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Pioneer Investments Expands Liquid Alternative Offerings

Global asset manager Pioneer Investments has announced the addition of new liquid alternative strategies through simultaneous product launches across global markets. Three strategies are available as U.S. mutual funds and two are non-U.S. funds available internationally. One of the strategies being offered in the U.S. uses similar investment techniques to a strategy that has been available outside the U.S. since 2010.

“Liquid alternatives represent an important evolution for Pioneer and an area where we have made a significant commitment on a global scale,” said Giordano Lombardo, Group Chief Investment Officer. “We believe global demand for liquid alternatives products will continue to grow as investors seek additional strategies beyond traditional fixed income approaches to manage interest rate and credit risks across all market cycles,” he said.

Pioneer’s liquid alternative capabilities build on the firm’s expertise in managing a wide range of fixed-income strategies aimed at navigating challenging global bond markets, including multisector and unconstrained bond, emerging market debt, and floating rate loan strategies.

Lombardo said, “We believe that our new suite of liquid alternatives strategies offers a differentiated approach that can help meet the needs of a wide range of investors. Pioneer’s approach to liquid alternative investing employs our entire global fixed income expertise in Boston, Dublin and London. We use absolute return strategies that seek to generate positive returns with low or negative correlations to broader fixed income and equity markets. As part of this process, we are expanding the use of our distinctive proprietary risk budgeting capability that we have been using successfully for several years to drive a highly disciplined investment process.”

The new strategies are supported by Pioneer’s global fixed income team of 63 portfolio managers, 27 credit analysts and 12 portfolio construction / risk management analysts. The strategies leverage the company’s global resources in risk management, compliance, distribution, technology, and operations. The products provide daily liquidity and transparency of portfolio holdings, and are available globally in Pioneer Investments’ markets where the products are registered.

The U.S. fund launches are being supported by a wide range of new marketing and education material, including a web site (pioneeralts.com), in-depth blue papers, videos, a glossary of terms related to alternative investing, and access to product-specific materials and content. In addition, specially trained Pioneer sales professionals will be working with financial intermediaries to assist them in preparing to educate potential clients on how these new funds might be incorporated as part of a diversified portfolio.

The funds are distributed globally through a wide range of financial advisors in retail and institutional share classes. Not all products are available in all jurisdictions.

Among the funds are Pioneer Absolute Return Bond Fund, well suited to a rising yield environment and the resulting volatility as investors adapt to higher rates. It offers exposure to investment strategies that strives to deliver positive returns uncorrelated to either interest rate or credit cycles, which we believe will be vital in the coming years. The fund aims to preserve capital while generating positive returns in rising or falling markets. Employing the use of Pioneer Investments’ approach to portable alpha, seeking return opportunities through independent decision-making, the fund does not rely on market beta to generate returns.

The fund is co-managed by Tanguy Le Saout, Head of European Fixed Income, and Cosimo Marasciulo, Head of European Government Bonds and FX, who are based in Dublin and supported by the Dublin-based fixed income teams. LeSaout and Marasciulo have been working together for 10 years.

Pioneer Long/Short Global Bond Fund provides exposure through both long and short positions to a broad range of absolute return strategies focused on fixed income and fixed income-related securities, including derivatives, on a global basis. From this diverse set of strategies, the Fund seeks to identify and isolate specific opportunities designed to generate positive, uncorrelated absolute returns. The fund is managed using an absolute return approach, which means that its portfolio is not managed relative to a securities index. The Fund strives to maintain a durationin the range of -3 to +3 years in an effort to minimize interest rate sensitivity.

Pioneer Long/Short Opportunistic Credit Fund is similar to Pioneer Long/Short Global Bond Fund but under normal circumstances the fund’s average portfolio duration will be between -4 and +4 years. This slightly longer duration means that the fund takes on additional risk. The Fund provides exposure to a broad range of alternative strategies that seek positive returns uncorrelated to traditional asset classes. As compared to Pioneer Long/Short Global Bond Fund, Pioneer Long/Short Opportunistic Credit Fund may utilize a broader range of alternative and traditional investment strategies and asset classes in pursuing positive total returns, including exposure to equities or equity-linked securities on a long and short basis.

