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Large American Banks Pass The Exam

The nation’s largest bank holding companies have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital position than before the financial crisis, according to the summary results of bank stress tests announced by the Federal Reserve on Thursday.

Reflecting the severity of the stress scenario–which includes a peak unemployment rate of 12.1 percent, a drop in equity prices of more than 50 percent, a decline in housing prices of more than 20 percent, and a sharp market shock for the largest trading firms–projected losses at the 18 bank holding companies would total $462 billion during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014 in the hypothetical stress scenario.

“Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

The Federal Reserve’s stress scenario estimates are the outcome of deliberately stringent and conservative assessments under hypothetical, adverse economic conditions and the results are not forecasts or expected outcomes.

Despite the large hypothetical declines, the aggregate post-stress capital ratio exceeds the actual aggregate tier 1 common ratio for the 18 firms of approximately 5.6 percent at the end of 2008, prior to the government stress tests conducted in the midst of the financial crisis in early 2009. This is the third round of stress tests led by the Federal Reserve since the tests in 2009, but is the first year that the Federal Reserve has conducted stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Reserve’s implementing regulations.

“The stress tests are a tool to gauge the resiliency of the financial sector,” Federal Reserve Governor Daniel K. Tarullo said. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

You may access the complete report (pdf file) on this link.

Latin America will generate 13,000 new ultra rich in the next decade, according to Knight Frank

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London and New York remain the top destinations for the world’s ultra-high net worth individuals to live and invest in but Asian cities are fast catching up, says Knight Frank’s seventh annual Wealth Report

Key Findings

The global number of High-Net-Worth Individuals (HNWIs is defined as someone with $30 million or more in net assets) increased by almost 8,700, or 5%, in 2012
Their number is set to increase by another 50% in the coming decade, according to forecasts prepared for Knight Frank’s Wealth Report
Fastest growth in wealth creation will be in Asia and Latin America over the next 10 years
London and New York are the top destinations in the world for wealthy individuals and will remain so until 2023, according Knight Frank’s survey of wealth advisors, whose 15,000 clients have assets worth US $1 trillion.
The 2012 results of Knight Frank’s index which tracks the performance of luxury property prices across 80 global destinations shows Jakarta and Bali recorded the highest growth
Monaco remains the most expensive location to buy prime residential property: a luxury home can range in value from $5,350 to $5,920 per square foot.
Classic cars have enjoyed the biggest uplift in value over last 10 years (395%), measured against other key collectable assets, such as fine wine and art, inKnight Frank’s Luxury Investment Index.

The total number of super-rich individuals increased globally by 5% in 2012, pushing an extra 8,700 people into the ultra-high net worth bracket, according to the seventh edition of The Wealth Report, produced by Knight Frank, a leading global property company.

The total wealth of HNWIs – those with net assets of US $30m or more – increased by $566bn to $26 trillion, an increase of 2% year- on-year, according to data produced exclusively for Knight Frank’s Wealth Report by Wealth X, a wealth intelligence firm. Over the next ten years another 95,000 individuals are set to break the $30m barrier in terms of personal wealth, and while Asia and Latin America will see the largest growth in the number of ultra-wealthy individuals, North America will still have the highest total number of HNWIs in 2022.

In this regard, the report notes that in Latin America the ultra rich 15,230 recorded in 2012 to reach 26,628, representing an increase of 88%, the same as in the case of the asians ultra-rich, rising from recorded more than 43,000 last year to more than 82,300 in ten years.

Liam Bailey, Global Head of Residential Research at Knight Frank, said: “The largest concentration of wealth is currently based in the established centres of North America and Europe, but there is set to be rapid growth in Asia, Latin America and the Middle East. In the next decade we will see the biggest increase in ultra-wealthy individuals in cities such as Sao Paulo, Beijing, and Mumbai.”

“According to a survey of advisors with 15,000 ultra-wealthy clients, London and New York are still the most important destinations in the world. In ten years’ time they will still lead the way, but key Asian cities will have moved further up the list.”

