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MFS Investment Management: “We Cannot Emphasize Enough the Fact that We Are Active Managers”

MFS Investment Management held its 2017 European Investment Forum on September 28-29, in London, an event that focused on the culture and investment philosophy of the Boston-based international asset management firm and offered its perspective on the challenges facing its clients. Through various presentations, the firm’s investment teams presented the outlook for its fixed income, equity and multi-asset strategies as well.

MFS’ CEO, President and CIO, Michael Roberge, reviewed the firm’s key differentiating attributes, and William J. Adams, CIO of Global Fixed Income, walked clients through the firm’s spectrum of fixed income capabilities. Attendees were then able to meet with MFS Meridian Funds’ managers, who shared the investment objectives, key features, current positioning and future outlook for each of the asset classes in which they invest.

The event was attended by the MFS Meridian Funds Global Opportunistic Bond Fund’s portfolio manager Pilar Gómez-Bravo, the MFS Meridian Funds Emerging Markets Debt Fund’s institutional portfolio manager Robert M. Hall, the MFS Meridian Funds U.S. Corporate Bond Fund’s portfolio manager Robert Persons, the multi-asset MFS Meridian Funds Global Total Return Fund’s institutional portfolio manager Katrina Mead, and the MFS Meridian Funds Prudent Capital Fundy Prudent Wealth Fund’sportfolio manager Barnaby Wiener.

An active management firm

Lina Medeiros, president of MFS International Limited, hosted the event and welcomed attendees from Germany, Spain, Italy, Switzerland, France, Portugal and the United Kingdom. During her presentation, she reminded those present that MFS continues to seek investment opportunities for its clients around the world. “Today we are one of the top active asset managers, focusing on what is important -a company’s fundamentals- to provide the returns that clients expect. This focus results in low-turnover and high active share portfolios.”

For MFS, having an integrated global research platform, in which ideas are developed and heard, translates into better performance. While performance over 3- and 5-year periods is important, MFS is pleased to deliver strong over longer time horizons, according to Medeiros.

“For the 10-year period ending on July 31, 2017, 93% of our MFS Meridian Funds Assets are in the top half of their respective Morningstar categories. In addition, approximately 70% of these funds’ assets are in the top quartile compared to their Morningstar peer groups. As a management firm that has been in existence since 1924, we know we can take a long-term perspective on how we invest. We marry that long-term perspective with a disciplined, repeatable investment process.”

Medeiros emphasized the importance for MFS to demonstrate its culture and values through its managers’ different presentations. “We treat our clients honestly, with as much transparency as possible regarding our approach, our products and our people. We are a company based on teamwork and collaboration, which we believe drives better decision-making. We are not satisfied, nor are we complacent, with our achievements; we must continually strive to achieve high standards, especially in the dynamic industry in which we work and in an increasingly complex world where intellectual curiosity is vital. Everything changes so fast that without that intellectual curiosity, it would be easy to fall behind.”

For MFS, it’s essential to do the right thing for its clients, employees and communities. They take their responsibility very seriously, as it is vital to manage clients’ assets prudently. “We are passionate about client service and about the MFS culture. We like what we do and we believe in what we do. It is precisely our values that have helped us to create a sustainable and diversified business.”

With more than EUR 400 billion in assets under management at the end of the third quarter of 2017, MFS has a diversified client base of institutional and retail clients globally, which allows it to bring efficiencies of scale in major markets around the world. At the asset class level, they have also developed in-depth experience in all areas of equities, fixed income and multi-asset class investing.

What are clients’ main worries?

In order to get a better understanding of the concerns of institutional investors, financial advisors and professional fund buyers, MFS commissioned a study in which it sought to know the sentiment of investors. Medeiros also referenced an independent study at the event, which sought to uncover the factors that motivate their investors’ decisions.

For professionals surveyed in the 2016 MFS Active Management Investment Sentiment Study -500 financial advisors, 220 institutional investors and 125 professional buyers – the main concern is a sharp drop in the markets. This is followed closely by global geopolitical instability. For the retail financial advisers (1,628) and professional fund buyers (670) surveyed in the NMG Global Investment & Brand Study, cited by MFS at the event, long-term performance was the most decisive factor, followed by the consistency and quality of the investment process. “Investors are as worried about how the results are obtained, as about the results themselves,” Medeiros added.

The signals sent by the market

There are numerous forces that are changing the value chain in all aspects of the financial services industry. Companies are shifting their business models to meet current challenges. According to MFS, facing all the factors that are challenging the industry – the backlash against globalization, the move toward passive and heightened regulatory scrutiny – it is imperative to have conviction in what they do and in how they do it. “Sometimes clients ask us why we don’t offer a certain product or capability. If it turns out that the capability is needed for clients in the long run, in a strategy where we feel we can add alpha, we will develop it. But, if it’s just a fad, we will pass. We cannot emphasize enough the fact that we are active managers. Now more than ever, when the tide of passive investment has raised all markets, it’s important that we remain on course.”

How to Invest in Funds Affiliated with Not One But Two Nobel Prize in Economics Winners

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Richard H. Thaler received the 2017 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Back in 2002 the recipient was Dr. Daniel Kahneman. They both are associated with Fuller & Thaler Asset Management. Founded in 1993, the company has pioneered the application of behavioral finance in investment management taking advantage of over or under reactions in the stock market.

