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Quality Growth and Income, Two Strategies to Invest in Europe by AllianzGI

Quality Growth y Dividendos, las dos estrategias que recomienda Allianz GI para invertir en Europa — Neil Dwane, CIO of European Equity, Allianz GI. Quality Growth and Income, Two Strategies to Invest in Europe by AllianzGI

In order to obtain returns in the current low-rate environment, risks have to be taken. For Neil Dwane, CIO of European Equity at AllianzGI, it is essential to choose the type of risk you assume. “There is growth in the world, but you have to look around carefully for companies which do show growth. In periods of low growth such as now, stocks with high dividend yields are a good choice, and those with high quality growth are the other.”

With these two tips, Dwane focuses his discussion on what type of product is currently more attractive when investing in European equities. Focusing on quality growth, he cites late 2007 as an example as the situation was a similar to the present moment “in which quality was more affordable than companies with more questionable fundamentals; in that environment, Quality Growth, managed to rise in 2008 compared to a market which fell by 40%.”

Delving deeper into this “return to quality,” Dwane points out that it may come either from quality of growth, “as in Inditex’ case”, as from quality of dividends, “as Repsol’s or Royal Dutch’s.” Dwane explained that right now, the right decisions must be taken, even within sectors, and gives the example of the banking sector: “between two large global banks such as HSBC and BBVA, we currently opted for HSBC. Firstly, BBVA is more expensive, and secondly, the recovery in Spain and much of Latin America is questionable, while HSBC bank is more diversified. “

For investors who prefer something less volatile, a strategy focusing on a high dividend yields is more appropriate.

In the high income strategy, Allianz GI’s management team scouts for companies which have a 25% higher yield than the market’s. “It is a quantitative process that we carry out each and every Monday to see which companies meet this criterion. Once we have the candidates, we see which securities have solid fundamentals by looking at the sustainability of the dividend, the generation of cash flows, the quality of the management team, etc. Businesses that meet our criteria will enter the portfolio. In turn, the sales discipline is simple: when a security we have in the portfolio reaches the market’s dividend yield, it’s offered for sale” Dwane explains.

In an interview with Funds Society, Neil Dwane talks about bPost, the Belgian postal company, as an example of a company which fits these criteria. “bPost met the criteria of high yield dividends, but is also recently benefiting from Amazon’s entry into the Belgian market since most of the packages distributed by Amazon in Belgium travel through the bPost postal service. As befits a company of this type listed in Europe, bPost trades at a PE ratio of 6x and has an attractive yield of 6.5%, with an expected dividend growth of 10% due to improved cash flows” he adds.

Allianz GI’s European Equity Dividend strategy has an average dividend yield of 5.1%, with expectations that the yield will rise to 5.8% next year. “Therefore, a higher yield than that offered by high yield debt in the Euro zone is obtained through this strategy, and also, in the case of investing in dividends, you do so in high-quality companies, whilst if investing in high yield debt you are positioning yourself in companies with poor credit quality whose emissions, going back to par, have a potential drop of 35%,” argues Dwane.

Sentiment towards Europe Has Changed. Was It All an Illusion?

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El sentimiento hacia Europa ha cambiado: ¿Ha sido todo una ilusión? — Ann Steele, Portfolio Manager for Threadneedle’s Pan-European Equity Strategy. Sentiment towards Europe Has Changed. Was It All an Illusion?

Earlier this year, everything seemed to be running well in Europe. Mario Draghi had promised to “do everything necessary,” growth was returning to the economies of the euro zone, albeit slowly; and even peripheral countries showed recovery. Investors trusted this recovery and returned to the European market, and nobody would bank on the collapse of the euro.

But sentiment has now changed. Has it all been an illusion? Ann Steele, Portfolio Manager for Threadneedle’s Pan-European Equity Strategy, spoke to Funds Society on the problems besetting Europe. Her diagnosis is severe: “We’re in the same spot we were two years ago.” Steele puts some hard data on the table: “Earlier this year, the consensus estimated growth of 14%, in European earnings per share, we are now at 5%, and virtually everything is due to the currency effect. If we look at GDP, we see that growth has stalled. In fact, France does not grow, Germany’s growth is very weak, and Italy has negative growth. These three countries together generate two thirds of GDP in the Euro zone, the situation, therefore, is complicated.”

