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. J.P. Morgan Launches First Active ETF
J.P. Morgan Asset Management recently launched its first alternative and actively managed ETF, the JPMorgan Diversified Alternatives ETF (JPHF). The ETF provides investors with diversified exposure to hedge funds strategies including equity long/short, event driven and global macro strategies.
JPHF was designed and is managed by Yazann Romahi, CIO of Quantitative Beta Strategies at J.P. Morgan Asset Management. A pioneer in hedge fund beta investing, Romahi created the ETF with the support of a team of 17 investment specialists who have been focused on beta philosophy research and development for more than a decade. In addition, the team manages over $3.5bn of assets in alternative beta with this ETF being the latest extension of their offering.
JPHF aims to democratize hedge fund investing by providing investors with institutional quality hedge fund strategy in a cost efficient, tradeable ETF wrapper. The ETF can serve as a core component of a portfolio’s alternatives allocation. The bottom-up approach results in a purer capture of the hedge fund exposure and better diversification than traditional hedge fund replication strategies, as it employs strategies that have true low correlation to traditional markets.
“In the past, alternative investments have been an exclusive option only accessible by a small portion of investors; however, JPHF now makes these investment vehicles available to a wider array of investors,” said Robert Deutsch, Head of ETFs for J.P. Morgan Asset Management. “Alternative beta strategies provide investors with true diversification with attractive liquidity, transparency and cost.”
With the launch of JPHF, J.P. Morgan Asset Management’s Diversified Return ETF suite features nine product offerings. J.P. Morgan manages more than $120bn in alternatives globally.
CC-BY-SA-2.0, Flickr. New Leak of Offshore Files from The Bahamas
While most uses for offshore companies and trusts are legitimate and the International Consortium of Investigative Journalists (ICIJ) does not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly, their publication causes much scandal for those involved.
The latest revelations published by ICIJ reveal fresh information about a series of offshore companies in the Bahamas with the offshore activities of prime ministers, ministers, princes, convicted criminals, the UK’s Home Secretary Amber Rudd, and Neelie Kroes, a prominent former EU commissioner.
The Bahamas, which once sold itself as the “Switzerland of the West,” is a constellation of 700 islands, many smaller than a square mile. It is one of a handful of micro nations south of the United States whose confidentiality laws and reluctance to share information with foreign governments gave rise to the term “Caribbean curtain.”
Mossack Fonseca, the law firm whose leaked files formed the basis of the Panama Papers, set up 15,915 entities in the Bahamas, making it Mossack Fonseca’s third busiest jurisdiction.
In the case of Kroes, the former senior EU official, the records show that she was director of Mint Holdings, from July 2000 to October 2009. The company was registered in the Bahamas in April 2000 and is currently active. However, Kroes, through a lawyer, told ICIJ and media partners that she did not declare her directorship of the company because it was never operational. Kroes’ lawyer blamed her appearance on company records as “a clerical oversight which was not corrected until 2009.” Her lawyer said the company, set up through a Jordanian businessman and friend of Kroes, had been created to investigate the possibility of raising money to purchase assets – worth more than $6 billion – from Enron, the American energy giant. The deal never came off, and Enron later collapsed amid a massive accounting scandal.
The Bahamas has not signed the global treaty that helps countries share tax information. The OECD, the treaty’s governing body, calls it the “most powerful instrument against offshore tax evasion and avoidance.” In August, the number of participants hit 103, which includes tax havens and some of the world’s poorest countries.
Details from the Bahamas corporate registry, along with those of the Panama Papers and the Offshore leaks, are available to the public at the searchable ICIJ Database.
On Wednesday both the Federal Reserve and the Bank of Japan decided upon leaving interest rates on hold. However, the BOJ shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates. Its policy announcement had two main parts. First, it committed itself to continue expanding the monetary base until the inflation rate “exceeds the price stability target of 2 percent and stays above the target in a stable manner.” Second, it will start targeting the yield on ten-year Japanese government debt (JGBs), while continuing to buy about 80 trillion yen in JGBs annually.
