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The Finance, Insurance, & Real Estate sector was the most targeted sector during September, comprising 27 percent of all targeted attacks, accorging the new study by Symantec.
Large enterprises were the target of 45.7 percent of spear-phishing attacks in September, up from 11.7 percent in August.
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Over the past decade, blended emerging market debt (EMD) strategies have grown from nowhere to around a US$100 billion asset class (see Figure 1). In the last few years, in particular, they have become the favoured way for investors to access EMD, receiving positive net flows whilst dedicated local and hard currency EMD universes have seen net outflows.
But what exactly constitutes a ‘blended’ emerging market debt strategy? And how should investors expect these strategies to behave? Indeed, what is the optimal long-term strategic asset allocation and what should investors expect from their managers in terms of asset allocation and risk management? In this month’s topic piece Investec looks to answer some of these fundamental questions in an attempt to offer a better understanding of this new and, attractive, entry point to emerging market debt.
Defining ‘blended’ EMD
Defining what makes a strategy blended should be easy: namely any strategy that combines both local currency and hard currency denominated debt. However, the difficulty is that most ‘pure’ local currency debt funds will at times include some form of dollar (hard currency) denominated debt. Similarly, many ‘pure’ hard currency debt funds include some allocation to local debt.
Thus, as well as having a meaningful allocation to both local and hard currency debt, one of the key attributes of a blended EM debt strategy should be the ability to dynamically allocate between asset classes with the view of outperforming a mixed local currency/hard currency benchmark. Yet many blended strategies make little or no attempt to allocate between asset classes or outperform a mixed benchmark. To illustrate this point, Investec AM examines the ‘eVestment Emerging Markets Fixed Income – Blended Currency’ universe which consists of 50 strategies described by their managers as ‘blended’. However, as Figure 2 shows, only 19 of these strategies have identified themselves with a benchmark made up of both local and hard currency emerging market debt (be this sovereign or corporate debt).
Even if we filter out strategies that do not meet our basic definition, its research shows that not all blended strategies offer a truly blended approach. “We find that most blended strategies tend to have a strong bias towards hard currency debt and also to generally being overweight risk (i.e. being long beta)”.
“We believe that the bias towards hard currency debt exposure, both within benchmarks and relative to benchmarks, is due to a number of factors. First and foremost, some managers may be inexperienced in managing local currency debt, especially with regards to managing the currency exposure itself and treating it as an opportunity rather than a risk. Secondly, not all managers have the experience and capacity to open local currency accounts, manage settlement and custody, as well as taxes, for the various local markets. Finally, we envisage that some managers are adapting what were once pure hard currency EMD strategies into more typical blended approaches, a process that will take time to fully evolve”.
As the asset class and blended strategies continue to evolve, along with client preferences and demands, Investec expects that the universe of blended strategies will tend to become more focused, with a similar range of benchmarks and more balanced asset allocation.
Determining an optimal strategic allocation
Not surprisingly, it is a difficult task trying to determine what the optimal long-term allocation to the various emerging market debt asset classes should be, not least because ultimately this will also depend on each individual or institutional investor’s risk preferences. “What we are able to do, however, is consider a range of factors which should at least inform our decision on the strategic asset allocation and, hopefully, give us a better understanding of what to expect from this allocation in terms of a range of likely outcomes”.
“Using simulation of historical data (please see the longer white paper for more details) in combination with evaluating the size and accessibility of each component of the EMD universe, we believe that an approximately equal allocation between local and hard, which some blended strategies offer, is reasonable. While this may mean that returns are dampened by the local currency hedged bond component, historically (although not recently) this has somewhat been made up for by the currency component. Meanwhile, including corporate debt in the hard currency debt allocation should serve to dampen the overall volatility over time, although drawdowns might be expected to be slightly worse”.