Both funds are managed by Thomas Swaney, Head of Alternative Fixed Income, U.S. and Benjamin Gord, Portfolio Manager, Alternative Fixed Income, who are supported by Pioneer’s global fixed income team. Tom Swaney and Ben Gord have more than 17 years of combined experience managing alternative strategies.

The Crisis in Emerging Markets: What Happens When the Tide Goes Down?

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La crisis de los emergentes: ¿qué pasa cuando baja la marea? — Photo: Tenisca, Flickr, Creative Commons.. The Crisis in Emerging Markets: What Happens When the Tide Goes Down?

The latest headlines talk of a slowdown in China, strong currency devaluations in Argentina, Venezuela, South Africa, and Turkey, terrorist attacks in Egypt, protests and government crisis in Ukraine … the impression is that emerging markets are in crisis once again. Against this backdrop, “investors sell first and think later,” says Peter Marber, head of emerging investments at Loomis Sayles & Company, whose products are distributed in Spain by Natixis GAM. Just last week, 6.4 billion dollars in equity funds and 2.7 billion dollars of fixed income had fled emerging markets, while repayments have accumulated in recent months.

The change in monetary policy, especially in the U.S, and a return to growth in the developed world seem to be the main catalysts of the crisis, or at least those which have revealed the structural problems of many developing economies. “The tide is moving away from emerging markets. The prospect of the end of cheap money in developed markets, with the certainty of the end of even cheaper money in China, is forcing up the cost of capital in emerging markets. We’ve seen this scenario before: one emerging country after another are left stranded on the shore when the wave recedes. The weaker ones, such as Argentina and Turkey will go first, and will soon be followed by Brazil, Russia and others.” This quote by Dominic Rossi, Global CIO for Equities at Fidelity Worldwide Investment, summarizes what for many marks a turning point in global capital flows: the tide of capital in search of high returns driven by policies of zero interest rates in the West is now receding, revealing major differences between those who have taken advantage of the high period in external financing, and those whose macroeconomic health has deteriorated.

This reduced funding appears inevitable in an environment of monetary standardization and rate increases (which, according to Robert F. Wescott, member of the Macroeconomic Advisory Council for Pioneer Investments, could reach the U.S. by the end of 2014, or, according to other analysts by 2015 – 2016): “the end of rates at 0% will attract more capital to the developed world. Emerging markets must get used to foreign capital flows between 3% and 3.5% of their GDP, as compared to 7% -10% seen in the past,” said Wescott during a recent presentation in Madrid.

That is partly the reason why emerging markets are immersed in the search for a new economic model which is much more about looking inward: “The 1997-2010 models, which focused on export growth, cannot succeed in a world in which the European Union has current account surpluses while the U.S. is rapidly reducing its trade deficit. The world of emerging markets needs to dust off its agenda of structural reforms which it pushed aside 15 years ago and stimulate their domestic economies. Those who do so will avoid the extended period of low growth, and those who don’t will look back on the past 10 years as a Golden Era,” adds Rossi. Therefore, now more than ever, asset management in emerging markets requires greater evaluation, both by country and by securities.

The Core of the problems: Asia or Latin America?

By region, the stakes are focused on Asia: John Ford, CIO for the Asia- Pacific region at Fidelity Worldwide Investment, is of the opinion that “Asian companies are in a relatively strong position to navigate the storm caused by the withdrawal of artificial liquidity by the Fed. The hard lessons learned from the Asian currency crisis in 1997 means that, for the most part, the structural economic problems uncovered by the conclusion of the Fed policy are largely restricted to countries outside the Asia-Pacific region.” At BofA Merrill Lynch, they also reject the idea of a contagion from Argentina or Turkey to the Asian region due to its lower external debt and lower deficits; therefore they don’t expect aggressive rate hikes in the region.

Invest Now?

In the midst of this crisis, there are those who point out the opportunity presented by entering emerging markets due to the attractive valuations and for another reason: McIntyre, a fund manager at Brandy Wine, Legg Mason’s fixed income manager, sees recovery in the developed world (U.S., Europe and Japan) and in China, rather than as a risk factor, as something which will allow the re-growth of emerging economies through trade. And he reminds us that, when you begin withdrawing monetary stimulus, there will still be global accommodative bias in monetary policy, so the liquidity tap will not be fully closed and the capital flows will seek profitability in the emerging markets, which, in his opinion, is where the best opportunities in fixed income will be in 2014, if their volatility can be assumed.

