Active vs. Passive? Choose Both

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The active/passive management conversation doesn’t have to be a debate. Those are better left to the politicians. As MFS Co-CEO Michael Roberge says in his October 18 opinion piece in the Wall Street Journal, investors can choose both. And they may want to consider that, given the potential diversification benefits of having active alongside passive in their portfolios.

With active management facing criticism of late, Mike sheds some light on the rhetoric and how to recognize a manager with skill. He also makes a compelling case for active’s risk management capabilities and the importance of excess return in an environment fraught with return-generating challenges.

Investors know this. In a recent survey conducted by MFS, nearly three-quarters of professional investors surveyed in the US cited strong risk management as an important criteria when selecting actively managed investments

So passive has its place. Active has its advantages. And there are some real merits to a “bipartisan” portfolio. Here’s what Mike has to say:

  • It is true that flows into passive strategies have picked up. But U.S. advisers are still allocating 70% of their clients’ assets to active investment strategies, according to our recent survey.1 Investment flows can be fickle and aren’t always a good barometer for long-term shifts in sentiment.
  • Most of it points to the average active manager’s inability to consistently beat their benchmark, net of fees. And while that might be true for average managers, there are skilled active managers who have consistently outperformed their benchmarks over a full market cycle. But how do you distinguish between skilled and average? It really comes down to conviction and risk management.
  • Investors caught in the active/ passive debate need to under- stand the issues—but stay focused on the outcome. Market returns might look appealing. Excess return will matter more. And managing the downside is essential. Long term, the bipar- tisan portfolio probably wins.

Investors – Focus on State Polling as U.S. Election Nears

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Inversores: ahora centren su atención en las encuestas estatales
CC-BY-SA-2.0, FlickrPhoto: Indi Samarajiva . Investors - Focus on State Polling as U.S. Election Nears

With less than a week to go until the U.S. presidential election, investor anxiety about next Tuesday’s outcome is running high, as evidenced by the recent move in risk assets. So what should investors (and others) focus on between now and Election Day? According to PIMCO, state polling in the coming days will be especially important.

Libby Cantrill, PIMCO’s head of public policy, says that since last Friday’s revelation that the FBI is considering other possible “pertinent” emails in the Hillary Clinton case, several national polls have shown the presidential race tightening, continuing a trend we had observed even before Friday’s news.

But at the end of the day, national polls can only tell us so much. Because of the unique way people elect their presidents in the U.S. – through the Electoral College, rather than the popular vote – a handful of key battleground states will likely dictate next Tuesday’s outcome, as in so many prior races.

Between 10 and 12 of these battleground states are important, but arguably only a subset are truly critical to get to the needed 270 electoral votes to win the White House: Florida, Ohio, North Carolina and Pennsylvania. That is because Donald Trump would have to win all four if Clinton maintains her relatively healthy leads in the battleground states of Colorado, Virginia, Michigan and Wisconsin.

Pathways to the White House

In other words, even considering Friday’s news, Trump’s pathway to 270 electoral votes, although possible, remains narrow. To be even more reductive, it is unlikely Trump wins the White House if he does not win Florida.

Similarly, most pathways for a Clinton victory require her to win Pennsylvania. She can afford to lose certain battleground states (including Florida, Ohio and North Carolina) given her polling in others, but it’s hard to see her winning the White House if she loses Pennsylvania.

Polling in Ohio shows Trump with more than a three-point lead on average and shows Trump tied with Clinton in Florida and North Carolina (according to Real Clear Politics). Clinton’s lead in Pennsylvania remains solid, however, with an average four-point lead over Trump.

We should be getting more state polling in these four states (and the other battleground states) in the coming days, and we think these data are what investors should focus on – not simply the national polls.

Regardless, with a tightening race and a larger number of undecided voters this election cycle, the chances of an unexpected election outcome are not immaterial – and that could cause continued repricing in the market, as we’ve seen over the past few days.
 

Chinese HNWI Choose The USA As Most Suitable Country For Emigration

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Chinese HNWI Choose The USA As Most Suitable Country For Emigration
Foto: Paul Arps . Una parte importante de los HNWI chinos tienen en mente emigrar, y Estados Unidos es su opción preferida

The Hurun Research Institute and Visas Consulting Group jointly published a report –on its third year- on Immigration and the Chinese HNWI. The 2016 report features a bespoke index on the Most Suitable Countries for Emigration and a bespoke list of the Preferred Cities to Buy Houses and Emigrate to.

