In the latest edition of Global Horizons, “A Brave New World for Fond Markets” Jeremy Lawson and Sebastian Mackay -Standard Life Investments- look at whether bond markets are pricing in a great stagnation and how yields are likely to evolve through the rest of the business cycle.
“These are highly unusual times in the world of fixed income. The factors weighing on bond yields are numerous, complex and in some cases, unprecedented.” Said Jeremy Lawson, Chief Economist, Standard Life Investments
“Aftershocks of the financial crisis are still being felt, seven years after Lehman Brothers collapsed. Our analysis shows that the scarring from the crisis and prolonged private sector deleveraging has raised desired savings, weighing on domestic demand and inflation. Weakness in domestic demand in advanced economies has been amplified by policy mistakes and this has depressed labor markets, discouraged firms from investing, and held down inflation. Productivity growth, which had been in decline even before the crisis, has weakened further, underpinned by the drought in private and public capital spending.”
“Both by accident and design, central banks and regulators have been pursuing policies that lower real interest rates and term premia, enhancing the demand for all income yielding assets. Central banks have been forced to keep short term interest rates at or even below the zero lower bound, and to put in place unconventional policy measures aimed at suppressing real interest rates along the entire yield curve.”
Jeremy Lawson, adds “Looking ahead and taking account of these special factors – why should the market change its mind and begin to anticipate higher long term interest rates? We examine the potential triggers for long-term bond yields to shift in the US. If recoveries in the advanced economies become more self-sustaining and if emerging market economic and financial conditions do not deteriorate further, inflation expectations could pick up. The Fed should be willing to accommodate some increase in real interest rates. Investors might also demand more compensation for holding long-term interest rate risk.
“We conclude that it is unlikely that the long term interest rates will return to their pre-crisis norms. Our research suggests that the benchmark US 10 year government bond yield will peak at 3 to 4% during the current business cycle. This would be above today’s levels but well below the peak of previous business cycles.”
Victoria Mio, co- chief investment officer in Asia Pacific at Robeco.. Robeco, about China: "Some Investors Did Leave The Market, Providing A Good Entry Point for Long Term Investors"
Victoria Mio, co- chief investment officer in Asia Pacific at Robeco and Robeco Chinese Equites’ fund manager, explains in this interview with Funds Society her outlook for the Chinese economy and markets and the impact for the global economy.
How would you explain the volatility that the Chinese stock markets have experienced in recent weeks?
For the offshore Chinese equities listed in Hong Kong and the US, the recent volatility is due to the following factors: continued lack of sign for macroeconomic condition improvement in China; changing of Chinese currency CNY pricing mechanism and 3% one-off CNY depreciation; lack of upside surprise from the 1H2015 corporate earnings result season in August; expectation of interest rate hike in the US causing funds outflows from global emerging markets, including China. For the domestic A share markets, there is a Chinese specific condition: unwinding of margin finance. At the peak, margin financing through the official channels stood at CNY 2.3 trn in mid Jun, and dropped to less than CNY 0.9 trn.
Will the current Chinese government measures be enough? To what extent the Chinese authorities have room to boost the markets?
China government has recently introduced new stimulus as debt-swap (CNY 3.2 trn debt-swap program for maturing short-term LGFV debts to be converted into long-term local government bonds), local government projects (boosting the capital adequacy ratios of China Development Bank and Export-Import Bank of China, and issue policy bonds to support local government projects), infrastructure (support construction in 5 areas: agriculture, urban infrastructure, environment protection, public housing and high-end manufacturing & telecom), property (PBOC cut the down-payment requirement for second homes to 40% from 60%. This will likely lead to an improvement in property investment in 4Q15), export (the State Council pledged on 26 August 2015 to support China’s export by cutting levies on exported goods, increase the transparency of port and customs fees, etc.) and consumption (the government also cut the RRR for auto loan by 300bps to support auto finance).
