CC-BY-SA-2.0, FlickrPhoto: Travis Simon. Legg Mason to Acquire Australian Infrastructure Firm
US asset manager Legg Mason announced that it has agreed to acquire a majority equity interest in Rare Infrastructure, Ltd., (Rare) a global infrastructure asset manager headquartered in Sydney, Australia.
Rare has offices in Sydney, Melbourne, London and Chicago and specialises in global listed infrastructure investments, managing $7.6bn (€6.8bn) for institutional and retail clients.
Under the terms of the transaction, Legg Mason will acquire a 75% ownership stake, the Rare’s management team will retain a 15% equity stake and The Treasury Group, a previous minority owner, will retain 10%.
Joseph Sullivan, chairman and CEO of Legg Mason, said, “Rare’s investment expertise has strong relevance for many clients today, meeting important investment objectives including income, growth, diversification and capital preservation. The market for infrastructure investing has grown significantly over the past few years and RARE has participated in this growth, particularly in early adopter markets like Australia and Canada.”
Rare will operate as a core independent investment affiliate along with Brandywine Global, ClearBridge Investments, Martin Currie, the Permal Group, QS Investors, Royce and Associates, and Western Asset Management.
CC-BY-SA-2.0, FlickrPhoto: Shizhao. A Quick Look at Possible Implications of China’s Record Weakening of the Renminbi
The People’s Bank of China (PBoC) has announced yesterday that it is improving the pricing mechanism of the daily fixing rate of the renminbi. It will do this by referencing the previous day’s closing rate and by taking into account “demand and supply conditions in the foreign exchange markets” as well as exchange rate movements of other major currencies. As a result, the USDCNY (US dollar to Chinese Yuan Renminbi rate) was fixed higher by 1.9% as a one-off adjustment and represents a record weakening of the Chinese currency. It is the first weakening in the exchange rate by the PBoC since 1994.
The announcement of the PBoC that it will increase yuan flexibility suggests the daily fixing of the currency will be much more dependent on the market. As a result, it is unlikely that the yuan will continue to exhibit relatively low volatility and may continue to depreciate over the medium term as the authorities grapple with a slowdown in economic growth.
For Anthony Doyle, investment director within the M&G Fixed Interest team, there are a number of implications of a weakening yuan over the medium term:
Firstly, any move to weaken the yuan against the USD is likely to be bullish for US treasuries at the margin, resulting in lower yields. If the yuan depreciates in value, then China will have more USD to invest in US treasuries through foreign reserve accumulation, suggesting a strengthening in demand. However, unless we see a sustained weakening in the yuan in the weeks ahead then this move is unlikely to have a large impact in the demand for US treasuries in the short-term.
Secondly, this move will put downward pressure on already low inflation rates in the developed economies. Import prices for developed economies are likely to fall, suggesting lower producer and consumer prices. A substantial amount of Chinese manufactured goods consumed in the developed world are now cheaper and could cheapen further, resulting in lower costs for inputs which could lead to lower consumer prices.
Thirdly, the fall in the yuan will mean the purchasing power of Chinese businesses and households will deteriorate. It will also make raw material prices, which are largely denominated in USD, more expensive. The suggests further downward pressure on commodity prices and further pressure on commodity-rich export nations like Australia, New Zealand and Brazil. A weakening yuan suggests weakening demand and could result in lower growth for economies that export to China and weaker growth for the Asian region.
Any move to liberalise the determination of exchange rates should be viewed positively for the global economy. Given China’s level of importance as a key manufacturer of goods and its huge cache of foreign reserves, it is unsurprising that large moves in the exchange rate can have significant spillover effects for other economies and financial assets. Any further evolution of the determination of the daily fixing rate of the renminbi will continue to be closely watched, especially in an environment where the Chinese economic growth profile continues to be questioned.
Photo: Mauro Sartori
. Investing Lessons from Baseball’s Active Managers
As the popularity of passive investing continues to gain momentum, AB has taken a pause to think about a lesson from baseball. The question is: what kind of equity lineup creates a winning team?
Nobody can deny the increasing shift of equity investors toward index strategies. Net flows to passive US equity funds have reached $21.7 billion this year through June, while investors have pulled $83.7 billion out of actively managed portfolios, according to Morningstar. In this environment, active managers are increasingly challenged to prove their worth and justify their fees.
