CC-BY-SA-2.0, FlickrPhoto: Clint Budd
. Where’s The Growth?
Looking into 2017, our primary investment thesis is based on the belief that investors are underestimating the prospect of stronger growth and inflation in the US economy relative to the rest of the world over the next year.
Where’s the growth?
Global growth has been weaker than many policymakers and market participants expected following the 2008 global financial crisis. The deleveraging cycle in the developed world and the Chinese economy’s transition to a lower-growth path have both acted as major headwinds to the global economy. In response, central banks have undertaken extraordinary policy measures to provide support, which, in turn, have strongly in uenced the direction of asset prices.
Pessimism is in the price
We believe the global economy’s structural issues will remain with us for some years to come, resulting in a continuation of the low-growth environment. However, this has largely been accepted by investors. Looking into 2017, our primary investment thesis is based on the belief that investors are underestimating the prospect of stronger growth and in ation in the US economy relative to the rest of the world over the next year.
Following an easing of financial conditions over the past year, with government bond yields and mortgage rates having declined significantly, we see positive trends emerging in US credit growth and the housing market in particular. In our view, this implies higher longer-dated US bond yields and a stronger US dollar looking forward. As a result, we believe that many of the areas that have struggled through 2016 appear to offer some of the most attractive opportunities.
Sectors are diverging
The large decline in longer-dated government bond yields this year resulted in a meaningful division within equity markets. This has been particularly prevalent in the US market where, although the S&P 500 has made little overall progress, there has been a high level of dispersion in performance between those sectors that gained from lower bond yields and those that lost.
US banking bounce?
An example would be the performance of US banks relative to utility companies, with the former underperforming significantly. While a stronger US dollar and higher bond yields may act as a headwind to US equities more broadly, we believe there is scope for a rotation within the equity market and consequently we have been sellers of US utility companies and buyers of US banks.
Greenback revival?
We have also been sellers of government bonds and have been reinitiating long US dollar positions against the currencies of countries where we expect monetary policy to remain loose or even be eased further, such as the Korean won, Taiwanese dollar, New Zealand dollar and Japanese yen. With the exception of the latter, these currency positions are designed to act as defensive positions at a time when government bonds may struggle to perform.
Positioning for 2017: Flexibility is the key
Although we believe there are a number of compelling opportunities in 2017, we acknowledge that valuations across the majority of asset classes are not as attractive as they have been in recent years, as we remain in an environment of structurally low growth with economies more susceptible to shocks. As a result, the overall risk level of our strategies will likely remain lower than would otherwise be true, were risk premia to be higher, and we will continue to use our flexibility to identify opportunities as they appear and to seek to protect capital as risks emerge.
Iain Cunningham is a Portfolio Manager in the multi-asset team atInvestec Asset Management.
Pixabay CC0 Public DomainFoto: 495756. Annika Falkengren and Denis Pittet, New Managing Partners at Lombard Odier
The Lombard Odier Group announces the appointment of Annika Falkengren and Denis Pittet as new Managing Partners.
“These two nominations provide a solid base for the further build-up of the Lombard Odier Group” said Patrick Odier, Senior Managing Partner of the Lombard Odier Group. “We are particularly pleased to welcome two highly complementary personalities with Annika Falkengren, who brings a recognised expertise in the running of a respected and successful European financial institution, and Denis Pittet, who has contributed significantly to the strategic development of the bank over the past 20 years. These two appointments represent a strong endorsement of our strategy, differentiated business model and long term vision.”
Annika Falkengren, currently President and CEO of Skandinaviska Enskilda Banken (SEB), will join the Lombard Odier Group in July 2017 as a Managing Partner based in Geneva. Annika Falkengren joined SEB in 1987 and made a long and distinguished career which culminated in her nomination as President and CEO of SEB in 2005. Recognised as one of Europe’s most respected bankers, she is also Chairman of the Swedish Bankers Association.
“I am very honoured to join a Group with strong family values and with a truly international mindset and outlook”, said Annika Falkengren. “I firmly believe in the partnership model which has been underpinning Lombard Odier’s evolution over the 221 years of its history.”
Denis Pittet will become a Managing Partner in January 2017. Denis Pittet joined the Group in 1993 as a trained lawyer. He was Group Legal Counsel, before joining the Private Clients Unit in 2015 where he took over the responsibility for the independent asset managers’ department and led the expansion of wealth planning services in the areas of family governance and philanthropy. He became a Group Limited Partner in 2007. He is also Chairman of the Fondation Philanthropia, an umbrella foundation supporting clients’ long-term philanthropic projects.
“My objective will be to maintain a first class client experience at Lombard Odier”, added Denis Pittet. “We are solely dedicated to clients in a model which puts independence at the heart of everything we do.”
