“The Long-Term Investment Opportunity in the Energy Sector in Brazil and Mexico is Enormous”

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"La oportunidad de inversión a largo plazo en el sector energético de Brasil y México es enorme”
Paul H. Rogers, courtesy photo. “The Long-Term Investment Opportunity in the Energy Sector in Brazil and Mexico is Enormous”

The improvement in economic fundamentals, in both emerging countries and companies, gives these countries the opportunity to grow faster than developed ones, and offer more returns for investors. That’s why they remain a long-term bet, despite the latest rally in their stock markets. This is maintained by Paul H. Rogers, Manager and Analyst of Lazard Asset Management, emerging stock market expert, in this interview with Funds Society, during which he discloses the main risks and opportunities for these markets.

How do you rate the current momentum for entering the emerging market?

Emerging markets have appreciated 20% during the year and we believe that thanks to the improvement of both, country and company fundamentals, they continue to be a good long term opportunity We see how companies’ balance sheets are stronger and the balances of the countries have also improved, leaving behind those bad years experienced between 2013 and 2015. This gives emerging markets the opportunity to grow faster than developed ones.

By price, where is it currently more attractive to invest?

We have to think in general terms. Our investment process is based on the selection of companies, not countries, but the relative valuations of emerging markets versus developed markets point to discounts of 13%, with equity returns of around 25%. That is, we believe that there is a possibility of obtaining higher returns than in the developed markets.

Where in Asia: do you see more opportunities?

We are currently underweight in China, while we are overweight in South Korea and Taiwan. Asia represents 72% of the benchmark and 75% of MSCI EM benefits. That is, it’s the bulk of the emerging market. Other smaller markets, such as Indonesia or the Philippines offer investment opportunities, although they have to be evaluated. company by company.

Is China a risk to be taken into account?

We believe that China’s risk is concentrated in its high debt levels. Its debt to GDP ratio stands at 250%, while growth has begun to slow down. Nonetheless, we believe that the country will be able to manage this risk during President Xi Jimping’s five-year term by carrying out serious structural reforms.

Latin America: Do you see opportunities in this region?

In Latin America we are currently slightly overweight in Mexico and Brazil, where we see good prospects for their companies. Thanks to the improvement of macro factors and the process of stabilizing the price of raw materials, we believe that Brazil can continue to grow, and that companies’ profits should improve. In fact, if we look at the macro factors, it seems more likely that companies generate profits at current prices. We believe that the long-term investment opportunity in the energy sector in Brazil and Mexico is enormous.

Brazil: Despite the recent corruption scandals, do you think that low prices and falls should be an incentive for investment?

It is a country that for many years has demonstrated its ability to overcome political difficulties. Brazil is very attractive at these levels, although Brazil should be approached as a long-term investment.

Which are Mexico’s strengths?

Mexico is going to benefit from the economic strengthening of the US, since many companies have exposure to the American market. Its situation in NAFTA is going to mature and I think it will reach a good agreement with the USA. Both economies are likely to negotiate and improve their relationships. In Mexico, the elections will be held in 2018 and a more populist candidate could be elected. Volatility will surround the electoral process over the next year.

If you had to choose companies from other more modest markets, which markets offer the best fundamentals and prices?

No, we generally do not see great opportunities in these smaller markets, although in Chile and Colombia we see an incredible opportunity for the banking sector to expand and increase its profits.

What will be the impact of higher interest rates by the Fed on Latin American stocks?

I think the US is going to carry out a gradual increase in rates, consistent with the economic growth of the country, which will keep the dollar stable and, therefore, stability within the currency market.

Will other Latin Central Banks follow the Fed’s path?

Each central bank is very independent in its monetary policy, depending on the inflationary situation of each country. In fact, Brazil has to continue to reduce its interest rates, while Mexico is in a cycle of rate hikes.

What are the main challenges and risks for the Latin American stock market during the coming months?

The most significant risks are political, for example, in Mexico, the next presidential elections, and Brazil is pending resolution of the corruption scandals and the final decision on President Temer’s future. These events will generate short-term volatility.

The currency risk: is it better to hedge against it or to assume it when investing in the Latin American stock market?

We take the currency risk into account when investing in a company, although we do not expressly hedge the portfolio. In addition, we have invested in a significant number of companies that generate income and profits in dollars, since they have a large part of their business in the US, and this helps us to somehow hedge against exposure to local currencies.

When investing in Latin American stock market… do you also invest in European or Spanish companies with exposure to LatAm?

Not at present. We have been invested in banks with Spanish holding company and local businesses, but we prefer to invest in companies with at least 50% of their assets or their income in emerging countries

Risk Taking will Require Active Management to Control the Periods of Volatility Which May Arise

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"Si no asumes riesgo, no tendrás retorno, pero eso requerirá de una gestión activa para controlar los periodos de volatilidad”
Neil Dwane, courtesy photo. Risk Taking will Require Active Management to Control the Periods of Volatility Which May Arise

For the second half of the year, with global growth dull, and interest rates staying low for longer, Beta returns will remain low and thus clients should remain confident that active management can deliver good returns that meet the needs for income and capital gain according to Neil Dwane, Global Strategist with Allianz Global Investors, in his latest interview with Funds Society.

What is your vision/forecast for the markets in the second half of the year? Will there be volatility or will calm predominate, as in these last months?

In general we see little upside in many asset classes after a strong H1. The US equity market is now expensively valued with little dividend support and is desperate for Trump tax reform and fiscal stimulus. Also, the US is seeing dull economic growth and faces a Federal Reserve intent on raising rates.

Asia offers more growth opportunities as India and Indonesia capitalise on their modernising new Governments whilst we expect China to be stable ahead of the Party Congress in November. Longer term, Asia offers the opportunity of 4bn new consumers for whom the “American Dream” is alive and well.

