Photo: Tarek Saber, Head and Lead Portfolio manager of the Convertible Bonds Team at NN Investment Partners. Tarek Saber, from NN Investment Partners, brings the current state of convertible bonds to the Fund Selector Summit in Miami
Convertible bonds are a well established asset class which has outperformed through the cycle over the last 40 years. During this time, convertibles have displayed lower volatility than equities and fewer defaults than high yield debt. The main attraction of this investment class is its potential ability to generate returns from both credit markets and rising equity markets.
Tarek Saber, Head and Lead Portfolio manager of the Convertible Bonds Team at NN Investment Partners, will present the strengths of the Dutch firm’s strategy in this asset class, under the title, ‘Convertible bonds: the fixed-income alternative to equities’, at the Second edition of the Funds Selector Summit to be held in Miami on the 28th and 29th of April.
The conference, aimed at leading funds selectors and investors from the US-Offshore business, will be held at the Ritz-Carlton Key Biscayne. The event-a joint venture between Open Door Media, owner of InvestmentEurope, and Fund Society- will provide an opportunity to hear the view of several managers on the current state of the industry.
The NN Investment Partners’ convertible investment strategy team, headed by Saber since 2014, seeks to capture the essence of the opportunities offered by the market for convertible bonds globally, focusing on balanced convertibles, backed by a process of in-depth research and concentrated on a select number of convertibles.
Prior to joining NN IP, Tarek Saber was CEO / CIO for Avoca Convertible Bond Partners LLP and Head of Convertible Bond Strategies in the management company’s London office.
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: Carlos ZGZ. Surviving Chinese Volatility
Christine Lagarde, Managing Director of the International Monetary Fund, was once quoted as saying, “Markets love volatility.” She may be correct in the abstract. But right now, investors in Chinese equities would certainly love a bit less volatility.
2016 is likely to be a year of volatility in China. With the government apparently keen to continue intervening in its A-share market, we can expect continued volatility there. And with the manufacturing and construction part of the economy set to grow more slowly, there will be macroeconomic volatility. As privately owned firms take more market share from state-owned companies that too will contribute to volatility. In addition, as the government presses ahead with structural reform in the state sector, capacity reduction will add to volatility.
We can, however, point to two areas where volatility is less likely: China’s booming consumer and services sector; and U.S. – China relations as China prepares to host its first G-20 summit.
This volatility can, however, create opportunities for investors, especially when dire headlines incorrectly assume that weak performance by outdated market indexes signal an economic hard landing. And keep in mind that volatility due to execution of necessary reforms, such as reducing the role of state-owned enterprises (SOEs), is good for the long run.
China suffers from a serious case of “debt disease,” but the treatment and side effects may not be as severe as some expect, and dramatic credit tightening is very unlikely. Debt is concentrated among state-owned firms, while the private firms that generate most of China’s new jobs and investment have already deleveraged.
As I explained in a May 2015 issue of Sinology (“Diagnosing China’s Debt Disease”), the medicine for this problem will be another round of significant SOE reform—including closing the least efficient, dirtiest and most indebted state firms in sectors such as steel and cement—rather than broad deleveraging, leaving healthier, private firms with room to grow. At the end of last year, the government indicated that it was finally prepared to begin reducing capacity in construction-related heavy industry. In contrast to the experience in the West after the Global Financial Crisis, cleaning up China’s debt problem should actually improve access to capital for the privately owned companies that drive growth in jobs and wealth.
Let’s turn to politics. Will U.S.-China relations become more volatile in 2016?
U.S.-China relations will remain complicated and noisy this year, but the two countries will continue to engage productively on the most important issues.
Territorial disputes in the South and East China Seas will again dominate the headlines, but two points are worth keeping in mind. The U.S. does not claim any of the disputed territory, and China seems resigned to the fact that the U.S. Navy will continue to exercise its right to patrol the region. The risk of accidents remains, but none of the players appear to be looking for an excuse to engage in a military conflict.
