CC-BY-SA-2.0, FlickrPhoto: Pictures of Money. Don't Fight Today's Markets With Tomorrow's Money
Crude oil has now fallen below $28 per barrel. Not so many months ago, no one could have predicted — or even imagined — that this commodity would drop from over $120 per barrel so far and so fast. And with this deep decline in the price of oil, the US dollar is rising and global trade is slowing.
It is still my strong contention that cheap oil means more spending and growth. But that isn’t happening yet.
So where do I stand now? Here are my new points:
The majority of the world’s economies seem to be faring a bit better. A number of the eurozone’s peripheral countries have shown signs of turnaround. And in the United States, we haven’t seen the excesses that are typically associated with the risk of recession.
Looking at history, recessions haven’t occurred because commodities are cheap — usually it’s the other way around. Many of the world’s consumers and producers ultimately stand to benefit from low energy costs.
This is not the same situation we faced in 2008, when we were on the brink of the global financial crisis. The global banking system is exposed to oil and China now, but not nearly in the proportions we saw with exposures to risky US mortgage debt then.
I do think the smoke will eventually clear on the business cycle. However, until we get more data to indicate whether the slowdown in manufacturing, the weakness in exports and the stutter step in earnings will persist, fear could rule the markets for riskier assets.
In this unsettled environment, with so many unknowns, there’s a risk of jumping into the global equity markets too early. An investor with new money may want to consider a more conservative asset mix to ride out this storm.
CC-BY-SA-2.0, FlickrPhotos: Pablo Blazquez. Funds Society celebrated its 3rd Anniversary party in Miami and presented its objectives for 2016
On January 14th, Funds Society celebrated its 3rd Anniversary party in Miami. The rain did not deter over 160 professionals from leading Asset and Wealth Management entities in Miami and New York that attended.
Some friends and readers from Mexico, Barcelona and Madrid, who did not want to miss the occasion, also joined us for the event. During the party, photos of which can be seen in the attached video, Funds Society presented a corporate video with last year’s main achievements and its objectives for 2016.
The latter includes the launch of a print magazine for the Spanish market following the success achieved by its US Offshore edition, and creating a directory for the Asset and Wealth Management sector, segmented by major regions in which Funds Society has a presence: US Offshore, Spain, and Latin America.
In 2016 Funds Society will hold its second edition of the Fund Selectors Summit in Miami during the month of April, to be followed in October by an event aimed at fund selectors in New York.
CC-BY-SA-2.0, FlickrPhoto: Carlos ZGZ
. Driving Mr. Andy
Uber, the U.S. ride-sharing company, has big plans for China, and it says the number of Uber trips there is almost as large as it is in the U.S. While Uber has raised more than US$1 billion for its standalone Chinese unit, its mainland market share is dwarfed by that of a local competitor, DiDi. But on a recent trip to China, I was less interested in the numbers than in discovering why some Chinese prefer to drive for the foreign underdog rather than the dominant, homegrown ride-hailing firm.
Same App, Same Credit Card
I was impressed to discover that I could use the U.S. app to request an Uber ride in Shanghai, and bill it to my American credit card already on file. For my first trip, Mr. Xie pulled up in a new Toyota, bemused to see that his passenger was a foreigner. He’d only been driving for Uber for a few days, but was enthusiastic. “My main business is P2P (peer-to-peer) lending, and all of the work is at night, taking prospective clients to dinner and drinking. So I have lots of free time during the day,” he told me.
Mr. Xie was keen to chat about his private lending business. So keen, in fact, that he missed the exit to get us into the tunnel under the Huangpu River, adding 20 minutes to my journey as we were swallowed up in traffic.
He said he hoped that driving for Uber would be a great way to meet new borrowers, and that attracted him more than the pay. “I started driving for DiDi, but the customers were not really the kind I’d want to lend to. Uber riders are richer, so I’m sticking with Uber,” he added. Mr. Xie noted that lots of foreigners also use Uber, but he didn’t think they would end up borrowing from him.
