NUR February 2021 Edition

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Contents Page

3 Page


Quick take on Iberian Markets Uncovering the Rise in Hostile Takeovers in Japan



Wallstreetbets vs Big Funds


10 Page


Thematic Investment Extra: What are Call and Put Options?



NIC-UD Fund: Monthly Performance

2 NIC Undergrad Review

Quick Take on Iberian Markets Unemployment forecasts have been revised downwards. The Spanish government disproved predictions of a coronavirus-driven surge in unemployment, in an indication of the effectiveness of furlough schemes across Europe. The OECD and the Bank of Spain had predicted unemployment to be between 22 and 25.5%, however they failed to take account of the impact of the ERTEs (Temporary workforce reduction programmes). This failure translated into a significant difference between forecasts and real unemployment, which turned out to be 16% at the end of 2020, and it is expected to remain around this level for 2021. Portugal’s Finance Ministry assumes slippage in deficit and economic growth forecasts for 2021 due to confinement. The Ministry of Finance says that the public deficit closed last year at 6.3% of GDP, which was below the 7.3% proposed in the October’s State Budget for 2020. However, this does not anticipate an improvement in the budget balance forecast for 2021. The Ministry of Finance assumes that the second wave of the pandemic, and the associated restrictive confinement measures, should lead to a downward revision of the macroeconomic scenario and the budget balance for 2021. For this year, the Government foresaw an economy growth of 5.4% and a deficit of 4.3% of GDP. Portugal should raise €58.3m from the EU to mitigate exit from the UK. Portugal should receive at least €58.3m from the reserve created by the European Union (EU) to support the economic sectors most affected by the UK's exit from the single market. Credit to families in Portugal rises again in December and reaches peak since July 2015. Total loans to households continued to rise in December, reaching €1.21bn, according to data released on 29th January by Banco de Portugal. This represents a yearly increase of 1.6% and it is necessary to go back to July 2015 to find a higher value of loans to individuals. Also, according to the data released by Banco de Portugal, deposits from individuals in resident banks totalled €161.9bn at the end of December.

João Freire The IBEX 35 opens the year with its worst month since October, falling 4% under the weight of the third wave of Covid-19. The third wave of the pandemic ended up being a heavy burden for investors, and the unstoppable rate of contagion and problems with the supply and application of vaccines have been converted into a ballast for the stock exchange. Consequently, the optimism with which the year began in the stock markets has been fading throughout its first month. With a cumulative decline of 3.92%, the IBWX 35 remains the worst European index. Foreign funds in Spain grow €25bn in the year of the pandemic. Despite the pandemic, foreign investment funds grew by €25bn, which is 12.8% more than in the previous year, resulting on a total turnover of €220bn. Its growth stands out strongly when compared to the change (slightly below 0%) of Spanish funds. The leaders continue to control more than half of the market, albeit with less space. The joint participation of BlackRock, JPMorgan Asset Management, Amundi, Morgan Stanley and DWS is now 50.01%, compared to the prior 52%. Bankia exceeds pre-crisis levels in mortgages after a record of €1bn in Q4 of 2020. The crisis has bypassed Bankia's mortgage business. The entity formalized a record of more than €1bn in the Q4 of 2020, allowing it to far exceed the 'pre-Covid-19 levels' in this business segment. Specifically, Bankia dismissed the year with €3.35bn in mortgages already formalized, 14.3% more than the €2.93bn registered at the end of 2019. BBVA prepares an adjustment plan in Spain to increase profitability. BBVA is preparing an adjustment plan that it aims to implement during the first half of the year, focusing first on Spain and the corporate centre, without ruling out transferring the process to other countries where it is present. This has been confirmed during the presentation of the bank's results, marked by the confirmation of a share buyback plan and the announcement of distributing a dividend of €0.059 per share next April, adjusting to the limitations of the ECB.

