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According to Craig Botham, Emerging Markets Economist at Schroders, “The end of the one child policy is an announcement with great political significance but little immediate effect.” Given the high cost of raising children in China, his team does not see a demographic boom resulting from the end of the government’s one child policy.

By the year 2030, the UN expects to see a 3% decline in China’s working age and a very small impact on growth, detracting between 0.1 and 0.3 percentage points per annum from growth over that period. With that, there will be a very important fiscal cost for China, “as its dependency ratio worsens to developed market levels even as incomes remain in emerging market territory. This will result in a painful fiscal burden for China, and it is not clear how it will be tackled,” says Botham.

He believes that boosting the fertility rate would help, but it is not certain that ending the one child policy will be effective. For example in 2014, 11 million couples were eligible for a second child, but only 1 million applied to do so. Adding that, “it may be that after so long, the one child norm will take time to reverse. In addition, anecdotally, many young Chinese cite the cost of children, particularly education, as a major barrier to considering large families.”

And thus, “the cost of raising children needs to be reduced. Task that will require the provision of high quality and affordable – preferably free – education and childcare, and likely also an overhaul of the welfare system altogether.” Nowadays the “hukou” registration system limits people’s ability to claim social welfare outside of their registered area. This means many migrants to the cities have to go home to access education, healthcare, and so on. “Which adds immensely to the cost of raising children and settling down, and will be a contributing factor in delaying household formation. Until these issues are addressed, we do not see a demographic boom resulting from this policy change,” Botham concludes.

What the UK Might Want / What the EU Might Offer

Prior to the referendum on EU membership due in 2016 or 2017, the UK government will pursue negotiations to redefine its relationship with the Union. David Page and Maxime Alimi from Axa IM review the themes that are likely to form the basis of these negotiations and assess the margin for compromise between the UK and its European partners. On balance, they expect such negotiations to be constructive enough for the UK government to campaign in favour of the “Yes” at the subsequent referendum.

In their opinion, the UK has yet to define, specifically, what it desires from such negotiations. This month, the UK is supposed to offer more information on what they are looking for, as promised by David Cameron at the EU leaders’ Summit, but the Axa experts believe the main topics will include:

Trade and promotion of the Single Market– Where, according to the analysts, there is no clear disagreement between the UK and the EU
Competitiveness and over-regulatory burden– With no clear disagreement between the UK and the EU
Decision-making and institutional fairness– Where they believe exists much room for agreement between the UK and the EU
Progressing towards an ever closer union– Which needs clarifying since according to them constructive ambiguity has reached its limits
EU budget control– where, given their large deficit, the UK looks set to drive for greater cost control across the EU, while it seems like there is little room to further expand special treatment of the UK given many euro-area countries having experienced significant austerity in recent years.
Migration, social rights and access to benefits– The most contentious issues given the UK looks for immigration restrictions while for the EU free movement of people and labor is a fundamental principle

According to Alimi and Page, “overall, many of the areas where the UK is likely to pursue change are not contrary to EU ambition. This suggests significant room for agreement between the UK and its partners on most issues.” What will happen given the few, but key, areas the UK and the EU do not agree upon? Only time will tell…

You can read the full report in the following link

FINRA Chairman and CEO Rick Ketchum to Retire in 2016

The Financial Industry Regulatory Authority (FINRA) said on Friday that Chairman and CEO Richard Ketchum, 64, has announced his plan to retire in the second half of 2016. The Board of Governors will conduct a search for his successor that will take into consideration internal and external candidates.

Mr. Ketchum has been one of the foremost industry regulators for more than three decades. He came to FINRA from the NYSE where he was CEO of NYSE Regulation. He also spent 12 years at NASD and The Nasdaq Stock Market, Inc., where he served as president of both organizations. Prior to that, he was the director of the SEC’s division of Market Regulation.

