Gershon Cohen (Aberdeen Standard Investment): “Right Now, One of the Best Places to Invest in Infrastructure Projects is the Andean Region”

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Over the last two decades the ASI Infrastructure Platform has only ever invested in social and economic infrastructure projects. From their London and Edinburgh offices, in UK, they invested in government concessions, called Public Private Partnerships, which offer investors attractive risk-adjusted returns with a low correlation to economic cycles and other asset classes.

The Infrastructure Investment Team built a successful franchise that was then exported to Europe, opening offices in Paris and Madrid to cover all the Euro zone. Later, the team decided to expand to Asia, installing an office in Sydney, from where they invest in Australia, New Zealand and United States in funds that are targeted at US and Australian dollars. Last year, they decided to tap into the Andean region and the Latin American market, launching a fund targeting Social and Economic infrastructure projects in the Andean region.  

According to Gershon Cohen, Global Head of Infrastructure Funds, his team tend to work closely with global contractors and operators in infrastructure, organizations that they consider their industrial partners, some of them are renown companies like the Spanish construction company Grupo Ferrovial or the French firm Bouygues, who specializes in developing, building and operating infrastructure projects around the world.  

“We work with our industrial partners in bidding for concessions and the opportunity to invest in infrastructure through these concessions. We are backed by some of the worlds’ leading investors in infrastructure. Investors that, for the last 20 years, have pioneered in infrastructure investments, like the large Dutch sovereign wealth fund, as well as the South Korean and some of the Chinese funds, and some of the very large private equity groups, like Partners Group. These groups have supported us on our journey”, said Mr. Cohen.

“When we invest in infrastructure and concessions, we are always looking for a degree of political, fiscal and economic stability, as well as legal certainty. All these characteristics are relative, because they have a different mix and degree depending on which part of the world you are investing. However, we try to marry the opportunity to invest with the needs of our investors and with a degree of stability. In that sense, UK and US are a very stable place, Europe is fairly stable and Australia a very good place to invest. But, we also look for governments that are wanting to bring forward a large pipeline of investment opportunities, and right now, one of the best places that has all these ingredients is the Andean region in Latin America. Argentina and Brazil also present many opportunities, but currently Chile, Colombia, Mexico, Peru and Uruguay offer more economic and political stability, in our view. Especially now that Colombia has just became a member of the OECD and Peru is on its journey to become a member of this organization”, he added.

The Latin American footprint

The Infrastructure Investment Team always thinks on a long term basis, elucidating which economies will look more stable from a political perspective and which ones will want to bring forward infrastructure projects to support their growth. In the specific case of Latin America, they invest in infrastructure projects that build roads, rails, schools, hospitals or water treatment plants. Even today, a high proportion of the population in Peru does not have access to clean drinking water, therefore, there is a big need to invest in projects that can treat water and convert it into potable water. Health, education and transportation are big issues as well.       

“We are genuinely the only social infrastructure fund focused on the Andean region. There is no other competitor that are active and have offices on the ground or have capital dedicated to the region. Many of our peers are investing from their global vehicles, flying in and out, but giving the institutional way into our commitment to the region for a very long time, we have invested in developing a partnership with people on the ground, to gain a first movement advantage in the region, because we are honestly excited about building a team in Latin America”, said Ivan Wong, Deputy Head of Primary and Secondary Funds’ Investments and Asset Management at Aberdeen Standard Investments.      

A couple of years ago, the ASI Infrastructure team team formed a strategic partnership with a Colombian based organization, a boutique advisory company – LQA Funds SAS that has a long track record in raising capital for infrastructure projects with both the government and the private sector; and was looking to become more of a fund manager. Last year, they launched a first fund of 250 million dollars that are hoping to invest over the next 3 to 4 years, in about 10 to 12 projects in Chile, Colombia, Mexico, Peru and Uruguay.

“We team up with our industrial partners to bid for contracts. Hopefully, if we are successful and the investors supporting us are pleased with the results, maybe in 2 or 3 year-time, we would do another fund, and maybe after that, another one. That is our strategy: to create a long-term presence in Latin America’s infrastructure environment. Later, on, we could bring up alternative or private equity strategies.

In mature economies, infrastructure has become so well understood that there is an oversupply of capital and less supply of projects, causing returns to decrease. However, the slightly more emerging economies -with relative political and economic stability- offer a similar risk profile and infrastructure projects yield mid-teens returns. If we stayed in Europe now, we will not be able to achieve that type of returns. That is why we are making a strong commitment to the region, we have an office in Colombia with seven people from the strategic partner, some more people will join our local partner from our teams in Madrid and Australia”, explained Mr. Cohen.   

“As we become more familiar and successful within the region, and there is more economic stability in other parts of Latin America, we could look to broaden our scope to Argentina or Brazil, but we are very cautious. For 20 years, we have been gradually growing our platform and it makes sense to be cautious when you are entering in a new part of the world. We often say we are not very exciting, but in a world of volatility, long-term institutional investors are delighted to trust their pension funds money to us, because we have a very long term outlook and a track record that supports this”, added Mr. Wong.

The challenges of the region

Latin America’s economies are not simple, Colombia has just finished a long-term conflict and they still have some issues pending and Peru is going through a change of president, which is normally not easy. But, because ASI Infrastructure Team has presence on the ground, they can explain their investors in a transparent manner the complexities of the region. “Latin America’s investors are predominantly American leading investors that have already been invested in the region for many decades, so they actually appreciate the understanding that we have gained, and they recognize the challenges of the region. Nowadays, the US has more economic ties with Latin America than ever before, mainly due to political and macroeconomic issues. It is being an interest journey for us. We are delighted to be doing what we are doing and it is going very well”, concluded Mr. Cohen.

