CC-BY-SA-2.0, FlickrTim Dowling, director de High Yield Global, ING IM. Los tipos forward son una herramienta prácticamente inútil para predecir el futuro de las tasas de interés
ING Investment Management is warning investors against relying on forward interest rates when trying to estimate future bond yields, describing them as nearly ‘worthless’.
A forward rate is a theoretical expected yield on a bond several months or years from now, generated by subtracting the yield of a shorter maturity bond from the yield of a longer dated bond.
The investment manager is concerned that forward interest rates are currently being relied upon to advance the argument that future economic growth, inflation and bond yields will be lower than in the past. The relatively low forward rates implied by today’s bond prices are a seemingly objective measure that can be used to support “secular stagnation”, which is the idea that the world has shifted permanently into a lower growth mode. Applying this concept to today’s markets, the US Treasury five year note will yield approximately 3.34% on August 4th 2019 and the Bundesobligation five year will trade at approximately 1.97%.
However, analysis by ING IM reveals that using August 4th 2009 bond yields, the US Treasury five year note should be trading at 4.68% today and the Bundesobligation five year should be 4.18% – instead they are trading at 1.63% and 0.29%, respectively.
Tim Dowling, Head of Global High Yield, ING IM said: “Forward interest rates may be an objective measure, but they are close to worthless as a predictor.’’
“The main benefit from looking at the relationship between shorter and longer dated bonds is that it can provide some insight into trading levels a couple of months out, rather than five years from now. Making predictions that are more than a year away is little more than guesswork. The relationship of shorter and longer dated bonds really only helps with understanding how investors are anticipating short term price reactions.”
Lexington Partners together with AlpInvest Partners have announced that they have entered into a definitive agreement to acquire JPMorgan Chase’s interests in approximately 50% of the portfolio companies currently held by One Equity Partners, JPMorgan Chase’s principal private equity unit. Terms of the transaction, which is expected to close by year-end, were not disclosed.
The OEP professionals will form a new private equity investment advisory firm, OEP Capital Advisors, and become independent from JPMorgan Chase once the sale is completed. OEPCA will manage the portfolio being sold by JPMorgan Chase, as well as the investments being retained by JPMorgan Chase.
“Lexington is pleased to partner with One Equity Partners to acquire a significant portion of JPMorgan Chase’s interests, and to support the future investment activities of the OEP team,” said Brent Nicklas, Managing Partner of Lexington Partners.
“We view this as a great opportunity to partner with one of the industry’s leading private equity firms,” said Tjarko Hektor, Managing Director of AlpInvest Partners.
“We look forward to delivering great long-term value to these two leading alternative investment management firms,” said Richard M. Cashin, Chairman and Chief Executive Officer of One Equity Partners. “We also thank JPMorgan Chase for their partnership and support of many years, enabling us to build the business we have today.”
The transaction is not expected to have a material impact on JPMorgan Chase’s earnings. J.P. Morgan advised on the sale.
Foto: roberthiggins, Flickr, Creative Commons. Los inversores, ¿incapaces de beneficiarse de la habilidad de los mejores gestores?
In 1973, Princeton economist Burton Gordon Malkiel famously pointed out that a blind folded money manager throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts. He was translating into layman’s terms research that suggested that most investors would do better investing in index funds than in actively managed funds. His conclusion was accurate, but research from Stanford Graduate School of Business, “Measuring Skill in the Mutual Fund Industry”, explains why no one — especially financial policymakers — should jump to the conclusion that active-fund managers have no superior investment skills. Over time, people have used the truism about index funds to mistakenly conclude that mutual fund managers have no skill, and that it is impossible to ever beat the market.
In fact, research by Jonathan Berk of Stanford Graduate School of Business and Jules H. van Binsbergen, formerly of Stanford and now at Wharton, suggests that the typical mutual fund manager is persistently skilled, and that top performers are especially good. It’s just that the market is so hypercompetitive that most investors can’t benefit from the skill — it is competed away too quickly as money pours into emerging managers’ funds. The managers and their companies, rather than investors, capture the value of the total market earnings and fees charged to investors.
For policy makers, the research suggests that mutual fund managers have been unfairly castigated. If we confuse the questions of how skilled mutual fund managers are with how much individual investors can benefit from their skill, we risk making poor decisions about how to regulate and set policy in finance.
Measuring Investment Skill
Though conventional wisdom holds that mutual fund managers are unskilled, they are some of the most highly compensated members of our society. The researchers began looking into how that could be.
