Pixabay CC0 Public Domain. Active European Equity Funds Set to Continue Outperforming U.S. Counterparts
European equity funds with conviction and strong performance could lead the way in reversing outflows in the sector caused by a combination of Brexit, stretched valuations, and weak earnings that has sent investors elsewhere, according to the latest issue of The Cerulli Edge – European Monthly Product Trends Edition.
Cerulli Associates, a global research and consulting firm, notes that active equity funds in Europe have fared considerably better than their counterparts in the United States. A study by S&P Global shows that 90% of active U.S. equity funds tracking the S&P 500 underperformed the index in the three, five, and 10 years to the end of June 2016. In contrast, 63.8% of active equity funds in Europe underperformed the S&P Europe 350 over three years.
“To put it in a more positive way, over 36% of active funds matched or beat the index. Whether it is the result of the more disparate nature of the European markets or other factors, Europe clearly has more active funds outperforming than the United States,” says Barbara Wall, Europe managing director at Cerulli.
She points to companies such as Allianz Global Investors with its sizable funds that have outperformed over one, three, five, and 10 years. “The funds’ clear sector stances, such as overweighting industrials, seem to have paid off. Some funds can achieve outperformance just by underweighting one major sector.”
The performance of the finance sector over the past couple of years serves as an example, according to Wall. “Amundi’s Europe Conservative fund has underweighted this sector, which makes up just 4.45% of the portfolio. In the three years to September 2016 the fund gained 29.5%, compared with 18.4% for the MSCI Europe, in which financials are 19.5%.”
CC-BY-SA-2.0, FlickrPhoto: Ainhoa Sanchez Sierra. Millennials Put Greater Importance on ESG Factors
The Schroders Global Investor Study 2016, which surveyed 20,000 end investors in 28 countries, found that millennials (aged 18-35) are more likely to place greater importance on Environmental, Social and Governance (ESG) factors than older investors (aged 36+). The survey found that the millennial generation ranked ESG factors as equally important as investment outcomes when considering investments decisions. The study also highlighted that global investors would hold ESG investments for an average of 2.1 years longer than their usual investments.
Millennials demand for ESG
ESG factors such as corporate governance, social responsibility and environmental impact issues, such as world poverty and climate change, were all significantly more important to millennials than to the older generations in their investment decision. Opinions between these two age groups differed the most on world-based social outcomes, like poverty and climate change, with millennials rating these highly (7.2/10) compared to older investor groups (6.4/10), on average. The study also concluded that millennials were more likely to actively pull funds from companies with poor ESG records, companies associated with weapons manufacturing/dealing or linked to repressive regimes would be the primary causes of this.
Most groups of investors are looking for good corporate governance, with the issue topping their list of ESG concerns. However, millennials again appeared to show more concern rating it an average of 7.4/10 compared to older investors rating it 7.0/10.
ESG an alternative to short-termism
The study found that global investors would stay invested in ESG investments longer than usual, with 82% indicating they would do this. Over a third (38%) said they would stay invested in companies with positive ESG philosophies for at least two years longer than they would stay invested in their usual investments.
The value of ESG
On average, global investors rated ESG issues as less important when making an investment decision, than tangible, long-term growth, which they rated 7.8/10. However, global investors still rated positive ESG factors highly at 6.9/10 on average, indicating a high degree of importance placed on both issues. Many experts would argue the two considerations are inseparable.
Jessica Ground, Global Head of Responsible Investing at Schroders, said: “The interest in ESG and corporate governance issues for investors only looks set to grow given its prevalence amongst millennials. While returns are still the most important issue, ESG’s importance to end investors means that these factors are too big for any advisor to ignore… It is important to continue to educate investors on the value and added return ESG can provide. While many policymakers are concerned about the rise of short -termism in markets, encouragingly, those surveyed said they would stay invested in ESG philosophies longer than they would in other investments. It is important that investors recognise the value of being invested for the long term and this is especially relevant when considering ESG factors. ”
For more information on the study results follow this link.
