It feels like 2015 has been a long year already! Clearly markets have had much to contend with, but the dominant feature has been the continued collapse in core bond yields. Global economic activity remains muted, and the deflationary forces lowering inflation and impacting nominal growth are many and varied. Politics and geopolitics continue to grab headlines, and in the case of the Greek election, have the potential to affect markets significantly due to Greece’s conflicting ambitions of retaining the euro whilst also seeking forgiveness on its debt.
The oil price remains weak, and whilst its impact on inflation is clear, the follow-through in terms of consumer spending is less clear cut. On the policy front, the ECB recently announced full-blown sovereign bond quantitative easing (QE), with an intention to purchase €60bn a month in bonds until its target level of 2% inflation is reached.
Against this backdrop, yielding assets have had a strong start to the year. Credit, particularly investment-grade credit, has performed well, and similarly equities have enjoyed positive returns in a number of markets. Our equity strategy has been to favour the US, which has enjoyed a relatively stronger economy, the UK, which has valuation support, and Japan, where corporate profits are being boosted by ‘Abenomics’. Although the UK equity market has been held back by its exposure to energy and materials, both Japanese and US equities have performed well since we moved to favour them in our asset allocation model.
However, the US equity market’s valuation now looks relatively stretched given both its outperformance and, more worryingly, the impact of a stronger dollar on US corporate profits. Europe, on the other hand, benefits from a number of decent tailwinds: a weaker euro, lower oil prices, and a boost from the ECB’s QE programme. It is quite possible that we will see upward revisions to European GDP growth this year, a first for many years. European corporate profits will be supported by improved competitiveness as a result of the weaker currency, and valuations are relatively attractive. Interestingly, European earnings revisions have just turned positive (albeit in a very small way).
Elsewhere, in Asia Pacific excluding Japan, and also following a long period of underperformance, valuations look increasingly attractive. Whilst there a number of obvious losers in the region as a result of the oil price fall, there are many winners, and we are finding a wider range of interesting investment opportunities. Consequently we have moved overweight the region for the first time in a while. Similarly, we have moved overweight in European equities, funding both of these moves by downgrading US equities to neutral from overweight. We have also used these recent asset allocation changes as an opportunity to reduce the magnitude of our overweight in equities, but we continue to prefer equities over bonds.
The event consisted of a cocktail and a typical Scottish dinner in which there was no shortage of whiskey tasting, hosted by the whiskey tasting expert Nick Pollachi, Whisky Master and owner of The Whisky Dog. The evening was enlivened by Canadian piper Robert Ritchie and musical threesome Avalon.
“Our headquarters are still in the city of Aberdeen, in northeast Scotland, and our roots date back to 1875,” explained Hendry. “Our Scottish heritage is an essential part of the identity of Aberdeen AM, and we hope our customers enjoy aspects of our tradition, such as those we celebrate tonight,” added Hendry.
Aberdeen AM celebrates its traditional Burns Supper in cities around the world around the 25th January, to coincide with the birth, in 1759, of Robert Burns, poet, and author of more than 600 poems amongst them some as famous as “Auld Lang Syne”, used each year throughout the English-speaking world to bid farewell to the old year and welcome the new. This year, Aberdeen has celebrated its Burns Supper in 4 cities across North America: Toronto, Los Angeles, Dallas, and Miami. It is the fourth consecutive year in which Aberdeen AM celebrates this event in Miami.
Aberdeen Asset Management is present in over 25 countries in Europe, Asia, and America. As of September 30th 2014, it had US$525.9bn in assets under management. In Miami, Maria Eugenia Cordova, deals with the offshore business which has its epicenter in this city. Maria Eugenia reports to Menno de Vreeze, Head of the US offshore business, whose team is completed by Damian Zamudio and Andrea Ajila, all three based in New York. Linda Cartusciello, who is also based in Miami, is at the helm of all the institutional business in Latin America.
Photo: robinhood.org. BlackRock Appoints Deborah Winshel to Lead Impact Investing Platform
BlackRock announces the appointment of Deborah Winshel as a Managing Director and global head of impact investing. In her role, Ms. Winshel will help BlackRock unify its approach to impact investing through the launch of BlackRock Impact, a dedicated platform catering to investors with social or environmental objectives worldwide. Ms. Winshel will also be responsible for overseeing BlackRock’s Global Corporate Philanthropy program.
