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Alternative UCITS Finish 2013 on a Strong Note

Los UCITS alternativos cierran 2013 con buena nota y esperan repetir en 2014 — Photo: Txd. Alternative UCITS Finish 2013 on a Strong Note

In Q4 2013, the alternative UCITS sector grew by 21 percent compared to Q4 2012, showing continued demand and investment in alternative strategies, according to the Alceda Quarterly UCITS Review. Strong equity markets, rallying into the year end, supported the demand for Alternative UCITS strategies and drove the Q4 performance up 2.7 percent, bringing year to date gains to 6 percent.

“The universe saw Assets under Management grow by over EUR 25 billion over 2013, translating to a growth rate of 21 percent. With investor confidence growing, and more funds being driven into Alternative UCITS strategies, as well as a supportive regulatory environment, we expect this positive trend to continue into 2014”, said Michael Sanders, Chairman of the Board, Alceda FundManagement S.A.

Tracking the Absolute Hedge Alternative UCITS Index, which encompasses 468 funds, assets under management reached a total of EUR 159.4 billion, an increase in AUM of 3.2 percent on the previous quarter. As equity markets continued their strong performance in the last quarter of the year, the AH Equity Long Short Index kept its position as the top performing strategy in the year with a 12.3 percent increase over 2013, following the 4.3 percent uplift in Q4 2013.

In addition, AUM within Equity Long Short reached EUR 18.4 billion, registering a 17.2 percent increase over the quarter. FX strategies were hard hit with both gains and assets declining 15.4 percent and 33.3 percent, respectively, in Q4 2013, leading to an overall decline in performance of 1.3 percent in 2013. Managed Futures funds, which declined 2.4 percent in Q3 2013, rebounded in the last quarter adding 6.1%, making it the best performing category in the quarter; however AUM declined 3.2 percent over the quarter showing the strategy is still facing some challenges.

Macro funds control the largest share of total AUM with EUR 42.4 billion invested, with assets growing by 6 percent over Q4 2013. The AH Macro Index advanced 1.4 percent in Q4 2013 and 2.3 percent over the year. Q4 2013 was a particularly active quarter with regards new alternative UCITS launches, with 17 new funds across strategies coming to market, primarily within the Equity Long Short and Credit Indices. The AH Credit Index ended the year with gains up 3.37 percent (+1.23 percent in Q4 2013) as investors reacted to the dislocation of bond markets. In line the new issues across strategies, the report reveals that investors are increasingly happy to support new products with new funds achieving significantly higher launch assets, often within their first year.

“The results of the Alceda UCITS Review in Q4 2013, and over the full year, demonstrate the growing investor confidence in the global economic recovery and the continued demand for alternative UCITS strategies. While the overall results were encouraging, there was a significant dispersion in performance between the best and worst performing funds in the space. Equity Long Short, the strongest performing category over the year, outperformed FX strategies by over 60 percent, demonstrating the importance of good fund selection and portfolio diversification. Assuming equity markets continue to rally, we expect Equity Long Short funds to benefit and maintain their levels of performance”, according to Sanders.

European Property Funds Are Back on the Radar

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Pan-European real estate fund returns rose sharply in 3Q 2013, reaching 1.9%, their highest quarterly level since March 2011. While total inflows look healthy, there are plenty of negative numbers or weakening net new flow statistics at country level.

“Spanish funds have had a torrid time with many retail funds still in wind-down mode. German funds were also hit hard, caught out by redemption requests and liquidity issues,” commented Barbara Wall, Europe research director at Cerulli Associates. “Many German funds have closed their doors to redemptions-for some funds the move has been permanent. That has led to a divergence in performance between the zombies and the survivors.”

In the year to end-November active funds substantially outperformed those in liquidation, returning 2.2% against -6.4%, but investors are still wary. German trade body BVI reports a dramatic fall in flows into offenen Immobilienspezialfonds in 2Q and 3Q. A primary cause is the introduction of the Alternative Investment Fund Manager’s Directive.

