The European Fund and Asset Management Association (EFAMA) has published its latest quarterly statistical release which describes the trends in the European investment fund industry during the fourth quarter of 2015, and the results for the year 2015.
2015 was a record year for the European investment fund industry. Net sales of European investment funds rose to an all-time high of EUR 725 billion in 2015 and assets under management broke through to EUR 12 trillion thanks for a growth rate of 11%.
Further highlights on the developments in 2015 include:
Investment fund assets in Europe increased by 11.3% to EUR 12,581 billion. Overall, net assets of UCITS increased by 13% to EUR 8,168 billion. Net assets of AIF increased by 8.3% to EUR 4,412 billion.
Net sales of UCITS reached EUR 573 billion. Demand for UCITS reached its highest level ever in 2015.
Long-term UCITS enjoyed a record year. Long-term UCITS recorded net inflows of EUR 496 billion, compared to EUR 479 billion in 2014.
Multi-asset funds attracted the largest net inflows (EUR 236 billion) as the broad market, asset class and sector diversification offered by balanced funds attract investors.
Equity funds recorded the best year for net sales since 2000 (EUR 134 billion) as investors remained overall confident in the economic outlook for Europe and the willingness of the ECB maintain its accommodative monetary stance to support activity.
Bond funds recorded lower net sales (EUR 83 billion) compared to 2014 against the background of a reversal in bond yields and the associated uncertainty concerning the evolution of the bond market.
Money market funds saw a turnaround in net flows, ending the year with positive net inflows (EUR 77 billion) for the first time since 2008.
Net sales of AIF reached EUR 152 billion, compared to EUR 149 billion in 2014.
Bernard Delbecque, Director of Economics and Research at EFAMA, commented: “The growth of fund assets has been substantially positive across Europe, with a very few exceptions, confirming investor confidence in UCITS and AIF.”
CC-BY-SA-2.0, FlickrPhoto: Manuel. My Kingdom for a Hedge
Yet again most developed government bonds have proved their worth as a defensive hedge in the recent market turmoil. However, with yields at historically low levels and entering negative territory in a number of cases, the protective quality of such exposure in the future is surely becoming more doubtful. Recent market price action arguably suggests that market participants have increasingly abandoned bonds as material defensive positions in portfolios, in favour of ‘procyclical risk management’ which is designed to protect returns and mute any drawdowns in a generally rising market environment.
Lately, for example, we have seen a scramble to buy hedges to lower or cap increasing risk, as measured by short-term volatility. Given poor liquidity, there has also been a significant expansion in the use of proxies (designed to mimic the behaviour of traditional hedging instruments) to hedge positions, which in turn increases correlations. This can often result in ‘technical factors’ overwhelming fundamentals and contributing to bearish sentiment.
We have long been advocates of taking a broader view of the ‘defensive’ opportunity set and focusing on the qualities of structural diversification, rather than relying excessively on short-term market timing, particularly if it is reactive, to manage risk. If the laws of diminishing defensiveness increasingly apply to government bonds, what might take their place? This is a difficult question because bonds have typically paid investors a return and were generally reliably inversely correlated with growth assets.
Sadly, this golden era is largely in the past. Hedging is becoming more costly and less reliable. The behaviour of more complex defensive assets, when their qualities are needed, is more difficult to predict than more conventional hedges. Volatility-protection strategies are a good example of this, as they can show an alarming tendency to diverge from the underlying asset.
Despite its impressive recent performance, even a more conventional hedge, such as gold, pays no income and can be costly in terms of drawdown.
So what other defensive options are there? We would argue that currencies have long provided a fertile defensive opportunity set. Typically the currencies of credit or nations, such as Switzerland and Japan, have offered safe havens (although the yen lost this status under prime minister Shinzo Abe and governor of the Bank of Japan Haruhiko Kuroda), and periodically the US dollar by dint of its ‘world currency’ status. Naturally, as the depreciation of the Norwegian krone in the recent past reminds us, cyclical context and valuation remain important considerations, even if longer-term structural fundamentals are robust.
Taking short positions against currencies with poor or deteriorating macroeconomic fundamentals greatly expands the opportunity set. The Australian dollar was one of the main beneficiaries of China’s boom and as a consequence was driven up to unsustainable levels. Selling that currency forward proved to be an excellent hedge against general emerging market weakness, as it declined by 37.7% from a peak in November 2011 to its recent trough. More generally, the principle of shorting growth assets to create defensive ones applies more broadly than currencies.