Europe looks attractively valued as the political risks following Brexit fade and the new positive momentum from Macron could energise the “journey to the United States of Europe” in 2018, though actual policies seem unclear as yet. With interest rates likely to stay very low, Euro investors face the continuing conundrum of holding return-free bonds or switching into equities which offer either an attractive dividend or good industry exposure to the world’s opportunities.

“If you take no risk, you will earn no return” remains our mantra and thus taking some risk will require active management to control the periods of volatility which may arise.

What will be the main sources of uncertainty?

For many global investors, the key generator of uncertainty remains the policy directions from President Trump who may yet become trade protectionist with Asia and NAFTA and may or may not actually achieve any tax reforms which can sustain the US economy.

Geopolitics in the Middle East and other areas related to the energy sector may also continue to unnerve investors as an oil supply shock is not priced into the current price of oil. Clearly this would hurt most oil importing economies and tax global activity.

More difficult to assess, is the troubling situation with North Korea where pressure from the US and China is not yet showing any substantial progress but which could be easily inflamed by a diplomatic mistake or misinterpretation.

At geopolitical level, the negotiations of the Brexit will begin … how do you foresee that they will develop and what impact will there be on the markets, especially in Europe? Will the UK shares and the pound be the only ones harmed?

Brexit presents a period of great uncertainty, made worse by the recent result of the June UK elections. We think it very unlikely that a deal can be negotiated by 2019 and transition arrangements will be necessary. All European companies will hope that economic and business sense prevails and that the broad regulatory and trade processes used today are maintained. The UK will endure a significant period of economic uncertainty and weakness now, which may weaken Sterling further, whilst the EU may make better progress as Macron rejuvenates policy.

Both the Euro and Sterling are undervalued against the US Dollar, and we would expect Euro to strengthen from here first and further.

Also at the geopolitical level, there will be elections in September in Germany. After what happened in Holland and France, could it be said that populism has been banished in Europe or do we still have to wait?

For now it would seem that populism has peaked after the Brexit vote. However, it should still be noted that anti-EU parties received 40% of votes in recent elections and possibly, even in France, only half the electorate voted for Macron. Shorter term, Italy becomes the last fault line of significant political risk for Europe as nearly 60% currently favour anti-EU parties but at least we have until May 2018 to assess progress further. Thus, populism may slumber and awaken in the next electoral cycle if Europe’s policies do not share its wealth, growth and opportunities better.

Do you see political risks in markets like Italy or even Spain?

Italy is of concern as above. Spain seems to us to offer little political risk to Europe given its short history as a democracy and the Catalan question may be addressed through further local economic empowerment in due course.

On monetary policies: Do you see a clear distinction between the US and Europe? What do you expect from the Fed?

Yes, we have entered a period of monetary policy divergence with the ECB remaining accommodative and the Fed now raising rates and considering how to reduce its balance sheet. Financial conditions in the US remain quite loose so we expect the Fed to continue to raise rates in H2. Global monetary accommodation is peaking and the consequences for many asset classes from QE will now beginning to manifest themselves, especially in the overvaluation of sovereign bonds.

When will the ECB act? In this sense, how can monetary policies impact global equity markets and investor flows?

We expect the ECB to finish tapering QE in 2018 and to then raise rates albeit slowly in 2019, dependent on the strength of the economy then. This should support the mid-cycle economic expansion we see today.

Regulation, such as MIFID II: impact on industry and markets

We expect MIFID 2 to offer better transparency and thus better investment solutions to clients as it will force all managers and distributors / advisers to explain what services they are providing to their clients and at what costs. This could be very disruptive. It will thus force new business models and new relationships to be forged with clients but it will change the current financial services landscape. Brexit too, will shake up the industry as it remains unclear if being equivalent will mean the same as it does now for many European banks and insurers.

At the market level … what assets do you see more opportunities for the second half of the year and why?

Taking risk to earn a return, and managing client nervousness to headline shocks and uncertainty, leaves us with high conviction over the “hunt for income” where clients can find attractive levels of yield from US High Yield and Emerging Market Debt as well as European equities. With global growth dull, interest rates staying low for longer, Beta returns will remain low and thus clients should remain confident that active management can deliver good returns that meet the needs for income and capital gain.

Koesterich: There are Very Few Bargains Across Major Asset Classes. In Order to Find Value, One Must Get More Creative

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Koesterich: "Hay muy pocas gangas en las principales clases de activos y para encontrar valor uno debe volverse más creativo"
Russ Koesterich. Koesterich: There are Very Few Bargains Across Major Asset Classes. In Order to Find Value, One Must Get More Creative

It’s been over a year since Russ Koesterich, Portofolio Manager of BlackRock‘s BGF Global Allocation Fund joined the Global Allocation team. In this interview he talks about his investment process, asset allocation, the market, reflation, factor investing, volatility, and the key economic data points that his team is monitoring.

Tell us about the work that you and the team have been doing to evolve the investment process.

Since the inception of the strategy in 1989, Global Allocation has been a story of evolution as the investment opportunity set has grown, technology has improved and team resources have expanded. We have continued that evolution and made some enhancements to the investment process which we believe harness the competitive advantages of the Global Allocation platform. These include: a greater dedication of risk budget to our higher conviction ideas from our bottom-up security selectors, position sizing by the portfolio managers and the adoption of more robust portfolio optimisation tools that allow us to better calibrate our top-down asset allocation decisions.

What has not changed about Global Allocation is our mission to deliver returns competitive with global stocks, over a full market cycle, at a lower level of volatility. We also remain keenly focused on managing risk, maintaining flexibility, and being value-oriented in our investment decisions. We do, however, expect recent enhancements to allow for more deliberate risk taking in the portfolio and believe that they provide a competitive advantage relative to other multi-asset funds given our focus on both bottom-up security selection and top-down asset allocation. While it is still early days since initiating these enhancements, we are encouraged by the improvement in relative performance and in particular would note the contributions to performance that we have seen from both security selection and asset allocation.

