CC-BY-SA-2.0, Flickr. Four Messages From Draghi's Meeting
The European Central Bank’s (ECB) Governing Council met on Thursday, marking the first of a series of high profile meetings scheduled over the next few days (the Federal Open Market Committee (FOMC) meeting on July 27th, the Bank of Japan (BoJ) meeting on July 29th, Bank of England (BoE) on August 4th), which have become a strong focus for investors globally.
Past experience taught us never to take Mr Draghi and the Council for granted: whenever they needed to, they managed to surprise the market and that’s why this meeting was one to watch. The monetary stimulus is meeting its objectives of reducing credit fragmentation, and spreads between core and peripheral European government bonds. The programme has still quite a few months to go before its initial “end-date”, and more importantly the ECB has managed to provide stability to both Government and Corporate bonds during the past few volatile weeks.
Mr Draghi announced the following:
No news is good news: the Governing Council kept all key policy rates and asset purchases unchanged. Monthly purchases in particular have exceeded, so far, the ‘target’ of €80bn per month. He said that at the moment the stimulus package in place is sufficient – but that the ECB won’t hesitate to add fresh measures if needed.
It ain’t over till it’s over: the current Quantitative Easing programme was initially scheduled to go on until March 2017, but Mr Draghi stated that (i) the programme will run until a “sustained inflation adjustment” is seen and (ii) should the economic scenario deteriorate significantly, the Governing Council would act by using all instruments available within its mandate.
“Believe me, it will be enough”: Mr Draghi famously spoke these words in 2012, and they echoed in our mind when he said he would “stress readiness, willingness and ability to do so” regarding the ECB’s attitude to tackle any negative impact of Brexit on the broader European economy.
Non-Performing Loans (NPL’s) and Banks: When asked about initiatives to address the current NPL problems that the European banks (and Italian banks in particular) are facing, Mr Draghi said that addressing legacy NPL issues “will take some time” and, more importantly that any public backstop would be a useful measure but that it will need to be “agreed with the European Commission according to existing rules.”
Lastly, Mr Draghi reiterated that actions beyond monetary policy are the job of politically elected representatives – and that governments should support monetary stimulus with reforms aimed at raising productivity and improving the business environment.
The market reaction to Thursday’s meeting was relatively contained: we saw core rates correcting on the back of the lack of “new” news, and we share this view. We think this was a reassuring performance on behalf of the ECB, but a non-event from a market perspective.
We think investors are now in a “one down, four to go” mode and are awaiting for actionable catalysts from the meetings of FOMC, BOJ and BOE, as well as the results of European Banking Authority (EBA) Stress tests expected over the coming ten days.
CC-BY-SA-2.0, FlickrPhoto: Aziz Hamzaogullari, CFA, Portfolio Manager, at Loomis, Sayles & Company. Active Matters in U.S. Large-Cap Growth
Passive investments such as index funds have become increasingly popular, due primarily to lower fees and attractive performance amidst a seven-year bull market*.
This investor preference was recently captured in the 2016 Natixis Global Asset Management Individual Investor Survey – where 67% of 850 Latin American investors surveyed believed index funds can help minimize losses. Further, 64% also believe they are less risky, and 57% think they offer better diversification than other investments**.
While there certainly is a place for passive investments in portfolios, these survey results may have uncovered misconceptions about their risk mitigation and diversification benefits. Aziz Hamzaogullari – a leading active investment manager in the U.S. large-cap growth equity space – shares his insight on active risk management, alpha, and diversification.
What can an active approach to growth achieve that indexing may not?
At the heart of active management lies the belief that one can deliver returns in excess of benchmark returns. Whether we are in the midst of a market rally or downturn, active investment management and active risk management are integral to alpha generation – creating risk-adjusted excess returns and adding value to long-term investor portfolios. Our focus is on quality companies uniquely positioned to capture long-term growth and active management of downside risk. Over the long run, we believe markets are efficient. However, short-term investor behavior can cause pricing anomalies, creating potential opportunities for active, long-term, valuation-driven managers like us. Capitalizing on these opportunities requires a disciplined investment process and a patient temperament.
Also, I think defining risk in relative terms obfuscates the fact that the benchmark itself is a risky asset. This is particularly true with cap-weighted indices because downside risk increases significantly when the stocks of a particular sector experience a run-up in prices that are above their fundamental intrinsic value. If a portfolio manager ties his investment decisions to benchmark holdings and risk factors, he must necessarily take on this additional downside risk. Instead, we define risk as a permanent loss of capital, which means we take an absolute-return approach to investing and seek to actively manage our downside risk.
