The active/passive management conversation doesn’t have to be a debate. Those are better left to the politicians. As MFS Co-CEO Michael Roberge says in his October 18 opinion piece in the Wall Street Journal, investors can choose both. And they may want to consider that, given the potential diversification benefits of having active alongside passive in their portfolios.
With active management facing criticism of late, Mike sheds some light on the rhetoric and how to recognize a manager with skill. He also makes a compelling case for active’s risk management capabilities and the importance of excess return in an environment fraught with return-generating challenges.
Investors know this. In a recent survey conducted by MFS, nearly three-quarters of professional investors surveyed in the US cited strong risk management as an important criteria when selecting actively managed investments
So passive has its place. Active has its advantages. And there are some real merits to a “bipartisan” portfolio. Here’s what Mike has to say:
It is true that flows into passive strategies have picked up. But U.S. advisers are still allocating 70% of their clients’ assets to active investment strategies, according to our recent survey.1 Investment flows can be fickle and aren’t always a good barometer for long-term shifts in sentiment.
Most of it points to the average active manager’s inability to consistently beat their benchmark, net of fees. And while that might be true for average managers, there are skilled active managers who have consistently outperformed their benchmarks over a full market cycle. But how do you distinguish between skilled and average? It really comes down to conviction and risk management.
Investors caught in the active/ passive debate need to under- stand the issues—but stay focused on the outcome. Market returns might look appealing. Excess return will matter more. And managing the downside is essential. Long term, the bipar- tisan portfolio probably wins.
CC-BY-SA-2.0, FlickrPhoto: David Lofink
. M&G to Resume Trading in M&G Property Portfolio
Effective from noon on Friday 4 November 2016, M&G Investments (M&G) will resume trading in the shares of the M&G Property Portfolio and its feeder fund, the M&G Feeder of Property Portfolio. The M&G Property Portfolio is a broadly diversified fund, which after all sales, will invest in 119 UK commercial properties across retail, industrial and office sectors on behalf of UK retail investors.
The decision was taken in agreement with the Depositary and Trustee and the Financial Conduct Authority has been informed. The fair value adjustment originally applied on 1 July 2016 has also been removed in full.
M&G announced a temporary suspension on 5 July 2016 after investor redemptions rose markedly due to high levels of uncertainty in the UK commercial property market following the outcome of the European Union referendum.
William Nott, chief executive of M&G Securities, says: “Suspending the fund wasn’t a decision we took lightly, but we felt it was the only way to protect the interests of investors in what were very unusual circumstances in the aftermath of the referendum. Suspension created an environment more akin to normal conditions, allowing us time to choose the most appropriate assets to sell at the right price in order to preserve the integrity and future of the fund. As such, the fund manager has kept higher quality assets while reducing the exposure to assets deemed riskier than their prime counterparts, putting the portfolio in a good position for any further volatility that may be experienced in the lead up to Brexit.” As confidence returns to the market, 58 properties have been sold, exchanged or placed under offer for a total of £718 million.
Meanwhile, and effective January 1st, 2017, Sam Ford will be the new manager of the £598 million M&G UK Select Fund given the incumbent manager, Mike Felton is leaving M&G. Until the end of the year, the fund will be managed by co-deputy managers Garfield Kiff and Rory Alexander.
CC-BY-SA-2.0, FlickrPhoto: Google Earth. Marcelo Coscarelli Leaves Citi for EFG International
Marcelo Coscarelli has been appointed Head of Americas Region and a member of the Executive Committee at EFG International. The appointment will be effective January 1st 2017.
Previously, Marcelo Coscarelli was at Citibank Latin America, serving as Managing Director for high-net-worth and affluent clients since 2012. From 2008 to 2012, he was Chief Operating Officer of Itaú Private Bank International in Miami.
EFG International also announced that it has completed the acquisition of BSI for a preliminary purchase price of CHF 1,060 million. According to a press release, this transaction represents a milestone for EFG International’s positioning and growth. Joachim H. Straehle, CEO of EFG International said “the closing of the acquisition marks a historic milestone for both EFG International and BSI. Together we are forming a leading pure play private bank with strong Swiss roots, a broad international presence and an entrepreneurial spirit. Over the coming months, we will jointly drive forward the integration to realise the full benefits of the business combination for our clients, employees and shareholders. The combined group will have a solid capital and liquidity position, which will support the further development of the business.”
