CC-BY-SA-2.0, FlickrPhoto: Eneas de Troya. The Golden Rules of Multi Asset Investing
Underlying momentum in global growth moved to its best pace in four years during the second half of last year. Moreover, labour market dynamics, income trends and falling oil prices and interest rates bode well for further strengthening in the global cycle. Nevertheless, markets have been edge in recent months and volatility has started to trend higher after the Summer of 2014. Doubts about central bank behaviour, rising deflation risks, the economic and geo-political fall-out from oil price declines and renewed fears over Grexit have clearly weighing on sentiment and influencing investor behaviour.
Investors need to weigh these fundamental and behavioural cross-currents. The complex ecology of markets and the continuous mutual influencing of all components in the system makes it very hard to assess what the future direction of the market will be. Therefore, it is important to follow some principles to navigate the portfolio returns through the rough twists and turns of financial markets. Those are the 6 golden rules in ING IM´s multi asset investment approach:
1. Understand where you are
The environment around us is complex, not automatically reverting to an unobserved “equilibrium” and constantly changing. So, study the functioning of the ecology you operate in, map the players around you, understand how they interact. Key in this is to know what you don’t know. Be aware of the difference between uncertainty and risk, note the obvious limitations of the efficient market hypothesis due to heterogeneity of market players, bounded rationality and occasional irrationality, limits to arbitrage and the persistence of market “anomalies” and observed falsification of normally distributed returns.
This awareness helps to focus on robustness, both in the area of data research and portfolio construction. Balance portfolio exposures well across your opportunity set and between “safe” and “return” asset classes. While doing this always keep in mind not to under-estimate risk and not to over-estimate diversification benefits. Also, always expect the unexpected.
2. Expand your horizon
Continue to learn about the world you operate in and develop innovative research to explore the environment in the best possible way. This means not only understanding the underlying fundamentals well, but also developing expertise on the emotions and behaviour of the investors around you.
To do this effectively some creativity is needed. Information need to be found and utilized in an innovative way. On top of that the resulting data analysis needs to be rigorous and consistent to eliminate behaviour pitfalls, while also allowing investor skill to add insight on the unquantifiable like regime shifts at Central Banks or (geo) political shocks.
It also translated into the breath of your investment universe and the effective use of the diversity in investment opportunities, both across asset classes and through time.
3. Adapt to change
Allow yourself, said ING IM team, to be active, but make sure accountability is always in place and incentives an open minded way of thinking about the economy or markets. Therefore, change your opinion once the facts change or the market ecology has adapted. And while risk premiums are shifting during the process, take risk when opportunities are high and hide when uncertainty is not well rewarded.
4. Team up
Do not think you can do all of the above alone. Listen well to your stakeholders (clients, regulators, team members, other partners), determine the right risk tolerance and aim for a prudent investment solution. Utilize all skill in your investment team and stimulate cooperation and learning amongst team members against a backdrop of clear goals, responsibility and accountability. Play as a team.
5. Iron discipline
Make sure consistency of your investment decision is safeguarded well. Work with a strong investment process that works in different investment climates. Use strategist and portfolio manager skill and experience to construct a resilient investment toolkit. Have challenging discussion on motivations to deviate from guidance from the toolkit. Aim to have skin-in-the-game for decision takers.
6. Simplicity
Against the backdrop of the complex system of markets, keep it as simple as possible without damaging effectiveness. Identify clearly what the sources of returns are and where your own strengths lie in exploiting them. Value consistency over complexity and monitor liquidity, transparency and costs at all times aware.
CC-BY-SA-2.0, FlickrPhoto: www.pactomundial.org. State Street Corporation Signs United Nations Global Compact
State Street Corporation announced it has become a signatory to the United Nations Global Compact (UNGC), the world’s largest corporate citizenship initiative. The UNGC is based on 10 universal principles in the areas of human rights, labor, the environment and anti-corruption, which closely align with State Street’s corporate responsibility focus.
