Photo: NicolaCorboy, Flickr, Creative Commons. Pioneer Investments and Santander Asset Management Will Not Merge
After 20 months in negotiations, UniCredit announced on Wednesday that it has agreed with Banco Santander and Sherbrooke Acquisition to terminate the agreements entered into on 11 November 2015 to combine Pioneer Investments and Santander Asset Management. The merger would have created one Europe’s leading asset managers with around 370 billion euros (almost $400 billion) in assets under management.
According to a press release by Unicredit, “The parties held detailed discussions to identify viable solutions to meet all regulatory requirements to complete the transaction, but in the absence of any workable solution within a reasonable time horizon, the parties have concluded that ending the talks was the most appropriate course of action.”
Further to UniCredit’s announcement on 11 July 2016 of a Group-wide strategic review, the results of which will be communicated to the market before the end of 2016, Pioneer will now be included in the scope of the strategic review to explore the best alternatives for all Pioneer stakeholders including a potential IPO. “This is to ensure the company has the adequate resources to accelerate growth and continue to further develop best-in-class solutions and products to offer its clients and partners.”
Meanwhile in Spain, and during Santander’s earnings release presentation, José Antonio Álvarez, Santander’s CEO commented that “we will cancel the transaction. We will develop Santander AM along with our partners and strive to build an asset management business that excels in serving our clients.”
Pioneer has presence in 28 countries and an experienced team of over 2,000 employees, including more than 350 investment professionals. It manages €225 billion in assets and is known internationally as one of the leading fixed income managers across all strategies. It also offers strong capabilities in European, US and global equities, as well as multi-asset and outcome-oriented, non-traditional products.. Meanwhile, Santander Asset Management has presence in 11 countries, and assets of €172 billion across all types of investment vehicles. Santander Asset Management has over 755 employees worldwide, of which around 220 are investment professionals.
Hong Kong. Foto: TreyRatclif, Flickr, Creative Commons.. BNY Mellon WM lleva su negocio de gestión de patrimonios a Hong Kong y refuerza su presencia en Asia – Pacífico
According to Mercer’s 2016 Cost of Living Survey, Hong Kong tops the list of most expensive cities for expatriates, pushing Luanda, Angola to second position.Zurich and Singapore remain in third and fourth positions, respectively, whereas Tokyo is in fifth, up six places from last year. Kinshasa, ranked sixth, appears for the first time in the top 10, moving up from thirteenth place.
Other cities appearing in the top 10 of Mercer’s costliest cities for expatriates are Shanghai (7), Geneva (8), N’Djamena (9), and Beijing (10). The world’s least expensive cities for expatriates, according to Mercer’s survey, are Windhoek (209), Cape Town (208), and Bishkek (207).
Mercer’s widely recognized survey is one of the world’s most comprehensive, and is designed to help multinational companies and governments determine compensation strategies for their expatriate employees. New York City is used as the base city for all comparisons and currency movements are measured against the US dollar. The survey includes over 375 cities throughout the world; this year’s ranking includes 209 cities across five continents and measures the comparative cost of more than 200 items in each location, including housing, transportation, food, clothing, household goods, and entertainment.
Despite volatile global markets and growing security issues, organizations continue to leverage global expansion strategies to remain competitive and to grow. Mercer’s 22nd annual Cost of Living Survey finds that factors including currency fluctuations, cost inflation for goods and services, and instability of accommodation prices, contribute to the cost of expatriate packages for employees on international assignments.
“Despite technology advances and the rise of a globally connected workforce, deploying expatriateemployees remains an increasingly important aspect of a competitive multinational company’s business strategy,” said Ilya Bonic, Senior Partner and President of Mercer’s Talent business. “However, with volatile markets and stunted economic growth in many parts of the world, a keen eye on cost efficiency is essential, including a focus on expatriate remuneration packages. As organizations’ appetite to rapidly grow and scale globally continues, it is necessary to have accurate and transparent data to compensate fairly for all types of assignments, including short-term and local plus status.”
The Americas
Cities in the United Stateshave climbed in the ranking due to the strength of the US dollar against other major currencies, in addition to the significant drop of cities in other regions which resulted in US cities being pushed up the list. New York is up five places to rank 11, the highest-ranked city in the region. San Francisco (26) and Los Angeles (27) climbed eleven and nine places, respectively, from last year while Seattle (83) jumped twenty-three places. Among other major US cities, Honolulu (37) is up fifteen places, Washington, DC (38) is up twelve places, and Boston (47) is up seventeen spots. Portland (117) and Winston Salem, North Carolina (147) remain the least expensive US cities surveyed for expatriates.