A decision that former Fed Chairman, Ben Bernanke, found puzzling given the curent policy looks to both setting a price and buying a given amount at any price but he believes “that the BOJ was concerned that dropping the quantity target would lead market participants to infer (incorrectly) that the Bank was scaling back its program of monetary easing. Over time, assuming that the BOJ does adhere to its new rate peg, the redundant quantity target is likely to become softer and to recede in importance. The BOJ’s communication will accordingly begin to emphasize the yield on JGBs, rather than the quantity of bonds in the BOJ’s portfolio, as the better indicator of the degree of monetary policy ease.”
According to Tomoya Masanao, Head of Portfolio Management Japan at PIMCO, “the decision is in part a reflection of the BOJ’s recognition that base money expansion itself has little easing effect and that Japan’s neutral yield curve, which is neither expansionary nor contractionary for the economy, is steeper than the bank would have thought. The actual yield curve should not be too flat relative to the neutral curve otherwise the economy will be negatively affected through weakening of financial intermediation.”
Paul Brain, Head of Fixed Income at Newton Investment Management commented: “This is no bazooka from the BoJ but it’s an interesting approach nonetheless. Targeting long term rates as well as short rates reminds us of the period in the 1940s and 1950s when the US fixed 10 year government borrowing rates. It opens the door for more government spending finance at very low rates without further undermining the banking system.” While Miyuki Kashima, Head of Japanese Equity Investments, BNY Mellon Asset Management Japan said he believes the mid to longer-term prospects for the Japanese equity market remain attractive “as the domestic economy is at a rare transitional phase, moving from a period of contraction to one of expansion. The market sell-off this year has been largely due to external factors, and while Japan will be affected by any global slowdown for a period, the country has a large domestic base and can weather such turbulence much better than most economies. Contrary to Japan’s image as export dependent, reliance in terms of GDP is only about 15%, much smaller than most countries in Asia or Europe. The lower oil price is positive for corporate profits overall.’
A survey of over 100 UK IFAs and wealth managers has found that over a quarter expect the demand for investments in wine to grow over the coming 12 months as investors look for more real assets and diversification in the wake of the decision of UK voters to leave the EU.
According to Cult Wines, a specialist in the acquisition and investment management of fine wines, the research into the views of 101 UK intermediaries in July this year found that 27% expect Brexit to drive investments in this area.
Industry benchmark the Liv-ex Fine Wine 100 index gained 3.6% in June alone in the wake of the Brexit vote. This was the largest positive monthly movement since November 2010, and the index’ monthly closing level of 269.07 was the highest since August 2013.
In the week after the Brexit vote, Cult Wines says its trade sales rose 106%. The trend of strong sales has continued since then, the company says, as US and Asian investors have benefitted from weaker sterling against the dollar and the Hong Kong dollar.
The diversification element of invesing in a real asset such as wine is cited by about half, 48% of those intermediaries who see increasing investments in fine wine. Some 42% cited “attractive medium to long term returns”. The compounded annual return on investable wines since 1988 has averaged 10.65%, Cult Wines says.
Intermediaries also noted that awareness of wine as an invesable area has been rising among high net worth retail investors – as it has for alternative physical investments generally.
Cult Wines estimates the fine wines sector to be worth over $4bn annually, adding that “fine wines tend to perform well when the pound is weaker and boasts a number of defensive characteristics. Holdings in wine are not normally linked to other asset prices, with the long term correlation between wine prices and the FTSE 100 at just 0.04.”
Tom Gearing, managing director at Cult Wines, said: “An allocation towards fine wine provides investors with a number of guarding characteristics, and has the advantage of not necessarily following the general trend of lagging behind the rest of the market during economic expansion because demand is consistently strong. Real assets remain an attractive option as they tend to change in value independently of the core financial markets.”
Globally, sales of fine wines to investors continue to grow. Cult Wines opened an office in Hong Kong earlier in 2016; the market estimates that half of Bordeaux’s fine wines went to Asia last year, while its share of the Bordeaux export market has more than doubled over the past decade. Cult Wines’ own sales to Hong Kong in the first half of 2016 were £1.6m, and it expects annuals sales over £5m. Compound annual growth experienced in the region in the past four years has been 235%, and it expects annuals sales of £20m by 2020.
The European Fund and Asset Management Association (EFAMA) has recently published its latest Quarterly Statistical Release describing the trends in the European investment fund industry in the second quarter of 2016.
