Photo: Mike Gibb, co-head Global Wealth Management Distribution at Legg Mason Global Asset Management. Mike Gibb, co-head Global Wealth Management Distribution at Legg Mason Global Asset Management, will join the Fund Selector Summit Miami
Mike Gibb, equity specialist, co-head Global Wealth Management Distribution at Legg Mason Global Asset Management will join the upcoming Funds Society Fund Selector Summit Miami 2016, which takes place on the 28th and 29th of April.
The conference, aimed at leading funds selectors and investors from the US-Offshore business, will be held at the Ritz-Carlton Key Biscayne. The event-a joint venture between Open Door Media, owner of InvestmentEurope, and Fund Society- will provide an opportunity to hear the view of several managers on the current state of the industry.
Focusing on European long/short equity opportunities, Gibb, who is also an equity product specialist of Martin Currie, a Legg Mason affiliate, will look to outline how combining bottom up stockpicking with a macro overlay can generate alpha and deliver absolute returns in variable market conditions.
Before his previous role managing relationship and wealth mangement opportunities, Gibb was a client services director covering an institutional client base across regions. He has also been a hedge fund salesman with responsibility for investors in Europe and Asia. Before joining Martin Currie in 2005, Gibb was at Credit Suisse First Boston as a director and equity saleman for five years.
He was also an equity research salesman at Salomon Smith Barney for four years and before that a Far East equities fund manager for Gartmore and Scottish Amicable in 1990-1995. He is an associate of the UK Society of Investment Professionals (Asip) and a member of the CFA Society of the UK and has attained the Fundamentals of Alternative Investments certificate from CAIA . He graduated with an MA (Hons) in economic science from The University of Aberdeen.
CC-BY-SA-2.0, FlickrPhoto: The Tax Haven. The Earnings Season in the US Adds Pressure To Financial Markets
As we approach the start of the Q1 earnings season in the US, financial markets experienced renewed pressures. During the last week, the MSCI world was down 1%, with EMU and Japanese equities underperforming US equities. Commodities were also down but interestingly this had limited implications on US high yield and EM.
This was detrimental for hedge funds with the Lyxor index down 0.7% during the last week. CTAs again outperformed, driven by the performance of the fixed income, energy and FX clusters. Long positions on the JPY vs USD were also rewarding (see chart) as a result of the continued depreciation of the USD.
“The minutes of the 15-16 March FOMC meeting reminded investors that the dovish stance of the Fed is not so consensual within the voting members of the Committee but this had little impact on the currency. It is actually a well known fact that Yellen had to deal with hawkish regional Fed presidents in 2016. The good news is that she has managed to control the hawks so far”, explain the Lyxor AM team head by Jeanne Asseraf-Bitton, Global Head of Cross Asset Research.
Overall, Lyxor AM are upgrading CTAs, from neutral to slight overweight. “After the market rally in March and ahead of the US earnings season, their defensive portfolio appears to be a good hedge against any disappointment. Meanwhile, their long stance on US fixed income is less aggressive and with 10-Treasury yields near the bottom of the range of the past three years, it seems adequate. They have also reduced their shorts on energy, which is a positive development as the USD depreciation implies upside risks on the asset class”, says the research.
With regards to Event-Driven, Merger Arbitrage funds suffered due to the Pfizer/ Allergan deal break. It followed the announcement of new Treasury rules to discourage tax inversion deals. The Lyxor Merger Arbitrage index is down 1.9% this week. A number of funds were involved in the deal: Merger Arbitrage managers had set up the spread (long Allergan/ short Pfizer), while Special Situation managers held either long positions in Allergan, Pfizer or both, explaining why they outperformed. “We maintain the slight overweight stance on Merger Arbitrage. The exposure of the strategy on inversion deals is marginal today, hence limiting contagion risks to the rest of the portfolios”, concludes.
Central banks usually target inflation, and for most central banks the target is headline inflation. But if a central bank actually tried to target headline inflation they would be changing rates every few months, and quite possibly changing direction each time. Both oil and food prices are very volatile and can have a big impact on inflation from one month to the next. Just think of what monetary policy would have looked like if central banks had tried to compensate for the fluctuations in oil prices over the last couple of years. And in any case, monetary policy has little impact on energy prices; monetary policy would just force the rest of the economy to compensate.
So central banks effectively target core inflation, because it is so much more stable. Markets, of course, are fully aware that core inflation is more stable and, for this reason, it does not take much of a surprise in the core inflation data to trigger an aggressive reaction.
