CC-BY-SA-2.0, FlickrPhoto: Guillermo Viciano
. The Summer Months Seem Prone to Market Setbacks
The old investment adage, ‘Sell in May and go away, come back again on St Leger’s Day’ seems more pertinent than usual this year. The summer months seem prone to market setbacks in thin trading conditions. This time around not only are there some clear event risks on the horizon, but also market liquidity is likely to be even worse than usual, explained John Stopford, co-Head of Multi-asset at Investec.
The key risks are probably the threat of Greek default and of higher interest rates in the US. “To some extent, these possible events must already be partly in the price, because they are known. It is unlikely, however, that they are fully priced in as their likelihood remains uncertain and their market impact is unclear”, said Stopford.
In the case of Greece, investors appear to still put a high probability on a default being avoided. This assumes that fear of the consequences of default will force an 11th hour compromise between the institutions and Greece. The rhetoric of late, unfortunately, suggests that the risk of an accident is rising. Even if a deal is struck it may only to buy a little time for further negotiations, and would need to be passed by unpredictable parliaments and possibly electorates.
Greece is too small to have major direct economic ramifications for the global economy, and now that the ECB is buying government bonds, there is more support for peripheral markets. “At some level, however, Greek default and possible Euro exit would mark a failure of European monetary union. This should leave investors feeling less comfortable about holding other Southern European debt, at least without a higher yield premium”, point out Investec expert.
A near-term tightening of US monetary policy is seen, more so than Greek default, as quite likely. Despite this, the bond market continues to price the balance of risks towards a more dovish outcome. Investors are conditioned by post crisis experience, perhaps, to expect the FOMC to err on the side of caution. Labour market data, however, suggest that spare capacity is being used up quickly and the Fed board is in danger of falling behind the curve. Historically, said Investec the bond market has been slow to price in possible interest rate increases until they are imminent, and then the market has tended to over react.
“So the potential for a negative market reaction this summer to either event seems reasonably high, with a likely spill over into broader market volatility. The fear is that any sell-off will be exaggerated by poor liquidity, especially in bond markets. Trading volumes have been negatively impacted by market regulation which has reduced the ability and willingness of investment banks to make markets. Liquidity is likely be further diminished over the next few months, by the absence of many risk takers from their desks over the summer holiday season”, argued Stopford.
As a consequence, it seems prudent to take some risk off the table, or to buy protection. Any weakness, however, will probably be a buying opportunity as risks become more fully priced in. This is especially true for equity markets, where volatility tends to cause corrections rather than marking the end of bull markets.
Photo: Steven S.. Family Firms, an Opportunity for Minority Investors?
Family-owned firms are not just key drivers of economic growth, but also key employers. But do they generate returns comparable to benchmarks, and what type of specific risks do they pose for external shareholders?
To find out whether family firms generate returns comparable to non-family-owned peers, the Credit Suisse Research Institute analyzed financial data from the CS Global Family 900 universe, a proprietary basket composed of 920 family-owned businesses located across the globe.
From an investment point of view, sector-adjusted share price returns show that since 2006 family-owned companies have delivered superior performance: The CS Global Family 900 universe has generated a 47 percent outperformance compared to the benchmark MSCI ACWI index. This equates to an annual excess return of 4.5 percent over the nine-year period to the end of April 2015, according to the Research Institute’s study “The Family Business Model.”
Considering profitability in terms of return on equity (RoE), superior RoEs were seen in family-owned companies both in Asia and EMEA (Europe, Middle East and Africa), while US- and European-based family firms posted lower returns on equity (RoE) than benchmark. “Lower RoEs in more developed markets are indicative of more conservative strategies as well as broader priorities for family ownership beyond simply financial returns,” explained Richard Kersley, Head of Global Equity Research Product for Credit Suisse’s Investment Banking division.
But looking beyond a simple RoE analysis, data showed that the family firms in the CS Family 900 universe, excluding banks and regulated utilities, generated annual cash flow return on investment (CFROI) averaging 130 basis points higher than companies in MSCI ACWI. Over the longer term, family firms have generated twice the economic profit (earnings in excess of the opportunity cost of using assets or capital) than the benchmark.
US- and European-based family firms use less leverage than their non-family-owned peers and showed faster deleveraging following the recent financial crisis compared to benchmarks. Asian family companies, however, operate with higher leverage than the benchmark. Globally, family-owned businesses delivered smoother and more stable business cycles than the benchmark. “Sales growth is less volatile through the cycle with lower peaks and less pronounced troughs,” said Julia Dawson, an equity analyst at the bank’s Investment Banking division.
