According to ETFGI’s analysis there was US$2.971 trillion invested in the 5,823 ETFs/ETPs listed globally at the end of Q2 2015, assets were down slightly from their record high of US$3.015 trillion at the end of May 2015, while assets in the global hedge fund industry, according to a new report published by Hedge Fund Research HFR, reached a new record high of US$2.969 trillion invested in 8,497 hedge funds, which is US$2 billion smaller than the assets in the global ETF/ETP industry.
This is a significant achievement for the global ETF/ETP industry, which just celebrated its 25th anniversary on March 9th while the hedge fund industry has existed for 66 years. The ETF/ETP industry have been gaining on the assets invested in the hedge fund industry, more notably since the financial crisis in 2008.
In Q1 2015 the performance of the HFRI Fund Weighted Composite Index was 2.3%, which is only 1.3% higher than the 1% return of the S&P 500 Index. Many investors have been disappointed with the performance of hedge funds over the past few years as the HFRI Fund Weighted Composite Index has delivered returns significantly below the returns of the S&P 500 Index, according to S&P Dow Jones.
With the positive performance of equity markets many investors have been happy with index returns and fees. This situation has benefited ETFs/ETPs, which offer an enormous toolbox of index exposures to various markets and asset classes, including hedge fund indices and some active and smart beta exposures.
The ETF structure offers intraday liquidity, transparency, small minimum investment sizes and at costs that are lower than many other investment products, including futures in many cases. According to our research the asset-weighted average annual cost for ETFs/ETPs is 31 basis points or less than one third of a percent, while fees charged by the majority of hedge funds are 2% of assets and 20% of profits.
Accordingly, net inflows into ETFs/ETPs have been significantly higher than net inflows into hedge funds over the past few years. In the first half of 2015, net inflows into hedge funds globally were US$39.7 billion, while net inflows into ETFs/ETPs globally were US$152.3 billion over the same period.
Capital Group has announced that it plans to launch a fund aimed at European investors. The company will be making one of its global equity strategies from the US simultaneously available to European and Asian investors, pending regulatory approval, later this year.
The new fund, New Perspectives, will be a Luxembourg-domiciled fund (UCITS) and will follow the same unconstrained, global investment approach as in the US. Like the original which launched in 1973, the New Perspectives fund will focus on global blue chips.
Having recognised the continuing evolution of global companies over many decades, the Capital Group New Perspective strategy focuses on blue-chip companies that are well-positioned to take advantage of global secular trends with the potential to develop into leading multinationals. These companies typically have the added experience of working in multiple currencies, regulatory and political regimes and economies.
The new fund will be managed by the same investment team who runs the New Perspective strategy in the US.
Grant Leon, Managing Director, Financial Intermediaries, Europe, said: “US investors have had access to New Perspective Fund for many years and we are excited to bring this strategy to European clients. The launch of the New Perspective strategy will complement our drive to grow our European Financial Intermediary business and epitomises our focus on delivering superior, consistent long-term investment results.”
Stephen Gosztony, Managing Director, Institutional, UK and Ireland, said: “This launch demonstrates our continued focus on making it as simple as possible for our clients in Europe to access the very best of Capital Group’s capabilities. The European institutional market is a core market for Capital Group and we are particularly pleased that investors in the region will be able to benefit from a strategy with such a strong heritage which complements our existing fund range. We believe that the long term aims of the strategy further align our interests with the needs of our clients across the European market.”
Henderson Group Plc published its Interim Results for the six months ended 30 June 2015 on 30 July 2015. By the end of this period, its assets under management had experienced a growth of 10%; ending the first half of this year with GBP 82.1 billion under management.
Its net inflows in these past six months totaled GBP 5.6 billion. This new record on net inflows is attributed to the consistently strong investment performance, as 83% of funds are outperforming relevant metrics over the past three years.
Andrew Formica, Chief Executive of Henderson, said: “We are very pleased to have delivered another six months of record net inflows, built on consistently strong investment performance for our clients which highlights the strength of our active approach”. These new net inflows represent an annualized net new money growth of 14% in the period.
