CC-BY-SA-2.0, FlickrPhoto: Giuseppe Milo. Eaton Vance Launches a Multi-Asset Credit Fund
Eaton Vance Management Limited. (EVMI), a subsidiary of Eaton Vance Management, today announced the launch of Eaton Vance (Ireland) Multi-Asset Credit Fund, a sub-fund of Eaton Vance Institutional Funds Plc, which is available to investors in the UK and Ireland, with forthcoming registration in other jurisdictions.
In an uncertain market for traditional core fixed income asset class returns, this strategy seeks to provide investors with broad exposure to the global sub- investment grade credit markets, principally through higher yielding credit assets including global high yield bonds and floating-rate loans. Up to 40% of the fund’s assets may be allocated to opportunistic and risk-reducing fixed income asset classes. The strategy will also be available to investors as a customisable segregated mandate.
The Fund’s co-portfolio managers are Jeffrey Mueller, Vice President, Justin Bourgette, CFA, Vice President, and John Redding, Vice President. The Fund will be managed in a way that draws on Eaton Vance’s breadth of investment expertise and capabilities, based on the ‘intelligent integration’ of top-down and bottom-up inputs to optimise portfolio construction.
Payson Swaffield, Chief Income Investment Officer of Eaton Vance Management, commented: “Eaton Vance is an experienced manager of investments across the global credit spectrum. Bringing our multi-asset Credit capability to investors in a QIAIF structure is a natural evolution of our market leadership position in leveraged credit. I am confident that the combination of Jeff, Justin and John will allow us to provide an attractive strategy for investors seeking higher yields and strong, sustainable returns.”
The Fund is a regulated, Irish domiciled qualifying investor alternative investment fund (“QIAIF”) and complies with the Alternative Investment Fund Managers Directive (“AIFMD”).
CC-BY-SA-2.0, FlickrPhoto: D Chris. Careful With The Brexit: Not To Confuse The Local Economy And Politics With Markets
The United Kingdom’s decision to leave the European Union has begun to reverberate around the world.
Prime Minister Cameron has announced he will resign in October, around the time of the next Conservative Party annual conference. Only after a new prime minister is in place will the UK trigger Article 50 of the Lisbon Treaty and start the two-year process of negotiating its exit from the E U.
From a credit perspective, the ratings agencies have made it known that the UK’s sovereign credit rating will be downgraded as a result of the decision to leave the European Union. Standard and Poor’s called the AAA credit rating ‘no longer tenable under the circumstances’. Moody’s called Brexit a credit negative for the UK and for other issuers in the country, citing a prolonged period of policy uncertainty that will likely dent investment flows and confidence. On an absolute basis, UK gilt yields may fall in the near term, but spreads could widen.
Central banks have made it clear that they stand ready to provide liquidity to financial institutions — and in some cases intervene in currency markets — amid volatile market conditions. Expect central banks to work together to suppress volatility. A rate cut by the Bank of England in July is increasingly likely, while the US Federal Reserve, as a result of the vote, is unlikely to hike short-term rates for the balance of the year.
Currency markets have borne the brunt of today’s volatility, with the pound falling by a record 11% against the dollar in the wake of the vote before stabilizing. Equity markets were hit hard at the open of trading on 24 June, with the FTSE 100 Index falling nearly 9%, but those losses moderated significantly as the session wore on. The moves have been relatively sensible, with the sectors most at risk in the short term — financial services and cyclicals — bearing the brunt of the pressure thus far. Ten-year UK gilts fell to a record 1% before stabilizing near 1.10% toward Friday’s close, while the 10-year US Treasury note tested record low yields, near 1.40%, this morning before rebounding to 1.57%.
This sort of environment can create opportunities for investors. We are long term in our focus, and we’re very careful not to confuse the local economy and politics with markets. We invest in international and global businesses, and stock prices act as a discounting mechanism. Some of the impacts of the Brexit vote may already be reflected in prices. Against this more volatile backdrop, long-term inefficiencies may emerge. There are great businesses that have been hit hard in the short term, and there are others where risks have increased substantially. This is the type of environment where long-term active managers would be expected to add value. After all, volatility should be our friend over the long term.
