CC-BY-SA-2.0, FlickrFoto: frankieleon
. Financière de la Cité Launched a Brexit Themed Fund
French boutique Financière de la Cité has launched the FDC Brexit fund, with the aim of benefiting from the new market environment created by the imminent departure of the United Kingdom from the European Union.
The fund managed by Bruno Demontrond, which was launched on December 30th, 2016 and invests primarily in British, Swiss and Scandinavian stocks, is quoted in euros and aims to outperform the Euro Stoxx 600 index for at least the next five years. BNP Paribas acts as custodian.
The management team believes that the devaluation of the pound will facilitate a rebalancing in the UK economy that will offer new flexibility to Britain, at a time when the euro zone economy is vulnerable to deflationary policies, as well as disagreements over the management of the single currency. FDC Brexit intends to take advantage of this environment with a selection of industrial companies essentially focused on the United Kingdom and Switzerland, European countries in which economic policy and monetary policy are in the same hands.
According to Financière de la Cité, FDC Brexit will offer, in addition to exposure to Europe, through a diversified portfolio of solid companies, a theme of renationalisation of economies and trade, as well as ordinary dividends in popular currencies.
CC-BY-SA-2.0, FlickrPhoto: Chris Dlugosz. The Market Is Underpricing Inflation Risks
The actions of central banks and the search for yield were once again dominant themes for investors during 2016. Says Barry Gill, Head of Active Equities at UBS AM. He believes that the wider market’s strongly consensual views about ’lower for much longer’ have been evident in a host of crowded trades across asset classes that only began to demonstrate the first signs of vulnerability in the wake of the US election.
“Within equity markets, these crowded trades include bond proxies and structured vehicles targeting isolated risk premia factors, including lower volatility. However, we believe the quantum of capital now focused on such factors presents an asymmetric risk to investors: despite recent underperformance, low volatility stocks in the US are almost as expensive as they have ever been.” Explains Gill.
In his view, this strongly suggests any change in the ’lower for longer’ narrative could see both the realized return and realized volatility of these factor exposures differ significantly from the recent history that attracted investors in the first place.
Inflation risks underpriced
With a surprise Trump presidency focusing attention on the US, what and where are the disruptive forces which could further shake investors in US equities from their consensual thinking in the coming months? “When we look at the macroeconomic assumptions discounted in markets, the one key area where we see widespread complacency is inflation. A Trump presidency likely exacerbates those risks. ’Lower for much longer’ has become accepted wisdom – and a broad investor base is positioned aggressively in the expectation that inflationary forces have been slain.”
But, according to Gill, this view flies in the face of several data points and emerging trends. Notwithstanding the sharp move higher in oil from its February lows, with the US economy close to full employment, they see potential for a tight labor market to squeeze wages higher still.
“And while wage growth in the official US average hourly earnings statistics currently looks modest, we do not believe this is representative of cost pressures experienced by listed companies. The Atlanta Federal Reserve Bank has created a more representative wage growth gauge which is currently running at 3.3% YoY. These higher costs are highly likely to be passed on to consumers. If they are not, margins and profitability will have to bear the brunt. Neither outcome is reflected in equity prices at the time of writing.” He concludes.
Pixabay CC0 Public DomainFoto: Unsplash. Schroders Launches First High Yield Fund Using the “Value Approach”
Schroders launched the Schroder ISF Global Credit Value. The fund is one of the first of its kind and will use a value investment style to invest in the global credit universe. According to a press release, the value approach will enable the team to identify opportunities in out of favour market segments with the aim of providing investors with a high total return.
The fund will not be constrained by a benchmark, allowing the investment team the flexibility to maintain their contrarian approach and exploit opportunities in the global credit universe, consisting of bonds of corporate and financial issuers (including developed and emerging markets), convertibles and other securities.
The fund will be run by the credit team based in London, as part of Schroders’ well established global credit franchise and managed by Konstantin Leidman, Fixed Income Fund Manager, with the support of over 40 analysts around the globe.
