SRI: Also With Passive Management?

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ISR: ¿también con gestión pasiva?
Pixabay CC0 Public DomainPhoto: Krysiek. SRI: Also With Passive Management?

Innovation in the field of responsible investment funds is a fact, as these criteria (environmental, social, and good governance) are increasingly applied to more asset classes, whether equities, fixed income, emerging debt, or high yield, as well as to thematic products. This innovation also concerns passive management, and managers such as Candriam, Degroof Petercam AM, BNP Paribas IP, or Deutsche AM, for example, have both, actively managed, and indexed or passive SRI vehicles. Recently, Deutsche Asset Management has created the db x-trackers II ESG EUR Corporate Bond UCITS ETF (DR), a fixed income ETF to offer investors exposure to the corporate bond market, denominated in Euros, of companies that meet certain environmental, social, and corporate governance requirements.

These types of launches reignite the debate on whether it’s feasible to apply SRI management, which requires a large degree of analysis, to passively managed vehicles. The entities with ISR offer of both types believe that it is equally possible, although others characterized by a more active management, such as Mirova (Natixis Global AM’s SRI specialist), or Vontobel, have their doubts.

“Although most of the SRI management is done through active management, there are very interesting SRI ETFs, such as the BNP Paribas Easy Low Carbon Europe ETF, which invests in the 100 European companies with largest capitalization and the lowest carbon footprint,” says Elena Armengot, explaining that BNP Paribas Investment Partners manages 15.3 billion in ETFs, where they exclude any security that is on their exclusion list, and also, ETFs that replicate MSCI indices exclude the arms industry.

“The experience we have with SRI in passive management is proof that it also makes sense, and the issue in this field is the level of SRI quality that we target and the index to replicate,” Candriam says

Petra Pflaum, from Deutsche AM, argues that both active and passive management can be applied to SRI.”Passive products may include the use of indexes constructed from an eligible universe based on SRI characteristics of a company or a country” the expert explains; and says that they will expand the business in passive management in this area, after its recent launch.

UBS ETF is also defensive of SRI in passive management: “In UBS AM’s offer of ETFs, we have the largest range in Europe of fixed income and equity funds with a SRI filter, with a total of 9 funds and 1.2 billion Euros, which replicate MSCI indexes with SRI filter, such as MSCI World, MSCI Emerging Markets, MSCI EMU, MSCI USA, MSCI Pacific, MSCI Japan, and MSCI UK, for the equity indexes, and the MSCI Barclays Euro Area Liquid Corporates and US Liquid Corporates indexes, which are both investment grade fixed income,” explains Pedro Coelho, Head of UBS ETF in Spain.

“We believe that ETFs have their market, and of course any initiative to boost SRI is welcome: if passive management bets on these types of vehicles linked to socially responsible indexes, it will definitely give a definite boost to the integration of extra-financial criteria in Investor portfolios”, argues Xavier Fábregas from Caja Ingenieros Gestión.

However, active management adds value to the extra-financial analysis that can hardly be obtained otherwise, for example, corporate dispute management requires a more global approach, without adhering to an index, or to a certain universe, he adds.

Only Active Management

And there are also those who believe that the SRI philosophy is applied much more efficiently with active management: for Edmond de Rothschild AM, active management is the best way to achieve social and environmental profitability. According to Sonia Fasolo, SRI Manager at La Financière de l’Echiquier, “it is very natural that passive management also develops in the same way, but it must be remembered that a large part of SRI tries to get involved with companies to help them adopt better standards and practices; I have doubts that ETF managers will get involved with the companies, or deal with certain issues during the general assemblies,” she adds.

“We believe in active management, and we are convinced that in order to achieve high returns, investors need to follow an approach that is strongly linked to profitability and that fully integrates ESG issues into fundamental analysis rather than replicate indexes. When replicating indexes, investors are exposed to risks that may be unknown and indexes also tend to apply exclusion criteria that limit the investment universe,” says Ricardo Comín from Vontobel.

