Photo: Kenichi Amaki, potfolio manager at Matthews Asia.. Matthews Asia’s Kenichi Amaki to join Miami Summit
Kenichi Amaki, portfolio manager at Matthews Asia is set to join the Second Edition of the Funds Selector Summit to be held on 28th and 29th of April in Miami.
Amaki manages the firm’s Japan Strategy and co-manages the Asia Small Companies and China Small Companies Strategies. Now that the time has come to re-engage with Japan, he will share his perspective on the relevance of key governance changes that investors may have overlooked with all eyes on “Abenomics.” Kenichi will also explain how Japan has transformed from a “value” market to a “growth” market, and how the Matthews Japan strategy provides exposure to interesting investment opportunities across the market-cap spectrum.
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.
Prior joining in 2008 as a research analyst, he was an investment officer for a family trust based in Monaco, researching investment opportunities primarily in Japan. From 2001 to 2004, he worked on the International Pension Fund Team at Nomura Asset Management in Tokyo.
Kenichi received a BA in Law from Keio University in Japan and an MBA from the University of California, Berkeley, and is fluent in Japanese.
You can find all the information about the Fund Selector Miami Summit 2016, aimed at leading fund selectors and investors from the US-Offshore business, through this link.
CC-BY-SA-2.0, FlickrGrant M. Bughman, manager of the US growth equity strategy at UBS Global AM. Courtesy photo. UBS Global AM: “Now is A Great Time for US Growth Companies”
The markets may be nervous at the moment, plagued by issues like uncertainty in commodities and the structural changes faced by China, but there is no cause for concern around some assets, such asUS equities, because the situation is a far cry from 2008. “There are weak spots in the market – the energy and industrials sectors, for example – but we are optimistic and we expect the situation to improve,” says Grant M. Bughman, manager of the US growth equity strategy at UBS Global AM.
At an investor presentation held last week in Madrid, he recognized that the S&P 500 companies have not seen earnings acceleration but highlighted areas where earnings growth has been remarkable.“Now is a great time for US growth companies because they have proven that they can grow in any environment.” Bughman especially likes growth stocks in the IT and healthcare sectors, which are currently overweight in the UBS USA Growth portfolio.
These are quality companies that can gain market share, have pricing power and are able to grow and generate revenues in any environment, even a tough one like the present time. Bughman hails the benefits of growth versus value companies, which include banking sector names and more cyclical stocks. “When it comes to investing in US equities in a lower-growth environment, growth companies work best,” he says. Growth companies are also inexpensive, with valuations currently below their historical 14-year average.
Fundamental strategy
The fund’s portfolio comprises 45 stocks selected through a fundamental research process, midway between concentration and diversification. Stocks are divided into three groups: classic growth companies (such as Nike or Home Depot, which the managers buy when the valuations are compelling); “elite growth” companies, that is, companies in a period of high growth (such as Facebook, a “secular winner” which will benefit from the shift from traditional to online and mobile advertising and which has featured in the fund’s portfolio since its IPO), and cyclical stocks which enjoy more opportunistic growth (such as Delta Airlines). The latter tend to make up around 10% of the portfolio but currently account for less, given the complex backdrop. Fast-growing companies, which have outperformed in recent years, also have a smaller slice of the portfolio at the moment, making room for increased exposure to classic growth stocks.
“The three groups of stocks complement each other in the portfolio, which is designed to perform well in any environment.” It does not include energy sector stocks, “not because we have an outlook on where crude prices are headed, but because the risk-return trade-off is not attractive at this point.” The fund manager, who points out that the collapse in energy prices has not led to increased consumer spending in the US – the fund is underweight the consumer sector – explains that the drop in oil prices stems from the excess supply, adding that some players will be forced out of the business and into bankruptcy, especially if current prices mean they can’t repay their debt. “No-one knows where commodities prices will go but we don’t see them trending upwards over the long term.”
Volatility creates opportunities
Despite the many challenges that lie ahead, Bughman believes that the best strategy in the current environment is to take advantage of volatility, which he says “creates opportunities to use our tools and rebalance portfolios, adding good names at more compelling prices,” especially if you take a long-term view. He believes the selloffs we are seeing in 2016 are indiscriminate and that there are opportunities to be found in stocks that are falling for no reason but fear alone.