Primarily focused on U.S. small-cap equities, they offer tailored strategies which include two mutual funds as well as separately managed accounts. As Benjamin Johnson, Associate Director at the firm, told Funds Society, they would be open to potential new opportunities with Latin American family offices.

They currently also have two mutual funds that invest in small caps and one would be considered a US Small-cap blend strategy –the Fuller & Thaler Behavioral Small-Cap Equity Fund (FTHSX), as well as a sub-adviser for a US Small-cap Value focused mutual fund offered by JPMorgan Distribution Services, the Undiscovered Managers Behavioral Value Fund (UBVLX).

According to the Royal Swedish Academy of Sciences, “Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.”

Thaler has written six books and several articles. He also performed a Cameo in the 2015 movie The Big Short, were he explains the psychological fallacy of a hot hand to help reveal how a key part of the financial crisis came about.

OMGI Global Markets Forum Brought Together over 50 Latam and US Offshore Business Professionals at its Annual Boston Conference

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Old Mutual Global Investors held its conference’s fourth edition in Boston on September 20^th and 21^st. This event was attended by more than 50 industry professionals from the main US Offshore business centers in the United States – Miami, New York, San Francisco, Houston, San Antonio – and major markets in Latin America – Santiago, Montevideo, Lima, and Bogota.

After a brief presentation of the agenda by Chris Stapleton, Head of Americas Distribution, Allan Macleod, Head of International Distribution, welcomed the attendees and presented the latest corporate level changes experienced by Old Mutual Global Investors (OMGI). Its parent company Old Mutual plc, is going through a process of splitting the business into four new independent units. This ‘managed separation’ which began in March 2016 is expected to be completed by the end of March 2018. Following this, Old Mutual Emerging Markets, Old Mutual Wealth, Nedbank, and OMAM, will operate separately.

Furthermore, he mentioned that OMGI’s single strategy business, will start operating as a separate entity from its multi-asset strategy business, which is distributed through Old Mutual Wealth, and which is mainly carried out in the United Kingdom. The details of the organizational structure of the new entity are still pending.

In terms of business volume, the project which began in 2012 with US$ 17.9 billion and 162 employees, and a clear inclination for the UK business – which at that time represented 95% of its client base, and with only 2 people engaged in the international distribution business, is now a reality with US$ 47.4 billion dollars in assets under management (figures at the end of Q2 2017) and 292 employees, including 22 members of the international team, with presence in London, Edinburgh, Zurich, Milan, Singapore and Hong Kong, along with Boston, Miami and Montevideo, through entities affiliated with Old Mutual.

“For the third consecutive year, our net business in terms of international clients is higher than the UK business. And, this does not mean that we are having a bad year in the UK, where we are third in the market. We are having a fantastic year, but the international side is even stronger,” he pointed out.

Among the features that distinguish Old Mutual from the competition, Macleod pointed out that OMGI is an investment-led business in which there is no chief investment officer, since each of the strategies has its own investment process, its own philosophy, and its own profit and loss account. Which is something that provides a series of benefits, the most obvious being the fact that it allows business diversification. “We have some portfolio managers who operate based on the fundamentals, others who follow a systematic approach, while certain managers base their operations only on macro factors and others only focus on stock selection. But they all have active management with a high alpha in common.”

With respect to the firm’s culture, OMGI identifies itself as a small-sized asset manager, and has the intention of remaining so, displaying an extremely flat structure, something that is reflected in the fact that both the portfolio managers and the sales representatives have remained in the firm, which is especially significant in London which has a high turnover ratio in the sector. Another key factor has been the incorporation of talent from other large firms such as Schroders, BlackRock, Invesco, with Nick Payne, Head of Emerging Global Equities, and his team being the latest recruits.
As for the Americas team, the unit went from consisting solely of Allan Macleod and Chris Stapleton, to include five other people: Andrés Munho, Head of Sales LatAm, Santiago Sacias, Regional Manager for the Southern Cone, Francisco Rubio, Sales Specialist for Americas Offshore, and Valentina Rullo and Collen Rennie, as part of the sales support team.

The Event’s Agenda

Following the introduction came the turn of the investment specialists; Mark Nash, Head of Global Bonds shared his vision on how the withdrawal of monetary stimuli by central banks will affect the global fixed-income market.

Then, Josh Crabb, Head of Asian Equities, pointed out that despite the latest rally in Asian markets, valuations remain reasonable and the probability of making money in the next 12 months is very high. In turn, Old Mutual Gold & Silver FundManager, Ned Naylor-Leyland, spoke of the return of gold to its traditional role as means of facilitating trade, particularly in the East.

Before lunch, Ian Heslop, Head of Global Equities and Justin Wells, Global Equity Investments’ Director, commented on the difficulty of predicting macroeconomic events and their effect on markets, as well as the importance of active investment in the current market.

Following the break, Paul Shanta, Manager of the Old Mutual Absolute Return Government Bond Fund, explained the opportunities created in the interest rate market and inflation after the growth spurt in Europe. In emerging markets, Nick Payne, Manager of the Old Mutual Global Emerging Markets Fund, noted that the gradual withdrawal of monetary stimulus by the Fed should not divert the course of these markets. Meanwhile, Ian Ormiston, Manager of the Old Mutual European (ex UK) Smaller Companies Fund, commented on the importance of investing in companies rather than countries in order to find opportunities in the European region.