Economic sanctions on Russia, which even in the best of cases, will remain in force for some time, are affecting quite a few economies. The specter of deflation joins this economic stagnation. The Eurozone’s annual inflation data is, at 0.3%, “light years below the ECB’s 2% objective.” The falling oil prices will not help generate inflation in Europe. In short, “the banking and sovereign debt crisis has led to a growth crisis in Europe,” says Steele.

Some countries have taken bitter, but effective, measures. Steele cites Ireland’s example, which following the necessary reforms has managed to lower its unemployment rate from 15% to 11%, enjoys a recovery of 24% in housing prices, and has achieved 7.7%. GDP growth in the second quarter “The banks were recapitalized in 2009 and have taken off, and a tax reform, which has lowered corporate tax to 12.5%, has attracted worldwide multinationals to Ireland.” The country has managed to lower its budget deficit from 13.7% in 2009 to 2.8% in 2014.

Steele is disappointed that the Irish example does not abound in Europe. Even its island neighbor, the United Kingdom, which has maintained a fairly healthy rate of growth in recent years, is now slowed by political motives. “First we had the Scottish referendum, which will continue to generate debate and change.” Soon, the country faces a general election in 2015, and later, the referendum for the UK‘s permanence inthe EU, scheduled for 2017-18. “As a result, we have a market influenced by politics over the next couple of years,” states the Portfolio Manager, also adding that “we will not see any tax increases in the UK in April, as stated in the consensus, since elections are in May, so, at the earliest,they’ll come towards the end of the first semester.”

Europe faces a difficult road ahead, in which Draghi’s discourse and actions will have to demonstrate their effectiveness. While the European market’s valuation is relatively more attractive than that of the US, it doesn’t stand out in relation to either Japan or the emerging markets. What is the positioning for this market environment, of the pan-European strategy which Ann Steele manages.

It’s in times like these that good stockpicking shows its full potential. The portfolio manager has made several changes to her portfolio, which currently has 60 securities. On one hand, she has tended to invest more in large caps, or even in mega caps, dropping weight in small and mid cap which weigh heavily in domestic markets. By sector, Steele’s ideas for getting the best out of the current situation are:

Huge commitment onthe European pharmaceutical sector: among the 10 companies with the largest weight in the portfolio, four are pharmaceutical. “On one hand I am overweight in the sector because it has a defensive nature, but mostly because the portfolio of products under development in the field of cancer control is awesome right now, with a range of very encouraging products which act by boosting the immune system so that therapies to fight tumors could change radically. Roche and Novartis have good franchises in such drugs.”
Sale of domestic banks in which she invested in 2013: Currently, her strategy is underweight on banks, but it has not always been so. Just over a year ago Steele banked on the recovery of European domestic markets and was overweight on domestic medium-sized banks in countries like Spain, Italy and Ireland buying names like Bankinter, Banco Popular and Bank of Ireland. “On seeing the results of some of these banks during the first quarter of 2014, I undid many of these positions, and am now underweight in the sector, and I don’t have any German or French banks in the portfolio,” she explains.
Success stories such as Pandora and Richemont: Steele is underweight in consumer defensives “because of its high correlation with the development of emerging markets” and overweight in consumer cyclicals. However, she points out that in this field, the big companies of luxury goods are having uneven behavior. For example, LVMH, which is not in the portfolio, has performed weakly in the alcoholic beverages sector, while it did well in jewelry and watches. “To capitalize on this trend, I have the Swiss luxury goods company, Richemont, in the portfolio; it specializes in fine jewelry and watches, and also has a net cash position of 4.7 billion Euros.” Another success story which forms part of Steele’s portfolio is the Danish jewelry company Pandora, which has experienced a change in its management team to become a major exporter globally, and now plans to enter the Chinese market.