After 20 years of commitment to the Group, Managing Partner Anne-Marie de Weck retired on 31 December 2016. She joined Lombard Odier in 1997 to take over responsibility for the Firm’s legal department, and subsequently its Private Clients activity. A Managing Partner since 2002, Anne-Marie de Weck has made decisive contributions to the strategic development of the firm’s private client business.
“We would like to express our sincere thanks to Anne-Marie de Weck for her relentless commitment to serving our clients. We are also very grateful that she will maintain a close relationship with the Group as a member of the Board of Directors of our Swiss-based bank. In this role, she will continue to be involved in defining the strategic orientation and overseeing the operational activities of the business”, said Patrick Odier.
In July 2017, the Management Partnership of the Lombard Odier Group will be composed of Patrick Odier (Senior Partner), Christophe Hentsch, Hubert Keller, Frédéric Rochat, Hugo Bänziger, Denis Pittet and Annika Falkengren.
CC-BY-SA-2.0, FlickrPhoto: Chris D Lugos Z. Private Funds: Venturing Off the Beaten Path
This year, we expect a continuation of many of the same themes we’ve seen in private markets this year. The global macroeconomic environment remains weak, and central banks continue to pursue accommodative monetary policy. Top line growth is still hard to come by – both for companies and for the US economy.
Investors are looking for private market yield more than ever. So alternative investments continue to be popular among institutional investors as their comfort level in traditional assets of listed equity and fixed income is tested. Fixed income looks fully valued to many as interest rates can only go up from here and investors wait for the negative consequence of central bank intervention and negative rates to materialize. Long range forecasts for public market equities among major institutional investors are as low as 4%-5%, which is far below their actuarial assumptions for the growth of their liabilities. So where else can investors turn?
We think the biggest change just may be among investors themselves. When the world is becoming compartmentalized, investors feel crowded. Everyone is following the same themes and feeling the same pressures. Investors are looking for new opportunities and ways to optimize their exposure through a “best ideas,” unconstrained portfolio of private assets, whether it be in emerging markets or developed markets.
Finding opportunities
We’re seeing large buyouts in private markets, purchased at over 10 times (x) a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) using 6x leverage for larger deals. In the general secondaries market, pricing is also becoming fully valued because more people are looking for truncated J curves and a visible portfolio that has growth potential. (The J curve shows a private equity fund’s tendency during its life to deliver negative returns and cash flows early on and investment gains and positive cash flows later on as companies mature and are sold off.)
We think investors should go where most of them aren’t – that is, areas of the market with less capital formation. It may be harder to do the work to generate returns, but it may actually be a lower-risk strategy than following the path of least resistance that many other investors follow. In particular, we are focused on opportunities in the small and midmarket segments of the private market, along with private credit. We believe that investors should focus on smaller companies and/or funds to pursue alpha, while keeping in mind that these segments require greater expertise and selectivity.
A small midmarket business will generally trade at a lower multiple than a large market business. Among the same types of companies, just different sizes, investors can pay 7x EBITDA for the smaller company but 9x for the larger one. Why? Because the leverage is easier to come by for the larger company. The bigger the fund, the more pressure to put money to work. Of course, small midmarket transactions are hardly cheap, but it’s a relative value proposition as opposed to an absolute value one.
There’s another advantage to small and midmarket deals. Not only can investors get the benefit of higher growth, but once the company gets to a certain size, investors may get the benefit of an expanded multiple such that the next investor uses more leverage to buy the company. Investors should never use the expanded multiple as the main justification, in our view – they should look for growth, operational efficiency, and good bottom lines – but an expanded multiple can be a bonus.
Be mindful of risks
Of course, investors need to be aware of the risks and special skills involved in the private equity markets. Investors should do the proper due diligence to make sure the managers they pick are able to execute on the type of mandate they’ve been given. This execution risk is even broader in cases where an investor is looking for a manager to provide a “best ideas” portfolio. In the past, investors needed only to ensure that the manager was capable within a constrained or compartmentalized context. Now, managers need to demonstrate the breadth and depth of their capabilities in several areas or markets.
Another risk in the private markets is that portfolios cannot react as quickly to market developments or uncertainty as compared with more traditional asset classes like listed equities and fixed income. The ship turns much more slowly in private markets, and a level of uncertainty can slow things down. If an adverse event were to cause corporates to step back from markets, liquidity will become constrained for private equity. Exit trends have been favorable over the past three years as low interest rates have caused corporations to become more acquisitive. However, we expect the number of exits to moderate into 2017 and 2018. Exit trends have the potential to revert to the mean over the next 12-18 months because of the continued uncertainty over the global macroeconomic picture and investors’ nervousness about what central banks will do. On top of that is growing political risk, particularly in Europe and other developed markets.