Markets are quite good at understanding movements in core inflation that are driven by the economic cycle or consumer expectations. But there is one rarely considered factor that can cause quite significant inflation volatility: seasonality.
Inflation is meant to be an accurate measure of what the consumer pays for a certain basket of goods and services. If the prices of many consumer goods or services like clothes or airline fares, for instance, are affected by seasonal sales and public holidays then the consumer price index calculated on those prices should also mirror those seasonal swings.
The impact of seasonality on the price of goods and services can be quite substantial. For instance, the price of clothes or airplane tickets can move as much as 20% during sales and in the subsequent re-pricing. And this can have a relevant impact on the aggregate core price index.
Since we usually express inflation as the percentage change in the price of a basket of goods and services relative to a year ago, then in principle discounts during sales should have little effect on inflation. If sales take place every year on a given month then there should be little impact: prices drop this year but they also dropped last year, and the effects cancel out.
Although true in theory, this argument clashes with the crude reality that seasonality might not be constant over time and can change dramatically over the years. The Eurozone provides the best example of this. In fact, seasonal factors (i.e. the contribution to monthly changes in consumer prices due to seasonality) have changed radically since the introduction of the Euro (chart 1). Around a decade and a half ago, January sales would negatively impact core prices by just over 0.5% while July summer sales had almost no impact. This contribution has increased over time to about -2% for January sales and almost -1% for summer sales.
By construction, seasonal factors have to total zero over a year. This means more aggressive sales in January will also imply a more aggressive re-pricing over the following months (such as February and March). This can, and has, increased the volatility of core inflation through the year.
This dramatic change in the seasonal pattern is much more visible in the Eurozone than in other developed economies like the US and UK, where inflation tends to have a much more stable seasonality. So, what could have caused such an evolution in the seasonal pattern of Eurozone core inflation?
There are a few reasons. The first is more a technical than an economic reason and it relates to improvements in the statistical methodology used to account for seasonal sales and discounts.
Seasonal sales are not a recent phenomenon. However, in most countries they were not included in the calculation of inflation until it was decided to create a measure of Eurozone inflation based on a common methodology, the so called Harmonised Index of Consumer Prices. This meant most European countries had to modify their methodology for surveying prices and calculating inflation. Furthermore, not all the statistical offices of the different countries decided to introduce the new methodological improvements at the same time. As a result, it looks as if in the Eurozone seasonal sales have only become more popular recently, whereas it may be that they are simply being measured more accurately.
While this explanation is possibly responsible for most of the intensification in the seasonal pattern, there are also other economic factors at play, such as competition. The internet not only created an alternative means of purchasing goods and services it, also allowed consumers to compare prices among different shops and providers. This has probably led to more aggressive competition during sales. At the same time, the prolonged period of economic crisis in the Eurozone could have forced shops and firms to be more competitive during sale periods since people were not willing to spend that much. This cyclical component could partially explain the reversal in the seasonal pattern that seems to be taking place at the beginning of 2016.
If core inflation has become more volatile over the course of the year because of the change in seasonality, it has also become more difficult to forecast given that neither statistical models nor economic judgement can easily cope with such changes in the seasonal pattern. This also means the change in the seasonal pattern might have created a seasonality in market surprises for core inflation (the actual reading relative to consensus expectations) (see chart 2), and potentially on market reactions too.
The evidence suggests this is the case. Since 2004 core inflation has always surprised markets on the downside in January, July and November. Interestingly, it seems that over time, markets have accounted for more aggressive sales in January since the surprise has decreased over time. Conversely, markets have regularly underestimated core inflation in March and to a lesser extent in September.
The efficient markets hypothesis tells us that this should not really be happening. If there is a persistent seasonal bias in the data, the market should be capturing it. Perhaps market economists are not as good at capturing systematic patterns as the market is. But at least they do seem to be learning: economists are overestimating Eurozone inflation by far less in January than before, despite the increase in seasonality. The market (and especially economists) may not be as quick as the efficient markets hypothesis would suggest, but eventually they manage to discount the patterns. Or in this case, to discount, rather than miscount, the discounting.
Joshua McCallum is Head of Fixed Income Economics UBS Asset Management and Gianluca Moretti is Fixed Income Economist UBS Asset Management.
