Photo: Dennis Jarvis. Reforms in Asia Will Have a Positive Impact on Dividend Returns
Institutional investors believe the current reforms across Asia (excluding Japan) – from India, Indonesia, China and Korea – will have a positive impact on dividend returns in the region. This is the view of 65% of institutional investors interviewed by ING Investment Management (ING IM).
Nicolas Simar, Head of the Equity Value Boutique at ING IM, comments: “Asia provides an attractive and diverse universe of high dividend-paying stocks. Despite its reputation for growth, dividend investing in Asia has tended to outperform. Over the past five years investors tracking the MSCI AC Asia ex Japan Index would have seen a modest decline, with dividends being the only positive contributor to returns.
“We expect dividends to become an increasingly important element of total returns for investors in Asian equities because companies there are increasingly focusing on alignment with shareholders, and more are initiating or increasing dividends.”
In terms of why institutional investors expect reforms in Asia to have a positive impact on dividends, ING IM’s research reveals 43% believe the main reason is it will result in better corporate governance that will lead to companies increasingly looking to reward shareholders with higher dividends. Some 29% believe the key factor will be that reforms will encourage companies there to be more efficient, thereby improving returns.
ING IM says that as a higher proportion of Asian companies pay a dividend than in developed markets, it is possible to build a portfolio that is well diversified across countries and sectors. With Asian company balance sheets in good shape – the least leveraged globally – there are few constraints to increasing payouts, and Asia has delivered significantly stronger dividend growth than developed markets.
ING IM’s Asia Ex-Japan Equity Fund has returned 2.6% annualized since the inception of the strategy (31 March 2013). It invests in stocks of companies operating in the Asian region excluding Japan that offer attractive and sustainable dividend yields and potential for capital appreciation. The strategy combines quantitative screening with fundamental analysis to identify stocks that trade below their intrinsic value and offer an ability to grow their dividend in the future. The fund focuses on finding the strongest dividend payers from a valuation perspective and not the highest yielders.
Photo: MFS. MFS Launches MFS Meridian Funds – Diversified Income Fund
MFS Investment Management announced the launch of MFS Meridian Funds – Diversified Income Fund, a fund which seeks current income and capital appreciation. Led by James Swanson, MFS’ chief investment strategist, the strategy takes a disciplined investment approach that combines broad diversification, active asset allocation and bottom-up, fundamental security selection. In seeking to achieve its investment objective, the fund focuses on five income-oriented asset classes: US government securities, high-yield corporate bonds, emerging market debt, dividend-paying equities and real estate related investments.
“We think the fund’s disciplined and flexible approach to broad diversification, active asset allocation and fundamental security selection may help position the fund for favourable risk-adjusted returns”
“Similar to a strategy available in the US, this fund may be appropriate for investors who seek both income and growth potential through a diverse mix of income-producing securities”, said Lina Medeiros, president of MFS International Ltd. “The fund follows a disciplined and flexible approach and is managed by a team of highly-skilled portfolio managers who have managed money over long periods of time through varied market conditions”.
Lead portfolio manager James Swanson manages the asset allocation among the various types of securities in the portfolio. He works closely with co-managers and MFS’ Quantitative Solutions group and draws on insights from his 30-year career to determine the fund’s asset allocation. Working with Swanson is William Adams, co-head of Fixed Income for MFS and portfolio managers Ward Brown, David Cole, Richard Gable, Matthew Ryan, Jonathan Sage and Geoffrey Schechter. The management team has an average of more than 23 years of industry experience.
“We think the fund’s disciplined and flexible approach to broad diversification, active asset allocation and fundamental security selection may help position the fund for favourable risk-adjusted returns”, added Medeiros.
Issued by MFS Investment Management Company (Lux) S.àr.l. MFS Meridian Funds are a Luxembourg registered SICAV with US$27.0 billion in assets as of 30 September 2014. The MFS Meridian Funds are comprised of 31 equity, fixed income and mixed asset class funds. The MFS Meridian Funds are managed by MFS Investment Management, a global asset manager with US$424.8 billion in assets under management as of 30 September 2014.