How does your approach lead to high active share versus the Russell 1000 Growth Index?
Our approach is different from benchmark-centric portfolios that tend to begin their investment process by considering the influence of the benchmark’s top holdings and sector positioning on relative performance. The companies we invest in must first meet a number of demanding quality characteristics. Our philosophy and process often result in positions and position sizes that differ from the benchmark. If you want to outperform a benchmark net of fees, it stands to reason that you must be different from the benchmark. That said, high active share is a by-product of our distinct approach to growth equity investing. (Active share is a measure of how a portfolio differs from the benchmark. High active share indicates a larger difference between the benchmark and portfolio composition.)
A study by Antti Petajisto and Martijn Cremers found that high active share correlates well with positive excess returns and that the most active managers, those with active share of 80%–100%, persistently generated excess returns above their benchmarks even after subtracting management fees***.
Do you think there is a misconception among investors that more names in a portfolio mean more diversification?
Perhaps. While diversification does not guarantee a profit or protect against a loss, it is an important tool in managing portfolio risk or volatility. However, we do not think diversification is the simple notion that more names in a portfolio is better. Our 30 to 40 holdings isn’t a random number. A 2010 study by Citigroup demonstrated that a portfolio of 30 stocks was able to diversify more than 85% of the market risk. The diversification benefit of adding more stocks to the portfolio declined significantly as the number of stocks increased.
*- Refers to the U.S. stock market (as measured by the S&P 500® Index) from its low on March 9, 2009 through March 9, 2016. ** – Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February–March 2016. Survey included 7,100 investors from 22 countries, 850 of whom are Latin American investors. ***- Martijn Cremers and Antti Petajisto, “How Active Is Your Fund Manager?” International Center for Finance, Yale School of Management, 2009.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.
In Latin America: This material is provided by NGAM S.A., a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier (CSSF) and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of NGAM S.A.: 2 rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. The above referenced entities are business development units of Natixis Global Asset Management, the holding company of a diverse line-up of specialized investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. In the United States: Provided by NGAM Distribution, L.P. 1535854.1.1
CC-BY-SA-2.0, FlickrPhoto: Vadim Timoshkin. What Effect Might ‘Helicopter Money’ Have On Markets?
Helicopter money refers to the situation where a central bank finances the fiscal expenditure of a government. The government prints money instead of raising taxes or debt to fund spending.
The economic effects of QE are still being debated, but they are presumed to be positive to date. With helicopter money, there would be a direct fiscal expansion financed by central bank purchase of (and cancellation of) government bonds. This direct fiscal spend would be economically expansionary, unless the announcement of helicopter money represented a shock to households and firms that was suficiently significant to offset the fiscal stimulus. The economic effects of fiscal expansion combined with new QE appear identical to those of helicopter money.
The market effect of the recent experience of QE has been lower discount rates, a weaker currency, and a strong environment for risk assets. We might guess that the market’s reaction to helicopter money would be similar, but given that past episodes of dominance by the fiscal authority over the central bank have been associated with fiscal indiscipline and high inflation, there is a reasonable chance that markets could react in a meaningfully different and negative way. The truth is that we just don’t know.
Figure 1 outlines the impacts of QE, of helicopter money (where debt is purchased by the central bank and written-off), and a combination of QE and fiscal expansion. With the unknown market impact of helicopter money, with prospective policy tools in the hands of central banks narrowed through debt cancellation, and with the economic benefits associated with helicopter money rather than straight fiscal expansion de minimis, it is not clear why policymakers will choose the path of helicopter money. Perhaps the real lesson is that monetary policy has its limits and that in the event of an economic slowdown, aggregate demand is best supported by fiscal rather than monetary policy. In the event that new fiscal expansion requires supplemental monetary support in the form of additional QE, this is a decision that could be made at some point in the future.
Helicopter money is often associated with incidence of hyperinflation. In their study of the 56 incidents of world hyperinflation during the last 300 years, Hanke and Krus found hyperinflation to be ‘an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy to name a few’. By contrast, monetary financing has been used widely in the developed and developing world over time without ending in hyperinflation.
Until the US Fed Accord in 1951 the US operated a policy of fixing long-term bond yields, and as such increasing or decreasing the amount of reserves in the banking system, depending on private sector demand for these instruments. Canada used monetary financing for 40 years until 1975 under a free-floating exchange rate regime without calamitous macroeconomic effects, and India operated a policy of debt monetisation until 2006. Further examples abound. Indeed, of the 152 central bank legal frameworks analysed by the IMF, 101 permitted monetary financing in 2012. This is not to say that helicopter money is a desirable policy. It would be, in my opinion, a backwards step. But neither is it to be necessarily associated with hyperinflation.
