In today’s environment, multi-asset strategies remain an indispensable tool for gaining flexibility and diversification. But what elements make it possible to differentiate a multi-asset strategy from its competitors? Cristophe Machu, from the Multi Asset and Convertibles’ team of investment specialists at M&G Investments, explains in detail the approach used by the M&G Dynamic Allocation and the M&G Prudent Allocation strategies, which seek to convert market overreactions into a source of returns for the investor.
Both funds use an approach composed of three different pillars: strategic valuation, tactical valuation and portfolio construction. During the first block, strategic valuation, the management team examines and compares the valuations of the different asset classes in which the strategy invests – equities, fixed income, and currencies – with their fundamentals, to ensure the correct allocation of assets, which will be the portfolio’s main source of alpha. In the second block, tactical allocation, the management team seeks to exploit the opportunities that are generated in terms of volatility from changes in investor sentiment. According to M&G, on average, 18% of market volatility is the result of an excess of optimism or pessimism in investor sentiment, something that affects valuations, but not fundamentals. Finally, in portfolio construction, they focus on finding sources of decorrelation between the different assets. According to M&G, the correlations are not static, which is why they must perform a qualitative analysis over quantitative analysis, in order to understand the degree of correlation that future portfolio assets can reach.
Why is Strategic Valuation the Starting Point?
Returning to the first pillar, Cristophe points out that valuation is a good indicator of future returns, as it allows us to know what returns are expected of an asset and how it is being perceived by investors in the market. In equities, in both the United States and Europe, the current level of the forward P/E multiples can show the expected average yield over five years. Therefore, if you buy shares with multiples between 8 and 10 times, in five years you could realize an annualized yield of 20%. However, if you pay too much for an asset, with multiples between 24 and 26 times, the investor would almost certainly incur a loss.
A second issue that M&G evaluates, in order to try to take advantage of the opportunities it generates in the medium term, is the evolution of market volatility. In this respect, the managers of the multi-asset strategies would try to detect “episodes”, or moments in which quotes for the assets don’t correspond with their fundamentals to add risk to the portfolio. This alternative investment approach, with some contrarian vocation, tries to play tactically with asset allocation, increasing equity exposure when the market is over selling its positions for no apparent good reason. The strategies that follow this approach are called “Episode strategy”.
A good example of this approach is the returns obtained by the M&G Dynamic Allocation fund, which invests around 40% in US equities, compared to the performance of the S&P500 index and to a multi-asset portfolio that starts from the same allocation in US stocks, but that uses stop-loss mechanisms whenever the market experiences a fall, progressively reducing its exposure to risky assets with each decline. Over a period of 20 years, the returns of the M&G strategy would have been substantially higher than those of the market and of the strategy using stop-loss mechanisms, exceeding them by 60% and 108%, respectively.
2016 was a year full of political events, during which the difficulty of guessing when making predictions became quite clear. Many investors were surprised by the vote in favor of Brexit and by Donald Trump’s election as president of the United States. For Cristophe, the most surprising thing about that whole case is that, even knowing the final result, it is still possible to err when reading the expected market reaction. Some market experts anticipated that a Trump victory could mean a precipitous decline in the markets and the beginning of a recession. Far from these predictions, in the weeks following the November election, so-called safe haven assets, gold and Treasury bonds at 10 and 30 years yielded negative returns, while the S&P 500 index performed positively. That is why, in terms of tactical management, none of the asset managers at M&G tries to make predictions, but rather, to benefit from the volatility that different episodes or market events can create.
In this regard, the VIX volatility index could serve as an entry indicator into the equity market, because according to the M&G investment specialist, after a peak of volatility in the VIX, the S&P500 usually experiences a rally in the following years, showing adequate moments for the incorporation of greater exposure to risky assets in the strategies.
Cristophe also points to the purchase by the M&G Dynamic Allocation fund of European, US, British, and Japanese stocks during the months of January and February 2016 as an example of a response to a market “episode”, to then undo these tactical positions in March. Months later, after Brexit, the fund took advantage of the attractive valuations of the banking sector and of certain regions to increase its exposure to these assets. It then sold those positions as soon as the market moved sideways in September of the same year.
The Importance of Correlations Between Assets
At M&G, they argue that the correlation between equities and fixed income is dynamic and depends on the bond yield. If the bond yields are quite high, close to 10% or higher, there is usually a good source of bond and equity decorrelation. On the other hand, if the bond yields are much lower, below 5%, the ratio between the two assets is positive. This means that, at present, adding fixed income is not as attractive as equities, neither from a valuation point of view nor as a source of decorrelationas compared to equities, therefore, at M&G they do not believe that investing in a traditional multi-asset fund is the right solution for the client
Where is the Value?
Both the M&G Dynamic Allocation fund and the M&G Prudent Allocation fund can take short positions in equities and fixed income. In response to the cycle of interest rate hikes by the Fed, the fund positions itself with a negative duration.
The bond market is in an anomalous situation, where yields remain extremely low in both the United States and the United Kingdom, as well as in Europe and Japan. Taking inflation into account, these bonds have a negative yield, implying that an investor is willing to lose money in the medium term by investing in this type of assets. That is why the fund seeks to generate profitability by positioning itself short in relation to the debt of these countries.
Furthermore, at M&G they believe that, in US corporate credit, specifically in the BBB-rated universe, there may be value, as well as in some emerging markets, such as Brazil, Colombia and Mexico, which offer attractive spreads with respect to US Treasury bonds.
In equities, price is determined by the product of corporate profits and market valuations in terms of P/E multiples. In this regard, at M&G they strive to find sectors or geographical areas that can offer an increase in terms of corporate profits or whose valuations have potential for appreciation. Emerging markets and European equities would have these characteristics, and they hold long positions in both markets. While in the United States, although corporate profits are high, valuations are at their highest, so they hold long positions in some sectors with attractive valuations such as banking, technology, biotechnology, and oil, but for the first time in the fund’s history, they hold a net short position in US equities.