Finally, with China preparing for its first time as host of a summit of G-20 leaders in September, it is likely to behave more conservatively during the first three quarters of this year.
Finally, how can investors deal with all of this volatility?
The most important thing to recognize is that the Chinese equity markets do not reflect the health of the Chinese economy, and to expect some market volatility. Second, to recognize that the market indexes underrepresent the strongest parts of the economy: privately owned companies, and the consumer and services sector. This is why we believe in an active approach to investing in China, rather than an index-based strategy.
Andy Rothman is Investment Strategist at Matthews Asia.
CC-BY-SA-2.0, FlickrPhoto: Paul Lowry. Schroders Upgrades Crude to “Positive”
The price collapsed because global supply increased sharply in 2014-15 while demand growth sagged – and more recently even stopped altogether. The Dollar’s super strength played a key role also. In the past 3-6 months, supply growth has been sagging as a direct result of the lower price, but now it looks like a strong bet that supply is actually going to fall, and fall sharply. As a result, the market is likely to come into balance very quickly. As this happens, the price will recover smartly.
Mark Lacey and John Coyle have been reporting how very recently a number of companies have announced further huge reductions in capital spending, lower production guidance or even shut-ins. In 2016 to date, a very small sample of companies have announced a combined cut in production guidance for this year of 160kbpd already, representing a 5-6% drop from last year. In the next few weeks, as the rest of the companies report, we can expect similar announcements. From the initial sample, we can conservatively estimate a combined cut in production globally for 2016 of 1.5-2mbd, especially as the oil price is at least 20% lower than it was when the first companies reported. This reduction should be easily adequate to balance the market.
Anecdotal evidence which points towards production declines is everywhere now. This is especially in the US and Canada but notably in other parts of the world too. India, China, Kazakhstan and Nigeria are all reporting declines. North Sea activity is coming to a standstill. Tanker rates from the Gulf have collapsed recently as there has been a sharp drop in crude cargoes for February loading. Oil is being shipped to the US from far and wide because the US domestic oil price is trading expensively to the rest of the world, but the premium is being maintained. The futures market contango did not worsen at all as spot prices recently swooned and in recent days it has been reduced. US E&P bankruptcies are soaring and the financial tap is being turned off. The evidence is plain that US production is falling faster than the official statistics report and the required oil is being “sucked” in from the rest of the world. This trend is going to accelerate as US production drops precipitously in the next few months.
It’s not difficult to understand why companies are now reducing activity. Remind yourself of the chart below kindly compiled by Citibank in late 2014.
Everyone is losing money now. Producers are much better off leaving it in the ground than selling it for $27, especially as they know that storage facilities everywhere are pretty much full. The market has been rightfully worried about “tank tops” but the price collapse has now, very likely, done its job.
What can make the price fall further?
A collapse in demand. To some extent, this is already happening. Both Chinese and US demand has slowed markedly, and it could continue (likely will, in my opinion). But my view now is that the speed of supply response is overtaking the weakening of demand. We shall see. A sudden surge in Libyan production would also hurt the price; let’s afford that a 25% probability, given the security issues. A further surge in the Dollar would be a problem also, for sure; my view is that the Dollar’s run is now likely fully played out, at least for now, given the renewed turmoil in global stock markets and the weaker trend of US economic data, both of which suggest the Fed will no hike again anytime soon.
As a final note on Fundamentals, what if OPEC acts? This is a scenario completely dismissed by the market currently. Pressure on the Saudis is now immense. Of course the likelihood of the Saudis flinching may indeed be slim but just a suggestion of it today would be enough to send the price up $5-10 at least. Risk in this market is heavily skewed for sure.
I will be writing an updated formal oil report in the next two weeks.