The Highlights of the developments in Q2 2016 include:
Net sales of UCITS rebounded to EUR 71 billion, from net outflows of EUR 7 billion in Q1 2016.
Long-term UCITS, i.e. UCITS excluding money market funds, posted net inflows of EUR 44 billion, compared to net outflows of EUR 5 billion in Q1 2016.
Equity funds continued to record net outflows, i.e. EUR 18 billion compared to EUR 4 billion in Q1 2016.
Net sales of multi-asset funds increased to EUR 14 billion, from EUR 6 billion in Q1 2016.
Net sales of bond funds rebounded to EUR 42 billion, from net outflows of EUR 9 billion in Q1 2016.
Net sales of other UCITS increased to EUR 5 billion, from EUR 2 billion in Q1 2016.
UCITS money market funds experienced net inflows of EUR 28 billion, against net outflows of EUR 2 billion in Q1 2016.
AIF net sales increased to EUR 55 billion, from EUR 43 billion in Q1 2016.
Net sales of equity funds fell to EUR 3.7 billion, from EUR 6.7 billion in Q1 2016.
Net sales of multi-asset funds fell to EUR 15.2 billion, from EUR 20.3 billion in Q1 2016.
Net sales of bond funds rebounded to EUR 7.3 billion, from net outflows of EUR 170 million in Q1 2016.
Net sales of real estate funds fell to EUR 3.3 billion, from EUR 8.0 billion in Q1 2016.
Net sales of other AIFs increased to EUR 22.5 billion, from EUR 11.5 billion in Q1 2016.
Total European investment fund net assets increased by 2.1% in Q2 2016 to EUR 13,290 billion.
Net assets of UCITS went up by 1.7% to EUR 8,073 billion, and total net assets of AIFs increased by 2.8% to EUR 5,217 billion.
Bernard Delbecque, Senior director for Economics and Research at EFAMA commented: “Net sales of UCITS rebounded during the second quarter of 2016 thanks a signification increase in the demand for bond funds and money market funds, which can be partly explained by the low interest rate environment and renewed expectations of further falls in interest rates.”
CC-BY-SA-2.0, FlickrPhoto: Trade Mark Alex. Credit Suisse Appoints Two New AM Heads
Credit Suisse recently appointed Bill Johnson as Head of Asset Management Americas, and Michel Degen as Head of Asset Management Switzerland and EMEA, which includes all existing Core businesses, Alternative Funds Solutions (AFS) and Credit Suisse Energy Infrastructure Partners.
Johnson’s new appointment, in addition to his current role as Deputy Global Head of Asset Management, will oversee the Commodities Group, Credit Investments Group, Securitized Products Fund and Private Funds Group. Furthermore, Anteil Capital Partners, NEXT, and Mexico Credit Opportunities Trust (MEXCO), will continue to report to him, as well as the other Americas-based businesses that have done so so far.
Michael Strobaek, former Head of Asset Management in Switzerland, should remain Global Chief Investment Officer of Credit Suisse and Head of Investment Solutions and Products for International Wealth Management.
CC-BY-SA-2.0, FlickrPhoto: Tom Walker. Rising Inflation Pressures May Soon Force the Fed’s Hand
The evidence suggesting significantly higher inflation momentum in the months and years ahead continues to build. A turn higher in the inflation cycle would likely trigger a reaction from the Federal Reserve on monetary policy, with important consequences for investors, according to Stewart D. Taylor, Diversified Fixed Income Portfolio Manager at Eaton Vance.
The latest Consumer Price Index (CPI) number showed that inflation rose a higher-than-expected 0.2% in August, marking the fifth positive CPI print in the last six months. After bottoming at -0.2% in April 2015, headline CPI is now advancing at a 1.1% year-over-year pace. More importantly, the core CPI, which removes food and energy, is rising at a 2.3% annual rate.
However, for the Asset Manager, there are other notable signs that the trend in inflation may have turned higher, including:
Services inflation, roughly 70% of CPI, continues to increase at a rate exceeding 2.5%. In fact, the core consumer services component (services excluding energy services) is growing at over 3%.
