CC-BY-SA-2.0, FlickrPhoto: Tadson Bussey. PIMCO Launches an Absolute-Return UCITS Fund
PIMCO, a leading global investment management firm, has launched the PIMCO GIS Mortgage Opportunities Fund, which aims to generate consistent, absolute returns across full market cycles by investing in a broad range of mortgage-related securities. The fund is managed by Daniel Hyman, Alfred Murata and Josh Anderson, a global team of Portfolio Managers.
The fund provides investors with a dedicated exposure to the global mortgage-backed securities (MBS) market. Untethered by a traditional benchmark, the fund has the flexibility to tactically allocate across various subsectors of the global MBS market, and actively manage exposure to a variety of risk factors, including interest-rate risk and credit risk.
The $11 trillion securitized market represents a meaningful portion of the global fixed income market and has historically provided attractive risk-adjusted returns with limited correlations to equity and credit.
Daniel Hyman said: “Given the historically low yields on core bonds, and the correlation of corporate credit to equities, a dedicated allocation to securitized assets can help investors improve the overall diversification of their portfolios while also potentially enhancing returns.”
PIMCO is one of the largest investors in securitized assets with more than 30 years of investment experience in the asset class. The team covers the entire spectrum of mortgage related assets from around the world, seeking out the best value investment for clients.
The PIMCO GIS Mortgage Opportunities Fund is available in a variety of share classes in different currencies. As of January 30, it is registered in Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Singapore, Spain, Sweden and the UK.
CC-BY-SA-2.0, FlickrFoto: Gage Skidmore. La renta fija estadounidense sigue a la espera de Trump
As Trump continues to carry out his campaign promises and prepares to launch his stimulus plan, the Fed meets in the midst of a complicated state of affairs. The meeting will bring no surprises, especially after Janet Yellen said that the trend in wages does not guarantee that the Board which she presides will take additional measures this time.
However, several analysts agree that the market may be underestimating the expected pace of interest rate hikes. One of these analysts is Frank Dixmier, Global Head of Fixed Income for Allianz Global Investors.
“The difference between the Fed’s forecast report – known as the ‘dot plot’ – and market expectations is of particular importance. The points show the FOMC consensus expectations on three rate hikes this year and a further three in 2018. However, the market expects only four rate hikes in total over the next two years – a significant difference,” he explains.
The problem is that this gap between market expectations and the future pace of rate hikes shows that there is some fragility in US markets, “particularly given the increasing pressure from the labor market”, says Dixmier. It is in the interest of the Fed to clearly explain the pace of increases to allow markets to adjust fluently.
Eric Stein, Co Director of Global Income at Eaton Vance, admits that he was somewhat surprised when the Fed boosted its ‘dot-plot’ at the December meeting. “I had expected this to happen in March this year, when the market might have more information on the specific policies of President elect Donald Trump,” he states in the management company’s blog
“That said, I do think we could get more hawkish surprises on the dot plot in 2017. The economy was accelerating somewhat before the election, and inflation and inflation expectations had also been picking up pre-election as well. If we get regulatory reform, tax reform and infrastructure spending from the Trump administration and Congress in 2017 and the economy really gets going, then the Fed is going to hike more than investors expect.” Stein summed up.
And it’s that at this time the meetings of the Fed have a certain tone of state of war, but without open confrontation. All indications are that Trump is going to enact policies that will force the Fed to act. Similarly, the people he chooses to fill vacancies on the committee will determine to some extent the way the Fed moves. However, nothing has happened yet so everyone is waiting to receive more information.
“Much of it has to do with the appointments he will make to the Committee. If he implements some draft fiscal reforms, this should lead to higher rates, and to the strengthening of the dollar. However, a stronger dollar would not help the American producers, on whom Trump shows so much interest. If he tries to appoint candidates who are sympathetic to his political ambitions, then we might see how little he likes the independence of the central bank,” says Luke Bartholomew, fund manager at Aberdeen AM.
