Pixabay CC0 Public Domain. Los activos financieros globales caen en 2018 por primera vez desde la crisis financiera
The tenth edition of Allianz‘ “Global Wealth Report”, which puts the asset and debt situation of households in more than 50 countries under the microscope, presents a sad premiere: in 2018, financial assets in industrial and emerging countries declined simultaneously for the first time; even in 2008, at the height of the financial crisis, this was not the case. Worldwide, savers were in a bind: On the one hand, the escalating trade conflict between the US and China, the endless “Brexit saga” and increasing geopolitical tensions, on the other hand, the tightening of monetary conditions and the (announced) normalization of monetary policy.
The stock markets reacted accordingly: Global equity prices fell by around 12% in 2018. This had a direct impact on asset growth. Global gross financial assets of households1 fell by 0.1% and remained more or less flat at EUR 172.5 trillion. “The increasing uncertainty takes its toll”, said Michael Heise, chief economist of Allianz. “The dismantling of the rule-based global economic order is poisonous for wealth accumulation. The numbers for asset growth also make it evident: Trade is no zero-sum game. Either all are on the win- ning side – as in the past – or on the losing side – as happened last year. Aggressive protec- tionism knows no winners.”
Convergence between poorer and richer countries comes to a halt
In 2018, gross financial assets in emerging markets not only declined for the first time, but the decline of -0.4% was also more pronounced than in the industrialized countries (-0.1%). The weak development in China, where assets fell by 3.4%, played a key role in this. However, other important emerging markets such as Mexico and South Africa also had to absorb significant losses in 2018.
This is a remarkable trend reversal. Over the last two decades, the growth gap between poorer and richer regions of the world still stands at an impressive 11.2 percentage points on average. It seems that the trade disputes have set an abrupt stop sign for the catching-up process of the poorer countries. Industrialized countries, however, did not benefit either. Both Japan (-1.2%), Western Europe (-0.2%) and North America (-0.3%) had to cope with nega- tive asset growth.
The price of low yields
At the same time, fresh savings set a new record. They increased by 22% to more than EUR 2,700 billion. The increase in the flow of funds, however, was solely driven by US households, who – thanks to the US tax reform – upped their fresh savings by a whopping 46%; two thirds of all savings in industrialized countries thus originated in the US.
But the analysis of fresh savings in 2018 reveals another peculiarity: Savers seemed to turn their backs on the asset class of insurance and pensions. Its share in total fresh savings has fallen from more than 50% before and immediately after the crisis to a mere 25% in 2018. And while US households increased in return their demand for securities, all other households preferred bank deposits (and sold securities): In Western Europe, for example, two thirds of fresh sav- ings ended up in bank coffers; worldwide, bank deposits remained the most popular destina- tion for fresh savings, for the eighth year in a row. This penchant for liquid and supposedly safe assets costs savers dearly, however: Losses suffered by households as a result of inflation are expected to have risen to almost EUR 600 billion in 2018.
“It is a paradox savings behavior”, said Michaela Grimm, co-author of the report. “Many people save more because they expect a longer and more active life in retirement. At the same time, they shun exactly those products that offer effective old-age protection, namely life insurances and annuities. Seemingly, the low yield environment undermines the willingness for long-term saving. But the world needs nothing more than long-term savers and investors to deal with all the upcoming challenges.”
Growth in liabilities stabilize at high level
Worldwide household liabilities rose by 5.7% in 2018, a tad below the previous year’s level of 6.0%, but also well above the long-term average annual growth rate of 3.6%. The global debt ratio (liabilities as a percentage of GDP), however, remained stable at 65.1%, thanks to still robust economic growth. Most regions saw a similar development in that respect. Asia (excluding Japan) is a different story. In the last three years alone, the debt ratio jumped by al- most ten percentage points, driven mainly by China (+15 percentage points).
“Debt dynamics in Asia and particularly in China are, at least, concerning”, commented Patri- cia Pelayo Romero, co-author of the report. “With a debt ratio of 54%, Chinese households are already relatively as indebted as, say, German or Italian ones. The last time, we had to witness such a rapid increase in private indebtedness was in the USA, Spain and Ireland shortly before the financial crisis. Compared to most industrialized countries, debt levels in China are still markedly lower. Supervisory agencies, however, should no longer stand by and watch. Debt-fueled growth is not sustainable – even China is not immune against a debt crisis.”
Because of the strong growth in liabilities, net financial assets i.e. the difference between gross financial assets and debt fell by 1.9% to EUR 129.8 trillion at the close of 2018. Emerg- ing countries in particular suffered a drastic decline, net financial assets shrank by 5.7% (in- dustrialized countries: -1.1%).
Just a bump in the road?