Finally, in the area of foreign exchange, M&G’s multi-asset fund managers prefer emerging market currencies for two reasons: the attractive valuation level of the Turkish Lira, the Russian Ruble, the Mexican Peso and the Brazilian Real, and the carry that these currencies represent against the dollar.
De izquierda a derecha: Jason Brady, Chief Executive Officer de Thornburg Investment, Brian McMahon, Chief Investment Officer, Ben Kirby, Portfolio Manager / Foto cedida. Thornburg Investment: “Nos interesan aquellas empresas que están dispuestas a compartir sus beneficios con los accionistas”
How can an attractive dividend yield be achieved without giving up future growth and capital appreciation? Thornburg Investment Management looks for global stocks with a solid history of dividend payments and the capacity to increase their dividends over time. Thus, to provide an additional source of income, it also invests in bonds and hybrid securities.
Thornburg Investment Income Builder invests in a broad spectrum of securities that generate recurring income, at least 50% of its core assets are dividend paying shares, while the rest of the portfolio is composed of the fixed-income securities that serve as support.
Thornburg points out the historical importance of dividend yield as a component of shares’ total return. According to a study conducted from 1871 to 2001 over 10 year periods, shares with high payout ratios generated higher future earnings growth rates. In contrast, those companies that distributed a smaller percentage of their profits in the form of dividends, generated negative real earnings in the future.
“When selecting stocks, we focus on those stocks that have the capacity and willingness to pay dividends. By capacity, we mean those businesses that are able to generate cash flows, whereas willingness is more related to the dividend policy that the members of the Board of Directors and the management team have decided to implement. In that respect, we are interested in those companies that are willing to share their profits with shareholders,” they remarked.
Where are the best opportunities?
Diversification is important to the strategy’s performance. Looking at the expected dividend yield for 2018 by country of origin, the UK and Australia are at the top with 4.5%, well above the global average. These are followed by the Nordic countries’ stocks with an average of 3.7%, European stocks (excluding the United Kingdom) with an average of 3.6%, Latin American stocks with 3.5% and Canada with 3%.
“Dividend yield varies considerably around the world. Japan and the United States are among the countries with the lowest dividend yields, with 2.3% and 2.2%, respectively. In Japan’s case, companies are known to accumulate high levels of liquidity, without giving productive use to this cash. In the United States, however, the issue is related to double taxation of dividends: when a company generates a dollar in profit, it taxes 36% at the federal level. In addition, once profit is distributed as a dividend, the shareholder is taxed once more, causing more than half of that dollar generated to end up in the hands of the government. In that respect, we expect some kind of tax reform in the United States to improve the distribution between government and investors, although we don’t believe that double taxation will be eliminated.”
If you evaluate geographic regions in detail, there are higher dividend yields outside the United States, particularly in the United Kingdom, where there is a strong dividend payment culture and no double taxation on dividends. Generally speaking, a high dividend yield is offered in Europe, as there are more quality companies controlled by a family group, which demand the payment of dividends as part of their remuneration.
According to Thornburg, by sectors, there are attractive opportunities in the telecommunications sector, which is why the strategy allocates almost 20% of the portfolio to this sector. The exception is in telecommunications companies in Latin America, which have a lower dividend yield than in the rest of the regions. This is because Latin American companies are currently building their network systems, which requires high cash flows and limits their ability to distribute dividends.
Another sector with high exposure in the portfolio is the financial sector. Except in the United States, the dividend yield of the financial sector is far superior to that of other sectors due to its dividend payment policies. However, they expect that the capital requirements policies demanded of the US banks will change and allow an increase in the distribution of their profits as dividends.
Finally, Thornburg sources point out that it is quite common for the PE and forward PE multiples of the portfolio to be two or three decimal points cheaper than the market as a whole.
As regards fixed income, the fund takes advantage of the flexibility provided by the mandate to reinforce dividend yield with the coupons received by the corporate and hybrid debt instruments in which the portfolio invests. The strategy, with a benchmark index of 25% of the Bloomberg Barclays Aggregate Bond index and 75% of the MSCI World index, currently has a fixed income allocation of less than 10% (As of 5/31/17) because, according to Thornburg’s managers, prices in the fixed income market are manipulated by the effect of central bank actions. They expect this situation to continue until there is a clear change in trend; and they will strive to increase their debt position only when this adjustment will benefit shareholders.
Foto: StockSnap. ¿Cuáles son los factores en los que los inversores se deben enfocar?
Today’s low-return environment poses a challenge to investors. We believe investing through a lens of equity style factors—broad, persistent characteristics driving returns—can potentially help investors increase diversification and enhance returns relative to broad market exposure, as we write in our June Global Equity OutlookFocusing on factors. So which equity factors should investor focus on today?
Investors can potentially benefit from exposure to all five major equity style factors for diversification purposes, but returns can be enhanced by tilting or adjusting these exposures through the economic cycle, research from BlackRock’s Factor-based Strategies Group suggests.
The major equity style factors—value, quality, momentum, size and minimum volatility (min vol)—have behaved differently depending on the phase of the economic cycle. We believe there may be years left in the current expansion, as detailed in our latest Global macro outlook. Investors have historically been best rewarded for exposure to momentum in such phases, our analysis of factor performance since 1990 suggests. See the chart below.
We prefer momentum (stocks trending higher) in today’s economic environment. We also see the value factor (the cheapest corners of the market) potentially performing well in coming quarters against a backdrop of stable cyclical expansion. In periods of stable growth, market trends have historically tended to persist while confidence in value stocks rises. Today’s expansionary economic regime favors risk-seeking factors over defensive ones, we believe.
Momentum and value have had a small negative correlation over the past two decades, our analysis of MSCI index data shows. Yet the relationship is not static—and we see the current economic regime supporting both factors in coming quarters. We see the valuations of both factors as fair. Quality and min vol have historically tended to outperform in economic decelerations, as the chart above shows. But we believe these factors can provide some diversification throughout the cycle to cushion against volatility. The performance of size may depend on U.S. politics. Further delays in tax reform could dampen interest in these more domestically geared companies.
