‎Aberdeen: “Diversification Across Funds Should Mitigate Market Falls”

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“La diversificación debería mitigar en gran medida las caídas del mercado”
Foto cedidaSimon Fox, ‎Senior Investment Specialist at ‎Aberdeen Standard Investments, courtesy photo. ‎Aberdeen: “Diversification Across Funds Should Mitigate Market Falls"

Investors have to deal with both short-term volatility and downfalls risks. For Simon Fox, ‎Senior Investment Specialist at ‎Aberdeen Standard Investments, the adequate way to deal with this is to better diversify your portfolio. As he explains in this interview with Funds Society, at a difficult time for traditional fixed and variable income, he finds the most compelling opportunities through a range of diversifying assets, such as emerging market debt in local currency, investment in infrastructure and asset backed securities.

What does provide an ‘alternative’ approach to markets? Is it about looking for new sources of alpha or is it about protecting against risks?

Multi asset investing has evolved considerably since the Global Financial Crisis. Today’s investors are looking for a more explicit focus on their own objectives – such as a cash or RPI+ return; or maybe a consistent level of income.  In the past a simple blend of stocks and bonds may have delivered decent returns, but not without significant volatility.  Looking forward, historically low bond yields and challenging equity markets mean that even the returns achieved in the past look unlikely to be delivered in the future.

To address these challenges, we believe that investors should further diversify their portfolios.  In particular, there are, today, a broader array of asset classes available and accessible to investors via UCITS regulated investment structures.  Our Diversified Asset team seeks out fundamentally attractive long-term investments across listed equities, private equity, property, infrastructure, high yield bonds, loans, emerging market debt, asset backed securities, alternative risk premia, insurance linked securities, litigation finance, peer-to-peer lending, aircraft leasing, healthcare royalties and other asset classes.

Combining these asset classes in a diversified portfolio results in the attractive returns coming through in a much more consistent fashion than any one asset class in isolation.  This approach is very transparent and does not rely on complex derivatives trades or our ability to trade in and out of markets over short-term horizons. This makes the approach easy to understand and robust to differing market conditions.

What are the main risks that you currently appreciate and how could alternative strategies help to mitigate them?

Investors have to contend with both the risk of short-term volatility and also the risk of failing to generate the growth (or income) that they need over the longer-term.

We believe that the right foundation for dealing with both of these is to better diversify the portfolio.  As we have seen over the last few years, equity markets can, and do, suffer large drawdowns over short time periods – notably in the summer of 2015 and the start of 2016.  By being more diversified, our multi-asset funds have experienced much smaller drawdowns through these periods; as such, they have also been able to compound positively as the markets have recovered.

And talking on risk, we could mention the low rates risk… do you see a bubble in fixed income? And could this bubble burst in some markets? How do you manage this risk in the funds? – Central Banks: what do you expect from Fed? Which will be the next steps of ECB? How do you manage all this issues in your portfolios?

When building our portfolios we make use of sophisticated optimization techniques and other quantitative modelling; but we also believe that it is important to consider the possible future risk scenarios that risk models won’t capture. Most recently we have assessed the possible impact of a North Korea/US conflict, a global pandemic and secular stagnation – as well as a rout in bond markets.  While we regard it as a very low probability, there is nonetheless a risk that the US Fed is forced to raise interest rates rapidly over the next 12 months to deal with inflationary pressures and the prospect of a substantial fiscal stimulus.  This scenario would see Treasury yields spike higher and equity markets fall.  While our multi-asset funds would likely be down in this scenario, we would expect them to provide significant protection relative to a more traditional balanced portfolio. 

Often this exercise throws up a call for some portfolio protection (put options, gold, etc) as minds become overly focused on the worst-case scenarios. However we remain of the view that the diversification across the funds should mitigate market falls to a large degree and that portfolio protection strategies are typically not cost effective. The recent reduction in equities is an example of our more preferred route to risk reduction especially when stretched equity valuations make the risk-reward trade-off less attractive.   We currently have no exposure to traditional fixed income – either government bonds or investment grade credit.

Brexit: Which risks do you appreciate related to this process? Do you place the portfolios at a specific way in the run-up of Brexit?

At the start of 2016 – ahead of the UK referendum – we modelled a Brexit impact in our scenario analysis.  In practice, the diversified and global nature of our portfolios, as well as share class specific currency hedging, meant that Brexit had little impact on our portfolios. 

About Multi-Asset spectrum: in which segment do you see more opportunities of returns: in risk assets or in those assets with lesser risk?

Our asset allocation is derived from a longer-term outlook than many multi-asset funds, with a 5 year view of risk and return the main driver of our positioning.  The chart below shows our current outlook for various asset classes.  It highlights that traditional bonds – investment grade credit and government bonds – offer limited return potential (and, in some scenarios, limited diversification benefit).  Equities still offer a premium over risk free assets, but this has narrowed over the last 6 months, notably in the US where valuations looked stretched on a range of measures.  As such, we find the most compelling opportunities across a range of diversifying assets.  This includes local currency emerging market debt (benefitting from good yields and strong fundamentals); infrastructure investments (which we can access through REIT-like investment trust structures); and asset backed securities. 
 

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Taking into account the environment of markets: do you consider necessary to reduce the expectation of returns or is still possible to obtain good returns with an alternative and multi-asset approach?