International investors are kindly invited by Arcano to a breakfast presentation on investment opportunities in Spain. The presentation will be on Wednesday, December 3, 2014 and it will take plate in New York, at Chadbourne & Parke LLP (1301 Avenue of the Americas New York, NY 10019, 22nd Floor).
“Spain is leading the economic growth of the Eurozone. It is currently growing at a triple rate than the Eurozone (2% vs 0.6% in annualized terms). This impressive performance is based on two key factors: the recovery of the real estate market and the strength of the pillars of the Spanish economy; internal demand and exports. The Case for Spain III: Further Beyond, analyzes the reasons behind such accel- eration, as well as the solid foundation for future growth ”.
The event will start at 8:00 a.m., with registration and breakfast. At 8:30 a.m., the introductory remarks by Margarita Oliva Sainz de Aja, International Partner at Chadbourne & Parke LLP; at 8:35 a.m., the presentation of The Case for Spain III, by Jaime Carvajal, Partner and CEO at Arcano Group, and Ignacio de la Torre, Partner at Arcano Group and author of the report.
At 9:35 a.m., Ferran Escayola, Partner at Garrigues, will speak about “Spain is Back: New Legal Solutions for New Times”. The event will finish with some Q&A.
Foto: SP Duchamp. Un mundo en búsqueda de la recuperación
As the Federal Open Market Committee (FOMC) ends its fourth version of Quantitative Easing this month, whilst the European Central Bank (ECB) contemplates its first true version, Central Bankers are frustrated both by the lack of political restructuring to their national economies and also by the lack of economic growth, without which the huge Sovereign and private debts could not be afforded. Reinhart and Rogoff’s forecast that “using debt to solve a debt crisis” will simply result in slower economic growth than previously lives on. In the meantime, the World of Financial Repression is alive and kicking…unfortunately. Although the burden of debt is central to the recent financial crisis, there may be a confluence of events, globally, which is hampering a return to the old normal growth patterns of previous decades.
1. Demographics
Rapid aging can be experienced at first hand in many OECD (Organisation Economic Cooperation Development) countries, led by Japan and Italy with Germany and South Korea hot on their heels. In all these countries, we are seeing that as the number of hands to put to work diminishes, there are multiple challenges which inhibit economic growth. The fact is that the elderly spend significantly less on consumer and other goods whilst on the other hand they require increased healthcare treatment, services and assistance. Pensioners also tend to draw down on their savings which leads to a declining pool of investment capital. In addition, they have often become more risk averse in their latter years so that the pool of capital accessible to entrepreneurs and businesses also declines.
2. Youth education and youth unemployment
In the last few years, the USA has led the way with its youth assuming huge loans in pursuit of a college education which will lead to higher career earnings. However with over USD 1 trillion now lent and bad debt levels now rising to circa 20% of all loans, one must question if this “loan for education” is money well spent and indeed capable of generating a workforce with the changing skill-set which modern economies now require. Moreover, the UK is already heading in the same direction reflecting further misguided educational policy. This is of course juxtaposed with the travails in many European countries where between one third and one half of our youth under 25 is currently unemployed. Does it really matter, you may ask? Why is this so important for future growth? Well, with either heavily indebted youth or unemployed youth, we are circumventing our biorhythmic cycle of our youth moving into the workforce, forming relationships and families and moving onto the housing ownership ladder.
3. Falling productivity growth
Economic growth can be rationalised into the combinations of the availability of labour, the efficiency of labour and capital and, to a certain extent, a “frisson of leverage”, or debt. China’s urbanisation and industrialisation changed many sectors of the global economy including mining, manufacturing, steel and cement demand. Productivity (as I have noted already) is very important, but so too is the use, or productivity, of any debt which is incurred. At a global level this is because if this debt perpetuates or aggravates excess capacity, as in China, or excess welfare, as in Europe, or excess leverage, as in the global financial sector, then we are mis-allocating capital which will have to be written off eventually, at a cost to the growth prospects of the global economy. However, as this meteoric growth in China was being achieved, the global economy saw declining productivity, due to the impact of energy inputs rising consistently in price since the oil shocks of the 1970s and 1980s, together with the stalling in average wages for most blue and white collar workers. To the surprise of most economic commentators, the boom of IT and internet tools has not made that much difference to overall productivity levels.
