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MFS: “The Market Forgets that When Credit Liquidity Dries Up, There Is No Turning Back”

Pilar Gomez-Bravo was recently appointed Director of European fixed-income for MFS Investment Management. She also serves as Lead Portfolio Manager for MFS Meridian Funds Global Total Return and MFS Meridian Funds Global Opportunistic Bond. Pilar shared her views on the global debt markets during the 2017 MFS European Investment Forum in London.

Beginning with the disparity between what the US Federal Reserve is saying with regards to rate hikes and what the markets are anticipating, the Gomez-Bravo says the markets are probably right. “The Fed has been lowering its neutral rate, which indicates the extent to which they expect to raise rates, dropping now to 2.75%, whereas the 10 year yield is even lower at 2.3%. Every time there has been a difference between market expectations and those of the Fed, it’s the Fed that invariably moves towards the market. The Fed’s rate policy guides the short end of the yield curve and that is where its communication and guidance is focused. What Central Banks would really like is to be able to control the long-term slope of the curve because it determines the level of accommodation of monetary policy.”

Likewise, Pilar Gomez-Bravo doesn’t see rate hikes in Europe in the short term, although she does acknowledge that the European Central Bank will want to avoid any mistakes as it manages the exit of its public asset purchase program. They also want to assure the markets that they are not going to change the deposit rate, which is currently still negative. “At a time when the unemployment rate has fallen, and growth is on the rise, the European Central Bank will begin to consider that it makes sense to stop buying assets and injecting liquidity into the market. Another issue is that the ECB doesn’t have many more options, given the criteria established for the purchase of government assets. The time will come when it can no longer maintain the guidelines that were established in the buying process. The ECB will want to avoid creating panic -similar to what happened during the Taper Tantrum in 2013, which led to widespread selling of risky assets and a drastic rise in interest rates- largely due to poor communication from the Fed.”

At MFS they expect Draghi to continue to gradually reduce the ECB’sdebt balance due to the lack of alternatives. They will also try to create as much distance as possible between the decision to withdraw liquidity from the market and the commencement of the interest rate increases. “It‘s possible that the European economy will continue to strengthen and we could see rate increases well before the end of 2018, which is what is currently priced into the market.”

What is the expected inflation scenario?

It’s expected that there will be very little upward inflationary pressures, mainly due to the market structure. Globally, there is an immense amount of debt, which limits the extent to which rates can be rise without leading to a recession. In addition, there are certain demographic problems in the United States and other developed countries that prevent inflationary pressures on the labor side. “The generation of Baby Boomers who tend to have very high wages is beginning to retire, and the generations replacing them earn much less. Companies are not investing and there is no growth in productivity in the United States, indicating that inflation will be contained. In a world dominated by technology and demographic shifts, conventional wisdom stops working. We’ve seen unemployment fall, without a meaningful increase in inflation, particularly in the United States. In Europe, disruptive technology are not having the same impact that we’ve seen in the United States, where companies like Amazon or Airbnb suppress pricing pressures. That’s why we could see rising inflation in Europe before it takes hold in the United States. In both cases inflationary pressures will probably come from wages and commodity prices, and in particular from oil prices, if we see sustained upward pressures in either of these two variables, we will change our vision on long-term inflation.”

The importance of credit selection

In an idyllic period of low inflation and low growth, the business cycle is much further along in the United States than in Europe. Until now, MFS had had a preference for US companies, because it’s a large deep market, with a lot of diversification and credit capacity. “The United States offers relatively high rates compared to other countries, but the cycle is coming to an end; while in Europe it still has further to go. Eventhough we have to account for European and US credit valuations, we do think that Europe may offer somewhat more value because the technical valuation is supported by the European Central Bank which continues to buy bonds.”

At present, credit selection, of a specific bond or issuer, through analyzing its parameters and fundamentals, that leads to investing in bonds on which there is a high conviction, has much more potential to deliver alpha than directional positions, since the latter have their performance limited to that of a market that is trading at high valuations. “Investing in higher-conviction securities makes sense for two reasons: you can avoid potential losses of some market issuers and concentrate the portfolio in those names where we see greater potential for outperformance. We have also been reducing systemic credit risk in our portfolios, while looking to generate more opportunities by investing in specific credits, which we believe will lead to a longer lasting source of alpha.”

The emerging credit market

In emerging markets, after the 2017 super rally, we see value in certain countries whose fundamentals have significantly improved, such as in Indonesia, India, Brazil and Argentina. We continue to see value in emerging market debt, both in hard currency and in local currency.

Is now the time to add more risk to the portfolios?

The current bull market is approaching nine years. MFS is positioned somewhat defensively because they are expecting a market correction and current risk adjusted valuations are not as attractive. Still, Gomez-Bravo argues that there are still opportunities for investors and that the more flexibility one has the better: “If you manage funds that are more global, or if you have a multitude of factors to choose from, you diversify the portfolio while removing risks. But we are still waiting to see what happens with tax reform and fiscal policy in the US. The market forgets that when liquidity dries up there is no turning back. During the last crisis, many investors weren’t able to sell their short duration floating rate bonds, and they had to settle for 50 cents on the dollar. Taking on a lot more risk for an extra 30 basis points doesn’t make sense in this environment”

Grover Norquist Highlights Speaker Lineup at 7th Annual FLAIA Global Macro Perspective 2018 Conference

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As part of its long-standing effort to help fund managers, investors and family office leaders identify macroeconomic trends, geopolitical risks and where to allocate money next year, the Florida Alternative Investment Association (FLAIA) is sponsoring its seventh annual A Global Macro Perspective 2018 Conference in Miami on December 5, 2017.