“A Stronger Dollar Should Benefit the Emerging Markets Export Engine and Their Liquidity Should Be Less Vulnerable Than in the Past”

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"Un dólar más fuerte debería beneficiar al motor de exportación de los emergentes, y su liquidez debería ser menos vulnerable que en el pasado”
Nick Timberlake, courtesy photo. "A Stronger Dollar Should Benefit the Emerging Markets Export Engine and Their Liquidity Should Be Less Vulnerable Than in the Past"

Despite the challenges in the form of monetary tightening in the United States or geopolitical factors, emerging market equities this year have everything to gain. The reason? Levers such as valuations, earnings growth expectations and the confidence of investors. This is what Nick Timberlake, responsible for Global Emerging Equities of HSBC Global Asset Management, states in this interview with Funds Society.

Is the global synchronized growth scenario in danger? If this is the case, how could this impact the emerging world?

Global growth remains strong, though there has been a slight loss in momentum recently. Emerging Markets continue to be the key driver of global growth, and we expect them to contribute about 70% to total GDP growth in 2018. Many Emerging Markets remain in a “Goldilocks” environment of strong growth and low inflation. Some countries have scope for monetary easing, while some countries are taking advantage of growth acceleration to implement long-term economic reforms. Different inflation levels across countries is leading to policy divergence. This can affect relative interest rates and currency strength, particularly resulting in higher US interest rates and a stronger USD.

What will be the impact in emerging markets of a higher inflation, a cycle of rate hikes in the developed world, and a potential greater strength of the dollar?

Inflation remains relatively low in most Emerging countries, despite cyclical inflation in the US. A stronger USD should benefit the Emerging Markets export engine. Emerging country liquidity should be less vulnerable to a stronger USD than in the past, given that governments have reduced the proportion of short-term USD debt and improved their current account deficits. This makes the country’s liquidity position less sensitive to foreign exchange movements. Many emerging countries have improved their fiscal positions, and increased macro credibility provides them a degree of monetary policy flexibility if needed.  Certainly countries with a twin deficit are likely to be more sensitive than others.

Nonetheless, many experts are positive regarding emerging countries fundamentals, do you agree and why?

We are also positive on the fundamentals of Emerging countries. Fiscal budgets are better managed. For example, Russia has reduced the “oil breakeven” of its budget to reduce its sensitivity to fluctuations in oil prices. Monetary policy is more credible. A lower inflation environment in Brazil has allowed its Central Bank to implement aggressive monetary easing. Government reforms continue to strengthen the foundations for long-term economic growth. For example, Brazil is reducing its fiscal deficit through economic and anti-corruption reforms, while Mexico has a broad, long-term reform programme including energy, labour, and education. China is reducing capacity at state-owned enterprises and deleveraging.

Do the stock markets of emerging countries have potential to grow in 2018? At what pace or at what levels?

It is difficult to specify how the equity market will move, but, from my experience, this is the type of environment that should be positive for Emerging Markets equities and for active managers specifically.

Earnings drive equity markets. What is important for investors is that strong economic growth is translating into corporate earnings growth. Earnings growth expectations remain in double digits for 2018 and 2019, across most sectors and a majority of countries, though earnings revisions have moderated from a high level.

Valuations look attractive relative to profitability, though valuations are not as cheap as they were at the beginning of last year given the strong equity market returns. Emerging Markets equities offer a similar return on equity compared to Developed Markets equities while trading at a lower price-to-book valuation.

Investor sentiment has been positive. We have seen strong flows into the asset class over the past two years, yet global equity investors remain underweight Emerging Markets.

What is the biggest strength of emerging markets equities this year? The attractive valuations, corporate results outlook ….?

The biggest strength for Emerging Markets equities this year is that all the drivers we just discussed are present at the same time. We believe this combination of factors creates a positive and attractive environment for Emerging Markets equities.

What could be the impact of Fed’s rate hikes on the equities of the emerging world?

Investors should expect cyclical inflation at this point in the economic cycle. The current pace of Fed rate hikes has been well-flagged and has been priced in by the market. We are monitoring how high capacity utilisation, potential trade tariffs, and deficit spending could lead to higher prices and could cause the Fed to raise rates faster than expected. A much faster pace of rate hikes could lead to more volatility in equity markets in general, not specifically to Emerging Markets.

Currently, the volatility is stronger… Is this going to be the case in the stock markets of emerging countries.  Which are the potential consequences?

Volatility in Emerging Market equities reached the lowest point in a decade in January 2018 and has been near pre-financial crisis levels, so a pick-up in volatility was expected and has not come as a surprise to us. There are any number of reasons why uncertainty increases or investors begin to have differing views of the future. Inflation, trade tariffs, and geopolitical tensions are the first examples that come to mind. As active managers, we need to monitor these issues and incorporate our perspective into our stock selection and portfolio construction. I should note that higher volatility can be advantageous, as it can create investment opportunities where we see our fundamental outlook has been mispriced by the market.

Which are the more attractive markets? (Africa, Latin America, Eastern Europe, Asia …)

Our region and country positioning is driven by our stock selection. This allows our portfolio positioning to be guided towards the areas of the market with greater opportunity. On a regional basis, we are overweight Eastern Europe and underweight Asia and Latin America.

On a country basis, we are most overweight Russia, given a stable macroeconomic backdrop, accelerating growth, and attractive valuations.

Regarding Latin America: with which markets are you more positive and why?

We are less positive on Latin America relative to other parts of Emerging Markets. On a country basis, we are somewhat neutral in Brazil, and we are underweight Mexico, Chile, and Peru. Mexico valuations are high relative to other Emerging Markets, and there is election uncertainty. Chile has fundamentally attractive companies but valuations are again high. Peru has a limited universe, and valuations are not attractive.

The situation in Argentina is complex following the support requested to the IMF … are you positive on that country?

Our Frontier Markets has exposure to Argentina. The country has been implementing structural reforms that we feel should support long-term growth. Any IMF support would help to reinforce that path. Our Global Emerging Markets fund currently does not have a position in Argentina.