The day was brought to a close by David Sandham, an investment writer who moderated the discussion between Ian Heslop, Mark Nash, and Ian Ormiston, where it became clear that each strategy is free to choose its own investment process and philosophy, giving differing degrees of importance to economic factors, markets or companies.

Investing with a micro or macro approach, which side wins the debate?

During his speech in the discussion panel, Mark Nash advocated the importance of macroeconomic factors for recognizing the moment for exiting the market, something that in his opinion is decisive in generating an excess return.”Macro investment will return with the withdrawal of monetary policy stimulus, as markets resume their ability to price assets, and more importantly, when divergence between different economies begins to emerge. Volatility will then return to the macro and opportunities in operations with currency and interest rates will appear. How will these movements affect the price of assets? It’s something directly related to the level of current interest rates and where they are headed. We believe asset prices will not rise, especially as long as the central banks maintain a gradual withdrawal.”

He also pointed out the importance of geopolitical events as a factor that will shape fundamentals in bond markets: “The Brexit referendum, Trump, the forthcoming elections in Italy, introduce some de-correlation in the markets, creating opportunities in macroeconomic level opportunities, at least in fixed income markets”.

However, while Ian Heslop acknowledges the importance of macroeconomic factors in the determination of asset prices, he points out that the problem lies in the lack of capacity to predict interest rate behavior and then trying to construct a portfolio based on the shape taken by the yield curve. “Our team made a conscious decision not to take that road, given the difficulty of getting it right. While we do not make explicit predictions, if we are capturing our predictions in the portfolio, we obviously do so implicitly.”

Meanwhile, Ian Ormiston commented that it is generally believed that asset prices depend on fundamentals, when in fact they depend on investment flows. In turn, the latter depend on the various bets that investors are making in the market. “There is always the possibility of market distortion at any moment, pushing prices away from fundamentals, and that is when the opportunities appear.”

Regarding whether the asset management team should have a committed relationship with the company’s management team, Ormiston again stressed the importance of knowing the corporate governance apparatus, since many opportunities for investment can be derived from this. “If we talk about the cultural differences in Europe, the culture of each company is linked to sociological factors, which although important are difficult to quantify. At OMGI, we have the opportunity to manage our portfolios as if the business was our own; we have their confidence because we have the right motivations. It is extremely important to know a CEO’s motivation. In Europe, it is quite common to find businesses managed by families, so we have to be careful when it comes to how the management is aligned with our interests. We are investors, we need to be sure that these managers will deliver credibility and sustainability, although to be fair, we must admit that the first filter is quantitative, if the characteristics of the balance are not good, the stock is not considered.”

With an opposing approach, Ian Helsop acknowledged that while the quality of the management team is an important issue to be understood, since Reg FD (Fair Disclosure) was issued by the SEC, the management team cannot provide more information than what can be extracted from the balance sheet and from the income statement. In particular, he recalls an occasion when, after having spent a lot of time and effort in preparing the questions, before he actually finished asking each question, the firm’s investor relations representative began to answer, because he already had a predetermined answer for it. However, Heslop did acknowledge that when you move down the market cap scale, a relationship with company management does become more important.

Finally, Helsop also added that his fund’s investment philosophy can be summed up as “today’s search for stocks which investors will want to buy tomorrow” and disclosed its investment methodology: “In order to invest efficiently, we have to have a good knowledge of fundamentals and information at the company level, plus a good understanding of how the macro part will affect the company. But I think there are better ways to understand a company than to perform a traditional bottom-up and top-down analysis, such as trying to understand where investors are positioned in the markets, something that later translates into the styles and themes that are used in the portfolio. This bias derives from the market, rather than having a country or sector bias drawn from macroeconomic factors.”

Trying To Pick Winners Is Not Enough

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Deciding on the most fitting vehicles to implement a strategy is no easy task. The investments we want to own in the portfolio can conflict with the investments we need to own. Human nature creates bias, which leads us to desire investments that have recently performed well, potentially hindering us when the market turns. These biases can also create concentrations that can leave the portfolio woefully off-balance at times, potentially limiting its ability to deliver the return goals we seek.

Investing should be about the windshield—not the rearview mirror. Everything you choose should ultimately be valued by its ability to enhance your portfolio’s potential performance against its benchmark (which should represent your return and risk targets). If it doesn’t raise the level of expected risk-adjusted return—either by enhancing future returns or reducing risk—then it shouldn’t go in your portfolio.

Important questions to ask

When evaluating an investment, investors should ask: (1) How does it align with your overall investment strategy and objectives? (2) What could cause it to gain or lose value, and by how much? and (3) How does it work with the other holdings in your portfolio? Finally, if you decide to include it in the portfolio, (4) How much of it should you own?

Assessing the choices

The selections are vast. Individual stocks may offer terrific upside, and individual bonds can offer permanence and definition, but both security types also bring security-specific risk that can be undiversifiable in a portfolio, and thus, tough to recover from if anything goes wrong. Owning a stock that doubles in price is terrific to share at cocktail parties, but remember that if the stock can go up a lot, it also has the ability to fall a lot. Just ask anyone that owned internet stocks in 2001 or energy stocks in 2015. Big winners can be great to brag about, but big losers can wreak havoc on a portfolio.

