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Consistent dividend growth is generally a sign that a business is doing well and should provide investors with a degree of confidence. If dividends are rising steadily over time, said Alex Crooke, Head of Global Equity Income at Henderson, then a firm’s earnings, cashflow and capital should also be growing.
An indicator of sustainability
Payout ratios identify the percentage of corporate earnings that are paid as dividends and can be an indicator as to whether a company has the scope to maintain or increase dividends. The payout ratio, explains Crooke, can be influenced by a number of factors, such as the sector the company operates in and where the company is within its growth cycle. As the chart below shows, the level of current payout ratios varies considerably between countries and regions both at an absolute level and when compared to historical averages.
“Although the payout ratio chart shows that opportunities exist for dividend increases in the emerging markets, the outlook for earnings and dividends remains uncertain and at present we are finding the most attractive stock opportunities for both capital and income growth in developed markets. Within the developed world, Japan and the US have the greatest potential to increase payout ratios, although from a relatively low base with both markets currently yielding just over 2%” points out the Head of Global Equity Income at Henderson.
An active approach is important
Conversely, payout ratios from certain markets, such as Australia and the UK, are above their long-term median. “Companies from these countries are distributing a greater percentage of corporate earnings to shareholders in the form of dividends than they have done historically. This leaves the potential for dividend cuts if a company is struggling to grow its earnings. One area of concern for income investors with exposure to UK and Australia is the number of large resource-related companies listed within these market indices”, said Crooke. Henderson believes that earnings, cashflow and ultimately dividends from these types of firms are likely to be impacted by recent commodity price falls.
Nevertheless, explains Crooke, the UK in particular has a deep-rooted dividend culture and outside of the challenging environment for the energy and resources sectors is home to a number of businesses that are delivering sustainable dividend growth. Our approach is to invest on a company-by-company basis using an actively-managed process that considers risks to both capital and income.
Seeking dividend growth
Recent market volatility has affected share prices globally. Despite this, Henderson believes attractive businesses with strong fundamentals and the potential for capital and dividend growth over the long term can be found across nearly all regions and countries.
“Within our 12-strong Global Equity Income Team we continue to seek companies with good dividend growth, and payout ratios that are moderate or low, which provides the potential for dividend increases. Typically, we avoid the highest-yielding stocks and focus on a diversified list of global companies that offer a sustainable dividend policy with yields between 2% and 6%”, concludes.
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. America´s 10 Most Expensive Streets
Every two years, JLL takes a look at the priciest addresses across the United States, along with the factors that have shaped these record-setting rents. In 2015, location, industry and competition are contributing to office rents that are 1.7 times higher than CBD rent growth, and 2.9 percent higher than overall rent growth.
According to the firm, rents on these 10 streets cost the most on a per-square-foot basis:
Sand Hill Road, San Francisco Peninsula: Dubbed “the Wall Street of the West,” due to the presence of venture capital firms, Sand Hill Road remains at the top of the rankings for the third time in a row. Its 2015, average rent is $141.60 p.s.f., up more than 27 percent in just two years.
Hamilton Avenue, Silicon Valley: The rise of tech played a large role in Hamilton Avenue’s catapult to the second most expensive street. Add in restrictive planning ordinances and a transit-friendly, walkable environment and the appeal is apparent. Its 2015 average rent is $124.44 p.s.f., up more than 31 percent in just two years.
Fifth Avenue, New York: Although facing competition from creative space in Midtown South and rising micro-markets like Bryant Park and Columbus Circle, Fifth Avenue still leads the pack in New York, a city synonymous with large price tags. Its 2015 average rent is $119.27 p.s.f.
Greenwich Avenue, Fairfield County: Although one of the least-urbanized streets in the top 10, Greenwich Avenue is known as the hub for hedge funds and also offers proximity to New York. Its 2015 average rent is $90.25 p.s.f., down nearly three percent from 2013.
Mission Street, San Francisco:Mission Street makes its first foray into the top 10, driven largely by the rise of tech developments south of Market Street. Other contributing factors include the Transbay redevelopment and creative space in nearby properties. Its 2015 average rent is $89.58 p.s.f.
Pennsylvania Avenue, Washington, DC:“America’s Main Street” commands international name recognition due to its location near the White House and U.S. Capitol buildings. Redevelopments and renovations of marquee buildings will drive rents and tenant demand. Its 2015 average rent is $72.65 p.s.f., down from $75.83 p.s.f. in 2013.
