CC-BY-SA-2.0, FlickrLa directora de FinCEN, Jennifer Shasky Calvery, con el CEO de FIBA, David Schwartz / Foto FIBA. Estamos todos juntos en ésto
FIBA welcomed more than 1,300 people to its 16th Annual Anti Money Laundering (AML) Compliance Conference held March 7th to 9th in Miami. Regulators, policy makers and financial leaders from 42 countries representing 330 financial institutions and corporations shared expertise on the evolving trends in the AML landscape with the intention of enhancing overall transparency across banking and non-banking institutions.
Among the highlights from this year’s program the recent corruption scandals involving FIFA, IAAF and ITF that have not only made news headlines, but have also called into question the level of risk assessment partnering financial institutions should be applying to sports or entertainment federations. These cases have highlighted the obvious intersection between sports and finance because without proper financing, sport federations would cease to exist, placing both parties at risk and in need of a practical solution. Increased scandals warrant an increased “know your customer’s customer” approach by banks to ensure they are proactively aware of any potential fraudulent behavior occurring among clients.
In a different session, an in depth conversation with FinCEN Director, Jennifer Shasky Calvery, shed light on how the organization works and what their goals include. Ultimately, they’re not looking to “jail anyone,” least of all compliance officers, but rather find mechanisms to collect information. The obligation of protecting the financial system from criminals and terrorists lies not just with the financial services industry, but also the regulators and law enforcement. “We all are in this together,” was the message.
Finally, a subject directly related to Miami was the theme of one of the key sessions of this edition of the conference. On March 1, 2016, FinCEN’s third and most recent GTO on Miami took effect. Issued by FinCEN, the GTO is not meant to be a regulatory solution for issues, but rather a tool to understand the source of fraud, which is particularly high in this region. Currently, 22% of US real estate purchases are via all-cash transactions. The GTO requires that title insurance companies identify the true owners of shell companies, in an effort to prevent the laundering of illicit proceeds.
“The opportunity to facilitate an open dialogue between regulators and banks in one room is incredibly fulfilling and truly moves the needle on our industry,” said FIBA CEO, David Schwartz. “Compliance responsibilities and regulations may differ from region-to-region in terms of what’s expected by regulators and what’s realistic for banks, however, the common goal is to find practical solutions that protect customers, institutions and the overall system. This was our most successful event yet, and we thank our sponsors, partners and speakers who helped make it possible.”
CC-BY-SA-2.0, FlickrFoto: Thomas Leth-Olsen. Claves para entender el ciclo de crédito
Consistent dividend growth is generally a sign that a business is doing well and should provide investors with a degree of confidence. If dividends are rising steadily over time, said Alex Crooke, Head of Global Equity Income at Henderson, then a firm’s earnings, cashflow and capital should also be growing.
An indicator of sustainability
Payout ratios identify the percentage of corporate earnings that are paid as dividends and can be an indicator as to whether a company has the scope to maintain or increase dividends. The payout ratio, explains Crooke, can be influenced by a number of factors, such as the sector the company operates in and where the company is within its growth cycle. As the chart below shows, the level of current payout ratios varies considerably between countries and regions both at an absolute level and when compared to historical averages.
“Although the payout ratio chart shows that opportunities exist for dividend increases in the emerging markets, the outlook for earnings and dividends remains uncertain and at present we are finding the most attractive stock opportunities for both capital and income growth in developed markets. Within the developed world, Japan and the US have the greatest potential to increase payout ratios, although from a relatively low base with both markets currently yielding just over 2%” points out the Head of Global Equity Income at Henderson.
An active approach is important
Conversely, payout ratios from certain markets, such as Australia and the UK, are above their long-term median. “Companies from these countries are distributing a greater percentage of corporate earnings to shareholders in the form of dividends than they have done historically. This leaves the potential for dividend cuts if a company is struggling to grow its earnings. One area of concern for income investors with exposure to UK and Australia is the number of large resource-related companies listed within these market indices”, said Crooke. Henderson believes that earnings, cashflow and ultimately dividends from these types of firms are likely to be impacted by recent commodity price falls.
