CC-BY-SA-2.0, FlickrFoto: Randy Heinitz
. Changing Investor Preferences are Pressuring Hedge Funds
Hedge fund managers are feeling the pressure from changing investor demands and the managers that adapt accordingly and timely will be the most successful in achieving growth, according to the EY 2016 Global Hedge Fund and Investor Survey: Will adapting to today’s evolving demands help you stand out tomorrow?
The 10th annual survey found that hedge fund growth has slowed for a variety of reasons – the abundance of low fee passive investment options, lackluster hedge fund performance and cost concerns. In 2016, the proportion of North American investors that said they were reducing allocations to hedge funds exceeded the proportion that were increasing for the first time since the financial crisis of 2008.
Investors have more options than ever within the alternatives marketplace and are allocating funds to those managers that have a unique offering that is satisfying a specific need. Therefore, hedge fund managers must be at the forefront of actively listening to their investors to keep pace, or else be left behind, the report finds.
Michael Serota, EY Global Leader, Hedge Fund Services, says: “Growth is the industry’s top priority, but managers are changing the strategies employed to achieve it. While we find the largest managers pursuing several growth strategies, the smaller managers are more narrowly focused, seeking to expand investor bases within their home markets. Amidst today’s challenging environment, it is imperative for managers of all sizes to identify the needs of their clients and align product offerings to their demands.”
Other key findings include:
Hedge fund managers focus on asset growth to counter reduced inflows
As fee pressures increase, managers need to innovate and optimize processes to cut costs
Prime brokerages are putting pressure on hedge funds to evolve their relationships
Managers are focused on developing their talent management programs, which investors see as increasingly important
Pixabay CC0 Public DomainPhoto: Mike Bird . Passive Funds, Funds of Funds, and Team-Managed Funds, the Ones With More Women Fund Managers
Morningstar, has published a research report finding that across 56 countries, one in five funds has a female portfolio manager, and in the study’s eight-year timeframe, that ratio has not improved. The company’s second research report about fund managers and gender considered more than 26,000 fund managers, comparing the man-to-woman ratio of fund managers to other professions that require similar education, including doctors and lawyers, by country. The report also identifies areas of the industry where women have been making relative gains.
“Women are underrepresented in mutual funds’ leadership ranks globally, with larger markets farther behind smaller markets,” Laura Pavlenko Lutton, Morningstar’s director of manager research in North America, said. “We did find areas where women are finding more opportunity, specifically among passive funds, funds of funds, and team-managed funds. Larger equity firms are also more likely to promote women to fund-management roles than smaller firms.”
Key highlights of the research report include:
Countries with large financial centers have lower proportions of women fund managers than many smaller markets based on data from Morningstar’s global database. In France, Hong Kong, Israel, Singapore, and Spain, at least 20 percent of fund managers are women. Singapore is the global leader among 56 countries with women representing 30 percent of total fund managers and 29 percent of Chartered Financial Analyst (CFA) charterholders. Large financial centers, such as Brazil, India, Germany, and the United States, are behind the global average of 12.9 percent women fund managers. In India, only 7 percent of fund managers are women.
In some asset classes, women fund managers are more credentialed than men. A woman fund manager is approximately 7 percent and 4 percent more likely than a male peer to have her CFA designation among equity and fixed-income funds, respectively.
Women have better odds of running funds in areas of industry growth such as passive, funds of funds, and team-managed funds; women are 19 percent more likely to manage on a team than men. In addition, it appears difficult for women to achieve management roles in more-established parts of the fund industry, including actively managed funds and solo-managed funds. In fact, women are 36 percent less likely to manage an active equity fund than men.
The industry’s largest equity firms are more likely to name women as fund managers than smaller firms. Among funds at one of the top 10 largest firms by global equity assets under management, there are 83 percent higher odds that a woman would be named a fund manager.
