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William Finnegan, Senior Managing Director of Global Retail Marketing at MFS highlights the challenges investors face when their inheritance gets passed on to their heirs. He provides solutions to this challenge to make this transition a smoother process.
Click on the video for full interview.
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Private equity firms often get a bad rap in the popular media — picture Gordon Gekko in the 1980s movie Wall Street and, more recently, negative characterizations during the last presidential election — but new research by Stanford faculty member Shai Bernstein should dispel some of the myths about this class of investments.
“The public debate about private equity often lacks data upon which to base its arguments,” says Bernstein, who is an assistant professor of finance at Stanford Graduate School of Business. “We wanted to take an in-depth look at the operations of these privately held firms, which are, more often than not, hidden from the public eye.”
After a rigorous analysis of private equity (PE) buyouts in the restaurant industry in Florida, which looked at 103 separate deals from 2002 to 2012 and 3,700 restaurant locations, Bernstein and Harvard Business School faculty member Albert Sheen found strong evidence that private equity buyouts actually improved management practices and operations, as well as decreased prices, all with a minimal impact on employment.
While the study focuses on a single industry and geography, Bernstein stipulates that the findings are indicative of the broader value created by PE buyouts. As he explains, the restaurant industry has much in common with other sectors that attract private equity firms — they have tangible assets, relatively simple operations, and predictable cash flows. “We believe we can draw broader conclusions from these deals,” he says, although noting that some caution should be used in making generalizations.
The researchers decided to focus their efforts on restaurants because of the industry’s pervasive practice of dual ownership, in which a parent company directly owns and manages some locations and others are franchised. In general, a parent company has much less control over franchisees than locations that are directly owned. According to Bernstein, this provided a uniquely controlled experiment about the value added by PE firms, allowing the researchers to compare the effect of private equity ownership on direct-owned versus franchised locations.
“The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry” is part of a series for the Rock Center for Corporate Governance, a joint initiative of Stanford Law School and Stanford Graduate School of Business.
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The Chinese government recently released details of the reforms announced at the Third Plenum and the market has reacted positively. The Plenum is a key meeting of top Communist Party leaders to discuss China’s future policy direction. At the center of the policy changes are reforms addressing the government’s role in the economy and business, and the introduction of more market-orientated mechanisms to guide the development of industries.
While the reforms will have varying implications for different industries, the reduction in the role of the state alone could spark a drop in the risk premium applied to the Chinese market where indices are dominated by mega cap state-owned enterprises (SOE) trading at low price-to-earnings and price-to-book value multiples. The Plenum also addressed critical reform agendas that will improve the prospects for social stability and the rise of consumption, such as relaxing the one child policy, increasing rural ownership and land use rights for farmers and those owning agricultural land, and changes to the ‘hukou’ system of urban social welfare entitlements, all of which can help rebalance the Chinese economy over the long term.
We believe that market sentiment will be lifted by the announced reforms as investors witness the improving quality of economic growth and evolution of the financial and real estate sectors as well as fiscal policy and pension systems. A re-rating of Chinese equity markets is also likely, with the Hang Seng China Enterprises H Shares Index currently looking cheap on a forward P/E ratio of less than 9x – see chart 1.
Chart 1: Is a Chinese re-rating overdue?
Source: Datastream, Hang Seng China Enterprises H Shares Index, price earnings ratio, monthly data, 31 October 2003 to 31 October 2013.
The Chinese economy has continued its cyclical expansion with rising economic growth and industrial activity. Rising growth appears to be the result of government policy augmented by strengthening recoveries in Japan, Europe and the US. Clearer policy direction has certainly come from the Third Party Plenum. We believe there is sufficient scepticism over the Chinese story to allow ongoing positive surprises for some months. Stock picking should add value in this environment. We see abundant growth and value opportunities at present. Consumption stocks tend to be somewhat more expensive, but continue to offer high growth rates in earnings. Meanwhile, large state-owned enterprises (e.g. CNOOC) appear remarkably good value and valuations imply very negative outcomes, which we do not believe will occur.
Opinion column by Charlie Awdry, Investment Manager, China Opportunities Strategy, Henderson Global Investors.
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Azimut, Italy’s leading independent asset manager, and FuturaInvest, have signed an investment and shareholders agreement to set up a partnership to provide financial advisory services in the Brazilian market.
FuturaInvest, founded by 6 partners with proven experience in the financial industry with an average tenure of 12 years and a strong track record, counts 35 people and 11 offices around Brazil, providing advisory and asset allocation services via funds selection, financial education, and asset management services through funds of funds and managed accounts to around 2,500 clients.
