Pixabay CC0 Public DomainJosé Antonio Llaneza, courtesy photo. Principal To Acquire MetLife’s Pension Fund Management Business in Mexico
Principal Financial Group has signed an agreement to acquire full ownership of MetLife Afore, MetLife’s pension fund management business in Mexico, subject to regulatory approval. After closing, Principal Afore will be the fifth largest pension provider in Mexico in terms of assets under management.
According to CONSAR, the Mexican regulator, the main differences in their portfolios are that Principal has a larger allocation to equities and structured instruments than Metlife, which favors fixed income.
“As the middle class in emerging markets continues to grow, there is increasing demand for long-term retirement and investing products that enable individuals to retire with the highest pension possible,” said Roberto Walker, president of Principal International in Latin America. “This acquisition strengthens our commitment to Mexico’s pension market.” Giving them “additional scale, a larger distribution network and the capacity to better support its customers in Mexico with innovative advice and customized tools that help them achieve their retirement goals.”
Jose Antonio Llaneza, country head for Principal Mexico, added: “This acquisition demonstrates our continued commitment to invest in Mexico. Our focus remains on providing superior performance and counsel, while helping to educate people on the importance of increasing their contribution rate to their pension accounts.”
The purchase agreement between Principal and MetLife will be reviewed by Mexican regulatory authorities before closing, which is anticipated during the first quarter of 2018.
“The divestiture of MetLife Afore will allow us to enhance our focus on growing our leading insurance business in Mexico, where we are the number one provider of life insurance,” said Oscar Schmidt, executive vice president and head of MetLife’s Latin America region. “We are confident that Principal will provide our Afore clients in Mexico with access to quality resources and capabilities to help them achieve their retirement goals.”
BNP Paribas Securities Corp. and Credit Suisse Securities (USA) LLC served as financial advisors on the transaction to Principal and MetLife, respectively. White & Case LLP served as legal counsel for Principal and Nader, Hayaux y Goebel, S.C. for MetLife.
Pixabay CC0 Public Domain. Is it Possible for Value Investors to Find Opportunities in the Banking Sector?
A lot of fund value investors tend to avoid the banking sector altogether due to a number of reasons: a difficulty in understanding it’s business, the prolonged low interest rate environment, the lack of growth seen in credit, a poor market capitalization and a bad operating earnings trend. Despite these perceptions we are going to prove how an investment idea is possible to find in this sector with some banks that do have clear and sustainable competitive advantages or ‘moats’; especially strengthened in an increasing interest rate environment in the U.S.
Investment idea – Bank of the Ozarks
What would you say if I told you there was a commercial bank that has increased their earnings per share and its total assets by more than 2,000% in the last 20 years? It also boasts the highest quality of assets in the US and we managed to buy its shares below 15x its last twelve month earnings in September 2017?
I discovered Bank of the Ozarks 5 years ago, on a business trip to London while reading the American Bankers Association magazine in J.P. Morgan’s reception. I was so impressed by what I read about the bank that I began doing additional research and also came across its success story in other magazines, like Bank Director. In August this year, Ozarks was awarded for a 5th time in a row and for the 7th time running the number 1 bank in the US.
Bank of the Ozarks is a regional American bank founded in 1903 in Jasper, Arkansas with a market cap of USD 5269 million and 251 offices spread across 9 States in the U.S. Its main business is in loans servicing commercial real-estate development, office construction and other similar projects under the RESG unit or Real Estate Specialty Group. This division represents 80% of its total loan book of $15 billion dollars and is financed entirely from capturing deposits. Until this point it may seem like any other mortgage lending bank but what really makes Bank of the Ozarks an extraordinary bank?
1) Ultraconservative mortgage awarding policies.
The Real Estate Specialty Group (RESG) is made up of an experienced team of 107 employees of which 40 of them are in charge of origination. RESG works in the nonrecourse loans with a higher risk. In case of default, the bank only has collateral on the value of the property and the yield it generates to recover the loan. In exchange, these non-recourse loans are priced at a higher rate than the market.
So what does make Bank of the Ozarks different from other commercial banks?
It’s team of bankers in charge of origination are probably one of the main reasons with George Gleason, CEO since 1979, also heading the team and signing off each of the loans for the past 14 years. The bank is also very selective financing only certain properties and constructions in prime locations catering only to experienced customers with strong a solvency record. They even have the ability to almost transform a nonrecourse loan into one with recourse with their bad-boy carve-outs T&Cs in the event of default. Their experience and track record serve as testament to all these attributes. In the last 14 years, for example, they’ve only experienced losses on 2 loans (in 2009 and 2011) worth up to $ 10 million dollars from a total loan book of $15 billion! On top of this, the bank is always the only borrower in the senior trench of the deal, meaning they’re the least exposed in the capital structure of the loan and the borrower must ALWAYS put forward 50% of capital in advance. Another interesting fact working to the bank’s advantage can be seen in their average Loan to Value and Loan to Cost ratios. In the last few years, Loan to Value has declined to 42% and Loan to Cost to 49% after seeing highs of almost 70% around the time of the credit crunch. In today’s landscape, this could well be the most conservative loan book across the country. In June this year, George Gleason announced that he would dedicate approximately 75% of his time to the RESG division for the next two years, shortly before announcing the departure of Dan Thomas, longstanding RESG Chief Lending Officer.