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Uncovering the Rise in Hostile Takeovers in Japan Japan has been experiencing changes in its corporate culture, from shareholder activism to corporate governance reforms, which led to a rise in hostile takeover attempts in the past years. An overview on hostile takeovers A hostile takeover refers to the acquisition of a company without the approval of the board of directors of the target company. This is not friendly and is done by getting the approval of the shareholders directly. These can occur through a tender offer or proxy battle. A tender offer is a public bid to purchase a large volume of stocks of the target company at a premium, and a proxy battle is an insider action where shareholders try to convince other shareholders to vote the board of directors out. Geographically, hostile takeovers are more common in Anglo-Saxon countries (e.g. UK and US) in comparison to others. The US has seen 4487 hostile takeover attempts from 1988 to 2016, as opposed to Japan, Germany and the Netherlands which have only seen 209, 169 and 200, respectively, in the same time frame. Japan is not seen as an anomaly for hosting fewer hostile takeovers, given its similar numbers to other countries. It has, however, seen a rise in average deal value, from ¥30bn (€238m) in 2009 up to ¥590bn (€4.69bn) in 2019, showing that companies are now more willing to provide unsolicited bids to larger target companies.

Latest News o Nippon Steel plans a tender offer to acquire

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Benedita Velozo

19.9% of Tokyo Rope Manufacturing at a 40% premium. Toshiba hired an anti-activist team from Goldman Sachs as pressure from shareholder activism escalates. The Japanese restaurant chain successfully completed a hostile takeover bid and acquired Ootoya holdings, raising its stake to 47%. Maeda Corp. successfully completed a hostile takeover of Maeda road through a tender offer, raising its stake to 51%. Toshiba won hostile takeover bidding war against Hoya in acquisition of Nuflare, raising its stake to 68.5%.

Hostile takeovers for corporate control A hostile takeover can be a means to ensure the company’s performance is under control, and to ensure shareholders are aligned with the company’s management. It is a solution for effective corporate governance. Corporate governance is the system that ensures that a company is headed in its strategic direction and harmony between stakeholders is maintained. It is there to ensure particular alignment between the owners (shareholders) and managers (e.g. CEO). When there is a misalignment in incentives between shareholders (the principal) and management (agent), this is called an agency problem. As shareholders look for short-term profits in a company, a firm’s management can be more oriented to creating long-term value. The company’s management’s objectives and actions can lead to overall firm underperformance. Later in the article, we will see that Japan’s corporate culture in the past decades has aided in creating such agency problems and poor firm performance. In corporate governance, there are internal and external mechanisms for ensuring this control. Internal could be compensation schemes or shareholders.vvv

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monitoring to ensure management holds the same objectives as shareholders. If companies still do not perform to expectations, then external mechanisms such as hostile takeovers for corporate control come to play. Three months after Toshiba’s hostile takeover of Nuflare, the chairman of the board of directors at Nuflare was replaced. Similarly, in 2019, Itochu raised its stake to 40% through a tender offer in Descente, and five months later, members of the board at Descente were replaced as well.

Hostile takeovers in Japan, why is it so difficult? In order to understand why hostile takeovers are occurring more now, it is important to understand why they were occurring less in the past. A disclaimer to Japan’s corporate environment, it is layered. The main arguments included in this article are merely an overview of the main factors contributing to the unfavourable conditions for nonfriendly takeovers in Japan. These were sourced from academic research articles, news and Bloomberg Intelligence. Japan encompasses a difficult environment for hostile takeovers mainly due to three key barriers: its shareholder landscape, legal ambiguity, and corporate culture.

Shareholder landscape (stableshareholders and cross-shareholding) When considering hostile takeovers, a factor that makes it more attractive to purchase a company is the shareholder structure. In early studies, company ownership was seen as a two-side coin, dispersed or concentrated company ownership. Dispersed refers to when the company is owned by several shareholders with small holdings and very few large-block shareholders (holding at least 5% stake). On the other side, concentrated ownership means that shareholders are mostly large stake. However, what we have come to witness is that types of ownerships can have several nuances to it and in Japan, the forefront differs from such dichotomy. Japan holds two distinct characteristics in its shareholder structure. It can be perceived that companies in Japan hold a seemingly dispersedstable-shareholding landscape. This refers to

shareholders who typically hold less than 5% of shares yet are very loyal to the companies they own. Diffused ownership in companies makes hostile takeovers more common. This is due to the low relationship between management (board of directors) and shareholders, where we can see a rise in agency problems. Japan’s seemingly diffused shareholding landscape has led to hostile takeover attempts, however, the negligence of shareholders’ loyalty to Japanese companies has made it very difficult for them to successfully get through. Moreover, Japanese companies are heavily involved in cross-shareholding. This means that companies hold stakes between each other. These often involve banks owning large stakes in the companies that they lend to. Cross-shareholding can be seen as banks’ means to strengthen longterm bonds with their clients, making hostile takeovers more difficult to execute.

