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EFAMA Annual Asset Management Report Sees Strong Growth in 2014

The European Fund and Asset Management Association (EFAMA) has published its Eighth Annual Review of the Asset Management industry in Europe. The report focuses on the value of assets professionally managed in Europe, with a distinction between investment funds and discretionary mandate assets, across both the retail and institutional landscape. The report is primarily based on questionnaire responses by EFAMA member associations covering data at end 2013.

The review also reports on the industry’s key characteristics and functions in the context of the wider financial system. In particular, it outlines the vital role theasset management industry plays in channelling savings toward investment in the general financing of the economy – and therefore its core contribution to an efficient and well-functioning Capital Markets Union (CMU).

This year’s review highlights include:

Total Assets under Management (AuM) in Europe increased by approximately 15% in 2014 to EUR 19 trillion, from EUR 16.5 trillion at end 2013. In relation to GDP, the value of AuM is estimated to reach 124% at end 2014, up from 114% in 2013.

Europe ranks as the second largest market in the global asset management industry, managing one-third of the EUR 50 trillion global asset management industry at end 2013.

In Europe, discretionary mandates represented EUR 8,572 billion or 52% of total AuM at end 2013, while the share of investment fund assets in total AuM stood at 48% and amounted to EUR 7,884 billion at year end. Both investment fund and discretionary mandate assets stood at record high levels at end 2013.

Bond assets dominate asset managers’ asset allocation choice, with a share of 43% of all assets at end 2013. Equity assets accounted for 33% of assets, whilst money market and cash equivalents represented 8% of assets.

More than 3,300 asset management companies are registered in Europe employing 500,000 people. About 90,000 people are directly employed, with a further 410,000 full-time equivalents indirectly employed in functions servicing the asset management industry.

Institutional investors, acting on behalf of millions of households, represent the largest client category of the European asset management industry, accounting for 74% of total AuM in Europe. Insurance companies and pension funds accounted for 39% and 33% of total AuM for institutional clients at end 2013, respectively.

European asset managers held 23% of the debt securities issued by euro area sectors at end 2013, and 42% of the value of the free float of euro area listed firms. These figures highlight the role played by asset managers in the financing of Europe’s economy.

Peter De Proft, Director General of EFAMA, comments: “EFAMA’s Eighth Annual Review of Asset Management in Europe highlights the continuing growth of the industry and the increasingly important contribution it makes to the European economy. This makes our industry a key player in the wider financial system and one that has a prime position to support the EU in creating a Capital Markets Union (CMU).”

Chris Hart Applies the Strategy of the Three Circles to a Global Universe

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Chris Hart, CFA, manages a global equity strategy following the “Three Circles” investment philosophy for Robeco Boston Partners, . Hart manages the portfolio searching for opportunity from an unconstrained perspective, looking to take advantage of valuation anomalies in a global environment. “When we apply the investment philosophy of the three circles, to a universe of 10,000 securities, opportunities multiply making it a very powerful tool” he says.

This strategy is characterized by a high consistency in its performance, standing at the top of its category. The trick, as noted by Hart, is to be rigorous with the analysis and diversification of the ideas obtained when combining three concepts which contribute a little of each investment style, “the circle that refers to valuation is more value, that of the sound fundamentals may be described as core, while the momentum serves factors closer to growth”.

To capitalize on opportunities or anomalies in the market, Hart says it is necessary to invest by country, sector, currency, market capitalization, etc. without restrictions, taking note only in selecting good companies.