Ardian Opens an Office in Chile

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Ardian abre una oficina en Chile bajo la dirección de Nicolás Gazitua
Foto cedidaNicolás Gazitua. Ardian Opens an Office in Chile

Ardian, a private investment house with over 71 billion dollars in assets managed or advised, announced the opening of an office in Santiago, Chile. The new office, serving Ardian’s growing base of investors and investments in Latin America (LatAm), demonstrates Ardian’s long-term commitment to both Chile and the LatAm region. This will be Ardian’s 14th office in its global network.

 Ardian will work closely with its LPs – pension funds, insurance companies and family offices — to share knowledge and strengthen relationships. Currently, Ardian’s LatAm investor base, mainly within Chile, Colombia and Peru, has leveraged a diversified range of strategies on Ardian’s platform including Private Equity Secondaries, European Direct Buyouts, Infrastructure Secondaries, European Real Estate and Global Co-Investments. Ardian sees continued investor demand in the region, as well as particular interest from LPs within Brazil and Mexico, which are looking to diversify their holdings outside of LatAm.

In addition, Ardian has become increasingly active since it first entered the region in 2010 after it began acquiring LatAm businesses as build-ups for European portfolio companies. Over the last eight years, Ardian has supported portfolio companies acquiring nine LatAm build-ups with specific exposure to Brazil, Mexico, Chile and Ecuador.

In 2016, Ardian Infrastructure made its first LatAm direct investment when it acquired an 81 percent stake in Solarpack, which manages solar PV plants in Chile and Peru. It will continue to target mid-market essential infrastructure assets in the energy and transport sectors to provide Ardian’s global investor base with increased opportunities to invest in high-quality LatAm infrastructure assets.

Nicolas Gazitua will lead the new Chilean office supported by a dedicated team based in Santiago in coordination with the NYC office co-headed by Mark Benedetti and Vladimir Colas. Ardian will continue to build out the Chilean team and provide additional resources over the coming years.

Benoît Verbrugghe, Member of the Executive Committee, Head of Ardian US said: “The Latin American region is very important to Ardian and this office will allow us to focus on building closer relationships with our LPs and other institutional investors in the region. Our growing international footprint highlights our commitment to a truly global, multi-local approach. We prioritize the deep knowledge and relationships that can only come from an on-the-ground perspective, allowing us to understand the needs of our investors and portfolio companies on a granular level.”

“Furthermore, the Chilean office is an important step forward in our continued efforts to provide our global investor base with opportunities in high quality LatAm investments and superior returns. We will also use the office to source secondary deals from potential LatAm sellers” concluded Verbrugghe.

 

Franklin Templeton Prepares to Position its ETF Platform in all Distribution Channels in Mexico

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Franklin Templeton se prepara para posicionar su plataforma de ETFs en todos los canales de distribución de México
Wikimedia CommonsJenny Johnson, presidenta y COO de Franklin Templeton Investments . Franklin Templeton Prepares to Position its ETF Platform in all Distribution Channels in Mexico

During her last visit to Mexico, Jennifer M. Johnson, President and COO of Franklin Templeton Investments, pointed out that country’s importance for her company, stating that, regardless of the outcome of the elections, “We are very optimistic about the possibilities of the local market.”

Its most recent bet, the entry into the ETFs’ market, presents an unparalleled opportunity in Mexico: “Mexico is very interesting since ETFs are bigger than mutual funds, I think it is the only market where that happens”, commented Johnson, who, through Franklin Templeton has a line of ETFs that includes passive and Smart Beta strategies. “Mexico is a great opportunity for the Franklin ETFs platform. They are great for all markets, pension funds, institutional funds, retail clients, and we are going to look to position them in all distribution channels,” she added. Meanwhile, Hugo Petricioli, the company’s Regional Director for Mexico and Central America, mentioned that he has seen a strong appetite for ETFs from all of his clients.

Regarding the recent change in regulation, which will allow Afores to invest in international mutual funds, Johnson commented: “We believe that open architecture is the best thing for the client” adding that it is a natural progression to first invest in the local market and then turn around to see what’s on offer abroad, “also, when there is greater uncertainty within a country [such as the one generated before the presidential elections and the NAFTA renegotiations], investors like to hedge themselves by venturing into other geographies.”  She also mentioned that at Franklin Templeton they have “great portfolio managers both locally and abroad, and so we see this opening as an interesting opportunity”.

About the renegotiation of the North American Free Trade Agreement, Johnson commented that it may take a little longer to reach its culmination but that in general, President Trump likes to use social networks to provoke, but he is practical when it comes to executing, “so we believe that in the end it will be something sensible which will not be very disruptive.”

Despite the above, and according to Luis Gonzali CFA, Portfolio Manager, the team at Franklin Templeton is cautious in its positioning, seeking to hedge against a global rise in inflation. In addition, and according to Ramsé Gutiérrez CFA,Vice-president of the Fixed Income team in Mexico, the company is also looking, as long as the mandate allows, to reduce the duration of debt portfolios, “since the premium’s time value is currently almost nil.”

Aitor Jauregui (BlackRock): “Growing Demand in Europe and Sustainable Investment will Make the ETF Market Grow Over the Next Few Years”

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Aitor Jauregui (BlackRock): “La creciente demanda en Europa y la inversión sostenible harán crecer el mercado de ETFs durante los próximos años”
Aitor Jauregui, courtesy photo. Aitor Jauregui (BlackRock): "Growing Demand in Europe and Sustainable Investment will Make the ETF Market Grow Over the Next Few Years"

The ETF business continues to increase after three years of record growth figures. For Aitor Jauregui, Head of Business Development for BlackRock in Iberia, the outlook is much better in the long term: “With an average annual growth of 19% over the past few years, at BlackRock, we expect that in 2023 the ETF industry will reach 12 trillion dollars and 25 trillion dollars by 2030.”