“Now, the strategy has a lower beta than a year ago, as well as a lower tracking error, and 3.5% in cash, more than usual. I see value in the European market, but also problems of growth, both political and geopolitical, so it’s a good time to step aside and wait,” says Ann Steele, portfolio manager for Threadneedle’s strategy for Pan-European Equities.

Pioneer Investments Strengthens Its European Equity Team

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. Vuelta a lo simple: sacar más partido a la diversificación

Pioneer Investments announced the enhancement of its European Equity team with the appointment of Simone Ragazzi as European Equity Small Cap analyst.

Based in Milan, Simone will report directly to Cristina Matti, Head of Small Cap Europe.

Commenting on the appointment Diego Franzin, Head of Equities–Europe at Pioneer Investments said: “Pioneer Investments has been managing European Equity assets for fifteen years based on a consistently applied philosophy and process. This fundamental, proprietary research-driven approach to investment in the asset class has provided a strong track record over the medium to long term through all market cycles.’’

He added, “Over the past year, we have added resources to our team to further strengthen our European Equity capabilities and broaden our product range. We are thrilled to welcome Simone and his strong experience in European Equity research on board. His appointment represents a further enhancement of our research capabilities in the European Small and Mid Caps space.’’

Simone has over 10 years’ experience in the industry. He joins Pioneer Investments from MainFirst Bank where his sector coverage included European Luxury Goods and some Italian Consumer Small Caps. In MainFirst, he was recently appointed team coordinator of his sector. He previously covered Italian banks for almost 3 years and Italian consumer and luxury stocks for 8 years. Simone graduated from Bocconi University in Milan with a Major in Corporate Finance.

HSBC Brazil Lays off 800 Employees, with the Final Figure Expected to Reach 1,000

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HSBC Brasil despide a 800 empleados y se espera que la cifra llegue a las 1.000 personas — HSBC Headquarters in Curitiva. Photo: Morio . HSBC Brazil Lays off 800 Employees, with the Final Figure Expected to Reach 1,000

The Brazilian subsidiary of the British bank HSBC has laid off about 800 employees during the last week, and according to calculations by the Workers’ Guild, which were published on Saturday by the newspaper “O Estado de Sao Paulo” and picked up by the local press, that figure is expected to reach 1,000.

Funds Society contacted the bank’s subsidiary in Brazil to confirm the news; the company, however, declined to comment on the news which has been reported in the local press and is echoing the international financial press.

The National Confederation of Financial Sector Workers (Contraf-CUT) reported that a group of workers at the Curitiba Agency (southern Parana state capital) went on strike in protest at the cuts that the Group is carrying out in the country.

Employees at the Curitiva administrative center in Sao Paulo also joined Curitiva in the stoppages. According to Contraf, layoffs are taking place across the country and represent 4.5% of the group’s workforce. In Brazil, the bank has over 1,700 branches and offices in 550 cities.

Likewise, HSBC Brazil has more than 21,000 workers nationwide and is the fourth largest private bank in the country and the seventh in terms of assets. As for the results of the British bank during the third quarter, although it recorded a 7% increase in net profits, results in Latin America fell by 56% before tax, mainly because of its business in Brazil and Mexico.

Old Mutual Global Investors Launches Pan African Fund

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Old Mutual Global Investors lanza un fondo para invertir en África — Photo: Allan Ajifo. Old Mutual Global Investors Launches Pan African Fund

Old Mutual Global Investors has announced the launch of the Old Mutual Pan African Fund. The Fund will be managed by Cavan Osborne, supported by Peter Linley, of Old Mutual Investment Group (Pty) Limited, a South African partner company of Old Mutual Global Investors.

Osborne and Linley are part of a 17 strong team based in Cape Town. This team includes 12 analysts, all of whom are either country or sector specialists. Osborne was named Best African Fund Manager by African Investor in September 2014 for his management of Old Mutual Investment Group’s existing African capabilities which are available for South African investors. The existing Old Mutual Pan African Fund has US$11.75 million AUM (as at 30 September 2014) and has delivered annualised US$ net returns of 13.4%* over the past three years.

