Foto: Thelittletx, Flickr, Creative Commons. La tecnología hace la selección de fondos de inversión más rentable, barata y transparente
According to the latest research from Cerulli Associates, a global analytics firm, technological advances are pushing providers to keep up with investor expectations, and, ultimately, be the center of their clients’ financial lives.
“Wealth management providers, in particular, feel pressure from technology solutions (such as digital advice), changing financial planning expectations, and the commoditization of investment management services,” states Shaun Quirk, senior analyst at Cerulli.
“The retail investor is demanding more, forcing these firms to offer a deeper client experience,” Quirk explains. “Many advice providers tout a ‘holistic’ planning model to bolster their perceived value. However, this overused term in wealth management is vague and heavily focused on investment management as opposed to true financial planning.”
“As financial planning opportunities become available to a broader investor demographic, providers will need to leverage technological advances to scale the solutions, and streamline everything from the onboarding and information-gathering stage to the recurring planning conversations,” Quirk continues. “The providers that can take the abstract nature of financial and retirement planning and make it an engaging, tangible process will win client assets.”
Digital platform improvements and technological advances allow firms to interact with investors in ways that were not available just a few years ago. Investors desire deeper online, goal-oriented resources, research, and content to satisfy their investment management and financial planning needs. However, at the same time, they lack the bandwidth or attention span to dedicate significant time toward their financial well-being and the multitude of investment services used.
Cerulli’s second quarter 2016 issue of The Cerulli Edge – U.S. Retail Investor Edition examines wealth management and the evolving landscape.
CC-BY-SA-2.0, FlickrPhoto: Susanne Nilsson. The Case for Small Caps in a World of Deflation and Disruption
Over the last 30 years, the case for investing in small caps has been debated extensively. The long-term statistics certainly suggest that smaller companies do indeed outperform larger ones. There is less agreement on the reasons. According to Schroders, the explanations range from the contention that small caps offer a risk premium in return for lower liquidity, that limited research means any new information has a bigger impact on the shares, and/or that small companies in aggregate tend to grow faster than larger ones.
Whatever the case, even though US small caps have underperformed large by over 10% in the last two years, their outperformance over a longer period is dramatic. So what of the future?
In truth, the outlook for all investors is murky. Everything from disruptive technology to persistent low growth is making it easier to pick losers than winners. The challenges span the waterfront, from environmental concerns that put a question mark over the future of the carbon-based economy, to advances in artificial intelligence that could undermine the position of over 230 million knowledge workers around the world.
In these circumstances, and contrary to received wisdom, Schroders thinks that more winners may be found amongst the mass of lesser-known and under-researched smaller companies than amongst their larger brethren. With innovation and technological advances moving at an unprecedented pace, companies that are nimble and less burdened by layers of management may be better equipped to keep up with these changes. In this environment, having a strong brand, a large installed base and a wide distribution network are not necessarily assets anymore. “Instead we are seeing a new generation of winners that are “capital light” and have a strong online presence. As industries evolve in this direction, barriers to entry are reduced and innovations progress faster, creating increasing opportunities for small companies.” They state.
However, periods of disruptive innovation inevitably create losers as well as winners. One classic period was the dot com bubble. During most of this time, the US small cap index underperformed the large cap index. “However, a very different story emerges when the small cap universe is broken down into sectors. Smaller pharmaceutical, biotechnology and software companies outperformed the US S&P 500 Index of larger companies, whereas traditional industries, such as banking and retailing, lagged behind. This shows how vital it is to be able to actively pick winners when disruption occurs.”
For Schroders, what often handicaps traditional companies when it comes to developing or adopting a disruptive innovation is the fear of cannibalising their existing revenues. In contrast, smaller and newer companies not tied to an established product have more incentive to direct resources to the next disruptive innovation. Medical technology is a good example of this. Historically, incumbent providers of medical equipment, such as video scopes for internal examinations, focused on reusable technology that is high margin, but also expensive. Clearly, these incumbents had little incentive to produce a lower- cost alternative as such a course would have eaten into demand for their existing products. This allowed Ambu, a small cap technology company with fewer existing sales to defend, to launch a single-use alternative which was both cheaper and came with a lower risk of infection. Not surprisingly, this has allowed Ambu to disrupt the existing market and gain market share.
