Jason Brady (Thornburg IM): “Our Success is Predicated on a Commitment to the Tools, People, Solutions and Processes that Work”

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Jason Brady has been Thornburg Investment Management’s CEO since 2016. Funds Society interviews him to talk about Thornburg’s development, its business plan, how the Covid-19 crisis has been managed on behalf of their clients and employees and about its funds range, of course.  

In the past years we have seen a rash of realignment in the asset management industry due to regulation (MiFID) and the low rate environment. Covid-19 has acted as a new catalyst, and thus we have recently seen a lot of restructuring. What is the right size for a business in the global asset management industry and why? What growth plans has Thornburg for the medium to long term?

Jason Brady: This is a very important question for a medium-sized manager like Thornburg. Several years ago, many industry observers recommended an entry into the passive business and a myopic focus on scale, with success measured simply in terms of AUM. We believed then, and continue to demonstrate, that a deliberate and differentiated approach to adding value for clients through active management is the right way to catalyze growth and central to our identity as a firm. I believe that by conflating AUM with success, many asset management firms neglect to serve their clients well, and worse, lose their identities in the process. There’s no denying that economies of scale attract attention, but I see a dramatic shift in the execution of achieving scale.

Thornburg is firing on all cylinders. During the Covid-19 pandemic, we prioritized our employees’ health and wellbeing; inflows into our strategies are leading the industry; and we are delivering on the promise of active management for our clients. Our success is predicated on a commitment to the tools, people, solutions and processes that work. We have also made major investments for long-term success in risk management, ESG integration, geographic expansion and our platform of strategies. Charting a course in a deliberate manner has been our approach for the past 40 years and will guide our legacy for the next four decades.

Thornburg has currently six UCITS products that provide a diversified exposure to the global listed security landscape. Which products are currently experiencing more demand from clients? Do you plan to introduce new UCITS strategies any time soon?

At Thornburg, we aim to uncover the best risk/return opportunities across global equity and fixed income markets. Our range of choices for investors, including our six UCITS funds, reflects our deep, longstanding, and ongoing commitment to advisors and institutions around the world.

It’s no surprise that changing market environments have prompted a realignment of investor preferences. As our clients’ investment objectives evolve, we seek to tailor appropriate solutions to meet their needs. For example, in 2020 as investors sought safety, we observed enormous demand for fixed income strategies across the yield spectrum. The quality and value of our investment process have often helped us see around corners, and despite the crisis, our actions fueled steady outperformance. As a result, investor interest and inflows followed. 

Today, with hopefully the worst of the crisis behind us, investors are increasing their equity allocations. Correspondingly, investor demand for our global equity, emerging market and multi-asset strategies has taken off in recent months.

Creating a new investment strategy is deliberate, and there’s no need to break speed records. In fact, in our nearly 40 years as a company, Thornburg has incepted 20 investment strategies, most of them organically. The process to explore new strategy offerings predominately rests with a product management committee. Three tenets guide development:

  1. New portfolios fit with our investment process. Strategies should benefit from our investment approach look across asset class, sector and geographic silos. This tends to mean that we are less interested in niche strategies.
  2. New portfolios complement the products and capabilities of the firm, such that the whole continues to be greater than the sum of the parts.
  3. New portfolios have long potential lives. They should serve the needs of our clients today and into the future.

Let’s talk about your leadership at Thornburg. What lessons have you learned by leading the company in the past few years?

I never stop learning. Throughout my life and career, including as CEO, I constantly take lessons away from client meetings and uncover new ideas from the Thornburg team.

No greater example of listening to clients and colleagues is in weathering the Covid-19 crisis. The cornerstone of Thornburg’s success is our collaborative, team-based approach. The pandemic reinforced the importance of employee health and safety. Every decision—from curbing non-essential business travel to remote work to in-office protocols—was born with continual input from our teams and even conversations with clients. A crisis often forces leadership to move quickly, so feedback was crucial to make an effective transition to a remote work environment, and it will be equally as vital as we return in greater numbers and frequency to the office.

Turning the clock back to my first couple of years as CEO, I worried that the industry, client needs, and markets outpaced Thornburg’s growth and evolution. I shifted the team into high gear and prioritized technology, ESG, risk management, and geographic diversity of our business. To my delight, we quickly jumped to light speed and today, our accomplishments across all of these areas are noteworthy. As the fog lifts on the Covid-19 crisis, investors see that Thornburg has jockeyed ahead of competitors while simultaneously remaining steadfast to our brand identity. Rooted in our energizing success is an iterative, always-questioning-always-learning philosophy.