The Atlanta Fed Wage Tracker, a measure that adjusts for demographic changes in the work force, continues to suggest that inflationary wage pressures are quickly growing (see figure below).
Commodities have stabilized and started to move higher. For instance, crude oil is more than 30% higher than the low set in January 2016. This deflationary headwind is quickly turning into an inflationary tail wind.
Both presidential candidates have voiced support of protectionist trade policies that would potentially boost the prices of goods.
Taylor writes in the company’s blog that investors and consumers have gotten used to low inflation after the global financial crisis. And to be fair, there are global crosscurrents that could keep inflation subdued. The global economy remains weak, and if growth slows further, the lack of demand could lead to more losses in commodities and goods sectors. Also, in China, some of the most pressured industries are only operating at 60% capacity, and the world’s second-largest economy continues to “export” deflation in areas like steel.
Still, Taylor believes “investors should keep a close eye on any potential shift. Inflation, even modest inflation, acts as a hidden tax on wealth. And if the Fed’s implicit target of confiscating 2% of your wealth every year wasn’t onerous enough, now it is openly making the case that tolerating higher “opportunistic” inflation to drive growth may be desirable.”
“Sluggish CPI growth and falling oil prices may have hidden the potential risks of inflation from investors. Many portfolios are underweighted in inflation-sensitive assets, and a change in the trend would catch many off-guard.” He concludes.
CC-BY-SA-2.0, FlickrPhoto: Aiky RATSIMANOHATRA
. The Growing Role of Smart Beta In New Investment Strategies
Lyxor Asset Management has led a research that highlights the growing importance of risk factors and other Smart Beta strategies in generating performance in the current challenging market conditions.
In this research piece, that considers the performance of 3,740 active funds representing €1.2 trn in AUM compared to their traditional benchmarks over a period of ten years, the firm found that European domiciled active funds had a more positive year in 2015, with an average of 47% outperforming their benchmarks, significantly more than 2014 where just 25% outperformed on average.
Looking at the source of this outperformance, the team found a significant part could be attributed to specific risk factors. These ‘risk factors’ describe stocks that exhibit the same attributes or behaviours. Lyxor has identified five key risk factors: Low Size, Value, Quality, Low Beta and Momentum, which together account for 90% of portfolio returns.
European active fund managers for example were overweight Low Beta, Momentum and Quality Factors in 2015, which all outperformed benchmarks. Another aspect of the research compared active fund performance with Minimum Variance Smart Beta indices, which are designed to reduce portfolio volatility. Here the results were even more compelling: whereas 72% of active funds in the Europe category outperformed a traditional benchmark in 2015, only 14% outperformed the Smart Beta index.
These findings demonstrate the increasing role played by Smart Beta strategies that are based on rules that do not rely on market capitalization, as an indispensable pillar of investor portfolio. Factor-investing is one of the various investment strategies referred to as Smart Beta. “In today’s markets characterized by very low interest rates, higher volatility and no market trend in risky asset markets, investors need to look at new forms of portfolio allocation in order to find diversification and generate performance,” Marlene Hassine, head of ETF research at Lyxor Asset Management; commented. “Smart Beta, which can be implemented, either with a more passive or a more active bias, is one of the new tools at the disposal of investors”, she added.
“Mid-cap stocks exposed to structural change, ‘picks and shovels stocks’ and undervalued frontier market businesses are three areas of investment that would likely slip below the radar of the more passive and large-cap focused emerging market investor”, says Ross Teverson, Jupiter’s head of strategy, emerging markets. “For active, fundamentals-driven investors like us, they represent a great opportunity,” he added.
Undervalued mid-caps exposed to structural change
Emerging market equities have enjoyed strong recovery since their low in January of this year. Despite this, the valuations of many emerging market stocks remain undemanding and we continue to find a number of compelling opportunities, particularly within the mid-cap universe, where strong growth prospects are not yet reflected in share prices. This is in direct contrast to certain EM large- cap stocks with well-recognised growth prospects, which in recent years, have become expensive relative to company earnings, as increasingly risk-averse investors crowded into a relatively small group of large cap stocks that are perceived to be of high quality.