In fixed income, we continue to look for opportunities where valuations have become dislocated. We’re going through our names and sector exposures, deciding where we want to add or reduce risk. We’re not rushing, as we’re mindful of challenges around liquidity in the near term. We’re largely taking a wait-and-see approach, awaiting improved liquidity. We have already identified specific credits and sectors, so we can move quickly when the environment is conducive to adjusting portfolios appropriately.
Politically, it’s not over
As Michael Gove said during the Brexit campaign, many ‘have had enough of experts’. That sentiment is being felt far beyond the UK’s shores, notably within Europe and the United States. While the Brexit vote has brought a slight bit of clarity to the UK’s future relationship with the EU, it opens the door for a potential domino effect across Europe as populist movements gather strength. Investors wonder which countries will be next in the queue for an EU referendum of their own.
To sum up, it looks as though the UK’s decision to leave the EU could be the beginning of a large, protracted process in which dissatisfaction with the effects of three decades of globalisation is being expressed in ever more impactful ways. It bears watching to see if the trend accelerates, and what lasting impacts, if any, these political forces will have on companies around the world. Geopolitical conditions are ever shifting, but great businesses always seem to find a way to adapt and prosper over time. We suspect they will be able to weather this storm.
Pilar Gomez-Bravo, Fixed Income Portfolio Manager, and Ben Kottler, Institutional Equity Portfolio Manager – UK.
CC-BY-SA-2.0, FlickrPhoto: Iain Cunningham, Portfolio Manager in its established multi-asset team. Investec Asset Management Appointed Iain Cunningham to its Multi-Asset Team
Investec Asset Management has announced the appointment of Iain Cunningham as a Portfolio Manager in its established multi-asset team. Iain brings an extensive track record dedicated to multi-asset investment, most recently at Schroder Investment Management.
Iain Cunningham will join the firm’s multi-asset investment capability, reporting to Michael Spinks, co-Head of Multi-Asset Growth at Investec Asset Management. The range of solutions managed by the 31-strong team includes total return and relative return growth strategies, as well as defensive income.
Michael Spinks, co-Head of Multi-Asset Growth, commented: “We are excited about Iain joining the team given the asset allocation skills and experience that he brings with him. In addition to portfolio management responsibilities, Iain will help to develop Investec’s multi-asset capabilities globally, with a specific focus on our long-standing relative return growth strategies.”
Iain Cunningham joins from Schroder Investment Management where he spent nine years in investment management roles within the multi-manager and multi-asset investment teams – he co-managed the Schroder ISF Global Multi-Asset Income Fund and was co-manager of the Global Multi-Asset Allocation Fund. Additionally, he managed Global Tactical Asset Allocation mandates; was instrumental in developing Schroders’ Multi-Asset Income franchise; and led currency research for the multi-asset team.
“With today’s low growth environment and uncertain economic backdrop, clients are increasingly looking to target investment outcomes based on risk and return”, said Spinks. “Having managed multi-asset portfolios for over 25 years, our core investment capabilities are firmly established, and Iain will play a key role in helping us to continue to seek strong results for our clients.”
Hamish Forsyth, CEO at Capital Group for Europe. . "We Look Forward to A World Where It Is Clear The Investor Is Paying for Advice and It Is Not Being Bundled into Our Investment Management Fee"
The heart of what Capital Group has done for 85 years in the US is mutual fund distribution through financial advisors to individual investors and they want to do that in Europe and Asia as well. Hamish Forsyth, Capital Group’s CEO for Europe, explains in this interview with Funds Society his plans for the continent. Always, with a long-term view and being aware of the regulatory and political challenges: “If Brexit was to materialize, with modifications, the management company in Luxembourg could take on the role currently played by London”, he says. But he believes there are opportunities in Europe and Spain, specially for companies stable and conservative as Capital Group.
How do you assess the development of Capital Group in Europe in the last years?