4. Addicted to debt
The West has used more and more debt per unit of GDP since the mid 1970’s- a model which emerging markets are all copying today. We have currently solved the last Global Financial Crisis with yet more debt as Sovereigns have borrowed and borrowed to keep banks and their economies alive. This toxic combination of poor demographics, excess leverage and weak productivity suggests economic growth will remain anaemic in these financially repressive times. However, we are also seeing that it is not just Sovereigns and banks who are addicted to debt – but individual consumers too. With Zero Interest Rates, consumers are not being encouraged to save and invest and thus they are buying and borrowing to maintain and improve their lifestyles, bringing forward consumption from tomorrow, such that demand is likely to be lower in the future as we are shopped and borrowed out.
5. Global trade
Global trade has been slowing down despite many recent trade deals and hopes of greater World Trade Organisation initiatives. This is simply due to its scale and size inside the global economy. Since 1980, trade has grown from 14% of world GDP to 31.6% of world GDP. Interestingly, this means that trade has accounted for 50% of all the growth in activity in the last 25 years. Globalisation has indeed become a reality but the costs to many economies are now clear in terms of loss of manufacturing and some other office jobs such that off-shoring and on-shoring have become hotly debated political and social issues. With political and geopolitical tensions rising, trade is unlikely to carry the world higher from here and may indeed reverse for a while as trade sanctions in Russia and the EU are extended.
6. Energy
Over the last 40 years we have experienced two tremendous supply shocks to the price of oil, both emanating from the Middle East, which caused high levels of inflation and serious economic recessions in the West. Since 2000, the world has experienced more stable energy costs but this reflects a combination of strong and growing demand from Asia and the Middle East, where subsidies overstate demand and sharply rising costs of extracting oil and gas, as the “easy fields” have been developed and brought to market. Moreover, with productivity falling globally, energy is seeing nearly 35% of all capital expenditures, despite being less than 10% of economic activity, so that other sectors and industries are being squeezed out. Given the recent geo-political risks and rising Russian hostility plus possible American complacency over shale availabilities, a third oil shock remains a predictable “black swan”.
7. Structural reform and lack of political leadership
The Global Financial Crisis catalysed many of the apparent, if ignored, issues which had been brewing over the past decade; the proactive response from Central Bankers has held things together so far. However, around the world Central Bankers have been asking for, pleading for and even now begging for structural reforms from their national politicians which are a pre-condition for the economic “re-set” in many economies which urgently needs to occur. Whilst politicians have increased regulation on banks, for instance, there has been little recognition nor acceptance that policy also needs to change – hence Sovereign debt balloons, funded by Quantitative Easing Policies (QEP). With QEP now ending as the FOMC ends its latest program, the baton has been firmly handed to the politicians…
Conclusion
We continue to see a world enduring Financial Repression where growth remains fragile and dull. In this environment, it becomes essential for clients to “take on some risk in the search of some return”. With equities having been re-rated over the past few years with modest earnings upgrades, we do not expect a “rising tide of GDP growth” to bail-out the average corporate. Thus we conclude that clients need to become more selective in the future and look to companies offering superior growth opportunities through new products and geographies or through sustainably higher-yielding companies where mature and strong cash-flows provide an income well in excess of current Sovereign and credit yields.
If you’re worried about the recent spike in bond market volatility, we’ve got a bit of advice: Don’t be. There are plenty of other risks—chiefly credit quality and flatter yield curves—that are causing shakeups in some corners of the fixed-income world. Happily, there are things you can do about them.
There’s no denying the last few weeks have been volatile ones. But the recent price swings, amplified mainly by signs of weakening global growth, did not cause the two biggest dislocations in today’s bond market: sell-offs in the lowest-rated high-yield bonds and in short-maturity bonds in general.
Selling pressure in these areas has been building for months. As a result, many of these securities have underperformed higher-rated and longer-dated bonds. We think a closer look at the dynamics behind the selling can shed light on opportunities they have created and pitfalls investors should avoid.
