Pixabay CC0 Public DomainPhilip Carey (left) and Karim Aryeh (right) - courtesy photos. Philip Carey and Karim Aryeh Launch New RIA: Lloyd Crescendo Advisors
Located at 1450 Brickell Ave in Miami, Lloyd Crescendo Advisors arrives in the financial capital of Latin America to bring a traditional Swiss approach in wealth management. Philip Carey is the CEO, and Karim Aryeh is the CIO, both well-known professionals in Miami.
This newly formed Registered Investment Advisor was born of expertise from Lloyd Capital and Crescendo Capital, two Swiss-based firms. The headquarters of the firm and the wealth management business will be in Miami, while the asset management division will be run out of their New York office.
“Our advice is personal, independent and forward-thinking” – Karim Aryeh. Lloyd Crescendo Advisors will be focusing on bringing global diversification to its investors though the use of traditional, alternative and responsible investments. As part of their alterative offering, they will be focusing on private debt, hedge funds and real estate investments, while their responsible investments will incorporate environmental, social and governance criteria and seek out impact investments.
“We help clients align their investments with their values”- Philip Carey. Lloyd Crescendo Advisors will be looking to serve families all over Latin-America as well as domestic US HNWIs.
The CEO, Philip Carey has over 23 years of experience in the global wealth management industry between New York, London and Geneva. He started his career in Coutts from 1994 to 2001. Later, he worked as Director at Barclays Wealth & Investment Management from 2001 to 2005. Philip was Senior Private Banker at HSBC Private Bank from 2005 to 2011 when he left to start his own RIA in Switzerland: Lloyd Capital LLC.
Karim Aryeh, whom will actively manage the investments, brings more than 15 years of experience in the wealth management industry advising HNWI’s in Latin America and institutional clients. His career has taken him from New York to Geneva, and for the past 7 years, Karim has been based in Miami. He worked in UBS Wealth Management between 2002 and 2011 as Senior Investment Consultant and in Santander Private Bank from 2011 to 2016 as Senior Portfolio Advisor and Team Leader. Karim is a CFA Charterholder. He earned the CAIA Charter in 2006 and is a Co-Founder and Executive Member of CAIA Miami.
Foto cedidaJosé Castellano, CEO adjunto y responsable de distribución internacional de iM Global Partner.. jose castellano
The merger between Pioneer Investments and Amundi continues ahead and, in this context, the first changes in the teams are beginning to be announced. According to Funds Society’s best knowledge, Jose Castellano, who until now has been in charge of Pioneer Investments in the US Offshore, Latin America, and Iberia regions, has decided to leave the fund management company in order to pursue other professional projects.
Castellano, who has been Managing Director and Head of the three regions for 16 years, has been an architect of the growth that Pioneer Investments has experienced in Iberia, US Offshore and Latin America, making these areas one of the most profitable in the whole group. In recent years he has also been involved in strategic projects, globally.
Castellano has reconciled these functions with the leadership of H4U properties, his position as an investor in Thinking Heads, or, during the last few years, as Director for Southern Europe, Italy, Switzerland, Spain, and Portugal in Hedge Fund Association. Prior to joining Pioneer Investments in January 2001, he was Director for Morgan Stanley’s private equity group for two years, and Director of Wealth Management for a further seven years at the same entity.
Pioneer Investments has just confirmed the news and explains that the responsibility of the regions will be shared between the in European and US teams. Cinzia Tagliabue, Head for Western Europe and Latin America, will be responsible for the management company’s distribution business in Iberia and Latin America. She will be supported by an experienced team throughout these markets dedicated to providing the best quality service to customers.
Laura Palmer, Head of Intermediary Distribution in the US, will manage the sales team based in Miami, which drives the growth of the business in US Offshore. Palmer leads the US distribution team, which focuses on relationships with key financial intermediaries in the country, and reports to Lisa Jones, President and CEO of Pioneer Investment Management USA Inc. “We are confident that this change of management will strengthen our ability to serve offshore clients with excellence in the future,” the statement said. However, Pioneer Investments has commenced the process of hiring a Sales Manager for the US Offshore market.
