Emma Duhaney, Senior Product Specialist at Insight, a fund management company owned by BNY Mellon. / Courtesy photo. Insight: "We Reduce Market Volatility by Buying Very Short-Term Bonds"
How can portfolios be protected from volatility in a context so marked by politics and with so much uncertainty? This is perhaps one of the headaches for many managers, for which each firm has been developing different strategies that allow them to contain the risks. In this interview, Emma Duhaney, Senior Product Specialist at Insight, a management company owned by BNY Mellon, explains the formula which they apply in the management of BNY Mellon Global Short-Dated High Yield Bond.
“We focus our investment in bonds with a very short-term maturity, which allows maximum reduction of volatility. The key is the assets we choose and the way we build the portfolio to ensure that there is no default,” explains Duhaney. In her opinion, the key is to reduce volatility by buying the bond when it is about to materialize because, “default risk is minimal and it is unlikely that the price will move.”
This is the strategy applied to the BNY Mellon Global Short-Dated High Yield Bond Fund, an actively managed fixed income product that seeks to provide returns in excess of Libor. In order to do this, it invests mainly in a high-yield bond portfolio, in other words, lower than investment grade, in the short term, but also invests in convertibles, loans, and securitization bonds. In addition, it selectively sells protection in credit derivatives.
Now, for this principle to work, how the portfolio is made up, and which companies are part of it, are both very important. “We have a team of analysts who analyze companies. When your strategy is short bonds, there are a number of things that you have to check, including: whether they are companies that will be able to pay, their capital structure, when their bonds mature, whether the company is flexible, or if their benefits increase. In short, all the aspects that come into play to evaluate its ability to pay or its capacity to refinance,” says the expert.
She doesn’t like the retail sector because it is extremely changeable, but she does not discard any others because, she points out, they focus more on the duration and quality of the bond than on a specific area of economic activity. “We have a system called ‘the main check list’ by which we seek to identify any risk that can be generated in companies and which affect profitability. For example, if there are chances of it being bought, or any possible regulatory risks. We try to detect any aspect that could jeopardize the payment of their bonds,” she points out.
For Uncertain Environments
According to Duhaney, this strategy is perfect for times as uncertain as they are now, because it is designed for environments with increasing spreads and changing interest rates. “We find that many traditional high yield fund managers are selling short-term bonds because bonds with less than one year of maturity are not within their index, which allows us to buy the type of asset we want at cheaper prices. And since we work in the short-term, it is easy to have liquidity to continue acquiring new bonds,” says the expert.
Among the risks she identifies in the market right now, Duhaney agrees with the widespread views of the sector: politics. “It always raises uncertainty, and right now we have elections coming up in Holland, France, and Germany. This always means volatility because investors have seen big changes in the last UK and US elections, so they are worried about what will happen in Europe this year.”
To political risk, we must add the decisions taken by central banks such as the European Central Bank (ECB) and the Federal Reserve (Fed), since obviously a rise in interest rates will impact the bond market. “We believe that the Fed will raise rates twice this year, maybe if the growth of the US economy is very strong, it will be more; but, currently, we think it will be twice in 2017,” she says.
She is cautious regarding Trump, and is waiting to see what the first economic measures taken by the new administration will be, and reminds us that trade and tax policies are the most important ones because of the impact that his electoral promises would have on them. As a matter of fact, she focuses on the commercial side and warns that it would be highly negative if Trump “gets into a trade war because it would cause significant restrictions on world trade.”
Pixabay CC0 Public DomainPhoto WIFA. Well-known Industry Professionals Create the Women in Finance Association, Which Already Operates in Miami and New York
WIFA, Women in Finance Association, was born less than a month ago, an entity which came to be thanks to the initiative of several well-known Miami professionals. Initially, it was Lauren Shapiro, a securities lawyer for the Miami-based company, Capital Legal Group, who founded the association, after realizing that there was no outlet or platform for female financial professionals in the area. “It‘s important for women to be given a voice, and to be able to meet in an intimate and attractive environment in which to discuss the difficulties of their successes in the industry,” explains Shapiro, when asked about the reasons behind this project.