Photo: JimmyReu, Flickr, Creative Commons. Luxembourg Secured Lending Funds: Attractive Alternative to Traditional Fixed Income for Wealth Managers
“It is remarkable…what a change of temper a fixed income will bring about”. Virginia Woolf, A Room of One´s Own.
Though few who practice our trade will admit it publically, the wealth management industry is immersed in an existential crisis. Quantitative easing by the world’s central banks has driven yields on high quality corporate bonds to near zero, and those of many sovereign nations to negative values. Traditional fixed income instruments are an essential tool of the wealth management industry and have been the mainstay of the classic “bonds/equities/hedge funds” asset allocation for decades. However, until yields rise from their current levels, government bonds and high quality corporate debt no longer add value to a portfolio. Rather, the fixed income allocation of a portfolio under current interest rate conditions adds credit and duration risk compensated by almost no return, or indeed a negative return.
If questioned as to why they persist in recommending traditional fixed income to their clients, wealth managers and asset allocators typically will state that “there is no alternative” as a justification for continuing to invest in this grossly overpriced asset class. It does not require a guru to see that market price and intrinsic value are clearly out of equilibrium in the fixed income markets, due to massive bond purchases by central banks and the increasingly frenzied search for yield by pension funds and insurance companies desperate to cover their future obligations. Even high yield bonds (formally known as junk bonds) now offer scant returns, as the hunger for yield overrides caution. From my point of view after twenty-five years of practice in the wealth management industry, to invest in an asset class that adds risk to a portfolio without providing return is tantamount to professional malpractice.
This being the case, where is a wealth manager to turn to secure attractive yields given the ongoing distortion of the traditional fixed income markets? Many wealth managers and family offices worldwide are turning to real estate as a substitute for fixed income, where rental yields replace bond yields. Investing in direct purchases of rent-generating properties as well as participations in real estate investment trusts and similar instruments is unarguably a reasonable move. However, I would suggest that many wealth managers are overlooking an alternative source of attractive yields that avoids the pitfalls of direct real estate purchase or participation in real estate funds, such as liquidity risk and exposure to real estate price cycles. This source is secured lendingfunds registered and regulated in the Grand Duchy of Luxembourg.
There is an astounding width and depth of credit expertise to be found among the management teams of many of the secured lending funds registered as Luxembourg SICAV-SIFs. Luxembourg is second only to the United States in terms of mutual fund assets, totaling over 3,500 billion euros as of July 2016 according to the highly respected CSSF, the Luxembourg financial regulatory authority. Although the majority of Luxembourg-registered assets are daily liquidity retail funds under the UCITS umbrella, there are over 1,000 Luxembourg-registered SICAV-SIFs. These vehicles are by their very nature a wealth management rather than a retail product, as they are intended for well-informed investors and are subject to the Luxembourg Act of 13 February 2007 on specialized investment funds, as amended. For this reason, they are subject to a minimum investment requirement of 125 000 euros. Liquidity varies, but redemptions and NAV declarations are typically on a monthly basis.
Since there is no equivalent of Morningstar to collectively track the performance of the SICAV-SIFs, a great deal of outstanding investment and credit analysis talent in this segment has not received the attention it deserves. For example, among the SICAV-SIF managers, there are secured lending funds specializing in each of the various segments of the asset-backed lending spectrum, including financing account receivables, specialized small business lending, aviation and machinery leasing, trade finance and real estate bridge financing. Though the particulars are different in each case, the common element among these successful secured lending funds is that they lend their investor’s capital to finance selected short term opportunities in the real economy, with a sufficient guarantee to secure the loan and protect the fund’s NAV in case of a default. These funds normally operate in creditor-friendly jurisdictions such as the United Kingdom or Germany where assets pledged to secure a loan can be quickly transferred to the creditor if a default does occur. In short, these funds operate in a terrain that once belonged to traditional merchant banks, but is increasingly abandonded by the banks as they restructure in the face of Basel III capital requirements.