Back in April, Henderson Global Investors announced the sale of its 40% stake in TH Real Estate, to CREF for GBP 80 million, and the transaction was closed in June. Apart from this divestiture, new acquisitions were announced in June, to accelerate the presence of Henderson Global Investors in Australia. Formica added: “During the period, we continued to deliver on our strategy and attracted inflows from an increasingly global client base and product line. The acquisitions of Perennial Fixed Interest, Perennial Growth Management and 90 West will accelerate the growth of our Australian business and firmly establish our presence in this important market.”
In its latest interim business update, Henderson Global Investors, announced an underlying profit before tax from continuing operations of GBP 117.4, which represents a 29% increase compared to last year figure. Its underlying continuing diluted EPS rose to 8.9 p, from 6.8 p last June 2014; and its interim dividend rose from 2.60p per share last year to 3.10p.
Henderson Global Investors also announced a share buyback program to be initiated in the second half of 2015, with shares to the value of GBP 25.0 million to be purchased by year end. Finalizing its press release, Andrew Formica stated “We remain relatively positive on the market outlook, but are conscious that lingering investor caution during the northern hemisphere summer could affect flows across the industry in the third quarter. Nevertheless, Henderson remains well positioned. With strong sales momentum, increased brand recognition, excellent investment performance and disciplined investment in new initiatives.”
CC-BY-SA-2.0, FlickrPhoto: dpitmedia, Flickr, Creative Commons. A Bipolar Economy in USA: Strong Consumer Economy vs Weak Industrial Economy
Janet Yellen and her colleagues at the U.S. Federal Reserve (Fed) will spend the coming weeks and months contemplating the timing of an increase in short-term interest rates. While a cynic might describe the Fed’s behavior as “reactionary,” the Fed itself prefers the term “data-dependent.” As the Fed monitors incoming data, it will be searching for signs of the overall strength of the economy and any associated inflationary pressures. In so doing, the Fed is likely to find a two-speed economy, with the general health of the U.S. consumer improving rapidly, while the industrial side of the economy continues to struggle, says Eaton Vance in a report.
Part of the explanation for this seeming disconnect in economic data lies with energy prices. Over the past 12 months, the price of a barrel of oil has fallen 43%, from $105 to $60. This has led to a drop in average U.S. gasoline prices from approximately $3.70/gallon to $2.75/ gallon. With more money in their pockets, U.S. consumers (at least those who drive) are apparently feeling somewhat better about things. Accordingly, the University of Michigan Consumer Sentiment Index recently neared its five-year high.
While the collapse in oil prices has been good news for the consumer, it’s bad news for many industrial companies. Oil and gas is an important end market for capital goods and equipment manufacturers. “We have been struck by how rapidly the energy sector cut expenses at the beginning of 2015. North American exploration and production companies tell us they have cut capital spending by roughly 35% this year. This has had a ripple effect throughout the supply chain, well beyond the direct exposure of oil and gas equipment. The softness in the industrial part of the economy has begun to manifest itself in the form of lower utilization rates at U.S. factories”.
Aside from lower energy prices, another big reason for the greater optimism on the part of many consumers is the recent improvement on the jobs front. After topping 10% in 2009, the U.S. unemployment rate has steadily fallen since then and is now at what many would consider a more “normal” level – 5.3% as of June 2015. Perhaps even more telling is that wage growth has finally begun to pick up after years of stagnation.
Bringing it back to equities
Understanding the relative health of different segments of the economy is important, but for equity investors, the key question is always, “What’s not priced in?” Looking at the trailing 12-month performance of the consumer discretionary and industrials sectors within the S&P 500 Index, it seems clear that the U.S. equity market has begun to figure things out, as consumer discretionary stocks have handily outperformed industrials over the past several months.
“This divergence of performance between the two sectors has led to widening valuation differentials: Consumer discretionary stocks were recently valued at 19.5x forward EPS estimates, whereas industrials stocks were only valued at 16.3x. In the Eaton Vance Large-Cap Value strategy, we have recently been cutting back our consumer discretionary exposure and have been adding to industrials. Meanwhile, in our growth strategies, we have recently had underweight positions in industrials. Our growth team has continued to be optimistic about the outlook for companies that it believes to be benefiting from strong, secular growth trends in the areas of consumer, technology and health care, among others”.
