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False Promise? Doubts in Europe Over UCITS ‘Protection’

The ‘protection’ afforded by the rapid redemption rights of a UCITS-compliant structure is of limited value, if the fund’s investments cannot be easily liquidated or only at fire-sale values, according to the latest issue of The Cerulli Edge – Europe Edition. With illiquidity fears mounting, Cerulli Associates, a global analytics firm, says the UCITS brand faces a denting if the professed safeguards of regular and speedy withdrawals prove of limited worth to redeemers if markets dry up.

One Genevan house directing insurers’ cash into UCITS-compliant hedge funds, told Cerulli that illiquidity risk is already evident in the investments of some liquid vehicles. It contends that given some of this sector’s largest portfolios grew so rapidly, and bought into mid- and small-caps, some of their equities positions “could take up to two years to unwind.” This, says Cerulli, could make it very difficult to sell some holdings at reasonable prices, to honor redemption requests in a matter of days.

It seems that portfolio managers in the UCITS hedge fund sector are not blind to the illiquidity risks sometimes attached to their strategies. At periods during last year, for instance, up to 40% of assets in onshore directional equities hedge funds were in portfolios that were closed to new business.

“It seems somewhat contradictory to deploy a liquid hedge fund vehicle, but then to restrict investors’ entry to it in any way,” says David Walker, European institutional research director at Cerulli. “However, limiting subscriptions to a fund makes good sense overall for the manager and clients, if the manager’s ‘alpha’ is threatened by fund size, or if shallow markets would stop significant withdrawals being met readily.”

Many European institutional investors Cerulli Associates speaks with at present express concerns that fixed income instruments right across the spectrum of credit worthiness could face illiquidity problems if holderstake flight.

Institutions are faced with a conundrum, says Barbara Wall, Europe research director at Cerulli. “Not only is the fixed-income complex they are most familiar with worthless as anything but a cushion or safe harbor. Now it threatens to turn illiquid.”

Receding Systemic Risks, But Cautious Risk Appetite

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Retroceden los riesgos sistémicos, pero el apetito por el riesgo sigue siendo prudente — . Receding Systemic Risks, But Cautious Risk Appetite

The Lyxor Hedge Fund Index was up +1.3% in July. 8 out of 12 Lyxor Indices ended the month in positive territory, led by the Lyxor CTA Long Term Index (+4.6%), the Lyxor Global Macro Index (+2.6%), and the Lyxor Variable Bias Index (+2.3%).

“Receding systemic risks following the Greek deal and the stabilization of the Chinese stock market haven’t opened a risk-on period. Instead the focus has shifted on the implications from the Chinese slowdown and from the Fed’s normalization.” says Jean- Baptiste Berthon, Senior Cross-Asset Strategist at Lyxor AM.

A macro month with markets left in the passenger seat driven by highly speculative catalysts. They were bound to follow the unpredictable jolts of the intensifying Greek saga ahead of the July 20th repayment deadline. The eleventh hour deal allowed a recovery in risky asset. 3000 km away from there, the Iran nuclear deal was another speculative catalyst with severe implications for the energy sector. Far East, the acceleration of the Chinese stock crash unsettled emerging markets and global assets, with concerns of a domino effect from the unwind of trading margins.

L/S Equity funds were strongly up overall, except for Asian funds. The – temporary – settlement of the Greek saga and the second down leg in commodities selectively favored Europe and to some extent Japan. Both regions also enjoyed a strong earning season. European L/S equity managers outperformed in July, benefiting from a strong beta contribution and exploitable themes. All of them were up in July. By contrast, the US trading environment was more challenging, facing a pending start of the Fed’s normalization and a poor Q2 earning season. However, the drop in US correlations and increased fundamental/company- specific pricing allowed US managers to extract a strong alpha both on their shorts and their longs. Almost all of them ended the month up. The laborious stabilization process in Chinese stock market continued to erode Asian managers’ returns. They were however much better protected than during the first phase of the Chinese de-bubbling.