These stimuli may not be enough to stop the deceleration in growth, but they will reduce the downside. We expect that the Chinese central bank will continue to cut interest rate or RRR in Oct this year, and will continue the monetary easing policy next year. We also expect the government to do more fiscal spending to boost growth in the coming months, particularly related to the 13th Five Year Plan (covering 2016-2020). The initial plan is likely to be announced in October 2015 and finalized in March 2016.
Is there anything you may find positive about such markets correction?
Valuation becomes extremely attractive now. Some investors did leave the market, providing a good entry point for long term investors.
Do you see room for further declines in China’s markets?
Given the extreme bearishness in the market, and record low valuation, the downside is limited. The risk is to the upside in the next 3-6 months.
At this moment, what is your strategy: taking the opportunity to buy low or selling because of high volatility?
We remain overweight China within our APxJ/EM coverage universe. We are selective with stock ideas, and prefer sectors/stock names with healthy earnings growth trajectory, and potentially have higher US$ or equivalent revenue exposure while its cost base is more RMB denominated. Such sectors/companies will benefit under the RMB depreciation scenario.
To what extent this crisis will impact in the developed world, especially Europe and the US? Do you think the situation can be spread around, as we saw in August?
Due to capital control in China, the correction in China A share markets will have little impact on global markets, except the Hong Kong equity market, through the Shanghai-Hong Kong Stock Connect.
The net impact of the change in the RMB currency management approach on the global economy is dependent on whether policy-makers also take up easing measures in a way that stabilizes growth in China. A currency move, just by itself, will lead to tightening financial conditions elsewhere in the world (by way of appreciation of other economies’ trade-weighted indices) and could prolong the impact of disinflationary forces on the global economy. We expect this impact to be felt most materially in the Asia ex Japan region and also in the US (given the close trade linkages between China and these economies).
What about the contagion of other markets in Asia? And in Latin America?
From macro perspective, the Asia ex Japan region is highly exposed to the impact of China’s slowdown, as China has emerged as a key source of end demand over the past years. Within the region, Korean, Taiwan and Singapore would be the most affected via the direct trade channel, while Indonesia and Malaysia would be affected via the commodity price channel, owing to their status as the net commodity exporters in the region.
Latin America is less directly exposed to China’s end demand. But with the majority of tis exports basket commodity related, a growth slowdown in China would affect the region via weaker commodity prices and a negative terms of trade impact. Domestic demand could be further affected via weaker consumer purchasing power and reduced attractiveness of commodity related investment. Government spending could be constrained by weaker commodity tax revenues.
From a currency market perspective, the adjustment of the fixing mechanism of the CNY may have a potential impact on other Asia currencies, as the resultant devaluation has resulted in the Asian currencies trading weaker too.
Do you think this turmoil may lead the Fed to delay, even more, the interest rates hikes?
Specifically, for the Fed, China’s move complicates one of the three criteria – a leveling out in the trade-weighted dollar – that the Fed had laid out earlier this that, if met, would give it the confidence to raise the target rate this year. Robeco holds the view that the Fed will start its first rate hike in December 2015.
What impact will the new China have in global growth, commodity prices, and in general, in the world economy?
Unlike the “old China” sectors that are more investment + export driven and more energy intensive, the “new China” is more consumption driven and less energy intensive. If the relatively faster growth in “new China” helps to prevent a major slowdown in China’s growth, in general, China is likely to continue contribute to world GDP growth by a significant share, though commodities prices are unlikely find a meaningful lift from this.
Will there be soft or hard landing?
We expect China to have a gradual pace of adjustment to address the challenges of managing the disinflationary pressure and high debt level. This gradualism approach means that the disinflationary pressure could persist for longer as we believe that the magnitude of excess capacity in China remains large during this slow adjustment process.
