Terry Simpson: “Economic Expansion is Becoming Sustained and Synchronized Across the Globe”

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The global economy is moving towards more sustained economic expansion, and is still far from an inflationary environment. Although the Fed has begun its normalization process, there are still many questions surrounding the policies of the European Central Bank, the Bank of Japan, the Bank of England, and even the Bank of Canada, which recently decided to increase its reference rate by 25 basis points, the first-rate increase in seven years. Structurally, the economic environment is one of low growth and low interest rates, but what do these conditions mean for returns? Where can they be found in this environment? Terry Simpson, Multi-Asset Investment Strategist at the Black Rock Investment Institute, answered these, as well as other questions, during his visit to Miami for the presentation of the firm’s strategic vision for the second half of the year to their clients.

Simpson, who joined BlackRock in 2004, explained that they use various tools to be able to identify economic growth that is not captured by traditional economic indicators, such as capex, employment, or industrial production. In addition to estimating the growth of the G-7, the seven major world economies through advanced economic indicators using an econometric technique called Nowcasting, they also use Big Data technology to continue to innovate in their internal forecasting elements. “There are household spending patterns and business developments that you cannot capture with traditional economic variables, and we believe our differentiated approach gives us a competitive advantage over the data analyzed by the market consensus on the street,” he says.

In this way, BlackRock establishes that the G-7 12-month forward growth forecasts are shaping up to be 2% over the next 3 months, between 25 and 30 basis points above the market consensus, a difference that may seem small, but in which a low growth environment can be sufficient to influence asset allocation decisions and investor sentiment. “We are seeing that the improvement in global economic growth is in a synchronized trend. The United States’ economic cycle is ahead, but the rest of the G-7 economies are now catching up.” Last year all the improvement came from the US economy, but now there is significant improvement in Germany, Canada, Japan and France, which is very important to increasing global growth.”
Continuing with the theme of sustained economic expansion in the United States, Terry Simpson addressed a frequent question about the duration of the cycle. “The United States is now eight and a half years into this economic cycle, this is the third longest economic expansion in US history, and many expect it to end soon. This is erroneous. They are just thinking about it from the wrong perspective. By our analysis, we can see that, since the last cycle, we are still far from reaching what we call the potential in the economy, which still argues that this cycle has room to run and this cycle should be measured in years, not quarters.”

Next, Simpson referred to the more aggressive tone from central banks in the early part of the summer, beginning with statements by Mario Draghi at the Sintra symposium in late June during the European Central Bank Forum, where the market interpreted that the European authority on monetary policy is prepared to be more aggressive in withdrawing its economic stimulus measures. The FOMC then continued with its third-rate hike in 6 months. But this should not divert investors’ attention, who should nevertheless bear in mind that most central banks aim to keep inflation close to their target: “Since 2015, core inflation in the US, the Eurozone and Japan has remained very stable and flat, if anything we have recently seen a decline in US inflation, which has raised much concern. The reality is that Central Banks really have not been hitting their inflation targets, so it is very likely that they are not going to be aggressive while removing their expansionary policies and that is one thing that markets misinterpreted, and structurally, we believe that we are going to be in this low-growth, low- interest rate environment for the foreseeable future.” Most central banks are mandated to manage around an inflation target. Some banks have a dual mandate, like the Fed with full employment as their second mandate, but the vast majority of them conduct their monetary policy in relation to an inflation target, projections on GDP and developments on the output gap. In any case, in Europe inflation is around 1%, while the inflation target is 2%. “If Draghi announced the tapering of the QE program this year, we think it would be a very gradual wind down.”

China is another frequent concern for investors. BlackRock uses economic data to evaluate the trend for China’s PMI, a leading indicator for the country’s economic prospects. The current data remains high by recent historical standards, the highest of the last three years, so they do not believe that a hard landing is as automatic as some think. “Policy makers have identified the imbalances in the economy and are starting to address them; and that is a good thing. This doesn’t necessarily mean it’s going to be a smooth ride, but at least they recognized the importance and potential impact on the economy,” adds Simpson.

Rethinking Risk

At a time when volatility levels are at a minimum, it is important to ask about the likelihood of a shift to a high volatility regime. According to BlackRock, if we are currently in a low volatility regime like the present one, there is a 90% probability that we will be in the same regime one year forward and a 70% probability that the same regime will be maintained over a three-year period. This is an important fact, since most clients are de-risking their portfolios because they believe that such low volatility is not normal. “Volatility is at such low levels because of conventional and unconventional monetary policy measures of recent years. However, there are other reasons at the macroeconomic level: GDP, unemployment, and inflation volatilities are at levels below their historical rates. It is consistent that if you have low macroeconomic volatility, you will have low financial volatility, so we do not expect volatility to mean revert.”

It may rise from the current levels, but it would take a geopolitical shock or economic shock to shift us into high volatility regime. In other words, investors should maintain their current exposure to risk, or even increase it. “This is a contrarian call as investors are pairing risk exposure back and taking profit. We still like equities and high quality credit fixed income” he said.