Event Driven funds returns lagged. Merger Arbitrage underperformed Special Situation funds. The overall US regional bias of the strategy played out adversely. The poor US earning season added volatility in key healthcare, media and tech deals. It offset gains locked on the completion of DirectTV vs. AT&T operation or on the announcement of the Teva vs. Allergan jumbo deal. Such environment was much more challenging to navigate for Merger arbitrageurs. While Event Driven funds’ exposure to the resources sectors was limited, the magnitude of the collapse in energy and base metals in July was unexpected. It hit positions among both Merger Arbitrage and Special Situation funds. Besides the cautiousness building up on illiquid positions ahead of the Fed’s normalization didn’t help. The resilience of the liquid activist stakes allowed Special Situation funds end the month flat or so.

Quite an honorable performance from the L/S Credit Arbitrage funds. Very conservatively positioned, managers dodged most of the accelerating deterioration in the energy sector. They also were little affected by concerns rapidly building up in US credit market, both in IG (mainly from resources issuers) and in HY (factoring in poor earnings). They delivered increased P&L on their shorts. They were also able to benefit from the opportunity window opening in European periphery spreads, following the eleventh hour Greek deal.

CTAs outperformed in July thriving on commodities. They were initially hit by the cross-asset reversals following the surprise referendum announced in Greece. They fully recovered the lost ground thereafter. Their selective directionality paid off. The largest gains were recorded on their short energy, and their long on European risky assets.

They recorded milder gain on their long USD positions and their long US and UK bonds. In balance, gains in these bonds were eroded by losses in European bonds.

Global Macro funds performed well in constrained markets. Unlike CTAs managers, commodities were not key contributors. But they were well positioned to benefit from an environment with lower systemic risk, but concerned by the pace of global growth recovery. Renewed weakness in oil added support to reflation zones. To that regards, their overweight on Eurozone vs. US equities paid off. The volatility during the month was managed through their rate exposure, which provided a hedge. By month end, they held a zero net exposure to European bonds, and a 15% US net bond position.

U.S. On Track To Break $70 Billion In Venture Capital Funding In 2015

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El capital riesgo norteamericano superará los 70.000 millones en inversiones en 2015 — Photo: Ian Sane . U.S. On Track To Break $70 Billion In Venture Capital Funding In 2015

After reaching a record high of $56.4B spent in 2014, the U.S. is on track to smash that record and break $70B in Venture Capital (VC) spending by the end of 2015, according to “Venture Pulse Q2´15”, a report from KPMG International and CB Insights. With $36.9B already invested in the first half of the year, the final total money spent by VCs in 2015 could mark a five-year high for the U.S.

According to the report, the U.S. has collectively seen more than $15B invested in four of the last five quarters, including more than $18B in both quarters of 2015 (which contained large deals to airbnb, Zenefits, and Wish, among others). In addition, Q2’15 was a banner quarter for Unicorns – VC-backed companies with valuations in excess of $1 billion. During Q2’15, 24 VC-backed companies achieved Unicorn status (up from just 11 in Q1), including 12 in the U.S. and nine in Asia. Much of the growth in the number of Unicorns can be linked to the availability of late-stage funding.

“Activity is high and should remain so, with 2015 shaping up to be a record year,” said Brian Hughes, National Co-Lead Partner, KPMG LLP’s Venture Capital Practice. “This is driven by a number of factors, including low interest rates, strong participation by corporate investors, and new capital sources such as hedge and mutual funds. Companies are staying private longer and growing to an immense size as a result of access to investment and stronger investor interest, combined with a trend toward late stage mega-rounds.”

Hughes added, “While many analysts are predicting a slight decrease in VC investment in the months ahead, we believe the strength of such fundamental growth drivers have created strong conditions for continued investment.”

The reseach also shows that 55 percent of all VCs in Q2’15 were based in either California, New York, or Massachusetts; Deal activity in California continues to top 400 per quarter (488 in Q2 ’15); and New York has now outpaced Massachusetts in 4 of the last 5 quarters (142 to 117 in Q2 ’15), with the exception of Q1’15 when both states had the same number of deals (121).