Added to that are property-specific measures. From July 22, 2014, new investors will have to hold their property fund investments for at least two years and give one year’s notice for redemptions. A mini-rush preceded implementation, only for sales to be crushed from August onward.

“A return to the good old days seems unlikely-we expect more closures and mergers,” said Cerulli senior analyst Angelos Gousios.

RBC to Sell its Jamaican Banking Operations

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RBC se deshace de su negocio bancario en Jamaica — Photo: Francisco Diez. RBC to Sell its Jamaican Banking Operations

Royal Bank of Canada (RBC) has announced that it has entered into a definitive agreement to sell RBC Royal Bank (Jamaica) Limited and RBTT Securities Jamaica Limited (collectively “RBC Jamaica”) to Sagicor Group Jamaica Limited. The transaction is subject to customary closing conditions, including regulatory approvals and is expected to be finalized in the coming months.

“Consistent with our strategy of being a competitive leader in the markets where we operate, we determined after a careful and thorough review that the best decision for the long-term future success of RBC Jamaica was to sell it to Sagicor,” said Suresh Sookoo, CEO of RBC Caribbean. “Sagicor is a well established financial franchise in Jamaica with the size, scale and complementary capabilities that RBC Jamaica does not currently possess.”

“RBC has operated in the Caribbean for over 100 years and remains committed to this region. This transaction will allow us to successfully reposition our Caribbean business for the future and focus on regions where we have significant market share,” said Dave McKay, group head, Personal & Commercial Banking, RBC. “We are focused on strengthening our business performance, service and competitiveness in markets where we can be a leading competitor over the long term.”

While financial terms of the transaction were not disclosed, the purchase price approximately reflects the book value of RBC Jamaica. RBC expects the transaction to result in an estimated loss of C$60 million (before and after-tax) as a result of International Financial Reporting Standards, largely related to an estimated writedown for the proportionate share of RBC Jamaica goodwill and other intangibles acquired by RBC in connection with its acquisition of RBTT Financial Group in 2008. The transaction is not expected to have a material impact on RBC’s Basel III Common Equity Tier 1 ratio.

The loss is based on current estimates and is subject to change and will be reflected in the results of the first quarter ending January 31, 2014. RBC will release its first quarter 2014 results and host an earnings conference call on February 26, 2014.

What Are the Investment Prospects for 2014?

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El 2014 estará liderado por los países desarrollados, principalmente Estados Unidos — Wikimedia CommonsJohn Stopford, Co-Head of Multi-Assets. What Are the Investment Prospects for 2014?

John Stopford, Co-Head of Multi-Assets at Investec AM, does not think we should be concerned about rising interest rates per se, but more of an issue is that as investors begin to anticipate higher interest rates in 2015 or 2016, that is probably not yet fully priced into government bond yields.

Click on the video to view the complete interview.

Pimco Makes 4 Additional Portfolio Management Leadership Appointments

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Pimco, a global investment management firm, announced today four additional Deputy Chief Investment Officers, a senior Generalist Portfolio Manager hire and two departures. Changes come after Chief Executive Officer and Co-Chief Investment Officer, Mohamed A. El-Erian, decided to step down from his role and leave the firm in mid-March.

The leadership appointments as Deputy Chief Investment Officers are Mark Kiesel (a Managing Director in the Newport Beach officer, a Generalist Portfolio Manager and Global Head of the Corporate Bond Portfolio Management Group); Virginie Maisonneuve (a Managing Director in the London Office and Global Head of Equities); Scott Mather (a Managing Director in the Newport Beach office and Head of Global Portfolio Management); and Mihir Worah (a Managing Director in the Newport Beach office and head of the Real Return Portfolio Management team).

They join Dan Ivascyn (Managing Director in the Newport Beach office and Morningstar 2013 Fixed-Income Fund Manager of the Year (US)) and Andrew Balls (Managing Director in the London office and Head of European Portfolio Management) as Pimco’s Deputy Chief Investment Officers, reporting to Founder and Chief Investment Officer Bill Gross.

