CC-BY-SA-2.0, FlickrPhoto: Dennis Jarvis. Are Dividends from Emerging Markets Worth The Risk?
The latest Henderson Global Dividend Index (HGDI) report – a long-term study into global dividend trends based in US dollars– shows how dividends from Emerging Markets (EM) have declined in headline terms* during the last two years, in stark contrast to their significant growth between 2009 and 2013. The trend supports the view that taking a global approach to equity income, with the flexibility to access growth opportunities and seek out attractive yields, is important to help reduce an investor’s reliance on any one region or sector.
*Headline dividends reflect the total sum of payouts received within the HGDI in US dollar terms. Underlying dividends are adjusted for special dividends, changes in currencies, timing effects and index changes.
Dividends from the EM more than doubled in headline terms between 2009 and 2013 (+114.4%), which compares favourably to the 45.1% rise in dividends globally. Since the start of 2014, however, payouts from companies listed in the EM have fallen at a headline level by 17.9%, while global dividends have risen by 8.8%.
A heavy weighting of commodity companies, which have suffered from weak demand leading to many implementing dividend cuts, along with falling emerging market currencies are mainly responsible for the EM dividend decline since 2014. China is the largest EM dividend payer, making up more than a quarter of the HGDI EM total (27%), as shown in the chart below.
Dividends from Chinese companies have almost tripled since 2009 at a headline level, far outperforming the EM and global average. But growth stalled in mid-2014 and since then Chinese dividends have fallen in headline terms for the first time since the HGDI was introduced in 2009. A limited number of commodity companies, however, and a managed currency mean Chinese dividends have declined less than those from other EM countries.
Over the long term, exchange rate effects broadly even out but the impact in 2015 was exceptional and reflected the US dollar’s strength. Last year headline dividends from EM declined by 8.3% but underlying growth was strong at 12.7% (year-on-year). Exchange rate effects accounted for 18% of the difference, with the impact greatest in Russia and Brazil, while the remaining 3% was down to special dividends and index changes.
Henderson Global Equity Income strategy
The geographical allocation of the Henderson Global Equity Income strategy is a function of where the managers find attractive stocks with good fundamentals and appealing valuations rather than being based on an overarching macro view.
Currently, we are finding the most attractive stock opportunities for both capital and income growth in developed markets. The outlook for earnings and dividends remains uncertain in many EM markets whereas most developed markets offer the potential for dividend growth.
While the strategy has a low direct weighting to EM, exposure is also achieved through certain developed market companies with significant emerging market business streams.
Ben Lofthouse became a fund manager at Henderson in 2008 and since then has managed a range of Equity Income mandates.
CC-BY-SA-2.0, FlickrPhoto: Kath Cates. Columbia Threadneedle Investments Appoints Kath Cates as Non-Executive Director
Columbia Threadneedle Investments announces the appointment of Kath Cates to the Board of Threadneedle Asset Management Holdings Sarl (effective 10 May) and the Board of Threadneedle Investment Services Limited (effective 29 March), as a Non- Executive Director.
Ms Cates is also a Non-Executive Director of RSA Insurance Group Plc, where she Chairs the Board Risk Committee and is a member of the Group Audit Committee and the Remuneration Committee. In addition, she is a Non-Executive Director of Brewin Dolphin, where she chairs the Board Risk Committee and is a member of the Group Audit Committee.
Ms Cates’ most recent executive role was Global Chief Operating Officer for Standard Chartered Bank, a position based in Singapore which she held until 2013. In this role she led the Risk, IT, Operations, Legal and Compliance, Human Resources, Strategy, Corporate Affairs, Brand and Marketing functions across 60 countries. Prior to joining Standard Chartered Bank, Ms Cates spent over 20 years at UBS, most recently in the Zurich-based role of Global Head of Compliance. For the previous 10 years she was based in Hong Kong, as APAC General Counsel and then as Regional Operating Officer.
Ms Cates earned a First Class Honours degree in Jurisprudence from Oxford University and qualified as a Solicitor in England & Wales before specialising in financial services.
Tim Gillbanks, Interim Regional Head, EMEA at Columbia Threadneedle Investments said: “I’m pleased to welcome Kath to Columbia Threadneedle. She brings valuable financial services experience particularly in the areas of risk management, governance and regulation and operational excellence. We look forward to working with Kath and to the benefit of her contribution to our business.”