CC-BY-SA-2.0, FlickrMatteo Renzi, after the referendum. Italy Starts a Period of Uncertainty After Matteo Renzi's Defeat
On Sunday, the populist wave spreading across Europe saw a defeat in Austria after the Green Party’s Alexander Van der Bellen won 53.3% of the votes versus Hofer’s 46.4%. However, in Italy, with around 60% of voters opting for a “no”, and nearly 70% turnout, Italians firmly rejected an important Constitutional reform that would have removed power from the Senate and left the Lower House as the key legislative Chamber in Italy. The reform was one of the flagship measures of PM Renzi, who has already confirmed he will tender his resignation.
Patrice Gautry – Chief economist, Union Bancaire Privée (UBP) believes that “a period of political uncertainty is coming back on Italy, with rising difficulties to form a government coalition or to find a clear majority. No time for the government to engage new economic reforms in front of political uncertainties.”
According to Nicola Mai, Head of European Sovereign Credit Research at PIMCO the result is negative at the margin for Italian and European risk assets, for a couple of reasons:
First, the reform’s failure means that Italy has lost an opportunity to make its political system leaner and more conducive to reforms.
Second, Renzi’s resignation is likely to lead to a period of higher political uncertainty which comes in the midst of ongoing recapitalization efforts in the Italian banking sector.
However, he believes that negative market sentiment on the vote is likely to be mitigated by the fact that the market has been expecting a “no” (based on polls) and that the ECB, which will meet next Thursday remains in play in European sovereign markets. Although originally they experienced losses, shares in Italian banks have rallied this morning. “Tail risk is sentiment deteriorating significantly on Italian banks and infecting other Italian and European risk markets.” Mai points out stating that the referendum outcome makes the recapitalization of Monte dei Paschi harder to achieve, with potential negative knock-on effects on the rest of the system and in particular on Unicredit’s equity raising plans, which today announced is in exclusive talks with Amundi for the sale of Pioneer Investments.
The Amundi team considers the Italian referendum is particularly important for portfolio construction for several reasons:
The markets doubt in Italy’s ability to make the reforms needed to revitalise its economy, which is a problem in a country where the debt-to-GDP ratio is well over 100%. The referendum is merely adding uncertainty to an already complex situation;
It comes at the end of a year of political surprises that caught out some investors;
It is being held just days before two much-awaited central bank meetings (ECB and Fed), which will only add to market jitters;
The markets’ capacity to absorb heavy trading flows at the end of the year is, at best, reduced, and this is stoking fears that volatility will rise. This is particularly true as the Italian market’s interest rate futures are also used to hedge positions on other premium-based markets (the credit market, for example) when liquidity is tight.
In terms of next steps, President Mattarella will seek to facilitate the formation of a transition government, headed by a political or technocratic figure, tasked with leading through ongoing bank recapitalizations and reforming the current electoral law (which is currently inconsistent between the two Chambers). This will take some time, and elections are unlikely to be called until this is done (until mid-2017 at the earliest). The new electoral system is likely to be proportional in nature, and facilitate the formation of grand coalition governments in future.
The people “have spoken in a clear and unequivocal way… we leave with no regrets,” said Italy’s Matteo Renzi, before tendering his resignation. According to Allianz GI, Italy’s rejection of reforms and Renzi’s resignation may lead to early elections or other scenarios that could spook investors already facing a tumultuous political year in Europe. Then again, markets may have already discounted future bad news, and the ECB stands ready to step in.
CC-BY-SA-2.0, Flickr. Pioneer Investments Could Become French
UniCredit and Amundi have entered into exclusive negotiations in relation to the possible sale of the Pioneer Investments business to Amundi. In a brief joint press release, they confirmed the negotiations are ongoing without disclosing price or further details.
The french asset management group confirmed its interest in acquiring Pioneer Investments last October saying the acquisition was consistent with the growth strategy, and that if it was to be closed it would have to offer a return on investment greater than 10% over a three-year horizon. However they denied a €4bn valuation for Pioneer Investments.
Other groups that were interested in acquiring Pioneer include British Aberdeen Asset Management which decided a €3.5bn valuation was too expensive, Australian Macquarie and Spanish Banco Santander which decided last July not to merge its Asset Management Business with Pioneer.
Pioneer had over 225 billion euros in Assets Under Management as of end of September.