Annual sales growth has also been higher in family-owned firms – 10 percent compared to 7.3 percent for MSCI ACWI companies since 1995 – and less volatile during both the Internet bubble and the financial crisis. “A longer term corporate strategy is fundamental to the structural nature of this higher and less volatile (sales) growth,” Dawson said. “The importance of product or service quality, the development of long-term client relationships and brand loyalty, along with the focus on core products and innovation in these products rather than diversifying are all elements explaining this outperformance,” she underlined.
A founder’s premium was established when analyzing the CS Global Family 900 universe. Over the past nine years, first generation companies have delivered a share price compound annual growth rate (CAGR) of 9 percent. Share price returns are indeed the highest in the first generation, when investing alongside the founder, and then decline as family ownership passes down successive generations and the companies mature. “It pays to invest alongside the company founder, in the early years of a company’s existence that is likely to correspond to a period of high growth,” Dawson concluded.
Photo: Pedro Ribeiro. Nikko Asset Management Expands UCITS Range
EMEA (Europe, Middle East and Africa) investors’ strong appetite for gaining exposure to specialist investment strategies is driving Nikko Asset Management to expand its range of UCITS funds.
“UCITS funds are an excellent way for clients in EMEA and other regions to access global investments in an easily accessible and efficient manner,” said Takuya Koyama, executive vice president and global head of sales at Nikko Asset Management. “The launch of more UCITS funds is central to our strategic effort to significantly expand our business in EMEA.”
Nikko Asset Management is launching two new UCITS funds this month that invest in global equities and multi-asset. These institutional quality strategies will allow sophisticated global investors access to a broad range of exposures across developed and emerging markets.
“As we position ourselves as Asia’s premier global asset manager, we are eager to leverage our expanded investment capabilities and expertise,” said Yu-Ming Wang, global head of investment at Nikko Asset Management. “We have a first-rate team of investment professionals, and now we are making their skills available to an even broader range of global clients.”
Over the past two years, Nikko Asset Management has been expanding its existing investment capabilities. The most recent addition was the highly experienced UK-based global active equity team led by William Low in August 2014. The global multi-asset team headed by Al Clark joined the company in March 2014 and the Asia ex-Japan equity team headed by Peter Sartori joined in October 2013.
The Tokyo-based asset manager has plans to launch more UCITS funds in the coming months in order to meet global investors’ evolving demand for exposure to more markets and strategies.
Photo: A Guy Taking Pictures. Aberdeen Launches Multi-Asset Fund
Aberdeen Asset Management has launched the Aberdeen Global – Multi-Asset Income Fund to be managed by its Edinburgh-based Multi-Asset Income Team. Share classes of the Luxembourg-domiciled UCITS fund are registered for public distribution to investors in Belgium, Czech Republic, Hungary, Luxembourg, Netherlands, Switzerland and Singapore (restricted to Qualified Investors).
The Fund is designed to address the increased demand for multi-asset investment products and the challenges that investors are facing when they seek income in the current low rate environment. It combines a broad range of high quality income-generating assets with the aim of producing a high, but sustainable, annual yield while maintaining the real value of capital over the medium term.
The eight-strong Multi-Asset Income team will manage the fund. The team will also draw on knowledge and research from the broader 60-strong Investments Solutions division.
The Fund’s strategic asset allocation is determined by the yield expectations of a range of assets and reviewed on a regular basis. Throughout this process, the focus is on creating a diversified portfolio of high quality income-generating assets.
Mike Turner, Head of Multi-Asset at Aberdeen Asset Management, comments: “In the post-financial crisis world, income is harder to come by. Using our team’s extensive experience in multi-asset investment, we aim to provide a product which can deliver a sustainable annual yield while maintaining the real value of investors’ capital over the medium term.”
Aberdeen’s Investment Solutions division currently manages over €129 billion in multi-asset portfolios on behalf of clients around the world.
CC-BY-SA-2.0, FlickrPhoto: Daniel Lobo. Greek Mattress Stash Up to 30% of GDP
The stock of banknotes put into circulation by the Bank of Greece rose by a further €5.3 billion in June to a record €50.5 billion – see chart. The central bank’s liability to the rest of the Eurosystem related to the supply of notes is now €22.8 billion, on top of a €107.7 billion TARGET2 deficit.
The stock of notes is equivalent to 30% of forecast GDP in 2015 and 37% of bank deposits of Eurozone residents in Greek banks at end-May. For comparison, the Eurozone-wide stock equals 10% of GDP and 9% of bank deposits.