BlackRock Impact will work closely with the firm’s global investment teams and leverage its data and analytic capabilities to develop scalable, innovative investment solutions that also meet clients’ desired societal outcomes. BlackRock currently manages over $225 billion in strategies designed to align clients’ portfolios with their objectives and values, which will now be integrated under BlackRock Impact. Ms. Winshel joins the firm with a distinguished career in non-profit management and venture philanthropy, during which she took an active role in shaping charitable giving programs while defining and measuring successes based on the programs’ lasting effects.
“Today, many clients are looking for investment opportunities that advance social and financial goals at the same time. While the roots of this movement can be traced back many years, the frequency and complexity of these mandates are increasing. More and more, clients are looking to measure the returns on their investments both by the societal and financial outcomes they can help to create. With her experience at Robin Hood, and its focus on programs with measurable impacts, Deborah is the ideal choice to help BlackRock develop scalable impact investing offerings through both public and private markets,” said Laurence D. Fink, Chairman and CEO of BlackRock.
Currently BlackRock offers a number of investment strategies which incorporate environmental or social considerations, including:
Values Based –Utilizes screens to exclude securities, aligning investors’ portfolios with their values. BlackRock currently manages more than $214 billion in Values Based mandates.
ESG Consideration – Focuses on investing in companies that display strong track records in the governance, social or environmental areas. The firm recently launched the iShares MSCI ACWI Low Carbon Target ETF.
Impact Investing – Pursues measurable societal or environmental outcomes alongside financial goals. To date we have participated in over $1 billion in client mandates for investing in Green Bonds. With over $1.5 billion of commitments and AUM, BlackRock’s renewable power investment platform is one of the largest in the world, offering clients compelling opportunities to meet their investment needs.
Brazil has submitted new plans to restore investor confidence and strengthen growth. In this regard, Marie-Thérèse Barton, Senior Manager of Emerging Market Debt at Pictet, who has been visiting the country, believes that despite the pessimism held by many managers regarding the country, change is in the air, and authorities strive to open up for business. So it could positively surprise.
“I landed in Rio de Janeiro for a full day of meetings, with the growing pessimism of foreign investors, and then the local optimism that Rousseff and her team can support this, the largest economy in Latin America, hit me. Besides, the economic and political elites try to be friendly to entrepreneurs. In fact, we were greeted warmly in Congress by a senior coalition party official, even though it was one of their busiest days. Everyone is interested in stressing that Brazil is open for business and I cannot remember how many times I heard the words “tax adjustment”. The message is clear: change is in the air. Foreign investors are almost universally pessimistic and may be pleasantly surprised,” she says.
Even so, there are still some misgivings, and this expert does not deny that the situation is serious. “This economy flirts with recession, and inflation has reached the end of its tolerance levels, yet prices of raw materials like iron, soybeans, and other key exports continue to fall.” In addition, at least one credit rating agency has suggested a drop in rating, while a billionaire scandal which threatens to further undermine confidence, affects Petrobras, the state oil giant.
The administration, however, seeks to restore investor confidence, says the expert. “To shore up state finances, it has already announced cuts to subsidies to state-owned banks, higher interest rates in the development bank BNDES, and limits to pensions and unemployment benefits. But, more importantly, the Government has taken a big step in the right direction with the appointment of Joaquim Levy as finance minister. Mr. Levy is a banker educated in Chicago, an orthodox economist who has worked at the IMF and ECB and is known for having cut spending for the period 2003-2006. Indeed, all officials and bankers whom I have met are almost unanimous about the fact that curbing public spending is the most important task during the next four years, and that Levy is the right person for the job”.