In short, we need to consider the broadest range of defensive assets in order to sustain structural diversification in portfolios at a time when the traditional defensive ‘armoury’ is becoming challenged. True, this opportunity set is in some cases difficult to access and requires additional technical skills and competence, but we believe the alternative of placing undue reliance on market timing and the standard risk models is misguided.
Philip Saunders is Co-Head of Multi-Asset at Investec.
CC-BY-SA-2.0, FlickrPhoto: Chan Chen. Abenomics in Crisis
Japan’s economy contracted at an annualized rate of -1.4% in the fourth quarter. That was much worse than the Bloomberg consensus was looking for. Declining industrial production and weak household spending had pointed at renewed contraction risk. Most Japan watchers were probably focusing on the country’s composite PMI index, which improved to 52.3 in Q4 the best quarter in nearly two years.
Japan has already seen three recessions since 2009. In fact, in six years starting in 2010, Japan’s GDP has contracted in 11 out of 24 quarters(!). Amazingly the economy has still not recovered from the ill-advised Consumption Tax hike in April of 2014. Private consumption declined again in Q4 and is now 5.4% below the pre-tax hike peak.
The decline in consumer spending has been more than twice as large as the consumption contraction during in the 2008/09 financial market crisis. That’s astonishing for such the relatively small tax increase and for an economy essentially on full employment. Residential investment contracted mildly last quarter and inventories shaved 0.5% off the quarterly growth rate. The only bright spot was a 5.7% annualized increase in business investment.
Where is government?
I am surprised we are not seeing more fiscal spending in Japan. The government had promised to offset the Consumption Tax increase with fiscal stimulus, which never materialized. The average contribution to quarterly GDP growth after the second quarter of 2014 was a mere 0.2%.
The weak growth trend in Japan is another serious blow to the effectiveness of monetary policy as a growth stimulus tool. The Bank of Japan has been buying about $70 billion worth of bonds and ETFs every month for the past three years with very little growth or inflation to show for. Now the BOJ is trying negative interest rates, a tool that has not been tested and whose side effects are not yet fully understood.
Japan is trapped in a low interest rate world. What the economy needs is a significantly weaker currency to boost inflation, corporate profits and wages. Yet, with global interest rates unwilling to rise, the BOJ evidently felt compelled to widen the interest rate differential by further lowering Japanese rates. So far we haven’t seen any lasting effect on the yen.
Forecast impact.
Similar to the US, Japan will struggle to exceed last year’s growth rate in 2016. The sharp decline at the end of last year has lowered the starting point for 2016 such that even the 1.3% average quarterly growth rate we are forecasting will only add up to 0.5% growth for the full year. Like in the US, looking at the Q4/Q43 growth rate will be more informative about the growth momentum. Here we expect a modest improvement from the 0.7% last quarter to 1.2% at the end of this year.
Abenomics is in danger of failing. Structural reforms have done little to raise Japan’s actual growth rate. The damage from last year consumption tax still dominates the household sector, reflecting the lack of income growth, which could have offset the modest tax hike. Absent faster rate hikes in the US there is little the Bank of Japan can do to stimulate growth and the focus is shifting back to fiscal policy.
Much of that is likely to be timed for the June Upper House elections where the ruling LDP enjoys a big majority. Elections for the Lower House where the cushion is much thinner aren’t required until 2018. So Prime Minister Abe has two more years to turn the economy around. More stimulative fiscal policy and greater efforts to weaken the yen as the year progresses should eventually boost growth and help Japan avoid a fourth recession since 2009.
Markus Schomer is a Managing Director and Chief Economist of PineBridge Investments.
Photo: Kenichi Amaki, potfolio manager at Matthews Asia.. Matthews Asia’s Kenichi Amaki to join Miami Summit
Kenichi Amaki, portfolio manager at Matthews Asia is set to join the Second Edition of the Funds Selector Summit to be held on 28th and 29th of April in Miami.
Amaki manages the firm’s Japan Strategy and co-manages the Asia Small Companies and China Small Companies Strategies. Now that the time has come to re-engage with Japan, he will share his perspective on the relevance of key governance changes that investors may have overlooked with all eyes on “Abenomics.” Kenichi will also explain how Japan has transformed from a “value” market to a “growth” market, and how the Matthews Japan strategy provides exposure to interesting investment opportunities across the market-cap spectrum.
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.