Building a Winning Lineup
Baseball provides an interesting analogy for the active equity manager. “Across all players in Major League Baseball, the batting average this season is .253, as of August 6. Yet even in today’s statistics-driven environment, you won’t find a single team manager who would choose to put together a lineup of nine players who all bat .253—even if it were possible”, explained James T. Tierney, Chief Investment Officer, Concentrated US Growth.
The reason is clear and intuitive. For a baseball team to be successful, it need to have at least a few hitters who are likely to get hits more often than their peers. And to create a really robust lineup, a manager wants a couple of power hitters who pose a more potent threat. “Of course, some hitters will trend toward the average and slumping players will hit well below the pack. That’s why you need a diverse bunch. A team comprised solely of .253 hitters is unlikely to have the energy or the momentum needed to win those crucial games and make the playoffs”, said Tierney.
False Security in Average Performance
So what does this have to do with investing? “When an investor allocates funds exclusively to passive portfolios, it’s like putting together an equity lineup that is uniformly composed of .253 hitters. This lineup might provide a sense of security because returns will always be in synch with the benchmark. But it’s little consolation if the benchmark slumps. A passive equity lineup won’t be able to rely on any higher-octane performers to pull it through challenging periods of lower, or negative, returns”, point out the CIO.
Still, many investors fear getting stuck with a lineup of .200 hitting active managers. AB believes the best strategy to combat that risk is to focus on investing with high conviction managers, who have a strong track record of beating the market, according to a research.
Passive and Active: The Best of Both Worlds
Passive investing has its merits. Investors have legitimate concerns about fees as well as the ability of active managers to deliver consistent outperformance. The appeal of passive is understandable.
Yet AB believes that putting an entire equity allocation in passive vehicles is flawed. It leaves investors exposed to potential concentration risks and bubbles that often infect the broader equity market. And with equity returns likely to be subdued in the coming years, beating the benchmark by even a percentage point or two will be increasingly important for investors seeking to benefit from compounding returns and meet their long-term goals
“There is another way. By combining passive strategies with high-conviction equity portfolios, investors can enjoy the benefits of an index along with the diversity of performance from an active approach, in our view. Baseball managers don’t settle for average performance. Why should you?”, summarized Tierney.
CC-BY-SA-2.0, FlickrPhoto: SuperCheeli. CTAs Outperform as Commodities Slump in July
Hedge funds are on track to deliver solid returns in July, up 1.4% month to date (0.4% last week). In line with our overweight recommendation, CTAs and Global Macro managers outperformed other hedge fund strategies.
Meanwhile, Event-Driven managers underperformed both last week and on a month-to-date basis, in line with our downgrade of the strategy from overweight to neutral early June. The event-driven strategy was negatively impacted recently due to its exposure to gold and energy related stocks. Asian event-driven managers have, on the contrary, delivered solid returns for a second week in a row, and contributed partly to compensate losses.
Philippe Ferreira, Senior Cross Asset Strategist Lyxor Asset Management enumerates the recent market developments have been supportive for hedge funds:
The sharp fall in commodity prices in July has supported CTA managers. They have increased their short precious metals/short energy positions since end-May. CTAs also have no EM currency exposure. The slump in several EM currencies since mid- July is not having any meaningful implication for hedge funds (some Global Macro managers are long MXN/USD but this is compensated by short EUR/USD).
CTAs are long GBP/USD and are thus capturing the hawkish tone of the Bank of England, which has expressed concerns over wage growth at its latest MPC meeting early July.
Finally, the earnings season in the US has been a tailwind for L/S Equity managers for the time being. Technology, industrials and commodity related industries (oil, gas and materials) have disappointed, but the aggregate exposure of L/S Equity managers to these sectors has been significantly reduced since end-May (see chart below). Meanwhile, consumer cyclicals, financials and health care have all reported earnings in line with or above expectations and these are precisely the sectors where the bulk of the exposures are concentrated.
Overall, the hedge fund industry has recently demonstrated its nimbleness. It has been protected against falling equity and bond markets in May/June by adjusting exposures downwards quite rapidly. But it has also captured the rebound that took place in July. The beta exposure of equity strategies has recently been increased in line with the improving risk sentiment.
