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As Lukas Daalder, Senior Portfolio Manager at Robeco explains in last night’s Best Economic links of the Web issue, “Japanese bond yields hold the key of success of the Japanese plans: if they move higher, thinks could go wrong…” To explain in a short simple way why, you may want to watch this 6 minute video from youtube.
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The Global Financial Centers Index (GFCI) provides profiles, ratings and rankings for 79 financial centers, drawing on two separate sources of data – instrumental factors (external indices) and responses to an online survey.
The main headlines of GFCI 13 are:
You may access the complete GFCI 13 assessment through this link.
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According to a report released by Morgan Stanley this week, the brokerage firm is more constructive on Greece than consensus expectations. “A recovery hasn’t started yet, but soft data are becoming less bad, as the shocks that hit the Greek economy – including euro exit worries – are starting to dissipate, and bank deposit flows now look fully stabilized”.
Morgan Stanley points out that the competitiveness gap is closing. “With unit labor costs likely to fall further, the incentive for Greece to exit the Eurozone to boost competitiveness via a weaker exchange rate is no longer there,” points out the research. Morgan Stanley expects Greece to reach a primary budget surplus this year and maintain it thereafter.
“We expect the GGB strip to reach 52.5% by year-end. We also see valuations higher in most scenarios of second restructuring”
They also emphasize that contagion risks from Cyprus appear limited. “The main sources of uncertainty are domestic politics and the ongoing Troika review of the Greek program. While there’s some room for maneuver, the government’s ability to stay the course will continue to be widely watched by investors over time”.
Morgan Stanley finds the risk/reward particularly attractive in GGBs. “Current valuations are lower than in most of the medium-term scenarios we laid out. In fact, we expect the GGB strip to reach 52.5% by year-end. We also see valuations higher in most scenarios of second restructuring”.
Morgan Stanley’s economists, Daniele Antonucci and Samar Kazranian, see downside only in the case of a euro exit (a remote tail risk, in their view) or a potential second restructuring with the private and the official sectors taking a 60% principal reduction which they consider would be a quite a harsh scenario for the private sector.
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Headlines have been awash in talk of the Heinz LBO. The bonds priced at month end at 4.25% ‐ the lowest yield ever for an LBO issue. In its latest Corporate Credit Market Snapshot Muzunich considers the Heinz deal to be a one‐off and in no way reflective of an uptick in LBOs or a return to excessive leverage. “Heinz was relatively unique since it is a highly recognizable brand name and benefitted from Warren Buffett’s participation. Buffett’s sizeable equity contribution helped drive down financing costs for the bond and loan portions of the deal,” highlights the snapshot, available in the asset manager’s website.
According to Muzinich, the deal also highlights the strength of the loan market ($10 billion of Heinz loans cleared the market) and the generally favorable borrowing rates currently available. Muzinich does not believe the deal reflects deteriorating corporate fundamentals. “On the contrary – corporate fundamentals remain strong as evidenced by the increase in rising stars (high yield companies that are upgraded to investment grade status),” points out the asset manager in the report. Last month in the U.S. high yield market, four companies with $12 billion of bonds outstanding, were upgraded to investment grade. “This is the highest number of monthly upgrades from high yield to investment grade in more than 7 years and underscores the strong corporate fundamentals that underpin the current high yield market”, they conclude.
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Markets provided remarkably healthy returns to investors in the first quarter of the year despite ongoing headlines over political brinkmanship in both Europe and the US. With global equities up close to 10% and also real estate and most fixed income assets printing firmly positive returns, ING IM points out that most multi- asset portfolios are already close to year-end targets. According to the latest HouseView report published by the firm, on a risk-adjusted basis (correcting for the volatility of the asset class) equities have clearly taken over the lead from credits as the star performer of the year.
Still, Valentijn van Nieuwenhuijzen, Head of Strategy in ING IM, remarks that both returns and investor flow dynamics clearly show that investor appetite has broadened across asset classes that provide some form of income rather than that it rotated from fixed income into equities. The main change in investor behavior is that not only yields are being searched for, but that all asset classes that provide a claim on future cash flows, generated either coupons, rents or dividends, have become more popular destinations for cash that had been piled up in recent “crisis” years.
Another important change in the behavior of investors, he emphasizes, is that they have not only become willing to broaden their horizon, but also have started to discriminate much more between markets. This is partially reflected in the unusually large gap between the performance of commodities (that do not earn any income and often have a negative cost of carry!) and other risky assets. Also it is shown by the less “top-down”-driven nature of the market. Not only has dispersion in the performance between asset classes become more visible, but also at regional, sectorial and security level have performances started to deviate much more and have observed correlations come down sharply.
As the strategist continues, this type of market dynamics create a wider set of investment opportunities that are not only concentrated at the highest allocation or asset class level. More than in previous years, it seems that the investor crowd is being crafted to look for market opportunities at a lower level that is relatively uncorrelated to the overall risk appetite of the broader market.
