CC-BY-SA-2.0, FlickrPhoto: Stefan Krause, new Portfolio Manager at Schroders. Schroders Strengthens Convertible Bond Team with New Hire
Schroders is pleased to announce the hire of Stefan Krause in the role of Portfolio Manager in its convertible bond team based in Zurich. Stefan will work alongside Peter Reinmuth as co-manager of the Schroder ISF Global Conservative Convertible Bond.
Stefan joins Schroders from Man Investments (CH) AG where he was responsible for managing the Man Convertibles Europe Fund. Prior to joining Man in 2012, Stefan spent two years with Warburg Invest in Hamburg as a portfolio manager for European convertibles and almost five years with UBS in Zurich. Stefan holds a Master’s in Business Administration from the University of Zurich.
The hire coincides with the first anniversary of Schroder ISF Global Conservative Bond, in which the fund has achieved strong performance against the benchmark and peers, and continues to see positive inflows. The fund aims to provide capital protection and growth within volatile markets by investing in high quality convertibles with an average credit quality of investment grade at all times. The conservative approach emphasises protective elements of convertibles, focusing on above-average downside protection.
With a team of eight specialists, Schroders convertible bond team manages three dedicated investment strategies: global opportunistic, global conservative and Asian convertible bonds.
CC-BY-SA-2.0, FlickrPhoto: Helfrain. Japan Lowers Its Rates into Negative Territory: the Currency War Intensifies and Gives Wings to Short-Term Equities
In a surprise move, the Bank of Japan decided on Friday to join the ECB’s strategy and cut interest rates by 20 basis points, taking rates into negative territory at -0.1% (from the previous + 0.1%) for deposits of financial institutions at the central Japanese bank. The experts are divided: the news will help the markets and an economy with great export weight, but accentuates the currency war spiral to capture very modest overall growth and finally, the consequences may not be as promising.
The adoption of a negative rate helps the Bank of Japan to fight deflation by reducing financial costs, in an attempt to breathe some life into Abenomics, the government’s major plan to revive the economy. The Bank of Japan, which blames oil prices for persistently low inflation in the country, adds this new measure to its program of quantitative easing which involves the annual purchase of 80 trillion yen in assets.
In response, the yen fell sharply against the dollar and other reference currencies like the euro, fueling a currency war which though undeclared, continues to cause panic in the trading rooms of half the financial sector.
In the press conference following the decision, the Bank of Japan’s Governor, Haruhiko Kuroda, stated that he does not rule out expanding the quantitative easing program, which could even include further cuts to increase the dip into negative territory.
“As such this challenges our previous outlook and as a result we are stepping back from some of our long yen currency positions as we reassess the absolute and relative policy stances of developed market central banks,” explained Kevin Adams, Director of Fixed Income atHenderson Global Investors.
Meanwhile, despite the rise in stock markets and debt, Keith Wade, Chief Economist and Strategist at Schroders, believes that the decision is caused by weakness and increases the risk that China may retaliate by further depreciating its currency.“If so, we will have entered a new phase in the currency wars where countries fight over a limited amount of global growth, an outcome which does not bode well for risk assets,” Wade points out.
Equities and fixed income
For Simon Ward, Henderson’s Chief Economist, it is more likely that the move is interpreted by the market as a negative signal for economic prospects, and as evidence of “Bank of Japan’s desperation”. This, claims Ward, will cause the market to be more, rather than less, risk-averse.
In the short term, however, the Bank of Japan has become the investors’ best friend. Japanese stocks rose on Friday and analysts agree that they are likely to continue rising in the short term. Robeco’s portfolio of international equities, Robeco Investment Solutions, is overweight in Japan. “We will obviously continue with this strategy. Our position has been strengthened by the decision of the Bank of Japan,” says Leon Cornelissen, Chief Economist at the firm.
“We believe that the surprise announcement is likely to have an incrementally positive effect on the outlook for Japanese equities, as it tempers the recent concern around the drag of a stronger yen on earnings. We maintain the view that Japanese stocks could withstand a moderate appreciation of the yen,” explains the team at Investec’s multi-asset strategies.
Regarding fixed income, Anjulie Rusius, from the Retail Fixed Interest team at M & G, pointed out that the move by the Japanese central bankhas been supportive of Japanese government bonds, alongside those of other countrieswhich have also adopted negative rate regimes, in a movement which could be repeated in the medium term.