The daylong event, which is co-sponsored by the international law firm Greenberg Traurig, is expected to attract money managers from Florida, New York, Europe and Latin America. This year, it will take place at the law offices of Greenberg Traurig in downtown Miami. The conference immediately precedes Art Basel week, the world’s largest modern art show.

“We are now a full year into the Trump Administration, which has placed its trade, foreign policy and tax reform agendas on the table”, said Michael Corcelli, Founder and Chairman of FLAIA, and Managing Partner of Miami-based Alexander Alternative Capital.

Highlighting the speaker lineup for A Global Macro Perspective 2018 is Grover Norquist, President of Americans for Tax Reform and regarded as the most powerful tax advocate in Washington, who will share his perspectives on Tax Reform policy in the United States. Norquist chairs the Washington, DC – based Wednesday Meeting, a weekly gathering of more than 150 elected officials, political activists, and movement leaders.

The day’s featured panel discussions will include:

Tax Reform and the impact the proposed plans in Congress will have on rates for corporations and individual taxpayers across America.
Opportunities in Alternative Investments: Outlook for 2018.
The Emergence of Digital Money and Blockchain Technology: A look at the emergence of the cryptocurrency market and the pitfalls of self-regulation.
Quantitative Investment Trends: Perspectives from Data Driven Managers: A look at how the macro environment impacts trading signals, and how artificial intelligence and machine learning can add value.

To register for the conference, click here.

BlackRock Launches New China A-Share Opportunities Fund

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BlackRock has launched the BlackRock Global Funds (BGF) China A-Share Opportunities Fund. The Fund is designed for investors looking for growth, alpha and diversification from the China A-Share market.

The Fund is a liquid, long only, Systematic Active Equity (SAE) UCITS strategy targeting consistent alpha on an annual basis. The strategy uses a combination of both traditional quantitative signals and more innovative big data and machine learning insights. Together, these tools are used to identify around 300 companies for investment from a universe of 1,300 Chinese companies in the Shanghai, Shenzhen and Hong Kong Exchange Stock Connect programme.

The Fund will be managed by the SAE team in San Francisco, with trading executed in Hong Kong. The team comprises more than 80 investment professionals across research, portfolio management and investment strategy. Dr Jeff Shen, PhD, co-chief investment officer of active equity and co-head of investments within SAE, leads the portfolio management team. He is supported by Dr Rui Zhao, PhD, who is co-portfolio manager on the fund.

Jeff Shen comments: “We’ve been applying systematic investment methods to equity markets for over thirty years and more recently, we’ve been researching and applying new methods – big data, machine learning and artificial intelligence – to our models. We find these insights have extraordinary relevance in a market like China where data is quite often available and the market is large and complex. We have been managing this strategy for institutional investors for five years, and we are very excited to offer this strategy to retail investors in a vehicle that provides daily liquidity.”

Michael Gruener, Head of EMEA Retail at BlackRock, adds: “China is one of the largest stock markets in the world, but due to restrictions on ownership, foreign investors have had very little exposure to Chinese domestic equities. Now, with access to onshore Chinese companies through the recently opened Stock Connect programme, investors have the opportunity to invest in a previously untapped market.”

Michael Roberge: “If Berkshire Hathaway Were a Mutual Fund, Warren Buffet Would Have Been Fired as a Manager”

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Investors are at a crossroad. To be able to obtain the same level of returns as in the past and achieve their investment goals, they must take on roughly three times more risk than that of two decades ago. During the 2017 MFS European Investment Forum in London, Michael Roberge, CEO, President, and CIO of MFS Investments Management, emphasized the secular and cyclical difficulties facing investors and the importance of choosing active managers who are both committed to investing with a long-term time horizon and have conviction in their portfolios.

Secular challenges

Following the Global Financial Crisis, the prolonged approach of central banks around the world was to try to stabilize the economy by keeping rates low. This approach has resulted in extremely low interest rates persisting, with some countries even dipping into negative yields. These low interest rate levels have completely changed the investment environment, helping to push both bonds and stocks to maximum valuation records. Many investors, including MFS are asking what will this environment lead to? While asset prices are expensive today, the lower-for-longer rate environment is likely to dampen returns for both equity and stock investors in future business cycles. With that backdrop, investors will be challenged to achieve their investment goals and we can expect to see many investors taking on greater risk to achieve the same historical return they would expect to achieve in a more normal environment. To illustrate the case, Michael Roberge mentioned a study by investment services consulting firm Callan Associates. The report shows that in 1995, in order to obtain an average return of 7.5% — which is the average yield that most pension plans expect to obtain in the long run – an investor would need to allocate approximately 73% to bonds and 27% to cash. The volatility of the portfolio, measured by its standard deviation, was around 6%, so that the investor was not really exposed to excess risk. In the following decade, the deterioration of interest rates has meant that, to achieve the same return of 7.5%, new asset classes must be introduced. Investors have to expand the allocation beyond the fixed income and cash instruments, needing instead to add riskier exposure to equities and alternative assets, for example. The new portfolio would now need to invest 52% in fixed income, 40% in equities and 9% in alternative assets, including exposure to private equity and real estate. This results in a more complex portfolio which incurs greater risk, with a volatility of 8.9%, representing a 50% increase relative to the portfolio of the previous decade. Moving forward another 10 years, in 2015, following the Global Financial Crisis and a dramatic drop in interest rates, central banks significantly increased their balance sheets with quantitative easing measures. To achieve the same return of 7.5%, the portfolio now would need to invest 12% in fixed income, 63% in equities, and 25% in non-traditional assets. Given the complexity of this portfolio, the risk rises up to 17.2%, tripling the risk level of 20 years ago. “This explains the current stress of investors globally, because they can see the potential for lower future returns as compared to those currently and in the past. Of course, they still have to meet their investment goals. The problem now is that they have to take greater risks to achieve them,” said Roberge.

