CC-BY-SA-2.0, FlickrPhoto: Martin Fish. Investment Fund Assets Worldwide See 4% Increase in Q2 2016
The European Fund and Asset Management Association (EFAMA) has recently published its latest International Statistical Release, which describes the developments in the worldwide investment fund industry during the second quarter of 2016.
The main developments in Q2 2016 can be summarized as follows:
Investment fund assets worldwide increased by 4 percent in the second quarter of 2016. In U.S. dollar terms, worldwide investment fund assets increased by 1.4 percent to stand at USD 42.3 trillion at end Q2 2016.
Worldwide net cash inflows increased to EUR 206 billion, up from EUR 154 billion in the first quarter of 2016.
Long-term funds (all funds excluding money market funds) recorded net inflows of EUR 217 billion, compared to EUR 192 billion in the first quarter of 2016.
Equity funds recorded net outflows of EUR 17 billion, against net inflows of EUR 50 billion in the previous quarter.
Bond funds posted net inflows of EUR 130 billion, up from net inflows of EUR 72 billion in the first quarter of 2016.
Balanced/mixed funds registered net inflows of EUR 58 billion, up from net inflows of EUR 35 billion in the previous quarter.
Money market funds continued to register net outflows in Q2 2016 (EUR 11 billion), compared to net outflows of EUR 38 billion in Q1 2016.
At the end of the second quarter of the year, assets of equity funds represented 39 percent and bond funds represented 22 percent of all investment fund assets worldwide. Of the remaining assets, money market funds represented 12 percent and the asset share of balanced/mixed funds was 18 percent.
The market share of the ten largest countries/regions in the world market were the United States (47.1%), Europe (33.8%), Australia (3.8%), Brazil (3.6%), Japan (3.5%), Canada (3.1%), China (2.7%), Rep. of Korea (0.9%), South Africa (0.4%) and India (0.4%).
CC-BY-SA-2.0, FlickrPhoto: Wansan Son
. Department of Labor Conflict of Interest Rule Expected to Boost Advisors' Allocation to ETFs by 65%
Financial advisors are likely to recommend that their clients increase allocations to exchange-traded funds (ETFs) by 65 percent as a result of the recent Department of Labor (DOL) Conflict of Interest Rule, according to a white paper by BNY Mellon.
The survey results indicated that advisors in the study currently have 23 percent of their assets under management in ETFs, and they plan to boost that allocation to 38 percent over the next two years as assets are transitioned to ETFs from other products. That would increase the percentage of assets allocated to ETFs by 65.2 percent. Approximately 55 percent of the 170 advisors polled by BNY Mellon said they plan to increase their investments to ETFs because of the rule, which becomes effective in April 2017.
“The rule requires financial advisers to recommend investments that are in the best interests of their clients when they offer guidance on 401(k) plan assets, individual retirement accounts or other qualified monies saved for retirement,” said Frank La Salla, chief executive officer of BNY Mellon’s Global Structured Products and Alternative Investment Services business. “This includes emphasizing financial services products such as ETFs that tend to have lower fees than other types of investments.”
The advisors said they will increase their use of both actively managed ETFs and passively managed ETFs. They also said they expect to increase their use of separately managed accounts and decrease their use of unit investment trusts and annuities. Funding for the growing products is likely to come at least in part from the declining products, according to the survey.
La Salla noted that cost will not be the only factor determining the types of assets that advisors recommend. “The advisor and the client might be looking to fill a need in an investment portfolio, such as obtaining exposure to a particular asset class or country,” he said. “The best product might be an ETF, or it might be a mutual fund or some other financial product.”
While the respondents indicated they expect continuing rapid growth of ETF assets, they said that changes in three areas are needed to facilitate this growth. First, the majority of defined contribution programs will need to upgrade their technology to trade ETFs, as many do not have this capability. The DOL rule could accelerate the introduction of the necessary technology as plan sponsors and advisors will be more motivated to offer these products.
The other two areas are education and information access.
