Nick Timberlake, courtesy photo. "A Stronger Dollar Should Benefit the Emerging Markets Export Engine and Their Liquidity Should Be Less Vulnerable Than in the Past"
Despite the challenges in the form of monetary tightening in the United States or geopolitical factors, emerging market equities this year have everything to gain. The reason? Levers such as valuations, earnings growth expectations and the confidence of investors. This is what Nick Timberlake, responsible for Global Emerging Equities of HSBC Global Asset Management, states in this interview with Funds Society.
Is the global synchronized growth scenario in danger? If this is the case, how could this impact the emerging world?
Global growth remains strong, though there has been a slight loss in momentum recently. Emerging Markets continue to be the key driver of global growth, and we expect them to contribute about 70% to total GDP growth in 2018. Many Emerging Markets remain in a “Goldilocks” environment of strong growth and low inflation. Some countries have scope for monetary easing, while some countries are taking advantage of growth acceleration to implement long-term economic reforms. Different inflation levels across countries is leading to policy divergence. This can affect relative interest rates and currency strength, particularly resulting in higher US interest rates and a stronger USD.
What will be the impact in emerging markets of a higher inflation, a cycle of rate hikes in the developed world, and a potential greater strength of the dollar?
Inflation remains relatively low in most Emerging countries, despite cyclical inflation in the US. A stronger USD should benefit the Emerging Markets export engine. Emerging country liquidity should be less vulnerable to a stronger USD than in the past, given that governments have reduced the proportion of short-term USD debt and improved their current account deficits. This makes the country’s liquidity position less sensitive to foreign exchange movements. Many emerging countries have improved their fiscal positions, and increased macro credibility provides them a degree of monetary policy flexibility if needed. Certainly countries with a twin deficit are likely to be more sensitive than others.
Nonetheless, many experts are positive regarding emerging countries fundamentals, do you agree and why?
We are also positive on the fundamentals of Emerging countries. Fiscal budgets are better managed. For example, Russia has reduced the “oil breakeven” of its budget to reduce its sensitivity to fluctuations in oil prices. Monetary policy is more credible. A lower inflation environment in Brazil has allowed its Central Bank to implement aggressive monetary easing. Government reforms continue to strengthen the foundations for long-term economic growth. For example, Brazil is reducing its fiscal deficit through economic and anti-corruption reforms, while Mexico has a broad, long-term reform programme including energy, labour, and education. China is reducing capacity at state-owned enterprises and deleveraging.
Do the stock markets of emerging countries have potential to grow in 2018? At what pace or at what levels?
It is difficult to specify how the equity market will move, but, from my experience, this is the type of environment that should be positive for Emerging Markets equities and for active managers specifically.
Earnings drive equity markets. What is important for investors is that strong economic growth is translating into corporate earnings growth. Earnings growth expectations remain in double digits for 2018 and 2019, across most sectors and a majority of countries, though earnings revisions have moderated from a high level.
Valuations look attractive relative to profitability, though valuations are not as cheap as they were at the beginning of last year given the strong equity market returns. Emerging Markets equities offer a similar return on equity compared to Developed Markets equities while trading at a lower price-to-book valuation.
Investor sentiment has been positive. We have seen strong flows into the asset class over the past two years, yet global equity investors remain underweight Emerging Markets.
What is the biggest strength of emerging markets equities this year? The attractive valuations, corporate results outlook ….?
The biggest strength for Emerging Markets equities this year is that all the drivers we just discussed are present at the same time. We believe this combination of factors creates a positive and attractive environment for Emerging Markets equities.
What could be the impact of Fed’s rate hikes on the equities of the emerging world?
Investors should expect cyclical inflation at this point in the economic cycle. The current pace of Fed rate hikes has been well-flagged and has been priced in by the market. We are monitoring how high capacity utilisation, potential trade tariffs, and deficit spending could lead to higher prices and could cause the Fed to raise rates faster than expected. A much faster pace of rate hikes could lead to more volatility in equity markets in general, not specifically to Emerging Markets.
Currently, the volatility is stronger… Is this going to be the case in the stock markets of emerging countries. Which are the potential consequences?
Volatility in Emerging Market equities reached the lowest point in a decade in January 2018 and has been near pre-financial crisis levels, so a pick-up in volatility was expected and has not come as a surprise to us. There are any number of reasons why uncertainty increases or investors begin to have differing views of the future. Inflation, trade tariffs, and geopolitical tensions are the first examples that come to mind. As active managers, we need to monitor these issues and incorporate our perspective into our stock selection and portfolio construction. I should note that higher volatility can be advantageous, as it can create investment opportunities where we see our fundamental outlook has been mispriced by the market.
Which are the more attractive markets? (Africa, Latin America, Eastern Europe, Asia …)
Our region and country positioning is driven by our stock selection. This allows our portfolio positioning to be guided towards the areas of the market with greater opportunity. On a regional basis, we are overweight Eastern Europe and underweight Asia and Latin America.
On a country basis, we are most overweight Russia, given a stable macroeconomic backdrop, accelerating growth, and attractive valuations.
Regarding Latin America: with which markets are you more positive and why?
We are less positive on Latin America relative to other parts of Emerging Markets. On a country basis, we are somewhat neutral in Brazil, and we are underweight Mexico, Chile, and Peru. Mexico valuations are high relative to other Emerging Markets, and there is election uncertainty. Chile has fundamentally attractive companies but valuations are again high. Peru has a limited universe, and valuations are not attractive.
The situation in Argentina is complex following the support requested to the IMF … are you positive on that country?
Our Frontier Markets has exposure to Argentina. The country has been implementing structural reforms that we feel should support long-term growth. Any IMF support would help to reinforce that path. Our Global Emerging Markets fund currently does not have a position in Argentina.
