CC-BY-SA-2.0, FlickrPhoto: Live4Soccer. Spanish Revenge: Their Bonds Yield Lower Than Their Italian Counter-Parts
Amongst the 3 things Pioneer Investments’ European Investment Grade Fixed Income team talked about recently was Spain.
In the last 16 of the recent Euro 2016 football championships, Italy gained revenge for a 4-0 drubbing in the Euro 2012 final by beating Spain 2-0.
Tipped as one of the pre-tournament favourites, Spain’s exit prompted the departure of their coach Vicente Del Bosque and led to concerns that it might have been the end of a golden era for Spanish football that saw them win Euro 2008, the World Cup in 2010 and the Euro championships again in 2012. “However, Spain’s footballing woes are being offset by a stellar out-performance in European bond markets,” says Tanguy Le Saout, Head of European Fixed Income, Executive Vice President at Pioneer.
Having traded as high as 20bps above similar-duration Italian sovereign bonds at end-March 2016, Spanish 10-year government bonds now yield over 20bps lower than their Italian sovereign counter-parts. “Why has this happened? ” Asks Le Saout. “We think there are a couple of reasons”
Firstly, he believes the Spanish economy is experiencing relatively rapid growth. Q2 GDP was revised higher to 0.83% quarter on quarter, suggesting that an annualised growth rate of 3% is on the cards for 2016. That would make Spain the 3rd fastest growing region in the Eurozone after Ireland and Slovakia.
Secondly, he mentions Spain has made much better progress in consolidating and recapitalising its banking industry than Italy.
Thirdly, Spanish banks were large sellers of Spanish government bonds in 2015 in order to reduce their large existing exposure, whilst Italian banks did not undertake the same action with respect to their holdings of Italian government bonds. “But since the start of 2016, Italian banks have been buying non-domestic Eurozone sovereign paper, and especially Spanish government bonds.”
Finally, according to the Pioneer expert, “the political situation had been looking a bit clearer in Spain, with the incumbent PP party accepting the conditions set out by a smaller party (Ciudadanos) for forming a coalition. That coalition would still fall short of an overall majority but a minority government could potentially be formed, ruling out the possibility of a third election within 12 months. Y Viva Espana.” He concludes.
Using data from its Hedge Fund Online product, Preqin estimates that there were net outflows of $34bn over the first half of 2016; the majority of outflows ($20bn) occurred in Q2 2016. As a result, as of 30th June 2016 the hedge fund industry represented a total of $3.11tn in assets under management, down from $3.14tn at the end of 2015.
Among leading hedge fund strategies, credit and equity strategy funds suffered the greatest outflows in H1, totalling $26bn and $25bn respectively. By contrast, CTAs increased their AUM by 11% over the first half of the year, recording the greatest inflows of any strategy ($17bn). Additionally, a surge of investor capital committed to multi-strategy funds in Q1 helped the strategy offset small net outflows in Q2, to register overall H1 inflows of $11bn. Other Key H1 2016 Asset Flow Facts:
Investor Appetite: 17% of investors plan to increase their exposure to discretionary CTAs in H2 2016, the highest proportion of any strategy, while just 3% plan to invest more in event driven strategies and funds of hedge funds. Only 9% of investors plan to cut their exposure to activist funds, the lowest of any strategy.
Impact of 2015 Performance: Those funds that performed better in 2015 were more likely to see inflows in Q2 2016; 43% of funds that made gains of more than 5.00% in 2015 recorded Q2 inflows, compared to less than a quarter (23%) of those that suffered losses of 5.00% or more through the year.
Asset Flows by Fund Size: A higher proportion of hedge funds larger than $1bn recorded inflows (35%), than those smaller funds (32%). However, a higher proportion of larger funds also recorded outflows, with 44% recording losses compared to 40% of smaller funds.
Asset Flows by Location: The greatest proportion of funds based in Europe saw inflows over Q2, with 35% seeing net inflows and 38% recording outflows. In contrast, only a quarter of firms based in North America registered inflows, while 44% saw net outflows of investor capital.