CC-BY-SA-2.0, FlickrPhoto: US Lipper Awards 2016. Five Columbia Funds Earn Lipper Fund Awards
Five Columbia funds have received 2016 Lipper Fund Awards as top-performing mutual funds in their respective Lipper classifications for the period ending December 31, 2015:
Columbia Select Large-Cap Value Fund (R5 shares): Large-Cap Value Funds classification (290 funds) – 10 years
Columbia Greater China Fund (Z shares): China Region Funds classification (26 funds) – 10 years
Columbia Global Equity Value Fund (I shares): Global Large-Cap Value Funds classification (39 funds) – 3 years
Columbia Contrarian Core Fund (Z shares): Large-Cap Core Funds classification (499 funds) – 10 years
Columbia AMT-Free California Intermediate Muni Bond Fund (Z shares): California Intermediate Municipal Debt Funds classification (30 funds) – 10 years
The U.S. Lipper Fund Awards recognize funds for their consistently strong risk-adjusted three-, five-, and 10- year performance, relative to their peers, based on Lipper’s proprietary performance-based methodology.
“We are pleased to have five funds recognized by Lipper for their consistent, risk adjusted performance,” said Colin Moore, Global Chief Investment Officer. “Our priority is to deliver consistent investment returns for our clients through superior research and capital allocation within and across our strategies and with a deep understanding of their investment needs.”
This is the fifth consecutive year that Columbia Select Large-Cap Value Fund has earned a Lipper Award in the Large-Cap Value category. The fund received the award for 10-year performance in 2015 (90 funds), 10- year performance in 2014 (84 funds), for 5-year and 10-year performance in 2013 (102 funds and 84 funds), and for 5-year performance in 2012 (402 funds).
CC-BY-SA-2.0, FlickrPhoto: Moyan Brenn. PineBridge Investments Completes Fundraising for Structured Capital Partners III, L.P.
PineBridge Investments, the global multi-asset class investment manager, has announced the final close for PineBridge Structured Capital Partners III, L.P. (together with parallel partnerships, the “Fund”).
PineBridge completed the fundraising in March with US $600 million of aggregate capital commitments, surpassing its planned target amount of US $500 million. The Fund will invest in junior capital securities including mezzanine debt and structured equity issued by privately-owned middle- market companies across all sectors in North America.
F.T. Chong, Managing Director and Head of PineBridge Structured Capital, stated, “We are committed to being reliable and flexible providers of junior capital to middle market companies. We are pleased with the positive reception for our Fund. Most of the Limited Partners from our prior fund have signed up for this Fund and new investors include major institutions in the US as well as Europe, the Middle-East and Asia.”
CC-BY-SA-2.0, FlickrPhoto: Billie Ward. China: Real or Imagined Economic Improvement?
The ‘lower for longer’ environment that we are experiencing has required central banks to adopt some extraordinary measures. Most recently the Bank of Japan adopted negative interest rates and the European Central Bank pulled multiple levers including cutting the depo rate by 0.1%, increasing quantitative easing and opening it up to non-financial corporate bonds, as well as introducing a new series of four-year targeted long-term refinancing operations (TLTROs). These measures, along with an upswing in corporate profitability and growing signs of stability in credit markets, have helped provide a backdrop against which risk assets look more benign. They have certainly resulted in a wild ride for banks.
Our view is that, in Europe at least, the ECB measures are probably a net positive for bank earnings and banking pressures should diminish from here; but market sentiment is still ‘see-sawing’ between confidence that central banks absolutely have enough in their policy toolkits to avert deflationary pressures and stimulate growth, and fears that those toolkits do not have a lot left in them – as seen by initial reactions to the ECB closing the door on further rate cuts.
In the US, a host of market participants had been circulating expectations that the US could be heading into recession this year, but economic data has begun to turn, with very strong US employment data in particular coming hot on the heels of other economic surprises, helping to ease financial conditions. But we must bring China in here. As China-watchers, we are trying to interpret whether the recent improvement in sentiment is backed up by real or imagined economic improvement. Clearly, none of the structural issues we have identified previously appears to have been addressed: the central bank is targeting a 6-6.5% growth rate this year and the liquidity taps have been turned on but, ultimately, we believe China is experiencing a cyclical rather than a structural improvement as the PBoC tries to ease the pace at which economic growth decelerates. For the US, the key question is one of divergence: is the Fed able to adopt monetary policy that diverges from ECB and Bank of Japan actions and operates independently of spillover pressure from the China slowdown? We believe the US dollar is ready for another leg-up, but it needs a catalyst such as the Fed raising rates – that may not happen until June.
