Pixabay CC0 Public DomainFoto: sasint. Harvard University's Endowment to Lay Off Over 100 People
Harvard Management Company (HMC), in charge of Harvard University’s endowment and related financial assets since 1974, announced on Wednesday the addition of Rick Slocum as chief investment officer, effective in March 2017, and three managing directors to its investment team. Each will report to chief executive officer N.P. Narvekar, who was appointed president and chief executive officer of HMC back in September and assumed his role on December 5, 2016.
“I am pleased to welcome four senior investors to HMC who bring substantial investment expertise and deep insight into building and working in a generalist investment model and partnership culture. I have known these individuals both personally and professionally for the majority of my career and I value their insights and perspectives,” said Narvekar. “I am confident they will be a great addition to the talented and experienced investment team here at HMC.”
The new hires will play a key role in helping HMC transition from an asset class-specialization approach to a generalist investment model and help support a strategy of further deepening HMC’s relationships with a select group of external managers, which will translate into an overhaul of HMC that could include the lay off of roughly half of their 230 employees.
Harvard University’s endowment is the largest academic endowment in the world.
CC-BY-SA-2.0, FlickrFoto: frankieleon
. Financière de la Cité Launched a Brexit Themed Fund
French boutique Financière de la Cité has launched the FDC Brexit fund, with the aim of benefiting from the new market environment created by the imminent departure of the United Kingdom from the European Union.
The fund managed by Bruno Demontrond, which was launched on December 30th, 2016 and invests primarily in British, Swiss and Scandinavian stocks, is quoted in euros and aims to outperform the Euro Stoxx 600 index for at least the next five years. BNP Paribas acts as custodian.
The management team believes that the devaluation of the pound will facilitate a rebalancing in the UK economy that will offer new flexibility to Britain, at a time when the euro zone economy is vulnerable to deflationary policies, as well as disagreements over the management of the single currency. FDC Brexit intends to take advantage of this environment with a selection of industrial companies essentially focused on the United Kingdom and Switzerland, European countries in which economic policy and monetary policy are in the same hands.
According to Financière de la Cité, FDC Brexit will offer, in addition to exposure to Europe, through a diversified portfolio of solid companies, a theme of renationalisation of economies and trade, as well as ordinary dividends in popular currencies.
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: Vladimir Kud
. Northern Trust Strengthens South Florida Wealth Management Team
Northern Trust has promoted Rick Fernandez to Managing Director of one of its Wealth Advisory teams in its Miami office, and has hired Xavier Martinez as Senior Portfolio Manager within that team.
Fernandez, who joined Northern Trust in 2002, has responsibility for overseeing a team of professionals who serve high net worth clients and families with comprehensive wealth management services incorporating investment management, trust, and banking solutions.
Martinez will be directly reporting to Fernandez. He most recently served as Chief Investment Officer for Coconut Grove Bank, and immediately prior to that spent nine years with Fiduciary Trust International, where he managed high net worth client portfolios for more than nine years as Managing Director of Investments.
Alexander Adams, Northern Trust Senior Market Executive for Miami-Dade County, said, “These moves greatly strengthen our team, as Xavier brings to us deep expertise and experience in the precise type of clients we serve, while Rick’s extensive experience meeting our clients’ complex needs makes him extremely qualified to lead our talented team of professionals.”
Fernandez earned his MBA from the Darden Graduate School of Business at the University of Virginia, and his BBA in Finance from Florida International University. He is a Certified Private Wealth Advisor (CPWA). He is a Director of Make-A-Wish Southern Florida.
Martinez received a Bachelor of Science degree in Civil Engineering from Tulane University where he graduated Magna Cum Laude, and earned a Juris Doctor degree with honors from Duke University School of Law, where he was honored as a member of the Order of the Coif. He is a Chartered Financial Analyst (CFA). He is the President of the College Assistance Program, Inc. and the Secretary of the Board of Advisors for Belen Jesuit Preparatory.
Northern Trust’s Miami office is located at 600 Brickell Avenue, Miami, Florida.
