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U.S. Investors Expectations Do Not Reflect a Full Understanding of ETFs

More than three-quarters of investors agree that index funds and exchange-traded funds (ETFs) are a cheaper way to invest, but 71% also believe they are less risky, according to new research published by Natixis Global Asset Management. The findings suggest that many investors have expectations that don’t reflect a full understanding of the risks of index funds versus the benefits.

“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have”

The asset management firm commissioned an independent survey of 750 individual investors in the U.S., from the affluent to the high net worth. It found that: 64% of investors think using index funds will help minimize investment losses; 69% believe index funds offer better diversification; And 61% believe index funds provide access to the best investment opportunities in the market.

However, investors expecting lower risk may have been surprised at the start of 2016 when the Standard & Poor’s 500 had its worst opening since 1928. The index bottomed out on February 11, having fallen 10.5% since trading began in January. The market did rebound, finishing the quarter 0.7% ahead. But tracking the index would have resulted in a hair-raising ride. And while the first quarter might be seen as an anomaly, volatility in markets is not.

“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia. “Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blind-side investors during volatile markets.”

Professional investors see the role for passive investing differently. Recent surveys of both institutional investors and financial advisors by the asset manager showed they preferred active strategies to take advantage of market movements, generate alpha and provide risk-adjusted returns, while viewing passive investing primarily as a way to save on management fees.

Investors willing to use new investment strategies

The survey finds evidence that investors are willing to move beyond 60/40 allocation investment approaches. Nearly two-thirds (65%) say a traditional approach (equities and bonds) to portfolio allocation is no longer the best way to pursue returns and manage investments.

Further, 70% of investors want new strategies that are less tied to broad markets and 75% favor strategies that can help them better diversify their portfolio, an approach that would seem to open the door to wider ownership of alternative investments.

But just over half of investors (52%) surveyed actually own alternative assets, a grouping that includes private equity, long-short funds, hedge funds and real estate.

Investors who don’t own alternatives say the assets are too risky (56%); 34% acknowledge they don’t understand how alternatives work, and 28% don’t think they need alternatives.

Investors say learning more about investing is the number one thing that would help them better achieve their investment objectives – adding to their financial knowledge was named by 42% of respondents.

“It is encouraging to see investors are looking beyond traditional asset classes to build portfolios designed to help them reach their financial goals through the widest range of potential market conditions,” said Hailer. “However, it is clear the financial industry still needs to provide more education to help investors make informed decisions.”

About the survey
Natixis surveyed 750 individual investors across the United States with a minimum of $200,000 in investable assets. The online survey was conducted in February 2016 and is part of a larger global study of 7,100 investors in 21 countries from Asia, Europe, the Americas and the Middle East. The findings are published in a new whitepaper, “Help Wanted: How investor behavior is rewriting the job description for financial professionals.”

AXA to Sell Its Investment, Pensions and Direct Protection Businesses in the UK to Phoenix Group Holdings

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AXA venderá sus negocios de inversiones fuera de plataforma, pensiones y seguros directos en Reino Unido a Phoenix Group Holdings — CC-BY-SA-2.0, Flickr. AXA to Sell Its Investment, Pensions and Direct Protection Businesses in the UK to Phoenix Group Holdings

AXA announced today that it had entered into an agreement with Phoenix Group Holdings to sell its (non-platform) investment and pensions business and its direct protection business (Sunlife) in the UK. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to occur in the second semester 2016.

The overall consideration for the sale of the UK Life & Savings businesses, including the transaction announced today, the sale of the offshore investment bonds business based in the Isle of Man announced on April 28th, and the sale of the wrap platform Elevate announced on May 4th would amount to ca. GBP 632 million (or ca. Euro 832 million). These transactions would generate an exceptional negative P&L impact of ca. Euro 0.4 billion accounted for in net income.

The operations affected by these transactions will be treated as discontinued operations in AXA’s 2016 consolidated financial statements. As a consequence, their earnings will be accounted for in Net Income until the closing date.

Alvaro Morales Appointed New Head of the Santander Global Private Banking Team

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Álvaro Morales: nuevo responsable de Banca Privada de Banco Santander a nivel global — Photo: Ennor. Alvaro Morales Appointed New Head of the Santander Global Private Banking Team

Santander is currently experiencing an overhaul of its Private Banking division. Amongst the most important changes is Alvaro Morales’ promotion to Head of Santader’s Global Private Banking team. He will continue to be based out of Miami, where up until now, he served as Head of Santander International Private Banking.

