CC-BY-SA-2.0, FlickrPhoto: Moyan Brenn. PineBridge Investments Completes Fundraising for Structured Capital Partners III, L.P.
PineBridge Investments, the global multi-asset class investment manager, has announced the final close for PineBridge Structured Capital Partners III, L.P. (together with parallel partnerships, the “Fund”).
PineBridge completed the fundraising in March with US $600 million of aggregate capital commitments, surpassing its planned target amount of US $500 million. The Fund will invest in junior capital securities including mezzanine debt and structured equity issued by privately-owned middle- market companies across all sectors in North America.
F.T. Chong, Managing Director and Head of PineBridge Structured Capital, stated, “We are committed to being reliable and flexible providers of junior capital to middle market companies. We are pleased with the positive reception for our Fund. Most of the Limited Partners from our prior fund have signed up for this Fund and new investors include major institutions in the US as well as Europe, the Middle-East and Asia.”
CC-BY-SA-2.0, FlickrPhoto: L'Ubuesque Boîte à Savon
. Japan's "Show Me the Money" Corporate Governance
Given the 4th quarter slowdown in the global economy, it is no surprise that overall corporate profit margins in Japan decelerated during that period. But before one panics and says that they are about to plummet, one should realize that it would likely require a global recession for such to occur and that the 2005-2007 period showed that profit margins can plateau at a high level for an extended period of time. Indeed, the four quarter average is still creeping upward to new record levels, and like most of the rest of the world, the manufacturing sector is declining while the non-manufacturing sector is accelerating to record highs. Meanwhile, Japanese profits are performing much better than those in the US or Europe. We have covered the reasons for such in our recent piece The Japanese Equity Outlook After the Nasty New Year Start, but let us emphasize herein the corporate governance aspect of that piece.
The fact remains that, partially due to the encouragement of the Abe administration, Japanese corporations are continuing their structural shift towards improving profitability. This is “icing on the cake” of the “Show Me the Money” corporate governance improvement that we have long-highlighted in our thought leadership effort on Japan. Indeed, while increasing the number of independent directors and other recent governance issues are very important in the intermediate term for Japan, it is crucial for investors to understand that much of the profitability message has actually been understood by Japanese corporates for a decade. This is shown by the divergence in the profit margins from the trend in GDP growth in the chart below, showing that even though GDP growth has remained subdued, profit margins have surged.
Since the Koizumi era, Japan has embarked on major rationalizations in most industries, with the number of players often reduced from seven down to three. The fruits of this restructuring were slower to ripen than in Western world examples, and they were hidden by a series of crises (the Lehman shock, the turbulence in China, the strong Yen and of course, the Tohoku crisis), but since Abenomics began, the global backdrop for Japan has been stable and there have been no domestic crises, thus allowing the fruits to ripen.
The CY4Q15 data on overall corporate profits (not just of listed companies) recently announced unsurprisingly shows some flattening of this upward trend, with pretax profit margin’s four-quarter average hitting the slightly higher new record level of 5.36%. We expect that profit margins will flatten in coming quarters, partially driven by continued industry rationalizations and cost-cutting, but also negatively impacted by the stronger Yen. As mentioned above, the profit margin of services industries also surged to a new record high, as shown in the second chart below.
One should also note that Ministry of Finance statistics do not cover post-tax income, and due to recent corporate tax cuts, the overall net profit margin is likely expanding significantly.
Conclusions
Japan’s overall corporate profit margin is unlikely to reverse soon on a four-quarter basis, while we believe the service sector will remain strong.
“Show Me the Money!” corporate governance: partly due to Abenomics, Japanese companies care even more now about corporate profitability and shareholder returns.
The dividend paid by TOPIX is surging upward and we expect it to double in the five years from 2013 through 2018.
Poor demographics can be linked with poor GDP growth, but countries like Japan with strong automation and efficiency capabilities will likely continue to completely offset this factor (see our report on Debunking Demographics).
