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Investec’s 4factor Process or How to Invest Leaving Personal Feelings Aside

Proceso 4factor de Investec - Invirtiendo sin sentimientos — Mark Breedon, Portfolio Manager and Co-Head of 4factor Equities at Investec. Investec’s 4factor Process or How to Invest Leaving Personal Feelings Aside

Lately there is a lot of talk on investment by factors, a process which has established itself amongst institutional investors, and which is also gradually descending to the retail public. Some management companies, such as Investec, have been applying this method for years, since 1999, to build their portfolios. Mark Breedon, Portfolio Manager and Co-Head of 4factor Equities at Investec, explains to Funds Society how the 4factor team works and what the key factors are for this investment method, under which Investec manages $34 billion.

What arethe broad outlines ofthe 4factor process?

The 4factor process observes four factors in all securities that pass through its filter: 1) Quality 2) Value 3) Earning revisions and 4) Momentum. The process is applied to the universe of securities that have a market capitalization of more than 1 billion dollars and which have an average daily trading volume of over $ 10 million (3500). The system sorts the securities according to these four factors and tells you which ones rate best (600); from there, the fundamental analysis of each company by analysts at Investec come into play; they will propose ideas to invest in each of the geographical strategies handled by this method: Global Equity, Dynamic Global Equity, Global Strategic Equity, European Equity, Asia-Pacific Equity, and Asia Equity.

What market environments work best for the 4factor process?

If you’re a stock picker, things are easier if the market is cheap, that’s where the best opportunities are found. However, erratic markets such as 2009 and part of 2010 and 2011, when the market moved constantly from risk-on to risk-off, are more complicated. In 2012, the selection of good companies carried out in previous months reaped its rewards, and this strategy worked very well. With volatility and correlations at normal levels, disciplined processes such as this tend to function correctly. On the other hand, it is remarkable that such processes of long-term investment perform well in all market environments, because they focus on the company’s fundamentals without placing so much emphasis on political and macroeconomic factors.

What are your 4factor filters saying geographically?

In terms of quality-returns in relation to the cost of capital, there are more US companies listed with high scores, these also show positive earning revisions, as well as good momentum. However, the factor relating to value is poor. We see good signs in emerging markets both in valuation and in momentum and improved corporate earnings; perhaps Asian companies are better positioned than the average emerging markets. Europe does not fare as well. The momentum was excellent in 2012 and 2013, quality and valuation were not bad, but these never came along with positive earning revisions. Now, in addition, the momentum has worsened and it’s bad. Japan represents an opportunity: value is good, earning revisions are improving but, for now, the quality of companies is very bad. The reforms being carried out by Prime Minister Abe may help in making companies gradually improve shareholder returns. Some are applying very positive restructuring measures.

And, by sectors?

In Technology, the result of the filters is positive, but you cannot generalize. Large companies such as Microsoft, IBM, and Hewlett Packard are big cash generators. The cycle of low value-added semiconductor companies is lengthening as there has been no investment in capacity increases, so they also look attractive. Financial institutions, especially insurance companies, are benefitting from the long cycle of low rates. However, it is early days for companies in the commodity and energy sector, the value factor is terrible because the price of commodities is very low.

What are the differential characteristics of the Global Strategic Equity strategy, which you manage?

Investors tend to underestimate change; in a way, we’re stuck in the past. We usually set a reference point, and pivot around it. But change is powerful, and in this strategy we seek companies which fare well under the 4factor filter, and which are also undergoing a process of change that can come from a process of restructuring, liberalization of a sector, consolidation moves, spin-off of one of its divisions, etc. An example is Hewlett Packard, a company in which we have invested for a year and half because, besides receiving a good score according to our 4factor filters, it was undergoing a restructuring process that has recently led to the announcement of the spin-off of its business into two and an additional 5,000 job cuts. Another example is Cash America, a pawnshop and payday loan management company which operates mainly in the US, Mexico and the UK, and that is in the process of splitting the two businesses surfacing hidden value.

Finally does your 4factor process shed any ideas for Latin America?

In the emerging markets strategy we are invested in securities listed in Brazil, Chile, and Mexico. An example is Itaú, the bank of Brazilian origin. The valuation factor gives satisfactory results for Brazil, but it’s not positive in Mexico’s case. However, earning revisions in the Mexican market are good.