“The ETF industry will need to accelerate the educational efforts about ETFs and the DOL rule among industry participants to smooth the way for projected growth,” said Steve Cook, managing director and business executive for BNY Mellon’s Structured Product Services. “As to accessing information, ETF-oriented advisors tend to favor accessing research in small bites rather in long documents. They prefer to learn about new offerings via virtual webcasts rather than attending conferences or attending sales meetings.”
LaSalla concludes that registered investment advisors (RIAs), like brokers, are likely to give ETFs serious consideration. “Given the fee-based nature of RIAs, their level of sophistication and willingness to adopt new strategies to help their investors to optimize their investments, it would seem natural for them to embrace ETFs even more.”
The white paper, Accelerating Growth: The Department of Labor Conflict of Interest Rule and its Impact on the ETF Industry, produced by BNY Mellon in association with ETF Trends, can be read here.
While 2015 was a weak year for the global offshore financial market, with growth slowing to 1.6% over the previous year, there are notable differences between offshore centers and their propositions and performances, and wealth managers need to understand these differences to service customers more effectively, according to financial services research and insight firm Verdict Financial.
The company’s latest report found that safe havens, such as the US and Switzerland, are rising in prominence, while more traditional offshore destinations, such as the Bahamas, are experiencing declines in offshore assets.
Heike van den Hoevel, Senior Analyst at Verdict Financial, notes: “Understanding the unique selling points of each offshore center is key to determine not only their performance, but also future prospects, and the reasons why investors will want to invest there.”
For example, the Bahamas, which is mainly known as a tax haven, has struggled in recent years. In light of recent scandals, in particular the Panama Papers, as well as increased media attention on tax evasion, investors and wealth managers are turning away from traditional offshore centers to avoid being tainted by association.
Switzerland, one of the world’s largest safe havens, represents another interesting example. Traditionally known for banking secrecy and numbered accounts, the Alpine state felt the full brunt of the increased pressure on offshore centers after the 2008 crisis, and retail non-resident deposits declined by 24% between 2008 and 2013. However, the tide is turning, and the Swiss government has made efforts to increase transparency and end bank secrecy in recent years, most notably committing to the automatic exchange of tax information as part of the OECD’s Common Reporting Standard, which will begin in 2018.
Van den Hoevel continues: “These efforts combined with the country’s safe haven status have seen non-resident deposits return in recent years. Various international developments – including Britain leaving the EU, the coup in Turkey, continuous unrest in the Middle East, slowing economic growth in China, and uncertainties surrounding Russia’s geopolitical ambitions – have all contributed to funds flowing back into Switzerland as investors seek a safe haven for their money.”
CC-BY-SA-2.0, FlickrPhoto: ecosistema urbano
. J.P. Morgan Launches First Active ETF
J.P. Morgan Asset Management recently launched its first alternative and actively managed ETF, the JPMorgan Diversified Alternatives ETF (JPHF). The ETF provides investors with diversified exposure to hedge funds strategies including equity long/short, event driven and global macro strategies.
JPHF was designed and is managed by Yazann Romahi, CIO of Quantitative Beta Strategies at J.P. Morgan Asset Management. A pioneer in hedge fund beta investing, Romahi created the ETF with the support of a team of 17 investment specialists who have been focused on beta philosophy research and development for more than a decade. In addition, the team manages over $3.5bn of assets in alternative beta with this ETF being the latest extension of their offering.
JPHF aims to democratize hedge fund investing by providing investors with institutional quality hedge fund strategy in a cost efficient, tradeable ETF wrapper. The ETF can serve as a core component of a portfolio’s alternatives allocation. The bottom-up approach results in a purer capture of the hedge fund exposure and better diversification than traditional hedge fund replication strategies, as it employs strategies that have true low correlation to traditional markets.
“In the past, alternative investments have been an exclusive option only accessible by a small portion of investors; however, JPHF now makes these investment vehicles available to a wider array of investors,” said Robert Deutsch, Head of ETFs for J.P. Morgan Asset Management. “Alternative beta strategies provide investors with true diversification with attractive liquidity, transparency and cost.”
With the launch of JPHF, J.P. Morgan Asset Management’s Diversified Return ETF suite features nine product offerings. J.P. Morgan manages more than $120bn in alternatives globally.
