Foto: Doug8888, Flickr, Creative Commons. Lombard Odier IM and ETF Securities Launch Emerging Market Local Government Bond ETF
Lombard Odier Investment Managers, a pioneer in smart beta fixed income investing, and ETF Securities, one of the world’s leading, independent providers of Exchange Traded Products (“ETPs”), have listed their emerging market local government bond ETF on the London Stock Exchange.
This fourth addition to the range of fundamental, fixed income ETFs, is designed to provide exposure to local government currency debt ofemerging marketsand developing countries, using fundamental factors that assess issuers’ creditworthiness to identify those that we believe are best-placed to repay their debt.
Today, emerging sovereign bondsoffer an appealing yield-to-maturity as interest rates in advanced economies are likely to remain low for longer. In addition, unlike market-cap benchmarks, which reward the most-indebted borrowers, our fundamental focused approach is designed to deliver quality-based diversification and includes exposure to India and China (the two largest emerging market countries).
Kevin Corrigan, Head of Fundamental Fixed Income, Lombard Odier IM commented:“We are extremely pleased to introduce our emerging market local government bond ETF to the European market. As interest rates in advanced economies remain depressed, relative valuation dynamics in emerging market debt are becoming interesting and our fundamentally weighted approach provides greater quality-focused diversification for investors. Lombard Odier IM has over five years of experience in fundamentally-weighted fixed income investing and our partnership with ETF Securities enables us to offer a wide range of investors an innovative approach to investing in emerging debt markets.”
Howie Li, Co-Head of CANVAS, ETF Securities added: “The suite of ETFs that we have brought to the market with Lombard Odier IM aim to capture the increasing shift towards more cost-effective investment solutions but, at the same time, provide an improved risk-adjusted return profile. Our first three products, launched in April, were well received and investors have already expressed their interest in the launch of this innovative emerging market ETF. With bond liquidity increasingly being a source of concern, investors in ETFs have extra liquidity support from the secondary market to help mitigate this. This liquidity support coupled with the ability to trade intraday makes the ETF vehicle an ideal access route into fixed income at a time when liquidity matters.”
CC-BY-SA-2.0, FlickrFoto: Dana Riza. Asia vuelve a repuntar: ¿Qué está pasando?
The decision by the PBoC to introduce the new FX regime serves two purposes, explains Global Evolution in its last analysis. First, the move should be seen as a step forward to comply with SDR eligibility. The IMF recently declined the Chinese calls for letting the CNY become a SDR currency as the fund criticized the gap between the CNY’s market level and daily fixings. In fact, the IMF and the US Ministry of Finance have both welcomed the Chinese policy shift.
Secondly, economic growth is in retreat and the export sector is in dire straits judged by recent export data. A weaker CNY could help stem the growth decline although most would agree that the 2.7% adjustment in USD/CNY since Monday August 10 will not make much of a difference, points out the firm.
Still, if the market believes that the CNY should weaken leading to capital outflows the CNY adjustment may have more legs in the weeks and months to come. The PBoC will lean against disruptive currency volatility but welcome a weaker currency as long as capital outflows are manageable and the CNY depreciation takes place in a controlled and orderly fashion. Inflation is a no worry for now. July’s headline CPI inflation may have increased to 1.6% YoY from 1.4% YoY in June but PPI inflation declined to minus 5.4% from minus 4.8% thereby hitting the lowest level since autumn 2009. To put things short, says Global Evolution, what we now have in China is a managed float and who can blame the Chinese authorities for letting markets determine the value of their currency.
Sin embargo, si el mercado cree que el yuan se debilitará esto provocará la salida de capitales y el ajuste de la divisa china podría continuar en los próximos meses. El Banco Popular de China luchará contra la volatilidad de la moneda, pero estará a favor de una divisa más débil, siempre y cuando las salidas de capital sean manejables y la devaluación del renminbi se lleva a cabo de una manera controlada y ordenada.
La inflación no es una preocupaciónpor ahora, afirma Global Evolution. La inflación subyacente del mes de julio podría haber aumentado hasta el 1,6% interanual desde el 1,4% interanual en junio, pero la inflación de los precios de producción industrial disminuyó hasta -5,4% desde -4,8%, marcando el nivel más bajo desde el otoño de 2009. Para resumir, lo que tenemos ahora en China es una fluctuación controlada y quién puede culpar a las autoridades chinas por dejar que los mercados determinen el valor de su moneda.