Regardless of where there may (or may not) be opportunities in today’s equity market, their view remains that true bargains are far from plentiful. However, that could change in the months ahead. “In the interim, we continue to believe investors should selectively favor shares of companies with skilled management teams that allocate capital well”.
CC-BY-SA-2.0, FlickrPhoto: Jeckman, Flickr, Creative Commons. Edmond de Rothschild Group Opens a Branch in Zurich
Present in Switzerland since 1965, Edmond de Rothschild has further expanded its operations by opening an office in Zurich on 1 July this year. The Group is thus strengthening its offering of private banking and asset management services for German-speaking and international clients.
The Zurich agency marks the Group’s fifth location in Switzerland in addition to Geneva, Lausanne, Lugano and Fribourg.
“Switzerland is our foremost market in terms of assets under management and client numbers. While traditionally we have concentrated on the French-speaking area and Ticino, we are now determined to grow in the German region where we perceive real market demand,” said Emmanuel Fievet, CEO of Edmond de Rothschild (Suisse) SA.
The Zurich agency activities
Edmond de Rothschild boasts a full private banking offering that ranges from investment solutions, portfolio management and risk analysis and control to wealth engineering, corporate finance and access to exclusive opportunities. The Group provides each client with tailored services. “Our approach is based on catering to clients’ individual needs and taking account of their individual risk profiles. What makes us stand out is the power of our brand, the experience of our teams and the quality of our management,” Fievet emphasised.
In asset management the Edmond de Rothschild Group aims to grow its institutional business, mainly with pension funds, vested benefits institutions and insurance companies. It also wants to expand the external distribution of its investment funds. “We have a broad range of products and solutions that can be accessed by all Swiss investors and are capable of meeting their expectations and requirements. In addition we have a line of real estate funds that features the Swiss market and that clients in Zurich have owned shares in since 2012,” said Christian Lorenz, Chairman of the Executive Committee of Edmond de Rothschild Asset Management (Suisse) SA.
Foto cedida. Susan M. Brengle estará al frente de la división de negocio institucional en América del Norte para Eaton Vance
Eaton Vance Management announced that Susan M. Brengle has been promoted to Managing Director, Institutional, reporting to Matthew J. Witkos, President, Eaton Vance Distributors, Inc. Effective immediately, Ms. Brengle will oversee institutional business development, consultant relations and relationship management efforts in the U.S. and Canada for Eaton Vance Management. She will continue to direct institutional relationship management efforts outside the U.S.; Ms. Brengle will also be responsible for overseeing institutional business activities in the U.S. for Hexavest, Inc., an Eaton Vance-affiliated investment manager based in Montreal.
Ms. Brengle joined Eaton Vance in 2006 to lead relationship management across the institutional market for pension plan, insurance, corporate, healthcare, endowment and foundation clients in North America, Asia and Europe. Until 2010, she was also responsible for institutional product management.
Prior to joining Eaton Vance, Ms. Brengle spent 19 years at MFS Investment Management in a number of roles, including international business director, senior relationship manager and equity product specialist. She also served as a member of the institutional management committee. She is a graduate of the University of Vermont with a B.A. in economics.
“Sue’s proven knowledge of our clients’ needs and Eaton Vance’s investment capabilities has enabled her to build a world-class client service effort and institutional platform at Eaton Vance,” said Mr. Witkos. “She knows the marketplace, understands client and consultant priorities, and is committed to further developing our ability to anticipate and respond as the markets evolve.”
Eaton Vance has expanded its institutional capabilities in recent years by strengthening the consultant relations function and further building out its product offerings, including the recent addition of multi-sector bond and emerging market debt capabilities.
Photo: Day Donaldson. Rate Hike in the US: the Arguments and the Effect
There are clear indications that the Federal Reserve is going to raise interest rates for the first time in more than nine years this September. Kommer van Trigt, manager of the Rorento Total Return Bond Fund, looks at the arguments for and the likely effects of a rate hike.
