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“Argentina will Continue to be a High-Risk Country, but at Levels that Exceed the Reasonable Possibilities of Default”

“Argentina va a continuar siendo un país de alto riesgo, pero a niveles que exceden las posibilidades razonables de default” — Pixabay CC0 Public Domain. “Argentina will Continue to be a High-Risk Country, but at Levels that Exceed the Reasonable Possibilities of Default”

In an exclusive interview with Gorky Urquieta, Global Co-Head of Emerging Market Debt Neuberger Berman, Funds Society has had the opportunity to talk about their current vision and perspectives of emerging markets debt after the instability experienced in these markets during last August.

The current situation of emerging markets is different from that of 2013 or 2015 Neuberger Berman’s assessment of the current situation of emerging markets differs significantly from what happened in 2013 or 2015, when emerging markets experienced significant spread extensions and currency falls. Although they admit that there is a certain deceleration stage, and that some countries will have to make more aggressive adjustments in monetary policy, they also point out that there are others that are in relatively good conditions despite a more complicated current environment. In particular, Urquieta points out that: “There are countries that are in relatively good conditions in Latin America, countries such as Mexico and Colombia, and even Brazil, which is recovering from a hard recession, but there are vulnerabilities that have become more evident in recent times due to the rate hike, the expectation of rising US Treasury rates and the revaluation of the dollar that has complicated refinancing prospects, access to liquidity, and financial conditions for markets in general.”

Main risks: trade conflict and rate hikes in the United States

At Neuberger Berman, they believe that one of the reasons for the adjustment of emerging markets has to do with the uncertainty with respect to “trade,” not only the trade dispute between China and the United States, but also with regard to the uncertainty generated before an agreement was reached in NAFTA. Urquieta concludes: “In general, this whole protectionist attitude in the US is clearly not prone to lead to growth in world trade and that will affect emerging markets to a greater or lesser degree.”

In particular, and with respect to the trade conflict between China and the United States, he acknowledges that there is a risk factor as to how it will affect the Chinese economy’s demand for raw materials, although he states that it’s in a very good position to react on the side of monetary and fiscal policy favored by low pressure for the devaluation of the renminbi.

However, he acknowledges that part of this risk in emerging debt assets has already been priced in: “It’s possibly the only risk asset which has put some price on that conflict, via commodities.” Despite this, he explains that Asian currencies that may be more exposed, such as, for example, the Korean Yuan or the Taiwanese dollar, have not been so affected, thanks to their good fundamentals.

When asked about another of the major risks that concern investors, the rate hike by the Fed, Urquieta says that some of these are already priced in and justify the appreciation of the dollar with respect to its base. However, he does not expect rates to rise more than twice, due to his doubts about the ability of the American economy to maintain its current growth rate, which is close to 4%, and adds: “As we approach 2019, growth expectations will probably begin to cool down a bit and we think that the FED will not end up raising rates 3 or 4 times.”

Opportunities in Latin America: Brazil, Argentina, and Mexico

After strong corrections in the markets, there are usually purchase opportunities due to the indiscriminate sale of assets that occurs in situations of uncertainty. Urquieta explains: “In times of stress, the market starts to act without differentiating; and we saw that in August, when the lira collapsed and the Argentine peso fared worse than the lira. That example indicates that when we see that kind of reaction it means that the market is capitulating, that is to say that it has reached a point that does not distinguish, and that indiscriminate fall creates many opportunities “

As regards their interest in debt markets in foreign currency and local markets, Brazil is a country that attracts them greatly. While it is true that local rates and the real have suffered a lot of pressure due to political uncertainty, there will potentially be a point of entry that has not yet been defined, but which will be after the first round of elections.

Argentine debt assets in foreign currency are a type of asset that also seems interesting, despite all the uncertainty surrounding the country, and he explains why: “Its market price, with the current spreads, as far as regards the probability of default, seems a bit excessive. But it‘s still a high risk country, which will probably continue to be high risk for a while, but it’s already at levels that exceed reasonable possibilities of default.”

Going into greater detail concerning the Argentine political issue, they agree that it’s complicated, but they also believe that Macri still has a relatively stable level of support, at around 40%, and that necessary adjustment plans for 2019 will be approved. They do not believe that there is any significant risk of government collapse and he adds: “Conditions would have to deteriorate greatly, a break with the fund, the program aborted for some reason, there would have to be a very extraordinary event outside of Argentina.”

“On the part of the markets we may have seen the worst,” Urquieta adds regarding the Argentine markets, although he acknowledges that the Argentine economy will suffer a severe adjustment and will be in negative growth for a long time. As for the Argentine peso, he believes that its fall is beginning to be under control, mainly because the domestic market begins to have more confidence and he adds: “That will follow a course and will eventually turn into a virtuous cycle, after having been a vicious cycle, where the outflow of capital, and the more aggressive sale of pesos to buy dollars has created a vicious circle. The stability of the exchange rate is a requirement for the rest to begin to recompose.”

