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. Basel III Fundamentally Changes How Asset Managers Are Connected To The Financial System
Basel III reforms have fundamentally changed how asset managers are connected to the financial system, with hedge funds challenged to understand expense, usage and access to the financing power grid, according to a joint survey and report by the Alternative Investment Management Association (AIMA), the global representative body for alternative asset managers, and S3 Partners, a leading financial data, analytics and services firm.
Jack Inglis, CEO of AIMA, commented: “There is no doubt that the Basel III banking standards are having a significant impact on hedge funds and other alternative asset managers. Financing costs are rising and the fund manager / prime broker relationship is changing fundamentally. It is our hope that this timely and important report will provide clarity and direction to those who have felt the impact of the recent regulations, and to give context to issues that are being felt across the industry.”
Bob Sloan, CEO of S3 Partners, commented: “New bank capital regulations are creating downstream financing challenges and opportunities for asset managers and hedge funds. The survey clearly shows how plugging into the financial power grid is getting more expensive.”
Mr Sloan continued: “Managers of all shapes, sizes and strategies now seek to answer the question: How can we maintain access to the grid, while optimizing for the right amount of efficiency? As the survey results show, access to unbiased data, comprehensive Return on Assets/Return on Equity analytics, and a common language are critically important towards determining fairness – as rates, margin, spreads and contracts will be a key determinant for an asset managers’ success.”
Rising financing costs. The survey of fund managers worldwide found that:
Financing costs have risen for 50% of firms, with an even split between those who quantify the level of cost increase as being greater than 10% and below 10%.
75% of firms expect further cost increases over the next two years.
The impact is consistent regardless of a fund manager’s size, investment strategy or location.
Rethinking prime brokerage relationships:
Fund managers responding to the survey said they are having to rethink their prime brokerage relationships due to Basel III.
75% have been asked to change how they do business with their prime brokers, while more than 67% have had to cut the amount of cash they keep on their brokers’ balance sheets.
Importantly, the survey found that:
Most alternative asset managers over the last two years have either maintained or increased the number of prime brokers they use, with the average number of financing relationships found to be four.
Only 20% of fund managers have a clear understanding of how their prime brokers calculate their worth in terms of the revenue they provide relative to balance sheet impact, known as “return on assets” or RoA. Fewer still have the data necessary to calculate this themselves.
Photo: Youtube. BNY Mellon Names Mitchell Harris CEO of Investment Management Business
BNY Mellon recently announced that Mitchell Harris has been named chief executive officer of the company’s Investment Management business, effective immediately. Harris, who already had responsibility for the day-to-day oversight of the company’s investment boutiques globally and wealth management business, will report to Gerald L. Hassell, BNY Mellon’s chairman and CEO. BNY Mellon Investment Management amounts $1.6 trillion in assets under management.
Harris succeeds Curtis Arledge, who led the company’s Investment Management business and Markets Group and has decided to pursue other opportunities outside of the company.
Harris, most recently president of BNY Mellon Investment Management, joined BNY Mellon in 2004 and has had a distinguished career in investment management and private banking spanning more than 30 years. Harris was CEO of Standish, a BNY Mellon investment boutique, from 2004 to 2009. He joined Standish from Pareto Partners, where he served as chief executive officer from 2000 to 2004 and as chairman from 2001.
“Mitchell has an impressive track record in the investment management industry, having led several successful firms during his career and most recently in overseeing our industry leading line-up of investment boutiques globally. He is well regarded across our client base, and I am confident he will lead our investment management business with great insight and success,” said Hassell. “I want to thank Curtis for his many contributions and helping to position our Investment Management and Markets businesses for growth and success moving forward.”
Michelle Neal,president of the Markets Group, who reported to Arledge, will report to Hassell, effective immediately. In her role, Neal leads the company’s foreign exchange, securities finance, collateral management, and capital markets businesses.
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. Are Markets Right to Worry?
Lower oil prices would normally be expected to benefit the global economy through aiding both consumers and corporates in oil-importing economies, says Stefan Kreuzkamp, Chief Investment Officer, Deutsche Asset Management. He remains constructive on global growth, but thinks there is still some risk of the benefits of lower oil prices being overshadowed by continuing financial- market turbulence. “Perhaps most importantly, lower oil prices have reopened the Pandora’s box of concerns about the longer-term negative side effects of looser monetary policy. In the ancient Greek fable, of course, Hope lies at the bottom of the box – but many more problems fly out first.”