As can be seen from the chart above, our 5-year view is that traditional assets will under-perform relative to history.  However, by being able to diversify the portfolio across a broader array of asset classes, we continue to believe that we can meet our long-term return targets for our funds while maintaining a volatility well below that of equity.  Since inception our growth strategy has outperformed its Cash+4.5%pa return target, net of institutional fees, with a volatility of c.4.5%pa.  Our ability to access a range of compelling opportunities stems from our ability to identify and access a broad range of asset classes in a liquid form. This is driven by the breadth and depth of resources we have across a range of investment specialisms.

Could you give us some examples of investments you currently hold in the portfolio? I mean some bets on relative value, for instance.

Within social infrastructure we have taken a couple of new positions recent months – adding Bilfinger Berger Global Infrastructure (BBGI) and International Public Partnerships limited (INPP).  Both INPP and BBGI provide exposure to a large portfolio of Public Private Partnerships/Private Finance Initiative projects across the UK, continental Europe, Canada, Australia and the USA. These provide attractive, government-backed and largely inflation-linked long-term cash flows.

Within our special opportunities sleeve we have also made a new allocation BioPharma Credit.  This holding provides exposure to a diversified portfolio of debt backed by the assets or royalties of biotechnology firms.  Benefitting from the premium associated with specialist lending, Pharmakon Advisors are targeting an 8-9%pa return from a portfolio offering significantly different return drivers to other exposures in our Funds. 

Carstens Says Mexican Pension Funds Could Learn From Behavioral Economics

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Los fondos de pensiones podrían aprender de la economía del comportamiento, según Carstens
Pixabay CC0 Public DomainCarlos Noriega and Agustín Carstens at AforeMX. Carstens Says Mexican Pension Funds Could Learn From Behavioral Economics

Celebrating the 20th anniversary of the Mexican Pension funds, the Afores, Mexican financial authorities, OECD and IDB representatives along with international experts, specialists, academics and investors met in Mexico City for the Second Afores National Convention and the 15th FIAP international seminar.

In the event, Carlos Ramírez Fuentes, president of the Mexican Pension system regulator, Consar, said that this year has been of significant capital gains and a good level of collection, but that the discussion on commissions for 2018 is expected to be “complicated”. The participants also recognized that the contribution rate of Mexican workers is one of the lowest in the OECD.

In his speech, the Bank of Mexico’s Governor, Agustín Carstens, commented on “the virtuous circle that is produced thanks to the synergies that have been generated by the reform of the pension system and the autonomy of the Bank of Mexico, with its consequent impact on the savings in our country,” but he noted that the system faces enormous challenges that must be addressed in a coordinated manner. “The current pension system has a low coverage, to the first quarter of 2016 the contributors to social security in Mexico represented only 27% of the population of working age, which places our country below countries like Chile ( 40%), Costa Rica (41), Panama (47) and Uruguay (65),” he said.

Robert Kapito, president of BlackRock, said that Latin America offers investment opportunities because it has a large percentage of workers compared to the general population, but stresses the need to improve its performance and savings capacity, following the example of emerging Asia. In his opinion, this can be achieved through an improvement in financial education, an increase in women in the workforce, adjustments to policies and regulations, as well as an evolution of investment solutions. “Definitely if people in Latin America know more about their finances and their future financial needs, that would help economic growth,” he said.

Meanwhile, Guillermo Arthur, president of FIAP, warned that short-term solutions should not be sought in Mexico, since doing so could lead the country to face a crisis like the one currently experienced in Chile. While the Undersecretary of finance SHCP, Vanessa Rubio, said that “we must think of an increase to mandatory contributions, in voluntary contributions, in the possibility of giving incentives for this, and in perhaps gradually increasing the retirement age. ” However, Carstens stressed that “while establishing an increase in mandatory contributions could be reasonable, (…) this measure alone could generate incentives that would favor informal employment”, proposing the use of schemes such as 2017 Nobel Prize winner, Richard Thaler’s nudges, to automatically enroll workers in voluntary savings schemes. The central banker concluded that although there are still important challenges, he is convinced that “with the will and commitment of the institutions, the authorities and the employer and union sector, the necessary measures will be implemented for the benefit of the workers and the country as a whole. “

Why We Are In The Silver Era For Hedge Fund Strategies

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Por qué estamos en la era de la plata para las estrategias de hedge funds
CC-BY-SA-2.0, FlickrPhoto: Eric Golub . Why We Are In The Silver Era For Hedge Fund Strategies

Three years ago K2 Advisors, part of Franklin Templeton Investments, launched its first UCITS Liquid Alternatives fund, the Franklin K2 Alternatives Strategies Fund. At the time, some would have argued that the macroeconomic conditions were not favorable for certain hedge-fund strategies. While they haven’t for a number of years, but now this may be changing.

Monetary policy looks to be shifting in some countries, currencies are becoming more volatile and geopolitical risks have intensified of late.

“We think these fundamental elements could drive alpha opportunities for skilled hedge fund managers to capture. Many think that hedge-fund strategies are super-charged and high-octane. We would argue hedge-fund strategies are actually meant to be dull, with low volatility. But hedge-fund strategies can also provide diversification and long-term capital growth potential.” Says Brooks Ritchey, Senior Managing Director, Head of Portfolio Construction, K2 Advisors.