CC-BY-SA-2.0, Flickr. New Leak of Offshore Files from The Bahamas
While most uses for offshore companies and trusts are legitimate and the International Consortium of Investigative Journalists (ICIJ) does not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly, their publication causes much scandal for those involved.
The latest revelations published by ICIJ reveal fresh information about a series of offshore companies in the Bahamas with the offshore activities of prime ministers, ministers, princes, convicted criminals, the UK’s Home Secretary Amber Rudd, and Neelie Kroes, a prominent former EU commissioner.
The Bahamas, which once sold itself as the “Switzerland of the West,” is a constellation of 700 islands, many smaller than a square mile. It is one of a handful of micro nations south of the United States whose confidentiality laws and reluctance to share information with foreign governments gave rise to the term “Caribbean curtain.”
Mossack Fonseca, the law firm whose leaked files formed the basis of the Panama Papers, set up 15,915 entities in the Bahamas, making it Mossack Fonseca’s third busiest jurisdiction.
In the case of Kroes, the former senior EU official, the records show that she was director of Mint Holdings, from July 2000 to October 2009. The company was registered in the Bahamas in April 2000 and is currently active. However, Kroes, through a lawyer, told ICIJ and media partners that she did not declare her directorship of the company because it was never operational. Kroes’ lawyer blamed her appearance on company records as “a clerical oversight which was not corrected until 2009.” Her lawyer said the company, set up through a Jordanian businessman and friend of Kroes, had been created to investigate the possibility of raising money to purchase assets – worth more than $6 billion – from Enron, the American energy giant. The deal never came off, and Enron later collapsed amid a massive accounting scandal.
The Bahamas has not signed the global treaty that helps countries share tax information. The OECD, the treaty’s governing body, calls it the “most powerful instrument against offshore tax evasion and avoidance.” In August, the number of participants hit 103, which includes tax havens and some of the world’s poorest countries.
Details from the Bahamas corporate registry, along with those of the Panama Papers and the Offshore leaks, are available to the public at the searchable ICIJ Database.
On Wednesday both the Federal Reserve and the Bank of Japan decided upon leaving interest rates on hold. However, the BOJ shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates. Its policy announcement had two main parts. First, it committed itself to continue expanding the monetary base until the inflation rate “exceeds the price stability target of 2 percent and stays above the target in a stable manner.” Second, it will start targeting the yield on ten-year Japanese government debt (JGBs), while continuing to buy about 80 trillion yen in JGBs annually.
A decision that former Fed Chairman, Ben Bernanke, found puzzling given the curent policy looks to both setting a price and buying a given amount at any price but he believes “that the BOJ was concerned that dropping the quantity target would lead market participants to infer (incorrectly) that the Bank was scaling back its program of monetary easing. Over time, assuming that the BOJ does adhere to its new rate peg, the redundant quantity target is likely to become softer and to recede in importance. The BOJ’s communication will accordingly begin to emphasize the yield on JGBs, rather than the quantity of bonds in the BOJ’s portfolio, as the better indicator of the degree of monetary policy ease.”
According to Tomoya Masanao, Head of Portfolio Management Japan at PIMCO, “the decision is in part a reflection of the BOJ’s recognition that base money expansion itself has little easing effect and that Japan’s neutral yield curve, which is neither expansionary nor contractionary for the economy, is steeper than the bank would have thought. The actual yield curve should not be too flat relative to the neutral curve otherwise the economy will be negatively affected through weakening of financial intermediation.”
Paul Brain, Head of Fixed Income at Newton Investment Management commented: “This is no bazooka from the BoJ but it’s an interesting approach nonetheless. Targeting long term rates as well as short rates reminds us of the period in the 1940s and 1950s when the US fixed 10 year government borrowing rates. It opens the door for more government spending finance at very low rates without further undermining the banking system.” While Miyuki Kashima, Head of Japanese Equity Investments, BNY Mellon Asset Management Japan said he believes the mid to longer-term prospects for the Japanese equity market remain attractive “as the domestic economy is at a rare transitional phase, moving from a period of contraction to one of expansion. The market sell-off this year has been largely due to external factors, and while Japan will be affected by any global slowdown for a period, the country has a large domestic base and can weather such turbulence much better than most economies. Contrary to Japan’s image as export dependent, reliance in terms of GDP is only about 15%, much smaller than most countries in Asia or Europe. The lower oil price is positive for corporate profits overall.’