The ECB has accommodated a huge shift in Greek liquidity preference caused by the confidence-wrecking manoeuvres of the former finance minister and associated “Grexit” fears. His claim of deliberate “liquidity asphyxiation” is surreal.
Kevin Choy, Portfolio Manager. Pioneer Investments Strengthens Alternative Fixed Income Team
Pioneer Investments announced the enhancement of its Alternative Fixed Income team with the appointment of Kevin Choy as Portfolio Manager. Based in Boston, Kevin will report directly to Thomas Swaney, Head of Alternative Fixed Income, U.S.
In his role, Kevin will work alongside Thomas to support the management of Pioneer Investments’ liquid alternative strategies, including the Long/Short Bond strategy and Long/Short Opportunistic Credit strategy.
Ken Taubes, Head of Investment Management U.S., commented: ‘’In an environment of lower expected returns from bonds, combined with a potential rise in volatility, we need to consider a different way of investing that targets new sources of returns, downside risk mitigation, and volatility management. Liquid alternative strategies aim to provide diversification, improve risk-adjusted returns, and act as shock absorbers during times of market stress,’’ he continued. “They’re potentially also a way to reduce correlations versus traditional asset classes.’’
Taubes added: ‘’We are pleased to welcome Kevin to the team and his appointment represents a further commitment to our capabilities in the growing alternative fixed income area.’’
Kevin joins Pioneer Investments from Hartford Investment Management, where he was a Senior Analyst covering a variety of sectors, including telecom, media and technology. Before joining Hartford he was a Senior Analyst at OFI Global Asset Management, where he generated long and short investment ideas for both retail and institutional investment mandates. Kevin also held positions at NEC Corp. in Tokyo, Japan and the U.S. Kevin has a B.S. in Business Administration with a concentration in Accounting from San Jose State University. Kevin also has an M.B.A. from the Massachusetts Institute of Technology. He is a CFA charterholder.
As a more unique insight to their Liquid Alts efforts, Thomas Swaney will be a key presenter speaking on Long / Short Opportunistic Credit when he visits Miami for a due diligence event Pioneer is hosting in early October. For more detail on this upcoming event, please post the contact: US.Offshore@pioneerinvestments.com.
Photo: Santi Villamarin. Where Are the Most Interesting Opportunities in Equity Markets?
There are several reasons why we think upward momentum on equity markets will continue. US growth is set to continue, Europe is recovering, both the ECB and BoJ are deploying ultra accommodating policy, large groups are once again looking to do deals and European company margins are expected to continue improving.
But index gains are likely to be slower than at the beginning of 2015 and the road ahead will be rocky due to persistent volatility over events like the Greek talks, Fed policy and the crisis between Russia and Ukraine. We are maintaining our preference for developed country equities, especially in Europe and Japan, as earnings upgrades are set to continue and likely to underpin equity market advances.
Absolute European valuations may look testing but they are not excessive in cyclically adjusted terms. And compared to bond markets, equities still look attractive. We prefer the Eurozone, cyclical and banks. Japanese equity valuations are not yet in expensive territory and recent regulatory developments and the resulting boost to ROE should provide additional support for equity prices.
In the US, however, valuations and historically high profit margins suggest we should be more cautious. We prefer financials and cyclicals. Financials are trading at attractive valuations and should gain from any Fed action while cyclicals, especially in the consumer sector, stand to benefit from lower unemployment and future wage increases.
Finally, we remain selective in emerging markets which remain just as disparate as far as fundamentals and valuations are concerned.
Philippe Uzan is CIO at Edmond de Rothschild Asset Management (France)
CC-BY-SA-2.0, FlickrFoto: José María Silveira Neto. El S&P 500 en 2.250 puntos, la apuesta de Fidelity para los próximos 12 meses
Bloomberg has introduced the first tool in the marketplace to help banks and other financial institutions identify covered funds under the provisions of the Volcker Rule. More than a dozen banks are using Bloomberg’s Covered Funds Identification (CFID) tool to automate the process of detecting and tagging covered funds ahead of an upcoming compliance deadline.
Beginning on July 21 of this year, most U.S. banks and foreign banks with U.S. operations must divest ownership interest in, and sponsorship of, covered funds, which include CLOs, CDOs, CMBS and other securitizations. Classifying which third-party instruments are considered covered funds is a challenging and often manual process. While the overarching rule is straightforward, there are many nuances and exceptions that must be considered. In most cases, making the right determination involves a review of prospectuses and deal documents, many of which are not readily available to individual institutions.
