Photo: Mark Mobius, Guru of emerging market equities at Franklin Templeton. Star Manager: Hero or Villain?
Each asset management firm has a star portfolio manager or at least a manager who’s held as the role model. This is typically a PM with years of experience, a track record to die for, and a renowned reputation within the industry. If at Franklin Templeton we have Mark Mobius and Michael Hasenstab, or at Matthews Asia Andy Rothman, we must not forget Russ Koesterich when speaking of BlackRock, or Greg Saichin of Allianz GI.
They lead teams with good results and are in major mutual fund firms. For years, their management attracts clients, and therefore increase the flow of capital. The problem comes when they want to start new projects, change companies, or retire without further ado.
What for years was a sweet dream for any company suddenly becomes its nightmare overnight. The most recent example is Bill Gross, who after years as a star manager at PIMCO, a company which he helped to establish, he decided on a change of scenery and joined Janus Capital.
The Allianz subsidiary then experienced capital outflows amounting to $176 billion worldwide in 2014, i.e. 26% of the assets it managed in 2013. The losses of the PIMCO Total Return, Gross strategy, amounted to over $96 billion dollars in just five months. A genuine catastrophe.
Something similar happened in Spain with Francisco Garcia Paramés’ departure from Acciona Group’s Bestinver, after 25 years of service to the company. Known as “Europe’s Warren Buffett”, he achieved a placing for the company’s funds at the top of the rankings within their class. When he decided to start a new project, however, the outflow of funds began. Assets under management fell by about 30%, especially with the exit of institutional clients.
The capital outflow requires companies to react quickly in searching for the most suitable replacement, but, even so, prefer to choose other managers with similar reputation. The damage to the company is twofold. Not only do they leave, they also do so to join the competition.
Recently, Morningstar left the door open to hope by giving an example of an orderly transition with low impact for the company when placing Jupiter UK Growth in the hands of Steve Davies, who replaced Ian McVeigh after his departure. Among the lessons to be learnt from this is that the longer the star manager and the manager who shall replace him work together, the less impact on the firm.
Photo: Lee. Why High Yield? Low Interest Rate Sensitivity and Default Rates
The high yield market typically has a lower duration than other fixed income markets due to a combination of higher coupons and shorter maturities. This helps to insulate it from movements in interest rates – a characteristic that is becoming increasingly valuable as the market anticipates a rise in US interest rates. The chart below shows how US high yield has historically provided better excess returns in periods where 10-year Treasury yields increase by more than 100 basis points (bps).
High yield tends to exhibit a higher level of idiosyncratic risk than other areas of fixed income, with individual company factors proving a bigger determinant of the bond price than is the case for investment grade bonds. As the correlation table below demonstrates, high yield also has a stronger correlation with equity markets, making it a useful diversifier within a fixed income portfolio.
For a long-term investor, the heightened risk of default is the key driver of spread premia for high yield bonds. We expect default rates to remain low for an extended period given sensible leverage, lack of capex and historically-low interest rates – the exception to this being the energy sector which is troubled by over-investment meeting a collapse in oil prices.
In a recent study, Deutsche Bank remarked that 2010-2014 is the lowest five-year period for high yield defaults in modern history (quality adjusted). To protect for default risk in BB and B-rated bonds over this period, investors would have required spreads of 27bp and 94bp respectively. To put this in context, current European/US BB spreads are 314/346 bp and B spreads are 528/518 bp2, suggesting high yield bonds in aggregate are more than compensating for a moderate pick up in defaults.
Although we are seeing evidence of late cycle activity in some sectors in the US, at a more broad level and globally companies are still using the proceeds of their high yield bond issues for non-aggressive activities such as refinancing. Bondholder unfriendly activities (issuing bonds to pay for leveraged buyouts or to pay dividends to equity holders) remain well below the worrying levels of 2005-07.
Photo: Caio Bruno. Brazil’s Slumping Economy Likely To Decline Further
Hurt by the global slump in commodities and mismanagement by government officials, Brazil’s economy has been battered both internally and externally. Given the current domestic political crises in Brazil over the alleged Petrobras payments to politicians, and the country’s current budget crisis, I believe it is unreasonable to expect any near-term recovery.
Gross domestic product (GDP) and industrial production have dropped
Over the past year, Brazil’s real GDP and industrial production have declined sharply, continuing a trend that began with the collapse of output and production following the Global Financial Crisis of 2008 and 2009. Since peaking in the first quarter of 2014, Brazil’s real GDP has fallen by a cumulative 3.5%, while industrial production has declined by 6.8% (on a 12-month moving average basis).1
The Brazilian economy is laboring under “twin deficits.”