Aitor Jauregui, courtesy photo. Aitor Jauregui (BlackRock): "Growing Demand in Europe and Sustainable Investment will Make the ETF Market Grow Over the Next Few Years"
The ETF business continues to increase after three years of record growth figures. For Aitor Jauregui, Head of Business Development for BlackRock in Iberia, the outlook is much better in the long term: “With an average annual growth of 19% over the past few years, at BlackRock, we expect that in 2023 the ETF industry will reach 12 trillion dollars and 25 trillion dollars by 2030.”
These positive forecasts are also positive for the ETFs market in Europe which, according to Jauregui, will be “one of the main drivers of the investment fund business during the coming years”. According to this executive, and as shown by the Greenwich Associates European ETF Study commissioned by BlackRock, European institutional investors will have a prominent role in this growth, as the average of their allocation to exchange-traded funds increased by 10.3% of its total assets in 2017, from 7.7% in 2016.
“European institutional investors are adjusting their portfolios to a more volatile environment, given the return of volatility to the market and the end of stimuli from central banks. In this context, European institutional investors have found in the ETFs an investment vehicle that adapts to their needs,” says Jauregui before delving into this survey’s data, which was compiled from the responses of 125 investors, mainly pension funds, asset management companies, and insurance companies.
The survey shows the trends that make the ETF business set a positive trend in Europe. First of all, there has been an increase in the use of smart beta ETFs, which, at present 50% of respondents admit to using. Secondly, there is a greater demand for ETFs by multi-asset funds: In fact, 79% of asset managers admit to using them, as well as their intention to increase their use during the next year.
Finally, the survey shows two further trends: The use of fixed-income ETFs is a source of growth in the ETFs universe, and socially responsible investment (SRI) has a leverage effect on this business. Regarding the latter, it is worth noting that 50% of the respondents admit having invested part of their assets following sustainable investment criteria.
The attractiveness of ETFs
For Jauregui, these four trends are, “sources of forward ETFs market growth.” And they will be a driver because European institutional investors appreciate the value that this vehicle brings to their portfolio. For example, according to the aforementioned survey, ETFs are used to substitute direct investments, such as bonds, shares or derivatives. The survey shows that 50% of respondents say they use ETFs to substitute derivatives, compared to the 30% who acknowledged doing so last year.
In this regard, Jauregui points out that, regardless of the economic environment, investors value the characteristics they offer positively. “In Europe, in particular, I believe that the implementation of MiFID II makes institutional investors appreciate transparency, cost, and operational simplicity more. This is also going to be an argument that will sustain its growth in the coming years,” he says.
Speaking in terms of strategies, the ETFs that arouse most interest among European institutional investors are those of minimum volatility, dividends, factors and, finally, multifactor strategies.
Finally, should we carry out this same analytic exercise by asset allocation, the survey would show that fixed income is the type of asset where ETFs are most likely to grow. “In the case of equity ETFs, 86% of respondents admit to using them and 43% expect to increase their use throughout 2018. In fixed income, 65% expect to invest in this type of ETF as compared to the 48%registered last survey. Once again, the main criteria of European institutional investors when deciding on their use are: their liquidity, their cost, their performance and, finally, the choice and composition of the index they follow.
Debates within the Sector
In the midst of the strong development that this market is experiencing, the sector faces two debates: Possible overheating in the ETFs market and the argument between active management and passive management. In both cases, Jauregui has a solid position that he defends coherently. “It‘s clear that the weight of the ETFs in the market as a whole, and the assets that are there, is too small a part for their behavior to affect the progress of the underlying markets,” he said in relation to the first debate.
Regarding the second debate, Jauregui argues that the approach of two different types of confronting management does not make any sense. “I think that every investment decision is an active decision, even when a manager chooses to use an indexed vehicle in his portfolio. At BlackRock we believe that we have to think about indexed management as one more element when managing our clients’ capital and offering investment solutions,” he points out.
And while the sector continues debating this, BlackRock has advanced over all its competitors and has become the leading provider of the European market in terms of ETFs. According to the survey, 91% indicates iShares as its main provider.
In this regard, the asset manager believes they are on the right track. “We will continue working on new launches, while always being very selective about the solutions we provide in the market and betting on the indexes without leverage and without using derivatives. Likewise, we will focus on smart beta and factors ETFs. There is a general interest on the investors‘part, but we believe that managers of multi-active strategies are very interesting potential investors. In the long term, we will also focus on the trends we see, such as fixed-income ETFs and socially responsible investment,” concludes Jauregui
Pixabay CC0 Public DomainRobeco, courtesy photo . Robeco Appoints Bart Oldenkamp as Head of Investment Solutions
Robeco has hired Bart Oldenkamp as Head of Investment Solutions, effective July 1st, 2018. In this role, he will be responsible for further expanding Robeco’s Investment Solutions business, which includes services such as fiduciary management and multi-asset solution products.
He will succeed Martin Mlyná, who currently holds this role, while also serving as Managing Director at Corestone, Robeco’s manager selection platform. As from 1 July 2018 he will focus fully on his position at Corestone to further increase its added value for clients and to further grow Corestone’s multi-manager business.
Gilbert Van Hassel, CEO of Robeco, said: “I welcome Bart to Robeco; in him we have found a highly experienced professional to fulfil this crucial role for our clients with a strong network and reputation in the area of fiduciary management and investment solutions. This appointment underlines our commitment and ambition to grow our fiduciary business, which is a key element of our strategy for 2017-2021.”
Oldenkamp said: “I am excited to join Robeco and I am looking forward to working together with clients to achieve their financial objectives. I am confident that based on Robeco’s strong academic and research driven approach we will be able to further strengthen our solutions for clients and achieve sustainable growth of our business.”
He previously worked at NN Investment Partners, where he was Managing Director Integrated Client Solutions. Before that, he headed the Dutch office of Cardano, a consultancy firm specialized in fiduciary management, risk management and investment advisory services, after having held various positions at ABN Asset Management, including Global Head of LDI & Structuring and Product Specialist Structured Asset Management in the US. He is the academic director of the Pension Executive program at the Erasmus School of Accounting & Assurance, and a non-executive board member at the pension fund for the Dutch railway transport sector. He holds a PhD in Econometrics from Erasmus University Rotterdam.