“I’m proud of FINRA’s achievements over the past six years,” said Mr. Ketchum. “We have been at the forefront of investor protection in our aggressive efforts to help enforce the rules that are so crucial to fair financial markets. Our accomplishments are founded on a commitment to excellence in our core competencies: examinations, enforcement, rulemaking, market transparency and market surveillance. Investor protection is our principal reason for being, and I have been honored to work with an incredibly dedicated and talented group of professionals who take this vital mission seriously. FINRA is well-placed to continue to play an important role in educating and protecting investors in the years ahead.”

“FINRA has thrived under Rick’s leadership, and we look forward to his continued guidance over the next many months,” said Lead Governor Jack Brennan, former CEO of Vanguard Group. “His stewardship began in the aftermath of the financial crisis when public trust in the financial system was at an historic low. As a champion of initiatives such as the High Risk Broker program, improvements in BrokerCheck, the expansion of TRACE reporting of asset-backed securities, and the expansion of FINRA’s responsibilities across stock and options trading, Rick has put FINRA on the front line of the movement for stronger investor protections and greater market integrity. Under Rick’s management, FINRA has emerged as a leader in the reshaping of American financial regulation and helped to restore the faith in the capital markets that forms the bedrock of our financial system.”

Happy Halloween. Five Scary Charts That Freddy Krueger Would Be Proud of

M&G and bondvigilantes.com proudly present the scariest charts on the global economy. Some will make you laugh, some will make you cry. You will be amazed, you will be enchanted, you will be mystified, you will be amused. Of course, the following is not for the faint of heart. You have been warned.

1.- Companies are scared of risk

There has been a glut of corporate bond issuance since the financial crisis, as companies have issued debt at low interest rates. What have companies done with all that cash that capital markets have leant them? Overwhelmingly, US companies have embarked upon equity buy backs and M&A activity, which has helped shift the equity market higher. Only a small amount of proceeds raised by US companies in bond markets have been used for capital expenditure. This suggests that corporations remain hesitant to take risk, even in an environment where many perceive that the US economy is ready to withstand higher interest rates.

2.- Nowhere to hide for investors

In the old days, an investor could expect the bonds in their investment portfolio to do well when equities sold off and vice versa. Not anymore. Analysis by the IMF shows that asset classes are increasingly moving in the same direction, meaning that the famous rule of investing – diversification – no longer applies to the same degree that it once did. Worryingly, the tendency for global asset prices to move in unison is now at a record high level and correlations have remained elevated even during periods of low volatility. A large scare in investment markets could really test the fragility of the financial system should asset values deteriorate across the board.

3.- Terrible forecasts

Commodity prices are highly volatile and unpredictable as evidenced by futures market pricing for crude oil. This poses a significant challenge for policymakers in resource-rich countries. In the majority of commodity-exporting nations, a large share of government revenue is provided by the resource sector. The current shock to commodity prices could put severe pressure on government balances, particularly in geopolitical hotspots like the Middle East, Russia, Nigeria and Venezuela. Those forecasting (hoping) that commodity prices rebound may be disappointed.

4.- Monstrous derivatives exposure

The notional value of derivatives in the global financial system is around $630 trillion. To put this in comparison, the value of global GDP is $77.3 trillion. Whilst $630 trillion is a huge number, it does overstate the dangers lurking in the global derivatives market. The notional amount does not reflect the assets at risk in a derivatives contract trade. According to the BIS (Bank for International Settlements), the gross market value of the global OTC derivatives market is $20.9 trillion (close to a third of global GDP).

5.- Not enough is being done to prevent global warming

And finally, the scariest chart of the lot. Global greenhouse gas emissions continue to increase, putting further pressure on the environment. The OECD estimate that greenhouse gas emissions will increase by more than 50% by 2050, driven by a 70% increase in carbon dioxide emissions from energy use. Energy demand is expected to rise by 80% by 2050. Should this forecast prove accurate, global temperatures are expected to increase by between 3-6 degrees Celsius. This is expected to alter precipitation patterns, melt glaciers, cause the sea-level to rise and intensify extreme weather events to unprecedented. It could cause dramatic natural changes that could have catastrophic or irreversible outcomes for the environment and society.