As these charts show, even if Nominal GDP growth is fairly subdued, corporate profits can rise sharply in Japan due to productivity increases and gearing to global growth via multinationalization. Thus, weak domestic GDP statistics should not concern investors much. Indeed, normally, the service sector would be hurt the most by weak domestic GDP in a typical country, but Japan’s services sector profitability has been very strong despite weak GDP and we expect such to continue, which should assuage investors’ fears to a large degree.
John Vail is Nikko AM’s Head of Global Macro Strategy and Asset Allocation.
Photo: Moyan Brenn. Japan's "Show Me the Money" Corporate Governance
The fact that due to the encouragement of the Abe Administration, Japanese corporations are strongly emphasizing profitability is extremely important to investors in Japanese equities. This is “icing on the cake” of the “Show Me the Money” corporate governance improvement that we have long-highlighted in our thought leadership effort on Japan. Indeed, while increasing the number of independent directors and other recent governance issues are very important in the intermediate term for Japan, it is crucial for investors to understand that much of the profitability message has actually been understood by Japanese corporates for a decade. This is shown by the divergence in the profit margins from the trend in GDP growth in the chart below, showing that even though GDP growth has remained quite subdued, profit margins have surged.
Since the Koizumi era, Japan has embarked on major rationalizations in most industries, with the number of players often reduced from seven down to three. The fruits of this restructuring were slower to ripen than in Western world examples, and they were hidden by a series of crises (the Lehman shock, the turbulence in China, the strong Yen and of course, the Tohoku crisis), but since Abenomics began, the global backdrop for Japan has been stable and there have been no domestic crises, thus allowing the fruits to ripen.
The CY2Q15 data on overall corporate profits (not just of listed companies) recently announced continues this upward trend, showing that the pretax profit margin’s four-quarter average hit a new high of 5.26%. We expect that profit margins will expand further in coming quarters, driven by continued industry rationalizations and cost-cutting. It is also worth mentioning that forex related profits are not the only driver of this improvement, as the profit margin of services industries also surged to a new record high, as shown in the second chart below.
Of course, this improving structural profitability trend has become more fully realized by global investors, but there remain a decent number of Japan-skeptics, and 2Q profit margins surged so much that this dwindling group should reduce their remaining doubts; and thus, there is a significant amount of overseas capital that can still flow into Japanese equities.
Conclusions
Years of corporate restructuring’s progress was hidden due to successive global and domestic crises.
“Show me the Money!” corporate governance: Japanese companies care even more now about corporate profitability.
The dividend paid by TOPIX is surging upward and we expect it to double in the five years from 2013 through 2018.
On top of the corporate tax cut in April, Abenomics is having a strongly positive effect on profits due to the normalized Yen and further deregulation should gradually push profit margins higher.
Poor demographics are linked with GDP growth, but countries with strong automation and efficiency capabilities can completely offset such (see our report on Debunking Demographics). As these charts show, even if Nominal GDP growth is fairly flat, corporate profits can rise sharply in Japan due to productivity increases and gearing to global growth via multinationalization.
Opinion column by John Vail, Chief Global Strategist at Nikko AM
CC-BY-SA-2.0, FlickrPhoto: Billie Ward. China: Real or Imagined Economic Improvement?
The ‘lower for longer’ environment that we are experiencing has required central banks to adopt some extraordinary measures. Most recently the Bank of Japan adopted negative interest rates and the European Central Bank pulled multiple levers including cutting the depo rate by 0.1%, increasing quantitative easing and opening it up to non-financial corporate bonds, as well as introducing a new series of four-year targeted long-term refinancing operations (TLTROs). These measures, along with an upswing in corporate profitability and growing signs of stability in credit markets, have helped provide a backdrop against which risk assets look more benign. They have certainly resulted in a wild ride for banks.
Our view is that, in Europe at least, the ECB measures are probably a net positive for bank earnings and banking pressures should diminish from here; but market sentiment is still ‘see-sawing’ between confidence that central banks absolutely have enough in their policy toolkits to avert deflationary pressures and stimulate growth, and fears that those toolkits do not have a lot left in them – as seen by initial reactions to the ECB closing the door on further rate cuts.