Let’s start with the sell-off in short-maturity bonds. These securities are heavily exposed to the risk of rising interest rates, and as the third quarter wound down, it was beginning to look as if the US Federal Reserve could start hiking rates sooner than the market was anticipating. Investors tried to shield themselves by selling short-maturity bonds—investment-grade and high-yield corporates as well as US Treasuries.
This selling spree pushed up yields at the front end of most curves and shorter-dated bonds widely underperformed. We think the sellers may have jumped the gun. While the US economy has gained momentum, recent data from the euro area, China and elsewhere suggests the global economy may be slowing down. Consequently, the market is starting to think the Fed may play it safe and keep rates low for longer.
If so, this may prove a good opportunity to buy shorter-dated bonds at reduced prices. Through September, spreads on US high-yield bonds with maturities of one to five years have widened almost twice as much as those on bonds in the five-to-seven-year range. That could mean more potential upside for the short-maturity securities if interest rates don’t rise quickly
By the way, shorter-maturity paper tends to hold up better over a longer time period. Fund managers often refer to it as “cushion paper.” This is why we think the recent sell-off creates some nice buying opportunities for investors looking for short-duration securities with attractive yields.
The other notable disturbance in fixed income has been concentrated in the lowest-rated high-yield bonds. In this case, we view the sell-off as more warning siren than opportunity. Remember, CCC-rated bonds are issued by fragile companies with high leverage and weak balance sheets. It doesn’t take much for such companies to fail, and they often do so before the broader high-yield market starts to see rising default rates.
For most of the past year, investors have overlooked these risks and focused on the higher yields CCC-rated bonds offer. As a result, high demand has pushed yields down to the point where investors, in our view, are no longer being compensated for the risk they’re taking.
But the tide may be turning, with credit hedge funds leading the selling. The resulting rise in yields may tempt some investors to wade back in. But we think stretching for yield at this point in the cycle is risky. Doing so requires extensive credit research, and in most cases, we doubt the returns over the next 12 months will justify the risk.
To sum things up: We don’t think bond investors should fret about overall market volatility. But we do think they should pay attention to the bonds getting beat up the most. Understanding the cause of the selling can make it easier to view the bond market’s opportunities and dangers clearly.
Article by Ashish Shah, Head of GlobalCredit and Chief Diversity Officer, AllianceBernstein
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Photo: Carles Cerulia, Flickr, Creative Commons. Private Banks and External Asset Managers Will Thrive in LatAm Serving the Region’s HNWIs
Latin American high net worth individuals (HNWI) are on average far wealthier than those in other regions (USD 13.5 million compared to e.g. European HNWIs with USD 3.3 million). The USD 2.66 trillion wealth management industry servicing this clientele is changing, evidenced by a shifting landscape of market participants. The drive towards localisation, the rise of transparency and the renewed role of cross-border banking accelerate the demand for a refined HNWI service offering, focused on a sophisticated understanding of client needs and circumstances, professionalism and accessibility. In light of this new environment, financial institutions such as dedicated private banks and professional external asset managers – if committed to adapting accordingly – will thrive given the dynamism and value that can be achieved from serving the region’s HNWIs.
Julius Baer has launched the first edition of the ‘Industry Report Latin America’, covering wealth creation, wealth management and investment behaviour in Latin America. The report was produced – according to Julius Baer’s open product and service philosophy – in cooperation with leading market specialists such as Aite Group and BlackRock. Roi Y. Tavor, Head Independent Asset Managers & Global Custody Americas and Africa, who initiated the study, said: “With this inaugural edition of Julius Baer’s first Industry Report on Latin America we aspire to highlight various aspects of the changing wealth management landscape in Latin America. We hope that this report will serve as a reference for all participants in the Latin American wealth management industry, including private clients, family offices and external asset managers.”
Evolving investment behaviour
Latin American investors have become younger and more sophisticated over the past decades, resulting in an increasing risk appetite and a more diversified portfolio to achieve investment objectives. But cash, fixed income and real estate investments still represent 76% of average Latin American asset allocation today. Latin American economies, at the same time, are more integrated into the global economy today than ever before and thus more exposed to international economic cycles and global social trends. With total wealth in the region set to continue to grow, heightened exposure to external shocks and increased investor sophistication will lead to new investment behaviours. The growing middle classes are forced to think beyond their immediate consumption needs and to re-evaluate notions of saving, wealth protection, investment preferences and allocations, while considering systematic risks amongst others.