When it comes to challenges like China, which will no longer be enjoying double-digit growth, Bughman points out that whilst the US is not an island its exposure through exports is smaller than countries like Japan and Germany. He refers to two US sectors: industrials, which is more closely linked to the emerging markets and will therefore underperform, and the services sector, which is more exposed to the domestic economy and is performing better as employment climbs, salaries improve and support aimed at boosting consumer spending gains momentum. He does add, however, that the upturn in consumer spending has only been observed among part of the US population and is not widespread. He is not worried, though, because household deleveraging and saving means healthier balance sheets, which may not lead to steep spending growth in the short term but will underpin a more robust improvement in the future.
Limited Fed action in 2016
With regard to the Fed, Bughman believes interest rates will stay low for longer and does not expect to see 4 rate hikes this year, as Fed previosly announced. “The Fed took the first step in December and unleashed volatility in equity and credit markets, driving up financing costs. The Fed has continually repeated the mantra that they will be data-dependent and given our generally positive view we see support for further future hikes, but not at the pace the Fed had anticipated to start the year,” he says, completely ruling out another hike in March. He believes rates could be raised as of June if the situation is more stable but expects Yellen to take a cautious stance in a deflationist environment. “The market is still underestimating how long interest rates will remain low. The path of rate hikes will be modest,” he adds.
CC-BY-SA-2.0, FlickrPhoto: Paul Wilkinson
. Monaco to Examine Draft Law on Multi Family Offices
The national council of Monaco, the Principality’s parliament, is to examine a draft law on multi family offices’ activity in Monaco.
It points out that if single family offices have been run for years in Monaco, multi family offices which have started to flourish in recent years in the Principality remain unregulated so far in the country.
The further law will then provide a regulatory framework to the business.
Moreover, it seeks to promote Monaco as a centre of excellence for family offices, pursuing therefore Monaco’s government plan that aims to make the country more attractive to ultra-high-net-worth individuals and entrepreneurs.
Among compliance obligations enshrined in the draft law, multi family offices conducting financial transactions will have to be granted a license by Monaco’s state minister and will be subject to regulatory approval by Monaco’s financial authority, the Commission de contrôle des activités financières (CCAF).
Also multi family offices in Monaco will have to be structured in Monegasque public limited companies (Société anonyme monégasque).
Michael Roberge, MFS’ CIO and co-CEO, was recently in Miami where he met with more than 120 investors in two events organized by Jose Corena, Managing Director for the aforementioned management company, together with Paul Britto, Regional Director, and Natalia Rodriguez, Internal Wholesaler.
Roberge, who has been working with the company for the past 20 years, began his review of the global macroeconomic and business landscape by emphasizing the huge disconnect between what markets are discounting and the realities of the economy. The current environment is much more favorable than a year ago, because, according to MFS’ co-CEO, market downturns have led to more attractive entry prices. “It is undeniable that there are risks. A year ago the markets were calm and everyone was buying, even though all asset classes were overvalued,” he pointed out.
But the fear factor currently extending through the market is not so much a concern over valuations, but is more focused on the possibility of a recession on the horizon. For Roberge, even if the market discount rate reflects a scenario of great pessimism, the United States will not fall into recession in 2016.
“Consumption accounts for seventy percent of US GDP, and its health is enviable. The unemployment rate is declining and heading towards 4%; real wages are rising by about 2-2.5%; and the price of energy has fallen considerably in the last 18 months — which for the consumer’s disposable income is comparable to a tax cut” he claimed.
“US manufacturing, which accounts for about 10% of the overall economy, is underperforming the consumer-oriented sectors of the US economy,” he said. “This is due to both a stronger dollar, which hurts exports, as well as a clean-up of accumulated inventories during the past year. Once these inventories have been depleted, it is likely that the manufacturing sector will not continue to be a drag on GDP growth.”
