India: Strength in Numbers

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India: la fortaleza de la demografía
CC-BY-SA-2.0, FlickrPhoto: Bo Jayatilaka. India: Strength in Numbers

Asia is home to about 60% of humanity. With 1.3 billion people, China has demonstrated over the last three decades how an economic miracle can be created by productively employing such masses. It moved millions of people from a rural low productivity, agrarian economy to a more productive industrial and urban economy, thereby radically lifting its economic standards. In 1990, more than 60% of the Chinese population was below the poverty line but by 2015 that proportion was less than 4%. India and the ASEAN (Association of Southeast Asian Nations) economic bloc maintain a similar strength in numbers with populations of over 1.2 billion and 650 million, respectively.

India’s case is particularly unique. Estimates suggest India will add over 115 million people to the global labor force in the next 10 years, and then an additional 100 million over the following decade. By some estimates, this means that India will add more people to the global labor force than the rest of the world combined, excluding Africa. This has significant macroeconomic implications not only for the country, the region and the world, but it should also create opportunities for investors.

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A paramount challenge for India is effectively employing these millions and generating strength from numbers rather than merely allowing resources to become constrained by rapid population growth. The need for sustainably high GDP growth to generate new jobs is not a debatable topic. The debates center around whether India is doing enough and whether it is on the right path. India went through liberalization in 1991. And since then, the country has seen significant benefits as GDP growth moved from low single digits (3.5% from 1950-1980) to high single digits. There remains much criticism, however, that government reforms around land, labor and taxation have not been completed. But over the last two years, there have been several government efforts that are worth highlighting.

Bankruptcy Law: More Power to Banks

A structural factor to India’s banking woes has been the lack of a bankruptcy code, which distorts the system. “If a loan goes bad in India then the promoter (owner of the business) tells the bankers that he’ll see them in court and will keep seeing them in court for the next decade,” noted Indian central bank Governor Raghuram Rajan. This is aptly summarized given that politically well-connected promoters historically have not lost ownership of the asset even when loans have gone bad. Recovery takes much longer (more than four years versus less than two years in the U.S.) and recovery rates are dismal (25% versus 80% in the U.S.).

Recently passed insolvency and bankruptcy legislation, however, could critically revamp the current system by superseding existing laws, reversing the balance-of-power in favor of banks (i.e. promoters run the risk of losing their assets), and providing transparent and shorter time-bound resolution guidelines. The new law should remove willful defaulters from the system and prevent nonperforming loans (NPLs) from significantly jamming the banking system. Improving the efficiency of capital utilization is important in supporting entrepreneurs, and thereby helping job creation.

Inclusion for “Unplugged India”

When investors see India’s major urban areas, they see a lot of people but that does not describe the real story behind Indian demographics. Many in India still live in villages, rely on agriculture as their primary means of livelihood (about 65% of the population) and feel largely unconnected with the urban ecosystem. India cannot move forward without including this significant majority, or in other words, if included, the country should be able to produce tremendous national growth.

Much progress has been made over the last two decades in connecting “unplugged India” by improving and adding to its roadways and electricity grids. “All weather” roads have moved from fewer than 50,000 kilometers to over 450,000 kilometers; households with electricity have jumped from about 44% to more than 70%. These simple projects have provided a significant productivity boost to SMEs in India’s smaller towns.

In 2014, Prime Minister Narendra Modi launched a plan for comprehensive financial inclusion for all Indian households. This plan has added more than 175 million banking accounts to the existing 400 million over just two years. In India, consumer companies have been known to do well selling products in individual-sized “sachets” versus typical product sizes for such things as toothpaste or shampoo. In this way, this “sachetization” of the banking system over time will help broader access and increase participation in the financial system, leading to more efficient savings, credit availability for business, increase in investments, and hence, job creation.

