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Erste Asset Management Expands its Sustainable Investment Activities

Erste Asset Management, with an invested fund volume of approximately 2.8 billion euros (as of 30/06/2014), making it Austria’s leading investment company in the field of SRI (Socially Responsible Investments or Sustainable Investments), is enlarging its in-house SRI research team.

Dominik Benedict (32) joined in July as a Senior Analyst to further develop the rating process and company analysis. Dominik Benedict can draw on many years’ experience in the field of Socially Responsible Investments (SRI) and, as a former employee of MSCI ESG Research in Paris, will not only contribute an international perspective but also bring the mind-set of a recognized rating agency to the team.

In addition, Richard Boulanger (25) and Stefan Rössler (26) will also be reinforcing the SRI research team. Richard Boulanger has already gained experience in the SRI team and focuses, in addition to conventional company analysis, on the areas of engagement and active ownership. The active safeguarding of owners’ interests with regard to sustainable corporate policy is an integral part of Erste Asset Management’s sustainable activities.

Stefan Rössler completes the SRI team as a quantitative analyst and will primarily be involved in the development of Erste Asset Management’s rating system as well as the expansion of the in-house rating database. Producing EAM’s own ratings and intelligent use of information constitute key factors in the investment process.

The overall responsibility for the sustainability team, as in the past, lies with Gerold Permoser, Chief Investment Officer of Erste Asset Management.

Christian Schön, member of the Board of Erste Asset Management explains: “Sustainability is a growing market. So we are very pleased that since we started our SRI activities in 2001, we have been able to build this field into one of the company’s core competencies. Over the years we have established ourselves as the clear market leader in Austria.”

With these three new recruits, the analytical capacity in the field of sustainability has been noticeably reinforced. And the expansion of the team is not over yet: “We will continue to strengthen our core competency of sustainable investment and are convinced that in so doing, we are emphasizing our internationally recognized market position in this field,” said Schön.

Continued Appetite for Equities and Rising Caution on US Credit among HF Managers

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According to the results of a survey conducted at the end of June of hedge fund managers on the Lyxor platform, there is a positive sentiment concerning risk assets. Equities are largely expected to continue to rally, both in the US and Europe, on the back of accommodative monetary conditions recently reiterated by Janet Yellen. However, on the negative side, Lyxor managers express caution regarding US credit and China.

The bullish stance on equities, both in Europe and in the US, was largely shared by the respondents to the survey. The level of agreement that US equities are not overvalued and European equities remain undervalued is very high. The respondents were more divided with regards to equity investment styles. 50% do not expect value continue to outperform growth  stocks. Value stocks have underperformed growth stocks for several years, especially  in the US. However, the underperformance of value stocks unexpectedly and abruptly reversed in March and April 2014.

According to a recent press report, this is the least- believed bull market in years. Most asset allocators remain bullish on equities because of the lack of opportunities in other asset classes. Equity investors believe that valuations are not overstretched globally. The bullish case generally assumes that earnings will take the lead after the expansion of multiples over recent years. “L/S equity funds continue to attract significant investor interest. However, style gyrations caused some damage earlier in Q2. As a result, investors must be aware of the biases implied by the investment style of a fund. We recommend a balance between growth and value oriented funds in a L/S equity portfolio”, says Lyxor. L/S Credit funds focused on Europe and L/S equity funds focused on Japan should do well if these expectations effectively materialise.

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The majority of the respondents to the survey currently expect the central banks to remain extremely accommodative. According to Lyxor managers, the ECB and the BoJ should implement (or expand) quantitative easing programmes in the second half of 2014. At the same time, only 47% of respondents think that the Fed will lift rates in the first half of 2015. As a result, 10-year Treasuries are not expected to reach 3% over the next six months. Finally, the increasingly dovish stance of the ECB suggests that the EUR will fall versus the USD to below 1.35 according to 53% of the managers surveyed.

Other important finding of the survey is that hedge fund managers are increasingly cautious regarding US credit. This is being seen in the context of rising fears concerning financial stability following the extended period of near-zero interest rate policies implemented by the major central banks. According to the survey, 65% of the respondents do not expect the credit rally to continue.