According to one public official, says Barton, “he promises little and obtains much”, which is what it takes to make difficult cuts and increase taxes. “Many investors doubt that he will to be able to exercise any autonomy because Rousseff is interventionist, (apparently, given her promises to union leaders,she has recommended the new planning minister, Nelson Barbosa, to change his position on adjusting the minimum wage). Many people, however, consider that Rousseff has no choice. Levy’s promise, which seems ambitious, is to improve the fiscal balance by 1.5%, but Brazil’s central bank has reaffirmed its commitment to have reached its inflation target within the next two or three years, and it seems that investors are willing to give Levy the benefit of the doubt, at least for the next few months. “
Deceleration: the Risk
Economic slowdown is the inevitable collateral damage of these measures is the economic slowdown, the emerging market debt team at Pictet AM thinks that Brazil, after growing about 0.1% in 2014,will hardly see any growth this year, and an increase in unemployment is likely. On the other hand, the market lists an expectation of rising interest rates by at least 75 basis points. To keep inflation below 6.5%, reference rates have already been raised to four year maximums, at 12.25%, and, given the adverse impact on the economy, it is possible that the central bank does not tighten as much. In any event, officials and executives believe that interest rates will rise this year, but differ as to the rate, with some expecting it to reach as high as 13%. “The central bank, however, may wish to focus by the end of the year, in supporting growth by cutting interest rates, which can generate an interesting investment opportunity in Brazilian bonds,” she says. This scenario can be partly discounted, since the yield curve on maturities from two to six years on the state debt is reversed, but there is room for the gap to widen if Levy and his team positively surprise.”
“However, the Real may fall further against the dollar this year, in line with what is indicated by the currency market’s interest rates’ differential on forward contracts. We must bear in mind that in 2014 the Real was one of the emerging market currencies with higher falls against the dollar, following the Russian Ruble at over 11%. In our fair value models, however, it’s still overvalued by 10.5% in nominal terms.”
Laurent Crosnier, CIO at Amundi London, recently visited Madrid. Attracted by Mexico and Brazil, Amundi’s Laurent Crosnier Begins to See Value in Emerging Market Debt
Towards late 2014, around 80% of the global bond market offered returns below 2%, and half, less than 1%. Under such circumstances, where is it possible to obtain returns in fixed income? Amundi’s Global Aggregate bond strategy seeks to achieve that through a strategy based on expanding the investment universe and in a flexible style, in order to invest wherever there is value, depending on the stage of the cycle (with dynamic asset allocation and by combining long-term macro visions with short-term tactical management).
Laurent Crosnier, CIO of Amundi London, who was recently in Madrid, says the key is to identify the best asset class and learn to adequately combine it so that, for example, currencies do not undermine the gains. For 2015, he is cautious in duration (the fund may vary from 0-8) and in US Public Debt, although he is more positive regarding European Public Debt (where he prefers peripheral debt to German debt, due to its greater potential to benefit from ECB QE).
Laurent Crosnier shall share his market vision with attendees at the first Funds Society Fund Selector Summit organized in association with Open Door Media, to be held on the 7th and 8th of May at the Ritz-Carlton Key Biscayne in Miami. You may view the program and additional event information by clicking on this link.
As explained in a presentation to reporters, he is very positive towards investment grade credit, which will also benefit from the QE in Europe, although at this time he sees more value in the United States because of the valuations. By sector, he prefers the financial to the industrial, and also begins to be positive towards emerging debt, in which he sees attractive valuations in Mexico and Brazil (where “there is no growth but prices are very attractive in light of the devaluation of the Real, and therefore provides a good risk-return ratio”), he also favors the debt of countries benefiting from the fall in oil prices, such as India or Turkey. However, in order to be covered in the event of a hard landing in China, he takes short positions in debt and currencies of commodity-exporting countries such as Canada, Australia and New Zealand.
In currencies, he’s banking on the Dollar (supported by US growth) against the Yen and the Euro, and asked about a possible currency war, he warns of the contradictory effects that may result from the decisions of some central banks to avoid deflation. He considers that all that the Swiss Central Bank’s decision will achieve is to import that deflation.
Regarding China, he affirms that it will need a weaker currency in order to gain competitiveness in Asia against Japan, but it will have to achieve a balanced compromise between the need for a weaker currency and its desire to internationalize the Renminbi. “You cannot ask investors to invest in a currency that is going to depreciate by 20%,” he says, indicating China’s need to find equilibrium between both plans.