The Fed is on course to raise rates in the autumn. In mid-June, Fed chair Janet Yellen stated that thanks to the strengthening economy there is room to raise the federal funds rate. This official interbank rate currently stands at an all-time low of 0.125%. She also made it known that in future rates would rise less rapidly than the Fed had originally anticipated.
In a normal cycle, rising inflation and the threat of an overheated economy resulting from too high a growth rate often trigger an interest rate hike. At the moment this is certainly not the case. In the last three years, core inflation in the US has fluctuated between the one and two percent level and since 2010, economic growth has moved in a bandwidth of one to three percent.
In previous cycles, economic growth was around four percent at the point when the Fed implemented a first rate hike. On the basis of those figures, a rate hike seems by no means a necessity. That makes you wonder why Yellen alludes with such certainty to a rate hike after the next Fed meeting in mid-September.
Building up weapon reserves
“One important reason for a rate hike is that the central bank want to build up its weapon reserves for the future”, explains Van Trigt. “If the US economy falls into recession, there is currently no room whatsoever for a further rate cut. The Fed wants to ensure that it does not have to rely on taking a whole range of unorthodox steps in such a scenario.
What Yellen also wants to prevent is a repeat of the so-called ‘Taper Tantrum’ of 2013, when a wave of selling engulfed the bond market after former Fed chair Ben Bernanke alluded to higher rates. “There is a much better chance that financial market stability will remain intact if the increase in interest rates takes place gradually, and if the market is made aware of the Fed’s plans”, explains Van Trigt to clarify this second argument for raising rates without it being economically necessary to do so.
In such a scenario, fixed income markets at least have plenty of time to come to terms with the idea of a rate hike and up to now the central bank has been pretty successful in managing market expectations. According to Van Trigt, this scenario is not without its dangers, however: “A rate hike is approaching, but the market is only pricing in a minimal rise of 12.5 basis points in September and 25 basis points in the months that follow. If these rate hike steps occur earlier than planned this could have a major impact on the prices of short-dated paper.”
Vulnerable market segments
The approaching rate hike in the US is the reason why we have reduced Rorento’s exposure to those segments of the bond market where this can hit hardest. “The fund is still invested in US bonds, but its interest rate sensitivity (duration) for bonds with a maturity of seven years or less has been brought back to zero”, says Van Trigt. Another part of the bond market that is vulnerable to rising US rates is emerging market debt.
There are better prospects for short-dated Australian bonds, given that the central bank there is still busy cutting rates. “By cutting back the duration for short-dated US paper and overweighting Australian bonds, we have ensured that Rorento is as well-positioned as it can be to cope with any negative effects of rising rates in the US”, summarizes Van Trigt.
CC-BY-SA-2.0, Flickr. Adrien Pichoud Appointed New Chief Economist at SYZ Asset Management
SYZ Asset Management has announced the appointment of Adrien Pichoud as Chief Economist. Adrien Pichoud is also a member of the Strategy Committee, which defines the Group’s investment policy. Under the direction of Fabrizio Quirighetti, Chief Investment Officer of SYZ Asset Management, Adrien Pichoud also assumes the function of co-manager of the OYSTER European Fixed Income and OYSTER USD Bonds funds.
Adrien Pichoud joined the SYZ Group in 2010 as an economist. Prior to that, he spent seven years as an economist in a brokerage firm in Paris. He holds a master’s degree in finance from the University of Grenoble (France) and a BA in Economics from the University of Sussex (UK). Adrien Pichoud is a well-known commentator in the Swiss investment media to which he frequently contributes.
“Adrien Pichoud’s skills as an economist greatly contribute to the quality of our investment strategy and the performance of our bond and multi-asset funds. This promotion demonstrates a strong internal progression confirmed by results,” commented Katia Coudray, CEO of SYZ Asset Management.
In addition, Adrien Pichoud is a member of the management team of the OYSTER Multi-Asset Absolute Return EUR and OYSTER Absolute Return GBP funds as well as other multi-asset funds and institutional mandates in absolute return strategies.
