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QE in Europe and Japan Set to Benefit Higher Dividend Yielding Stocks

El QE en Europa y Japón favorecerá mayores dividendos en los valores con alta rentabilidad — Photo: Alex Crooke heads Henderson’s Global Equity Income team. QE in Europe and Japan Set to Benefit Higher Dividend Yielding Stocks

Alex Crooke heads Henderson’s Global Equity Income team, which consists of twelve professionals with an average industry experience of 16 years. In his case, he has been managing income generating strategies since 1997. In an interview with Funds Society, Crooke explains: “high dividend yielding stocks are not a fad, they have played an important role in the market for decades. Dividends are a very powerful strategy when investing in equities.”

In fact, over time, dividends are responsible for a highly significant proportion of the total returns on global stock markets. In 2014, listed companies worldwide paid more than $1 trillion in dividends. They are also a good indicator of corporate health. In recent years, payouts of listed companies have continued to grow. The Henderson Global Equity Income team believes that this trend will continue as fundamentals in markets lagging the economic cycle, such as Europe, improve.

“Our strategy is truly global,” says Crooke. The universe includes Asia and emerging markets, and stocks of all market capitalizations. “Right now we find better yield in Europe and Asia than in the United States, as well as better dividends among large-cap companies, compared to small and mid caps. Essentially, we have a yield of 3.4%.”

In a world where interest rates are at historically low levels, a dividend culture is warranted, especially in those areas of the world where aging populations lead to increased demand for income-generating assets.

High and Rising Dividends

“Ours is a bottom-up investment process. The portfolio is constructed from a global universe of companies, which generate good dividend yields. In addition, we have found that companies that raise their dividend tend to perform better overall.”

Crooke’s team looks closely at companies that deliver good dividends, with a focus on analyzing whether they are able to increase cash flows over the next two or three years. “At the end of the day, a dividend is cash leaving the company, therefore, in order to have a dividend, there must be good cash generation.”

During the investment process, the Global Equity Income team examines several factors, including balance sheet strength, capex needs, and cash generation, but without losing sight of the macroeconomic framework. An example of this is what’s happened with oil companies over the past year, “the macro environment suggested that the price per barrel could not be maintained above US$100 for a long period of time, but even at that price, we saw that many companies within the industry were financing dividend distributions with debt, instead of cash flow; they were handing out the results of future projects. For us, that was a warning sign indicating that it was best to steer clear of these companies, even though their dividend was high. “

A UCITS Strategy for a Three-Year Old UK Domiciled Fund

Alongside Andrew Jones and Ben Lofthouse, Alex Crooke manages the Luxembourg-domiciled SICAV strategy, which launched a year and a half ago as a mirror version of the existing Global Equity Income Strategy, domiciled in the UK. The launch of the UCITS Luxembourg version was driven by the low interest rate environment, which has seen increasing demand in Europe and Asia, as well as interest for such products in the US Offshore and Latin America market.

Overall, Henderson manages approximately US$15 billion in both regional and global Equity Income Strategies. Henderson began investing in income at the global level in 2006, and manages US$3.5 billion in its global dividend strategy domiciled in the United States, and about US$1 billion in the strategy domiciled in the UK.

QE in Europe and Japan should Act as Catalyst for Higher Dividend Yielding Stocks

This strategy, which has the MSCI World Total Return Index as its benchmark, typically has between 50 and 80 companies in the portfolio. “The United States represent 30% of the portfolio, an underweight position,” explains Crooke. This positioning is more the result of valuation rather than one of dividend growth. “Since the United States launched its QE program, the popularity of stocks offering a good dividend yield increased, raising the price of securities in both equities and fixed income.” Henderson’s Global Equity Income team, however, does see some interesting American companies, such as mature technology names like Microsoft and Cisco, which have “a good payout combined with strong cash flow generation.” Another sector in which they are beginning to focus is that of US banks “which we think will be in a position to start paying better dividends.”

But it is in Japan and Europe where Crooke sees the greatest opportunities. “The QE program is in its infancy, thus, the same rationale which pushed money in the US towards dividend stocks should also operate in Europe and Japan.”