For the first time in over a decade, the global wealth middle class did not grow: At the end of 2018, roughly 1,040 million people belonged to the global wealth middle class – which is more or less the same number of people as one year before. Against the backdrop of shrink- ing assets in China, this does not come as a big surprise. Because up to now the emergence of the new global middle class was mainly a Chinese affair: Almost half of their members speak Chinese as well as 25% of the wealth upper class. “There are still plenty of opportuni- ties for global prosperity”, said Arne Holzhausen, co-author of the report. “If other heavily populated countries such as Brazil, Russia, Indonesia and in particular India would have had a level and distribution of wealth comparable to China, the global wealth middle class would be boosted by around 350 million people and the global wealth upper class by around 200 million people. And the global distribution of wealth would be a little more equal: at the end of 2018, the richest 10% of the population worldwide owned roughly 82% of total net financial assets. Questioning globalization and free trade now deprives millions of people around the world of their opportunities for advancement.”
When analyzing the movements between the wealth classes, the scars of the financial and euro crisis become visible again. Whereas emerging countries – particularly in Asia – can look back on two decades of mostly social rise, the picture for Western Europeans and Americans is bleaker. In fact, it’s only in these two regions that the ranks of the low wealth class have increased since 2000 – by 4% of the population in Western Europe – and those of the high wealth class have decreased – by 6% and 9% of the population in Western Europe and North America, respectively –, when adjusted for population growth. In Germany, on the other hand, the situation remained relatively stable.
Foto cedidaFlorian Komac, gestor de inversiones dentro del equipo de crédito global de GAM.. GAM IM incorpora a Florian Komac como especialista en crédito y refuerza su equipo global de renta fija
GAM Investments appointed Florian Komac as investment manager on the Global Credit Team.
He joined the team on 16 September 2019. Komac is based in Zurich and works closely with Christof Stegmann and Dorthe Nielsen. The team reports to Jack Flaherty in New York.
Komac comes from AXA XL (formerly XL Catlin) in New York, where he focused on corporate bonds as a portfolio manager. Previously, he was a portfolio manager at Swiss Re in Zurich and London and a buy-side credit analyst at Activest (now Amundi) in Munich.
“According to Matthew Beesley, the incorporation of Florian highlights GAM’s commitment to have a global organization within its investment team, which positions the Global Credit to increase GAM’s fixed income experience in Zurich, New York and London. This offer complements GAM’s Global Strategic Bond team.
Eduardo Antón, courtesy photo. Andbank nombra a Eduardo Antón responsable de gestión de carteras para América y Latinoamérica
Eduardo Anton got promoted to Head of Portfolio Management America and LatAm at Andbank. Funds Society learned that his main function will be the coordination of the Portfolio Management and Advisory teams in the Latin American Jurisdictions where Andbank has a presence: Miami, Mexico, Panama, Brazil, Uruguay and Argentina.
Eduardo maintains its functional dependence on Jose Caturla Head of Asset Management and Portfolio Management at the Group level.
Graduated in Economics from the Universidad Anahuac of Mexico and MBA from the Instituto de Estudios Bursatiles (IEB) in Madrid, Eduardo joined the Group in 2014 as Portfolio Manager in Miami with responsibility for the entire portfolio management of Andbank Advisory.
Before joining Andbank, Eduardo developed his career at Inversis Banco since 2010 where he was part of the Asset Management department. It was also in this entity co-responsible of developing the ETFs platform for the bank, leading its entry and growth in Spain and achieving a position of leadership with a market Share of 20%
In Andbank, he is also member of the Global Investment Committee, President of the Fund Managers Committee and chairs the Latam Markets Committee.
Walter Ellem / Pexels CC0. Dowside Risks Can Only be Minimized and Not Eliminated As Major Central Banks’ Policies Leave Little Room for Further Stimulus
Stocks dropped sharply during early August following the first U.S. Federal Reserve rate cut in ten years, setting the low for the month on August 5. For the remainder of the month prices whipsawed irregularly higher in reaction to headlines and events related to the global trade war, economic releases, corporate deals and earnings, and falling world interest rates, ending the month with a loss.
The China vs U.S. tariff dispute has spiralled into an economic trade war and its duration and outcome are unpredictable. Rapid currency movements further complicate the dynamics for orderly corporate earnings progressions as well as the efficient procurement of global resources and supplies. Brexit is a wild card.
Notwithstanding the White House political tactics and decision making, Fed Chairman Powell made it clear at Jackson Hole that the FOMC will reduce rates to ‘insure’ downside risks if conditions deteriorate and U.S. growth falters. But these risks can only be minimized and not eliminated as major central banks’ ongoing negative interest rate policies leave little room for further rate stimulus.
A merger and acquisition arbitrage investment strategy with its absolute return focus makes a good choice to complement portfolios.