“Brazilian bonds offer 13% return, the Indian rupee has an implicit yield of about 9%, South African bonds exceed 9%, while the Turkish ones reach 10% and Mexican 7.70%, etc. From a historical point of view, the highest performance in emerging market debt is obtained when investing in these markets while they are in crisis,” he says, and the recent price movement constitutes a crisis.

The Hedge Fund Industry Could Reach a Record $3 Trillion by 2014 Year End

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Los inversores institucionales auparán la industria de hedge funds hasta los 3 billones — Photo: US Navy. The Hedge Fund Industry Could Reach a Record $3 Trillion by 2014 Year End

The hedge fund industry is predicted to reach a record $3 trillion by 2014 year end -up from $2.6tn as of 2013 year end-, driven by significant inflows, most notably from institutional investors, according to a recent study by Deutsche Bank. This is based on investors’ predictions of $171 billion net inflows and performance-related gains of 7.3% (representing $191 billion).

The bank has released its twelfth annual Alternative Investor Survey, which stands as one of the largest and longest standing hedge fund investor surveys available. This year over 400 investor entities participated, representing over $1.8 trillion in hedge fund assets and over two thirds of the entire market by assets under management (AuM).

Barry Bausano, Co-head of Global Prime Finance at Deutsche Bank, said: “Hedge funds continue to establish their growing position within the broader asset management industry, alongside some of the more mainstream asset managers. The hedge fund industry is predicted to reach a record $3 trillion by 2014 year end driven by significant inflows, most notably from institutional investors.”

According to the survey, commitment from institutional investors continues to strengthen: nearly half of institutional investors increased their hedge fund allocations in 2013, and 57% plan to grow their allocations in 2014. Institutional investors now account for two thirds of industry assets, compared to approximately one third pre-crisis.

Anita Nemes, Global Head of the Hedge Fund Capital Group at Deutsche Bank, said: “With the majority of investors happy with hedge fund performance, we expect institutional investors to further strengthen their commitment to hedge funds. Last year’s respondents targeted 9.2% for their hedge fund portfolios, and hedge funds delivered – the weighted average return for respondents’ hedge fund portfolios this year was 9.3%. Looking forward, respondents are targeting 9.4% for 2014.”

Investors are happy with hedge fund performance: 80% of respondents state that hedge funds performed as expected or better in 2013, after their allocations returned a weighted average of 9.3% in 2013. 63% of respondents, and 79% of institutional investors, are targeting returns of less than 10% for their hedge fund portfolios in 2014. Equity long short and event driven are the most sought after strategies.

About the fee trends, the study says 2 & 20 is not the norm. Investors today pay an average management fee of 1.7%, and an average performance fee of 18.2%. While fees have come down slightly, investors remain willing to pay for performance: almost half of all investors would allocate to a manager with fees in excess of 2&20 where the manager has proven ‘consistent strong performance in absolute terms’.

The industry will have a bigger part of a bigger pie. 39% of investors are now embracing a risk-based approach to asset allocation, up from 25% in 2013. 41% of pension consultants recommend this approach to clients. The risk-based approach effectively removes historical constraints on the percentage allocation to absolute return strategies, allowing equity long/short managers to compete with long only and fixed income absolute return funds within the overall fixed income risk budget.

Conducted by Deutsche Bank’s Global Prime Finance business, the survey identifies trends amongst a growing and evolving hedge fund investor base. Respondents include asset managers, public and private pensions, endowments and foundations, insurance companies, fund of funds, private banks, investment consultants and family offices. Allocators from 29 different countries completed the survey. Approximately half (46%) of responding investors manage $1bn+ in hedge fund AuM, and 18% manage over $5bn.

Mexico: The Next Brazil?

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México: ¿El próximo Brasil? — Photo. Bruno_tak, Flickr, Creative Commons.. Mexico: The Next Brazil?

There is a natural tendency to benchmark Mexico with Brazil. Indeed, Credit Suisse can identify demographic, socioeconomic and political factors capable of driving a steady rise in the middle- income bracket, similar to that seen in Brazil over the last decade with a similar potential impact on the fortunes of the Mexican consumer. However, Credit Suisse says “there are headwinds today that stand in the way of this structural potential”, which are reflected in the cautious near-term measures of optimism.

