CC-BY-SA-2.0, FlickrPhoto: Glyn Lowe. Columbia Threadneedle Investments to Acquire Emerging Global Advisors
Columbia Threadneedle Investments announced on Wednesday an agreement for Columbia Management Investment Advisers, LLC to acquire Emerging Global Advisors, LLC (EGA), a New York-based registered investment adviser and a leading provider of smart beta portfolios focused on emerging markets. The acquisition will significantly expand the smart beta capabilities of Columbia Threadneedle Investments. Terms of the EGA acquisition were not disclosed. The transaction is expected to close later this year.
With $892 million in assets, EGA has an established presence in the smart beta marketplace. It is the investment adviser to the EGShares suite of nine emerging markets equity exchange-traded funds (ETFs) that track custom-designed indices:
Beyond BRICs (BBRC)
EM Core ex-China (XCEM)
EM Quality Dividend (HILO)
EM Strategic Opportunities (EMSO)
Emerging Markets Consumer (ECON)
Emerging Markets Core (EMCR)
India Consumer (INCO)
India Infrastructure (INXX)
India Small Cap (SCIN)
“The experience and knowledge of the EGA team and strong emerging markets ETF products will complement our existing actively managed product lineup,” said Ted Truscott, chief executive officer of Columbia Threadneedle Investments. “The EGA acquisition will allow us to reach even more investors and accelerates our efforts as we build our smart beta capabilities.”
Since launching its first ETF in 2009, EGA has had a dedicated focus on providing rules-based, smart beta strategies designed to provide investors with diversification and growth opportunities in emerging markets.
“The team is excited about joining Columbia Threadneedle Investments and building on our complementary strengths to deliver smart beta strategies across asset classes to investors,” said Marten Hoekstra, Chief Executive Officer of EGA. “Now our clients gain access to Columbia Threadneedle’s rich investment expertise, while continuing to benefit from EGA’s experience converting investment insights into rules-based, smart beta strategies.”
“Columbia Threadneedle Investment’s expansive footprint across global markets provides an opportunity to accelerate the growth of our smart beta platform,” said Robert Holderith, President and Founder of EGA.
As part of their efforts to enter the smart beta marketplace, in the first quarter of 2016 Columbia Threadneedle Investments filed with the SEC a preliminary registration statement relating to multiple equity smart beta ETFs, including Columbia Sustainable Global Equity Income ETF, Columbia Sustainable International Equity Income ETF and Columbia Sustainable U.S. Equity Income ETF (referred to as the Columbia Beta AdvantageSM ETFs).
CC-BY-SA-2.0, Flickr. Credit Markets: Confidence Returns, but is it Sustainable?
Stephen Thariyan, Global Head of Credit at Henderson, reviews the credit markets in Q1 highlighting the ‘two-thirds—one-third’ nature of the markets. Financials came under particular pressure over the quarter exemplified by Deutsche Bank’s ordeal. While investors are happy to be back in the markets for now, as central banks have acted effectively to bring confidence back, challenges lie ahead in 2016. Thus, Stephen believes investors should be prepared for volatility to resurface.
Can you give a brief summary of corporate bond markets in Q1 2016?
It was a tough start to the year. It seems that in the first two months, particularly in February, the markets were discounting all the possible bumps in the road for 2016: concerns about central bank policy, illiquidity, Brexit, the oil price, China and growth in general. This led to quite a major sell-off across all capital markets, both debt and equity.
The end of February and March then saw a strong recovery, essentially based on the oil price, rallying from a low of US$26 upwards. That resulted in good returns, especially in high yield and emerging markets; total returns being positive across most currencies, across most credit markets, and excess returns again being broadly flat across most credit markets. So, a quarter of two thirds/one third: a very poor start and a strong recovery that continued into Q2.
Can you explain why the financial sector underperformed, particularly Deutsche Bank and subordinated banks/insurers more broadly?
The financial sector came under particular pressure in the first quarter. This was based on a combination of issues. Deutsche Bank in a way personified this with a situation that led to a significant sell-off in its bond prices, CDS and equity price. In a negative interest rate world, the core way the banks make money is challenged (ie, use short-term borrowing to lend for longer periods). This means significantly reduced returns from investment banking, especially in trading, fixed income, commodity and currency.
Banks, such as Deutsche, reported their first major loss in around eight years and there is a huge degree of outstanding litigation surrounding these banks, totalling billions. The last point was, especially with respect to Deutsche, concerns about the AT1 securities, contingent capital notes, which are complex subordinated financial securities, in existence to increase the capital buffer. There was a rumour that Deutsche would not pay its coupon, and even though these securities are designed to protect the public, the potential triggering spooked investors. Deutsche did recover the situation, but for the first time it felt a bit like 2008.
So financials generally took an awkward situation largely on the chin, given that central banks, especially in Europe, are trying to make banks lend money. Banks, however, are deleveraging, carrying lots of liquidity and struggling to find borrowers to borrow that money.
What is the outlook for credit markets and what themes are likely to drive the markets?
We are at an interesting point. We have suffered from a difficult first few months in 2016. The central banks have come in and almost acted in unison, with the European Central Bank subtly talking about a movement in monetary policy, but more importantly, the purchase of corporate bonds in the next few months. They haven’t given any details but the sheer fact that they are prepared to do it has given the markets confidence that there is a bidder for bonds.
It is debatable how effective that would be but the markets have rallied as a result. That combined with the Fed being a little more dovish a week later gave the capital markets, debt and equity, a huge fillip. Equity markets strengthened, bond markets strengthened, new issuance has started and the oil price steadied. A combination of all those events and generally benign data means that the investor seems happy to be back in the market again.
