CC-BY-SA-2.0, FlickrPhoto: Charles Clegg. Europe's "Great Rotation" Fails to Live Up to Expectations
The expected flight from bond funds to equities has not lived up to its “Great Rotation” billing, according to the latest issue of The Cerulli Edge – Europe Edition.
Cerulli Associates, the global analytics firm, says that where there has been movement, the outflow has largely ended up in other income classes such as property and multi-asset funds. That low interest rates and quantitative easing would help create the conditions for an exodus to equities made sense, yet a definitive shift, which would have left asset managers scrambling to stem bond fund outflows, has failed to materialize.
“While bond inflows are lower than they were, outflows haven’t happened to the extent that many expected,” says Barbara Wall, Europe research director at Cerulli Associates. “In the current climate, fixed-income managers are looking for new ways to deliver yield. Several have adopted an unconstrained, benchmark-free investment approach, which provides the flexibility to respond with greater decisiveness to macro developments, and to invest more broadly across regions, structures, and products.”
The marketing rationale behind unconstrained or strategic bond funds is that investors can access fixed income while enjoying some protection and also profiting from moving across asset classes. The advent of unconstrained emerging-market funds takes investors another step up the risk scale. Standard Life Investments launched one such vehicle in April, to sit alongside its emerging-market hard-currency and local-currency debt funds.
Also up the risk measure slightly from conventional bond funds is emerging-market debt, supporting the theory that rather than rotating away from fixed income entirely, investors are looking for yield in other areas of the market.
Angelos Gousios, an associate director at Cerulli, notes: “The macro environment is forcing managers to meet the needs of investors by providing both more alpha and greater protection. Product development, so long driven by supply, has become more demand led. The appetite for emerging-market debt has certainly grown, but to some extent investors have had little choice but to take more risk to get the yield they want from fixed income without leaving the asset class.”
Other Findings:
Europe’s alternatives managers may be on the cusp of some significant inflows, says Cerulli, as insurers look to non-mainstream strategies as a means of increasing yield. Insurers’ in-house investment skills typically stop at high -yield, or emerging-markets debt. The global analytics firm expects alternatives mandates to start trickling in from 2016. Until then business imperatives, including preliminary Solvency II reporting, will take precedent, it says.
Islamic funds are under pressure to ensure strict compliance with Shariah principles, which require investors to avoid interest and investments in businesses providing goods and services seen as contrary to the spirit of Islam. Cerulli believes the industry would benefit from a distinction being drawn between liquid and illiquid products. It expects that the challenge of raising assets will encourage asset managers to position funds as Shariah-compliant. However, these will need to be competitive relative to conventional products.
Socially responsible investing (SRI) is once again popular with retail investors in Europe, but nowadays managers must be able to explain stock selection, the research backing it, their engagement and divestment policies, and how the fund communicates and interacts with its investors. Cerulli notes that across Europe, impact investing – whereby investors seek to affect social or environmental change while also making money – is the fastest-growing area within SRI.
Foto cedidaRichard Pease is manager of the Henderson European Special Situations Fund, the Henderson European Growth Fund and the Henderson Horizon European Growth Fund. Henderson: Identifying value in Europe
Global dividends fell to $218bn in the first quarter, down 6.3% year on year, the second consecutive quarterly decline and the sharpest since the first quarter of 2010, according to the latest Global Dividend Index from Henderson. However, this disappointing headline picture masks a more encouraging underlying one. Underlying growth, which strips out special dividends, currency movements, and other factors, was in fact up 10.9% year on year.
The severity of the drop in the first quarter is mainly because Vodafone’s $26bn special dividend paid last year was not repeated, but the sharp rise in the US dollar also made a significant impact. This means the value of dividends paid in a variety of currencies is translated back into US dollars at a lower exchange rate, costing dollar based investors $15.9bn in the quarter. For individual regions, especially Japan, Europe, and Emerging Markets, the effect is very pronounced. The impact on the headline growth rate in Q1 was to deduct seven percentage points, the largest exchange rate effect in any quarter since Q2 2011.
The US dominates the first quarter, accounting for more than half the global total, so the rapid growth in dividend payments from US companies had a very positive impact on the quarter. US companies paid out a record $99.4bn in Q1, up 14.8% at the headline level, (+11.2% underlying).
This is the fifth consecutive quarter of double digit increases, cementing the US as the engine of global dividend growth. All sectors in the US raised their dividend payouts growth, except for insurance and US dividends have outstripped the global average significantly since 2009. In Canada, headline dividends fell 4.5% to $8.8bn, with the fall due almost entirely to the weakness of the Canadian dollar. Underlying payouts rose a very positive 9.8%.