Finally, Roberge said that the public sector, which in recent years has either been neutral or has had a negative contribution, will contribute between 0.6% and 0.7% to GDP growth in 2016 through a combination of tax cuts and increased spending. “In short, the US economy is in good shape. Doing the math, it seems highly unlikely that the US goes into recession unless an exogenous factor which significantly affects consumer confidence takes place,” he explained to attendees. The factors which could affect consumption are gasoline prices and interest rates, neither of which appears to be going up this year.
Global Growth
With respect to global growth, a stronger US dollar helps Europe, as it favors exporters, and ultimately its manufacturing sector. The MFS executive believes this will last throughout 2016. He also believes the Old Continent is benefiting greatly from low energy prices. For its part, Japan is not likely to contribute in any great measure to global growth this year. Finally, emerging markets are expected to be the part of the world that will continue to deteriorate in 2016. “Continued pressure from China means they will grow, but less than last year. If we look at the world as a whole, I think there is a very low probability of falling into recession. It is the market which is mistaken and not the fundamentals of the economy,” he said.
With all of this on the table, MFS’ advice for investors is to consider equities over high quality bonds. The reason, he said, is very simple. The average dividend yield currently stands at 2.4%, while the yield on the benchmark 10-year Treasury is 2%. So unless the economy falls into recession, “which is something we do not believe will happen, it is better to have an emphasis on equities, given the current lack of profitability in the bond market.”
Limited Opportunities in Fixed Income
Among the few opportunities currently offered by fixed income securities, Roberge mentioned the high yield bond market, where the average yield is around 9%. “It will probably beat equities this year,” therefore, he believes it’s a good idea to include this asset in a portfolio. “We believe that the market is being a lot more pessimistic about high yield market conditions than our own vision of what will really happen. The key factors here are volatility and liquidity, two factors which are of great concern, but the market has already discounted both of those risks. This year, high yield should perform much better than US Treasuries and, in our opinion, also much better than stocks.”
MFS’ co-CEO also opts for dollar-denominated emerging market debt, and explains that “during the last five or six years, we have seen a flattening in the debt curve of developed countries, due to the slowdown in growth and the monetary policies of central banks, and we believe that the next debt cycle will favor emerging markets. We prefer debt issued in dollars because local currencies are still exposed to risk from China, to the price risk of raw materials, and to what the Fed does throughout the year,” he added.
The market is expecting the Fed to raise interest rates again in March, but MFS does not believe that will be the case. Roberge ventures that the board headed by Janet Yellen will go easy. “It is likely that this time it may be the Fed which moves the market and not vice versa. It will be difficult for the board to raise interest rates since the major central banks in the developed world continue easing monetary policy due to global deflationary pressures. Therefore, we do not see the Fed raising rates four times this year, and have positioned our portfolios accordingly,” he said.
In his analysis of Latin American countries, MFS’ co-CEO explained that there is dollar-denominated Mexican debt in their portfolios, and Argentine debt has recently been added as a result of the political changes brought about by recent elections. With respect to Venezuela, given political circumstances and the price of oil, the Boston-based firm believes that at some point it will have to restructure its debt because its current levels are unsustainable.
“Brazil has a lot of challenges,” he said. “The economy is stagnant, inflation is high, and the central bank has little room for maneuver; added to all this is the political turmoil as a result of corruption exposed during the last year. These factors make it almost impossible to implement the reforms which the country needs.”
CC-BY-SA-2.0, FlickrPhoto: Keith Ney, Fixed Income Fund Manager at Carmignac. Keith Ney, Fund Manager at Carmignac, Will Analyze The Challenges of The Fixed Income Markets at The Funds Selector Summit in Miami
After a secular bull market lasting 30 years, fixed income is now facing a challenging phase. Following a long period of monetary policies that have kept interest rates low in the United States, the Federal Reserve appears to have embarked on a normalization process. By contrast, European and Japanese rates seem to have reached historic lows due to the support of interventions by central banks. Additionally a combination of increased quantitative easing and lower trading liquidity has exacerbated the volatility of this asset class.
