Recent bond yield spreads are signaling familiar territory, though US equity REITs have a decidedly different plan of action during this credit cycle, according to Fitch Ratings in a new report.
Bond yield spreads between equity REITs and corporate industrials have tightened to levels last seen during 2006-2007, the tail end of the last REIT credit cycle. However, a closer look by Fitch shows that equity REIT behavior has changed markedly over the last six years.
For one, “REITs are showing less tolerance for development risk, a likely byproduct of the economic crisis,” said Director Stephen Boyd. “While most REITs have sufficient access to capital to fund development, their hesitation to grow pipelines aggressively has more to do with a desire to preserve financial flexibility by limiting their exposure to non-income producing assets.” REITs are also showing less enthusiasm for share repurchases during this cycle, a more discerning approach that Fitch views as a credit positive.
Another notable change that Fitch has observed is a conscious move away from the “bigger is better” diversification strategy, utilized by some REITs during the last credit boom. ‘The REITs of today are diversifying in a more prudent and thoughtful manner that plays more to their strengths,’ said Boyd.
So what are the primary concerns that should be foremost on investors’ minds during this REIT credit cycle? They are a combination of risks both familiar and new, according to Fitch. In addition to the recurring threat of higher interest rates, REITs of 2013 are also contending with changes in tenant space usage requirements and leasing patterns stemming from technological developments that, for the most part, they did not encounter six years ago. That said, the generally more prudent approach to portfolio and liability management has positioned equity REITs well for the foreseeable future.
The report “Contemplating the REIT Credit Cycle” is available here.
Foto: W. Moroder. KKR Acquires the European Credit Investment Manager Avoca Capital
KKR,has announced a transaction to acquire Avoca Capital, a leading European credit investment manager with approximately $8 billion in assets under management. Financial terms of the transaction were not disclosed.
Founded in 2002, Avoca has a long track record as one of the leading investment firms in the European leveraged credit markets. Avoca invests across five strategies — European loans and bonds, credit opportunities, long/short credit, convertible bonds and structured and illiquid credit. The Avoca platform has experienced strong inflows in recent years as institutional investors seek access to credit asset classes with a focus on attractive returns and downside protection.
Henry Kravis and George Roberts, co-founders and co-CEOs of KKR, stated: “We believe the European credit space offers significant opportunity. To date we have built our European credit business focused on originated credit opportunities such as private credit and special situations, providing $2 billion of capital in just the last two years to European companies.”
“Avoca has a very strong track record, an entrepreneurial management team and excellent capabilities that are complementary to ours in European senior and liquid credit. This acquisition will enable us to expand our credit platform to offer a full spectrum of credit opportunities globally for our clients.”
Alan Burke and Dónal Daly, co-founders of Avoca, stated: “European credit markets are likely to grow significantly over the decade ahead as banks deleverage and take time to rebuild their capital bases. This transaction creates a broad based credit business that will be at the forefront of the developments in European credit markets in the years to come. We are very excited by the enhanced opportunities the transaction will bring for the Avoca team and its clients.”
As European banks have shifted assets to comply with Basel III regulations on capital and leverage, alternative capital providers that are able to make longer term investments are providing financing to European companies while providing institutional investors with the returns they need to pay their pension and insurance obligations.
Upon closing the transaction, KKR will have approximately $28 billion in credit assets in its multi-strategy credit platform operating globally in San Francisco, New York, Dublin, London and Sydney. The combined European credit business will have approximately 80 people on the ground and €8bn ($11bn) of European credit assets ranging across the entire capital structure in credit from senior loans to long short credit, structured credit, mezzanine, special situations and convertible bonds.
Alan Burke, Avoca co-founder and CEO, will lead KKR’s European credit platform and together with Nat Zilkha will help drive the future growth of KKR’s global credit business. Both Alan and Nat will report to Craig Farr, who has responsibility for KKR’s global credit and capital markets businesses. Dónal Daly, co-founder and Chairman of Avoca, will become a Senior Advisor to KKR at transaction close.
