Wikimedia Commons. Franquicias de calidad: cuatro temáticas de inversión para cerrar el año 2013
Five years on from the onset of the financial crisis and reflecting on the evolution of markets in 2013, there has been general optimism. This has been reflected in fairly buoyant equity markets so far this year. As the world economy recovers, in our view, we expect markets to continue following the path of least resistance – upwards. That being said, there is always the risk that expectations rise too rapidly and stocks rise too quickly. We believe that investors should still be rewarded from holding equities, however, but to avoid shares of businesses like most banks that rely on a continued strengthening of the global environment in the event that these trends prove over-optimistic.
Below, we outline four top themes informing our portfolio construction now as we move to the close of 2013:
Positioning to cater for a broadly positive environment ahead – Whilst our portfolios are constructed on a bottom-up basis, we are mindful of the environment in which we operate. We hold 29 high-conviction ideas in the portfolio, which consist of time tested businesses that are steady compounders of cash flows.
Defensive tilt – Our high quality portfolio with its defensive tilt has limited exposure to industrials, consumer discretionary, financials, telecommunications and materials. These sectors are typically highly capital intensive, and thus names in which we would not have exposure through any market cycle. Informing our investment process is a belief in moving away from highly leveraged and capital intensive industries, preferring industries which are low in leverage and capital intensity, generate high free cashflows, with strong balance sheets and capital independence. We own only one direct Emerging Market share, Samsung Electronics, where the value in the share price is inconsistent with the dominance of the Franchise and the growth the business is producing and the investments it is making to extend its advantage over its peers.
Investing in quality global franchise businesses – Over the year to date, all companies in our portfolio have increased dividend payouts, nine companies have re-purchased shares and five have increased repurchases of shares. In addition, steady compounding of cashflows provides ongoing comfort with a compound growth rate of 11.4%. For example, Microsoft remains one of the best performing shares in the portfolio, up 26% year to date. In our view, Microsoft remains one of the few technology businesses that has managed to evolve and stay relevant in its market, and is in the midst of doing it again. We believe Microsoft remains attractively valued with a free cashflow yield of 10% and dividend yield of 2.9% as the market underestimates the growth prospects.WPP is a further example, as it continues to deliver robust performance. The proposed merger of its two biggest competitors, Omnicom and Publicis, sparked WPP to increase its focus on digital media and faster growing emerging markets, notably increasing its sales target. Capital allocation is also set to improve given the increase in the dividend payout ratio target from 40% to 45% over the next two years.
Companies with persistent returns, but receiving scepticism from the market – We maintain that quality is just as important as safety and safety just as important as price, making it crucial to consider strong durable franchises at attractive valuations. We have found that a strong franchise is a product or service that is able to resist the incursion of competition and consistently meet the needs of customers for decades. To us, businesses whose competitive advantage or franchise is dominated by intangible assets that will lead to high sustainable returns on capital and strong free cashflow are the definition of ‘quality’ companies. Our investment philosophy remains focused on low volatility, steady compounding of profits and consistent share price returns over time.
Column by Clyde Rossouw, Portfolio Manager, Investec Global Franchise strategy, Investec Asset Management
Wikimedia CommonsPhoto: Daniel Schearf. Vibrant Vietnam
I recently made my first visit to Vietnam and spent several days in Ho Chi Minh City. Considered by the investment community to be a frontier market, Vietnam has a low per capita income (approximately US$1,600), a relatively young population and less mature capital markets. My research trips have taken me to many remote locations so I am generally prepared for poor infrastructure and chaotic environments. However, I found Ho Chi Minh’s Tan Son Nhat International Airport to be surprisingly efficient and modern, and the city’s roads are decent, if not better, than those in many other emerging or frontier Asian economies. The droves of motorcyclists and roadside food vendors, however, were a reminder that Vietnam is still in its early stages of economic development.
While many Asian countries generally do not have a strong coffee-drinking culture until incomes reach higher levels that induce lifestyle and consumption changes, Vietnamese coffee consumption is quite ubiquitous. There you can find a combination of both local coffee shop chains as well as foreign ones on virtually every bustling street. The popularity of coffee in Vietnam likely stems from the country’s French colonial influence, and the fact that Vietnam is a coffee producer sets it apart from the rest of Asia. Vietnam is actually the world’s second largest coffee producer behind Brazil with current annual output of approximately 1.5 million metric tons. Over 90% of coffee produced is exported, which makes coffee one of Vietnam’s most important commodities. I sampled some of the local coffee and I must say, Vietnamese coffee is quite strong and invigorating.