With the completion of the transaction, Steve Jacobs, Vice-Chairman of BSI from September 2015 until closing, and Roberto Isolani, CEO of BSI from May 2016 until closing, have become members of EFG International’s Board of Directors as representatives of BTG Pactual.
BSI will operate as a separate subsidiary within EFG International’s holding structure for a limited time, until its full legal integration, expected in the second quarter 2017.
CC-BY-SA-2.0, FlickrPhoto: Allie_Caulfield
. Singapore Tops The Charts As Best Overall Destination For Expats
For the second year in a row, Singapore takes the top spot in HSBC’s Expat Explorer country league table. Expatriates in Singapore enjoy some of the world’s best financial rewards and career opportunities, while benefiting from an excellent quality of life and a safe, family-friendly environment.
More than three in five (62%) expats in Singapore say it is a good place to progress their career, with the same proportion seeing their earnings rise after moving to the country (compared with 43% and 42% respectively of expats globally). The average annual income for expats in Singapore is USD139,000 (compared with USD97,000 across the world), while nearly a quarter (23%) earn more than USD200,000 (more than twice the global expat average of 11%).
Overall, 66% of expats agree that Singapore offers a better quality of life than their home country (compared to 52% of expats globally), while three quarters (75%) say the quality of education in Singapore is better than at home, the highest proportion in the world (global average 43%).
Now in its ninth year, Expat Explorer is the largest and one of the longest running surveys of expats, with 26,871 respondents sharing their views on life abroad including careers, financial wellbeing, quality of life and ease of settling for children.
The 2016 Expat Explorer report also reveals:
Millennials are drawn to expat life to find more purpose in their careers Nearly a quarter (22%) of expats aged 18-34 moved abroad to find more purpose in their career. This compares to 14% of those aged 34-54 and only 7% of those aged 55 and over. Millennials are also the most likely to embrace expat life in search of a new challenge: more than two in five (43%) say this, compared with 38% of those aged 34-54 and only 30% of those aged 55 and over. Millennials are finding the purpose they seek, with almost half (49%) reporting that they are more fulfilled at work than they were in their home country.
Expat life accelerates progress towards financial goals Far from slowing progress towards their longer term financial goals, expats find many are fast tracked by life abroad. Around two in five expats say that moving abroad has accelerated their progress towards saving for retirement (40%) or towards buying a property (41%), compared to around one in five (20% and 19% respectively) whose move abroad has slowed their progress towards these financial goals. Almost a third (29%) of expats say living abroad has helped them to save towards their children’s education more quickly, compared to only 15% who say it has slowed them down.
The top expat destinations for economics, experience and family are:
Dean Blackburn, Head of HSBC Expat, comments: “Expats consistently tell us that moving abroad has helped them achieve their ambitions and long-term financial goals, from getting access to better education for their children to buying property or saving more for retirement. Most expats also find that their quality of life has improved since making the move – and that they are integrating well with the local people and culture.”
CC-BY-SA-2.0, FlickrPhoto: Aston Martin. Aston Martin and the Real Estate Branch of the Coto Family Join Forces for a Luxury Real Estate Project
Aston Martin is collaborating with global property developer G and G Business Developments on a unique waterfront real estate project at the mouth of the Miami River. Aston Martin Residences at 300 Biscayne Boulevard Way will be a striking 66-floor luxury residential tower featuring approximately 390 condominiums offering incredible panoramic views of Biscayne Bay and the Miami area.
G and G Business Developments, the luxury real estate branch of the Coto family, has a reputation for pursuing innovative projects with a clear vision which ensures the delivery of exceptional results. To this Aston Martin brings its ability to define luxury and exclusivity through craftsmanship, design and attention to detail, understanding the important balance between beauty and performance.
Aston Martin’s design team, led by EVP and Chief Creative Officer, Marek Reichman, will design the interior spaces including the two private lobbies, the two-level fitness centre with ocean views and the full-service spa amongst other shared spaces in the development. When the development opens in 2021, seven penthouses and a duplex penthouse – all of which will enjoy private pools and spacious terraces – will be complemented by a range of luxury one to four bedroom condominiums.
