Photo: Philippe Put. Loomis Sayles Joins UN’s Responsible Investment Initiative
Loomis, Sayles & Company, a subsidiary of Natixis GAM, announced that it is a signatory to the United Nations-supported Principles for Responsible Investment (PRI) Initiative. The PRI is recognized as the leading global network for investors who are committed to integrating environmental, social and governance (ESG) considerations into their investment practices and ownership policies.
As a signatory to the PRI, Loomis Sayles volunteers to work towards a sustainable global financial system by adopting the PRI’s six aspirational Principles for Responsible Investment, which includes incorporating ESG issues into investment analysis and decision-making processes; including ESG issues into ownership policies and practices; and reporting activities and progress towards implementing the six Principles.
“In 2013, Loomis Sayles senior management resolved to establish company-wide integration of ESG considerations into every team’s investment process. We did this independently and proactively, in order to ensure our business practices reflect the environmental, social and governance values that we, as an organization, believe are essential to creating a viable and enduring global financial system,” said Kevin Charleston, Chief Executive Officer.
Loomis Sayles adopted a set of guidelines and principles that articulate the interaction of its principal goal of providing superior investment results for its clients, as well as the satisfaction of its fiduciary duty under ERISA, and the use of easily accessible high quality inputs on ESG matters by its investment professionals. These inputs are meant to be used by the investment professionals in the benefit and risk analyses that inform their investment recommendations and decisions.
“We are delighted to welcome Loomis Sayles to the PRI,” said PRI managing director, Fiona Reynolds. “By putting ESG matters at the heart of their business, they have already demonstrated their commitment to responsible investment. Joining the PRI further underscores that commitment.”
. Receding Systemic Risks, But Cautious Risk Appetite
The Lyxor Hedge Fund Index was up +1.3% in July. 8 out of 12 Lyxor Indices ended the month in positive territory, led by the Lyxor CTA Long Term Index (+4.6%), the Lyxor Global Macro Index (+2.6%), and the Lyxor Variable Bias Index (+2.3%).
“Receding systemic risks following the Greek deal and the stabilization of the Chinese stock market haven’t opened a risk-on period. Instead the focus has shifted on the implications from the Chinese slowdown and from the Fed’s normalization.” says Jean- Baptiste Berthon, Senior Cross-Asset Strategist at Lyxor AM.
A macro month with markets left in the passenger seat driven by highly speculative catalysts. They were bound to follow the unpredictable jolts of the intensifying Greek saga ahead of the July 20th repayment deadline. The eleventh hour deal allowed a recovery in risky asset. 3000 km away from there, the Iran nuclear deal was another speculative catalyst with severe implications for the energy sector. Far East, the acceleration of the Chinese stock crash unsettled emerging markets and global assets, with concerns of a domino effect from the unwind of trading margins.
L/S Equity funds were strongly up overall, except for Asian funds. The – temporary – settlement of the Greek saga and the second down leg in commodities selectively favored Europe and to some extent Japan. Both regions also enjoyed a strong earning season. European L/S equity managers outperformed in July, benefiting from a strong beta contribution and exploitable themes. All of them were up in July. By contrast, the US trading environment was more challenging, facing a pending start of the Fed’s normalization and a poor Q2 earning season. However, the drop in US correlations and increased fundamental/company- specific pricing allowed US managers to extract a strong alpha both on their shorts and their longs. Almost all of them ended the month up. The laborious stabilization process in Chinese stock market continued to erode Asian managers’ returns. They were however much better protected than during the first phase of the Chinese de-bubbling.
Event Driven funds returns lagged. Merger Arbitrage underperformed Special Situation funds. The overall US regional bias of the strategy played out adversely. The poor US earning season added volatility in key healthcare, media and tech deals. It offset gains locked on the completion of DirectTV vs. AT&T operation or on the announcement of the Teva vs. Allergan jumbo deal. Such environment was much more challenging to navigate for Merger arbitrageurs. While Event Driven funds’ exposure to the resources sectors was limited, the magnitude of the collapse in energy and base metals in July was unexpected. It hit positions among both Merger Arbitrage and Special Situation funds. Besides the cautiousness building up on illiquid positions ahead of the Fed’s normalization didn’t help. The resilience of the liquid activist stakes allowed Special Situation funds end the month flat or so.