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You talk about the ability for Global Allocation to deliver a higher breadth investment solution at a time when there are few cheap traditional asset classes. What do you mean by that?

Higher breadth refers to a portfolio that is well diversified, with lots of relatively small, uncorrelated bets. Having the opportunity to work on the BGF Global Allocation Fund with its flexible mandate and a highly experienced, fundamentally driven, multi-asset investment team was very compelling to me. It is uncommon for multi-asset funds to have both bottom- up and top-down expertise within one captive team. This depth of expertise allows for multiple ways to generate alpha relative to a standard 60/40 benchmark and allows for more differentiation versus a portfolio of all ETFs.

Looking at valuations, the challenge for many investors is that broad betas are generally expensive. That is certainly the case in developed market government bonds and US equities. In fact, US equities and US bonds have never both been as expensive at the same time as they are today. In short, there are very few bargains when looking across at major asset classes. In order to find value, one has to look a little deeper, beneath the surface of the index, and get more creative in order to isolate opportunities.
 

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This is where we can build a portfolio of more bespoke ideas. This includes the work we are doing to focus more of our risk budget on the idiosyncratic ideas derived by our fundamental investors. In addition, we have capabilities to build customised baskets of securities that seek to capitalise on a particular theme that we feel strongly about, such as dividends in emerging markets or low-volatility stocks that possess less interest rate sensitivity. The fund’s ability to utilise derivatives such as options, also allows us to move opportunistically when we identify an attractive opportunity and build an asymmetric payout into the portfolio. This was on display last summer when we bought long-dated, out-of-the-money call options on US financial stocks shortly after the UK referendum. It is flexibility like this that allows for more varied ways to generate alpha at a time when broad betas have enjoyed a phenomenal market rally.

The ‘reflation rally’ that began in mid- 2016 stalled out in the first quarter of 2017. What do you think is driving this change in asset class performance and how has the fund performed as a result?

The exact cause of the change in asset class performance is tough to pinpoint, but it is likely to be a combination of investors adjusting their views on global growth in the short-term and asset price movements. On the latter point, the asset classes most likely to benefit from a period of reflation moved a good deal from the summer of 2016 as global growth expectations improved. In many respects, it is not unusual to see these market trends reverse, even if for only a brief period, as investors seek to rebalance their portfolios. Within the BGF Global Allocation Fund, we too made a number of rebalancing decisions in Q1 in response to this change in asset prices. These included: reducing the fund’s financials weighting; adding to US dollar (USD) duration as yields backed up; reducing the fund’s USD weighting and adding to gold-related securities. These rebalancing decisions, along with a few others, have allowed the Fund to maintain a strong start to the year despite shifts in asset class leadership.

What are the key economic data points that your team is monitoring and do you believe that the world economy has shifted into a higher-growth, higher-inflation regime? How is the portfolio positioned in light of this?

While there has undoubtedly been an improvement in the global economy since early 2016, the jury is still out on whether we have shifted into a higher-growth, higher-inflation regime. Like many investors, we are very focused on the divergence between the consumer and business survey data (i.e. soft data) and the transactional data such as GDP, retail sales and things like auto sales (i.e. hard data). In short, the global economy is not performing as well as the survey data would suggest. We have seen episodes like these in the post-financial crisis era, whereby risk assets have appreciated given expectations for monetary and/or fiscal stimulus; when those expectations prove to be too optimistic or when the stimulus starts to fade, risk assets can become vulnerable to the downside. In the near-term, we need to see firmer evidence, especially in the US, that confidence is translating into activity.

Therefore, I would characterise the portfolio as still constructive on the economic outlook over the intermediate term and as a result, still constructive on equities, especially in Japan and Europe vis-à-vis the US. We have, however, made a number of small adjustments to the fund’s sector positioning, fixed income duration, gold exposure and currency positioning as potential hedges in the event that global growth expectations start to deteriorate more rapidly.

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Equity market volatility is at a historical low despite policy uncertainty and geopolitical risks increasing. How do you guard against the possibility of increases in market volatility while still pursuing your high conviction views?

This is the essence of portfolio construction and something that I think we do well and that we have been able to evolve over the past year. The possibility that equity market volatility could increase should not prevent us from pursuing our higher conviction views. Rather, it should cause us to think about what we want to own in conjunction with those higher conviction ideas in order to effectively manage our risk, both in absolute and relative terms. Unfortunately, what we see from many end investors over time is a tendency to construct a portfolio based purely on their best ideas without any thoughtful consideration to correlations and how things interrelate. The risk is that the investor ends up with a portfolio of correlated ideas at the wrong time in a market cycle.

We have the ability to look at the fund through multiple prisms, which allows us to understand not only sector or regional exposures, but also something like our factor exposures. To what extent are we more exposed to quality or momentum and how can we manage that if we believe volatility could spike? We can also look at recent asset class correlations and then change our correlation assumptions in order to stress test the portfolio under a different market regime. To what extent is gold helping to diversify equity risk today versus previous years? The answers to these questions can provide us with important insights so that we persist with our high conviction ideas, remain well diversified in the event of a change in volatility and seek to deliver a return that is competitive with global stocks over a full market cycle at a lower level of volatility.
 

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Dubreuil: “The ECB Should Lag the Fed in Hiking Interest Rates by at Least Another Year”

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Dubreuil: “El BCE se retrasará al menos un año con respecto a la Fed en comenzar su ciclo de subida de tipos”
Photo: Pascal Dubreuil, Portfolio Manager, at H2O Asset Management, an affiliate of Natixis Global Asset Management / Courtesy. Dubreuil: “The ECB Should Lag the Fed in Hiking Interest Rates by at Least Another Year”

Almost two years ago, after a long career in the asset management industry, Pascal Dubreuil joined the global fixed income and currency team, as Portfolio Manager, at H2O Asset Management, an affiliate of Natixis Global Asset Management, which specializes in Global macro management and alternative strategies of fixed income.