“US fixed income and credit appear increasingly expensive as an asset class. Although long dated Treasury yields are not expected to move significantly higher, a long-only strategy on credit does not fit with current market conditions”, says the report. For this reason, unconstrained bond funds are much more adapted to current market conditions. At the same time, Global Macro funds should do well as a result of established short EURUSD positions.

Emerging markets

Emerging Markets remain a key investment theme given attractive equity valuations and carry positions in fixed income. However, downside risks for EM have increased as the Fed prepares its exit strategy. The EM asset price gyrations in May 2013 (when Bernanke first signalled tapering) were a good reminder of the emerging markets’ sensitivity to US monetary policy.

The vast majority of the respondents of the survey (74%) expect real GDP growth in China to fall below 7% over the next two years. In parallel, over the next six months, the WTI is not expected to fall below USD100/ bbl (USD105/ bbl as of 30 June). However, it is important to note that the survey was conducted at a time when geopolitical tensions were rising and the risk premium attached to oil prices had probably increased significantly.

“Deceleration in growth in China would have a significant impact on emerging markets, particularly Latin America (huge producer of base metals consumed by China) and Asia (supply manufacturing chains). Latin America is more exposed here given that the deceleration would tend to come from an adjustment of the real estate market, a commodity intensive market”, says the report.

In terms of strategies, L/S equity funds with a Chinese focus playing domestic consumption themes should be resilient due to the rebalancing of the economy. At the same time, the Chinese equity market is attractive from a valuation standpoint. Additionally, the deceleration in growth should already be priced in to a certain extent, as this forecast is quite consensual. Finally, CTAs provide a very good hedge against geopolitical factors due to their established long energy positions.

GBI Secures Long Term Funding With Investment From New York Private Bank & Trust

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Foto: Covilha, Flickr, Creative Commons. El oro y la volatilidad

GBI (Gold Bullion International), an electronic platform for the purchase, sale and storage of precious metals, is pleased to announce that New York Private Bank & Trust has made an investment in the company. The NYPB&T investment will enable GBI to continue its growth – including the build-out of its cutting-edge, Internet-based software offerings for use by sovereign mints, wealth managers, investment firms, high net worth investors, as well as for digital currencies.

New York Private Bank & Trust is the parent company of Emigrant Bank, HPM Partners and three Internet-based banks, and offers private banking services through its NYPB&T division. NYPB&T and its affiliate companies will join the GBI platform in order to offer its wealth management and banking clients access to physical precious metals through GBI’s platform.

“The GBI family is excited by its partnership with NYPB&T,” said Steven Feldman, GBI’s co-founder and CEO. “The visionary thinking that Howard Milstein and New York Private Bank & Trust are known for will be a very valuable asset to GBI as it further expands its existing platforms and enables its sophisticated precious metals business to be utilized by far more market participants.”

“We believe our relationship with GBI will enable our clients to have a robust opportunity to invest in gold and other precious metals that have been a store of value for thousands of years,” said Howard Milstein, New York Private Bank & Trust Chairman, President and CEO. “Gold is the ultimate store of value. As inflation, geopolitical and sovereign debt risks move to the forefront of investor minds, gold will become an effective hedging component in the portfolios of small and large investors alike.”

Mr. Milstein added: “GBI provides the most cost effective and advanced trading platform for investors to purchase and store precious metals, given its ability to offer consumers transparent and razor-sharp pricing through unprecedented access to the largest network of dealers.”

DeAWM Hires Carolyn Patton as Head of Consultant Relations for the Americas

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Deutsche Asset & Wealth Management (DeAWM) has announced that Carolyn Patton will join as a Managing Director and Head of Consultant Relations, Americas.

Based in New York, Carolyn will report to Mark Bolton, Global Head of Consultant Relations. Regionally, she will report to J.J. Wilczewski, the newly appointed Co-Head of the Global Client Group, Americas, who is responsible for serving institutional investors.

