Investec: Quality Businesses Typically Create Dependable Earnings Growth in Difficult Market Circumstances

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Investec: “Las empresas de calidad típicamente son capaces de inspirar confianza en entornos como el actual"
Photo: Clyde Rossouw, head of Quality at Investec Asset Management. Investec: Quality Businesses Typically Create Dependable Earnings Growth in Difficult Market Circumstances

Clyde Rossouw, Head of Quality at Investec Asset Management, explains his outlook for 2015.

What has surprised you most in 2014?

In terms of market performance the biggest surprise in 2014 has probably been the strength of the US stock market compared to most other markets around the world. In fact, it has been the only game in town; we have had a strong dollar and a great performing US stock market almost at the expense of everything else. We know that at the margin people have had the expectation that the US was getting better and that looks like it is running its course now.

How will ‘quality’ companies fare in 2015?

The ‘quality’ businesses we target have typically been able to create dependable, meaningful earnings growth in difficult market circumstances such as we have now, i.e. falling bond and commodity prices. Therefore, we would expect to see a similar consistency of earnings in 2015. In the past, when market participants have started to look for more dependability, quality assets have moved back into focus. As a result, we would expect a relative re-rating of such assets and that is typically the type of business in which we would look to invest in our strategies.

Where do you see the greatest opportunity in 2015?

We are focusing on two distinct categories: Companies that have pricing power and business models that are able to embrace ‘disruption’ risk.

Typically, businesses that have pricing power are able to put through inflationary or above inflationary rates of increases in their product prices. Tobacco is an obvious example: every year excise duties go up all around the world and even though the incidence of smoking is declining, tobacco companies have this pricing power mechanism built into their business model and are able to put up prices.

The other opportunity that we believe investors should focus on is businesses that have very strong market shares or business models that are able to embrace disruption risk. Technology is changing the way in which businesses have to operate. Therefore, investing in companies that are part of the disruption, but at the same time have very strong cash-generating business models, such as Microsoft, is, we believe, one way of offsetting some of the pricing risks that are at play in the market place.

What are the biggest risks to these views?

The biggest risk to any equity-based investment strategy would be if markets were to be just dismal and disappointing. We have had various episodes in the past, such as the financial crisis in 2008/9, where there was no obvious tailwind for stock market performance, and also in 2011, when there was a fear the euro zone might implode.

The biggest risk for us, therefore, is that even though we are invested in businesses that we think are more dependable in terms of their earnings, there could potentially be a significant drawdown because they are part of the equity markets.

How are you positioning your portfolio?

The businesses we invest in are typically of high quality. We also have sector preferences and have done a considerable amount of work looking at which parts of the market are able to produce companies that have intrinsically high quality characteristics. So, in terms of the natural leanings in our portfolio, we will always have a relatively high weighting in consumer staple names, certain parts of the pharmaceutical market and also within areas of technology. This does not mean that other parts of the market do not interest us, but generally they will have smaller weightings.

A cornerstone philosophically of the way we construct our portfolios is what some people would conceive to be inherent biases. But, based on academic evidence, we would rather invest in parts of the market where we believe we can maximise our probability of investment success.

In terms of individual stocks, our top ten holdings comprise a technology company, three pharmaceutical companies, a non-bank financial stock and a range of consumer staples companies with a specific focus on beverages, food, tobacco and home & personal care products. We still see opportunities across the board, but it is very much motivated by bottom-up opportunities and looking for superior businesses that have those key characteristics.

Trends in Technology for 2015

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¿Qué tecnologías darán que hablar en 2015?
Foto: Phsymys. Trends in Technology for 2015

The rapid pace of both innovation and obsolescence in technology offers a constant flow of investment opportunities worldwide. Hyper-connectivity, cyber security, smartphones, the “digital wallet” and Big Data are among the major themes three technology analysts from across Natixis Global Asset Management are closely following. They share their insight along with 2015 outlooks for technology in the U.S., Europe and Asia.

Tony Ursillo, CFA, Equity Analyst, Portfolio Manager Loomis, Sayles & Co. explain: “On the consumer technology side, we are intensely focused on the relentless shift to mobile smartphone usage. Apple’s introduction of the iPhone in 2007 marked the beginning of the modern era. In those seven years, smartphones have achieved an installed base of over two billion users globally, with more than one billion new smartphones being sold every year”.