Lastly, the conservative credit provision policy is clearly reflected in the quality ratios of their assets not only in their most recent filing but also consistently across their recent reporting history. As of 30th September 2017:
Allowance for LLS as % T.Loans = 0,55%
Non-performing loans as % T.Loans = 0,11%
Allowance for LLS as % NPLs = 650%
Loans and Leases past due 30days = 0,12%
Net charge-off = 0,09%
2) Seeking opportunity in its loan provision strategy for Commercial Real Estate and Construction – The Arkansas-based bank has only gone after niche markets that have experimented recent problems or difficulties where supply and demand is unbalanced. They therefore come against very few competitors in real estate lending projects ranging from condos, offices and hotels. Their most notable success can be seen in New York City where the bank has been capable of growing their volume of transactions very quickly from 2012, making it account for roughly 20% of the bank’s total loan book. This strategy has lead Ozarks to see a higher than market credit yield, as their interest margin increases at a faster pace than competition. Even the CEO himself defines their strategy the following way:
“What we have tried to do is sort of ignore the headlines to a great extent, I mean certainly you to have to take larger macroeconomic and market themes into account. But we have really tried to not let that drive our decisions, but instead to look at the supply demand metrics of each sub-market market and macro market and the relative competitive position of each product in the market and do a much deeper level of analysis on projects”.
3) Strong growth in Real Estate lending volumes.
Gleason expects to double the RESG business in the next 3 to 4 years and twofold in the following 7 to 8 years. It’s ambitions cover not only commercial real estate but also the expansion of other sectors including marine, SMEs and leasing. Their ambition is supported by their strong organic growth in a sector that is unlikely to grow organically.
In addition to this, there is also a strong inorganic component behind it’s success, after completing over 15 transactions from 2010. Each transaction has been accretive during the 1st year not only in terms of tangible value per share but also in their earnings per share.
The most interesting aspect of their organic and inorganic growth has been their unbeatable efficiency margin close to 30%, unseen in any other competitor, neither in the U.S. nor in Europe.
4) George Gleason, Bank of the Ozarks’ Chief Executive Officer (CEO). Management’s commitment and aligned interest to the company’s performance is exemplified in it’s CEO history. He bought a controlling stake in the bank in 1979 at a time when the total number of employees was 12, assets were $28 million and he was only 25 years of age. In 2003, he set up the RESG division with Dan Thomas commanding the team. Since 2010, Ozarks has completed 15 acquisitions becoming the largest bank in Arkansas and never allocate more than 50% of total purchase price to goodwill. Any investor, who would have co-invested with Gleason in the 1979 IPO, would have obtained a compound annual return of 22% including dividends when the average competitor has only seen a 4% return and the S&P 400 Mid Cap, a 10%. George harnessed his parents experience and began working at the early age of 5, when he was already in charge of set tasks within his father different businesses. Once he joined the bank, he founded and fostered a culture to motivate employees on a continual path of year-on-year performance, making sure they always felt were part of the company and also carried a sense of holding a stake in it. During this time and until today, George has managed to grow the profit in compound interest towards 19%, with a total return over its own funds and efficiency at the top of the sector.
Then why has its share price dropped by almost 30% from March’s all-time highs? There are 2 reasons behind this:
1) Muddy Waters Capital’s Short Selling note and skepticism over it’s Commercial Real Estate line of business. Muddy expressed concerned over the banks provision for loan losses, assuming it did not have enough cash to cover itself in the event of rising non-performing loans. It also believed it’s total off-balance sheet liabilities were becoming unsustainably high.
Answer 1) the provisions calculated by any bank are based on the quality of its assets. In Ozarks’ case, we are talking about one of the most high quality loan books, made evident by only experiencing losses on 2 of their transactions during the recent credit crunch. It’s average LTC and LTV of are healthily positioned at around 45%. What this means is that if a borrower would like to apply for a $100 million dollar credit, Ozarks
Answer 2) Even though the off-balance sheet liabilities add up to $11 billion dollars, mainly from their RESG side of business, most of these loans are senior, meaning Ozarks would be the last to provide funding for credit but the first to receive any repayment. The bank also demands collateral against the loan worth up to 2x the value of the credit. Tim Hicks, Chief Administrative Officer, showed no qualms when openly admitting that 92% of loan applications it receives are surprisingly rejected!
2) Dan Thomas quits as Chief Lending Officer of Ozarks’ RESG division. On the 28th July, Dan Thomas suddenly announced his departure from the firm forcing the share price into a sharp 12% decline.
Answer 3) Even though the longstanding Chief didn’t reveal his true motives behind leaving the company and despite the fact he was one of the masterminds behind the growth and the bank’s spectacular track record during his tenure, it may seem that George Gleason’s earlier decision and public announcement to commit a larger part of his time to overseeing the day to day operations of the RESG unit was not well-received by Dan. Despite these changes in senior management, we still believe the RESG unit is staffed with experienced, independent and long-serving employees equally capable of continuing on with the business alongside the CEO. For us, it would be far more worrying if we were to see the CEO suddenly leave. And how much have we paid for this extraordinary franchise? The average price paid was $43 per share and approximately 14-15x it last twelve month earnings. We estimate its intrinsic value at $66 per share, after applying a 21x price to earnings multiple for the next twelve months against a 15,5x observed multiple for the sector in the US.
And how much have we paid for this extraordinary franchise?
The average price paid was $43 per share and approximately 14-15x it last twelve month earnings. We estimate its intrinsic value at $66 per share, after applying a 21x price to earnings multiple for the next twelve months against a 15,5x observed multiple for the sector in the US.
As of today, we see a low probability in there being a recession in the US economy (at least within the next quarters) but despite this we would still apply a conservative approach and calculate an intrinsic value assuming that scenario were to take place. The resulting intrinsic value would therefore be $35 per share, placing it 18% lower than our average price paid. If it does happen to reach these levels, we would seek to increase are holding in this company. As a reminder, it is important to not only buy extraordinary companies but also not making a mistake in overpaying for them. Coca-Cola’s case in 1998 should serve as a reminder.