The Merger Continues
Castellano’s departure falls within the context of the merger between Pioneer Investments, which will continue with its usual activity, and Amundi, which will also continue its course. This week, the European Commission has given the green light to the operation, considering that the operation will not have a negative impact on the European economic space.
“The operation would not give rise to competition problems given the complementarity between the activities of the companies, the small increase resulting from the operation, and the existence of several competitors, which guarantees sufficient choice for customers,” the Brussels statement said. In this way, they could meet the deadlines and tie up any loose edges of the operation before the close of the first half of this year.
Pioneer’s acquisition by Amundi, valued at 3.545 billion Euros, was notified to Brussels on the 20th February, and has been examined under the normal merger control procedure. The acquisition makes the resulting group the eighth largest global asset manager with almost € 1.3 trillion in assets under management.
Pixabay CC0 Public DomainPhoto: RonKikuchi, FLickr, Creative Commons. Funds Society Magazine Taps Trendscout to Reveal Investor Trends in Spain and Latin America
Spain and Florida-based “Funds Society” magazine is a media partner of fundinfo that focuses on investment fund news for Spanish-speaking countries. Available in both Spanish and English, Funds Society now publishes a monthly article which reveals real-time investor trends about funds distributed in Spanish speaking regions.
By tapping into fundinfo’s online fund analytics tool “Trendscout”, Funds Society can now publish articles on a wide range of topics including changes in investor interest on a per-category basis, a precise ranking of the most interesting funds, and macro trends such as an overall shift from passive to active funds.
Trendscout charts worldwide industry trends and investor interest by monitoring investor activity on fundinfo’s web platform. With Trendscout, asset managers identify sector and investor trends to support product launches and strategic decisions, or monitor the effectiveness of their sales and marketing efforts. Financial media use trendscout to publish revealing trends about the latest developments in country-specific fund markets.
For more examples about what Trendscout can do for the financial media, read our recent Trendscout newsletter.
Photo: Max Pixel / Creative Commons Zero - CC0. 12 Foreign Currency Funds in Mexico Doubled Their AUM
The rise in rates, and the dollar exchange rate, between September 2016 and January 2017, caused outflows from Mexican debt funds. Investors made precautionary withdrawals to avoid additional losses, anticipating to greater volatility. Tenure decreased by 4.81%, to 72.93 billion pesos (mdp). Are more outflows expected?
Exits at National Currency Funds and Inflows in Foreign Currency ones
Five managers accounted for 77.8% of total outflows: Santander, BBVA Bancomer, Impulsora, Banorte-IXE and Interacciones. In percentage terms, the ones with the highest outflows were Monex, Interacciones, Multiva, CI Fondos and Santander. Despite the adversity, there were some managers that attracted inflows, such is the case of Franklin Templeton, Compass, Value and Sura. Finamex and BNP are excluded, given their percentage increases can be explained by their recent creation.
Of 275 funds, 177 showed outflows and 98 showed inflows. Short-, medium- and long-term funds in local currency securities reduced their assets by 109,460 mdp, 7.22% of the sector’s absolute value as of September. A total of 29 funds reduced its assets by more than 30%. In contrast, 26 funds increased them by more than 30%. Eight funds decreased their AUM by more than 60%.
The resettlement meant unusual increases for a long list of funds, which excludes those of new creation and/or a different regime. AUM of 12 foreign currency funds grew more than 100%, while only a single national currency fund increased in that proportion.
Medium and Long Term Funds with the Biggest Outflows
The medium and long-term funds, in all their modalities (discretionary, governmental, indexed, etc.), were the most affected. Its inflows totaled 18,070 mdp and its outflows, 60,160 mdp, for a negative net variation of 42,090 mdp, 57.7% of the total reduction. Short-term funds, given their less vulnerable nature, reflected inflows of 46,900 mdp and outflows of 77,800 mdp, for a net negative flow of 30,800 mdp, 42% of the total.