There is a degree of suspicion about how long this will last, but I think as we have said ever since the back end of last year, given all the different events that could occur in 2016, we are in for a volatile time. Certainly central banks have acted effectively so far in giving investors the confidence that they should be back in the markets buying both debt and equity.
CC-BY-SA-2.0, FlickrPhoto: Neal Fowler. Time To Take A Step Back?
As a disappointing first quarter earnings season rolls on, I am beginning to feel more cautious about the markets in the months ahead. We’re in the midst of a third consecutive quarter of poor profits and cash flows, and what’s most troubling is the weakness that’s spreading beyond energy and exporters to a broader swath of companies in the index. To me, this is a signal to reduce risk in many portfolios.
Why the increasing level of concern? The three previous earnings recessions of the last 50 years that were caused by a combination of tumbling oil prices and a strong dollar tended to last two quarters. But this pronounced downturn in earnings has now stretched into a third quarter. By now, I would have expected sales and profits to have rebounded, with consumers responding to the “energy dividend” that has accompanied the tumble in oil prices. And the pass-through from lower input costs should have driven an increase in overall economic activity, fueled by higher real consumer incomes. That has not yet happened. I find it both discouraging and an ominous sign for risk assets.
Reevaluate your asset mix
With new money, investors may want to contemplate standing aside for now. An appropriate response for existing diversified portfolios could be to reevaluate their quality mix, and to consider favoring a tilt toward shares in companies with sustainable dividend yields and toward high-quality bonds, perhaps US corporate credits.
Although I don’t believe the present backdrop signals the beginning of a US recession, it does mean that we are now experiencing a protracted earnings recession. To resume favoring risk, I’d need to see the following:
A recovery in capital expenditures
An improved revenue line for US-based multinationals
A sustained improvement in emerging markets
Improved pricing power on the back of an increase in global inflation
Additional concerns
Aside from the concerns expressed above, there are a number of other issues that the market needs to confront. In particular, because of the growing weakness in earnings, the current price-earnings ratio for the S&P 500 is too high, at 16.3x.
Seasonal trends are not particularly favorable in the months ahead. The May–October period is historically characterized by sideways market movements, delivering indifferent returns to investors when viewed over many decades. As the popular saying goes, “Sell in May and go away.” This year, in particular, investors can afford to wait for more clarity from the data flow.
Generally, market participants tend to be cautious in the months leading up to major elections. And with this year’s US election likely to be contentious, that caution may be justified. Further risks that may warrant caution are the Brexit referendum on 23 June and a Spanish general election days after, as well as concerns about Greece’s ability to meet its financial obligations over the coming months.
The macroeconomic environment has proven less dynamic than expected in recent months. US government income tax receipts have slowed despite still-robust employment data. New single family home sales, though solid, have not met my expectations. Auto sales are losing momentum after a very strong 2015. And most importantly, the profit share of gross domestic product, one of the most important forward indicators I follow, has started to slide.
While the current US business cycle remains strong by many measures, like job and wage growth and corporate profit margins, the equity markets are laboring to produce the earnings and margins that we’ve come to expect in recent years.
Our job will be to follow the shifts in the markets and the economy, and it’s our hope that our current concerns will be temporary.
But for now, it might make sense to take a step back.
James Swanson is Chief Investment Strategist at MFS Investment Management.
CC-BY-SA-2.0, FlickrPhoto: InvertmentEurope. Roderick Munsters Appointed Global CEO Asset Management of the Edmond de Rothschild Group
The Edmond de Rothschild Group has decided to entrust the management of all of its Asset Management business to Roderick Munsters from May 10, 2016. He replaces Laurent Tignard who leaves the Group to pursue new professional opportunities.
Edmond de Rothschild confirms its willingness to accelerate the development in France and abroad of one of the Group’s flagship business, representing over CHF 85 billion (€78 billion) in assets under management (at 31.12.2015).
Roderick Munsters (1963) has both a Dutch and a Canadian nationality. He was Chief Executive Officer of Robeco Group from 2009 to 2015 (EUR 273 billion AUM at end-2015). He also headed Robeco’s subsidiaries RobecoSAM (Sustainable Investing) in Zurich and Harbor Capital Advisors (US multi-manager) in Chicago. From 2005 to 2009 he was a member of the Executive Committee and Chief Investment Officer of ABP and APG All Pensions Group.
Roderick Munsters will report to Ariane de Rothschild and is part of the Group Executive Committee as Global CEO Asset Management.
“We are very pleased to welcome Roderick Munsters. He will bring a wealth of experience, strong knowledge of international financial markets, entrepreneurial spirit and recognised ability to generate long-term performance” said Ariane de Rothschild, Chairwoman of the Edmond de Rothschild Group Executive Committee.
“I am very pleased and proud to join the Edmond de Rothschild Group and its teams in France and abroad” said Roderick Munsters. “Edmond de Rothschild is a leading reference in Asset Management. The Group is a forerunner of alternative multi-management since 1969, high-yield bonds in the 70s and currency overlay more recently. It is an honour to have the opportunity to take part in the Group’s European and international development and to support the further growth of its reputation”, adds.
Photo: KayGaensler, Flickr, Creative Commons. The Miami Selectors Event is Brought to a Close with Debates on Equities, Flexible Strategies, and High Yield
The second edition of the Funds Selector Summit held in Miami, organized by Funds Society and Open Door Media, offered in its second and final day, investment ideas focused on equities with different perspectives (European Equities with long-only and long-short strategies, US Small Caps, European and Emerging Equities with a value investment approach), global High Yield and flexible strategies (in equities, fixed income and emerging market debt) of fund management companies Allianz Global Investors, Legg Mason Global AM, Schroders, Brandes, Edmond de Rothschild AM, and Aberdeen AM.