Boylston Street, Boston: High-profile properties and a broad range of tenants keep Boylston Street solidly among the top 10 Most Expensive Streets. Additional retail and hotel space is on tap to deliver on Boylston, which will keep the street competitive. Its 2015 average rent is $67.44 p.s.f.
Avenue of the Stars, Los Angeles: While there is plenty of star power in Los Angeles, the Century City submarket is a pre-eminent hub for the highest-profile legal, financial and entertainment tenants. Its 2015 average rent is $63.12 p.s.f.
Royal Palm Way, West Palm Beach: Royal Palm Way earned its nickname, “Banker’s Row,” due to the concentration of wealth management and financial services firms. Its 2015 average rent is $58.07 p.s.f., which is actually down from the $58.52 p.s.f. it was two years ago.
Newport Center Drive, Orange County: According to the market’s fundamentals, it may be the perfect storm for investors to check out Orange County’s top retail and office destination: Newport Center Drive is displaying vacancy near 11 percent and rent growth of 3.3 percent since 2013. Its 2015 average rent is $51.72 p.s.f.
CC-BY-SA-2.0, FlickrPhoto: Beijing Patrol. China Will Need To Maintain And Even Lower Its Interest Rates To Avoid A Sharper Downturn
China’s rapid growth over the past decade has been fuelled by cheap credit. According to Investec, this has led to a misallocation of capital, particularly following the global financial crisis when policymakers unleashed a RMB4 trillion stimulus package into infrastructure, construction and heavy industry. According to Oxford Economics, the China’s overall debt load (public, private and financial) rose from 176% of gross domestic product (GDP) in 2007, to 258% by mid-2014, and over 300% by the end of 2015. This has continued to rise as China’s so-called total social financing, or aggregate debt, rose by RMB3.42 trillion ($520 billion) in January alone, according to official data.
Bank lending is in much need of reform. Borrowing is concentrated in sectors where there is major overcapacity – heavy manufacturing, property and infrastructure – which are dominated by often inefficient state-owned enterprises (SOEs). The Emerging Market Fixed Income team at Investec, which has recently conducted a number of research trips to mainland China, thinks that the implicit government guarantee of SOE borrowings remains in place, resulting in debt being rolled over, rather than called in.
SOEs rolling over debt presents a challenge for policymakers. “Given high and rising debt service ratios, as credit growth continues to outstrip nominal GDP growth, China will need to maintain and even lower its interest rates to avoid a sharper and more prolonged downturn,” says Mark Evans, an analyst in Emerging Market Fixed Income. “But lowering interest rates on Chinese assets will again put pressure on capital outflows as investors earn less yield on their renminbi assets, hence the difficulties policymakers are facing right now.”
Rising debt loads is likely to lead to a financial cycle whereby the proportion of non-performing loans (NPLs) starts rising. Official data suggest that banks’ NPLs were around RMB1.95 trillion (2% of GDP) in December 2015. But a truer measure of where non-performing loans may actually settle is the sum of NPLs and special-mention loans – those that are overdue but which banks don’t yet consider impaired – which the IMF estimated these constituted about 5.4% of GDP in August 2015.
According to John Holmes, a sector specialist for financials in the 4Factor Equity™ team, “Prior banking crises globally have typically seen a 6-7 percentage point increase in the NPL ratio from trough, which would suggest a 7% or 8% true NPL ratio as a starting point for the Chinese banks in the event of a severe downturn.”
The growth of NPLs in the shadow-banking sector is also concerning. “It is hard to pinpoint exactly who has done the lending”, says Mike Hugman, strategist in Emerging Market Fixed Income, “as there have been several rapidly growing lending channels outside the banking system. But we think that corporate leverage is now around 140-150% of GDP, higher than in any other emerging market.”
The good news is that much of China’s credit growth has been domestically financed. Consequently, we expect that policymakers have a greater ability to manage the cycle than perhaps we would expect in more open economies, as we saw during the global financial crisis.
The State Council is expecting China’s banks to share the burden of cleaning up bad debt. John believes that “Chinese banks have historically enjoyed high levels of profitability, with return on equity averaging in the region of 20% over the last decade, aided by strong loan growth, high pre-provision margins and relatively benign asset quality.” He reckons that “their high pre-provision profit margins means they should have the capacity to charge-off bad assets over a multi-year period and remain profitable even with NPLs north of 10%, as some analysts suggest.”