Prominent proposed but complex mega deals – over $10 billion – in the pipeline (target / acquirer) at the end of August included Celgene / Bristol-Myers Squibb, Sprint Corp / T-Mobile US, and Viacom / CBS. In the $5-10 billion range, Cypress Semiconductor / Infineon Technologies and in the under $5 billion bracket, Tribune Media / Nexstar Media, and Cray / Hewlett Packard Enterprise. We continue to see momentum in M&A market with overall business and investment trends still in a wait and see mode.
Column by Gabelli Funds, written by Michael Gabelli
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GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
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GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
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Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
Pixabay CC0 Public Domain. invertido_mix_gestoras.jpg
The US yield curve has been reversed again and the United Kingdom is about to do so, which worries investors. According to the main asset managers, the fact that it is invested can indicate that, at best, investors expect the economy to slow down and at worst, that a recession could be on its way.
In the opinion of Keith Wade, chief economist at Schroders, “The US curve is a reliable indicator of recession, the UK curve less so. Nonetheless, if the US goes into recession it is hard for others not to go the same way given its importance as a driver of the world economy. So the double signal is important. There is normally a lag of about one year from inversion to recession so the curves are signalling problems for 2020.”
The same concern is shared by Mark Holman, Chief Executive Officer of Twentyfour AM (Vontobel), who acknowledges that the reversal of the curve is not good news. “In our opinion, the reversal of the yield curve is fully justified given the weight of geopolitical events, and one thing absolutely certain is that an inverted curve is not good news. The only question is how bad this news is and how it could convey and encourage greater economic concern,” he says.
“August doesn’t seem as calm as we would have thought. Tensions continue between the United States and China. The German and Swiss yield curve is in a negative territory, European equity markets continue to live out, while gold continues to rise. On the economic front, recessions in China and Germany are being felt. Although the global economy seems to resist, investors begin to fear that a recession is not far. However, the United States is managing to maintain a solid cycle and the latest figures show an acceleration in consumption. Central bank measures seem to have become the last line of defense to prolong the cycle and alleviate political tensions. However, it is by no means certain that this is sufficient between now and 2020,” says Igor de Maack, fund manager at DNCA, affiliated with Natixis IM.
For Holman, the investment of the curves is explained by the global slowdown that is continuing over time, and that keep markets restless. “A consequence of this is that fixed-income investors increase exposure to risk-free pure assets such as US, German or UK Treasury bonds, but to protect the portfolios they must maintain a duration greater than the normal, which is one of the main catalysts of the curve’s shape. As a result, the curves become lower and flatter, which is perhaps more sinister than higher and flatter returns, ”he explains.
This reading is what alerts the investor, who sees the possibility of a recession as more and more likely. But the managers ask for peace of mind and continue to insist that we are not facing a recession. “While we agree that the risk has increased, a recession over the next year is not yet an inevitable conclusion. Unlike the period prior to other recessions in the past in the US, current financial stability risks appear moderate, balance sheets are solid, family debt is manageable and the personal savings rate is high. All these fundamental factors should help cushion any economic recession,” say Tiffany Wilding, US economist, and Anmol Sinha, fixed income strategist at PIMCO.
The same message came out of the BlackRock Investment Institute (BII) in its weekly report: “We do not believe that the investment in the yield curve is a sign of recession and we believe that the accommodative turn of the central banks is dilating the growth cycle… Assets considered refuge, such as gold, rebounded. We continue to observe limited short-term recession risks, since the accommodative turn of the central banks helps to prolong the economic cycle, although we note that commercial and geopolitical tensions pose fall risks.”
“The reversal of the yield curve does not cause a recession, but it indicates that we are in an advanced phase of the economic cycle. So, instead of considering it a cause for concern, it could be a good time for investors to verify that their portfolios are well diversified and that their fixed-income positions can limit excess risk. In the final stages of the cycle it is especially important to determine whether fixed income positions offer diversification with respect to equities, as well as the appropriate level of balance,” concludes Jeremy Cunningham, Investments Director at Capital Group.
Julius Baer has signed a declaration to support the United Nations (UN) Principles for Responsible Banking making it the first Swiss bank to commit to them. The Bank will formally sign the principles on the occasion of the UN General Assembly in New York in September 2019.
The Principles for Responsible Banking have been developed by the UN Environment Finance Initiative (UNEP FI) and 28 banks from around the world and will be officially launched on 22 September 2019. The Principles set out the banking industry’s role and responsibility in shaping a sustainable future and in aligning the banking sector with the objectives of the UN Sustainable Development Goals and the 2015 Paris Climate Agreement. The principles represent a single framework for the banking industry that aim to embed sustainability across all business areas.