The USA led for the second year of the index, followed by the UK, which held onto second place despite Brexit. Canada was third, followed by Australia and Singapore. The Republic of Ireland broke into the Top 10 for the first time, shooting straight into sixth place. Six of the Top 10 are European countries.

Overseas property purchases are most popular form of overseas investment. The West Coast of America is the most attractive destination for Chinese HNWI to settle in, particularly Los Angeles, San Francisco and Seattle. Rupert Hoogewerf, Chairman and Chief Researcher of Hurun Report, said “Seattle has been shooting up the rankings of Preferred Destinations for Chinese HNWI for the second year in a row, even surpassing New York to break into the top three this year.”

Over the next three years, 60% of HNWIs intend to invest in overseas property. Rupert Hoogewerf said: “China currently has 1,340,000 high net worth individuals, defined as individuals with US$1.5m, so that means we are looking at a massive 800,000 individuals who want to buy property overseas over the next three years.”

International Asset Allocation

More than half of the HNWI are concerned about the depreciation of the yuan, with other prominent concerns including the US dollar exchange rate and overseas asset management. Rupert Hoogewerf said, “The trend this year goes beyond emigration to global asset allocation. For rich Chinese today, the target is to have one third of their wealth overseas. Buying houses and foreign exchange deposits lead the way.”

Overseas financial investment accounted for 15% of the wealth of the individuals surveyed.  Rupert Hoogewerf said, “The main reasons for investing overseas are to spread their investment risk, children’s education and with emigration in the back of their minds.”

When investing overseas, asset safety is the top priority. 64% chose ‘risk control’ as their foremost consideration. Foreign exchange deposits are the investment of choice, at 31%, followed by funds with 15 and insurance accounting for more than 10%. Rupert Hoogewerf said, “For Chinese HNWIs today, their investments overseas are conservative nest eggs, not risk capital.”

Eight out of ten HNWIs have ‘passion investments‘, with the two most popular ones, paintings and watches, accounting for 24% and 16%.  Stamps (7%), wine (4%) and classic cars (2%) are other popular options. Compared with last year, the proportion investing in painting showed a considerable increase, up 33%, while wine investments fell by 2%.

Chinese Immigrants Index

This index considers the most suitable countries for Chinese high net worth individuals to emigrate to, taking into consideration a basket of eight factors, including education, ease of investment, immigration policy, property investment rules, taxation, medical care, visas and ease of adaptation for Chinese emigrants.

Preferred Destinations for Emigration and Overseas Property Purchases

The report draws on a survey of around 300 Chinese high net worth individuals (HNWIs), carried out between August and October 2016, with average wealth of 27 million yuan, who have either emigrated or considered emigrating. A Chinese high net worth is defined as a family with net wealth of 10 million CNY, equivalent to US$1.5 million.

 

François Farjallah, New Global Head of the Middle East Region at Indosuez

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Indosuez Wealth Management, the global wealth management division of Crédit Agricole Group, has appointed François Farjallah as global head of the Middle East region.

Based in Indosuez regional hub in Switzerland, he will drive and coordinate all wealth management activities in the region.

Indosuez’s Middle East business is primarily developed from offices located in Switzerland, in the United Arab Emirates (Dubai & Abu Dhabi) and Lebanon (Beirut).

Farjallah joins from Societe Generale Private Banking where he spent nine years and held a number of senior executive roles across Switzerland, Luxemburg, Greece, and the UAE.

Formerly, between 1998 and 2007 he worked at Credit Suisse across Switzerland and the Levant.

Indosuez Wealth Management had €110bn in AUM as at end of December 2015.

M&G to Resume Trading in M&G Property Portfolio

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Los fondos de real estate británicos vuelven a operar con normalidad tras suspender reembolsos ante el Brexit
CC-BY-SA-2.0, FlickrPhoto: David Lofink . M&G to Resume Trading in M&G Property Portfolio

Effective from noon on Friday 4 November 2016, M&G Investments (M&G) will resume trading in the shares of the M&G Property Portfolio and its feeder fund, the M&G Feeder of Property Portfolio. The M&G Property Portfolio is a broadly diversified fund, which after all sales, will invest in 119 UK  commercial  properties  across  retail,  industrial  and  office  sectors  on  behalf  of  UK  retail  investors. 

