CC-BY-SA-2.0, FlickrPhoto: Matthew Grange. Standard Life Wealth Strengthens Investment Team
Standard Life Wealth, the discretionary fund manager, has announced the recent appointment of Matthew Grange and Matthew Burrows as Senior Portfolio Managers based in London. Both are working with UK and International clients and report to Charles Insley, Head of International for Standard Life Wealth.
“We are delighted that Matthew Grange and Matthew Burrows have joined Standard Life Wealth. They both have very strong investment backgrounds and have joined us to work with UK and International clients. As long term investors we offer clients investment strategies across the full risk spectrum and have an investment process that focuses on gaining exposure to secular growth drivers, which we believe will out-perform the broader market over the long term. Both Matthew Grange and Matthew Burrows are excellent additions to the team and bring valuable insight and institutional expertise to our investment process,” said Charles Insley, Head of International, Standard Life Wealth.
Matthew Grange has over 18 years of private client and institutional investment management experience. He spent over twelve years managing institutional UK equity portfolios for ABN Amro Asset Management and the corporate pension schemes for Lafarge and Reed Elsevier. In addition to his experience managing substantial UK equity portfolios, Matthew has experience of many other asset classes, particularly commercial property and private equity.
Matthew Burrows has five years of experience in the management of discretionary portfolios for charities, trusts, pensions and both institutional and private clients’ portfolios. He has managed portfolios for both UK and international clients at Falcon Private Wealth and Sarasin & Partners LLP, covering the full spectrum of traditional asset classes, as well alternatives and derivatives.
Standard Life Wealth, with offices in London, Edinburgh, Birmingham, Bristol and Leeds, and an offshore presence in the Channel Islands, provides both target return and conventional investment strategies private clients, trust companies and charities.
. CTA & Merger Hegde Funds Insulated From Rotations
The Lyxor Hedge Fund Index was down -0.9% in February. 3 out of 11 Lyxor Indices ended the month in positive territory. The Lyxor CTA Long Term Index (+2.2%), the Lyxor Merger Arbitrage Index (+0.5%), and the Lyxor LS Equity Long Bias Index (+0.4%) were the best performers.
“In a make-or-break environment, we recommend keeping some directionality through tactical styles. We would remain put on relative-value strategies, but focusing in areas least correlated to current themes.” says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.
Brexit risk helped Global Macro funds recoup some of the losses endured early February. It was a hill-start for the strategy, which suffered on their short bond and long European equities exposures (we note that positioning divergence among managers remained elevated). The collapse of the pound below $1.39 then allowed Global Macro funds to regain some of the lost ground. Indeed, London mayor Boris Johnson throwing support to the exit cause led markets to implement stronger protection against a risk of Brexit. The relative economic and monetary pulses between the UK and the US also played out. Funds remain slightly long in European equities. In bonds, they are long US and short EU bonds. Their top plays remain on their long dollar crosses.
The rally by mid-February triggered multiple macro and sector rotations. The selling pressure exhausted by mid-month. The rally in risky assets unfolded in poor trading volumes as most market players were initially reluctant to join in. An unstable market tectonic and multiple downside fundamental risks kept investors – hedge funds included – on the cautious side. In that context, CTAs outperformed, hoarding returns in the early part of the month, while remaining resilient thereafter thanks to stubbornly low yields. Besides, the longest bias strategies enjoyed a V-shape recovery. By contrast, those exposed to the rotations suffered the most.
L/S Equity: volatile and dispersed returns, skepticism prevails. Long bias funds enjoyed a V-shape recovery over the month and ended up slightly positive. They continued to generate strong alpha. Variable bias funds pared losses on the way down thanks to their cautious stance, but they underperformed on the way up. The rotation out of defensive back into value stocks proved costly. Market Neutral funds were the worst performers. They were hit by multiple sector and quant factor rotations, amid high equity correlation, while keeping their leverage steady. They endured a double whammy through untimely portfolio shifts.
