. The 'Funds Society Fund Selector Summit' Won Silver in the British Media Awards
The ‘Funds Society Fund Selector Summit’, produced by Open Door Media Publishing Ltd, picked up the Silver Award in the ‘Event of the Year’ category in the British Media Awards which took place in London on May 4th.
The event serves fund selectors in the US offshore market and is a joint-venture between Funds Society, the Miami-based publisher of the eponymous website and publication, and Open Door Media Publishing Ltd, the award-winning publisher of ‘Investment Europe’ and ‘International Investment’.
Nick Rapley, CEO of Open Door Media Publishing Ltd, commented: ‘We are extremely proud to receive this recognition for one of our premier events. The ‘Funds Society Fund Selector Summit’ is a fantastic event and the result of a unique collaboration between two leading financial media companies. We look forward to building on this success and to producing more conferences with Funds Society in the future.’
Alicia Jimenez, partner and founder of Funds Society, added: ‘.This event is the result of a joint effort between Open Door Media’s fantastic expertise as an event organizer for the asset management business and Funds Society’s deep knowledge of the Americas region. A combination that will hopefuly bear more fruits in the future. We are extremely greatful for this recognition’.
The latest ‘Funds Society Fund Selector Summit’ took place at the Ritz Carlton, Key Biscayne, Miami, on the 28th & 29th April 2016. Coverage of the event can be found at both www.investmenteurope.net and www.fundssociety.com
CC-BY-SA-2.0, FlickrPhoto: Mohmed Althani. Emerging Markets, Japan and Fixed Income: The Favorites on the First Day of the Miami Fund Selector Summit
Current markets present significant challenges, but investment professionals are convinced that there are many opportunities to be exploited: Emerging Markets (both fixed income and equities), Japanese Stock Market, High Yield, Global Fixed Income from a flexible perspective, and Convertible Bonds were some of the strategies presented by the fund management companies M&G Investments, Matthews Asia, RWC, Carmignac, Henderson Global Investors, and NN Investment Partners during the first day of the 2016 Fund Selector Summit, organized by Funds Society and Open Door Media, and held in Miami on April 28th and 29th .
The opportunity which emerging markets currently represent became apparent during the event. Regarding equities, John M. Malloy, Fund Manager at RWC, spoke of a positive environment due to attractive valuations, the strong growth in some markets, and some other matters which represent a great investment opportunity in certain securities. “Valuations are not like those of the late 90s or the year 2000, but markets are cheap. And the most interesting thing is that when profit begins to recover, they’ll become even more attractive,” said the fund manager. Growth will also support this statement: “We see emerging markets as a growth opportunity: although this has been questioned in recent years, countries like India, Pakistan, the Philippines and some Latin American markets will offer higher growth than in many parts of the developed world, and at some point, the markets will recognize it,” he added. He believes that these markets are in good shape overall, and there are positive signs such as export growth, which had been declining for some time but have since stabilized and begun to recover; and the expert is convinced that the figures will increasingly improve.
In addition, some of the factors which play in favor of some companies are automotive industry technology, the growth of infrastructure (strong in countries like India, Indonesia, and Brazil) or media and advertising (with companies that are not expensive, unlike in the developed markets). The team is currently optimistic, especially with Asia, which has very strong fundamentals and higher growth rates, but also speaks of turning points in Russia and Brazil: “Brazil faces major problems and a great recession but everything can change and the market may rebound faster than you can think… as was the case with Argentina: one year ago no one spoke of the country and in six months the markets’ mentality had totally changed,” he explains. Regarding interest rate hikes in the US, he believes there will be one or two more this year but will not be a big risk in an environment where the dollar is stable and will perhaps weaken (does not cover currency); and he is also more optimistic with data coming from China, because “the pressure has dropped.”
His emerging stock market strategy (which includes up to 20% in frontier markets and in the most liquid part, now 12%), combines a top-down and bottom-up approach. It is index-agnostic, and has a very high active share, over 90%, and materializes in 50-60 names, in a diversified portfolio which is very focused on growth (their companies have the potential to see their profits grow by more than 20%). It is also biased towards large and mid-caps. And they can boast of beating the market in difficult years. The company launched the fund in UCITS format in December and he thinks it can now generate much interest, and they also recently opened an office in Miami. In frontier markets, he points out Pakistan’s potential, for its demographics, its reforms, its political stability and Chinese and IMF investments, and also points out the existing opportunities within the banking sector.
