Foto: Kecko
. Suiza se mantiene como principal destino de riqueza offshore en 2015
Global private wealthgrew sluggishly in 2015, with some markets seeing significant slowdowns, leaving wealth managers searching for innovative ways to meet the shifting needs of diverse client segments, according to a new report by The Boston Consulting Group (BCG). The report, Global Wealth 2016: Navigating the New client Landscape was released recently.
A Slowdown in Growth
Global private financial wealth grew by 5.2% in 2015 to a total of $168 trillion, according to the report. The rise was less than a year earlier, when global wealth rose by more than 7%. All regions except Japan experienced slower growth than in 2014.
Unlike in recent years, the bulk of global wealth growth in 2015 was driven by the creation of new wealth (such as rising household income) rather than by the performance of existing assets, as many equity and bond markets stayed flat or even fell. Assuming that equity markets regain momentum, private wealth globally is expected to rise at a compound annual growth rate of 6% over the next five years to reach $224 trillion in 2020. The number of global millionaire households grew by 6% in 2015, with several countries, particularly China and India, seeing large increases.
Offshore Wealth Management
The report says that private wealth booked in offshore centers grew by a modest 3% in 2015 to almost $10 trillion. A key factor was the repatriation of offshore assets by investors in developed markets. Offshore wealth held by investors in North America, Western Europe, and Japan declined by more than 3% in 2015. The annual growth of offshore wealth globally is expected to pick up through 2020, although at a lower rate than onshore wealth (5% versus 6%).
Among offshore centers, Hong Kong and Singapore saw the strongest growth (around 10%) in 2015. Offshore wealth booked in these domiciles is projected to grow at roughly 10% annually through 2020, increasing their combined share of the world’s offshore assets from roughly 18% in 2015 to 23% in 2020. Switzerland remained the largest destination for offshore wealth in 2015, holding nearly one-quarter of all offshore assets globally.
According to a global BCG benchmarking survey, an annual feature of the report, average revenue and profit margins declined for wealth managers from 2012 to 2015. This development underlines the need for wealth managers to seize the opportunities stemming from three major trends that have altered—and will continue to alter—the industry: tightening regulation, accelerating digital innovation, and shifting needs in traditional client segments.
Nontraditional Client Segments
The report says that two nontraditional client groups whose investment needs and size (population-wise) merit special attention are female investors—whose success as corporate executives and entrepreneurs (in addition to being the beneficiaries of inheritances and legal settlements) have raised their wealth levels significantly—and millennials (people born between 1980 and 2000), whose overall wealth accumulation is rising steadily. In 2015, women held an estimated 30% of global private wealth, with the share slightly higher in developed markets than in emerging ones. Yet just 2% of wealth managers surveyed by BCG said they considered women a specific client segment—fully investigating their investment needs and how they wish to be served—and had adjusted their service models accordingly. Similarly, 50% of wealth managers surveyed said they did not possess a clear view on how to address millennials in terms of service model, products, and overall approach.
Foto: Enzo Plazzotta . Implicaciones de la permanencia o salida del Reino Unido en términos de inversiones
According to Richard Turnill, BlackRock Global Chief Investment Strategist, the outcome of the June 23 UK referendum on whether to remain in the European Union could have far-reaching market implications in the near term.
“Betting markets imply a roughly 27 percent chance of a British-exit (or Brexit), but momentum has been building toward a leave vote, as evident in the chart below.” he writes on his company’s blog.
Other indicators suggest a higher probability of a Brexit and a much more uncertain outcome. Traditional polls point to a near 50/50 race, and comments on Twitter are tilted toward a Brexit, BlackRock’s analysis shows.
So, what would be the investing implications of a Brexit? Turnill believes that the U.K. and other European assets would likely bear the brunt of a leave vote. The chart above suggests the British pound could drop significantly in the event of a Brexit. “We would also expect to see U.K. equities (especially domestically exposed small- and mid-caps) decline under a Brexit scenario.” He mentions.
