WE Family Offices: How To Manage HNW In An Increasingly Globalized Environment

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WE Family Offices: Cómo gestionar grandes patrimonios en un entorno cada vez más globalizado
Santiago Ulloa, founding partner of WE Family Offices. Courtesy Photo . WE Family Offices: How To Manage HNW In An Increasingly Globalized Environment

There is no doubt that globalization has changed the world stage at all levels, and the wealth management sector has not been able to escape the effects of this economic, global, and cultural process. That is why, as announced last September, the US company, WE Family Offices, decided to sign an alliance with MdF Family Partners – with whom they already had a collaboration agreement which had been in place for over a year and a half – and with Wren Investment Office, a company with London Headquarters which advises UHNW families in the UK and Europe. Thanks to this strategic alliance, WE Family Offices can respond to the needs of its increasingly global clients.

Presence outside the United States

Santiago Ulloa, a founding partner of the American firm, which already has 50 employees, provides advisory services for assets worth over 6.8 billion dollars as of September 30th, 2016, and offers service to 70 families, says that “the reason for which we saw a need to have a presence outside the United States was because we observed that many of the families are already global, are in several jurisdictions, and have children spread across different continents. For one reason or another they want access to advisory services also from Europe, since in some cases they have more presence there. We have also been fortunate to find a team that has the same mentality and vision as us.”

The three firms share the same view on how to manage high-level family wealth in the long run. Qualities such as transparency, objectivity, or not having their own product, are all part of the philosophy with which they serve clients. Ulloa says that in this alliance, the firms involved will “function as independent companies, each with their own relevant licenses in their respective countries, but we will share investment opportunities search teams and asset advisory teams for issues at fiscal and succession planning level, or of global planning”.

In this regard, the common investment committee will be one of the most interesting contributions of this alliance. The main idea is to share the investment strategy, “for example, if we think that we have to reduce the risk of the portfolios in the stock market, we want it to be a strategy developed and agreed on by the investment committee. However, the implementation will be local, through the local investment vehicles that have the appropriate taxation for each client. We will also try to look for investment managers that will serve all firms,” adds Santiago.

Search for joint opportunities

There are many competitive advantages that come from having a global presence, among them “the possibility of finding investment opportunities together, which we can all share and thus obtain a greater critical mass that allows us to invest for our clients under the best possible economic conditions”.
These synergies are especially important at a time when WE Family Offices believes that “the most interesting investment opportunities are currently found in private markets.”

Santiago Ulloa points out that “we currently have a total of more than 800 million dollars committed in illiquid operations, and disbursed more than 600 million dollars.” However, the company considers that such investments are not suitable for all families “we have to carry out strategic planning in advance to fully understand the family’s entire wealth, their liquidity needs, cash flows, etc.,” says Ulloa.

Illiquid investments

Illiquid investment opportunities are sought in different sectors around the world; real estate, energy, and technology are the company’s big commitments.
In real estate they are investing in the United Kingdom, Germany, Switzerland, and the United States. Two of the most important recent operations were “the one in which we participated together with the Collier family’s family office, and another in which we co-invested with Starwood Capital in a project of more than 20,000 rental homes in the United States,” says Santiago. In the energy sector they invested in a company specialized in solar power which was later bought by a JP Morgan fund, and the one in which they have many hopes for investment and for the future is the technology sector, especially in the field of artificial intelligence in which they are working together with a specialist based in Silicon Valley, to where they plan to organize a trip with some of their clients, offering them the opportunity to get to know this sector first hand.

The average worth of the families that decide to commit to the firm is increasingly higher, reaching an average of 100 million dollars. In some cases they are single family offices that “entrust the general management of their global wealth to a company that has its own resources and outsources part of its operations, as well as the reporting and consolidation of all its assets, and with the capacity to access good investment opportunities globally.” This, says Ulloa, together with its global presence, means that WE Family Offices have a unique UHNW heritage management model.
 

HSBC Completes the Restructuring of its Global Private Banking Division

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HSBC da por zanjada la reestructuración de su negocio de banca privada global
Photo: Amitauti. HSBC Completes the Restructuring of its Global Private Banking Division

When Stuart Gulliver took over the reins of HSBC back in 2011, the private banking business of the London-based Asian bank had presence in roughly 150 countries. Nowadays HSBC has private banking presence in around 50 countries, but the bulk of the restructuring is over.

After the bank was involved in a tax evasion scandal in 2015, with the so-called Panama Papers, Gulliver hired specialists from Rothschild and KPMG to lead the restructuring. They focused their efforts on eliminating or reducing private banks from, mainly Europe, but including countries such as Japan, Panama, Israel, Bermuda, Brazil and even Mexico.

In its most recent earnings release, which saw a 62% fall in earnings-affected by a lower income after the closure of several units-Gulliver wrote that “The restructuring of Global Private Banking is now largely complete, and although Global Private Banking is now much smaller than it was three years ago, it is deliberately positioned for sustainable growth with a focus on serving the personal wealth management needs of the leadership and owners of the Group’s corporate clients.”