All Avoca employees in Dublin and London will join KKR on transaction close. Investment teams and processes for both KKR and Avoca, including the portfolio management of the respective firms’ strategies, will remain unchanged by the transaction. Avoca’s Dublin office will remain a core part of the combined franchise. The transaction, which is subject to customary regulatory approvals, is expected to close in the first quarter of 2014.
Salamanca Group has together with existing management, acquired the Investec Trust group of companies from Investec Bank for an undisclosed consideration. Investec Trust Services currently has over £4.5 billion in assets under administration. The transaction is subject to regulatory approval.
The business will be run as a stand-alone division, and will be re-branded Salamanca Group Trust Services. It currently has offices in Jersey, Switzerland, South Africa and Mauritius and employs around 100 people, administering some 600 trust structures on behalf of clients. Clients include high net worth individuals and entrepreneurs; financial and professional intermediaries; family offices and corporate entities. Additionally the business regularly partners with specialist legal and tax advisers to achieve bespoke solutions for clients.
Commenting on the acquisition, Martin Bellamy, Chief Executive of Salamanca Group said: “The addition of Trust services has been a strategic objective for Salamanca Group for some time and having undertaken an extensive analysis of the market place, the Group concluded that the acquisition of Investec’s Trust business represented the ideal opportunity. We have bought a business with a first class management team and the highest levels of corporate governance.”
Avron Epstein of Investec Bank plc said: “As a professional services business we feel the trust company would benefit under independent ownership. We believe Salamanca, together with management, is best placed to take this business forward and to provide certainty and clarity to our clients and people. The professionalism and excellent service our staff have demonstrated throughout is testament to the strength and quality of the business. We wish them all the best and look forward to continuing our mutually beneficial relationship with the trust company.”
Salamanca Group Trust Services will offer the following services:
Complex and vanilla trusts, foundations and company structures
Multi-family office services
Wide experience of holding financial and non-financial assets
Experts in working with entrepreneurs
Philanthropy
Martin Bellamy added: “Salamanca Group’s primary focus is establishing long-term, trusted relationships with our clients. This acquisition provides the Group with another significant medium through which to achieve this, expanding our offering to include a comprehensive range of high-end, tax compliant wealth preservation and succession planning services. There are also clear synergies with our existing business – particularly our Advisory and Private Client divisions. There will be no changes for existing clients nor will the other relationships with Investec be affected. We will work with management to build on the business’ solid foundations to create the pre-eminent Trust provider, distinguished by our core principles of integrity and agility.”
Xavier Isaac, CEO of Investec Trust Division said: “The acquisition by Salamanca Group and our existing management of the Investec Trust Group is a fantastic opportunity to deliver on our vision. High and ultra-high net worth individuals are no longer looking for traditional trust and fiduciary services in an increasingly complex environment. They expect independent thinking and high touch administration services complemented by multi-family office capabilities. By joining forces with a dynamic company like Salamanca Group, we will retain the entrepreneurial spirit that characterised us when we were operating under the Investec banner.”
Photo: KAZVorpal . The Washington Theatre Could Lead to a Rotation from the US into Europe and Emerging Markets
In the short term, the market seems to be just focusing on what’s going on in the Washington theatre. But what consequences will it have in the following weeks? Ignacio Pakciarz, CEO of BigSur Partners, a multi family office based in Miami, speaks with Funds Society about their views on this issue from an investment strategy point of view.
“We are concerned that holidays retail sales might be soft, as these should occur right before another potential government shut-down”
“The deal most probably to be finally passed will no doubt be a game of deadlines, with no real long-term structural solution tackling”, affirms Mr. Pakciarz, highlighting that “in 2-3 months from now, we will have another similar Washington horror show”.
