Photo: Scott Beale. Recovery Moves Up a Gear as Consumers Step on the Gas
Nadia Grant, Fund Manager at Threadneedle Investments, addresses some of the questions currently on the minds of US equity investors. Overall, she believes that US stocks are very attractively valued in relation to other markets and will gain support from a broad-based economic recovery.
Last year we saw relatively strong economic growth in the US, but a slowdown elsewhere, while oil prices have now halved and the US dollar has surged. Given those developments, how sustainable is the US recovery and will the shape of that growth be affected?
We think the US economic recovery is broadly based and are forecasting GDP growth in 2015 of around 3%, which should provide a very supportive backdrop for equities. We expect the consumer to account for around two-thirds of this growth, at about two percentage points, up from 1.6 percentage points in 2014. The collapse in the oil price is benefitting US consumers enormously. They are now paying an average US$2.14 a gallon, and just US$1.80 in some states, rather than US$3.50 before the oil price drop. These extra dollars provide a considerable boost to lower-income workers, who have a significant propensity to spend. Thus, the lower gasoline price is highly stimulative for the economy.
We expect investment to contribute about one percentage point to overall growth, a level which is also higher than last year.
Interest rates have not risen in the US for nearly nine years but the Federal Reserve has been guiding investors to expect a rise at some point this year. Do you think that this is a reason for US equity investors to be fearful?
No, we do not think investors should be concerned. The Federal Reserve’s guidance reflects the fact that interest rates are abnormally low by historical standards, and more importantly, that the US is on the path to a self- sustainable recovery and thus a normalisation of interest rates. A rise in interest rates would provide concrete evidence of the Federal Reserve’s confidence in the recovery and that view should also support equities. Historically, the market tends to anticipate the first rate hike six months in advance of it taking place and tends to be a lot more volatile during this period. However, historical evidence indicates that rising interest rates have no material impact on the market six months to a year after the first rate hike.
US equity market valuations were at the top of investors’ minds in 2014. Our view was that valuations were quite reasonable and that earnings growth would drive market gains and this proved largely correct. What is your view of valuations going into 2015?
The market has not re-rated but has simply grown in line with earnings and we expect this trend to continue in 2015. The consensus is that equities will be trading at about 15 times PE by the end of the year, which is in line with the market’s long-term historic average. Thus, we think that US equities are neither expensive nor cheap. Given that the US is the sole engine of global growth and given how sound the recovery is, we believe US stocks are very attractively valued in relation to other markets.
What about the inflation?
Low inflation means the rate at which equity cashflow is discounted is also low and historically this has been very supportive for the market. Economic fundamentals and earnings growth should underpin expectations for 2015. As mentioned, we are forecasting 3% GDP growth, which translates into 5-6% revenue growth, some profit margin expansion and buybacks of around 1%. Thus, we anticipate high single-digit earnings growth in 2015, which is high by historic standards.
How are you positioning the American Fund for 2015 and could you provide examples of stocks in which you have the highest conviction?
We focus on companies that are uniquely placed in terms of having secular growth drivers and pricing power. Consequently, in the American Fund we are overweight in the technology and healthcare sectors, which are home to companies that have disruptive new technologies as well as pricing power. Meanwhile, we are underweight in energy and telecoms. We believe energy prices have yet to find a floor, yet the stock price of companies within the sector does not reflect the fall that we have seen in the oil price, while the telecoms sector is subject to intense competition and price erosion, in other words the complete opposite of what we seek.
Photo: Daniel Chapman. Loomis Sayles Adds Investment Strategist to Emerging Markets Team
Loomis, Sayles & Company announced the addition of Esty Dwek as emerging markets global strategist. She is based in the company’s London office and reports to both Peter Marber, head of emerging markets and Christine Kenny, co-managing director of the Loomis Sayles London office.
In this newly created role, Esty is responsible for analyzing emerging market (EM) trends and formulating broad EM country and asset allocation recommendations. As a member of the EM team, Esty will liaise with sell-side analysts, consultants, prospects and existing clients.
“I’m very pleased Esty has joined our team – we worked together previously and I think she is a thoughtful, skilled investor and communicator,” said Peter Marber.
Loomis Sayles has been managing emerging markets assets for over 20 years. Total firm-wide emerging markets assets totaled $16.2 billion, with approximately $8.3 billion in hard currency and $7.9 billion in local currency, as of December 31, 2014.
In 2014, Loomis Sayles announced three new EM portfolio management additions; Joshua Demasi and Michael McDonough were named EM equity portfolio managers in July; Elisabeth Colleran joined the team as EM fixed income portfolio manager in April.
