CC-BY-SA-2.0, FlickrPhoto: Scott Hudson. Risk Budget: Spend It Wisely
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” – Sam Ewing (baseball player)
According to Aneet Chachra and Steve Cain from Henderson, discussing inflation far too often devolves into a cage match between the “deflation forever” team versus the “hyper-inflation is coming” camp. The former has gained the upper hand with ECB President Mario Draghi pushing through a comprehensive easing package while Google searches for “helicopter money” are surging. However, based on recent economic data and the stabilization in commodities, a moderate pickup in inflation is more likely ahead. Meanwhile, the US Treasury Inflation-Protected Securities (TIPS) market appears to systematically underestimate future inflation due to structural reasons. Thus, bond markets and the Federal Reserve could be “behind the curve” necessitating two or more rate hikes in 2016 with a knock-on effect on medium-term yields. This is not a call for persistent, surging inflation, but rather a view that fixed income markets are overly optimistic in disregarding the risks of higher inflation.
February headline consumer price inflation (CPI) in the US was just +1.0% year-over-year (YoY), however core CPI (which excludes food & energy) rose +2.3% YoY, its highest reading since 2008. This wide differential was mainly due to lower commodity prices, especially crude oil which fell -32% YoY through February 2016. However, the March 2016 decline is much smaller at -20% YoY, and the futures curve projects that oil’s year-over-year change will turn positive during the fourth quarter of 2016.
Another deflationary force has been the rising US dollar which gained 20% over the last two years, reducing the cost of imported goods. But the year-over-year change for the dollar index just turned negative for the first time since mid-2014. This will gradually make imports more expensive for US consumers, although with a typical lag of 6-12 months.
Importantly, lower unemployment is finally driving higher wages with companies passing on some of the post-crisis profit margin expansion to employees. Fourteen US states have raised their minimum wage in 2016, with California (the most populous state) poised to further increase its minimum from $10/hour to $15/hour over the next five years. Labour markets have recovered not just in the US and the UK, but the unemployment rate in Japan is below pre-crisis levels. European unemployment remains elevated but has been improving since 2013.
Given all the above factors are widely known – why do TIPS still only forecast annual inflation of about 1.6% over the next decade? Perhaps TIPS prices are biased. There is an argument that TIPS should be expensive relative to nominal bonds as they are one of the few ways to directly hedge inflation risk.
But the available evidence since TIPS were launched in 1997 shows the exact opposite. Even with fairly benign inflation over the last 20 years, realized 5-year and 10-year inflation has averaged above TIPS-implied forecasts at issuance. The average gap has been about 0.35% per year ie. TIPS buyers have generally outperformed nominal bondholders.
Despite their valuable inflation protection qualities, why have TIPS historically been under-priced? Two reasons stand out. The first is their liquidity is poor relative to regular US bonds – traders joke the acronym really stands for “Totally Illiquid Pieces of Stuff”. Secondly, inflation expectations are often highly correlated to equity market moves particularly during large sell-offs. Hence TIPS do not provide the diversification to risk portfolios that other bonds do.
The generally negative correlation of nominal treasuries offer significant hedging benefits and are likely expensive to reflect this “crisis alpha” value – especially in the era of Risk Parity funds. Thus nominal treasuries are overvalued, TIPS are undervalued, and both distortions artificially compress the implied inflation rate forecast. An alternative measure that uses nominal 10-year yields minus trailing 12-month core CPI shows that real US 10-year rates are currently near 30-year lows of -0.5% per annum.
An interesting historical precedent is the 1985-1988 period when oil prices collapsed from above $30/barrel in late 1985 to below $10/barrel in 1986 pushing inflation lower. However, starting in 1987 (see black line below) a gradual rebound in oil prices drove a spike in CPI. This led to several Fed rate hikes and a significant selloff in US treasuries, with bond yields rising from 7% to above 9% within six months.
