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PIMCO Expects the Bank of England to Consider Quantitative Easing

According to Mike Amey, MD & Head of Sterling Portfolios at PIMCO, now that we have had some time to digest the UK’s collective decision to leave the European Union, their expectation is that growth in the UK will fall to around 0% or slightly above over the next 12 months, based upon a material slowdown in business investment, some easing in consumer spending and little change in either fiscal policy or the contribution from net trade.

Amey, that recognizes there is a lot of uncertainty to any outlook amid this politically charged atmosphere, expects CPI to rise to 2% by mid-2017, as the impact of weaker sterling is reflected in import prices. But while there are risks around this forecast, not all of those risks are to the downside. “Certainly there is scope for a more material fall in business investment or consumer spending than we are expecting, but there is also scope for some form of fiscal stimulus.”

“Business investment had already shown some weakness ahead of the EU referendum on 23 June, and we would expect a further slowing to a -5% to -10% annual rate over the next 12 months, in line with some of the weaker periods in the decade prior to the financial crisis. At around 10% of GDP, this will take around 0.5% to 1% off growth. Arguably harder to gauge will be the hit to consumer spending, and given that it generates around two-thirds of GDP, this will be an important determinant of the magnitude of the slowdown. Our expectation is that household consumption will slow by around 1%, which would be materially weaker than the pre-crisis period; however, we would be the first to acknowledge the risks around this forecast.”

UK inflation potential
Meanwhile, thinking about the path of inflation, the PIMCO strategist believes that the 11% fall in the trade-weighted sterling index should add around 0.75% to core inflation in the next 12 months. Core inflation is currently 1.2%. The headline CPI rate will converge to the core rate as the effect of the drop in energy prices falls out of the annual number, and this should mean that headline CPI rises from its current rate of 0.3% to the 2% target by mid-2017. “Again, there is substantial uncertainty about how much of the fall in sterling gets passed into the CPI, but we have used prior relationships which indicate that a 10% fall in sterling typically adds 0.5% to 0.75% to headline CPI in 12 months’ time. Crucially, this will only take CPI back to the target rate, and as such will not prove an impediment to monetary stimulus in the months ahead.”

Given the weak growth profile, we expect the Bank of England to cut official rates toward (but not below) zero, and thereafter consider quantitative easing if further stimulus is deemed necessary. This should support gilts and keep sterling on the back foot.

Anne Robinson Leaves Citi To Lead Vanguard´s Legal Department

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Vanguard has announced that Anne E. Robinson will join the $3.5 trillion investment management firm next month as General Counsel and Managing Director of its Legal and Compliance Division. She most recently served as a Managing Director and General Counsel Global Cards and Consumer Services at Citi.

“Anne Robinson is an ideal addition to Vanguard’s senior leadership team. Her expansive and varied legal experience in the financial services and consulting fields will be of great value to Vanguard and our clients,” said Vanguard CEO Bill McNabb.

Ms. Robinson will assume leadership of Vanguard’s Legal and Compliance Division from Managing Director Heidi Stam, who announced her intentions to retire in October 2015.

As a member of the firm’s 12-person senior leadership team, Ms. Robinson will be responsible for all legal and compliance activities, including regulatory, corporate, and litigation matters.

After spending the early part of her career in private law practice and with Deloitte Consulting, Ms. Robinson joined American Express in 2003 and served in various legal positions of increasing responsibility. She joined Citi in 2014 as the General Counsel for Global Cards. She received a B.A. degree in political science with honors from Hampton University in 1991 and graduated from the Columbia Law School in 1994.

Legg Mason Acquires Financial Guard

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Legg Mason announced that it has agreed to acquire an 82% majority equity interest in Financial Guard, an online Registered Investment Advisor and innovative technology-enabled wealth management and investment advice platform. Financial terms of the transaction were not disclosed.

The firm will operate as part of Legg Mason’s alternative distribution strategies business, which focuses on combining technology with the firm´s investment affiliates’ capabilities to better serve clients. The investment is part of its overall long-term strategy focused on creating choice for investors across investment capability, product and vehicle, and distribution.