Before joining Loomis Sayles, Esty was an investment strategist in the private bank at HSBC for nearly six years in London. Previously, Esty attended HSBC Private Bank’s graduate program in London, Geneva, New York and Singapore. She earned a BA from Princeton University and holds the CISI accreditation.
Photo: Giuseppe Milo. Irish Domiciled Mutual Funds Continue to be Repositioned in Chilean AFPs’ Portfolios
2014 ended with about US$52.5 billion invested in international funds (excluding ETFs) by the Chilean AFPs. The year was marked by the return of funds registered in Ireland to pension funds’ investment portfolios, since Chile’s Risk Classification Committee Risk (CCR), decided in September 2011 to remove all mutual funds domiciled in Ireland from its list of approved funds, due to Ireland’s perceived risk at that time in the context of the euro crisis.
This situation was reverted during 2014, normalizing steadily as the CCR gradually re-approved funds domiciled in Ireland. In total, at the end of December there were US$2.2 billion invested by Chilean pension funds in funds registered in Ireland. We continue to see new additions to this list monthly. In December, one of the three funds which premiered among Chilean AFPs was domiciled in Ireland; this was the Muzinich Short Duration High Yield Fund, which becomes part of the list of international funds in the hands of Chilean AFPs with US$40 million in assets. Nicolás Lasarte, head for Latin America at Capital Strategies, a company which is the exclusive distributor of Muzinich funds in Latin America, expressed his “great satisfaction” to Funds Society with this change which provides the opportunity to increase the availability of niche products for Chilean pension funds. “Although since 2011 we have been increasing Muzinich assets very steadily in the Chilean market, we could not be completely satisfied without access to pension funds and other institutions in the scope of influence of the CCR” added Lasarte. This is the first Muzinich fund which has obtained assets from Chilean pension fund management companies.
During the month of December, there have been only two other international funds, excluding ETFs, that have become part of this select group of funds. These are the Luxembourg domiciled Aberdeen Global Japanese Equity Fund, which has obtained assets of US$30 million from pension funds, and the Henderson UK Equity Income and Growth Fund, a fund domiciled in the UK which has obtained inflows of US$3.5 million.
For the time being, Luxembourg continues to be the quintessential home of international funds in which Chilean AFPs invest, with US$40.6 billion in assets at the end of December. Following is a list of the 10 international funds with most assets invested by the AFPs:
Foto: BCE Official. ¿Ha cambiado el programa QE el comportamiento de los inversores?
A recent post noted that the oil price has fallen by more than 30% over six months on five previous occasions since World War Two. The global economy was stronger a year after these drops: the six-month increase in industrial output was higher than its starting level in all five cases, said Simon Ward, economist in financial markets at Henderson Global Investors.
Three of the five oil price falls (1991, 2001 and 2008) were associated with US/global recessions, he explains. A fourth (1998) reflected the Asian economic crisis. The 1986 decline bears the closest resemblance to today. It was partly the result of a mid-cycle global economic slowdown but the more important drivers were a large rise in non-OPEC supply and a structural reduction in demand due to energy conservation in response to a sustained high price in the early 1980s.
The first chart, writes Ward in his last article, overlays the path of spot Brent in the mid 1980s on its recent movement, with the 1980s price rescaled by multiplying it by four. Based on the earlier episode, Brent could bottom at below $40 during the first quarter before recovering to $70-80 by end-2015.
The recovery could be stronger if non-OPEC supply is more price elastic than in the 1980s, as some analysts contend.
The oil price bottomed in July 1986. G7 industrial output growth embarked on a strong recovery soon after, reaching a boom level by late 1987, highlights Ward.
G7 consumer price inflation fell sharply in 1986 but retraced most of this decline in 1987.
Falling US inflation contributed to the Federal Reserve cutting its target Fed funds rate by 2.125 percentage points between December 1985 and August 1986. The Fed, however, reversed course in December 1986 and was forced to tighten aggressively in 1987 as the economy boomed. Longer-term Treasury yields bottomed in April 1986 ahead of the oil price, moving sideways over the remainder of the year before rising sharply from March 1987.
The relevant comparison today may be with the Eurozone. “ECB President Draghi is using a temporary fall in headline consumer prices to push through further easing despite monetary trends and leading indicators suggesting improving economic prospects, with Germany already at full employment. In 1986, the Fed started to raise rates only four months after its final cut. The QE could find ECB opponents that may have strong grounds for calling for a suspension later in 2015″, concludes Henderson’s economist.
Cassandra Alami, Real Estate associate / Courtesy photo. Cassandra Alami Joins Avila Rodriguez Hernandez Mena & Ferri LLP as Associate
Avila Rodriguez Hernandez Mena & Ferri LLP (ARHMF), a South Florida law firm representing domestic and international businesses and investors across various practice areas, announced the addition of a new associate, Cassandra Alami, to the firm’s Real Estate Practice.