The first is an external current account deficit that implies that the economy has lost some competiveness and/or that there’s a build-up of overseas debt.
The second is a growing fiscal deficit that the government appears very unwilling to bring under control.
The worrying aspect of Brazil’s macroeconomics is that both deficits are currently widening, suggesting a marked lack of discipline with respect to spending. Normally a government faced with this kind of situation would attempt to rein in fiscal expenditures by reducing the fiscal deficit or private expenditures, leading to an improvement in the current account balance. However, the fact that Brazil is not doing either of these two things is a major reason to expect the currency to weaken further.
With the government’s unwillingness to bring the country’s fiscal deficit under control, most of the burden of adjustment rests on the central bank’s interest rates, which are very high at 14.25%,2 and the currency, which has depreciated sharply despite high domestic interest rates.
Recession extension likely
Brazil’s economy is in a protracted slump. Given the weakness of demand abroad for Brazil’s key commodities, and the inability to revive the economy at home, it seems likely that the recession will be extended.
Key indicators of domestic spending show a gloomy picture:
New car sales were down 13.2% year-on-year in June
Industrial production was down 6.6% year-on-year in July
The latest comprehensive figures for retail sales show they were down by 3.0% in June.
Outlook
With high inflation eroding purchasing power and high interest rates curtailing credit growth, it is hard to envision any near-term upswing in the domestic economy for Brazil.
Going forward, I believe Brazil’s currency is likely to depreciate further, and interest rates will like stay high until the twin deficits are properly addressed.
Article by John Greenwood, Chief Economist of Invesco Ltd
CC-BY-SA-2.0, FlickrPhoto: 一元 马 . Aberdeen Granted WFOE Licence, Signals Long-Term Ambition in China
China has granted Aberdeen Asset Management, the UK-based asset manager, a Wholly Foreign-Owned Enterprise (WFOE) business licence.
The announcement comes as UK Chancellor of the Exchequer, George Osborne, leads a trade delegation to China.
The licence, issued to a newly-created Aberdeen subsidiary by the Shanghai Administration for Industry & Commerce, Pilot Free Trade Zone Branch, will enable the company to set up an office there under the pilot Free Trade Zone.
Aberdeen has long wanted to expand its activities in China. The chief constraints have been access, control and manpower. The company has taken a gradual approach, having opened a representative office in 2007. That office has mainly performed liaison work.
Under the new venture, the plan is to add analysts to research local equities and business development staff. At present, Aberdeen does such research mainly from Hong Kong, preferring to do this in-house, and this will continue.
In the first stage asset-raising will focus on local institutions. The WFOE is based in the Free Trade Zone which brings further advantages.
Aberdeen stresses the importance of patience, however. It is not seeking quick returns but looking to build its presence step by step, mindful that, while liberalisation is good for the industry, opportunities are evolving fast.
That view is informed by the raft of new investment initiatives, which have included the likes of ‘Stock Connect’, the Hong Kong-China mutual recognition scheme for funds as well as the WFOE regime itself.
Photo: campamento de Lazio. CFA Institute Conference: Fixed-Income Management 2015 Preparing for a Different and Divergent Environment
What will be the impact of a divergence in monetary policies around the globe? What are the major risks facing the global economy and financial markets? What fixed-income strategies adapt well to a changing environment?
With fundamental questions lingering in today’s global debt markets, there is an increased need for savvy bond investors who have the skills and insights to thrive in a new cycle and deliver value to investors.
At Fixed-Income Management 2015 -organized by CFA Institute in Boston on October 22 and 23, leading practitioners will navigate through what’s happening in global bond markets, take a closer look at the long-term effects of a divergence in monetary policies and the path of growth in developed and emerging economies, and discover where leading investors are finding value. They will examine fixed-income strategies that provide diversification and adapt well to a changing environment.
Covering practical topics ranging from security analysis to sector allocation and risk management to portfolio construction, this year’s conference brings together researchers, analysts, portfolio managers, and top strategists to focus on
analysis of the long-term effects of the divergence in monetary policies in the United States, the United Kingdom, Europe, and Japan and their impact on sovereign debt markets
the unintended consequences of regulation on bond market functioning and liquidity;
inflation and deflation cycles globally;
strategy and sector allocation and the role of fixed income in the total portfolio;
the outlook for interest rates, economic growth, currencies, asset classes, and sectors;
credit investing strategies—where to find value and reduce market sensitivity;
critical factors that will influence the medium- to long-term performance of fixed-income investments, including demographics, technology, and policy; and
risk management and how investors can prepare for market recalibration.