Financial Guard’s aggregation technology provides advisors the ability to create a comprehensive picture of clients’ financial positions and recommend potential solutions to meet their clients’ investment objectives. It offers portfolio analysis and recommendations for a large universe of both passive and active funds. By making the technology available to advisors and their clients, both brands intend to help financial institutions grow their advisory business and be well-positioned to conform to the new Department of Labor fiduciary standard, set to be implemented in April 2017. Legg Mason will offer the Financial Guard platform to firms who are looking for technology solutions to assist them in meeting expanded compliance requirements in a holistic, cost efficient way.

More broadly, as demand continues to grow for technology-enabled advice, it becomes increasingly important for firms to offer to all of their clients technology solutions that are intuitive and easy to implement across a client’s entire portfolio. The technology offered by the firms can be implemented seamlessly at distribution partner firms to help them provide comprehensive advice.

Legg Mason plans to complement the Financial Guard platform’s existing capabilities with investment products from its nine independent investment managers, including multi-asset class solutions from QS Investors.

Pavilion Financial Corporation Creates Pavilion Alternatives Group

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Pavilion Financial Corporation, a North American based employee-owned, investment services firm, is planning to acquire Altius Holdings, the parent company of Altius Associates, a global private markets advisory and separate account management firm with offices in the UK, U.S. and Singapore. The transaction is expected to close in the third quarter of this year subject to regulatory approval.

Pavilion will combine the operations of Altius Associates with LP Capital Advisors, the alternative asset advisory subsidiary of Pavilion headquartered in Sacramento, California. The combination will create a larger global alternative asset class advisory platform with expanded depth and breadth of services and geographic footprint. At closing, the combined organisation will be rebranded as Pavilion Alternatives Group and represent Pavilion’s global advisory platform specialising in alternative asset classes with total alternative assets under advisement of over US$60 billion, out of a total US$570 billion.

Pavilion Alternatives Group will be comprised of approximately 70 dedicated professionals located in London, UK; Singapore; and across offices in North America (Sacramento, Richmond, Boston, Salt Lake City and Montreal). All senior management from Altius Associates and LPCA will remain in leadership positions in Pavilion Alternatives Group.

“This acquisition, our fifth since 2010, is consistent with our strategy of assembling various expert and specialized teams to bring top quality investment advisory services and solutions to our clients,” said Daniel Friedman, President of Pavilion. “Altius has an excellent reputation in providing alternative asset consulting to a global clientele over a span of nearly 20 years. Altius and LPCA already share common values and a proven client service approach and they complement each other geographically. Together, we will form a stronger alternative asset class advisory platform for Pavilion offering consulting services and solutions across private equity, private credit, real assets, and hedge funds.”

John Hess, London-based Executive Chairman and founder of Altius Associates added, “Since our founding in 1998, we have been globally focussed. Our professionals have over 150 years of experience working with clients across Europe, North America, Australia and Asia with global research coverage. We are delighted to join Pavilion’s team and excited by their enthusiasm to work together to grow our business.”

“We firmly believe that our partnership with Pavilion will provide our clients with access to greater resources that will enhance our already strong advisory and research capabilities, while maintaining our entrepreneurial culture and client-service standards,” said Brad Young, co-CEO with Altius Associates in Richmond. “As part of Pavilion Alternatives Group, we will have additional resources to recruit top talent and invest in the development of our service offering and expansion of our global footprint.”

Donn Cox, President and Managing Director of LPCA said, “Combining forces with Altius will provide our clients with additional resources in North America, significant global reach into Europe, Australia and Asia, and enhanced service offerings and solutions without compromising our focus of providing objective and thoughtful advice with a fiduciary mindset. In addition to advising highly sophisticated institutional investors around the globe in private markets, Altius has a proven track record in providing customized solutions to its clients. Its deep and global research capabilities, dedicated private debt platform and significant real asset resources will also complement our core service offerings.”

Will Central Banks Look to New Tools?

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Starting in Japan, monetary policy may need to go to the next level.

With a couple weeks to digest the Brexit vote, I see some key takeaways tied to the market rebound.