Finally, he adds that, in their opinion, Mexico is another market to be taken into account, as it is a highly rated segment that seems interesting on the side of the handles and debt in foreign currency.

Portfolio recommendations

Given the current market environment and the variety of strategies that Neuberger Berman offers, we asked Gorky Urquieta about his investment recommendations and he presents the following 3 alternatives based on the risk profile.

On the more conservative side, he talks about short duration which is a fairly conservative strategy within emerging markets due to the duration profile, its foreign exchange risk, being exclusively foreign currency, and the credit quality of its portfolio with an average investment grade of BBB- . He also adds that, due to the pressure that has been observed in the short part of the curves of emerging markets during the month of August, the YTD (yield to maturity) was expanded by 100 basis points to stand above 5.8% , and thanks to this it is quite possible that they exceed the return target set at 3% over cash (3 month treasury rates).

On the opposite side, are the strategies in local currency and he adds: “If things recover, it is the strategy that has the most upside.” He also explains that based on their own analyses, following market falls exceeding 10 %, there will frequently be a rebound in prices in the following one to three months, and he confirms that the market has fallen 10% since February’s highs.

In between both strategies, there’s debt in foreign currency. Urquieta adds that although it‘s true that the spread of the benchmark has expanded 100 basis points since the beginning of the year to levels of 375 basis points, it’s mainly due to the component with credit rating below investment grade, which represents 49% of the benchmark , and whose spreads have expanded between 175-180 basis points, and half of this movement has occurred in August.

Gorky Urquieta joined Neuberger Berman in 2013. He is currently a Senior Portfolio Manager and Co-Head of the Emerging Markets Debt team, responsible for the management of numerous strategies including the following: Hard Currency, Local Currency, Corporate Debt, Short Duration, Blend, Blend Investment Grade, Asian Hard Currency, and China Bond Fund, with assets under management totaling 18 billion USD.

Founded in 1939, Neuberger Berman is a privately owned, 100% independent company. It has offices in 32 cities around the world, assets under management of approximately 304 billion dollars, and more than 40 UCITS funds registered in Ireland. With over 500 professional investors and approximately 2,0000 employees in total, Neuberger Berman stands out for its extensive offer in equities, fixed income and alternative products.

Marc Pinto (Janus Henderson Investors): “Companies that Are Benefiting from Disruption Are in the Growth Category”

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According to Marc Pinto, Portfolio Manager at the Janus Henderson Balanced Fund investment team, the three characteristics that differentiate his portfolio are: the growth orientation in the equity sleeve of their strategy, the dinamically managed allocation between equity and fixed income, and the fact that the equity team and the fixed income team maintain a very collaborative working relationship.

The latter being especially noticeable when the investment team makes decisions on asset allocation, where equity and fixed income teams must compete for capital, taking into account the opportunities offered by their markets.

Additionally, the investment team has a three-way approach for disruption. They think about the companies that have been disrupted, the companies that are creating the disruption and the companies that will benefit from it. Currently, the team identifies two major disrupting forces, the e-commerce and the cloud computing. In these two trends, the investment team assess who are the winning and losing companies, and how to invest on the right side of each trade.

E-commerce

Consumers are clearly benefiting from all the innovation that is going on in the world. Technology is providing consumers more bargaining power, anyone can go to a store and compare the price of the product offered online at Amazon.

“People have said that traditional retail stores have become the showroom for Amazon, and that is true to a certain degree. However, the smart retailers have chosen to be the showroom for their e-commerce model. At Janus Henderson, we have invested in those retailers that have done a good job migrating the physical store aspect s of retail sales to e-commerce, proving an incentive to buy through them and not through Amazon”, explained Marc Pinto.

“The e-commerce penetration is still low. The retail e-commerce is going to continue growing as a percentage of total retail sales. The question is, how do traditional retailers survive in this environment? For example, Nike, the sportwear brand, is one of our largest positions in our Balanced portfolio. A couple of years ago, Nike realized that developing a direct relationship with the customer will give them a huge opportunity to essentially know their customers better. Additionally, the direct relationship with consumers would allow Nike to bypass the middleman and capture its margin, avoiding having to compete for shelf space at retail stores.

NikeID is Nike’s direct to consumer offering, where basically customers can go online and get a pair of customized training shoes, choosing the colors, putting their names on them, and shipping them directly to their homes. Nike does not incur in any retail margin and can sell them at a more expensive price. It is a very profitable business, NikeID represent now 15% of their business and it is growing around 30% to 40% per year.

Traditional retailers who have figure out how to nail the on-line and traditional retail models are the ones who will be successful on the future. These businesses have to invest a big sum of money in terms of technology to create a seamless model where customers can go into the store and decide what they want to buy and how they want to buy. Another example of a traditional retail company that has managed to have an integrated model of e-commerce and traditional retail business is Home Depot. Their website is offering the possibility of knowing the exact inventory that they have in every store and their location within the store. They have an integrated inventory management system and they have created a customer friendly portal where customers can know in real time how much of every item they have in a store. It is not technology for technology sake, is technology to make the consumer experience better”, he added.