But before investing in emerging market equities, many investors are beginning to increase their positions in emerging market fixed income, both in hard and local currency. Claudia Calich, Fund Manager of Emerging Markets Bond at M&G Investments, pointed out the opportunity presented by that asset and its good current entry point: currencies have depreciated a lot and are stabilizing, although still the levels are low and exporters will benefit; low raw material prices have stopped their collapse, although importers and consumers continue to benefit (also, beyond the winners and losers of cheap oil prices, she is positive in countries that have adapted to current levels of oil, such as Russia. She is not positive about Nigeria). She also believes that there are opportunities in the currency area, leading her to increase its exposure in the portfolio. In her opinion, Central America and the Caribbean are the most attractive markets in which to invest to benefit from the recovery in the US…. Moreover, growth is more visible and that can change the negative perception people have of emerging markets versus developed ones.
When it comes to risks, she believes these have diminished: and so, she is now less cautious with Brazil than she was a year ago. On oil prices, the situation has also changed in respect to early in the year; China’s rebalancing has improved, although there are still challenges ahead…With regard to countries that are suffering from exposure to China via exports, she points out the adjustments carried out in many of them, mainly from Latin America, for example with adjustments to their currencies. Regarding the Fed, there have also been changes from the initial perception of four rate hikes this year. She believes that there will be one or two rate hikes during the remainder of the year (in June or July, and at the end of the year): If the Fed is forced to make more rate increases, the losers would be countries with large financing needs, such as Brazil, Turkey, and South Africa, and the winners would be those exposed to its economy-because the Fed would raise rates for a good reason, such as Mexico, Central America and the Caribbean, or Eastern Europe. Due to that exposure to the US and its recovery, she is comfortable with countries like Honduras, Dominican Republic, El Salvador, or Guatemala. In general, by countries, the fund is heavily overweight in Bulgaria, Azerbaijan, Paraguay, Guatemala, and Romania versus underweight in Malaysia, Poland, Turkey, South Africa, or Colombia, with less attractive valuations which do not compensate for risk.
On valuations, she believes these to be similar to those faced in the debt crisis in Europe, far from the highs, and which, in some cases, compensate for the risk taken. The fund manager has reduced exposure to credit− the chances of defaults have increased and compensate less for the risks taken, while she believes that if the correct names are chosen, it is still interesting− and has increased investment in the area of government debt in the fund, which can invest in both corporate debt and public debt, in both hard currency or local currency −local currency exposure has risen recently−. The fund manager is positive with the attractive valuations overall, but is cautious with some, such as some Asian ones, and the fund’s exposure to currency is currently around 25% in aggregate terms. In relation to flows in emerging markets, she believes that we will not see as many outflows as in the past.
As regards fund management, she considers it essential to adopt a flexible and active style, which is capable of seizing opportunities wherever they may be found (in credit or public debt), and to find the best ideas, using both interest rates and currency exchange, as well as credit, as profit drivers.
Japanese equities
Matthews Asia focused its presentation on Japanese equities: the management company has been investing in these assets since the mid 90s. The company tries to look at Japan as part of Asia, and they explain that Japanese companies are experiencing a lot of growth from other parts of Asia (e.g. the consumer and tourism sectors): with a long-term and growth approach, they try to find the best ideas in Japan, ranging from 50 to 70. “The economy presents many challenges in terms of growth, it’s not an attractive investment destination from that point of view, but there is great opportunity in Japanese companies,” says Kenichi Amaki, Fund Manager. “There are high quality growth companies and that’s why I invest there.”
The fund’s portfolio is focused on the best opportunities in the country: the fund manager looks for growth companies, understanding this concept in three ways: leading global companies such as Toyota; the “Asia growers” that capture the productivity growth and wealth in the rest of Asia −a game that, unlike in the past, can now be played and which has great potential−; and companies which are able to grow in the domestic Japanese market, capturing niches. The company focuses on growth companies in the country, all of them of great quality.
The expert also pointed out the onset of the country’s improved corporate governance, and the trend of returning cash to shareholders: “Changing corporate culture will take time, but it will improve; most companies already have payout ratios… and that’s one of the reasons to invest in the country,” he says.
Regarding the recent disappointment in the Bank of Japan’s monetary policy, the fund manager believes that the authority will wait to push its monetary policy to announce those measures together with other tax measures, “combining both will be a more powerful combination.” Market expectations have also risen and, he believes, the central bank awaits its opportunity when expectations are lower than they are now, in order to positively surprise the markets.
With regard to valuations, the fund manager stressed that Japan is the cheapest developed equity market. By sectors, he points out opportunities in healthcare and industrial, while he is underweight in consumer discretionary, materials, utilities and financial institutions (“there is much competition for loans, banks have no power to set prices,” says the fund manager, whose consumer discretionary underweight is due to the fact that the benchmark weight in the sector is concentrated in auto companies).