Photo: Gabriel de Andrade Fernandes
. Middle East Investors To Spend US$15.0 Billion Per Year In Global Real Estate Markets
An average of US$15.0 billion per year will flow out of the Middle East into direct real estate globally in the near-term, with investors from the region increasingly targeting U.S markets, according to the latest research from global property advisor CBRE Group.
The Middle East continues to be one of the most important sources of cross-regional capital into the global real estate market, with US$14.0 billion invested outside of the home region in 2014—the third largest source of capital globally. Qatar, driven by its sovereign wealth funds (SWFs), was by far the largest source of outbound capital with US$4.9 billion invested. Saudi Arabia has emerged as a significant new source of capital globally, investing US$2.3 billion in 2014, up from almost no reported investment in 2013.
The Middle Eastern investor base has expanded, fueled by weakening oil prices; this has led to a major shift in global investment strategies towards greater geographic and sector diversification, with activity spreading across gateway markets to second-tier locations in Europe and the Americas. A greater proportion of Middle Eastern capital is now targeting the U.S.—the US$5.0 billion invested globally in Q1 2015 was almost equally split between Europe and Americas, with New York, Washington, D.C., Los Angeles, and Atlanta targeted. London, while retaining the top position, is no longer as dominant, with a 32 per cent share of all Middle East outbound investment in 2014, compared to 45 per cent in 2013.
Middle Eastern investors are becoming more active across a wider range of sectors. This is clearly evident in the U.S. where, historically, these investors have bought office buildings and trophy hotels in New York, Los Angeles and other gateway markets. Competition from Chinese investors and other global capital sources means that these investors are increasingly seeking alternatives, such as Abu Dhabi Investment Authority’s $725 million acquisition this year of a 14.2 million-sq.-ft. industrial portfolio.
Private, non-institutional investors (property companies, high net worth individuals (HNWI), equity funds and any other form of private capital) have emerged as a major and increasing source of outbound capital from the Middle East. With a greater allocation to real estate and more concentration on geographical diversification away from the home region, the potential for non-institutional investors to expand their global real estate investments is of growing importance. Weaker oil prices are a strong contributing factor to this, triggering and accelerating global deployment of capital, with value-add investments in high demand. CBRE forecasts that global real estate investment by non-institutional capital from the Middle East will range from US$6.0 to $7.0 billion per annum in the near-term, if not higher, increasing from approximately US$5.0 billion per year during 2010 to 2013.
“Private capital from the Middle East is once again becoming a measurably more important investor group globally. The most immediate change will bring down the average lot size, as non-institutional investors tend to target assets at circa US$50.0 million. This extends naturally to a more diverse investment strategy—a trend already felt in the market so far in 2015 and is expected to become more pronounced in the next six to 18 months. In particular, we expect the Americas region to see more capital flows from the Middle East, with Europe less dominant than it has been over the last five years,” said Chris Ludeman, Global President, CBRE Capital Markets.
CC-BY-SA-2.0, FlickrPhoto: Hernán Piñera, Flickr, Creative Commons. Henderson: Waiting in The Wings
With Greece’s theatrics dominating the world stage, investors may have missed some compelling stories unfolding in the wings. Bill McQuaker, Co-Head of Multi-Asset at Henderson, spotlights three of his favourites: oil, emerging markets and job creation.
Oil: a new script
If investors thought oil’s slump was over, they were wrong. Rising US demand for petrol (gas) has been met by unfettered global supply, with prices heading south of US$60 again. Credible explanations include: an urgent need for foreign currency (Russia/Venezuela); the desire to re-assert control over the market (Saudi Arabia); and new supply (Iran). We also suspect innovations in horizontal drilling and re-fracking are only beginning to drive US oil field economics, pointing to over-supply in the immediate future.
Implications? We see three. First, the renewed sell-off may finally persuade consumers that low prices are here to stay. Expect the contributions to GDP growth from (particularly US) consumption to strengthen. Second, some oil producing countries may suffer further currency weakness, heaping pressure on their central banks to tighten policy; a financial shock to accompany an oil price collapse is a possibility, particularly if US rates rise soon. Third, price weakness is evident across the whole commodity complex. Investors who made a strategic allocation to commodities at their height may capitulate – posing opportunities for those who steered clear.
