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Liquidity: Size Matters, Remain Nimble

Generally speaking growth markets are more vulnerable to downturns and changes in the cycle. Emerging market equities are no exception, on average presenting a significantly higher risk than equities in developed countries, as we have seen in previous downturns. Risk therefore should be the most important dimension of any investment process in this universe. RAM Active Investments manages an Emerging Market Equity strategy which is currently on roadshow in Chile, Peru, Brazil and Colombia with its distributor in Latin America, Capital Strategies. These are the views of Emmanuel Hauptmann, Senior Equity Fund Manager, Emerging Equity Markets, RAM Active Investments.

Know your market impact

Liquidity in Emerging markets has developed favourably over the last ten years, at the same time as it dried up in developed markets around the world. Lately, less mature frontier markets saw an even stronger liquidity trend driven by large investor inflows into the space. This improvement of liquidity can give a false sense of security which investors typically pay for in deleveraging phases of the cycle. The volatility of volumes on local stocks, the vulnerability of many Emerging markets still dependent on foreign capital inflows mean we can’t compromise on liquidity management within the portfolio. To tackle this risk and to ensure we don’t give away the alpha generated by our investments through trading costs, we have developed a robust market impact model and portfolio construction process that aims to dynamically adjust and scale positions in our Emerging portfolio based on the recent volatility and volume characteristics of each stock. That process helps us maintain good risk and liquidity control at every point in time, which is crucial in periods of outflows like last summer, and will help prevent investors from being hurt in case of a sudden deleveraging in the future.

Manage your liquidity actively

The temptation is to think that a passive investment help reduce market risk more than an active one, given its usual diversification. Not necessarily if one selects an active strategy with strong risk management. Actually, the issue with market-cap based benchmarks is that they don’t give any attention to stock-specific risk. The bigger the company, the better. That can often lead to a too high concentration of risk on a few names and a sub-optimal allocation of risk in the fund. Overly concentrated equity exposures or insufficiently active liquidity management could make it impossible for an asset manager to provide its investors with cash within a reasonable timeframe or at a respectable price. As investors wishing to withdraw from emerging market equity (and debt) ETFs have unfortunately learned the hard way, the same can happen with passive management strategies if too many requests are received. A healthy selection must pay just as much attention to a position’s liquidity risk as to the fundamental opportunity that it represents or the market risk that it carries. Our philosophy, on daily liquidity funds, is to do everything we can to ensure liquidity to all our investors in a matter of days (not weeks, nor months…).

Emerging market equities still abound with inefficiencies and opportunities but with risks also and it is through a fundamental, disciplined approach to these markets, conscious of all risks incurred, that an investor will maximize his chances of a high return on investment there over the long term.

Article by Emmanuel Hauptmann, Senior Equity Fund Manager, Emerging Equity Markets, RAM Active Investments.

Opportunities Shift From Domestic to Global Europe

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Las nuevas oportunidades: de la Europa doméstica a la Europa global — Photo: Eric Fischer. Opportunities Shift From Domestic to Global Europe

Macro headwinds, but domestic improvement

There have been some tangible signs that confidence is slowly returning to Europe, although recent gross domestic product (GDP) numbers and industrial figures have been lacklustre. The unemployment rate for Europe, while still at elevated levels compared to historical averages, has begun to fall. New car sales are also rising – job security makes a new car purchase a far easier decision. There are, nonetheless, a range of significant hurdles to overcome, not least the consequent impact of the escalating crisis in Ukraine.

Growth still remains fragile in Europe and the European Central Bank (ECB) recently implemented a package of measures aimed at helping to shift growth up a gear. While ECB intervention could stimulate a slow and stuttering recovery, it may not be the ‘silver bullet’ that many commentators are hoping for. Inflation has remained stubbornly low; due in part to the strength of the euro, and this has fuelled fears about the risk of deflation. But Europe is not alone in struggling to address the structural issues that are impeding growth; it is a global problem. The ECB will certainly be hoping to see some currency weakness in the second half of 2014, which would aid exporters.

Fresh opportunities to access global leaders

It is easy for investors, particularly in other parts of the world, to read the news, look at the uncertain macro backdrop and panic about Europe. But we believe that this is the wrong response. Uncertainty creates mispricing in the market, providing an opportunity for active stock pickers, such as ourselves, to generate alpha.