Cyclical challenges

While the United States is experiencing its second longest economic cycle since World War II, it is impossible to predict how much longer this cycle can last. Obviously, you can say that the end is approaching, and investors should be starting to think about preserving capital instead of increasing their risk.
Global economies have performed relatively well. Inflation is still not a problem, and central banks remain relatively accommodative. This adds up to a favorable environment with low volatility. Investors have been forced to take greater risk, being compelled to participate in the equity market. This works “until it stops working.” Historically, when entering periods of low volatility, investors often show signs of market complacency, and according to Roberge, a surge in volatility and market pullback is probably not that far off. At present, investors are not discriminating between companies with positive results and companies with negative results, the cycle seems to have forgotten the possibility of the market incurring a correction.

The importance of the time horizon and conviction in the portfolios

MFS emphasizes the importance of understanding both time horizon and conviction, two factors which are often overlooked in this long business cycle. In a low volatility, low interest rate environment investors have been forced to take on greater risk across multiple asset classes, including less-liquid opportunities, like infrastructure and private equity to achieve returns.

First, the investment horizon must be determined within the market cycle, because that determines the managers’ evaluation criteria. The market cycle can be determined from either peak to peak or trough to trough. In order to correctly assess a manager’s performance within an asset class, the complete investment cycle must be taken into account. However, despite the fact that 57% of institutional investors define a complete market cycle between 7 and 10 years, managers’ performance is usually measured within a range of 1 to 3 years. This is clearly a disconnect in the evaluation process of investment managers.“Studies carried out in this respect show that failure to give managers time to complete a cycle results in lost performance. Specifically, between 1% and 2% per year, a figure which may seem not very high, but which, given the current level of low interest rates, can be a problem for investors, especially when compounded over time. Now, given where we are in the cycle, is the ideal time to identify ways to preserve capital. It is an environment in which active management tends to perform better. In a market at such an advanced stage in the cycle, investors continue to pursue the market’s beta, when in fact they should be doing precisely the opposite”.

Returning once more to the issue of the importance of long-term investment, Roberge referred to Warren Buffet, who is considered by many to be the world’s best investor: “If we compare Berkshire Hathaway’s returns over the past 30 years against the S & P 500 Index, it can be seen that the firm which Buffet leads surpasses the market index by 600 basis points. However, if you look at different three-year periods, approximately 37% of the time his company trailed the market. If it had been a mutual fund, Warren Buffet would have been fired as manager. But being Warren Buffet, he’s allowed time to make good, long-term decisions and let them slowly materialize. As a consequence, the returns obtained at various 10-year periods exceed the S&P 500 Index in 95% of the time. Quite simply, time matters. It’s necessary to allow an investment manager’s conviction to deliver the alpha clients need to achieve their long-term financial goals.”

Ian Heslop (Old Mutual GI): “Our Strategies are Not a ‘Black Box’, but Rather a Very Transparent ‘Glass Box’

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During his presentation at the OMGI Global Markets Forum in Boston, and questioning conventional investment thinking, Ian Heslop, Head of Global Equities at Old Mutual Global Investors, explained the double difficulty of forecasting market behavior. It’s often quite easy to make a mistake when forecasting, but even when the outcome of an event has been forecasted successfully, guessing the market reaction is just as complex. “If someone had been able to foresee the Brexit result, they could have guessed the market’s behavior for about 7 days. If someone predicted that Donald Trump would be elected for president, they could have guessed market behavior for about 7 hours. As a team, we try not to forecast, especially as regards market reactions.”

Another important issue, according to Heslop, is that investors have lost confidence in active management. In the United States, only 27% of active managers are able to beat the S & P 500, the main reason is that many fund managers are not taking enough risks to beat the index: “Firstly, if investing in an active fund which is not taking sufficient active risk, but which charges active management fees, the return will be lower than the index. Secondly, the S & P500 index is also said to be a very efficient index, which it is, to a certain extent, but to attribute the lack of higher yields to the index’ efficiency is to greatly simplify the argument. The difficulty in consistently outperforming it is real enough, but I don’t think it’s based on the efficiency of the index itself. The third reason would be concentrating on a particular style. Active funds are often cyclical in nature. Sometimes it is the value style that gains the favor of the market, in others it is the growth style, or the quality, if the fund only takes into account a particular style of investment, it will not be letting compound interest act correctly, lagging behind the market at some stage.”
As a result, investors have turned their backs on active investment by investing more than US$ 1.4 trillion in US equity ETFs since 2007. “The main problem with indexed products is that investors think they are buying diversified exposure to the US equity market, when in fact the portfolio’s performance comes from 10 shares of the S & P 500. Partly, because these companies represent a significant part of the economy, but to a larger extent it’s due to flows. “

Helsop cited as examples those ETFs that invest in the 100 less volatile stocks of the S & P 500 index, the valuations of which, in terms of price to book value rates, have increased substantially, increasing from 2.37 times in 2013 to 3.59 times in 2017. Another trend is the purchase of equity ETFs with high dividends. Investors often do not take into account their exposure in terms of risks, and are unaware that they are actually buying risk of size, momentum, market sensitivity or beta. “It should be noted that some of the dislocations in the US equity market are directly dependent on the extensive use of ETFs by investors, both from the point of view of market capitalization and from the point of view of exposure of styles in the portfolio. Investors find it very attractive that a particular investment environment can work all of the time, but this is not the case.”

How do we solve the problem?