Given this track-record and the ease of investment in Luxembourg SICAF-SIFs for wealth management clients through their securities accounts, I would encourage private bankers, family offices and wealth managers in general to begin to think outside the box of traditional fixed income and real estate to give serious consideration to Luxembourg-registered secured lending funds as a source of attractive, stable, non-market correlated returns.
Opinion column by James Levy, Director of Clearwater Private Investment.
. Liquidity Management Top Priority for Fund Managers and Institutional Investors in New Market Environment
State Street Corporation in partnership with the Alternative Investment Management Association (AIMA), the global representative of alternative investment managers, released a new research report that found that nearly half (48 percent) of survey respondents say that decreased market liquidity is a secular shift that is here to stay. Regulations stemming from the 2008 financial crisis, coupled with historically low interest rates and slow rates of growth in the global economy, have constrained the ability of many banks to perform their traditional roles as market makers, which in turn has impacted broader market liquidity conditions.
More than three-fifths of the survey respondents say current market liquidity conditions have impacted their investment management strategy, with nearly a third rating this impact as significant, and are reassessing how they manage risk in their investment portfolios. More broadly, they are adjusting to an environment of less liquidity in which trading roles have been transformed, new market entrants are emerging, and electronic platforms and peer-to-peer lending are changing the way firms transact their business.
“Increased regulation and the pressure to manage costs have significantly changed market liquidity conditions,” says Lou Maiuri, executive vice president and head of State Street’s Global Exchange and Global Markets businesses. “The new liquidity paradigm is causing many players in the investment industry to think again about the fundamentals: what roles they play, where they invest, and how they transact their business.”
While there is no one-size-fits all strategy for balancing risk and return in the current market environment, investors and managers are adapting to the new environment by focusing their efforts in three areas:
Rationalizing the risk
Optimizing the portfolio
New rules, new tools
49% say the role of non-bank institutions as liquidity providers will grow and 42% say that this growth will come from hedge funds Nearly half (47%) say hedge funds may play an important role in providing liquidity in more volatile markets. “With liquidity likely to remain top of mind for years to come, now is the time to find the strategies, tools, and solutions that will make a sustainable difference in the new investment climate,” continued Maiuri.
“Hedge funds and other asset managers are responding to more challenging market liquidity conditions by increasingly seeking out new opportunities, including taking on a more prominent role as market-makers, providing new sources of finance to the real economy, and lending their support and expertise to improving liquidity risk management,” added AIMA CEO Jack Inglis.
Photo: Naroh, Flickr, Creative Commons. New Equities Fund Invests in Listed European Family Businesses
The current economic and financial situation is changing investment habits. Persistently low interest rates, the resulting quest for yield and control of risks are the main concerns for investors seeking to invest in equities. Against this backdrop, BLI – Banque de Luxembourg Investments will launch the BL-European Family Businesses fund, a new equities fund that invests in around 60 listed European family businesses, rigorously selected according to strict criteria: a clear competitive advantage, strong profitability, a value-creating business strategy and attractive valuation.
“One distinguishing characteristic of family businesses is that they are not driven by short-term financial objectives. Because of the family’s commitment to the next generation, the company naturally develops a long-term strategy with an underlying desire for continuity and resilience over time. Of course, growth and performance are also important, but these goals are balanced by socio-economic values that can strengthen the organisation and its position in the market,” says fund manager Ivan Bouillot, who is also fund manager for the BL-Equities Europe fund since 2004.
“Family business leaders are also able to steer the company’s strategy and shape the corporate culture through the values they advocate, their passion for their profession and their social commitment. It was during meetings with family business owners that we began to appreciate the added value of businesses managed by families, and the idea of developing this family business fund project grew from there.”
The BL-European Family Businesses fund invests in European equities, regardless of market capitalisation. They define a company as a family business if at least 25% of its equity is owned by the person or family that founded the company or acquired the company’s capital, if the family has an active role in the company as a manager or a board member, and if there is a desire to preserve the company as part of the family’s wealth.