We have been in Europe since 1962 and we have built, particularly through the 1990’s, a meaningful size institutional business; historically our focus has stayed on the institutional market. Since the financial crisis we have been working hard on a plan to develop a mutual fund distribution business. The heart of what Capital Group has done for 85 years in the US is mutual fund distribution through financial advisors to individual investors and we want to do that in Europe and Asia as well. We are physically present now in support to that mutual fund distribution business in London, Zurich, Geneva, Frankfurt, Luxembourg, Milan, Madrid, Hong Kong, Singapore, New York and Miami.
In which markets will Capital Group focus on in 2016 and which are the favorite ones for boosting its business?
This is like with my children, I have no favorite one.
The uncertainty because of elections in Europe and geopolitical risks (Brexit, elections in Spain, rise of populism in Austria): How could it affect to your business development strategy in Europe?
Let´s distinguish between portfolio impact and business planning impact. So, there are lots of things that could affect stock markets, bond prices, and I´m not worried about that so much, I am not a portfolio manager; I leave that to the portfolio managers. For me, as CEO, my focus remains on the factors that could impact our business development strategy. Obviously, Brexit is one of them. We have a strategy throughout the EU that it is based on our UK company and our ability to passport our services from the UK. And if the UK leaves, we presumably will have to find another way of doing that. We have a small management company in Luxembourg today that takes care about our funds (domiciled in Luxembourg) and if Brexit was to materialize, with modifications, that management company could take on the role currently played by London.
Political uncertainty mostly is not affecting our business planning but regulatory uncertainty certainly does. We are in an era of significant regulatory changes and we spend a lot of time thinking about that.
In the case of Spain-Iberia: How are your goals working since the office was opened?
We came to Spain in 2014 to stay. Our goals and measurements of success therefore go beyond AUM and sales objectives. Our initial objective was twofold: firstly, to get to know the local market and distributors needs better and secondly, for us to start introducing CG investment process and capabilities. We trust this approach will help us building a solid, balanced long term business in Spain which is our ultimate goal. 2015 was our first full year in Spain and we feel we have progressed well in our efforts to introduce CG in the local market.
How do you see the positioning of international asset managers in Spain? Are there opportunities?
We had a faster than expected progress last year, which was our first full year with the team in Madrid. Since then, we have also hired a dedicated marketing manager for Spain, so the team has grown. Like everybody this year has been harder; it has been a hard year for mutual fund sales across the board in Europe and our challenge continues to be to find really first class organisations we can do long term business with.
Another important thing to stress, is that now Capital Group is known for the right reasons. We are not only just one of the biggest asset managers in the world. Apart from that, we are very different compared to other big asset managers. In this sense, the feedback we are receiving from clients is very good. We received a very warm welcome from Spanish investors. We trust our investment philosophy and our conservative and long term approach fits well with Spanish investors.
We could say we are a slightly old fashioned, rather conservative asset manager. What we have seen over our 85 years is that people who come to know us well appreciate us greatly. We are not a firm which is necessarily going to dazzle you with star products, a star manager or an outstanding short term investment result because this is not what we are looking for. What we are looking for is long term sustainability of good investment results. This is something that people have to come to learn about us and part of Mario and Álvaro’s jobs in the ground. In this context, and given our way of managing money, it’s important that we present the firm and our investment process before we sell our products.
In the last years, many asset managers have entered Spain; do you think that the Spanish market is crowded now? Where is the market niche for Capital Group?
Yes, we think it´s a crowded market. In the short term, inflows in the Spanish market have attracted a lot of new asset managers chasing short term inflows. Our view is more long term oriented. We think there is a long term opportunity for asset managers in the Spanish market and, in particular, for stable, conservative international asset managers like us.
How many products are currently registered in Spain and which are your latest news? And which products will you bring in the near future?
All of our Luxembourg funds, which are about 20 products now, are registered for distribution in Spain. Spain is an important market for us. We are on the process at the moment of bringing to Europe a number of our long standing American mutual funds. This is the heart of our firm, the family funds called American Funds. In October last year we brought a global equity portfolio, the New Perspective Fund launched in 1964. This month we are bringing our oldest mutual fund, The Investment Company of America, a US equity fund with an 82 year track record which launched in 1934. And later this year we are bringing New World Fund, an all country fund looking to get exposure to emerging markets through multinational companies.