There are, of course, a number of examples of large technology suppliers operating in markets where the “winner takes all”. Here the so-called FANG companies with dominant technology (Facebook, Amazon, Netflix and Google) often use their substantial cash reserves to buy up smaller competitors. For investors in the shares of these publicly-traded small companies, this is clearly good news, even if it may limit their opportunities for making even larger gains.
“Of course, not all small technology companies are publicly quoted. With return prospects low, venture capital financing is popular and often more readily available than other sources of finance (Figure 3). In this environment, innovative companies may remain private long after the development stage, denying investors the chance to piggy-back on rapid growth.” For example, the electric car manufacturer Tesla floated when it was valued at over $2 billion, while the app-based taxi group Uber remains private and is already worth over $60 billion. “However, we would argue that the publicly listed universe of companies still provides ample opportunity to find disrupters. For example, at the end of February, the technology sector accounted for 3.8% of the FTSE SmallCap Index, more than twice the figure for either the FTSE All-Share or the FTSE 100 indices. In the tech-heavy NASDAQ index in the US, about 65% of the constituents by number are valued at $500 million or less.
Beyond these general characteristics, they identify a number of specific areas where smaller companies enjoy advantages not necessarily shared by their larger rivals:
Unfilled niches
Pricing power
Better balance sheets
Investment impact
Lower profile
“Given the outlook for low economic growth and increasing technological disruption, we believe investors should pay particular attention to small caps. This environment will make life hard for large companies, whereas smaller companies have the opportunity to gain market share and grow faster than the market. At a time of unprecedented technological, social and regulatory change, small companies may be able to operate “below the radar” and dominate niches which are likely to grow in light of these changes. For investors, each investment will need to be evaluated on a company by company basis. They should not rely on the assumption that the small cap premium will operate universally. Being able to sort the wheat from the chaff will be vital to the success of a small cap portfolio.” They conclude.
Hervé Hanoune, Head of Fixed Income at Vontobel AM and fund manager of the Vontobel Fund- Bond Global Aggregate. Courtesy photo. "We Identify US Duration as The Strongest Source of Risk for The Next Couple of Months"
Hervé Hanoune, Head of Fixed Income at Vontobel AM and fund manager of the Vontobel Fund- Bond Global Aggregate, explains in this interview with Funds Society where he is looking for the best opportunities in the asset class.
In a low minimum return environment in many debt assets, is there still value?
Yes, of course, from a bond investor’s perspective, the current environment is actually a rather positive one, in particular for spread products. The reason is very simple.We face a landscape with low interest rates and low inflation, combined with slow or even sluggish economic growth. Low inflation will keep rates down and slow growth will keep corporates above water and enable them to meet their coupon payments and roll over their debts. Currently, we retain a positive view on European financials, insurers, utilities and the euro-zone “periphery” – the latter due our expectation that ECB President Mario Draghi will stress his wishes to normalise spread levels within the euroarea. We particularly like legacy tier-1 paper Intesa, BNP, Natixis, NSBC as well as insurers like AXA, Allianz, Groupama and Zurich.
In the current environment, with low rates in spite of they are likely to increase in the US, what do you prefer, duration risk or credit risk?
I actually prefer a global flexible fixed income approach. I don’t believe that investors are well compensated by being exposed to duration. Duration risk is notoriously difficult to manage, particularly in the current environment, where it is exacerbated by the asymmetric nature of the risk caused by low interest rates. With central-bank rates near zero, this danger is self-evident. The increase in duration has the effect of exposing bond portfolios to ever-larger drawdowns. But the good news is the fixed income universe is very large and in addition to traditional strategies there are further strategies that investors should consider, for example, multiplying the opportunity set, and that means investing globally. Investors should diversify by investing across asset classes, investment strategies and time horizons which helps to improve the risk-return profile of their portfolios. Last but not least, investors can also harvest returns by seizing relative-value opportunities.
