Better Finance and EFAMA have joined forces to call for investors’ concerns to be duly considered.
Both organisations have always been strong supporters of the “PRIIPs” Key Information Document (“KID”), seeing it as a powerful instrument for retail investors to enable sound investment choices by allowing easier comparisons within a wide range of investment products. In order for this to happen, the rules defining the detailed contents of the PRIIPs KID must be correctly calibrated so that investors are given meaningful, comprehensible and comparable information.
Unfortunately, the recently rejected draft RTSs on the PRIIPs KID suffer from a number of flaws, leading to clearly negative consequences for retail investors. Better Finance and EFAMA firmly believe these flaws need to be addressed if the RTS are to succeed in providing the right information to retail investors.
While Better Finance and EFAMA may have diverging views on other issues, those addressed in this letter are so crucial for individual investors as well as for asset managers that the two organisations have come to a consensual view here.
Peter de Proft, Director General of EFAMA, commented: “There are two crucial issues that need to be addressed: allowing the disclosure of past performance, and fixing the misleading disclosure of costs and fees, and in particular the calculation methodology of transaction costs. The joint letter explains why both topics need to be solved”.
Guillaume Prache, Director General of Better Finance, commented: “Past performances of an investment product are an extremely valuable piece of factual information for investors in their investment decision, if only for investors to know whether the product has made any money or not. It is very difficult to understand why investors should be deprived of such information”.
Both organisations call on the EU institutions to reflect on and address these two concerns in light of the fact that both are of utmost importance for retail investors, the very investors the PRIIPs Regulation is meant to protect.
CC-BY-SA-2.0, FlickrPhoto: Alice Cavalier / LinkedIn / Andy Sedg . Alice Cavalier, New Senior Vice President of the Alternatives Team at PIMCO
PIMCO, a leading global investment management firm, announced that Alice Cavalier has joined the firm as a Senior Vice President in its alternatives team. In this new role, Cavalier will focus on the analysis of stressed and distressed investments in Europe. She will be based in the firm’s London office.
Cavalier joins PIMCO’s established alternatives team of 110 investment professionals globally. According to a press release, her hiring is part of the continued expansion of the firm’s alternatives investment platform and follows the hires of Paul Vosper, Executive Vice President and Real Estate Strategist and Lionel Laurant, Executive Vice President and Distressed Credit Portfolio Manager earlier in the year.
Cavalier joins PIMCO from Bayside Capital, the distressed debt and special situations affiliate of private equity firm HIG Capital. Prior to that, she worked as an analyst in the leverage & acquisition finance department at Morgan Stanley.
“Alice’s experience is a strong addition to our global team. Clients are continuing to diversify in their search for yield and alternative investment strategies are in high demand. We see excellent opportunities in the distressed credit market and expect this to continue for some time” said Laurant.
“We have hired more than 140 new employees this year and continue to recruit top talent from around the globe. Recent hires include over 40 investment professionals across alternatives, client analytics, emerging markets, mortgages, real estate and macroeconomics” said Dan Ivascyn, Managing Director and PIMCO’s Group Chief Investment Officer.
PIMCO manages approximately $26 billion in alternative investment strategies. The firm has developed and managed alternative strategies for more than 10 years, including a range of distressed credit and opportunistic strategies.
CC-BY-SA-2.0, FlickrPhoto: g0d4ather
. Renminbi: Depreciation Of Around 8% Or So Feels About Right On The Longer Term
The renminbi has been on a fairly consistent depreciating path versus the China Foreign Exchange Trade System (CFETS) renminbi index (the basket of trading partners’ currencies that Beijing implemented in December 2015), with some volatility around big moves in the US dollar spot index (DXY), points out Investec.
Initially the renminbi strengthened against the US dollar as the American currency generally weakened over the first half of 2016, but it weakened against the CFETS basket – a goldilocks scenario that helped China to contain capital outflows, as investors capitulated on their long view on the US dollar.