“Our six Deputy CIOs demonstrate the strength, depth and breadth of investment talent at Pimco. Individually and as a team they have delivered for clients consistently, and they will now help lead Pimco’s investing excellence into the future”, said Gross. “Together with our newly appointed CEO Doug Hodge, who has 25 years at Pimco, and President Jay Jacobs with a 15-year tenure (much of it globally), they will lead Your Global Investment Authority. The future here is bright, and it will get even brighter in the months and years ahead!”

The firm has also hired Sudi Mariappa, who will re-join Pimco as a Managing Director and Generalist Portfolio Manager, based in the Newport Beach office. Mr. Mariappa will return to Pimco from GLG where he has served since 2012 co-managing that firm’s absolute return fixed income offering. He was previously at Pimco from 2000-2011 as a Managing Director, Portfolio Manager and Senior Advisor.

The departures

Charles Lahr, a Managing Director and Equities Portfolio Manager, has decided to leave the firm pursue other opportunities, including spending more time with his family. Marc Seidner, a Managing Director and Portfolio Manager, has decided to return to Boston to take a role outside of Pimco. They both joined the firm in 2009.

Pioneer Investments Completes its Board of Directors with Majority of Independent Members

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Following Pioneer Investments’ (Pioneer Global Asset Management “PGAM”) ordinary shareholders meeting held on January 22, the company announces the completion of its new board of directors with the appointment of its fifth independent member, Robert Glauber, Former Chairman and Chief Executive Officer of NASD now Finra (2000-2006) and currently Chairman of the Board of XL Group Plc and Northeast Bancorp.

Mr. Glauber, whose appointment brings the number of independent directors of Pioneer Investments’ board to a majority of five, joins other well-known individuals in the industry who were appointed to the board in May of last year: Claude Kremer, Partner of Arendt & Medernach law firm, former Chairman of ALFI (2007 – 2011), former President of EFAMA (2011 – 2013); Alessandro Leipold, Former Acting Director of the European Department at the IMF including a variety of senior management roles (1982-2008), currently Chief Economist of the Lisbon Council, a Brussels-based think tank; and Antonio Vegezzi, Former Member of the Management Committee & the Board of Capital Group, currently independent director at Banque Mirabaud & Cie and visiting professor at Geneva and USI universities, former Trustee & Member of the Executive Committee of the International Financial Reporting Standards Foundation (2005-2010).

In addition, Axel Börsch-Supan, Director of the Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy & currently Professor for the Economics of Aging at the Technical University of Munich, an existing member of the company’s board is the fourth independent director.

Confirming the strategic direction already set for the company, Roger Yates, a non-executive member and former CEO of Pioneer Investments before Sandro Pierri took over this role in July 2012, was appointed chairman of the board. Commenting on his appointment, Roger Yates said, “Having been closely associated with Pioneer during my tenure as CEO, I have seen the company grow from strength to strength. As a member of the board, I have been monitoring the progress of the strategic plan and I am pleased to see the excellent results achieved in 2013 under Sandro’s leadership. It’s a fantastic time to be chairing the Pioneer board at this key stage of the company’s growth.”

The other non-independent directors are Sandro Pierri (CEO, Pioneer Investments), Giordano Lombardo (Group CIO & Deputy CEO, Pioneer Investments) and Marina Natale (CFO, UniCredit). The term of this board will be April 2016.

CorpBanca Agrees to Merge with Itaú in Chile and to Combine Businesses in Colombia

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Corpbanca e Itaú anuncian la fusión de sus operaciones en Chile y Colombia — Corpbanca in Chile. CorpBanca Agrees to Merge with Itaú in Chile and to Combine Businesses in Colombia

CorpBanca and Itaú Unibanco announced that they have entered into a definitive agreement to merge CorpBanca and Banco Itaú Chile in a stock-for-stock transaction. The transaction will create a new Chilean Bank that will operate under the Itaú name. Through this merger, Itaú Unibanco and CorpBanca will combine their banking businesses in Chile and Colombia to create an Andean banking platform.