Credit Suisse Boosts its China A-share Research Ahead of the Shanghai-Hong Kong Stock Connect Launch

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Foto: TreyRaatcliff, Flickr, Creative Commons. ¡Mr. Marshall ya no es americano!

Credit Suisse has announced that it has significantly expanded its China A-share Research and Analytical capabilities, providing investors with the most comprehensive and best in class analytical tools for A-shares listed in PRC.

HOLT LensTM, an analytical platform proprietary to Credit Suisse, has added more than 300 A-share companies to its database, bringing the total to more than 800 A-share companies. These stocks represent an aggregate market capitalization of US$3.9 trillion. In addition to the CSI 300, HOLT will now provide 100% coverage of all constituent stocks of the Shanghai Stock Exchange 180 and 380 indices, which include the 568 companies that are eligible for the Shanghai-Hong Kong Stock Connect Scheme (“Scheme”).

In addition, Credit Suisse Equity Research has also more than triple its coverage of domestic China A-shares to now include 130 A-share companies, representing a total market capitalization of about US$1.84 trillion. Credit Suisse plans to further expand its Equity Research to cover 300 China A-share stocks by 2016.

Nicole Yuen, Vice Chairman Greater China and Head of Greater China Equities said: “China is an important market for Credit Suisse in the region and we will continue to invest in building the bench of talent and infrastructure to provide best in class products and services to our clients. By expanding the HOLT database and our Equity Research coverage of China’s A-share companies, Credit Suisse aims to offer the leading research product on the A-share market to international investors. Combining our strengths in systematic analytical capability through the HOLT® framework and fundamental analysis through our Equity Research team, Credit Suisse provides the most comprehensive coverage in China A-share markets to international investors.”

Credit Suisse Equity Research provides comprehensive analysis of 1,350 stocks in the region, including 410 Hong Kong and China companies. The HOLT database includes analysis of over 20,000 stocks across 60 countries globally, with 860 companies in Hong Kong. It is made available to more than 5,000 investment professionals at over 750 investment managers.

Credit Suisse is one of the leading equities houses in Asia Pacific by cash turnover, including Hong Kong. It is rated #3 for Asian Equity Research in 2014 by Institutional Investor.

Ernest Fong, Head of Research, Non-Japan Asia said: “The Shanghai-Hong Kong Stock Connect is a signification step forward in the liberalisation of China’s capital account and Renminbi (RMB) internationalisation. The Scheme opens up new investment opportunities for both inbound and outbound investors. As a leading Equity Research house in Asia, we will continue to expand our equity research capabilities in the A-share market, producing insightful analysis that identifies longer term investment themes and opportunities.”

HOLT LensTM: Credit Suisse’s proprietary analytical platform

HOLT provides proprietary methodology that objectively measures economic performance and valuation for companies, globally. Delivered via the HOLT LensTM, platform, it provides investors with unique insights into a company’s performance, valuation and future expectations.

“One differentiator for Credit Suisse is that we can provide consistent valuation metrics across all sectors and geographies. By using this globally comparable framework for comparing and valuing companies, our clients are equipped to make better investment decisions,” said Jonathan Tischler, Head of HOLT’s business in Asia Pacific.

The scale of China’s capital market

With a total market capitalization of about US$4.2 trillion, the China A-share market is currently ranked #3 globally, accounting for about 6.6% of the world’s market capitalization. China is also the world’s 2nd most actively traded market with average daily turnover of US$59 billion.

A recent Credit Suisse Research Institute (CSRI) report, entitled EM Capital Markets: the road to 2030, forecasts that China will become the world’s 2nd largest equity market before 2030 and will account for almost one-fifth of the value of global equity markets.

On secondary cash equity activities, the report projects that China A-share market’s average daily traded value to reach US$396.3 billion by 2030, while its share of global traded value to double to 26.9% by 2030, compared to 13.9% this year. CSRI also projects that Hong Kong’s secondary equity annual share traded value is to increase by 8.7 times from currently about US$1.32 trillion in 2013 to US$11.49 trillion. The projected trading values would translate into potential secondary equity revenue opportunity of US$249 billion for China and of US$46.5 billion for Hong Kong cummulatively between 2014 and 2030.

Vincent Chan, Head of China Equity Research estimates that by the end of 2020, about US$112 billion of the world equity funds will be invested in China A-share market, compared to US$49 billion today.

For a copy of “Emerging capital markets: the Road to 2030,” please click this link.