These positive forecasts are also positive for the ETFs market in Europe which, according to Jauregui, will be “one of the main drivers of the investment fund business during the coming years”. According to this executive, and as shown by the Greenwich Associates European ETF Study commissioned by BlackRock, European institutional investors will have a prominent role in this growth, as the average of their allocation to exchange-traded funds increased by 10.3% of its total assets in 2017, from 7.7% in 2016.

“European institutional investors are adjusting their portfolios to a more volatile environment, given the return of volatility to the market and the end of stimuli from central banks. In this context, European institutional investors have found in the ETFs an investment vehicle that adapts to their needs,” says Jauregui before delving into this survey’s data, which was compiled from the responses of 125 investors, mainly pension funds, asset management companies, and insurance companies.

The survey shows the trends that make the ETF business set a positive trend in Europe. First of all, there has been an increase in the use of smart beta ETFs, which, at present 50% of respondents admit to using. Secondly, there is a greater demand for ETFs by multi-asset funds: In fact, 79% of asset managers admit to using them, as well as their intention to increase their use during the next year.

Finally, the survey shows two further trends: The use of fixed-income ETFs is a source of growth in the ETFs universe, and socially responsible investment (SRI) has a leverage effect on this business. Regarding the latter, it is worth noting that 50% of the respondents admit having invested part of their assets following sustainable investment criteria.

The attractiveness of ETFs

For Jauregui, these four trends are, “sources of forward ETFs market growth.” And they will be a driver because European institutional investors appreciate the value that this vehicle brings to their portfolio. For example, according to the aforementioned survey, ETFs are used to substitute direct investments, such as bonds, shares or derivatives. The survey shows that 50% of respondents say they use ETFs to substitute derivatives, compared to the 30% who acknowledged doing so last year.

In this regard, Jauregui points out that, regardless of the economic environment, investors value the characteristics they offer positively. “In Europe, in particular, I believe that the implementation of MiFID II makes institutional investors appreciate transparency, cost, and operational simplicity more. This is also going to be an argument that will sustain its growth in the coming years,” he says.

Speaking in terms of strategies, the ETFs that arouse most interest among European institutional investors are those of minimum volatility, dividends, factors and, finally, multifactor strategies.

Finally, should we carry out this same analytic exercise by asset allocation, the survey would show that fixed income is the type of asset where ETFs are most likely to grow. “In the case of equity ETFs, 86% of respondents admit to using them and 43% expect to increase their use throughout 2018. In fixed income, 65% expect to invest in this type of ETF as compared to the 48%registered last survey. Once again, the main criteria of European institutional investors when deciding on their use are: their liquidity, their cost, their performance and, finally, the choice and composition of the index they follow.

Debates within the Sector

In the midst of the strong development that this market is experiencing, the sector faces two debates: Possible overheating in the ETFs market and the argument between active management and passive management. In both cases, Jauregui has a solid position that he defends coherently. “It‘s clear that the weight of the ETFs in the market as a whole, and the assets that are there, is too small a part for their behavior to affect the progress of the underlying markets,” he said in relation to the first debate.

Regarding the second debate, Jauregui argues that the approach of two different types of confronting management does not make any sense. “I think that every investment decision is an active decision, even when a manager chooses to use an indexed vehicle in his portfolio. At BlackRock we believe that we have to think about indexed management as one more element when managing our clients’ capital and offering investment solutions,” he points out.

And while the sector continues debating this, BlackRock has advanced over all its competitors and has become the leading provider of the European market in terms of ETFs. According to the survey, 91% indicates iShares as its main provider.

In this regard, the asset manager believes they are on the right track. “We will continue working on new launches, while always being very selective about the solutions we provide in the market and betting on the indexes without leverage and without using derivatives. Likewise, we will focus on smart beta and factors ETFs. There is a general interest on the investors‘part, but we believe that managers of multi-active strategies are very interesting potential investors. In the long term, we will also focus on the trends we see, such as fixed-income ETFs and socially responsible investment,” concludes Jauregui

Armistead Nash (Morgan Stanley Investment Management): “We Try to Invest in Those Companies that Are Exposed to Minimal Disruption Risk”

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This year, Morgan Stanley Investment Management is celebrating the 20th anniversary of the Growth Team. The team’s strategies emphasize long-term concentration of capital in what the team believes to be high quality companies with sustainable competitive advantages and an attractive free cash flow profile: MSIF Growth Portfolio, MSIF Advantage Portfolio and MSIF Global Advantage Portfolio.    

To commemorate this milestone, Morgan Stanley’s distribution team for the Latin American and US Offshore business, led by Carlos Andrade, invited more than 80 investment professionals, including fund selectors, portfolio managers, CIOs and top producing offshore financial advisors, to the EAST Hotelin Miami to participate in a discussion about disruption and permanence and how both concepts are incorporated into portfolios. Leading the debate, three members of the Growth Team: Stan DeLaney, Managing Director and disruptive change researcher, Armistead Nash, Managing Director and an investor on the team, and Mary Sue Marshall, Managing Director and portfolio specialist; who shared their views on secular trends and big changes coming from disruption on technology and disruption in business models. 

The disruption landscapes

According to the Growth Team, disruptive changes play a very important role in their research process. As long-term investors, they focus on companies they believe to have a sustainable competitive advantage. To separate the wheat from the chaff, they need to have a good handle on the competitive environment that these companies face and the tech disruptive forces that may impact them over time.

From their experience, they state that disruption almost always fits into one of two types of paradigms: bottom-up disruption or top-down disruption. The first one, would represent those products or services that are not that good, but are so much cheaper than anything else in the market. Over time, people adopt them, the products or services improve, and the adjustable markets expands. The second type, a top-down disruption, would consist of those products or services that have a premium performance and price comparing to existing offer in the markets. As the technology improves, their cost declines and their markets expand.

