Pixabay CC0 Public DomainFoto: Unsplash. Schroders Launches First High Yield Fund Using the “Value Approach”
Schroders launched the Schroder ISF Global Credit Value. The fund is one of the first of its kind and will use a value investment style to invest in the global credit universe. According to a press release, the value approach will enable the team to identify opportunities in out of favour market segments with the aim of providing investors with a high total return.
The fund will not be constrained by a benchmark, allowing the investment team the flexibility to maintain their contrarian approach and exploit opportunities in the global credit universe, consisting of bonds of corporate and financial issuers (including developed and emerging markets), convertibles and other securities.
The fund will be run by the credit team based in London, as part of Schroders’ well established global credit franchise and managed by Konstantin Leidman, Fixed Income Fund Manager, with the support of over 40 analysts around the globe.
Leidman said: “We will focus on sectors and regions that have been hit hard by negative investor sentiment and aim to identify issuers in these groups that have been undeservingly punished. They may be unloved due to some political or other bias, or simply unfashionable; overlooked or under-researched where investors are absent and valuations are very cheap. Our philosophy is based on minimising the risk of permanent capital loss and applying a large margin of safety – or discount – which means we aim to buy bonds for significantly below their intrinsic value to maximise returns and minimise losses.”
John Troiano, Global Head of Distribution at Schroders, said: “We’re delighted to be able to offer investors this innovative investment strategy. The new fund will be suitable for long-term investors seeking superior total returns and to diversify their portfolios. The value approach in global high yield corporate bonds has so far been under-utilised by the investment community, we are one of the few managers to offer such a strategy.”
CC-BY-SA-2.0, FlickrPhoto: Robert Vanden Assem, managing director at PineBridge. Stay Flexible in Investment Grade Credit as the Hunt For Yield Continues
In recent years, demand for US dollar investment grade credit has grown worldwide. Many investors have been drawn to this market by the attractive yield differential, large and diverse opportunity set, and absence of foreign exchange volatility. The outlook for the US economy, with anticipated progrowth fiscal and regulatory policy, should support US dollar strength and higher yield differentials, which we expect will continue to fuel demand for US dollar investment grade credit.
Here, Robert Vanden Assem, managing director and head of developed markets investment-grade fixed income at PineBridge, discusses frequently asked questions about investing in US dollar investment grade credit, the most liquid credit market in the world.
What do you think the US election results mean for fixed income markets?
On the whole, we are expecting mostly positive consequences of a Donald Trump presidency on US dollar denominated spread products. Tax cuts, possible infrastructure spending, repatriation of overseas cash, and a reduction in regulation are bullish for corporate markets.
The election result has also made certain sectors more attractive. Financials have been buffeted this year by the possibility of negative rates, and now they’re looking to be one of the more attractive sectors in fixed income with the likelihood of higher interest rates and relaxation of regulation. The aerospace and defense sector seem poised to benefit from a global increase in military spending, the metals and mining sector should benefit from an increase in infrastructure spending, and both energy and communications sectors should benefit from a more business friendly approach from their respective regulatory agencies. Finally, we see possible positive outcomes for corporates in the form of tax cuts, less regulation, and the possible repatriation of cash held overseas.
The election also gave a boost to the US dollar, which had been range-bound since last December. We think, going forward, a strong and stable dollar will contribute to performance of US dollar denominated fixed income.
From an interest rate volatility side, the prospect of fiscal stimulus and less regulation has already impacted our markets. We’re still expecting a decent amount of interest rate volatility, but the recent back-up in rates has provided an opportunity to invest at more attractive yield levels.
What risks do you see ahead?
I think a key risk at this point could be too much bullishness in markets. Beyond the obvious positives of more fiscal spending and less regulation, what the Federal Reserve does in response is something to keep an eye on.
Our view for a long time has been that the Fed cannot normalize policy unless there is an adequate correction in terms of the fiscal policy and regulatory policy within the economy. Of course, we now have hope that we might see that, but it’s still uncertain in terms of what the exact programs will be and their likelihood of success. Importantly, the US is still burdened by tremendous debt levels that continue to rise.
