Fresh Insights for Investment in Equities, Credit, and Hedge Funds on the Last Day of the Fund Selector Summit in Miami

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Novedosas perspectivas de inversión en renta variable, crédito y hedge funds en el último día del Fund Selector Summit de Miami
The event was held at the Ritz Carlton in Key Biscayne, Miami. Fresh Insights for Investment in Equities, Credit, and Hedge Funds on the Last Day of the Fund Selector Summit in Miami

On Friday, the Fund Selector Summit, organized by Funds Society and Open Door Media, saw its second and final day, in which six managers explained their different perspectives of investment in equities and fixed income: Henderson, Carmignac, Robeco, Old Mutual, Lord Abbett, and Schroders analyzed different strategies with which they seek to generate returns in the current environment.

The day’s events were preceded by a conference by Javier Santiso, Vicepresident of ESADE’s International Centre for Economics and Geopolitics, in which he explained how a new world is emerging, with two background forces: the technology and digitization wave, and the growing importance of emerging markets. “The change in the wealth of nations is also related to digitization and technology, an issue which is also linked to the emerging world and its growing strength, and which has the potential to change the world and create disruptions in all sectors, including asset management,” Santiso explained.

For this expert, digitization is essential as an element which shall determine the future wealth of nations and he advised asset management professionals that they must not only take into account macroeconomic and microeconomic indicators when selecting their investments, but also the progress in digitization of the different markets. And he warned: management companies’ biggest competitors may be in companies like Facebook or Google rather than in other management companies. Santiso concluded his presentation with his vision of how Latin America is positioned in this environment.

The investment solutions presented at the conference covered various assets. In fixed income, Brian Arsenault, Leveraged Credit Investment Strategist at Lord Abbett, explained how in a world “starving for yield” it’s still possible to obtain returns on fixed income. The key? Flexibility, which they apply to negative duration funds in preparation for a rising interest rates environment, or high yield products, an asset which he still considers attractive in the US, even though he admits that spreads have fallen as compared to the past, and valuations are somewhat tighter.

The expert also spoke of his multi-asset fund with income prospects which may have up to 20% in equities: although it is focused on high yield, which occupies more than half of the portfolio, and in investment grade credit (over 20%), equities currently weigh almost 15% (the maximum is 20%), especially in mid-cap firms. Stock market investments, rather than seeking dividends, focus on shares which have a short-term appreciation catalyst, for example, US energy companies, with preference for natural gas over oil, which he doubts has a sustainable rally due to increasing supply. Some companies in the technology and healthcare sectors may also be interesting, because they have corporate movements as catalyst and can be bought. “When we like a company very much we study it from the point of view of bonds, loans, and equity, and can enter any of them, several, or all. We will go where we see value,” he added.

Regarding the last sell off in European public fixed income, he claims it’s normal because “growth is coming”. In his opinion, most of the market is focused on what the Fed does, but “we must also look to the European Central Bank.”

In equities, Justin Wells, Investment Director at Old Mutual Global Investors, explained their different investment style, which is focused on exploiting market inefficiencies: “We use the stocks ​​as commodities to extract alpha over a period of time,” he explained, “in order to achieve uncorrelated returns.” Because, in his opinion, diversification and decorrelation are no longer achieved by investing in global stock markets or in a portfolio of stocks and bonds … at least in the short term, or at certain times. Their investment process is committed to a diversified portfolio in which stock selection is based on five criteria, or sources of alpha: valuation, sustainable growth, management of the company, as well as on sentiment analysis and market dynamics (momentum): “The trend is your friend, we are not a private equity, we want to extract alpha from the market”. According to these five criteria, they allocate scores to each stock, on the basis of which they construct the portfolio. They are currently more positive with the US stock market than with the European or Japanese, where the general feeling is more positive.

Meanwhile, Robeco focused on its factors investment strategy applied to its emerging market fund, Robeco Emerging Conservative Equities. “Factor investing is here to stay; assigning depending on factors rather than assets is generating increasing interest,” said Michael McCune, Client Portfolio Manager at Robeco. The expert stressed value, momentum, and low volatility, especially the latter, as key factors. “Factor investment works very well in emerging markets.” Nevertheless, the company uses the same strategy in global US, and European stock funds. The management company has launched the European stock market version (Robeco European Conservative Equities) with hedged currency.

Nick Sheridan, Manager of Henderson Euroland Fund, stressed that the Euro zone is currently one of two developed markets with greater discount, and it is clear that “if you buy in cheaper markets, your chances of obtaining returns will be greater”. Remaining true to their investment style, Sheridan explained that the European stock market without financials “is still extremely cheap.” Among the reasons is the poor appetite for assets: “Everyone is disappointed with Europe and does not believe in growth because the continent has disappointed in the past. In addition, investors have favored growth stocks rather than value,” he says; something which favors current market valuations. But he believes there will be more growth in Europe than that which has been anticipated. “Europe is very cheap and the reasons why the market has been cheap will change,” he added. The greatest risk: Greece’s default.