“Although we are unlikely to see a bond selloff quite as severe as 1987 given sluggish world growth and low yields globally, fixed income markets appear to be ruling out even a modest spike in rates. We should also not underestimate the highly stimulatory effects of cheap energy on importing nations where offsetting shale oil industries do not overwhelm them – eg. the Eurozone and Japan. Remarkably, Fed funds futures are only pricing in one rate hike this year, while US 10-year yields have fallen about 30bps in the last five months despite a concurrent 40bps rise in core CPI. Stronger inflation data and consequently a rise in bond yields appear to be an underappreciated risk,” they conclude.
Source: Bloomberg, as at 30 March for all data, unless otherwise stated.
CC-BY-SA-2.0, FlickrPhoto: Koshy Koshy. The Reserve Bank of India is Focusing on Liquidity and Transmission
In his latest white paper, Paul Milon, Investment Specialist, Indian Equities, Hong Kong at BNP Paribas Investment Partners talks about the Reserve Bank of India’s decition to cut its key policy repo rate by 25bp to 6.50% on 5 April 2016. in what he believes was a widely expected move.
“The 25bp repo rate cut was widely expected by financial markets. By January 2016, Consumer Price Index (CPI) had met the central bank’s target of 6% and now seems on track to be at 5% by March 2017. Moreover, the budget announced on 29 February supported the government’s commitment to fiscal consolidation. Despite the pressure on expenditure from the implementation of the 7th central pay commission, the budget maintained the government’s fiscal reduction targets aiming for a deficit of 3.5% of GDP for FY2017, down from 3.9% for FY2016.”
He mentions that as well as the rate cut, the RBI has also taken several steps to improve liquidity and transmission. “While the cash reserve ratio (CRR) was unchanged, the minimum daily CRR was reduced from 95% to 90%. Additionally, the Marginal Standing Facility (MSF) rate was reduced by 75bp to 7% and the reverse repo rate was increased by 25bp to 6%, leading to a narrowing of the policy rate corridor from +/-1% to +/-50bp around the repo rate.
These measures to improve liquidity, combined with the recent introduction of the marginal cost of funds-based lending rate (MCLR) on 1 April 2016, are likely to lead to better monetary transmission. Since the implementation of the MCLR, fresh lending rates have already declined by around 25bp and are expected to decline further following April 11th’s measures.
Following this rate cut, the RBI is likely to remain cautiously accommodative. In assessing further moves, the RBI will monitor a) the CPI inflation trajectory along with the 5% target by March 2017; b) monsoon development as deficient rainfalls could lead to higher food inflation; c) the inflationary impact of the roll-out of the 7th pay commission; and d) evidence of transmission of prior policy rate cuts into lower lending and deposit rates.
In light of the inflation dynamics and RBI’s targeting of 1.5%-2% positive real rates, there may be room for another 25bp rate cut later this year, pending sufficient monsoons occurring.
Following the rate cut, banks are expected to lower their deposit rates, which may lead to more domestic investors shifting part of their assets from deposits to equities, providing some support to the Indian equity market.
He concludes that “More broadly, the accommodative monetary policy stance – with a focus on improving liquidity and policy transmission – is expected to help India’s economic recovery, especially as lower lending rates should lead to a pick-up in credit growth. The RBI continues to expect India to grow at 7.6% as measured by Gross Value Added (GVA) for the financial year ending in March 2017 (FY 2017), the fastest growth rate among large economies.”
Asia ex Japan equities are set to benefit from the second wave of the “flying geese” economic model, according to global asset manager PineBridge Investments.
In its most recent whitepaper: Why it’s Time Time to Flock to Asian Equities, PineBridge Investments explains that as developing markets move up the value-chain, long-term investment themes across the region are emerging, including increasing demand for premium goods and services in sectors including healthcare, media, tourism and telecommunications.
Wilfred Son Keng Po, Portfolio Manager, Asia ex Japan Equities at PineBridge Investments, says: “The dynamic we’re now seeing is that ambitious and well-managed companies in Asia are being buoyed by progressive population trends, increased wealth, better education and social welfare, and supportive government policies for innovation and entrepreneurship. We believe this new trend offers equity investors significant potential in the years to come.”