China has also benefitted from the UK’s unexpected vote to leave the European Union, said expert´s firm. The market shock that accompanied the result on 24 June, enabled Beijing to weaken in the RMB against the CFETS basket without causing market panic, as it had done on previous devaluations. The People’s Bank of China decided to manage the renminbi “with reference to a basket”, but it has not kept it stable, instead allowing the currency to depreciate steadily.
“We have seen the pace of depreciation at times up to 20% annualised”, says Mark Evans an analyst in the Emerging Markets Fixed Income team, “but it would be hard to expect that pace of depreciation going forwards without it triggering more capital outflow pressures. We believe that depreciation of around 8% or so feels about right on the longer term.” While there is likely to be some volatility, we expect the exchange rate to be stable near-term ahead of one important policy event: October’s renminbi inclusion in the Special Drawing Rights (SDR) basket of currencies, which effectively confers global reserve currency status.
China Global integration
An important aspect of integrating China into the global economy, remarks Investec, is the internationalisation of the renminbi. This aim advanced in December last year when the IMF agreed to include the Chinese currency in its SDR basket. There were, however, questions about whether the renminbi met all the criteria. By including the currency in the SDR basket the IMF hoped to encourage China to fully liberalise the renminbi by 2020. But in fact, it appears that the reverse has happened. The renminbi’s share of payments via the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network has fallen over the past year from a high of 2.79% in August 2015 to just 1.96% at the end of June 2016.
Surprised by the volatility and weakness over the past year, investors and corporates have reduced renminbi deposits held in banks in Hong Kong, Taiwan and South Korea over the past year. While investment inflows, which indicate willingness to hold Chinese assets, have also fallen 38% over the same period.
Beijing’s unpredictable policymaking history of the past year or so – state intervention in the stock markets and sudden currency devaluations – has also played its part. “We expect more policy clarity once we know the identity of the top echelons truly calling the shots after the leadership transition of the Politburo Standing Committee next year,” says Wilfred Wee, portfolio manager in the Emerging Markets Fixed Income team.
The Morgan Stanley Investment Management’s Global Fixed Income Team believes the upcoming months, including a full calendar of central bank policy meetings in September, will be key to watch as central banks reconsider their thinking, potentially shaking up the lull in sovereign bond markets.
Markets have been predicting more of the same over the next few months, and there is some chance expectations will not be met, in a bearish way. However, they said, adjustments will likely only result in a correction in government bond markets, as we maintain that the trend in central bank policy will be supportive of spread products and carry strategies. “But we are careful with our duration and do not want to be too long, given how far yields have fallen and how optimistic markets have been on monetary policy”, pointed out.
With moderate global growth and low inflation the most likely path forward and emerging market (EM) fundamentals stabilizing-to-turning, the Team believes EM debt should perform reasonably well.
“We continue to monitor signs that the credit cycle is maturing. However, we believe the strong technical backdrop afforded by easy central bank policy will continue to dominate the global fixed income markets going forward. Investors seeking returns will continue to buy global credit, while U.S. credit will likely outperform, as relatively attractive yields in the country will continue to attract foreign buyers”, concludes.
The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.
All information provided is for informational purposes only and should not be deemed as a recommendation. The information herein does not contend to address the financial objectives, situation or specific needs of any individual investor.
Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.
Prior to making any investment decision, investors should carefully review the strategy’s / product’s relevant offering document.For the complete content and important disclosures, refer to the pdf above.
Slight upside news for inflation, but still well below target
According to HSBC, we are not going to get a new forecast from the ECB on 20 October, but positive news for industrial production in Q3, the possibility of slightly looser fiscal policy in 2017 and a 5% rise in the EUR oil price imply slight upside news for inflation as the ECB prepares for its policy meeting.
For markets, the biggest news since the previous meeting was an ECB official quoted as saying that the “ECB might reduce purchases in steps of EUR10bn”. Some investors are taking the comments very seriously and, on top of the disappointment that the ECB did not extend QE in September, 10-year bund yields have risen around 20bps from their September trough.