At Mirova, Natixis Global AM’s SRI specialist, they warn of the need to assess the risk of ETFs and doubt as to their ability to apply SRI criteria with the same effectiveness as active management.

Pioneer Investments Kicks Off “Age of the Unexpected’’ Meetings in Montevideo & Buenos Aires

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Pioneer Investments realizó con éxito su Kick Off en Montevideo y Buenos Aires
CC-BY-SA-2.0, FlickrCourtesy photo. Pioneer Investments Kicks Off “Age of the Unexpected’’ Meetings in Montevideo & Buenos Aires

As the benefits of extraordinary monetary policy fade and the split between the political establishment and the electorate widens, a new unpredictable economic and political framework is going to take center stage going forward. New politics bring uncertainty and volatility to financial markets. 

Facing this new “Age of the Unexpected”, Julieta Henke, Country Head of Argentina at Pioneer Investments, traveled to meet with 75+ clients across Montevideo and Buenos Aires, and 3 top Portfolio Managers joined her to discuss the benefits of an active investing mind-set, in topics including:

  • A macroeconomic update by Paresh Upadhyaya, Senior Vice President, Director of Currency Strategy, U.S.
  • Discussions on where to find opportunities in Emerging Markets by Giles Bedford, Client Portfolio Manager
  • Views of the U.S. Equities market moving forward by Andrew Acheson, Portfolio Manager, Senior Vice President
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Pioneer Investments continues to show commitment to the Latin American markets, providing clients with the most up to date transparency into their investment strategies and the opportunity to ask PMs directly any questions of the day.

 

Old Mutual GI: “Trump Did Not Invent US Inflation; Rather, He Cannot Curb the Expectations”

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Old Mutual GI: “Trump no inventó la inflación en Estados Unidos; más bien, no puede contener las expectativas”
Pixabay CC0 Public DomainPaul Shanta, Head of Fixed Income Absolute-Return at Old Mutual Global Investors, at a recent conference in Oxford.. Old Mutual GI: “Trump Did Not Invent US Inflation; Rather, He Cannot Curb the Expectations”

For just under six months, markets have begun to anticipate with great force the arrival of inflation. One of the most powerful triggers, which caused the Fed to adopt a more aggressive stance and raised alarm bells among investors, was Donald Trump’s arrival to the US presidency; elected in the November elections, he’s been leading the country since last January. However, when referring to the reflationary trend in the market, Paul Shanta, Head of Fixed Income Absolute Return at Old Mutual Global Investors, is very graphic in pointing out that the inflationary trend goes far beyond politics. “Trump did not invent US inflation,” he said firmly in the framework of a recent event held in Oxford by the management company.

“By 2014 we were starting to see a rise in wages and in core services in the country. Inflation was there before Trump,” he recalls. Pressures began with interest rates in negative territory and, it soared as early as last July. So, according to the expert, it would be more appropriate to say that “Trump cannot do anything to curb inflationary expectations,” instead of saying that it is he who generates them.

It is true, however, that the President’s plans are inflationary: the tax cut project, the infrastructure program, and his commercial proposals, will support that increase in prices that occurred prior to his arrival

However, the market is not accounting for higher inflation- it expects only 2% up to 2026 – and that’s where the fund management company sees opportunities:Shanta explains how they position their debt fund with absolute return strategy to benefit from this imbalance, with positions to benefit from a rebound in US inflation. “The interest rate markets are getting ahead of themselves,” he says.

On the situation in Europe, he values Draghi’s work in achieving, like the Fed in the US, the falling unemployment is rate in many countries. And points out that “Inflation is not just the story of the US,” since consumer prices are also rising, and in markets such as Italy, France, Germany, and Spain are already reaching 3%. “Inflationary pressures are starting in Europe, with underlying Euro area inflation rising,” he insists.