In the US, a host of market participants had been circulating expectations that the US could be heading into recession this year, but economic data has begun to turn, with very strong US employment data in particular coming hot on the heels of other economic surprises, helping to ease financial conditions. But we must bring China in here. As China-watchers, we are trying to interpret whether the recent improvement in sentiment is backed up by real or imagined economic improvement. Clearly, none of the structural issues we have identified previously appears to have been addressed: the central bank is targeting a 6-6.5% growth rate this year and the liquidity taps have been turned on but, ultimately, we believe China is experiencing a cyclical rather than a structural improvement as the PBoC tries to ease the pace at which economic growth decelerates. For the US, the key question is one of divergence: is the Fed able to adopt monetary policy that diverges from ECB and Bank of Japan actions and operates independently of spillover pressure from the China slowdown? We believe the US dollar is ready for another leg-up, but it needs a catalyst such as the Fed raising rates – that may not happen until June.
Brexit uncertainties persist. The online polls seem unambiguously to be coming out in favour of leave, whereas the phone polls are unambiguously favouring remain – by a wide margin. Central establishment figures have entrenched themselves on both sides of the debate but this has not lessened the uncertainty, that is only intensifying as we move closer to the 23 June referendum. Sterling has been the main mover in this, with market forecasts indicating 1.50 against the dollar is the appropriate valuation for remain and 1.20 an appropriate valuation for leave. As the polls change, so Sterling gets battered about. How markets change in the run-up to the referendum will be interesting. The uncertainty is putting ever more distance between the Bank of England moving interest rates – despite relatively good labour market numbers – with our valuation research indicating the first rate rise in April 2019, though some analysts have pushed that back to 2020.
Mark Burgess is CIO EMEA and Global Head of Equities at Columbia Threadneedle.
CC-BY-SA-2.0, FlickrPhoto: Walter-Wilhelm
. Momentum Building in U.S. Impact Investing Market
Private investments are a growing area of opportunity for asset managers looking to get into the impact investing space, according to the last issue of The Cerulli Edge – U.S. Monthly Product Trends Edition. Thus far, only a small portion of managers has penetrated the impact investing market. In Cerulli’s 2016 alternative investments survey, just 14% of institutional asset managers polled indicate that they manage alternative asset impact funds (or thematic investing funds).
The survey, conducted in partnership with US SIF, shows that over the next two to three years, more than half of asset managers offering responsible investment products expect high demand from foundations (56%) and high-net-worth (52%) investors. Moreover, the research reveals that more than half (52%) of consultants surveyed are evaluating and, in some cases, recommending impact investments to their private wealth and institutional clients.
Mutual fund assets dropped for the fourth straight month, losing 0.7% in February to end the month at $11.3 trillion. The continued decline is now entirely attributable to performance. Despite underlying market fluctuations, February brought little change to ETF assets, as they held steady at just about $2 trillion. Flows reversed course during the month and totaled nearly $3 billion for the vehicle.
Foto cedida. Telecommunications, Healthcare, Consumer Products or Services: Sectors in which Muzinich sees Value in High Yield
The high yield debt market is worth $ 1.3 trillion in the US alone, that of European high yield is about 500 billion, and the corporate debt market of emerging countries is growing. Erick Muller – Head of Markets and Products Strategy at Muzinich, who recently visited Miami- thus explained the scope of the huge , corporate credit industry, in which his company has focused since its foundation in 1988. The strategies managed by the management company are neither limited to high yield, since it also invests in investment grade securities, nor to a fixed term.
Time to invest in energy…
Muller believes that the price of the oil barrel will remain low and volatile, and avoids investing in the US energy sector, except in those companies not sensitive to the price of crude oil. “Now is not the time to invest: with the barrel price remaining at around US$ 40, 30% of companies could fail in the next 12 months. There are sectors that represent better opportunities, such as telecommunications, cable television, healthcare, and consumer products or services, to name a few,” he said in an interview with Funds Society.
Equities or corporate debt ?
According to Muller, there is starting to be some competition between equities and high yield corporate debt, and there seems to be a greater flow towards the latter. “Now is the time to enter the corporate debt market, but staying within securities rated BB or B, and away from emission with a C rating,” says Muller, explaining that the crisis will continue, and lower quality debt can suffer.