Examples of these mid-cap opportunities are diverse by geography and sector. One stock that we hold in Jupiter Global Emerging Markets Equity Unconstrained is a Brazilian private university operator, Ser Educacional, which we believe is well positioned to benefit from structural growth in Brazilian education spending. Another is Indonesian property developer Bumi Serpong, a mid-cap stock that is exposed to structural growth in mortgage penetration in Indonesia, which is coming from very low levels. The company is a beneficiary of Indonesia’s very strong demographics: high rates of household formation are creating strong demand for the types of properties that Bumi Serpong are building.
‘Picks and shovels’ stocks
They say that in a gold rush, the ones that make the most money are the suppliers of the tools you need to find gold rather than the miners themselves. The modern equivalents of these businesses in EM are companies that give exposure to well-known and significant trends or structural changes like the growth of electric vehicles, the move towards industrial automation or the switch to renewable energy. Take BizLink in Taiwan. A key supplier of wiring harnesses to one of the most advanced manufacturers of electric cars, Tesla, it is held in Jupiter Global Emerging Markets Equity Unconstrained and Jupiter China Select. BizLink may be the less glamorous of the two businesses, but it is making high and consistent margins while Tesla itself, while ground-breaking, is some way from making a profit.
Or there is Chroma, another Taiwan-based company held in Jupiter Global Emerging Markets Equity Unconstrained. Chroma provides testing equipment to a number of different areas within clean technology and renewable energy, including solar power, electric vehicle batteries and LEDs. Because its management team has a culture of paying out free cash flow to shareholders, investors in the company typically receive a decent dividend. What’s more, because Chroma is a key supplier to manufacturers within its business areas, it can afford to make the pricing of the equipment it sells very stable.
Frontier-market banks
Large state-owned banks make up a big part of the Emerging Markets index, which means that these are the banks an investor in an EM ETF might own. Hanging over these largely government- controlled banks, however, is a great unknown. A history of undisciplined or politically incentivised lending has left many of these banks with a level of non-performing loans that is likely to be much higher than official numbers suggest. It is hard to quantify exactly how big the problem will be. A number of frontier market banks, in contrast, trade at similar valuations to their larger EM peers but with better asset quality, higher returns and superior long term growth prospects
Specifically, we like frontier markets banks which either have a strong deposit franchise or are building a strong deposit franchise. Depositors entrust these banks with their money because they provide a good branch network, easy access to money, and are considered a safe place for them to keep their cash. There are good examples in Georgia, where we own Bank of Georgia, in Pakistan, where we own Habib Bank, and in Nigeria, where we own Access Bank. By operating the traditional retail banking model, these banks make a high return by taking deposits on which they pay a low level of interest and then lending to blue chip corporates. It’s also less risky than an alternative model (which is to borrow money from the wholesale money markets and then lend to riskier borrowers). In frontier markets, this operating model has led to high returns and good growth prospects as a result of underpenetrated consumer credit.
New research from global analytics firm Cerulli Associates reports that asset managers have identified registered investment advisors (RIAs), broker/dealer (B/D) mega teams, and home-office due diligence relationships as the groups with the largest pockets of opportunity to generate revenue and increase marketshare. These channels are also leading the trend toward more sophisticated, investment- and data-focused interactions that have traditionally been reserved for firms operating within the institutional space.
“In our survey of national sales managers, 67% rank increasing the technical skills of existing wholesalers to address more sophisticated advisor teams as the top priority,” says Emily Sweet, senior analyst at Cerulli. “We believe this expanding institutional influence in the retail market, especially in the areas growing most quickly, will continue for the foreseeable future.”
Cerulli projects that within these areas of growth, the independent RIA and hybrid RIA channels combined will increase their asset marketshare from 23% in 2015 to 28% in 2020. “While wirehouses still hold a substantial share of assets, RIAs are the growth story,” explains Kenton Shirk, associate director at Cerulli. “To build a relationship within an independent practice, wholesalers need to truly understand a firm’s investment philosophy and decision-making process.”
Cerulli’s latest report, U.S. Intermediary Distribution 2016: Evolving Roles in Distribution, focuses on the convergence of the institutional and retail markets and its influence over distribution strategies. In addition, the report analyzes trends related to advisor product use, portfolio construction, and allocation changes across industry segments.