Governance: a Prerequisite to Development

India ranks very poorly in terms of ease of doing business (130 out of 189 countries). Hence, the current ecosystem seems inadequate for the creation of enough new jobs to employ the millions expected to join the labor force. The numerous reasons for this poor ranking include layers of bureaucracy and corruption. In my view, improvements in governance are a precursor to improvements in physical infrastructure.

 In May 2015, the government also passed the Black Money Act, which made ownership of illegal money a criminal offense. Some say it is an overly aggressive remedy, but necessary medication. The government also implemented a biometric check-in and check-out system for their officials, notorious for being missing-in-action while still being employed. Other improvements include the relaxation of certain rules for SMEs in order to promote a “start-up culture.”

Glass Half Full

Central bank Governor Raghuram Rajan’s announcement that he will not seek an extension to his term has created some anxiety. While some angst may be justified, I believe there is evidence that progress is in motion at various levels to improve the economic landscape. It should also be noted that the average length of tenure for the Reserve Bank of India (RBI) governor position has generally been shorter than that of Western countries. Already during Rajan’s term, he adopted an inflation-targeting framework, worked in conjunction with the Ministry of Finance to help resolve nonperforming assets in PBSs and set up a new Monetary Policy Committee as part of an institutional framework. These changes will become part of his legacy. The RBI has long been hailed as an institute of high repute in India, and should remain so even after his term.

Stepping back from the nuances of individual events, overall, I am impressed at the amount of activity and clear intentions by key officials in resolving the myriad of challenges at hand. Don’t get me wrong, there is still a long way for policy makers to go but some credit is due to them. India has a high cost of capital, hence, freeing up capital from dead physical assets, improving the allocation of that capital by an improved banking system and providing a higher governance environment for entrepreneurial talent in SMEs, will go a long way in delivering the strength of demographics. I hope that policy makers continue their good work and continue to take on the challenge of tough reforms to satisfy the need to create more jobs. Entrepreneurial businesses out of this fertile landscape would be good investment candidates for us.

At Matthews Asia, our investments are not based on macroeconomic projections or policy changes. That said, we still do try to understand the implications of the actions of key policymakers for our economies and businesses in the region. For us, macroeconomic understanding is not about predicting GDP, interest rates, and/or currency changes, but more about socioeconomic developments related to the social fabric of Asian societies. I look at these broader developments through that lens while seeking quality businesses and management teams.

Column by Mathews Asia written by Rahul Gupta, Senior Research Analyst and Portfolio Manager at Matthews Asia

AUM in the Global Investment Funds Market Grew US$1.1 Trillion in July

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El mercado global de fondos de inversión creció en 1,1 billones de dólares en el mes de julio
CC-BY-SA-2.0, FlickrPhoto: Jose Gutierrez. AUM in the Global Investment Funds Market Grew US$1.1 Trillion in July

According to the Global Fund Market Statistics Report, written by Otto Christian Kober, Global Head of Methodology at Thomson Reuters Lipper, assets under management in the global collective investment funds market grew US$1.1 trillion (+3.0%) for July and stood at US$37.1 trillion at the end of the month. 

Estimated net inflows accounted for US$107.7 billion, while US$967.3 billion was added because of the positively performing markets. On a year-to-date basis assets increased US$2.1 trillion (+6.1%). Included in the overall year-to-date asset change figure were US$123.9 billion of estimated net inflows. Compared to a year ago, assets increased US$1.1 trillion (+2.9%). Included in the overall one-year asset change figure were US$478.9 billion of estimated net inflows. The average overall return in U.S.-dollar terms was a positive 3.0% at the end of the reporting month, outperforming the 12-month moving average return by 3.0 percentage points and outperforming the 36-month moving average return by 2.9 percentage points.