There was a substantial selloff for the three days after the vote, and then (leaving aside more durable currency effects) a meaningful, if uneven, resurgence for many risk assets. But headlines regarding the bounce have been, I think, a bit misleading.

One notion is that the gains were driven by the fact that separation will take considerable time to implement—but this was known the day of the Brexit vote and seems to me of limited importance to the bounce-back. Another is that the parliament and prime minister may not have to follow through on Brexit at all, that voters “may not have known” what was at stake. Given the sizable turnout and wide margin of victory, I believe the idea of such a turnabout has been debunked. Brexit is real, for better or worse.

More significant for the rebound, in my view, was the response by central banks: The Bank of England announced that it would encourage bank lending through lower reserve requirements; ECB Chair Mario Draghi made reassuring comments about supportive policy; and Federal Reserve minutes reinforced the importance of non-U.S. conditions to its policies.

So investors felt better, which is great.

But I think it’s crucial to understand some key drivers of the vote itself that have far-reaching, global implications. In particular, I’m talking about the issues of trade and immigration, which have become lightning rods for voters, across Western economies, who are frustrated by subpar growth and the lack of opportunity and jobs it has engendered.

In my view, it would be a mistake to dismiss “Leave” voters and their counterparts on the Continent and in the U.S. as being narrow-minded or lacking global perspective. In fact, it is hard to find a good job, especially for the less skilled and the young, and people have latched onto what they perceive to be the most tangible culprits, namely immigration and trade. The reality is that many of the culprits are less tangible, such as inefficient tax codes, excessive regulation and simple demographics.

Could Japan Export Policy Innovation?
So the bigger picture issue becomes, how can you deliver better growth? Unfortunately, although central banks can provide some support, at the end of the day they can’t address the growth issue on their own. Indeed, then Fed Chairman Ben Bernanke was talking about the limits of monetary policy some five years ago, and with major central banks appropriately reluctant to aggressively pursue negative policy rates to spur growth, there are fewer policy options at their disposal.

After the Brexit vote, my CIO colleagues Joe Amato and Erik Knutzen, along with Benjamin Segal, head of the Global Equity team, participated in a webinar in which they discussed what could be done to break the economic logjam. One key market to watch, Erik said, was Japan.

The sharp rise in the Japanese yen is one of the more challenging effects of the referendum vote. The yen has long been viewed as safe-haven currency, and thus recently reached highs not seen since 2014, threatening to undermine progress made via Abenomics.

Given the bleak picture, we think it’s possible that Japan could be the first country to introduce the next stage of the Bernanke playbook, which is “helicopter money”—a term first coined by Milton Friedman to describe central bank policy that, instead of relying on indirect stimulus through banks, put dollars directly in the hands of consumers.

A central bank cannot implement such a policy on its own, of course. It needs the cooperation of executive branch heads and legislatures. This makes the task more challenging, but it also has the advantage of moving governments and economies toward structural reform. This could include increasing economic efficiency by simplifying tax codes, and reducing or streamlining regulation—which are key impediments to healthy growth.

Success in Japan could encourage action elsewhere. At the risk of overstatement, that in turn could prove a turning point in what has become a very long journey toward meaningful global recovery.

Neuberger Berman’s CIO insight by Brad Tank

Cryptocurrency for Dummies: Bitcoin and Beyond

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Bitcoin created a lot of buzz on the Internet. It was ridiculed, it was attacked, and eventually it was accepted and became a part of our lives. However, Bitcoin is not alone. At this moment, there are over 700 AltCoin implementations, which use similar principles of CryptoCurrency.

So, what do you need to create something like Bitcoin?
Without trying to understand your personal motivation for creating a decentralized, anonymous system for exchanging money/information (but still hoping that it is in scope of moral and legal activities), let’s first break down the basic requirements for our new payment system:

All transactions should be made over the Internet
We do not want to have a central authority that will process transactions
Users should be anonymous and identified only by their virtual identity
A single user can have as many virtual identities as he or she likes
Value supply (new virtual bills) must be added in a controlled way

Decentralized Information Sharing Over Internet
Fulfilling the first two requirements from our list, removing a central authority for information exchange over the Internet, is already possible. What you need is a peer-to-peer (P2P) network.