The UNGC initiative was officially launched in 2000 to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. State Street joins more than 12,000 other signatories from companies, governments, labor, and civil society organizations in approximately 145 countries.
“Our membership with the UNGC furthers our focus on these issues and emphasizes the importance of them to our clients, employees, shareholders and the communities where we live and work. We are pleased to become an official member of the UNGC initiative, as its 10 universal principles in the areas of human rights, labor, the environment and anti-corruption closely align with our own values,” said Alison Quirk, executive vice president and chief human resources and citizenship officer at State Street. “Our membership with the UNGC furthers our focus on these issues and emphasizes the importance of them to our clients, employees, shareholders and the communities where we live and work.”
By signing the compact, State Street confirms its support of the initiative’s 10 principles and its intent to advance those principles within its organization.
Photo: Gabriela Da Costa. Will 2015 Finally Be the Year When the Global Economy Returns to Normal?
Throughout the global economic expansion that is now stretching into its sixth year, we have experienced periods of accelerating growth followed by brief pauses or setbacks. Even with extraordinary monetary policy stimulus and ultra-low interest rates, the world economy has struggled to maintain an above-trend rate of growth. As a result, excess capacity remains. Little wonder that global inflation continues to surprise to the downside. “In other words, this expansion has been anything but normal”, point out MFS experts, Robert Spector, Institutional portfolio manager, Sanjay Natarajan, Institutional Equity portfolio manager, and Robert M. Hall, Institutional Fixed Income portfolio manager.
Will 2015 finally be the year when the global economy returns to normal?, asked. After all, consensus growth estimates reported by Bloomberg show an accelerating pace this year versus last year. And these forecasts probably underestimate the constructive impact of the sharp plunge in energy prices, which is likely a net positive for the global expansion.
“In our view, a normal economy is characterized by being relatively synchronized across regions, maintaining a self-sustaining growth rate at or above its potential without hyper- accommodative monetary conditions and having a functioning credit system so that easy central bank policies can work effectively. Let’s look at each of these three characteristics in turn”, they explain.
Synchronized across regions
The global economy remains unsynchronized. The United States is the undisputed growth leader among the major economies, with third-quarter real GDP growth hitting 5% at an annual rate, the labor market improving at an impressive clip and prospects for consumer spending looking solid. Energy-related capital spending will likely take a hit from lower oil prices, yet overall we expect US growth to be around 3% in 2015.
By contrast, European growth may struggle to hit 1%, given ongoing deleveraging and the threat of deflation. Although Japan could receive a boost from lower energy prices and a weaker yen, real wages may continue to stagnate, and structural reforms remain a headwind until they become a reality. Emerging economies in general face a muted global trade cycle and structural issues related to productivity. The bottom line is that the global economy will continue to grow in 2015, but without the reinforcing vigor of a synchronized expansion.
Self-sustaining growth at or above potential rate
Given these divergent growth trends, it will be difficult for the world economy to grow above the long-run potential rate on a sustained basis. “As a result, we expect global monetary conditions to remain super easy in 2015. Though the US Federal Reserve (Fed) has ended quantitative easing and is guiding the market toward a midyear rate tightening cycle, the timing of the first hike could be pushed out if inflation keeps undershooting expectations on downward pressure from crude oil prices or if US labor market improvements fail to generate wage gains”, says MFS.
Functioning credit system
Blockages in credit continue to get in the way of monetary stimulus, as money multipliers and the velocity of money are still falling. To be sure, deleveraging has reached an advanced stage in the United States, yet debt levels remain high by historical standards. Globally, there has actually been no net deleveraging since the financial crisis, owing to the debt buildup among European governments and emerging markets (EM). “Without the powerful accelerant of credit expansion, easy monetary policy can provide a buffer against deflation pressures and boost asset prices but cannot be the savior of global growth as in normal cycles”, concludes the MFS analysis.