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Fund Market by Asset Type, July

Most of the net new money for July was attracted by bond funds, accounting for US$77.6 billion, followed by money market funds and commodity funds, with US$47.7 billion and US$3.3 billion of net inflows, respectively. Equity funds, with a negative US$19.4 billion, were at the bottom of the table for July, bettered by “other” funds and real estate funds, with US$4.5 billion of net outflows and US$0.3 billion of net inflows, respectively. The best performing funds for the month were equity funds at 4.6%, followed by “other” funds and mixed-asset funds, with 4.3% and 2.5% returns on average. Commodity funds at negative 1.3% bottom-performed, bettered by real estate funds and money market funds, with a positive 0.2% and a positive 0.3%, respectively.

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Fund Market by Asset Type, Year to Date

In a year-to-date perspective most of the net new money was attracted by bond funds, accounting for US$279.3 billion, followed by commodity funds and alternatives funds, with US$26.0 billion and US$9.1 billion of net inflows, respectively. Equity funds were at the bottom of the table with a negative US$110.9 billion, bettered by mixed-asset funds and money market funds, with US$51.4 billion and US$38.2 billion of net outflows. The best performing funds year-to-date were commodity funds at 12.1%, followed by mixed-asset funds and bond funds, both with 7.2% returns on average. Alternatives funds, with a positive 1.3% was the bottom-performing, bettered by money market funds and “other” funds, with a positive 1.9% and a positive 5.1%, respectively.

You can read the report in the following link.

Schroders US Strengthens Credit Team with Three Key Hires

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Schroders refuerza su equipo de crédito estadounidense con tres fichajes estratégicos
CC-BY-SA-2.0, FlickrDavid Knutson, Eric Skelton and Chris Eger . Schroders US Strengthens Credit Team with Three Key Hires

Schroders has announced three senior appointments in the US to underpin the strong growth of its US fixed income business.

David Knutson has joined the US Credit team as Head of Credit Research – Americas. He will be based in New York and report into Wes Sparks, Head of US Credit. David will be covering large US banks. David brings almost 25 years of research experience to Schroders; he joins from Legal and General Investment Management America, where he had been a Senior Analyst in Fixed Income Research for ten years. Prior to this, David spent three years as Director of Fixed Income Research at Mason Street Advisors and seven years working in Credit Research and Debt Capital Markets at UBS. David replaces Jack Davis who transitions internally into a Senior Analyst role.

Eric Skelton joined the Global Fixed Income and FX trading team as US Credit trader for US investment grade credit, based in New York. He will report into Gregg Moore, Head of Trading, Americas and will work closely with US Credit Portfolio Managers, Rick Rezek and Ryan Mostafa and the rest of the US Fixed Income trading desk. Eric Skelton joins Schroders from Achievement Asset Management (formerly Peak6 Advisors), where he was a Credit Trader. Prior to joining Achievement Asset Management in 2014, Eric spent three years at Nuveen Investments.

Chris Eger joins the US Credit team in a newly created role as Portfolio Manager, reporting to Wes Sparks. Chris is based in the New York office. He joins Schroders with 14 years of experience in Investment Grade – in both Trading and Portfolio Management capacities. He joins from J.P. Morgan Chase, where he held the role of Executive Director – Credit Trader, Investment Grade Domestic and Yankee Banks. Prior to joining J.P. Morgan in 2007, Chris spent five years at AIG Global Investment Group where he held two Vice President positions, firstly as a Credit Trader and then as a Total Return Portfolio Manager.

Karl Dasher, CEO North America & Co-Head of Fixed Income at Schroders, said: “Investors globally are increasingly attracted to US credit markets in the search for yield and we have been beneficiaries of that trend. To support continued client demand and process evolution, we have made three strategic hires. These additions will further strengthen our in-house research and execution capabilities in the USD credit domain.” 
 

US Engine of Dividend Growth Slows Markedly, While Europe Picks up the Pace

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El motor estadounidense del crecimiento de dividendos se frena notablemente mientras Europa recupera terreno
CC-BY-SA-2.0, Flickr. US Engine of Dividend Growth Slows Markedly, While Europe Picks up the Pace

Global dividend growth slowed in the second quarter, according to the latest Henderson Global Dividend Index. Underlying dividend growth, which strips out exchange rate movements and other lesser factors, was 1.2%. This is slower than the 3.1% underlying growth seen in the first quarter, partly reflecting Q2 seasonal patterns that give greater weight to slower growing parts of the world, and partly owing to a more muted performance from the US.