“One example is our overweight position in the French market,” Hart says. “We have a number of French small and midcap companies in the portfolio, they are all very well managed, able to make money in any market environment, and they also present attractive valuations. It doesn’t worry us if the French GDP does not grow.” At the other extreme is the negligible exposure to European banks which the strategy has held during the last seven years. “Overall, it is an undercapitalized sector operating in an environment of low growth in lending activity. In addition, valuations in terms of P/BV are misleading because if we incorporate actual capital needs of European banks, we see that they are not cheap. “

This strategy, which incorporates emerging markets in its universe though “its weight is very low because well-managed companies tend to be expensive”, now has 33% of the portfolio in Europe (including UK) and around 50 % in USA “The weight in Europe has increased by around 10 percentage points from the third quarter of 2014, to the detriment of exposure to the US, which we’ve cut on valuation grounds.” Japan, “a market in which we have always been invested, mainly through small and midcaps,” also currently weighs a bit more in the strategy’s portfolio.

This is Part 3 of a Three part interview to Robeco Boston Partners US and Global Equity Team, published in Spanish in Funds Society print magazine (April 2015)

*Market ratios are calculated as of February 2015

Robeco Boston Partners’ Three Circles Applied to Apple

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Mark Donovan, CFA, who describes himself as an “unswayed value investor” takes us by the hand through the process of Robeco Boston Partners’ three circles stock selection criteria through a concrete example. Does it make sense that a value investor like himself has Apple in his portfolio? “I will prove that Apple, theoretically a growth company, is a perfect candidate for our investment philosophy,” he says.

In fact, for a while now, Apple has been one of the top ten positions within the strategy managed by Donovan. “Now that, for the first time, the value has exceeded the US$700bn of market capitalization, the company is on everyone’s lips, but keep in mind that its earnings and cash flows have grown more than its market capitalization”.

Therefore, Donovan analyses Apple through the prism of the first circle, that of valuation. Apple is trading at a 2015 calendar PE ratio of 13,7x*, the S&P 500 does so at 17,3x and the strategy’s benchmark, the Russell Value 1000 Index, trades at 15,5x. “As you can see, Apple trades at a significant discount in relation to the market, and even to the value index. If we look at other ratios such as free cash flow yield, Apple has a yield of 8.9%, three times better than the S&P 500, which is below 3%,” he adds.

Exhibit 1 “Three circle selection criteria”:

Enlarge

Regarding sound business fundamentals, Donovan has no doubts about the ability of Apple to improve profitability. “They have proved to be unique in transforming the money invested in R&D into high demand consumer products.” For Donovan, the fact that iphone models 6 and 6+ have broken all sales estimates prove that the company that invented the concept of the tablet and the smartphone is still able to innovate. “Given the strong demand observed in recent quarters, I think the risk that their products become obsolete in the near term is low. Also, it still has a valuable computer franchise with the Mac brand”.

When analyzing the fundamentals of a business, this investment philosophy pays special attention to the allocation of capital. “It is true that Apple devotes an enormous amount of its cash flows to R&D, but in recent quarters we’re also seeing a growing trend to remunerate shareholders.” On the one hand, Apple pays a dividend which, although small, represents a yield of 1.5%. But above all, it highlights the share buyback activity in the firm. “Apple has reduced its number of shares by 7%,” a relevant figure considering that up to three years ago, Apple did not repurchase shares.

The third circle, momentum, is also functioning in Apple’s case. Not only is the general trend of its business positive, but also analysts’ revisions on their estimates support this momentum. “During the last quarter 44 analysts have revised their estimates on Apple, 42 were upward and only two were downward” Donovan specifies.

Therefore, Apple meets Robeco Boston Partners’ three circles or “fundamental truths”. “When will you sell the stock?” We asked. “Should a serious impairment of their fundamentals occur or if the stock reached our target value” replies Donovan.

This is Part 2 of a Three part interview to Robeco Boston Partners US and Global Equity Team, published in Spanish in Funds Society print magazine (April 2015)

*Market ratios are calculated as of February 2015

The “Fundamental Truths” According to Mark Donovan, an Unswayed Value Investor

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Robeco Boston Partners invests in equities based on the process of the “Three Circles”, a philosophy conceived in the eighties, which is known by the managers of the company as the “fundamental truths” of investment.

