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Henderson Global Growth: A ‘Growth’ Equity Strategy that Selects Stocks from a ‘Value’ Perspective

The Henderson Global Growth strategy essentially seeks to analyze the underlying business of the companies in which it invests, with a strong focus on those companies that grow in the long term. A global equity portfolio of growth style, but which selects its stocks from a ‘value’ perspective. Two of the four managers that make up the investment team explain its characteristics in detail.

The Management Team

For Ian Warmerdam, Portfolio Manager and Director of the Henderson Global Growth strategy at Janus Henderson Investors, it is imperative to have the best talent in managing a global equity fund. And, that can only be achieved by creating the best conditions to attract and retain talent, with a boutique management culture and entrepreneurial spirit.

That is why he believes that, in a small team of managers, it’s easier to see the results of each manager’s individual contributions: “If you are a good manager or a good analyst and you have confidence in your capabilities, why would you want to be just another cog in the machine in a large management team when you could see the direct result, in terms of risks and rewards, of your investment decisions?”

He also does not expect his team to grow in the short term. Composed of 4 highly motivated and autonomous managers: Ronan Kelleher, Gordon Mackay, Steve Weeple and Ian Warmerdam himself, they all have over 16 years experience in the investment industry and at least 7 years within global equity management. A team that, before joining Global Equities, had already worked together at some point during each of their careers, and which shares investment ideas with the Global Emerging Market Equities team, led by Glen Finegan.

According to figures at the end of March of this year, in total, they manage about 1.5192 billion dollars in assets, with its flagship strategy being the Henderson Global Growth, which, seven years after its launch, manages 604.5 million dollars.

Investment Philosophy

As for the investment philosophy followed by his team, Warmerdam points out that the strategy follows a bottom-up approach: “We spend very little time thinking about geopolitical factors. We believe that the vast majority of companies we value have intrinsic value in their own right. External factors are actually a distraction, when the market moves it creates opportunities, but it is really the business analysis that allows us to invest in the long term.”

Janus Henderson’s team likes to think that when you invest in a company you do it in perpetuity; that kind of mentality helps to focus on stocks with high quality at the franchise and managerial levels, two variables that allow the stock to accumulate value in the long term. “We carry out a strict valuation process, Henderson Global Growth is a growth strategy, but we like to think that we are value investors. We never build the portfolio based on an index, under any circumstances. The core of our investment process is very simple, companies change, industries change, but the important thing is to focus on weighting risks and opportunities. But the financial industry likes to complicate it; the key is not to be distracted by new theories and by terminology.”

Warmerdam admits that it is extremely difficult not to be distracted in a world inundated with news 24 hours a day, macroeconomic and political events broadcast as sensationalist press, and real-time information on stocks and markets. “Following the markets in real time is a huge distraction, which can play tricks on our human emotions when it comes to investing, fear and greed. We look for some kind of gratification that confirms our decisions in the feedback that the market seems to provide, and that is a very dangerous thing to do. Financial markets are the only market in the world that people tend to flee from when there are rebates, this shows how little logic they have.”

What Type of Stocks Make Up the Portfolio?

The fund includes quality stocks that continue to grow over the long term with attractive valuations. When they look for new investment ideas for the fund’s portfolio, they pose six questions grouped into three themes: strength of franchisee, financial fundamentals and management team. In order to include a stock on the follow-up list, and from there to the final portfolio, they must be able to successfully address these questions.

Gordon Mackay comments that the first question asked is whether the company participates in an attractive final market. What they are looking for with this question is to identify markets in which companies continue to grow and where participants can obtain attractive economic returns. Markets with a clear structural growth trend in which, from the consumer’s perspective, the final product is very difficult to differentiate in any significant way. The second question is whether the company has a competitive advantage that is sustainable over time. With this question they seek to determine who the competitors are and how the company is positioned in relation to them.

In terms of financial fundamentals, they look at the quality of earnings, which is usually determined by a strong cash flow component and by high levels of cash flow conversion capability for long-term shareholder returns. Generally, it’s those companies that are able to generate high yield on their own resources (return on equity), which are able to reinvest in their businesses and to keep growing.

“We look for businesses that are able to withstand a downturn in the business cycle. We try to find out how resilient the underlying business itself is, and how strong its balance sheet is; and whether the company has been managed in a conservative way from a financial perspective,” says Mackay. “From the standpoint of portfolio positions, we tend to find fewer companies in the financial sector that are able to meet these criteria.”

For managers of the Henderson Global Growth strategy it’s very important to know the senior management team that manages the company. We are looking for high quality leadership that has been able to allocate its capital historically and which demonstrates ethical practices and good corporate governance. The final question is whether the company’s management team is able to act in the interest of minority shareholders. “We like to see that there is a high level of alignment between the shareholders and the management team. What we prefer is that there are executives who own the same shares that we do in the company, instead of only benefiting from stock options, because when they are part of the shareholder group, they tend to be more conservative in their actions.”

Once a company meets these six requirements, they can potentially be included on a watch list, which typically contains between 80 and 120 securities. That any of these stocks make it into the final portfolio depends on the level of valuation and the analysis of expectations. The Henderson Global Growth portfolio is a high conviction portfolio, which concentrates on between 45 and 60 securities. “When we add a new company to our strategy, we use weights of 1.5% or 3%. When we do not get it right in the valuation of fundamentals, or when the stock is overvalued, it is sold. Each of the portfolio managers has his own inventory of investment ideas, we do not try to cover the entire market,” adds Mackay.