In the past year, Internet companies have dominated the marketplace of VC-backed deals, and, in Q2 ’15, they have continued to trump all other sectors with 45 percent of the share, followed by Mobile & Telecommunications (16 percent), Healthcare (14 percent), Non-Internet/Mobile Software (6 percent), Consumer Products & Services (3 percent) and all other sectors (15 percent).

According to the report, Internet companies also topped other sectors based on dollar shares, jumping from 34 percent in Q1 ’15 to 51 percent in Q2 ’15. This increase was primarily led by airbnb’s $1.5B financing in late June. Mobile companies’ dollar share followed with 14 percent in Q2 ’15 (a decrease of 13 percent from Q1 ’15). This decrease can be attributed to Uber’s multiple billion dollar financings in Q1 ’15 compared to the largest Mobile financing of Q2 ’15 (Snapchat at $337M).

“Numerous disruptive technologies and applications are also spurring interest and investment from the VC community,” said Conor Moore, National Co-Lead Partner, KPMG LLP’s Venture Capital Practice. “The growth of new on-demand platforms continues to be particularly robust. This trend, which escalated with Uber and airbnb, is now expanding into new verticals and well beyond North America.”

The analysis by KPMG and CB Insights also found that early-stage deals into VC-backed companies remained steady at 49 percent in Q2’15, while seed deal share dropped to a five-quarter low of 24 percent. Average early-stage deals were $5.3M in Q2’15, breaking $5M for the first time in five quarters.

Additionally, mid-stage (Series B – Series C) deal share reached a five-quarter high, accounting for 26 percent of all deals to U.S.-based VC-backed companies. Interestingly, average late-stage (Series D+) deals in North America rose for the third consecutive quarter, with an average late-stage deal size of $56.3M in Q2’15. This can be partially attributed to the rise of mutual funds, hedge funds, private equity firms and corporations in recent mega-financings.

Moore added that “the availability of these late-stage mega-deals continues to delay potential IPO exits. If companies can raise similar amounts of money through private financing, many companies will opt for it.”

Threadneedle Enhances Institutional Client Proposition

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Threadneedle Investments has appointed Chris Wagstaff as Head of Institutional Marketing.

Chris will be instrumental to Threadneedle’s effort to further cement its presence in the institutional market and enhance its DB and DC client propositions, through educational & thought leadership initiatives and the development of investment strategies for a post-annuities world. His appointment follows the recent addition of Craig Nowrie to Threadneedle’s Multi- Asset Allocation team, in an effort to expand the firm’s proposition in the multi-asset and solutions space.

Chris joins from Cass Business School Executive Education, where he was Client Director with responsibility for the development, design and delivery of bespoke pensions and investment programmes. Prior to this, he was Head of Investment Education at Aviva Investors.

Dominik Kremer, Head of Institutional Sales at Threadneedle Investments, said: “The fact that the institutional market is a key focus for Threadneedle is perhaps one of our best kept secrets. We are the fourth largest manager of UK retail assets, yet 67% of our global investments and mandates across equities, fixed income, multi-asset and real estate are managed for institutional clients.

Chris is the co-author of “The Trustee Guide to Investment”, published in 2011. He has an Economics degree from Cardiff University and is a graduate of the London Business School Investment Management Evening Programme. Chris holds several certificates and diplomas, including the Chartered Institute for Securities and Investment Diploma, the Chartered Insurance Institute Personal Finance Society Diploma, the UK SIP Investment Management Certificate and the Pensions Management Institute Award in Trusteeship.

BlackRock to Acquire FutureAdvisor

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BlackRock has entered into a definitive agreement to acquire FutureAdvisor, a digital wealth manager. The company will operate as a business within BlackRock Solutions (BRS), the firm’s investment and risk management platform.

The transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2015. The financial impact of the transaction is not material to BlackRock earnings per share. Terms were not disclosed.