The decision was taken in agreement with the Depositary and Trustee and the Financial Conduct Authority has been informed. The fair value adjustment originally applied on 1 July 2016 has also been removed in full.  

M&G  announced  a  temporary  suspension  on  5  July  2016  after  investor  redemptions  rose markedly  due  to  high  levels  of  uncertainty  in  the  UK  commercial  property  market  following  the outcome of the European Union referendum.  

William Nott, chief executive of M&G Securities, says: “Suspending the fund wasn’t a decision we took lightly, but we felt it was the only way to protect the interests of investors in what were very unusual circumstances in the aftermath of the referendum. Suspension created an environment more akin to normal conditions, allowing us time to choose the most appropriate assets to sell at the right price in order to preserve the integrity and future of the fund. As such, the fund manager has kept higher quality assets while reducing the exposure to assets deemed riskier than their prime counterparts, putting the portfolio in a good position for any further volatility that may be experienced in the lead up to Brexit.” As confidence returns to the market, 58 properties have been sold, exchanged or placed under offer for a total of £718 million.  

Meanwhile, and effective January 1st, 2017, Sam Ford will be the new manager of the £598 million M&G UK Select Fund given the incumbent  manager, Mike Felton is  leaving M&G. Until the end of the year, the fund will be managed  by  co-deputy  managers  Garfield  Kiff  and Rory Alexander.

 

Wealthy Individuals Believe Charitable Giving and Volunteering Have A Greater Potential for Positive Impact than Voting

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¿Es más útil donar que votar? Radiografía de la filantropía estadounidense
CC-BY-SA-2.0, FlickrPhoto: contemplativechristian . Wealthy Individuals Believe Charitable Giving and Volunteering Have A Greater Potential for Positive Impact than Voting

Most wealthy individuals believe charitable giving (45 percent) and volunteering (31 percent) have the greatest potential for positive impact on society –far more so than voting for (13 percent) or contributing to (1 percent) a political candidate who shares their ideals on topics important to them – according to the 2016 U.S. Trust® Study of High Net Worth Philanthropy. Through an ongoing partnership with the Indiana University Lilly Family School of Philanthropy, the sixth in this series of biennial studies reveals a strong commitment to charitable causes among high net worth (HNW) households, and giving and volunteering levels poised to increase in future years:

  • Last year, the vast majority (91 percent) of HNW households donated to charity. This high rate of giving among the wealthy compares with 59 percent of the U.S. general population who donate to charity.
  • Fifty percent of wealthy individuals volunteered their time and talents last year to charitable organizations they care about – twice the rate of the general population (25 percent).
  • The study offers an optimistic view of future giving levels, with 83 percent of wealthy individuals planning to give as much (55 percent) or more (28 percent) in the next three years (through 2018) than they have in the past. Women, African Americans, and younger individuals (age 50 and under) are even more likely to increase their giving in the next three years.
  • Future levels of volunteerism are also promising. Among wealthy individuals who currently volunteer, 90 percent say they plan to do so as much (60 percent) or more (30 percent) over the next three years. Even among those who did not volunteer last year, 39 percent plan to do so during the coming years.

“Wealthy donors continue to be incredibly generous with their time and money in support of social change in their communities and in the world,” said Claire Costello, national philanthropic practice executive for U.S. Trust. “And while their charitable activity is driven to a large extent by their personal values and convictions, donors are also listening closely to the needs of nonprofits as they make their giving and volunteering decisions.”

A variety of motivations drive HNW philanthropy. In 2015, wealthy households cited the following among the primary reasons they give: believing in the mission of the organization (54 percent); believing that their gift can make a difference (44 percent); experiencing personal satisfaction, enjoyment or fulfillment (39 percent); supporting the same causes annually (36 percent); giving back to the community (27 percent); and adhering to religious beliefs (23 percent). Just 18 percent of wealthy donors said they gave largely because of tax benefits in 2015.