The growing influence of Asian wealth creation is shown in the results of The Wealth Report’s Prime International Residential Index (PIRI) which tracks the value of luxury residential prices in 80 prime global locations in 2012. Price growth was strongest in Jakarta and Bali, with luxury property values rising by 38% and 20% respectively, boosted by a growing middle class in Indonesia.

The Chinese cities of Guangzhou and Shanghai also saw double-digit growth in the value of prime property, while the sheer weight of Chinese wealth pouring into Hong Kong resulted in an annual price increase of 8.7%, despite the Government cooling measures which limited the potential for similar increases in Beijing.

“Wealth creation has not been dented by the global economy slowing, nor has this affected the demand for prime property as the search for safe haven investments has continued,” Liam Bailey explained. “These factors will likely drive prime values higher in the short to medium term as HNWIs look to invest in tangible assets such as a prime property in the major global cities. But the results of our survey of advisers to the ultra-wealthy around the world shows that the appetite for some level of risk is returning, which in turn is opening up some property markets which have been moribund for several years.”

The super-wealthy, especially those in China, are also set to step up their interest this year in “investments of passion” such as art, fine wine, classic cars, coins and watches. Knight Frank’s Luxury Investment Index shows that classic cars have seen the largest appreciation in value over the last decade, with an average uplift in price of 395%.

The basket of collectable assets such as art, fine wine, classic cars, coins and watches within the overall luxury index has accrued cumulative gains of 175% over 10 years (with a 6% uplift in 2012 alone). The ultra-wealthy also increased their spending on philanthropic activities in 2012 compared to 2011, with the most significant increase in expenditure among those in Asia and Russia and CIS.

Long short equity, event-driven and emerging markets, the favorite strategies of hedge managers

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Credit Suisse is pleased to announce the results of its annual Global Hedge Fund Investor Survey, in which we analyze responses from close to 550 institutional investors, representing $1.03 trillion of hedge fund investments, on a number of topics. These include investors’ current views on the growth and return prospects for the hedge fund industry; their preference and allocations plans across various strategies and regions and their views on key new trends and developments in the industry. This year’s survey also explored in closer detail preferences and investing trends amongst pensions and other institutional investors.

The title of this year’s survey, “Reaching New Heights”, reflects optimism expressed by institutional investors towards the prospects for industry performance and growth during 2013. Robert Leonard, Managing Director and Global Head of Capital Services at Credit Suisse commented: “Institutional investors are clearly expressing more confidence in risk assets in this year’s survey and appear less worried about left tail risk events or macroeconomic uncertainty. Given the backdrop of effective central bank policies, lower political uncertainty and positive performance last year, it is not surprising to see increased expectations for 2013.”

When respondents were asked to forecast total industry assets at the end of 2013, the average prediction was US$2.42 trillion. This would represent an industry growth rate of over 10% or $220B, comprising of positive performance and new capital inflows. If correct, this would represent an all-time high for hedge fund industry assets under management by the end of this year.

Respondents shared their insights into which hedge fund strategies they anticipate allocating capital to during 2013:

Long/Short Equity was identified as being the most sought after strategy in 2013
Emerging Markets Equity was the second most favored strategy
Event-Driven strategies moved up to 3rd place from 10th place last year

In terms of regional preferences, Emerging Markets and Asia-Pacific regions remained in the top two spots, though they traded places from last year’s survey. This seems in keeping with investors’ stated increase in risk appetite. Investors also exhibited a very strong bounce back (26%) in demand for Developed Europe, as they appear to have taken comfort in some of the political actions taken there in the latter half of 2012.

When asked about their preference for hedge funds from a size standpoint, investors indicated that those managers running between $500M and $2B in assets under management were in the best position to be considered for future allocations.