The average forecast yield of the companies which form the strategy is 3.8%, with an estimated dividend growth of 5 to 10%. “In the UK, for example, we see interest rates at levels below the average yield of the equity market; this is the situation throughout most developed world markets, except the United States. Now is the time to reconcile this difference.”

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The team’s outlook for emerging markets is very cautious. The strategy’s allocation is less than 5%, although exposure is also gained through certain developed market companies with emerging market business streams.

Restructuring Companies, a Recurring Theme in the Strategy

Around a third of the stocks included in the portfolio are undergoing some form of restructuring. “Companies that have gone through a process of change to improve their fundamentals tend to behave well regardless of the economic cycle. Since we are not very positive about the global macroeconomic outlook, we focus on these types of businesses as well as companies in sectors uncorrelated with the economic cycle, such as pharmaceuticals or insurance.”

A recurring concern when investing in dividends is to avoid “value traps”. Some high-yielding equities can be more risky than their lower-yielding counterparts, particularly after a period of strong market performance when equity price rises push yields down. The high-yielding companies that are left can be structurally-challenged businesses or companies with high payout ratios that may not be sustainable. Crooke says that it is essential to analyse the sustainability of a company’s ability to pay income.”We avoid investing in companies whose dividend policy is vulnerable to regulatory changes, the interest rate environment, declines in commodity prices, etc”.

Does High Yield Debt Investment Compete with Dividends?

Crooke points out that investing in high yield bonds is currently not as attractive an option. “If you want high yields from fixed income, you have to look to heavily indebted companies. Those with a good credit rating don’t offer such attractive yields. In Europe, for example, 55% of companies offer better yields through dividends than through debt issues.”

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Furthermore, if inflation returns, the risk of rising rates is still there, and it may damage the performance of a fixed-income portfolio. “If you’re counting on a gradual reflation of the economy, we believe that it’s much better to be in equities than in fixed income,” says Crooke.

BME Joins the Sustainable Stock Exchanges (SSE) Initiative to Promote Sustainable Capital Markets

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BME se incorpora a la Sustainable Stock Exchanges (SSE) Initiative para fomentar mercados de capitales sostenibles — Photo: Jackietl, Flickr, Creative Commons. BME Joins the Sustainable Stock Exchanges (SSE) Initiative to Promote Sustainable Capital Markets

BME has announced that it has partnered with the United Nations Sustainable Stock Exchanges (SSE) initiative to raise awareness on environmental, social and corporate governance issues, and to spread sustainable business practices.

The UN SSE initiative was launched by UN Secretary-General Ban Ki-Moon in 2009, and offers a learning platform for exploring how exchanges—together with investors, regulators and listed companies—can encourage sustainable investments and enhance corporate transparency. The SSE is convened by the UN Conference on Trade and Development (UNCTAD), the UN Global Compact, the UN Environment Program’s Finance Initiative (UNEP FI), and the Principles for Responsible Investment (PRI).

In a letter to UN Secretary General Ban Ki-moon, BME committed to working with investors, companies and regulators to promote long term sustainable investment and improved environmental, social and corporate governance (ESG) disclosure and performance among companies listed on its markets.

The Chairman of BME, Antonio Zoido, said: “We are proud to join the SSE Initiative and partner with the UN and our industry to support best practices in corporate governance and transparency related to corporate sustainability and help advance this cause globally. Being part of the Sustainable Stock Exchange initiative demonstrates our commitment to adopting sustainable business practices and encouraging our stakeholders to do the same”.

Non-EU Managers Ditch European Investors in Face of AIFMD Grief

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Alternative Investment Fund Managers Directive (AIFMD) headaches are causing some non-EU fund managers to forgo European investors, according to the latest issue of The Cerulli Edge-Europe Edition.

Cerulli Associates, the global analytics firm, says the hurdles and uncertainty linked to the financial directive are proving too troublesome for some managers. The chief operating officer of one hedge fund told Cerulli that U.S. and Asian managers are ignoring Europe, concentrating greater marketing efforts instead on domestic investors.

