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M&G: “The Valuation Gap Currently Between Value and Growth Stocks is Almost as Wide as it Has Ever Been”

M&G: "La brecha de valoración que vemos actualmente entre las acciones value y growth es prácticamente más amplia que nunca" — Foto cedidaRichard Halle, courtesy photo. M&G: "The Valuation Gap Currently Between Value and Growth Stocks is Almost as Wide as it Has Ever Been"

Richard Halle, portfolio manager of the M&G European Strategic Value Fund believes that the context is favorable for value investing in equities. In his interview with Funds Society, he explains that the economic recovery environment in Europe, together with the reduction of political and macroeconomic uncertainty and the increase in interest rates, should turn the situation and prove beneficial to this style of investment.

What are the main arguments in favour of investing in European equities?

European equities look attractively valued, in our view, both in absolute and relative terms, particularly compared to US stocks. In addition, European companies should benefit from the region’s economic recovery which should support earnings growth. Economic growth has picked up, unemployment rates have fallen across the eurozone and inflation has started to rise. The European Central Bank has arguably provided the necessary support to revive the eurozone and investors are now focusing on how the stimulus measures will be withdrawn.

You apply a value investing approach…how easy (or hard) is it to find undervalued companies in Europe?

While the overall market has risen this year, we think there are still plenty of opportunities for selective value investors. In our view, value stocks are attractively valued on both a relative and absolute basis.

Value as a style has been out of favour for several years as investors have favoured growth stocks with reliable earnings and ‘bond proxies’ offering steady income payments. The value recovery in 2016 proved to be short-lived and investors have preferred growth stocks this year. As a result of this prolonged underperformance, the valuation gap currently between value and growth stocks is almost as wide as it has ever been. If this gap were to narrow we think the potential rewards could be significant.

More recently, we have been finding value opportunities right across the market, rather than concentrated in particular sectors.

Is it necessary to hold cash in case better opportunities arise?

As value investors who are looking for mispriced opportunities to arise we tend to have a slightly elevated level of cash in the portfolio. This is so we are able to take advantage of short-term volatility and mispriced stocks.

What is the potential upside of your current portfolio? With the recent stock market rally…has this figure decreased?

We think there are plenty of stocks in the portfolio whose prospects are being significantly undervalued. While a number of our cyclical holdings have performed well recently as investors have become more optimistic about the outlook for the European economy, we continue to believe that the portfolio still has several cheap stocks that are being mispriced. In terms of valuation, the fund is trading at a significant discount to the MSCI Europe Index (on both price to book and price to earnings metrics).

Are you expecting a market correction in the medium or long term that could benefit your strategy?

In recent years, value has underperformed as investors have sought defensive ‘bond proxies’ amid uncertainty, volatility and ultra-low rates. Looking ahead, we believe the continued recovery in Europe, a reduction in uncertainty (both political and macro) and rising interest rates should be beneficial for a value approach.

How do you harness volatility episodes in your management strategy, such as the recent French elections of the future elections in Germany?

As long-term investors, we see uncertainty and the volatility it can generate as a source of opportunity rather than something to be feared. When sentiment rather than fundamentals drives markets, stocks can often become mispriced. As long-term bottom-up stockpickers we would try to take advantage of any valuation opportunities that present themselves in these situations.

Sectors and names: how are you positioning your fund now? Which sectors are you overweighting and why?

The fund’s sector allocation is an outcome of our bottom-up stock selection process rather than top-down views. Nor do we take high-conviction positions in individual stocks. The fund is limited to a 3% weight in stocks relative to the MSCI Europe Index. As a value fund, the value style is expected to be the main driver of fund performance rather than bets on particular stocks or sectors.

Having said that, we have been focusing lately on finding attractively valued opportunities that could benefit from the European recovery. We have been adding to a number of our more cyclical holdings, including Bilfinger, a German engineering and construction company, and Randstad, a Dutch recruitment firm. We have also invested in Wereldhave, a Dutch real estate company that invests in shopping centres.

At the sector level we have overweights in consumer discretionary, industrials and energy. In contrast, we have underweights in consumer staples (an area that we believe is expensive as investors have sought the perceived safety of defensives in recent years), financials and materials.

Even though we have a below-index position in materials, we have been adding to our holdings in stainless steel makers Aperam and Outokumpu, which we believe have attractive prospects given potential demand for steel.

Banking sector: many fund managers are staying on the sidelines. Are you following the same strategy or not? Why?

We have an underweight in financials which is due to an underweight in insurers – we think the current environment is difficult for them to grow their earnings.

However, we have been investing in individual banking stocks lately. For instance we have a holding in Bank of Ireland, which we believe is well positioned to benefit from the improving economic situation in Ireland. Another recent purchase holding is Erste Bank, Austria’s largest bank by market value. In our view, Erste Bank has strengthened its balance sheet recently and is arguably now well placed to benefit from stronger economic growth in Europe.

Mexican Pension Plans Can Now Invest in 11 First Trust ETFs

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First Trust consigue que las afores mexicanas puedan invertir en once de sus ETFs — Foto cedidaPhoto: Anthony Creek. Mexican Pension Plans Can Now Invest in 11 First Trust ETFs

The Mexican pension funds investment regulator, la Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR), has approved four additional First Trust ETFs for sale to Mexican funded pensions, known as AFORES, they are:

First Trust Health Care AlphaDEX® Fund (Ticker: FXH)
First Trust NYSE Arca Biotechnology Index Fund (Ticker: FBT)
First Trust US Equity Opportunities ETF (Ticker: FPX)
First Trust Rising Dividend Achievers ETF (Ticker: RDVY)

“The evolution of the Mexico pension system has been remarkable to watch: it seems not so long ago when the AFORES first started to incorporate ETFs to diversify their stock positions,” said Codie Sanchez, Head of First Trust Latin America Investment Distribution. “We are excited to add four additional ETFs approved for use by the Mexican AFORES due to client demand. As always, we’re incredibly thankful to our clients in Mexico, the CONSAR and the AMAFORE who continue to allow us to grow right alongside them. As we say in Spanish, Adelante! Or, forward together.”