Subject to the satisfaction of certain conditions precedent, the transaction will entail the acquisition, through AZ Brasil, of a 50% stake in three entities: (i) a financial advisory company, (ii) an asset management company (dedicated to funds of funds and managed accounts) and, (iii) subject to the approval of the Banco Central do Brasil countersigned by the President of Brazil, in FuturaInvest DTVM (Distribuidora de Titulos de Valores Mobiliarios). FuturaInvest DTVM is a regulated financial institution authorized to distribute financial products to local investors (operative since September 2013).
The overall transaction value is around $5.3 millon (R$ 12.5 million) mainly paid via a capital increase, which will finance the growth envisaged in the business plan. Furthermore, the agreement contemplates the possibility of a maximum adjustment to the subscription price in connection with the business development over the first three years of operations. As at 30th November 2013 FuturaInvest has around $97 million.
Azimut and FuturaInvest management share the same medium-long term commitment and will cooperate to grow the existing business also by hiring new financial advisors, opening new offices to extend the country’s coverage and increasing the funds of funds product offering.
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Myths about the innate differences between men and women when it comes to investing behavior and performance are debunked in a new research report publishedby the Merrill Lynch Wealth Management Institute. A study of 11,500 investors found that while men and women differ in their approach to investment decision-making, gender is less a determinant of investing success than other social, demographic and circumstantial factors.
The Merrill Lynch report, “Women and Investing: A Behavioral Finance Perspective,” suggests that the basis of previous research, which focuses on investing behavior of men versus women, has relied on stereotypes that are limiting in scope. The goal for researchers and advisors is to move away from gender comparisons and instead focus on women’s varied and unique perspectives.
Numerous studies have found that compared to men, women are more averse to investment risk, less engaged in investment decision-making, trade less often and establish investment goals that put the needs of family and community ahead of personal needs.
Merrill Lynch analyzed the behavior and preferences of women investors through a wider lens of social and demographic factors, and found that men and women are far more alike than many people have thought.
Key findings of this research include:
“Our research reinforces the importance of concentrating on the unique, personal goals of each investor. Doing so can identify a deeper understanding of the individual’s concerns and priorities which may better align investments to achieve the outcomes the investor desires,” said Michael Liersch, head of Behavioral Finance for Merrill Lynch Wealth Management. “We believe we need to change the dialogue with both men and women, to discuss what really matters to them and what they want their investments to achieve.”
The Merrill Lynch report provides three key action steps action steps for advisors to better understand the unique perspective of men and women clients:
A copy of the Merrill Lynch paper “Women and Investing: A Behavioral Finance Perspective” is available here.
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As 2013 draws to a close, investors’ thoughts inevitably turn towards 2014 and the knowledge that risk assets will have to learn to begin to live without the seemingly unending flow of central bank liquidity. This presents some concerns as the earnings growth that many companies had banked on for the second half of this year has failed to materialise. If this trend continues, and the market’s focus shifts gradually from liquidity to fundamentals, risk assets may well come under pressure.
Excluding high yield, fixed income markets have had a lackluster year and we expect to see a similar trend in 2014
Excluding high yield, fixed income markets have had a lackluster year and we expect to see a similar trend in 2014. The continuing scramble for income has supported the high yield sector, which offers the highest level of income (relatively at least, although yields are low in historical terms) and the shortest duration exposure in the fixed income asset class. We regard corporate credit as a suitable asset class for a low-growth world and it is clear that coupon flows and maturities continue to easily absorb new issuance. Sectorally, financials remain in credit-friendly mode (and we expect them to remain so) but corporates appear to be increasingly equity-friendly, and thus leverage is rising. In core sovereign markets, yields will rise next year, particularly if the Federal Reserve delivers an earlier-than-expected taper (I still anticpate such a development at the end of March). However, we do not expect a rout in core markets and would anticipate 10-year US treasures to yield around 3.5% by end-2014. Sovereign markets such as the US and the UK are offering positive real yields, which will provide some valuation support in what is still a low-growth/income-hungry world.
We would anticipate 10-year US treasures to yield around 3.5% by end-2014
In terms of our recent activity, we have been taking some risk off the table in our multi-asset portfolios, primarily through reductions in emerging market equity and emerging market debt. The sell-off experienced by these asset classes in the summer, caused by concern over tapering fears, has provided a portent of events next year. Indeed, emerging market assets are likely to face a number of headwinds in 2014, namely rising treasury yields, a stronger dollar and a less benign liquidity environment.
We do not anticipate a re-run of 2013’s stellar returns but remain positive on the outlook for risk assets
Looking forward to next year, we do not anticipate a re-run of 2013’s stellar returns but remain positive on the outlook for risk assets. There are some developing tail risks (European deflation, Chinese/Japanese regional political tensions) that are not part of our core scenario, but which nonetheless provide potential uncertainty for markets should we see a continuing deterioration in the recent trends in these areas. China has thrown another wildcard into the mix with its recent announcements on domestic policy following the Third Plenum, which outlined a shift towards more market-friendly policies. However, as one would expect the timing, detail and implementation of these moves remains suitably vague.