In addition to being a CEO, you are a fixed income PM.  What’s the future of FI as an asset class and where does it belong in a portfolio?  Are you more in the 60/40 camp or the Buffet 90/10?

The central challenge for many investors has been the search for income without sparking a surge in volatility. I believe that after 40 years of ever-declining interest rates, bonds will play a different role in portfolios going forward. In previous market downturns, particularly over the last several decades, high-quality fixed income softened the landing while providing some modest—and dependable—real returns. Today, the real return on much of the fixed income universe is negative, and we’re seeing the insurance effect when bonds go up when stocks go down, get more complicated. In fact, on several occasions, the dominant growth equity stories in the market have been highly correlated with rates.

While many investors reconsider 60/40, I don’t think that 90/10 is appropriate for most portfolios. We should still depend on fixed income to help manage volatility. Moreover, a greater breadth of fixed income securities beyond the staple U.S. Treasurys provides an opportunity to deepen the diversification of the allocation.

More and more funds are being managed according to ESG principles What kind of changes are taking place at TIM to embrace improvements in environmental, social and governance practices in the business?

This is one of my favorite questions. At Thornburg, we are integrating ESG factors into the investment process for all of our strategies.

What investors often observe about ESG is that it’s is treated as a theme. However, our investment team looks at ESG considerations from a fundamental perspective. These factors are valuable, so we believe they should reside alongside other valuable factors that are going to impact our decision to invest or not invest in a security, have the right sell discipline, or have a stewardship plan.

The ESG integration journey started with a 2009 LEED Gold certification of our Santa Fe headquarters, and our more recent diversity, equity, and inclusion initiatives. ESG also extends to our governance, namely with a majority independent board of directors, including recent appointees Julia Sze, CFA, and Blair Naylor. So, when it comes to ensuring all members of our 40-person investment team are on board with the ESG integration journey, a strong, existing foundation propels the process forward in an organic manner. Obviously, integration within our strategies takes shape differently in equity portfolios than in fixed income—and even within the taxable and non-taxable strategies—but a culture in which every portfolio manager and analyst is able to challenge one another and contribute to each other’s deliberations produces balanced portfolios with stronger client outcomes.

 

Important Information

 

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

 

This is not a solicitation or offer for any product or service. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein.

 

Investments carry risks, including possible loss of principal.

 

Outside the United States

 

This is directed to INVESTMENT PROFESSIONALS AND INSTITUTIONAL INVESTORS ONLY and is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to the laws or regulations applicable to their place of citizenship, domicile or residence.

 

Thornburg is regulated by the U.S. Securities and Exchange Commission under U.S. laws which may differ materially from laws in other jurisdictions. Any entity or person forwarding this to other parties takes full responsibility for ensuring compliance with applicable securities laws in connection with its distribution.

 

Please see our glossary for a definition of terms.

 

For more information, please visit www.thornburg.com

 

Snowden Lane Partners Expands its International Wealth Presence with the OSM Group

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Foto cedidaJorge Silva, Jessy S. Mogro, Joe Olivera y Ana Paula P. O'Keefe. THE OSM Group

Snowden Lane Partners, an independent wealth advisory firm, has announced the launch of a new advisory team based in their New York City headquarters: the Oliveira, Silva & Mogro (OSM) Group, whose members join from Wells Fargo.

This new team, the sixth one to join Snowden Lane this year, is composed by Joe Oliveira, Jorge Silva and Jessy Mogro as Partners and Managing Directors; and Ana Paula O’Keefe as Senior Registered Client Relationship Manager. They will oversee 212 million dollars in client assets.

Rob Mooney, CEO of Snowden Lane Partners, claimed to be “delighted” to welcome the group. “They care deeply about their clients and they’ve created a tight-knit team that really works well together. It’s no surprise they’ve become such a successful and high-performing group, and we look forward to watching them grow”, he added.

The team specializes in customized wealth management solutions and financial planning for their clients residing predominantly in Brazil, Mexico, Argentina, Colombia, Venezuela and Europe, as well as in the U.S. OSM tailors a customer-centric and fiduciary approach to each of their clients’ needs and financial goals, with client satisfaction and trust at the center, says their webpage. 

