John Dickie: “Investors are Realizing that by Sticking to the Public Markets they are Limiting Themselves”

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John Dickie: “Investors are Realizing that by Sticking to the Public Markets they are Limiting Themselves”
John Dickie, foto cedida. John Dickie: “Los inversores se están dando cuenta de que al mantenerse en los mercados públicos se están limitando"

Nearly four out of every five institutional investors globally are allocating capital to alternative assets and private equity represents a large chunk of that capital, Preqin’s data shows. Aberdeen’s John Dickie, Co-Head of U.S. Private Equity at Aberdeen Standard Investments, talks with Funds Society about the outlook for private equity investment and fundraising in the second half of 2018/year ahead.

In John’s opinion, it is a very good time to be raising money, and there is a lot of interest globally in private equity given that it has performed quite well and has continued to outpace the public markets. John also notes that investors increasingly appreciate that there are hundreds of thousands of private companies in the U.S., whereas, there are less than 4,000 public companies in the U.S., so “investors are realizing that by sticking to the public markets they are limiting themselves to a very small portion of the total investable universe.”

However, he believes that “GPs have to have an edge to catch LP’s attention.” At a high level he sees strong interest in the lower middle market, “given that returns in that part of the market have been better” than larger funds.

When looking to invest with a GP John and his team at Aberdeen Standard Investments focus on two main areas:

  • Quantitatively, they need to fundamentally believe the GP’s team are good investors and have a great track record of improving the operations of businesses they invest in. They also look to how they source investments.
  • Qualitatively, “we look for people that we trust and value as partners, that value our input, and that are building great firms culturally, with multigenerational layers and appropriately shared economics,”

Co-investing is here to stay

John believes co-investing is an important tool for LPs to enhance returns and to minimize, or even eliminate, J-curves. However, he observes that there are many firms that have been reckless with co-invest.  “So, whenever the next downturn comes, many LPs will not be happy.”

At Aberdeen Standard Investments, the firm has built a team with professionals that have GP experience, which allows them to keep up with the GP due diligence activities, and to dig deep into companies. 

What will the market look like?

According to John, we will continue to see the big firms get bigger, but there will also be more small firms.  “The largest firms are going to continue to attract capital from all over the world and continue to grow, but a number of middle markets firms are going to continue to have spin outs,” he said, adding “we are observing a huge number of spin offs and first time funds. A lot of LPs will back first time funds but NOT first time investors.”

The reason why he believes that emerging or new private equity fund managers are attractive is that “you can allocate capital to a team of people that are highly trained from a well-respected organization that have, in many cases, 10-15, sometimes 20 years of PE experience, but now they get to do it for themselves. The passion of having your own firm with your closest partners leads to an incredible incentive in alignment where these teams are hungry to succeed and have a successful fund. We think that can be a pretty interesting dynamic.”

DoubleLine UCITS Funds Now Available on Allfunds Bank Platform

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La plataforma de Allfunds Bank ya cuenta con fondos de DoubleLine
Pixabay CC0 Public DomainPhoto: Hans. DoubleLine UCITS Funds Now Available on Allfunds Bank Platform

DoubleLine Capital has begun offering its Luxembourg-domiciled UCITS funds on the Allfunds Bank platform, an open architecture, worldwide distributor of mutual funds.

“Allfunds is one of the leading international distribution platforms,” said Ron Redell, executive vice president of DoubleLine. “The availability of DoubleLine Funds (Luxembourg) on this distribution network is strategically important for DoubleLine’s UCITS funds global expansion.”

The term UCITS stands for Undertakings for the Collective Investment of Transferable Securities, an open-end fund vehicle available in Europe, Latin America and many other countries outside the U.S. The sub-funds of the DoubleLine Funds (Luxembourg) UCITS currently include the DoubleLine Shiller Enhanced CAPE® equity sub-fund, which is co-managed by DoubleLine Alternatives LP and DoubleLine Capital LP, and DoubleLine Short Duration fixed income sub-fund, which is managed by DoubleLine Capital LP. Depending on an investor’s country of residence, the sub-funds are available via retail and institutional share classes denominated in various currencies.