Markus Schomer, chief economist at PineBridge Investments, also believes that the Fed’s position is largely tied to the policies put in place by the new president of the United States. “The market’s performance in the first half of the year will depend on Trump’s projects. If he focuses on tax cuts and deregulation, the economy and markets are likely to take off. If it comes to trade restrictions and reduced health care coverage, sentiment could turn around and growth could slow down.
What if Trump puts all these policies in place at once?
The expert at Loomis, Sayles & Company, a subsidiary of Natixis GAM, agrees with the rest of analysts. “The introduction of fiscal stimulus could push inflation, prompting the Fed to tighten its monetary policy sooner than the markets are discounting,” says Gregory Hadjian, member of the firm’s macro team.
CC-BY-SA-2.0, FlickrRobert Wescott & Franceso Sandrini. Robert Wescott: “The Market is Not Evaluating the Risks Involved in Donald Trump's Policy”
Robert Wescott served as an advisor to President Bill Clinton in the late 1990s and for the last two decades has been a member of the Pioneer Investments Global Asset Allocation Committee. His long history analyzing the world economy does not preclude his surprise at the positive reaction of the markets after Donald Trump’s victory. Is it justified? During a lunch-conference with reporters in Madrid, Wescott pointed out that “the Dow Jones above 20,000 points reflects all the good news because the market expects Trump to make many economic decisions, but what are not being evaluated are the risks”.
And it is precisely the small companies that are most optimistic about the increase in spending that could further boost economic growth. “Companies’ high profits combined with more public spending are good news for the market,” said Francesco Sandrini, Head of Multi-Asset Solutions at Pioneer Investments. He says that in this sense we find ourselves in a period of transition from the so-called “secular stagnation”, “from fear of deflation to fear of inflation.”
But the risk, although not perceived yet, is there, and is mainly called China. And, according to Wescott, is not only because of the evolution of its economy, but also because of the political tensions generated by Taiwan’s diplomatic recognition. Trump’s words during his recent interview with The Wall Street Journal in which he admitted that “everything is in negotiation” are as explosive as a lit wick near a barrel of oil.
But the nature of the new president’s relationship with Russia is also a source of uncertainty. It could even be the trigger for a process of “impeachment” if it were demonstrated that “secret connections” exist. Wescott acknowledges that during his lectures in Europe, “everyone has asked me about the possibility of this process being initiated against Trump.” But the truth is that the new president, ” surrounds himself only with people who always agree with him and who flatter him “
“The Mexican wall is a symbol, there are many ways to cross that border”
Trump, who since the election campaign, has been firmly anchored in transmitting the message that everything is terrible, and identifying immigrants as terrorists “who have come to kill our women,” has as his main objective to keep America safe. However, as Wescott admits, the wall he wants to build between the US and Mexico, has been in operation since the mid-1990s when, to be precise, the Clinton administration, for which he was an advisor, authorized its construction in small areas of the border, such as San Diego or El Paso. “The wall is only symbolic, there are many ways to cross that border, but the wall symbolizes that the US does not want immigrants,” he says.
Another point of friction will be with the Republican Party itself. According to Wescott, “Republicans want little regulation, low taxes, and little spending. Trump agrees on everything except spending, and this is what can create tension.” Expenditure which will be focused on infrastructures and that will seek the support of the private sector. “Everybody looks at the big infrastructures, but there are many other microprojects that can be put in place,” says Sandrini.
On the continuity of Janet Yellen at the helm of the Fed, Wescott is very clear: “The chances of Trump holding on to Yellen are zero” and he points to Jack Welles as a possible candidate, despite his advanced age. In his final message, the expert points out what, in his view, is an “imperative for the future, we need economic growth.”
CC-BY-SA-2.0, FlickrPhoto: olnetchannel
. The Future of Monetary Policy – Normalization or New Norms?
In its new report “The Future of Monetary Policy”, the Credit Suisse Research Institute looks at the transformative changes central banks in advanced economies have undergone since 2008. The report concludes that the key issue for decision-makers globally remains to consider which fundamental direction monetary policy ought to take next, assessing two alternative scenarios that may evolve: a return to a pre-crisis “normal”, or an extension or amplification of recent policy trends, leading to a further blurring of boundaries between monetary, regulatory and fiscal mandates.