His team believes that low interest rates are often an overlooked factor in regard to hedge-fund strategy performance. Now, as US interest rates are making slow but steady strides upward from historic lows, they think certain hedge-fund strategies may be finding new opportunities to show their mettle.

“If the US Federal Reserve (Fed) continues to raise interest rates this year and next, we think it could cultivate an environment for certain hedge-fund strategies’ to flourish. Rising interest rates have historically been associated with lower cross asset correlations, creating more alpha opportunities for hedge funds,” adds Ritchey.

 

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Additionally, K2 Advisors reminds us that rising interest rates have typically led to future periods of above average alpha, as represented by the Hedge Fund Research Index Fund Weighted Composite Index (HFRIFWI).

The illustration below shows a positive correlation between alpha and interest rates. The average level of alpha rose to the highest level at 14.07% during the measured period, where the US 10-year Treasury yield stood at 7.05%. Based on what we’ve seen in the past, they think hedge-fund managers could have the opportunity to capture that alpha, or outperformance, as US interest rates continue to rise.

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For Ritchey, global geopolitical risk is another element that should drive a change in the landscape for hedge-fund strategies. On the back of recent geopolitical tensions, major currency spreads have widened, and historically wider spreads have benefitted hedged strategies’ alpha. “This is particularly noticeable within the Group of Seven (G7) economies, since they coordinate and attempt to manage major exchange rates in a way that leaves their currencies closely linked. As a result, we might not yet be in the golden era for hedge-fund strategies—the most-ideal environment for managers to capture alpha—but we could be approaching the silver era, where favourable opportunities are starting to appear.” He notes.

Allocating Toward Market Themes

Not all hedge strategies will fair equally as conditions change. K2 Advisors expects that the event-driven hedge-fund space, for example, may face headwinds as central banks globally begin to normalize interest rates. Event-driven hedge funds often seek to profit from merger-and-acquisition (M&A) corporate activity, which, in their opinion, could be diminished as interest rates rise. Global macro strategies, however, may benefit from rising rates. The global- macro space has seen an increase in trading volume over the last two months, and the firm anticipates this trend will continue.

“We’ve seen evidence that the current market landscape could become a nurturing environment for certain hedge-fund strategies, but we’re only just at the beginning and believe more opportunities could crop up during this silver era.” He concludes.

Michael Roberge: “If Berkshire Hathaway Were a Mutual Fund, Warren Buffet Would Have Been Fired as a Manager”

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Investors are at a crossroad. To be able to obtain the same level of returns as in the past and achieve their investment goals, they must take on roughly three times more risk than that of two decades ago. During the 2017 MFS European Investment Forum in London, Michael Roberge, CEO, President, and CIO of MFS Investments Management, emphasized the secular and cyclical difficulties facing investors and the importance of choosing active managers who are both committed to investing with a long-term time horizon and have conviction in their portfolios.

Secular challenges

Following the Global Financial Crisis, the prolonged approach of central banks around the world was to try to stabilize the economy by keeping rates low. This approach has resulted in extremely low interest rates persisting, with some countries even dipping into negative yields. These low interest rate levels have completely changed the investment environment, helping to push both bonds and stocks to maximum valuation records. Many investors, including MFS are asking what will this environment lead to? While asset prices are expensive today, the lower-for-longer rate environment is likely to dampen returns for both equity and stock investors in future business cycles. With that backdrop, investors will be challenged to achieve their investment goals and we can expect to see many investors taking on greater risk to achieve the same historical return they would expect to achieve in a more normal environment. To illustrate the case, Michael Roberge mentioned a study by investment services consulting firm Callan Associates. The report shows that in 1995, in order to obtain an average return of 7.5% — which is the average yield that most pension plans expect to obtain in the long run – an investor would need to allocate approximately 73% to bonds and 27% to cash. The volatility of the portfolio, measured by its standard deviation, was around 6%, so that the investor was not really exposed to excess risk. In the following decade, the deterioration of interest rates has meant that, to achieve the same return of 7.5%, new asset classes must be introduced. Investors have to expand the allocation beyond the fixed income and cash instruments, needing instead to add riskier exposure to equities and alternative assets, for example. The new portfolio would now need to invest 52% in fixed income, 40% in equities and 9% in alternative assets, including exposure to private equity and real estate. This results in a more complex portfolio which incurs greater risk, with a volatility of 8.9%, representing a 50% increase relative to the portfolio of the previous decade. Moving forward another 10 years, in 2015, following the Global Financial Crisis and a dramatic drop in interest rates, central banks significantly increased their balance sheets with quantitative easing measures. To achieve the same return of 7.5%, the portfolio now would need to invest 12% in fixed income, 63% in equities, and 25% in non-traditional assets. Given the complexity of this portfolio, the risk rises up to 17.2%, tripling the risk level of 20 years ago. “This explains the current stress of investors globally, because they can see the potential for lower future returns as compared to those currently and in the past. Of course, they still have to meet their investment goals. The problem now is that they have to take greater risks to achieve them,” said Roberge.