Back in NOvember, 2014 two First Trust ETFs received such approval, they were the First Trust Large Cap Value AlphaDEX Fund with ticker FTA and the First Trust Large Cap Core AlphaDEX Fund, with ticker FEX. Since then, other five vehicles had been approved, totalling 11 First Trust ETFs in which the AFORES can invest. The other five are:

First Trust STOXX^® European Select Dividend Index Fund (Ticker: FDD)
First Trust Dow Jones Internet Index Fund (Ticker: FDN)
First Trust Financials AlphaDEX^® Fund (Ticker: FXO)
First Trust Morningstar Dividend Leaders Index Fund (Ticker: FDL)
First Trust Chindia ETF (Ticker: FNI)

Nordea: “We Still Believe That the Risk Aversion Towards Emerging Markets is Too High”

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Nordea: "Seguimos pensando que la aversión al riesgo en los mercados emergentes es demasiado elevada" — Foto cedidaEmily Leveille, courtesy photo. Nordea: "We Still Believe That the Risk Aversion Towards Emerging Markets is Too High"

The current economic fundamentals in many emerging countries, along with the perception that they involve too much risk, generate interesting opportunities for investors with a medium to long-term investment horizon according to Nordea‘s Emily Leveille. In this interview with funds society she discusses Emerging market opportunities.

Apart from valuations, which other attractions do the Emerging Markets investments currently have?

We still believe that the risk aversion towards emerging markets is too high; this is partly based on concerns over the impact on these markets of the Federal Reserve raising interest rates. In our view, however, the current economic fundamentals in many emerging markets, combined with this perception that they are too risky, creates an attractive investment opportunity for investors with a medium to longer term horizon. We acknowledge that EM in general have been performing well recently – particular in 2017 – but because of valuations, which are still at a discount to developed markets, growth rates which are higher than in developed markets, and the great companies that we can find in emerging markets, we still see an attractive long-term opportunity here.

Are all the regions cheap, or are there some cheaper than others?

We are bottom-up investors, so we don’t have strong views about the valuations of particular markets, but what I can say is that we find a lot of opportunities across regions in companies exposed to domestic development. These could be companies focused on urban consumers in India, healthcare companies in China, or education businesses in Brazil. We also find lots of innovative companies in the technology space in emerging markets, where we see that there is a lot of potential for earnings growth that is not being priced by the market.

Which are the main challenges that the emerging countries are facing? Would they be affected by FED’s monetary normalization? Mainly in Latin America?

We believe there is already a sufficiently large valuation buffer that exists between emerging markets and developed markets due to the expectation of monetary tightening in United States, such that emerging markets are able to stomach future increases in the Fed’s benchmark rate. When we look at the underlying medium to long-term economic drivers of a large number of EM countries relative to a group of DM countries – and here of course as the key benchmark the USA – and look at the 10 year yield, we see a significant risk premium already priced into EM. In particular when we look at the underlying growth and debt dynamics of EM vs DM, and how EM has improved since 2013. Of course, we cannot rule out some short-term volatility in EM, particularly if the Fed increases rates at a faster pace than the market expects, but we would argue that this would be a an opportunity for adding to the asset class.

In order to look for opportunities in the Nordea 1 – Emerging Stars Equity Fund…which are the most important criteria for you? And, following these criteria, in which region do you see more opportunities?

When we look for new investments for the Emerging Stars Fund, we look for high quality businesses that can grow their earnings sustainably for many years to come, and then we make sure that we buy them at a discount to their intrinsic value. We can find companies like this all around the world, but as an example, right now we find a lot of interesting companies in India, where you will see we have a big overweight positon. Many of the reforms implemented by the current administration have created a more favourable business environment and lowered the cost of investing, creating many new opportunities for good businesses to take advantage of.

Focusing in Latin America (where we have a lot of audience), which are the opportunities, divided by sectors or type of company, that you see? Could you give any example? Is it key to have a fundamental bottom-up focus or is the macro view important for you as well?

We see a lot of opportunities in industries like healthcare and education, particularly in Brazil, where an ageing population and rising middle class provide a tailwind for higher spending in these areas. We also still see that banking penetration is very low in many countries across the region, and the competitive environment for banks is very favourable, so we also have a positive view on banks like Banorte and Itau, for example.

With regards to the importance of macroeconomics- for us, the most important thing is to find good businesses that generate returns above their cost of capital for many years. We often find however, that there are many more investable companies in countries with stable macroeconomic environments, because it is difficult to grow a company and invest in a market which experiences a lot of economic volatility. Furthermore, when we make projections as part of our valuation work, we of course take into account projections of inflation, GDP growth, and interest rates and we can have a higher degree of confidence in these projections if there is a stable macroeconomic backdrop.

By countries, in Latin America, where do you see a more promising economic situation that can lead to the creation of investment opportunities in these markets and why?

We have been very impressed by the reforms being implemented in Argentina since the change in administration. The equity market is still very small, but with reforms in monetary and fiscal policy, we are already seeing a lot of businesses coming to the market that want to grow because the economy is growing and the political environment is more stable. In Brazil as well we are encouraged by the economic recovery, very low inflation, a consumer with less leverage, and recent reforms in the labour market and long term interest rates, though we still need to see reform to the pension system in order for us to feel comfortable with debt dynamics longer-term. Finally in Mexico we see a government and central bank committed to prudent fiscal and monetary policy and the ongoing adjustment to government spending due to falling oil production. We believe that the energy reform will be transformational to many sectors of the economy and is already creating many new investment opportunities.

In which Latin American markets is Nordea 1 – Emerging Stars Equity fund overweight?

We currently have no overweight positions in any markets in Latin America, but that is not because we do not find interesting companies in which to invest. Our process is a bottom-up, company by company analysis, and our under- and overweight positions are a result of individual companies that we find to invest in at the right price. We are invested in a concentrated group of companies that we like very much in the region, but we happen to have more investments at the moment in Asia and India primarily.

Does the region face a wave of positive changes and reforms for its equities?

