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The July Equity Rally

After a torrid June, stock markets rallied strongly in July, with the FTSE World index up well over 4% in local currency terms. Pleasingly, the UK, which is a large overweight in most of our multi-asset portfolios, also had a stellar month, with the FTSE All-Share producing a sterling total return of 6.8%. Year-to-date total returns for the FTSE All-Share now stand at 15.9%, and within this the Mid 250 has been very strong, with sterling total returns in excess of 20%.

Looking further afield, US and European equity markets also performed strongly, while Japan struggled to make headway. However, Japan’s muted performance needs to be seen in the context of very strong performance year to date, and recent news flow from the likes of corporate bellwethers such as Toyota suggests that Japanese companies really are reaping significant benefits from the softer yen. Asian and emerging markets also rallied in July, although the latter in particular continue to disappoint in terms of their year-to-date performance.

Two key things helped to underpin the July equity rally. First, the US Federal Reserve has been at great pains to point out that the withdrawal of policy support will be gradual and data dependent. This helped to stabilize bond markets during the month, with benchmark 10-year US Treasury yields rising to only 2.6% from 2.5% at the beginning of July. From here, we anticipate a gradual rise in bond yields, not the rout that some market participants have feared. Nonetheless, despite further modest increases in yields in July, we still see better value in high yield and investment grade credit within fixed income, and are not inclined to close our large underweight in core sovereigns at current valuation levels. For investment grade credit markets, yield spreads continue to provide support but valuations will not be immune to the gradual rise in sovereign yields that we expect. It is for this reason that we have been reducing our large overweight in recent weeks. We remain constructive on high yield, and while market liquidity is thin, valuations are supported by the shorter duration of the asset class relative to investment grade.

The second thing supporting equity markets in July was the general improvement in global macroeconomic data – even in the most stressed areas, such as the peripheral Eurozone. While the better data is clearly positive in terms of sentiment, we are not inclined to reduce our European ex UK equity underweight, given the current political uncertainties and risks. However, this is likely to be something that we discuss in more detail in the months ahead, particularly if the better data starts to translate into meaningful earnings upgrades – although it remains to be seen how well European manufacturers will cope with the global competitive threat that is posed by a weaker yen.

In equity markets, we retain a large overweight in the UK, and are also overweight the Pacific ex Japan, emerging markets and Japan. Our overweight in emerging markets has worked against us this year, but the strength of our asset allocation decisions elsewhere has meant this has not mattered in terms of overall portfolio performance. Moreover, given where valuations are now, we do not think it makes sense to start unwinding this position. In the UK, we continue to regard equity valuations as attractive and further support comes from the UK’s high proportion of overseas earnings, which gives the UK leverage to the global recovery.

Turning to alternative assets, we remain overweight UK commercial property as the high real yield on property remains very attractive and anecdotal evidence suggests that forced sellers have now diminished significantly. Commodities also rallied in July, although perhaps counter intuitively they have been quite volatile when economic data releases have been strong, as market participants have viewed stronger data as hastening the likely demise of quantitative easing. For the year to date, however, returns from commodities remain poor.

Investment Strategy by Mark Burgess, Chief Investment Officer at Threadneedle Investments

BNY Mellon Announces Five-Year Commitment to World’s Largest Rowing Competition

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BNY Mellon announced an exclusive multi-year sponsorship of the Head Of The Charles Regatta, held annually in Boston and Cambridge, Mass.

One of the world’s pre-eminent rowing competitions, the 2013 Head Of The Charles Regatta presented by BNY Mellon is free to the public, and features a variety of races for local and international rowers of all skill levels and ages. The event draws global participation, including a number of national, international and Olympic athletes. The 49th Regatta, scheduled this year for October 19 and 20, is expected to attract almost 10,000 competitors and more than 400,000 spectators.

To highlight this key sponsorship, BNY Mellon also is sponsoring the inaugural BNY Mellon Championship for collegiate competitors in the Regatta’s Men’s and Women’s Championship Eights. Winners will be presented with the BNY Mellon Championship Trophy.