Prior joining in 2008 as a research analyst, he was an investment officer for a family trust based in Monaco, researching investment opportunities primarily in Japan. From 2001 to 2004, he worked on the International Pension Fund Team at Nomura Asset Management in Tokyo.
Kenichi received a BA in Law from Keio University in Japan and an MBA from the University of California, Berkeley, and is fluent in Japanese.
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: Tony Hisgett. Investigating the Market Correction
After any dramatic market sell-off there is invariably a flurry of after-the-event rationalisation, an exercise in ‘Who done it?’. Many believe the trigger of the current sell-off was pulled by the People’s Bank of China in December when it moved to measure the value of the renminbi against a basket of currencies rather than the dollar, which made it easier to devalue the currency by circa 1.4%.
As was the case last August, this was interpreted as further evidence of an increasing risk of a hard landing for the Chinese economy, and the inevitability of a substantial devaluation with its attendant deflationary implications. Huge though they are, Chinese foreign exchange reserves were apparently at risk of being overwhelmed by burgeoning capital outflows.
The US Federal Reserve Board (Fed) also made it on to the ‘who done it’ list. The risk of the Fed raising interest rates, in the teeth of increasingly alarming evidence of weakness in the US manufacturing sector, and the conflict in statements from its senior board governors, suggested a determination to fight inflationary, rather than deflationary, forces. Other suspects include plummeting oil prices, (which have been causing sovereign wealth fund asset liquidation and forcing banks to write off loans), deteriorating liquidity, pro-cyclical risk management and high frequency trading. In short, markets are full of convexity (interest rate risk) and prone to more violent, but episodic shocks.
Where now?
We continue to expect a weak, but positive, global growth outcome in 2016, believing recession risks in the key developed economies to be exaggerated.
In our view, oil price weakness is very much a supply problem rather than an indicator of collapsing demand, which continues to rise and, in any event, it has more than likely over-shot on the downside. Although disruptive in the shorter term, weak commodity and especially oil prices should, ultimately, be significant positive drivers for global growth. In contrast to manufacturing, the much larger consumer sector is in reasonably good shape across the developed world and the shift in the balance of demand will continue to move in the latter’s favour.
Despite the market angst, our view is that China’s economy is slowing down in a relatively measured manner and the capital outflow scare is wildly exaggerated. This is not to deny the transitional challenges it faces and that there are downside risks. If the Fed does raise rates in line with the higher estimates, it will be against a background of a strengthening US economy. For now, despite the downgrades, forecast earnings in the US, Europe and Japan remain positive.
Liquidity, the key challenge
Liquidity remains the key challenge. Tighter US monetary conditions and the anticipation of further tightening has caused emerging market liquidity to swing from abundance in the heyday of quantitative easing to scarcity now. This has effectively offset looser monetary policy in Europe and Japan. Paradoxically, global monetary conditions appear to be much more restrictive than the low level of nominal and real interest rates would seem to imply. Contrary to expectations, the Bank of Japan have effectively expanded their quantitative easing programme further, with the introduction of negative interest rates and the European Central Bank has intimated that it could do the same. A recognition of this on the part of the Fed in 2016 could well prove decisive in reducing the risk of more negative outcomes.
The return of Ro-Ro
We, therefore, believe the period ahead is likely to prove to be one of uncertainty and transition, not unlike the ‘risk-on, risk-off’ period we saw between 2010 and mid- 2012. Portfolio resilience will remain a particularly important theme, which requires selectivity in terms of the choice of defensive assets. Among these long-dated US Treasuries, the yen and the euro are our current preferences. Interestingly the dollar, which admirably fulfilled that role over the last three years, may be losing some of its lustre against other developed market currencies. Arguably, the US dollar has moved far further than likely real rate divergence really justifies.
In our view, equities, especially after the recent market weakness, are not trading at excessive valuations. Risk premia relative to bonds are high, if, as we suspect, bond yields are going to remain low on a structural basis. Patience may still be required with regards to assessing value asset classes that are repricing, such as high yield bonds and emerging market currencies and debt. However, selective opportunities are arising where risk premia have risen to levels that should prove to be attractive over the medium to longer term.
Finding bottom-up equity opportunities
From a bottom-up equity perspective, as has been the case for a while, it should still prove to be a challenging environment for cyclical stocks, with investors likely to continue to be prepared to pay up for ‘quality’. There is ‘value’ in the out-of-favour financial, materials and energy sectors, but earnings dynamics remain resolutely negative. Established technology stocks are one of the few subsectors that could be described as squaring the circle between quality and value and, as such, are a favoured area.