Wages: enter NAIRU
You know the world is a strange place when Conservatives announce “Britain needs a pay rise”, while an unpopular Chancellor is congratulated for announcing a new “National Living Wage”. Clearly, mounting political pressure to share the spoils of recovery is having an effect. And it is not just a UK phenomenon. US politicians are pushing for higher minimum wage levels, and state legislators and corporates are showing signs of responding. Walmart, which has a legendary reputation for cost control, is leading the way in raising wages for 500,000 of its lowest paid staff.
Calls for higher wages are not just the result of political processes. Rapid rates of job creation have seen unemployment rates collapse in the UK and US. Many economists believe we are very close to, or at, NAIRU: the rate at which falling unemployment begins to exert upwards pressure on inflation. Tight labour markets are leading to similar dynamics in Germany and Japan.
None of this is lost on policymakers, with central banks in the US and UK preparing the way for rate rises soon. Will a bull market built on generous liquidity conditions crumble if central banks are forced to raise rates? We suspect not, but do anticipate a pick-up in market volatility: good for those investors with some cash to invest.
EM: curtain call?
The outperformance of developed markets (DM) over emerging markets (EM) in recent years has been immense. The S&P 500 has roughly doubled since the US debt-ceiling debacle (August 2011), alongside MSCI EM’s c5% rise (USD terms). The explanatory narrative cited is: slow EM growth, weak commodity prices, and a desperate need for structural change. The fact that many of these points could just as easily be applied to DM is often ignored.
This cannot last: disenchantment with all things ’emerging’ looks to be approaching fever pitch, reminding us of the haste to be rid of ‘old economy’ stocks in H2 1999 and early 2000. We are not inclined to stick our heads above the parapet just yet, but when the liquidity-driven bull market gives way to a downturn, the best buys may well be found in EM, and in the unloved companies listed in the West that service them.
CC-BY-SA-2.0, FlickrPhoto: Steve Gatto. Market Opportunities Related to the Water Sector Are Expected to Reach USD 1 Trillion by 2025
Water is essential for life. But for years some parts of the world have taken their water supply for granted. And it’s easy to understand why. Crystal clear drinking water flows in abundance from the taps in our homes, schools, and workplaces. Many of us don’t give a second’s thought to the challenges that lie behind getting clean water to our taps or indeed how much of this finite resource we consume on a daily basis.
But for most of the world, clean drinking water is a precious commodity. Although water covers about 70% of the Earth’s surface, we must rely on annual precipitation for our actual water supply. About two-thirds of annual precipitation evaporates into the atmosphere, and another 20-25% flows into waterways and is not fit for human use. This leaves only 10% of all rainfall available for personal, agricultural and industrial use.
Moreover, precipitation is not evenly distributed: 1.2 billion people are living in areas of water scarcity. What’s more, pollution has made much of that water undrinkable and unsafe for use. Meeting the world’s increasing water needs has fast become one of the biggest challenges facing society.
But there is reason for optimism: in the past, a short- age of vital resources has driven the need to innovate, discover new materials and generate new technologies. The water challenge is no exception, and companies across the globe are seeking to find solutions to tackle the problem.
The RobecoSAM study ‘Water: the market of the future’ examines the key megatrends that are shaping the water market, and explores the investment opportunities that are arising from these trends:
Population growth
Aging infrastructure
Water quality improvements are necessary in many places
Climate change is altering the availability of water resources
Such trends generate risks and opportunities for companies and investors alike. Market opportunities related to the water sector are expected to reach USD 1 trillion by 2025. Companies that are early to respond and take steps to exploit the market opportunities associated with these water-related challenges are more likely to gain a competitive advantage and achieve commercial success.
. Aberdeen AM Expands its Wealth Management International Team with Paula Ojeda as Business Development Associate
Paula Ojeda joins the Wealth Management International team of Aberdeen AM, as Business Development Associate. She will be based out of Aberdeen’s New York Office.
Bev Hendry, Co-Head of Aberdeen in the Americas, says that “Paula will be an invaluable member of our team and will be integral in continuing to grow our market share in the U.S. Offshore and Latin American markets. Her sales and customer experience will be instrumental as we continue to expand our business and key partnerships.”