WIFA was born after an extensive analysis of women’s situation in various sectors of the male dominated financial world, explains its founder. It is an instrument for raising awareness, ensuring adequate recognition of the impact of women in the world of finance, and for providing the tools which allow them to wade through a ruthless system and advance to executive level in their professional development. “We have created a forum so that women not only share the difficulties they face when working towards success, but which also allows them to share their knowledge, perceptions, and experiences with each other,” she says. “We are committed to giving every member, regardless of their level of expertise, valuable benefits to develop future executives, recognize and honor the achievement of women in the industry, and invest in the community.”
Currently, Shapiro is accompanied on the Board of Directors by her co-founders Franciele Sgarioni, Senior Sales and Marketing Executive for Trident Fund Services, and Stephanie Tetreault, Senior Audit Manager at KPMG; they are committed to the objective of creating an organization which women feel is beneficial, both from a professional perspective, and for achieving personal growth.
Presently, the association, which operates in Miami and New York, and intends to reach some Latin American cities in the near future, requires its members to pay a fee, which can vary from 25 to 250 dollars, depending on their professional rank.
In return, they are part of a platform that aims to bring professional women from the financial industry together for the purpose of networking, offering training, mentoring, leadership coaching, industry awareness, and philanthropy.
“In the future, we will have various programs and activities tailored to our members’ objectives,” explains Saphiro. They will focus on women and markets, and will offer programs and activities, in Miami and New York, for members at different levels. In order to do this, at the time of affiliation, each woman will be asked to select from a menu of objectives and, from there, they will receive information on the programs and activities geared to their specific objectives.
“We will make our events intimate, informal, and frequent, so that women feel comfortable and can truly be themselves,” adds the founder.
Even though it’s still in its early days, the association declares itself open to collaboration with other associations and corporations, as long as they are appropriate for their members and in tune with their objectives
At last, these fierce and powerful women, as Saphiro describes women in the financial world, from Miami and New York, have already achieved their own “club.”
For further information, please visit the WIFA website.
Foto cedidaPhoto: TitoAlfredo, Flickr, Creative Commons.. Fixed Income Or Emerging Equities? It All Depends On Whether Reflation Triumphs
The future evolution of emerging markets is inexorably linked to three variables: trade policies applied by Donald Trump with respect to these countries, the strength of the dollar, and the pace of rate hikes by the US Federal Reserve. And experts still have doubts about their evolution, due to uncertainty about the US president’s future policies.
“The key variable for the returns and the evolution of emerging currencies is the dollar. The initial reaction to Trump has been one of strength but we do not know if this will continue, it will depend on politicians,” said Nicholas Field, Emerging Markets Equity Manager, at a Schroders event with reporters in London. “If rates rise in the US, that money could come from the emerging world,” warned Ugo Montrucchio, Multi-asset Manager at the fund management company, but he also indicated that another variable could enter the equation: if investors associate inflation – which is what forces such rate increases – to more growth, the effects on developing markets could be positive.
In this environment of uncertainty, one thing is clear: after three years being underweight in emerging markets in the management company’s multi-asset portfolio, the scenario is now beginning to be favorable for investment, and always with very selective and active management, which is the most sensible in a scenario in which dispersions are once again strong.
But, let’s not forget, with the uncertainty… also between the two, of whether it will be emerging equities, or fixed income that will do better. “For some weeks the markets have been immersed in the reflation story. For me, the dilemma in 2017 is whether there will be a very rapid reflation, in which consumption and growth will accelerate, or all expectations of inflation and growth will lead to a world in which restrictive monetary policies by the Fed Will dilute that growth by mid-2017. The bias is now toward emerging equities, where we see more potential than in fixed income, but as we enter into the new year, everything will depend on US policy, and on the reaction of central banks,” says Montrucchio.
Field points out the attractive valuations of emerging equities, where the question is how much each country has adjusted their account balances, and where he sees opportunities in markets like Brazil (the country where to increase exposure). Although negative in Mexico and South Africa, he believes that this last market could be the turnaround story of 2017, just as the Rio stock market has been this year. As regards China, the vision is not too pessimistic because, despite the heavy debt it faces, it has adequate mechanisms, says Field. He declines to comment regarding trade relations with Trump and the problems that could be derived from this aspect, as currently all you can do is speculate, he says.