Within ING IM’s own asset allocation stance it is certainly visible that opportunities have shifted from asset classes towards regions and sectors. At the beginning of the year the asset management firm had much more pronounced asset class tilts, with overweights in equities (strong), real estate (medium) and credit (small) and an underweight in treasuries (medium). Throughout the first quarter however asset class tilt have been reduced and ING IM is currently left with only small overweights in equities and real estate and neutral stances in the rest.
Within regions and sectors, however, the firm gradually accentuated their preferences in recent months as underweights in emerging markets and Europe were built-up in both equity and fixed income space. Also, Japan was moved to a firm overweight within equities and US sensitive High Yield was upgraded to our best pick in fixed income.
Moreover, their stance within equities on global sectors and emerging market countries does no longer have a clear “high beta”-tilt and is very much driven by idiosyncratic drivers. ING IM is, for example, long in both industrials and healthcare, while being underweight in both materials and telecom. Also, the asset manager is underweight in both Indonesia (high beta) and Malaysia (low beta) for country specific reasons.
In the search for the best opportunities in markets and the best balance between risk and return, ING IM currently sees different opportunities than at the start of the year. Therefore, they have crafted an allocation stance that is less dependent on the risk-on/risk-off theme and concentrates on exposure at a different level in the allocation spectrum. Depending on the state of the global cycle, visibility on political risks and observed shifts in investor behavior the firm will assess over time whether future adaptation in their allocation stance will move back up to the asset class level or intensify the regional and sectorial tilts.
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Private equity firms around the world are bracing for tough conditions for both fundraising and deal-making, according to Grant Thornton International Ltd’s Global Private Equity Report. Now in its second year, the report is the result of 143 in-depth interviews with senior private equity practitioners around the globe.
“The report highlights that the search for profitable growth remains fundamentally about strategy rather than pure geographical expansion. Growth remains the key, and is driving the globalization of the private equity industry, including Canada”
“A central role of the private equity community is to seek new growth opportunities and then act as a catalyst for that growth. Many of today’s investors are finding themselves at the centre of the evolution of a truly global economy and the continuing search for new corporate frontiers,” says Tim Oldfield, Partner, Corporate Finance, Grant Thornton LLP.
“The report highlights that the search for profitable growth remains fundamentally about strategy rather than pure geographical expansion. Growth remains the key, and is driving the globalization of the private equity industry, including Canada,” he adds. “At the same time, private equity is also acting as a driver of globalization. Canadian private equity firms need to grow outside the Canadian market”.
The report provides insight into the expectations of private equity general partners (GPs) for numerous aspects of the fundraising and investment cycle. It shows, among other things:
Fundraising fears
This year’s report sees a marked decline in fundraising expectations of GPs around the world, with nearly three-quarters (72 percent) describing the fundraising outlook as either “negative” or “very negative”. In 2011, the figure was just 46 percent. The most dramatic decline in optimism from 2011 is evident in the BRICS: Brazil, Russia, India, China and South Africa. This year, 78 percent of respondents in these markets described the fundraising outlook as “negative” or “very negative”. In 2011, the figure was 39 percent.
Private equity firms looking for new investors
Private equity firms are expecting to have to turn to a greater number of new investors – or limited partners (“LPs”) – and rely less on their existing LPs to make follow-on commitments to their next funds. This year, 40 percent of respondents said they expect their next fund to be majority funded by first time investors. In 2011’s report, this figure was only 24 percent.
Global exit routes
Private equity firms are looking across borders for exit routes, in particular to overseas trade buyers. More than half of respondents (52 percent) expect the majority of the trade buyers they transact with in the near term to be foreign, while a further 20 percent expect the split between foreign and domestic buyers to be 50-50. Only 28 percent expect to deal mostly with domestic trade buyers. Globally, China and Japan, Europe and North America are the regions from which most GPs expect non-domestic strategic buyers to originate.
Regions as expected sources of non-domestic acquirers
| China, Japan, Korea | 31% | ||
| Europe | 24% | ||
| North America | 22% | ||
| South East Asia | 11% | ||
| India | 10% | ||
| MENA | 1% | ||
| Africa | <1% | ||
| Latin America | <1% | ||
| Russia | <1% |
Top ten “high growth” markets
While growth in “high-growth” countries outstrips that seen in Western markets, the search for growth leaves local private equity firms to keep a watchful eye on where tomorrow’s deal-flow will originate. While a move to new unknown territories may be a risk too far for many Western funds, investors based in regions such as Canada typically have good visibility on the next frontier markets.