The market sentiment and perceived level of risk in the market are two factors that determine which type of values are going to perform better than the index. At the end of the first quarter of 2016, the markets were going through a scenario of high volatility with a very negative sentiment. With a macroeconomic scenario very different to that in 2008, the market reflected an environment with little appetite for risk, behaving in the same way, but for very different reasons. Looking at the market’s behavior during the third quarter of 2017, the markets’ scenario is of low volatility and high optimism, where risk appetite has increased. “The approach that active management must take in both scenarios is different, so obtaining results above the index is extremely difficult, being especially complicated if it aims to forecast the outcome of an event and the market’s behavior towards it, something which depends on the sentiment. However, if we try to locate which moment the market is at by measuring its evolution against the change and then adjusting the portfolio accordingly, we will be somewhat behind the market, but we maximize the time in which we have a signal located, being able to discard noise. On the negative side, if we see a very abrupt change over a very short time, it will take a while for the portfolio to adjust. For each period of rapid adjustment to a new state in the market, there are multiple periods of time in which there is no direction in the market, minimizing the loss in those moments.”

The investment and stock selection process

Old Mutual Global Investors’ global equity team uses five variables or themes to identify which type of company will achieve a good result at each moment in the cycle: a dynamic valuation that allows them to be alert at every moment of the cycle and to buy a certain style of investment, sustainable growth, which looks for opportunities within the market, analyst sentiment, which allows them to assess what happened in the company, the company’s management team, whose communications are used to control whether they are acting in the best shareholder interest, market dynamics, with which they try to understand the demand and supply of each stock.

“Our way of managing strategy is not a ‘black box’, but rather a very transparent and rigorous ‘glass box’. We invest and create portfolios in a very rigorous way. The investment process uses the five themes to have or not to have assets in the portfolio. We look at metrics for valuation, quality, growth, revenue, information, momentum, and trends, but what really sets us apart is that we are trying to understand the motives that make a stock perform well. There are environments in which the market is willing to buy stocks of a certain style: value, growth or quality, and if at that time you maintain exposure to that particular style in the portfolios, it will most likely add return to the portfolio”

Helsop also commented that what really matters to the management team is to know the elements that are influencing the market’s direction, something that is the key to understanding how the investors will behave. “We try to respond to the requirement that clients have for a different type of alpha, without forecasting or minimizing the amount of forecasts we use. In our alpha generation process we don’t consider a top-down macroeconomic analysis or a fundamental bottom-up analysis, but we mix all the factors and the result is a different approach that provides the opportunity to diversify”.

Funds under the same approach

With nearly 18 billion in assets under management, Old Mutual Global Investors’ equity team manages a number of different strategies; all of them with a high active share. The Old Mutual North American Equity fund strategy, the Old Mutual Global Equity Fund and the Old Mutual Global Equity Income fund are long-only strategies. The first one has about 200 securities in the portfolio and has been managed by Ian Heslop’s team since 2013. The second one has approximately 450 securities and the third has 500 securities and doesn’t invest in those classic names that pay a high dividend and that the rest of funds have in their portfolios. Lastly, the Old Mutual Global Equity Absolute Return strategy with over 650 names in the portfolio is market neutral, being a clear example of how the five factors combine to generate alpha in a different way from the rest of the market. This fund manages about 11 billion dollars in assets.

Investec AM Brought Together Over 130 Professionals from the United States and LatAm in Washington

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At the 10th annual Investec Global Insights held in Washington, Investec Asset Management brought together over 130 professionals from the investment industry, mostly from the United States and Latin America, at the Four Seasons Hotel. The event, which took place on the 19^th and 20^th of October, was attended by the firm’s leading managers and strategists, who shared with attendees their perspectives and positions in the portfolios.
Richard Garland, Managing Director of the Global Advisor division and Hendrik du Toit, CEO of Investec AM, were responsible for the welcoming to the event. Following them, Philip Saunders, Co-Head of the Multi-Asset Growth strategies, explained how to navigate mature bull markets, where both fixed income and equities are at maximum price levels.

Then came the turn to disclose where the opportunities in fixed income and currencies may be found, John Stopford Head of Multi-Asset Income, reminded the audience that despite the low interest rate environment in developed markets, emerging markets continue to offer a decent real profitability. In addition, a selected basket of emerging currencies shows relatively attractive levels.
Then, in a discussion moderated by Stopford himself, Jeff Boswell, Strategy Leader of Developed Markets Credit, Matthew Claeson, Latin American Debt Portfolio Manager, Peter Eerdmans, Co-Head for Emerging Market Fixed Income, and Abrie Pretorious, Quality Capability Portfolio Manager, discussed where to find sustainable sources of income for investors.

To concludethe morning presentations, strategist Michael Power explained the implications of the improvement in solar and wind energy efficiency on the fourth industrial revolution. During the afternoon meetings the attendees had the opportunity to meet with the management teams. Once these meetings were over, they enjoyed a gala dinner at the Warner Theater.

On the second day of the conference, Robert J O’Neill, the Navy Seal who shot Bin Laden, opened with a motivational talk on how to persevere in achieving goals. Following him, Aniket Shah, Program Leader of the Financing for Sustainable Development Initiative at the UNexplained the paradigm shift in an economy that shifts from focusing on theWest to looking to the East and where China takes the lead in global prominence

Emerging markets were the subject of the conferences’ third discussion. Participating in the discussion panel were Chris Freund, Head of SA Equity & Multi-Asset, Carina Güerisoli, Portfolio Manager for Latin America, Victoria Harling, Strategy Leader for Emerging Market Corporate Debt, and Asian Equity Portfolio Manager, Greg Kuhnert.

Lastly, Richard Garland moderated a fourth discussion which addressed the trends of the financial advisory business, participating in this panel were Shane Balkhan, CIO of Beaufort Investments in the UK, Gonzalo Cordova, CEO for LarrainVial in Latin America, Joshua Heimann, Head of WMA International Sales and Business Development for UBS International in the US, and Erich Lang, Executive Director, Head Fund Provider Management for Julius Baer in Switzerland.