With a net 25% of consumers expecting an improvement in their financial position in the next six months, Mexico ranks fourth in Credit Suisse’s fourth annual Emerging Consumer Survey – a detailed study profiling consumer sentiment and its drivers across the emerging world. Credit Suisse has again partnered with global market research firm Nielsen to conduct nearly 16,000 face-to-face interviews with consumers across nine economies (Brazil, China, India, Indonesia, Russia, Saudi Arabia, Turkey South Africa and, for the first time, Mexico).

“Interestingly, Mexico scores the lowest in the survey in terms of the number of respondents that perceive their government to be very effective or quite effective at solving problems that relate to the population (17% of the total), which might be an indication that we are in the very early stages of the new administration’s reform agenda and the structural changes proposed in areas such as education and labor markets, among others. A fierce debate on reforms and perhaps some skepticism is natural, although it is still too early to forecast positive results”, says the report.

In terms or sectors, although carbonated drinks (unsurprisingly) have been bought by much of the population over the past 12 months, only 16% plan to do so going forward; categories that look to have stronger growth going forward, however, include smartphones and internet. Spending on cars has been high (29%), but is set to decline next year (10%).

Brazil: Missing a beat 

The structural optimism among Brazilians again comes across in the survey, but near-term risks do emerge. Brazilian consumers remain the most upbeat when judged by the balance of respondents who see their personal finances as likely to improve in the next six months.

However, the more immediate perceptions are less bullish. When asked whether it was a good time to make a major purchase, Brazilians were the third most pessimistic in our survey – with a net –10% figure claiming it was a bad time. This would be consistent with the prevailing environment of slower economic growth (2% in 2013), social unrest, higher inflation and lower real income growth. To a large degree, the buoyant nature of the longer-term optimism might be explained by the ongoing low unemployment rate and its broader underpinning of real wage growth.

Unsurprisingly, the actual year-on-year decline in the degree of optimism has been most acute at the lower end of the income spectrum, as evidenced by a 16% and 36% year-on year decrease in confidence in the two lowest income brackets we surveyed. This may be primarily explained by the substantial increase in food inflation during 2013 (5.5% in the last 12 months – the highest level among all the economies surveyed).

With regard to consumption, momentum continues to favor the discretionary end. The following sectors showed the greatest momentum in spending, according to Credit Suisse: smartphones (+17% versus +11% in our 2012 survey), fashion apparel (+10%), computers (+6%), internet access (+5%) and smartphone penetration is still relatively low at 45%, suggesting further ample room for growth.

In general, the survey concludes that the cyclical backdrop is more challenging, but structural optimism is retained. The net percentage of consumers surveyed across the nine countries who believe their financial position will improve relative to those who feel it will deteriorate stands at a net 26% compared to 28% a year ago. The study finds a fall in the number of consumers seeing now as a good time to make a major purchases. For example, in Brazil nearly two- thirds of people regarding now as not a good time to make a major purchase. Anyway, the report says the profile of the emerging consumer differs vastly within and between countries and understanding this fact is key to unearthing relative growth opportunities and identifying risks.

A presentation video outlining the key findings of the survey can be found here. For a copy of the survey, please click here.

Sunshine Daydream? Wake Up – Now is The Time for Solar Energy in Latin America

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¿Es la energía solar un sueño? Despierta, es el momento en Latinoamérica — Photo: Toby Hudson. Sunshine Daydream? Wake Up – Now is The Time for Solar Energy in Latin America

Often, the most promising opportunities are those that become visible when the sun shines on a dark space. One such dark space is the wealth of untapped energy sources throughout Latin America; and of those energy alternatives, perhaps none looms as promising as the sunlight itself.

The rate of adoption for solar energy throughout Latin America is shockingly low when compared to the rest of the world. With up to 100 gigawatts of solar energy expected to be deployed globally each year, less than 500 megawatts — or about one half of one percent — is expected in Latin America.

While other regions have already deployed considerable resources in solar as part of larger sustainable energy programs, solar photovoltaic technology is largely non-existent in Latin America. The Inter-American Development Bank released a report last year indicating that Latin America and Caribbean countries could, in theory, meet 100 percent of their energy needs from renewables. For instance, the Chilean desert offers an economic potential for solar similar to Arizona or Nevada, two leaders in the U.S. Other regions – like South Africa – are making rapid headway; the time for solar power in Latin America is now.