According to an internal memo by Angel Rivera, Head of Retail and Commercial Banking for Banco Santander, to which Funds Society had access, “The Retail and Commercial Banking division will also play a central role in the development of the Group’s Private Banking business, in the direct management of International Private Banking and in the support given to domestic private banks in the various geographies, taking greater advantage of the synergies of our international platform and all of the countries.”

The aim, according to the memo, is to continue improving the specialization of Santander Private Banking’s advisory service model with a segmented offer and a personalized specialist service model that provides each customer tailored solutions.

Morales has been working close to Santander since 1999 when he joined the group as Regional Director for Banco Banif. In 2007 he moved to London to run the UK’s Private Banking business of the bank. By 2009 he became Head of Santander International Private Banking and moved to Miami.

Carlos Díaz will remain in charge of products and market intelligence and will work with Álvaro in managing this unit. Blanca Vilallonga will now will be responsible for coordinating the division’s activities, implementing new ways of working, monitoring projects, ensuring compliance with work plans and measuring the impact they have on the organization.

Through the same internal memo Rivera signaled the following appointments:

Angel Rivera will directly assume leadership of Digital Transformation coordinating with the area of Innovation and with each country. It is a shared responsibility throughout the Group. Alberto Fernández Tomé will lead the Digital Solutions team, and Julián Colombo will continue to head the CRM and Business Intelligence team.

Fernando Lardies will be in charge of the new Network Banking project, wheras Javier Castrillo will be in charge of the Commercial Strategy and Best Practices team which includes:

Ignacio Narvarte who will be in charge of Means of Payment (issuing and acquiring).
Francisco del Cura who will remain in charge of Insurance
Frederico Bastos who will remain in charge of Businesses
Ignacio Gomez-Llano who will remain in charge of Quality and Customer Satisfaction

The memo also included Rivera’s appreciation to Gonzalo Algorri, former group director of Global Private Banking Santander, “for his contribution to the development of the Private Banking business and to all our colleagues who have left the Bank in recent weeks, for their contributions.”

Santander AM Expands Selection to Passive Strategies

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El equipo de selección de fondos de Santander AM amplía su foco y cubrirá ahora también estrategias pasivas — CC-BY-SA-2.0, FlickrPhoto: Carlescs79, Flickr, Creative Commons. Santander AM Expands Selection to Passive Strategies

The Research and Selection team of Santander Asset Management (SAM) has started covering passive vehicles, on the back of demand for these strategies.

The move will see the Spanish firm’s recommended list or “manager matrix” increase from about 300 to almost 400 strategies, of which about 80 names will come from the passive sphere.

“This move [including the passive sphere] makes sense, it’s something that we have been discussing for a while, and finally we decided to merge both, passive and active within the same research team. I think it makes total sense,” José Maria Martinez-Sanjuán, head of Manager Research and Selection at Santander Asset Management told InvestmentEurope. “The fact is that there’s more demand, so we have to respond from a research point of view,” he said.

The growth in the ETFs segment illustrates investors’ bullish demand for passive strategies. According to ETFGI, assets invested in ETFs/ETPs listed globally reached a record high of $3.1trn (€2.7trn) at the end of April 2016.

This compares to $2.9trn in 2015, and $1.5trn in 2011 — a growth of 106% over the last five years. “If you see the flows of the industry, you will see that ETFs are only growing. There’s also a new wave of smart beta coming now to the market, so we need to be aware of this and understand the market evolution,” he said.

Martinez-Sanjuán said fee reduction plays a key role on the growth for passive vehicles, along with the ability to implement more easily strategic allocations through a core-satellite portfolio. Following this trend, the team led by Martinez-Sanjuán has developed a research process for passives, and it has just started to cover these strategies. “The coverage of passive vehicles is not as time consuming as the active world, but I guess that covering both gives you the global picture of what is going on in the industry and it is a value added piece of information for the investors,” Martinez-Sanjuán said.

“This is to help our various clients, so we can have a global view of any strategy, active or passive,” he said. Early this month, it emerged that SAM made two new appointments within its selection team. Last month, Wee-Tsen Lee joined Santander from Barclays Wealth to be responsible for manager selection global & US equities. In addition, Pryesh Emrith was promoted within Santander in March, to be in charge of US & global fixed income and multi-asset.