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The last six years have witnessed the most severe financial crisis since the end of World War II, with household earning capacity and saving ability experiencing significant changes due to the downturn in the real economies. This challenging economic situation definitely affected household saving behavior, although the impact has been different in various countries – for some, the impact on household earning capacity was more intense than others.
European households endured a sizeable reduction in their per capita real gross disposable income (GDI), with the exception of Germany
Recently, members of Pioneer Investments investment team in Europe gathered research on Savings & Wealth Trends in 2007-2013. Their findings were very interesting and I wanted to share some highlights.
Holding Steady, Despite Challenges
European households endured a sizeable reduction in their per capita real gross disposable income (GDI), with the exception of Germany, which exhibited an increase. Saving rates for Germany and France, two countries historically characterized by high and stable levels of saving, did not show significant fluctuations in the last few years and are also expected to remain well above the 15% threshold in 2013. Japan is another country that has shown a stable saving rate (8.3% of income in 2012), although at lower levels compared to the two core euro area countries.
A “Change of Habit”, but Still Lagging Behind
The US and UK, typically considered among the highest “spenders” in the early 2000s, have shown a significant increase in the tendency to save, a sign of a “change of habit” after 2008. More restrictive credit market conditions, following the burst of the sub-prime crisis, are probably one of the main causes of this attitudinal shift. Despite the increase in saving, these two countries continue to be marked by relatively lower saving rates compared to the rest of the countries we analyzed.
Visible Declines
On the other hand, Italy, Austria, Spain and Greece have experienced a visible decline in saving over the last few years. We believe in these regions, the steep fall in incomes combined with higher taxes are key elements that have driven down the ability to save. In other words, the erosion of revenue, along with consumption levels that have not declined as rapidly, had a direct impact on household ability to accumulate resources for the future.
For 2013, with the market normalizing and some signals of a turnaround on the economic front, we believe saving rates will increase (compared to 2012) in Italy and Spain (11.9% and 8.5% respectively), while Austria should remain stable at 12%. We anticipate a further saving decrease in Greece (7.4%) and some reduction for Portugal, which is expected to revert to its historical average.
Household Wealth on the Rise?
Much of the volatility observed in household total net worth is a direct consequence of changes in financial asset prices. From 2009, most of the countries we observed underwent a period of uninterrupted growth in financial assets, thanks to both market appreciation and new money flowing into financial investments. Now, many of these financial assets have largely closed the gap in valuations with respect to 2008 (with the exception of Spain and Greece). In six year’s time, the strongest appreciation was reported by France and the UK, where household assets are now up 19% compared to 2007 values, followed by Austria (+17%) , Germany (+15%) and the US (+13%). More subdued asset growth was recorded for peripheral European countries, where the sovereign debt crisis weighed on both household confidence as well as asset valuations.
Between 2007 and 2013, German households, on the back of a buoyant economy, experienced the most significant progress in total net wealth (+23%). German and Italian households were least affected by the collapse of financial markets in 2008. Italy, however, was unable to recover and ended up with just a 2% increase in wealth over the six-year period. Japanese household results were worse as their net wealth is expected to be 5% lower in 2013 compared to 2007.
Household Net Wealth (in % to 2007 values)
Source: OECD, National Statistics Institutes and Central Banks, as of September 30, 2013. 2013 estimates: Pioneer Investments.
With higher exposure of portfolios to equity markets, U.S. and UK households shouldered the most significant drop in wealth in 2008. However, following the upsurge in market prices after 2009, these countries were characterized by a much quicker upturn in wealth in the following years and are expected to end 2013 with a level of total resources equal to 10% and 16%, respectively, above pre-crisis levels.
In conclusion, the evolution of household incomes is a reflection of the crises that have repeatedly shaken the world’s economies, with particularly negative consequences in Europe, which reflected an almost generalized decline in real GDP in 2008-09 and again in 2011-13.
Note: For calendar years 2007 – 2012, measurements are as of December 31. For 2013, measurements are forecasted for year-end.
Article by Giordano Lombardo, Global CIO, Pioneer Investments. This article was originally posted on followPioneer on December 11th, 2013.
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Sovereign creditworthiness in Latin America is expected to remain broadly stable in 2014, although some negative bias can be observed in the region’s ratings, with six sovereigns on Negative and none on Positive Outlook, said Fitch Ratings in its 2014 Latin American Sovereign Outlook Report.