Europe and Asia Pacific
The first quarter is a very small one for Europe, accounting for just one seventh of the annual total payout. European dividends fell 2.0% (headline) to $34.3bn, with a $6.1bn currency loss deducting 18 percentage points from the dollar growth rate. By contrast, underlying growth in Q1 was impressive, at 15.2%, though this will be hard to sustain all year. Very few companies made payments, but the fastest underlying growth came from Germany, Spain, and France, while other countries had a more mixed performance. Swiss companies Roche and Novartis were the two largest payers in the world in Q1, together distributing $13bn. Japan, also a small payer in Q1, followed a similar trend of good underlying growth pulled down by currency weakness.
In Asia Pacific, dividends of $12.7bn were 11.7% higher than a year ago on a headline basis, but were up 18.3% underlying. Currency was the biggest adjustment factor, as a result of the sharply weaker Australian dollar, though Australia had the fastest growth in the region on an underlying basis, comfortably outstripping Hong Kong and Singapore.
Emerging Market dividends were boosted strongly by Russia. They rose 13.7% on a headline basis to $15.6bn, but were up 30% on an underlying basis, after currency declines and other adjustments were taken into account. Russia, unpredictable as ever, more than doubled its payout in dollar terms (trebled in rouble terms), after a poor 2014. Brazil, down in headline terms, showed growth after adjusting for the low Brazilian real, while total Indian dividends declined.
Industry perspective
From an industry perspective, financials and consumer industries grew rapidly, with the US leading the way. Healthcare, the second largest payer in the first quarter, has seen relatively subdued dividend growth of late and this was pulled down further by lower exchange rates in Q1. Utilities continued their poor performance, falling 13.6% year on year (headline). They remain the worst performing industry in recent years, from a dividend growth perspective.
As the US dollar extended its gains into the second quarter, offsetting a slightly stronger than expected underlying performance from a number of regions, Henderson has reduced its forecast for the year from +0.8% to -3.0% (headline), taking total dividends to $1.134 trillion, $42bn less than the forecast we made in January. Henderson expects underlying growth to be +7.5%, slightly stronger than Henderson’s initial forecast of 6.9%.
Alex Crooke, Head of Global Equity Income at Henderson Global Investors said:
“The effect of the strong dollar is set to be even greater in the second quarter when Europe and Japan pay a large share of their annual dividends. In fact, if the current exchange rates persist, the impact could be as much as $40bn. In any given period, exchange rates can have a very large effect on dividend payments, but our research shows that over time they even out almost entirely, so investors can largely disregard them if they take a longer term approach.
“Despite our lower forecast, there are many reasons for optimism. Japan, the second largest stock market in the world, is undergoing a cultural shift towards higher dividend payments, unlocking large cash piles from what has traditionally been a low yielding part of the world, while in Europe, though dividend growth is modest, it is tracking somewhat higher than we expected. Meanwhile the US goes from strength to strength, and is likely to break new records this year.
“With interest rates and bond yields likely to remain at relatively low historic levels, equity income investing has a significant role to play in meeting investors’ income needs. Over time, the risks to dividend growth are significantly smaller if you look beyond the confines of your own domestic stock market.”
CC-BY-SA-2.0, FlickrPhoto: FdeComite
. From a Valuation Perspectives Bunds Remain Unattractive at Current Yield Levels
German 10 year Bund yields reached a low of 0.07% on the 20th of April. A rise followed in the remaining of the month. The 10 year yield reached a level of 0.58% on the 6th of May, up 51bp from the low. 30 year Bund yields rose 68bp over the same period. Pieter Jansen, senior Multi-Asset Strategist at NN Investment Partners analizes if this is a overshoot or trend reversal in german fix income.
Also the US 10 year yield rose (+33bp since 20th of April). However, it is clear from the graph below that given the significantly lower level of Bund yields in a relative sense the Bund yield correction is very significant indeed, said Jansen. Measured as 20 day yield volatility as a ratio of the yield level the move is beyond any correction in Bunds seen in the past decades.
Along with Bunds also other European government bond yields rose. Periphery spreads were under pressure earlier in April due to Greek related stress, but during the Bund yield correction Periphery spreads declined once again.
