CC-BY-SA-2.0, FlickrPhoto: Scott Hudson. Risk Budget: Spend It Wisely
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” – Sam Ewing (baseball player)
According to Aneet Chachra and Steve Cain from Henderson, discussing inflation far too often devolves into a cage match between the “deflation forever” team versus the “hyper-inflation is coming” camp. The former has gained the upper hand with ECB President Mario Draghi pushing through a comprehensive easing package while Google searches for “helicopter money” are surging. However, based on recent economic data and the stabilization in commodities, a moderate pickup in inflation is more likely ahead. Meanwhile, the US Treasury Inflation-Protected Securities (TIPS) market appears to systematically underestimate future inflation due to structural reasons. Thus, bond markets and the Federal Reserve could be “behind the curve” necessitating two or more rate hikes in 2016 with a knock-on effect on medium-term yields. This is not a call for persistent, surging inflation, but rather a view that fixed income markets are overly optimistic in disregarding the risks of higher inflation.
February headline consumer price inflation (CPI) in the US was just +1.0% year-over-year (YoY), however core CPI (which excludes food & energy) rose +2.3% YoY, its highest reading since 2008. This wide differential was mainly due to lower commodity prices, especially crude oil which fell -32% YoY through February 2016. However, the March 2016 decline is much smaller at -20% YoY, and the futures curve projects that oil’s year-over-year change will turn positive during the fourth quarter of 2016.
Another deflationary force has been the rising US dollar which gained 20% over the last two years, reducing the cost of imported goods. But the year-over-year change for the dollar index just turned negative for the first time since mid-2014. This will gradually make imports more expensive for US consumers, although with a typical lag of 6-12 months.
Importantly, lower unemployment is finally driving higher wages with companies passing on some of the post-crisis profit margin expansion to employees. Fourteen US states have raised their minimum wage in 2016, with California (the most populous state) poised to further increase its minimum from $10/hour to $15/hour over the next five years. Labour markets have recovered not just in the US and the UK, but the unemployment rate in Japan is below pre-crisis levels. European unemployment remains elevated but has been improving since 2013.
Given all the above factors are widely known – why do TIPS still only forecast annual inflation of about 1.6% over the next decade? Perhaps TIPS prices are biased. There is an argument that TIPS should be expensive relative to nominal bonds as they are one of the few ways to directly hedge inflation risk.
But the available evidence since TIPS were launched in 1997 shows the exact opposite. Even with fairly benign inflation over the last 20 years, realized 5-year and 10-year inflation has averaged above TIPS-implied forecasts at issuance. The average gap has been about 0.35% per year ie. TIPS buyers have generally outperformed nominal bondholders.
Despite their valuable inflation protection qualities, why have TIPS historically been under-priced? Two reasons stand out. The first is their liquidity is poor relative to regular US bonds – traders joke the acronym really stands for “Totally Illiquid Pieces of Stuff”. Secondly, inflation expectations are often highly correlated to equity market moves particularly during large sell-offs. Hence TIPS do not provide the diversification to risk portfolios that other bonds do.
The generally negative correlation of nominal treasuries offer significant hedging benefits and are likely expensive to reflect this “crisis alpha” value – especially in the era of Risk Parity funds. Thus nominal treasuries are overvalued, TIPS are undervalued, and both distortions artificially compress the implied inflation rate forecast. An alternative measure that uses nominal 10-year yields minus trailing 12-month core CPI shows that real US 10-year rates are currently near 30-year lows of -0.5% per annum.
An interesting historical precedent is the 1985-1988 period when oil prices collapsed from above $30/barrel in late 1985 to below $10/barrel in 1986 pushing inflation lower. However, starting in 1987 (see black line below) a gradual rebound in oil prices drove a spike in CPI. This led to several Fed rate hikes and a significant selloff in US treasuries, with bond yields rising from 7% to above 9% within six months.
“Although we are unlikely to see a bond selloff quite as severe as 1987 given sluggish world growth and low yields globally, fixed income markets appear to be ruling out even a modest spike in rates. We should also not underestimate the highly stimulatory effects of cheap energy on importing nations where offsetting shale oil industries do not overwhelm them – eg. the Eurozone and Japan. Remarkably, Fed funds futures are only pricing in one rate hike this year, while US 10-year yields have fallen about 30bps in the last five months despite a concurrent 40bps rise in core CPI. Stronger inflation data and consequently a rise in bond yields appear to be an underappreciated risk,” they conclude.