Our official Chart indicators for oil remain bearish, we looked at them closely yesterday. I will argue, however, that from a Pattern point of view a very significant low is very likely in place, or will be within a few days. I believe the sell-off from the mid-2014 high is finishing now, based on wave counts. If this is indeed the case, the first upside target for crude is $38 (+36%), and after that $48 and $57. Strong supporting evidence, I believe, comes from the performance of some of the oil stocks yesterday: they dropped sharply in the morning but then closed very strongly, e.g. WPX was down 34% first thing but closed down only 6%, which left a bullish candlestick. The relative strength of oil stocks versus crude is another indication of a potential turning point. (And by the way, the gas stocks went up yesterday eg Southwestern up 13%; the chart patter non this stock, I believe, is super-bullish. We already has this stock rated as bullish chartwise. 50-100% upside looks easily achieveable.).
On Sentiment, again, our official indicators remain bearish but anecdotally we can now all read the tea leaves. Just listen to any TV or radio commentator or Bloomberg video, or read the papers. Everyone and his dog can now tell you why we are in a “lower for longer” scenario, and I believe it is notable that even CEOs of major oil companies are now saying the price won’t recover until second half 2016, a big change from their position 3 or 6 months ago. The IEA monthly report was widely quoted yesterday; “drowning in oil”, being repeated everywhere. In summary, the big picture sentiment story is bullish; when our shorter-term indicators turn it will be super-bullish.
To conclude, while more volatility can of course be expected, I would bet strongly that oil will finish this month well above $30. I recommend at least a fully neutral position on oil with a strong bias towards equities, which should be increased aggressively if the prices continue to recover. Gas stocks ditto.
Geoff Blanning is Head of Commodities at Schroders and Energy Fund Managerat Schroders.
CC-BY-SA-2.0, FlickrPhoto: Julia Rubinic
. FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami
The Financial Crimes Enforcement Network (FinCEN) today issued Geographic Targeting Orders (GTO) that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash”for high-end residential real estate in the Borough of Manhattan in New York City and Miami- Dade County. FinCEN is concerned that all-cash purchases – i.e., those without bank financing – may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. To enhance availability of information pertinent to mitigating this potential money laundering vulnerability, FinCEN will require certain title insurance companiesto identify and report the true “beneficial owner” behind a legal entity involved in certain high-end residential real estate transactions in Manhattan and Miami-Dade County.
With these GTOs, FinCEN is proceeding with its risk-based approach to combating money laundering in the real estate sector. Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with the money laundering vulnerabilities associated with all-cash real estate transactions. This includes transactions in which individuals use shell companies to purchase high-value residential real estate, primarily in certain large U.S. cities.
“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” said FinCEN Director Jennifer Shasky Calvery. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”
Under specific circumstances, the GTOs will require certain title insurance companies to record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing. They will report this information to FinCEN where it will be made available to law enforcement investigators as part of FinCEN’s database.
The information gathered from the GTOs will advance law enforcement’s ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering. This would mitigate the key vulnerability associated with these transactions – the ability for individuals to disguise their involvement in the purchase.
FinCEN is covering certain title insurance companies because title insurance is a common feature in the vast majority of real estate transactions. Title insurance companies thus play a central role that can provide FinCEN with valuable information about real estate transactions of concern. The GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies. To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.
The GTOs will be in effect for 180 days beginning on March 1, 2016. They will expire on August 27, 2016.
Courtesy photo. BNY Mellon Announces Lisa Dolly as the Next Chief Executive Officer of Pershing
Pershing announced that Lisa Dolly has been named as the company’s new chief executive officer, effective February 16, 2016.
Dolly, currently the firm’s chief operating officer, succeeds Ron DeCicco, who after a long and distinguished 45-year career with Pershing, has decided to retire from his role as chief executive officer of Pershing. As part of the leadership transition, he will serve as an executive advisor over the next year working closely with Dolly, Pershing’s executive committee and key clients.
“We’ve selected a very capable and committed leader at a time when Pershing is in a strong position,” said Brian Shea, BNY Mellon vice chairman and CEO of Investment Services. “For the past three years, Lisa has been an exemplary chief operating officer and in her new role as Pershing’s CEO, I am confident that she will lead the company to continued success.”