Leidman said: “We will focus on sectors and regions that have been hit hard by negative investor sentiment and aim to identify issuers in these groups that have been undeservingly punished. They may be unloved due to some political or other bias, or simply unfashionable; overlooked or under-researched where investors are absent and valuations are very cheap. Our philosophy is based on minimising the risk of permanent capital loss and applying a large margin of safety – or discount – which means we aim to buy bonds for significantly below their intrinsic value to maximise returns and minimise losses.”
John Troiano, Global Head of Distribution at Schroders, said: “We’re delighted to be able to offer investors this innovative investment strategy. The new fund will be suitable for long-term investors seeking superior total returns and to diversify their portfolios. The value approach in global high yield corporate bonds has so far been under-utilised by the investment community, we are one of the few managers to offer such a strategy.”
CC-BY-SA-2.0, FlickrPhoto: Quinn Dombrowski. Making Sense of Misalignment
When the Centre for International Finance and Regulation (CIFR) says that “investment horizon reflects an interconnected web of influences,”1 chief among them is the relationship between asset owner (principal) and asset manager (agent). It’s a relationship where we see growing friction, largely based on the misalignment between asset owner time horizons and the delegation of investment decisions to asset managers. We touched on this misalignment in my last post, but now it’s time to be more clear about one of the root causes.
Both asset managers and asset owners play a part in this misalignment — and one of the most significant areas of confusion is the lack of clarity around full market cycles. While most active managers will state that their objective is to outperform over a full market cycle, they need to be more emphatic with asset owners up front about how much time that really entails and why they need it, especially if they state they have a long-term philosophy. They must also be clear about the fact that this is what investors are paying them to do. Asset owners need their own sense of clarity around the length of a full market cycle, because, as CIFR research acknowledges, “there is no common definition of long-term horizon that is accepted or clear.” Asset owners also need to recognize the importance of giving their active managers a full market cycle, and whether or not their own time tolerance will allow them to make that commitment.
So let’s start with clarity on the definition of a full market cycle. We see that as peak to peak or trough to trough. What history has shown us is that, on average, a full market cycle is at least 7 to 10 years, depending on the extent of any drawdowns in the market, i.e., 15% or 20%. According to our recent investor sentiment survey, and as shown in the exhibit below, more than half the institutional investors we spoke with around the globe know this. But their time tolerance does not line up. As you see in the exhibit, at least 70% of the investors we surveyed would only tolerate underperformance for three years or less.
What results from this misalignment of time horizons between investors and those managing their money is principal/agent friction. And that has potentially significant costs to institutional investors, particularly those who might be pressured to hire and fire active managers at the wrong time because their boards are focused on chasing short-term performance. In fact, as we see in the third bar of the chart, many boards are placing demands on their internal investment staff to deliver alpha in less time than the investment staff gives external managers to perform.
The trouble is, we may also be underestimating how much this misalignment is driving institutional investors into pro-cyclicality, i.e., a herd mentality. In a paper on countercyclical investing, Bradley Jones at the International Monetary Fund (IMF) points out that investors often hire active managers just after a period of outperformance, only to experience a period of subsequent underperformance based on where they are in the market cycle.3 Or after doing a tremendous amount of due diligence to hire active managers, institutional investors might be forced to replace underperforming managers, only to leave alpha on the table as these fired managers often outperform in subsequent periods. As Goyal and Wahal point out in their widely read Journal of Finance article, these hire and fire decisions can damage investor returns over time.
To avoid rotating managers at the point where active skill might matter most, institutional investors need more support to impress upon their boards the importance of a full market cycle. That is particularly critical during periods of underperformance, when an active manager’s countercyclical view can help manage future risks or find good entry points to invest. Yet today, underperformance for any period has become unacceptable. That is likely because institutional investors, who have to take on so much more risk today, may naturally react by overmeasuring short-term performance to gain a sense of control and satisfy their external constituents.