Migrating to the cloud

Another big source of disruption are the cloud computing and the software as service players. Amazon Web Services, Salesforce, Microsoft Azure are some of the companies that are going to benefit from the migration to the cloud. “Players on the cloud are doing really well. As investors, the big question we have is about valuation levels and when it is the right time to get in. But as growth investors we definitively want to be invested in these companies”, said Pinto.

“In this case, the losers are the companies that are providing the traditional hardware and their prices. Companies like HP, IBM or Oracle are still supplying hardware to a lot of offices, but their demand is at risk to decline as cloud spending becomes a bigger portion of the business. Total IT spending is going to start flattening because the cost of deployment in the cloud is substantially less than it is for buying traditional hardware and software. Some estimates point out that the cloud deployment is 10% the cost of the traditional IT infrastructure deployment. There is going to be a massive deflationary pressure on IT spending when every company migrates to the cloud. Companies will benefit form a massive reduction on their technology costs and they will be able to spend those dollars in other areas”.

Is the growth trade over?

Since January 2009, the returns of the growth component of the S&P 500 have consistently beaten the returns of the value component of this index. With only 2016 being an exception, growth stocks have outperformed value stocks in the last 9 years. Because it has been such a long period without alternance, investors are beginning to be worried about the possibility of a mean reversion to value.

“We think that this is happening for good reasons. This is not a question of market rotation or even low rates, there is a logic behind the outperformance of growth stocks. What is driving this discrepancy of growth versus value is that the companies that are disrupting are the growth companies; and the companies that normally are being disrupted are typically value companies. The companies that are benefiting from disruption are in the growth category. More companies are going to be in the growth space as they will continue to do well”, he concluded.

Investec AM Gets Back to Their Roots and Celebrates its Annual Investment Conference in Cape Town

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In Cape Town, where Investec Asset Management story began 27 years ago, the international asset management firm with South African origins hosted the 11th Investec Global Insights conference and brought together 220 delegates from eleven countries around the world.

Richard Garland, Managing Director of the Global Advisor division, welcomed the attendees explaining what are the key elements that make Investec Asset Management a unique asset management firm. According to Garland, being a global asset management firm with emerging market roots differentiates the firm apart from competitors.

“The most important thing is where did we come from. There are many asset managers who start in London, New York, Boston or Los Angeles, but neither came out of the future. And, why do I say the future? It is because Africa is the future. We learned how to run money in the most difficult continent in the world for running money, and then we went global. We grew out of South Africa, an emerging market, to become a global asset manager”.

Some other characteristics that Garland believes differentiate Investec AM from competitors are: stability and continuity, multiple alignments of interests, a multi-specialist framework and culture.

“Over the years, we still have the same sales people and the same fund managers. This is core to who we are. The top 50 to 60 people at Investec Asset Management own equity from the company, our interests are aligned with the client interests. We work with a multi-specialist frame, we do not have only one investment style, we do not have only one investment team or philosophy. We have different ways of running money, which means we always have investment strategies or funds which will work for your clients in any environment.”

A top-level view: Interview with Hendrik du Toit

Following his introduction to the firm, Richard Garland interviewed Hendrik du Toit, Joint-CEO of Investec Group. Hendrik was one of the founders of the company in 1991, 27 years ago in Cape Town, where Investec AM was a small start-up asset manager offering domestic strategies in an emerging market.

From the early days, Hendrik remembered some chaos. But the firm was able to build up a mid-caps strategy and buy their growth in the next decade. They were able to build a track record based on multiple expansion, something that allowed them to reach new clients.

Du Toit stated that being a mid-size asset manager firm can be an advantage to compete against the large-scale asset managers. “This is an industry in which size is one of the components of strength and not necessarily the defining. It is about quality and excellence, it is not about size. In the banking industry balance sheet matters, it is an important source of strength. But in the asset management industry, you only need to be big and strong enough to deal with the regulatory barriers. When asset management firms become bigger, they lose control on what is going on in the business and only worry about the politics on the board room.”

When asked about entering the passive management business, Du Toit specified that there are only going to be two, or three at the most, serious global passive managers. “If you are in a race where prices tend to zero, only one or two scale players can live with one or two basis points. BlackRock and Vanguard, the discount players that make real money in the passive investment business, have a huge active business. ETFs have brilliantly market themselves as a passive investment and they tell the world they are cheap, when they are rather expensive. The managers make money out security trading and the commission fee and sell the illusion of a 100% liquidity when you are actually investing on very long duration assets. ETFs are a useful tool for all, we use them in our multi-asset portfolios, but they are not a competitor. In the end there are certain risks that provide the returns the clients need in a low yield world. You need to allocate your money where the winners are, otherwise you are going to stay with the losers. The promise of active is not that we are going to always outperform some index, which are difficult to beat. Instead, the promise of active is that we are going to allocate capital sensibly and try to capture the huge opportunities that the 4th revolution is bringing to capital markets.”