Legal ambiguity Japan’s lack of experience in hostile takeovers means they have not had such opportunities to develop legislation containing clarity and detail as the US and UK have had. Ambiguity in the legislation could have made it a market less attractive for hostile takeovers.

Japan’s corporate culture Japan’s corporate culture has been known for holding a high regard to lifetime employment. Employees are hired and guaranteed employment for life in exchange for loyalty. As they grow older, they can get invited to top-level management positions. This leads companies in Japan to perceive their workplace more as a family than a profit-making machine, which could have contributed to overall firm underperformance over the years. Additionally, the employee loyalty to management could have made it more difficult for other firms to see these companies as targets for acquisition. If we consider Japan’s scores in a culture framework such as Hofstede, we can see the latest trends in corporate governance bode well with the population’s underlying beliefs. Japan is known for being one of the highest risk-averters on earth. Overall, employees try to avoid risks at all costs as to ensure predictability.

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The high score in uncertainty avoidance means, overall, the Japanese have been very slow to change, given the low number of corporate governance reforms in the past. Additionally, regarding long-term orientation, the Japanese score high on this dimension. This shows that Japanese corporate culture values a long-term outlook and planning. This bodes well with its high levels of uncertainty avoidance, creating an environment where it takes time adapt, for example, corporate governance strategies to global standards.

A Changing Climate for Hostile Takeovers, why are there more now? The recent rise in hostile takeovers in Japan has originated from a shift in corporate governance standards and corporate culture. Management is now facing stricter regulations regarding corporate governance reforms, changes in legislations and shareholders are becoming more comfortable in expressing their concerns. The second part of this article considers how these factors have made hostile takeovers more prone to occur in Japan.

Corporate governance increased legislation



In 2015, the corporate governance code was written in Japan, detailing the rules and guidelines companies should ensure in their governance. These recommendations included pushes for more gender diversified boards, adding more independent board members and reducing cross-shareholding between companies. The stewardship code was established in 2014 and the corporate governance code was reformed in 2018, incentivising companies to change their culture and overall code of conduct. In 2015, 50% of boards did not have any independent members. In 2018, more than 80% had at least two. The codes aim to aid in the sustained growth of companies, by formalizing mechanisms companies should use to monitor management. It pushed companies to reduce cross-shareholding, making them easier to be acquired. Furthermore, the rise in hostile takeover cases such as bidding wars between companies, has led to increased government legislations regarding mergers & acquisitions. This has weakened some of the legal barriers previously held against hostile takeovers.

A rise in shareholder activism Shareholder activism refers to people who own stock from a company using their rights as shareholders to pressure the company to generate further returns. According to a Lazard report, Japan was the second country in the world for holding most activist campaigns in 2020. Recently, shareholders have become more willing to express their opinions regarding management and corporates more willing to listen. Shareholders made proposals at the annual meetings of 54 companies in 2020, up by 14 since 2019. In 2019, there were 11 shareholder proposals to remove Japanese companies’ directors, up 83% from previous years. This sudden rise in dialogue between the two parties shows that Japan is experiencing a change in corporate culture, where expressing disagreement is becoming more socially acceptable. Toshiba is currently facing tensions regarding activist investors. The activist fund Effissimo owning 9.9% of stock at Toshiba has been criticising the company’s governance. They refer specifically to their potential misconduct in 2015 due to an accounting scandal which led to Toshiba being demoted to the second section of the Tokyo Stock Exchange in 2017. Effissimo’s founder presented a request to be on the board of directors, to allow for close monitoring of Toshiba’s governance, however, this was met with a rejection. Moreover, Effissimo discussed with other shareholders the concerns it held regarding the company and the board, of which was met with agreement. This showed threat for a potential hostile takeover to change the board. The recent news has pushed the government to create further regulation regarding foreign shareholder’s rights. Nevertheless, these tensions reinforce further how shareholders are increasingly expressing their malcontent with company management, which, at times, has pushed them to engage in hostile takeovers.