Source: Bloomberg, as at 30 March for all data, unless otherwise stated.
Asia ex Japan equities are set to benefit from the second wave of the “flying geese” economic model, according to global asset manager PineBridge Investments.
In its most recent whitepaper: Why it’s Time Time to Flock to Asian Equities, PineBridge Investments explains that as developing markets move up the value-chain, long-term investment themes across the region are emerging, including increasing demand for premium goods and services in sectors including healthcare, media, tourism and telecommunications.
Wilfred Son Keng Po, Portfolio Manager, Asia ex Japan Equities at PineBridge Investments, says: “The dynamic we’re now seeing is that ambitious and well-managed companies in Asia are being buoyed by progressive population trends, increased wealth, better education and social welfare, and supportive government policies for innovation and entrepreneurship. We believe this new trend offers equity investors significant potential in the years to come.”
In its original incarnation, the “flying geese” economic model saw a cascade of technology transfer from Japan to the “Asian tigers”: Hong Kong, Singapore, South Korea, and Taiwan. But PineBridge explains that a second iteration is now in operation that includes China, Southeast Asia and India.
“Both China and India are vast markets that are becoming manufacturing and innovation power houses, supported by Asean nations. These Southeast Asian economies provide both the natural resources and value-added manufacturing products and services to drive domestic demand as well as to boost manufacturing sectors for exports,” adds Elizabeth Soon, Portfolio Manager, Asia ex Japan Equities at PineBridge Investments.
“We believe that while economic growth in Asia is impacted by US interest rates, commodity prices, and the pace of structural reforms, the progression of developing economies along the value-chain will continue be the main driver for powerful, long-running investment themes across several industries, despite the economic headwinds.”
These investment themes include:
Domestic demand will continue to expand, helping the consumer retail sector, especially in China where the government is re-directing the country’s economic growth from an investment and export platform to one based on household consumption.
Southeast Asia’s expanding middle class will also provide a strong market for branded consumer goods. This rapidly growing demographic segment is spending money on mobile phones, internet access, and online shopping. Some of the fastest growing sectors have been in technology, media, both outbound and inbound tourism and telecommunications.
Meanwhile, aging populations in countries such as Singapore, Taiwan and South Korea mean that health care – including hospitals, pharmaceuticals, and technology will be another opportunity for investors.
PineBridge says that for investors in Asia ex Japan equities to succeed, sectoral trends such as domestic consumption should be considered a main driver of growth but not looked at in isolation. Detailed analysis of company performance, management, balance sheets and potential, is needed as broad-brush investment style choices such as size, growth, value, and momentum are unlikely to be rewarded due to continued market volatility.
“Investors can use the volatility caused by macro factors to look for durable and high-quality companies within consumer sectors that are both driving the region’s growth and supplying demand for premium products and services across the flock of flying geese,” adds Mr. Son Keng Po.
Amundi continues to develop its ETF, Indexing and Smart Beta, which are major components of the Group’s strategy. In this context, Fannie Wurtz is appointed Managing Director of the ETF, Indexing and Smart Beta business line under the supervision of Valérie Baudson, member of Amundi’s Executive Committee.
Fannie Wurtz is Managing Director of ETF & Indexing Sales at Amundi. Prior to joining Amundi in February 2012, she was responsible for ETF Institutional Sales and Amundi ETF business development with French & Swiss institutional clients at CA Cheuvreux from 2008.
In addition, the Board of Directors of CPR Asset Management has appointed Amundi’s Valerie Baudson as CEO of the company. CPR Asset Management is a subsidiary of Amundi which manages, in particular, thematic equities with close to €38bn in assets under management.
The CPR Asset Management Board of Directors has also promoted Emmanuelle Court and Arnaud Faller, respectively, to Deputy CEO heading business development and Deputy CEO heading investments. Nadine Lamotte has been confirmed as Chief Operating Officer responsible for Administration and Finance. The above named make up the Management Committee which also includes Gilles Cutaya, Head of Marketing and Communication.