“I also want to recognize and thank Ron for being an outstanding leader, consistently putting the good of our clients, the company, the industry and the well-being of employees as his highest priorities”, said Shea. “Ron has been a strong, highly effective and responsible leader and we have been extremely fortunate to have had him as CEO and now as an executive advisor.”
Dolly is a member of Pershing’s executive committee and BNY Mellon’s Operating Committee. Over her 25-year career at Pershing, she has held numerous leadership roles prior to becoming Pershing’s COO. She was responsible for the firm’s Managed Investment business and Lockwood Advisors, Inc., managed global operations, and served as chief administrative officer overseeing a number of internal and operational functions. Dolly has served as chairperson of the Securities Industry and Financial Markets Association (SIFMA) Operations and Technology Steering Committee and has served on cross-industry committees with DTCC. In addition, she volunteers her time with the 30% Club mentoring aspiring professional women.
An announcement of Dolly’s successor as chief operating officer of Pershing is expected in the coming weeks.
CC-BY-SA-2.0, FlickrPhoto: Janus Capital. Bill Gross: “Don’t Go Near High Risk Markets, Stay Safe and Plain Vanilla”
The BoJ’s surprise move to take interest rates into negative territory this month helps Bill Gross continue its case against ultra-low interest rates policies. “How’s it workin’ for ya?” He writes in reference to central bankers.
The US Federal Reserve, the European Central Bank and the Bank of Japan, “they all seem to believe that there is an interest rate SO LOW that resultant financial market wealth will ultimately spill over into the real economy. I have long argued against that logic and won’t reiterate the negative aspects of low yields and financial repression in this Outlook. What I will commonsensically ask is ‘How successful have they been so far?’… The fact is that global markets and individual economies are increasingly ‘addled’ and distorted,” says the former Bond King at PIMCO and now part of Janus Capital Group.
In its February’s outlook, Gross lists the main distortions of recent monetary policy:
Venezuela – bankruptcy just around the corner due to low oil prices and policy mismanagement. Current oil prices are (in significant part) a function of low interest rate central bank policies over the past 7 years.
Puerto Rico – default underway due to overspending, the overpromising of retirement benefits, and the inability to earn adequate investment returns due to ultra-low global interest rates.
Brazil – in deep recession due to commodity prices, government scandal and in this case, exorbitantly high real interest rates to combat the effect of low global interest rates, and currency depreciation of the REAL. No country over time can issue debt at 6-7% real interest rates with negative growth. It is a death sentence. In the interim, the monetary authorities deceptively issue, then roll over more than a $100 billion of “currency swaps” instead of selling dollar reserves in an effort to hoodwink the world that there are $300 billion of reserves to back up their sinking credit. This maneuver effectively costs the government 2% of GDP per year, leading to the current 9% fiscal deficit.
Japan – 260% government debt/GDP and climbing sort of says it all, but there’s a twist. Since the fiscal (Abe) and the monetary (Kuroda) authorities are basically one and the same, in some future year the debt will likely be “forgiven” via conversion to 0% 50-year bonds that effectively never come due. Japan will not technically default but neither will private investors be incented to make a bet on the world’s largest aging demographic petri dish. I’m tempted to say that “Where Japan goes – so go we all”, but I won’t – it’s too depressing.
Euroland – “Whatever it takes”, “no limit”, what new catchphrases can Draghi come up with next time? It’s not that there’s a sufficient recession ahead, it’s just that the German yield curve is in negative territory all the way out to 7 years, and the shaky peripherals are not far behind. Who will invest in these markets once the ECB hits an effective negative limit that might be marked by the withdrawal of 0% yielding cash from the banking system?
China – Ah, the dragon’s mysteries are slowly surfacing. Total debt/GDP as high as 300%; under the table capital controls; the loss of $1 trillion in reserves to support an overvalued currency; a distorted economic model relying on empty airports, Potemkin village housing, and investment to GDP of 50%, which somehow never seems to transition to a consumer led future. Increasingly, increasingly addled.