US payouts rose 3.1% on a headline basis to $101.7bn, equivalent to an underlying increase of 4.6%. This was the slowest rate of growth since 2013, reflecting subdued profit growth in the US, partly due to the impact of a strong dollar. The slowdown in the US began late last year but should be considered a normalisation to more sustainable levels of dividend growth after several quarters of double digit increases.

Income investors turn their attention to Europe in the second quarter. Two-thirds of the region’s dividends are paid in Q2, making it comfortably the largest contributor to the global total. European dividends (excluding the UK) rose 1.1% year on year in headline terms*, but on an underlying basis were an encouraging 4.1% higher. European dividends of $140.2bn made up two-fifths of the global second-quarter total. They were 1.1% higher than Q2 2015 on a headline basis. Underlying growth was an impressive 4.1%, once lower special dividends, particularly in France and Denmark, as well as other lesser factors were taken into account.

The Netherlands and France enjoyed the second and third fastest growth rate in the world, while German growth was hit by big cuts from Volkswagen and Deutsche Bank; Austria, Spain and Belgium also lagged behind.

In Japan, headline growth was 28.8%, with payouts totalling $30.8bn. Two thirds of this increase was down to the currency, with positive index changes accounting for the rest. In underlying terms, therefore, dividends were 0.8% lower, as company earnings were depressed by the strong yen, and as economic confidence in Japan weakened.

It was a challenging quarter for emerging markets. Dividends fell over a quarter on a headline basis to $22.9bn, as weaker currencies and index changes took their toll. Adjusting for these factors, payouts fell 18.8% in underlying terms, with a large number of countries, including the big four BRICs, seeing underlying declines.

The second half of the year is likely to be weaker than the first, partly because seasonal patterns means the emphasis shifts slightly towards those parts of the world where dividends are growing more slowly, like emerging markets, Australia, and the UK. Owing to the changes in the latest quarter, the Henderson’s team has reduced their forecast for the full year to $1.16 trillion, down from $1.18 trillion. This is equivalent to a headline expansion of 1.1%, or 1.4% on an underlying basis.

“We can see how more muted profit expansion, partly owing to stronger currencies, has slowed dividend growth in Japan and the US. In emerging markets, payout cuts have been greater than we expected so far this year as well. Europe remains broadly positive, in line with our expectations. The weak spots we have seen have been company-driven, or owing to specific sector trends like the impact of lower commodity prices, rather than related to wider economic difficulties. The slowdown in the US began late last year but should be considered a normalisation to more sustainable levels of dividend growth after several quarters of double digit increases.” Said Alex Crooke, Head of Global Equity Income.

Since the UK’s decision to leave the EU at the end of June, the pound has fallen further on the foreign exchange markets, extending a descent that began in the months running up to the referendum. However, a number of large international UK companies pay their dividends in dollars, so, according to Crooke, the impact will be less severe than the pound’s devaluation might suggest. In addition, the UK only accounts for around only 10% of global dividends so the effect on the global total is likely to be relatively small.

80% of Institutional Investors to Increase or Maintain Exposure to Real Estate Over the Next Two Years

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El 80% de los inversores institucionales aumentarán su exposición al mercado inmobiliario en los próximos dos años
CC-BY-SA-2.0, FlickrPhoto: d26b73. 80% of Institutional Investors to Increase or Maintain Exposure to Real Estate Over the Next Two Years

Approximately four in five (80%) institutional investors plan to increase or maintain their exposure to real estate over the next two years, according to a new study by Aquila Capital. With 38% of respondents feeling ‘positive’ or ‘very positive’ about the outlook for the asset class, the research suggests that institutional investor demand for European real estate shows few signs of abating.