Currency movements have had a huge impact on returns for international investments. EM currency performance relative to developed market currencies and even within Europe (for example, the euro versus the pound) has been dramatic. Most investment professionals believe volatility will still be the name of the game going forward, so general partners (GPs) of funds should be cognizant of currency effects. Many investors in the UK and continental Europe did not expect the pound and euro to move so dramatically. GPs should think about hedging within their funds versus telling their clients to manage it themselves, in our view.
Finally, it’s worth repeating that something that looks low risk can come at a high price. Investors can end up paying too much because debt is readily available. Paying up for an asset and then putting leverage on it makes something once solid and straightforward become more risky because of high purchase price multiples and high debt use.
One size will not fit all
The search for yield is becoming a catalyst for change in the private markets as investors now focus on determining the right strategy. Many are turning to alternative investments because of their ability to generate yield when there is little to be found in the traditional markets. Growth opportunities may also be more readily available in the private markets.
However, investors must remember that it’s not easy. As interest in these opportunities grows, assets become more expensive. And as competition for yield grows, returns are moderated. While there are many obstacles, we believe there is still more opportunity for skilled investors to generate yield and growth.
Steven Costabile is the Global Head of PineBridge’s Private Funds Group (PFG).
This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.
CC-BY-SA-2.0, FlickrPhoto: Toby Oxborrow. What The Markets May Be Miscalculating?
The last few days of 2016 have receded amidst continued pain for Asia’s markets. The year had begun with a rally in Asia’s equity and fixed income markets, but it ended in a slump. I wish performance had been better, but the sectors that rallied—materials, energy and other cyclicals—did so less due to fundamental reasons than due to expectations of inflationary conditions rising once again. Sectors with more robust secular growth profiles, such as health care, have recently suffered. This environment has been a difficult one for investors, including our team at Matthews Asia, which is focused on making long-term strategic decisions to buy secular growth at reasonable prices. But it is also an environment of which we have warned investors, one that I believe is transient, and so we intend to stick to our investment philosophy and our commitment to long-term growth, not short-term trading. But sentiment is against us right now.
Indeed, as markets have marched on since the victory of President-elect Donald Trump, each footstep seems to bring new confidence into the U.S. market, just as it sends tremors through the East. Expectations of higher inflation, easier regulations, and an America-first trade policy are being priced in as being a boon to the U.S. and a burden to Asia. But have the markets been marching blindly? Is the focus too much on NOW and too little on the far future? Has the market been relying too much on conventional wisdom, what it feels is true, rather than spending the time to think through the issues in a cooler, more logical fashion? If it has done so, it would not be surprising—given the shock and emotional reaction by many over Trump’s surprise win. And yes, I do believe that the market has gotten some things wrong.
First, the markets may be overestimating the inflationary stimulus from President-elect Trump’s economic policy. Tax cuts will raise the budget deficit, yes. But that will be offset by a faster pace of interest rates hikes by the Federal Reserve. Tax cuts that save money for the wealthiest and broaden the tax base at the bottom are more likely to be saved than spent. That is not stimulative. Plus, many on the new administration’s economics team are advocates of hard money and tighter control over, even auditing, the Fed. This is not an environment in which it will be comfortable for the Fed’s doves (those happy to see higher inflation) to operate.
Second, the markets may be overestimating the effects of looser regulation. Yes, there are costs associated with it, but it is not as if profits are at a low level. Indeed, they are close to peak levels of GDP. Where is the evidence that regulation has imposed high costs? The effect of tax cuts in the corporate tax rate are real—but for how long are they likely to persist? Perhaps the market is overestimating the boost to valuations from these potential events.
And the effect of trade tariffs? They are likely to impose costs—a one-off jump in import costs, on the U.S. consumer and businessman alike. The reaction in the markets has been stark—as if the U.S. was isolated to this effect and Asia is incredibly exposed. This is the old canard about Asia being an export-led economy. It is not. Asia grows because it saves, it invests and it reforms. The excess that it produces beyond its immediate needs, it exports. But that is not vital to its citizens’ standard of living. Indeed, Asia would simply consume even more of what it produces (and it already consumes the vast majority) if tariffs became punitive. The short-term impact is likely to make the U.S. dollar stronger—but less trade means less cross-border investment and that could weaken the dollar further down the line.
Would supply chains be affected? Shortened? Probably, but again, don’t take too much of a U.S.-centric view of the world. China and other large Asian manufacturers are building out their supply chains in more developing parts of Asia only in part to satisfy Western demand. The long-term goal is still to produce for their own citizens. China will keep investing in the rest of Asia. Yes, some businesses will suffer, but others will benefit. Our portfolios largely consist of those companies focused on the domestic consumer and the domestic business in Asia, where long-term trends are overwhelmingly positive.