Allfunds Bank Group offers integrated fund solutions (operational, analysis and information). Created in 2000, today Allfunds Bank has more than €370 Billion assets under administration and offers more than 64,400 funds from over 1,200 fund managers. Allfunds Bank Group has a local presence in Luxembourg, Switzerland, United Kingdom, Spain, Italy, United Arab Emirates, Singapore, Chile and Colombia and has more than 605 institutional clients, including major commercial banks, private banks, insurance companies, pension funds, fund managers, financial supermarkets, international brokers, and specialist firms from 45 different countries. Allfunds Bank Group operates in Asia through the entity of Allfunds Singapore Branch.

Andrew Gillan (Janus Henderson Investors): “We Have Already Started Asia’s Century. The US and Europe Are Losing Ground to China and India”

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According to Andrew Gillan, Head of Asia ex Japan Equities at Janus Henderson Investors, there is a huge amount of disruption in Asia, the world’s growth engine, but this also means that there is a huge amount of opportunity for investors. Gillan, who is based in Singapore and has an extended on the ground experience, explains that the main rationale to invest in Asian equities is that, over the long-term, Asian equities have had the capacity to generate a higher return than other markets. Even through the Asian Crisis in the late 90s and through the 2008 Financial Crisis, the MSCI AC Asia Pacific Ex Japan Index has generated greater returns than the MSCI AC World Index, obtaining 8,1% of annualized gross returns vs 7,4%, from December 1987 to August 2018. 

The relevance of Asia in technology and disruption

With a population of 1.4 billion of people, China has 772 million of internet users (55% of the population); 717 million of smartphone users (51%); 753 million of mobile internet users (53%) and 527 million of mobile payment users (37%). Meanwhile, in the US, with a population substantially smaller and a higher percentage of internet, smartphones and mobile internet users, there is less room for potential growth.     

“The relevance of the information technology sector in Asia has grown considerably in the last two decades, and now represents a 26% of the benchmark index. Meanwhile, Financials, that right now comprise about 32% of the index, are very susceptible to disruption. In ten years, they will probably have a lower weight. Tactically, our strategies are overweighting Financials now, in part because the Fed is rising interest rates, but from a long-term structural perspective, we have been underweighting Financials when investing in Asia”, says Andrew Gillan.

“In terms of allocating geographically to the region, I could say that we have already started Asia’s century. Tailwinds for Asia, in terms of population growth and demographics are very powerful. The US and Europe are losing ground to China and India. By 2030, Asia is expected to make up to 66% of the world’s middle-class population, a powerful reason for accessing the consumer in these markets.

Another matter that is worth highlighting is the effect of the online grocery markets on bricks and mortar retail sector. China’s online grocery market is expected to reach 30 billion USD this year. This market has been growing at an annual rate of 73% over the last six years”, he adds.  

Managing disruption

The Janus Henderson Asia Pacific Capital Growth fund is a truly active strategy, investing only in 40 companies or less. It does not have an overwhelming style bias, mixing quality and value stocks, and its is liquid, the volume of asset under management allows the portfolio management team to be nimble in their investment decisions.   

“About 70% of the stocks in the portfolio are considered core companies, with superior and consistent return on equity and cash generation ratios and with very strong franchises, for example: Alibaba or Tencent. The other 30% is the dynamic part of the portfolio, those are the stocks that we believe give us a good positioning to navigate markets. We hold positions in companies that we consider to be disruptive or adapters to the industry changes, or if we think that market conditions are changing in the short-term, we focus on companies that have a compelling valuation or are cyclicals”, explains Andrew Gillan.

