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The Finance, Insurance, & Real Estate sector was the most targeted sector during September, comprising 27 percent of all targeted attacks, accorging the new study by Symantec.
Large enterprises were the target of 45.7 percent of spear-phishing attacks in September, up from 11.7 percent in August.
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Over the past decade, blended emerging market debt (EMD) strategies have grown from nowhere to around a US$100 billion asset class (see Figure 1). In the last few years, in particular, they have become the favoured way for investors to access EMD, receiving positive net flows whilst dedicated local and hard currency EMD universes have seen net outflows.
But what exactly constitutes a ‘blended’ emerging market debt strategy? And how should investors expect these strategies to behave? Indeed, what is the optimal long-term strategic asset allocation and what should investors expect from their managers in terms of asset allocation and risk management? In this month’s topic piece Investec looks to answer some of these fundamental questions in an attempt to offer a better understanding of this new and, attractive, entry point to emerging market debt.
Defining ‘blended’ EMD
Defining what makes a strategy blended should be easy: namely any strategy that combines both local currency and hard currency denominated debt. However, the difficulty is that most ‘pure’ local currency debt funds will at times include some form of dollar (hard currency) denominated debt. Similarly, many ‘pure’ hard currency debt funds include some allocation to local debt.
Thus, as well as having a meaningful allocation to both local and hard currency debt, one of the key attributes of a blended EM debt strategy should be the ability to dynamically allocate between asset classes with the view of outperforming a mixed local currency/hard currency benchmark. Yet many blended strategies make little or no attempt to allocate between asset classes or outperform a mixed benchmark. To illustrate this point, Investec AM examines the ‘eVestment Emerging Markets Fixed Income – Blended Currency’ universe which consists of 50 strategies described by their managers as ‘blended’. However, as Figure 2 shows, only 19 of these strategies have identified themselves with a benchmark made up of both local and hard currency emerging market debt (be this sovereign or corporate debt).
Even if we filter out strategies that do not meet our basic definition, its research shows that not all blended strategies offer a truly blended approach. “We find that most blended strategies tend to have a strong bias towards hard currency debt and also to generally being overweight risk (i.e. being long beta)”.
“We believe that the bias towards hard currency debt exposure, both within benchmarks and relative to benchmarks, is due to a number of factors. First and foremost, some managers may be inexperienced in managing local currency debt, especially with regards to managing the currency exposure itself and treating it as an opportunity rather than a risk. Secondly, not all managers have the experience and capacity to open local currency accounts, manage settlement and custody, as well as taxes, for the various local markets. Finally, we envisage that some managers are adapting what were once pure hard currency EMD strategies into more typical blended approaches, a process that will take time to fully evolve”.
As the asset class and blended strategies continue to evolve, along with client preferences and demands, Investec expects that the universe of blended strategies will tend to become more focused, with a similar range of benchmarks and more balanced asset allocation.
Determining an optimal strategic allocation
Not surprisingly, it is a difficult task trying to determine what the optimal long-term allocation to the various emerging market debt asset classes should be, not least because ultimately this will also depend on each individual or institutional investor’s risk preferences. “What we are able to do, however, is consider a range of factors which should at least inform our decision on the strategic asset allocation and, hopefully, give us a better understanding of what to expect from this allocation in terms of a range of likely outcomes”.
“Using simulation of historical data (please see the longer white paper for more details) in combination with evaluating the size and accessibility of each component of the EMD universe, we believe that an approximately equal allocation between local and hard, which some blended strategies offer, is reasonable. While this may mean that returns are dampened by the local currency hedged bond component, historically (although not recently) this has somewhat been made up for by the currency component. Meanwhile, including corporate debt in the hard currency debt allocation should serve to dampen the overall volatility over time, although drawdowns might be expected to be slightly worse”.