Accepting periods of underperformance, however — even three years or more — could be the price of admission for allowing active skill to work effectively. We know this is a real pain point for investors. But as Mark Baumgartner points out in his paper on shortfall risk, periodic underperformance does not necessarily reflect a lack of skill. He notes that even “Warren Buffett’s Berkshire Hathaway lagged the S&P 500 in more than one-third of rolling three-year periods in the 25 years since 1987,” which, he says, is “something to keep in mind when trying to gauge manager skill over shorter time periods.”5
Getting out of this trap starts with the clarity I’ve outlined — clarity around full market cycles, around investor time tolerance and around the need to evaluate performance over longer time periods. In fact, that clarity around time is not only the start to solving misalignment, it’s the basis of good governance. When we get right to the heart of good governance for asset owners, it really is about the time tolerance built into the partnerships they have with their asset managers, as well as within their own delegation chain. That good governance is what restores and maintains alignment and builds trust that can be maintained even through the most difficult investment periods.
We know this involves a tradeoff. Asset owners, as principals, take on more agency risk when they commit to asset managers long term. So in my next post, I’ll talk about how to manage that agency risk and get comfortable with commitment.
Carol Geremia is President of MFS Institutional Advisors.
Pixabay CC0 Public DomainPhoto: Bluesnap. And What About Best Execution in Spain?
Now that the equity market reform is behind us, the Spanish industry can refocus on other things. One of the topics that seems to take much momentum is the question of Best Execution. Not that it will create business but not addressing it could have dramatic consequences.
Last time ESMA looked into it (2015/494 Peer Review Report: Best Execution under MiFID), Spain was saved from receiving bad notes because with the very high concentration of the activity on the primary exchange (the analysis was conducted in 2013. By then the primary exchange concentrated over 80% of the market), there were no real concerns about best execution. The picture has significantly changed now with between 30 and 40% of the volume that moved away from the primary exchange to the alternative venues, so called MTFs. We need to consider a range here as there seems to be no number all stakeholders agree on, but even if we don’t agree on the numbers, the trend is very clear. Also comparing with the other European markets, Spain was exceptionally resisting the trend. This is now over and one might wonder whether Spain will not actually become the European market where the primary exchange will lose the largest market share (comparing with data provided by LiquidMetrix). Time will tell but this might happen in a not too distant future. The percentage today is only made of flows coming from international brokers. Spanish institutions are still mostly concentrated on the primary exchange. But many now seriously look at the alternative trading venues, understanding that this is an unstoppable trend that will have to be addressed.
And better earlier than later! The information that recently came out in the press that CNMV is investigating how Spanish brokers address the Best Execution requirements dictated by MiFID raises many concerns. Is the Best Execution principle being applied in Spain as it should be? Today, the concentration argument mentioned above does not apply anymore.
Beside the regulatory angle which is obviously the one Spanish financial institutions and asset managers should be the most concerned about, there is also a commercial argument which should not be underestimated. There is a clear first mover advantage and no one will want to be the last one to adapt to this new reality. There has been news recently in the press of first Spanish institutions moving in that direction and positioning themselves commercially on that ground of Best Execution capabilities, using Smart Order Routing technology to direct orders in the best interest of the investor.
The problem is that adapting quickly to this new reality is very challenging. Offering best execution over different trading venues requires some technology and more precisely a Smart Order Router (SOR). Developing one from scratch is probably the least realistic option. Buying one still represents the challenge of implementing it and feeding it with the right data to work properly. Here this is not so much about the cost of buying a license but more about implementation, maintenance and upgrading to industry or regulatory changes. Another option is to use a broker to access the alternative venues and leverage their SOR. The benefit of this option is that by using a leading broker, you will most certainly enjoy the most advanced technology but also automatically benefit from all the upgrades that broker will have to implement for their own business anyway. This solution however means that you do not access directly the alternative trading venues. Is that a problem?
Accessing directly the different alternative trading venues also present some challenges. First there is the cost of each membership and the time to implement. But more importantly, once you are a direct member of a trading venue, you have to set up a clearing solution. Do you want to become a self clearer? Is this a core business you want to invest in because it adds value to your clients? Alternatively you can look for a general clearing member to clear your activity. On this last option, the question is how much appetite is there out there for this business, particularly if it does not include the custody that you will want to keep on your Iberclear account.