As policy makers continue to adopt gradual adjustment, we believe investment growth will continue to slow in an environment of relatively high real borrowing cost trend, particularly for the industrial corporate sector. Moreover, moderation in corporate revenue and nominal industrial growth is resulting in the corporate sector slowing wage growth, which in turn is likely to weigh on private consumption growth. Hence, we expect GDP growth to slow to 6.8% YoY in 2016.
We have seen the slower GDP growth mainly weighed by industrial sectors. The current weakness in growth mainly reflected the difficulties in industrial economy on the back of deceleration in investment growth and systematically weaker external demand. However, services sectors growth continues to outperform the industrial sectors. The services sectors – which represented 48.1% of GDP in 2014 (vs. 44.2% in 2010) – have been outperforming the overall GDP growth. Tertiary sectors growth was 8.4% YoY in 1H15 (vs. 7.8% YoY in 2014), partially offsetting the slower growth in secondary sectors (6.1% YoY in 1H2015 vs. 7.3% YoY in 2014). The strength in the services sectors is reflected in the relatively higher reading of non-manufacturing PMI at around 53-54, well above manufacturing PMI which is hovering at around or slightly below 50.
Global assets under management in the collective investment funds industry dropped by US$ 1.44 trillion or minus 4% in August and stood at US$ 34.7 trillion at the end of the month. Estimated net outflows accounted for US$ 20.8 billion while the remainder of the drop was due to market losses. Thus a provisional all time high in assets under management was reached at the end of April 2015 with US$ 36.4 trillion, according to Lipper Thompsonfigures.
All asset types posted negative average returns with Equity funds performing worst at minus 6.9% on average in US$ terms, while Bond funds where hit most net redemptions wise with minus US$ 38 billion. Some of this money, however, found its way into Money Market funds, which were able to attract US$ 28.5 billion net new money. However, the trend into money market funds slowed from the previous month as the market waited, “on hold”.
Taking a look at Lipper Global Equity Classifications, Equity Global ex US (+13.7), Equity Japan (+5.3) and Equity Europe funds with plus US$ 3.4 billion accounted for the highest estimated net inflows, while Equity US funds (+US$ 1.7 billion) were able to halt the outflows trend as observed in the previous two months. On the lagging side we find Equity Global (-10.5), Equity Emerging Markets Global (-9.1) and Equity Asia Pacific ex Japan funds with a minus US$ 8.2 billion in estimated net outflows.
On the Bond Classifications side, Bond Global (-6.7), Bond USD High Yield (-6.1) and Bond Emerging Markets Global HC with minus US$ 5 billion led the outflows table while only Bond USD Mortgages attracted significant net new money with plus US$ 1.4 billion. Money Market funds USD led the overall inflows table with plus US$ 30.1 billion followed by Money Market EUR funds with plus US$ 16.4 billion net new money.
“Rising volatility in equity markets and an uncertain outlook for fixed income, due to mixed signals from the FED, combined with a significantly expansive monetary policy from the ECBhave left their traces in the global investment funds market in August, with investors remaining put or moving to the side lines,” commented Otto Christian Kober, Lipper’s Global Head of Methodology and author of the report.
“Bond fund outflows seem to anticipate rising interest rates as equity markets retreat from their all time highs”, added Kober.
Few global asset classes have experienced the same level of risk re-pricing as emerging market (EM) local currency bonds over the last three years. The yield on the asset class relative to a basket of developed market government bonds now stands at a six-year high, representing a pickup of 5.4%. Meanwhile, EM currencies have weakened to such an extent that many of them now appear very cheap on a range of valuation measures. However, we believe –says Standard Life Investment in their document- investors should refrain from viewing the asset class as a potential beta allocation opportunity. Rather, they should seek to understand the varied dynamics of the small number of large countries in the opportunity set.
When assessing investment opportunities within emerging markets, the company focusses on understanding the direction of travel of fundamentals for each country. This allows them to understand which are improving and which are deteriorating. The company´s relative value models for local market instruments determine whether these fundamental changes, or expected changes, are reflected in asset prices.