The increase in yields does not seem to be driven by fundamental data flow. Global macro data surprises were at best mixed during the past month (US data surprises were negative and the positive growth surprise trend in Euro Area data seems to be stabilizing somewhat). Indications of an early QE exit by the ECB could have the potential to trigger a correction like this, but also this was not the case and the ECB remains dovish. “It is possible that fading Greek related stress and a disappointing Bund auction may have contributed to a rise in yields, but in isolation it seems that it is hard to justify the significant move we have seen”, point out Jansen. Therefore, it is most likely that technical and/or positioning factors played an important role. Surveys had indicated that on average investors were significantly overweight in Bund for instance. This can be seen in the graph below:
Most of the rise we have seen in German Bund yields was a result of the rise of the real yield, believes NN Investment Partners´expert. It is no surprise that it is this component that is showing the strongest correction. Of the 51bp rise of German Bund yields since the 20th of April, 42 stem from a pickup in the real component. The inflation expectations component has been trending up for longer, which coincided with a rise of the oil price. Probably part of the rise is also a result of currency weakening and ECB policy.
After such a sizeable correction that is not obviously the result of macro data flow and/or a significant directional change in the monetary policy outlook “it seems that part of the move is an overshoot, although at this stage there are no signs yet of a stabilization after this significant move. Even though the overshoot may be relevant for the very short‐term, from a valuation perspectives Bunds (and other core government bonds) remain unattractive at current yield levels. The real yield remains significantly negative”, concluded Jansen.
Photo: Denis Jarvis. India: Balancing Fiscal Discipline and Growth
It is nearly a year since Narendra Modi and his Bharatiya Janata Party’s landslide election victory in India. At the time Investec wrote about its cautious optimism that the new prime minister and his team could implement much needed reforms to unlock the country’s economic potential. A year later, the Modi administration has broadly met expectations with a number of pro-market reforms and most recently a pragmatic budget, balancing the needs for fiscal consolidation with that of spurring growth.
On the fiscal consolidation front the biggest step so far has been the cut in fuel subsidies. Mr Modi was dealt a fortuitous hand after oil prices collapsed in the latter half of 2014. The Indian government was the first of many to see the opportunity to cut inefficient oil subsidies – and the 2015-16 budget estimates a 50% cut from 2014-15 fuel subsidies. However, point out Investec´s experts, rather than take a dogmatic approach to fiscal consolidation, the government have taken a more balanced view and modestly relaxed the paceof the adjustment (the 2015-16 target fiscal deficit has been revised up to 3.9% from 3.6%). Hence it has used some of the savings from subsidy cuts to commit to a 25% year-on-year rise in capital spending, with a large chunk due to be spent on the country’s dilapidated road and rail networks. A number of steps have also been made to reform the tax code. Corporate taxation is set to be brought down, over a staggered period, to 25%. Meanwhile, the first steps to introducing a goods and services tax (GST) were introduced with a rise in services tax and a commitment to implement the GST next year. This is a long overdue move: tax rates will go down, while tax revenue should increase due to higher tax buoyancy.
Other important pieces of legislation were approved by parliament in March. Firstly, the insurance bill (delayed over a number of years) was finally passed which will allow increased involvement by foreign firms in developing the country’s underdeveloped insurance market. Secondly, two pieces of legislation designed to liberalise the coal mining industry also passed through congress. The pending land reform bill, which would make it easier to acquire land for industrial development (and deemed to be the most contentious), will be a big test of the government’s ability to pass legislation through the parliament. That said, overall Modi’s reform agenda since taking office has been impressive and deft political manoeuvrings in the upper house should be enough to secure the passage of key bills without support from the opposition.
These much-needed fiscal and structural reforms have been supported by a government commitment to officially adopt inflation targeting as the new monetary policy framework. This will help to secure the credibility of monetary policy that has been won in the two years since Raghuram Rajan was appointed as central bank governor in 2013. He ensured India was among the first emerging market economies to hike interest rates in the wake of the ‘taper tantrum’, helping to ease the current account deficit and building up the monetary authority’s credibility. The move to formalise the inflation targeting regime is particularly welcome as it should help to underpin transparency and consistency in monetary policy, as well as hopefully ensure that excessive inflation – long a problem in India – becomes a thing of the past. The central bank’s foreign exchange reserves have also shot up to an all-time high of US$340 billion. So overall, we have seen a pertinent shift in both fiscal and monetary credibility. This has underpinned investor sentiment and the once imperilled investment grade credit rating is now no longer at risk; indeed Moody’s have recently upgraded India’s outlook to positive.
There is of course still much progress to be made. Not least, India’s underdeveloped manufacturing sector is not going to mushroom overnight. Yes, government policies such as ramping up capital expenditure on infrastructure will help, but much more will be required in the coming months and years to improve transport links, energy infrastructure and perhaps most importantly, cutting through the country’s infamous swathes of red tape to make it easier for businesses to invest. We feel that the significant progress Mr Modi has already made indicates that India has never had a better chance of attaining the strong growth rates the country needs to catch up with its peers.