The survey also uncovered a number of other key new industry trends and developments for 2013:

Return expectations among institutional investors for hedge funds increased to 6.9% from returns expectations from a forecast of 5.4% last year. This appears to coincide with the ongoing reduction in correlations and the belief that this will create an environment for stock-picking strategies to outperform.
Respondents ranked crowded trades/herd behavior, additional regulatory changes and underperformance risk as the three greatest sources of risks facing the hedge fund industry this year. Sovereign default risk and credit/counterparty risk, which were both in the top three last year, dropped significantly.
Investors continue to show strong appetite for those new hedge funds launches deemed to be of institutional quality. However, in a new development, the survey results showed a large uptick in the number of investors who would require some level of reduced fees, including founder’s share classes.
A new section in this year’s survey covered trends and developments in the pension space. The results indicated that public pension funds were the most active in this segment and expect to increase their allocations going forward. Further, our findings identified risk-adjusted and uncorrelated returns as the primary investment objectives of the pension community, and also highlighted the continued significance of consultants.
Investors regard further hedge fund consolidations/liquidations this year to be a potentially significant development. They also expect to see additional fee compression this year, as well as the growth of alternate structures such as 40 Act Funds and long-only vehicles from hedge fund managers.

Leonard added: “We believe that pension funds represent a key element for the future growth of the hedge fund industry and therefore, wanted to take a deeper dive into the developing trends surrounding their investment preferences and requirements. We believe that this year’s survey provides some truly unique insights into those trends.”

The survey, produced by Credit Suisse’s Hedge Fund Capital Services Group, is the most comprehensive published to date, with more than 550 groups participating—including pension funds, consultants, family offices and funds of hedge funds—and with respondents diversified across all regions.

The world without Chávez for Global Evolution

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El mundo sin Chávez para Global Evolution — Wikimedia CommonsFoto: Victor Soares/ABr. The world without Chávez for Global Evolution

The dead of Chavez doesn’t come unexpected as he has been very sick for a long time…the important thing are the next steps that follows:

Constitutionally, Chavez’s death should result in snap elections to take place in 30 days. As Chavez has been physically unable take oath for his 2013-19 term (the prescribed inauguration date was January 10), Venezuela is being governed under a constitutional gray area based on the Supreme Court’s interpretation of “administrative continuity” in the case of a re-elected president. A new election is likely to be a contest between Vice President Maduro (who in December was formally endorsed by Chavez as the government candidate under any adverse scenario for Chavez’s health – Maduro is a former busdriver that made his political route through the labor union and later became foreign minister) and opposition leader Capriles (who won re-election to the Miranda state governorship on December 16).

Calls for internal unity are telling. Villegas’s call for unity underscores the fact that Chavez has never formally been sworn in to the current term, which barring another Supreme Court “interpretation” means that National Assembly President Diosdado Cabello, not VP Maduro, should in theory be the interim president during the electoral period and until the inauguration of a new president (a date which is not defined in the constitution). Although the former military officer Cabello and the former civilian labor leader Maduro have gone to great lengths to publicly demonstrate a united front, many commentators believe they represent different, potentially competing, factions within Chavismo. It will also be interesting to see what role Chavez’s family plays in shaping his legacy and bestowing legitimacy upon the new leader ship. The key figures are Chavez’s daughters (who have been increasingly visible) and his brother, Adan (who has been noticeably silent in recent months compared to a more prominent role in 2011-12). Despite these potential tensions, we think the political equilibrium remains anchored by the base-case scenario of new elections.

Market expectations are already braced for a transition scenario without undue expectations that the opposition can come to power in the near term.

As such we think volatility around upcoming events, though possible, should be limited. Market base-case view holds that a presidential election will occur between current Maduro and Capriles. The base-case scenario that has consolidated since the turn of the year would have Maduro win a relatively competitive election, riding a wave of sympathy for Chavez and superior government resources.

Schroders announces launch of Global Unconstrained Bond fund

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Schroders announce the launch of Schroder ISF1 Global Unconstrained Bond, a new fund which will take an unconstrained approach and aim to achieve an attractive risk adjusted return of 4-5% p.a. over the benchmark over an interest rate cycle, told in a statement.

