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Emerging Markets Bonds: “Responsibility and Growth are Not Mutually Exclusive“

The global, sustainable corporate bond fund ERSTE RESPONSIBLE BOND EMERGING CORPORATE has clearly passed the threshold of EUR 100mn of assets under management. A perfect occasion to take stock. Christian Schön, member of the board of directors of Erste Asset Management, explains what role sustainable investments play in emerging markets, especially in the corporate bond segment.

Question: How do sustainability and emerging markets go together?
Schön: Very well, actually. Responsibility and growth are not mutually exclusive. Let me take China as example: between 2006 and 2012 energy consumption per unit of GDP was reduced by almost a quarter. By 2020, CO2 emissions are to be cut by 40 to 45% per GDP unit. On top of that, the government plans to increase the share of non-fossil fuels in energy consumption to 15%. The entire industry benefits from this green policy. In China alone, more than EUR 500bn have been invested in renewable energy and measures to cut greenhouse gas emissions over the past five years. In South America, too, we can see enormous progress as far as sustainable business practices are concerned. At the same time corporate bonds from emerging economies continue to pay significantly higher yields than their peers from developed countries. This scenario holds opportunities for sustainable investors, especially in the emerging markets corporate bonds segment.

Q: From your point of view, what is the added value of an emerging markets bond fund that is managed on the basis of sustainable criteria?
S: The application of sustainable criteria in company research facilitates an improved risk assessment, particularly for emerging economies. Imagine that in addition to traditional company valuation, you are using another magnifying glass that provides you with new insights into the respective company and its governance. This is particularly essential for the assessment of corporate governance criteria including the risk of corruption. This expanded analysis is done against the backdrop of the stringent ethical criteria, which we as sustainable investors apply with regard to the upholding of human rights or in connection with the problem of child labour.

Q:What criteria play a role in the investment process for emerging markets bonds?
S: Especially in a dynamic environment such as emerging markets, an ongoing research process is a crucial element of success. We have been developing our approach for 15 years. It combines all methods of analysis and selection that are available to sustainable investors into one integrated management approach. In addition, we complement our in-house expertise with the know-how of renowned research partners. On the basis of this method, we develop an initial ESG investment universe, which is then used for the individual investment process of the individual funds. The ERSTE RESPONSIBLE BOND EMERGING CORPORATE fund for example invests in the bonds of emerging markets companies that have successfully gone through our ESG screening. It also taps the high-yield segment while requiring a rating of at least B-. However, BBB bonds account for the biggest share of the portfolio. Foreign exchange risks are largely hedged against the euro. This multi-step process ensures the compliance with criteria of sustainability and the opportunity of surplus return.

Q: How has ERSTE RESPONSIBLE BOND EMERGING CORPORATE fared since its launch, and what is its outlook?
S: Since the launch of the fund in December 2013 we have recorded a compound annual growth rate of 4.25% in spite of a relatively difficult market environment. We have seen investors return to the emerging markets segment especially as a result of the current low interest rates. The capital inflow into our funds testifies to the fact that sus-tainable criteria play an ever-greater role in this area as well.

In Defense of Sitting Tight

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Earnings disappoint again, but markets stay resilient. With the U.S. party conventions out of the way and Hillary Clinton polling more strongly, investors may divert their attention, at least for a while, away from politics to focus on economic and company fundamentals.

If they do, will they subscribe to Republican presidential candidate Donald Trump’s view that they should follow him and sell out of equities?

Markets Have Been Remarkably Resilient
They’d have to reckon with just how resilient markets have been lately. Equities bounced back from Brexit at the end of June. They even sailed through July’s bear market in oil, which briefly slipped under $40 per barrel last week.

At the beginning of the year, the oil price was one of the major factors driving extreme risk aversion. This time, the impact has been muted. Even energy sector high-yield spreads are pretty much where they were when oil hit its recent high at the beginning of June.

Still, underneath these low yield-supported valuations the economy remains sluggish. As last Friday showed, the U.S. continues to post healthy jobs data. And yet the second quarter U.S. GDP print seriously undershot expectations at 1.2% real and 2.4% nominal growth. You have to go back to the first quarter of 2010 to find a report that weak. Household spending was strong and a lot of the weakness came from inventories being run down, but it wasn’t so long ago that economists were forecasting 3% real GDP growth for the second half of this year.

