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
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.
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.”
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.
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.
“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.
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”.
Yazann Romahi, Photo J.P. Morgan AM. J.P. Morgan Asset Management Takes Nine U.S. ETFs to Mexico
J.P. Morgan announced the expansion of its business in Mexico and the launch of nine US equity ETFs. Leveraging J.P. Morgan’s existing capabilities and expertise, the funds will be managed by an investment team led by Yazann Romahi, CIO of Quantitative Beta Strategies and Portfolio Manager at J.P. Morgan Asset Management.
“The listing process of US ETFs in Mexico underscores our commitment to providing choice for Mexican investors, what believe are, some of the best and most innovative products to market,” said Juan Medina-Mora, representative in Mexico for J.P. Morgan Asset Management. “The ETFs allow investors to customize their portfolios in an effort to meet distinct outcomes, also considering currency-hedged alternatives.”
The funds, which are designed to provide exposure to traditional indexes for better risk-adjusted returns, are:
J.P. Morgan Diversified Return Global Equity (JPGE): The fund is designed to provide global equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Developed Diversified Factor Index.
J.P. Morgan Diversified Return International Equity (JPIN): The fund tracks the FTSE Developed ex-North America Diversified Factor Index, which utilizes a rules-based approach combining risk-weighted portfolio construction with multi-factor security screening based on value, low volatility, momentum and size factors.
J.P. Morgan Diversified Return International Currency Hedged (JPIH): The fund is designed to provide core developed international equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Developed ex North America Diversified Factor 100% Hedged to USD Index.
J.P. Morgan Diversified Return Emerging Markets Equity (JPEM): The fund is designed to provide emerging markets equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Emerging Diversified Factor Index.
J.P. Morgan Diversified Return U.S. Equity (JPUS): The fund tracks an index whose methodology is designed in an effort to capture market upside while providing less volatility in down markets compared to a market cap-weighted index, the Russell 1000 Diversified Factor Index.
J.P. Morgan Diversified Return U.S. Mid Cap Equity (JPME): The fund is designed to provide U.S. mid-cap equity exposure with potential for better risk-adjusted returns than a market cap- weighted index. It tracks the Russell Midcap Diversified Factor Index.
J.P. Morgan Diversified Return U.S. Small Cap Equity (JPSE): The fund is designed to provide U.S. small-cap equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the Russell 2000 Diversified Factor Index.
J.P. Morgan Diversified Return Europe Equity (JPEU): The fund is designed to provide developed Europe equity exposure with potential for better risk-adjusted returns than a market cap- weighted index. It tracks the FTSE Developed Europe Diversified Factor Index.
J.P. Morgan Diversified Return Europe Currency Hedged (JPEH): The fund is designed to provide developed Europe equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Developed Europe Diversified Factor 100% Hedged to USD Index.
J.P. Morgan Asset Management’s ETF suite in the U.S. features 22 product offerings with over 4 billion dollars in assets under management. J.P. Morgan achieved a top ten position in flows in the U.S. across smart beta ETFs in 20161. J.P. Morgan was also named one of the “Most Trusted” ETF providers according to Cogent Reports’ 2016 Advisor Brandscape report
Jean Raby, Chief Executive Officer of Natixis Investment Managers (Natixis IM) and a member of the senior management committee of Natixis, joined the firm sixteen months ago. Since February 2017, he oversees Natixis IM’s Asset Management, Private Banking and Private Equity business lines. Of French-Canadian origin, Mr. Raby began his career in 1989 as a corporate lawyer with Sullivan & Cromwell in New York, where he worked in corporate finances projects based in Argentina, Chile and Mexico. Later, in 1992, he got transferred to the Paris office.
After four years, he joined Goldman Sachs’ investment banking division, where he worked for sixteen years in corporate finance, M&A, restructuring and capital markets, as well as he worked occasionally in asset management projects. He became a Partner of the firm in 2004, he served as CEO of the division for France, Belgium and Luxembourg and head of the firm’s Paris office in 2006 before becoming co-CEO of Goldman Sachs in Russia in 2011. Then in 2013, he served as Executive Vice President and Chief Financial and Legal Officer for Alcatel-Lucent, the global telecom equipment manufacturer, at a time when the company was on the verge of bankruptcy. A year and a half later, they were able to sell the company to Nokia for 15 billion euros. He subsequently served as Chief Financial Officer of SFR, an integrated media operator in France. But, he missed the hectic and fast pace environment of the asset management industry, so he decided to sign with Natixis.