Fighting for the Future of Hong Kong

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Luchando por el futuro de Hong Kong — Photo: Ching King. Fighting for the Future of Hong Kong

Pro-democracy demonstrators took to the streets of Hong Kong’s Central business district in late September and October – demanding China’s Communist Party live up to the promise of democracy made when the British transferred the territory back to China in 1997. The uncertainty surrounding Hong Kong’s future weighs heavily on its citizens, as well as the international financial community.

Will protesters’ demands for open elections in 2017 push the power of China President Xi Jinping? Could perceive instability cause international investors to take their business elsewhere, such as Singapore? Just how badly has the reputation of Hong Kong’s financial sector been damaged? Emerging market investment experts from across Natixis Global Asset Management share their view points

Assessing the economic impact of these protests, François Théret, Chief Investment Officer at Absolute Asia Asset Management, makes the following comments:

The short-term damage to the economy is already visible. Hong Kong economic growth has been slowing since 2013 and the recent developments will only exacerbate the downtrend, with retail sales and tourism badly hit. China has stopped group tours to Hong Kong and retail sales recorded double-digit falls during China’s Golden Week holiday from October 1 to 5, according to the Hong Kong Retail Management Association. The group also reported restaurants and retailers located in the Central and Admiralty business districts recorded volume drop of 40% to 50% compared to the same holiday week last year. Some watch and jewelry shops in the Central area even reported close to 80% decline in sales. The impact on financial services and merchandise trade has probably been limited so far.

The key question is whether the current protest will jeopardize the city’s long-term economic potential. We strongly believe that Hong Kong’s status as a major global financial market with strong rule of law and increasing cooperation with other international financial hubs is unshakable. Mainland China is as important to Hong Kong as Hong Kong is to China for implementation of its reforms agenda. Hong Kong has been the main test field for nearly all the new open-up policies introduced by Beijing, including the recent R-QFII (RMB Qualified Foreign Institution Investors) program and the Shanghai–Hong Kong Stock Connect. The first-mover advantage has helped Hong Kong secure the rapidly growing source of financial revenues from the offshore yuan business. Hong Kong maintains a comfortable lead over other locations, such as Singapore, London and Frankfurt.

Michael McDonough, Emerging Markets Analyst at  Loomis, Sayles & Company, adds:

Hong Kong, for here and now, is still the finance capital of Asia ex-Japan. We believe the pro-democracy protests do not undermine this leadership.

The protests do highlight that Hong Kong is ultimately a city that belongs to China. Within that, it raises a broader question of Hong Kong’s ultimate positioning: a city of eight million, within China, a country of 1.4 billion. Beijing is the political capital. Shanghai is the industrial capital. Hong Kong has been the financial capital, the place where international (offshore) investors have sought to invest in China.

With the new Shanghai–Hong Kong Stock Connect, both cities, the country overall and investors (Chinese and international) will benefit. However, over the intermediate term, we believe Hong Kong’s relevance will be less dominant as Hong Kong becomes enveloped in China and international investors gain comfort and access to the onshore market.

Eaton Vance Launches Floating Rate Exchange Fund For Non-US Investors

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Eaton Vance Management International, a subsidiary of Eaton Vance Management, has launched a new floating rate exchange fund for non-US qualified investors.

The Eaton Vance Floating-Rate Income Fund is an Irish-domiciled qualifying investor alternative investment fund and complies with the Alternative Investment Fund Managers Directive.

The fund invests in a portfolio primarily of senior floating rate loans of US and non-US corporate borrowers, Eaton Vance said in a statement.

It will be managed by Scott Page and Craig Russ, co-directors, Eaton Vance Floating Rate Loan team and John Redding, vice president.

The firm said the fund is currently seeking the necessary marketing passport registration to enable it to be marketed across various jurisdictions in the European Union under the requirements of AIFMD, as well as separate approvals to be permitted to market in Switzerland and certain Asian jurisdictions.

“Particular interest today is coming from large institutions grappling with near-zero bond returns and undercompensated risk elsewhere. Seven years into a global economic recovery, we see appetites for unencumbered risk ultimately creating an opportunity to fill the void in risk-managed approaches to the asset class. As investors shift their view of risk, the fund we are launching today will be uniquely positioned to complement or replace existing strategies,” said Niall Quinn, president of EVMI.