While the Fed finally raised rates this year, over the longer term it has been cutting its forecast, or its terminal rate of interest going forward. The market has continually underpriced the Fed, and it has been successful in doing that so far. More recently, however, Fed and market forecasts are coming together.
Inflation and labor markets are also not robust enough to warrant significant tightening in US monetary policy. While the longer term view of inflation (the five-year, five-year forward inflation rate) has ticked up a bit, it hasn’t moved enough to warrant concern at this point. And the job market is not as robust as you would normally see in a typical recovery. What is missing is investment, less regulation, and better fiscal policy.
Although our view is that the Fed will remain accommodative, central bank policy continues to be a big risk as we look into 2017. If markets get too bullish with any possible fiscal legislation or less regulation, the Fed could end up moving too aggressively, and that would negatively impact the economy. I think this is a major risk in 2017 and beyond.
Is there an area of fixed income that you favor currently?
Financials have been one of our more favored sectors, but they suffered in the past year due to fear of negative rates and low interest rates. Since the Global Financial Crisis, from a fixed income perspective, financials have been a great balance sheet story as they raised capital levels and improved liquidity. This year, however, they became more of an equity story, where earnings were a concern given the low and negative rate environment.
Going forward, we are positive on financials for two reasons. First, they have underperformed the rest of the market on this bounce back and appear attractive on a relative value basis. Second, with the prospect of less regulation and higher rates, there should be more opportunity for banks to increase profitability going forward. More recently, with the advent of Additional Tier 1 preferreds and Contingent Convertible securities, we have seen added interest in financials.
What is your outlook going forward?
Despite pro-growth changes we will likely see in fiscal and regulatory policy, we think that the big-picture rate environment is not going to change significantly. Moreover, we expect the global search for yield to continue. While the US is seeing positive developments, many advanced economies are still dealing with low growth, low inflation, and an increase in geopolitical risk. Therefore, we think that the market is not poised for the breakout growth that many investors seem to be anticipating at this point.
Looking ahead, we expect robust performance on a relative basis within the credit markets supported by a constructive environment for corporate fundamentals, strong global demand for US dollar investment-grade credit and relatively easy monetary policy. However, investors should focus on being nimble since liquidity dynamics are not what they used to be. The investor base is strong, as is demand, but the transmission mechanism for sales and purchases from investor to investor has changed. The dealer community is still inhibited by regulation, so they must maintain low levels of inventory. Therefore investors need to be mindful of liquidity and how they can maneuver within the market.
CC-BY-SA-2.0, FlickrPhoto: Quinn Dombrowski. Making Sense of Misalignment
When the Centre for International Finance and Regulation (CIFR) says that “investment horizon reflects an interconnected web of influences,”1 chief among them is the relationship between asset owner (principal) and asset manager (agent). It’s a relationship where we see growing friction, largely based on the misalignment between asset owner time horizons and the delegation of investment decisions to asset managers. We touched on this misalignment in my last post, but now it’s time to be more clear about one of the root causes.
Both asset managers and asset owners play a part in this misalignment — and one of the most significant areas of confusion is the lack of clarity around full market cycles. While most active managers will state that their objective is to outperform over a full market cycle, they need to be more emphatic with asset owners up front about how much time that really entails and why they need it, especially if they state they have a long-term philosophy. They must also be clear about the fact that this is what investors are paying them to do. Asset owners need their own sense of clarity around the length of a full market cycle, because, as CIFR research acknowledges, “there is no common definition of long-term horizon that is accepted or clear.” Asset owners also need to recognize the importance of giving their active managers a full market cycle, and whether or not their own time tolerance will allow them to make that commitment.
So let’s start with clarity on the definition of a full market cycle. We see that as peak to peak or trough to trough. What history has shown us is that, on average, a full market cycle is at least 7 to 10 years, depending on the extent of any drawdowns in the market, i.e., 15% or 20%. According to our recent investor sentiment survey, and as shown in the exhibit below, more than half the institutional investors we spoke with around the globe know this. But their time tolerance does not line up. As you see in the exhibit, at least 70% of the investors we surveyed would only tolerate underperformance for three years or less.