Appendix: Ratio definitions and quality of assets chart.
Allowance for LLS as % T.Loans are the provisions made to face any future losses.
Non-performing loans as % T.Loans are the unpaid loans with more than 90 overdue, where neither capital nor interest is paid off.
Allowance for LLS as % NPLs is the coverage ratio.
Net charge-off is the total unpaid debt by the company minus any recovered payments.
Pixabay CC0 Public DomainPhoto: stevepb. The Case For Fixed Income In The Core Of A Portfolio, Despite Low Rates
Bonds have long played an essential role as a foundational holding at the core of investors’ portfolios. Bonds and bond ETFs have the potential to offer income and stable returns that can offset volatility from a portfolio’s stocks.
But, in recent years, investors have struggled to achieve their investment goals amid low bond yields, especially from government bonds. The main cause? In response to the 2008 financial crisis, the U.S. Federal Reserve (and other central banks around the world) slashed interest rates to encourage economic growth.
While the Fed has since started to raise interest rates, they are still below historical averages. A low yield environment could be with us for some time because of several factors, including demographics (aging baby boomers have greater demand for bonds, potentially keeping interest rates low).
Beyond providing income potential it is important to emphasize that bonds and bond ETFs can play multiple roles in a portfolio.
These roles may include:
Recurring Income Stream No matter if an investor is looking to grow wealth or save for retirement, generating income in a portfolio can help get an individual closer to reaching an investment goal. Investors can receive interest payments at a regular cadence, typically monthly, quarterly or annually, potentially providing stable income and strengthening total return in their portfolio.
Stability of Principal In addition to receiving an income stream, bond investors receive the bond’s principal at maturity, assuming the bond is held to maturity and does not default. Repayment of the bond’s principal (a fixed amount) at a fixed time helps provide an investor with stability in their portfolio.
Potential hedge against risk Bonds and bond ETFs can offer a potential hedge against increased equity market volatility. Historically, bonds have been more likely to move in the opposite direction to stocks. For example, fixed income investors have increased their allocations to U.S. Treasuries during equity market sell-offs as a potential safe haven investment.1
Despite challenges that bond and bond ETF investors may face with yield and income in the short term, it is important to remember that fixed income investments can play a vital role as a foundational, long term holding, at the core of a portfolio.
While there are similarities between bonds and bond ETFs, there are also differences between the two investments. Investors should be diligent when researching the best investment vehicles for their portfolios. For example, individual bonds have set maturity dates while traditional bond ETFs do not. Bonds and bond ETFs may have different distribution schedules, despite tracking the same asset class, this may result in different income streams for investors. Individual bonds trade over-the-counter while bond ETFs trade on an exchange. Additionally, bonds and bond ETFs may create different tax liabilities and therefore investors may be subject to a variety of federal, local and/or capital gains taxes. Cost of ownership is another area where individual bonds and bond ETFs differ, bond investors may face a transaction and brokerage cost at the time of purchase whereas a bond ETF investor will likely pay both an expense ratio and transaction cost.
Get started building the core or your portfolio in Spain or LatAm.
Pixabay CC0 Public DomainShutterstock. Argentina: 116/583
Regularization / situation correction / normalization / tax pardon / repatriation / externalization of assets / fiscal disclosure / amnesty. Different names that mean essentially the same thing.
This is not an issue relating solely to Latin America. In the past, countries like Australia, Belgium, Colombia, Ecuador, Spain, the Philippines, France, Honduras, India, Ireland, Italy and Panama have implemented some kind of tax pardon/ amnesty program. Other countries, such as Denmark, Finland, Greece, Mexico, New Zealand, Norway, Peru, Portugal and Sweden, at one time or another, have also instituted relief schemes to normalize fiscal conditions.
Argentina concluded its own asset amnesty program in late 2016. Of a GDP of $583 billion, $116 billion worth of assets have been disclosed. The amnesty means an increase of approximately 12% of GDP to the economy’s tax base.
In the last 60 years, the country has sanctioned and carried out 20 of these amnesty programs with differing results. It is worth pointing out that they were all “for one time only”.
For many years, some citizens have sought a safe-haven for their capital abroad due to political, financial or security reasons. The results of this diversification, particularly in developing countries, could negatively impact the economy and increase the cost of private and sovereign financing. The effects of reduced tax collections are generally compensated by an increased tax burden with possible consequences for the country’s economic development.
I believe this repatriation of capital will have short, medium and long-term impacts. For now, the effects are unseen by most but they will become much more obvious in 2017 and beyond.
The immediate effects include: reduced debt cost, increased tax revenue, tax deficit reduction and possible credit risk improvements not only for the sovereign but also for private entities that need to access the local credit market and markets in stronger currencies than the peso. With this multitude of potential investments, building a capital market that allows financing in the local currency will be easier.
To be eligible for amnesty / repatriation, individuals must not only pay a special tax but they must also make payments on earnings from what they have declared so far. For example, 35% on earnings generated by their investments (excluding certain Argentinian assets, Brazilian and Bolivian sovereign debt). The way to avoid this cost is to have a portfolio invested in Argentinian bonds or sovereign bonds from the countries mentioned above or Argentinian provincial bonds that are also exempt.
In any case, there are side effects. For example, Argentinian bond portfolios are over exposed to local debt issuances making the portfolios undiversified.