According to Amy Bensted, Head of Hedge Fund Products at Preqin “Growing concern from investors regarding the recent performance of the hedge fund sector has manifested as two consecutive quarters of net outflows, taking the total size of the industry to approximately $3.1tn as of the end of H1 2016. Despite most leading hedge fund strategies witnessing outflows over the course of the first half of 2016, there were some bright spots, notably CTAs and multi-strategy funds, indicating that investors are seeing value in some areas of their hedge fund holdings in 2016. Performance, along with fees, looks set to be a key driver of change in the industry over the rest of 2016. Managers will be hoping that the recent run of better performance from March -July 2016 may help win back the favour of investors, and help the industry gain fresh capital inflows in the second half of the year.”
Northern Trust expects most investments to generate single-digit positive returns over the next five years, predominantly due to slow economic growth and persistent low interest rates.
This Slow Growth Angst – one of six key themes profiled in Northern Trust’s annual five year market outlook – is a key driver behind the company’s return forecasts for global investors of 5.8 percent for global equities and 2.1 percent for investment-grade bonds.
“While we expect markets may be volatile at times, we remain convinced the global economy is in a narrow and slow growth channel,” said Northern Trust Chief Investment Strategist Jim McDonald. “Current regulatory and fiscal policies have greatly restricted the boom-bust cycles and, although the risk of a recession increases, if one does materialize it should be shallow due to a lack of economic excesses and financial system stability.”
Despite these subdued, yet positive, projections, Northern Trust believes the three-month German Bunds and Japanese Government Bonds will turn in negative returns during the next five years.
“Developed economies overall will continue their slow pace, expecting annual real economic growth of 1.4 percent over the next five years, and the outlook for emerging economies remains similarly subdued,” said Wayne Bowers, chief investment officer for Northern Trust Asset Management in Europe, Middle East and Africa and Asia-Pacific. “Ultimately, while concerns over slow growth are further impeding global growth, investors need to resist becoming bearish during market weakness or bullish when the economy appears strong and instead scrutinize any future dramatic swings – positive or negative.”
In addition to the theme of “slow growth angst”, Northern Trust has identified five more themes expected to shape the global markets over the next five years including:
CC-BY-SA-2.0, FlickrFoto: Chris Dlugosz. Por qué el euro ya no llegará a la paridad con el dólar
Over the recent weeks, the Federal Reserve has signaled its willingness to move ahead with a second rate hike. Such a move would follow the December 2015 decision to raise policy rates. Statements from Yellen and Fisher left opened the possibility of a rate hike as soon as September 21st, when the FOMC will meet next.
However, and according to Lyxor AM’s latest weekly brief, “the decision is not straightforward considering the disappointing US GDP growth figures in H1-16 and the associated falling labor productivity. Financial markets remain somewhat unconvinced but at the same time they cannot ignore the Fed guidance. As a result, short dated Treasury yields moved higher and the USD appreciated against major currencies.” Says a team headed by Jean-Baptiste Berthon, Senior Strategist and Jeanne Asseraf-Bitton, Global Head of Cross Asset Research.
Market movements related to the new Fed guidance had a differentiated impact on hedge fund strategies. CTAs underperformed last week as a result of their long fixed income and short USD positions. Meanwhile, Global Macro managers outperformed. They benefitted from their long USD positions, a stance they have maintained for some time on the back of the growth divergence thesis between the US and the rest of the world.
Contrasted views
Interestingly, most funds within each strategy share the same stance on the USD (i.e. most CTAs in our sample are short USD and most Global Macro are long USD). But there is a much wider disagreement across Global Macro managers on US fixed income. “The aggregate exposure of Macro managers on the asset class is close to zero, but at the fund level we see approximately half of the managers being long US bonds and another half being short. That reflects the conflicting signals on the US economy. A vibrant job market has fuelled household consumption but this is not reflected in GDP numbers.” They write.
Economic expansion was actually pulled back in H1-16 by declining capex as companies are not investing to expand production capacities. “All in all, we tend to be rather in favor of the CTA stance. We believe that the Fed is unlikely to move as soon as September. There are simply too many uncertainties regarding the strength of the US economy to act now. The Fed will probably err on the side of caution in our view and the USD upward pressure may abate, a support for CTAs over Macro funds.” Lyxor AM concludes.
CC-BY-SA-2.0, FlickrPhoto: Doug8888, Flickr, Creative Commons. Liquid Alternatives and Private Debt Likely to Benefit Most from Brexit
According to investment consultant bfinance, the list of asset classes benefitting through the Brexit is long with gold and govies being seen as safe havens. In their study “Brexit, One Month On-Working Through the Investment Implications” they stress that the US equity market also benefitted “to a certain extent” from a flight to quality from equity investors.