In this newly-created position, Patton will be responsible for cultivating relationships with investment consultants based in the Americas. She will play a key role in helping the region’s leading consultancies access the firm’s global investment capabilities on behalf of their clients.

“I am delighted to welcome Carolyn to the firm, as we are committed to broadening our reach and strengthening our position in the institutional marketplace,” said Mark Bolton. “Carolyn’s connections and depth of experience will be a significant factor in helping consultants and their clients appreciate the full scope of our investment capabilities.”

Patton is the latest high-profile strategic senior hire by DeAWM as it pushes to enhance outreach to institutional investors, expand its institutional product offerings, and continue to build its overall market share in the Americas. In July, the firm announced that J.J. Wilczewski was hired to lead the institutional investor effort, overseeing client coverage and distribution in the Americas region. Over the last six months, DeAWM has added more than a dozen leading asset and wealth management executives to its Americas team while investing in new technology and launching innovative fund offerings.

“Investment consultants are a critical element of our institutional growth initiative in the Americas,” said Jerry Miller, Head of DeAWM in the Americas. “With a full suite of solutions across multiple asset categories and investment disciplines, we believe we have a compelling and differentiated offering for institutional clients in the region.”

Patton brings over twenty years of experience to the DeAWM. Most recently, she was an Executive Managing Director and Principal at Turner Investments, an employee-owned investment manager based in Pennsylvania. From 2005 to 2011 she worked for Janus Capital Group, where she was Global Head of Consultant Relations. Before that, she worked at Morgan Stanley Investment Management both in the Americas and Europe.

Stronger Global Economic Growth Expected Geopolitical Turmoil

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Despite geopolitical turmoil and global economic uncertainties, both the global and U.S. economy appear to be at an inflection point in mid-2014 to a somewhat stronger growth rate despite risks, according to BNY Mellon Chief Economist Richard Hoey in his most recent Economic Update.

“After an initial global growth surge early in the expansion reflecting an easing financial crisis and aggressive Chinese stimulus, global growth has been running at a sustained but sluggish pace for several years,” said Hoey. “This has extended through the first half of 2014 since two major countries (the U.S. and Japan) were roughly flat in the first half of 2014 while the initial phase of the fragile European recovery from its double-dip recession was quite tentative.”

“There has been a clear improvement in the U.S. labor market in recent months,” Hoey continued. “We expect mid-2015 to represent the transition from five years of U.S. economic growth slightly above 2% to three years of three percent growth in a ‘three-for-three’ pattern. The expected acceleration does not reflect major new sources of strength but rather the fading of several drags, including the fiscal tightening and private sector deleveraging. Thus we continue to expect an ‘eight-year economic expansion’ (2009 to 2017) in the U.S.”

“Geopolitical turmoil has been occurring in a number of locations and appears to have worsened recently. We are hopeful that a major disruption in the flow of oil from Iraq can be avoided, given the location of the Iraqi oil fields. We do expect that there will be continued worry about the flow of natural gas from Russia to Europe this winter. Those worries could hold back confidence in Europe over the next several months even if a major disruption of natural gas supplies to major European countries this winter can be avoided, which is our expectation,” Hoey concluded.

Other report highlights include:

China Sustained Expansion Expected – Contrary to a talked about “Chinese financial meltdown scenario,” Hoey expects a sustained expansion and a gradual downshift in Chinese trend growth over the coming years.
Japanese Expansion Resuming – Japanese real GDP growth should be reported to be roughly flat in the first half of 2014 in a very volatile pattern, according to Hoey.
European Recovery Sluggish but Sustained – While the Ukraine conflict and associated sanctions should weaken Russian demand for imports from Europe and raise uncertainties about the outlook for the European economy, the most likely case for Europe is sustained economic recovery at a sluggish pace over the next several years according to Hoey.