While the early play on mobile was oriented around device sales, including tablets, “we believe the more lucrative opportunity now revolves around expanding usage of smartphones by that already installed base. We are focused on companies that offer compelling applications or solutions that can be adopted by that base”, says Ursillo.

Expanding the social network

“Within the corporate or enterprise end market, we see two powerful trends that are far outpacing the trend line of about 3% growth in information technology (IT) spending”, tells the portfolio manager. The first is the shift of IT resources to “the cloud.” The cloud can simply be thought of as a hyperscale data center environment managed by an IT vendor who acts as a servicer, providing access to resources that historically would have been implemented and managed on premise by the enterprise itself.

The second powerful enterprise trend, continues Ursillo, is the heightened concern around securing enterprise data. High profile credit card breaches at retailers such as Target, Home Depot, and Neiman Marcus, as well as online sites like eBay, have put the spotlight on how vulnerable the payment information and other personal data of tens of millions of U.S. consumers are to an increasingly sophisticated hacker community. And that has made security breaches not just a network risk, but a business risk.

Is the “digital wallet” here to stay?

It´s no surprise that many companies are positioning themselves to gain a foothold in the online and mobile payments space. Giants like Apple, Amazon, Google and PayPal already have brand-name recognition and can leverage hundreds of millions of existing customer accounts with attached credit card or bank account information. “We maintain our belief, however, that the vast majority of these transactions will continue to traverse the existing financial network infrastructure, largely controlled by Visa and MasterCard”.

Meanwhile, Hervé Samour Cachian, Head of Value & Opportunities – European Equities says that Natixis Asset Management technology focus today is on everything that is related to Hyperconnectivity – the use of multiple communication systems and devices that allow us to remain constantly connected to networks and streams of information. This includes trends like Internet of Things, Big Data analytics, digital commerce & payment and social media. There are numerous applications, including driverless car technology, Google GlassTM and contactless payment systems that could be game-changers in the future.

“Emergence of the digital economy is the main theme in technology for us. Digitalization is a tremendously disruptive force in society and it knows no boundaries. Companies that fail to amend and to adapt their business model accordingly could be at risk, while companies that are preparing for this new paradigm can be offered multiple opportunities to reap the benefits”, explains.

“We are finding a few European tech companies connected to digital payment solutions that appear attractively valued today. For example, Paris-based Ingenico, which is a global leader in seamless payment solutions for mobile, online and in-store channels, combines three key drivers in our view: structural growth, market share gain and expansion up the value chain. We believe it could benefit long-term from the adoption of chip cards in the U.S. and the emergence of mobile payments. Another area of growing interest interconnected to it all is digital security. Within this space, European firms such as Gemalto are leading providers of innovative digital security solutions globally”, affirms Cachian.

Outlook for European technology

Despite a gloomy macroeconomic picture for Europe and other parts of the world, Natixis GAM have a positive outlook for the technology sector in 2015. Search for growth could lead investors to increase their exposure to the tech-related stocks and especially the ones that either sell or create cutting-edge products. “We believe that Internet of Things is the area of technology that could offer the most promising opportunities in 2015 – driven by gadgets and the widespread adoption of wearable technology.”

Ng Kong Chiat, Equity Analyst, Portfolio Manager of Absolute Asia Asset Management conclude that 2014 extended the strong growth pattern for the technology sector seen over the past few years. Asia-ex-Japan technology stocks were driven by the launch of Apple’s iPhone 6 and iPhone 6 Plus in September. They were also boosted by the expiry of Microsoft’s support for Win XP earlier in the year – which gave rise to and supported a corporate PC replacement cycle. Further penetration of smartphones into the emerging markets and the moderate economic recovery in the developed markets, which prompted more corporate technology spend, also supported growth in the industry this year.

“But these positive factors in 2014 could turn into hurdles for the industry in 2015, as they have created a large base and are beginning to lose momentum. In addition, some of this growth was linked to a one-time event which we may not witness in 2015. Accordingly, we believe there will be less impact from the next version of the iPhone to be released in the New Year, as well as other Apple products. Also, we believe there will be a less robust PC replacement cycle in 2015, slower penetration of smartphones worldwide and more moderate technology capital expenditures by global companies. With such a backdrop, it may be trickier to navigate in the technology space”, argues.