The value proposal
Mr. Raby firmly believes that Natixis IM offers an attractive value proposition to those asset managers that want to expand their business but feel they have hit a glass ceiling in their growth. “You would be surprised by how many asset managers want to enlarge their business but, either because the pressure of the regulation or their need for investing in technology, they do not have the time or find it difficult to go through the effort of distributing their products outside their niche markets. That’s when they come to us. We want them to do what they do best, which is to manage money, and we take care of everything else, preserving the autonomy of the investment process. On the other hand, in Europe, and to a lesser extent in the US and Canada, sizable asset managers are owned by a financial institution. Their DNA is to stick with the footprint of the financial institution to which they belong to, and there is very little momentum or incentive to do something different than that of their parent company. In our case, we have the strength and solidity of a large banking group, but we are not constrained. In fact, we benefit substantially from the stability of the structure and the financial support. However, we are able to act nimbly and demonstrate the entrepreneurship of a third-party business. We manage very little of our own money, and that is a unique feature, you will not find many asset managers of our size owned by financial institutions that are so focused on third-party’s money. We are the only one, and that is an additional value-add to these partnerships, to offer the stability of a long-term shareholder,” he said.
In September of 2017, the firm made its most recent transaction. Natixis IM, which has a network of 26 autonomous asset managers affiliates, acquired a majority stake in Investors Mutual Limited, an Australian fund management company, as part of its plans to expand in the Asian region. “I would be very surprised if we do not announce one or two more acquisitions by the end of the year. It is about adding entrepreneurial teams joining us; we seek asset managers that have a strong track record of generating performance and that have a brand. That will be right set up for us, either because we bring a solution to them and the support of a long-term shareholder, or because they bring something new to us, like a platform that our other affiliates can use or a strategy or investment category that supplements our offering. We want to do business with management teams that we consider our partners,” he added.
Natixis seeks the growth of their affiliates’ business. For this, they offer a centralized distribution throughout the world. “In our business model, we respect the autonomy of our asset managers in their investment process and allow them to upgrade their business. For example, in 2015, we welcomed DNCA Finance into the group, a value equity France-based asset manager. At that time the firm had 14 billion euros of asset under management. Today, the firm has more than 25 billion euros. We accomplished that figure in only three years and with tremendous pressure on fee rates. We can maintain pricing because our clients see value -we do not sell expertise cheap-, and because there is a central management of distribution, creating a healthy discipline. We are also trying to mutualize investments on technology, finding the right balance between the investment autonomy of the affiliates and the benefits of sharing technological developments. The group is defining its digital roadmap, and we are going to add more joined development of technological innovations that hopefully will benefit everyone.”
Active vs passive asset management
Although Mr. Raby acknowledges that passive asset managers have dominated the market narrative in the latest years, the return of volatility may, in his opinion, turn the tables. “Passive investment is here to stay, but we are not going to participate in that business and we are not going to change our strategy. Volatility has returned, we may be at the end of a 35-year bond bull market and at the end of a 10-year equity market. In a more volatile and uncorrelated environment, an active approach to managing risks and chasing opportunities may make more sense. Individual investors will have a rough wake up call when they realize that with greater transparency and disclosure on fees, passive investment is not as cheap as it seems. People will hopefully start looking beyond the low fees and study the actual performance deliverance after fees, which is what really matters. When that happens, I am confident the value proposition of active management will be recognized.”
Long-term savings
In Europe, long-term savings have not been privatized, by contrast, that has been the case in the US, Canada, UK and Australia, thus funding the savings for retirement. These countries are the fourth largest asset managers markets in the world, being China the fifth largest market, and that is mainly because they have a population 1.6 billion of people. There is a big question mark on whether, in ten to twenty-year time, those people who relied on defined contribution plans, abandoning defined benefits plans, will have enough savings for retirement. According to Mr. Ruby, experience demonstrates that people with the right incentives for long-term savings will save enough for retirement, without having to depend on the government. “At the end of the day, if it materializes that the privately arranged retirement systems are no sufficient to fulfill the needs of the population the government will have to chip in. I would hope for a bigger debate on the privatization of long-term savings in Europe. There should be greater tax incentives for people to save and a strive for the right balance. In Canada, there is a mix of both systems, people are encouraged to save through tax incentives and yet, they also have the promise of a basic retirement savings for everybody. Even the US created the 401k plans, with lots of tax incentive to do so, with does encourage people to be prepared, and I think that is the way to go. In UK, the debate is also out in the street, but unfortunately there is no enough discussion in Europe right now. In France, we are having the debate on pensions and insurance policies, trying to get some more flexibility, but I wish we could go further and discuss about private pension funds.”
