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Is this the Road to Normalization? Launching: 2015 Market Assumptions

The increased market turbulence in the last couple of weeks is driving investors to question if they should be repositioning their investment portfolios, whether the current volatility is a new normal, and what will happen to different asset classes as interest rates start to rise and inflation moves further up the agenda.

Now in its nineteenth year, the newly launched 2015 Long Term Capital Market Return Assumptions by J.P. Morgan Asset Management aims to help investors answer these burning questions and navigate the increasingly complex investment universe.

Anthony Werley, Chief Portfolio Strategist in J.P. Morgan Asset Management’s Endowments and Foundations Group, and one of the leading authors of the paper, said, “It has been six years since the end of the great recession and we are certainly on the road to normalization. In general, due to continued headwinds, we believe that diversification across geographies and asset classes will be rewarded in the longer term.”

He continued, “Globally, we see decoupling continuing as the eurozone and Japan actively pursue easier monetary policies and the monetary policy cycle turns in the UK and US. In the US, we believe growth will be constrained compared to prior cycles and that inflation will remain range bound. In addition, long-term nominal return expectations for US treasuries, corporate bonds and equities are more subdued and the implied risk premia arguably offers limited protection against any missteps in the policy normalization process.”

The Assumptions put forward different considerations and opportunities for investors with different objectives, for example:

Opportunities for investors in search of diversification:
- Use diversified hedge funds as fixed income substitute
- Invest in commodities for their diversification benefit
- Add duration in non-US government bond markets where central banks are easing
Opportunities for investors in search of higher returns:
- Reconsider the case for emerging markets where valuations are lower and top-line growth is likely to be higher
- Add direct or indirect leverage while funding rates are low
- Invest in less liquid markets such as value-added real estate and private equity

As well as providing vital information to investment decision makers across all types of investors, including pension funds, wealth managers, insurance companies and endowments, the Assumptions also form the investment principles around J.P. Morgan Asset Management’s multi-asset portfolios, which include defined contribution target date funds, multi-asset income funds and tailored strategies within the Solutions Group.

Please click here to view the full report.

Greg Saichin Looks Back over His First Year with Allianz GI

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Greg Saichin joined Allianz Global Investors on 23 September 2013 to build a new emerging market debt business. A 26-year veteran of the asset class, here is his personal reflection on the journey and his hopes for the future.

“I walked through the doors of Allianz Global Investors for the first time last September with a sense that big things were about to happen. The company had energy and momentum following its transformation to a single brand and I was excited and proud to be asked to create a new business in this challenging asset class that I know and love.

The so-called taper tantrum was still fresh in my mind, but I was confident in my plan to assemble a team of experienced portfolio managers, credit analysts and traders, who would be able to protect and build value for clients when US interest rates finally rise. Twelve months on, I can tell you that the team has exceeded my expectations and I am still more than a little surprised at how far we have come in so short a space of time. One year at AllianzGI has been like four or five years anywhere else!

Let me share with you some of the important milestones from our journey so far.

The first challenge came for me and my colleagues, Oleksiy Soroka and Zeke Diwan, when we took over management of the Allianz Emerging Markets Bond strategy just three months after entering the company. By April 2014, we had been joined by a further five professionals – Naveen Kunam, Shahzad Hasan, Vlad Andryushchenko, Eoghan McDonagh and Daniel Haas we launched three new funds to extend the global EMD coverage and complete the first stage of my strategic plan. We launched a fourth fund in the US at the beginning of September, taking total assets under management to an impressive US$1.8bn. I could not be more pleased with this progress, but this is just the beginning of a very ambitious plan to make Allianz Global Investors a benchmark in global emerging markets debt management.

We are sovereign specialists and credit experts, who combine top-down country analysis with bottom up credit research to construct portfolios across the entire EMD risk spectrum.

Emerging market debt is a vast, varied and at times volatile asset class that can deliver a valuable contribution to overall portfolios in the hands of experienced, specialist investors. Given this scale and complexity, I felt it was essential for Allianz GI to have a global presence augmented by decentralized decision making so that our regional teams are empowered to act in the interests of clients in real time.