Every country is so different in Latin America, from their size to the components of their economy and their politics. Though we have seen some positive and market-friendly reforms in recent years in places like Brazil, Argentina, and Mexico, I do not necessarily see these as related to some sort of general consensus in the region about a move to the right or to the left of the political or economic spectrum. Each case has been very much related to specific domestic situations.

The weakness of the dollar … how is it helping the region? Do you consider currencies when investing or covering them?

We do consider currencies in our fundamental analysis as we think about the impact of currency movements to the operating profits of our investments, but we do not try to predict currency movements and we do not cover our currency exposures from being invested in local markets. The weakness of the dollar helps certain industries and hurts others- in general, because commodity exports are a big portion of many Latin American economies, they tend to benefit from the inverse correlation between the dollar and commodity prices; furthermore, the weak dollar makes imported goods in local currency more affordable. However, a dollar that is too weak can also overly inflate the value of Latin American currencies and reduce their relative competitiveness in manufactured exports, as we saw during the financial crisis in 2008-2009, but we are not seeing these types of movements at this point.

Thomas Johnston and Nuno Loureiro Will Lead Amundi Pioneer AM’s US Offshore and LatAm Efforts

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Amundi Pioneer AM impulsa su negocio Offshore y nombra a Thomas Johnston como wholesaler en Miami junto a Nuno Loureiro — Foto cedidaPhoto: Thomas Johnston, senior wholesaler at Amundi Pioneer AM. Thomas Johnston and Nuno Loureiro Will Lead Amundi Pioneer AM's US Offshore and LatAm Efforts

Following the completion of Amundi’s purchase of Pioneer Investments on July 3, 2017, Amundi has restructured its brand and team in the US, where the Latin American and Offshore businesses are an important part of their organization.

Michelle Boquiren, CEO of Amundi Distributors USA, has left the company. According to an internal memo Funds Society had access to, Amundi “thank her for her dedication and many contributions and wish her well in the future.”

As of October 3, 2017, Amundi Distributors USA, LLC terminated its registration with FINRA and the SEC. The licenses of the former Amundi Distributors USA registered representatives are now held by Amundi Pioneer Distributor, which continues to be led by Laura Palmer, as Head of U.S. Intermediary and Offshore Distribution at Amundi Pioneer.

Looking to continue focusing on this business going forward, Amundi has made some recent appointments, including two wholesalers – one in Miami and one in New York – and an Internal Sales Representative based in Miami, to support U.S. Offshore and Latin America.

Thomas Johnston, Senior Wholesaler, will be relocating from NY to Miami to cover this crucial market in concert with Nuno Loureiro. Thomas will also manage the Texas region on an interim basis. Alejandro Espina will assume coverage of the NY region, with the West Coast as well on an interim basis. Felix Canela has recently joined the team as internal sales support, based in Miami.

Amundi plans to expand its team further in the coming months, they are looking to hire two additional Offshore wholesalers, for the Texas & West Coast regions.

OMGI: You Missed the Rally… Is it Still a Good Time to Invest in Asian Equities?

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The Asian equity market continues to rise, exceeding by over 50% the lows it touched in 2016. So far this year, the MSCI Asia Pacific Ex Japan index surpasses the S & P 500 by more than 21%, while the renminbi appreciated 6% against the dollar, is it still a good time to enter this asset class if you missed the rally? Josh Crabb, Head of Asian equities for Old Mutual Global Investors, thinks so.

During the OMGI Global Markets Forum in Boston, the Lead Manager for the Old Mutual Asian Equity Income and Old Mutual Pacific Equity funds reviewed potential threats to this asset class, their valuations, and the likelihood of a positive return in the next 12 months, along with the issues that are the main alpha generators in their portfolios.

What should concern the Asian equity investor?

In recent weeks, rising tensions between the United States and North Korea have created a lot of noise in the markets. According to Crabb, it should not be something that worries investors too much, because it estimates a 99% probability that nothing happens and only 1% that something truly bad happens that entails a 100% drop in the markets. Multiplying probabilities, this only represents a 1% impact on the markets.

“If we look back in history and review other events which were much more extreme, such as the Cuban missile crisis, with two powers which were more equipped and with a much worse possible final result, we can see that the market only moved between 3 % and 4%. If, as investors, this issue genuinely concerns us, and without this comment being meant as advice, the solution would be to buy put options on the Kospi (Korea Stock Exchange Index) index, which are “out of the money” and whose expiration date is long-term, this strategy will pay better than leaving some extra cash in the portfolio.”

The spectacular rally experienced by this asset class since last year to date has made some investors think that they are late for the party, but it’s still a good time to enter if you take into account the valuations in terms of the price /book value rate: “If investors had entered to buy in February 2016, when the price / book rate was 1.2 times, they would have obtained, with 100% probability, a positive return in the next 12 months, according to historical data of this asset class for the last 20 years. At present, the market stands at a rate of 1.7 times, at some distance from the lows, but still with a very favorable outlook, with a probability of obtaining positive returns around 70% to 80%. Right now it’s one of the cheapest asset classes and it’s still a good time to invest, with a good chance of making a profit.”

Another common concern is how Asian equities will react to potential interest rate hikes by the US Federal Reserve. The base scenario many investors anticipate is that if there is a new rate hike due to rising inflationary pressures, the dollar will appreciate, impacting negatively on commodity prices, emerging markets and in particular in Asia. Which is something that, according to Crabb, should not necessarily occur. To explain his vision, the Old Mutual manager goes back to the period between 2003 and 2007 to contrast the behavior of the dollar, as measured by the DXY (US Dollar Index), and the Asian equities under a restrictive cycle by the Fed : “While the American market was recovering from the technological bubble, Asian market rates were at low levels for a number of reasons: qualitative easing measures in Thailand, terrorist attacks on Indonesian discos, SARS disease, prices of real estate in Hong Kong were at half their current value and the economy was weak. When the Federal Reserve began to raise rates, the dollar began to appreciate at first to then depreciate, but the stock market continued to rise throughout the cycle. It is not until the Federal Reserve begins to lower rates that the MSCI Asia ex Japan index begins to fall. If we go back to the current cycle and review what happened so far, we can see that the dollar started its rally in anticipation of the Fed rate hike and Asian equities began to get better returns. The dollar has already begun to depreciate, but Asian markets continue to rise.”