“Teamwork, excellence and delivering world-class performance are all values to which we aspire at BNY Mellon,” said Curtis Arledge, vice chair of BNY Mellon and CEO of BNY Mellon Investment Management. “The sport of rowing has these values in abundance, and we are privileged to play such a key role in this event’s ongoing success.”

Frederick V. Schoch,executive director of the Regatta, said, “We are delighted that BNY Mellon is becoming part of the Head Of The Charles family, a relationship we look forward to continuing for years to come. The Regatta is a cherished Boston tradition, and our partnership with BNY Mellon will further enhance race weekend, building on a proud legacy for both organizations. This sponsorship is not only a boon for our race, but for the entire city of Boston.”

Larry Hughes, chairman of BNY Mellon New England and CEO of BNY Mellon Wealth Management, noted Boston’s importance to BNY Mellon: “This is the hometown of BNY Mellon Wealth Management, and across all our businesses we employ more than 4,000 people throughout New England. Our commitment to Boston is key to our continued growth, and we are proud to support this historic Regatta.”

Family-friendly activities for all ages include a Rowing and Fitness Expo and food vendors serving worldwide delicacies. The Reunion Village at the race’s mid-way point, will serve as a fun and casual spot for clubs, schools, alumni groups, parents and boosters to catch up and relax during the event. The picturesque race course begins at Boston University’s DeWolfe Boathouse and ends at Artesani Park in Brighton.

BNY Mellon’s sponsorship continues the firm’s long history of partnerships with institutions worldwide to bring iconic events to a broader audience. The firm is currently the title partner of the annual rowing competition between the Oxford University Boat Club and the Cambridge University Boat Club on the River Thames in London. BNY Mellon seeks to create a legacy of involvement through its sponsorships. During its five-year commitment to the Head Of The Charles Regatta, BNY Mellon aims to develop the championship, engage audiences across the event, and generate interest and enthusiasm from national and international audiences.

International Equity and Value Funds Benefit From Bond Fund Sell-Off

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Los fondos value registran su mejor mes en captaciones desde 2007 — Wikimedia CommonsBy auriarte. International Equity and Value Funds Benefit From Bond Fund Sell-Off

Morningstar reported estimated U.S. mutual fund asset flows for July 2013. Investors added $15.9 billion to long-term mutual funds in July, driven by inflows of $7.9 billion into international-equity funds. Outflows from taxable-bond funds ebbed to $1.3 billion after record outflows of $43.7 billion in June, with investors continuing to favor bank-loan and nontraditional bond funds at the expense of more traditional intermediate-term bond categories.

Additional highlights from Morningstar’s report on mutual fund flows:

Detroit’s bankruptcy filing kept municipal-bond funds in heavy redemptions; the category group lost $10.3 billion in July to mark the fifth straight month of outflows.
Value offerings led the way among equity funds, which was likely a result of yield-starved fixed-income investors seeking dividend income. Large-value funds collected $3.3 billion, the category’s strongest inflow since February 2007.
JPMorgan led all providers with inflows of $3.4 billion. Dimensional Fund Advisors, Oakmark, Principal Funds, and MFS have also gained market share over the last year.
Investors pulled $7.5 billion from PIMCO Total Return in July, its third month of outflows. The fund has seen outflows of $18.4 billion over the previous three months compared with inflows of $21.5 billion over the 16-month period from January 2012 through April 2013.

How Will Latin America Weather a “Sudden Stop” in Investment?

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¿Cómo afrontará Latinoamérica un parón súbito en la inversión? — Wikimedia CommonsBy Hans Hillewaert. How Will Latin America Weather a “Sudden Stop” in Investment?

Since May, over one-quarter of the past five months’ foreign portfolio investment into emerging markets has been withdrawn, according to the latest available data from Emerging Portfolio Fund Research. For the Latin American economies, this is likely to result in slower growth, but the impact may be milder this time around.