Three-quarters of the way through the second quarter reporting season, we can see that this is a tough environment in which to eke out earnings growth.

Another Weak Earnings Season
Year-over-year, we are on course for a 2% drop in earnings. Take out the energy sector and earnings are up around 2%-3%. That would be false comfort, however. A year ago, the consensus estimate for 2016 S&P 500 earnings per share was $130. Three months ago it was around $123. Now, we’ll be lucky to make $118. That was what U.S. equity investors got in 2014 and 2015, too; three years of flat earnings suggests this isn’t just about oil, but low investment across industry in general.

It’s a similar story in Europe. We’ve pointed to the quiet outperformance of European macro data over recent months, and both second quarter GDP growth and July inflation data came in ahead of expectations. Corporate earnings have been even weaker than in the U.S., however. We are looking at double-digit year-over-year declines for the second quarter.

It’s true that, if we strip out Europe’s banks, we might expect earnings growth of 3%-4% overall. However, stripping out banks in Europe is even more questionable than stripping out energy companies in the U.S. These banks lost a third of their value between the two stress tests of 2014 and 2016 and remain poorly capitalized, weighed down by nonperforming loans and overexposed to sovereign credit issues, which, in an economy as dependent on bank credit as Europe’s, is a serious impediment to growth.

Mixed Signals Create ‘Confused Apathy’
To sum up, the slight improvement in corporate earnings over the last couple of quarters cannot disguise how disappointing the figures are, given the easing off of the China, oil and, for U.S. companies, strong-dollar headwinds that we have been describing since the spring.

A phrase I have heard to describe investment psychology at the moment is “confused apathy.” Active managers struggle to generate alpha; beta looks tired, stretched and expensive; bond yields are incredibly low; the political environment is unpredictable. But wasn’t that what we were saying two years ago when the S&P 500 was 15% cheaper and earnings were exactly the same?

In other words, this is not an ideal way to invest, given the long-term, common sense correlation between earnings and market valuations, but ordinary investors that are patiently trying to grow their wealth arguably can ill afford to ditch equities, especially with bond yields so low. Monitoring risk is sensible, but trying to time this market makes about as much sense as, let’s say, building a wall around Mexico.

Neuberger Berman’s CIO insight by Joe Amato

Exclusivity’s Losing Its Edge

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Institutional investors across Europe are steadily increasing proportional investment exposure via mutual funds, even where mandates could be demanded, according to the latest issue of The Cerulli Edge – Global Edition.

Cerulli Associates, a global analytics firm, says statistics suggest that, while insurers are leading the way, the trend in Europe is pan-institutional. For example, German pensions’ proportional exposure via funds rose from 41.3% in 2011 to 50.1% in 2015.

“In the search for better investments, insurers are turning to less familiar asset classes–prompting the use of funds rather than segregated accounts to make their investments. There is clearly a greater willingness to have commingled investments,” says David Walker, director European institutional research at Cerulli.

He notes that early allocations to less well-trodden asset classes will be smaller, and therefore the volumes involved may not justify, in either the insurer’s or asset manager’s eyes, a separate account. That said, even in some of the more familiar yield classes–for instance high yield and emerging market debt–certain insurers prefer funds as these are easier to enter and exit compared with being in a segregated account.

“One manager Cerulli interviewed uses geography to split his insurer clientele’s preference for commingled/pooled structures, or investing via mandates. He has mutual funds more generally in France, Germany, Italy, and Spain, but mandates typically in the UK and Europe’s north,” says Walker.

He notes that some institutions are not willing to forfeit the influence over the strategy/risk exposures and the briefings that are part and parcel of a mandate-based relationship. For some institutions, not knowing the identity of the other coinvestors in a broader pooling vehicle is a step too far.

“Some insurers seeking prize investment assets such as buildings or infrastructure projects in this yield-starved environment argue that they lose competitive edge by ‘sharing’ them with rivals in a pooled structure,” says Walker.

BNY Mellon Launches Real -Time Delivery of Daily Net Asset Values And Dividend Accrual Rates

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BNY Mellon said its U.S. Investor Solutions Group has launched a real-time service to deliver net asset values (NAV) and daily dividend accrual rates for mutual funds.

