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Investors are Less Bearish as Cash Levels Drop Sharply Amidst a Rebound in Global Growth Expectations

According to the latest BofA Merrill Lynch Fund Manager Survey cash levels dropped sharply, from a 15-year high of 5.8%, to 5.4% in August. At the same time, global growth expectations rebounded, with a net 23% of investors expecting the global economy to improve in the next 12 months.

“Investors are less bearish, but sentiment has yet to shift from ‘fear’ to ‘greed’. As such, we expect stock prices to rise further until bonds throw another tantrum,” said Michael Hartnett, chief investment strategist.

Other findings include:

Central banks’ creation of a low and stable rates environment is a big factor driving fresh optimism and a preference among fund managers for deflation assets over inflation assets; only 13% of respondents expect the BoJ or ECB negative interest rate policy to end within the next 12 months
A record net 48% of investors think global fiscal policy is currently too restrictive
Geopolitics is seen as the largest risk to financial market stability, followed by protectionism – which is cited at the highest level since December 2010
EU disintegration, followed by renewed China devaluation and US inflation are seen by investors as the biggest tail risks
Allocation to US equities is highest since January 2015 at a net 11% overweight
Allocation to Eurozone equities remains low at a net 1% overweight while allocation to UK equities improves to net 21% underweight from net 27% underweight last month
Allocation to EM equities improves to net 13% overweight, its highest level since September 2014
While allocation to Japanese equities improves to a net 1% underweight from a net 7% underweight last month, allocation preference for the next 12 months worsens to -8% from -3% with only the UK behind Japan

Manish Kabra, European equity quantitative strategist, added that “Eurozone equity allocations are broadly unchanged amid concerns of EU disintegration and UK stocks are still the least-preferred. Within Europe, we prefer UK large-caps from both a positioning and macro perspective, as they benefit from weaker GDP, lower yields and less European exposure.”

Jorge Escobar Joins TSG as Partner

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TSG -a leading, diversified real estate investment, development and sales company in South Florida formerly known as The Solution Group – has announced that Jorge Escobar has joined as an equal partner alongside founding partner and CEO Camilo Lopez. Following more than 20 years in the international banking industry, most recently as Global Market Head of Chile for HSBC Private Bank, Escobar will serve as a managing partner in his new position.

TSG, which has successfully grown a portfolio of more than $400 million in assets since its inception in 2008, will utilize Escobar’s diverse financial expertise to enhance the firm’s boutique platform on a global level for investment in South Florida real estate. Capitalizing on Escobar’s institutional-minded discipline, the company’s new structure will focus on expanding its international network, while allowing for a more sophisticated and seamless approach to local market investment opportunities in a highly-personalized process.

“I am thrilled to welcome Jorge to the TSG family,” said Lopez. “Having developed strong relationships in Latin America, the U.S. and Europe for decades, Jorge possesses an ideal combination of global investment experience and an entrepreneurial drive that add tremendous value to our organization. Complimenting my expertise identifying real estate opportunities and in design ideation, our partnership will now deliver a robust strategy to expand TSG’s company value.”

Prior to joining TSG, Escobar was responsible for overseeing more than $1.5 billion in funds for high-net-worth clients throughout the world. During his nine-year tenure with HSBC, he led some of the largest investment transactions in offshore private bank business in Latin America and generated significant new business from the region’s most noteworthy families.

Prior to HSBC, Escobar was head of the private bank business for ABN AMRO Bank in Chile for four years. He began his career at Citi Group as an investment advisor, and later served as vice president of BankBoston Private Bank for more than three years.

“It is with great pride that I join this trusted organization built on the foundation of astute leadership and solid fundamentals,” adds Escobar. “This is a natural move for me to enter the real estate environment given South Florida’s prime position to set global benchmarks and TSG’s unique and innovative platform, which now places the company at the forefront through our partnership.”

AUM in European ETF Industry at all Time High in July

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The latest European ETF Market Review from Thomson Reuters Lipper shows that assets under management in the European exchange-traded fund (ETF) industry increased from 452.8 billion euros in June to a new all-time high of 473.6 billion euros at the end of July. Further insight and analysis for both assets under management and fund flows by asset type, classification, promoter and fund can be found here.

According to Detlef Glow, Head of EMEA research at Thomson Reuters Lipper, the increase of 20.8 billion euros for July was mainly driven by the performance of the underlying markets (+€12.8 bn), while net sales contributed €8.0 billion to the overall growth in assets under management in the ETF segment.

Bond ETFs (+€5.0 billion) enjoyed the highest net inflows for July. Equity US (+€1.5 bn), followed by Equity Emerging Markets Global (+€1.3 bn) and Equity Global (+€1.0 bn) were the best selling Lipper global classifications for July.