Another observation I made was the proliferation of not only small- to medium-sized, domestic branded coffee shops, but also jewelry and apparel stores, which could be somewhat of an indication of entrepreneurism in the local economy. In the past decade, the economic dominance of state-owned enterprises (SOEs) has shrunk due to ongoing reforms. The contribution to GDP growth from SOEs from 2001 to 2005 was about 33%. It dropped to 19% from 2006 to 2010, while GDP contributions from the private sector increased from about 45% to 54% in the same time period. Not surprisingly, the private sector now accounts for the bulk of Vietnam’s new job creation. However looking beyond these economic data points, I was heartened to see the vibrancy and drive of the local people on the ground. Not dissimilar to China’s pattern of economic development, Vietnam has been carrying out SOE reforms. Local entrepreneurs are now able to enjoy a higher degree of economic freedom, which should be favorable for Vietnam’s long-term economic development.
Lydia So, CFA, Portfolio Manager at Matthews Asia
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
The MIT Sloan School of Management celebrated last Tuesday, December 10th, the opening of its Latin America Office in Santiago, Chile, during an event there that commemorated the 100th anniversary of the founding of Course XV: the beginning of management education at MIT and the precursor to the Sloan School.
The commemoration of Course XV is being marked with a series of events both on campus and in cities around the globe. The events pay tribute to people at MIT Sloan whose ideas and work changed thought, theory, and practice in the world of management.
The MIT Sloan Latin America Office (LSMAO) is made possible by a gift from Andrónico Luksic. He is a member of the MIT Sloan Latin American Executive Board, the MIT Sloan Latin America Office Advisory Council, and the school’s Visiting Committee.
The office promotes the school’s programs to potential students in Latin America, develops channels for faculty and student research, and creates opportunities for action learning through MIT Sloan’s signature experience-based education program where students translate classroom knowledge to solve real-world problems.
MIT Sloan’s new office also expands the scope of its international training programs. This January, for instance, 16 companies based in Brazil, Argentina, Chile, and Colombia will host MBA students in conjunction with the school’s Global Entrepreneurship Program. Additionally, the MIT International Science and Technology Initiatives (MISTI) group runs more than 30 projects in the region.
Vanguard has reopened Vanguard High-Yield Corporate Fund and Vanguard Intermediate-Term Tax-Exempt Fund to all investors, effective immediately.
The $16.1 billion High-Yield Corporate Fund, which is managed by Wellington Management Company LLP, was closed in May 2012. The $33.7 billion Intermediate-Term Tax-Exempt Fund, a municipal bond fund that is managed by Vanguard Fixed Income Group, was closed in February 2013. In both cases, Vanguard acted pre-emptively to address concerns that continued asset growth in the funds could harm the interests of current shareholders.
“These funds were closed to reduce cash flow, with the aim of preserving the advisors’ ability to implement their investment strategies and produce competitive long-term returns,” Vanguard CEO Bill McNabb said. “Cash flow to the funds has subsided which, along with a change in market conditions, has enabled us to reopen the funds.”
Capital Opportunity Fund Closed
Vanguard has closed Vanguard Capital Opportunity Fund to most new accounts, effective immediately. The fund is managed by PRIMECAP Management Company.
The $11.4 billion Capital Opportunity Fund was closed in 2004. It reopened to select investors in 2007, and to all retail investors in April 2013. Since its wider reopening this year, the fund’s assets have grown by more than $2 billion.
“While the size of the fund is currently manageable, continued strong cash inflows and growth resulting from market appreciation could pose challenges for PRIMECAP Management in the future. We feel closing the fund is the appropriate step at this time,” Mr. McNabb said.
Vanguard has a long history of closing funds and restricting cash inflows to maintain fund assets at reasonable levels. Currently, six Vanguard funds are closed to most new accounts in order to manage asset size: Admiral™ Treasury Money Market Fund, Federal Money Market Fund, Convertible Securities Fund, Capital Opportunity Fund, PRIMECAP Core Fund, and PRIMECAP Fund. An additional five funds are closed pending fund mergers.
Manager added to long-term bond fund
The board of trustees of Vanguard Long-Term Investment-Grade Fund has approved the addition of Vanguard Fixed Income Group to the fund’s advisory team. Wellington Management Company has managed the $13.4 billion fund since its inception in 1973 and will continue to serve as the lead advisor.