Outlook Japan was known in the past as a hostile environment for successful non-friendly acquisitions. These conditions have changed. Continuous modifications to the corporate governance code and a rise in shareholder activism b 6

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have shown that companies are evolving, and it is not the end. The progress is expected to be slow given Japan’s well-established corporate culture, yet the future for corporate governance looks optimistic. As firms reduce their cross-shareholding schemes, improve gender diversity in boards and the number of independent parties in their governance, Japan could see its value-trap finally unleashed. Now, companies might get the incentives they need to generate the profits shareholders want them to.

7 NIC Undergrad Review

Wallstreetbets vs Big Funds How retail investors Outsmarted Institutional Money What happened?

Bernardo Martins

Recently, investors all over the world have been witnessing a dramatic increase in the volatility, as well as in the traded volume of certain stocks. Normally, this would be explained by a big fundamental change within the companies’ business model, or regarding investor´s future expectations, but, interestingly enough, that was not the case. For instance, we have Gamestop, a video game retailor, which stock presented over a 1700% return in less than a month, increasing its market cap from just over $1bn to, as much as, over $22bn at its peak. On the other hand, AMC Entertainment, the largest movie theatre chain in the world, has seen its stock price rallying just under 600% in less than 30 days. Needless to say that similar situations have happened to Blackberry, Bed Bath & Beyond, Nokia, among others.

How did such thing happen? In order to understand what led to this massive stock price increases, firstly, we have to find what do these companies have in common. On the surface, they all seem to have struggling business models, without much future expectations from investors, however, when we look deeper, we realize that all these companies have massive short floats. For instance, Gamestop stock presented a short float of around 140%, this means that, over 100% of the tradable shares outstanding were being shorted mostly by big Wall Street funds, but what does short-selling mean? Short-selling a stock means that a certain investor profits when the stock goes down. In short, the short-seller borrows the stock from the brokerage, and sells it immediately in the market. If the stock goes down and the investor wants to cover the short position, then he would buy the stock again in order to return it to the brokerage, and his profit would be the difference between the initial price and the final one. Needless to say that, by a risk management standpoint, short-sell such a company is not the safest strategy to carry on, since there would not be enough supply of the underlining stock, in case investors were to cover the short positions, which could lead to a massive short-squeeze.

On the other hand, a virtual community of retail investors and traders present on the social media platform Reddit, started to notice this situation, and also started to realize that they could actually profit by taking advantage of the big funds’ “sloppiness” in relation to their short positions in such companies. If this community of around 2m retail investors at the time could somehow create a strong buying pressure in these type of stocks, by either buying the underlying asset, by call options, or any other financial instrument, in a way that it would move the stock price up, which they did, then it would force some institutional investors to cover their shortpositions, since they now faced a higher stock price. As some short-positions started being covered, the institutional investors were forced to buy back the respective stock in order to give it back, since the short float was so high in these companies and the “Wallstreetbets” community was not selling their recently built positions. Consequently, there was not enough supply to satisfy such a strong demand. As expected by the reddit community, the stock price of these companies started to go up in a dramatic way, driven by the snowball effect of more and more funds wanting to close their short positions as fast as possible.

What were the consequences? Due to this insane short-squeeze that happened in certain companies such as Gamestop and AMC, Hedge-Funds like Melvin Capital lost billions and billions of dollars, as this community of retail investors had clearly taken advantage of their “sloppy” risk-management. Furthermore, this situation created such a volatile situation in the stock market that some well-known brokerages used by retail investors, such as Interactive Brokers, Robinhood, Degiro, among many others, have experienced problems during the trading session due to the excessive amount of orders, and some of them, even halted the trading of those same short-squeezed stocks for their clients, leaving only the sell option available, situation which was not well received by the “Wallstreetbets” kkk 8 k

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community and by other retail investors, as it was speculated that brokerages were biased in favour of the institutional investors.