Simultaneously, markets are, I believe, mispricing Asia’s long-term prospects. The better performance we saw in the early part of 2016 was, I believe, partly a recognition that Europe had its own problems, but also that in Asia, equity valuations were reasonable and real interest rates were actually very high in global terms (hence the rally in bonds)—and that despite several years of poor earnings results, Asia’s economic growth would sooner or later translate into profit growth. That confidence has gone for now. But the fundamentals remain in place and even as valuations in the U.S. become increasingly stretched as markets price in an idealistic interpretation of the next administration’s policies, valuations in Asia are getting cheaper for long-term secular growth businesses.
Indeed, as I meet clients these days, I am often asked: “Where is the good news?” As I talk about the likely issues to come—trade issues, more worries about China’s currency, a strong dollar, and all the other issues that the markets are focused on, it’s a fair question. The answer is twofold. First, Asia appears well set to weather the storm! This may seem mealy-mouthed, but it’s important to recognize the current issues and also to see that high savings, high current accounts, low inflation, and low budget deficits give Asia a lot of policy room to maneuver—room that Latin America, for example, largely does not have. Second, Asia’s economies are still growing faster than the West and that should ultimately mean stronger profits. This is no small advantage. It may seem like a thin thread to hang your hopes on, but it only appears thin because it is not tangible—corporate profits are not growing quickly NOW.
Still, Asia right now has much going for it—economic growth, stable politics, strong fiscal and monetary positions, and reasonable valuations. The only things it lacks are momentum in corporate profits and the change in sentiment which that would bring. As I look into 2017, I do not know if this is the year when profits will turn (though margins are close to 15-year lows). But with dividend yields in the market near 3%, I know we will be paid to be patient. And now in Asia, more than ever, there would appear to be prospective returns to patience. That patience may be tried at times by “junk rallies” and sensationalist headlines, but we will continue to look beyond the headlines and help you see the opportunities in the region. And we intend to keep investing in the companies that are set to grow sustainably for the long term, not try to time rallies in those companies enjoying their last days in the sun. When the market is thinking “now, now, NOW”… we are trying to be patient, patient, patient.
Robert Horrocks is Chief Investment Officer at Matthews Asia.
Photo: Investment Europe. Invesco Fixed Income Appoints Emea Chief Investment Officer
Invesco today announced the appointment of Gareth Isaac as Chief Investment Officer, EMEA for Invesco Fixed Income (IFI). Gareth reports to Rob Waldner, Chief Strategist and Head of the Multi-Sector team for Invesco Fixed Income.
This is a newly created role and a significant hire to support the growth of IFI globally and in the EMEA region in particular. As EMEA CIO, Gareth will lead the portfolio management and strategic investment thinking of the Global Macro team in London and represent the EMEA region on the IFI lnvestment Strategy Team (IST). Gareth will support Nick Tolchard, IFI’s Head of EMEA, to drive growth of the IFI business in the EMEA region. He will also work closely with the Investment Grade Credit, High Yield, Emerging Markets and Credit analyst teams to contribute to product development in these areas.
Gareth, who is based in London, joins from Schroders Investment Management, where he was a Senior Fixed Income Fund Manager for five years, with responsibility for portfolio management, investment strategy and client and consultant relationships. His experience in managing fixed income investments spans nearly 20 years, with previous roles at GLG Partners, SG Asset Management, Newton Investment Management and AXA Investment Management.
Nick Tolchard, Head of EMEA for Invesco Fixed Income, commented: “Gareth’s credentials in developing and delivering strong investment strategies and his depth of experience in fixed income markets make him the ideal candidate for this role. He is known in the investor and consultant industry as a highly credible and respected investment strategist and we look forward to working together to deliver a superior investment experience for our clients globally.”
Pixabay CC0 Public DomainPhoto: bykst. Credit Suisse: Conflicts of Generations Sets Tone for 2017
In its recently published annual Investment Outlook, Credit Suisse’s investment experts suggest that financial markets are likely to remain challenging in 2017. The central economic forecast is for global GDP growth to accelerate slightly next year from 3.1% to 3.4%, albeit with pronounced regional differences. In combination with a slight rise in inflation and some monetary tightening, most asset classes are expected to generate low returns in 2017.
Fundamental economic and social tensions – summarized using the term ‘Conflicts of Generations’ – provide an uncertain backdrop for investors. Michael Strobaek, Global Chief Investment Officer at Credit Suisse, predicts: “The investment environment remains difficult and political events are again likely to trigger some turbulence in 2017. However, market corrections are likely to offer selected opportunities that investors should seize”.