From an economic perspective, the main problem with attempting to reduce carbon emissions is that the developed world must find a way to subsidise developing nations to adopt (more expensive) renewable energy technologies. This could cost hundreds of billions of dollars. Developing countries argue that the developed world should bear the brunt of any emission cuts, as emissions per capita in richer nations are higher.

Fortunately, there are actions underway to attempt to limit the increase in greenhouse gas emissions. Eighty one global companies signed a White House-sponsored pledge to take more aggressive action on climate change. Later this year, France will be hosting “COP21/CMP11”, a United Nations conference aimed at achieving a new international agreement on the climate in order to keep global warming below 2 degrees Celsius. And for the innovators, there is a $20m carbon X prize on the table for anyone who can develop technologies that will convert carbon dioxide emissions from power plants and industrial facilities into valuable products, like building materials, alternative fuels and other everyday items.

Opinion column by Anthony Doyle, M&G and bondvigilantes.com

Generali Unveils Two New Funds

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The Generali Group has recently launched two new funds within its UCITS-compliant Generali Investments SICAV (GIS). Generali Investments – the Group’s main asset management company with approximately €375 billion of assets under management- has been appointed investment manager of the new funds.  

The GIS Absolute Return Convertible Bonds fund is designed for investors seeking consistent risk-adjusted returns. The strategy combines opportunities in a broad convertible bond universe with hedging/arbitrage techniques to improve downside protection. The GIS SRI Ageing Population fund is designed to benefit from the long-term ageing demographic trend by investing in companies that are exposed to this growing market and applying a screening based on Socially Responsible Investments criteria as well as on the theme.  

Andrea Favaloro, Head of Sales & Marketing at Generali Investments, said: “As part of Generali Investments’ ambition to become a world-class investment brand and the preferred choice for our clients, we have initiated a robust plan to develop our business dedicated to third- party investors, basing on our strongest expertise areas. The two new funds demonstrate our commitment to executing this plan taking advantage of some of our most outstanding capabilities, including our credit research, macro research, SRI analysis and stock-picking.”  

The GIS Absolute Return Convertible Bonds fund invests in a global convertible bond universe, albeit with a bias towards Europe. Convertible bonds, as an asset class, combine various alpha drivers – equities, credit, implied volatility, rates, currencies and ratchet/prospectus clause. These components do not always move together depending on the market conditions and cycles. The fund has the ability to hedge the unwanted features and isolate and better exploit the desired ones. In addition, the strategy is implemented in a transparent, rigorous and risk- managed UCITS-compliant structure.  The dedicated convertible bonds investment team manages over €950 million across open ended funds and segregated mandates. The team is headed by Brice Perin, lead portfolio manager, with over 16 years of experience in asset management and convertible bonds. Prior to joining Generali Investments, Brice was responsible for volatility funds at Acropole AM. Between 2007 and 2011 he was in charge of convertible and volatility arbitrage funds at La Française AM. From 1999 to 2007, he was head of convertible and volatility arbitrage at DWS Investments. The investment team is backed by a 18-strong in-house credit research team and a 13-strong macro research team.

 The GIS SRI Ageing Population fund invests in European companies with a business model positioned to benefit from the demographic trend of the ageing of the world’s population. Due to lower birth rate and longer life expectancy, it is estimated that the world’s population over 60 will reach 1.7 billion people in 2040 from 700 million in 2010. Moreover, this age group is expected to own an increasingly larger share of total income, especially in developed countries.  This fund is unique as it combines a long-term demographic trend and investment theme, a fundamental equity valuation process and a fully SRI-compliant portfolio. After an initial Environmental, Social and Governance (ESG) screening of the investment universe (MSCI Europe), the fund manager selects companies exposed to the ageing theme based on three key investment pillars: healthcare, pension & savings and consumer goods. The fund manager then uses proprietary fundamental valuation models to select companies and create a portfolio of around 50 stocks.