We will continue to bring American funds to Europe and they can be an important manifestation of what we were saying earlier about the long term sustainable nature of what we aim to do.
Are you planning to expand your Iberian team in the mid-short term?
As we mentioned early, we have hired recently a new country marketing manager, Teresa García. One of the goals of our local presence is to provide the best service and support we can to our clients and distributors. That´s what drives the size of the team and currently we are happy with the current size of the team.
Many people argue that the environment will become more complicated for asset managers in the forthcoming future, due to the margin compression, the increase in costs, new regulation, and competition from passive products… Which are in your opinion the most important challenges for the AM industry, especially for Europe, in the next years?
The first thing I would say is that I remain rather positive. Regulatory change has often been very helpful for asset managers, and for us as a firm; and the creation of the single European market for mutual funds, the UCITS directive has given international players like us the ability to distribute one fund cross border in many countries, this is an incredible privilege and one we have taken advantage of.
Regulatory changes have resulted on margin compression and lower fees. As a firm, we believe very strongly in the importance of good advice. We think investors have better financial outcomes when they have worked with a good financial advisor but as I said, in a way, we look forward to a world where it is clear the investor is paying for that advice and it is not being bundled into our investment management fee. A world eventually where it is clear who is doing what for what fee is positive for us as a firm.
The most important challenge for us as an active asset manager has to be results. Linking back with something I´ve said earlier, if fees come down, in the end, it makes it easier for us to do a good job of producing investment results after fees.
Some American and Canadian asset managers are coming to Europe and expanding their product ranges with UCITS products, is this a long-lasting trend? Why?
I think it probably is. If you want to expand as an asset manager and you’re based outside the EU, I think expanding in the EU is always going to be an obvious move because of what we said earlier about the size of the client field, and because of the ability to distribute one set of funds across multiple markets in the EU and beyond. The UCITS magnet as a place for people to start is pretty good. We are not part of the UCITS magnet. We arrived to Europe in 1962 and launched our first fund in Luxembourg in 1969, so our commitment to cross boarder distribution of mutual funds in Europe predates UCITS by a couple of decades. However I think this is an explanation for why so many fund managers are arriving now.
You recently hired a new sales person to cover NRC Markets. How are you positioning yourselves?
Regarding NRC regions, indeed we now have a team of two front line sales people, one based in New York and another based in Miami, covering the main NRC territories in the USA. So, we feel now we are one step closer to the market.
CC-BY-SA-2.0, FlickrPhoto: Kurtis Garbutt. Outside Chances
So just when the Fed had finally convinced markets that rate hikes were possible this summer, the labor market data had to go and ruin everything. The 38,000 (38k) new jobs as reported by the US Department of Labor this past Friday was clearly well below expectations, and can only be partly explained away by the strike at Verizon (which when added back would almost double the number). Everyone is dissecting the number, and looking at the details to try to understand it. But sometimes it is worth stepping back and asking: On Thursday what probability would you have assigned to the likelihood of Friday’s payroll number being below 50k?
This does not require any real expertise. The simplest way to do it would be to ask what the probability would be of any random month you select giving you a number below 50k. It turns out the answer is about one in three over the last two decades. This naive approach was dubbed the ‘outside view’ by psychologists Daniel Kahneman and Amos Tversky, because it does not rely on any information about the specific circumstance of today’s economy.
So for example, the outside view on whether it is likely to rain at least 1mm on any given day in London is 35% over the last two decades. Well that’s all very well, but surely you know it is June. OK, we can narrow down the outside view a bit to just look at days in June over the last two decades. Sure enough the probability of rain drops (but just to 30% – England has a well-deserved reputation for rain). But that does not take into account any unique information about tomorrow.
In a similar way, we can narrow down the outside view on the nonfarm payrolls to help test a hypothesis. Suppose that you want to ask yourself what the likelihood of this kind of payroll number is when the economy is still in an expansion. By ruling out all the months in and the twelve months around recessions, we can find out how likely we are to get this kind of outcome. It turns out the probability is 18% over the last decade (chart 1). So over the last five years we might reasonably have expected around eleven months with the first release of payrolls below 50k. In the event, the US was lucky: there were only three (including the most recent).
