I often hear about the connection between the bond-buying actions of the US Federal Reserve and the rise in stock prices. Indeed, the two do appear to have moved higher in tandem. The S&P 500 Index is up almost 200% since 2009, while the Fed has added trillions to its balance sheet to provide the US economy with extra liquidity to fuel growth and create jobs.
Something else has been happening during the same period, and I would like to draw attention to that. Not only have bond purchases and liquidity measures gone up on the Fed’s actions, but earnings have also risen — in the economy as a whole and by about 190% in particular for the companies traded on the major exchanges.
Over long periods of time, the observed behavior of stock markets has been directly linked to the amount of profits created by companies. That the market is up roughly in line with earnings over five years suggests to me that profitability has been much more of a driving force than Fed liquidity.
As I see it, there are five reasons why this is so important for investors to consider.
First, S&P 500 profits have continued to expand throughout this business cycle, well beyond the bounce that could be expected from recession-induced lows. Even in the third quarter, more than five years into the cycle, profits have risen at a rate of about 8.5% year over year as the US economy has regained momentum.
Second, the performance of companies in the major indices has been so robust that profits increased even when the US economy was shrinking. In the first quarter, the US government reported that economic activity contracted by an inflation-adjusted 2.1% — effectively a mini-recession. Earnings rarely, if ever, expand in the face of a shrinking economy, yet we saw that when first-quarter profits rose 4.5% year over year.
Third, the net profit margin —that is, the profit booked per dollar of sales— has continued to rise. To achieve profit margins that now exceed long-term averages by 100%, companies have limited their costs and improved their productivity to a dramatic degree — producing more goods and services per labor hour worked, turning assets more quickly, realizing lower natural gas costs, reaping the advantages of lower interest expense and so on.
Fourth, the gains in profits and profit margins are showing encouraging signs of breadth, occurring simultaneously in nearly all sectors and industries — including the much maligned health care and technology sectors.
Fifth, the US economy is expanding, almost alone among the major economies in the world. In fact, evidence is piling up that the US cycle is moving forward with solid support from consumer income, capital spending, pent-up demand, competitive improvements in global sales, wage gains and falling unemployment rates.
Won’t get fooled again
The investment world is on the lookout for bubbles, wary of asset categories filled with little but air, ready to be punctured by the slightest jab of interest rate increases or the withdrawal of government-injected liquidity. After all, only six years ago the collapse of credit pierced a genuine bubble in the housing market. No one who has sacrificed hard-earned savings to market breakdowns and defaults wants to be fooled again.
But today, there is no major flood of credit sweeping prices upward. Companies and consumers have demonstrated more responsibility with their borrowing. When the private sector borrows, incomes and cash flows are now supporting that debt.
So I agree, let’s not be fooled again. At the same time, let’s not suppose that the Fed is powerful enough to drive up profits in all categories when energy prices, labor costs and asset turnover are helping companies do well. In my view, the market cannot ignore the truly impressive results coming not from a world of liquidity, but from a world of real economy improvements.
Photo: James. Pioneer Investments Names Fixed Income Client Portfolio Manager
Pioneer Investments announced that Craig Anzlovar has been named Fixed Income Client Portfolio Manager. He is based in Boston.
“Pioneer has one of the industry’s strongest and most tenured fixed-income teams, and we have a continued focus on providing the highest level of service possible to our growing client base, said Kenneth Taubes, Chief Investment Officer, U.S. “We’re pleased to have someone with Craig’s experience joining us”.
Prior to joining Pioneer, Craig was a fixed income Institutional Portfolio Manager at Fidelity Investments, and a member of the firm’s liability-driven investing (LDI) strategy team. In this role, he was responsible for developing custom LDI solutions for institutional clients. He was also responsible for client servicing and representing the firm’s fixed income strategies to the marketplace. Prior to that Craig was an Investment Director at Fidelity responsible for product management and client servicing for the firm’s institutional high yield, bank loan and emerging market debt strategies.