What Trends does the Strategy Follow?

It is a portfolio composed exclusively of long positions, which does not use derivatives to try to improve the performance obtained. In addition, it seeks to focus on positions with growth in the long run, following a series of trends that the management team has identified as secular trends that are still below their intrinsic value. Thus, Mackay comments that, although these trends are not necessarily “undiscovered”, they will represent a significant change over the next five and ten years: the transformation of the internet, innovation in the field of health care, improvement in energy efficiency, consumption growth in emerging countries, and digital payment.

“A clear example of the trend of digital payment is Mastercard. A stock which could be perceived as expensive in terms of multiple P/E with respect to next year, but which, if evaluated over a five-year horizon, can be seen as attractive growth,” Warmerdam concludes.

The Importance of Tactical Management: How to Benefit From Market Volatility Episodes

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In today’s environment, multi-asset strategies remain an indispensable tool for gaining flexibility and diversification. But what elements make it possible to differentiate a multi-asset strategy from its competitors? Cristophe Machu, from the Multi Asset and Convertibles’ team of investment specialists at M&G Investments, explains in detail the approach used by the M&G Dynamic Allocation and the M&G Prudent Allocation strategies, which seek to convert market overreactions into a source of returns for the investor.

Both funds use an approach composed of three different pillars: strategic valuation, tactical valuation and portfolio construction. During the first block, strategic valuation, the management team examines and compares the valuations of the different asset classes in which the strategy invests – equities, fixed income, and currencies – with their fundamentals, to ensure the correct allocation of assets, which will be the portfolio’s main source of alpha. In the second block, tactical allocation, the management team seeks to exploit the opportunities that are generated in terms of volatility from changes in investor sentiment. According to M&G, on average, 18% of market volatility is the result of an excess of optimism or pessimism in investor sentiment, something that affects valuations, but not fundamentals. Finally, in portfolio construction, they focus on finding sources of decorrelation between the different assets. According to M&G, the correlations are not static, which is why they must perform a qualitative analysis over quantitative analysis, in order to understand the degree of correlation that future portfolio assets can reach.

Why is Strategic Valuation the Starting Point?

Returning to the first pillar, Cristophe points out that valuation is a good indicator of future returns, as it allows us to know what returns are expected of an asset and how it is being perceived by investors in the market. In equities, in both the United States and Europe, the current level of the forward P/E multiples can show the expected average yield over five years. Therefore, if you buy shares with multiples between 8 and 10 times, in five years you could realize an annualized yield of 20%. However, if you pay too much for an asset, with multiples between 24 and 26 times, the investor would almost certainly incur a loss.

A second issue that M&G evaluates, in order to try to take advantage of the opportunities it generates in the medium term, is the evolution of market volatility. In this respect, the managers of the multi-asset strategies would try to detect “episodes”, or moments in which quotes for the assets don’t correspond with their fundamentals to add risk to the portfolio. This alternative investment approach, with some contrarian vocation, tries to play tactically with asset allocation, increasing equity exposure when the market is over selling its positions for no apparent good reason. The strategies that follow this approach are called “Episode strategy”.

A good example of this approach is the returns obtained by the M&G Dynamic Allocation fund, which invests around 40% in US equities, compared to the performance of the S&P500 index and to a multi-asset portfolio that starts from the same allocation in US stocks, but that uses stop-loss mechanisms whenever the market experiences a fall, progressively reducing its exposure to risky assets with each decline. Over a period of 20 years, the returns of the M&G strategy would have been substantially higher than those of the market and of the strategy using stop-loss mechanisms, exceeding them by 60% and 108%, respectively.

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Why is it Pointless to Try to Predict the Future?

2016 was a year full of political events, during which the difficulty of guessing when making predictions became quite clear. Many investors were surprised by the vote in favor of Brexit and by Donald Trump’s election as president of the United States. For Cristophe, the most surprising thing about that whole case is that, even knowing the final result, it is still possible to err when reading the expected market reaction. Some market experts anticipated that a Trump victory could mean a precipitous decline in the markets and the beginning of a recession. Far from these predictions, in the weeks following the November election, so-called safe haven assets, gold and Treasury bonds at 10 and 30 years yielded negative returns, while the S&P 500 index performed positively. That is why, in terms of tactical management, none of the asset managers at M&G tries to make predictions, but rather, to benefit from the volatility that different episodes or market events can create.
In this regard, the VIX volatility index could serve as an entry indicator into the equity market, because according to the M&G investment specialist, after a peak of volatility in the VIX, the S&P500 usually experiences a rally in the following years, showing adequate moments for the incorporation of greater exposure to risky assets in the strategies.

Cristophe also points to the purchase by the M&G Dynamic Allocation fund of European, US, British, and Japanese stocks during the months of January and February 2016 as an example of a response to a market “episode”, to then undo these tactical positions in March. Months later, after Brexit, the fund took advantage of the attractive valuations of the banking sector and of certain regions to increase its exposure to these assets. It then sold those positions as soon as the market moved sideways in September of the same year.

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The Importance of Correlations Between Assets
At M&G, they argue that the correlation between equities and fixed income is dynamic and depends on the bond yield. If the bond yields are quite high, close to 10% or higher, there is usually a good source of bond and equity decorrelation. On the other hand, if the bond yields are much lower, below 5%, the ratio between the two assets is positive. This means that, at present, adding fixed income is not as attractive as equities, neither from a valuation point of view nor as a source of decorrelationas compared to equities, therefore, at M&G they do not believe that investing in a traditional multi-asset fund is the right solution for the client

Where is the Value?

