“Portuguese are starting to become less conservative in terms of risk exposure”

To obtain a higher return, the Portuguese are willing to invest in shares, vinca João Pratas, president of the Portuguese Association of Investment Funds and Pensions and Patrimony (APFIPP). Fund performance for the rest of the year depends heavily on the eventual second wave of the pandemic.

How do you rate the performance of investment funds available in Portugal, both in terms of returns and subscription flows? Which categories would you highlight?
With regard to returns, the performance of investment funds is closely related to the assets and markets in which they invest, so, of course, recent performance is negatively affected by the pandemic caused by Covid-19 and the impact it has caused in the economy and, of course, in the financial markets.

There was a very sharp drop in March, but since then, we have seen a recovery, in line with what has been observed in the main markets. In fact, considering the three months ended on June 30, there are several funds with an effective return greater than 10%, although, in the period since the end of 2019, the majority still show a negative return.

It is mainly the Funds with the greatest exposure to the shareholder segment that were most affected, both in the reduction in profitability observed in March and, subsequently, in the recovery that has occurred since then.
With regard to subscription flows, and at a time when we are still waiting for the June results, the balance this year is negative at 86 million euros, influenced by the higher volume of redemptions observed in March this year, when there was a balance negative of almost 600 million euros of net subscriptions.
The months of January and, in particular, February of this year were particularly positive, with net subscriptions of 172 million euros and 367 million euros, respectively. May was again a positive month, with net inflows of 38 million euros.

We have noticed, since 2019, an increase in the demand for PPR and, also, for multi-active funds, the categories most sought after by national savers, corresponding, also, to the categories with the highest volume of assets under management. In other words, it seems that the pattern of high conservatism in the applications of the Portuguese who are looking for a higher return are willing to invest in products with some exposure to the stock market.

How did the Covid-19 pandemic and the authorities' responses (political and monetary) affect performance?
Covid-19 caused a sudden and significant slowdown in the world economy, with a very relevant impact in terms of the expected earnings of companies, the real size of which, not only until now, but in the coming months, has yet to be determined. The confinement enacted in many countries, all over the world, led to the temporary closure of many companies and the markets reacted immediately, in the months of February and March, with a significant drop in prices which, obviously, had repercussions on the performance of funds.

As mentioned, the following months brought significant recoveries from these initial losses, but it is admitted that in the current scenario, it is still too early to determine what the direction of evolution will be in the near future.
There are at least three factors that will be decisive, although their weight is still unknown. First, the reopening of world economies. Second, public aid to the world economy (authorities in both the EU and the USA have come up with very significant support plans that will have given the markets some confidence at this stage). Third, the interest of investors in buying shares in companies that, in principle, will have declines in their results compared to the recent past, in contrast to the debt, which indicatively will have an even lower return than it has had.

Regarding the political response, it has been very different worldwide. In Portugal, I think that the way to face a problem that was unknown (1918 happened a long time ago), was quite good at all levels, namely because the various sovereign bodies (Presidency, Government and opposition) were, in general terms, cooperating with the options taken. The authorities were quick to implement measures to mitigate the negative effects of the pandemic, namely by instituting greater social support, simplifying the lay-off regime and expanding the moratorium system.

At European level, the European Commission has approved a plan to support economies that is very significant and robust, and the European Council is expected to agree on it at a meeting scheduled for next week.

Naturally, these measures have somehow sustained household incomes at this stage, avoiding an even more negative impact on the economy and the performance of companies, but, unfortunately, the problem is not over and strict management will have to continue. Now in a complex balance of (necessary) opening of the economy and in the control of the disease.

How can these and other factors influence the performance of the funds in the second half?
The evolution of Covid-19 will certainly continue to condition the financial markets and, in this way, the performance of Investment Funds, not only those that invest in securities, but also Real Estate Funds. If the discovery of an effective cure and / or a vaccine in the coming months could mean a faster economic recovery, an eventual second wave could have very negative effects on citizens and the economy.

On the other hand, the real impact of Covid-19 for companies is yet to be determined. Many are suffering from economic contraction and restrictions on the movement of people and goods. Profits will surely be affected and many companies will have to enter or have already gone through restructuring processes or even close.

The way companies adapt to this new reality will be vital for their survival. The digital economy will undoubtedly be strengthened from this crisis and it will be the most advanced companies in this area that are better equipped, not only to overcome the crisis but to emerge more strengthened.

With regard to asset management, it is up to managers, as always, to try to identify, in the current situation, the sectors and companies that have the best conditions for success.

How do you see the outlook for the PSI 20 index? Do you think that stocks in this index and other Portuguese assets can be good bets for funds?
One of the sectors that has shown the most dynamism in the national economy in recent years is tourism, a sector that has been most affected by the Covid-19 pandemic. The recent non-inclusion of Portugal in the air corridors that are being opened by some European countries contributes, even more, to aggravate the crisis that all agents directly related to this sector have been facing in recent months.