Fabio Balboni and Simon Wells believe this small upside inflation news is unlikely to prompt a significant re-assessment by the ECB of its inflation forecast, which is well below target (1.2% in 2017, and 1.6% in 2018). The minutes of the September meeting made clear that the ECB “remained committed” to continuing asset purchases beyond March 2017 and “until the Governing Council saw a sustained adjustment in the path of inflation consistent with its inflation aim”. The sub-target inflation forecasts it made in September were conditional on market expectations of more (not less) monetary easing.
So in their view, it is too early for the ECB to start tapering its asset purchases.
Extend now, later or taper?
Once the technical constraints have been overcome, they continue to expect a six-month QE extension to be announced. Although an October extension might avoid a more heated debate in December as base effects push inflation up, more time may be needed for the ECB’s committees to complete their technical work. Also, the higher yields rise, the less binding the yield floor becomes.
“We therefore expect an extension to be announced at the 8th December meeting. Based on the ECB’s recent comments and inflation forecasts, we expect it to maintain the current purchase rate of EUR80bn per month. To do this, it may need to increase the issuance limit for bonds with Collective Action Clauses, but we also look at other options the ECB might have to explore. It is also possible that the ECB may start to signal its exit strategy from QE, once it thinks inflation is back on track.” They conclude.
In its latest report on responsible investment, the European Fund and Asset Management Association (EFAMA) presents the European asset management industry’s role and involvement in responsible investment and puts forward key recommendations for the future. The report is an update of EFAMA’s previous 2014 report on the same topic.
The growing demand from investors to address environmental, social and governance ‘ESG’ matters in the investment decision-making process has created a global momentum around sustainable and responsible investments. European asset managers, as intermediaries between investors and companies, have a crucial role to play in driving this trend.
Responsible investment has long been a focus for EFAMA. This year’s report sets out EFAMA’s outlook and recommendations on the main questions surrounding responsible investment: the importance of reliable and accurate reporting by companies, the debate about investment performance and responsible investment, the role of legislation and the different selection methods in the responsible investment process.
Peter De Proft, Director General of EFAMA commented: “In the context of the increased focus on sustainable finance at EU level, we believe it is particularly timely to discuss the European asset management industry’s ever-growing role and involvement in responsible investment.”
“There is no doubt that demand for sustainable and responsible investment is growing. This is in part due to the recognition that economic sustainability will impact longer term value creation, however the changing social and ethical values of asset owners and the broader public have also strongly influenced this transition”.
He concluded: “The European asset management industry is determined to continue to play its part in this global effort to solve some of the most pressing issues of our generation. We hope that this report will provide guidance for this collective initiative”.
The second part of the report details country-by-country descriptions of the legal frameworks and various private sector initiatives in relation to responsible investment in different Member States.
The debate on active versus passive investing has evolved following the growth of transparent algorithmic investment approaches such as smart beta. Advocates of smart beta believe that it offers benchmark-beating returns with lower costs than active management. However, smart beta investing is more complex than many investors perceive and requires careful consideration. Despite this, the widespread availability of these alternative passive strategies has undeniably changed the investment landscape.
Standard Life Investments, the global investment manager, considers the reality of smart beta investing in its latest edition of Global Horizons. The key points evaluated in the paper are:
The pitfalls investors should be aware of when considering smart beta strategies, including a lack of clarity in investment objectives and limited sustainability.
As the active versus passive paradigm shifts, traditional market benchmarking will be increasingly superseded by outcome oriented mandates. Transparent algorithmic components such as smart beta have a role to play but should not be used as static allocations.
Flows in smart beta have been significant and can strongly influence asset prices.