“With this new fund, we continue to apply our proven investment strategy, which involves selecting quality companies and taking an interest in their long-term development”, explains Head of Sales, Lutz Overlack. “Our strategy focuses mainly on manufacturers of personal and household goods, food and beverages and companies in the industrial, healthcare, chemistry and technology sectors.” Banking and insurance, capital-intensive industries, commodities and telecommunication companies are excluded from all the funds in the BL funds range.
CC-BY-SA-2.0, Flickr. Standard Life Investments Extends Ryder Cup Deal
Following the 41st Ryder Cup at Hazeltine National Golf Club in Minnesota last Fall, where the US regained the trophy, the global asset manager, Standard Life Investments, confirmed that it has extended its ground-breaking sponsorship of The Ryder Cup to include the 2018 contest, which will be played at Le Golf National, Paris, France, from September 28-30 2018.
Commenting on the extension, Nuala Walsh, Global Head of Marketing & Client Relations at Standard Life Investments, said: “The Ryder Cup continues to reflect and complement our commitment to fostering team spirit in order to deliver performance excellence. Following the 2016 contest at Hazeltine National in Minnesota, and our close partnership with the European Tour, we are thrilled to announce an extended commercial agreement for The 2018 Ryder Cup.”
Keith Pelley, Chief Executive of The European Tour, the Managing Partner of Ryder Cup Europe, welcomed the extended partnership: “The Ryder Cup is one of the most prestigious events in sport and Standard Life Investments both share and exemplify our values of integrity and the pursuit of potential. We are delighted that they have chosen to extend their partnership with The Ryder Cup and we look forward to working together to deliver another world-class contest in Paris in 2018.”
Standard Life Investments became the first Worldwide Partner of The Ryder Cup in February 2013, sponsorship which included both Europe’s victory at Gleneagles in 2014 and the recent US triumph at Hazeltine National in 2016.
Foto: AedoPulltrone, Flickr, Creative Commons. Aviva to Lift UK Property Fund Suspension On December 15th
Aviva Investors has announced it will resume trading of its £1.5bn Property Trust on 15 December, having suspended the fund on 4 July to implement a “sustainable sales programme” in order to raise liquidity.
In a note sent to investors seen by InvestmentEurope, the asset manager said the trust has sold 11 properties totalling £212m between the EU referendum vote and 17 November 2016. The temporary suspension has allowed the company to be selective with its orderly sales programme, and ensure the retained portfolio remains “robust and well diversified.”
“There have been no forced sales, and we have focused on taking the right time to obtain the best value on sales, whilst retaining core assets and maintaining a balanced UK commercial property portfolio. Prices achieved have been broadly in line with market valuation changes since the EU referendum vote,” the note reads.
“The sales have been selected in line with our wider real estate strategy to focus on fewer centres, and values achieved have been broadly in line with market valuation changes since the EU referendum vote. We are confident that the trust holds a robust and diverse portfolio of properties; providing significant potential for growth, a strong income stream and the opportunity for further income growth,” Ed Casal, CEO of Aviva Investors Real Estate, said.
“Despite the recent uncertainty in the market, yields on property remain relatively attractive in a low interest rate environment. We believe there is a convincing place for the asset class within a balanced portfolio for long-term investors,” he added.
Fund co-manager retires
Aviva has also announced that Mike Luscombe, co-manager of the fund, will retire at the end of January. Following his departure, Andrew Hook, co-manager of the fund since March 2015, will assume the role of lead manager.
Hook joined Aviva in 2007 and has over 15 years’ industry experience.
“He has played a key role in the repositioning of the trust’s portfolio over the past year, and will be supported by a dedicated and experienced asset management team along with the newly-established UK transaction team, who between them help source, develop and manage the properties in the portfolio,” the note reads.
CC-BY-SA-2.0, FlickrPhoto: Ana Guzzo, Flickr, Creative Commons.. Short Duration, Attractive Yield and Moderate Risk – a Combination that Many Investors Haven’t Seen Lately
Ever since the European sovereign crisis and the ECB’s strong counter measures we have witnessed yields trending down, posting record low levels over and over again. Corporate bonds are still offering attractive spreads over government bonds, but in absolute terms yields are at all-time lows. To make life even harder for portfolio managers, the ECB expanded its quantitative easing program this summer to include corporate bonds.
