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The Japanese Equity Market Remains Attractive

On Wednesday both the Federal Reserve and the Bank of Japan decided upon leaving interest rates on hold. However, the BOJ shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates. Its policy announcement had two main parts. First, it committed itself to continue expanding the monetary base until the inflation rate “exceeds the price stability target of 2 percent and stays above the target in a stable manner.” Second, it will start targeting the yield on ten-year Japanese government debt (JGBs), while continuing to buy about 80 trillion yen in JGBs annually.

A decision that former Fed Chairman, Ben Bernanke, found puzzling given the curent policy looks to both setting a price and buying a given amount at any price but he believes “that the BOJ was concerned that dropping the quantity target would lead market participants to infer (incorrectly) that the Bank was scaling back its program of monetary easing. Over time, assuming that the BOJ does adhere to its new rate peg, the redundant quantity target is likely to become softer and to recede in importance. The BOJ’s communication will accordingly begin to emphasize the yield on JGBs, rather than the quantity of bonds in the BOJ’s portfolio, as the better indicator of the degree of monetary policy ease.”

According to Tomoya Masanao, Head of Portfolio Management Japan at PIMCO, “the decision is in part a reflection of the BOJ’s recognition that base money expansion itself has little easing effect and that Japan’s neutral yield curve, which is neither expansionary nor contractionary for the economy, is steeper than the bank would have thought. The actual yield curve should not be too flat relative to the neutral curve otherwise the economy will be negatively affected through weakening of financial intermediation.”

Paul Brain, Head of Fixed Income at Newton Investment Management commented: “This is no bazooka from the BoJ but it’s an interesting approach nonetheless. Targeting long term rates as well as short rates reminds us of the period in the 1940s and 1950s when the US fixed 10 year government borrowing rates. It opens the door for more government spending finance at very low rates without further undermining the banking system.” While Miyuki Kashima, Head of Japanese Equity Investments, BNY Mellon Asset Management Japan said he believes the mid to longer-term prospects for the Japanese equity market remain attractive “as the domestic economy is at a rare transitional phase, moving from a period of contraction to one of expansion. The market sell-off this year has been largely due to external factors, and while Japan will be affected by any global slowdown for a period, the country has a large domestic base and can weather such turbulence much better than most economies. Contrary to Japan’s image as export dependent, reliance in terms of GDP is only about 15%, much smaller than most countries in Asia or Europe. The lower oil price is positive for corporate profits overall.’

Wine Investments to Benefit From Brexit

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A survey of over 100 UK IFAs and wealth managers has found that over a quarter expect the demand for investments in wine to grow over the coming 12 months as investors look for more real assets and diversification in the wake of the decision of UK voters to leave the EU.

According to Cult Wines, a specialist in the acquisition and investment management of fine wines, the research into the views of 101 UK intermediaries in July this year found that 27% expect Brexit to drive investments in this area.

Industry benchmark the Liv-ex Fine Wine 100 index gained 3.6% in June alone in the wake of the Brexit vote. This was the largest positive monthly movement since November 2010, and the index’ monthly closing level of 269.07 was the highest since August 2013.

In the week after the Brexit vote, Cult Wines says its trade sales rose 106%. The trend of strong sales has continued since then, the company says, as US and Asian investors have benefitted from weaker sterling against the dollar and the Hong Kong dollar.

The diversification element of invesing in a real asset such as wine is cited by about half, 48% of those intermediaries who see increasing investments in fine wine. Some 42% cited “attractive medium to long term returns”. The compounded annual return on investable wines since 1988 has averaged 10.65%, Cult Wines says.

Intermediaries also noted that awareness of wine as an invesable area has been rising among high net worth retail investors – as it has for alternative physical investments generally.

Cult Wines estimates the fine wines sector to be worth over $4bn annually, adding that “fine wines tend to perform well when the pound is weaker and boasts a number of defensive characteristics. Holdings in wine are not normally linked to other asset prices, with the long term correlation between wine prices and the FTSE 100 at just 0.04.”

