Asset management companies with flexible bond products that outperform have a chance of reversing the recent run of outflows but fee cuts may be a decisive factor in tempting back investors, according to the latest issue of The Cerulli Edge – European Monthly Product Trends Edition.
Flexible bond products, a category which usually includes strategic and unconstrained bond funds, fell out of favor in 2015 after soaring in popularity the previous two years, partly on the perception that they were better able than other bond funds to cope with the U.S. Federal Reserve’s supposedly imminent rate rises, notes Cerulli Associates, a global analytics firm.
The entire bond market suffered last year, but funds with a substantial high-yield element were hardest hit. However, Cerulli believes that the policies of central banks can benefit flexible bonds. The European Central Bank has cut its main refinancing interest rate to zero and announced an extension of bond buying. With some yields already negative, value in European bonds is proving hard to come by. This strengthens the case for a fund to be as unconstrained as possible as it searches for alpha. If emerging market corporate bonds seem to offer better value than eurozone sovereigns, the fund can act accordingly.
“Flows for flexibles may take some time to come back and many will fall by the wayside,” says Barbara Wall, Europe managing director at Cerulli Associates. “However, stronger funds may benefit from the shakeout. The longer established ones with better past performances may be able to convince investors they can recapture the glory days. Their chances of doing so will be that much greater if they reduce charges, even if only temporarily.”
Wall points out that Goldman Sachs, PIMCO, and M&G, which charge in the 1.4% to 1.7% range, look expensive given recent negative returns, especially when compared with the likes of Artemis and BNY Mellon, which charge well under 1%. She adds that some funds should consider ditching their performance fee, even though this has been largely irrelevant given the losses.
Accuity, the leading global provider of risk and compliance, payments and know-your-customer solutions, announced on Wednesday that it is opening an office in Miami to serve new and existing clients in Miami, Central America, Mexico, Colombia, Venezuela, the Caribbean and Gulf countries.
Accuity is part of Reed Business Information (RBI), which is in turn is part of RELX Group, a world leading provider of information solutions, listed on the London and Amsterdam Stock Exchanges.
The opening of Accuity’s Miami office is in response to the firm’s rapidly expanding business in Central and Latin America. It reflects Accuity’s strategy in LATAM, which has been to grow its Sao Paolo office to meet demand in the South of LATAM region (SOLA) and grow its Miami base for Northern LATAM and the Caribbean. Accuity has more than 200 clients in LATAM and predicts continuing growth across the region as a whole – across the breadth of Accuity’s payments, risk and compliance solutions. Being in Miami will enable Accuity to enhance its service levels to new and existing regional clients who already include some of the region’s leading financial institutions.
Hugh Jones, President and CEO of Accuity, said: “The opening of our Miami office brings us closer to our Central and Latin American customers, many of whom have branches in Miami. We see Miami as a financial services hub for the region and we look forward to forging ever stronger relationships with the financial services community there. Our local team, now based in Miami, will work closely with our Sao Paulo office to leverage our deep Brazilian market experience. Together, they will build on Accuity’s reputation for improving operational efficiency and protecting our financial and corporate clients against sanctions and compliance violations.”
Accuity’s new office is located at: 1101 Brickell Avenue, 8th Floor, South Tower, Suite #102. Miami, FL, 33131, USA.
According to Jodie Gunzberg, Global Head of Commodities and Real Assets at S&P Dow Jones Indices, March saw the biggest comeback in commodities.
St. Patrick’s Day didn’t just have a pot of gold at the end of the rainbow, but had basically the whole commodity basket. The S&P GSCI that represents the world’s most significant commodities, ended March 17th with a positive total return year-to-date for the first time in 2016, up 1.9%.
The index reached its highest level since December 10th, 2015, and gained 18.8% since its bottom on January 20th, 2016. This is the most the index has ever increased in just 40 days after bottoms.
Further, now in March, 23 of 24 commodities are positive. This is the most ever in a month with one exception when all 24 commodities were positive in December 2010. It is also the fastest so many monthly returns of commodities changed from negative to positive, making a comeback from November 2015 when just two commodities were positive.