Ken Hsia, Manager of European Equity Strategy at Investec. Great Britain and the Franco-German Axis make up the Bulk of European Equity Strategy at Investec
Ken Hsia, manager of European Equity Strategy at Investec recently visited Miami. His strategy invests in companies listed on the European stock exchanges, including the UK, as well as in those that, while trading in other markets, carry out most of their operations on the continent.
It is precisely the British market which Hsia mostly favors, concentrating more than one third of the positions of the strategy which he manages. France, Switzerland, Germany, and Norway, complete the group of the five markets which he perceives most positive, whilst Spain is in sixth position. This strategy has a class which hedges all currencies in the portfolio – not only the Euro – ,ensuring a real exposure to the behavior of the underlying companies.
“Overall, there have been very few changes since November, but there has been a recovery of corporate earnings, often due to a reduction in costs through corporate reforms,” says the manager. “In the past nine months, both the Euro, in respect to the dollar, as well as oil prices, since June, have weakened, favoring a continent which, on the one hand, is almost twice as sensitive as the United States to exports, because much of its production is exported all over the world, and, on the other hand, is a net consumer of oil, which, with the low prices, the value is transferred from the producers to the consumers. Eight of the 10 Star ideas have exposure to Europe, “he says.
Hsia supports his positive view of the consumer, industrial, and technological sectors stating that “money is in the hands of consumers.” According to him, the relative value of European markets to the United States is unbalanced downward. “The European stock market is still down and there is a 45% gap between the European and US stock markets, which has to close,” he adds. “Indeed, my job is to find companies that have less than 10x EPS, with further growth in profits,” he says.
The average tenure of companies in the portfolio is two years, “despite market speculation, I have not had to change my portfolio more than normally,” says Hsia. It is an actively managed fund which concentrates its positions on three ideas: global winners, the assets with European exposure but which benefit from reduced competition, and a third group in sectors which are in question, but which are beginning to turnaround.
Among the first, which from about a year ago, account for between 50% and 60% of the portfolio, are Bayer, Novartis or Teleperfomance. The weight of shares of companies in the second group, TUI, DS Smith or Dixons Carphone, is growing as a result of improved profits, which are based on achieving better contracts due to reduced competition. A couple of examples: in TUI’s case, it’s margin has risen from 4% to 6% by negotiating major global contracts, and benefits are expected to grow in the coming years, resulting in a positive impact on the distribution of dividends; and with regard to Dixons Carphone, it will clearly benefit from the disappearance of its biggest competitor because the private equity which bought it out loaded it with debt.
The third group, the one in sectors in question, is composed of companies which, within the telecom and utilities sectors, for example, are expected to perform better than their competitors, and in the future become part of one of the other two groups. This could be the case withEndesa, which will benefit from the sale of its Latin American operations, with greater exposure to the Spanish recovery and therefore higher dividends predicted.
By sector, the manager is positive in discretionary consumer and technology (software and hardware) and negative in utilities and energy, as the fall in energy prices will decrease the sector’s corporate profits, and especially in banks, due to the efficiency problems they suffer. “There are not many cheap banks according to their results. In the UK, banks which are too-big-to-fail are being penalized. It currently makes no sense to have large banks,” although he admits havingKBC (Belgium) and ING (Netherlands).
Photo: Adriano Makoto Suzuki. Will Brazil's Sovereign Debt Lose Investment Grade Rating?
Standard & Poor’s said it may cut Brazil’s credit rating to junk, citing the country’s political and economic challenges amid an ongoing corruption probe. The ratings company revised the outlook on Brazil’s rating to negative from stable. The country’s rating from S&P is already at BBB-, the lowest investment grade.
The ratings move adds to challenges for President Dilma Rousseff and her economic team led by Finance Minister Joaquim Levy as they duel with Congress to shore up fiscal accounts at the same time the country slips into recession. Expanding corruption investigations of politicians and companies jeopardize the government’s efforts to adopt policies that could help Brazil preserve its investment-grade rating, S&P said.
S&P believes there is a “greater than one-in-three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected,” according to their statement.