Overall Lyxor L/S Equity funds slightly raised their market beta mainly through short covering. But skepticism prevails as to the sustainability of the rally. Interestingly, a number of funds are increasingly tactical in their stock and sector positioning.
Merger Arbitrage continued to defy risk aversion. The performance of Special Situation funds mirrored that of broader markets. They suffered in the early part of the month – especially in their healthcare and telecom positions – before recouping most of their losses. The returns of Merger Arbitrage funds were less volatile. Deal spreads initially factored higher macro risks, before settling down. Short duration operations with small P&L to lock in continued to lure managers. They maintained their elevated long exposures, reflecting their confidence in the current merger opportunity set.
The underperformance of European credit hurt L/S Credit strategies. The pressure mounting on global banks, and in particular European institutions, hurt some funds. Underperforming junior debt in Europe, and concerns about coupons suspension in contingent convertibles took a dent in some funds (as a reminder, “cocos” convert into shares if a pre-set trigger is breached – the level of solvency ratios for example. These securities were designed to enhance capital levels and provide investors with greater safety). BoJ venturing into negative yield regime also hurt Japanese and Asian issues.
Perfect conditions for CTAs, which continued to outperform. Continued de-risking in the early part of the month was beneficial to most CTAs. They kept on making strong gains in their long bond positions, their equity and energy shorts. In the second part of the month, most of the gains were made in EU long bonds and on GBP. The recovery in risk appetite led their models to shave off their most aggressive bearish positions. They reduced their short on energy and brought their equity allocation up to neutral. Their main vulnerability lies with their long bond exposure.
CC-BY-SA-2.0, FlickrPhoto: Todd Chandler. Foreigners are Interested in Participating in the Mexican Asset Management Marketplace
The interest of foreign operators to enter the Asset Management business in Mexico keeps on growing.
Late last year, the Swiss bank Julius Baer completed the acquisition of 40% of the Mexican company NSC Asesores, a firm that serves as an independent financial advisor in Mexico since 1987. BNP Paribas Investment Partners Mexico last month announced its foray into the Mexican market through mutual funds and mandates.
The Azimut Group expects to receive authorization in the near future to become a fund operator. Azimut Group acquired Mexican Más Fondos owns more funds (founded in 2002) which is the largest integrated distributor of investment companies in Mexico.
A few days ago we read in the news that Afore XXI Banorte finally funded the two mandates it gave BlackRock and Schroders back in 2013. BlackRock received 320 million dollars and Schroders 220 million dollars.
This business has very interesting numbers, where many firms want to enter but only five have been able to do since only two Afores have participated in this type of vehicle. Although CONSAR allowed mandates since 2011, Afore Banamex was able to fund the strategy until 2013 and Afore XXI Banorte just in the last month.
According to updated information of the regulator (Consar), US$ 2.2 billion have been promised to five Global Asset Managers: BlackRock, Pioneer, Schroders, Franklin Templeton and Banque Paribas. Approximately 60% of the resources allocated come from Afore Banamex and 40% from XXI Banorte. If all Afores diversify using a mandate, this amount is equivalent to only 8% of the US$28.4 billion that the 20% limit allows. Currently the Afores manage about US$142 billion in assets.
The appetite for having a presence in Mexico is due to a growing market with increasingly sophisticated needs; as well as confidence in the country, given Mexico has become a very attractive market in Latin America, as well as a sizeable potential revenue.
Some firms are redefining their business in Latin America as in the case of Deutsche Bank which will sell or close its business in 10 countries, five of them in Latin America -including Mexico, however, from my point of view, the reason for this has more to do with specialization than with a disdain for the region.
Considering the appetite to enter the Mexican market, local and foreign participants who are already present, can not sit and wait it out while strong competition is displayed. In fact, there is speculation that there are a couple of signatures embedded in evaluation processes and more advanced in local authorizations.