Its investment case in Turkey, for example, is less favourable. The country is heading toward fresh parliamentary elections, as the process of coalition building following the June elections appears to be failing. Meanwhile, they believe the country’s financing mix is extremely risky. “There are internal policy challenges that need to be resolved before we could become more bullish on local market assets. In Brazil, even though we believe that the government’s revisions to primary surplus targets for 2015 may present risks to debt sustainability, the market understands these risks better than those present in Turkey. Therefore, we would still consider holding Brazilian debt.”
Meanwhile –says the company-, the renewed slump in commodity prices continues to present challenges to those countries which rely on these products as a source of exports, government revenues or GDP growth. Any rebound in commodity prices – especially oil – would result in a more constructive view of fundamentals in Malaysia and Nigeria. Among oil exporters, Standard Life Investments believes Colombia should perform well in the months to come. “Its currency has undergone a drastic adjustment and we believe fiscal and monetary tightening is likely in the short to medium term.”
Emerging markets have been subjected to extreme stresses in recent years: the ‘taper tantrum’, China weakness and the precipitous decline in commodity prices having created something of a perfect storm. In such a scenario, investors can be guilty of exhibiting insufficient discretion, choosing instead to view all EM countries as equal. For those willing to take a more nuanced approach, however, this creates opportunities. Sound fundamentals and coherent, responsible policy making are still on display among many EMs, and their local currency bonds offer an attractive level of income in today’s low-yield world.
Allianz Global Investors has announced that it is further expanding its European fixed income expertise. As part of this expansion, AllianzGI has appointed Mike Riddell as UK fixed income portfolio manager.
With a track-record of European fixed income experience dating back to the 1950s, Allianz Global Investors is already one of the leading fixed income managers in Europe, with EUR 147 billion of European fixed income assets under management. Expanding its Eurozone fixed income capability to include a regional fixed income focus in the UK, fully integrated into AllianzGI’s established global fixed income platform, will help ensure AllianzGI continues to offer the blend of expert, active investment solutions that clients want.
Mike, who starts his new role on October 1, joins AllianzGI from M&G Investments, with a strong track-record across a range of fixed income funds. At M&G, Mike was an active contributor to the Bond Vigilantes blog, writing regularly on global fixed income topics, and was particularly well-known for his bearish view of China. Based in London, Mike, who has worked in international fixed income markets for nearly fifteen years, will report to Mauro Vittorangeli, CIO for Conviction Fixed Income at Allianz Global Investors.
Franck Dixmier, Global Head of Fixed Income at Allianz Global Investors, said: “Allianz Global Investors has a fixed income heritage stretching back many decades. Creating a dedicated footprint in the UK, one of the world’s most important and outward-looking financial markets, will perfectly complement our existing Eurozone expertise, giving our clients access to a one-stop shop for European fixed income.
“Mike joins us at an exciting time for our fixed income business, and I am sure that his deep experience of both UK and global fixed income markets will play a central role in building this new pillar in our international fixed income capability. Hiring such a senior, experienced fixed income practitioner as Mike underlines our ambition for our bond business in the UK.”
With recent equity volatility, news headlines are once again screaming about the collapse of capital markets worldwide and are claiming that conditions globally have not only weakened but have suddenly and drastically deteriorated. “We have many things to say, but will only say a few, with hopes that by focusing on our most important facts, principles, and insights, our message might be heard through the din of the mainstream media”, says Daniel Chung, CEO of Fred Alger Management.