The firm provides the data on behalf of its asset manager clients to intermediaries such as broker-dealers via The Depository Trust & Clearing Corporation’s (DTCC) Mutual Fund Profile Services (MFPS) by utilizing IBM MQ real time transmission methodology. The technology conveys information more quickly than the batch transmission technology it replaced. BNY Mellon is the first transfer agent to leverage the technology utilized by DTCC to deliver NAV data.

“Our first-to-market MQ technology delivery service enables asset managers to accelerate the delivery of key data—such as NAVs and daily dividend accrual rates—to intermediaries, thereby increasing their ability to meet critical nightly processing windows,” said Christine Gill, head of Investor Solutions Group. “The value of this improved turnaround time flows end-to-end to all stakeholders, not only to intermediaries, but in turn to the clients they serve, and ultimately to shareholders.”

The importance of providing timely data to broker-dealers has been increasing as these intermediaries have gathered a growing percentage of mutual fund assets on their platforms, according to the company. BNY Mellon’s U.S. Investor Solutions Group comprises its transfer agency and subaccounting businesses. As of March 31, 2016, BNY Mellon supported over $2.6 trillion in assets globally on its transfer agency platform and over 165 million accounts with assets of more than $2.6 trillion on its subaccounting platform and is ranked as the largest third party provider of subaccounting services and the second largest provider of transfer agency services (based on accounts) in the U.S., per the 2016 Mutual Fund Service Guide.

Concluded Gill, “We remain committed to investing in technological innovations that improve our clients’ experience and underscore our leadership position as the investments company for the world.”

European Equity Funds Experienced a Turnaround in Flows in May

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The European Fund and Asset Management Association (EFAMA) in its latest Investment Funds Industry Fact Sheet, which provides net sales of UCITS and non-UCITS from 28 associations representing more than 99% of total UCITS and AIF assets, highlights that for May 2016, net inflows into UCITS and AIF totaled EUR 52 billion, compared to EUR 65 billion in April.

According to EFAMA, the decrease in UCITS net sales was caused by lower net sales of bond funds. Long-term UCITS (UCITS excluding money market funds) recorded net inflows of EUR 24 billion, compared to EUR 33 billion in April.

Equity funds experienced a turnaround in flows, increasing from net outflows of EUR 1 billion in April to net inflows of EUR 3 billion in May.
Net inflows into bond funds decreased to EUR 14 billion from EUR 23 billion in April.
Multi-asset funds recorded net sales of EUR 5 billion, compared to EUR 6 billion in April.

Meanwhile, net sales of UCITS money market funds increased to EUR 17 billion, from EUR 11 billion in April and AIF recorded net inflows of EUR 11 billion, compared to EUR 21 billion in April.

Overall, total net assets of European investment funds increased by 1.8% in May to stand at EUR 13,519 billion at the end of the month. Net assets of UCITS increased by 1.9% in May to EUR 8,290 billion, and AIF net assets increased by 1.6% to EUR 5,229 billion.

Bernard Delbecque, Senior director for Economics and Research at EFAMA commented: “After three months of negative outflows, equity funds achieved again positive net sales in May”.

Bank of England’s MPC Deploys Aggressive Policy Arsenal

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According to Mike Amey, Head of Sterling Portfolios at PIMCO, with its first policy move in four years and first interest rate move in seven years, the Bank of England’s Monetary Policy Committee has very much embraced the view that if you decide to ease, then be aggressive. “When your economy is approaching the zero lower bound on interest rates and intermediate gilt yields are already well below 1%, it makes sense to use what modest monetary scope you have as decisively as you can. Thursday’s four policy moves – to cut interest rates to 0.25%, restart quantitative easing, initiate a corporate bond buying programme and provide financing support to the banking system – certainly constitute a decisive and comprehensive package. Now the two critical questions are will it work, and what are the investment implications?” He writes.

Amey believes that whether it is likely to work is best explained by looking at the BOE’s growth and inflation forecasts, which are very similar to PIMCO’s. UK growth is expected to fall to just above zero for the next twelve months, and then rise back up to 2% by 2018–2019. Headline inflation is expected to rise to 2.5% and fall back slowly to the 2% target thereafter. “This represents a relatively benign outlook, and assuming the new Chancellor announces some reversal of the previous plan to further tighten fiscal policy, there looks to be a good chance that these forecasts will be realised. Given the speed of deterioration in the Purchasing Managers’ Index and other surveys released post the Brexit vote, there are clearly risks to the outlook, but the new policy measures should go some way to negating those risks.” He adds.