Have Equities Become Too Expensive?

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Global equities continue to offer good value, though Threadneedle beleives the case for active management has seldom been stronger given the diverging performance of regional markets and the emergence of powerful trends that are driving individual stocks.

The price to earnings ratio of global markets is currently below the average seen since 1997, which would certainly seem to suggest that equities are not overvalued.

Ampliar

However, there are marked variations in terms of regions (as measured by trailing PE ratios). Surprisingly, Europe is among the more expensive markets despite its well-known problems, but if one looks at PEs on a forward basis, Europe is more attractively valued. This reflects a belief that European companies will grow earnings at a faster pace than those in other parts of the world. While the weaker euro may support earnings growth, we are concerned that expectations may not be met given the economic difficulties facing the region.

Dividend yields also provide an interesting measure of the relative attractiveness of equities around the world. Globally, sovereign bonds yields are low (below 1% in Germany and Japan, for instance), whereas dividend yields on world equity markets average around 2.5%. Not only is this yield attractive at face value, it will grow over time – making equities an attractive option for investors in a low-growth environment.

The case for US equities

Although dividend yields are relatively low in America, the picture changes markedly once you add in the impact of share buybacks. Including these, US companies are actually returning more capital to shareholders than their counterparts around the world. There are other good reasons for investing in US equities. The domestic economic recovery is continuing and the shale energy revolution is providing the US with a competitive edge in a wide range of sectors, and is boosting the country’s external finances. Meanwhile, corporate earnings growth is solid, helped by good cost management and the effective use of capital. Low interest rates will support equity valuations and we believe the main risk facing the US economy is how it reacts when interest rates start to increase.

Profit margins are at historically high levels. Threadneedle believes that they are likely to moderate in the long term, but remain high over the next few years at least given that:

  • Wage inflation is controlled and the participation rate can rise as economy improves.
  • Capital expenditure plans are conservative, with companies favouring capital returns or M&A.
  • Energy costs are particularly low in the US, reflecting the development of shale resources.

Thus, the asset management firm believes that US companies deserve their premium ratings.

Opportunities in Japan

Threadneedle is also overweight in Japan, where the government of Prime Minister Shinzo Abe appears to be succeeding in transforming the deflationary landscape of the past 20 years or so via its “three arrows” policy programme into one of inflation. Thus, we now have underlying inflation of around 1.5% in Japan, a development that is encouraging people to go out and spend rather than waiting for the price of goods to fall even further. The first two arrows – monetary stimulus via a massive programme of quantitative easing and fiscal stimulus via increased spending are already in place. Investors are now concerned that the delivery of the third arrow of structural reforms to the economy, including labour reforms, deregulation and trade agreements is making disappointing progress.

However, Threadneedle believes that investors would do better to regard the third arrow as a form of acupuncture with lots of little needle pricks taking place across the economy. Thus, Threadneedle points out that we have seen progress in a number of areas, including the ability of companies to make redundancies, and the encouragement of more women and migrants into the labour force.

There has also been significant progress in terms of corporate governance. Thus in 2013, the authorities launched a new stock index. The JPX-Nikkei 400 aims to showcase the country’s most profitable and shareholder-friendly companies and it is having a major impact. On learning that it was not in the index, the toolmaker Amada, for example, promptly announced that it would pay out half of its net profits in dividends, and use the other half to buy back stock, and improve corporate governance by appointing two independent directors. Thus, the new index is changing corporate behaviour and the third arrow is bringing about a major improvement in returns. Indeed, Threadneedle believes returns on equity can almost double over a period of three to four years as companies are increasingly run for the benefit of shareholders rather than employees.

Our overall strategy in global equities

Given the low growth environment that we envisage over the next few years, Threadneedle is focusing upon businesses which are not dependent upon a growing economy to expand their earnings. They favour companies that are fuelled by secular growth trends. These include:

  • Disney: benefitting from the rising value of differentiated media content.
  • Facebook and Google – beneficiaries of increasing advertising on the internet.
  • TE Connectivity (electronic engineering) – benefiting from the rapid growth of electronic components within cars in areas such as safety, infotainment, emission control, and fuel economy.