According to Hendrik, there are massive investment opportunities in China’s growth, in the renewable energy transition and in the food industry; and you need to be an active manager to capture them.

Demerger of Investec Group and listing of Investec AM

In September, Investec Asset Management announced that the firm will become a separately listed entity. After the separation of Investec AM from the remaining Investec Group, Hendrik du Toit will lead the new listed entity as Executive Chairman.

“Investec’s banking and wealth group are largely based in two countries: South Africa and UK. Whereas most of the growth of the asset management business comes from the Americas, Asia, Western Europe and the whole continent of Africa. Geographically, we are thinking differently. Also, client niches were totally different, we do not have direct clients as the banking and the wealth group do, we work with intermediaries. We focus on our client’s relationships and that turns into long-run revenue and profit growth,” stated du Toit.

“The strategy is going to remain the same. We are going to help clients who want to take active risks to achieve the returns over and above target benchmarks in chosen markets with our skillsets. All our portfolio managers have different but complementary skillsets. There is an addressable market of 25 to 30 trillion dollars and we would like to keep growing on our current shape. We will obviously add some private market illiquid asset offer or any other business that is active and difficult to do.”

Sustainability

Concluding the interview, du Toit mentioned the importance of considering environmental, social and sustainability criteria when investing. “I grew up in Africa and I have seen what climate change can do to communities. I have seen what overfishing, deforestation, and polluted rivers can do to places. It is not debatable that 7 billion humans have an excessive impact on this world. We also know that we have to combine development and job creation with protection of the natural resources of our world. We are long-term investors. We are supposed to invest for the next generation and the generation after. We must think about the consequences of our capital allocation. We are fortunate to be the stewards of capital and we have a long-term liability to choose where to allocate the capital. Companies will be sued and will go bankrupt for environmental liabilities”.

Shiller: “You Must Have Exposure To The United States Even Though It Is One Of The Most Expensive Markets In The World”

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Shiller: "Se debe tener exposición a los Estados Unidos aunque es de los mercados más caros del mundo" — Photo: Funds Society. Shiller: "You Must Have Exposure To The United States Even Though It Is One Of The Most Expensive Markets In The World"

According to Robert Shiller, Nobel laureate in economics 2013, economic growth is good in the United States and although there is concern about high valuations, he does not predict a near collapse.

In his last visit to Mexico, to celebrate the launch of the Ossiam Shiller Barclays ETF in the Mexican Global Market (SIC in Spanish), the economist told Funds Society about the importance of geographic diversification and added that, within it, exposure to the United States should be kept, even though “the US market is at high valuations with a cap ratio of 30”.

“Despite the short-term fluctuations that come and go, I think we should not think that a bear market is approaching and I think that we should have some exposure to the United States that, although it is one of the most expensive markets in the world, continues to behave positively. The key is not to put all the eggs in the US basket, but to diversify,” he added.

In his opinion, one way to get exposure to this market is to look for instruments that have a value-focused approach, such as the ETF that replicates the index resulting from its collaboration with Barclays.

However, he warns that markets are not only about interest rates and their effect, but the ideas of people. Currently we have important changes in the political sphere of the United States and many places in the world, including Mexico, and according to the economist, “one would have believed that the markets had suffered, which did not happen on a large scale…”

In his opinion, “the way the economy looks is changing. It is becoming less theoretical, less mathematical, less abstract and is becoming more practical. Now it is giving greater importance to the narrative that accompanies it,” he mentions adding that, “the desire and willingness of people to invest and take risk changes over time and the narrative they live.”

Mexico

The economist, who personally has exposure to Mexico in his investments and considers the country as a key player in the global economy, commented that “the next government of Mexico, headed by Andrés Manuel López Obrador, should give certainty and security to investors” .

About the airport, Schiller said: “I do not know if Mexico needs a new airport, but I hope that this can be resolved in a way that all the people who made investments and plans feel that they made a good agreement … It is important that the new president encourages investors to feel that there is a safe environment to invest.” He concluded.

John Dickie: “Investors are Realizing that by Sticking to the Public Markets they are Limiting Themselves”

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Nearly four out of every five institutional investors globally are allocating capital to alternative assets and private equity represents a large chunk of that capital, Preqin’s data shows. Aberdeen’s John Dickie, Co-Head of U.S. Private Equity at Aberdeen Standard Investments, talks with Funds Society about the outlook for private equity investment and fundraising in the second half of 2018/year ahead.

In John’s opinion, it is a very good time to be raising money, and there is a lot of interest globally in private equity given that it has performed quite well and has continued to outpace the public markets. John also notes that investors increasingly appreciate that there are hundreds of thousands of private companies in the U.S., whereas, there are less than 4,000 public companies in the U.S., so “investors are realizing that by sticking to the public markets they are limiting themselves to a very small portion of the total investable universe.”