Investec Launches an Investment Grade Corporate Debt Fund in Association with Compass Group

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Investec lanza, de la mano de Compass Group, un fondo de deuda corporativa con grado de inversión
. Investec Launches an Investment Grade Corporate Debt Fund in Association with Compass Group

Compass Group is the sub-manager of the new Investec Latin American Investment Grade Corporate Debt Fund, recently launched in Luxembourg and included in Pershing.

The strategy is almost a year old and will be managed by Tomás Venezian and Mathew Claeson, who have more than 15 years of experience in the industry, and currently the portfolio is built through a bottom-up process of ‘best ideas’.

Latin America is at a turning point, where growth and inflation stabilize, which has allowed an expansive monetary policy in the region. On the business side, a process of deleveraging has begun to be observed since mid-2016, which should result in much lower default rates than those observed in recent years.

On the technical side, Compass Group experts expect a negative net bond offer in Latin America this year, in an environment in which demand for interest rates continues strong, and therefore, global investors have appetite for the region.

US investment grade debt spreads and emerging market spreads remain at attractive levels compared to their historical average. Latin America is the most attractive region in terms of spreads adjusted by risk classification, says Compass.

The fund’s objective is to generate income with the opportunity to obtain long-term capital gains by investing in Latin American fixed income assets rated as investment grade.
The spectrum of bonds includes sovereign, quasi-sovereign and corporate, the latter having the greatest participation in the portfolio.

Compass Group LLC has a history spanning over 20 years, specializing in asset management in Latin America, where it has more than 40 specialists based in the main cities in the region.
 

Larrainvial Answers Three Questions About the Progress of the Agreements with Vontobel and Columbia Threadneedle

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Tres preguntas a LarrainVial sobre el avance de los acuerdos con Vontobel y Columbia Threadneedle
Wikimedia CommonsSantiago de Chile. Larrainvial Answers Three Questions About the Progress of the Agreements with Vontobel and Columbia Threadneedle

LarrainVial Estrategia has been promoting its funds’ offer and currently maintains contacts with two new administrators. The Chilean firm responded to three questions from Funds Society about these negotiations:

1. At what stage are the discussions between Vontobel Asset Management and Columbia Threadneedle Investments?

We are constantly monitoring the market in search of managers to complement the 36 fund managing companies with whom we currently have an agreement, with the idea of improving our availability of products to incorporate our asset allocation through the best instruments for each asset class.

We do indeed have contacts, however, agreements must be approved by our Compliance area, which may take some time due to the exhaustiveness of the review process of the counterparts that is carried out, both by us, and by the aforementioned managing companies.

2. What are the main advantages of these funds and what do they contribute to LarrainVial’s existing offer?

In Vontobel’s case, what caught our attention was its consistency in funds related to emerging markets, especially in fixed income.

In Columbia Threadneedle’s case, what caught our attention was its diversified range of products globally, with interesting alternatives mainly in European equities, where they have various diverse strategies.

3. How does the work of LarrainVial Estrategia fit into the company’s regional expansion policy?

LarrainVial Estrategia was designed to be an easily scalable model for the rest of the region, with a team characterized by absolute independence, open architecture, ability to combine national and international investments, plus renowned experience in combining traditional investments with the most complete range of alternative investments.

If to all of the above we add a great commercial capacity to lower our vision, and recommendations to our financial advisors, so that these can in turn be transmitted in a consistent way to their clients, we can see the leading role in our area within LarrainVial’s general strategy.

All this is being highly valued by our financial advisors and their clients, which is reflected by the fruits that our work has started to reap. This is evident by the extreme loyalty to the company shown by our clients, due to the consistency of their portfolios and the cohesion of the discourse within the sales force.

 

Aberdeen AM: Asia and Latin America Harbour Opportunities in Equity Investments

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Aberdeen AM: “Asia y América Latina ocultan empresas con fuertes balances, buena rentabilidad y dividendos sólidos”
CC-BY-SA-2.0, FlickrPhoto: Emilio García. Aberdeen AM: Asia and Latin America Harbour Opportunities in Equity Investments

According to  the Aberdeen Global Equity Team, recent events – from the political to the economic – have conspired to test the mettle of even the most seasoned investors. Savers, particularly those using bond markets, have had their reserves eroded by a combination of inflation and a long period of very low interest rates. With the normalization of monetary policy (the U.S. Federal Reserve, or Fed, expects that rates will be increased “a few times a year” until the end of 2019, for example), they believe bond yields should rise. But while this is positive for those trying to generate an income using bonds, the consequences for global equities could be less positive, as stocks look less attractive to investors under such circumstances. “Although some equity markets, particularly those in the U.S., have surged in recent months, there seems to have been little real foundation for the gains. Instead, they have been built on bombast and political rhetoric.”

Another potential headwind for equities they identify is the recent surge of populism in the political sphere. At the time of writing, it is unclear to what degree Donald Trump will implement the protectionist policies he touted during his election campaign, although he has not shied away from controversy in the early days of his presidency. In addition, we do not yet know the terms of the UK’s exit from the European Union (EU). A worldwide decline in free trade could have severe implications for corporate earnings.