Now is also the time to be tactical, because the correlations are very large; and flexible, in order to afford seizing opportunities and exiting at the appropriate time, without being tied down. Another one of this strategist’s keys for investment in the current market environment is diversification, more sophisticated diversification which dilutes risks within each asset class, while allowing him to remain loyal to his convictions.
The US high yield market, which is very domestic economy oriented, is attractive for its fundamentals (except for some activities such as oil or mining), The European is attractive for its lower volatility, while the emerging markets could be attractive for their valuation.
“We are very cautious about global growth. The Fed raised rates for reasons of financial stability and not to relax overheating in the US economy,” said the strategist, who does not believe that the conditions for more than one rate hike in 2016 are given, but also warns that we will have to wait until June to be clearer as to how the year will end.
In his opinion, the most appropriate strategies for this environmentare the short-term US high yield debt strategy, absolute return (global, tactical, and long-short), and those focused on long-term US high yield debt.
CC-BY-SA-2.0, FlickrPhoto: Claudia Calich, fund manager at M&G Investments. M&G’s Claudia Calich to attend Miami Summit
Claudia Calich, fund manager at M&G Investments will outline her view on where to find pockets of value in emerging markets debt assets, when she takes part in the Funds Society Fund Selector Summit Miami 2016.
Currently, emerging market investors face uncertainty from factors such as slower economic growth in China, volatile oil prices and geopolitical risk. Calich suggests flexibility in strategies such as the M&G Emerging Markets Bond fund facilitate taking high conviction positions without being constrained by local or hard currency, or differences between government and corporate bonds.
Outlining the opportunities, Calish will also explain her currency and interest rate positioning.
Calich joined M&G in October 2013 as a specialist in emerging markets debt and was appointed fund manager of the M&G Emerging Markets Bond fund in December 2013. She was also appointed acting fund manager of the M&G Global Government Bond fund and acting deputy fund manager of the M&G Global Macro Bond fund in July 2015. Claudia has over 20 years of experience in emerging markets, most recently as a senior portfolio manager at Invesco in New York, with previous positions at Oppenheimer Funds, Fuji Bank, Standard & Poor’s and Reuters. Claudia graduated with a BA honours in economics from Susquehanna University in 1989 and holds an MA in international economics from the International University of Japan in Niigata.
Photo: Enrique Chang. Janus Capital Names President, Head Of Investments
Janus Capital has promoted Enrique Chang to the position of president, head of Investments.
Chang took up his new duties on 1 April, overseeing Janus’ fundamental and macro fixed income teams, in addition to his existing leadership responsibilities of the Janus equity and asset allocation investment teams.
“The decision to promote Enrique to president, head of Investments, is reflective of his increased responsibility in now overseeing the majority of our Janus investment teams, as well as his significant contributions to the firm over the past two and a half years,” said Dick Weil, CEO of Janus Capital Group.
Chang will partner with CEO Dick Weil and president Bruce Koepfgen.
Janus Capital specified that Perkins Investment Management and Intech Investment Management will continue to report into their respective leadership teams and relevant boards.
Chang was previously CIO Equities and Asset Allocation. He joined Janus in September 2013 and was previously executive vice president and chief investment officer for American Century Investments, where he was responsible for the firm’s fixed income, quantitative equity, asset allocation, US value equity, US growth equity and global and non-US equity disciplines.
At end December 2015, Janus Capital’s AUM reached around $192.3bn (€169.2bn).
CC-BY-SA-2.0, FlickrPhoto: Harold Navarro. Boring Can Be Beautiful
While it’s easy to get caught up in campaign season — whether in the United States, where raucous primaries are underway, or in the United Kingdom, where the Brexit campaign is in full swing — that probably won’t help you make investment decisions. It’s probably better to see what’s going on inside some of the world’s biggest economies.
The US economy ebbs and flows, but the real average growth rate for this business cycle —after adjusting for inflation—has been about 2%. And we’re slogging along at about that pace as we begin the second quarter despite repeated, and so far unfounded, concerns that the economy is headed for a recession.