European equities are still the trend, both with long-only and long-short strategies. In the first area, Matthias Born, Senior Portfolio Manager of European Equities at Allianz Global Investors, presented a high conviction strategy focused on new ideas of structural long-term growth (with features such as structural growth, cost leadership, technology leadership, or a superior business model). The strategy (currently with 70 billion Euros in assets) is managed very actively and stock picking is a key factor because, in the long term, the growth style does not necessarily have to beat the market.
Allianz Europe Equity Growth Select is designed specifically to take advantage of the main strength of its investment team: the selection of securities with a bottom-up approach. The fund has the potential to evolve well in both bull and bear markets, where it shows resistance “due to stock picking and to the companies in the portfolio,” explains the fund manager. He normally invests in about 30-35 names, with a maximum position of 6% and a focus on the universe of European large and midcaps. As investment examples, Born spoke of companies such as Infineon, Inditex, Reckitt Benckiser, or Coloplast. The names he most overweighs in his portfolio are Infineon, Reckitt Benckiser, SAP, Hexagon, Prudential, Novo Nordisk, Ingenio, DSV, Legrand, and Richemont; by sectors, he favors information or industrial technology, while he has no exposure to utilities or telecommunications. By country, he is overweight in Germany, Denmark, and Sweden. The fund’s turnover is usually below 20%.
He explained that growth is the main catalyst for the performance of the portfolio, as it is what determines the long-term evolution of the shares. “In Europe, which will continue to experience an environment of low growth and inflation for years, it’s even more important to have such a long term strategy,” he said. The individual weight of each company is based on the level of conviction which reflects growth criteria, quality and valuation: “We seek high profits and price setting power,” says the fund manager. He looks to not being influenced by the benchmark and being agnostic as to countries and sectors; and also giving importance to SRI criteria. Normally, the companies in his portfolio do not pay high dividends because they use their capital for new investments.
One can also capitalize on the European stock market with long-short strategies. Mike Gibb, Product Specialist at Legg Mason Global Asset Management, spoke about a way to invest with a long-short strategy in the European market. He also showed how the Legg Mason Martin Currie European Absolute Alpha fund investment process, managed by Michael Browne and Steve Frost, is flexible enough to weather this market environment, while offering an attractive risk-return profile. It is a high-conviction directional strategy (not market neutral), which aims to capture two-thirds of the market upturns and only part of the downturns. The net exposure may vary between -30% and 100% and typically invests in between 40 and 70 companies (about 35 in the long portfolio− focusing on companies with great products and balance sheets, margin growth and innovation− and about 35 in the short− companies with declining margins and market share, poor balance sheets, poor management, low entry barriers…) all selected from a universe of 600 companies), and focusing on the mid-cap universe with a purely bottom-up approach.
The process includes quantitative and qualitative analysis, visits to companies (about 300 each year) and a thorough evaluation. “Fund managers try to identify changes at the company level and how these can affect their business and their stock price,” explains the expert. They also apply a macro-level filter with a system of traffic lights. Currently, he has a neutral vision of the asset, being neither too optimistic nor pessimistic.
“Volatility reigns in the markets and we try to capture returns while controlling risk and potential downfalls. The challenge is to capture the growth of companies in the region: Europe is a place with big companies but also with companies with problems and pressures on margins… and so the long-short concept works very well and helps to avoid problems and protect capital.” In his opinion, this strategy fits well into the portfolios.
Value style…
Meanwhile, Gerardo Zamorano, Emerging Markets’ Fund Manager at Brandes Investment Partners, also offered his perspectives on Equities, which his company manages from a value perspective and with strategies for the global stock market as well as emerging, European, or American markets. The investment process consists of three phases: analysis (by investment teams), valuations (investment committees make the final decisions), and portfolio construction (also the responsibility of the investment committees). With the conviction that in the long-term value outweighs markets and that with the current environment− after years of the style’s worst performance due to the financial crisis− there is great opportunity in this investment style.
In emerging markets, valuations are close to the levels seen on previous crises but, since then, there have been strong improvements in fundamentals. “The situation is much healthier than in the late 90s,” says the expert. Value had performed better than growth but since 2014, it has performed worse. Therefore, securities with this bias are cheaper than in the past. The Brandes Emerging Markets Value Fund invests in companies of all capitalizations, leverages overreaction to macro factors and negative feelings (e.g. political events) leverages the lack of understanding or coverage of individual firms ( “we explore all corners of the market “) and build concentrated portfolios that manage risk with conviction. They also include into their investment universe, companies from border markets and companies from developed markets with characteristics which are more similar to those from emerging markets. In total, they usually have between 60 and 80 names. Currently, some key overweights are in the consumer discretionary sector, Brazil, Russia and Hong Kong, and underweights in Taiwan, South Africa, China, or the information technology sector. They also like Panama.
In Europe, Zamorano also points out the attractiveness of valuations and opportunity in the Brandes European Value fund. Overweight in the oil and gas sector, food, and countries like Italy and Russia, while underweight in banks, health, and countries such as Switzerland and Germany. The fund includes investment in emerging European markets, currently at around 10%. Companies such as GlaxoSmithKline, Engie, Sanofi, BP and ENI are among its top 10 positions.