There is also the conundrum presented by an environment of increasing inflation and low economic growth. Before the Brexit referendum, Mark Carney, governor of the Bank of England, warned that leaving the EU could create just such a scenario — sometimes known as “stagflation”— for the UK. He predicted that a Brexit-induced decline in sterling could push inflation higher. Since the vote, the pound has fallen sharply, and inflation in the UK recently touched its highest level since July 2014. “Although equities are sometimes viewed as a hedge against inflation, increasing consumer prices have the potential to drive volatility and put pressure on future cash flows. And the UK is not the only country at risk from the phenomenon; we are yet to see the effects of Mr. Trump’s policies on the U.S. economy, while political tensions in Europe remain high.” They state.

Collectively, these circumstances seem to paint a pessimistic picture for those looking to gain an income from investing in global equities. However, the team believes there is a potential upside: “we have become relative veterans of political instability and uncertainty; we have lived with bank bailouts, national recapitalizations and dramatic government change for ten years. Now, as in those times, we believe that a focus on high-quality businesses combined with discipline on valuation will put investors in good stead.” They are certain however that there are several important questions income investors should ask when building their portfolios:

  • Is this company likely to grow both its profits and its dividends?
  • Is the company located in a place where there is potential for interest rates to come down?
  • Where are corporate profits beating expectations?

The team believes that many of these opportunities can be found in Asia and Latin America. “Both regions have underperformed in recent years, but they have companies with strong balance sheets, good profitability and robust dividends.”

Emerging equity markets had a very strong 2016, but they warn investors to view this performance in the context of the last five years and net investment withdrawal from the region. “The rebound itself is unsurprising, given the depth of pessimism about the region at the beginning of 2016. There is scope for further improvement should the trend continue.”              

In their opinion, dividends, it seems, go in and out of fashion, but they are always significant to individual investors. In some markets, however, they are ascribed little importance, and there may be an almost inherent opposition to returning value to shareholders in this manner. Markets such as the U.S and Japan tend to have this view. In other regions, however, dividend coverage has become stretched, and capital expenditure by companies has been very low.

“When looking for income from equity investments, it is important to select companies that not only have good cash flow and are investing for the future, but that also have surplus cash available to pay dividends. Balance sheet strength, as well as the desire and willingness to return cash to their shareholders, are other very important characteristics. Above all, in-depth research is key when to achieving the objective of earning a steady income stream from a diversified portfolio, even in the most difficult markets.” They conclude.
 

Agustín Carstens and Maria Ramos Join the Group of Thirty

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Agustín Carstens, gobernador de Banxico, y Maria Ramos, CEO de Barclays África, se unen al G30
CC-BY-SA-2.0, FlickrMaria Ramos and Agustín Carstens. Agustín Carstens and Maria Ramos Join the Group of Thirty

The Group of Thirty (G30) announced that Agustín Carstens, Governor of the Banco de México, and Maria Ramos, Chief Executive Officer of Barclays Africa Ltd., have accepted invitations to join the membership of the G30.

Jacob A. Frenkel, Chairman of the Board of Trustees, stated: “The G30 is very pleased to welcome Agustín Carstens and Maria Ramos to membership and I look forward to their engagement in our program and projects in the years ahead.”  Frenkel added: “I am delighted that Agustín is joining the Group. He brings decades of knowledge of international finance and economics to the G30, from his leadership of the Banco de México, as Chair of the IMFC of the International Monetary Fund, and from his previous work both as Minister of Finance of Mexico, and other roles. Maria will add diversity of perspective, and a strong and influential South African voice, to our deliberations. She has a breadth of private and public sector experience that will benefit our work and discussions, from her current positions as Chief Executive Officer of Barclays Africa, as Chair of the Banking Association of South Africa, and her prior role as Director General of South Africa’s National Treasury.”

Tharman Shanmugaratnam, Chairman of the G30, said: “Agustín and Maria are outstanding leaders. They each bring a wealth of understanding of the financial and economic challenges of the times, which the G30 seeks to address through our deliberations and ongoing work program of studies. The work of the G30 in international financial and economic thought leadership relies on its dynamic, engaged membership, drawn from across the globe and across public and private sectors. I very much look forward to Agustín and Maria’s contributions in the years ahead.”

Carstens stated: “I thank Jacob, Tharman, and the G30 members for the invitation to join the Group’s membership. I am honored to join the organization and look forward to participating in its discussions and activities.”

Ramos stated: “It is a pleasure to join the G30, which does such key work on international economics and governance. I look forward to working together on projects of common concern and to supporting the Group’s mission.”

The Group of Thirty was founded in 1978. The Group is a private, nonprofit, international body composed of senior participants from the private and public sectors and academia. The Group
The Group is led by Jacob A. Frenkel, Chairman of its Board of Trustees, and Tharman Shanmugaratnam, Chairman of the G30. Amongst its members are Jean-Claude Trichet, Paul A. Volcker, Ben Bernanke, Mario Draghi, Timothy Geithner, Paul Krugman, Haruhiko Kuroda, and Jaime Caruana.