Examining mutual funds extends beyond looking up rankings and reading analysts’ reports. Evaluating each fund’s track record is important. However, don’t simply screen for top performers, but rather understand each fund’s performance, and how it was created. How have both the fund and its benchmark performed in a variety of market environments, in terms of both risk and return? What types of markets does the fund do well in (both absolute and relative to its peers/benchmark), and when does it lag?

If you’re considering exchange-traded funds (ETFs), many factors play a role in selection, but cost is usually a big determinant. In addition to fees, you should also consider implicit costs, including your cost of trading, and the ETF’s own rebalancing costs. Whether you seek a targeted or broad market exposure, ensure the ETF you choose provides what you’re looking for, without introducing additional market factors. In addition, examine the ETF’s liquidity and structure. Is it truly an ETF, or is it really structured like a unit investment trust in an ETF wrapper? This can be an inefficient way to track the index you’re seeking to mirror. Is the ETF connected to an index mutual fund? This will potentially cause it to lose some of its tax efficiency. These issues are easily avoided with a little research.

Whether you’re after mutual funds or ETFs, one common question should be, “Is the manager who runs this product any good at it?” Answering this question involves evaluating the manager’s tools, experience, process, and history. Two products could have similar returns over a five-year period. One delivered an amazing return for one of those years, combined with four so-so years, while the other delivered four years of above average performance and one year that was a little below. Which of these two would you rather own in the future?

Asking the right due diligence questions

Researching and choosing from the ever-growing number of options can be time consuming and confusing. A disciplined investment selection process helps a portfolio to potentially capture the returns the market offers, while limiting the decisions that either unintentionally lever bets or reduce diversification—either of which can negatively impact its ability to generate the return goal.

When adding something new to your portfolio, two key thoughts to consider: (1) Does it offer something unique that the portfolio doesn’t currently have, or is it increasing the bet on something I already own? And (2) What do I plan to sell in order to buy it, and what happens when I remove that security from the portfolio? You don’t automatically become better diversified simply because your list of “best ideas” gets longer.

Selecting the right investments is a lot more than choosing what you think will go up the most in the future. It also involves owning a few things that you likely aren’t happy to own—this is where real diversification comes from. At BlackRock, in-depth knowledge on every investment being considered is gleaned by putting each through rigorous analysis. It’s critical to devote the necessary time to this step in the portfolio construction process, or find ways to outsource it to a party capable of conducting the necessary, ongoing research.

Build on Insight, by BlackRock, written by Patrick Nolan, CFA

Investing involves risks, including possible loss of principal.
In Latin America and Iberia, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security and it is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of your relevant jurisdiction. If any funds are mentioned or inferred in this material, such funds have not been registered with the securities regulators of Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain Uruguay or any other securities regulator in any Latin American or Iberian country and thus, may not be publicly offered in any such countries. The securities regulators of any country within Latin America or Iberia have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America or Iberia. The contents of this material are strictly confidential and must not be passed to any third party.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.
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Cancun will host the Latin Private Wealth Management Summit

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The Latin Private Wealth Management Summit, the premium forum for Latin America’s leading single and multi-family offices as well as qualified service providers, will take place next October 9-10, 2017, at The Ritz Carlton in Cancun, Mexico.

The invitation only event will explore key topics and issues, for the private wealth industry in the region. Amongst the key topics to be discussed are:

Economic Outlook and Investment Opportunities in Latin America
The Challenges in Structuring a Family Office
Implications of the Creation and Implementation of the Family Office Protocol
Migration of Assets to the United States
Best Practices for Impact Investments
The Influence of Technology in Family Offices

Speakers include:

Alfonso Carrillo, Partner, Family Office Mexico SC
Javier Lopez Casado, CEO, Finaccess Advisors
Marcelo Benitez, CEO, Proaltus Capital
Alvaro Castillo, President, Loyola Asset Management
Arturo Hierro, VP, Loyola Asset Management
Ivan Carrillo, CEO, Creuza Advisors
Antonio Gastelum, Presidente, Antonio Gastelum Inc.
Javier Mtanous Arocha, Partner, MG Capital

For more information, please contact Deborah Sacal or visit the following link.

Gold Shines as Washington Stumbles

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One of the more unique aspects of this year’s market is that both risky assets as well as investments that seek to hedge those risks are advancing simultaneously. Despite last week’s selloff, the S&P 500 is up 8%, the tech-heavy Nasdaq Composite 15% and the MSCI Emerging Markets Index over 22%. Yet oddly, typical “safe-haven” hedges are also doing remarkably well, such as long-dated U.S. Treasuries and gold.

Gold’s performance, up 12% year-to-date, is particularly interesting. A hard-to-define asset, gold is often thought to perform best when either inflation and/or volatility is rising. This year has been notable for both falling inflation and record low volatility, raising the question: What is powering gold’s ascent and can it continue? Two trends stand out:

1. Real rates have flattened out

Gold is most correlated with real interest rates (in other words, the interest rate after inflation), not nominal rates or inflation. While real rates rose sharply during the back half of 2016, the trend came to an abrupt halt in early 2017. U.S.10-year real rates ended July exactly where they began the year, at 0.47%. The plateauing in real yields has taken pressure off of gold, which struggled in the post-election euphoria.