The fund, which is set to launch in April of this year and will be benchmarked against the Barclays Capital Global Aggregate Bond USD Hedged Index over a rolling three to five year period, will be managed by the global multi-sector team, supported by over 100 investment professionals worldwide. The team, led by Head of Global Macro, Bob Jolly, and fixed income fund manager, Gareth Isaac, will use a diversified top-down approach and seek to generate consistent returns through the exploitation of opportunities across a range of alpha sources.

Schroder ISF Global Unconstrained Bond will be managed using a similar approach to the existing portfolios run by the Schroders global multi-sector team (Schroder ISF Global Bond, Schroder ISF Strategic Bond and Schroder GAIA Global Macro Bond). This approach aims to exploit the skill and experience of Schroders’ global resource within diversified portfolios.

Structural growth decline in China poses a threat for Emerging Market Equities

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In ING IM’s last edition of the Emerging Equity Markets Monthly (EEMM) that was published in December the asset manager wrote about the improved environment for emerging equities. Until January, they saw accelerating Chinese growth, better global growth data and easy financial conditions throughout the emerging world producing a nice EM outperformance vis-à-vis developed markets.

But the new positive trend, that emerged after two years of underperformance, has not continued in the new year. Although ING IM still thinks that the current global environment for EM equities is rather good, they have to acknowledge that new risks to the asset class have emerged in recent months. It is the pressure on Asian growth prospects and currencies from the sharp yen depreciation that explains part of the recent headwinds. But the asset manager cannot stress enough that it has also seen increased vulnerability in flows to emerging debt markets because of rising balance-of-payments risks and rising US yields. The recent sell-off in the Turkish equity market can be seen as a warning sign in this respect.

In this EEMM, ING IM assess the key drivers of EM equity markets and explain how it sees EM relative to DM. In the short term, the asset manager does not expect much out or underperformance. The positives and negatives, on their view, seem balanced currently. However, its longer-term take on emerging markets remains cautious, mainly because of the structural growth decline in China and the growing macro imbalances throughout the emerging world.

You can access the full report in the pdf file attached.

AXA IM launches AXA WF Equity Volatility

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AXA IM lanza el fondo AXA WF Equity Volatility — Photo: Roger McLassus. AXA IM launches AXA WF Equity Volatility

Equity volatility tends to be inversely correlated from traditional asset classes such as equities and therefore offers the twin benefits of diversification and extreme risk mitigation. AXA Investment Managers has launched the AXA WF Equity Volatility Fund offering institutional investors cost efficient, positive exposure to the implied volatility of major equity markets.

AXA WF Equity Volatilityseeks to capture significant increases in equity volatility in the European and/or US equity markets while partially mitigating the cost of carry of this exposure. The Fund achieves this by building a long position in implied volatility of the S&P 500 index and/or the Euro Stoxx 50 index through derivatives. In order to mitigate the cost of carry of this long position, the Fund has the flexibility to opportunistically take short positions on the near term implied volatility through the use of indices futures.

Laurent Ramsamy, lead fund manager of AXA WF Equity Volatility said: “Volatility, if managed dynamically, is not a mere measure of risk, it is also an attractive source of diversification and performance, especially for investors exposed to riskier assets. The challenge, however, is how to provide the long term long volatility exposure in a cost efficient manner. The strategy is designed to offer timely protection and strong gains when equity markets move into crisis mode.”

As noted in the press release, AXA IM has a proven track record in managing volatility instruments, including the use of derivatives: “Our extensive experience and robust risk management underpins this Fund and ensures compliance with European regulations. Our Multi Asset Client Solutions team has been trading derivatives within an asset liability matching framework for institutional investors since 1997, with €77 billion notional value in derivatives for major hedging programs”.