Motivation behind the trade Moreover, it is important to understand that, to some members of this virtual community, this trade was not only for the quick profit, but also a way to send a loud and clear message to the mainstream media and to the hedge funds which, according to some people, allegedly manipulate the financial markets for their own benefit, profiting by taking advantage of the small retail investors. Yet, it is still unclear whether the SEC will take any actions against this situation, as it may be seen as market manipulation by the community of “Wallstreetbets�.

What can we learn from all this? Finally, I would like to end the article, by mentioning that this situation really shows us, finance enthusiasts, that investing is not only about finance or numbers, it also has a very strong human behavior component, which must not be left aside or forgotten.

9 NIC Undergrad Review

Thematic Investment In an ever-changing society, Thematic Investment can offer the opportunity for investors to be at the forefront of change rather than be subjected to it, whilst simultaneously contributing to a better tomorrow. Tomás Forte Vaz

The Normalization of Change In the span of 9 months, we have seen how much things can change, how habits can be altered, how some companies can prosper whilst others become insolvent, but more importantly than the sheer amount of change, it is the velocity at which this change can occur. It took the telephone roughly 50 years to reach 50m users, it took the telephone application “Pokemon Go” just 19 days to reach this same mark, with the aid of globalization and technological advancements, the ability to become `viral´ and reach a larger consumer base has never been so easy. If we look at the current life expectancy in Portugal it currently sits at 81 years, we go back 60 years ago, it was only 63. The rapid acceleration in longevity is driven by a multitude of factors, changes in nutrition and diets, improvements in medical research and investigation in conjunction with the overall increase in standards of living. Furthermore, the implications are as substantial as they are widespread, from increased demand for medical care and nursing homes, to changes in retirement ages, restructuring of pension schemes and even in the way we live our lives. Change has a rippling effect, to implicate change, we need a series of factors to propel it, and this change is then following by further change, this is the power of innovation, it drives further innovation, becoming a vicious cycle, and if we can predict the forming of such cycle before it becomes evident, we can capitalize on it.

Megatrends: predicting




However, trying to predict large scale changes, especially at the speed in which occur is both difficult and speculative, but the underlying principle is rather than predicting the changes themselves, it is about identifying the forces driving these changes, enabling investors to be at the forefront of innovation. These forces are called megatrends, and

they are defined as long-term forces which drive change from an economic and social perspective independent of economic cyclicality.

A deeper look into megatrends The collection of megatrends are as extensive as they are diverse, from nutrition to globalization, from water and cyber security, they aim to the best of their ability: determine the most disruptive forces and the subsequent disrupted industry that will be affected by them. Further expanding on the concept of shifting demographics, growing population in conjunction with higher life expectancy and lower birth rates can revolutionize the way we live. Experts predict an inversion in population pyramids, meaning for government pensions, more pensioners are being support by a smaller relative percentage of workers. Furthermore, although the higher life expectancy has brought many benefits, is has come at an increased cost, higher dependency on medical pills and medication, which then translates to a higher cost to individuals directly or indirectly via taxation. Megatrends drive change, sometimes this change is not as evident, or better yet, the implications of these changes are not evident, but if we can determine what they are, we can have a greater understanding of how tomorrow will look like and how we can stand benefit.

Thematic Investment Thematic Investment is a form of investing which aims at identifying these Megatrends and the underlying investments which stand to benefit from the materialization of those trends. The idea behind thematic investment is investing in what you believe in and believing in what you invest in. This is a spin off to more traditional forms of investments, rather than predicting the change itself or identifying undervalued companies, it is about identifying the the underlying forces behind these vvvv 10

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changes and the companies that will benefit from these changes, which enables a greater conviction in the construction and long-term performance of the portfolio.