However, there are also imbalances between market projections (from 1.3% at the end of 2020, with 67 basis points of ECB rate increases in that period), and reality (the ECB projects 1, 7%), therefore something’s amiss. “It‘s not consistent: expectations of market inflation are too low, while expectations of rate increases are very high.” The fund management company tries to take advantage of these differences.

The Arrival of Turbulence

At the conference, Mark Nash, a multi-sector fixed income manager, warned that in fixed income, “the days of earning easy money are over” and pointed out that after a rally environment in all assets (fixed income doubled its value in six years), there is a time for changes, marked by structural factors, causing him to predict volatility and turbulence.

Among those changes to be considered, populism in the face of problems such as low wages, inequality, or immigration; the demographic changes, with the growth of the aging population and the increase in dependency ratios; the new role of central banks … “Financial assets will be impacted: there are many turbulences ahead.”

Neil Schwam and Ricardo Outi Join Big Sur Partners

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BigSur Partners refuerza su estructura con las incorporaciones de Ricardo Outi y Neil Schwam
Pixabay CC0 Public DomainRicardo Outi (left) y Neil Schwam (right). Neil Schwam and Ricardo Outi Join Big Sur Partners

BigSur Partners is proud to announce that Neil Schwam and Ricardo Outi have joined the Miami office of their firm.  Neil Schwam joined as Chief Operating Officer (COO) and Ricardo Outi is joining as Head of Real Estate.

Neil Schwam joined as Chief Operating Officer as of April 1, 2017. Neil brings over 20 years of experience in Operations, Technology and Asset Management. Neil’s most recent roles have been with the Fund of Hedge Funds including Man Group and Harcourt Alternative Investments where he managed Operational Due Diligence teams covering hedge funds, private equity/debt/real estate funds. Neil brings particular interest and expertise in management and management technology and is looking forward to helping Big Sur build upon the existing platform through implementing cutting edge practices and technologies to achieve an even higher standard of operational excellence.

Schwam holds the designation of Chartered Alternative Investment Analyst, an MBA in Finance from New York University (1996), and he earned a BA in Economics from the University of Maryland (1990), and also attended the Hebrew University of Jerusalem. Mr. Schwam speaks 4 languages (German, Hebrew, Spanish, and English).

Ricardo Outi is joining the BigSur team as their Head of Real Estate, leading the acquisition and management of new Real Estate invesments. Outi is an accomplished Senior Manager with 18 years of working experience in the financial industry. Prior to joining BigSur, Ricardo held several senior roles in Citi Wealth Management, Venture Capital and Retail sectors, where he was responsible for managing a $740 million revenue  business for Affluent & High Net Worth clients across Latin America. He also collaborated with startups, venture capitalists, and regulators to lead Citi Ventures in Asia, where Outi additionally co-led the design and implementation of the Smart Banking initiative, which has since become the new operating standard for Citi branches globally. 

Outi holds an MBA from The University of Chicago Booth School of Business (2013), and he earned a Bachelor in Business Administration from the Universidade Mackenzie (2001). He is also the co-inventor of 2 patents related to new technologies and process design.

 

AXA IM Chorus Launches Multi-Premia Strategy

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AXA IM Chorus lanza una estrategia multipremia
CC-BY-SA-2.0, FlickrPhoto: Daxis . AXA IM Chorus Launches Multi-Premia Strategy

AXA Investment Managers (AXA IM) announced the launch of a multi-premia strategy with initial assets under management of 1 billion dollars, managed by AXA IM’s new investment team in Hong Kong, AXA IM Chorus.

The strategy takes a quantitative approach to get exposure to a diversified set of premia strategies, which are sources of performance that can be harvested systematically. Through premia selection, continuous research and combination, the strategy deploys a liquid, diversified approach seeking to offer investors consistent risk adjusted returns that are uncorrelated to traditional asset classes. The strategy invests globally in liquid equity, interest rate, foreign exchange and credit instruments.