This is an extract from the US based asset management firm:
Volatility Creates Buying Opportunities
First, markets are markets, and thus volatility is to be expected and, indeed, welcomed by smart investors. An important fact: U.S. equity corrections of 5% or more are common — very common. There have been over 200 such declines since 1927.Since that year, the average decline among corrections exceeding 5% has been 12.1% and the median has been 8.3%. The recent correction, with the S&P 500 index declining 12.4%, has therefore been simply average or perhaps just slightly worse. It’s not, however, “unusual,” “extreme,” or “catastrophic” as newspapers and TV commentators suggest. Rather, it’s normal. In particular, we note –he says- that the correction occurred when the S&P 500 and the NASDAQ Composite Index were at post-Great Recession highs. From that perspective, this correction should be viewed as highly normal, rational, and even, may we dare say, pleasing to long-term, fundamental investors. This philosophy of investing is something that Alger has embraced for over 50 years. Simply put, we maintain that the correction is a buying opportunity. We are not alone in this belief, he adds. Warren Buffett, for example, recently said volatility has created even greater discounts on the stocks that he is buying. Investors, he added, should take a long-term perspective rather than focus on volatility. Warren agrees with our view that stocks are likely to be substantially higher in 10 years.
A Look at Economies Across the Globe
Second on our list is the state of global economies, the CEO adds. There is no single fact that we, nor anyone, can cite to reassure readers that all is economically well globally. Yet, our view, based on the research of our investment team and resources provided by our excellent economic and strategic partners across the world, is that not much has changed. Again, the situation is simply not as dramatic as headlines suggest. And, we are at least very certain that nothing has fundamentally happened to imply that the world has gone from “recovering” to “ruination” in such a short time as markets suggest. The U.S. economy is running, or perhaps jogging would be a more apt image. The jogging may not be occurring in every sector or every area, but overall the economy is fine and, unquestionably, better than it was two, three, or five years ago.
For example, consumer confidence is at post-2008 highs and the housing market recovery is continuing, with housing starts reaching 1.2 million units in both June and July of this year (See Figures 1 and 2). This is steady progress in the housing market, but it remains below, roughly, the 1.5 million unit long-term average that we continue to view as needed to reflect growth in the U.S. population. In comparison, monthly housing starts hit a Great Recession low of only 478,000 units in April of 2009. Shifting lifestyle preferences may be altering the kind of housing preferred by U.S. consumers, but residential as well as commercial real estate continues to be a positive driver for the U.S. economy. Unemployment, meanwhile, has significantly declined and continues to drop. In past commentaries, we expressed our belief that as the labor market improves, there would be variations in unemployment rates among different divisions of workers. That belief was correct. In particular, college educated Americans have had strong employment prospects for several years now and today, with unemployment within this subgroup at only a bit over 2%, they are in short supply from the perspective of employers. Significant improvements have been seen across the less educated subgroups of Americans as well.
Corporate Earnings Have Been Resilient
Similarly, on the corporate side of our economy, revenues and profits have been quite resilient despite weakness in foreign markets. Europe is very mixed, with some countries such as Ireland, Iceland, Germany, and the United Kingdom doing much better than various other countries, including Greece and Russia. But Europe overall is not worse than it was one, two, or three years ago. Looking elsewhere, certain commodity- reliant exporting countries such as Brazil are truly in difficult shape. And –he adds- the Chinese economy is certainly slowing (as it has been for years) as it realigns from being driven by growing exports and by statist policies, including government investment in capital and construction intensive projects, to being driven by consumer services and the private sector. Dislocations in such a massive and shifting economy as China should be expected, but that doesn’t necessarily mean a broader collapse is occurring.