Electing to give, and giving to elect

Twenty-four percent of wealthy individuals contributed to a political candidate, campaign or committee last year or plan to do so during the 2016 election season. Among this group, donors over the age of 70 (40 percent) and LGBT individuals (38 percent) were more likely to make such political contributions.

Among those who contributed to a political candidate or campaign, wealthy individuals reported doing so because they:

  • View it as an opportunity to exercise their voice (56 percent).
  • Hope to influence the outcome of elections (49 percent).
  • Believe their contribution can make a difference (46 percent).

The main reasons why 76 percent of wealthy individuals have not and do not plan to make political contributions during this election season include:

  • Feeling such contributions would have little to no impact when compared to corporate contributions (47 percent) and contributions from political action committees (PACs) (26 percent).
  • Believing such contributions won’t make a difference (31 percent).
  • Not having a particular candidate they would endorse (26 percent).

Results of this study are based on a survey of 1,435 U.S. households with a net worth of $1 million or more (excluding the value of their primary home) and/or an annual household income of $200,000 or more. To view a detailed summary of key findings and to access the full report, visit www.ustrust.com/philanthropy.

Deutsche Bank’s Sell of its Banking and Securities Subsidiaries in Mexico is in Jeopardy

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Deutsche Bank’s Sell of its Banking and Securities Subsidiaries in Mexico is in Jeopardy
Foto: ell brown. Peligra la venta de las filiales mexicanas de Deutsche Bank

Just last October 26th, Deutsche Bank announced that, as part of its Strategy 2020, it had entered into an agreement to sell its Banking and Securities subsidiaries in Mexico to InvestaBank. However, the operation, that was expected to close in 2017, might be in jeopardy.

On Monday, the U.S Department of Justice issued a complaint charging two of Investabanks main shareholders, Carlos Djemal, and Isidoro Haiat for their role in an International Money Laundering Scheme involving over $100 million.

According to the U.S. Attorney’s Office, Southern District of New York’s release, allegedly and “since about June 2011 through in or about at least May 2016, Carlos Djemal, Isidoro Haiat, Braulio Lopez, Max Fraenkel, Daniel Blitzer, and Robert Moreno transferred funds through dozens of shell companies in the United States and Mexico as part of a scheme to fraudulently obtain tax refunds from the government of Mexico.”

Investabank has already removed Djemal from its Board and day-to-day operations but made no statement over Haiat’s situation. Haiat, who died in June 2015, was the bank’s main shareholder, with 15.56% ownership. Djemal owned 15.14% totalling a 30.70% stake involved in the investigation. The bank also stated that is still looking to buy Deutsche Bank’s subsidiaries. However, Funds Society has learned that, although Investabank claims Abraaj Group is supposedly still interested, and willing to up their stake in the operation (which could not be confirmed with the group since the information was received after business hours in Mexico), other investors have backed out for now and Investabank does not have the sufficient funds to go ahead with the purchase. 

This happens while Deutsche Bank is still looking to settle a U.S. Justice Department $14 billion fine related to a set of high-profile mortgage-securities probes stemming from the financial crisis. Funds Society also contacted Kerrie McHuch at Deutsche Bank to confirm InvestaBank’s release stating the German Bank was still looking to sell to them their subsidiaries and has not yet received an answer.

 

Aegon Asset Management US Announces New Head of Distribution

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Aegon Asset Management US nombra a Martin Coughlan director de distribución
CC-BY-SA-2.0, FlickrPhoto: Anuma Bhattarai . Aegon Asset Management US Announces New Head of Distribution

Aegon Asset Management has announced that Martin Coughlan has been appointed as Head of Distribution for Aegon Asset Management US. Coughlan is a 20-year veteran with US and non-US institutional sales, product, marketing, and client service experience. Coughlan was most recently Global Head of Institutional Sales and Client Service at Westwood Management, where he led the firm’s successful product and sales expansion globally.

Previously, Coughlan was Head of Global Institutional Services at Calamos Advisors LLC, where he spent more than seven years building the firm’s global institutional client base and a global business model for direct plan sponsor sales, consultant relations, and client service. Coughlan also served as a senior portfolio specialist while at Calamos, focusing on global and emerging markets strategies.