Australian Boutique Antipodes Partners Unveils UCITS Version of Flagship Global L/S Strategy

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Australian Boutique Antipodes Partners Unveils UCITS Version of Flagship Global L/S Strategy
Wikimedia CommonsFoto: Thennicke. La australiana Antipodes Partners lanza una versión UCITS de su fondo insignia

Antipodes Partners Limited (Antipodes Partners), the boutique Australian investment management firm, has launched a UCITS version of its flagship long/short global equity fund.

The Antipodes Global Fund – UCITS, which was launched with $125m of cornerstone assets, has come to the market in response to strong demand from European and Asian investors. It is the first sub-fund of the Pinnacle ICAV, a Dublin-based UCITS umbrella distributed by Pinnacle Investment Management, a leading Australian multi-boutique platform with over $20bn in AUM across its affiliate managers.

A pragmatic value manager of global equities, Antipodes Partners was founded in 2015 by Jacob Mitchell, former Deputy CIO of Platinum Asset Management, together with a number of former colleagues and like-minded value investors.

The launch of the Antipodes Global Fund – UCITS follows the two-year anniversary of its flagship global long/short strategy, which delivered a 28.9% return since inception on 1 July 2015 to 30 June 2017, in USD terms, against the MSCI AC World Net Index return of 14.4%. Overall, Antipodes Partners manages in excess of $3bn in global equities.

Antipodes Partners builds high conviction portfolios and focuses on capital preservation, with the aim to deliver consistent alpha at lower levels of risk than the overall market. Its investment process seeks to take advantage of the market’s tendency for irrational extrapolation in the identification of investments offering a high margin of safety.

The experienced 13-strong Antipodes Partners investment team includes top sector specialists and a research team with expertise across multiple geographies and industries.

Mitchell explains: “At the core of our investment philosophy, we seek in our long investments both attractively priced businesses that offer margin of safety, as well as investment resilience characterised by multiple ways of winning. The opposite logic applies to our shorts. While the investment case will always be predicated on idiosyncratic stock factors such as competitive dynamics, product cycles, management and regulatory outcomes, we seek to amplify the investment case by taking advantage of style biases and macroeconomic risks and opportunities.”

The Antipodes Global Fund – UCITS, a high conviction portfolio of around 30-60 major long holdings, launched with a highly differentiated portfolio versus the index and peers. Antipodes Partners’ long/short strategy currently has its largest net allocations to Developed Asia, Developing Asia and Western Europe – with a minor net long to the US, the dominant geographic weight in the benchmark and, hence, most other global equity funds.

Mitchell believes today’s market backdrop has created a false sense of security, as investors are confusing the low volatility environment with low risk.

“Central bankers have somewhat cornered themselves. Increasingly, political and economic pressure to normalise interest rates or withdraw stimulus is likely to trigger volatility and widen credit spreads. While the low-volatility regime may endure, investors have grown too comfortable with the central bank reaction function, extending the illusion of stability,” Mitchell adds.

“We are avoiding expensive versions of the bond proxies as long investments, accumulating selective opportunities that have suffered the most from yield curve compression – while increasing our shorts on the beneficiaries of the low rate world.

“We are encouraged by the growing valuation dispersion within and across markets – across region, sector and factor – as we think it is indicative of broadening pragmatic value opportunities, both long and short. Flexible and risk-aware investment strategies seeking idiosyncratic alpha, rather than passive beta, should outperform in an environment where volatility awakens from temporary hibernation.”

Antipodes Partners has also opened a London research office, run by senior investment analyst Chris Connolly, and expects to add further investment expertise to its London office in the coming months.

The Antipodes Global Fund – UCITS includes an early-bird share class, which offers preferential fees for early investors.

Bill Gross: “A “Less Flat” Curve Could Signal the Beginning of a Possible Economic Reverse””

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¿Se van a mantener los tipos eternamente bajos?
CC-BY-SA-2.0, FlickrFoto: Lunita Lu. ¿Se van a mantener los tipos eternamente bajos?

In his latest monthly outlook, titled Curveball, Bill Gross mentioned that to his mind, free will is the key to our unique position among life’s animals. Without it, this business of living is reduced to a meaningless game.

He also makes the case that monetary policy in the post-Lehman era has resembled the gluttony of long departed umpire John McSherry – they can’t seem to stop buying bonds, although as compulsive eaters and drinkers frequently promise, sobriety is just around the corner. In his opinion, “The adherence of Yellen, Bernanke, Draghi, and Kuroda, among others, to standard historical models such as the Taylor Rule and the Phillips curve has distorted capitalism as we once knew it, with unknown consequences lurking in the shadows of future years.”