Not All Argentinean Government Bonds Affected by Default

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Not all holders of Argentinean government bonds are affected by the partial default of the country. “Argentina is not facing national bankruptcy, but is only subject to a moratorium, which affects only a part of the Argentinean government bonds”, as Felix Dornaus, Senior Fund Manager for Global EM Hard Currency with Erste Asset Management explains. Only those bonds are affected that have been issued within the framework of the restructuring programme since 2001 and under US jurisdiction. It s still up to legal clarification whether bonds issued under British law are also affected. “All other bonds, both government and corporate bonds, should basically remain serviceable without restrictions”, he points out.

The rating agency S&P had declared a partial default (“technical default”) for the South American country in the previous week. Prior to that a 30-day period had lapsed within which coupon payments on certain restructured government bonds should have been made. While Argentina had deposited the amount required by the due date, the actual payment by Bank of New York, which acts as paying agent for Argentina, was prevented by the arbitral verdict of a New York district judge. According to the verdict, the claims by those creditors that had not participated in the restructuring since 2001 would have also had to be honoured. These so-called holdouts accounted for about seven percent of all creditors at the time.

The negotiations between the Argentinean government and the holdouts are ongoing. It is now crucial to clarify complex legal circumstances and interests. According to Dornaus, the results of these negotiations defy prediction. In the worst-case scenario, the terms of the contract would allow even those creditors to sue for a full servicing of debt that have already given their consent to the restructuring. This group makes up 93% of all creditors of the government bonds that were up for restructuring at the time. “If this were to happen, which from the current perspective is unlikely, and should this lawsuit be successful, Argentina would probably be facing a shortage in foreign currency”, says Dornaus. An agreement is not foreseeable at this point. “We expect months worth of negotiations rather than weeks.”

No risk of contagion for other emerging markets bonds

Until a solution has been found, the fund manager expects elevated levels of volatility, and that includes Argentinean corporate bonds. At the same time, Dornaus does not envisage any risk of contagion for emerging market bonds overall. “Argentina is an isolated case, which is why the development should not come with any significant form of impact on the bonds of other countries.” That being said, the history of conflict between Argentina and the suing hedge funds should be taken into consideration in any future restructuring. In the future the question will not only be how to deal with investors that do not wish to take part in restructuring programmes. Debtors would also have to consider whether they wanted their issue to be based on US jurisdiction again, which would enable district courts to interfere with the sovereign rights of states.

“Even for professional investors in emerging bond markets it is hard to project the future development, given that in the past 35 years there has been no comparable case to this one”, as Felix Dornaus explains. But in any case, Erste Asset Management is only marginally affected by this situation. EAM is basically underweighted in Argentinean government bonds. At EUR 1.6mn vis-à-vis total assets under management of EUR 50.5bn, its exposure in the Argentinean government bonds that are affected by the New York verdict is very limited indeed.

Gold, Inflation and a Higher Oil Price

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As we enter the second half of the year, Bradley George and Scott Winship, Portfolio Managers of the Investec Global Gold Funds, provide their review of 2014 and key drivers of gold market sentiment going forward, in particular the linkage with the higher oil price and higher inflation.

Gold in the year to date

The first half of 2014 saw the gold price up 10%, as weak US economic data raised concerns about the economic recovery and hence implications for the longevity of the Federal Reserve’s quantitative easing (QE), which is currently being tapered.

More recently there has been renewed investor interest in gold. Investec’s Gold Team thinks the following three factors are influencing investors’ appetite for gold.

Is inflation potentially entering the system?

Inflation has long been suggested as a potential consequence of unprecedented money creation by the world’s central banks over the last few years. There are signs that it may slowly be emerging in 2014. Year-to- date US consumer prices have risen at a 2.6% annualized rate. Some of this can be attributed to fuel and food, but examining core inflation shows an acceleration to 2.3% for the first five months of the year versus 1.6% at the end of 2013.

Gold has historically proven to be an excellent hedge against inflation. Goldman Sachs recently produced research which suggests that there is a 91% correlation between US CPI and the USD gold price over the past decade1. The correlation remains strong at 73% when the time period is extended and run from 1970 to today.