The bottom line is that growth in 2015 may surpass last year’s tally, thanks mainly to the strength of the US expansion and the sharp drop in oil prices. However, we expect the recovery to remain far from normal, so the environment of low inflation and long-term sovereign yields should persist. “That would be good for equity prices and the US dollar. As long as the global economy avoids recession, which is our base case, global equities should outperform global government bonds in 2015”, they explain.
Photo: epSos.de . More Than 50% of Asset Managers Received Requests for Responsible Investing
New research from global analytics firm Cerulli Associates finds that more than 50% of asset managers received requests for socially responsible investing (SRI) and environmental, social, governance (ESG) mandates from institutional clients.
“Many executives we spoke with during our research interviews told us that they are getting more client inquiries regarding responsible investing strategies,” states Susana Schroeder, senior analyst at Cerulli. “Most managers deal with requests that involve restrictions against holding securities, which are often tied to responsible investing.”
Responsible investment encompasses several areas: ESG, SRI, mission-related investing, impact investing, and program-related investing.
“There is increasing acceptance among investors and managers that ESG factors, such as hazardous waste disposal and predatory lending practices, can have a material impact on a company’s financial wellbeing,” Schroeder explains. “Public defined benefit plans and nonprofits are most likely to incorporate ESG factors into their investment process, because of pressure from donors, students, taxpayers, and other constituents.”
“Institutional sales teams report that clients and prospects are inquiring about this area as they seek to better understand the different aspects of sustainable investing,” Schroeder continues. “Even professionals working in the trenches have witnessed this shift, including request for proposal (RFP) teams, which have reported a rise in the number of RFPs with embedded ESG-related questions.”
Miguel Salinero Barbolla, client service associate at Capital Group. Capital Group Expands Client Service Team
Investment management company Capital Group has announced the appointment of Miguel Salinero Barbolla as client service associate.
Based in London, Salinero is responsible for facilitating client servicing for Capital Group’s financial institutions and intermediaries in Europe.
He joins from BNY Mellon, where he worked most recently as head of international client services and prior to that as client service executive for Spain and Portugal.
Grant Leon, head of Sales for Capital’s Financial Institutions and Intermediaries business, comments on the appointment: “Miguel’s appointment is important as we continue to establish new – and deepen our existing – relationships with intermediaries and our distribution partners across Europe.”
Photo: José Luis Cernadas Iglesias. Riccardo Dallolio Joins H.I.G. Capital as Co-Head of European Real Estate
H.I.G. Capital, a global private equity investment firm with more than €13 billion of capital under management, is pleased to announce the appointment of Riccardo Dallolio as Managing Director and Co-Head of European Real Estate. Based in London, he will share these leadership responsibilities with Ahmed Hamdani, who has been a Managing Director in London since 2012.
With over 16 years in the real estate industry, Riccardo has extensive investment and transactional experience across a number of jurisdictions in Europe. Prior to H.I.G., he was at AXA RE where he was Head of Alternatives and Special Situations. During his time at AXA RE, he also held the positions of Head of Transactions in Europe and Head of Asset Management and Transactions in France. Prior to AXA, Riccardo was a Partner at Grove International Partners, and worked in the J.P. Morgan Real Estate Group in London.
H.I.G. Capital’s real estate platform targets opportunistic real estate investments, with a focus on adding value, improving performance, and achieving attractive risk adjusted returns. With offices in London, Madrid, and Milan, the H.I.G. European real estate team is active across a wide spectrum of real estate asset classes. It has completed 13 transactions across multiple jurisdictions in Europe in the last two years including the U.K., Spain, Italy, the Netherlands, and Finland. With the ability to invest in all parts of the capital structure, H.I.G. Capital is able to develop creative financing solutions and consummate transactions on an expedited basis. Typical investment size ranges from €10 million to €100 million.
In commenting on the appointment, Sami Mnaymneh, Co-Founder and Co-CEO of H.I.G., noted, “I am delighted to welcome Riccardo to the firm. He is a very experienced and successful real estate investor who significantly augments the expertise and capabilities of our team. I am confident he will play an instrumental role in H.I.G. Capital’s development and growth in the real estate asset class.”