Global economic forecast
Global growth should improve somewhat in 2017, albeit with significant differences between countries and regions. On the whole, investors can expect a slight recovery in corporate investment coupled with still robust consumer demand, but overall growth is likely to remain well below pre-crisis levels. US fiscal easing would support the cyclical upswing, while uncertainty over global trade could act as a restraint.
Inflation is likely to pick up but should remain well below central bank targets in many developed economies except for the USA. While the US Federal Reserve will likely continue its gradual normalization of interest rates, other central banks will probably maintain a more accommodative stance, while shifting away from mechanical balance sheet expansion.
Oliver Adler, Head of Economic Research at Credit Suisse says: “Political uncertainty and risks look set to remain in the spotlight, as Brexit negotiations are initiated, elections are on the agenda in core European countries and the foreign, security and trade policies of the new US Administration take shape”.
Credit Suisse’s investment experts see European risk assets (credits and equities) as particularly exposed to an increase in political risks.
Global market outlook
Rising yields and steepening yield curves are beneficial for financial sector profitability. European political events are a source of potential volatility for European institutions, but US financials (including junior subordinated debt) are still favored as a source of return. The Trump administration is likely to favor less rather than more regulation in the financial sector. Emerging market (EM) hard currency bonds are attractive due to their yield and diversification potential. After the strong rally in EM bonds in 2016, country and sector selection will, however, be a key determinant of returns in the year ahead.
Among equities, investors should favor the healthcare and technology sectors in view of their sound fundamentals. Healthcare offers some of the strongest earnings trends. Technology, meanwhile, is still growing strongly in areas such as cybersecurity, robotics and virtual reality. Both sectors also have the most to gain from a likely US repatriation tax break.
Credit Suisse’s investment experts also favor selected infrastructure-oriented stocks, notably construction and construction-exposed industrials. In combination, the increased political will for fiscal expansion and a growing need to renew infrastructure will provide significant stimulus in several large economies in the coming years, including in the USA. The US dollar is expected to gain ground in view of rising US interest rates, fiscal expansion and a potential repatriation of deferred US corporate taxes. While the euro may suffer from a focus on political risks in 2017, the Japanese yen should recover from undervalued levels.
Nannette Hechler Fayd’herbe, Global Head of Investment Strategy at Credit Suisse, says: “The biggest challenge investors face in 2017 is to find yield at reasonable risk. We consider emerging market bonds to be the most attractive but selectivity as regards issuer risk remains key.”
Switzerland
For Switzerland, Credit Suisse’s investment experts expect continued moderate growth with an ongoing recovery in exports and subdued domestic demand. While inflation should remain below target, deflation risks have subsided.
The Swiss franc is, however, likely to weaken versus a generally stronger US dollar. Credit Suisse currency experts believe that any depreciation of the Swiss franc against the euro is likely to very limited, given that interest rates will remain low in the Eurozone and also due to lingering political risks in Europe.
Anja Hochberg, Chief Investment Officer Switzerland at Credit Suisse, says: “We recommend to add broadly diversified emerging market bonds to the portfolio and favor Swiss equities over Swiss bonds, with a preference for pharma and IT shares. For investors that can bear some illiquidity, private equity continues to be an interesting asset class.”
Europe & EMEA
Uncertainties over Brexit, political risks and intermittent worries over the health of European banks are likely to create bouts of volatility in European risk assets, making risk-adjusted returns on equities less attractive.
However, Credit Suisse’s economists believe that Brexit is unlikely to trigger exits by other EU members. Hence, peripheral sovereign and bank bonds should hold up well. Risks in Italy and Portugal need to be closely monitored, however.
The Eurozone should see modest growth. However, the divergence between a slightly tighter Fed and a still very accommodative European Central Bank mean the euro is unlikely to make gains against the US dollar. The British pound should stabilize after its drop below fair value in 2016.
Michael O’Sullivan, Chief Investment Officer International Wealth Management at Credit Suisse, explains: “What is certain even at this stage is that Brexit will visit economic and political uncertainty not just upon the UK itself but also upon its European neighbors.”
Asia Pacific
Asia can look forward to stable growth in 2017, underpinned by a structural transition from manufactured exports to services-based consumption.
China remains on course for a soft landing, as the government successfully manages a bifurcated economy in which the industrial trade sector continues to decelerate while domestic services expand steadily. In this context, the real estate sector must be prevented from overheating in tier 1 cities.
A supportive combination of firming economic growth, reasonable valuations and improving profitability suggests that emerging Asian equities should perform well in 2017, possibly outperforming their global emerging markets counterparts.