So what are the risks? Momentum investors should keep an eye on market breadth, we believe. This is a measure of the sustainability of the market trend, which measures the number of advancing stocks relative to the number declining. Our analysis shows that nearly 80% of the names in the each of the major U.S., European and Japanese markets were trading above their one-year moving average as of mid-May. U.S. equity markets have posted solid gains in the six to 12 months following this level of breadth, our analysis of S&P 500 data since 1990 shows. We find similar results for other markets. Robust earnings growth in the first quarter reinforced our view that the breadth of equity performance can be sustained.
We see an unexpected economic regime change as the major risk to value. Lower growth and inflation would weaken the fundamental outlook for cheaper stocks. Factor tilting, rather than short-term in-and-out timing, can help balance opportunities with the aim to improve returns without disrupting the long-term benefits of a diversified factor portfolio, in our view. Finally, the economic regime is the biggest driver of factor performance, although combining this with other indicators such as relative strength, valuation and dispersion can produce better results, we find.
Bottom line: We prefer the momentum and value factors in the current environment, but caution that how investors implement them could lead to different outcomes. Read more in our full Global Equity Outlook.
Build on Insight, by BlackRock, written by Kate Moore
Investing involves risks, including possible loss of principal. Investing in small cap companies may entail greater risk than large-cap companies, due to shorter operating histories, less seasoned management or lower trading volumes.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
The 2017 MFS Annual Global Analyst and Portfolio Manager Forum was held from the 15th to the 17th of May in Boston, where the international asset management company, MFS Investment Management, is headquartered. The event was attended by professionals from the wealth management industry and fund analysts from the Offshore and Latin American markets, to meet with the firm’s investment teams and product specialists.
Lina Medeiros, President of MFS International Ltd., was responsible for welcoming over 145 attendees, mostly from Argentina, Chile, Uruguay Brazil and US, who participated in the event. During her speech, she pointed out the company’s pioneering nature in the asset management industry, a track record spanning over 90 years, and that the company remains committed to offering portfolios with strong risk-adjusted returns, low turnover, and high active share.
Medeiros then stressed the long-term nature of MFS’ strategies and the firm’s values: teamwork, constant evolution in the search for long-term solutions for clients, and an absolute commitment to its fiduciary responsibility. She spoke of the firm’s ethos, which is “always doing the right thing for the client” with the greatest dedication possible, and reminded the attendees that the MFS team loves what it does: “We believe that what we do is to help people. Having clients who trust us to manage their wealth is a huge responsibility, and that generates a deep satisfaction that inspires us to remain firm in our convictions.” It is due to this work ethic, in part, that more than 90% of the firm’s investment vehicles, the MFS Meridian Funds, are in the first half of their respective Morningstar categories over 5 and 10 years as of 31 March 2017. In addition, approximately 70% of the funds rank in the first quartile against their Morningstar peers over 10 years.
A Diversified Business
MFS has more than US$ 450 billion in assets under management. Medeiros presented this figure and defended a solid business model, with capacity to continue leading investment partner of choice in the future due to the firm’s diversified approach across three different dimensions: by channel, by style and by region. MFS institutional business represents about 68% of client assets, with the remaining 32% in retail client accounts. In addition, at the product level, the company offers broad classification by asset class, with its thorough knowledge in different equity disciplines as well as its renewed focus to broaden and deepen its capabilities in fixed income. Finally, at the geographical level, 77% of the business comes from the Americas region, a fact that should not be surprising given the US origin of the firm, strong US-Canada commercial ties, and more than 25 years of presence in Latin America. However, MFS is also devoting considerable resources to grow inEurope and Asia, which they hope will be noticeable in the coming years.
Which Issues are Investors Losing Sleep Over?
Prior to the conferences which followed, Ms. Medeiros presented the results of a study carried out by MFS at the end of last year. In this survey, more than 800 financial advisors and 450 professional buyers were asked which were their main concerns over the next 12 months. For these investors, geopolitical tensions and instability are as relevant as market-driven issues. Another one of the conclusions emerging from this study is that, as far as investment factors are concerned, for clients, the return on a product is just as important as how that return is achieved, showing that the qualitative aspects of the investment process are noteworthy.
Medeiros concluded her remarks by pointing out, that even for long-tenured investment industry professionals, this is an unprecedented period. She stressed that investors should become accustomed to lower-than-expected returns, given the US interest rate environment: “Financial markets, despite being more efficient, are becoming increasingly complex.”
An Overview of the Event’s Agenda
Taking a closer look at MFS Investment Management’s capabilities, Michael Roberge, CEO, President and CIO, reviewed the key differentiating elements of its approach: the search for opportunities through active management, a long-term investment horizon, and risk management . Later, during the talk entitled “Disruptions, dichotomies, and destinations,” Erik Weisman, the firm’s chief economist, gave his views on the disruptive nature of technology and innovations derived from “Big Data”, as well as the effects they may have on the global economy and on the investment environment.
Following this line of discussion, four equity analysts from the technology and capital goods teams presented the implications of the changes that are occurring in the automotive industry: the vehicle of the future will be autonomous, electric, shared, and connected to a network.
The event also looked at the impact of recent regulatory changes in the financial services industry. Martin Wolin, Chief Compliance Officer, together with a panel of professionals, reviewed the main regulatory developments in the United States and Europe, focusing on the OECD CRS regulations, the MiFID II directive and money laundering prevention policies.
To analyze the global geopolitical situation in detail, MFS invited Alexander Kazan, Managing Director of Global Strategy for the Eurasia Group, who reviewed the economic and political dynamics of the global scene, including China, Russia and the Middle East.