Nevertheless, explains Crooke, the UK in particular has a deep-rooted dividend culture and outside of the challenging environment for the energy and resources sectors is home to a number of businesses that are delivering sustainable dividend growth. Our approach is to invest on a company-by-company basis using an actively-managed process that considers risks to both capital and income.
Seeking dividend growth
Recent market volatility has affected share prices globally. Despite this, Henderson believes attractive businesses with strong fundamentals and the potential for capital and dividend growth over the long term can be found across nearly all regions and countries.
“Within our 12-strong Global Equity Income Team we continue to seek companies with good dividend growth, and payout ratios that are moderate or low, which provides the potential for dividend increases. Typically, we avoid the highest-yielding stocks and focus on a diversified list of global companies that offer a sustainable dividend policy with yields between 2% and 6%”, concludes.
The open ended fund, AXA CoRE Europe has an initial investment capacity close to EUR 700 million and aims to build a highly diversified portfolio of Core European real estate assets, it has already raised over EUR 500 million from a range of European institutions.
AXA CoRE Europe will seek to provide institutional investors with long-term stable income through the acquisition of Core real estate assets across Europe, capitalizing on individual market dynamics and timing. Over the long term AXA IM – Real Assets aims to grow AXA CoRE Europe steadily into a flagship European fund with a target size of EUR 3 billion to EUR 5 billion.
AXA CoRE Europe was one of the club of investors which AXA IM – Real Assets put together and have agreed to acquire the France’s tallest tower, Tour First in Paris La Défense. This project is in-line with the Fund’s strategy to focus investments on Europe’s largest and most established and transparent markets – UK, Germany and France – while maintaining the ability to invest across the entire continent from Spain to Benelux and the Nordics or Switzerland. AXA CoRE Europe will target mainstream asset classes, primarily offices and retail, and primarily seek investments into well-located assets which have high building technical and sustainability specifications and are let to strong tenants on medium or long term leases. The Fund will also consider selective investments where it can enhance returns by improving occupancy rates and/ or through repositioning works and will also retain a flexibility of allocation which provides for the ability to manage real estate cycles over the long term.
The fund will leverage on the established capabilities of AXA IM – Real Assets to source and actively manage European Core assets in all sectors and geographies by utilizing its unrivalled network of over 300 asset management, deal sourcing and transaction professionals, as well as fund management professionals who are locally based in 10 offices and operating in 13 countries across Europe.
The number of actively managed exchange-traded funds (ETFs) is likely to increase significantly once the U.S. Securities & Exchange Commission rules on proposals designed to discourage high-frequency traders from stepping ahead of active managers, according to BNY Mellon‘s ETF Services group.
While traditional ETFs are highly transparent, this characteristic has been a detriment to some active managers who do not want every move studied by high-frequency traders seeking to front-run their transactions. The various proposals being considered by regulators would limit the transparency required for managers of active ETFs. However, many in the industry believe that investors are willing to give up a measure of transparency to access active management in a cost-effective vehicle.
Steve Cook, business executive, structured product services at BNY Mellon, said, “Uncertainty around which proposal will be adopted has slowed the launch of actively managed ETFs this year. However, once we have regulatory clarity, we expect a rebound in launches of actively managed ETFs. It will result in more options for investors, which is what everyone wants.”
The negative interest rate regime in Japan is likely to circumvent banks and target currency and market financing. According to Maxime Alimi, from Axa Investment Management, there are three main implications to this:
The Bank of Japan has room to cut further and is likely to use it;
Significant risks of financial market disruptions and
Financial repression for institutional investors.
In their view, “the BoJ played a role in the recent market correction as it sharpened the market’s pessimistic assessment of central banks’ potency to address sluggish growth and inflation.” Japanese banks have, and will continue to have, only a very small share of their reserves effectively taxed, unlike in Europe, plus “banks are very unlikely to pass on negative rates to their clients either through deposits or loans.”
What is the point, then, of cutting interest rates into negative territory? The team believes that the BoJ is counting on non-bank channels to support the economy and borrowing condition, which include:
Currency: lower policy interest rates still influence money market rates and therefore the relative carry of the yen compared to other currencies.
Sovereign yield curve: lower short-term interest rates spread to longer-term yields via the expectation channel.
Corporate bond yields: financing costs for corporates fall as a consequence of lower JGB yields as well as tighter spreads resulting from the search for yield.
