Research from global analytics firm Cerulli Associates finds that exchange-traded fund (ETF) assets in the United States will grow to more than $6 trillion by 2020, and this number can potentially increase if more asset managers enter the space. Cerulli believes the slow erosion of mutual fund assets by exchange-traded products will prompt a growing number of asset managers to enter the ETF market.
“While many sponsor firms believe the ETF market will continue to grow organically, growth will largely be a result of more investors using the low-cost vehicle,” explains Jennifer Muzerall, senior analyst at Cerulli. “As new investor segments continue to acclimate to ETFs in their portfolios and sponsors develop new products, ETF assets are expected to climb as the industry enters its second decade.”
Cerulli’s report, Exchange-Traded Fund Markets 2015: Opportunities in the Face of Changing Dynamics, analyzes asset managers that manufacture and distribute ETFs in the U.S. The report focuses on the distribution and trends in the ETF market, including active ETFs and strategic beta ETFs, institutional distribution, marketing, and staffing.
“With more asset managers developing an ETF strategy, product proliferation will continue to increase, and firms will need to think strategically about the types of products they develop, attempting to fill any white space that remains untouched,” Muzerall explains. “As investor sentiment is evolving toward solutions-oriented outcomes, sponsors need to think of ETFs no longer solely as a product, but as a tool for investors to achieve their investment objectives.”
Aegon Asset Management created the role of Director of U.S. Consultant Relations, in the middle of December. Fulfilling the new position is Ainsley Borel, who is responsible for distribution of the institutional investment strategies and services offered by Aegon Asset Management’s U.S. member companies to insurers, pension plans, and other benefit plans.
Aegon Asset Management is the global, active investment management arm of Aegon N.V., with centers of investment expertise in Europe and the United States and distribution across the Americas, Europe and Asia. The Aegon Asset Management U.S. member companies include Aegon USA Investment Management, LLC, a SEC-registered investment adviser and manager of fixed income and asset-allocation investment strategies, and Aegon USA Realty Associates, LLC, a real estate asset manager.
“Building strong relationships with institutional consultants is an important element of Aegon Asset Management’s growth strategy in the United States,” said Tom Neukranz, Head of Distribution for Aegon Asset Management U.S. “We are very pleased to have a veteran of Ainsley’s caliber and experience join us in expanding and enhancing relations with the consultant community.”
During 22 years in the investment industry, Borel has managed the distribution of both off-the-shelf investment products and customized investment solutions. Most recently, Borel was a senior vice president and senior consultant relationship manager at Northern Trust Asset Management, responsible for relationships with major domestic and global investment consulting firms.
“Aegon Asset Management U.S. offers what consultants and their clients are looking for in a quality asset manager – a well-defined investment process, strong product line, and experienced investment teams,” said Borel. “I am eager to begin sharing the Aegon Asset Management story with them.”
CC-BY-SA-2.0, FlickrStephen Acheson, director ejecutivo en Standard Life Investments. Foto cedida. Aumenta el apetito por el riesgo entre las aseguradoras europeas
According to a survey conducted by Standard Life Investments, European insurers feel they are unlikely to be able to generate sufficient future returns to meet guaranteed rates for all their policyholders, and that regulatory modernisation and change may make it more challenging for traditional business models to strengthen income streams and make necessary strategic asset allocation changes.
The survey identified five key themes:
Increasingly, European insurers may no longer be able to generate sufficient future returns to meet guaranteed rates to policyholders.
The expected future annual return (based on existing investment strategies) of 2.4% is below the 2.7% respondents need to meet future policyholder requirements (based on current guarantee levels).
In response, many European insurers are considering undertaking significant strategic (SAA) and tactical asset allocation (TAA) changes to improve yield.
Risk appetite appears to be rising. Half of insurers expect to reduce sovereign fixed income exposure, while over 60% expect to increase allocations to real estate and/or alternatives.
However, the survey highlights a ‘north/south’ divide on asset allocation, with Southern European countries having more confidence in existing investment strategies due in part to higher domestic yields on their sovereign fixed income.
Insurers’ investment freedom is affected by Solvency II.
73% of insurers indicated that the forthcoming EU Directive is affecting the way they design investment portfolios as the taking of asset risk now requires appropriate risk-capital and a fuller understanding of the risks being taken.
Outsourcing asset management activity is increasingly attractive, but there are concerns about fund management capacity and the number of asset managers able to meet complex insurer requirements.
44% of European insurers are looking to outsource management of one or more asset classes.
Insurer business models and profitability are under pressure from a structural shift away from guaranteed savings to unit-linked structures.
