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Pre-Retirees Emphasize Legacy Building Over Wealth Accumulation

Many Americans aged 51 to 69 have a unique outlook on life, particularly when it comes to financial management and insurance, according to a new white paper from Chubb. While sharing several of the same interests and passions as younger cohorts, pre-retirees are more focused on legacy building than on wealth accumulation.

“The Pre-Retirees: Changing Minds, Changing Needs”white paper explores the implications this changing mindset may have for wealth advisors and insurance agents. It also outlines the property and personal liability issues impacting pre-retirees, including risks associated with home ownership, travel and passionate pursuits.

“Pre-retirees hold about $8 trillion in assets but, unlike younger generations, the majority are not focused on accumulating more wealth or property—rather, the emphasis is on what they have accomplished and the legacy they want to leave,” explains Alanna Johnson, Senior Vice President, Premier Practice Leader, Chubb Personal Risk Services. “This has implications for how pre-retirees and their advisors approach risk management. Wealth advisors and insurance agents can best serve this generation by understanding the client’s changing risk profile and designing a holistic risk management program that fits their lifestyle.”

According to the white paper, some of the most pressing legacy building-related risks pre-retirees and their advisors should be aware of include:

Serving on non-profit boards that might not offer sufficient D&O liability coverage in the event of a lawsuit
Emerging property risks as a result of relocation as more pre-retirees move or purchase property to be closer to their adult children and grandchildren
Unforeseen gaps in protection when pursuing sophisticated wealth transfer strategies, such as the establishment of a trust or LLC
Having sufficient medical evacuation coverage and travel insurance in the event of an accident or injury abroad.

You Cannot Keep Ignoring Emerging Markets

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According to Derek Silva, Portfolio Manager at Elvi, nothing scares more than the words “Emerging Markets corporate debt.” in his opinion, the list of frightening aspects is plentiful:

There’s Russia’s geopolitical issues.
Turkey’s coup attempt and downgrade to junk.
Brazilian corporate and political scandals.
President elect Trump’s Mexico obsession.

And then there’s China, for which CNBC and Bloomberg have a favourite term, “China worries”, to lazily explain any down day in global markets when they cannot find any other good reason.

So, EM corporate debt? Who buys this stuff? Well, if you ignore it, Silva believes you’re missing out on some excellent diversification and the best risk/return over the past 17 years. In fact, since 1999, EM IG has the best risk/return (in terms of Sharpe ratio) among all major fixed income asset classes. And EM HY outperforms its US and EU counterparts by the same measure.

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It is interesting that diversification is one of the basic principles of investing and yet many investors, both professionals and laypersons, only put tiny portions of their equity/fixed-income allocations into EM, despite EM growth rates being double those of DM economies. Only in this year’s extreme scenario of a global low rate environment have investors piled into EM equities and debt. But even after retail inflows into EM corporate debt reached record levels this summer, a recent survey by JP Morgan revealed most are still underweight in EM debt. To see the benefits of adding EM to an investor’s portfolio, since 1999, the addition of EM IG & HY (to US credit holdings) have provided an extra 0.5% of return for the same level of risk, and dramatically higher returns for smaller increases in risk.

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Silva believes that the EM market is more resilient to crises than US and European markets. Why? Because DM markets are priced to perfection and any scandal or crisis can have wide-ranging negative effects for the whole DM markets. Just look at the most recent example, with problems at one bank (Deutsche Bank) shaking the European markets and even spilling over into the US.

In contrast, “EM” is truly diversified by 5 vastly different regions (Asia, Latin America, Middle East, East Europe, Africa) and over 40 countries within the broad corporate bond benchmark (no country more than 10% weighting). These include even advanced (but not yet officially “DM”) economies like Singapore, Taiwan, Hong Kong and Korea, along with riskier “high beta” countries like Russia, Turkey and South Africa. But it is rare for any individual crisis to affect the EM credit market as a whole.