Embracing disruption  

Janus Henderson’s team embraces disruption in investment decisions. They define disruption as an entirely new product, service, or process that creates significant incremental value over the long term. They do not limit it to the Artificial Intelligence or the Technology sector, but they extended it to traditional sectors, like consumer, insurance, banking and IT services.

“We normally identify the disruption potential in companies through the leading indicators of potential disruption. These may be a visionary leader or a management team that is willing to change an existing ecosystem or trying to challenge a different business model. It can also be the “right” corporate culture, a track record of innovation, a good long-term strategy and vision, strong financials to organically fund required investments, or strategic and timely mergers and acquisitions. We believe that successful disruption will lead to high and sustainable return on equity over the long-term”, he says.

“Similarly, if we apply the same disruption potential to our investment process, we can say that we assess the management, financial and franchise quality. Additionally, we have frequent interactions with the companies that we invest in, something that we think is the key way to identify and look for the impact of disruption on investments. We are probably more quality investors rather than disruption investors, as we believe that quality companies have higher chances of becoming disruptors or being protected from disruptions”.

Not all disruption is profitable

Clearly, not all disruption is profitable. More than 40 bike-sharing service companies have sprouted in China since 2016, because it is a business with very low barriers to entry. However, the bike-sharing market in China is undergoing a significant consolidation, with more than 20 start-ups going to bust as of February 2018.

“There are only going to be a few winners, and not surprisingly, they will be the companies that are backed by the “big guys”. That is the case of OFO, a company that secured 866 million USD in a new round of financing led by Alibaba, or the case of Mobike, a company adquired by Meituan Dianping, China’s larger provider of on-demand online services, at a valuation of 3.7 billion USD. The companies with the bigger and deeper pockets become the winners”, he concludes.   

AMLO’S Actions Erode Investors’ Confidence in Mexico

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After Mexico’s president-elect, López Obrador, announced that he plans to scrap the most important infrastructure project of the past two decades – the New Mexico City International Airport, the peso had one of its worst days since President Trump’s election and the stock market, which fell 4%, had its worst close in a decade.

According to JPMorgan Chase & Co which lowered its expectations for Mexico, the decision (which followed the mandate of the referendum held on the issue, with minimum participation -only 1,067,859 votes, or less than 1% of the Mexican population), “left investors worried about how he would manage the economy and increases the probability of the central bank raising interest rates.”

Morgan Stanley also reacted by changing its preference of exposure to that country from an overweight to an underweight position due to “the short-term asymmetric risks associated with the free trade agreement with the US and the airport situation.”

According to UBS the issue seems even riskier, since they warn that this dynamic could be used to carry out material changes in Mexico, such as invalidating “effective suffrage, not re-election” or even the central bank’s autonomy. “We see the potential for a public referendum to be approved as a constitutionally valid way of enforcing changes in the future, including possibly extending the six-year presidential mandate. The use of reserves at the central bank (Banxico) could also be subject to the people’s choice,” they point out in the attached report.

AMLO, who will not be sworn into office until December 1st, stated that after the public consultation, “our decision is to obey the referendum mandate, so two runways will be added to the military airport at Santa Lucia, the current Mexico City airport will be improved, and the Toluca airport will be upgraded, so that shortly we will have solved the saturation in Mexico City’s current airport.”  The politician also commented that, “in economic terms, with this decision the Federal Government is going to save, around 100 billion pesos.” Just with the change in capitalization value due to Monday’s fall, Mexican companies lost 17 billion dollars, or more than 341 billion pesos. This means that in just one day, they lost more than three times the savings promised by AMLO.

Meanwhile, President Enrique Peña Nieto informed that Grupo Aeroportuario de Ciudad de México, or GACM, the company in charge of the New International Airport of Mexico (NAIM) project, will continue working on the construction of the new terminal in Texcoco at least until his last day in office, November 30th. Whereas, Juan Pablo Castañón, President of the (CCE), or Business Coordinating Council, said that the consultation lacks legal fundamentals in order to be accepted and warned that if after December 1st the stance continues to be to halt the Project underway in Texcoco, stakeholders will undertake legal actions in defense of the Project, and “in favor of Mexico’s economic development.”