Increased geo-political risk

The second factor affecting the gold price is linked to the first. Geo-political tension surrounding the Russia and Ukraine situation tested investors’ risk appetite in the first half of the year and continues to do so. The market has also focused on escalating violence in the Middle East, with particular attention on Iraq. The Investec Asset Management Energy team published the following thoughts on the situation:

“Iraq today produces 3.3m barrels/day, making it the second-largest producer in OPEC, after Saudi Arabia. Over 2.5m barrels/day of this (75%) come from the giant structures in the Southern Mesopotamian Basin, approximately 150km southeast of Baghdad .In our view, these oil fields are not under threat from ISIS at this stage, nor is the key export facility at Basra. If Baghdad falls to the insurgents, which we feel looks unlikely, then these oil installations become vulnerable.

We are forecasting $115 Brent for the second half of 2014. If exports from Southern Iraq are threatened, we believe the move up in international oil prices will be at least $5-$10 from here. If they are physically disrupted for any length of time we expect to see Brent above $130. At such levels we would expect demand rationing.”

The relationship between the gold and oil price exists as oil is a significant input of the world’s activity and hence inflation baskets. If Investec’s Energy team’s view of a stronger for longer oil price is correct it would keep inflation statistics elevated. Over the long term, the gold price has traded at approximately 16x the oil price. Today that relationship is just shy of 12x and arguably represents value for gold if oil remains at these levels.

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Gold price seasonality

The final point is that of seasonality, which has historically led to higher gold demand in the second half of the calendar year and hence better price performance. This is because the Indian monsoon/harvest season boosts incomes and the timing of the Indian wedding season, around Diwali, sees significant quantities of gold purchased as gifts.

Investec believes that the factors discussed above will generate further interest in gold and gold ETF inflows driving the gold price higher.

Deutsche Asset & Wealth Management Renames Retail Product Suite in the Americas

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Deutsche Asset & Wealth Management (DeAWM) has announced that it has renamed all retail products in the Americas, effective on Monday. This change will affect all open-end funds, closed-end funds, the Variable Insurance Portfolios (VIPs) currently named “DWS,” and the db X-trackers exchange-traded funds (ETFs).

“Renaming our products to reflect our integrated platform is the natural next step for our business, as we continue to expand our footprint and leverage Deutsche Bank’s global reach,” said Jerry Miller, Head of Deutsche Asset & Wealth Management, Americas.

“The Deutsche brand better reflects our platform’s global capabilities and our ability to deliver unique, holistic solutions to our growing client base in the Americas.”

As part of the rebranding, Deutsche Asset & Wealth Management’s suite of retail products and ETFs will be renamed as follows:

Current Brand Name				New Brand Name
DWS and DWS RREEF funds				Deutsche funds
DWS variable insurance portfolios (VIPs)				Deutsche VIPs
DWS-branded closed-end funds				Deutsche-branded closed-end funds
db X-trackers exchange-traded funds				Deutsche X-trackers exchange-traded funds

Additionally, the names of three key service providers will be renamed as follows:

Current Entity Name				New Entity Name
DWS Investments Distributors, Inc.				DeAWM Distributors, Inc.
DWS Trust Company				DeAWM Trust Company
DWS Investments Service Company				DeAWM Service Company

DST fund numbers, ticker symbols, and fund objectives will remain unchanged.

Discretionary Programs Growing 50% Faster Than Nondiscretionary

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According to global analytics firm Cerulli Associates, discretionary managed account programs are growing 50% faster than nondiscretionary programs.

“Discretionary advisory platform growth has far outpaced nondiscretionary programs and separate accounts over the last two years,” states Frederick Pickering, analyst at Cerulli. “Nondiscretionary unified managed account programs have grown faster than discretionary programs overall, but their small asset base had little effect on overall weighted growth rates.”

As of year-end 2013, total managed account assets reached nearly $3.5 trillion, representing more than 25% growth over year-end 2012. Cerulli projects the managed account market will exceed $5 trillion in assets under management by the end of 2016.