Following the closing of the transaction, Itaú Unibanco and CorpGroup will sign a shareholders’ agreement to determine aspects related to corporate governance, transfer of shares and liquidity among others. The new Chilean Bank will control CorpBanca ́s and Itaú Unibanco ́s Colombian subsidiaries.

This transaction is subject to regulatory approvals from the Brazilian, Colombian, Chilean, Panamanian and United States regulators and also subject to Banco Itaú Chile’s and CorpBanca’s shareholders’ approval.

If approved, CorpBanca’s current shareholders will own 66.42% of the bank resulting from the merger of CorpBanca and Itaú Chile while Itaú Unibanco will own the remaining 33.58%. Prior to the closing of the merger, Itaú Unibanco will make a US$652 million equity infusion into Itaú Chile. Management expectsto receive all required approvals by the end of the fourthquarter of 2014. CorpBanca anticipate that closing will occur shortly following the receipt of all required regulatory approvals.

CorpBanca will be the surviving entity. Under the merger agreement, Itaú Unibanco will exchange all of the shares of Banco Itaú Chile in exchange for 172,048MM newly issued shares in CorpBanca, representing a 33.58% direct stake ofthe Chilean Bank immediately following the closing. Following the closing, the new Chilean Bank will acquire and control 100% of Itaú Colombia.

Key corporate governance terms to be included in the shareholders’ agreement are related to the Board of Directors and senior management teams. The Board of Directors of the new Chilean Bank will be comprised of 11 directors and 2 alternate directors, while the Board of Directors of the Colombian bank will be comprised of 9 directors. CorpGroup will be entitled to appoint the Chairman of the Board of directors. CorpGroup expects to appoint Mr. Jorge Andrés Saieh to serve as Chairman of the new Board of Directors in Chile as of the closing.

The Chief Executive Officer of the new Chilean Bank will be appointed by Itaú Unibanco. Mr. Boris Buvinic, current CEO of Itaú Chile, is expected to be appointed as CEO of the new Chilean Bank effective as of the closing. Mr. Fernando Massú, current CEO of CorpBanca,will become a member of the new Board of Directors. Other senior management members will be appointed by the Board of Directors following recommendation of the Management and Talent Committee.

As a result of the partnership, the new Chilean Bank will enjoy several benefits, including:

Combined franchise will have a greater scale and resources to compete more effectively:
Greater market share in Chile by gross loans with approximately 12.4% market share (excluding gross loans from CorpBanca Colombia and Helm Bank);
Opportunity to partner with a premier Latin American franchise;
Ability to leverage Itaú Unibanco ́s strong global client relationships;
Combined entity has the potential to generate significant synergies in Chile; and
Sustainable dividend flow supported by greater scale and earnings capability of the combined enterprise.

The transaction enables the creation of additional synergies through: synergies related to optimization of cost structures; savings derived from enhanced branch network; relevant savings derived from scalable IT systems; the improvement in cost of funding; and the ability to further leverage Tier I Capital.

The new Chilean Bank is expected to be the fourth largest private bank in Chile with US$43billion in assets, US$33 billion in loans and US$27 billion in deposits. With this greater scale, the institution will be able to exploit various cross-selling opportunities and access funding at lower cost.

Capital soundness of the new bank will be strengthened by the US$652 million capital increase that Itaú Unibanco will inject into Itaú Chile prior to the merger. As a result of this merger, customers of all entities involved will have access to a greater array of product offerings as well as a more extensive branch network (217 branches in Chile and 172 branches in Colombia).

FINRA Fines Banorte-Ixe Securities for Inadequate AML

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Banorte-Ixe Securities, multado por fallar en las prácticas contra el lavado de dinero y no registrar a referenciadores en EE.UU. — Photo: Alvesgaspar. FINRA Fines Banorte-Ixe Securities for Inadequate AML

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Banorte-Ixe Securities International, a New York-based securities firm that services Mexican clients investing in U.S. and global securities, $475,000 for not having adequate anti-money laundering (AML) systems and procedures in place and for failing to register approximately 200 to 400 foreign finders who interacted with the firm’s Mexican clients.