“We remain overweight in the rupee and have recently added more exposure. The current account deficit has narrowed sharply since 2013. It now stands at 1.6% of GDP and should continue to improve this year assuming oil prices remain contained around these levels. Meanwhile, foreign inflows have picked up, with around US$13 billion inflows since the start of the year. With a much improved FX reserve position, the central bank has both the willingness and capability to underpin the rupee through FX intervention. As such it should remain relatively stable, making it an attractive currency while headwinds to emerging market currencies remain prevalent while the implied yields on the rupee are a very alluring 6-7%. We expect India to continue to outperform its peers over the medium term as investors become more discerning as we approach the start of Fed rate hikes; India with its credible fiscal and monetary policy is well placed to negotiate the headwinds”, conclude Investec.
Mirabaud Asset Management has announced the appointment of Emilio Barberá, who joins the firm as senior portfolio manager and analyst for Spanish equities.
Barberá joins Mirabaud Asset Management from Inverseguros in Madrid where he was responsible, for a Spanish equity fund, and actively involved in the management of various European funds. Both firms employ a bottom-up approach to stock picking.
Within Mirabaud Asset Management, Emilio Barberá will act as the deputy portfolio manager for the Equities Spain fund and analyst on Spanish equities while Gemma Hurtado San Leandro will remain the lead portfolio manager and team leader.
Lionel Aeschlimann, CEO of Mirabaud Asset Management, said: “We are delighted to welcome such a talented stock picker as Emilio whose experience and professionalism will allow us to reach new heights for our Spanish equities franchise. We firmly believe that we have one of the best teams operating in this asset class and we are geared for growth.”
CC-BY-SA-2.0, FlickrPhoto: Caroline. UK Elections: The Dog That Didn't Bark
What a night for the Conservative party. They out-polled all the predictions and will be staying in Downing Street to govern on their own, thanks to the small majority they look likely to achieve. Comparisons with 1992 seem valid: David Cameron is the New John Major, the man who confounded the pollsters!
For the markets, the election was the dog that didn’t bark. Short-term uncertainty has been avoided and growth headwinds caused by electoral uncertainty have abated. Equities have rallied somewhat, and the pound has bounced. Looking further ahead, the markets seem unlikely to push these moves too much further. The likelihood of a fresh round of austerity probably means less growth and a different policy mix than seemed likely only yesterday. Slower growth may dampen equity market enthusiasm, while less upwards pressure on interest rates could keep a lid on sterling.
Renewed challenges
Politically, there remains the possibility of renewed challenges in the weeks and months ahead. The failure of the Conservatives to win more convincingly means the government will have its work cut out. After the 2010 election the coalition government held 364 seats. The Conservative government will be lucky if it has 329, when technically 326 seats is a majority (BBC data/projections). The weakness of Labour may help the Tories, but the guile of the Scottish Nationalist Party (SNP) will not. More importantly, problems arising within the Tory party may be a challenge to effective government.
John Major had a much more stable platform than Cameron after the 1992 poll, yet struggled to govern convincingly. “In government but not in power” was the view of Norman Lamont, one of Major’s own MPs. Major struggled to deal with the rebels and backstabbers in his own party, and the Conservatives may reprise that experience in the years ahead, especially when the current generation of euro-sceptics seek to achieve their primary aim of leaving the European Union (EU). The fact that David Cameron has already announced he will stand down during the life of the next parliament likely diminishes his authority and raises the probability of fractious behaviour from his own side.
The last Prime Minister?
The second challenge that faces the government and the country post-election is what to do about Scotland. The disaster suffered by Labour north of the border means that Labour – like the Conservatives – is no longer a national party. The nationalists are the big winners in terms of seats, but because of Labour’s failure to do better in England they have no platform to influence what happens in government. This is a receipt for anger and frustration in Scotland. Whether that visceral response is harassed by the nationalists or defused by the Conservatives could be immensely important for the stability of the government and the country. Looking at the form books, you would fancy the nationalists to make the most of the opportunity they have won for themselves. The Scottish schism is real. Could David Cameron be the last Prime Minister of the United Kingdom?
The third and possibly most important challenge for the new government is Europe. Business leaders have voiced their concerns about the dangers of ‘Brexit’, and under different circumstances you would expect the Conservatives – the party of business – to listen to their cries. But these are not ‘normal’ times, and Cameron is obliged to lead the country down the road to an In-Out referendum and, possibly, an exit from the EU. The clock won’t start ticking today, but it will at some point: if it looks like Cameron could fail to deliver a vote for staying ‘in’, the markets will take fright.