In addition, a leave vote would likely shock global markets. They believe risk assets — including stocks and credit — would suffer in the resulting risk-off environment, as concerns about political instability and a reversing globalization trend would lead to higher risk premiums. Peripheral European assets and the global financials and materials equity sectors would be especially exposed, according to their stress-test analysis. Political risk could also rise amid uncertainty over the succession to British Prime Minister David Cameron. BlackRock believes safe-haven investments would benefit from this situation.
What if the U.K. votes to stay? “We see risk assets rallying, safe-haven assets suffering, the pound getting a boost and market attention turning to the upcoming U.S. presidential election. The key for the next few weeks: Caution. We believe now is a good time to dial down equity and credit risk, and U.K. investors may want to put in place hedges against a potential Brexit outcome,” Turnill concludes.
Foto: Courtney Rhodes
. El 62% de los adultos estadounidenses no recibe ningún tipo de asesoramiento financiero
The findings of the 2016 Planning and Progress Study, recently published byNorthwestern Mutual, show that the majority (62%) of U.S. adults are not getting any professional financial advice; and among those who are, many (43%) say their advisors don’t feel like long-term partners with a deep knowledge of their complete financial picture.
The study also found that nearly seven in ten Americans (68%) say that they do not have a trusted advisor who offers comprehensive lifetime financial planning; 45%of Americans do not know where to get the help they need as they move through life stages and need different financial solutions. Among those with a financial plan, 82% believe that their financial plan should be reviewed at least once every six months..
Among those who are getting professional advice only 56% say their current/primary advisor gives them an understanding of their complete financial picture; Only 43% say their current/primary advisor has a long-term commitment;Only 41% say their current/primary advisor provides tailored attention; And a third (32%) works with multiple different advisors to address different parts of their financial lives (e.g., retirement planning, investments, insurance).
The study seeks to provide unique insights into U.S. adults’ attitudes and behaviors towards money, financial decision making, and the broader landscape issues impacting people’s long-term financial security. It was based on an online study of 2,646 U.S. adults conducted from February 1-10, 2016. Data were weighted to be representative of the U.S. population (age 18+) based on Census targets for education, age/gender, race/ethnicity, region and household income.
During Old Mutual’s second conference in Punta del Este, Uruguay, Ian Ormiston, Fund Manager for Old Mutual Europe (Ex UK) Smaller Companies Fund, defined his strategy as “a sensible fund which invests in a sensible mix of businesses, consistently providing a series of fairly high returns when compared with other funds in their category or against the benchmark.” A full bottom-up strategy, which invests in some 50 European small-cap companies, equally weighted at 2%, with sufficient market liquidity and which have pricing power and show growth potential.
For Ian Ormiston, the key factor is that companies are genuinely small cap companies: “For some fund managers, especially for those who have succeeded, the important thing is to achieve more assets, therefore small cap funds become small and medium cap funds. We want to buy companies that are genuinely small cap; the segment we seek is in the range of 1 billion to 1.5 billion. The reason is that it’s in this segment where the greatest opportunities lie, it’s the most imperfect segment in the market, and it’s where we will get the returns.”
As for the market outlook for European equities, Ian says that through the media we only become aware of the problems, the crisis in Greece, the probability of Brexit, Austria’s shift towards the radical right, the repetition of elections in Spain, the massive influx of refugees, etc.; while all this commotion favors the creation of opportunities for finding companies with good fundamentals at good valuation levels. “Europe is a rich continent with slow growth, with a GDP growth between 1.5% and 2%. It is not a dynamic economy, but there are pockets of growth. Especially in small-cap companies which have provided good returns over time. “
When asked about the advantages of investing in small cap stocks versus the large cap within the European market, the fund manager mentioned three reasons: the first factor is the higher compounded growth in returns in this asset type, generally small cap sales grow 2% faster than sales of large caps. Secondly, the low coverage by analysts, European large caps have an average of 36 analysts covering each stock, while only 5 analysts cover each stock within the small caps segment. And finally, the third reason would be the high degree of family ownership in European businesses in comparison to that of the United States or United Kingdom. “We maintain a stock in the portfolio for a period of between five and seven years, as usually, a person who has founded their company remains in charge of the company for the next 30 or 40 years, so their interests are aligned with ours.”