Our coverage of Latin America, Emerging Asia and Central & Eastern Europe, the Middle East and Africa is hence driven out of New York, Hong Kong and London, where I am pleased to say that we are regarded as local investors, with all the privilege and credibility that status conveys.

Our investment process benefits from duality as well. We are sovereign specialists and credit experts, who combine top-down country analysis with bottom up credit research to construct portfolios across the entire EMD risk spectrum. How does this work in practice, I hear you say. Well, take Chinese real estate as an example.

Around 20 to 25 million people a year are moving from the Chinese countryside to the cities, requiring significant investment in urban infrastructure. Great sovereign angle. Yet, there is not enough public finance available for all these projects, which is where bottom up analysis of the private companies that have stepped up to fill the funding gap can be so invaluable.

Quite simply, you cannot afford to enter the sector through third level builders in third tier cities without a firm conviction. In this context, we look for well-run companies that can pre-fund cash flows throughout the lifecycle of a construction project, usually because they have existing credit lines and a strong relationship with local banks. They must also have a track-record of delivering projects on time and be on good terms with the local authorities, which are influential if not key to this entire sector.

Another example of personal relevance to me, is my native Argentina. I have anticipated that it would default twice in the last 13 years and I cut my exposure to zero ahead of both occasions. A money manager needs to understand the emotional drivers that may impact investment decisions and flows in the wider markets without falling victim to such influence himself. This was an example, however, of how the diverse cultural backgrounds in our team give us a unique insight into how events will unfold in a particular country. On both those occasions, the market thought that Argentina would avoid a default, and on both occasions I knew the market was wrong! Similarly, in the CEEMEA region, we took early action to diversify away from Russia before the full extent of the country’s involvement in Ukraine had unfolded. As a native of Ukraine, Oleksiy’s cultural insight was crucial to that decision.

AllianzGI’s EMD team has achieved a huge amount in a short space of time, but we have ambitions to do far more in the years to come. In 2015, we plan to further refine our investment process to ultimately scale up conviction ideas into multiple client solutions. As much as I am proud of what we have achieved, I am even more enthused about what we will do in the year ahead.”

New Research about Investment “Popularity” Featured in 40th Anniversary Issue of Journal of Portfolio Management

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The Journal of Portfolio Management has selected “Dimensions of Popularity” by Roger Ibbotson and Thomas Idzorek for its prestigious 40^th anniversary issue. Ibbotson, Ph.D., is founder of Ibbotson Associates, chairman and chief investment officer of Zebra Capital Management, and professor of finance at the Yale School of Management, and Idzorek, CFA, is head of the Morningstar Investment Management group, a unit of Morningstar, Inc. Morningstar acquired Ibbotson Associates in 2006.

“Investors have long viewed the world through the risk-reward paradigm. They recognized that with greater risk comes greater return. This holds true when examining asset class performance—stocks are riskier than bonds and, on average over time, produce higher returns; small capitalization stocks are more volatile than large capitalization stocks, but outperform in the long run,” Idzorek said. “At the individual security level, however, this truism of investing—that with more risk comes more return—isn’t supported by historical data. The risk-reward paradigm also doesn’t explain many of the other premiums and anomalies we see in the market.”

In “Dimensions of Popularity,” Ibbotson and Idzorek identify the most common market premiums and anomalies, such as:

Small cap—Smaller capitalization stocks outperform larger capitalization stocks
Valuation—Value companies beat growth companies
Liquidity—Less liquid stocks best those with more liquidity
Momentum—Stocks trending up will continue to trend up

Because the risk-return framework does not explain all these premiums and anomalies seen in the market, the researchers propose the unifying “theory of popularity.” They explain that the most common market premiums and anomalies are associated with a stock’s popularity or unpopularity. For example, if investors “vote with their dollars,” small cap companies have gotten fewer votes. Value companies commonly have something wrong with them, which makes them unpopular.