The basic economic principle of rents holds that someone cannot earn a “rent” — a wage above costs, in this case — unless they possess a desired skill in short supply. Though there can be distortions in the market, such as government incentives or penalties that might explain the high incomes, it seemed impossible that mutual fund managers would earn such high wages without possessing any skills at all. “We then asked ourselves a basic but crucial question: Could we be measuring skill incorrectly?” Berk says.
Many people have used gross alpha — the industry term for returns above a benchmark of diversified stocks, such as the S&P 500, and before fees charged to investors are deducted — as a proxy for investment skill. The researchers offer the example of Peter Lynch to show why looking at skill this way could be a mistake. In his first five years managing Fidelity’s Magellan Fund, Peter Lynch had a 2 percent monthly gross alpha on average assets of about $40 million. In his last five years, his gross alpha was only 20 basis points per month, but on assets that ultimately grew to more than $10 billion.
“Based on the lack of persistence in gross alpha, one could mistakenly conclude that most of Peter Lynch’s early performance was due to luck, rather than skill,” Berk and van Binsbergen write. But the skill is still there, which you can see when you take into account how much money Lynch actually made from the funds he invested. The value he extracted from financial markets went from less than $1 million per month in his first five years to over $20 million per month in the last year.
If not gross alpha, then how ought skill to be measured? Berk says it is important to first recognize how a manager makes money. First, she buys low and sells high, to make money for investors. She then charges fees to investors for the returns. The money made by the manager — and the better representation of her skill — is the return she earns over her benchmark plus the fees that investors are willing to pay her, says Berk. As with the Lynch example, the measure needs to take into consideration the percentage fee charged and the size of the fund upon which the percentage is charged.
Funds Analyzed
Berk and van Binsbergen looked at a universe of 5,974 mutual funds from 1969 to 2011 and compared their results to comparable Vanguard index funds, which are alternative products that investors can actually buy. When they divided the mutual funds into 10 groups based on the amount of money managers have made in the past, as described above, the researchers found that the funds that made the most in the past also made the most in the future. That is, the ability to make money is persistent. The researchers also calculate that the average fund manager added $2 million in value each year.
Who Benefits?
If the higher earnings are persistent, why can’t individual investors benefit more from them? The market responds very quickly when a new manager with skill emerges, rewarding her with more assets to invest. As the fund grows, it is harder for the manager to make money for a variety of reasons: For instance, placing trades in large enough quantities for all the investors becomes more difficult. Over time, returns are lower on the larger funds. But the amount of money the skilled managers earn remains high, based on this analysis.
Does it matter that mutual fund managers are skilled if investors don’t benefit from the skill? Consider other professions. The Army, for instance, would not rate a doctor only on her rate of cures without regard to the difficulty of her cases, the number of people she is required to see every hour, and whether she is operating in a war zone. Conflating skill with results might lead to poor policy decisions. If mutual fund managers have no skill, then it follows that their high pay could be the result only of marketing — or worse, chicanery.
This research found the opposite story: Mutual fund managers walk an ever-narrower ledge in a highly competitive industry.
The research revealed another intriguing result: The mutual fund manager’s current compensation from aggregate fees and the value he or she added to the fund predicted the fund’s future returns even better than past value added. That suggests that investors pick up on tiny signals in the market to evaluate the potential for managers to outperform in the future. It’s possible that neither investors nor mutual fund managers have been as foolish as they have been portrayed.
Foto: Deintana3, Flickr, Creative Commons. Luz verde a los fondos de inversión a largo plazo europeos
Ireland, one of the biggest hubs for funds in Europe, will allow hedge funds based in the country to lend to companies under new rules drawn up by the central bank, the bank said.
According to Reuters, with banks in Europe still reducing their lending to households and corporations in the wake of the financial crisis, firms who are too small to issue bonds are increasingly seeking to borrow from other sources such as insurers, private equity firms and hedge funds.
Ireland has traditionally prevented hedge funds domiciled in the country from lending because regulators viewed it as too risky. But with access to credit a growing problem in Europe, the central bank has drawn up regulations that will allow specialized loan funds that it authorizes to extend loans internationally.
The central bank issued a consultation paper on the rules last Monday and expects them to be in place by the end of the year.
“In our view this is a sector that should be subject to some additional regulation,” said Martin Moloney, head of markets policy at the Irish central bank.
“If you have loan origination funds operating out of Ireland and lending into other countries there are potential cross border issues. We wanted to deal with that upfront and we have been very focused on the financial stability issues.”