And emerging- markets’ debt?
For Jim Barrineau, Co-Head of Emerging Markets Debt Relative Return at Schroders, if the reflation story wins, it will probably benefit stocks to the detriment of emerging debt, but “if we see rate hikes that go too far and too fast, there could be significant opportunities in fixed income,” he explains.
The expert, who reminds us of the strong returns seen in 2016 in some emerging debt segments, argues that if global debt markets remain stable, the search for profitability in emerging markets will continue. And points out positive points for the asset, such as currency valuations (which despite having regained ground in 2016 after the falls of recent years, are still below their peaks) or the recovery of commodity prices, which can benefit many countries in Latin America (except Mexico), not to mention that the markets have already priced-in a US rate hike in December and two next year.
Among the markets with more opportunities, and which can play the reflation story, is Brazil, less affected by the Trump policies, as well as some in Asia. In general, his proposal focuses on debt with low duration, and outside the investment grade segment, that is, in high-yield, where he sees much appeal. And always, with active management: “When investing in emerging debt, passive management does not make sense,” he says.
Santiago Ulloa, founding partner of WE Family Offices. Courtesy Photo . WE Family Offices: How To Manage HNW In An Increasingly Globalized Environment
There is no doubt that globalization has changed the world stage at all levels, and the wealth management sector has not been able to escape the effects of this economic, global, and cultural process. That is why, as announced last September, the US company, WE Family Offices, decided to sign an alliance with MdF Family Partners – with whom they already had a collaboration agreement which had been in place for over a year and a half – and with Wren Investment Office, a company with London Headquarters which advises UHNW families in the UK and Europe. Thanks to this strategic alliance, WE Family Offices can respond to the needs of its increasingly global clients.
Presence outside the United States
Santiago Ulloa, a founding partner of the American firm, which already has 50 employees, provides advisory services for assets worth over 6.8 billion dollars as of September 30th, 2016, and offers service to 70 families, says that “the reason for which we saw a need to have a presence outside the United States was because we observed that many of the families are already global, are in several jurisdictions, and have children spread across different continents. For one reason or another they want access to advisory services also from Europe, since in some cases they have more presence there. We have also been fortunate to find a team that has the same mentality and vision as us.”
The three firms share the same view on how to manage high-level family wealth in the long run. Qualities such as transparency, objectivity, or not having their own product, are all part of the philosophy with which they serve clients. Ulloa says that in this alliance, the firms involved will “function as independent companies, each with their own relevant licenses in their respective countries, but we will share investment opportunities search teams and asset advisory teams for issues at fiscal and succession planning level, or of global planning”.
In this regard, the common investment committee will be one of the most interesting contributions of this alliance. The main idea is to share the investment strategy, “for example, if we think that we have to reduce the risk of the portfolios in the stock market, we want it to be a strategy developed and agreed on by the investment committee. However, the implementation will be local, through the local investment vehicles that have the appropriate taxation for each client. We will also try to look for investment managers that will serve all firms,” adds Santiago.
Search for joint opportunities
There are many competitive advantages that come from having a global presence, among them “the possibility of finding investment opportunities together, which we can all share and thus obtain a greater critical mass that allows us to invest for our clients under the best possible economic conditions”. These synergies are especially important at a time when WE Family Offices believes that “the most interesting investment opportunities are currently found in private markets.”
Santiago Ulloa points out that “we currently have a total of more than 800 million dollars committed in illiquid operations, and disbursed more than 600 million dollars.” However, the company considers that such investments are not suitable for all families “we have to carry out strategic planning in advance to fully understand the family’s entire wealth, their liquidity needs, cash flows, etc.,” says Ulloa.