 “Back in 2004, we started working on the digitalization of advertising. At that time, executive directors and media had already realized that online advertising was a completely different animal, mainly because of its measurability. Our hypothesis was that, over time, companies will eventually migrate their ads from traditional media into internet. Fourteen years ago, 20% of the media time was spent on the internet, but only 4% of the advertising dollars were spent there. The relationship between advertising dollars and GDP has always being about 2% to 3%, and we do not think that will change. Today over 35% of advertising dollars are spent online, being online roughly internet and mobile, and over 50% are media that have transferred to online”, said Stan DeLaney.  

Optimizing for the minimal disruption risk

Additionally, Armistead Nash believes that it is necessary that investors have a view on disruption and the competitive landscape the companies they invest in are facing. Especially nowadays, in a world where disruption is happening faster than ever before, driven by several different forces. 

“One important factor of disruption is certainly the internet software space. The price of computing power has come down significantly with the advent of large cloud infrastructure players. Small businesses now have the capacity to outlay less capital investment upfront for their technology infrastructure. They can just rely on the computing power provided by these large cloud infrastructure players, and consequently, there are more start-ups coming to the internet and software space. We also feel that, with the advent of the internet and global funds, companies can have a broad distribution and approach to services like never before at a much lower cost. All these factors are driving an accelerated pace of innovation and change and starting out some new competition. It is precisely in this environment when it is more important to have a handle on the competitive landscape and to have a view out for the next three to five years, to invest in those companies that are exposed to minimal disruption risk”.

Considering its relation to disruptive change, Nash differentiates four groups of stocks: “First, we try to invest in companies that offer a product or service with very few or no substitutes. Second, we invest in companies that have an innovative culture, that despite incurring into failures, continue to invest a significant amount of capital back into new product launches. The third type of stock that we include in our portfolios are those that have the willingness to alter their product or business model based on the consumer preferences or the market demand. And, finally, the fourth type of company we invest in, are those companies that are not over-earning or over-charging relatively to the value that they provide to customers, avoiding creating an environment in which other enterprises can generate disruption in terms of pricing.

At a portfolio level, we intend to mitigate the impact of disruptive change from a risk manager perspective. First and foremost, we make sure we are using conservative assumptions in our financial projections for the companies that we invest in. Next, we avoid those businesses in which we do not have an edge on or we do not feel we have a competitive advantage”, he explained.  

Latin America Has Higher Earnings Expectations than Other EM, but Significant More Political Risk

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Hay mayores beneficios en Latinoamérica que en el resto de los emergentes, pero el riesgo político es significativo
Pixabay CC0 Public DomainSean Taylor, courtesy photo. Latin America Has Higher Earnings Expectations than Other EM, but Significant More Political Risk

Funds Society had the occasion to, from Santiago de Chile, interview Sean Taylor, Chief Investment Officer for Asia Pacific at DWS, and discuss with him his market view on the Asia Pacific region for 2018. Taylor, who joined DWS in 2013 with 21 years’ experience in the Industry, manages two flagship DWS products: DWS Investor Emerging market fund and DWS Top Asian fund. He is also responsible for the EM equity platform.

Positive view on global economy but need to be selective in sector and stocks

DWS outlook is positive on the global economy but recently they have observed an increase in uncertainty due to the US trade policy, Italy’s new government’s anti-EU rhetoric and select Emerging Market currency weaknesses. Taylor states that: “All three aspects require close monitoring. While an outcome is difficult to predict, our base case assumes no escalation of these issues and an eventual positive resolution triggering a sentiment relieve.”

Taylor also thinks that assets prices have already rallied and DWS is recommending their clients to be more selective in sectors and stocks: “Even under these positive scenarios, investors have to be more selective on duration and seek diversification.”

Same happens in the EM context, where Taylor recommends that: “it is not just buying EM, is being more selective particularly on the credit side and the sovereign side” and adds: “Current account deficit EM countries and those with high US debt levels are being impacted through their domestic currencies and/or foreign reserves, although rising US rates have been well flagged.” According to Taylor, if easing financial conditions tighten more sharply than expected, EM debt could become under pressure. DWS expects 2 further 25bps hikes by the Fed by the end of the year with the US 10yr yields of 3.25% by March 2019.

Regarding credit, they are expecting positive returns although not as high as in the recent years. They recommend a multicredit strategy to blend in some of that risk in.

On equities they are positive, US equities are expensive but still have upside: “it is really going to be based in earnings and earnings this year will be quite positive.” The rest of the international markets are looking cheaper, as they are not reflecting this economic growth.

Emerging markets: Expecting rewards after years of growth negative policies

When questioned about their preferences in terms of markets from a macro perspective, Taylor stated that beginning 2017 DWS was overweight in EM and continue to do so structurally: “There have been changes happening in those markets that we consider very positive. From a Macro perspective we see high potential in GDP growth versus previous years because we will start to see the positive impact of the new policies of new leaders in Asia. The new leaders in Asia came all about at the same time with a new mandate: to widen the economy. To achieve this they had to change the model: China had to stop corruption, India had to reduce burocracy and so did the Philippines and Indonesia. These changes implied being growth negative for the first 5 years but now they are able to collect the positive effect.

Also from a monetary point of view, Asia had a tight monetary policy and was dampening growth when the rest of the world had QE.  Now as QE comes out we think Asia continues to be driven by its owns dynamic in economic terms. “

Taylor also thinks that EM and Asia are in a better position to adjust to changes in US and Chinese policy and adds, “Investing in EM has therefore been selective, avoiding those most vulnerable economies with deteriorating current account deficits and uncertain politics (Indonesia, Argentina, Philippines, Turkey, Malaysia) and under pressure to raise rates (Indonesia, Philippines) as well as those under potential trade/sanctions (Mexico, Russia) – however we have taken advantage of the rise in commodities, energy and oil prices where we have been sectorally overweight.”

Latam higher earnings growth than EM area but significant political risk

Turning into the Latin American region, although it has been underweight in DWS portfolios for several years, they have started to increase their exposure recently. Even if political risk is on top of the table, DWS has a forecast of 25% estimated growth earnings versus 18% for the EM market area as a whole.  