The manager also mentioned that “2016 was a good year in which we achieved a solid performance of all our global businesses,” despite the fact that it collected a provision of approximately 700 million dollars for legal expenses related to investigations related to money laundering and tax evasion in countries like the USA, Argentina, France, Belgium and India.

Compass Group and PIMCO Will Get Together to Launch a Fixed Income Strategy for Chilean Investors through a Feeder Fund

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Compass Group y PIMCO se asocian para lanzar una estrategia de renta fija para el inversor chileno
Photo: Sergom5. Compass Group and PIMCO Will Get Together to Launch a Fixed Income Strategy for Chilean Investors through a Feeder Fund

Compass Group, one of the leading independent investment advisors in Latin America, has partnered with PIMCO, a global fund manager, to launch Compass Global Credit, a feeder fund that invests 100% of its assets in fixed income strategies managed by PIMCO, which are registered in Ireland, comply with UCITS regulations and have daily liquidity.

The management team is headed by Mark Kiesel, CIO of the company’s Global Credit division, Andrew Jessop, a manager specializing in high-yield debt, and Hozef Arif, a manager specializing in global high-yield debt and corporate credit strategies.

Compass Global Credit invests at least 80% of its portfolio between the PIMCO GIS Global Investment Grade fund, a portfolio that seeks to maximize the total return on its assets by actively investing at least two-thirds of them in global corporate debt investment grade instruments, and the PIMCO GIS High-Yield Bond, a strategy that seeks to maximize total return and limit risk by investing at least two-thirds of its assets in a portfolio ofglobal high-yield bonds rated lower than ‘Baa’ (In Moody’s case) or ‘BBB ‘(as per S & P), with a maximum of 20% of its assets invested in securities with a rating lower than B.

Depending on PIMCO’s view on the two asset classes in which the major funds are invested, either of the two strategies can be underweight/overweight versus the benchmark, which is composed of BofA ML US High-Yield index (60%)and Barclays Global Aggregate Credit (40%).

In addition, the fund has a potential 20% to make a tactical allocation to other PIMCO UCITS mutual funds that invest in other asset classes within the fixed income universe. In this way, the management team can assign assets to the two main strategies according to their macroeconomic and market perspectives, and at the same time has the ability to tactically allocate resources to other funds, in case they have a stronger conviction in those asset classes.

To provide greater flexibility to the investor, the fund, which distributes dividends annually, has a dollar class and another in Chilean pesos.

At the end of December 2016, the fund denominated in Chilean pesos reached a wealth of more than 13.5 billion pesos, while the fund denominated in dollars exceeded 34 million dollars.

A visit from a PIMCO Product Specialist to Santiago de Chile has been scheduled for March to present the strategy to Family Offices, UHNW individuals, andprivate banking platforms.

Jonathan Gibbs: “I Do Not See Any Irrational Behavior In The Fixed Income Market or a Bubble”

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Jonathan Gibbs: “No veo un comportamiento irracional en el mercado de renta fija y, por lo tanto, no veo una burbuja”
Pixabay CC0 Public DomainJonathan Gibbs, Fixed Income Macro Strategies Specialist at SLI / Courtesy Photo. Jonathan Gibbs: "I Do Not See Any Irrational Behavior In The Fixed Income Market or a Bubble"

As a specialist in SLI Fixed-Income Macro Strategies, Jonathan Gibbs rules out the existence of a bubble for this asset, and to make his case, he compares the situation with the dot-com bubble of the late 1990s. “A bubble is a very specific concept, and is usually recognized by the irrational behavior of investors. Towards the end of the 1990s everyone bought shares in technology companies without even knowing what the business behind them was… I do not see that now in the bond market at all, I do not see any irrational behavior and, therefore, I do not see a bubble,” says the expert during an interview with Funds Society.

Thus, Gibbs answers the big question: where is the value in fixed income now? In his opinion, this depends on our economic vision. “If we think that inflation will remain weak, then returns will remain low for a long time.” Gibbs explains, however, that “if interest rates confirm their upward trend, some investors may suffer negative returns, but on the other hand, probably those who have opted for risky assets have done well.” For the expert, “what we need to recover is the negative correlation between stocks and bonds.”

Nor does the expert believe that we are seeing the end of the credit cycle in fixed income, a cycle which he considers “nebulous” and the beginning and end of which “is difficult to determine.” In his opinion, although “we have been experiencing a long period of expansion in the credit market, it does not mean that it is expensive: the spreads remain low, but I see no great reason for the credit cycle to be over,” he says.

As an investment specialist for the Absolute Return Global Bond Strategies Fund, Gibbs must explore market inefficiencies through active allocation to a wide range of positions. He uses a combination of traditional assets (such as bonds, cash and market instruments, and investment strategies based on advanced derivative techniques) embodied in a highly diversified portfolio. The fund can take long and short positions in markets, issues and groups of these through derivatives.

Inflation is coming

“We are very vigilant about the duration of sovereign debt, especially in the last weeks since Donald Trump’s victory,” he informs. For Gibbs, governments and central banks are comfortable with what is happening because they are getting what they want: inflation, the key element for fixed income investors. However, “if we analyze the rise in prices and its second-round effects, we see that prices do indeed rise, but it is a movement of prices, whereas inflation is a process.”