Information sharing in P2P networks is similar to information sharing among friends and family. If you share information with at least one member of the network, eventually this information will reach every other member of the network. The only difference is that in digital networks this information will not be altered in any way.

You have probably heard of BitTorrent, one of the most popular P2P file sharing (content delivery) systems. Another popular application for P2P sharing is Skype, as well as other chat systems.

Bottom line is that you can implement or use one of the existing open-source P2P protocols to support your new cryptocurrency, which we’ll call Topcoin.

Hashing
To understand digital identities, we need to understand how cryptographic hashing works. Hashing is the process of mapping digital data of any arbitrary size to data of a fixed size. In simpler words, hashing is a process of taking some information that is readable and making something that makes no sense at all.

You can compare hashing to getting answers from politicians. Information you provide to them is clear and understandable, while the output they provide looks like random stream of words.

There are a few requirements that a good hashing algorithm needs:

Output length of hashing algorithm must be fixed (a good value is 256 bytes)
Even the smallest change in input data must produce significant difference in output
Same input will always produce same output
There must be no way to reverse the output value to calculate the input
Calculating the HASH value should not be compute intensive and should be fast

If you take a look at the simple statistics, we will have a limited (but huge) number of possible HASH values, simply because our HASH length is limited. However, our hashing algorithm (let’s name it Politician256) should be reliable enough that it only produces duplicate hash values for different inputs about as frequently as a monkey in a zoo manages to correctly type Hamlet on a typewriter!

Digital Signature
When signing a paper, all you need to do is append your signature to the text of a document. A digital signature is similar: you just need to append your personal data to the document you are signing.

If you understand that the hashing algorithm adheres to the rule where even the smallest change in input data must produce significant difference in output, then it is obvious that the HASH value created for the original document will be different from the HASH value created for the document with the appended signature.

A combination of the original document and the HASH value produced for the document with your personal data appended is a digitally signed document.

And this is how we get to your virtual identity, which is defined as the data you appended to the document before you created that HASH value.

Next, you need to make sure that your signature cannot be copied, and no one can execute any transaction on your behalf. The best way to make sure that your signature is secured, is to keep it yourself, and provide a different method for someone else to validate the signed document. Again, we can fall back on technology and algorithms that are readily available. What we need to use is public-key cryptography also known as asymmetric cryptography.

To make this work, you need to create a private key and a public key. These two keys will be in some kind of mathematical correlation and will depend on each other. The algorithm that you will use to make these keys will assure that each private key will have a different public key. As their names suggest, a private key is information that you will keep just for yourself, while a public key is information that you will share.

If you use your private key (your identity) and original document as input values for the signing algorithm to create a HASH value, assuming you kept your key secret, you can be sure that no one else can produce the same HASH value for that document.

If anyone needs to validate your signature, he or she will use the original document, the HASH value you produced, and your public key as inputs for the signature verifying algorithm to verify that these values match.

How to send Bitcoin/Money
Assuming that you have implemented P2P communication, mechanisms for creating digital identities (private and public keys), and provided ways for users to sign documents using their private keys, you are ready to start sending information to your peers.

Since we do not have a central authority that will validate how much money you have, the system will have to ask you about it every time, and then check if you lied or not. So, your transaction record might contain the following information:

I have 100 Topcoins
I want to send 10 coins to my pharmacist for the medication (you would include your pharmacists public key here)
I want to give one coin as transaction fee to the system (we will come back to this later)
I want to keep the remaining 89 coins

The only thing left to do is digitally sign the transaction record with your private key and transmit the transaction record to your peers in the network. At that point, everyone will receive the information that someone (your virtual identity) is sending money to someone else (your pharmacist’s virtual identity).

Your job is done. However, your medication will not be paid for until the whole network agrees that you really did have 100 coins, and therefore could execute this transaction. Only after your transaction is validated will your pharmacist get the funds and send you the medication.

Miners – New Breed of Agents
Miners are known to be very hard working people who are, in my opinion, heavily underpaid. In the digital world of cryptocurrency, miners play a very similar role, except in this case, they do the computationally-intensive work instead of digging piles of dirt. Unlike real miners, some cryptocurrency miners earned a small fortune over the past five years, but many others lost a fortune on this risky endeavour.