The smiles fade
Through the prism of party politics it was a good night for the Conservatives. But the challenges of delivering effective government, keeping Scotland in the Union, and dealing with a European issue that has split the Conservative party for the last 30 years may soon see the smiles fade. If that isn’t enough to worry about, demands for electoral reform will come thick and fast once the opposition parties have dusted themselves down. Today Cameron looks like John Major. He must be hoping people aren’t saying the same thing in five years’ time.
Together will Paul O’Connor, Bill heads up Henderson’s Multi-Asset team.
One of the five concurrent sessions which brought together 45 investors with five asset managers on the first day of the 2015 Fund Selector Summit in Key Biscayne, Miami. Five Attractive Investment Solutions on the First Day of the Fund Selector Summit
The Fund Selector Summit, which was held in Miami on the 7th and 8th of May and organized by Funds Society and Open Door Media, started its first day with the participation of five asset management companies, whose professionals offered interesting solutions to deal with a challenging backdrop of uncertainty in the markets.
MariaMunicchi, Investment Specialist in Multi Asset and Convertibles Strategies at M&G Investments, explained the different perspective they apply to the M&G Dynamic Allocation Fund when investing in multi-assets, which is based on a strategic perspective (valuations and fundamentals), tactics (understanding the reasons for the volatility, whether it is due to fundamentals or to investor behavior, and taking advantage of it), and the construction of portfolios analyzing and contextualizing the current correlations in the markets. While remaining aware at all times that making predictions about the markets “may lead to dangerous ground, because the opposite may occur.”
M&G is currently positive with equities, especially European and Japanese, and with the dollar (although they’ve reduced exposure) and they advocate for flexibility on fixed income to adopt relative value positions. Convertibles and real estate also bring diversification to the portfolio. The expert pointed out the recent launch of a similar but more prudent fund, M&G Prudent Allocation.
Sunil Asnani, Senior Manager of the Indian equities fund at Mathews Asia, focused on rejecting arguments which recently explained the great interest in the asset class, and advocated for getting into the country’s equity for the good reasons rather than for the bad. In his opinion, investing for the expectations that the asset will generate diversification (when in fact it is closely related to other markets), for the desire for a short-term gamble (with all the associated risks); for the good macro situation which the country is currently experiencing (even though it’s very difficult to predict what will happen in the future), or trying to invest in firms which grow faster or are thematic investments (when they aren’t necessarily the best options) is an erroneous perspective.
“The potential for economic growth and market accessibility are good reasons to invest in India,” he said, and he defended bottom-up active management focused on company analysis and fundamentals, and always with a long-term horizon. “The problem with India is that investors are either too optimistic or too pessimistic with the asset class,” he complained.
Also on the subject of equities, Sam Shapiro, Client Portfolio Manager and member of the Quantitative Investment Strategies team at Goldman Sachs Asset Management, explained the company’s vision on the technological transformations in recent years, focusing his presentation on how to apply Big Data to the asset management industry. With three distinct ideas: Big Data and technology are transforming the world and determining the winners and losers in each sector; data itself does not provide solutions and requires the application of skills and work; and that this data can be applied not only in analyzing trends and market sentiment, but also in understanding the company better from a fundamental perspective. Therefore, he defended the good use of data by fund managers in order to improve their work, applying it to the management of equities.
Fixed Income
Opportunities are also available in fixed income. Laurent Crosnier,CIO at Amundi London, defended flexible and dynamic global asset management (across the entire spectrum of fixed income and geographies), which the management company applies to its Amundi Global Aggregate Fund. And of utmost importance in the current environment: “The worst thing for a fixed income investor is yet to come: the worst is to invest and pay a negative return,” he said, pointing out that much of the public debt universe, especially in the developed world, offers negative returns or returns of less than 1%.
This is why he advocated for solutions to avoid “paying to invest”, which their company is trying to achieve with very active and flexible investment strategies. Within the current environment, he is positive with credit (preferably European and with an overweighting in the financial sector), negative with the duration due to the next interest rate hike (although preferring European government debt over German, so as “not to fight the ECB”), positive with the dollar and the pound against other currencies like the yen and the euro, and also possitive in some emerging markets, such as Mexico and Brazil, versus the commodity currencies. Regarding emerging debt, he defends the need to be selective, with some commitments in countries like Brazil, Mexico, or South Africa.
Also within fixed income, Jeff Bakalar, Managing Director and Senior Loan Group Head at Voya Investment Management (formerly ING US Investment Management), focused on the opportunity offered by senior loans in an environment of rising interest rates. “In an environment of rising interest rates, even if these are minor or gradual, having this asset in the portfolio is a good idea,” he defended. Partly due to the stability offered in returns but also due to its attractive profitability when compared to other assets such as high yield debt and noting that it can offer a competitive reward-to-risk ratio.