Crabb also argues that now that global conditions seem to improve, with China and Europe offering attractive valuations and greater economic strength, investors will begin to allocate more resources to these asset classes.

What is the correct approach to positioning in Asian equities?

When investors think of the next economic crisis, they refer back to the 2009 crisis. Although, according to Josh Crabb, the next crisis is likely to look more like the 2000 crisis, in spite of the fact that the S&P 500 fell quite a lot, many value stocks rose in absolute terms. In this way, the asset manager seeks exposure to companies expected to have a great growth because their market is going to have great growth. At present, there are five trends that the manager is considering as the main alpha drivers of the portfolio: Indian infrastructure, frontier markets, pollution in China, the Internet of Things (IOT) and artificial intelligence (AI).

Beginning with companies linked to the internet of things and artificial intelligence, Crabb emphasizes the irruption in homes of new products that will represent a revolution in the same scale that the mobile phone represented in its day. “Most of those present will have heard of Amazon Echo and Google Home. The previous week I was in Europe and basically nobody knew these products, or the fact that Microsoft, Alibaba, Samsung and a good number of companies are in the process of launching their own versions of these products that will completely change the way in which people interact. These devices allow you to connect every household appliance in the house using voice as a command. This will lead to a cycle of mass product proliferation that we can benefit from by participating in companies of a relatively small size in terms of market capitalization today.”

As an example, the asset manager mentions Primax Electronics, a Thai company that specializes in manufacturing microphones that are able to identify voices, used by Google home and Amazon Echo. While the valuation of the company measured as a P/E ratio is about 10.5 times, that of Alibaba is around 50 times. “When we think that this product has not yet reached Latin America, Asia or Europe and how many people will have it in a short period of time. We can see it’s a fantastic opportunity. In addition, this technology will be integrated into televisions, light systems, door bells and sprinklers. This reasoning can also extend to manufacturers of sensors, camera lenses and other products whose companies show cheap valuations and massive potential growth.”

Finally, Crabb mentions the issue of pollution in China, noting that those highly polluting companies, such as steel manufacturers that are not complying with environmental regulation or paying their taxes, will have to close in the not very distant future, deriving their production to those companies which are complying. “The population in China has reached a socioeconomic level which is high enough to start worrying about pollution. This is why the creation of job positions is no longer a priority, and they are beginning to give more importance to steel manufacturing companies that respect the rules, that create quality standards and that in the future will gain the extra volume lost by companies which fail to comply “.

MFS Investment Management: “We Cannot Emphasize Enough the Fact that We Are Active Managers”

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MFS Investment Management held its 2017 European Investment Forum on September 28-29, in London, an event that focused on the culture and investment philosophy of the Boston-based international asset management firm and offered its perspective on the challenges facing its clients. Through various presentations, the firm’s investment teams presented the outlook for its fixed income, equity and multi-asset strategies as well.

MFS’ CEO, President and CIO, Michael Roberge, reviewed the firm’s key differentiating attributes, and William J. Adams, CIO of Global Fixed Income, walked clients through the firm’s spectrum of fixed income capabilities. Attendees were then able to meet with MFS Meridian Funds’ managers, who shared the investment objectives, key features, current positioning and future outlook for each of the asset classes in which they invest.

The event was attended by the MFS Meridian Funds Global Opportunistic Bond Fund’s portfolio manager Pilar Gómez-Bravo, the MFS Meridian Funds Emerging Markets Debt Fund’s institutional portfolio manager Robert M. Hall, the MFS Meridian Funds U.S. Corporate Bond Fund’s portfolio manager Robert Persons, the multi-asset MFS Meridian Funds Global Total Return Fund’s institutional portfolio manager Katrina Mead, and the MFS Meridian Funds Prudent Capital Fundy Prudent Wealth Fund’sportfolio manager Barnaby Wiener.

An active management firm

Lina Medeiros, president of MFS International Limited, hosted the event and welcomed attendees from Germany, Spain, Italy, Switzerland, France, Portugal and the United Kingdom. During her presentation, she reminded those present that MFS continues to seek investment opportunities for its clients around the world. “Today we are one of the top active asset managers, focusing on what is important -a company’s fundamentals- to provide the returns that clients expect. This focus results in low-turnover and high active share portfolios.”

For MFS, having an integrated global research platform, in which ideas are developed and heard, translates into better performance. While performance over 3- and 5-year periods is important, MFS is pleased to deliver strong over longer time horizons, according to Medeiros.

“For the 10-year period ending on July 31, 2017, 93% of our MFS Meridian Funds Assets are in the top half of their respective Morningstar categories. In addition, approximately 70% of these funds’ assets are in the top quartile compared to their Morningstar peer groups. As a management firm that has been in existence since 1924, we know we can take a long-term perspective on how we invest. We marry that long-term perspective with a disciplined, repeatable investment process.”

Medeiros emphasized the importance for MFS to demonstrate its culture and values through its managers’ different presentations. “We treat our clients honestly, with as much transparency as possible regarding our approach, our products and our people. We are a company based on teamwork and collaboration, which we believe drives better decision-making. We are not satisfied, nor are we complacent, with our achievements; we must continually strive to achieve high standards, especially in the dynamic industry in which we work and in an increasingly complex world where intellectual curiosity is vital. Everything changes so fast that without that intellectual curiosity, it would be easy to fall behind.”

For MFS, it’s essential to do the right thing for its clients, employees and communities. They take their responsibility very seriously, as it is vital to manage clients’ assets prudently. “We are passionate about client service and about the MFS culture. We like what we do and we believe in what we do. It is precisely our values that have helped us to create a sustainable and diversified business.”

With more than EUR 400 billion in assets under management at the end of the third quarter of 2017, MFS has a diversified client base of institutional and retail clients globally, which allows it to bring efficiencies of scale in major markets around the world. At the asset class level, they have also developed in-depth experience in all areas of equities, fixed income and multi-asset class investing.