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. Investors Want Transparency, Ethics, and Performance, CFA Institute Survey Reveals
Investors are expecting higher levels of transparency than ever before, holding their investment managers to the highest ethical standards, and are laser-focused on returns, according to a newly released study “From Trust to Loyalty: A Global Survey of What Investors Want,” by CFA Institute, the global association of investment professionals, that measures the opinions of both retail and institutional investors globally.
The findings reveal that investors want regular, clear communications about fees and upfront conversations about conflicts of interest. The biggest gaps between investor expectations and what they receive relate to fees and performance. Clients want fees that are structured to align their interests, are well disclosed and fairly reflect the value they are getting from their investment firms.
“The bar for investment management professionals has never been higher. Retail and institutional investors, as always, crave strong performance, however both groups also demand enhanced communication and guidance from their money managers. Building trust requires truly demonstrating your commitment to clients’ well-being, not empty performance promises or tick-the-box compliance exercises. Effectively doing so will help advance the investment management profession at a time when the public questions its worth and relevance.” said Paul Smith, president and CEO of CFA Institute.
“While an increase in overall trust in the financial services industry is a net positive for financial professionals,” continued Smith, “performance is no longer the only ‘deal breaker’ for investors. They are continuing to demand more clarity and service from financial professionals and, with the rise of robo-advisors, they have more alternatives than ever before. Further, if investment professionals don’t provide this clarity, then regulators may force them to, for better or worse.”
The study also shows that investors are anxious about global markets, and do not believe their investment firms are prepared. Investors revealed a growing anxiety about the state of global finance. Almost one-third of investors feel that another financial crisis is likely within the next three years (33 percent of retail investors/29 percent of institutional investors), with significantly more in India (59 percent) and France (46 percent). In addition, only half of all investors believe their investment firms are “very well prepared” or “well prepared” (52 percent retail investors/49 percent institutional investors) to manage their portfolio through a crisis.
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. The Majority of New Assets in European Equities Have Landed in The Most Active Funds
Average active share for European large-cap funds was 69.6% in the three-year period through March 2015, with a median of 72.4% when measured against the funds’ appropriate style indexes. That is the finding of a new study from Morningstar.
“Our results show that between 2005 and 2015 “closet indexing” has become rarer among European large-cap funds, and those funds with higher active shares have received the lion’s share of new assets. We find that funds with higher active share have delivered better investment results than the least active funds in most of our research period, but not unambiguously. Because dispersions in returns and risk characteristics become much wider as a portfolio’s active share rises towards 100%, investors should not rely solely on active share when selecting funds”.
Among other findings of the report, the percentage of funds with a three-year average active share below 60% (so-called closet indexers) was 20.2%. The portion of funds that can be characterized as closet indexers has been falling in the researched categories in recent years. The majority of new assets in European equities have landed in the most active funds.
Although funds in the most active quartile charge 33 basis points more on average than those in the least active quartile for their retail share classes, we find that when price is measured per unit of active share, European investors are overpaying for low active share funds. Investors should compare fees carefully as dispersion in fees among funds with similar active shares is high.
Morningstar finds a strong inverse correlation between active share and market risk. Active share numbers dropped considerably during the financial crisis of 2008-09 but have been rising at a steady pace since then.
Funds across the board lowered the share of mid- and small-cap stocks in their portfolios in 2008-09, but this was especially the case for the most active funds.
The funds with the highest active shares have done better, on average, than those in the least active quartile in all of the five-year periods tested between 1 July 2006 and June-end 2015. However, the difference in excess returns between the most and the least active quartile has decreased recently, which implies that the strength of active share as a selection tool is time-period dependent. Invariably, however, the funds with the lowest active shares have been the worst performers.
The study finds that funds in the highest active share quartile have displayed much stronger style biases than the average fund. This may not always be desirable from a fund investor’s point of view, and complicates the use of active share in fund selection. The style effects have been especially strong in the small group of funds with an above 90% active share. After controlling for style effects in a four- factor regression model, we find their alpha to be lower than for any other group in the most recent five-year period researched.
Investors who use active share as a fund selection tool should exercise caution. As active share increases, dispersion in returns and risk levels rises sharply; the best and worst performing funds are to be found among the more active ones. Therefore, we advise using active share only in combination with other quantitative and qualitative tools.
Combining active share with tracking error adds a useful dimension to the analysis, and we find this to be an adequate analytical framework in the European large-cap space. Confirming results in US markets, we find that funds that exhibit a large tracking error but a low or moderate active share (so- called factor bet funds) have underperformed.