Pixabay CC0 Public DomainPhoto: Unsplash. Monaco Passes Law on Multi-Family Offices
The National Council of Monaco – the Monegasque Parliament – has passed a law on 29 November 2016, aiming to regulate the activity of multi-family offices in the Principality.
Amendments to the draft law put forward by the Monegasque government, allowing banks and asset managers to establish MFOs in the Principality and the ability given to MFOs to manage portfolios, were finally removed to avoid possible conflicts of interest.
Monegasque MFOs will be categorised in one of two ways: some will only focus on administration but will not be allowed to process financial transactions, while those in the second category will be able to transmit financial orders and provide financial advice to their clients.
The second type of MFOs will need both authorisation from Monegasque regulator the Commission de Contrôle des Activités Financières (CCAF) and the Monegasque government, as well as starting capital of €300,000.
Speaking to InvestmentEurope, Thierry Crovetto, the rapporteur of the law on MFOs and CEO/independent fund analyst at TC Stratégie Financière, says : “The law will spur foreign residents of Monaco to favour local MFOs rather than those of their countries of origin.
“It is estimated only 10% of the assets of Monaco’s foreign residents are currently deposited in banks established in the Principality. There is a huge potential to explore here. A few legal safeguards have been enshrined in the text. The remuneration will be that pertaining to clients only. In addition, banks and asset managers cannot be major shareholders of MFOs that will establish themselves in the Principality. We do not want to see asset managers selling their products through the setup of MFOs in Monaco,” Crovetto adds.
More to read about Monaco’s law on multi-family offices in the forthcoming December 2016/January 2017 issue of InvestmentEurope.
CC-BY-SA-2.0, FlickrPhoto: rachaelvoorhees
. AllianzGI to Acquire Sound Harbor Partners
Allianz Global Investors will acquire Sound Harbor Partners, a US private credit manager led by Michael Zupon and Dean Criares, for an undisclosed sum.
As a result of the acquisition, the Sound Harbor team will join AllianzGI. Sound Harbor is a New York-based private credit manager focused on alternative investments in corporate loans, direct lending, distressed debt and opportunistic credit. The firm manages these investments on behalf of its clients in private limited partnerships, collateralized loan obligations and separately managed accounts. Zupon is a former Partner at The Carlyle Group where he founded and led the leveraged finance business. Criares is a former Partner of The Blackstone Group where he founded and led the loan management business. The transaction is expected to close in the first quarter of 2017.
Andreas Utermann, CEO and Global CIO of AllianzGI, said: “Over the last five years, AllianzGI has invested steadily in the quality and breadth of its active investment offering. Within our fast-growing Alternatives segment, private debt stands out as a particularly exciting area, where we’ve clearly signalled our intent to expand our capabilities to address our clients’ evolving investment needs. The addition of the team from Sound Harbor is a significant step in that process, strengthening and complementing our existing capabilities in this important space.”
Deborah Zurkow, Head of Alternatives at AllianzGI, added: “We are very excited the Sound Harbor team are joining our expanding private debt platform. We continue to see strong demand from our clients for access to a diverse range of illiquid alternatives solutions. Sound Harbor’s expertise enhances AllianzGI’s existing global Alternatives capability, which includes infrastructure debt and a fast-growing corporate loans capability in Paris, underlining our desire to establish ourselves as one of the most prominent private debt managers globally.”
Commenting on behalf of Sound Harbor, Michael Zupon said: “Dean and I, along with the entire team, are looking forward to joining a leading and respected investment manager that shares Sound Harbor’s commitment to outstanding investment performance and dedication to its clients’ needs. Joining AllianzGI will enhance our ability to capitalize on trends favoring growth in alternative investment managers with scale, brand recognition and long-term capital.”
CC-BY-SA-2.0, FlickrFoto: M M . China: cautela en el futuro a corto plazo
Taiwanese and Korean insurance companies are currently the most active in overseas investments among insurers in Asia ex-Japan, but it is Chinese insurers that outsource the most assets. Cerulli Associates, a global research and consulting firm, estimates that Chinese insurers outsourced US$228.1 billion in life insurance assets in 2015, up by 38.6% over 2014 and nearly double the amount in 2011.