The BOE’s asset purchase programme will take six months to complete and the corporate bond purchase programme is intended to be completed over an 18-month period. In amey’s words, this suggests monetary policy will remain highly accommodative for much of the cyclical horizon, keeping the damper on shorter- to medium-term UK sovereign yields despite the fact that many are already hitting new lows. In relative terms, longer-dated (30-year) gilts yielding around 1.5% are becoming more attractive versus shorter maturities, where yields are around 0.1% on the two-year and 0.7% on the 10-year. Meanwhile the British pound has been weak, but is still at levels above those seen in the last month.

“In summary, we expect longer-term gilt yields should be supported by the BOE policy moves and the broader economic environment, whilst the British pound looks to have scope to go lower.” He concludes.

Latin Private Wealth Management Summit in Panama

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The Latin Private Wealth Management Summit is the premium forum bringing leaders from Latin America’s leading single and multi-family offices and qualified service providers together.

Schedule one on one business meetings with qualified buyers
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All inclusive investment

Key Topics

Private Equity
Alternative Investments
Asset Protection
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FATCA and CRS
Family Conflict and decision making
Cyber Security

Network with industry experts like:

Guillermo de Leon, Managing Director, Blue Line Investments
Elaine King, Founder & CEO, Family and Money Matters Institute
Nelson Cury Filho, CEO, Cedar Tree Family Business Advisors
Martin Zavalia, Head of Non-Financial Services, Guggenheim Partners Latin America
Jesus Gustavo Garza, Chief Economist, ITAU BBA

For more information, please contact Deborah Sacal or follow this link.

United States Ranks 14th in Retirement Security

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The United States ranks 14^th for retirement security, according to the 2016 Global Retirement Index, released by Natixis Global Asset Management. The index examines key factors that drive retirement security and provides a comparison tool for best practices in retirement policy across 43 countries.

Among the leading countries for retirement security identified by the Index, Northern Europe dominates the top 10, including Norway at No. 1, followed by Switzerland, Iceland, Sweden, Germany, The Netherlands and Austria. They are joined by New Zealand (No. 4), Australia (No. 6) and Canada (No. 10).

“Retirement used to be simple: Individuals worked and saved, employers provided a pension, and payroll taxes funded government benefits, resulting in a predictable income stream for a financially secure retirement,” said John Hailer, CEO of Natixis Global Asset Management in the Americas and Asia. “Demographics and economics have rendered the old model unsustainable, but the leaders in our index are finding innovative ways to adapt to the new reality and provide a blueprint for the rest of the world.”

The Natixis Global Retirement Index, introduced in 2013, creates an overall retirement security score based on four factors that affect the lives of retirees. Finances in retirement are an important component, but three other sub-indices that gauge material wellbeing, health, and quality of life are included to provide a more holistic view. With this year’s edition, Natixis has focused on a smaller number of countries than in the past, mainly developed economies where retirement is a pressing social and economic issue.

Despite many positives, warning signs clear for the U.S.

The U.S. ranking benefits from high per capita income, the stability of its financial institutions and its low rate of inflation, according to index data compiled by Natixis. In addition, the nation’s unemployment rate has moved lower, continuing a long-term trend.

In contrast to these positive factors, the U.S. also has one of the highest levels of income inequality among developed nations, putting the goal of retirement savings beyond the reach of millions. The U.S. also has a growing ratio of retirees to employment-age adults, which means there are fewer workers to support programs such as Social Security and Medicare, putting increasing pressure on those government resources over time. That trend, combined with the broader shift from defined-benefit to defined-contribution employer retirement plans, is transferring the burden of retirement financing to individuals.

Americans recognize the shift in funding responsibility

American investors are acutely aware of increasing the need for individuals to fund a greater share of retirement. In a survey of investors conducted by the firm earlier this year, 75% said this responsibility increasingly lands on their shoulders.

However, many Americans may be underestimating how much money they need to save in order to retire comfortably. Investors estimate they will need to replace only 63% of their current income when they retire, well short of the 75% to 80% generally assumed by planning professionals.

In addition, a large segment of Americans simply doesn’t have access to employer-sponsored savings programs such as 401(k) plans. The U.S. Department of Labor estimates that one-third of the nation’s workforce doesn’t have access to a retirement plan. A separate survey of participants in defined-contribution plans found that, even when they have access to a plan, four in 10 contribute less than 5% of their annual salary.