The inaugural ‘Julius Baer Industry Report Latin America’ was presented at the 35th anniversary of Julius Baer Bank & Trust (Bahamas) Ltd. in Nassau. Gustavo Raitzin, Head Latin America and Israel and Member of the Executive Board, commented: “The ‘Julius Baer Industry Report Latin America’ reflects our dedication to guiding our clients through complexity by anticipating trends and jointly developing strategies to prepare for a prosperous future.”
Ingredients for sustained wealth creation
There are a number of ingredients for sustained wealth creation in place in Latin America today. Growing at a strong pace, the region has almost tripled its gross domestic product since 2002, allowing for sustained periods of political stability. An overall higher purchasing power has enabled important parts of the population, which historically speaking were economically insignificant, to influence the overall level of activity in the region. In Brazil, for example, demand for cars has surged from 1.7 million units in 2005 to 3.8 million units in 2012. This rise of the middle class continues to shape the economic structure of Latin America.
Governments in the region have wisely used the windfall profits of the commodity super cycle to strengthen their financial position. External debt in % of GDP declined since 2002 from 42% to 25% of GDP, driving institutional and socio-economic change. A more business-friendly environment as well as checks and balances on governmental institutions continue to be established, a precondition for sustained growth. For example: Colombia carried out 27 reforms over the past eight years to improve the regulatory environment for doing business; key economies within the region have more than halved the time to start up a new business between 2003 and 2013 and the rising middle class in Brazil is increasingly educated, as reflected by a growth of tertiary education by 215% from 1998 to 2011.
Thus, the ingredients necessary to reveal the region’s full potential for wealth creation are provided for. Latin America today is one of the regions with the highest expected growth rates of wealthy individuals with the number of ultra high net worth individuals (UHNWI) expected to grow by 42% until 2023.
Mark Breedon, Portfolio Manager and Co-Head of 4factor Equities at Investec. Investec’s 4factor Process or How to Invest Leaving Personal Feelings Aside
Lately there is a lot of talk on investment by factors, a process which has established itself amongst institutional investors, and which is also gradually descending to the retail public. Some management companies, such as Investec, have been applying this method for years, since 1999, to build their portfolios. Mark Breedon, Portfolio Manager and Co-Head of 4factor Equities at Investec, explains to Funds Society how the 4factor team works and what the key factors are for this investment method, under which Investec manages $34 billion.
What arethe broad outlines ofthe 4factor process?
The 4factor process observes four factors in all securities that pass through its filter: 1) Quality 2) Value 3) Earning revisions and 4) Momentum. The process is applied to the universe of securities that have a market capitalization of more than 1 billion dollars and which have an average daily trading volume of over $ 10 million (3500). The system sorts the securities according to these four factors and tells you which ones rate best (600); from there, the fundamental analysis of each company by analysts at Investec come into play; they will propose ideas to invest in each of the geographical strategies handled by this method: Global Equity, Dynamic Global Equity, Global Strategic Equity, European Equity, Asia-Pacific Equity, and Asia Equity.
What market environments work best for the 4factor process?
If you’re a stock picker, things are easier if the market is cheap, that’s where the best opportunities are found. However, erratic markets such as 2009 and part of 2010 and 2011, when the market moved constantly from risk-on to risk-off, are more complicated. In 2012, the selection of good companies carried out in previous months reaped its rewards, and this strategy worked very well. With volatility and correlations at normal levels, disciplined processes such as this tend to function correctly. On the other hand, it is remarkable that such processes of long-term investment perform well in all market environments, because they focus on the company’s fundamentals without placing so much emphasis on political and macroeconomic factors.
What are your 4factor filters saying geographically?
In terms of quality-returns in relation to the cost of capital, there are more US companies listed with high scores, these also show positive earning revisions, as well as good momentum. However, the factor relating to value is poor. We see good signs in emerging markets both in valuation and in momentum and improved corporate earnings; perhaps Asian companies are better positioned than the average emerging markets. Europe does not fare as well. The momentum was excellent in 2012 and 2013, quality and valuation were not bad, but these never came along with positive earning revisions. Now, in addition, the momentum has worsened and it’s bad. Japan represents an opportunity: value is good, earning revisions are improving but, for now, the quality of companies is very bad. The reforms being carried out by Prime Minister Abe may help in making companies gradually improve shareholder returns. Some are applying very positive restructuring measures.