Overall, they believe that Brexit will probably have “a relatively mild impact on global equities and bonds, but to have a more direct impact on those asset classes within the UK,” the consultant estimates.
bfinance highlights that liquid alternatives and private debt are two asset classes which are likely to perform well in a Brexit landscape.
“Liquid alternatives will benefit from the increased dispersion associated with the greater uncertainty at both stock and sector level. Private debt, which includes corporate, real estate and infrastructure debt, is set to benefit from the relatively high yield, the reduced competition from banks and the resilience to a downturn in values and cashflows,” bfinance argues.
It specifies that this is particularly the case for more senior debt and less so for higher yield or mezzanine debt that has less of a cushion to protect loans from value declines.
Morningstar announced that its board of directors has appointed Kunal Kapoor, CFA, chief executive officer, effective Jan. 1, 2017. Kapoor, 41, who currently serves as president for Morningstar, has also been appointed to Morningstar’s board of directors.
Company founder Joe Mansueto will become executive chairman effective Jan. 1, 2017 and will continue to serve as chairman of the board. To limit the number of inside directors, Don Phillips has voluntarily opted to step down from the board, effective Dec. 31, 2016.
Joe Mansueto, chairman and chief executive officer of Morningstar, said, “I can’t think of a better person than Kunal to lead Morningstar as we head into the next stage of our company’s innovation and growth. He’s a Morningstar veteran who lives and breathes our mission of creating great products that help investors reach their financial goals.”
Kapoor originally joined Morningstar as a data analyst in 1997 and has been president of the company since October 2015. In his current role, he is responsible for product development and innovation, sales and marketing, and driving execution and accountability across the company. He previously served as head of global products and client solutions and has served in a variety of other leadership roles for Morningstar, including director of mutual fund analysis, director of business strategy for international operations, president and chief investment officer of Morningstar Investment Services, and head of Morningstar.com and the company’s data business.
As mentioned above, Don Phillips will step down from the board of directors, effective Dec. 31, 2016, and will be succeeded by Kapoor. He will continue in his role as a managing director for Morningstar, focusing on research innovation. Mansueto added, “Don has been an outstanding board member since we first formed a board in 1999, and his perspective on the industry is second to none. Don is a beloved leader in the Morningstar community, and I am grateful for his commitment to Morningstar’s success.”
London based boutique True Potential Investments has partnered with UBS Asset Management to launch five new multi-asset funds, in its wealth strategy fund range.
The five True Potential UBS Funds have fees of 0.60%, with a minimum investment of just £50 and include profiles such as Defensive, Cautious, Balanced, Growth and Aggressive.
Each fund will be actively managed within its risk banding to navigate changing markets, seeking to manage volatility and capitalise on opportunities for growth.
UBS is to provide investment expertise to sub-manage the funds.
Mark Henderson, senior partner at True Potential Investments, said: “We are excited to have partnered with UBS to build a fund range that can quickly adapt to the challenges and opportunities that global markets present. Our aim is to put clients first in every decision we make and we believe that long-term investing in multi-asset funds may put clients in a better position to reach their investment goals.
“By using the investment expertise, precision and heritage of UBS, alongside our philosophy of providing low-cost funds with low minimum investment amounts, we have produced a range of funds that adapt to the market, always seeking to get the best returns for investors.”
Richard Lloyd, head of Portfolio Management, Research & Risk, Investment Solutions at UBS Asset Management said: “The True Potential UBS fund range will be fully diversified across multiple asset classes, geographic regions, industries and currencies to enable us to capture opportunities from a wide range of sources.
“We will make use of a wide spectrum of investments including a range of ‘next generation’ smart beta passive funds. Our investment strategy uses agile, active asset allocation to target optimal performance in all market conditions.”
CC-BY-SA-2.0, FlickrPhoto: Susanita, Flickr, Creative Commons. Brexit will Fuel Fund Launches in Europe
According to Detlef Glow—Lipper’s Head of EMEA Research, and Christoph Karg—Content Management Funds EMEA at Thomson Reuters Lipper, at the end of Q2 2016, equity funds dominated the scene with a market share of 37% of the funds available for sale in Europe, followed by mixed-asset funds (28%), bond funds (21%), and money market funds (3%). The remaining 11% of “other” funds were real estate funds, commodity funds, guaranteed funds, and funds of hedge funds.
