European Smart Beta ETF market flows continued to be strong in Q1 2016. Net New Assets (NNA) year to date (until 31/03/2016) amounted to EUR 2 billion. Total Assets under Management are up 4% vs. the end of 2015, reaching EUR 16.7 billion. Smart Beta assets have doubled since the end of 2014. Year to date, ETF flows were sustained especially in the Risk based & Factor allocation categories as investors looked for defensive strategies and alternative sources of return in an uncertain environment.
Smart Beta definition: Smart Beta indices are rules-based investment strategies that do not rely on market capitalization. To classify all the products that are included in this category we have used 3 sub segments. First, risk based strategies based on volatility, and other quantitative methods. Secondly, fundamental strategies based on the economic footprint of a firm – through accounting ratios- or of a state – through macroeconomic measures. Then factor strategies including homogeneous ranges of single factor products, and multifactor products designed for the purpose of factor allocation.
Q1 2016 flows were positive for Smart Beta ETFs at EUR 2 billion, with a one-year record high at EUR 907 million in February 2016, and a strong month of March at EUR 807 million. The quarterly figure is equal to the amount gathered in Q1 2015, in a context where equity ETFs globally registered significant outflows. Year to date, risk based ETFs registered the highest inflows with a record high on Minimum volatility ETFs at EUR 1.2 billion.
Due to high uncertainties on the economic and monetary environment worldwide,low volatility ETFs continued to attract significant interest especially on US and global indices. In the factor allocation space, multifactor ETFs continued to gather inflows, EUR 357 million year to date, mainly on European indices as investors are looking for diversification in a context of poor equity market performance. In the fundamental space, quality income ETFs benefited from the low yield environment due to their attractive yield/risk profile.
Foto: Yoshihide Nomura
. Broker dealers, banca privada y trusts controlan el 72% del mercado de los grandes patrimonios
Wirehouses and banks control nearly three-quarters of all high-net-worth assets in the United States, according to the research “High-Net-Worth and Ultra-High-Net-Worth Markets 2015: Understanding and Addressing Family Offices”, published by Cerulli Associates.
“As of year-end 2014, wealth managers controlled approximately $8 trillion inHNW and UHNW client assets,” states Donnie Ethier, associate director at Cerulli. “The longtime market leaders – the wirehouses, private banks, and trust companies – have maintained their reign with a collective marketshare of 72%.”
The wirehouses and banks must stop relying on intra-channel recruiting (e.g., wirehouse-to-wirehouse) or these channels will likely experience moderate growth. Moreover, heirs of their existing clients may be the biggest wildcard as they will likely boost growth within the independent and direct channels.
State-chartered trust companies and multi-family offices have experienced significant growth. These are exclusive, independent practices focused on sophisticated estate planning. These firms are often established around the softer elements of wealth, including family governance and succession planning.
Traditional registered investment advisors are also now included in Cerulli’s HNW asset sizing because, similar to several broker/dealers and investment councils, they may not qualify as MFOs but are successful among HNW families.
“Wirehouses, private banks, and trust companies remain the three largest HNW channels, respectively,” Ethier explains. “Wirehouse assets lessened from past years; however, this is not always due to a loss of assets. Instead, it can be due to a change in Cerulli’s methodology, including redistributing a wirehouse’s assets to an affiliated channel. An example is separating U.S. Trust’s marketshare from Merrill Lynch.”
The times when chocolate was a luxury good are long gone. Consumption has increased continuously and amounts to about 5.2kg per person and year in Europe. While demand has been on the rise, climate change and social problems in production constitute challenges that cause an imbalance of supply and demand. For the cocoa farmers, the chocolate dream can easily turn into a nightmare. We talked to Stefan Rößler, quantitative analyst in the ESG team of Erste Asset Management, about how this situation could be changed.
Mr Rößler, many of us have a sweet tooth for chocolate. However, most people are not aware that the cultivation of cocoa and its processing can cause problems. Rößler: That’s right. Our analysis clearly shows two main problemat- ic areas, i.e. the environment and the social impact. With regard to the latter, we are specifically talking about child labour and low work- ing and social standards. Initial steps have been taken to remedy the situation, but the implementation leaves a lot to be desired. The vast number of cocoa farmers in West Africa makes organisation difficult.