Both the M&G Dynamic Allocation fund and the M&G Prudent Allocation fund can take short positions in equities and fixed income. In response to the cycle of interest rate hikes by the Fed, the fund positions itself with a negative duration.
The bond market is in an anomalous situation, where yields remain extremely low in both the United States and the United Kingdom, as well as in Europe and Japan. Taking inflation into account, these bonds have a negative yield, implying that an investor is willing to lose money in the medium term by investing in this type of assets. That is why the fund seeks to generate profitability by positioning itself short in relation to the debt of these countries.

Furthermore, at M&G they believe that, in US corporate credit, specifically in the BBB-rated universe, there may be value, as well as in some emerging markets, such as Brazil, Colombia and Mexico, which offer attractive spreads with respect to US Treasury bonds.

In equities, price is determined by the product of corporate profits and market valuations in terms of P/E multiples. In this regard, at M&G they strive to find sectors or geographical areas that can offer an increase in terms of corporate profits or whose valuations have potential for appreciation. Emerging markets and European equities would have these characteristics, and they hold long positions in both markets. While in the United States, although corporate profits are high, valuations are at their highest, so they hold long positions in some sectors with attractive valuations such as banking, technology, biotechnology, and oil, but for the first time in the fund’s history, they hold a net short position in US equities.

Finally, in the area of foreign exchange, M&G’s multi-asset fund managers prefer emerging market currencies for two reasons: the attractive valuation level of the Turkish Lira, the Russian Ruble, the Mexican Peso and the Brazilian Real, and the carry that these currencies represent against the dollar.

Sara Shores: Over the Long Run I Love All My Children and Factors Equally but Over the Short Run One Might be Having a Better Day

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Smart Beta is a growing strategy that according to Sara Shores, CFA, Global Head of Smart Beta at BlackRock, has captured investor’s attention and interest for three main reasons: returns, diversification and fees. In an interview with Funds Society, she also explains how they do factor investing, a strategy that accounts for over 170 billion of their assets under management and expects double digit growth.

Shores explains that the main reason for the strategy’s popularity is that the return environment has been getting more and more challenging with equity returns in the 5% range, as expected by BlackRock’s capital markets assumptions for the next five years which “is not enough for most investors to meet their retirement goals.” So by focusing on factors, the broad, historically persistent drivers of return, and doing so with Smart Beta vehicles, one has the potential of incremental returns, with a significant lower fee than traditional active management.

Regarding diversification, which has been proven elusive via traditional allocations, she mentions that most the factors they look at in equities are also present in fixed income, currencies, commodities “and that then opens up a whole new range of diversification because momentum in equity is not particularly correlated with momentum in commodities or currencies, so by investing across asset classes we can really take full advantage of the opportunity set for factor investing.” So despite having equity factor investing as the largest Smart Beta asset class and continue to “see a tremendous growth in equities there are great opportunities in other asset classes.”

The BlackRock executive believes that there are five persistently rewarding factors in equity markets are: Value, Quality, Size, Low Vol, and Momentum and while “over the long run I love all my children equally and I love all my factors equally but over the short run your son or your daughter might be having a better day, and it is the same for factors, so one of the things the team has been working on is to see what factors are better poised based on the current market.” They are overweight in US equity markets with Momentum, and just recently moved to an overweight in minimum volatility given US growth is strong but grow at a modestly slower pace than in recent months, which could translate into investor caution.

About their operation, she mentions that at BlackRock they want to marry quantitative research with a really strong economic understanding on what drives markets and what drives risk and return. “Humans are made better by data, data is made better by humans, we like data and models but we also want to rely on our intuition. Our philosophy on factor investing is to always start with the economic grounding of asking why, what is the economic justification that suggest a factor will continue to earn a return in the future and only with that economic just we go and look at the date to see if it actually works over time over a wide range of assets and geographies, so we want to inject the human judgment as well.”

With over 170 billion in AUM for their factor-based strategies, both the index driven smart beta strategies and the non index ‘enhanced’ factor strategies, they are always mindful of liquidity and capacity to make sure that any of their strategies don’t move the market in an unexpected way. Most of their assets are in their smart beta ETF type strategies, whose markets are so large and liquid that liquidity is generally not a problem. However, in their enhanced strategies, where they have 12.5 billion in AUM they are “very mindful of liquidity, our strategies are not of a size were we are worried of moving markets yet, but we do think of how big can we be, we manage that by making sure we don’t have too much risk deployed in any individual factor/instrument to make sure we can trade the portfolio with a reasonable liquidity should something change unexpectedly. So we keep a very watchful eye on that capacity question.” She concludes.

Pioneer Investments: “Earnings Growth Will Be the Dominant Driver of Returns for European Equities”

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Pioneer Investments: “En renta variable europea la clave ahora es estar atentos a los beneficios empresariales ya que si crecen, las bolsas continuarán subiendo” — Fiona English, courtesy photo. Pioneer Investments: “Earnings Growth Will Be the Dominant Driver of Returns for European Equities"

The arrival of capital flows into European equities coincided with the reduction of political risk in the Old Continent after the first round of French presidential elections. But with the German and Italian elections on the horizon, the question is whether the fundamentals will continue to support the upturn. Fiona English, client portfolio manager at Pioneer Investments, talks with Funds Society about het outlook for European Equities.