In some cases, the resources were partially transferred to other funds of the same manager, regardless of their profile. At BBVA, 22,510 mdp came out of BMERGOB and BMERPZO, while 7,730 mdp went to BBVADOLL and BMRGOBP. In Santander, 9,380 mdp came out of STERGOB and ST & ER-7, while 6,020 mdp went to ST & ER-5. In Banamex, 9,850 mdp came out of BNMDIN and BNMPZO, while 8,050 mdp went to BNMCOB + and BNMREAL. In Banorte-Ixe, 6,606 mdp came out of NTEGUB and IXEMPM +, which were offset with inflows of 6,850 million pesos to IXEUSD, NTERTD and IXEDINT.
The only fund group with net growth (36,540 mdp, 120% of its value in September) was that of foreign currency instruments, in all its variants, but mainly in the short term sphere. The increase underlies the fear that the Mexican peso’s devaluation will intensify and the preference for cash to change strategies if conditions warrant so.
Regarding managers, the generalized negative flow reveals that the public took refuge in, for example, bank branches products, notes and foreign currencies in cash, as well as metals and real estate.
While the 10 years and longer bond rates did not evolve in January 2017 as they did in previous months, traders are worried and estimate that investors will remain expectant for at least two more months. As a result, some predict additional marginal outflows and estimate that, if volatility remains contained, assets could stabilize in April.
Pixabay CC0 Public DomainPhoto: Jsouth . Pioneer Investments, Investec AM, JP Morgan and BlackRock Get 850 Million Dollars From Afore XXI Banorte's Mandate
Mexican pension fund manager Afore XXI Banorte awarded Pioneer Investments, Investec Asset Management, JP Morgan Asset Management and BlackRock, with close to 850 million dollars to invest in an Asian Equity Mandate. To date, Afore XXI Banorte has funded one previous mandate on European Equity Market and this is the second project that they are awarding, continuing the pension funds’ diversification to international markets through active management.
The Asian Equity mandate follows an innovative pan Asiatic approach that includes Japan. This allows the investors to benefit from emerging Asia potential, while investing in developed market high quality companies based in Japan and Australia.
Juan Manuel Valle, CEO for Afore XXI Banorte, remarked: “The assignment of this mandate aims at optimizing our affiliates’ investments, which is evidence of the great progress undertaken by the savings for retirement industry in Mexico. This puts Afore XXI Banorte on the cutting edge when it comes to investment management and reinforces our position through participation in complex markets like Asian equities, taking advantage of international managers’ expertise, in addition to using transition management services and the international custodian model offered by the State Street Bank and Trust Company platform. The latter with the objective of enhancing the return of our affiliates’ portfolios in the long term”.
Sergio Mendez, CIO for Afore XXI Banorte noted: “With the funding of the Asian equity mandate, Afore XXI Banorte confirms its commitment to grant its affiliates access to the best investment vehicles, in order to achieve better returns to their investment”.
Gustavo Lozano, Country Head of Pioneer Investments Mexico, stated: ‘Funding of this mandate in just four months after being appointed managers signals that the regulatory changes, along with our previous experience onboarding Mexican Pension Funds’ projects, shortens implementation times of mandates in Mexico and this will be in itself an asset class catalyst. Pioneer Investments manages and on-boards these projects from London bringing diversification to pensioners and engaging Mexican Institutional clients with comprehensive relationships where we are not only providing investment services, but complement this with Knowledge Transfer Services, which add value to the business proposition.”
Pioneer Investments received 150 million dollars which will be actively managed by the specialist Asian Equities investment team at Pioneer Investments’ London Investment Center. BlackRock, got 200 that will be managed by Andrew Swan. JP Morgan Asset Management got 280 million and Investec Asset Management received 220 million dollars.
Ariel Bezalel, gestor del Jupiter Dynamic Bond. Foto cedida. "The Role of Fixed Income as a Volatility Dampener in a Diversified Portfolio Will Remain"
Fixed income faces many challenges today, but Ariel Bezalel, manager of the Jupiter Dynamic Bond, explains how, by combining a top-down and bottom-up approach with flexible management, opportunities can be found. Its bets: the financial sector of developed markets and emerging markets like India (debt in dollars and also in local currency). In this interview with Funds Society, he also explains how he keeps the risk of duration in the face of rising inflation and political risks in Europe.
Many experts say that the biggest focus of trouble could be now in fixed income: Is it true that nowadays fixed income has a higher risk profile than other assets? Why?