US Equities
There are also opportunities in US equities. Jason Kotik, Senior Investment Manager of US equities at Aberdeen Asset Management, spoke about investment in small caps companies. “Overall, the US economy grows at a slow pace, but good quality companies can be found. Two thirds of the economy is consumption and is in good shape.” Overall, companies are in good financial health and valuations are not too aggressive, says the expert. “We are not investing on the economy, but on the companies,” he reminds us.
Regarding equity flows, investors are wary after the rally experienced, but in that rally the small caps lagged behind the large caps. So valuations in the small caps are now more attractive. “Historically, small caps do better than large ones, and also usually perform well even in scenarios of interest rate hikes,” the fund manager pointed out. The reason: when rates climb it’s due to an improvement in the economy (higher growth and inflation) and the small caps usually have greater exposure to the US domestic economy. In addition, they can be protagonists in processes of M&A, usually with significant premiums, and have less coverage by analysts, giving advantage to active managers.
In the company, they believe that corporate fundamentals support this investment, they speak of a modest but positive macro scenario and believe valuations are fair. In a more volatile scenario, the dispersion has also increased and makes stock selection more important. For the expert, the markets will remain volatile given the upcoming elections in the US, the uncertainty about monetary policy and macro doubts, which can lead to some correction but can also benefit asset management companies like Aberdeen. “We like boring names in which the others aren’t interested,” says the expert, who expects returns around the mid-single-digit. With its strategy (Aberdeen Global-North American Smaller Companies Fund, which also invests a small part in Canada) is able to offer a better return than the market, he explains, both in bull and bear markets. Currently overweight in sectors such as materials, consumer staples, industrial, and communications services, he has a strong underweight position in finance and utilities.
In Fixed Income…
In fixed income, Wes Sparks, Head of Credit Strategies and Fixed Income at Schroders in the United States, explained the opportunity which credit, investment grade and high yield, represent globally. “We are optimistic in IG and HY but we must be aware that there has been a big rally in a very short period of time: the global high yield has risen more than 12% since February,” he reminds us. For this reason, and as far as fundamental and technical factors are concerned, the management company remains optimistic on the asset, but is somewhat concerned about its valuations. “The fundamental and technical factors of high yield are more positive than in investment grade debt, but valuations are less attractive than in February. It is even a faster recovery than the sell-off and usually it does not work that way,” says Sparks; hence his caution in the asset. “It’s not expensive, but there is no safety margin,” he adds.
But he insists that the fundamentals are positive: “The risk of default is not a widespread threat.” In the United States, he speaks of many fallen angels during the first quarter, which he sees as very attractive opportunities. In terms of flows, the management company uses extreme flows in funds as a contrarian indicator: if there is output, it coincides with strong sales and falling prices, which is followed by recovery. And there is support from long term investors: “In an environment of low interest rates, investors continue to seek profitability and high yield is one of the assets in fixed income with the highest potential. We are seeing demand for long-term investors, such as pension funds,” he adds.
The fund manager denies that there may be a strong sell-off in high yield from now on, but believes that investment grade debt, by presenting better valuations, can be a better place to be in the medium term, because it has not experienced such a strong rally in recent months. “Valuations are more positive, and the asset has a more diversified buyer base which supports the market,” he says, although he clarifies that he is confident that high yield will beat IG over a twelve month period. “We have confidence in both assets, the returns will be positive in twelve months,” he adds.
In his global HY fund (Schroder ISF Global High Yield), he is committed to companies with cash, good margins and profits, pricing power, and manageable leverage, and regarding the US, he speaks about domestic-market-oriented defensive sectors (not impacted by the dollar and commodities at low levels) such as health or gambling, or companies that benefit from low gas prices (restaurants, automotive industry….). The fund is underweight in sectors related to raw materials (energy, basic industries…) and sees more value in other sectors such as communications.
Regarding central banks, Sparks believes the Fed will not be very aggressive in its rate hike because it will take into account international problems, while central banks in Japan and Europe will remain accommodative. Treasury bonds will rise in the coming months, but not too much, he says. Regarding the risks, he acknowledges that the interest rate is higher in IG than in HY, denies a cycle of widespread defaults (it will be reduced to the metals, mining, and energy sectors, he believes) and believes the next cycle of defaults will be in two years, in 2018. Regarding illiquidity he says that markets must compensate for it.
Flexible Strategies…
Kevin Thozet, Product Specialist in the Asset Allocation team and Sovereign Debt at Edmond de Rothschild Asset Management, shared the company’s positioning of flexible and dynamic funds in Global Fixed Income, Emerging Fixed Income, and European Equities. “Flexibility is part of our DNA and we define it as active management and investment without restrictions. We seek opportunities wherever they are, and we are flexible to invest in different market segments and vehicles.” The company believes that with the return of volatility, liquidity shortages, and greater market movements, this philosophy is more necessary than ever to create value. Because, regardless of vision on markets, the key is to be able to adapt quickly to whatever happens, the company comments.
His global fixed income fund tries to beat the market and obtain absolute returns, and it can invest across the fixed income universe. As some examples of that activity and how they try to capture the opportunities, he explains that when tapering started in 2013, they invested on assets that suffered, such as emerging debt, because they had conviction; during the Chinese crisis last year, they built positions in convertibles to benefit from the rebound in November 2015; this year, with strong volatility and widening spreads on the government debt of Greece and Portugal, they saw it as an opportunity and increased exposure to Portugal. With regard to profitability, credit and public debt have been the largest contributors on an annual basis, but so have emerging debt and convertible bonds.