Here’s a look at the US economic scorecard for March:
Looking around the world, China remains weak, but economic data is no longer worsening. There is still a lot of excess capacity, but fears of a deep recession have faded somewhat.
We have seen manufacturing weakness in the eurozone amid headwinds from slowing exports to emerging markets. Inflation has remained scant, prompting the European Central Bank to push interest rates deeper into negative territory and adopt additional unconventional monetary policy tools. Consumption is a bright spot, boosting companies that cater to consumers. We expect a real economic growth rate of slightly better than 1% in 2016.
Japanese growth continues to hover near zero. Despite negative interest rates, fiscal stimulus and structural reforms, Abenomics has not proven sufficient to rekindle growth.
Few signs of excess
We follow a number of business cycle indicators for signs that the present US expansion may be continuing, or conversely, coming to an end. Of these indicators, half are flashing signs that excesses may be creeping into the economy while the other half are showing no signs of stress. Several areas of concern have shown modest improvement of late. For instance, there have been tentative signs of improvement in the Chinese manufacturing sector, and oil prices, which until recently had wreaked havoc with corporate profits, have stabilized to some degree.
While US growth may seem boring, there are some intriguing phenomena going on in other parts of the world. Perhaps the most interesting — some would say crazy — phenomenon is the adoption of a negative interest rate policy (NIRP) by the European Central Bank, Bank of Japan and other central banks. About 40% of the sovereign debt issued by eurozone governments today trades with a negative yield. Not only are investors paying to lend governments money, but they retain all the credit and interest rate risk with no compensation. That’s anything but boring.
Where to turn in a world of NIRP?
Logically, investors are seeking more rational alternatives. Dividend stocks have proven alluring against a backdrop of negative yields. US dividend stocks are particularly attractive. Positive real yields and a steadily growing US economy will likely help companies generate the free cash flow necessary to pay out, and eventually grow, dividends. The US private sector has been producing strong, if not record, free cash flow since the end of the global financial crisis. And dividend-paying stocks outside the US have proven attractive in many developed markets as well. The key is not to chase the ones with the highest yields — they can be dangerous — but to look for sustainable cash flow growers.
Absent a recession, which is often fueled by excessive credit growth, investment-grade credit markets look like an attractive alternative to government securities. They are relatively cheap by historic standards and offer the potential to outperform Treasuries in a mildly rising interest rate environment. It is our belief that against the present backdrop moderate additions to risk assets may be appropriate for some investors. Moving out the risk spectrum, cheap high-yield bonds also look compelling in this environment. And large-cap stocks are another area of opportunity, given their moderate valuations.
This economy may not be as exciting as the latest accusations on the campaign trail, but boring can be a good thing. Especially for long-term portfolios.
James Swanson is the chief investment strategist of MFS Investment Management.
Photo: David Leo Veksler. RBS Sells ETF Business To Chinese Asset Manager
Hong Kong based asset manager China Post has acquired the ETF offering of Royal Bank of Scotland, which consists of ten funds with combined assets of €360m.
China Post is the international asset management arm of China Post & Capital Fund Management. As a result of the acquisition, China Post will become the promoter and global distributor of the ETFs, formerly RBS’s ETFs listed in Frankfurt and Zurich.
Morover, the ETF’s will be seeded with additional capital to make them more attractive to institutional investors, they will also be cross-listed in Hong Kong.
The current fund range offers investors access to commodities, emerging market and frontier market equities, China Post aims to expand the offering with a new smart beta strategy offering investors access to Chinese equities.
Danny Dolan, managing director of China Post Global (UK), comments: “This acquisition demonstrates China Post Global’s long term commitment to the European region. Our aim is to differentiate ourselves through innovation. For example, while ETFs giving exposure to China and smart beta strategies already exist, no-one in Europe has yet combined the two.”
“Other differentiators for us include our access quotas to mainland Chinese securities, the strength of our parent companies and their distribution networks, and the strong financial engineering background of our team, which will help with product construction” he adds.