Floating-rate bank loans: a large share of mortgages and corporate bank loans are floating and use interbank market rates as benchmarks.
They also believe that given “deposit interest rates have a floor at zero, largely removing the risk of cash withdrawals, the BoJ has a lot of room to cut interest rates below the current -0.1%. They have effectively made the case that ‘there is no floor.'” As well as that with negative rates, the risk of disruptions and illiquidity is high and that the burden of negative interest rates will be mostly borne by institutional investors, which have to invest in debt securities.
“The BoJ is “fighting a war” against deflation and has repeatedly proven its commitment since early 2013. But this war has to be short in order to be won. This was true with QE, it becomes even more true with negative rates. This will require not only monetary policy to be effective but the other pillars of Abe’s policies to come to fruition soon. Otherwise, not only will the benefits of this ‘shock-and-awe’ strategy fade away, but associated risks will mount. More than ever, the clock is ticking for Abenomics,” he concludes.
CC-BY-SA-2.0, FlickrPhoto: Investment Europe. Invesco Hires Deutsche AM Head of EMEA Marketing
Invesco announce the appointment of Henning Stein as Head of Institutional Marketing for the EMEA region. Based in Zurich, Stein will report to will report to David Bower, head of Marketing at Invesco and will be part of the distribution leadership team led by Colin Fitzgerald, head of Invesco’s EMEA Institutional Business.
Henning joins from Deutsche Asset Management where he led EMEA Institutional and Retail Marketing. One of his core focus areas has been the development of research-based marketing programmes for institutional investors. As Chair of the firm’s academic foundation, he established and developed a thought leadership programme to provide clients with a wide range of perspectives and research. This helped clients develop ideas and solutions to address wider financial requirements beyond their immediate manager selection activities. In so doing, he has established a broad academic network of finance professors from institutions such as the University of Cambridge, the University of Zurich and MIT; a network that we believe will complement our ongoing activities in the institutional market. Henning holds a PhD from the University of Cambridge (Darwin College) in Business and Economics.
“I would also like to take this opportunity to thank Carsten Majer who since 2013 has been responsible for EMEA Institutional Marketing. Under his leadership we have consolidated our institutional marketing efforts in the region and progressed our marketing activities particularly in the UK, CH, DE, AT and the Middle East. With the near doubling in size of the Cross Border retail channel over the period and corresponding growth in complexity and depth of marketing activities, I’m delighted that Carsten will have more time to focus on this critical activity”, points out Bower.
CC-BY-SA-2.0, FlickrPhoto: Beijing Patrol. China Will Need To Maintain And Even Lower Its Interest Rates To Avoid A Sharper Downturn
China’s rapid growth over the past decade has been fuelled by cheap credit. According to Investec, this has led to a misallocation of capital, particularly following the global financial crisis when policymakers unleashed a RMB4 trillion stimulus package into infrastructure, construction and heavy industry. According to Oxford Economics, the China’s overall debt load (public, private and financial) rose from 176% of gross domestic product (GDP) in 2007, to 258% by mid-2014, and over 300% by the end of 2015. This has continued to rise as China’s so-called total social financing, or aggregate debt, rose by RMB3.42 trillion ($520 billion) in January alone, according to official data.
Bank lending is in much need of reform. Borrowing is concentrated in sectors where there is major overcapacity – heavy manufacturing, property and infrastructure – which are dominated by often inefficient state-owned enterprises (SOEs). The Emerging Market Fixed Income team at Investec, which has recently conducted a number of research trips to mainland China, thinks that the implicit government guarantee of SOE borrowings remains in place, resulting in debt being rolled over, rather than called in.
SOEs rolling over debt presents a challenge for policymakers. “Given high and rising debt service ratios, as credit growth continues to outstrip nominal GDP growth, China will need to maintain and even lower its interest rates to avoid a sharper and more prolonged downturn,” says Mark Evans, an analyst in Emerging Market Fixed Income. “But lowering interest rates on Chinese assets will again put pressure on capital outflows as investors earn less yield on their renminbi assets, hence the difficulties policymakers are facing right now.”