CFID uses nearly 30 data fields to automatically extract relevant details from offering documents to classify securities against the requirements of the Volcker Rule covered funds regulations. CFID also provides details about ownership structure, deal type, tranche type, and collateral, as well as an industry-defined decision tree that addresses the Volcker Rule covered fund requirements. When one of more than 200,000 securities incorporated in the tool is viewed on the Bloomberg Professional service, a tag appears indicating whether the security “is a covered fund,” “is not a covered fund” or “legal review required.”
The tool can also help buy-side firms discover market liquidity and price discrepancies for covered funds.
“Banks and other financial institutions are still struggling with the requirements to identify and monitor instruments affected by the Volcker Rule,” said Ilaria Vigano, Head of Regulatory and Accounting Products at Bloomberg. “Working directly with industry stakeholders, Bloomberg developed a way for traders and back office teams to eliminate the need to conduct lengthy manual reviews of portfolios. Now, more than a dozen banks are using our tool to verify which investments are covered and build a compliance program that helps ensure covered funds are not reacquired.”
. Allianz Global Investors Names Global Head of Fixed Income
Allianz Global Investors has recently promoted Franck Dixmier as global head of Fixed Income. He has also joined the global executive committee.
In addition to his new duties, Dixmier remains chief investment officer Fixed Income Europe and CEO of Allianz Global Investors France. Dixmier joined Allianz Group in 1995 as fixed income portfolio manager.
He became head of Fixed Income at AGF Asset Management (former AllianzGI France) in 1998. In 2008, Dixmier became a member of the executive committee and chief investment officer of Allianz Global Investors France.
He started his career at MACSF as fixed income manager.
Allianz Gl has €454bn of assets under management as at 31 March 2015.
The lack of hedge funds’ excess returns since the financial crisis put the industry under rising pressure. The 12th edition of the White Paper by Lyxor Research issued this month, “A New Era for Hedge Funds?”, reviews the causes and identifies the key hedge fund performance drivers. Lyxor puts to test these drivers under 3 long-term macro-economic scenarios. It is reasonable, in their view, to expect hedge funds to deliver an annual excess returns in the 5-6% range above the Libor 3M, with low volatility.
Criticism against the lack of hedge funds outperformance climaxed in 2014. Hedge funds have underperformed traditional asset classes since the financial crisis. Despite its outstanding track record over recent decades, the industry has come under rising pressure.
The collapse in volatility and yield might be the main culprits. Volatility neared the mid-90’s all time lows in 2014 as a result of a combination of factors. According to the White Paper the unprecedented global monetary reflation was undoubtedly the most powerful one. Subject to growing risks constraints and a positive correlation between equity and bonds, hedge funds only partially benefitted from the asset reflation which unfolded since the financial crisis. Meanwhile the plunge in volatility and asset dispersion shrunk the potential for alpha generation. Lyxor emphasizes that the Volatility / Correlation / Dispersion regimes are key hedge fund return factors. For instance, a low volatility environment is negative for alpha generation and this has hurt hedge fund performance during the time the Fed has tamed volatility with its QE programme. One response of the hedge fund industry was to significantly lower both management and performance fees.
A sustainable inflection in market regimes unfolded since mid-2014. Reflation policies, as highlighted by the study, have indeed inflated DM financial assets. Valuations are stretched in most classes. The economic cycle is maturing, and the Fed policy is about to normalize. As a result, the alpha environment has improved, while that of the traditional asset management is getting more challenging. As of end-May, the Lyxor Hedge Fund Index is up 4% year to date, while the S&P 500 in total return is up 3.2% and 10y sovereign bond prices are in negative territory both in Europe and in the US. It is no coincidence that hedge fund assets keep on breaking their highs, going north of $3tn.
In this white paper, Lyxor evaluates the drivers of hedge fund returns. It tests their structural exposures under 3 macro-economic scenarios over the next 5 years. Using conservative assumptions, the study estimates that hedge funds could deliver annual excess returns in the 5-6% range over the Libor 3M, with lower volatility than that of risky assets. In order to reach these expected returns, hedge funds would have to deliver alpha in the range of 3-4% per year, the rest being market beta. The research sets several scenarios for market developments and their influence on hedge fund return, finding that a scenario in which the Fed tightens faster than expected by the market would boost hedge fund returns. Meanwhile a scenario in which the US economy would face secular stagnation, leading to continued monetary easing would be the less supportive.
LyxorAM believes that diversifying portfolios with an increased allocation to alternatives is particularly attractive at this stage of the cycle. According to the firm, hedge funds have demonstrated their ability to protect portfolios against wide market fluctuations, a scenario that cannot be excluded when the Fed turns the screw.