As far as the purchase of cocoa goes, the producers are also faced with structural challenges. There are eight global companies that buy almost the entire crop. The nontransparent and convoluted supply chain adds to the difficulties of implementing adequate measures in terms of social and environmental standards.
You just mentioned the environmental aspect – what are the challenges in this area? Rößler: It is important to bear in mind that cocoa is not the only in- gredient used in the production of chocolate. Other raw materials such as sugar, hazelnuts, and palm oil are also required; and they cause problems similar to those of cocoa. The high demand for chocolate and thus cocoa has led to a status quo where investments are largely funnelled into higher productivity. However, this strategy is extremely one-sided. What would be necessary and preferable is a double-edged strategy: investment in know-how that facilitates a rise in productivity, but also investment in sustainable cultiva- tion skills. According to forecasts climate change will make it impossible to cultivate cocoa in West Africa by 2050. This will also affect the chocolate producers down the road, as their security of supply will be taken away from them.
Investments are always also a question of what price can ultimately be charged. What are we looking at from this angle? Rößler: That is correct, more funding is necessary for investments in know-how and the modernisation of pro- duction in order to facilitate sustainable cultivation. From our point of view, the cocoa price would have to dou- ble in order to compensate the cocoa farmers fairly, make education possible, and modernise cultivation.
Your prediction: will we still be able to indulge our longing for chocolate in the future, or will we at some point run into a supply shortage? Rößler: We have spoken with various research agencies, NGOs, and market participants. The good news is: there will be cocoa in the future – and therefore chocolate as well. Numerous initiatives and certificates such as FairTrade, UTZ, and Rainforest Alliance are going in the right direction. Everybody should support this on an individual basis by buying chocolate with such labels. And we as investors, Erste Asset Management, can do the same thing: we only invest in the shares of companies that maintain certain minimum standards and that do not violate labour laws or human rights in the supply chain. Environmental controversies are also criteria that we take into account. Thus, everyone can contribute to the best of their abilities to ensure that cocoa farmers make a decent living and that they therefore have a future.
If the transformation to sustainable cocoa cultivation fails, the perspectives for the cocoa farmers will be gloomy. Because then production will be moved to regions where cocoa cultivation is still possible in spite of the climate change.
For more on cacao and chocolate, you can read Erste AM’s ESG Letter on Environmental, Social and Governance issues, which focuses on this commodity, following this link.
CC-BY-SA-2.0, FlickrFoto: RCRW. La francesa Orange compra el 65% de Groupama Banque
French telecom company Orange has signed an agreement with Groupama Banque to develop a full mobile banking service that will be launched in France at the beginning of 2017.
The deal, subject to regulatory approval, will also lead to the acquisition by Orange of a 65% stake in Groupama Banque. Groupama will retain the remaining 35%.
Following the completion of the transaction, expected during Q3 2016, Groupama Banque should become Orange Bank.
This service will be marketed under the Orange brand within Orange’s own distribution network and under the Groupama brand within Groupama’s distribution networks.Services provided will cover current accounts, savings, loans and insurance services, as well as payment.
Orange and Groupama seek to attract two million customers in France.
Stéphane Richard, Chairman and Chief Executive Officer of Orange, said: “This agreement is a major step forward in our ambition to diversify into mobile financial services as we outlined in our Essentials2020 strategy. Groupama Banque will bring an existing banking structure as well as considerable experience in managing customer relations remotely within a banking context. This will enable us to move forward rapidly in order to provide our customers with an innovative, 100% mobile banking service, first in France and then in Spain and Belgium. By leveraging the power of its brand, its distribution network and its extensive experience in digital services, Orange aims to bring mobile banking into a new dimension.”
Thierry Martel, CEO of Groupama, said: “This partnership represents an important step for Groupama. It will enable us to leverage Orange’s technical know-how and its expertise in digital services to accelerate our existing online banking activity. Through this partnership, we are effectively combining two powerful and complimentary brands in order to offer our customers a disruptive banking service. We are aiming to put the highstreet bank into our customers’ pockets, turning tomorrow’s bank into today’s reality.”