Illiquid investments
Illiquid investment opportunities are sought in different sectors around the world; real estate, energy, and technology are the company’s big commitments. In real estate they are investing in the United Kingdom, Germany, Switzerland, and the United States. Two of the most important recent operations were “the one in which we participated together with the Collier family’s family office, and another in which we co-invested with Starwood Capital in a project of more than 20,000 rental homes in the United States,” says Santiago. In the energy sector they invested in a company specialized in solar power which was later bought by a JP Morgan fund, and the one in which they have many hopes for investment and for the future is the technology sector, especially in the field of artificial intelligence in which they are working together with a specialist based in Silicon Valley, to where they plan to organize a trip with some of their clients, offering them the opportunity to get to know this sector first hand.
The average worth of the families that decide to commit to the firm is increasingly higher, reaching an average of 100 million dollars. In some cases they are single family offices that “entrust the general management of their global wealth to a company that has its own resources and outsources part of its operations, as well as the reporting and consolidation of all its assets, and with the capacity to access good investment opportunities globally.” This, says Ulloa, together with its global presence, means that WE Family Offices have a unique UHNW heritage management model.
Photo: Amitauti. HSBC Completes the Restructuring of its Global Private Banking Division
When Stuart Gulliver took over the reins of HSBC back in 2011, the private banking business of the London-based Asian bank had presence in roughly 150 countries. Nowadays HSBC has private banking presence in around 50 countries, but the bulk of the restructuring is over.
After the bank was involved in a tax evasion scandal in 2015, with the so-called Panama Papers, Gulliver hired specialists from Rothschild and KPMG to lead the restructuring. They focused their efforts on eliminating or reducing private banks from, mainly Europe, but including countries such as Japan, Panama, Israel, Bermuda, Brazil and even Mexico.
In its most recent earnings release, which saw a 62% fall in earnings-affected by a lower income after the closure of several units-Gulliver wrote that “The restructuring of Global Private Banking is now largely complete, and although Global Private Banking is now much smaller than it was three years ago, it is deliberately positioned for sustainable growth with a focus on serving the personal wealth management needs of the leadership and owners of the Group’s corporate clients.”
The manager also mentioned that “2016 was a good year in which we achieved a solid performance of all our global businesses,” despite the fact that it collected a provision of approximately 700 million dollars for legal expenses related to investigations related to money laundering and tax evasion in countries like the USA, Argentina, France, Belgium and India.
Photo: Sergom5. Compass Group and PIMCO Will Get Together to Launch a Fixed Income Strategy for Chilean Investors through a Feeder Fund
Compass Group, one of the leading independent investment advisors in Latin America, has partnered with PIMCO, a global fund manager, to launch Compass Global Credit, a feeder fund that invests 100% of its assets in fixed income strategies managed by PIMCO, which are registered in Ireland, comply with UCITS regulations and have daily liquidity.
The management team is headed by Mark Kiesel, CIO of the company’s Global Credit division, Andrew Jessop, a manager specializing in high-yield debt, and Hozef Arif, a manager specializing in global high-yield debt and corporate credit strategies.
Compass Global Credit invests at least 80% of its portfolio between the PIMCO GIS Global Investment Grade fund, a portfolio that seeks to maximize the total return on its assets by actively investing at least two-thirds of them in global corporate debt investment grade instruments, and the PIMCO GIS High-Yield Bond, a strategy that seeks to maximize total return and limit risk by investing at least two-thirds of its assets in a portfolio ofglobal high-yield bonds rated lower than ‘Baa’ (In Moody’s case) or ‘BBB ‘(as per S & P), with a maximum of 20% of its assets invested in securities with a rating lower than B.
Depending on PIMCO’s view on the two asset classes in which the major funds are invested, either of the two strategies can be underweight/overweight versus the benchmark, which is composed of BofA ML US High-Yield index (60%)and Barclays Global Aggregate Credit (40%).
In addition, the fund has a potential 20% to make a tactical allocation to other PIMCO UCITS mutual funds that invest in other asset classes within the fixed income universe. In this way, the management team can assign assets to the two main strategies according to their macroeconomic and market perspectives, and at the same time has the ability to tactically allocate resources to other funds, in case they have a stronger conviction in those asset classes.