Muhammed Yesilhark, Head of European Equities at Carmignac, explained their investment philosophy which sets them apart from the competition and with which they manage products of either large caps (Carmignac Portfolio Grande Europe), medium and small caps (Carmignac Euro-Entrepreneurs), or diversified strategy (Carmignac Euro-Patrimoine). “We are pure stock pickers, which is somewhat different from the management company’s top-down strategy.” Their strategy is based on bottom-up analysis, fundamental, value-based, and focused on turning points. They also believe in discipline and simplicity and all their investments are made from an absolute rather than from a relative point. Finally, it has limited downside risks.

To build the portfolio, with 40 to 60 securities, and a minimum 30% upside potential, they follows three steps: generate ideas; build portfolio (which is based on four sections based on their belief in the securities: core longs, trading longs, relative value and special situations, and alpha shorts), and risk management. “The portfolio tells me that we are in a late phase of the expansion cycle, even though the press talks of recovery. I do not have enough core longs in the portfolio” he said.

Schroders provided the vision of alternative management, with its liquid hedge fund platform, GAIA, a segment in which they see increasing potential. Andrew Dreaneen, Head of Schroder GAIA Product & Business Development, pointed out three liquid alternative strategies for this year which may offer protection and which are within the platform: “Investors are concerned about the situation in equities and fixed income, they seek diversification and want downside protection,” he said. So he highlighted three funds that even in the market’s worst moments are able to offer protection, including positive net exposure.

The products are Schroder GAIA Sirios US Equity (a long short US equity fund which provides protection against falls); Schroder GAIA Paulson Merger Arbitrage (offering adjusted returns at higher risk, decorrelated with the markets and in 50 of the 51 S&P bear months they have managed to beat the index) and Schroder GAIA KKR Credit (a fund of absolute return focused on credit and long short perspective which invests primarily in Europe and in the high yield market. Normally with very little net exposure, neutral market). In total, Schroders GAIA has 6 strategies (4 external, adding Egerton to the three aforementioned), and two of the management company.

EFGAM Adds to its Growth-Oriented Equity Strategies with the Launch of the New Capital Global Equity Conviction Fund

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EFG Asset Management lanza el fondo New Capital Global Equity Conviction
Photo: Davide D´Amico. EFGAM Adds to its Growth-Oriented Equity Strategies with the Launch of the New Capital Global Equity Conviction Fund

EFG Asset Management (EFGAM), an international provider of actively managed investment products and services, has launched the New Capital Global Equity Conviction Fund, an open-ended equity fund that will typically invest in 40 to 60 global stocks across all market capitalisations.

The Fund will be managed by Robin Milway, a highly experienced London-based equity fund manager who joined EFGAM in 2012. Robin will combine his expertise in bottom-up stock selection with EFGAM’s top-down geographic and sector analysis, without the constraints of a benchmark or specific investment style. Prior to joining EFGAM, Robin spent nine years at Cooper Investors in Melbourne Australia where he managed the CI Global Equities Fund. During his tenure at the firm, the fund returned 8.5% annualised over seven years, outperforming the MSCI by 5.6% annualised. (Source: CI).

The New Capital Global Equity Conviction Fund is based on EFGAM’s Global Equity Conviction Strategy which Robin has been running as part of discretionary mandates since joining the firm. The Fund will mirror the investment approach of its top-performing European counterpart, the New Capital Dynamic European Equity Fund, which is also co-managed by Robin Milway and Bibiana Carretero. The new Fund will be available to retail investors pending local registration and is the tenth sub-fund in the New Capital UCITS family – a range of high-conviction funds designed to produce long-term outperformance for clients.

Moz Afzal, Chief Investment Officer, EFGAM: “We are very excited to launch this long-awaited product for our clients. Many investors are increasingly looking for exposure to global investment opportunities and the launch of the New Capital Global Equity Conviction Fund caters for this demand. Robin has an outstanding proven track record of managing global equities and we are pleased to add to our specialist equity offering.”

Robin Milway, Portfolio Manager, New Capital Global Equity Conviction Fund, EFGAM: “The name of the fund underlines the philosophy of this fund – only stocks we have the highest conviction in make the cut. Our proprietary analytic framework allows us to identify companies that can sustainably grow their cash flows over time and importantly know what to do with the profits. This tried and tested investment methodology, which we’ve developed over the last decade, has resulted in long-term, sustainable outperformance for clients.”

The UK Economy and Financial Markets after the Election

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¿Amenaza el resultado de las elecciones británicas el estatus de la City?
CC-BY-SA-2.0, Flickr. The UK Economy and Financial Markets after the Election

The British election has delivered a stunning set of results, mostly unpredicted by the pre-election polls. Whatever the explanation for these forecasting errors (e.g. “shy Tories” not disclosing their true feelings to pollsters), the recovering economy and the lack of trust in the Labour programme must have played a large role in returning David Cameron and his Conservative party to Downing Street. Gains of over two million jobs in the past five years combined with low inflation and the start of real wage gains for the first time since the recession of 2008-09 will all have played a role in shaping voters´preferences for a party that has put economic credibility and the restoration of sound public finances at the top of its priorities. In addition, economic surveys show that consumer confidence is at a three-year high while the consensus forecast of economists for UK real GDP growth is 2.6% in 2015, a rate far ahead of most of the Eurozone. All these factors will have contributed to Camerons unexpected victory.

