CC-BY-SA-2.0, FlickrFoto: Sebastien Bertrand. La Fed, a punto de pasar de muy acomodaticia a acomodaticia
As explained in last week’s FridayMail, by AllianzGI, more and more high-quality issuers can afford to offer negative bond yields. Attractive bond yields are becoming scarcer around the globe, putting investors on a diet. At the same time, the Greek budget is in for lean times, too. Even if Athens has agreed with the “institutions” on an extension of the bail-out programme until the end of June, it will not receive financial support immediately. The agreement will bring some relief for Greek banks, though (not least because Greek bonds will probably become eligible for ECB refi operations again).
Despite the tense situation, not least with regard to the still unresolved conflict in Ukraine, stock prices rose in both Europe and the US at the beginning of the week and crossed the thresholds of 18,000 (Dow Jones) and 11,000 (DAX), respectively. Market participants‘ trust in the central banks‘ willingness to act works like a sedative, and the ECB’s ultra-expansionary monetary policy is a treat for the European stock markets in particular.
Speaking of monetary policy, Allianz GI believes that even though Fed Governor Janet Yellen’s testimony statements were largely regarded as dovish, the Fed is slowly moving towards its first rate hike – while the global bond markets are still not willing to believe that. A repricing of the Fed’s and the Bank of England’s (BoE) monetary policy will therefore remain one of the key investment themes during the coming months, said the week’s FridayMail of AllianzGI.
Meanwhile, the PMIs suggested that the US upswing is still intact, despite recently disappointing data. While the downtrend in consumer prices might trigger a deflation discussion in North America, too, the oil price slide is the main reason for the price decline. In the medium term, the economic uptrend – and the labour-market recovery in particular – should increase inflationary pressures. Interestingly, according to the minutes of its January meeting, even the Bank of Japan does not seem to see any necessity for additional monetary stimulus, as downward risks to inflation abate.
Photo: vice1. Asian Debt Is Expected to Outperform Developed Market Bonds in 2015
Asian debt is expected to outperform developed market bonds in 2015, thanks to healthy corporate credit dynamics, supportive global liquidity, stable economic and political environments and investors’ demand for yield.
Joep Huntjens, head of Asian Debt at ING IM said: “Although the anticipated rise in US interest rates may present a challenge for Asian bonds, the Federal Reserve is still only likely to remove its zero-rate monetary policy gradually. Furthermore, the impact of this will be outweighed by the spread cushion offered by Asian credit/high yield and the additional yield offered by the region’s local currency bonds.”
ING Investment Management anticipates Asian credit, including USD-denominated, High yield and Local Currency bonds, to deliver a total return potentially as high as 8.6% in 2015, although the base case is between 2.0 to 4.0%. Asian high yield could be as high as 11.4%, with the base case between 5.3% and 7.3%.
Huntjens said Emerging Asia is once again set to generate the fastest rate of global growth with the region’s largest economies China, India and Indonesia set to continue economic reforms. Lower oil and commodity prices will result in better external balances and lower inflation for most Asian economies and will afford policymakers a greater degree of freedom to enact expansionary policies..
The key risk to Asian local bonds, said the head of Asian Debt at ING IM, comes from currency performance versus the greenback. Aggressive central bank policies aimed at stocking growth and warding off disinflation in Japan, Europe and elsewhere are likely to help the dollar strengthen. However, performance is relative, and versus other regional EM currencies, such as Latin America, Asia should outperform given its respectively lower average volatility.
Photo: Antonio Tajuelo. Higher Returns Thanks to ‘Sin Stocks’
If you’d invested a dollar in American tobacco shares 115 years ago, you’d be USD 6.3 million better off now. If you’d have invested the same dollar in the wider American market on that same day, you’d have to make do with USD 38,255 today.
This 5% outperformance by the tobacco industry over such a long period is impressive – and it’s not hidden behind a smokescreen either. Mark Glazener, fund manager of Robeco NV, summarizes the success in four words: “A good business case. How many products are there that elicit such a sudden moment of panic in users: ‘Have I got any at home, or on me?’ Not many.”
Twenty percent of the Western population smokes – a market share that is shrinking only very slightly – and the demographic development in emerging markets is providing tailwind. The degree of penetration is reasonably stable, but the population is growing and therefore the number of users continues to rise.
