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ESG is a Conflict Zone for Pension Funds

The Volkswagen emissions scandal looks set to bolster environmental, social and governance (ESG) investing, but pension funds adopting this approach face potential conflicts of interest, cautions the latest issue of The Cerulli Edge – Global Edition.

“The possible legal implications of looking beyond pure financial returns when making investment decisions need to be weighed up,” says Barbara Wall, Europe research director at Cerulli Associates, a global analytics firm. The UK’s Law Commission, for example, says that trustees should not proceed on a decision motivated by non-financial factors if it risks significant financial detriment to the fund. However, as Cerulli notes, this can come down to a question of degree: in one case a court ruled that “church commissioners had acted within the law by deciding that excluding 13% of the market would be acceptable, while excluding 37% would not be.”

Affecting millions of vehicles globally, Volkswagen‘s fraudulent action may even threaten the German automaker’s existence. Cerulli says that pension fund shareholders of Volkswagen are entitled to feel aggrieved; not only over the loss to their portfolio valuations, but also because of the health and environmental damage inflicted on society at large.

“Would a focus on ESG have avoided investing in Volkswagen? Probably not, because no fund manager could have anticipated fraud in a company such as Volkswagen,” says Wall. “But, by probing companies’ governance structures and having a full understanding of their management incentives, investors should be better placed to identify those vulnerable to shock events.”

Over the past 10 years the United Nations’ Principles for Responsible Investment (UNPRI) initiative has grown from about 100 signatories with US$4 trillion (€3.7 trillion) in assets under management to 1,260 signatories with US$45 trillion in AUM. Cerulli believes that this trend will continue, with ESP investing playing a more prominent role.

Many investors have long had specific exclusions within their investment guidelines; faith-based entities, for example, often will not invest in weapons and tobacco. ESG investing, however, has moved well beyond passive exclusion to an activist approach that encompasses key issues, of which the most visible and controversial today is carbon dioxide-induced climate change, says Cerulli.

Dutch pension fund ABP announced in October that it will be asking every company in its investment portfolio to “reapply” as part of its new socially responsible investment policy. Companies will need to detail how responsibly they operated and how much attention they paid to sustainability.

“We expect more pension funds to start considering ESG investing, but cultural backgrounds and the level of investor sophistication will be factors in determining any commitment. For example, pension funds in the Netherlands and Denmark will be far more inclined to do so than say those in Germany,” says Justina Deveikyte, an international analyst at Cerulli.

The Global ETP Industry Reached a New Record 2.9 Trillion US Dollars at the end of November

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According to Deutsche Bank Markets Research’s latest report, the global ETP industry continued to grow during November. After net inflows totaling US$ 34 billion in October, the November figure was a further US$ 25.7 billion. As such, the industry now manages US$ 2.9 trillion. As in the previous month, the American ETP sector was the driver of this growth. It contributed US$ 26 billion to global growth. Since the start of the year US ETPs have secured virtually US$ 200 billion. In keeping with the previous month, inflows from Equity ETFs dominated with US$ 25 billion.

The trend for Bond ETFs turned negative in November. In contrast to worldwide inflows of US$ 14.5 billion for this segment in October, during the month just past investors withdrew US$ 47 million. Inflows also declined for Commodities ETCs. After a plus of US$ 789 million in October, the past month saw a minus of US$ 153 million. In parallel with the American ETP sector, the European ETF sector continued to grow during November. Following net inflows of US$ 6.9 billion for October, the sector secured US$ 3.4 billion in November. Equity ETF inflows also dominated in this case. Conversely, Asian ETPs saw a continuation of the negative trend of the previous month. Investors withdrew US$ 3.7 billion. Equity ETFs were particularly affected with outflows running to US$ 3 billion. In fact, Bond ETFs also recorded a decline.

European ETF Market In and Outflows

Equities:

The positive trend for European ETFs continued during November. In total, the sector recorded net inflows of EUR 3.1 billion, compared with October’s EUR 5.9 billion. This was primarily due to Bond ETFs with net inflows of EUR 515 million which was significantly lower than the previous month (+ EUR 3.5 billion). At the same time, net inflows for Equity ETFs at EUR 2.5 billion were slightly higher than in October (+ EUR 2.4 billion).