First, let’s dispel some of the myths about the viability of solar energy.

There is a big distinction to be made between making solar panels and producing solar power. For instance, the U.S. solar panel manufacturer, Solyndra, a favorite target of critics of solar power, was in fact not a producer of solar power, but a maker of solar panels. Its demise was the consequence of a Darwinian shift in market forces: panel prices, driven down sharply by cheaper alternatives from China, made the business model of Solyndra – and many other manufacturers globally – untenable. That these companies were unable to compete in a burgeoning market is not evidence that the market does not exist, or that others won’t succeed in it. Solyndra is gone, but the demand for solar panels is growing rapidly. Supplying that demand today are fewer but stronger manufacturers, who have a brighter future ahead.

Where government assistance and intervention was once required for solar power plants to work economically, subsidies are no longer a requirement for solvency in the space. In the past five years, the cost of solar panels and other balance of plant components have fallen so dramatically that solar is reaching parity with conventional power sources – like coal and natural gas. The solar power model now stands on its own—a sustainable energy source supporting a viable business.

Latin America, as a potential market, has a competitive advantage in not being first. With new technologies, much can be learned from the mistakes of others. The average cost of an installed watt of solar energy has dropped nearly 25 percent in the past couple of years, and most projections indicate that the improvement will continue. More dramatically, consider that a watt of solar energy cost $1,785 to produce in 1953. Today, it costs about one dollar. The underlying costs associated with deployed solar photovoltaic power are expected to continue to decline.

For all the criticism it’s faced, solar energy has the biggest upside of all renewables. This is equally true when viewed through the lens of an investment opportunity. The time required to build a solar power project is less than or comparable to wind, significantly less than for hydroelectric or biomass, and a fraction of what’s required for coal or geothermal. Financing is readily available from both commercial and development banks, even without the need for a long-term power purchase agreement. Operators can start to produce power on a merchant basis, providing flexibility – and higher short-term profitability – in the more expensive power markets in Latin America. In addition, environmental impacts are often far less than other renewable alternatives. Residential and commercial rooftop installations require even lower investment and power can be turned on very quickly.

Solar energy is fast becoming the most productive natural resource in the world. Over the next 20 years, cumulative investment in solar power is expected to be close to $3 trillion – as much as $100 billion per year globally looking for investments. With some of the best solar resources in the world, Latin America is a vastly untapped potential source. It doesn’t take a flashlight the size of the sun to see the opportunity.

Ben Moody is President and CEO of Miami-based Pan American Finance, a specialized investment banking advisory firm providing advisory services on renewable energy in Latin America, the Caribbean and the U.S. markets.

Cirque du Soleil and Grupo Vidanta Partner to Introduce a Spectacle in Riviera Maya

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Cirque du Soleil en versión mexicana en la Riviera Maya — . Cirque du Soleil and Grupo Vidanta Partner to Introduce a Spectacle in Riviera Maya

Cirque du Soleil, an entertainment company, and Grupo Vidanta, a developer of world-class resorts and tourism infrastructure in Mexico, have announced plans to introduce a new brand of cultural and culinary entertainment to Mexico and Latin America. Housed in a custom-designed theater now under construction in Riviera Maya, the first-of-its-kind intimate dinner and spectacle will be Cirque du Soleil‘s first resident show operating outside Las Vegas or Orlando.

“We believe the entertainment offerings for our region’s guests and visitors should rival any in the world,” said Grupo Vidanta founder Daniel Chavez Moran. “Through our partnership with Cirque du Soleil we will deliver an entertainment experience beyond what currently exists in Mexico or the world in the Vidanta Theater in Riviera Maya. This entirely new category of entertainment will be an experience one must see, hear and taste. We are extremely proud to bring this dream to life.”

“This is the marriage of two creators of unique entertainment and world-class experiences,” said Daniel Lamarre, president and CEO of Cirque du Soleil. “We were asked four years ago by Grupo Vidanta to imagine something different, something new, something unprecedented for this destination. We’re excited that our partnership will unveil a new intersection for us between performance and culinary creativity. The setting is the most intimate custom-built theater of all the Cirque du Soleil resident theaters in the world.”