“The trick is to keep things simple,” said Mark Donovan, portfolio manager of the company’s Large Cap US Equity strategy. “There are too many people wasting time trying to predict the unpredictable, while for me, investing my time in finding companies that meet the three circles: Attractive valuation, sound business fundamentals, and good momentum, is much more interesting “.

While stock selection is the center of Robeco Boston Partners’ philosophy, the management firm is not alienated from events affecting the market. “We don’t try to guess where the dollar or the oil price will stand, but we do carry out constant sensitivity analyses on the effect of these factors on the fundamentals of the companies which we follow, in order to see if the market is misinterpreting the consequences. “

According to Donovan, the evolution of interest rates in recent years has created valuation traps in certain sectors, such as utilities. “Utilities are often equated with bonds, so in times when bonds pay as little as now, investors tend to buy more utilities looking for extra yield.” This has driven the sector to trade at a PE of 19x compared to a historical average of 13x-14x. “The market is assuming that rates will remain low, or even continue to decline, a wrong bet, in our judgment,” says Donovan. “If rates start to rise, the utilities will suffer a lot.”

The banks are at the other extreme. It is a sector that has behaved lackluster for the last two years, due to the low rates, the bank’s net interest margin is lower and profitability suffers. “The sector is trading at a PE of 10x, a ratio which reflects that investors believe that banks are dead money, but if rates start to rise, even a little, the potential for improvement is important,” said Donovan.

The earnings season remains positive, beating expectations as regards the fourth quarter “but not so in the revision of targets for 2015, which is generally downward”. As a large caps investor, Donovan closely monitors the US dollar effect on the earnings of US companies. “The vast majority generates a significant portion of its revenue overseas, so that a strong dollar means lower dollar value of foreign income in addition to the problem of loss of competitiveness“. Donovan points out that even without considering the currency effect, revenue growth is slowing compared to the second half of 2014. “Growth has moderated in the US, and neither China nor Europe is helping.”

Corporate Activism, an interesting trend

According to Donovan, an interesting factor in the current North American business scene is the proliferation of activist investors. “In Robeco Boston Partners we are not ‘activist’ investors, but it strikes my attention that within my portfolio there are several names that have either been touched by, or are likely to arouse the interest of activist investors whose ultimate goal is to influence company management to unlock its value,” he explains. “If I was currently the CEO of a listed company in USA, what would deprive me of some sleep would be to think of waking up one day to find that Bill Ackman, Carl Icahn, or someone similar has taken an interest in my business, “adds Donovan.

Activist investors acquire a stake in companies in which they see they would be able to obtain value with some major changes in senior management. A recent example is McDonalds, which has had two bad years, causing its former CEO, who had barely held the position for two years, to decide to “retire” pushed by the board of the company. His replacement has the mandate to turn the company around by taking a different path than his predecessor. The board of McDonalds, influenced by shareholders who have decided to take an active approach in their investment, has zero tolerance for management with mediocre results. Although Donovan insists on clarifying that they are not activists in their positions, he also claims that this trend is benefiting the type of companies that are often part of their portfolio. “One example is United Technologies, which has been part of our strategy for some months. It is a company that has inherited a good business, even though it has recently experienced some problems. The appointment of a new management team is usually a good catalyst for change. “

This is Part 1 of a Three part interview to Robeco Boston Partners US and Global Equity Team, published in Spanish in Funds Society print magazine (April 2015)

*Market ratios are calculated as of February 2015

BNY Mellon Introduces ESG Advisory Services for its Depositary Receipts Clients

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BNY Mellon announced that it is teaming with Sustainalytics, a leading provider of environmental, social and governance (ESG) research and analysis, to make available a wide range of ESG data and insight to its depositary receipts clients. BNY Mellon is the first depositary bank to offer such services to securities issuers.