“The universe of wealth advisors has grown dramatically over the last few years, but as we took a look at the firms out there and analyzed which platforms offered the best home for our clients, Snowden Lane really stood out,” commented Oliveira.

The team

The firm has 112 total employees, 62 of whom are financial advisors, across 12 offices around the country. Since its founding in 2011, it has attracted top industry talent from Morgan Stanley, Merrill Lynch, UBS, JP Morgan, Raymond James, and Wells Fargo, among others. 

Oliveira is a 21 year veteran of the financial industry, who obtained his Series 7 and Series 66 licenses at Paine Webber/UBS. He then continued his career in finance at JP Morgan, focusing on domestic and non-resident wealth management. As an International Financial Advisor, Joe traveled extensively to Latin America and Europe and developed strong knowledge of the international markets and the specific needs of the non-resident clients. Most recently, Joe served as a Vice President, Senior Financial Advisor at Wells Fargo Advisors where he continued to develop his skills.

Silva began his career in financial services in 1994 with Pacific Life Insurance Company in California. He serviced and marketed their suite of variable annuities to financial advisors located in the southeast and Florida. He obtained the required licensing with the series 7 & 63. Over the past 27 years he has gained extensive knowledge and experience of capital markets, banking and wealth management. Silva has dedicated the last 14 years to advising individual clients, families and businesses in accumulating and managing wealth. Since 2018, he was a Private Client Advisor in the New York office of Wells Fargo Advisors and prior to that, he was with JP Morgan Securities in their International Financial Services division since 2009. He began his financial advising career with Merrill Lynch through their Paths of Achievement training program.

Mogro has over three decades of experience in the financial service industry specializing in wealth management to high net worth international clients. Prior to joining Snowden Lane Partners, she was a Private Wealth Financial Advisor at the International Private Client Service Group at Wells Fargo Advisors in New York, catering to domestic and international clients mainly in Latin America and Europe, where she provided high-net-worth clients with strategic long-term investment guidance. She began her career in 1990 at JPMorgan Chase Bank, formerly Chemical Bank, in the International Private Banking and in the Retail Group. She gained extensive experience in sales where she held several positions. After 15 years, she transitioned to brokerage services and became a financial advisor.

Pinto-O’Keefe has over 20 years in the industry. She started at JP Morgan in 1997 as Client Advisor Assistant and Analyst, then moved on to UBS, Unique Associated, until she returned to JP Morgan in 2014 as Investment Associate of International Financial Services. She held this position until 2018, when she joined Wells Fargo.

Gaurav Saroliya and Joe Pak Join the Allianz GI Macro Fixed Income Team

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Foto cedidaDe izquierda a derecha, Gaurav Saroliya y Joe Pak, nuevos gestores de fondos en el equipo de renta fija macro de Allianz GI. . Gaurav Saroliya y Joe Pak se unen al equipo de renta fija macro de Allianz GI

Allianz Global Investors has expanded its Macro Unconstrained Fixed Income team, which manages assets of 8.7 billion dollars across four strategies, with two new Portfolio Managers: Gaurav Saroliya and Joe Pak.

In a press release, the asset manager explained that their appointments will be effective in July and August, respectively. Both new joiners will be based in London, alongside team head Mike Riddell and Associate Portfolio Managers Jack Norris and Daniel Schmidt. Besides, Allianz GI has anticipated that the Macro Unconstrained team is set to announce the hire of one additional experienced macro portfolio manager in the coming weeks.

“With Gaurav and Joe joining the team, we can set the direction for further growth. Both bring in a rich experience in macro-driven investing and add to the broad and very diverse skill set in our team”, said Mike Riddell, Head of Macro Unconstrained.

Both managers have extensive experience in the asset management industry. Saroliya was most recently Head of Macro Strategy at Oxford Economics and Strategist at Lombard Street Research. He was previously a sell side Macro Strategist and, at the beginning of his career, spent five years helping to manage an absolute return Fixed Income fund at UBP. He has a PhD in Economics from York University. 

Meanwhile, Pak joins from Rothesay Life, the UK’s largest pensions insurance specialist, where he was lead portfolio manager on a 2 billion euros European periphery bond portfolio and on the firm’s macro absolute return portfolio which he launched in 2019. He has extensive experience in trading a broad range of derivatives, both at Rothesay and also in his previous position as a trader on RBS’ US rates options desk. 