Now, only aluminum is negative in March, down 3.1%. However, its roll yield recently turned positive that shows more scarcity (that is very rare for aluminum,) indicating it may turn with the rest of the metals. Especially if the U.S. dollar weakens, the industrial metals tend to benefit most of all commodities. That says a lot about their economic sensitivity given all commodities rise with a weak dollar.
According to Axa IM‘s credit market monthly review, the strong rebound in credit since mid-Feb has legs to run further. Greg Venizelos from the Axa Research & Investment Strategy team writes that the improvement in US macroeconomic data and the stabilisation in both the oil/commodity markets and the Chinese risk premia, have brought some respite to global risk. “Credit spreads saw a material tightening as a result, from levels that were arguably overdone in the context of global growth and credit fundamentals. Since 11 February, US High Yield (HY) has transformed itself from the worst performing market within developed market credit to the best performing, matching our early February call for HY to outperform investment grade (IG). Looking ahead, while it’s reasonable to expect a consolidation in the broader risk rally after a very strong run, we think that credit spreads can continue to tighten and HY spreads can compress further vs IG in the near term.
The rebound in US HY has been nothing short of spectacular, with the overall index returning 7.2% since 11 February, led by an increase of c.20% in energy and c.16% in metals and reaching 1.3% YTD
Venizelos notes that “the rebound in energy is, of course, from a very distressed level.” Indicative of the brutal correction earlier in the year, energy remains the worst among the biggest HY sectors year-to-date, down by 2.9%.
The outperformance of HY over IG that we advocated in early February has materialised and we see scope for this HY/IG spread compression dynamic to run further. While IG spreads have clearly widened YTD, HY spreads have remained relatively contained.
As a result, the US HY/IG spread ratio has compressed from 4.2x in mid-December 2015 to 3.6x currently.”We think that there is room for further compression in spreads, pushing the spread ratios towards the ‘low 3s’ in US and below 3.5x in euro. One technical hindrance to further spread compression for US HY, in particular, is that the US HY index spread has tightened markedly vs x-asset volatility, from 100bps (+3.7) in late January to -38bps (-1.5) currently, implying that the compression momentum could be due a pause for breath.”
From a seasonality perspective, Venizelos noted that, on average, March tends to be a month of positive returns for HY credit and flat-to- negative returns for IG credit. HY credit has already met and exceeded this seasonal pattern, with US HY at 2.8% month to date, which is above its March ‘average plus one standard deviation.’ “This suggests that the current run rate of HY performance is unlikely to be sustained over the entire month. Indeed, while the tail risks that have dogged global risk until early February have receded, credit investors may begin to fret about more mundane risks, like excessive supply in primary markets and insufficient new issue premiums, which could hinder credit spread performance,” he concludes.
CC-BY-SA-2.0, FlickrPhoto: Rede Brasil Actual. For Brazil, No Glimmers of Light Yet
With so many headlines recently over politics and economics in Brazil, Eaton Vance wants to provide an update on recent events and the market volatility that has followed.
Over the past two years, Brazil’s economy has suffered from a terms-of-trade shock as well as simultaneous fiscal and political crises. These shocks have led to seven straight quarters of economic contraction (the longest recession since at least the Great Depression era of the 1930s) and multiple credit rating downgrades, leaving Brazil’s sovereign credit rating back in “junk” territory by all of the major ratings agencies.
With the exception of large currency depreciation, says Matt Hildebrandt, Global Credit Strategist at Eaton Vance, Brazil’s progress adjusting to these shocks has been limited. Fiscal deficits have grown larger and public debt levels higher with no sign of debt sustainability in sight. To make matters worse, President Dilma is currently defending herself in congressional impeachment hearings while former President Lula and the heads of both of the lower and upper houses of Congress have been implicated for corruption from testimony received from the ongoing Operation Carwash investigations.
