Pablo González (Ábaco Capital): “Now come difficult months, but they are a buying opportunity”

Abaco Fixed Income Mixed Global, which earns 12.76% in the year, is by far the best fund in its category, in which it competes with giants such as M&G (Lux) Optimal Income or Quality Inversión Conservadora. Its small size, of just over 47 million euros of assets, allows it to be much more flexible and enter into debt issues to which the largest funds do not go. Its manager, Pablo González, who is also the firm’s CEO, assures that inflation will end up higher than the market estimates.

How are you preparing the portfolio between now and the end of the year taking into account the omicron variant?

We believe that it is something temporary, but it will not be a factor that radically changes the way out of the pandemic. It seems that this variant is less severe, that the mutations go towards more transmissibility with less severity. From the point of view of the response of the laboratories, the firms speak of having a vaccine in five or six weeks and could have a more effective version in a hundred days. The bad, in the short term, may be the reaction of governments, which may affect some sectors, such as restrictions on tourism. But what happens is not only because of the new variant, but because of the seasonality of the virus and the lack of vaccination in some countries. We will probably enter the worst months between now and February, and it will be a period of uncertainty. But in spring we will have probably left the virus behind and the worst will be over. So we are moderately cautious in the short term, with the idea of ​​gradually building portfolios with exposure to the sectors most affected by Covid.

But is the market going to take it so cautiously?

In the short term, we will see caution, but for the long term it is a buying opportunity, because the exit from the pandemic is in the spring, when people will be vaccinated or infected. Now difficult months are coming but they are a buying opportunity.

Is a lot of volatility to be expected in the first quarter of 2022?

Especially now, in December, because investors are closing the year and do not want to increase the risk of the portfolios. Starting in January, you start to think about rebuilding and you can find cheap things, opportunities, in the face of spring.

In the mixed fund, what has been the strategy this year?

In fixed income, the strategy has been to enter into very liquid issues and, as the fund is small, we can enter into issues below 400 million euros. We are looking for companies where the rating may not be very good, but the quality of their assets is. In fixed income we focus more on assessing the balance sheet than the income statement. I mean the real balance: what assets do you have and what is the market price of those assets. What we are looking for are firms with strong real assets, that can be liquidated and that the value of the assets is twice that of the net debt of the company. This gives us a guarantee that, in the event of suspension of payments, they are protected by their assets and can always be refinanced using their assets as collateral. And we make sure that their assets are no longer collateralized. And if high inflation comes, the value of the assets of these companies would greatly benefit. We would have some protection. The third characteristic we are looking for is not very long durations: practically all bonds have durations of less than five years, because we are not clear where inflation is going. We work with a probability scenario of between 30-40% that rates will have to normalize, and a probability of 10-20% that we will have to go to rates much higher than we had in 2018-19, because inflation is a potential threat.

In what values ​​do you have the most conviction?

Those who can benefit from the end of the pandemic. Car manufacturers seem like a good opportunity to us, companies linked to the catering sector, such as the AB InBev breweries; Ibersol, hotel chains, airlines like Easyjet. Heavily punished companies such as Inmobiliaria del Sur or Galp, which is at its lowest in the last 12 months, although its results are not being bad. And we are also targeting companies that can benefit from a rate hike in the US and UK, banks and insurers, such as Fairfax and Lloyds. We think unemployment levels are starting to drop a lot and central banks are going to have to start raising rates in the second half of next year, or sooner.

To what extent could they feel pressured to overtake it?

There are two key factors: the evolution of the pandemic and the levels of unemployment. There are fewer and fewer people asking for unemployment benefits in the US, and there are many job openings in companies that are not filled, and the firms that we continue to are having difficulty finding workers. And if we start to see that wages begin to rise, the central banks will have no choice but to raise rates, moderately at first, but they will have no choice.

Would that advance the rate hike before the summer?

There is a lot of social and political pressure from the loss of purchasing power and the demand for wage increases, and governments may have to give in to this pressure, if inflation remains high. We have doubts as to whether it will stay in the forecasts of central banks, especially in the Anglo-Saxon countries, but it is likely that it will stay at 3%. The risk is that inflation will not stay in the second semester as central banks think, that wages will have no choice but to rise, and we will enter a feedback process.

And at what level do you expect inflation to stay?

Average inflation in the next four years is hardly going to be below 2.5-3%. That is why the average duration of the portfolio is two and a half years, because for that period I am very positive. It is better to be in short duration corporate debt than in government bonds in long positions, where you have a greater risk of losing purchasing power.