The debate about the referendum on the UK’s membership of the EU is heating up. There is a lot of argument about the relative costs and benefits of staying in or leaving the EU, but that is all speculation about the future. But what about the impact on the UK economy today caused by simply asking the EU question?
Nobody in business or finance likes uncertainty, which is why people spend so much effort trying to predict the future. This is hard enough to do at the best of times. The referendum makes prediction very difficult, and the outcome is not even binary; a post-exit UK could have any of a number of potential relationships with the EU. Nobody really knows what economic policies would look like under those circumstances.
Thanks to some innovative work by Scott Baker, Nick Bloom and Steven Davis Kellog School of Management, Stanford University and Booth School of Business , we have a way of measuring economic policy uncertainty. They compile a news based index by finding references in newspapers to uncertainty about economic policy. The resulting economic policy uncertainty indices reveal a stark divergence between the UK and the Eurozone (chart 1). In the past, uncertainty in Europe and the UK tended to move together. This year policy uncertainty in the UK spiked, and this is almost certainly the referendum effect.
The first instinct when facing increased uncertainty is to defer whatever decisions we can until we have more information. For a household this will not be everyday spending on food or energy, but rather big ticket items like washing machines or a new car. For a business it will not be wages and running costs, but rather big investment plans or additional hiring. In the grand scheme of things, delaying a new factory or a new piece of equipment by a few months is not going to matter much.
Sure enough, we can see investment and employment intentions shifting in the UK. This is very clear in the Bank of England (BOE) agent scores (not as exciting as it sounds; these are surveys by BOE regional offices). Investment intentions and employment intentions have both softened for several months now (chart 2), suggesting a growing reluctance to commit to anything long-term.
The impact on manufacturing appears to have been more stark (although it is worth noting that manufacturing has slowed in the US as well). But manufacturing, which is involved in more international trade, may have more reason to be worried about the uncertain impacts on trade of a vote to leave.
The consequences for UK GDP in the first half of the year are likely to be strongly negative, and as such it makes it all the more likely that the BOE does not hike rates any time soon. The market has already pushed out the timing for the first rate hike until 2018 or even later.
We observed the same phenomenon in the USA a few years ago (see Domestic Disputes, 21 October 2013). At the time another government shutdown was looming. The US policy uncertainty index spiked and net business investment fell. Nobody wanted to expand capacity when there was so much uncertainty about the future. Once the uncertainty faded (the crisis was averted), investment spending returned.
Unlike the risk of US government shutdown, which would have been temporary, the EU referendum could have longer- term consequences. In the event of a vote to remain in the
EU, the uncertainty would quickly fade. But if there is a vote to leave, the negotiations with the rest of the EU could take many years. Uncertainty could actually increase after the referendum, which could have prolonged consequences for the economy. Whatever the vote decides, the effect will create a short-term negative impact on the economy. In that event, the only certainty is that the Bank of England will consider deferring rate hikes even further into the future.
Joshua McCallum is Head of Fixed Income Economics UBS Asset Management.
CC-BY-SA-2.0, FlickrPhoto: Christian Theulot . Christian Theulot, New Chief Retail and Digital Officer at Lyxor AM
Lyxor AM announces the appointment of Christian Theulot as Chief Retail and Digital Officer. The appointment took effect on 15 March 2016.
In this newly created position, Christian Theulot will be responsible for accelerating Lyxor’s digital transformation, supporting its commercial development and fostering excellence in its business processes. He is also tasked with strengthening Lyxor’s presence in distribution, where it is already well established, especially among private banks.
Lionel Paquin, Lyxor AM CEO, said: “The digital transformation presents many opportunities for asset management, whether for enhancing investor experience or for developing digital tools to optimise management processes. Christian Theulot’s appointment will allow us to fully seize them, while enhancing our ties to distribution and delivering Lyxor’s proven expertise and innovation capabilities to this segment.”
Based in Paris, Christian Theulot will report to Guilhem Tosi, Head of Products, Solutions and Legal and a member of Lyxor’s executive board.
Before joining Lyxor, Christian Theulot was Head of Marketing and Development for the Retail Partners & Investment Solutions business line at the Amundi Group for four years. Christian began his career at the Paribas Group, where he spent some ten years in various Marketing/Partnerships managerial roles (Cardif, Cortal-Consors, Compagnie Bancaire). At the beginning of the 2000s, Christian joined AXA’s holding as Senior Vice-President e-business. In 2004 Christian was recruited by the Société Générale group, where he spent seven years as Head of Savings Products for the French network.