The asset manager believes that Pak’s experience “lends itself particularly well to Allianz Fixed Income Macro Fund, where he will be named co-lead Portfolio Manager”. He will also be named co-deputy manager on Allianz Strategic Bond Fund, and given his rates background, deputy manager on Allianz Gilt Yield. Pak graduated with degrees in Economics and Sociology from Duke University.

Global Dividends Show Signs of Revival as Economic Growth Accelerates

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Pixabay CC0 Public Domain. Los dividendos a escala mundial comienzan su recuperación gracias a la aceleración del crecimiento económico

There are clear signs of a forthcoming revival in global dividends following the first quarter of 2021, according to the latest Janus Henderson Global Dividend Index. Compared against pre-pandemic Q1 2020 levels, payouts were only 2.9% lower year-on-year at 275.8 billion dollars.

The study shows that on an underlying basis, dividends were just 1.7% lower than the same period last year, “a far more modest decline” than in any of the preceding three quarters, all of which saw double-digit falls. Janus Henderson’s index of dividends ended the quarter at 171.3, its lowest level since 2017, but the asset manager believes that growth is now likely.

In this sense, for the full year 2021, the stronger first quarter along with a better outlook for the rest of the year have enabled Janus Henderson to upgrade its expectations for global dividends. The new central-case forecast is 1.36 trillion dollars, up 8.4% year-on-year on a headline basis, equivalent to an underlying rise of 7.3%. This compares to January’s best-case forecast of 1.32 trillion.

 

The analysis highlights that over the four pandemic quarters to date, companies cut dividends worth 247 billion dollars, equivalent to a 14% year-on-year reduction, wiping out almost four years’ worth of growth. Even so this was a milder fall than after the global financial crisis and the sector patterns were consistent with a conventional, if severe, recession.

“The successful vaccine rollout in the US and the UK in particular is enabling society and the economies here to begin to normalise to some extent and offers encouragement for other countries following closely behind with their own inoculation programmes. Even so with infection rates still out of control in Brazil and India, and the third wave in Europe still curtailing economic and social activity while the vaccines are administered, there is still a lot of uncertainty for company profits and, in turn, dividends”, said Jane Shoemake, Client Portfolio Manager on the Global Equity Income Team at Janus Henderson.

On top of this, there remain political sensitivities around shareholder payments, while the timing and extent of the removal of regulatory restrictions on banking dividends, especially in Europe and the UK is still unclear. The asset manager also expects share buybacks to return as a use for surplus cash and this too will influence how much is returned via dividends (especially in the US). All these factors are adding a layer of unpredictability to dividend payments.

“Despite this uncertainty, we are more optimistic given that Q1 was undoubtedly better than expected and we are now more confident that companies are willing and able to pay dividends, especially those companies that have traded well”, Shoemake added. In her view, there is certainly much less downside risk to payouts this year than previously anticipated, though the timing and magnitude of individual company payouts is going to be unusually uneven and this will add volatility to the quarterly figures.

“Special dividends will play a role too. Since late last year we have been adding to areas of the market that will benefit as economies reopen and where there is increased confidence in a business’s ability to generate cashflow and pay a dividend. As we move into the second quarter, the year-on-year comparisons will look very positive because it was the worst period for dividend cuts last year”, she concluded.

The first quarter: dividend recovery mixed across markets

Globally, just one company in five (18%) cut its dividend year-on-year in the first quarter, well below the one third (34%) over the last year overall. North America has seen dividends fall far less than other parts of the world: payouts of 139.3 billion dollars were 8.1% lower year-on-year on a headline basis, though the decline was due almost entirely to unusually large US special dividends last year not being repeated. On an underlying basis, the 0.3% fall in North American dividends was better than the global average of -1.7%.

The analysis points out that the first quarter is “usually relatively quiet” for European dividends, but this year there are positive signs ahead of the seasonally important second quarter. Payouts in Europe (ex-UK) rose year-on-year, up 10.8% on a headline basis to 42.5 billion dollars, boosted by catch-up payments from Scandinavian banks. Equally Switzerland made a disproportionate contribution in Q1 and companies there have also proven resilient. One third of European companies that usually pay in the first quarter cut their dividends year-on-year, but this compares to just over half in the previous three quarters.

In the UK, the first quarter saw lower dividends than a year ago, down 26.7% on an underlying basis as the country continued to feel the effects of the oil company cuts. However, less than half of British companies in the Janus Henderson index cut dividends in Q1, much better than over the last year. There are also signs of a revival with the headline total for UK dividends rising 8.1% in Q1 thanks to a number of extra payouts and special dividends. 