| 1 | Indonesia | ||
| 2 | Peru | ||
| 3 | Colombia | ||
| 4 | Turkey | ||
| 5 = | Myanmar | ||
| 5 = | Egypt | ||
| 5 = | Saudi Arabia | ||
| 8 = | Mexico | ||
| 8 = | Ghana | ||
| 8 = | Malaysia |
xpected investment activity by region
| Region | Increase | Same | Decrease | ||||
| Asia Pacific | 50% | 44% | 6% | ||||
| China | 33% | 11% | 56% | ||||
| India | 33% | 22% | 45% | ||||
| Latin America | 78% | 22% | 0% | ||||
| MENA (Middle East & North Africa) | 60% | 33% | 7% | ||||
| North America | 59% | 41% | 0% | ||||
| Western Europe | 27% | 64% | 9% |
There is an enormous expectation for growing new deal activity in Latin America with 78 percent reporting that they expect an increase. This represents only a slight dampening of last year’s sentiment, when 89 percent of respondents expected deal activity to increase in the region.
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Every year RobecoSAM invites the 2,500 largest companies in terms of free float market capitalization from all industries to participate in its annual Corporate Sustainability Assessment (CSA). In addition, 800 companies from the emerging markets are invited to participate and gain eligibility for inclusion in the recently launched DJSI Emerging Markets. The CSA is the research backbone for the constructions of all the Dow Jones Sustainability Indexes (DJSI). After the assessment, companies are included in the DJSI World if their sustainability performance ranks among the top 10% of their industry peers.
800 companies from the emerging markets are invited to participate and gain eligibility for inclusion in the recently launched DJSI Emerging Markets
The CSA focuses on a company’s long-term value creation with over 100 questions on financially material, economic, environmental, social and corporate governance practices. Over half of the questions are industry-specific as RobecoSAM is convinced that industry-specific sustainability risks and opportunities play a key role in a firm’s long term success. The other half includes questions on general sustainability issues such as corporate governance, product stewardship and talent attraction and retention.
The assessment process has continuously been refined over the years. This year, RobecoSAM has aligned several of its Climate Strategy questions with corresponding questions asked by CDP, the provider of Climate Disclosure abd Climate Performance Leadership Indexes. This will reduce the workload for 90% of DJSI participating companies which also respond to the request for climate change information through CDP.
Further, the 2013 CSA and DJSI family will be aligned with the Global Industry Classification System (GICS), thus meeting commonly accepted sector classification standards. The switch to GICS, which is a widely used standard in the financial industry, will therefore allow the DJSI to become more attractive for investors as it meets the need for one complete and consistent set of global sector and industry definitions. The changes will be implemented into all the indices. This means that the former 19 ICB super sectors will be replaced with 24 GICS industry groups, and the 58 RobecoSAM sectors will be replaced by 59 RobecoSAM industries.
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As we are bottom-up stock pickers, macro views are not a key determinant of how we shape our portfolio. That said, a more positive macro backdrop will support our convictions. Although eurozone headwinds continue in the form of political deadlock in Italy, the Cypriot banking crisis and rising peripheral bond yields, a number of global equity markets remain close to five-year highs. Clearly, the recent Italian election result has provided a setback to Europe but this seems unlikely to cause an imminent return to euro fragmentation. On the contrary, there have been a number of recent positive signals for European equities; the return of Portugal to the debt market and signs that funding conditions continue to ease for European banks. Accelerating merger and acquisition (M&A) activity and a surge in buy-back announcements has also lent support to equities as corporates have put excess cash to work. Global M&A volumes in February surpassed that of last year’s while buy-back announcements in 2013 currently stand at a 20-month high.
Looking at the IMA monthly fund flow data, there has been a steady increase in the level of gross sales into the European ex UK equity sector – see chart. As Europe’s recovery gains traction and as gross domestic product growth forecasts increase, we would expect investor sentiment to improve and for fund flows to increase further, which should in turn drive up capital values.
Chart 1 – IMA: Gross sales to the Europe ex UK equity sector
Source: Investment Management Association (IMA), total gross sales by period (retail and institutional), in sterling, Jan 2012 to Jan 2013.
While we do not like to adopt a macro view, we do have a focus on buying good quality global players which originate from Europe but which are not entirely vulnerable to the region’s woes. Our portfolio is largely composed of companies with lots of free cash flow generation, on low valuations and with a good history of delivering strong results and value for shareholders. These companies should prosper even in tough times thanks to their exposure to faster growing economic areas and robust pricing power.
Currently, industrials are a particularly appealing sector and we are attracted to service companies due to their strong balance sheets and recurring revenue streams, such as Kone and Schindler. Kone, the Finnish lift company, has been able to tap fast-growing emerging markets as well as the developed world. The company’s servicing arm, which maintains and refurbishes lifts, accounts for more than half of Kone’s sales. At the other end of the spectrum, we have avoided financials. We remain underweight the sector and do not currently hold any banks. Banks have bounced sharply over the last six months but we continue to prefer service-related businesses with high levels of recurring revenue. However, we do own some high yielding insurance stocks such as Nordic-based general insurance provider Tryg, which is paying an attractive dividend yield, and non-life insurer Gjensidige.