With a focus on the US and other developed markets, James Swanson, Chief Investment Strategist, conveyed his concern about the disconnect between market sentiment and key economic data. Meanwhile, Bill Adams, CIO of the Global Fixed-Income Department, detailed the management company’s ability to find value in credit markets worldwide.
These presentations were accompanied by a series of breakout sessions on the range of MFS products, with the participation of its European, US, and Global equity management teams, as well as the teams from the global fixed income department, including emerging markets, and investment grade corporate debt.
Closing the conference, José Corena, Managing Director for the Americas, reviewed the main topics discussed during the event and thanked the attendees for their presence.
Foto: jniittymaa0. El uso de ETFs se está acelerando en América Latina
Although exchange-traded funds are a relatively recent addition to institutional investing in Latin America, ETFs are quickly taking on an important role in institutions’ portfolio management toolkits. Based on the results of interviews with 50 Latin American institutions and trends among institutions in markets with a longer history of ETF investment, Greenwich Associates expects that process of integration to continue and even accelerate in Latin America.
The study finds that, like their counterparts in other regions, most Latin American institutions are starting out with relatively small allocations to ETFs, mainly in equity portfolios. “Through these initial investments, institutions are discovering the efficiency and versatility ETFs can bring to their investment portfolios. As they do so, they are expanding their use of ETFs to fixed income and other asset classes, as well as to a growing range of portfolio applications”. Institutions in Latin America are introducing ETFs to their portfolios first and foremost as a means of obtaining long-term strategic investment exposures and diversifying portfolios. They are then extending ETFs to a host of additional applications, ranging from tactical adjustments and portfolio completion to enhancing portfolio liquidity.
Latin American institutions that use ETFs now invest an average of 7.6% of total assets in them, with allocations poised for growth in 2017. Of Latin American institutions currently investing in equity ETFs, 68% expect to increase allocations next year, with 64% planning increases of more than 10%. More than two-thirds of Latin American institutions currently investing in fixed-income ETFs plan to increase allocations in the next year. Greenwich Associates expects ETF growth rates to accelerate in 2017 and beyond due to several ongoing and emerging trends:
Institutions around the world are experimenting with new and innovative ETF fund structures to help them manage mounting levels of volatility and other challenges facing their portfolios. In Latin America, more than 50% of institutional ETF investors invest in smart beta ETFs, and half of these users plan to increase allocations to them in the next 12 months. Demand appears strongest for smart beta ETFs that generate income and help institutions manage volatility.
Current impediments to investment will give way as Latin American institutions gain experience with ETFs. Factors such as limited availability of ETFs, internal investment guidelines that limit or prohibit use, and concerns about ETF liquidity and expenses have initially slowed the adoption of ETFs in other markets. All of these factors have eased over time as institutions saw early adopters using them safely and effectively.
Institutions will continue integrating ETFs into the mix of investment vehicles they employ in their portfolios, alongside and as replacements for derivatives and other products. Nearly 60% of institutions that use derivatives have diversified their mix of investment vehicles in the past year by replacing an existing futures position with an ETF—mainly for operational simplicity and reducing costs. Looking ahead, 42% of ETF users plan to evaluate existing futures positions in both equity and fixed income for potential replacement.
Institutional demand for ETFs in Latin America will get a boost from the continued proliferation of multi-asset funds. Following a global trend, approximately 40% of Latin American asset managers that invest in ETFs are using them in multi-asset funds and are investing 14% of total assets in ETFs. As Latin American managers launch multi-asset funds, Greenwich Associates expects ETF allocations within those funds to increase.
UCITS ETFs will provide new opportunities for investment. Latin American investors are beginning to initiate their first UCITS trades and are pleasantly surprised by their benefits, including tax and operational efficiencies. As institutions become more familiar with ETFs and seek new ways to employ them, UCITS ETFs will become a significantly larger part of the Latin American investment universe.
From barter to cash to checks to online banking, money is an evolving technology that has been part of human history for thousands of years. While cash is expected to remain a significant payment instrument in the near future, Melissa Lin, Finance Editor at Toptal, believes factors such as “contactless” pay systems, increasing mobile penetration, and high costs of cash (ATM fees for individuals, cash storage for businesses, currency printing for governments, etc.) are prompting society to reconsider its ubiquity.
She states as an example, the case of countries like Sweden and India, as well as the EU region, which are adopting cashless habits or policies. “Driven by “contactless” pay technology, increasing digital penetration, costs of using cash, and policy initiatives, the idea of a cashless society is no longer a figment of the imagination.” She says.
Lin believes that in the near term, we are likely to witness a transition to less-cash societies, rather than a switch to cashless societies. Cash still accounts for 85% of total consumer transactions globally. Among established alternatives to cash, cards are the fastest growing payment instrument.
As cashless economy pros she identifies the increased scope for monetary policy, reduced tax evasion, less crime and corruption, savings on costs of cash, and accelerated modernization of citizens. While listing as cons: potential violation of privacy, increased risk of large scale personal and national security breaches, and technology-dependent financial inclusion.
Migrations to a cashless economy include considerations ranging from the purely financial, to those social in nature. Consequently, a country’s specific technological, financial, and social situations will inform its specific benefits, drawbacks, and approach to such a transition. In her opinion, the countries best positioned to go cashless include the US, the Netherlands, Japan, Germany, France, Belgium, Spain, Czech Republic, China, and Brazil.
“We are likely approaching a less-cash future, not a completely cashless future. And, while progress has been made in this transition, it has hardly been universal or uniform. A migration to a cashless economy includes considerations ranging from the purely financial to those social in nature. Consequently, a country’s specific technological, financial, and social situations will inform its specific benefits, drawbacks, and approach to such a transition.” She concludes.