And then you have the pricing power, which according to Glazener is of unprecedented importance. “Rounded off, the tax on a packet of cigarettes is four euros and is raised occasionally by the government. And tobacco manufacturers have the opportunity to increase their margins each time the excise duties are raised. Basically, volumes are falling slightly worldwide – but this is more than made up for by the margins. In addition, the production costs rarely increase and tobacco manufacturers are not allowed to advertise – saving them millions each year. Unilever invests 11% of its budget in advertising.”
Exclusion from portfolios
Another advantage is that there has been no major consolidation in the tobacco industry. Barring a few specific American players, there are but three big global names: British and American Tobacco, Philip Morris and Japan Tobacco. The competition from e-cigarettes doesn’t pose much of a threat either. “The nicotine hit from e-cigarettes is much less intense. You don’t get the same level of satisfaction from taking a drag.”
Glazener believes that the momentum in the tobacco industry can be maintained at least until 2020, thanks to the increasing prices that are compensating for the slight decline in volumes. But the prices of cigarettes cannot continue to rise without challenge, in particular because the majority of users are from low income groups. “During the crisis, the turnover in Italy and Spain plummeted because smokers switched to imitation brands, bought via the illegal circuit.”
Tobacco shares are examples of ‘sin stocks’ – shares in controversial sectors and activities, like the weapons industry and alcohol and gambling companies. As a result, these shares are avoided by a growing group of investors that is guided by principles concerning ESG (Environment, Social, Governance). But not by Glazener, who applies the best in class principle for his fund. “Excluding certain sectors limits your possibilities and opportunities as a fund manager and we only do that when it is required by law, like with cluster bomb makers. At the end of the day, you are judged by your returns in the financial sector.”
Immune for headwind
Shares that are excluded by groups of investors tend to be traded at a discount. Due to the taint on the sector or industry, as a rule they are valued lower than the market average. This doesn’t apply to tobacco shares – these certainly aren’t cheap.
The merits of investing in shares in tobacco firms outweigh the disadvantages of the tobacco industry. “As long as these shares continue to perform above average, investors will continue to buy them.” Shares in tobacco will keep doing surprisingly well for now, even against the sentiment of the modern world. “The industry has survived billions in claims, the ban on smoking in public places, shocking messages on cigarette packs and even a ban in Australia on printing brand names on packets. But these shares have proven exceptionally immune to every type of headwind.”
The 5% extra return is obviously just too tempting to resist. Even the pension fund for GPs was investing in tobacco shares until a year ago. It has excluded this industry now, as has PGGM’s Zorg & Welzijn (Health & Welfare) pension fund. A complete end to investing in tobacco shares is not in sight either.
But that time may come, thinks Glazener. “If further government restrictions cause the sector to lose its appeal, for instance.” Until then, investors remain caught in the devil’s dilemma of return versus ESG considerations. Glazener too, despite the fact that the management team of Robeco NV is looking into whether tobacco shares can be replaced in the portfolio – preferably by an alternative with the same risk-return profile.
Photo: Fred Hsu . Agnelli Family Seeks Buyers for Cushman & Wakefield
According to the Wall Street Journal, the Italian family Agnelli has hired Goldman Sachs and Morgan Stanley to find a buyer for the third largest real estate company in the world, Cushman & Wakefield Inc, under their control, quoting people familiar with the matter.
The sale could fetch as much as $2 billion, for the company that recorded $163 million in earnings in the 12 months that ended in September, according to the newspaper, and acquired New York-based Massey Knakal Realty Services for $100 million late last year.
The Agnelli family, which currently owns 81 percent of the company, paid $565.4 million for a 67.5 percent stake in Cushman & Wakefield 8 years ago, according to the WSJ. “There is currently no transaction to disclose, nor guarantee that such a review may result in any transaction involving Cushman & Wakefield,” a Cushman & Wakefield spokesman said.
. Pension Insurance Corporation Appoints Henderson Global Investors as Part of Preparations for Solvency II
Pension Insurance Corporation, a specialist insurer of defined benefit pension funds, has appointed Henderson Global Investors as its sole external Sterling corporate bond manager, as part of preparations for the implementation of a “buy-to-hold” asset strategy under Solvency II. Henderson will now manage a £3.2 billion portfolio, more than doubling its previous mandate.
PIC manages a further £2 billion of Sterling corporate bonds in-house including direct investments in infrastructure. PIC has a total portfolio of almost £14 billion.
Tracy Blackwell, deputy CEO of Pension Insurance Corporation, said: “Consolidating our Sterling bond portfolio managers is an important step in our preparations for the “buy-to-hold” discipline required by Solvency II. The appointment of Henderson demonstrates that our transition is on track. We are of course delighted to be continuing our partnership with Henderson. Excellent credit skills, a strong working relationship and high levels of client service were key to this appointment.”