Bernhard Hodler, Chief Executive Officer Julius Baer said: “We are very proud to be the first Swiss bank to commit to the UNEP FI Principles for Responsible Banking. At Julius Baer, we continuously include sustainability practices into our business, meeting a number of notable milestones in our pursuit of long-term value creation for clients, shareholders, and society as a whole. We see our responsibility as encompassing all aspects of sustainability: economic, social, as well as environmental. With our declaration to the Principles for Responsible Banking, we affirm our willingness to assume an active leadership role in sustainable changes.”
Foto cedidaHenry Wong, CFA Managing Director Head of Asia Fixed Income. Henry Wong, DWS: "There are Currently More Interesting Investments than Chinese Fixed Income from a Risk Return Perspective"
Henry Wong, CFA Head of Asia Fixed Income, with close to 30 years of experience in the industry, has a management style that runs away from sentimentality, maintains its long-term investment strategy, seeks internal and external transparency. “My intention when buying an asset is to sell it and when I sell it, to buy it again at a better time market momentum” states Wong
Chinese Macroeconomic picture
For the manager, “after four decades of continued growth, the Chinese economy is tired and with significant excess capacity” . The adjustment of this excess capacity will be painful in terms of job losses and increased competitiveness by companies.
In his opinion, it is still premature to know if it will be successful or not, because this adjustment needs a change in mentality that has not yet occurred and that takes time. But “they have no choice but to do so, and the government must decide whether to do it gradually or faster,” says Wong.
In addition, Wong points out that the markets since 2007/2008 have been favored by an excess of liquidity that benefited more asset holders than ordinary people, so in his opinion, the political class, especially in the United States and Europe, has to rethink its strategy in this line to redirect this imbalance.
For Wong, the trade conflict between the United States and China is a “consequence of this money printing excess,” but to some extent this increase in protectionism is also related to sustainability policies by having to reduce the transportation costs of products to favor of local products. “I do not think we can foresee a specific termination date of the conflict, it is a global structural change that will take decades,” he concludes.
Bond Connect
From his point of view, China, like many other economies, faces a problem aging population that will lead to a reduction in income due to lower taxes collected from a depleted workforce and an increase in expenses derived from an older population,
In this sense, the Bond Connect project, which will include fixed income assets in local currency in the main world indexes, is an effort by the State to open its capital market and secure foreign financing sources.
Although Wong´s portfolio invests mostly in hard currency, the manager states that this process has just begun and that the supply of available assets is still reduced, limited to government bonds and state owned entities: “At this very initial moment the Investment alternatives are very limited for international investors, who can only move along the curve buying assets with different maturities, but the number of issuers is very limited and liquidity is reduced. I think this market will get bigger every day, but it will do so at a very gradual speed, ” concludes Wong.
Regarding the attractiveness of the Chinese fixed income market, the manager affirms that risk return ratio currently does not suggest putting too many resources in Chinese assets, or in other words: “There are currently more interesting opportunities from a risk/return perspective than China”, he points out.
India and Indonesia
Specifically, one of its current hard currency bets is Indonesia, since after the presidential elections it is one of the countries that can benefit the most from an exit from the factories of China in search of greater competitiveness. Preferably, they opt for companies that have already gone through a process of restructuring and sovereign or quasi-sovereign issuers for the good macro moment that the country is going through.
Additionally, India is also an overweight country in its portfolio, although they are very selective and avoid financial names.
Increase in portfolio duration
With regards to positioning within the curve, Wong explains that they have been extending the duration of the portfolio gradually since last October, reaching a duration of 5 years compared to the 2 years they maintained in August 2018.
This commitment responds to his conviction that global growth will be slower and less efficient affected by protectionist policies and capacity adjustments. This duration objective has been achieved through the purchase of high quality long term Asian corporate bonds and 10 year and 30 year US treasuries up to 10% of its portfolio.
Foto cedidaChris Kaminker (left) and Ebba Lepage (right) / Courtesy photo. Chris Kaminker and Ebba Lepage Join Lombard Odier
Lombard Odier further strengthens its commitment to sustainability with two strategic hires. Christopher Kaminker and Ebba Lepage have joined the firm.
Kaminker joins as Head of Sustainable Investment Research & Strategy, a newly created role within Lombard Odier Investment Managers (LOIM). He will lead on strengthening LOIM’s sustainability offering and research capabilities. He joins from Skandinaviska Enskilda Banken (SEB), a leading Nordic financial banking group, where he was Head of Sustainable Finance Research and a Senior Advisor. He is the author of over 30 publications on sustainable finance, and has held responsibilities for cross-asset research and strategy, as well as advising on and structuring sustainability financing solutions for investors, corporates and sovereigns.