Tom Gearing, managing director at Cult Wines, said: “An allocation towards fine wine provides investors with a number of guarding characteristics, and has the advantage of not necessarily following the general trend of lagging behind the rest of the market during economic expansion because demand is consistently strong. Real assets remain an attractive option as they tend to change in value independently of the core financial markets.”

Globally, sales of fine wines to investors continue to grow. Cult Wines opened an office in Hong Kong earlier in 2016; the market estimates that half of Bordeaux’s fine wines went to Asia last year, while its share of the Bordeaux export market has more than doubled over the past decade. Cult Wines’ own sales to Hong Kong in the first half of 2016 were £1.6m, and it expects annuals sales over £5m. Compound annual growth experienced in the region in the past four years has been 235%, and it expects annuals sales of £20m by 2020.

Net Sales of UCITS See Strong Rebound in Q2 2016

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The European Fund and Asset Management Association (EFAMA) has recently published its latest Quarterly Statistical Release describing the trends in the European investment fund industry in the second quarter of 2016.

The Highlights of the developments in Q2 2016 include:

Net sales of UCITS rebounded to EUR 71 billion, from net outflows of EUR 7 billion in Q1 2016.
Long-term UCITS, i.e. UCITS excluding money market funds, posted net inflows of EUR 44 billion, compared to net outflows of EUR 5 billion in Q1 2016.
- Equity funds continued to record net outflows, i.e. EUR 18 billion compared to EUR 4 billion in Q1 2016.
- Net sales of multi-asset funds increased to EUR 14 billion, from EUR 6 billion in Q1 2016.
- Net sales of bond funds rebounded to EUR 42 billion, from net outflows of EUR 9 billion in Q1 2016.
- Net sales of other UCITS increased to EUR 5 billion, from EUR 2 billion in Q1 2016.
UCITS money market funds experienced net inflows of EUR 28 billion, against net outflows of EUR 2 billion in Q1 2016.
AIF net sales increased to EUR 55 billion, from EUR 43 billion in Q1 2016.
- Net sales of equity funds fell to EUR 3.7 billion, from EUR 6.7 billion in Q1 2016.
- Net sales of multi-asset funds fell to EUR 15.2 billion, from EUR 20.3 billion in Q1 2016.
- Net sales of bond funds rebounded to EUR 7.3 billion, from net outflows of EUR 170 million in Q1 2016.
- Net sales of real estate funds fell to EUR 3.3 billion, from EUR 8.0 billion in Q1 2016.
- Net sales of other AIFs increased to EUR 22.5 billion, from EUR 11.5 billion in Q1 2016.
Total European investment fund net assets increased by 2.1% in Q2 2016 to EUR 13,290 billion.

Net assets of UCITS went up by 1.7% to EUR 8,073 billion, and total net assets of AIFs increased by 2.8% to EUR 5,217 billion.

Bernard Delbecque, Senior director for Economics and Research at EFAMA commented: “Net sales of UCITS rebounded during the second quarter of 2016 thanks a signification increase in the demand for bond funds and money market funds, which can be partly explained by the low interest rate environment and renewed expectations of further falls in interest rates.”

RIAs Continue to Win Marketshare, Growing at 6% While Wirehouses Shrink

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New research from global analytics firm Cerulli Associates reports that asset managers have identified registered investment advisors (RIAs), broker/dealer (B/D) mega teams, and home-office due diligence relationships as the groups with the largest pockets of opportunity to generate revenue and increase marketshare. These channels are also leading the trend toward more sophisticated, investment- and data-focused interactions that have traditionally been reserved for firms operating within the institutional space.