Europe has received a big amount of inflows in the last quarter, but is it sustainable? Are the fundamentals supporting this performance?

Indeed flows coincided with the reduction in political risk following Round 1 of the French presidential Election as investors believe the chances of fragmentation within the Eurozone has subsided. That said, in reality there are 4 main drivers of European Equities which combined suggest that the performance of the European market can continue– 1) better economic growth, 2) better earnings growth 3) reduced political risk and 4)flows into the asset class

We are experiencing quite synchronized global growth at this moment and with 50% of earnings for European companies lying outside the Eurozone, this clearly provides a support to earnings potential for European companies. Within this, European GDP Growth is likely to strengthen this year with our Economists forecasting 1.8% for FY 2017. The key here is for companies to translate the more supportive economic backdrop into earnings growth and we are witnessing signs of this. In Q1 on aggregate, 46% of companies beat consensus estimates by 5% or more, while just 22% missed, pointing to the strongest quarter since the Q2 2007.

This and the reduction in political risk within the Eurozone has given investors the confidence they needed to return to the asset class with 18bn of inflows in the last 2 months alone.

In our view, for the market trajectory to be sustainable – we need to see confirmation of earnings growth continuing as we move through Q2 and Q3 this year.

Have investors lost the train in European equities after the rally seen in April and May?

While the rally was swift, we still believe there is more to go if earnings growth proves sustainable. The asset class remains underowned with many international investors now beginning to consider European equities “investable” again.

In fact despite the rally, European Equities have seen a slight reversal of this trend since mid-May with the market moving sidewards at best and underperforming the US market. There is probably an element of seasonality at play and the market is likely seeking another catalyst to move higher from here. We believe this will come in the form of a confirmation of further earnings growth. Any further weakness may provide a good buying opportunity as we move into the second half of the year.

Where are you finding the most attractive opportunities and what areas are you avoiding?

Given we believe that earnings growth will be the dominant driver of returns from here and in line with our investment process, we believe the most consistent way to generate performance will be through good stock selection. We do not believe that earnings growth will happen across the market as a whole but rather you must look for the companies which have a strategic competitive advantage and the ability to capitalize on better economic trends and convert it into better earnings growth. In this environment, stock selection will be key to performance.

How have you positioned your portfolio to take advantage from the rally?

We have looked to keep quite balanced portfolios not favouring any one area of the market but looking for idiosyncratic/stock stories which we believe have the potential to deliver medium term outperformance. For example, most of our portfolios are overweight Industrials at this moment due to the number of individual compelling investment cases we find there. The sector offers a number of different business models which will benefit from the more positive macroeconomic tone but also strong companies which have a strategic advantage that allows them to translate this into earnings growth. Finally valuation is clearly always important and we look to seek the correct entry point which should allow us upside potential from a valuation standpoint.

Is it the right moment to invest in more risky assets within equity or should we be more cautious?

The key for the equity market is to see greater earnings growth – if this happens we believe the market can move higher.

Do small-caps look attractive versus large-caps?

We see opportunities in all areas of the market. Finding value should be less focused on market capitalization but more on individual companies and their ability to deliver.

Thornburg Investment: “We Are Interested in those Companies that Are Willing to Share their Profits with Shareholders”

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How can an attractive dividend yield be achieved without giving up future growth and capital appreciation? Thornburg Investment Management looks for global stocks with a solid history of dividend payments and the capacity to increase their dividends over time. Thus, to provide an additional source of income, it also invests in bonds and hybrid securities.

Thornburg Investment Income Builder invests in a broad spectrum of securities that generate recurring income, at least 50% of its core assets are dividend paying shares, while the rest of the portfolio is composed of the fixed-income securities that serve as support.

Thornburg points out the historical importance of dividend yield as a component of shares’ total return. According to a study conducted from 1871 to 2001 over 10 year periods, shares with high payout ratios generated higher future earnings growth rates. In contrast, those companies that distributed a smaller percentage of their profits in the form of dividends, generated negative real earnings in the future.

“When selecting stocks, we focus on those stocks that have the capacity and willingness to pay dividends. By capacity, we mean those businesses that are able to generate cash flows, whereas willingness is more related to the dividend policy that the members of the Board of Directors and the management team have decided to implement. In that respect, we are interested in those companies that are willing to share their profits with shareholders,” they remarked.

Where are the best opportunities?

Diversification is important to the strategy’s performance. Looking at the expected dividend yield for 2018 by country of origin, the UK and Australia are at the top with 4.5%, well above the global average. These are followed by the Nordic countries’ stocks with an average of 3.7%, European stocks (excluding the United Kingdom) with an average of 3.6%, Latin American stocks with 3.5% and Canada with 3%.

“Dividend yield varies considerably around the world. Japan and the United States are among the countries with the lowest dividend yields, with 2.3% and 2.2%, respectively. In Japan’s case, companies are known to accumulate high levels of liquidity, without giving productive use to this cash. In the United States, however, the issue is related to double taxation of dividends: when a company generates a dollar in profit, it taxes 36% at the federal level. In addition, once profit is distributed as a dividend, the shareholder is taxed once more, causing more than half of that dollar generated to end up in the hands of the government. In that respect, we expect some kind of tax reform in the United States to improve the distribution between government and investors, although we don’t believe that double taxation will be eliminated.”