Christian Theulot is a graduate of Kedge Business School and holds an MBA in Marketing from HEC.
CC-BY-SA-2.0, FlickrPhoto: Carlos ZGZ. Surviving Chinese Volatility
Despite strong concerns at the start of the year, at Pioneer Investments, they believe that overall economic conditions are stabilizing, backed by a more aggressive policy stance, better fiscal supports, recovery of the real estate sector and credit growth, while consumers and the private sector have remained relatively resilient. Tail risks of a hard-landing in the near term are easing meaningfully.
Policy stance: 6.5% GDP Growth is the Floor
Following China’s annual National People’s Congress meeting (NPC) in March, policymakers sent relatively strong messages regarding their stance this year, which is likely biased towards the easing side.
The GDP growth target for the year was announced as the 6.5-7.0% range. According to Monica Defend, Head of Global Asset Allocation Research with Pioneer, the floor of 6.5% is probably a harder target than others. In other words, if growth risked breaching the 6.5% floor, policy support would turn stronger than planned, while support could ease if growth reached 7.0%.
Better Fiscal Support
“China’s overall fiscal and quasi-fiscal position is complicated, including the budget deficit, out-of-budget funds to local governments, net revenues from land sales, and changes of fiscal deposits in PBOC accounts,” says Defend.
The latest information allows us to have a more complete picture of the underlying fiscal & quasi-fiscal position, and suggests that fiscal policy is becoming more supportive and perhaps more effective.
The overall fiscal stance, including all budgetary and quasi-fiscal measures, became less supportive or even tightened beginning in late 2014 and through most of 2015, largely due to strengthening of regulations on local government out-of-budget financing and weak land sales. Defend believes that the increase of central government spending was not sufficient to offset such weakness. But this seems to have changed since late 2015. And so she estimates that the overall fiscal and quasi-fiscal deficit will rise by around 1.5% of GDP in 2016 vs 2015. This is mainly due to:
The fiscal deficit has increased since late 2015 and the plan is for it to continue to rise.
Land sales are likely to at least stop acting as a drag in 2016, with further positive signs in real estate markets.
The creation of Special Construction Funds (SCFs) in late 2015, which policy banks use to inject capital into specific projects, mainly infrastructure-related. This new quasi-fiscal channel appears, relative to traditional out-of-budget local government borrowing, easier to regulate and manage, and thus more flexible and efficient.
Easing of policy over the past year or so appears to have stabilized the real estate sector, with a visible rebound early this year. Relatively strong sales have been pushing acceleration of existing projects and new starts have finally picked up.
Although property activity is still fairly weak for the country as a whole and price increases have been subdued, momentum in some large cities has been relatively strong. This has triggered a recent tightening of property purchase policy in a few large cities. But this is largely designed to prevent potential price bubbles in individual regions, rather than reflecting a reversal of a generally supportive policy stance.
“The latest data suggest that sales in Tier 1 cities have cooled somewhat, while overall sales have been relatively stable. While we expect only stabilization or a moderate recovery for the whole year, this scenario should be relatively sustainable.”
Conclusions
“Despite strong concerns about China’s economy at the start of the year, there is increasing evidence suggesting that the underlying situation has been stabilizing, with tail risks easing. This is buying more time for China to push structural reforms. We are conscious that the process is still long and not straightforward. A failure in reform implementation would add to medium-term risks. So far, we believe that the reforms are progressing nicely and that the transition of China toward a more balanced economic model is underway. For this reason, we are moderately positive on China, that is one of our favorite countries among emerging market universe,” she concludes.
To read Defend’s complete macroeconomic update, follow this link.
CC-BY-SA-2.0, FlickrPhoto: Glyn Lowe. Columbia Threadneedle Investments to Acquire Emerging Global Advisors
Columbia Threadneedle Investments announced on Wednesday an agreement for Columbia Management Investment Advisers, LLC to acquire Emerging Global Advisors, LLC (EGA), a New York-based registered investment adviser and a leading provider of smart beta portfolios focused on emerging markets. The acquisition will significantly expand the smart beta capabilities of Columbia Threadneedle Investments. Terms of the EGA acquisition were not disclosed. The transaction is expected to close later this year.