The fund is 100% SRI compliant, leveraging Generali Investments’ SRI resources and process to invest in companies with strong ESG credentials. Generali Investments’ SRI team of eight analysts applies a proprietary screening model based on 34 ESG criteria. The SRI overlay brings additional scrutiny and value when analysing companies, their business models and their management’s strategic decisions. As a result, the GIS SRI Ageing Population fund caters to investors who look for long-term and sustainable returns.

The fund is managed by Mattia Scabeni, with 11 years of experience in the asset management industry. Mattia joined Generali Investments in 2009 as a portfolio manager. Previously, he worked for Swiss financial institutions both as a portfolio manager and equity analyst. Mattia holds an MBA from HEC Paris and an Executive Master in Financial Markets from SDA Bocconi.

ROAM Capital Will Open an Office in Miami to Cover the Family Offices and Latin American HNWI Markets

ROAM Capital is finalizing all preparations for its arrival in Miami, the main destination of high net worth Latin American investors in the United States. The company, which already has a presence in Bogota, Colombia, will have a new office and a team of professionals highly specialized in alternative investments.

Founded in 2009 by Philippe Stiernon, ROAM Capital is the first Latin American placement agent exclusively focused on private equity and other alternative investments. The company only strives to work with “top quartile”, and preferably “top decile”, managers, giving them access to its proprietary network of Latin American investors. It is usually limited to about 3 or 4 mandates per year, as their philosophy prioritizes quality over quantity. “By investing with the best, it is very difficult to lose capital, and the premium for choosing well is very high; therefore, we seek to only work with top quartile managers, as above all, we have a commitment to alpha and capital preservation,” says Philippe mentioning the rigorous “due diligence” process to which the company submits the managers. Using four key assessment criteria: team, strategy, track record, fund terms and structure, it seeks to identify segments of high conviction with managers who have demonstrated consistency in returns and have maintained a successful and proven track record that spans multiple vintages during different economic cycles, with stable teams and narrowly defined strategies. The company also has its own grading system for managers and maintains an updated ranking of all funds by strategy and vintage year.

In the company’s five-year history, ROAM Capital has raised more than US$ 750 million for the private equity funds it has represented, among which are groups like Quilvest, PineBridge, RCP Advisors, ICG, Asia Alternatives and Coller Capital, amongst others.

The company’s initial goal was to bring the best alternative strategies to Latin America. At the time, instability in the North American and European markets favored the migration of private capital to emerging markets where the company also capitalized representing Latin American fund managers, as was the case of Teka Capital in Colombia, Evercore in Mexico, The Forest Company in Brazil, and most recently, MAS Equity Partners also in Colombia, a company which is currently raising its third fund with the help of ROAM Capital, and in which the IFC is the anchor investor.

The first stage developed in Latin America while regulatory changes were taking place, which allowed Pension Fund Administrators to venture into alternative investments and authorized a designated exposure for investments in private equity funds, a segment in which ROAM Capital specializes. “We managed to compete and differentiate ourselves through specialization, since many of our competitors have other priorities and have placed alternative investments on the back burner. It is a big universe, which requires lots of study and full-time dedication. We also have no conflicts of interests, nor have we ever suffered scandals like some of our competitors, because we only do one thing, distribution of third party funds and are always guided by the highest ethical standards and our commitment to delivering results for our clients,” says Philippe Stiernon, founder of ROAM Capital.

ROAM Capital´s office in Bogota / Courtesy photo

The company also didn’t take long to specialize in the Latin American family offices segment, a high-growth and closed door market, in which the company has a reputation for leadership and privileged access to the largest industrial and financial groups in the region. Due to confidentiality reasons, the company does not disclose the names of the families for which it has had the privilege to work, but many of them are part of the Forbes list of billionaires. “We work with a large group of about 75 families in the region, within which there are various levels of sophistication. From the high net worth individual investor to the large single family office with institutional infrastructure. We also work with several multi-family offices who share our absolute return mentality and seek the best managers for each strategy regardless of personal biases in their due diligence process”.