One could argue that we should bias the exposure to hard currency debt (as many strategies have done) given that the currency component of local debt increases the volatility and, at least recently, has not contributed much to returns. “However, we believe that this argument may be relying too much on the recent historical data and ignores the important fact that local debt is a much larger asset class than hard currency debt, yet with far less money dedicated to it. One thing we would favour is increasing the exposure to hard currency corporate debt from the 10% suggested by our simulations. This is because, once again, it is a much larger asset class than hard currency sovereign debt. Furthermore, we also believe that the hard currency corporate debt asset class will continue to grow and present investors with attractive, diversified access to new countries and sectors. Ultimately, each investor’s risk profile will be different and would thus demand different allocations. Furthermore, we have only considered this allocation from the point of view of a dollar-based investor. The analysis could be quite different for investors with other base currencies. However, a 50/50 allocation between local and hard currency debt, with a reasonable (at least 20%) allocation to corporate debt seems to us to be a good way of balancing the need to optimise risk-adjusted returns while still not chasing the crowd and investing into already well- owned asset classes”, according to Investec.
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With today’s low yields and interest rates at historic lows, traditional sources of income such as bonds and bank account savings have failed to meet investors’ income goals. Investors continue to look for other sources of income — whether to supplement pensions or paying for a child’s education — but are they equipped with enough knowledge when choosing?
Schroders has launched incomeIQ, a new online tool designed in partnership with University of Cambridge behavioral scientist and PhD researcher, Joe Gladstone, to help investors determine their unique behavioral biases when making income investment decisions, and improve their income intelligence or ‘incomeIQ’.
Gonzalo Binello, Head of US Intermediary Offshore for Schroders commented:
“Our clients have had a tendency to invest in direct fixed income securities and real estate in order to generate income within their portfolios. This strategy creates a concentration risk and can make the portfolio returns vulnerable to the global interest rate cycle. That is why we stress the importance of a more diversified income oriented strategy going forward. We see continued need and demand for income and at Schroders, we want to ensure that investors are equipped with the knowledge to achieve their goals. The incomeIQ tool and knowledge center offers a hub for investors to explore their unique profile, along with guides, tips and products to help them make more informed decisions to build their income oriented portfolios”.
Is the tendency to look on the bright side always a good thing? Do you buy more when you go to the supermarket hungry? As humans we don’t always make logical or rational decisions. IncomeIQ, which is supported by in depth research on behavioral finance, can help investors understand their individual profile in order to make more informed investment decisions.
Our recent research shows that 88% of investors say they are on average or better than average at making investment decisions. People generally overestimate their investment ability and this ‘over confidence bias’ can cause errors in judgment.
Joe Gladstone, behavioral scientist and PhD researcher, University of Cambridge, England said:
“It is far more common for people to see themselves as above-average investors (41%) than as below average (12%). Psychologists have long found that people are biased to be overconfident about their abilities, resulting in unrealistic perceptions of risk. This overconfidence spills over into investment behavior too. The result is impoverished returns as investors take bad bets because they fail to realize that they are at an informational disadvantage.”
To try the tool and build your incomeIQ you may do so in http://incomeiq.schroders.com/en/americas/adviser/
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Markets had been unusually calm, until risk surged in late August. Bigger portfolio shifts when volatility is rising may be magnifying the spikes, making markets harder to navigate. AB thinks the answer is focusing on more than risk.
It’s true that volatility has moderated a bit but is still higher than it was before August, and policy makers have taken note of these sudden shifts in risk. In fact, it was one of the reasons why the US Federal Reserve decided to hold off on raising interest rates in September, point out Brian T. Brugman, portfolio manager of Multi-Asset at AB, and Martin Atkin, Head of US Client Solutions at AllianceBernstein Multi-Asset Solutions Group. To avoid being whipsawed, recommended, investors should take a holistic view of their portfolios. The focus should be on more than risk signals—return signals matter, too.
Reactions to Market Volatility Amplify It
“Our research indicates that risk factors—and oversimplified asset-allocation decisions based largely on volatility measures—can create a painful cycle. The very trigger that prompts an allocation shift away from equities is itself influenced by the resulting sale. And volatility begins to feed on itself”, said Brugman and Atkin.
There’s evidence that more managers are making decisions based largely on changes in market volatility. The firm looked at allocation changes over time, based on the implied equity exposure across different mutual fund categories, examining both high-risk and low-risk environments. Brugman and Atkin found that reductions in equity exposure have become noticeably larger since the Global Financial Crisis of 2008.