“In our survey of national sales managers, 67% rank increasing the technical skills of existing wholesalers to address more sophisticated advisor teams as the top priority,” says Emily Sweet, senior analyst at Cerulli. “We believe this expanding institutional influence in the retail market, especially in the areas growing most quickly, will continue for the foreseeable future.”

Cerulli projects that within these areas of growth, the independent RIA and hybrid RIA channels combined will increase their asset marketshare from 23% in 2015 to 28% in 2020. “While wirehouses still hold a substantial share of assets, RIAs are the growth story,” explains Kenton Shirk, associate director at Cerulli. “To build a relationship within an independent practice, wholesalers need to truly understand a firm’s investment philosophy and decision-making process.”

Cerulli’s latest report, U.S. Intermediary Distribution 2016: Evolving Roles in Distribution, focuses on the convergence of the institutional and retail markets and its influence over distribution strategies. In addition, the report analyzes trends related to advisor product use, portfolio construction, and allocation changes across industry segments.

Cash Levels Remain High

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According to the latest BofA Merrill Lynch Global Research report, cash levels rose from 5.4% in August to 5.5% in September – the two most popular reasons cited for high cash levels are a “bearish view on markets” (42%) and a “preference for cash over low-yielding equivalents” (20%).

Manish Kabra, European equity quantitative strategist, said that, “European investors have increased cash allocations to cover their sector underweights in Banks and Commodity sectors. Macro optimism is firmly at pre-Brexit levels, with economic growth expectations at their strongest since June.”

“Investors see an unambiguous vulnerability to ‘bond shock’ among risk assets, with the most crowded negative interest trades and EM equities susceptible should the Fed and especially the BoJ fail to reduce bond volatility in September,” said Michael Hartnett, chief investment strategist.

Other highlights include:

An all-time high, net 54%, of investors say equities and bonds are overvalued
Equity allocation relative to cash allocation is effectively the lowest it has been in 4 years, and is now at levels which have historically been a good entry point to stocks
83% of investors believe the BoJ and ECB will maintain negative rates over the next 12 months
Global growth expectations continued to rise, with a net 26% of investors expecting the global economy to improve over the next 12 months
Investors cite Long High Quality stocks as the most crowded trade, followed by Long US/EU IG corporate bonds and Long EM debt – all of which are dependent on everlasting negative interest rate policy (NIRP)
Hedge fund exposure to stocks at its highest level since the May 2013 “taper tantrum,” underscoring the market’s vulnerability to a bond shock
Allocation to US equities falls to net 7% underweight from net 11% overweight last month
Allocation to Eurozone equities improves modestly to net 5% overweight from net 1% overweight last month
Allocation to EM equities jumps to the highest overweight in 3.5 years – net 24% overweight from net 13% overweight last month
Allocation to Japanese equities falls to net 8% underweight, the biggest underweight since December 2012

As Polls Tighten, the U.S. Election May Start to Sway the Markets

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The “dog days” of summer have shown their teeth. Last week we saw some action on the S&P 500 at last. But this doesn’t feel like a real correction.

It’s worth remembering that not even a surprise like Brexit could knock equity markets off course. What set off last week’s wobble? Dovish Boston Fed Chair Eric Rosengren telling us there was a “reasonable case” for a rate hike and that ducking it could delay the economic recovery. Theories circulated that Fed board member Lael Brainard, another dove scheduled to speak three days later, was there to soften us up for a hike this Wednesday.

The Fed False Alarm

In her remarks, Brainard stayed with her dovish instincts. Fed Funds futures went from pricing in a 24% probability of a September hike to 15%—lower than before Rosengren spoke. The S&P 500 bounced 1.5%, led by the high-yielding stocks that had sold off in response to Rosengren.I’m no professional Fed watcher, but I’ll stick my neck out and predict that Janet Yellen will hold again on Wednesday.

And so then we’ll turn to the Q3 earnings season. Current expectations are for a flat quarter. To meet expectations for 2016 earnings, that implies a pop up to high single-digit growth in Q4, and given recent weakness in economic data, that seems very optimistic. But if markets stay true to recent form they will likely worry about that in December.