One of Europe’s strengths remains the fact that companies in the region are in many cases global leaders. Such companies include Roche, the Switzerland-based pharmaceuticals company, a leader in oncology and haematology, and German tyre and vehicle components manufacturer Continental, which is benefiting from a long-wave cycle of growing demand for active safety components in cars.

The global reach of European companies and the breadth of their sources of revenue allow European equity portfolios to be adjusted towards companies with exposure to those regions with the most compelling opportunities. Over the past 18 months we have focused more on ‘Domestic Europe’; holding attractively valued companies with more domestically focused operations. Recent economic uncertainty, however, has led some macro investors to cut their exposure to Europe and we believe that this has created a fresh opportunity to invest in global names at appealing prices.

Corporates looking to put cash to work

On the corporate side, we are seeing pressure grow on cash-rich companies to spend capital on merger and acquisition activity, or to return it to investors through dividends. We would not be surprised, in this late-stage, but still very strong bull market, to see a boom in merger and acquisition activity in large-cap stocks. This, combined with the separation of macro and micro, leaves us particularly constructive on the potential for equity markets to move higher in the coming months.

Rewarding environment for stock pickers

Following the financial crisis, Europe saw a rise in the correlation between the performance of the winners and losers of European equity markets. Good stocks and bad stocks moved in unison, largely irrespective of quality or value. This eroded the value that fund managers could add through strong stock selection. Since early 2012, however, as chart 1 here shows, this trend has reversed, with stock pricing correlations falling back towards their longer term average. This has created better conditions for active managers to outperform through good stock selection.

Chart 1: Falling correlation favours stockpickers

Enlarge

Source: BofA Merrill Lynch European Investment Strategy, Thomson Reuters DataStream, as at 13 August 2014. ‘1yrMvgAvg’ refers to a one-year moving average of pricing correlations in Europe.

The lower correlation is understandable. As the crisis recedes, less attention is paid to the macro picture and more focus is given to corporate fundamentals, not the least of which is earnings. The re-rating in European equities has so far been driven by the ‘price’ in the price to earnings (P/E) ratio, but the margin expansion story has largely run its course. We have yet to see the highly anticipated growth in earnings that would justify further gains. Earnings growth was disappointing in 2013 and we expect that market direction will ultimately be driven by whether or not the optimistic estimates for 2014 and 2015 (Citi consensus estimates at 8 per cent and 13 per cent respectively) can be met. While we wait for confirmation, our portfolio remains constructively positioned to try and capitalise on the opportunities provided by ‘global Europe’ and cash-rich corporates.

Opinion columns by John Bennet, Portfolio Manager of the European Selected Opportunities Strategy, Henderson Global Investors.

S&P Dow Jones Indices and the Lima Stock Exchange Announce Indexing Agreement

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S&P Dow Jones Indices y la Bolsa de Valores de Lima anuncian un acuerdo de indexación — Lima Stock Exchange. Photo: Chimi Fotos, Flickr, Creative Commons. S&P Dow Jones Indices and the Lima Stock Exchange Announce Indexing Agreement

S&P Dow Jones Indices have announced that, as part of its strategic growth plan to expand throughout Latin America, it has signed a landmark agreement with the Bolsa de Valores de Lima (BVL) to license, distribute, and govern all of the BVL indices including a new version of their flagship index, IGBVL (Indice General de la Bolsa de Valores de Lima).  

S&P DJI will be responsible for the marketing and commercial licensing of the BVL indices. The agreement also allows S&P DJI to eventually calculate all of the BVL indices, and to jointly create new indices with the Exchange to meet the evolving needs of investors inside and out of Peru. Each of these indices will be designed with an eye toward being liquid enough to serve as the basis for potential investment products.  

“Interest in passive investing through index-based investment products is just beginning to take shape in Latin America,” says Alex Matturri, CEO of S&P Dow Jones Indices. “With more ETF assets based upon our indices than any other index provider in the world, S&P Dow Jones Indices is in a unique position to help facilitate the growth of index-based investing in Peru by offering a deeper and more prolific lineup of benchmarks to its investors. By aligning with one of the premier exchanges in Latin America, the Bolsa de Valores de Lima, international and domestic investors will have the tools necessary to measure and potentially access opportunities in Peru, a country which has witnessed the fastest economic growth in South America over the past decade.”  

Francis Stenning, CEO of the Lima Stock Exchange said: “This strategic alliance of S&P DJI with the Lima Stock Exchange will generate greater worldwide exposure of our stock market. In addition to measuring Peruvian market behavior, this agreement should make the BVL a source of international investment.” He also noted that a new blue chip index will be created for the local market, which shall include leading companies in terms of capitalization and liquidity.  