Pierre-Emmanuel Juillard, Managing Director of AXA IM Chorus, commented: “We’ve built a strong team over the last 12 months bringing together an exciting mix of top industry talent. Over the period, our original group of 8 founders has been extended to a team of 22 investment professionals. Our aim is to deliver attractive, liquid and transparent risk-adjusted performance to clients with this new strategy.”

The strategy is managed by Hector Chan and Jérôme Brochard, drawing on research from the AXA IM Chorus Research Lab, led by Augustin Landier, and software engineering from the AXA IM Chorus Technology team, led by Philippe Muller.

Christophe Coquema, Global Head of Client Group at AXA IM, said: “Adding an absolute return strategy team to our asset management capabilities and offering to clients demonstrates our continued investment in our business and push for innovation as we recognise that market conditions are changing rapidly and so are our client needs. We believe that the liquid absolute returns space is highly relevant for investors today who are searching for a liquid solution in their continued hunt for yield.”

BlackRock’s Landers: “Mexico Stock Market Opportunities Could Become More Attractive”

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BlackRock: “Hay que esperar para invertir en México; las oportunidades en bolsa se van a poner más baratas”
Pixabay CC0 Public DomainWilliam Landers, Courtesy photo. BlackRock’s Landers: "Mexico Stock Market Opportunities Could Become More Attractive"

In recent years, Brazil’s investment history cannot be reviewed without seeing a mixed picture, but one thing that William Landers, Head of BlackRock’s Latin American team, is confident of, is that Michel Temer’s arrival in government following Dilma Rousseff’s ‘impeachment’, is going to turn policies around, placing the country on its way to recovery. However, in the short term, much of what happens in emerging markets will depend on the proceedings of the Trump administration.

Landers, who is a portfolio manager of the firm’s range of Latin American equity funds, estimates that a key factor in capital flows this year will have to do with the possibility of the U.S. government launching a corporate tax reform. “A plan of this kind would make U.S. companies more attractive to investors and would draw in the money that is in foreign subsidiaries to put it to work in the United States,” he explains.

Precisely because of the doubts aroused by Trump’s policies, Landers’ team keeps Mexico strongly underweight in the portfolio. “If as an investor you have a vision between 1 and 3 years, then there are many Mexican stocks that make sense. But we’re probably going to have the chance to buy these shares cheaper, so our vision right now is to wait. In Mexico what we are really waiting for is to see a better market entry point.” In fact, BlackRock believes that even Peru or Argentina are more interesting markets in which to be right now.

Brazil Sets the Stage for Improvement

In Latin America, Brazil’s economy provides the other end of the spectrum to Mexico’s ‘stand by’ story. If during the last quarter of 2016, following Trump’s victory, Mexico raised interest rates by 100 basis points to 5.75% to contain peso volatility, Brazil was going in the opposite direction by starting a relaxation cycle with a cut of 50 basis points, placing the interest rate at 13.75%.

“If we look at what we have learned in 2016, especially when it comes to equities, we can say that the market was not looking at what was happening at the time. What I mean, from an economic perspective, is that growth was still negative in several Latin American countries, inflation remained very high in some of them, and then came a series of events that no one believed could possibly happen, such as China’s earlier last year, Brexit, the Fed’s measures, Trump…. but something very important happened in the region, which was Dilma Rousseff’s impeachment in Brazil. This really changed the country’s direction in such a way that we still don’t know what the result will be, but it has put the present Temer government on its way to solve the country’s problems,” he explains.

Landers believes that, in a way, Brazil’s economy is similar to the US economy, in that it depends on its own growth. Although the US market is very open and Brazil’s is not, the BlackRock portfolio manager points out that both countries have exports that are equivalent to only 10% of their GDP. Thus, he says, for Brazil, the rate of inflation is much more important than the growth rate in the United States or China.

“It is true that there are several companies in BOVESPA, the local stock exchange, that depend on global trade. I’m thinking of Vale, or Bradespar, which we recently added to our portfolio. For these companies, it is relevant what happens in China, and whether Donald Trump finally sets an infrastructure spending plan in motion, which would also be positive in the short term for Chile or Peru.”