In a more volatile environment there is a general assumption that the large index constituent stocks should be preferred. However, the dynamics of indexation may have reached a tipping point, because our bottom-up steers are favouring the merely large cap and mid cap stock territories and ‘active shares’ in our equity allocations are high. We believe volatility will continue throughout 2016, which will increase the need for portfolio resilience. Investing in quality stocks should help to navigate this environment.
Philip Saunders is Co-Head of Multi-Asset at Investe.
CC-BY-SA-2.0, FlickrPhoto: Takadanobaba Kurazawa. The Japanese Equity Outlook After the Nasty New Year Start
An outlook for any major asset market likely involves QE, so a comment on such is firstly warranted. Clearly, it is wrong to state definitively that QE works or not in any given country, as one can only make an educated guess as to whether events would have been better or not, in sum, compared to a counter-factual estimate of what would have occurred without QE. In that sense, it seems QE has done far more good than harm for participating countries, especially when one recalls the dark days of 2009 and the various European crises.
More recently, QE (in either balance sheet holdings or new purchases forms) has helped counter one of the greatest deflationary factors in world history, which has occurred outside the control of central banks: shale drilling. Major technological inventions often cause boom and deflationary bust cycles, but have rarely, if ever, have affected the world’s most important commodity in such substantial way. The effect on the oil price did not occur immediately, but when it did, the 80% decline, also partly caused by geopolitically-driven factors, was astonishing. This is another reason to ignore those who state that QE failed to create inflation in Japan or elsewhere, as shale drilling was an uncontrollable external factor, and inflation would likely have been much lower without QE. Indeed, a global depression was a likely counterfactual scenario. One must also realize that deflation characterizes only commodity prices and quality-adjusted technology goods, whereas the most important asset class in the world, real estate, is quite significantly inflating, greatly due to QE’s effects.
In the current equity environment, one of the most important aspects of QE is its effect on corporate profits. Of course, forex rates are affected by QE, so the size of one country’s QE is important in relation to other countries’ QE, and the forex rate significantly influences corporate profits. In this regard, Japan has clearly benefited more than the West in recent years due to its massive QE program. QE also lowers interest costs, which usually increases capital expenditure and personal consumption, at least compared to what would have occurred without QE, which contribute to corporate earnings, as well.
With QE, the Yen reversed its overvaluation and confidence in general increased greatly. Asset prices, including equities, increased, partly due to increased valuation metrics, but mostly due to the rise in underlying earnings. Indeed, earnings growth expectations in Japan have remained high, while such in the US and Europe (not to mention emerging markets) have steadily declined. This is the key reason why Japanese equities outperformed global markets in USD terms in 2015 and will likely do so again in 2016, as the earnings expectation divergence trend seems to be accelerating, so it is important to understand all the reasons for corporate earnings growth in Japan.
Fortunately, Japan has relatively minor commodity-producing exposure, so its corporate profits have performed much better than European or American corporate profits during the commodity bust of the last eighteen months, as mining and energy multinationals comprised a significant portion of corporate profits in the West. Meanwhile, the effects of low energy prices have pummeled energy-based economic zones in the US, as have low agriculture prices in its farm-belt.
Similarly, parts of Europe have been hurt by lower energy prices and the region has been hit by the effect of mutual economic sanctions with Russia. Corporate profits in Japan have also benefited from lower commodity input costs, and perhaps as much as any country, Japanese consumers have benefited from lower import prices of such (although partly offset by a weaker Yen). On the converse, recent media reports and analyst commentaries are suggesting the ECB’s QE program has failed to lift profits, although it seems clear profits would have been much worse without QE and that much of the profit problem was commodity price-related and, thus, out of the ECB’s control.
Importantly, yet completely separate from QE or other global fundamental factors, Japan has structurally improved its corporate governance. As my earlier writings have indicated, this improvement began ten years ago, but only became widely apparent in the last few years, and was augmented even further by Abenomics (along with the beneficial political stability that he has brought). The effect on corporate profits has been very strong, and expectations by the market for continued profit maximization has also boosted intermediate-term earnings estimates, which are extremely important for equity valuations. As corporate governance improvement has become mainstream, we expect this trend to continue developing this year, as there is yet much more to accomplish.
In any market, corporate profits should be the main driver of equity prices as long as valuations are fair, and on this front, as commodity prices remain low and corporate governance remains strong, Japan’s earnings and earnings expectations should outperform those in the West. Since equity valuations are also more attractive than in the West, these two factors strongly suggest that Japanese equities should outperform global equities in the next six months. Japan does have high operational gearing due to lower profit margins than the West, so if there is a global recession, the equity outlook vs. global markets is not as strong, but still relatively firm, in our view.