Overall, a positive outlook for active managers

In conclusion, there a number of reasons to be optimistic about the outlook for equities including the fact that although valuations have risen they are not high in historical terms, while cash returns to shareholders provide support. However, Threadneedle is also seeing a growing divergence in the performance of individual economies around the world and the rise of nationalism and geopolitical instability. The asset management firm believes this underscores the need for an active approach to stock picking, while the prospect of low economic growth over the next few years supports our focus on companies that are well positioned to exploit secular growth trends.

ING IM Hires Convertible Bond Team from Avoca Capital

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ING IM contrata al equipo de bonos convertibles de Avoca
. ING IM Hires Convertible Bond Team from Avoca Capital

ING Investment Management has confirmed the hire off Tarek Saber and Jasper van Ingen from Avoca Convertible Bond Partners LLP to add convertible bond investment capabilities.

Having joined in November, Saber and Jasper respectively fulfill the roles of investment team manager Convertible Bonds and senior portfolio manager Convertible Bonds, based in London. The two previously managed the Avoca Convertible Select Global Fund, which launched in April 2012.

Tarek Saber has more than 27 years of experiences in convertible bond markets. He joined Avoca in 2011 where he led the convertible bond business. Prior to joining Avoca, Saber was at ABP/APG, where he set up and managed the successful corporate opportunity strategy fund (COS fund), which consisted of investments in convertible bonds and equity linked instruments. Before this, he spent seventeen years in investment banking as global head of convertible bonds at HSBC Investment Bank and as head of European convertible bonds and global head of global depository receipts trading at Schroder Securities.

Jasper Van Ingen has more than 10 years of experience in convertible bond markets. Between 2004 and 2010, he was senior portfolio manager at APG’s COS Fund. Van Ingen played an important role in the development of the COS Fund. He was responsible for the day to day management of the fund in all aspects, ranging from fundamental analysis to trading and corporate restructuring. Before joining the COS Fund, Van Ingen worked as a portfolio manager at APG’s $5 billion Hedge Fund investment department in Amsterdam and New York.

One-Child Policy

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La política de “un solo hijo” de China
. One-Child Policy

Last year’s decision to relax the one-child policy was an important political step by the Chinese government but it will have little impact on the country’s demographic and economic trends. Chinese leaders have effectively ended “one of the most draconian examples of government social engineering ever seen.”

Historical Background

Rapid population growth after World War II led to a global focus on birth control. One extreme response was India’s forced sterilization campaign between 1975 and 1976 when more than 8 million sterilizations were performed. In 1980, China began enforcing its “one-child policy,” which three prominent Chinese demographers, writing recently in a U.S. academic journal, called “the most extreme example of state intervention in human reproduction in the modern era. . .that has forcefully altered family and kinship for many Chinese.”

Last Year’s Policy Change

Last November, China’s Communist Party announced that the one-child policy would be relaxed by implementation of a policy in which families are permitted to have two children if either a husband or a wife is an only child. This marks a change from the previous rules which required both the husband and wife to be only children in order to qualify to have a second child.

Because this relaxation was accompanied by a decision to dismantle the one-child enforcement bureaucracy, in my view it spells the rapid end of the one-child policy.

The most significant aspect of this move is political, as it represents the Party’s decision to withdraw from its citizens’ bedrooms. Restoring this element of personal freedom should help rebuild people’s trust in the Party.

But, contrary to conventional wisdom, ending the one-child policy is unlikely to change the longer-term trend toward a lower fertility rate. China’s current fertility rate of about 1.5 could drop even lower in the future, closer to South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families.

Smaller Families Before One-Child

It is important to recognize that the steepest fall in China’s total fertility rate (the average number of live births per woman) actually came before enforcement of the one-child policy began in 1980. The fertility rate dropped by more than half, from 5.5 to 2.7, between 1970 and 1980, influenced by rising urbanization and falling infant mortality rates. Today, China’s fertility rate is about 1.5.

Although 11 million couples are now eligible to apply for permission to have a second child under the new policy, only 700,000 couples (6% of total) applied through August of this year.

Long-Term Impact

Last year, before the policy change was announced, I spoke with one of China’s leading demographers, Wang Feng, about the prospects for change. Wang is a professor of sociology at the University of California, Irvine, and is on the faculty of Fudan University in Shanghai. He is also a nonresident senior fellow at the Brookings-Tsinghua Center in Beijing, and he recently wrote that the one-child policy “will go down in history as a textbook example of bad science combined with bad politics.”