Wikimedia CommonsCourtesy photo. Above 3%. Is the Party Over?
It has been a long time coming but we have finally been given a wake-up call: the 10-year US Treasury bond yield has gone above 3%. So, now what? Should we prepare our fixed income portfolios to hedge interest rates in case of further hikes? Or should we increase the duration to take advantage of potential corrections below 3%?
In a time before Central Banks routinely employed cash injections and mass bond purchasing, textbooks on macroeconomics traditionally taught that 10-year yields responded to a simple formula: expected growth + inflation expectations. So, if we consider just these two factors and we believe the consensus forecasts for the coming years are valid, we could conclude that we will soon be grazing the 5% mark for the 10-year US Treasury bond. The reality is not all that simple and recent years have served to cast doubt on some of the principles we learnt during our studies, as they reflect a new reality in the interrelationships among economic variables. For instance, after several years of unlimited liquidity, inflation is only now beginning to rise slightly or even though the Federal Reserve increased official rates and four hikes are expected for this year, the dollar has weakened.
Some official projections for US economy growth include: IMF: 2.9% for 2018 and 2.7% for 2019; and OECD: 2.9% for 2018 and 2.7% for 2019. Yes, the figures look good. No doubt about it. But they do not point to accelerated growth that could justify inflationary pressures and aggressive rate hikes and we cannot rule out the possibility that these forecasts will fall in the coming quarters. After 35 straight quarters of economic expansion in the US, we may beat the record of 39 quarters set in the 90s, which culminated in the technology bubble (“dotcom”). Let’s face it, until Trump’s fiscal stimulus peters out, the tailwind will continue to blow for consumption, investment expenditure and the real estate sector. However, we are not looking at an abrupt rally, but an ongoing slow and steady pace for growth. In other words, even if we stick to the traditional factors that we mentioned, which determine the 10-year yield, we are not anticipating an environment that justifies much higher rates than now. We might also add other “non-traditional” factors into the equation, such as the impact of the behaviour of some very influential players in the sovereign debt market like China (largest foreign holder of US Treasury bonds), insurance companies and sovereign wealth funds.
Nor are we convinced by those who predict an imminent recession and a return to yields below 2% for the 10-year US bond. One of the arguments that has become popular among proponents of this position relates to the yield curve inversion. That is to say, a lower interest rate for the 10-year than the 2-year bonds. Historically, the inverted yield curve has been one of the best indicators of recessions. In fact, all the recessions suffered by the US since the 1960s have been preceded by yield curve inversions. Recently, the slope has reduced, but there is still a 50-basis point spread between the 10-year and the 2-year bonds. And we believe that this reduction is due more to the non-traditional dynamics that we have mentioned, which are sustaining the 10-year yield level, than to signs of an imminent recession.
And what about the voices warning us of another consumer delinquency crisis caused by official rate hikes? The market is discounting a total of four rate hikes by the Federal Reserve for this year. Despite the rise in the short rates, which brings an increase in consumer credit costs, we are still not seeing alarming increases in the delinquency rate among the various classes of consumer loans. If rates continue to increase more aggressively, we could indeed see this but, for now, it is not our base case.
Even if we think that the rate hikes will not be sufficiently aggressive to rain on our parade, we do need to be prepared for unexpected summer downpours. We choose not to fully hedge interest rate risk, but we are carefully looking at the relative value and potential risks. With a spread of just 15 basis points between the 5 and 10-year US Treasury bond yields, can we justify assuming an additional 4 years of duration risk? We do not think so.
Funds Society's Charitable logo. Funds Society Launches a Charity Campaign
Since Funds Society began the publication of the three editions of its magazine, in Spain, the offshore market and, since this year, for the Latin American region, it has told the stories of numerous NGOs that, in some way, are linked or supported by the firms and professionals in the investment fund sector.
Now, our publication goes a step further and has decided to support the NGOs that go through this section with an online advertising campaign. The objective of this campaign is to grow the NGO’s visibility in our readership with a banner under the slogan ‘Solidarity Corner: Together we will make it possible’.
Funds Society will be donating 10% of its publicity impressions of the MPU format during eight weeks to the foundation that was featured in the Rincón Solidario or Solidarity Corner section in the magazine. As is logical, these banners will direct the reader to the official website of the NGOs so that they can learn more about their activity and the groups they serve; as well as collaborate with them, if they wish to do so.
This quarter, the protagonist in Spain is the Association of Relatives and Friends of Children with Cancer (Afanic), an entity that aims to cover the diverse needs that hospitalized children present at both medical and psychological, educational and recreational levels. The organization interprets that these are basic needs to enable their expected recovery and give adequate attention to their families. José Miguel Maté, CEO of Tressis, has run numerous marathons to raise funds for his cause, and collaborates with them closely.
In the case of the offshore market, this space is assigned to the Adam J. Lewis School (AJLP), a non-profit institution created in 2013 in tribute to Adam Lewis, who died on September 11. In this school, 18 children between three, four and five years of age study under a model that mixes Montessori, Piaget and Reggio Emilia techniques. By 2018, their goal is to double the size of the school and for that, they are looking to grow their donations considerably. Supporting them in this effort, is Richard Garland, director of Investec, who is running seven marathons in seven continents to raise 100,000 dollars, contributions he is planning to match.
Finally, in the Latin American region the featured NGO is Los Tréboles, an educational center, located in Montevideo. This center is winning the battle against school dropouts, one of the biggest educational problems in Uruguay. The NGO, which is financed in 40% by private donations (45% contributed by the State) serves 120 children and 40 teenagers from the Flor de Maroñas neighborhood. They have been 20 years in the area and in 2017 they managed to get only 1.5% of those attending the place to repeat the course.
CC-BY-SA-2.0, FlickrPhoto: Albarcam, FLickr, Creative Commons. Which Asset Management Companies in Spain had the Highest Average Salaries in 2017?