BigSur Partners’ CEO lists some of the clear consequences of this political uncertainty: a lower level of consumer confidence, a rise in volatility to reflect a more normal environment and a lower level of investor sentiment in the US. “We are concerned that holidays retail sales might be soft, as these should occur right before another potential government shut-down”, he expresses, pointing out that the market is also starting to see some rotation outside of US Equities vs. International Equities, “mainly Europe, as German’s IFO survey at best level since the European crisis started”.
“The S&P 500 needs good fundamental news to move sensibly higher”
On the other hand, earnings revisions are pointing down. BigSur Partners sees a 3Q2013 earnings report that is mainly weak with S&P500 earnings expected to grow only 1%, and “revisions that at this point are coming down as we have a mixed picture, with a few large cap companies like Pepsi or Johnson & Johnson over-performing while others like Citigroup, Coca-Cola, JPMorgan Chase and Alcoa have underperformed.” Mr. Pakciarz asks himself the following question: Can the market continue to trade higher on market multiple expansion?
Regarding the delay of tapering Mr. Pakciarz considers that the Fed already made a big mistake in its communications with the market in May, provoking a sharp spike in market and mortgage rates, that it does not want to repeat. “We think Yellen’s Fed will ensure easy monetary policy continuation and delay tapering. However, after a great 2013, a great 3rd quarter and a great October, the S&P 500 needs good fundamental news to move sensibly higher.”
As a conclusion, BigSur Partners offers some advise for the following weeks: “From a strategic point of view, we maintain a portfolio positioning for a “reflationary” environment (long stocks, real estate, real assets and credit). From a tactical point of view, if the market trades up to a 1725 level and is unable to break that level, we think that the 4Q2013 could be disappointing on a fundamental level. We consider reducing our “Overweight” position in US Equities and rotating into lower valuation European and Emerging Markets stocks.”
Foto cedidaTim Stevenson, Head of European Equity at Henderson Global Investors. Don’t let politics get in the way of the economy
It was Mark Twain, in Pudd’nhead Wilson, who originally suggested that October is a dangerous month to speculate in stocks. He, of course, went on to suggest that every month of the year is ‘peculiarly dangerous’, in effect. This October seems to follow the phenomenon: there is a rather nervous feel to European markets, but almost solely due to political uncertainty rather than the imminent results season.
Politics has loomed its head across markets, with Italy in particular hit by concerns over recent attempts by the despicable Mr Berlusconi to avoid imprisonment. In the Netherlands, politics is an increasingly volatile game, while in Austria the populist ‘Team Stronach’ party, which campaigned on a mandate to split the euro by national borders, has won seats in parliament. In France, President Hollande continues to plumb new depths of unpopularity, and in the UK politics remains a threat to stability. Even Germany’s Chancellor Merkel is being forced to compromise with the left-leaning SPD in order to form a coalition, despite a very strong showing for her party in the recent elections.
Just in case all this is not enough to make markets nervous, party-political infighting over where to apply spending cuts has forced the US government to shut up shop for an indeterminate period.
If this all sounds familiar; it should. It was the same last year.
The result this time around is a sharp increase in short-term uncertainty, which throws a cloud over recent economic data and companies’ statements, which indicate that conditions are improving. Suddenly, the obvious inflow of funds to European markets could be checked by concerns that we might be close to launching into another Euro crisis.
My view is that the next few months may be tense, but the benefits of taking tough decisions on austerity are beginning to show. The only party in Germany that wants to exit the Euro, the AfD, failed to reach the 5% threshold needed to enter the Bundestag, and generally there is optimism that the eurozone has already passed through the worst. That some parts of the electorate want to return to previous failed policies seems a contradiction, given that economies in the region look to have finally turned the corner.
Part of the market thrives on uncertainty and changes of direction provide renewed opportunities to trade on conflicting investor sentiment, at least for a while. Certainly, after the strong share price gains we have seen so far in 2013, a period of consolidation is both healthy and quite likely. There is also evidence that a significant part of the funds flowing to European Equities has been by way of the ETF market, which has been shown to be a flaky, somewhat artificial means of ‘investing’. These investor flows might just as quickly run in the opposite direction, reversing a trend that has been in place for several months.