Undoubtedly, with yields at today’s levels it is not easy to achieve compelling returns. We will however have to work hard to spot the opportunities given the low yield environment. A key to this is our time-tested process combining top-down and bottom-up analysis as well as our flexible, unconstrained mandate. That flexibility enables us to find those opportunities.
It is worth mentioning as well that despite the rate hikes expected by the market, we expect that the role of the fixed income asset class as a volatility dampener in a diversified (bond/equity) portfolio will remain.
It seems that the inflation is going to rise suddenly… Are you amongst the people who think that or do you think expectations are overstated?
Inflation in the developed world has certainly been picking up. Market indicators, such as breakeven inflation rates, are rising in the UK, US and Germany, putting upward pressure on government bond nominal yields. Elsewhere, economic growth in China is ticking along nicely, reflected in resilient commodity prices and brighter US service sector data and wages.
Donald Trump’s election of course is a further inflationary signal. The US president’s rhetoric points towards potentially faster economic growth, and with an economy almost at full employment, inflationary pressures are bound to build. However, Trump still has yet to implement his plans and there is still a lot of uncertainty around the plan and the timeline.
Do your inflation expectations have any impact on the portfolio of your fund? Are you preparing for the rise of the inflation or it is too soon?
We are fortunate that our strategy’s unconstrained mandate means we can select what we consider to be the best opportunities across global bond markets while seeking to carefully mitigate risk, in part through management of duration which we continue to keep low. In credit, for instance, as we see inflation risk picking up and favour short-dated paper with decent carry alongside ‘special situations’ where we see the possibility of capital gains.
With inflationary pressures building up in Europe, and rising political risk surrounding the French elections, we have also initiated a short position in French government bonds over the months.
Do you believe that this a moment to be cautious with the duration and to assume risk in credit, or are there various shades to this idea? Why?
We are balancing careful management of duration with a reactive approach to market developments and continue to use the strategy’s unconstrained mandate to exploit ‘special situations’ where we see the possibility of capital gains. That said, we have been steadily reducing duration, starting in August 2016, to help insulate the fund from rising rates.
Regarding central banks: have the markets already discounted the interest-rate hikes what the Fed is expected to make this year?
Markets are currently pricing in a 30% probability for a rate hike in March due to lackluster average earnings and the back-up we’ve seen in 10-year yields. The markets though see 50/50 chance of the Fed raising in April, and a close to 70% chance of a hike in June. However these probabilities may change significantly as Trump fiscal policy unfolds during the year.
Will the ECB take progressive measures also in terms of “taper tantrum” in the mid-term? Will it be more difficult for Europe than for the US to withdraw stimulus? What will be the effects on the European debt market?
The ECB’s decision to reduce its monthly asset purchase programme from €80bn to €60bn in April demonstrates the pressure the central bank faces from hawkish members to reduce the pace of the programme. While the ECB would seek to minimise disruption in the bond markets, it will be more and more difficult to justify QE as inflation picks up in the euro zone. Another very significant event risk for peripheral spreads in Europe will be the French elections in May. A victory for Marine Le Pen would likely trigger a significant widening across European peripheral spreads.
In which segments of the fixed income market do you see the best opportunities these days? (by regions, sections, countries … and by public or private debt)
Within developed markets we see opportunities in the banking sector as it benefits from both the reflation in the global economy and a secular trend towards deleveraging. EM is another area we like. However one has to be very selective. One of our main picks is India where the combination of favorable demographics and improvement of the institutional framework since Modi’s arrival to power have underpinned our investment thesis.
Because of the next rate hikes, is it a good moment to invest in the banking sector? Many people are talking about the attractive of the subordinated bank debt. Do you agree with them?
Banks remain a favoured sector for us because secular deleveraging combined with steeper yield curves should ultimately benefit bond investors in this area, particularly junior bond holders, although one has to be selective.
What are your views on EM debt? Do you prefer local or hard currency?