If you evaluate geographic regions in detail, there are higher dividend yields outside the United States, particularly in the United Kingdom, where there is a strong dividend payment culture and no double taxation on dividends. Generally speaking, a high dividend yield is offered in Europe, as there are more quality companies controlled by a family group, which demand the payment of dividends as part of their remuneration.

According to Thornburg, by sectors, there are attractive opportunities in the telecommunications sector, which is why the strategy allocates almost 20% of the portfolio to this sector. The exception is in telecommunications companies in Latin America, which have a lower dividend yield than in the rest of the regions. This is because Latin American companies are currently building their network systems, which requires high cash flows and limits their ability to distribute dividends.

Another sector with high exposure in the portfolio is the financial sector. Except in the United States, the dividend yield of the financial sector is far superior to that of other sectors due to its dividend payment policies. However, they expect that the capital requirements policies demanded of the US banks will change and allow an increase in the distribution of their profits as dividends.

Finally, Thornburg sources point out that it is quite common for the PE and forward PE multiples of the portfolio to be two or three decimal points cheaper than the market as a whole.

As regards fixed income, the fund takes advantage of the flexibility provided by the mandate to reinforce dividend yield with the coupons received by the corporate and hybrid debt instruments in which the portfolio invests. The strategy, with a benchmark index of 25% of the Bloomberg Barclays Aggregate Bond index and 75% of the MSCI World index, currently has a fixed income allocation of less than 10% (As of 5/31/17) because, according to Thornburg’s managers, prices in the fixed income market are manipulated by the effect of central bank actions. They expect this situation to continue until there is a clear change in trend; and they will strive to increase their debt position only when this adjustment will benefit shareholders.

MFS Investment Management: “We’re Going Through an Unprecedented Period, Markets Are Becoming More Efficient, but Much More Complex”

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The 2017 MFS Annual Global Analyst and Portfolio Manager Forum was held from the 15^th to the 17^th of May in Boston, where the international asset management company, MFS Investment Management, is headquartered. The event was attended by professionals from the wealth management industry and fund analysts from the Offshore and Latin American markets, to meet with the firm’s investment teams and product specialists.

Lina Medeiros, President of MFS International Ltd., was responsible for welcoming over 145 attendees, mostly from Argentina, Chile, Uruguay Brazil and US, who participated in the event. During her speech, she pointed out the company’s pioneering nature in the asset management industry, a track record spanning over 90 years, and that the company remains committed to offering portfolios with strong risk-adjusted returns, low turnover, and high active share.

Medeiros then stressed the long-term nature of MFS’ strategies and the firm’s values: teamwork, constant evolution in the search for long-term solutions for clients, and an absolute commitment to its fiduciary responsibility. She spoke of the firm’s ethos, which is “always doing the right thing for the client” with the greatest dedication possible, and reminded the attendees that the MFS team loves what it does: “We believe that what we do is to help people. Having clients who trust us to manage their wealth is a huge responsibility, and that generates a deep satisfaction that inspires us to remain firm in our convictions.”
It is due to this work ethic, in part, that more than 90% of the firm’s investment vehicles, the MFS Meridian Funds, are in the first half of their respective Morningstar categories over 5 and 10 years as of 31 March 2017. In addition, approximately 70% of the funds rank in the first quartile against their Morningstar peers over 10 years.

A Diversified Business

MFS has more than US$ 450 billion in assets under management. Medeiros presented this figure and defended a solid business model, with capacity to continue leading investment partner of choice in the future due to the firm’s diversified approach across three different dimensions: by channel, by style and by region. MFS institutional business represents about 68% of client assets, with the remaining 32% in retail client accounts. In addition, at the product level, the company offers broad classification by asset class, with its thorough knowledge in different equity disciplines as well as its renewed focus to broaden and deepen its capabilities in fixed income. Finally, at the geographical level, 77% of the business comes from the Americas region, a fact that should not be surprising given the US origin of the firm, strong US-Canada commercial ties, and more than 25 years of presence in Latin America. However, MFS is also devoting considerable resources to grow inEurope and Asia, which they hope will be noticeable in the coming years.

Which Issues are Investors Losing Sleep Over?

Prior to the conferences which followed, Ms. Medeiros presented the results of a study carried out by MFS at the end of last year. In this survey, more than 800 financial advisors and 450 professional buyers were asked which were their main concerns over the next 12 months. For these investors, geopolitical tensions and instability are as relevant as market-driven issues. Another one of the conclusions emerging from this study is that, as far as investment factors are concerned, for clients, the return on a product is just as important as how that return is achieved, showing that the qualitative aspects of the investment process are noteworthy.

Medeiros concluded her remarks by pointing out, that even for long-tenured investment industry professionals, this is an unprecedented period. She stressed that investors should become accustomed to lower-than-expected returns, given the US interest rate environment: “Financial markets, despite being more efficient, are becoming increasingly complex.”

An Overview of the Event’s Agenda

Taking a closer look at MFS Investment Management’s capabilities, Michael Roberge, CEO, President and CIO, reviewed the key differentiating elements of its approach: the search for opportunities through active management, a long-term investment horizon, and risk management .
Later, during the talk entitled “Disruptions, dichotomies, and destinations,” Erik Weisman, the firm’s chief economist, gave his views on the disruptive nature of technology and innovations derived from “Big Data”, as well as the effects they may have on the global economy and on the investment environment.