In Latin America, Buenos Aires (41) ranked as the costliest city despite a twenty-two place drop from last year. San Juan, Puerto Rico (67) follows as the second most expensive location in the region, climbing twenty-two spots. The majority of other cities in the region fell as a result of weakening currencies against the US dollar despite price increases on goods and services in countries, such as Brazil, Argentina, or Uruguay. In particular, São Paolo (128) and Rio de Janeiro (156) plummeted eighty-eight and eighty-nine places, respectively, despite a strong increase for goods and services. Lima (141) dropped nineteen places while Bogota (190) fell forty-two places. Managua (192) is the least expensive city in Latin America. Caracas in Venezuela has been excluded from the ranking due to the complex currency situation; its ranking would have varied greatly depending on the official exchange rate selected.
Canadian cities continued to drop in this year’s ranking mainly due to the weak Canadian dollar. The country’s highest-ranked city, Vancouver (142), fell twenty-three places. Toronto (143) dropped seventeen spots, while Montreal (155) and Calgary (162) fell fifteen and sixteen spots, respectively.
Europe, the Middle East, and Africa
Two European cities are among the top 10 list of most expensive cities. At number three in the global ranking, Zurich remains the most costly European city, followed by Geneva (8), down three spots from last year. The next European city in the ranking, Bern (13), is down four places from last year following the weakening of the Swiss franc against the US dollar.
Several cities across Europe remained relatively steady due to the stability of the euro against the US dollar. Paris (44), Milan (50), Vienna (54), and Rome (58) are relatively unchanged compared to last year, while Copenhagen (24) and St. Petersburg (152) stayed in the same place. In Spain, Madrid is up from 115 to 105, and Barcelona from 124 to 110.
Other cities, including Oslo (59) and Moscow (67), plummeted twenty-one and seventeen places, respectively, as a result of local currencies losing significant value against the US dollar. London (17) and Birmingham, UK (96) dropped five and sixteen places, respectively, while the German cities of Munich (77), Frankfurt (88), and Dusseldorf (107) climbed in the ranking.
A few cities in Eastern and Central Europe climbed in the ranking as well, including Kiev (176) and Tirana (186) rising eight and twelve spots, respectively.
Tel Aviv (19) continues to be the most expensive city in the Middle East for expatriates, followed by Dubai (21), Abu Dhabi (25), and Beirut (50). Jeddah (121) remains the least expensive city in the region despite rising thirty places. “Several cities in the Middle East experienced a jump in the ranking, as they are being pushed up by other locations’ decline, as well as the strong increase for expatriate rental accommodation costs, particularly in Abu Dhabi and Jeddah,” said Ms. Constantin-Métral.
Despite dropping off the top spot on the global list, Luanda, Angola (2) remains the highest ranking city in Africa. Kinshasa (6) follows, rising seven places since 2015. Moving up one spot, N’Djamena (9) is the next African city on the list, followed by Lagos, Nigeria (13) which is up seven places. Dropping three spots, Windhoek (209) in Namibia ranks as the least expensive city in the region and globally.
Asia Pacific
This year, Hong Kong (1) emerged as the most expensive city for expatriates both in Asia and globally as a consequence of Luanda’s drop in the ranking due to the weakening of its local currency. Singapore (4) remained steady while Tokyo (5) climbed six places. Shanghai (7) and Beijing (10) follow. Shenzhen (12) is up two places while Seoul (15) and Guangzhou, China (18) dropped seven and three spots, respectively.
Mumbai (82) is India’s most expensive city, followed by New Delhi (130) and Chennai (158). Kolkata (194) and Bangalore (180) are the least expensive Indian cities ranked. Elsewhere in Asia, Bangkok (74), Kuala Lumpur (151) and Hanoi (106) plummeted twenty-nine, thirty-eight, and twenty places, respectively. Baku (172) had the most drastic fall in the ranking, plummeting more than one hundred places. The city of Ashkhabad in Turkmenistan climbed sixty-one spots to rank 66 globally.
Australian cities have witnessed some of the most dramatic falls in the ranking this year as the local currency has depreciated against the US dollar. Brisbane (96) and Canberra (98) dropped thirty and thirty-three spots, respectively, while Sydney (42), Australia’s most expensive ranked city for expatriates, experienced a relatively moderate drop of eleven places. Melbourne fell twenty-four spots to rank 71.