Since then, Dubreuil has been the main investment decision maker of the H2O Multi Aggregate fund, a flexible global fixed income fund actively embracing all debt and currency markets. It can invest globally, with a high degree of granularity, in the widest possible set of liquid fixed income securities ranging from all the investment grade securities featuring in its benchmark, the Bloomberg Barclays Global Aggregate index (BBGA), to high yield securities, issued both by governments and corporations. The currency exposure of the fund is also actively managed according to directional and relative value strategies designed to optimally translate their macroeconomic scenario into global asset allocation.

The Base Scenario in Macroeconomic Terms

According to Dubreuil, the business cycle of developed countries has further to go, as private leverage is not extended enough yet. “Within this group, the US is leading the Eurozone by one to two years, while the UK is beginning to feel the economic cost of Brexit. In contrast with most developed countries, growth in emerging countries is structurally impaired. Commodity producers (most of Latin America and the Middle East) have barely recovered from their recession and are pulled down by bloated balance sheets inherited from the past,” he said.

Furthermore, he believes that growth of manufacturing exporters, mostly from the Asian region, has fared better, but it has over-extended through an increasing and unsustainable leverage. “Growth in emerging countries is either poor in quantity or in quality. Like in the late 90s, the global business cycle is not synchronized across regions. To express these macroeconomic views in H2O Multi Aggregate, we inter alia use currencies, e.g. implementing a long USD position versus a short exposure to Asian and commodity currencies like AUD and NZD.”

Dubreuil maintains that, the excess leverage of manufactured products’ exporting countries has resulted in core inflation in the US becoming the other main macro risk. “The tightness of the US labor market should increase further as the business cycle continues. Pressure on wages and inflation should eventually recover from the recent soft patch. When it does, dollar funding would get tighter which would present a key challenge to de facto dollar-zone countries, some of which also exhibit excessive leverage (e.g. China, Northern Asia, Canada, and Australia). Fixed income markets would not perform well in this rising US core inflation scenario, but the extent depends on how prepared investors are for a rising yield environment.”

How is the portfolio positioned?

The H2O Multi Aggregate strategy’s investment process is designed to implement relative value strategies across the main Sovereign Developed debt markets in order to benefit from rising divergences in monetary policies. “We also slice and dice the H2O Multi Aggregate’s benchmark, the BBGA, and implement strategies aiming at exploiting its strengths and weaknesses. To benefit from the normalization of interest rates initiated by the Fed, we underweight the duration of the fund in the US compared to the benchmark, with a particular emphasis on the 5-year segment of the US curve, as we expect the US interest curve to continue to flatten between the 5-year and 30-year pillars,” Dubreuil commented.

He also believes that the valuation of government bonds issued by European peripheral countries compelling: “The core and the periphery are converging economically; political risk is receding, while the ECB should lag the Fed in hiking interest rates by at least another year.”

Moreover, valuations of Emerging Debt Markets are less attractive since the sharp rally they have experienced since early 2016. “China’s cyclical recovery is likely to fade out, leading to headwinds for commodities, which are key for Emerging Markets. Therefore, we have a selective allocation, focused on core value trades like Mexican local sovereign bonds, offering a high yield and a clear disinflation path ahead. We also see opportunities in frontier markets like Iraq and Zambia, both benefiting from their carry and IMF’s involvement that anchors both policies and investors’ expectations.”

As regards corporate credit exposure, the team at H20 favors subordinated bonds from European financials and non-financial issuers exhibiting strong fundamentals. “They still offer attractive credit spreads and benefit from strong technical factors as the volume of new issuance of the credit markets we favor, is expected to remain moderate in the coming months.”

To conclude, Dubreuil sums-up H2O Multi Aggregate’s directional strategies by asset class, “The fund is underweighted in duration and overweighted in credit versus the benchmark, and long USD versus other currencies. The main relative value strategies as far as rates, currencies, and credit are concerned, are respectively: underweight in US duration versus the EMU duration; long MXN vs. Asian currencies; overweight European credit vs. US credit.

Why, According to Aberdeen AM, Diversification is the Key to Creating Robust Multi-Asset Portfolios in the Long Term

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Por qué la diversificación es la clave para crear carteras multiactivo robustas a largo plazo, según Aberdeen AM
Foto cedidaSimon Fox, courtesy photo. Why, According to Aberdeen AM, Diversification is the Key to Creating Robust Multi-Asset Portfolios in the Long Term

For many years now, asset managers have been responding to financial challenges through multi-asset strategies that seek to adapt to different market contexts, and they always seek the most appropriate sources of profitability and protection for portfolios. But the current environment is different from the past, and the challenges it poses are more acute, so it’s necessary to seek more creative solutions and go beyond traditional portfolios – which move within a framework composed of 60% fixed income and 40% equities. For Simon Fox, Senior Investment Specialist at Aberdeen Asset Management, these strategies “will no longer serve to build robust portfolios in the future,” he explained in a recent interview with Funds Society.

The motives? Investors will not only have to face a much more volatile environment, (marked by short-term problems such as Brexit, and long-term, with structural problems for growth such as demography, adjustment in China or de-globalization) but will also be faced with the fact that traditional assets, such as fixed income and equities, will offer much lower returns than in the past, within a framework of lower global growth. “Investors will have to face strong short-term volatility, but there are also structural hurdles: stock markets will no longer provide returns as high as at other times in history, and bonds, which have also provided strong returns in portfolios in the last decades, have much lower yields,” he explains. And in many cases, the latter do not even offer protection. In conclusion, with the traditional mix between equities and fixed income, future returns will be reduced inexorably.

In order to deal with this situation there is no other option than to look for creative solutions. Some opt for more active management that regulates the exposure to equity and debt based on the market situation, that is, they choose to do market timing. For Fox, this solution is very difficult, because “the markets are very difficult to predict.” On the other hand, there are also professionals who, in order to navigate this environment, are opting for strategies based on the use of derivatives to boost returns and increase hedging, but which may be more complex to implement and highly dependent on the capabilities of asset managers and the success of their bets. Faced with these alternatives, Fox has no doubts and opts for diversification.