Quite an honorable performance from the L/S Credit Arbitrage funds. Very conservatively positioned, managers dodged most of the accelerating deterioration in the energy sector. They also were little affected by concerns rapidly building up in US credit market, both in IG (mainly from resources issuers) and in HY (factoring in poor earnings). They delivered increased P&L on their shorts. They were also able to benefit from the opportunity window opening in European periphery spreads, following the eleventh hour Greek deal.
CTAs outperformed in July thriving on commodities. They were initially hit by the cross-asset reversals following the surprise referendum announced in Greece. They fully recovered the lost ground thereafter. Their selective directionality paid off. The largest gains were recorded on their short energy, and their long on European risky assets.
They recorded milder gain on their long USD positions and their long US and UK bonds. In balance, gains in these bonds were eroded by losses in European bonds.
Global Macro funds performed well in constrained markets. Unlike CTAs managers, commodities were not key contributors. But they were well positioned to benefit from an environment with lower systemic risk, but concerned by the pace of global growth recovery. Renewed weakness in oil added support to reflation zones. To that regards, their overweight on Eurozone vs. US equities paid off. The volatility during the month was managed through their rate exposure, which provided a hedge. By month end, they held a zero net exposure to European bonds, and a 15% US net bond position.
Photo: Derek Gavey
. Where to Seek Returns When Traditional Investments May Not Be Enough?
Much has been said, and written, recently regarding the end of the “Golden Age” of fixed income. Since the late 1970’s, we have seen a continuous increase in bond prices, coupled with decreasing interest rates across all developed countries. However, since overcoming what was arguably the most catastrophic economic crisis to occur in the last 50 years in the United States, a gradual increase in the cost of money is to be expected. This increase will have a potentially significant impact on nearly every other financial asset and investors will be wise to understand these broad impacts on their own portfolios and investment strategies.
In the past, conservative investors, along with many traditional savers, were able to deposit their money in a highly-rated bank to earn a fixed interest rate, or invest in high-quality bonds and conceivably live off of the income generated from the interest with relatively little risk. Presently, and going forward, this will likely no longer be the case because the income generated by these fixed income related investments will not be sufficient to satisfy the cash flow and income requirements they may have previously provided. In addition, the historically low cost of money has led to a situation in which potentially negative real rates (when discounted for inflation) in the short- and intermediate-term, may become reality.
So, we find ourselves in a new age requiring a modified framework for how to invest capital and achieve returns commensurate with objectives.
Faced with this situation, investors are forced to look for alternative ways to invest their capital. The strategy most widely promoted by many banks and brokers, in the face of this challenge, is to generate income by allocating investments to stocks of publicly-listed companies that pay relatively high dividends. This comes with a commensurate increase in risk exposure to the equity markets – which over the long term will likely result in real growth, but over the short term could expose the investor to significantly greater volatility in portfolio values. This requires a significantly greater tolerance for risk than the historical strategy of achieving income through fixed income and bank deposit type investments. This opens the typical investor to the traps of behavioral finance, which lead them to let their emotions drive their decisions in times of crisis, and sell at precisely the wrong time, subsequently incurring a permanent impairment of capital.
Balancing yield, time, liquidity and potential return become ever more important for investors in light of these market conditions. In particular, the historical relationships between these factors that investors have relied on may need to be re-interpreted in light of current conditions. For instance, what has traditionally been viewed as a safer, more conservative investment could become, at least for the short term, riskier than other investment strategies. Fixed income strategies in particular may be subject to loss of capital and purchasing power, unlike what investors have experienced over the past 30 years.
It is in this context that we have begun to look at private, illiquid investments as an important component of a family’s investment portfolio. Within private investments, we include investing in the private markets for both debt and equity, and across asset types that include real estate, operating companies, venture capital, etc.
Illiquid Investments
When we speak of investments which are illiquid, or private investments, there are generally three categories:
Private equity in the most traditional sense. Private equity refers to investment in private (non-listed) companies with the objective to generate returns by providing resources, management expertise, a long-term strategic vision, and value purchases at ideal pricing. The investments of capital and resources ideally lead to value creation and attractive earnings within 5 to 10 years.