Coming back to the option of using a broker to access the alternative exchanges, there is also here an issue: Spanish entities probably want to keep their membership on the primary exchange and therefore don’t want all the activity to be executed by the broker, only the transactions the SOR would send to the alternative venues.
The solution is for the broker to set up a mechanism through which it re-routes to the client’s membership the orders that the SOR will have directed to the primary exchange. Then the client can process completely that flow under their membership. The broker will only execute the orders directed to the MTFs, clear them and get them settled directly on the Iberclear account of the client.
That way, the client gets both of both worlds: it gets Best Execution, maintains its membership on the primary exchange and gets an all-in solution for the flows directed to MTFs.
This should be the fastest and cheapest option, avoiding expensive technology build and allowing to concentrate on the core business, be it brokerage, private banking or else, and focus on things that really add value to the underlying client.
In short, alternative trading venues are now a reality that cannot be ignored anymore. Regulators will increasingly monitor whether investors get the best execution service. It will become a requirement to be able to execute on the venues available, be it for regulatory reasons or simply competitive pressure. There are different ways to achieve this, some will take a lot of time and require significant financial and human resources. Others will ask for the support of brokers to get it sorted fairly quickly, allowing the client to direct their energy and resources to other tasks and add value to their own underlying clients.
It is now high time to move on that front if you want to stay in the race.
Opinion article by Benoit Dethier, Head of Sales and Relationship Financial Institutions, Citi Securities Services in Spain
CC-BY-SA-2.0, FlickrFoto: Craig Sunter. AXA IM: "Secular Stagnation is an Over-rated Concept"
Research & Investment Strategy of AXA Investment Managers team publishes its prospects for next year focusing not only in 2017, but choosing a theme and medium-term approach to examine the thesis of a secular stagnation, the normalization of economic growth and inflation. They review in turn the root causes of the lack of demand, the low productivity growth based on the absence of technical progress, the drivers of the saving gluts and the end of globalisation. Ultimately their conviction is that secular stagnation is an over-rated concept.
The global lack of demand is fading and can be addressed by an appropriate mix of monetary and fiscal policies. Monetary policy will never be the same as before the Global Financial Crisis: the extension of the tool box is there to last. Fiscal policy has to play its role where possible and this is particularly the case in the euro area, where some, but not all countries, have fiscal space.
In the medium term, the saving glut is set to resorb, while productivity will regain some strength and may even be boosted by the digital economy, especially if structural reforms provide a tailwind. They dispute the idea that technology is “everywhere but in the data” and believe the countries investing most heavily in the digital economy will benefit extensively.
Taking into account their growth estimates and modelling the term premium, AXA IM estimates that US long-term rates should return to 3.4% in the coming five years. This is certainly far from current levels, implying a multi-year normalisation that should radically affect asset allocations.
Given that previous episodes of rising rates have scarcely been smooth operations, they also take a deep dive into financial market stability analysis. The key ingredients of another financial crisis are mostly absent at the current juncture but certain elements may be a cause for concern, such as stretched fixed income valuations and constrained market liquidity.
De izquierda a derecha, Jean-Luc Hivert y Laurent Jacquier Laforge. Fotos cedidas.. La Française Reorganises its Securities Fund Management Division
Over the last five years, La Française has experienced strong growth through its expansion and through the internationalisation of its expertise, thanks to its strategic partnerships that have allowed the group to strengthen its skills.
So as to create synergies between the various group affiliates and divisions, La Française has reorganized its Securities Fund Management Division.
Accordingly, under the leadership of Pascale Auclair, Global Head of Investments, Jean-Luc Hivert and Laurent Jacquier Laforge are heading the two divisions of expertise: “Fixed Income and Cross Asset” and “Equity”, respectively.