Rising debt loads is likely to lead to a financial cycle whereby the proportion of non-performing loans (NPLs) starts rising. Official data suggest that banks’ NPLs were around RMB1.95 trillion (2% of GDP) in December 2015. But a truer measure of where non-performing loans may actually settle is the sum of NPLs and special-mention loans – those that are overdue but which banks don’t yet consider impaired – which the IMF estimated these constituted about 5.4% of GDP in August 2015.
According to John Holmes, a sector specialist for financials in the 4Factor Equity™ team, “Prior banking crises globally have typically seen a 6-7 percentage point increase in the NPL ratio from trough, which would suggest a 7% or 8% true NPL ratio as a starting point for the Chinese banks in the event of a severe downturn.”
The growth of NPLs in the shadow-banking sector is also concerning. “It is hard to pinpoint exactly who has done the lending”, says Mike Hugman, strategist in Emerging Market Fixed Income, “as there have been several rapidly growing lending channels outside the banking system. But we think that corporate leverage is now around 140-150% of GDP, higher than in any other emerging market.”
The good news is that much of China’s credit growth has been domestically financed. Consequently, we expect that policymakers have a greater ability to manage the cycle than perhaps we would expect in more open economies, as we saw during the global financial crisis.
The State Council is expecting China’s banks to share the burden of cleaning up bad debt. John believes that “Chinese banks have historically enjoyed high levels of profitability, with return on equity averaging in the region of 20% over the last decade, aided by strong loan growth, high pre-provision margins and relatively benign asset quality.” He reckons that “their high pre-provision profit margins means they should have the capacity to charge-off bad assets over a multi-year period and remain profitable even with NPLs north of 10%, as some analysts suggest.”
CC-BY-SA-2.0, FlickrPhoto: Arturo Sánchez
. Investors Want Transparency, Ethics, and Performance, CFA Institute Survey Reveals
Investors are expecting higher levels of transparency than ever before, holding their investment managers to the highest ethical standards, and are laser-focused on returns, according to a newly released study “From Trust to Loyalty: A Global Survey of What Investors Want,” by CFA Institute, the global association of investment professionals, that measures the opinions of both retail and institutional investors globally.
The findings reveal that investors want regular, clear communications about fees and upfront conversations about conflicts of interest. The biggest gaps between investor expectations and what they receive relate to fees and performance. Clients want fees that are structured to align their interests, are well disclosed and fairly reflect the value they are getting from their investment firms.
“The bar for investment management professionals has never been higher. Retail and institutional investors, as always, crave strong performance, however both groups also demand enhanced communication and guidance from their money managers. Building trust requires truly demonstrating your commitment to clients’ well-being, not empty performance promises or tick-the-box compliance exercises. Effectively doing so will help advance the investment management profession at a time when the public questions its worth and relevance.” said Paul Smith, president and CEO of CFA Institute.
“While an increase in overall trust in the financial services industry is a net positive for financial professionals,” continued Smith, “performance is no longer the only ‘deal breaker’ for investors. They are continuing to demand more clarity and service from financial professionals and, with the rise of robo-advisors, they have more alternatives than ever before. Further, if investment professionals don’t provide this clarity, then regulators may force them to, for better or worse.”
The study also shows that investors are anxious about global markets, and do not believe their investment firms are prepared. Investors revealed a growing anxiety about the state of global finance. Almost one-third of investors feel that another financial crisis is likely within the next three years (33 percent of retail investors/29 percent of institutional investors), with significantly more in India (59 percent) and France (46 percent). In addition, only half of all investors believe their investment firms are “very well prepared” or “well prepared” (52 percent retail investors/49 percent institutional investors) to manage their portfolio through a crisis.
CC-BY-SA-2.0, FlickrPhoto: Leticia Machado
. The Majority of New Assets in European Equities Have Landed in The Most Active Funds
Average active share for European large-cap funds was 69.6% in the three-year period through March 2015, with a median of 72.4% when measured against the funds’ appropriate style indexes. That is the finding of a new study from Morningstar.
“Our results show that between 2005 and 2015 “closet indexing” has become rarer among European large-cap funds, and those funds with higher active shares have received the lion’s share of new assets. We find that funds with higher active share have delivered better investment results than the least active funds in most of our research period, but not unambiguously. Because dispersions in returns and risk characteristics become much wider as a portfolio’s active share rises towards 100%, investors should not rely solely on active share when selecting funds”.