One could argue that we should bias the exposure to hard currency debt (as many strategies have done) given that the currency component of local debt increases the volatility and, at least recently, has not contributed much to returns. “However, we believe that this argument may be relying too much on the recent historical data and ignores the important fact that local debt is a much larger asset class than hard currency debt, yet with far less money dedicated to it. One thing we would favour is increasing the exposure to hard currency corporate debt from the 10% suggested by our simulations. This is because, once again, it is a much larger asset class than hard currency sovereign debt. Furthermore, we also believe that the hard currency corporate debt asset class will continue to grow and present investors with attractive, diversified access to new countries and sectors. Ultimately, each investor’s risk profile will be different and would thus demand different allocations. Furthermore, we have only considered this allocation from the point of view of a dollar-based investor. The analysis could be quite different for investors with other base currencies. However, a 50/50 allocation between local and hard currency debt, with a reasonable (at least 20%) allocation to corporate debt seems to us to be a good way of balancing the need to optimise risk-adjusted returns while still not chasing the crowd and investing into already well- owned asset classes”, according to Investec.
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With today’s low yields and interest rates at historic lows, traditional sources of income such as bonds and bank account savings have failed to meet investors’ income goals. Investors continue to look for other sources of income — whether to supplement pensions or paying for a child’s education — but are they equipped with enough knowledge when choosing?
Schroders has launched incomeIQ, a new online tool designed in partnership with University of Cambridge behavioral scientist and PhD researcher, Joe Gladstone, to help investors determine their unique behavioral biases when making income investment decisions, and improve their income intelligence or ‘incomeIQ’.
Gonzalo Binello, Head of US Intermediary Offshore for Schroders commented:
“Our clients have had a tendency to invest in direct fixed income securities and real estate in order to generate income within their portfolios. This strategy creates a concentration risk and can make the portfolio returns vulnerable to the global interest rate cycle. That is why we stress the importance of a more diversified income oriented strategy going forward. We see continued need and demand for income and at Schroders, we want to ensure that investors are equipped with the knowledge to achieve their goals. The incomeIQ tool and knowledge center offers a hub for investors to explore their unique profile, along with guides, tips and products to help them make more informed decisions to build their income oriented portfolios”.
Is the tendency to look on the bright side always a good thing? Do you buy more when you go to the supermarket hungry? As humans we don’t always make logical or rational decisions. IncomeIQ, which is supported by in depth research on behavioral finance, can help investors understand their individual profile in order to make more informed investment decisions.
Our recent research shows that 88% of investors say they are on average or better than average at making investment decisions. People generally overestimate their investment ability and this ‘over confidence bias’ can cause errors in judgment.
Joe Gladstone, behavioral scientist and PhD researcher, University of Cambridge, England said:
“It is far more common for people to see themselves as above-average investors (41%) than as below average (12%). Psychologists have long found that people are biased to be overconfident about their abilities, resulting in unrealistic perceptions of risk. This overconfidence spills over into investment behavior too. The result is impoverished returns as investors take bad bets because they fail to realize that they are at an informational disadvantage.”
To try the tool and build your incomeIQ you may do so in http://incomeiq.schroders.com/en/americas/adviser/
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Seedrs announced that it will commence a beta test of its platform in the United States within weeks, following Friday’s vote by the U.S. Securities and Exchange Commission (SEC) to implement Title III of the JOBS Act.
The beta test will offer US accredited investors the opportunity to invest in selected campaigns listed on the platform, with an official launch expected in early 2016.
In late 2014, the largest crowdfunding platform in Europe to focus solely on equity investments acquired California-based crowdfunding platform Junction Investments in preparation for its push into the United States. It has been working tirelessly in 2015 developing the right approach to commence operation in the United States, as compliance with applicable law has always been a non-negotiable element of the company´s approach to business.
The firm has been active in supporting the JOBS Act equity crowdfunding regime with Jeff Lynn, Seedrs CEO, having provided expert testimony to subcommittees of the U.S. House Oversight & Government Reform Committee in September 2011 and the U.S. House Financial Services Committee in May 2014.