At the end of June 2016 there were 31,815 mutual funds registered for sale in Europe. For Q2 2016 a total of 689 funds (437 liquidations and 252 mergers) were withdrawn from the market, while only 463 new products were launched. However, the Thomson Reuters’ professionals expect that following the “Brexit” vote and its possible implications for fund distribution in Europe, “the number of products to rise over the course of the next two years. Investment managers based in the United Kingdom will ensure their access to the continental European market with the launch of products that are domiciled in the EU, while EU-based asset managers may start to launch funds that are domiciled in the U.K. The first scenario is expected to lead to an even higher dominance of Luxembourg and Ireland as international fund hubs in Europe, while the latter may drive up the number of products domiciled in the U.K.”
Additionally, they believe that market and fund-flow trends will impact the activity of the European fund promoters in one or another direction, “since these trends normally lead to the launch of new products or, contrarily, to the closure of existing products that have fallen out of favor with investors. With the increasing pressure on profitability, at least for bank-or insurance-owned asset managers, fund promoters will also further clean up their product ranges to become more efficient in an environment of increasing costs from the permanently increasing regulatory demands.”
For Q2, Luxembourg continued to dominate the fund market in Europe, hosting 9,109 funds, followed by France, where 4,452 funds were domiciled.
You can read the full report on the following link.
In many ways, 2016 has been the year of bonds, at least so far: Global aggregate bond markets have outperformed global equity markets year to date. That leaves many investors wondering if bonds still offer value, given their low yields.
According to Mark Kiesel, CIO Global Credit at PIMCO, though investors may need to get used to lower returns on bonds, this does not mean they should give up on them; “we believe there are still many bond market sectors and securities offering attractive return potential as well as diversification benefits. However, the current environment of lower bond yields means investors need to be more selective and also need to consider reducing interest rate risk. The U.S. corporate bond market continues to be one of the main areas offering much-needed yield, especially given our long-term outlook for continued global demand for income-producing assets – a tailwind likely to help support prices.”
The search for yield amid this appetite for income is complicated by the reality that almost $12 trillion in bonds in the Barclays Global Aggregate Index are now at negative yields, including more than 80% of Japanese and German government bonds.
As the European Central Bank and the Bank of Japan continue with ever-increasing unconventional policies, such as negative interest rates and large-scale asset purchases, local investors are faced with the challenge of finding income in a world of negative-yielding government bonds and low-yielding corporate bonds in their home markets. They are consequently looking further afield, and this has resulted in a wave of investment into U.S. corporate bonds, according to the expert.
“Even after this year’s rally, we believe investors can still seek potential yields of 3%–6% in the U.S. credit markets by investing in investment-grade and select high yield corporate bonds, bank loans and non-agency mortgages. Among major developed markets, Japan and Europe are barely growing, but the U.S. should be able to grow at roughly 2% over the coming year. Therefore, from a fundamental perspective, we are favoring the U.S. credit market, along with U.S. domestically-focused businesses.”
While they have reduced exposure to select credits in the U.S., they are maintaining overweights to U.S. credit across most portfolios. “We remain very constructive on housing and many consumer-related sectors, such as cable, telecom, healthcare and gaming. And even though there’s a lot of pressure on banks at the moment, U.S. bank bonds are actually very attractive. We also like energy: We added to our energy positions back in January near the market lows, and we still like pipelines at current levels.”
Kiesel believes that the positive outlook for the U.S. bodes well for credit assets in industries and sectors supported by high barriers to entry, above-trend growth and pricing power, in addition to companies with management teams that act in the best interest of bondholders. “With a large credit research and analytics team, we can still seek and find many companies with these characteristics – and these days, many of them are in the U.S.” He concludes.
CC-BY-SA-2.0, FlickrPhoto: Minwoo, Flickr, Creative Commons. Santander Will Also Pass Negative Interest Rates to its Institutional Clients
Banco Santander is supposedly joining other European lenders, like Deutsche Bank or BBVA in passing on the region’s negative interest rates to some of its financial institutional clients. According to Bloomberg, Spain’s biggest bank notified clients of its securities services unit that it will introduce a fee on their deposits.
At a time when the European Central Bank is charging banks on overnight deposits to encourage spending, the rate, is of -0.4%.
Spain’s second-largest bank, Banco Bilbao Vizcaya Argentaria, is charging between 0.15 and 0.25% since July.
Santander Securities Services has about 700 billion euros ($782 billion) in assets, according to its website.