The largest Spanish asset management companies last year offered their employees fixed average salaries between 35,000 and 72,000 Euros, according to a Funds Society study prepared from figures that the 20 largest national asset management companies sent to the National Securities Market Commission (CNMV).
According to 2017 year-end figures, the management company that best pays its employees is Bestinver Gestión, 12th largest in assets, but the most generous in terms of fixed salary. According to CNMV figures, and taking only fixed salary into account, each employee had an average salary of 72,373 Euros (figure obtained by dividing the expenses in fixed salaries among the total number of staff). It was the only management company with average salaries exceeding 70,000 Euros last year.
Bankinter Gestión de Activos, Caja Laboral Gestión, Santander AM, GIIC Fineco y Mutuactivos also stand out for the salaries they offer, in excess of 60,000 Euros. The first company, 67,632 Euros on average last year, although it is the ninth largest in terms of assets. The second company, which ranks 19th in the asset ranking, 67,400 Euros, while Santander AM, the second in the asset ranking, showed fixed average salaries in 2017 of 66,480 Euros.
The other two large asset management companies in Spain, BBVA AM and CaixaBank AM, as well as Mapfre AM, Bankia Fondos, Sabadell AM and Imantia Capital pay average salaries above 50,000 Euros.
Among the management companies with lower salaries in terms of fixed salary are Trea AM, Kutxabank Gestión, Ibercaja Gestión, Allianz Popular AM and Renta 4 Gestora.
We must remember, however, that the figures refer only to fixed salary, excluding the variable part or bonus, which is common in the sector.
Wikimedia CommonsPhoto: JoseTellez, Flickr, Creative Commons. According to Experts, Argentina's Request for Help from the IMF is a Precautionary Measure and, as yet, There is no Risk of Default
Mauricio Macri, President of Argentina, announced on Tuesday that he has begun talks with the International Monetary Fund (IMF) to receive a “financial support line” for the situation which has been generated in that country due to the strong depreciation of the peso against the dollar in a difficult global context, marked by the rise in US interest rates and the potential revaluation of the American currency against some currencies of the emerging world. And mainly against countries that, like Argentina, depend heavily on external financing.
“I have made this decision thinking of the best interest of all Argentines, not lying to them as has been done so many times (…).I am convinced that fulfilling commitments and moving away from demagoguery is the way to achieving a better future,” said Macri yesterday, trying to instill tranquility in the markets. Investors fear that this situation will negatively impact the country’s debt, and may even infect the markets of other emerging economies, and by proximity, those of Latin America
Last Friday, in a new attempt to defend the exchange rate of the peso against the dollar, the Central Bank of the Republic of Argentina (BCRA) decided to raise the reference interest rate to 40%, less than 24 hours after it had raised the price of money to 33,25%. Therefore, the central bank increased the benchmark rate by 675 basis points in less than a day, in what represents the third increase in the price of money last week, thus raising the benchmark interest rate to 40% from the 27, 25% rate of the previous week.
Precautionary measure
The new aid measures aim to alleviate this situation. For Alejandro Hardziej, Julius Baer’s Fixed Income analyst, this is a “precautionary” measure: “It seems that Argentina is negotiating a line of credit as a precautionary measure to cover potential financing needs without having to go to the international debt markets in a scenario of rising loan costs and greater risk aversion of investors to emerging markets,” he explains. In his opinion, the movement”doesn’t reflect an underlying liquidity problem but it’s a government move to calm investor’s fears and reduce pressure on the currency, the Argentine peso”
“The fact that Argentina has gone ahead and asked the IMF for help is a good sign, as it can help because things are being done properly, despite the fact that it damages Macri’s image”Alejandro Varela, Portfolio Manager at Renta 4 Gestora.
For Amílcar Barrios, Tressis analyst, “Argentina resorts to the IMF toget a line of financing that the market is denying it, owing to the extensive and disastrous financial history accumulated by that country, regardless of who governs.”
Claudia Calich, Fund Manager of the M & G Emerging Markets Bond fund, pointed out that, in the last two months, the Argentine peso had become more expensive in real terms, following the strong flows received from international investors in 2017. “These capital flows caused the ratio of nominal exchange to depreciate much less than inflation.” But the tide began to change at the end of last year, when, in her opinion, the country’s Central Bank committed the political error of raising the inflation target for 2018, from 10% to 15%, so that adjustment allowed the entity to cut rates at the beginning of January, something that undermined its credibility and raised concerns about whether monetary policy is free from government interference. “Another political error was the announcement of the 5% tax on Treasury investments in Argentine pesos, which had an impact both on local and international investors and led to a reduction in investments in public debt in pesos,” the expert explains. A higher reading of inflation and a stronger dollar generated strong pressure on the country’ currency, explains the asset manager, so the Central Bank realized the need to restrict monetary policy, with three emergency increases, until the 40% mentioned above. “I think that monetary authorities will now be successful in slowing down the depreciation of the currency,” she explains. Calich argues that the overvalued peso is also contributing to expand the country’s current account deficit by up to 5% but, in this situation, she expects it will begin to reduce as the peso moves towards equilibrium. “The implications will be higher inflation this year and possibly the next one, lower growth, and a further decline in Macri’s popularity.”
But without default…
On whether or not it’s a default situation, she believes that “not yet. I see this as a re-pricing of Argentina’s risk, which had started at the beginning of the year, along with sales in the emerging debt market in both local and strong currency,” she explains.
She also speaks of two glimmers of hope for Argentina: First, the next elections will not be held until January 2019, so authorities have time to take their “bitter medicine” this year, but it will lead to a readjustment of the economy in 2018. Secondly, the IMF can intervene with an aid program if the Latin American country loses access to the capital market or if there is some type of crisis caused by the outflow of capital (unlike other markets such as Venezuela), something that it considers positive. “Argentina and the IMF have had a tumultuous relationship in the past but the objective this time would be to ensure stability so that Argentina does not return to its failed populist policies under a new administration,” she adds.