There are some exciting opportunities in emerging markets. We have been increasing our exposure to Indian bonds because of the country’s favourable long-term economic and political backdrop, putting us in a position where we are able to capture attractive yields. I’m very encouraged by India. It is a very insular economy; it doesn’t rely too much on exports, it doesn’t have much dollar-denominated debt and the current government is a very business-friendly administration that is really picking up on implementing reforms over the last year or so. We invest in both dollar-denominated and local currency bonds.
Do you believe that public Spanish debt has potential or this is not a good time to invest?
We have limited exposure to peripheral Europe due partially to the uncertainty surrounding the European project. However, one has to recognize that Spain’s economy is showing great strength underpinned by the structural reform undertaken following the crisis in the euro zone debt crisis.
Bob Michele, Fixed Income CIO at JP Morgan, at a recent conference. Courtsey Photo . "We are Currently at an Experimental Period in Monetary Policy and we Must Discover if the Appreciation of Assets Since 2009 is Just a Monetary Effect
According to Bob Michele, JP Morgan‘s fixed-income CIO, the Fed will raise rates in March; he believes that the monetary authority will carry out a normalization process in the US which will last at least five years, during which the Fed will raise rates every two months to around 4%.
During a conference on fixed-income opportunities organized by the management company, Michele pointed out, however, that the Fed’s main problem is managing the volume of US sovereign debt on its balance sheet. “By 2018 there will be 425 billion dollars in Treasury bonds, how can it wait until their maturity? Reversing will be difficult; therefore, it will have to opt for either gradual debt forgiveness or refinancing debt, because it could crush the market” he explained.
The expert also admits to being bearish with fixed income, and that bond yields cannot do other than rise in an environment of rising inflation and interest rates. That is, the trend that started after Trump’s victory, and which has increased the yield of the US bond from 1.5% to 2.4%, will continue. “The Treasury (10-year US bond) will act as a type of springboard. In summer we will see a change in profitability,” he states. He predicts that it will achieve 3.5% profitability during the next 12 months.
As for the upward trajectory that, a priori, interest rates have taken, a lot will depend on Janet Yellen’s successor as Fed Chair. According to Michele, there is a tide of opinion that bets on Yellen’s continuity but “the odds on that are %”. In this regard, he believes that the Fed has so far been controlled by academics who apply traditional econometric models. “These models work well in theory, but not in the real world,” he explains. In his opinion, “it’s good if someone from the real world, who is not so academic, arrives at the Fed.”
In fact, in recent years, reality has shown us that theories may probably not be fulfilled. The theory says, for example, that an accommodative monetary policy is the best for equities, but the reality is that fixed income has had a spectacular behavior. “We are currently at an experimental period in monetary policy and we must discover if the appreciation of assets since 2009 is just a monetary effect,” Michele states.
As Head of Fixed Income of one of the largest fund managers in the world, Michele is not reluctant to admit that he is bullish with equities. “If rates increase at a rate of 1% a year, the stock market will do very well, if they rise 0.5%, a bear market will be created.”As for options within fixed income, they focus on reducing durations, and betting on bonds linked to inflation, European and US high-yield bonds, and emerging market debt in local currency. “Many people think I’m crazy for recommending emerging debt in local currency, but these currencies have already made their adjustments. On the other hand, if I protect the currency, I give up a lot of profitability and I don’t want to do that,” he concludes.
Jean-Marc Pont, Equity Investments Specialist at Generali Investments. Courtesy Photo. Generali Investments: Applying a SRI Approach to the Ageing Population Theme Provide Additional Value
Turning the aging population into a responsible investment opportunity: this is what is done by the Generali Investments Sicav (GIS) SRI Ageing Population fund, a thematic fund seeking to capitalize on this long-term demographic trend, which is also in line with SRI (Socially responsible investment) criteria. It’s an innovative approach.
The so-called “gray power” is the basis on which to build portfolios that identify those sectors and companies that can most benefit from this phenomenon… and which also meet social profitability criteria.
In an interview with Funds Society, Jean-Marc Pont, Equity Investments Specialist at Generali Investments, explains that “the universe of investable companies is very broad, but the fund concentrates on large and medium-sized European companies with a very small position in those outside the Old Continent.” As a result of the management team’s selection, France, the United Kingdom, and Germany represent over 63% of their exposure to European markets, and there is no talk of uncertainty here because, as Pont points out, “it is a portfolio that is not moved by political events.”