Cyclical challenges

While the United States is experiencing its second longest economic cycle since World War II, it is impossible to predict how much longer this cycle can last. Obviously, you can say that the end is approaching, and investors should be starting to think about preserving capital instead of increasing their risk.
Global economies have performed relatively well. Inflation is still not a problem, and central banks remain relatively accommodative. This adds up to a favorable environment with low volatility. Investors have been forced to take greater risk, being compelled to participate in the equity market. This works “until it stops working.” Historically, when entering periods of low volatility, investors often show signs of market complacency, and according to Roberge, a surge in volatility and market pullback is probably not that far off. At present, investors are not discriminating between companies with positive results and companies with negative results, the cycle seems to have forgotten the possibility of the market incurring a correction.

The importance of the time horizon and conviction in the portfolios

MFS emphasizes the importance of understanding both time horizon and conviction, two factors which are often overlooked in this long business cycle. In a low volatility, low interest rate environment investors have been forced to take on greater risk across multiple asset classes, including less-liquid opportunities, like infrastructure and private equity to achieve returns.

First, the investment horizon must be determined within the market cycle, because that determines the managers’ evaluation criteria. The market cycle can be determined from either peak to peak or trough to trough.  In order to correctly assess a manager’s performance within an asset class, the complete investment cycle must be taken into account. However, despite the fact that 57% of institutional investors define a complete market cycle between 7 and 10 years, managers’ performance is usually measured within a range of 1 to 3 years. This is clearly a disconnect in the evaluation process of investment managers.“Studies carried out in this respect show that failure to give managers time to complete a cycle results in lost performance. Specifically, between 1% and 2% per year, a figure which may seem not very high, but which, given the current level of low interest rates, can be a problem for investors, especially when compounded over time. Now, given where we are in the cycle, is the ideal time to identify ways to preserve capital. It is an environment in which active management tends to perform better. In a market at such an advanced stage in the cycle, investors continue to pursue the market’s beta, when in fact they should be doing precisely the opposite”.

Returning once more to the issue of the importance of long-term investment, Roberge referred to Warren Buffet, who is considered by many to be the world’s best investor: “If we compare Berkshire Hathaway’s returns over the past 30 years against the S & P 500 Index, it can be seen that the firm which Buffet leads surpasses the market index by 600 basis points. However, if you look at different three-year periods, approximately 37% of the time his company trailed the market. If it had been a mutual fund, Warren Buffet would have been fired as manager. But being Warren Buffet, he’s allowed time to make good, long-term decisions and let them slowly materialize. As a consequence, the returns obtained at various 10-year periods exceed the S&P 500 Index in 95% of the time. Quite simply, time matters. It’s necessary to allow an investment manager’s conviction to deliver the alpha clients need to achieve their long-term financial goals.”

Principal To Acquire MetLife’s Pension Fund Management Business in Mexico

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Principal adquirirá MetLife Afore en México
Pixabay CC0 Public DomainJosé Antonio Llaneza, courtesy photo. Principal To Acquire MetLife’s Pension Fund Management Business in Mexico

Principal Financial Group has signed an agreement to acquire full ownership of MetLife Afore, MetLife’s pension fund management business in Mexico, subject to regulatory approval. After closing, Principal Afore will be the fifth largest pension provider in Mexico in terms of assets under management.

According to CONSAR, the Mexican regulator, the main differences in their portfolios are that Principal has a larger allocation to equities and structured instruments than Metlife, which favors fixed income.

“As the middle class in emerging markets continues to grow, there is increasing demand for long-term retirement and investing products that enable individuals to retire with the highest pension possible,” said Roberto Walker, president of Principal International in Latin America. “This acquisition strengthens our commitment to Mexico’s pension market.” Giving them “additional scale, a larger distribution network and the capacity to better support its customers in Mexico with innovative advice and customized tools that help them achieve their retirement goals.” 

Jose Antonio Llaneza, country head for Principal Mexico, added: “This acquisition demonstrates our continued commitment to invest in Mexico. Our focus remains on providing superior performance and counsel, while helping to educate people on the importance of increasing their contribution rate to their pension accounts.”

The purchase agreement between Principal and MetLife will be reviewed by Mexican regulatory authorities before closing, which is anticipated during the first quarter of 2018.

“The divestiture of MetLife Afore will allow us to enhance our focus on growing our leading insurance business in Mexico, where we are the number one provider of life insurance,” said Oscar Schmidt, executive vice president and head of MetLife’s Latin America region. “We are confident that Principal will provide our Afore clients in Mexico with access to quality resources and capabilities to help them achieve their retirement goals.”

BNP Paribas Securities Corp. and Credit Suisse Securities (USA) LLC served as financial advisors on the transaction to Principal and MetLife, respectively. White & Case LLP served as legal counsel for Principal and Nader, Hayaux y Goebel, S.C. for MetLife.

 

 
 

Ian Heslop (Old Mutual GI): “Our Strategies are Not a ‘Black Box’, but Rather a Very Transparent ‘Glass Box’

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During his presentation at the OMGI Global Markets Forum in Boston, and questioning conventional investment thinking, Ian Heslop, Head of Global Equities at Old Mutual Global Investors, explained the double difficulty of forecasting market behavior. It’s often quite easy to make a mistake when forecasting, but even when the outcome of an event has been forecasted successfully, guessing the market reaction is just as complex. “If someone had been able to foresee the Brexit result, they could have guessed the market’s behavior for about 7 days. If someone predicted that Donald Trump would be elected for president, they could have guessed market behavior for about 7 hours. As a team, we try not to forecast, especially as regards market reactions.”