Multi-Asset Management
Dan Levy, Head of Multi-Asset Flexible Management Specialists of Amundi, spoke of Amundi Patrimoine and was positive towards many assets (such as equities, fixed income and duration in the US, he’s not expecting an imminent rate hike there, and Europe) but he believes there will be pressures which can add volatility (rate hikes by the Fed, the situation of the emerging world, international political risks, or deflationary pressure in Europe).
In the absence of haven securities, he advises as to the importance of risk management and of decreasing it whenever necessary. In that regard, the fund is flexible to protect the portfolio by cutting risk and adding diversification when needed. Currently, the fund’s exposure to equities is around 45%. “We expect a correction, although it will not be big,” he says.
Jean Jacques Durand, Senior Manager for EdRAM’s Emerging Fixed Income strategy / Courtesy Photo. Venezuela, Amongst the Main Options in EdRAM’s Emerging Debt Strategy
Jean-Jacques Durand, Senior Manager of the Emerging Fixed Income strategy at Edmond de Rothschild Asset Management (EdRAM), is firmly committed to Venezuelan fixed income assets as he considers that the default risk is below 50% and that it has great upside. A few months ago, Venezuela, which currently represents the largest position in their portfolio, had unfavorable technical factors which, during the summer, prompted partial profit taking for an asset in which the portfolio manager had already invested previously, and to which he returned in early 2014. After the fall of oil prices during the month of December, Durand has decided to strengthen his commitment to this country once again.
“Oil risk is high but Venezuela’s upside potential is huge,” says Durand, who explains that, “six months ago I would have thought that the worst scenario for Venezuela’s sovereign debt would be a sharp drop in oil prices, if this was produced by a fall in demand. The highest risk was a brutal fall of the development of Chinese economy, but the decline in prices has been due to supply and the OPEC’s decision not to intervene.”
The manager is confident that Venezuela will not need a restructuring of its debt or reach a default situation, which 85% of the market expects. While considering that the country has been very poorly managed, he thinks it has a good chance of readjustment, which would enable it to continue repaying its debt. “The default risk is below 50%. Even though currently the situation is difficult because social spending is very high, there are elections later this year, and the price of oil is very low, if a default were to occur it would be a political decision. The country has already overcome similar situations experienced in previous crises. It has never defaulted. “With a ratio of external debt to GDP below 20%, and most of its debt held by local investors, Venezuela has a relatively strong position to negotiate with its creditors.
Durand, who has spent the last four years in EdRAM after a long career as an emerging market’s fixed income trader in investment banks in New York and London, confesses that flexibility is required in order to choose the adequate risk and to invest the portfolio in the appropriate assets. “During those periods when the conviction is not as attractive, you have to be able to lower the portfolio’s overall exposure,” he says. When he took over management of the fund in 2012, he had to decide whether he wished to adopt either a more cautious, or a more risky approach as his overall investment philosophy. In his strategy’s investment decisions, the macro situation weighs as much as technical factors (flows, valuation, momentum), which may lead to take positions in assets that are unattractive if we just look at macro data such as the ratio of debt to GDP of the issuing country, but have very favorable fund flows or very attractive valuations. Thus, this strategy’s portfolio has a very distinct composition compared to its peers.
Such is the case of Russia, a market with very negative macro fundamentals. The political crisis and international sanctions imposed on the country have impacted the economy and the Russian Debt market, causing the consensus recommendation to drop from overweight to outright underweight. The price of bonds reflects a situation that is four or five levels below its credit rating, due to lack of investor confidence. According to Durand, “despite the crisis, its level of public debt to GDP is below 15%, external debt is virtually nonexistent, only 3% of GDP, and its ability to repay is very strong”. Currently, despite its fundamentals, which in the past prompted the manager to stay out of this country, the strategy holds a strong position in Russia.
Egypt, where Durand began building a position during the crisis “because when everyone sells there are opportunities”, is yet another example to illustrate that many times the portfolio composition is different from most of the other strategies within its category. In Mexico’s case, however, the momentum and valuation have caused the strategy to exclude it since 2012, when he disposed of an important position with significant gains, even though it shows a positive macro fundamental analysis.
Market flows greatly condition performance. Argentina, with a significant technical specific risk in 2013, was at that particular time the biggest position within the strategy. “There was a consensus recommendation to clearly underweight Argentinian sovereign debt, and us a result that the marginal seller had already exited. The only possibility remaining was for it to climb, and it did. The debt stock changed hands, leaving that of investors who cannot tolerate risk to local or medium long term investors,” added Durand.