This past year, Bolton Global, one of the 50 largest independent broker dealers in the United States, has seen its team of financial advisors grow substantially throughout the country, and especially in Miami, an important place in the international wealth management industry. The firm has announced the appointments, which, in turn, served as a call for other advisers contemplating, or in the process of, a change. From November 2015 to December 2016 the digital version of Funds Society has published such a series of appointments – The Perez Group, Eduardo Robson, Daniel Aymerich, Soraya Batista-Gracía, Eddie Moreno, Alex Astudillo, Ángela Canas, Tanya Duarte and Archivaldo Vásquez, Felipe Ballestas, Oscar Guevara, Samuel Nunez, Ricardo Morean, and Christian Felix – that we wanted to speak with Ray Grenier, CEO of the firm, to discover the keys to this firm’s irresistible model.
Bolton Global is one of the 50 largest independent broker dealers in the US. With 32 years of track history and 45 branch offices, it ranks among the top of independent firms in annual revenue and AUM per producing FA, across the US. This last year, Bolton Global has seen more than 15 advisors with international clients join the firm, many of whom are based in Miami.
What is the key? Why do financial advisors choose to join Bolton Global? How do they arrive at the firm and what does it offer them? “We do not have an FA recruiting team, we have grown fundamentally through word of mouth.” The best tool to attract new teams of financial advisors are the FAs that already work in Bolton, who refer other teams with quality assets and extensive experience. “A happy team that has the full support of the organization to carry out its work is the best ambassador to attract new talent to the firm,” says its CEO.
Ray Grenier, CEO explains: “Our platform allows FAs to establish their own brand name, capture the equity in their book of business and generate a substantially higher net income after expenses. Bolton provides turnkey solutions to incorporate the business, develop a company logo and company promotional materials, develop and establish a professional website, set up office infrastructure and train staff. We also provide all of the back office and compliance support to process the business efficiently and effectively in accordance with industry rules and regulations.
Through Bolton, FAs have access to all of the capabilities, products and services available through the major wirehouses and private banks.”
We are talking about Financial Advisors who had prior successful careers at the major US wirehouses in 90% of cases, with a client book of over $100 million and 15 or more years of industry experience. Most of them are US citizens or visa holders. Bolton also has several affiliated financial advisors operating from offshore locations in a fully registered capacity.
When talking about attracting clients, Grenier says the financial crisis of 2008 highlighted the importance of financial institution safety and security. BNY Mellon is a global financial institution with the highest safety rankings among the largest US banks. This provides clients with the security that their assets are held through a solid financial institution which also supports international business.
He adds: “BNY Mellon is the oldest US bank, founded by Alexander Hamilton in 1784 and is the world’s largest custodian with more the $30 trillion in assets under custody. It’s clearing subsidiary, Pershing is the world’s largest clearing firm servicing over 100,000 financial advisors working at financial institutions in over 60 countries.
In addition to providing clients with superior safety and security, the BNY Mellon companies furnish Bolton with all of the capabilities, products and services of the major wirehouses and private banks for both domestic and international clients.
As an independent firm, Bolton offers clients a pure wealth management play as the firm does not engage in investment banking or underwriting and generally avoids illiquid products.”
Bolton has a wide mix of customers from the United States, Latin America and Europe. Among the international clients, the firm has a strong representation in Argentina, Spain, Uruguay, Mexico and Panama.
The average account size is over $500,000 with the average relationship over $1 million. Portfolios hold a mix of stocks, bonds, ETFs and mutual funds managed either by the FA or by third party asset managers.
In the international business, around 40-50% of the assets are in mutual funds. Bond portfolios also prevail, as is customary in Latin American clients. Ray Grenier also points out that some of its representatives work with portfolios of UCITS ETFs domiciled in Europe, which represent a tax advantage over US-based ETFs.
Although Pershing is able to carry out the full range of services its clients require, Bolton’s financial advisors (FAs) can also work with a number of local banks that offer advantageous conditions for leveraging their asset portfolios, including international mutual funds. Thus, the FAs that join the Bolton platform can carry out the transition of the assets of their clients without losing functionalities over the broker dealers in which they worked previously.
Bolton provides FAs with a complete set of research tools to manage their client portfolios including recommended buy-sell lists, model portfolios, analytics, and performance reporting. Financial advisors have the flexibility to advise clients on the composition of their investment portfolios in accordance with the client’s objectives and risk profile. “In addition, FAs can use our Separately Managed Account (SMA) platform with access to more than 100 major asset management firms with multiple investment styles to construct and rebalance portfolios on a discretionary basis.” The CEO says. Approximately 40 percent of the business is fee based with 60 percent conducted on a commission or transactional basis.
In addition to portfolio management, Bolton offers clients the full range of account services including on-line account access, BNY Mellon VISA card, check-writing, ACH and bill payment, portfolio lending, multicurrency holding and reporting as well as trustee services. Bolton also provides access to execution and clearing on exchanges in 45 countries.
Goals
Over the last 5 years, Bolton has increased revenue and AUM by an average of 17 percent annually. The company experienced 23 percent growth in 2016. Grenier, says, excited: “We believe that industry conditions will continue to be favorable to Bolton allowing the firm to grow in the 15 to 20 percent range for the next 5 plus years.”
Among the most immediate expansion plans for the branches, the leader says: “The company believes that the Miami market will offer continued strong growth opportunities for the next several years.” He announces Bolton is in the process of opening an office in New York City to house a major wirehouse team that will be joining the firm in 2017 and reminds the firm opened an office in San Diego last year. Additionally, they are evaluating real estate options in Houston. “It’s a market that we look favorably on to open a new office because the establishment costs are relatively low – especially the cost of renting the office – and the international wealth management market has clear potential.” However, for the moment the growth focus for the non-resident business is still in Miami.
The environment and its good consequences
There is no doubt that Bolton Global’s business has grown as a result of the strategic shift of some firms with respect to its international clients. In Grenier’s words: “Many major financial institutions have withdrawn or significantly curtailed their servicing of international clients over the last 5 years. Bolton has definitely benefited from this environment. Sustainability in the international wealth management business requires a firm to limit account opening for only the highest quality clientele and to commit significant resources to AML compliance and surveillance.”