In fairness, this success has been achieved in the midst of severe restrictions on non-declared assets abroad, with a local government managing to generate investor confidence, multiple business opportunities in Argentina and very low portfolio returns internationally (let’s recall that $8 trillion worth of bonds are operating at negative rates).
The challenge we are facing is to get these portfolios to a level of diversification and return that brings peace of mind to our clients and bankers.
Foto cedidaRichard Halle, courtesy photo. M&G: "The Valuation Gap Currently Between Value and Growth Stocks is Almost as Wide as it Has Ever Been"
Richard Halle, portfolio manager of the M&G European Strategic Value Fund believes that the context is favorable for value investing in equities. In his interview with Funds Society, he explains that the economic recovery environment in Europe, together with the reduction of political and macroeconomic uncertainty and the increase in interest rates, should turn the situation and prove beneficial to this style of investment.
What are the main arguments in favour of investing in European equities?
European equities look attractively valued, in our view, both in absolute and relative terms, particularly compared to US stocks. In addition, European companies should benefit from the region’s economic recovery which should support earnings growth. Economic growth has picked up, unemployment rates have fallen across the eurozone and inflation has started to rise. The European Central Bank has arguably provided the necessary support to revive the eurozone and investors are now focusing on how the stimulus measures will be withdrawn.
You apply a value investing approach…how easy (or hard) is it to find undervalued companies in Europe?
While the overall market has risen this year, we think there are still plenty of opportunities for selective value investors. In our view, value stocks are attractively valued on both a relative and absolute basis.
Value as a style has been out of favour for several years as investors have favoured growth stocks with reliable earnings and ‘bond proxies’ offering steady income payments. The value recovery in 2016 proved to be short-lived and investors have preferred growth stocks this year. As a result of this prolonged underperformance, the valuation gap currently between value and growth stocks is almost as wide as it has ever been. If this gap were to narrow we think the potential rewards could be significant.
More recently, we have been finding value opportunities right across the market, rather than concentrated in particular sectors.
Is it necessary to hold cash in case better opportunities arise?
As value investors who are looking for mispriced opportunities to arise we tend to have a slightly elevated level of cash in the portfolio. This is so we are able to take advantage of short-term volatility and mispriced stocks.
What is the potential upside of your current portfolio? With the recent stock market rally…has this figure decreased?
We think there are plenty of stocks in the portfolio whose prospects are being significantly undervalued. While a number of our cyclical holdings have performed well recently as investors have become more optimistic about the outlook for the European economy, we continue to believe that the portfolio still has several cheap stocks that are being mispriced. In terms of valuation, the fund is trading at a significant discount to the MSCI Europe Index (on both price to book and price to earnings metrics).
Are you expecting a market correction in the medium or long term that could benefit your strategy?
In recent years, value has underperformed as investors have sought defensive ‘bond proxies’ amid uncertainty, volatility and ultra-low rates. Looking ahead, we believe the continued recovery in Europe, a reduction in uncertainty (both political and macro) and rising interest rates should be beneficial for a value approach.
How do you harness volatility episodes in your management strategy, such as the recent French elections of the future elections in Germany?
As long-term investors, we see uncertainty and the volatility it can generate as a source of opportunity rather than something to be feared. When sentiment rather than fundamentals drives markets, stocks can often become mispriced. As long-term bottom-up stockpickers we would try to take advantage of any valuation opportunities that present themselves in these situations.
Sectors and names: how are you positioning your fund now? Which sectors are you overweighting and why?
The fund’s sector allocation is an outcome of our bottom-up stock selection process rather than top-down views. Nor do we take high-conviction positions in individual stocks. The fund is limited to a 3% weight in stocks relative to the MSCI Europe Index. As a value fund, the value style is expected to be the main driver of fund performance rather than bets on particular stocks or sectors.
Having said that, we have been focusing lately on finding attractively valued opportunities that could benefit from the European recovery. We have been adding to a number of our more cyclical holdings, including Bilfinger, a German engineering and construction company, and Randstad, a Dutch recruitment firm. We have also invested in Wereldhave, a Dutch real estate company that invests in shopping centres.
At the sector level we have overweights in consumer discretionary, industrials and energy. In contrast, we have underweights in consumer staples (an area that we believe is expensive as investors have sought the perceived safety of defensives in recent years), financials and materials.
Even though we have a below-index position in materials, we have been adding to our holdings in stainless steel makers Aperam and Outokumpu, which we believe have attractive prospects given potential demand for steel.
Banking sector: many fund managers are staying on the sidelines. Are you following the same strategy or not? Why?
We have an underweight in financials which is due to an underweight in insurers – we think the current environment is difficult for them to grow their earnings.
However, we have been investing in individual banking stocks lately. For instance we have a holding in Bank of Ireland, which we believe is well positioned to benefit from the improving economic situation in Ireland. Another recent purchase holding is Erste Bank, Austria’s largest bank by market value. In our view, Erste Bank has strengthened its balance sheet recently and is arguably now well placed to benefit from stronger economic growth in Europe.
Foto cedidaEmily Leveille, courtesy photo. Nordea: "We Still Believe That the Risk Aversion Towards Emerging Markets is Too High"
The current economic fundamentals in many emerging countries, along with the perception that they involve too much risk, generate interesting opportunities for investors with a medium to long-term investment horizon according to Nordea‘s Emily Leveille. In this interview with funds society she discusses Emerging market opportunities.
Apart from valuations, which other attractions do the Emerging Markets investments currently have?