The fact that the Tories have won an outright majority of seats in Parliament (330 out of a total 650 seats) automatically means that the near-term uncertainties that threatened to dominate financial markets in the immediate weeks ahead can be dismissed. Now there will be no slide in the currency during a fractious process of coalition-forming, and no jitters in the stock market about a possible rejection of the Queen´s speech (which outlines the government´s legislative programme) by the House of Commons. Already sterling (+1.6% against the US dollar at midday on Friday, May 8th) and the FTSE100 (+1.87% also at midday) have bounced back from recent losses, while sterling bonds have rallied.

Moreover, the continuity of the Tory-led Coalition´s economic programme fiscal discipline in the public sector with a preference for allowing the private sector to promote economic growth and prosperity rather than widespread intervention in the markets (such as Ed Miliband´s plans to impose a freeze on electricity and gas prices or to re-write hundreds of thousands of “zero hours” employment contracts) will be a relief to business and the financial markets. Although the Coalition government failed in its aim to reduce the structural budget deficit to zero within a single parliament -in part due to the ring- fencing of expenditures on health and overseas aid, as well as numerous tax reductions on personal incomes especially at the lower end of the income scale – there can be little doubt that the Tories will seek to resume this programme, restraining public expenditure on both current and capital account until tax revenues have been restored to stronger growth.

On the monetary policy front there is no reason to expect any change in the mandate given to the Bank of England to maintain a 2% inflation target. The Monetary Policy Committee of the Bank is due to meet and report next week (May 11) on a meeting held on May 7 and 8. With CPI inflation in March well below target at 0% year‐on‐year (headline) and 1.0% (core) it is likely that the MPC will vote to keep rates unchanged at 0.5% and to leave the amount of asset purchases outstanding also unchanged at £375 billion. As the UK economy continues to recover it is probable that investors will start to anticipate a gradual series of rate rises later in the year, starting, in my view, after the US Federal Reserve starts to hike US rates.

In contrast to the resolution of these short-term uncertainties, the Conservative victory in the election brings one major, longer term uncertainty, the prospects of Britain´s future in Europe. David Cameron has promised the British electorate the opportunity to vote in an “in‐out” referendum on Britain´s membership of the European Union by 2017, a commitment that he will find impossible to avoid. Opinions in the country are very divided.

One side views Europe -with its heavy- handed regulations on everything from labour markets to the names of cheeses, its slow-growing economy, and its demand for large annual payments from Britain to the common budget, and its over bearing judiciary which is constantly expanding the areas of its remit -as an economic sinkhole that the country urgently needs to escape from before it suffers a Japanese- style fate of one or more “lost decades” of growth.

The other side views Europe as integral to Britain’s place in the world and the key to its ability to play a meaningful role in any international strategic, diplomatic or economic dialogue with other major powers such as the US, China or Russia. This side also claims that, with the EU being Britain’s largest trading partner, as many as three million domestic jobs are essentially dependent on British membership of the EU, and if Britain left the EU it would soon suffer debilitating trade or financial discrimination that would damage inward investment into Britain and hurt the country’s long term growth prospects.

Of major importance to the UK when considering its EU membership is the City’s position as Europe’s financial centre. The financial services industry accounted for around 8% of UK GDP and 12% of tax receipts in 2012. In addition, London is home to the European headquarters of many of world´s largest financial institutions. Major uncertainty would arise in the event of a UK exit from the EU, specifically concerning whether the UK would be excluded from the common market in financial services and passporting rules. It is legislation from Brussels that enables the City to carry out these activities and guarantees unrestricted access under pan-European regulations across every member state. For all these reasons the longer term uncertainties will remain, at least until 2017.

While the Conservative party is traditionally divided in its views on Europe (and at times in the past 30 years the issue has threatened to tear the party apart), the newly resurgent Scottish Nationalists are ardent Europeans, while Labour is generally pro‐European. The business world is by no means united in favour of EU membership. These divisions and the Prime Minister´s agenda for an “in-out” referendum will pose a major challenge to the new government.

In summary, although the election has resolved some short-term unknowns, longer term unknowns still remain.

Opinion Column by John Greenwood, Chief Economist Invesco

Brazil: Seeing Through the Scandal

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Tras el escándalo de Petrobras, Brasil sienta las bases para reactivar la economía, estiman los expertos de Investec
CC-BY-SA-2.0, FlickrPhoto: Eduardo Marquetti. Brazil: Seeing Through the Scandal

Paulo Roberto Costa, a former senior executive at Petrobras, the Brazilian state energy company, was arrested on charges of money laundering early last year. At first it seemed like any another corruption case. But then Mr Costa began to talk. The evidence he gave began to lift the veil on the largest corruption scandal in Brazilian history. In twelve months it has snowballed: nearly 50 politicians have been implicated, including the Treasurer of the governing Workers’ Party and the speakers of both houses of Congress. The scandal has overshadowed more positive political developments, hurting investor sentiment and casting a shadow over an already beleaguered economy.