CC-BY-SA-2.0, FlickrPhoto: Glyn Lowe. Nikko Asset Management Receives Two Awards from Asia Asset Management
Nikko Asset Management has been recognized for excellence in two categories by the Hong-Kong based publication Asia Asset Management. The firm won the Best of the Best Award for both the Japan: Most Innovative Product and the Singapore: Best RQFII House categories for 2015. This is the second consecutive year for Nikko Asset Management to win the Singapore: Best RQFII House Award.
The Tokyo-headquartered asset manager was recognized with the Japan: Most Innovative Product Award for one of its most innovative products in 2015, the Global Robotics Equity Fund. Launched in August, the fund attracted over 300 billion yen of inflows within three months, driven by Japanese investors’ demand for greater exposure to robotics-related equities. The firm’s research uncovered that fast-growing robotics companies were not well captured with a traditional sector-focused approach to investing. The Global Robotics Equity Fund was the first in Japan to focus on cross-sectoral robotics companies.1
“It’s an honor to be recognized for our excellence in product development and innovation. I believe it’s a strong testament to our firm’s ability to not only recognize global investment trends but to provide our clients with the ability to benefit from them,” said Hideo Abe, director and executive vice chairman at Nikko Asset Management.
The firm was also awarded the Singapore: Best RQFII House Award for its leadership in RQFII solutions. Nikko Asset Management launched Singapore’s first retail China Onshore Bond Fund in July 2014. The fund opened up a highly regulated market with limited foreign investor access to Singaporean investors. Following the launch of the fund, investors were able to participate in the potential growth prospects of China’s onshore bond market. The firm has been a pioneer in the offshore RMB bond fund market in Singapore since 2010.
In September 2015, the firm launched the Nikko AM China Equity fund in Singapore, offering retail investors the opportunity to benefit from the growth potential of the China A-shares market.
“This recognition as Singapore’s best RQFII house validates our position as the industry leader in providing our clients with direct access to China, which is expected to account for 20 percent of global GDP by 2020 and become the world’s largest economy within the next 15 years,” said Eleanor Seet, President of Nikko Asset Management Asia, a subsidiary based in Singapore of Nikko Asset Management.
Photo: Tristan Hanson . M&G Investments Appoints Tristan Hanson To Its Multi-Asset Team
M&G Investments, a leading international asset manager, today announces the appointment of Tristan Hanson as Fund Manager to its Multi-Asset team, starting on 21st March. Tristan will be responsible for developing the team’s absolute return proposition and will report to Dave Fishwick, Head of Multi-Asset.
Tristan has 15 years’ experience in asset management and joins M&G from Ashburton Investments, where he was Head of Asset Allocation with responsibility for global multi-asset funds. Prior to this, Tristan worked as a Strategist at JP Morgan Cazenove covering equities, fixed income and currencies.
Graham Mason, Chief Investment Officer at M&G Investments, says: “We are very pleased to welcome Tristan to our team. He has extensive experience across multi-asset strategies and will play a key role in broadening our capabilities around absolute return products. This will strengthen our Multi-Asset team and meet increasing demand from our clients.”
Over the past 15 years, M&G’s 16-strong Multi-Asset team has successfully developed a robust investment approach by combining valuation analysis and behavioural finance.
CC-BY-SA-2.0, FlickrPhoto: Matthieu Duncan, new CEO of Natixis Asset Management. Matthieu Duncan Becomes Natixis Asset Management CEO
The Natixis Asset Management Board of Directors met today, chaired by Pierre Servant, to appoint Matthieu Duncan as Chief Executive Officer (CEO) of Natixis Asset Management following the resignation of Pascal Voisin. This new appointment will take effect on April 4, 2016. Until that date, Jean François Baralon, Natixis Asset Management’s Deputy CEO, will serve as interim CEO of Natixis Asset Management.
Matthieu Duncan will be looking to accelerate the international growth of Natixis Asset Management and to continue to integrate Natixis Asset Management within Natixis Global Asset Management’s global multi-affiliate business model.