“We find that funds with Positive Morningstar Analyst Ratings tend to have above-average active shares and tracking errors”, says the study.
“In less than a decade, “active share” has become a widely used concept in fund analysis. However, much of the available active share research references only US-domiciled funds. In this paper we study a subset of European funds investing in European equities to see how their active share has developed over time, and evaluate how the active share measure might be used as a tool to aid fund selection within the European fund universe. The study encompasses the period 1 January 2005 through June-end 2015. By including only large-cap funds, we reduce the difficulties arising from benchmark selection and the impact of the small-cap effect”.
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. Basel III Fundamentally Changes How Asset Managers Are Connected To The Financial System
Basel III reforms have fundamentally changed how asset managers are connected to the financial system, with hedge funds challenged to understand expense, usage and access to the financing power grid, according to a joint survey and report by the Alternative Investment Management Association (AIMA), the global representative body for alternative asset managers, and S3 Partners, a leading financial data, analytics and services firm.
Jack Inglis, CEO of AIMA, commented: “There is no doubt that the Basel III banking standards are having a significant impact on hedge funds and other alternative asset managers. Financing costs are rising and the fund manager / prime broker relationship is changing fundamentally. It is our hope that this timely and important report will provide clarity and direction to those who have felt the impact of the recent regulations, and to give context to issues that are being felt across the industry.”
Bob Sloan, CEO of S3 Partners, commented: “New bank capital regulations are creating downstream financing challenges and opportunities for asset managers and hedge funds. The survey clearly shows how plugging into the financial power grid is getting more expensive.”
Mr Sloan continued: “Managers of all shapes, sizes and strategies now seek to answer the question: How can we maintain access to the grid, while optimizing for the right amount of efficiency? As the survey results show, access to unbiased data, comprehensive Return on Assets/Return on Equity analytics, and a common language are critically important towards determining fairness – as rates, margin, spreads and contracts will be a key determinant for an asset managers’ success.”
Rising financing costs. The survey of fund managers worldwide found that:
Financing costs have risen for 50% of firms, with an even split between those who quantify the level of cost increase as being greater than 10% and below 10%.
75% of firms expect further cost increases over the next two years.
The impact is consistent regardless of a fund manager’s size, investment strategy or location.
Rethinking prime brokerage relationships:
Fund managers responding to the survey said they are having to rethink their prime brokerage relationships due to Basel III.
75% have been asked to change how they do business with their prime brokers, while more than 67% have had to cut the amount of cash they keep on their brokers’ balance sheets.
Importantly, the survey found that:
Most alternative asset managers over the last two years have either maintained or increased the number of prime brokers they use, with the average number of financing relationships found to be four.
Only 20% of fund managers have a clear understanding of how their prime brokers calculate their worth in terms of the revenue they provide relative to balance sheet impact, known as “return on assets” or RoA. Fewer still have the data necessary to calculate this themselves.
Photo: Youtube. BNY Mellon Names Mitchell Harris CEO of Investment Management Business
BNY Mellon recently announced that Mitchell Harris has been named chief executive officer of the company’s Investment Management business, effective immediately. Harris, who already had responsibility for the day-to-day oversight of the company’s investment boutiques globally and wealth management business, will report to Gerald L. Hassell, BNY Mellon’s chairman and CEO. BNY Mellon Investment Management amounts $1.6 trillion in assets under management.
Harris succeeds Curtis Arledge, who led the company’s Investment Management business and Markets Group and has decided to pursue other opportunities outside of the company.
Harris, most recently president of BNY Mellon Investment Management, joined BNY Mellon in 2004 and has had a distinguished career in investment management and private banking spanning more than 30 years. Harris was CEO of Standish, a BNY Mellon investment boutique, from 2004 to 2009. He joined Standish from Pareto Partners, where he served as chief executive officer from 2000 to 2004 and as chairman from 2001.
“Mitchell has an impressive track record in the investment management industry, having led several successful firms during his career and most recently in overseeing our industry leading line-up of investment boutiques globally. He is well regarded across our client base, and I am confident he will lead our investment management business with great insight and success,” said Hassell. “I want to thank Curtis for his many contributions and helping to position our Investment Management and Markets businesses for growth and success moving forward.”
Michelle Neal,president of the Markets Group, who reported to Arledge, will report to Hassell, effective immediately. In her role, Neal leads the company’s foreign exchange, securities finance, collateral management, and capital markets businesses.
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. Are Markets Right to Worry?