ETFs on US Equities were particularly in demand with European investors. With net inflows of EUR 637 million, US Equities accounted for one quarter of positive Equity ETF cash flows, followed by Global Indices (+ EUR 436 million) and Japanese Equities (+ EUR 387 million). This marked a trend change for US Equities after investors withdrew capital totaling EUR 227 million from this segment in October.

Net inflows recorded by ETFs on European Equities fell to EUR 54 million after EUR 1.1 billion the previous month. Since the start of the year, cumulative net inflows recorded by ETFs on broadly-based European Equity Indices total EUR 20.3 billion, although during November the trend showed a slight change with investors withdrawing EUR 279 million from this segment.

The positive shift in ETFs on Emerging Markets continued in November. This segment recorded a further EUR 6 million following EUR 824 million in October. Since the start of the year however, Emerging Markets ETFs have registered total outflows of EUR 1.9 billion. Having said that, during November inflows for ETFs on large Emerging Markets declined, in particular India ETFs where investors withdrew EUR 225 million. Positive inflows were recorded by ETFs on international Emerging Markets Indices. Strategy ETFs achieved a turnaround in November again registering inflows of EUR 178 million, after October’s outflows of EUR 481 million.

Bonds

The positive trend for Bond ETFs also progressed in November, although net inflows of EUR 0.5 billion were significantly lower than the October figure (+ EUR 3.5 billion). In this arena, ETFs on Corporate Bonds accounted for the highest inflows with EUR 1.7 billion. This exceeded the October inflows figure. From an annual viewpoint, Corporate Bonds have registered net inflows amounting to EUR 13.1 billion. The positive trend over recent months for Sovereign Bonds has come to an end for the time being. Investors withdrew EUR 1.3 billion from this segment.

Commodities

European Commodities ETPs registered EUR 166 million in November after EUR 340 million during October. While ETFs on Industrial Metals did once again generate slightly positive cash flows, ETFs on Precious Metals shed EUR 167 million contrasted with October when this segment had made a positive contribution to inflows.

Most Popular Indices

In November, investors showed interest in Real Estate and Dividend ETFs. As such, ETFs on Real Estate Equity Indices in particular came high up the lists.
The most popular Equity Indices in November were the S&P 500, the Euro STOXX 50 as well as the Stoxx 600.
In the Bond arena, ETFs on Corporate Bond Indices in particular proved to be some of the most popular indices.

International Equity and Sector Equity Lead Inflows in USA Funds and ETFs in November

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Morningstar, a leading provider of independent investment research, has reported estimated U.S. mutual fund and exchange-traded fund (ETF) asset flows for November 2015. Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.

The trend of heavy investor allocations to international stocks and passive positions in U.S. equity and taxable-bond funds seems poised to continue. Intermediate-term bond and foreign large blend remained two of the most popular categories in November.

Actively managed U.S. equity funds saw their sixth-worst monthly outflow in November since 1993, when Morningstar began tracking asset flow data.

The high-yield bond category has seen volatile flows over the past few months and landed among the five categories with the greatest outflows in November. The turbulence continued into early December following the announcement from Third Avenue Management that it would liquidate its high-yield bond fund, Third Avenue Focused Credit, without allowing investors to redeem their shares right away.

Outflows from active funds continued in November for a number of fund companies, including PIMCO, Franklin Templeton, Fidelity, and J.P. Morgan. On the passive side, Vanguard and iShares took in $14.2 billion and $13.0 billion, respectively. Vanguard has collected inflows of $1 trillion since the beginning of the financial crisis in December 2007 and has seen just two months of outflows since then, October 2010 and June 2013.

Each of the five active funds with the highest monthly inflows were fixed-income funds. PIMCO Income, which has a Morningstar Analyst Rating™ of Silver, led the pack with inflows of $1.2 billion, and Bronze-rated T. Rowe Price New Income was a newcomer to the list with inflows of $741 million.