“After careful consideration, the fund’s board determined that our Fixed Income Group’s investment philosophy and capabilities will complement the fund’s existing advisor,” Mr. McNabb said. “It is also expected to benefit the fund’s investors by adding a high-quality manager to the fund’s overall portfolio and investment strategy without changing its fundamental character.”
Vanguard Fixed Income Group is one of the largest fixed income managers in the world, managing nearly $745 billion invested in 70 taxable and tax-exempt bond, taxable and tax-exempt money market, and stable value funds. The Group oversees about $420 billion in actively managed funds and about $325 billion in bond index and exchange-traded funds.
Wellington Management oversees about $400 billion in fixed income assets, including nearly $105 billion for Vanguard. In addition to the Long-Term Investment-Grade and High-Yield Corporate funds, Wellington provides investment advisory services to the $27.9 billion Vanguard GNMA Fund.
This marks the first time that Vanguard has employed the multi-advisor approach on a fixed income fund. Vanguard has long used multiple managers on its actively managed equity funds. Vanguard Windsor II became the first Vanguard fund to adopt this approach in 1987. Today, 17 of its actively managed U.S.-domiciled equity funds currently employ the approach. Vanguard believes that a fund with multiple managers can benefit from the diversity of thought and investment ideas.
Institutional Investor rates Robeco as the best European high-yield bond manager of 2013. The US financial publisher’s rating is based on Robeco’s positive long-term performance and consistent investment process.
Out of a group of several hundred asset managers, Institutional Investor selected the best managers in 20 different investment categories. The winners were chosen on the basis of both the long and short-term returns realized by their funds, their Sharpe ratios and the evaluations made by their European fund distributors.
For Roeland Moraal, fund manager of the Robeco European High Yield Bonds fund, this award is recognition for the consistent manner in which the credit team invests. “We use a top-down approach – riding the phase in the market cycle and capitalizing on thematic risk – combined with the results of thorough bottom-up analysis. For this, a credit team of 12 looks at bond-issuing companies, and studies aspects such as their financial solvency, strategy and sustainability. A significant factor in achieving positive performance in challenging market conditions has been to remain focused on the long term.”
The Robeco European High Yield Bonds Fund realized annualized gross returns of 10.2% over the last three years and 19.2% over the last five years. With these returns, the fund has consistently outperformed its benchmark
Smead Capital Management announces the launch of the Pareturn Smead US Value Fund domiciled in Luxembourg. The Fund, which became available to qualified non-US investors on November 29th 2013, will initially be offered through the US Dollar-denominated Institutional Share Class with a $1 million investment minimum. The Fund will also offer the Institutional Share Class in British Pounds Sterling and Euros.
The portfolio of the Pareturn Smead US Value Fund will mirror the US-based Smead Value Fund and the firm’s flagship US Large Cap equity strategy. CIO William Smead will serve as Lead Portfolio Manager of the fund with Director of Research Tony Scherrer, CFA, serving as Co-Portfolio Manager. The portfolio will be managed based on the firm’s investment philosophy and eight criteria, which is focused on valuation mattering dearly, being long-term business owners and seeking out high-quality businesses.
Our firm believes there is lack of competition in the UCITS marketplace and would like to put our best foot forward to fill the needs of advisors, family offices and institutions.
Director of Marketing and Sales Cole Smead, CFA, will head the firm’s UCITS distribution and will serve as the primary contact for UCITS shareholders. BNP Paribas Securities Services is the custodian and fund administrator to the UCITS Fund.
“We are excited to offer our long-duration US common stock ownership to investors outside the United States borders,” noted Bill Smead, CIO of Smead Capital Management. “We see a bright economic future for the US paired with a strengthening dollar as the economy improves and consumer confidence returns. We believe our stock picking criteria combined with what will likely take place in the United States over the next 5-7 years will be a delight to foreign investors.”
Andrew Dougherty, Head of Alternative & Institutional Solutions, BNP Paribas Securities Services, commented, “We are honored to be the service provider of choice for a well-established firm like Smead Capital. The company’s interest in establishing distributions abroad is forward-thinking and speaks volumes about the increasing global nature of asset management. Our know-how in cross-border distribution coupled with their disciplined investment strategy will prove to be a fruitful long-term relationship.”