Before December, we have the small matter of a U.S. presidential election. With Labor Day behind us, the campaign is beginning to impinge on the market’s consciousness just as it is on the minds of voters at large.

Election Polls Are Tightening

We can see that in recent opinion polls. A month ago, the New York Times analysis of state and national polls put the probability of Hillary Clinton winning the White House at 85%. Since then, a surge for Donald Trump has pulled that back to 76%.

The latest national poll average has 44% of voters opting for Clinton and 42% for Trump, but the Electoral College math, which makes it more important to win in certain states rather than others, still favors the Democrat.

One key state to watch is Ohio, where the winner has nearly always claimed the presidency. George W. Bush in 2004 and Barack Obama in 2012 were both taken over the 270 College-vote threshold by Ohio. Trump is now slightly ahead in the Ohio polls. It’s also worth noting that his recent boost has put Trump ahead in five of the 12 most crucial states, and that in two others Clinton has only a marginal lead.

The U.S. is waking up to the possibility that this race could go to the wire.

Markets Have Been Pricing Gridlock

Financial assets have been discounting a Clinton White House, a Democratic Senate and a Republican House of Representatives. Markets would seem to prefer this outcome because a balance of power limits the potential for extreme policies. Less cynically, there is some evidence of bipartisan support for infrastructure spending. Debate about how much to spend and where to spend it could still leave the idea bogged down in Washington, but a well thought-out fiscal stimulus program could be a driver of stronger growth.

But a strong consensus for a certain electoral outcome like this creates the potential for volatility should polls start to signal a Trump presidency, or Democratic control of the House.

With more uncertainty now coming through in the polls, investors have to ask themselves what these candidates’ policies will really look like. The first debate in a week’s time may make things clearer, but at the moment that’s a challenge: Trump has no track record and his pronouncements have often been vague, and while Clinton clearly has form it’s still difficult to know how seriously to take her statements on issues like drug-pricing policy.

In other words, a few shocks in the polls could leave us facing considerable political uncertainty. That’s likely a recipe for more volatility.

The Weighing Machine Needs the Voting Machine

The great value investor Benjamin Graham once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” His words resonate during times like these.

Those of us who, like Graham himself, think of markets as weighing machines, guiding prices gradually towards economic fundamentals, acknowledge the role the voting machine plays in giving us compelling entry points for long-term investments.

We appear due for a re-pricing of risk. Brexit couldn’t provide it. The Fed appears unwilling to. Step forward the American voter.

Neuberger Berman’s CIO insight written by Joe Amato

PIMCO Launches an Actively Managed US Investment Grade Corporate Bond Fund

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PIMCO, a leading global investment management firm, has launched the PIMCO GIS US Investment Grade Corporate Bond Fund, which is a portfolio consisting of high quality USD-denominated corporate bonds. It is designed for investors seeking a high-quality fixed income alternative to government bonds or domestic corporate bonds, with the potential for higher yields and enhanced portfolio diversification. The fund is managed by a team led by Mark Kiesel, Managing Director and Chief Investment Officer Global Credit.

Mark Kiesel said: “With yields on European government and corporate bonds at historic lows, and in some cases negative, the U.S. corporate bond market continues to be one of the main areas offering much needed yield.”

PIMCO’s global investment process involves a three-step process including top-down considerations, bottom-up fundamentals, and valuations. The firm’s specific expertise in credit builds on a team of more than 50 credit analysts and more than 50 credit portfolio managers. In 2012, Mark Kiesel and PIMCO’s credit team were awarded Morningstar’s U.S Fixed Income Fund Manager of the Year.

PIMCO has been managing U.S. investment grade credit strategies since 2000, and has delivered over 1.75 percentage points of outperformance relative to the index, before fees, since inception.