For the strategy, Ian Ormiston selects those small cap companies that have sufficient liquidity and which are relatively easy to operate. He also seeks companies with established sales growth, a good product, and a clear market. “We avoid those companies with business models resembling a lottery ticket. We look for companies which still have many years of growth ahead, with a potential upside of around 30%. We then meet with Management to test whether their strategy is credible, their growth is sustainable and their restructuring plan is believable.”
Regarding ECB measures and their impact on the economy, Ian points out that the EU’s delay in taking action on monetary policy, as compared to the US or the UK, led to the growth in divergence of economic performance between EU Member states. But he admits that the situation has improved since Mario Draghi made his “Whatever it takes” speech in 2012. Although the new measures have no direct effect on European small caps companies, these measures will lower the cost of financing, encourage credit growth, and avoid further fragmentation of interest rates between core European countries and the periphery.
Finally, regarding “Brexit“, he admits that two of the companies in which the fund invests specifically mentioned Brexit as one of the main reasons that have affected sales. “The uncertainty itself will have an impact. The UK is currently very much connected to Europe. If investors begin to worry about the UK’s possible exit, it could be very negative for Europe by fostering debate in Italy, Spain, Ireland and Greece, where the population also questions the future of the Euro “.
Last Friday, the Economic and Monetary Affairs Council of the EU approved the General Approach reached on MMFR at Council Working Party level. This General Approach followed an original proposal by the European Commission in September 2013.
The European Fund and Asset Management Association (EFAMA) is of the view that a well-functioning European market for MMFs has an important part to play in the European Commission’s flagship Capital Markets Union initiative. EFAMA, whose members manage both VNAV and CNAV funds, has from the outset indicated that a proportionate and balanced Regulation which ensures the viability of both CNAV and VNAV MMFs, can contribute to supporting alternative sources of financing to the real economy and financing European growth.
“We believe the agreement reached under the Netherlands Presidency, taking into account market realities, to be an improvement on crucial matters. We are nonetheless conscious that the magnitude of the MMF reform will require a major overhaul of the industry. We also believe that further work is necessary during the Trilogue discussions to safeguard current achievements but also to further ensure that the rules work in practice and secure the viability of all MMFs”.
Peter De Proft, Director General of EFAMA, commented: “Ultimately, EFAMA believes the final agreement should find the right balance between financial stability and economic growth. Ensuring the viability of MMFs as an alternative source of short-term financing with a crucial role to play in our capital markets is all the more important considering the unprecedented economic, political and societal challenges faced by the European Union today”.
With the uncertainty generated around the outcome of Britain’s impending EU membership referendum, Thomson Reuters Lipper investigates if recent UK fund flows can reveal any insights into investor sentiment. Insights from Thomson Reuters Lipper follow below, with supporting data attached.
On mutual funds, examination of data on the U.K.’s Investment Association (IA) classifications (sourced via Thomson Reuters Lipper) shows an overall drop of 18% in total assets of the funds in all IA classifications and estimated net outflows of GBP 38 billion for the 12 months to May 31, 2016. January 2016 proved the worst month overall, with nearly GBP 16 billion of net outflows that month alone.
The largest IA sector (UK All Companies), with some 12% of all IA assets, has suffered a yearly net outflow of GBP 9.2 billion. In the last 12 months it has experienced only a single positive month of flows (July 2015).
The IA Sterling Strategic Bond sector has been worst hit as a proportion of its overall size in the U.K. market. With 4% of total assets overall, it has suffered nearly GBP 12 billion of net outflows to the end of May 2016, without a single monthly net inflow for the year.