“But the reliance on historical models in an era of extraordinary monetary policy should suggest caution. Logically, (a concept seemingly foreign to central bank staffs) in a domestic and global economy that is increasingly higher and higher levered, the cost of short term finance should not have to rise to the level of a 10-year Treasury note to produce recession.” And notes that commonsensically, a more highly levered economy is more growth sensitive to using short term interest rates and a flat yield curve, which historically has coincided with the onset of a recession.

“Just as logically, there should be some “proportionality” to yield curve tightening. While today’s yield curve would require only an 85 basis increase in 3-month Treasuries to “flatten” the yield curve shown in Chart 1, an 85 basis point increase in today’s interest rate world would represent a near doubling of the cost of short term finance. The same increase prior to the 1991, 2000 and 2007-2009 recessions would have produced only a 10-20% rise in short rates. The relative “proportionality” in today’s near zero interest rate environment therefore, argues for much less of an increase in short rates and ergo – a much steeper and therefore “less flat” curve to signal the beginning of a possible economic reversal.

How flat? I don’t know – but at least my analysis shows me that the current curve has flattened by nearly 300 basis points since the peak of Fed easing in 2011/2012. Today’s highly levered domestic and global economies which have “feasted” on the easy monetary policies of recent years can likely not stand anywhere close to the flat yield curves witnessed in prior decades. Central bankers and indeed investors should view additional tightening and “normalizing” of short term rates with caution” he concludes.

“We are Underweight US Financials, but the Pending Deregulation Could be an Interesting Catalyst”

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“Estamos infraponderados en el sector financiero en EE.UU. pero la desregulación podría ser un interesante catalizador”
Grant Cambridge, courtesy photo. “We are Underweight US Financials, but the Pending Deregulation Could be an Interesting Catalyst"

To avoid companies that are overvalued in a stock market such as the US, which since February 2009 has revalued 280%: is the goal of Grant Cambridge, fund manager at Capital Group, which explains in this interview with Funds Society its management keys. He says that this American strategy, which has recently been offered to European investors with the launch of its Luxembourg version, offers long-term returns through a fundamental analysis of companies. And that he is not afraid of the Fed, which he hopes will continue with his gradual upward path, and that it will remain as transparent as possible to avoid surprises.

1.    The first thing which nowadays comes to my mind when speaking about US equities is high valuations. Do you agree? If not, or at least partially not, in which sector valuations are still attractive?

When I think about the US, I actually don´t necessarily think about high valuations. Although there are companies in the US which are getting a tremendous amount of attention that do have high valuations. That´s why it is important to think about diversification through a fund like ICA and avoid areas that are overvalued.

If I had to guess what the best industries were over the last twenty years, they are a highly diverse set of sectors. This is to show that I can find in all sectors companies that are attractively valued. But I can also find in all sectors companies that are not attractively valued. The real objective is to try to avoid the names which are overvalued.

Right now, a lot of attention is put on large tech companies and the top five stocks right now, in terms of market cap, are equal to the bottom 250 stocks.  That speaks about how concentrated is the market. This fund can invest in growth, but also looks for growth and income. So we have the flexibility to invest in a company like Amazon, with no dividend income, but we also might invest in a company like Verizon, which has lower growth but a really attractive absolute yield, almost 5%. ICA provides a dividend yield of around 2.2%, which is better than the S&P 500.   Most of the companies we have in the fund are domestically domiciled and we can invest up to 15% outside the US. However, we actually get our exposure through US companies that have revenues and earnings around the world. 

2.    Which factors could support the continuation of the rally in the stocks you have in your portfolio? Will it come from earnings, from economic growth or from Trump fiscal policies?

Just to put in perspective, since February 2009, the US equity market is up 280%. So I look for companies that have reasonable earning growth, with that you need fundamental analysis to make sure you have that fundamental growth. In other words, I´m worry about the macro, I mean I can worry on the top down, but I build the portfolio on a bottom-up basis. One company at a time. And all of the companies that we invest in are analyzed on fundamental basis. Many times we meet with the companies. Many of them we have met with the companies in their local activities around the world. So, we are doing a true global fundamental research. This gives us the confidence to invest in those companies for a long term period. 

The turnover of ICA is around 25%. That means that 40% of the fund asset has been in companies we held of more than eight years.

3.    Based on your long experience, would you say macro or fundamentals are more important in the performance of your portfolio? What do you need to find in a company to invest in it?

I look for ethical management.  I look for reasonable valuations. I look for companies that have attractive capital allocation strategies and usually what it does mean is an orientation to return cash to shareholders through dividends or even better, dividends which are progressively growing over the time.

This fund is oriented towards larger caps companies.  What we do is we think about the objective of this fund and we orient our investment universe towards that.

4.    Are Fed rates hikes impacting on in any way in the equity market in general and in your portfolio in particular? What do you expect from the Fed? Will you implement any change in your portfolio accordingly?

For the Fed, I expect a continued measured pace of interest rates increases and I think up until now we have seen that. They have been increasing rates for the right reasons. The market has tolerated the increases in interest rates. And actually if you see interests rising for the right reasons is not a bad backdrop for equity markets.  So I expect the Fed to continue to be measured, to be as transparent as possible and to not have any surprises.