Their positions in Belize are another sign of the management style of this strategy, in which the size of the country or its weight in the index are irrelevant. In 2012-13, elections were held in the country, debt was restructured, bonds fell dramatically, and there was very little liquidity, but there was value. “The macro analysis showed that debt was below 90% of GDP, the last government had not performed badly. It was a question of predicting, before the elections, what was the likelihood that the candidate who wanted to restructure debt would win the elections, and upon election, how would it handle restructuring (fast or slow, friendly or not). Seeing the price at which it was trading, profits were assured, regardless of who won power. In order to build the position, we began taking positions in 2012, further increasing them in 2013.”
This strategy, which may invest either in sovereign and quasi sovereign debt, as well as in corporate bonds, also takes advantage of opportunities in hard currency and in local currency debt. The strategy currently does nor hold local currency bonds because Durand expected some adjustment after the commodity boom. “We have something on the radar, but we have not entered as yet. We currently offer a strategy which is more focused on hard currency debt than in local currency debt”, he concludes.
Photo: SEC. SEC Names David Grim as Acting Director of the Investment Management Division
The Securities and Exchange Commission announced that David Grim has been named as Acting Director of the Division of Investment Management. He replaces Norm Champ, the division’s former director, who left the SEC at the end of January.
“Dave has served with distinction for nearly 20 years in the Division of Investment Management,” said SEC Chair Mary Jo White. “The Commission and investors will benefit tremendously from his extensive legal knowledge, deep roots in the work of the division, and his managerial expertise.”
Mr. Grim has been the division’s Deputy Director for the past two years where he has been responsible for overseeing all aspects of the division’s disclosure review, rulemaking, guidance, and risk monitoring functions.
“As a part of the Division of Investment Management for my entire career, I have witnessed first hand the exceptional talent and dedication of my colleagues. It is a privilege to work with Chair White, the other Commissioners, and the staff as we continue to carry out our important mission,” said Mr. Grim.
Mr. Grim joined the SEC in September 1995 as a Staff Attorney in the division’s Office of Investment Company Regulation. In January 1998, he moved to the division’s Office of Chief Counsel and was named Assistant Chief Counsel in September 2007.
Mr. Grim graduated cum laude with a degree in Political Science from Duke University and received his law degree from George Washington University, where he was Managing Editor of the George Washington Journal of International Law and Economics.
The SEC’s Division of Investment Management works to protect investors, promote informed investment decisions, and facilitate innovation in investment products and services through oversight and regulation of the nation’s multi-trillion dollar asset management industry.
Photo: Winnie Chwang, portfolio manager at Matthews Asia. Matthews Asia’s Winnie Chwang to Participate in Miami Summit
Winnie Chwang, portfolio manager at Matthews Asia, is set to present her views on Chinese companies when she takes part in the Fund Selector Summit Miami 2015, at the Ritz-Carlton Key Biscayne on 7-8 May.
Chwang will focus on China’s economic growth and rebalancing, and the resulting wave of small cap investment opportunities in some of the fastest growing segments of the economy, including health care, education, e-commerce, and other services industries.
The manager is seeking to take advantage of these opportunities through the Matthews China Small Companies fund.
Chwang not only is a portfolio manager, but also co-manages the firm’s China strategy. She joined the firm in 2004 following an MBA from the Haas School of Business.
The Funds Society Fund Selector Summit Miami 2015 will bring key fund selectors, primarily from the Miami area but also from other locations where decisions are made regarding the US Offshore market, together with top-performing Asset Managers to explore the latest portfolio management strategies and investment ideas. The Summit is designed specifically for key fund selectors who want to benefit from the knowledge of leading fund managers. You may access further information through this link.
Photo: Dennis Harvis. India’s Prospects Brighter as Modi Gets Serious about Reforms
India offers many investment opportunities but is often stymied by its perceived hostile business climate. Since taking office in May last year ending ten years of a Congress-led government, Prime Minister Narendra Modi has demonstrated that he is eager to revive India’s economy, which has been in the doldrums suffering from a large current account deficit, spiralling inflation, poor infrastructure, as well as having unfriendly business laws and regulatory environment.
