Photo: Stéphane Cloâtre. The Danger of Duration With a Monetary Policy Change
The Federal Reserve’s years-long zero-interest rate policy has flattened Treasury yields to where rising interest rates and inflation are almost assured manifestations, according to Pioneer Investments’ latest blue paper, “The Danger of Duration With a Monetary Policy Change”, written by Michael Temple, Senior VP and Director of Credit Research. In this scenario, “investors may have to face the threat of rising bond yields with periods of significant volatility”.
The Key Points for this Blue Paper are:
“The Great Monetary Experiment,” the Federal Reserve’s zero rate policy, may be coming to an end. But many investors may be being lulled into a potential false sense of security that rising rates are a long way off. The Fed not only expects the yield curve to steepen, but may in fact encourage it. This could be a wakeup call.
The U.S. economy may likely surprise to the upside shortly, driven by multiple secular forces including a resurgence in home prices and home construction, an energy renaissance, and a revival of credit demand.
This would propel a normalization of the yield curve and many scenarios could emerge. With the Fed Funds rate anchored at zero, the sequencing and speed of monetary accommodation removal could have consequences as to how fast the yield curve adjusts.
The fear of an imprecise course correction is palpable among many investors and economic pundits. There is a growing fear that the Fed may commit to zero far longer than economically necessary. The consequence could be an escape from Treasuries by retail, institutional and foreign investors.
Investors need to be aware of the potential consequences to their fixed income investments as this paradigm shift takes place. The blue paper explores the math of duration, which is particularly dangerous in this historicallylow yield environment. However, not all duration is bad. Indeed, spread duration has the ability not only to help cushion the loss but also provide strong and positive excess returns in a rising yield-curve and interest-rate environment.
As financial markets grapple with the coming structural change in the yield and interest rate environment, high-quality, fixed-income bonds will likely experience periods of significant volatility. The transition to a new investment paradigm is rarely smooth.
Finally, the report takes a look at the fixed income subsectors that are being viewed as “refuges” from what may be a turbulent transition to higher rates.
You may access the complete report through this link.
Wikimedia CommonsBy Hao Wei from China. Improvement in Chinese Data is Very Welcome
Data indicate that the Chinese economy may have found some temporary support. According to the MarketExpress report published by ING Investment Management, Further support for commodities and other risky assets could come from abating tapering fears and a stabilization in bond yields.
For equities, commodities and other risky assets it will probably not be a smooth ride in the weeks ahead. We mention risks as geopolitics (Middle East), tapering and the German elections (September 22). Furthermore, Japan has to decide upon the increase of the sales tax and in the US debt-ceiling discussions will soon emerge. In the near term, these factors could weight on risky asset prices.
Nevertheless, we remain inclined to look for more rather than for less cyclical tilting. We point to the ongoing favourable economic data, globally. Recently, the improvement in Chinese data also provides support. The data add more juice to the overweight in cyclical sectors. Furthermore, the situation changed for the better for commodities.
Commodities bottomed in August after better Chinese data
Rising yields are biggest headwind for commodities
The biggest headwind for commodities currently seems to be the rise in bond yields in the developed economies. Not only capital flows to emerging markets are reduced for that matter, they are also putting (commodity) demand and emerging market currencies under downward pressure. Depreciating currencies in the emerging world themselves also prevent supply discipline at commodity producers in emerging markets. After all, depreciating currencies lower their production costs and increase their revenues in (appreciating) US dollars.
Welcome support for commodities and risky assets
As already said, the recent improvement in Chinese data is very welcome in the September month which is traditionally the weakest month in the year for equities, commodities and other risky assets. Currently, the better data in China were even more welcome against the background of some additional risks (Middle East, tapering) that the global economy and global markets have to digest. A most welcome support for the commodity asset class would arise from abating tapering fears and from some stabilisation in government bond yields.
To view the complete story, click the attached document.
Foto: Martin Falbisoner. CTPartners adquiere la firma de headhunters mexicana Taylor Executive Consultancy
CTPartners, a leading global retained executive search firm, has signed a Letter of Intent to acquire Taylor Executive Consultancy Latam S. de R.L. Eduardo Taylor will join CTPartners as Managing Partner, Mexico.
Taylor is a seasoned multinational executive search consultant with over 17 years of experience placing executives in global and regional companies. His primary focus is in the Industrial and Consumer Products markets where he has completed searches at the most-senior levels, including CEO and Board of Directors. He has also worked with clients on succession planning and management assessment.