Luxembourg Welcomes ELTIF

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As the regulation of European Long-Term Investment Funds (ELTIFs), established by the European Commission to give new impetus to economic recovery in Europe, entered into force on 9 December 2015, the Association of the Luxembourg Fund Industry (ALFI) announced that Luxembourg is prepared and believes it has a key role to play in ensuring the success of ELTIFs.

“The objective of the EU in setting up ELTIFs was to boost smart, sustainable and inclusive growth,” said Denise Voss, Chairman of ALFI. “Take-up of the new funds may be a gradual process, but we believe that Luxembourg has the in-depth experience and expertise required to support fund promoters wishing to launch ELTIFs, and we are ready to assist them.”

Ms Voss continued: “To articulate the essential role of investment funds for the global economy is an important part of the ALFI 2020 Ambition. Luxembourg has practical solutions for ELTIFs, the Luxembourg legal framework offering a wide range of solutions to fulfil the needs of ELTIFs, their managers and investors.”

ELTIFs are an initiative of the European Commission under its Capital Markets Union plan. They are a pan-European regime for Alternative Investment Funds (AIF) which channel the capital they raise into European long-term investments in the real economy in order to achieve growth and create jobs.

The ELTIF represents a milestone in the development of the cross-border European long-term funds business. Their long-term focus distinguishes them from most existing investment vehicles and they are therefore particularly suitable for institutions such as pension schemes and insurance companies with long investment horizons, as well as complementing and diversifying individuals’ savings portfolios.

Like the funds subject to the Alternative Investment Fund Manager Directive (AIFMD) legislation, they must have an authorised alternative investment fund manager, but like UCITS, their pan-European marketing ‘passport’ allows them (under certain conditions) to be sold to individual investors who may not necessarily be classified as professional or sophisticated.

“The leading position of Luxembourg as a true cross-border and fund distribution hub will greatly serve the development of ELTIFs”, Ms Voss concludes.

ALFI has prepared brochure on ELTIFs which gives details on what ELTIFs could look like and what the regulatory requirements are such as the fact that an ELTIF shall not undertake any of the following activities:

Short selling of assets;
Taking direct or indirect exposure to commodities;
Entering into securities lending, securities borrowing, repurchase transactions or any other agreement which has an equivalent economic effect and poses similar risks, if thereby more than 10% of the assets of the ELTIF are affected; and
Using derivatives (except for hedging purposes)

The document is available on the ALFI website.

ALFI’s Hong Kong Office Celebrates Five Successful Years

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The Association of the Luxembourg Fund Industry (ALFI) celebrated the fifth anniversary of the opening of its Asia Office in Hong Kong at its annual roadshow. Asia has become the main non-European market for UCITS funds, totaling approximately 62% of total UCITS registrations outside of Europe.

Luxembourg’s position as the international fund center of reference continues to grow in Asia, with over 700 people attending ALFI’s financial seminars in Tokyo, Tapei and Hong Kong this week.

“Through our ongoing activities in Asia, we have developed strong relationships with stakeholders from the various Asian fund jurisdictions and we continue to work with them on key issues that impact the industry,” said Camille Thommes, general director of ALFI.

“Since the opening of our office in Hong Kong five years ago, the Chinese economy and financial markets have undergone a remarkable transformation and seen significant growth. More specifically, the Chinese equity market has grown to the second largest equity market in the world after the US,” said Thommes.

“ALFI has helped to make significant in-roads into the opening up of China’s capital markets. Luxembourg was the first country to authorize an RQFII UCITS in 2013 as well as the first country to authorize a UCITS to invest through the Shanghai – Hong Kong Stock Connect program,” added Thommes. “Luxembourg is also Europe’s leading financial center in terms of RMB denominated investment funds.”

Launched in November 2014, the Shanghai-Hong Kong Stock Connect program represented one of the biggest developments for foreign investors wishing to access this market and enabled foreign investors to trade Shanghai-listed shares via the Hong Kong stock exchange, and mainland investors to invest in Hong Kong shares via the Shanghai stock exchange.