And, by sectors?
In Technology, the result of the filters is positive, but you cannot generalize. Large companies such as Microsoft, IBM, and Hewlett Packard are big cash generators. The cycle of low value-added semiconductor companies is lengthening as there has been no investment in capacity increases, so they also look attractive. Financial institutions, especially insurance companies, are benefitting from the long cycle of low rates. However, it is early days for companies in the commodity and energy sector, the value factor is terrible because the price of commodities is very low.
What are the differential characteristics of the Global Strategic Equity strategy, which you manage?
Investors tend to underestimate change; in a way, we’re stuck in the past. We usually set a reference point, and pivot around it. But change is powerful, and in this strategy we seek companies which fare well under the 4factor filter, and which are also undergoing a process of change that can come from a process of restructuring, liberalization of a sector, consolidation moves, spin-off of one of its divisions, etc. An example is Hewlett Packard, a company in which we have invested for a year and half because, besides receiving a good score according to our 4factor filters, it was undergoing a restructuring process that has recently led to the announcement of the spin-off of its business into two and an additional 5,000 job cuts. Another example is Cash America, a pawnshop and payday loan management company which operates mainly in the US, Mexico and the UK, and that is in the process of splitting the two businesses surfacing hidden value.
Finally does your 4factor process shed any ideas for Latin America?
In the emerging markets strategy we are invested in securities listed in Brazil, Chile, and Mexico. An example is Itaú, the bank of Brazilian origin. The valuation factor gives satisfactory results for Brazil, but it’s not positive in Mexico’s case. However, earning revisions in the Mexican market are good.
Photo: Ching King. Fighting for the Future of Hong Kong
Pro-democracy demonstrators took to the streets of Hong Kong’s Central business district in late September and October – demanding China’s Communist Party live up to the promise of democracy made when the British transferred the territory back to China in 1997. The uncertainty surrounding Hong Kong’s future weighs heavily on its citizens, as well as the international financial community.
Will protesters’ demands for open elections in 2017 push the power of China President Xi Jinping? Could perceive instability cause international investors to take their business elsewhere, such as Singapore? Just how badly has the reputation of Hong Kong’s financial sector been damaged? Emerging market investment experts from across Natixis Global Asset Management share their view points
Assessing the economic impact of these protests, François Théret, Chief Investment Officer at Absolute Asia Asset Management, makes the following comments:
The short-term damage to the economy is already visible. Hong Kong economic growth has been slowing since 2013 and the recent developments will only exacerbate the downtrend, with retail sales and tourism badly hit. China has stopped group tours to Hong Kong and retail sales recorded double-digit falls during China’s Golden Week holiday from October 1 to 5, according to the Hong Kong Retail Management Association. The group also reported restaurants and retailers located in the Central and Admiralty business districts recorded volume drop of 40% to 50% compared to the same holiday week last year. Some watch and jewelry shops in the Central area even reported close to 80% decline in sales. The impact on financial services and merchandise trade has probably been limited so far.
The key question is whether the current protest will jeopardize the city’s long-term economic potential. We strongly believe that Hong Kong’s status as a major global financial market with strong rule of law and increasing cooperation with other international financial hubs is unshakable. Mainland China is as important to Hong Kong as Hong Kong is to China for implementation of its reforms agenda. Hong Kong has been the main test field for nearly all the new open-up policies introduced by Beijing, including the recent R-QFII (RMB Qualified Foreign Institution Investors) program and the Shanghai–Hong Kong Stock Connect. The first-mover advantage has helped Hong Kong secure the rapidly growing source of financial revenues from the offshore yuan business. Hong Kong maintains a comfortable lead over other locations, such as Singapore, London and Frankfurt.
Michael McDonough, Emerging Markets Analyst at Loomis, Sayles & Company, adds:
Hong Kong, for here and now, is still the finance capital of Asia ex-Japan. We believe the pro-democracy protests do not undermine this leadership.