A long-term perspective in a shortterm world Thematic Investment can be illustrated by the joining of 3 fundamental characteristics. Firstly, in a world where short termism is prominent, from quarterly reports to overreactions to price changes, having a long-term perspective enables investors to exploit the inefficiencies caused by short-termism. The idea can be illustrated by asking an individual to analyse a 4 by 4 painting at a palms distance, no matter how much she or he may speculate or extrapolate from what is in front of them, it is only when they take a step or two back that they are truly able to appreciate the whole picture, and the same ideology can be applied to investments, we often fail to see the big picture. Secondly, it is the idea of benchmark agnostic, that is, indexes tend to gravitate towards companies with large market capitalizations, giving priority to past performance and give little insight to changes in the future. As such Thematic Investment does not use benchmarks as a basis for selection of its entities on the contrary to many other forms of investing. And finally, the idea of believing in what you invest in, by understanding what one is investing in, it enables a higher risk tolerance, resulting in concentrated portfolios typically composed of 40 to 50 entities of strong conviction.

Case Study: BlackRock Global Fund Sustainable Energy Fund (Class D2 USD) An example of Thematic Investment is the BGF Sustainable Energy Fund, targeting at the development of renewable energy sources globally. With a total fund size of $5.07bn, BCF Sustainable Energy consists of 48 entities with the largest holdings consisting of Nextera Energy Inc (4.78%), Enel S.p.A (4.65%) and Schneider Electric SE (3.67%), outlining the idea of being a portfolio of conviction and exposure to the relevant industry. This translates to high risk, as using the BlackRock Risk Indicator, it recorded a 6 out of 7 (7 being the

highest possible risk and 1 the lowest). During the first 10-year period the fund was at a net loss after a strong performance in the first 2 years, nonetheless we must be reminded that these funds are long term, and once analysing them we must take the same approach. Currently, after a significant fall in the stock market crash of 2020, the fund has grown notoriously, recording an annualized return of 51.64% in 2020. Whilst this is only one example, it puts in practice the fundamentals explained previously, targeting long term performance and with high risk in the short term, but if the megatrend and respective entities are well selected, it may lead to a large payoff in the future. Historical Net Asset Value (Growth of Hypothetical $10)

Source: BlackRock

Why Thematic Investment now? The global pandemic for the many social and economic consequences it has brought has allowed a time for reflection, or better yet a need to do, of prioritization, and better understanding of the importance of collective initiatives to confront growing obstacles. With the momentum of Environmental, Social and Corporate Governance derived from a growing interest of younger generations in a sustainable tomorrow, Thematic Investment offers the opportunity of coinciding capital gains with being part of the solution, and this message had a much larger resonance with potential investors than investing in an ETF of the S&P 500, it is easier to invest when you know and care about what you are investing in, this is a key aspect of Thematic Investments historical growth.

The rise of Thematic Investment Global Thematic Funds have been growing at a significant rate, in the last 10 years, they have grown by almost 300%, driven primarily by European and Asian market with the United States lagging behind. Currently occupying 1% of ffff 11

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global equity funds, a decade ago it was only 0,1% outlining the upwards trend of thematic investment both in absolute terms and relative ones. Addressing the net asset flows, the greater percentage of net investment in these funds, came post 2015 with a negative trend in Q4 of 2018, further supporting the growing momentum and interest for these investments. Whilst Thematic Investment has been on the upwards trend, based on greater preoccupation of investors with a sustainable future and the change driven world we live in, the performance of these funds will play a pivotal role in determining whether Thematic Investment is here to stay or a bridge for something else.

In short, it is, but given the current climate driving towards sustainability can to some extent justify this short-term performance hike, but only time will really tell if Thematic Investment is here to stay.

Concluding Remarks With that I would like to leave you with one last quote: “Change is inevitable, the question lies, do we choose to acclimatize to it or capitalize on it�.

Underperformance‌ so far If we look at historic rates, using the Morning Start report, we can see that the majority of Global Thematic Funds at the 10-year mark have underperformed, with a mortality rate of just under 60% and only 26% outperforming the MSCI World Index, and if we were to take into account management fees this number is even smaller. Nonetheless the short-term performance of these funds is rather impressive, which begs a more interesting question, is Thematic Investment really a long-term investment?