This is one of the key findings in Cerulli’s newly released Asian Insurance Industry 2016 report. Though most of these outsourced assets are invested domestically, more assets are expected to flow overseas as Chinese insurers see a growing need for better returns outside their domestic market to help meet their liabilities. China’s life insurers have seen their liabilities rise as they tried to compete with providers of popular wealth management products by offering policies with attractive return rates, such as universal life. Total insurance liabilities in the country stood at US$1.7 trillion in 2015, up by 44.5% from 2013.
Chinese insurers also face a growing concern over the potential impact of lower interest rates, with the People’s Bank of China‘s base rate for one-year loans now at 4.35% and its benchmark rate at 1.5%. With more than 21% of total insurance assets invested in deposits alone at end-2015, insurers derive an important portion of their investment income from the interest earnings of these investments. A fall in interest rates will inevitably have an impact on their investment income and will push insurers to deploy assets more efficiently by diversifying their sources of returns, including overseas.
This is something Cerulli has already seen happening. Looking at the Chinese insurance industry’s total investment portfolio, the proportion of assets in bank deposits declined from 27.1% in 2014 to 18.8% in June 2016. On the other hand, investments in the “others” category–which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans, and real estate–rose from 23.7% in 2014 to 34.2% in June 2016.
With the general lack of overseas investment experience and expertise among Chinese insurers, Cerulli expects many of them to work with foreign managers on offshore allocation. “There will particularly be opportunity among small and mid-sized players as they follow the lead of large insurers and rely on third parties. Unlike their larger counterparts, most of these players don’t have asset management subsidiaries in China or Hong Kong to help them with their investments,” says Manuelita Contreras, associate director at Cerulli, who led the report.
Supporting this outlook is the increasing number of insurers with regulatory approval to invest overseas. “Nine life and non-life companies received the green light to invest overseas in 2015 through the external manager route, up from only four in 2014. As of July 2016, 15 insurers have the approval to invest overseas through this route,” says Rui Ming Tay, analyst at Cerulli, who co-led the report.
“Through the Qualified Domestic Institutional Investor (QDII) scheme, some of the private insurers are expected to use their overseas investment quotas to outsource assets, potentially for global fixed-income and multi-asset strategies,” says Kangting Ye, analyst at Cerulli, who covers the Chinese insurance market. There were 40 approved QDII insurers as of June 2016.
CC-BY-SA-2.0, FlickrPhoto: Gage Skidmore. What Should Investors Make of a Trump Victory?
After a turbulent, historic election, Republican Donald Trump was elected to the US presidency and will take office in January. Republicans also swept the Senate and House of Representatives. What does it all mean for investors?
One of Trump’s biggest campaign issues was protecting US industry, which raises the potential for import tariffs. The president, whether a Democrat or a Republican, has enormous powers regarding the regulation of international trade, including the power to unilaterally impose tariffs and duties. Given that there was downward pricing pressure in the global economy prior to the election, the addition of tariffs or countervailing duties is probably a negative for S&P 500 companies since roughly 40% of their revenues are generated outside the United States. Lower revenues and profits should be expected if deglobalization becomes a centerpiece of the Trump agenda, and I think it will.
Trump has proposed very large tax cuts, and he is likely to have the support of a Republican-led legislative branch in enacting those proposals. Lower taxes could mean many things, including larger fiscal deficits if revenues fall and government spending is not cut. At the moment, there appear to be no plans for massive spending cuts. If the deficit increases, the US Department of the Treasury will need to issue more bonds to finance it, and I believe there will be a bias toward higher interest rates in such an environment.
On the campaign trail and in the presidential debates, President-elect Trump voiced his opposition to the Federal Reserve’s low interest rate policy. While the Fed is an independent central bank, Trump may choose — when her term expires in 2018 — to replace Chair Janet Yellen with someone more hawkish, which could lead to higher short-term rates down the road. Expect the regulatory burden on banks to be less onerous under a Trump administration than it would have been under Clinton.