Rethinking the Role of the Federal Reserve
Finally, we provide our strong opinion on a subject that dominates too many headlines and discussions: what will the Federal Reserve do in the near future? Our opinion: the Fed no longer matters. Central bank interest rate management as a “tool” for managing the U.S. economy and economic growth is fundamentally and largely irrelevant. Many professional investors have expressed concerns over potential Federal Reserve interest rate increases. While interest rates certainly matter, we believe that the Fed long ago lost control of that aspect of the economy and that is a good thing. As we have said before in our Market Commentaries, we are not concerned about the Fed raising rates because the main rates that consumers and corporations borrow at will be determined ultimately by lenders and by debt and bond investors, not the Fed. We think that since the adoption of quantitative easing and the long, unprecedented maintenance of an essentially zero Fed Funds rate, the result has been to show that the once thought “emperor” has no clothes. Do not misunderstand us; market interest rates matter very much. But barring Fed rate mismanagement of an exceptional absolute scale (i.e., the Fed raises rates by 400 basis points, not 50 or 100 basis points), it’s simply that the Fed currently has no real control over rates. We think the U.S. market is indeed reacting to fears of higher rates — but we think the global situation makes it very clear that significant rate increases will not happen in any absolute sense. Rates are declining across the globe, making U.S. nominal rates more attractive (even as they do nothing or, as shown in August, decline slightly) to global investors. Much to the dismay of those who wish the Fed to be truly the emperor of our economy, corporations (driven by the dynamic individuals who work at them) are innovating, competing, growing, and realigning their businesses for the future, regardless of what the Fed does or doesn’t do. We see the real markets offering U.S. companies many advantages in the recent rout: lower commodity and energy prices (costs), increased buying power for international expansion, and increased workplace attractiveness for an increasingly global labor force. U.S. workers — despite persistently flat nominal wages — are also benefiting tremendously from lower costs for many basic necessities as well as from the productivity or “enjoyment” enhancing values delivered by technology and Internet industries. As an example, 20 years ago, many well-off U.S. citizens owned a camera, a video camera, a CD player, a stereo, a video game console, a cellphone, a watch, an alarm clock, a set of encyclopedias, a world atlas, a Thomas Guide, and other assets that had a combined cost of more than $10,000. All of those items are now either standard on smartphones, or they can be purchased at an app store for less than the cost of a cup of coffee.
Drivers of Equity Market Performance
What does matter? Corporate and consumer fundamentals are driven by opportunities, changes, and challenges that are abundant in the real economy, the real world. And we see a lot of opportunity for growth, profit, and recovery. With that in mind, we believe stock markets will oscillate on uncertainty, but we believe the most likely outcome will be a sharp recovery for the markets into year-end and in 2016, the expert says. As an active equity manager with a research-driven, fundamental investment strategy, we think the potential for generating substantial returns by investing in leading companies that are innovating, growing, and taking advantage of incredible opportunities within the U.S. and global economy is highly attractive.
CC-BY-SA-2.0, Flickr. Pictet Asset Management Launches Robotics Fund
Pictet Asset Management, a pioneer in thematic investing, has announced the launch of Pictet-Robotics, one of the first funds of its kind to invest in robotics and artificial intelligence technologies. A Luxembourg Sicav, the fund aims to capitalize on the growth of an industry that is forecast to expand as much as four times faster than the global economy over the next decade.
Advances in IT, such as cloud computing and the emergence of powerful new microprocessors, are revolutionizing robotics and automation technologies, which are expanding beyond the factory floor into our everyday lives. Modern robotic devices are now equipped with a remarkable capacity to sense, gather, process and act on information, endowing them with dexterity, versatility and cognition. Robots that can detect changes in facial expressions and tones of voice are being used in services and security industries. In the health care industry, sophisticated robots already assist surgeons in complex procedures, while in transport smart sensor technology is being deployed in driverless cars.
Karen Kharmandarian, Senior Investment Manager, Thematic Equities, said, “Robots have long been used in factories to automate dangerous, dirty or dull tasks. But the pace of invention is accelerating as robots are becoming indispensable to our professional and personal lives. Companies active in robotics seem bound to enjoy strong growth from this new wave of innovation”.
The Robotics fund is the most recent addition to Pictet Asset Management’s range of thematic strategies which already include, among others, specialist funds in digital communication, security, health and water. Thematic funds allow investors to capitalize on long-term socio-economic trends shaping our world.
The official launch date of Pictet-Robotics is 8th October 2015 and the initial subscription period for the fund is 2-7 October.
The fund is currently registered in the following countries: Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Liechtenstein, Luxembourg, Netherlands, Portugal, Spain, Sweden and the UK. It will be available in other countries soon.