According to the agreement, the BVL will transition index calculation of its indices to S&P DJI over time to ensure a smooth transition for existing clients. S&P DJI will be responsible for the commercial licensing of the indices, as well as the end-of-day data. In addition, all BVL indices will be co-branded “S&P”.  

APEX Appoints New CEO as Demand for Outsourced Services Increases

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Apex Fund Services (Apex) has named Bill Salus as Chief Executive Officer with immediate effect. Salus will take over day-to-day running of Apex from current CEO Peter Hughes, who becomes Chairman. Hughes founded Apex 10 years ago.

The new appointments mark a new era for Apex, which is targeting further growth in all of its 34 offices located around the world. Salus, based in the Apex New York office, will have a particular focus on continuing Apex’s success in the US market where he will lead Apex’s North American team.

As Chairman, Hughes will focus on building Apex’s Capital Introductory Service, which helps Apex clients access investor capital. Hughes will also manage Apex’s largest clients as well as concentrate on the company’s growth strategy including acquisitions and targeting large institutional funds.

Salus, who has over 30 years of experience in sales, management and consulting in the investment and financial services industry, was previously Managing Director and Business Executive for BNY Mellon’s asset servicing organization.

Peter Hughes, Chairman and Founder, Apex Fund Services, said: “Outsourcing to specialists in the fund servicing sector is growing fast as managers look to keep headcount low and minimize operating costs. In addition, fund administration is playing an increasingly important role in the support of regulatory reporting as well as providing the right infrastructure needed for managers to get significant allocations. These trends are set to continue and going forward, Apex requires the strongest leadership team available to meet these changes. Having managed Apex since its formation I am proud of the global services and solutions Apex provides its clients. It is very satisfying to have set new standards for the fund administration sector and to be recognized as one of the largest independent providers of these services with the largest global footprint.

Salus also held senior positions at PNC Global Investment Servicing, KeyCorp, Security Pacific Bank and Bank of America. Salus was a member of the ICI International Operations Advisory Committee and the ICI International Committee. He was named to Global Custodian magazine’s Securities Services Hall of Fame.

RBC Global Asset Management Appoints New CEO of International Business

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RBC Global Asset Management, the asset management arm of Royal Bank of Canada, has announced the appointment of Clive Brown as CEO and managing director, RBC GAM International. In this newly created role, Mr. Brown will oversee RBC GAM’s business in Europe, the Middle East, Africa and the Asia-Pacific region excluding BlueBay Asset Management.

Officially assuming the role on October 1, 2014, Mr. Brown will be based in RBC GAM’s London office and will report to John Montalbano, CEO, RBC GAM Inc.

Mr. Brown joins RBC GAM with over 30 years’ experience in the financial services industry, including 21 years at JP Morgan Asset Management, where he held a number of senior roles, most recently as global chief operating officer and chairman of Asia, based in Hong Kong, and prior to that as CEO of JP Morgan Asset Management International. He started his career in 1982 at Price Waterhouse where he qualified as a Chartered Accountant.

“RBC Global Asset Management’s global growth plans include a focus on Europe, the Middle East, Africa and the Asia- Pacific region,” said John Montalbano, CEO, RBC GAM Inc. “The financial strength and stability of RBC, combined with our strong investment discipline and client-focused culture enable us to continue to attract top industry talent. Clive has an exceptional background and is ideally suited to provide focus and direction to our teams in London and Hong Kong in support of our business expansion plans in these regions.”

RBC GAM has over C$335 billion in assets under management globally, as at April 30, 2014. With sales and distribution teams located throughout Europe and in Hong Kong, RBC GAM offers a full spectrum of investment solutions for institutional and individual investors including mutual funds, exchange-traded funds, hedge funds, pooled funds, separate accounts and specialty investment strategies.

Today’s announcement reflects a continuation of a growth trajectory that includes consistent organic growth as well as acquisitions: Voyageur Asset Management (2001), Phillips, Hager & North Investment Management (2008) and BlueBay Asset Management (2010). It also follows the recent build-out of RBC GAM’s investment management teams in both London and Hong Kong, including the addition of 10 global equity specialists earlier this year and, more recently, the addition of three new members to RBC GAM’s London-based EMEA business development team. Globally, RBC GAM has more than 1,250 employees located across Canada, the United States, Europe and Asia.