43% of insurers stated they were unable to price new guaranteed investment products at competitive rates.
When the survey was conducted over the summer, European insurers felt they had further work to do before they would be completely ready for Solvency II. As evidenced by the many internal model approvals that have been announced recently, very good progress has been made in the interim. 56 interviews were carried out with senior insurance investment executives representing over €2.4trn, or around 30%, of pan-European insurance assets under management.
Stephen Acheson, Executive Director, Standard Life Investments said: “European insurers’ business strategies and traditional business models are being fundamentally challenged due to the combination of the long-term low return environment, Solvency II and the ongoing need to deliver on promised guarantees. The survey highlighted a clear theme of insurers looking to outsource to the external asset management industry. However, it also highlights a belief among insurers that the number of credible outsourcing partners is declining. It is important to remember that Solvency II was conceived and developed in a very different economic environment. Since our survey completed, fundamental questions about the design and performance of the Solvency II balance sheet in the current low interest rate environment have begun to be raised. For example, in the UK the PRA has recently pointed out that, as a consequence of low interest rates, the risk margin is leading to higher capital requirements and volatility. So the Solvency II development and implementation issues that the European industry has been working on over recent years will certainly not end on 1 January 2016.”
Standard Life Investments has 69 insurance clients investing balance sheet assets in over 20 countries, representing an AUM of £137bn as of the second quarter of 2015.
Looking at emerging market equities, there is reason to believe the tide is about to turn for the better. It is, however, likely to be a divergent and volatile process but 2016 should be a good opportunity to selectively start to build up exposure to emerging markets again, especially as the downside risks have fallen.
There are four main reasons behind our careful optimism.
First, emerging markets have not wasted the crisis. Most major emerging markets’ currencies have adjusted more than the EUR, which has dropped 20% against the USD over the past five years. Similarly, the current account adjustment has been significant and especially important in economies like Turkey, Poland and India that use to run large deficits.
Second, emerging markets offer the best value, growth and yield combination. There is a big spread in absolute and relative valuations across the emerging universe, but most emerging markets are expected to trade lower than their respective five-year valuation average in 2016 with emerging markets at a 15% compared to 5% for developed markets. Emerging markets are not only cheaper in absolute and relative terms than developed markets, they are also expected to have higher earnings growth and dividend yields.
Third, the EM/DM growth ratio will re-accelerate. The relative growth ratio between emerging and developed markets seems to be correlated with the relative stock market performance. IMF expects emerging markets’ growth to gradually accelerate from 4% this year to 5.3% in 2020 while developed markets’ growth will stay flat around 2% over the same period. This means that the DM/EM growth ratio, which has fallen during the past five years, is set to start a five-year re-acceleration in 2016.
Finally, US rate hikes tend to be supportive for emerging market equities. Perhaps contrary to popular perception, emerging market assets tend to outperform the year after a US rate hike. The reasons are very basic but nevertheless fundamental; economies adjust and markets discount the rate move ahead of time, and the reason for hikes – that the US economy is doing rather well – is supportive for emerging economies.
According to Michael Hasenstab, Chief Investment Officer at Templeton Global Macro, “at the start of 2016, we are encouraged by the vast set of fundamentally attractive valuations across the global bond and currency markets. We expect continued depreciation of the euro and yen, rising US Treasury yields, and currency appreciation in select emerging markets.”
During the next year, the investment professional expects a dichotomy of Monetary Policies, with rising interest rates from the US Federal Reserve and Quantitative Easing from the BOJ and ECB. Hasenstab also mentions that “fears of global deflation are unwarranted” and that him and his team “do not anticipate a global recession.” Their growth projections for 2016 are 2%–3% for the United States, above 1% for the eurozone, around 1% for Japan and between 6% and 7% for China. In regards to the Asian giant, Hasenstab believes that newer sectors such as the service one, will fuel wage growth and help support consumption.
Looking at Emerging markets, the Franklin Templeton expert believes that Solvency will not be a mayor issue in the area. “Emerging markets were often regarded as being in near-crisis condition during the second half of 2015. We believe concerns of a systemic crisis have been exaggerated” says Hasenstab, adding that commodity exporters, and emerging markets with poor macro fundamentals, remain vulnerable. Therefore, “investors should not view the emerging-markets asset class as a whole but should instead selectively distinguish between individual economies.” Hasenstab highlights Mexico and Malaysia as countries with strong fundamentals and solid domestic sources of financing, which will allow them to raise interest rates either in conjunction with US interest-rate hikes or shortly thereafter, while countries like Turkey or South Africa will most likely be negatively impacted by US interest-rate hikes.