Following this line of discussion, four equity analysts from the technology and capital goods teams presented the implications of the changes that are occurring in the automotive industry: the vehicle of the future will be autonomous, electric, shared, and connected to a network.

The event also looked at the impact of recent regulatory changes in the financial services industry. Martin Wolin, Chief Compliance Officer, together with a panel of professionals, reviewed the main regulatory developments in the United States and Europe, focusing on the OECD CRS regulations, the MiFID II directive and money laundering prevention policies.

To analyze the global geopolitical situation in detail, MFS invited Alexander Kazan, Managing Director of Global Strategy for the Eurasia Group, who reviewed the economic and political dynamics of the global scene, including China, Russia and the Middle East.

With a focus on the US and other developed markets, James Swanson, Chief Investment Strategist, conveyed his concern about the disconnect between market sentiment and key economic data. Meanwhile, Bill Adams, CIO of the Global Fixed-Income Department, detailed the management company’s ability to find value in credit markets worldwide.

These presentations were accompanied by a series of breakout sessions on the range of MFS products, with the participation of its European, US, and Global equity management teams, as well as the teams from the global fixed income department, including emerging markets, and investment grade corporate debt.

Closing the conference, José Corena, Managing Director for the Americas, reviewed the main topics discussed during the event and thanked the attendees for their presence.

Disappointment in Argentina After Not Recovering Emerging Market Status, While China’s Inclusion is Poised to Redefine EM Investing

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MSCI mantiene a Argentina como “mercado frontera” — Photo: Danielsantiago9128. Disappointment in Argentina After Not Recovering Emerging Market Status, While China's Inclusion is Poised to Redefine EM Investing

MSCI Argentina Index will not be reclassified to Emerging Markets status, at least until 2018, as investors expressed concerns that the recently implemented market accessibility improvements, including the removal of capital controls and FX restrictions, needed to remain in place for a longer time period to be deemed irreversible.

MSCI said in a press release that “although the Argentinian equity market meets most of the accessibility criteria for Emerging Markets, the irreversibility of the relatively recent changes still remains to be assessed.”

This decision hurt the Argentinean stock exchange and forex position. Argentine stocks also receded on Wall Street, state oil company YPF was particularly affected. According to Jonatan Kon Oppel, Director at Inversiones y Gestión “the decision to keep Argentina under review as an emerging market makes it clear that while the country managed to make important changes in economic policy, the sustainability of these changes is so important As the policies themselves.” The analyst added that “there is little time left for the elections and the government still lacks seats in Congress to make the structural changes it needs.”

In the Meantime, the MSCI approval of China A-shares inclusion in their benchmark Emerging Markets and ACWI indices is likely to redefine the way investors invest in emerging markets. Howie Li, CEO, Canvas at ETF Securities, one of the world’s leading, independent providers of Exchange Traded Products (ETPs), mentioned that the investment landscape for emerging markets is now confirmed to change with the inclusion of China A-shares into MSCI’s Emerging Market benchmark, given demand for domestic Chinese equities is likely to increase.

Analysts at Allianz GI expect around USD 20bn of inflows as a result of this index change. “This is less than half a day’s trading volume on China A share markets. The longer-term implications are probably more significant, as this USD 7 trillion market cap opportunity becomes increasingly accessible to global investors. Inclusion in widely-followed global indexes means that an investment in China A shares moves from off-benchmark (and therefore can be easily ignored) to an active asset allocation decision. As the weight in indexes increases over time – as has been the experience in other emerging markets – then increasingly China A shares are likely to become too big to ignore for much longer.”

Investec: “With a Multi-Asset Strategy, the Investor Perceives Greater Protection”

| For Beatriz Zúñiga | 0 Comentarios

Investec: “Con una estrategia multiactivo, el inversor percibe que está más protegido” — Foto cedidaJustin Simler, Investment Director at Investec / Courtesy photo. Investec: “With a Multi-Asset Strategy, the Investor Perceives Greater Protection”

Multi-asset strategies continue to gain weight in response to the current market environment. For Justin Simler, Investment Director at Investec, “it has become a reality everywhere, and the reason it is commonly demanded by investors is because it offers greater profitability, taking into account the relationship between the risk assumed and the return on investment.”

Simler speaks from his experience as Investment Director with the Multi-asset team at Investec Asset Management and, therefore, responsible for the management of processes and products throughout the range. “Investing in single assets forces you to follow a single market and is an attractive option, but what happened in 2008 remains fresh in the memory of many investors. With a multi-asset strategy, however, the investor perceives protection,” he points out.

As an example of this, Simler cites the Investec Global Multi-asset Income fund, which is marketed in Spain by Capital Strategies. It is a flexible fund with a maximum in equities of 50% per prospectus, but which has never surpassed 34%. It can invest in government or corporate bonds, as well as in all countries, but maintaining a minimum of 35% in countries within the European Economic Area.

“The focus of our multi-asset strategy is different from other strategies of this type. When selecting the assets, we take into account the fundamentals, as well as their valuation and the behavior of their price in the market. And when we build the portfolio, we establish an optimal mix between growth, defensive and uncorrelated assets, with the goal of earning attractive long-term income,” Simler says about the fund.

In this respect, the three key drivers of Investec’s strategy are: “a resilient portfolio built from the bottom up, structurally diversified and actively managed, and limiting downside risks,” he adds. In growth type assets, the fund considers corporate stocks, high yield, emerging market debt and private equity, amongst others; While among defensive assets it takes positions in government bonds, investment grade bonds and indexed bonds. Regarding the search for uncorrelated assets, it focuses on sectors such as infrastructures, insurance and assets of relative value.