FINRA also suspended Banorte Securities’ former AML Officer and Chief Compliance Officer, Brian Anthony Simmons, for 30 days in a principal capacity, as he was responsible for the firm’s AML procedures and for monitoring suspicious activities. As a result of the firm’s AML compliance failures, Banorte Securities opened an account for a corporate customer owned by an individual with reported ties to a drug cartel, and did not detect, investigate or report the suspicious rapid movement of $28 million in and out of the account.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “FINRA continues to focus on the activities of foreign finders and the effectiveness of member firms’ AML programs. When foreign finders function as associated persons, they need to be properly registered with a U.S. broker-dealer. When firms accept customers who are located in high-risk jurisdictions, their AML programs need to be carefully tailored and robust to address the risks inherent in this activity.”

FINRA found that Banorte Securities’ AML program failed in three respects. First, the firm did not properly investigate certain suspicious activities. The Bank Secrecy Act requires broker-dealers to report certain suspicious transactions that involve at least $5,000 in funds or other assets to the Financial Crimes Enforcement Network. Banorte Securities lacked an adequate system to identify and investigate suspicious activity, and therefore failed to adequately investigate and, if necessary, report activity in three customer accounts. In one example, it failed to adequately vet a corporate customer in Mexico who deposited and withdrew a substantial amount of money within a short period of time—$25 million in a single month—a “red flag” for suspicious activity. A few weeks later, the same customer transferred $3 million into and out of another corporate account via two wire transfers two and a half weeks apart. Had Banorte Securities conducted a simple Google search in response to the suspicious movement of funds, it would have learned that one of the owners of the corporate customer had been arrested by Mexican authorities in February 1999 for alleged ties to a Mexican drug cartel.

Secondly, Banorte Securities did not adopt AML procedures adequately tailored to its business, relying instead on off-the-shelf procedures that were not customized to identify the unique risks posed by opening accounts, transferring funds and effecting securities transactions for customers located in Mexico, a high-risk jurisdiction for money laundering, or the risks that arose from the firm’s reliance on foreign finders. Third, Banorte Securities did not fully enforce its AML program as written.

In addition, FINRA found that from January 1, 2008, to May 9, 2013, Banorte Securities failed to register 200 to 400 foreign finders. The firm’s Mexican affiliates employed foreign finders who not only referred customers to Banorte Securities but also performed various activities requiring registration as an associated person, including discussing investments, placing orders, responding to inquiries, and in some instances, obtaining limited trading authority over customer accounts. The firm had previously registered individuals performing the same functions prior to July 2006.

Standard & Poor’s Opens a New Office In Poland

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Standard & Poor’s Ratings Services (S&P) announced this week the expansion of its European network with the opening of a new office in Warsaw, Poland, and the appointment of Marcin Petrykowski as Regional Head for Central and Eastern Europe and Managing Director of the Poland office.

The Warsaw office will serve as a hub for S&P’s operations, serving financial markets across Central and Eastern Europe (CEE).

“We are committed to fostering the development of deep and efficient capital markets across the region, linking local market participants with the global economy, and enhancing transparency for investors,” said Mr. Petrykowski. “We have chosen Poland as our Central and Eastern Europe hub due to its strategic location, growing internationalization of business, and emerging domestic bond market. Poland provides a unique location for S&P to offer its full range of services covering credit research, data, and ratings, together with a wider set of analytics, information, and index services provided by the McGraw Hill Financial businesses across the region,” Mr. Petrykowski added.

S&P first upgraded Poland to investment grade in April 1996. Since then, Poland has grown to become a leader in the region, with a diversified, resilient economy, backed by a flourishing banking sector. Poland now has a long-term foreign currency rating of ‘A-‘.

Mr. Petrykowski will oversee S&P’s strategy for Central and Eastern Europe, lead activity in the region, and facilitate the use of ratings for issuers in the market as the global benchmark for creditworthiness, helping them access the domestic and international capital markets for funding. S&P already holds a strong position in the region, with over 70 entities rated.