Miners are the core component of the system and their main purpose is to confirm the validity of each and every transaction requested by users.

In order to confirm the validity of your transaction (or a combination of several transactions requested by a few other users), miners will do two things.

First, they will rely on the fact that “everyone knows everything,” meaning that every transaction executed in the system is copied and available to any peer in the network. They will look into the history of your transactions to verify that you actually had 100 coins to begin with. Once your account balance is confirmed, they will generate a specific HASH value. This hash value must have a specific format; it must start with certain number of zeros.

There are two inputs for calculating this HASH value:

Transaction record data
Miner’s proof-of-work

Considering that even the smallest change in input data must produce a significant difference in output HASH value, miners have a very difficult task. They need to find a specific value for a proof-of-work variable that will produce a HASH beginning with zeros. If your system requires a minimum of 40 zeros in each validated transaction, the miner will need to calculate approximately 2^40 different HASH values in order to find the right proof-of-work.

Once a miner finds the proper value for proof-of-work, he or she is entitled to a transaction fee (the single coin you were willing to pay), which can be added as part of the validated transaction. Every validated transaction is transmitted to peers in the network and stored in a specific database format known as the Blockchain.

But what happens if the number of miners goes up, and their hardware becomes much more efficient? Bitcoin used to be mined on CPUs, then GPUs and FPGAs, but ultimately miners started designing their own ASIC chips, which were vastly more powerful than these early solutions. As the hash rate goes up, so does the mining difficulty, thus ensuring equilibrium. When more hashing power is introduced into the network, the difficulty goes up and vice versa; if many miners decide to pull the plug because their operation is no longer profitable, difficulty is readjusted to match the new hash rate.

Blockchain – The Global Cryptocurrency Ledger
The blockchain contains the history of all transactions performed in the system. Every validated transaction, or batch of transactions, becomes another ring in the chain.

So, the Bitcoin blockchain is, essentially, a public ledger where transactions are listed in a chronological order.

The first ring in the Bitcoin blockchain is called the Genesis Block

There is no limit to how many miners may be active in your system. This means that it is possible for two or more miners to validate the same transaction. If this happens, the system will check the total effort each miner invested in validating the transaction by simply counting zeros. The miner that invested more effort (found more leading zeros) will prevail and his or her block will be accepted.

Controlling The Money Supply
The first rule of the Bitcoin system is that there can be a maximum of 21,000,000 Bitcoins generated. This number has still not been achieved, and according to current trends, it is thought that this number will be reached by the year 2140.

This may cause you to question the usefulness of such a system, because 21 million units doesn’t sound like much. However, Bitcoin system supports fractional values down to the eight decimal (0.00000001). This smallest unit of a bitcoin is called a Satoshi, in honor of Satoshi Nakamoto, the anonymous developer behind the Bitcoin protocol.

New coins are created as a reward to miners for validating transactions. This reward is not the transaction fee that you specified when you created a transaction record, but it is defined by the system. The reward amount decreases over time and eventually will be set to zero once the total number of coins issued (21m) has been reached. When this happens, transaction fees will play a much more important role since miners might choose to prioritize more valuable transactions for validation.

Apart from setting the upper limit in maximum number of coins, the Bitcoin system also uses an interesting way to limit daily production of new coins. By calibrating the minimum number of leading zeros required for a proof-of-work calculation, the time required to validate the transaction, and get a reward of new coins, is always set to approximately 10 minutes. If the time between adding new blocks to the blockchain decreases, the system might require that proof-of-work generates 45 or 50 leading zeros.

So, by limiting how fast and how many new coins can be generated, the Bitcoin system is effectively controlling the money supply.

Start “Printing” Your Own Currency
As you can see, making your own version of Bitcoin is not that difficult. By utilizing existing technology, implemented in an innovative way, you have everything you need for a cryptocurrency.