Laurent Seyer, Global Head of Multi Asset Client Solutions at AXA IM, commented: “AXA IM’s understanding of volatility trends and proven derivatives expertise enables us to react quickly to market movements, thereby dynamically managing exposure to equity volatility consistent with prevailing market conditions in a cost efficient manner. With short term equity volatility at near historical low levels we believe this is an opportune moment to launch this fund”.

AXA WF Equity Volatility, which launched on 12 February 2013, is a UCITS regulated fund with active risk monitoring and controls.

Principal Global Investors to Acquire Majority Stake in Liongate Capital Management Share

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Principal Global Investors, a leading global asset manager and a member of the Principal Financial Group, today announced an agreement to acquire a 55 percent stake in Liongate Capital Management (Liongate), a global alternative investment boutique based in London and New York focused on managing portfolios of hedge funds.

Founded in 2003, Liongate has approximately US $2.1 billion¹ in assets under management across a range of commingled funds and dedicated client portfolios. Its client base includes many of the world’s leading pension funds, insurance companies and sovereign wealth funds. Liongate is recognized for its dynamic approach to asset allocation and managed hedge solutions, which have delivered strong, long-term risk-adjusted returns to its blue-chip investor base.

The transaction will strengthen The Principal’s alternative investment capabilities, deepen its pool of investment talent, and help extend its product offerings into customized multi-asset and hedge fund solutions.

“With its strong reputation and focused investment expertise, Liongate is a welcome addition to our multi-boutique investment management structure,” said Jim McCaughan, chief executive officer of Principal Global Investors. “The partnership will enhance our capabilities in alternative investments, which is an area where client demand continues to grow. Very few institutional investment firms have this level of expertise in hedge fund investing.”

Being affiliated with a global investment management leader, Liongate will benefit from access to The Principal’s global footprint and strong distribution networks, as well as its product development expertise and best-practice support infrastructure.

“Our clients increasingly want hedged solutions over their entire portfolios, and not just on an ‘alternatives’ side plate. The operational synergies and economies of scale will enhance our client resources globally, enabling Liongate to focus on consistent, risk-adjusted client performance. The Principal gets what we want to do, and our personal chemistry is strong, so that is why we decided to work together,” said Randall Dillard, chief investment officer and co-founder of Liongate.

The Liongate partners will retain a 45 percent share and will manage Liongate within their current roles. The partners are reinvesting a significant share of their consideration into existing Liongate investment strategies.

The transaction is expected to close in the second quarter of 2013, pending regulatory approval. The Principal estimates the acquisition will be slightly accretive in the first year. Sandler O’Neill + Partners advised The Principal on the transaction and Fenchurch Advisory Partners advised Liongate.

Kimpton Group Holding Closes $203 Million Hotel Investment Fund

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Kimpton Group Holding, the parent company of Kimpton Hotel & Restaurant Group, the largest player in the boutique/lifestyle hotel segment, has announced it has closed its fourth institutional real estate fund and its third fund within the Kimpton Hospitality Partners series. KHP Fund III, L.P. (“KHP Fund III”), has $203 million in committed equity capital with the goal of acquiring more than $500 million worth of hotels over the next three years.

“The discretionary nature of our fund provides us a distinct advantage in acquiring properties because we are able to offer sellers and developers a quick and certain close, something that few others can match.”

Kimpton is the only branded hotel company with institutionally backed, fully discretionary, dedicated real estate investment funds for the acquisition and development of boutique hotels. The company’s first institutional fund, the $122 million Kimpton Development Opportunity Fund (“KDOF”), was established in 1997 and acquired/developed nine properties. Similar to KDOF, the three subsequent KHP Funds (the first of which closed in 2005) have been raised to acquire, develop and redevelop boutique/lifestyle hotel properties in select major metropolitan cities and resort areas across North America.

Today, Kimpton is a fully integrated hotel and restaurant company with its proprietary Kimpton brand, an experienced operations team, in-house development expertise and a national acquisitions team. In addition to its fund acquisitions, Kimpton provides management services to owners of boutique hotels throughout North America, with approximately three-quarters of its portfolio third-party owned.