The President, Enrique Peña Nieto, also warned that if the airport is canceled, the next government will have to comply with all its contractual and financial obligations, which includes advancing airport bond payments. According to AMAFORE, Afores investments in the NAICM are assured: “Workers must be calm about their savings, since the instruments used by the Afores for this investment, Fibra-e and Bonds, are backed by the collection of the TUA (Airport Use Fee), that is, by the flow of passengers, so the investment of their savings has enough guarantees to recover the capital plus a yield higher than inflation,” the organism said in a statement.

Steve Drew (Janus Henderson Investors): “Argentina is Going to Be One of the Best Bond Markets in the Next Six Months”

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According to Steve Drew, Portfolio Manager and Head of Emerging Markets Fixed Income at Janus Henderson Investors, the Emerging Market Corporate bond is an asset class that has been often overlooked and misunderstood, but this trend is distinctly changing. With about 15 years of history, this asset class sometimes behaves as a teenager, reacting with tantrums every now and then. 

“This evolving asset class is growing rapidly and is now disrupting previous notions of how and where to earn income. With an investable universe of 2,149 billion of dollars, the JP Morgan CEMBI Broad Diversified Index is twice the size the of the JP Morgan EMBI Index, one of the most frequently used benchmarks for Emerging Market Sovereign bonds”, said Drew.  

Over the past 10 years, the Emerging Market Corporate asset class has also doubled the annual growth rate of Emerging Market Sovereign bonds, 18% vs 9%. It now comprises 52 countries, 12 sectors and 645 unique issuers, set against 149 issuers for the EM Sovereign debt.

In Emerging Markets, corporate bonds have higher credit quality than sovereign bonds, the average credit rating of the JP Morgan CEMBI is BBB- and 59% of its universe is investment grade, whereas the JP Morgan EMBI has an average rating of BB+ and only 51% of its bonds are investment grade.

“There is one big market that dominates the issuance of Emerging Market Corporate debt, and that is China, who happens to be an investment grade country, and therefore, lot of the companies that issue debt in China are investment grade”, explained Steve Drew.

There are also some other characteristics that make EM Corporate debt attractive. Duration, a matter that is in every fixed income investors mind now that the Federal Reserve is hiking interest rates every three months, is lower in the EM Corporate debt than in most of other credit asset classes. For example, their benchmark duration is only 4.52 years, whereas EM Sovereign bond’s benchmark has a duration of 6.66 years, the US Aggregate Bond index has a duration of 6,36 and the Global Aggregate Bond index has a duration of 7.16 years.     

Recently, emerging markets have grabbed the attention of news headlines, debt and currency crisis in Argentina and Turkey, elections in Mexico and Brazil or trade tensions in China have added uncertainty to the asset class. But, when volatility is translated across many issuers, there is less volatility in EM Corporate bonds than in EM Sovereign bonds. EM Corporate bonds have lower maximum drawdown and lower standard deviation than the EM Sovereign bonds, with -4,6% vs -6,6% (5 years trailing, as of 31 August 2018), and 4,2% vs 6,0% (3 years trailing, as of 31 August 2018), respectively.  

EM Corporate bonds also have lower leverage than developed markets, both in investment grade and high yield asset classes, and their forecasted default rates for 2018 are expected to be lower than those of US High yield. 

“Emerging Market Corporate bonds, as an asset class, has lower leverage, less or similar volatility, lower duration and is actually cheaper than other developed markets. So, what risks are the investors taking? They are taking the macro and geopolitical risks, and sometimes foreign exchange risks, even if the investors are buying a dollar denominated bond”, explained Drew.