According to the expert, Brazilian assets have rallied the last few weeks, as the market has interpreted negative news related to President Dilma as positive for the country. The thinking is as follows: Dilma’s removal may ease the political gridlock currently paralyzing the policy process, which would allow the government to develop and implement a plan that puts the country’s debt trajectory on a sustainable path and that improves the economy’s competitiveness. Such thinking may prove correct in the long run, but impeachment will likely be a messy process and even if Dilma is removed, the political establishment will still be plagued by unscrupulous personalities, vested interests and party factions. The path to debt sustainability and greater economic competiveness will be a long one.
From a long-run perspective, Eaton Vance thinks Brazilian assets offer a lot of attractive opportunities. But, the recent market rally has priced in the best possible near-term outcome even though the outlook is fluid and uncertain.
“Expect more market volatility in Brazil in the months to come until the government, regardless of who is running it, is able to articulate and implement a more coherent policy path forward. Only at that point will we be able to say that there is some light emerging at the end of the tunnel”, concludes Hildebrandt.
Foto: Jonathan Mueller
. UBS Wealth Management Americas y UBS AM lanzan un servicio de externalización de CIO
UBS Wealth Management Americas and UBS Asset Management announced the launch of UBS Outsourced Chief Investment Officer (OCIO), a new service to address the needs of institutional clients and those who serve on investment committees at institutions such as religious organizations, pension funds, foundations, endowments, alumni associations and charities. This program combines UBS’s consulting experience and investment heritage, providing clients the ability to retain portfolio oversight while delegating investing decisions to experienced managers.
“Outsourcing investment decisions to aknowledgeable and dedicated discretionary consultant, rather than relying on those within the organization who have differing responsibilities, can better help organizations accomplish their missions,” said Peter Prunty, head of UBS Institutional Consulting. “UBS OCIO has the institutional skills and asset management expertise to work on behalf of clients to help them achieve their investment goals, giving clients more time to focus on their organization’s objectives.”
“In partnering with our colleagues in Wealth Management Americas to deliver a compelling OCIO offering, we are focused on enabling clients to concentrate on what matters to them and their organization,” said Frank van Etten, Head of Client Solutions for UBS Asset Management. “We have complemented the institutional offering of a global asset management organization with the accessibility of a local financial advisor who understands each particular client’s needs.”
The improved governance and shared fiduciary responsibility that OCIO provides can help clients better manage risk. OCIO also moves many administrative burdens from the client to UBS through a disciplined process that keeps clients focused on results. In addition, Institutional Consultants deliver regular performance reports and economic and market intelligence to help keep clients updated and on track.
CC-BY-SA-2.0, FlickrPhoto: Michael J. Kelly, CFA, global head of multi-asset at PineBridge Investments. PineBridge: “Asset Allocation Is The Biggest Decision In Every Portfolio”
As volatility increases throughout global markets and returns lower, investors are facing a turning point. Michael J. Kelly, CFA, global head of multi-asset at PineBridge Investments, explains why asset allocation -along with a dynamic approach- is more important than ever.
What is going on in markets now?
Today’s volatility is the result of forces that have been building for a while. For many years, the global savings rate was relatively stable. Then, just before the global financial crisis, it stepped up. We saw extreme caution from businesses, central banks, and investors. Far fewer people and institutions were investing.
This was one of the biggest ever tailwinds for financial assets. Too much money was chasing too few opportunities. Meanwhile, central banks were growing their balance sheets relative to global economic growth. So they’ve been adding liquidity on top of naturally formed liquidity – another huge tailwind for financial assets.
This caused a global liquidity surge, which caused many investors to lean on growth assets, weighing down prospective returns. However, this challenging market environment also created opportunity for investors who can selectively identify attractive insights and dynamically shift their investment mix.
Now is a good time for investors to start thinking ahead and realizing that the next several years won’t be easy. Unlike during the crisis, which was extremely painful but ended relatively quickly, this will be a slow drip. Expect more risk and not enough return to meet investors’ expectations. And the answer is not diversification alone, but optimal allocation across the investment universe while expressing convictions.