Following are excerpts from my interview with him. I began by asking him about the long-term impact of ending the one-child policy. Professor Wang said expectations for a rebound in the fertility rate have been exaggerated:

Professor Wang: The reason I say it’s exaggerated is because in most of China’s rural areas, couples who want to have two children have already had two. There are certainly some couples who would want to have two children, which would be good for them, but we have all indications showing that many urban couples are happy to stay with one. And then there are couples who are actually choosing not to have any children, given the larger financial ramifications—the cost of having them.

For instance, in Shanghai, fertility is even below the one-child-per-couple level. This is despite the fact that, because of the early implementation of the one-child policy, many Shanghai couples are in the only-child cohort and are thus eligible, under the current rules to have a second; but they are often choosing not to have a second and many are not even having one.

Click the following link to read the interview with Professor Wang Feng.

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change.  It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquid­ity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.

How Can the Global Economy Adapt to Resource Scarcity?

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¿Cómo puede adaptarse la economía mundial a la escasez de recursos?
Foto: Philippe Put. How Can the Global Economy Adapt to Resource Scarcity?

The supply of resources is limited. Yet global demand for resources such as metals, fuel, water and minerals is increasing as the world’s population continues to grow. How can the global economy adapt to resource scarcity?

Resource scarcity prompts resourcefulness

According to the UN, the world’s population is expected to grow by another 3.7 billion, reaching a total of 10.9 billion by 2100. At the same time, changing consumer habits as a result of growing disposable incomes in the emerging markets and increasing industrial activity are putting additional pressure on natural resources essential to long-term economic prosperity.

The effects of rising demand are compounded by steepening costs
 of securing an adequate supply of resources. Most of the easily accessible resources have already been extracted. Geographical, political and environmental constraints mean that many supplies of critical resources such as oil or some metals are increasingly found in remote, difficult to reach places – such as deep sea areas or the arctic – making it difficult and expensive to extract them. In many cases, their extraction comes with added environmental, social and other indirect costs. All of this is contributing to price volatility and rising prices of production inputs. As a result, the global economy now sits at a crossroads. In order to prevent the depletion of natural resources critical to economic growth, we must transform industrial processes to become more resource efficient, develop substitutes for supply constrained resources and promote the reuse and recycling of limited resources.

But throughout history, human ingenuity and innovation have enabled us to adapt to resource scarcity by substituting away from supply-constrained resources and developing technological advances that have enabled productivity gains and the more efficient use of resources. Examples include energy-efficient LED lighting technology, or the aerospace industry, which has increasingly relied on lighter materials to reduce fuel consumption of their aircraft. These are the very mechanisms that have enabled humankind to cope with population and economic growth in a resource constrained world.

Companies that translate our resource challenges into opportunities by developing resource efficiency solutions that increase productivity or lower input costs will benefit from reduced risks associated with price fluctuations, environmental liabilities and regulation, and an enhanced reputation, boosting their competitiveness. And investors who identify these game- changers can benefit from superior risk-adjusted returns.

At RobecoSAM, we are convinced that companies that introduce innovative solutions to our resource challenges are more likely to enjoy a long term competitive advantage. Building on our in-depth understanding of long- term sustainability trends, we identify and invest in innovative game chang- ers that are leading the way in providing resource efficiency solutions. Our listed equity themes and private equity funds translate resource-related challenges into specialized investment portfolios containing future-oriented companies that are providing innovative solutions to resource scarcity in the areas of water, energy, climate, agribusiness and smart materials and infrastructure.

Ultimately, investing in the resource efficiency theme enables investors to mobilize capital to preserve resources critical to economic
growth, generating a positive impact on the environment and society.