While the reforms introduced have so far been incremental, Modi has now promised “unlimited” economic reforms. Recently, the PM opted to push through reforms via ‘ordinances’ – a temporary executive order while parliament is in recess. Six weeks after parliament reconvenes, an ordinance must be approved by parliament or be reissued. We think this could be a game changer for India as Modi is showing he means business and will not be deterred by parliamentary obstruction.
Key reforms include:
Insurance: Raising the foreign investment limit in insurance to 49% from 26%. This could potentially attract up to US$ 7-8 billion from overseas investors, providing a major boost to the industry.
Land acquisition: Making it easier to acquire land for projects such as power,defence, industrial corridors, social infrastructure and housing for the poor. These projects no longer require consent of 80% of landowners during acquisition.
Coal mining auction process: The repromulgation of the ordinance on coal will facilitate e-auction of coal blocks for private companies and allot mines directly to the state. This removes a big overhang for the sector and will boost coal production.
Auction of minerals: All minerals other than coal will be allocated through auctions instead of an allotment basis. This will aid transfer of leases and allow a bigger scale of operations for mining companies and attract global majors.
In our view, India is one of the most positive markets in Asia. From a macroeconomic perspective there are reasons to be cheerful. GDP is forecasted to grow at a respectable 6.4% this year, while inflation appears to be under control, with the CPI remaining within the RBI’s target of 6% retail inflation by January 2016. Additionally, the manufacturing sector has been strengthening over recent months. While this more optimistic view for India is reflected in stock prices, following the recent market correction Indian equities appear to be reasonably valued now relative to historical valuations.
In the short term, lower commodity prices should be positive for corporate earnings. Lower oil prices would significantly benefit India as an oil importing country; resulting in more savings for consumers, reducing imports, improving the fiscal deficit and increasing foreign exchange reserves. Longer term, progress on reforms could provide a boost to equity markets and support the already positive macroeconomic investment case for India. Similar to many other countries within Asia, demographics, relative fiscal strength and a higher rate of growth should ensure India’s attractiveness to investors.
The Henderson Horizon Asian Growth Fund remains overweight India as we believe our investments in selected financial, consumer, pharmaceutical and IT services companies can continue to generate significant profit growth and superior returns over the next few years. Clearly the risk is that the economic reforms stall but the companies that we hold have delivered impressive returns even in a weaker political environment. Our current favoured holdings include HDFC and affiliate HDFC Bank, Tata Motors, fast moving consumer goods manufacturer Dabur, and software business, Tech Mahindra. We have also initiated a position in Lupin. The pharmaceutical has broad geographic exposure and a strong pipeline, and is also one of the fastest growing major generics companies in the key US market.
Andrew Gillan and Sat Duhra are Portfolio Managers of the Asia ex Japan Equities team at Henderson Global Investors. Andrew Gillian will be speaking in Miami Beach in the investor’s brunch, which will precede the II Funds Society Golf Tournament, on March 13th, 2015. If you are a professional investor and would like to register for this event, please contact info@fundssociety.com
Photo: Simon & His Camera. Investec Asset Management Extends Relationship with State Street
Investec Asset Management has extended its relationship with State Street Corporation for another seven years to provide full middle office and fund accounting services across the UK, South Africa, Luxembourg and the United States.
Investec Asset Management is a specialist investment manager providing investment products and services to institutions, advisory clients and individuals. Their clients include pension funds, central banks, sovereign wealth funds, insurers, foundations, financial advisers and individual investors.
Kim McFarland, chief operating officer of Investec Asset Management, said: “State Street has always worked with us as a partner and understands the constant evolving needs of our business and the industry. We were keen to continue our relationship to ensure State Street’s excellent support.”
John Campbell, head of Global Services for UK, Middle East and Africa at State Street said, “We are very proud to have been able to support Investec Asset Management during their phenomenal growth over the past ten years and are delighted that they have chosen to continue our successful partnership.”
“There is a new battleground for today’s asset managers,” continued Campbell. “Our recent research revealed that more than three quarters of asset managers are embarking on a fundamental shift in their business strategy in response to changing client demands.”