U.S. – Well now, the U.S. is impervious to all this, is it not? An 85% internally generated growth model that relies on consumption which in turn, relies on job growth and higher wages, all of which seems to keep on keepin’ on. Somehow, though, even the Fed seems to have doubts, as in last week’s summary statement, where for the first time in 15 years they were unable to assess the “balance of risks”. “We need some time here to understand what is going on”, says Kaplan from the Dallas Fed. Shades of 2007. The household sector has delevered, but the corporate sector never did, and with Investment Grade and High Yield yields 200-1000 basis points higher now, what does that say about future rollover, corporate profits and solvency in many commodity-sensitive areas?
“Our finance-based global economy is transitioning due to the impotence of monetary policy which has always, and is now increasingly focused on the elixir of low/negative interest rates. Don’t go near any modern day Delos Romans; don’t go near high risk markets, stay safe and plain vanilla. It’s not predetermined or guaranteed, but a more prosperous outcome should be somewhere around the corner if you do.” He concludes.
CC-BY-SA-2.0, FlickrPhoto: Tambako The Jaguar. Lyxor Named “The Leading UCITS Hedge Fund Platform”
Lyxor was named “The Leading UCITS Hedge Fund Platform” at the Hedge Fund Journal Awards 2016 held in London last week. This accolade highlights Lyxor’s outstanding accomplishments in the field of Alternative UCITS.
By the end of 2015, Lyxor grew its assets under management to $2bn across 8 alternative UCITS fund and is the 6th largest provider of Alternative UCITS funds. Lyxor’s Alternative UCITS Platform achieved a progression in assets of more than 30% vs. 2014 (and 450% vs. 2013). HFM Week also recently distinguished Lyxor as the 3rd platform with the highest growth in the industry last year (with net new assets of $504m in 2015).
Since the end of 2014, Lyxor has expanded its Alternative UCITS range with the launch of several new managers, including Capricorn Capital Managers with a long/short equity program focusing on global emerging markets, Chenavari’s European-focused long/ short credit strategy, and Och-Ziff with a Long/Short US equity fund. The firm is eyeing the addition of a further managers in 2016 and will look to add strategies that are currently not present or under-represented on the platform
. Julius Baer Announces Final Settlement with the U.S. Department of Justice Regarding its Legacy U.S. Cross-Border Business
Julius Baer announced that it has reached a final settlement with the DOJ in connection with its legacy U.S. cross-border private banking business. This settlement is the result of Julius Baer’s proactive and long-standing cooperation with the DOJ’s investigation. The two Julius Baer employees indicted in this context in 2011 have also taken an important step towards a resolution of their cases.
Julius Baer has entered into a Deferred Prosecution Agreement pursuant to which it will pay USD 547.25 million. In anticipation of the final resolution, the Group had already taken provisions in June and December 2015, totalling this amount, and booked them to its 2015 results.
In announcing the settlement, Daniel J. Sauter, Chairman of Julius Baer, commented: “Julius Baer’s ability to reach this final settlement with the U.S. Department of Justice is the result of its constructive dialogue and cooperation with U.S. authorities. I would like to thank all our employees, clients and shareholders for their ongoing trust and support.”
Boris F.J. Collardi, CEO of Julius Baer, added: “Being able to close this regrettable legacy issue is an important milestone for Julius Baer. The settlement ends a long period of uncertainty for us and all our stakeholders. This resolution allows us now to again fully focus on the future and our business activities.”
Wikimedia CommonsPhoto: Wes Sparks, Head of Credit Strategies and Fixed Income at Schroders. Wes Sparks, of Schroders, Will Discuss High Yield Bond at the Funds Selector Summit 2016
Continuing volatility and elevated risk premiums mean that high yield bond returns in 2016 could be in the mid single-digit range; however, Wes Sparks, Head of US Credit Strategies and Fixed Income at Schroders, believes that the asset’s expected performance will continue to make it attractive in relation to many other fixed income alternatives.