So if these low numbers are to be expected, how much should we read into a weak jobs report? Does it mean that a bounce back the next month is likely? As always, start with the outside view: how often is a low number followed by another low number (below 50k)? For the full sample it is 72%, but excluding recessions it is 41%. So experience tells us that a bounce back is marginally more likely, but by no means certain.
We can make things more sophisticated by bringing in more outside information to inform the outside view. For example, the number of people making initial claims for unemployment benefits is widely viewed by economists to lead the payrolls data and to be more reliable at identifying turning points.
So instead of conditioning on whether we are in recession, we can ask ourselves how likely it is that the payroll data will bounce back if the initial claims data has remained strong, as it has recently (fluctuation down by no more than half a standard deviation). When bad payroll data is not matched by bad initial claims data the payrolls tends to bounce back 65% of the time.
Now we can start to examine the individual circumstances, and ask ourselves whether we can add any further information. We can’t use excuses like the Verizon strike, because plenty of those past instances of low payrolls could have also been caused by strikes. One thing to consider is what is happening in the labor market overall. For example, it could be argued that slowing employment could even be a sign of a tighter labor market.
This may sound counterintuitive, but it is possible. The logic is that when there is significant slack in the labor market, all those unemployed people are happy to get work even if wages have not risen. So in chart 2, as demand for labor moves from the first to the second demand curve, employment grows a lot but wages only rise a little. So firms have all the bargaining power. However, as an economy approaches full employment the trade-off becomes less favourable for businesses. For the same increase in demand (the second to the third curve), businesses now need to pay higher wages to lure those now scarce additional workers to sign a contract with them. Businesses get fewer employees but have to pay more.
Not every economist would agree with this characterization (no surprise there), but the point is that this is approximately the model that central bankers have used for decades. And to the hawks, it tells them that if the economy is growing at the same speed, eventually you should have slower job growth and higher wages. And that means that the Fed should have to hike rates.
Of course, if the nonfarm payroll data continues to worsen then the hawks need to consider some other outside views. In the last twenty years, when the first release of nonfarm payrolls has been below 50k for four months in a row it has signalled a recession half of the time.
Joshua McCallum is Head of Fixed Income Economics UBS Asset Management.
CC-BY-SA-2.0, FlickrKen Nicholson, courtesy photo. Mirabaud AM: “Good Small Caps Can Provide Resiliency And Durablility Even In Difficult Times”
Ken Nicholson, PM for the European Small Caps Fund at Mirabaud Asset Management talks about the performance European small caps have had this year. “The market value of the companies in our portfolio is usually between €500m and €4bn. We find opportunities not just classic growth stories but also some restructuring and value ideas,” he points out in this interview.
What is the fund’s investment philosophy? To invest in 40-50 European small and mid-sized companies that will provide a strong investor return. The market value is usually between €500m and €4bn.
How has been the performance of European small caps this year? On average, the performance has been average but the better names would have provided a strong return. So your returns depends on good stockpicking. Our performance has been as well average, as the major trend in the market is.
How can the slow growth and deflation in Europe affect European small caps? Of course it is better to have a good economic development as this provides a strong tail-wind for all businesses. But our strong view is that good small companies can provide resilient and durable even in more difficult times.
Do small-caps look attractive versus large-caps? Not especially on valuation but forecasts are for a little higher growth for small companies. However it is important to be very careful in picking only the best stocks. Smaller companies often operate under less market scrutiny than their larger rivals and have lower liquidity.
Are riskier assets than large-caps? Smaller companies are usually considered more risky but this is the mentality of an asset allocator. There are many stock specific risks in every case. Just because the Banks were big and oil companies too didn’t save them from disastrous performance. You can find risky small caps but you also can find very safe and stable ones. Our job is simple …to pick the good small companies!