“Raising capital for real estate investment has been more challenging than ever over the past few years, which is why we are especially proud to announce the close of this new fund,” said Kimpton CEO, Mike Depatie. “The discretionary nature of our fund provides us a distinct advantage in acquiring properties because we are able to offer sellers and developers a quick and certain close, something that few others can match.”

In line with the first two KHP funds, KHP Fund III will follow a multi-pronged strategy for making new investments:

Acquire non-hotel buildings that can be converted to Kimpton hotels, including “adaptive reuse” projects, such as KHP II’s new Hotel Monaco Philadelphia that opened in October 2012 in the city’s historic Lafayette building, which was previously an office building.
Acquire existing hotels that either fit the Kimpton model, such as the recently added Hotel Wilshire in Los Angeles (also a KHP II acquisition) or properties that are underutilized and where opportunities exist to reposition them as a Kimpton hotel, such as the Hotel Palomar in Washington, DC (formerly a Radisson).
Build new boutique hotels in targeted urban and resort areas in North America.

Kimpton Expanding Footprint via Acquisition and Management Contracts

KHP Fund III has already acquired a property in Savannah Georgia – The Mulberry Inn, a 145-room hotel in downtown Savannah, located in an historic site that once housed a livery stable, a cotton warehouse and later a Coca-Cola bottling plant. The property was converted into a hotel in 1982. The Mulberry Inn is owned in a joint venture between KHP Fund II and KHP Fund III, and will undergo a major renovation in the latter half of 2013 to convert into a Kimpton hotel.

Savannah’s Mulberry Inn is just one in a series of new hotels Kimpton has opened or announced in the past year. Since January 2012, the company has added seven hotels to its roster, including acquisitions of the River Place Inn in Portland, the Canary Hotel in Santa Barbara, the Hotel Monaco Philadelphia and the Hotel Wilshire in Los Angeles, along with management contracts for Washington, D.C.’s Donovan House, the La Jolla Hotel and the Hotel Palomar Phoenix.

Kimpton also recently announced it has won the management contract for two upcoming new hotels in San Antonio and Milwaukee, marking the third Kimpton hotel in Texas and the latest in the brand’s longstanding history of adaptive reuse projects, and the first-ever Kimpton hotel in Milwaukee.

Morgan Stanley Investment Management Launches Global Mortgage Securities Fund

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Morgan Stanley lanza un fondo global de titulizaciones hipotecarias — Foto: Commons, Wikipedia Takes Manhattan . Morgan Stanley Investment Management Launches Global Mortgage Securities Fund

Morgan Stanley Investment Management (MSIM) has announced the launch of the Morgan Stanley Investment Funds (“MS INVF”) Global Mortgage Securities Fund. The fund seeks to provide an attractive rate of return through investment in a portfolio of mortgages and securitized debt instruments issued by government agencies and private institutions.

Commenting on the launch, Sheila Huang, Head of the MSIM Mortgage Team, said “The global mortgage market is a broad and dynamic landscape. Over time, investor preferences and convictions can change due to such factors as regulatory constraints, asset values and the availability of credit. These changes result in dislocations in relative value and solid opportunities for mortgage-related investments. In order to spot these opportunities as they just begin to take shape, the fund’s experienced and informed team takes a long-term perspective and leverages its disciplined investment process and commitment to research.”

The new fund applies a consistent, thematic, targeted bottom-up investment approach that combines global macro fundamental analysis, thorough research and analysis of industry trends to create a diversified portfolio of securitised instruments. MSIM’s Global Mortgage research teams seek to identify potential value opportunities in all areas of the securitised market, and portfolio construction takes place over three key stages – value identification, implementation and evaluation.

Arthur Lev, Head of MSIM’s Long-Only Business, added, “Our focus is our clients – in these difficult market conditions, our goal is to develop products that allow clients access to diverse asset classes. The Global Mortgage Securities fund leverages the extensive market experience of investment professionals within the Long-Only business to help clients achieve their investment goals.”