“The genie is out of the bottle and the Asian devaluation race is on as illustrated by the Vietnamese central bank’s decision to devaluate the Vietnamese dong by 2%. Elsewhere in Asia, depressed commodity prices will allow for easy monetary policies with central bankers happy to see their respective currencies staying weak and competitive”, explain the firm specialized in emerging and frontier markets debt.
In emerging Asia, Singapore, South Korea and Malaysia are the countries that are most exposed to the Chinese business cycle whereas in Latin America Chile stands out with an export to China worth around 7% of GDP.
In Asian frontier universe Mongolia stands out with an export exposure to China worth more than 30% of GDP whereas in Africa, Angola and Republic of Congo are the countries most exposed.
What are the consequences?
Asian local fixed income should perform well as headline CPI inflation stay subdued. The tricky part is FX, growth, the banking sector and budget performance. “We believe that local Asian currencies have limited upside potential over the next few months and have cut Asia significantly in our local currency strategies. India and Indonesia are the two countries where we still hold some exposure with our strongest conviction trade being India and with Indonesia offering a notable carry in compensation for currency risks”, point out.
“As to Asian hard currency debt, sovereign debt stocks are low and we do not see roll over risks as a problem (with FX reserves being amble). Spreads may face upside pressure should the overall economic outlook deteriorate but that is only a mark-to-market risk. Distressed market pricing or defaults are highly unlikely. Asia constitutes 23% in the typical hard currency benchmark (JPMorgan EMBI GD) and we typically hold only around 15% of AuM in Asian “pure” sovereign debt (no quasi-sovereigns) across funds within our hard currency strategy due to zero-weighting of China, Malaysia, India, Mongolia and Pakistan. Therefore we believe that our Asian exposure in hard currency debt is highly manageable”, concludes.
Global Evolution, an asset management firm specialized in emerging and frontier markets debt, is represented by Capital Stragtegies in the Americas Region.
CC-BY-SA-2.0, FlickrPhoto: Esparta Palma. Investec Wealth & Investment Strengthens Research Team with Four New Appointments
Investec Wealth & Investment is pleased to announce the appointment of four new members to its research team. Dominic Barnes joins as a fixed income portfolio manager, Esther Gilbert as a fixed income analyst, while Marcus Blyth and Adrian Todd both join as fund selection specialists.
The decision to further strengthen IW&I’s research team stems from its conviction that increased market volatility over the medium term will create more challenging conditions in which to generate meaningful risk-adjusted investment returns for its clients. IW&I’s research team has, therefore, broadened its coverage to include an expanded range of sophisticated collective and fixed income instruments. The additional complexity of these products requires greater breadth and depth of resource in order to ensure they are thoroughly analysed for their suitability.
John Haynes, Head of Research at Investec Wealth & Investment, said: “I am delighted to welcome Dominic, Esther, Marcus and Adrian to the research team. They bring significant expertise in the fixed income and collectives sectors and will enhance the capabilities and performance of an already well-resourced team. Best-in-class research is an integral part of the service we offer our clients and gives Investec Wealth & Investment a significant advantage in the UK wealth management industry.”
Prior to joining IW&I, Dominic was a Director at Credit Suisse Private Bank & Wealth Management and, before this role, a Fixed Income Specialist at Merrill Lynch International. Esther joins IW&I from AXA Investment Managers, where she was a Portfolio Manager and Fixed Income Investment Analyst covering a range of securities such as global bonds, High Yield, emerging market debt and convertibles.
Marcus Blyth joins from Kleinwort Benson, where he covered collective investment schemes across all sectors. Adrian Todd joins from private bank Coutts, where he analysed third-party funds across discretionary investment portfolios globally.
Photo: TrentStrohm, Flickr, Creative Commons. Bruno Colmant, New Head of Macro Research at Bank Degroof Petercam
Bruno Colmant will join the executive committee of the group that will result from the merger between Bank Degroof and Petercam, subject to regulatory approvals.
He will be appointed Head of Macro Research at Bank Degroof Petercam and will also perform some specific assignments as Group Economic Advisor.
Bruno Colmant holds a PhD in applied economics sciences and is a commercial engineer from the Solvay Business School Economics & Management (ULB). He is a member of the Académie Royale de Belgique. He holds a Master of Sciences from the Purdue University (USA) and a Master in Fiscal Sciences (ICHEC-ESSF).