Jean-Luc Hivert, with nineteen years of asset management experience, becomes CIO Fixed Income & Cross Asset. He is responsible for €30 billion in assets under management and heads a team of twenty-six experts. Accordingly, he is entrusted with the Group’s Cross Asset management, discretionary portfolio management and targeted management, for which Odile Camblain-Le Mollé holds operational responsibility. Jean-Luc joined La Française des Placements in 2001. As Co-Head of Bond Management, Jean-Luc innovated and contributed to the launch of the fixed maturity fund concept, one of the key differentiation factors of La Française. He holds a specialised post-graduate diploma (DESS) in Finance from Université Paris VI (1996), a MIAGE (Computer science applied to business management) degree (1995) and a MASS (Applied mathematics and social sciences) degree from Université Paris XII (1993).
Laurent Jacquier Laforge, with more than thirty years of experience, becomes CIO Equities Global. He is responsible for the entire SRI Equity range offered by La Française, small caps management and the monitoring of partnerships, such IPCM, an extra-financial research firm, Alger and JK Capital Management. For several years, La Française has been building strategic partnerships with specialised foreign management companies. As group CIO Equities Global and in the interests of investors, Laurent Jacquier Laforge will identify potential collaborations on products and research synergies. Laurent joined La Française in 2014. Since then, he has transformed the range of funds offered by La Française Inflection Point by incorporating the philosophy of Strategically Aware Investing (SAI) which includes an additional responsible dimension and was developed by IPCM, the London research firm with which the group has established a strategic partnership. Laurent Jacquier Laforge holds a DESS-DEA postgraduate degree in Economics from Université Paris X in Nanterre. Laurent is a member of the SFAF (French Financial Analysts association).
CC-BY-SA-2.0, FlickrPhoto: Elite Fuegos Artificiales
. 2016, a Good Year for Hedge Funds
Markets closed 2016 on the right foot with the way cleared from the Italian wildcard. The post-Trump election rally extended to December, benefiting DM markets globally while EM markets lagged. The upbeat tone also echoed the global agreement to scale back oil production. The surge of Brent to $56 supported the US High Yield segment.
Meanwhile, and according to Lyxor AM´s monthly barometer, the fixed income space continued to witness the great divergence in monetary policies. The Fed hiked rates by 25 bps mid-month while the ECB delivered a dovish tapering: it extended the program until end-2017 but reduced monthly purchases. Yields spread between Treasuries and German Bunds hit record highs. That led to further strengthening of the USD vs. major currencies while gold sold-off.
“In 2017, we expect less monetary accommodation, more fiscal boost and more policy ruptures to support rising rates and inflation. That would result in greater asset prices dispersion and more fundamental pricing, especially in the US where the process is more advanced. These factors would benefit Macro managers. However, the strategy is likely to remain constrained by elevated political uncertainty, prompting funds to be either overly hedged or endure volatility in their returns. We maintain a slight overweight on the strategy but we expect rising fund performance differentiation.” said Jean-Baptiste Berthon, Senior Cross-Asset strategist at Lyxor Asset Management
The risk-on environment supported hedge funds, with the Lyxor Hedge Fund Index up 1%. Global Macro delivered strong returns thanks to their long on equity markets and USD crosses. On the flip side, L/S Equity funds lagged due to the underperformance of Neutral funds.
Global Macro funds continued to gain traction and confirmed their year-end recovery. Managers benefited from the strong rally in European equities past the Italian referendum, while the depreciation of the EUR and GBP against USD added to gains. Overall, Macro funds’ positions became more homogeneous in December. Most of them bet on the reflation trade in Europe (long equities, short bonds and short EUR), while playing out rising inflation in the US and a stronger dollar (long bonds and USD, but short equities). In that regard, the divergence that took place in the fixed income space proved costly for portfolios this month. Finally, funds caught up the swift jump in energy but the sell-off in gold was detrimental.
In December, CTAs regained a meaningful chunk of the lost ground. The negative correlation between equities and bonds was supportive for models as they slashed their long fixed income allocations and re- weighted equities. Long USD vs. EUR and GBP was also a strong driver of returns. The commodity bucket remained overall mixed, but their long stance on energy paid off.