Overall, 87% of institutional investors currently invest in real estate, with their average exposure equating to 11% of their portfolio. 58% of investors have exposure to a core real estate investment strategy with a third (33%) holding core-plus assets. 27% and 16% of respondents are invested in value-added and opportunistic strategies respectively.

Despite their enthusiasm, investors have a number of concerns about the outlook for European real estate: nearly half (47%) are worried by the impact of continued economic uncertainty while 43% think assets are at, or are close to, being fully priced. Around a third (31%) flagged falling yields in prime markets while 22% cited uncertain geopolitics and the threat of terrorism as being problematic.

The real estate investment vehicles most favoured by institutional investors include: collective funds (39%), specialist investment funds (35%) direct ownership (23%) and fund-of-funds (23%).

Rolf Zarnekow, Head of Real Estate at Aquila Capital, said: “Institutional investor demand for European real estate remains extremely strong and we are likely to see increasing amounts of new capital allocated to this asset class given the risk-adjusted returns it can offer.

“In our view, the Spanish residential sector currently offers a significant investment opportunity. We began investing in the Spanish property market two years ago and continue to see a significant increase in demand from international investors seeking to gain exposure to prime residential assets in key cities such as Madrid and Barcelona.”

The findings follow Aquila Capital’s recent launch of a new real estate strategy for institutional investors that invests in the reinvigoration of the Spanish residential property market. The strategy focuses on the construction of residential housing complexes and the conversion of existing properties to residential real estate in the metropolitan regions of Spain. Aquila Capital has already made a number of acquisitions and has a significant pipeline of further opportunities in this sector. The strategy targets a total return of 155% to 175% after local taxes and costs by the end of its investment term in 2019.

According to the research, almost 82% of investors are positive or neutral about the prospects for the Spanish real estate market and one in three respondents (31%) expects to see increasing numbers of institutional investors capitalising on the opportunities offered by the sector over the next two years.

Roman Rosslenbroich, CEO and Co-Founder of Aquila Capital, added: “We are delighted by the interest that our investment strategy has generated among investors and look forward to deploying newly raised-capital across a range of residential schemes that offer tremendous potential for capital appreciation.”

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Stressed? A Low Volatility Strategy May Help

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¿Estresado? Una estrategia de baja volatilidad puede ayudarle a conciliar el sueño
CC-BY-SA-2.0, FlickrPhoto: Ben Sutherland . Stressed? A Low Volatility Strategy May Help

Investing means taking calculated risks, but nobody should have to lose sleep over it. If your portfolio is keeping you up nights, it may be time to consider a low-volatility strategy.

No matter what country they call home, investors who need their portfolios to generate steady income know they have to take some risk to get returns. But markets have grown more volatile and less predictable this year, and high-income assets are usually the first to sell off when sentiment sours or the market outlook changes.

Yet pulling out of high-income sectors altogether isn’t an option for most of us—particularly when income is so hard to come by. So how can investors stay the course and generate the income they need without taking undue risk?

Our research shows that high-quality, short-duration bonds have over time dampened portfolio volatility and held up better in down markets.

What’s the secret? A lot of it has to do with duration, a measure of a bond’s sensitivity to changes in its yield. In general, bonds are highly sensitive to yield changes—when yields rise, prices fall. The shorter the duration, the less damage a rise in yields will do.

For most investment-grade bonds, yield changes are driven primarily by changes to interest rates, or the yields on government bonds. High-yield bonds, though, are less sensitive to interest-rate changes than other types of bonds. But yields can rise for a number of reasons. When concern about global growth and falling commodity prices hit high-yield bond markets hard earlier this year, the shorter-duration bonds held up best.

Like any strategy, a short-duration one can lose money in down markets—but it generally loses much less than strategies with higher duration and additional risk.