Rich and Bored
While the original Uber app worked well in Shanghai, all of the communications were in Chinese, which might be an obstacle for all but the most adventurous foreigner. But a few days after returning to the U.S., I received a message from Uber: “We’re thrilled to bring you a language-specific service, ENGLISH, to make it a bit easier for expats and global travelers to get around the city [of Shanghai].” According to the message, you just open the app and enter the referral code “zaishanghai” (meaning “in Shanghai”) and then “unlock the English option.”
My second driver in Shanghai rolled up in a brand new Mercedes sports coupe. Mr. Zhang looked like he was about 23 years old, and I couldn’t help but start the conversation by asking why a young guy with a very expensive car was driving for Uber. “Well, my dad has a successful business, so I haven’t had to get a job . . . and I’m bored. One of my friends told me I could meet interesting people driving for Uber,” he said.
I asked how that was working out. “Well, today is my first day,” he replied. “But it is pretty cool to drive a foreigner.” I’d be surprised if he lasted more than a couple of days.
My Own Boss
Mr. Wang was more experienced, having driven his Buick for Uber for a few months. Prior to that, he drove for a company, but he quit for the freedom to set his own schedule. Initially, Mr. Wang drove for DiDi, although he said, “I make more money with Uber, and the customers are better.” He thought many riders were switching to Uber from DiDi, because it is easier to get a car. “DiDi drivers can see the customer’s destination before they pick him up, so often they will reject a fare they don’t like, while with Uber, we don’t know until the customer gets into our car,” he said.
Not a Cop
When I climbed into Mr. Zhou’s Toyota Camry, he said he was thrilled to discover that his next passenger was a foreigner. “This business isn’t really legal, and other drivers have told me that cops are ordering rides and then fining drivers 10,000 renmimbi (RMB or US$1,570). And when I saw you, I knew you couldn’t be a cop!”
Mr. Zhou told me that his son, who is studying in the U.S., bought the car for him specifically so he could drive for Uber. I asked if he was retired. “Ha, no. But I work for a state-owned company, which is almost like being retired! I’ve got nothing to do all day, so I just leave the office and drive to make extra cash!”
Better than Driving a Truck
Mr. Luo quit his job driving a truck to join the ride-sharing economy. He told me he started with DiDi, but said Uber passengers are “better behaved,” something I heard frequently from drivers who couldn’t really explain the difference.
He said the money was okay, taking home RMB700 (US$110) for a 12-hour day of driving.
Better than Driving a Taxi
Mr. Yu gave up a long career as a taxi driver to strike out on his own. He also started with DiDi, but switched to Uber because “DiDi charged me too many fees. Either is much better than a taxi. More relaxing as there is no boss, and I can take a break anytime. And Uber passengers are much better than taxi passengers,” he said. He estimated that he took home about RMB7,000 (US$1,099) a month driving for Uber.
The Long Haul
Overall, the Shanghai Uber experience was pretty good. Two drivers never appeared—I watched as one drove by without stopping, possibly assuming that a foreigner couldn’t have been the customer—and in both cases I was automatically charged a cancellation fee of RMB10 (US$1.60). But when I filed a complaint through the app, those fees were immediately refunded.
The fares were ridiculously low, presumably due to large subsidies from Uber as they try to grab market share from DiDi. That will be just one of the many challenges the American firm faces in the future, along with an uncertain regulatory environment, and the issue of retaining drivers after the novelty wears off.
Andy Rothman is Investment Strategist at Matthews Asia.
CC-BY-SA-2.0, FlickrPhoto: Achim Hepp
. LVMH, Catterton and Groupe Arnault Partner to Create a Global Consumer-Focused Private Equity Firm
Catterton, the leading consumer-focused private equity firm, LVMH, the world leader in high-quality products, and Groupe Arnault, the family holding company of Bernard Arnault, announced today that they have entered into an agreement to create L Catterton. The new partnership will combine Catterton’s existing North American and Latin American private equity operations with LVMH and Groupe Arnault’s existing European and Asian private equity and real estate operations, currently conducted under the L Capital and L Real Estate franchises. Under the terms of this agreement, L Catterton will be 60% owned by the partners of L Catterton and 40% jointly owned by LVMH and Groupe Arnault.