Over the past year, 69 Luxembourg UCITS funds as well as 12 alternative funds have received approval from the Luxembourg Supervisory Authority, the CSSF, to access Stock Connect. The RQFII scheme was launched in Hong Kong in 2011 and has been expanded to other jurisdictions since 2013, allowing an increased volume of offshore RMB to be reinvested into China’s securities markets. In April this year, the People’s Bank of China granted a RMB 50 billion Qualified Foreign Institutional Investor (RQFII) quota to Luxembourg. ICBC (Europe) and Bank of China Luxembourg both recently received regulatory approval as the first Luxembourg-based RQFII holders.

Bond Funds Lost Market Share Amongst European ETFs

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According to Detlef Glow, Head of EMEA research at Lipper, assets under management in the European exchange-traded fund (ETF) industry increased from €444.3 billion to €457.4 billion during November.

This €13.1 billion increase in November was driven mainly by the performance of the underlying markets, which accounted for €10.0 billion, while net sales contributed €3.1 billion to the overall growth of assets under management in the ETF segment.

In terms of asset classes, Equity funds with €2.2 billion enjoyed the highest net inflows for the month, followed by alternative UCITS products with €2.8 billion and mixed-asset funds with €2 billion. Meanwhile, bond funds, which in October had the highest net inflows, suffered during November from the highest net outflows, loosing €7.8 billion.

The best selling Lipper global classifications for November where:

Bond EUR Corporates with €0.6 billion
Equity Global with €0.6 billion
Bond EUR High Yield with €0.6 billion

Amongst ETF promoters, Blackrock’s iShares with €1.4 billion, Source with €0.5 billion and db x-trackers with €0.4 billion, were the best selling ones.

The best selling ETF for November was the iShares Euro High Yield Corporate Bond UCITS ETF, which accounted for net inflows of €572 million

For further details you can follow this link.

Henderson: “Still Fundamental Value in Euroland Equities”

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Henderson: "Aún hay valor fundamental en los títulos en euros" — CC-BY-SA-2.0, FlickrNick Sheridan is european equities manager at Henderson. Henderson: “Still Fundamental Value in Euroland Equities”

Henderson european equities manager Nick Sheridan explains why he tries to set aside the sentiment of short-term uncertainty when looking for value, and why he believes that the eurozone remains a prime area to seek out investment opportunities at the start of 2016.

What lessons have you learned from 2015?

Probably the most important lesson from 2015 is the importance of trying to look beyond the emotional impact of short-term news flow, when it comes to valuing stocks. Investors have had to deal with a bewildering series of ‘big news’ events, from the optimism surrounding the European Central Bank’s QE programme to unexpected shocks (the Greek debt crisis; uncertainty over Chinese growth, Volkswagen’s emissions bombshell). As ever these short-term sell-offs provided good buying opportunities for those discerning investors willing to focus on what matters: value.

Are you more or less positive than you were this time last year, and why?

While it is true that the recovery in Europe has been slower and more erratic than hoped, recent news has been reasonably upbeat. Eurozone PMIs are a 54-month high, German industrial output is improving and regional consumer prices are up – all signs that suggest solid growth in the region over the next few months. Although recent earnings in Europe have on the whole been a touch disappointing, many companies have upgraded their expectations for 2016. The question now is whether investors will be patient enough to wait for this earnings recovery to come through.

What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?

Our bottom-up strategy is designed to set aside the sentiment and incorporate in-depth analysis of meaningful measures to help identify those stocks that are best placed to outperform. Market volatility, short-term news flow and unexpected events can contribute to a degree of change, but we tend to focus on measurable factors, such as earnings/cash flow, dividends and the balance sheet.

At the heart of the process is very much a focus on value. What price you pay at the beginning of a holding period ultimately dictates your returns. Should market volatility continue to increase, this will create pricing disparities, offering a potentially rich vein of opportunities to invest in quality companies at attractive valuations.

Wealth-X Presents: What Do You Buy the Person Who Has It All?