“Pioneer has one of the industry’s strongest and most tenured fixed-income teams, and we have a continued focus on providing the highest level of service possible to our growing client base, said Kenneth Taubes, Chief Investment Officer, U.S. “We’re pleased to have someone with Craig’s experience joining us,” he added. As of Sept. 30, Pioneer Investments managed approximately $148 billion in fixed income asset globally, including approximately $40 billion in the U.S.
Craig earned his B.S. from Fairfield University and his M.B.A. from Babson College. He is a CFA® Charterholder and a member of the Boston Security Analysts Society.
RBC Toronto. . RBC WM Confirms its Departure from the Caribbean and its International Advisory Centers in the US
RBC Wealth Management has confirmed it will leave its international wealth management business in the Caribbean and other international private banking and international advisory groups in Toronto, Montreal, and the US, as confirmed to Funds Society by a company spokesman, who wished to emphasize that these segments “only represent a small part of the RBC Wealth Management business.”
According to a release by the firm earlier this year “the international division of RBC Wealth Management-U.S. serves high-net-worth and ultra-high-net-worth clients worldwide from offices in New York, Houston, Miami, San Diego, Seattle and Wilmington, Del. More than 50 international financial advisors and private bankers serve the needs of international and domestic clients through private banking, credit, investment management, asset management, trusts and other solutions”.
Refering to the closure, RBC Wealth Management said it “is undertaking a process of realigning certain businesses within their international operations as part of a focused strategy that allows us to achieve sustainable, controlled, and profitable growth in our core markets, while providing an excellent service to our customers.”
This closure is in addition to those already announced in October and which resulted in the closure of the private banking offices in Miami and Houston, two units which specialized in cross-border business, which is now in the process of decommissioning. Now, the closure also affects the broker dealer business in the US and Canada related to international clients. We must recall that in April, the largest Canadian bank also announced its departure from the Chilean market after six years in the marketplace, a decision which was also due to a “strategic review” of its business in Latin America. A year earlier, RBC closed its offices in Uruguay.
RBC Wealth Management ensures that it looks at the business in a scalable way and aims more towards the business of wealth management focused on serving high-net-worth and ultra-high-net-worth clients from their key operations centers in Canada, United States, the British Isles and Asia, “because we know that we are more successful when we leverage and build on the strength of the other RBC businesses.”
Finally, the same source stressed that they shall continue to serve their customers as they strategically exit those businesses.
The business of RBC WM is among the five largest in the world. RBC Wealth Management has more than $ 442 billion Canadian dollars (392 billion US dollars) in assets under management.
Photo: JJBAS. Threadneedle Investments Launches Multi-Asset Income Fund
Threadneedle Investments has launched the Threadneedle (Lux) Global Multi Asset Income Fund with immediate effect.
Managed by Toby Nangle, Threadneedle’s head of Multi-Asset Allocation, the Sicav is focused on income generation, targeting an income level of 5%. To be able to target this income in the current investment environment, the fund uses derivatives to enhance the anticipated yield. It is expected that this portfolio will be less volatile than a pure equity portfolio, Threadneedle said.
Nangle has 17 years’ investment experience and a proven track record in multi-asset fund management. As Threadneedle’s head of Multi-Asset Allocation, he is responsible for managing and co-managing a range of multi-asset portfolios, as well as providing strategic and tactical input to the Threadneedle asset allocation process.
The fund was previously launched with an absolute return investment strategy, but the company recently decided to revamp it betting on “Threadneedle’s core investment capabilities: asset allocation and income,” the company said.
It is now available in Austria, France, Germany, Italy, Luxembourg, Netherlands, Spain, Sweden and Switzerland.
“The investment approach of the fund enables the manager to invest directly across asset classes, principally in global equities and bonds. The fund may also invest up to 10% in other Threadneedle funds and uses derivatives for investment purposes and hedging, including the generation of additional income. It draws on the scale and diversity of Threadneedle’s wider investment platform and sophisticated risk management framework,” the company said.
Toby Nangle, head of Multi-Asset Allocation and manager of the Fund, said: “This fund offers investors the opportunity to receive a regular, targeted level of income from a range of assets. With investors looking for a degree of certainty around the level of income they receive from their investments, we aim to offer an appealing solution to these investors who are also concerned with the control of volatility. We aim to do this through our active asset allocation and risk management processes.”