L Catterton will become the largest global consumer-focused investment firm with six distinct and complementary fund strategies focusing on consumer buyout and growth investments across North America, Europe, Asia and Latin America, in addition to prime commercial real estate globally. L Catterton, a firm with a 27-year history and more than 120 investment and operating professionals in 17 offices across five continents, expects to grow its assets under management to more than $12 billion after various successor funds are closed.
L Catterton’s headquarters will be in Greenwich, CT and London, with regional offices across Europe, Asia and Latin America and will be led by Global Co-CEOs J. Michael Chu and Scott A. Dahnke, currently Managing Partners at Catterton. Each fund will continue to be managed by its own dedicated team in their respective locations across Europe, Asia and the Americas.
“We are delighted to partner with Catterton and its team,” said Mr. Arnault, Chairman and CEO of LVMH and Groupe Arnault. ” Having been investors in Catterton’s funds since 1998, we have participated in its growth and success, evidenced by its strong track record and its distinctive culture. I would also like especially to thank Daniel Piette whose entrepreneurship and leadership have been instrumental in creating and developing the L Capital franchise over the past 15 years. I very much look forward to continuing to collaborate with him at LVMH.”
Mr. Chu said, “We look forward to benefitting from the strength and global reach of the team at L Capital and L Real Estate as we continue to seek out investment opportunities with significant growth potential.”
“The globalization of media and technology, combined with increasingly permeable geographic borders, is driving rapid consumer growth on an unprecedented global scale,” said Mr. Dahnke. The transaction is expected to close early in 2016, subject to customary regulatory and certain investor approvals.
CC-BY-SA-2.0, FlickrPhoto: pedronchi
. Lazard Launches US Fundamental Alternative Fund
Lazard Asset Management announced the launch of the Lazard US Fundamental Alternative Fund. The Fund, which is UCITS compliant, is a liquid and diversified portfolio primarily focused on US securities, with the flexibility to invest across the whole market cap spectrum. Utilising bottom-up stock selection, the Fund seeks to take long positions in equities of companies believed to have strong and/ or improving financial productivity and attractive valuations, and short positions in companies with deteriorating fundamentals, unattractive valuations, or other qualities warranting a short position.
The Fund will be managed in New York by portfolio managers Dmitri Batsev and Jerry Liu, who leverage a dedicated and highly experienced US equity investment team. The team, which is made up of 23 investment professionals, has an average of 18 years of investment experience and 12 years at LAM.
“In our view it is financial productivity that ultimately drives the valuation of companies.” said Dmitri Batsev, portfolio manager of the Lazard US Fundamental Alternative Fund. “We believe that forward-looking fundamental analysis is key to valuing these opportunities, both when stocks rise and when stocks fall.”
Jerry Liu said: “Expanding the US opportunity set to both longs and shorts allows us to create a differentiated portfolio of investments, seeking to provide investors with strong down-market protection, up-market participation, and lower volatility than the overall market.”
CC-BY-SA-2.0, FlickrPhoto: Astiken, FLickr, Creative Commons. Niall Quinn: New Global Head of Institutional Business at Pictet AM
Leading asset manager Pictet Asset Management is pleased to announce the appointment of Niall Quinn as the Global Head of Institutional Business (excluding Japan), based in London, at the end of February 2016. He replaces Christoph Lanter, who retires after 17 years with Pictet Asset Management.
Niall has over twenty years’ experience in the industry, most recently as Managing Director of Eaton Vance Management International, responsible for all their operations outside North America. His focus was institutional business development.
Niall is an Irish national with a BA in Economics and Philosophy from Trinity College, Dublin.
Laurent Ramsey, Managing Partner of the Pictet Group and Chief Executive of Pictet Asset Management, said, “Niall is a great hire for us and we are delighted that he is joining the team. His appointment marks a step up in our institutional business effort globally.”