The prospect of class action by institutional investors darkens an already grim outlook for the state-controlled company, although Investec feels one of the big outstanding risks, that the company fails to issue audited accounts, is an unlikely outcome. Petrobras issuing audited accounts, and the sentencing of those found guilty, should go some way to drawing a line under the scandal. The lack of evidence implicating President Dilma Rousseff would suggest her impeachment being unlikely.

Overall, experts at Investec feel the political impact of the scandal will recede and market sentiment should begin to recover in the months ahead, although given the important role that Petrobras plays in the economy – it accounts for around 10% of capital investment and 6% of GDP – the headwinds to growth will be significant, especially given the knock on impact on a number of other large companies linked to the scandal. The growth outlook is further hampered by the prospect of additional water rationing as well as the increasing likelihood of energy rationing. The country is suffering its worst drought in 80 years, which has particularly hit the economically vital Sao Paulo region. While recent heavy rain has helped alleviate the situation, water rationing may continue for some time yet while some energy rationing cannot be ruled out sometime in the year which would further weigh on the industrial sector.

These two exogenous shocks have come at a time of acute weakness in the Brazilian economy, point out the analisys by Investec. GDP growth has collapsed since the heady days of the 2000s. Brazil’s external and fiscal positions have weakened significantly, inflation is at a 9-year high and the real has halved in value since 20103. Robust growth during the 2000-10 period was largely the result of strong commodity exports and with the commodities supercycle seemingly over, the lack of diversity in the economy has become all too apparent. This dynamic is also at the heart of the weakening external position. The current account deficit has been on a worsening trend for the last eight years, partly driven by the trade balance, and in particular the lower value of commodities.

 

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Brazil’s fiscal position has also deteriorated markedly. In 2014 the country recorded its first primary budget deficit (i.e a government budget deficit before interest payments) of the century. However, the new finance minister, Joaquin Levy, is seen as a credible technocrat and he has pledged to restore fiscal sustainability and transparency, commented the firm. The methods by which primary surplus targets were met have been in question in the past few years. To this end, the government’s target this year is for a primary budget surplus of 1.2% and pledged fiscal tightening measures such as reduction in unemployment benefits and cuts in discretionary spending. The political outlook is also supported by a number of small reforms in the pipeline, which on aggregate should underpin growth over the medium to longer term.

Of particular note, the lower house has approved legislation that will improve labour market flexibility. Notably this bill was opposed by Dilma’s Workers’ Party, but with the legislation containing significant changes from Mr Levy, this should ensure the bill passes both the Senate and gets signed into law by the President. So while the reform agenda may not be on the same scale as India, the outlook is much more positive than Dilma’s first term and a lot more positive than investors were envisaging even just a few months ago. The central bank is also trying to regain some of its credibility, with Governor Tombini vowing to bring inflation back towards the official target of 4.5%. He has subsequently restarted the rate hiking cycle. Brazil’s benchmark rate now stands at a six-year high of 12.75% after a cumulative 175 basis point increase since September, up 5.5% since the beginning of the tightening cycle in 2013.

Currency risks remain to the downside, particularly through further deterioration in the country’s terms of trade. We have generally held an underweight exposure to the Brazilian real over the last few months which has added to relative performance. For now, however, we are neutrally positioned. While the risks to the currency remain to the downside, with reference rates at 12.75%, it is an expensive currency to remain underweight and given the sell-off in recent months we are unconvinced about the scope for further weakness.

“We have maintained an overweight position in local duration as we are positive on the long term fundamentals. The headwinds from the Petrobras scandal and the weakening real have ensured this position has hurt relative performance over the last few months. However, we have favoured longer-dated bonds which have held up relatively well as the increased credibility of the new economics team has helped underpin the long-end of the Brazilian yield curve. While it is unlikely that the ambitious primary surplus target will be met, it has at least encouraged the ratings agencies, and we expect them to give Mr Levy time to implement fiscal adjustments and so we believe the sovereign credit rating will remain investment grade. We feel the sell-off in yields has been excessive, given the long term fundamentals, but we felt it prudent to reduce our position from a risk perspective. In hard currency bonds, we moved to an overweight position in February after spreads widened to levels we viewed as oversold. As the crisis receded in March/April spreads have compressed from a peak of 375 to around 290 at the time of writing”, concluded Investec.

The next few months will require careful monitoring, but over the longer term Investec is still optimistic about the ability of the government’s new economics team to make the appropriate adjustments to help repair the Brazilian economy.

It is likely to be a year of difficult adjustment in Brazil and it will likely remain one of the more vulnerable large markets in the GBI-EM universe. However, over the longer term we are encouraged that the government is taking the first steps to regain market credibility and make the necessary reforms the country so desperately needs.