CC-BY-SA-2.0, FlickrBlackRock: 2016 Latin America & Iberia Investment Forum - foto cedida. BlackRock celebra el 2016 Latin America & Iberia Investment Forum
Connectivity brings with it a positive force for change, and in turn, innovation. By almost all measures, the world is more connected than ever, hastening the access and speed of information and data. The impact of connectivity and innovation on the financial community is no exception.
On March 14-16, 2016 BlackRock hosted its fourth annual Investment Forum with the objective of Connecting for a Better Tomorrow.
The message throughout the conference was focused on how best to transform challenges into opportunities by working hand and hand with key partners that will help foster innovative solutions. Through this message of connectivity, BlackRock empowered its clients to make connections to the trends, insights and solutions that will matter not only today, but also in the future investment landscape.
Over two days, The BlackRock Investment Forum connected 180 wealth and institutional clients across 10 countries in Latin America & Iberia. Clients attended a total of 15 sessions led by BlackRock leaders across the firm, such as the President of the firm, six members of the Global Executive Committee and several investment leaders.
Notable sessions included:
Keynote: Talent and Innovation
The keynote address from Rob Kapito, President and Director of BlackRock, stressed the importance of rethinking how our industry can help clients move cash off of the sidelines in order to invest for the future. To set this catalyst for change, “modern technology can be applied to the challenges clients are facing in order to help make better investments decisions to achieve the outcomes needed.”
Big Data achieve returns
In a recent study, IBM estimated that approximately 90% of the data in the world today was created in the last two years. In addition to there being more data, we have the capability to understand this data more comprehensively and quickly than ever before.
In this forward looking session, Rob Goldstein, Chief Operating Officer of BlackRock, interviewed Raffaele Savi, Co-CIO for Blackrock’s Scientific Active Equity and Co-Lead of Active Equities on how the intersection of technology and investors will revolutionize the way we invest in the future. They focused their discussion on understanding how BlackRock’s Scientific Active Equity (SAE) Team harnesses the power of Big Data, providing new signals and indicators through advanced methods of data extraction to seek sustained alpha across market environments.
The Power of Factor Investing: Smart Beta
Other ways investors are building better portfolios is through Factor Investing. Sara Shores, Managing Director and Head of Smart Beta Strategies at BlackRock, touched on the importance of factor investing and how it is empowering investors by identifying and precisely targeting broad, persistent and long-recognized drivers of return.
Smart Beta strategies have democratized access to Factor Investing. Individuals, investment professionals and institutions alike are using these strategies to screen thousands of securities to capture single or multiple factors transparently and efficiently. As of April 2016, Smart Beta ETP flows hit a new monthly high with $7.8bn*”
Other sessions presented at the 2016 Investment Forum included:
The State of the Markets
Geo-Political Perspectives
Connecting Investors to Retirement Capabilities
Financial Distribution Trends
Casting a Wider Net with Multi Asset Investing
Equity Markets: New Drivers, Rethinking Fixed Income in 2016 and Beyond
ETF Growth
Connecting to New Sources of Diversification: The Alternatives Approach
Investing with IMPACT
Portfolio Construction
At the end of the Forum clients walked away with a better understanding of the importance of becoming more outcome-oriented than ever before. Investment decisions are no longer just about products or asset classes but rather finding the diversified solutions that will help investors achieve their investment goals. As highlighted by the Forum, connecting with the right partner is critical in order to foster innovative solutions that can transform today’s challenges into tomorrow’s opportunities.
*Data is as of March 31, 2016 for all regions. Global ETP flows and assets are sourced from Markit as well as BlackRock internal sources. Flows for the years between 2010 and 2015 are sourced from Bloomberg as well as BlackRock internal sources. Flows for years prior to 2010 are sourced from Strategic Insights Simfund. Asset classifications are assigned by BlackRock based on product definitions from provider websites and product prospectuses. Other static product information is obtained from provider websites, product prospectuses, provider press releases, and provider surveys.
CC-BY-SA-2.0, FlickrPhoto: Lucas Hayas. How Important is the Valuation of High-quality Companies?