European stock markets have recovered this year and are not as cheap as they once were. However, the Henderson European Special Situations Fund has a portfolio of companies with minimal balance sheet debt, strong underlying cash generation and most stocks have enjoyed excellent track records due to quality management who, in most cases, have significant exposure to their own shares. The underlying portfolio is yielding around 3.2%, and has an adjusted free cash flow yield in excess of 8% compared with other asset classes whose real value may be impaired by government initiatives to generate economic growth. Looking at the 1.9% yield currently earned on 10-year UK government bonds, European equities appear to be a much more sensible and attractive option.
Richard Pease is manager of the Henderson European Special Situations Fund, the Henderson European Growth Fund and the Henderson Horizon European Growth Fund
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The president of Peru, Ollanta Humala, and members of Proinversion, the Private Investment Promotion Agency of Peru, will start their promotional road show in Asia on Monday the 8th of April. The road show, organized by Proinversion with the cooperation of the Ministry of Foreign Affairs through its diplomatic missions in the countries that will be part of the tour and with the support of Promperú and Commercial Offices of Peru Abroad (OCEX will take place in Beijing, Shanghai, Seoul, and Tokyo; four cities which the Peruvian delegation have identified as having special potential within the Peruvian market. The road show aims to bring the Peruvian and Asian markets closer and to promote Peru as an attractive investment destination.
Named “Invest in Peru: It Is Possible”, the road show will begin in Beijing on the 8th of April with special attendance by the Peruvian President of Peru, Ollanta Humala who will also be participating in the second event, on the 9th of April in Shanghai. The two following events will take place in Seoul and in Tokyo on the 10 th -11th- and 12th of April respectively, coinciding with the celebrations of the 50th anniversary of the establishment of bilateral relations between Peru and Korea.
Comprising the Peruvian delegation will be Javier Illescas Mucha, Executive Director of Proinversión; Carlos Herrera, Director of Investor Services, and Rosa María Tejerina, financial adviser of the project ‘the second line of the Lima Metro’. In China, in addition to the Peruvian President, Mr. Humala, the meetings will also include the participation of Jorge Merino, Minister of Energy and Mining, and Carlos Paredes, Minister of Transport and Communication. Representatives from the Geodata, ESAN and Serconsult Groups, in charge of the construction of the second line of the Lima Metro, will also be present. Local banks will also support the road show, as well as Interbank from Peru, in each of the three cities.
The events will include presentations on the historical and commercial relationships between Peru and each host country, as well as talks on the current opportunities for investment in sectors such as transport, telecommunications, energy and hydrocarbons, sanitation and hydraulics.
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Three centuries of investment experience round one table – an occasion that brought Robeco together for the 80th anniversary of the Robeco NV global equity fund. On Thursday 21 March 2013, the fund’s former portfolio managers discussed the past, present and future. A lot has changed in 80 years. Where the first fund manager Lodewijk Rauwenhoff even sold participating units to clients from his bicycle, the current fund manager, Mark Glazener, requires an entire team to decipher the complex information flows. And yet a great deal remains the same. The quest for quality and low risk stocks is as apparent as ever.
Peter Ferket, Robeco’s head of equity investment, questions the passionate investors – the oldest of which is 93 – on the daily reality of investing. At the table sat Mark Glazener, portfolio manager since 2003, and all his living predecessors: Jaap van Duijn (1995–2003), Izaak Maartense (1988–1995), Guus van Oostveen (1973–1993), Antony Bunker (1971–1983) and Donald van Raalte (1959–1971). Together they have managed the Robeco fund for more than 50 years. The first two fund managers – Lodewijk Rauwenhoff and Ewold Brouwer – are deceased.
Robeco NV was founded on 24 March 1933. This was the second milestone after the formation of the Rotterdamsch Beleggingsconsortium in 1929. What began as a club of wealthy Rotterdammers developed into one of Europe’s largest investment funds, ensuring its survival from the crisis in the thirties. With investment company Robeco as its progeny, its post-war formula of internationally diversified investments in quality stocks became a major success.
What are the key differences in a fund manager’s tasks between now and then?
Mark Glazener emphasizes the size of his equity team: “In the past, the fund was managed by a small number of people. Typically now we have a team of three portfolio managers and nine analysts that together administer the portfolio.
But what has stayed the same over those 80-years?
Mark Glazener points out that many things stayed the same in his fund: “Someone who buys a Robeco fund, buys a well-diversified portfolio of quality equities, leaving the investment decisions to those who face such matters daily and who buy and sell with care. This is not a fund for cowboys.”
You may access the complete interview through this link