“I’ve seen Martin’s strong leadership skills first-hand,” says Gary Black, newly appointed CEO of Aegon Asset Management US. “His expertise in building high-performing teams across sales, client service, and product areas will add tremendous value to our goals of maintaining strong investment performance, growing our third-party asset base, and increasing profitability. We welcome his leadership to the team.”

Prior to Calamos, Coughlan, who graduated with honors from the University College Dublin with a Bachelor of commerce (banking and finance), spent nine years with Bank of Ireland Asset Management, where he served as Client Relationship Manager, working in Ireland, Japan, and the United States.

Coughlan will be located in the Chicago office of Aegon Asset Management US.

 

More Opportunities in China Beckon Foreign Managers

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China lost some of its glow for investors since the collapse of A-shares in June last year, which precipitated volatility in global markets as well as in the RMB. However, in 2016, the booming asset management industry, with continued growth in every sector, cannot simply be ignored.

These are some of the key findings of Cerulli Associates‘ newly-released report, Asset Management in China 2016. Private funds is one area showing stunning growth, having expanded rapidly since the filing system with Asset Management Association of China (AMAC) was approved in 2014. Total AUM continued to rise, over 30% from end-2015, to reach RMB5.6 trillion (US$842.8 billion) at the end of second quarter 2016.

At the same time, the sector shows varying quality. To clean up shell companies and unqualified managers, AMAC deregistered nearly 10,000 private fund managers in the middle of this year. Nevertheless, more than 16,000 local private fund companies are still operating.

The long-awaited liberalization of the private funds industry finally received the go-ahead from the China Securities Regulatory Commission (CSRC) at the end of June this year. The Chinese authorities moved to broaden the business scope of WFOEs and joint ventures (JVs) by allowing them to establish onshore private securities funds under their own brands and directly invest into the Chinese market, including the secondary market.

“We should note that, despite the WFOE breakthrough, foreign exchange control measures remain in place, and so a WFOE’s fundraising activities and investment activities have to remain within China,” says Thusitha De Silva, director with Cerulli.

“For foreign asset managers that want to tap into the competitive local private fund industry, full-scale localization is necessary,” says Miao Hui, senior analyst with Cerulli who leads the China research initiative. “This should include distribution and investment networks, the capacity to handle legal issues, and local talent,” she adds.

Unlike many local managers, foreign asset managers typically have long-term time horizons. Pension funds and mutual funds, rather than private funds, could be their ultimate target product spaces to penetrate in China. However, to win domestic mandates, a domestic investment track record is necessary. Along with the deregulation of market entry, foreign asset managers could build up local teams, create brand awareness, and prepare for possible mandates.

 

Marcelo Coscarelli Leaves Citi for EFG International

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EFG International nombra director para Américas a un ex directivo de Citi LatAm
CC-BY-SA-2.0, FlickrPhoto: Google Earth. Marcelo Coscarelli Leaves Citi for EFG International

Marcelo Coscarelli has been appointed Head of Americas Region and a member of the Executive Committee at EFG International.  The appointment will be effective January 1st 2017.

Previously, Marcelo Coscarelli was at Citibank Latin America, serving as Managing Director for high-net-worth and affluent clients since 2012. From 2008 to 2012, he was Chief Operating Officer of Itaú Private Bank International in Miami.

EFG International also announced that it has completed the acquisition of BSI for a preliminary purchase price of CHF 1,060 million. According to a press release, this transaction represents a milestone for EFG International’s positioning and growth. Joachim H. Straehle, CEO of EFG International said “the closing of the acquisition marks a historic milestone for both EFG International and BSI. Together we are forming a leading pure play private bank with strong Swiss roots, a broad international presence and an entrepreneurial spirit. Over the coming months, we will jointly drive forward the integration to realise the full benefits of the business combination for our clients, employees and shareholders. The combined group will have a solid capital and liquidity position, which will support the further development of the business.”

With the completion of the transaction, Steve Jacobs, Vice-Chairman of BSI from September 2015 until closing, and Roberto Isolani, CEO of BSI from May 2016 until closing, have become members of EFG International’s Board of Directors as representatives of BTG Pactual.

BSI will operate as a separate subsidiary within EFG International’s holding structure for a limited time, until its full legal integration, expected in the second quarter 2017.