Lastly, dividends from Asia-Pacific ex-Japan were 6% lower on an underlying basis, with the 16.9% fall in Hong Kong making a significant impact. This meant the asset manager’s index of Asia-Pacific’s dividends fell to 190.6. In general, emerging markets were boosted by dividend restorations in Brazil, India and Malaysia.

Citi Appoints Meredith Chiampa as Head of ESG for North America

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. Foto cedida

Citi has appointed Meredith Chiampa as new Head of ESG for North American Markets. In an internal statement accessed by Funds Society, the firm revealed that she will lead ESG client engagement, product development, and the monetization strategy for ESG in the region.

“She will work closely with product partners to develop and deliver ESG products and services to help our clients achieve their individual ESG objectives. As one of the lead architects of the Citi World ESG Index, Citi’s new ESG benchmark, and with 17 years of experience in Multi-Asset Structuring, Meredith brings a wealth of expertise to the role”, Elree Winnet Seeling, Head of ESG for Markets and Securities Services at Citi, published in her LinkedIn account.

In her new role, Chiampa will report to Dan Keegan, Head of North American Markets, locally and to Winnet Seeling globally. She will replace Jayme Colosimo, who over the last eight months helped frame and build the Markets ESG offering. “We want to thank Jayme for her leadership over the last eight months and wish her great success in her new role as Head of NAM Business Advisory Services”, they pointed out in the internal statement.

Chiampa joined Citi in 2004 and brings 17 years of experience to her new role. The majority of her career has been in equity structuring as part of the Multi Asset Group, where she oversaw the development and growth of the investor structuring business, and more recently focused on creating solutions for private clients and originating business for cross asset sales.

“I am very excited by this opportunity and can’t wait to help drive our markets ESG strategy moving forward!”, wrote Chiampa in her LinkedIn.

HSBC Asset Management Hires a New Climate Technology Team

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Pixabay CC0 Public Domain. HSBC AM incorpora un equipo especializado en tecnología climática y prepara un primer fondo de capital riesgo

HSBC Asset Management has hired a Climate Technology (Climatech) team as part of its strategy to expand direct investment capabilities in alternatives. The new team will develop a venture capital investment strategy providing clients with opportunities to invest globally in technology startups who are addressing the challenges of climate change.

In a press release, the asset manager revealed that the strategy will focus on companies across the energy, transportation, insurance, agriculture and supply chain sectors. The first fund is planned to be launched before the end of the year with an intended cornerstone investment from HSBC.

The team will report to Remi Bourrette, Head of Venture and Growth Investments, who arrived at the firm last year from HSBC Global Banking and Markets. As for the new recruits, Christophe Defert joins as Head of Climate Technology Venture Investments. He has over 16 years’ experience in investment banking, private equity, corporate M&A, energy contracts and venture capital. Before joining HSBC Asset Management, he spent 10 years at Centrica where he most recently built and led Centrica Innovations’ Venture effort globally.

Also Michael D’Aurizio has been appointed Investment Director, Climate Technology. He has over 10 years’ experience in power, utilities, and clean energy including business strategy and venture capital, and previously led Centrica Innovations’ US activities.

“Technology will play a major role in enabling the energy transition, funded by public money, private capital and philanthropic commitments like HSBC’s Climate Solutions Partnership with the World Resources Institute and WWF. The appointment of this team will allow us to provide clients with early exposure to sectors which are just emerging as such, but will become major sources of financial and environmental value over the decade”, Joanna Munro, Global CIO at HSBC Asset Management, commented.

In 2020, HSBC Asset Management set out its strategy to re-position the business as a core solutions and specialist emerging markets, Asia and alternatives focused asset manager, with client centricity, investment excellence and sustainable investing as key enablers. The firm currently manages 45 billion dollars in alternatives strategies.

Aberdeen Standard Investments: “Higher Yields and Lower Duration Risk Has Been Beneficial for Investors in Frontier Bonds 2021”

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Aberdeen Standard Investments is confident that frontier market bonds represent a compelling investing opportunity in a diversified portfolio, considering the low level of interest rates worldwide.

Among the main features of this asset class, we could mention its decorrelation versus Treasuries, which is especially interesting if yields continue its upward trend and if the ghost of inflation remains in place. But also, because of the decorrelation we could find among the different local currencies of frontier markets.