How to navigate mature bull markets

In a bullish market environment which seems unstoppable, and with most assets at levels above their historical averages, Philip Saunders remarked that valuations by themselves are rarely the trigger for a sharp drop in the market, revealing that the trigger is usually, in 93% of cases, a significant increase in the cost of capital.

Although fundamentals are favorable and the leading indicators still show no signs of going into recession, Saunders advised taking a somewhat more cautious position, suggesting an increase in liquidity in the portfolios, greater structural diversification, and wider exposure to different sources of return beyond traditional asset classes.

Carrying out a structural diversification requires focusing on the behavior of the assets rather than on their classification. According to Saunders, each asset class can be attributed a growth characteristic if it reacts positively to an increase in risk appetite, a defensive characteristic if its returns are positive when expectations of economic growth decline, and a decorrelation characteristic if returns are not related to economic growth or corporate profits. “Mixing these three characteristics is when you get superior diversification and more consistent results. Selection is important in this type of diversification, we do not have exposure to all assets all the time,” said Saunders.

Regarding the positioning of their portfolio, within growth assets they have a preference for a selective exposure in equities, where, due to the corporate benefits and alpha potential, exposure to global equity markets is favored, with the exception of the US, and they balance the risk with a selection of defensive assets.

A Paradigm Shift: China’s global prominence

Beginning with an allusion to a recent cover of The Economist, which showed Xi Jinping as the most powerful man in the world, Aniket Shah, explained the main themes that are developing in China and how we should think about the side-effects that its development has on Asia and on the rest of the emergent economies. China continues to grow, at a lower rate of growth, but on a higher growth basis. Assuming that China continues to grow at an average rate of 6.5% and the US at an average rate of 2.5%, China’s gross domestic product will reach 22.8 trillion as of 2026, while the US would not reach that figure until 2030.

Although China often has a rather negative narrative, with an excess of debt and production capacity, its prominence is an issue which goes beyond the construction of large infrastructures. “A frequent error in analyzing China’s economy is to believe that its growth depends on the accumulation of physical capital that began in the 1990s, without realizing the importance of human capital; an investment that began in the late 50’s and 60’s, and which is now much more productive. In a recent analysis of the growth of the scientific research which is published in different parts of the world, it can be seen that, from 2003 to 2013, the US has gone from 26% to 18.2% of publications, while China has gone from 6% to 18%, reaching parity with the United States. “

China has set out to stop being a technological copy-cat country by investing heavily in R&D. “One of the most interesting initiatives being carried out by the Chinese government is the “Made in 2025” initiative. The idea, inspired by the German initiative “Industry 4.0”, is that China wants more prominence in the country’s production chains, and the figures are quite impressive, specifically, it seeks to make domestic content of the main components of production chains grow from 40% in 2020 to 70% in 2025 “.

The program aims to position itself as a pioneering country in the generation of new information technologies, in high-end machines and robots, in maritime equipment and highly technological ships, in rail transport, in new sources of energy and in energy saving vehicles, in new agricultural machinery, new materials, and in biopharmacy; all of which are critical industries for development within the next 30 years.

Another growth dimension in China that must be taken into account is geographical expansion. China has stepped up its efforts to expand its economic growth across the country, specifically in the western regions. The “one belt, one road” initiative, an attempt to rebuild the old silk route and the creation of a parallel maritime route, created in 2013 by the Chinese authorities, benefits from the enormous low-cost capital capacity of the Chinese economy.

In terms of renewable energy investment, China’s investment is above that of the US, the UK and France combined. In addition, it considers it a key industry when it comes to positioning its global prominence. Most importantly, China is making the necessary efforts to build an economy and society that can meet most of the challenges of the future.

In terms of world trade, China is the largest trading partner of 124 countries, while the US is the main trading partner of only 56 countries. Equity and debt financial markets are growing and gaining in depth. China has already outgrown the Japanese stock market, although it still lags behind the US and European markets, while its bond market is behind that of both the US and Japan.

Shah is therefore convinced that China’s role in the Asian region, and in the world, will only grow, despite the many challenges it faces: “China is becoming the leader in global innovation, in economy, in politics, in international diplomacy and in innovation,” he concluded.

MFS Investment Management: “It’s a Very Complex World for the Fixed Income Investor; a Passive Approach Doesn’t Make Sense”

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During the 2017 MFS European Investment Forum in London, Bill Adams, Global Fixed Income CIO for MFS Investment Management, explained the different structural reasons why the Boston-based global investment management firm argues that the low interest rate environment will persist for some time, mainly because of a series of structural factors that are persistent headwinds, such as the level of global indebtedness, the disruption of technology which fundamentally affects the lack of inflation in wages, and demographic trends.

Examining structural trends

From a cyclical perspective, global growth has improved, but inflation expectations, both from the point of view of market participants, and from the point of view of central banks, have been persistently wrong.

“It is mainly in developed markets where inflation projections in economies are not being met. This is due to the lack of inflation in wages, money is not being put into workers’ hands and they have less money to return to the economy. And it is precisely this discontent with wages that has provoked the resurgence of populist movements. The disruption of technology has affected workers from both the middle and working classes, who’ve had to return to the labor market with lower wages. The economy’s inability to create inflation is an important issue,” said Bill Adams.

Another issue affecting wage inflation is demographic trends. In developed countries, birthrates have fallen below the level needed to sustain population growth (i.e., more deaths than births). According to MFS ‘research, this has very clear implications for economic growth, inflation and the demand for fixed income products. When older, more experienced workers retire, they do so with higher wages than those workers entering the labor market who may have lower productivity, less experience, and lower wage expectations. “We are seeing an economy that is constantly being challenged by lower growth and inflation in wages.” Adams noted that as more people approach retirement, their needs for income are greater than their needs for growth, the natural movement of these people is to seek greater exposure to fixed income than to equity. “This movement creates a persistent demand in the market for high quality debt.”