His message is that the changing structure of the oil market and uncertainty about what this means will continue to have market implications. Oil can no longer be seen as a “known problem” that can be assessed in terms of known fundamentals, he adds. Therefore the firm has reduced its forecasts for major equity indices and increased its end-2016 spread forecasts for U.S. high yield. Although they have slightly adjusted the euro high-yield spread forecast as well, they see much lower risks of defaults in this segment.
“We caution that it is still too early to invest in oil-related equities. But this, in a sense, is the easy part.” Declares Kreuzkamp. What is more difficult is to assess the timing to re-enter or to build up positions. For U.S. high yield, for example, implied default rates look excessive, in his view. But the tag-war between markets and fundamentals might well continue, in high yield as in other areas, and impair fundamentals in the process.
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. Henderson Global Investors Hires Stephen Deane to Join Emerging Markets Equities Team
Stephen Deane has joined Henderson Global Investors from Stewart Investors (previously known as First State Stewart) as a senior portfolio manager. He will work alongside the head of emerging markets equities, Glen Finegan, and the wider emerging markets equities team. Stephen will be based in Henderson’s Edinburgh office.
Most recently Stephen spent over five years at Stewart Investors where he worked as an analyst and co-manager of the worldwide Equity funds. In this role, Stephen was responsible for generating ideas for global, emerging markets and Asian portfolios.
Previous to this, Stephen spent 13 years at Accenture and during this time he completed an Executive Masters in Business Administration (MBA) at INSEAD, Fontainebleau in France, with distinction.
Glen Finegan, head of emerging markets equities at Henderson, said: “Stephen and I worked closely together at First State and, given our shared experience, I feel the hire is a very good fit for the team. We share a similar investment philosophy and Stephen’s disciplined approach will be of great benefit to our clients.
“Stephen’s hire evidences Henderson’s continued commitment to the emerging markets equities asset class and signals the further strengthening of Henderson’s franchise working out of Edinburgh. We are certain Stephen’s global insights will be invaluable going forward.”
Stephen Deane adds: “I believe that there is a significant opportunity to help build Henderson’s emerging markets franchise based on its philosophy of long-term quality oriented investing, something Glen and I both share. This combined with Henderson’s reputation for excellent client service, global distribution and a client-led culture made joining the company a straightforward decision”.
As part of the team build-out in Edinburgh, Michael Cahoon has been promoted from analyst to portfolio manager, effective immediately, having contributed significantly to overall performance during the past year. Additionally he has been named co-manager on the US mutual fund, the Emerging Markets Fund. Nicholas Cowley will also be named as co-manager on the Henderson Gartmore Emerging Markets Fund.
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. The Morningstar European Institutional Conference Will Focus on Long-Term Investments
The Morningstar Institutional Conference, to be held in Amsterdam on 17 and 18 March 2016, will explore key themes relevant to long-term investors and will provide a holistic view of the current investing environment through a diverse program of presentations from leading investors, academics and industry experts. The organization expects more than 200 investment professionals from across Europe to attend.
Headlining speakers include John C. Bogle, Founder and former Chief Executive of Vanguard and creator of the first index mutual fund. In a conversation with Morningstar’s Scott Cooley, transmitted live from Pennsylvania, Mr. Bogle will share his views on building effective portfolios for long-term investorsand will challenge assumptions about active management. Attendees will also hear from James Montier, member of GMO’s asset allocation team, renowned author and expert on behavioral finance and value investing, who will explore the features of an independent-minded approach to investing and the challenges of implementing such a strategy in a multi-asset environment.
Haywood Kelly, Head of Global Research, of the organising firm will examine the landscape for sustainable investing and explain what the firm is doing to help individuals, advisors, and asset managers invest in ways that are meaningful to them. In addition, Thomas Idzorek, Head of Investment Methodology and Economic Research, Morningstar Investment Management group, will update and expand upon his ground- breaking research on the use of popularity as an investment tool.
Photo: Thomson Reuters. Seilern Investment Management Wins Two Lipper Awards
Seilern Investment Management, the long-term investment management company, won two awards at the Thomson Reuters Lipper Fund Awards in Switzerland. For its range of equity funds it won the Best Equity Group award (in the Small Company category) and for its flagship fund, Stryx World Growth GBP, Seilern won the 5 Year Performance award out of 358 Global Equity funds.