In fact, the downward shifts for tactical allocation strategies have almost doubled in size. It’s not surprising that tactical strategies make adjustments, but the bigger moves today are notable, explain the experts. Even world allocation strategies, which largely left their equity allocations alone pre-crisis, have begun to make significant equity reductions.
“Our analysis also suggests that portfolio shifts aren’t just bigger than before, but they’re also happening faster when volatility rises. This helps make volatility spikes more pronounced. The August episode confirmed this: selling pressure due to a collective decision to de-risk likely made the first few days more severe. Before August 24, when risk was below average, the group of strategies we isolated for this analysis had an average overweight to equity of 9%.Shortly after the spike in risk they were significantly underweight, averaging 15% less equity exposure than is typical”, point out.
The Problem of Volatility Tunnel Vision
One likely reason for the rush for the exits is that many risk-managed strategies exclusively use volatility gauges as a simplified trigger for making allocation changes. Because this systematic approach is so common, it creates significant selling momentum in equities when risk starts to rise and the signal turns red. This risk “tunnel vision” can lead to even sharper moves in the very metrics used to determine portfolio positioning.
Brugman and Atkin don’t think these type of asset-allocation triggers are robust enough. It’s important to determine if a sudden change in the risk environment is temporary or long-lasting. That knowledge can make a portfolio manager less likely to make the classic mistake: trend-following and selling into distress at a market trough.
A Holistic Process Must Integrate More than Risk Signals
One way to tackle this problem is to include both expected risk and expected return across asset classes in quantitative analysis. It’s also important not to leave fundamental judgement behind, and to consider how technical factors in the market impact the asset allocation equation.
All things considered, AB thinks it makes sense to be modestly underweight equities in the current environment. Volatility is above average, but we think the initial spike may have been exacerbated by indiscriminate selling from risk-managed strategies. Stalling growth in emerging markets and falling commodity demand may not be as much of a spillover risk for developed economies as some investors may think.
“In turbulent times like these, the ability to be dynamic in shifting equity beta can be very helpful. And volatility is a valuable signal that helps inform that decision. The key is to make sure that the trigger for shifting beta isn’t overly sensitive to changes in volatility alone”, concluded.
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Old Mutual Global Investors recently held its annual client’s conference at the Taj Boston Hotel. The meeting was attended by more than 60 clients from around the world who were able to hear about the management ideas, which the company is developing for each of its different strategies.
During the first session, five of the top OMGI fund managers from London, Hong Kong, and Edinburgh, explained their views on the market’s most important current issues. Therefore, the rate hike by the Fed and its impact on assets, volatility, problems in China, the profitability of global fixed income, and energy prices were some of the issues on the table in the first panel.
“We met here in Boston a year ago to discuss how we saw the end of the year and what are our prospects were for 2015. Today, we can say that the predictions we made then have been met only in part, and that in 2016 we are going to continue to see a high level of uncertainty as to what the world holds in store for asset managers,” said Chris Stapleton, head of distribution for the Americas Offshore market.
Christine Johnson, Head of Fixed Income, Josh Crabb, Head of Asian Equities, Ross Oxley, Head of Absolute Return strategies, Justin Wells, Global Equities Investment Director, and Lee Freeman-Shor, fund manager and author of the book “The Art of Execution: How the world’s best investors get it wrong and still make millions in the markets”, reviewed the movements carried out in their portfolios in order to adapt the portfolio to the current environment.
“Each team and each strategy has its own vision, and I think this is the key to our success, and reflects the talents of our portfolio managers. If you follow the path marked by a CIO it would be much more difficult to reach the levels of profitability that our funds currently offer,” explained Allan MacLeod, Head of International Distribution.
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ConsulTree International, a Leadership and Talent Development consulting founded in United States announced the opening of a new office in Argentina as the most recent expansion of ConsulTree International’s presence in Latin America.
The launch ceremony was held two weeks ago at the exclusive Palacio Duhau in Buenos Aires, with a Cocktail reception attended by a selected group of human resources professionals.
The local partners, Eduardo Cappello -managing director for the new office, with over 17 years in the business- and Paula Valente -Senior Consultant and Partner, Human Resources & Talent Development Specialist, with over 15 years of experience in leadership roles-, joined Luisa Guzman, CEO of ConsulTree International, who spoke about the New Global Trends in Development.