This brings me to asset allocation. This is the biggest decision in every portfolio. It’s not a new concept, but many investors still don’t pay it enough attention.
And that has been fine so far – investors have been playing it safe with few consequences – but the time is coming when markets will reach an inflection point, and investors will need to use asset allocation to help them navigate a world of much lower returns but continued high expectations.
What’s the danger for investors in playing it safe?
We’re entering a period of slowly rising interest rates, and it’s been a while since markets have had to deal with that. For a long time, we’ve been in markets dominated by falling interest rates. You can play it safe without much of a penalty in that world. In periods of disinflation, the correlation between capital conservation assets and growth assets becomes negative. The effectiveness of one to hedge the other goes up. So playing it safe has worked really well as rates have dropped.
But what happens when rates are no longer falling? They’re either flat or rising. While play-it-safe investing lowers the risk, it carries quite a penalty in returns. When inflation and rates are flat and rising, that negative correlation actually becomes positive. We have already started to see this, for instance, in the fourth quarter of 2015, as the market anticipated higher rates by the US Federal Reserve. The effectiveness of those two to balance each other out goes down while the cost goes up, since the differential of returns is much higher.
How can investors best position their portfolios in this environment?
We do see some opportunities, but to explain, let’s go back to the idea of diversification. If you own a little bit of everything in a market capitalization sense, that means you own the slope of our Capital Market Line (CML). The CML is our firm’s five-year forward-looking view into risk and return across the asset class spectrum. Right now we consider its slope to be disappointingly positive.
But there is a silver lining: The dispersion of dots around the line has widened over time, and it’s the widest we’ve seen since we began constructing the CML. This means that the upcoming period will have more winners and more losers. So for investors, it’s a matter of picking more of the winners and avoiding the losers – which, of course, is not as easy as it sounds.
How do you do that?
With more opportunistic investing along with an intermediate-term perspective. You need to be much more opportunistic if you’re going to deliver an outcome over a three-, five-, seven-, or 10-year horizon.
In a world of policy-distorted markets that have created this massive tailwind, we think it’s relatively easy as the environment unwinds to avoid the asset classes that have been helped the most, those that might have the biggest tailwind.
How do you and your team approach asset allocation?
Our approach focuses on growth assets – trying to get growth-asset-like returns with 60% or less of the risk that normally accompanies them. We think the only way to do this is to be much more opportunistic in moving between markets and between growth assets, shifting between growth and capital conservation when necessary. That shift, in fact, can sometimes be as dynamic as a rotation, which we witnessed in the financial crisis.
So I believe in a balance of approaches. But there’s going to be really no alternative in a lower return world with flat or rising rates to being more opportunistic in the growth assets that you pursue. We expect this to lead to investors’ “scavenging” for alpha, which presents its own challenges. The market has grown in terms of people looking for alpha within infrastructure, within stocks, within bonds. Before the crisis, looking for alpha between asset classes was basically talked about and not employed. How are investors gearing up to do that? The answer is not just getting more alpha out of security selection, but finding better, more efficient ways to allocate assets that provide a more consistent alpha source.
Opportunistic investments are providing the unexploited source of alpha to fill in the gap between market returns and investors’ expectations. In the current environment, everyone’s investing in more assets, in more areas of the world. So to get us to those windows of opportunity, we need to move more toward seeking returns through asset allocation.
This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.
According to the latest BofA Merrill Lynch Global Research report, conducted from March 4-10, 2016, average cash balances are down to 5.1%, from a 15 year-high of 5.6% in February. While the three top most crowded trades are Shorting Emerging Markets, Long US dollar and Shorting Oil.
“With cash levels now slightly above their 3-year average, investors no longer are sending the unambiguous buy signal we saw last month,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch.
During March investors made a strong rotation of positioning into industrials, energy, materials and Emerging Markets, with the biggest monthly jump in allocation to commodities on record. Also, allocation to real estate/REITS experienced its second highest month in survey history.
The survey also noted that investors have flipped their views on credit, with a net 15% believing high yield will outperform high grade in March, versus a net 13% favoring HG in February. Net overweight positions in equities improved.