When Turkey’s credit rating was junked recently, only the Turkish credits were weak. Last year, during 2015’s corporate and political scandals in Brazil, it was mainly Brazil’s markets that suffered. The prior year, in 2014, when Russia was in conflict with Ukraine, it was mainly Russia and Ukraine that were affected. During all of these events, regions like Asia continued chugging along with attractive returns, immune to the crises in other EM regions. Even for a more wide-ranging crisis, like when many commodities prices fell dramatically in late 2015 and early 2016, some countries suffered (LatAm, Middle East), while some countries benefited (Asia).

In 2016, EM credit markets have been the best in global fixed-income, with double-digit returns, in spite of a myriad of negative factors:

still low commodity prices,
slow turnarounds in Brazil and Russia,
Turkish political problems and downgrade to junk,
South Africa’s impending downgrade to junk,
“China worries”,
the Trump-Mexico effect,
and the looming threat of a Fed rate hike.

“I believe this is a testament to EM’s superior diversification, growth and ability to derive attractive long-term risk/return performance. This is something that cannot be ignored for long.” He concludes.

EFAMA: Concerns Remain in the Final Money Market Funds Deal

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A political agreement reached on the Money Market Fund Regulation was signed-off by the Council of Ministers on December 7th in a meeting of EU Ambassadors (COREPER) and on December 8th by the European Parliament’s ECON Committee. These votes followed an original proposal by the European Commission in September 2013.

According to a press release, “EFAMA is appreciative of the work done and time spent by EU policymakers, which has resulted in a more workable outcome than the initial proposal, for European investors, MMF managers and the Capital Markets Union more generally.”

Peter De Proft, Director General of EFAMA commented: “EFAMA members manage both VNAV and CNAV Money Market Funds. From the outset, we have indicated that a proportionate and balanced Regulation which ensures the viability of both CNAV and VNAV MMFs can support alternative sources of financing to the real economy, a key focus of the European Commission’s flagship initiative on a Capital Markets Union.”

He continued: “In terms of CNAV MMFs, we welcome the creation of the LVNAV product which has the possibility of offering investors a real alternative to European CNAV Prime MMFs. Equally important is the retention of a workable government CNAV regime in different currencies. For the VNAV industry, a number of serious operational challenges have been minimised. However, the MMFR is by no means a panacea for either the industry or investors in MMFs”.

One noteworthy concern for both sides of the industry are the liquidity calculations of MMFs. EFAMA believes that the lack of a principles-based approach on liquidity will make it difficult to determine whether the arbitrary thresholds set in the final political agreement will be workable in different market scenarios.

EFAMA also regrets the agreement’s rejection of MMFs being able to operate as funds of funds, an important mechanism used by many VNAV managers for diversification purposes, and points out to some outstanding concerns on how the exemption from the 10% diversification limit of assets in deposits would work.

Finally, there are some practical difficulties with the ‘Know Your Customer’ requirements and the periodic reviews of the internal credit quality assessments will, in EFAMA’s view, not be workable for smaller players on the market.

Peter De Proft concluded: “There is no doubt that today’s MMFR result is a better outcome than the initial European Commission proposal. However, one cannot ignore the number of question marks on the potential consequences of different parts of the agreement. It remains to be seen whether smaller players will be able to continue operating, given the more elaborate compliance and disclosure requirements, combined with low business margins”.

ECB Extends its Stimulus Program but at a Slower Pace

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At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council decided to continue its purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. From April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If, in the meantime, the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP.

To ensure the continued smooth implementation of the Eurosystem’s asset purchases, the Governing Council decided to change some of the parameters of the APP. In addition to the extension of the programme, the following parameters will be adjusted on 2 January 2017:

The maturity range of the public sector purchase programme (PSPP) will be broadened by decreasing the minimum remaining maturity for eligible securities from two years to one year.
Purchases of securities under the APP with a yield to maturity below the interest rate on the ECB’s deposit facility will be permitted to the extent necessary. The implementation details will be worked out by the relevant committees.

CFA Institute: Latin America Investment Conference

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The risks, opportunities, and challenges facing the global investment profession are as complex as ever and as investment professionals, it’s imperative that you remain current. With this in mind, next February 2nd and 3rd, the CFA Institute and CFA Society Mexico will host its first Latin America Investment Conference at the Westin Resort and Spa Cancun in Cancun, Mexico.