Another important issue, according to Heslop, is that investors have lost confidence in active management. In the United States, only 27% of active managers are able to beat the S & P 500, the main reason is that many fund managers are not taking enough risks to beat the index: “Firstly, if investing in an active fund which is not taking sufficient active risk, but which charges active management fees, the return will be lower than the index. Secondly, the S & P500 index is also said to be a very efficient index, which it is, to a certain extent, but to attribute the lack of higher yields to the index’ efficiency is to greatly simplify the argument. The difficulty in consistently outperforming it is real enough, but I don’t think it’s based on the efficiency of the index itself. The third reason would be concentrating on a particular style. Active funds are often cyclical in nature. Sometimes it is the value style that gains the favor of the market, in others it is the growth style, or the quality, if the fund only takes into account a particular style of investment, it will not be letting compound interest act correctly, lagging behind the market at some stage.”
As a result, investors have turned their backs on active investment by investing more than US$ 1.4 trillion in US equity ETFs since 2007. “The main problem with indexed products is that investors think they are buying diversified exposure to the US equity market, when in fact the portfolio’s performance comes from 10 shares of the S & P 500. Partly, because these companies represent a significant part of the economy, but to a larger extent it’s due to flows. “

Helsop cited as examples those ETFs that invest in the 100 less volatile stocks of the S & P 500 index, the valuations of which, in terms of price to book value rates, have increased substantially, increasing from 2.37 times in 2013 to 3.59 times in 2017. Another trend is the purchase of equity ETFs with high dividends. Investors often do not take into account their exposure in terms of risks, and are unaware that they are actually buying risk of size, momentum, market sensitivity or beta. “It should be noted that some of the dislocations in the US equity market are directly dependent on the extensive use of ETFs by investors, both from the point of view of market capitalization and from the point of view of exposure of styles in the portfolio. Investors find it very attractive that a particular investment environment can work all of the time, but this is not the case.”

How do we solve the problem?

The market sentiment and perceived level of risk in the market are two factors that determine which type of values are going to perform better than the index. At the end of the first quarter of 2016, the markets were going through a scenario of high volatility with a very negative sentiment. With a macroeconomic scenario very different to that in 2008, the market reflected an environment with little appetite for risk, behaving in the same way, but for very different reasons. Looking at the market’s behavior during the third quarter of 2017, the markets’ scenario is of low volatility and high optimism, where risk appetite has increased. “The approach that active management must take in both scenarios is different, so obtaining results above the index is extremely difficult, being especially complicated if it aims to forecast the outcome of an event and the market’s behavior towards it, something which depends on the sentiment. However, if we try to locate which moment the market is at by measuring its evolution against the change and then adjusting the portfolio accordingly, we will be somewhat behind the market, but we maximize the time in which we have a signal located, being able to discard noise. On the negative side, if we see a very abrupt change over a very short time, it will take a while for the portfolio to adjust. For each period of rapid adjustment to a new state in the market, there are multiple periods of time in which there is no direction in the market, minimizing the loss in those moments.”

The investment and stock selection process

Old Mutual Global Investors’ global equity team uses five variables or themes to identify which type of company will achieve a good result at each moment in the cycle: a dynamic valuation that allows them to be alert at every moment of the cycle and to buy a certain style of investment, sustainable growth, which looks for opportunities within the market, analyst sentiment, which allows them to assess what happened in the company, the company’s management team, whose communications are used to control whether they are acting in the best shareholder interest, market dynamics, with which they try to understand the demand and supply of each stock.

“Our way of managing strategy is not a ‘black box’, but rather a very transparent and rigorous ‘glass box’. We invest and create portfolios in a very rigorous way. The investment process uses the five themes to have or not to have assets in the portfolio. We look at metrics for valuation, quality, growth, revenue, information, momentum, and trends, but what really sets us apart is that we are trying to understand the motives that make a stock perform well. There are environments in which the market is willing to buy stocks of a certain style: value, growth or quality, and if at that time you maintain exposure to that particular style in the portfolios, it will most likely add return to the portfolio”

Helsop also commented that what really matters to the management team is to know the elements that are influencing the market’s direction, something that is the key to understanding how the investors will behave. “We try to respond to the requirement that clients have for a different type of alpha, without forecasting or minimizing the amount of forecasts we use. In our alpha generation process we don’t consider a top-down macroeconomic analysis or a fundamental bottom-up analysis, but we mix all the factors and the result is a different approach that provides the opportunity to diversify”.

Funds under the same approach

With nearly 18 billion in assets under management, Old Mutual Global Investors’ equity team manages a number of different strategies; all of them with a high active share. The Old Mutual North American Equity fund strategy, the Old Mutual Global Equity Fund and the Old Mutual Global Equity Income fund are long-only strategies. The first one has about 200 securities in the portfolio and has been managed by Ian Heslop’s team since 2013. The second one has approximately 450 securities and the third has 500 securities and doesn’t invest in those classic names that pay a high dividend and that the rest of funds have in their portfolios. Lastly, the Old Mutual Global Equity Absolute Return strategy with over 650 names in the portfolio is market neutral, being a clear example of how the five factors combine to generate alpha in a different way from the rest of the market. This fund manages about 11 billion dollars in assets.