The strategy, which is suitable for clients looking to invest over a five to seven year period, aims for long-term capital growth by investing in companies that benefit from economic developments and growth across the African continent. This includes those listed on regulated African stock markets and other global markets, where more than 50% of their revenue or profit comes from Africa. The strategy will invest in approximately 30 to 40 stocks and will be seeded with US$ 50 million.

Cavan Osborne, comments on the opportunities for investors in the new fund: “We believe that now is an excellent time for investors with a slightly higher appetite for risk to invest in Africa. The continent provides a diverse range of investment opportunities and is currently going through a massive growth period with economic forecasts suggesting there are good returns to be had over the next few years”.

“At Old Mutual Investment Group our focus is to identify those companies that we believe will benefit from growth in Africa, building a diverse investment portfolio that will deliver long-term capital growth for investors.”

Julian Ide, CEO, Old Mutual Global Investors, adds: “This is an exciting development for Old Mutual Global Investors as it is the first time that we have collaborated with our colleagues in South Africa to launch a fund for a global client base. We are committed to ensuring our fund range offers a variety of asset classes and approaches for clients. We believe that there are excellent investment opportunities to be found within Africa and our new Fund will offer clients access to the top talent in the industry.”

The Safra Group To Acquire London Premier Property 30 St Mary Axe

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The Safra Group, controlled by Joseph Safra, and Deloitte, the receiver for the London property 30 St Mary Axe, today announced an agreement under which Safra will acquire 30 St. Mary Axe, a 180-meter office tower that is the second-tallest building in the City of London. Financial terms of the transaction were not disclosed.

Completed in 2004, 30 St Mary Axe, otherwise known as The Gherkin, provides highly flexible space and outstanding views of London. It is an iconic part of the London skyline, recognized around the world as a great achievement by noted architect Lord Norman Foster. It encompasses approximately 50,000 square meters of office space and its largest tenants are Swiss Re and Kirkland & Ellis.

Safra Group said, “The acquisition of 30 St Mary Axe is consistent with our real estate strategy of investing in properties that are truly special – at the best locations within great cities. While only ten years old, this building is already a London icon that is distinguished from others in the market, with excellent value growth potential. We intend to make the building even better and more desirable through active ownership that will lead to a range of enhancements that will benefit tenants.”

Threadneedle’s Global Equity Income Recaps Negatives and Positives for the Last Ten Months

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Recapitulando: lo bueno y lo malo de los últimos 10 meses — Photo: Stephen Thornber, Portfolio Manager of Threadneedle’s Global Equity Income . Threadneedle’s Global Equity Income Recaps Negatives and Positives for the Last Ten Months

Stephen Thornber, Portfolio Manager of Threadneedle’s Global Equity Income strategy, reviews the developments of the past ten months or so and outlines how the team has responded to recent challenges.

Style rotation

April and May of this year witnessed a significant movement away from growth stocks and into their value and defensive counterparts. Threadneedle’s positioning in more growth-oriented dividend stocks meant that it did not benefit from this rotation, unlike the more traditional, low-growth dividend strategies, which did gain an advantage.

Threadneedle continues to believe that its long-term strategy of investing in growing companies with high and sustainable dividend yields should generate superior returns. While it expects interest rates to increase only slowly, Threadneedle says we should be wary of low growth ‘bond proxies’ in the current environment.

Regional allocation

A diverging economic performance has seen US equities significantly outperform those in Europe and Asia this year. Additionally, the dollar has strengthened against the euro and most global currencies. Threadneedle’s Global Equity strategy has been positioned underweight the US, partly due to the fact that American stocks traditionally offer relatively low dividends.

Over thirty per cent of the portfolio is invested in the US, and Threadneedle could increase this exposure either through taking larger positions or selecting additional American stocks. However, they will continue to construct the portfolio from the best individual high-dividend stock ideas, which means that it is likely that they will remain structurally underweight the US market relative to the benchmark.

Sector allocation

The portfolio has been underweight the technology sector, which has outperformed this year. It has also been overweight the telecommunications sector, which has underperformed.