If an asset has characteristics that investors really dislike, such as low liquidity, little name recognition, or high volatility, its price will be lower and therefore its expected future returns will be higher, all other things being equal. According to the theory of popularity, if an investor were to rank stocks by popularity, he or she could buy a basket of unpopular stocks and systematically rebalance as the stocks become more popular by buying a new portfolio of relatively less popular stocks. As some of the stocks in the portfolio become more popular over time, they become more valuable and the investor will see appreciation.

Ibbotson and Idzorek test this theory by sorting the universe of stocks by popularity, as defined by share turnover, and dividing them into quartiles each year from 1972 through 2013. They find that stocks in the lowest quartile of share turnover—the least popular stocks—outperformed the highest quartile by more than 7 percentage points per year over the period studied.

“Risk has become a catch-all for all of the attributes that investors do not like, but riskiness does not explain all the anomalies we see in the market. Value premiums are a perfect example. Stocks with low market-to-book ratios or low price-earnings ratios are not necessarily more volatile or less liquid, but we know that over time value stocks beat growth stocks. We need a new model for explaining investment performance that goes beyond risk and return. Popularity may be a better lens through which to view investment behavior,” Ibbotson said. “Many of the well-known market premiums are associated with unpopular stocks. Unpopular stocks tend to be smaller, less liquid, and perceived as lacking growth potential. These stocks, with their low relative prices, may offer investors better future performance as they move along the spectrum toward popularity.”

Click here to view the paper.

Four Family Office Industry Pioneers Honored with the FOX Founders Award

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Family Office Exchange (FOX), a global membership organization of private family enterprises, their family offices, and key advisors, bestowed the FOX Founders Award on four family office industry pioneers at the 25th Anniversary FOX Forum in Chicago on October 29, 2014.

The honorees were Christine K. Galloway, President and CEO of Okabena Company, Dirk Jungé, Chairman of Pitcairn, Patricia M. Soldano, Chairman – Western Region at GenSpring Family Offices, and Loraine Tsavaris, Managing Director at Rockefeller & Company.

In presenting the awards, Sara Hamilton, Founder and CEO of FOX, commented, “Each of these individuals is the epitome of our best industry leaders, but in very unique ways. They were all pioneers in changing the wealth management industry to better serve the ultra-wealthy client. ”

The FOX Founders Award has only been presented once before– in 2009 to James E. Hughes, Jr., at the 20th Anniversary FOX Fall Forum.

Chris Galloway has worked for the Okabena Company, a single family office in Minneapolis, for 21 years. Retiring at the end of the year, she says, “Nothing is more meaningful than my role as ‘trusted Advisor’ to multiple generations of family members.”

Dirk Jungé, a fourth generation Pitcairn family member, is an outstanding example of a family leader who has served as a family steward for over 40 years. There is an old saying: “If you don’t create change, change will create you.” Dirk understands the need for innovation, coupled with his commitment to the time-tested principles that create family success, characterize his leadership style and underlie the business model of the 90-year old family office.

Pat Soldano has worked tirelessly for the past 20 years campaigning for elimination of the death tax based on her experiencing the devastating impact of estate taxes on families in her advisory practice. She founded The Policy and Taxation Group to educate lawmakers on the issues and impact of estate taxes on families.

The final recipient, Loraine Tsavaris, has been an advisor to families and to aspiring wealth advisors for more than 40 years. A strong supporter of FOX conducted research, she participated in the first FOX Thought Leaders Summit in 2004 about Conflicts of Interest and in every Thought Leaders Summit since.

Evercore Completes Acquisition of ISI Group

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Evercore Partners has announced that it completed on October 31, 2014 the acquisition of the ISI International Strategy & Investment and the remainder of its legacy Institutional Equities business.

The acquisition positions Evercore as an elite and scaled provider of non-proprietary capital markets advice and execution, broadening Evercore’s Investment Banking business and expanding its growth opportunities. The business, Evercore ISI, will initially provide macro research, as well as fundamental research coverage of more than 600 companies across 12 industries, or approximately 60% of the combined market cap of the S&P 500. Evercore ISI will serve more than 1,500 institutional investors globally, including the largest asset managers and fund complexes in the world.