On Donald Trump’s fiscal policy, Gibbs questions whether it is the right time to do so. “Fiscal policy is a traditional way of stimulating the economy, but, and this is important, it’s extremely unusual to implement fiscal stimulus eight years after the economic recovery begins. It’s a strange moment to do so,” he says. Of course, he admits that his influence (Trump’s) in monetary policy may be greater outside the US, and “the shift from monetary policy to fiscal is probably a good thing.”

Regarding emerging markets, he points out that despite their new-found appeal, “it is about selecting the winners and avoiding the losers. Sometimes the losers are obvious, but there are also less obvious losers,” he warns. With their SLI Emerging Market Debt Fund, they are committed to countries like Peru: “It is a market that we like very much, for its political stability and its control over public spending.” On the duration, Gibbs insists that “it depends on the country in question”.

Finally, in Europe, they’re underweight in Italy and France. “We believe that political risk is high in these countries for the coming year. I do not think Marie Le Pen will win the elections in France, but the possibility can frighten. I think the French will avoid a radical party because of their more centrist tradition,” he added.
 

Emerging Debt is One of the Last Fixed Income Categories that Provide a Compelling Upside

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"La deuda de empresas de mercados emergentes es una de las últimas categorías en renta fija que proporciona un gran potencial alcista"
CC-BY-SA-2.0, FlickrThomas Rutz, co-fund manager MainFirst Emerging Markets Corporate Bond Fund Balanced / Courtesy photo.. Emerging Debt is One of the Last Fixed Income Categories that Provide a Compelling Upside

Nowadays, in an environment of higher growth, inflation and growing prospects of rate hikes, getting returns on fixed income is not easy, but Thomas Rutz, co-manager of the MainFirst Emerging Markets Corporate Bond Fund Balanced, believes that emerging corporate debt could offer attractive returns this year. In this interview with Funds Society, the manager explains that he prefers to take long-term credit risk and reaffirms the attractiveness of companies in emerging countries, which have improved their fundamentals in recent years, adjusting to falling commodity prices  and their currencies, and gaining strength for upcoming episodes of volatility. According to the expert, Latin America, cyclical sectors and high yield are the segments to watch.

– Emerging debt is an asset that is increasingly driven by international managers. What are the main benefits of these types of assets right now?

The main benefits are that EM corporates, in particular the high yield segment, offer an excellent risk-adjusted return profile in an environment of slowly rising interest rates. They are one of the last fixed income categories that provide a compelling upside. In addition, an allocation to emerging markets corporate debt provides an attractive opportunity to add diversification, as they exhibit a different risk profile to developed markets and provide investors with the opportunity to capitalize upon the future growth of private sector companies.

We believe that emerging markets are in the process of a multi-year convergence towards the developed world and the credit spreads (risk-premium) will narrow driven by those dynamics. There are very good prospects for a solid performance in 2017 due to better fundamentals with overall growth increasing from 4% in 2016 to 4.5%.

– Are the valuations attractive? In which segment are they more attractive: public or corporate debt?

Overall, emerging markets economies have greatly benefited from macroeconomic stabilization, improved legal and regulatory framework and better corporate governance, and also continue to benefit from very attractive demographics, such as population growth and the emergence of a new middle class. This will continue to drive domestic demand and economic output.

Valuations are therefore highly attractive. We prefer EM corporates over EM sovereign investments, since corporate credit spreads offer a better risk-adjusted return profile. In addition, credit spreads are higher and their duration is on average lower than those of sovereign debt. They, thus, offer better protection in a rising interest rate environment.

– Will the commodity rebound last and drive emerging markets? Which commodities will profit and which will suffer?

The recovery of commodity prices provided a crucial fundamental support to many emerging market countries and corporates last year. At current price levels, many firms already profit from massively increased cash flows which are then used to further deleverage their balance sheets.

– Have emerging market companies improved their fundamentals in recent years? If so, in what sense and in which segments of the market?

Yes, they certainly have! Leverage levels in EM corporates have stabilized markedly. Most companies have adjusted to the higher dollar and the lower commodity prices. This provides the base for corporate balance sheets to be more resilient to further volatility in currencies and commodities and, therefore, default rates are likely to decline.

Especially in the energy and mining & metals sectors, the firms responded to the crisis with cost-cutting initiatives, severe capex cuts and asset sales.  The extent of these adjustments has differed by region and country. In Russia, the flexible FX regime has largely mitigated the effects of declining oil prices. In Latin America, we are also seeing good progress, with many corporates taking proactive steps to cut CAPEX and sell assets (e.g. Brazil’s Petrobras or Vale).

– Do you prefer interest rate risk or credit risk at present?  Do the Fed’s future policies play a role in this?

We prefer credit risk for the reason that through credit spread compression, a positive return can be achieved, even in an environment of rising interest rates. Therefore, we manage our funds with a focus on the credit spread performance. Their duration is either in line with or shorter than the benchmark.

– What potential influence may Fed policies have on emerging corporate debt? Will its impact be smaller or greater than that of public debt?

Since, due to such developments as stronger commodity prices and the corrected macroeconomic imbalances, the overall position of the emerging markets is much stronger than a few years ago, Fed policy is likely have a comparatively milder impact on emerging market debts.