Investec AM Brought Together Over 130 Professionals from the United States and LatAm in Washington

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At the 10th annual Investec Global Insights held in Washington, Investec Asset Management brought together over 130 professionals from the investment industry, mostly from the United States and Latin America, at the Four Seasons Hotel. The event, which took place on the 19th and 20th of October, was attended by the firm’s leading managers and strategists, who shared with attendees their perspectives and positions in the portfolios.
Richard Garland, Managing Director of the Global Advisor division and Hendrik du Toit, CEO of Investec AM, were responsible for the welcoming to the event. Following them, Philip Saunders, Co-Head of the Multi-Asset Growth strategies, explained how to navigate mature bull markets, where both fixed income and equities are at maximum price levels.

Then came the turn to disclose where the opportunities in fixed income and currencies may be found, John Stopford Head of Multi-Asset Income, reminded the audience that despite the low interest rate environment in developed markets, emerging markets continue to offer a decent real profitability. In addition, a selected basket of emerging currencies shows relatively attractive levels.
Then, in a discussion moderated by Stopford himself, Jeff Boswell, Strategy Leader of Developed Markets Credit, Matthew Claeson, Latin American Debt Portfolio Manager, Peter Eerdmans, Co-Head for Emerging Market Fixed Income, and Abrie Pretorious, Quality Capability Portfolio Manager, discussed where to find sustainable sources of income for investors.

To concludethe morning presentations, strategist Michael Power explained the implications of the improvement in solar and wind energy efficiency on the fourth industrial revolution. During the afternoon meetings the attendees had the opportunity to meet with the management teams. Once these meetings were over, they enjoyed a gala dinner at the Warner Theater.

On the second day of the conference, Robert J O’Neill, the Navy Seal who shot Bin Laden, opened with a motivational talk on how to persevere in achieving goals. Following him, Aniket Shah, Program Leader of the Financing for Sustainable Development Initiative at the UNexplained the paradigm shift in an economy that shifts from focusing on theWest to looking to the East and where China takes the lead in global prominence

Emerging markets were the subject of the conferences’ third discussion. Participating in the discussion panel were Chris Freund, Head of SA Equity & Multi-Asset, Carina Güerisoli, Portfolio Manager for Latin America, Victoria Harling, Strategy Leader for Emerging Market Corporate Debt, and Asian Equity Portfolio Manager, Greg Kuhnert.

Lastly, Richard Garland moderated a fourth discussion which addressed the trends of the financial advisory business, participating in this panel were Shane Balkhan, CIO of Beaufort Investments in the UK, Gonzalo Cordova, CEO for LarrainVial in Latin America, Joshua Heimann, Head of WMA International Sales and Business Development for UBS International in the US, and Erich Lang, Executive Director, Head Fund Provider Management for Julius Baer in Switzerland.

How to navigate mature bull markets

In a bullish market environment which seems unstoppable, and with most assets at levels above their historical averages, Philip Saunders remarked that valuations by themselves are rarely the trigger for a sharp drop in the market, revealing that the trigger is usually, in 93% of cases, a significant increase in the cost of capital.

Although fundamentals are favorable and the leading indicators still show no signs of going into recession, Saunders advised taking a somewhat more cautious position, suggesting an increase in liquidity in the portfolios, greater structural diversification, and wider exposure to different sources of return beyond traditional asset classes.

Carrying out a structural diversification requires focusing on the behavior of the assets rather than on their classification. According to Saunders, each asset class can be attributed a growth characteristic if it reacts positively to an increase in risk appetite, a defensive characteristic if its returns are positive when expectations of economic growth decline, and a decorrelation characteristic if returns are not related to economic growth or corporate profits. “Mixing these three characteristics is when you get superior diversification and more consistent results. Selection is important in this type of diversification, we do not have exposure to all assets all the time,” said Saunders.

Regarding the positioning of their portfolio, within growth assets they have a preference for a selective exposure in equities, where, due to the corporate benefits and alpha potential, exposure to global equity markets is favored, with the exception of the US, and they balance the risk with a selection of defensive assets.

A Paradigm Shift: China’s global prominence

Beginning with an allusion to a recent cover of The Economist, which showed Xi Jinping as the most powerful man in the world, Aniket Shah, explained the main themes that are developing in China and how we should think about the side-effects that its development has on Asia and on the rest of the emergent economies. China continues to grow, at a lower rate of growth, but on a higher growth basis. Assuming that China continues to grow at an average rate of 6.5% and the US at an average rate of 2.5%, China’s gross domestic product will reach 22.8 trillion as of 2026, while the US would not reach that figure until 2030.

Although China often has a rather negative narrative, with an excess of debt and production capacity, its prominence is an issue which goes beyond the construction of large infrastructures. “A frequent error in analyzing China’s economy is to believe that its growth depends on the accumulation of physical capital that began in the 1990s, without realizing the importance of human capital; an investment that began in the late 50’s and 60’s, and which is now much more productive. In a recent analysis of the growth of the scientific research which is published in different parts of the world, it can be seen that, from 2003 to 2013, the US has gone from 26% to 18.2% of publications, while China has gone from 6% to 18%, reaching parity with the United States. “

China has set out to stop being a technological copy-cat country by investing heavily in R&D. “One of the most interesting initiatives being carried out by the Chinese government is the “Made in 2025” initiative. The idea, inspired by the German initiative “Industry 4.0”, is that China wants more prominence in the country’s production chains, and the figures are quite impressive, specifically, it seeks to make domestic content of the main components of production chains grow from 40% in 2020 to 70% in 2025 “.