During the last 10 years, we have seen an unprecedented expansion in Brazil’s middle class, and that they managed to control inflation, drop interest rates significantly, and return job creation to double-digit rates. On that basis, Brazil has just gone through a political moment in which it has had to restore credibility in its institutions. And Landers believes it has managed to do so.

“We are seeing that investors are regaining trust in the country, business owners also feel more confident about the economy. In short, confidence has improved. It is true that consumption still does not reflect this and has not yet recovered, just as employment has not. But you can see that it is headed down that path, and I believe that in the first quarter of this year we will see that things are starting to improve somewhat” he says.

And he adds: “However, even if Brazil does not reach the growth rate we expect, going from a negative growth rate in the last years of -3.5% or -4% to a positive growth rate of 0.5% is a jump that we are not going to see in any other economy in the world, and this is really going to cause the central bank to start cutting interest rates, although it will not do so very aggressively and will not surprise the market with these measures. So this is the story that makes us think that Brazil is going to do well and that’s why 2/3 of our investments are here. Brazil has a lot of room for growth.”

Changes in the Portfolio

During the last quarter of 2016, BlackRock’s BGF Latin American Fund, which selects between 50 and 70 equity securities in Latin America, divested positions in a number of Mexican securities.

In Brazil, the fund maintains a large overweight, favoring companies that stand to benefit from improved governance and from falling interest rates.

Pioneer Investments Receives 200 Million US Dollars from Mexican Afore Sura

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Pioneer Investments recibe 200 millones de dólares por el segundo mandato de Afore SURA
Pixabay CC0 Public DomainGustavo Lozano, courtesy photo. Pioneer Investments Receives 200 Million US Dollars from Mexican Afore Sura

Global Asset Manager Pioneer Investments received 200 million US dollars from a Global Equity mandate with Mexican pension fund manager Afore Sura. The equity investment team at Pioneer Investments’ Boston hub will actively manage the mandate. Pioneer Investments, which currently has 240 billion of Assets Under Management, has been managing investments in global markets since the 1930’s through the Pioneer Fund, created by Philip L. Carret in 1928.

Afore Sura awarded Pioneer Investments’ Boston investment team the mandate as part of its process to diversify their investment strategy and as a tool to grant their clients access to investment opportunities in global equity markets. region.”

Luis de la Cerda, CIO for Afore Sura said: “By granting this mandate, we strengthen our investment strategy, reaping the benefits of the resources, skills and experience offered by external teams specialized in markets, strategies, styles and specific geographical regions.”

Gustavo Lozano, Country Head of Pioneer Investments Mexico, commented: ”Completing the funding of this project is once again the culmination of many efforts coming together. The relationship that Pioneer Investments has with Sura has allowed us to build a comprehensive partnership that ranks Pioneer Investments as one of the most important global managers in the Latin-American region, regarding the active management of investments for the institutional clientele. Pioneer Investments not only offers competitive, high quality investment products that we believe can stand the test of time, but compliments them with investment services designed exclusively for Sura, which strengthens the development of asset management for such investors in the

The global equity markets mandate will allow the Afore to access a strategy which expedites decision-making through the allocation of assets, sectors, regions and risk, based on a robust investment process seeking to maximize investment returns while endeavoring to limit risk. It will also provide them exposure to high quality companies, whose investment thesis and business propositions remain abreast of global economic developments, with a long-term investment horizon.

 

 

“An Investment in Japanese Fixed Income is a Bet on The JPY”

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“Una inversión en deuda japonesa, desde el punto de vista del inversor europeo, es una apuesta en el yen"
Pixabay CC0 Public DomainLeft Tony Glover, right, Naruki Nakamura. "An Investment in Japanese Fixed Income is a Bet on The JPY"

With a current attractive business situation, political, fiscal and monetary support and a healthy inflation, the Japanese debt market offers investment opportunities according to BNP Paribas Investment Partners.