CC-BY-SA-2.0, FlickrPhoto: Jorge Gobbi
. Will Erdogan Overplay his Hand in Turkey?
The dramatic events of the failed coup in Turkey and its aftermath has weighed heavily on all of the country’s asset sectors – equity, debt and currency. For the Eaton Vance Global Income Team this is not an unreasonable reaction, given many uncertainties of the political landscape. A member of the Global Income team is visiting Ankara now to assess the situation.
Turkish President Recep Erdogan announced a three-month extension of the state of emergency, following days of rounding up thousands of perceived political adversaries in the military, police and universities. As the situation evolves, Eaton Vance’s team will be focusing on two broad issues:
The U.S./Turkey relationship. It was strained before the coup, and is under even more stress now. Planes involved in the coup flew from the NATO airbase in which the U.S. military operates, and Turkey subsequently cut the power to the facility. Turkey is also seeking extradition from the U.S. of Fethullah Gulen, an Islamic cleric accused by Erdogan of being behind the coup.
Possible fissures in Turkish society. The relevant factions in Turkish society can be broadly divided into Erdogan and his ruling AKP party; the opposition, dominated by secular Turks; and Gulenists – followers of the exiled cleric. Erdogan’s opposition came out against the coup, despite the misgivings many have about his authoritarian style of rule.
“Most believe the purge is the right course of action for now, and believe the Gulenists are the problem – society is not fractured on this issue. On the other hand, we hear estimates that some 50,000 people are affected by the purges, so the impact is widespread – a scenario in which Erdogan goes too far would be worrisome.” The team explains.
For the team, the bottom line is: Turkey’s reputation as a democracy capable of reasonable growth and holding to tight budgets is obviously overshadowed by the latest developments. “We believe the U.S./Turkey relationship will survive this episode because it continues to serve the interests of both countries. We are watching very carefully to see if Erdogan overplays his hand and threatens the cohesiveness in Turkish society that currently works in his favor.”
CC-BY-SA-2.0, FlickrPhoto: Ennor, Flickr, Creative Commons. Allianz Global Investors: Institutional Risk Management Strategies Need Urgent Overhaul
Institutional risk management strategies are in need of urgent overhaul, according to a study of institutional investors conducted by Allianz Global Investors.
Conducted in the first quarter of 2016, AllianzGI’s 2016 RiskMonitor asked 755 institutional investors about their attitudes to risk, portfolio construction and asset allocation. The firms surveyed represent over $26 trillion USD of assets under management in 23 countries across North America, Europe and Asia-Pacific.
The Risk Monitor report found that since the 2008 global financial crisis, risk management practices have changed very little. Pre-crisis, investors’ top three strategies were diversification by asset class (57%), geographic diversification (53%) or duration management (44%). Despite the fact that 62% of respondents admit these strategies didn’t provide adequate downside protection, their use has actually increased post-crisis, with 58% of investors reliant on diversification by asset class, 56% using geographic diversification and 54% embracing duration management.
As a result, two-thirds of institutions are calling for innovative new strategies to help balance risk-return trade-offs, provide greater downside protection and replace traditional approaches to risk management. In fact, 48% say their organization is willing to pay more if it means access to better risk management strategies and 54% say their organization has set aside additional resources to improve risk management.
Commenting on the findings, Neil Dwane, Global Strategist AllianzGI, said:
“Investors are facing a world where average market returns continue to be lower and volatility is higher. In this environment, fulfilling investment objectives will require taking risk and applying truly active portfolio management,which needs to go hand in hand with an adequate strategy for managing that risk. Unfortunately, our RiskMonitor results show that a considerable number of investors do not show much confidence in their ability to manage risks effectively in both up- and down markets.”
“Encouragingly, institutional investors do seem to recognize the need for more effective risk management solutions. However, it is time for asset managers to innovate and offer solutions and products that will help clients to navigate the low yield environment without exposing them to inappropriate levels of volatility. This can take different forms, but the next few months and years will certainly be a litmus test for the growing offering in sophisticated multi asset solutions.”
Main investment concerns and allocation trends
There are countless risks lurking on the horizon, but a few are on the top of many investors’ minds as they navigate the markets in 2016 and try to meet their return objectives. Globally, 42% of those surveyed say market volatility is their main investment concern. Add to that the other big concerns this year – low yields (24%) and uncertain monetary policy (16%) and there is little doubt that investors may be in for an even bumpier ride compared to the last few years.