These awards, coming shortly after Stryx World Growth reached its 20-year milestone, may be attributed to Seilern’s highly focused strategy; commitment to investing in quality growth businesses and holding them through the business cycle.
Seilern combines a rigorous process and proprietary research to identify the highest quality growth companies with superior business models, stable and predictable earnings, and a sustainable competitive advantage. The resulting shortlist, of no more than 70 companies in the world, forms the ‘Seilern Universe’, and from this pool of companies the fund managers select 17-25 stocks per fund providing investors with a concentrated high-conviction portfolio. Once invested, these companies are then held by the funds for the long-term, often for a period of many years.
Peter Seilern-Aspang, founder of the company and architect of the investment process commented: “It is very much a team effort at Seilern, so these awards mean a tremendous amount. We are very focused on finding the best companies and leaving them to grow, an approach that has worked well over the last 20 years.”
Capital Strategies Partners has an strategic agreement to cover Spain, Italy, Switzerland and LatAm market for Seilern Investment Management.
CC-BY-SA-2.0, FlickrPhoto: Mark Vegas. Negative Rates Explained: Are Central Banks Opening Pandora’s Box?
The Bank of Japan (BoJ) has followed central banks in Denmark, the Eurozone, Sweden and Switzerland by imposing a negative interest rate on a portion of commercial bank reserves – see chart. In Switzerland and Sweden, the main policy interest rate, as well as the marginal rate on reserves, is below zero. Short-term interbank interest rates are negative in all five cases, explains Simon Ward, Chief Economist at Henderson.
Danish rates were cut below zero to preserve the currency peg with the euro. Unwanted currency strength was also a key reason for the Swiss and Swedish moves to negative. The European Central Bank (ECB) and BoJ justify negative rates by reference to their inflation targets, but both central banks have welcomed currency weakness in recent years.
“An individual bank can avoid negative rates by using excess liquidity to increase lending or invest in securities. This is not, however, possible for the banking system as a whole, since the total amount of reserves is fixed by the central bank. A reduction in reserves by one bank will be matched by an increase for others. Negative rates, therefore, act as a tax on the banking system. The Danish, Swiss and Japanese systems reduce this tax by imposing negative rates only on the top tier of bank reserves,” says Ward.
Pros and cons
According to the expert, supporters of negative rates argue that a cut to below zero provides a net economic stimulus, even if the effects are smaller than a reduction when rates are positive. The move to negative, they claim, puts further downward pressure on banks’ lending and deposit rates, boosting borrowing and deterring “hoarding”. It also encourages “portfolio rebalancing” into higher-risk / foreign investments, implying a rise in asset prices and / or a fall in the exchange rate. Higher asset prices may yield a positive “wealth effect” on demand, while a lower currency stimulates net exports.
And, opponents of negative rates, highlights Chief Economist at Henderson, argue that they squeeze banks’ profitability, making them less likely to expand their balance sheets. Banks in the above countries have been unwilling to impose negative rates on retail deposits, fearing that such action would trigger large-scale cash withdrawals. This has limited their ability to lower lending rates without damaging margins. Banks need to maintain profits to generate capital to back lending expansion. Any boost to asset prices from negative rates, moreover, is likely to prove temporary without an improvement in “fundamentals”, while exchange rate depreciation is a zero-sum game.
Cash withdrawal
Ward points out that radical thinkers such as the Bank of England’s Andrew Haldane have suggested increasing the scope and effectiveness of negative rates by placing restrictions on or penalising the use of cash. Such measures could allow banks to impose negative rates on retail as well as wholesale deposits without suffering large-scale withdrawals, thereby increasing their ability to lower lending rates while maintaining or increasing margins. Such proposals may be of theoretical interest but are unlikely to be politically feasible. They are dangerous, since they risk undermining public confidence in money’s role as a store of value.
Just the beginning?
As a conlusion, Henerson´expert says that central banks’ experimentation with negative rates is likely to extend. “ECB President Draghi has given a strong indication of a further cut in the deposit rate in March, while the recent BoJ move is widely viewed as a first step. The ECB may copy other central banks by introducing a tiered system to mitigate the negative impact on bank profits and increase the scope for an even lower marginal rate. The necessity and wisdom of such initiatives are open to question. The risk is that central bankers are opening Pandora’s Box and that any short-term stimulus benefits will be outweighed by longer-term damage to the banking system and public confidence in monetary stability”, concludes.