CC-BY-SA-2.0, FlickrPhoto: Jose Antonio Cotallo López
. European Smart Beta ETF Market Flows Were Sustained in 2015
European Smart beta ETF market flows were sustained in 2015 but were still impacted by Q2 trend inflection. Net new assets (NNA) for the full year 2015 amounted to EUR4.1bn, close to the EUR4.4 record level of 2014 NNA. Total Assets under Management are up 49% vs. the end of 2014, reaching EUR 15.1 billion. In 2015, Smart Beta ETF flows were mainly focused around Fundamental, Minimum volatility and Multifactor ETFs, with the latter two respectively benefitting from increasingly volatile markets and investors’ search for return enhancement, according to the last Lyxor European Smart Beta ETF Market Trends.
Smart beta are rules-based investment strategies that do not rely on market capitalization. To classify all the products that are included in this category Lyxor has used 3 sub segments. First, risk based strategies based on volatilities, and other quantitative methods. Secondly, fundamental strategies based on the economic footprint of a firm – through accountant ratios – or of a state – through macro-economic measures. Then factor strategies including homogeneous ranges of single factor products, and multifactor products designed purposely for factor allocation.
Q4 2015 flows were relatively limited for Smart beta ETF sat EUR737M, far from Q1 record of EUR2bn, the report says. Yet December 2015 marked a rebound vs the limited flows of November. This is still in contrast with the overall European ETF market where November flows were limited while December flows were close to January record highs.
Factor allocation ETFs saw the highest growth over the year with NNA of EUR1.5bn more than twice the 2014 NNA as investors sought new ways to enhance return. Increasing volatility expectations due to the Fed interest rate increase following end of QE and uncertainties on China growth have led to sustained flows on minimum volatility ETFs gathering a quarter of European Smart beta ETF inflows over the year. Flows on fundamental ETFs driven by high income, high dividend products continued to be signficant at EUR1.6bn due to global yield scarcity and appetite to capture structural reform in Japan, concludes the report.
CC-BY-SA-2.0, FlickrPhoto: Ian D. Kaeting. Facing Up to the Bear
Widespread fears over ongoing stock market and currency weakness in China, the falling oil price, geopolitical tensions, overvalued assets and an end to fiscal stimuli have led to stock markets plunging around the world. The bear appears to have his claws out and investors with shorter memories may well be spooked.
Oil prices have once again played a key part in this fresh round of market sell-offs, with Brent crude slumping to a little over $27.5/barrel on 20 January – down 75% from its June 2014 high of $112/barrel and 39% off the $45/barrel price we saw as recently as November 2015. Indeed, there are fears that the rock-bottom oil price may even put some oil companies out of business.
Bear markets are typically defined by a broad range of indices falling by 20% or more from their most recent peaks. At the time of writing, at 5,673 the FTSE 100 index is 20.3% off its April 2015 peak of 7,122, while the Dow and the MSCI AC World indices are not far behind. If a bear market is also defined as one where investors should expect further sell-offs, then we may well be in the bear’s claws.
Ironically, the drivers of this bear market may be found in economic policies aimed at stabilising global economies. Volatility has been artificially low in recent years due largely to quantitative easing (QE), with markets settling into a pattern of reassurance that modest earnings growth would continue all the while asset prices were being boosted by QE.
I’ve previously referred to this as markets ‘resting easy as they drank from the punchbowl of QE’, but recent events indicate that markets have perhaps had their fill and, even if the QE bowl is not yet empty, it might as well be.
This should not have come as a shock to investors
The recovery of financial asset prices from the nadir of the last financial crisis has been dramatic; indeed, it has been one of history’s most fruitful periods for investors. The six years ending March 31 2015, for example, stand at the apex of historical six-year returns for the US stock market.
The Greek debt crisis made markets sit up and take notice – reminding them that bull runs do not last forever – while in December the US Federal Reserve embarked on a tightening of policy which eliminated one of the financial markets’ greatest tailwinds. The era of asset price reflation, fueled by both post-crisis undervaluation and aggressive central bank easing, is over and we cannot rely on our returns being flattered by QE or other valuation recovery dynamics.