Loomis Sayles Expands Scott Service’s Global Bond Portfolio Management Responsibilities

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Loomis Sayles refuerza su equipo de renta fija con el nombramiento de Scott Service como co-gestor
Wikimedia CommonsPhoto: Scott Service, co-portfolio manager at Loomis, Sayles & Company . Loomis Sayles Expands Scott Service’s Global Bond Portfolio Management Responsibilities

Loomis, Sayles & Company announced today that Scott Service, CFA, has been named co-portfolio manager on the following suite of investment strategies managed by the company’s global bond team:

  • Loomis Sayles Global Opportunistic Bond Fund (UCITS)
  • All institutional global aggregate strategies
  • All world government bond portfolios

Scott, a long-time global credit strategist and portfolio manager on the global bond team, joins co-portfolio managers Lynda Schweitzer, David Rolley and Ken Buntrock on the Fund. Prior to this promotion, Scott was a co-portfolio manager on the team’s global credit strategies. Together, the team oversees approximately $38 billion in global assets. Scott reports to Jae Park, chief investment officer.

“Scott is a valued member of the global bond team,” said Ken Buntrock, co-head of the global bond group. “As a team, we have enjoyed the success of a growing client base over the last ten years. By naming Scott a portfolio manager for our full suite of global bond products, we feel well positioned for future growth and success.”

Scott, a member of the global bond team since 2004, remains co-portfolio manager on the team’s global credit and global corporate strategies as well as several offshore funds including the Loomis Sayles Global Credit Fund and the Loomis Sayles Institutional Global Corporate Fund.

Scott joined Loomis Sayles in 1995 and was promoted to credit analyst in 1999. Between 2001 and 2003, Scott worked in Paris for Loomis Sayles’ parent company, Natixis Global Asset Management. He returned to the Loomis Sayles fixed income team in 2003 and became team leader of the global investment grade sector team. Scott joined the global bond team in 2004. Scott earned his Bachelor of Science from Babson College and an MBA from Bentley College.

Crucial Differences Amongst Multi Asset Funds

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Diferencias cruciales entre las estrategias multiactivos
Photo: Andrés Nieto Porras. Crucial Differences Amongst Multi Asset Funds

Research by ING Investment Management (ING IM) based on flow data from LIPPER confirms the overwhelming popularity of multi asset funds among investors in the recent years. Given the current environment, ING IM expects this trend to persist. At the same time, ING IM’s research reveals a number of important differences among these funds, in terms of expected returns and risks, which should be carefully considered by investors before putting their money to work.

Low growth and multiple financial crises have made investors more risk aware. In combination with the low interest rate environment this has made adaptability of fund managers, their absolute return focus and drawdown management more dominant themes for investors. Coupled with increased uncertainty in the markets, where purely behavioural factors can put pressure on asset prices, investors are seeking flexible funds with clearly defined return and overall risk objectives. Total return multi asset funds provide such characteristics and have been a popular choice among retail as well as institutional investors in the recent years.

Inflows increase

ING IM’s analysis of LIPPER fund data has found that asset allocation funds have been the most popular category of funds among investors in Europe in 2014 so far, with inflows topping over 54 bn EUR up until September. This was also the case in 2013 when asset allocation funds attracted more than 62 bn EUR. These flows were only seconded by sales of flexible bond funds, which saw inflows of around 29 bn in 2013 around 23 bn EUR up until September 2014.

What should investors focus on?

In the face of the apparent attractiveness of the total return multi asset proposition, the investment manager is flagging that investors need to focus more on proven risk awareness of the available multi asset funds. While the return objectives of all such funds are set well above government bond yields, it is essential take into account the riskiness of these funds, typically expressed as overall target volatility. Next to this, while the ability of multi asset fund managers to digest and react to changing market environment is at the core of the multi asset proposition, understanding the degree of flexibility and robustness of these funds at the outset is also essential for investors to decide on where to invest.

How do multi asset funds differ?

ING IM’s analysis of 20 of the largest and most well-known multi asset funds registered in Europe and available only to European investors, with combined assets under management of €165 billion reveals a wide variety of returns and risk. In this group of funds, annual returns before fees over the last 3 years averaged a solid 6.6%. At the same time however, there’s great diversity in the returns of the individual funds as well as their investment approach and the amount of overall risk these funds take on to achieve their returns. While the best performing fund in this group returned 9.8% on an annual basis before fees over the last 3 years, this figure was only 2.8% for the worst performing fund. At the same time the most risky of these funds showed an annualized volatility of 8.9% over this period, while this was only 2.1% for the safest one.