2. Political uncertainty has risen

Although market volatility has remained muted, albeit less so the past week, policy uncertainty has risen post-election (see the accompanying chart). This is important. Using the past 20 years of monthly data, policy uncertainty, as measured by the U.S. Economic Policy Uncertainty Index, has had a more statistically significant relationship with gold prices than financial market volatility. In fact, even after accounting for market volatility, policy uncertainty tends to drive gold prices.

Enlarge

To a large extent, both trends are related. Investors came into 2017 expecting a boost from Washington in the form of tax cuts and potentially infrastructure spending—resulting in the so-called “reflation” trade. Thus far neither has materialized. While economists can reasonably debate whether either is actually needed, lower odds for tax reform and stimulus have resulted in a modest drop in economic expectations. This, in turn, has caused a reversal in many reflation trades, a development that has allowed gold to rebound.

Going forward, gold’s performance may be most closely linked with what happens in D.C. Absent fiscal stimulus, the U.S. economy appears to be in a state of equilibrium: modest but stable growth. In this environment, gold should continue to be supported by historically low real rates and continued political uncertainty. Alternatively, if Congress does manage to enact a tax cut or other stimulus, we are likely to see some, albeit temporary, reassessment of growth and a corresponding backup in real rates, a scenario almost certainly negative for gold.

While I won’t pretend to have any special insight into the Greek drama that is modern day Washington, for now my bias would be to stick with gold. Most risk estimates still suggest gold has a low to negative correlation with most asset classes, suggesting a mid-single digit allocation in most portfolios. Yes, a positive surprise out of Washington would arguably hurt gold. But for now I would prefer to bet on gold’s diversifying properties rather than political stability.

Build on Insight, by BlackRock written by Russ Koesterich, CFA

Investing involves risks, including possible loss of principal. Investments in natural resources can be significantly affected by events in the commodities markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of August 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results.

In Latin America and Iberia, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security and it is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of your relevant jurisdiction. If any funds are mentioned or inferred in this material, such funds have not been registered with the securities regulators of Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain Uruguay or any other securities regulator in any Latin American or Iberian country and thus, may not be publicly offered in any such countries. The securities regulators of any country within Latin America or Iberia have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America or Iberia. The contents of this material are strictly confidential and must not be passed to any third party.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Think Outside the Style Box

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According to the Fall 2017 Pantone Fashion Color report for New York, this season is all about Grenadine red and tawny Autumn Maple. I like a pop of color, but I’m still keeping my traditional black and navy staples. If you are a traditional style box investor, can smart beta exchange traded funds (ETFs) refresh the style in your portfolio?

The investment universe was traditionally carved up between growth and value, and large and small securities. Several decades ago, Morningstar introduced the now-ubiquitous nine-box matrix known as the style box, providing a framework to evaluate funds against peers with similar investment styles.

Today, technological improvements and better access to data have democratized style investing beyond simple value and size screens to target historically rewarded style factors in a cost effective way.

The evolution of style

Style box investing began with actively managed style exposure funds and moved on to style-tilted index funds weighted by market cap. The industry is now turning to factor exposures that more directly screen for attributes traditionally sought by active funds—cheap, trending, high quality, more stable and smaller names—weighted by the strength of these metrics.

Style factor investing with ETFs takes the concepts introduced with the nine-box grid and modernizes them. Just as investors combined blend, growth and value funds in a portfolio, they now have the ability to combine momentum, quality and value factor exposures—more directly targeting these broad, historically persistent drivers of return.

Investors can consider a few ways to update their style:

1. Swap growth for momentum

Traditional growth investing seeks capital appreciation by investing in companies that have high expected earnings and may steadily increase in value. Similarly, the momentum factor targets stocks that are trending up in price. In other words, the term “momentum” is a new way to describe what many growth managers have historically tried to deliver.

Momentum factor investing tends to be highly cyclical and focused on a concentrated portfolio of stocks displaying stronger price appreciation than their peers. This exposure directly maps to the investment characteristic that has driven returns for active growth managers in the past.

2. Upgrade blend to quality

Blend investments have traditionally provided broad exposure that’s neither strongly growth nor strongly value. Many active managers in the blend section of the style box enhance their performance over the long run by looking for securities that have strong earnings and a reasonable price.

In the same way, quality investing focuses on buying bellwether firms with strong balance sheets and stable earnings. Investors in this style have typically been rewarded in the later stages of the economic cycle, including downturns, as companies with resilient business models and attractive return on equity may offer defensive protection in the portfolio.

Quality factor indexes can potentially provide a more appropriate benchmark to help investors evaluate blend managers. These indexes more closely align with the active investment process than broad market cap-weighted indexes.

3. Deepen your value

Value investing draws on the idea of buying companies that are priced inexpensively relative to their fundamentals. Value investors invest in companies with pro-cyclical business models that tend to be rewarded in market booms and over longer holding periods.