As for the company’s emerging market strategy− in UCITS format and domiciled in Luxembourg−, in the management company they have a contrarian and opportunistic approach without restrictions, are agnostic regarding benchmark, and are also able to invest in the entire universe (public and private debt). The largest position in the portfolio today is Ukraine (they see opportunities particularly in the corporate segment). Another conviction of the portfolio is Venezuela (with positions in both public and private debt): it’s not a commitment to its economy, but it does offer a very asymmetric profile between risk and return, says the fund manager. Also, an opportunistic coverage, although they are positive on emerging market debt, is investment in CDS in China. In 2013, emerging markets suffered heavy falls but the fund achieved positive returns.
The fund manager also spoke about the company’s flexible strategy in European stock market, which has some core, 60%, concentrated in equities with conviction, and above it, a hedge with derivatives to generate returns and reduce volatility and protect markets in case of falls.
CC-BY-SA-2.0, FlickrPhoto: masaru minoya. Can Japanese Stocks Rise Again?
With Japan now one of the worst performing equity markets this year, BlackRock’s Global Chief Investment Strategist Richard Turnill provides an updated outlook for stocks in the Land of the Rising Sun.
According to the specialist, Japanese companies’ inflation expectations have been steadily declining in recent quarters, amid an appreciating yen. Bank of Japan (BoJ) stimulus efforts this year – including an expanded quantitative easing (QE) program and a shift into negative interest rate territory– have failed to stem the yen’s rise and boost inflation expectations.
In his opinion, deflationary pressures have weakened market confidence in the central bank, and hurt Japanese stocks. Japanese equities experienced record outflows in April, according to BlackRock research based on exchange traded fund (ETF) flows, and Japan is now among the worst-performing equity markets this year in local currency terms, with the TOPIX index down more than 13% year to date, according to Bloomberg data.
Turnill believes that there are reasons to like Japan over the longer term, even as a strong yen contributes to Japanese corporate earnings downgrades. The “short Japan” trade looks increasingly crowded, Japanese stocks appear cheap (around 13x forward earnings) relative to their own history and to other markets, and Japanese corporate balance sheets in aggregate have low financing risk, BlackRock analysis suggests.
“We still hold a neutral view of the market, however. We believe monetary policy, the first arrow of Prime Minister Shinzo Abe’s “three-arrow” economic plan, isn’t enough to boost the local economy and market. The BoJ still has ammunition left to raise inflation expectations, including increased equity purchases, despite last week’s inaction. But we would need to see additional easing coupled with advances toward achieving Abe’s second and third arrows, for us to adopt a more bullish view of Japan. In the near term, we are awaiting credible fiscal stimulus aimed at paving the way for structural reforms. Over the longer term, we want to see tangible progress in labor reform and in cutting red tape for local businesses.” He concludes.
CC-BY-SA-2.0, FlickrPhoto: James Halliday. Roboadvisors Present Concerns when it Comes to Mis-Selling and Data Protection
Of the growing number of fintech innovations, robo-advisors will have the greatest impact on the financial services industry in the short- (one year) and medium-term (five years), according to a member survey by CFA Institute, the global association of investment professionals. An overwhelming majority of respondents, 70 per cent, consider that mass affluent investors will be positively affected by automated financial advice tools in the form of reduced costs, improved access to advice, and improved product choices.
The Fintech Survey, which measured the opinions of CFA Institute members globally, found it unlikely that automated financial tools will replace engagement with human advisors for institutional investors and ultra-high net worth individuals. The implication is that the tailored nature of financial advice to these market segments is not as easily amenable to standardized automation tools typically provided by robo-advisors. These groups of investors, with large portfolios and potentially diverse and complex investment needs, are likely to continue to favour personalised, human advice.
Respondents are most divided about the impact of financial advice tools on market fraud/miss selling and on the quality of service, with a roughly even split between respondents who believe that the growing prevalence of financial advice tools will exacerbate or diminish market fraud and miss selling. However, investment professionals made it clear that flaws in automated financial advice algorithms could be the biggest risk introduced by robo-advisors (46 percent of respondents, a plurality), followed by mis-selling (30 percent) and data protection concerns (12 percent).
Blockchain Technology
Additionally, the survey addressed the impact of blockchain technology, the distributed ledger that underpins virtual currencies, and which is being explored by financial services firms. The survey revealed that members thought that clearing and settlement, alternative currencies, and commercial banking are the top three areas which will likely be impacted the most by blockchain technology.
Commenting on the survey, Svi Rosov, CFA, analyst at CFA Institute, said: “FinTech is attracting increasing attention from consumers, investors, the investment management industry and regulators across the globe. Our survey confirms the intuition that rapid technological innovation has the potential to shape and even disrupt the asset management industry, but also reveals that investment professionals are not yet convinced that investors will be made unambiguously better-off.”
. The 'Funds Society Fund Selector Summit' Won Silver in the British Media Awards
The ‘Funds Society Fund Selector Summit’, produced by Open Door Media Publishing Ltd, picked up the Silver Award in the ‘Event of the Year’ category in the British Media Awards which took place in London on May 4th.
The event serves fund selectors in the US offshore market and is a joint-venture between Funds Society, the Miami-based publisher of the eponymous website and publication, and Open Door Media Publishing Ltd, the award-winning publisher of ‘Investment Europe’ and ‘International Investment’.
Nick Rapley, CEO of Open Door Media Publishing Ltd, commented: ‘We are extremely proud to receive this recognition for one of our premier events. The ‘Funds Society Fund Selector Summit’ is a fantastic event and the result of a unique collaboration between two leading financial media companies. We look forward to building on this success and to producing more conferences with Funds Society in the future.’