These beautiful spaces will be encased in a bold sail-shaped building, an engineering master-piece designed by Revuelta Architecture and Bodas Mian Anger, renowned for creating landmark properties that are aesthetically pleasing and yet grounded in performance and purpose.
Katia Bassi, VP Aston Martin and Managing Director AM Brands said: “For over a century Aston Martin has delighted in working with talented people who not only understand our ethos but embody it. G and G Business Developments are just such people and we are excited to be collaborating with them to create truly exemplary residences. This remarkable new ven-ture realises our long-term vision of entering the world of luxury real estate, and is a natural extension of the Aston Martin brand. We create beautiful cars for those who appreciate automotive fine art, and we are excited to extend our expertise in design and craftsmanship into a project of this calibre. Such ventures enable us to further enhance and grow the brand into new aspects of the luxury world that appeal to both our existing and future customers.”
German Coto, CEO of G and G Business Developments said: “I am particularly proud of this project and our partnership with such an iconic British brand. We are working closely with the Aston Martin design team to create a stunning tower that will enhance and define the new Miami skyline. The collaboration is a beautiful mix of technology, style and elegance. I be-lieve that together we can build a highly desirable place to live, setting new standards in both design and quality of life.”
The Aston Martin Residences at 300 Biscayne Boulevard Way is part of a carefully curated collection of luxury projects and experiences within the Art of Living by Aston Martin portfolio’ taking customers beyond sports cars and expressing the company’s design and cultural ethos into other products and experiences.
The brand’s signature understated elegance, authenticity of materials and clean lines will be evident throughout and residents will experience the Art of Living by Aston Martin at every touch point. Highlight features will include doors with bespoke artisan Aston Martin handles, number plinths and kestral tan leather door tabs. Aston Martin designed reception desks fea-turing craftsmanship from the company’s halo products will adorn each lobby, along with key design features in all shared areas, including a beautiful infinity pool located on the 55th floor. Residents of the new development will also be able to enjoy easy access to the turquoise wa-ters of Miami via an exclusive yacht marina.
Reichman concluded: “As our first real estate project, we wanted to express the timeless style of Aston Martin through design elements and materials appropriate for an ultra-modern residential building. Our design team is providing the inspiration for a look and feel that will be truly Aston Martin.” The sales centre for the Aston Martin Residences at 300 Biscayne Boulevard Way will open in March 2017 and the project will break ground during Summer 2017.
Photo: Pictures of Money. Diagnosing the Health Care Selloff
Health care stocks have suffered as political rhetoric heats up around health care reform. Heidi suggests the sector may have been over-penalized.
No sector has been a victim of election antics and volatility like health care, the third-largest sector weight in the S&P 500 Index. The S&P 500 Health Care Index is down a little more than 2% this year and the S&P Biotechnology Select Industry Index has plummeted over 15%, while the S&P 500 has notched a decent 6% gain, according to Bloomberg data.
This should come as no surprise: A key factor in the recent selloff has been investor concerns that new regulations could impact the prices of drugs. These concerns are exacerbated by political rhetoric connected to the presidential election, and we think the likelihood of significant reform remains low. Although both U.S. presidential candidates have very different approaches to health care, each has proposed significant changes to the current system. And as politicians suggest plans to rectify an imperfect system, many health care companies feel the heat, particularly biotechnology companies, which then see weakened stock prices.
However, despite the potential for near-term political headwinds, there are positive fundamental and structural factors that suggest some health care companies are being over-penalized.
In recent years, U.S. equities overall have generally seen their stock prices gain from multiple expansion, rather than significant earnings growth. In other words, investors have been willing to pay more for the same dollar of earnings. But the health care sector is an exception; its earnings have been overlooked. The cheaper the stock prices get, the less the stocks are loved. See the chart below.
So why have health care and biotech stocks been left out in the cold? The market selloff in biotech began last year when Hilary Clinton commented on drug price gouging and the need for increased regulation. In a single day, the Nasdaq Biotech Index dropped almost 5% (source: Bloomberg).
I think this is a classic example of investor behavior driving stock prices rather than investment fundamentals. For now, this reform talk is all rhetoric. Actual reform measures affecting drug pricing would likely take years to legislate and implement. I won’t speculate on whether Congress would remain under Republican control, or which candidate would become president, but I believe that there is a strong likelihood of continued political divisions and gridlock. This suggests that the power to push through major reforms will be limited.