Following the European Commission’s publication of its Action Plan for a Capital Markets Union, EFAMA voices again its continued backing to the Commission’s plan to promote further the financing of the European economy through a well-functioning CMU.
EFAMA has always been a strong supporter of the EU Single Market and supports the Commission’s Action Plan. It is consistent with its aspirations for more single market, more capital market union, and less cross-border barriers, and includes a sensible step-by-step approach that travels in the right direction.
The recent European regulatory momentum has led to considerable improvements within the regulatory environment. The new rules take time and effort to be put in place, and it is crucial to first properly implement them, and then carefully evaluate their impact.
Alexander Schindler, President of EFAMA, commented: “We applaud the Commission’s plans to assess the impact of previous regulatory reforms. This should also serve the purpose of addressing, sooner rather than later, we hope, the current overlapping requirements that are either not fully consistent with each other, or which inadvertently create an unlevel playing field among financial sectors.”
Legal and other barriers still remain. Goldplating practices are one of them. Peter De Proft, Director General of EFAMA, said: “These practices go against the idea of developing further the European single market, and we welcome the Commission’s objective to tackle this issue with Member States”.
In line with developing the single market, EFAMA equally welcomes the Commission’s suggestion to improve the functioning and effectiveness of existing European fund passports. The European asset management industry supports this as an appropriate way to address remaining cross-border barriers, lower the regulatory costs of setting up funds and facilitate the cross-border distribution of investment funds.
EFAMA also supports the creation of a truly single market for personal pensions in the EU. The current market fragmentation makes economies of scale impossible to achieve and limits the choice of pension products and pension providers. A shift in focus is needed towards, yet again, more single market and long-term saving. The creation of a Pan-European Personal Pension Product (PEPP) would have the potential to boost the flow of retail savings into capital markets and therefore to provide long-term funding to the EU economy.
Inherent to more single and capital market is also more investor trust and protection. EFAMA wholeheartedly agrees with the Commission that regulatory consistency is a key element to enable investors to compare between different types of products and make informed investment decisions. The quest for a coherent and workable EU regulatory framework should seek to create a level playing field for investment products in the EU, more transparency, and consequently, increase investor confidence. EFAMA sees no reason for the coexistence of different levels of consumer protection in the current EU regulatory landscape (MiFID II, IDD, PRIIPs). Retail investors should be offered similar disclosure requirements that will allow them a fair and meaningful comparison of similar investment options. Alexander Schindler, President of EFAMA, commented: “We regret this is not the case at the moment, and believe the Commission’s planned assessment of European markets for retail investment products will shed light on how to re-evaluate and improve the current unlevelled situation”.
Equally, EFAMA reiterates its view that consistency is yet to be achieved between the broader objectives of building a CMU and pending EU legislation, most notably the proposed Financial Transaction Tax, whose approach is in full contradiction to that of the CMU. EFAMA urgently advises that the Commission address this issue.
EFAMA welcomes the priority given to ELTIFs as a key vehicle to support infrastructure investment. The EU label of ELTIFs as new products has the potential to unlock and shift important capital towards investments in longer term projects. However if ELTIFs are to become a market success, it will be necessary to align the interests and needs of those investors that ELTIFs seek to attract. The flexibility of the ELTIFs structure and the incentives offered to potential investors will be important factors of their take-up and market success.
For that reason, EFAMA welcomes the Commission’s steps in encouraging fiscal incentives at national level, and in proposing to re-calibrate the capital requirements for insurance companies in Solvency II with regards to the ELTIFs units and shares. Lower risk factor attributed to them can become an important incentive for insurers, which are natural providers of such funds.
Foto: Hiroyuki Takeda
. Los roboadvisors tendrán que crecer un 60% anual en los próximos seis años para subsistir
According to The Cerulli Edge – U.S. Edition released in September 2015 electronic registered investment advisors (eRIAs) in the United States will need to grow aggressively to compensate their investors after six years.