Keith Ney, Fixed Income Fund Manager at Carmignac, will present Carmignac Portfolio Global Bond’s investment allocation under the title “Alpha generation in an uncertain fixed income environment” at the Second Edition of the Funds Selector Summit to be held on 28th and 29th of April, where he will explain how they have been able to achieve performance by investing across sovereign, credit, and currency markets,
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.
Keith Ney, who joined Carmignac Gestion in 2005, has been Fund Manager for Carmignac Securite since 2013. Prior to that, he worked as an analyst for Lawndale Capital Management from 1999 to 2005. Keith holds a Bachelor of Science in Business Administration from the University of California at Berkeley, and is a CFA Charter holder since 2002.
You can find all the information about the Fund Selector Miami Summit 2016, aimed at leading fund selectors and investors from the US-Offshore business, through this link.
Rahul Chadha, CIO at Mirae Asset Global Investments.. mirae
Jung Ho Rhee, CEO at Mirae Asset Global Investments, explains in this interview with Funds Society all the details about its success in Asia and its international growth in markets as Europe, Asia, Latin America, Australia and USA, where the firm looks to expand also in the offshore market.
Mirae Asset Global Investments was established in 1997 at the height of the Asian economic and currency crisis…How has this timing marked the nature of the firm?
It may be counter intuitive, the financial crisis created tremendous opportunities for Mirae Asset. Mirae Asset Global Investments was established in 1997 during which regulation in Korea was relaxed following the Asian financial crisis. Our firm started off as the first asset management company in Korea when mutual funds were largely unheard of by the Korean population. With years of vigorous investor education, our firm created a market for our products. In other words, Mirae Asset transformed the asset management industry in Korea. Now, we are the largest asset management company in Korea by AUM. Our firm’s ambition is not only to establish a presence in Korea, but also provide global investors best-in-class financial products. To that, our firm set up overseas office in Hong Kong in 2003 which managed regional and global funds to be sold to Korean and global investors. Since then, we have set up offices in India and Brazil to bolster our onshore fund offerings. In 2007, we established our UK office to boost our SICAV fund distribution capability throughout Europe. As of end October 2015, Mirae Asset Global Investments Group’s AUM amounted to USD 77.6 billion. All I can say is that our firm is resilient and has grown exponentially amid adverse macro condition.
Since then, what are the main challenges in managing Asian assets? How has your investment philosophy evolved?
The main challenge in managing Asian assets is that Asia is a unique and diverse region, whose constituent countries and sectors all possess different attributes, are all at different levels of development and maturity, and are driven by different cultural trends and consumer habits. In order to be successful, asset managers need to possess deep understanding of and insights into the economies and culture of the region. Mirae Asset is a company with an Asian heritage. We have a strong team of investment professionals focusing on the Asian markets and seven offices across Asia-Pacific. Our investment philosophy is focused on identifying long-term winners that possess sustainable competitiveness, and our investment process is driven by our on-the-ground research process. This allows us to construct compact, high conviction portfolios that shun “benchmark approaches” and achieve real alpha for our investors.
Regarding your international expansion, it started in 2003. Beyond Asia, you have presence in UK, Colombia, Brazil, USA and Canada but, where else are you selling your funds?
We are selling our Luxembourg-domiciled SICAV funds into Asia, Europe and Latin America. Our India office offers local domiciled funds for Indian investors. In the US, we are selling our local domiciled funds to US investors, but we are thinking about expanding our SICAV offerings in the US through wholesale channels to non-US citizens.
What are going to be your next steps in your international expansion?
Our expansion plan is on multi-pronged approach. We will continue to grow assets through expanding geographically, strengthening our relationships with clients and investment consultants, as well as widening our product offering. Recently, we have hired Marko Tutavac as head of consultant relationships based in Hong Kong, and Chris Wildman as head of Australia sales in Sydney. As our firm had gained ground in wholesale distribution in Europe and Asia and now wanted to further grow its institutional business, which was reflected in the new hires.