Incidentally, the leverage level of the global economies has increased considerably. “Any economy whose debt-to-GDP ratio exceeds 100, is impeding future growth by bringing it into the present. We know that the central banks responded to a challenging macroeconomic situation during the Global Financial Crisis, increasing the level of debt on their balance sheets, which caused higher leverage in the economy. There has certainly been an improvement in the metrics on the corporate side, but on public balance sheets, we are reaching the future that we have leveraged, and therefore, we are now struggling to achieve greater growth.”

The performance of central banks

Following Janet Yellen’s announcement at the Federal Reserve’s last meeting in September, the Fed’s balance sheet assets will decline from $ 4.5 trillion to $ 3.5 trillion. This will gradually remove liquidity from the market. But when you look at the central banks as a whole, they continue to provide greater liquidity. But, in global terms, the market continues to pursue an accommodative policy as long as central banks continue to maintain a large number of assets in their balance sheets. This is a trend that MFS does not expect to be reversed until the second half of 2018.

“The Fed’s performance has been very transparent and patient, revealing its plans very prudently. The plan that has been put in place to gradually reduce the size of its balance sheet reflects that they have spent a lot of time, energy, and trillions of dollars in getting the economy out of the stagnation of the financial crisis. I doubt they’d want to risk that progress because of a miscalculation in monetary policy, so the withdrawal will be very slow. Reducing that balance will put interest rates on a positive trajectory, but as long as it runs smoothly, it will ensure that interest rates rise gradually.”

Although similar growth trends are being observed in Europe, there is still no impact on the interest rate environment. European growth has lagged behind the US for years and is now closing that gap with the help of the European Central Bank. “Inflation in Europe starts from a smaller base, and is not yet at a US level.” explained the asset manager.

Where are the opportunities in global fixed income?

Adams argued for the importance of talking to investors about preserving capital, but believes that it is equally critical to expand the opportunities presented in fixed income beyond the country in which the investor resides, seeking global alternatives, and ultimately seeking an active process, with a strong credit selection process, rather than a passive investment or exposure to ETFs.

“At MFS we are increasingly comfortable with the duration of the United States, rather than with the duration of developed Europe or Japan. We are comfortable in choosing portfolio duration, but we are overweighting US duration over developed Europe and Japan. This is an example of how global duration is diversified.”

Since mid-2016, it has been a wonderful environment for risky assets, both high-yield fixed income and emerging fixed income experienced a rally, but at MFS they are beginning to question those good tidings, wondering whether it’s time to ‘take the foot off the accelerator’ and emphasize the preservation of capital.

“Investors should continue to invest in fixed income. There are still opportunities in the market for adding value, but instead of being in an environment where all you had to do was to buy the market, this environment requires higher levels of selection. You need to understand the companies and know what they are offering their investors.”

Adams compared the dispersion in the spreads of the lower part of the high-yield debt spectrum (with CCC rating) against the higher part (BB rating). A collapse in the levels of spreads has been observed and risk has positioned itself aggressively as compared to its lower risk alternative. “High-yield debt with a CCC rating has a default rate of approximately 35% historically, so if you try to get returns by investing in this type of debt, your losses could be greater than what you expect to earn. We are not convinced investors are being adequately compensated for the level of risk in the CCC part of the market.”

Finally, the MFS global debt specialist points out that emerging sovereign debt has responded less aggressively than the high-yield market, so that relative value bets can still be positioned in emerging markets.

“We live in a very complex world, with many challenges for bond investors. We are promoting among our investors the benefits of expanding their investment horizon, with an active selection of securities in that type of environment. When the spreads are compressed and the markets lack dispersion, a passive focus on investments doesn’t make sense to us,” he concludes.

Who Are the European Rising Stars of Asset Management 2017?

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The 25 men and women under the age of 40 standing out in the European investment industry, according to Financial News, includes a list of “talented individuals that are also the asset managers, consultants, strategists and client relationship specialists who have the opportunity to change the way the industry generates and distributes wealth in the years to come”.

The winners of this year’s award were voted by a panel of Financial News editors and industry judges who assessed entrants on four criteria: investment criteria, strength, new developments and ‘better than the rest’, and are:

Maya Bhandari, portfolio manager, multi-asset, Columbia Threadneedle Investments (38)
Olivier Blin, head of systematic strategies, Unigestion (36)
Emma Cameron, partner and senior investment consultant, Hymans Robertson (37)
Gunjan Chauhan, head of cash, Emea, State Street Global Advisors (35)
Joanna Crompton, portfolio manager, JPMorgan Asset Management (33)
Daniel Danon and Tobias Knecht, portfolio managers, Assenagon (35)
Gaetan Delculee, global head of ETF, indexing and smart beta sales, Amundi (32)
Louise Dudley, portfolio manager, Hermes Investment Management (32)
Dana Harlan, senior client strategist, transition management, BlackRock (32)
Joubeen Hurren, portfolio manager, Aviva Investors (28)
Christopher Inman, principal consultant and head of UK DC investment advisory, Aon Hewitt (34)
Amy Jupe, executive director, alternative investments and manager selection group, Goldman Sachs Asset Management (34)
Wesley Lebeau, portfolio manager, CPR Asset Management (35)
Howie Li, chief executive, Canvas — part of ETF Securities — (34)
Garvan McCarthy, CIO for alternatives, Europe, Mercer (35)
Tom Morris, fund manager, Majedie Asset Management (30)
Joseph Mouawad, emerging markets analyst, Carmignac (33)
Andrew Mulliner, portfolio manager, Janus Henderson Investors (34)
Henning Potstada, portfolio manager and deputy head of the multi-asset total return unconstrained team, Deutsche Asset Management (37)
Jean Sayegh, head of fixed income, Lyxor Asset Management (35)
Simon Smiles, chief investment officer for ultra high net worth, UBS Wealth Management (39)
Nicolas Trindade, senior portfolio manager, AXA Investment Management (34)
Felipe Villarroel, portfolio manager, TwentyFour Asset Management (33)
Naomi Waistell, portfolio manager, emerging markets equities, Newton Investment Management (32)
Matthew Yeates, quantitative investment manager, Seven Investment Management (27)

According to the publication, “this year’s crop reflects the efforts of their firms to produce strong performance in order to attract investors and grow assets during a time of low yields and low interest rates.”