“Regional GDP growth is expected to recover moderately to 3.1% in 2014 from an estimated 2.6% in 2013, led primarily by a rebound in Mexico,” said Shelly Shetty, Head of Fitch’s Latin America Sovereign Group. “However, weaker growth in China, softer terms of trade, tighter financial conditions and lagging productivity improvements will constrain growth rates to levels below those seen in the past.”
“Potential external shocks continue to represent the region’s main downside risks, though strong international reserves, combined with flexible exchange rate regimes and steady foreign direct investment should mitigate these risks,” added Shetty.
Growth rates are expected to vary significantly throughout the region. Brazil, Argentina, El Salvador, Jamaica and Venezuela are anticipated to underperform the regional average. Investment-grade Andean countries as well as Bolivia and Paraguay are expected to record above-average growth rates in 2014. Panama, while decelerating, should be the fastest-growing economy in the region.
Below-potential economic growth, easing of commodity price pressures and credible monetary regimes should lead inflation to remain well contained in most countries. On the other hand, moderate growth rates and less favorable terms of trade, combined with continued spending pressures and a busy election cycle could pressure fiscal accounts in some countries. Chile and Peru have the maximum fiscal buffers and among the lowest debt burdens in the region which places them in the best position to implement fiscal stimulus, if needed.
Despite a heavy election schedule for 2014, a significant departure from current policies is unlikely. As a result, elections should be largely credit-neutral, although they could detract from progress on competitiveness-boosting reforms.
Fitch’s special report 2014 Outlook: Latin American Sovereigns – Stable Credit Outlook with Negative Bias is available here.
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The business of hedge funds is caught between rising costs and falling management fees, holding little profit for managers who don’t perform. That’s one key finding from the second annual global survey of the economics of hedge funds in the just-released Citi Prime Finance 2013 Business Expense Benchmark Survey.
“Today, a hedge fund needs at least $300 million in assets just to break even. The survey also uncovers dramatic regional differences in business and regulatory expenses.”
According to the survey, the traditional “2 and 20” model of investment manager compensation – 2% management fee and 20% of the profits — has declined to fee levels as low as 1.58% of assets under management for all but the largest managers. As a result, hedge fund managers, unlike their counterparts in traditional, long-only funds, barely break even simply collecting fees. For example, after paying expenses, funds with $500 million in AUM realize operating margins of 69 basis points, rising to 82 basis points for a manager overseeing $900 million, survey data show.
“Fee compression continues to reshape the business of hedge funds, lowering fees even as expenses rise, all but eliminating fee-only operating margins, and raising the level of assets needed for a hedge fund business to succeed,” said Alan Pace, Global Head of Prime Brokerage and Client Experience. “And while it’s clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned – both parties are focused on performance.”
“Our latest survey takes a deep dive into the business challenges of running a hedge fund,” said Sandy Kaul, Global Head of Business Advisory Services for Citi Prime Finance. “Today, a hedge fund needs at least $300 million in assets just to break even. The survey also uncovers dramatic regional differences in business and regulatory expenses.”
In this latest survey, Citi Prime Finance surveyed 124 hedge fund firms in North America, Europe and Asia representing $465 billion, more than 18% of total industry assets. Select findings of the new survey:
Expenses, Fees & Margins
Regional Differences
Impact of Regulation
The full report can be viewed at: 2013 Business Expense Benchmark Survey.
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Glennmont Partners, one of the largest infrastructure vehicles dedicated to clean energy across Europe, has secured a €50 million investment in its second fund by the European Investment Bank. The investment is the single largest clean energy equity investment made by EIB this year.
Clean energy investment is a key focus for the EIB as it works to support the European Union’s stated policy objective to cut greenhouse-gas emissions across Europe by 20% over the next six years. In recent years the EIB’s annual lending in this sector has increased substantially reaching €3.3bn in 2012. As well as lending, the EIB makes equity investments and provides finance and expertise to projects across Europe. The EIB has a rigorous review process for all the projects that it chooses to invest in including considering their financial, technical and social long-term performance.
Commenting on the EIB investment, Joost Bergsma, CEO of Glennmont, said: “We are delighted that the EIB has chosen to invest in our second fund. It has developed a first class reputation for its work in clean energy and this investment further demonstrates that our independent, specialist approach is attractive to top-level investors. We share a common goal with the EIB to promote sustainable and secure sources of energy for the UK while also delivering consistent yield and long-term capital appreciation for investors.”
“Glennmont has an established track record and proven readiness to support renewable energy projects across Europe. The European Investment Bank is pleased to back projects that tackle a changing climate.” said Jonathan Taylor, European Investment Bank Vice President responsible for environment and climate lending.
The EIB’s investment will be directly injected into Glennmont’s second clean energy infrastructure fund which now has commitments of €250 million from both new and existing investors from its first fund.