Real estate. Within this group of investments there are several subsectors with differing levels of risk, liquidity and in many cases cash flows originating from leases. Diversifying between the local market and constantly changing opportunities in different international markets should also be taken into consideration.
Credit markets. Within this categorization we include direct financing for firms, projects, and even governments, with fixed or variable interest rates which provide reasonable cash flows and potentially, capital appreciation.
Within this universe there exist several “sub-groups,” in venture capital – some which serve to support entrepreneurs starting a venture from scratch, and others which involve debt restructuring for companies in complicated situations, as in the case of financing acquisitions through debt (Management Buy-Outs).
The Action Plan
Our view is that including a diversified set of private investments sourced in the illiquid markets can add both income and capital appreciation potential to a family’s investment portfolio, as long as the trade off of having more illiquid investments is fully understood and vetted for each particular family and their objectives. This is particularly true as we look at the potential challenge of a lower-return public market environment (in both fixed income and equities) which is likely to be the case for the near to medium term.
Sourcing illiquid investments is not as straightforward as sourcing investment opportunities in the public markets. Information is harder to come by, evaluation of the investment strategy requires more time, understanding and negotiating the potential terms of investment can be more challenging, and assessing the alignment of interests between the opportunity “sponsor” and the investor is critical.
We have been seeing wealthy families adopting greater exposure to the illiquid, private investment markets with the objective of diversifying and increasing their returns and yields, relative to the apparently diminishing potential in the public markets.
By: Santiago Ulloa, Managing Partner, WE Family Offices
Photo: Cristian Eslava. A Time To Reflect — Not React
China’s attempts to shore up its domestic growth through currency devaluations and aggressive monetary stimulus have unnerved many investors around the globe. As a result of this and other macroeconomic events like the drop in oil prices and the uncertainty surrounding rate lift-off in the US, equity markets have sold off sharply and volatility has spiked. On Aug. 17, the CBOE Volatility Index (VIX) was around 13; just one week later, however, it had jumped to nearly 411 – a level last seen in October 2011 during the eurozone sovereign debt crisis.
These extreme short-term gyrations can be quite stressful, but are an excellent time to reflect, not react. The investing horizon for most investors is measured in years, if not decades — not days. Therefore, it is most appropriate — and fiscally responsible — to consider the implications of risk over a time frame that extends beyond today’s headlines.
A long-term view of risk
Within Invesco Quantitative Strategies, we have been managing risk as well as return for over 30 years. Throughout that time we have quite deliberately used models that forecast risk over a longer horizon in all our equity strategies. This has led to more stable risk profiles in those strategies because long-term average volatility is simply easier to predict — and therefore manage — than short-term volatility. It’s a bit like the weather. I can’t tell you if it will rain next Friday, but I can tell you with a high degree of certainty that we’ll get an average of about three inches of rain over the summer months.
Reacting to short-term volatility and chasing the accompanying trends can be quite dangerous. First, it’s a certainty that the incremental turnover and related transaction costs will eat into your portfolio’s returns. Second, and even more importantly, there’s a very good chance that you will get whipsawed by the sharp moves — selling after prices have already fallen, and buying back after prices have reverted to former levels. Rather than fret about the right tactical decisions to make against a rapidly shifting backdrop, these times are a good opportunity to reflect on your strategic allocations. Is my risk properly balanced and diversified across strategies? Am I getting the diversification I thought I had? Are there strategies to consider that have historically performed well during stressed market conditions?
Compared to the longer market history, investors have enjoyed a generally low level of volatility since 2012. This may have led to some complacency regarding strategic asset allocation decisions. Given the generally low levels of volatility in recent years, and the uncertainty in the macroeconomic environment, it may be likely that after we get through this current spike, average volatility will creep higher. Therefore, investors and their advisors may want to consider strategic allocations to strategies that have historically held up in periods during which volatility increased and equity market returns were less robust. Should you find an unmet need, it is likely prudent to wait for the dust to settle before making any changes. Volatility spikes, by definition, are short-lived, but regret lasts quite a bit longer.
Kenneth Masse is Client Portfolio Manager at Invesco.
Photo: R. Nial Bradshaw. Why High-Yield Bonds Are Compelling Now?