So prepare for a nervous few months and watch developments carefully. It may be difficult to filter out reality from the noise. My suspicion is that Italy will have a working coalition in the not too-distant future, which will get to grips with some of the many pressing issues that need addressing. Germany is likely to see a Merkel-led coalition, which will continue to press on with measures to reform and reflate the German economy, while also preparing for more debt write-downs in some of the peripheral countries of Europe. In the UK, we may still be wrestling over whether or not we want to be part of Europe, or part of some fantasy world.
In the meantime, the US government might reopen for business, after settling on a compromise agreement that allows difficult decisions to be postponed another year.
In this period, I recommend that investors look at where quality companies are trading and what returns they may be able to offer to patient investors over the next few years.
Photo: Ivan Martinez. BTG Pactual starts operations in Mexico
The Central Bank of Brazil and the Mexico Securities Commission (CNBV) have approved the start of BTG Pactual’s broker dealer in the Mexican market. Based on an organic growth strategy, BTG Pactual Mexico will operate in integrated fashion with the rest of the Bank ́s regional platform, which already has presence in Brazil, Chile, Peru and Colombia. Thereby, BTG Pactual will open up the doors of the second largest economy in Latin America to Brazilian and international investors looking to either do business or expand their existing business in Mexico.
Javier Artigas, who will head up the operation as Regional Head for Mexico, said “We will offer the Mexican market BTG Pactual ́s renowned excellence initially in the area of Investment Bank and in a later stage also intend to offer in Asset Management and Wealth Management”. The synergies between our global platforms will also give clients access to investors and investment opportunities in Asia, Europe and the US. Javier added that “We are blending BTG Pactual ́s expertise in Latin America with the vast knowledge of the Mexican market of the team heading up this new operation”.
BTG Pactual Mexico complements its presence in Latin America and strengthens the current integrated business platform. In addition to its proximity to the US market, the Mexican economy also benefits from the sweeping structural reforms implemented to boost productivity in a whole range of sectors. Commenting on the move, André Esteves (CEO of BTG Pactual) said “We remain very optimistic on business prospects in Latin America”. Investment flows between Latin American countries are on the rise, as reflected in growth in capital markets. Esteves added that “We have consolidated the internationalization strategy of BTG Pactual, a reference for any company, institutional or retail investor with interests or businesses in the region”.
Henderson has further strengthened its executive management team with the appointment of Rob Gambi as Chief Investment Officer as it continues its growth plans across global markets. He will focus on the leadership and development of Henderson’s investment capabilities globally, including its growing resources in the US and Asia. Rob joins from UBS Global Asset Management where he was a Group Managing Director and Global Head of Fixed Income with responsibility for over US$230 billion. In addition he was a member of the executive committee of UBS Global Asset Management.
Previous to this he was Head of Equities and Head of Fixed Income at AMP Asset Management (AMPAM) and Henderson. He will report directly to Henderson CEO Andrew Formica and sit on Henderson’s Executive Committee. He will start at Henderson in 2014.
Commenting on Rob’s appointment Andrew Formica, Chief Executive of Henderson, says, “Rob is a highly regarded investment professional and is recognised for both his investment and business acumen. His role at UBS incorporated managing teams spread throughout the globe with members of his team in the UK, Continental Europe, Asia, Australia and America. His global knowledge is a critical attraction to us as we continue the development of our international businesses including a greater number of our investment professionals residing in locations outside of our London office.” ”We have laid strong foundations over the past few years by streamlining and simplifying the business. The result is that we are focused on our core strengths in Global and European Equities, Absolute Return, Multi-asset and Global Fixed income. With the current momentum in the business, and with Rob’s help, we are well set for our next phase of growth.”
Rob adds, “I have known Andrew since he moved to the UK at AMPAM in 1995 and have been impressed with Henderson’s progress under his leadership. I am excited to be joining a business with strong foundations and I am looking forward to playing a part in the next phase of its development as a truly global asset manager.”