The central bank is drawing heavily on new regulations devised to prevent a repeat of the banking crisis to regulate funds which lend money.
Under the rules, a loan fund will not be able to lend more than a quarter of its assets to one borrower and the amount of debt the fund can take on will be capped at a ratio of 1 to 1, meaning that if a fund has assets of 100 million euros it can borrow another 100 million euros.
The move by the Irish central bank comes as the European Central Bank and the Bank of England are trying to resurrect the European Union’s market for asset-backed securities as a way of getting credit flowing to smaller businesses and plug some of the gap left by banks.
CC-BY-SA-2.0, FlickrFoto: Thomas Depenbusch. Reforma del hukou: Un paso importante para reducir la inestabilidad social en China
Last week’s announcement that the Communist Party will reform the hukou, or household registration system, is an important first step toward reducing the contradictions and conflicts in Chinese society. According to Andy Rothman, Investment Strategist at Matthews Asia, hukou reform should also boost consumption and raise manufacturing productivity. In the most recent post of “Sinology”, an investment blog authored by Rothman, he explains what is a hukou, its purpose and the implications of this relevant reform.
Historically, the hukou system served several purposes for Mao. First, it restricted movement within the country. People born in rural areas received an agricultural hukou, which we will refer to as a rural hukou, while those born in cities received a non-agricultural hukou, which we will refer to as an urban hukou. It was very difficult for most Chinese to change their hukou designation, and for those holding a rural hukou, it was almost impossible to move to a city.
China’s Communist Party used the hukou system in support of the planned economy. In the late 1950s, about 85% of the population was rural, and the Party wanted peasants to remain in the countryside, to grow the grain and raise the animals necessary to feed the smaller urban population that was going to establish China’s new industrial economy. The rural population was also expected to be largely self-reliant and was given access to land for farming, but few other benefits.
Holders of urban hukous, in contrast, were assigned a job (there were no private firms) and provided housing, education, health care and pension benefits. Grain was rationed until 1992 and only urban hukou holders received ration coupons, which limited both the cost to the government and the ability of rural hukou holders to survive in the city.
Why hukou reform now?
Over the past decade, the Party often acknowledged the need to reduce formal discrimination against migrant workers and proposed some reforms, but there was very little progress.
Over the past year, however, the Party leadership appears to have recognized the risks of continuing to discriminate against a segment of the population, which is both large and vital to economic growth. Pressure to act has been growing: as migrant workers shift from being a “floating” to a more permanent urban population, they increasingly expect better non-wage benefits, including social-security coverage and other urban social entitlements such as free education and social housing that historically have been available only to workers with urban hukous.
After more than a year of debate and planning, last week the Party leadership launched its program for hukou reform. Little details were released, but Rothman expects the program to focus initially on migrant workers who are living with their family members in smaller cities, and the government announced a target of providing urban status to 100 million people by 2020.
Three key benefits
Matthews Asia anticipates the following benefits from implementation of the hukou reform program:
Reducing social instability risks. Launching a complex and expensive reform program is a sign that the new Party leadership is willing to take on big challenges. Hukou reform will also reduce the risk of social instability from the 234 million people living in cities who face de jure discrimination on a daily basis, particularly due to their ineligibility for social services and subsidized housing.
Boosts to labor supply and consumption. Reform of the hukou system may increase the supply of migrant workers in cities at a time when the overall labor force is shrinking, and should improve consumptionby strengthening the social safety net for migrants, which will increase transfer payments and reduce precautionary savings.
Productivity gains. Ending the current hukou restrictions should result in higher productivityin manufacturing and construction by reducing worker turnover, and by creating a better-educated workforce. One example of gains from converting temporary labor to permanent staff may illustrate the potential improvements that could result from lower turnover. A multinational company with large China operations told us last year that when they switched from temporary to permanent contract workers, their costs per unit rose by 4.5%, but output per worker rose 27%, accidents were down by half, and consumer complaints attributable to operations fell 30%.
You may access the full article, authored by Andy Rothman, through this link.
Andy Rothman is Investment Strategist at Matthews Asia.
As Millennials become more established in their careers, they are generally not on the radar of most financial advisors, reveals new research from the Principal Financial Group. According to The Principal Financial Well-Being Index: Advisors, a nationwide study of 614 financial advisors conducted online by Harris Poll for the Principal Financial Group in the second quarter of 2014, only 18 percent of financial advisors surveyed are targeting clients in Generation Y, and 57 percent of advisors prefer new clients with assets of more than $250,000.