S&P Dow Jones Indices And MSCI Announce The Creation Of A Real Estate Sector In GICS Structure

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S&P Dow Jones Indices, announced last week that as a result of their annual review of the Global Industry Classification Standard (GICS®) structure, a new Real Estate Sector is being created, elevating its position from under the Financials Sector and bringing the number of GICS Sectors to 11. Additionally, a new Sub-Industry for Copper is being created. The changes are being considered for implementation after the market close (ET) on August 31, 2016.

“Feedback from the annual GICS structural review confirmed that Real Estate is now viewed as a distinct asset class and is increasingly being incorporated separately into the strategic asset allocation of asset owners,” said Remy Briand, Managing Director and Global Head Equity Research at MSCI. “Investors told us that there are significant differences between public Real Estate and Financial companies and therefore Real Estate deserves a dedicated GICS Sector. Today’s announcement ensures that GICS continues to be the most accurate, complete and standard industry analysis framework for investment research, portfolio management and asset allocation.”

According to David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, “Real estate is an important and growing part of major economies throughout the world. To reflect this and support good financial analysis, GICS is introducing an eleventh sector for Real Estate and redefining financials to exclude Real Estate. This is an example of our ongoing effort to ensure that GICS is reflective of today’s markets.”

The annual review is intended to ensure that the GICS structure continues to appropriately represent the global equity markets and, thereby, enables asset owners, asset managers and investment research specialists to make consistent global comparisons by industry. The GICS revision is the result of a consultation with members of the global investment community.

S&P Dow Jones Indices and MSCI are proposing to implement the changes to the GICS structure after the market close (ET) on Wednesday, August 31, 2016, but are requesting feedback from market participants on this proposed implementation date by February 13, 2015. The final decision on the date of implementation will be announced by March 13, 2015. The list of securities affected by these changes will be announced at a later date closer to the implementation, but with plenty of advance notice.

The changes to the GICS structure in 2016 are summarized below.

Real Estate Sector

Real Estate is being moved out from under the Financials Sector and being promoted to its own Sector under the code 60. The Real Estate Investment Trusts Industry is being renamed to Equity Real Estate Investment Trusts (REITs), and excludes Mortgage REITs. Mortgage REITs remain in the Financials Sector under a newly created Industry and Sub-Industry called Mortgage REITs.

Copper

A Copper Sub-Industry is being created in the Metals & Mining Industry. This change will be implemented along with the creation of the Real Estate Sector in 2016.

The proposals relating to the Telecommunication Services Sector and the Luxury Goods Sub-Industry are not resulting in any changes to the GICS structure at this time.

The new GICS structure, when implemented, will consist of 11 Sectors, 24 Industry Groups, 68 Industries and 157 Sub-Industries.

Aberdeen Asset Management, Focused on Growing its US Offshore Business

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Aberdeen prepara su artillería para crecer en el negocio offshore en América — CC-BY-SA-2.0, FlickrPhoto: Bev Hendry, co-Head of Aberdeen AM Americas. Aberdeen Asset Management, Focused on Growing its US Offshore Business

Bev Hendry, current co-Head of Aberdeen Asset Management in the Americas, came to Fort Lauderdale 19 years ago to plant the seed of the Scottish asset management firm in the Americas. “In 1995, it was decided that America would be the next area of growth for Aberdeen Asset Management, at a time when the company was present only in its home town, Aberdeen, and in London and Singapore,” Hendry said during an interview with Funds Society.

The strategy proved successful as the region of the Americas “has grown so much that we thought it made sense to give it two co-Heads,” Bev Hendry deals with the financial side, as well as the US offshore business, Latin America, and Canada, while Andrew Smith is more focused on the operational side of the business as well as the US domestic leg. Both have come to replace Gary Marshall, who last summer returned to Scotland to participate in the integration of the recently acquired business of Scottish Widows. Both Bev Hendry and Andrew Smith have their offices in Philadelphia, the American city that serves as Aberdeen’s headquarters in the United States.

“Andrew and I have known each other since 2000, when he was working in our offices in Fort Lauderdale,” Hendry said. “The first thing we developed was the offshore business in the US, even before the institutional one in Chile, which was followed by those of Peru and Colombia,” he added. Now, Linda Cartusciello, who is based in Miami, is in charge of all the institutional business in Latin America. Also in Miami is Maria Eugenia Cordova, who deals purely with the US offshore business that has its epicenter in this city. Maria Eugenia reports to Mennode Vreeze, Head of Business Development of the US offshore business, whose team is completed by Damian Zamudio and AndreaAjila; all three are based in New York.