CC-BY-SA-2.0, FlickrEli Dominitz, CEO of Q6 Cyber - Courtesy photo. The Financial Sector Remains a Key Target for Criminal Masterminds of Cyberattacks
The Financial Sector Remains Key Target for Criminal Masterminds of Cyberattacks As the number, frequency and severity of cyberattacks continues to escalate, the financial sector remains a key target for criminals: it’s where the money is. “The global network of cyber criminals, the digital underground, is becoming more sophisticated in going after institutions with large amounts of cash and wealthy clients,” says security expert Eli Dominiz. “If you are in wealth management, the question is no longer if your firm will be targeted, but when.”
With smarter technology tools and techniques, the criminal underground is actively searching for vulnerabilities in your system 24 hours a day, he says. “Even if you think your security is strong, in looking for a hole to get in, criminals only have to get it right one time. You have to get it right 100 percent of the time.”
Mr. Dominiz, CEO of Q6 Cyber, is focused on helping companies fight cybercrime by taking a pro-active, rather than reactive approach to data protection. As a featured speaker at the 2016 Florida International Bankers Association (FIBA) Wealth Management Forum, May 5-6 in Miami, his presentation, “How the Criminal Underground is Targeting the Financial Sector and our Brokerage and Retirement Accounts,” will give forum attendees a closer look into data protection challenges facing the industry today.
“The criminal underground is business oriented, and interested in a high rate of return for their efforts,” he points out. “The significant amount of money concentrated in the wealth management sector presents an attractive high yield for low risk opportunity for cybercriminals.”
Within the atmosphere of ongoing attacks and hacktivism, Mr. Dominiz urges industry professionals to shift their focus in being proactive by deploying the best IT protections, employing threat intelligence, implementing industry best practice procedures and rigorously training employees.
“Cybersecurity is about risk management,” says Mr.Dominiz. “To reduce risk, you have to evaluate three things: your technology, your policies/procedures, and your people. A mistake in any of these areas can open the door wide to an attack. User behavior is important. Humans are the weakest link in the security chain.”
Insider threat is a big component of cybercrime, with 30-40 percent of all security breaches attributable to insider actions, whether malicious or unintentional. The 2014 attack at JPMorgan, a stunning incident that placed 83 million individuals and small businesses at risk, was traced back to a single employee log-in which extended the consequences beyond financial losses. The Panama Papers breech and the Ashley Madison collapse demonstrate the scale and far-reaching impact of a single security fail. “One attack can destroy reputations and shut down an entire company, with reverberations throughout the employee and customer network,” says Mr. Dominiz. “An attack on your firm is going to happen, and when it does, you need to be ready with a response plan. Once you have been attacked, it is too late to start planning ways to contain the damage and protect customers.”
Criminals operating within the digital underground use a multitude of diversionary tactics that can send up warning flags to an alert company. Denial of Service attacks, for instance, are designed to keep a firm’s IT department scrambling while the criminals invade the network.
“Stay aware of what is happening in your industry,” Mr. Dominiz advises. “The criminal underground shares information, and so should you. Forums such as the 2016 FIBA Wealth ManagementForum are increasingly important for heightening awareness and for educating the industry on criminal activities, while providing a platform for both informal and formal intelligence sharing. When companies collaborate there is a much better chance of defeating crime. FIBA facilitates the exchange of best practices and helps develop formal mechanisms to increase collaboration.”
FIBA’s Wealth Management Forum, a well-developed tradition that brings together the leading practitioners, solution providers and other industry specialists, convenes May 5-6 at the Ritz Carlton Hotel in Coconut Grove. To register, or for more details visit http://www.fibawealthmanagement.com/ or contact Belkis Lopez at blopez@fiba.net or via phone at 305.539.3745.
CC-BY-SA-2.0, FlickrPhoto: Jason Kotik, senior investment manager, North American Equities at Aberdeen Asset Management . Jason Kotik will talk US Small Caps at the Fund Selector Summit in Miami
Jason Kotik, senior investment manager, North American Equities at Aberdeen Asset Management is set to discuss smaller companies investing when he takes part in the upcoming Fund Selector Summit Miami 2016 on the 28th and 29th of April.