The protests do highlight that Hong Kong is ultimately a city that belongs to China. Within that, it raises a broader question of Hong Kong’s ultimate positioning: a city of eight million, within China, a country of 1.4 billion. Beijing is the political capital. Shanghai is the industrial capital. Hong Kong has been the financial capital, the place where international (offshore) investors have sought to invest in China.
With the new Shanghai–Hong Kong Stock Connect, both cities, the country overall and investors (Chinese and international) will benefit. However, over the intermediate term, we believe Hong Kong’s relevance will be less dominant as Hong Kong becomes enveloped in China and international investors gain comfort and access to the onshore market.
CC-BY-SA-2.0, FlickrPhoto: Bev Hendry, co-Head of Aberdeen AM Americas. Aberdeen Asset Management, Focused on Growing its US Offshore Business
Bev Hendry, current co-Head of Aberdeen Asset Management in the Americas, came to Fort Lauderdale 19 years ago to plant the seed of the Scottish asset management firm in the Americas. “In 1995, it was decided that America would be the next area of growth for Aberdeen Asset Management, at a time when the company was present only in its home town, Aberdeen, and in London and Singapore,” Hendry said during an interview with Funds Society.
The strategy proved successful as the region of the Americas “has grown so much that we thought it made sense to give it two co-Heads,” Bev Hendry deals with the financial side, as well as the US offshore business, Latin America, and Canada, while Andrew Smith is more focused on the operational side of the business as well as the US domestic leg. Both have come to replace Gary Marshall, who last summer returned to Scotland to participate in the integration of the recently acquired business of Scottish Widows. Both Bev Hendry and Andrew Smith have their offices in Philadelphia, the American city that serves as Aberdeen’s headquarters in the United States.
“Andrew and I have known each other since 2000, when he was working in our offices in Fort Lauderdale,” Hendry said. “The first thing we developed was the offshore business in the US, even before the institutional one in Chile, which was followed by those of Peru and Colombia,” he added. Now, Linda Cartusciello, who is based in Miami, is in charge of all the institutional business in Latin America. Also in Miami is Maria Eugenia Cordova, who deals purely with the US offshore business that has its epicenter in this city. Maria Eugenia reports to Mennode Vreeze, Head of Business Development of the US offshore business, whose team is completed by Damian Zamudio and AndreaAjila; all three are based in New York.
In New York, Aberdeen also has fixed-income and alternative investment teams. As confirmed by Hendry, one of Aberdeen’s main goals in the Americas region, is to boost the offshore business in the United States. “Each month, the offshore team meets in Miami. This coming year we want to participate in more events and conferences for this market segment and provide our customers, particularly broker dealers, the support and the specific products they demand.” With this, Hendry refers to specific share classes for the funds demanded by offshore investors in the US, which often differ to those, which are registered in European platforms.
Aberdeen is commonly recognized as one of the strongest asset management companies for emerging markets global equity, although Hendry emphasizes that they also offer interesting management capabilities in other asset classes such as fixed income, real estate, and alternative investments. “We are a much more diversified asset management company than we were 10 years ago, but we have to convey this message to investors, as US offshore investors have known us for almost 20 years as an asset management company specializing in emerging markets’ equity.”
Emerging market debt would be one of the asset classes to emphasize. “The process is very similar to our equities business. We follow a very fundamental bottom-up process, with careful attention in selecting corporate credit securities.” These strategies, notes Hendry, “offer higher yield while diversifying a fixed income portfolio.” In emerging market debt Aberdeen has, amongst others, a Global Select Emerging Markets Bond strategy and a Frontier Markets Bond strategy, launched a year ago, “even though Aberdeen has been investing for a long time in frontier markets’ fixed income through our Flexible Bond strategy”, Hendry stressed.
In the Latin American market, Aberdeen Asset Management is also widely recognized for its emerging market equities franchise. It is, in fact, the asset management company with the most assets in emerging market equities in Chile and Peru, and the second in Colombia. “These are the regions in which we have focused the most and for which we are best known.”