In its original incarnation, the “flying geese” economic model saw a cascade of technology transfer from Japan to the “Asian tigers”: Hong Kong, Singapore, South Korea, and Taiwan. But PineBridge explains that a second iteration is now in operation that includes China, Southeast Asia and India.
“Both China and India are vast markets that are becoming manufacturing and innovation power houses, supported by Asean nations. These Southeast Asian economies provide both the natural resources and value-added manufacturing products and services to drive domestic demand as well as to boost manufacturing sectors for exports,” adds Elizabeth Soon, Portfolio Manager, Asia ex Japan Equities at PineBridge Investments.
“We believe that while economic growth in Asia is impacted by US interest rates, commodity prices, and the pace of structural reforms, the progression of developing economies along the value-chain will continue be the main driver for powerful, long-running investment themes across several industries, despite the economic headwinds.”
These investment themes include:
Domestic demand will continue to expand, helping the consumer retail sector, especially in China where the government is re-directing the country’s economic growth from an investment and export platform to one based on household consumption.
Southeast Asia’s expanding middle class will also provide a strong market for branded consumer goods. This rapidly growing demographic segment is spending money on mobile phones, internet access, and online shopping. Some of the fastest growing sectors have been in technology, media, both outbound and inbound tourism and telecommunications.
Meanwhile, aging populations in countries such as Singapore, Taiwan and South Korea mean that health care – including hospitals, pharmaceuticals, and technology will be another opportunity for investors.
PineBridge says that for investors in Asia ex Japan equities to succeed, sectoral trends such as domestic consumption should be considered a main driver of growth but not looked at in isolation. Detailed analysis of company performance, management, balance sheets and potential, is needed as broad-brush investment style choices such as size, growth, value, and momentum are unlikely to be rewarded due to continued market volatility.
“Investors can use the volatility caused by macro factors to look for durable and high-quality companies within consumer sectors that are both driving the region’s growth and supplying demand for premium products and services across the flock of flying geese,” adds Mr. Son Keng Po.
Amundi continues to develop its ETF, Indexing and Smart Beta, which are major components of the Group’s strategy. In this context, Fannie Wurtz is appointed Managing Director of the ETF, Indexing and Smart Beta business line under the supervision of Valérie Baudson, member of Amundi’s Executive Committee.
Fannie Wurtz is Managing Director of ETF & Indexing Sales at Amundi. Prior to joining Amundi in February 2012, she was responsible for ETF Institutional Sales and Amundi ETF business development with French & Swiss institutional clients at CA Cheuvreux from 2008.
In addition, the Board of Directors of CPR Asset Management has appointed Amundi’s Valerie Baudson as CEO of the company. CPR Asset Management is a subsidiary of Amundi which manages, in particular, thematic equities with close to €38bn in assets under management.
The CPR Asset Management Board of Directors has also promoted Emmanuelle Court and Arnaud Faller, respectively, to Deputy CEO heading business development and Deputy CEO heading investments. Nadine Lamotte has been confirmed as Chief Operating Officer responsible for Administration and Finance. The above named make up the Management Committee which also includes Gilles Cutaya, Head of Marketing and Communication.
Wells Fargo & Company announced this week that Kristi Mitchemhas been appointed president, chief executive officer, and head ofWells Fargo Asset Management, a division of Wells Fargo’s Wealth and Investment Management Group. Effective June 1, Mitchem will lead a business with more than $480 billion in assets under management in institutional separate accounts, mutual funds and stable value portfolios.
Mitchem most recently served as executive vice president at State Street Global Advisors (SSGA), the investment management arm of State Street Corporation. She replaces Mike Niedermeyer, who had served as head of WFAM from 1994 until his retirement in March after 28 years with Wells Fargo. Based in San Francisco, Mitchem will join the firm on June 1 and will report to David Carroll, senior executive vice president and head of WIM.