What are clients’ main worries?

In order to get a better understanding of the concerns of institutional investors, financial advisors and professional fund buyers, MFS commissioned a study in which it sought to know the sentiment of investors. Medeiros also referenced an independent study at the event, which sought to uncover the factors that motivate their investors’ decisions.

For professionals surveyed in the 2016 MFS Active Management Investment Sentiment Study -500 financial advisors, 220 institutional investors and 125 professional buyers – the main concern is a sharp drop in the markets. This is followed closely by global geopolitical instability. For the retail financial advisers (1,628) and professional fund buyers (670) surveyed in the NMG Global Investment & Brand Study, cited by MFS at the event, long-term performance was the most decisive factor, followed by the consistency and quality of the investment process. “Investors are as worried about how the results are obtained, as about the results themselves,” Medeiros added.

The signals sent by the market

There are numerous forces that are changing the value chain in all aspects of the financial services industry. Companies are shifting their business models to meet current challenges. According to MFS, facing all the factors that are challenging the industry – the backlash against globalization, the move toward passive and heightened regulatory scrutiny – it is imperative to have conviction in what they do and in how they do it. “Sometimes clients ask us why we don’t offer a certain product or capability. If it turns out that the capability is needed for clients in the long run, in a strategy where we feel we can add alpha, we will develop it. But, if it’s just a fad, we will pass. We cannot emphasize enough the fact that we are active managers. Now more than ever, when the tide of passive investment has raised all markets, it’s important that we remain on course.”

Managing the Exit: How to Position Portfolios for the Withdrawal of Monetary Stimulus?

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Gestionando la salida: ¿Cómo posicionar las carteras ante la retirada de los estímulos monetarios? — Foto cedidaPhoto: Mark Nash, Head of Global Bonds for Old Mutual Global Investors and Lead Manager of the Old Mutual Strategic Absolute Return Bond Fund. Managing the Exit: How to Position Portfolios for the Withdrawal of Monetary Stimulus?

During the fourth annual conference of the OMGI Global Markets Forum 2017, Mark Nash, Head of Global Bonds for Old Mutual Global Investors and Lead Manager of the Old Mutual Strategic Absolute Return Bond Fund, explained the implications and risks to financial markets from the gradual withdrawal of monetary stimulus by central banks. Furthermore, he disclosed the bets they are implementing in the portfolio in order to manage the exit of excess liquidity in the markets.

Following the financial crisis, the US Federal Reserve was the first central bank to react by cutting interest rates. The situation was so dramatic that when the traditional instruments failed to take effect, the Fed had to inject liquidity into the economy through several rounds of quantitative easing to get consumers to revive spending.

Almost a decade later, what is the nature of economic recovery? According to Mark Nash, recovery has been slow and somewhat disappointing, with the gradual increase in consumer spending being the main driver. With the recovery, consumers in developed markets, especially the United States, were able to get out of debt.

Fiscal spending soared. Deficits in developed countries skyrocketed as governments were forced to replace consumer demand, with the implementation of austerity measures being particularly counterproductive. Companies have not been especially collaborative, not being especially comfortable with the global scenario; they stopped investing and began to increase recruitment. 2017 has been the year in which investment spending has finally started, the economic cycle is perceived to be long-term sustainable, not overheated, with some improvement in terms of productivity.

But there are two fundamental issues that threaten the cycle: wages and inflation. Globalization and the automation of production processes keep wages down, while the global production gap is widening, technology business models and weak commodity prices helped to depress inflation.

“As regards inflation, what we think is happening is a kind of struggle between the elements that play in favor and those structural elements that play against, such as globalization and the increase of new technological business models, for example, Amazon, Airbnb and Uber, which not only offer new uses of the internet to lower costs, and therefore lower prices, but also attract new supply to the market, helping to keep inflation levels low. In terms of wages, these are down since companies can outsource their employees easily or send their factories to countries where labor is cheaper. Also, the advance of the technology affects wage prices, since many of those jobs will be automated in the future. Unemployment levels have also declined and more people have rejoined the workforce,” Nash said.

What will happen to asset prices once liquidity is withdrawn?

With the injection of liquidity in the markets, financial asset prices have not stopped rising. Bonds boosted their prices as interest rates fell, and shares rose as the only alternative to negative or incredibly low interest rates.

But what will happen to the price once the stimulus is withdrawn? A strong impact is expected, there are clear pressure points: wages and inflation will begin to grow with the withdrawal QE and the increase in interest rates. Furthermore, the current financial conditions are too relaxed, corporate debt continues to grow: “If you lend money to activities that are not being productive, there is a risk that that debt will not be returned to the lender in the end. There is no reason to keep interest rates at the current minimum levels.”

Also, asset prices are high, running the risk of being surprised by a sharp drop when market conditions tighten. Another variable that must be taken into account are the technical factors, the European Central Bank is running out of bonds to buy.

Market consequences and risks

The Bank of England points out that a reduction of stimulus begins to be necessary, the Bank of Canada that the interest rate reduction has already served its purpose, Mario Draghi that the threat of deflation has already been eliminated, and Janet Yellen maintains the rate hike cycle and announced the beginning of the Fed’s balance-sheet reduction.

“Central banks are beginning to undo their positions, bond yields will obviously rise, liquidity in markets will disappear, and markets will start to do their jobs, which is precisely to assign the correct price to assets. Volatility will reappear and passive investment, especially ETFs, which have enjoyed exceptional years due to ‘anything goes’, will fail to yield higher returns than active management. The stock markets and the real estate market will be affected. In addition, assets with lower liquidity such as emerging markets, high yield debt, and REITS will be affected, and may suffer a correction.”

The market may react in a disorderly way, if this happens; adverse conditions that could affect the economic cycle could appear in the market, with economies with the highest debt-to-GDP ratio being the most vulnerable. There is an additional risk in economies such as Australia, Canada, and Singapore, which did not get to deleverage, and whose real estate market may be directly damaged. It is also possible that those mutual funds that have grown disproportionately in recent years may be in a liquidity problem when they are forced to sell and there is not enough liquidity in the market. Finally, the sustainability of the Italian debt may be questioned, raising the risks of the Euro zone.