Photo: Roland zh. UBS Global AM appoints John Dugenske as Global Head of Fixed Income
UBS Global Asset Management announced the appointment of John Dugenske as Global Head of Fixed Income with immediate effect.
John was most recently Head of North American Fixed Income for UBS Global Asset Management. He succeeds Rob Gambi who is leaving the firm after seven years.
John will become a member of the UBS Global Asset Management Executive Committee, reporting to John Fraser, Chairman and CEO of UBS Global Asset Management. He will remain based in Chicago.
During his career, John has held senior roles in New York, Chicago and London. Prior to joining UBS Global Asset Management in 2009, he was Head of European and Middle East Fixed Income at the former asset management business of Lehman Brothers, where he also held global responsibility for the Cash Management business.
John Fraser, Chairman and CEO of UBS Global Asset Management, said: “John is a seasoned investor with more than 24 years working in fixed income. During his career, he has had responsibility for a wide range of investment portfolios across the fixed income spectrum as well as extensive experience working with a broad array of clients”.
He added, “I am confident that John is well positioned to build on our strong global platform and breadth of capabilities to lead our Fixed Income business forward”.
Foto cedidaFoto: www.robeco.com. Eurozone Not The Problem For Once
The eurozone isn’t the world’s problem child for once after US political wrangling caused a partial shutdown of government in the world’s most powerful nation.
Debt ceiling debacle
Democrat President Barack Obama is at loggerheads with the Republican controlled US House of Representatives, which has linked his request to raise the $16.7 trillion debt ceiling to avoid a default to partisan policies.
It means that for once, the eurozone isn’t the biggest issue facing investors, following an upbeat month that showed economic growth improving and large-scale political problems avoided, says Léon Cornelissen, Robeco’s chief economist.
“We think the US government shutdown will be short lived, as it is highly unpopular and could turn out to be very damaging to the Republican Party,” he says. Equity market volatility has been rising since the crisis began at the start of the month.
“Furthermore, in our opinion, no US president would allow the US to default. The most likely outcome is that the Republican front will break before a default is imminent.
“Otherwise Obama would resort to emergency measures as a last resort. We think the current political theatrics will temper economic growth only temporarily. The US economy is showing underlying strength, as demonstrated by the healthy developments of the ISM manufacturing and non-manufacturing indices.”
“Current political theatrics will temper economic growth only temporarily”
Tapering? What tapering?
Investors were surprised when after months of fanfare about the impending tapering of quantitative easing, the US Federal Reserve decided not to start scaling down its $85 billion-a-month program in September after all.
“But given the underlying strength of the US economy, the start of tapering is inevitable in the coming months,” says Cornelissen. “As markets are now completely left in the dark about future Fed policy, making a call on the precise moment that tapering will begin is very difficult, and it will be highly dependent on recent economic data.”
Eurozone confidence is improving
The US’s problems lie in contrast for once to improving confidence in Europe. European PMI surveys for September confirmed that the eurozone recovery is gaining traction, and political problems have abated.
Economic recovery is being led as usual by Germany, but France has also returned to growth, and data for Italy and Spain were also upbeat. Italy avoided yet another change of government, while Angela Merkel’s re-election as German Chancellor confirmed a strengthening European leadership, Cornelissen says.
Headline inflation in the EU fell in September to 1.1% on a yearly basis, and core inflation dropped to 1.0%. This gives the European Central Bank some room for additional stimulus, although it won’t be in a hurry to act, due to the current economic recovery. However, we should not get carried away, as the eurozone remains vulnerable to political risk, Cornelissen says.
World economy also improving
More generally, the world economy is recovering steadily. “Inflationary developments have in general been benign, so there is no need for central banks to reign in their ultra-loose monetary policy,” he says.