Moreover, potential protectionist trade measures by Donald Trump should be manageable since they have mostly already been priced in. In other cases, many investors have used short-term kneejerk reactions and dislocations as excellent initial buying opportunities. The proposed infrastructure program is likely to have a positive effect on commodities and thereby provide further attractive investment opportunities.

In which markets do you currently see the highest number of opportunities and why? Can you give some examples of sectors and names?

We currently see a lot of potential in Latin America as it is still largely undervalued. We, therefore, maintain a 25% overweight in the Latin American region. and our portfolio is tilted to more cyclical sectors, such as industrials, infrastructure and commodities. We like names such as Brazil’s Petrobras (energy) and Gerdau (steel). The latter, for example generates 45% of its revenues in North America and 35% in Brazil and is therefore well positioned for Trump’s infrastructure push in the coming years.

– Is China still a major risk for the emerging markets, or less so than before?

We neither did nor do we see China as a major risk for the emerging markets. Still, as long as valuations remain very stretched we will continue to have a large China underweight vs. the benchmark (2% in our fund vs. 20% in the JP Morgan CEMBI).

– Active management is key to your investment style in the emerging markets. Why? Is it a market that requires active investment management?

Yes, emerging markets require active management. We actively search for relative value in undervalued companies in the whole fixed income universe by applying a bottom-up, 5-step decomposition of the credit spread approach. Fund managers have to face the fact that there will again be significant winners and losers. A very active and opportunistic investment style will therefore provide additional alpha for those who are willing to continuously search for new opportunities and are able to adjust their positions. Our active management allowed us to outperform the benchmark by 560 basis points in 2016. For 2017, we expect another good year for active managers.

– How is the structure of the portfolio of the MainFirst EM Corporate Bond Fund Balanced set up? Is it a concentrated or a broad portfolio? Why? How many positions does it hold?

The MainFirst Emerging Markets Corporate Bond Fund Balanced is a fairly balanced mix of investment grade and high yield corporate bonds. The approach is opportunistic and based on the convictions of our fund management team. In a way, we are “bond pickers” and the resulting portfolio is a collection of global “best of” titles. This is at all times accompanied by diversification across multiple axes (regions, countries, sectors, ratings, duration). Currently, the portfolio holds 107 positions in 37 countries.

– How are titles selected? What characteristics do the titles need to have to be included in your portfolio?

Every investment is subjected to a risk and opportunity analysis, assigned a credit spread target, and usually replaced with another security once the target is reached. This encourages an active, target-focused style of investing. Emerging markets are ideally suited to a relative investing style.

– What do you like most, IG or HY firms at the moment, and why?

We currently like HY firms most, as they provide a greater upside potential through credit spread compression. With real yields hovering at very low levels, credit spreads are one of the last remaining potential sources of performance gains. Instead of focusing on long duration, the emphasis in the current market environment is on a thorough analysis and a disciplined investment approach to deliver performance. In contrast to most developed market fixed income instruments, whose performance is generally highly correlated with underlying government bonds, in emerging market credit products positive returns can still be achieved in an environment of slowly rising interest rates.

– Can you say something about the expected returns for this asset in 2017?

It is always difficult to predict performance, as unforeseen developments may always affect markets. However, if the current market conditions hold and trends continue as expected, we assume that the portfolio should be able to deliver the average portfolio yield plus roughly 200 basis points, which should result in a high single digit or even double digit return for 2017. As of February 7, 2017, the year to date performance for the MainFirst Emerging Markets Corporate Bond Fund Balanced is already at 2.76%.

Western Asset Macro Opportunities Bond Fund is Available to Brazilian Investors through a Local Feeder Fund

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Western Asset Macro Opportunities Bond, una de las opciones que ofrece Legg Mason al inversor brasileño a través de un feeder fund
Pixabay CC0 Public DomainPhoto: Jorge Letelier, Regional Director for Legg Mason in South America, and Roberto Teperman, Head of Sales for Legg Mason in Brazil / Courtesy photo . Western Asset Macro Opportunities Bond Fund is Available to Brazilian Investors through a Local Feeder Fund

At the beginning of January of this year, Roberto Teperman was appointed Head of Sales for Legg Mason Global Asset Management in Brazil. Previously, Roberto, who has a track record of almost 20 years in the financial industry, worked for Western Asset Management for 12 years, a subsidiary of Legg Mason that specializes in global fixed income solutions.

Over a year now, Roberto Teperman, based in Sao Paulo, has worked alongside Jorge Letelier, Regional Director for Legg Mason in South America, based in Santiago, Chile, in the development of feeder funds, which are investment vehicles that allow local investors to access funds in the UCITS format, and are registered in either Dublin or Luxembourg.

In October 2015, Legg Mason launched its first feeder fund in Brazil, the Legg Mason Western Asset Macro Opportunities Bond fund, an ‘unconstrained’ fixed income strategy that invests in a combination of investment grade and high-yield debt securities and derivatives. While the original strategy, which was launched in November 2013, is registered in Dublin and managed by a team headed by Kenneth Leech, CIO at Western Asset, which manages over US$ 4 billion in assets, the feeder fund has approximately US$ 100 million in assets.