The program aims to position itself as a pioneering country in the generation of new information technologies, in high-end machines and robots, in maritime equipment and highly technological ships, in rail transport, in new sources of energy and in energy saving vehicles, in new agricultural machinery, new materials, and in biopharmacy; all of which are critical industries for development within the next 30 years.

Another growth dimension in China that must be taken into account is geographical expansion. China has stepped up its efforts to expand its economic growth across the country, specifically in the western regions. The “one belt, one road” initiative, an attempt to rebuild the old silk route and the creation of a parallel maritime route, created in 2013 by the Chinese authorities, benefits from the enormous low-cost capital capacity of the Chinese economy.

In terms of renewable energy investment, China’s investment is above that of the US, the UK and France combined. In addition, it considers it a key industry when it comes to positioning its global prominence. Most importantly, China is making the necessary efforts to build an economy and society that can meet most of the challenges of the future.

In terms of world trade, China is the largest trading partner of 124 countries, while the US is the main trading partner of only 56 countries. Equity and debt financial markets are growing and gaining in depth. China has already outgrown the Japanese stock market, although it still lags behind the US and European markets, while its bond market is behind that of both the US and Japan.

Shah is therefore convinced that China’s role in the Asian region, and in the world, will only grow, despite the many challenges it faces: “China is becoming the leader in global innovation, in economy, in politics, in international diplomacy and in innovation,” he concluded.

MFS Investment Management: “It’s a Very Complex World for the Fixed Income Investor; a Passive Approach Doesn’t Make Sense”

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During the 2017 MFS European Investment Forum in London, Bill Adams, Global Fixed Income CIO for MFS Investment Management, explained the different structural reasons why the Boston-based global investment management firm argues that the low interest rate environment will persist for some time, mainly because of a series of structural factors that are persistent headwinds, such as the level of global indebtedness, the disruption of technology which fundamentally affects the lack of inflation in wages, and demographic trends.

Examining structural trends

From a cyclical perspective, global growth has improved, but inflation expectations, both from the point of view of market participants, and from the point of view of central banks, have been persistently wrong.

“It is mainly in developed markets where inflation projections in economies are not being met. This is due to the lack of inflation in wages, money is not being put into workers’ hands and they have less money to return to the economy. And it is precisely this discontent with wages that has provoked the resurgence of populist movements. The disruption of technology has affected workers from both the middle and working classes, who’ve had to return to the labor market with lower wages. The economy’s inability to create inflation is an important issue,” said Bill Adams.

Another issue affecting wage inflation is demographic trends. In developed countries, birthrates have fallen below the level needed to sustain population growth (i.e., more deaths than births). According to MFS ‘research, this has very clear implications for economic growth, inflation and the demand for fixed income products. When older, more experienced workers retire, they do so with higher wages than those workers entering the labor market who may have lower productivity, less experience, and lower wage expectations. “We are seeing an economy that is constantly being challenged by lower growth and inflation in wages.” Adams noted that as more people approach retirement, their needs for income are greater than their needs for growth, the natural movement of these people is to seek greater exposure to fixed income than to equity. “This movement creates a persistent demand in the market for high quality debt.”

Incidentally, the leverage level of the global economies has increased considerably. “Any economy whose debt-to-GDP ratio exceeds 100, is impeding future growth by bringing it into the present. We know that the central banks responded to a challenging macroeconomic situation during the Global Financial Crisis, increasing the level of debt on their balance sheets, which caused higher leverage in the economy. There has certainly been an improvement in the metrics on the corporate side, but on public balance sheets, we are reaching the future that we have leveraged, and therefore, we are now struggling to achieve greater growth.”

The performance of central banks

Following Janet Yellen’s announcement at the Federal Reserve’s last meeting in September, the Fed’s balance sheet assets will decline from $ 4.5 trillion to $ 3.5 trillion. This will gradually remove liquidity from the market. But when you look at the central banks as a whole, they continue to provide greater liquidity. But, in global terms, the market continues to pursue an accommodative policy as long as central banks continue to maintain a large number of assets in their balance sheets. This is a trend that MFS does not expect to be reversed until the second half of 2018.

“The Fed’s performance has been very transparent and patient, revealing its plans very prudently. The plan that has been put in place to gradually reduce the size of its balance sheet reflects that they have spent a lot of time, energy, and trillions of dollars in getting the economy out of the stagnation of the financial crisis. I doubt they’d want to risk that progress because of a miscalculation in monetary policy, so the withdrawal will be very slow. Reducing that balance will put interest rates on a positive trajectory, but as long as it runs smoothly, it will ensure that interest rates rise gradually.”

Although similar growth trends are being observed in Europe, there is still no impact on the interest rate environment. European growth has lagged behind the US for years and is now closing that gap with the help of the European Central Bank. “Inflation in Europe starts from a smaller base, and is not yet at a US level.” explained the asset manager.

Where are the opportunities in global fixed income?