And the Japanese economy is currently clearly improving, as illustrated by the reading for the Tankan survey for large manufacturers which rose in the third quarter from 4 to 12. ‘Abenomics’ is on track, and the ‘third pillar’ of stimulus is eagerly awaited, though the upcoming sales tax hike does carry risks for growth, he says.
Asset class top picks
Regarding asset classes, Robeco’s Financial Markets Research team remains neutral on equities. “Delayed withdrawal of excess liquidity by the Fed is sustaining expansion of equity market multiples, but risks remain,” Cornelissen says.
Risky assets such as equities performed well in September, thanks to the Fed’s decision not to start tapering. However, higher rates and the end of easy money are still on the horizon, and Robeco prefers to wait for a correction in equity markets before raising the weight of equities in portfolios.
High-yield bonds are still Robeco’s favorite asset class. Our strategists expect default rates to remain low in the near term and in their opinion absolute return is still very decent. While they are positive on corporate bonds, the team is negative on government bonds because the current environment of low or negative real interest rates makes sovereign debt unattractive relative to higher-yielding fixed income classes.
China strong but emerging markets mixed
Real estate remains out of Robeco’s favor due to its sensitivity to potentially higher interest rates once tapering does start. And the outlook for emerging markets is mixed, Cornelissen says. “The Chinese economy is showing acceleration and China is heading for a strong third quarter, but the big question is whether this accelerated growth is sustainable,” he says.
“We remain neutral on commodities. Although we think that escalation risk from ongoing tensions in the Middle East has eased considerably, with no military intervention in Syria and conciliatory noises coming from Iran, we think energy prices will move sideways.
Investment managers characterize the U.S. economy as resilient, whether or not the Federal Reserve curtails its current quantitative easing (QE3) program, according to a survey by Northern Trust. The survey of approximately 100 managers, took place between September 4 and September 18.
“Throughout 2013, investment managers have weighed the impact of politics and policy decisions against a steadily improving economy in their market outlook,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust. “Regarding the budget stand-off, it seems as if Washington’s continued infighting was not news to Wall Street, and managers expected that gradual strengthening of key indicators would prevail over short-term political factors. Optimism on the economy also appears to outweigh Fed policy changes that have been anticipated by the financial markets.”
Managers expressed optimism on several key economic factors:
86% believe job growth will either remain stable or accelerate over the next 6 months
71% expect housing prices to rise over the next 6 months
89% expect corporate profits to remain stable or increase in the fourth quarter
Investment managers identified a change in Federal Reserve monetary policy or QE tapering as the top risk to equity markets. Long-term interest rates are expected to rise when the Fed tapers its bond purchases under the QE program. However, more than 60 percent believe the U.S. economy will keep growing if the 10-year rate rises by 50 basis points, and 42 percent of managers said long-term rates could rise by 1 percent without stifling economic growth.
Looking outside the U.S., managers are seeing value in Emerging Markets equities after losses in those markets in 2013. About two-thirds (64 percent) of managers believe emerging markets equities are undervalued, up from 49 percent in the second quarter. However, managers don’t expect strong performance to return soon: Only 23 percent of managers expect emerging market equities to outperform developed market equities over the next 6 months. Managers also view European equities favorably, with more than half (53 percent) saying European equities are undervalued. Most managers (69 percent) believe the Japanese equity market is undervalued or appropriately valued.
On the bullish-bearish spectrum for asset classes and broad economic sectors, managers continue to be most bullish on U.S. large-cap equities, U.S. small caps and emerging market equities:
62% of managers are bullish on U.S. large caps.
For small-caps, 53% of managers are bullish, down from 59% in the second quarter.
51% are bullish on emerging market equities versus 53% in the second quarter.
Managers were most bullish on information technology, industrials and health care.
For more details, please see the full Investment Manager Survey Report on Northern Trust’s web site. For its survey, Northern Trust polls investment firms that participate in its multi-manager investment programs and funds. The select group of respondents includes fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. The survey is conducted quarterly so that Northern Trust and participating managers can examine trends in attitudes and allocations.