U.S. investors see clear hurdles to financial security in retirement, identifying their three greatest challenges as long-term care and healthcare costs, not saving enough, and outliving their assets. When asked how they would make up for an income shortfall, two-thirds of U.S. investors say they will continue to work in retirement.

“Americans must come to grips with their increasing responsibility for their own retirement security,” said Ed Farrington, Executive Vice President of Retirement Services for the asset management firm. “The leading nations in our research are developing effective solutions, but we also need greater commitment by decision makers, engagement by individuals and a willingness to learn from the experiences of other countries around the world.”

Fixed Income Investors Should Seek Opportunity in Emerging Market and Investment Grade Bonds

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In a market update webcast, Western Asset Management Chief Investment Officer Ken Leech described a global economy rife with problems – yet one that continues to grow, especially in the United States, even if slowly and with evident risks.

“We expect steady, unspectacular U.S. and global growth,” Leech said adding: “That’s been our basic message: slow but sustainable growth globally. The fear the market had in the first quarter, that the slow growth rate might actually fall, is what got the markets in pretty dire straits.”

During that first quarter, Western Asset did not believe the global growth situation was going to develop into a global recession, (a prediction that has so far proven correct), but it has warranted exceptional monetary accommodation.

“Policymakers have to be attentive to downside risks, especially in an environment where U.S. and global inflation remain exceptionally subdued,” Leech said. “Fortunately, central bank accommodation is aggressive, and increasing. That means U.S. Treasury bonds and sovereign bonds will be underpinned by these low policy rates, which will continue around the world.”

As for the U.S. Federal Reserve, which Leech said has made “a dovish pivot,” he concluded, “The Fed is going to be very cautious, and is unlikely to be moving rates up any time soon.”

Leech continues to see strong opportunity ahead in investment grade (IG) corporate bonds. Regarding Europe, the recent Brexit vote injected a high level of uncertainty into the outlook.
He expects that the European Central Bank (ECB) will expand its QE program, both in length of the program and the size. Addressing emerging markets, Leech reported a generally positive outlook. “There’s a real case to be made for emerging markets, both in local currency and dollar-denominated bonds,” he said. “That’s an area we are focusing on even more meaningfully than coming into the year. The yield spread between EMs and developed has reached crisis wide. When you think about valuations and people needing yield, this is where yield is abundant… The two positions we’ve liked structurally have been Mexico and India. Over the course of the year we have been opportunistically investing in a number of others. One I’d highlight is Brazil.”

“Another point highlighted by the World Bank is the bumpy adjustment in China,” he added. “China’s growth is going to be slow. We need to be very thoughtful about it, but the policy adjustment in China was so aggressive that they could avoid a hard landing.”

“Global headwinds are straightforward. When you look at world GDP, we have been in the camp that a 3 percent growth rate, very slow by historical standards, can be maintained. A low bar, and it’s going to take a lot of policy help. Fortunately, we’ve had that, which truncated some of the downside risk. But the major headwind of growth over time is the enormity of the debt burden around the world. It’s going to take time, low interest rates and a continuation of policy support.” He concluded.

You can watch the replay of the webcast in the following link.

Fidelity Launches Fidelity Go

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Fidelity Investments has announced the national launch of Fidelity Go, an advisory solution designed for investors seeking a trusted team to manage their money through a simple and efficient digital experience.

The platform was developed in collaboration with younger, digitally-savvy investors, and is a unique combination of a professionally managed portfolio, an easy-to-use digital dashboard, integration with Fidelity’s broader investment tools and services, and an all-in cost that is among the lowest in the industry.

“Fidelity Go makes professionally managed portfolios broadly accessible by helping people move from saving to investing quickly and efficiently, with costs starting at approximately $20 a year,” said Rich Compson, head of managed accounts at Fidelity. “Our goal is to help people meet their lifetime financial needs, and Fidelity Go is a new way for Fidelity to help digital-first investors and those just getting started.”

Investors also benefit from Fidelity’s broader capabilities, including integration with its online financial planning tools, ongoing monitoring with Fidelity mobile apps including Apple Watch alerts, and the ability to direct the unlimited 2% cash back from the new Fidelity Rewards Visa Signature Card into their Fidelity Go accounts. “Integration with Fidelity’s broader experience can help customers both enhance and simplify their financial lives,” said Compson.