As Simler points out, the three investment areas that they consider are: United States, Europe, and Emerging Markets. “In equities, we are moving away from the United States, although we remain in certain sectors like the technological one, which has allowed us to make a lot of money. Even though it’s not a matter of choosing between American or European equities but rather of being very selective with the securities chosen and the exposure that is taken. In general, we believe that we must take advantage of European fragmentation to keep the best assets,” he says. The political uncertainty experienced in Europe has also made him cautious, focusing his portfolio on emerging markets and Asia.

Within emerging markets, Brazil and Australia are the countries he places the greatest emphasis on. “For example, in Brazil, government-backed bonds offer a good quality option,” he cites as an example.

Economic Environment

Although political instability seems to have calmed down and global growth continues, Simler believes we still shouldn’t let our guard down. He is particularly concerned about the probability of recession and watchful of any economic signals pointing to that possibility.

“We are in an environment where there is growth in the United States, Europe and the emerging countries. For now, we believe it is unlikely that there could be a recession in the short-term. However, there are certain risks that are beginning to grow. And of course, the political risks around the Euro zone, in particular the Italian elections and the growth of that anti-European sentiment,” he says.

ETF Usage is Accelerating in Latin America

| For Gabriela Huerta | 0 Comentarios

Although exchange-traded funds are a relatively recent addition to institutional investing in Latin America, ETFs are quickly taking on an important role in institutions’ portfolio management toolkits. Based on the results of interviews with 50 Latin American institutions and trends among institutions in markets with a longer history of ETF investment, Greenwich Associates expects that process of integration to continue and even accelerate in Latin America.

The study finds that, like their counterparts in other regions, most Latin American institutions are starting out with relatively small allocations to ETFs, mainly in equity portfolios. “Through these initial investments, institutions are discovering the efficiency and versatility ETFs can bring to their investment portfolios. As they do so, they are expanding their use of ETFs to fixed income and other asset classes, as well as to a growing range of portfolio applications”. Institutions in Latin America are introducing ETFs to their portfolios first and foremost as a means of obtaining long-term strategic investment exposures and diversifying portfolios. They are then extending ETFs to a host of additional applications, ranging from tactical adjustments and portfolio completion to enhancing portfolio liquidity.

Latin American institutions that use ETFs now invest an average of 7.6% of total assets in them, with allocations poised for growth in 2017. Of Latin American institutions currently investing in equity ETFs, 68% expect to increase allocations next year, with 64% planning increases of more than 10%. More than two-thirds of Latin American institutions currently investing in fixed-income ETFs plan to increase allocations in the next year. Greenwich Associates expects ETF growth rates to accelerate in 2017 and beyond due to several ongoing and emerging trends:

Institutions around the world are experimenting with new and innovative ETF fund structures to help them manage mounting levels of volatility and other challenges facing their portfolios. In Latin America, more than 50% of institutional ETF investors invest in smart beta ETFs, and half of these users plan to increase allocations to them in the next 12 months. Demand appears strongest for smart beta ETFs that generate income and help institutions manage volatility.
Current impediments to investment will give way as Latin American institutions gain experience with ETFs. Factors such as limited availability of ETFs, internal investment guidelines that limit or prohibit use, and concerns about ETF liquidity and expenses have initially slowed the adoption of ETFs in other markets. All of these factors have eased over time as institutions saw early adopters using them safely and effectively.
Institutions will continue integrating ETFs into the mix of investment vehicles they employ in their portfolios, alongside and as replacements for derivatives and other products. Nearly 60% of institutions that use derivatives have diversified their mix of investment vehicles in the past year by replacing an existing futures position with an ETF—mainly for operational simplicity and reducing costs. Looking ahead, 42% of ETF users plan to evaluate existing futures positions in both equity and fixed income for potential replacement.
Institutional demand for ETFs in Latin America will get a boost from the continued proliferation of multi-asset funds. Following a global trend, approximately 40% of Latin American asset managers that invest in ETFs are using them in multi-asset funds and are investing 14% of total assets in ETFs. As Latin American managers launch multi-asset funds, Greenwich Associates expects ETF allocations within those funds to increase.
UCITS ETFs will provide new opportunities for investment. Latin American investors are beginning to initiate their first UCITS trades and are pleasantly surprised by their benefits, including tax and operational efficiencies. As institutions become more familiar with ETFs and seek new ways to employ them, UCITS ETFs will become a significantly larger part of the Latin American investment universe.

“We are About to Witness a Record-Breaking Expansion Cycle in the United States”

| For Alicia Miguel | 0 Comentarios

"Estamos a punto de asistir a un récord de ciclo expansivo en los Estados Unidos” — Foto cedidaDavid Bianco, Chief Investment Strategist para las Américas de Deutsche Asset Management. Foto cedida. “We are About to Witness a Record-Breaking Expansion Cycle in the United States”

After more than 150 days of the Trump administration, David Bianco, Chief Investment Strategist for the Americas at Deutsche Asset Management, during this interview with Funds Society, explains his perspectives on the markets, particularly on the American investor, with an optimistic look at the expansion cycle in this region.

The expert denies that stock markets are over-priced, due to the current level of interest rates, and he is confident of rises in the S&P 500 this year, especially in sectors such as technology, healthcare, and big banks. Trump’s tax reform should be a catalyst for US companies and not providing too many negative shocks, explains Bianco in this interview.