The best selling ETF promoters in Europe for July were iShares (+€7.2 bn), State Street SPDR (+€1.0 bn) and Vanguard (+€0.5 bn). The ten best selling funds gathered total net inflows of €4.6 bn for July. iShares Diversified Commodity Swap (+ €0.7 bn), was the best selling individual ETF for July.

You can access the report in the following link.

Presidential Politics Shape Outlook for Latin America’s Asset Management Industry

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Amid a global economic slowdown and waning growth prospects for Latin America, presidential politics in four countries -Argentina, Brazil, Chile, and Peru- have also greatly impacted the prospects of recovery, according to the latest research from global analytics firm Cerulli Associates.

These findings and more are from “Latin American Distribution Dynamics 2016: Keys to Gaining a Foothold in Increasingly Globalized Market”, a report developed in partnership between Cerulli and Latin Asset Management.

“In broad terms, the movements signal a return to free-market and investor-friendly policies, reversing a troubling trend toward populism, nationalism, and expansion of the welfare state,” explains Thomas V. Ciampi, founder and director of Latin Asset Management. “In fact, as of mid-2016, only Venezuela and minor players Ecuador and Bolivia were still proudly carrying the leftist torch, while the rest of Latin America had seemed to grow restless with that approach.”

“The asset management industries in Argentina, Brazil, Chile, and Peru-including the AFP private-pension businesses in Chile and Peru, the local mutual fund industries of the four countries, and for offshore asset gathering through the wealth management channel-all face consequences from the shifts in leadership and the attitudes of the public,” Ciampi adds.

“In the case of Argentina especially, the recent election of pro-market president Mauricio Macri boded well for a normalization of the local capital markets, but created uncertainty for cross-border firms that have raised tremendous amounts of assets via the offshore wealth channel,” Ciampi said, noting that the government was eager to launch an amnesty plan aimed a repatriating a portion of the USD 500 billion of Argentine-investor assets held abroad.

Remember Inflation Risk?

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It may be time to add to inflation-sensitive assets.

I recently was giving a presentation on the various risks stalking global markets, speaking from a list in a PowerPoint deck. Included were the usual suspects: negative growth shocks, China, commodity prices, over-aggressive action by the Fed, the strong dollar, etc. But then someone raised their hand and asked, what about higher inflation? I realized it wasn’t even shown.

Pausing for a moment, I thought, did that omission make sense? Should we relegate inflation risk to a footnote and focus our attention on the more obvious challenges that face the global economy and markets? After all, U.S. headline inflation is running at just a 0.8% annual rate, while in Europe it’s a mere 0.2%. Inflation is something that central banks are trying to catalyze, not eradicate, and generally with limited success.

On the other hand, that doesn’t mean that higher prices won’t make a comeback. A few weeks ago, my colleague Brad Tank explored the potential value of an unpredictable Federal Reserve in addressing inflation, and noted Alan Greenspan’s recently articulated view that a combination of economic stagnation and price increases could be something to worry about.

In my view, unexpected inflation could emerge from a combination of flashpoints, whether the strong U.S. housing market, firming wages or health care costs, which have been low but are now starting to surge, three years into Obamacare. Other potentially inflationary trends are (aside from a post-Brexit bump) this year’s decline in the dollar as well as the rally in commodities. Employment figures are already at the Fed’s target levels, implying that wage pressures may be building, while the most recent print for U.S. core inflation (excluding energy and food) was 2.2%, or north of the central bank’s long-term target.

Thinking about Inflation Hedges

In the context of a multi-asset portfolio, it is important to consider the potential cost of hedging the risks of extreme economic environments. Right now, it is very expensive to hedge against negative growth shocks—because the traditional vehicles for this purpose, cash and government bonds, pay investors very little, if anything. In contrast, the cost of hedging against inflation is relatively low. Although commodity prices have increased this year, they remain at deflated levels, while the breakeven rate for 10-year Treasury Inflation Protected Securities (TIPS) is about 1.5%, which is lower than the current core inflation rate in the U.S. (implying a return premium if inflation continues at or exceeds current levels).

Based on the pricing of inflation in the markets, it’s clear that few investors are really focused on it as a risk. But given the low price of inflation-sensitive assets, our Multi-Asset team believes that it may make sense to add to them in diversified portfolios. At this point, we prefer TIPS over commodities, which given recent gains are likely to be range-bound in the near term. TIPS also have the advantage of providing some duration exposure, which can be helpful if we experience further declines in interest rates. Although U.S. bonds appear pricey in relation to U.S. fundamentals, we acknowledge that their yields may decline further based on the influence of negative rates in Europe and Japan.1 Nevertheless, on balance, our view is that rates are likely to creep up from here.

In sum, although I don’t believe higher inflation is a front-and-center concern, I do think that its importance is growing. It is often said that “the time to buy insurance is when it is cheap,” and inflation-hedging exposure is definitely cheaper than many other components of global markets. The potential for rising prices definitely merits an “upgrade” to my list of key risks the next time I give a talk on market prospects and asset allocation.