High-yield bonds occupy a special niche within the fixed-income market. These bonds, which are issued by companies with below-investment-grade credit ratings, offer higher yields to compensate investors for accepting exposure to additional credit risk. Generally, the lower the bond rating, the higher the yield.
Traditionally, companies with poorer credit ratings have issued high-yield debt to finance mergers or buyouts to help meet expanding capital needs. However, in recent years, more high-yield bonds have been issued to refinance existing debt. Companies have taken advantage of low interest rates and investors’ increased appetite for higher-yielding income investments to lock in relatively cheap financing. Situations where companies refinance their debt at more favorable rates generally put them in better financial health. Consequently, they tend to involve significantly less risk of default.
High-yield bonds are atractive to a wide range of investors because of their unique set of attributes. They appeal to investors who seek equity-like returns at much lower volatility levels than equities and to those who seek income with relatively low interest-rate sensitivity.
For the past five years, the high-yield market generally has been improving. These are, for Eaton Vance, four reasons to invest now in high-yield:
1. Low default rates.
The default rate has been below 2% in each calendar year since 2010, and as low as 0.6% in 2013 and early 2014, before rising to 2.0% with the default of TXU, a large high-yield bond issuer. This compares very favorably to the
10.3% default rate that was briefly reached in 2009, in the early aftermath of the credit crisis. It also stands well relative to the asset class’s long-term average default rate of 3.9%.
2. Healthy balance sheets.
Corporate balance sheets of below-investment-grade firms are generally in good shape and likely to improve as the economy gradually continues to recover.
3. Higher-quality issues.
The quality of new high-yield bond issues has been relatively good for several years, with 56% of issues currently being used to refinance debt, which is generally a positive scenario, bolstering company financial health. Conversely, fewer high-yield bonds being issued are lower-rated or being used to finance acquisitions and buyouts.
4. Low leverage
Another positive trend is that the leverage ratio of debt to EBITDA now stands at around 4, which is roughly where it’s been for about four years after peaking at about 5.2 in mid-2009. This is a reflection of the diligent work by many corporations to strengthen their balance sheets as well as more prudent stances taken by financial institutions and by investors in general.
With all that said, it is important to be mindful of market changes and the risks of deteriorating credit standards as the credit cycle changes at some point. For instance, a rise in the issuance of CCC-rated lower-quality debt could be a warning that the credit cycle is nearing an end. These riskier bonds tend to accompany an upswing in aggressive leveraged buyouts and indicate an increase in the high-yield market’s overall risk exposure.
Eaton Vance is mindful of quality within the high-yield market and the importance of being compensated appropriately or sufficiently for higher levels of risk. If yields are only rising incrementally for much higher levels of risk, it may be wise to pass rather than take on higher or excess levels of risk. “In brief: Ask if you are being paid appropriately or if risk is being appropriately priced“, said the firm.
Patrice Dussol, Responsible for Spain and LatAm. The Oddo Group Gives Rise to Oddo Meriten Asset Management
Following BaFin’s approval in Germany, Oddo & Cie has closed the acquisition of Meriten Investment Management. Together with Oddo Asset Management, the newly formed asset manager will be named Oddo Meriten Asset Management. With €45bn assets under management, the Franco-German player becomes a Eurozone’s independent asset manager leader. The Oddo Group confirms its expansion on the German market as well as its long term commitment to the asset management industry.
The Franco-German DNA of Oddo Meriten Asset Management translates into its current clients’ geographic breakdown: 55% in Germany, 37% in France, 8% in other markets of which globally 76% are institutional investors and 24% are third-party distributors.
The two key investment centers and geographical pillars of Oddo Meriten Asset Management are Paris and Düsseldorf with additional distribution offices in Milan, Geneva and Singapore. The two legal entities in France and Germany will be led as before by Nicolas Chaput and Werner Taiber. Nicolas Chaput becomes Global CEO and co-CIO of Oddo Meriten Asset Management while Werner Taiber, based in Düsseldorf, becomes Global Deputy CEO in charge of Sales Development.
Oddo Meriten Asset Management, a specialist focused on European markets, enhances its investment capabilites on all main asset classes. As of today, assets under management breakdown as follows: €17bn in Fixed Income, €8bn in Equities, €9bn in Asset Allocation, €2bn in Convertibles Bonds, €6bn in Systematic Strategies and other €3bn.
