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.”
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.
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.”
CC-BY-SA-2.0, FlickrCourtesy Photo. Maitland Group Opens Its Doors in Miami: Celebration on 15 September 2016
The newly established LatAm team in Miami and Maitland’s CEO (visiting from London) will host an evening of cocktails and networking. The event will take place in a water view venue in downtown Brickell, Miami. Hours will be from 6pm-8pm.
This cocktail reception is a celebration of Maitland’s office opening in Miami and an opportunity to get to know the team behind Maitland – a global advisory, accounting and fund administration firm that prides itself on high-touch client service, best-of-breed technology, and a proven track record as demonstrated by $280 billion in assets under administration.
Maitland was founded in Luxembourg in 1976, the firm is privately owned and fully independent, with over 1,200 employees globally. We specialize in complex, cross-border solutions, operating from 15 offices across 12 countries, providing seamless multi-jurisdictional legal, tax, fiduciary, investment and fund administration services to private, corporate and institutional clients.
The LatAm team is comprised of Benjamin Reid (Senior Manager – Business Development & Client Management for LatAm) and Client Relationship Managers Camila Saraiva and Pedro Olmo.
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).
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.
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.
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.”
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.
CC-BY-SA-2.0, FlickrPhoto: David Mello
. US Investor Optimism had Rebounded Prior to Brexit
Prior to the British vote to exit the European Union, U.S. investor optimism had rebounded in the second quarter, following a rocky first quarter for the markets, according to the second quarter Wells Fargo/Gallup Investor and Retirement Optimism Index survey, conducted May 13-22 with 1,019 U.S. investors, who have a total of $10,000 or more in savings and investments.
The Optimism Index rose 22 points in the second quarter to +62, returning the index to the level seen in the last half of 2015, before it dipped to +40 in the first quarter of 2016.
Non-retired investors scored highest on the optimism index, with the index increasing 27 points to +68. The index rose 10 points to +45 among retirees. Most of the gains in the overall index result from investors’ increased optimism about the 12-month outlook for the stock market as well as about reaching their 12-month investment targets. Additional gains were seen in investor optimism about economic growth as well as maintaining or expanding their household income. There was no change in investor perceptions about unemployment, inflation or reaching their five-year investment goals.
CC-BY-SA-2.0, FlickrPhoto: Adrian Clark
. Kristin Snyder Named Co-Head of SEC’s Investment Adviser/Investment Company Examination Program
The Securities and Exchange Commission has announced that Kristin Snyder was named Co-National Associate Director of the Investment Adviser/Investment Company examination program in the Office of Compliance Inspections and Examinations (OCIE). She joins Co-National Associate Director Jane Jarcho who has led the program since August 20, 2013 and was named OCIE’s Deputy Director on February 3, 2016. Together, Jarcho and Snyder oversee more than 520 lawyers, accountants, and examiners responsible for inspections of SEC registered investment advisers and investment companies.
Snyder has been the Associate Regional Director for Examinations in the SEC’s San Francisco office since November 2011 and will continue in that role while also assuming this new leadership position in the national investment adviser/investment company program. She joined the SEC in 2003 and spent eight years as a Branch Chief and a Senior Counsel in the San Francisco office’s enforcement program.
“With Kristin’s experience in examinations and enforcement, she is well-positioned to develop and lead national initiatives in our investment adviser and investment company program that support OCIE’s mission to improve compliance, prevent fraud, monitor risk, and inform policy,” said OCIE Director Marc Wyatt.
Snyder said, “I am truly honored by this opportunity to lead OCIE’s IA/IC program with Jane. I look forward to expanding my role to work with our talented and dedicated colleagues throughout the country as we continue to develop and implement important national initiatives in the asset management industry.”
Prior to joining the SEC, Snyder practiced law at Sidley Austin Brown & Wood in San Francisco. She received her law degree from the University of California Hastings College of the Law and received her bachelor’s degree from the University of California at Davis.
OCIE conducts the SEC’s National Examination Program through examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and transfer agents. It uses a risk-based approach to examinations to fulfill its mission to promote compliance with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.