The Pictet Group
Founded in 1805 in Geneva, the Pictet Group is one of the premier independent asset and wealth management specialists in Europe, with EUR 381 billion in assets under management and custody at 30th September 2015. The Pictet Group is owned and managed by seven partners with principles of ownership and succession that have remained unchanged since foundation. Based in Geneva, the Pictet Group employs more than 3,800 staff. The Group has offices in the following financial centres: Amsterdam, Barcelona, Basel, Brussels, Dubai, Frankfurt, Hong Kong, Lausanne, London, Luxembourg, Madrid, Milan, Munich, Montreal, Nassau, Paris, Rome, Singapore, Turin, Taipei, Tel Aviv, Osaka, Tokyo, Verona and Zurich.
Pictet Asset Management includes all the operating subsidiaries and divisions of the Pictet Group that carry out institutional asset management and fund management. Pictet Asset Management Limited is authorised and regulated by the Financial Conduct Authority. At 30th September 2015, Pictet Asset Management managed EUR 134 billion in assets, invested in equity and bond markets worldwide. Pictet AM has seventeen business development centres worldwide, extending from London, Brussels, Geneva, Frankfurt, Amsterdam, Luxembourg, Madrid, Milan, Paris and Zurich via Dubai, Hong Kong, Taipei, Osaka, Tokyo and Singapore to Montreal.
CC-BY-SA-2.0, FlickrPhoto: Francebleu. Private Equity Investors in General do Not Have the Skills, Experience and Processes Needed for Proper Co-investing
According to Coller Capital’s Global Private Equity Barometer, 84% of LPs believe that private equity investors in general do not have the skills, experience and processes needed to do co-investing well. This is not only because meeting GP deadlines is hard (though 71% of investors acknowledge this) or because they are unable to recruit staff with the necessary skills (acknowledged by half of LPs) – but also, 55% of investors say, because Limited Partners have an insufficient understanding of the factors that drive the performance of co-investments.
Investors also expect a divergence in the returns that different types of Limited Partner will earn from the asset class. They believe small investors are increasingly being disadvantaged by the volume of money being committed by their large peers to individual funds (because small LPs have limited access to, and less negotiating-power with, the best GPs, for example). They also think that investors with a higher degree of operational freedom (to embrace direct investing, or open overseas offices, or set their own compensation levels, say) will achieve higher returns from private equity than more constrained investors.
The proportion of LPs with special (or managed) accounts attached to private equity funds has risen dramatically in the last three years or so – from 13% of LPs in Summer 2012 to 35% of LPs today. 43% of investors believe that this growth in special accounts is a negative development for the industry, on the grounds that it creates potential conflicts of interest.
“A huge amount gets written about the shifting dynamics of the private equity industry,” said Jeremy Coller, CIO of Coller Capital, “but the vast majority of it looks at it from a General Partner’s point of view. This edition of the Barometer provides valuable food-for-thought on the evolution of the industry for the trustees and CIOs of pension plans and other investors.”
Direct private equity investing has been a growing focus for many investors. The Barometer suggests this trend will continue: just over a third of investors plan to recruit investment professionals with skills and experience in directs over the next 2-3 years.
Investors also remain committed to expanding their emerging markets footprints. Over the next 3-4 years, the proportion of LPs with more than a tenth of their private equity exposure in emerging markets will rise from 27% to 44% (notwithstanding the 41% of investors who report that their private equity commitments in emerging markets have underperformed their expectations to date.) And on balance, Limited Partners remain positive about the prospects for China – with 37% of LPs saying China will be a more attractive destination for private equity investment in five years’ time, compared with only 17% who say it will probably be a less attractive destination.
With many investors having backed debut funds from newly-formed GPs since the financial crisis, the Barometer probed what LPs are looking for in these investments. Investors said several factors influenced them, but one factor in particular was cited by almost all LPs (94%), namely, that the new GP team in which they had invested contained individuals with an outstanding investment track record in other roles.