“We are very appreciative of the investors abroad that have entrusted us to manage our US Large Cap portfolio on their behalf,” said Director of Marketing and Sales Cole Smead, CFA. “We are pleased to bring on BNP Paribas Securities Services as a new partner with their expertise in the UCITS space. Our firm believes there is lack of competition in the UCITS marketplace and would like to put our best foot forward to fill the needs of advisors, family offices and institutions.”
Schroders has announced the establishment of an in-house convertible bond team in Zurich with assets under management of USD2.1billion
Dr Peter Reinmuth, the fund manager of Schroder ISF Global Convertible Bond and Asian Convertible Bond, Dr Martin Kuehle, Product Specialist for the two funds and Urs Reiter, Senior Convertibles Trader have all transferred to the company enabling Schroders to bringthe management of its convertible bond funds in-house. They report to Philippe Lespinard, Schroders’ CIO Fixed Income, and are supported by Schroders’ 32 credit analysts and extensive equity research.
Damien Vermonet has also been appointed as Convertible Bonds Fund Manager and has eight years experience as a convertible bond manager. He joins from Acropole AM where he was portfolio manager of global convertible long only strategies with a particular focus on US convertibles. Previously, he was at Fortis Investments where he managed global and European convertible bonds. He is also based in Zurich and reports to Peter Reinmuth.
Philippe Lespinard, CIO Fixed Income at Schroders, comments:
“Schroders has invested heavily in its fixed income business in recent years to deliver robust investment performance. Convertible bonds are an attractive asset class for our clients worldwide, in addition to the firm’s existing credit and equity capabilities. We are delighted to welcome Peter, Martin, Urs and Damien and look forward to further developing our convertibles business from Zurich.”
Miles O’Connor, Head of Pan-European Institutional Business, also commented:
“Convertible bonds are an attractive asset class and we are seeing continued demand from clients worldwide. Convertibles provide protection on the downside while also offering exposure to equity market upside, making them an ideal way to gain long-term exposure to growth markets as the global economy recovers. Our new in-house team should enable us to maximise this opportunity and continue to grow our convertible capabilities for clients.
. Ryan Forms Strategic Alliance with Garnham Abogados to Support Expansion of International Tax Practice in Latin America
Ryan, a global tax services firm with the largest indirect and property tax practices in North America, announced that it has formed a strategic alliance with Garnham Abogados, located in Santiago, Chile. Garnham Abogados is a law firm specializing in corporate tax matters and foreign investment advisory services. It will support Ryan’s ability to deliver higher levels of value and results for the firm’s expanding portfolio of multinational clients and provide business development opportunities to extend the Firm’s North American leadership position in tax services to Chile.
“We are excited to grow our network of tax experts in Latin America through this partnership with Garnham Abogados Ltda.,” said Todd E. Behrend, Ryan Principal and International Tax Practice Leader. “Its reputation is widely respected throughout Chile, and it will play an important role in our ability to offer a more comprehensive suite of value-added services to our multinational clients.”
“We are delighted to be part of the network,” said Arturo Garnham, Managing Partner of Garnham Abogados. “Ryan’s tax and business expertise, combined with our intimate knowledge of the Chilean market, will enable both of us to provide excellent services to Chilean clients and to foreign firms exposed to the Chilean tax environment.”
“Ryan already provides tax services to many of the world’s leading global companies, and the partnership with Garnham Abogados Ltda. will deliver tremendous value through additional international tax solutions in Chile,” said Brendan F. Moore, Ryan President of Europe, Asia, and Latin America Operations. “The trust that Ryan has earned by delivering superior results for these multinational clients drives our commitment to dramatically expand Ryan’s international tax services.”
“We are proud to reinforce our international tax services with the expertise and best-in-class solutions of Garnham Abogados Ltda.,” said G. Brint Ryan, Chairman and CEO of Ryan. “The firm is an exceptional strategic partner that will strengthen our international capabilities and support our continued Latin American expansion.”