Europe is the epicenter of its investment, while it is also the area of the world where the aging of the population will be most evident. After all, about a third of Europeans will be over 60 in 2040. As a result, it will be here that seniors will progressively control a higher percentage of income. This is the case in Sweden, Finland, Belgium, and France, where by 2020 they will already own over 30% of total revenues.
Also, as explained by Pont, “European companies have a high level of geographical diversification and, therefore, investing in them is investing in other areas of the world, that is, being exposed to worldwide income.”
Thus, its average exposure to income from the European continent stands at 53%, with the remaining 47% of exposure to income from the rest of the world.
Three major themes and 13 sub-sectors
The megatrend leads them to maintain an exposure at the end of January, of 48% to the consumer sector, 34% to the health sector, and 18% to retirement planning and saving products. Within these three themes, there are another 13 sub-sectors which range from anti-aging treatments to vitamin supplements, oncology, incontinence, or dental implants. Among the top 10 fund positions at the end of January are, Royal Philips, LVMH, L’Oreal, Roche, Axa, Prudential, or Sanofi.
The thematic investment strategy only includes securities that meet socially responsible investment requirements, and these are, in fact, ahead of the aging megatrend. “We indeed believe that applying a SRI approach to this theme will also provide additional value, through its in-depth analysis of extra-financial criteria,” says the expert.
In the SRI filtering process, a proprietary method is used that includes aspects such as reputation, regulatory pressure, or carbon footprint. Subsequently, companies that meet the 34 most relevant criteria for each sector are identified, and those with a higher than average rating are chosen.
The Thematic European Equity Investment team makes a thematic selection to identify the level of exposure of companies to the three investment pillars. The team then selects the companies for each of the three themes, based on different financial metrics. The result of this three-step strategy is a portfolio of about 50-60 securities that the team periodically follows in order to re-evaluate investment projects and sell the securities when objective valuation is achieved.
Unstoppable Trend
The aging population is worrisome and the figures are alarming. According to the UN, by 2040, the percentage of people over sixty will have increased from 12% in 2015 (900 million) to around 19%, or 1.9 billion.
Raphael Pitoun, courtesy photo. Raphael Pitoun: “I very much doubt that at this stage of the cycle, it makes sense to invest in companies with a leveraged balance sheet”
The Stryx Global Growth Fund, a global equity fund, only invests in the best companies in the world in terms of quality and growth. In fact, it is a growth strategy with a low number of expositions: between 17 and 25 shares. To this we must add that its rotation is of around 20%. Some of the companies stay for more than fifteen years. Raphael Pitoun, CIO of Seilern Investment Management, explains the reasons why the fund is concentrated: “The companies you are looking for are very rare,” he says.
The strategy, which Capital Strategies markets in Spain, selects stocks between industries and sectors that present high barriers to entry, strong pricing power and visible growth prospects. “The companies in our portfolio combine a sustainable competitive advantage with a strong balance and high profitability,” explains the CIO of this boutique manager with $ 400 million of assets under management in this interview with Fund Society.
How does your fund differ from other global equities funds?
The Stryx World Growth fund only invests in the best companies in the world in terms of quality and growth. Stocks are selected from industries and sectors with high barriers to entry, strong pricing power and visible growth prospects and the companies combine a sustainable competitive advantage with a strong balance sheet and high profitability. Stryx World Growth is a concentrated fund of between 17 to 25 stocks as the companies we are looking for are very rare. The fund has a low turnover of around 20%; some of the companies are in the portfolio for more than fifteen years.
What is your broad outlook for equities in 2017?
We continue to have a positive Outlook for Equities in 2017. The level of systemic risk is moderate as the banking sector restored its profitability and the amount of leverage in the private space is not disproportionate. There is still plenty of liquidity and except if the Federal Reserve makes errors and tighten too quickly this should continue to be the case. We are not very optimistic regarding the ability of the new US administration to boost growth but overall global growth prospects remain acceptable. Despite indexes reaching recent highs, the investment world is still largely skeptical and underweight in Equities. This bodes well for a continuation of the rally in the foreseeable future. We only start to perceive the first signs of market euphoria since a few weeks and these signs are still far from a bubble.