A few final thoughts. The risk of price controls on the pharmaceutical industry has fallen dramatically with Trump’s election. Businesses broadly will likely see a reduction in government red tape. The impact of large tax cuts remains an open question. Will they lead to a sustained boost in economic growth? History doesn’t offer much evidence of this since the biggest chunk of tax cuts falls to the top 10% of earners, who tend to be savers as opposed to spenders. A lot of the tax cuts could end up in the banks as savings rather than recirculated into the Main Street economy. It’s hard to say for sure, but the outlook from here suggests a more cautious approach is warranted for both bond and equity investors as they digest the potential for a combination of tariffs and somewhat higher interest rates in the future.
CC-BY-SA-2.0, FlickrFoto: Randy Heinitz
. Changing Investor Preferences are Pressuring Hedge Funds
Hedge fund managers are feeling the pressure from changing investor demands and the managers that adapt accordingly and timely will be the most successful in achieving growth, according to the EY 2016 Global Hedge Fund and Investor Survey: Will adapting to today’s evolving demands help you stand out tomorrow?
The 10th annual survey found that hedge fund growth has slowed for a variety of reasons – the abundance of low fee passive investment options, lackluster hedge fund performance and cost concerns. In 2016, the proportion of North American investors that said they were reducing allocations to hedge funds exceeded the proportion that were increasing for the first time since the financial crisis of 2008.
Investors have more options than ever within the alternatives marketplace and are allocating funds to those managers that have a unique offering that is satisfying a specific need. Therefore, hedge fund managers must be at the forefront of actively listening to their investors to keep pace, or else be left behind, the report finds.
Michael Serota, EY Global Leader, Hedge Fund Services, says: “Growth is the industry’s top priority, but managers are changing the strategies employed to achieve it. While we find the largest managers pursuing several growth strategies, the smaller managers are more narrowly focused, seeking to expand investor bases within their home markets. Amidst today’s challenging environment, it is imperative for managers of all sizes to identify the needs of their clients and align product offerings to their demands.”
Other key findings include:
Hedge fund managers focus on asset growth to counter reduced inflows
As fee pressures increase, managers need to innovate and optimize processes to cut costs
Prime brokerages are putting pressure on hedge funds to evolve their relationships
Managers are focused on developing their talent management programs, which investors see as increasingly important
Pixabay CC0 Public DomainPhoto: Mike Bird . Passive Funds, Funds of Funds, and Team-Managed Funds, the Ones With More Women Fund Managers
Morningstar, has published a research report finding that across 56 countries, one in five funds has a female portfolio manager, and in the study’s eight-year timeframe, that ratio has not improved. The company’s second research report about fund managers and gender considered more than 26,000 fund managers, comparing the man-to-woman ratio of fund managers to other professions that require similar education, including doctors and lawyers, by country. The report also identifies areas of the industry where women have been making relative gains.
“Women are underrepresented in mutual funds’ leadership ranks globally, with larger markets farther behind smaller markets,” Laura Pavlenko Lutton, Morningstar’s director of manager research in North America, said. “We did find areas where women are finding more opportunity, specifically among passive funds, funds of funds, and team-managed funds. Larger equity firms are also more likely to promote women to fund-management roles than smaller firms.”
Key highlights of the research report include:
Countries with large financial centers have lower proportions of women fund managers than many smaller markets based on data from Morningstar’s global database. In France, Hong Kong, Israel, Singapore, and Spain, at least 20 percent of fund managers are women. Singapore is the global leader among 56 countries with women representing 30 percent of total fund managers and 29 percent of Chartered Financial Analyst (CFA) charterholders. Large financial centers, such as Brazil, India, Germany, and the United States, are behind the global average of 12.9 percent women fund managers. In India, only 7 percent of fund managers are women.
In some asset classes, women fund managers are more credentialed than men. A woman fund manager is approximately 7 percent and 4 percent more likely than a male peer to have her CFA designation among equity and fixed-income funds, respectively.
Women have better odds of running funds in areas of industry growth such as passive, funds of funds, and team-managed funds; women are 19 percent more likely to manage on a team than men. In addition, it appears difficult for women to achieve management roles in more-established parts of the fund industry, including actively managed funds and solo-managed funds. In fact, women are 36 percent less likely to manage an active equity fund than men.
The industry’s largest equity firms are more likely to name women as fund managers than smaller firms. Among funds at one of the top 10 largest firms by global equity assets under management, there are 83 percent higher odds that a woman would be named a fund manager.