At a global level, expected earnings are lower than they have been for five years while prices are much higher even if, while volatility is high and rising, it is not in territory that typically marks capitulation and is some way off the levels of volatility we saw in 2008.
China, of course, remains a key driver of volatility. Its economy is slowing as it desperately tries to rebalance (even if the recent rate of decline is not as bad as many feared – for example, its recent quarterly GDP figure indicated growth of 6.9%, marginally better than many analysts expected). This slowdown has already resulted in currency depreciation and stock market woes, which have spilled over into other Asian markets and across the world.
Yet fears over China are also not new and we have warned for some time that the ongoing slowdown in the country would pose challenges not only for Asian and emerging markets investors but for financial markets globally.
Now is not the time to throw in the towel
Dollar strength, liquidity, credit spreads and Brexit also remain key concerns. Yet this is not the time for investors to throw in the towel, as some pugilistic analysts and doom-mongers have suggested.
Investors should be aware that 2016 will be a low growth, low return world, with corporate margins pressured by weak end demand and overcapacity in a number of industries.
The outlook for emerging markets (EM) remains challenging, particularly for those countries that have built their economies to serve Chinese demand for commodities. The outlook for these countries is downbeat, and weaker currencies may not help to lift demand for EM exports where consumer and corporate demand is subdued. A world where the US tightens policy but other central banks retain an accommodative stance should mean a stronger dollar, all else being equal. That is likely to be a further headwind for EMs, as there is a strong inverse correlation between the dollar and emerging markets.
Active managers using multi-asset allocation strategies are well-placed to ride out short-term shocks in markets. The rising tide of global QE that had lifted all boats will begin to ebb, and in that environment it will make sense to differentiate within and across asset classes. In this world, a focus on valuations and fundamentals – ‘old school’ investing if you like – should be more important than it has been in recent years, when markets were backstopped by abundant and growing liquidity.
Longer-term investors know that what can feel like an emergency in the short-term may not hold as much significance some years down the line, so a focus on old school investing values makes particular sense in such a volatile world.
Tackle the bear
But if we are to tackle the bear, we would ideally like to see some markers of stability. If China and its investors could accept the country’s need to rebalance its economy, we might see a smoother stock market ride. Oil price stability would also help, but the situation in the Middle East is difficult to fathom, defined by Saudi Arabia’s continued willingness to pump oil even at current prices and its squabbles with Iran. With demand falling, partly as a result of US shale oil flooding the market, oversupply remains a key issue and it remains to be seen how the geopolitical factors in play will pan out.
Even if the prospect of further interest rate rises have been pushed a little further towards the horizon, they arguably remain one of the key threats. The macro and company indicators that we are seeing at the moment – subdued growth and inflation, soft final demand and a deteriorating outlook for corporate earnings – are not the kind of the things that one would expect to see when the world’s most important central bank, the US Federal Reserve, is starting an interest-rate tightening cycle.
It is clear that the Fed is very keen to start normalising interest rates, but if one simply looked at the data in isolation, it is hard to come to the conclusion that the Fed needs to raise rates quickly or aggressively. The recent US jobs data releases have been strong, but they need to be set in context – labour participation rates in the US are still at 40-year lows. Markets do expect the Fed to act, and we expect the FOMC to do so in a controlled and sensible manner. If the Fed loses control of its own narrative and policymakers are seen to ‘flip-flop’, markets could react strongly.
What does all this mean from an asset allocation perspective? In terms of valuations, we still regard equities as more attractive than bonds and expect to retain that positioning for now in our asset allocation portfolios, although with less conviction than we have done for some time. However, compared to their longer-term history, equities still offer better value than bonds.
Mark Burgess is CIO EMEA and Global Head of Equities at Columbia Threadneedle Investments.
According to a presentation by Rahul Chadha, co-director of Mirae Asset Global Investments Investments, despite the over 40% correction seen in recent months, the A-share market in China is still overvalued. However investors should not panic because “valuations in Asia are still very attractive with a price over book value of 1.25x. At these levels, investors have historically achieved positive returns in 12 months” Chadha writes.
The presentation notes that 85% of the A-shares market is held by retail investors, of which 81% operate at least once a month, whereas in the US, 53% of retail investors operate monthly. One important thing to note is that according to Chadha, more than two thirds of new retail investors did not attend or finish High School.