Alicia Jimenez, partner and founder of Funds Society, added: ‘.This event is the result of a joint effort between Open Door Media’s fantastic expertise as an event organizer for the asset management business and Funds Society’s deep knowledge of the Americas region. A combination that will hopefuly bear more fruits in the future. We are extremely greatful for this recognition’.
The latest ‘Funds Society Fund Selector Summit’ took place at the Ritz Carlton, Key Biscayne, Miami, on the 28th & 29th April 2016. Coverage of the event can be found at both www.investmenteurope.net and www.fundssociety.com
CC-BY-SA-2.0, FlickrPhoto: Mohmed Althani. Emerging Markets, Japan and Fixed Income: The Favorites on the First Day of the Miami Fund Selector Summit
Current markets present significant challenges, but investment professionals are convinced that there are many opportunities to be exploited: Emerging Markets (both fixed income and equities), Japanese Stock Market, High Yield, Global Fixed Income from a flexible perspective, and Convertible Bonds were some of the strategies presented by the fund management companies M&G Investments, Matthews Asia, RWC, Carmignac, Henderson Global Investors, and NN Investment Partners during the first day of the 2016 Fund Selector Summit, organized by Funds Society and Open Door Media, and held in Miami on April 28th and 29th .
The opportunity which emerging markets currently represent became apparent during the event. Regarding equities, John M. Malloy, Fund Manager at RWC, spoke of a positive environment due to attractive valuations, the strong growth in some markets, and some other matters which represent a great investment opportunity in certain securities. “Valuations are not like those of the late 90s or the year 2000, but markets are cheap. And the most interesting thing is that when profit begins to recover, they’ll become even more attractive,” said the fund manager. Growth will also support this statement: “We see emerging markets as a growth opportunity: although this has been questioned in recent years, countries like India, Pakistan, the Philippines and some Latin American markets will offer higher growth than in many parts of the developed world, and at some point, the markets will recognize it,” he added. He believes that these markets are in good shape overall, and there are positive signs such as export growth, which had been declining for some time but have since stabilized and begun to recover; and the expert is convinced that the figures will increasingly improve.
In addition, some of the factors which play in favor of some companies are automotive industry technology, the growth of infrastructure (strong in countries like India, Indonesia, and Brazil) or media and advertising (with companies that are not expensive, unlike in the developed markets). The team is currently optimistic, especially with Asia, which has very strong fundamentals and higher growth rates, but also speaks of turning points in Russia and Brazil: “Brazil faces major problems and a great recession but everything can change and the market may rebound faster than you can think… as was the case with Argentina: one year ago no one spoke of the country and in six months the markets’ mentality had totally changed,” he explains. Regarding interest rate hikes in the US, he believes there will be one or two more this year but will not be a big risk in an environment where the dollar is stable and will perhaps weaken (does not cover currency); and he is also more optimistic with data coming from China, because “the pressure has dropped.”
His emerging stock market strategy (which includes up to 20% in frontier markets and in the most liquid part, now 12%), combines a top-down and bottom-up approach. It is index-agnostic, and has a very high active share, over 90%, and materializes in 50-60 names, in a diversified portfolio which is very focused on growth (their companies have the potential to see their profits grow by more than 20%). It is also biased towards large and mid-caps. And they can boast of beating the market in difficult years. The company launched the fund in UCITS format in December and he thinks it can now generate much interest, and they also recently opened an office in Miami. In frontier markets, he points out Pakistan’s potential, for its demographics, its reforms, its political stability and Chinese and IMF investments, and also points out the existing opportunities within the banking sector.
But before investing in emerging market equities, many investors are beginning to increase their positions in emerging market fixed income, both in hard and local currency. Claudia Calich, Fund Manager of Emerging Markets Bond at M&G Investments, pointed out the opportunity presented by that asset and its good current entry point: currencies have depreciated a lot and are stabilizing, although still the levels are low and exporters will benefit; low raw material prices have stopped their collapse, although importers and consumers continue to benefit (also, beyond the winners and losers of cheap oil prices, she is positive in countries that have adapted to current levels of oil, such as Russia. She is not positive about Nigeria). She also believes that there are opportunities in the currency area, leading her to increase its exposure in the portfolio. In her opinion, Central America and the Caribbean are the most attractive markets in which to invest to benefit from the recovery in the US…. Moreover, growth is more visible and that can change the negative perception people have of emerging markets versus developed ones.
When it comes to risks, she believes these have diminished: and so, she is now less cautious with Brazil than she was a year ago. On oil prices, the situation has also changed in respect to early in the year; China’s rebalancing has improved, although there are still challenges ahead…With regard to countries that are suffering from exposure to China via exports, she points out the adjustments carried out in many of them, mainly from Latin America, for example with adjustments to their currencies. Regarding the Fed, there have also been changes from the initial perception of four rate hikes this year. She believes that there will be one or two rate hikes during the remainder of the year (in June or July, and at the end of the year): If the Fed is forced to make more rate increases, the losers would be countries with large financing needs, such as Brazil, Turkey, and South Africa, and the winners would be those exposed to its economy-because the Fed would raise rates for a good reason, such as Mexico, Central America and the Caribbean, or Eastern Europe. Due to that exposure to the US and its recovery, she is comfortable with countries like Honduras, Dominican Republic, El Salvador, or Guatemala. In general, by countries, the fund is heavily overweight in Bulgaria, Azerbaijan, Paraguay, Guatemala, and Romania versus underweight in Malaysia, Poland, Turkey, South Africa, or Colombia, with less attractive valuations which do not compensate for risk.