Cassandra Alami counsels both international and domestic clients on issues relating to real estate, including acquisitions, dispositions, leasing, finance, and related corporate issues. Ms. Alami graduated from the University of Florida with a Bachelor of Science and earned her J.D. from the University of Virginia in 2012. She is admitted to practice law in Ohio and Florida.
“Given the reinvigorated real estate market, we are pleased that Cassandra decided to join our firm’s Real Estate Practice,” said Alcides I. Avila, Managing Partner at ARHMF.
Prior to joining ARHMF, Ms. Alami practiced real estate at a national law firm, where she represented financial institutions, loan servicers, home builders and healthcare systems in various aspects of real estate.
Large private equity firms are increasingly flexing their scale, balance sheets, restructuring experience and connections with creditors and limited partners to tighten control and enhance return potential on investments, says Fitch Ratings. Recent examples include Apollo’s and TPG’s decision on Jan. 15 to voluntarily place the largest operating subsidiary of Caesars Entertainment Corp. into a Chapter 11 bankruptcy and KKR’s follow-on private placement investment in First Data Corporation last June.
While such activities can bring creditors’ competing interests to the forefront, they also underscore the fiduciary responsibility of alternative investment managers to maximize returns for their limited partners through all available means. To the extent that managers are able to translate these activities into enhanced returns (or minimized losses) it can serve to support future fundraising and the overall franchise, both of which are important rating considerations when assessing investment managers.
In the Caesars case, Apollo has deployed aggressive tactics in an effort to retain control despite minimal recovery prospects for the most junior creditors. Maneuvers have included the sale of assets to affiliates at attractive multiples, repaying junior intercompany debt at par and the release of parent company guarantees of the debt at the weakest subsidiary. Apollo’s reputation and long track record of achieving outsized returns on distressed-for-control situations has helped drive the managers’ efforts and built some consensus among creditors. However, others among Caesars’ creditors have aggressively pushed back, so further legal and court action is possible.
Fitch believes that the largest private equity firms have also become more willing to use their balance sheets as a strategic advantage. This was demonstrated with First Data last year, when KKR itself committed part of the funding for a follow-on $3.5 billion investment in the portfolio company it originally bought in a 2007 LBO. KKR made its investment through a combination of $500 million from its 2006 Fund, $700 million from its own balance sheet, and $2 billion in co-investments from third-party investors. Such maneuvers, while demonstrating flexibility, create the type of balance sheet concentration that can constrain a private equity firm’s rating, or, in a scenario where the investment becomes degraded, potentially pressure the rating.
The Caesars and First Data examples show that as large private equity firms have grown their balance sheets and connections with large limited partners that are increasingly interested in co-investment opportunities, there is greater access to investment capital to weather downturns and improve capital structure positioning for IPOs.
In both the Caesars and First Data examples, private equity’s long investment cycle is providing the time to work through challenges, wait out market declines and achieve the debt reductions necessary to improve the prospect of achieving targeted returns on invested capital.
Photo: Moyan Brenn. Azimut Pruchases 70% of Largest Independent Asset Manager in Turkey
Italy’s independent asset manager Azimut and Turkish Bosphorus Capital Portfoy Yonetimi have signed an investment and shareholders agreement to start a partnership in Turkey.
According to the deal, which is subject to regulatory approval, Azimut, through AZ International Holdings S.A., will purchase 70% of Bosphorus equity capital for €7.4m.
Bosphorus was established as an independent asset manager in 2011 by four partners with an average 20 years investment experience.
Currently Bosphorus is the largest independent asset management company in Turkey thanks to its consistent and positive track record in excess of the local risk-free rate, its direct funds raising capability and the implementation of a successful distribution model via the banking channel.
Furthermore, 20% of Bosphorus’ AUM are linked to institutional clients, mainly insurance companies. On the product side, the range of 10 managed funds span fixed income, equity and balanced strategies.
As of December 2014, Bosphorus had AUM of some TL1bn (equivalent to €390m), of which almost 70% in Turkish domiciled mutual funds and 30% in discretionary portfolios.
The Turkish asset management industry has €22bn in AUM as of December 2014 (of which more than 90% is invested in short term fixed income strategies) with around 40 asset management companies (of which 29 are independent) registered with the Turkish Capital Market Board.
The commercial and industrial integration of Azimut Portföy, AZ Notus Portföy and Azimut Bosphorus Capital Portföy creates Turkish largest independent player with a diversified product range and a distribution network with both proprietary financial advisors and third party distributors.
Capital Strategies Partners, a third party mutual fund distribution firm, holds the distribution of AZ Fund Management products in Latin America
CC-BY-SA-2.0, FlickrFoto: Fut und Beidl. ¿Aciertan las estrategias 'top-down'?