Riding the asset-allocation seesaw

In up markets, on the other hand, investors who follow a short-duration strategy give up some return in exchange for a smoother ride—but not as much as they might think. To understand why, it can help to think of one’s various investment options as an asset-allocation seesaw, with cash in the middle; interest-rate sensitive assets, which do well in “risk-off” environments, on the left; and return-seeking assets, which thrive when investor risk appetite is high, on the right (Display 1).

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Moving away from cash in either direction increases return. On the rate-sensitive side, moving away from the center increases duration, but investors are compensated with higher yields. There’s a catch, though: yields rise on a curve, not a straight line, so the further out one moves, the smaller the yield increase. Moving from cash to three-year government bonds can provide a hefty bump in yield. But the pickup available when moving from 10-year to 30-year bonds can be tiny.

It’s a similar story on the return-seeking side: return expectations increase as one moves away from cash, but by ever diminishing amounts. Moving from high-yield bonds to equity, for instance, increases returns only slightly, but doubles drawdown risk.

The good news is that this works when moving toward the center, too. An investor who wants to reduce risk doesn’t have to go all the way to cash. For example, she can shorten duration by moving from high yield to low-volatility high yield and only give up a little return in the process.

Don’t skimp on quality

Of course, not all high-yielding securities are alike. Credit quality varies widely, and that’s particularly important in short-duration strategies. The primary risk for short-duration high-yield bonds is credit risk.

We’re in the late stages of the credit cycle in many parts of the global high-yield market. Reaching for the high yields on low-quality, CCC-rated “junk bonds” in that environment is dangerous. In our view, the yields don’t justify the relatively high risk of default.

How investors choose to balance returns, risk and downside protection will vary depending on individual needs and comfort levels. But in our view, the ability to reduce risk and not sacrifice too much return makes this strategy a compelling one in today’s volatile markets. At the very least, we think it could help investors rest easier at night.

Gershon Distenfeld  and Ivan Rudolph-Shabinsky are Senior Vice President and Credit Portfolio Managers at AB.

Chopper Money?

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¿Ha llegado la hora del helicóptero monetario en Japón?
CC-BY-SA-2.0, FlickrPhoto: Moyan Brenn . Chopper Money?

Imagine a helicopter flying overhead, spilling thousand-dollar bills all over your backyard. That’s the visual that comes to mind when I read about “helicopter money”, a proposed alternative to quantitative easing (QE). The most recent headlines on this topic have centered around Japan. As the Bank of Japan approaches practical limits on its purchase of government bonds, several economists have argued that it might be time to consider helicopter money.

Simply put, helicopter money is a direct transfer of money to raise inflation and output in an economy running substantially below potential. Thus far, conventional QE has not achieved Japan’s 2% inflation target. According to a paper by the St. Louis Fed, this could be due to expectations that it would eventually be unwound, diminishing the policy’s credibility. Since helicopter money is free and never has to be repaid, this approach may have a better shot at achieving Japan’s inflation target.

One form of helicopter money being discussed is the issuance of a zero coupon perpetual bond (with no maturity) by the Ministry of Finance to the Bank of Japan. The Bank of Japan “prints money” via an electronic credit of cash on its balance sheet, and uses the cash to buy the bonds. Because the bonds will pay no coupon and no principal, the Ministry of Finance would never have to pay it back.

It is important to point out the distinction between this “helicopter money” approach and QE. In QE, the central bank prints money and uses the money to buy bonds. However, the bonds eventually have to be repaid, so it adds to the overall debt levels of the country. The distinction here is the permanent nature of a perpetual bond. With QE, assets purchased are expected to be unwound at some point in the future, i.e. future generations would still have to pay back the money spent by today’s generation. With a zero coupon perpetual bond, the debt is never repaid, making this tool “helicopter money” rather than conventional QE.

Continuing with the helicopter analogy, QE is like the helicopters spilling 1,000 yen bills from the sky, but Japanese consumers and investors have been reluctant to pick up these 1,000 yen bills because the bills come with a string attached, a promise to pay back 999 yen sometime in the future. (One can think of negative interest rates as paying back less than the principal borrowed.)