We still believe that the risk aversion towards emerging markets is too high; this is partly based on concerns over the impact on these markets of the Federal Reserve raising interest rates. In our view, however, the current economic fundamentals in many emerging markets, combined with this perception that they are too risky, creates an attractive investment opportunity for investors with a medium to longer term horizon. We acknowledge that EM in general have been performing well recently – particular in 2017 – but because of valuations, which are still at a discount to developed markets, growth rates which are higher than in developed markets, and the great companies that we can find in emerging markets, we still see an attractive long-term opportunity here.
Are all the regions cheap, or are there some cheaper than others?
We are bottom-up investors, so we don’t have strong views about the valuations of particular markets, but what I can say is that we find a lot of opportunities across regions in companies exposed to domestic development. These could be companies focused on urban consumers in India, healthcare companies in China, or education businesses in Brazil. We also find lots of innovative companies in the technology space in emerging markets, where we see that there is a lot of potential for earnings growth that is not being priced by the market.
Which are the main challenges that the emerging countries are facing? Would they be affected by FED’s monetary normalization? Mainly in Latin America?
We believe there is already a sufficiently large valuation buffer that exists between emerging markets and developed markets due to the expectation of monetary tightening in United States, such that emerging markets are able to stomach future increases in the Fed’s benchmark rate. When we look at the underlying medium to long-term economic drivers of a large number of EM countries relative to a group of DM countries – and here of course as the key benchmark the USA – and look at the 10 year yield, we see a significant risk premium already priced into EM. In particular when we look at the underlying growth and debt dynamics of EM vs DM, and how EM has improved since 2013. Of course, we cannot rule out some short-term volatility in EM, particularly if the Fed increases rates at a faster pace than the market expects, but we would argue that this would be a an opportunity for adding to the asset class.
In order to look for opportunities in the Nordea 1 – Emerging Stars Equity Fund…which are the most important criteria for you? And, following these criteria, in which region do you see more opportunities?
When we look for new investments for the Emerging Stars Fund, we look for high quality businesses that can grow their earnings sustainably for many years to come, and then we make sure that we buy them at a discount to their intrinsic value. We can find companies like this all around the world, but as an example, right now we find a lot of interesting companies in India, where you will see we have a big overweight positon. Many of the reforms implemented by the current administration have created a more favourable business environment and lowered the cost of investing, creating many new opportunities for good businesses to take advantage of.
Focusing in Latin America (where we have a lot of audience), which are the opportunities, divided by sectors or type of company, that you see? Could you give any example? Is it key to have a fundamental bottom-up focus or is the macro view important for you as well?
We see a lot of opportunities in industries like healthcare and education, particularly in Brazil, where an ageing population and rising middle class provide a tailwind for higher spending in these areas. We also still see that banking penetration is very low in many countries across the region, and the competitive environment for banks is very favourable, so we also have a positive view on banks like Banorte and Itau, for example.
With regards to the importance of macroeconomics- for us, the most important thing is to find good businesses that generate returns above their cost of capital for many years. We often find however, that there are many more investable companies in countries with stable macroeconomic environments, because it is difficult to grow a company and invest in a market which experiences a lot of economic volatility. Furthermore, when we make projections as part of our valuation work, we of course take into account projections of inflation, GDP growth, and interest rates and we can have a higher degree of confidence in these projections if there is a stable macroeconomic backdrop.
By countries, in Latin America, where do you see a more promising economic situation that can lead to the creation of investment opportunities in these markets and why?
We have been very impressed by the reforms being implemented in Argentina since the change in administration. The equity market is still very small, but with reforms in monetary and fiscal policy, we are already seeing a lot of businesses coming to the market that want to grow because the economy is growing and the political environment is more stable. In Brazil as well we are encouraged by the economic recovery, very low inflation, a consumer with less leverage, and recent reforms in the labour market and long term interest rates, though we still need to see reform to the pension system in order for us to feel comfortable with debt dynamics longer-term. Finally in Mexico we see a government and central bank committed to prudent fiscal and monetary policy and the ongoing adjustment to government spending due to falling oil production. We believe that the energy reform will be transformational to many sectors of the economy and is already creating many new investment opportunities.
In which Latin American markets is Nordea 1 – Emerging Stars Equity fund overweight?
We currently have no overweight positions in any markets in Latin America, but that is not because we do not find interesting companies in which to invest. Our process is a bottom-up, company by company analysis, and our under- and overweight positions are a result of individual companies that we find to invest in at the right price. We are invested in a concentrated group of companies that we like very much in the region, but we happen to have more investments at the moment in Asia and India primarily.
Does the region face a wave of positive changes and reforms for its equities?
Every country is so different in Latin America, from their size to the components of their economy and their politics. Though we have seen some positive and market-friendly reforms in recent years in places like Brazil, Argentina, and Mexico, I do not necessarily see these as related to some sort of general consensus in the region about a move to the right or to the left of the political or economic spectrum. Each case has been very much related to specific domestic situations.
The weakness of the dollar … how is it helping the region? Do you consider currencies when investing or covering them?
We do consider currencies in our fundamental analysis as we think about the impact of currency movements to the operating profits of our investments, but we do not try to predict currency movements and we do not cover our currency exposures from being invested in local markets. The weakness of the dollar helps certain industries and hurts others- in general, because commodity exports are a big portion of many Latin American economies, they tend to benefit from the inverse correlation between the dollar and commodity prices; furthermore, the weak dollar makes imported goods in local currency more affordable. However, a dollar that is too weak can also overly inflate the value of Latin American currencies and reduce their relative competitiveness in manufactured exports, as we saw during the financial crisis in 2008-2009, but we are not seeing these types of movements at this point.