Looking to the future, as the baby boomer generation and China’s new middle class retires, labor supply will decline, something that should lead to a rise in wages and a decline in global savings. The automation of jobs will help raise productivity above growth levels, supporting the economy. As a result, higher rates are expected, which will be bad for bonds, average for equities and good for inflation and wages. It is expected to be an economic cycle similar to that of the 60s, 70s and 80s.

How to position the portfolio

Finally, Mark Nash explained how to position the portfolio to benefit from the outflow of liquidity in the markets. He recommended a commitment to Long-Short funds and tofavor active management versus passive, to be in the short part of the curve in developed markets, to be short in Italian debt, and to take into account that yield curves will steepen. “Curves have flattened because terms have been eliminated; investors in Japan and Europe buy the long part of the US yield curve, with the withdrawal of liquidity it should steepen.”

Also, he expects an adjustment in the credit markets, which is why he recommends a short position in this asset class because the market ignores the individual credit situation, causing the spreads to be compressed. Regarding currencies, Nash believes the dollar should remain at current levels, but the Euro and other European currencies like Swedish kronor will appreciate. While he recommends avoiding the Swiss franc, which is perceived as an active safe-haven.

Likewise, he recommends buying volatility and protection against inflation, as both should reach the markets naturally once the structural factors are overcome. Investment in emerging markets, as well as high-yield debt, can turn out to be a good bet, both assets have become the means by which to obtain superior returns. When the Fed raises rates again, US bond yields will rise, there will be outflows in these two types of assets, so it would be advisable to exit these asset classes now, and wait for a correction before returning.

How to Invest in Funds Affiliated with Not One But Two Nobel Prize in Economics Winners

| For Gabriela Huerta | 0 Comentarios

Richard H. Thaler received the 2017 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Back in 2002 the recipient was Dr. Daniel Kahneman. They both are associated with Fuller & Thaler Asset Management. Founded in 1993, the company has pioneered the application of behavioral finance in investment management taking advantage of over or under reactions in the stock market.

Primarily focused on U.S. small-cap equities, they offer tailored strategies which include two mutual funds as well as separately managed accounts. As Benjamin Johnson, Associate Director at the firm, told Funds Society, they would be open to potential new opportunities with Latin American family offices.

They currently also have two mutual funds that invest in small caps and one would be considered a US Small-cap blend strategy –the Fuller & Thaler Behavioral Small-Cap Equity Fund (FTHSX), as well as a sub-adviser for a US Small-cap Value focused mutual fund offered by JPMorgan Distribution Services, the Undiscovered Managers Behavioral Value Fund (UBVLX).

According to the Royal Swedish Academy of Sciences, “Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.”

Thaler has written six books and several articles. He also performed a Cameo in the 2015 movie The Big Short, were he explains the psychological fallacy of a hot hand to help reveal how a key part of the financial crisis came about.

OMGI Global Markets Forum Brought Together over 50 Latam and US Offshore Business Professionals at its Annual Boston Conference

| For Fórmate a Fondo | 0 Comentarios

Old Mutual Global Investors held its conference’s fourth edition in Boston on September 20^th and 21^st. This event was attended by more than 50 industry professionals from the main US Offshore business centers in the United States – Miami, New York, San Francisco, Houston, San Antonio – and major markets in Latin America – Santiago, Montevideo, Lima, and Bogota.

After a brief presentation of the agenda by Chris Stapleton, Head of Americas Distribution, Allan Macleod, Head of International Distribution, welcomed the attendees and presented the latest corporate level changes experienced by Old Mutual Global Investors (OMGI). Its parent company Old Mutual plc, is going through a process of splitting the business into four new independent units. This ‘managed separation’ which began in March 2016 is expected to be completed by the end of March 2018. Following this, Old Mutual Emerging Markets, Old Mutual Wealth, Nedbank, and OMAM, will operate separately.

Furthermore, he mentioned that OMGI’s single strategy business, will start operating as a separate entity from its multi-asset strategy business, which is distributed through Old Mutual Wealth, and which is mainly carried out in the United Kingdom. The details of the organizational structure of the new entity are still pending.

In terms of business volume, the project which began in 2012 with US$ 17.9 billion and 162 employees, and a clear inclination for the UK business – which at that time represented 95% of its client base, and with only 2 people engaged in the international distribution business, is now a reality with US$ 47.4 billion dollars in assets under management (figures at the end of Q2 2017) and 292 employees, including 22 members of the international team, with presence in London, Edinburgh, Zurich, Milan, Singapore and Hong Kong, along with Boston, Miami and Montevideo, through entities affiliated with Old Mutual.

“For the third consecutive year, our net business in terms of international clients is higher than the UK business. And, this does not mean that we are having a bad year in the UK, where we are third in the market. We are having a fantastic year, but the international side is even stronger,” he pointed out.

Among the features that distinguish Old Mutual from the competition, Macleod pointed out that OMGI is an investment-led business in which there is no chief investment officer, since each of the strategies has its own investment process, its own philosophy, and its own profit and loss account. Which is something that provides a series of benefits, the most obvious being the fact that it allows business diversification. “We have some portfolio managers who operate based on the fundamentals, others who follow a systematic approach, while certain managers base their operations only on macro factors and others only focus on stock selection. But they all have active management with a high alpha in common.”

With respect to the firm’s culture, OMGI identifies itself as a small-sized asset manager, and has the intention of remaining so, displaying an extremely flat structure, something that is reflected in the fact that both the portfolio managers and the sales representatives have remained in the firm, which is especially significant in London which has a high turnover ratio in the sector. Another key factor has been the incorporation of talent from other large firms such as Schroders, BlackRock, Invesco, with Nick Payne, Head of Emerging Global Equities, and his team being the latest recruits.
As for the Americas team, the unit went from consisting solely of Allan Macleod and Chris Stapleton, to include five other people: Andrés Munho, Head of Sales LatAm, Santiago Sacias, Regional Manager for the Southern Cone, Francisco Rubio, Sales Specialist for Americas Offshore, and Valentina Rullo and Collen Rennie, as part of the sales support team.