CC-BY-SA-2.0, FlickrPhoto: Adrian Naik. Six Afores account for 78% of investments in CKDs
CKDs exposure in Afores grew 26% in 2015, to the equivalent of US$8.6 billion, which represents almost 6% of the Afore’s assets under management. CKDs are the vehicle by which the Afores can invest in private equity. Regulatory limits for this kind of investment still allow the Afores to increase their positions more than two fold to almost 18% of Assets Under Management.
According to Capital 414, firm that provides service and corporate financial consulting, during 2015 about US$1 billion through 19 issues, went to market. This figure represents almost double the issuances observed over the previous year and represents the third best year in issuances since their inception in 2008. In 2010 about US$1.2 billion were issued and in 2012, US$1.4 billion. Capital 414 states that there are close to US$1.9 billion dollars in the pipeline.
Through investment in CKDs, Afores have financed a growing range of projects and companies. According to Consar, 32% of CKDs available invest in Real Estate (Malls, Retail/office, properties, Housing); 29% in Infrastructure (Hospitals, Universities, Highways, Airports, Logistic platforms); 24% other Private Equity (E-commerce, Health Industry, Touristic services, Food and restaurants); 7% in Financial Assets (Subordinated/ Mezzanine/ Convertible Loans, Loan Portfolios); 5% are Forest Projects (Development and commercialization of plants and wood in Campeche) and only 3% is allocated to Energy (hydroelectric power stations Oil platforms). Given the resource requirements in sectors such as Infrastructure and Energy it is expected to see higher issues in these sectors during the coming years.
At the end of 2015 the Afores with higher investments in CKDs were Afore Banamex with nearly US$2 billion; Sura and XXI Banorte with US$1.6 billion each; while Profuturo and PensionISSSTE had US$833 and US$667 million each. These six Afores account for 78% of total holdings in these securities, according to firm Capital 414.
With investments between US$300 and US$600 million dollars are Invercap with US$556 million dollars; Principal with US$444 million dollars; Inbursa with US$333 million dollars and Coppel with US$278 million. The two Afores with fewer investments in CKD’s are Metlife and Azteca with US$167 and US$56 million dollar respectively.
The participation of Afores in this type of instrument means a great responsibility in terms of selection and diversification, hence the importance that the CONSAR has given to these investments which not only require a thorough analysis, but also approval of the independent member of the investment committee.
CC-BY-SA-2.0, FlickrPhoto: Allan Ajifo. The Headlines Are Relentless, but the News Isn't All Bad
So far in 2016, the headlines have been somewhat harrowing: China imploding. Banking problems in Europe. Devastation in the oil patch. To be sure, there are reasons for concern. World trade is declining on a year-over-year basis. We’re not yet at recession levels, but there is a slowdown. What is not yet clear is whether the slowdown will be temporary or prolonged.
China remains a major concern as it attempts to transition from an export-driven society to one based on consumption. Both imports and exports have been declining, and concerns over China’s banking sector are mounting. Thankfully, Chinese debt is not owned by many investors outside the country, so a Chinese debt or banking crisis, while painful, would likely not have the same sort of global ripple effects that the US mortgage crisis did in 2007–2009.
Consumption creeps up
Meanwhile, the Chinese consumer is beginning to carry more weight. Consumption is growing year over year, and housing markets have picked up in China in recent months. I don’t anticipate implosion taking place there.
Europe is a mixed bag at the moment. While German exports are slowing, consumption in the eurozone is picking up and easy monetary policy remains in place. Japan’s diversified economy is in the midst of a multiyear re-engineering push — but without much to show for it thus far.
US consumer spending accounts for a larger share of the global economy than the entire economic output of China does. And US consumers kicked into gear in January. Apparently they didn’t get the memo about all the bad news in the rest of the world. US real incomes are rising, wages are growing and both the number of workers and their hours worked are climbing.
Overall, the global backdrop does not suggest an imminent recession.
Corrections don’t necessarily signal recessions
History tells us that market declines like we’ve seen so far in 2016 don’t always signal a recession. Since 1959, there have been 11 declines in the S&P 500 of the magnitude we’ve seen in recent months —between 10% and 19% declines. Three of those episodes ended in recession, while the other eight did not. The average decline during those eight episodes was approximately 16%. And just six months after the decline ended, the average return on the S&P was 18%–19%. It’s also worth noting that the average forward P/E ratio in those periods was 19 to 20 times. Today it is a more reasonable 15½ times.