Foto cedidaJean-Marc Routier, courtesy photo. BlackRock: "We Think The Chinese Economy Is Doing Well and Do Not See Any Worrying ‘Bubbles’ Forming Up At This Stage"
Jean-Marc Routier, Director, and Product Strategist for the Asian Equities team in the Fundamental Equity division of BlackRock‘s Active Equity Group is convinced that there are many fundamental reasons for investing in Asian equities, an asset still not well favored by investors: not only its growth surpasses the rest of the world, but the reforms are improving its quality and there are solid advances in urbanization, consumption and the services sector that can not be overlooked. Besides China, which dominates the investment universe, in this interview with Funds Society, he speaks of the attractiveness of markets such as India and Indonesia,
Are investors coming back round to Asian equities as an alternative to the high prices of the US stock market? Is Asia just an alternative or are there fundamental reasons to invest in their equity markets?
Investors are still relatively underweight Asian Equities (source EPFR). Whilst Asia would indeed be a nice alternative to other markets and a good source of diversification, investors remain cautious to allocate as they are still unsure about China and don’t yet believe in the earnings recovery story that we have been observing now for the last 18 months. We believe that Asia benefits from attractive valuations, low ownership and good fundamentals. The fundamentals reasons to invest in Asia are that growth is outpacing the rest of the world, reforms are improving the quality of growth and we are seeing strong urbanization, consumption and services sector developments.
Growth could be one of the reasons for the return to the Asian equity markets, but this growth will slow down due to China’s effect. Do you think that less growth in the future will impair returns? Or do you consider a more balanced growth as positive for the region?
We think growth in China has now normalised – in fact China has doubled its GDP growth in nominal terms from Q1 2016 to Q1 2017. We expect growth to be lower than a decade ago but we also expect the growth to be better quality (less reliant on capital investments) which we think is positive for company returns and therefore markets. Yes definitely more balanced growth is a positive for the region
Regarding China… Do you see opportunities in the framework of the country’s new growth? In what sectors? Do you opt for the old or the new economy in the BGF Asian Dragon fund?
Contribution from consumption to GDP growth has gained importance over the year and now contributing to around 2/3 of China’s GDP growth. The importance of investment component will be reduced over time. The economy transition from an investment-driven model to a consumer-led model is a multi-year process, but well-supported by urbanization, job creation (mainly driven by private sector employment due to privatization progress), strong labor market (very low unemployment rate), and wage growth. We have recently seen very strong growth in the e-commerce and internet part of the market – China has one of the world best penetration of e-commerce (15% of retail sales) and most of its population online.
How will the recently announced inclusion of China’s A-shares in the MSCI emerging markets index affect the Chinese and Asian markets?
MSCI’s A-share inclusion decision represents a significant step in opening China’s equity markets to foreign investment and to aligning the weight of China in global indices with the country’s emerging status as an economic superpower (China’s weight in MSCI ACWI is only 3% but China accounts for around 17% of world GDP in 2015 per IMF).
While A-share inclusion may lift sentiment temporarily, we believe the impact in the China onshore market will be minimal at the initial stages of inclusion. Firstly, the actual inclusion implementation will not happen until mid-2018. Secondly, incremental inflows to A-share market will be modest initially. Incremental active inflows at initial inclusion stages shall actually be minimal since active investors who took a view on A-share would have already increased exposure given the multiple market access channels already in place (including QFII and Stock Connect).
However, the long-term investor implications are likely to be far-reaching. At full inclusion, China weight (offshore and A-share equity together) can exceed 40% in MSCI EM index. Therefore as MSCI moves towards full inclusion of China A-share, China allocation will be strategically important for international investors. The entry of more institutional investors would also help drive the healthy development of China’s onshore equity markets.
To what extent could economic slowdown in China and its debt and financial issues impact the rest of Asia? Will there be firewalls or is there a real danger of these problems spreading?
While we recognize that China’s debt makes up 250% of its economy and is increasing at a rapid pace, we think concerns are overblown. The likelihood of a debt contagion is minimal as China is a close-ended economy and debt is concentrated in state-owned companies whilst consumers, private corporate and government debt is very low. But more importantly, we believe we have seen the peak in the non-performing loan cycle as reform progress in the past few years is starting to come through and many of the structural problems such as overcapacity and credit growth are starting to be addressed. Furthermore, good cyclical momentum within China as well as a pickup in global demand in developed markets may also help lift the economy.
On account of China, is there a risk that the volatility in the Asian stock markets could surge once again, as they did in 2015 or is this risk more controlled than in the past? And why?
There are always risks that situations that move on non-fundamental drivers come back to normalised levels. At the moment we think the Chinese economy is doing well and do not see any worrying ‘bubbles’ forming up at this stage.
Is the Asian equity market just China? What other regions offer decent opportunities to be taken into account? Do you like the Indian market? And other more modest markets, such as Indonesia, Philippines..?
China now makes up 35% of the Asian index (MSCI AC Asia ex Japan) and is the biggest constituent. But indeed, we see a lot of value in more peripheral markets. Specifically, we have good exposures to Indonesia at the moment as we see the economy normalising after a period of sub trend growth. We like India and have good exposure there too specifically to cyclicals and financials. We are currently cautious on the Philippines where the twin deficit is increasing
Following the strong rally which Asian equities experienced in 2016, is it still the right time to enter?
Asian equities are trading below the 40years long term average so valuations are not yet on mid-cycle levels yet. Investor ownership is low. Earnings drivers should remain positive as long as the main world economies continue to see normalising growth and we can maintain the domestic reform agenda in the region.
When investing in Asia, what is the most important thing to bear in mind, the macroeconomic aspects or the companies’ fundamentals and why? What are the characteristics that you look for in the companies which you invest in?