Therefore, the search for opportunities in new market segments, and research into new assets capable of enriching portfolios, is AberdeenAM’s commitment to its multi-asset flagship strategies (one focused on growth, Aberdeen Global-Multi Asset Growth Fund, and another in dividends, Aberdeen Global-Multi Asset Income Fund). The portfolios, which were traditionally positioned one-third in equities, another third in fixed income and the remaining third in diversifying assets, have evolved over time to a situation which, since the end of 2014, is much more diversified and with alternatives to those assets in which the asset managers do not see value.

For example, there is no exposure to public debt or investment-grade credit, because asset managers believe that they currently offer neither return nor hedging. Instead, these assets have been replaced by other segments of the universe of fixed income with more possibilities (emerging market debt, asset backed securities, loans, high yield…) and also with real assets. Therefore, segments such as private equity, real estate, and especially infrastructures, have gained strong positions in the portfolio, in an environment where traditional assets yield less, including equities, with positions of around 25%.

In total, the portfolios have hundreds of positions, implemented, in the case of equities. from a quantitative perspective and focused on low volatility. And it has been shown that the most diversified portfolios can provide value: they offer greater protection in case of problems and, as a result, better results than their comparable ones.

Long Term Vision

The idea of building these portfolios is not based on market timing or short-term analysis: According to Fox, their construction is based on a long-term global vision (5-10 years) carried out by a group of analysts who make forecasts with this horizon, and with whom the multi-asset management team works very closely within the management company. Therefore, the positions do not change overnight depending on the markets, but they work to find diversifying solutions that bring added value.

For example, the vision is that inflation will end up rising, but it will not do so abruptly in the coming months: hence the inclusion in the portfolio of assets such as floating rate bonds and, above all, the infrastructures to play this story of price hikes – while eliminating the risk of duration by renouncing to public debt in the portfolios.

New Assets

Creativity is key in this context, and at Aberdeen AM they point out some of the latest additions and newest strategies, or the assets with the biggest appeal to offer returns. “There are now many more opportunities than in the past,” Fox says, and that leads us to talk about not multi-assets, but multi-multi assets.

As examples in this regard, Fox points out the bonds in India with high investment grade calification (which can offer annual returns above 7% and is a market that benefits from the improvement in fundamentals – in fact, the asset management company has a fund focused on this asset-), or access to equity through a smart beta perspective (focusing on low volatility or earning income, something they apply to funds). The alternative spectrum also opens up new opportunities, such as aircraft leasing (which can offer returns of close to 10%),insurance-linked securities, or royalties on health companies, options which are available to the asset management company thanks to its global character and its size. At the moment, they do not use ETFs, although they could do so.

All of this, at a time when the traditional barriers to diversification (such as transparency, illiquidity, regulation, commissions…) are dissolving, therefore “currently, diversification is easier thanks to the size and globality gained by asset managers and by the greater exposure and access to different assets,” explains Fox.

Solutions for Retirement

These types of solutions are suitable for retirement because they offer a low risk profile and provide benefits of diversification, returns and profitability, so that demand is very strong in both Europe and Latin America, as well as in the US offshore market.

 

 

 

 

 

 

 

 

Sara Shores: Over the Long Run I Love All My Children and Factors Equally but Over the Short Run One Might be Having a Better Day

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Smart Beta is a growing strategy that according to Sara Shores, CFA, Global Head of Smart Beta at BlackRock, has captured investor’s attention and interest for three main reasons: returns, diversification and fees. In an interview with Funds Society, she also explains how they do factor investing, a strategy that accounts for over 170 billion of their assets under management and expects double digit growth.
 
Shores explains that the main reason for the strategy’s popularity is that the return environment has been getting more and more challenging with equity returns in the 5% range, as expected by BlackRock’s capital markets assumptions for the next five years which “is not enough for most investors to meet their retirement goals.” So by focusing on factors, the broad, historically persistent drivers of return, and doing so with Smart Beta vehicles, one has the potential of incremental returns, with a significant lower fee than traditional active management.
 
Regarding diversification, which has been proven elusive via traditional allocations, she mentions that most the factors they look at in equities are also present in fixed income, currencies, commodities “and that then opens up a whole new range of diversification because momentum in equity is not particularly correlated with momentum in commodities or currencies, so by investing across asset classes we can really take full advantage of the opportunity set for factor investing.” So despite having equity factor investing as the largest Smart Beta asset class and continue to “see a tremendous growth in equities there are great opportunities in other asset classes.”
 
The BlackRock executive believes that there are five persistently rewarding factors in equity markets are: Value, Quality, Size, Low Vol, and Momentum and while “over the long run I love all my children equally and I love all my factors equally but over the short run your son or your daughter might be having a better day, and it is the same for factors, so one of the things the team has been working on is to see what factors are better poised based on the current market.” They are overweight in US equity markets with Momentum, and just recently moved to an overweight in minimum volatility given US growth is strong but grow at a modestly slower pace than in recent months, which could translate into investor caution.
 
About their operation, she mentions that at BlackRock they want to marry quantitative research with a really strong economic understanding on what drives markets and what drives risk and return. “Humans are made better by data, data is made better by humans, we like data and models but we also want to rely on our intuition. Our philosophy on factor investing is to always start with the economic grounding of asking why, what is the economic justification that suggest a factor will continue to earn a return in the future and only with that economic just we go and look at the date to see if it actually works over time over a wide range of assets and geographies, so we want to inject the human judgment as well.”
 