In New York, Aberdeen also has fixed-income and alternative investment teams. As confirmed by Hendry, one of Aberdeen’s main goals in the Americas region, is to boost the offshore business in the United States. “Each month, the offshore team meets in Miami. This coming year we want to participate in more events and conferences for this market segment and provide our customers, particularly broker dealers, the support and the specific products they demand.” With this, Hendry refers to specific share classes for the funds demanded by offshore investors in the US, which often differ to those, which are registered in European platforms.

Aberdeen is commonly recognized as one of the strongest asset management companies for emerging markets global equity, although Hendry emphasizes that they also offer interesting management capabilities in other asset classes such as fixed income, real estate, and alternative investments. “We are a much more diversified asset management company than we were 10 years ago, but we have to convey this message to investors, as US offshore investors have known us for almost 20 years as an asset management company specializing in emerging markets’ equity.”

Emerging market debt would be one of the asset classes to emphasize. “The process is very similar to our equities business. We follow a very fundamental bottom-up process, with careful attention in selecting corporate credit securities.” These strategies, notes Hendry, “offer higher yield while diversifying a fixed income portfolio.” In emerging market debt Aberdeen has, amongst others, a Global Select Emerging Markets Bond strategy and a Frontier Markets Bond strategy, launched a year ago, “even though Aberdeen has been investing for a long time in frontier markets’ fixed income through our Flexible Bond strategy”, Hendry stressed.

In the Latin American market, Aberdeen Asset Management is also widely recognized for its emerging market equities franchise. It is, in fact, the asset management company with the most assets in emerging market equities in Chile and Peru, and the second in Colombia. “These are the regions in which we have focused the most and for which we are best known.”

Now they are also focusing on Brazil, where the firm has a business development team of two people in Sao Paulo, because “the market is beginning to open up through their pension funds business.” Aberdeen opened the office in Sao Paulo in 2009 as an investment center and “we now have two local funds that invest in Brazilian equity and fixed income.” Hendry points out that they are finally seeing a clear appetite by Brazilian pension funds for diversifying internationally. The creation of a feeder fund that invests in one of its flagship funds, or the creation of custom institutional vehicles, are amongst Aberdeen’s plans for Brazil.

Mexico is another market that Aberdeen is following closely. “It is quite possible that in the future Mexico will be an important Latin American business focus for Aberdeen, and that eventually it might consider opening an office there,” said Hendry. Should that be the case, it would add to the five Aberdeen offices already in the region in Philadelphia, New York, Miami, Toronto, and Sao Paulo. Overall, Aberdeen Asset Management has AUMs of US$80bn in the Americas, of which US$7bn are Latin American and US offshore assets. According to information available at the end of July 2014, the Latin American institutional business comprises US$5.4bn, while the remaining US$1.6bn relate to assets of US offshore business. Hendry concludes by noting that “we have a great and very enthusiastic team, who devotes all its efforts and expertise to develop Aberdeen’s business in the Americas.”

State Street Report Points to Increasingly “Hands-On” Approach of Pension Funds Globally

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Pension funds globally say they intend to adopt a more proactive approach to managing their assets, according to a new report by State Street Corporation. “Pensions Funds DIY: A Hands-On Future for Asset Owners,” highlights the key trends that are reshaping how pension funds manage their investments operating models and deliver long-term value to members. The report is based on a research survey of more than 100 pension fund executives conducted in conjunction with the Economist Intelligence Unit (EIU).

Driving this change is the challenge of building a holistic view of risk across a multi-asset portfolio while aggregating risk data from multiple managers, aligning interests and managing costs. “Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance and is leading to a need for more in-house accountability for asset and risk management,” said Martin J. Sullivan, head of Asset Owner sector solutions for North America, State Street. “However, this undertaking requires pension funds to carefully evaluate how to achieve a balance of in-house and external talent, tools and technologies.”

Some key trends that emerged from the research include:

A majority of pension fund respondents (81 percent) indicate they are exploring bringing more asset management responsibilities in-house over the next three years. This is due in part to cost concerns, with 29 percent indicating it is a challenge for them to justify the fees of their asset managers.
As part of this shift, a majority of pension funds (53 percent) are expecting to use more lower-cost strategies to achieve desired investment outcomes, as well as expanding the number of technology platforms and software solutions they employ (43 percent).
More than half (51 percent) of funds place a high priority on strengthening their governance over the next three years.