The Asian Equity team believes that stock prices are driven by fundamentals, liquidity and perceptions of risk. Markets frequently exhibit sharp swings of sentiment and misprice a company’s true worth. By combining fundamental research with local market knowledge and quantitative and qualitative screening and valuation techniques, we can exploit market inefficiencies. By investing over the medium to long term, we aim to invest in companies that are both relatively cheap to reasonably priced (valuation conscious), which can meet or beat market expectations.
Investing in Asia, is it better to cover currency risk or take it on? What are the current risks for Asian currencies against the dollar?
We invest with currency un-hedged as we take a view when we pick a stock that we make a deliberate call on the company, where it is listed, the sector it is in and the currency it is traded under. We do recommend investors to hedge to their local currency to avoid surprises unless they have very strong and informed views otherwise.
The times in which investing in bonds of Latin American issuers was something done only by managers of the most daring funds and/or those specialised in that region are behind us. In fact, these days practically everybody holds some LatAm fixed income investments in their portfolios.
There are several key factors typically pinpointed to justify international investors’ rising demand for bonds of Latin American issuers: the expansionary policies of the main central banks and the consequent search for returns under a global scenario of low/negative interest rates. However, we should also bear in mind other factors as well: the improvement of the region’s economies, adjustments to their trade and current account balances, a decline in inflationary pressures, company earnings growth, greater political stability, structural reforms, the rise in the number of issuers as well as the number of issuances in international markets, etc. These factors also underpin the rising presence of this region’s debt in a greater number of portfolios.
According to the Bank for International Settlements (BIS), in June 2016 the value of international debt outstanding by non-financial Latin American and Caribbean companies amounted to $406 Billion or triple the June 2010 figure. According to Dealogic’s data, in the first half of 2017 new international issues of LatAm bonds had already reached $93 Billion. With regards to LatAm’s presence in international debt markets, we would mention the stellar reappearance of Argentina in April of last year – after suffering a 15-year shutout from international debt markets – with its $16.5 Billion issue which was then followed by a $2.75 Billion centenary bond in June 2017 (initial yield of 7.9% and it was 3.5x oversubscribed). We would also highlight the fact that numerous corporate issues have been carried out in international primary markets, often (40% in 2016) accompanied by buybacks of outstanding issues: thus leading to healthier financial positions thanks to refinancing at lower rates and with longer-term maturities.
Clearly, this wave of primary issues has greatly improved the liquidity, diversity and size of the LatAm debt market. But, as some voices are saying, is this also a symptom of excessive leverage and a potential bubble? Well, based on June 2016 data compiled by Bank of America Merrill Lynch, LatAm issuers with investment grade ratings are 30% less leveraged than North American companies. As for liquidity levels, LatAm corporations are quite comparable to their North American peers.
Obviously, neither all Latin American countries nor all of their companies face similar situations and/or have identical outlooks. Opportunities arising in the region’s debt markets are certain to be diverse and changing, but can investors aiming to build solid medium-term portfolios opt to completely ignore LatAm debt? Investing in this region no longer seems to be a temporary fad. Its greater resilience may help prevent price upheavals such as we suffered in 2013 on the back of the taper tantrum caused by Bernanke. Moreover, this asset class is increasingly becoming a key element for well diversified portfolio construction.
Foto cedidaPhoto: Financial News. Yves Perrier and Amundi, Considered the Best in Europe
Amundi was the standout winner at Financial News’s 16th Asset Management Awards last night, fending off fierce competition from a strong line-up of contenders to claim three of the top awards on offer.
Europe’s largest fund house was the only asset manager to take home more than one award — no mean feat in a year where several top prize winners only just pipped their closest contenders to claim victory.
Amundi was crowned Asset Manager of the Year after a distinguished panel of industry judges deemed its €3.5bn acquisition of Pioneer Investments last year worthy of the top award.
Amundi also beat Lyxor Asset Management and AQR Capital Management, Ossiam and Tobam to take home the award for Smart Beta Manager of the Year.
Yves Perrier picked up Amundi’s third award, for Chief Executive of the Year, after judges felt much of the firm’s success in the past 12 months was driven by its senior leadership team.
The other industry personality to receive recognition was Dominic Rossi. He picked up the Chief Investment Officer of the Year award as a result of his work to bolster Fidelity International’s stance on corporate governance.
Among exchange traded fund providers, Lyxor stormed to success after beating BlackRock’s iShares division — the world’s largest ETF firm.
Emerging markets proved to be the most competitive categories this year, with Ashmore only just beating Hermes Investments to claim success.
It was also a closely fought battle for Environmental, Social and Governance Manager of the Year, with Hermes emerging the victor after managing to outshine rivals Legal & General Investment Management and Nordea.
An enviable track record for Terry Smith, who holds a concentrated portfolio of 20-30 stocks in global equities, was enough for the judges to hand Fundsmith the award for Boutique Manager of the Year.
Others continued their winning streak from last year. Insight Investment once again picked up the Liability-Driven Investment Manager of the Year award — the eighth year the asset manager has claimed victory in this category.
Edinburgh-based Baillie Gifford was the runaway winner in the Equities Manager of the Year category, with its performance alone enough to impress the judges it should be awards the top prize.
Redington held onto its prize for Investment Consultancy of the Year, demonstrating again it has the ability to fend off larger rivals Mercer, Hymans Robertson and Aon Hewitt for the top award.
Anglo-Dutch outfit Cardano continued to steamroll competition and claim top prize in the fiduciary management category — the ninth consecutive year it has won the award.