Fixed income opportunities
Keith Ney, Fixed Income Fund Manager at Carmignac Risk Managers and Fund Manager of the Carmignac Sécurité fund (which has never had a negative result in 27 years) spoke about the fixed income opportunity. During his presentation, he focused on the strategy of the Carmignac Global Bond fund, managed by Charles Zerah since February 2010. The fund has a flexible and opportunistic style with a focus on total return, seeking to beat the market with a strong focus on risk management and capital preservation. The asset manager has greatly increased its holdings of fixed income, which accounted for 23% of the portfolio in 2007, and now account for 60%. “The structure is very flexible and very quick to adapt to changing markets,” said the expert. Another of the fund’s key factors is a global universe, both as regards to geographies, as well as assets, which can take long and short positions (in duration, credit, currency… but the latter in a purely tactical way and for hedging purposes, as the fund is not a long-short). The fund’s duration can range from 4 to 10, so that they can benefit from rate increases. The idea is to exploit market inefficiencies to add value. The volatility is limited to 10%, and the fund has a negative correlation with other similar funds of its competitors.
Currently, in duration he has exposure to the US, Germany, Australia, and Switzerland and European peripheral debt in countries like Italy, Portugal, Bulgaria and Greece. However, he has slightly reduced his position in the United States because he advises that the market has perhaps underestimated future rate hikes in the country, but explains that the Fed is now more dependent on markets and global financial conditions than on economic data. In Europe, the activity of the ECB could be positive, although he believes that the corporate debt repurchase program will fail, to the extent that there are not enough debt securities to buy and the ECB will have to extend its purchases to the public debt of peripheral countries: hence its exposure to markets such as Italy.
In credit, positions are focused on sectors with very low prices, with an opportunistic view: the distressed raw materials segment− with many fallen angels− or CLOs. But the star position is on European banks, “still cheap and in deleveraging phase” and he points out the opportunity available in subordinated debt and CoCos, “a poorly understood asset which is a great opportunity from an opportunistic point of view.” In currencies, they currently have no great convictions: “We no longer hold the positive vision of the dollar which we had a few years ago,” says the manager. Carmignac will soon open an office with five people in Miami.
Henderson Global Investors also pointed out the opportunity in fixed income which High Yield credit represents from a global perspective: Kevin Loome, Head of US Credit, pointed out that High Yield spreads in the US do not signal a recession and that problems in the energy sector have been “contained”. “I do not think we’re close to the situation in 2008”, so the fundamentals are intact: “High Yield has been placed in a position which now represents an opportunity” in an environment of negative rates in many assets which increases appetite for this debt segment. “There may be a strong technical advantage in the coming years,” he adds. Finance companies have performed badly, he points out, and are disadvantaged by the policies of the Fed, but they don’t represent a large part of the high yield universe, he says.
On the asset side, he points out its higher returns overall, its shorter duration, and exposure to the upward rate cycle, low levels of default, a growing market in Europe and opportunities for stock pickers: “In my career I have never seen such great dispersion,” he explains, hence a good selection of credit can provide much value, which he applies to the Henderson Global High Yield Bond fund. In his opinion, the greatest opportunities are in High Yield and bank loans.
The fund manager also points out the importance of having a global High Yield strategy, and not just in the US, although it represents most of the market, and the management company has a bigger team in Europe and emerging markets than other companies. In fact, he sees opportunities in Europe for its better quality, less exposure to energy, and because the asset will benefit from the ECB’s policies in relation to the US market, where he is cautious. “We are now less US-centric because we see more opportunities in Europe,” he says.
With regard to defaults, they are low but they tend to rise especially in the US energy sector, in which Henderson is underweight.
Convertible bonds
Convertible bonds were also discussed at the event: Pierre Lepicard, of NN Investment Partners, brought the asset’s current status to the 2016 Fund Selector Summit. “The drought in Africa has consequences except for lions and crocodiles… that is what is currently happening in the markets: we live in a world with few returns and those who seek them have to leave their comfort zone, where they used to invest, and that is associated with risks.” For the expert, markets go through some fundamental changes: including that last year interest rates hit rock bottom, and that had consequences for investors.