For Portfolio Positioning, Chadha identifies key differences in between what he considers Good China vs. Bad China. Under Good China he highlights industries that are Under-penetrated, less capital intensive, with sustainable economic moats, such as healthcare, insurance, clean energy, internet / e-commerce, travel & tourism. While on the Bad China side we can find Well-penetrated industries that are capital intensive, have low barriers to entry and weak pricing power such as steel, cement, capital goods and banks.
Ariel Bezalel, fund manager of Jupiter Dynamic Bond Fund, explains in this interview with Funds Society the opportunities he sees in the Fixed Income space.
In the current low yield scenario and bearing in mind the US rates hikes we are starting to see, do you believe fixed income still offers value?
We do not believe that the US Federal Reserve will hike rates aggressively this year. Nevertheless, our portfolio is defensively positioned and our allocation to high yield is the lowest it has been in a while. We see pockets of value in fixed income.
Are there more risks than opportunities in the bonds markets?
Policy mistakes by the US Fed, a China hard-landing and the broader emerging markets’ crisis are some of the risks in the bond markets at the moment. Opportunities persist and one of our top picks at the moment is local currency Indian sovereign bonds.
Is it harder than ever to be a fixed income manager?
We may be in a more challenging environment for bonds but the advantage of a strategic bond fund like ours is that we can move in and out of different fixed-income asset classes, helping us to steer clear of riskier areas.
Some managers in charge of mixed funds used to see the fixed income as a source of protection and returns. Do you believe that this asset plays now a much more limited role?
Fixed income can still provide protection for investors – default rates are far from recent highs.
Where can you find investment opportunities in fixed income right now (high yield, investment grade, public, private, senior loans…)? Any particular market or sector?
We are running a bar-bell strategy in the funds – in which we have a large allocation to low risk, highly rated government bonds and a balancing exposure to select higher-yielding opportunities. We like legacy bank capital and pub securitizations within the UK. Within EM, we like local currency Indian sovereign bonds, Russian hard currency corporate debt and Cypriot government bonds.
What is going to be the effect of the US interest rates hike we saw last week? Which will be the next steps of the Fed in 2016? Will we see a decoupling between the US and the European yields?
It will be several months before we can assess the impact of the Fed’s move on the US economy. However, a number of leading indicators suggest to us that the US economic recovery is less secure than is commonly believed. The Evercore ISI Company Surveys, a weekly sentiment gauge of American companies, has weakened this year and is currently hovering around 45, suggesting steady but not spectacular levels of output. The Atlanta Fed’s ‘nowcast’ model indicates underlying economic growth of 1.9% on an annualised basis in the fourth quarter, a level consistent with what many believe is a ‘new normal’ rate of US growth of between 1.5% and 2%.
More worryingly, the slowdown in global trade now appears to be affecting US manufacturing. The global economy is suffering from acute oversupply, not just in commodities but across a range of sectors, and industrial output in the US is now starting to roll over. In this climate, there is a genuine risk that the Fed will end up doing ‘one and done’. In some ways, it seems that the Fed is looking to atone for its failure to begin normalizing monetary policy earlier in the cycle, before the imbalances in the global financial system became so pronounced.
Longer term, the ability of central bankers to normalise policy is constrained by powerful deflationary forces, including aging demographics, high debt levels and the impact of disruptive technology and robotics, a reason why we are comfortable maintaining an above- consensus duration of over 5 years.
What are the forecasts for the emerging debt in 2016? Do you see a positive outlook for the bonds of any emerging country?
We have adopted a cautious stance towards emerging markets (EMs) recently at a time when many developing countries have been experiencing economic and financial headwinds. Currencies and bond markets in countries such as Brazil, Turkey and South Africa have been uncomfortable places for investors to be over the past 12 months as the strengthening US dollar, lower commodities prices and high dollar debt burdens have proved to be a toxic combination.
We have benefited though from situations where indiscriminate selling has left opportunities, and we have found a couple of stories that we really like.
In Russia, we have been investing selectively in short-dated names in the energy and resource sectors including Gazprom and Lukoil. Russian credit sold off last year as the conflict in Ukraine, the country’s involvement in Syria and the oil price sell-off caused the rouble to depreciate. Investor aversion towards Russia has meant we have been able to find companies with what we believe are double A and single A rated balance sheets whose bonds trade on a yield typically more appropriate for double B or single B credits.