In light of the choppy markets at the start of this year, 77% of investors are apprehensive about equity-market risk, citing it as the top threat to portfolio performance this year. Also high on the list of threats that those surveyed believe could derail the performance of portfolios were interest rate risk (75%), event risk (75%) and foreign-exchange risk (74%).
Despite the concerns around market turbulence and equity market risk by institutional investors, many have not been persuaded to take a wide-spread defensive attitude. Institutional investors report their primary investment goal for 2016 is to maximize their risk-adjusted returns. Further, their inclination towards equities suggests their risk appetite has not been completely dampened by the market volatility. In particular, with 29% and 28% respectively, US equities and European equities garner the top spots among the investments earmarked for long exposure again this year.
CC-BY-SA-2.0, FlickrPhoto: Brian Evans
. Robeco Opens a New Office in Singapore
Robeco has opened a new office in Singapore. This office will focus on credit research and strengthening Robeco’s service to their clients in the market and the broader Southeast Asia region.
According to a press release, “Singapore is a fast growing Asian fixed income hub, so by establishing a permanent presence in the market, Robeco is able to expand capabilities, leverage opportunities and further strengthen our fixed income infrastructure in the region.” Maurice Meijers, Client Portfolio Manager Fixed Income for the Asian markets, will be heading the Singapore office. In addition to Meijers, two credit analysts will also be based in Singapore.
Maurice Meijers said: “Singapore is uniquely positioned as a leading fixed income hub in Asia, with a strong outlook for future growth. Robeco’s pan-Asia business, which includes offices in many key Asian markets, allows us to gain access to local market knowledge and attract local talent. The opening of our Singapore office is another important addition to Robeco’s Asia footprint and will enable us to further expand our fixed income capability to leverage opportunities in the region.”
Nick Shaw, Head of Global Financial Institutions, said: “The Asia Pacific region leads the world in new wealth creation and Singapore has long-since established itself as a global private banking hub. The opening of a local Singapore office will allow us to better service our distribution partners and provide local support to institutional clients and consultants in the region.”
Robeco has had a presence in Asia Pacific since 2005 and it has been growing its footprints in the region with offices in Australia, China, Hong Kong, Japan, Korea and now Singapore. Hong Kong is home to their Asia Pacific equities investment team, and their new Singapore office will be an extension of their Rotterdam fixed income team. The expansion in Asia Pacific is a key part of their “strategy 2014-2018: accelerate growth”.
CC-BY-SA-2.0, FlickrPhoto: Cheryl Marble. Anything But "Me-Too" Management
The decision to hire an active manager requires a belief that markets are inefficient. But in the last five years, active managers have been losing significant market share to passive vehicles, which suggests investors no longer believe markets are inefficient and instead have adopted the “efficient market hypothesis” theory.
On the surface, I can understand why. Alpha has been elusive in this market recovery. Consequently, many active managers have responded by documenting the reasons why and when alpha may become abundant. I believe, however, it’s our job as active managers to showcase the inefficiency of markets and distinguish between what is coincidental and causal when it comes to understanding what truly drives stock prices. We also need to build confidence that over a full market cycle investors in active portfolios won’t be overpaying for market beta.
Investors throughout time have anchored to the wrong things. Consider how often investors source their market view to the economic backdrop. A statistical regression of GDP growth between countries from multiple regions and their respective equity markets showed no relationship between the two. And yet, investors get caught up in determining when the Fed is going to raise rates or the results of the upcoming U.S. Presidential election and how it may impact stock prices. This is a “me too” investment thesis with binary outcomes. That isn’t what stock pickers focus on, because it isn’t important to alpha generation.
What drives stock prices long term – and what we want to understand as active managers – is a company’s steady state value plus future cash flows. While many of us learned this in school or early in our careers, it has gotten lost in today’s investment climate.
Another way to think about it, is where a company’s product or service fall on its industry’s “S curve.” Is the product in early awareness phase? Or has it reached escape velocity and at the point of commoditization where it’s under threat from “me too” copy cats? Determining where a company’s products exit in its maturation cycle is critical to understanding what has driven a company’s stock price versus what may drive its stock price in the future.