“While the largest and most sophisticated funds can handle most aspects of multi-asset class portfolios in-house, the majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed,” continued Sullivan. “This shift underscores pension funds’ need for new, more collaborative partnerships with asset managers who can offer them transparency and effectively tailor investment ideas and solutions to their unique needs.”

On behalf of State Street, the EIU conducted a global survey of institutional asset owners during July and August of 2014. The survey garnered 134 responses from pension fund executives, spanning both defined contribution and defined benefit assets. Forty-two percent of respondents were from the Americas, 36 percent from Europe, Middle East and Africa (EMEA) and 22 percent from Asia Pacific. Just over half (52 percent) of respondents came from public sector pension funds, 31 percent from private sector pension systems and 16 percent from superannuation funds.

To learn more about the findings, click here.

MUFG Union Bank Names Mike Feldman Head of Branch and Private Banking

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MUFG Union Bank, N.A., has announced that Mike Feldman has been named Head of Branch and Private Banking. In his expanded role, he will manage Private Banking, through which the bank offers a variety of services for affluent individuals, families, businesses and organizations. Based in Orange County, he continues to report to Pierre P. Habis, who heads MUFG Union Bank’s Consumer and Business Banking groups.

“Mike is a proven leader, and his extensive experience and success leading investment services and licensed banker programs made him the obvious choice to lead Private Banking,” says Habis. “Mike will work with me and other senior leaders to help manage the bank’s affluent strategy and ensure that we offer best-in-class products and services to this valued segment.”

Feldman will continue to oversee the bank’s network of more than 400 retail branches in California, Oregon and Washington, including the licensed banker program and other sales leadership and service initiatives.

Feldman joined Union Bank in 2009 and has more than 20 years of banking experience. He previously served as head of California Branch Banking and as national sales manager for the Retail Banking division. Prior to joining Union Bank, Feldman was a managing director of Retail Banking at Countrywide Bank and president and chief executive officer of Countrywide Investment Services Inc. He also served as a senior vice president and Community Banking president at Wells Fargo, where he managed several diverse market areas and developed the licensed banker program.

Feldman received a bachelor’s degree in business administration from California State University, Fresno. He also earned a Personal Financial Planning certification from the University of California, Irvine. Active in the community, Feldman serves on the board of directors for the American Heart Association in Orange County and is a board member of the California Chamber. He has also served on several boards throughout Southern California, including: the Personal Financial Planning Advisory Committee at the University of California, Irvine; United Way; and Junior Achievement, an organization dedicated to educating students about workforce readiness, entrepreneurship and financial literacy.

Van Eck to Launch First China Bond Focused ETF in the U.S.

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Van Eck Global has launched the Market Vectors ChinaAMC China Bond ETF, a U.S.-listed ETF designed to provide investors with direct access to China’s onshore bond market.

The launch continues Van Eck’s leadership in China and emerging markets funds. The company launched the first ETF providing exposure to A-shares in the U.S. (Market Vectors ChinaAMC A-Share ETF) on October 13, 2010, and this summer it launched a Chinese equity ETF (Market Vectors ChinaAMC SME-ChiNext ETF), primarily focused on innovative, non government-owned companies.

CBON seeks to invest in all major segments of the Chinese fixed income markets, including sovereigns, policy banks, and high rated corporate bonds. “China’s domestic bond market is expanding and evolving at the same time. While the full liberalization of the markets is likely to take a long time, movement towards greater access for borrowers and lenders, and a higher degree of market oriented financings such as bond issuance have already greatly broadened the opportunity set for local investors,” said Fran Rodilosso, Senior Investment Officer for Market Vectors ETFs.

CBON is the newest addition to Van Eck’s family of emerging markets bond ETFs which include the largest local-currency bond ETF in the U.S., Market Vectors Emerging Markets Local Currency Bond ETF, and the largest emerging markets corporate bond ETF in the U.S, Market Vectors Emerging Markets High Yield Bond ETF, by assets under management as of October 31, 2014.

“China is currently the largest emerging markets bond market, yet to this point investors outside of mainland China have been mostly excluded from direct ownership of locally issued bonds,” said Mr. Rodilosso. He added “China’s onshore bond market has had historically low correlation to core asset classes and has delivered attractive yields in comparison to developed bond markets in recent years.”