Anil Shenoy, director of institutional business at Henderson, says: “We are very proud to be appointed by PIC as this is an eminent endorsement of Henderson’s fixed income franchise and institutional client service. We look forward to deepening our relationship with one of the insurance industry’s leading and most innovative companies.”
Stephen Thariyan, global head of credit at Henderson, adds: “Being chosen as PIC’s manager of choice for Sterling corporate bonds reflects our robust portfolio management process and the strength and depth of our offering. PIC has been a leader in its sector for a number of years and this decision is a big boost for our team, which we have been building out globally.”
Photo: Ramón Llorensi. BNP Paribas Securities Services Appoints Head of Brazil
BNP Paribas Securities Services has announced the appointment of Andrea Cattaneo as head of Brazil.
Cattaneo joined BNP Paribas Securities Services in 2004, becoming global head of solutions for asset managers in 2011.
“We have expanded our custody offering in Brazil and across Latin America in recent years with great success,” commented Alvaro Camuñas, head of Spain and Latin America, BNP Paribas Securities Services.
“We are seeing strong demand both to help foreign investors develop their business in Brazil and to help local investors reach out to international markets by using our worldwide networks and expertise.”
“Andrea has played an important role in the development of our global offering for asset managers and I am delighted to see him take the lead of our Brazil office. His new appointment positions us well for future growth in the country.”
“This is a fascinating time for Brazilian finance,” commented Cattaneo. “The need to diversify investments to boost returns means Brazilian investors are reaching out to global markets, which are eager to connect with them.
“This is the moment for us to bring our global reach and local expertise to bear and help connect Brazilian investors to markets worldwide. It is an exciting time for us and I am delighted to have been appointed to this role.”
Photo: Jeff Belmonte. The Upside Of Seeing The Downside
With the bull market running well past five and a half years now, the standard three- and five-year performance screens for mutual funds now look really great. Once the calendar turned from February to March 2014, the major losses sustained during the global financial crisis all but dropped out of funds’ trailing five-year return figures (the market hit its low in March 2009).
But those numbers forget that the average economic expansion has been roughly five years in the post-World War II era, and it’s hard to tell right now how your clients’ assets might fare once the bears begin to growl. True, we’re in uncharted territory: The current bull market has extended well past the 4.9-year average we’ve seen since 1950. And with the S&P 500 headed mostly upward since it bottomed out at 676.53 on March 9, 2009, it’s no wonder investors have such a tough time taking alonger-term view. That’s especially true given the amount of noise in the markets and the number of behavioral biases toward shorter-term investment decisions.
Furthermore, if you look back only five years, you’re judging active managers on only half their skill. It’s just as important to see how they performed on the downside, through a bear market, to evaluate their ability to add long-term value. Yes, past performance is no guarantee of future results, and certainly every market disruption is different. But advisors should judge managers’ performance in both the good times and bad times to better understand their investment process and see how they manage risk.
That’s why, if you’re using hypotheticals with your clients, make sure to emphasize the 10-year returns (if available) just as much as the three- and five-year figures. Or maybe look at how fund managers do over periods with significant intra-year volatility — at 2011, for example, when the S&P 500 slipped 20% from late April to October but still managed to close up just over 2% for the year. You can also look at measures of risk and volatility like standard deviation, beta and downside capture. Still, those may not resonate as well with your clients. Instead, show them how the values of their accounts have changed on their monthly statements. Look back at those values over several years, perhaps using rolling 30-day periods, to help your clients see what market volatility really means to their bottom lines.
What’s important is getting past complacency and unrealistic expectations of what the capital markets can actually deliver. We’ve seen a lot of that lately, as well as investors’ misperceptions about what their funds are designed to do. In a recent MFS survey of defined contribution plan participants, 65% of those surveyed believed that index funds were safer than the overall stock market, and nearly half (49%) thought index funds delivered better returns than the stock market. And while strong stock market performance may have helped keep such misperceptions intact, these investors could be in for a rude awakening when the market eventually pulls back.
As investment professionals, it’s our job to dispel myths, set the right expectations and help investors get a realistic picture of how capital markets perform over time. At times, that’s a matter of questioning the answers. Are certain performance figures enough or do advisors need more context to give their clients a full picture? If active managers are to demonstrate value through full market cycles, clearly there is an upside to showing your downside.
Jim Jessee is co-head of Global Distribution for MFS Investment Management (MFS). He is also a member of the firm’s management committee.