The Vidanta Theater in Riviera Maya is a 600-seat architectural marvel planned and built by Grupo Vidanta to house this new and unique Cirque du Soleil production. Grupo Vidanta’s chief architect, Arturo Hernandez, designed the theater to deliver a level of intimacy between audience and performance never before seen in a Cirque du Soleil show. World-class dining and champagne service will be integrated with the spectacle.

This unique partnership was imagined to build new tourism offerings in Mexico. The Premiere is scheduled for November 2014.

Deutsche Asset & Wealth Management Appoints Barbara Rupf Bee to Lead Distribution in EMEA

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DeAWM nombra a Barbara Rupf Bee responsable de distribución en EMEA — Barbara Rupf Bee. Deutsche Asset & Wealth Management Appoints Barbara Rupf Bee to Lead Distribution in EMEA

Deutsche Asset & Wealth Management (DeAWM) has announced that Barbara Rupf Bee has joined the firm as Head of Global Client Group EMEA.

Rupf Bee will lead a coverage team responsible for delivering DeAWM’s investment products and services to institutional and retail clients across Europe, the Middle East and Africa. She will also join the EMEA region and Global Client Group Executive Committees.

The Global Client Group team in EMEA comprises approximately 400 professionals. Across both asset and wealth management, the EMEA region accounts for approximately EUR 600 billion of DeAWM’s EUR 931 billion of assets under management.

Michele Faissola, Head of Deutsche Asset & Wealth Management, said: “Barbara is a perfect fit for our global firm. She has extensive experience across the full breadth of our product offering, including traditional and alternative investments, as well as developed and emerging markets. She also has a deep understanding of the needs of both retail and institutional investors. I am delighted to welcome her to the team.”

Based in Frankfurt, Rupf Bee reports to Dario Schiraldi, Head of Global Client Group. She brings almost 30 years’ experience to Deutsche Asset & Wealth Management. She was most recently Chief Executive Officer of Renaissance Asset Managers Group, a specialist asset manager focused on emerging Europe, Russia and Africa.

Before that she spent approximately 10 years with the HSBC Group. From 2007 to 2012, she served as Global Head of Institutional Sales for HSBC Global Asset Management. Previously she was CEO of HSBC Alternative Investments Ltd, the investment advisor to HSBC’s fund of hedge funds and institutional client portfolios. She began her career in private banking.

Peter Roemer, who previously held the role of Head of Global Client Group EMEA, has decided to leave Deutsche Bank to pursue other opportunities.

ING IM’s Global High Yield Strategy Hits €5 billion

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ING Investment Management International has announced that the ING (L) Renta Fund Global High Yield has surpassed the €5 billion mark in assets under management (AUM).

Despite Asian and European investors being increasingly worried about rising interest rates, high yield continues to attract positive flows with returns attractive compared to those available within the fixed income space. Furthermore, the sensitivity to changes in interest rates is low within high yield.

ING IM’s outlook for the asset class remains cautiously optimistic and the investment manager prefers spread over rates, reflecting the belief that the credit fundamentals remain healthy leading to low default rates. Furthermore, ING IM believes that the global economic recovery, particularly in the US, will lead to gradually rising interest rates.

Tim Dowling, Head of Global High Yield at ING Investment Management, said: “Our overall return expectation for the asset class is a return of around 5% which is near the current coupon yield levels. There is still some room for further spread tightening which is dampening the impact of rising interest rates. In contrast to Emerging Markets debt, the flows to the asset class remain supportive, particularly within the European space.”

Launched in 2001, the Global High Yield strategy is managed on a total return basis, combining credit analysis on individual issuers with top down views on regions, credit quality, and industry sectors to construct a diversified investment portfolio that balances avoiding defaults with investments that offer attractive upside potential.

Dowling continues: “At ING IM we prefer exposure to credit risk over the exposure to interest rate risk. Within Europe there is still a positive flow towards high yield while in the US we have seen some signs of rotation from fixed income to equities.”

Lyxor Appoints Lionel Paquin as CEO

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Lyxor Asset Management has announced the appointment of Lionel Paquin as CEO. He replaces in this position Inès de Dinechin who will leave the Group.

He joins as well the Management Committee of the Global Banking & Investor Solutions division.

Mr. Lionel Paquin was previously the Head of Lyxor Managed Accounts Platform since 2011. He has also held the position of Chief Risk Officer and Head of Internal Control at the firm, and was a member of Lyxor Executive Committee since September 2007.