With $892 million in assets, EGA has an established presence in the smart beta marketplace. It is the investment adviser to the EGShares suite of nine emerging markets equity exchange-traded funds (ETFs) that track custom-designed indices:
Beyond BRICs (BBRC)
EM Core ex-China (XCEM)
EM Quality Dividend (HILO)
EM Strategic Opportunities (EMSO)
Emerging Markets Consumer (ECON)
Emerging Markets Core (EMCR)
India Consumer (INCO)
India Infrastructure (INXX)
India Small Cap (SCIN)
“The experience and knowledge of the EGA team and strong emerging markets ETF products will complement our existing actively managed product lineup,” said Ted Truscott, chief executive officer of Columbia Threadneedle Investments. “The EGA acquisition will allow us to reach even more investors and accelerates our efforts as we build our smart beta capabilities.”
Since launching its first ETF in 2009, EGA has had a dedicated focus on providing rules-based, smart beta strategies designed to provide investors with diversification and growth opportunities in emerging markets.
“The team is excited about joining Columbia Threadneedle Investments and building on our complementary strengths to deliver smart beta strategies across asset classes to investors,” said Marten Hoekstra, Chief Executive Officer of EGA. “Now our clients gain access to Columbia Threadneedle’s rich investment expertise, while continuing to benefit from EGA’s experience converting investment insights into rules-based, smart beta strategies.”
“Columbia Threadneedle Investment’s expansive footprint across global markets provides an opportunity to accelerate the growth of our smart beta platform,” said Robert Holderith, President and Founder of EGA.
As part of their efforts to enter the smart beta marketplace, in the first quarter of 2016 Columbia Threadneedle Investments filed with the SEC a preliminary registration statement relating to multiple equity smart beta ETFs, including Columbia Sustainable Global Equity Income ETF, Columbia Sustainable International Equity Income ETF and Columbia Sustainable U.S. Equity Income ETF (referred to as the Columbia Beta AdvantageSM ETFs).
CC-BY-SA-2.0, Flickr. Credit Markets: Confidence Returns, but is it Sustainable?
Stephen Thariyan, Global Head of Credit at Henderson, reviews the credit markets in Q1 highlighting the ‘two-thirds—one-third’ nature of the markets. Financials came under particular pressure over the quarter exemplified by Deutsche Bank’s ordeal. While investors are happy to be back in the markets for now, as central banks have acted effectively to bring confidence back, challenges lie ahead in 2016. Thus, Stephen believes investors should be prepared for volatility to resurface.
Can you give a brief summary of corporate bond markets in Q1 2016?
It was a tough start to the year. It seems that in the first two months, particularly in February, the markets were discounting all the possible bumps in the road for 2016: concerns about central bank policy, illiquidity, Brexit, the oil price, China and growth in general. This led to quite a major sell-off across all capital markets, both debt and equity.
The end of February and March then saw a strong recovery, essentially based on the oil price, rallying from a low of US$26 upwards. That resulted in good returns, especially in high yield and emerging markets; total returns being positive across most currencies, across most credit markets, and excess returns again being broadly flat across most credit markets. So, a quarter of two thirds/one third: a very poor start and a strong recovery that continued into Q2.
Can you explain why the financial sector underperformed, particularly Deutsche Bank and subordinated banks/insurers more broadly?
The financial sector came under particular pressure in the first quarter. This was based on a combination of issues. Deutsche Bank in a way personified this with a situation that led to a significant sell-off in its bond prices, CDS and equity price. In a negative interest rate world, the core way the banks make money is challenged (ie, use short-term borrowing to lend for longer periods). This means significantly reduced returns from investment banking, especially in trading, fixed income, commodity and currency.
Banks, such as Deutsche, reported their first major loss in around eight years and there is a huge degree of outstanding litigation surrounding these banks, totalling billions. The last point was, especially with respect to Deutsche, concerns about the AT1 securities, contingent capital notes, which are complex subordinated financial securities, in existence to increase the capital buffer. There was a rumour that Deutsche would not pay its coupon, and even though these securities are designed to protect the public, the potential triggering spooked investors. Deutsche did recover the situation, but for the first time it felt a bit like 2008.
So financials generally took an awkward situation largely on the chin, given that central banks, especially in Europe, are trying to make banks lend money. Banks, however, are deleveraging, carrying lots of liquidity and struggling to find borrowers to borrow that money.
What is the outlook for credit markets and what themes are likely to drive the markets?
We are at an interesting point. We have suffered from a difficult first few months in 2016. The central banks have come in and almost acted in unison, with the European Central Bank subtly talking about a movement in monetary policy, but more importantly, the purchase of corporate bonds in the next few months. They haven’t given any details but the sheer fact that they are prepared to do it has given the markets confidence that there is a bidder for bonds.