To get better insight in risk adjusted returns, ING IM has ranked the group in terms of their Sharpe ratios. This is the most well-known measure of the risk-return trade-off in an investment portfolio. A higher value indicates a greater reward to taking on risk. While the average fund of the first quartile of this group of 20 funds was able to achieve an annualized return of 8.6% before fees, with a volatility of just 4.5%, resulting and in Sharpe ratio of 1.87, this measure of risk adjusted performance was only 0.75 for the average fund in the fourth quartile, implying a significantly worse trade-off between risk and return. ING IM’s own flagship multi asset strategy – ING (L) Patrimonial First Class Multi Asset – ranks above the top quartile average according to Lipper data, with a Sharpe ratio of 2.04.

Valentijn van Nieuwenhuijzen, Head of Strategy Multi Asset at ING Investment Management, says: “Multi asset strategies are proving very popular with investors and as growing uncertainly fuels the markets, they are likely to be in even greater demand. However, there is a huge variance in the asset allocation of multi asset funds and their risk profiles, which could be made clearer to investors. For example, for downside risk mitigation purposes, with our Patrimonial First Class Multi Asset strategy we keep at all times at least 50% of the fund’s assets invested in very low risk assets such as high quality government bonds and money market instruments, while invest the rest in other potentially more rewarding assets such as equities and real estate.”

Léon Cornelissen: “Africa Is A Continent of Opportunities and Risks”

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Léon Cornelissen: "África es un continente lleno de riesgos y oportunidades"
Photo: Robeco. Léon Cornelissen: "Africa Is A Continent of Opportunities and Risks"

Economic growth in Africa has been strong for years and the standard of living is rising. Does Africa’s future look rosy or will weak leadership and ebola cloud its prospects? Léon Cornelissen, Chief Economist at Robeco, explains in this interview why he sees both opportunities and risks.

What are the most important factors influencing Africa’s strong economic development?

The continent is characterized by immense diversity, yet there are a number of identifiable features that African countries have in common. These are mainly their rich commodity resources and their young and rapidly growing population. As a result, many countries are showing strong economic growth.

The situation in South Africa and Nigeria is particularly significant for investors. These countries are developing into major economies. But they are not the only ones to show growth. Among the smaller economies, Botswana is doing very well. Commodities play a role here, but also the country’s good governance. This last feature is important, as badly functioning governments are one of Africa’s core problems.

How important is the commodities sector for economic growth?

Extremely important. China invests heavily in Africa because it wishes to safeguard commodity supplies for its own economy. Economic growth in China will diminish gradually as a result of the country’s transition from an export-led to a more consumer- driven economy. Yet if we consider production per capita, China is still poor. A high catch-up demand can therefore be expected from domestic consumers. This will lead to a sustained hunger for commodities.

Then there is India. Since the Modi government came to power there, the likelihood of an upturn in economic growth has increased considerably. Commodity-producing countries in Africa are reaping major benefits from Asia’s strong growth.

Besides commodity production, what other opportunities does the continent offer?

Further privatization can make a major contribution in Africa, not only in commodity extraction. Provided governments give businesses more latitude, large amounts of foreign capital can still be attracted. Another positive factor is Africa’s population structure. While money is clearly required to educate its young population, the continent is free of the burden of an aging society. And of course Africa is huge, and therefore still has substantial development potential.

Due to global population growth, agriculture offers further opportunities. Examples are coffee and flowers from Ethiopia, fruit and vegetables from Morocco, and wine from Algeria. These countries can gain a substantial amount of ground if they manage to upgrade their production methods and succeed in making infrastructure improvements. And this is happening. Ethiopia, one of the poorest countries in the world, is investing in its infrastructure.

As economies prosper, they become more diversified. Nigeria has a major film industry, for instance. After Hollywood, and India’s Bollywood, ‘Nollywood’ is the biggest film production center in the world. It is the country’s second-largest source of employment.

What are the primary risk factors?

In many countries, the primary risks are political in nature. Individual situations vary considerably, and many countries – I mentioned Botswana earlier – have effective leadership, but in other countries, conditions are in danger of deteriorating. Nigeria developed a type of pacification model that appears to have succeeded in reconciling the Islamic North and the Christian South with the distribution of power. However, since the rules of the game are not always observed, the elections in February threaten to become fairly fraught. This is not a good sign. Egypt has similar problems. The economy is taking a positive turn there, but religious tensions could ruin everything.