Neuberger Berman’s CIO insight by Erik L. Knutzen

Registration is Open for Funds Society’s Fund Selector Forum New York 2016

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Following 2 hugely successful events in Miami, Fund Society and Open Door Media will be bringing together a selected group of the top fund selectors from the New York area with 5 leading asset management firms at the Fund Selector Forum New York 2016.

Kevin Thozet from Edmond de Rothschild and Jeffrey Germain from Brandes Investment Partners will be joined by Kevin Loome, of Henderson Global Investors and Sandra Crowl of Carmignac on the panel, taking place at the prestigious Waldorf Astoria on the morning of 18th October.

This event will bring key fund selectors from the New York area with top-performing Asset Managers to explore the latest portfolio management strategies and investment ideas. Places are reserved specifically for professional investors involved in fund selection, in the New York area, from a variety of institutions including:

Private Banks
Commercial Banks
Life Insurance Companies
Family Offices
Funds of Funds

To confirm your attendance, please contact Irma Gil, or register here.

Deutsche Bank appoints Anke Sahlén and Daniel Kalczynski as Co-Heads of Wealth Management

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Anke Sahlén and Daniel Kalczynski are now in charge of Deutsche Bank Wealth Management (WM) in Germany. As Co-Heads the 48 year-olds will pursue the goals of developing WM into the leading trusted expert advisor to wealthy clients and advancing Deutsche Bank’s market leadership in its home market.

Sahlén and Kalczynski have both spent many years at Deutsche Bank and in its Wealth Management. “The appointment of Anke and Daniel demonstrates continuity and stability – values to which wealthy clients attach great importance,” said Fabrizio Campelli, Global Head of Wealth Management. “I am pleased to appoint two recognised wealth management experts whose expertise and abilities complement one another.”

Sahlén and Kalczynski will also be responsible for Sal. Oppenheim and Deutsche Oppenheim Family Office AG and intensify cooperation with their colleagues in Deutsche Bank’s Private, Wealth & Corporate Clients division to ensure that wealthy clients have access to the best products and services within the bank.

Kalczynski joined Deutsche Bank in 1990. He has been managing WM Germany on an interim basis since April, in addition to his responsibility as Chief Operating Officer (COO) of WM Germany and prior to that of Asset & Wealth Management (AWM) Germany. His previous roles included Head of Sales Management and the Southern Region for WM Germany.

Sahlén started her career with Deutsche Bank in 1993 and has focused on advising wealthy clients both nationally and internationally ever since. She currently leads the WM team in Germany’s Eastern Region and is a member of the Management Board for that region.

Fed Minutes – Failure to Communicate

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In the minutes of the June meeting, we learned that despite a great deal of public commentary from Fed officials since the April meeting – including a statement from Chair Janet Yellen herself on 27 May that a rate hike could be appropriate “in the coming months” – many participants remained fixated on communication:

“Several participants expressed concern that the Committee’s communications had not been fully effective in informing the public how incoming information affected the Committee’s view of the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy.”

That was a concern we also saw earlier this year, in the minutes of its April meeting, when the Federal Open Market Committee (FOMC) conveyed that:

“Some [FOMC] participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments. … It was noted that communications could help the public understand how the Committee might respond to incoming data and developments over the upcoming intermeeting period. Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.”

Which according to Richard Clarida, PIMCO’s global strategic advisor, it translates to: To value bonds, stocks and currencies, market participants need to understand how the Federal Reserve will react to incoming macro data and developments. In April, at least some members “expressed concern” that the market then didn’t understand the Fed’s reaction function and that more communication could help.

Coming clean on the reaction function
Clarida believes that perhaps the problem is not inadequate communication, but rather the need for transparent communication that this Fed does not have a reaction function. “Or more precisely, perhaps the problem is that the FOMC has 16 individual reaction functions plus the reaction function of the chair, which she is either unwilling or unable to persuade the entire FOMC to adopt.” He beliebes that the minutes of the July Fed meeting released on Wednesday confirm this impression. They tell us that “some” voting members of the FOMC want to hike rates “soon,” and that a couple of participants – which can include nonvoting members – wanted to hike at the July meeting. However, at least a “couple” of members wanted to wait for “more evidence that inflation would rise to 2% on a sustained basis.” Noteworthy in this regard was the minutes’ discussion of core PCE inflation, the Fed’s preferred measure. Core PCE inflation is increasing at close to a 2% annual rate, “but it was noted that some of the increase likely reflected transitory effects that would be in part reversed during the second half of the year.” which claridas believes tell us that Fed “communications released in conjunction with the June FOMC meeting were interpreted by market participants as more accommodative than expected.”

