA Investment Management (SIM), on the other hand, only provides asset management services. This is a key differentiator since all of its operations and resource structures are designed to provide clients with the best standard of service, as well as a focus on achieving superior risk adjusted returns.
How does SIM differentiate itself to gain an advantage over its competitors?
I believe that SIM has two particular advantages over its competitors: an operational structure designed to generate superior investment capabilities, and a unique investment philosophy.
Integrated financial companies leverage their core resources and personnel to provide all kinds of financial services (among them asset management). However, asset management is often not a priority for financial groups and their incentive programmes often result in neglecting or even subordinating the asset management unit to investment banking, brokerage or commercial banking units.
SURA only focuses on providing asset management. That requires us to have specialised areas and develop core competencies by using unique processes and human capabilities. Those include investment analysis and portfolio management, operational and execution efficiency, and highly specialised service and relationship management staff.
Let me give you an example: SIM has a clear separation of the portfolio management and trading functions (something that is pretty standard among the top asset managers worldwide but is seldom found within the Mexican financial groups). Both functions are key to achieving investment success but require specialised resources. SIM has a portfolio management group formed by portfolio managers and analysts who focus exclusively on generating investment strategies and ideas, as well as a separate trading group that focuses on the best possible execution and operational efficiency.
Most of our competitors have a combined group that performs both trading and portfolio management, and often leverages the analysis at the sell side of the business to inform its investment strategies. Another standard practice that we have is to trade with as many counterparts as possible to achieve best execution, whereas most of our competitors trade with their own sell side desks, meaning that best execution is not a common practice for them.
What is SURA’s investment philosophy?
With respect to the investment philosophy, we believe in active management, and our aim is to generate superior risk-adjusted returns for our clients. To achieve this, we use an investment process based on fundamental analysis and a medium term horizon.
Our goal is to provide an investment performance that not only compares favourably with a benchmark of similar risk but also with its peer group of competitor funds.
The process involves analysing macroeconomic and fundamental factors, and finding strategies that generate a consistent medium term performance above the benchmark and also allow our funds to be positioned in the top quartile of its category among peers.
Security selection is made from a fundamental perspective. We seek to invest in instruments that not only offer a good rate of expected return but also compensate us for the risk we are taking. That sometimes means looking for low-risk instruments that have been neglected by market participants and, other times, making a careful selection of those securities with high rates of return that are properly discounting their level of risk.
For fixed income and debt, the strategies we use vary depending on the economic environment but often include relative value between government curves (changing exposure between nominal and real rates, as well as finding and exploiting attractive nodes within each curve), credit strategies for security selection and overall allocation to the asset class and anticipation strategies (where the duration of the funds is modified to anticipate changes in the levels of interest rates).
Equity strategies are also heavily based on economic and fundamental factors, and are mostly focused on security selection. Relative value and market timing strategies are also used both for the equity strategy and for the tactical asset allocation strategies that switch the allocation from one asset class to the others.
Another fundamental part of our philosophy is the focus on the medium term view; we know that excessive trading is detrimental to our clients, so our focus is always set on our medium term. We do not chase the market; we hold our views and avoid constantly rotating the portfolios, and long-term consistency is key (even if that means holding on to securities that have recently underperformed but that we believe will generate superior returns in the long term).
One last point I would like to emphasise is risk management: we know that taking excessive risk might lead to higher returns, but our focus is to generate superior returns with a limited amount of risk. That is why we focus on consistency and a medium term view, which are fundamental for managing tracking error, maintaining a specified level of volatility and generating high information ratios.
Risk management is essential to achieve a consistent performance. That is why, in addition to the risk management area, we have developed proprietary quantitative tools where portfolio managers can directly visualise in advance the impact of investment strategies in each of the funds, allowing them to adjust the exposure level of each fund to limit the desired level of risk.
How does SURA decide on an investment and then carry it out?
The portfolio managers for each asset class are responsible for setting the strategy of each portfolio and making all the decisions about their management. Portfolio managers are each supported by fundamental analysts who cover both the equity and the credit markets, constantly monitoring securities and generating investment ideas. A quantitative analysis team also helps the managers by developing and updating portfolio management tools that allow them to monitor positioning and risk exposures of the portfolios in real time.
Additionally, managers and analysts are part of an investment committee, which regularly evaluates market trends and economic conditions to determine opportunities and risks, and to generate a view for the medium term outlook.
Once the PM makes an investment decision, the trading team carries out the implementation, focusing on best execution. The risk management group also helps monitor exposures and ensures that the portfolios are at all times in line with the specified investment mandate.
For further information email surainvestment@suramexico.com