What results from this misalignment of time horizons between investors and those managing their money is principal/agent friction. And that has potentially significant costs to institutional investors, particularly those who might be pressured to hire and fire active managers at the wrong time because their boards are focused on chasing short-term performance. In fact, as we see in the third bar of the chart, many boards are placing demands on their internal investment staff to deliver alpha in less time than the investment staff gives external managers to perform.
The trouble is, we may also be underestimating how much this misalignment is driving institutional investors into pro-cyclicality, i.e., a herd mentality. In a paper on countercyclical investing, Bradley Jones at the International Monetary Fund (IMF) points out that investors often hire active managers just after a period of outperformance, only to experience a period of subsequent underperformance based on where they are in the market cycle.3 Or after doing a tremendous amount of due diligence to hire active managers, institutional investors might be forced to replace underperforming managers, only to leave alpha on the table as these fired managers often outperform in subsequent periods. As Goyal and Wahal point out in their widely read Journal of Finance article, these hire and fire decisions can damage investor returns over time.
To avoid rotating managers at the point where active skill might matter most, institutional investors need more support to impress upon their boards the importance of a full market cycle. That is particularly critical during periods of underperformance, when an active manager’s countercyclical view can help manage future risks or find good entry points to invest. Yet today, underperformance for any period has become unacceptable. That is likely because institutional investors, who have to take on so much more risk today, may naturally react by overmeasuring short-term performance to gain a sense of control and satisfy their external constituents.
Accepting periods of underperformance, however — even three years or more — could be the price of admission for allowing active skill to work effectively. We know this is a real pain point for investors. But as Mark Baumgartner points out in his paper on shortfall risk, periodic underperformance does not necessarily reflect a lack of skill. He notes that even “Warren Buffett’s Berkshire Hathaway lagged the S&P 500 in more than one-third of rolling three-year periods in the 25 years since 1987,” which, he says, is “something to keep in mind when trying to gauge manager skill over shorter time periods.”5
Getting out of this trap starts with the clarity I’ve outlined — clarity around full market cycles, around investor time tolerance and around the need to evaluate performance over longer time periods. In fact, that clarity around time is not only the start to solving misalignment, it’s the basis of good governance. When we get right to the heart of good governance for asset owners, it really is about the time tolerance built into the partnerships they have with their asset managers, as well as within their own delegation chain. That good governance is what restores and maintains alignment and builds trust that can be maintained even through the most difficult investment periods.
We know this involves a tradeoff. Asset owners, as principals, take on more agency risk when they commit to asset managers long term. So in my next post, I’ll talk about how to manage that agency risk and get comfortable with commitment.
Carol Geremia is President of MFS Institutional Advisors.
CC-BY-SA-2.0, FlickrPhoto: Oliver Bruchez. Monetary Policy: Is A Change Coming?
Against the backdrop of weak global growth and soft inflation, central banks have been biased towards loosening policy further or talking down the prospect of future tightening. Stimulus measures, however, have recently come into question as evidence suggests that unconventional monetary policy may have reached its limits.
For example, the Bank of Japan has recently moved away from a commitment to buy a xed quantity of government bonds and adopted a yield target instead. This may be more sustainable in the long-run, but re ects an inability to expand its government bond holdings inde nitely. Similarly, market participants have speculated that the European Central Bank may move to taper its bond purchases before long and have lost appetite for pushing interest rates to ever more negative levels.
As a consequence, many investors are beginning to look for fiscal policy to take a greater role in stimulating growth and are starting to call for a turn in the direction of interest rates and bond yields. Our view is that although we may have moved to an environment of less aggressive monetary easing, it is too soon to look for a decisive in ection point. Central banks will be cautious about changing direction given the risk of derailing the economic recovery, and scal policy is hard to expand quickly. Fiscal expansion may also be limited in some countries by debt levels, and requires a level of coordination which will challenge most governments.