Kevin Daly, fund manager of the Aberdeen Standard SICAV I – Frontier Markets Bond Fund, explains in this interview with Funds Society why he thinks the risk/return profile of this asset class is interesting compared to other emerging market assets, especially government bonds or equities.

Why is the present market environment a suitable opportunity to invest in frontier markets? Given their growth, the level of volatility and risk and the potential reflationary situation.

There are several reasons why I believe frontier bonds remain attractive. Firstly, higher carry compared to mainstream Emerging Markets (EM) and lower duration risk, explains outperformance amid rising US Treasury yields. Angola is my top pick in terms of USD bonds, as they have very moderate external liabilities coming due over the next several years following China and DSSI [The G20 Debt Service Suspension Initiative] relief in 2020. High oil prices will also result in an improving fiscal outlook and declining debt levels. With spreads of 650-725 investors can access an attractive risk premium for a country with improving credit metrics and low issuance needs. Having said that, I would expect Angola to return the market in 2022 if spreads continue to decline.

We continue to see good value in Sub-Sahara Africa bonds such as Ivory Coast, Senegal, Ghana, Kenya, Nigeria and Gabon. We are also maintaining a 2% position in Ecuador, which surged after the election result last month. Egypt remains our top pick in local markets given the high real and nominal rates, and stable currency. Ghana, Ukraine, Kazakshtan, Kenya and Uganda are other local markets where we see value.

What about the risks?

The main risk for frontiers is higher default risk over the medium term, as we could have more countries opting for the Common Framework [debt relief beyond the DSSI] if they don’t address fiscal and debt vulnerabilities.

What do these markets offer in terms of advantages over emerging markets and from a decorrelation and diversification point of view?

Higher yields and lower duration risk compared to mainstream EM has been beneficial for investors in frontier bonds 2021. I would expect that to remain intact during the year. Rising commodity prices is another factor why some frontier credits have performed well in 2021.

What is the current level of flows to these markets and how might they evolve over the course of the year?

Flows into EM funds have been pretty strong at around $32bn, of which half is hard currency funds. Using a straight line benchmark assumption, that suggests around $2.5-3bn have gone into frontier hard currency bonds.  

 And in terms of expected valuation evolution?

Spreads on frontier hard currency sovereign bonds are currently 540bp over USTs, and while they’ve tightened around 60bp this year, they are still 120bp wide of their 2020 lows. So I believe there’s still decent value, although I would not expect spreads to revisit 2020 lows until we have a better picture on the impact from the pandemic, and some improvement on the fiscals and debt levels.     

What role do local currencies play in investing in these markets and specifically in your investment philosophy?

Local currency provides higher carry and in some cases defensive characteristics compared to hard currency, as was the case during the peak of the pandemic in 2020 when hard currency sold off sharply due to huge outflows from mutual funds that invest in those bond. However, there’s very little mutual fund investment in frontier local markets. When it comes to portfolio construction, we take a bottom up approach, and we will look at the relative value between hard and local currency bonds that will dictate how we want to be positioned in that particular country.  

Why Aberdeen Standard SICAV I Frontier Markets Bond?

We have the resources and long track record investing in frontier markets. Among our four dedicated frontier bond strategies, we have a highly diversified approach as our fund has traditionally invested in HC, LC and corporates. We can also demonstrate a consistent long-term track record.

China’s Bond Market Comes of Age for Global Investment Funds

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Pixabay CC0 Public DomainPekín. Pekín

The trajectory of the onshore Chinese bond market has been positive over recent years with increasing inflows.  Eight percent of the market is already owned by offshore investors, which includes about 3% foreign ownership, and this is up from virtually 0% just 5 years ago. The IMF SDR (’15), the JPM GBI-EM (Feb ’20) and the FTSE WGBI (Oct ’21) have all created demand for local Chinese bonds and Bond Connect has helped create a path to satisfy that demand, with average daily trading volume in April at RMB24.7 billion.

However, as with most things, it takes time – time for funds to recognize that the benefits outweigh the costs (operational, execution, setup) and time to get approval to trade in the onshore market as an offshore participant.  

If Bond Connect were easier to deploy, more funds in the US, Europe and Japan would have pre-positioned in the lead-up to China bonds being included in the FTSE Russell WGBI. Once funds are greenlit, it will be a steep trajectory for inflows. With that, investors will see more strategies oriented towards offshore investors and a huge push for green bond issuance (already 13% of the market and the 2nd largest green bond market in the world) which is a major topic for investors in the west.

