Last Friday, the Economic and Monetary Affairs Council of the EU approved the General Approach reached on MMFR at Council Working Party level. This General Approach followed an original proposal by the European Commission in September 2013.
The European Fund and Asset Management Association (EFAMA) is of the view that a well-functioning European market for MMFs has an important part to play in the European Commission’s flagship Capital Markets Union initiative. EFAMA, whose members manage both VNAV and CNAV funds, has from the outset indicated that a proportionate and balanced Regulation which ensures the viability of both CNAV and VNAV MMFs, can contribute to supporting alternative sources of financing to the real economy and financing European growth.
“We believe the agreement reached under the Netherlands Presidency, taking into account market realities, to be an improvement on crucial matters. We are nonetheless conscious that the magnitude of the MMF reform will require a major overhaul of the industry. We also believe that further work is necessary during the Trilogue discussions to safeguard current achievements but also to further ensure that the rules work in practice and secure the viability of all MMFs”.
Peter De Proft, Director General of EFAMA, commented: “Ultimately, EFAMA believes the final agreement should find the right balance between financial stability and economic growth. Ensuring the viability of MMFs as an alternative source of short-term financing with a crucial role to play in our capital markets is all the more important considering the unprecedented economic, political and societal challenges faced by the European Union today”.
With the uncertainty generated around the outcome of Britain’s impending EU membership referendum, Thomson Reuters Lipper investigates if recent UK fund flows can reveal any insights into investor sentiment. Insights from Thomson Reuters Lipper follow below, with supporting data attached.
On mutual funds, examination of data on the U.K.’s Investment Association (IA) classifications (sourced via Thomson Reuters Lipper) shows an overall drop of 18% in total assets of the funds in all IA classifications and estimated net outflows of GBP 38 billion for the 12 months to May 31, 2016. January 2016 proved the worst month overall, with nearly GBP 16 billion of net outflows that month alone.
The largest IA sector (UK All Companies), with some 12% of all IA assets, has suffered a yearly net outflow of GBP 9.2 billion. In the last 12 months it has experienced only a single positive month of flows (July 2015).
The IA Sterling Strategic Bond sector has been worst hit as a proportion of its overall size in the U.K. market. With 4% of total assets overall, it has suffered nearly GBP 12 billion of net outflows to the end of May 2016, without a single monthly net inflow for the year.
Of the diversified categories the conservative IA Mixed-Asset 0%-35% has proven most resilient, with GBP 410 million of net outflows for the year to the end of May 2016. By contrast, the IA Mixed-Asset 20%-60% sector has suffered nearly GBP 5 billion of net outflows for the last 12 months.
Only four of the IA sectors have experienced more than GBP 1 billion of net inflows in the 12 months to the end of May: Property, Global Equity Income, Global Bonds, and Targeted Absolute Return. The latter sector has been the standout success story for the U.K. market for the last 12 months. It has collected nearly GBP 10 billion of net inflows. This is despite the corresponding average fund return of the sector being a negative 0.6% over the same period.
Beware distortion in yield curves and discount rates. Last week was certainly a jittery one in equity markets, but in bond markets history was being made.
The yield on Germany’s 10-year government bond went negative for the first time ever. A Swiss government bond set to mature 32 ½ years from now also saw its yield go red. Bank of America Merrill Lynch offered a chart showing global interest rates hitting their lowest levels in 5,000 years.
What happens in the world of fixed income matters a lot to equity portfolio managers: It gives us valuable signals about what’s going on in the macro environment, and hence the potential for companies to grow revenues and earnings; and by providing us with discount rates it directly influences how we value those potential earnings.
So what are these historic numbers telling us today?
‘Brexit’ Risk Has Jolted Markets… On the macro side there was certainly a bout of risk aversion last week. As bond yields plummeted, gold rallied to test the $1,300/oz. level. Last Monday the VIX Index rocketed from 17 to 23.
Much of this seemed to come down to a spate of opinion polls showing momentum for the “Leave” camp in the U.K.’s referendum on membership in the European Union. Brad Tank, Erik Knutzen and I will discuss the longer-term implications of that vote in a special edition of CIO Weekly Perspectives this Friday, so keep an eye out for that.
… But Equities Are Still in a Rally For now, it’s enough to point out that this binary risk may well be priced back out of markets by this time next week. In the meantime, while bonds trade with historic low yields, U.S. equities are still only down around 2.5% from their recent high, itself close to an historic level.
How do we make sense of these apparently contradictory market signals? Is one of them spectacularly wrong in its growth forecast, and if so, which is it—the bond market or the equity market?
This is the wrong question to ask in the post-financial crisis world. Instead we should ask about the extraordinary forces causing these fixed income records to tumble.