The combined offering will enable financial institutions to grow their advisory businesses by leveraging technology to meet a growing consumer trend of engaging with technology to gain insights on their investment portfolios, including when making critical decisions around retirement. This need is particularly acute among the mass-affluent – a large segment accounting for 30% of total U.S. investable assets.

This acquisition helps the company meet the needs of a range of financial institutions including banks, insurers, large and small broker-dealers, 401(k) platforms, and other advisory firms looking for a digital-advice platform to increase customer loyalty and grow advisory assets.

“As demand for digital wealth management grows, we believe that our combined offering will accelerate our partner firms’ abilities to serve the mass affluent in a convenient, scalable way,” said Tom Fortin, Head of Retail Technology for BlackRock.

“BlackRock has dedicated enormous effort over the years to improving financial outcomes through its leading active and passive investment offerings as well as innovative retirement planning tools including its CoRI™ Retirement Indexes. We look forward to integrating and delivering this expertise to investors in partnership with financial institutions in the months to come,” said Bo Lu, Chief Executive Officer and Co-Founder of FutureAdvisor.

TotalBank Adds Ana Olarte as SVP To Private Client Group

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TotalBank ficha a Ana Olarte en Miami para la recién creada división de clientes privados — Courtesy photo. TotalBank Adds Ana Olarte as SVP To Private Client Group

TotalBank announced Ana M. Olarte is joining the recently created Private Client Group as Senior Vice President and Private Banker. In her new position, Olarte will service and augment existing Private Client relationships, and will develop relationships with new clients, targeting professionals and high-net-worth individuals.

Olarte was most recently a Senior Vice President and Private Banker at Gibraltar Private Bank & Trust. She began her career at BankUnited almost a decade ago, and her experience includes consumer lending and international private banking in addition to domestic private banking.

“Ana will be a tremendous asset to our private banking team. Having had the pleasure of working with her in the past, I know firsthand that she has the skills and experience needed in acquiring, developing, and retaining clients. She is also actively involved in the community and local professional groups, an essential component to growth and development in this important market,” stated Jay Pelham, EVP of the Private Client Group.

Olarte holds a Bachelor of Science degree in finance and international business from Florida State University. She is a member of numerous organizations including Bankruptcy Bar Association, Legal Services of Greater Miami, and Women’s Chamber of Commerce.

Chinese Stimulus to Boost Sentiment, but Not Growth Yet

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The People’s Bank of China (PBoC) moved to cut both the benchmark interest rate and reserve requirement ratio (RRR) on August 25. The stimulus measures should help market sentiment, but Craig Botham does not expect a resurgent China as a result.

The Emerging Markets Economist says: “The cuts, of 25bps and 50bps respectively, follow a disastrous few days on the equity markets, but we do not believe the PBoC wishes to reflate that particular bubble. However, the magnitude of the slump in the stockmarket is likely to have a negative impact on sentiment, especially given a weak economic environment (we saw a much softer-than-expected manufacturing Purchasing Manager’s Index (PMI) print last week).”

In addition, Schroders´s economist considers the change in exchange rate policy which resulted in a devaluation of the renminbi has seen capital outflows, which in turn have reduced liquidity and led to tighter monetary conditions. By cutting the RRR, alongside recent market operations, this liquidity is restored and lending supported. Interest rate cuts, meanwhile, should reduce borrowing costs for existing borrowers, particularly households and state-owned enterprises.

Will this stimulus drive a growth rebound? “We are doubtful. As mentioned, the RRR cut likely just restores lost liquidity. The rate cut, while helpful, probably just forestalls defaults, rather than encouraging investment in an economy beset by deflation, overcapacity, and high debt levels. Further, previous rate cuts have done little to lower borrowing costs for new borrowers, as bank interest margins have been squeezed by asymmetric effects on deposit rates compared to lending rates. This asymmetry has eased thanks to further deposit rate liberalisation, but banks may still seek to restore some of their lost margins, particularly given their mandatory participation in the local government debt swap.

“The stimulus measures should help market sentiment, but we do not expect a resurgent China as a result.” Concludes the economist.

Why High-Yield Bonds Are Compelling Now?