What are the reasons why investors should consider investing in the European small and mid strategy? In a low-growth world where there are few other good investment opportunities, we still find many great small cap names that offer good return potential.
Where are you finding opportunities? We find good names in most sectors and in most countries. Not just classic growth stories but also some restructuring and value ideas. The economic environment is not especially supportive but then it has also been a lot worse!
What do you expect for the next months? We seem to be in a low growth environment with the remnants of the financial crisis still not finally eradicated. Political risks are uppermost in investor minds, of course in Spain and also with the Brexit vote which could impact on the whole of Europe, not just the UK. Investor uncertainty is intense and this leads to market volatility. All this can provide opportunities to time a good entry point for investing in good small and mid cap companies.
CC-BY-SA-2.0, FlickrPhoto: Camilo Rueda López. Countdown To Brexit: What You Need To Know
Tomorrow, Britain will vote on whether or not to leave the European Union. Given the deep economic ties between Britain and the EU, “Brexit” would have implications across the global economy. “Before we understand the implications, it’s important to establish that Britain is an open economy actively involved in the global economy and heavily intertwined with the EU. Here’s what that looks like”, explains Colin Moore, Global Chief Investment Officer at Columbia Threadneedle in the firm´s Global Perspectives Blog.
Britain’s EU membership
Britain joined the EU in 1973 and is now one of 28 current member states. Nineteen of these share the euro as a common currency, accounting for around three quarters of EU gross domestic product (GDP). Britain is not part of the common currency and continues to use the British pound. The existence of the British pound with a floating exchange rate has given the Bank of England an array of policy options to manage the shocks to which Britain’s economy is subject.
The sizable impact of Britain’s role in the EU
While we may not be able to measure the precise impact of EU membership on Britain’s economy, it can demonstrate the interconnectedness of Britain and the EU. The following is extracted from the EU membership and Bank of England Report, published October 2015. British pounds have been converted to U.S. dollars based on an estimated exchange rate of 1.42.
Population
505 million people live in the EU, approximately 7% of the world’s population.
Britain is home to 12.5% of the EU’s population, the second most populous EU country.
Economies
EU is the largest economy in the world with GDP worth £11.3 trillion (approximately $16 trillion) in 2014, which is larger than the U.S. ($15 trillion).
Within the EU, Britain is the second largest economy.
The U.K. GDP was worth £1.8 trillion (approximately $2.6 trillion) in 2014, nearly one-sixth of EU output.
Cross-border trade
One-third of all global trade is with the EU, the largest exporter and importer in the world.
The EU is Britain’s biggest trading partner.
The U.K.’s exports and imports are worth 60% of its GDP.
70% of Britain’s largest import and export markets are fellow EU members.
The EU serves as the destination for or source of more than two-fifths of Britain’s cross-border investments.
Britain is one of the top destinations for foreign direct investment (FDI) within the EU and globally.
Two thirds of all global cross-border investment involves the EU.
Foreign investors own £10.6 trillion (approximately $15 trillion) of U.K. assets while U.K. investors own £10.2 trillion (approximately $14 trillion) of foreign assets.
The EU has one of the world’s largest financial service sectors, second only to the U.S.
The EU is home to 14 of the world’s 30 globally systemically important banks (GSIBs) versus eight for the U.S., and accounts for half of all global exports of financial services.
Britain is the largest financial center in the EU, with financial services accounting for 8% of Britain’s national income.
The British financial sector is heavily interconnected with the rest of the EU, with 80 of the 358 banks operating in Britain headquartered elsewhere in Europe.
A long goodbye
Global Chief Investment Officer at Columbia Threadneedle reminds that even if the referendum passes, a decision to leave the EU will not be effective for two years after a formal notice to leave is issued by the British government. The time between vote and exit would be critical to untangle the myriad of interconnections and negotiate new agreements. Agreements on trade, people movement, investment and financial services are important to both Britain and the EU. They are also important to the global economy.
Bottom line
“Overall, it is clear that a post-Brexit world would have its challenges. Only time will tell how the world reacts if Britain decides to leave the EU, but this is a global event not just a British or EU event. Many financial markets are at or above fair value and any disruption to growth would be cause for concern. In the event of market disruption caused by the vote, investors should keep in mind that an exit from the EU is not immediate and the required changes would take years to see through”, concludes Moore.