“At the crux of the debate is the question of whether the financial rewards outweigh the compliance costs,” says Barbara Wall, Europe research director at Cerulli, noting that the cost of becoming AIFMD compliant is estimated at between US$300,000 (€278,000) and US$1 million.

The directive subjects fully compliant AIFMs to a number of obligations, most notably the appointment of a depositary bank, restrictions around remuneration and additional risk oversight requirements. In return, full-scope AIFMs can in theory distribute funds to institutional investors across the EU without impediment.

The situation for EU managers of non-EU funds and non-EU managers of non-EU funds is, however, more complicated. While Guernsey, Jersey and Switzerland have been cleared by the European Securities and Markets Authority (ESMA) to use the AIFMD passport, the U.S., Hong Kong and Singapore have been told that more analysis is needed before a ruling can be made. “The delay is cause for concern. A speedy decision is needed–however, we are not hopeful of one,” says Wall, noting that the huge regulatory divergences between the EU and the U.S., particularly around the definition of an accredited investor, is an obstacle to equivalence that will not be easily resolved.

David Walker, director of European institutional research at Cerulli, adds it is a cause for concern if Europe’s growing web of regulation affecting alternatives managers means U.S. and Asian managers simply ignore European investors. “European allocators could effectively be denied some very talented managers, and returns they badly need in Europe’s low-interest rate, low-returns environment,” says Walker.

Managers without passporting rights can use the National Private Placement Regimes (NPPR). However, a lack of uniformity across the EU with regard to interpretation of NPPR is creating confusion, points out Cerulli. It notes that differences between countries on AIFMD regulatory reporting rules have resulted in some non-EU managers marketing into just a handful of jurisdictions, while others are moving onshore or launching UCITS. Also, there is no certainty as to how long NPPR will exist.

“Alternatives managers depending on reverse solicitation rely on being ‘found’ and then pursued by prospective clients–a fairly tall order–whereas regulation-compliant rival managers will be able actively to promote the benefits of their strategies, which does seem a rather easier path to sales,” says Walker.

Shareholders Approve Towers Watson-Willis Merger

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Shareholders of financial services provider Towers Watson & Co and insurance broker Willis Group Holdings voted last Friday to approve their merger, the companies said in a joint statement.

The support by Towers shareholders comes after an $18 billion merger agreement between the companies was amended to increase the one-time cash dividend to be paid to Towers stockholders to $10 per share from $4.87, according to Reuters.

“We are pleased with the outcome of today’s vote and thank all of our shareholders for their support,” said John Haley, Chief Executive Officer of Towers Watson.

At the first vote to approve the merger, that took place in November, top Towers shareholders, including BlackRock Inc, refused to support the deal which proved to be a critical blow, and forced the company to adjourn the meeting until last Friday.

A key goal of the merger is to have Willis, the world’s third-largest insurance broker, combine with Towers Watson to add consulting operations and help take on bigger rivals.

The raised dividend proved enough to swing top Towers shareholders to switch their vote in favor of the deal, leading to the approval at Friday’s meeting.

Towers Watson Chief Executive John Haley will lead the combined company, and James McCann of Willis will be the chairman.

Market Volatility Causes an Important Reduction in Net Inflows in Long-Term UCITS and AIF in Q3 2015

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The European Fund and Asset Management Association (EFAMA) has published its latest quarterly statistical release which describes the trends in the European investment fund industry during the third quarter of 2015. Bernard Delbecque, Director of Economics and Research at EFAMA, commented: “Volatile markets in August and September triggered an important reduction in net inflows in long-term UCITS and AIF in the third quarter of 2015.”

UCITS net sales declined to EUR 55 billion, down from EUR 114 billion in Q2.Long-term UCITS, i.e. UCITS excluding money market funds, also posted a steep decline in net sales during the quarter to stand at EUR 33 billion at the end of Q3, down from EUR 144 billion in Q2.