Given China’s ambitious net-zero carbon target by 2060, the country will require trillions of yuan in new investments to revamp its carbon-intensive economy and energy system over the coming four decades. This will pique the interest of many funds given the average yield of Chinese green bonds was 3.44% as of March 31st, compared to 0.58% for the Barclays MSCI Global Green Bond Index.

 

Gráfico 1

Source:  Goldman Sachs

China debt inclusion in the Russell flagship benchmark (FTSE Russell WGBI) will be a gamechanger in terms of foreign investors’ strategic allocations.The inclusion can’t be ignored, as an estimated $2-4 trillion in assets follow this index. It will make China the sixth largest market by weight and will have the second highest country group yield in the FTSE World Government Bond Index (WGBI) behind only Mexico, but with a much larger weight (5.25% vs .6%) thereby pushing the overall index yield up 15bps. It may not sound significant, but it is, considering the whole index only yields 32bps today.  Monthly passive inflows will likely total US$5-7.5bn a month (3x today’s pace) from October 2021.

There will likely be a 36-month phase in after that (in-line with previous inclusions). We should expect an acceleration of inflows (2x today’s pace) which could lead to a market driven compression of yields which was the case when Malaysia and Mexico were added to the index in 2007 and 2010, respectively.

 The inclusion also provides a stamp of approval around liquidity, policy transparency and currency management that have kept many offshore managers at bay for years. For many funds, navigating the local landscape was a daunting prospect. With this inclusion, the prospect is far less scary.

 

Gráfico 2

Source:  Goldman Sachs

 

The Chinese government’s management of Covid-19 along with recent policy changes have made its bond market more attractive to institutional investors. While policy makers elsewhere were cutting funding rates, expanding balance sheets and increasing fiscal spend, Chinese counterparts were more austere, and in some cases, they even tightened policy. The goods and digital economy in China far outweigh the service economy so less structural support was needed.

 Why does this matter? Chinese rates were stable and even higher in absolute terms while bond yields were plummeting elsewhere with some credit fundamentals deteriorating. The Covid-19 pandemic has really been a goldilocks situation for Chinese bonds. After the initial shock of the pandemic, investors started to realize China offered a unique opportunity and we saw flows into Chinese local bonds ramp up in the second half of 2020.

Default risk in China has always been more about refinancing risk than leverage. Seventy-six companies have roughly $50bn of repayment pressure over the coming months. Moody’s forecasts the trailing 12-month default rate for these firms will fall to 3.5% at year-end from 7.4% at the end of 2020. Continued supportive fiscal and monetary policies and better pandemic containment with vaccination rollouts also play a role in the improvement.

Still, weaker firms’ funding channels “could be restricted” following guidance last month from China’s supervisor of state-owned assets regarding bonds’ proportion of total debt at riskier firms.

 In the private credit sector, there can be too much gearing, forex risk, and/or secular headwinds. This risk is far easier for international investors to tolerate, understand and navigate than the SOE risk. If a company has 8x debt to EBITDA and a majority of that is in FX despite most income being in local currency, there is potential solvency risk. It’s high yield for a reason.

Regulators have stepped in to limit home price growth and home development. That means the property names that grew unchecked for years by accessing cheap financing in USD and using it to amass disproportionately large land banks, now find themselves on the wrong side of regulation. These corporations have a lot of assets that they cannot offload or develop along with acute debt service costs.  

Regarding SOEs, bank regulators are doing what they can to limit future default risk by guiding the so-called zombie corporations towards insolvency. By doing so, they are pruning fundamentally impaired institutions before they become a systemic issue and cause contagion. We applaud these measures. Coal names come to mind most readily with the default of Yongcheng in late 2020 just weeks after they issued bonds. Fortunately, it was only RMB 1 billion, so it wasn’t a systemic issue. SOEs have some 5.4 trillion yuan of bonds maturing this year. Net bond financing has been negative for more than a dozen provinces since Yongcheng Coal’s default in November.

 

Ayman Ahmed is a Senior Fixed Income Analyst at Thornburg Investment Management.

 

 

 

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Gregor Hirt, New Global CIO for Multi Asset at Allianz GI

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Allianz nombramiento global
Foto cedidaGregor Hirt, nuevo director de inversiones global de multiactivos de Allianz GI.. Gregor Hirt, nombrado director de inversiones global de multiactivos de Allianz GI

Allianz Global Investors has announced in a press release the appointment of Gregor Hirt as Global CIO for Multi Asset as of July 1. He will be based in Frankfurt and report to Deborah Zurkow, Global Head of Investments.