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¿Por qué la deuda high yield es atractiva ahora? — Photo: R. Nial Bradshaw. Why High-Yield Bonds Are Compelling Now?

High-yield bonds occupy a special niche within the fixed-income market. These bonds, which are issued by companies with below-investment-grade credit ratings, offer higher yields to compensate investors for accepting exposure to additional credit risk. Generally, the lower the bond rating, the higher the yield.

Traditionally, companies with poorer credit ratings have issued high-yield debt to finance mergers or buyouts to help meet expanding capital needs. However, in recent years, more high-yield bonds have been issued to refinance existing debt. Companies have taken advantage of low interest rates and investors’ increased appetite for higher-yielding income investments to lock in relatively cheap financing. Situations where companies refinance their debt at more favorable rates generally put them in better financial health. Consequently, they tend to involve significantly less risk of default.

High-yield bonds are atractive to a wide range of investors because of their unique set of attributes. They appeal to investors who seek equity-like returns at much lower volatility levels than equities and to those who seek income with relatively low interest-rate sensitivity.

For the past five years, the high-yield market generally has been improving. These are, for Eaton Vance, four reasons to invest now in high-yield:

1. Low default rates.

The default rate has been below 2% in each calendar year since 2010, and as low as 0.6% in 2013 and early 2014, before rising to 2.0% with the default of TXU, a large high-yield bond issuer. This compares very favorably to the

10.3% default rate that was briefly reached in 2009, in the early aftermath of the credit crisis. It also stands well relative to the asset class’s long-term average default rate of 3.9%.

2. Healthy balance sheets.

Corporate balance sheets of below-investment-grade firms are generally in good shape and likely to improve as the economy gradually continues to recover.

3. Higher-quality issues.

The quality of new high-yield bond issues has been relatively good for several years, with 56% of issues currently being used to refinance debt, which is generally a positive scenario, bolstering company financial health. Conversely, fewer high-yield bonds being issued are lower-rated or being used to finance acquisitions and buyouts.

4. Low leverage

Another positive trend is that the leverage ratio of debt to EBITDA now stands at around 4, which is roughly where it’s been for about four years after peaking at about 5.2 in mid-2009. This is a reflection of the diligent work by many corporations to strengthen their balance sheets as well as more prudent stances taken by financial institutions and by investors in general.

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With all that said, it is important to be mindful of market changes and the risks of deteriorating credit standards as the credit cycle changes at some point. For instance, a rise in the issuance of CCC-rated lower-quality debt could be a warning that the credit cycle is nearing an end. These riskier bonds tend to accompany an upswing in aggressive leveraged buyouts and indicate an increase in the high-yield market’s overall risk exposure.

Eaton Vance is mindful of quality within the high-yield market and the importance of being compensated appropriately or sufficiently for higher levels of risk. If yields are only rising incrementally for much higher levels of risk, it may be wise to pass rather than take on higher or excess levels of risk. “In brief: Ask if you are being paid appropriately or if risk is being appropriately priced“, said the firm.

Santander Mexico Appoints Hector Grisi as Executive President and CEO

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Santander México nombra a Marcos Martínez presidente del Consejo y a Hector Grisi presidente ejecutivo — Photo: Marcos Martínez Gavica (left) and Hector Grisi Checa (right) / Courtesy photo. Santander Mexico Appoints Hector Grisi as Executive President and CEO

Grupo Financiero Santander Mexico, S.A.B. de C.V. and Banco Santander (Mexico), S.A. Institucion de Banca Multiple, Grupo Financiero Santander Mexico, pursuant to the announcement dated August 12, 2015, in connection with the changes to their Boards of Directors and CEO, announce that their Boards of Directors held a meeting, in which Mr. Marcos Martinez Gavica was appointed as Chairman of the Board and Mr. Hector Grisi Checa as Executive President and CEO, subject to applicable regulatory approvals.