Prior to SEB, Kaminker was the lead economist and policy advisor for sustainable finance at the Organisation for Economic Co-operation and Development (OECD) and represented the OECD as a delegate to the G20 and Financial Stability Board. Previously, he worked at Société Générale and Goldman Sachs.
Ebba Lepage will join as Head of Corporate Sustainability on 19 August 2019. Her experience in corporate business development and ESG strategy, assessment and implementation will be key assets to help drive Lombard Odier’s sustainability agenda forward.
Lepage has worked in a multinational environment, in New York, Montreal, Monaco, London, and Stockholm. She has spent her career in corporate finance, investment banking, asset management and for nearly five years in sustainable innovation. She joins from Stora Enso, a sustainability leader of renewable solutions in biomaterials for consumer products, where she was Group Vice President M&A and Corporate Finance. Here, she oversaw the Biomaterials Innovation group division’s sustainable investment activities.
Patrick Odier, Senior Managing Partner of the Lombard Odier Group, said: “I am pleased to welcome such experienced talents to Lombard Odier as we continue to strengthen our sustainability expertise and offering. Seeking to identify and provide the best solutions for our clients is at the heart of what we do, while always ensuring we have a positive impact on society, creating a better future for the next generation.”
Hubert Keller, Managing Partner of the Lombard Odier Group and CEO of Lombard Odier Investment Managers, said: “Investors and the corporate world are coming under mounting pressure to transition to a sustainable economy. Christopher’s extensive experience across the academic, financial and policy sectors will advance our integrated sustainability solutions and bolster our research capability within LOIM as we seek to give our clients access to companies which adopt sustainable business models and practices.”
Annika Falkengren, Managing Partner of the Lombard Odier Group, said: “Lombard Odier has a long heritage in sustainable investment and corporate sustainability. These appointments further demonstrate our commitment to continually innovate in these fields. Ebba’s experience in sustainable innovation will be crucial in helping us become an even more sustainable business as we continue to grow over the coming years.”
Wikimedia CommonsIan Sims, President and CIO . Colchester Global Investors: "In the Medium Term, We Seek to Establish a Diversified Footprint in Spain and Other Spanish-Speaking Countries"
A new management company has landed in Spain: it is the independent firm and fixed income specialist Colchester Global Investors, which invests exclusively in public debt with the objective of “preserving the diversifying integrity of government bonds” and which seeks to offer investors between 150 and 200 basis points of alpha above the benchmarks, and de-related risk assets. It only uses derivatives in currency futures contracts, whose exposure manages separately from that of bonds. Constance de Wavrin, Client Relationship Manager at the firm talks with funds society about their expansion plans.
Why have you decided to make the jump to the Spanish market?
We have recently made our investment strategies available in daily dealing, Irish-domiciled, UCITS Fund form. This prompts us to make headways in more intermediary- and retail distribution-focused jurisdictions than we have in the past, such as the Spanish market. While Colchester’s current assets under management are globally well-diversified, our presence in Continental Europe has historically been more heavily weighted in the more institutional space owing to managing portfolios in global sovereign bonds. We believe however that our trademark real yield investing process can bear significant decorrelation, diversification and liquidity advantages to Spanish investors in the intermediary and retail space. Colchester is committed to the Spanish market and this move is the first step in deepening our relationship with and presence in the market.
Do you think it has potential for growth and there is room for new managers?
The Spanish fund market, like many other continental European markets, is dominated by sizeable, established global asset managers. Especially in recent years, the rate of penetration by large, global managers has increased exponentially. We believe that the appeal of smaller, less well-known, asset managers can contribute to helping investors diversify their cross-asset exposure. In addition, by virtue of being of a more modest size, our fund strategies can help them gain exposure to less likely sovereign debt issuers which display strong balance sheets, are on a solid debt path and whose bond issuance is highly liquid.
What are the keys to your DNA and your offer in sovereign debt and currencies?
Colchester’s business is focused solely on bond and currency management.
As a result of this narrow focus, we believe our firm possesses six key advantages:
Independence of ownership and the resulting alignment of our interests with those of our clients;
Concentrated focus on global sovereign debt and higher quality smaller markets;
Sovereign-only focus delivering the diversification benefit of being invested in bonds;
Size (as measured in assets under management), which enables us to take meaningful positions in markets within the opportunity set;
Consistent and disciplined application of time-proven value-oriented techniques; and
Stability of investment team and other key professionals. Only one investment professional has left Colchester since inception.
We believe Colchester’s use of the smaller higher-quality sovereign bond markets is unique in the global bond investment management universe.
Colchester’s active use of this diversity allows it to circumvent the use of credit products in its portfolios and provides clients with attractive diversification at the aggregate portfolio level.
How do you want to conquer the Spanish market and what kind of product?