The type of “sudden stop” that we’ve seen in investment flows this year is typically associated with currency depreciations, wider current account deficits and slower GDP growth. Generally speaking, those symptoms are now present across Latin America. The recent selloff followed the announcement that the US Federal Reserve was considering tapering asset purchases later this year. But the deceleration in growth and the increase in external deficits in the region had begun before that, mainly because of weak external demand for the region’s exports and softer commodity prices amid still subpar global growth—and particularly concerns about demand from China.

Previous episodes of capital flow reversals, for instance in 1994, generated significant dislocations across Latin America; they gave rise to sharp contractions in domestic economic activity and prompted emergency adjustment policy packages and multilateral and bilateral loans to help some countries remain current in their external obligations. This happened because countries in the region were overindebted in foreign currency, which after a significant correction in exchange rates required a tightening of fiscal policy to service the debt. That is, the external shock was amplified at the local level.

We believe that although the sudden stop is still likely to result in slower growth in the region, the impact of the flow reversal on Latin American economies should be milder this time around. This is because macroeconomic conditions in the region are now sounder. We see five important differences relative to the situation in the 1990s.

First, current account deficits are generally smaller. Second, fiscal performance is stronger, with some countries even generating an overall surplus. Third, the stock of international reserves is higher, both in absolute terms and as a proportion of GDP, imports or debt payments. The two last and more important differences are that exchange rates are now flexible (see chart), and that the public sector is a net creditor of the rest of the world in hard currency in most countries.

This means that movements in exchange rates will act as partial buffers of the external shock, thus preventing a more severe domestic contraction in those countries with currency flexibility. In our view, this also means that the dynamics of the adjustment will be different, as the depreciation will not give rise to undesirable pro-cyclical fiscal policies. Therefore, we think that although the outflows will prompt diminished macroeconomic performance, most countries in the region are on a sufficiently solid footing to withstand the external shock.

The backup in bond yields is likely to result in increased credit quality differentiation. Thus, there is a good chance that countries with better fundamentals will outperform in the coming quarters. We favor those countries with smaller current account deficits and fiscal imbalances; low external debt amortization schedules; and low foreign holdings of domestic securities. We continue to believe that Mexico is a candidate to perform well in the coming months, while we maintain our view that Venezuela presents significant vulnerabilities.

Fernando J. Losada is Senior Economist—Latin America, at AllianceBernstein

Traditional Managers Poised to Ride the Next Wave of ETFs

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Despite declining fund use among advisors, traditional mutual fund managers, particularly large fund complexes, are positioned to play a leading role in the next phase of the ETF revolution, the rollout of active ETFs. This and other findings are included in a report recently released by Cogent Research, a Market Strategies International company. The report, Advisor Brandscape, is conducted annually and is based on a survey among a nationally representative sample of over 1,700 financial advisors in the U.S.

In the last six years, the proportion of advisors selling ETFs has increased dramatically, from less than half (46%) of advisors in 2007 to nearly three-quarters (73%) who use them today. In that same period, advisors’ allocations to ETFs have more than doubled, from 5% in 2007 to 12% in 2013. According to Cogent, most of the ETF gains thus far have come at the expense of mutual funds. Furthermore, for the first time ever, advisors now say they are as likely to invest new dollars in ETFs as they are to invest in mutual funds. However, as interest in active ETFs builds, it appears that traditional fund managers are well positioned to capture (or retain) a portion of future active ETF flows.

“While provider preferences certainly exist in the ETF category, many advisors remain relatively agnostic when it comes to choosing ETFs, particularly those tracking broad indexes,” says Meredith Rice, Senior Product Director and author of the Advisor Brandscape report. “However, the rules of engagement will change significantly when it comes to how advisors approach selecting actively managed ETFs. And that is where traditional active managers, even those late to the game, may find some real traction.”

While these findings may come as good news for active managers considering entry into the ETF marketplace, a potential downside is that advisors, while they are open to paying more for actively managed ETFs, expect these products to be less expensive than their actively managed mutual fund cousins.