With over 170 billion in AUM for their factor-based strategies, both the index driven smart beta strategies and the non index ‘enhanced’ factor strategies, they are always mindful of liquidity and capacity to make sure that any of their strategies don’t move the market in an unexpected way. Most of their assets are in their smart beta ETF type strategies, whose markets are so large and liquid that liquidity is generally not a problem. However, in their enhanced strategies, where they have 12.5 billion in AUM they are “very mindful of liquidity, our strategies are not of a size were we are worried of moving markets yet, but we do think of how big can we be, we manage that by making sure we don’t have too much risk deployed in any individual factor/instrument to make sure we can trade the portfolio with a reasonable liquidity should something change unexpectedly. So we keep a very watchful eye on that capacity question.” She concludes. 
 

Pioneer Investments: “Earnings Growth Will Be the Dominant Driver of Returns for European Equities”

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Pioneer Investments: “En renta variable europea la clave ahora es estar atentos a los beneficios empresariales ya que si crecen, las bolsas continuarán subiendo”
Fiona English, courtesy photo. Pioneer Investments: “Earnings Growth Will Be the Dominant Driver of Returns for European Equities"

The arrival of capital flows into European equities coincided with the reduction of political risk in the Old Continent after the first round of French presidential elections. But with the German and Italian elections on the horizon, the question is whether the fundamentals will continue to support the upturn. Fiona English, client portfolio manager at Pioneer Investments, talks with Funds Society about het outlook for European Equities.

Europe has received a big amount of inflows in the last quarter, but is it sustainable? Are the fundamentals supporting this performance?

Indeed flows coincided with the reduction in political risk following Round 1 of the French presidential Election as investors believe the chances of fragmentation within the Eurozone has subsided. That said, in reality there are 4 main drivers of European Equities which combined suggest that the performance of the European market can continue– 1) better economic growth, 2) better earnings growth 3) reduced political risk and 4)flows into the asset class

We are experiencing quite synchronized global growth at this moment and with 50% of earnings for European companies lying outside the Eurozone, this clearly provides a support to earnings potential for European companies. Within this, European GDP Growth is likely to strengthen this year with our Economists forecasting 1.8% for FY 2017. The key here is for companies to translate the more supportive economic backdrop into earnings growth and we are witnessing signs of this. In Q1 on aggregate, 46% of companies beat consensus estimates by 5% or more, while just 22% missed, pointing to the strongest quarter since the Q2 2007. 

This and the reduction in political risk within the Eurozone has given investors the confidence they needed to return to the asset class with 18bn of inflows in the last 2 months alone.

In our view, for the market trajectory to be sustainable – we need to see confirmation of earnings growth continuing as we move through Q2 and Q3 this year. 

Have investors lost the train in European equities after the rally seen in April and May?

While the rally was swift, we still believe there is more to go if earnings growth proves sustainable. The asset class remains underowned with many international investors now beginning to consider European equities “investable” again.

In fact despite the rally, European Equities have seen a slight reversal of this trend since mid-May with the market moving sidewards at best and underperforming the US market. There is probably an element of seasonality at play and the market is likely seeking another catalyst to move higher from here. We believe this will come in the form of a confirmation of further earnings growth. Any further weakness may provide a good buying opportunity as we move into the second half of the year.   

Where are you finding the most attractive opportunities and what areas are you avoiding?

Given we believe that earnings growth will be the dominant driver of returns from here and in line with our investment process, we believe the most consistent way to generate performance will be through good stock selection. We do not believe that earnings growth will happen across the market as a whole but rather you must look for the companies which have a strategic competitive advantage and the ability to capitalize on better economic trends and convert it into better earnings growth. In this environment, stock selection will be key to performance.

How have you positioned your portfolio to take advantage from the rally?

We have looked to keep quite balanced portfolios not favouring any one area of the market but looking for idiosyncratic/stock stories which we believe have the potential to deliver medium term outperformance. For example, most of our portfolios are overweight Industrials at this moment due to the number of individual compelling investment cases we find there. The sector offers a number of different business models which will benefit from the more positive macroeconomic tone but also strong companies which have a strategic advantage that allows them to translate this into earnings growth. Finally valuation is clearly always important and we look to seek the correct entry point which should allow us upside potential from a valuation standpoint.

Is it the right moment to invest in more risky assets within equity or should we be more cautious?

The key for the equity market is to see greater earnings growth – if this happens we believe the market can move higher. 

Do small-caps look attractive versus large-caps?

We see opportunities in all areas of the market. Finding value should be less focused on market capitalization but more on individual companies and their ability to deliver. 

 

 

Bright Future for Big-Cap Tech

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Un futuro prometedor para las grandes tecnologías
Pixabay CC0 Public DomainLoboStudioHamburg. Bright Future for Big-Cap Tech

Equity investors have enjoyed a solid continuation of the bull market in the first half of 2017. It is notable, though, that a handful of large-cap stocks have clearly driven the market. Journalists and analysts have been playing around with different acronyms to select and describe the current tech high-flyers. For the first time in 2013, CNBC’s “Mad Money” host Jim Cramer propagated the term FANG, which stands for Facebook, Amazon, Netflix and Google (now Alphabet). Recently, reporters included another “A” to include Apple and an “M” to include Microsoft in the acronym, sometimes replacing the Netflix’ “N”, depending whether the story’s focus is “growth” or “dominance”. 

Currently, an impressive headline is that FAAMG (Facebook, Amazon, Apple, Microsoft and Google) comprise 12% of the S&P 500 Index and have contributed 28% of the index’s year-to-date returns with a market-cap weighted combined return of 25%. If we look at the NASDAQ 100, FAAMG has accounted for more than 50% of the return in 2017. What is more, until recently, the trend has been remarkably solid with a very low volatility. However, on Friday June 9, the tech started to sell off without any fundamental reason. The following Monday morning, the NASDAQ showed a loss of 4.5% from the Friday high, driven by heavy losses of the FANG and FAAMG groups wiping out a market capitalization more than 200 billion in these six companies. Suddenly, the financial press started to draw analogies between today and the dotcom bubble. Obviously, this comparison is far-fetched. 