Then there is Ebola, of course. This dreadful disease – and more particularly the fear it generates – is putting a damper on growth. All areas can come under pressure as a result: economic activity, tourism and foreign investments. And this is not the only disease on the continent: while AIDS and Malaria cause many more deaths than Ebola, they are not a risk factor, though they do have a damping effect on economic growth.

What are South Africa’s economic prospects?

South Africa is one of the BRICS countries, a loose association of emerging economies with large populations. However, this country, with its more modest population numbers, remains something of an outsider. Its commodities were the reason China and India wished to include South Africa. Meanwhile, it is a convincing member of the ‘Fragile Five’, the group of emerging countries that rely heavily on foreign capital to finance their growth ambitions. Its large current-account deficit has become obscured by lengthy strike action in the mining sector, but the underlying figures are still high. This also applies to the country’s budget deficit and inflation.

Medium-term growth prospects are moderate and will not bring down the country’s high unemployment rate. Structural problems affect education, infrastructure and energy distribution, and the country’s political situation is unstable. The ANC did not manage to win a two-thirds majority in the May elections and has now formed a government team that can hardly be described as small and decisive.

Is the low oil price a problem for countries such as Nigeria, Algeria and Angola?

Only in the short term. I expect the relative price of oil to rise again. Oil is a fantastic product, and it is not easy to find substitutes. The shale-gas revolution in America is likely to be short-lived. At some point the reserves will be exhausted. Oil exports remain a positive factor for these countries, as does exporting other commodities to different countries.

All things considered, Africa is a continent of opportunities in economic terms. Nevertheless, a downturn scenario is also possible. The main thing now is to improve governance. If the continent succeeds in this respect, it will be able to maintain its present high growth rate for a long time to come.

Santander Invests £33 Million in Monitise’s Platform to Drive Growth in Mobile Money Ecosystem

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Santander invierte 33 millones de libras en la plataforma Monitise para impulsar su crecimiento en el ecosistema del dinero móvil
. Santander Invests £33 Million in Monitise’s Platform to Drive Growth in Mobile Money Ecosystem

Banco Santander will invest £33 million to acquire ca. 5% in Monitise — a world-leading mobile money business — to accelerate the development of the company’s new technology platform. Through this partnership, Santander also expects to develop its own capabilities with one of the most innovative digital technology companies, as it seeks to become the bank of choice for its customers who chose to interact with the bank on digital platforms. This is a major step in the development of the fintech strategy of Santander, and will be managed in the context of the Santander Innoventures fund initiative, announced in July this year.

The collaboration currently being discussed includes an accelerated pipeline of opportunities, leveraging Santander’s expertise and scale and Monitise’s technology to build new Mobile Money capabilities for Santander’s global customer base. Santander, the largest bank in the Eurozone by market capitalization has over 107 million customers across ten main markets in Europe and the Americas.

Monitise also announced a deepening collaboration with IBM that will include the deployment of Watson, IBM’s cognitive computing engine, to support Monitise’s new technology platform. In addition, Telefónica will become an investor and strategic partner and MasterCard has reconfirmed its strategic partnership relationship through a follow-on investment.

Ana Botín, Santander Group Executive Chairman, said: “With this investment, Santander will become part of a network of trusted partners who will work together to address our customers’ needs whenever, however and wherever they chose to bank with us. Our aspiration is to be the best global retail and commercial bank; and we are working to give simple, personal and fair service to all of our clients. Clearly a digital offer is key to this strategic vision of our bank, and this investment, coupled with the exciting opportunities we see through the Santander Innoventures Fund to enhance further what we can offer our customers, provides an excellent base from which to build a global digital offering.”

As strategic partners, Santander and Telefónica will have the right, acting jointly, to nominate a single Non-Executive Director to be appointed to the Monitise Board.

Monitise co-CEO Alastair Lukies said: “The Mobile Money industry is now a global phenomenon. In developed markets it is fundamentally changing the way we bank, pay and buy. In emerging markets it is the foundation of new economic systems. There are two clearand distinct approaches appearing in this industry: disruptors looking for control and collaborators working together to share in a very big and sustainable opportunity. With our partners, we are delighted to be playing our role as an enabler to the Mobile Money collaborators. Via deepening partnerships, our increasingly connected mobile commerce services can become even smarter and more engaging for the businesses we work with.”