The fund has been added to PIMCO’s UCITS compliant Global Investor Series (GIS) fund range. This Dublin-registered range now comprises 55 sub-funds with $98.5 billion under management as of 31st August 2016. With daily liquidity, investors can gain exposure to a broad range of asset classes, from the more traditional global and regional core fixed income funds, through credit portfolios, to enhanced equity, asset allocation and alternative solutions. The fund will be accessible in a variety of share classes in different currencies, depending on client requirements.

As of September 19, the PIMCO GIS US Investment Grade Corporate Bond Fund is registered in Austria, Denmark, France, Germany, Holland, Ireland, Italy (institutional share class only), Luxembourg, Norway, Spain, Sweden, and the UK.

Sotheby´s Appoints Mari-Claudia Jiménez as Managing Director of Trusts & Estates and Valuations

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Sotheby’s has announced that Mari-Claudia Jiménez will join Sotheby’s this September. Based in New York, Jiménez will lead Sotheby’s Trust & Estates and Valuations efforts as Managing Director.

As a Partner at Herrick Feinstein LLP – which has one of the world’s most prominent art and cultural property law practices, which she joined in 2004 – Jiménez has been involved in an impressive number of major acquisitions, consignments and cases, working with a wide range of clients including prominent museums, galleries, estates, top collectors and auction houses.

Some of Mari-Claudia Jiménez’s notable public cases include: in 2006, she and Herrick Feinstein LLP represented Neue Galerie New York in its acquisition of Gustav Klimt’s Adele Block-Bauer I, one of the artist’s greatest achievements and now a crown jewel of the museum’s collection. The heirs of Kazimir Malevich have been long-term clients of Mari-Claudia Jiménez, working together on the restitution and subsequent sales of five paintings by the artist that included Suprematist Composition, which set the current auction record for the artist at Sotheby’s New York in 2008 with a final price of $60 million. Jiménez was also a key player in the sale of the estate of Mrs. Sidney F. Brody at Christie’s New York in 2010. The collection included hundreds of items across multiple categories and was led by Pablo Picasso’s Nude, Green Leaves and Bust, a then-record price for any work of art at auction.

Mari-Claudia Jiménez said: “I am honored to be joining Sotheby’s vibrant business. Over the last 12 years, I have worked alongside high-profile estates and collectors in the art world as they consigned and purchased at auction and private sale. I am excited to bring to Sotheby’s my perspective on what works best for clients, and to contribute to their experience collecting and selling at all levels.”

Hugh Hildesley, Vice Chairman of Sotheby’s Americas, commented: “We are delighted to welcome Mari-Claudia to Sotheby’s, where she will join esteemed colleagues in our Trust & Estate and Valuations teams. Her impeccable credentials and wealth of knowledge in the world of art law will be major assets to the business, which continues to grow.”

Since joining Herrick Feinstein LLP in 2004, Mari-Claudia Jiménez has been an integral member of the Art Law Group. While building relationships over the course of weeks, months and years, she counseled her clients on transactions, advised on the maintenance of collections, and managed litigations. In addition to guiding private and institutional clients on consignments and purchases, arranging for loans at museums and galleries, and organizing the logistics required in between, Jiménez has also played an important role in domestic and international claims; she had particularly noteworthy success in cases relating to the restitution of art looted in Europe and in Cuba, to which she maintains a strong connection through her Cuban-Spanish heritage.

Mari-Claudia Jiménez is a graduate of Fordham University Law School and Fordham University Graduate School of Arts and Sciences. Prior to attending law and graduate school, Jiménez studied Art History at Williams College, and continues to support her alma mater as a board member of its Museum of Art Visiting Committee.

Is the Retainer the Next Method of Compensation?

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As the profession of financial planning has evolved from an industry focused on product sales to providing and implementing a client’s financial plan, compensation models have also shifted from a transaction-based model of compensation. Authors Ken Robinson and Jacob Kuebler through the Alliance of Comprehensive Planners explore how financial planning services and compensation continue to evolve in their White Paper “The Financial Planners’ Retainer: A Reflection of Real Value”, published in September.