“eRIAs have gathered significant assets during the past several years,” states Frederick Pickering, research analyst at Cerulli. “Although the technology of the eRIA space has allowed them to scale at a much faster rate than existing traditional financial advisors, they will still need to reach end clients. Cerulli has constructed several scenarios that approximate the annual growth rate necessary for eRIAs to realize the multiples required for their venture capital and remain standalone direct-to-consumer businesses.”
Through their research, the company believes that eRIAs’ ability to remain a standalone enterprise will be threatened due to commoditization of the eRIA model from traditional firms entering the space and massive fee compression.
“We project eRIAs will need to grow approximately 50%-60% per year for the next six years and gather approximately $35 billion in AUM to remain a standalone direct channel for consumer business,” Pickering explains. “Given the threat of commoditization within the software-only eRIA business-to-consumers marketplace and the lack of an economic moat to charge a price premium, eRIAs should consider pivoting to a business-to-business model.”
“The eRIA channel has created a business model that undercuts traditional advisory firms, but may lack the financial resources to compete if the business model becomes commoditized,” Pickering continues. “New entrants from traditional advisory firms and start-ups threaten to commoditize the space, drive down fees, and eliminate any remaining premium in eRIA fee structures.”
Foto: Elliott Brown. El 80% de los inversores institucionales invierte al menos en una clase de alternativos
Research for Preqin’s latest “Investor Outlook” has found that four out of five institutional investors invest in at least one alternative asset class. Private equity, hedge funds and real estate are the most targeted alternative asset classes, with over half of investors having an allocation to each of them in their portfolios. Although the benefits vary significantly between asset classes, common reasons cited by investors for holding allocations to alternative assets include diversification, high returns, reliable income streams and inflation hedging characteristics.
Investment in almost all asset classes is likely to increase over the coming year. In particular, 42% of private equity investors, 38% of private debt investors, and 36% of infrastructure investors plan to invest more capital in the next 12 months than they have in the previous year. A third of hedge fund investors are looking to invest less capital over the coming year compared to the last 12 months, compared to 19% that are looking to invest more.
The vast majority of investors have a positive or neutral view of each asset class. For investors in private equity and real estate, this stands at 95% and 94% respectively. Twenty percent of investors in hedge funds have a negative perception of the asset class.
Growth in investment also looks set to continue in the longer term, as the largest proportion of investors plan to increase their allocations to each asset class. In particular, 51% of private equity investors, and 44% of infrastructure investors are aiming to allocate more capital to these asset classes.
Over 60% of investors in real estate, infrastructure and private debt target returns of at least 8% annually. Just under 60% of private equity investors seek returns of at least 14%. A significant 15% of private equity investors target annualized returns of 20% or more.
The majority of investors in all asset classes believe that their interests align with those of fund managers. Private debt and real estate have the highest level of investor satisfaction, with 83% and 80% of investors respectively stating that their interests are representedby fund managers.
The largest proportion of investors in all asset classes believes that fund terms are changing in their favour. Forty seven percent of hedge fund investors, and 44% of private equity investors, feel that terms are becoming more favourable for investors
“Institutional investors allocate to alternative assets to diversify their portfolios and to achieve a broad range of other objectives. The high absolute returns generated by private equity, hedge funds’ ability to reduce volatility, the reliable income generated by private debt and the inflation-hedging characteristics of real assets are just some of the attractions for sophisticated investors.
It is clear that the institutional community remains confident in the ability of alternative assets to help them meet their return objectives. The majority feel returns are meeting or exceeding expectations and, as a result, a much larger proportion of investors plan to increase their exposure to alternatives than plan to reduce it. There remains huge scope for the alternative assets industry to grow in future years, both as investors build up existing allocations, and as they also further diversify their portfolios to include a wider range of asset classes.” Mark O’Hare–CEO, Preqin- comments on the subject.