All transaction are made over the Internet using P2P communication, thus removing the need for a central authority
Users can perform anonymous transactions by utilizing asynchronous cryptography and they are identified only by their private key/public key combination
You have implemented a validated global ledger of all transactions that has been safely copied to every peer in the network
You have a secured, automated, and controlled money supply, which assures the stability of your currency without the need of central authority

One last thing worth mentioning is that, in its essence, cryptocurrency is a way to transfer anonymous value/information from one user to another in a distributed peer-to-peer network.

Consider replacing coins in your transaction record with random data that might even be encrypted using asynchronous cryptography so only the sender and receiver can decipher it. Now think about applying that to something like the Internet Of Things!

A number of tech heavyweights are already exploring the use of blockchain technology in IoT platforms, but that’s not the only potential application of this relatively new technology.

If you see no reason to create an alternative currency of your own (other than a practical joke), you could try to use the same or similar approach for something else, such as distributed authentication, creation of virtual currencies used in games, social networks, and other applications, or you could proceed to create a new loyalty program for your e-commerce business, which would reward regular customers with virtual tokens that could be redeemed later on.

Column by Demir Selmanovic featured on toptal

Wealthy Chinese are Looking to Increase Their Overseas Allocation

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According to a report from China Industrial Bank (CIB) and The Boston Consulting Group (BCG) on Chinese private banking development in 2016, despite the slowing Chinese economic growth, the wealth of high net worth individuals (HNWIs) is rising steadily. It is estimated that China’s high net worth families will reach 3.88 million by 2020 and their investable financial assets will then account for 51％ of China’s individual wealth, offering great opportunities for the development of private banking business.

The report, called 2016 China Wealth Report: Growing Against the Trend with Global Asset Allocation notes that as the Chinese economy continues to open, the demand of HNWIs for global asset allocation will increase significantly. It is estimated that the proportion of Chinese individual assets to be allocated overseas will increase from the current 4.8％ to about 9.4％ in the next 5 years. And that from 2015 to 2020, HNWIs’ investable financial assets will increase at an average annual rate of 15％, significantly higher than the projected GDP growth rate of 6.5％ over the same period.

Chen Jinguang, CIB Vice President, is optimistic about the prospect of China’s private banking, saying, “It is estimated that China’s high net worth families will reach 3.88 million by 2020 and their investable financial assets will then account for 51％ of China’s individual wealth, offering great opportunities for the development of private banking business. However, at the same time, we should recognize the undersupply of private banking services. At present, China’s private banking institutions manage less than 20％ of the wealth of high net worth families, which implies huge opportunities for development. Moreover, in recent years, the banking industry has been accelerated its transformation, focusing on developing capital-light businesses. During this process, private banking business will face unprecedented development opportunities by taking advantage of connecting investment asset and private wealth.

According to their survey, about 30％ of HNWIs have invested overseas, and 56％ have not yet but say they will consider overseas investment in the next three years. “As the most dynamic participants in China’s economy, HNWIs are leaders in bringing China in line with the international norms. China’s continuous economic globalization will drive the HNWIs to shift from domestic wealth allocation to global wealth allocation.”

The survey points out that, against the background of Chinese economic globalization, RMB exchange rate volatility and declining domestic return on assets, the drivers for overseas investment of HNWIs will be more diversified. The change of drivers will create more business opportunities for Chinese Private Banks: the number of customers seeking overseas investments will expand, including not just ultra-high net worth individuals (UHNWIs) but also HNWIs; the shift from real estate to financial assets will increase demand for wealth management services; and the shift from overseas-oriented one-way flow to domestic-overseas two-way flow will help expand Chinese institutions’ operations into foreign markets.

All but Equity Funds got Favored in April by a Very Accommodative Monetary Policy

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The European Fund and Asset Management Association (EFAMA) has published its latest Investment Funds Industry Fact Sheet, which provides net sales of UCITS and non-UCITS for April 2016 from 28 associations representing more than 99 percent of total UCITS and AIF assets’ net sales data.