John Vail is Nikko AM’s Head of Global Macro Strategy and Asset Allocation.
CC-BY-SA-2.0, FlickrPhoto: Paul Wilkinson
. Monaco to Examine Draft Law on Multi Family Offices
The national council of Monaco, the Principality’s parliament, is to examine a draft law on multi family offices’ activity in Monaco.
It points out that if single family offices have been run for years in Monaco, multi family offices which have started to flourish in recent years in the Principality remain unregulated so far in the country.
The further law will then provide a regulatory framework to the business.
Moreover, it seeks to promote Monaco as a centre of excellence for family offices, pursuing therefore Monaco’s government plan that aims to make the country more attractive to ultra-high-net-worth individuals and entrepreneurs.
Among compliance obligations enshrined in the draft law, multi family offices conducting financial transactions will have to be granted a license by Monaco’s state minister and will be subject to regulatory approval by Monaco’s financial authority, the Commission de contrôle des activités financières (CCAF).
Also multi family offices in Monaco will have to be structured in Monegasque public limited companies (Société anonyme monégasque).
Michael Roberge, MFS’ CIO and co-CEO, was recently in Miami where he met with more than 120 investors in two events organized by Jose Corena, Managing Director for the aforementioned management company, together with Paul Britto, Regional Director, and Natalia Rodriguez, Internal Wholesaler.
Roberge, who has been working with the company for the past 20 years, began his review of the global macroeconomic and business landscape by emphasizing the huge disconnect between what markets are discounting and the realities of the economy. The current environment is much more favorable than a year ago, because, according to MFS’ co-CEO, market downturns have led to more attractive entry prices. “It is undeniable that there are risks. A year ago the markets were calm and everyone was buying, even though all asset classes were overvalued,” he pointed out.
But the fear factor currently extending through the market is not so much a concern over valuations, but is more focused on the possibility of a recession on the horizon. For Roberge, even if the market discount rate reflects a scenario of great pessimism, the United States will not fall into recession in 2016.
“Consumption accounts for seventy percent of US GDP, and its health is enviable. The unemployment rate is declining and heading towards 4%; real wages are rising by about 2-2.5%; and the price of energy has fallen considerably in the last 18 months — which for the consumer’s disposable income is comparable to a tax cut” he claimed.
“US manufacturing, which accounts for about 10% of the overall economy, is underperforming the consumer-oriented sectors of the US economy,” he said. “This is due to both a stronger dollar, which hurts exports, as well as a clean-up of accumulated inventories during the past year. Once these inventories have been depleted, it is likely that the manufacturing sector will not continue to be a drag on GDP growth.”
Finally, Roberge said that the public sector, which in recent years has either been neutral or has had a negative contribution, will contribute between 0.6% and 0.7% to GDP growth in 2016 through a combination of tax cuts and increased spending. “In short, the US economy is in good shape. Doing the math, it seems highly unlikely that the US goes into recession unless an exogenous factor which significantly affects consumer confidence takes place,” he explained to attendees. The factors which could affect consumption are gasoline prices and interest rates, neither of which appears to be going up this year.
Global Growth
With respect to global growth, a stronger US dollar helps Europe, as it favors exporters, and ultimately its manufacturing sector. The MFS executive believes this will last throughout 2016. He also believes the Old Continent is benefiting greatly from low energy prices. For its part, Japan is not likely to contribute in any great measure to global growth this year. Finally, emerging markets are expected to be the part of the world that will continue to deteriorate in 2016. “Continued pressure from China means they will grow, but less than last year. If we look at the world as a whole, I think there is a very low probability of falling into recession. It is the market which is mistaken and not the fundamentals of the economy,” he said.
With all of this on the table, MFS’ advice for investors is to consider equities over high quality bonds. The reason, he said, is very simple. The average dividend yield currently stands at 2.4%, while the yield on the benchmark 10-year Treasury is 2%. So unless the economy falls into recession, “which is something we do not believe will happen, it is better to have an emphasis on equities, given the current lack of profitability in the bond market.”