The two new appointments are based in the group’s London headquarters and work for the Research and Selection team, which works within SAM’s Global Multi-Asset Solutions team and alongside Santander Bank.

SAM manages around €20bn as an asset manager, and a further €20bn are assets under advice. The firm advised a further €8bn for institutional clients.

Pinebridge Investments Wins Key Industry Award From Institutional Investor Magazine

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La gestora PineBridge Investments, galardonada en los premios de la revista Institutional Investor — . Pinebridge Investments Wins Key Industry Award From Institutional Investor Magazine

PineBridge Investments has been named Floating-Rate Bank Loan Fixed Income Manager of the Year at the Institutional Investor US Investment Management Awards. PineBridge received the award at a gala event on 19 May 2016 at the Mandarin Oriental Hotel in New York City.

Steven Oh, Global Head of Credit and Fixed Income said, “We are honored to receive this recognition from Institutional Investor, and proud of the value we have been able to deliver to our clients, through an experienced and stable team that has navigated market challenges through multiple economic cycles. ”

The Institutional Investor US Investment Management Awards, now in their seventh year, recognizes US institutional investors for their innovative strategies, fiduciary savvy, and impressive short and long-term returns, as well as US money managers in 39 asset classes and strategies that stood out in the eyes of the investor community for their exceptional performance, risk management, and service.

According to Institutional Investor, the winners were chosen from a short list of top-performing managers across a range of investment strategies identified by the magazine’s editorial and research teams in consultation with eVestment, a leading provider of institutional investment data analytics. Investment strategies were evaluated on such factors as one-, three-, and five-year performance, Sharpe ratio, information ratio, standard deviation and upside market capture. More than 1,000 leading US pension plans, foundations, endowments and other institutional investors were also surveyed and voted for the top-performing managers in each strategy over the past year.

PineBridge received the Global Balanced/Tactical Asset Allocation Manager of the Year Award in 2015.

PIMCO: How to Play the Brexit Blues

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For much of the last few months it has been difficult to have any conversation about the outlook for the UK, or indeed Europe, without discussing Brexit, says Mike Amey. Uncertainty over the outcome ‒ the PIMCO´s MD and Portfolio Manager continues to assign a 40% probability to the UK voting to leave the European Union (EU) ‒ has slowed economic activity, pressured UK bank assets, reduced liquidity in sterling-denominated corporate bonds and put sterling under pressure.

The one market that has not been overly affected is stocks, he says. Due to the multinational nature of many UK-listed companies, the Brexit vote is exerting two opposing influences on valuations: The uncertainty of the UK’s trade outlook is counterbalanced by the positive impact of sterling weakness on overseas earnings.

Although his base case is that the UK votes to remain, “we devote much time to thinking about the implications of a vote to leave. Of the two competing views on this ‒ that it will be a globally systemic event or that, while important for the UK, its impact on global markets will be contained ‒ we side with the latter. In part this is due to our belief that any negotiations would be long and drawn-out. For one thing, a vote to leave would likely trigger a leadership challenge within the Conservative party. Furthermore, the UK does not even have a trade department that could lead the negotiations. In short, these things would take time!”

Nonetheless, there will likely be material volatility leading up to and around the vote on 23 June, adds Mike Amey. How can investors position for this?

In his portfolios he has been looking to combine positions that may benefit if the UK remains in the EU with those that will mitigate downside risk if it votes to leave. These include:

Buying UK bank bonds: They view the recent underperformance of UK bank bonds as an opportunity, with the subordinated bonds of major UK banks now trading at yields of 8% and above. Whilst there will be mark-to-market volatility in the event of a vote to leave, they do not see a material risk of capital loss.
Maintaining exposure to UK duration: They also see good risk-reward characteristics in five- and 10-year gilts, with the market currently pricing in a 25% probability of a 25-basis-point rate cut this year. With inflation low, they see a very small probability of a hike in the next 12 months regardless of the outcome in June, and in the event the UK votes to leave the EU, they think it likely that the Bank of England would cut the official rate to zero, potentially boosting gilt prices.
Selling the British pound versus the U.S. dollar: For portfolios with less liquid UK assets, or with significant exposure to UK banks, they think the best way to hedge is by selling the pound relative to the dollar. In the event of a vote to leave, they consider a 10% devaluation of the pound against the dollar.