It is debatable how effective that would be but the markets have rallied as a result. That combined with the Fed being a little more dovish a week later gave the capital markets, debt and equity, a huge fillip. Equity markets strengthened, bond markets strengthened, new issuance has started and the oil price steadied. A combination of all those events and generally benign data means that the investor seems happy to be back in the market again.
There is a degree of suspicion about how long this will last, but I think as we have said ever since the back end of last year, given all the different events that could occur in 2016, we are in for a volatile time. Certainly central banks have acted effectively so far in giving investors the confidence that they should be back in the markets buying both debt and equity.
CC-BY-SA-2.0, FlickrPhoto: Neal Fowler. Time To Take A Step Back?
As a disappointing first quarter earnings season rolls on, I am beginning to feel more cautious about the markets in the months ahead. We’re in the midst of a third consecutive quarter of poor profits and cash flows, and what’s most troubling is the weakness that’s spreading beyond energy and exporters to a broader swath of companies in the index. To me, this is a signal to reduce risk in many portfolios.
Why the increasing level of concern? The three previous earnings recessions of the last 50 years that were caused by a combination of tumbling oil prices and a strong dollar tended to last two quarters. But this pronounced downturn in earnings has now stretched into a third quarter. By now, I would have expected sales and profits to have rebounded, with consumers responding to the “energy dividend” that has accompanied the tumble in oil prices. And the pass-through from lower input costs should have driven an increase in overall economic activity, fueled by higher real consumer incomes. That has not yet happened. I find it both discouraging and an ominous sign for risk assets.
Reevaluate your asset mix
With new money, investors may want to contemplate standing aside for now. An appropriate response for existing diversified portfolios could be to reevaluate their quality mix, and to consider favoring a tilt toward shares in companies with sustainable dividend yields and toward high-quality bonds, perhaps US corporate credits.
Although I don’t believe the present backdrop signals the beginning of a US recession, it does mean that we are now experiencing a protracted earnings recession. To resume favoring risk, I’d need to see the following:
A recovery in capital expenditures
An improved revenue line for US-based multinationals
A sustained improvement in emerging markets
Improved pricing power on the back of an increase in global inflation
Additional concerns
Aside from the concerns expressed above, there are a number of other issues that the market needs to confront. In particular, because of the growing weakness in earnings, the current price-earnings ratio for the S&P 500 is too high, at 16.3x.
Seasonal trends are not particularly favorable in the months ahead. The May–October period is historically characterized by sideways market movements, delivering indifferent returns to investors when viewed over many decades. As the popular saying goes, “Sell in May and go away.” This year, in particular, investors can afford to wait for more clarity from the data flow.
Generally, market participants tend to be cautious in the months leading up to major elections. And with this year’s US election likely to be contentious, that caution may be justified. Further risks that may warrant caution are the Brexit referendum on 23 June and a Spanish general election days after, as well as concerns about Greece’s ability to meet its financial obligations over the coming months.
The macroeconomic environment has proven less dynamic than expected in recent months. US government income tax receipts have slowed despite still-robust employment data. New single family home sales, though solid, have not met my expectations. Auto sales are losing momentum after a very strong 2015. And most importantly, the profit share of gross domestic product, one of the most important forward indicators I follow, has started to slide.
While the current US business cycle remains strong by many measures, like job and wage growth and corporate profit margins, the equity markets are laboring to produce the earnings and margins that we’ve come to expect in recent years.
Our job will be to follow the shifts in the markets and the economy, and it’s our hope that our current concerns will be temporary.
But for now, it might make sense to take a step back.
James Swanson is Chief Investment Strategist at MFS Investment Management.
CC-BY-SA-2.0, FlickrPhoto: InvertmentEurope. Roderick Munsters Appointed Global CEO Asset Management of the Edmond de Rothschild Group
The Edmond de Rothschild Group has decided to entrust the management of all of its Asset Management business to Roderick Munsters from May 10, 2016. He replaces Laurent Tignard who leaves the Group to pursue new professional opportunities.
Edmond de Rothschild confirms its willingness to accelerate the development in France and abroad of one of the Group’s flagship business, representing over CHF 85 billion (€78 billion) in assets under management (at 31.12.2015).