“Convertibles are a way to take risk intelligently”, although it is important to choose a good fund manager. NN IP has the NN (L) Global Convertible fund to play the asset and obtain hedging in the bear markets while at the same time participating in bullish markets, focusing on selection from a thematic perspective approach, avoiding names which do not offer convexity, and the preservation of capital. Currently 95% of the portfolio is invested in 16 investment themes (especially “cloud computing”, health spending and the rebound in Europe) and 30 convertible bonds; the portfolio is neutral in credit risk and duration, and is slightly overweight to equity exposure (especially in the US and Europe).
The fund manager pointed out the benefits of convertible bonds from the point of view of diversification and talked about how well they have performed long term, both in markets where equities have had good results, and in those where they don’t. “These bonds will provide convexity, downside hedging, and diversification for both secure and risk assets,” he said.
Lepicard used a low profitability environment like Japan as a laboratory to see if this asset would work in a global environment of zero interest rates, like the current one … and it does work. In fact, in Japan, stocks are very volatile, bonds offer very low returns, and convertibles shine with good returns. And if rates rise, he says, the asset can provide good protection that can help both in a deflationary scenario as well as in another with rising interest rates.
“There are few assets that can work like that, offering profitability and diversification, reducing portfolio risk, while also providing hedging in an environment of rising rates”, he defended, and showed the advantages of portfolios which include convertible bonds versus those that do not.
Photo: HorseBadorties/Pixabay. Mexican REITS (Fibras): Some Stand Out For Their Capital Gains, Others For Their Dividends
With the emergence of Fibra Uno (FUNO) in March 2011, the Mexican REITS (Fibras) celebrate six years since they first appeared on the Mexican Stock Exchange. In these six years, we have seen 10 issues of Fibras which, according to the firm Vector, at the end of the first quarter have nearly 1,400 properties in total, of which roughly 500 belong to FUNO. Amongst the FIBRAS, one might find not only diversified ones but also specialized ones in sectors such as commercial, industrial, offices and hotels.
A Fibra is an investment vehicle dedicated to the acquisition and development of real estate in Mexico with the intention to lease (or potentially sell) such properties. A Fibra is similar to an investment trust real estate (“REIT” for its acronym in English) in the United States.
The Fibras have given liquidity to an illiquid market. During these six years, they have continued to increase their assets (through follow ons / subscriptions) and issuing debt, to also increase its investment portfolio, leverage their expertise and gain economies of scale.
Other investment vehicles that are considered Fibras but are really a different vehicle include VESTA, GICSA or Fideicomiso Hipotecario, FHIPO, among others. The case of FHIPO is perhaps the clearest example because although the company is considered as Fibra, some analysts place it in the financial sector.
The 10 Fibras manage assets worth just over 15.7 billion dollars, as of end of April. FUNO (with 48% of this) represents almost half the market value. The second largest Fibra is DANHOS with 20% of the market; and Fibra Macquarie (FIBRAMQ) and TERRA (7% respectively), are in the third and fourth place.
While this market does not represent even 2% of the Afores, or Mexican Public Pension’s AUM, between March 2014 and March 2016 Fibras holdings by the Afores increased 1.6 times. Afores now own the equivalent of 2.9 billion dollars in Fibras, or roughly 20% of all Fibra issuings. Considering that the investment regime allows the Afores to have 92% of the total outstanding issue of Fibras, which at today’s levels barely reach 10% of their assets, there is still some ways to go.
Fibras have two components that give investor returns: The first is the equity gains and the other the dividend. The major change in the share price (in pesos) since the IPO untill April, has come from FUNO (2011) Fibra which has gained 110%, followed by DANHOS (2013 ) 48%; TERRA (2013) with 13% and Fibra Monterrey (FMTY in 2014) with +7%. Fibras which price today is below their IPO are Fibra Inn (FINN in 2013) with -23%; Fibra Hotel (FIHO in 2012) with -15%; Fibra Macquarie (FIBRAMQ in 2012) and Fibra Shop (SHOP in 2013,) both with -5%. Fibra Prologis (FIBRAPL in 2014) and FIBRAHD (2015) are at IPO price.
Volatility in the equity price, shows risk vs returns. The Fibras with the highest volatility in the last 12 months were: FUNO, FIHO and FIBRAMQ.
The other component is the dividend. So far, the Fibras have generally adopted a quarterly distribution (although it could be annual). This year FIBRAHD adopted a policy of paying monthly. For a fiscal issue, the dividend is at least 95% of taxable income for the corresponding period.
The first quarter of 2016 the average Fibras dividend is at 6.55%. Fibras with higher dividends are FIBRAHD with 9.65%; FIBRAMQ with 7.47% and 7.10% FMTY.
The perspective of this industry is promising, so surely, we will see the Fibras growing in assets as well as new participants.