The firm believes Friday’s SEC vote on Title III of the JOBS Act represents a significant step forward for early-stage and growth-focused businesses that wish to use equity crowdfunding as a platform to raise capital for their businesses.
Jeff Lynn, CEO, said:“I have had the privilege of being involved in the lawmaking process for U.S. crowdfunding ever since the JOBS Act was introduced in 2011, and I am very pleased to see that the SEC has finally adopted rules implementing Title III. We believe this heralds the emergence of equity crowdfunding as a vibrant form of finance in the United States – just as it has become in the UK and Europe – and Seedrs is perfectly positioned to take advantage of the sector’s growth. The beta testing will be the first foray into the market, and we look forward to growing our presence there significantly in 2016.”
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Lloyd Jones Capital, a Miami-based multifamily investment firm, has acquired the Carol Oaks and the Villa Oaks apartment communities in Fort Worth and Houston, respectively. Both are considered exceptional value -add opportunities which the company anticipates improving and rebranding in order to enhance the asset value.
Says Chris Finlay, Chairman/CEO, “These properties are a great fit for our value-add portfolio. They are both currently producing cash flow, and with selective renovations and exciting rebranding they will prove to be fabulous opportunities for our investors.”
The Carol Oaks is a gated community consisting of 224 units on 18 acres. It is undergoing rebranding to the company’s proprietary ‘Vibe” concept that offers high tech opportunities for its residents with Wi-Fi and collaborative work areas. It is now called The Vibe at Landry Way.
The Houston property, Villa Oaks, with 212 units of affordable housing will be rebranded as TownParc at Sherwood. This townhouse community offers large units with numerous floor plans.
According to Finlay, two additional properties – in St. Petersburg, FL and Houston – are scheduled for closing in the next few weeks. These will add an additional 610 units to the company’s growing investment portfolio. Finlay says “One of the things that gives us great confidence in the ability to turn these C and B properties into C+ and B+ assets is Finlay Management, Inc., our property management arm.” He explains that the company is an Accredited Management Organization (AMO) In fact the company was named “AMO of the Year” of North FL for 2013 by IREM (Institute of Real Estate Management.)
The company specializes in multifamily investment in FL, TX and the Southeast. The company acquires well located, cash-flowing assets with value-add potential. It was founded by real estate veteran, Chris Finlay, who has over 35 years in the multifamily industry.
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Insight Investment, a BNY Mellon Investment Management boutique—announced that its global fixed income coverage now includes domestic US credit and loans expertise. The addition of a domestic US fixed income business, a deal completed at the start of the year, has enhanced Insight’s research resources and increased capacity in the strategies most widely owned by our international clients: Absolute Return Bonds, Global Active Credit and Buy and Maintain.
The global fixed income team at Insight now includes 97 investment professionals and the team manages $208 billion. The investment teams based in the US and the UK now share the same global investment process and research methodology. This is deployed within one investment-systems architecture and governance framework.
Adrian Grey, Head of Fixed Income at Insight, said: “The integration of a strong US domestic investment team has deepened our research capability. This means that our globally-focused portfolios can now better reflect the opportunities available in the world’s biggest and most diverse credit market. By aligning our research resources, processes and systems across London and New York we believe we have made a material step forward that should enhance the quality and foundations of our portfolios, and support us in seeking superior investment results.”
The 29-member strong US domestic fixed income investment team has an average of 11 years’ tenure and 18 years’ total investment experience. Key strategies managed include core, core plus, US credit and long duration bonds. They are part of a team of more than 80 staff now located at Insight’s expanded offices at 200 Park Avenue, New York. The North American business has been operating locally as Insight Investment since July 1.
Cliff Corso, Chief Executive Officer at Insight in North America, said: “We now have the structure to grow and fulfil our ambitions, operating from within an autonomous investment boutique that provides a supportive philosophy and culture. US investors have historically prioritized domestic strategies and the team in New York has a long and competitive track record. The influence of global investment markets on the US market continues to increase, so the fact that our North American investment professionals are now part of a formidable 100-member strong global fixed income team ultimately strengthens our proposition.”