The main developments in April 2016 can be summarized as follows:

Net inflows into UCITS and AIF increased to EUR 65 billion, up from EUR 26 billion in March.
Net inflows into UCITS amounted to EUR 44 billion, considerably higher than the EUR 8 billion recorded in March.
- The increase in UCITS net sales was driven by stronger net sales of long-term UCITS and money market funds.
Long-term UCITS (UCITS excluding money market funds) recorded net inflows of EUR 33 billion, compared to EUR 18 billion in March.
- Net inflows into bond funds increased to EUR 24 billion, from EUR 11 billion in March.
- Multi-asset funds recorded net sales of EUR 6 billion, same as in March.
- On the other hand, equity funds continued to experience net outflows, albeit lower than in March (EUR 2 billion).
Net sales of UCITS money market funds rebounded to EUR 11 billion, from net outflows of EUR 10 billion in March.
AIF recorded net inflows of EUR 21 billion, compared to EUR 19 billion in March.
- Net assets of UCITS increased by 1.4% in April to EUR 8,104 billion, and AIF net assets increased by 0.7% to EUR 5,148 billion.
- Overall, total net assets of European investment funds increased by 1.1% in April to stand at EUR 13,252 billion at the end of the month.

Bernard Delbecque, director of Economics and Research at EFAMA commented: “The accommodative monetary policy and the stimulus still in the pipeline supported the demand for bond and multi-assets funds in April, whereas weak economic growth and downside risks continued to weigh on equity funds.”

You can read the EFAMA Investment Funds Industry Fact Sheet in the following link.

John DeVoy Returns to Loomis, Sayles & Company

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Loomis, Sayles & Company announced that John DeVoy, CFA, returned to the company as a dedicated credit strategist for the flagship full discretion team. Simultaneously, Brian Kennedy and Todd Vandam, CFA, assume full-time portfolio management roles on the full discretion team and will transition their credit strategist responsibilities (investment grade and high yield respectively) to John. Todd, Brian and John will report to Elaine Stokes and Matt Eagan, co-heads of the full discretion team.

“The complexity of global fixed income markets continues to expand as does investor demand across the full discretion product suite. We are pleased that John is back on board to dedicate his full efforts to providing insight on credit trends,” said Elaine Stokes. “Additionally, John’s role allows Brian and Todd the time to focus exclusively on portfolio management. Their promotions are reflective of the excellent work they have done managing various full discretion strategies to date.”

As a dedicated resource for the full discretion team, John’s responsibilities will include:

Providing insight into cyclical and secular credit trends affecting the investment environment for the full discretion portfolio management team
Partnering with the firm’s various credit analysts and sector teams to form opinions of investment opportunities
Providing team portfolio managers with specific investment and trade recommendations in the corporate sector across the full discretion product line

As co-portfolio manager on the Loomis Sayles full discretion team, Brian joins veteran fixed income managers Dan Fuss, Elaine Stokes and Matt Eagan on the full suite of Loomis Sayles multisector funds and strategies, which includes the Loomis Sayles Bond Fund and Loomis Sayles Strategic Income Fund. In February 2013, Brian was named co-portfolio manager of the Loomis Sayles Investment Grade Bond and Loomis Sayles Investment Grade Fixed Income funds.

Todd is one of the founding co-portfolio managers of the Loomis Sayles strategic alpha strategy that launched in 2010, which currently has $4.4 billion in assets under management. Additionally, Todd is a co-portfolio manager of the Loomis Sayles US high yield strategy (currently $3.5 billion) and Loomis Sayles global high yield strategy ($290 million).

RARE Infrastructure: Why Are Investments In Infrastructure Interesting?

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One of the first things that you realise when you start looking into the infrastructure asset class is that everyone’s definition of what ‘infrastructure’ is varies. Our view of infrastructure is as follows; we are looking for hard assets that provide an essential service to an economy, and which have a degree of price certainty built in so that we know the asset provider is going to get paid for providing the service. It is this approach that forms the basis of our thinking, says Nick Langley, co-CEO & co-CIO, RARE Infrastructure, when asked about investment types in listed infrastructure investing.

The infrastructure universe can be broadly separated into four main asset types: community and social assets, regulated assets, user pay assets, and competitive assets. You can split the universe in this manner because of the different types of assets that fall within each group, and their different characteristics as investments. It is important to do so because you’re going to get very different types of risk and return profiles based on the type of infrastructure assets that you hold, he adds.