Roderick Munsters (1963) has both a Dutch and a Canadian nationality. He was Chief Executive Officer of Robeco Group from 2009 to 2015 (EUR 273 billion AUM at end-2015). He also headed Robeco’s subsidiaries RobecoSAM (Sustainable Investing) in Zurich and Harbor Capital Advisors (US multi-manager) in Chicago. From 2005 to 2009 he was a member of the Executive Committee and Chief Investment Officer of ABP and APG All Pensions Group.
Roderick Munsters will report to Ariane de Rothschild and is part of the Group Executive Committee as Global CEO Asset Management.
“We are very pleased to welcome Roderick Munsters. He will bring a wealth of experience, strong knowledge of international financial markets, entrepreneurial spirit and recognised ability to generate long-term performance” said Ariane de Rothschild, Chairwoman of the Edmond de Rothschild Group Executive Committee.
“I am very pleased and proud to join the Edmond de Rothschild Group and its teams in France and abroad” said Roderick Munsters. “Edmond de Rothschild is a leading reference in Asset Management. The Group is a forerunner of alternative multi-management since 1969, high-yield bonds in the 70s and currency overlay more recently. It is an honour to have the opportunity to take part in the Group’s European and international development and to support the further growth of its reputation”, adds.
Photo: KayGaensler, Flickr, Creative Commons. The Miami Selectors Event is Brought to a Close with Debates on Equities, Flexible Strategies, and High Yield
The second edition of the Funds Selector Summit held in Miami, organized by Funds Society and Open Door Media, offered in its second and final day, investment ideas focused on equities with different perspectives (European Equities with long-only and long-short strategies, US Small Caps, European and Emerging Equities with a value investment approach), global High Yield and flexible strategies (in equities, fixed income and emerging market debt) of fund management companies Allianz Global Investors, Legg Mason Global AM, Schroders, Brandes, Edmond de Rothschild AM, and Aberdeen AM.
European equities are still the trend, both with long-only and long-short strategies. In the first area, Matthias Born, Senior Portfolio Manager of European Equities at Allianz Global Investors, presented a high conviction strategy focused on new ideas of structural long-term growth (with features such as structural growth, cost leadership, technology leadership, or a superior business model). The strategy (currently with 70 billion Euros in assets) is managed very actively and stock picking is a key factor because, in the long term, the growth style does not necessarily have to beat the market.
Allianz Europe Equity Growth Select is designed specifically to take advantage of the main strength of its investment team: the selection of securities with a bottom-up approach. The fund has the potential to evolve well in both bull and bear markets, where it shows resistance “due to stock picking and to the companies in the portfolio,” explains the fund manager. He normally invests in about 30-35 names, with a maximum position of 6% and a focus on the universe of European large and midcaps. As investment examples, Born spoke of companies such as Infineon, Inditex, Reckitt Benckiser, or Coloplast. The names he most overweighs in his portfolio are Infineon, Reckitt Benckiser, SAP, Hexagon, Prudential, Novo Nordisk, Ingenio, DSV, Legrand, and Richemont; by sectors, he favors information or industrial technology, while he has no exposure to utilities or telecommunications. By country, he is overweight in Germany, Denmark, and Sweden. The fund’s turnover is usually below 20%.
He explained that growth is the main catalyst for the performance of the portfolio, as it is what determines the long-term evolution of the shares. “In Europe, which will continue to experience an environment of low growth and inflation for years, it’s even more important to have such a long term strategy,” he said. The individual weight of each company is based on the level of conviction which reflects growth criteria, quality and valuation: “We seek high profits and price setting power,” says the fund manager. He looks to not being influenced by the benchmark and being agnostic as to countries and sectors; and also giving importance to SRI criteria. Normally, the companies in his portfolio do not pay high dividends because they use their capital for new investments.
One can also capitalize on the European stock market with long-short strategies. Mike Gibb, Product Specialist at Legg Mason Global Asset Management, spoke about a way to invest with a long-short strategy in the European market. He also showed how the Legg Mason Martin Currie European Absolute Alpha fund investment process, managed by Michael Browne and Steve Frost, is flexible enough to weather this market environment, while offering an attractive risk-return profile. It is a high-conviction directional strategy (not market neutral), which aims to capture two-thirds of the market upturns and only part of the downturns. The net exposure may vary between -30% and 100% and typically invests in between 40 and 70 companies (about 35 in the long portfolio− focusing on companies with great products and balance sheets, margin growth and innovation− and about 35 in the short− companies with declining margins and market share, poor balance sheets, poor management, low entry barriers…) all selected from a universe of 600 companies), and focusing on the mid-cap universe with a purely bottom-up approach.