As a manager, Aberdeen has been harnessing big ideas in the North American smaller company space for years. The companies may be small, but they believe they have the potential to pack a punch for long-term investors, especially those willing to dig deep.
The conference, aimed at leading funds selectors and investors from the US-Offshore business, will be held at the Ritz-Carlton Key Biscayne. The event-a joint venture between Open Door Media, owner of InvestmentEurope, and Fund Society- will provide an opportunity to hear the view of several managers on the current state of the industry.
Kotik, Aberdeen senior investment manager and member of Aberdeen’s North American Equity Team, will speak about how to find such opportunities, including reasons why the current period offers opportunity to invest in small-cap equities.
Kotik’s responisbilities include co-management of client portfolios at Aberdeen, which he joined in 2007 following the acquisition of Nationwide Financial Services. Previously, he worked at Allied Investment Advisors and T. Rowe Price. He graduated from the University of Delaware and earned an MBA from Johns Hopkins University. He is a CFA charterholder.
You can find all the information about the Fund Selector Miami Summit 2016, aimed at leading fund selectors and investors from the US-Offshore business, through this link.
CC-BY-SA-2.0, FlickrPhoto: Mark Strozier. Be on the Right Side of Change
Companies are having a much harder time producing earnings growth. Those that are positioned on the right side of change should be better placed to increase profits—and deliver investment returns—in a growth-constrained world.
Corporate profit margins today are much higher than their average since the early 1950s (Display). These profitability levels are very high, even when taking into account that the mix of US economic activity has shifted toward more capital-light business models (e.g., services and technology), which inherently generate higher margins.
But not every company or industry is facing the same squeeze on earnings growth. In particular, changes triggered by technology, regulation or structural shifts in specific markets are excellent sources of growth potential—even in an earnings-constrained world. Finding companies that are on the right side of changes like these is one of several ways that active investors can capture excess returns over long time horizons.
Using Technology Right
Technological change isn’t only about the Internet or social networks. Consider the retail sector, where new technology and information systems allow companies to take advantage of massive amounts of available data on customer behavior. Companies that recognize this potential and invest accordingly are using these tools to deepen relationships with customers—and are capable of doing better than rivals who haven’t.
Manufacturing is another case in point. Companies that are at the vanguard of manufacturing innovation have greater flexibility in managing their businesses, which provides a powerful way to boost profitability.
For example, when we researched Nike in 2015, we discovered innovations that looked likely to significantly improve the company’s earnings growth potential. Nike may be adding sophisticated chips to some of its sneakers; this will allow it to deepen its relationship with customers by offering personalized deals that bypass retail outlets, bringing more profit to the shoemaker. It’s also using a new automated manufacturing technology called Flyknit that lets customers customize their orders with minimal labor, allowing Nike to shift its production closer to consumers—in the US and around the world—and save costs on shipping, duties and tariffs. Our research suggests that innovations like these are transforming Nike’s business model and could potentially trigger a leap in its profitability.
Why the wide gap between our view and the street’s? It’s because most analysts aren’t evaluating how new technologies and processes will filter down to the bottom line over several years; the potential payoff is a couple of years beyond their horizon. In a short-term world, building thoughtful, independent models like these can make the difference in choosing stocks that stand out from the crowd.
The Innovation Factor
It’s not only giants like Nike that turn innovation into investment opportunities. It’s becoming easier every year for people to change the world because traditional barriers to innovation—such as capital and time—are falling dramatically.
Today, new ideas can be transformed into businesses for only a fraction of the prior cost thanks to continued exponential declines in the cost of computing. For example, the required costs of a typical tech start-up have fallen by roughly 95% since the dot-com era of the 1990s (Display, left). And the disruptive potential is enormous, as seen in the shift in advertising from print newspapers toward the digital world, which has had a profound impact on profits for both traditional media companies like the New York Times and new media leaders like Google (Display, right). For investors, the challenge is to get an early grasp on how unfolding changes will transform the profitability outlook for a wide range of companies.
This often requires an understanding of broad themes that transcend traditional industries and sectors. For example, increasing environmental awareness is spurring global efforts to address challenges that include carbon emissions, clean water, food availability and sanitation. Policy support and technological progress are making the shift to decarbonized energy inevitable, in our view. And the costs of renewable energy such as solar or lithium-ion batteries for electric cars are falling dramatically (Display). We believe that many investors have underestimated the disruptive potential of exponential cost improvements to drive faster and broader adoption.