Undoubtedly this has been good in terms of mark-to-market performance for existing holders of ECB-eligible bonds (in general, euro-denominated investment grade rated bonds issued by non-bank corporates) but the sheer size of the program has resulted in rapid tightening in spreads and a total drain of secondary market liquidity – if you try to buy bonds of course, but selling would be easier than ever!
Are we doomed to invest in zero-yielding corporate bonds?
After a post-Brexit rally in virtually all fixed income and credit markets, investors are scratching their heads wondering where to get any yield going forward, especially if one doesn’t like to add too much duration. While interest rates are at all-time lows across the curve, extending duration (increasing interest rate risk) is not rewarding investors anymore but is increasing risk significantly.
The reason is that rates have only limited potential to go even lower and offer positive return, but when rates get higher the investor loses accumulated performance quickly. For example, investing in long bonds with modified duration of seven means that the investor loses seven percent if rates rise one percentage point. For me, it sounds like risk is quite badly skewed to the downside when even the longest of German sovereign bonds are yielding less than 0.5 percent!
All hope isn’t lost, non-rated Nordics still offer a pocket of yield
Investors looking for short duration investments have quite limited options if positive yield is desired; money market and sovereign bonds are trading by and large at negative yields, investment grade offers some spread but also has quite high interest rate risk, and high yield is very attractive relative to other fixed income classes but many investors are not willing or able to take that much credit risk. One available pocket of yield remaining is the non-rated Nordic corporate bond market.
Many non-rated Nordic companies are fundamentally very strong, well-known names in the Nordics and many of them have their equity listed in Nordic bourses. Traditionally, non-rated bonds have not been followed or owned by investors outside the Nordic countries, and as the companies are not officially rated they have been issuing bonds with hefty premium compared to their rated peers.
Even though there are more and more continental European investors involved in non-rated bonds these days than there were in the past, these bonds are trading at a very wide spread to their rated peers. One frequent explanation for spread is liquidity, but during the last few years these markets have had equally good (or bad, depending on how you look at it) liquidity. Surely the scale of credit risk is as broad as it is in a European officially rated market, but for selective investors, picking fundamentally strong companies can produce very attractive risk-adjusted returns.
I have been favoring Nordic non-rated bonds for years due to the unique combination of strong credit fundamentals and attractive valuation. Applying the same investment processes, conservative approach and discipline that are used in other credit classes has resulted in strong but stable performance over the cycles. Sooner or later masses of credit investors will expand into this market and correct the valuation difference, but until then we can continue to enjoy abnormally good carry.
Opinion column by Juhamatti Pukka, Portfolio Manager -Specializing in corporate bond portfolio management at Evli.
Photo: Keitikee, Flickr, Creative Commons.. Growth in Global Wealth Remains Limited in 2016
According to the Credit Suisse Research Institute’s (CSRI) seventh annual Global Wealth Report, the overall growth in global wealth remained limited in 2016, continuing the trend that emerged in 2013 and contrasting sharply with the double-digit growth rates witnessed before the global financial crisis of 2008.
In the mid-term, only moderate acceleration is expected. Switzerland once again ranked as the global leader in terms of average wealth per adult in 2016.
As the latest edition of the CSRI Global Wealth Report shows, total global wealth in 2016 edged upwards by USD 3.5 trillion to a total of USD 256 trillion (or 1.4%), a rise very much in line with the increase in the world’s adult population. Accordingly, average wealth per adult of USD 52,800 remains in line with last year’s figures.
Brexit vote hits wealth
The UK suffered a significant drop in wealth in 2016, with USD 1.5 trillion being wiped off household wealth in response to the Brexit vote, which triggered a sharp decline in exchange rates and the stock market.