“The potential pricing issues will certainly give some mutual fund companies pause,” says Rice. “But they need to look back over the past six years of ETF history, and ask themselves if they are willing to pass on the next wave of ETFs.”

Investing in Pharmaceutical Companies: A Prescription for Pursuing Long-Term Gains

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The ebbs and flows of pharmaceutical stock prices relative to their underlying fundamentals over the last two decades have provided yet another example of the potential benefits of value investing. This is the main conclusion of a White Paper signed by Brandes Investment Partners, a Value Investment Specialist with nearly $25 bn under management, established in San Diego, California, in 1974.

Additionally, according to Brandes’ review, the changing performance cycles of pharmaceutical stocks underscore the patience and fortitude required to see through negative investor sentiment and industry headwinds.

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The circumstances and conditions under which the pharma industry returned to favor, as shown in Exhibit 1, came amid the great recession, the storm of confusion over health care reform, and without the fanfare or arrival of any material new blockbuster drugs. This, to us, is yet another example of how the value-investing story often plays out.

Solid Businesses Bought at Attractive Prices

Like the current situation with pharmaceutical stocks’ return to investor favor,4 with a fundamental, value- based investment strategy, there is often no need for an extraordinary corporate event, exceptional execution or especially energizing macroeconomic forces for value to be recognized in the portfolio. In many cases, it is simply a solid business bought at an attractive price that is sufficient, if given the time to perform.

Brandes points out that this could be the most instructive lesson from the recent pharmaceutical cycle. It’s been said that there really are no value or growth stocks per se, just companies with fluctuating valuations at various stages of the business or market cycle. Over time they may pass in, and eventually out, of the value and growth categories. That a company’s fundamentals would gradually fluctuate over time is not especially surprising given the dynamics and vagaries of ever-changing markets and economies. The key from a value investor’s perspective is to recognize that good companies move in and out of fashion over time, purchase them when they are out of favor and under-priced, and have the discipline to sell when they reach estimates of fair value.

Pharmaceutical Industry Performance Cycles

Brandes takes a look back at pharma stocks’ performance cycles.

Soaring Prices + Lofty Expectations = Rich Valuations

Almost 20 years ago, in a contentious and politically charged healthcare environment strikingly similar to today, pharmaceutical stocks sat poised on a launching pad in the eyes of investors, seemingly ready to either vault into the stratosphere or implode at ignition depending upon the fate of the pending health care reform legislation colloquially known at the time as Hillarycare. When the plan was defeated in 1994, share prices of the major pharmaceutical companies within the MSCI World Index soared starting that year and as the decade of the 1990s came to a close, as these companies were freed from the perception of potentially excessive governmental regulation and benefited from a roster of blockbuster drugs.

At the start of the new millennium, pharma share prices within the MSCI World Index hit all-time highs in the early 2000s as the growth prospects for an increasingly sophisticated and vitally important industry, just a few years away from catering to a soon retiring baby boomer generation, looked brighter than ever. Although Brandes Investment Patners were attracted to the fundamental business case for many of these companies, the high prices the market ascribed to them kept them from including these companies in the portfolios at the time.

Uncertainties Had Driven Prices Down by the Mid-2000s

As it’s inclined to do, however, uncertainty then visited the thriving pharma industry in the form of competitive and regulatory challenges, and as the first decade of the new century progressed, both the outlook and share prices for large pharmaceutical companies within the MSCI World Index changed course and fell considerably by the mid-2000s. During that time, significant market concerns including the following began to weigh on pharma share prices:

Looming expiration of valuable drug patents
Declining research & development (R&D) productivity due to longer and more expensive clinical trials and greater U.S. Food and Drug Administration scrutiny
Renewed and even more substantial healthcare reform pressures in the United States and globally

The market responded by re-rating pharmaceutical companies to much lower multiples than it was willing to apply beforehand. Suddenly, the Golden Age of Pharma was ending and the previously bright outlook for a rapidly growing industry was dimming, and their share prices responded accordingly starting in the mid-2000s, as mentioned above.