Changes like these are opening up big investing opportunities. Over the next 15 years, we estimate that $4 trillion will be invested in new solar and wind capacity. Industries like these are highly fragmented, and offer strong growth opportunities for winners.
But identifying investment targets requires a substantial research effort in order to understand the technological and business dynamics of many public companies operating in nascent industries. By searching for businesses that are on the right side of changes like these, we believe investors can find companies that should be well positioned to grow their earnings—even when broader business conditions are stagnant.
Frank Caruso is CIO US Growth Equities at AB and Daniel C. Roarty is CIO Global Growth.
Photo: DanNguyen, Flickr, Creative Commons. Nordea Asset Management Expands its Active U.S. Fixed Income Offering with U.S Core Plus Bond Fund
Nordea Asset Management (NAM) announces that it has launched on April 4, 2016 the Nordea 1 – US Core Plus Bond Fund, provides investors active, diversified investment across the different sectors of the U.S. bond market. The investment objective of the Fund is to maximise total return over a full market cycle through income generation and price appreciation.
DoubleLine Capital LP (DoubleLine) is the sub-manager of the Fund. With this new offering, NAM broadens its partnership with DoubleLine, which as the sub-manager has provided investment services to the Nordea 1 – US Total Return Fund since its launch in 2012.
While the core of the portfolio consists of Investment-Grade U.S. debt instruments (covered by the Barclays Capital U.S. Aggregate Index), the “Plus” in the Fund name indicates that the investment universe expands beyond the traditional benchmark sectors to areas such as High Yield, USD-denominated Emerging Market Debt and non-Agency mortgage-backed securities.
“The design and flexibility of the Fund allows it to take advantage of areas of the market which DoubleLine believes offer attractive risk-adjusted return opportunities,” says Christophe Girondel, Global Head of Institutional and Wholesale Distribution. “We believe that the Fund forms an important addition to our current range of U.S. Fixed Income solutions, one of the major asset classes in any well diversified portfolio,” he adds.
The launch fully leverages Nordea’s multi-boutique approach and capabilities. This new fund complements the existing U.S. Fixed Income range of the Luxembourg-domiciled Nordea 1 SICAV, currently comprising a Low Duration US High Yield Bond fund, a US Corporate Bond fund, a US High Yield Bond fund, a North American High Yield Bond fund and a US Total Return Bond fund.
DoubleLine is an independent, employee-owned money management firm based in Los Angeles, California, U.S.A. Led by Chief Executive Officer and Chief Investment Officer Jeffrey Gundlach, the firm is widely recognised for its expertise and strong track record in active fixed income management. DoubleLine has been managing a similar strategy to the Nordea 1-US Core Plus Bond Fund since 2010.
DoubleLine’s investment philosophy is to build portfolios designed to outperform under a range of market scenarios by shunning away from unidirectional bets. The Fund achieves this through top-down active management of exposure to specific market segments combined with bottom-up security selection.
CC-BY-SA-2.0, FlickrPhoto: (stephan)
. A Glimpse into North Korea
During a recent visit to Asia, I took the opportunity to join a tour to the notorious demilitarized zone that separates North and South Korea. The “DMZ” as it is more commonly referred to, is 4 kilometers wide and has served as a buffer zone between the two states since the Korean War Armistice Agreement of 1953.
Lacking a peace treaty to bring the Korean War to an official conclusion, the countries remain technically at war, which makes the plight of the Kaesong Industrial Complex—a jointly run industrial park—all the more intriguing for visitors.
The complex, located just north of the DMZ, has manufactured goods for export into the South since 2004. According to global news agencies, there are 124 South Korean companies operating within this area and our tour guide informed us that some 50,000+ workers from the North can expect to earn approximately US$100 per month for their services.
If these figures are accurate, these employees earn only 6% of the average household disposable income in the South. However, upon closer inspection, this facility is less about profit margins than it is a step toward re-unification; a concept that was repeatedly referred to throughout our tour.