Brexit uncertainties persist. The online polls seem unambiguously to be coming out in favour of leave, whereas the phone polls are unambiguously favouring remain – by a wide margin. Central establishment figures have entrenched themselves on both sides of the debate but this has not lessened the uncertainty, that is only intensifying as we move closer to the 23 June referendum. Sterling has been the main mover in this, with market forecasts indicating 1.50 against the dollar is the appropriate valuation for remain and 1.20 an appropriate valuation for leave. As the polls change, so Sterling gets battered about. How markets change in the run-up to the referendum will be interesting. The uncertainty is putting ever more distance between the Bank of England moving interest rates – despite relatively good labour market numbers – with our valuation research indicating the first rate rise in April 2019, though some analysts have pushed that back to 2020.
Mark Burgess is CIO EMEA and Global Head of Equities at Columbia Threadneedle.
Foto cedida. Telecommunications, Healthcare, Consumer Products or Services: Sectors in which Muzinich sees Value in High Yield
The high yield debt market is worth $ 1.3 trillion in the US alone, that of European high yield is about 500 billion, and the corporate debt market of emerging countries is growing. Erick Muller – Head of Markets and Products Strategy at Muzinich, who recently visited Miami- thus explained the scope of the huge , corporate credit industry, in which his company has focused since its foundation in 1988. The strategies managed by the management company are neither limited to high yield, since it also invests in investment grade securities, nor to a fixed term.
Time to invest in energy…
Muller believes that the price of the oil barrel will remain low and volatile, and avoids investing in the US energy sector, except in those companies not sensitive to the price of crude oil. “Now is not the time to invest: with the barrel price remaining at around US$ 40, 30% of companies could fail in the next 12 months. There are sectors that represent better opportunities, such as telecommunications, cable television, healthcare, and consumer products or services, to name a few,” he said in an interview with Funds Society.
Equities or corporate debt ?
According to Muller, there is starting to be some competition between equities and high yield corporate debt, and there seems to be a greater flow towards the latter. “Now is the time to enter the corporate debt market, but staying within securities rated BB or B, and away from emission with a C rating,” says Muller, explaining that the crisis will continue, and lower quality debt can suffer.
Now is also the time to be tactical, because the correlations are very large; and flexible, in order to afford seizing opportunities and exiting at the appropriate time, without being tied down. Another one of this strategist’s keys for investment in the current market environment is diversification, more sophisticated diversification which dilutes risks within each asset class, while allowing him to remain loyal to his convictions.
The US high yield market, which is very domestic economy oriented, is attractive for its fundamentals (except for some activities such as oil or mining), The European is attractive for its lower volatility, while the emerging markets could be attractive for their valuation.
“We are very cautious about global growth. The Fed raised rates for reasons of financial stability and not to relax overheating in the US economy,” said the strategist, who does not believe that the conditions for more than one rate hike in 2016 are given, but also warns that we will have to wait until June to be clearer as to how the year will end.
In his opinion, the most appropriate strategies for this environmentare the short-term US high yield debt strategy, absolute return (global, tactical, and long-short), and those focused on long-term US high yield debt.
CC-BY-SA-2.0, FlickrPhoto: Claudia Calich, fund manager at M&G Investments. M&G’s Claudia Calich to attend Miami Summit
Claudia Calich, fund manager at M&G Investments will outline her view on where to find pockets of value in emerging markets debt assets, when she takes part in the Funds Society Fund Selector Summit Miami 2016.
Currently, emerging market investors face uncertainty from factors such as slower economic growth in China, volatile oil prices and geopolitical risk. Calich suggests flexibility in strategies such as the M&G Emerging Markets Bond fund facilitate taking high conviction positions without being constrained by local or hard currency, or differences between government and corporate bonds.
Outlining the opportunities, Calish will also explain her currency and interest rate positioning.
Calich joined M&G in October 2013 as a specialist in emerging markets debt and was appointed fund manager of the M&G Emerging Markets Bond fund in December 2013. She was also appointed acting fund manager of the M&G Global Government Bond fund and acting deputy fund manager of the M&G Global Macro Bond fund in July 2015. Claudia has over 20 years of experience in emerging markets, most recently as a senior portfolio manager at Invesco in New York, with previous positions at Oppenheimer Funds, Fuji Bank, Standard & Poor’s and Reuters. Claudia graduated with a BA honours in economics from Susquehanna University in 1989 and holds an MA in international economics from the International University of Japan in Niigata.