Government bond yields, as a result, are adjusting to a less supportive policy environment, but are expected to remain largely range bound, with fair value only modestly above current yield levels.
A structural increase in yields will require either a rise in trend growth, a rise in trend inflation or a clearer change in the direction and mix of policy. None of these are likely to happen quickly, but we may now be at the end of a 35-year bull market for government bonds.
John Stopford is Head of Multi-Asset Income at Investec.
CC-BY-SA-2.0, FlickrFoto: Craig Sunter. AXA IM: "Secular Stagnation is an Over-rated Concept"
Research & Investment Strategy of AXA Investment Managers team publishes its prospects for next year focusing not only in 2017, but choosing a theme and medium-term approach to examine the thesis of a secular stagnation, the normalization of economic growth and inflation. They review in turn the root causes of the lack of demand, the low productivity growth based on the absence of technical progress, the drivers of the saving gluts and the end of globalisation. Ultimately their conviction is that secular stagnation is an over-rated concept.
The global lack of demand is fading and can be addressed by an appropriate mix of monetary and fiscal policies. Monetary policy will never be the same as before the Global Financial Crisis: the extension of the tool box is there to last. Fiscal policy has to play its role where possible and this is particularly the case in the euro area, where some, but not all countries, have fiscal space.
In the medium term, the saving glut is set to resorb, while productivity will regain some strength and may even be boosted by the digital economy, especially if structural reforms provide a tailwind. They dispute the idea that technology is “everywhere but in the data” and believe the countries investing most heavily in the digital economy will benefit extensively.
Taking into account their growth estimates and modelling the term premium, AXA IM estimates that US long-term rates should return to 3.4% in the coming five years. This is certainly far from current levels, implying a multi-year normalisation that should radically affect asset allocations.
Given that previous episodes of rising rates have scarcely been smooth operations, they also take a deep dive into financial market stability analysis. The key ingredients of another financial crisis are mostly absent at the current juncture but certain elements may be a cause for concern, such as stretched fixed income valuations and constrained market liquidity.
De izquierda a derecha, Jean-Luc Hivert y Laurent Jacquier Laforge. Fotos cedidas.. La Française Reorganises its Securities Fund Management Division
Over the last five years, La Française has experienced strong growth through its expansion and through the internationalisation of its expertise, thanks to its strategic partnerships that have allowed the group to strengthen its skills.
So as to create synergies between the various group affiliates and divisions, La Française has reorganized its Securities Fund Management Division.
Accordingly, under the leadership of Pascale Auclair, Global Head of Investments, Jean-Luc Hivert and Laurent Jacquier Laforge are heading the two divisions of expertise: “Fixed Income and Cross Asset” and “Equity”, respectively.
Jean-Luc Hivert, with nineteen years of asset management experience, becomes CIO Fixed Income & Cross Asset. He is responsible for €30 billion in assets under management and heads a team of twenty-six experts. Accordingly, he is entrusted with the Group’s Cross Asset management, discretionary portfolio management and targeted management, for which Odile Camblain-Le Mollé holds operational responsibility. Jean-Luc joined La Française des Placements in 2001. As Co-Head of Bond Management, Jean-Luc innovated and contributed to the launch of the fixed maturity fund concept, one of the key differentiation factors of La Française. He holds a specialised post-graduate diploma (DESS) in Finance from Université Paris VI (1996), a MIAGE (Computer science applied to business management) degree (1995) and a MASS (Applied mathematics and social sciences) degree from Université Paris XII (1993).
Laurent Jacquier Laforge, with more than thirty years of experience, becomes CIO Equities Global. He is responsible for the entire SRI Equity range offered by La Française, small caps management and the monitoring of partnerships, such IPCM, an extra-financial research firm, Alger and JK Capital Management. For several years, La Française has been building strategic partnerships with specialised foreign management companies. As group CIO Equities Global and in the interests of investors, Laurent Jacquier Laforge will identify potential collaborations on products and research synergies. Laurent joined La Française in 2014. Since then, he has transformed the range of funds offered by La Française Inflection Point by incorporating the philosophy of Strategically Aware Investing (SAI) which includes an additional responsible dimension and was developed by IPCM, the London research firm with which the group has established a strategic partnership. Laurent Jacquier Laforge holds a DESS-DEA postgraduate degree in Economics from Université Paris X in Nanterre. Laurent is a member of the SFAF (French Financial Analysts association).