If we look back over the last 150 years, we can think of multiple products that have scaled up through the S curve: railroad, telephone, radio, automobiles, refrigerators, dishwashers, to name just a few, and most recently the internet and smartphones. The stocks of the original equipment manufacturers (OEMs) in all of these areas were massive outperformers as adoption cycles were escalating. Most often there were one, maybe two, horses in each race that enjoyed the lion’s share of unit growth and explosion of profits. However as the products reached escape velocity, investors behaved like they always behave, and continued to have linear expectations that what has happened would continue. Often they were unaware that margins were poised to decelerate and the stock’s outyear valuation was unrealistic.
With smartphone penetration rates in the developed world nearing potential peak levels, will these massive OEMs that are also enormous benchmark constituents because of past performance, continue to be strong outperformers? History suggests otherwise. ETFs and passive vehicles are constructed linearly based on what has already happened. Ultimately those icebergs become melting ice cubes and long-term underperformers.
Instead, let’s look at the impact of smartphone penetration on other profit pools and ask the question – are there alpha opportunities as a result? Advertising is an industry that will be significantly impacted, for example, as people spend more time watching programming on their hand held devices than sitting in front of a TV, reading magazines or going to the movies. Though only a small percentage of advertising is currently done through online platforms, this channel affords higher efficacy because it’s more targeted, measurable and cost effective.
As an active manager, we have to recognize disruptors and work to understand their impact on profit pools. That intelligence is critical to our ability to generate alpha – whether we’re trying to own the winners or trying to win by avoiding the secular losers.
Robert M. Almeida, Jr. is MFS Institutional Portfolio Manager.
CC-BY-SA-2.0, Flickr. Four Messages From Draghi's Meeting
The European Central Bank’s (ECB) Governing Council met on Thursday, marking the first of a series of high profile meetings scheduled over the next few days (the Federal Open Market Committee (FOMC) meeting on July 27th, the Bank of Japan (BoJ) meeting on July 29th, Bank of England (BoE) on August 4th), which have become a strong focus for investors globally.
Past experience taught us never to take Mr Draghi and the Council for granted: whenever they needed to, they managed to surprise the market and that’s why this meeting was one to watch. The monetary stimulus is meeting its objectives of reducing credit fragmentation, and spreads between core and peripheral European government bonds. The programme has still quite a few months to go before its initial “end-date”, and more importantly the ECB has managed to provide stability to both Government and Corporate bonds during the past few volatile weeks.
Mr Draghi announced the following:
No news is good news: the Governing Council kept all key policy rates and asset purchases unchanged. Monthly purchases in particular have exceeded, so far, the ‘target’ of €80bn per month. He said that at the moment the stimulus package in place is sufficient – but that the ECB won’t hesitate to add fresh measures if needed.
It ain’t over till it’s over: the current Quantitative Easing programme was initially scheduled to go on until March 2017, but Mr Draghi stated that (i) the programme will run until a “sustained inflation adjustment” is seen and (ii) should the economic scenario deteriorate significantly, the Governing Council would act by using all instruments available within its mandate.
“Believe me, it will be enough”: Mr Draghi famously spoke these words in 2012, and they echoed in our mind when he said he would “stress readiness, willingness and ability to do so” regarding the ECB’s attitude to tackle any negative impact of Brexit on the broader European economy.
Non-Performing Loans (NPL’s) and Banks: When asked about initiatives to address the current NPL problems that the European banks (and Italian banks in particular) are facing, Mr Draghi said that addressing legacy NPL issues “will take some time” and, more importantly that any public backstop would be a useful measure but that it will need to be “agreed with the European Commission according to existing rules.”
Lastly, Mr Draghi reiterated that actions beyond monetary policy are the job of politically elected representatives – and that governments should support monetary stimulus with reforms aimed at raising productivity and improving the business environment.
The market reaction to Thursday’s meeting was relatively contained: we saw core rates correcting on the back of the lack of “new” news, and we share this view. We think this was a reassuring performance on behalf of the ECB, but a non-event from a market perspective.
We think investors are now in a “one down, four to go” mode and are awaiting for actionable catalysts from the meetings of FOMC, BOJ and BOE, as well as the results of European Banking Authority (EBA) Stress tests expected over the coming ten days.
CC-BY-SA-2.0, FlickrPhoto: Aziz Hamzaogullari, CFA, Portfolio Manager, at Loomis, Sayles & Company. Active Matters in U.S. Large-Cap Growth
Passive investments such as index funds have become increasingly popular, due primarily to lower fees and attractive performance amidst a seven-year bull market*.