One of these is BigSur Partners, a multi-family office in Florida with more than US$1 billion in assets, which has been working with ROAM Capital for several years in the construction of its private equity funds program. Ignacio Pakciarz, BigSur CEO, comments: “We have been working with Philippe and his team for the past 4 years, and we share the philosophy of collaboration between our companies entirely, as well as that of focusing on managers who are first quartile leaders in their segment. Another advantage of working with ROAM Capital is that the commission is not paid by the investor but by the manager, so that their services do not increase the transaction cost for our clients. The benefit of having ROAM Capital as a source of support throughout the “due diligence” and subscription process is really tangible. Through them, we have managed to secure capacity for our clients in several private equity funds which would normally be oversubscribed, something which really helps differentiate ourselves”.

ROAM Capital is currently in the process of expansion. Recently, the company signed a couple of strategic alliances with a global agent and a regional group, which will allow them to break into the North American market and further expand and find opportunities in other Latin America countries. The opening of the Miami office is just the ‘tip of the iceberg’ in its quest to establish itself as the leading Latin American placement agent focused on private equity and other alternative investments.

During the past 18 months, ROAM Capital has attracted three major fund managers to Miami: the first was Intermediate Capital Group or “ICG”, a leading European credit and mezzannine funds manager, the second fund manager was Asia Alternatives, a company specializing in Asian private equity funds and an investment leader within its focus region, and the third one was Coller Capital, a pioneering and innovating secondary player who provides liquidity solutions for investors in private equity funds.

“All of these managers are leaders in their respective segments in terms of returns, and have historically exemplified a singular-focus on a specific region or strategy which is what we typically look for, we like specialists. All of them also exceeded their fundraising targets and were oversubscribed in their most recent funds, a common dynamic when dealing with first quartile managers,” adds Philippe Stiernon.

In short, the history of ROAM Capital is one of success, the firm has managed to double the fundraising volumes year after year since 2010, and perhaps most notably, it has managed to gain the trust and credibility of institutional and private investors in Latin America. With their arrival in Miami, a more personalized service is expected for single and multi family offices and the creation of new work schemes will be explored. Also new job opportunities will be created for professionals with the required skills to work in the private equity and alternative investments industry.

Strategic-Beta Products Proliferation Brings Increased Complexity to ETP Landscape

“The strategic-beta landscape is growing faster than both the broader ETP market as well as the global asset management industry, driven by new inflows, new product launches, and the entrance of new providers during the past year. Benchmarks underlying new products are more complex as well,” Ben Johnson, Morningstar’s director of global exchange-traded funds research, said. “As strategic-beta strategies continue to proliferate and become increasingly nuanced, investors’ due-diligence burden is growing commensurately.”

At its sixth annual ETF Conference in Chicago, Morningstar published “A Global Guide to Strategic-Beta Exchange-Traded Products,” its second annual global landscape report about trends in strategic-beta exchange-traded products (ETPs). The company defines strategic beta as a class of investment products that track indexes that seek to either improve performance or alter the level of risk relative to a standard benchmark, representing a fast-growing middle ground on the active-to-passive investment spectrum.

The firm´s global report also reports that the number of strategic-beta ETPs in its database rose from 673 to 844, from June 30, 2014 to June 30, 2015. Worldwide assets rose from $396 billion to $497 billion during the same time period.

Strategic-beta ETPs account for 21.2 percent of U.S. ETP assets, which is the largest strategic-beta ETP market, and 2.9 percent of ETP assets in the Asia-Pacific region, the smallest market, compared with 19 and 1.5 percent, respectively, a year ago.

Dividend screened/weighted ETPs are again the most popular among strategic-beta ETPs by assets in all regions examined in the report except for the Asia-Pacific region. Quality strategies are the largest subset of strategic-beta ETPs in the Asia-Pacific region, representing $3.8 billion and 55.4 percent of total assets in strategic-beta ETPs as of June 30, 2015.