Markets in autumn have historically seen an uptick in volatility, according to Bloomberg data. Given that we are in the final weeks before the election, we expect volatility to continue in the health care sector. In fact, the issue is top of mind for voters. In a 2016 national survey of registered voters, health care ranked number four on the list of importance behind the economy, terrorism, and foreign policy. With so much focus on the sector, health care companies could continue to pay the price for political rhetoric in the near term.
The need for health care
But it’s important to remember that in addition to valuations and earnings, lifestyle and demographic factors support health care over the long term. First, while we can postpone discretionary purchases like a car or new appliances in dire times, health care is one thing we cannot live without. Meanwhile, an aging baby boomer population means demand for health care services will likely continue to grow. And as advancements in technology ensue, so will the average age in life expectancy, thus furthering the need for health care.
Some options to think about
Stocks in the biotech industry have a history of volatility, and given the election, nothing is certain. Yet, the industry is experiencing a wave of innovation. Within this context, it may make sense for some long-term investors to consider how biotech stocks may fit into their portfolio. Investors with a higher risk tolerance and/or a longer-term investment horizon may want to think about taking advantage of market volatility to find select opportunities in health care and biotech. To gain exposure to health care or biotech companies, investors may want to take a look at the iShares Nasdaq Biotechnology ETF (IBB) or the iShares U.S. Healthcare ETF (IYH).
Build on Insight, by BlackRock written by Heidi Richardson
CC-BY-SA-2.0, FlickrPhoto: Tony Webster. Deutsche Bank is Looking to Sell its Banking and Securities Subsidiaries in Mexico to InvestaBank
Deutsche Bank has entered into an agreement to sell its Banking and Securities subsidiaries in Mexico to InvestaBank, Institución de Banca. Deutsche Bank will centralize its Mexican Global Markets and Corporate & Investment Banking coverage function in its global hubs.
“Only two months after announcing the sale of our Argentina subsidiary, we are pleased to mark another major milestone in simplifying our bank by selling our subsidiaries in Mexico as part of Strategy 2020,” said Karl von Rohr, Chief Administrative Officer at Deutsche Bank. “We will work in partnership with our clients, regulators, employees and other stakeholders to ensure a smooth transition to the new arrangements.”
The bank is committed to serving its governmental, corporate and institutional clients in Mexico from global hubs and will continue to offer these clients the full range of investment banking products. As of 2015, Deutsche Bank had 131 employees in Mexico.
The transaction, which is part of the bank’s Strategy 2020 plan to rationalize its global footprint, is expected to close in 2017, subject to regulatory approvals and other customary conditions. Terms of the transaction were not disclosed.
CC-BY-SA-2.0, FlickrPhoto: Ministerio de Cultura de la Nación Argentina. Investing in the Age of Populism: a European Equities View
Populism is on the march. The unexpected UK vote to leave the EU, rising support for right-wing politicians in several other European countries, and the surprisingly strong showing by politicians such as Donald Trump are starting to cause jitters amongst investors. Not least because several of these politicians and political movements support ideas that range from mildly damaging to economically illiterate, such as greater government intervention in business, criticism of central bankers and restrictions on immigration and protectionism.
Despite increasing popular support for these unattractive ideas, equity markets have so far held up reasonably well, with the US market still trading near record levels. European markets have also snapped back from their post-Brexit vote blues, but is this stance complacent? And what are the potential investment implications of this populist movement?
Discontent with the status quo
First we should consider what is behind these votes and polls. Popular dissatisfaction with general economic development since the global financial crisis is palpable, caused by stagnation or falls in real disposable income for middle or lower earners. And discontent has been further sharpened by the realisation that almost all of the economic rewards go to a tiny elite. Mostly, these are the failings of globalism, which has delivered cheaper goods but also a deflationary impact on the bargaining power of semi-skilled and unskilled labour in developed countries, as products and services are moved offshore.
But the key point is that this discontent is being directed at national governments, because of the belief that politicians can ‘do something’. More unscrupulous politicians have realised that they can exploit these discontents to further their careers, even if they have no clue how to solve the underlying problems. Remember how prominent Brexiteers in the UK promised that the UK could control immigration and retain full access to the single market – a false claim that was exposed fairly quickly after the vote.