Limited Opportunities in Fixed Income
Among the few opportunities currently offered by fixed income securities, Roberge mentioned the high yield bond market, where the average yield is around 9%. “It will probably beat equities this year,” therefore, he believes it’s a good idea to include this asset in a portfolio. “We believe that the market is being a lot more pessimistic about high yield market conditions than our own vision of what will really happen. The key factors here are volatility and liquidity, two factors which are of great concern, but the market has already discounted both of those risks. This year, high yield should perform much better than US Treasuries and, in our opinion, also much better than stocks.”
MFS’ co-CEO also opts for dollar-denominated emerging market debt, and explains that “during the last five or six years, we have seen a flattening in the debt curve of developed countries, due to the slowdown in growth and the monetary policies of central banks, and we believe that the next debt cycle will favor emerging markets. We prefer debt issued in dollars because local currencies are still exposed to risk from China, to the price risk of raw materials, and to what the Fed does throughout the year,” he added.
The market is expecting the Fed to raise interest rates again in March, but MFS does not believe that will be the case. Roberge ventures that the board headed by Janet Yellen will go easy. “It is likely that this time it may be the Fed which moves the market and not vice versa. It will be difficult for the board to raise interest rates since the major central banks in the developed world continue easing monetary policy due to global deflationary pressures. Therefore, we do not see the Fed raising rates four times this year, and have positioned our portfolios accordingly,” he said.
In his analysis of Latin American countries, MFS’ co-CEO explained that there is dollar-denominated Mexican debt in their portfolios, and Argentine debt has recently been added as a result of the political changes brought about by recent elections. With respect to Venezuela, given political circumstances and the price of oil, the Boston-based firm believes that at some point it will have to restructure its debt because its current levels are unsustainable.
“Brazil has a lot of challenges,” he said. “The economy is stagnant, inflation is high, and the central bank has little room for maneuver; added to all this is the political turmoil as a result of corruption exposed during the last year. These factors make it almost impossible to implement the reforms which the country needs.”
CC-BY-SA-2.0, FlickrPhoto: Keith Ney, Fixed Income Fund Manager at Carmignac. Keith Ney, Fund Manager at Carmignac, Will Analyze The Challenges of The Fixed Income Markets at The Funds Selector Summit in Miami
After a secular bull market lasting 30 years, fixed income is now facing a challenging phase. Following a long period of monetary policies that have kept interest rates low in the United States, the Federal Reserve appears to have embarked on a normalization process. By contrast, European and Japanese rates seem to have reached historic lows due to the support of interventions by central banks. Additionally a combination of increased quantitative easing and lower trading liquidity has exacerbated the volatility of this asset class.
Keith Ney, Fixed Income Fund Manager at Carmignac, will present Carmignac Portfolio Global Bond’s investment allocation under the title “Alpha generation in an uncertain fixed income environment” at the Second Edition of the Funds Selector Summit to be held on 28th and 29th of April, where he will explain how they have been able to achieve performance by investing across sovereign, credit, and currency markets,
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.
Keith Ney, who joined Carmignac Gestion in 2005, has been Fund Manager for Carmignac Securite since 2013. Prior to that, he worked as an analyst for Lawndale Capital Management from 1999 to 2005. Keith holds a Bachelor of Science in Business Administration from the University of California at Berkeley, and is a CFA Charter holder since 2002.
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.
Rahul Chadha, CIO at Mirae Asset Global Investments.. mirae
Jung Ho Rhee, CEO at Mirae Asset Global Investments, explains in this interview with Funds Society all the details about its success in Asia and its international growth in markets as Europe, Asia, Latin America, Australia and USA, where the firm looks to expand also in the offshore market.
Mirae Asset Global Investments was established in 1997 at the height of the Asian economic and currency crisis…How has this timing marked the nature of the firm?
It may be counter intuitive, the financial crisis created tremendous opportunities for Mirae Asset. Mirae Asset Global Investments was established in 1997 during which regulation in Korea was relaxed following the Asian financial crisis. Our firm started off as the first asset management company in Korea when mutual funds were largely unheard of by the Korean population. With years of vigorous investor education, our firm created a market for our products. In other words, Mirae Asset transformed the asset management industry in Korea. Now, we are the largest asset management company in Korea by AUM. Our firm’s ambition is not only to establish a presence in Korea, but also provide global investors best-in-class financial products. To that, our firm set up overseas office in Hong Kong in 2003 which managed regional and global funds to be sold to Korean and global investors. Since then, we have set up offices in India and Brazil to bolster our onshore fund offerings. In 2007, we established our UK office to boost our SICAV fund distribution capability throughout Europe. As of end October 2015, Mirae Asset Global Investments Group’s AUM amounted to USD 77.6 billion. All I can say is that our firm is resilient and has grown exponentially amid adverse macro condition.