Spend Your Time Wisely

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Both professional fund investors and asset managers are wasting valuable time in fund due diligence. The processes fund investors use to collect, and asset managers use to provide, due diligence information on funds are outdated and long due an upgrade.

Fund investors would like to spend less time gathering and organising information and more time performing analysis. Asset managers have similar inefficiencies. They are spending too much time repetitively ‘cutting and pasting’ the same content to respond to similar fund investor requests. Asset managers want to provide high quality information, faster responses, greater transparency – and highlight the strengths of their offering.

At Door, we are reimagining the future of fund due diligence. Bringing asset managers and professional fund investors together, we have collaborated on a new industry-led platform – a digital solution to streamline the due diligence process and drive value to all participants.

Door is solving a common problem

The challenge for fund investors is that fund information is not always provided by managers quickly and in consistent and easily comparable formats. While DDQs are a primary source of critical information for undertaking fund research and ongoing monitoring, current industry practice involves exchanging Word or Excel documents over email. The process is slow and archaic. Changes to information through time are not easily captured or understood.

Today, we know professional fund investors are spending as much as two thirds of their time gathering and organising basic due diligence information on funds and only one third on analysis and decision-making. Door aims to put better, more efficient tools into the hands of fund investors and to make responding to information requests more it more efficient for asset managers to respond to information requests.

Receiving fund information quickly and in an easily comparable format is key. Door is making this possible. We have brought together principles of standardisation and digitisation. This combination creates far-reaching benefits for professional fund investors and asset management companies alike.

Creating industry best practice

There is a high level of overlap between the questions asked by professional investors in their DDQs. While differing in shape and size, the vast majority of questions asked by investors intend to elicit similar responses from asset managers. Our research shows that over 90% of all the questions asked by investors of asset managers’ products around the world are common!

Standardisation has played an important role in the development of many modern advancements. It provides the basis for consistency in measurement and technical development.

The benefits of applying best practice standards to the questionnaire process were recognized first by the professional fund investor community – within the membership of the Association of Professional Fund Investors (APFI). Door has worked alongside APFI to deliver an independent and industry-led solution that continues to evolve with the changing investment environment and due diligence requirements: The Standard Questionnaire.

The Standard Questionnaire was built through an intensive 12-month collaboration that explored a wide array of questionnaires, RFPs, RFIs and DDQs from around the world and across many categories of investors. Dozens of participants, including leading global fund investors and asset management firms, provided input and feedback. 500 hours of research, analysis and collaboration went into the development of The Standard Questionnaire. With the support of the firms collaborating on Door, The Standard Questionnaire is fast becoming the new industry best practice. Asset managers’ responses to The Standard Questionnaire are designed to sit at the ‘core’ of a fund investor’s due diligence information gathering process. One of the key benefits of The Standard Questionnaire is that asset managers can better understand the information requirements of their clients. The questions are clear and easily understood. The quality of responses and the level of transparency improves.

Fund selectors point out that it takes far too long to receive responses to information requests: a turnaround time of three to five weeks. Asset managers are challenged with an ever-growing backlog of requests. Door enables asset managers to provide access to The Standard Questionnaire for their funds to fund investors on a real-time basis and investors are alerted to the most recent changes to information.

Fund selectors also struggle with the level of quality and depth of responses to questions asked. Because volumes are so high and asset managers receive many similarly worded questions, they often simply ‘cut/paste’ ready made responses. In many cases, these responses are a good fit for a question posed but too often, similar sounding questions don’t receive adequate attention. With a wider breadth of questions being asked, the depth and quality of responses suffer.

Tools for Humans

We believe that fund due diligence is a vital function. We believe that humans, not robots, are best equipped to make investment decisions on funds. In depth analysis and ongoing reviews of both robust qualitative and quantitative information is crucial. As both funds and asset management firms are ultimately managed by people, we think it takes solid human judgment and decision-making to invest in them. To make decisions, fund investors must have robust, up to date, easily comparable information. Changes to information need to be communicated more quickly.

Door’s aims are simple. We want to improve the due diligence information gathering process. We want professional fund investors to be able to apply their analysis to easily comparable, deep fund information. We want faster and more democratic communication of changes to information.

We want to give back the time to both fund investors and asset managers to focus on value.

About Door collaborators

Collaboration and mutual understanding are key facets of Door’s success. As Co-Founders of Door, we have brought together complementary, hands-on experience from both sides of the due diligence process.

The industry has been seeking innovation. So, Door brought the innovators together. The firms helping our drive for change include All Funds, Santander, Mediolanum, Pictet Wealth and EFG. Asset managers include Franklin Templeton, Columbia Threadneedle, Schroders, Aberdeen Asset Management, Robeco, M&G, Artisan Partners, Aviva Investors, Pictet Asset Management and Nordea Asset Management. Door is now working with 20 cross-border asset managers and over 50 fund investor firms. The number grows daily.

If you would like to join our community, please visit www.doorfunds.com

Column by Door

OMGI: You Missed the Rally… Is it Still a Good Time to Invest in Asian Equities?