Brian Sullivan, Chief Executive Officer of CTPartners, said, “Eduardo is a client-centric executive search consultant who has demonstrated superb leadership in running his own successful search firm, as well as when he was the Managing Partner of the largest search firm in Mexico. Eduardo is highly regarded in the board rooms of the largest Mexican companies throughout the country, and we are very pleased to have him leading our search consultancy.”
Nestor D’Angelo, Managing Partner for CTPartners in Latin America, said, “Eduardo’s commitment to his clients and his personal standards for providing the very best search experience are exactly what CTPartners is all about. Eduardo will complement our strong team in Mexico, an extremely important market for us. We are very excited he has joined our Latin American team to continue to strengthen our leadership in the region.”
Taylor commented, “CTPartners is a perfect fit for me and for clients in Mexico. The philosophy of transparency and accountability on every search is what I have built my career on, and I am thrilled to join a firm with the same principles. Global, regional and Mexican companies will benefit from CTPartners consultative, quality-driven approach.”
Wikimedia CommonsPhoto: Jason Auch. J.P. Morgan Appoints Edinardo Figueiredo to Lead Brazil Private Bank Business
J.P. Morgan announced that Edinardo Figueiredo will join the firm to head its Brazil Private Bank business.
He will be based in São Paulo and report jointly to José Berenguer, Brazil Senior Country Officer of J.P. Morgan, and Chris Harvey, Head of Latin America Private Banking.
“Edinardo is a first-rate private banker and business leader, and we are thrilled that he is joining J.P. Morgan,” Mr. Berenguer said. “As we build upon our continued momentum in Brazil, we are fortunate to be able to draw on Edinardo’s deep understanding of the market, significant investment experience, and strong management skills.”
Mr. Figueiredo, 45, joins J.P. Morgan from UBS, where he was Chief Executive Officer (CEO) of its Brazil wealth management business. He was previously with Banco Itau, where he was most recently CEO of its private banking business in Luxembourg and Switzerland. He has also held senior positions focusing on investment products at BankBoston and ABN AMRO in Brazil.
“Brazil is a key market for J.P. Morgan, and our clients look to us for local and global capabilities to serve their complex wealth management needs, particularly during volatile markets,” said Harvey. “Throughout his career, Edinardo has shown himself to be a strong and strategic partner, and we look forward to his leadership.”
MSCI has launched a new Emerging Markets index – the MSCI EM Beyond BRIC Index. The index, a subset of the widely used MSCI Emerging Markets Index, is comprised of 17 countries and excludes the BRIC countries – Brazil, Russia, India and China – which currently represent over 40% of the MSCI Emerging Markets Index.
“The BRIC countries have been recognized over the past few years as key drivers of economic growth within the Emerging Markets and many institutional investors already have exposure to those countries within their portfolios,” said Deborah Yang, Managing Director and Head of the MSCI Index Business in Europe, the Middle East, Africa and India. “We have launched the MSCI EM Beyond BRIC Index in response to client demand and believe it offers a new way to track and evaluate the Emerging Markets opportunity set for those wishing to invest in countries outside the BRIC region.”
To help diversify the representation across the 17 countries in the index, the weights of larger Emerging Market countries such as Taiwan and Korea are capped on a quarterly basis at 15%, giving greater prominence to smaller Emerging Market countries including Thailand, Malaysia and Indonesia.
The MSCI EM Beyond BRIC Index has outperformed the MSCI Emerging Markets Index since 1999 (12.0% gross annualized return in USD vs 11.1%). Between 1999 and 2007, the MSCI Emerging Markets Index outperformed the MSCI EM Beyond BRIC Index by 2.1 percentage points (20.1% vs 18%). Since 2007, the MSCI EM Beyond BRIC Index has had a positive annualized performance of 2.83% while the MSCI Emerging Markets Index had a negative performance of 2.1%.
The index may be licensed for benchmarking or as the basis for financial products such as ETFs and structured products.
Wikimedia CommonsPhoto: Pete Stewart . WE Family Offices refuerza su equipo y estrena oficina en Nueva York
WE Family Offices, founded in January of 2013 by Managing Partners Maria Elena Lagomasino, Santiago Ulloa and Michael Zeuner, announces the hiring of three industry experts to its team of professionals. Each brings extensive wealth management experience to the firm, which has recently surpassed $2 billion in assets under management.
Family office veteran Bruce Arella will join the global firm as a partner and head of real estate investing and will be responsible for serving US-based clients. He will join the firm’s Strategic Investment Committee and Implementation Committee and will be based in WE’s newly opened Manhattan office.