John Woods, Chief Investment Officer Asia Pacific at Credit Suisse, notes: “Our more favorable view on Asia reflects our improving view on China, where we believe the domestic economy – particularly the services sector – should surprise to the upside.”
Foto: Unsplash, Flickr, Creative Commons. Project Bonds, la palanca que transformará el mundo
5 new investors, for a combined EUR 147m, have joined the BRIDGE platform -a platform with funds that invest in debt related with infraestructures owned by Edmond the Rothschild AM- through BRIDGE II, a Luxembourg-regulated fund launched at the end of March 2016. Less than 2 years after its first closing, the BRIDGE platform has raised close to EUR 1bn through 3 funds, of which EUR 400m in 2016.
Persistently strong institutional demand
The first closing of BRIDGE II at the beginning of December involved new investors based in Italy, Germany and France and should enable an interim closing at the beginning of 2017 as investors are currently at an advanced due diligence stage. BRIDGE II is expected to complete its fundraising in the course of Q2 2017 and for a similar amount as FCT BRIDGE I (BRIDGE I).
“For institutions looking for yield in today’s low interest rates environment and amid ongoing banking disintermediation, high asset quality along with low volatility and stable cash flows over long maturities represent very solid fundamentals”.
As with BRIDGE I, this second generation fund, which is managed by the same London-based team of 11 experts, seeks to broaden the platform’s range and capture new opportunities among the vast universe of available infrastructure assets.
At the end of 2016, The BRIDGE platform comprises three funds representing an aggregate amount of close to EUR 1bn under management.
Strong momentum in commitments
The commitments from BRIDGE II’s initial investors also mark the beginning of the fund’s investment period. Three investments have already been structured and closed just before the Christmas break.
These first crystallised opportunities see the BRIDGE platform reinforce its position in the social and telecoms infrastructure, the latter via a first investment in a fibre optic PPP (Public Private Partnership) in France. A new opportunity in the renewable energy sector is being structured and should close soon, confirming BRIDGE’s focus on this sector.
In a very active year for the platform, these newly closed opportunities take the number of investments in 2016 to 10. BRIDGE I, 94% invested, is also finalising its investment period -one year ahead of schedule-.
The investment team’s strong relations with sponsors give it access to a wealth of diversified opportunities and enable it to act as lead arranger in major infrastructure projects financings.As the team investsonlyon behalf of its clients, this allows it to select high-quality assets with attractive credit margins and maximise investor protection in line with investment mandates.
Both fund vintages can act in concert through co-investments to access opportunities requiring significant investment capacity.
Photo: LinkedIn. Jimmy Ly Will Join Robeco in Miami as Head of Sales US Offshore & Latin America
Jimmy Ly, part of Pioneer Investment’s sales team in Miami, will join Robeco on January 17th. Funds Society has learned that Ly will join Robeco’s Miami office as Executive Director heading the Americas Sales Team (US Offshore and Latin America). Ly will succeed Joel Peña, who recently left the company.
According to Robeco, Jimmy Ly will be join Robeco as new head of Sales US Offshore & Latin America reporting to Javier García de Vinuesa. He will be responsible for maintaining, developing and expanding existing relationships with Robeco’s current client base and the main players in the America’s offshore region, and for acquiring and developing relationships with new clients which lead to new business opportunities.
Jimmy will continue working at Pioneer Investments until January 13th to help with the transition process to the rest of the team.
Jimmy started his career in 1998 as Mutual Funds Relationship & Product Manager at Merril Lynch in New York. He relocated to Singapore to manage and accelerate Merril Lynch´s mutual fund sales and marketing business in Asia.
In 2002 he joined Pioneer Investments as Regional Sales Manager in Los Angeles and Miami. During his last two years at Pioneer Investments he was Senior Sales Manager.
Jimmy holds and MBA International Marketing from Loyola Marymount Univesity Los Angeles and a Bachelor of Arts from the California State University in Northridge.
CC-BY-SA-2.0, FlickrPhoto: DD. The Road to Retirement is as Important as the Destination
If you use the GPS map application Waze then you know that there are usually multiple routes to a destination, and that each could provide an experience remarkably different than the others. You could follow the easiest route and make it to your location on time and without stress, but you could also get stuck in heavy traffic, because you choose “shortest route” on the app instead of “fastest route.” Or, seeking to save time, you could choose the fastest route but find yourself in a confusing maze of one-way side streets littered with potholes.
Employees participating in defined contribution retirement plans also take different routes to a common destination — retirement — and have different investment experiences along the way. A primary driver of a plan participant’s experiences is asset allocation, and the widespread adoption of target date and other default strategies used for that purpose is well documented. What is surprising, however, is that even with the proliferation of Target Date Funds (TDFs), more than three- quarters of retirement plan assets are still invested in individual core menu options, as shown below in Exhibit 1.