A Warning Sign?
However, we must not lose sight of the situation of emerging markets… especially those with fundamental weaknesses. This advice comes from Paul Greer, Asset Manager at Fidelity, who explains that the South American country has reached this point largely due to the strengthening of the dollar and the increase in the profitability of US fixed income. “As with the caged birds that serve as a warning for gray gas in the mines, Argentina is a wake-up call to investors positioned in emerging markets with weak fundamentals. These types of assets do not get along well with an increasingly strong dollar. The recent price situation illustrates how quickly [investor] sentiment can change,” he says.
Impact on Spain
Luis Padrón, an analyst at Ahorro Corporación, believes that Argentina’s problem “seems to be more structural than a currency problem.” Regarding Spain’s exposure to this market, he points out “how much the situation regarding the exposure that Spanish companies have had in this market has changed”, going from being one of the countries with greater exposure to having a very reduced exposure in the business of the companies.”Only Día, Centis and, to a lesser extent, Telefónica are ‘suffering’ the impact of this situation”, he adds (see Ahorro Corporación’s table below).
Wikimedia CommonsSpanish team, courtesy photo. Muzinich & Co Reaches Third Close on Pan-European Private Debt Fund
Muzinich & Co has made its third close of the Muzinich Pan-European Private Debt Fund at 460 million euros.
Focused on lending to the lower mid-market, or companies with EBITDA of between 5 and 25 million euros, the Fund is one of a suite of 6 private debt vehicles managed by the firm, which has been providing flexible financing solutions to small and medium-sized companies since 2014. Locally-based teams across Europe deliver on-the- ground deal sourcing and origination.
“We are one of very few private lenders in the lower middle market with a Pan-European offering,” said Kirsten Bode, Co-Head of Private Debt, Pan-Europe. “We have a large team of investment professionals and a local presence across Europe with offices in seven key markets. We believe this gives us a significant advantage in accessing a broad and diverse market in order to generate attractive IRRs for our investors.”
The Fund focuses on bespoke financing for growth capital opportunities for lower mid-market companies to fund acquisitions, expansions and transitions.
The final close of the Fund is expected later in 2018.
Wikimedia CommonsPhoto: Mark Mobius. Mark Mobius is Launching a New Asset Management Firm
Less than four months after leaving Franklin Templeton Investments, the legendary investor Mark Mobius has founded a new asset management firm that specializes in emerging and frontier markets.
According to Bloomberg, the new company would carry its name Mobius Capital Partners LLP and has Carlos Hardenberg and Greg Konieczny, other Franklin Templeton veterans, as main partners. Everything seems to indicate that its operations would start this June.
“I was not ready to retire and I was ready for something new after 30 years at Franklin Templeton,” the manager, who worked for more than 40 years investing in emerging markets, told Bloomberg on Wednesday.
The manager has yet to attract external investors and aims to raise about one billion dollars in the next two to three years. According to Bloomberg, Mobius would start with a concentrated portfolio of about 25 stocks that will invest in India, China, Latin America and frontier markets.
The Trump National Doral is the setting in which Funds Society celebrated its fifth Investment & Golf Summit on April 12th and 13th . Nine Proposals in Equities, Debt, Convertibles and Multi-Assets from the Investment & Golf Summit 2018 Organized by Funds Society in Miami
Janus Henderson, Thornburg, Vontobel, GAM, RWC, AXA IM, Schroders, Columbia Threadneedle and MFS: are the asset management companies that took part in the fifth edition of the Investment & Golf Summit 2018, organized by Funds Society and held in Miami on the 12th and 13th of April at the Blue Monster golf course, at the Trump National Doral. While golf was the main feature on the second day, throughout the first day the management companies captured all the attention of around 80 fund selectors, financial advisers, private bankers, and professionals involved in making investment decisions for non US resident clients who attended the conferences.
On Thursday, the management companies presented their best ideas for a more volatile environment in which all eyes are on US inflation and the pace of rate hikes by the Fed; a context in which profitability can be obtained with strategies, in equities (global, European, emerging…), in fixed income (dynamic high yield, convertible bonds, MBS, emerging debt…) and in multi-assets. In equities, the ideas came from Janus Henderson, Columbia Threadneedle Investments, and Thornburg, with their respective strategies in Chinese stock market, small caps, and global stock market.
In emerging equities, Charlie Awdry, manager of Janus Henderson, reviewed what investors can expect in 2018 and where he believes the best opportunities in Chinese equities are. The manager was critical of the elimination of the two term presidential limit -which reduces the distinction between the Communist Party and the State-, but stressed that, in politics, not everything is negative in that country, pointing to President Xi’s focus in reducing inequality and financial risks, and mainly, reforms (both socially and economically, which will lead to greater consolidation in some of the country’s heavy industries). And above all, he explained that the reforms in the SOEs (the companies in which the State has a participation greater than 50%) will be positive for shareholders: “The reforms in the SOEs will begin to stimulate better decisions of capital allocation, including greater dividends.”
The asset manager also pointed out how the country has gone from having a focus on growth, to shifting its focus to reforms, fighting corruption (improving business efficiency) and, since last year, deleveraging, so that debt will be lower than in the past. And growth also: Awdry talked about shorter economic cycles and a current peak, predicting a somewhat lower growth after the summer, but without reaching a hard landing, which will begin to recover by the end of the year. As a positive factor, he pointed to a better relationship between the dollar and the renmimbi, more favorable than in the past, and spoke of three additional risks: trade wars (there will be more friction and competition, which will force greater negotiations with the US), North Korea, and Taiwan.