Mr. Petrykowski joins S&P from J.P. Morgan Corporate and Investment Bank, where he was Executive Director, Head of Coverage for Central and Eastern Europe, Russia, CIS, and Israel for the Investor Services division. In this role, Mr. Petrykowski also served as the Deputy General Manager for the J.P. Morgan branch office in Poland. Prior to joining J.P. Morgan in 2007, he spent five years with Citi Corporate and Investment Banking, focusing on Poland and CEE.

The EMEA network of Standard & Poor’s offices now comprises 12 locations including London, Paris, Frankfurt, Moscow, Stockholm, Milan, Madrid, Warsaw, Istanbul, Tel Aviv, Johannesburg and Dubai. Approximately 450 analysts are based in the region, covering about 2,500 issuers.

Three Worries for 2014, and They’re All About Credit

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So far in the cycle the US economy has done well without the extra adrenaline of private credit creation. In other words, growth has been occurring organically since 2009 without consumers adding debt to their balance sheets to buy goods and services, or companies radically expanding bank borrowings and issuing new bonds to boost sales. Profits have been the key to sustaining this situation.

Not everything is going swimmingly, however. There are signs that the low volume of private credit creation could be changing for the worse. The potential use — or misuse — of credit could indicate what might happen during the next phase of the business cycle.

Let’s consider three concerns about credit that should keep investors on the alert, and where we are now:

Private credit acceleration can bring bubbles

Private credit growth reaching 6% to 8% of US GDP has historically been a warning sign of an aging and decaying business cycle. Why? Too much credit causes the economy to grow beyond the capacity that is in place, and bubbles become a concern. When that happens, too much capacity may come on line, often leading to a recession and a cooling in profits, which is generally preceded by a stock market collapse.

Now, credit growth is low, and the US Federal Reserve’s efforts to create some credit growth have not been working as planned. The velocity of money — or the movement of cash and bank lending throughout the economy — is still slow, but speeding up.

Excess corporate issuance can impair credit quality

When corporations use credit to drive earnings growth, their credit quality goes downhill and their ability to repay debt deteriorates. Buyers of riskier credit bonds expect a spread over safer Treasury securities. As that spread widens, credit issues underperform Treasury benchmarks.

Now, companies are starting to issue more debt in the bond market, and we are beginning to see significant increases in commercial and industrial loans. While this is quite normal, it usually occurs in the early part of an economic expansion, when credit can help to revive growth. As debt burdens increase, however, credit quality can become impaired, especially in the high-yield market. For now, credit measures are still solid, but the key measure of debt to cash flow is starting to rise for the first time in this cycle.

Credit can be linked to inflation

Credit growth can lead to economic growth, but if credit accelerates too quickly, it can lead to inflation, which is usually not welcomed by investors. In the initial phases of inflation, stocks can go up and credit quality can improve. However, when wages start to increase, profits begin to fall.

Now, there is no sign of inflation pressures building, nor is there any evidence of excess capacity in US factories, shops or the labor market. Yet this benign environment can change if credit expansion accelerates.

Credit is not a bad thing; rather, it is necessary to fund current needs against future income. Consumers and corporations alike have legitimate reasons for borrowing to finance big-ticket items, such as automobiles, and to expand inventories and capital plant, such as computers, software and factories. The growth of credit can help kindle the expansion phase, but as the business cycle progresses, the growth and use — or more precisely, misuse — of credit can lead to contraction and even recession, which is the worst outcome for investors.

Now, the use of credit in the United States is within normal bounds, but the lure of credit could ruin the investment story of 2014 if accelerating credit growth is accompanied by deteriorating credit quality. Credit excess is a storm warning, something we at MFS watch keenly. And we think it may make sense to build some conservatism into stock and credit portfolios, just in case.

Extract from James Swanson’s blog On The Outlook – James Swanson is Chief Investment Strategist at MFS Investment Management