CC-BY-SA-2.0, FlickrPhoto: KMR Photography. Old Mutual AM Acquires Majority Stake In Landmark Partners
Old Mutual Asset Management (OMAM) has reached an agreement to acquire a 60% equity interest in Landmark Partners, a global secondary private equity, real estate and real asset investment firm.
The cost of the transaction amounts to around $240m in cash with the potential for an additional payment based on the growth of the business through 2018. The deal is expected to close in the third quarter of 2016.
“The overall investment is expected to result in a purchase multiple of 8-10x economic net income generated by the Landmark transaction, prior to financing costs,” OMAM specified in a statement.
OMAM said it intends to fund the closing payment using available capacity on its existing revolving credit facility or may seek alternative sources of debt financing depending on market conditions.
The firm expects the transaction to be up to 12% accretive to 2017 ENI per share.
“Landmark is precisely the kind of industry leader with whom we seek to partner,” said Peter Bain, OMAM’s president and CEO.
“The depth and breadth of their management team are exemplary and we look forward to collaborating with them to grow their existing product set and further diversify their business into emerging secondary asset classes. Our global distribution team is excited about bringing Landmark into certain domestic channels as well as new markets outside the US”, points out Bain.
Founded in 1989, Landmark has completed over 500 transactions for a total amount of $15.5bn since its launch. The company has acquired interests in over 1,900 partnerships, managed by over 700 general partners. Landmark operates through locations in Boston, London, New York, and Simsbury, Connecticut.
CC-BY-SA-2.0, FlickrFoto: Moyan Brenn. Brexit: más que un riesgo, una incertidumbre
Over the recent weeks, hedge funds have remained broadly defensive in anticipation of key announcements in June that may disrupt market conditions. As such, explains Lyxor AM, they are definitely not adding risk to their portfolios.
The Brexit referendum is the most prominent event among the near term potential disruptors. In response, several European L/S Equity managers have decided to significantly downsize their exposure to UK assets ahead of the vote. Meanwhile, CTAs and Macro managers maintain large net short positions on the GBP/USD. At the end of May, point out the firm, CTAs added to their GBP/USD shorts while Macro managers slightly reduced their short positions on the currency pair.
According to the Lyxor AM team, head by Jeanne Asseraf-Bitton, Global Head of Cross Asset Research, the mid-June FOMC meeting and the associated summary of economic projections will also be closely monitored by managers amid signals that US economic activity accelerated in Q2. As a result of such near term uncertainties, the median equity beta of hedge funds on the Lyxor platform remained below 20% during the last week of May (see chart) and edged even lower for strategies such as CTAs, Global Macro and multistrategy.
With regards to recent performance, say Lyxor AM experts, the last week of May was supportive for every strategy, with Macro and L/S Equity funds outperforming. Macro managers benefitted from their equity exposures and from the USD rally. In the L/S Equity space, variable biased managers outperformed. It is interesting to note that L/S managers with a defensive bias made the most of the market environment in May as the value rally faded. However, CTAs continued their recent underperformance. In May the Lyxor CTA Broad index was down 2.3%.
“Going forward, we maintain the preference for strategies that limit exposure to market directionality (i.e. we prefer merger arbitrage to special situations as well as market neutral and variable biased L/S to long biased managers). We also remain overweight CTAs in the midterm though tactically we advise a neutral stance as the large build up of short GBP/USD positions would cause losses if the UK opts for remaining in the EU. Finally we are neutral on L/S Credit and overweight Fixed Income Arbitrage”, conclude the Lyxor AM team.
The G7 looks like a rather anachronistic grouping. Once upon a time it was the group of the seven largest economies. Only five of the seven are still ranked in the top seven. Huge economies like China and India are not members. But to concentrate on the size of the economy is to miss the whole point of the G7. The G7 is a club of like-minded, influential economies. Taken together, the voting power of the G7 in organisations like the IMF, the World Bank, the UN and the WTO is huge. Any deal that the G7 put together between themselves has a good chance of becoming the official policy of any of these organisations.