Going into more detail on the political risk, Taylor mentioned that the difficulty about the Brazilian election is the wide variety of candidates and possible scenarios. Therefore, there is a lot of event risk  going forward.  But to his view, Brazil is already factoring the worst case scenario:” From a fundamental point of view, Brazil went through 4 years of deep recession and although last year President Temer was beginning to put some reforms in there were also down because of the political situation. The Brazilian team is not factoring any positive news until the election. Brazil has the highest tax to GDP ratio of any large EM but has the lowest investment rate/GDP of 14% and the growth model relays on current account deficit. They need a strong president to implement the necessary reforms and leads Brazil to a cycle of economic growth. On the bottom up side they are expecting good earnings coming through.”

Commodities and Growing demand in China

DWS is expecting to see steady commodity prices going forward supported by growing demand in China. China’s growth for the following 5 years will be driven by : “the “One Belt one Road project” and growth in Chinese domestic economy. China is going to change from investment led growth to domestic lead growth so it will evolve into better consumption. In addition, the increase of the quality of life of the average Chinese will lead to the next phase of urbanization that will imply taking the next 100 million people from Central China to Western China into more urban areas. All these factors will enhance the demand for commodities”

Hong Kong versus Chinese domestic stocks

Taylor is an expert in Chinese and Hong Kong markets and as such he highlights the need to differentiate between forces driving Hong Kong markets and Chinese stocks. Taylor explains that; “the HK index, the Hang Seng, has relatively little to do with China as it is really based in domestic HK. Its sectors are: HK property, HK or international banks with HSBC and utilities and all those are quite interest rate sensitive so that puts as off. Utilities, we are underweight because the prices are capped by the government and if the funding costs increase their margins are going to be reduced and it is relatively expensive. The only area where we see some upside is consumer as consumption is picking up.”

He further states that on the other side, the China indexes traded in HK, the H Share index, which is effectively Chinese SOE (state owned enterprisers) listed in HK many years ago to improve Chinese corporate governance is 30% cheaper than the A share (Shanghai) index: “We have now a 25/28% arbitrage between H share and A share. The H share 3 years ago was 60% cheaper than the A share in China is now 30% cheaper”. This fact together with “Asian are buying Asian” and are demanding better balance sheet management, support his view that “ the earnings profile  of what I call, MSCI China H Share, which does not include Hang Seng-  domestics HK stocks- is much greater that the earnings of HK companies.”

In addition, as per recent announcements that could also boost Chinese equities, Taylor mentioned the Chinese Depository receipts. Although details are yet to come, the Chinese depository receipts will allow companies like the tech and the internet companies in the US to trade onshore in the Chinese market.

Chinese Bond Connect

Following on with his positive view on China, Taylor also comments on the Chinese Bond Connect project. It will allow foreign investors to be able to access the second largest bond market in the world:“ given our view in sovereign, where we are not seeing much yield globally, Chinese sovereign and corporate offer some good yields. That will mean that China will go into some of the big bond indexes and that will naturally put a one-of flow of bonds in there, but what it really means is that international investors can´t ignore China”

View on the generally accepted Chinese risks

The two biggest risk of China according to the majority of investors is that China´s got too much debt and too much leverage. To Taylor the two are different. The government debt to GDP, which is increasing every day, will be eased by foreign investors being able to access the Chinese bond market (Chinese Bond connect) as the government will be able to issue more, diversify and lower the risk premium of the Chinese economy . “Our view is that the debt problem is a balance sheet problem not a solvency problem and China owns effectively both sides of the balance sheet, so the only problem that can really put China into trouble is China itself.”

In his opinion, the biggest short term risk China is exposed to is the leverage in the financial system and particularly wealth management products. A lot of the smaller banks don’t have enough deposits, so they go to the overnight market and that causes spikes. Nonetheless, to Taylor the decision taken by the Chinese central bank has been very sensible: “what has happened in the last year is that PBOC has been very clever, it has kept policy rates very low, only raising 5 bps when the fed rose, but its kept 7 days rate quite tight, so it’s been squeezing liquidity out of the market, it´s been making the system safer. And that is also why we can assign a higher PE to China.”

EM Currencies outlook

For Taylor recent months have been complicated for emerging market currencies due to a stronger US dolar. That being said, most of the currencies are behaving as expected with current account surplus economies and better politics outperforming those with more difficult current accounts and uncertain politics. They consider Turkey and Argentina isolated incidents.

“In Asia, India has not done too well given the rise of commodities and oil prices, whilst Malaysia’s new government has caused some political uncertainty which is seen in the ringgit – however higher oil for Malaysia will help bolster their current account. For China the renminbi has strengthened since the beginning of the year while the Korean won has mostly been stable during the latest geopolitical tensions. Russia however has seen a depreciation in its currency post sanctions,” explains Taylor.

Strategies applied to the DWS Emerging and Asian funds

DWS Investor Emerging market and DWS Top Asian fund are both managed similarly combing country selection with stock selection. Their philosophy is one of a global perspective with local knowledge. They have localized teams all across the regions that provide a very good perspective of what is going on the ground: “3 years ago their strategy was defensive, which meant buying growth companies, buying quality. Now the strategy is more balanced. Last year they were really overweight in the technology areas, in South Korea and Taiwan while this year they are underweight because prices have already reflected the upside value. For 2018 they are focused more into consumer, financial, and cyclicals sectors. We have a very good risk adjusted return and very fundamentally driven, very disciplined process.”

2019 Outlook

As a final conclusion, Taylor states that their 2018 outlook for Asia and the emerging markets is positive: “We don’t see it being the same return as last year but we are confident for another 10% upside from here.” When asked about their expectations for 2019, he stated that next year earnings will be lower than 2018 but still positive at 14%. ”In 2019 we would expect to get full return as we would have gone through the rate cycle, would be a bit clearer on trade, hopefully more clear on sanctions and people would truly realize that our top down story of that growth continuing, plus the bottom up story of earning picking up structurally as well as cyclically, plus Asia buying Asia will give good support for the market.”