Value factor investing tends to have more concentrated style exposure and stronger factor weighting than the average active value fund or market cap-weighted value index, residing on the far left-hand side of that Morningstar style box. ETFs with this focused exposure to value can be a low-cost way to target inexpensive names, which have historically fared well when interest rates are rising.

Smart beta ETFs

Smart beta ETFs take advantage of time-tested investment ideas and today’s advances in data and technology, providing a lower-cost alternative to mutual funds. But that doesn’t mean you have to remake your portfolio: Smart beta ETFs can refresh the traditional style box framework. Investors may consider complementing or replacing existing active strategies to help reduce average costs or seek to improve overall performance.

In LatAm, style-savvy smart beta strategies to build a balanced U.S. portfolio include iShares Edge MSCI USA Momentum Factor ETF (MTUM), iShares Edge MSCI USA Quality Factor ETF (QUAL) and iShares Edge MSCI USA Value Factor ETF (VLUE) While in Spain they include the iShares Edge MSCI USA Momentum Factor UCITS ETF (IUMO), iShares Edge MSCI Europe Quality Factor UCITS ETF (IEQU) and iShares Edge MSCI World Value Factor UCITS ETF (IWVL).

Build on Insight, by BlackRock’s column written by Sara Shores

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.Investing involves risk, including possible loss of principal.
In Latin America and Iberia, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security and it is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of your relevant jurisdiction. If any funds are mentioned or inferred in this material, such funds may be registered with the securities regulators of Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain Uruguay or any other securities regulator in any Latin American or Iberian country and thus, may not be publicly offered in any such countries. The securities regulators of any country within Latin America or Iberia have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America or Iberia. The contents of this material are strictly confidential and must not be passed to any third party.
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Legg Mason Boosts its Offerings in Brazil with the Launch of Two New Feeder Funds

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Legg Mason continues to prove its strong commitment to Latin America, and especially to Brazil, the country where the asset management company recently decided to launch two new feeder funds, which are investment vehicles that allow local investors access to funds with UCITS format, registered in Dublin.

“We are presently living in times in which the political and economic situation has significantly helped Brazilian investors to start looking for new sources of return and diversification in their portfolios. To begin with, the Central Bank of Brazil has slashed its benchmark rate, from 14,25% on October 2016 down to 9.25%, a rate level which had not been seen since 2013. This has caused offshore products to start to seem more attractive to the local investor, as the yield on Brazilian debt is no longer as high when compared to the rest of the world. Another issue that must be taken into account is regulatory change. The Brazilian Securities and Exchange Commission changed its definition of qualified investor (proving investors with at least 1 million BRL, approximately 315,000 dollars), allowing the opening of the fund distribution business to mass affluent customers, greatly benefitting local feeder funds, vehicles that allow the investment of 100% of their assets in offshore funds platforms in Dublin. Finally, we should mention the country’s economic situation, strongly linked to the political scene. Brazil needs an urgent reform in its pension system in order to address its huge fiscal deficit, and it is very likely that this reform will be postponed until after the presidential elections of 2018. This uncertainty increases the search for opportunities outside the country,” says Roberto Teperman, Head of Sales at Legg Mason in Brazil.

The first of the funds, the Legg Mason Rare Infrastructure Value, is an equity fund that invests 100% of its assets in global listed shares of companies that develop long-term infrastructure projects,such as gas and electricity distribution and transmission networks, water supply and wastewater, airports, toll roads, railways, ports or communication networks. This strategy seeks to achieve a target yield of G7 inflation rate + 5.5% and offers very low correlation with the local equity market given its exposure to global alternative assets.

The second one, the Brandywine Global Credit Opportunities, is a fixed income fund that, using a top-down approach, invests in alternative credit in the global bond markets across the credit spectrum, including exposure to debt opportunities in emerging markets that the fund’s manager finds most attractive. In addition, the fund may use long and short positions through the use of derivative instruments, mortgage-backed debt instruments (MBS), high-yield debt and investment-grade debt.

These two strategies are in addition to the two feeder funds that the asset management firm already distributes in the Brazilian market, the Legg Mason Western Asset Macro Opportunities Bond and the Clear Bridge Global Equity.

“We try to launch fixed income and equity feeder funds in order not to focus on just one asset class. The decision to launch the Brandywine Global Credit Opportunities feeder fund was determined by the high demand for fixed income assets with high yields in Brazilian investors’ portfolios. In this regard, the Brandywine Global strategy offers a unique approach to investing in fixed income, uses a top-down process, and its average annual volatility fluctuates around 4%. However, the Legg Mason Western Asset Macro Opportunities Bond tries to leverage the opportunities that may arise in terms of duration in the yield curve, using a bottom-up approach in portfolio construction that uses relative strategies in credit, and usually has an average annual volatility close to 7% or 8%, with a limit of 10%,” adds Teperman.

Finally, Lars Jensen, Head of Legg Mason Americas International commented that the launch represents Legg Mason’s commitment to the region. “We intend to launch new feeder funds in Brazil before the end of the year. At some point, the hope is to have all our Investment Managers represented in Brazil.”