Paula will be working alongside Head of International Wealth Management Americas, Menno de Vreeze, and Business Development Managers, Damian Zamudio and Andrea Ajila, and will be based out of Aberdeen’s New York office.
Paula Ojeda joins Aberdeen after spending time at Proximo Spirits where she worked as a Commercial Finance Manager and has ample experience in sales, customer engagement and data analysis. Prior to Proximo, she worked several years at Diageo as Business Performance and Reporting Analyst as well as a Sr. Finance Analyst.
Paula graduated from Villanova University’s School of Business with a Bachelor of Science in Finance and a Double Minor in International Business and Real Estate. She is originally from Bogota, Colombia.
Photo: Scott S. PIMCO Gets a Wells Notice from SEC, a Lawsuit Could Be Coming
Bond giant Pacific Investment Management Co., commonly known as PIMCO, said that it is under investigation by the country’s top securities regulator over how it valued assets in one of its most popular funds aimed at small investors, according to Wall Street Journal.
The PIMCO Total Return Active ETF, an exchange-traded fund previously managed by star investor Bill Gross, has been under investigation by the Securities and Exchange Commission for at least a year for allegedly artificially boosting returns from its trading of certain mortgage bonds. This investigation was first reported in September 2014.
The SEC has been looking at how PIMCO purchased and valued certain bonds in the ETF portfolio. Specifically, the SEC has been examining whether the fund bought these mortgage investments at discounted prices, but relied on higher valuations for the investments when the fund calculated the value of its holdings shortly thereafter.
PIMCO disclosed in a news release early this week that it received a so-called Wells notice from the SECconcerning the ETF, which means the agency’s staff intends to recommend a civil action against the firm related to its investigation. The notice isn’t a formal allegation of wrongdoing and won’t necessarily lead to an enforcement action.
The SEC is looking at a four-month time period between the fund’s launch on Feb. 29, 2012 and June 30, 2012, examining how PIMCO valued smaller-size positions in non-agency mortgage-backed securities purchased by the ETF during that time, according to the release. The agency is looking at the fund’s performance disclosures for that period, and at PIMCO’s compliance policies and procedures. While Bill Gross was still at PIMCO, he spent at least a day being interviewed by SEC officials. The SEC also has interviewed fund trustees and other executives at PIMCO.
In the release, the firm said that the Wells process “provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards and that no action should be taken. We will continue to engage with the SEC and we are confident that this matter will not affect our ability to serve our clients.”
Photo: JImmyReu, Flickr, Creative Commons. GGM Capital Launches GGM Multistrategy, an IT-Centric Alternative Fund
GGM Capital, the investment banking IT focused boutique, is launching its new Technology-centric, open-ended fund under the umbrella of a Luxembourg SICAV-SIF. This new fund will have a target size above €50.0m and will invest in a diversified portfolio of equities, private equity/venture capital funds and corporate debt.
The objective is to achieve strong capital appreciation by investing in a diversified set of asset classes with various maturity levels, yields and risk profiles.
The asset allocation is outlined as follows: the equity portfolio, representing a majority of the invested assets at all times, will be composed of equities of technology companies listed in key financial markets such as NASDAQ, NYSE, LSE, Euronext and Xetra. For this purpose, GGM Capital will leverage on its extensive proprietary trading experience and in particular its strong track record developing successful intraday trading and short term swing strategies.
GGM Multistrategy will invest a smaller part of its assets under management in less liquid instruments, be it either investment funds or corporate debt, with generally a hold to maturity strategy. The objective of this part of the portfolio is to provide foreseeable returns with are not correlated with the equity portion of the portfolio.
GGM Capital will leverage of the combined 40+ years experience in capital markets of David Moix, Gabriel Padilla and Guillermo G. Morales as well as its positive track record achieved by GGM Capital managing venture capital investments in the technology space.
Guillermo G. Morales Lopez, Executive Chairman of GGM Capital said: “I’m excited to offer our investors a new innovative instrument leveraging on our experience and track record. We had been working hard in building up this amazing strategy during the last years and now we are pleased to offer this one of a kind investment opportunity to the market”.
Gabriel Padilla, Partner of GGM Capital added: “Our investors have asked us to develop an open-ended, diversified product to deepen their investment relationship with us. I believe we now have the right product for this purpose.”