 

It Takes 1.4 Million Dollars To Be Considered Truly Wealthy in the USA

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Se necesitan 2,4 millones de dólares para ser considerado rico en Estados Unidos
CC-BY-SA-2.0, FlickrPhoto: Gnuckx. It Takes 1.4 Million Dollars To Be Considered Truly Wealthy in the USA

According to the Modern Wealth Index, developed in partnership with Koski Research and the Schwab Center for Financial Research, nearly half of Americans (49%) believe saving and investing is the way to achieve wealth over time. 

The survey, conducted among 1,000 Americans aged 21 to 75, shows respondents believe it takes $1.4 million to be considered financially comfortable. To be considered truly “wealthy,” that number increases to $2.4 million.

In the short-term, respondents say that other things make them feel wealthy in their day-to-day live, such as:

  • Spending time with family (62 percent)
  • Having time to myself (55 percent)
  • Owning a home (49 percent)
  • Eating out or having meals delivered (41 percent)
  • Subscription services like movie/TV and music streaming (33 percent)

Other things that make people feel wealthy in their daily lives include owning the latest tech gadgets (27 percent), having a gym membership or personal trainer (17 percent), and using a home cleaning service (12 percent).

According to the Modern Wealth Index, millennials are in many cases more focused on saving, investing and financial planning than older generations, and are almost as likely as Boomers to work with a financial advisor (22% and 25%, respectively) while Gen X lags (16%)

“The idea that financial planning and wealth management are just for millionaires is one of the biggest misconceptions among Americans, and one of the most damaging,” said Joe Vietri, senior vice president and head of Schwab’s retail branch network.

“Whether people think they don’t have enough money, believe it would be too expensive, or just find the whole concept too complicated, the longer they wait the harder it is to achieve long-term success. We must make planning and advice more accessible to more people. Simply put, we believe every American deserves a financial plan, regardless of how much money they have today,” Vietri concludes.

 

 

2017 Brought More Clients and AUM to the Biggest 25 Global Wealth Management Operators

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Más clientes y también más volumen de activos: Así les fue en 2017 a las 25 mayores firmas de banca privada
Pixabay CC0 Public Domain. 2017 Brought More Clients and AUM to the Biggest 25 Global Wealth Management Operators

 Assets Under Management (AUM) at the top 25 global wealth management operators grew 17.0% on average this year, finds Scorpio Partnership’s 2018 Global Private Banking Benchmark. This means the top 25 operators now collectively manage 16.2 trillion dollars.

Just as a rising tide raises all boats, wealth managers were able to capitalize on favourable market conditions in 2017 as a core driver of growth. The FTSE All-World Index advanced nearly 22% during the year and global economic growth was estimated to have reached 3%, an uptick from 2.4% in 2016.

However, there were also positive indicators that firms achieved greater success in drawing additional assets from new and existing clients in 2017. On average, the contribution of Net New Money to AUM, which was flat in 2016, rose to 4.3% in 2017 for those firms who declared this data.

China Merchants Bank gained two positions, taking over Northern Trust and Pictec. BNP Paribas, Safra Sarasin Group, Banco Santander and Credit Agricole are the few non-American firms.

Asian firms grew the most, with a median increase in AUM of 15.2%, versus the 7.5% European ones got and the 13.8% from the Americans.

Ampliar

 

“Conditions have been exceptionally positive for global wealth management in the last 12 months, but wealth firms must also be given credit for starting to find new revenue” says Caroline Burkart, Director at Scorpio Partnership. “Our client engagement assessments throughout 2017 have indicated that client sentiment is on the up which is inevitable when markets are good.

Wealth firms should put processes in place now to measure and respond to customer feedback, so that when the next market downturn occurs, they have the insight they need to continue delivering a compelling client experience. A handful of wealth firms are starting to publish their client satisfaction data, highlighting that this is creeping up the agenda as a complementary measure to financial performance.”

Asia’s wealth managers achieved the most significant gains this year, with average AUM growth of 15.2% (in base reporting currency), compared to 7.5% among European operators and 13.8% among firms based in the Americas. Many wealth managers present in Asia continued to increase their focus in this region in 2017. In several emerging markets, strategic acquisitions contributed to inorganic growth in AUM.

Most notably, Bank of China – a new entrant to the top 25 table last year – stood out by reporting double-digit growth for a second consecutive year. The firm attributed its success to effective marketing, customer developed client profiles and proposition enhancements.

Sandra Crowl (Carmignac Gestion): “We Are in the Start of a Structural Dollar Depreciation Tendency”

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For more than ten years, Sandra Crowl has been both Member of the Investment Committee and a Portfolio Advisor at Carmignac Gestion, the European leading asset management firm that was founded in 1989 by Édouard Carmignac and Eric Helderlé. Ms Crowl, who holds a bachelor’s degree in Economics and French from the University of Melbourne and, since 2007, is also a Chartered Alternative Investment Analyst (CAIA). She started her career at Bankers Trust Australia in 1987, before transferring to Paris in 1991. Two years later, she became Managing Director and Head of European Foreign Exchange in London. In 2003, she returned to Paris and specialized in fund management seeding at New Alpha Advisers, a subsidiary of ADI. Four years later, she joined Carmignac Gestion.

Latin American investors be aware

Ms. Crowl believes that the tightening of Central Bank’s liquidity is going to create a great deal of volatility in fixed income markets, therefore, investors -particularly Latin American investors who traditionally have a fixed income bias-, should change their focus away from passive management towards active management. “We are seeing a great deal of interest in our unconstrained global bond strategy, a strategy that provides the flexibility necessary in a rising interest rate environment. It is a non-benchmark strategy able to invest across sovereign and corporate debt, both in developed and emerging markets. Considering our commitment to investors, we want to make sure that we provide an appropriate risk framework for them. We do contain some of the risks by having internal limits on some sub-classes of bonds, like the contingent convertible bonds or structured credit. We have four fixed income strategies and all them, at the aggregate part of their portfolio, must have an average credit rating of investment, they will not ever become high yield strategies,” she said.  