However, he believes that “GPs have to have an edge to catch LP’s attention.” At a high level he sees strong interest in the lower middle market, “given that returns in that part of the market have been better” than larger funds.

When looking to invest with a GP John and his team at Aberdeen Standard Investments focus on two main areas:

Quantitatively, they need to fundamentally believe the GP’s team are good investors and have a great track record of improving the operations of businesses they invest in. They also look to how they source investments.
Qualitatively, “we look for people that we trust and value as partners, that value our input, and that are building great firms culturally, with multigenerational layers and appropriately shared economics,”

Co-investing is here to stay

John believes co-investing is an important tool for LPs to enhance returns and to minimize, or even eliminate, J-curves. However, he observes that there are many firms that have been reckless with co-invest. “So, whenever the next downturn comes, many LPs will not be happy.”

At Aberdeen Standard Investments, the firm has built a team with professionals that have GP experience, which allows them to keep up with the GP due diligence activities, and to dig deep into companies.

What will the market look like?

According to John, we will continue to see the big firms get bigger, but there will also be more small firms. “The largest firms are going to continue to attract capital from all over the world and continue to grow, but a number of middle markets firms are going to continue to have spin outs,” he said, adding “we are observing a huge number of spin offs and first time funds. A lot of LPs will back first time funds but NOT first time investors.”

The reason why he believes that emerging or new private equity fund managers are attractive is that “you can allocate capital to a team of people that are highly trained from a well-respected organization that have, in many cases, 10-15, sometimes 20 years of PE experience, but now they get to do it for themselves. The passion of having your own firm with your closest partners leads to an incredible incentive in alignment where these teams are hungry to succeed and have a successful fund. We think that can be a pretty interesting dynamic.”

DoubleLine UCITS Funds Now Available on Allfunds Bank Platform

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La plataforma de Allfunds Bank ya cuenta con fondos de DoubleLine — Pixabay CC0 Public DomainPhoto: Hans. DoubleLine UCITS Funds Now Available on Allfunds Bank Platform

DoubleLine Capital has begun offering its Luxembourg-domiciled UCITS funds on the Allfunds Bank platform, an open architecture, worldwide distributor of mutual funds.

“Allfunds is one of the leading international distribution platforms,” said Ron Redell, executive vice president of DoubleLine. “The availability of DoubleLine Funds (Luxembourg) on this distribution network is strategically important for DoubleLine’s UCITS funds global expansion.”

The term UCITS stands for Undertakings for the Collective Investment of Transferable Securities, an open-end fund vehicle available in Europe, Latin America and many other countries outside the U.S. The sub-funds of the DoubleLine Funds (Luxembourg) UCITS currently include the DoubleLine Shiller Enhanced CAPE® equity sub-fund, which is co-managed by DoubleLine Alternatives LP and DoubleLine Capital LP, and DoubleLine Short Duration fixed income sub-fund, which is managed by DoubleLine Capital LP. Depending on an investor’s country of residence, the sub-funds are available via retail and institutional share classes denominated in various currencies.

Allfunds Bank Group offers integrated fund solutions (operational, analysis and information). Created in 2000, today Allfunds Bank has more than €370 Billion assets under administration and offers more than 64,400 funds from over 1,200 fund managers. Allfunds Bank Group has a local presence in Luxembourg, Switzerland, United Kingdom, Spain, Italy, United Arab Emirates, Singapore, Chile and Colombia and has more than 605 institutional clients, including major commercial banks, private banks, insurance companies, pension funds, fund managers, financial supermarkets, international brokers, and specialist firms from 45 different countries. Allfunds Bank Group operates in Asia through the entity of Allfunds Singapore Branch.

Andrew Gillan (Janus Henderson Investors): “We Have Already Started Asia’s Century. The US and Europe Are Losing Ground to China and India”

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According to Andrew Gillan, Head of Asia ex Japan Equities at Janus Henderson Investors, there is a huge amount of disruption in Asia, the world’s growth engine, but this also means that there is a huge amount of opportunity for investors. Gillan, who is based in Singapore and has an extended on the ground experience, explains that the main rationale to invest in Asian equities is that, over the long-term, Asian equities have had the capacity to generate a higher return than other markets. Even through the Asian Crisis in the late 90s and through the 2008 Financial Crisis, the MSCI AC Asia Pacific Ex Japan Index has generated greater returns than the MSCI AC World Index, obtaining 8,1% of annualized gross returns vs 7,4%, from December 1987 to August 2018.

The relevance of Asia in technology and disruption

With a population of 1.4 billion of people, China has 772 million of internet users (55% of the population); 717 million of smartphone users (51%); 753 million of mobile internet users (53%) and 527 million of mobile payment users (37%). Meanwhile, in the US, with a population substantially smaller and a higher percentage of internet, smartphones and mobile internet users, there is less room for potential growth.