The zero coupon perpetual bond would instead give the money to the government for free—call it a gift. With this free money, the government should be able to embark on the most ambitious public works program ever—hire people to upgrade roads, for example, or just deposit the money directly into its citizen’s bank accounts.

But once a government undertakes helicopter money, how easy is it to wean a populous hooked on free money? Can helicopter money be done incrementally? What if the Bank of Japan manages expectations by explicitly stating that this would be a “unique event which will never be repeated” as per Milton Friedman? Can taking baby steps lead to a gradual rise in in ation, wage growth, a mild depreciation of the yen, and nominal GDP growth?

Empirical evidences

The empirical evidence is mixed on helicopter money. The well-documented historical experience of Germany in 1923, Hungary in 1946, and most recently, Zimbabwe in 2008 were disastrous. At the risk of over-simplification, the tone of the policies these countries undertook was a drastic increase in the money supply, which led to hyperinflation, and a worthless currency, and ended in a major economic recession and political turmoil.

However, other less well-known historical evidence points to the opposite conclusion. A recent case study by the Levy Economic Institute on the Canadian economy in 1935–75 concluded that the permanent monetization of debt, with no intention of unwinding later, did not produce hyperinflation or exceptionally high inflation.

The huge increase in the money supply and credit engineered by the Canadian central bank was instead absorbed by a vast expansion in industrial production and employment.

In a recent article by former Federal Chairman Ben Bernanke, he said: “(Helicopter money policies) also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances—sharply de cient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt- nanced  scal policies—such programs may be the best available alternative. It would be premature to rule them out.”

In conclusion, we just don’t know whether or not helicopter money will work. The historical evidence has been mixed, with cases of success and failure. While helicopter money is still a low probability, we should not be surprised if some form of it gets implemented. Governor Kuroda is known for surprising the market, as he did when he introduced negative interest rates several days after signaling otherwise. It would certainly be a bold experiment from which most of the developed world would be able to learn from. In the meantime, we will wait for an announcement which could come by the end of the week and assess how the markets will react.

The immediate knee-jerk reaction would likely be a steepening of the yield curve and a depreciation of the Japanese yen on expectations of higher in ation over the long run and an increase money supply as a result of this policy. The longer-term impact on the economy and the markets will depend on the effectiveness of this policy.

Teresa Kong is Portfolio Manager at Matthews Asia.

Vanguard Looks to Diversify into Active ETFs

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Vanguard planea entrar en el negocio de ETFs con gestión activa en EE.UU.
CC-BY-SA-2.0, FlickrPhoto: AFTAB, Flickr, Creative Commons. Vanguard Looks to Diversify into Active ETFs

Vanguard, the king of passive investing with over 70 index-based ETFs, has asked for exemptive relief for offering actively managed ETFs via an Securities and Exchange Commission filing.

Vanguard, with over 2.5 trillion in AUM, is known for its index-based funds, both mutual funds and ETFs. However, the new filing suggests the firm is looking to branch further into active management. Although there is no mention of an initial fund and in practice there is a long period of time between been granted exemptive relief and launching a new product, with this filing Vanguard joins a growing number of fund companies filing for actively managed ETFs.

Companies such as Fidelity, Eaton Vance, Precidian, and Davis Selected Advisers have looked into joining the active ETF wagon, which accounts for roughly 26.4 billion dollars of the 2.3 trillion ETF market.

The Vanguard filing notes: “Applicants believe that the ability to execute a transaction in ETF Shares at an intra-day trading price has, and will continue to be, a highly attractive feature to many investors. As has been previously discussed, this feature would be fully disclosed to investors, and the investors would trade in ETF Shares in reliance on the efficiency of the market. Although the portfolio of each Fund will be managed actively, Applicants do not believe such portfolio could be managed or manipulated to produce benefits for one group of purchasers or sellers to the detriment of others.”