At the time the Brandes Global Equity Strategy began purchasing a number of the major pharmaceutical companies in 2004, the 12/31/2004 forward price-to-earnings ratio of the MSCI World-Pharmaceuticals had dropped to 16.2x. As is usually the case, P/Es had come down from lofty levels because the outlook for pharmas was not nearly as sanguine as it previously had been.

Fast Forward to 2013, Pharmaceutical Stock Prices Have Risen Again

Year to date through the end of the second quarter 2013, while pharma stocks within the MSCI World Index were on an upswing, their recent full cycle from high flyer, to laggard, and back again, is retracing a fairly familiar value pattern. A number of factors may have influenced renewed investor interest in pharma companies recently. These include the resiliency of the businesses amid changing investor perceptions, cash flow generation, conservative balance sheets as well as increases in dividends and share-buyback activity, as shown in Exhibit 2. Despite the recovery in share prices, Brandes Investment Partners still finds these companies attractively valued and they represent a meaningful allocation in the portfolio.

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Myanmar Rising

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Objetivo Birmania — By Justin Blethrow. Myanmar Rising

Weaving through flashing thunderstorms, our turbo-prop plane finally bounced onto the tarmac at Yangon International Airport in Myanmar during our research trip there earlier this summer. When constructed more than 60 years ago, the airport was considered among the best in Southeast Asia but it subsequently fell into disrepair and became antiquated. Modernized in 2007 with the design help of a Singaporean firm, the airport today is a bright little building with a faint whiff of antiseptic in the air. After immigration officials in dazzlingly white uniforms processed us and sent us into the steamy night, it struck us that this airport’s makeover seemed to mirror many other aspects of this once-outcast nation.

Over several decades, Myanmar’s brand of socialism had turned a land rich in rice, teak and natural resources into one of the world’s poorest nations that also faced dire political and diplomatic troubles. Only recently have sanctions been lifted following the dissolution of its oppressive military government in 2011. After three decades under this military junta, Myanmar has thrown open its doors to change. Areas such as agriculture, mining, manufacturing and tourism all appear to be bursting with potential.

Once described as the “rice bowl of Asia,” Myanmar had been famed for exports of its Paw San fragrant rice a generation ago. Its rice exports withered considerably since then but just this spring, Japan began making investments in Myanmar’s rice production, and also imported Burmese rice for the first time in more than four decades. Myanmar had also been an early oil producer, and nationalized its oil and gas industry in 1962. The industry is yet another that suffered from decades of isolation. However, just recently, the government has begun opening up to foreign exploration 30 untouched offshore oil and natural gas drilling sites. The country’s oil and gas agency is said to still be plagued by inexperience, mismanagement and cronyism, and Myanmar itself is under increasing pressure to fix its own energy shortages. But in June, the U.S. announced a new partnership with Myanmar to help “strengthen transparency and good governance” in the energy sector. The partnership aims to provide political support and technical assistance toward international best practices as well as improve financial accountability, safety and environmental stewardship.

Myanmar’s lack of infrastructure and the sheer amount of investment needed to boost it to match its regional peers is another obstacle to its success. In our view, the country’s infrastructure, although basic, is fairly solid and relatively well-maintained when compared to what we have seen in other frontier markets. The tens or even hundreds of billions of dollars of investment necessary to raise Myanmar up to a comparative regional level may be available should smooth political transitions continue. Myanmar is also strategically located, causing the need for various countries to nurture favorable relations. Many countries in the region have either maintained or rekindled longstanding relationships with Myanmar in recent years.

Myanmar’s large labor force and availability of land also offer opportunities for large-scale manufacturing activity. This could be additionally supported by the needs of many large corporations to diversify their country exposures. While we are still witnessing the very early days of this economic journey for Myanmar, we will continue to focus on developments there with great interest, including general elections and a planned opening of a stock exchange—both scheduled for 2015.

Opinion column by Emerging Asia Investment Team, Matthews Asia

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.