So, in conclusion, helicopter money is not a weird and wacky new form of money. Indeed, once we understand how money works helicopter money looks pretty straightforward. The prospective economic, monetary and fiscal effects of helicopter money (absent the sticker-shock of a new unfamiliar policy being implemented) look identical to a normal fiscal expansion supplemented with additional QE. As such, it could be argued that the UK, US, and Japan have all already effectively experienced helicopter money. It is harder to say the same about the Eurozone, consisting as it does of government entities that are not monetary sovereigns. Indeed, the Eurozone is much more complicated.
Toby Nangle has been the Head of Multi-Asset and Portfolio Manager at Threadneedle Asset Management Limited since January 1, 2012.
Photo: Narch, Flickr, Creative Commons. Luxembourg Approves an Alternative Fund Structure
The law introducing a new Luxembourg alternative fund structure, the Reserved Alternative Investment Fund (RAIF), has been approved by the Luxembourg Parliament and will come into force three days after publication in Luxembourg’s Official Gazette Mémorial.
Welcoming the new law, Denise Voss, Chairman of the Association of the Luxembourg Fund Industry, says: “The Luxembourg RAIF Law provides an additional – complementary – alternative investment fund vehicle which is similar to the Luxembourg SIF regime. Unlike the SIF, the RAIF does not require approval of the Luxembourg regulator, the CSSF, but is supervised via its alternative investment fund manager (AIFM), which must submit regular reports to the regulator. Luxembourg managers will therefore have a choice, depending on investor preference. They can set up their alternative investment funds as Part II UCIs, SIFs or SICARs if they prefer direct supervision of the fund by the CSSF. Alternatively they can set up their alternative investment fund as a RAIF, thereby reducing time-to-market.”
Freddy Brausch, Vice-Chairman of ALFI with responsibility for national affairs, adds: “In order to ensure sufficient protection and regulation via its manager, a RAIF must be managed by an authorised external AIFM. The latter can be domiciled in Luxembourg or in any other Member State of the EU. If it is authorised and fully in line with the requirements of the AIFMD, the AIFM can make use of the marketing passport to market shares or units of RAIFs on a cross-border basis. As is the case for Luxembourg SIFs and SICARs, shares or units of RAIFs can only be sold to well-informed investors.
Denise Voss concludes: “The new structure complements Luxembourg’s attractive range of investment fund products and we believe this demonstrates the understanding the Luxembourg legislator has of the needs of the fund industry in order to best serve the interests of investors.“
You can click here to access the legislative history in French.
CC-BY-SA-2.0, FlickrMarc Bolland . Marc Bolland to Become Head of European Portfolio Operations at Blackstone
Blackstone, one of the largest asset managers in the world has appointed Marc Bolland as Head of European Portfolio Operations of its private equity businesses. Bolland was formerly Chief Executive of Marks and Spencer and previously Chief Executive of Morrisons and Chief Operating Officer of Heineken. He will start on September, 19th, 2016.
Joseph Baratta, global Head of Private Equity at Blackstone, said: “We are delighted that Marc is joining us. He has had an outstanding career leading and developing major international businesses, and I am sure he will add great value to our current and future portfolio businesses.”
Marc Bolland said: “I am very pleased to be joining a firm of the quality and scale of Blackstone. I look forward to working with its extraordinary team and the businesses owned by Blackstone funds to drive growth and to add value for investors.”
Bolland was named The Times “Businessman of the year” in 2008.
CC-BY-SA-2.0, FlickrPhoto: Paramita. It's Getting Late In The Business Cycle
While the United Kingdom’s decision to leave the European Union (Brexit) has temporarily undermined market confidence, my confidence in equities was on the decline in advance of the vote. So let’s take a break from Brexit for a few minutes and look at some longer-term fundamentals.
I remain disenchanted with stocks and I need to see improvement in five key metrics before changing my view:
Improved pricing power for US based multi-national companies
Better consumer spend on goods and services
A weaker dollar relative to other currencies
Rising capital expenditures, especially in information technology
Moderating labor and health care costs
I’m focused on the behaviour of the private sector and its ability to generate free cash flows. During this business cycle, which began in July 2009, the US and many developed markets experienced record high profit margins, best-ever free cash flows relative to the size of the overall economy and high returns on equity. This surprised many cautious investors given that both the global and US growth rates had fallen below trend. The reasons for the high profit generation, which were complex, included gains in manufacturing sector efficiency, productive use of technology, rapid asset turnover, capital-light strategies, employment of global labor, use of operating leverage instead of financial leverage and low energy costs.