SRI Investing Strategies

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I am often asked “What is SRI?” or variations such as ESG Investing, Sustainable Investing, Mission-based Investing, Responsible Investing, Ethical Investing, Green Investing, Impact Investing or Socially Responsible Investing. Whatever the name, SRI is an approach to investing that recognizes the generation of long-term sustainable returns is dependent on sustainable companies and capital markets. More importantly, SRI explicitly acknowledges the relevance of environmental, social and governance (ESG) factors to financial returns.

According to US SIF, SRI Investing continues to grow with $8.72 trillion assets under management as of the beginning of 2016. A decade ago there was less than $1 tillion invested in SRI strategies. There are several trends behind this significant growth, certainly in the last few years. Investment Advisors, Multi-Family Offices and Institutional Investors are increasingly incorporating SRI and ESG factors into their investments analysis and portfolio construction. Recently, firms like Goldman Sachs and BlackRock launched major product initiatives in this field which has led to a greater awareness on Wall Street of the importance and client demand for increased SRI engagement. Another reason has been due to the growth of the UN Principles for Responsible Investment (PRI). The PRI initiative is an international network of investors working together to put the six Principles for Responsible Investment into practice. As of today, there are over 1’700 signatories which include asset owners, investment managers and service providers.

There are 6 key SRI strategies which include:

Negative Screening: the exclusion of assets based on ESG criteria
Positive Screening: the inclusion of best-in-class assets based on ESG criteria
ESG Integration: the systematic and explicit inclusion of ESG data into investment decisions
Impact Investing: targeted investments aimed at solving social or environmental problems
Engagement: which is active engagement with company management around ESG issues (selective or overlay)
Thematic Investing: the selection of assets based on their categorization under certain sustainability themes (e.g. renewables).

Negative Screening is the traditional and most common approach which excludes individual companies or entire industries from portfolios if their areas of activity conflict with an investor’s values. This process can be quite flexible as it can rely either on standard sets of exclusion criteria or be tailored to investor preferences. For instance, investors may wish to exclude companies with sales generated from alcohol, weapons, tobacco, adult entertainment or gambling – so-called “sin stocks.” Some faith-based investors also exclude companies involved in contraception and abortion-related activities.

In the case of government bonds, investors may seek to avoid an entire country based on the sovereign’s compliance with select international standards (e.g. human rights or labor standards). In general, one of the major criticisms of this approach is that it reduces the investable universe.

Positive screening seeks to identify companies working towards social or environmental good. This screening uses ESG performance criteria and financial characteristics to select the best companies within an industry or sector, usually relying on a sustainability rating framework. This is usually a more knowledge-intensive process than exclusionary screening because it requires understanding which factors are relevant for each industry and evaluating individual issuers on each of these factors.

ESG integration, unlike positive screening, seeks to incorporate material ESG risks and growth opportunities directly into traditional security valuation (e.g., through inputs such as earnings, growth or discount rates) and portfolio construction. This approach has gained traction in recent years and is based on the premise that additional ESG information not covered by traditional analysis could have an impact on the long-term financial performance of a company. ESG integration involves understanding how companies handle social, environmental and governance risks that could damage their reputations and whether they are positioned to capture ESG opportunities that could give them a competitive edge.

Impact investing explicitly seeks to generate a positive social or environmental impact alongside a financial return, unlike other SRI approaches, where progress on social and environmental issues may be a by-product of financial enterprise. The niche market of impact investing is growing fast. Examples include community investing, variants of microfinance, as well as private equity-like deals investing in such sectors as education, healthcare, basic infrastructure and clean energy.

Shareholder Engagement recognizes that as a shareholder of a company, investors have the ability to take an active part in the governance and activity a company employs. Shareholder influence attempts to shift corporate behavior toward greater compliance with ESG principles. Influence can be exerted by investors through direct communication with corporate management or by filing shareholder proposals and proxy voting. The influence of shareholder engagement on ESG issues has risen in recent years. The majority of the proposals filed have been focused on political activities of corporations, the environment, human rights/diversity, and governance.
Thematic Investing targets specific themes such as climate change, water, human rights or gender lens investing. For instance, using a gender lens to empower women would evaluate companies and investment opportunities based on women’s leadership, women’s access to capital, products and services beneficial to women and girls and workplace equity.

A common concern about SRI investing is that there is a premium to be paid for making responsible investments that would naturally diminish investment returns. For instance, by applying an exclusionary screen the available investable universe is reduced and thus this could have a negative impact on returns. Given that there are many different SRI strategies, making comparisons becomes more challenging. For example, shareholder engagement in single stocks might create long-term value but what benchmark would this be compared to?

Thus, an investor may choose to add value(s) to investing in order to achieve a positive environmental or social impact alongside financial returns; align investments with values and core beliefs; and improve portfolio risk/return characteristics by factoring sustainability into investment decisions. The way an investor can implement this objective would be to:

Develop a beliefs statement regarding ESG integration and sustainability
Update Investment Policy with ESG Policy
Develop asset allocation strategy in line with the ESG Policy
Implement changes in the portfolio
Manage and monitor the portfolio.

SRI investing does raise strong emotions and disputes from both sides of the debate. Opponents to SRI are opposed to anything other than financial factors affecting the value of a security. Likewise, some advocates for SRI have such deep moral convictions that they cannot imagine the possibility that the integration of ESG factors could have anything but a positive effect on investment returns. The challenge therefore is to ignore the emotion based in pre-conceived beliefs coming from these opposing views and rather focus on the facts.