Demand for equity funds decreased from EUR 22 billion in Q2 to EUR 13 billion in Q3. Bond funds registered a turnaround in net sales to post net outflows of EUR 19 billion, against net inflows of EUR 32 billion in Q2. Net sales of multi-asset funds net sales decreased from EUR 72 million in Q2, to EUR 34 billion in Q3.

Cumulative UCITS net sales totalled EUR 452 billion during the first three quarters of 2015, up from EUR 404 billion registered in the first three quarters of 2014.

Cumulative net sales of long-term UCITS also increased during the first three quarters of this year to EUR 414 billion, up from the EUR 399 billion registered in the first three quarters of last year.

Money market funds recorded a turnaround in net sales to post net inflows of EUR 21 billion in Q3, against net outflows of EUR 30 billion registered in Q2.

AIF net sales amounted to EUR 33 billion, down from EUR 48 billion in Q2. The reduction in AIF net sales can be primarily attributed to a decrease in demand for AIF multi-asset funds, from EUR 32 billion in Q2 to EUR 16 billion in Q3.

AIF bond fund net sales saw increased outflows of EUR 4.5 billion, compared to outflows of EUR 2 billion in Q2. Net sales of AIF equity funds decreased from EUR 3.6 billion in Q2 to EUR 3.2 billion in Q3.

European investment fund net assets decreased 4.1% during the third quarter of 2015 to stand at EUR 12,114 billion at end Q3 2015. Net assets of UCITS decreased by 4.7 percent to stand at EUR 7,784 billion at end Q3, while total net assets of AIFs decreased by 3.0 percent to stand at EUR 4,330 billion at quarter end.

Robeco Builds Presence in the UK

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Robeco se afianza en Reino Unido con la apertura de una oficina en Londres — CC-BY-SA-2.0, FlickrPhoto: Gabriel Villena. Robeco Builds Presence in the UK

Robeco announces the opening of its new London office in the City of London. The office will focus on serving UK institutional investors, global distribution partners and global consultants.

As previously announced Mark Barry has been appointed Head of UK and Institutional Business for Robeco UK. Robeco’s Global Financial Institutions team, headed by Nick Shaw, and Global Consultant Relations team, headed by Peter Walsh, are also run out of the London office. They are currently supported by a team of 6 FTE and Robeco is planning to expand this to around 20 FTE within the next two years. Robeco has a long track record with the UK institutional market and currently has approximately GPB 5bn in assets under management (as at 30 September 2015) from UK client mandates.

As in many other regions across the globe, Robeco will provide its client base in the UK market with access to high level expertise, amongst others within the field of Sustainability and Quantitative Investing. Robeco has been integrating ESG criteria in its mainstream products for many years, and has been at the forefront of active ownership by engaging with companies in which we invest to improve their sustainability practices since 2005. Robeco is also a pioneer in the field of quantitative stock selection since the early ‘90s. In 1994 the first stock selection models were used in Robeco equity strategies. Following the success of these models in practice, Robeco launched a 100% quantitative equity product line in 2002. This expanded over the years, currently spanning a wide range of investment strategies, with different regional exposures and risk-return characteristic and has over the last years developed a number of innovative factor investing strategies.

Mark Barry said: “Robeco coming to the UK is about bringing a suite of capabilities and skill sets to help clients build more sustainable, long-term portfolios to achieve their objectives. There is definitely a space in the UK for Robeco’s ‘cautiously pioneering’ mentality of using long-term, highly innovative sustainable investment strategies. These have been built on the bedrock that founded Robeco in 1929 and still stands today: using research-based, tried and tested strategies to deliver long-term results.”

Hester Borrie, Head of Global Distribution & Marketing and a Member of the Management Board of Robeco Group, said: “Building on our track record with clients in the UK, we are ready to be going to the next stage. We are delighted that our commitment to the UK market is now set in stone, with the opening of our new London office and the appointment of Mark Barry as Head of our UK business. Mark is supported by a strong team within Robeco that has had a solid focus on London in recent years. London is a key hub for the institutional and wholesale investment business globally. With the opening of our new London office, Robeco is now well established in all of the world’s major financial centres.”