Of the diversified categories the conservative IA Mixed-Asset 0%-35% has proven most resilient, with GBP 410 million of net outflows for the year to the end of May 2016. By contrast, the IA Mixed-Asset 20%-60% sector has suffered nearly GBP 5 billion of net outflows for the last 12 months.
Only four of the IA sectors have experienced more than GBP 1 billion of net inflows in the 12 months to the end of May: Property, Global Equity Income, Global Bonds, and Targeted Absolute Return. The latter sector has been the standout success story for the U.K. market for the last 12 months. It has collected nearly GBP 10 billion of net inflows. This is despite the corresponding average fund return of the sector being a negative 0.6% over the same period.
Beware distortion in yield curves and discount rates. Last week was certainly a jittery one in equity markets, but in bond markets history was being made.
The yield on Germany’s 10-year government bond went negative for the first time ever. A Swiss government bond set to mature 32 ½ years from now also saw its yield go red. Bank of America Merrill Lynch offered a chart showing global interest rates hitting their lowest levels in 5,000 years.
What happens in the world of fixed income matters a lot to equity portfolio managers: It gives us valuable signals about what’s going on in the macro environment, and hence the potential for companies to grow revenues and earnings; and by providing us with discount rates it directly influences how we value those potential earnings.
So what are these historic numbers telling us today?
‘Brexit’ Risk Has Jolted Markets… On the macro side there was certainly a bout of risk aversion last week. As bond yields plummeted, gold rallied to test the $1,300/oz. level. Last Monday the VIX Index rocketed from 17 to 23.
Much of this seemed to come down to a spate of opinion polls showing momentum for the “Leave” camp in the U.K.’s referendum on membership in the European Union. Brad Tank, Erik Knutzen and I will discuss the longer-term implications of that vote in a special edition of CIO Weekly Perspectives this Friday, so keep an eye out for that.
… But Equities Are Still in a Rally For now, it’s enough to point out that this binary risk may well be priced back out of markets by this time next week. In the meantime, while bonds trade with historic low yields, U.S. equities are still only down around 2.5% from their recent high, itself close to an historic level.
How do we make sense of these apparently contradictory market signals? Is one of them spectacularly wrong in its growth forecast, and if so, which is it—the bond market or the equity market?
This is the wrong question to ask in the post-financial crisis world. Instead we should ask about the extraordinary forces causing these fixed income records to tumble.
U.S. Curve Shaped by Fed and Non-U.S. Investors Take the shape of the yield curve, for example. A flat or inverted curve tends to make investors anxious: A flat or inverted spread between the two-year and 10-year U.S. Treasury yield has been quite a reliable forward indicator of a U.S. recession over the years.
Today that spread is around 90 basis points. A year ago it was as steep as 175. But this move has been not only, or even mainly, about investors reducing their long-term growth expectations. Indeed, part of it has been a move upwards at the short end of the curve as the Federal Reserve has talked about normalizing the Fed Funds rate in response to the U.S. economic recovery.
At the long end, rather than a new sense of economic gloom, yields have declined due to demand from investors in the Eurozone and Japan, where rates are low or even negative. In comparison, long-dated U.S. Treasuries look relatively attractive. There is simply a shortage of high-quality yielding assets in the world.
In short, we shouldn’t assume that bond markets are forecasting a hostile environment for equities.
Low Discount Rates Make Equities Look Expensive We should also think about how low risk-free discount rates affect our views on equity valuations. Through the simple mathematics of discounted cash flow models, lower discount rates lead to higher P/E ratios for the same level of future earnings. Higher levels of inflation and interest rates are one important reason why the average P/E ratio for the S&P 500 Index was around 15x from the 19th century until 2007, and 16.5x between 1950 and 2007. In the type of low-rate environment we have experienced in more recent years, the average has been 17-19x.