The opening of the Argentina office comes in response to proven demand from the existing client base comprised of multinationals based in South Florida for extended service in the region. “We are excited to lead the expansion of ConsulTree through a local presence in Argentina” said Luisa Guzman.
Guzman, with over 20 years of experience in Management Consulting, Human Resources, Organizational Development, Talent Acquisition and Leadership Development, is the founder of ConsulTree whose headquarters is in Miami and is present in Peru, Chile, Honduras, United Kingdom and Spain.
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The latest research from global analytics firm Cerulli Associates finds that advisors are more likely to join an existing registered investment advisor (RIA) firm, rather than start their own independent firm.
“Many advisors are daunted by the task of forging their own path and the accompanying headaches,” states Bing Waldert, director at Cerulli. “Advisors considering the RIA channel are increasingly looking to join existing firms that can provide them with not only the necessary operational infrastructure, but also a sense of community.”
Cerulli’s fourth quarter 2015 issue of The Cerulli Edge-Advisor Edition explores recruiting and retention, looking closely at the factors influencing advisors to switch firms, and the demand for support and flexibility in terms of how the advisors choose to conduct business.
“A variety of platforms and support organizations have emerged to provide advisors with different ways to run their practices,” Waldert explains. “The rise of the Subaggregator is happening for two reasons. The first, as has been noted, is providing an option for advisors interested in the independent business model, but without the skills or desire to operate their own business. The second and unique reason for the rise of these firms centers on the culture and community of being part of a smaller organization.”
“Cerulli is naming this class of firms the Subaggregators because their business model in many cases escapes traditional definitions of broker/dealers (B/Ds), RIAs, or office of supervisory jurisdiction (OSJs). They use the platform of a larger firm, such as a B/D or custodian, that more frequently works directly with advisors,” Waldert continues. “These firms support multiple advisory practices, with advisors operating autonomously, often across multiple geographies. They have professional leadership in place. Perhaps most importantly, the advisor’s primary relationship is with the Subaggregator rather than the B/D, custodian, or platform. Advisors are recognizing this evolution and believe the rise of Subaggregators is the next generation of financial firms.”
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The Chinese economy is in a transition phase as it works through the competing needs of growth, reform and deleveraging. Many of the country’s engines of growth are not firing as strongly; the export sector has been losing competitiveness for a number of years under the influence of rising wages and a strong currency. Meanwhile, investment expenditure is being held back by growing local government debt burdens and Communist Party officials scared to act because of the anti-corruption crackdown.
As a consequence, economic growth is being dragged southward. Concerned that growth is too weak, the government has announced that it will increase fiscal expenditure to boost activity levels.
Economy and policy driven by competing needs
But none of this is new to us − what is new are signs of change in the reform agenda. In 2013, the relatively new President Xi embraced market forces with welcomed initiatives such as the Hong Kong-Shanghai Stock Connect, which facilitates cross-border share trading, and promoting development of a bond market to reduce the reliance on banks for financing.
However, weakness over recent months in the stock and foreign exchange markets have been met by government intervention, aimed at supporting markets with measures including compelling brokers to buy stocks and prohibiting major shareholders from reducing their holdings. There has also been indirect intervention, for example imposing additional reserve requirements for banks when hedging renminbi for clients, with the aim of reducing speculation in the currency−essentially a mild form of capital control.
Policy pro-reform, action anti-reform
In theory, the reform agenda continues, but in practice the government’s actions are reflecting the Communist Party’s unwillingness to give up control, by exercising considerable financial muscle to influence the market forces it should be embracing. This is an important change and warrants close monitoring as it impacts the attractiveness of China to foreign investors.
Currency weakness is a new phenomenon
The liberalisation of the foreign exchange mechanism in China, with the aim getting the renminbi accepted into the International Monetary Fund’s Special Drawing Rights (reserve currencies basket) is subjecting the currency to market forces. Early indications are that the government will utilise its vast foreign currency reserves to support the renminbi. However, as a consequence, this will cause a contraction in domestic money supply, which may undermine efforts to boost the economy with fiscal stimulus. It may also provide a window that encourages rich Chinese to take money out of China. These reasons strengthen the argument for a weaker renminbi.