“Wells Fargo Asset Management is a valuable business for Wells Fargo, with a broad range of investment capabilities, strong risk management processes and a disciplined operating approach that have produced significant results for both customers and shareholders for many years,” said Carroll. “With an impressive mix of industry experience, a deep knowledge of the needs of institutional and intermediary investor clients, and proven success in inspiring large high-performing teams, Kristi is the ideal candidate to lead WFAM through its next phase of strategic expansion and growth.”
Since 2012, Mitchem led the Americas Institutional Client Group at SSGA, focusing the organization on delivering innovative investment solutions to institutional investor clients in the United States, Latin America, and Canada. Previously, she had served as the leader of the defined contribution businesses at both SSGA and Blackrock and of the institutionally-focused U.S. Transition Services group at Barclay’s Global Investors.
Bachelor of Arts degree in political science from Davidson College, where she graduated summa cum laude and was awarded First Honors. She received her Master of Business Administration from Stanford Graduate School of Business, where she was an Arjay Miller Scholar. Mitchem is also a Fulbright Scholar.
CC-BY-SA-2.0, FlickrEli Dominitz, CEO of Q6 Cyber - Courtesy photo. The Financial Sector Remains a Key Target for Criminal Masterminds of Cyberattacks
The Financial Sector Remains Key Target for Criminal Masterminds of Cyberattacks As the number, frequency and severity of cyberattacks continues to escalate, the financial sector remains a key target for criminals: it’s where the money is. “The global network of cyber criminals, the digital underground, is becoming more sophisticated in going after institutions with large amounts of cash and wealthy clients,” says security expert Eli Dominiz. “If you are in wealth management, the question is no longer if your firm will be targeted, but when.”
With smarter technology tools and techniques, the criminal underground is actively searching for vulnerabilities in your system 24 hours a day, he says. “Even if you think your security is strong, in looking for a hole to get in, criminals only have to get it right one time. You have to get it right 100 percent of the time.”
Mr. Dominiz, CEO of Q6 Cyber, is focused on helping companies fight cybercrime by taking a pro-active, rather than reactive approach to data protection. As a featured speaker at the 2016 Florida International Bankers Association (FIBA) Wealth Management Forum, May 5-6 in Miami, his presentation, “How the Criminal Underground is Targeting the Financial Sector and our Brokerage and Retirement Accounts,” will give forum attendees a closer look into data protection challenges facing the industry today.
“The criminal underground is business oriented, and interested in a high rate of return for their efforts,” he points out. “The significant amount of money concentrated in the wealth management sector presents an attractive high yield for low risk opportunity for cybercriminals.”
Within the atmosphere of ongoing attacks and hacktivism, Mr. Dominiz urges industry professionals to shift their focus in being proactive by deploying the best IT protections, employing threat intelligence, implementing industry best practice procedures and rigorously training employees.
“Cybersecurity is about risk management,” says Mr.Dominiz. “To reduce risk, you have to evaluate three things: your technology, your policies/procedures, and your people. A mistake in any of these areas can open the door wide to an attack. User behavior is important. Humans are the weakest link in the security chain.”
Insider threat is a big component of cybercrime, with 30-40 percent of all security breaches attributable to insider actions, whether malicious or unintentional. The 2014 attack at JPMorgan, a stunning incident that placed 83 million individuals and small businesses at risk, was traced back to a single employee log-in which extended the consequences beyond financial losses. The Panama Papers breech and the Ashley Madison collapse demonstrate the scale and far-reaching impact of a single security fail. “One attack can destroy reputations and shut down an entire company, with reverberations throughout the employee and customer network,” says Mr. Dominiz. “An attack on your firm is going to happen, and when it does, you need to be ready with a response plan. Once you have been attacked, it is too late to start planning ways to contain the damage and protect customers.”
Criminals operating within the digital underground use a multitude of diversionary tactics that can send up warning flags to an alert company. Denial of Service attacks, for instance, are designed to keep a firm’s IT department scrambling while the criminals invade the network.