“Clearly the outcome of 23 June can’t be predicted with certainty. However, through a combination of strategies like these, we think portfolios can be structured to potentially benefit in the event that the UK remains in the EU and hedged in the event it takes the alternate path,” he concludes.

Coelho: “We Are Going to Experience an Important Recovery in Real Estate From the Emerging Markets”

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“The more interest rates stay on zero, the less people know where they should invest money in”, Pedro Coelho, Vice President at Portuguese Real Estate manager Square AM, says in an interview with Funds Society. And, he remembers, “Core Real Estate has given higher return on a historical basis”.

From your experience as a real estate fund manager, what of these two options has more potential in the current environment: direct investment in Real Estate or the investment via traded securities related to the sector?

It depends on the investor expertise and size. If it has expertise and size enough it should get profitable to invest directly. If it has not that expertise and have not so much money (or both) it should invest indirect.

How do the Square’s funds work: are they investing directly? How long have you been investing this way?

Each member of Square AM top management team has more then 25 years real estate experience investing directly. And it has invested successfully in excess 4 billion euros in Real Estate over the past 25 years in Portugal, Brazil, Russia and USA.

Are investors willing to capture the iliquidity Premium of the direct investments? Is this Premium high enough?

The more the premium is getting shorter the less investors stay to pay it.

Income… is one of the reasons that people mention when investing in Real Estate. Are you focusing on income in some or your products?

We have two different types of products: some distress assets funds to make restructuring of Bank balance sheet and we have a income Fund that has 330 M € unlevered. This Fund bet MSCI Index on income every year since 2006 and won the MSCI award as the highest Portuguese portfolio return over the last 5 years (3 of each as Iberian award).

What are the main reasons why people should invest now in the asset class? Are you seeing a increasing interest? Why?

The more interest rates stay on zero, the less people know where they should invest money in. Core Real Estate has given higher return on a historical basis.

Regarding the situation of the market, it seems the real estate market in Europe is not as cheap as it used to be after the crisis (2008-2010). Are you still seeing distressed opportunities in some markets in Europe? What about Spain and Portugal?

There are always distressed opportunities. In South Europe, Bank restructuring is still one of the main trends. In the other countries, although is not a huge problem as it was, due to economic dynamic is always a thing to deal with.

In Spain, in which sectors are the best opportunities? Are you concerned by the political situation?

I would say that for the moment being there a little “on hold” to see what happens after June elections. Although, if we see last results, it could be a good lesson for all politicans. Just a management governement, managing the previous budget and economy growing at 3,5%. Why do we need a true government?

And what about other markets in the world: where are you seeing the best opportunities?

I think we are going to assist at a main recovery from the emerging markets, as they suffered (and their currencies) big depreciation.

The market seems attractive in an low interest rate environment but… if the Fed starts to hike rates… What could be the impact in the asset class? Are you concerned about this?

We should always be concerned about it, but my own view is that we are not going to assist at a hike in FED rates…

In the last years we have seen liquidation and closes in some real estate funds in Spain. After the adjustment, are the remaining funds in a better situation? Could the sector face more problems in the future that could force more closes?

It always depends on the economy and on the management skills, but dynamics also occur in the other asset class like bond and equity funds.

Hamilton Lane Believes it is an Exciting Time to Invest in Brazilian Private Equity

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Hamilton Lane: “El momento económico actual en LatAm representa una oportunidad única para invertir en private equity” — CC-BY-SA-2.0, FlickrFoto: Ricardo Fernández. Hamilton Lane Believes it is an Exciting Time to Invest in Brazilian Private Equity

Hamilton Lane, a leading independent alternative investment management firm, opened its first Latin America office in Rio de Janeiro back in 2011, but they had already been operating with investors in the region since 1997. From this office, Ricardo Fernandez and his team recently closed USD 160 million on capital for the Hamilton Lane Global SMID Fund, a customized approach to private equity for South American Institutional investors. In his interview with Funds Society, Ricardo Fernandez talks about the successful closure of this fund and the private equity opportunities in Latin America.