But, beyond the economic and political context, he pointed out the opportunities offered by some Chinese companies: “Many think that companies are not good, because of their state-owned nature or because of their low quality, but there are very interesting spaces in which to invest,” he said, pointing out the Internet segment, where the country is very innovative. In its fund, its main position is Alibaba, listed in New York, with a high percentage of market share in e-commerce, and the second Tencent, listed in Hong Kong (with data that invites investment, as is the fact that a third of its users spend more than 4 hours a day in the app.). The problem of some securities which represent the new China (technology, health, or consumption) is its price, so that its portfolio is currently divided equally between these segments and the most characteristic of old China (energy, materials, industries , banks or utilities), which are currently cheaper. In fact, the asset manager argued for the great opportunity in the H shares of the country’s banks (and also in some companies held by the state), which he bought in Q2 last year for the improvement in their fundamentals, for their attractive valuations and, tactically, for the annual dividends of 5% -6% which they offer.
Its Chinese equity fund seeks to find the best opportunities in three markets: Hong Kong (where it sees attractive valuations and which occupies two thirds of its portfolio), A-shares (which still offer a discount and represent slightly less than 20% of the portfolio) and Chinese stocks listed in the US. (Now, with less attractive valuations and a peak in the market, which suggests that it is time to sell and is the reason why they have reduced their positions). On the A-shares, the asset manager pointed out the attractiveness of the liberalization of Chinese markets and the potential that MSCI expects to include these shares in emerging stock market indexes soon. As an opportunity, also the fact that investors’ positions are below the 2013 levels. “China is a very interesting bet at the moment, it is a volatile market but there are opportunities. Our strategy is to leave behind the beta and to think more and more about the selection of values and the generation of alpha “, concluded the manager.
Smallcaps Opportunities
Continuing with opportunities in equities, a presentation by Mark Heslop, Small- caps Manager for the European equity team at Columbia Threadneedle Investments and of the Global Smaller Companies strategy -launched four years ago-, focused on the potential of small capitalization companies. History shows that these firms can provide higher returns and faster growth than large-cap companies and the reasons are several: First, the proportion of businesses in which the managers are also the owners of the company is greater in the small-caps segment, which means that, when making investment decisions, they do so with a longer-term horizon. “Many large-caps are managed with a view to the results of the next quarter and do not focus so much on creating value in the medium and long term.” In addition, smaller firms have the “humility and flexibility” to change business if they see opportunities, compared to large ones. “These are the reasons that justify the faster growth of small-caps and I hope this trend continues,” said the manager. As additional reasons for their attractiveness, a greater investment universe, and with higher levels of inefficiency, or lower hedging of these securities, are the factors that represent great opportunities to generate alpha within this segment.
And they also offer attractiveness from a quantitative point of view, risk adjusted profitability: “Some say that small-caps are a high-risk asset, but they are not, and it can be the same as when investing in large-caps. For a little more volatility, you can get double returns,” said the manager, who pointed out that if the returns of large companies at 20 years have been 4.1% with 15.2% volatility, those of small-caps have been 7.7% with a volatility of 17.6%.
The management company’s strategy in this segment is bottom-up and is focused on the quality of the companies, but also on growth (provided that this growth creates value for the shareholder). Due to its investment philosophy, the portfolio has structural underweights and overweights, depending on where they find high quality firms and good growth dynamics: They are overweight in industrials, a good area to find these firms, while on the other hand, it’s difficult to find names with these characteristics in financial or utilities, and in general, in highly regulated segments. By regions, the overweight is for Europe without the United Kingdom.
Beyond the small companies, in the global stock market, Josh Yafa, Director of Client Portfolio Management at Thornburg Investment Management, spoke of the opportunities in the asset, in his case also focusing the investment from a totally bottom-up perspective, although without losing sight of the macroeconomic situation, the analysis on the economic cycle and the valuations. In fact, the manager spoke of a positive economic context, with global PMIs expanding in the Q1 of the year, unemployment rates below the 1990-2017 average and other indicators that show that we are in a period of economic expansion.
On equity valuations, he pointed out that they are slightly below those of the end of 2006 (although above those at the end of 2008), and he stressed one positive factor: the net debt / EBITDA ratio, which, both at the end of 2008 and of 2006 was around 4.7 times, is now 1.8 times, a positive factor. The manager also spoke of a world in which, after the withdrawal of stimuli from the central banks, there will be more differentiation in the markets, which will benefit active managers, and also pointed out the fact that, according to the flows towards funds and ETFs, investors continue to show preference for bonds rather than for shares.
In this environment, Thournburg seeks to differentiate itself from other companies: Based in Santa Fe (New Mexico), it builds high conviction portfolios (its global equity portfolio has 30-40 names). “At Thornburg, we adopted a disciplined approach to the construction of portfolios, guided more by convictions than by conventions. Instead of using reference points as a starting point, we apply flexible and active management to find the best results for our clients,” added Yafa.
With a view focused on income, the entity also presented its global equity strategy that not only seeks capital appreciation but which also invests in firms willing to pay dividends, as well as a third multi-asset strategy, composed of equities – with about 50 names with a dividend yield of 3% – and fixed income (Investment Income Builder), and that it invests globally. “Companies that provide a higher payout ratio also tend to end up offering greater profit growth,” said the expert. The strategy, flexible in terms of geographical exposure and sectors, is positioned above all in segments such as financial and telecommunications companies and has low exposure in highly regulated firms such as utilities.
There are Still Opportunities in Fixed Income
There are still opportunities in fixed income, despite the dynamics of monetary normalization complicating this environment. Management companies such as Vontobel, GAM, AXA IM and Shroders, offered their ideas focused on obtaining income with a global focus, on the value that still exists in US high-yield, in emerging debt, or in the opportunity in the MBS.
Focused on obtaining income, and with its Strategic Income strategy -which aims to provide an attractive income level with capital growth as a second objective-, Mark Holman, CEO and manager of TwentyFour, a boutique of Vontobel AM, presented its strategy, which combines the best sources of income in the global debt segment in an unconstrained and unlevered portfolio, managed independently of the indices, with active management of interest rate and credit risks and focused in relative value and in liquidity. “2018 will be a tough year for fixed income: There is 85% of the market that I do not like but there’s still 15% that I do like,” he said.