In response to the extraordinarily challenging environment in the immediate aftermath of the global financial crisis of 2008, central banks in leading advanced economies have seen their mandates broadened from fairly narrowly defined macroeconomic targets, such as price stability and employment, to include financial stability.
Moreover, to achieve their targets, central banks have adopted an ever-broader range of previously untested “unconventional” policy tools, including quantitative easing and negative interest rates. As a result, central banks have become prominent providers of assets and liquidity for sovereigns, financial institutions and shadow banks, reflected also in a manifold expansion of their balance sheets.
Oliver Adler, Head of Economic Research International Wealth Management, Credit Suisse: “Since 2008, central banks have changed their policy-making in dramatic ways, initially to prevent a major destabilization of the financial system in the immediate aftermath of the financial crisis, and thereafter to offset evolving deflation risks. The coming years will be decisive in relation to the future direction of central bank policy, depending on both economic and political developments. Even if the influencing factors are difficult to predict, we believe that the discussion of the future of monetary policy needs to be reinforced.”
CC-BY-SA-2.0, FlickrPhoto: Buvette. More than 25,000 Investment Professionals Worldwide Pass the Level I CFA Exam
CFA Institute, the global association of investment management professionals, reports that 43 percent of the 59,627 candidates that took the Chartered Financial Analyst (CFA) Level I exam in December 2016 have passed. These successful candidates now progress to Level II of the CFA Program, charting a course to build an investment profession dedicated to professional excellence. The December 2016 exam saw continued growth with an increase of 14 percent from the previous year in the number of Level I candidates tested for the CFA Program, a globally recognized, graduate level curriculum that links theory and practice with real-world investment analysis, and emphasizes the highest ethical standards.
“CFA Institute is dedicated to shaping a trustworthy investment management profession, and the CFA Program prepares candidates from around the world to have the highest level of professional knowledge within the industry to better serve investors and society at large,” said Paul Smith, CFA, president and CEO of CFA Institute. “Congratulations to this next generation of investment professionals, who have already displayed a commitment to raising standards in the industry, and are one step closer to becoming CFA charterholders.”
To earn the CFA charter, candidates must pass all three levels of exam (successful candidates often report dedicating in excess of 300 hours of study per level); meet the work experience requirements of four years in the investment industry; sign a commitment to abide by the CFA Institute Code of Ethics and Standards of Professional Conduct; apply to a CFA Institute society; and become a member of CFA Institute.
The CFA Program curriculum develops knowledge and competencies that investment professionals deem necessary in today’s ever changing marketplace. It covers ethical and professional standards, securities analysis and valuation, international financial statement analysis, quantitative methods, economics, corporate finance, portfolio management, wealth management and portfolio analysis. Level I exams are offered in both June and December and Levels II and III are offered only in June. It takes most candidates more than three years to complete the CFA Program, and requires dedication and determination.
The December 2016 Level I exam was administered in 104 test centers in 72 cities across 40 countries worldwide. Examples of countries and territories with the largest number of candidates that took the Level I CFA exam last December are Mainland China (14,181), the United States (12,187), India (6,357), Canada (4,210), United Kingdom (3,790), Hong Kong (2,210), Singapore (1,577), South Africa (1,327), and United Arab Emirates (1,207).
CC-BY-SA-2.0, FlickrPhoto: Alonis. Decision Drivers: Stock Prices Versus GDP
Does the prospect of a rapidly growing economy mean that a country’s equity market will follow a similar upward path? Or conversely, will a country’s weak economic prospects weigh on its equity market returns? Not necessarily, though many investors tend to see gross domestic product (GDP) as an indicator of the direction of stock prices. It’s a common misperception. But in reality, there is little correlation between the two. And that’s an important point, because understanding the true drivers of stock prices can help investors uncover opportunities, avoid pitfalls and set more realistic return expectations.
Why the misperception?