The Colchester Multi-Strategy Bond Fund (“MSGBF”) ICVC has recently been registered for fund unit sales in Spain and has appointed Allfunds Bank as a transfer agent and distributor.
We are in the process of initiating relationships with a number of prestigious local banks. In addition, we are listed on a number of European platforms including Allfunds, MFEX and UBS Fondcenter. We also have strong, long-standing relationships with leading global consultants and are working closely with their respective local offices in Spain. Colchester is committed to the Spanish market and this move is the first step in deepening our relationship with and presence in the market.
We strongly believe that our singular focus on sovereign bonds will help Spanish institutional clients’ preserve the integrity of their fixed income allocations. We also expect our offering to complement existing fixed income products currently carried by fund buy lists at intermediaries in Spain, including retail distribution platforms, discretionary portfolio managers at private banks, open-architecture multi-managers and fund-of-funds.
We count four flagship strategies. Our core strategy is a Global Sovereign Bond program, which we have been running since September 2000. Colchester introduced the Global Inflation–Linked Bond program in 2006, the Local Currency Emerging Markets Debt program at the end of 2008 and the Alpha Program in 2005.
In the current environment of very low profitability in public debt… What is your bet to win profitability?
In order to respond to this question, I would like to share with you some insight into our investment style and process which aim to deliver value in real terms throughout the cycle to our investors.
Colchester is a value-oriented manager. At the heart of Colchester’s philosophy is the belief that investments should be valued in terms of the income they will generate in real terms. The investment approach is therefore based on the analysis of inflation, real interest rates and real exchange rates, supplemented by an assessment of sovereign financial balances – fiscal, external and monetary. Portfolios are constructed to benefit from those opportunities with the greatest relative investment potential for a given level of risk. Sovereign bonds form the majority of Colchester’s portfolios.
Colchester eschews corporate credit, believing instead that its broader sovereign opportunity set provides attractive diversity and return potential.
Colchester’s use of sovereign-only portfolios ensures that the diversifying integrity of bonds is not compromised. Our Global Bond program mainly invests in developed markets, however Colchester’s unique use of the smaller bond markets in its portfolios differentiates us from most other fixed income managers. The fact that we are willing to make meaningful allocations to the likes of Australia and New Zealand among the developed bond markets and to Mexico and Poland among the Emerging Markets sets us apart from peers.
Colchester applies a qualitative screen to all high-quality investment grade countries to decide upon their inclusion, or otherwise, in the opportunity set. Size of market, liquidity, institutional structure, regulatory environment, capital regulations, political environment, stability issues, etc., are all considered by Colchester in its determination of the suitability of a country to be included in the opportunity set. Not all investment grade countries are included as barriers to foreign entry, political uncertainty and other factors have resulted in some countries being ‘screened out’. We constantly monitor the suitability of all existing and potential countries for inclusion in their investment opportunity set.
Colchester’s investment process focuses on identifying “Investment Value” at each important level: country, currency, sector and duration/maturity.
“Investment Value” is the synthesis of what we term “Real Value” and “Financial Stability” and its determination provides the basis on which Colchester takes investment decisions. “Real Value” is composed primarily of traditional real yield and real exchange rate measures, supplemented with an analysis of the term structure of interest rates. The determination of real yields and rates requires forecasts of future inflation, for which we employ robust, time-proven quantitatively oriented methodologies. We complement this analysis with quantitative assessments of sovereign financial strength backed up by country visits. “Financial Stability” has as its key determinants economic deficits and surpluses, monetary conditions and policy objectives.
Bond management is treated independently from currency management when deriving optimal bond and currency portfolios and we aim to generate half to two thirds of the relative return from bond selection and one third to a half from currency management. However, cross correlation risk between bond and currency exposures are analysed as a part of the assessment of the overall composition of risks in the final portfolio. Colchester believes significant duration variation is a low information ratio strategy. Accordingly, duration management is constrained to approximately +/-25% of benchmark duration.
Colchester’s approach to currency management is underpinned by an assessment of a country’s real exchange rate. This real valuation framework complements the real yield driven approach used on the bond side. A currency’s deviation from fair value has repeatedly been a strong indicator of a currency’s future movement. The further and longer a currency moves away from fair value the greater the likelihood—and the faster the speed—of an adjustment back towards fair value. Accordingly, we believe that higher returns are achievable over the medium term by being exposed to those currencies that are the most undervalued according to their real exchange rate.