After years of committed and strategic leadership as Chairman of the Boards of Directors of the Group and the Bank since his appointment more than 18 years ago, Carlos Gomez y Gomez has expressed his intention to retire. Mr. Marcos Martinez Gavica has been appointed as his successor as Chairman of the Group and the Bank beginning January 1, 2016, currently Executive President and CEO of the two companies.

The Board also approved the appointment of Mr. Hector Grisi Checa as the new Executive President and CEO of the Group and the Bank, replacing Mr. Marcos Martinez Gavica beginning December 1, 2015.

The new Executive President and CEO, Mr. Hector Grisi Checa, has extensive experience in the Mexican financial system, having been Executive President of Credit Suisse Mexico until last August 13, 2015.

Back to Simplicity

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Generations of scribes have benefited from George Orwell’s famous rules for writing, guidelines that are still cited in the style manuals used at The Economist and Bloomberg. The author of 1984 and Animal Farm teaches us: never use a long word when a short word will do; if it is possible to cut a word out, always cut it out; and never use a foreign phrase, a scientific word, or a jargon word if you can think of an everyday English equivalent. In other words, keep it simple.

Orwell, like all masters of their craft, knew that simplicity is the ultimate goal of any endeavour. Simplicity aids understanding. Simplicity promotes efficiency. Simplicity means fewer things can go wrong. And yet, simplicity, ironically, is hard to achieve. Mathematicians seek ‘elegant’ solutions to problems – solutions that are simple yet effective. Stephen Hawking, arguably the most famous scientist alive, spent many years searching for the single, as yet elusive, ‘theory of everything’.

Sadly, simplicity has eluded the financial industry, opines the Asian Equity Team at Aberdeen Asset Management. More than 50 years ago Benjamin Graham, Warren Buffett’s investing mentor, warned that the more elaborate the mathematics used to support an investment strategy the greater the likelihood experience was being replaced by theory, investment with speculation.

And yet complex mathematical models that nobody understood underpinned the most egregious products to blow up ahead of the financial crisis. ‘Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex,’ said Andy Haldane, chief economist at the Bank of England, as recently as 2012. ‘That configuration spells trouble.’

“Asset management, in line with the broader financial industry, faces reform as regulators seek to prevent the repeat of abuses. They are subjecting fund managers to unprecedented scrutiny and censure even as new evidence of wrongdoing is being uncovered at the banks. Investors are also questioning whether so- called ‘actively managed’ funds offer value for money, while opting for low-cost index-tracking alternatives. Years of central bank stimulus policies have neutered the volatility in stock markets on which active fund managers depend”, writes the Aberdeen´s Asian Equity Team.

One of the biggest challenges the industry faces, continue the team, lies in winning back the trust of sceptical investors and market watchdogs. The challenge is both ethical and organisational. A simpler compensation structure helps remove some of the conflicts of interest that were inherent. For example, the U.K. has banned the payment of commissions by fund managers to financial advisers, a system which disadvantaged investors. This is something other jurisdictions are now looking to adopt.

Meanwhile, regulators need reassurance that financial institutions are behaving.

Whether they like it or not, fund managers are being treated more like banks, amid proposals in the U.S. to categorise them as being ‘systemically important’ to the financial industry and therefore subject to much of the restrictive legislation created after the financial crisis.

Asset managers would argue their industry does not pose the same risks, since it does not commit its own capital.

Creating and selling products that everyone understands is a priority, points out Aberdeen Asset Management. Regulators are trying to introduce more investor safeguards, but this can spawn more complexity not less. For example, excessive small print designed to highlight investment risks may serve the opposite purpose because the longer the disclaimers the less likely they are to be read. In an attempt to address this problem easier-to-understand ‘mini prospectuses’ are now mandatory in some jurisdictions.

“Disgust over the way some companies behaved before the financial crisis has paved the way for the return of simplicity as business proposition and regulatory imperative. However we believe that financial institutions, especially asset managers, should embrace the principle not because they have to, but because they want to. There should be nothing to fear if you have confidence in your investment process. Scrutiny should be something to be welcomed rather than avoided. We welcome the move towards simplicity, which is just as well, because simplicity is here to stay”, conclude.