Does it depend on the geographic area?
I believe that geographical diversification plays a key role. Indeed, investors who broaden their geographical scope from a local or continental one to a global one will be rewarded with a far larger choice of investment opportunities and strategies. I believe diversifying in today’s environment is crucial as bond investors require an approach that is capable of delivering returns, regardless of the direction of interest rates and regardless of market cycles. So opportunities for fixed-income investors will arise as long as they diversify and remain flexible.
Can you comment your positions in credit and public debt in your portfolio?
Our top ten positions are balanced between credit and public debt which reflects our conviction on issuers and sectors. In terms of public debt, we hold long-term UK and Portuguese government bonds. The UK is offering very attractive yields and while the currency would be at risk from a potential Brexit, gilts should prove resilient in the face of a British exit from the EU. Portugal in turn is a big beneficiary from the ECB bond purchase programmeand the market has yet to price this fully. In terms of credit, as outlined above, we like solid carry products, too. For example, we favor solid Italian financial institutions like Intesa Sanpaolo, one of the largest Italian banking groups.
In this context with so many news of central banks, how can they weight on markets and how do you manage it in your portfolio?
Our investment proposition is well prepared to handle these challenges. We only invest in areas where we see value. Therefore, we are able to avoid investments that we consider too expensive following the ECB bond purchases, e.g. German government bonds. In other areas, such as the euro zoneperiphery, we see the ECB action as supportive for our investments in carry products. As announced in April, the ECB is happy for now with their measures including extended bond purchases. With regards to the Fed, we only expect 1-2 additional rate hikes for this year, but this expectation is not set in stone. We have seen that the Fed is in a really dovish mode and has somewhat changed their typical behavior, so we need to act with some flexibility here.
Which are the major risks in this environment?
We believe that the strongest risks are now tied to capital preservation trades, which could sharply deteriorate when market normalize. We identify US duration as the strongest source of risk for the next couple of months.The need to be flexible/tactical is even more important now than at the beginning of the year. Our central scenario of sluggish but positive global growth, with very low inflation pressure, continues to be the one signalled by the economic data released so far. Especially in Europe and Japan, an investment landscape with zero or negative interest rates can prevail for still some time. We continue to believe that there are many opportunities present right now as the low liquidity and market stress creates many inefficiencies.
Regarding valuations, are the pricing a recession?
We clearly saw the credit market at recessionary type of valuations in January and February, but the recovery since then has led to more normal levels. We consider the general credit market fairly valued but pockets of value still exist.
Are there bubbles in some segments?
If you see the level at where German government bonds are trading, one can conclude that some government bond markets might be in bubble territory.
In Europe, you see value in peripheral debt, as Spain, Italy or Portugal. Why?
Yes, as mentioned before, peripherals are attractive, mainly Portugal and Italy, as their fundamentals are improving and they are supported by the ECB. There is an ongoing mutualisation of European debt, which is not priced in yet by the market.
Are you concerned about political risk in markets like Spain? How can it affect?
In the context of the current political trend where the electorate moves away from the established parties, this could have a negative effect. But as you could see it in Portugal, the market pays more attention to the ECB actions than to the national politics.
Currencies and sharp moves in markets like China or US are key issues now.
We remain short on various Asian currencies and will continue to actively manage our exposure to this theme when prices change. We also believe that the oil prices have stopped to correct and that producers will recover in the next few months with emerging-market oil-producing economies likely to outperform importers. As a consequence, we are long on the Russian rouble, and short on the Turkish lira.
We certainly have an element of competitive devaluation and the US took the main burden in 2015 by appreciating strongly. The US has made clear to the Chinese that they are not willing to accept a further appreciation at their expense and so the Chinese have turned to the Japanese Yen. Given that scenario, we can expect some indications that the BoJ will devalue their currency again.
Which sectors do you like?