The Board of Directors would like to thank Pascal Voisin for his role over the past eleven years leading Natixis Asset Management’s operational management. He brought new life to the company internationally and successfully contributed to the development of Natixis Global Asset Management’s multi-affiliate model by taking majority equity interests in H2O Asset Management and Dorval Asset Management and by using Natixis Asset Management’s expertise to create Seeyond and Mirova.
A dual French and US citizen, Matthieu Duncan completed his studies at the University of Texas (Austin) and the University of California (Santa Barbara). He began his career in the financial industry at Goldman Sachs, where he held various positions in the capital markets sector in Paris and London between 1990 and 2003. Since 2004, he has held various positions in the asset management area in London: Chief Investment Officer (CIO) Equities at Cambridge Place IM, Head of Business Strategy and member of the Board of Directors of Newton IM (a Bank of New York Mellon company), and Chief Operating Officer (COO) and member of the Board of Directors of Quilter Cheviot IM.
CC-BY-SA-2.0, FlickrFoto: Thomas Leth-Olsen. Claves para entender el ciclo de crédito
Consistent dividend growth is generally a sign that a business is doing well and should provide investors with a degree of confidence. If dividends are rising steadily over time, said Alex Crooke, Head of Global Equity Income at Henderson, then a firm’s earnings, cashflow and capital should also be growing.
An indicator of sustainability
Payout ratios identify the percentage of corporate earnings that are paid as dividends and can be an indicator as to whether a company has the scope to maintain or increase dividends. The payout ratio, explains Crooke, can be influenced by a number of factors, such as the sector the company operates in and where the company is within its growth cycle. As the chart below shows, the level of current payout ratios varies considerably between countries and regions both at an absolute level and when compared to historical averages.
“Although the payout ratio chart shows that opportunities exist for dividend increases in the emerging markets, the outlook for earnings and dividends remains uncertain and at present we are finding the most attractive stock opportunities for both capital and income growth in developed markets. Within the developed world, Japan and the US have the greatest potential to increase payout ratios, although from a relatively low base with both markets currently yielding just over 2%” points out the Head of Global Equity Income at Henderson.
An active approach is important
Conversely, payout ratios from certain markets, such as Australia and the UK, are above their long-term median. “Companies from these countries are distributing a greater percentage of corporate earnings to shareholders in the form of dividends than they have done historically. This leaves the potential for dividend cuts if a company is struggling to grow its earnings. One area of concern for income investors with exposure to UK and Australia is the number of large resource-related companies listed within these market indices”, said Crooke. Henderson believes that earnings, cashflow and ultimately dividends from these types of firms are likely to be impacted by recent commodity price falls.
Nevertheless, explains Crooke, the UK in particular has a deep-rooted dividend culture and outside of the challenging environment for the energy and resources sectors is home to a number of businesses that are delivering sustainable dividend growth. Our approach is to invest on a company-by-company basis using an actively-managed process that considers risks to both capital and income.
Seeking dividend growth
Recent market volatility has affected share prices globally. Despite this, Henderson believes attractive businesses with strong fundamentals and the potential for capital and dividend growth over the long term can be found across nearly all regions and countries.
“Within our 12-strong Global Equity Income Team we continue to seek companies with good dividend growth, and payout ratios that are moderate or low, which provides the potential for dividend increases. Typically, we avoid the highest-yielding stocks and focus on a diversified list of global companies that offer a sustainable dividend policy with yields between 2% and 6%”, concludes.
CC-BY-SA-2.0, FlickrPhoto: Beijing Patrol. China Will Need To Maintain And Even Lower Its Interest Rates To Avoid A Sharper Downturn
China’s rapid growth over the past decade has been fuelled by cheap credit. According to Investec, this has led to a misallocation of capital, particularly following the global financial crisis when policymakers unleashed a RMB4 trillion stimulus package into infrastructure, construction and heavy industry. According to Oxford Economics, the China’s overall debt load (public, private and financial) rose from 176% of gross domestic product (GDP) in 2007, to 258% by mid-2014, and over 300% by the end of 2015. This has continued to rise as China’s so-called total social financing, or aggregate debt, rose by RMB3.42 trillion ($520 billion) in January alone, according to official data.