“Our existing clients will benefit from our enhanced combined capabilities. Our German institutional clients will be offered access to convertible bonds and fundamental European Equities expertises. As for our French and international institutional clients, they will get access to corporate Investment Grade and High Yield, Euro Aggregate capabilities as well as quantitative strategies (Trend Dynamics, Quandus). On the German Wholesale and IFA side, clients will benefit from a targeted mutual fund range, focused on asset allocation (Oddo Patrimoine, Oddo ProActif Europe, Oddo Optimal Income) and European stock picking (Oddo Génération, Oddo Avenir Europe, thematic funds on real estate and banks)”, according to the firm.
Oddo Meriten Asset Management’s 276 employees are committed to ensure continuity of client satisfaction.
Philippe Oddo, Managing Partner of Oddo Group says: “We are pleased to welcome our Düsseldorf colleagues. Thanks to them we are creating a Franco-German group. 25% of our revenues and teams are from now in Germany. Oddo’s partnership will be opened to Meriten’s talents. We want to continue to retain and to attract the best people.”
“Our unmatched understanding of French and German markets will enable us to bring a unique set of European investment solutions to our clients”, says Nicolas Chaput. “This is a major change of dimension, as we have become one of the top independent players in the Eurozone. We are committed to provide sustained top notch performance to our clients and to keep investing into proprietary fundamental and quantitative research.”
“The merger of Oddo Asset Management and Meriten Investment Management ensures the consistency in our investment approach as well as the continuity with our clients in Germany and abroad. In addition it supports our ambition to further grow the business with existing and new clients,” says Werner Taiber.
Photo: Garry Knight. Columbia Threadneedle Investments Grows UK Equities Team
Columbia Threadneedle Investments has appointed Jeremy Smith to the new role of Head of UK Equity Research. He joins in September to lead the UK research team and further develop Columbia Threadneedle’s UK equity research capabilities. His appointment follows that of new analyst recruits Phil Macartney and Sonal Sagar.
Jeremy will be based in London and will report to Leigh Harrison, Head of Equities, Europe. He joins from Liberum Capital where he was part of the Equities Sales team. He has 23 years of experience and has held various roles in asset management including Head of UK Equities at Neptune Investment Management and Director in the UK large cap team at Schroders.
Leigh Harrison, Head of Equities, Europe, said: “Jeremy’s appointment comes at a fantastic time. We have been experiencing great success across the product range; with our UK and European funds AUM at record highs this year and the UK Absolute Alpha Fund reaching £500m this month. Active management and insight are a key part of our ability to deliver successful outcomes for our clients and Jeremy’s strong track record and extensive experience will further enhance our client proposition.”
Jeremy’s appointment follows Mark Nicholls who joined the European Equity team as a Portfolio Manager in May this year. Phil Macartney joined the UK Equity team in March 2015 from Bramshott Capital where he was a senior equity analyst and Sonal Sagar also joined the UK Equity team in May 2015 from Jefferies International where she was an equity research analyst. Phil has eight years and Sonar has nine years of investment experience.
Photo: Flickr. Chinese Volatility Provides Longer-Term Buying Opportunities
The huge decline of Chinese equities is a sign of increasing market volatility rather than the start of a bigger correction, argues Lukas Daalder, Chief Investment Officer for Robeco’s Investment Solutions.
Signs that China’s economic slowdown is deepening have sent the Shanghai Composite Index to its biggest one-day percentage loss in eight years. The index closed down 8.5% on Monday. The decline was partly a reaction to the publication of the preliminary Caixin/Markit China Manufacturing Purchasing Manager’s Index (PMI). This leading indicator declined from 47.8 in July to 47.1 in August, the lowest level since March 2009.
“The shift from an export- and investment-driven economy to a model which is driven by local consumption is a bumpy ride,” says Daalder. “The disappointing PMI report is the newest piece of a growing pile of evidence that the cracks in the Chinese economy are bigger than most investors anticipated. The stock market was already shaken by the sudden depreciation of the renminbi two weeks ago and this is a new shock.”
In a reaction to the falling markets, China has allowed pension funds managed by local governments to invest up to 30% of their net assets in stocks and equity funds. Chinese state media has calculated that this will theoretically allow USD 97 billion to flow into the stock market. “Local governments tend to react quite quickly to this kind of change in legislation”, says Daalder. “We expect China to take additional steps if they are needed for equity markets to calm down. Even a new deprecation of the renminbi cannot be ruled out.”