We retain a positive view on European financials and insurers. In addition, we like utilities, industrials and peripherals. In summary, exposure to credit is defined from a top-down perspective. However, the sector and issuer exposure is constructed through a detailed bottom-up approach supported by our experienced credit analysts. As with all other asset classes within the permitted investment universe, the value of credit is continually assessed relative to other asset classes.
Geographically, how is positioned your portfolio?
Our top 5 country weightings are the UK, France, Portugal, Italy and Germany.
It is time to enter in emerging countries? What do you think about Latin America?
We remain cautious on emerging markets, particularly on local currencies. As mentioned above, oil prices have stabilized which will help producers to recover in the next months. However, we are still very selective in emerging market hard currency sovereigns. In Latin America, we therefore consider countries such Mexico and Colombia attractive.
This is the personal opinion of the author and does not necessarily reflect the opinion of Vontobel Asset Management.
CC-BY-SA-2.0, FlickrGuillaume Jamet, fund manager of the Lyxor Epsilon Global Trend Fund. Courtesy photo. "What Many Investors Do Not Realize Is That Most Hedge Funds Have A Positive Correlation with Equity Markets"
Guillaume Jamet, manager of the Lyxor Epsilon Global Trend Fund, explains in this interview with Funds Society why CTAs are an interesting option for investors in the current environment.
Taking into Account the current market situation, which are, in your opinion, the reasons why Alternative UCITS are becoming so popular?
In the current market environment traditional asset classes offer few entry points. Due to (ultra) low interest rates fixed income offers an unattractive risk / reward profile: carry is low and it seems unlikely that rates will decrease even further. Equities suffer from relatively high valuations across the board and from weak global growth trends, particularly in the US. In such an environment it is logical that investors turn to alternatives.
We see that in Europe alternative UCITS are doing very well. A broad set of alternative strategies has become eligible for UCITS wrappers since the UCITS III introduction in 2003. However, the credit crisis of 2008 has been a real turning point: since then regulators are actively stimulating the usage of UCITS legal vehicles, rather than offshore constructions. Investors appreciate the protective elements of the UCITS framework, such as concentration limits.
Which are the most demanded strategies? Are CTAs among them?
Morningstar data shows us that the top 4 collecting strategies in April 2016 are, in decreasing order of collect: Multistrategy, Market neutral-equity, Long-short equity UK and CTAs. The strategy has gained in popularity relative to 2015, where CTAs were “only” the 6th largest collector. Due to the straightforwardness of their investment process and their ability to have a managed volatility, CTAs appeal to all investor types. Our own investor base includes amongst others banks, family offices, pension funds and distributors.
Which is the main advantage of including a CTA in a portfolio? Performance, diversification… and why?
Both performance and diversification. Performance of CTAs has historically been strong. The SG Trend Index, a performance indicator for the trend-following strategy sector, generated 6.5% annually since inception in 2000, clearly outperforming equities and bonds. CTAs offer true diversification opportunities to investors. Firstly, the strategy is intrinsically diversified: as it focuses on price data, all asset classes and markets can be reached in a single portfolio. Secondly, correlation between CTAs and traditional asset classes is low or even negative. Consequently, adding a CTA to an investment portfolio with traditional investments can significantly improve the portfolio’s risk/return characteristics. Thirdly, CTAs tend to do particularly well in periods of crisis as many asset classes show clear trends. Thanks to this “crisis alpha” ”, CTAs offer diversification when investors need it most. As an example: Epsilon Managed Futures generated 38% during the credit crisis, whereas the MSCI World Index plunged by 59%.
Their truly de-correlating characteristics make CTAs stand-out from many other alternative strategies. What many investors do not realize is that most hedge funds have a positive correlation with equity markets. E.g., the HFRI Fund weighted index, an indicator of general hedge fund performance, has a correlation of 0,74 with the MSCI World Index calculated over the period 1991 – 2015. Many strategy-specific hedge fund indices, such as the HFRI Equity Hedge (equity long / short), HFRI Event Driven and HFRI Relative value (fixed income long / short) also have a correlation of more than 0,5 with the MSCI World Index over the same period.