CC-BY-SA-2.0, FlickrPhoto: Jacinta Lluch. Durable Source of Alpha Generation: Invert the Pyramid
Many a market practitioner has been humbled in recent years trying to project the direction of US interest rates. Professional forecasters, futures markets, and even the Federal Reserve have all consistently gotten their interest rate calls wrong over the last half-decade. At MFS, explains Bill Adams, MFS Chief Investment Officer, Global Fixed Income at the firm, “we devote a great deal of fundamental analysis to forecasting rates, duration and the shape of the yield curve, and those elements make up an important part of our alpha generation toolkit”. However, given the extraordinarily difficult and unusual market environment of recent years, the firm recognizes there is an unusually low probability of getting one’s rate call correct, and an even lower probability of getting it right consistently. That is simply not a reliable or durable source of alpha generation within a well-managed fixed income portfolio.
In our view, says Adams, consistent alpha generation depends on actively managing multiple sources of risk. “We view the portfolio construction process a bit like an inverted pyramid. At the bottom of the pyramid are the factors hardest to consistently anticipate—rates, duration, and curve positioning. Next come currencies, another piece of the portfolio notoriously difficult to forecast. Against the present market backdrop, unduly influenced by global central bankers, these are the lowest conviction pieces of our alpha pyramid”, points out the CIO.
In the current environment, MFS believes that it can add more durable and sustainable alpha by engaging in a thorough process of analyzing and underwriting both corporate and sovereign credit. So security selection and sector and regional allocations are areas we approach with the greatest conviction. While you cannot generate excess returns without taking risks, we believe it is critical to take risks that are appropriate.
“Allocating assets to multiple regions is an alpha source we embrace”, explains Adams in the MFS blog. “Bringing together securities from multiple regions and reducing home country bias in a fixed income portfolio helps improve risk adjusted returns, in our view. It is also important to look beyond absolute levels of return and focus on relative return opportunities. In isolation, a 10-year US Treasury bond yielding 1.80% is not all that attractive. But compared to a Japanese 10-year JGB with a negative yield or a German 10-year bund with a yield not far north of zero, the value of the US security becomes clearer”.
As we move up the inverted alpha pyramid, the conviction grows. Moreover, MFS prefers underwriting individual credits by leveraging our global research platform to trying to make a significant call on the direction of 10-year Treasury yields. That research capability allows the firm to better manage risk. This is where MFS place its greatest conviction, with a deep understanding of both sovereign and company credit fundamentals. “Our global research platform leverages not only fixed income analysts, but equity and quantitative analysts as well, who provide a deeper understanding of individual corporate credits. To truly understand credit fundamentals, an investor must assemble a complete view of a company’s capital structure”, says Adams.
In the unusual global economic and interest rate environment that exists today, MFS believes fundamental, country-by-country and company-by-company analysis is a much more durable and sustainable alpha source than interest rates bets.
Photo: Michael Maeder. Columbia Threadneedle Investments Appoints Sales Director In Zurich
Columbia Threadneedle Investments, announces the appointment of Michael Maeder as Sales Director Financial Institutions with immediate effect. Michael is based in Zürich with direct report to Christian Trixl, who heads up Columbia Threadneedle Investments in Switzerland.
In his role, Michael Maeder is responsible for broadening and deepening relations with financial institutions with a focus on private banks, cantonal banks, independent asset managers and family offices in the German speaking regions of Switzerland and in Liechtenstein.
Michael joins from NN Investment Partners where he had been business development manager since 2009, covering a similar clientele in the same region. He started his career at UBS Investment Bank in 2006 in Zürich. He holds an MBA from International University of Monaco.
Christian Trixl, Head of Swiss Distribution at Columbia Threadneedle Investments, commented: “I am delighted to welcome Michael to our team. Michael’s experience in the Swiss market will help to expand our presence and client relations with financial institutions in Switzerland and Liechtenstein as we strive to offer them the successful investment solutions and products that they demand”.
CC-BY-SA-2.0, FlickrPhoto: AJC ajcann.wordpress.com
. UBS Raises Record $471m for Oncology Impact Fund
UBS Wealth Management which will release its first quarter results this Tuesday and might announce a change in its business, has raised a record $471 million for the final closing of the UBS Oncology Impact Fund, an impact investing initiative aimed at developing cancer treatments.
Investments will be made in early stage oncology to accelerate the development of new cures. Cancer care is particularly appropriate for this kind of investment because of a supportive regulatory environment.