In addition, the firm has recently hired Joseph Kellogg and Elaine King to join its Miami office. Mr. Kellogg comes on board as the firm’s wealth planning executive to work with clients and their external tax and estate planning professionals. Ms. King joins as director of family education and governance to advise client families and develop educational programs, content and learning events on topics including succession planning, financial literacy, and mission and strategy.
New partner Bruce Arella echoes the firm’s commitment to providing independent advice to UHNW clients saying, “The unique business model and approach of WE Family Offices helps clients look at their wealth strategically, as they would any business or enterprise. They stay in control of their wealth, while we provide them with the support and services they need. The more transparent, retainer-based service model is something I looked long and hard to find and represents the leading edge in family wealth management.”
Managing Partner and CEO Maria Elena Lagomasino comments, “WE Family Offices’ mission is to serve as our clients’ advocate, providing independent advice without any regard to sales of product. Each of these individuals joins the firm with a long track record of advocating for and advising wealthy families, and we are fortunate to have them join our team”.
Recently, I had the opportunity to join one of our Matthews Asia portfolio managers during a research trip to India, and was reminded of both the importance of such on-the-ground visits as well as the rigor required to conduct them.
A typical research trip for our investment team members can involve a hectic schedule of meetings with up to 50 companies during a two-week period. This may often entail travel beyond large cities to sometimes remote inland reaches in search of the best companies to meet a portfolio’s objectives. These face-to-face meetings are critical not only in the evaluation of individual companies and management teams, but in keeping a finger on the pulse of a particular market as a whole. They allow us the ability to take in any changes in a company’s environment and competitive landscape, and better scrutinize their outlook.
We started our trip this time in Mumbai before moving on to Pune and then to Chennai, the capital city of the southern state of Tamil Nadu, and met with firms in a variety of sectors. Perhaps the most striking aspect of life in the world’s largest democracy may be the vibrant tapestry of contradictions. In India, the chasm between the supremely wealthy and abject poor is notoriously wide and yet also in surprisingly close and constant proximity to one another. You only need to walk from your car to the entrance of a board room to witness the disparity. Outside, chaos (although a sort of organized chaos) seems to rule and yet once inside, you may likely find the sort of savvy, forward-thinking entrepreneurs with whom we frequently visit.
India’s remarkable Unique Identification (UID) project exemplifies the country’s contrasts. Started in 2010, the program harnesses advanced technological power in the form of biometric iris scans with the aim to create a fundamental system of accountability among its 1.3 billion people. Now, hundreds of millions of people born without any formal registration or birth certificates can be documented—their existences verified—and may claim services and benefits that citizens in wealthier economies take for granted. This vast and “cardless” endeavor has tremendous implications—not the least of which is a system of inclusion. A secure identity system should help government efficiencies in such areas as taxation as well as combat corruption and voter fraud. It can offer individuals more control over things like financial and medical records and better facilitate such benefits as insurance coverage. While India struggles with such widespread poverty on the one hand, it is leapfrogging developed nations in technological terms on the other.
Health care and education are two other areas that highlight India’s stark contrasts and complexities. While India boasts some state-of-the-art medical care facilities, malnutrition afflicts more than half of all rural children. In terms of schools, there has recently been an expansion in basic education. However, according to UNICEF, gender disparity is still prevalent as almost twice as many girls as boys are pulled out of school, or never enrolled.
In addition, India’s overall population is projected to grow rapidly, and even outpace China as the most populous nation, according to a 2013 United Nations Development Programme (UNDP) Human Development Report. The UNDP study predicts that by 2050 India’s education distribution will still be highly unequal, with a sizeable group of uneducated elderly adults. The rapid expansion in the country’s tertiary education, however, may build a better-educated young adult labor force.
To be sure, the vast Indian landscape is quite uneven, and in varying stages of development. Its infrastructure faces great challenges. We continue to focus on finding solid companies that have the potential to survive and thrive in the toughest of environments. Particularly in a diverse economy as India, Matthews’ bottom-up stock selection process is critical to help mitigate risks that may arise from such factors as inadequate governance and policy hurdles.
In the end, I left India with conflicting emotions—concerned about the current human condition for large swaths of its population but excited and encouraged by the vast opportunities presented by this populous and ever-changing country.
William J. Hackett Chief Executive Officer 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.
Foto: Fletcher. Calamos reabre su fondo insignia de convertibles a nuevos inversores en EE.UU.
Calamos Investments has reopened its flagship Calamos Convertible Fund to new accounts and new investments as of September 6, 2013.