If you go back to 1994-1995 time frame, rates gone up very rapidly, there were a lot of surprises and impacted both the fixed income and the equity market. Right now I see the Fed ´patrons being very transparent; they are trying to give as much indication of direction as possible. 

In sum, I don´t expect interest rates to go up and up an up.

5.    What are the keys for being able to protect investors’ capital in down markets? For instance, in the current environment, is it better to have a more defensive bias or a more aggressive one? Why?

We have already talked about this, but for us, the key is the diversification. In our Capital System we do not only apply diversification within the portfolio but we have diversification of styles. We have eight portfolio managers in this fund; we have a variety of styles. We have been able to find general defensive sectors which in weak market, these kinds of companies have hold up very well. Two of our larger sectors now are consumer staples and consumer discretionary, both of which are defensive sectors overall.

For us this not only diversification per se, is diversification but with convictions. We do not add companies just for the purpose of diversifying. Every single position in the portfolio is a conviction. Our investment process involves more than one decision maker. We have eight portfolio managers assigned to this fund and we also have a research portfolio, which is managed by the specialists or industry analysts. The industry analysts are looking for high conviction ideas. They only make a small number of decisions per year and when they invest, the portfolio managers who are in the fund will also co-invest. This process is very transparent, it is granted in trust, in communication and in collaboration. 

6.    Which sectors do you like the most from a fundamental standpoint? Which ones are you currently overweighting?

We are slightly overweight energy. As said before, consumer staples, energy and telecommunication companies we are overweight relative to the S&P benchmark. We are underweight financials.

7.    Energy and financial sectors, which have been in trouble, are they an opportunity now?

Energy is a cyclical commodity and we have seen an ample amount of supply which offsets the demand. So, basically, as a result, the commodity has weakened. We don´t have a wide company view on oil. Each person has his own opinion. My opinion is it will take some time before the supply and demand comes back into balance. Demand has been fairly stable and supply has been ample. OPEC has shown they wanted to set a floor on price and the US is producing more energy, natural gas and oil than it has historically.

It was only a few years ago when we were worry about peak oil and we were discussing oil at $200 a barrel. So this goes to prove that this is a commodity cyclical and where there is more supply there is pressure on the commodity. One thing we are particularly interested in are the low cost providers and the companies that can earn their dividend thanks to this weakness of the commodity.

Concerning the financial sector, we have been underweight in ICA, there may be a general feeling that interest rates will be lower for longer and you really need interest rates to go up two-three hundred basis points to make a meaningful impact on earnings. So we haven´t had enough increase in interest rates to make a material impact to earnings. We also have a tremendous amount of regulation in the US and the new Trump Administration is talking a lot about deregulation and we will have to see whether or not it really ends up impacting, particularly the banks.

The discussion around the Trump Administration considering deregulation will be one that we will continue to watch because it could be an interesting catalyst after having a period in which regulation was put on the market since the financial crisis.

Deregulation is a theme which goes beyond the financial sector and that could impact a number of sectors. President Trump has talked about removing two regulations for everyone that is audited, that goes very broadly across the economy so we will have to wait and see which areas are most affected. We do a lot of research about regulation and right now it is too early to tell what could be his priorities. The financial regulation is one which seems to be a priority.  

8.    Why do you overweight large caps and underweight small caps? Does it help to the portfolio stability?

This is a conservative fund launched by our founder. This is a lower volatility, larger cap fund.  We refer it as core fund which invests in seasoned companies; companies which stability and which are leaders, many of them, in their fields. They are liquid companies and most of them have an income as contribution to total return. CGICA’s 83-year average return of 12% has proved rewarding for long term investors.

In other words, this fund, because of its nature, has been relatively conservative and is currently overweight large caps. Around 10% of the fund is in mid caps today. We do not have any small cap in the fund. It does help with portfolio stability and it also contributes to have liquidity in the company we invest in. Besides, it gives you exposure to earnings and revenues around the world.

We are managing the fund with a longer term horizon and our approach to investing in larger caps, stable, seasoned companies, as said before, helps to maintain a stable portfolio. Small and mid caps can go through dramatic changes, some times in the short term, some times in the long term and larger caps tend to be more stable. It does not mean they not move around, but generally they provide stability.

9.    Why active management and having a high active share are key factors when investing in US equities?  How does it help to long term results?

We look to focus on fundamental research into companies and consider their long term future prospects -their weighting within the index is not a primary consideration.

When we are investing we almost rarely use the words index, underweight and overweight. In our vocabulary, in our day to day jobs, we are not using them. But when we are sitting with advisors, we can describe the fund using these words despite this is not the way we describe it in our meetings internally. In other words, we are aware about the benchmark but don´t use it as a way to build our portfolios.

Apart from that I would like to highlight that because of we are looking for companies with dividend characteristics, we are many times invested in the higher dividend quintiles and that is an area which gives the stability of the fund ´returns. It also provides downside protection in the event of a correction.   