Does the valuation of a high ROIC company matter? If Q1 companies have typically outperformed, is there any benefit to also selecting cheaper companies, or should we simply remain agnostic to stock valuation?
According to Investec experts, they prefer to use free cash flow (FCF) yield as their valuation metric as it captures the cash-generating power of the business, rather than the income statement profits, which are based on accrual accounting and are more vulnerable to manipulation by management. Moreover, the FCF yield better reflects the available cash that can be reinvested into a business for future growth, or returned to investors.
The next graph prepared by Investec shows that valuation does matter, and is more important for companies with low ROIC (those in Q4). The highest return at the individual stock level appears to be achieved by investing in companies with a high ROIC and FCF yield. Historically, investing in these companies has provided outperformance of 3.8% per annum. Meanwhile, investing in the most expensive companies with a Q1 ROIC has typically resulted in modest underperformance of 1.2%. Importantly, this analysis takes no account of the final ROIC of the company like the prior charts, and does not, therefore, assess the sustainability of high returns.
“We believe in exercising caution when operating in these areas of the market. A combination of high ROIC and seemingly cheap valuation can imply the market is anticipating a structural problem with the company’s business model, often meaning that returns have a high probability of fading fast. In this scenario you need a fundamental understanding of the inner workings of the company’s business model to properly assess the sustainability of returns. In our experience, we rarely find such an opportunity that is attractive on a risk-adjusted basis over a long-term investment horizon,” says Investec.
Alternatively, they suggest, to purchase a stock with a Q4 FCF yield, “we require the business model to be impeccable with structural trends that mean we are compensated with above average growth and limited uncertainty. Again, these types of opportunities tend to be few and far between. Lofty valuations are often caused by market over-exuberance around future growth, resulting in long-term underperformance. Consequently, we select moderately valued companies with a high ROIC that we believe can be maintained over the long term.”
Implications for portfolio construction To generate outperformance they aim to construct a portfolio for their Investec Global Franchise Strategy that, in aggregate, maintains a Q1 ROIC. Figure 7 tracks the Investec Global Franchise Strategy’s ROICs against the median quartiles for the market and shows that this aim has been met for almost the entire lifespan of the strategy. “We believe this is a positive indicator for its future performance, as we have confidence that the companies that make up this portfolio have competitive advantages to maintain their current high returns. Crucially, this confidence is based on our detailed bottom-up analysis of these companies and an assessment that their ROICs are sustainable over the long term.”
“Valuation plays an important role in our investment process. Although we believe that quality companies deserve a premium valuation, we are not willing to include overpriced stocks in our portfolios. For us, investing in high-quality companies only makes economic sense if FCF yields are superior to long-term bond yields. This comparison comes from the stable and consistent cashflow generation of these companies, many of which have bond-like characteristics,” they conclude.
CC-BY-SA-2.0, FlickrPhoto: Moyan Brenn. Schroders Enters into Market for SME Direct Lending Through a Partnership with NEOS Business Finance
Schroders today announces that it has entered into a strategic relationship with Dutch direct lending firm NEOS Business Finance. Schroders has acquired a 25 per cent. stake in the business.
Launched in 2012, NEOS Business Finance provides institutional investors access to an alternative debt financing platform for Dutch small and medium-sized enterprises (SMEs). The company has developed an approach to give SMEs access to small to medium size loans through a standardised issuance and loan terms process.
NEOS Business Finance will provide investment advisory services to Schroders in connection with the management of investment funds of Schroders’ clients investing in SME financing.
NEOS Business Finance has an extensive network and broad client base. To date, NEOS Business Finance has launched one investment fund funded by two large Dutch pension funds. In addition NEOS Business Finance works with the largest Dutch bank ABN Amro to source SMEs in need of financing. This complements Dutch government policy which encourages pension funds and other institutions to actively participate in local economies.
Philippe Lespinard Co-Head of Fixed Income at Schroders said: “Small and medium enterprises (SMEs) in Europe are increasingly looking to obtain debt financing from non-bank lenders. Part of this trend is explained by the decreasing supply of credit in that space by commercial banks who face increasingly onerous capital requirements on loans perceived as risky by regulators and supervisors. On the demand side, borrowers expect faster approval times and lower collateral requirements than afforded by banks’ traditional processes and systems. These conflicting trends open up a space for non-bank actors to provide growth financing to SMEs on simpler and faster terms.”