According to UBS, the market for cancer drugs is expected to grow faster than for any other disease, due to populations ageing in developed countries and an expanding middle class in emerging markets with better access to care. Oncology is the largest and fastest growing therapeutic area in terms of drug development activity, representing approximately a quarter of total research spend.
In addition to investing in early-stage cancer treatments, the Oncology Impact Fund will support academic research and better access to cancer care in the developing world. A portion of any performance fees generated and half of a royalty attached with best efforts to all successful drugs sales will be managed by UBS Optimus Foundation and ultimately fund expanded access to cancer care for children and their families in the developing world. The other half of the royalty amount will be spent on academic grants to promising oncology-related research. The Fund has already struck the first royalty agreement of this type, bringing this innovative practice from theory to reality.
Jürg Zeltner, President of UBS Wealth Management, says: “The record sum raised for the UBS Oncology Impact Fund is a milestone for our work in sustainable investing and for the impact investing industry as a whole. We believe initiatives like this can give hope to cancer sufferers and their families and divert more capital towards finding treatments and cures.”
Mark Haefele, Global Chief Investment Officer at UBS Wealth Management, says: “Impact investing gives our clients an opportunity to change the world and earn a financial return simultaneously. Using this growing medium to target cancer, one of the planet’s biggest killers, helps fulfil a critical social goal.”
Ansbert Gadicke, Co-Founder at bioventure investment manager MPM Capital, which is collaborating with UBS WM on the UBS Oncology Impact Fund, says: “We are delighted to be advising UBS on the management of this landmark fund. Over the long term, we hope this collaboration will add significant value in the field of oncology and in ongoing efforts to finance its development.”
CC-BY-SA-2.0, FlickrPhoto: Thomson Reuters. Seilern Investment Management Won Four New Awards
Seilern Investment Management have recently been acknowledged throughout Europe in the Lipper Awards, for the long-term performance of our funds. On 19th April in London, they announced the final round of UK and Pan-European awards, bringing the total to 14 awards in 2016.
Over the past weeks Seilern Investment Management have won awards for Best Equity Group (Small Company) in Switzerland, Germany, Austria, UK, and Europe and Stryx World Growth has won for Best 5 Year Performance in Switzerland, Germany, Austria, France, UK, and Europe.
“These awards are a testament to the commitment the team has in seeking out companies that demonstrate only the very highest prospects for long-term growth and reflect our consistency in generating returns for our investors. While we are gratified to be recognised, above all, we are pleased that we continue to deliver for our clients”, said Raphael Pitoun, Chief Investment Officer.
Capital Strategies Partners has an strategic agreement to cover Spain, Italy, Switzerland and LatAm market for Seilern Investment Management.
The annual “spring offensive” or in Japanese “Shunto” is currently underway in Japan. The terms refer to the annual wage negotiations that occur in March and April between labor unions and employers. In an effort to revitalize the economy, Prime Minister Shinzo Abe has been pushing the private sector to raise worker pay and try to boost consumer spending. However, media headlines have expressed much disappointment over a slowdown in wage growth and the so-called “failure of Abenomics.” But to get a true picture of Japan’s wage situation, it is important to look at growth in both base wages and bonus payments. Though base wage increases may be slowing from last year, the outlook for bonus payments is more positive.
Overall, base wage increases in Japan will likely be lower than last year, reflecting economic uncertainty surrounding the recent strength in the yen and a slowdown in its largest trading partners, namely China. On the other hand, bonus payments may be larger thanks to record corporate profits. Media attention seems to be fixated on the base wage hike at Japan’s leading manufacturers, particularly in the automotive and electronics sectors, as they set the trend for wage negotiations in the broad manufacturing sectors. So far, base wage increases have been lower than last year, so the media has been on its “Abenomics failure” frenzy. However, they ignore the fact that workers at some of those companies are getting large bonus checks that will increase their total compensation more than last year when base wage gains were higher.
Additionally, wage pressures are now stronger at small and medium-sized enterprises (SMEs) rather than larger corporations. The Japan Council of Metalworkers’ Union (JCM), which includes automotive and electronics sectors, reports that base wage gains were higher for companies with less than 300 employees than for larger corporations. This is important as SMEs provide the bulk of employment in Japan.
Even more importantly for Japan, however, is what happens at the lower end of the wage curve where we believe, wages are too low. The national average minimum wage was increased by 2.3% as of October 2015 (previous year was 2.1%). Abe is working to boost wages at the lower end, including plans to raise the minimum wage by 3% per year until it reaches 1,000 yen per hour (it will take eight years from the current 798 yen per hour) and an “equal work equal pay” rule where employers cannot discriminate pay between full-time and temporary and part-time workers if they are doing the same work. More than 30% of Japan’s workers are temporary or part-time, and are paid much less than full-time workers. Lower-income workers have a higher propensity to spend; therefore, wage increases at the lower end will have a more significant impact on consumption and hence the economy overall.