The portfolio management team of the Aberdeen Global Brazil Bond commented that Brazilian sovereigns were looking on the cheap side since Standard &Poor’s made its announcement. “We note that Brazil is now trading flat to the likes of Serbia & Croatia, two countries with higher Debt/GDP, a lack of willingness to commit to fiscal consolidation and poor growth prospects, which makes their debt dynamics even worse than Brazil’s”
Edwin Gutierrez, lead portfolio manager of the Aberdeen’s fixed income strategy in Brazil, commented that they do not believe that the downgrade from investment grade will happen this year. They believe that all three ratings agencies will have Brazil´s sovereign debt at the equivalent of BBB- and negative outlook by year end. However, they foresee a fairly highly risk of a downgrade from one or more of the agencies in 2016.
Gutierrez added that by the time the downgrade to junk bond happens, the event will be fully priced in, so the impact will be fairly minimal. “Brazilian Credit Default Swaps have actually tightened in, which reflects Aberdeen´s perception that Brazil sovereign debt is already trading at BB levels”.
Standard & Poor’s now expects the contraction in real GDP to be deeper and longer. Their projections are for a 2% contraction this year followed by no growth in 2016, before returning to modest growth in 2017. Brazil’s growth prospects are believed to be below that of its peers.
For Franklin Templeton Fixed Income’s team, it became clear that some action from Standard & Poor’s would be taken, once the government announced that the target for the fiscal primary surplus was being lowered for the next three years. The fact that the change in the outlook happened sooner than expected, has bought Brazil some time in order to try to avoid the downgrade to junk bond.
Although Brazilian CDS are already pricing Brazilian sovereign debt below investment grade rating, Franklin Templeton believes that Brazil is very far from a systemic crisis, which makes some Brazilian assets very attractive at the moment, such as nominal or real rates local currency denominated government bonds.
Franklin Templeton believes that a downgrade before year end is not likely. “The agency stressed that further deterioration in the political environment could jeopardize the approval of the needed measures to keep the fiscal adjustment on track. The sharp depreciation of the Brazilian real, together with the fear of higher inflation and economic chaos will probably trigger politicians well known sense of survival”.
Brazilian Financial Services companies
Standard & Poor’s Ratings Services revised the global scale outlook on eleven Brazilian financial services companies (Banco Bradesco S.A., Itau Unibanco Holding S.A., Itau Unibanco S.A., Banco Citibank S.A., Banco do Brasil S.A, Banco do Estado do Rio Grande do Sul S.A., Banco Santander Brasil S.A., Banco do Nordeste do Brasil S.A., BM&FBOVESPA S.A-Bolsa de Valores, Mercadorias e Futuros, Banco Nacional de Desenvolvimento Economico e Social, and Caixa Economica Federal) to negative from stable following the same rating action on the Federative Republic of Brazil.
At the same time, the national scale outlooks on fourteen entities was revised to negative from stable (Banco Volkswagen S.A., Banco Bradesco S.A., Bradesco Capitalizacao S.A., Itau Unibanco Holding S.A, Itau Unibanco S.A., Banco BNP Paribas Brasil S.A., Banco Citibank S.A., Banco de Tokyo-Mitsubishi UFJ Brasil S.A., Ativos S.A. Securitizadora de Creditos Financeiros, Banco do Estado do Rio Grande do Sul S.A., Banco Morgan Stanley S.A., Banco Santander Brasil S.A., Banco Toyota do Brasil S.A., and Banco do Nordeste do Brasil S.A.). Standard & Poor’s also affirmed the long-term and short-term ratings for all the entities.
The agency rarely rate financial services companies above the sovereign long-term rating because, during sovereign stress, the sovereign’s regulatory and supervisory powers may restrict a bank’s or financial system’s flexibility, and because banks are affected by many of the same economic factors that cause sovereign stress.
Fitch and Moody’sare maintaining their Brazil’s sovereing debt rating at BBB and Baa2 respectively, two notches above the speculative debt level. Back in April, Fitch also revised Brazil’s sovereign debt outlook, due to the poor performance of the economy, the growing macroeconomic imbalances, the fiscal budget deterioration, and the increase in government debt.