“Lately, Emerging Markets have suffered a sell-off, but they had a fantastic performance in 2016 and 2017. In the last 16 years, the total return of JP Morgan CEMBI Broad Diversified, annualized, has been a 7%, only 90 basis points below US High Yield (measured by BofA Merrill Lynch U.S. High Yield Master), but being an investment grade asset class, having better credit quality, lower leverage and duration”, he added.  

Where are EM Corporates headed?

Argentina, Turkey, Indonesia, South Africa, Brazil and Mexico have recently created some noise, but this noise is not necessarily related with the fundamentals of those countries, part of the uproar is strongly related to the Fed’s normalization of their monetary policy.

“In Emerging Markets, is very important to quantify how the macro, the geopolitical and foreign exchange risks are going to affect the country you are investing in. You should only invest when you get a green light in both the fundamentals and the macro. Back in 2014, US imposed new sanctions on Russia, a country that represents about 5% of the JP Morgan CEMBI Broad Diversified Index. Spreads widened 700 hundred points, but it was not a credit fundamental story, it was a macro story. So, we bought bonds issued by Gazprom, a company that has more cash than debt in its balance sheet and we knew it was a good investment. In 2015, all sectors in Brazil were trailing, whether it was a paper company, a petrochemical company or a protein producer, all companies traded at discount, without considering whether they were a good company or not, due to markets exposure to Lava Jato corruption case. For five months we were not invested in Brazil, the catalyst to go back and invest in the country was when we saw that Dilma Rousseff’s was going to be impeached, breaking the negative cycle.

In 2016, during US general election campaign, Trump threatened to build a wall on Mexico’s border and said that Mexicans would pay for it. If the US were to finally build that wall, the one company that would benefit from the construction would be CEMEX, which bonds were punished by the markets, trading at a discount of 10% to 20% for four weeks. When we saw the Mexican peso trading at 21 pesos against the dollar, we bought some more Mexican corporate debt, to see if we could take some foreign exchange translation risk”, said Drew. 

Since the beginning of this year, US foreign policy has created some distortion in Emerging Markets, but fundamentals are still good. From a valuation perspective, countries like Argentina, are now looking attractive. “Argentina is going to be one of the best bond markets in the next six months. Some of the quality companies that we have invested in Argentina are trading at 15% to 16% discount, if they were in any other country or in any other jurisdiction in the world, they would be trading at half that spread. Some of the Argentinian companies that we have invested in are one to two time leveraged, and they are strategically important within their country, but they are cheap because their macro circumstances. Turkey, on the other hand, has 105 billion dollars in its banking system to roll over in the next six months. Erdogan has already said no to an IMF bailout package, making more complicated for bond holders to recover their investments. Some of the banks’ Tier 2 capital debt is already trading at 70 to 80 cents of a dollar, but we think some of this debt is already worth 0. That is why I think Turkey is to avoid”, concluded Drew.

Important Information

US Offshore

This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and US Advisors to Non-US Investors and is not for general public distribution.  We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes. 
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757) and Henderson Equity Partners Limited (reg. no.2606646) (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE), are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Henderson Secretarial Services Limited (incorporated and registered in England and Wales, registered no. 1471624, registered office 201 Bishopsgate, London EC2M 3AE) is the name under which company secretarial services are provided. All these companies are wholly owned subsidiaries of Janus Henderson Group plc (incorporated and registered in Jersey, registered no. 101484, registered office 47 Esplanade, St Helier, Jersey JE1 0BD).

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Morgan Stanley Advisor Joins Bolton’s New York City Office

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Morgan Stanley Advisor Joins Bolton’s New York City Office
Foto: ahundt. Bolton ficha en Nueva York a Nicolas Schreiber

Nicolas Schreiber has joined Bolton Global Capital‘s New York City office. Schreiber, formerly with Morgan Stanley, manages $180 million in client assets. His international clientele includes high net worth individuals and institutions based in the US, Europe and Latin America.