The other glaring reality is that labor is in short supply in Japan as the population declines. In 2015, Japan created more full-time than temporary or part-time jobs for the first time in 21 years. Almost 90% of those full-time positions were filled by women. Japan’s unemployment rate is 3.3%, while the job offers-to-applicant ratio is 1.28, the highest level since 1992. Regardless of what the government may or may not do, we believe there is a structural upward bias on wages in Japan.
What does this mean for consumption and the Japanese economy as a whole? This is the tricky part. As Japan’s population is declining, there is a structural downward bias on consumption and GDP. Higher female labor participation and rising wages may offset the population decline but to what degree is uncertain. For now, we remain cautious on consumption in Japan as inflation in daily goods prices has made consumer spending habits more defensive. I hope Abe will cancel the planned consumption tax increase planned for April 2017. Nobel Laureates Joseph Stiglitz and Paul Krugman were both recently in Japan where they argued that raising the consumption tax would be detrimental for the economy. We believe Abe has his mind set on postponing the tax hike and this is just a ritual to convince the Ministry of Finance. Of course, cancelling the tax hike alone won’t lift the economy. Further wage increases are needed in Japan to convince the perennially conservative Japanese household to spend. Hopefully, younger Japanese will wake up to the fact that they are increasingly becoming a “rare” resource and actually have the upper hand in terms of wages.
Kenichi Amaki is portfolio manager at Matthews Asia.
CC-BY-SA-2.0, FlickrPhoto: Brian Jeffery Beggerly. High Yield in the Crosshairs
Investing in high yield bonds is not for the faint of heart. That said, the risks associated with below-investment-grade bonds are frequently overstated and couched in hyperbole, believes David P. Cole, CFA, Fixed Income Portfolio Manager at MFS.
Late last year, investors beat a thunderous exit from high yield bonds, which in turn reverberated through financial markets as analysts pondered the implication of deteriorating credit markets on the US economy. More recently, investors have made a U-turn, and high yield has witnessed inflows again and spreads have tightened. Talk of a US recession has similarly subsided.
According to the expert, high yield bonds are subject to a cyclicality that mirrors the economic cycle — and default risk is an important factor in total investment returns. If one understands the cyclical backdrop of the high yield asset class and adopts an investment approach that involves prudent security selection, particularly in the lower-credit-quality segment of the market, high yield bonds can make a compelling addition to a well-diversified portfolio.
“The asset class has historically delivered a risk-return profile somewhere between higher-quality fixed income and equities, and has exhibited characteristics of both markets over full market cycles. In the period from 1988 to 2015, the Barclays U.S. High Yield Corporate Bond Index delivered a compounded annualized total return of 8.1% — more than the 6.6% return of the Barclays U.S. Aggregate Bond Index but less than the 10.3% return of the S&P 500 Index”, points out.
High yield bonds can offer diversification against interest rate and equity risk. With relatively low interest-rate sensitivity compared with other fixed income asset classes, the US high-yield market may offer a buffer against a rise in interest rates.
Prudent security selection in the lower-quality segment
Volatility in the lowest-rated high yield bonds can be significant. For this reason, it’s important to focus on differentiation in return and risk characteristics by credit quality, as the returns of the lower-quality segment of the market can vary quite meaningful from that of the overall high yield market.
Historically, highlights Cole, investors have not been adequately compensated for a strategic allocation to lower-quality segments of the high yield market, as the perceived carry advantage is often offset by capital losses due to defaults. Compared to the higher-quality portions of the high yield market, the lowest-rated high yield securities (CCCs) have produced lower compounded returns given the variance drain — losses incurred from heightened volatility because of the wealth erosion caused by downdrafts in security prices — associated with their significantly higher return volatility.
“While lower compounded returns argue against a strategic overweight to CCCs, this market segment also displays a greater dispersion of returns than those in the higher-rated BB or B portions of the market. This suggests potential opportunities to add value by selectively investing in CCC securities, especially on the heels of a significant selloff, when credit spreads have widened substantially”, explains the MFS portfolio manager.
Consequently, says Cole, a tactical allocation to the lower-quality segment of the high yield market can be appropriate when one is being sufficiently compensated for taking on the additional price risk. In the current environment, for instance, energy and mining companies may become attractive. However, investments in these lower-rated securities must be carefully weighed against the overall risk profile of the portfolio, as they can be both distressed and highly illiquid.