Since then, what are the main challenges in managing Asian assets? How has your investment philosophy evolved?
The main challenge in managing Asian assets is that Asia is a unique and diverse region, whose constituent countries and sectors all possess different attributes, are all at different levels of development and maturity, and are driven by different cultural trends and consumer habits. In order to be successful, asset managers need to possess deep understanding of and insights into the economies and culture of the region. Mirae Asset is a company with an Asian heritage. We have a strong team of investment professionals focusing on the Asian markets and seven offices across Asia-Pacific. Our investment philosophy is focused on identifying long-term winners that possess sustainable competitiveness, and our investment process is driven by our on-the-ground research process. This allows us to construct compact, high conviction portfolios that shun “benchmark approaches” and achieve real alpha for our investors.
Regarding your international expansion, it started in 2003. Beyond Asia, you have presence in UK, Colombia, Brazil, USA and Canada but, where else are you selling your funds?
We are selling our Luxembourg-domiciled SICAV funds into Asia, Europe and Latin America. Our India office offers local domiciled funds for Indian investors. In the US, we are selling our local domiciled funds to US investors, but we are thinking about expanding our SICAV offerings in the US through wholesale channels to non-US citizens.
What are going to be your next steps in your international expansion?
Our expansion plan is on multi-pronged approach. We will continue to grow assets through expanding geographically, strengthening our relationships with clients and investment consultants, as well as widening our product offering. Recently, we have hired Marko Tutavac as head of consultant relationships based in Hong Kong, and Chris Wildman as head of Australia sales in Sydney. As our firm had gained ground in wholesale distribution in Europe and Asia and now wanted to further grow its institutional business, which was reflected in the new hires.
Tutavac is tasked with cultivating the firm’s relationship with global investment consultants and ratings agencies in Asia. He was hired from Fidelity Worldwide Investment, where he was associate director for institutional business for Asia ex-Japan. Wildman is responsible for driving the distribution of Mirae Asset’s fund particularly in the institutional marketplace. He was hired from AMP Capital, where most recently he was an institutional business executive. One of our recent product development initiatives is collaborating with Daiwa Asset Management to co-manage the Mirae Asset Next Asia Pacific Equity fund. The fund is domiciled in Luxembourg and Korea and we are now planning to domicile in Japan to cater for global investors’ appetite on Asia Pacific including Japan equities. We received a substantial amount of requests and interest regarding the launch of this fund from European investors. We will continue to explore expansion opportunities in different directions.
What products do you use for your international growth?
Our Ucits fund range has seen AUM triple in past two years to $2 billion, largely driven by flows from institutions and wholesale clients in Europe. We have seen significant interest in our SICAV funds globally. In particular, Mirae Asset Asia Great Consumer Equity Fund and Mirae Asset Asia Sector Leader Equity Fund have consistently outperformed the benchmark and gained traction among our clients. As I mentioned earlier, we collaborate with Daiwa Asset Management to co-manage the Mirae Asset Next Asia Pacific Equity fund. The fund is domiciled in Luxembourg and Korea and we are now planning to domicile in Japan to cater for global investors’ appetite on Asia Pacific including Japan equities.
Your AUM reach over $70 bn…What are your objectives for the coming years?
Our objective in the coming year is to continue our distribution efforts in SICAV funds across Europe, Asia and Latin America. As I mentioned earlier, we have recently hired our head of Australia sales, we will step up our distribution efforts in Australia.
Why did you choose a “team-based approach” model instead of betting on star fund managers or great individual talents?
We believe that a team-based approach, where a team of talented investment professionals work collaboratively, each focusing on and being accountable for their area of expertise is the best way to achieve long-term outperformance. This is borne out by our own experience and by independent academic research. Reliance on star investment managers may work for some asset management companies but we believe that it limits the scope, breadth and depth of investment ideas and is susceptible to personal bias. Furthermore, a structure dominated by a few key persons increases risks, whereas we believe that a team approach minimizes risks, including key man risks.
Risk analysis and factors like valuations, liquidity or governance are key in your investment philosophy, which one of these three factors is the biggest threat in Asia nowadays?