Which are the characteristic of your fund you would highlight over competitors?
First of all our track record. The Epsilon program was launched in 1994. Since then we continuously invested into research and development of the model, systems and infrastructure. Epsilon Managed Futures, one of our two flag ship funds, has an annual performance of 8,0% since inception in 1997. Secondly, our investment approach. We are a true trend follower, without any discretionary portfolio manager intervention. Many other CTAs apply an amalgam of techniques, making them opaque to investors. In our peer group of CTAs we are amongst those which have the lowest correlation with both the SG Trend Index. Thirdly, our diversification model. Many CTAs diversify equally over markets. Our proprietary research shows that this can lead to sub-optimal outcomes as many markets are correlated.
Which are the main risks the CTA strategies front nowadays?
Frankly, I don’t see any major risks. What is important for investors to realize is that CTAs generate their performance during relatively short periods. Most of the time CTAs generate zero, or even slightly negative performance, while “seeking” trends. During such periods, investors need to hold on to their investments, knowing that performance will be generated once two market conditions have been fulfilled: markets show clear trends and correlations between asset classes are low.
CC-BY-SA-2.0, Flickr. Schroders Enters into Strategic Relationship with Hartford Funds to Accelerate Growth Plans in US
Schroders has entered into a strategic relationship with Hartford Funds, a leading US based asset management company that offers a broad range of actively managed strategies to US financial advisors and their clients.
The relationship will involve Hartford Funds adopting 10 of Schroders’ existing US mutual funds, with potential for the partnership to expand over time. The adopted funds will be advised by Hartford Funds, sub-advised by Schroders, and renamed ‘Hartford Schroders Funds’. The funds, which include equity, fixed income and multi-asset strategies, collectively have $2.2 billion in assets under management.
Peter Harrison, Group Chief Executive at Schroders explained that “Hartford Funds is a high-quality company whose reach and scale makes them an ideal strategic partner for Schroders. The addition of funds sub-advised by Schroders to Hartford Funds’ investment platform will give investors in the US access to our diverse investment management expertise. This relationship will enable us to build scale in our US intermediary business and accelerate our growth plans in the US market.”
“This relationship allows us to expand the breadth of our investment capabilities and continue to deliver quality solutions to US investors, both now and in the future. Schroders’ history of product innovation and disciplined investment processes reflect our belief in differentiated, long-term thinking that helps investors meet their financial goals,” said Jim Davey, President at Hartford Funds.
Hartford Funds has $73.6 billion assets under management and offers more than 45 funds in a variety of styles and asset classes.
The fund adoptions are expected to be complete by the end of the third quarter of 2016, subject to shareholder approval.
Uncertainly as to the consequences for the UK’s fund industry in the event of Britain exiting the European Union is adding to the ‘fear factor’ ahead of the June 23 referendum, according to a poll conducted for the latest issue of The Cerulli Edge – European Monthly Product Trends Edition.
Nearly 54% of respondents expected sales of funds across Europe to be affected to varying degrees should the UK pull out of the EU, says Cerulli Associates, a global analytics firm. Just over 30% foresaw some hurdles to doing business for up to three years, while 15.4% predicted long-term disruption that would require new distribution and sales strategies. Just under 8% of respondents envisaged difficulties for up to 12 months. The largest individual grouping–46% of those polled–did not feel that a Brexit would affect sales.
“Cerulli believes that if only half of asset managers’ worries about Brexit are justified, then the industry should be firmly in favor of remaining in the EU,” says Barbara Wall, Europe managing director at Cerulli Associates, adding that the vast majority of asset managers seem to regard voting to remain as a no-brainer, even if an exit would only cause anxiety and inconvenience rather than a catastrophe.
“Uncertainty abounds, partly due to no one knowing whether a Brexit would result in Britain’s relationship with the EU looking more like that enjoyed by Norway, Switzerland, and South Korea, or something else. Nor does anyone know how long the renegotiating of agreements would take. This uncertainty is feeding the ‘fear factor’,” says Wall.