We tend to be in the upper quintile of our peer group for consistent risk-adjusted returns, but we are in the lower volatility category of our peer group. Actually, we are in the lowest quintile of volatility of our peer group.  What is exactly what we want to do for our long term shareholders: provide superior returns with lower volatility.  We must not forget our mission which is to improve people´s life through successful investing.  It is important also to bear in mind the investment management is our only business. We are focus on the long term interest of our clients. Finally, I would like to remember another key feature of CG is that portfolio managers invest their own capital in the funds they are managing.

10.    Finally, is the Luxembourg strategy being well received in Europe? What does it strategy offer to European investors?

Yes. It provides to European investors the same thing we have been providing to US investors for 83 years. It provides long term investment returns through fundamental analysis of companies.

Now European investors can access to one of the most successful strategies and it represents what they are looking for a US equity fund: it is a conservative, first quartile, low volatility, easy to understand fund. And more than proved, with 83 year track record.  
 

Three Questions on Pension Reform Answered by Francisco Murillo, CEO at SURA Asset Management Chile

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Tres preguntas a Francisco Murillo, CEO de SURA Asset Management Chile, sobre la reforma de las pensiones
Francisco Murillo, CEO at SURA Asset Management Chile. Three Questions on Pension Reform Answered by Francisco Murillo, CEO at SURA Asset Management Chile

The pension reform in Chile is at the height of the consultation stage. The project will bring several new features to the pension system, including a 5% increase in contributions. The Chilean government has announced that the reform will reach parliament between March and April, and that its approval is expected by the end of the year.

Francisco Murillo, CEO at SURA Asset Management Chile, answered three questions about the reform.

1. How do you evaluate the announced incorporation of alternative assets among the investments of the AFPs?, Is it something positive for the markets and for the savers?

It is an excellent initiative, and addresses the need to seek new sources to ensure profitability, considering that the returns we have known in the past will hardly be repeated in the future.
In fact, we were among those who raised the urgent need for this measure. In 2014, in the midst of the debate on the pension system reform, we presented 11 proposals to the Bravo Commission, one of which was precisely to make the investment in alternative assets possible, because of the strong impact they have on pension profitability.

It is shown that an additional 1% of the average annual return in the active life of a member can improve their pension by 20% to 25%. In the recent past, alternative investments have obtained higher returns, less volatility and, moreover, contributed to portfolio efficiency.

The retirement reality that we Chileans live today shows us that there is a gap between the expected pension and the one that is actually received at the end of the working life. Currently there is a broad consensus on the urgent need to apply changes to the system, and that is probably one of the great challenges we have as a country: closing that gap.

It is within this context that we must promote and encourage actions that generate a positive impact on the pension savings of Chileans.

2. One of the potential items of the pension reform could be the limitation of multi-fund movements: How do you evaluate that potential innovation?

It’s fundamental to know the proposed bill in more detail, since there are issues that would have to be analyzed from the technical point of view, in order to evaluate its implementation and impact.

We believe that fund management is relevant to pension construction and requires people’s involvement, so it is very important to have that freedom of choice and action, to decide in which multi-fund to invest your pension savings.

However, we must clarify that the changes that arise from so-called massive funds, or without adequate advice, can generate lower returns for fund members. Our mission as an AFP is to educate people to make appropriate decisions, according to their investment profile and their expectations for post-retirement life.

3. In general, who will win and who will lose with the changes?

Our expectations are that the changes are adjusted so as to achieve the great common goal: improving pensions.

Most likely, the final solution will not be perfect for any of the players involved, there are issues that are shared more strongly than others, but what is clear is that the pension system as such, I do not mean only that of individual capitalization, will better address the needs of an aging country.

In order for us Chileans to enjoy a retirement stage of life according to our expectations, we must act urgently, applying parametric changes and adjustments with greater savings as soon as possible, leaving decisions about the pension system out of the political cycle. The further we delay in acting, the later we will reach our goal of having better pensions.

We are convinced that once the pension reform takes shape, the role of individual capitalization will become even clearer as a key pillar of the pension system and that, outside the environment that has been generated in recent years, the AFPs have fulfilled a fundamental role, and are far from being the problem of the pension system in Chile.
 

Aberdeen AM: “India’s Debt has Such Low Correlation with Other Markets Given it is More Linked to Internal Factors”

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Aberdeen AM: “India es un mercado más ligado a factores internos y por eso su deuda tiene una correlación tan baja con otros mercados”
Wikimedia CommonsPhoto: Kenneth Akintewe. Aberdeen AM: “India’s Debt has Such Low Correlation with Other Markets Given it is More Linked to Internal Factors”

The global economic context reinforces the argument for the Indian bond market. India’s transformation is mainly an internal growth story, in contrast with that of China, for example. India’s economy has a low correlation with international markets, and this extends to Asia.

A study conducted by Bank of America Merrill Lynch found that the average correlation of Indian bonds with the rest of Asia has been close to zero  over the last 5 years. Indian bonds, therefore, offer a large source of diversification for investors in international debt.