“Stay aware of what is happening in your industry,” Mr. Dominiz advises. “The criminal underground shares information, and so should you. Forums such as the 2016 FIBA Wealth ManagementForum are increasingly important for heightening awareness and for educating the industry on criminal activities, while providing a platform for both informal and formal intelligence sharing. When companies collaborate there is a much better chance of defeating crime. FIBA facilitates the exchange of best practices and helps develop formal mechanisms to increase collaboration.”
FIBA’s Wealth Management Forum, a well-developed tradition that brings together the leading practitioners, solution providers and other industry specialists, convenes May 5-6 at the Ritz Carlton Hotel in Coconut Grove. To register, or for more details visit http://www.fibawealthmanagement.com/ or contact Belkis Lopez at blopez@fiba.net or via phone at 305.539.3745.
CC-BY-SA-2.0, FlickrPhoto: Jason Kotik, senior investment manager, North American Equities at Aberdeen Asset Management . Jason Kotik will talk US Small Caps at the Fund Selector Summit in Miami
Jason Kotik, senior investment manager, North American Equities at Aberdeen Asset Management is set to discuss smaller companies investing when he takes part in the upcoming Fund Selector Summit Miami 2016 on the 28th and 29th of April.
As a manager, Aberdeen has been harnessing big ideas in the North American smaller company space for years. The companies may be small, but they believe they have the potential to pack a punch for long-term investors, especially those willing to dig deep.
The conference, aimed at leading funds selectors and investors from the US-Offshore business, will be held at the Ritz-Carlton Key Biscayne. The event-a joint venture between Open Door Media, owner of InvestmentEurope, and Fund Society- will provide an opportunity to hear the view of several managers on the current state of the industry.
Kotik, Aberdeen senior investment manager and member of Aberdeen’s North American Equity Team, will speak about how to find such opportunities, including reasons why the current period offers opportunity to invest in small-cap equities.
Kotik’s responisbilities include co-management of client portfolios at Aberdeen, which he joined in 2007 following the acquisition of Nationwide Financial Services. Previously, he worked at Allied Investment Advisors and T. Rowe Price. He graduated from the University of Delaware and earned an MBA from Johns Hopkins University. He is a CFA charterholder.
You can find all the information about the Fund Selector Miami Summit 2016, aimed at leading fund selectors and investors from the US-Offshore business, through this link.
Foto: Jorge Andrés Paparoni Bruzual
. Más de dos tercios de los family offices realizaron inversiones directas en alternativos en 2015
2016 FOX Global Investment Survey from Family Office Exchange (FOX) finds that 69% of Family Offices engaged in direct investing in 2015. Families with first- or second-generation leadership are much more likely to do direct investing than families with later-generation leadership, with 81% of Gen 1-2 families engaging in direct investing compared to 46% of Gen 3 and later. Growth capital is the most popular private equity deal stage (32%) followed by venture capital (30%).
“Investing directly in real estate properties or operating companies is familiar for many family offices that earned their wealth by building businesses,” says Charles B. Grace, III, managing director at FOX. “In the face of volatility in the public markets, direct investments can seem a haven for those who want transparency and prefer taking risks with companies and/or properties they can investigate and perhaps control in some manner.”
Direct investors tend to be active investors, with forty percent (40%) preferring a lead role that gives them the transparency and control that they desire from their direct investments. When asked where they are finding new direct investing opportunities, 71% of direct investors said they rely on networking or their existing relationships/word of mouth. Proper evaluation of opportunities and deal pricing are the two biggest challenges facing direct investors looking to implement their strategy.
“Deal pricing has become a bigger challenge in executing a successful direct investment strategy as the market has become more efficient,” says Karen Clark, managing director at the organization. “Evaluating opportunities is a bigger challenge for participants than finding deal flow.”
Regarding returns, the research finds out that the median overall return for survey participants in 2015 was 2%, and expected 2016 return is 6%. Also that direct real estate and direct private equity enhanced returns in 2015, gaining 18% and 15% respectively.