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Wealth-X, the global ultra-high net worth prospecting, intelligence and wealth due diligence firm, has curated a selection of thoughtful gifts that suit the global lifestyle of the ultra-wealthy, regardless of the season, from an US$ 10,000 custom luxury sneakers to a US$ 60 million Superyacht. The list includes ten exclusive gifts ideas:

1. Polar Star Superyacht

The 63.4 m (208’) Polar Star by Lürssen combines the capabilities of an explorer vessel with the sleek lines, interior volume and amenities of a modern luxury superyacht. For total comfort and a relaxed Hamptons beach-house feel, the expansive interior features a wide selection of living areas and facilities, including gym and movie theater. The abundant outdoor spaces, spanning five decks, host sun lounging and “al fresco” dining areas, a large Jacuzzi, bar, barbecue and open-air cinema. Polar Star sleeps up to 12 guests in six large staterooms, and the panoramic master suite with private study on the upper deck enjoys unobstructed views. The Polar Star’s comprehensive list of toys and tenders includes a 29’ Naiad jet tender and a 25’ Malibu Wake setter tender, so water-sport “aficionados” can enjoy extreme thrills surfing waves of up to 2m tall. The superyacht can be purchased for EUR 55,000,000 and is also available to charter from EUR 380,000 per week.

2. Tiffany & Co. out of retirement jewelry collection

The luxury jewelry house Tiffany & Co. has embarked on its first collaboration with another retailer — Dover Street Market, the cutting-edge multi-brand emporium established by Comme des Garçons’ Rei Kawakubo. The capsule “Out of Retirement” collection consists of 18 limited-edition pieces — eight jewelry designs and 10 gift items — inspired by styles from the Tiffany & Co. archives. The offerings include witty sterling silver gifts such as a fish flask riffing on the old “drink like a fish” adage (price upon request), a pillbox shaped like a miniature Chinese take-out box (US$ 545) and party hat (US$ 780) with matching party horn (US$ 1,550). Other vintage pieces are a trio of postage money clips in 18 karat gold (US$ 5,450) and a wood interlock bracelet in 18 karat gold with interlocking rose gold bangle (US$ 10,600).

The exclusive gift items and jewelry will be showcased in installation spaces in Dover Street Markets New York, Ginza and London stores, with site-specific displays inspired by Gene Moore, who designed Tiffany’s iconic windows from 1955 to 1994. To honor the partnership, the classic Tiffany Blue Box will give a nod to Dover Street Market by replacing its signature white ribbon with black on all packaging for the collection.

The limited-edition items will be available at Dover Street Market until January 2016.

3. Myswear custom luxury sneakers

E-commerce fashion retailer Farfetch has partnered with London-based footwear brand Swear to launch a customization program named Myswear. The service will combine 3D modeling technology with expert artisanal Portuguese craftsmanship; the platform allows customers to design their own sneakers, choosing among 16 unisex silhouettes and over 80 combinations of colors and materials, including ethically sourced python, ostrich and crocodile skins. The footwear designs can run from US$ 385 to US$ 10,000, with four to six weeks lead time from design submission to delivery. Each finished design will be handmade in Portugal, and buyers can opt to have their initials subtly foiled or embossed on the tongue of the sneaker.

4. Chivas 12 made for gentlemen by Globe-Trotter steamer trunk

Made on request, this modern interpretation of a timeless steamer trunk is a collaboration by Chivas Regal and Globe-Trotter. Featuring bespoke burgundy fibreboard, American white oak from oak casks and a hand engraved copper plaque made from a retired Scotch whisky still, the steamer trunk also comes with specially created compartments for shoes, a drawer to hold up to eight watches, leather covered hangers for pristine suits and a beautifully crafted mini bar with mirrored back. The retail price is GBP 12,000 (US$ 18,000).

5. The Citation Longitude private jet

The Citation Longitude is a super-midsize business jet with a range of 3,400 nautical miles, a payload of 1,500 pounds and a cruise speed of 550 mph. The spacious cabin has seating for up to 12 with ample legroom, and the jet provides the quietest interior in its class. Natural light is in plentiful supply, with 15 large windows positioned for optimal viewing. While enjoying the view, passengers can stay connected and productive utilizing the standard Internet and cabin management system. The forward wet galley, finished in fine hardwoods, has plenty of room for food preparation. Cabin service is enhanced by hot and cold water, generous cold storage, large supply cabinets and can accommodate an espresso maker and a microwave oven.