Thornber states that the portfolio will continue to be constructed by picking individual stocks on their merits rather than allocating by sector. In the past the team has had considerable success by investing in Asian technology companies with high dividend yields such as Delta Electronics. But the majority of US technology stocks, (even dividend payers such as Microsoft), remain well below their yield threshold for investing in a stock. The strategy will thus likely maintain its bias against technology. Within telecommunications, Threadneedle continues to avoid highly-indebted legacy, fixed-line operators, but favors exposure to younger, mobile-focused players, and those in faster-growing economies.

Exposure to China

The authorities in Beijing have tightened credit restrictions in order to cool China’s overheated property market. Consequently, sentiment towards companies with both direct and indirect exposure has weakened. The portfolio has been overweight Asia, and some of the more economically-sensitive Asian stocks to which they have exposure have underperformed.

Exposure to beta within Europe

Within the portfolio’s overweight position in Europe, exposure has been concentrated in Scandinavia, Germany, France and Switzerland. Unfortunately this has not shielded the strategy from deteriorating confidence, particularly following events in Ukraine. Positions in the media, financials, construction, industrials and telecoms sectors have all underperformed. Threadneedle continues to have confidence in the outlook for other investments held in Europe, but they are reviewing the scale of their overweight positioning given the softening outlook.

Acknowledging the positives

Notwithstanding the challenges outlined above, the strategy has benefited from positive investments this year. Highlights included the purchase of L Brands (Victoria’s Secret), in February, when the stock was depressed following weather- affected December results. The original investment case was based on both improving results in the US, as the economy brightens, and its global store roll-out plans. Since investing, the stock has paid two dividends, and gained c.20% on improved sales results and sentiment.

Elsewhere, UK healthcare stock AstraZeneca has outperformed following a takeover bid from Pfizer, which was ultimately rejected. Threadneedle recognized the attractive free cash-flow generation and improving prospects for the large cap pharmaceutical sector as early as 2012, as a number of companies moved towards or through patent expiries on major drugs. With fresh innovation, particularly in the area of immunoconcology, and tax-driven M&A, investor appetite for the industry has dramatically improved. We think AstraZeneca remains an attractive stand-alone investment, but would not be surprised should Pfizer return to the deal-making table in the future.

Conviction in the strategy remains intact

While recent performance has disappointed, the strategy has built an excellent long-term track record over the last seven years by patiently investing in ‘Quality Income’, i.e., companies with high, sustainable and growing dividends. Threadneedle plans to continue pursuing the approach that has underpinned this performance and is working hard to ensure that the good record is maintained. Thornber notes that investors should be aware that the portfolio has a defensive bias, and therefore its best relative performance usually occurs in weaker periods for the market. In that respect, he would remind investors that the last two years have been very rewarding, and that caution should be exercised in extrapolating recent trends over a longer period. It is also important to note that the strategy acts on a two to three-year view when taking investment decisions, and is prepared to ride out periods of underperformance to deliver its long-term objectives.

AllianzGI Launches Flexible Emerging Markets Debt Fund

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AllianzGI lanza un nuevo fondo, el Emerging Markets Flexible Bond — Foto: Moyan Brenn. AllianzGI Launches Flexible Emerging Markets Debt Fund

Allianz Global Investors has announced the launch of the Allianz Emerging Markets Flexible Bond Fund.

“We firmly believe that strong economic-growth prospects, favourable demographics and markedly improving fundamentals mean that emerging markets debt (EMD) is set to perform over the longer- term, despite any liquidity risk from a rise in US interest rates or country-specific geo-political tensions,” said Greg Saichin, CIO of AllianzGI’s EMD business and a 26-year veteran of the asset class.

The Allianz Emerging Markets Flexible Bond fund will invest across the full range of emerging markets debt instruments, including companies and countries of any credit rating or currency. The flexible approach enables the fund’s experienced team to construct a portfolio based on their conviction views of an asset class where individual securities can exhibit an exceptionally wide range of risk and return.

“The launch of this fund represents a significant milestone in our plan to make AllianzGI a benchmark in global emerging markets debt management. As a team of active, specialist EMD managers we understand and are able to navigate the diverse risks associated with this vast and varied asset class,” added Saichin, who has been a flexible bond investor for nearly 10 years having been an early pioneer of the approach.