CC-BY-SA-2.0, FlickrPhoto: David Dennis. MSCI Delays Inclusion of China A-Shares in Index
After nearly one year firmly positioned at #7, the Renminbi has entered the top five of world payment currencies since November 2014, overtaking both the Canadian Dollar and the Australian Dollar by value. Just two years ago, in January 2013, the RMB was ranked at position #13 with a share of 0.63%. In December 2014, the RMB reached a record high share of 2.17% in global payments by value and now trails the Japanese Yen which has a share of 2.69%.
“The RMB breaking into the top five world payments currencies is an important milestone” says Wim Raymaekers, Head of Banking Markets at SWIFT. “It is a great testimony to the internationalisation of the RMB and confirms its transition from an “emerging” to a “business as usual” payment currency. The rise of various offshore RMB clearing centres around the world, including eight new agreements signed with the People’s Bank of China in 2014, was an important driver fuelling this growth”.
Overall, global RMB payments increased in value by 20.3% in December 2014, while the growth for payments across all currencies was 14.9%. The RMB has been showing a consistent three digit growth over the past two years with an increase in value of payments by +321%. Over the last year, RMB payments grew in value by 102% compared to an overall yearly growth for all currencies of 4.4%.
Photo: LinkedIn. Jean Pierre Mustier Joins Tikehau Capital for Expansion
Jean Pierre Mustier, formerly head of corporate and investment banking at UniCredit, has joined Tikehau Capital as a partner to help the fund manager’s international expansion.
Mustier joined in early January and is based in London. He stepped down from UniCredit at the end of 2014 after a tenure of almost four years at the bank. He is, however, still a member of UniCredit’s international advisory board.
As well as overseeing Tikehau’s international expansion, Mustier will contribute to the fund manager’s existing business.
Tikehau Capital Group manages $5bn for institutional and private investors in various asset classes – listed and private equity, credit, private debt, and real estate – through its asset management subsidiary, Tikehau IM.
Photo: ITU Pictures. Beamonte Investments to Acquire Venture Academy
Beamonte Investments, along with is affiliate, Beamonte Mexico Holdings, announced it has invested in Venture Academy, an educational platform for training entrepreneurs how to raise money through a four day intensive boot camp designed to provide attendees with the information, guidance, and advice to run their businesses. After the closing, Venture Academy will be a wholly owned by Beamonte.
Based in Mexico City and with offices in Boston, MA Venture Academy was born from the idea that with the right information and guidance, any start-up can be successful. The path from business idea to business maturity can be long and difficult, with many uncertainties along the way. Most start-ups know where they want to go, but do not know hot to get there. They have a vision, but lack funding. When money from friends and family is not enough, outside capital is needed.
Venture Capital firms see hundreds, if not thousands, of slide decks per year. Of these, only about 10% ever get a first meeting. A meeting with an institutional investor could be the make-or-break moment for any start-up. Knowing how to approach investors is critical to getting the capital entrepreneurs need to grow their businesses.
“We notice a huge gap between entrepreneurs and private investment firms. We are the guys on the other side of the table, we know what wins and what loses; our goal is to build more bridges between entrepreneurs and investors,” said Claudia Yan, Manager at Venture Academy.
Venture Academy will provide the knowledge and tools to ace this test.The boot camp consists of an intensive program divided in six modules, including management 101, valuations, term sheets, financing, immigration and more. Venture Academy plans to do multiple boot camps each year.
Beamonte has an outstanding track record on Venture Capital in the United States, recently investing in Arthena and Nanostatisfi. They are eager to replicate the same success in emerging markets such as Mexico and Colombia.
Luis F. Trevino, Senior Managing Director at Beamonte Investments commented, “There are talented and driven entrepreneurs with great ideas claiming there are no funds nor financial opportunities to develop their businesses. On the other hand, there are people like us, keen to find the next big project to invest, develop, and grow. The biggest obstacle to sealing a Venture Capital deal is a lack of sophistication during the negotiation process.”