Tutavac is tasked with cultivating the firm’s relationship with global investment consultants and ratings agencies in Asia. He was hired from Fidelity Worldwide Investment, where he was associate director for institutional business for Asia ex-Japan. Wildman is responsible for driving the distribution of Mirae Asset’s fund particularly in the institutional marketplace. He was hired from AMP Capital, where most recently he was an institutional business executive. One of our recent product development initiatives is collaborating with Daiwa Asset Management to co-manage the Mirae Asset Next Asia Pacific Equity fund. The fund is domiciled in Luxembourg and Korea and we are now planning to domicile in Japan to cater for global investors’ appetite on Asia Pacific including Japan equities. We received a substantial amount of requests and interest regarding the launch of this fund from European investors. We will continue to explore expansion opportunities in different directions.
What products do you use for your international growth?
Our Ucits fund range has seen AUM triple in past two years to $2 billion, largely driven by flows from institutions and wholesale clients in Europe. We have seen significant interest in our SICAV funds globally. In particular, Mirae Asset Asia Great Consumer Equity Fund and Mirae Asset Asia Sector Leader Equity Fund have consistently outperformed the benchmark and gained traction among our clients. As I mentioned earlier, we collaborate with Daiwa Asset Management to co-manage the Mirae Asset Next Asia Pacific Equity fund. The fund is domiciled in Luxembourg and Korea and we are now planning to domicile in Japan to cater for global investors’ appetite on Asia Pacific including Japan equities.
Your AUM reach over $70 bn…What are your objectives for the coming years?
Our objective in the coming year is to continue our distribution efforts in SICAV funds across Europe, Asia and Latin America. As I mentioned earlier, we have recently hired our head of Australia sales, we will step up our distribution efforts in Australia.
Why did you choose a “team-based approach” model instead of betting on star fund managers or great individual talents?
We believe that a team-based approach, where a team of talented investment professionals work collaboratively, each focusing on and being accountable for their area of expertise is the best way to achieve long-term outperformance. This is borne out by our own experience and by independent academic research. Reliance on star investment managers may work for some asset management companies but we believe that it limits the scope, breadth and depth of investment ideas and is susceptible to personal bias. Furthermore, a structure dominated by a few key persons increases risks, whereas we believe that a team approach minimizes risks, including key man risks.
Risk analysis and factors like valuations, liquidity or governance are key in your investment philosophy, which one of these three factors is the biggest threat in Asia nowadays?
All of these issues are important for investors to consider. However, investors should be aware that Asia has seen rapid growth in the total investible universe of companies while continued efforts at improving market access, such as the recent Shanghai Hong Kong Stock Connect Scheme, have contributed to marked upgrades in liquidity. In addition, several Asian governments and regulators are making continued efforts to implement improvements to corporate governance. All of these are positive measures, which will contribute to Asia’s ongoing evolution as an accessible, efficient and transparent market for investors looking for stable and diversified investment opportunities. The advantage that Mirae Asset Global Investments offers is that we are a company with a unique heritage and presence in Asia – this means that we have a deep understanding of the Asian markets. Our on-the-ground research presence by our research analysts in Asia means that we are able to make first hand checks on issues related to liquidity and corporate governance before we make investments, and keep performing ongoing checks on all stocks in our portfolios. In particular, as signatories of United Nations Principles for Responsible Investment, Mirae Asset Global Investments has a firm responsibility to ensure that issues of corporate governance are fully taken into consideration in our investment decisions.
China is in historical key moment, in the midst of a transition to a consumer economy. How do you value the difficulty and implications of this process to China? And for the rest of Asia? Do you think it is necessary to be focused when investing in China?
China is in the midst of an unprecedented effort to correct structural imbalances in its economy, and the success of this great transition will depend on how effectively the central government implements reforms. The China market saw some intense periods of volatility in 2015 as investor sentiment swung from optimism to pessimism, and while we expect there to be some volatility in 2016, what is certain is that the country is likely to avoid a hard landing. There could be some near-term pain as the reforms take time to play out and growth will likely remain low but we do not believe the current situation is as severe as in the global financial crisis of 2008 or the Asian financial crisis of 1997.