This has motivated some plan sponsors to enlist “white label” strategies for help. White label strategies contain one or more funds that are stripped of company and fund brands and replaced with generic asset class names or investment objectives such as “income” or “capital preservation,” among others. These solutions aim to improve core allocations (by making plan choices simpler), create more diversified portfolios and be more cost effective.
Aligning white label solutions with participant DNA
You can take a white label strategy a step further by aligning the type of investment experience the strategy will deliver with factors like participant perceptions of investing and plan demographics. In other words, you can build investment strategies that make the journey to retirement a bit more pleasant. The general characteristics, or “DNA,” of participant bases can vary greatly. Many DC plans, for example, have growing numbers of millennial workers (those born between 1980 and 2000) among their ranks. Having started their savings years with the bursting of the tech bubble followed by the global financial crisis, millennials tend to be conservative investors and concerned about losing money despite their long-term investment horizons. They have the same amount invested in cash and fixed income assets as older generations do. Plans with a significant millennial participant population should consider options that aim to limit losses in challenging market environments while still providing the growth opportunities critical for younger investors, given their long journey to retirement ahead.
By tailoring white label investment options to the characteristics and unique needs of a particular demographic or work force, the solutions can be optimized to deliver an investment experience that can drive better long-term outcomes for participants.
How can you determine what type of investment experience is most appropriate for a given population? Exhibit 2 provides some examples of factors plan sponsors can consider when evaluating the best approach for their plan. White label solutions incorporating these factors may help participants stay invested through various market conditions.
For most, there isn’t a perfect route to retirement. There are inevitable bumps and detours along the way. You can find ways to make the ride easier and less anxiety-provoking, however. Since plan demographics, behavioral beliefs and investment committee dynamics vary from plan to plan, these factors can play a role in determining the appropriate investment experience for a group of participants.
Demographic considerations such as age, employee turnover and the presence of a Defined Benefit (DB) plan are important drivers, while behavioral factors including loss aversion, engagement and professional profile are also important. Additionally, you should consider investment committee beliefs around expressing investment views and the role of a core menu. Taking all of these factors into consideration can help you optimize white label portfolios for your participants. While getting participants to their retirement destination is critically important, you can’t ignore the journey they will take to get there.
Kristen Colvin is a director of consultant relations at MFS Institutional Advisors, Inc., the institutional asset management subsidiary of MFS Investment Management® (MFS®).
CC-BY-SA-2.0, FlickrPhoto: Henry Jager. Three Main Concerns for EM in 2017: Potential Protectionist Trade Policies, Rising Rates and a Strengthening US Dollar
According to Goldman Sachs Asset Management, Donald J. Trump’s victory in the US election has fuelled three main concerns for Emerging Markets (EM): potential protectionist trade policies, rising rates and a strengthening US dollar. The surprising result created uncertainty for EM, which is reflected in equity market performance and flows since the election: the MSCI EM Index is down 5%, underperforming developed market equities by almost 7% and suffering the worst week of underperformance since the financial crisis. EM equity flows have also sharply reversed; outflows hit $7bn in the week following the election – equating to one third of YTD inflows.
The firm believes the initial market reaction is underappreciating the diversity of the EM opportunity set and the wide- ranging impacts of trade policy, rising US interest rates and a strengthening dollar on each of the 23 economies in EM. They also think investors may be overestimating the potential for campaign promises to become actual policy.
In their view, the long-term case for owning EM equities – portfolio diversification and alpha potential – remains intact.
The Possibility of Protectionism
EM has been the low-cost manufacturer to the world since the early 1990s. If the US introduces protectionist policies, most likely in the form of tariffs on imported goods, many EM economies could be negatively impacted. Crucially, the US may also experience sizeable repercussions. In fact, the introduction of tariffs – and resulting retaliatory measures from countries like China – could cause up to a -0.7% hit to US real GDP growth.
The firm is not convinced that tariffs would bring trading partners “to the negotiating table” – as is often cited using the example of Ronald Reagan’s 45% tariff on Japanese motorcycles in the 1980s – they would more likely result in trade wars and counter-protectionist acts. The Chinese government has already suggested that it is open to letting the country’s US dollar peg relax and is threatening to stop the import of key US products – actions that could further undermine growth in the US.
The firm could see aggressive government concessions for firms willing to keep manufacturing in the US and tariffs in specific industries where US manufacturing has suffered most. If the Trump administration is slightly more pragmatic than the market has assumed then investors may feel more assured that the EM growth model is still intact. They believe there could be a difference between campaign rhetoric around protectionism and actual implementation as policy makers may be constrained by economic realities such as negative consequences to US economic growth. The introduction of unilateral tariffs could have lasting negative consequences for the US and could undermine what has been widely considered part of President-elect Trump’s mandate: to improve the economic position of the US working class.