CC-BY-SA-2.0, FlickrPhoto: Chad McDonald
. Snowden Lane Partners Welcomes Former Wells Fargo International Advisory Team to San Diego Office
Snowden Lane Partners, an independent, advisor-owned, wealth advisory firm dedicated to providing client-focused advice in a values-driven culture, announced that David Lautz and Francisco Malfavon, both internationally-focused advisors from Wells Fargo, have joined the firm’s San Diego office.
Lautz and Malfavon, each a Partner and Director, are forming the LEM Group and bring $125 million in client assets to Snowden Lane, increasing Snowden Lane’s total client assets to over $3 billion.
“David and Francisco bring extensive knowledge of Latin Americans’ financial planning needs, the kind that can only be had by their personal experience in Latin America and from several decades of working in the industry,” said Alison Murray Burkett, Partner, Managing Director and Head of Enterprise Development. “We look forward to their future contributions to making Snowden Lane a significant player in this global wealth management category.”
“The San Diego office continues to grow and thrive given increased demand for financial advisory services among international clients,” said Greg Franks, Managing Partner and Snowden Lane’s President. “This highly-skilled, globally-minded and well-regarded team will be a significant contributor to the Snowden Lane franchise, complementing the services we provide U.S. resident clients from our other offices, and we’re thrilled to bring David and Francisco on board.”
Added Snowden Lane Managing Partner and the firm’s CEO, Rob Mooney: “This is our first team from Wells Fargo and they represent our commitment to serving high-quality non-resident clients, and to leverage our team’s extensive international experience. As we’ve said before, global banks have left a gap in the cross-border business and talent like this puts Snowden Lane in an optimal position to fill that gap.”
Lautz has been a financial advisor for more than two decades specializing almost exclusively in working with Latin America-based clients. He previously held senior-level positions at Prudential Financial and Fidelity Investments. He worked at Wells Fargo Advisors where he most recently served as a vice president.
Malfavon was an assistant vice president at Wells Fargo Advisors International Group. He began his career at Wells Fargo Bank in 2003 where he served as a regional private banker developing international high net worth client relationships and subsequently became a financial advisor. His key focus areas are wealth and asset protection, trusts and estate planning, and asset management.
“We’re excited to join such a dynamic and universally qualified team to capture the opportunity that exists in the Latin American market,” said Lautz. “We intend to help Snowden Lane to continue to be a stand-out player in this important 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.
BNY Mellon, a global leader in investment management and investment services, announced that Jeff McCarthy has joined the company in the newly-created role of Chief Executive Officer, Exchange Traded Funds, and will report to Frank LaSalla, Chief Executive Officer of BNY Mellon’s Global Structured Products and Alternative Investment Services business.
“Jeff brings extensive experience in global exchange traded funds platforms and trading markets,” said LaSalla. “His deep knowledge and track record of results in developing and delivering on trade revenue expansion strategies for ETF’s with a strong emphasis on delivering strong partnership solutions will play a critical role for BNY Mellon in serving a market that is likely to at least double in size over the next 10 years.”
In his role as CEO, Exchange Traded Funds, McCarthy will lead and execute the long-term strategy to drive growth in BNY Mellon’s ETF business. As part of this mandate, he will play a critical role in the successful enterprise-wide delivery of comprehensive ETF solutions to the marketplace, and work to further develop long-lasting partnerships for BNY Mellon in the ETF industry.
McCarthy joins from NASDAQ, where he was Vice President and Head of Exchange Traded Product Listings & Trading, having led the strategy and business execution of the Nasdaq Exchange Traded Product Listing (ETP) and Trading Market. Prior to his role with NASDAQ, McCarthy was Head of Global ETF Products and Co-Head of ETF Trading & Investor Services in Asia Pacific for Citigroup. Earlier in his career, McCarthy was Global ETF Product Head for Brown Brothers Harriman & Co., where he created the firm’s global ETF service model.
As an acknowledged thought leader on a wide range of ETF issues, including global trends, product construction, distribution and market development, McCarthy is frequently quoted by media on ETF topics and speaks regularly at industry conferences. He holds a BA in History and Business Studies from Providence College.