“This is a Fed that continues to be mystified why it is misunderstood by market participants and observers. Right now, observers think a September policy rate hike is off the table. Chair Yellen will have her chance at Jackson Hole to put September in play. But after these minutes, “soon” does not look like September.” Claridas concludes.

Muzinich & Co. Expands European Syndicated Loans Capabilities

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Corporate credit specialist Muzinich & Co. has announced that Torben Ronberg, Stuart Fuller, Sam McGairl and Alex Woolrich will be joining the firm.

These very talented investment professionals will focus on syndicated loans in Europe. “Their long-standing expertise complements our current activities in European publicly traded corporate bonds and European private debt”, says the firm in a comunication.

“This expansion of our team forms part of our global effort to invest across the capital structure and provide compelling investment opportunities for our investors”.

They will join from ECM Asset Management, a subsidiary of Wells Fargo.

The Formula to Locating, Identifying and Selling any Fund or Firm to International Investors

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The world of wealth is shifting from North America to Asia-Pacific, which means fund managers need to pivot towards international investors if they want to grow their portfolios.

The latest World Wealth Report shows Asia-Pacific passed North America as the region with the largest group of high net worth individuals. The report credits the expansion of emerging economies for the rapid expansion of wealth overseas.

During my time as Managing Director with Genesis Securities and Lek Securities in New York, I had to navigate this international terrain in search of institutional investors. It wasn’t easy, but along the way, I learned a few business tactics that can help other fund managers reach international investors.

Here’s a breakdown of how I located and identified these elusive investors for potential business deals.

1. Identify Local Banks and Hook Them with Incentives – The local bank in every country is the crucial connector with high asset holders. Any fund or business pursuing international investors must establish relationships with account managers and appeal to their self-interest by explaining how this new deal will make them more profitable.

Many foreign markets have underdeveloped financial services, and the services tend to be offered by one type of institution – the bank. Most foreign investors have local business interests and are actively involved with their bankers. Thus, bankers have access to elusive high-net-worth investors, have working financial relationships with them, and are a perfect conduit for selling your investment or making introductions.

However, in the banker’s mind, a dollar invested outside of the bank is a dollar not deposited. Thus, it is important to incentivize the bank by convincing them that for every dollar their clients invest with you, the bank will make more money than it would if investors kept their assets in the bank.

Identify the spread between deposit and lending rates for a particular country. The smaller the spread, the less of an incentive the bank will need to introduce their clients to you. Countries with very low or even negative interest rates may be attractive.

2. Create a Roadshow or Seminar – This is typically where the deal falls apart because of cultural nuances and an information gap. For example, a business plan for a restaurant that compensates workers through gratuities is easily understandable in the U.S. In Japan, where tipping is uncustomary and impolite, it might need further elaboration.

Ensure that your presentations are in both English and the local language. You need to scrutinize the local translation more than the polished English one. Hire independent and separate editors and translators to recheck your editors’ and translators’ work.

Also, think of local analogies to your business. Don’t think about the products, but the principles involved. For example, when selling a fund that is trading carbon futures on an exchange, analogize to trading deep-sea fishing permits at industry meetings in maritime countries.

3. Establish Credibility – Investor’s care about your address and it impresses them when they recognize a name like Wall Street. Famous areas and buildings carry a lot of weight with international investors.

Information on trends takes a long time to permeate international boundaries. The next hot area in Brooklyn may be very prestigious and signal innovation to the insiders in New York, but investors in Dubai will not be impressed.

When investors look at a financial firm and do not see a Wall Street address, their impression of the reputability of the firm will immediately drop. Luckily, U.S. streets and landmarks are among the most well known worldwide and with the inexpensive availability of office sharing, address sharing, and other tools that provide a recognizable address, there is no need to relocate operations.

4. Form Alliances – Chambers of commerce, professional associations, and industry groups all share one trait – their members are business leaders. Partnering with these organizations will provide access to their members and interacting with them through an allied organization plants the seeds of trustworthiness.

For targeting investors in emerging economies, NGOs are your friends. They tend to know which players are large in each industry and what they are interested in. They have networks in many countries as well. An NGO trying to improve infrastructure in Sudan may bring investors from France. Funds or firms should specifically look for NGOs with a strong presence and long history in the country they are targeting.

5. Industry Specific – Most firms looking for international investors search too broadly, targeting people with the most money. If you are a real estate agency looking for international investors for development projects, target international law firms who are struggling to provide options for their clients. Likewise, hedge fund managers should target admins.

There is a dramatic amount of opportunity in emerging markets. It’s natural that firms are searching for investors overseas, but that brings new challenges. However, if there is a thoughtful plan in place and these investors are strategically targeted, they are absolutely attainable.

Opinion column by Serge Pustelnik. He is currently studying international law at Harvard and is also a legal fellow at New Markets Lab in Washington