This presents opportunities to active investors who take a multi-strategy approach and offers new chances in the area of stock selection
Arne Staal, Head of Multi-Asset Quantitative Strategies, commented “advances in technology, the increasing availability of data and the rapid growth of smart beta strategies results in a fast-changing and expanding opportunity set for investors. However, they have more complex evaluations and choices to make, and a wider range of associated costs to assess against desired outcomes. An awareness of the pitfalls in utilising transparent algorithmic investment strategies such as smart beta is increasing but not yet widely discussed. We advise investors to approach smart beta investing with similar levels of due diligence as they would for active managers. Most active managers deliver a combination of smart beta and pure alpha. Those that consciously position their business model to build portfolios through security selection and active allocation to a broad range of strategies will be best placed to achieve better outcomes for clients and benefit from this evolution in asset management.”
In a constitutional reform referendum on 4 December, Italian voters will weigh in on some key proposals, chief among them the abolition of the Senate’s legislative power. According to Nicola Mai, portfolio manager and leads sovereign credit research in Europe for PIMCO, this would leave the lower house (Chamber of Deputies) as the key legislative body, a move proponents say will streamline Italy’s political system, clear a path for needed reforms and ensure a clear winner in the next general election.
The specialist believes Prime Minister Matteo Renzi’s pledge to resign if the reform fails has made the vote highly politicized, and the attendant political uncertainty has fueled nerves among market participants. Polls suggest the vote is too close to call, and the high proportion of undecideds (around 30%) compounds the uncertainty.
Potential scenarios
“While we believe a failure of the referendum to pass would hurt the country’s long-term political stability and reform prospects, we view the key risk to markets to be the election of an anti-establishment euroskeptic government – an outcome we think is unlikely irrespective of the referendum’s outcome (with a “no” arguably making the possibility even more remote).” In brief, at PIMCO, they envision the following scenarios:
A “yes” vote: Better for the markets. Italy would adopt an electoral system that delivers a clear winner, and Renzi would likely stay in power until the legislative term ends in 2018. At that point, it may become a close contest between Renzi and Beppe Grillo’s anti-establishment Five Star Movement (M5S).
A “no” vote: Politics as usual. Renzi would likely resign, but we would not expect new elections to be called (this because the Senate would retain legislative power and be elected with a proportional electoral system, which would probably deliver a hung parliament). President Sergio Mattarella would thus likely push for the formation of a transitional government – perhaps led by Renzi himself – tasked with implementing a new electoral law before proceeding to new elections. This scenario would feel like an old-style, “muddle through” political development for Italy, and would also hurt Grillo’s chances to win an election outright.
Longer-term caution, short-term opportunity
“We are cautious when investing in European assets over the medium term. Our secular investment focus on capital preservation is especially relevant for the region, where the macro outlook is underwhelming, political risk is elevated and compensation for that risk is slim.
In the near term, however, volatility in peripheral spreads and European risk assets could rise in the run-up to the referendum, and risk would likely underperform in the aftermath of a “no” vote. This could create opportunities to add risk at more attractive levels, especially in peripheral sovereigns, which remain anchored by the European Central Bank’s quantitative easing. We would be more cautious about Italian bank exposures, where vulnerabilities persist and where a “no” vote could further increase execution risk for banks’ ongoing recapitalization plans.” He concludes.
The passage of Directive 550 of the Securities and Exchange Commission (Comissao de Valores Mobiliarios) of Brazil, which went into effect in July 2015, provides greater access to international funds. Although Brazilian investors have opened up to investing in new asset classes in the last few years, Fernando Franco Franco, Head of distribution for Americas International at Legg Mason, recognizes that the main challenge that international managers face in Brazil is the need to inform clients on the value of diversified investments beyond their preference for domestic fixed income.
The enactment of the Brazilian regulation changed the definition of a qualified investor so that foreign asset managers can now distribute onshore funds to “massaffluent” clients, who before could only be served by local fund management companies with a clear bias towards the Brazilian domestic market. Previously, the Brazilian investor needed BRL 1 million to access a single international investment fund. Currently, Brazilian investors with of BRL 1 million in investable assets, can access structured vehicles outside Brazil that use a local “feeder” fund structure.