The Risk of Rising Rates
Since the election, inflation expectations and US government bond yields have increased. Rising US interest rates will mean higher funding costs for EM debt and increased pressure on EM economies. In addition, higher US rates and a waning search for yield could reduce foreign investment into EM, which has lowered funding costs and supported increased consumption and lending in EM economies. These are clearly headwinds for EM growth.
An end to the ‘low rates, low growth’ environment may not be as negative for EM as markets may be suggesting. If rising rates are the result of an improving growth backdrop in the US, it should be supportive for EM economies. Since 1980, EM equities have outperformed developed markets on average by 11% during Fed rate hike cycles, including three of the past four cycles. This scenario played out during the last Fed hike cycle between 2004 and 2006 – the Fed raised rates by 425 bps in less than two years, but it coincided with a strengthening US and global economy that supported a sustained rally in EM equities.
The debt profile of EM countries has also changed meaningfully in recent years. In 2000, the vast majority of debt issued by EM countries was in US dollars. Today, over two-thirds of all EM sovereign debt is in local currency. This typically reduces any potential instability and should make EM more resilient to rising rates. There will be greater headwinds for those countries and companies that have only been able to drive growth in recent years because of cheap, easy money in developed markets. In our view, companies with more sustainable long-term growth models can differentiate themselves in this environment.
Rising rates will highlight fragilities in EM and put pressure on companies with weaker governance practices who have attempted to take advantage of the lower rate environment in the US. However, if the cyclical recovery in earnings and return on equity that has materialized in 2016 can be supported by a better global growth backdrop, then there is reason to be constructive on EM equities going forward.
The 1980s Dollar Revival?
A further concern post-election has been the idea that we are once again in a bull market for the US dollar.
Many commentators have compared the prospects for the dollar to what was seen in the Reagan years of the 1980s, namely a multi-year, close to 100% rally. Goldman Sachs AM believes the US dollar has scope to further strengthen, but the magnitude may not mirror the 1980s because the starting points are very different. When Reagan came to power in 1981, the US was trying to pull itself out of recession, inflation had reached almost 15% and the dollar had fallen by roughly a third over the prior decade. More recently, the backdrop has been years of consistent dollar strength. In fact, following almost nine years of depreciation, EM currencies are trading at a discount of ~15% relative to fair value.
Furthermore, the primary driver of EM equity returns historically has been corporate fundamentals, not currency. In fact, over the past fifteen years, EM FX has been a slight detractor from total returns, but this has been comfortably offset by earnings growth. We see encouraging signs that EM earnings and returns on equity are picking up from cyclical lows and continue to believe that this can be the major driver of the asset class going forward, offsetting any potential currency headwinds.
Outlook and Opportunity: Stay the Course
EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar. The firm´s view is that these risks will not be as prevalent as initially feared.
Despite increased uncertainty, the key reasons for investing in EM, namely the diversification and alpha potential, are both still intact. In fact, they believe these benefits are potentially enhanced given that the market appears to be discounting the diverse, heterogeneous nature of the asset class.
Fundamentals are recovering
Fundamentals in EM are also far stronger than at the time of the 2013 Taper Tantrum when the asset class sold off following the Fed’s tapering of quantitative easing, although the market reaction has been similar.
The growth premium relative to developed markets has begun to reappear, external imbalances have been reduced, inflation remains benign and EM FX is more attractively valued than it was in 2013. Finally, we have seen the earnings and returns cycle turn positive in the past six months and earnings expectations continue to support a mid-teens earnings outlook for 2017. Historically this has been the key driver of EM outperformance.
On a forward price-to-earnings basis EM still trades at a 25% discount relative to developed markets. In absolute terms, EM appears to be returning to its long-term average, though we believe this is largely the result of significant earnings declines over the past few years, which have inflated the multiple. This is most apparent when observing a cyclically-adjusted price-to-earnings ratio, which shows EM is comfortably in the bottom quartile relative to its long-term history.
As such, while it is reasonable to argue that EM is not extremely cheap, the firm believes that long-term investors are able to access the market today at an attractive level for what could be cyclically suppressed earnings.
Selectivity is critical
EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar.
Their view is that these risks will not be as prevalent as initially feared. EM equity returns have historically been driven by corporate fundamentals rather than currency, suggesting the uptick that we have seen in earnings and ROEs suggests that there is significant growth potential for the asset class. In their view, an actively managed investment approach, focused on mitigating the structurally-impaired parts of the EM universe, is a potentially effective way to access this growth potential over the long-term.