The conference, which is a must-attend event for investors in Latin America, features globally-acclaimed speakers and a range of diverse topics and perspectives to shape investment strategies in Latin American markets.

A practitioner-oriented educational conference focused on Latin American economies and capital markets, as well as global issues relevant to investors worldwide. It is aimed at analysts, portfolio managers, and other senior investment professionals working in or interested in Latin American markets.

For further information, follow this link.

OppenheimerFunds Expands International Offering and Appoints Distribution Team

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OppenheimerFunds has announced the appointment of Doug Stewart as Head of European, Middle East and Africa Distribution, based in London. The appointment represents a further expansion of OppenheimerFunds’ International Distribution platform, which also includes the launch of a UCITS-Fund platform. Stewart will be responsible for marketing and distribution efforts throughout Europe, the Middle East and Africa. He will report to Steve Paddon, Head of Institutional & International at OFI Global Asset Management, Inc., a subsidiary of OppenheimerFunds serving institutional investors and consultants throughout the world.

Paul Eisenhardt, Head of International Distribution (ex EMEA), is responsible for the distribution of international solutions and developing client relationships in Canada, Latin America and the Asia-Pacific region. Eisenhardt also reports to Paddon.

The launch of OppenheimerFunds ICAV, an Ireland-domiciled UCITS platform and its sub-funds will focus on investment opportunities in global and developing markets equities, providing new choices to clients and deepening relationships with consultants and investment platform providers. The first of these strategies to become available is the company´s flagship global value, global equity and developing markets equity funds which launched last week.

“We are pleased to bring some of our most compelling investment strategies to an international audience, to help meet the needs of our evolving client base,” said Art Steinmetz, Chairman and CEO of OppenheimerFunds.

“Expansion to non-U.S. markets is a core element of our long term engagement with institutional investors,” said John McDonough, the firm´s Head of Distribution. “We’re delighted to welcome Doug to the team as we build our reach globally, and continue our focus on developing long-term client-centric solutions that differentiate us in the marketplace.”

Paddon added, “Doug and Paul’s appointments deepen the talent base of our dedicated institutional team, with their proven track records working across a variety of client segments. We look forward to increasing our engagement with institutional clients internationally by building access to our investment capabilities.”

ECB Preview: The Right Dose of QE

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According to Andrew Bosomworth, PIMCO’s head of portfolio management in Germany, the European Central Bank (ECB) faces a tricky challenge at its Governing Council meeting. On December 8th, it must decide on the minimum amount of quantitative easing (QE) needed to return inflation to target – and in what size doses it should be administered.

So far, the ECB has conducted two rounds of QE and committed to buy €1.74 trillion in assets, mostly government bonds. Phase one began in March 2015, spanned 13 months and saw €60 billion in asset purchases per month; phase two began in April of this year and is scheduled to run for 12 months at a rate of €80 billion per month.

The PIMCO specialist believes striking the right balance between the stock (of assets to purchase) and flow (the rate of purchases) will be key. “Both current inflation and projections for next year remain far below the ECB’s just-under-2% target, supporting the argument for more QE at a high monthly purchase rate. But monetary policy works with a lag, and because the ECB has already administered a lot of easing, further purchases risk creating asset bubbles and hurting savers – an argument for phasing out QE as soon as possible.”

In his opinion, there may appear to be little difference between purchasing €80 billion in assets per month for six months and purchasing €60 billion in assets for nine months (two options likely to be on the table). But while the ECB might be tempted to reduce the monthly purchase rate now, he thinks maintaining higher monthly purchases for a shorter period is more likely to square the stock-versus-flow circle, for three reasons.