CBON seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the ChinaBond China High Quality Bond Index. The Index is comprised of fixed-rate, Renminbi (RMB)-denominated bonds issued in the People’s Republic of China by Chinese credit, governmental and quasi-governmental (e.g., policy banks) issuers. As of November 10, 2014, the yield to maturity for the Index was 4.1%.

ChinaAMC will serve as sub-adviser to CBON using a Renminbi-Qualified Foreign Institutional Investor (RQFII) quota that it has received in order to gain access to this market on behalf of foreign investors. This marks the third ETF for which Market Vectors and ChinaAMC have partnered, joining the China A-share focused Market VectorsChinaAMC A-Share ETF and the Market Vectors ChinaAMC SME-ChiNext ETF.

“China continues to be a focus for Van Eck Global, particularly through our Market Vectors ETF family,” said Ed Lopez, Marketing Director at Market Vectors. “Its economy has had significant impact on global markets in recent years and continues to evolve, yet may be under allocated in investors’ portfolios. This CBON launch is another example of how Market Vectors is delivering access to relevant investment ideas we believe will help shape tomorrow’s markets.”

CBON has a gross expense ratio of 0.57 percent and a net expense ratio of 0.50 percent, which is capped contractually until September 1, 2016. The cap excludes certain expenses, such as interest.

Reconsidering Asia’s Currencies

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Reconsiderando las divisas asiáticas — Foto: epSos. Reconsidering Asia's Currencies

The recent spasm of U.S. dollar (USD) strength is more likely a symptom, less likely a cause, of several political and economic dislocations in today’s markets. But what does the dollar rally mean to investors of Asian equities and fixed income? Gerald Hwang, Portfolio Manager at Matthews Asia, discusses this issue in a recent article:

The Asian Financial Crisis of 1997–98 looms like a ghost over any consideration of Asian currency risk. Given the robust performance of Asian currencies since 1999, however, it may be time to reconsider Asian currencies in a modern context that takes into account the diverse monetary systems, business cycles and development stages of Asia’s economies.

Over the third quarter, the worst-performing Asian currency was the Korean won, which depreciated 4.1% against the U.S. dollar. Interestingly, this was better than the best-performing G-10 currency—the Norwegian krone, which lost 4.6% vs. the USD. Performance in other Asian currencies ranged from a 1% gain in the Chinese renminbi to a 2.9% loss in the Philippine peso.

With the trade-weighted basket of Asian currencies losing 1% vs. the dollar in the third quarter, it’s fair to say that Asian currencies were relatively stable over the quarter compared to other currencies. Latin American currencies lost 6% over the same period. Even traditional safe haven currencies—the Euro, Swiss franc and Japan’s yen—lost ground against the USD, losing in the neighborhood of 7% to 8% each.

This is not the first time that Asian currencies have shown resilience in the face of stress emanating from more developed markets. They performed better than expected during the Great Financial Crisis of 2008, losing 9% vs. the USD from the end of July 2008 until the end of the following March. This compared favorably to the 27% loss in Latin American currencies and 14% loss in all trade-weighted currencies over that period.

Equity investors usually pay little heed to currency risk due to its small contribution, over the long run, to total returns. Foreign exchange (FX) volatility is also not a meaningful contributor to overall returns volatility.

For investors in Asian bonds, currencies matter more. Over the long run, currency returns have contributed about one-fifth toward total return and about two-thirds toward volatility. When you buy a bond denominated in a foreign currency, you receive the following basket of returns: local currency coupon income, local currency price return (primarily due to yield changes that can arise from either interest rate or credit spread changes), and FX return on the coupon income you have received as well as on the bond principal. Currency movements can either add to or detract from bond coupon and price returns.

The tension between FX return and coupon plus price return is starkest when markets become risk averse. For investors whose home currency is a “safety currency” (the USD preeminent among them), negative returns from local currency depreciation can negate positive returns from coupon cash flows.

Enlarge

Since the Asian Financial Crisis, have Asian currencies been net positive or negative contributors to Asian bond returns? On a trade-weighted basis, they have appreciated about 1% each year on average. A valid objection is that 1999 is an unfair starting point because that marked the end of the Asian Financial Crisis. Use any point after that, and Asian currencies still look relatively stable compared to currencies of other developing markets. Compared to Latin American currencies, to which they are often compared, Asian currencies have performed decently, with less than half the volatility and less severe drawdowns.

Opinion column by Gerald Hwang, CFA, Portfolio Manager, Matthews Asia

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