India is another emerging market story we like. Monetary policy has become more prudent and consistent. Inflation has fallen from a peak of 11.2% in November 2013, aided by lower oil prices which has supported the rupee against major currencies. Our approach has therefore been to seek longer-duration local currency bonds. We rely on rigorous credit analysis to select what we believe are the right names, particularly as the quality of corporate governance remains low in India.
Will emerging currencies keep depreciating vs the US dollar?
With the US Fed raising rates in December and economic weakness persisting in emerging markets, we believe the trend will be for gradual depreciation of emerging currencies.
Which are the main risks for the fixed income market these days?
US Fed policy mistake, China hard-landing, emerging markets crisis.
We have seen a notorious crisis in the high yield market in the last weeks. What is exactly happening? Does the lack of liquidity concerns you?
Much was written at the end of last year concerning certain US funds that have frozen redemptions. In addition to this we have seen material outflows from US high yield mutual funds. We have been concerned about US high yield for some time, and have limited exposure to this market. Furthermore, the other concern we have had for a while is some sort of contagion to European credit as credit in emerging markets and US credit have continued to come under pressure. For this reason we have been reducing our European high yield exposure and within our high yield bucket we have been improving the quality and also preferring shorter dated paper.
Yes, liquidity has been the other big risk for the credit market. Due to regulatory reasons investment banks simply cannot support the markets as well as they did in the past. At this late stage of the credit cycle, and with the Fed tightening policy even further (the combination of a strong dollar and quantitative easing coming to an end in the US is a tightening of economic conditions in our opinion) caution is warranted.
What are the prospects for inflation in Europe? Do you see value in the inflation-linked bonds?
We think inflation will remain low in Europe driven by stagnating economic growth and lower oil prices. One of the key measures of inflation expectations, the 5y5y forward swap, demonstrates that investors do not expect inflation to increase materially.
CC-BY-SA-2.0, Flickr. Guillermo Ossés joins Man GLG as Head of Emerging Market Debt Strategies
Man GLG, the discretionary investment management business of Man Group plc, announced on Monday that Guillermo Ossés joined the firm as Head of Emerging Market Debt Strategies, based in New York.
Guillermo, who brings 24 years of experience in emerging markets fixed income investing to Man GLG, joins the firm from HSBC Asset Management. Guillermo joined HSBC in 2011 and led the firm’s emerging markets fixed income capabilities, managing in excess of $20 billion. Prior to this, Guillermo was an emerging markets fixed income portfolio manager at PIMCO and held emerging markets positions at Barclays Capital and Deutsche Bank. He holds a BA in Business from Universidad Católica de Córdoba in Argentina and an MBA from the Massachusetts Institute of Technology Sloan School of Management.
The recruitment of Guillermo follows the acquisition of Silvermine and the recent hire of Himanshu Gulati last year, demonstrating Man GLG’s commitment to expanding its presence in the US, and further strengthening the firm’s capabilities.
Guillermo Ossés will report to Man GLG’s co-CEO Teun Johnston. According to whom, “it is with great pleasure that we welcome Guillermo to Man GLG. He has extensive experience in investment management and a distinctive investment process, alongside a proven track record of investing and managing investment teams in the emerging markets fixed income space. As Head of Emerging Market Debt Strategies, Guillermo will be instrumental in broadening our capabilities in the fixed income space and enhancing our client offering.”
Guillermo Ossés said: “Man GLG is a performance-focused business and its institutional framework, combined with an entrepreneurial environment and collaborative culture, make this a very compelling opportunity. I am very excited to be joining the firm, and working alongside Teun and his team as we strive to build a world class emerging markets fixed income investment management business.”
CC-BY-SA-2.0, FlickrPhoto: Pictures of Money. Don't Fight Today's Markets With Tomorrow's Money
Crude oil has now fallen below $28 per barrel. Not so many months ago, no one could have predicted — or even imagined — that this commodity would drop from over $120 per barrel so far and so fast. And with this deep decline in the price of oil, the US dollar is rising and global trade is slowing.
It is still my strong contention that cheap oil means more spending and growth. But that isn’t happening yet.