The process includes quantitative and qualitative analysis, visits to companies (about 300 each year) and a thorough evaluation. “Fund managers try to identify changes at the company level and how these can affect their business and their stock price,” explains the expert. They also apply a macro-level filter with a system of traffic lights. Currently, he has a neutral vision of the asset, being neither too optimistic nor pessimistic.
“Volatility reigns in the markets and we try to capture returns while controlling risk and potential downfalls. The challenge is to capture the growth of companies in the region: Europe is a place with big companies but also with companies with problems and pressures on margins… and so the long-short concept works very well and helps to avoid problems and protect capital.” In his opinion, this strategy fits well into the portfolios.
Value style…
Meanwhile, Gerardo Zamorano, Emerging Markets’ Fund Manager at Brandes Investment Partners, also offered his perspectives on Equities, which his company manages from a value perspective and with strategies for the global stock market as well as emerging, European, or American markets. The investment process consists of three phases: analysis (by investment teams), valuations (investment committees make the final decisions), and portfolio construction (also the responsibility of the investment committees). With the conviction that in the long-term value outweighs markets and that with the current environment− after years of the style’s worst performance due to the financial crisis− there is great opportunity in this investment style.
In emerging markets, valuations are close to the levels seen on previous crises but, since then, there have been strong improvements in fundamentals. “The situation is much healthier than in the late 90s,” says the expert. Value had performed better than growth but since 2014, it has performed worse. Therefore, securities with this bias are cheaper than in the past. The Brandes Emerging Markets Value Fund invests in companies of all capitalizations, leverages overreaction to macro factors and negative feelings (e.g. political events) leverages the lack of understanding or coverage of individual firms ( “we explore all corners of the market “) and build concentrated portfolios that manage risk with conviction. They also include into their investment universe, companies from border markets and companies from developed markets with characteristics which are more similar to those from emerging markets. In total, they usually have between 60 and 80 names. Currently, some key overweights are in the consumer discretionary sector, Brazil, Russia and Hong Kong, and underweights in Taiwan, South Africa, China, or the information technology sector. They also like Panama.
In Europe, Zamorano also points out the attractiveness of valuations and opportunity in the Brandes European Value fund. Overweight in the oil and gas sector, food, and countries like Italy and Russia, while underweight in banks, health, and countries such as Switzerland and Germany. The fund includes investment in emerging European markets, currently at around 10%. Companies such as GlaxoSmithKline, Engie, Sanofi, BP and ENI are among its top 10 positions.
US Equities
There are also opportunities in US equities. Jason Kotik, Senior Investment Manager of US equities at Aberdeen Asset Management, spoke about investment in small caps companies. “Overall, the US economy grows at a slow pace, but good quality companies can be found. Two thirds of the economy is consumption and is in good shape.” Overall, companies are in good financial health and valuations are not too aggressive, says the expert. “We are not investing on the economy, but on the companies,” he reminds us.
Regarding equity flows, investors are wary after the rally experienced, but in that rally the small caps lagged behind the large caps. So valuations in the small caps are now more attractive. “Historically, small caps do better than large ones, and also usually perform well even in scenarios of interest rate hikes,” the fund manager pointed out. The reason: when rates climb it’s due to an improvement in the economy (higher growth and inflation) and the small caps usually have greater exposure to the US domestic economy. In addition, they can be protagonists in processes of M&A, usually with significant premiums, and have less coverage by analysts, giving advantage to active managers.
In the company, they believe that corporate fundamentals support this investment, they speak of a modest but positive macro scenario and believe valuations are fair. In a more volatile scenario, the dispersion has also increased and makes stock selection more important. For the expert, the markets will remain volatile given the upcoming elections in the US, the uncertainty about monetary policy and macro doubts, which can lead to some correction but can also benefit asset management companies like Aberdeen. “We like boring names in which the others aren’t interested,” says the expert, who expects returns around the mid-single-digit. With its strategy (Aberdeen Global-North American Smaller Companies Fund, which also invests a small part in Canada) is able to offer a better return than the market, he explains, both in bull and bear markets. Currently overweight in sectors such as materials, consumer staples, industrial, and communications services, he has a strong underweight position in finance and utilities.