The Principal Financial Well-Being Index: Advisors surveyed financial advisors nationwide including independent broker/dealers, wire house and regional brokerage firms, insurance agencies, independent wealth management firms, banks and independent asset management firms. The Index is part of a series of quarterly studies commissioned by The Principal Knowledge Center examining the financial well-being of American workers, business owners and advisor opinions and practice management.
According to the Index, at least three out of five financial advisors surveyed are targeting Baby Boomers (64 percent), affluent/high net worth individuals (64 percent), or business owners (62 percent). In fact, only 30 percent of American workers overall work with a financial advisor.
“This research illustrates the enormous opportunity for up-and-coming advisors to build relationships with underserved Millennials, who are in a growing phase of their careers and income potential,” said Tim Minard, Senior Vice President of Distribution at The Principal.
So what prevents Millennials and other workers from seeking the help of a financial advisor? The study found that 29 percent of advisors surveyed report that fees and costs are the biggest barrier, followed by fear (16 percent) and people thinking they can do it on their own (10 percent).
Many of these financial advisors reported that clients tend to live beyond their means (22 percent), don’t save enough (15 percent) and do not start to save early enough in their careers (11 percent). The majority of advisors (52 percent) indicate that no more than one in four of their clients begin saving early enough in their career to actually achieve the recommended level of retirement savings.
“One of the biggest challenges advisors face is helping clients try to catch up when they didn’t start saving for retirement in the early years of their careers,” Minard said. Financial professionals are able to easily demonstrate to clients the power of early savings and the impact it has on their retirement nest egg.”
Foto: Archer 10, Flickr, Creative Commons. Oportunidades en China
The dynamics of China’s asset management space have changed over the past 24 months, so much so that managers moving early may find themselves at a disadvantage as the regulatory landscape changes.
Deregulation has largely dictated some of the emerging trends, with new avenues such as the impending Hong Kong-China mutual recognition agreement (MRA) and Shanghai Free Trade Zone (FTZ) popping up as alternative ways to tap assets in China. Distribution bottlenecks have also been eased with a spate of easing measures since June last year.
At the same time, the Renminbi Qualified Foreign Institutional Investor (RQFII) space has seen substantial developments and it now appears to be a business that is not just exclusive to Chinese managers anymore.
“These avenues contrast sharply with the traditional route of establishing a joint venture fund management company (JV FMC) in China, which has lost some of its luster in recent months with the exit of BNY Mellon,” says Felix Ng, a senior analyst at Cerulli.
However, it is still early in the long-term development of China’s asset management industry, and it is not uncommon for firms to capitalize on regulatory loopholes. This was seen in the explosive growth of trust products set up by subsidiaries of mutual fund firms, now worth RMB1.6 trillion-500 times their registered capital.
But regulatory voids do not last long in China. For instance, the China Securities Regulatory Commission (CSRC) has announced plans to finalize and implement new regulations for the money market fund segment before year-end 2014.
“Any measures introduced by the CSRC may not be detrimental to foreign managers who are used to the much stricter due diligence processes required by their parents,” notes Yoon Ng, Asia research director at Cerulli.
Increased oversight reflects regulators’ intention to exercise more authority on the development of the asset management industry on the domestic front, she adds.
CC-BY-SA-2.0, FlickrAndrew Formica, CEO de Henderson. Henderson prevé nuevas contrataciones en Miami y Ginebra para apoyar su desarrollo internacional
Henderson Group published its Interim Results for the half year ended 30 June 2014 last week. The British asset manager continued delivering a strong performance, with 10% growth in AUM–up 10% to £74.7bn (US$125bn) and net inflows of £5.0bn (US$8.4bn), of which £4.7bn came from retail clients, broadening Henderson’s international footprint. In Europe, Henderson benefited from its global relationships whereas for Latin America the highest growth came from the offshore private banking channel.
To contribute into the SICAV retail development Henderson has announced it will invest in a resource in Miami to give support to the offshore channel in Latin America and another one in Geneva to support global distribution relationships. Moreover, Henderson is working on strategic relationships with IFA networks in Italy.
On the institutional side, Henderson obtained inflows of £0.3bn, reversing the outflows trend (£2.0bn) of the previous semester. Mandates in Global Equity helped outpace redemptions in the institutional space. There has also been a turnaround in the absolute return offshore fund flows. Henderson envisages a significant contribution in the institutional side in its five year plan, given the investment and turnaround in certain asset classes –Global Equity, Multi-Asset, Global Credit- that is expected to compensate for the annual £700mn in outflows that it has experienced in recent years.