The growth opportunities
Natixis IM has a history of 25 years of presence in Europe and the Americas. Their arrival in Latin America is more recent but is a key piece in their growth plans: “When I arrived last year, one of the first conversations that I had with Sophie Del Campo, -Executive Managing Director, Head of Iberia, Latin America, and US Offshore, at Natixis Investment Managers, was about the opportunity in Latin America. Obviously, we want to be careful, invest for the long term and with a steady approach. On the other hand, we think that the region is an opportunity for us to locally manufacture products, but again we need to find the right partner in the region with four characteristics: entrepreneurial character, a good brand, a good performance track record and that we can bring something to them in terms of revenue synergies, or that they can bring something to the group. This type of partner does exist, but it takes time to find it,” he concluded.
Pixabay CC0 Public DomainRobeco, courtesy photo . Robeco Appoints Bart Oldenkamp as Head of Investment Solutions
Robeco has hired Bart Oldenkamp as Head of Investment Solutions, effective July 1st, 2018. In this role, he will be responsible for further expanding Robeco’s Investment Solutions business, which includes services such as fiduciary management and multi-asset solution products.
He will succeed Martin Mlyná, who currently holds this role, while also serving as Managing Director at Corestone, Robeco’s manager selection platform. As from 1 July 2018 he will focus fully on his position at Corestone to further increase its added value for clients and to further grow Corestone’s multi-manager business.
Gilbert Van Hassel, CEO of Robeco, said: “I welcome Bart to Robeco; in him we have found a highly experienced professional to fulfil this crucial role for our clients with a strong network and reputation in the area of fiduciary management and investment solutions. This appointment underlines our commitment and ambition to grow our fiduciary business, which is a key element of our strategy for 2017-2021.”
Oldenkamp said: “I am excited to join Robeco and I am looking forward to working together with clients to achieve their financial objectives. I am confident that based on Robeco’s strong academic and research driven approach we will be able to further strengthen our solutions for clients and achieve sustainable growth of our business.”
He previously worked at NN Investment Partners, where he was Managing Director Integrated Client Solutions. Before that, he headed the Dutch office of Cardano, a consultancy firm specialized in fiduciary management, risk management and investment advisory services, after having held various positions at ABN Asset Management, including Global Head of LDI & Structuring and Product Specialist Structured Asset Management in the US. He is the academic director of the Pension Executive program at the Erasmus School of Accounting & Assurance, and a non-executive board member at the pension fund for the Dutch railway transport sector. He holds a PhD in Econometrics from Erasmus University Rotterdam.
According to Vidur G. Gupta, Finance Expert at toptal and based on a report by UBS, the origins of a given family’s wealth determines the family offices’ risk appetite, its investment style, and its allocation choices. US and Asian families are most keen on investing in “growth” assets, with heavy weighting toward venture capital and private equity.
iCapital research shows that first-generation single family offices tend to prefer alternative assets such as real estate, private equity, and venture capital. In addition to the generation, country, and origin of wealth, the sfamos’ strategy is also defined by the size and stage (institutional maturity/experience) of the family office itself.
Longer-tenured family offices increasingly employ experienced management teams to invest their capital across an array specialty asset classes. This is especially true for active positions in equity and bond markets, given family offices have historically invested in hedge funds or private equity funds as fund-of-funds investors. The increasing size of Famos and desire to have stronger control over investments and outcomes has propelled them to “insource” professional management teams.
As an asset class, private equity also holds some other advantages over hedge funds regarding family offices. It fits with families’ “emotional desire to back entrepreneurs and ideas they believe in,” according to Philip Higson, Vice Chairman of the family office group at UBS.
“In the search for yield, family offices are playing to their strengths by allocating longer-term and accepting more illiquidity,” a report from UBS and Campden Wealth notes. “This approach is successful when experienced in-house teams have sufficient bandwidth for conducting due diligence and managing existing private market investments.”