During the last three quarters most of these tailwinds for risk markets began to falter. Margins narrowed not just in the materials and mining sectors, but throughout much of the S & P 500, countering well-established trends that dated back to 2009. Now, selling, general and administrative (SG&A) expenses have been rising as a percentage of revenues. Financial leverage is replacing operating leverage, and both return on equity and margins continue to weaken into midyear.
All of these measures feed into a very important metric for me—the share of US gross domestic product going to the owners of capital. When the share of the economy going to the owners as profits begins to subside, a direct casualty is capital expenditure and durable goods spending.
Both are now weakening. Big ticket expenditures like purchases of machine tools by manufacturing firms and information technology spending by most firms, are a key to future growth of both jobs and profits and tend to perpetuate the cycle. These large expenditures by businesses have been weakening and the trend is downward.
The US consumer is doing better. Spending is increasing, but consumers have not spent the extra income afforded by the earlier oil price decline. And now, worryingly, energy prices are rebounding. The US dollar had been weak during much of this cycle, but now because of interest rate differentials and a flight to safety, the dollar has been heading back up. The strong company fundamentals that were the signature of this longer-than-usual cycle, have weakened in almost all categories.
Overall I am biased toward being underweight equities. Within equities I would favor US shares relative those of the UK, Eurozone and Japan. Some emerging markets look attractive, particularly Latin America and Eastern Europe, but selectivity is very important, as always. In fixed income I prefer high yield because fundamentals in the US remain solid with odds favoring the US avoiding recession near-term, in my view.
History tells us a weakening of the profit cycle can herald recession. Usually a profits recession comes as rising interest rates hijack consumer and business spending. US recession risks are rising, but the risk of rates rising seems remote now. Rather than a recession unfolding soon, I see a continuing plague of profit disappointments but no economic collapse. A kind of investor’s limbo, if you will. I hope the five points above reverse, but unless they do, late cycle flags should be a caution to investors.
James Swanson, CFA, MFS Chief Investment Strategist.
CC-BY-SA-2.0, FlickrPhoto: Moyan Brenn. The Implications Of Brexit For The Emerging World
In the end, the implications of Brexit are larger for the UK and Europe than for the emerging world. But this does not mean that Brexit does not impact EM.
Firstly, if there is a prolonged risk aversion in global markets, eventually it should affect the weakest links most. Large parts of the emerging world are still suffering from weak growth, the excessive leverage built up in the past years that limits the room for a domestic demand recovery, a high reliance on foreign capital and increased political risk.
Secondly, Brexit has increased the likelihood of an extended period of US dollar strength. This is never good for emerging markets: EM currencies are likely to depreciate and capital outflows should increase. Also, a stronger USD index normally means that the price of oil and other commodities declines. This affects the commodity‐ exporting countries, which in general are the fundamentally weaker economies.
Thirdly, the uncertainty caused by Brexit should lead to an adjustment in growth expectations for the UK and Europe. This hurts central Europe and Asia, for which Europe is the main trading partner. And global trade was already weak. It has recovered a bit in recent months, from ‐3% in January to +2% in April, but we should question the sustainability of this pick‐up now. Also relevant in this context is the weakening of the euro. This does certainly not help the Asian exporters.
And fourthly, with the globalisation trend already struggling in the past few years, Brexit could turn out to be a new negative factor. Trade between the UK and Europe is likely to be affected in the first years after Brexit and more headwinds for global trade could emerge after the US elections. The emerging economies have poor domestic demand growth prospects mainly due to the large debt overhang after many years of excessive credit growth. As a consequence, global trade has become even more important for a possible recovery. Globalisation in reverse would justify an adjustment in longer‐term growth expectations for the emerging world as a whole.
Willem Verhagen is Senior Economist and Maarten-Jan Bakkum is Strategist, Emerging Markets Equity at NN Investment Partners.
CC-BY-SA-2.0, FlickrPhoto: Juan FernandezG. Ignacio Pedrosa Joins BTG Pactual in Chile
BTG Pactual Chile hired Ignacio Pedrosa, as Executive Director of its Internatonal Funds division.