A difficult choice
Daalder says the Chinese government faces a difficult choice if its current actions fail to create a more stable market climate. “Additional interventions might provide some stability, but that would mark a step back in the shift to a more market driven model,” he says. “It is also a dangerous precedent, for investors have a tendency to get addicted to government support for financial markets quite quickly. On the other hand, without intervention the current panic might lead to a decline of 20%.”
According to Daalder, the base scenario is that the decline in Chinese equity markets is a sign of increasing market volatility rather than the start of a large correction: “Global equity markets have had a steady run-up during the last couple of years, which was not always supported by an improving economy. We have already warned investors that they should prepare themselves for larger price movements and growing uncertainty.”
The effects of the correction on the Chinese stock market are also being felt in different regions and among other asset classes. “China has become an essential part of the world economy,” says Daalder: “The fear of an economic slowdown is putting huge pressure on commodity prices. The oil price has fallen to its lowest level in more than seven years. A correction in commodity prices usually spells bad news for emerging markets.”
Correction creates buying-opportunities
“Financial markets are already quite edgy and in this climate, investors tend to overreact to bad news,” explains Daalder: “As long-term investors, we are plotting the market to see if the price declines are creating buying opportunities in some markets. The correction in the high yield-market illustrates that investors are already bracing themselves for a sharp increase in defaults, anticipating that a lot of shale companies will not be able to survive the collapse in the oil price. There is a good chance that the market is overshooting with this price reaction.”
Another effect of the panic in Chinese equity markets is a possible delay of an interest rate hike in the United States, explains Daalder. “The Federal Reserve has been communicating to financial markets that it intends to raise interest rates in September,” he says. If the markets do not calm down, they might decide to hold off raising interest rates until December. All in all, although the turmoil may continue for some time to come, we are looking at it as a longer-term buying opportunity”.
Photo: BlackRock’s BGF Global Multi-Asset Income Fund portfolio manager, Michael Fredericks. BlackRock: "We Must Begin To Look Beyond The Traditional Income Generating Assets”
Today’s markets have largely been characterized by increasing market volatility coming from diverging global monetary policy and macroeconomic uncertainty. In addition, future return expectations across risk assets are more modest than in previous years, causing investors to have to rethink their overall investment strategy.
In this market environment it is very difficult to find assets which generate income while “keeping the risk at bay,” which is one of the obsessions of BlackRock’s BGF Global Multi-Asset Income Fund portfolio manager, Michael Fredericks. The company’s expert is convinced that flexibility and the ability to search for assets beyond traditional income-generating sectors will be a key element for the future, and the market is beginning to realize this.
Proof of this is that traditional income-oriented investments, such as dividend paying equities and high yield bonds, have seen significant inflow in recent years and are beginning to be overvalued. It’s time to look elsewhere.
The strategy, with five star Morningstar rating, has the flexibility to invest across a wide variety of income-producing asset classes, with no regional constraints. “Non-traditional income asset classes such as Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), Preferred Stock, Floating Rate Loans and Emerging Market Debt are often more difficult for individual investors to access yet can offer attractive diversification within a broader income portfolio.”
In addition to derivatives, BlackRock’s Global Multi-Asset Income Fund uses covered call options, “which are very attractive in a low interest rate and low returns environment,” Fredericks said. “In particular, we favor an approach that focuses on writing calls on individual securities rather than on an index as this offers more attractive opportunities to take advantage of market and individual stock volatility. We prefer short maturities, typically writing calls with maturities between 1-3 months, and write options that are on average 5-8% out-of-the-money which allow us to capture 5-8% upside potential on the underlying stock. We believe this approach provides the best risk-adjusted income and return opportunities for our investors.”
For Fredericks, it’s a fact that equities offer attractive value in this environment relative to credit. However, he reminds us that, “it is important to consider an investor’s risk tolerance when increasing an allocation to stocks. While valuations across most stock and bond sectors are at or near elevated levels, we do still think there are opportunities for attractive risk-adjusted yield opportunities, though investors need to tame their expectations for returns. Specific to credit, we believe current spread levels offer investors attractive opportunities for income, but we do not expect significant appreciation above and beyond the coupon from these securities.”