DeAWM Hires New Head of Wealth Management for Latin America

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Deutsche Asset & Wealth Management announced today that Felipe Godard will join the firm as a Managing Director and Head of Wealth Management, Latin America, effective October 1, 2013. He will be based in Geneva, Switzerland and will report to Haig Ariyan and Chip Packard, Co-Heads of Wealth Management, Americas and into the Executive Management Board of the Swiss banking entity, chaired by Marco Bizzozero, CEO Deutsche Bank Switzerland and Head of Wealth Management for EMEA.

Ariyan said: “Felipe is an experienced and talented professional who has a deep understanding of the evolving investment needs of ultra-high-net-worth families and individuals.”

Packard added: “Latin America is strategically important to our wealth management franchise. We are excited to have Felipe join the team to lead our efforts in delivering the Bank’s global capabilities to clients across the region.”

Godard will join the Firm from Credit Suisse in Switzerland, where he was Head of Advisory, Solutions and Investments for the Latin American Private Bank. Prior to joining Credit Suisse in 2010, Godard worked for J. P. Morgan in Geneva for 11 years where he headed the Latin American Team and later took responsibility for the Eastern European and Swiss markets for the Private Bank.

In June, Dutsche Asset and Wealth Management appointed Raphael Zagury as Head of Key Client Partners and Wealth Investment Advisory for Latin America from Bank of America Merrill Lynch. Additionally, Antonio Braun joined from J.P. Morgan as a Senior Relationship Manager, focusing on the Mexico market. Caroline Kitidis joined in August as Head of Key Client Partners & Wealth Investment Advisory for the Americas from Goldman Sachs.

LarrainVial Appoints LatAm’s Fixed Income “Dream Team”

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LarrainVial ficha al "Dream Team" de la Renta Fija — . LarrainVial Appoints LatAm's Fixed Income "Dream Team"

On the first of September, Pedro Laborde and Felipe Rojas will become part LarrainVial’s team, one of the leading financial institutions in Latin America.

Rojas has agreed to join LarrainVial AGF to be in charge of the Latin American corporate debt funds, and will do so just a few days after leaving Cruz del Sur, where he earned the honor of becoming the only Latin American in Citywire’s global list of top 1000 mutual fund managers.

Pedro Laborde, who has extensive experience in the investment area and has worked with Rojas for a long time, will serve as manager for Credit Strategies.

Rojas’ duties will begin on the 1^stof September, as he commented to Funds Society.

With a presence in Chile, Peru, Colombia and the United States, LarrainVial, which was founded in 1934, is one of the oldest and most important investment firms within the Chilean market. It currently manages assets worth 14,400 million dollars.

GAIN Capital Hires Peter Cronin To Lead Institutional Sales Business In EMEA

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GAIN Capital Holdings, a global provider of online trading services, has appointed Peter Cronin as Managing Director and Head of EMEA GTX Sales. Peter Cronin will be responsible for growing GTX, GAIN Capital’s institutional business, in Europe, the Middle East and Africa. He will report directly to Executive Vice President and Head of GTX, Joseph Wald, and has begun his new role in GTX’s London offices starting August 5^th.

“Peter is an accomplished and talented banking professional who is moving to the FX ECN business at a time when the global foreign exchange industry is undergoing many exciting changes,” said GAIN Capital Executive Vice President and Head of GTX, Joseph Wald. At GTX, Peter Cronin will specifically be responsible for growing the institutional client base and ECN volumes, and building out the EMEA sales team.

Previously, Mr. Cronin was Head of EMEA e-Commerce at UBS Investment Bank, where he managed a 16-person sales team situated in Zurich, Lugano, Dubai and the United Kingdom. Mr. Cronin joined UBS in 2000, and during his 13 years tenure held senior roles focused on developing the bank’s e-Commerce business.

On July 16^th, GTX reported average daily institutional volume of $18.4 billion for June 2013, an increase of 10% from May 2013 and 137% from June 2012.