The event was held at the Ritz Carlton in Key Biscayne, Miami. Fresh Insights for Investment in Equities, Credit, and Hedge Funds on the Last Day of the Fund Selector Summit in Miami
On Friday, the Fund Selector Summit, organized by Funds Society and Open DoorMedia, saw its second and final day, in which six managers explained their different perspectives of investment in equities and fixed income: Henderson, Carmignac, Robeco, Old Mutual, Lord Abbett, and Schroders analyzed different strategies with which they seek to generate returns in the current environment.
The day’s events were preceded by a conference by Javier Santiso, Vicepresident of ESADE’s International Centre for Economics and Geopolitics, in which he explained how a new world is emerging, with two background forces: the technology and digitization wave, and the growing importance of emerging markets. “The change in the wealth of nations is also related to digitization and technology, an issue which is also linked to the emerging world and its growing strength, and which has the potential to change the world and create disruptions in all sectors, including asset management,” Santiso explained.
For this expert, digitization is essential as an element which shall determine the future wealth of nations and he advised asset management professionals that they must not only take into account macroeconomic and microeconomic indicators when selecting their investments, but also the progress in digitization of the different markets. And he warned: management companies’ biggest competitors may be in companies like Facebook or Google rather than in other management companies. Santiso concluded his presentation with his vision of how Latin America is positioned in this environment.
The investment solutions presented at the conference covered various assets. In fixed income, Brian Arsenault, Leveraged Credit Investment Strategist at Lord Abbett, explained how in a world “starving for yield” it’s still possible to obtain returns on fixed income. The key? Flexibility, which they apply to negative duration funds in preparation for a rising interest rates environment, or high yield products, an asset which he still considers attractive in the US, even though he admits that spreads have fallen as compared to the past, and valuations are somewhat tighter.
The expert also spoke of his multi-asset fund with income prospects which may have up to 20% in equities: although it is focused on high yield, which occupies more than half of the portfolio, and in investment grade credit (over 20%), equities currently weigh almost 15% (the maximum is 20%), especially in mid-cap firms. Stock market investments, rather than seeking dividends, focus on shares which have a short-term appreciation catalyst, for example, US energy companies, with preference for natural gas over oil, which he doubts has a sustainable rally due to increasing supply. Some companies in the technology and healthcare sectors may also be interesting, because they have corporate movements as catalyst and can be bought. “When we like a company very much we study it from the point of view of bonds, loans, and equity, and can enter any of them, several, or all. We will go where we see value,” he added.
Regarding the last sell off in European public fixed income, he claims it’s normal because “growth is coming”. In his opinion, most of the market is focused on what the Fed does, but “we must also look to the European Central Bank.”
In equities, Justin Wells, Investment Director at Old Mutual Global Investors, explained their different investment style, which is focused on exploiting market inefficiencies: “We use the stocks as commodities to extract alpha over a period of time,” he explained, “in order to achieve uncorrelated returns.” Because, in his opinion, diversification and decorrelation are no longer achieved by investing in global stock markets or in a portfolio of stocks and bonds … at least in the short term, or at certain times. Their investment process is committed to a diversified portfolio in which stock selection is based on five criteria, or sources of alpha: valuation, sustainable growth, management of the company, as well as on sentiment analysis and market dynamics (momentum): “The trend is your friend, we are not a private equity, we want to extract alpha from the market”. According to these five criteria, they allocate scores to each stock, on the basis of which they construct the portfolio. They are currently more positive with the US stock market than with the European or Japanese, where the general feeling is more positive.
Meanwhile, Robeco focused on its factors investment strategy applied to its emerging market fund, Robeco Emerging Conservative Equities. “Factor investing is here to stay; assigning depending on factors rather than assets is generating increasing interest,” said Michael McCune, Client Portfolio Manager at Robeco. The expert stressed value, momentum, and low volatility, especially the latter, as key factors. “Factor investment works very well in emerging markets.” Nevertheless, the company uses the same strategy in global US, and European stock funds. The management company has launched the European stock market version (Robeco European Conservative Equities) with hedged currency.
Nick Sheridan, Manager of Henderson Euroland Fund, stressed that the Euro zone is currently one of two developed markets with greater discount, and it is clear that “if you buy in cheaper markets, your chances of obtaining returns will be greater”. Remaining true to their investment style, Sheridan explained that the European stock market without financials “is still extremely cheap.” Among the reasons is the poor appetite for assets: “Everyone is disappointed with Europe and does not believe in growth because the continent has disappointed in the past. In addition, investors have favored growth stocks rather than value,” he says; something which favors current market valuations. But he believes there will be more growth in Europe than that which has been anticipated. “Europe is very cheap and the reasons why the market has been cheap will change,” he added. The greatest risk: Greece’s default.