Seventy-eight percent (78%) of families are broadly diversified with a conservative growth orientation, including 20% to cash and fixed income, 43% to equities, 2% to hard assets, and 33% to alternatives.
The study provides an in-depth look at the investment activity of leading single family offices, providing perspective on a range of topics including Economic Outlook and Investment Opportunities for 2016, Asset Allocation and Performance, Use of Investment Consultants and Investment Committees, Reliance on Alternative Investments, and Direct Investing.
Photo: DanNguyen, Flickr, Creative Commons. Nordea Asset Management Expands its Active U.S. Fixed Income Offering with U.S Core Plus Bond Fund
Nordea Asset Management (NAM) announces that it has launched on April 4, 2016 the Nordea 1 – US Core Plus Bond Fund, provides investors active, diversified investment across the different sectors of the U.S. bond market. The investment objective of the Fund is to maximise total return over a full market cycle through income generation and price appreciation.
DoubleLine Capital LP (DoubleLine) is the sub-manager of the Fund. With this new offering, NAM broadens its partnership with DoubleLine, which as the sub-manager has provided investment services to the Nordea 1 – US Total Return Fund since its launch in 2012.
While the core of the portfolio consists of Investment-Grade U.S. debt instruments (covered by the Barclays Capital U.S. Aggregate Index), the “Plus” in the Fund name indicates that the investment universe expands beyond the traditional benchmark sectors to areas such as High Yield, USD-denominated Emerging Market Debt and non-Agency mortgage-backed securities.
“The design and flexibility of the Fund allows it to take advantage of areas of the market which DoubleLine believes offer attractive risk-adjusted return opportunities,” says Christophe Girondel, Global Head of Institutional and Wholesale Distribution. “We believe that the Fund forms an important addition to our current range of U.S. Fixed Income solutions, one of the major asset classes in any well diversified portfolio,” he adds.
The launch fully leverages Nordea’s multi-boutique approach and capabilities. This new fund complements the existing U.S. Fixed Income range of the Luxembourg-domiciled Nordea 1 SICAV, currently comprising a Low Duration US High Yield Bond fund, a US Corporate Bond fund, a US High Yield Bond fund, a North American High Yield Bond fund and a US Total Return Bond fund.
DoubleLine is an independent, employee-owned money management firm based in Los Angeles, California, U.S.A. Led by Chief Executive Officer and Chief Investment Officer Jeffrey Gundlach, the firm is widely recognised for its expertise and strong track record in active fixed income management. DoubleLine has been managing a similar strategy to the Nordea 1-US Core Plus Bond Fund since 2010.
DoubleLine’s investment philosophy is to build portfolios designed to outperform under a range of market scenarios by shunning away from unidirectional bets. The Fund achieves this through top-down active management of exposure to specific market segments combined with bottom-up security selection.
Foto: Leo Grübler
. J.P. Morgan Asset Management se hace con una participación minoritaria en el proveedor de ETFs Global X
J.P. Morgan Asset Management recently announced that it has made a passive, minority investment in Global X Management Company, a New York based ETF provider with a diversified suite of over 40 ETF solutions.
“Investing in Global X augments our ETF strategy by expanding and deepening our participation in this fast-growing industry,” said Jed Laskowitz, Co-Head of Global Investment Management Solutions for J.P. Morgan Asset Management. “We will continue to develop the J.P. Morgan ETF lineup with an eye toward future innovation in active ETFs while building this strategic partnership.”
“Widely acknowledged for its innovative products, Global X has become a leading provider of ETF solutions, and we are pleased to have them as a strategic partner,” said Robert Deutsch, Global Head of ETF Solutions for the firm. “This investment complements the growth of J.P. Morgan’s own ETF line-up, with seven strategic beta ETFs launched and many more to come.”
This investment will have no impact on how the asset management ETF Solutions and Global X operate their respective businesses. Specifically, there will be no co-marketing, investment management, distribution agreements or shared governance between the two organizations. This investment does not result in Global X becoming an affiliate of J.P. Morgan.