Beamonte Investments is a single family office located in Boston, Massachusetts. Beamonte has been a pioneer in direct venture capital and private equity investments, credit alternatives, and activist investment campaigns, as well as a pioneer in cross border transactions with Latin America. Since its inception, the firm has executed, as principal and agent, over $5 billion USD in transactions.
Photo: Scott Beale. Recovery Moves Up a Gear as Consumers Step on the Gas
Nadia Grant, Fund Manager at Threadneedle Investments, addresses some of the questions currently on the minds of US equity investors. Overall, she believes that US stocks are very attractively valued in relation to other markets and will gain support from a broad-based economic recovery.
Last year we saw relatively strong economic growth in the US, but a slowdown elsewhere, while oil prices have now halved and the US dollar has surged. Given those developments, how sustainable is the US recovery and will the shape of that growth be affected?
We think the US economic recovery is broadly based and are forecasting GDP growth in 2015 of around 3%, which should provide a very supportive backdrop for equities. We expect the consumer to account for around two-thirds of this growth, at about two percentage points, up from 1.6 percentage points in 2014. The collapse in the oil price is benefitting US consumers enormously. They are now paying an average US$2.14 a gallon, and just US$1.80 in some states, rather than US$3.50 before the oil price drop. These extra dollars provide a considerable boost to lower-income workers, who have a significant propensity to spend. Thus, the lower gasoline price is highly stimulative for the economy.
We expect investment to contribute about one percentage point to overall growth, a level which is also higher than last year.
Interest rates have not risen in the US for nearly nine years but the Federal Reserve has been guiding investors to expect a rise at some point this year. Do you think that this is a reason for US equity investors to be fearful?
No, we do not think investors should be concerned. The Federal Reserve’s guidance reflects the fact that interest rates are abnormally low by historical standards, and more importantly, that the US is on the path to a self- sustainable recovery and thus a normalisation of interest rates. A rise in interest rates would provide concrete evidence of the Federal Reserve’s confidence in the recovery and that view should also support equities. Historically, the market tends to anticipate the first rate hike six months in advance of it taking place and tends to be a lot more volatile during this period. However, historical evidence indicates that rising interest rates have no material impact on the market six months to a year after the first rate hike.
US equity market valuations were at the top of investors’ minds in 2014. Our view was that valuations were quite reasonable and that earnings growth would drive market gains and this proved largely correct. What is your view of valuations going into 2015?
The market has not re-rated but has simply grown in line with earnings and we expect this trend to continue in 2015. The consensus is that equities will be trading at about 15 times PE by the end of the year, which is in line with the market’s long-term historic average. Thus, we think that US equities are neither expensive nor cheap. Given that the US is the sole engine of global growth and given how sound the recovery is, we believe US stocks are very attractively valued in relation to other markets.
What about the inflation?
Low inflation means the rate at which equity cashflow is discounted is also low and historically this has been very supportive for the market. Economic fundamentals and earnings growth should underpin expectations for 2015. As mentioned, we are forecasting 3% GDP growth, which translates into 5-6% revenue growth, some profit margin expansion and buybacks of around 1%. Thus, we anticipate high single-digit earnings growth in 2015, which is high by historic standards.
How are you positioning the American Fund for 2015 and could you provide examples of stocks in which you have the highest conviction?
We focus on companies that are uniquely placed in terms of having secular growth drivers and pricing power. Consequently, in the American Fund we are overweight in the technology and healthcare sectors, which are home to companies that have disruptive new technologies as well as pricing power. Meanwhile, we are underweight in energy and telecoms. We believe energy prices have yet to find a floor, yet the stock price of companies within the sector does not reflect the fall that we have seen in the oil price, while the telecoms sector is subject to intense competition and price erosion, in other words the complete opposite of what we seek.