Schreiber began his career as a financial advisor with HSBC Private Bank in 2001 in Manhattan. Two years later, he moved to UBS International where he worked for 5 years until joining Smith Barney in 2008. Smith Barney was acquired by Morgan Stanley in 2009 where Schreiber has worked for the last 9 years before joining Bolton in October 2018. Custody of his client accounts will be through BNY Mellon Pershing.

Bolton recently opened an office on 5th Avenue in New York City to recruit Manhattan based advisors who wish to convert their practices to the independent business model. Since the financial crisis of 2008, several hundred teams have migrated their client accounts from the major banks and wirehouses to independent broker dealers and registered investment advisors like Bolton. Over this period, Bolton has recruited financial advisors with more than $5 billion in client assets from the major banks and wirehouses.

Bolton provides compliance, back office, and brand development support as well as the wealth management and trading technologies for its independent financial advisors. Under Bolton’s independent business model, advisors retain a much higher percentage of their fees and commissions and yet have access to all of the wealth management and trading capabilities offered by the largest firms.

Schreiber hold a bachelors degree in economics as well a CPA designation from the Catholic University in Argentina. He lives in Williamsburg in Brooklyn NY with his wife Florentine and two children Philippe and Melody.

“We are proud to have such a well respected professional affiliate with our company and look forward to supporting the continued growth of his wealth management business. Mr. Schreiber will operate under the trade name Nomad Advisors.” Said Bolton in a statement.

New Legislation in the State of Florida for Foreign Trust Companies

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Florida pone en marcha una nueva legislación para compañías de Trust internacionales
CC-BY-SA-2.0, FlickrPhoto: Neil Williamson. New Legislation in the State of Florida for Foreign Trust Companies

Various international independent trust companies with presence in the State of Florida gathered in 2013 to create Florida International Administrators Association (FIAA), with the common goal to support the enactment of modern legislation for foreign trust companies, throughout their affiliates, that engage in marketing activities in Florida. FIAA’s primary goal has been to obtain an approved new section in the Florida Statutes that defines and regulates a Qualified Limited Service Affiliate (QLSA).

FIAA’s founding members Citco Corporate Services Inc, CISA LatAm LLC, JTC Miami Corporation, Amicorp Services Ltd, Corpag Services USA Inc and Integritas Inc, have registered to become a QLSA and all have been granted such qualification by the Florida Office of Financial Regulation (FOFR). This qualification, which is imperative by law and provides adequate supervision, has been a fundamental step in the consolidation of the international fiduciary industry in Florida.

FIAA’s  President Ernesto Mairhofer, Secretary Myriam Bril and the rest of the Directors, Emilio Miguel, Tony Valdes, Anthony Perea and Ewout Langemeijer, will carry out a series of events in the financial market of Miami with the objective of publicizing the new regulatory framework and ensuring that the trust services offered by international Trust companies are only through companies registered and approved by the FOFR, in order to preserve the good reputation of this sector and helping to maintain relations with the leaders of this industry.

Afores will Have to Wait in Order to Invest in International Mutual Funds

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Las afores tendrán que esperar para invertir en fondos mutuos internacionales
Pixabay CC0 Public DomainPhoto: AMAFORE. Afores will Have to Wait in Order to Invest in International Mutual Funds

It had seemed that the beginning of 2018 would mark a big milestone in the way the Mexican Pension Plans, or Afores, invest. At the end of 2017, the ‘Comisión Nacional del Sistema de Ahorro para el Retiro’ (CONSAR), or National Commission for the Retirement Savings System decided, among other things, such as making CERPI more flexible or including SPACs, to include Mutual Funds with active strategies as an additional investment vehicle. This decision was published in the official bulletin in January 2018.