Another Leg Up for L/S Equity Funds

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Los fondos de renta variable L/S triunfan en abril
. Another Leg Up for L/S Equity Funds

The Lyxor Hedge Fund Index was up +0.1% in April. 3 out of 12 Lyxor Indices ended the month in positive territory, led by the Lyxor LS Equity Long Bias Index (+4.5%), the Lyxor LS Equity Market Neutral Index (+2.4%), and the Lyxor Merger Arbitrage Index (+0.7%), explained “The Alternative Investment Industry Barometer” published by Lyxor AM.

“A complex asset rotation is unwinding the key year-to-date trades. Powerful flows and technical dynamics are at play, but it’s not the end of the reflation story” says Jeanne Asseraf-Bitton, Global Head of Cross Asset Research at Lyxor AM.

Oil prices rallied through the month from improved EIA forecasts and US stocks accumulation starting to slow down. The Greece-Troika negotiations paced markets headlines on roller- coaster mode. In the second half of the month, EMU markets got seized in the cross currents of profit taking and QE trades unwinding. Eurozone equities netted a 1% gain while Germany’s 10Y yields bounced back 10bps from lows, followed by UST. Despite weaker US data, equity markets benefitted from a decent earning season. In EM, stocks got lifted by Chinese markets reflecting monetary easing efforts and driven by market liberalization, commented the firm.

L/S Equity funds were by far the outperformers in April with the long bias up +4.5%. Within the space, Asian managers stood out, boosted by rocketing Chinese markets. The rally surprised by its amplitude and unfolded amid a structural Chinese deleveraging with multiple signs of a gradual economic slowdown. It was driven by monetary easing. PBOC has already cut rates and RRR twice while adding about RMB 1tn of liquidity through various channels, and it is expected to ease furthermore. The market liberalization was also a powerful driver to the rally, according with the Barometer.

The authorization to open multiple accounts at different broking firms, an easier access to foreign investors through the Hong Kong-Shanghai Stock Connect, and an easier access for mainland investors into the Hong Kong exchange all contributed to unleash massive buying flows. Domestic flows were particularly strong. Importantly, adjusted from their net exposure, our Asian managers generated excess return. Meanwhile US managers continued to extract decent alpha, helped by the Fed remaining on the dovish side and by a better earning season than initially anticipated. European managers also performed decently, especially the market neutral styles as the YTD momentum started to dry out.

Event driven funds took a pause in April after several months of strong returns, courtesy of rising risk appetite and recovering illiquid premiums. Merger arbitrage funds have decently navigated the rising volatility in deal spreads. In particular they limited the damages from the TWC-Comcast deal termination. They also took positions in several healthcare freshly announced deals. Volatility also rose for Special Situation funds. After a positive start of the month, they gave up some of the gains thereafter. Continued signs of a slowdown in the US and rich valuations contributed to stall the momentum in event positions, including activist holdings

The Lyxor L/S Credit Arbitrage index was flat over the month. Funds’ return dispersion was however elevated. Developments in Eurozone and Asia were the main movers. The Greek saga had been largely shrugged off so far by global markets. In April, a risk premium started to be priced in on stalling negotiations and nearing debt repayment deadlines. The turn in periphery spreads went against QE forces and caught some managers off guards. In Asia, credit markets weren’t as strong as equities, in cross currents between monetary easing and a structural deleveraging, in the Chinese housing sector in particular. Gains were recorded in the US market where credit benefitted from further signs of oil prices stabilization and postponed concerns about the Fed normalization pace.

Convertible funds underperformed their L/S Credit peers in April, just like year to date. Their equity and rates hedges proved costly. The mixed gamma trading environment brought little contribution. Issuance volumes also remained below par.

The environment for CTAs proved more challenging in the second part of the month, especially for the long term models, point out the Barometer. The turn in yields, FX and energy was the main performance detractor. In contrast, short term models rotated their allocation much faster. They ended the month only marginally negative. While the overall CTAs’ exposure was shaved off in response to a more unstable trend following backdrop, the net exposures were little changed. On average by month end, CTAs remained long USD (especially against EUR, but slightly long JPY), short commodities – both on energy and precious metals – long equity and bonds, in the US and Eurozone in particular. We note that by mid-month CTAs have started to build substantial futures positions on Asian equities.

The Lyxor Global Macro Index was flat over the month. Funds displayed high resiliency to a number of cross asset reversals emerging in the second part of the month. The turn in periphery spreads, rallying US yields, and the USD weakness detracted performance. It was offset by the managers’ short European bond exposure, their positions in EM markets and in commodities to some extent. In aggregate, Lyxor Global Macro funds ended April with long USD positions – mainly against EUR and GBP – a long bias on base and precious metals, a neutral exposure to energy, a long US bond vs. a short European bond exposures. The bulk of their equity holdings were in Europe and Japan.

 

Robeco Launches a New High Conviction Emerging Markets Equities Fund

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Robeco lanza un nuevo fondo de renta variable de mercados emergentes
Photo: Rakib Hasan Sumon. Robeco Launches a New High Conviction Emerging Markets Equities Fund

Robeco announced the launch a new fund for EM equity that it will be managed by Jaap van der Hart, lead manager on the Robeco Emerging Stars Equities fund.