Photo: adjusted Fotorus / Flickr Creative Commons image
. Rafael Tovar Joins Axa IM as US Offshore Distribution Director
Rafael Tovar has joined Axa Investment Management in order to develop the offshore business for the Americas, and will be working in James Wallace’s team.
Rafael will be based at the AXA Investment Management US headquarters, located in Greenwich, Connecticut.
Until a month ago, Tovar worked at Nikko AM, the Japanese management company, where he worked within the Sales and Marketing team based in New York, serving institutional clients and family offices throughout the Americas region.
Prior to that, he formed part of the team at Compass Group, where he was responsible for business development for institutional clients in Brazil, Miami, and New York, providing coverage to private banks, family offices, wholesalers, broker dealers, and pension funds. He had previously worked for renowned firms such as Goldman Sachs and Accenture.
He holds a Bachelor of Engineering Degree from the Simon Bolivar University in Venezuela, has an MBA in Finance, and an MA in International Studies from the University of Pennsylvania – The Wharton School.
As part of the process of internationalization of their asset management company, AXA Investment Managers, recently appointed Leticia Aymerich as Head of Customer Service for the region of the Americas, serving markets in the United States, Canada, and Latin America. Leticia has joined the management company’s headquarters in the United States from Spain, where she worked for Axa IM since 2006.
Photo: Arek Olek. Navigating The Storm: In Risk Budgeting and Alpha We Trust
The Lyxor Hedge Fund Index was down -2.7% in August. 1 out of 12 Lyxor Indices ended the month in positive territory. The Lyxor Convertible Arbitrage Index (+3.3%), the Lyxor L/S Equity Variable Bias Index (-0.7%), and the Lyxor L/S Equity Market Neutral Index (-1.1%) were the best performers.
The deflation and growth scares, which built up over the summer, accelerated following the CNY devaluation. They morphed into a vicious cycle in the last week of August. With volatility reaching 55 and equities plunging by the hour, Monday 24 will from now on count among the major stress episodes used as reference. The bulk of the Lyxor Hedge Fund index was endured during that week. Event Driven funds were the main losers. Return dispersion was elevated. Losses in some heavy-weight funds hid decent performances among macro traders (CTAs and Global Macro). A milder pressure on credit and govies supported credit and fixed income arbitrage strategies. The L/S Equity space proved resilient apart from Asian and US long bias managers.
“Beyond a possible near-term rally, we expect moderate and riskier returns from traditional assets. Thus, we continue to strengthen our focus on hedge funds’ relative value approaches.” says Jean-Marc Stenger, Chief Investment Officer for Alternative Investments at Lyxor AM.
To the notable exception of Asian and US long bias funds, the L/S Equity strategy was remarkably resilient. Most funds had steadily reduced their net exposures over the summer, cautiously positioned ahead of the sudden end-of-August debacle. In Europe, Variable bias managers implemented efficient hedging strategies, with an increased number of single shorts. European managers, which generally missed the reflation trade early this year, regained all the lost ground over the summer. They even outperformed market neutral strategies. In contrast, Lyxor Asian managers suffered in August, down -2% in aggregate. Their dramatic cut in net exposure since June (-10%) limited the damages. US Long Bias also took a major hit, losing most of their beta.
Event Driven funds were the main losers, with a severe plunge across the board. The aggregate Event Driven performance was close to flat before the last week of the month. Until then, some losses were recorded in China and Resources related exposures. They were offset by positive earnings releases in few large corporate situations and by the favorable closing of several M&A deals. The last week of August unsettled both merger spreads and the pricing of corporate situations, including activist positions. Special Situation underperformed Merger Arbitrage funds, even adjusted from their market beta. The sudden widening of deal spreads and the depressed valuation levels of corporate situations will probably open a phase of recovery going forward.
The Lyxor L/S Credit Arbitrage index was only down -1.5%. The market turmoil infected credit markets but less than equities. Spreads had already meaningfully widened over the recent months. This kept managers on a very cautious footing, positioned on high quality and high grade issues, with increased diversification. As dispersion returned in the space, short opportunities also emerged – and not only in the energy segment. In particular weakening cross credit correlations provided fixed income arbitrage funds with greater relative value opportunities. The alpha produced by Credit strategies alleviated the adverse beta contribution.