Thankfully, no politician has the power to roll back the effects of globalism – otherwise someone might propose that we all buy locally made clothes or rear our own chickens. Perhaps that sounds like a lovely idea. But on a more serious note, there is still a risk that politicians could come up with increasingly outrageous ideas to try to appeal to voters and to make a difference in a low-growth world. The Brexit debate is a case in point. Is the UK really likely to be a more prosperous place if it becomes significantly less attractive to foreign investors?
The politics of pragmatism
So the key task is to identify politicians who might do real damage and to assess if they really will be in a position to do that damage. The resilience of markets in the face of Brexit and other factors is explained by the expectation (or hope) that relatively sensible people are likely to end up taking decisions, or that the most foolish ideas will not actually be enacted.
In the case of the UK, the finance ministry is being run by the first man to have some actual business experience in at least a generation. And although much of the public rhetoric in the UK seems to be anti-business, a good part of this is probably pre-Brexit negotiation tactics aimed at securing a good deal. There is a difference between what politicians feel they need to say to justify their positions to discontented voters and what they are likely to enact in practice. It is also overlooked that the UK could well remain inside the European customs union – even if it leaves the single market.
If you work on the basis that the most extreme politicians will not get their hands on the controls and that mildly daft ones will be reined in by bureaucrats, then the current market view looks more realistic. There are risks that relatively sensible politicians could try and spend their way out of low growth, especially because we seem to be close to the limits of what central banks can do via quantitative easing (QE) and negative interest rates.
But it is more likely that a few high-profile infrastructure projects or housing schemes will be announced (maximum publicity for the least money) and that much riskier ideas such as ‘helicopter money’ – an alternative to QE that could be anything from payments to citizens to monetising debt – will be avoided. Fears that the EU will fall apart because of Brexit also seem misplaced: history means that other European countries have a completely different view of the institution.
Why pay for nothing?
Back to investment. If you want to get a return on your capital, no-one likes the idea of paying to lend money to a company (thanks for the offer, Henkel and Sanofi, which have both offered debt at negative rates). This only makes sense if you think someone else will buy the debt for an even more negative return.
So it seems that equities are one of the few places that can offer the potential of a real return. And within equities, there are some sensible steps to follow that can help to identify the types of company that should be able to ride out the next few years in a resilient way:
Look for basic products and services (tyres, lubricant, shampoo, food)
Look for recurring revenues or long-term contracts
Don’t overpay for growth – it might disappoint!
Find niche products with pricing power
Avoid regulatory/tax risk
Avoid dependence on a few products or countries
Identify beneficiaries of low interest rates (infrastructure)
Look for contractors with specialist infrastructure skills (tunnels, bridges)
Locate ‘self-help’ stories
Although valuations in Europe are significantly higher than they were two years ago, it is still possible to find solid businesses capable of delivering a cash yield of 6–7% and with opportunities to grow. Unless the political situation really deteriorates, those prospects are some of the best available in a world where low growth and negative rates are likely to continue for some time to come.
Simon Rowe is a fund manager in the Henderson European Equities team.
CC-BY-SA-2.0, FlickrPhoto: Concepción Muñoz. The Hedge Fund Allocation Is Dead. Long Live Total Return!
Outflows from hedge funds are accelerating. Hedge funds are now finding themselves on the defensive from poor performance, high fees, unfriendly legal structures, and an onslaught of negative publicity. Investors were already becoming more conscious of fees amid low nominal returns. Now a new dynamic is setting in: fear.
Those who are still invested in hedge funds are right to worry about whether today’s flood of outflows will induce tomorrow’s lowering of the portcullis, with hedge funds invoking gates to prevent investors from running en masse. Runs on banks can happen very suddenly, hence the time-tested maxim: “If you are going to panic, panic first.”
But here’s a more benign view of hedge funds’ future.
Five years from now, there will be no hedge fund allocation. In its place will be the total return allocation. This will consist of a whittled down group – in numbers and fees – of surviving, talented hedge funds that tear down their gates and earn their keep net of fees, blended with managers of liquid alternatives. Just as multi-strategy hedge funds eclipsed their single-strategy counterparts, so too will multi-asset strategies incorporate and push aside single-strategy liquid alts. This new and improved allocation will have lower overall fees, boost transparency, and deliver better and more differentiated riskadjusted returns (Sharpe ratios).