It was Japanese Prime Minister Shinzo Abe’s turn to host the G7 meeting last week. He took the opportunity to argue that the current economic situation is as bad as the post- Lehman crisis. He noted that commodity prices had fallen by over 50% and that investment growth in EM is at its slowest pace since 2009 (chart 1a).
The scale of the commodity price movements may be similar, but that does not make them the same. There is a world of difference between a collapse in prices that comes from a negative demand shock (a recession) and one that comes from a positive supply shock (over-supply). Neither are great outcomes for commodity producers, but the positive supply shock is great news for consumers.
More interesting are not the similarities, but the differences. Emerging market growth is higher, export growth may be low but at least is positive, and the unemployment rate in the G7 has been dropping (chart 1b). And these are just a few of the comparisons. Equity markets, core inflation, confidence, you name it – all look markedly better now than they did in 2009.
So why has Mr Abe suggested such an odd and palpably incorrect comparison? What is his ulterior motive? Quite simply it looks like he wants political cover for more fiscal easing in Japan. Mr Abe had committed to raising the sales tax in March next year (a fiscal tightening) unless there was either an earthquake or an economic crisis. Hence his efforts to get the G7 to agree things are as bad today as in the post- Lehman crisis.
Regardless, deferring the sales tax looks like an obvious solution. Just look at the performance of the Japanese economy over the last decade or so. First the financial crisis hit and knocked real GDP well off its pre-crisis trend (chart 2), just as happened in most other economies. The recovery was quite rapid, but then the Tōhoku earthquake hit, and once again real GDP was thrown off its trajectory (not that the trajectory could have continued at that pace). After the earthquake, the recovery resumed at a slower pace. Then the sales tax hit, and derailed growth once again.
The experience of sales tax increases in other countries would not have given cause for concern beforehand. Consumers tend to bring expenditure on durable goods forward to avoid the higher tax, which boosts growth in the prior quarter and then slows it in the subsequent quarter. Expenditure patterns then normally recover and smooth out. But in Japan they did not. The hit to expenditure appears to be permanent. After that experience, why would you want to do it again?
Some would argue that a sales tax is necessary for fiscal solvency. But the market disagrees: they are so unworried about the Japanese fiscal outlook that they are willing to pay for the privilege of lending the Japanese government money for 10 years. Yet the government has not been keen on using fiscal policy, so they have been relying on monetary policy. But increasingly unusual monetary policy may be upsetting some of Japan’s G7 colleagues.
The international knock-on effects of monetary policy tend to be more significant than those of fiscal policy. Exchange rates are linked to relative short-term interest rates; in other words, by expectations of monetary policy in the central banks of each country. Looser monetary policy will push down your exchange rate, which by necessity means a higher exchange rate for other countries. This is why big monetary policy moves often lead to accusations of exchange rate manipulation and currency wars. It is also why in the past central banks have sometimes coordinated their easing.
It also explains why there are so many rumours that the G20 (a wider group than the G7 that includes emerging markets) put pressure on Japan to stop cutting interest rates. Given that the marginal negative rate structure the Bank of Japan introduced arguably has little effect on the economy (since it does not affect all rates) but has a lot of impact on the exchange rate, it would not be surprising if other countries may be getting somewhat annoyed.
Fiscal policy has a far less direct effect on others, so should be more acceptable. Extra easing is only really likely to affect the exchange rate if markets expect the central bank to react to the potential inflationary consequences by raising rates. But even if that happens, it pushes the exchange rate up, not down.
While fiscal policy is more palatable from an international perspective, it is not necessarily so palatable from a domestic perspective. In recent years the byword has been austerity: G7 economies have been tightening policy. For economic growth it is not the level of the budget deficit, but rather the change in the budget deficit. This year is forecast to be the first year when this fiscal thrust is positive since 2010 (chart 3). The forecast is for an end to additional austerity but no stimulus. Apparently Mr Abe hopes to change that. For Japan, simply not tightening would be a welcome first step.