Tony Glover, Tokyo-based head of the investment management department at the company believes that “it really depends on the assumptions that the investor has. An investment in Japanese fixed income (for a European investor) is a bet on the JPY. Investors in our Parvest Bond JPY fund generally do so if they think the JPY will strengthen, as it tends to do in times of market stress (i.e. a ‘risk-off’ play). A strengthening JPY generally puts downward pressure on the equity markets (as earnings forecasts are usually revised down) – so if the investors’ assumption is a strong JPY, then fixed income might be the better investment. But as I said to clients in Madrid last month, we think that the equity markets currently look attractive due to 1) earnings growth, 2) inexpensive valuations, 3) expected corporate governance improvements, 4) increased activity by domestic investors.”

Naruki Nakamura, head of Fixed Income with BNP Paribas Investment Partners Japan, and Fund Manager of the Parvest Bond JPY believes that if you look at flow indicators published by MoF (Japanese Ministry of Finance), foreigners have been heavy buyer of short and intermediate JGBs for months at deep negative yen base yield. “Why they buy? I assume the buyers are USD based investors who are buying with currency swap hedging. Toward the end of November last year (Nov 29), the spread went as far as -0.85%. 2 Year JGB was traded around -0.17%. If the USD based investor buy 2 year JGB with currency swap hedges, USD based yield can be as high as 1.95%, which is much higher than 2 Year Treasury yield of around 1.1% then (Very rough estimation without considering transaction cost). Investors with ample USD and who do not care about illiquidity, such as Sovereign wealth fund or Foreign reserve, might think it attractive. Any way, if you are an institutional investor with currency swap capability, have ample cash and unwilling to invest in deep negative yield short Bunds (or better have 0% return rather than sizable negative rate return), willing to sacrifice liquidity, willing to take Japanese sovereign risk, JGB market might be the candidate to put money in. As of now, basis swap has recovered to some extent and 2-year JGB’s yield is at deeper negative level, however, short Bunds yields are much lower due to ECB/risk off, so relative attractiveness may be bigger.”

Apart from FX hedging base, he agrees on that some European investors use JGB to take JPY FX risk. “In the past, JPY strengthened in the risk-off environment. Although Japanese fiscal situation continues to deteriorates, we think the Japanese crisis is at least 5 years away. So, if an Euro based investor wants to diversify the investment, buying unhedged JGB might make sense, especially if the investor is worried about Europe-oriented risk-off.”

“As of BOJ policy, as you might know, they changed their policy frame work in September 2016. They used to think unlimited quantitative ease could solve the problem, but they no longer think so. Currently they are reluctant to either increase QE nor go deeper into negative yield policy rate. They only want to fix the entire JPY yield curve at current level. Which means, we do not expect JPY to decline excessively from Japanese monetary policy factor for now . (So, for example, if US tightens more than market expectation, JPY may fall versus USD.) If there is another global financial crisis, we expect JPY to initially strengthen sharply. Then, if the JPY’s appreciation is excessive, BOJ may again change their policy to add aggressive monetary ease, which likely to curve the appreciation.” He concludes.

 

“As Rate Volatililty Might Prevail this Year, We’d Have a Propensity to Favour Credit Risk”

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"Dada la volatilidad en los tipos de interés, tendemos a favorecer el riesgo de crédito: ratings más bajos con menor riesgo de duración"
Pixabay CC0 Public DomainPhilippe Berthelot, courtesy photo. "As Rate Volatililty Might Prevail this Year, We’d Have a Propensity to Favour Credit Risk"

With the rates normalization process already underway, Philippe Berthelot, Head of Credit Management Teams (Corporate and structured credits) at Natixis Asset Management talks in an exclusive interview with Funds society about where he sees value and highlights two of their funds: Natixis Euro Short Term Credit y Natixis Short Term Global High Income.