CC-BY-SA-2.0, Flickr. UBS, Henderson y Generali Investments, entre los ganadores de los 2016 UCITS Hedge Awards
Organized by the Hedge Fund Journal and currently in their sixth year, the UCITS Hedge Awards reward the best performing funds on a risk adjusted basis across a range of asset classes and strategies. The winners are chosen following the in-house calculation of the Sharpe ratio based upon the 2015 full calendar year data points.
Generali Investments, the main asset manager of the Generali Group, has received a significant double acknowledgement for its expertise in convertible bonds. The Generali Investments SICAV (GIS) Absolute Return Convertible Bond fund was awarded as the Best Performing Fund in 2015, and Best Performer over a 3-year period, in the Fixed Income – Convertible Bonds category at the 2016 UCITS Hedge Awards.
Henderson‘s UK Absolute Return fund won Best Performer over a 2 Year Period in the Long/Short Equity – UK category, as well as over the three year period. UBS‘ Equity Opportunity Long Short Fund was awarded with the title of Best Performer over a 2 Year Period in the Long/Short Equity – Europe. While the Pictet Total Return Agora fund won Best Performing Fund in 2015 for Equity Market Neutral – Europe.
Other winners include Helium Opportunités, Rothschild CFM, Muzinich, Aquila, Candriam and Finex.
Finex
Rothschild CFM
You can see the full list of winners in this link.
CC-BY-SA-2.0, FlickrPhoto: Susanne Nilsson. Repurchasing Confidence: The Potential Benefits Of Stock Buybacks
There’s no substitute for a well-run company with solid fundamentals, steady earnings growth and a seasoned management team. But investors in even the most profitable firms are always looking to add value. Two commonly used methods for bolstering corporate shareholder value are dividends and stock buybacks.
A company may decide to repurchase outstanding stock for many reasons — to telegraph confidence in the company’s financial future, return cash to investors in a tax-efficient manner (shareholders typically pay taxes on dividends) or simply to reduce the number of shares outstanding. In some cases, buying back shares just makes good financial sense – particularly when a company’s stock is trading at a discount, explains Thomas Boccellari, Fixed Income Product Strategist at Invesco.
A positive buyback performance track record
For these same reasons, investors may wish to consider companies with a propensity for repurchasing shares. A company stock repurchase is like reinvesting a dividend without incurring taxes.
“Consider also that the shares of companies that repurchase stock have tended to outperform and exhibit lower volatility than the broader market. In fact, studies show that buyback announcements have historically led to a 3% jump in stock price on average, and that the subsequent average buy-and-hold return over four years was 12%” points out the strategist.
And he adds, “the chart below shows the dollar amount of share buybacks for companies within the S&P 500 Index since 2004, as well as the performance of the NASDAQ US BuyBack Achievers Index relative to the S&P 500 Index. A rising orange line indicates that the NASDAQ US BuyBack Achievers Index (BuyBack Index) outperformed the S&P 500 Index; when the orange line is falling, the BuyBack Index underperformed the S&P 500 Index”.
So, according to the expert, while past performance is not a guarantee of future results, you can see that when the dollar amount of buybacks increased, as shown by the purple line, the stock of companies that repurchased shares (as measured by the BuyBack Index) generally outperformed the S&P 500 Index. Conversely, when the dollar amount of buybacks decreased, the stock of companies that bought back shares generally underperformed the broader market.
The benefits of international buyback shares
While stock buybacks have long been popular as a means of returning cash to shareholders in the US, they are also gaining favor internationally — particularly in Japan and Canada, poins out.
“Investing in international companies with a history of buying back outstanding shares offers the added advantage of international exposure — including geographic diversification and, in some cases, more attractive valuations than US-based companies. With both interest rates and stock valuations currently low, I believe international companies will increasingly view share repurchases as a sound investment proposition and a means of enhancing shareholder value”, concludes.
The PowerShares International BuyBack Achievers Portfolio tracks the NASDAQ International BuyBack Achievers Index and provides diversified exposure to international companies that repurchase their own shares.