“The relevance of the information technology sector in Asia has grown considerably in the last two decades, and now represents a 26% of the benchmark index. Meanwhile, Financials, that right now comprise about 32% of the index, are very susceptible to disruption. In ten years, they will probably have a lower weight. Tactically, our strategies are overweighting Financials now, in part because the Fed is rising interest rates, but from a long-term structural perspective, we have been underweighting Financials when investing in Asia”, says Andrew Gillan.

“In terms of allocating geographically to the region, I could say that we have already started Asia’s century. Tailwinds for Asia, in terms of population growth and demographics are very powerful. The US and Europe are losing ground to China and India. By 2030, Asia is expected to make up to 66% of the world’s middle-class population, a powerful reason for accessing the consumer in these markets.

Another matter that is worth highlighting is the effect of the online grocery markets on bricks and mortar retail sector. China’s online grocery market is expected to reach 30 billion USD this year. This market has been growing at an annual rate of 73% over the last six years”, he adds.

Managing disruption

The Janus Henderson Asia Pacific Capital Growth fund is a truly active strategy, investing only in 40 companies or less. It does not have an overwhelming style bias, mixing quality and value stocks, and its is liquid, the volume of asset under management allows the portfolio management team to be nimble in their investment decisions.

“About 70% of the stocks in the portfolio are considered core companies, with superior and consistent return on equity and cash generation ratios and with very strong franchises, for example: Alibaba or Tencent. The other 30% is the dynamic part of the portfolio, those are the stocks that we believe give us a good positioning to navigate markets. We hold positions in companies that we consider to be disruptive or adapters to the industry changes, or if we think that market conditions are changing in the short-term, we focus on companies that have a compelling valuation or are cyclicals”, explains Andrew Gillan.

Embracing disruption

Janus Henderson’s team embraces disruption in investment decisions. They define disruption as an entirely new product, service, or process that creates significant incremental value over the long term. They do not limit it to the Artificial Intelligence or the Technology sector, but they extended it to traditional sectors, like consumer, insurance, banking and IT services.

“We normally identify the disruption potential in companies through the leading indicators of potential disruption. These may be a visionary leader or a management team that is willing to change an existing ecosystem or trying to challenge a different business model. It can also be the “right” corporate culture, a track record of innovation, a good long-term strategy and vision, strong financials to organically fund required investments, or strategic and timely mergers and acquisitions. We believe that successful disruption will lead to high and sustainable return on equity over the long-term”, he says.

“Similarly, if we apply the same disruption potential to our investment process, we can say that we assess the management, financial and franchise quality. Additionally, we have frequent interactions with the companies that we invest in, something that we think is the key way to identify and look for the impact of disruption on investments. We are probably more quality investors rather than disruption investors, as we believe that quality companies have higher chances of becoming disruptors or being protected from disruptions”.

Not all disruption is profitable

Clearly, not all disruption is profitable. More than 40 bike-sharing service companies have sprouted in China since 2016, because it is a business with very low barriers to entry. However, the bike-sharing market in China is undergoing a significant consolidation, with more than 20 start-ups going to bust as of February 2018.

“There are only going to be a few winners, and not surprisingly, they will be the companies that are backed by the “big guys”. That is the case of OFO, a company that secured 866 million USD in a new round of financing led by Alibaba, or the case of Mobike, a company adquired by Meituan Dianping, China’s larger provider of on-demand online services, at a valuation of 3.7 billion USD. The companies with the bigger and deeper pockets become the winners”, he concludes.

AMLO’S Actions Erode Investors’ Confidence in Mexico

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After Mexico’s president-elect, López Obrador, announced that he plans to scrap the most important infrastructure project of the past two decades – the New Mexico City International Airport, the peso had one of its worst days since President Trump’s election and the stock market, which fell 4%, had its worst close in a decade.

According to JPMorgan Chase & Co which lowered its expectations for Mexico, the decision (which followed the mandate of the referendum held on the issue, with minimum participation -only 1,067,859 votes, or less than 1% of the Mexican population), “left investors worried about how he would manage the economy and increases the probability of the central bank raising interest rates.”

Morgan Stanley also reacted by changing its preference of exposure to that country from an overweight to an underweight position due to “the short-term asymmetric risks associated with the free trade agreement with the US and the airport situation.”

According to UBS the issue seems even riskier, since they warn that this dynamic could be used to carry out material changes in Mexico, such as invalidating “effective suffrage, not re-election” or even the central bank’s autonomy. “We see the potential for a public referendum to be approved as a constitutionally valid way of enforcing changes in the future, including possibly extending the six-year presidential mandate. The use of reserves at the central bank (Banxico) could also be subject to the people’s choice,” they point out in the attached report.