All of these issues are important for investors to consider. However, investors should be aware that Asia has seen rapid growth in the total investible universe of companies while continued efforts at improving market access, such as the recent Shanghai Hong Kong Stock Connect Scheme, have contributed to marked upgrades in liquidity. In addition, several Asian governments and regulators are making continued efforts to implement improvements to corporate governance. All of these are positive measures, which will contribute to Asia’s ongoing evolution as an accessible, efficient and transparent market for investors looking for stable and diversified investment opportunities. The advantage that Mirae Asset Global Investments offers is that we are a company with a unique heritage and presence in Asia – this means that we have a deep understanding of the Asian markets. Our on-the-ground research presence by our research analysts in Asia means that we are able to make first hand checks on issues related to liquidity and corporate governance before we make investments, and keep performing ongoing checks on all stocks in our portfolios. In particular, as signatories of United Nations Principles for Responsible Investment, Mirae Asset Global Investments has a firm responsibility to ensure that issues of corporate governance are fully taken into consideration in our investment decisions.
China is in historical key moment, in the midst of a transition to a consumer economy. How do you value the difficulty and implications of this process to China? And for the rest of Asia? Do you think it is necessary to be focused when investing in China?
China is in the midst of an unprecedented effort to correct structural imbalances in its economy, and the success of this great transition will depend on how effectively the central government implements reforms. The China market saw some intense periods of volatility in 2015 as investor sentiment swung from optimism to pessimism, and while we expect there to be some volatility in 2016, what is certain is that the country is likely to avoid a hard landing. There could be some near-term pain as the reforms take time to play out and growth will likely remain low but we do not believe the current situation is as severe as in the global financial crisis of 2008 or the Asian financial crisis of 1997.
What is important to consider is that in low growth macroeconomic environments such as this, the importance of bottom-up growth picking comes to the fore. There are many sectors in China that have strong prospects for growth, and there are many high quality businesses with sustainable competitive advantages, strong balance sheets and capable management teams that are reasonably valued. Therefore, for skilled asset managers such as Mirae Asset Global Investments who rely on fundamental analysis and bottom-up stock picking to achieve alpha, this market presents many opportunities. The case is the same for the wider Asian region. Some countries are seeing lower rates of growth as ageing demographics and highly leveraged households exert negative pressure. However, emerging markets experts such as Mirae Asset Global Investments do not consider all emerging markets countries as one homogenous pack – there are many countries in the Asian region where we see rich opportunity and which may actually benefit from the current situation. This includes India, which will strongly benefit from the collapse of commodity prices.
What can we expect from Emerging Markets, after the last developments in China?
Top experts from Mirae Asset think it is important not to be blinded by macroeconomic pictures. Asia still provides ample investment opportunities. There has been a lot of volatility and things have happened so fast. After recent market correction, valuations of Asian equities become more attractive. This environment offers good opportunities to exploit. A bottom-up approach is key and we like selected stocks in consumer, technology and healthcare sectors.
Is it the moment to invest again in these “less favoured” markets, against other developed markets?
As mentioned above, China needs to correct some distortions in its economy and there will be a lot of deleveraging that needs to be performed. The “Old China” sectors which traditionally fueled China’s growth in the past will see some near-term pain. Growth in the economy will undoubtedly slow. However, for an US$11 trillion economy, growth at 3 to 4% overall is still reasonable and higher than some developed markets. Furthermore, there are many sectors in what we call the “New China” economy that offers excellent growth opportunity for investors. This includes investment themes such as the continued growth in IT services, healthcare services and underpenetrated financial sectors such as insurance. This is also true for other emerging markets. Commodity producers will no doubt suffer a downturn at least in the short run, but several emerging market countries will benefit from cheaper energy ad commodity prices, while countries such as Philippines still benefit from strong demographics and economic fundamentals. We still believe that Asia will drive the world’s economic growth in decades to come. Hence, it is important for investors to consider making an allocation to Asia in their portfolios.
What about alternative investments? Are you trying to boost this business globally? What could this provide to a Real Estate or Private Equity investor in Europe or America?
Mirae Asset Global Investments is considered to be a pioneer in regards to alternative investments in Asia. We were the first company to launch private equity funds in Korea, and introduced the first real estate fund in Korea as well. Today, we have an extensive portfolio of private equity and real estate holdings and manage various forms of alternative products spanning the full spectrum of asset classes. We also offer a diverse range of Asian hedge fund products that invest in more plain vanilla financial instruments such as equities, fixed income and derivatives. These aim to deliver absolute return type returns. We want to be a global business partner to all of our current and prospective clients – we recognize that our investors have a diverse range of unique investment needs, and we always aim to cater to those needs by driving innovation and diversity in our product line-up.