In practical terms, this means that little or no currency risk is taken when a country’s real exchange rate is around fair value, but currency exposure is taken as currencies begin to meaningfully diverge from fair value. Estimates of the real exchange rate therefore provide the cornerstone of our currency valuation. We supplement these estimates with an assessment of a country’s financial balance factors and real interest rate differentials to generate Colchester’s estimate of each currency’s value. These currency values are then input into our optimisation framework to determine final currency allocations. Final portfolio exposures reflect both this underlying real valuation philosophy and clients’ risk preferences. Approximately 60% of Colchester’s currency valuation is determined by our estimate of the deviation of the real exchange rate from fair value, 20% by our assessment of the state of a country’s financial balances and 20% by the differential in short term real interest rates.
Are the Funds registered in Spain?
Yes, our funds are registered for sale in Spain. Our transfer agent is Allfunds Bank. Allfunds are also our distributing platform. We are aiming to add to this soon for greater accessibility.
Please see below our flagship funds. Each strategy exists in Irish-domiciled UCITS commingled fund form offering daily dealing, with different currency share classes, available hedged and unhedged:
Colchester Global Bond Fund (sovereign bonds only) – USD 1.3 billion with a since inception annualised alpha of 0.9% (7yr track record)
Colchester Local Markets Bond Fund (EM local debt only) – USD 2.4 billion with a since inception annualised alpha of 1.6% (6yr track record)
Colchester Global Real Return Bond Fund (inflation-linked bonds) – USD 490 million with a since inception annualised alpha of 0.9% (10yr track record)
Colchester Global Low Duration Bond Fund (sovereign bonds only) – USD 97 million with a since inception annualised alpha of 1.1% (4yr track record)
Colchester Local Markets Real Return Bond Fund – seeded with our own money so only 2m USD in size with a since inception annualised alpha of 0.8% (7 year track record)
What kind of funds (of your offer) are generating more interest in the Spanish investor? And why?
To date, we have found that our EMD Local Currency fund is of particular interest to our prospects in the Spanish market. While demand in the EMD sector has recently shown signs of weakening and fund buy lists appear to be well-stocked, it appears that the compelling differentiating characteristics of our investment approach (as described below) are worthwhile considering by domestic fund selectors. Diversification in the form of uncompromised interest rate duration, daily liquidity and decorrelation from risk assets, including credit and other equity-linked securities, are appealing to today’s fixed income investors.
The analysis of your sovereign debt funds is different from the rest… how do you tell from the competition?
What sets us apart from other Global Fixed Income asset managers is that we are a value-oriented manager. At the heart of Colchester’s philosophy is the belief that investments should be valued in terms of the income they will generate in real terms. The investment approach is therefore based on the analysis of inflation, real interest rates and real exchange rates, supplemented by an assessment of sovereign financial balances—fiscal, external, monetary and Environmental, Social and Governance (ESG) factors. Portfolios are constructed to benefit from those opportunities with the greatest relative investment potential for a given level of risk.
Contrary to most managers of Global Bond and Emerging Market Debt funds, sovereign bonds form the majority of Colchester’s portfolios. Colchester eschews corporate credit, believing instead that its broader sovereign opportunity set provides attractive diversity and return potential. Colchester’s use of sovereign-only portfolios ensures that the diversifying integrity of bonds is not compromised. Our Global Bond program mainly invests in developed markets, however Colchester’s unique use of the smaller bond markets in its portfolios differentiates us from most other fixed income managers. The fact that we are willing to make meaningful allocations to the likes of Australia and New Zealand among the developed bond markets and to Mexico and Poland among the Emerging Markets sets us apart from peers.
This greater independence in the opportunity set improves the potential information ratio. This compounded with the highly liquid nature of our investment universe and the powerful decorrelation effect of the allocation make for a compelling investment proposition as part of a broader mix of assets.
Colchester give great importance to the ESG factors in the management. How we incorporate in the management of funds?
Colchester is a PRI signatory and we integrate ESG analysis into the financial balance sheet work within our investment process. All members of the Investment Team are involved in implementing our ESG Policy as part of their day-to-day involvement in research and portfolio management activities. Claudia Gollmeier, Senior Investment Officer, is responsible for PRI reporting and initiatives which are approved by Compliance and the Chief Investment Officer. Claudia is also a member of the PRI Fixed Income Advisory Committee (https://collaborate.unpri.org/news/eleven-new-signatories-added-to-pri-fixed-income-advisory-committee) and chairs the Sovereign Working Group. Please find on page 78 of the “PRI – Shifting Perceptions” a new paper from Claudia, which can be found here: https://www.unpri.org/credit-ratings/credit-risk-case-study-colchester-global-investors-/4028.article.
What customer profile do you direct?
We strongly believe that our singular focus on sovereign bonds can help Spanish institutional and intermediary clients’ preserve the integrity of their fixed income allocations. We also expect our offering to complement existing fixed income products currently carried by fund buy lists at intermediaries in Spain, including retail distribution platforms, discretionary portfolio managers at private banks, open-architecture multi-managers and fund-of-funds.