AMLO, who will not be sworn into office until December 1^st, stated that after the public consultation, “our decision is to obey the referendum mandate, so two runways will be added to the military airport at Santa Lucia, the current Mexico City airport will be improved, and the Toluca airport will be upgraded, so that shortly we will have solved the saturation in Mexico City’s current airport.” The politician also commented that, “in economic terms, with this decision the Federal Government is going to save, around 100 billion pesos.” Just with the change in capitalization value due to Monday’s fall, Mexican companies lost 17 billion dollars, or more than 341 billion pesos. This means that in just one day, they lost more than three times the savings promised by AMLO.

Meanwhile, President Enrique Peña Nieto informed that Grupo Aeroportuario de Ciudad de México, or GACM, the company in charge of the New International Airport of Mexico (NAIM) project, will continue working on the construction of the new terminal in Texcoco at least until his last day in office, November 30^th. Whereas, Juan Pablo Castañón, President of the (CCE), or Business Coordinating Council, said that the consultation lacks legal fundamentals in order to be accepted and warned that if after December 1^st the stance continues to be to halt the Project underway in Texcoco, stakeholders will undertake legal actions in defense of the Project, and “in favor of Mexico’s economic development.”

The President, Enrique Peña Nieto, also warned that if the airport is canceled, the next government will have to comply with all its contractual and financial obligations, which includes advancing airport bond payments. According to AMAFORE, Afores investments in the NAICM are assured: “Workers must be calm about their savings, since the instruments used by the Afores for this investment, Fibra-e and Bonds, are backed by the collection of the TUA (Airport Use Fee), that is, by the flow of passengers, so the investment of their savings has enough guarantees to recover the capital plus a yield higher than inflation,” the organism said in a statement.

Steve Drew (Janus Henderson Investors): “Argentina is Going to Be One of the Best Bond Markets in the Next Six Months”

| For Meritxell Sedo | 0 Comentarios

According to Steve Drew, Portfolio Manager and Head of Emerging Markets Fixed Income at Janus Henderson Investors, the Emerging Market Corporate bond is an asset class that has been often overlooked and misunderstood, but this trend is distinctly changing. With about 15 years of history, this asset class sometimes behaves as a teenager, reacting with tantrums every now and then.

“This evolving asset class is growing rapidly and is now disrupting previous notions of how and where to earn income. With an investable universe of 2,149 billion of dollars, the JP Morgan CEMBI Broad Diversified Index is twice the size the of the JP Morgan EMBI Index, one of the most frequently used benchmarks for Emerging Market Sovereign bonds”, said Drew.

Over the past 10 years, the Emerging Market Corporate asset class has also doubled the annual growth rate of Emerging Market Sovereign bonds, 18% vs 9%. It now comprises 52 countries, 12 sectors and 645 unique issuers, set against 149 issuers for the EM Sovereign debt.

In Emerging Markets, corporate bonds have higher credit quality than sovereign bonds, the average credit rating of the JP Morgan CEMBI is BBB- and 59% of its universe is investment grade, whereas the JP Morgan EMBI has an average rating of BB+ and only 51% of its bonds are investment grade.

“There is one big market that dominates the issuance of Emerging Market Corporate debt, and that is China, who happens to be an investment grade country, and therefore, lot of the companies that issue debt in China are investment grade”, explained Steve Drew.

There are also some other characteristics that make EM Corporate debt attractive. Duration, a matter that is in every fixed income investors mind now that the Federal Reserve is hiking interest rates every three months, is lower in the EM Corporate debt than in most of other credit asset classes. For example, their benchmark duration is only 4.52 years, whereas EM Sovereign bond’s benchmark has a duration of 6.66 years, the US Aggregate Bond index has a duration of 6,36 and the Global Aggregate Bond index has a duration of 7.16 years.

Recently, emerging markets have grabbed the attention of news headlines, debt and currency crisis in Argentina and Turkey, elections in Mexico and Brazil or trade tensions in China have added uncertainty to the asset class. But, when volatility is translated across many issuers, there is less volatility in EM Corporate bonds than in EM Sovereign bonds. EM Corporate bonds have lower maximum drawdown and lower standard deviation than the EM Sovereign bonds, with -4,6% vs -6,6% (5 years trailing, as of 31 August 2018), and 4,2% vs 6,0% (3 years trailing, as of 31 August 2018), respectively.

EM Corporate bonds also have lower leverage than developed markets, both in investment grade and high yield asset classes, and their forecasted default rates for 2018 are expected to be lower than those of US High yield.

“Emerging Market Corporate bonds, as an asset class, has lower leverage, less or similar volatility, lower duration and is actually cheaper than other developed markets. So, what risks are the investors taking? They are taking the macro and geopolitical risks, and sometimes foreign exchange risks, even if the investors are buying a dollar denominated bond”, explained Drew.

“Lately, Emerging Markets have suffered a sell-off, but they had a fantastic performance in 2016 and 2017. In the last 16 years, the total return of JP Morgan CEMBI Broad Diversified, annualized, has been a 7%, only 90 basis points below US High Yield (measured by BofA Merrill Lynch U.S. High Yield Master), but being an investment grade asset class, having better credit quality, lower leverage and duration”, he added.