In Fixed Income…
In fixed income, Wes Sparks, Head of Credit Strategies and Fixed Income at Schroders in the United States, explained the opportunity which credit, investment grade and high yield, represent globally. “We are optimistic in IG and HY but we must be aware that there has been a big rally in a very short period of time: the global high yield has risen more than 12% since February,” he reminds us. For this reason, and as far as fundamental and technical factors are concerned, the management company remains optimistic on the asset, but is somewhat concerned about its valuations. “The fundamental and technical factors of high yield are more positive than in investment grade debt, but valuations are less attractive than in February. It is even a faster recovery than the sell-off and usually it does not work that way,” says Sparks; hence his caution in the asset. “It’s not expensive, but there is no safety margin,” he adds.
But he insists that the fundamentals are positive: “The risk of default is not a widespread threat.” In the United States, he speaks of many fallen angels during the first quarter, which he sees as very attractive opportunities. In terms of flows, the management company uses extreme flows in funds as a contrarian indicator: if there is output, it coincides with strong sales and falling prices, which is followed by recovery. And there is support from long term investors: “In an environment of low interest rates, investors continue to seek profitability and high yield is one of the assets in fixed income with the highest potential. We are seeing demand for long-term investors, such as pension funds,” he adds.
The fund manager denies that there may be a strong sell-off in high yield from now on, but believes that investment grade debt, by presenting better valuations, can be a better place to be in the medium term, because it has not experienced such a strong rally in recent months. “Valuations are more positive, and the asset has a more diversified buyer base which supports the market,” he says, although he clarifies that he is confident that high yield will beat IG over a twelve month period. “We have confidence in both assets, the returns will be positive in twelve months,” he adds.
In his global HY fund (Schroder ISF Global High Yield), he is committed to companies with cash, good margins and profits, pricing power, and manageable leverage, and regarding the US, he speaks about domestic-market-oriented defensive sectors (not impacted by the dollar and commodities at low levels) such as health or gambling, or companies that benefit from low gas prices (restaurants, automotive industry….). The fund is underweight in sectors related to raw materials (energy, basic industries…) and sees more value in other sectors such as communications.
Regarding central banks, Sparks believes the Fed will not be very aggressive in its rate hike because it will take into account international problems, while central banks in Japan and Europe will remain accommodative. Treasury bonds will rise in the coming months, but not too much, he says. Regarding the risks, he acknowledges that the interest rate is higher in IG than in HY, denies a cycle of widespread defaults (it will be reduced to the metals, mining, and energy sectors, he believes) and believes the next cycle of defaults will be in two years, in 2018. Regarding illiquidity he says that markets must compensate for it.
Flexible Strategies…
Kevin Thozet, Product Specialist in the Asset Allocation team and Sovereign Debt at Edmond de Rothschild Asset Management, shared the company’s positioning of flexible and dynamic funds in Global Fixed Income, Emerging Fixed Income, and European Equities. “Flexibility is part of our DNA and we define it as active management and investment without restrictions. We seek opportunities wherever they are, and we are flexible to invest in different market segments and vehicles.” The company believes that with the return of volatility, liquidity shortages, and greater market movements, this philosophy is more necessary than ever to create value. Because, regardless of vision on markets, the key is to be able to adapt quickly to whatever happens, the company comments.
His global fixed income fund tries to beat the market and obtain absolute returns, and it can invest across the fixed income universe. As some examples of that activity and how they try to capture the opportunities, he explains that when tapering started in 2013, they invested on assets that suffered, such as emerging debt, because they had conviction; during the Chinese crisis last year, they built positions in convertibles to benefit from the rebound in November 2015; this year, with strong volatility and widening spreads on the government debt of Greece and Portugal, they saw it as an opportunity and increased exposure to Portugal. With regard to profitability, credit and public debt have been the largest contributors on an annual basis, but so have emerging debt and convertible bonds.
As for the company’s emerging market strategy− in UCITS format and domiciled in Luxembourg−, in the management company they have a contrarian and opportunistic approach without restrictions, are agnostic regarding benchmark, and are also able to invest in the entire universe (public and private debt). The largest position in the portfolio today is Ukraine (they see opportunities particularly in the corporate segment). Another conviction of the portfolio is Venezuela (with positions in both public and private debt): it’s not a commitment to its economy, but it does offer a very asymmetric profile between risk and return, says the fund manager. Also, an opportunistic coverage, although they are positive on emerging market debt, is investment in CDS in China. In 2013, emerging markets suffered heavy falls but the fund achieved positive returns.
The fund manager also spoke about the company’s flexible strategy in European stock market, which has some core, 60%, concentrated in equities with conviction, and above it, a hedge with derivatives to generate returns and reduce volatility and protect markets in case of falls.