Despite this positivity, my visit unfortunately coincided with an indefinite closure of the Kaesong Industrial Complex—a response by the South to the launching of a North Korean long-range rocket. While this is not the first time the complex has had to close, it should be noted that past shut-downs had been initiated by the North. Whether we will see future reconciliation on this front remains open to debate.
While we don’t know if the lights are out for good or not at Kaesong, my experience was that commerce is not completely absent from the region. As just one of 42 paying visitors on my tour, I saw several other bus-loads of sightseers at multiple stops. Furthermore, whether it was in the Joint Security Area, the Third Infiltration Tunnel or the Dora Observatory, we found gift shops were never all that far away. This offered me the opportunity to buy key rings, figurines and even soju—a distilled rice liquor—that reputedly came from the North.
From my various vantage points (and despite technically setting foot inside the secretive state), it is impossible to tell what life is truly like in North Korea, north of the DMZ. Whether North Korea will ever see projects such as Kaesong as a pathway to economic development remains to be seen. But I would like to think that one day I’ll be able to return to this fascinating region in an investment capacity.
Colin Dishington, CA, CFA, is Research Analyst at Matthews Asia.
CC-BY-SA-2.0, FlickrPhoto: Matthias Born, senior portfolio manager, European Equities at Allianz Global Investors. Allianz GI’s Matthias Born is attending the Fund Selector Summit
Matthias Born, senior portfolio manager, European Equities at Allianz Global Investors will be discussing structural growth investing at the upcoming Fund Selector Summit Miami 2016, taking place 28-29 April.
Born, who is lead portfolio manager on the Allianz Europe Equity Growth Select fund, will outline how a high conviction strategy can focus on the most attractive structural growth ideas. His fund has been designed to benefit from bottom-up stock selection, through which weights on individual stocks are based on conviction levels across growth, quality and valuation criteria.
The conference, aimed at leading funds selectors and investors from the US-Offshore business, will be held at the Ritz-Carlton Key Biscayne. The event-a joint venture between Open Door Media, owner of InvestmentEurope, and Fund Society- will provide an opportunity to hear the view of several managers on the current state of the industry.
Born was appointed co-leader of the Investment Style Team Growth in 2009. Since then he has been lead portfolio manager of the funds and mandates of the strategy Euroland Equity Growth and Continental Europe Growth.
Before joining Allianz GI he worked for the Middle Market Group (Global Corporate Finance) at Dresdner Bank. In 2001, he graduated in Business Administration from the University of Würzburg with a master’s degree.
You can find all the information about the Fund Selector Miami Summit 2016, aimed at leading fund selectors and investors from the US-Offshore business, through this link.
Photo: Mike Gibb, co-head Global Wealth Management Distribution at Legg Mason Global Asset Management. Mike Gibb, co-head Global Wealth Management Distribution at Legg Mason Global Asset Management, will join the Fund Selector Summit Miami
Mike Gibb, equity specialist, co-head Global Wealth Management Distribution at Legg Mason Global Asset Management will join the upcoming Funds Society Fund Selector Summit Miami 2016, which takes place on the 28th and 29th of April.
The conference, aimed at leading funds selectors and investors from the US-Offshore business, will be held at the Ritz-Carlton Key Biscayne. The event-a joint venture between Open Door Media, owner of InvestmentEurope, and Fund Society- will provide an opportunity to hear the view of several managers on the current state of the industry.
Focusing on European long/short equity opportunities, Gibb, who is also an equity product specialist of Martin Currie, a Legg Mason affiliate, will look to outline how combining bottom up stockpicking with a macro overlay can generate alpha and deliver absolute returns in variable market conditions.
Before his previous role managing relationship and wealth mangement opportunities, Gibb was a client services director covering an institutional client base across regions. He has also been a hedge fund salesman with responsibility for investors in Europe and Asia. Before joining Martin Currie in 2005, Gibb was at Credit Suisse First Boston as a director and equity saleman for five years.
He was also an equity research salesman at Salomon Smith Barney for four years and before that a Far East equities fund manager for Gartmore and Scottish Amicable in 1990-1995. He is an associate of the UK Society of Investment Professionals (Asip) and a member of the CFA Society of the UK and has attained the Fundamentals of Alternative Investments certificate from CAIA . He graduated with an MA (Hons) in economic science from The University of Aberdeen.