Photo: Enrique Chang. Janus Capital Names President, Head Of Investments
Janus Capital has promoted Enrique Chang to the position of president, head of Investments.
Chang took up his new duties on 1 April, overseeing Janus’ fundamental and macro fixed income teams, in addition to his existing leadership responsibilities of the Janus equity and asset allocation investment teams.
“The decision to promote Enrique to president, head of Investments, is reflective of his increased responsibility in now overseeing the majority of our Janus investment teams, as well as his significant contributions to the firm over the past two and a half years,” said Dick Weil, CEO of Janus Capital Group.
Chang will partner with CEO Dick Weil and president Bruce Koepfgen.
Janus Capital specified that Perkins Investment Management and Intech Investment Management will continue to report into their respective leadership teams and relevant boards.
Chang was previously CIO Equities and Asset Allocation. He joined Janus in September 2013 and was previously executive vice president and chief investment officer for American Century Investments, where he was responsible for the firm’s fixed income, quantitative equity, asset allocation, US value equity, US growth equity and global and non-US equity disciplines.
At end December 2015, Janus Capital’s AUM reached around $192.3bn (€169.2bn).
CC-BY-SA-2.0, FlickrPhoto: Harold Navarro. Boring Can Be Beautiful
While it’s easy to get caught up in campaign season — whether in the United States, where raucous primaries are underway, or in the United Kingdom, where the Brexit campaign is in full swing — that probably won’t help you make investment decisions. It’s probably better to see what’s going on inside some of the world’s biggest economies.
The US economy ebbs and flows, but the real average growth rate for this business cycle —after adjusting for inflation—has been about 2%. And we’re slogging along at about that pace as we begin the second quarter despite repeated, and so far unfounded, concerns that the economy is headed for a recession.
Here’s a look at the US economic scorecard for March:
Looking around the world, China remains weak, but economic data is no longer worsening. There is still a lot of excess capacity, but fears of a deep recession have faded somewhat.
We have seen manufacturing weakness in the eurozone amid headwinds from slowing exports to emerging markets. Inflation has remained scant, prompting the European Central Bank to push interest rates deeper into negative territory and adopt additional unconventional monetary policy tools. Consumption is a bright spot, boosting companies that cater to consumers. We expect a real economic growth rate of slightly better than 1% in 2016.
Japanese growth continues to hover near zero. Despite negative interest rates, fiscal stimulus and structural reforms, Abenomics has not proven sufficient to rekindle growth.
Few signs of excess
We follow a number of business cycle indicators for signs that the present US expansion may be continuing, or conversely, coming to an end. Of these indicators, half are flashing signs that excesses may be creeping into the economy while the other half are showing no signs of stress. Several areas of concern have shown modest improvement of late. For instance, there have been tentative signs of improvement in the Chinese manufacturing sector, and oil prices, which until recently had wreaked havoc with corporate profits, have stabilized to some degree.
While US growth may seem boring, there are some intriguing phenomena going on in other parts of the world. Perhaps the most interesting — some would say crazy — phenomenon is the adoption of a negative interest rate policy (NIRP) by the European Central Bank, Bank of Japan and other central banks. About 40% of the sovereign debt issued by eurozone governments today trades with a negative yield. Not only are investors paying to lend governments money, but they retain all the credit and interest rate risk with no compensation. That’s anything but boring.
Where to turn in a world of NIRP?
Logically, investors are seeking more rational alternatives. Dividend stocks have proven alluring against a backdrop of negative yields. US dividend stocks are particularly attractive. Positive real yields and a steadily growing US economy will likely help companies generate the free cash flow necessary to pay out, and eventually grow, dividends. The US private sector has been producing strong, if not record, free cash flow since the end of the global financial crisis. And dividend-paying stocks outside the US have proven attractive in many developed markets as well. The key is not to chase the ones with the highest yields — they can be dangerous — but to look for sustainable cash flow growers.
Absent a recession, which is often fueled by excessive credit growth, investment-grade credit markets look like an attractive alternative to government securities. They are relatively cheap by historic standards and offer the potential to outperform Treasuries in a mildly rising interest rate environment. It is our belief that against the present backdrop moderate additions to risk assets may be appropriate for some investors. Moving out the risk spectrum, cheap high-yield bonds also look compelling in this environment. And large-cap stocks are another area of opportunity, given their moderate valuations.
This economy may not be as exciting as the latest accusations on the campaign trail, but boring can be a good thing. Especially for long-term portfolios.
James Swanson is the chief investment strategist of MFS Investment Management.