The most important difference is valuation. In the first months of 2000, the S&P 500 Technology Index reached a 12-month forward Price/Earnings Ratio of 60, which was more than twice the valuation of the S&P 500. Today, the tech sector is trading at a multiple of around 19, just narrowly above the market’s valuation. It is true that the valuation has gone up in the last years and the valuation is not cheap anymore, but it is certainly not in bubble territory. 

More importantly, today’s tech giants have much stronger fundamentals with solid growth prospects. They still sit on a $ 700 billion cash pile, but started to invest huge amount of cash in their infrastructures and new growth areas. Today, the FAAMG companies have leading positions in at 

least one of the most promising investment trends, such as cloud computing, artificial intelligence & machine learning, virtual reality & augmented reality and big data. They all benefit from a secular shift to online spending. For example, Amazon Web Services (AWS) accounts for more than one third of the global cloud infrastructure market generating $ 12 billion a year from nothing five years ago. This segment is expected to grow more than 15% annually. Amazon’s scale and leading IT and logistics infrastructure is highly disruptive for traditional retailers, especially as it enters the traditional bricks-and-mortar retail segment (best illustrated by the announced Whole Foods acquisition). Facebook has increased its monthly active users from 1.4 to an impressive 1.9 billion and more than doubled its revenues in the last two years. The company is ramping up its investments in research & development including video content and augmented reality, which should help to main profit growth north of 20% for several years. Alphabet has consolidated its leadership in mobile search ads and strengthened its positioning in video (YouTube), the cloud and Google Play. There might be interesting start-ups in these high-growth areas, but the difference in scale and resources compared to the leaders has never been so vast. 

So if valuations are reasonable and fundamentals strong, what has caused the mini sell-off? Most analysts are pointing to an increasing dependence of algorithmic trading. JPMorgan estimates that only 10% of US stock trading comes from traditional traders. The machines are taking over. Before the correction, the positioning in the FAAMG stocks was extreme. Fund managers were overweight and the machines were long, following the strong momentum of growth stocks. Also the untypical low volatile of these stocks attracted the machines. The trigger for the sell-off is not really clear. Many point to a cautious Goldman Sachs research report published on Friday, June 9 that might have caused some selling pressure. Once the short-term trend was broken and the volatility spoke up, the machines took over and continued liquidating positions. The good news is that the sell-off stopped after only two days and that the pressures from quantitative traders has probably played out. The bad news is that investors that want to benefit from the strong long-term prospects of these tech companies should get used to higher volatility again. But the tech leadership is most likely here to stay. 

Column by Crèdit Andorrà Financial Group’s Pascal Rohner

Investec: “With a Multi-Asset Strategy, the Investor Perceives Greater Protection”

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Investec: “Con una estrategia multiactivo, el inversor percibe que está más protegido”
Foto cedidaJustin Simler, Investment Director at Investec / Courtesy photo. Investec: “With a Multi-Asset Strategy, the Investor Perceives Greater Protection”

Multi-asset strategies continue to gain weight in response to the current market environment. For Justin Simler, Investment Director at Investec, “it has become a reality everywhere, and the reason it is commonly demanded by investors is because it offers greater profitability, taking into account the relationship between the risk assumed and the return on investment.”

Simler speaks from his experience as Investment Director with the Multi-asset team at Investec Asset Management and, therefore, responsible for the management of processes and products throughout the range. “Investing in single assets forces you to follow a single market and is an attractive option, but what happened in 2008 remains fresh in the memory of many investors. With a multi-asset strategy, however, the investor perceives protection,” he points out.

As an example of this, Simler cites the Investec Global Multi-asset Income fund, which is marketed in Spain by Capital Strategies. It is a flexible fund with a maximum in equities of 50% per prospectus, but which has never surpassed 34%. It can invest in government or corporate bonds, as well as in all countries, but maintaining a minimum of 35% in countries within the European Economic Area.

“The focus of our multi-asset strategy is different from other strategies of this type. When selecting the assets, we take into account the fundamentals, as well as their valuation and the behavior of their price in the market. And when we build the portfolio, we establish an optimal mix between growth, defensive and uncorrelated assets, with the goal of earning attractive long-term income,” Simler says about the fund.

In this respect, the three key drivers of Investec’s strategy are: “a resilient portfolio built from the bottom up, structurally diversified and actively managed, and limiting downside risks,” he adds. In growth type assets, the fund considers corporate stocks, high yield, emerging market debt and private equity, amongst others; While among defensive assets it takes positions in government bonds, investment grade bonds and indexed bonds. Regarding the search for uncorrelated assets, it focuses on sectors such as infrastructures, insurance and assets of relative value.

As Simler points out, the three investment areas that they consider are: United States, Europe, and Emerging Markets. “In equities, we are moving away from the United States, although we remain in certain sectors like the technological one, which has allowed us to make a lot of money. Even though it’s not a matter of choosing between American or European equities but rather of being very selective with the securities chosen and the exposure that is taken. In general, we believe that we must take advantage of European fragmentation to keep the best assets,” he says. The political uncertainty experienced in Europe has also made him cautious, focusing his portfolio on emerging markets and Asia.

Within emerging markets, Brazil and Australia are the countries he places the greatest emphasis on. “For example, in Brazil, government-backed bonds offer a good quality option,” he cites as an example.

Economic Environment

Although political instability seems to have calmed down and global growth continues, Simler believes we still shouldn’t let our guard down. He is particularly concerned about the probability of recession and watchful of any economic signals pointing to that possibility.

“We are in an environment where there is growth in the United States, Europe and the emerging countries. For now, we believe it is unlikely that there could be a recession in the short-term. However, there are certain risks that are beginning to grow. And of course, the political risks around the Euro zone, in particular the Italian elections and the growth of that anti-European sentiment,” he says.