Investors’ medium-term return expectations remain strong, with 86% of Limited Partners forecasting net annual returns of 11%-plus from their private equity portfolios over the next 3-5 years. (They are almost unanimous that the biggest risk to this picture is today’s high asset prices.) Indeed, the majority believe it should be possible – at least for switched-on Limited Partners – to continue earning returns at this level even beyond a 3-5 year horizon, because they think new investment opportunities will open up even as established parts of the private equity market mature.
The Barometer also probed investor views on the implications of a ‘Brexit’ (an exit by the UK from the European Union) for the performance of European private equity as a whole. Very few investors (just 6%) think a Brexit would have positive implications for their European private equity returns, while one third of LPs believe it would reduce their returns.
The growing attraction of alternative assets shows no sign of diminishing, with 41% of Limited Partners planning to increase their target allocation to these asset classes over the next 12 months. Almost half of LPs (46%) plan to boost the share of their assets in infrastructure, with over one third (37%) planning an increase in their allocation to private equity.
The Winter 2015-16 edition of the Barometer also charts investors’ views and opinions on:
The importance of corporate brand for GPs
Expected returns from different regions and types of private equity
The implications of potential changes in the transparency and tax treatment of PE fees
LPs’ ongoing appetite for private debt funds
LPs’ plans for, and expected benefits from, upgrading their back office technology
CC-BY-SA-2.0, FlickrPhoto: Charlie Awdry, China portfolio manager at Henderson. How to Invest in a Changing China?
Charlie Awdry, China portfolio manager at Henderson, looks back at 2015 and discusses where investment opportunities can be found in a country that is undergoing significant economic, political and social change.
What lessons have you learned from 2015?
First, the Chinese currency can depreciate but we find it odd to call August’s 2% move against the US dollar a devaluation, given other emerging market currencies have fallen as much as 35% during the year. Second, President Xi’s reform programme is reaching a critical stage and his vision of market forces includes both the invisible hand of the free market and the state’s visible and powerful hand working towards stability. Third, when markets move in an extreme fashion, correlations between stocks increase − this lack of discrimination is a reliable source of investment opportunities for our strategy.
Are you more or less positive than you were this time last year, and why?
We have been downbeat on the Chinese economy, but upbeat on the stocks we hold for quite a few years; that stance continues into 2016. Overall, economic activity continues to be squeezed by the competing needs of reform and deleveraging and challenged by a loss of competitiveness in the manufacturing sector. Rebalancing is taking place but declining commodity prices illustrate how significant the ‘old part of the economy’ is. Unfortunately, the vibrancy of the ‘new consumer economy’ is probably underrepresented in official growth measures. The tough macroeconomic situation means we should expect more volatility in markets.
What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?
We will continue to see diverging valuations between consumer-driven businesses, such as technology, consumer services and healthcare. These sectors will generally be generating profit growth, while sectors dominated by state-owned enterprises (SOEs), like energy, telecommunications and financials, will struggle to react to the tougher economic environment, and will most likely continue to be ‘inexpensive’.We do not own any banks and continue to strongly favour privately-managed consumer-driven businesses with strong profit margins and cash flows.
CC-BY-SA-2.0, FlickrPhoto: Vins Stonem. Shelter from the Storm
In a late cycle environment, most commentary tends to focus on the challenge of finding return opportunities with reasonable risk and reward characteristics. However, finding reliable defensive assets is equally challenging. Until now, traditional balanced strategies have performed well, especially those with structurally long duration bond exposure. Despite more complex hedging strategies being expensive and at times unreliable, conventional developed market bonds have continued to be inversely correlated with equities, thus smoothing the bumps in the road and providing a return in excess of cash. But this period may be coming to an end. For long periods in the past, bonds have been positively correlated with equities and the risk is that such a relationship re-asserts itself and that conventional approaches to diversification, no longer flattered by high nominal and real interest rates, cease being effective.