U.S. Curve Shaped by Fed and Non-U.S. Investors Take the shape of the yield curve, for example. A flat or inverted curve tends to make investors anxious: A flat or inverted spread between the two-year and 10-year U.S. Treasury yield has been quite a reliable forward indicator of a U.S. recession over the years.
Today that spread is around 90 basis points. A year ago it was as steep as 175. But this move has been not only, or even mainly, about investors reducing their long-term growth expectations. Indeed, part of it has been a move upwards at the short end of the curve as the Federal Reserve has talked about normalizing the Fed Funds rate in response to the U.S. economic recovery.
At the long end, rather than a new sense of economic gloom, yields have declined due to demand from investors in the Eurozone and Japan, where rates are low or even negative. In comparison, long-dated U.S. Treasuries look relatively attractive. There is simply a shortage of high-quality yielding assets in the world.
In short, we shouldn’t assume that bond markets are forecasting a hostile environment for equities.
Low Discount Rates Make Equities Look Expensive We should also think about how low risk-free discount rates affect our views on equity valuations. Through the simple mathematics of discounted cash flow models, lower discount rates lead to higher P/E ratios for the same level of future earnings. Higher levels of inflation and interest rates are one important reason why the average P/E ratio for the S&P 500 Index was around 15x from the 19th century until 2007, and 16.5x between 1950 and 2007. In the type of low-rate environment we have experienced in more recent years, the average has been 17-19x.
To be clear, we still caution that current equity market valuations represent optimistic expectations for earnings growth over the next 12 months—but we do not think they represent “irrationally exuberant” expectations, as a cursory look at relative value versus bonds might suggest. Bond markets still provide useful signals to equity portfolio managers, but we need to be clear about what they are—especially when those markets rewrite the history books as vigorously as they are at the moment.
The collapse of Lehman Brothers, the Greek debt crisis, the end of US quantitative easing, the slump in commodity prices, the slowdown of the Chinese economy and depreciation of its currency, the war in Ukraine, sanctions against Russia… a series of events that contributed to putting an end to a decade of strong growth in emerging markets. Some of these countries are more exposed to the slowdown than others. IMF returns to favour In the “noughties”, following sovereign defaults in Latin America, Russia and Asia in the 80s and 90s, the IMF was severely undermined. In his book analysing recent crises and the roles played by international institutions, Joseph Stiglitz, Nobel Prize-winning economist, wrote that the IMF made mistakes in every area in which it intervened: development, crisis management and the transition from communism to capitalism. From Stiglitz to Varoufakis (the former Greek Finance Minister), its critics have been blistering. Leading emerging countries have even gone as far as proposing an alternative to the Washington institutions with the creation of the New Development Bank (NDB) 70 years after the IMF was founded. The NDB, launched in July 2014, has authorised capital of 100 billion dollars. Its principal objectives are stated to be infrastructure and sustainable development. Eskom, the South African electricity production and distribution company is one of the beneficiaries of its financing operations.
Meanwhile, the 2008 crisis put the institution that had always been considered as the guarantor of global financial stability back in the saddle. This is reflected in the subsequent history of IMF loans, which had sunk in the preceding decade. In 2012, Greece was one of the first economies to turn to the Fund and in March 2012, the IMF approved a 28 billion euro loan to the Greek economy.
The IMF went on to sign a number of other agreements, particularly in 2015, including:
flexible credit lines for Mexico and Poland, for 47 billion and 15.5 billion SDRs respectively (equivalent to 67 and 22 billion dollars).
a 36-month extended arrangement for Ukraine for 12.3 billion SDRs (17.5 billion dollars).
Apart from the credit arrangements, in common with other countries, Ukraine benefits from a technical assistance programme. The elixir of devaluation Irrespective of what was happening in the eurozone (social tensions, increasing protests and breakthrough of populist parties, from Madrid to Paris), the fact is that the sharp rise in commodity prices encouraged various emerging markets to massively increase their spending. The Greek debt crisis turned out to be an early sign of what was going to happen in other regions of the world. In many cases, the noughties led to excessive debt and unsustainable deficits once prices fell. This is illustrated by the situation in Brazil and Venezuela. Unfortunately, the reforms to achieve sustainable growth, such as they are, were not sufficient. These countries therefore needed more than recourse to international institutions to try and counter the deterioration in their public finances. Devaluation or the adoption of a floating exchange mechanism are another potential solution. China and Argentina were the first to go down this road at the beginning of 2014. They were followed by several other countries, mostly commodity exporters, such as Russia, Kazakhstan, Nigeria and Venezuela. After its currency fell nearly 30% against the dollar, in November 2014, Russia’s central bank allowed its currency to float almost freely, leaving itself the possibility of intervening if needed. Due to its efforts to defend the rouble, its currency reserves dropped from 475 billion dollars to 373 billion dollars between November 2013 and November 2014.