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The Asian equity market continues to rise, exceeding by over 50% the lows it touched in 2016. So far this year, the MSCI Asia Pacific Ex Japan index surpasses the S & P 500 by more than 21%, while the renminbi appreciated 6% against the dollar, is it still a good time to enter this asset class if you missed the rally? Josh Crabb, Head of Asian equities for Old Mutual Global Investors, thinks so.

During the OMGI Global Markets Forum in Boston, the Lead Manager for the Old Mutual Asian Equity Income and Old Mutual Pacific Equity funds reviewed potential threats to this asset class, their valuations, and the likelihood of a positive return in the next 12 months, along with the issues that are the main alpha generators in their portfolios.

What should concern the Asian equity investor?

In recent weeks, rising tensions between the United States and North Korea have created a lot of noise in the markets. According to Crabb, it should not be something that worries investors too much, because it estimates a 99% probability that nothing happens and only 1% that something truly bad happens that entails a 100% drop in the markets. Multiplying probabilities, this only represents a 1% impact on the markets.

“If we look back in history and review other events which were much more extreme, such as the Cuban missile crisis, with two powers which were more equipped and with a much worse possible final result, we can see that the market only moved between 3 % and 4%. If, as investors, this issue genuinely concerns us, and without this comment being meant as advice, the solution would be to buy put options on the Kospi (Korea Stock Exchange Index) index, which are “out of the money” and whose expiration date is long-term, this strategy will pay better than leaving some extra cash in the portfolio.”

The spectacular rally experienced by this asset class since last year to date has made some investors think that they are late for the party, but it’s still a good time to enter if you take into account the valuations in terms of the price /book value rate: “If investors had entered to buy in February 2016, when the price / book rate was 1.2 times, they would have obtained, with 100% probability, a positive return in the next 12 months, according to historical data of this asset class for the last 20 years. At present, the market stands at a rate of 1.7 times, at some distance from the lows, but still with a very favorable outlook, with a probability of obtaining positive returns around 70% to 80%. Right now it’s one of the cheapest asset classes and it’s still a good time to invest, with a good chance of making a profit.”

Another common concern is how Asian equities will react to potential interest rate hikes by the US Federal Reserve. The base scenario many investors anticipate is that if there is a new rate hike due to rising inflationary pressures, the dollar will appreciate, impacting negatively on commodity prices, emerging markets and in particular in Asia. Which is something that, according to Crabb, should not necessarily occur. To explain his vision, the Old Mutual manager goes back to the period between 2003 and 2007 to contrast the behavior of the dollar, as measured by the DXY (US Dollar Index), and the Asian equities under a restrictive cycle by the Fed : “While the American market was recovering from the technological bubble, Asian market rates were at low levels for a number of reasons: qualitative easing measures in Thailand, terrorist attacks on Indonesian discos, SARS disease, prices of real estate in Hong Kong were at half their current value and the economy was weak. When the Federal Reserve began to raise rates, the dollar began to appreciate at first to then depreciate, but the stock market continued to rise throughout the cycle. It is not until the Federal Reserve begins to lower rates that the MSCI Asia ex Japan index begins to fall. If we go back to the current cycle and review what happened so far, we can see that the dollar started its rally in anticipation of the Fed rate hike and Asian equities began to get better returns. The dollar has already begun to depreciate, but Asian markets continue to rise.”

Crabb also argues that now that global conditions seem to improve, with China and Europe offering attractive valuations and greater economic strength, investors will begin to allocate more resources to these asset classes.

What is the correct approach to positioning in Asian equities?

When investors think of the next economic crisis, they refer back to the 2009 crisis. Although, according to Josh Crabb, the next crisis is likely to look more like the 2000 crisis, in spite of the fact that the S&P 500 fell quite a lot, many value stocks rose in absolute terms. In this way, the asset manager seeks exposure to companies expected to have a great growth because their market is going to have great growth. At present, there are five trends that the manager is considering as the main alpha drivers of the portfolio: Indian infrastructure, frontier markets, pollution in China, the Internet of Things (IOT) and artificial intelligence (AI).

Beginning with companies linked to the internet of things and artificial intelligence, Crabb emphasizes the irruption in homes of new products that will represent a revolution in the same scale that the mobile phone represented in its day. “Most of those present will have heard of Amazon Echo and Google Home. The previous week I was in Europe and basically nobody knew these products, or the fact that Microsoft, Alibaba, Samsung and a good number of companies are in the process of launching their own versions of these products that will completely change the way in which people interact. These devices allow you to connect every household appliance in the house using voice as a command. This will lead to a cycle of mass product proliferation that we can benefit from by participating in companies of a relatively small size in terms of market capitalization today.”

As an example, the asset manager mentions Primax Electronics, a Thai company that specializes in manufacturing microphones that are able to identify voices, used by Google home and Amazon Echo. While the valuation of the company measured as a P/E ratio is about 10.5 times, that of Alibaba is around 50 times. “When we think that this product has not yet reached Latin America, Asia or Europe and how many people will have it in a short period of time. We can see it’s a fantastic opportunity. In addition, this technology will be integrated into televisions, light systems, door bells and sprinklers. This reasoning can also extend to manufacturers of sensors, camera lenses and other products whose companies show cheap valuations and massive potential growth.”

Finally, Crabb mentions the issue of pollution in China, noting that those highly polluting companies, such as steel manufacturers that are not complying with environmental regulation or paying their taxes, will have to close in the not very distant future, deriving their production to those companies which are complying. “The population in China has reached a socioeconomic level which is high enough to start worrying about pollution. This is why the creation of job positions is no longer a priority, and they are beginning to give more importance to steel manufacturing companies that respect the rules, that create quality standards and that in the future will gain the extra volume lost by companies which fail to comply “.