Gary Collins, head of EMEA Wholesale distribution at Threadneedle, said: “Threadneedle has a strong asset allocation heritage, with around €52bn – 44% of assets under management – in some form of asset allocation mandate. Our income investment capability is very well known in the industry with a top performing product range.
“The combination of these two capabilities represents the blueprint behind our successful investment philosophy – working across asset classes and using the knowledge of our whole investment team to gain a perspective advantage and deliver the outcome desired by our clients.”
Photo: Caroline Gagné. OMGI Signs LatAm Distribution Agreement
Old Mutual Global Investors has entered a distribution agreement with Aiva in Uruguay to help broaden the business’s sales capability through third party channels in the US Offshore and Latin American markets.
Headquartered in Montevideo, Aiva is a Latin-America platform business. Over the last 16 years, it has provided savings solutions and long-term investments to clients in Latin America, as well as administration services to Old Mutual in the region.
Old Mutual acquired a majority stake in Aiva in November 2012.
As part of this agreement, OMGI will be serviced by three dedicated sales professionals who will support Chris Stapleton, head of Americas Offshore Distribution.
Veronica Rey and Santiago Sacias will operate from Montevideo, with Rey providing day-to-day field sales coverage in the cross-border investment hub in Uruguay, as well as a regular presence in Chile, Brazil and Argentina. Santiago will be supporting the efforts of both Veronica and the wider team as an investment analyst and broker desk consultant.
Andres Munho will operate initially via a satellite presence in Miami, Florida, USA and, from 2015, will be based out of a local office in Miami’s financial district. Andres’s distribution coverage will encompass the gateway offshore investment hubs in South Florida and Texas, as well as Northern Latin America, which includes Mexico, Panama, Colombia, Peru and Venezuela.
Warren Tonkinson, head of Global Distribution, commented: “This new agreement demonstrates that Old Mutual Global Investors is committed to expanding its international footprint. After investing in the strengthening of our Hong-Kong based team over the last year, we are now delighted to have finalised this Distribution Agreement with such a well-respected and successful company in AIVA, a sister company within our parent company.
Old Mutual Global Investors recently announced key investment and distribution hires. Joshua Crabb has been appointed head of Asian Equities, supported by a new team of two investment analysts.
Ian Ormiston has joined as a European Smaller Companies Portfolio Manager and Russ Oxley and his Fixed Income – Absolute Return team will join in 2015. In addition, Allan MacLeod joined the company as head of International Distribution in November to spearhead Old Mutual Global Investors’ international growth plans.
The African continent offers huge growth potential for international investors. Coming from a low base, it is relatively easy for African economies to achieve high growth and companies’ valuations are still very reasonable.
The proportion of African equities in institutional investors’ portfolios is quite small however. The exposure they do have is usually to South Africa, as part of an allocation to emerging markets. The amount of listed equities in African frontier markets is still modest and only a few of them trade in big volumes every day. However, as investors’ interest in African frontier markets is growing, we expect this to change gradually.
Equity culture
This change will take place through two channels: the establishment of more stock exchanges and an increase in the number of companies going public. Algeria and Angola, for example, have concrete plans to introduce stock exchanges in the next three to five years. These are countries with large companies and local investors with a lot of money to invest. We see that the English-language countries, such as Kenya and Nigeria and, to a lesser extent, Ghana and Zambia, already have some sort of equity culture. This is less the case in countries with a French colonization history, such as Cameroon.
The investment case for Africa has many drivers African companies operate in a difficult environment in terms of productivity and corruption. We see this as an opportunity, as there is plenty of ‘low-hanging fruit’ that can be plucked to boost efficiency. We already see that the business climate is improving as governments in various countries are improving accountability. Environmental, social and governance (ESG) factors are therefore important to watch.
Another growth driver is the large amount of investments in infrastructure many African countries are making. Not only do these investments benefit, for example, cement companies and banks that finance these investments; they also reduce logistical problems by providing more ports, better roads and cheaper electricity. This should boost economic growth and earnings in other sectors as well. The emerging middle class in various African countries is growing and will drive strong growth in local consumer spending on both basic necessities and discretionary items.