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According to Craig Botham, Emerging Markets Economist at Schroders, “The end of the one child policy is an announcement with great political significance but little immediate effect.” Given the high cost of raising children in China, his team does not see a demographic boom resulting from the end of the government’s one child policy.
By the year 2030, the UN expects to see a 3% decline in China’s working age and a very small impact on growth, detracting between 0.1 and 0.3 percentage points per annum from growth over that period. With that, there will be a very important fiscal cost for China, “as its dependency ratio worsens to developed market levels even as incomes remain in emerging market territory. This will result in a painful fiscal burden for China, and it is not clear how it will be tackled,” says Botham.
He believes that boosting the fertility rate would help, but it is not certain that ending the one child policy will be effective. For example in 2014, 11 million couples were eligible for a second child, but only 1 million applied to do so. Adding that, “it may be that after so long, the one child norm will take time to reverse. In addition, anecdotally, many young Chinese cite the cost of children, particularly education, as a major barrier to considering large families.”
And thus, “the cost of raising children needs to be reduced. Task that will require the provision of high quality and affordable – preferably free – education and childcare, and likely also an overhaul of the welfare system altogether.” Nowadays the “hukou” registration system limits people’s ability to claim social welfare outside of their registered area. This means many migrants to the cities have to go home to access education, healthcare, and so on. “Which adds immensely to the cost of raising children and settling down, and will be a contributing factor in delaying household formation. Until these issues are addressed, we do not see a demographic boom resulting from this policy change,” Botham concludes.
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Prior to the referendum on EU membership due in 2016 or 2017, the UK government will pursue negotiations to redefine its relationship with the Union. David Page and Maxime Alimi from Axa IM review the themes that are likely to form the basis of these negotiations and assess the margin for compromise between the UK and its European partners. On balance, they expect such negotiations to be constructive enough for the UK government to campaign in favour of the “Yes” at the subsequent referendum.
In their opinion, the UK has yet to define, specifically, what it desires from such negotiations. This month, the UK is supposed to offer more information on what they are looking for, as promised by David Cameron at the EU leaders’ Summit, but the Axa experts believe the main topics will include:
According to Alimi and Page, “overall, many of the areas where the UK is likely to pursue change are not contrary to EU ambition. This suggests significant room for agreement between the UK and its partners on most issues.” What will happen given the few, but key, areas the UK and the EU do not agree upon? Only time will tell…
You can read the full report in the following link
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The Financial Industry Regulatory Authority (FINRA) said on Friday that Chairman and CEO Richard Ketchum, 64, has announced his plan to retire in the second half of 2016. The Board of Governors will conduct a search for his successor that will take into consideration internal and external candidates.
Mr. Ketchum has been one of the foremost industry regulators for more than three decades. He came to FINRA from the NYSE where he was CEO of NYSE Regulation. He also spent 12 years at NASD and The Nasdaq Stock Market, Inc., where he served as president of both organizations. Prior to that, he was the director of the SEC’s division of Market Regulation.
“I’m proud of FINRA’s achievements over the past six years,” said Mr. Ketchum. “We have been at the forefront of investor protection in our aggressive efforts to help enforce the rules that are so crucial to fair financial markets. Our accomplishments are founded on a commitment to excellence in our core competencies: examinations, enforcement, rulemaking, market transparency and market surveillance. Investor protection is our principal reason for being, and I have been honored to work with an incredibly dedicated and talented group of professionals who take this vital mission seriously. FINRA is well-placed to continue to play an important role in educating and protecting investors in the years ahead.”