The launch of this feeder fund was carried out shortly after the establishment of Instructions number 554 and 555 of the Brazilian Securities and Exchange Commission, which modified the definition of qualified investor, thus opening the fund distribution business to the “mass affluent” client.
One of the main factors taken into account for the launch of the Western Asset Macro Opportunities’ feeder fund was its investment style, as it can invest up to 50% of the fund in high-yield debt and emerging markets as well as  have exposure to currencies.  Having the capacity to invest in futures, options, and other derivatives in order to actively manage the duration of the portfolio is a strategy that perfectly adapts to the preferences of the Brazilian investor.

“The Brazilian investor is accustomed to high interest rates on fixed income, which limits the options that can be offered to cover their investment needs. An alternative could be an equity fund, which generally offers near-double-digit yields, but they have higher volatility. However, fixed income funds with exposure to higher yielding securities seem like a better option,” says Roberto Teperman. “What we decided at that time was to review our product platform and look for the fund that best fits the needs of Brazilian clients. That’s how it was decided to distribute the Western Asset Macro Opportunities,” he adds.

The second feeder fund, the ClearBridge Global Equity fund, has been launched in Brazil to provide exposure to the MSCI World Index; the given client’s needs. These investment strategies are aimed at both institutional and retail clients, with the latter being private banking platforms, HNWI, and asset managers.

“We are working with clients and the sales team at Western Asset, who is an entity legally licensed as a Brazilian fund administrator, to open and create feeder funds that invest in offshore funds.  Currently, we are evaluating the possibility of launching new feeder funds for different strategies with other affiliates of Legg Mason. The launch of these two funds is just the beginning, we are likely to launch new feeder funds in Brazil soon,” continues Roberto.

Legg Mason has been present in Brazil since 2005, after acquiring Citigroup’s asset management business. By having a person with knowledge of the local players and language, based in Sao Paulo, and fully dedicated to funds distribution, the management company aims to reinforce its long-term commitment to the local market.

Chile, Peru and Uruguay

In Chile, Legg Mason has been present since 2006 and its Santiago office serves as a base from where to develop the business in Peru and Uruguay. Currently, talks are being held with institutional investors, private banks and family offices, so that feeder funds that give Chilean investors access to offshore products can soon be launched.

The latest tax amnesty programs that have taken place in Chile, Argentina, and more recently Peru, have changed the landscape of the local investment fund industry. In this regard, Legg Mason has adapted to the changes quickly.

“The fiscal amnesty in Argentina and the fact that some global players like Royal Bank of Canada and Merrill Lynch have left the region has caused the fragmentation of the offshore business in Uruguay. Due to the former, numerous independent financial advisors have established themselves as family offices so as to continue serving their clients,” says Jorge Letelier.

“Both in Argentina and Peru, investors are taking advantage of the benefits offered by their governments, to repatriate capital to their country of origin and to be able to invest, either in local bonds with high yields, or in local funds with tax incentives for them”.

At this very moment, Legg Mason is not considering the idea of having a sales manager in Buenos Aires, but it does follow the development of the local industry very closely. “For now, Chile will continue as the center of operations for the Southern Cone,” concludes Letelier.

Seeking for Alternative Ways to Diversify Your Income?

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¿Buscando caminos alternativos para diversificar la obtención de rentas? 
CC-BY-SA-2.0, FlickrPhoto: Tristán Schmurr. Seeking for Alternative Ways to Diversify Your Income?

2016 leaves behind much economic uncertainty, regional political tensions, an oil price roller-coaster, and monetary policies which would have been unthinkable in the past. Hence, calmness and patience were key virtues for ending the year with positive returns.

And, heading into 2017?

The Franklin Templeton Investments solution goes through three very flexible strategies, which are able to adapt to the environment as the year’s uncertainties –the Trump stimulus program, the presidential elections in France and Germany, and Brexit–unfold, and as monetary and fiscal policies gain clarity.

Franklin Strategic Income Fund

“In a world still hungry for yield, our view is that a number of fixed income sectors still represent potentially attractive income-generating opportunities, particularly on a risk-adjusted basis, despite recent volatility following the US elections,” explained Christopher Molumphy CIO at Franklin Templeton Fixed Income Group and Portfolio Manager at FTIF (Franklin Strategic Income Fund).

In the coming months, any gradual replacement of monetary stimulus with fiscal stimulus could also lead to periodic volatility. However, Franklin Templeton’s fixed income team believes that demand for income-producing securities has not diminished, and that such demand should provide support for income oriented funds. “We regard periodic volatility as a signal of healthy markets functioning normally,” explained the fund manager.
 

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The strategy which he heads focuses on obtaining a high level of current income, with capital appreciation over the long-term as a secondary objective, and opts for fixed income and variable rate debt, which includes emerging markets. The fund uses an active asset allocation process and, under normal market conditions, invests at least 65% of its assets in US and foreign debt securities.
 

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Diversification is achieved by seeking opportunities across the whole spectrum of investment grade and below investment grade bonds, while global bond and currency markets provide the potential for risk reduction through a combination of low-correlated sectors and strategies.