Finally, as very few international investors are active in smaller markets like Botswana, Ghana and Zambia, we believe many stocks in these markets are undervalued. When frontier investors discover these markets, we expect significant share price increases.
Isn’t it risky?
Investing in Africa tends to be perceived as risky. Of course, we do not contend that it’s risk-free. However, we do want to put this notion into perspective. Research shows that over the last 12 years African equities were less volatile than equities in other emerging and frontier regions. This is explained by the fact that the various countries move quite independently from one another as local factors play an important role.
In addition, global cyclical downturns are felt to a lesser extent in some African countries because of their strong structural growth. Finally, as African stocks have a low correlation with stocks in the rest of the world, an investment in this continent offers diversification advantages in a portfolio context.
Ebola
Of course any article about Africa has to address Ebola. This big human tragedy has already affected the local economies of the three hardest hit countries: Guinea, Liberia and Sierra Leone. International flights to and from these countries have been canceled and domestic transport has also become very difficult. We do not hold stocks of any companies with significant exposure to the domestic economies of these countries. However, we do hold shares in some mining companies that are active there. Production could be disrupted as some foreign engineers will choose to stay out of these countries in the next few months. The share prices of these mining companies have been under pressure. They currently represent 0.5% of the portfolio.
In Nigeria, which takes up quite a big chunk of our portfolio, we were pleasantly surprised by the very effective way in which the Nigerian government tackled the issue. As per mid-October, Nigeria appears Ebola-free after eight patients died and twelve others fully recovered. Barring unforeseen developments, we expect the consequences for our portfolio to remain limited.
Opinion column by Cornelis Vlooswijk, Senior Portfolio Manager within the Robeco Emerging Markets Equities team.
This publication is intended to provide investors with general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products.
. Concerns About Frontier Markets Debt? Global Evolution Answers
Global Evolution has been investing in frontier markets sovereign debt for more than 10 years, which gives the asset management firm a solid background and expertise in identifying investment opportunities with attractive risk-return characteristics.
Nevertheless, investors in frontier markets have some questions or concerns about an asset class that, in many cases, is something new for their portfolios. Funds Society has gathered these questions and asked Soren Rump, CEO of Global Evolution, to give us his insight on these issues. Soren Rump, who will be joining Capital Strategies on a road show across Chile and Peru next week, answered the following:
Is liquidity an issue when investing in frontier markets?
Frontier markets have over the recent years developed significantly in terms of size and liquidity. Liquidity in frontier markets is daily, but bid/offer spreads and the size of individual trades are typically smaller than those in traditional emerging markets, but often with a larger pool of price providers than, for example, emerging markets corporate bonds.
How do you manage the different regulations in each country?
Similar to traditional emerging markets debt, we access the individual regulations, such as holding periods, FX restrictions, withholding tax, etc. before entering individual local markets. We gather ongoing intelligence through our local network of market participants, such as local banks, stock exchange, regulatory bodies etc.
What is the presence and characteristics of institutional investor in these markets?
Local institutional investors are dominated by pension funds and local banks, as the two most dominant investors in the primary and secondary government bond market. By regulation, typically pension funds need to invest in local government bonds which provide a natural bid both at the ongoing auctions as well as in the secondary market.
What is the size of the market?
We estimate a liquid market capitalization of US$400bn based on sovereign bonds from 62 countries with daily valuations on Bloomberg.
What different types of bond issues are there in these markets?
You can find Eurobonds (issued in USD, EUR, JPY, CHF), offered to the market both through primary EMTN issuance programs by international banks, and in the secondary market through international banks and brokers. We also have Local T-bills and T-bonds, both offered to the market through primary auctions, and in the secondary market through primarily local market maker banks. Further to this we actively invest through the FX markets using spot FX, FX forwards, cross currency swaps etc.
Global Evolution, an asset management firm specialized in emerging and frontier markets sovereign debt, is represented by Capital Strategies in the Americas Region.
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.