On valuations, she believes these to be similar to those faced in the debt crisis in Europe, far from the highs, and which, in some cases, compensate for the risk taken. The fund manager has reduced exposure to credit− the chances of defaults have increased and compensate less for the risks taken, while she believes that if the correct names are chosen, it is still interesting− and has increased investment in the area of government debt in the fund, which can invest in both corporate debt and public debt, in both hard currency or local currency −local currency exposure has risen recently−. The fund manager is positive with the attractive valuations overall, but is cautious with some, such as some Asian ones, and the fund’s exposure to currency is currently around 25% in aggregate terms. In relation to flows in emerging markets, she believes that we will not see as many outflows as in the past.
As regards fund management, she considers it essential to adopt a flexible and active style, which is capable of seizing opportunities wherever they may be found (in credit or public debt), and to find the best ideas, using both interest rates and currency exchange, as well as credit, as profit drivers.
Japanese equities
Matthews Asia focused its presentation on Japanese equities: the management company has been investing in these assets since the mid 90s. The company tries to look at Japan as part of Asia, and they explain that Japanese companies are experiencing a lot of growth from other parts of Asia (e.g. the consumer and tourism sectors): with a long-term and growth approach, they try to find the best ideas in Japan, ranging from 50 to 70. “The economy presents many challenges in terms of growth, it’s not an attractive investment destination from that point of view, but there is great opportunity in Japanese companies,” says Kenichi Amaki, Fund Manager. “There are high quality growth companies and that’s why I invest there.”
The fund’s portfolio is focused on the best opportunities in the country: the fund manager looks for growth companies, understanding this concept in three ways: leading global companies such as Toyota; the “Asia growers” that capture the productivity growth and wealth in the rest of Asia −a game that, unlike in the past, can now be played and which has great potential−; and companies which are able to grow in the domestic Japanese market, capturing niches. The company focuses on growth companies in the country, all of them of great quality.
The expert also pointed out the onset of the country’s improved corporate governance, and the trend of returning cash to shareholders: “Changing corporate culture will take time, but it will improve; most companies already have payout ratios… and that’s one of the reasons to invest in the country,” he says.
Regarding the recent disappointment in the Bank of Japan’s monetary policy, the fund manager believes that the authority will wait to push its monetary policy to announce those measures together with other tax measures, “combining both will be a more powerful combination.” Market expectations have also risen and, he believes, the central bank awaits its opportunity when expectations are lower than they are now, in order to positively surprise the markets.
With regard to valuations, the fund manager stressed that Japan is the cheapest developed equity market. By sectors, he points out opportunities in healthcare and industrial, while he is underweight in consumer discretionary, materials, utilities and financial institutions (“there is much competition for loans, banks have no power to set prices,” says the fund manager, whose consumer discretionary underweight is due to the fact that the benchmark weight in the sector is concentrated in auto companies).
Fixed income opportunities
Keith Ney, Fixed Income Fund Manager at Carmignac Risk Managers and Fund Manager of the Carmignac Sécurité fund (which has never had a negative result in 27 years) spoke about the fixed income opportunity. During his presentation, he focused on the strategy of the Carmignac Global Bond fund, managed by Charles Zerah since February 2010. The fund has a flexible and opportunistic style with a focus on total return, seeking to beat the market with a strong focus on risk management and capital preservation. The asset manager has greatly increased its holdings of fixed income, which accounted for 23% of the portfolio in 2007, and now account for 60%. “The structure is very flexible and very quick to adapt to changing markets,” said the expert. Another of the fund’s key factors is a global universe, both as regards to geographies, as well as assets, which can take long and short positions (in duration, credit, currency… but the latter in a purely tactical way and for hedging purposes, as the fund is not a long-short). The fund’s duration can range from 4 to 10, so that they can benefit from rate increases. The idea is to exploit market inefficiencies to add value. The volatility is limited to 10%, and the fund has a negative correlation with other similar funds of its competitors.
Currently, in duration he has exposure to the US, Germany, Australia, and Switzerland and European peripheral debt in countries like Italy, Portugal, Bulgaria and Greece. However, he has slightly reduced his position in the United States because he advises that the market has perhaps underestimated future rate hikes in the country, but explains that the Fed is now more dependent on markets and global financial conditions than on economic data. In Europe, the activity of the ECB could be positive, although he believes that the corporate debt repurchase program will fail, to the extent that there are not enough debt securities to buy and the ECB will have to extend its purchases to the public debt of peripheral countries: hence its exposure to markets such as Italy.
In credit, positions are focused on sectors with very low prices, with an opportunistic view: the distressed raw materials segment− with many fallen angels− or CLOs. But the star position is on European banks, “still cheap and in deleveraging phase” and he points out the opportunity available in subordinated debt and CoCos, “a poorly understood asset which is a great opportunity from an opportunistic point of view.” In currencies, they currently have no great convictions: “We no longer hold the positive vision of the dollar which we had a few years ago,” says the manager. Carmignac will soon open an office with five people in Miami.
Henderson Global Investors also pointed out the opportunity in fixed income which High Yield credit represents from a global perspective: Kevin Loome, Head of US Credit, pointed out that High Yield spreads in the US do not signal a recession and that problems in the energy sector have been “contained”. “I do not think we’re close to the situation in 2008”, so the fundamentals are intact: “High Yield has been placed in a position which now represents an opportunity” in an environment of negative rates in many assets which increases appetite for this debt segment. “There may be a strong technical advantage in the coming years,” he adds. Finance companies have performed badly, he points out, and are disadvantaged by the policies of the Fed, but they don’t represent a large part of the high yield universe, he says.