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Extra: What are Call and Put Options? Call and Put options were created back in 1872, by Russel Sage, a well-known American Financer born in New York. Effectively, they are examples of stock derivatives because their value is derived from the value of an underlying stock. A call option gives the buyer the right, but not the obligation, to buy the underlying security at the strike price, at or within a specific period. A put option gives the buyer the ability, but not the obligation, to sell the underlying stock at the exercise price, at or within a specified time. Both are composed by 5 elements: option type (call/put), security, expiring date, strike price and premium. In order to explain each component lets analyse the following situation. Imagine you own an airline company, one of your main inputs is fuel with a current price of 1$ per gallon. Some news just came out announcing that the price of fuel is expected to steadily increase throughout the next five years, reaching 2$ per gallon representing a 100% increase. Your airline company, with the purpose of reducing risk and saving future costs, closes a deal with the fuel supplier in which it has the right to buy (call option) the jet fuel (underlying security) at the fixed price of 1$ per gallon (strike price), until January 2025 (expiring date). Upon buying an option contract, the investor pays a cost per option share, that is the premium. This cost must be taken into consideration when calculating the breakeven point, which will be for both options type the cost per option plus the strike price. In a call option, only above this value will the investor have returns, while for a put option only below. Note that, since this stock derivatives are not obligations, the maximum loss an investor can take is the premium, a rational investor will not exercise his call/put right when the stock price is below/above the exercise price. For an investor, call options have unlimited potential gains because equities can increase infinitely, while put options maximum return is the value of the underlying security, nevertheless, unlike equities which maximum loss is the stock value, options’ maximum loss is the premium. Therefore, call and put options are usually perceived as being less risky than equities, in fact, option contracts were initially

Guilherme Santos were initially conceived as a way to reduce risk through hedging against the market volatility. If the investor’s analysis on a stock is well done, options trading is no less risky than trading individual issues of stocks and bonds, it may even be more lucrative. It all comes down to the bottomline strategy of buying a call option if the stock price is expected to increase, buying a put option if the price is expected to decrease. Nevertheless, upon considering purchasing options contracts consider that unlike equities they do not pay dividends, and the market has asymmetric information, therefore your research on the underlying security and respective expected price evolution, will never contemplate all factors. An investor is able to either buy call/put options or write them, also known as “writing” a put or a call, the decision on where to stand depends on his strategy, portfolio and market analysis. If a call option is written, then the investor has the obligation to sell the security at the strike price to the option buyer if they exercise the option, if a put option is written then the investor has the obligation to buy the security at a predetermined price from the option buyer if they exercise the option. The return on this side mirrors the inverse of the buyside.

Source: QuantInsti

Source: QuantInsti

Traditionally, put options are fundamentally bearish strategies, since they are used to speculate on a potential decline in the underlying stock, while call options are perceived as bullish strategies. However, if instead of buying an option contract you “write it”, the strategy purpose is reversed.

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Additionally, upon emission, the options contracts can be traded as a financial asset. Its market price is determined by the stock’s current price, time to expiration, volatility, interest rates, cash dividends paid and intrinsic value. There are several options in terms of pricing models, the most widely used are the Black-Schloles model, the binomial model, and the trinomial model. In conclusion, put and call options are stock derivatives used to hedge against the market volatility, allowing the investor to cover the downside of the portfolio. Although their potential gains are very attractive, these instruments should only be used by experienced investors due to the high level of financial knowledge required, when not used correctly, the individual may lose the whole premium.

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NIC-UD Fund Joe Biden’s inauguration and GameStop’s trading frenzy were the two defining moments for markets this month Bernardo Patrício