Global Multi-Asset Income Fund

The US firm’s other solution for the year is the Franklin Global Multi-Asset Income Fund, which aims to distribute a consistent level of income while maintaining potential for long-term capital appreciation. The fund aims to do this while maintaining strong downside protection and within a specified risk budget of half of the volatility of the global equity market.

Given that 46% of its assets are fixed-income, and of this, 86% are investment grade bonds, its profile is more conservative.

With a three star Morningstar rating, the fund’s Portfolio Manager, Matthias Hoppe, of Franklin Templeton Solutions, explained that “by following a sensible approach to portfolio construction and adopting a philosophy that attempts to ‘win by not losing’, we approaches 2017 optimistic about the opportunities the market offers to generate a good level of income on a risk adjusted basis.

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The fund, a pure multi-asset one, invests in equities, fixed income, and alternative assets such as REITs, commodities, infrastructures and other instruments. Its regional positioning currently prefers the United States, followed by global assets and Europe in third place.

Franklin Income Fund

Heavily weighted in U.S. assets, which represent almost 80% of the portfolio, Franklin Templeton’s latest solution for income diversification is the Franklin Income Fund.

“While the pace of economic growth may remain relatively subdued, we see reasons for optimism in US and global equity markets in 2017, even as investor uncertainties over commodity prices and upward-trending US interest rates will likely persist,” said Edward Perks, CIO at Franklin Templeton Equity and Portfolio Manager for the Franklin Income Fund.

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The strategy has an almost identical weight of equities than of fixed income. 46% compared to 42%, respectively. The third leg of this portfolio is the convertible bonds, which have a weight of 10%.

The main difference with the Franklin Global Multi-Asset Income Fund is that in this case most of the fixed income assets have a rating below investment grade.
 

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“We follow a flexible, value-oriented investment philosophy seeking income and long-term capital appreciation potential by investing in dividend-paying stocks, convertible securities and bonds,” Perks summed up .

The Franklin Income Fund team believes that as the year moves forward, a stronger US economy offers a positive dynamic for many other economies and markets, “allowing for a potential shift in equity market leadership from the United States to other parts of the world,” he concluded.

Vasiliki Pachatouridi: “ETFs Will Benefit From a More Diversified Client Base Thanks to the MiFID II Directive”

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Vasiliki Pachatouridi: “La dimensión futura de los ETFs se beneficiará de una base de clientes más diversificada gracias a la directiva MiFID II"
Vasiliki Pachatouridi, courtesy photo. Vasiliki Pachatouridi: “ETFs Will Benefit From a More Diversified Client Base Thanks to the MiFID II Directive”

According to a report by Greenwich Associates and commissioned by BlackRock under the heading “ETFs in the European Institutional Channel”, the volume of assets in exchange-traded fixed income funds worldwide could exceed $2 trillion in 2025. There are those who draw attention to the high volumes of investment that this vehicle is attracting, but for Vasiliki Pachatouridi, iShares Fixed Income Product Strategist at BlackRock, the growth of debt ETFs should be taken into account in relation to the size of the underlying fixed income market and the investment fund sector as a whole.

In an exclusive interview with Funds Society, Pachatouridi states that, in November 2016, fixed-income ETFs reached almost US $600 billion in managed assets worldwide, with US-based fixed-income listed funds leading the way with US $421 billion in assets under management, followed by those domiciled in Europe with US $139 billion. “While assets managed by fixed-income ETFs have more than tripled since 2009, they still make up a small part of the underlying bond market: in fact, it accounts for less than 1%,” she explains. In fact, Pachatouridi points out that, if broken down by segment, high-yield fixed income ETFs currently have the largest share of the underlying market for this type of bond, at 2.4%, followed by listed fixed income funds with investment grade rating, representing only 1.8% of the underlying bond market with this rating.

As a reason for this growth, it should be noted that, during the past two years 25% of institutional investors have started using ETFs to access fixed income markets, and everything points to the fact that this interest is increasing. In  her opinion, the main catalysts for this trend are, “the purchase of bonds by central banks, which are shifting investors to US corporate debt; secondly, the consequences of regulations in trading models that, in particular, have reduced the ability of banks to maintain risky assets and act as liquidity providers within the framework of the main trading model and, finally, the pursuit of profitability.”

Over 55% of investors use ETFs to rebalance their portfolios. In the current market context we witnessed a strong upturn in risk inclination in all segments of corporate debt, which translates into inflows into exchange-traded fixed income funds. “November was a record month for TIPS ETFs (US bonds protected against inflation), which raised $ 2.4 billion, as inflation outlooks rose in the face of signs of upward pressure on prices, and the translation into practice of monetary policies at the budgetary level. At the same time, investment in conventional US Treasury bond ETFs fell ($ 2 billion), on fears of the Fed’s rate hike in December, which finally came.

The end of fixed income investment?

On the Fed’s monetary policy, Pachatouridi comments that, “now that rates are rising, some investors talk about the end of investment in fixed income. This position assumes that investors are always looking for profitability. The reality is that investors have balanced their portfolios, therefore, the debate no longer focuses on the interest of incorporating fixed-income securities into the portfolios but, instead, on how they should be maintained. Within a context of rising interest rates, we could witness a new rotation towards safer assets and bonds,” she explains.