To provide greater flexibility to the investor, the fund, which distributes dividends annually, has a dollar class and another in Chilean pesos.
At the end of December 2016, the fund denominated in Chilean pesos reached a wealth of more than 13.5 billion pesos, while the fund denominated in dollars exceeded 34 million dollars.
A visit from a PIMCO Product Specialist to Santiago de Chile has been scheduled for March to present the strategy to Family Offices, UHNW individuals, andprivate banking platforms.
Pixabay CC0 Public DomainJonathan Gibbs, Fixed Income Macro Strategies Specialist at SLI / Courtesy Photo. Jonathan Gibbs: "I Do Not See Any Irrational Behavior In The Fixed Income Market or a Bubble"
As a specialist in SLI Fixed-Income Macro Strategies, Jonathan Gibbs rules out the existence of a bubble for this asset, and to make his case, he compares the situation with the dot-com bubble of the late 1990s. “A bubble is a very specific concept, and is usually recognized by the irrational behavior of investors. Towards the end of the 1990s everyone bought shares in technology companies without even knowing what the business behind them was… I do not see that now in the bond market at all, I do not see any irrational behavior and, therefore, I do not see a bubble,” says the expert during an interview with Funds Society.
Thus, Gibbs answers the big question: where is the value in fixed income now? In his opinion, this depends on our economic vision. “If we think that inflation will remain weak, then returns will remain low for a long time.” Gibbs explains, however, that “if interest rates confirm their upward trend, some investors may suffer negative returns, but on the other hand, probably those who have opted for risky assets have done well.” For the expert, “what we need to recover is the negative correlation between stocks and bonds.”
Nor does the expert believe that we are seeing the end of the credit cycle in fixed income, a cycle which he considers “nebulous” and the beginning and end of which “is difficult to determine.” In his opinion, although “we have been experiencing a long period of expansion in the credit market, it does not mean that it is expensive: the spreads remain low, but I see no great reason for the credit cycle to be over,” he says.
As an investment specialist for the Absolute Return Global Bond Strategies Fund, Gibbs must explore market inefficiencies through active allocation to a wide range of positions. He uses a combination of traditional assets (such as bonds, cash and market instruments, and investment strategies based on advanced derivative techniques) embodied in a highly diversified portfolio. The fund can take long and short positions in markets, issues and groups of these through derivatives.
Inflation is coming
“We are very vigilant about the duration of sovereign debt, especially in the last weeks since Donald Trump’s victory,” he informs. For Gibbs, governments and central banks are comfortable with what is happening because they are getting what they want: inflation, the key element for fixed income investors. However, “if we analyze the rise in prices and its second-round effects, we see that prices do indeed rise, but it is a movement of prices, whereas inflation is a process.”
On Donald Trump’s fiscal policy, Gibbs questions whether it is the right time to do so. “Fiscal policy is a traditional way of stimulating the economy, but, and this is important, it’s extremely unusual to implement fiscal stimulus eight years after the economic recovery begins. It’s a strange moment to do so,” he says. Of course, he admits that his influence (Trump’s) in monetary policy may be greater outside the US, and “the shift from monetary policy to fiscal is probably a good thing.”
Regarding emerging markets, he points out that despite their new-found appeal, “it is about selecting the winners and avoiding the losers. Sometimes the losers are obvious, but there are also less obvious losers,” he warns. With their SLI Emerging Market Debt Fund, they are committed to countries like Peru: “It is a market that we like very much, for its political stability and its control over public spending.” On the duration, Gibbs insists that “it depends on the country in question”.
Finally, in Europe, they’re underweight in Italy and France. “We believe that political risk is high in these countries for the coming year. I do not think Marie Le Pen will win the elections in France, but the possibility can frighten. I think the French will avoid a radical party because of their more centrist tradition,” he added.
A conference on the new trends in Family Office investments presented by Jones Day, KPMG, Northern Trust, and Funds Society, will be held at Northern Trust’s Brickwell Avenue headquarters in Miami on the afternoon of March 21st.
The professional event, of which the agenda is yet to be announced, will start at 3 pm and run until 5.30 pm. Afterwards there will be a networking cocktail.