While it is unlikely that a Brexit would stop UK asset managers from managing funds sold in the EU or prevent sales of funds in the other direction, Cerulli believes that it would be disproportionately expensive for many smaller companies to make the necessary adjustments, and it could threaten the viability of some operations.
“Whether Britain stays in the EU is a matter for the electorate. Many voters will feel the businesses in which they work have given them a strong steer, usually to vote to remain in the EU. Cerulli believes this is because those who would be charged with adjusting for a Brexit have examined this scenario–as far as it is possible to examine it–and can see far more downside than upside,” says Wall.
CC-BY-SA-2.0, FlickrPhoto: Alex Crooke, responsable del equipo de Global Equity Income de Henderson . Global Equity Income: Value Opportunities Emerging
In this video update, Alex Crooke, Head of Global Equity Income at Henderson, reveals where his team are finding the best opportunities for equity income and capital growth. He also explains the long-term regional and sector findings from the Henderson Global Dividend Index, a research report into global dividend trends.
Where are the best opportunities?
We are finding interesting opportunities within the financials sector. A number of central banks have started new policies, such as negative interest rates, which have been affecting sentiment and profits in the short term for a number of financial companies. Longer term, we believe this will create value so we are looking to selectively increase our bank exposure in Europe by investing in good-quality recovery companies such as ING, the Dutch multinational banking and financial services company. Insurance is another area that was negatively affected earlier this year but offers the potential for very good dividend growth. The pharmaceuticals sector has been impacted by market rotation this year after a strong 2015 but we believe it remains attractive and recent underperformance is providing an opportunity to invest in quality companies at more attractive valuation levels.
Which are the regional dividend trends?
Key findings from the Henderson Global Dividend Index (HGDI) reveal that Japan and North America have exhibited the best dividend growth during the last two years. We are also seeing some interesting opportunities arise in Europe, where companies are returning to the dividend payment list, particularly in the financials and consumer-related sectors.
Which are the sector dividend trends?
HGDI shows that the technology sector is continuing to provide good dividend growth. A number of companies are increasing their payout ratios (the proportion of profits paid out as dividends) as well as earnings and profits, which is feeding dividends. Pharmaceuticals and financials were the largest sectors in terms of dividend payments in Q1 16, although growth has been moderating. Consumer-based sectors are demonstrating good dividend growth and we expect this to continue through the rest of the year.
Dividend growth outlook
We are seeing a slower environment for dividend growth overall. This reflects slower economic growth from many countries around the world and the fact that payout ratios have reached higher levels than in previous cycles. With earnings, cashflow and ultimately dividends from commodity-based sectors still under pressure from recent price falls, markets with a high percentage of oil or mining companies, such as the UK and Australia, are experiencing dividend cuts. Despite this, many businesses outside of these sectors are delivering sustainable dividend growth.
Why global equity income?
In the current environment the benefits of a global approach to equity income are based on opportunity and value.
In opportunity terms, we can position the strategy away from difficult areas, such as concerns about growth from China and worries about a potential Brexit vote, while accessing growth in other parts of the world.
In terms of value, we are still finding some very good opportunities, with the dividend yield available on equities looking good value relative to bond yields and interest rates. We believe that by maintaining a good-quality bias and searching for opportunities in international markets and sectors we are able to provide an attractive long-term strategy for investors.
Foto: Leif and Evonne
. Nancy Bosley nombrada directora de desarrollo de negocio de Global Insurance Solutions Group
Nancy L. Bosley has been named Director of Strategic Business Development for Global Insurance Solutions Group (GISG), an independent insurance brokerage firm with offices in Greater Philadelphia and Miami, as announced by Michael Blank, managing partner. In this role, Bosley is responsible for the strategic development aspects of GISG, with specific emphasis on the firm’s expanded services for the international and domesticwealth management, private banking, and investment advisory channels.