Pedrosa has had a successful career in Asset Management and Private Banking with over 20 years experience. Prior to joining BTG Pactual he was in charge of the Spanish operations of French Tikehau Investment Management. Before that he served in Spain’s most renowned independent asset managers, Bestinver and EDM and was a member of the Board of the United Investors Sicav Luxembourg. Between 1999 and 2005 he held various positions at Banco Urquijo (Sabadell) including Regional Private Banking Director.
He holds and Economics and Business BA from the San Pablo CEU University in Madrid.
CC-BY-SA-2.0, FlickrRoger Ibbotson set up Zebra Capital in 2001.. Kepler Launches New UCITS Platform with A Global Equity Beta Neutral Fund Advised by Zebra Capital
Kepler Partners LLP has raised $81m via its new UCITS platform, Kepler Liquid Strategies (KLS), for a global equity beta neutral fund. This is the first sub-fund of the KLS ICAV, which is a Dublin domiciled UCITS structure designed to give investors access to high quality managers selected by the team at Kepler Partners.
The fund, KLS Zebra Global Equity Beta Neutral, began trading on June 30th and saw significant interest from investors across Europe, despite the chaos in financial markets around the Brexit referendum.
Kepler has appointed Connecticut based Zebra Capital Management LLC as investment advisor on the fund, who will manage the portfolio based on their established investment process and philosophy. The KLS Zebra Global Equity Beta Neutral fund mirrors a strategy run by Zebra Capital in an existing offshore hedge fund. As a beta neutral strategy, it is designed to avoid the kind of volatility which markets have been experiencing in recent weeks. The new fund targets a net return of 7-8% per annum over a market cycle with a volatility of 5-6% per annum.
The underlying strategy is typically made up of 650 long and 450 short equity positions and uses a unique ‘popularity factor’ developed by the Zebra team which includes former Yale Professor Roger Ibbotson, who set up Zebra Capital in 2001. The core theory revolves around the idea that fundamentally strong but unpopular stocks tend to outperform fundamentally weak but popular companies. Ibbotson was described by the FT this year as the ‘pioneering analyst of the equity risk premium’ and the ‘godfather of smart beta’.
Georg Reutter, head of research at Kepler Partners, said: “Given the current uncertainty in global markets, we feel it is a good moment to be bringing a beta neutral strategy to the market. We are very pleased that our research based approach has led us to partnering with Zebra Capital as the first fund on the KLS platform.”
Laurie Robathan, head of sales, added: “Kepler has raised $1.3bn for UCITS fund clients since 2010 and, after biding our time for some years, it is exciting to have now made the logical step into this space by launching our own dedicated UCITS platform”. “We are very pleased to be working with a group of Zebra’s calibre and their total commitment as a firm to this project has been clear from the outset. Given the turmoil of recent weeks, the success of this launch is a clear signal from the market that this is the right fund at the right time.”
KLS Zebra Global Equity Beta Neutral Fund has an annual fee of 1% and a performance fee of 10%.
CC-BY-SA-2.0, FlickrPhoto: Intv Gene. GAM announces acquisition of Cantab Capital Partners and launches GAM Systematic investment platform
GAM announced the acquisition of Cantab Capital Partners (Cantab), an industry-leading, multi-strategy systematic manager based in Cambridge, UK. Cantab manages USD 4.0 billion in assets for institutional clients worldwide.
Purchase price consists of an upfront cash payment of USD 217 million, funded from GAM’s existing cash resources, and deferred consideration based on future management fee revenues. GAM is the industry’s third-biggest provider of liquid alternative UCITS funds.
At the same time, GAM launches GAM Systematic, a new investment platform dedicated to systematic products and solutions across liquid alternatives and long-only traditional asset classes including equities, debt and multi asset. Cantab will form the cornerstone of GAM Systematic.
By moving into the growing segment of scalable systematic investing, GAM takes an important step to deliver on its long-term objective to expand and diversify its active asset management business. Leading systematic strategies are attracting substantial allocations from investors globally due to their compelling returns and their rigorous, disciplined investment processes.
GAM Systematic will complement GAM’s successful active discretionary investment offering. It will also serve as the Group’s innovation hub for the development of new technologies, investment ideas and approaches for systematic strategies and products.
Alexander S. Friedman, Group Chief Executive Officer of GAM, said: “We have been evaluating how best to enter the systematic space for the past 18 months because we believe it represents an important capability for an active investment firm in the current environment and in the decades to come. GAM Systematic will offer our clients a compelling range of unique products complementary to our strong discretionary product range at a time when the investment industry is challenged to provide cost-efficient, liquid and diversified sources of returns.”