Bank lending is in much need of reform. Borrowing is concentrated in sectors where there is major overcapacity – heavy manufacturing, property and infrastructure – which are dominated by often inefficient state-owned enterprises (SOEs). The Emerging Market Fixed Income team at Investec, which has recently conducted a number of research trips to mainland China, thinks that the implicit government guarantee of SOE borrowings remains in place, resulting in debt being rolled over, rather than called in.
SOEs rolling over debt presents a challenge for policymakers. “Given high and rising debt service ratios, as credit growth continues to outstrip nominal GDP growth, China will need to maintain and even lower its interest rates to avoid a sharper and more prolonged downturn,” says Mark Evans, an analyst in Emerging Market Fixed Income. “But lowering interest rates on Chinese assets will again put pressure on capital outflows as investors earn less yield on their renminbi assets, hence the difficulties policymakers are facing right now.”
Rising debt loads is likely to lead to a financial cycle whereby the proportion of non-performing loans (NPLs) starts rising. Official data suggest that banks’ NPLs were around RMB1.95 trillion (2% of GDP) in December 2015. But a truer measure of where non-performing loans may actually settle is the sum of NPLs and special-mention loans – those that are overdue but which banks don’t yet consider impaired – which the IMF estimated these constituted about 5.4% of GDP in August 2015.
According to John Holmes, a sector specialist for financials in the 4Factor Equity™ team, “Prior banking crises globally have typically seen a 6-7 percentage point increase in the NPL ratio from trough, which would suggest a 7% or 8% true NPL ratio as a starting point for the Chinese banks in the event of a severe downturn.”
The growth of NPLs in the shadow-banking sector is also concerning. “It is hard to pinpoint exactly who has done the lending”, says Mike Hugman, strategist in Emerging Market Fixed Income, “as there have been several rapidly growing lending channels outside the banking system. But we think that corporate leverage is now around 140-150% of GDP, higher than in any other emerging market.”
The good news is that much of China’s credit growth has been domestically financed. Consequently, we expect that policymakers have a greater ability to manage the cycle than perhaps we would expect in more open economies, as we saw during the global financial crisis.
The State Council is expecting China’s banks to share the burden of cleaning up bad debt. John believes that “Chinese banks have historically enjoyed high levels of profitability, with return on equity averaging in the region of 20% over the last decade, aided by strong loan growth, high pre-provision margins and relatively benign asset quality.” He reckons that “their high pre-provision profit margins means they should have the capacity to charge-off bad assets over a multi-year period and remain profitable even with NPLs north of 10%, as some analysts suggest.”
CC-BY-SA-2.0, FlickrPhoto: Arturo Sánchez
. Investors Want Transparency, Ethics, and Performance, CFA Institute Survey Reveals
Investors are expecting higher levels of transparency than ever before, holding their investment managers to the highest ethical standards, and are laser-focused on returns, according to a newly released study “From Trust to Loyalty: A Global Survey of What Investors Want,” by CFA Institute, the global association of investment professionals, that measures the opinions of both retail and institutional investors globally.
The findings reveal that investors want regular, clear communications about fees and upfront conversations about conflicts of interest. The biggest gaps between investor expectations and what they receive relate to fees and performance. Clients want fees that are structured to align their interests, are well disclosed and fairly reflect the value they are getting from their investment firms.
“The bar for investment management professionals has never been higher. Retail and institutional investors, as always, crave strong performance, however both groups also demand enhanced communication and guidance from their money managers. Building trust requires truly demonstrating your commitment to clients’ well-being, not empty performance promises or tick-the-box compliance exercises. Effectively doing so will help advance the investment management profession at a time when the public questions its worth and relevance.” said Paul Smith, president and CEO of CFA Institute.