“We are excited to announce the closing of the ISI transaction, moving us one step closer to our goal of creating the most elite independent investment banking advisory firm in the world,” said Ralph Schlosstein, President and Chief Executive Officer. “While it is still early days, client feedback to date affirms our expectation that Evercore ISI will have a positive effect on the growth rate of our overall Investment Banking business and that the Equities business will be an attractive business in its own right. Since the announcement of the acquisition in August, ISI has achieved a #5 ranking for its research product from Institutional Investor, and the firm has had record revenues in September and October, reflecting the support for this transaction from institutional investors globally. We are excited to welcome the entire ISI team to Evercore.”

“This step creates a broader and more effective banking firm because it provides Evercore with premier skills in all aspects of equities,” said Roger Altman, Executive Chairman. “I look forward eagerly to working with our new ISI colleagues.”

“Our clients’ support for this transaction has been extremely positive,” said Ed Hyman, Evercore ISI’s Chairman. “The combination of talent from the ISI and Evercore Equities businesses has created a powerhouse in research and distribution and we look forward to continuing to serve our expanded client network with the highest quality independent research, analysis and advice.”

Henderson Appoints Glen Finegan as Head of Emerging Market Equities

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Henderson Global Investors has hired Glen Finegan as Head of Emerging Market Equities. He will join the Henderson team on 5 January 2015.

Glen will report to Graham Kitchen, Head of Equities, and will have responsibility for managing the £1bn (€1.26bn / US$1.73bn) global emerging markets’ equities’ (GEM) franchise based in the UK.

Most recently Glen was a senior portfolio manager at First State Stewart covering GEM all cap strategies. He managed US$3bn as lead manager and was co-lead on US$10bn. Before joining First State Stewart in 2001 he was a geophysicist within the oil and gas industry.

In addition, as part of the wider review of the emerging markets business, Chris Palmer will leave Henderson. Chris joined during the Gartmore acquisition in 2011 and served as Director of Emerging Market Equities.

deVere Group Launches its Flagship Investment Strategy Division

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deVere Group announced the launch of deVere Investment Strategy that will be headed by Tom Elliott, a former Executive Director at JP Morgan Asset Management, who has 25 years experience in the financial sector and was appointed deVere Group´s International Investment Strategies in 2013.

The independent financial advisory organizations, which has a growing presence across America, has officially introduced its new Investment Strategy division. deVere Group, has 80,000 clients globally and more than $10bn under advice and management.

The founder and chief executive of deVere Group, Nigel Green, comments: “We’re thrilled to announce the introduction of deVere Investment Strategy, a free service that aims to help investors better understand the economic, political and social factors that drive capital markets, and which in turn influence returns on portfolios.

“This pioneering service, which offers a comprehensive view of global economies, regular updates on current stock markets and fixed income trends, in-depth analysis and detailed outlooks from Tom Elliott, one of the best-known and experienced experts in his field, is unlike any other in our sector.

“We’re confident that deVere Investment Strategy will be a powerful tool in helping our clients make informed investment decisions”.

He continues: “The launch of deVere Investment Strategy underscores our commitment to using our resources to continually lead and shape the industry and is further evidence of our laser-like dedication to helping clients hit their important goals through intelligent insights.”

For his part, Mr Elliott comments: “After months of strategic planning, research and development, I’m incredibly excited about the introduction of this trailblazing service that requires no fees or logins and that I hope will add real value to investors.

“An informed investor is a smarter investor and as such I look forward to delivering timely and relevant commentaries.” “It’s a privilege to be able to be working directly with our clients and helping them to reach and hopefully exceed their financial objectives by providing a holistic, bespoke approach to investment advice.”

Expected Returns 2015 -2019: The Rising Economic Tide Isn´t Plain Sailing

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Is the Euro crisis over? What if China slows down? Do liquidity premium exist?