The predominant method of compensation that has emerged has been the Assets Under Managements (AUM) model, says the document. While there are many advantages to this model, there is no reason to believe it is the ultimate evolutionary development in fee-only compensation. Limited markets, increasing competition, and regulatory concerns have contributed to some advisors’ interest in other fee-only compensation models.

Just as important, disconnects often exist between the value added for clients and the effort required by the advisor to deliver services. Service models have continued to evolve to include the emergence of new values added beyond maximizing economic value. These include attention to the client’s life values, behavior, and how those characteristics affect their financial well-being.

Therefore, the profession is in need of a fee model that represents these new value-added services. The authors present the retainer as a potential solution.

The retainer is a value-based system that increases compatibility with newer service models and aligns the advisor-client relationship, specifically with new fiduciary standards. Further advantages of the retainer model include resistance to commoditization, the ability to provide service profitably to a much broader market,

and adaptability to a wide variety of services the advisor may wish to make available. Not being tied exclusively to the value of assets managed, the retainer removes the implied (and erroneous) understanding that investment management is the sole service of value being provided in a planning relationship.

The work explains there are potential disadvantages to the retainer model. These include saliency of the fee payment, and limitation of the client’s ability to make apples-to-apples comparisons between different advisors’ fees and the benefits offered. Additionally, there is some risk that the advisor will perform less work than he should, or will spend more time than is profitable, when the fee is fixed at the outset. Each of these risks can be mitigated successfully so the retainer model of fee-only compensation can provide the advisor a competitive and financially successful professional practice.

CFP Professionals Surpass 75,000

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Certified Financial Planner Board of Standards recently announced that there are more than 75,000 active Certified Financial Planner professionals – a historic milestone that marks the highest number of CFP professionals ever serving the public’s need for competent and ethical financial planning.

“Over the years, more and more financial professionals have recognized the tremendous value that the certification holds in advancing their careers and giving them the credibility and expertise needed to help consumers plan for the future,” said CFP Board Chief Executive Officer Kevin R. Keller, CAE. “We are especially proud that our relatively young profession has surpassed 75,000 active CFP professionals. Our efforts to increase access to CFP professionals will only continue as we carry out our mission to benefit the public through certifying individuals who deliver the highest standard of financial planning.”

The first group of financial planning professionals attained CFP certification in 1973 following completion of a Certified Financial Planners (CFP) course at the College for Financial Planning. In 1985, the College entered an agreement to establish an independent, non-profit certifying and standards-setting organization, and transferred ownership of the CFP® marks and responsibility for continuing the CFP® certification program to the new organization, which eventually became known as CFP Board. The total number of CFP® professionals has grown steadily since then. Since 2007, the number of CFP professionals has grown more than 35 percent. As of August 31st, there are 75,467 CFP professionals in the United States.

Gigi Guerra, recent CFP of Miami says: “Helping our profession by being part of a class that moved us past the 75,000th CFP professional is a true honor. This achievement has boosted my confidence as a young Millennial woman who is just entering the workforce,” said Guerra. “It’s an exciting time for CFP Board, and I’m thrilled to be a part of it and our profession, helping people achieve their dreams through financial planning.”

The need for recruiting CFP professionals to the profession has never been stronger as it continues to experience growth trends in hiring, retirement and succession planning.

“As we celebrate this significant milestone, we look forward to the next generation of CFP professionals with the hope that it will be even better positioned to serve the American public by being more representative of the population it serves,” said CFP Board Center for Financial Planning Executive Director Marilyn Mohrman-Gillis. “With the recent launch of the CFP Board Center for Financial Planning – which is working to advance a more diverse and sustainable profession.”

To learn more about CFP Board or becoming a CFP professional follow this link.