Now they are also focusing on Brazil, where the firm has a business development team of two people in Sao Paulo, because “the market is beginning to open up through their pension funds business.” Aberdeen opened the office in Sao Paulo in 2009 as an investment center and “we now have two local funds that invest in Brazilian equity and fixed income.” Hendry points out that they are finally seeing a clear appetite by Brazilian pension funds for diversifying internationally. The creation of a feeder fund that invests in one of its flagship funds, or the creation of custom institutional vehicles, are amongst Aberdeen’s plans for Brazil.
Mexico is another market that Aberdeen is following closely. “It is quite possible that in the future Mexico will be an important Latin American business focus for Aberdeen, and that eventually it might consider opening an office there,” said Hendry. Should that be the case, it would add to the five Aberdeen offices already in the region in Philadelphia, New York, Miami, Toronto, and Sao Paulo. Overall, Aberdeen Asset Management has AUMs of US$80bn in the Americas, of which US$7bn are Latin American and US offshore assets. According to information available at the end of July 2014, the Latin American institutional business comprises US$5.4bn, while the remaining US$1.6bn relate to assets of US offshore business. Hendry concludes by noting that “we have a great and very enthusiastic team, who devotes all its efforts and expertise to develop Aberdeen’s business in the Americas.”
The recent spasm of U.S. dollar (USD) strength is more likely a symptom, less likely a cause, of several political and economic dislocations in today’s markets. But what does the dollar rally mean to investors of Asian equities and fixed income? Gerald Hwang, Portfolio Manager at Matthews Asia, discusses this issue in a recent article:
The Asian Financial Crisis of 1997–98 looms like a ghost over any consideration of Asian currency risk. Given the robust performance of Asian currencies since 1999, however, it may be time to reconsider Asian currencies in a modern context that takes into account the diverse monetary systems, business cycles and development stages of Asia’s economies.
Over the third quarter, the worst-performing Asian currency was the Korean won, which depreciated 4.1% against the U.S. dollar. Interestingly, this was better than the best-performing G-10 currency—the Norwegian krone, which lost 4.6% vs. the USD. Performance in other Asian currencies ranged from a 1% gain in the Chinese renminbi to a 2.9% loss in the Philippine peso.
With the trade-weighted basket of Asian currencies losing 1% vs. the dollar in the third quarter, it’s fair to say that Asian currencies were relatively stable over the quarter compared to other currencies. Latin American currencies lost 6% over the same period. Even traditional safe haven currencies—the Euro, Swiss franc and Japan’s yen—lost ground against the USD, losing in the neighborhood of 7% to 8% each.
This is not the first time that Asian currencies have shown resilience in the face of stress emanating from more developed markets. They performed better than expected during the Great Financial Crisis of 2008, losing 9% vs. the USD from the end of July 2008 until the end of the following March. This compared favorably to the 27% loss in Latin American currencies and 14% loss in all trade-weighted currencies over that period.
Equity investors usually pay little heed to currency risk due to its small contribution, over the long run, to total returns. Foreign exchange (FX) volatility is also not a meaningful contributor to overall returns volatility.
For investors in Asian bonds, currencies matter more. Over the long run, currency returns have contributed about one-fifth toward total return and about two-thirds toward volatility. When you buy a bond denominated in a foreign currency, you receive the following basket of returns: local currency coupon income, local currency price return (primarily due to yield changes that can arise from either interest rate or credit spread changes), and FX return on the coupon income you have received as well as on the bond principal. Currency movements can either add to or detract from bond coupon and price returns.
The tension between FX return and coupon plus price return is starkest when markets become risk averse. For investors whose home currency is a “safety currency” (the USD preeminent among them), negative returns from local currency depreciation can negate positive returns from coupon cash flows.
Since the Asian Financial Crisis, have Asian currencies been net positive or negative contributors to Asian bond returns? On a trade-weighted basis, they have appreciated about 1% each year on average. A valid objection is that 1999 is an unfair starting point because that marked the end of the Asian Financial Crisis. Use any point after that, and Asian currencies still look relatively stable compared to currencies of other developing markets. Compared to Latin American currencies, to which they are often compared, Asian currencies have performed decently, with less than half the volatility and less severe drawdowns.
Opinion column by Gerald Hwang, CFA, Portfolio Manager, Matthews Asia
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