High dispersion among CTAs in August. CTAs were up nearly +1% before the last week of August. With their long bond and USD positions along with their short commodities exposures, they were well hedged against the various risks being priced in. In particular: a slower global growth, a slower Fed normalization and the Chinese ripple effects on EM countries and resources. During the last week, a majority of funds remained reasonably resilient. However some heavy weight funds were substantially hurt on their remaining long equity holdings and on some of their long USD crosses. ST models outperformed thanks to a faster portfolio repositioning. We observe that, in aggregate, LT models cut their about 30% net equity exposure down to less than 10% over that week.
Heterogeneous returns among Global Macro, with losses in heavy weights. Until the last week of August the strategy remained resilient, with a slightly positive MTD return. While cautiously exposed to risky assets, their hedges had little efficiency in the sell- off. They were essentially hit in their equity and long USD positions, with limited cushion from bonds or safe havens. However, losses in large macro funds actually hide a more heterogeneous and favorable picture. After the sell-off, Lyxor Global Macro funds were on average 10% net long on equities (from 15% early August), with more than half of their equity positions in Europe. They continue to play commodities mostly in relative value. Overall they remain long USD, especially against EUR and GBP.
Courtesy photo.. Hartwig Kos Joins SYZ Asset Management as Co-Head of the Multi-Asset Team
SYZ Asset Management, the institutional asset management division of the SYZ Group, has announced the appointment of Hartwig Kos as Co-Head of the Multi-Asset team. Hartwig Kos will co-manage the team with Fabrizio Quirighetti and also serve as Vice-CIO of SYZ Asset Management. He will take up his position on 15 October 2015.
Based in London, Hartwig Kos will contribute with his specific skills and experience in active allocation strategies to the team of 7 people in place and will take over the management of the OYSTER Multi-Asset Diversified fund as lead manager. For their part, Fabrizio Quirighetti and his team in Geneva will manage the OYSTER Multi-Asset Absolute Return EUR and OYSTER Absolute Return GBP and Fixed Income strategies.
Before joining SYZ Asset Management, Hartwig was a Director in the Global Multi Asset Group at Baring Asset Management, where he was responsible for managing the Baring Euro Dynamic Asset Allocation Fund. He was also the Co-Manager of the Baring Dynamic Emerging Market Fund. Moreover, Hartwig was a member of the Strategic Policy Group at Barings, the firm’s asset allocation committee. Hartwig holds a Ph.D. in Finance from Cass Business School in London and a degree in Economics and Business Administration from the University of Basel, Switzerland. Hartwig is also a CFA® charterholder.
The London office is one of SYZ Asset Management’s clusters of excellence and notably houses the European equities fund management and research team. An office was opened in Edinburgh in November 2014 to include additional European fund management and research capabilities and an expanded sales team.
Commenting on the appointment, Katia Coudray, CEO of SYZ Asset Management, said: “I am pleased to have hired Hartwig Kos. He is an investment professional who is highly respected by his peers and his renowned experience in active allocation management adds value to our fund management team.”
Hartwig Kos added: “SYZ Asset Management has an excellent reputation and a convincing track record in the competitive field of multi-asset management. I am delighted to be a part of this team and join a Group with a strong investment culture and a human dimension.”
Photo: Moyan Brenn. Advisors May Not be Allocating Enough Effort to Target Millenials
New data released by Hartford Funds suggests that there is significant opportunity for financial advisors to better engage their young clients. Survey results uncovered that most advisors report not proactively pursuing the ‘Millennial’ generation as potential clients, despite identifying as prospects the individuals that fall into that category. Findings also revealed that advisors expect client risk aversion to nearly double in the next 12 months, continuing an upward trend.
When asked how much they focus on attracting Millennial clients, 56 percent of advisors said “less than other age groups” or “not at all.” However, 70 percent reported that they target clients in their late-twenties and early- to mid-thirties. Further, the majority (63 percent) of financial advisors who say they’re not targeting Millennials at all are also pursuing prospects in this age group.
“The term ‘Millennial’ has become a buzzword in financial services, being discussed constantly by financial firms and advisors. However, our survey suggests a disconnect when it comes to understanding who falls into this Millennial category,” said Bill McManus, Director of Strategic Markets at Hartford Funds. “In an attempt to filter noise, many advisors might be missing valuable insights for attracting their younger client targets.”