“FINRA has thrived under Rick’s leadership, and we look forward to his continued guidance over the next many months,” said Lead Governor Jack Brennan, former CEO of Vanguard Group. “His stewardship began in the aftermath of the financial crisis when public trust in the financial system was at an historic low. As a champion of initiatives such as the High Risk Broker program, improvements in BrokerCheck, the expansion of TRACE reporting of asset-backed securities, and the expansion of FINRA’s responsibilities across stock and options trading, Rick has put FINRA on the front line of the movement for stronger investor protections and greater market integrity. Under Rick’s management, FINRA has emerged as a leader in the reshaping of American financial regulation and helped to restore the faith in the capital markets that forms the bedrock of our financial system.”
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Markets had been unusually calm, until risk surged in late August. Bigger portfolio shifts when volatility is rising may be magnifying the spikes, making markets harder to navigate. AB thinks the answer is focusing on more than risk.
It’s true that volatility has moderated a bit but is still higher than it was before August, and policy makers have taken note of these sudden shifts in risk. In fact, it was one of the reasons why the US Federal Reserve decided to hold off on raising interest rates in September, point out Brian T. Brugman, portfolio manager of Multi-Asset at AB, and Martin Atkin, Head of US Client Solutions at AllianceBernstein Multi-Asset Solutions Group. To avoid being whipsawed, recommended, investors should take a holistic view of their portfolios. The focus should be on more than risk signals—return signals matter, too.
Reactions to Market Volatility Amplify It
“Our research indicates that risk factors—and oversimplified asset-allocation decisions based largely on volatility measures—can create a painful cycle. The very trigger that prompts an allocation shift away from equities is itself influenced by the resulting sale. And volatility begins to feed on itself”, said Brugman and Atkin.
There’s evidence that more managers are making decisions based largely on changes in market volatility. The firm looked at allocation changes over time, based on the implied equity exposure across different mutual fund categories, examining both high-risk and low-risk environments. Brugman and Atkin found that reductions in equity exposure have become noticeably larger since the Global Financial Crisis of 2008.
In fact, the downward shifts for tactical allocation strategies have almost doubled in size. It’s not surprising that tactical strategies make adjustments, but the bigger moves today are notable, explain the experts. Even world allocation strategies, which largely left their equity allocations alone pre-crisis, have begun to make significant equity reductions.
“Our analysis also suggests that portfolio shifts aren’t just bigger than before, but they’re also happening faster when volatility rises. This helps make volatility spikes more pronounced. The August episode confirmed this: selling pressure due to a collective decision to de-risk likely made the first few days more severe. Before August 24, when risk was below average, the group of strategies we isolated for this analysis had an average overweight to equity of 9%.Shortly after the spike in risk they were significantly underweight, averaging 15% less equity exposure than is typical”, point out.
The Problem of Volatility Tunnel Vision
One likely reason for the rush for the exits is that many risk-managed strategies exclusively use volatility gauges as a simplified trigger for making allocation changes. Because this systematic approach is so common, it creates significant selling momentum in equities when risk starts to rise and the signal turns red. This risk “tunnel vision” can lead to even sharper moves in the very metrics used to determine portfolio positioning.
Brugman and Atkin don’t think these type of asset-allocation triggers are robust enough. It’s important to determine if a sudden change in the risk environment is temporary or long-lasting. That knowledge can make a portfolio manager less likely to make the classic mistake: trend-following and selling into distress at a market trough.
A Holistic Process Must Integrate More than Risk Signals
One way to tackle this problem is to include both expected risk and expected return across asset classes in quantitative analysis. It’s also important not to leave fundamental judgement behind, and to consider how technical factors in the market impact the asset allocation equation.
All things considered, AB thinks it makes sense to be modestly underweight equities in the current environment. Volatility is above average, but we think the initial spike may have been exacerbated by indiscriminate selling from risk-managed strategies. Stalling growth in emerging markets and falling commodity demand may not be as much of a spillover risk for developed economies as some investors may think.
“In turbulent times like these, the ability to be dynamic in shifting equity beta can be very helpful. And volatility is a valuable signal that helps inform that decision. The key is to make sure that the trigger for shifting beta isn’t overly sensitive to changes in volatility alone”, concluded.