Muhammed Yesilhark, Head of European Equities at Carmignac, explained their investment philosophy which sets them apart from the competition and with which they manage products of either large caps (Carmignac Portfolio Grande Europe), medium and small caps (Carmignac Euro-Entrepreneurs), or diversified strategy (Carmignac Euro-Patrimoine). “We are pure stock pickers, which is somewhat different from the management company’s top-down strategy.” Their strategy is based on bottom-up analysis, fundamental, value-based, and focused on turning points. They also believe in discipline and simplicity and all their investments are made from an absolute rather than from a relative point. Finally, it has limited downside risks.
To build the portfolio, with 40 to 60 securities, and a minimum 30% upside potential, they follows three steps: generate ideas; build portfolio (which is based on four sections based on their belief in the securities: core longs, trading longs, relative value and special situations, and alpha shorts), and risk management. “The portfolio tells me that we are in a late phase of the expansion cycle, even though the press talks of recovery. I do not have enough core longs in the portfolio” he said.
Schroders provided the vision of alternative management, with its liquid hedge fund platform, GAIA, a segment in which they see increasing potential. Andrew Dreaneen, Head of Schroder GAIA Product & Business Development, pointed out three liquid alternative strategies for this year which may offer protection and which are within the platform: “Investors are concerned about the situation in equities and fixed income, they seek diversification and want downside protection,” he said. So he highlighted three funds that even in the market’s worst moments are able to offer protection, including positive net exposure.
The products are Schroder GAIA Sirios US Equity (a long short US equity fund which provides protection against falls); Schroder GAIA Paulson Merger Arbitrage (offering adjusted returns at higher risk, decorrelated with the markets and in 50 of the 51 S&P bear months they have managed to beat the index) and Schroder GAIA KKR Credit (a fund of absolute return focused on credit and long short perspective which invests primarily in Europe and in the high yield market. Normally with very little net exposure, neutral market). In total, Schroders GAIA has 6 strategies (4 external, adding Egerton to the three aforementioned), and two of the management company.
Photo: Davide D´Amico. EFGAM Adds to its Growth-Oriented Equity Strategies with the Launch of the New Capital Global Equity Conviction Fund
EFG Asset Management (EFGAM), an international provider of actively managed investment products and services, has launched the New Capital Global Equity Conviction Fund, an open-ended equity fund that will typically invest in 40 to 60 global stocks across all market capitalisations.
The Fund will be managed by Robin Milway, a highly experienced London-based equity fund manager who joined EFGAM in 2012. Robin will combine his expertise in bottom-up stock selection with EFGAM’s top-down geographic and sector analysis, without the constraints of a benchmark or specific investment style. Prior to joining EFGAM, Robin spent nine years at Cooper Investors in Melbourne Australia where he managed the CI Global Equities Fund. During his tenure at the firm, the fund returned 8.5% annualised over seven years, outperforming the MSCI by 5.6% annualised. (Source: CI).
The New Capital Global Equity Conviction Fund is based on EFGAM’s Global Equity Conviction Strategy which Robin has been running as part of discretionary mandates since joining the firm. The Fund will mirror the investment approach of its top-performing European counterpart, the New Capital Dynamic European Equity Fund, which is also co-managed by Robin Milway and Bibiana Carretero. The new Fund will be available to retail investors pending local registration and is the tenth sub-fund in the New Capital UCITS family – a range of high-conviction funds designed to produce long-term outperformance for clients.
Moz Afzal, Chief Investment Officer, EFGAM: “We are very excited to launch this long-awaited product for our clients. Many investors are increasingly looking for exposure to global investment opportunities and the launch of the New Capital Global Equity Conviction Fund caters for this demand. Robin has an outstanding proven track record of managing global equities and we are pleased to add to our specialist equity offering.”
Robin Milway, Portfolio Manager, New Capital Global Equity Conviction Fund, EFGAM: “The name of the fund underlines the philosophy of this fund – only stocks we have the highest conviction in make the cut. Our proprietary analytic framework allows us to identify companies that can sustainably grow their cash flows over time and importantly know what to do with the profits. This tried and tested investment methodology, which we’ve developed over the last decade, has resulted in long-term, sustainable outperformance for clients.”