Regarding the US Monetary Policy, the vast majority of fund managers still expect no more than two Fed hikes in the next 12 months, while a record net 35% think global fiscal policy is still too restrictive, and “quantitative failure” is seen as one of the biggest tail risks.
According to Manish Kabra, European equity and quantitative strategist, “global investors are trimming their extreme regional views and cite ‘quantitative failure’ as the biggest tail risk. However, they remain the least bearish on Europe.” Europe is seen as relative winner as European cash allocations dropped to average levels, and the region remained the most preferred globally; EUR now seen as cheapest since April 2003. Japan has fallen further out of favor as allocation to Japanese equities declines to a 22-month low of net 15% overweight, down from net 24% overweight in February, whereas in Emerging Markets, Chinese growth expectations jump to 4-month highs but a net 26% of investors still expect a weaker Chinese economy over the next 12 months.
CC-BY-SA-2.0, FlickrPhoto: Matthew Grange. Standard Life Wealth Strengthens Investment Team
Standard Life Wealth, the discretionary fund manager, has announced the recent appointment of Matthew Grange and Matthew Burrows as Senior Portfolio Managers based in London. Both are working with UK and International clients and report to Charles Insley, Head of International for Standard Life Wealth.
“We are delighted that Matthew Grange and Matthew Burrows have joined Standard Life Wealth. They both have very strong investment backgrounds and have joined us to work with UK and International clients. As long term investors we offer clients investment strategies across the full risk spectrum and have an investment process that focuses on gaining exposure to secular growth drivers, which we believe will out-perform the broader market over the long term. Both Matthew Grange and Matthew Burrows are excellent additions to the team and bring valuable insight and institutional expertise to our investment process,” said Charles Insley, Head of International, Standard Life Wealth.
Matthew Grange has over 18 years of private client and institutional investment management experience. He spent over twelve years managing institutional UK equity portfolios for ABN Amro Asset Management and the corporate pension schemes for Lafarge and Reed Elsevier. In addition to his experience managing substantial UK equity portfolios, Matthew has experience of many other asset classes, particularly commercial property and private equity.
Matthew Burrows has five years of experience in the management of discretionary portfolios for charities, trusts, pensions and both institutional and private clients’ portfolios. He has managed portfolios for both UK and international clients at Falcon Private Wealth and Sarasin & Partners LLP, covering the full spectrum of traditional asset classes, as well alternatives and derivatives.
Standard Life Wealth, with offices in London, Edinburgh, Birmingham, Bristol and Leeds, and an offshore presence in the Channel Islands, provides both target return and conventional investment strategies private clients, trust companies and charities.
According to Detlef Glow, Head of EMEA research at Lipper, assets under management in the European mutual fund industry faced net outflows of €24.5 bn from long-term mutual funds during February.
The single fund markets with the highest net inflows for February were Switzerland (+€1.5 bn), Ireland (+€1.2 bn), Norway (+€0.8 bn), Germany (+€0.4 bn), and Andorra (+€0.1 bn). Meanwhile, Luxembourg was the single market with the highest net outflows (-€18.3 bn), bettered by the United Kingdom (-€2.8 bn) and Spain (-€0.8 bn).
Absolute Return EUR Medium (+€1.6 bn) was the best selling sector for February among long-term funds.
In terms of asset types, Bond funds (-€11.5 bn) were the one with the highest outflows in Europe for February, by equity funds (-€8.4 bn), mixed-asset funds (-€5.8 bn), and “other” funds (-€0.8 bn). On the other side of the table alternative UCITS funds (+€1.1 bn) saw the highest net inflows, followed by real estate products (+€0.6 bn) and commodity funds (+€0.3 bn).
BlackRock, with net sales of €5.4 bn, was the best selling fund group for February overall, ahead of Generali (+€2.9 bn) and Legal & General (+€2.7 bn). MMA II – European Muti Credit BI (CHF hedged) (+€0.7 bn) was the best selling individual long-term fund for February.