On the asset side, he points out its higher returns overall, its shorter duration, and exposure to the upward rate cycle, low levels of default, a growing market in Europe and opportunities for stock pickers: “In my career I have never seen such great dispersion,” he explains, hence a good selection of credit can provide much value, which he applies to the Henderson Global High Yield Bond fund. In his opinion, the greatest opportunities are in High Yield and bank loans.
The fund manager also points out the importance of having a global High Yield strategy, and not just in the US, although it represents most of the market, and the management company has a bigger team in Europe and emerging markets than other companies. In fact, he sees opportunities in Europe for its better quality, less exposure to energy, and because the asset will benefit from the ECB’s policies in relation to the US market, where he is cautious. “We are now less US-centric because we see more opportunities in Europe,” he says.
With regard to defaults, they are low but they tend to rise especially in the US energy sector, in which Henderson is underweight.
Convertible bonds
Convertible bonds were also discussed at the event: Pierre Lepicard, of NN Investment Partners, brought the asset’s current status to the 2016 Fund Selector Summit. “The drought in Africa has consequences except for lions and crocodiles… that is what is currently happening in the markets: we live in a world with few returns and those who seek them have to leave their comfort zone, where they used to invest, and that is associated with risks.” For the expert, markets go through some fundamental changes: including that last year interest rates hit rock bottom, and that had consequences for investors.
“Convertibles are a way to take risk intelligently”, although it is important to choose a good fund manager. NN IP has the NN (L) Global Convertible fund to play the asset and obtain hedging in the bear markets while at the same time participating in bullish markets, focusing on selection from a thematic perspective approach, avoiding names which do not offer convexity, and the preservation of capital. Currently 95% of the portfolio is invested in 16 investment themes (especially “cloud computing”, health spending and the rebound in Europe) and 30 convertible bonds; the portfolio is neutral in credit risk and duration, and is slightly overweight to equity exposure (especially in the US and Europe).
The fund manager pointed out the benefits of convertible bonds from the point of view of diversification and talked about how well they have performed long term, both in markets where equities have had good results, and in those where they don’t. “These bonds will provide convexity, downside hedging, and diversification for both secure and risk assets,” he said.
Lepicard used a low profitability environment like Japan as a laboratory to see if this asset would work in a global environment of zero interest rates, like the current one … and it does work. In fact, in Japan, stocks are very volatile, bonds offer very low returns, and convertibles shine with good returns. And if rates rise, he says, the asset can provide good protection that can help both in a deflationary scenario as well as in another with rising interest rates.
“There are few assets that can work like that, offering profitability and diversification, reducing portfolio risk, while also providing hedging in an environment of rising rates”, he defended, and showed the advantages of portfolios which include convertible bonds versus those that do not.
CC-BY-SA-2.0, FlickrPhoto: Jacinta Lluch. Durable Source of Alpha Generation: Invert the Pyramid
Many a market practitioner has been humbled in recent years trying to project the direction of US interest rates. Professional forecasters, futures markets, and even the Federal Reserve have all consistently gotten their interest rate calls wrong over the last half-decade. At MFS, explains Bill Adams, MFS Chief Investment Officer, Global Fixed Income at the firm, “we devote a great deal of fundamental analysis to forecasting rates, duration and the shape of the yield curve, and those elements make up an important part of our alpha generation toolkit”. However, given the extraordinarily difficult and unusual market environment of recent years, the firm recognizes there is an unusually low probability of getting one’s rate call correct, and an even lower probability of getting it right consistently. That is simply not a reliable or durable source of alpha generation within a well-managed fixed income portfolio.
In our view, says Adams, consistent alpha generation depends on actively managing multiple sources of risk. “We view the portfolio construction process a bit like an inverted pyramid. At the bottom of the pyramid are the factors hardest to consistently anticipate—rates, duration, and curve positioning. Next come currencies, another piece of the portfolio notoriously difficult to forecast. Against the present market backdrop, unduly influenced by global central bankers, these are the lowest conviction pieces of our alpha pyramid”, points out the CIO.
In the current environment, MFS believes that it can add more durable and sustainable alpha by engaging in a thorough process of analyzing and underwriting both corporate and sovereign credit. So security selection and sector and regional allocations are areas we approach with the greatest conviction. While you cannot generate excess returns without taking risks, we believe it is critical to take risks that are appropriate.
“Allocating assets to multiple regions is an alpha source we embrace”, explains Adams in the MFS blog. “Bringing together securities from multiple regions and reducing home country bias in a fixed income portfolio helps improve risk adjusted returns, in our view. It is also important to look beyond absolute levels of return and focus on relative return opportunities. In isolation, a 10-year US Treasury bond yielding 1.80% is not all that attractive. But compared to a Japanese 10-year JGB with a negative yield or a German 10-year bund with a yield not far north of zero, the value of the US security becomes clearer”.
As we move up the inverted alpha pyramid, the conviction grows. Moreover, MFS prefers underwriting individual credits by leveraging our global research platform to trying to make a significant call on the direction of 10-year Treasury yields. That research capability allows the firm to better manage risk. This is where MFS place its greatest conviction, with a deep understanding of both sovereign and company credit fundamentals. “Our global research platform leverages not only fixed income analysts, but equity and quantitative analysts as well, who provide a deeper understanding of individual corporate credits. To truly understand credit fundamentals, an investor must assemble a complete view of a company’s capital structure”, says Adams.
In the unusual global economic and interest rate environment that exists today, MFS believes fundamental, country-by-country and company-by-company analysis is a much more durable and sustainable alpha source than interest rates bets.