– Is it possible to talk about danger when we talk about the current situation in fixed income? Are the investors in danger when they take in account the arrival of the growth, the inflation, and the following rise in interest rates?

A rising rate environment may not be that supportive indeed for fixed income products in general, as it can lead to some disappointing performances. That said, 2017 is totally different from a 1994 scenario, we just expect 10 year rates to be 30-40bp higher by ear end in the USA and in Europe!

– Which are your previsions of the interest rate hikes in USA this year and how will this affect to the assets? There will be contagion in Europe? Will the ECB need to take solutions soon?

The FED is expected to raise rates 3 times this year (a hike of 25 bp already made yesterday) but really nothing to worry on the ECB side. What would matter the most in Europe would be hints at “tapering:” it is likely to occur next year. For the time being, political risk is a driver of sentiment with Dutch / French and German elections

– Is there danger of capital turnover from fixed income to equity?

It is genuinely true that a rise of nominal rates, at first, is supportive for risky asset classes like equities and even  credit. With further  growth prospects in Euroland this year Equities should outperform Fixed Income,  caeteris paribus.

– In this environment, is it still a good asset to invest or should we sharpen the caution at the time to invest in debt? Is it still possible to find value in credit, for example?

There are so many different animals within what is labelled “fixed-income” ! For instance, the bulk of ABS and senior secured loans are made floating-rate products, as such they’re not very sensitive to a rise of interest rates ! HY spreads are also negatively correlated to rates, which means that sub investment grade bonds should fare quite well this year. Last but not least, focusing on short duration investments is another way of performing almost  always  positively  whatever the state of nature.

– In which sectors of fixed income are we still finding value? And where do we find the biggest risks?

Financials and subordinated financials are very cheap vs corporates (as they are not eligible to the ECB QE). High beta sector like AT1 , Hybrid securities should perform quite well  this year.

– Do you prefer credit risk or duration risk? Why? It seems that now the most popular choice is to maintain a low duration… why?

As rate volatililty might prevail this year, we’d have a propensity to favour credit risk : lower in ratings with shorter duration risk

– Natixis Euro Short Term Credit y Natixis Short Term Global High Income are two solutions that are driving. What characteristics have these vehicles and what can they contribute to the portfolios?

Natixis Euro Short Term Credit is a core plus fund : mainly IG plus  a HY tilt than can up to 15% of its assets. In order to benefit from a  better  yield we also have a substantial exposure on subordinated financials. On top of it the fund duration is below 2 years, which is exhibits limited sensitivity to a rate rising environment.

The second fund, Natixis Short Term Global High Income,  is also targeting fixed income investments with  duration to worst below 2 years within the HY space this time with an average exposure to 50% Europe and 50% US. It features a much higher yield due do its very HY nature.

– Where can we find the best opportunities in credit: Europe or USA? What do you prefer; high yield or investment grade?

The answer is threefold: credit quality is much better in Europe with lower default rates and lower leverage, US fixed income will likely be hurt by a rising rate cycle , but carry is much  better off in the USA (assuming no dollar  hedge from an Euro  investor point of view)

– Do you like the profitability risk profile that the debt and emerging credit present?

We do have very little exposure but hard currency corporate exposure in some specific names. There is a another  team to deal with local currency in Emerging credit exposure.

-What returns can be expected on credit and with short durations facing this year?

You may expect the current carry with limited capital gains : 0.8% to 1.0% in Euro IG and ca 3% to 4% for Global HY short duration.

– Does the fact of taking short duration limit the returns?

It provides the best sharpe ratio in general, with the highest carry per unit of risk. It limits draw-downs to the detriment of lower expected returns.