In her opinion, the rise in rates does not necessarily lead to the widening of corporate debt spreads. “For example, if rates rise because growth is really improving, corporate debt spreads could also be reduced as benefits outlook improves and the risk of default decreases. However, if rates rise because markets are concerned about rising inflation (in the absence of growth) or, worse, due to the persistently high level of sovereign risk, spreads are likely to widen as long as the rest of the variables remain intact.”

More Investors

One of the challenges facing the future is the expansion of the ETFs’ investor base, which is currently very small. In this regard, for Pachatouridi, the future dimension of these products will benefit from a more diversified client base thanks to the MiFID II directive. “Reporting requirements on trading and on post-trading transparency represent clear progress that will improve the perception of the liquidity of European-domiciled ETFs, as they will provide more visibility to transactions in non-organized (OTC) markets.” In her opinion, other key catalysts for the growth of this market could be the standardized calculation of risk and trading, the increase in the supply of securities in ETFs for loans, the development of ETF derivative instruments, as well as greater acceptance of these products as collateral in over-the-counter transactions.

Pachatouridi states that one of the main differences between Europe and the US in terms of trading in fixed income assets, is the lack of consistent and reliable data on that activity in the Old Continent, which is something that MiFID II also seeks to solve. “Since trading is not required to be reported, there is a tendency to underestimate trading volumes in the secondary market for exchange-traded fixed income funds. MiFID II will improve the perception of the liquidity of the ETFs domiciled in Europe, since they will provide visibility to operations in unorganized markets (OTC).”

The ECB will have 10% of corporate debt

As regards the ECB’s corporate debt buy-back program and its impact on the market, the expert points out that, assuming the program runs until March 2017 and that the ECB continues to acquire debt at a rate of approximately 250/280 million Euros per day, bonds in the hands of the institution will add up to between 70 and 78 billion Euros. The market volume of corporate debt (non-financial) in Euros in the Euro zone amounts to approximately 950 billion Euros, so the ECB would hold less than 10% of this figure. “Incidentally, the ECB’s activity has had a considerable impact on the current price fluctuations and liquidity of eligible bonds for the program. The willingness of intermediaries and their ability to generate two-way markets and, especially, to offer securities to clients to start short positions have been hampered,” she says.

In her opinion, ETFs also play a role in the fragmentation of the fixed income market: “Corporate debt takes the form of a multitude of different securities and only a small part of them are suitable for inclusion in the general indices” In this regard, Pachatouridi adds, “ETF trading provides insight into the future state of the bond market: it’s electronic, transparent, and low-cost in a standardized and diversified product.”

Amundi Will Reduce Positions In The US Market and Increase Its Weight in European and Emerging Markets

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2017 will, not in the least, be a quieter year than 2016, and from Amundi analysts point out three key issues to watch: the consequences of Donald Trump’s presidency in the US, the upcoming elections in Europe, and the negotiations over Brexit which, according to Philippe Ithurbide, Global Head of Analysis and Strategy in Amundi, are not priced into the markets. “The consequences for Europe and the United Kingdom will be greater than is believed, and the probability for the UK to get everything it wants is zero: you cannot have everything without paying a price for it.” The expert, who does not believe that the process will be canceled, or that it will be short, predicts long negotiations, lasting many years, which will lead to painful consequences for both the EU and the British. But, despite all of the above, his star commitment for this year is the European stock exchange.

In 2017, growth will not expand beyond 3% (with the exception of markets such as Brazil, Russia or the USA, which will increase their growth), due to the impetus of protectionism, the fall of global trade, and the weakness of the investments, and in which neither is inflation going to spiral (in more than 80 countries throughout the world, the expectations of inflation surpass reality, in some cases there are negative inflations and in Europe it has not arrived yet, he says), the expert explains that the fund management company plans to reduce positions in US stocks and bonds markets (in which they strongly positioned themselves months ago) and to allocate part of those investments to Europe (both stocks and credit) and also to the emerging world.

“In the United States, markets have risen greatly, but neither growth, nor inflation, nor the Fed justify those levels,” explains Ithurbide, who only expects two rate hikes in the US during the year. “After the election, the market became more expensive and we decided not to be short because the momentum was there, but now we can say that the US market is preparing a bubble,” he adds.

He says, however, “in European equities, valuations are more attractive, there is more potential for profit growth, and dividends are the highest in the developed world,” he adds. Which is something that Alexandre Drabowicz, global Co-Head of Equity in Amundi, confirms: “Unlike at other times when profit expectations were high, this year starts from a very low base so that there is room for surprises” , He says, and predicts improvements in sectors such as energy and banks. The management company does not think there will be a re-rating of the asset, but believes that the European stock exchange will be revalued due to the effect of profits, as the expert expects a growth of 10%, coupled with dividend yields of 4% that lead him to predict “very decent returns”.

The fund manager is also very positive with the Japanese stock exchange, which has been the best after the US elections, due to the effect of a low yen, and where he sees “tremendous opportunities from a stock picking point of view”, also in part because of the inflows that will come from pension fund investments and the return of foreign investors, net sellers of the asset last year, who could begin to return.