Prior to this, Mr. Paquin has served as Managing Director and Principal Inspector of the “Inspection Générale” at the Societe Generale Group since June 2004. Mr. Paquin began his career in 1995 in the French Ministry of Finance as a high-ranking civil servant and held several positions within this Ministry.

Mr Lionel Paquin is a graduate of Ecole Polytechnique (1993) and ENSAE (1995).

High Yield Bonds Set Fair

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High yield bonds have had a reasonably strong start to the year, particularly considering the fallout within the equity markets. For example, in January, the S&P 500, the index of leading shares in the US was down 3.5% over the month. In contrast, US high yield bonds, as represented by the BofA Merrill Lynch US High Yield Master II Total Return Index have returned 0.7% in US dollar terms.

A similar phenomenon exists in Europe where the MSCI Europe Total Return Index is down 1.8% in euro terms versus a rise of 1.0% in the BofA Merrill Lynch European Currency High Yield Total Return Index.

Driving the positive performance in high yield has been the decline in yields on core government bonds. Bond prices move inversely to directional moves in yields, so when yields fall, prices rise. The yield on the 5-year US Treasury fell more than 20 basis points in January whilst the yield on the 10-year US Treasury fell more than 30 basis points. This is important for the high yield markets because this is the maturity part of the yield curve around which high yield securities are priced.

The other major influence on bond prices is credit risk: this reflects individual corporate strengths together with broader macroeconomic forces on an issuer’s capacity to meet their repayment obligations to bondholders. There is a danger that investors may extrapolate the recent weakness in some of the economic data statistics such as the soft non-farm payrolls growth in the US as less an aberration (related to harsh winter weather) and more of a turning point signalling loss of economic momentum. Our view is that the temporary weakness in developed market economic data will abate.

More concerning has been the weakness in emerging markets where slower Chinese growth and volatility in emerging asset prices (partly due to liquidity draining from emerging markets in response to the US Federal Reserve tapering its asset purchases) has led to negative sentiment towards emerging market debt and equities.

So far, the emerging market fallout has not led to contagion to credit markets, although there have been outflows from Exchange Traded Funds (ETF). In the past, we have seen that during bouts of volatility, the ETF market has been a lot more closely correlated with equity markets than the cash bond high yield market.

This suits us because we are primarily invested in cash bonds from developed market issuers. In fact, fund flows support the notion that in volatile times, investor preference is for bonds over equities. The global mutual fund data flows from BoA Merrill Lynch for the first five weeks of 2014 show an outflow from equity funds and positive flows into bond funds, with government bonds, investment grade corporates and high yield all benefiting. The exception is emerging market debt, which remains in outflow.

Flows can be notoriously volatile, however, and our focus is on the cues that drive medium to long-term performance – valuations, fundamentals and liquidity. On all three factors, we believe the outlook for high yield bonds remains fair.

Valuations within high yield remain attractive. On a historical basis, metrics are marginally rich but only slightly above historical averages. On a relative basis, high yield bonds continue to look inexpensive when yield spreads are set against government bonds, investment grade bonds and expected default rates.

At the fundamental level, corporate earnings have been good. By 12 February 2014, almost 76% of S&P 500 companies that had announced earnings in the most recent reporting season had beaten expectations and the companies we talk to are generally upbeat. What we do not want to see, however, is optimism spilling over into shareholder-friendly/bondholder-unfriendly corporate behaviour. We have noticed, particularly in the US, which is at a more advanced stage in the economic cycle to Europe, a tick-up in more aggressive uses of high yield issuance proceeds, such as for acquisitions. However, as the chart shows more aggressive uses of proceeds (red shadings) are still far below the danger levels of 2005-7.

Enlarge

Source: Morgan Stanley, 6 February 2014

In terms of liquidity, the outlook remains encouraging. There is approximately US$25 billion of new US high yield issuance in February and that calendar is spread across bonds of different sizes, industries and credit ratings. Such breadth is usually a sign of a healthy market.

For now, our expectations are unchanged that global high yield can generate mid-single digit total returns in 2014, although the strength of that figure will depend on the quality of security selection. For our part, we continue to favour single B and CCC high yield bonds, and some of the smaller issuers where we believe fundamental research is able to identify value.

Kevin Loome, co-manager of the Henderson Horizon Global High Yield Bond Fund