6. Richebourg Grand Cru wine

A rare vintage from Burgundy, the Richebourg Grand Cru garnered media attention as the world’s most expensive wine this summer, just after the famous French wine-making region was named a U.N. world heritage site. UNESCO recognized the uniqueness of the vineyards of the Cote de Nuits and the Cote de Beaune south of Dijon, which produce some of the finest red wines in the world made from pinot noir and chardonnay grapes. The Richebourg Grand Cru currently sells at an average US$ 14,478 per bottle across all vintages and all merchants stocking it, according to Wine-Searcher. In particular, the 1985 regularly commands up to US$ 20,000 a bottle.

The Richebourg Grand Cru was a Cote de Nuits created by visionary winemaker Henri Jayer, who died in 2006 at the age of 84. Jayer was against using chemicals in the winemaking process and only produced about 3,500 bottles per year. As a result of the low supply and high demand, this wine has been one of the priciest in the world since May 2011.

7. Zhoujie Zhang Evolution of a chair artwork

This stainless steel, mirror finish piece is a unique 2011 artwork by furniture designer Zhoujie Zhang, known for integrating automated digital design and elements of spontaneity and chance. To produce his pieces, Zhang inputs basic mathematical instructions into a computer program, which then generates the object forms. The pieces are then cut, assembled and polished by hand at Zhang’s in-house workshop. The price of “Evolution of a Chair” is US$ 20,000.

8. Four Seasons’ around the world tour

Since 2012, Four Seasons has offered extravagant world tours via private jet with TCS World Travel. However, this spring, the luxury resort company started running tours on its own fully branded private jet (a Boeing 757-200ER), with more opportunities to provide its famous levels of service at 35,000 feet in the air. For US$ 132,000 per person starting in January, up to 52 passengers can enjoy a 24-day voyage of discovery, spanning the Taj Mahal, Sydney Opera House, Bora Bora and jungles of Chiang Mai. The inclusive, exquisitely curated tour removes the ordinary hassles related to travel; Four Seasons handles all accommodation, meals, drinks, ground transportation and custom excursions.

There are at least 21 hotel-trained crew and staff on board each Four Seasons flight, including three pilots, two engineers, a travel coordinator, concierge and executive chef. During trips that involve adventurous activities — such as game watching in the Serengeti — a physician and a photographer also are available. Each guest receives an iPad Air 2 in advance of the trip for pre-loading entertainment; upon boarding, passengers each get a cashmere blanket, Bose noise-cancelling headphones and custom leather travel journal by Moleskin — all theirs to keep.

9. BAC Mono Marine Edition supercar

BAC has created the “Marine Edition” of its Mono supercar — a single-seat sports car specifically designed to be stored on a superyacht. Weighing only 580 kg, the ultra-lightweight model is powered by a new 305hp normally aspirated engine delivered through a Hewland FTR gearbox, as found on current F3 race cars, and it can reach 0-60mph in 2.8 seconds. Launched in collaboration with yachting company Camper & Nicholsons, the Marine Edition will feature anti-corrosive ultra-high specification components for performance and durability, proprietary lifting system for safe and easy hoisting, an Environmental Control Container System for on board storage in climate-controlled environment and complete customizable designs to complement the colour scheme of the yacht. It is built to order at GBP 500,000 (US$ 750,000).

10. 1201 Laurel Way, Beverly Hills

The six-bedroom, 10-bathroom, 11,000-square-foot estate sits on a promontory in the hills on nearly an acre north of Sunset Boulevard. Surrounded by a dramatic “moat,” the home features floor-to-ceiling windows with sweeping, unobstructed views of Downtown Los Angeles, Catalina and the coastline of California. 1201 Laurel Way has a 2,200-square-foot private deck with a six-person Jacuzzi hot tub, a home theater with seating for 11 people, a 1,000-bottle wine room, all-glass six-car garage and a master suite fitted with a wet bar and a fireplace set in a white glass wall. The main outdoor entertainment area comes with an infinity pool and another Jacuzzi. There is also a guesthouse on the property with built-in kitchenette and gym. The asking price is US$ 42 million.