Still, he believes that “an unconstrained global strategy is the most effective way to position for a rising-rate environment because it provides access to the full global opportunity set.” For 2016 he remains optimist, “we are encouraged by the vast set of fundamentally attractive valuations across the global bond and currency markets.” And favors currencies “in countries where inflation is picking up and growth remains healthy, yet the local currency remains fundamentally undervalued. Looking ahead, we expect continued depreciation of the euro and yen, rising US Treasury yields, and currency appreciation in select emerging markets,” he concludes.
The value of European private equity deals through 2015 has hit its highest level since 2007, according to data published by the Centre for Management Buyout Research.
So far the total value of all deals stands at €80.9bn, the highest yearly total since 2007, when the value hit €172.9bn. This is also the fourth highest year recorded by CMBOR, behind 2007, 2006 and 2005 respectively.
Currently, the total exit value in Europe is estimated at €153.2bn, which is a new record according to the methodology; IPOs and trade sales set records at €48.7bn and €63.8bn respectively.
CMBOR’s latest annual report suggests there were many bigger deals helping to drive the private equity market on this past year. Some 19 deals worth more than €1bn were recorded, against 13 the previous year. These bigger deals account for about half the total value of the European buyout market. Such deals were also geographically spread “with Switzerland (1), Denmark (1), France (3), Germany (4), Sweden (1), Austria (1), Spain (1) and the UK (7) all seeing deals of €1bn and over during the course of the year.”
“The spread of large deals across Europe, suggests a resurgence in the private equity market across the continent. For instance, Belgium has had a particularly strong year with total value of deals at €3.2bn, just below the 2007 record value, while Denmark has had its strongest year since 2006 (€4.8bn). Switzerland and Austria also had impressive years with the total value of deals in 2015 standing at €3.7bn and €2.6bn respectively, which in both cases are record values,” CMBR said.
And while the UK retains its position as the strongest European deal market, with value totalling €26.8bn, France has seen a rebound putting it on par with Germany.
Other findings in the data point to strong deal flows in manufacturing and retail, but less so in technology, media and telecommunication. The value of deals in the support services sector remained fairly constant, at around €9bn compared to €9.3bn in 2014.
Christian Marriott, Investor Relations partner at Equistone Partners Europe Limited, which sponsored CMBOR’s research, said: “2015 has been a very strong year for European private equity deal activity, with the UK still leading the way. However, all the core European markets have performed well, which reflects the trend of a consistent increase in total European buyout value of about €10bn since 2013. Boosted by the Verallia buyout, France has been strong in 2015 and made up previously lost ground on Germany, which in recent years has firmly established itself as Europe’s second biggest deal market behind the UK.”
“The European private equity exit market also had an outstanding 2015, achieving a record total value. While volatility in European markets stifled the IPO activity in the previous two quarters, a flurry of big IPOs at the end year, including Worldpay and Scout24, helped the boost the value to a record number. However, it has not all been about IPOs, as there have been more exits via trade sales than flotations amongst the year’s top 10 largest deals.”
“2015 clearly shows that big deals are back, as shown by the highest average deal value and number of billion plus deals since 2007. With the final quarter proving strong for both deals and exits, the European private equity market will start 2016 with positive momentum.”
Foto: Pablo Fernández. La inversión responsable: ¿zona de conflicto para los fondos de pensiones?
The Volkswagen emissions scandal looks set to bolster environmental, social and governance (ESG) investing, but pension funds adopting this approach face potential conflicts of interest, cautions the latest issue of The Cerulli Edge – Global Edition.
“The possible legal implications of looking beyond pure financial returns when making investment decisions need to be weighed up,” says Barbara Wall, Europe research director at Cerulli Associates, a global analytics firm. The UK’s Law Commission, for example, says that trustees should not proceed on a decision motivated by non-financial factors if it risks significant financial detriment to the fund. However, as Cerulli notes, this can come down to a question of degree: in one case a court ruled that “church commissioners had acted within the law by deciding that excluding 13% of the market would be acceptable, while excluding 37% would not be.”
Affecting millions of vehicles globally, Volkswagen‘s fraudulent action may even threaten the German automaker’s existence. Cerulli says that pension fund shareholders of Volkswagen are entitled to feel aggrieved; not only over the loss to their portfolio valuations, but also because of the health and environmental damage inflicted on society at large.
“Would a focus on ESG have avoided investing in Volkswagen? Probably not, because no fund manager could have anticipated fraud in a company such as Volkswagen,” says Wall. “But, by probing companies’ governance structures and having a full understanding of their management incentives, investors should be better placed to identify those vulnerable to shock events.”