If I had to buy a bond today, it would be in credit (not in the public debt area) and, given that the cycle and valuations are mature, it would have to be high-quality and well analyzed, to avoid the risks of default. In addition, it would have a short duration to avoid the risk of interest rates, but not too low, to be able to obtain “roll down” gains. And it would be in the currency of the country of origin, because currently said risk is too high. Such a bond would survive complicated market conditions, summarized the expert. Because this year is a year for caution, and their fund is better positioned to face it (it has a shorter duration than the index, 2.72 compared to almost 7, and a much higher yield, 5.24% as compared to 2.11%).
Within that 15% of the market where the asset manager sees value, by geographies he points out that there are more opportunities outside the US. – “an economy which is close to the end of the cycle” – that within the US, and has strong positions in Europe (29%) and especially in the United Kingdom (more than 30%), where it takes advantage of the Brexit premium. North America occupies 21% of the portfolio and the remaining 18% is mainly in Australian public bonds, “secure, because the country is not in a dynamic of rate increases”. By rating, it’s willing to take credit risk but avoiding the CCC segment, where many defaults are concentrated, and the B, while it’s positioned in the BBB and BB areas, more secure and with good returns. By sectors, it mainly focuses on banks… as the manager sees opportunities mainly in three segments: European CLOs, subordinated bank debt and emerging corporate debt in strong currency (the latter benefited from the coordinated global recovery that began last year). “The banking sector has never been as healthy as it is now, it has more capital than ever before,” he says.
As to what to avoid in 2018, he points out the interest rate risk, the sectors where the ECB focused its purchasing program, European public debt (especially the German Bunds), the British Gilts, the long-term investment grade credit and the CCC segment while it is willing to take credit risk, to take advantage of the “roll down” gains (favoring securities in the part of the curve from 3 to 4 years), stories with rating upside potential and the Brexit premium. In general, his watchword is that it’s a year to face credit risk (the end of the cycle is far away, and 2017 showed a scenario of global financial recovery), but taking care of the valuations (the markets are expensive, although the situation is justified by the fundamental forts, economic recovery and technical support). That is why its strategy is to gradually reduce this risk as the cycle progresses and focus on finding relative value by geographies, sectors and companies.
MBS & ABS Strategy
GAM’s idea in order to take advantage of this environment focuses on mortgage and asset-backed securities (MBS and ABS). Tom Mansley, Investment Director of GAM Investments and specialist in the analysis and management of these securities, argued for how these vehicles can offer a differentiated fixed income proposal for investors. A strategy that arises from the need to respond to two recent problems: One is correlation, because although in recent years the markets have been highly correlated in a positive way, the situation could change: “We are looking for something that provides diversification in the fixed income portfolios “. And the second is the lack of income and liquid income when investing in the asset. In response to these concerns, the entity has built a portfolio that invests in bonds backed by US mortgages, a market that has been growing in emissions in recent years, although with different dynamics depending on whether it is agencies’ MBS – with a majority of issues and considered lower risk -, CMBS or RMBS issued by other entities.
With the strategy which, thanks to their attractive valuations, has been increasing the positions in these latter securities that have no government guarantee, the idea is to offer returns in the mid single-digits, with very low volatility: “It is not an overly exciting market, but in a context in which many financial assets are expensive, we can offer those returns with very low volatility – below the index and also high-yield and correlation,” and always with the idea of making money (in 2013 within the context of the Taper Tantrum, with a downward bonds market, their strategy rose). This low volatility is helped by the fact that investors aren’t retailers, but institutional: According to the expert, pension funds and insurers are very comfortable with the asset, because the credit is “very solid”.
And it’s solid because the real estate market in the US is going through a sweet moment: The ratio of empty houses is already at historically normal levels, around 1.5%; the offer of existing homes for sale is below the average levels (so that in three months all would be sold); the number of houses under construction is also below normal levels (around 500,000); the home ownership ratio is lower than that of the levels prior to the crisis and around the average of the last decades which was 64%… these factors, together with the greater capacity to pay for a home, serve as a basis for an appreciation in the price of it. “The index that compares the average income with the average mortgage payment, and that, taking that income into account, measures ease of payment, shows that current generations can buy a house cheaper than their parents”- by measuring the relationship between price and income-, both because the price is lower and because of the income growth, characteristics which are totally the opposite to those of a few years ago.
Dynamic High-yield
Although some prefer fixed income alternatives, some others continue committed to more classic segments, such as AXA IM, which highlighted the opportunities for investing in high-yield debt from a dynamic perspective. Robert Schumacher, Chief US Strategist and Client Portfolio Manager of Fixed Income at AXA Investment Managers, explained why it’s still a good time to bet on high-yield, dismantling stereotypes that keep some investors out of the assets. “If the argument for not investing in US high yield is that the cycle is coming to an end, you can lose a great opportunity to obtain income,” he said. In the first place, because nobody can know when a cycle is going to last – and it is not clear that it will end soon -, and also because, even if it were true, the work of the managers is, as in other assets, such as variable income, to look for inefficiencies in those environments. “The argument for not investing cannot be that,” he said. Also, in his opinion, “cycles do not die of old age, but due to political errors.”
According to the entity, the moment is still good for the asset, and it can be an attractive alternative for those reluctant to invest in equities but looking for correlated returns with stocks with lower volatility. The management company’s US high- yield strategy has positions concentrated on names of great conviction, with the selection of credit as the main source of alpha, a volatility in line with the market (but with higher returns) and the possibility of using leverage derived from the use of CDS (up to 150%) -with the objective of improving returns in neutral and bull markets-. However, entity sources explain, it’s not a distressed strategy or a neutral market or negative exposures. Last year, it beat the market thanks to the selection of securities in debt and also to positions in CDS -which are not the main catalysts of returns, but are also a source for achieving them-; it also did so in 2016, despite being underweight in energy and with limited exposure to very cheap commodity issuers whose prices rebounded strongly. Since its launch, it has managed to limit the falls in difficult markets and offer alpha in periods of positive returns.