CC-BY-SA-2.0, FlickrPhoto: Elite Fuegos Artificiales
. 2016, a Good Year for Hedge Funds
Markets closed 2016 on the right foot with the way cleared from the Italian wildcard. The post-Trump election rally extended to December, benefiting DM markets globally while EM markets lagged. The upbeat tone also echoed the global agreement to scale back oil production. The surge of Brent to $56 supported the US High Yield segment.
Meanwhile, and according to Lyxor AM´s monthly barometer, the fixed income space continued to witness the great divergence in monetary policies. The Fed hiked rates by 25 bps mid-month while the ECB delivered a dovish tapering: it extended the program until end-2017 but reduced monthly purchases. Yields spread between Treasuries and German Bunds hit record highs. That led to further strengthening of the USD vs. major currencies while gold sold-off.
“In 2017, we expect less monetary accommodation, more fiscal boost and more policy ruptures to support rising rates and inflation. That would result in greater asset prices dispersion and more fundamental pricing, especially in the US where the process is more advanced. These factors would benefit Macro managers. However, the strategy is likely to remain constrained by elevated political uncertainty, prompting funds to be either overly hedged or endure volatility in their returns. We maintain a slight overweight on the strategy but we expect rising fund performance differentiation.” said Jean-Baptiste Berthon, Senior Cross-Asset strategist at Lyxor Asset Management
The risk-on environment supported hedge funds, with the Lyxor Hedge Fund Index up 1%. Global Macro delivered strong returns thanks to their long on equity markets and USD crosses. On the flip side, L/S Equity funds lagged due to the underperformance of Neutral funds.
Global Macro funds continued to gain traction and confirmed their year-end recovery. Managers benefited from the strong rally in European equities past the Italian referendum, while the depreciation of the EUR and GBP against USD added to gains. Overall, Macro funds’ positions became more homogeneous in December. Most of them bet on the reflation trade in Europe (long equities, short bonds and short EUR), while playing out rising inflation in the US and a stronger dollar (long bonds and USD, but short equities). In that regard, the divergence that took place in the fixed income space proved costly for portfolios this month. Finally, funds caught up the swift jump in energy but the sell-off in gold was detrimental.
In December, CTAs regained a meaningful chunk of the lost ground. The negative correlation between equities and bonds was supportive for models as they slashed their long fixed income allocations and re- weighted equities. Long USD vs. EUR and GBP was also a strong driver of returns. The commodity bucket remained overall mixed, but their long stance on energy paid off.
Special Situations outperformed within Event Driven, supported by the year-end rally. Sector wise, they benefited from core investments in Basic Materials, Consumer Non-Cyclicals, Financials and Technologies. Merger Arbitrage funds benefited from spread compression across a number of deals. The completion of the LinkedIn/Microsoft deal on Dec 8th paid off. In aggregate, managers closed the year cautiously exposed, with sizeable exposure to Consumer Non–Cyclicals and Technology. Heading into 2017, higher US corporate activity would foster Event Driven. Prospects of deregulation in some industries, corporate tax cut and cash repatriation would offer fresh opportunities for the strategy.
L/S Credit Arbitrage enjoyed healthy returns and closed 2016 up 5.4% with a very low volatility. Credit markets were supportive, in particular in the High Yield segment. Additionally, fixed income funds delivered healthy returns as well. Relative value investors navigated well the rising bond yield environment.
L/S Equity strategy delivered poor returns in December, but this hides disparate returns across regions and styles. On one hand, the longest biased funds continued to extend gains this month, and closed the year up 4.5%. Long books were the main source of alpha, especially within the financial sector. Some variable biased with a value-tilt recorded strong results. On the other hand, Asian and European Market Neutral funds were hardest hit by sector rotation. Overall, L/S Equity funds dramatically increased their positions towards Cyclicals vs. Defensives. They moderately increased their net exposure to equities throughout the month.