As Carlos Ramírez, President of the CONSAR, commented, “When looking to invest with an international asset manager, we look for better yields and this is what we have seen with the mandates that have paid a good return… Mutual funds are a reflection of the mandates and what we are really doing is opening another option for investing abroad, especially with the small and medium Afores in mind.”

However, in a recent interview with Funds Society, which will be available in the printed magazine this October, Ramírez commented that, unfortunately, this resolution has as yet not been implemented waiting for its authorization in a pending CAR, or Risk Committee meeting, “which would formally give life to mutual funds, and which to date was unable to be held for various reasons. I hope it can be achieved before the end of the administration so that we can see closure on an issue that we have been working on for a long time, which is a very deep analysis of the benefits of Afores being able to invest in mutual funds, and which we hope to be able to complete before this administration ends. It‘s practically ready, all that’s missing is that CAR meeting.”

Meanwhile, Carlos Noriega Curtis, President of AMAFORE, told us prior to the Third Afores Convention that this meeting will most likely not go ahead until the next administration is in power: “If during the transition stage, within the next two months, there is communication between the incoming and outgoing governments, the CAR will meet, if not, it will meet as soon as it is able to do so following the transition.” The executive added that they are watching very closely how the situation develops. “All the information has been prepared. We, as an association, have been supporting the importance, the necessity, and the convenience of being able to invest in mutual funds… we are convinced of this, and we are doing everything possible to achieve it,” concluded Noriega.
 

Dan Siluk (Janus Henderson Investors): “We Will Probably Look Back to US Treasuries when the Fed Announces They Have Reached their Neutral point”

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Borrowing Donald Trump’s electoral campaign slogan, Dan Siluk, co-manager of the Absolute Return Income strategy at Janus Henderson, explained at the Madrid Knowledge Exchange 2018  event that markets are at the beginning of a new cycle of quantitative tightening that will “make rates great again”.

In the past decade, the intervention of the three main central banks were able to save the global economy from the financial crisis, but at the same time there were some intended and unintended consequences. The balance sheets of the Federal Reserve, the European Central Bank and the Bank of Japan rose exponentially, substantially dampening the volatility in the markets. 

The VIX index, who typically settled in the 20 – 30 points range over decades, in the last ten years traded in a very tight range, between 10 and 15 points. Any time there was a bout in volatility, the presidents of the central banks always came back to give an answer that reassured the markets. That’s what happened during the Greece and the Eurozone crisis in 2011-2012, when Mario Draghi pronounced his “Whatever it takes” speech, or in the “taper tantrum” episode, in the summer of 2013, when Ben Bernanke’ FOMC statement was interpreted by bond investors as a sell signal. 

With a clear correlation between central banks’ balance sheet size and the value of global assets indices, there has been inflation in practically all the asset classes, something that has greatly favored passive investments, like ETFs and index funds.    

“In the past decade, investors could do pretty well by simply earning the beta of the market. They could obtain an attractive performance regardless whether they owned rates or credits, just because rates were driven lower, and credit spreads were driven tighter. Any bouts of volatility were short lived, because central bankers were coming to the rescue. So as long as investors could ride through those periods of volatility their fixed income portfolios tended to do pretty well”, said Siluk. 

However, consumer price inflation has barely appeared. Except for United States and United Kingdom, were inflation expectations are lower in the near future, is expected that there will be a real inflation growth in the rest of developed economies, that would be the case of the Eurozone and Japan. In the latter country, after decades of low growth, consumption and growth in wages is returning. While in the Eurozone, unemployment levels are declining in many of the member states. Also, the Asian region excluding Japan is contributing significantly to global inflation. The emerging consumer is one of the fastest growing segments of the global economy and lately is leading inflation.

According to Janus Henderson Investors’ portfolio manager, we are facing the beginning of a new cycle, in which the Federal Reserve is reducing its balance, the European Central Bank has reduced the volume of monthly of its program purchases, aiming to finalize it at the end of year. And, even the Bank of Japan, in the last two years has slowed its program of quantitative easing, sporadically decreasing its balance.