While the consensus view is that interest rate increases in the US are going to be gradual, and that few other countries are in a position to follow the US in normalising interest rates, there is a real sense that the rate cycle is beginning to turn. Should growth turn out to be stronger than what is popularly characterised as ‘secular stagnation,’ it would arguably not take much in the way of growth surprises to impact bond yields. Even at the current moderate rate of growth in the US, the run rate of job creation is consistent with a sharp uptick in wage inflation which we believe could easily eventuate in the not too distant future. Furthermore, even if the consensus view proves correct, at current yield levels the benefit of developed market bond exposure in periods of market stress could prove to be very modest compared to previous periods. This was very much the case in August when equity markets sold off sharply and the offset from long bond positions was not material.
So how should one address the challenge of diversification? It is probably time to adopt a rather more tailored approach since one size no longer fits all. If owning US government bonds doesn’t offer the protection it used to, then shorting duration might offer some defence. Given the widely held view on the likely course of US interest rates, put options on interest rate futures appear to be surprisingly attractively valued. There are also government bond markets, such as those of Korea, Australia and Canada, where the likely path of interest rates means that they provide more protection than US Treasuries, particularly at the shorter end where correlations to US long-term interest rates tend to be much lower. Certain currencies also offer attractive defensive potential.
In our opinion, the yen appears to be well supported by Japan’s creditor nation status and improving cyclical fundamentals which should help it perform like a traditional ‘risk off’ currency in periods of market stress. Back in 2007, it was one of a very few defensive assets that provided strong diversification benefits. By contrast, other defensive assets had been pushed to unattractive valuations by loose credit conditions, which is not dissimilar to the impact of the zero rate policies of today. Interestingly, the dollar’s defensive characteristics may be eroding.
Equity options appear neither cheap nor expensive at present and volatility can be expected to rise on a cyclical basis, however pricing can periodically be more benign. Despite volatility strategies appearing attractive, they have tended to be fraught with disappointment in practice because of high transaction costs and volatility that peaks but then rapidly subsides. Effective use of defensive exposures to diversify portfolios has to reflect changing valuation and cyclical contexts in exactly the same way as one should approach growth assets.
Philip Saunders y Michael Spinks are co-heads of Multi-Asset at Investec.
CC-BY-SA-2.0, FlickrPhoto: Omar Burgos
. Neuberger Berman Acquires Options Investment Team From Horizon Kinetics
Neuberger Berman on Monday announced that it has acquired from Horizon Kinetics an investment team that manages collateralized index-based options portfolios that seek to capture global volatility premiums. The team’s investment track records, proprietary research and client assets have also transferred to Neuberger Berman.
Neuberger Berman’s new options investment team is overseen by Doug Kramer, who joined the firm in November 2015 as Co-Head of Quantitative & Multi-Asset Class Investments (working alongside current Multi-Asset Class Chief Investment Officer Erik Knutzen). Derek Deven salso joins Neuberger Berman from Horizon Kinetics as a Managing Director and senior portfolio manageralong with research analysts, Rory Ewing and Eric Zhou. With the addition of this team, Neuberger Berman strengthens its lineup of systematic, outcome oriented investment capabilities.
Previously, Mr. Kramer was CEO of Horizon Kinetics, an investment management firm with approximately $8 billion in assets under management, and prior to that a Managing Principal of Quadrangle Group and a Partner of Goldman, Sachs & Co., where he served as Chief Investment Officer and Head of the Global Manager Strategies Group.
Joseph Amato, President and Chief Investment Officer, Equities, at Neuberger Berman, said “This highly differentiated global options strategy has a demonstrated, long-term track record of delivering attractive risk-adjusted returns. Doug’s leadership and investment expertise is valuable as we serve global investors seeking innovative, outcome-oriented solutions.”
Mr. Kramer said of coming to Neuberger Berman, “The breadth and rigor of Neuberger Berman’s investment capabilities is well-suited to serve a wide variety of client needs. I am excited to be working with such a talented group of investment professionals as we help clients achieve their unique investment objectives.”