“We are About to Witness a Record-Breaking Expansion Cycle in the United States”

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"Estamos a punto de asistir a un récord de ciclo expansivo en los Estados Unidos”
Foto cedidaDavid Bianco, Chief Investment Strategist para las Américas de Deutsche Asset Management. Foto cedida. “We are About to Witness a Record-Breaking Expansion Cycle in the United States”

After more than 150 days of the Trump administration, David Bianco, Chief Investment Strategist for the Americas at Deutsche Asset Management, during this interview with Funds Society, explains his perspectives on the markets, particularly on the American investor, with an optimistic look at the expansion cycle in this region.

The expert denies that stock markets are over-priced, due to the current level of interest rates, and he is confident of rises in the S&P 500 this year, especially in sectors such as technology, healthcare, and big banks. Trump’s tax reform should be a catalyst for US companies and not providing too many negative shocks, explains Bianco in this interview.

Broadly speaking, what major concerns are there currently in the US market?

What we have been discussing with other investors is that, rather than worrying about whether the market will rise by 3% or by only 1%, we should pay more attention to the expansion cycle. We are about to witness a record-breaking expansion cycle in the United States: the record until now was 10 years, from 1991 to 2001. If the cycle goes beyond the summer of 2019, we will be facing a new expansion cycle record. Forecasting is difficult, but I believe it will continue – and without recession – until at least 2020, and we could see a 12 year record of increases in the United States.

Do you believe that American stocks are overvalued?

It’s evident that we have high P/E Ratios in relation to historical values. The P/E Ratio according to last year’s profits has been 19.5 and the estimated P/E Ratio will be 18 or 18.5. Thus, the S & P 500 index has a 20% premium over its historical valuation, since in 1960 we had a P/E Ratio of 16x, reason why many consider the market is expensive based on historical standards.

But I believe it is justified, because interest rates are very low compared to historical rates and therefore stocks are still cheap when compared to interest rates and bonds. In my opinion, interest rates are the key when estimating whether the P/E Ratios are expensive or have upside: we have been expanding for eight years and interest rates remain very low in historical terms, and they remain low for structural reasons, not because the economy is weak. Thus, we are facing a secular decline in interest rates structurally that would justify these P/E Ratios.

I think interest rates will rise somewhat, but not much. I think the Federal Funds interest rate is going to rise to 2% by the end of 2018 and that the yield on the 10-year Treasury bonds will not exceed 3% during the remainder of the cycle.

What is your price target for the S&P 500?

My year-end price target for the S&P 500 is 2,400 points, but if the tax reform announced by the Trump administration takes place, I think the index could surpass 2,450 points. If it doesn’t end up happening, we would be at levels of 2,350.

What type of economic reforms do you think the Trump administration will be able to carry out?

The most important reform for the economy and markets is the corporate tax reform; I do not think they will implement the border adjustment tax. Republicans will be in haste and would want to carry out something simple and significant, and one of the most effective and simple economic measures is to lower the tax on businesses, something that the United States can afford, since tax collection through this tax is not so high and would be good for the economy, helping to consolidate the longevity of the expansion.

Who do you think would benefit more, small and medium-sized enterprises or large corporations?

The measure will consist of reducing the corporate tax rate from the current 35% to 25% with very few additional changes to the tax code. On the one hand, it would benefit small companies that are currently structured as “partnerships”, “S class companies” or “pass-through entities” that are paying tax on their profits, which, if they are doing well, would normally be around 40 % or the top marginal personal income tax rate. If we have the 25% corporate tax rate they will choose to organize as “C class” companies, and if they decide to reinvest their profits in growth and not pay dividends, they would then be deferring any dividend tax for many years and only be paying 25% tax vs near 40% now. But big companies would also benefit from this economic reform.

In what sectors do you think we will see growth during the next few years?

The sectors that have been behaving well, and which we are following, are technology and health, with technology performing particularly well, and I think they will continue to grow during the next three years. We also like big banks in both the United States and Europe.

Although many investors think more in terms of regions, I prefer to follow sectors and styles with the developed equity markets. In this respect, within “growth” securities in the United States we prefer technology and health, since there is almost no technology in Europe and health companies are cheaper in the United States than in Europe. And in Europe we like “value” stocks.

Where we are underinvested is in energy in the United States. We believe that oil must be above $ 60 in 2018 so that securities in the energy sector fairly priced where they trade today, and we think it will be difficult to see oil prices at those levels.

What about currencies?

I believe that currencies will be more stable than they have been in recent times, both the currencies of major countries and those of emerging countries. After all, currency stability opens the door to investing in other regions.

We believe that the Fed will raise interest rates twice more this year and probably two to three times more next year, and as this happens, my vision is that the Yen and the Euro will weaken somewhat. I think the Euro will be more between 1.05 and 1.10 dollars than above 1.10.

China could be interested in a slightly weaker currency in order to make its exports more attractive, but they will try to control it, since they don’t want an exodus of capital to other economies in the region.

Finally, do you consider that relations between China and the United States are going to be more hostile than in the past?

This government wants to implement a trade policy that is more active than what we have seen in recent times, with bilateral, reciprocal agreements, in which they will analyze case by case with each country to try to find opportunities to improve the trade balance. As I said earlier, I do not believe that a border adjustment tax, which is so feared for China, Mexico or Canada, will be approved.

I know that this government is very aggressive in its negotiations, but I think that what they are trying to do is to find situations with most countries where both parties win. For example, trying to have the industrial property of American products respected in exchange for not hindering imports. As long as the border adjustment tax is not passed, I am optimistic about the Trump administration, perhaps I am the only one who is.

That said, I believe that the friction between China and the US is going to be currency, rather than trade policy. It seems that the Trump administration has finally come to the conclusion that China is not manipulating the currency. Rather if they have done something, it has been to support their currency for the past two years instead of trying to make it weaker.

I think a lot of tension has been released between China and the US, and that’s why we probably hear more about tensions with Mexico or Canada. From my point of view, the relationship between China and the US is very harmonious. Another thing is the geopolitical influence, in which we are experiencing a natural transition, in which China will gradually gain influence in Asia, where the United States traditionally had it. But the business relationship with China is very important.