Although, in the PSI-20, there are no companies that dedicate themselves exclusively to the tourism sector, they will not fail to be affected by the breakdown of a sector that has a leading role in the creation of wealth and employment. In this respect, the speed with which Portugal is able to be present in the list of air corridors will be preponderant.
Additionally, Portugal is an open economy, entirely open in the European market, so the performance of national companies and, well, those listed on the PSI-20 will depend, to a large extent, on what the behavior will be and the performance of financial markets in the rest of the European Union.

How are the Portuguese reacting to the economic consequences of the pandemic from the point of view of savings and investment management?
Eurostat recently released data on the evolution of savings in eurozone households in the first quarter of this year, showing a maximum of 5 years, with a savings rate of 16,90%.

Portuguese households followed this trend, with the savings rate reaching 8,79%, just over half the average of our European partners. This increase has already been noticed since the first quarter of 2019, when this indicator had a value of 5,87%, but we are still far from the European average and, since the impact of the pandemic has been more evident since March, I believe that this increase in savings will not be linked to the current crisis.

Even so, economic theory and historical data demonstrate that, in times of crisis and greater uncertainty, there is a greater concern with savings. It is certain, however, that an eventual decrease in disposable income (as a result of the lay-off or even unemployment caused by Covid-19) necessarily translates into a lesser capacity to save, since there are essential goods that are not possible to do without. We therefore have to wait for more data to understand the impact of this pandemic, also in terms of household savings.

With regard, in particular, to savings applied to investment funds and, particularly, to national funds, it is still too early to draw conclusions. On the one hand, as I mentioned earlier, in the month of March, when the pandemic hit Portugal and the state of emergency was declared, we had a very high volume of rescues. The month of April, although negative, already showed greater tranquility on the part of investors and May returned to be positive, in terms of net subscriptions.

Investment funds, due to their characteristics, namely, professional and diligent management, attentive supervision and high transparency and liquidity, have the ideal characteristics for the application of savings. The fact that, in Portugal, unlike other jurisdictions, there has been no end of subscriptions in funds or the cancellation of redemptions reinforces the confidence that should be placed in national funds.

What would APFIPP like to see improved in the regulation and taxation of investment funds in Portugal?
The regulation of asset management activity and, in particular, investment funds, derives, to a large extent, from legislation issued by the institutions of the European Union (directives and regulations) that has application in all EU countries.

To the extent that the same legislation subsequently allows funds domiciled in any one member state, to be freely traded in the rest, which we have been asking the competent authorities (government and regulators) for a long time. is that national funds and managers are not subject to more stringent requirements than those in force in other jurisdictions because this has a detrimental impact on our ability to compete competitively with funds and managers in those jurisdictions.

I should note, however, that we are pleased to note that there has been a concern by the competent authorities to eliminate this gold-plating.

With regard to taxation, there was a significant reform in 2015, which changed the current paradigm of taxation in the sphere of the fund to an outgoing taxation, in the sphere of investors, which allowed, at this level, that national funds compete on an equal footing with the thousands of foreign funds that are traded in our territory.

There are, however, two situations that need to be reviewed: first, the adoption of taxation equivalent to that of other savings instruments. In order to avoid tax arbitrage, that is, the choice of certain investment products motivated only by the most favorable taxation regime and not because they are better suited to the savers' characteristics, it is absolutely essential that the tax framework is equitable and that the participants in investment funds benefit from the same reduction in the tax base that occurs in these other products, when the investment is held for more than 5 and 8 years.

In another aspect, the investor should not be taxed when he changes his allocation between different funds, so a mechanism should be implemented, similarly to what happens in Spain, in which taxation would only occur when there is an effective redemption by the Participants, allowing that tax on transfers between Funds.

How does APFIPP see and foresee the growing importance of ESG criteria in the market, both at European and international level?
The theme of sustainable investment is not, according to APFIPP, a fad. It is a trend that is here to stay and thankfully it is.

Environmental, social and governance matters are important to ensure the long-term sustainability of companies, the environment and people.

Markets are part of a broader ecosystem and cannot remain apart from this problem, but should instead be part of the solution, helping to channel the essential economic resources to companies and projects that contribute most to this true global goal that is to guarantee the social and economic well-being of all who live on this planet. At the regulatory level, however, it will have significant implications for the entire industry, because it is a very complex matter. The incorporation of ESG factors in the management of funds and pensions is imposed by European regulations, which will soon come into force, but will be an increasing requirement on the part of investors, impelling managers to be increasingly demanding in these areas. APFIPP and its management, as it considers sustainable investment as one of its priorities - and given the complexity of the theme - already promoted this year, two training courses for associates on this matter.

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