Foreign investors have been used to a relatively strong Chinese currency. The renminbi was pegged to the US dollar from 1994 to 2005 and has appreciated in recent years − so currency weakness is a new headwind for overseas investors.
Summary
These developments mean it will be imperative to monitor government actions as much as policy rhetoric, while investors will be dealing with a new dynamic of a weaker Chinese currency. In the meantime, as China’s economy muddles along we believe the best approach is to continue investing in the strongest, best managed, cash generative businesses that stand to benefit as China’s economy transforms. One positive from this point of view is that owing to the macroeconomic pessimism, many of these companies are currently trading on attractive valuations and we will continue to seek to take advantage of this on behalf of investors.
Charlie Awdry is China portfolio manager at Henderson.
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MFS launches two equity income funds: MFS Meridian Funds U.S. Equity Income and MFS Meridian Funds Global Equity Income.
Both funds seek total return through a combination of current income and capital appreciation. They follow a disciplined, repeatable process that utilises the full capabilities of MFS’ integrated global research platform, which includes fundamental equity and quantitative analysis. This approach is called MFS Blended Research.
The funds are available to investors through the Luxembourg-domiciled MFS Meridian Funds range. Jonathan Sage is the lead portfolio manager on the funds and is a member of the team that has been implementing the Blended Research investment process since 2001.
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Thomas Angermann is a member of the Specialist Equities Team at UBS Global AM, based in Zurich. Specifically he is responsible for the management of a number of Pan European small and midcap mandates. In this interview with Funds Society, he explains why the growth potential currently offered by Small Caps is higher than the one that can be found for Large Caps.
Do you think the current momentum is good for European Equities? Has the equity valuation improved after the market correction in August?
After the recent market correction the valuation for European equities looks interesting now. We definitely see more opportunities in European equities and particularly in Small and Mid caps than three months ago. We think the current correction is healthy as the market is pricing out the too high growth expectations.
Which will be the key factors for the revaluation? Which factor will have a greater importance: Profits, QE support or other macro factors?
Three main drivers should be mentioned. First, the potential earnings growth for the next year as well as the current expectations about this growth potential. Second factor, the Chinese economy, it seems we see first signs of stabilization, however we are still waiting for robust evidence on this. The adjustment from the pure investment driven economy of the past to a more balanced consumer driven economy of the future will take years. That will also create a lot of opportunities. The third factor is monetary policy by the central banks. We think they will stay accommodative but we do not count on any additional measures yet.
In general, what are the risks of short/medium tern correction in European stocks markets? In particular for Small Caps?
As before, three main risk drivers should be highlighted. The first risk we face are Emerging market turbulences. Specifically how the Emerging markets growth pattern will behave in the upcoming months and the level of volatility of EM currencies. We should keep an eye on how this will impact European export driven economies. The second driver is the behavior of the European consumer and to what extent it will remain supportive. A third risk factor would be given by central banks. However, as previously mentioned, we do not expect any upcoming change in their policies and it seems a first interest rate hike by the Fed is desired by the markets.
What extra value are Small Caps going to add vs. Large/Midcaps? Can Small Caps offer greater potential opportunities?
First of all the growth potential currently offered by Small Caps are higher than the one that can be found for Large Caps. Additionally Small Caps offer M&A opportunities, as in the current low growth environment larger companies might add growth by buying smaller companies. We expect that the M&A activity will increase, founding its main targets in the Small Caps universe rather than in the Large Cap world. A second factor is the daily volatility. Surprisingly during last months the volatility registered for Small Caps has often been lower than the one for Large Caps. However we will need further evidence of this pattern.
Is the SC sector affected anyway by general elections (such as the Spanish ones)?
Regarding elections, Small Caps sector is as much affected as the Large Caps sector is. We do not expect any remarkable long term impact coming from the Spanish political situation. However there might be short term effects.
Do you think that volatility will increase in the upcoming months? In this sense, which would be the consequences of a volatility increase regarding your investment style?
Since volatility has already been increased since end of last year with additional acceleration during August and September we do not expect further significant increases under current market conditions. However, in the case of a “Black-Swan-Event” (occurrence of something important which was not expected) we will see an further increase. Nevertheless we would not change our investment style and we would stick to our stock picking approach but would have an even closer look at our risk systems.