When asked about retirement, 71 percent of financial advisors plan to work for at least 16 more years, and 53 percent plan to work for more than 20 years. Despite the desire to continue offering financial advice beyond 2030, these advisors overwhelmingly are not focused on attracting Millennial clients. More than half of advisors who plan to work for more than 15 more years target Millennials less than any other age group or not at all. Similarly, 51 percent of advisors who plan to work for more than 20 years are also targeting Millennials less than any other age group or not at all.
“When factoring in career longevity, there is even greater concern that many advisors aren’t intentionally engaging Millennial clients. Advisors who plan to work for at least two more decades need to thoughtfully engage their younger clients in order to grow along with their needs,” McManus continued. “Millennials will reach critical planning milestones in the coming ten years and require support in navigating the market and reaching their goals.”
When discussing client risk aversion, advisors expect a significant rise in the coming 12 months. Continuing a steady upward trajectory, 57 percent of financial advisors expect clients to become more risk averse in the next 12 months, up 22 percent from 2014 (35 percent) and up 40 percent from 2013 (17 percent).
“Because advisors foresee greater risk aversion among clients in the coming months, they are in the unique position to help maintain focus on the bigger picture and minimize clients’ tendencies to make emotionally-driven investment decisions,” McManus added. “Particularly as the market and investors anticipate a rise in interest rates, it will be critical for advisors to help clients manage through potential market adjustments.” The data underscores that the majority of financial advisors (57 percent) place market volatility at the forefront of the issues that keep them up at night; interest rates follows in second (51 percent) and international turmoil and its impact on markets follows in third (46 percent). Financial advisors appear to be unanimously less concerned by clients’ anxiety about saving and investing (42 percent), while only 32 percent of financial advisors are worried about attracting the next generation of clients. Concerns about inflation come in last, with only nine percent of financial advisors noting this as an area of worry.
For its third annual Advisor Anxiety Survey, executed by Hartford Funds during June of 2015, Hartford Funds spoke with more than 100 financial advisors about their anxieties as well as attitudes and practices regarding Millennial clients, individuals born roughly between 1980 and 2000.
Photo: ben
. Most Latino Business Owners Expect to Pass Business on to a Family Member
According to a new study by Massachusetts Mutual Life Insurance Company (MassMutual), research from the2015 MassMutual Business Owner Perspectives Study revealed that 80 percent of Latino respondents expect to pass their businesses on to a family member – most often a child. However, 37 percent of those individuals said their chosen successor may not even know about this succession plan.
For Latino business owners, the aspiration to live the American Dream is no different, but the definition of success may be broader, encompassing their ability to care for and support extended families, friends, and their communities. The study reported they feel a strong sense of responsibility to their families and communities but tend to lack financial confidence and knowledge to put plans in place to ensure they can continue to provide for them.
“Latino entrepreneurs are strongly interconnected with their businesses, community and families,” said Dr. Chris Mendoza, Latino Markets Director, MassMutual. “Without the proper financial knowledge and preparation, Latino business owners are inhibited from fully realizing and protecting their dreams.”
Latino-owned businesses are growing at double the national rate, according to the U.S. Census, are generally younger and more likely to take community into account when making business decisions.
Only half of the Latino business owners surveyed have a formalized plan in place (a buy-sell agreement) to protect themselves for an untimely death; even fewer have a buy-sell agreement in place for disability; Protecting the business (35 percent) and family (37 percent) are the primary motivators for having these plans in place, yet an unforeseen illness or injury could jeopardize their ability to meet that goal.
While Latino business owners are ahead of their general population peers, when it comes to succession planning (49 percent of Latinos vs. 41 percent of the general population have a succession plan), only about half of the Latino business owners surveyed have any type of succession plan in place; Eighty percent said they will pass the business on to a family member – most often a child. However, 37 percent of those individuals said their chosen successor may not even know he/she is the successor (significantly higher than 23 percent of the general population).
Forty percent don’t have any retirement savings plan outside of their businesses and either plan to continue receiving income from the business post-retirement or will use the proceeds from the sale of the business to fund their retirement; Latino business owners are significantly more likely than the general population to say they plan to retire but haven’t given it much thought, and few (only 12 percent) say they plan to retire in the next five years, driven by the younger average age of Latino business owners; They are more likely to leave the business to a family member or relative (80 percent vs. 65 percent of the general population) and much less likely to sell the business to a key employee (9 percent vs. 14 percent of the general population).