Without going into too much theory, it is useful to remind ourselves of some of the hoped-for objectives when countries devalue their currency:
in terms of financial balance: to limit the haemorrhaging of a country’s currency reserves which are often needed to cover foreign obligations (such as a high debt in dollars),
in terms of fiscal balance: offset the drop in income by revaluing foreign receipts in local currency,
in terms of balance of trade: improve competitiveness and increase exports. This can have indirect effects such as increased production and lower unemployment.
In fact, many countries that let their currency depreciate have already seen a boost in their exports. This is largely the case for manufacturing countries (less so for countries that are net exporters of commodities). The differences are also regional as can be seen from the graph below. Emerging Europe is the region that has benefited most. Not yet the panacea Recourse to the IMF or currency depreciation are just a few of the remedies that have been adopted by governments in difficulty. They are not sufficient to resolve the ongoing structural problems. In particular, corporate debt seems to be one of the main variables in the equation. Companies in emerging countries are facing growing difficulties. Some, like Pemex, need to be restructured and recapitalised as their prospective income streams have been undermined. In Malaysia and Brazil, 1MDB and Petrobras have suffered severe governance problems. The remedies described above are only a first step in the search for solutions.
Column by Jean-Philippe Donge, Head of Fixed Income at BLI
According to the latest managed accounts research from global analytics firm Cerulli Associates, discretionary accounts will continue to exhibit strong growth.
“Clients are largely working with financial advisors because they want to delegate investment management,” comments Tom O’Shea, associate director at Cerulli. “In addition, advisors are looking to take over more of the discretion as it allows them to easily manage their books of business.”
In their latest annual report, U.S. Managed Accounts 2016: Leveraging Digital Advice to Maximize Scale, Cerulli analyzes the fee-based managed account marketplace, which has been a core research focus since the firm’s inception in the early 1990s. This report, in its fourteenth iteration, is the result of ongoing research and quarterly surveys of asset managers, broker/dealers, and third-party vendors, which captures more than 95% of industry assets.
“Many rep-as-portfolio-manager platforms and unified managed account platforms allow advisors to tie client accounts to portfolio models the advisor has created,” O’Shea explains. “In a discretionary arrangement, the advisor can quickly rebalance these accounts and swap out underperforming managers for new managers. In a client discretionary arrangement, where the client has the ultimate control, advisors need to get permission from the client before making changes to the portfolio.”
“If current trends in the managed account industry hold, discretionary accounts will reach $4 trillion by year-end 2019,” O’Shea adds.
“We believe Southern Europe has a significant recovery potential”, said François Gobron, fund manager of GIS European Equity Recovery, a Generali Investments‘ fund. “Clear signs point in that direction, including the economic growth in Spain and a rapidly rising employment in Italy. Furthermore, as companies in Southern Europe still trade at lower earnings multiples than their European peers, we believe their potential to outperform is meaningful. By leveraging our proven stock-picking skills, the fund will benefit from the re-rating of Southern European markets as soon as confidence in the macroeconomic environment is fully restored.”
More dynamic Southern European economies and supportive valuations at company level reinforce Generali Investments’ confidence in the recovery potential of Southern Europe and the investment theme underpinning the GIS European Equity Recovery fund, one of the few equity funds on the market specifically focused on this region.
The GIS European Equity Recovery fund invests mainly in equity securities issued by companies listed on Southern European markets. Spain, Italy, Portugal and Greece represent 99% of the total equity invested. The fund favors companies with strong operational leverage and large restructuring potential. The fund adopts a pure stock-picking investment process and selects companies based on the quality of their strategy and management. The shortlisted companies are valued through a Discounted Cash-Flow model combined with a recently introduced, proprietary and innovative Monte-Carlo model designed for highly uncertain environments. The fund invests in companies offering at least a 50% upside potential in terms of total return on a 3 to 5 years’ time horizon, leading to a low annual turnover ratio of 25%.
“Companies in Southern Europe still show higher upside potential relative to their European peers as the local financial markets have not fully recovered yet from the 2008 and 2011 crises and valuations remain lower on a relative basis”, added Gobron. For instance, the 11x median of the 2017 price-to-earnings ratio estimates of the fund’s portfolio compares with 15x for the Eurostoxx. The 1.0x median of the 2017 price-to-book value ratio estimates of the fund’s portfolio compares with 1.7x for the Eurostoxx. “We are therefore strongly convinced that the companies we decide to invest in after our careful strategic analysis have the potential to outperform peers on an operational basis going forward.” He concluded.
Recording the biggest single-tower real estate transaction in the Asia-Pacific, BlackRock agreed to sell the Asia Square Tower 1, a 43-story office building in Singapore, to the Qatar Investment Authority.
QIA will pay S$3.4 billion, or 2.5 billion dollars, for the Tower located along Marina View at Marina Bay, making this the largest-ever single-tower real estate deal in the Asia-Pacific region.