Ultimately, I believe there is an important value added in helping our clients identify the core values that are important to them and creating an investment strategy that empowers those values.

Column by Philip Carey

Terry Simpson: “Economic Expansion is Becoming Sustained and Synchronized Across the Globe”

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The global economy is moving towards more sustained economic expansion, and is still far from an inflationary environment. Although the Fed has begun its normalization process, there are still many questions surrounding the policies of the European Central Bank, the Bank of Japan, the Bank of England, and even the Bank of Canada, which recently decided to increase its reference rate by 25 basis points, the first-rate increase in seven years. Structurally, the economic environment is one of low growth and low interest rates, but what do these conditions mean for returns? Where can they be found in this environment? Terry Simpson, Multi-Asset Investment Strategist at the Black Rock Investment Institute, answered these, as well as other questions, during his visit to Miami for the presentation of the firm’s strategic vision for the second half of the year to their clients.

Simpson, who joined BlackRock in 2004, explained that they use various tools to be able to identify economic growth that is not captured by traditional economic indicators, such as capex, employment, or industrial production. In addition to estimating the growth of the G-7, the seven major world economies through advanced economic indicators using an econometric technique called Nowcasting, they also use Big Data technology to continue to innovate in their internal forecasting elements. “There are household spending patterns and business developments that you cannot capture with traditional economic variables, and we believe our differentiated approach gives us a competitive advantage over the data analyzed by the market consensus on the street,” he says.

In this way, BlackRock establishes that the G-7 12-month forward growth forecasts are shaping up to be 2% over the next 3 months, between 25 and 30 basis points above the market consensus, a difference that may seem small, but in which a low growth environment can be sufficient to influence asset allocation decisions and investor sentiment. “We are seeing that the improvement in global economic growth is in a synchronized trend. The United States’ economic cycle is ahead, but the rest of the G-7 economies are now catching up.” Last year all the improvement came from the US economy, but now there is significant improvement in Germany, Canada, Japan and France, which is very important to increasing global growth.”
Continuing with the theme of sustained economic expansion in the United States, Terry Simpson addressed a frequent question about the duration of the cycle. “The United States is now eight and a half years into this economic cycle, this is the third longest economic expansion in US history, and many expect it to end soon. This is erroneous. They are just thinking about it from the wrong perspective. By our analysis, we can see that, since the last cycle, we are still far from reaching what we call the potential in the economy, which still argues that this cycle has room to run and this cycle should be measured in years, not quarters.”

Next, Simpson referred to the more aggressive tone from central banks in the early part of the summer, beginning with statements by Mario Draghi at the Sintra symposium in late June during the European Central Bank Forum, where the market interpreted that the European authority on monetary policy is prepared to be more aggressive in withdrawing its economic stimulus measures. The FOMC then continued with its third-rate hike in 6 months. But this should not divert investors’ attention, who should nevertheless bear in mind that most central banks aim to keep inflation close to their target: “Since 2015, core inflation in the US, the Eurozone and Japan has remained very stable and flat, if anything we have recently seen a decline in US inflation, which has raised much concern. The reality is that Central Banks really have not been hitting their inflation targets, so it is very likely that they are not going to be aggressive while removing their expansionary policies and that is one thing that markets misinterpreted, and structurally, we believe that we are going to be in this low-growth, low- interest rate environment for the foreseeable future.” Most central banks are mandated to manage around an inflation target. Some banks have a dual mandate, like the Fed with full employment as their second mandate, but the vast majority of them conduct their monetary policy in relation to an inflation target, projections on GDP and developments on the output gap. In any case, in Europe inflation is around 1%, while the inflation target is 2%. “If Draghi announced the tapering of the QE program this year, we think it would be a very gradual wind down.”

China is another frequent concern for investors. BlackRock uses economic data to evaluate the trend for China’s PMI, a leading indicator for the country’s economic prospects. The current data remains high by recent historical standards, the highest of the last three years, so they do not believe that a hard landing is as automatic as some think. “Policy makers have identified the imbalances in the economy and are starting to address them; and that is a good thing. This doesn’t necessarily mean it’s going to be a smooth ride, but at least they recognized the importance and potential impact on the economy,” adds Simpson.

Rethinking Risk

At a time when volatility levels are at a minimum, it is important to ask about the likelihood of a shift to a high volatility regime. According to BlackRock, if we are currently in a low volatility regime like the present one, there is a 90% probability that we will be in the same regime one year forward and a 70% probability that the same regime will be maintained over a three-year period. This is an important fact, since most clients are de-risking their portfolios because they believe that such low volatility is not normal. “Volatility is at such low levels because of conventional and unconventional monetary policy measures of recent years. However, there are other reasons at the macroeconomic level: GDP, unemployment, and inflation volatilities are at levels below their historical rates. It is consistent that if you have low macroeconomic volatility, you will have low financial volatility, so we do not expect volatility to mean revert.”

It may rise from the current levels, but it would take a geopolitical shock or economic shock to shift us into high volatility regime. In other words, investors should maintain their current exposure to risk, or even increase it. “This is a contrarian call as investors are pairing risk exposure back and taking profit. We still like equities and high quality credit fixed income” he said.