What growth objectives do you set in Spain for the next few years?
Colchester’s focus on generating solid risk-adjusted performance for our investors has been the main driver of the firm’s growth over the past 20 years. With this in mind, we are hoping to continue deliver for our clients and simultaneously gain traction with as many institutions, private banks and multi-managers as possible in the Spanish market. We are looking to establish mutually beneficial partnerships with key fund distributors. In the medium term, we are looking to establish a diversified footprint in Spain and other Spanish-speaking countries. As mentioned before, Colchester is committed to the Spanish market and this move is the first step in deepening our relationship with and presence in the market.
About the history and team…
Colchester was founded by Ian G. Sims in 1999 and commenced managing client portfolios in February 2000. Ian Sims, Chairman and Chief Investment Officer, was one of the premier global bond managers of the 1990s prior to founding Colchester. Our business is focused solely on interest rate, bond and currency markets managed by an investment team with combined experience of over 100 years. Colchester manages only fixed income, and as of end of May 2019 had US$ 46 billion under management.
Colchester is headquartered in London, and this is where the majority of the investment activities and operations take place. Colchester also has offices in New York and Singapore and Compliance and Marketing and Client Service representatives are based in all three office locations. Colchester Singapore was incorporated in February 2012 and is a wholly owned subsidiary of Colchester London and provides discretionary investment management, research and advisory services, marketing, client services and trade execution services to Colchester London and to external clients in Asia Pacific.
Pixabay CC0 Public DomainCourtesy photo. Facebook: The New Central Bank?
Facebook has become an essential part of our social, cultural, economic and political spheres. Now it is looking to become our new global payment system. This was the announcement that came last week from the Libra Association (led by Facebook) along with a whitepaper about the creation of a new cryptocurrency called Libra and its accompanying digital wallet, Calibra.
The first digital currency, Bitcoin, was followed by many others: Ethereum, Dodgecoin, Litecoin, Ripple, XEM, Dash, Monero, Petro, etc. Apparently, we will now have one more as early as the first half of 2020. However, this is not going to be just “one more” as Libra looks more like a fiat currency than a cryptocurrency. In other words, with the gold standard consigned to the history books, along comes the all-powerful Facebook to create a digital currency backed by a basket of financial assets.
Facebook is not alone in this endeavour. Companies like Visa, Mastercard, PayPal, Spotify, eBay, Vodafone, Booking, Mercado Pago and Thrive Capital are among the 28 founding members of the Libra Association that will govern Libra. The goal is to reach 100 members before the official launch of the digital currency. Besides the sheer weight of the consortium of businesses backing the currency, if we add into the equation the 2.32 billion active users enjoyed by Facebook each month (one third of the world’s population), it is not hard to image the potential reach of this new cryptocurrency.
In many respects, the use of blockchain technology for Libra is quite different from the other digital currencies we know about today. Quite the opposite, in fact. The Libra whitepaper rejects the idea of anonymity and secrecy in transactions and the Libra Association has already confirmed its collaboration with financial regulators to prevent money laundering and tax avoidance.
A further crucial difference with Libra is the backing of a reserve of low volatility assets including bank deposits and short-term government debt in stable currencies like the dollar, euro, Swiss franc and yen. That said, we will need to have faith that the Libra Association will maintain these assets, record transactions and that Libra itself will be fungible, etc. Ultimately, this is the same faith we currently have in the central banks, except for a couple of important distinctions: Facebook is a private entity but it will hold some underlying assets, whereas central banks are public bodies but they do not hold assets that fully support currency issuance.
Of course, misgivings and controversies are already springing up regarding matters like data protection and the use of information in such a high-profile project. Let us not forget that Facebook possesses a vast archive of personal data from its users, about whom it knows practically everything. Many of us have not forgotten about the fines imposed on Facebook by the European Union for controversies like this and the scandal surrounding Cambridge Analytica, the consulting firm that unlawfully used information gathered from 87 million Facebook users.
Following the announcement of Libra’s creation, it is inevitable that the reflections that have been floating around for some time regarding cryptocurrencies come to the forefront once again. For example, questions are being asked about the implications for central banks and monetary policy in the event of the widespread use of a payment system like Libra, which employs blockchain technology although with a different objective to other digital currencies like Bitcoin. At first glance, it may look like an attempt to undermine the power of central banks. But curiously, as one analyst has already pointed out, in the context of a financial crisis, it could reinforce the impact of negative interest rates as it would eliminate the possibility of hoarding physical currency and other means of avoiding negative rates.
According to the whitepaper on the creation of Libra, it is “a simple global currency and financial infrastructure that empowers billions of people”. For now it is just a fledgling project, but it is certainly an interesting one.