For more information and registration, please contact Dyron Hernandez and Diane Cruz on 305 789 1185 or Email: DadeRSVP@ntrs.com
CC-BY-SA-2.0, FlickrThomas Rutz, co-fund manager MainFirst Emerging Markets Corporate Bond Fund Balanced / Courtesy photo.. Emerging Debt is One of the Last Fixed Income Categories that Provide a Compelling Upside
Nowadays, in an environment of higher growth, inflation and growing prospects of rate hikes, getting returns on fixed income is not easy, but Thomas Rutz, co-manager of the MainFirst Emerging Markets Corporate Bond Fund Balanced, believes that emerging corporate debt could offer attractive returns this year. In this interview with Funds Society, the manager explains that he prefers to take long-term credit risk and reaffirms the attractiveness of companies in emerging countries, which have improved their fundamentals in recent years, adjusting to falling commodity prices and their currencies, and gaining strength for upcoming episodes of volatility. According to the expert, Latin America, cyclical sectors and high yield are the segments to watch.
– Emerging debt is an asset that is increasingly driven by international managers. What are the main benefits of these types of assets right now?
The main benefits are that EM corporates, in particular the high yield segment, offer an excellent risk-adjusted return profile in an environment of slowly rising interest rates. They are one of the last fixed income categories that provide a compelling upside. In addition, an allocation to emerging markets corporate debt provides an attractive opportunity to add diversification, as they exhibit a different risk profile to developed markets and provide investors with the opportunity to capitalize upon the future growth of private sector companies.
We believe that emerging markets are in the process of a multi-year convergence towards the developed world and the credit spreads (risk-premium) will narrow driven by those dynamics. There are very good prospects for a solid performance in 2017 due to better fundamentals with overall growth increasing from 4% in 2016 to 4.5%.
– Are the valuations attractive? In which segment are they more attractive: public or corporate debt?
Overall, emerging markets economies have greatly benefited from macroeconomic stabilization, improved legal and regulatory framework and better corporate governance, and also continue to benefit from very attractive demographics, such as population growth and the emergence of a new middle class. This will continue to drive domestic demand and economic output.
Valuations are therefore highly attractive. We prefer EM corporates over EM sovereign investments, since corporate credit spreads offer a better risk-adjusted return profile. In addition, credit spreads are higher and their duration is on average lower than those of sovereign debt. They, thus, offer better protection in a rising interest rate environment.
– Will the commodity rebound last and drive emerging markets? Which commodities will profit and which will suffer?
The recovery of commodity prices provided a crucial fundamental support to many emerging market countries and corporates last year. At current price levels, many firms already profit from massively increased cash flows which are then used to further deleverage their balance sheets.
– Have emerging market companies improved their fundamentals in recent years? If so, in what sense and in which segments of the market?
Yes, they certainly have! Leverage levels in EM corporates have stabilized markedly. Most companies have adjusted to the higher dollar and the lower commodity prices. This provides the base for corporate balance sheets to be more resilient to further volatility in currencies and commodities and, therefore, default rates are likely to decline.
Especially in the energy and mining & metals sectors, the firms responded to the crisis with cost-cutting initiatives, severe capex cuts and asset sales. The extent of these adjustments has differed by region and country. In Russia, the flexible FX regime has largely mitigated the effects of declining oil prices. In Latin America, we are also seeing good progress, with many corporates taking proactive steps to cut CAPEX and sell assets (e.g. Brazil’s Petrobras or Vale).
– Do you prefer interest rate risk or credit risk at present? Do the Fed’s future policies play a role in this?
We prefer credit risk for the reason that through credit spread compression, a positive return can be achieved, even in an environment of rising interest rates. Therefore, we manage our funds with a focus on the credit spread performance. Their duration is either in line with or shorter than the benchmark.
– What potential influence may Fed policies have on emerging corporate debt? Will its impact be smaller or greater than that of public debt?
Since, due to such developments as stronger commodity prices and the corrected macroeconomic imbalances, the overall position of the emerging markets is much stronger than a few years ago, Fed policy is likely have a comparatively milder impact on emerging market debts.