Due to all of the above, Aberdeen is still quite bullish on India and if we ask its managers and analysts what their high conviction ideas are for the coming months, Kenneth Akintewe, Senior Investment Manager for the firm’s Asian fixed income team, is convinced that, almost unanimously, the answer would be precisely that one. Not surprisingly, the firm has positions in the country’s fixed income and equity products.

Its bond fund, launched in 2015, has been very well received in the US offshore market and in Latin America and already exceeds  200 million dollars, in assets under management. India’s bond market is a large and liquid market, with over one trillion in debt, and with an attractive return of 7.42% so far this year. The average duration of the Aberdeen strategy is 6.4 years and it has an investment grade rating of Baa3. Currently, there are only about five funds in the market competing within this asset class.

“Presently, India’s story is one of exceptional growth and reform, but that is not the only reason. There’s many. A key factor is that, if we think about the current global environment, there are multiple risks such as global policy, global demand, commodity market performance, geopolitics, as well as high correlations between most core markets, and we have very few options that help counteract these risks. Indian debt, however, is an asset class with low correlation with other markets,” explains Akintewe.

Growing Demand

The Indian bond market is a large, liquid market – over a trillion dollars – and Aberdeen has been investing there for about 10 years. They consider this an achievement when taking into account that, until a few years ago, India had the dubious honour of being part of the group of economies known as the ‘Fragile Five’, i.e. the five emerging economies which were very dependent on foreign investment in order to finance their growth, with high levels of fiscal deficit, current account deficits and a high degree of institutional corruption. Access to capital markets was very difficult for them.

But Akintewe explains the transformation: “Ten years ago, the context for bond investment was radically different. Capital market regulations made it very difficult to invest. International investors required a licence first, then they had to have a quota for government bonds and another one for corporate debt, which were subjected to multiple layers of other rules and restrictions. If you sold one of the positions you lost your quota and would have to wait for an undeterminable amount of time to get another one, meaning active management was impossible”, he recalls.

The reform of the capital markets, however, has been greatly simplified, and for Aberdeen that means that it now makes sense to market a fund of these characteristics. “Now we can actively manage risk,” the manager points out. But despite this opening, the exposure of foreign investors to the country is still small. This is partly due to the fact that, due to capital controls, India is not part of most bond indices, not even that of the emerging markets. Aberdeen examined about 160 emerging market local currency bond funds and found that the average exposure to India was less than 1%, a ridiculously small amount considering it has not only been one of the strongest reform stories in EM but one of the most consistently best performing trades over the last few years.

The main players in the domestic bond market are essentially institutional investors or Indian insurers, although Akintewe believes that as the market grows international investors will pay more attention to it. There are currently one trillion dollars in the Indian bond market, with $700 billion corresponding to the public debt market and $300 billion to the corporate debt market. The share of the government bond market that foreign asset management firms can access was 3.5% in 2015 but is being increased to 5% by March 2018. The market has seen increasing participation but, Aberdeen’s manager explains that for the overall bond market foreign exposure is still low at around 7.5%. . In other EM bond markets foreign exposure can be 30% or much higher in some cases, making them vulnerable to changes in investor sentiment.

“There is still room for growth. Progress is very gradual, but it is expected that in the long run the government will be more comfortable with international investors in its bond market. Therefore it is possible that the foreign quotas could be increased, particularly with respect to the 51 billion dollar corporate bond quota, as it is in the country’s interest that companies continue to have uninterrupted access to capital.

Risk Profile

Regarding the risk profile of the Aberdeen funds, the manager explains that it is an asset class with little correlation to issues that are very correlated with other emerging markets, such as oil, even with the global bond market, or with emerging debt. It is a market that is linked more to internal factors such as monetary, fiscal, deficit reduction or inflation control.

“Local insurers are increasing their assets by 20% annually thanks to the population’s wealth growth, so technically there is a very strong growth in demand from the local institutional sector. And it is a very liquid market particularly compared to other emerging markets with government, quasi-government and the more highly rated corporate issues trading with tight bid/offer spreads of 2-3bps and in large sizes.

The Aberdeen Global Indian Bond fund invests in local currency bonds. Akintewe explains that it is the most uncorrelated asset, because including Indian debt in  hard currency in the portfolio means there is a certain correlation with US Treasuries.

Akintewe knows that the currency risk exists, it’s clear. “However India remains committed to fiscal reform, has built a high level of foreign exchange reserves, has seen its current account deficit come down significantly and moved to a positive basic balance of payments position thanks to very strong growth in foreign direct investment meaning that the rupee enjoys firm support from its underlying fundamentals., We estimate that the Rupee will be able to stay at current levels or even appreciate around 1% to 2% against the dollar, but the key is its low volatility which is half to a third of other G10 and EM currencies.”

“We must point out that the fund’s volatility is quite low compared to other emerging market bonds, and of course, much lower than any exposure to Indian equities. Since its inception, the fund’s volatility has been at 5.6%,” he concludes.