Winners of the Asset Management Awards Europe 2017:
Chief Executive Officer of the Year — Yves Perrier, Amundi
Asset Manager of the Year — Amundi
Chief Investment Officer of the Year — Dominic Rossi, Fidelity International
Investment Consultant of the Year — Redington
Index Funds/ETF Provider of the Year — Lyxor Asset Management
Fiduciary Manager of the Year — Cardano
Boutique Manager of the Year — Fundsmith
ESG Strategy of the Year — Hermes Investment Management
Equity Manager of the Year — Baillie Gifford
Fixed Income Manager of the Year — M&G Investments
Multi-Asset Manager of the Year — Nordea Asset Management
C4_0010_shutterstock_540575218. How Could Individual Investors Outperform Institutional Investors?
Portfolio management is the art and science of making decisions about mixing investment with policy, matching investments to objectives. Within Crèdit Andorrà, the Advisory team is dedicated to portfolio construction and to guiding clients on capital markets.
There are two categories of investors in the financial markets: individual investors and institutional investors. The term institutional investors refers to just what the name implies: large institutions, such as banks, insurance companies, pension funds, and mutual funds.
Institutional clients usually use a benchmark to manage their portfolios, meaning that they have to follow defined rules of asset allocation that they cannot derive too much from. Those rules are hard constraints, with a defined level of active exposure (also called tracking error) that they can implement. Those hard constraints oblige them to own assets on which they have negative views, which is highly inefficient. More constraints are usually bad for portfolio management if you are talented, as you cannot completely implement your views on capital markets. As most of the portfolios from individual investors are not benchmarked, their portfolios’ returns should on average outperform the ones from institutional clients. However, we are seeing the opposite as institutional clients outperform individual clients by 1% per year on average. We explore the reasons behind this phenomena and what could be done to reduce this performance gap.
Outperformance is less due to skills differential
One could think that this outperformance mostly comes from skills. Institutional money, which is also called “smart money”, is managed by professionals that not only have a lot of experience in managing money but also dedicate 100% of their time to this activity. On the other hand, individuals usually manage their portfolio when they have the time, mostly during weekends or at night, and they do not always have the technical background to do so.
However, most of the outperformance is not due to the difference in skills, but to basic mistakes coming from individual investors that could be easily corrected. Thanks to investment behavioural mistakes
For instance, we see patterns of investor behaviour biases that have a negative impact on portfolio returns. Most clients have a home bias, which is the natural tendency for investors to invest in large amounts in domestic markets because they are familiar with them. This results in an unnecessary concentration in assets and less portfolio diversification. In addition, many Latin clients look for assets that provide yields, as they perceive them as being less risky. This is not true, as the demand for this type of assets is high and, therefore, they end up being expensive from a valuation point of view. Finally, individuals have a bias towards loss aversion. Loss aversion refers to people’s tendency to strongly prefer avoiding losses rather than acquiring gains. As a result, investors keep assets in their portfolio with large losses for years even though those assets have very little probability of recovery.
We believe that individual investors could reduce the performance gap with institutional investors by simply focusing on three aspects of portfolio management:
#1 Focus on diversification by holding alternative assets
Everybody knows that diversification is key in portfolio management. But the reality is that few portfolios are well diversified within private banks. Many Latin American clients’ portfolios are only invested in US stocks and emerging market bonds, which is a strategy that has worked very well over the last 3 years. There are benefits to being exposed to direct names to reduce the cost of management fees; however, it is also primordial to use funds to benefit from diversification. Indeed, it is wiser to use funds in the following asset classes: high yield bonds, preferred shares, catastrophic bonds, small caps Equity, and emerging markets equities.
We believe that most portfolios should have an exposure to the alternative assets class. We define alternative assets as those assets that have a low correlation with equity and fixed income.
Those are strategies such as long/short equity, CTAs, Global Macro, Merger Arbitrage, Real Estate and Private Equity, for instance. Adding alternative assets allows portfolios to be more robust during phases of market correction; in other terms, they reduce downside risks.
#2 Focus on the right asset allocation instead of on picking securities
The second advice is to stop spending too much time on picking the right securities. What is important is asset allocation, where most of the portfolio performance will come from. A top down approach should be implemented to determine the right exposure to equity vs. fixed income, at the region level and sector level.
Indeed, what is important is not if you own Facebook instead of Google, but your exposure to technology vs. energy, as technology has been the best performing sector in the US this year and energy the worse one. Stocks within the same sector tend to be highly correlated in average.
A common mistake for individual investors is to do the opposite. They focus on trade ideas applying a bottom-up approach without taking the interconnection amongst all those ideas.
Worse, they usually cumulate all the trading ideas without having specific target returns and stop losses. If the ideas do well, they will sell it -most of the time too early. And if the ideas do not work, they will keep it until they recover their losses. This is a bad idea, as returns are auto correlated (following a negative return, an asset has a higher probability to go down than to go up).
#3 – Do not overreact by taking more risks than you can afford
Following a market correction, some individual investors start to feel nervous and prefer to sell their positions, basically selling at the worse time. This happens because they took more risks than they could afford.
The most important question investors should be able to answer is how much they can lose before they start selling their positions, basically knowing their capacity to lose investments. Once you know that the most you can lose is a 20% for instance, you can manage your risk exposure accordingly.
To manage your risk, you need to rebalance you portfolio on a regular basis. As equity usually tends to outperform fixed income, its weight in the portfolio increases over time. Rebalancing allows a reset of the portfolio to the initial portfolio weight.
Conclusion:
We saw that institutional money tends to be benchmarked, which adds constraints for portfolio management. Individuals, on the other hand, do not have all those constraints. By focusing on diversification, asset allocation, and risk tolerance, they can generate alpha and manage risks efficiently in the long term.
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