Amongst its more than 1.25 million square feet of net lettable area, the most prominent tenant in the building is Citigroup.
BlackRock was advised by real estate consultant firms JLL and CBRE. According to Seeking Alpha, the tower was on the market since last year after bids by a consortium of Norway’s sovereign wealth fund and CapitaLand, and rival bids by ARA Asset Management failed to clinch the deal.
Asian managers have chosen multi-asset/balanced and income/dividend strategies as the top product strategies to promote to distributors in 2016.
According to a proprietary survey conducted for Cerulli’s Asian Distribution Dynamics 2016 report, asset managers from Hong Kong, China, and Taiwan will put the most effort toward marketing these strategies. In Singapore and India, asset managers give their strongest vote to plain-vanilla equity funds.
Notably, equity appetite went down in most Asian markets, with a greater preference for multi-asset/balanced funds.
In Hong Kong, Singapore, and Taiwan, asset managers have seen a rotation from high-yield bond funds two to three years ago to multi-asset, and most recently, dividend-paying funds. European and Japanese equity funds were most often mentioned during Cerulli’s research rotations earlier this year.
In a separate survey for Cerulli’s Asian Fund Selector 2016 report, results showed that the product strategies that fund selectors are looking for in 2016 broadly match what asset managers are promoting. European equities, Japanese equities, and multi-asset funds were the most favored investment strategies for selectors last year, and most believe the trend will continue in 2016.
As for liquid alternatives, Cerulli notes that asset managers are jumping on the bandwagon to either start or expand their liquid alternative offerings this year, due to an increasing use of liquid alternatives among global/regional banks as part of their discretionary portfolio offerings.
CC-BY-SA-2.0, FlickrFoto: PeterRosbjerg, Flickr, Creative Commons. Jupiter Asset Management entra en el mercado italiano de la mano de Matteo Dante Perruccio
Jupiter Asset Management, active asset manager with headquarters in London and offices in Continental Europe and Asia, announces its entry into the Italian market and the opening of a branch office in Milan. The announcement follows the appointment of Matteo Dante Perruccio as Executive Adviser supporting the development of Jupiter’s strategy in Italy.
Founded in 1985 as a specialist boutique with a strong investment-led culture, Jupiter Asset Management boasts a total of €49 billion assets under management (as at 31 December 2015). Over the past few years it has initiated a phase of internationalisation through expansion of its activities in Asia and several European countries, including Italy. Jupiter Asset Management offers multi-asset, equity, fixed income and absolute return investment solutions with a total currently of 16 funds registered for sales in Italy.
Matteo Dante Perruccio, Executive Adviser for Italy, said: “With a culture characterized by active fund management and an unconstrained approach to investments, Jupiter is well positioned to meet its objectives in Italy. I am convinced that the mix of values that differentiate Jupiter from its competitors and the strong performance track record of the funds available to Italian investors will be crucial in attracting Italian clients, contributing to the development of the company in the country”.
Matteo Dante Perruccio has already served for eight years as a non-executive Director of London-listed Jupiter Fund Management plc, and has 30 years’ experience in the asset management industry, including various roles in Pioneer Investments as Global Head of Distribution, Vice Chairman Pioneer Alternatives, CEO International and CEO of Pioneer Investment Management SgR.
The Standard Life InvestmentsEuropean Property Growth Fund has sold a portfolio of eight assets across Europe, as it adjusts its focus to concentrate on its core markets.
Logicor has acquired the portfolio of logistics assets from the fund in an off-market transaction. Located in Belgium, Germany, Italy and Hungary, the assets in the portfolio total 241,753 sq m with a total average occupancy rate of 99.7%. Tenants include third party logistics providers such as DB Schenker, DHL and online electronics retailer Redcoon.
This sale represents around 20% of the Standard Life Investments European Property Growth Fund, which reflects the significant emphasis the fund is placing on its research-led strategy of targeting its core markets in Europe. Proceeds from the sale of the portfolio will be reinvested in the acquisition of high quality assets across a range of sectors in markets such as the Netherlands, Germany, Spain and Ireland.
Veronica Gallo-Alvarez, Fund Manager of the Standard Life Investments European Property Growth Fund said: “This is a strategic transaction that meets our long-term objectives for the fund, which is about continuing to deliver robust long-term returns for investors. We are targeting income generating assets as well as opportunities to create value in core and recovery European markets with a demonstrable opportunity for strong rental growth. As part of this repositioning, we are already undertaking due diligence on a number of possible acquisitions.”
Mo Barzegar, CEO & President, Logicor added: “This is a well-let portfolio of high-quality modern logistics assets. This acquisition strengthens our pan-European logistics platform and is consistent with our strategy of investing in key logistics locations across the European supply chain.”