On the bond side, Ms. Crowl suggests a very diversified bond portfolio that is still concentrated on sovereign issuers that are providing high real yields today. That would be the case of the sovereign debt in Greece, Mexico or Brazil. “Sovereign bonds with good real yields will act as a cushion for future volatility. Using our expertise for identifying value opportunities, we could also invest in cheap corporate bonds that are perhaps being sold off indiscriminately by the market. We also want to build up our portfolios in structured credit strategies based on floating rates, a suitable asset class in a rising interest rate environment,” she added.  

Carmignac’s unconstrained global bond strategy aims to protect investors in a bond bear market. As is clear in the Funds prospectus, the strategy has the capacity to actively manage modified duration, ranging from -4% to 15% and it can take short and long positions in currencies. “If we are invested in a country where there is short term volatility, we may want to hedge the currency for short periods but stay invested in the local debt of the country. That is the case of Brazil today, while we are very confident about their macroeconomic recovery and improved current account , we are less sure of the political outcome of elections later this year. Whereas in Mexico, we have chosen not to hedge the currency, that is to stay invested in local currency debt.”     

Uncertainty in Latin American

Ms. Crowl states that, despite the short-term risk that Argentina is currently experiencing, Carmignac Gestion is very positive about the fundamental improvements through economic reforms achieved since Mr. Macri became president. “Recently investors lost confidence in the independence of the central bank, inflation was accelerating, but Mr. Macri has always delivered on budget reform. He has recently promised even more constraint with will sooth credit agencies nerves. And we expect inflation to drop back in the second half of the year. Some large international money managers have already bought back into the asset class just one week after the Central Bank of the Republic of Argentina raised rates and Macri asked the IMF for a credit line. The announcement of the assurance by IMF to provide funding necessary for future months will be considered as a positive catalyst. Also, they could obtain support albeit smaller from the Bank of International Settlements.”      

Regarding Mexico, this year elections have added uncertainty to the ongoing renegotiation process of the NAFTA agreement. “It appears that Mr. López Obrador will lead the incoming government. This provides a bit of challenge going forward should the NAFTA agreement be decided before US mid-term elections. We believe the new government may create some difficulties with whatis has been previously signed under Peña Nieto’s term. There is a small degree of risk premium built into Mexican assets today, the election risk is being correctly priced by markets. We believe Mexican assets will be positively revalued as soon as a relatively friendly NAFTA agreement can be discerned,” she added.    

A not so positive view on the US or the dollar?

For 2018, the market consensus is expecting a 2.8% of GDP growth in the US, but Carmignac Gestion is expecting a slightly less, something around a 2.2% for the end of the year. “We do not anticipate the investment cycle to be as robust as it has been in last years. We do not think that corporate firms will be able to use the fiscal reform to create jobs or to implement strong capital expenditures programs, but rather to paid down debt or buy back stock. We are not seeing the strength in the order books of cyclically oriented companies that perhaps growth-oriented companies have. But we are invested in the US, in an overweight nature if we compared to the benchmark and are positive about the country’s economy. Particularly in equity, we are invested in some of the very strong secular growth themes: in the disruption created by e-commerce, the change in spending patterns, the digitalization of the economy, the increase of energy efficiency, the improvement of connectivity and cloud usage. All these themes provide strong secular earnings, generating very good returns on equities. We are investing on technological multinationals, but we are also focusing on companies that offer specific services to US corporations that need to improve their capacity. And we are bearish on the companies that are challenged by this new digitalized environment. In some strategies, we have the capacity to sell against a corporation that we have in effect a long-term position and that we have identified that would be challenged. This is part of how the portfolio is constructed to compose the winners and losers of this digital era”.    

On the dollar, Carmignac Gestion believes a structural dollar depreciation tendency is about to start, despite the dollar has strengthen a little bit lately in the face of raising short-term interest rates. The new issuances made by the US administration to finance part of the tax fiscal stimulus created some pressure on the short end of the interest curve, but there are some medium-term influences that will determine the dollar value. “In the US, current account and budget deficits are deteriorating. The budget deficit would be hitting towards a 6% of GDP. Also, the implementation of tariffs and trade barriers can affect the current account. Initially, imported goods subjet to tariffs will be costlier for the US to import. And, historically, in the periods in which the US is maintaining a loan with the rest of the world, the US economy needs to be ahead in the economic cycle for the US dollar to remain strong. But, today we have a synchronized global recovery, and that usually reflects in a dollar bearish period that may last for 5 or 6 years. That is how cycles have behaved since World War II,” she explained.       

A deceleration in Europe?  

According to Ms. Crowl, Germany is signaling small a slowdown, but it will not probably be reflected on the economy for as long as the European Central Bank continues with its Quantitative Easing program. Since the global financial crisis, the world economy has experienced mini-cycles that have lasted around 18 months or 2 years, there have not been 5 or 6 years boom and bust cycles due to Central Banks’ intervention in the markets, which created a distortion in prices. Now, the liquidity retraction started by Central Banks could lead into another shallow dip recession. 

“The interest rates in Germany are still around 60 basis points for the ten-year bond, when they have an over 2.5% GDP growth rate and a 2% inflation rate. It makes no sense; interest rates need to be normalized. For this year, the growth rate may still be above 2% because the ECB will continue to purchase 30 billion euros worth of European bonds on monthly basis to the end of the year. However, 2019 will be quite challenging year for European bonds. In the meantime, bond curve has started to price in Quantitative Easing tapering and we are positioned rather tactically to pick up performance. We intend to benefit from rising interest rates by having short positions in German bonds, actively managing duration, a feature that fixed income investors would need to consider”.