Among other findings of the report, the percentage of funds with a three-year average active share below 60% (so-called closet indexers) was 20.2%. The portion of funds that can be characterized as closet indexers has been falling in the researched categories in recent years. The majority of new assets in European equities have landed in the most active funds.
Although funds in the most active quartile charge 33 basis points more on average than those in the least active quartile for their retail share classes, we find that when price is measured per unit of active share, European investors are overpaying for low active share funds. Investors should compare fees carefully as dispersion in fees among funds with similar active shares is high.
Morningstar finds a strong inverse correlation between active share and market risk. Active share numbers dropped considerably during the financial crisis of 2008-09 but have been rising at a steady pace since then.
Funds across the board lowered the share of mid- and small-cap stocks in their portfolios in 2008-09, but this was especially the case for the most active funds.
The funds with the highest active shares have done better, on average, than those in the least active quartile in all of the five-year periods tested between 1 July 2006 and June-end 2015. However, the difference in excess returns between the most and the least active quartile has decreased recently, which implies that the strength of active share as a selection tool is time-period dependent. Invariably, however, the funds with the lowest active shares have been the worst performers.
The study finds that funds in the highest active share quartile have displayed much stronger style biases than the average fund. This may not always be desirable from a fund investor’s point of view, and complicates the use of active share in fund selection. The style effects have been especially strong in the small group of funds with an above 90% active share. After controlling for style effects in a four- factor regression model, we find their alpha to be lower than for any other group in the most recent five-year period researched.
Investors who use active share as a fund selection tool should exercise caution. As active share increases, dispersion in returns and risk levels rises sharply; the best and worst performing funds are to be found among the more active ones. Therefore, we advise using active share only in combination with other quantitative and qualitative tools.
Combining active share with tracking error adds a useful dimension to the analysis, and we find this to be an adequate analytical framework in the European large-cap space. Confirming results in US markets, we find that funds that exhibit a large tracking error but a low or moderate active share (so- called factor bet funds) have underperformed.
“We find that funds with Positive Morningstar Analyst Ratings tend to have above-average active shares and tracking errors”, says the study.
“In less than a decade, “active share” has become a widely used concept in fund analysis. However, much of the available active share research references only US-domiciled funds. In this paper we study a subset of European funds investing in European equities to see how their active share has developed over time, and evaluate how the active share measure might be used as a tool to aid fund selection within the European fund universe. The study encompasses the period 1 January 2005 through June-end 2015. By including only large-cap funds, we reduce the difficulties arising from benchmark selection and the impact of the small-cap effect”.
Ahead of the European Central Bank’s (ECB) meeting on March 10th, Keith Wade, Chief Economist & Strategist at Schroders looks at whether central banks’ powers are waning in their fight against falling inflation.
According to him, ahead of the March ECB meeting, three factors have set the scene for potential further policy easing:
Lower oil prices
Fears over global growth
Lower market based measures of inflation expectations
He mentions that “one may expect similar policy responses of rate cuts or quantitative easing (QE) expansion to not produce vastly different medium term results to what we have seen already, with growth and inflation so far limited in the backdrop of subdued global growth. It is perhaps this thought process that leaves the market questioning what effective policies central banks can enact further.”
Wade says that there is a cchance that we could see, for the first time, a lowering of inflation targets across the globe.
For at least the last decade the general belief within markets is that regardless of the situation, central banks will help limit losses in risk assets by lowering interest rates or introducing QE (also known as the central bank ‘put’ option). This school of thought has been questioned in recent weeks, with further possible policy action available to central banks seemingly limited, at least compared to what was available in the past. “Monetary policy has been kept very loose, yet signs of strong growth and inflation are difficult to see… with lower spot inflation used in setting future wages and prices, thus affecting core inflation. The problem with inflation is the longer it stays low, the more embedded lower long-term inflation expectations become.”
With market-based measures of average inflation in the 6-10 year range falling across many major markets, consumer-based expectations of inflation have also been falling in recent years.
The market had previously nicknamed the ECB President ‘Super’ Mario Draghi after the “shock and awe” asset purchasing programme announced in January 2015. “On March 10th we will find out whether that nickname has been reclaimed after the disappointment of the December meeting,” he concludes.