In their search for return, particularly as the markets grow more complex, investors often anchor their analysis to the wrong data point. In this case, they believe economic activity has some predictive value in forecasting the direction of stock prices.
But taking a closer look at the components of GDP tells us more about consumer, business and government spending and very little about individual company valuations or the forces behind them.
What’s important to recognize is that two-thirds of GDP is based on consumer spending. Since that’s generally true of most economies, GDP is essentially just a proxy for population growth and consumer spending. Equity prices, on the other hand, are a discounting mechanism of a company’s value, which is its steady state value (the value of the enterprise) plus its future cash flows. Historically, we’ve seen very little correlation between the two, as we see in the chart below.
What does that mean in terms of setting expectations for equity returns? First, GDP doesn’t have to be growing at what most would consider a normal rate in order for investors to find adequate returns in the stock market, nor does a booming economy translate into higher stock returns.
What drives stock prices?
So if GDP doesn’t shed much light on stock prices, where should investors look for signals? In a word, profits (or earnings). If you think about the simplest formula for equity valuation, it’s price/earnings. Investors utilize trailing P/E ratios, which reflect historical earnings versus today’s stock price, or forecasted P/Es, which compare 12-month consensus earnings expectations to today’s price. Either way, most importantly, earnings, or profits, typically carry a lot of weight in driving stock prices.
Over time, the equity-market multiple has been roughly 15 times earnings. Outside extreme valuation periods, or bubbles, such as in the late 1990s, when the S&P 500 Index multiple reached an all-time high of approximately 26 times earnings, what matters most among the components of stock prices is their profits.
Considering profits and prices
Here is some historical evidence. When we look back at companies that have made money (red line in the chart) versus those that haven’t (yellow line in the chart), we see those with profits outperforming those that lose money, which isn’t surprising. But the magnitude of outperformance is significant. Over the past 20 years companies that were profitable were up more than 650% (cumulative), while unprofitable ones were down 23%.
The ability to see the potential for future profitability (or lack thereof) ahead of what the market has discounted is an active manager’s most critical skill. An important part of that is to understand where a company’s product or service is in its life cycle (see Exhibit 3 below), as this can help estimate future cash flows. Will a company be a price taker, because there is little competition and high demand, or a price giver, because its value proposition is no longer unique?
The point is that investors need to think carefully about the data points they use to make decisions. The importance of differentiating between what is noise and what are meaningful fundamental signals has probably never been greater. That’s a challenge for many, because while technology has made information readily accessible, it also tempts investors to act on false triggers. Today’s world of instant information gives investors the opportunity to exercise an age old behavioral bias: buying at maximum enthusiasm and selling at maximum pain, which often leads to punitive outcomes. Understanding the value of individual companies over the long term isn’t about the current level of federal funds, the growth rate of the economy or the upcoming US presidential election. Rather, fundamentals drive cash flow, cash flow drives profits, and profits drive stock prices.
Pixabay CC0 Public DomainFoto: sasint. Harvard University's Endowment to Lay Off Over 100 People
Harvard Management Company (HMC), in charge of Harvard University’s endowment and related financial assets since 1974, announced on Wednesday the addition of Rick Slocum as chief investment officer, effective in March 2017, and three managing directors to its investment team. Each will report to chief executive officer N.P. Narvekar, who was appointed president and chief executive officer of HMC back in September and assumed his role on December 5, 2016.
“I am pleased to welcome four senior investors to HMC who bring substantial investment expertise and deep insight into building and working in a generalist investment model and partnership culture. I have known these individuals both personally and professionally for the majority of my career and I value their insights and perspectives,” said Narvekar. “I am confident they will be a great addition to the talented and experienced investment team here at HMC.”
The new hires will play a key role in helping HMC transition from an asset class-specialization approach to a generalist investment model and help support a strategy of further deepening HMC’s relationships with a select group of external managers, which will translate into an overhaul of HMC that could include the lay off of roughly half of their 230 employees.
Harvard University’s endowment is the largest academic endowment in the world.
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.”