Over the past 10 years the United Nations’ Principles for Responsible Investment (UNPRI) initiative has grown from about 100 signatories with US$4 trillion (€3.7 trillion) in assets under management to 1,260 signatories with US$45 trillion in AUM. Cerulli believes that this trend will continue, with ESP investing playing a more prominent role.
Many investors have long had specific exclusions within their investment guidelines; faith-based entities, for example, often will not invest in weapons and tobacco. ESG investing, however, has moved well beyond passive exclusion to an activist approach that encompasses key issues, of which the most visible and controversial today is carbon dioxide-induced climate change, says Cerulli.
Dutch pension fund ABP announced in October that it will be asking every company in its investment portfolio to “reapply” as part of its new socially responsible investment policy. Companies will need to detail how responsibly they operated and how much attention they paid to sustainability.
“We expect more pension funds to start considering ESG investing, but cultural backgrounds and the level of investor sophistication will be factors in determining any commitment. For example, pension funds in the Netherlands and Denmark will be far more inclined to do so than say those in Germany,” says Justina Deveikyte, an international analyst at Cerulli.
Following the closure of the Third Avenue fund earlier this month, liquidity issues are once again at the forefront of investor’s minds when it comes to the high yield market. Ultimately, conditions will only improve with structural changes to the market but in the meantime we think there are several steps that can be taken to help improve the underlying liquidity profile of a high yield portfolio.
Buy and Hold – by keeping portfolio churn low and buying securities with a view to a long term holding period and accepting that there will be some price volatility, the liquidity needs of a portfolio are automatically curtailed. This also means corporate fundamentals and the underlying credit worthiness of an issuer over the long term are bought more sharply into focus at the point any purchase is made. The question “Would I be happy to hold this bond through periods of market distress” is a good one to ask. If the answer is “yes”, then the chances of finding a buyer during such periods are greatly enhanced.
Stick to larger bond issues – The bigger the bond issue, the greater the investor base and the greater chance of being able to match a buyer and a seller (we illustrate this below by comparing the recorded activity trade activity for a $4.28bn bond, and a $200m bond issued by the same company). However, this can be a double-edged sword. The larger a bond issue, the more likely it is to be a constituent of an ETF portfolio which can be disadvantageous during periods of large redemptions.
December 17th 2015 Trade History for Sprint 7.875% 2023, $4.28bn outstanding:
December 17th 2015 Trade History for Sprint 9.25% 2022, $200m outstanding:
Diversify by market – Trading environments can and often do differ in different markets. A portfolio that can invest across the range of ABS, financials, corporate, sovereigns, emerging markets, fixed rate or floating rate, Europe or the US can often exploit better liquidity conditions in one market when another is facing difficulty.
Use liquid proxies – The daily volume that trades in the synthetic CDS index market is an order of magnitude greater than the physical cash market. Keeping part of a portfolio in such instruments provides access to a deeper pool of liquidity and can provide a useful buffer in periods when the physical market conditions worsen. However, there is an opportunity cost in terms of stock selection that needs to be considered.
Keep cash balances higher – The most effective way to boost liquidity in a portfolio is the simplest: hold more cash. 5% is the new 2%. Again, there are opportunity costs in terms of market exposure and stock selection, but the benefits in terms of liquidity are immediate and tangible.
It’s important to stress that none of these measures are a silver bullet, but they are mitigants. They can buy time and help investors tap liquidity. In today’s high yield markets, the question of how a portfolio’s liquidity is managed has become just as important (if not more so) than its investment position
Opinion column by James Tomlins from M&G Investments
According to Deutsche Bank Markets Research’s latest report, the global ETP industry continued to grow during November. After net inflows totaling US$ 34 billion in October, the November figure was a further US$ 25.7 billion. As such, the industry now manages US$ 2.9 trillion. As in the previous month, the American ETP sector was the driver of this growth. It contributed US$ 26 billion to global growth. Since the start of the yearUS ETPs have secured virtually US$ 200 billion. In keeping with the previous month, inflows from Equity ETFs dominated with US$ 25 billion.
The trend for Bond ETFs turned negative in November. In contrast to worldwide inflows of US$ 14.5 billion for this segment in October, during the month just past investors withdrew US$ 47 million. Inflows also declined for Commodities ETCs. After a plus of US$ 789 million in October, the past month saw a minus of US$ 153 million. In parallel with the American ETP sector, the European ETF sector continued to grow during November. Following net inflows of US$ 6.9 billion for October, the sector secured US$ 3.4 billion in November. Equity ETF inflows also dominated in this case. Conversely, Asian ETPs saw a continuation of the negative trend of the previous month. Investors withdrew US$ 3.7 billion. Equity ETFs were particularly affected with outflows running to US$ 3 billion. In fact, Bond ETFs also recorded a decline.