The first group, community and social assets, is those assets that many people will mention when you ask them to name infrastructure; schools, hospitals, and prisons are some of the main examples. These are assets which have traditionally been funded with public sector involvement, and which have a clearly visible beneficial impact on society, although for investors may offer low returns with limited growth potential.

The second group is regulated assets. These are assets that operate in a regulated environment; their operations, and therefore return profiles, are impacted by the regulator of their particular industry. The key examples here are energy companies (e.g. gas and electricity utilities which manage the gas and electricity networks) and water utilities. These companies are regulated because they typically operate in markets that tend to be natural monopolies. For example, the UK, like most countries, only has one national electrical transmission network which is managed and operated by National Grid.

The third group, user pay assets, are assets that are involved with moving people or goods around an economy. For example, companies that operate road and rail networks, airports, and ports. These companies are not regulated, however they often operate with concession-based contracts; for example, a company may hold the lease to operate a particular toll road for a certain amount of time. User pay assets are more exposed to growth than regulated assets, as their revenues are typically linked to economic or population growth.

The final group consists of assets that operate in competitive markets, with exposure to wholesale prices, and typically without the security of regulation or concession contracts. An example here is energy generation and retail companies – rather than managing the energy networks, these are companies that create energy and sell energy to the end user. They are therefore subject to supply and demand risk, and potentially commodity price risk.

Which are the most interesting investments?

We focus on investing in the regulated assets and user pay assets. We do so due to the fact that these companies operate either within a defined regulatory framework or with long-term contracts in place, which underpins the return profiles of these companies. The cash flows of these companies typically stretch out decades into the future (i.e. they have a long duration), and the frameworks that they operate in means that with the appropriate expertise it is possible to estimate these cash flows, and therefore the intrinsic value of the companies, with some degree of accuracy.

This means that the main types of assets we invest in include the regulated gas, water, and electricity companies in the regulated assets space, and then toll road, rail, port, and airport companies in the user pay space.

Why are investments in infrastructure interesting?

Infrastructure has a number of characteristics that are often attractive to investors, including a strong and stable risk/return profile, inflation protection, income, lower correlation to traditional asset classes, and defensive qualities such as generally lower drawdown in falling equity markets.

Stable risk return profile and inflation protection – as infrastructure companies are typically involved in the provision of an essential service (often over a long time period), backed by hard assets, whilst having a degree of price certainty (e.g. a regulatory framework or long-term contract), we see the risk/return profiles on offer in the sector being stable over time. Whilst any return will involve some degree of risk, the nature of the asset class means that skilled investors can achieve a return that more than compensates for the risk incurred. In addition, given underlying infrastructure assets typically have some degree of inflation-linkage built in through these regulatory frameworks or long-term contracts, infrastructure provides good protection against changes in inflation. We estimate that 70% of the cashflows of companies invested in within our flagship Value strategy are either directly or indirectly linked to inflation.

Income – As discussed in more detail below, infrastructure typically provide an attractive income over time, given the recurring and growing dividends paid by many companies within the opportunity set.

Lower correlation to traditional asset classes – infrastructure can act as a good diversifier in a portfolio, given its lower correlation to asset classes such as equities and bonds. This is a result of the underlying return streams of infrastructure companies being strongly linked to the regulatory or contractual frameworks in place, rather than typical drivers of equity and bond returns. Even more importantly, we frequently see this diversification benefit increase in times of market stress, meaning that infrastructure can provide protection through diversification exactly when it is needed the most.

What yields could you expect from these investments?

The type of listed infrastructure companies we invest in provide an attractive (typically high single digit) return, whilst achieving this in a relatively low risk manner. We also see listed infrastructure providing favourable up- and down-market performance characteristics, participating in returns in up markets, but providing protection in down markets. This is a result of the defensively natured (and often income paying) regulated assets providing protection in times of market stress.

The yield on the assets we invest in varies – in the user pay assets we typically see a lower yield, however in the regulated assets we see significant and growing dividend yields over time, with figures in the 5% – 10% p.a. range not uncommon. Bringing these two asset types together, we would expect to see a yield of say 3.5% to 5.5% in a portfolio which maintained a 50:50 weighting between user pay assets and regulated assets.