Special Situations outperformed within Event Driven, supported by the year-end rally. Sector wise, they benefited from core investments in Basic Materials, Consumer Non-Cyclicals, Financials and Technologies. Merger Arbitrage funds benefited from spread compression across a number of deals. The completion of the LinkedIn/Microsoft deal on Dec 8th paid off. In aggregate, managers closed the year cautiously exposed, with sizeable exposure to Consumer Non–Cyclicals and Technology. Heading into 2017, higher US corporate activity would foster Event Driven. Prospects of deregulation in some industries, corporate tax cut and cash repatriation would offer fresh opportunities for the strategy.
L/S Credit Arbitrage enjoyed healthy returns and closed 2016 up 5.4% with a very low volatility. Credit markets were supportive, in particular in the High Yield segment. Additionally, fixed income funds delivered healthy returns as well. Relative value investors navigated well the rising bond yield environment.
L/S Equity strategy delivered poor returns in December, but this hides disparate returns across regions and styles. On one hand, the longest biased funds continued to extend gains this month, and closed the year up 4.5%. Long books were the main source of alpha, especially within the financial sector. Some variable biased with a value-tilt recorded strong results. On the other hand, Asian and European Market Neutral funds were hardest hit by sector rotation. Overall, L/S Equity funds dramatically increased their positions towards Cyclicals vs. Defensives. They moderately increased their net exposure to equities throughout the month.
CC-BY-SA-2.0, FlickrPhoto: Pedro Ribeiro Simões
. Investor’s Attention Shifts to Passive in European Equities
Very disappointing results of active European equity fund managers in 2016 may have caused an acceleration of the shift into passive solutions, says www.fundinfo.com.
Active European equity managers got wrong-footed on sector allocation in 2016, adds the website. As ifund revealed this week, only 8% of European equity managers outperformed the MSCI Europe NR net of retail fees and just 24% did so gross of fees.
This may have caused an acceleration of the shift into passive solutions: while one year ago active European equity funds accounted for about 75% of all document views this number has most recently collapsed to 54%. This shift was most pronounced within public channels for German investors but was also remarkable for Swiss, Italian and UK investorss.
Andrew Balls, courtesy photo. PIMCO Launches Global ESG Investment Platform
PIMCO, a leading global investment management firm, has launched a dedicated Environmental, Social and Governance (ESG) investment platform globally, offering a range of fixed income solutions to investors seeking attractive returns while making a positive social impact. As part of this effort, the PIMCO GIS Global Bond ESG Fund has been launched in EMEA.
PIMCO applies a robust framework across its ESG solutions, delivering maximum impact for investors. This framework includes three key elements: exclusion, evaluation and engagement. Companies with business practices that are misaligned with sustainability principles are excluded from PIMCO’s ESG portfolios. Companies are also evaluated on their ESG credentials and those with best-in-class ESG practices are favored in these solutions. Critically, the team engages collaboratively with companies, encouraging them to improve their ESG practices and influence long term change.
The newly launched PIMCO GIS Global Bond ESG Fund invests in a range of sovereign and investment grade corporate bonds from around the world. The fund aims to maximize total return whilst favoring issuers with best-in-class ESG practices and those that are working to improve them. The fund is managed by a team led by Andrew Balls, Managing Director and CIO of Global Fixed Income and Alex Struc, Portfolio Manager co-heading the ESG initiative at PIMCO.
In addition, PIMCO has enhanced two of its socially responsible funds in the U.S. to incorporate a wider range of ESG considerations into the investment process. These funds are managed by a team led by Scott Mather, Managing Director and CIO for US Core Strategies and Alex Struc.
Andrew Balls said: “For many investors, screening out undesirable investment categories isn’t enough anymore; they want to use their investments to promote change in the world. Our ESG platform provides the tools to do that without compromising on returns.”
Alex Struc said: “Historically, this type of strategy has been pursued by equity investors but we firmly believe that engagement as a debtholder is equally important. Across the vast fixed income universe, small change can have an enormous positive impact.”