First, maintaining €80 billion in monthly purchases minimizes the risk of tightening financial conditions, even if it involves purchasing a smaller total stock of assets. Financial markets are sensitive and might interpret a smaller purchase rate as a signal that QE will stop soon.
Second, committing to a shorter-term policy gives the ECB more flexibility to change course. If it turns out that nominal economic growth recovers strongly and durably – say, above 3.5% – the ECB could slow purchases during the final quarter next year and stop altogether by mid-2018. If growth remains weak, it could opt to extend QE into 2018. We see little cost to postponing the decision.
Third, interest rates and the euro are likely to rise for fundamental reasons independent of QE once growth recovers. Winding down QE under those circumstances would reduce the risk of tighter financial conditions that could push the economy back into recession. From a risk management perspective, we think it’s better to delay reducing monthly purchases until there is a high degree of confidence in economic forecasts.

Owing to the scarcity of eligible Bunds, Bosomworth believes any extension of QE will likely require relaxing some of the ECB’s rules for purchasing government bonds, and so the ECB may change its rules so that it can buy bonds at yields below the deposit facility rate and in quantities that deviate from its capital key. “With so much government debt on its balance sheet and peripheral banking systems (especially Italy’s) dependent on ECB liquidity as never before (see chart), a sovereign debt restructuring would be a crisis for the ECB. We therefore think relaxing the 33% cap on purchases for any one bond or issuer is less likely, and may be left in the toolkit for the next recession. Let’s hope that’s a long way away.” He concludes.

ABN AMRO Sells its Private Banking Operations in Asia and the Middle East

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In line with the strategic update as announced on 16 November 2016, ABN AMRO has decided to sell its private banking operations in Asia and the Middle East to LGT, a leading international private banking and asset management group.

Jeroen Rijpkema, CEO of ABN AMRO Private Banking International said: ‘Private banking is a core activity of ABN AMRO. After a strategic review, we have decided to focus on further strengthening and growing our private banking activities in Northwest Europe. The transfer of our private banking business in Asia and the Middle East is the logical next step in implementing this strategy. We are happy to have found in LGT a strong and solid partner to ensure continuity of service in the best interest of our clients and staff involved’.

ABN AMRO Private Banking manages around USD 20 billion (EUR 18.5 billion) of client assets in Singapore, Hong Kong and Dubai, representing about 10% of ABN AMRO Private Banking client assets worldwide. The transaction is subject to approvals from the relevant authorities and closing is expected in Q2 2017. ABN AMRO expects to realise a substantial book gain.

In the region, ABN AMRO will continue to offer financial services to its Corporate Banking clients active in amongst others Energy, Commodities & Transportation, the Diamond & Jewellery sector and Clearing.

Most Banks Don’t Need More Capital, But More Flexibility To Use It

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Despite having much stronger capital bases than before the financial crisis, banks around the world remain exposed to capital-related confidence shocks, according to S&P Global Ratings‘ Most Banks Don’t Need More Capital, But The Flexibility To Use It In Times Of Stress.

“This apparent paradox reflects the effectiveness of the significant increase in minimum regulatory capital requirements in ensuring that systemically important financial institutions (SIFIs) have enough bail-in-able resources to absorb stress losses in a resolution,” said S&P Global Ratings credit analyst Bernard De Longevialle. “However, at the same time, the higher requirements have also lead to a parallel shift in what the market believes are the minimum capital levels banks should permanently respect to keep its confidence.”

As a result, in period of stress, banks might react with many of the same procyclical behaviors that we’ve seen in the past. Current considerations by Europe’s Single Supervisory Mechanism to split Tier 1 Pillar II requirements into a hard “requirement” and a softer “guidance” component may give welcome additional flexibility to Europe’s large banks to absorb unexpected shocks without triggering confidence-sensitive coupon suspension.

Regulators have been successful in forcing the banking system to build a much stronger capital base than before the crisis.

This achievement should not, however, hide the fact that most of these capital resources would be available only as part of a resolution. Over the past six years, new forms of concurrent regulatory requirements have emerged in addition to going-concern risk-sensitive metrics. In assessing where large banks in Europe and the U.S. stand according to these metrics, we observe that their effective loss-absorbing margins above regulatory requirements have not improved on average since before the crisis.

International standard setters didn’t intend for these regulatory buffers to be viewed as establishing new minimum capital requirements. However, as seen earlier this year, the perceived risk of restrictions on distributions to shareholders or hybrid instrument holders can spread to the wider credit markets.