CC-BY-SA-2.0, FlickrPhoto: Pedro Ribeiro Simões
. Investor’s Attention Shifts to Passive in European Equities
Very disappointing results of active European equity fund managers in 2016 may have caused an acceleration of the shift into passive solutions, says www.fundinfo.com.
Active European equity managers got wrong-footed on sector allocation in 2016, adds the website. As ifund revealed this week, only 8% of European equity managers outperformed the MSCI Europe NR net of retail fees and just 24% did so gross of fees.
This may have caused an acceleration of the shift into passive solutions: while one year ago active European equity funds accounted for about 75% of all document views this number has most recently collapsed to 54%. This shift was most pronounced within public channels for German investors but was also remarkable for Swiss, Italian and UK investorss.
Andrew Balls, courtesy photo. PIMCO Launches Global ESG Investment Platform
PIMCO, a leading global investment management firm, has launched a dedicated Environmental, Social and Governance (ESG) investment platform globally, offering a range of fixed income solutions to investors seeking attractive returns while making a positive social impact. As part of this effort, the PIMCO GIS Global Bond ESG Fund has been launched in EMEA.
PIMCO applies a robust framework across its ESG solutions, delivering maximum impact for investors. This framework includes three key elements: exclusion, evaluation and engagement. Companies with business practices that are misaligned with sustainability principles are excluded from PIMCO’s ESG portfolios. Companies are also evaluated on their ESG credentials and those with best-in-class ESG practices are favored in these solutions. Critically, the team engages collaboratively with companies, encouraging them to improve their ESG practices and influence long term change.
The newly launched PIMCO GIS Global Bond ESG Fund invests in a range of sovereign and investment grade corporate bonds from around the world. The fund aims to maximize total return whilst favoring issuers with best-in-class ESG practices and those that are working to improve them. The fund is managed by a team led by Andrew Balls, Managing Director and CIO of Global Fixed Income and Alex Struc, Portfolio Manager co-heading the ESG initiative at PIMCO.
In addition, PIMCO has enhanced two of its socially responsible funds in the U.S. to incorporate a wider range of ESG considerations into the investment process. These funds are managed by a team led by Scott Mather, Managing Director and CIO for US Core Strategies and Alex Struc.
Andrew Balls said: “For many investors, screening out undesirable investment categories isn’t enough anymore; they want to use their investments to promote change in the world. Our ESG platform provides the tools to do that without compromising on returns.”
Alex Struc said: “Historically, this type of strategy has been pursued by equity investors but we firmly believe that engagement as a debtholder is equally important. Across the vast fixed income universe, small change can have an enormous positive impact.”
CC-BY-SA-2.0, FlickrSasha Evers, courtesy photo. Sasha Evers Will Lead the Latin America and Spanish Business of BNY Mellon
BNY Mellon Investment Management (BNY Mellon IM), the world’s largest multi-boutique asset manager with 1.7 trillion dollars in assets under management, announced that Sasha Evers, Managing Director for Iberia, expands his role to lead the Latin America business.
Antonio Salvador Nasur will continue in his regional role based in Santiago, Chile, reporting directly to Sasha Evers, based in Madrid, Spain.
Under Evers’ leadership BNY Mellon IM opened its Madrid office in 2000 to successfully grow BNY Mellon IM’s presence across Iberia (Spain, Portugal and Andorra), where current assets under management are USD 3,537 bn (EUR: 3.730 m).
Sasha Evers, Managing Director of BNY Mellon IM for Iberia, said: “The Latin American region offers a strong long-term growth story for our business. I am looking forward to working closely with Antonio to further build upon our business in the region.”
Matt Oomen, Head of International Distribution at BNY Mellon Investment Management, commented: “While setting in stone our longer term distribution strategy to grow assets in Latin America, we saw many synergies between Iberia and Latin America. Sasha’s experience and leadership puts him in the best position to further grow our presence in the region, following his success leading BNY Mellon IM Iberia.”