Bruno Colmant began his career at Arthur Andersen, Dewaay and Sofina. He was managing director at ING (1996-2006), Cabinet head of the Belgian Finance ministry (2006-2007), CEO of the Brussels Stock Exchange, member of the management committee of NYSE Euronext and chairman and CEO of Euronext Brussels (2007- 2009) and Deputy CEO at AGEAS (2009-2011). Since 2011 he is academic advisor AGEAS and partner of the consulting firm Roland Berger.
He is a member of the Central Council for the Economy and lecturer in finance at the Vlerick Management School, UCL and at the Solvay Business School Economics & Management (ULB).
CC-BY-SA-2.0, FlickrFoto: Yi Yuan Ma. China: ¿Estallido de la burbuja o exceso de pánico?
China’s slowdown has been going on for five years now. After the extensive stimulus measures that kept China safe during the U.S. credit crisis of 2008 (and that benefitted the whole world), a growth decline was simply inevitable, points out Maarten-Jan Bakkum, Senior Strategist, Emerging Market Equities at NN Investment Partners. “Policy makers and economists agreed that China should rebalance its economy, with less dependence on investment and export growth and greater importance for consumer spending. In this process, overall growth would decline, but that would obviously be fine if growth would be more balanced and sustainable.”
It soon became clear that Chinese policy makers were only marginally interested in rebalancing the economy in the short term. The credit-driven investment model, in which the primacy for the most important economic decisions lies with the government, remained intact. The sectors with the largest excess capacity were rarely addressed, as local governments had major economic interests in those sectors. Overcapacity became even more significant in industries like steel and aluminum, and in parts of the housing market as well. “It gradually became clear that the economy only became more dependent on credit. So the most urgent measure – reducing the debt level in the economy – came to nothing. Since the massive stimulus package in 2008, the debt ratio has increased by 85 percentage points. This is unprecedented anywhere in the world, and leads to a significant risk of a credit crunch,” reminds Bakkum.
With the recent correction on the Shanghai stock exchange and the mini-devaluation of the renminbi, NN Investment Partners has clear that the confidence in the Chinese government is declining significantly, leading to stronger outflows and further increasing economic problems. “For the first time in decades, people begin to realise that the government in Beijing no longer has complete control over the economy. The capital flight is very difficult to stop.
Over the past sixteen months, China has faced outflows of about 700 billion euros. The authorities have clearly been overtaken by developments. Their monetary stimulus has not been enough to offset capital outflows. This makes an economic recovery increasingly unlikely, which in turn leads to more capital flight and makes further rate cuts necessary. In this process, the renminbi needs to depreciate further. But this would have undesirable effects on the financial system, as companies have accumulated a foreign debt of roughly 3 trillion US dollars during the years of renminbi appreciation,” explains the senior strategist.
“For a long time, investors considered a sharp slowdown in growth to be the biggest risk in China. In recent months, the focus has slowly shifted to a systemic crisis. This creates great uncertainty in the financial markets. And it’s not just affecting emerging markets. Finally, the realisation begins to dawn that there is a real risk of a Chinese credit crisis” concludes Bakkum.
Within internationally invested portfolios, currency fluctuations can have a significant impact on overall risk and return. Investors seeking purer exposure to the underlying investments of any international market can potentially reduce risk with a currency-hedged investment. Deutsche X-trackers currency-hedged, international equity ETFs offer investors a variety of potential investment solutions from broad core international holdings to targeted investments in specific countries. The ETFs seek currency-neutral market-cap exposure to designated international markets.
“As a European-based bank, we have been able to leverage our local insight to offer the most comprehensive suite of currency-hedged international equity ETFs in the US,” said Fiona Bassett, Head of Passive in the Americas. “We will continue to strategically expand our suite, providing strategies that meet the demands of investors.”
Offering the broadest suite of currency-hedged ETFs in the US, Deutsche’s X-trackers US platform has experienced breakthrough success. With assets totaling USD 20 billion as of August 7, 2015, the Deutsche X-trackers platform has increased by approximately 365% since year end, and continues to be among the fastest growing exchange-traded fund (ETF) franchises in the US.
Earlier this month, the Deutsche’s X-trackers US platform improved its market share position to a top-10 ETF provider in the US. The firm’s global exchange traded products platform is now the world’s fifth largest, with approximately USD 76.9 billion in assets under management as of June 30, 2015.
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.