“The future is like a corridor into which we can see only by the light coming from behind.” This quote sums up the hazardous nature of the exercise to try and tell what the future will bring, certainly with respect to the world economy and asset returns. As stated by Robeco in a recently published report on this matter, all we have to go by is what we have seen in the past. So, the outlook 2015-2019 presented by Robeco in this video is as much a story about the past, as it is for the future: Robeco assumes that the long-term returns that we have seen in the past will – under normal circumstances – be a good guideline for the future. Interestingly, the further we try to look into the future, decades out, the more we tend to assume that the returns we have seen over the past hundred years will be more or less repeated. The shorter the outlook –and with short in this context Robeco refers to the five-year outlook being presented here– the more emphasis will be put on recent history.

A fair question is why it should be expected to see similar long-term, steady-state returns, even though the past hundred years can in no way be compared to the hundred to come. The simple answer, according to Robeco, is that the past hundred years have seen enough turmoil and volatility to be considered a good sample of possible hurdles that we will face in the next hundred years: wars, (hyper) inflation, natural disasters, booms, busts and financial crises – the world has had our share of turbulence. Yet underlying all this is Robeco’s conviction, which stems from their belief in the ingenuity of human beings, that we will realize equivalent returns. Robeco believes that mankind will continue to overcome complex and threatening situations. They trust that the drive of innovation and productivity gains will persist. Certainly, there will be setbacks as there have been in the past, but generally Robeco believes that growth, and with it returns on financial assets, will continue more or less as before.

You may access an Executive Summary of this report through the pdf file attached, and you may download the full report through this link.

Bank J. Safra Sarasin Announces the Resignation of Eric Sarasin

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Over recent days, the media has widely reported the ramifications of legal investigations initiated in Germany against a number of people, including Mr. Eric Sarasin. Investigations on behalf of German prosecutors have been carried out in Switzerland, said Bank J. Safra Sarasin in an statement.

“Eric Sarasin categorically denies the accusations made against him and wants to be free and available to organise his own defence. He also wants to ensure that the personal implications for him do not tarnish the image and reputation of the Bank he has served”.

“Eric Sarasin has therefore resigned from his position as Deputy CEO and member of the Bank’s Executive Committee. The Bank has accepted his resignation with regret and thanks Mr. Eric Sarasin for all his efforts and achievements over many years of collaboration”, says the entity.

Global X Funds Launches Two New ETFs Based on J.P. Morgan Indexes

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Global X Funds, the New York-based provider of exchange-traded funds, has launched two ETFs based on indexes developed by J.P. Morgan Corporate and Investment Bank: the Global X | JPMorgan Efficiente Index ETF and the Global X | JPMorgan US Sector Rotator Index ETF.

These new ETFs from Global X enter the market at a time when investors are increasingly interested in products linked to strategies that are designed to help manage against downside risks.

The Global X | JPMorgan Efficiente Index ETF aims to provide investors with superior risk- adjusted returns. The fund rebalances monthly, shifting exposures across five asset classes and thirteen sub-classes, while targeting an annual realized volatility of 10%. The strategy is designed as an alternative investment, seeking to generate low volatility returns across a variety of market conditions.

The Global X | JPMorgan US Sector Rotator Index ETF seeks to provide investors with the ability to participate in market upside while limiting downside exposure. On a monthly basis, the fund will select up to five US sector ETFs which have demonstrated positive recent performance from a pool of 10 possible sectors. The fund may shift up to 100% of its exposure to 1-3 year US treasuries to defend against declining or volatile markets.

“We regularly hear about the need for investment vehicles that manage downside risk”, said Greg King, Executive Vice-President at Global X Funds. “With these new funds, we can now offer two potential solutions to investors who want the liquidity and transparency of an ETF wrapper and a rules-based index approach.”

“We are pleased to see the J.P. Morgan Efficiente and Sector Rotator indexes in ETF form with Global X as the ETF provider,” said Scott Mitchell, Managing Director at J.P. Morgan.