Wes Sparks will be discussing this market’s expected performance at the second edition of the Fund Selector Summit on the 28th and 29th of April. The meeting, aimed at leading fund selectors and investors within 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 Funds Society, provides an opportunity to hear several management companies’ view on the industry’s current issues. During his presentation, Sparks will also give his views on global corporate debt market, on which he is an expert following 22 years in the industry.
Wes Sparks is based in New York, leading the US team responsible for all of Schroders’ investment-grade and high yield credit portfolios. He is the lead fund manager for Schroder ISF Global High Yield, a position he has held since the inception of the fund in 2004, and is additionally a co-manager for Schroder ISF Global Corporate Bond and various US Multi-Sector funds.
Sparks joined Schroders in 2000 from Aeltus Investment Management (1999 to 2000) and Trust Company of the West (1996 to 1999), where he worked as Vice President and Portfolio Manager with the corporate sector.
You will find all the information regarding the Fund Selector Summit Miami 2016, which is aimed at leading fund selectors and investors within the US-Offshore business, in this link.
CC-BY-SA-2.0, FlickrPhoto: Helfrain. Japan Lowers Its Rates into Negative Territory: the Currency War Intensifies and Gives Wings to Short-Term Equities
In a surprise move, the Bank of Japan decided on Friday to join the ECB’s strategy and cut interest rates by 20 basis points, taking rates into negative territory at -0.1% (from the previous + 0.1%) for deposits of financial institutions at the central Japanese bank. The experts are divided: the news will help the markets and an economy with great export weight, but accentuates the currency war spiral to capture very modest overall growth and finally, the consequences may not be as promising.
The adoption of a negative rate helps the Bank of Japan to fight deflation by reducing financial costs, in an attempt to breathe some life into Abenomics, the government’s major plan to revive the economy. The Bank of Japan, which blames oil prices for persistently low inflation in the country, adds this new measure to its program of quantitative easing which involves the annual purchase of 80 trillion yen in assets.
In response, the yen fell sharply against the dollar and other reference currencies like the euro, fueling a currency war which though undeclared, continues to cause panic in the trading rooms of half the financial sector.
In the press conference following the decision, the Bank of Japan’s Governor, Haruhiko Kuroda, stated that he does not rule out expanding the quantitative easing program, which could even include further cuts to increase the dip into negative territory.
“As such this challenges our previous outlook and as a result we are stepping back from some of our long yen currency positions as we reassess the absolute and relative policy stances of developed market central banks,” explained Kevin Adams, Director of Fixed Income atHenderson Global Investors.
Meanwhile, despite the rise in stock markets and debt, Keith Wade, Chief Economist and Strategist at Schroders, believes that the decision is caused by weakness and increases the risk that China may retaliate by further depreciating its currency.“If so, we will have entered a new phase in the currency wars where countries fight over a limited amount of global growth, an outcome which does not bode well for risk assets,” Wade points out.
Equities and fixed income
For Simon Ward, Henderson’s Chief Economist, it is more likely that the move is interpreted by the market as a negative signal for economic prospects, and as evidence of “Bank of Japan’s desperation”. This, claims Ward, will cause the market to be more, rather than less, risk-averse.
In the short term, however, the Bank of Japan has become the investors’ best friend. Japanese stocks rose on Friday and analysts agree that they are likely to continue rising in the short term. Robeco’s portfolio of international equities, Robeco Investment Solutions, is overweight in Japan. “We will obviously continue with this strategy. Our position has been strengthened by the decision of the Bank of Japan,” says Leon Cornelissen, Chief Economist at the firm.
“We believe that the surprise announcement is likely to have an incrementally positive effect on the outlook for Japanese equities, as it tempers the recent concern around the drag of a stronger yen on earnings. We maintain the view that Japanese stocks could withstand a moderate appreciation of the yen,” explains the team at Investec’s multi-asset strategies.
Regarding fixed income, Anjulie Rusius, from the Retail Fixed Interest team at M & G, pointed out that the move by the Japanese central bankhas been supportive of Japanese government bonds, alongside those of other countrieswhich have also adopted negative rate regimes, in a movement which could be repeated in the medium term.