In which areas do you see more opportunities?
We are not keen to make any macroeconomic gamble and the companies we invest in are also chosen because they are more immune than an average company to any kind of macroeconomic trend. What we can say is that with the ongoing sector rotation, which favored low quality sectors, indebted companies and banks, our highly growing and predictable companies are very much affordable. Also, I very much doubt that at this stage of the cycle, it makes sense to invest in companies with a leveraged balance sheet for example.
Three themes for this year
One of the themes we have been working on recently is the consumer staples industry. It looks like the sector growth algorithm is getting increasingly challenged by competition, new consumption habits, the direct to consumer business and slowing developed markets. We become structurally more prudent about this sector and, for example, we sold our 17-year-old position in Reckitt Benckiser a few weeks ago.
The other theme, which looks interesting to us, is the healthcare sector. We progressively moved our exposure from pure drug manufacturers to medical devices makers. The latter often have a good pricing power, interesting strong growth prospects and high barriers to entry. We do not think they will be completely immune to the huge pressure on developed market’s healthcare system but, if chosen carefully, some of them make very interesting investments.
Last, we have been working on robotics. Most companies we invest in have a plan to increase their capital expenditures on automation. With inflation fears coming back and full employment in some markets, this should only accelerate this trend. What we see on that front is similar to what companies experienced in the 2000s when they outsourced production or open plants in low-cost countries: when one competitor start doing that, the others are obliged to follow creating a strong halo effect. This should benefit companies such as Fanuc in Japan.
Are we seeing a rotation from growth to value?
Yes, it is visible that some investors shift from growth investment into value. On our side, we are very wary of using the distinction between growth and value. We are quality growth investors and it is a big difference with what is considered a growth investor. We do not bet on growth prospects for one or two years but for the long term and growth is only one of the criteria we are looking at. We do not have any style or do not follow any fashion: we use the equity market as a tool to invest but our investments are not in the equity market but in companies.
What are your capabilities of capital preservation?
Our capabilities of capital preservation are very high from both a company and portfolio perspective. At a company level, the risk of default is very low as the companies we aim at investing in are very established businesses (on average, they were founded in 1944), have healthy businesses and are highly cash generative. From a portfolio perspective, the main driver of the performance is the earnings generation rather than multiple expansion or fragile dividend payments. For investors who have a sufficient time horizon across the cycle, the capital should be not only preserved but increased significantly.
How do you identify areas of the market that may provide stock ideas?
Our ideas are purely proprietary and based on the work on our internal research team. We also capitalize on our own track record of 25 years and know how in the quality growth investment. Finding new ideas comes from two ways. Firstly, we are using a quantitative screening as we want the companies to tick many boxes in terms of track record, growth and balance sheet. Secondly, we identify structural growth themes and, often when we look at one company, it often leads to another one. But, again, identifying an idea is the very first step of a long process; we then deep dive and investigate on all the aspects of the company and this can take between six months and one year before a company is approved for investment.
We have seen a upward trend in US equities because of Trump, is this trend sustainable?
To put things into perspective, the change in the market environment has started last July before the US elections. The stimulus plan announced in China, and decreasing deflation fears in Europe already helped the equity market. The election of Trump made some investors think that the US could also see better growth prospects. That’s a point we are doubtful about given the local political context and the division inside the Republican party. But again Trump was only one explanation for the rally and a potential disappointment, even if it will not help, should not entirely break the positive market dynamics.
Why you do not invest in Banks? And in Oil? And in Insurances companies?
This is explained by our investment philosophy. We only invest in companies we can understand and analyze. Banks and insurance companies are not transparent enough. On top of that, there is no real structural growth driver and the capital intensity in the financial sector is going up. As far as oil is concerned, we want the earnings growth to be as predictable as possible. For oil companies, we are not in a position to forecast even the revenue line in an accurate manner.