The Event’s Agenda

Following the introduction came the turn of the investment specialists; Mark Nash, Head of Global Bonds shared his vision on how the withdrawal of monetary stimuli by central banks will affect the global fixed-income market.

Then, Josh Crabb, Head of Asian Equities, pointed out that despite the latest rally in Asian markets, valuations remain reasonable and the probability of making money in the next 12 months is very high. In turn, Old Mutual Gold & Silver FundManager, Ned Naylor-Leyland, spoke of the return of gold to its traditional role as means of facilitating trade, particularly in the East.

Before lunch, Ian Heslop, Head of Global Equities and Justin Wells, Global Equity Investments’ Director, commented on the difficulty of predicting macroeconomic events and their effect on markets, as well as the importance of active investment in the current market.

Following the break, Paul Shanta, Manager of the Old Mutual Absolute Return Government Bond Fund, explained the opportunities created in the interest rate market and inflation after the growth spurt in Europe. In emerging markets, Nick Payne, Manager of the Old Mutual Global Emerging Markets Fund, noted that the gradual withdrawal of monetary stimulus by the Fed should not divert the course of these markets. Meanwhile, Ian Ormiston, Manager of the Old Mutual European (ex UK) Smaller Companies Fund, commented on the importance of investing in companies rather than countries in order to find opportunities in the European region.

The day was brought to a close by David Sandham, an investment writer who moderated the discussion between Ian Heslop, Mark Nash, and Ian Ormiston, where it became clear that each strategy is free to choose its own investment process and philosophy, giving differing degrees of importance to economic factors, markets or companies.

Investing with a micro or macro approach, which side wins the debate?

During his speech in the discussion panel, Mark Nash advocated the importance of macroeconomic factors for recognizing the moment for exiting the market, something that in his opinion is decisive in generating an excess return.”Macro investment will return with the withdrawal of monetary policy stimulus, as markets resume their ability to price assets, and more importantly, when divergence between different economies begins to emerge. Volatility will then return to the macro and opportunities in operations with currency and interest rates will appear. How will these movements affect the price of assets? It’s something directly related to the level of current interest rates and where they are headed. We believe asset prices will not rise, especially as long as the central banks maintain a gradual withdrawal.”

He also pointed out the importance of geopolitical events as a factor that will shape fundamentals in bond markets: “The Brexit referendum, Trump, the forthcoming elections in Italy, introduce some de-correlation in the markets, creating opportunities in macroeconomic level opportunities, at least in fixed income markets”.

However, while Ian Heslop acknowledges the importance of macroeconomic factors in the determination of asset prices, he points out that the problem lies in the lack of capacity to predict interest rate behavior and then trying to construct a portfolio based on the shape taken by the yield curve. “Our team made a conscious decision not to take that road, given the difficulty of getting it right. While we do not make explicit predictions, if we are capturing our predictions in the portfolio, we obviously do so implicitly.”

Meanwhile, Ian Ormiston commented that it is generally believed that asset prices depend on fundamentals, when in fact they depend on investment flows. In turn, the latter depend on the various bets that investors are making in the market. “There is always the possibility of market distortion at any moment, pushing prices away from fundamentals, and that is when the opportunities appear.”

Regarding whether the asset management team should have a committed relationship with the company’s management team, Ormiston again stressed the importance of knowing the corporate governance apparatus, since many opportunities for investment can be derived from this. “If we talk about the cultural differences in Europe, the culture of each company is linked to sociological factors, which although important are difficult to quantify. At OMGI, we have the opportunity to manage our portfolios as if the business was our own; we have their confidence because we have the right motivations. It is extremely important to know a CEO’s motivation. In Europe, it is quite common to find businesses managed by families, so we have to be careful when it comes to how the management is aligned with our interests. We are investors, we need to be sure that these managers will deliver credibility and sustainability, although to be fair, we must admit that the first filter is quantitative, if the characteristics of the balance are not good, the stock is not considered.”

With an opposing approach, Ian Helsop acknowledged that while the quality of the management team is an important issue to be understood, since Reg FD (Fair Disclosure) was issued by the SEC, the management team cannot provide more information than what can be extracted from the balance sheet and from the income statement. In particular, he recalls an occasion when, after having spent a lot of time and effort in preparing the questions, before he actually finished asking each question, the firm’s investor relations representative began to answer, because he already had a predetermined answer for it. However, Heslop did acknowledge that when you move down the market cap scale, a relationship with company management does become more important.

Finally, Helsop also added that his fund’s investment philosophy can be summed up as “today’s search for stocks which investors will want to buy tomorrow” and disclosed its investment methodology: “In order to invest efficiently, we have to have a good knowledge of fundamentals and information at the company level, plus a good understanding of how the macro part will affect the company. But I think there are better ways to understand a company than to perform a traditional bottom-up and top-down analysis, such as trying to understand where investors are positioned in the markets, something that later translates into the styles and themes that are used in the portfolio. This bias derives from the market, rather than having a country or sector bias drawn from macroeconomic factors.”

BlackRock: “We Think The Chinese Economy Is Doing Well and Do Not See Any Worrying ‘Bubbles’ Forming Up At This Stage”

| For Alicia Miguel | 0 Comentarios

BlackRock: "Por el momento, la economía china funciona bien y no creemos que se estén formando burbujas preocupantes" — Foto cedidaJean-Marc Routier, courtesy photo. BlackRock: "We Think The Chinese Economy Is Doing Well and Do Not See Any Worrying ‘Bubbles’ Forming Up At This Stage"

Jean-Marc Routier, Director, and Product Strategist for the Asian Equities team in the Fundamental Equity division of BlackRock‘s Active Equity Group is convinced that there are many fundamental reasons for investing in Asian equities, an asset still not well favored by investors: not only its growth surpasses the rest of the world, but the reforms are improving its quality and there are solid advances in urbanization, consumption and the services sector that can not be overlooked. Besides China, which dominates the investment universe, in this interview with Funds Society, he speaks of the attractiveness of markets such as India and Indonesia,

Are investors coming back round to Asian equities as an alternative to the high prices of the US stock market? Is Asia just an alternative or are there fundamental reasons to invest in their equity markets?