Strong market returns paired with substantial inflows pushed each program type, except separate accounts, to record asset levels. Though differences exist between sponsors and advisors regarding how to best implement the programs, the recurring revenues and process-driven portfolio management aspects of fee-based relationships have been roundly embraced as the industry’s preferred option for the delivery of wealth management services.

Overall, Cerulli anticipates continued growth of the segment as more advisors adopt the programs, and advisors who already use the platforms transition more clients out of commission relationships.

In their Managed Accounts 2014: Confronting Threats report, Cerulli analyzes the fee-based managed account marketplace, which has been a core research focus since the firm’s inception in the early 1990s. This report, in its twelfth iteration, is the result of ongoing research and quarterly surveys of asset managers, broker/dealers, and third-party vendors, which captures more than 95% of industry assets.

“Advisors have largely accepted that discretionary account management simplifies their business model and allows for greater trading efficiency,” Pickering explains. “Having already chosen to place their faith in their advisors by initiating their relationships, few investors feel the need to be consulted before any possible trades are executed.”

Cutting Trading Costs in Emerging Markets

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Rising wealth in emerging markets is making the companies listed on their stock markets increasingly attractive. Growing disposable incomes from a middle class that adds millions to its ranks every year means higher profits and better returns for investors.

However, buying and selling stocks in emerging markets can incur high trading costs. When these are deducted from gross returns, profits made on equity markets are reduced. It can also be difficult to buy and sell shares in the first place due to relatively lower numbers of investors in emerging markets than the developed world, which makes many equities illiquid.

To counteract the problem and make trading emerging market equity stocks both more affordable and accessible to investors, Robeco has developed a model that estimates stock-specific trading costs.

“Trading costs are disproportionately high in emerging markets,” says Wilma de Groot, portfolio manager for quantitative emerging markets equity for the past year and a quant researcher at Robeco since 2001.

Thought leadership for peers

De Groot’s research has been blended with that of her quant colleague Weili Zhou, who developed the trading costs model, and Joop Huij, who is also a quant researcher. The three authored a 2011 report, ‘Another Look at Trading Costs and Short-Term Reversal Profits’, which has formed significant thought leadership for the asset management industry.

“Our quant products have a relatively low turnover, so we are already cost-aware, but trading costs will become more important as the funds grow,” she says. “We developed a proprietary trading costs model, for our own Robeco trades, so these costs are visible in our tools when we do a trade.”

These cost estimates are reliable predictions for the actual costs that would be incurred when the trade is executed. “The next step is the integration of this trading costs model into our investment process and we have several ideas,” De Groot says.

“The first is that we want to use it to determine our active positions, so if a stock is very attractive, but has very high trading costs, then we will not take our full overweight position.

“The second is to make a connection between the expected alpha of a stock, and the trading cost of acquiring it. Although a stock might be expensive to trade, if it has an attractive alpha, it might still be worthwhile buying that stock.”

Market impacts important

Direct trading costs are fairly straightforward to quantify, but a bigger problem is the impact that a sizeable trade in the shares of an illiquid stock can have on the overall market. If an investor buys or sells a large tranche in one hit, the act of trading can itself move the share price upwards of downwards.

“Trading costs consist of multiple components: there are the fixed trading costs such as commissions and fees, and taxes, which can also be relatively high in emerging markets,” she says.

“But then we have market impact, because the trading volumes are much lower in emerging markets than in developed markets. And we continuously look at how we can further refine our market impact estimates. This is something on our research agenda.”

Relationship with anomalies

New research by the quant team includes a large-scale investigation into the relationship between investment anomalies and trading costs. These include market phenomena such as the momentum effect which has been proven to show that stocks which demonstrate high momentum outperform those with low momentum, contrary to standard investment theory.

“There is a stream of academic literature that argues that profits of well-known anomalies disappear once correcting for trading costs,” De Groot says. “We observed that the strategies used in these articles are, however, very simplistic and include many small- and micro-stocks which are very expensive to trade”.

Indeed, research by De Groot, Zhou and Huij shows that by implementing investment strategies using smart trade rules is a better option. It results in much lower turnover compared to naïve trading algorithms without the loss of gross performance, thus increasing net profits.