“While an increase in overall trust in the financial services industry is a net positive for financial professionals,” continued Smith, “performance is no longer the only ‘deal breaker’ for investors. They are continuing to demand more clarity and service from financial professionals and, with the rise of robo-advisors, they have more alternatives than ever before. Further, if investment professionals don’t provide this clarity, then regulators may force them to, for better or worse.”
The study also shows that investors are anxious about global markets, and do not believe their investment firms are prepared. Investors revealed a growing anxiety about the state of global finance. Almost one-third of investors feel that another financial crisis is likely within the next three years (33 percent of retail investors/29 percent of institutional investors), with significantly more in India (59 percent) and France (46 percent). In addition, only half of all investors believe their investment firms are “very well prepared” or “well prepared” (52 percent retail investors/49 percent institutional investors) to manage their portfolio through a crisis.
CC-BY-SA-2.0, FlickrPhoto: Leticia Machado
. The Majority of New Assets in European Equities Have Landed in The Most Active Funds
Average active share for European large-cap funds was 69.6% in the three-year period through March 2015, with a median of 72.4% when measured against the funds’ appropriate style indexes. That is the finding of a new study from Morningstar.
“Our results show that between 2005 and 2015 “closet indexing” has become rarer among European large-cap funds, and those funds with higher active shares have received the lion’s share of new assets. We find that funds with higher active share have delivered better investment results than the least active funds in most of our research period, but not unambiguously. Because dispersions in returns and risk characteristics become much wider as a portfolio’s active share rises towards 100%, investors should not rely solely on active share when selecting funds”.
Among other findings of the report, the percentage of funds with a three-year average active share below 60% (so-called closet indexers) was 20.2%. The portion of funds that can be characterized as closet indexers has been falling in the researched categories in recent years. The majority of new assets in European equities have landed in the most active funds.
Although funds in the most active quartile charge 33 basis points more on average than those in the least active quartile for their retail share classes, we find that when price is measured per unit of active share, European investors are overpaying for low active share funds. Investors should compare fees carefully as dispersion in fees among funds with similar active shares is high.
Morningstar finds a strong inverse correlation between active share and market risk. Active share numbers dropped considerably during the financial crisis of 2008-09 but have been rising at a steady pace since then.
Funds across the board lowered the share of mid- and small-cap stocks in their portfolios in 2008-09, but this was especially the case for the most active funds.
The funds with the highest active shares have done better, on average, than those in the least active quartile in all of the five-year periods tested between 1 July 2006 and June-end 2015. However, the difference in excess returns between the most and the least active quartile has decreased recently, which implies that the strength of active share as a selection tool is time-period dependent. Invariably, however, the funds with the lowest active shares have been the worst performers.
The study finds that funds in the highest active share quartile have displayed much stronger style biases than the average fund. This may not always be desirable from a fund investor’s point of view, and complicates the use of active share in fund selection. The style effects have been especially strong in the small group of funds with an above 90% active share. After controlling for style effects in a four- factor regression model, we find their alpha to be lower than for any other group in the most recent five-year period researched.
Investors who use active share as a fund selection tool should exercise caution. As active share increases, dispersion in returns and risk levels rises sharply; the best and worst performing funds are to be found among the more active ones. Therefore, we advise using active share only in combination with other quantitative and qualitative tools.
Combining active share with tracking error adds a useful dimension to the analysis, and we find this to be an adequate analytical framework in the European large-cap space. Confirming results in US markets, we find that funds that exhibit a large tracking error but a low or moderate active share (so- called factor bet funds) have underperformed.
“We find that funds with Positive Morningstar Analyst Ratings tend to have above-average active shares and tracking errors”, says the study.
“In less than a decade, “active share” has become a widely used concept in fund analysis. However, much of the available active share research references only US-domiciled funds. In this paper we study a subset of European funds investing in European equities to see how their active share has developed over time, and evaluate how the active share measure might be used as a tool to aid fund selection within the European fund universe. The study encompasses the period 1 January 2005 through June-end 2015. By including only large-cap funds, we reduce the difficulties arising from benchmark selection and the impact of the small-cap effect”.