Robeco Emerging Opportunities Equities is the latest high conviction fund to be added to the fundamental Emerging Markets Equities capability of the firm.

The fund has been launched as a result of growing demand for products with a high active share. This is because many clients now combine low-cost index-tracking products with high-active share strategies to enhance performance.

Robeco Emerging Opportunities Equities invests worldwide in stocks of the most promising emerging and frontier economies. The fund aims to achieve higher returns by investing in the most promising countries irrespective of their weight in the reference index, while maintaining a well-diversified portfolio of 70 to 100 stocks. It will invest up to 25% of the portfolio in attractive opportunities within the smaller companies’ universe. The fund manager combines a top-down country allocation process with bottom-up stock selection, where stock selection is based on a unique blend of fundamental and quantitative proprietary research.

The fund will be managed within Robeco’s Emerging Markets Equity Team, and the fund manager will be Jaap van der Hart.

 

T. Rowe Price CEO and President James A.C. Kennedy to Retire in 2016

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T. Rowe Price nombra nuevo CEO y presidente a William J. Stromberg
CC-BY-SA-2.0, FlickrPhoto: William J. Stromberg. T. Rowe Price CEO and President James A.C. Kennedy to Retire in 2016

The Board of Directors of T. Rowe Price Group today announced that James A.C. Kennedy, CEO and president and chair of the firm’s Management Committee, has decided to step down from those roles, effective December 31, 2015. He will retire from the firm at the company’s Annual Meeting on April 27, 2016, following a highly successful 38-year career with the firm, the last nine as CEO and president.

William J. Stromberg, a 28-year veteran of the company who is currently head of Global Equity and Global Equity Research and a member of the firm’s Management Committee, will succeed Jim. Bill will become president and CEO and chair of the Management Committee, effective January 1, 2016. He will also join the Board of Directors at that time.

As part of the transition, Eric L. Veiel, a director of Equity Research–North America and a member of the U.S. Equity Steering Committee, will become head of U.S. Equity and chair of the U.S. Equity Steering Committee, effective January 1, 2016. He will also join the Management Committee at that time.

Brian C. Rogers, Chairman and Chief Investment Officer said: “The Board of Directors has tremendous confidence in Bill. His appointment as president and CEO will be the culmination of a thoughtful and planned transition of leadership at T. Rowe Price, and testament to Bill’s career success and proven leadership abilities. Bill has the respect of everyone in the organization.”

William J. Stromberg, Head of Global Equity and Global Equity Research, commented: “Jim’s career contributions to our clients, associates, and shareholders have been truly extraordinary. He has been a role model and mentor to me for many years and I will be honored to succeed him and serve as president and CEO. I am very proud of our talented associates and look forward to continuing to work with them to deliver excellent investment performance and client service while we expand our business globally.”

Investment Outlook for 5 Latam countries, by Global Evolution

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Cinco países de Latinoamérica bajo el radar de Global Evolution
Photo: DSasso. Investment Outlook for 5 Latam countries, by Global Evolution

In april 2015, Global Evolution attended the World Bank—IMF spring meetings with three objectives:

  • Country coverage: Conduct face-to-face meetings with IMF/World Bank Mission Chiefs as well as Government officials from emerging and frontier countries
  • Research collaboration: Discuss joint research with IMF Research Department; planning World Bank-Global Evolution ESG Research Seminar ahead of Annual Meetings 2015
  • IMF-World Bank relations: To maintain and extend our network with IMF and World Bank mission chiefs.

The firm draws these headline conclusions for five Latam countries:

  1. Argentina: The prospects depend crucially on two themes: A solution with the holdouts on the bonds that (temporarily) are in technical default; and the economic policy management after the elections in the end of 2015. A solution before the elections is highly unlikely—as Kirchner states: “patri o muitres”. Either winner of the elections will likely seek a solution with the houldouts. Macri seems more “market-friendly” than Scioli.
  2. Venezuela: Our view, backed by the dialogue in Washington, is that a default is not imminent since liquid assets to sell are around $70bn. Furthermore, Venezuela may give Jamaica a debt buyback deal similar to the one for Dominican Republic with early repayment—and they made March payments to debt holders indicating their willingness to service debt this year.
  3. Panama: The Panama Canal Authority is extremely well managed. They have their own constitution and governance structure like a separate state. The economy is furthermore thriving with growth likely to reach 7% over the medium term.
  4. Honduras: We are very positive on Honduras. IMF program progress is very convincing with quantitative targets being met with a wide margin. As an example, the fiscal deficit was 7.6% in 2014 with a target of 5.6% but the deficit ended up at 4.3%. The review in May will be very convincing. Honduras remains a positive credit story that seems to have slipped the attention of most other investors.
  5. Nicaragua: The Chinese government is unlikely to support the private sector investor who has intended to finance the canal. Unoffical estimates reveal a 50:50 chance that the investor will pull the plug and drop the investment. This will reduce expectation to growth, employment, and FDI going forward— while boosting the relative expectations for the same in Panama.