Andrew Formica, Chief Executive of Henderson, said: ”We have made great strides on a number of fronts in the first half of 2014 towards delivering on our strategy. We are starting to see early results from some of our previous investments, including mandate wins for our Global Equities strategy and excellent first year performance from our US high yield team. We continue to add resources in investment management and distribution and are enhancing our global platforms.
In it’s interim business update, Henderson also highlighted the strong investment performance of its products, where 86% of its funds outperformed relevant metrics over three years. Over the six month period Henderson hadpositive flows and investment performance in all five core capabilities – European Equities, Global Equities, Global Fixed Income, Multi-Asset and Alternatives
On June 30, Henderson announced the acquisition of Geneva Capital Management, which will increase US AUM to c.15% of the Group.
You may access the presentation of the interim results through this link.
Principal Financial Group has announced that Elizabeth Brady has joined the company as senior vice president and chief marketing officer (CMO), effective September 2, 2014.
As CMO, Brady assumes overall responsibility for global marketing, including branding, advertising, media relations, digital marketing, sponsorships, data analytics, multi-cultural marketing, research and business intelligence. She will be based in Des Moines, Iowa. She replaces Mary O’Keefe, who retired from Principal in June 2014.
Most recently, Brady served as president of segmentation solutions at Nielsen Corporation, New York, N.Y. Prior to her current role, she was the global head of marketing effectiveness also at Nielsen.
“As one of the top 30 money managers in the world, The Principal is committed to continuing to build a global brand that champions financial security among businesses and individuals,” said Larry Zimpleman, chairman, president and chief executive officer – The Principal Financial Group. “A seasoned strategist with a proven track record in global marketing and branding, as well as a deep background in consumer research, Beth brings added strength to our existing management team. The breadth and depth of this team further positions The Principal as a powerful force in the global investment management marketplace,” said Zimpleman.
“I look forward to working with this talented team to build The Principal brand both in the U.S. and globally, and to expand its leadership position within the financial services sector,” said Brady.
Prior to her roles at Nielsen Corporation, Brady spent more than a decade at General Mills Inc. as an officer of the corporation and business unit leader with profit and loss responsibility over several packaged goods brands. Prior to General Mills, Brady held marketing roles at Wise Foods, Inc., Best Foods, Inc., and Port Authority of New York and New Jersey.
Brady earned a Bachelor of Arts degree in political science and economics from St. Lawrence University, Canton, N.Y., and a Master of Public Policy, Administration with a focus on International Trade from the School of International and Public Affairs, Columbia University.
Foto cedidaPhoto: Nacho Fradejas, Flickr, Creative Commons. Essay Contest: How Would You Reinvent Foreign Aid?
The world has changed radically since the emergence of official development assistance and since the aid agency was invented. Aid is by no means the only source of financing for development in today’s world. Yet for the poorest countries, aid is a vital source of government finance.
In the lead up to 2015, when many significant financing commitments for development will be made, we will need to be smart about where and how to deploy aid, based on an understanding of how aid can be most valuable. How would you reinvent foreign aid for today’s world? How would you reach the poorest people, no matter where they live? How would you use aid alongside other resources both public and private and how would you organize the development finance system as a whole?
We are looking for the best ideas from around the world on these and other questions that will define the next generation of effective development assistance. In order to help bring attention to the need for scholarship and fresh ideas in this area, and to encourage broad participation, the Global Development Network (GDN) in partnership with the Bill & Melinda Gates Foundation invites you to submit ideas and solutions in an essay of not more than 5000 words. Select winning ideas may be promoted by GDN and the Bill & Melinda Gates Foundation, to inform the aid discourse and bring this thinking to policy makers and practitioners.
Pierre Jacquet, President, GDN says, “GDN is delighted to partner with the Bill & Melinda Gates Foundation for the Next Horizons Essay Contest 2014. There is a need to catalyse and drive fresh thinking and solutions on questions regarding the future of aid in the context of the reflection on the post-2015 challenges of development finance. GDN will advertise and run the contest both in developed and developing countries, and will be keen to give an opportunity to the recipients of foreign aid to raise their voice in the global debate about its future.”
Up to 20 winning entries will be chosen, and receive US$ 20,000 each. An independent panel will make the final selection of the best and most potentially consequential submissions, based on criteria defined.
Submissions can be sent in English, French or Spanish.
The closing date for submission is 15 September, 2014 (14:00 hrs GMT).
For application and more information on eligibility, submission guidelines and contest details, visit www.gdn.int/nexthorizons