“A Rate Hike by the ECB May Not Occur Until Later in 2018 at the Earliest”

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"La subida de tipos por parte del BCE no tendrá lugar hasta finales de 2018, como muy pronto"
Pixabay CC0 Public DomainJim Caron, portfolio manager and senior member on the Morgan Stanley Investment Management Global Fixed Income team . "A Rate Hike by the ECB May Not Occur Until Later in 2018 at the Earliest"

The primary risk to fixed income is a sudden and sustainable rise in interest rates. The conditions for this to occur is for the market to believe both domestic and global growth will be on a sustainable trend higher and that inflation will rise. However, according to Jim Caron, portfolio manager and senior member on the Morgan Stanley Investment Management Global Fixed Income team, there is little evidence that such a robust and sustainable event will actually occur. In his interview with Funds society he mentions that “We believe growth and inflation conditions are on the rise, but at a modest pace, not quickly. The key for fixed income investors is to create a durable portfolio that is actively managed. This provides one the ability to construct a portfolio with assets that are less sensitive to interest rates, such as credit related products, and provides the opportunity for the fund manager to manage duration risks. If done properly, bond funds can still produce positive excess returns even as rates rise.”

What are your expectations of rate hikes in the US this year and how will it affect the assets? Will there be contagion in Europe and will the ECB soon have to take solutions?

We believe the Fed will hike rates two times this year, with the risk being they hike three times. As we see it, the Fed will proceed cautiously as there are still many unknowns with US resect to fiscal policy, political risk events in Europe and economic risks surrounding trade and China. The ECB faces the same challenges but is further behind in the post crisis recovery cycle than the US. A rate hike by the ECB may not occur until later in 2018 at the earliest.

Is there a danger of capital turnover from fixed income to equity?

We recognize that there are other risks to fixed income in terms of capital flows. Many are over invested in fixed income and under invested in equities. If economic conditions convincingly improve, then investors may reallocate away from bonds into equities. This is a risk. However, if bond yields rise enough, it could slow the economy and this would re-attract investors to fixed income. So, there are limitations to how high and how fast bond yields can rise in the current environment.

In this environment, is it still a good asset to invest in or should we exacerbate caution when investing in debt? Is it still possible to find value, for example by assuming a global and flexible fixed income perspective?

Fixed income will continue to be a large part of a balanced portfolio. Yes, we believe there are still opportunities in fixed income, but it needs to be managed differently. We believe flexible and active management is essential. A flexible strategy should perform better than a passive strategy because the bond manager can allocate risk away from sectors of the bond market with the most sensitivity to rising rates and into other sectors that are less sensitive to rising rates.

In which fixed income areas still you find value? Where is there more risk?

We believe there are certain ‘winning characteristics’ for fixed income assets in the current environment: 1) assets with improving fundamentals, 2) attractive yield and carry, 3) positive idiosyncratic factors such as valuation and supply an demand technicals and 4) assets with more credit sensitivity rather than interest rate sensitivity.

Do you prefer credit risk or duration risk? why?

The assets we think will perform best are: 1) US non-agency mortgages – these assets benefit from improving fundamentals and have positive supply and demand technicals in addition to having good carry and more credit rather than interest rate sensitivity. 2) Emerging markets: we like commodity exporters both in external and local EM. For local EM we also select countries whose fundamentals are improving, have attractive yields and undervalued currencies. 3) Middle market high yield: these are companies with less than $1Bn of debt outstanding whose performance is driven more by idiosyncratic credit factors rather than interest rates. Sectors we like are Manufacturing, exploration and production energy and food and beverage sectors. We believe high quality sovereign bonds, which are most rate sensitive will perform worst.

European peripheral debt: are there still opportunities in markets such as Spain?

We think European peripheral bond markets are risky and we hold minimal exposure. The risk stems from political uncertainty. However, once the election cycles pass across Europe, we do see value in owning peripheral bonds. However, we think they will first cheapen over the next several months.

What returns can be expected from assets facing this year?

Bond market returns will vary across asset class and strategy. In our unconstrained and actively managed fund, Global Fixed Income Opportunities, we think we can achieve a 5-6% return. Our asset selection and weightings are skewed to less interest rate sensitive products such as non agency mortgages, EM and high yield. In addition, we are underweight duration and for additional protection against a rise in yields.