A new global survey commissioned by State Street amongst 235 hedge fund professionals reveals strong optimism within the industry. The findings show that respondents (55 percent) expect pension funds to increase their exposure to hedge fund strategies over the next five years. This figure increased to 63 percent when the question was asked more broadly about institutional investors increasing their exposure to hedge funds in the next five years.
Of the 55 percent of hedge fund professionals who expect pension funds to increase their allocation, 53 percent believe the main driver of this is the performance challenges facing investors’ portfolios. 35 percent believe it will be a growing focus on portfolio diversification and 13 percent who think it will be improved terms offered by hedge funds.
However, to really capitalise on the growing appetite for hedge fund strategies, nine out of ten industry professionals interviewed believe hedge funds will be required to more clearly demonstrate their value to prospective investors.
Maria Cantillon, global head alternative investment solutions sales at State Street said, “Despite the challenges facing the hedge fund industry, our findings show that many working in the sector are optimistic about its future prospects. This is being fuelled by challenges facing asset owners as they search for better returns and greater diversification. The hedge fund industry is maturing and becoming more transparent and competitive.”
In terms of how hedge fund professionals see their own firms changing over the next five years, 60 percent expect to broaden the range of investment strategies they manage; 37 percent anticipate that they will expand abroad and one in ten expects to acquire another company.
According to the survey, regulation will continue to have a significant impact on hedge fund managers. However, the full impact of Basel III is yet to be determined, with 29 percent of respondents believing that it will significantly increase their firm’s cost of financing, compared to 42 percent saying it wouldn’t and the remainder (29 percent) saying they don’t know. The findings also suggest growing competition from alternative mutual funds. Half of those interviewed believe that over the next five years, they will seize market share from traditional hedge fund strategies.
CC-BY-SA-2.0, FlickrPhoto: HSLO. MSCI Reports Record Surge in Demand from ETF Providers for Factor Indexes in 2014
MSCI Inc. a leading index provider to the ETF industry worldwide, is reporting a surge in demand from ETF providersfor its factor indexes, with almost half of new MSCI index-based ETFs launched in 2014 linked to MSCI Factor Indexes.
Overall, 95 ETFs based on MSCI indexes were launched in 2014, almost twice as many as the next index provider, with 42 (45 percent) of these linked to Factor Indexes, compared to six in 2013. 12 new ETFs tracking MSCI Multi-Factor Indexes, which combine more than one factor, were launched in 2014.
“2014 was a year of strong growth in the number of ETFs based on our indexes, in particular our factor indexes,” said Baer Pettit, Managing Director and Global Head of MSCI’s Index Business. “These numbers are evidence that our innovative index offering, combined with the strength of our brand, continue to make MSCI indexes the first choice of ETF providers around the world.”
Certain factors have historically earned a long-term risk premium and represent exposure to systematic sources of risk and return. Factor investing is the investment process that aims to harvest these risk premia through exposure to factors. MSCI currently calculates indexes on six key equity risk premia factors: Value, Low Size, Low Volatility, High Yield, Quality and Momentum.
With over 675 ETFs2 tracking MSCI indexes globally, more ETFs track MSCI’s indexes than those of any other index provider.
Hector Chacon, CEO of Texas Border Region, BBVA Compass. BBVA Compass Names Hector Chacon CEO of Texas Border Region
BBVA Compass announced today it has named Héctor Chacon the bank’s Texas border region CEO in a move aimed at fostering deeper ties to clients and communities in the region that stretches more than 800 miles from El Paso to Brownsville.
Chacon will lead the bank’s efforts to further tap into opportunities in the region, which has been important to BBVA since the global financial services firm entered the U.S. market with its acquisition of Laredo-based Laredo National Bancshares in 2004. BBVA Compass, BBVA’s U.S. franchise, now has a leading market share position in the upper and lower Rio Grande Valley, El Paso and Laredo.
Chacon’s new role is part of the bank’s broader reorganization, which was announced in November and combines BBVA Compass’ lines of business — Retail, Wealth Management and Commercial — into one unit. The new Consumer and Commercial Bank is designed to provide more comprehensive customer service while increasing productivity and revenues, and its emphasis on local market leadership builds greater accountability in meeting community needs.
“Héctor knows the region and he knows Mexico and that makes him an excellent choice to lead our efforts in the border cities, which have different needs and demands than customers in larger metro cities,” said BBVA Compass Chief Operating Officer Rafael Bustillo, who leads the Consumer and Commercial Bank. “He has the expertise to help our clients in this growing region.”
Chacon joined Bancomer, BBVA’s subsidiary in Mexico, in 1986, and its U.S. operations in 1997. Most recently, he led BBVA Compass’ International Wealth Management unit.