In his new role, Hirt will work closely with the firm’s Multi Asset experts in Europe, Asia and the US to ensure Allianz GI continues to strategically develop and grow its Multi Asset business in areas of client demand, including risk management strategies and multi asset liquid alternatives.

Hirt brings 25 years of experience in Multi Asset investing from both a wealth management and asset management perspective. He joins from Deutsche Bank, where he has been Global Head of Discretionary Portfolio Management for the International Private Bank since 2019. Prior to that, he was Group Chief Strategist and Head of Multi Asset Solutions at Vontobel Asset Management, having also gained strong experience at UBS Asset Management, Schroders Investment Management and Credit Suisse.

“Allianz GI has a rich heritage in Multi Asset investing, with one of the strongest teams in the industry. Marrying the best of our deep expertise in both quantitative and fundamental approaches, while integrating ESG considerations, will be pivotal in ensuring that our offering is as successful for clients in the next generation as it has been in the past. With just the right mix of leadership experience, market insight and client understanding, we are delighted to be welcoming Greg. As well as significant experience across asset management and wealth management, he has deep appreciation for quantitative discipline while having a background in fundamental analysis”, highlighted Zurkow.

Allianz GI currently manages 152 billion euros in Multi Asset portfolios for retail and institutional clients around the world. AllianzGI’s Multi Asset investment approach combines a systematic assessment with the insights of fundamental analysis with the dual objective of mitigating risks and enhancing return potential for clients.

Managers Remain Optimistic about Mega Fund Launches in China

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China dragón
Pixabay CC0 Public Domain. Los gestores siguen siendo optimistas sobre los lanzamientos de megafondos en China

China is a major player in the global fund industry. Blockbuster fund initial public offerings (IPOs), which have seen popular new funds being oversubscribed and sold out within a day after sales commence, have become more common in the country over the past few years. While short-term investor sentiment has been hurt by the recent market downturn, Cerulli Associates points out in its latest analysis that the trend could resume over the long run.

China’s mutual fund assets under management, including that of ETFs, recorded robust year-on-year growth of 37.5% to reach 19.7 trillion renminbi (3 trillion dollars) in 2020. Total assets garnered through mutual fund IPOs reached 3.2 trillion renminbi, double the size in 2019. The average IPO volume of new funds also improved to 2.2 billion renminbi, compared to 1.5 billion in 2019.

Local media reports show that in 2020, over 100 new funds were sold out within one day after subscriptions commenced, and 15 of these IPOs successfully garnered assets of over 10 billion renminbi. “The trend continued in the beginning of 2021, according to China Fund News reports, when a total of 122 new mutual funds were rolled out in January, raising assets of almost 500 billion renminbi, the second largest monthly amount for IPO assets recorded in the market”, Cerulli says.

Among the factors behind blockbuster new fund launches the firm identified are optimistic investor sentiments, star managers with good track records, and sufficient liquidity in the market. Over the past few years, the Chinese government has introduced a series of monetary easing measures to stimulate the economy following the U.S.-China tensions and COVID-19 pandemic. “Part of the money supply went to the real economy and real estate market as traditional long-term investment vehicles for local residents, while the rest was available to asset management products. This created plenty of opportunities for mutual funds, as other investment products in general are not attractive enough”, they add.

In this sense, some managers Cerulli spoke with said that the fast-track fund approvals introduced by the China Securities Regulatory Commission (CSRC) have also facilitated their new fund launches. Extensive marketing efforts and digital distribution have also supported mega fund launches.

Following this year’s Chinese New Year holiday, the stock market plunge dampened investors’ interest in new fund launches. However, despite the potential challenge to fundraising, the firm’s analysis shows that managers focused on the long term are still upbeat about the industry’s prospects, and are “confident that mega fund launches will resume if the stock market turns bullish again”.

In Cerulli’s view, mutual funds’ long-term growth prospects should continue because profits earned by listed enterprises which survived COVID-19 will eventually enter the stock market, and funds have an inherent advantage over other financial products.

“The cooling of market sentiments is normal, and it is also an opportunity to educate small-ticket young investors who have not experienced many market cycles. As long as the recovery does not take too long and a bear market is avoided, the long-term outlook for mutual fund IPOs should remain positive”, said Ye Kangting, senior analyst at the firm.