“With rising inflation and political volatility in recent years in Brazil, the real rates of return are lower, which represents an opportunity to offer clients European, Asian equities and US equities which may offer higher rates of return,” said Fernando Franco.
“Foreign asset management companies are in the process of helping the Brazilian investor get comfortable with international investments. Following the change in regulation, many US asset management companies have partnered with local fund managers to enter the market. Legg Mason has been present in the Brazilian market since 2005 when it bought Citigroup’s Asset Management business. Citi has had a presence in Brazil for more than 100 years..,” he added.
Legg Mason provides vehicles for investing in global equities, fixed income and alternative assets, such as investment in infrastructure and real estate, which allow clients access to a diversified portfolio through customized solutions.
Some of Legg Mason’s affiliates are Western Asset Management a large, global fixedincome provider; Martin Currie, a Scotland based firm which specializes in the active management of global equities; QS Investors, focuses on the quantitative management of global equities and multi-asset funds; RARE, a firm dedicated to investing in global infrastructure through listed securities; EntrustPermal, a specialist in global alternative investment, and a leader in fund of hedge fund investments, and Clarion Partners, a firm dedicated to investment in real estate.
When Legg Mason established its presence in Brazil in 2005 from the acquisition of Citigroup’s Asset Management business and due to Brazilian regulation, its main presence like other international fund managers, was with offshore clients. At that time, the main international players in the country were Merrill Lynch, Prudential, which was acquired by Wells Fargo, and Citigroup Asset Management, now Legg Mason, which had a presence in Chile, Uruguay, Mexico and Brazil.
“Brazil offers a strategic opportunity for global asset management companies because it is a mature and sophisticated market with developed private banking, family offices, institutional and retail investment markets. In my view, perhaps only the United States has a higher level of sophistication than Brazil in its distribution to institutional clients,” said Franco.
In addition to Brazil, Legg Mason has local presence in Chile and is committed to growing its presence in Latin America. “We are actively working in Mexico, Peru, Uruguay and assessing opportunities in other countries.”
Foto: Silentpilot / Pxabay. China: crédito inflado y defaults al alza
China’s credit markets continue to expand. In June the International Monetary Fund (IMF) issued a warning to Beijing to tackle corporate debt levels in state-owned enterprises (SOEs), by liquidating the weakest firms and restructurings. Defaults are rising from a low base. More than 20 bond defaults have been confirmed this year – an unprecedented number – as many companies, especially in industries with surplus production, struggle to meet their obligations amid China’s economic transformation.
In August the government acted to dispel the perception that it will always backstop losses for SOEs. An editorial in the People’s Daily, the official communist party mouthpiece, stated that bond defaults by Chinese SOEs should be handled through market-based mechanisms and the legal system. “Guaranteed repayment of bonds raises risks in SOE bonds and leads to higher leverage ratios and a build-up of risks,” the editorial said.
According to Investec Asset Management, by talking tough on defaults, Beijing seems to be keen to slow the rate at which corporate debt is growing. Currently credit growth is outstripping that of GDP by double-digit percentage points and the authorities are keen to slow this to come more in line to the economy as a whole. The China Banking and Regulatory Commission has also proposed to local banks and financial institutions for a coal and steel debt-to-equity programme to be established to help reduce the debt load.
“This trend may not necessarily be unwelcome, as it suggests China recognises that weaker companies should be allowed to fail. But which companies will default is hard to spot. China’s domestic credit-rating agencies have given an investment-grade rating to 99.5% of all publicly issued bonds. But again there are mixed messages. On 4 August, the National Business Daily published a piece suggesting that banks should act together and not “randomly stop giving or pulling loans.” Rather it suggested that they should either provide new loans after taking back the old ones or provide a loan extension, to fully help companies to solve their problems” the Investec team concludes.