Fernandez mentions that from their offices in Rio de Janeiro, they serve different institutional investors across the region, mostly corporate pension funds, private banks, and family offices, from Chile, Colombia, Peru and Central America. “Our firm works with local private equity funds, conducts operations with other managers, and also does co-investments. Our primary local investment started back in 1997, and we have been doing primary and secondary investments since then. These funds are normally targeted towards local institutional investors. On the co-investment side, Hamilton Lane acts as a General Partner by investing with other managers, facilitating their access to the investment and adding know-how to its investments.”

Amongst what they do with Latin American family offices, Hamilton Lane offers partnerships where “we provide them with our expertise in private markets and help set up their private equity investment programs and separate accounts.”

In his opinion, the current environment in Brazil, with a 3.8% contraction for 2015, “represents an exciting time to invest in private equity, as investors can take advantage of the good asset prices and benefit in the long term, looking at the next five to ten years. Some businesses and sectors continue to grow despite the current situation, but because of the lack of growth and financing alternatives, entrepreneurs don’t have a lot of options. Thus, they will look toward PE funds in order to get the financing they need to grow. In addition, valuations have come down and now there are attractive investment opportunities at the right multiple.” He concludes.

Nikko Asset Management Launches Japan Focus Equity Strategy

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Nikko Asset Management lanza una estrategia centrada en la renta variable japonesa — CC-BY-SA-2.0, FlickrPhoto: OTA Photos. Nikko Asset Management Launches Japan Focus Equity Strategy

Nikko Asset Management has launched a Luxembourg domiciled Japan Focus Equity UCITS fund managed by Yuki Watanabe.

The Japan Focus strategy aims to achieve long-term capital growth by investing in a portfolio of more than 30 stocks. The team takes an active investment approach based on thorough fundamental research, analysing long term structural trends and identifying companies that benefit from them.

The UCITS fund is based on an existing strategy domiciled in Japan, which has been managed by Watanabe since August 2012. As of 31 March, 2016, the fund has returned 26.15 per cent annually since September 2012 compared with an annualised 21.24 per cent rise in the TOPIX Total Return Index.

“Our Japan Focus fund has been launched in response to investor demand for specialist expertise in actively managed investments in Japan,” says Watanabe, Senior Fund Manager of the Nikko AM Japan Focus Fund. “We have strong relationships locally which provide our team with unique insights into the underlying companies, and the ability to tap into opportunities that may have otherwise been overlooked.”

The fund provides access to Nikko Asset Management’s proven investment team and market leading resources. The company has approximately 200 investment professionals operating in 11 countries, nine of which are based in Asia.

Spanish General Elections… Again

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Christoph Riniker, Julius Baer’s Head of Strategy Research, and his investment team are currently underweighting the Spanish equity market based on the ongoing political uncertainty. As they are assuming that this situation is here to stay for some more time.

The potentially shortest Spanish legislature is bound to come to an end on the 26th of June of 2016, when Spain will elect a new parliament for the second time within six months. Since the politicians have failed to form a new government after the last general election in December 2015, King Felipe VI has dissolved the parliament and called for new elections. The situation after the new elections might not be better than before. Current polls suggest that the outcome will be very similar to the one in December 2015.

According to the most recent polls, the ruling PP might see an unchanged result and the PSOE a noticeable decline. Both new parties, Podemos-IU (recently merged) and Ciudadanos might get more seats in the parliament than after the previous general election in December 2015. However, only minor changes can be expected. Since no party will reach the absolute majority, coalitions will have to be formed. The same problem as in the recent months might therefore emerge but we remain confident that the politicians are aware of that they cannot fail again.

Potential coalitions to think about

On the basis of the above-mentioned expectations there are only a limited number of possible combinations. Expecting the PP to stay in the relative lead, the party might first get the opportunity to build a coalition. The most likely partner according to the political programs would be Ciudadanos. Political reforms already achieved my stay in place and taxes could be reduced while the Catalonian issue might remain a topic of conflict between the two parties.

Should a coalition between PSOE and P-IU be considered, the differences in the Catalonian question would also remain an issue here as the PSOE strongly opposes more authority for the north-eastern region. From an investor’s perspective (be it equities or fixed income) the former combination would be strongly preferred. In both cases the coalitions might not reach the absolute majority and therefore remain dependent on smaller regional parties in the parliament. Last but not least a grand coalition between PP and PSOE could be an option although a collaboration of the traditional antagonists seems impossible at first glance. The only argument therefore can only be external political pressure in order to avoid another failure. Not a promising outlook.