What is important to consider is that in low growth macroeconomic environments such as this, the importance of bottom-up growth picking comes to the fore. There are many sectors in China that have strong prospects for growth, and there are many high quality businesses with sustainable competitive advantages, strong balance sheets and capable management teams that are reasonably valued. Therefore, for skilled asset managers such as Mirae Asset Global Investments who rely on fundamental analysis and bottom-up stock picking to achieve alpha, this market presents many opportunities. The case is the same for the wider Asian region. Some countries are seeing lower rates of growth as ageing demographics and highly leveraged households exert negative pressure. However, emerging markets experts such as Mirae Asset Global Investments do not consider all emerging markets countries as one homogenous pack – there are many countries in the Asian region where we see rich opportunity and which may actually benefit from the current situation. This includes India, which will strongly benefit from the collapse of commodity prices.
What can we expect from Emerging Markets, after the last developments in China?
Top experts from Mirae Asset think it is important not to be blinded by macroeconomic pictures. Asia still provides ample investment opportunities. There has been a lot of volatility and things have happened so fast. After recent market correction, valuations of Asian equities become more attractive. This environment offers good opportunities to exploit. A bottom-up approach is key and we like selected stocks in consumer, technology and healthcare sectors.
Is it the moment to invest again in these “less favoured” markets, against other developed markets?
As mentioned above, China needs to correct some distortions in its economy and there will be a lot of deleveraging that needs to be performed. The “Old China” sectors which traditionally fueled China’s growth in the past will see some near-term pain. Growth in the economy will undoubtedly slow. However, for an US$11 trillion economy, growth at 3 to 4% overall is still reasonable and higher than some developed markets. Furthermore, there are many sectors in what we call the “New China” economy that offers excellent growth opportunity for investors. This includes investment themes such as the continued growth in IT services, healthcare services and underpenetrated financial sectors such as insurance. This is also true for other emerging markets. Commodity producers will no doubt suffer a downturn at least in the short run, but several emerging market countries will benefit from cheaper energy ad commodity prices, while countries such as Philippines still benefit from strong demographics and economic fundamentals. We still believe that Asia will drive the world’s economic growth in decades to come. Hence, it is important for investors to consider making an allocation to Asia in their portfolios.
What about alternative investments? Are you trying to boost this business globally? What could this provide to a Real Estate or Private Equity investor in Europe or America?
Mirae Asset Global Investments is considered to be a pioneer in regards to alternative investments in Asia. We were the first company to launch private equity funds in Korea, and introduced the first real estate fund in Korea as well. Today, we have an extensive portfolio of private equity and real estate holdings and manage various forms of alternative products spanning the full spectrum of asset classes. We also offer a diverse range of Asian hedge fund products that invest in more plain vanilla financial instruments such as equities, fixed income and derivatives. These aim to deliver absolute return type returns. We want to be a global business partner to all of our current and prospective clients – we recognize that our investors have a diverse range of unique investment needs, and we always aim to cater to those needs by driving innovation and diversity in our product line-up.
CC-BY-SA-2.0, FlickrPhoto: Scott Hudson. Risk Budget: Spend It Wisely
For those who budget, time is an asset. Wise spending decisions often take longer to bear fruit. Committing to a budget long-term could potentially lower one’s debt and improve their cash flow. Blow the budget with short-sighted spending decisions, however, and what might have been a good financial outcome turns undeniably less certain.
Similarly, an active manager’s risk budget—how and where they decide to “spend” or allocate risk —directly impacts their potential to outperform. In fact those spending decisions are a critical component of active risk management. In budgeting risk, an active manager essentially identifies, quantifies and sets their active risk allocations as efficiently as possible. The end goal is to maximize the potential reward for the amount of risk taken.
Just as in personal budgeting, there are tradeoffs to risk budgeting — deciding to spend in one place sacrifices the ability to spend in another. So those spending decisions must be meaningful — and purposeful. For an active manager, that’s a matter of understanding the idiosyncratic risks of individual securities, seeing the potential upside and recognizing the potential downside. The idea is not to take unintended risks.