Safra Sarasin expands Total Return team

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Safra Sarasin potencia su equipo de Total Return — CC-BY-SA-2.0, FlickrPhoto: Rosanna Galvani . Safra Sarasin expands Total Return team

Swiss private banking group Safra Sarasin has announced the appointment of Stéphane Decrauzat, and Vincent Rossier to head its Total Return team as of Janaury 2016.

Decrauzat joins from RAM Active Investments, where he spent the last eight years as fixed income manager. Rossier joins from Pictet Wealth Management, where he held a number of positions in the fixed income asset mamangement team.

In addition, the group also confirmed the hire of Yann Schorderet as quantitative strategist to the CIO office. He joins from Mirabaud & Cie, where he was also responsible for investment strategy.

Serge Ledermann, member of the Bank’s Executive Committee and head of Asset Management Switzerland, comments on the appointments: ”We are very pleased to welcome these managerial appointments and new skill sets, which not only will enable us to strengthen our existing teams but above all will allow us to provide new asset management expertise. The current financial market environment, with the virtual disappearance of positive yield curves, in fact calls on us to adapt our product range both within the fixed income space and in multi-asset management.”

Bonds from Emerging Markets Are Underrated

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The interest rate reversal is a long time coming. The US Fed has pushed back a decision on a rate hike to December, citing the uncertain outlook for the global economy as reason, among others. At the same time the ECB president, Mario Draghi, has hinted at the fact that the ECB might expand its bond purchase programme considerably. This keeps the interest rates, both for government and for corporate bonds, at historically low levels. “In this environment it is difficult for many investors to achieve a satisfactory yield,” as Péter Varga, fund manager and specialist for emerging markets corporate bonds at Erste Asset Management, explains. “As alternative, we recommend investors to take a closer look at investment grade bonds from emerging markets issuers.”

Stimulus package in China and weak economy in Brazil

“We currently rate the situation of the emerging markets as mixed,” as Varga points out. The semi-annual figures of the corporate sector in the emerging markets were anything but convincing, but the stimulus package announced in China creates new opportunities. The government in Beijing announced that the equity portion for property purchases was to be cut. At the same time, a tax break will be granted for the purchase of a compact car. The situation in Brazil, on the other hand, remains difficult and diffuse in the foreseeable future. “We are critical of the country due to the political instability and the generally weaker economy,” as Varga explains. A careful selection of the right assets in the emerging markets is therefore key.

Erste Asset Management offers interested investors suitable access to this investment universe via its Espa Bond Emerging Markets Corporate IG fund, which was floated three years ago. The investment focus of this fund is on investment grade bonds from the emerging markets. The fund is eligible in accordance with the Austrian Insurance Supervisory Act and thus also interesting for a number of institutional clients. It is also hedged against currency fluctuations and commands a good rating.

“From our point of view there are numerous factors supporting an investment in investment grade emerging markets bonds,” as Varga points out. It is generally a fast growing, broadly diversified asset class with bonds from many well-known, internationally operating companies such as for example Alibaba from China, or Grupo Bimbo from Mexico. At the same time, the rising capital inflow ensures liquidity. Overall this asset class is dominated by real-economy companies. Industrials account for 57.1%, whereas for European investment grade bonds, this percentage is only 47.1%. “Another reason to invest, from our point of view, is also the structurally favourable, i.e. lower, valuation of emerging markets corporate bonds vis-à-vis the industrialised countries. In recent years, the spreads on investment grade companies from the emerging markets have been a stable 2-2.5% above those of corporate bonds from developed countries in spite of negative market phases,” highlights Varga.

Operating since 2007, Erste Asset Management has years of experience in the asset class of emerging markets corporate bonds. The company successfully combines local know-how with global strategies. Over the years, Erste Asset Management has recorded a constant inflow of assets and has received numerous national and international awards.