There is a positive relationship between the adoption of strategic-beta ETPs and the stage of development of a region’s ETP market as well as its asset management and financial services industries at large. For example, the United States has the second-oldest ETP market in the world, holding 52 percent of strategic-beta ETPs, which account for nearly 91 percent of total assets in the global strategic-beta ETP landscape.

United States: The top 10 strategic-beta ETPs by assets account for approximately 42 percent of the United States’ strategic-beta ETP market. iShares and Vanguard account for 16.5 percent of the total number of strategic-beta ETPs, holding 57.4 percent of assets in the United States.

Europe: Assets under management in strategic-beta ETPs rose by 18.6 percent in the last 12 months to $32.1 billion as of June 30, 2015. Strategic-beta ETPs’ share of the broader European ETP market expanded from 5.7 percent to 6.3 percent in the same period.

Emerging Markets: South Africa and Brazil are the main emerging markets in the strategic-beta ETP landscape. Neither market saw strategic-beta ETP launches in the last year. The single strategic-beta ETP in Brazil saw its assets under management decline by 50 percent from June 30, 2014 to June 30, 2015.

What are the Main Differences Between Bond and Equity ETFs?

An Exchange Traded Fund (ETF) is an investment tool, which combines the features of both mutual funds and stocks, providing multiple benefits such as diversification, liquidity and transparency. Like a mutual fund, an ETF is a collection of individual stocks or bonds that track a predefined index. Like a stock, ETFs trade on exchanges and can be bought or sold throughout the day. These features provide investors with an easy-to-use, low cost and tax efficient way to invest your money.

Originating in 1993, the first ETFs originally followed only equity indexes. It wasn’t until a decade later that Bond ETFs started to appear. While Equity and Bond ETFs display the same structural characteristics and have many things in common—typically tracking a diversified index and trading on exchanges—there are some key differences, because of the fundamental difference in stock and bond markets.

Stocks trade on exchanges, making them simple to access and value. Bonds on the other hand, trade over-the-counter (OTC). Prices are negotiated privately between buyers and sellers leading to a lack of price transparency. It can also be difficult for investors to find the bonds they want to buy. So how does this impact the management and valuation of Equity and Bond ETFs?

The objective of an ETF portfolio manager (PM) is to track the performance of the ETFs target index as closely as possible. For a simple equity index such as the S&P 500, PMs will hold all the securities in the respective weights as the index. The ability to access the constituent securities can be more difficult for broader, or less liquid indexes, i.e. the MSCI Emerging Market IMI index. Tracking a bond index adds another layer of complexity. The nature of the bond market makes it extremely difficult to exactly follow the index’s composition. Due to the enormous number of issuers and bonds within the US Aggregate bond index, bond ETF Portfolio Managers use a “sampling” approach wherein they aim to replicate the risk and return characteristics of the index using a smaller portfolio of available bonds. Large managers are able to leverage economies of scale and bond desk relationships, alleviating the legwork of tracking down bonds and simultaneously seeking to ensure fair pricing for investors.

The second main difference between Equity and Bond ETFs is the way they calculate underlying value. Price transparency in stock markets allows the price of an Equity ETF to be aligned to the value of the underlying basket of stocks, both during the day and at the close. Bond ETFs on the other hand, are often forced to rely on an estimate of Bond prices, as there’s typically no central market where investors can see where bonds were bought and sold—remember that on top of not necessarily trading every day, bonds tradeover-the-counter (OTC). This means that Bond ETF prices and the NAV values tend to deviate more than Equity ETFs, but keep in mind that NAV in the fixed income world is a best effort estimate and not necessarily an actionable price that investors could use to transact in the underlying securities. The reality is that market price of a bond ETF represents the price at which the underlying bonds can actually be traded at any given moment, derived by buyers and sellers transacting in a transparent investment tool.

The benefits Bond ETFs bring to markets have been immense. Bond ETFs have provided a price discovery tool that simply did not exist in Bond markets before. When we talk about how innovative bond ETFs are, this is what we’re referring to.

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This material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator in any Latin American and Iberian country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.

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