Momentum is growing both from investors and companies to more carefully consider the implications of ESG factors. The number of institutional signatories participating in the United Nations-backed Principles for Responsible Investment (PRI) Initiative – an international network of investors dedicated to advancing responsible investment practices – grew by 19% last year and now includes more than 1,300 signatories representing over $45 trillion in assets under management.

To support growing interest in ESG investing, BNY Mellon’s Depositary Receipts business will offer its clients access to Sustainalytics’ ESG research and ratings, as well as custom benchmark reports that provide a lens through which issuers are viewed by investors. Sustainalytics will also offer clients access to in-house industry analysts who can provide deeper insight on ESG issues.

“More investors are evaluating corporate ESG practices and performance as part of their decision-making process. Through Sustainalytics, we can create an important link to help global firms gain insight into the approaches of investors and asset owners,” said Christopher M. Kearns, CEO of BNY Mellon’s Depositary Receipts business. “Sustainalytics’ coverage of international issuers is excellent and widely utilized by institutional shareholders.

“This new offering signals the next phase of BNY Mellon’s unmatched DR advisory service, enabling us to help clients better understand the needs of investors and develop strategies around enhanced corporate disclosure. We want to keep firms at the forefront of these trends,” Kearns added.

“Companies working with BNY Mellon will benefit from a deeper understanding of how investors view their sustainability practices and how they can improve upon them to attract new investments,” said Sustainalytics’ CEO, Michael Jantzi. “We look forward to working closely with BNY Mellon as they break new ground in being the first depositary bank to offer ESG data to its clients.”

Broker Dealers, Custodians, and Asset Managers Need to Adapt as Advisor Teaming Gains Speed

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According to new research from global analytics firm Cerulli Associates, broker/dealers, custodians, and asset managers need to adapt as advisor teaming grows.

“The appeal of advisor teaming has grown among both established and new advisors,” comments Kenton Shirk, associate director at Cerulli. “For advisors, a successful merger can generate substantial growth and productivity enhancements.”

With the growing complexity of planning needs, investment products, technology, and regulations, small advisor practices may struggle to tread water, opening the door to consolidation opportunities for larger practices with a robust infrastructure.

“The growth of multi-advisor practices is most pronounced in independent channels. The average number of total professional staff per practice is 3.3 in the wirehouse channel. That compares to an average of 5.2 for dually registered practices and 4.5 for registered investment advisors,” Shirk explains.

“The advisory industry is increasingly shifting away from an individual producer mindset to that of a multi-advisor team,” Shirk continues. “The industry’s largest practices and mega teams also typically serve affluent investors, which reinforces their propensity for teaming. The desired result is providing broader and deeper services to meet the more sophisticated needs of their high-net-worth clientele.”

“Mega teams cite the ability to provide more services as the primary reason for teaming. By pooling resources, they are better equipped to specialize advisor and staff roles,” Shirk adds. “Teaming offers an opportunity to develop specialized roles for both advisors and staff, which greatly enhances advisor growth opportunities and productivity levels.”

H.I.G. Capital Appoints Henri Penchas to its Latin America Advisory Board

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H.I.G. Capital has appointed Mr. Henri Penchas to its Latin America Advisory Board. H.I.G. established a local presence in Brazil in 2012 and is one of the most active private investors in the country. Its 31-member team, operating out of four offices across Brazil, has completed nine transactions to date.

Henri Penchas is a senior executive at Itaúsa, one of the largest conglomerates in Brazil, with whom he has been associated since 1985. He is currently a member of several Boards of Directors, including those of Itaúsa, Itaú Unibanco, the largest bank in Brazil, Duratex and Elekeiroz.

Fernando Marques Oliveira, Managing Director and Head of H.I.G. Brazil & H.I.G. Latin America, added: “The creation of a regional Advisory Board, which already includes Gustavo Loyola, a former Chairman of the Brazilian Central Bank, is another strong statement of our long-term commitment to Brazil and Latin America. It is with great pleasure that I welcome Mr. Penchas, with whom I have already worked in the past, to our Advisory Board. He is one of the most influential business leaders in Brazil and I am confident he will make a significant contribution to our team and to our success.”