What are some of the risk budgeting decisions an active manager might make? In more difficult markets, where active managers can play to their strengths, they might choose not to own the largest stocks, which, historically haven’t grown as fast through a market cycle. Or, an active manager might try to position away from some of the most expensive parts of the market, which have often become overextended in the days leading up to market peaks. They might also position away from the most volatile parts of the market, which typically haven’t performed as well through a full market cycle. In fact part of an active manager’s potential to outperform depends on their ability to mitigate the impact of volatility by reducing the downside risk at the security level. That’s why it’s so important to integrate risk management into the investment process, all the way down to the analyst level and in the evaluation of individual companies.
Much like personal budgeting, risk budgeting needs time to come to fruition. It’s not something that can be turned off or on but rather, a process that relies on discipline and a long-term, forward looking view. Active managers budget risk based on what they think could happen, not just on what has happened. But that’s really where spending wisely could have its greatest opportunity –sacrificing a little now to potentially get closer to what you might need further out.
Photo: Tarek Saber, Head and Lead Portfolio manager of the Convertible Bonds Team at NN Investment Partners. Tarek Saber, from NN Investment Partners, brings the current state of convertible bonds to the Fund Selector Summit in Miami
Convertible bonds are a well established asset class which has outperformed through the cycle over the last 40 years. During this time, convertibles have displayed lower volatility than equities and fewer defaults than high yield debt. The main attraction of this investment class is its potential ability to generate returns from both credit markets and rising equity markets.
Tarek Saber, Head and Lead Portfolio manager of the Convertible Bonds Team at NN Investment Partners, will present the strengths of the Dutch firm’s strategy in this asset class, under the title, ‘Convertible bonds: the fixed-income alternative to equities’, at the Second edition of the Funds Selector Summit to be held in Miami 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.
The NN Investment Partners’ convertible investment strategy team, headed by Saber since 2014, seeks to capture the essence of the opportunities offered by the market for convertible bonds globally, focusing on balanced convertibles, backed by a process of in-depth research and concentrated on a select number of convertibles.
Prior to joining NN IP, Tarek Saber was CEO / CIO for Avoca Convertible Bond Partners LLP and Head of Convertible Bond Strategies in the management company’s London office.
You can find all the information about the Fund Selector Miami Summit 2016, aimed at leading fund selectors and investors from the US-Offshore business, through this link.
CC-BY-SA-2.0, FlickrPhoto: Carlos ZGZ. Merging Markets
Despite a slowdown in trade globalisation, it looks like equity markets are more globalised than ever. When one market falls, the contagion quickly spreads to bring the others down as well. This is a change from the past. In the old way of thinking about the world, the US sneezed and the world caught a cold. The S&P 500 was always viewed as the leading indicator for global equity markets. But the perception since last summer is that it is the Chinese equity market that is doing the sneezing.
Figuring out whether a drop in one equity market causes a drop in another is a tricky task. Just because the fall of one equity market is followed by a fall in another, does not necessarily mean that the first caused the fall in the second. To assume so would make you guilty of the logical fallacy of post hoc ergo propter hoc, or “after therefore because of”. There could always be a third factor that is driving both equity markets down, but it so happens that the effect has fed through to one market earlier than the other. But given we can never test everything, there will always be the possibility of a third factor that we did not include.
That is why proper science (as opposed to the dismal science of economics) is based on the idea that you can never prove anything, only disprove something. And here at least economics, or more precisely, econometrics, can help us out. We can figure out if one equity market is good at predicting changes in another equity market. This is known as predictive causality (using a test named after the late Nobel-prize winning economist Clive Granger). If changes in one market are useless at predicting the change in another market, we have at least disproven the causality. If it is useful, then we have failed to disprove the causality (even if we cannot ever prove it).
Things get a bit more confusing when we realise that the causality can actually run in both directions. So a drop in the Chinese equity market might be predictively causing a drop in the US equity market, yet at the same time there is a feedback loop whereby US equities are predicting subsequent moves in the Chinese equity market. As so often in economics, it is hard to figure out whether the chicken or the egg came first.
Sure enough, over the last decade or so the S&P 500 and the Shanghai Composite have both predictively caused moves in each other (see chart), sometimes at the same time. Some correlation is always likely, so readings above 80% probability or so start to become statistically significant (shaded darker). Between 2003 and 2005 the two moved pretty much independently, and then moves in the S&P 500 started to affect the Shanghai composite. The run-up in US equities was good at predicting a subsequent run-up in Chinese equities (albeit with a much larger proportional increase in China).