CC-BY-SA-2.0, FlickrTom Ross, gestor de fondos de renta fija en Henderson Global Investors. Descendiendo por el espectro del crédito
From a top down perspective we expect spread compression to continue, i.e. a reduction in the yield that corporate bonds offer over corresponding risk-free bonds. This is likely to be driven by ‘lower for longer’ interest rates, especially in Europe where the European Central Bank appears to be taking a more dovish stance and diverging somewhat from the US Federal Reserve. Additionally, declining corporate bond supply in investment grade, particularly amongst financials, continues to create a demand for higher yielding assets further down the credit spectrum
Within high yield bonds – those that are rated sub-investment grade – Moody’s, the credit ratings agency, expects default rates to remain low. The global trailing 12-month default rate for sub-investment grade bonds was 2.8% for the year to October 2013 and Moody’s expects this to fall to 2.4% by October 2014. We share a similarly benign outlook for defaults within high yield and are therefore happy to move down the credit spectrum on a selective basis to pick up incremental spread/yield.
Taking into consideration the value within high yield bonds at the fundamental level, we prefer B/CCC credits relative to BBs for a number of reasons. First, they have fewer call constraints. What do we mean by this? Well, a lot of BB rated bonds are trading at prices that are close to, or in some cases above, the call price (the price at which the issuer has the option to redeem the bond). When an issuer calls in a bond it pays the bondholder the face value of the bond plus accrued interest, so when prevailing yields in the bond market for similar bonds fall below the rate on the callable bond, the issuer has an incentive to redeem the bond early and issue a new one. This can limit capital appreciation for the bondholder. In a world where yield is scarce we are keen to have greater control over the yields we receive.
Second, the issue sizes lower down the credit spectrum are typically much smaller at $200-300m. Since this is too small an issue size for the very large funds there tends to be fewer analysts following these bonds. This can create opportunities for those funds with strong analytical expertise to add value.
Third, there are fewer “tourist” investors in high yield such as exchange traded fund (ETFs) and investment grade funds. Again, this is often a reflection of the smaller size of the issues.
Finally, many of the B and CCC rated companies are new to the high yield market. They have effectively moved from bank loan to bond refinancing and so are less well known. This gives those asset managers with expertise in loans, such as Henderson, an advantage because the loans team who have already been analysing the companies can share their knowledge of a company ahead of a new high yield bond issue.
The above views are expressed within the Henderson Horizon Global High Yield Bond Fund, Henderson Horizon Euro High Yield Bond Fund, and Henderson Credit Alpha Fund, whilst within the investment grade Horizon Euro Corporate Bond Fund we have 8% of an available 20% off-benchmark allowance invested in high yield.
Opinion column by Thomas Ross, fixed income portfolio manager, Henderson Global Investors.
Pixabay CC0 Public Domain. Japan’s “Show Me the Money” Corporate Governance: 3Q update
ING IM highlights that the macroeconomic backdrop globally remains positive with some catch-up recently taking place in Europe and China. Also, the no tapering decision by the Fed in the latter half of 2013 implies a clear growth bias in its reaction function further supporting the recovery process.
Fixed Income
For the reasons above, ING IM maintains a growth bias in its positioning within fixed income and spread products with an allocation that is underweight Treasuries and overweightSpreads. Within spread products, ING IM has a growth tilt in its positioning. ING IM has a firm overweight in High Yield next to a medium overweight in Eurozone Peripheral Treasuries (EPT).
Equities
ING IM foresees that equities will be driven by better earnings fundamentals in 2014 while Europe, Japan and Cylicals are expected to lead the way over the next twelve months.
Patrick Moonen, Senior Equity Strategist, ING IM said: “We expect modest revenue growth with some margin expansion from lowinput costs, especially with regard to labor. Interest and depreciation charges remain low. Share buy backs will be an additional driver for EPS growth. .”
“Over the past year, global capex growth has been on a declining trend due to sluggish economic growth, uncertainty leading to cash hoarding and tight credit conditions. However, now investment intentions and conditions are improving, there is a potential for growth, higher capacity utilization and, as a consequence, profitability.
Turning to key investment themes, ING IM highlights that Europe will benefit from an economic turnaround and strong earnings growth with the most upside set to come from the periphery. This, coupled with the historical discount to the US, high equity risk premium and lower systemic risk means a superior risk/return profile.
With regard to Japan, the investment manager says the region is set to go through a short-term consolidation phase with Bank of Japan temporarily on hold while the Yen remains a dominant driver. However, longer-term prospects are good; borne out by the economic data strength, high earnings growth and a loose monetary policy, which is set to last
In terms of allocation, cyclical sector allocation remains in place considering the improvement in housing markets, labor market and the expected increase in corporate spending. Elsewhere, the stable growth sectors remain underweight as ING IM believes they are still too popular and expensive.