H.I.G. is a leading global private equity and alternative assets investment firm with more than $17 billion of equity capital under management. Based in Miami, and with offices in New York, Boston, Chicago, Dallas, San Francisco and Atlanta in the U.S., as well as international affiliate offices in London, Hamburg, Madrid, Milan, Paris and Rio de Janeiro, H.I.G. specializes in providing both debt and equity capital to small and mid-sized companies, utilizing a flexible and operationally focused/ value-added approach.

Capital Group Boosts Madrid Team

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Following the opening of its Spanish office in Madrid last October, Capital Group has announced the hiring of Alberto Belinchón Azpeitia as a Business Development associate.

Based in Madrid, Belinchón Azpeitia will be responsible for supporting Capital Group´s business development efforts in Iberia.

This hire follows that of other two Business Development Directors, Álvaro Fernández Arrieta and Mario González-Pérez, earlier in 2014.

Belinchón Azpeitia, who has a Bachelor of Business Administration and is EFPA (European Financial Planning Association) holder, started his professional career at Deloitte, in the marketing and institutional relations department. After that, he moved to Barclays where he held a number of different positions, latterly that of Premier Relationship Manager.

Capital Group now has eight offices in Europe, having opened in Luxembourg, Milan, Madrid, Zurich, Frankfurt and Amsterdam since 2012 – in line with its growth strategy for its European business.

Grant Leon, Senior Vice President at Capital Group, said: “Alberto’s appointment responds to our strategy of expanding our presence in the Spanish market while also ensuring we continue to deliver world-class client service. This is also aligned with our goal of continuing to establish new – and deepen our existing – relationships with intermediaries and our distribution partners in Spain and across Europe.”

Peru to Host World Bank Annual Meeting in October

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The Peruvian Minister of Economy and Finance Alonso Segura officially announced that the Annual Meeting of the World Bank will take place in Lima, Peru this October. He was joined by President of the World Bank Jim Yong Kim; Managing Director of the IMF Christine Lagarde and the President of the Peruvian Central Bank, Julio Velarde.

It is the first time in 48 years that the Annual Meeting will be held in Latin America, emphasizing the great progress that Peru and the region have made in their economic sectors. Over 15,000 delegates and representatives are expected to attend this meeting from the 9th-11th October 2015. The construction of a new convention centre is nearing completion and hundreds of new hotel rooms are being made available for this event.

Mr. Velarde noted the good micro economic policies that the Peruvian government has implemented during the last few years in light of the fall in government earnings due to the decline in commodity prices. Peru was chosen as the location for the summit due to the country’s growth, which has averaged 6.4% annually over the past decade.

J.P. Morgan Asset Management Launches Direct Real Asset Investment Platform

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J.P. Morgan Asset Management Global Real Assets has launch Tactical Direct Investments (“TDI”), a dedicated cross-real assets group to help further meet client demand for direct and co-investment real asset opportunities across the risk/return spectrum and around the world.

Global Real Assets (GRA) currently manages or advises more than $17 billion of direct and co-investment transactions globally on behalf of clients. The new unit, a dedicated cross-real assets group within GRA,will be under the leadership of Avik Mukhopadhyay.

“Institutional investors are increasingly seeking to complement their real asset fund holdings with direct investments. However, for both the investor and the investment manager, direct investing is fundamentally different from fund investing,” said Joe Azelby, Global Head of Real Assets.

Avik Mukhopadhyay said, “In many ways, Tactical Direct Investments is leveraging what the group has been doing exceptionally well for more than four decades. And by creating a dedicated team focused on providing bespoke investment solutions – be it co-investments, direct single asset transactions or thematic separately managed accounts – for clients across real estate, infrastructure and maritime/transports globally, we hope to both deepen our relationships with existing clients and help new clients achieve their individual goals.”