So where do I stand now? Here are my new points:
The majority of the world’s economies seem to be faring a bit better. A number of the eurozone’s peripheral countries have shown signs of turnaround. And in the United States, we haven’t seen the excesses that are typically associated with the risk of recession.
Looking at history, recessions haven’t occurred because commodities are cheap — usually it’s the other way around. Many of the world’s consumers and producers ultimately stand to benefit from low energy costs.
This is not the same situation we faced in 2008, when we were on the brink of the global financial crisis. The global banking system is exposed to oil and China now, but not nearly in the proportions we saw with exposures to risky US mortgage debt then.
I do think the smoke will eventually clear on the business cycle. However, until we get more data to indicate whether the slowdown in manufacturing, the weakness in exports and the stutter step in earnings will persist, fear could rule the markets for riskier assets.
In this unsettled environment, with so many unknowns, there’s a risk of jumping into the global equity markets too early. An investor with new money may want to consider a more conservative asset mix to ride out this storm.
CC-BY-SA-2.0, FlickrPhotos: Pablo Blazquez. Funds Society celebrated its 3rd Anniversary party in Miami and presented its objectives for 2016
On January 14th, Funds Society celebrated its 3rd Anniversary party in Miami. The rain did not deter over 160 professionals from leading Asset and Wealth Management entities in Miami and New York that attended.
Some friends and readers from Mexico, Barcelona and Madrid, who did not want to miss the occasion, also joined us for the event. During the party, photos of which can be seen in the attached video, Funds Society presented a corporate video with last year’s main achievements and its objectives for 2016.
The latter includes the launch of a print magazine for the Spanish market following the success achieved by its US Offshore edition, and creating a directory for the Asset and Wealth Management sector, segmented by major regions in which Funds Society has a presence: US Offshore, Spain, and Latin America.
In 2016 Funds Society will hold its second edition of the Fund Selectors Summit in Miami during the month of April, to be followed in October by an event aimed at fund selectors in New York.
CC-BY-SA-2.0, FlickrPhoto: Achim Hepp
. LVMH, Catterton and Groupe Arnault Partner to Create a Global Consumer-Focused Private Equity Firm
Catterton, the leading consumer-focused private equity firm, LVMH, the world leader in high-quality products, and Groupe Arnault, the family holding company of Bernard Arnault, announced today that they have entered into an agreement to create L Catterton. The new partnership will combine Catterton’s existing North American and Latin American private equity operations with LVMH and Groupe Arnault’s existing European and Asian private equity and real estate operations, currently conducted under the L Capital and L Real Estate franchises. Under the terms of this agreement, L Catterton will be 60% owned by the partners of L Catterton and 40% jointly owned by LVMH and Groupe Arnault.
L Catterton will become the largest global consumer-focused investment firm with six distinct and complementary fund strategies focusing on consumer buyout and growth investments across North America, Europe, Asia and Latin America, in addition to prime commercial real estate globally. L Catterton, a firm with a 27-year history and more than 120 investment and operating professionals in 17 offices across five continents, expects to grow its assets under management to more than $12 billion after various successor funds are closed.
L Catterton’s headquarters will be in Greenwich, CT and London, with regional offices across Europe, Asia and Latin America and will be led by Global Co-CEOs J. Michael Chu and Scott A. Dahnke, currently Managing Partners at Catterton. Each fund will continue to be managed by its own dedicated team in their respective locations across Europe, Asia and the Americas.
“We are delighted to partner with Catterton and its team,” said Mr. Arnault, Chairman and CEO of LVMH and Groupe Arnault. ” Having been investors in Catterton’s funds since 1998, we have participated in its growth and success, evidenced by its strong track record and its distinctive culture. I would also like especially to thank Daniel Piette whose entrepreneurship and leadership have been instrumental in creating and developing the L Capital franchise over the past 15 years. I very much look forward to continuing to collaborate with him at LVMH.”
Mr. Chu said, “We look forward to benefitting from the strength and global reach of the team at L Capital and L Real Estate as we continue to seek out investment opportunities with significant growth potential.”
“The globalization of media and technology, combined with increasingly permeable geographic borders, is driving rapid consumer growth on an unprecedented global scale,” said Mr. Dahnke. The transaction is expected to close early in 2016, subject to customary regulatory and certain investor approvals.