A survey of over 100 UK IFAs and wealth managers has found that over a quarter expect the demand for investments in wine to grow over the coming 12 months as investors look for more real assets and diversification in the wake of the decision of UK voters to leave the EU.
According to Cult Wines, a specialist in the acquisition and investment management of fine wines, the research into the views of 101 UK intermediaries in July this year found that 27% expect Brexit to drive investments in this area.
Industry benchmark the Liv-ex Fine Wine 100 index gained 3.6% in June alone in the wake of the Brexit vote. This was the largest positive monthly movement since November 2010, and the index’ monthly closing level of 269.07 was the highest since August 2013.
In the week after the Brexit vote, Cult Wines says its trade sales rose 106%. The trend of strong sales has continued since then, the company says, as US and Asian investors have benefitted from weaker sterling against the dollar and the Hong Kong dollar.
The diversification element of invesing in a real asset such as wine is cited by about half, 48% of those intermediaries who see increasing investments in fine wine. Some 42% cited “attractive medium to long term returns”. The compounded annual return on investable wines since 1988 has averaged 10.65%, Cult Wines says.
Intermediaries also noted that awareness of wine as an invesable area has been rising among high net worth retail investors – as it has for alternative physical investments generally.
Cult Wines estimates the fine wines sector to be worth over $4bn annually, adding that “fine wines tend to perform well when the pound is weaker and boasts a number of defensive characteristics. Holdings in wine are not normally linked to other asset prices, with the long term correlation between wine prices and the FTSE 100 at just 0.04.”
Tom Gearing, managing director at Cult Wines, said: “An allocation towards fine wine provides investors with a number of guarding characteristics, and has the advantage of not necessarily following the general trend of lagging behind the rest of the market during economic expansion because demand is consistently strong. Real assets remain an attractive option as they tend to change in value independently of the core financial markets.”
Globally, sales of fine wines to investors continue to grow. Cult Wines opened an office in Hong Kong earlier in 2016; the market estimates that half of Bordeaux’s fine wines went to Asia last year, while its share of the Bordeaux export market has more than doubled over the past decade. Cult Wines’ own sales to Hong Kong in the first half of 2016 were £1.6m, and it expects annuals sales over £5m. Compound annual growth experienced in the region in the past four years has been 235%, and it expects annuals sales of £20m by 2020.
The European Fund and Asset Management Association (EFAMA) has recently published its latest Quarterly Statistical Release describing the trends in the European investment fund industry in the second quarter of 2016.
The Highlights of the developments in Q2 2016 include:
Net sales of UCITS rebounded to EUR 71 billion, from net outflows of EUR 7 billion in Q1 2016.
Long-term UCITS, i.e. UCITS excluding money market funds, posted net inflows of EUR 44 billion, compared to net outflows of EUR 5 billion in Q1 2016.
Equity funds continued to record net outflows, i.e. EUR 18 billion compared to EUR 4 billion in Q1 2016.
Net sales of multi-asset funds increased to EUR 14 billion, from EUR 6 billion in Q1 2016.
Net sales of bond funds rebounded to EUR 42 billion, from net outflows of EUR 9 billion in Q1 2016.
Net sales of other UCITS increased to EUR 5 billion, from EUR 2 billion in Q1 2016.
UCITS money market funds experienced net inflows of EUR 28 billion, against net outflows of EUR 2 billion in Q1 2016.
AIF net sales increased to EUR 55 billion, from EUR 43 billion in Q1 2016.
Net sales of equity funds fell to EUR 3.7 billion, from EUR 6.7 billion in Q1 2016.
Net sales of multi-asset funds fell to EUR 15.2 billion, from EUR 20.3 billion in Q1 2016.
Net sales of bond funds rebounded to EUR 7.3 billion, from net outflows of EUR 170 million in Q1 2016.