Michael O’Sullivan, Chief Investment Officer of International Wealth Management at Credit Suisse, stated: “The impact of the Brexit vote is widely thought of in terms of GDP but the impact on household wealth bears watching. Since the Brexit vote, UK household wealth has fallen by USD 1.5 trillion. Wealth per adult has already dropped by USD 33,000 to USD 289,000 since the end of June. In fact, in US dollar terms, 406,000 people in the UK are no longer millionaires.”
Japan rises, distribution of Chinese wealth growth more unequal
The Global Wealth Report also highlights the impact of adverse currency movements, which caused wealth to fall in every region except Asia-Pacific. The highest rise in wealth amongst individual countries was achieved by Japan with a total increase of USD 3.9 trillion, followed by a USD 1.7 trillion rise in the US. Switzerland once again topped the rankings in terms of average wealth per adult. Despite a decline in average adult wealth, its leading position remains unchallenged.
Loris Centola, Global Head of Research of International Wealth Management, said: “The consequences of the 2008-2009 recession will continue to have a material impact on growth, which is pointing more and more towards a long-term stagnation. The emergence of a multi-polar world, confirmed by the impact of the Brexit vote in the UK and by the US Presidential election, is likely to exacerbate such a trend, which could possibly lead to a new normal lower rate of wealth growth.”
Key themes addressed in the Global Wealth Report include:
Wealth outlook
Trends in the number of millionaires
The wealth pyramid
Bottom billion
Inequality
For a copy of the Global Wealth Report 2016, follow this link.
CC-BY-SA-2.0, FlickrPhoto: Jeff Gunn
. The Old Mutual Global Investors’ Annual Conference in Boston Brought Together 55 Delegates
Last October, about 55 delegates from Miami, Bogota, Montevideo, Santiago, Lima, Houston, Dallas, San Antonio, San Francisco, and New York, gathered in Boston for the Old Mutual Global Investors’ annual conference.
With Chris Stapeton, Head of Distribution for the Americas, as Master of Ceremonies, attendees were able to listen to several of the company’s portfolio managers, such as Lee Freeman-Shor, portfolio manager of the European Best Ideas Fund, who spoke about his post-Brexit vision, and John Peta’s presentation on emerging market debt, as well as Josh Crabb, Head of Asian equities.
John Peta joined OMGI in 2015 from Threadneedle. In recent years, the company has been attracting professionals of a very high-level. An example is that of Mark Nash, who arrived at Old Mutual from Invesco (fixed income), or Rob Weatherston (Asian Equities), who came from BlackRock. “They have come to Old Mutual because our managers can develop their strategies, based on their vision, to generate alpha in their teams,” explained Warren Tonkinson, Managing Director of Old Mutual GI, in his opening speech.
The presentation led by Ned Naylor-Leyland, Manager of the new Gold & Silver Fund strategy, entitled “Gold’s Perfect Storm,” attracted the attention of the audience and detailed, among other things, why “Gold ETFs do not make much sense,” or, that right now, the precious metal “is the only asset you can have that is not discounting another round of quantitative easing.”
Old Mutual Global Investors’ path to its current position as a benchmark company in the Asset Management industry and ranked in the top 5 in the United Kingdom, could be described as meteoric. Founded in 2012 from the merging of two smaller UK management companies, OMGI has gone from managing 17.9 billion dollars in assets to 35.7 billion. Its team, which started with 140 people, currently has 273 professionals. Tonkinson explained that in order to grow, they first invested in their investment, operational, and risk platforms, and later in their distribution platform by opening sales offices in several markets. They started with London, Hong Kong and Boston, and recently added Miami, Uruguay, Singapore, Zurich, and Milan.
The managing director pointed out that while at the beginning 95% of its assets were generated in the United Kingdom, currently only half of their flows come from there, due to its internationalization process. Old Mutual GI has also carried out a diversification process by type of client, just last year, they took their first steps in the institutional business, and thus far they have received 750 million dollars in assets from this type of client.