Global Evolution, an asset management firm specialized in emerging and frontier markets debt, is represented by Capital Stragtegies in the Americas Region.

An Early Upgrade in Bonds Will Prove Rewarding

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Es el momento de apostar por la deuda de mayor calidad
CC-BY-SA-2.0, FlickrPhoto: Soclega. An Early Upgrade in Bonds Will Prove Rewarding

Over the last few months we have been raising the quality of high yield bonds in the portfolio. At this stage in the credit cycle it seems sensible to avoid undue risk while at the same time acknowledging that unconventional monetary policy is elongating the cycle. While we do not see an imminent risk of defaults, we believe an early upgrade will prove rewarding and have been reducing our weight in CCC in favour of BB rated bonds.

What has prompted the rise in quality?

  • Energy sector: Deutsche Bank estimate that a third of US single B and CCC energy high yield bonds are at risk of restructuring or default if the current low oil price persists for a few quarters. While we see the energy sector as a special case, it is likely to have a knock-on effect on sentiment towards lower rated bonds as pressures among energy borrowers cause US default statistics to deteriorate.
  • Liquidity: Banks have stepped back somewhat from their traditional role as market makers. This role is a victim of well-intended regulation having the opposite desired effect as stricter requirements on bank capital and trader remuneration has led to a reduction in banks’ willingness to take risk onto their own books. We need to be mindful that liquid assets can become illiquid if everyone trades in the same direction. Premiums will be paid for better quality assets so it makes sense to own them early.
  • US monetary policy: The US Federal Reserve (Fed) is preparing the way for an interest rate rise. In March, the Fed scrapped its pledge to be “patient” before lifting rates, although this was tempered by rate projections being pushed out. The Fed has been good at providing guidance but we are wary of complacency. Rewind back to summer 2013 and investors may recall the taper tantrum when bonds sold off on suggestions the Fed would taper its asset purchasing program. Tightening still has the capacity to shock!

Recent weakness in some of the US economic data means expectations of a rate rise have drifted out somewhat, but we want to own the better quality bonds before investor concerns rise. A rise in interest rates in the US is likely to lead to tighter credit standards at banks and this may make it harder for some companies to refinance. There has been a close relationship historically between tightening credit standards and the default rate as shown in the chart below.
 

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Regional differences

The shift in credit quality improvement within the portfolio is primarily among US bonds because the credit cycle in Europe is younger and the monetary policy background is different. They say “don’t fight the Fed” but we don’t want to fight the European Central Bank (ECB) either.

The ECB’s quantitative easing (asset purchases) is pushing down yields on sovereign bonds, such that €1.7 trillion of Eurozone bonds were negative yielding in mid-April. This figure is several times larger than the entire euro high yield market, as shown in the chart below. With ECB quantitative easing set to remain in place until September 2016 this creates strong technical support for European high yield bonds. This is because a cascade effect takes place with investors moving down the credit spectrum in search of a positive yield, supporting our overweight position to the region.
 

 

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Identifying improvement
 
Credit ratings are not static and as active managers we have the opportunity to benefit from identifying bonds with improving credit quality. During 2014 the fund profited from ratings upgrades to bonds issued by GKN, the automotive and aerospace group, and Grand City, the real estate investment trust.
 
We hold perpetual preferred stock in Ally Financial, formerly GMAC, the auto financing group. We expect an eventual move to investment grade status due to improvement in the auto business, growth of the bank and successful refinancing of the capital structure resulting in a lower cost of funds and improved net interest margins. We also look at valuation opportunities where industry or stock-specific shocks have led to excessive pessimism but where credit fundamentals remain sound. This explains our holdings in bonds issued by Tesco, the supermarket group, which is reinvigorating its business after losing market share to discounters, and Chesapeake, the energy company, which was caught up in the negative sentiment towards energy companies, despite its strong balance sheet.
 
Taken together, the adjustments to the credit quality of the portfolio strike a balance between reducing risk while retaining exposure to the returns potential of high yield. The portfolio now has a weighted average yield and spread that is slightly lower than the benchmark.

 

Kevin Loome is Head of US Credit at Henderson Global Investors.

BBVA Appoints Carlos Torres New President & COO

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BBVA nombra a Carlos Torres nuevo consejero delegado del Grupo
. BBVA Appoints Carlos Torres New President & COO

The Board of Directors of BBVA named Carlos Torres Vila president & COO at a meeting held today in Madrid, replacing Ángel Cano. The Board also approved a new organizational structure that puts digital transformation at the center of the strategy to accelerate its execution, while creating a function with the sole mission of managing the country’s networks and operations to enhance results.

“Ángel has been a great president & COO during very complex years and now we start a new phase to advance toward our goal of becoming the best universal bank in the digital age,” said Francisco González, chairman & CEO of BBVA.

Amid the disruption underway in banking, with new consumer demands, digital entrants and new business models, BBVA has defined a structure to carry out digital transformation as the Group’s top priority. After the outstanding performance achieved by the team led by Ángel Cano through the most severe financial crisis in recent history, BBVA is now making the needed changes to start the new phase.   