Still some work to do
So are we headed for a recession? In my opinion, there isn’t a “yes” or “no” answer, but rather a two-stage process at work. The continued fall in oil prices —largely due to falling demand from China— is an input cost, and falling costs will initially cause some capital destruction. No doubt there will be defaults by energy companies that are geared to crude oil prices of $70, $80 or $100 per barrel. However, once the loss of capital works its way through the system, there will be a boost to manufacturing in the form of higher profits based on lower input costs.
As another ripple effect of China’s recent woes, the decline in commodity prices is suppressing expectations of higher interest rates — the cost of capital. Now we have two input costs that are likely to remain relatively low for the balance of 2016. And those should eventually benefit big economies like the US, the eurozone, Japan and, strangely enough, China itself.
Anxiety is understandable, and investors are wise to be cautious. It is probably best for investors to hold back a bit and to watch the macroeconomic data for the world’s major economies in the next few months. That should help us figure out if the worst of the crisis has passed.
James Swanson is Chief Investment Strategist at MFS Investment Management.
CC-BY-SA-2.0, FlickrPhoto: Cucho Schez. Listed Real Estate As An Income Investment
The role that listed real estate can play in portfolio management is evolving, and there are three factors in particular which have been instrumental in determining how this sector can contribute positively to risk-adjusted returns for income-oriented funds.
The first factor is simply size. At the end of February 2009 the free float market capitalisation of the EPRA Global Index was US$297 billion and the sector represented just 1.1% of the global equity market. Fast forward to December 2015 and the free float market capitalisation of the EPRA Global Developed Market Index is now US$1,284 billion (a fourfold increase) and represents 2.7% of the global equity market (source: EPRA). As a result the investable universe of liquid global real estate stocks has expanded considerably.
Secondly, the sector has a unique structure. Real Estate Investment Trusts (REITs) are obliged to distribute a high, fixed, percentage (typically 90%) of their income as dividends. If they meet this requirement they are typically exempt from corporate and Capital Gains Tax. As a result REITs combine the liquidity benefits of equities, with attractive income characteristics, and total returns driven by real estate factors. REITs account for around 70% of the EPRA Global Index and are the predominant structures in the US, UK, Europe and Australia.
Thirdly, valuation. The yield on the EPRA Global Developed REIT Index tended to trade below that of the Merrill Lynch Global Investment Grade Bond Index prior to the Global Financial Crisis. Since then, the reverse has generally been the case with REIT yields trading at a premium even after the recent sell-off in corporate bonds.
Preferred characteristics
However, a significant yield premium is only one part of the valuation picture. The other component is the level of anticipated growth in rental and capital values, which translates through to dividends and Net Asset Values (NAV) at the company level. It is here where we see different geographic areas displaying different growth trajectories, due to variances in local supply/demand dynamics. In this regard we can split the sector into three categories; regions with positive rental growth such as the UK, US, Japan and Australia; those with flatter growth profiles such as Europe and Canada; and those with declining rental values including Hong Kong and Singapore.
Our preference is to invest in those companies which have a decent starting yield, positive rentals and NAV growth projections, a high quality real estate portfolio, experienced and high quality management, and sensible leverage, broadly those with loans to value of under 40%.
What about rising interest rates?
Clearly, there are concerns about the impact of rising interest rates on real estate values, and as a result real estate shares. However, there are a number of reasons why we believe that the impact of potential issues could be muted. Firstly, as discussed previously current pricing of the sector, with a dividend yield of around 4.1%, and a discount to NAV of c.9% provides a reasonable ‘buffer’ against rises in bond yields. Secondly, in terms of valuation yields on direct property a significant proportion of the capital which is targeting the sector is equity, not debt, so rises in financing costs may have limited impact on values. As an example in 2015 Blackstone raised US$15.8 billion for its latest global real estate fund. Thirdly there is a level of rental growth already embedded in forecasts, and we anticipate dividend growth of 3.5% p.a. over the next three years. Finally, any rise in bond yields is likely to be limited by low inflation, slow GDP growth and cautious central banks.
Conclusion
We believe that selective listed real estate companies have a valuable role to play in income focussed funds at the present time, due to a combination of a dividend yield premium, stable cash flows, and attractive growth prospects.
John Stopford is Co-Head of Multi-Asset at Investec.