“This is an exciting time for RBC GAM, our clients and our employees as we continue to bring to the global market the expertise and client-focused service we are known for in North America,” said Mr. Montalbano. “I am confident that under Clive’s leadership, RBC GAM’s international businesses will continue to attract clients globally that recognize the value of our approach.”

Scottish Independence Referendum 2014: Implications of the Vote

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Background

In 2013, the governments of Scotland and United Kingdom passed the Scottish Independence Referendum Bill inviting all United Kingdom residents living in Scotland and aged 16 and over to vote on the referendum question “Should Scotland be an independent country?” On 18 September 2014, 4.3 million registered voters will vote “Yes” or “No” on Scottish independence. A simple majority is required to gain independence.

Implications

Our base case view has remained that Scotland will vote “No” and view the possibility of a “Yes” vote as a low-probability (< 20%) tail-risk event. Recent opinion polls, suggesting that the outcome to the Scottish independence referendum will be close, have caught us by surprise. However, we view the narrowing of the gap in light of similar events which have resulted in spikes in the “Yes” votes. Here, we note the distinction between voters who feel the responsibility to vote and have registered to do so, and those who will actually end up voting. This could potentially swing the vote in favour of Scotland remaining a part of the United Kingdom.

In our view, there are three possible outcomes at this stage. Regardless of the results of the referendum vote, we believe that Prime Minister Cameron’s political strength has been significantly impacted.

No result due to a lack of voters voting, in which case uncertainty will prevail in financial markets until another referendum is organised
A “No” vote, which would have no impact on financial markets
A“Yes” vote would result in a slow and long transition towards an independent Scotland with broad and deep consequences for financial markets.

The main concerns surrounding a vote in favor of Scottish independence are around the management of currency and monetary arrangements; more specifically the choice of currency regime, management of deposit/capital outflows and capital controls. The choice of the currency to be adopted remains the predominant concern where the options are to continue with the Sterling as part of a formal currency union, using the Sterling but not in a formal currency union or “Sterlingisation”, joining the Euro currency bloc or creating Scotland’s own free-floating currency. The significant costs associated with creating a new currency may make this final option the riskiest and hence the least favorable.

Adopting the Euro may be Scotland’s favored option at this time, but may not be a likely outcome given the opposition from anti-Euro supporters as well as costs of currency conversions. Scotland would also need to become a member of the European Union first before it can adopt the Euro currency. In this case, it would still need to create a national currency which would have to remain stable for at least another two years before it is allowed to join the European Union. The probability of a formal currency union being accepted is low – the Bank of England and the Treasury have advised against this due to the lack of fiscal oversight. Hence, the only remaining option is for “Sterlingisation”. This could be damaging to financial markets as a lack of a formal commitment to a currency union could lead to a capital flight from Scotland.

Conclusion

Despite recent polls, we believe that the vote will swing in favor of “against” Scottish independence. However, we do expect short-term volatility to persist and have a negative impact primarily on equity and currency markets.

As a result, in terms of our asset allocation we have closed the long exposure to GBP versus EUR, taking advantage of the position, and maintained the hedges on our equity exposure.

JP Morgan AM Hires François Pirrello in Geneva

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JP Morgan Asset Management has appointed François Pirrello as senior client adviser and managing director in Geneva. He will report to Nicolas Deblauwe, who is responsible for the Benelux, Geneva and Ticino regions, JP Morgan Asset Management.

Pirrello will be responsible for business development and the advancement of client relations for professional investors in the French-speaking part and Italian-speaking part of Switzerland, according to Investment Europe.

He will manage a team of five fund marketing specialists, including senior sales executive Sophie Courmont Vezon.

Prior to joining JP Morgan Asset Management, Pirrello spent 13 years at Pictet Asset Management as regional head of Sales in Switzerland servicing financial institutions, third party clients, insurances and family offices. Previously, he served in various roles at Standard & Poor’s and Credit Suisse.

“We are pleased to welcome Francois. His experience in the funds industry, extensive knowledge of the Swiss marketplace and background in business development will enhance our Geneva team,” said Nicolas Deblauwe.

“Switzerland remains an integral marketplace for JP Morgan Asset Management. Francois’ appointment enables us to continue to provide exceptional client service across the investment spectrum.”