Upside risks to rates

In the US, the necessity of financing a swelling deficit has significantly increased the supply in Treasuries. This increase together with a decrease in foreign investors demand on Treasuries, mainly due to the higher cost of hedging the exposure to US dollars, has partially diminished the total demand for Treasuries.

“Fiscal expansions tend to generate high levels of inflation. Even when there is a strong dollar due to the diversion in monetary policies among developed economies. Trump’s administration has certainly a bias towards a weaker dollar, which is inflationary. All these factors support our vision that rates are going to climb, and curves are going to steepen, that does not necessarily mean that we are going to wake up one morning and see rates 25 or 50 basic points higher. Typically, what happens is that they try to trade in a range and when they break that range, the highest point of the range becomes the new support level. For quite few months of this year, we have seen these 2,70% -3,0% yield range in the US Treasury 10-year bond. We just broke the 3,0%, and at some point, this 3% becomes now the point that backs up a resistance level”, he said. 

All these factors are pointing out that you need to be very nimble in fixed income management, specially in terms of asset allocation. Therefore, in this strategy, they favor a benchmark agnostic strategy.

“Benchmark indices normally have certain limitations. We need to be active and flexible, to invest anywhere around the globe. For example, today, rather than bear interest risk in US, which is rising rates, we are looking at commodity-producing countries, like Australia and New Zealand. Because China is slowing down, these economies have very high household debt to income ratios. Their banking costs are increasing. Local banks are rising mortgage rates, whereas central banks are on hold. So, the domestic banks are partially doing the job of the central banks, who are maintaining a dovish position. We rather have interest rate risk in countries that are dovish or on hold monetary policy”, he explained.      

“We will probably look back to US Treasuries when the Fed announces they have reached their neutral point.  The US is today the highest yield across the developed world. It is also a very steep curve in the front part of the curve. The 10-year Treasury bond yields are offering a spread of 20 basis points over the 2-year notes, so investors are not actually getting paid for the additional interest rate risk or duration risk. On the other hand, the front-end of the curve will be an even more attractive investment once the Fed will finish their hiking cycle”, he concluded.

Important Information:

US Offshore:

This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and US Advisors to Non-US Investors and is not for general public distribution.  We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC actúa en calidad de asesor de inversiones. Janus, INTECH y Perkins son marcas registradas de Janus International Holding LLC. © 2018, Janus Henderson Investors. La denominación “Janus Henderson Investors” incluye a HGI Group Limited, Henderson Global Investors (Brand Management) Sarl y Janus International Holding LLC. Para obtener más información o localizar la información de contacto del representante de Janus Henderson Investors en su país, visite​ ​​www.janushenderson.com​​​.

Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), and Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office 201 at Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services.

© 2018, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC

Abanca to Open an Office in Miami Before the end of 2018

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Abanca abrirá una oficina en Miami antes de que finalice 2018
Pixabay CC0 Public DomainPhoto: Abanca. Abanca to Open an Office in Miami Before the end of 2018

Abanca has obtained the license from the Federal Reserve of the United States (Fed) to open an office in Miami and operate in the United States.

The license that comes into the project after a year of work enables the Spanish bank to develop total activity with companies and non-residents and, in certain circumstances, to develop activities with residents of average and high incomes. Miami is a city with a large presence of Latin American, Spanish and Portuguese non-residents, groups that will focus on Abanca’s growth strategy.

With this new opening, the firm’s objective is to continue to grow in markets with high potential and, as in the case of Portugal, in the company segment and medium and high income.

The Miami office, located in the Brickell financial zone, will open before the end of 2018 and will have 12 employees, four Spanish and the rest of the United States.

Abanca is present through representations in Brazil, Mexico, Panama, Venezuela, France, Germany and the United Kingdom. In addition, the entity has centers in Portugal, with its own bank card and Switzerland, where we have offices with both modalities.