Lower oil prices would normally be expected to benefit the global economy through aiding both consumers and corporates in oil-importing economies, says Stefan Kreuzkamp, Chief Investment Officer, Deutsche Asset Management. He remains constructive on global growth, but thinks there is still some risk of the benefits of lower oil prices being overshadowed by continuing financial- market turbulence. “Perhaps most importantly, lower oil prices have reopened the Pandora’s box of concerns about the longer-term negative side effects of looser monetary policy. In the ancient Greek fable, of course, Hope lies at the bottom of the box – but many more problems fly out first.”
His message is that the changing structure of the oil market and uncertainty about what this means will continue to have market implications. Oil can no longer be seen as a “known problem” that can be assessed in terms of known fundamentals, he adds. Therefore the firm has reduced its forecasts for major equity indices and increased its end-2016 spread forecasts for U.S. high yield. Although they have slightly adjusted the euro high-yield spread forecast as well, they see much lower risks of defaults in this segment.
“We caution that it is still too early to invest in oil-related equities. But this, in a sense, is the easy part.” Declares Kreuzkamp. What is more difficult is to assess the timing to re-enter or to build up positions. For U.S. high yield, for example, implied default rates look excessive, in his view. But the tag-war between markets and fundamentals might well continue, in high yield as in other areas, and impair fundamentals in the process.
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. Henderson Global Investors Hires Stephen Deane to Join Emerging Markets Equities Team
Stephen Deane has joined Henderson Global Investors from Stewart Investors (previously known as First State Stewart) as a senior portfolio manager. He will work alongside the head of emerging markets equities, Glen Finegan, and the wider emerging markets equities team. Stephen will be based in Henderson’s Edinburgh office.
Most recently Stephen spent over five years at Stewart Investors where he worked as an analyst and co-manager of the worldwide Equity funds. In this role, Stephen was responsible for generating ideas for global, emerging markets and Asian portfolios.
Previous to this, Stephen spent 13 years at Accenture and during this time he completed an Executive Masters in Business Administration (MBA) at INSEAD, Fontainebleau in France, with distinction.
Glen Finegan, head of emerging markets equities at Henderson, said: “Stephen and I worked closely together at First State and, given our shared experience, I feel the hire is a very good fit for the team. We share a similar investment philosophy and Stephen’s disciplined approach will be of great benefit to our clients.
“Stephen’s hire evidences Henderson’s continued commitment to the emerging markets equities asset class and signals the further strengthening of Henderson’s franchise working out of Edinburgh. We are certain Stephen’s global insights will be invaluable going forward.”
Stephen Deane adds: “I believe that there is a significant opportunity to help build Henderson’s emerging markets franchise based on its philosophy of long-term quality oriented investing, something Glen and I both share. This combined with Henderson’s reputation for excellent client service, global distribution and a client-led culture made joining the company a straightforward decision”.
As part of the team build-out in Edinburgh, Michael Cahoon has been promoted from analyst to portfolio manager, effective immediately, having contributed significantly to overall performance during the past year. Additionally he has been named co-manager on the US mutual fund, the Emerging Markets Fund. Nicholas Cowley will also be named as co-manager on the Henderson Gartmore Emerging Markets Fund.
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. The Morningstar European Institutional Conference Will Focus on Long-Term Investments
The Morningstar Institutional Conference, to be held in Amsterdam on 17 and 18 March 2016, will explore key themes relevant to long-term investors and will provide a holistic view of the current investing environment through a diverse program of presentations from leading investors, academics and industry experts. The organization expects more than 200 investment professionals from across Europe to attend.
Headlining speakers include John C. Bogle, Founder and former Chief Executive of Vanguard and creator of the first index mutual fund. In a conversation with Morningstar’s Scott Cooley, transmitted live from Pennsylvania, Mr. Bogle will share his views on building effective portfolios for long-term investorsand will challenge assumptions about active management. Attendees will also hear from James Montier, member of GMO’s asset allocation team, renowned author and expert on behavioral finance and value investing, who will explore the features of an independent-minded approach to investing and the challenges of implementing such a strategy in a multi-asset environment.
Haywood Kelly, Head of Global Research, of the organising firm will examine the landscape for sustainable investing and explain what the firm is doing to help individuals, advisors, and asset managers invest in ways that are meaningful to them. In addition, Thomas Idzorek, Head of Investment Methodology and Economic Research, Morningstar Investment Management group, will update and expand upon his ground- breaking research on the use of popularity as an investment tool.