Global Markets As the new year arrives, a breath of hopefulness sets in the markets. The optimistic prospects of 3 announced vaccines and the inauguration of Joe Biden in the U.S. were soon demolished by an acceleration of COVID-19 cases due to a British and South African variant, which are more contagious and, allegedly, more fatal. Lockdown measures have been put in place all over Europe causing more pressure on businesses as the pandemic reaches its 1st year anniversary since it was first reported to the world. The Capitol Riot of January 6th shocked the world as the pinnacle of democracy in the world was attacked by ferocious “Stop the steal” supporters, rallied up by former president Trump. It sets a bad precedent for the future and it caused major corporations to stop funding both political nnnnnnnnn

campaigns and the ban of Parler by Amazon from the AWS platform. Although the UK had already officially left the EU on January 31st of 2020, a trade deal was only agreed on December 24th. It was agreed that both blocks could still trade goods and services without importation taxes, but Boris Johnson had to accept shared rules and workers’ rights, putting an end to a nearly 5-year process. Reddit traders were in the spotlight as the biggest short squeeze has been taking place in Wall Street. GameStop spiked from $18 to $500 in a matter of days due an army of young traders bought leveraged long positions to apply pressure to hedge funds who were short the stock. Melvin Capital, the biggest victim, has lost roughly 50% of its assets due to this genius move.

Current Positions Currently, our cash position weights more than a quarter of our portfolio and that’s mainly due to the sale of our EDP position back in December. We will continue to focus on our long-term value investing philosophy and will apply our cash on new positions or increase the weight of overperforming ones, such as the eSport and Gaming ETF and the EV Battery ETF. Our best performing positions are Gilead Sciences and L&G Battery Value-Chain ETF, while PCG and Walt Disney Co. slided during January after gaining momentum in December. Nº 1

Positions Weight on Total Equity

Entertainment US Pharma US




Streaming/Entertainment US Equity

Current Price

Open Price










US Equity




Social Media/Internet

US Equity





US Equity





US Equity




EV Battery





Consumer Products

EU Equity



Gold Miner

CND Equity



Internet US

27,60% 9,27%

Utilities US Gaming ETF Renewables US



Electric Batteries ETF Gold Miner


6,19% 12,54% 3,81%


Consumer Products EU Cash


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NIC-UD Share Price (Inception Cumulative Returns) 4% 3% 2% 1% 0% 12/31/2020








Benchmark Analysis

Monthly Performance

The Fund’s share price returned 3.39% this month, outperforming major benchmarks such as the MSCI World Index and S&P 500 by fair amount. January was plagued by a resurgence of COVID-19 and slower than expected vaccines roll-out with new variants coming to play and shaking short term economic prospects, making major indices to fall. Europe has been the worst performer with its index losing more than 2.5%, a signal that investors are afraid of how the new lockdown measures will affect the region’s short and medium term recovery. Still, FANG+, the index covering the biggest blue-chip tech companies around the world, returned 3.03%, with companies such as Netflix and Tesla experiencing a surge in their share price, even after a slide in social media companies due to the ban of former president Donald Trump. Japan and China held steady in their ground, despite suffering a recent surge in COVID-19 and slowing manufacturing growth, respectively.






-10% ETF #1 Stock Stock Stock Stock Stock ETF #2 Stock Stock #1 #2 #3 #4 #5 #6 #7

Portfolio Returns vs Benchmarks 4%



3% 2% 0,80%



0% -1%

-0,43% -1,11%

-2% -3%

Portfolio (Share Pri ce)

MSCI World Index


-2,52% S&P 500 FTSE 100 Eurostoxx Nikkei 225 Shanghai FANG+ 50 Composi te

Corporate News As discussed before, social media companies were in the spotlight this month due to the incitement of insurrection in far-right group chats in Facebook, Whatsapp, Parler, (…), which made major tech companies to side against Donald Trump and his most radical followers. The social media accounts of the former “POTUS” were locked with the argument of infringement of the firm’s policy guidelines about the incitement of violence. The topic of freedom of speech and the Big Tech control in shutting a person’s voice were central in January and may cause an increase in regulation to weaken this power. Tesla has its first profitable year, a landmark 18 years in the making, after reporting net income of $721m. Still, Hyundai announced that it is in talks with Apple to make an electric self-driving vehicle to compete with the biggest car maker by market capitalization, Tesla. Despite the booming of their streaming business unit, Disney is still suffering from the pandemic and increased lockdown measures effects and had to cancel spring cruises dates until June of this year, while Netflix posted better than expected subscriber growth and reaching the 200m active accounts landmark. 16 NIC Undergrad Review

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