Adams argued for the importance of talking to investors about preserving capital, but believes that it is equally critical to expand the opportunities presented in fixed income beyond the country in which the investor resides, seeking global alternatives, and ultimately seeking an active process, with a strong credit selection process, rather than a passive investment or exposure to ETFs.

“At MFS we are increasingly comfortable with the duration of the United States, rather than with the duration of developed Europe or Japan. We are comfortable in choosing portfolio duration, but we are overweighting US duration over developed Europe and Japan. This is an example of how global duration is diversified.”

Since mid-2016, it has been a wonderful environment for risky assets, both high-yield fixed income and emerging fixed income experienced a rally, but at MFS they are beginning to question those good tidings, wondering whether it’s time to ‘take the foot off the accelerator’ and emphasize the preservation of capital.

“Investors should continue to invest in fixed income. There are still opportunities in the market for adding value, but instead of being in an environment where all you had to do was to buy the market, this environment requires higher levels of selection. You need to understand the companies and know what they are offering their investors.”

Adams compared the dispersion in the spreads of the lower part of the high-yield debt spectrum (with CCC rating) against the higher part (BB rating).  A collapse in the levels of spreads has been observed and risk has positioned itself aggressively as compared to its lower risk alternative. “High-yield debt with a CCC rating has a default rate of approximately 35% historically, so if you try to get returns by investing in this type of debt, your losses could be greater than what you expect to earn. We are not convinced investors are being adequately compensated for the level of risk in the CCC part of the market.”

Finally, the MFS global debt specialist points out that emerging sovereign debt has responded less aggressively than the high-yield market, so that relative value bets can still be positioned in emerging markets.

“We live in a very complex world, with many challenges for bond investors. We are promoting among our investors the benefits of expanding their investment horizon, with an active selection of securities in that type of environment. When the spreads are compressed and the markets lack dispersion, a passive focus on investments doesn’t make sense to us,” he concludes.

Banorte Buys Interacciones Becoming Second Biggest Bank in Mexico

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Banorte compra a Interacciones convirtiéndose en el segundo grupo financiero de México
Pixabay CC0 Public DomainMarcos Ramírez Miguel, courtesy photo. Banorte Buys Interacciones Becoming Second Biggest Bank in Mexico

Grupo Financiero Banorte (GFNorte) has agreed to buy Grupo Financiero Interacciones (GFInter) in a cash-and-share deal. The merger would position Banorte as the largest infrastructure lender in Mexico and the second largest bank in the country.

Banorte would pay 13.7 billion pesos ($719.39 million) in cash and 109.7 million of its shares. In order to do so, the Mexican bank would issue about 4% of new shares. The advisors are BofA Merril Lynch, Morgan Stanle,  White & Case, and FTI Consulting.

The operation is expected to close in the second quarter of next year, pending regulatory and compliance authorizations.

“With this deal, Banorte positions itself as a leader in the financing of the enormous infrastructure necessities of our country, which represents a unique opportunity to propel competitiveness, attract investment and improve quality of life for Mexican families,” said Marcos Ramirez Miguel, chief executive officer of Banorte.

The merged entity will become second in assets, loans and deposits:

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Banorte has had many succesful M&A operations thus far:

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International Wealth Protection Expands Their Presence across the Atlantic

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International Wealth Protection abre oficina en Suiza, desde donde atenderá a clientes europeos
Foto cedidaMalcolm Dermit, courtesy photo. International Wealth Protection Expands Their Presence across the Atlantic

A highly recognized leader in servicing the insurance needs of Latin America’s most affluent, International Wealth Protection announced the expansion of their unique offering as they establish presence in Zurich, Switzerland.

Leading the Zurich based office, as shareholder and Managing Director of International Wealth Protection Switzerland AG, is Malcolm Dermit, a highly respected veteran within the banking and insurance industry. Dermit contributes over 40 years of experience servicing the high net worth segment at a global scale to the brand. As a resident of Switzerland and Spain, and fluent in over five languages, he will continue to service clients in the Latin American region with a connection to Switzerland and expanding the services to the European region.

“While most high net worth clients around the world are facing unforeseen taxation issues, European clients are subject to a heavy inheritance tax burden and are not aware of simple and straightforward solutions that can mitigate the issue. International Wealth Protection Switzerland is qualified and positioned to offer them alternatives via insurance that can minimize the impact of taxation on their estate. Our wealth protection and transfer strategies are reinforced by offshore and U.S. based highly rated, competitively priced insurance products designed to meet the tax related needs of our European clients. After many years of serving my worldwide clientele with life insurance structures, I am delighted to partner with International Wealth Protection and have the opportunity to bring this unique offering to Switzerland,” said Dermit.

“Establishing a footprint in Zurich is a result of the high demand from Swiss based referral resources that seek out our unique concierge style offering, jumbo case placement and ample product platform, all which differentiate us from the competition. I am honored to make this vision a reality with my longstanding and esteemed colleague, Malcolm Dermit and his exceptional team which grants International Wealth Protection outreach beyond Latin America and unparalleled success in the international insurance marketplace. As the established and well regarded International Wealth Protection brand crosses the Atlantic into Switzerland, the global high net worth client segment will finally benefit from unparalleled service standards and objective advice. Trusted advisors should consider partnering with International Wealth Protection as they guide their clientele through today’s challenging tax and regulatory landscape,” concluded Mary Oliva, founder of International Wealth Protection.