But then coming into late 2007 and 2008 it was China’s turn to take the driver’s seat, becoming a good predictor of the US. Once the financial crisis hit the causality went both ways, reflecting the global nature of the crisis.
But for the next few years, up until the end of 2011, the S&P 500 was clearly dominant. It was an effective predictor of Chinese equities (and probably most other markets as well). But this is a good example of where a third factor likely came into play. This was the period when the Fed started its quantitative easing, pushing investors out of government bonds and triggering a search for yield. So investors moved into progressively riskier assets: first US equities and then emerging market equities.
Equity markets started to reassert their independence up until the taper tantrum. Once Fed chair Ben Bernanke announced that QE would not continue forever, the effects of QE on investment appetite went into reverse. Investors started to retreat from emerging market equities first, so the causality flipped the other way. Chinese equities became a better predictor of US equities.
Since last summer the gyrations of the Chinese equity market became a clear predictor of what would happen in the US. This does not necessarily mean it was the only factor, or even the major factor, just simply that it led the moves in the US. Ask most investors and they will tell you that China is the dominant factor.
There may be some good reasons for this. Firstly, the Chinese economy has been growing rapidly (even if it has slowed down) so it is an ever larger share of the world economy. Secondly, equity markets are very often dominated by global firms who earn revenues from many other markets. So US firms with large exports to China should be reacting to downturns in China (that is, assuming Chinese equity markets are representing the real economy, which is another question entirely). Lastly, the weakness in the equity market brought about a depreciation in the CNY against the USD, even as the People’s Bank of China had to expend a lot of reserves to prevent too rapid a depreciation. Not only is currency depreciation likely to be bad for US exports to China, but the selling of reserves constitutes a substantial capital outflow, which is bad for financial markets.
But one consequence of the closer links between the Chinese equity markets and the US equity markets is that the US equity market is, almost by definition, telling us less about the US economy. The equity markets may merging, but that does not mean the economies are.
Joshua McCallum and Gianluca Moretti are part of the Fixed Income team at UBS Asset Management.
Photo: Aranjuez1404, Flickr, Creative Commons. Pamplona Capital Appoints Pedro Rapallo as Operating Partner Focused on Iberia
Pamplona Capital Management is pleased to announce the appointment of Pedro Rapallo as an Operating Partner in order to supplement its deal team and support its focus on the Iberian Peninsula. In this new position, Pedro, along with the Pamplona Capital team, will drive new investment opportunities in Spain and Portugal.
“Pedro brings a wealth of local knowledge and expertise in Spain and Portugal and a large experience in the global financial services industry. Pedro’s insight will be invaluable for Pamplona Capital as we increase our focus on investment opportunities in Iberia,” said John Halsted, Managing Partner at Pamplona Capital.
Pedro Rapallo brings 20 years of business and consulting experience to Pamplona Capital. Most recently, Pedro was a Partner and Managing Director at The Boston Consulting Group, with a focus on financial services in Iberia and wholesale transactional banking globally. Prior to joining The Boston Consulting Group, Rapallo worked for Oliver Wyman as a Partner in their financial services team focusing on corporate strategy, wholesale banking and risk and capital management, and was a visiting scholar at the Department of Economics at the University of California San Diego.
A native of Madrid, Spain, Rapallo holds bachelor degrees in Law and Business Administration from the Universidad Pontificia de Comillas, and a Masters and C.Phil. in Economics from the University of California, San Diego.
Pamplona Capital Management is a London and New York based specialist investment manager established in 2005 that provides an alternative investment platform across private equity, fund of hedge funds and single manager hedge fund investments.
Pamplona Capital Management, LLP manages over USD 10 billion in assets across a number of funds for a variety of clients including public pension funds, international wealth managers, multinational corporations, family offices and funds of hedge funds. Pamplona is currently managing its fourth private equity fund, Pamplona Capital Partners IV LP, which raised $4 billion in 2014. Pamplona invests long-term capital across the capital structure of its portfolio companies in both public and private market situations.