“We’re pleased to reopen our convertible mutual fund to new investors at what we consider to be an opportune time to invest in these unique hybrid securities,” said John P. Calamos, Sr., Chief Executive Officer and Global Co-Chief Investment Officer of Calamos Investments. “An improving global economy and widening spreads have boosted interest in the asset class by issuers, resulting in an improving and diversified convertible market that we expect will become more robust. Moreover, during periods of rising rates and economic expansion, convertibles have historically outperformed their more traditional fixed-income counterparts.”
Calamos has been a pioneer and long-time champion of the convertible asset class, launching the fund in 1985 as one of the first convertible mutual funds. The fund, with $1.1 billion in assets, invests primarily in convertible securities issued by U.S. companies, though it generally will invest 5% to 15% of net assets in non-U.S. securities and may invest in equities. It is managed through an active approach blending global investment themes and fundamental research. The portfolio is diversified across market sector and credit quality emphasizing mid-sized companies with higher quality balance sheets.
Regarding non-US investors, Calamos Investments highlights that the Calamos Convertible Fund, which just reopened, is most similar to the U.S. Convertible Strategy, which is available to non-U.S. institutional investors in an SMA. In its European SICAV Calamos Investments has the UCITS Global Convertible Opportunities Fund, which is not the same strategy as the Convertible Fund, as the UCITS Global Convertible Fund combines equity, convertibles and fixed income.
Times Square Tower. Boston Properties Sells Interest in Times Square Tower to Norwegian Sovereign Wealth Fund
Boston Properties, a real estate investment trust has entered into a binding agreement to sell a 45% interest in the ground leasehold interest and related tax credits in Times Square Tower to the Norwegian Government Pension Fund Global, an affiliate of Norges Bank, for a gross purchase price of $684 million in cash. The property is unencumbered by debt. Boston Properties and NGPF will form a joint venture upon closing, and Boston Properties will retain property and leasing management for the venture.
Assuming the closing occurs as contemplated, the Company currently expects that it would distribute at least the amount of proceeds necessary to avoid paying a corporate level tax on the gain realized from the sale.
Times Square Tower is a 1,246,000 square foot, Class A office tower, including associated retail space and signage, located in the heart of Times Square in New York City. It was developed by Boston Properties and completed in 2004, and it is currently 99% leased.
The property is subject to a ground lease with The City of New York with 76 years remaining, and it benefits from a Payment In Lieu of Taxes (PILOT) program through June 2024. The joint venture will hold the contractual right to purchase the fee interest in the property beginning in July 2024.
Photo: Diego Delso. Latin America Private Equity and Venture Capital Post Gains in 2013
Despite recent outflows of capital from emerging markets, privateequity and venture capital in Latin America expanded by all measures in the first half of 2013, with an increase in fundraising, investments, and exits as compared to the same period in 2012, according to data released today by the Latin American Private Equity and Venture Capital Association (LAVCA). In the first semester of 2013, firms raised US$3.8b with final or partial closings for 36 separate funds. This represents a 100% increase in capital as compared to the same period last year when, US$1.89b was committed through 10 final or partial closings.
“The emergent theme in LAVCA 1H2013 data is in contrast to headlines reporting a flight out of emerging markets in response to expected policy shifts by the US Federal Reserve,” said Juan Savino, Director of Research for LAVCA. “We have seen an uptick in private equity and venture capital activity across the board in Latin America with an increasing universe of global and local investors taking part.”
The number of mid-market deals (US$25-100m) continues to grow, with nearly twice as many in Brazil in 2013 as compared to 2012. Global LPs oversubscribed mid-market funds in Peru and Colombia and have demonstrated interest in Mexico, encouraged by the government’s reform agenda. Overall, private equity and venture capital fund managers invested a total of US$2.9b (a 5% increase from 2012) through 108 transactions (a 19% increase from 2012).
The number of IT deals in Latin America was up 21% in 1H2013, while Consumer Retail saw a 44% increase, both leading sectors by percentage of total investments overall. The Energy sector was also well represented in the data with US$336m invested, up from US$126m in 1H2012.
Venture capital investments from international and Latin American VC firms, accelerators, and angels (ranging from seed to expansion) also increased in 2013, with US$151.9m across 58 deals, representing a 69% rise in capital committed and a record number of early stage deals in the region.
“The increase in venture capital activity in the first semester was driven largely by Latin American VCs and is another positive bellwether for the long-term development of the investment ecosystem,” continued Savino.
According to LAVCA’s findings, proceeds from exits were up 67% to US$1.5b in 1H2013, compared with 1H2012. Significant in 2013, Mexico saw two exits, both PE-backed IPOs, from hospitality chains during this period. The education sector was particularly dynamic, generating exits worth a total of US$572m.
The following graph provides a summary of data described in the above release.