Moreover, potential protectionist trade measures by Donald Trump should be manageable since they have mostly already been priced in. In other cases, many investors have used short-term kneejerk reactions and dislocations as excellent initial buying opportunities. The proposed infrastructure program is likely to have a positive effect on commodities and thereby provide further attractive investment opportunities.
In which markets do you currently see the highest number of opportunities and why? Can you give some examples of sectors and names?
We currently see a lot of potential in Latin America as it is still largely undervalued. We, therefore, maintain a 25% overweight in the Latin American region. and our portfolio is tilted to more cyclical sectors, such as industrials, infrastructure and commodities. We like names such as Brazil’s Petrobras (energy) and Gerdau (steel). The latter, for example generates 45% of its revenues in North America and 35% in Brazil and is therefore well positioned for Trump’s infrastructure push in the coming years.
– Is China still a major risk for the emerging markets, or less so than before?
We neither did nor do we see China as a major risk for the emerging markets. Still, as long as valuations remain very stretched we will continue to have a large China underweight vs. the benchmark (2% in our fund vs. 20% in the JP Morgan CEMBI).
– Active management is key to your investment style in the emerging markets. Why? Is it a market that requires active investment management?
Yes, emerging markets require active management. We actively search for relative value in undervalued companies in the whole fixed income universe by applying a bottom-up, 5-step decomposition of the credit spread approach. Fund managers have to face the fact that there will again be significant winners and losers. A very active and opportunistic investment style will therefore provide additional alpha for those who are willing to continuously search for new opportunities and are able to adjust their positions. Our active management allowed us to outperform the benchmark by 560 basis points in 2016. For 2017, we expect another good year for active managers.
– How is the structure of the portfolio of the MainFirst EM Corporate Bond Fund Balanced set up? Is it a concentrated or a broad portfolio? Why? How many positions does it hold?
The MainFirst Emerging Markets Corporate Bond Fund Balanced is a fairly balanced mix of investment grade and high yield corporate bonds. The approach is opportunistic and based on the convictions of our fund management team. In a way, we are “bond pickers” and the resulting portfolio is a collection of global “best of” titles. This is at all times accompanied by diversification across multiple axes (regions, countries, sectors, ratings, duration). Currently, the portfolio holds 107 positions in 37 countries.
– How are titles selected? What characteristics do the titles need to have to be included in your portfolio?
Every investment is subjected to a risk and opportunity analysis, assigned a credit spread target, and usually replaced with another security once the target is reached. This encourages an active, target-focused style of investing. Emerging markets are ideally suited to a relative investing style.
– What do you like most, IG or HY firms at the moment, and why?
We currently like HY firms most, as they provide a greater upside potential through credit spread compression. With real yields hovering at very low levels, credit spreads are one of the last remaining potential sources of performance gains. Instead of focusing on long duration, the emphasis in the current market environment is on a thorough analysis and a disciplined investment approach to deliver performance. In contrast to most developed market fixed income instruments, whose performance is generally highly correlated with underlying government bonds, in emerging market credit products positive returns can still be achieved in an environment of slowly rising interest rates.
– Can you say something about the expected returns for this asset in 2017?
It is always difficult to predict performance, as unforeseen developments may always affect markets. However, if the current market conditions hold and trends continue as expected, we assume that the portfolio should be able to deliver the average portfolio yield plus roughly 200 basis points, which should result in a high single digit or even double digit return for 2017. As of February 7, 2017, the year to date performance for the MainFirst Emerging Markets Corporate Bond Fund Balanced is already at 2.76%.
Pixabay CC0 Public DomainPhoto: Jorge Letelier, Regional Director for Legg Mason in South America, and Roberto Teperman, Head of Sales for Legg Mason in Brazil / Courtesy photo . Western Asset Macro Opportunities Bond Fund is Available to Brazilian Investors through a Local Feeder Fund
At the beginning of January of this year, Roberto Teperman was appointed Head of Sales for Legg Mason Global Asset Management in Brazil. Previously, Roberto, who has a track record of almost 20 years in the financial industry, worked for Western Asset Management for 12 years, a subsidiary of Legg Mason that specializes in global fixed income solutions.