Also in fixed income, Schroders‘ bet focuses on emerging debt. John Mensack, Senior Investment Manager Emerging Markets for the management company, was very constructive with the asset: “Emerging debt is a main asset class and one in which investors are underinvested,” and which already represents 18% of the market of negotiated bonds. In addition, considering the growth of public debt issues in local currency and corporate bonds in hard currency, traditional indices become obsolete, so that investment in assets “deserves a more sophisticated approach; It’s time to be more sophisticated.” In addition, in seven of the last 10 years, the difference between the returns of the most and least profitable debt segments has been greater than 7%: Hence the importance of looking for a professional who only invests where the value is and moves away from areas that are expensive.
And that is precisely Schroders’ perspective, which combines in its strategy sovereign debt in strong currency, sovereign debt in local currency, and credit in hard currency; the latter is a sector in which it sees great opportunities while being less exposed, for example, than the second one: “Debt in local currency usually offers 100 basis points more profitability than that in hard currency, but now there is only 30 points difference -6.1% against 5.8% -, so it makes no sense to overweight the currency now. There are good stories like South Africa or Indonesia, but when we look at these cases of relative value we tend to underweight the areas that we see more expensive, as is now the case with local currencies.” In fact, less than a third of its portfolio is exposed to sovereign debt in local currency (27%), while the rest is debt in hard currency – corporate debt weighs 28% and public debt in hard currency, 40% -. In any case, the idea is to have around one third of the portfolio in local currency, which works better than the 50/50 strategies. The opposite occurs with corporate debt in hard currency, where it sees opportunities, with more than double the returns for the same level of risk in duration as US credit, and focusing on “great national champions,” that can achieve rating increases and that are mainly in the investment grade segment. In general, Schroders’ fund positions are low in interest rate risk, it’s overweight in credit risk -because countries are doing well and credit is improving- and underweight in currency risk due to low differentials (and high valuations) of the debt in local currency).
All in a strategy that offers greater diversification (thanks to lower volatility and a greater set of opportunities), a better opportunity to obtain income globally with good credit quality and low correlation with US Treasury bonds, which reduces the interest rate risk (specifically, 24% correlation, so that the Fed rate hikes will not condition the portfolio). On the dollar, the expert argued that, at the current level or lower – something that could happen, in his opinion, due to the deterioration of some US data, which will cause investors to look for opportunities in other markets, such as emerging markets-, would be positive for their strategy. “During the period of Taper Tantrum the dollar rose a lot but that reality has already been left behind and we believe in its moderate weakening,” Mensack added.
The Opportunity in Convertibles
Halfway between fixed and variable income, convertibles are also a good idea in this environment, according to RWC. Davide Basile, Head of the Convertible Bond Strategy team and Manager of RWC Partners, explained the benefits of the asset, capable of capturing a large part of the increases in equities (with between half and a third of its volatility) and offering bearish protection at the same time. “At present, a strange world is combined with global growth, and convertibles offer the best of both worlds: An appreciation when there are increases in the markets with the security of a bond”, commented sources from the management company, with a focus on understanding both the credit part and the equity of the asset, “understanding each name, the different components, how they move…”
“The asset has an additional ally in this environment: The increase in volatility. Thus, since the end of 2016 and during 2017, and due to the low volatility, convertibles have participated less in the rise of equities, but that could change. “When the volatility is higher, they also participate more in equity returns thanks to the exposure to optionality, so in these scenarios they tend to do better, as compared to shares”, explained the experts. And a more volatile environment also favors the issue of convertibles.
Due to their characteristics, experts recommend this asset, rather than as a substitute for shares, as an alternative to a debt market with already tight spreads – and with less potential for narrowing – and the risk of raising interest rates. In this segment, they would be a “good place for diversification, since they tend to have shorter durations” and protect them from these increases. “A few years ago convertibles offered lower returns than corporate debt, which can be explained by the cost of the option, but now the level of income they offer is comparable, so if you are comfortable with the characteristics of the convertibles, they could serve as substitutes for fixed income, in order to obtain a similar income level”. Even in a multi-active portfolio, its introduction does not usually involve surprises in terms of volatility, and provides diversification benefits.
Multi-asset: The Necessary Diversification
What all the experts agree on is that the environment makes portfolio diversification necessary, something that multi-asset strategies undoubtedly achieve. During this event, MFS was the management company that presented a strategy of this type to achieve diversification and a better performance adjusted to risk, in an environment of lower rates and in which, in order to achieve the same results as 20 years ago, greater diversification and taking more risk is required. The management company’s strategy has a historical allocation of approximately 60% in shares and 40% in fixed income, which facilitates the work of the managers, explained Gary C. Hampton, CFA, Product Specialist of MFS Investment Management. “The combination of stocks and bonds in a multi-asset portfolio offers investors diversification and the opportunity to achieve better risk-adjusted performance,” he explained.
Thus, the equity part focuses on investing in global companies and large businesses, selected from a value perspective (they must be global businesses, sustainable for years, generating cash flows, with strong balance sheets and that are well managed by good equipment, also with attractive valuations). Thus, their perspective of looking for high quality firms with attractive valuations is clearly differentiated from the so-called “deep value” managers, which look for highly undervalued firms, but which could belong to industries in difficult situations or have problems that justify those low prices.
In fixed income, the fund uses a top-down approach in the process of selecting countries and currencies, generally investing in investment-grade debt. “The correlation between high- yield and shares in bear markets is very high, so we think that the mix of equities with investment grade debt is a better mix for times of correction,” explained Hampton, recalling that in 2008, when the market fell by 40%, the fund only fell 15%. This perspective tends to cause overweight positions in the variable income sector and in sectors such as basic consumption, and underweight in technology, while in fixed income corporate credit is overweight and, for example, US public debt is underweight.
The management company also presented its MFS Meridian Funds-Prudent Capital Fund, with an exposure to global equities of between 50% and 90%, global credit of between 10% and 30% and up to 40% in liquidity, a concentrated portfolio in which preserving capital is key.