Nick Smith, Head of European Retail Sales (Ex-Germany) at AllianzGI, added:

“This fund, which covers the full EMD spectrum, will give investors the opportunity to access carefully identified, high-conviction growth opportunities across some of the world’s most dynamic and diverse geographies, currencies and sectors.”

“This is an asset class where experience really counts. With no two emerging markets the same, our regional teams are able to act in clients’ interests in local time, using their skilled, experienced eyes to unlock the very best buying opportunities.”

The fund is a Luxembourg domiciled SICAV, available through the AGIF (Allianz Global Investors Funds) platform, a vehicle AllianzGI uses to distribute its funds to a number of markets across the globe. The fund is currently available to institutional investors in the UK and will be made available to retail investors later this year.

AllianzGI’s Emerging Market Debt franchise was launched in October 2013 on the conviction that emerging economies will expand more quickly than developed markets, offering potential for superior returns. The team is now 10 strong, with portfolio managers and analysts in London, New York and Hong Kong.

Advent International Raises Largest Private Equity Fund Dedicated to Latin America

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Advent International levanta un fondo de private equity para América Latina de 2.100 millones — Photo: Tuxyso . Advent International Raises Largest Private Equity Fund Dedicated to Latin America

Advent International announced that it has received $2.1 billion in commitments for Advent Latin American Private Equity Fund VI (“LAPEF VI” or the “Fund”), reaching the Fund’s hard cap after less than six months in the market. LAPEF VI is the largest private equity fund ever raised for Latin America.1 Advent’s previous fund dedicated to the region, LAPEF V, closed on $1.65 billion in 2010.

Over 60 institutional investors participated in LAPEF VI, including public and corporate pension funds, endowments and foundations, funds of funds, sovereign wealth funds, family offices and other financial institutions. The majority of the capital came from limited partners in LAPEF V, with Advent admitting a select number of new strategic investors into the Fund as well. Approximately half the capital was raised from North American investors, one-quarter from European investors and the remainder from institutions in Latin America, the Middle East and Asia.

“We are pleased with the strong support we received from both existing and new investors,” said Advent Managing Partner Patrice Etlin. “We believe the high level of demand reflects our leadership position in Latin America based on our strong 18-year track record and differentiated strategy for creating value in companies. Latin America continues to be an attractive region in which to invest. It is a large, growing market with an expanding middle class, opportunities for productivity enhancement, a high degree of family ownership and limited competition from other financial sponsors relative to the size of the markets.”

Continuing the strategy of its predecessor funds, LAPEF VI will focus on control-oriented investments in later-stage companies throughout Latin America, investing mainly in Brazil, Colombia and Mexico. The Fund will target sectors where Advent has significant experience both regionally and globally, including business and financial services; healthcare; industrial and infrastructure; and retail, consumer and leisure.

“LAPEF VI underscores our longstanding commitment to investing in attractive opportunities in our target sectors throughout Latin America,” said David Mussafer, Managing Partner and Co-Chairman of Advent’s Executive Committee. “We believe our industry and local market expertise, combined with our global resources and operational approach to creating value, provides us with a distinct competitive advantage in the region. We are pleased investors continue to recognize this and we remain focused on exceeding their expectations.”

Old Mutual Global Investors Appoints Allan MacLeod as Head of International Distribution

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Old Mutual Global Investors announced that Allan MacLeod has joined the business in the newly created role of Head of International Distribution.

Based in London and reporting to Warren Tonkinson, Head of Global Distribution, Allan will be responsible for expanding Old Mutual Global Investors’ footprint in the global financial institutions and international sector. The business has already made steady progress in increasing its market share in this sector, however, it is widely recognised that this is a key sector where significant future growth opportunities exist.

Allan 25 has years of experience in the asset management industry. He spent 21 years at Martin Currie in a variety of senior roles including eight years managing money. He set up and ran the hedge fund business and had a number of international sales and client service roles, including running global distribution for the firm. He was also a member of the executive committee and a main board director. He left Martin Currie in 2011 and joined Ignis Asset Management in 2012 as Head of Global Accounts and spent two years building their business in the Middle East, Japan, Asia, Australia and North America.