BlackRock’s BGF Global Multi-Asset Income Fund currently has a large percentage of assets invested within the US, mainly in fixed income. “. With bond yields at historic lows across the globe, we have favored exposure to U.S. credit sectors that offer attractive levels of income and ample liquidity,” adds the portfolio manager. However, when talking about the equity portion in the portfolio, Fredericks prefers to avoid the US market and opts for Europe or Japan. The reason is obvious: “quantitative easing programs offer an attractive backdrop for companies with greater exposure to those regions.”
While it’s true that fixed income is starting to look less expensive after a recent increase in yields, the expert from BlackRock, however, heightened volatility within bonds and believe a more tactical approach is necessary during these markets. “We currently favor corporate bonds (both investment grade and below investment grade) over government debt and also find opportunities within the mortgage-backed market, particular commercial mortgage-backed securities and residential non-agency mortgages. Finally, we see value in Preferred Stock, in particular the institutional preferred market which offers attractive income levels but also a fixed-to-floating rate structure which we find attractive amid the possibility of rising interest rates,” he explains.
CC-BY-SA-2.0, FlickrPhoto: Hubert Figuière
. Three Important Things about the European Investment-Grade Fixed Income Market
The European Investment-Grade Fixed income team at Pioneer, lead by Tanguy Le Saout, Head of European Fixed Income, Executive Vice President, talked last week about certain developments in the fixed income markets to keep in mind in the short term:
1. Inflation – Down Down, Deeper and Down
Perhaps the reason that global bonds initially rallied was that the Renminbi (RMB) move was seen as a global deflationary move. A weaker RMB (and other Asian currencies) should mean weaker commodity prices, and lower U.S. and European import prices. However, oil is probably the main driver behind some of the big moves in the inflation markets. This week West Texas Intermediate (WTI) fell to a 6.5 year low. The reason? In our opinion, not so much a lack of demand, but rather a surplus of supply. The International Energy Agency described global oil supply as growing at “breakneck speed”. Coupled with modest demand growth, the situation might suggest further downward pressure on the oil price before a bottom is found. Little wonder then that inflation breakevens globally are falling back towards recent lows. The market appears to be moving away from expecting a pick-up in inflation, to expecting falling inflation again. That could happen in the short-term, but longer-term we believe inflation will move higher.
2. Greece and the ECB – “Hello, Mr Draghi, my old friend”
Former British Prime Minister Edward Heath once remarked that “a week was a long time in politics”. What an apt description for the week that Greek Prime Minister Alex Tsipras has enjoyed. Firstly, encouraging noises are being made about concluding negotiations on a third bail-out package in time to meet the next repayments to the ECB on 20 August. Secondly, the fiscal targets being set in this package appear to be considerably easier than initially suggested. Thirdly, and probably most surprisingly, Greek Q2 2015 GDP was reported as a stronger-than-expected +0.8%, as opposed to consensus expectations for a fall of 0.5%. So it is worth asking exactly when Greek bonds might be eligible for the ECB’s QE bond-buying programme? The ECB would have to reinstate the waiver of the minimum rating criteria for Greek government debt. However, that could come potentially as soon as European Stability Mechanism approval of the first tranche of loans. Could you have imagined back in early July that the ECB might be buying Greek government bonds by the end of 2015? No, us neither.
3. What’s happening to the Swiss Franc?
In all the excitement about the Chinese RMB movements, not much attention is being paid to the recent surprising depreciation of the Swiss Franc. Following the surprise abandonment of the floor against the Euro back in January 2015, the Swiss Franc had settled around the 1.05 level against the Euro. But in the last few weeks, it’s fallen about 4% to a level of 1.09. Perhaps the resolution of the Greek situation has led to some reversal of safe-haven flows. Or maybe, the Swiss National Bank is quietly intervening in the market. And one thing we on the European Fixed Income Investment-Grade Team have noticed is that liquidity is quite scarce in the Swiss Franc, as investors have struggled to understand the Swiss National Bank’s currency policy. Therefore, intervention would have a bigger impact in an illiquid market. Either way, for the moment, it’s a currency that we prefer to watch rather than trade.