This investor preference was recently captured in the 2016 Natixis Global Asset Management Individual Investor Survey – where 67% of 850 Latin American investors surveyed believed index funds can help minimize losses. Further, 64% also believe they are less risky, and 57% think they offer better diversification than other investments**.
While there certainly is a place for passive investments in portfolios, these survey results may have uncovered misconceptions about their risk mitigation and diversification benefits. Aziz Hamzaogullari – a leading active investment manager in the U.S. large-cap growth equity space – shares his insight on active risk management, alpha, and diversification.
What can an active approach to growth achieve that indexing may not?
At the heart of active management lies the belief that one can deliver returns in excess of benchmark returns. Whether we are in the midst of a market rally or downturn, active investment management and active risk management are integral to alpha generation – creating risk-adjusted excess returns and adding value to long-term investor portfolios. Our focus is on quality companies uniquely positioned to capture long-term growth and active management of downside risk. Over the long run, we believe markets are efficient. However, short-term investor behavior can cause pricing anomalies, creating potential opportunities for active, long-term, valuation-driven managers like us. Capitalizing on these opportunities requires a disciplined investment process and a patient temperament.
Also, I think defining risk in relative terms obfuscates the fact that the benchmark itself is a risky asset. This is particularly true with cap-weighted indices because downside risk increases significantly when the stocks of a particular sector experience a run-up in prices that are above their fundamental intrinsic value. If a portfolio manager ties his investment decisions to benchmark holdings and risk factors, he must necessarily take on this additional downside risk. Instead, we define risk as a permanent loss of capital, which means we take an absolute-return approach to investing and seek to actively manage our downside risk.
How does your approach lead to high active share versus the Russell 1000 Growth Index?
Our approach is different from benchmark-centric portfolios that tend to begin their investment process by considering the influence of the benchmark’s top holdings and sector positioning on relative performance. The companies we invest in must first meet a number of demanding quality characteristics. Our philosophy and process often result in positions and position sizes that differ from the benchmark. If you want to outperform a benchmark net of fees, it stands to reason that you must be different from the benchmark. That said, high active share is a by-product of our distinct approach to growth equity investing. (Active share is a measure of how a portfolio differs from the benchmark. High active share indicates a larger difference between the benchmark and portfolio composition.)
A study by Antti Petajisto and Martijn Cremers found that high active share correlates well with positive excess returns and that the most active managers, those with active share of 80%–100%, persistently generated excess returns above their benchmarks even after subtracting management fees***.
Do you think there is a misconception among investors that more names in a portfolio mean more diversification?
Perhaps. While diversification does not guarantee a profit or protect against a loss, it is an important tool in managing portfolio risk or volatility. However, we do not think diversification is the simple notion that more names in a portfolio is better. Our 30 to 40 holdings isn’t a random number. A 2010 study by Citigroup demonstrated that a portfolio of 30 stocks was able to diversify more than 85% of the market risk. The diversification benefit of adding more stocks to the portfolio declined significantly as the number of stocks increased.
*- Refers to the U.S. stock market (as measured by the S&P 500® Index) from its low on March 9, 2009 through March 9, 2016. ** – Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February–March 2016. Survey included 7,100 investors from 22 countries, 850 of whom are Latin American investors. ***- Martijn Cremers and Antti Petajisto, “How Active Is Your Fund Manager?” International Center for Finance, Yale School of Management, 2009.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.
In Latin America: This material is provided by NGAM S.A., a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier (CSSF) and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of NGAM S.A.: 2 rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. The above referenced entities are business development units of Natixis Global Asset Management, the holding company of a diverse line-up of specialized investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. In the United States: Provided by NGAM Distribution, L.P. 1535854.1.1
CC-BY-SA-2.0, FlickrPhoto: Vadim Timoshkin. What Effect Might ‘Helicopter Money’ Have On Markets?
Helicopter money refers to the situation where a central bank finances the fiscal expenditure of a government. The government prints money instead of raising taxes or debt to fund spending.
The economic effects of QE are still being debated, but they are presumed to be positive to date. With helicopter money, there would be a direct fiscal expansion financed by central bank purchase of (and cancellation of) government bonds. This direct fiscal spend would be economically expansionary, unless the announcement of helicopter money represented a shock to households and firms that was suficiently significant to offset the fiscal stimulus. The economic effects of fiscal expansion combined with new QE appear identical to those of helicopter money.