Photo: Vinoth Chandar. Opportunities in Asia’s Economies
Unfortunately, in recent times, developed markets have been veering on a downwards trajectory as global growth concerns come to the fore once again. In contrast, we believe the Asia-Pacific region is different: there’s a powerful ‘reform’ agenda creating specific catalysts that may drive markets there.
With changes of leadership in China, Thailand, India and Indonesia, a region-wide clampdown on corruption and a drive to improve efficiency, investor perceptions are beginning to shift for the better, along with share prices. The improving backdrop warrants a closer look.
Chinese SOEs – the lumbering giants are getting fit State-owned enterprises (SOEs) have been instrumental in the Chinese economic growth story. Recently, however, there has been a drive to reshape these bloated structures into companies focused on shareholders rather than market share or job creation.
The hope is those SOEs with improving operating efficiency should contribute to China’s economic growth, reinvigorate private sector investment and help revitalise the economy by creating a more competitive business environment. Coupled with President Xi Jinping’s well-publicised anti-corruption measures, we believe this may improve investor returns in the medium term.
The SOE, PetroChina, is one of our favoured picks. The new management, installed in 2013, is more focused on the returns from invested capital, which should resonate well with external shareholders.
India – powering forward Across the Bay of Bengal, newly-elected Prime Minister, Narendra Modi, is beginning to drive real change in political and economic attitudes. Expectations are high, and there is already evidence of the new administration beginning to address legacy stalled projects, by simplifying project approval and land-acquisition processes.Coal shortages are a major issue for the power sector and economy as a whole. With the newly-formed government committed to ‘24/7’ power supply across India, augmentation of national coal output is of vital importance.
Coal India is one beneficiary. With a virtual monopoly in domestic coal production, a lot of cash on its balance sheet, an undemanding valuation and increasing commitment to return cash to shareholders (as highlighted by the recent special dividend), we currently view this as an attractive investment proposition.
Korea – tapping reserves The newly-installed Finance Minister, Choi Kyoung-hwan, announced a raft of tax measures aimed at unlocking billions of dollars in corporate cash reserves. The government plans to discourage companies from hoarding cash by imposing tax penalties on excess reserves after wages, capital expenditure and dividends have been taken into account. Investors hope this will boost the historically low dividend yields of Korean companies, and hence raise share prices.
We exercise some caution however. While there are changes being made at the government level these have not necessarily trickled down to the corporate level yet.
Indonesia – bringing the islands together The people of Indonesia, and the third largest democracy in the world, chose Jowoki Widodo last July last year as their president following the failure of Susilo Bambang Yudhoyono to push through necessary reforms.
Undeniably a long list – first in line is energy, where fuel subsidies have led to an over-reliance on oil and a 20% strain on the total government purse. It’s not an easy task as, even though the knock-on effect frees money for other reforms (around $30bn), it risks social unrest with the impact felt by many companies and individuals alike.
Other reforms include education and agriculture, and infrastructure investment, where a focus on ports, railways, toll roads, and dams (for farming), should serve to decentralise manufacturing and release pressure from crowded urban areas. In this respect, Telekomunikasi Indonesia, the country’s largest telecommunications provider, is one that may benefit from such renewed investment.
Opinion column by Mike Kerley, manager of the Henderson Horizon Asian Dividend Income Fund.
CC-BY-SA-2.0, FlickrHovasse draws on 14 years of experience as an analyst and fund manager. Xavier Hovasse and David Park Appointed Fund Managers of Carmignac Emergents
Carmignac’s emerging equity fund managers Simon Pickard and Edward Cole will be leaving the company for different personal reasons. Edouard Carmignac, Chairman and CIO of Carmignac, stated “Simon Pickard has been with us for over 12 years, during which time he has been a great asset to the company; first as part of the European investment fund management team and then as head of the emerging equities team.”
Carmignac is delighted to announce the promotion of Xavier Hovasse and David Park, who currently manage Carmignac Emerging Discovery (CED), as fund managers of Carmignac Emergents (CE). Xavier Hovasse will also manage the emerging equities component of Carmignac Emerging Patrimoine (CEMP), while CEMP’s bond component (i.e. 50% of the fund’s assets) continues to be managed by Charles Zerah.