Alejandro Moreno Appointed New Head of Distribution for Northstar

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Northstar, a firm dedicated to provide financial solutions to meet the needs of non-US clients, announced the appointment of Alejandro Moreno in the role of Head of Distribution. Alejandro Moreno brings over 19 years of experience in global financial organizations. Alejandro has joined Northstar from Sun Life Financial International, where he was most recently Head of Global Relationships. At Sun Life, Alejandro managed the global key account and sales teams and the firm experienced significant growth across all territories under his stewardship. Prior to joining Sun Life in 2008, Alejandro spent 12 years at Putnam Investments where he held a variety of positions within the firms’ offshore business. Alejandro completed his undergraduate program at CENP in Madrid and is bilingual in English and Spanish.

Northstar’s CEO, Michael Staveley, commented: “We are delighted that Alejandro has joined us in the newly created role of head of distribution and we look forward to him playing a central role in the firms continued growth. Alejandro will be working closely with the other members of the executive team and directors as we seek to expand the firm’s global distribution network and enhance our product range. The Northstar platform has been in operation for 17 years and this key hire is a further demonstration of our longstanding commitment to the international business.”

Northstar was first established in 1998 as Nationwide Financial Services (Bermuda) Limited and renamed Northstar in 2005, the firm offers a range of attractive fixed-rate and variable investment plans to a global client base. The firm’s fixed-rate products offer competitive guaranteed interest rates coupled with the option of added principal protection. Northstar’s variable products offer investors access to a broad selection of funds from a range of leading asset managers, with unlimited free transfers between underlying investment options. Working with an extensive range of distribution partners such as banks and other financial institutions, Northstar has clients in over 100 countries.

Despite Outflows, Investor Confidence in European Funds is Coming Back

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According to the latest Investment Funds Industry Fact Sheet from the European Fund and Asset Management Association (EFAMA), which provides net sales of UCITS and non-UCITS, during September 2015, total net assets of the European investment fund industry decreased by 2.3% percent to stand at 12,109 billion euros.

With information from 27 associations representing more than 99 percent of total UCITS and AIF assets, the main developments that month can be summarized as follows:

UCITS net sales decreased to 1 billion euros, down from net inflows of 9 billion euros in August. The decrease can be attributed to net outflows from money market funds.
Long-term UCITS (UCITS excluding money market funds) experienced a rebound in net sales of 12 billion euros, compared to net outflows of EUR 3 billion in August.
Equity funds enjoyed a turnaround with net sales of EUR 3 billion, up from net outflows of EUR 3 billion in August.
Net outflows from bond funds amounted to EUR 1 billion, compared to net outflows of EUR 12 billion in August.
Net sales of multi-asset funds remained steady with inflows of EUR 8 billion in both August and September.
UCITS money market funds recorded net outflows of EUR 11 billion, compared to net inflows of EUR 12 billion in August. This reflected usual end-of-quarter redemptions.
Total AIF net sales saw net outflows of EUR 6 billion, down from inflows of EUR 6 billion in August.

Net assets of UCITS stood at EUR 7,815 billion at end September 2015, representing a decrease of 2.2% during the month, while net assets of AIF decreased by 2.5% to stand at EUR 4,294 billion at month end.

Bernard Delbecque, Director for Economics and Research at EFAMA commented: “The rebound in net sales of long-term UCITS, even though modest, suggests that investor confidence began to strengthen again in September, after a few weeks of turbulence in the markets.”

Two-Thirds of Marketing Managers Plan to Add Staff to Support Digital Transformation

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New research from Cerulli Associates finds that two-thirds of marketing managers plan to add to their staff to support their digital transformation needs, focusing on content, data analytics, and technology-skilled individuals.

“When marketing managers are asked which trends are impacting their job, most respond with answers that are directly associated with digital transformation,” states Pamela DeBolt, associate director at Cerulli. “Acquiring more technologically-oriented personnel allows managers to enhance their ability to deliver content through budding digital channels, such as blogs, videos, or social media. Another opportunity for hiring comes in the form of more analytically-oriented candidates. More and more, marketing groups are performing their own segmentations, engaging in predictive analytics, and attempting to measure marketing return on investment (ROI).”