But Bolton has been in market for many years now. “Bolton recognized the potential of the international market as early as 2008 when a Merrill Lynch team in Texas with a non-resident clientele joined the firm. In recruiting from the major wirehouses and private banks, we realized that FAs from these firms would be more likely to convert to the independent business model if we provided them with a complete turnkey package to transition their book including brand development, office infrastructure, staff training and on-site support.”
In Dec 2016, Bolton had 30 international FAs managing aprox. $3.5 billion, and in the last year those advisors joining the firm’s Miami office collectively manage over $1.2 billion in client assets. In 2016, the firm added 5 teams and 5 individual FAs with over $1.5 billion in AUM. (Note: As a significant amount of these assets are still in the process of transfer, they would not all be included in the $3.5 billion number cited above.)
They are all in the process of monetizing the value of their book, improving their compensation and growing their practices with a supportive business partner. All of the recruits mentioned above have joined the firm as a result of a referral or recommendation by another Bolton advisor.
“The firm has the benefit of a robust pipeline of recruits to continue to add high quality teams through 2017 and beyond. In any case, we do not want to have a multitude of FAs, but a good ratio of assets and revenues per representative, “says Ray Grenier, giving clear priority to quality over quantity.
Pricing is one of the most important financial levers that companies have at their disposal to influence the financial success of their business. However, it is not an easy task.
As Tayfun Uslu, Finance Expert at Toptal states, firstly, pricing affects multiple stakeholders, both inside and outside the company. “Experimenting with pricing is therefore not a task that should be taken lightly. Secondly, finding the right price is notoriously hard. Customer preferences are hard to gauge ex-ante, and internally, it can be difficult to foresee the effects of pricing changes on the financial performance of a company. And finally, of course, pricing doesn’t happen in a vacuum. In any competitive market, pricing changes can often lead to retaliatory actions which end up canceling out the intended effect of the pricing adjustment.”
With this in mind, techniques and methods for getting around these challenges, such as Software as a Service (SaaS) are extremely useful. In his experience, “the SaaS business model and its delivery mechanism have important ramifications related to pricing which, in turn, can be extremely useful in the financial management of your company” and, amongst other things, very pricing-friendly. Reason why he believes the shift to SaaS from On-Premises software is likely to continue at a steady pace.
To know more about the ramifications and benefits of SaaS, visit Toptal.
Whilst the equity research industry worldwide has endured substantial declines since 2007, there are still roughly 10,000 analysts employed by investment banks, brokerages, and boutique research firms. And even more analysts offer their services independently or on a freelance basis, and there are still more voices in the crowd contributing to blogs or sites like SeekingAlpha.
The reason for the above is clear: equity research provides a very useful function in our current financial markets. Research analysts share their insights and industry knowledge with investors who may not have them, or may not have the time to develop them. Relationships with equity research teams can also provide valuable perks, such as corporate access, to institutional investors.
Nevertheless, despite its obvious importance, the profession has come under fire in recent years.
Analysts’ margin of error has been studied, and some clear trends have been identified. Some onlookers bemoan the sell-side’s role in stimulating equity market cyclicality.
In some cases, outright conflicts of interest muddle the reliability of research, which has prompted regulation in major financial markets. These circumstances have generated distrust, with many hoping for an overhaul of the business model.
With the above in mind, I’ve divided this article into two sections. The first section outlines what I believe the main value of equity research is for both sophisticated and retail investors. The second looks at the pitfalls of this profession and its causes, and how you should be evaluating research in order to avoid these issues.
Why Equity Research is Valuable
Sophisticated Professional Investors
As sophisticated or experienced investors, you likely have your own set of highly developed valuation techniques and qualitative criteria for investments. You will almost certainly do your own due diligence before investing, so outside parties’ recommendations may have limited relevance.
Even with your wealth of experience, here are some things to consider.
To maximize the use of your time, buy-side professionals should focus on the research aspects that complement their internal capacities. Delegation is vital for every successful business, and asset management is no different. External parties’ research can help you:
Secure enhanced corporate access
Gain deeper insights
Outsource tedious, low-ROI research
Generate ideas
Gain context
Enhanced Corporate Access
Regulations prevent corporate management teams from selectively providing material information to investors, which creates limitations for large fund managers, who often need specific information when evaluating a stock.
To circumvent this, fund managers often have the opportunity to meet corporate management teams at events, hosted by sell-side firms that have relationships with executives of their research subjects.
Buy-side clients and corporate management teams often attend conferences that include one-on-one meetings and breakout sessions with management, giving institutional investors a chance to ask specific questions.
Language around corporate strategies, such as expansion plans, turnarounds, or restructuring, can be vague in conference calls and filings, so one-on-one meetings provide an opportunity to drill down on these plans to confirm feasibility.
Tactful management teams can confirm the legitimacy and plausibility of strategic plans without violating regulations, and it should quickly become obvious if that plan is ill-conceived.
Institutional clients of sell-side firms also have the opportunity to communicate the most relevant topics that they want to see addressed by company management in quarterly earnings conference calls and reports.
Deeper Insight
The sell-side analyst’s public role and relationship with corporate management also allows him to strategically probe for deeper insights. Generally, good equity research demonstrates the analyst’s emphasis on teasing out information that is most relevant to institutional clients. This often requires artful posing of incisive questions, which allows management teams to reach an optimal balance of financial outlook disclosure.
Buy-side analysts and investors have a massive volume of sell-side research to comb through, especially during earnings season, so succinct, analytical pieces are always more valuable than reports that simply relay information presented in press releases and financial filings. If these revelations echo the interest or concerns of investors, the value is immediately apparent.
Outsourcing Tedious or Low-ROI Aspects of Research
Smaller buy-side shops may lack the resources to monitor entire sectors for important trends. These asset managers can effectively widen their net by consuming research reports. Sell-side analysts tend to specialize in a specific industry, so they closely track the performance of competitors and external factors that might have sector-wide influence. This provides some context and nuance that might otherwise go unnoticed when concentrating on a smaller handful of positions and candidates.