Xavier Hovasse draws on 14 years of experience as an analyst and fund manager, initially at BNP Paribas and then Carmignac. He has successfully applied his knowledge of Latin America, Eastern Europe, Africa and the Middle East to the benefit of the emerging equity funds. David Park, who joined Carmignac eight years ago as an expert on Asia, became co-manager of CED two and a half years ago. Haiyan Li-Labbé has been an analyst specialising on China for 14 years including three years at Carmignac, a role through which she continues to enrich the company with her experience as an analyst and fund manager with Société Générale and then ADI-OFI.
These three members of the investment team have actively contributed to the fund management process and the success of our range of emerging equity funds over the past few years.
Commenting on this new structure, Edouard Carmignac said that “the emerging market funds will benefit from the continuity of the existing management process, as well as the efforts of a team that has been in place for several years and the presence of Charles Zerah, who will continue to steer CEMP’s bond component.”
Simon Pickard stated that he would be available to ensure the transition towards the new management structure, adding: “It was a difficult decision, but I have a personal project that I would like to explore, the details of which I will share at the right point in time. I wish all the best to the Carmignac teams.”
Hispania Activos Inmobiliarios, has communicated to the Spanish Stock Market Regulator, CNMV, that its subsidiary Hispania Real SOCIMI, S.A.U, has signed an agreement with Grupo Barceló for the creation of the first hotel REIT focused on the holiday resort segment; industry in which Spain is one of the leaders worldwide.
Part of this agreement includes the acquisition by Hispania in an initial phase of 11 hotels (3,946 keys) and 1 shopping centre. Later on, Hispania will have the option to acquire 5 additional hotels (2,151 keys) along with a second shopping centre. The agreement is subject to the successful completion of the due diligence process.
Once the transaction is completed and the option on the 5 additional hotels executed, Hispania will have invested 339 million euro, obtaining an 80.5% stake in the new REIT. Grupo Barceló will maintain 19.5% with the option to reach up to 49% through future capital increases.
Barceló will remain as the operator of the acquired hotels through lease contracts with an initial term of 15 years.
The valuation of the 16 hotels and 2 shopping centres amounts to 421 million euro. It is expected that the REIT, following the execution of the option, will have an initial equity of 187 million euro and a syndicated loan amounting to 234 million euro. Hispania’s capital contribution will amount to a maximum amount of 151 million euro (total attributable investment of 339 million euro).
The initial asset portfolio will have pro forma rental income of approximately 45 million euro (40 million euro pro forma 2014).
The Barceló assets included in this agreement comprise most of its resort portfolio in Spain, located in the Canary Islands, Andalusia and the Balearic Islands; touristic destinations which have had a strong performance during the last few years and are expected to continue consolidating their position in the future. Out of the 16 hotels, more than 90% of the rooms available are 4* category and are leaders in their respective influence areas.
Hispania and Barceló have agreed to invest together an additional 35 million euro in the short term in order to complete the repositioning and updating of some of the properties.
“Spain is the third most important touristic destination in the world, preceded only by France and the United States”, commented Concha Osácar, Board Member of Hispania. “Spain has almost twice the number of resort keys than the United States, as well as a well-diversified tourist base, with British, German and French visitors representing more than 50% of the total. This illustrates the opportunities which the industry offers in Spain”.
The agreement signed between Hispania and Barceló allows to start an ambitious plan focused on increasing the portfolio of the new REIT, through hotel acquisitions or incorporations of existing hotels. The purpose is at least, to duplicate the size of the initial portfolio, creating a Spanish resort portfolio managed by different leading hotel operators.
According to Concha Osácar, “our objective and that of our partner Barceló, is that the new entity becomes the first listed REIT focused solely on hotel resorts, with a diversified portfolio in terms of hotel operators, and a steady income base, through lease contracts with a strong fixed income component and enough exposure to the future increase of the Spanish tourism market. The objective of the new REIT for Hispania and Barceló, is to become an instrument with which to attract institutional capital for the Spanish hotel industry, creating new sources of capital for the hotel industry”.
From Barceló’s perspective, “as a result of this transaction, we are creating a solid alliance with one of the most active investors in the industry”. According to Barceló’s CEO, Raúl González, “after this transaction we will be in leading position to benefit from the concentration process that should take place in the Spanish hotel industry”.
Hispania has invested a total of 112 million euros, including capex for 2015, in 6 hotels (5 acquired in 2014 and 1 in 2015) managed by different hotel operators (Meliá, NH and Vincci), which could be included into the new REIT; this decision will be made by the partners during the second half of 2015.
Hispania will have invested 100% of the net proceeds raised
With this agreement, Hispania will have committed a total investment of c. 800 million euros in a total of 44 assets since its IPO on March, 14th 2014.