CC-BY-SA-2.0, Flickr. The UK Economy and Financial Markets after the Election
The British election has delivered a stunning set of results, mostly unpredicted by the pre-election polls. Whatever the explanation for these forecasting errors (e.g. “shy Tories” not disclosing their true feelings to pollsters), the recovering economy and the lack of trust in the Labour programme must have played a large role in returning David Cameron and his Conservative party to Downing Street. Gains of over two million jobs in the past five years combined with low inflation and the start of real wage gains for the first time since the recession of 2008-09 will all have played a role in shaping voters´preferences for a party that has put economic credibility and the restoration of sound public finances at the top of its priorities. In addition, economic surveys show that consumer confidence is at a three-year high while the consensus forecast of economists for UK real GDP growth is 2.6% in 2015, a rate far ahead of most of the Eurozone. All these factors will have contributed to Camerons unexpected victory.
The fact that the Tories have won an outright majority of seats in Parliament (330 out of a total 650 seats) automatically means that the near-term uncertainties that threatened to dominate financial markets in the immediate weeks ahead can be dismissed. Now there will be no slide in the currency during a fractious process of coalition-forming, and no jitters in the stock market about a possible rejection of the Queen´s speech (which outlines the government´s legislative programme) by the House of Commons. Already sterling (+1.6% against the US dollar at midday on Friday, May 8th) and the FTSE100 (+1.87% also at midday) have bounced back from recent losses, while sterling bonds have rallied.
Moreover, the continuity of the Tory-led Coalition´s economic programme fiscal discipline in the public sector with a preference for allowing the private sector to promote economic growth and prosperity rather than widespread intervention in the markets (such as Ed Miliband´s plans to impose a freeze on electricity and gas prices or to re-write hundreds of thousands of “zero hours” employment contracts) will be a relief to business and the financial markets. Although the Coalition government failed in its aim to reduce the structural budget deficit to zero within a single parliament -in part due to the ring- fencing of expenditures on health and overseas aid, as well as numerous tax reductions on personal incomes especially at the lower end of the income scale – there can be little doubt that the Tories will seek to resume this programme, restraining public expenditure on both current and capital account until tax revenues have been restored to stronger growth.
On the monetary policy front there is no reason to expect any change in the mandate given to the Bank of England to maintain a 2% inflation target. The Monetary Policy Committee of the Bank is due to meet and report next week (May 11) on a meeting held on May 7 and 8. With CPI inflation in March well below target at 0% year‐on‐year (headline) and 1.0% (core) it is likely that the MPC will vote to keep rates unchanged at 0.5% and to leave the amount of asset purchases outstanding also unchanged at £375 billion. As the UK economy continues to recover it is probable that investors will start to anticipate a gradual series of rate rises later in the year, starting, in my view, after the US Federal Reserve starts to hike US rates.
In contrast to the resolution of these short-term uncertainties, the Conservative victory in the election brings one major, longer term uncertainty, the prospects of Britain´s future in Europe. David Cameron has promised the British electorate the opportunity to vote in an “in‐out” referendum on Britain´s membership of the European Union by 2017, a commitment that he will find impossible to avoid. Opinions in the country are very divided.
One side views Europe -with its heavy- handed regulations on everything from labour markets to the names of cheeses, its slow-growing economy, and its demand for large annual payments from Britain to the common budget, and its over bearing judiciary which is constantly expanding the areas of its remit -as an economic sinkhole that the country urgently needs to escape from before it suffers a Japanese- style fate of one or more “lost decades” of growth.
The other side views Europe as integral to Britain’s place in the world and the key to its ability to play a meaningful role in any international strategic, diplomatic or economic dialogue with other major powers such as the US, China or Russia. This side also claims that, with the EU being Britain’s largest trading partner, as many as three million domestic jobs are essentially dependent on British membership of the EU, and if Britain left the EU it would soon suffer debilitating trade or financial discrimination that would damage inward investment into Britain and hurt the country’s long term growth prospects.
Of major importance to the UK when considering its EU membership is the City’s position as Europe’s financial centre. The financial services industry accounted for around 8% of UK GDP and 12% of tax receipts in 2012. In addition, London is home to the European headquarters of many of world´s largest financial institutions. Major uncertainty would arise in the event of a UK exit from the EU, specifically concerning whether the UK would be excluded from the common market in financial services and passporting rules. It is legislation from Brussels that enables the City to carry out these activities and guarantees unrestricted access under pan-European regulations across every member state. For all these reasons the longer term uncertainties will remain, at least until 2017.
While the Conservative party is traditionally divided in its views on Europe (and at times in the past 30 years the issue has threatened to tear the party apart), the newly resurgent Scottish Nationalists are ardent Europeans, while Labour is generally pro‐European. The business world is by no means united in favour of EU membership. These divisions and the Prime Minister´s agenda for an “in-out” referendum will pose a major challenge to the new government.
In summary, although the election has resolved some short-term unknowns, longer term unknowns still remain.
Opinion Column by John Greenwood, Chief Economist Invesco