Research reports can also be useful ways for shareholders to spot subtle red flags that might not be apparent without carefully reading through lengthy financial filings in their entirety. Red flags might include changes to reporting, governance issues, off-balance sheet items, and so forth.
Buy-side investors will of course dig into these issues on their own, but it’s useful to have multiple eyes (and perspectives) on portfolio constituents that may number in the hundreds. Likewise, building a historical financial model can be time consuming without providing the best ROI for shops with limited resources. Sell-side analysts build competent enough models, and investors can maximize their added value by focusing entirely on superior forecasting or a more capable analysis of the prepared financials.
Idea Generation
Identifying investment opportunities falls under the umbrella of tedious activities since effectively screening an entire market/sector can be overwhelming for a smaller team at some buy-side shops. As such, idea generation has become an important element of some sell-side firms’ offerings. This is especially pronounced regarding small and medium cap stocks, which may be unknown or unfamiliar, to institutional investors.
It’s simply impractical for most buy-side teams to cover the entire investable universe.
Research teams fill a niche by identifying promising smaller stocks or analyzing unheralded newcomers to the market.They can then bring this to the attention of institutional investors for further scrutiny.
Creating Context
Reports might be most useful for sophisticated investors as an opportunity to develop a meta perspective. Stock prices are heavily influenced by short-term factors, so investors can learn about price movements by monitoring the research landscape as a whole.
Consuming research also allows investors to take the temperature of the industry, so to speak, and compare current circumstances to historical events. History has a way of repeating itself in the market, which is driven in part by the industry’s tendency to shake during crashes, and pull in new professionals during bull runs.
Having a detached perspective can help shed light on cyclical trends, making it easier to identify ominous signals that might be lost on the less acquainted eye. In turn, this drives idea generation for new investing opportunities.
With that being said, investors should not consume research that only confirms their own bias, a powerful force that has clearly contributed to historical booms and busts in the market.
Retail Investors
The value of equity research is much more straightforward for retail investors, who are usually less technically proficient than their institutional counterparts.
Retail investors vary substantially in sophistication, but they mostly lack the resources available to institutional investors. Research can supplement deficiencies on some basic levels, helping investors with modeling guidance, framing an investment narrative, identifying relevant issues, or providing buy/sell recommendations.
These are great starting points for retail investors seeking value out of research. Individuals probably can’t consume the sheer volume of reports that asset managers can, so they should lean on the expertise of trustworthy professionals.
What are the risks associated with equity research?
Despite the above, there are clear risks to over-relying on equity reports to make trading decisions. To properly assess the dangers of equity research, one must consider the incentives and motivations of research producers.
Regulations, professional integrity, and scrutiny from clients and peers all play significant roles in keeping research honest, but other factors are also at play. Research consumers should be mindful of the producer’s business model. I highlight the five key issues below.
Equity research can be exaggerated due to the need to drive trading volumes
Reports that are produced by banks and brokers are usually created for the purpose of driving revenues. Sell-side equity research is usually an add-on business to investment banks that earn significant fees as brokers and/or market makers in traded securities and commodities.
As a result of this, research tends to focus on highlighting opportunities for buying and selling stocks. If research reports only included forecasts of “steady” performance, this would result in less trading activity. The incentive for research analysts is therefore to come out with predictions of a change in performance (whether up or down).
This isn’t to say the content of the research is compromised, but that opinions on directional changes in performance may be exaggerated.
Numerous academic studies and industry white papers are dedicated to estimating the magnitude of analyst error. The findings have varied over time, between studies and among different market samples. But all consistently find that analyst estimates are not particularly accurate.
Andrew Stotz indicates an average EPS (earnings per share) estimate error of 25 percent from 2003 to 2015, with an annual minimum under 10 percent and annual maximum over 50 percent.
Research analysts may avoid criticizing companies they cover due to the need to maintain a positive working relationship
Another important point to consider is that analysts generally benefit from having a positive working relationship with the executive management and investor-relations teams of their research subjects.
Analysts rely on corporate management teams to provide more specific and in-depth information on company performance that is not otherwise publicly provided.
Brokers also provide value to investors by providing seminars and one-on-one meetings that are attended by those executive teams, so a strong roster of presenters at conferences can be dependent on the relationships built by the research teams.
I’ve witnessed the negative impact of a souring relationship: One of the tech analysts at a company I worked for was covering a small-cap stock and built up a good relationship with both the corporate management team and the investor relations person who worked with them. Being a small company, this visibility was valuable to the research subject.
Poor results one quarter were downplayed by management as a temporary speed bump, but the analyst had concerns that these were longer-term problems.
The executive team was upset when the subsequent report negatively portrayed the recent events, and soon thereafter withdrew from an upcoming conference our research firm hosted. The analyst’s bonus compensation suffered as a result as well.
Obviously, this all has very serious implications.
Sell-side analysts tend to produce reports that portray their subjects favorably, and they are more likely to set attainable expectations. It also means that analysts may hesitate to downgrade a company’s stock. This is especially true when poor executive management would be the primary culprit causing a downgrade. All of this may help explain why EPS estimates are disproportionately bullish (see chart 2).
Research analysts may avoid making contrarian calls due to the need to maintain good reviews and a trusted reputation.
Equity research reports are influenced by the means by which analyst quality is measured. Analysts compete with peers at rival banks.
Taking a contrarian stand that results in bad recommendations could genuinely harm an analyst’s compensation and career prospects. These mechanisms create a herd-like mentality.
This can be extremely detrimental if it goes unnoticed or unaddressed by research consumers. These are precisely the sorts of circumstances that fuel bubbles. It’s hard to look especially foolish if everyone else looks foolish too.
Independent equity research may be sensationalized due to the need to stand out.
Research produced by independent firms, which substantially derive all revenues from the sale of research and do not maintain a brokerage business, is not meant to motivate trading.