Sales Force Regulation is Slowing Transfers Between Afores

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La regulación de los agentes promotores frena los traspasos entre las Afores
CC-BY-SA-2.0, Flickr. Sales Force Regulation is Slowing Transfers Between Afores

The implementation of new regulatory requirements has led in recent months to a significant contraction in transfers carried out by the Afores. From an average of 165,094 monthly transfers in 2015, to 10,239 last June and 73,083 in July. The latter figure shows a recovery from the previous month, but do not reach even half the average transfers.

Until last year the business model most Afores was based on attracting a larger number of accounts and for this, recruited many promoting agents who were engaged in convincing workers to transfer their account, but not necessarily convenient for employee. Today this model is complicated.

In order to improve services to affiliated workers, in January last year, new surveillance checks, sales force supervision as well as new training criteria were implemented. The implementation has been gradual over 2015 and 2016. This led to a 10% drop in the sales force between January and October 2015 to locate in 42,070. As part of these changes, in May this year the use of biometrics, which means reducing the use of paper and incorporating digital, voice prints and digital signature which strengthens the verification of the identity of workers affiliated and security controls.

Practically since inception the pension system in Mexico (almost 18 years from November 1998 to July 2016), the figures show that 6 of 10 workers affiliated have been changed Afore. The data for the past 5 years show that the average transfer annual of the last 5 years is about two million workers annually representing nearly 4% of the 53 million registered accounts in the Afores, reflecting a significant reduction. Only between 2006 and 2010 the average transfer was 3.3 million workers annually that is a contraction compared to the current trend.

In the fall in transfers, only a couple of Afores have been able to recover such as Azteca, Profuturo and Sura which are above its monthly average affiliate of 2016. In June, for example, three Afores  made no affiliation (Metlife, Invercap and PensiónISSSTE) and in July these three Afores don’t reach a thousand affiliations.

The cost of transfers

One point that has done much emphasis Consar refers to expenditure by the Afores for transfers which rose from 31% –vs. fee income in 2014–, to 26% in 2015. These resources could be used in a better way by Afores, such as investments in human capital in order to have better management and investment of resources.

According to Consar, 2015 figures show a new trend in transfers:

  • The proportion of workers they are changed before a year permanence in the AFORE was 5%.
  • Workers who are transferred between one and three years of stay was 31%.
  • Workers who transferred after three years spent accounted for 64%.
  • Young workers are most changed Afore (SIEFORE Basic 4), as it accounted for 40% of all transfers in 2015.

Dimensioned to organic growth (transfers) between the Afores, this will lead in the medium term search for mergers. Even should not rule out the possibility of strategic alliances which have not been seen between Afores.

Column by Arturo Hanono
 

UK Investors’ Outflows Drive 900% Rise in Property Funds Trade

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Las salidas de los fondos inmobiliarios de Reino Unido se incrementan en un 900%
CC-BY-SA-2.0, FlickrPhoto: Niamalan Tharmalingam. UK Investors’ Outflows Drive 900% Rise in Property Funds Trade

UK retail investors’ activity around property funds has risen by 900% following Brexit compared with the same period a year earlier, according to data from Rplan.co.uk.

The increase in trade was driven by outflows outweighing inflows by more than 12 times, according to the online investment platform’s analysis.

The research mirrors latest data released by the Investment Property Databank that shows UK property values fell by 2.4% in July.

Investor outflows from property funds via rplan.co.uk peaked in the third week following Brexit (commencing 4 July) but dropped sharply thereafter.

In the first weekend after Brexit, UK retail investors ditched property and UK equity funds and switched into global and Japan equities.

“Self-directed investors pulled out of property funds in droves following Brexit, which would have played a role in driving down commercial property prices,” said Stuart Dyer, Rplan.co.uk’s Chief Investment Officer. “But our data suggests that gating was actually quite effective – or rather, than things could have been much worse without the gating/pricing adjustments,” Dyer said.