Broadly speaking, what major concerns are there currently in the US market?

What we have been discussing with other investors is that, rather than worrying about whether the market will rise by 3% or by only 1%, we should pay more attention to the expansion cycle. We are about to witness a record-breaking expansion cycle in the United States: the record until now was 10 years, from 1991 to 2001. If the cycle goes beyond the summer of 2019, we will be facing a new expansion cycle record. Forecasting is difficult, but I believe it will continue – and without recession – until at least 2020, and we could see a 12 year record of increases in the United States.

Do you believe that American stocks are overvalued?

It’s evident that we have high P/E Ratios in relation to historical values. The P/E Ratio according to last year’s profits has been 19.5 and the estimated P/E Ratio will be 18 or 18.5. Thus, the S & P 500 index has a 20% premium over its historical valuation, since in 1960 we had a P/E Ratio of 16x, reason why many consider the market is expensive based on historical standards.

But I believe it is justified, because interest rates are very low compared to historical rates and therefore stocks are still cheap when compared to interest rates and bonds. In my opinion, interest rates are the key when estimating whether the P/E Ratios are expensive or have upside: we have been expanding for eight years and interest rates remain very low in historical terms, and they remain low for structural reasons, not because the economy is weak. Thus, we are facing a secular decline in interest rates structurally that would justify these P/E Ratios.

I think interest rates will rise somewhat, but not much. I think the Federal Funds interest rate is going to rise to 2% by the end of 2018 and that the yield on the 10-year Treasury bonds will not exceed 3% during the remainder of the cycle.

What is your price target for the S&P 500?

My year-end price target for the S&P 500 is 2,400 points, but if the tax reform announced by the Trump administration takes place, I think the index could surpass 2,450 points. If it doesn’t end up happening, we would be at levels of 2,350.

What type of economic reforms do you think the Trump administration will be able to carry out?

The most important reform for the economy and markets is the corporate tax reform; I do not think they will implement the border adjustment tax. Republicans will be in haste and would want to carry out something simple and significant, and one of the most effective and simple economic measures is to lower the tax on businesses, something that the United States can afford, since tax collection through this tax is not so high and would be good for the economy, helping to consolidate the longevity of the expansion.

Who do you think would benefit more, small and medium-sized enterprises or large corporations?

The measure will consist of reducing the corporate tax rate from the current 35% to 25% with very few additional changes to the tax code. On the one hand, it would benefit small companies that are currently structured as “partnerships”, “S class companies” or “pass-through entities” that are paying tax on their profits, which, if they are doing well, would normally be around 40 % or the top marginal personal income tax rate. If we have the 25% corporate tax rate they will choose to organize as “C class” companies, and if they decide to reinvest their profits in growth and not pay dividends, they would then be deferring any dividend tax for many years and only be paying 25% tax vs near 40% now. But big companies would also benefit from this economic reform.

In what sectors do you think we will see growth during the next few years?

The sectors that have been behaving well, and which we are following, are technology and health, with technology performing particularly well, and I think they will continue to grow during the next three years. We also like big banks in both the United States and Europe.

Although many investors think more in terms of regions, I prefer to follow sectors and styles with the developed equity markets. In this respect, within “growth” securities in the United States we prefer technology and health, since there is almost no technology in Europe and health companies are cheaper in the United States than in Europe. And in Europe we like “value” stocks.

Where we are underinvested is in energy in the United States. We believe that oil must be above $ 60 in 2018 so that securities in the energy sector fairly priced where they trade today, and we think it will be difficult to see oil prices at those levels.

What about currencies?

I believe that currencies will be more stable than they have been in recent times, both the currencies of major countries and those of emerging countries. After all, currency stability opens the door to investing in other regions.

We believe that the Fed will raise interest rates twice more this year and probably two to three times more next year, and as this happens, my vision is that the Yen and the Euro will weaken somewhat. I think the Euro will be more between 1.05 and 1.10 dollars than above 1.10.

China could be interested in a slightly weaker currency in order to make its exports more attractive, but they will try to control it, since they don’t want an exodus of capital to other economies in the region.

Finally, do you consider that relations between China and the United States are going to be more hostile than in the past?

This government wants to implement a trade policy that is more active than what we have seen in recent times, with bilateral, reciprocal agreements, in which they will analyze case by case with each country to try to find opportunities to improve the trade balance. As I said earlier, I do not believe that a border adjustment tax, which is so feared for China, Mexico or Canada, will be approved.

I know that this government is very aggressive in its negotiations, but I think that what they are trying to do is to find situations with most countries where both parties win. For example, trying to have the industrial property of American products respected in exchange for not hindering imports. As long as the border adjustment tax is not passed, I am optimistic about the Trump administration, perhaps I am the only one who is.

That said, I believe that the friction between China and the US is going to be currency, rather than trade policy. It seems that the Trump administration has finally come to the conclusion that China is not manipulating the currency. Rather if they have done something, it has been to support their currency for the past two years instead of trying to make it weaker.

I think a lot of tension has been released between China and the US, and that’s why we probably hear more about tensions with Mexico or Canada. From my point of view, the relationship between China and the US is very harmonious. Another thing is the geopolitical influence, in which we are experiencing a natural transition, in which China will gradually gain influence in Asia, where the United States traditionally had it. But the business relationship with China is very important.