Within most portfolios, we’ll see differing blends of total return. At one end of the spectrum will be total return blends that focus more on seeking a capital appreciation outcome. Here, more growth-oriented multi-asset liquid alts will be teamed with long-biased multi-strategy hedge funds. Together, they will cannibalize equity and private markets to deliver returns based on capital appreciation while taming volatility – without the need to tie up capital for up to a decade at very high fees. On the other end of the spectrum will be blends that deliver capital conservation, with multiasset liquid alts focused on absolute return teamed with multi-strategy hedge funds focused on relative value. As interest rates start to rise, investors will increasingly see these blends as a more stable and steady source of capital preservation. Most portfolios will blend strategies focused on capital appreciation and capital conservation depending on the client’s objective.
The total return allocation will grow to help constituencies achieve outcomes that are important to them. With lower nominal returns and rising volatility, blending and increasing the size of the total return allocation – an outcome-based strategy – will be the order of the day for most portfolios. Outcomes include compounding money in real terms over inflation by certain hurdles over defined time frames. For example, an outcome could be exceeding inflation by 3% per year over rolling three years, or by 5% per year over rolling five years. This allocation will be more of a talent pool than an asset class, focused on achieving higher Sharpe ratios than those of traditional asset classes.
Today’s 10% allocations to hedge funds will give way to 20% allocations to total return. Within US institutional portfolios, hedge funds will shrink from a 10% allocation to 5%, while liquid alt forms of multi-asset will grow to 15% to lower fees while enhancing liquidity and transparency. Of course, this will differ by region. The UK has already evolved toward 10%-15% multi-asset (which they call diversified growth). This will keep growing to 30%. Australia is furthest along in eliminating hedge funds, owing to unseemly fees.
Comparable talent found in liquid alts will have the edge. This is because of their lower fees, higher liquidity, and greater transparency. Liquid alts also tend to be attached to more formidable and buttoned-down marketing and compliance organizations than hedge funds are – an important consideration in the post-Bernie-Madoff world.
Relative return has worked well for asset managers, yet only in secular booming markets. Gone is the 30-year disinflationary tailwind that enabled booming markets with shrinking volatility. The total return allocation will manage to objectives, not benchmarks, gradually weaning away the overall portfolio from relative return investing. As regimes evolve, so too must portfolios.
Michael J. Kelly, is Managing Director, Global Head of Multi-Asset at PineBridge.
This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.
CC-BY-SA-2.0, FlickrJoe DaGrosa - Courtesy photo. Miami Private Equity Is Taking the Marathon, Triathlon and Spartan Race to Cuba
In the last year, Miami-basedprivate equity investor Joe DaGrosa has quietly – and kind of accidentally – become the leader in the participatory sports space in Cuba. Joe DaGrosa and his MultiRace event company, in partnership with Spanish company Eventos Latinamerica, now effectively holds exclusive rights to the Havana Marathon (November 20), Havana Triathlon (February 25-26) and Spartan Race Cuba (March 18).
As the Company expands its presence in Cuba, it aims to help build an athletic bridge by bringing runners and triathletes from the World over to the country while introducing and developing a new generation of competitors in Cuba. “We believe that sports are a wonderful means to bridge cultural gaps and bring people together.” The Company has been holding workshops in Cuba on running sports training, nutrition and rehabilitation, with an emphasis on “training-the Trainers” in order to promote the sports.
Although there has been significant investor interest in doing business in Cuba since the re-establishment of relations with the US nearly two years ago, the reality is that there remains much to do in creating business, diplomatic and legal frameworks for international businesses and investors to operate. These challenges highlight Mr. DaGrosa’s achievement in establishing a business presence which positions him well to expand into other areas of opportunities in the country. Mr. DaGrosa added that “Cuba is a country whose people share a great affinity for many aspects of US culture and sports. Our focus today is to position these events as World leaders and make Cuba a global destination for elite runners and triathletes while seeking opportunities to help Cuba develop and expand its hospitality infrastructure which will be critical in this effort.”