A further increase in regulatory minimum capital requirements could have unintended consequences, but flexibility to use capital buffers when needed would in our opinion benefit the resilience of the world’s banking system.

Taking Stock of the U.S.

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Stronger GDP growth is the key to sustaining U.S. equity momentum.

As we enter December, the market continues to chew over the implications of a Donald Trump presidency. Last week, my colleague, Erik Knutzen, CIO of Multi-Asset Class, examined the outlook for emerging markets debt and equities. This week, we take a look at the prospects for U.S. equities.

There’s been a lot of noise and excitement about the so-called “Trump Bounce” in equities, but I want to dig a little deeper and look at some of the factors that are likely to sustain it. The most important element in equities’ continued recovery is a pickup in expectations for stronger GDP growth. Indeed, this may already be in the works.

The most recent figures, for example, show an upwards revision in Q3 GDP—up from 2.4% to 2.9%1, largely driven by consumer spending. This was better than anticipated, and although estimates tend to fluctuate throughout a quarter, the Atlanta Fed is projecting Q4 GDP to be over 3%. So, if this plays out, it represents a 2.25% increase in GDP for the whole year. That’s a pretty decent tick up from the 1.5% the U.S. economy experienced throughout 2015 and much of 2016.

Fiscal Boost?

Next, you need to factor in the new administration’s plans for meaningful fiscal stimulus. Indeed, Steven Mnuchin, the Treasury secretary designate, made a case for greater fiscal policy intervention only last week. This included much talk about tax cuts, both corporate and personal, together with the long-heralded increase in infrastructure spend. Taken together, and if implemented, these initiatives should provide the tailwind that will drive U.S. GDP growth above the levels we’ve seen in recent years.

With a stronger level of growth, earnings should improve. Back in the spring, this was an area of concern for us. Accelerating earnings growth would be the strong foundation for further improvement in U.S. equity markets and support the higher P/E multiples that, for the first half of 2016, were driven by lower bond yields.

Industry Sectors a Mixed Bag

So, which areas of the U.S. stock market are most likely to benefit under this new environment and which ones will be left out in the cold? On the positive side of the ledger, financials should do well because of the expectation of interest rate increases and less rigorous bank regulation. Domestic cyclicals and energy companies should also be among the beneficiaries of faster domestic growth.

The small-cap space is also enjoying a strong rally. Since its November 3 low point, the Russell 2000 Index is up nearly 15% through the end of November. In contrast, the S&P 500 has posted a return of around 6%.

Health care, however, is a mixed bag. Tom Price, the proposed Secretary of Health and Human Services, is a vocal critic of the Affordable Care Act. In fact, he’s likely to try to do away with “Obamacare” altogether and replace it with a more market-based system. As a result, investors are struggling to figure out who’ll be the winners and losers if the current system begins to unravel.
Risks?

Trade and the Dollar

So what are the risks to this more optimistic scenario? One is that trade becomes an issue. There was a lot of anti-trade rhetoric during the recent U.S. election, although things have quieted down a bit since then. But tensions could reignite next year when Trump takes office. A trade “war” of sorts could be a meaningful drag on global GDP growth. Trade has in fact already been slowing over the past three years due, in part, to protectionist measures implemented in many countries.

The stronger U.S. dollar is making life increasingly uncomfortable for many large-cap exporters. Growing dollar strength has major implications for large international companies and, by association, their earnings growth. Since the U.S. election, the greenback has already risen by 4% and looks set to rise higher. And there’s near-universal agreement that the Fed will increase rates later this month, which will put additional upward pressure on the currency and, therefore, on big global exporters.

Net-Net, We have a Positive Outlook

But despite these concerns, the prospects for U.S. equities look far healthier than they did a month ago. So the decision of our Asset Allocation Committee just over a week ago to raise our 12-month outlook for U.S. equities to slightly above normal has, so far, proved to be the right one. Stay tuned to see whether this remains the case.

Neuberger Berman’s CIO insight by Joseph V. Amato