Net sales of real estate funds fell to EUR 3.3 billion, from EUR 8.0 billion in Q1 2016.
Net sales of other AIFs increased to EUR 22.5 billion, from EUR 11.5 billion in Q1 2016.
Total European investment fund net assets increased by 2.1% in Q2 2016 to EUR 13,290 billion.
Net assets of UCITS went up by 1.7% to EUR 8,073 billion, and total net assets of AIFs increased by 2.8% to EUR 5,217 billion.
Bernard Delbecque, Senior director for Economics and Research at EFAMA commented: “Net sales of UCITS rebounded during the second quarter of 2016 thanks a signification increase in the demand for bond funds and money market funds, which can be partly explained by the low interest rate environment and renewed expectations of further falls in interest rates.”
CC-BY-SA-2.0, FlickrPhoto: Trade Mark Alex. Credit Suisse Appoints Two New AM Heads
Credit Suisse recently appointed Bill Johnson as Head of Asset Management Americas, and Michel Degen as Head of Asset Management Switzerland and EMEA, which includes all existing Core businesses, Alternative Funds Solutions (AFS) and Credit Suisse Energy Infrastructure Partners.
Johnson’s new appointment, in addition to his current role as Deputy Global Head of Asset Management, will oversee the Commodities Group, Credit Investments Group, Securitized Products Fund and Private Funds Group. Furthermore, Anteil Capital Partners, NEXT, and Mexico Credit Opportunities Trust (MEXCO), will continue to report to him, as well as the other Americas-based businesses that have done so so far.
Michael Strobaek, former Head of Asset Management in Switzerland, should remain Global Chief Investment Officer of Credit Suisse and Head of Investment Solutions and Products for International Wealth Management.
CC-BY-SA-2.0, FlickrPhoto: Tom Walker. Rising Inflation Pressures May Soon Force the Fed’s Hand
The evidence suggesting significantly higher inflation momentum in the months and years ahead continues to build. A turn higher in the inflation cycle would likely trigger a reaction from the Federal Reserve on monetary policy, with important consequences for investors, according to Stewart D. Taylor, Diversified Fixed Income Portfolio Manager at Eaton Vance.
The latest Consumer Price Index (CPI) number showed that inflation rose a higher-than-expected 0.2% in August, marking the fifth positive CPI print in the last six months. After bottoming at -0.2% in April 2015, headline CPI is now advancing at a 1.1% year-over-year pace. More importantly, the core CPI, which removes food and energy, is rising at a 2.3% annual rate.
However, for the Asset Manager, there are other notable signs that the trend in inflation may have turned higher, including:
Services inflation, roughly 70% of CPI, continues to increase at a rate exceeding 2.5%. In fact, the core consumer services component (services excluding energy services) is growing at over 3%.
The Atlanta Fed Wage Tracker, a measure that adjusts for demographic changes in the work force, continues to suggest that inflationary wage pressures are quickly growing (see figure below).
Commodities have stabilized and started to move higher. For instance, crude oil is more than 30% higher than the low set in January 2016. This deflationary headwind is quickly turning into an inflationary tail wind.
Both presidential candidates have voiced support of protectionist trade policies that would potentially boost the prices of goods.
Taylor writes in the company’s blog that investors and consumers have gotten used to low inflation after the global financial crisis. And to be fair, there are global crosscurrents that could keep inflation subdued. The global economy remains weak, and if growth slows further, the lack of demand could lead to more losses in commodities and goods sectors. Also, in China, some of the most pressured industries are only operating at 60% capacity, and the world’s second-largest economy continues to “export” deflation in areas like steel.
Still, Taylor believes “investors should keep a close eye on any potential shift. Inflation, even modest inflation, acts as a hidden tax on wealth. And if the Fed’s implicit target of confiscating 2% of your wealth every year wasn’t onerous enough, now it is openly making the case that tolerating higher “opportunistic” inflation to drive growth may be desirable.”
“Sluggish CPI growth and falling oil prices may have hidden the potential risks of inflation from investors. Many portfolios are underweighted in inflation-sensitive assets, and a change in the trend would catch many off-guard.” He concludes.