Over a year now, Roberto Teperman, based in Sao Paulo, has worked alongside Jorge Letelier, Regional Director for Legg Mason in South America, based in Santiago, Chile, in the development of feeder funds, which are investment vehicles that allow local investors to access funds in the UCITS format, and are registered in either Dublin or Luxembourg.
In October 2015, Legg Mason launched its first feeder fund in Brazil, the Legg Mason Western Asset Macro Opportunities Bond fund, an ‘unconstrained’ fixed income strategy that invests in a combination of investment grade and high-yield debt securities and derivatives. While the original strategy, which was launched in November 2013, is registered in Dublin and managed by a team headed by Kenneth Leech, CIO at Western Asset, which manages over US$ 4 billion in assets, the feeder fund has approximately US$ 100 million in assets.
The launch of this feeder fund was carried out shortly after the establishment of Instructions number 554 and 555 of the Brazilian Securities and Exchange Commission, which modified the definition of qualified investor, thus opening the fund distribution business to the “mass affluent” client. One of the main factors taken into account for the launch of the Western Asset Macro Opportunities’ feeder fund was its investment style, as it can invest up to 50% of the fund in high-yield debt and emerging markets as well as have exposure to currencies. Having the capacity to invest in futures, options, and other derivatives in order to actively manage the duration of the portfolio is a strategy that perfectly adapts to the preferences of the Brazilian investor.
“The Brazilian investor is accustomed to high interest rates on fixed income, which limits the options that can be offered to cover their investment needs. An alternative could be an equity fund, which generally offers near-double-digit yields, but they have higher volatility. However, fixed income funds with exposure to higher yielding securities seem like a better option,” says Roberto Teperman. “What we decided at that time was to review our product platform and look for the fund that best fits the needs of Brazilian clients. That’s how it was decided to distribute the Western Asset Macro Opportunities,” he adds.
The second feeder fund, the ClearBridge Global Equity fund, has been launched in Brazil to provide exposure to the MSCI World Index; the given client’s needs. These investment strategies are aimed at both institutional and retail clients, with the latter being private banking platforms, HNWI, and asset managers.
“We are working with clients and the sales team at Western Asset, who is an entity legally licensed as a Brazilian fund administrator, to open and create feeder funds that invest in offshore funds. Currently, we are evaluating the possibility of launching new feeder funds for different strategies with other affiliates of Legg Mason. The launch of these two funds is just the beginning, we are likely to launch new feeder funds in Brazil soon,” continues Roberto.
Legg Mason has been present in Brazil since 2005, after acquiring Citigroup’s asset management business. By having a person with knowledge of the local players and language, based in Sao Paulo, and fully dedicated to funds distribution, the management company aims to reinforce its long-term commitment to the local market.
Chile, Peru and Uruguay
In Chile, Legg Mason has been present since 2006 and its Santiago office serves as a base from where to develop the business in Peru and Uruguay. Currently, talks are being held with institutional investors, private banks and family offices, so that feeder funds that give Chilean investors access to offshore products can soon be launched.
The latest tax amnesty programs that have taken place in Chile, Argentina, and more recently Peru, have changed the landscape of the local investment fund industry. In this regard, Legg Mason has adapted to the changes quickly.
“The fiscal amnesty in Argentina and the fact that some global players like Royal Bank of Canada and Merrill Lynch have left the region has caused the fragmentation of the offshore business in Uruguay. Due to the former, numerous independent financial advisors have established themselves as family offices so as to continue serving their clients,” says Jorge Letelier.
“Both in Argentina and Peru, investors are taking advantage of the benefits offered by their governments, to repatriate capital to their country of origin and to be able to invest, either in local bonds with high yields, or in local funds with tax incentives for them”.
At this very moment, Legg Mason is not considering the idea of having a sales manager in Buenos Aires, but it does follow the development of the local industry very closely. “For now, Chile will continue as the center of operations for the Southern Cone,” concludes Letelier.