“December’s headline-driven selloff in high yield, prompted by a small handful of high yield strategies that ran into trouble with overweight positions in commodity sectors and CCC-rated securities, provided a stark reminder of just how important it is to manage credit risk in high yield”, concludes.
For MFS, the high yield market provides an opportunity for investors to gain exposure to the credit market with an asset class that provides diversification and an attractive return profile over time. Investing in this market also requires prudence, an eye for identifying inflection points, and favoring certain names — such as those on the higher-quality tier of the credit quality spectrum — to deliver attractive risk-adjusted returns.
Glen Finegan. Emerging Markets Equities: Positioning And Opportunities in Henderson's View
Glen Finegan, Head of Emerging Market Equities at Henderson, provides a detailed update on his strategy covering recent market drivers, performance and activity, and his outlook for the asset class.
How have the emerging markets performed so far this year?
A sharp decline for the MSCI Emerging Markets Index in January was followed by a strong rally during February and March, leading to a gain for the asset class overall during the first quarter of 2016.
Against this backdrop the Henderson Emerging Markets Strategy, outperformed a rising market. The investment in gold producer Newcrest Mining and significant exposure to companies listed in the unpopular Brazilian, Polish and South African markets helped. The strategy’s Egyptian and Nigerian holdings performed poorly and fell during the quarter. Over the last year the strategy declined less than the benchmark. Our approach of owning high-quality companies with properly aligned controlling shareholders and strong track records of delivery aided relative performance.
What can you tell us about your portofolio allocation?
We added to the strategy’s Brazilian positions during January’s market fall only to reduce these somewhat towards the end of the quarter following a rapid increase in valuation. We are confident the strategy owns high-quality businesses with strong franchises that will enjoy cyclical recovery when it comes. Predicting the timing of this is, however, impossible, meaning we remain extremely valuation sensitive.
Emerging consumption ¿Cómo ha funcionado el tema del consumo en los mercados emergentes?
We fully disposed of the strategy’s SABMiller position during the first quarter. The discount to Anheuser-Busch InBev (ABI)’s takeover offer has narrowed considerably and the deal still has to clear a number of regulatory hurdles. In the unlikely event it should fail there would be substantial downside in this stock.
Our search for high-quality, reasonably-valued consumer companies in India resulted in the purchase of a new holding in leading cement producer Ultratech.
Cement consumption in some less developed markets shares the same fundamental driver as basic fast moving consumer goods, namely improving living standards. Indian cement sales are conducted mostly in cash and demand is largely driven by the need for improved housing. Housing in India is primarily financed by savings and construction is often as wholesome as adding a small room to an existing property. More than 90% of cement sold in India still comes in bags rather than in bulk, indicative of this being a consumer-driven market. Furthermore, per capita consumption of cement remains low, meaning there is scope for this to increase over time.
What is Ultratech’s appeal?
A unique feature of Ultratech is its network of over 50,000 dealers throughout India selling “Ultratech” branded cement. This network is far larger than any of its competitors and has enabled the company to reach an almost 40% market share in rural India.
Ultratech is one of the crown jewels in the Aditya Birla Group, accounting for approximately 10% of group revenues. Aditya Birla is a family-controlled industrial group led by Kumar Mangalam Birla. Since becoming Chairman in 2004, after the passing of his father, Kumar has shown an ability to take a long-term approach to building strong franchises in a number of industries, including cement. He is also recognised as a leading advocate for strong corporate governance in India.
With the backing of the Birla family, we believe Ultratech will continue to take a leading role in the consolidation of India’s fragmented and overly-indebted cement industry.
What about China?
We have continued building a position in Fuyao Glass following a meeting with its Chief Financial Officer. Fuyao is China’s leading auto glass manufacturer and serves well-known carmakers in China and now also in the US and Europe. The company is a governance leader in China thanks to its far-sighted controlling shareholder who has insisted on global auditing standards since listing in 1993 and emphasised research and development investments to protect the long-term profitability of the franchise. We find the company’s current valuation undemanding given its opportunities for growth.
What is your strategy going forward?
Weak rule of law combined with many undesirable political and business leaders mean there are parts of the emerging markets universe that are cheap for a reason. We are not deep value investors and aim to avoid being seduced by low-quality companies trading cheaply. Neither are we outright growth investors and we continue to avoid what we believe are overvalued but growing South Asian consumer businesses. Instead, as bottom-up stock pickers our focus is on combing unpopular markets for good-quality companies trading at reasonable valuations.