This eliminates some of the conflicts of interest inherent in the sell-side banks, putting extra emphasis on accuracy. However, independent and boutique analysts are tasked with creating income by selling something that’s been largely commoditized, and they compete with banks that have vast resources.
To survive, they have to offer something specialized or contrarian. Their philosophy must radically depart from the herd. They have to claim special industry knowledge through independent channels, or they must cover stocks that are largely uncovered by the larger powers in the research space.
This creates the incentive for sensationalized research that can attract attention amongst the sea of competing reports.
Putting it all together
As we have seen, there are important facets of the equity research profession that often lead to skewed incentive mechanisms, and may ultimately compromise the quality of research being done.
To be fair, the practice of making complex and precise forecasts is necessarily flawed by the requirement to make assertions about future conditions, which by definition are unknowns.
Nevertheless, whilst this might be acceptable if the errors appeared random and with a predictable margin of error, this is not the case.
According to Factset research, consensus 12-month forward EPS estimates for S&P constituents were about 10 percent higher than the actual figures for the years 1997-2011. These numbers are skewed by large misses, and the median error is only 5.5 percent, but several important conclusions can be drawn:
Analysts tend to be too bullish. In 10 of those 15 years, consensus estimates were higher than the reported figures.
Analysts were especially bad at navigating recession periods, overcooking their numbers by 36 percent in 2001 and 53 percent in 2008. The error is less extreme for years with rapid EPS growth. Forecasts only lagged actual results by eight percent in 2010, indicating asymmetric tendencies to misforecast earnings.
How can you avoid equity research pitfalls?
There are several ways that consumers of research reports can judge the validity and quality of such reports,in light of what’s been discussed above.
Analyst Credentials
Analyst credentials are an obvious method for vetting quality. CFA designations don’t necessarily guarantee quality, but it indicates a baseline level of competency.
Research produced by reputable banks ensures that it was created and reviewed by a team of professionals with impressive resumes and highly competitive skills. Likewise, veterans of big banks who leave to start an independent shop have been implicitly endorsed by the HR departments of their former employers.
Producers can also be distinguished by specialized backgrounds, for example former doctors turned healthcare analysts or engineers weighing in on industrial/energy stocks. If the analyst has been recognized in financial media, it usually indicates extremely high quality.
Analyst Track Record
Investors can also look at historical analyst recommendations and forecasts to determine their credibility.
Institutional Investor provides a service that tracks analyst performance, and there are similar resources available, especially for investors with deep pockets.
Fintech startups, such as Estimize, actually focus on attracting and monitoring analyst recommendations to identify the most talented forecasters.
However, while third-parties and financial media offer helpful ranking systems based on earnings forecasts or performance of analyst recommendations, these tend to put a lot of emphasis on short-term accuracy. This might therefore be less useful for consumers with a long-term approach or emphasis on navigating black swans.
Investors should consider these factors and look for red flags that an analyst is hesitant to turn bearish. These could include shifting base assumptions to maintain growth forecasts and target prices, suddenly shifting emphasis away from the short-term to the long-term outlook, or perhaps an apparent disconnect between the material presented in the article and the analyst’s conclusions.
Investors should also consider context.
Some stocks simply don’t lend themselves to reliable research. They might have volatile financial results, an unproven business model, untrustworthy management, or limited operating history, all of which can lead to wide margins of error for earnings growth and intrinsic value.
The business cycle’s phase is also extremely important. Research shows that forecasts are less reliable in downturns, but investors are also more likely to rely most heavily on research during these times. Failure to recognize these issues can severely limit one’s ability to glean full value from research.
Research consumers should also make sure they know their own investment goals and be mindful about how these differ from those implied by research reports. A temporal mismatch or disconnect in risk aversion could completely alter the applicability of reports.
Consume a lot of research, and hold analysts accountable
For those fund managers wishing for a more reliable research product, the most effective move is to vote with your wallets, and buy reports from the most accurate and conflict-free sources.
It might be expensive to source research from multiple sources, but there’s value in diversifying the viewpoints to which you are exposed. It’s unlikely that you will move on from low-quality research if that’s all you are reading.
Additionally, consuming a large volume of research from different sources helps forge a meta perspective, allowing investors to identify and overcome worrisome trends in research.
Equity Research Continues to be Useful, but Should be Consumed Thoughtfully
The equity research industry has undergone profound changes in recent years, due to regulatory changes, the emergence of independent research shops, as well as more automated methods of analyzing public company performance.
At the same time, smart investors are looking at broader sets of investments and taking a more active approach to research. This is facilitated by the increasing quantity of publicly available information on listed companies.
Nevertheless, good research continues to be extremely valuable. It lets you manage a wider pipeline of investment opportunities and be more efficient.
An informed and thoughtful approach can enhance the value of research reports for investors, so asset managers can better serve clients (and their own bottom lines) by considering the content above.
Research consumers need to be wary of predictable errors, analyst incentives, conflicts of interest, and the prevalence of herd-like mentality.
If you can adjust your interpretation of research along these lines, then you can focus on the most valuable aspects of research, namely idea generation, corporate access, and delegation of time-consuming activities.
Pixabay CC0 Public DomainNational Doral Golf Course. IV torneo de golf de Funds Society
Funds Society will host its IV Golf Tournament on Thursday, March 9th, at the National Doral Golf Course (Golden Palm). At the event, participants will be able to take the opportunity to discuss about Global Markets along with portfolio managers from Henderson Global Investors and M&G Investments, followed by a golf tournament and networking reception.
Spanning from 9:30 in the morning with a welcome breakfast, followed by chats with Guy Barnard and Chrisophe Machu, a lunch and the tournament, which will conclude with a cocktail and prize ceremony starting at 6:00pm, participants will enjoy an all day event at the National Doral Golf Course at 4400 NW 87th Ave, Doral, FL 33178.
To RSVP, please email info@fundssociety.com or call +1 786 254 7149.