To be clear, we still caution that current equity market valuations represent optimistic expectations for earnings growth over the next 12 months—but we do not think they represent “irrationally exuberant” expectations, as a cursory look at relative value versus bonds might suggest. Bond markets still provide useful signals to equity portfolio managers, but we need to be clear about what they are—especially when those markets rewrite the history books as vigorously as they are at the moment.
The collapse of Lehman Brothers, the Greek debt crisis, the end of US quantitative easing, the slump in commodity prices, the slowdown of the Chinese economy and depreciation of its currency, the war in Ukraine, sanctions against Russia… a series of events that contributed to putting an end to a decade of strong growth in emerging markets. Some of these countries are more exposed to the slowdown than others. IMF returns to favour In the “noughties”, following sovereign defaults in Latin America, Russia and Asia in the 80s and 90s, the IMF was severely undermined. In his book analysing recent crises and the roles played by international institutions, Joseph Stiglitz, Nobel Prize-winning economist, wrote that the IMF made mistakes in every area in which it intervened: development, crisis management and the transition from communism to capitalism. From Stiglitz to Varoufakis (the former Greek Finance Minister), its critics have been blistering. Leading emerging countries have even gone as far as proposing an alternative to the Washington institutions with the creation of the New Development Bank (NDB) 70 years after the IMF was founded. The NDB, launched in July 2014, has authorised capital of 100 billion dollars. Its principal objectives are stated to be infrastructure and sustainable development. Eskom, the South African electricity production and distribution company is one of the beneficiaries of its financing operations.
Meanwhile, the 2008 crisis put the institution that had always been considered as the guarantor of global financial stability back in the saddle. This is reflected in the subsequent history of IMF loans, which had sunk in the preceding decade. In 2012, Greece was one of the first economies to turn to the Fund and in March 2012, the IMF approved a 28 billion euro loan to the Greek economy.
The IMF went on to sign a number of other agreements, particularly in 2015, including:
flexible credit lines for Mexico and Poland, for 47 billion and 15.5 billion SDRs respectively (equivalent to 67 and 22 billion dollars).
a 36-month extended arrangement for Ukraine for 12.3 billion SDRs (17.5 billion dollars).
Apart from the credit arrangements, in common with other countries, Ukraine benefits from a technical assistance programme. The elixir of devaluation Irrespective of what was happening in the eurozone (social tensions, increasing protests and breakthrough of populist parties, from Madrid to Paris), the fact is that the sharp rise in commodity prices encouraged various emerging markets to massively increase their spending. The Greek debt crisis turned out to be an early sign of what was going to happen in other regions of the world. In many cases, the noughties led to excessive debt and unsustainable deficits once prices fell. This is illustrated by the situation in Brazil and Venezuela. Unfortunately, the reforms to achieve sustainable growth, such as they are, were not sufficient. These countries therefore needed more than recourse to international institutions to try and counter the deterioration in their public finances. Devaluation or the adoption of a floating exchange mechanism are another potential solution. China and Argentina were the first to go down this road at the beginning of 2014. They were followed by several other countries, mostly commodity exporters, such as Russia, Kazakhstan, Nigeria and Venezuela. After its currency fell nearly 30% against the dollar, in November 2014, Russia’s central bank allowed its currency to float almost freely, leaving itself the possibility of intervening if needed. Due to its efforts to defend the rouble, its currency reserves dropped from 475 billion dollars to 373 billion dollars between November 2013 and November 2014.
Without going into too much theory, it is useful to remind ourselves of some of the hoped-for objectives when countries devalue their currency:
in terms of financial balance: to limit the haemorrhaging of a country’s currency reserves which are often needed to cover foreign obligations (such as a high debt in dollars),
in terms of fiscal balance: offset the drop in income by revaluing foreign receipts in local currency,
in terms of balance of trade: improve competitiveness and increase exports. This can have indirect effects such as increased production and lower unemployment.