Photo: Kenichi Amaki, Matthews Japan Fund Portfolio Manager . Matthews Asia: “Yen Weakness is not a Requirement for Japanese Stocks to Perform Well This Year”
Regarding the factors that make him optimistic about Japanese equities in 2017, Kenichi Amaki, Lead Manager of the Matthews Japan Fund, notes that over the years, the Japanese economy has faced many macroeconomic headwinds, but this year many of them have turned into tailwinds.
As an example, the fund manager mentions that improved PMIs, the acceleration of wage growth, and the announcement that the Japanese government will expand fiscal spending for the first time in three years, all bode well for the strength of the economy.
And then, he says, we run into inflation. “Japan has been caught up in deflation for most of the past two decades and even I anticipated that after a few years of positive CPI growth, the economy would sink back into deflationary territory. However, given the weakness of the yen, a potentially inflationary environment in the United States and elsewhere, coupled with rising commodity prices, it is time to rethink this. I think that, in all likelihood, inflation may actually accelerate this year.”
The other note in this positive context is the yen, although Amaki likes to stress that its weakness is not a requirement for Japanese stock markets to perform well this year, although “it is helpful owing to its effect on corporate earnings.” Prior to the US election, the exchange rate ranged from 103-104, “however, I remain skeptical that it will weaken to as low as 125.”
He explains that this is how Matthews Asia arrives at the optimistic scenario it envisages for Japan this year: “All these factors, and especially our vision of inflation are good news for Japanese stocks and it is a tailwind that, frankly, we have not had before. It should be supportive of Japanese revenues, trickling down to earnings and eventually to share prices.”
For the Matthews Japan Fund manager, the two areas which are likely to benefit greatly are the retail sector and the financial sector. “Japanese retail companies underperformed last year, owing to expectations of a return to deflation and renewed price competition amongst retailers. However with a change in both currency and inflation expectations, those things might be viewed positively for the retail sector,” he anticipated. Meanwhile, the fund manager points out that yield curves steepened globally, “including in Japan,” which should be positive for Japanese banks and life assurance companies.
In fact, 3 of the top 4 positions of the fund he manages are Japanese financial entities: Mitsubishi UFJ, Tokyo Marine Holdings and Sumimoto Mitsui.
Shinzō Abe Administration
But the question that everyone who is looking for opportunities on the Japanese stock exchange has in mind is: Is Abenomics working? Shinzo Abe boasts one of the highest approval ratings amongst heads of state worldwide, which is basically another positive factor. Furthermore, the inflows into the stock markets are another reason to be optimistic.
“By the end of October last year, international investors had sold almost two-thirds of what they purchased at the start of ‘Abenomics’. Meanwhile, the Bank of Japan will be buying 6trn yen of Japanese equities annually, while corporate share buybacks have been robust, hitting 5trn yen in 2016, and are expected to continue apace this year,” he explains.
Meanwhile, Amaki adds that domestic pension funds are short of their target allocations for Japan, and goes on to explain that, he estimates that there is likely to be around 10-15trn yen of domestic buying into the asset class this year. “If international investors change their attitude to Japan and decide to up their weightings, it could really propel the market upwards.”
Trump and Car Manufacturers
But of course, as in the rest of the world, the risk for this optimistic scenario is called Trump. Especially for the Japanese automotive industry, which has many interests in the United States
Without going any further, Toyota imports from Mexico only 70,000 units of the 1 and a half million cars it sells in the United States, “it’s a tiny number, but it will still be affected to some extent. All Japanese car manufacturers will be affected,” he states.
Therefore, in terms of the fund’s exposure to the United States, Amaki has been reducing the positions of those companies that have US competitors producing in the United States. “Because, if US companies are actually producing in China, they will actually be in the same position as a Japanese company which also imports its parts from China.”
“His protectionist policies could have a big negative impact, while any U.S. policy mistakes causing U.S. economic reversal are also a concern.” In this regard, the risk comes from the mix of fiscal incentives envisaged by Trump and the rates hikes of the Federal Reserve, since this could hamper US growth.
“Policy mistakes causing deflationary trends would also be a threat to the global economy and remove all the inflationary tailwinds we discussed earlier.” Amaki adds.
“Such risk scenarios will inflict pain on all of US trade partners, not just Japan.” He concludes.