Where are EM Corporates headed?

Argentina, Turkey, Indonesia, South Africa, Brazil and Mexico have recently created some noise, but this noise is not necessarily related with the fundamentals of those countries, part of the uproar is strongly related to the Fed’s normalization of their monetary policy.

“In Emerging Markets, is very important to quantify how the macro, the geopolitical and foreign exchange risks are going to affect the country you are investing in. You should only invest when you get a green light in both the fundamentals and the macro. Back in 2014, US imposed new sanctions on Russia, a country that represents about 5% of the JP Morgan CEMBI Broad Diversified Index. Spreads widened 700 hundred points, but it was not a credit fundamental story, it was a macro story. So, we bought bonds issued by Gazprom, a company that has more cash than debt in its balance sheet and we knew it was a good investment. In 2015, all sectors in Brazil were trailing, whether it was a paper company, a petrochemical company or a protein producer, all companies traded at discount, without considering whether they were a good company or not, due to markets exposure to Lava Jato corruption case. For five months we were not invested in Brazil, the catalyst to go back and invest in the country was when we saw that Dilma Rousseff’s was going to be impeached, breaking the negative cycle.

In 2016, during US general election campaign, Trump threatened to build a wall on Mexico’s border and said that Mexicans would pay for it. If the US were to finally build that wall, the one company that would benefit from the construction would be CEMEX, which bonds were punished by the markets, trading at a discount of 10% to 20% for four weeks. When we saw the Mexican peso trading at 21 pesos against the dollar, we bought some more Mexican corporate debt, to see if we could take some foreign exchange translation risk”, said Drew.

Since the beginning of this year, US foreign policy has created some distortion in Emerging Markets, but fundamentals are still good. From a valuation perspective, countries like Argentina, are now looking attractive. “Argentina is going to be one of the best bond markets in the next six months. Some of the quality companies that we have invested in Argentina are trading at 15% to 16% discount, if they were in any other country or in any other jurisdiction in the world, they would be trading at half that spread. Some of the Argentinian companies that we have invested in are one to two time leveraged, and they are strategically important within their country, but they are cheap because their macro circumstances. Turkey, on the other hand, has 105 billion dollars in its banking system to roll over in the next six months. Erdogan has already said no to an IMF bailout package, making more complicated for bond holders to recover their investments. Some of the banks’ Tier 2 capital debt is already trading at 70 to 80 cents of a dollar, but we think some of this debt is already worth 0. That is why I think Turkey is to avoid”, concluded Drew.

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This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and US Advisors to Non-US Investors and is not for general public distribution. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757) and Henderson Equity Partners Limited (reg. no.2606646) (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE), are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Henderson Secretarial Services Limited (incorporated and registered in England and Wales, registered no. 1471624, registered office 201 Bishopsgate, London EC2M 3AE) is the name under which company secretarial services are provided. All these companies are wholly owned subsidiaries of Janus Henderson Group plc (incorporated and registered in Jersey, registered no. 101484, registered office 47 Esplanade, St Helier, Jersey JE1 0BD).

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Morgan Stanley Advisor Joins Bolton’s New York City Office

| For Gabriela Huerta | 0 Comentarios

Nicolas Schreiber has joined Bolton Global Capital‘s New York City office. Schreiber, formerly with Morgan Stanley, manages $180 million in client assets. His international clientele includes high net worth individuals and institutions based in the US, Europe and Latin America.

Schreiber began his career as a financial advisor with HSBC Private Bank in 2001 in Manhattan. Two years later, he moved to UBS International where he worked for 5 years until joining Smith Barney in 2008. Smith Barney was acquired by Morgan Stanley in 2009 where Schreiber has worked for the last 9 years before joining Bolton in October 2018. Custody of his client accounts will be through BNY Mellon Pershing.

Bolton recently opened an office on 5th Avenue in New York City to recruit Manhattan based advisors who wish to convert their practices to the independent business model. Since the financial crisis of 2008, several hundred teams have migrated their client accounts from the major banks and wirehouses to independent broker dealers and registered investment advisors like Bolton. Over this period, Bolton has recruited financial advisors with more than $5 billion in client assets from the major banks and wirehouses.

Bolton provides compliance, back office, and brand development support as well as the wealth management and trading technologies for its independent financial advisors. Under Bolton’s independent business model, advisors retain a much higher percentage of their fees and commissions and yet have access to all of the wealth management and trading capabilities offered by the largest firms.

Schreiber hold a bachelors degree in economics as well a CPA designation from the Catholic University in Argentina. He lives in Williamsburg in Brooklyn NY with his wife Florentine and two children Philippe and Melody.

“We are proud to have such a well respected professional affiliate with our company and look forward to supporting the continued growth of his wealth management business. Mr. Schreiber will operate under the trade name Nomad Advisors.” Said Bolton in a statement.