“It has been a challenging and intense period and today BBVA is in a position of strength,” Ángel Cano said. “Carlos the ideal person to keep advancing the transformation process.”

Carlos Torres Vila joined BBVA in 2008 as head of Strategy & Corporate Development, and later was named head of the global Digital Banking area. Previously, he was director of corporate strategy and CFO of Endesa. Prior to Endesa, he was partner at McKinsey & Company. Carlos Torres Vila graduated from the Massachusetts Institute of Technology (MIT) with a BS. in Electrical Engineering and a BS. in Management Science, and also holds a Law degree from the Universidad Nacional de Educación a Distancia. He earned an MBA from MIT.

With his appointment as president & COO, he will be able to accelerate the digital transformation process globally and in every geography, strengthening the efforts initiated at the Digital Banking area.

“Transformation is our responsibility, a responsibility for everybody who is part of BBVA, because it will allow us to lead the banking industry and to continue the success story of this great Group,” Carlos Torres Vila said.

The new structure will strengthen the results of the franchises through a function with the sole mission of managing the country’s networks and operations. To meet that goal the new model includes the following areas:

  • Country Networks: Vicente Rodero will lead this newly created area that will be fully dedicated to managing the networks and operations of all of the countries in order to boost the results of the franchises of the Group. The country managers will now report to the head of the area. Vicente Rodero will also stay on as head of BBVA Bancomer.
  • C&IB: Juan Asúa continues as head of the wholesale banking area at BBVA.

On the other hand, the new structure adds critical competencies and global talent to compete in the new landscape, with the following goals:

  • To globally boost the development of digital products and services, taking full advantage of design, technology and information to best meet client needs, retail and corporate alike.
  • To transform the business model of each geography to offer the best solutions to our customers, deploying and adapting the global solutions to each market.
  • To accelerate cultural change at the Group toward a more flexible and agile organization and to obtain and develop intellectual capital in key disciplines for digital transformation such as digital marketing, design of customer experience, software development and big data.     

To fulfill the goals, the structure has the following areas:

  • Talent & Culture: Donna DeAngelis, with extensive experience in transforming large global organizations such as Publicis Groupe as well as executive management roles in digital companies such as Digitas, will lead the area, responsible for managing talent and driving cultural change.
  • Customer Solutions: Mark Jamison will lead the creation and promotion of global products and solutions, including Global Payments. The area includes customer experience, design, quality and big data. Before joining BBVA, Mark Jamison was chief digital officer of Capital One Bank, and prior to that he held key positions at companies such as Charles Schwab and Fidelity. 
  • Marketing & Digital Sales: Javier Escobedo will lead e-commerce, marketing and brand management. Prior to BBVA, Javier Escobedo worked for Expedia, responsible for Hotels.com in Latin America. During his career he has held relevant roles in the development of renowned brands, such as Procter & Gamble, Microsoft and Univision. 
  • Engineering: Ricardo Moreno, currently country manager of BBVA in Argentina and with ample experience in the area of Technology and Operations, and of Transformation at BBVA, will be the head of software development and of the management of technology and operations. Martín Zarich, currently head of Business Development in Argentina, will replace Ricardo Moreno as country manager.
  • The Business Development (BD): the function will be responsible in each country for retail and commercial offerings and for the deployment of global developments. BD Spain, with David Puente, and BD U.S., led by Jeff Dennes, will now report to the president & COO.  The rest of the countries (Turkey, Mexico and countries in South America) will be included in BD Growth Markets, led by Ricardo Forcano, who will also report to Carlos Torres Vila. Ricardo Forcano is currently head of strategy and finance at Digital Banking.
  • New Digital Businesses: Teppo Paavola, reporting to the president & COO, continues as head of the area responsible for investing and launching new digital businesses, including BBVA Ventures, as well as promoting the collaboration with the ecosystem of startups and developers. Before joining BBVA, Teppo Paavola was head of development of global businesses and M&A at PayPal.

Regarding other areas, relevant changes include:

  • Global Risk Management: Rafael Salinas, head of risk management at C&IB with global responsibilities for large corporates’ credit portfolio and markets and counterparty risks, and with more than 10 years in risk management, takes over as head of Global Risk Management. 
  • Strategy & M&A: Javier Rodríguez Soler, reporting directly to the chairman & CEO, will be responsible for defining the digital transformation strategy, as well as carrying out the M&A operations and alliances of the Group. 
  • The area of global retail lines of business (LOBS) & South America is reorganized.  The region’s country managers, as the rest of country managers, will report directly to Vicente Rodero. Asset Management is included in Country Networks. Consumer Finance moves to Strategy & M&A to focus on the execution of alliances and joint ventures to help the franchises boost results.
  • Communications: Paul G. Tobin will head Communications. 

Regarding the rest of areas of support and control there are no changes, and Jaime Sáenz de Tejada continues as the Group’s chief financial officer.

“Based on the three pillars of the Group –principles, people and innovation- and with this new phase that starts today, BBVA takes a significant step forward in its ambition to become the best universal bank of the digital age,” Francisco González said.
 

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