In fact, many countries that let their currency depreciate have already seen a boost in their exports. This is largely the case for manufacturing countries (less so for countries that are net exporters of commodities). The differences are also regional as can be seen from the graph below. Emerging Europe is the region that has benefited most. Not yet the panacea Recourse to the IMF or currency depreciation are just a few of the remedies that have been adopted by governments in difficulty. They are not sufficient to resolve the ongoing structural problems. In particular, corporate debt seems to be one of the main variables in the equation. Companies in emerging countries are facing growing difficulties. Some, like Pemex, need to be restructured and recapitalised as their prospective income streams have been undermined. In Malaysia and Brazil, 1MDB and Petrobras have suffered severe governance problems. The remedies described above are only a first step in the search for solutions.
Column by Jean-Philippe Donge, Head of Fixed Income at BLI
According to the latest managed accounts research from global analytics firm Cerulli Associates, discretionary accounts will continue to exhibit strong growth.
“Clients are largely working with financial advisors because they want to delegate investment management,” comments Tom O’Shea, associate director at Cerulli. “In addition, advisors are looking to take over more of the discretion as it allows them to easily manage their books of business.”
In their latest annual report, U.S. Managed Accounts 2016: Leveraging Digital Advice to Maximize Scale, Cerulli analyzes the fee-based managed account marketplace, which has been a core research focus since the firm’s inception in the early 1990s. This report, in its fourteenth iteration, is the result of ongoing research and quarterly surveys of asset managers, broker/dealers, and third-party vendors, which captures more than 95% of industry assets.
“Many rep-as-portfolio-manager platforms and unified managed account platforms allow advisors to tie client accounts to portfolio models the advisor has created,” O’Shea explains. “In a discretionary arrangement, the advisor can quickly rebalance these accounts and swap out underperforming managers for new managers. In a client discretionary arrangement, where the client has the ultimate control, advisors need to get permission from the client before making changes to the portfolio.”
“If current trends in the managed account industry hold, discretionary accounts will reach $4 trillion by year-end 2019,” O’Shea adds.
“We believe Southern Europe has a significant recovery potential”, said François Gobron, fund manager of GIS European Equity Recovery, a Generali Investments‘ fund. “Clear signs point in that direction, including the economic growth in Spain and a rapidly rising employment in Italy. Furthermore, as companies in Southern Europe still trade at lower earnings multiples than their European peers, we believe their potential to outperform is meaningful. By leveraging our proven stock-picking skills, the fund will benefit from the re-rating of Southern European markets as soon as confidence in the macroeconomic environment is fully restored.”
More dynamic Southern European economies and supportive valuations at company level reinforce Generali Investments’ confidence in the recovery potential of Southern Europe and the investment theme underpinning the GIS European Equity Recovery fund, one of the few equity funds on the market specifically focused on this region.
The GIS European Equity Recovery fund invests mainly in equity securities issued by companies listed on Southern European markets. Spain, Italy, Portugal and Greece represent 99% of the total equity invested. The fund favors companies with strong operational leverage and large restructuring potential. The fund adopts a pure stock-picking investment process and selects companies based on the quality of their strategy and management. The shortlisted companies are valued through a Discounted Cash-Flow model combined with a recently introduced, proprietary and innovative Monte-Carlo model designed for highly uncertain environments. The fund invests in companies offering at least a 50% upside potential in terms of total return on a 3 to 5 years’ time horizon, leading to a low annual turnover ratio of 25%.
“Companies in Southern Europe still show higher upside potential relative to their European peers as the local financial markets have not fully recovered yet from the 2008 and 2011 crises and valuations remain lower on a relative basis”, added Gobron. For instance, the 11x median of the 2017 price-to-earnings ratio estimates of the fund’s portfolio compares with 15x for the Eurostoxx. The 1.0x median of the 2017 price-to-book value ratio estimates of the fund’s portfolio compares with 1.7x for the Eurostoxx. “We are therefore strongly convinced that the companies we decide to invest in after our careful strategic analysis have the potential to outperform peers on an operational basis going forward.” He concluded.