The market effect of the recent experience of QE has been lower discount rates, a weaker currency, and a strong environment for risk assets. We might guess that the market’s reaction to helicopter money would be similar, but given that past episodes of dominance by the fiscal authority over the central bank have been associated with fiscal indiscipline and high inflation, there is a reasonable chance that markets could react in a meaningfully different and negative way. The truth is that we just don’t know.
Figure 1 outlines the impacts of QE, of helicopter money (where debt is purchased by the central bank and written-off), and a combination of QE and fiscal expansion. With the unknown market impact of helicopter money, with prospective policy tools in the hands of central banks narrowed through debt cancellation, and with the economic benefits associated with helicopter money rather than straight fiscal expansion de minimis, it is not clear why policymakers will choose the path of helicopter money. Perhaps the real lesson is that monetary policy has its limits and that in the event of an economic slowdown, aggregate demand is best supported by fiscal rather than monetary policy. In the event that new fiscal expansion requires supplemental monetary support in the form of additional QE, this is a decision that could be made at some point in the future.
Helicopter money is often associated with incidence of hyperinflation. In their study of the 56 incidents of world hyperinflation during the last 300 years, Hanke and Krus found hyperinflation to be ‘an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy to name a few’. By contrast, monetary financing has been used widely in the developed and developing world over time without ending in hyperinflation.
Until the US Fed Accord in 1951 the US operated a policy of fixing long-term bond yields, and as such increasing or decreasing the amount of reserves in the banking system, depending on private sector demand for these instruments. Canada used monetary financing for 40 years until 1975 under a free-floating exchange rate regime without calamitous macroeconomic effects, and India operated a policy of debt monetisation until 2006. Further examples abound. Indeed, of the 152 central bank legal frameworks analysed by the IMF, 101 permitted monetary financing in 2012. This is not to say that helicopter money is a desirable policy. It would be, in my opinion, a backwards step. But neither is it to be necessarily associated with hyperinflation.
So, in conclusion, helicopter money is not a weird and wacky new form of money. Indeed, once we understand how money works helicopter money looks pretty straightforward. The prospective economic, monetary and fiscal effects of helicopter money (absent the sticker-shock of a new unfamiliar policy being implemented) look identical to a normal fiscal expansion supplemented with additional QE. As such, it could be argued that the UK, US, and Japan have all already effectively experienced helicopter money. It is harder to say the same about the Eurozone, consisting as it does of government entities that are not monetary sovereigns. Indeed, the Eurozone is much more complicated.
Toby Nangle has been the Head of Multi-Asset and Portfolio Manager at Threadneedle Asset Management Limited since January 1, 2012.
Photo: Narch, Flickr, Creative Commons. Luxembourg Approves an Alternative Fund Structure
The law introducing a new Luxembourg alternative fund structure, the Reserved Alternative Investment Fund (RAIF), has been approved by the Luxembourg Parliament and will come into force three days after publication in Luxembourg’s Official Gazette Mémorial.
Welcoming the new law, Denise Voss, Chairman of the Association of the Luxembourg Fund Industry, says: “The Luxembourg RAIF Law provides an additional – complementary – alternative investment fund vehicle which is similar to the Luxembourg SIF regime. Unlike the SIF, the RAIF does not require approval of the Luxembourg regulator, the CSSF, but is supervised via its alternative investment fund manager (AIFM), which must submit regular reports to the regulator. Luxembourg managers will therefore have a choice, depending on investor preference. They can set up their alternative investment funds as Part II UCIs, SIFs or SICARs if they prefer direct supervision of the fund by the CSSF. Alternatively they can set up their alternative investment fund as a RAIF, thereby reducing time-to-market.”
Freddy Brausch, Vice-Chairman of ALFI with responsibility for national affairs, adds: “In order to ensure sufficient protection and regulation via its manager, a RAIF must be managed by an authorised external AIFM. The latter can be domiciled in Luxembourg or in any other Member State of the EU. If it is authorised and fully in line with the requirements of the AIFMD, the AIFM can make use of the marketing passport to market shares or units of RAIFs on a cross-border basis. As is the case for Luxembourg SIFs and SICARs, shares or units of RAIFs can only be sold to well-informed investors.
Denise Voss concludes: “The new structure complements Luxembourg’s attractive range of investment fund products and we believe this demonstrates the understanding the Luxembourg legislator has of the needs of the fund industry in order to best serve the interests of investors.“
You can click here to access the legislative history in French.