European ETF Market In and Outflows
Equities:
The positive trend for European ETFs continued during November. In total, the sector recorded net inflows of EUR 3.1 billion, compared with October’s EUR 5.9 billion. This was primarily due to Bond ETFs with net inflows of EUR 515 million which was significantly lower than the previous month (+ EUR 3.5 billion). At the same time, net inflows for Equity ETFs at EUR 2.5 billion were slightly higher than in October (+ EUR 2.4 billion).
ETFs on US Equities were particularly in demand with European investors. With net inflows of EUR 637 million, US Equities accounted for one quarter of positive Equity ETF cash flows, followed by Global Indices (+ EUR 436 million) and Japanese Equities (+ EUR 387 million). This marked a trend change for US Equities after investors withdrew capital totaling EUR 227 million from this segment in October.
Net inflows recorded by ETFs on European Equities fell to EUR 54 million after EUR 1.1 billion the previous month. Since the start of the year, cumulative net inflows recorded by ETFs on broadly-based European Equity Indices total EUR 20.3 billion, although during November the trend showed a slight change with investors withdrawing EUR 279 million from this segment.
The positive shift in ETFs on Emerging Markets continued in November. This segment recorded a further EUR 6 million following EUR 824 million in October. Since the start of the year however, Emerging Markets ETFs have registered total outflows of EUR 1.9 billion. Having said that, during November inflows for ETFs on large Emerging Markets declined, in particular India ETFs where investors withdrew EUR 225 million. Positive inflows were recorded by ETFs on international Emerging Markets Indices. Strategy ETFs achieved a turnaround in November again registering inflows of EUR 178 million, after October’s outflows of EUR 481 million.
Bonds
The positive trend for Bond ETFs also progressed in November, although net inflows of EUR 0.5 billion were significantly lower than the October figure (+ EUR 3.5 billion). In this arena, ETFs on Corporate Bonds accounted for the highest inflows with EUR 1.7 billion. This exceeded the October inflows figure. From an annual viewpoint, Corporate Bonds have registered net inflows amounting to EUR 13.1 billion. The positive trend over recent months for Sovereign Bonds has come to an end for the time being. Investors withdrew EUR 1.3 billion from this segment.
Commodities
European Commodities ETPs registered EUR 166 million in November after EUR 340 million during October. While ETFs on Industrial Metals did once again generate slightly positive cash flows, ETFs on Precious Metals shed EUR 167 million contrasted with October when this segment had made a positive contribution to inflows.
Most Popular Indices
In November, investors showed interest in Real Estate and Dividend ETFs. As such, ETFs on Real Estate Equity Indices in particular came high up the lists.
The most popular Equity Indices in November were the S&P 500, the Euro STOXX 50 as well as the Stoxx 600.
In the Bond arena, ETFs on Corporate Bond Indices in particular proved to be some of the most popular indices.
CC-BY-SA-2.0, FlickrFoto: Benontherun, Flickr, Creative Commons. La renta variable lidera las entradas durante noviembre en fondos y ETFs estadounidenses
Morningstar, a leading provider of independent investment research, has reported estimated U.S. mutual fund and exchange-traded fund (ETF) asset flows for November 2015. Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.
The trend of heavy investor allocations to international stocks and passive positions in U.S. equity and taxable-bond funds seems poised to continue. Intermediate-term bond and foreign large blend remained two of the most popular categories in November.
Actively managed U.S. equity funds saw their sixth-worst monthly outflow in November since 1993, when Morningstar began tracking asset flow data.
The high-yield bond category has seen volatile flows over the past few months and landed among the five categories with the greatest outflows in November. The turbulence continued into early December following the announcement from Third Avenue Management that it would liquidate its high-yield bond fund, Third Avenue Focused Credit, without allowing investors to redeem their shares right away.
Outflows from active funds continued in November for a number of fund companies, including PIMCO, Franklin Templeton, Fidelity, and J.P. Morgan. On the passive side, Vanguard and iShares took in $14.2 billion and $13.0 billion, respectively. Vanguard has collected inflows of $1 trillion since the beginning of the financial crisis in December 2007 and has seen just two months of outflows since then, October 2010 and June 2013.
Each of the five active funds with the highest monthly inflows were fixed-income funds. PIMCO Income, which has a Morningstar Analyst Rating™ of Silver, led the pack with inflows of $1.2 billion, and Bronze-rated T. Rowe Price New Income was a newcomer to the list with inflows of $741 million.