Investors are still relatively underweight Asian Equities (source EPFR). Whilst Asia would indeed be a nice alternative to other markets and a good source of diversification, investors remain cautious to allocate as they are still unsure about China and don’t yet believe in the earnings recovery story that we have been observing now for the last 18 months. We believe that Asia benefits from attractive valuations, low ownership and good fundamentals. The fundamentals reasons to invest in Asia are that growth is outpacing the rest of the world, reforms are improving the quality of growth and we are seeing strong urbanization, consumption and services sector developments.

Growth could be one of the reasons for the return to the Asian equity markets, but this growth will slow down due to China’s effect. Do you think that less growth in the future will impair returns? Or do you consider a more balanced growth as positive for the region?

We think growth in China has now normalised – in fact China has doubled its GDP growth in nominal terms from Q1 2016 to Q1 2017. We expect growth to be lower than a decade ago but we also expect the growth to be better quality (less reliant on capital investments) which we think is positive for company returns and therefore markets. Yes definitely more balanced growth is a positive for the region

Regarding China… Do you see opportunities in the framework of the country’s new growth? In what sectors? Do you opt for the old or the new economy in the BGF Asian Dragon fund?

Contribution from consumption to GDP growth has gained importance over the year and now contributing to around 2/3 of China’s GDP growth. The importance of investment component will be reduced over time. The economy transition from an investment-driven model to a consumer-led model is a multi-year process, but well-supported by urbanization, job creation (mainly driven by private sector employment due to privatization progress), strong labor market (very low unemployment rate), and wage growth. We have recently seen very strong growth in the e-commerce and internet part of the market – China has one of the world best penetration of e-commerce (15% of retail sales) and most of its population online.

How will the recently announced inclusion of China’s A-shares in the MSCI emerging markets index affect the Chinese and Asian markets?

MSCI’s A-share inclusion decision represents a significant step in opening China’s equity markets to foreign investment and to aligning the weight of China in global indices with the country’s emerging status as an economic superpower (China’s weight in MSCI ACWI is only 3% but China accounts for around 17% of world GDP in 2015 per IMF).

While A-share inclusion may lift sentiment temporarily, we believe the impact in the China onshore market will be minimal at the initial stages of inclusion. Firstly, the actual inclusion implementation will not happen until mid-2018. Secondly, incremental inflows to A-share market will be modest initially. Incremental active inflows at initial inclusion stages shall actually be minimal since active investors who took a view on A-share would have already increased exposure given the multiple market access channels already in place (including QFII and Stock Connect).

However, the long-term investor implications are likely to be far-reaching. At full inclusion, China weight (offshore and A-share equity together) can exceed 40% in MSCI EM index. Therefore as MSCI moves towards full inclusion of China A-share, China allocation will be strategically important for international investors. The entry of more institutional investors would also help drive the healthy development of China’s onshore equity markets.

To what extent could economic slowdown in China and its debt and financial issues impact the rest of Asia? Will there be firewalls or is there a real danger of these problems spreading?

While we recognize that China’s debt makes up 250% of its economy and is increasing at a rapid pace, we think concerns are overblown. The likelihood of a debt contagion is minimal as China is a close-ended economy and debt is concentrated in state-owned companies whilst consumers, private corporate and government debt is very low. But more importantly, we believe we have seen the peak in the non-performing loan cycle as reform progress in the past few years is starting to come through and many of the structural problems such as overcapacity and credit growth are starting to be addressed. Furthermore, good cyclical momentum within China as well as a pickup in global demand in developed markets may also help lift the economy.

On account of China, is there a risk that the volatility in the Asian stock markets could surge once again, as they did in 2015 or is this risk more controlled than in the past? And why?

There are always risks that situations that move on non-fundamental drivers come back to normalised levels. At the moment we think the Chinese economy is doing well and do not see any worrying ‘bubbles’ forming up at this stage.

Is the Asian equity market just China? What other regions offer decent opportunities to be taken into account? Do you like the Indian market? And other more modest markets, such as Indonesia, Philippines..?

China now makes up 35% of the Asian index (MSCI AC Asia ex Japan) and is the biggest constituent. But indeed, we see a lot of value in more peripheral markets. Specifically, we have good exposures to Indonesia at the moment as we see the economy normalising after a period of sub trend growth. We like India and have good exposure there too specifically to cyclicals and financials. We are currently cautious on the Philippines where the twin deficit is increasing

Following the strong rally which Asian equities experienced in 2016, is it still the right time to enter?

Asian equities are trading below the 40years long term average so valuations are not yet on mid-cycle levels yet. Investor ownership is low. Earnings drivers should remain positive as long as the main world economies continue to see normalising growth and we can maintain the domestic reform agenda in the region.

When investing in Asia, what is the most important thing to bear in mind, the macroeconomic aspects or the companies’ fundamentals and why? What are the characteristics that you look for in the companies which you invest in?

The Asian Equity team believes that stock prices are driven by fundamentals, liquidity and perceptions of risk. Markets frequently exhibit sharp swings of sentiment and misprice a company’s true worth. By combining fundamental research with local market knowledge and quantitative and qualitative screening and valuation techniques, we can exploit market inefficiencies. By investing over the medium to long term, we aim to invest in companies that are both relatively cheap to reasonably priced (valuation conscious), which can meet or beat market expectations.

Investing in Asia, is it better to cover currency risk or take it on? What are the current risks for Asian currencies against the dollar?

We invest with currency un-hedged as we take a view when we pick a stock that we make a deliberate call on the company, where it is listed, the sector it is in and the currency it is traded under. We do recommend investors to hedge to their local currency to avoid surprises unless they have very strong and informed views otherwise.