Emerging Markets: A constructive vision

Their vision is also very constructive in emerging equities, given the economic adjustment of recent years and improvements in current account balances, their attractive valuations (with a discount of 25% -30% in some markets), their cheap currencies (which will be another catalyst for profitability), and also by the low investor positions: “Many investors are underweight in this asset in their portfolios, but will have to reduce those positions: in 2016 they took a first step when entering into emerging debt, and if they go one step further and enter into emerging equities – even if only to place that underweight in a neutral position – they could strongly boost stock market returns. “

The management company is committed to markets with good stories of internal growth (more so than external, in a world that is decelerating globally) with emphasis on countries such as India (where, for example, they’re playing on banking history, since in the last 18 months more than 200,000 current accounts opened, and it is a market in which Pension funds are opening up their investments to the country’s stock), the Philippines, Russia or China. In Latin America, these stories are harder to find, because their economies are more closely tied to commodities, although Peru would be the country of choice. They are underweight in Brazil and, although they are reducing that position somewhat, they believe that it is difficult to be positive with the political problems facing the country. It would also be difficult to commit to markets like Turkey (where they have not invested for years), but the fund manager does support Mexico’s investment case: “There may be volatility, the peso may fall even further… but we will reassign positions gradually, it is a candidate for it,” he says.

Latin America… Debt is Best

In fact, rather than an attractive market from the point of view of equities, Latin America is so from the point of view of fixed income, according to Abbas Ameli-Renani, emerging markets’strategist. In contrast to their 2014-2016 commitment to Central and Eastern European markets (due to the ECB’s EQ benefits and low inflation; markets which he now considers as overvalued and risky if there is an inflationary rebound), their commitment when it comes to debt in local currency is now on Latin America. Thus, markets like Brazil are attractive, both when considering local currency debt and external debt in hard currency, along with other prominent markets such as Russia or Indonesia. He likes local debt because, in many markets (with some exceptions), inflation is lower than that forecast by central banks, which not only does not lead to rate increases, but which will cause them to be maintained or even for some authorities to adopt an accommodative bias, which is positive for local debt. The exception would be Mexico, but it is a market in which the fund manager is looking for buying opportunities, as the central bank is prepared to support the currency if necessary in the face of Trump’s threats. He does not see the same attraction in Turkey.

Nonetheless, Amundi’s strong conviction overweight is emerging market debt in hard currency, thanks to the improvement of fundamentals in those countries, and reminds us that it is an asset which offers the same return as global shares but with a quarter of its volatility.

Trump: A demon for emerging markets?

The fund manager, who believes that China may be a key risk for emerging markets, explains, however, that although the Trump effect may be seen as negative in these markets because of protectionist rhetoric and the implications of rate hikes by the Fed, it should, in fact, help the emerging world due to the implementation of US tax policy, and the country’s growth, which supports greater global growth. “Historically, when the United States has raised rates, the spreads of emerging countries have narrowed,” he points out. And if the Fed raises rates for the same reason, because there is growth, there is no impact either. “Trump will not necessarily be negative for emerging markets: only if there is a combination of strong protectionism, while at the same time the Fed raises rates very aggressively, will there be an impact, but it is unlikely that both events coincide” he added.
 

BECON Investment Management Partners with Cullen Funds in Latam

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BECON Investment Management alcanza un acuerdo de distribución con Cullen Funds para clientes latinoamericanos
Pixabay CC0 Public DomainPhoto: Camerage. BECON Investment Management Partners with Cullen Funds in Latam

BECON Investment Management, led by José Noguerol, Florencio Mas and Frederick Bates, has reached a partnership agreement with Cullen Funds. BECON is going to distribute all of Cullen’s strategies in the Latam region. 

The main focus will be on the Cullen US Enhanced Equity Income, Cullen Emerging Markets High Dividend and Cullen North American High Dividend funds.  All of these strategies have an income focus to their stock selection and Cullen feels the Latin American client and advisor will want to invest in other income producing options besides core fixed income. They believe that the US Enhanced Equity Income strategy is particularly interesting as it invests in value, dividend paying stocks and applies a selective covered call writing process to generate additional income.  “The yield the fund generates should be attractive to investors given it has been historically around 7%.” BECON states.

This is not the first time that Cullen taps the Latam market. The firm has been distributing their funds to Latin American clients for over five years through their own distribution efforts to advisors based in Miami, Texas, New York and California who work with Latin American clients.  Cullen have also marketed strategies in Uruguay and Chile over the past three years, traveling from the NY headquarters.  According to BECON Investment Management, “advisors really like the investment process and style Cullen employs but wanted more local support.” The relationship with Becon, which manages more than $300 million in investments from Latin American clients today, will now allow Cullen to focus on local support and expertise in the region.  

For BECON’s first partnership, the firm is planning on working with very few asset managers in order to provide a focused sales effort and be able to position multiple strategies through the distribution channels. They will also be hosting several events. The first multifirm event will take place on March 15th in Montevideo where 150 advisors will attend. the second event will take place on March 16th in Buenos Aires where 150 advisors will attend. Several more events will take place in Chile, Peru, Brazil and Colombia once more intermediary agreements are signed with the key brokers and banks in those countries.