In its new report, Cerulli explores digital marketing and how firms are using these digital technologies to promote their brand, build preference, and increase sales through various sales marketing techniques.

“Digital is a positive game-changer for marketing groups, contributing to more targeted segmentation, expanded delivery mechanisms, and more opportunities to build firms’ brand,” DeBolt explains. “Firms have been able to use innovations in technology to improve the scale and efficiency of digital marketing, and to get a better handle on the idea and implementation of big data for business intelligence/predictive analytics. To take advantages of these opportunities for growth, marketers must recognize the importance of adding skilled employees to better shape their organization to navigate the challenges they will face.”

“The recent resurgence of product lines-in terms of both size and complexity-has led to a new demand for marketing professionals,” DeBolt continues. “The acceptance and embracing of technology into the marketing process has added a new flavor to marketing organizations. More quantitatively-focused candidates have become highly desirable, as marketing heads look to fill positions surrounding analytics and measuring ROI.”

Has Volatility Fueled Active Management?

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During the last six years, US equities experienced a nearly uninterrupted rally. An unusually accommodative monetary policy environment coupled with economic and earnings growth helped fueled the U.S. stock market—things, however, are starting to change.

The Federal Reserve (Fed) is signaling its intention to normalize monetary policy, which could happen as early as this month. At the same time, earnings growth outside of energy is modest and valuations are on the expensive side of fair value. It is therefore likely that investors going forward will not only have to adjust to more modest returns from U.S. stocks, but they may also have to brace for heightened volatility at a time when U.S. fixed income will continue to yield low level of returns.

In order to maintain the same level of returns, investors will have to change their strategies. One way to do so in the equity market would be to look for beta by pursuing cheaper markets (sectors, factors, geographies) with fundamental tailwinds, as well as strategies that have long-term structural support. For example, exposure in Europe or Japan—other developed countries with improving economic activity, accommodative monetary policy, cheaper currencies and strong profit growth.

Another strategy would be to combine active and passive management. While passive management has outperformed active management in the last years, this was done at a time during which the stock market was moving higher and was immersed in a low volatility environment, where generating alpha proves to be more difficult. Nowadays, investors can potentially benefit more from security and risk selection, be it via actively-managed exchange traded funds (ETFs), multi-asset managers, long/short managers or traditional active equity managers. However they must keep in mind two essential issues with active management:
• Finding a top-tier investment manager who will benefit from this shift in the investment environment is not certain, and
• Alpha generation is basically a zero-sum game over time. In aggregate, investors compete to generate alpha, creating winners and losers.

Although the dataset is admittedly small, historical data shows that in US large caps, periods when alpha generation improves happen to coincide with periods of stress in financial markets. So, while alpha generation may be thought of as sourcing opportunities to generate a higher return, it may equally be thought of as being underweight risks during times of heightened financial and economic stress. Thus, it might be safer to have a more thoughtful approach to combining alpha and beta strategies going forward.

In regards to the fixed income sphere, (where given the low level of interest rates it doesn’t take much of a reversal in interest rates to wipe out a year’s worth of coupon income), in order to boost returns and generate sufficient income, investors may feel compelled to migrate to ever riskier credits, extend maturity/duration, or allocate to less liquid securities. However, like with equities, there is an option other than pure market beta. Instead of taking more risk, investors could consider how they build alpha generation tools into their fixed income portfolio. One way to do so would be employing global multi-asset income solutions as a way to limit volatility while also pursuing objectives like income and total return. Tools such as unconstrained bond funds, global long/short credit or credit ETFs can be a good way of diversifying your fixed income sources.

With the world ‘normalizing’ comes the worry of higher volatility. Yet, it also presents an opportunity for alpha generation that has somewhat evaded markets in recent years. Investors can take advantage of that through picking the right active fund manager, through flexible multi-asset portfolios while also employing beta strategies to boost returns through tactical sector, geography and factor tilts.

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This material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator in any Latin American and Iberian country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.