Things We Learned Last Summer

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There are two main things that have changed over the last few months, which affect markets and should be noticed by investors. James Swanson, Chief Investment Strategist at MFS Investment Management, discusses them in his latest video and blog:

U.S. corporate profits and margins keep rising even if everyone predicted they had to revert to its mean. Corporations are growing in all types of environments, as in the U.S the first quarter of this year saw a drop, whereas the second one grew swiftly, and in both quarters margins and profits kept rising. Swanson numbers a series of reasons for this: U.S low relative labor costs, low energy costs, more effective use of resources, low interest rates and some financial engineering via share buybacks.
The direction of the U.S. economy, which seems to be accelerating, is different to the rest of the world. Meanwhile, Europe is heading towards its second recession, Japan is experimenting with totally new policies with an unknown outcome, and China is not growing at the same pace we are used to. The U.S. economy, according to Swanson, is benefiting from a pick up in car sales, a slightly better home market, better exports, factory production and growth in the service industry.

For investors, this has two implications: on one hand, slower growth in the rest of the world suggests that interest rates in the U.S. could stay low for a longer period of time. On the other hand, as stressed by Swanson, the resilience in margins and profits for U.S. corporations imply that investors can still find value in the U.S. equity market.

You can visit James Swanson’s investment blog “On the Lookout” thrugh this link.

Latin America Cross-Border Allocations from Pension and Mutual Funds to Exceed US$350 Billion By 2018

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Latin America cross-border allocations from pension and mutual funds will exceed US$350 billion by 2018 as new research from global analytics firm Cerulli Associates found.

“Although most mutual fund markets in the region are investing less than 5% of total assets abroad as result of the heavy bias to local products, the size of the potential opportunity cannot be ignored,” states Nina Czarnowski, senior analyst at Cerulli. “An increase of 1% in allocation translates to an additional USD$20 billion in inflows to global managers.”

Cerulli’s annual report, Latin American Distribution Dynamics 2014: Entry Points to Emergent Economies, analyzes distribution and product development trends in the six key local mutual fund and pension fund markets–Brazil, Mexico, Chile, Colombia, Peru, and Argentina.

“Pensions will continue to be the largest buyers of cross-border instruments. We predict that cross-border allocations by the pension markets in Latin America should more than double over the next 5 years, with Chile expected to hold its position as the largest regional allocator to cross-border vehicles,” Czarnowski explains.

According to Cerulli’s research, while the current size of the marketplace is an important factor to global managers wishing to expand in Latin America, growth potential, market saturation, and integration with global markets should not be underweighted. Having a long-term commitment is crucial in a region that continues to progress, albeit slowly.

“The region needs to educate industry professionals and investors to reconcile the difference between investors’ high ability and low willingness to take on risk,” Czarnowski continues

Investec Asset Management Significantly Broadens UK Equity Offering

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Investec Asset Management announced that Simon Brazier, Head of UK Equities at Threadneedle Investments, will be joining the company in November 2014.

Brazier currently manages the highly rated £2bn Threadneedle UK Fund as well as a number of institutional mandates. Also joining from Threadneedle are fund manager Blake Hutchins, analysts Ben Needham and Anna Farmbrough, and product specialist Neil Finlay.

On joining Brazier will run UK Equity strategies consistent with his current UK alpha strategy and Investec will launch a UK Equity Income strategy to be run by Hutchins. They will have access to the significant research platform provided by Investec Asset Management’s extensive team of investment professionals. Their strategies will complement the well-established range run by Investec’s Value Team Head, Alastair Mundy.

Brazier will form part of the Investec Quality capability where he will operate as co-head with Clyde Rossouw, manager of the successful Investec Global Franchise strategy.

Domenico Ferrini, Co-Chief Investment Officer, said, “We are delighted that such high-calibre investment professionals have decided to join Investec Asset Management. This deepens our capability in UK equities and positions us to better meet the requirements of our UK advisor and institutional clients, and respond to the increasing interest from international investors for UK Equity strategies. “

David Aird, Managing Director, UK Client Group, said “Simon has an excellent UK equities track record. Positioning him alongside Alastair Mundy and his complementary Value Team provides our clients with a compelling choice of UK equity-centric strategies that strengthens our market position and relevance.”

Threadneedle Investments announced that after Brazier’s resignation Leigh Harrison, Head of Equities at Threadneedle has resumed responsibility for the UK Equities team. Leigh has overseen Threadneedle’s highly successful Equities franchise since 2010, and was previously Head of UK Equities from 2006 to May 2011.