Bosley most recently served as President of Transamerica Life Brokerage after serving as the organization’s Senior Vice President, Chief Marketing Officer, and Chief Sales Officer. Prior to joining Transamerica, Bosley served as President and Chief Executive Officer of LifeMark Partners, a national brokerage marketing organization. Bosley has been in the life insurance industry since 1980, first serving as a principal in Security House, for 20 years, an independent life brokerage firm.
“Our firm is privileged to be a recognized leader in insurance-based solutions for businesses and families world-wide. With the additional bench strength of Nancy, we are further positioned for expansion and growth in 2016 within the registered investment advisory and private banking channels,” said Blank. “Our expanded team further elevates our support model to assist wealth managers and private banks as they grow and scale their businesses.”
CC-BY-SA-2.0, FlickrAndrea Mossetto, Investment Specialist of Parvest Diversified Dynamic Fund (BNP Paribas IP). Courtesy photo.. "In Markets, We Can Be More Confident That “Bad Will Be Bad” and “Good Will Be Good” When It Comes to News or Data”
Andrea Mossetto, Investment Specialist of Parvest Diversified Dynamic Fund (BNP Paribas IP), explains in this interview with Funds Society the secret of this strategy and the importance of flexibility in the current environment, as well as where the best opportunities.
According to the PDD dynamic multi asset strategy, which asset class do you currently think has more value?
In current financial markets, characterised by a declining influence of external stimulus, we can be more confident that “bad will be bad” and “good will be good” when it comes to news or data. This is a welcome development seeing how in the past “bad appeared good” given the uncertain environment brought about by central banks’ unconventional monetary policy.
In a “winner takes all” market, at first glance, performance will be the only parameter that investors take note of, with no distinction between the thousands of management styles populating this type of multi-asset investments still sustained by strong inflows across Europe.
Since the end of 2014, we at THEAM believe asset allocation flexibility has become paramount to limit drawdowns and turn market challenges into opportunities. Investment performance can come from the asset manager’s ability to efficiently capture market risk premiums. To accomplish this, six years ago THEAM built a strategy where the weightings allocated to the various asset classes are not set in stone and there are no guidelines favouring one asset class over another. At no time do these strategies hold just one asset class or focus, say, 60%, of the portfolio exposure on a single investment theme. Instead, funds are always invested in a range of assets and the mix is adjusted according to the realized volatility of each asset held in the portfolio.
Is it the right moment to invest in more risky assets within equities or should we be more cautious?
Our approach can meet the needs of investors who, in an environment that has become structurally more volatile, are looking for a strategy that seeks to provide a stable risk profile without sacrificing the potential return. Our ‘Isovol’ risk-based strategic asset allocation is designed to offer risk stability and exposure reactiveness in bull and bear markets. We are able to align a flexible asset allocation with market dynamics according to the realized volatility of each asset held in the portfolio.
With our approach, investors can still have exposure to asset classes that they perceive as risky, while relying on the fund managers to scrutinize those risks by using a range of monitoring tools and their knowhow. At the same time, they are invested in asset classes that are typically less volatile, less cyclical, etc. and that can act as a counterweight.
As a result of such a multi-pronged strategy, investors can expect the portfolio to be shifted into higher-yielding assets in rising markets to maximize returns, while in a downturn, an adjustment to a more risk-averse portfolio should ensure that losses are minimised. Such an approach should appeal to investors intuitively.
Is it necessary to include other type of asset classes in the portfolio to look for such a decorrelation and reach a truly diversified portfolio?
On top of the Risk-based Strategic Asset Allocation, our Medium-term opportunistic ‘diversification assets’ aim to contextualize the portfolio within a dynamically changing world. The aim of such opportunistic trades could be to hedge the portfolio against a growth slowdown, e.g. in China (by being long Australian 10-year government bond), and an unstable market environment (by being long gold). Being long the US dollar index should allow the strategy to benefit from gains in the dollar against G4 currencies.
Tactically, the fund manager may put in place hedging strategies to manage the market inflection points he identifies, even before a rebalancing signal has been activated.