Courtesy photo. Why Do Chileans Invest in Chile? Should We Follow Their Example?
Luis Felipe Céspedes, Minister for Economy, Development, and Tourism of the Republic of Chile, shared his overview on the current situation of “the most competitive economy in Latin America,” its optimistic forecasts and investment opportunities in the country –which was placed 35th in the Global Competitiveness Index– for the more than 200 participants in the World Strategic Forum. We had a chance to interview him after his speech at the event held in Miami last week.
Céspedes attributes the success of this Southerneconomy on the strength of four key elements: its institutions and the communication between them, the macroeconomic framework, the financial system and the commitment to the country’s openness and global integration. “We need to generate savings which will later be invested,” he said, referring to the financial system, adding that the vocation of integration with the economy of the rest of the world is not only governmental but a commitment of the country.
The reality is that Chilean investors represent a tiny part of the capital which the wealth management industry manages in Miami, since, say the experts, Chile presents conditions of security, stability, and opportunities for investment which are rare in the region. The Minister agrees and explains that the process of internationalization of companies, the strong growth of the economy, and its openness made it very attractive to invest in Chile. To this we must add that the government recently carried out a tax reform plan that included a capital repatriation plan, with a preferential tax rate of 8% so that fortunes held offshore would be returned to the country.
Chilean investors who wish to seize the opportunities offered by foreign instruments can do so without major difficulties, contrary to what happens in other economies in the region. According to a report by ALFI, the Association of the Luxembourg Funds Industry, of the 100 most international fund managers in the world, 57 have their products registered in Chile. And according to a study by Global Pension Assets Study, published by Willis Towers Watson, Chile is the market where the volume of pension fund assets under management grew the most globally, according to CAGR figures over the last 10 years (in local currency), up to 18%.
Cespedes insists that “the growth of the Chilean economy is due to its own engines” even though it “benefits when neighboring countries do well”. With a GDP of $ 22,972 (ppp), and a net public debt with a surplus of 3% of GDP, the minister explained that the state budget is consistent with the long-term forecasts, so that, for example, “this year we have adjusted our budgets to the lower copper prices and its long-term forecasts”. Unemployment is at around 6%, inflation fluctuates between 3 and 4%, and growth forecast for this year stands at 2%.
Challenges
The great challenge is to increase productivity; that is difficult partly because the Chilean labor force is very small -half of that in the OECD countries- and its economy is concentrated in several, but limited sectors. In this respect, the government has set several objectives: to generate diversification, attract investors, establish policies to improve competitiveness and provide opportunities for innovation.
Mining
One of the country’s great talents and major industries is mining. Chile is the largest copper producer in the world and accounts for 30% of world reserves of a mineral which represents 60% of its exports, 20% of revenues in the state coffers through taxes, generates 11% of all employment and accounts for 13% of the country’s GDP. The question is can copper play a new role in the development of the Chilean economy?
“We have to attract investments”
It’s complicated, but doable. At least, that’s what is deduced from the optimistic speech of this finance professional, and from the policy stating that “we have to attract investments” in order to improve technology and innovation, the connection between demand and providers, care for the environment, and develop the production process to adapt it to global needs, promoting exports of other, already manufactured, copper-related products.
Opportunities
Following the fall of oil prices and the sharp rise in energy prices, the government took action: “Since 2013, the government has reduced the price of energy by 40% and investment in the energy sector is now greater than that allocated to copper. We have attracted new investors to the energy sector,” the satisfied Minister for the Economy pointed out.
According to the minister, opportunities currently lie in mining development, sustainable tourism, healthy food, construction, creative economy, the fishing and fish farming sector, technology, and health services.
“The five largest companies in the world did not exist 20 years ago, however, the 10 largest Chilean corporations are all more than 20 years old,” he says, convinced that the key is to attract innovative minds.
Profile
Luis Felipe Céspedes Cifuentes is Minister of Economy, Development and Tourism of the Republic of Chile. He previously held various positions in the Central Bank of Chile, the last as Director of Research; he was chief economist adviser to the finance ministry, a professor at several universities, both in Chile and in the United States, and author of numerous publications on monetary, fiscal, and currency exchange policies.