Will investors’ demand for balanced funds continue to grow?
Flexible multi-asset funds can be a good way for investors to diversify their portfolio investments. Current economic conditions, with still low interest rates, a hesitant global economic recovery and geopolitics-related risk aversion, have reinforced the perception of many investors that their usual investments can no longer ensure the looked-for returns. In many financial markets, the heightened degree of uncertainty and the potential for volatility spikes remain a challenge.
We believe such a transparent approach helps investors understand the reasons for changes in the asset allocation and the risks they could incur. The EUR 2.3 bln AUMs progression we experienced since beginning 2014 is the investors answer to this these funds, well-suited for this environment, willing to invest over medium-term horizon.
What is the fund’s investment philosophy?
A key objective and benefit of this approach is to minimize losses in a downturn and maximize returns when markets are rising. By combining the strengths of our asset managers and calculation models, the strategy has outperformed the market peer group since the end of 2009. It is simple and intuitive on top of being well suited for client searching for a transparent and straightforward approach to be exposed to financial markets.
CC-BY-SA-2.0, FlickrPhoto: OnCall team. Investor Demand For Real Assets Will Surge By 2020
Private equity, real estate and infrastructure managers anticipate strong growth in assets in the next five years, according to new research Building for the future: How alternative investment managers are rising the demographic challenge from BNY Mellon, prepared in collaboration with Preqin. the study surveyed 340 private equity, real estate and infrastructure fund managers globally.
Global macro-economic, social and environmental shifts are fuelling a need for investments in real assets, property and infrastructure worldwide. The report forecasts that appetite for these assets among retail and institutional investors will continue to grow. Sixty percent of infrastructure managers, 44% of real estate managers and 39% of private equity managers surveyed expect their assets under management to grow by at least 50% in the next five years.
“Deep-rooted demographic and macro forces are driving an unprecedented need for investment in real assets such as transport facilities, communications networks, housing and hospitals. These demands far outstrip the reach of government and public finances, and this creates huge opportunities for private capital to play a part in people’s everyday lives,” said Alan Flanagan, global head of Private Equity and Real Estate Fund Services at BNY Mellon.
While institutional investors, most notably pension funds and family offices, currently demonstrate the biggest appetite for real investments, almost half of the private equity and real estate fund managers surveyed believe that retail investors will account for a higher level of capital inflows by 2020 than they do today. Investment will come from mass affluent and high net worth individuals in developing markets, the continued expansion of sovereign wealth funds, and increasing numbers of defined contribution schemes.
“Investors are turning more and more to real assets to find yield, diversify their portfolios, and steer through volatile markets,” said Flanagan. “The growth in real asset investments has been impressive and there is no sign of it slowing down. As a result, the marketplace has become increasingly competitive on deal sourcing, presenting challenges for managers to successfully deploy the capital they have raised.”
The majority of alternative investment managers surveyed have seen institutional investor appetite for real assets climb over the last 12 months. A third of real estate and 41% of infrastructure managers are seeing the most demand coming from public pension funds, followed by private sector pension funds. Private equity managers see the greatest interest coming from family offices, followed by public pension funds (26% and 25% respectively). The survey also revealed that more than a third of infrastructure and real estate fund managers had altered their investment approach, either by diversifying their assets or exploring different geographies and niche strategies.
The need for transparency, driven by clients and regulators, is prompting a growing number of managers to consider outsourcing certain functions. Overall, two-thirds of fund managers across all asset classes feel regulation might lead to outsourcing in the future. Cost was the most commonly stated reason to outsource, in addition to having access to enriched data and analytics from an outsourcing provider and access to the expertise of external staff.
“Investment managers’ business models must have flexibility to thrive in such a fast-evolving environment and also be able to meet growing regulatory reporting as well as institutional investor demands for transparency,” added Flanagan. “To maintain strong allocations and achieve sustainable growth, it’s vital that managers of assets are invested in their infrastructure and supported by the right operating models.”
