ESG has Gone Mainstream in 2016

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¿Qué ha ocurrido en 2016 que ha impulsado la responsabilidad social corporativa?
CC-BY-SA-2.0, FlickrPhoto: Moyan Brenn. ESG has Gone Mainstream in 2016

The adoption of environmental, social and governance (ESG) issues into investment decision-making has gone mainstream in 2016. According to Investec, in a low-growth, low-yield and uncertain environment, investors are looking for new tools to drive long-term value creation. For institutions, increased attention has been placed on corporate behaviours and practices which are neither delivering shareholder value nor building sustainable businesses that will enable them to fulfil their fiduciary duty to their stakeholders.

So what has happened in 2016 that has galvanised ESG action?
The Paris Agreement on Climate Change in December 2015 has focused investors’ minds on the environment. This is the first global pledge to limit carbon emissions and is the fastest-ratified UN accord to date.

The speed with which the governments of over 175 countries signed the agreement – a little over four months – has added momentum to efforts to integrate environmental factors into investment processes. It has also spurred investors to look for new opportunities in industries to meet the objective of limiting the global temperature rise to less than 2 degrees Celsius (2°C) above pre-industrial levels.

While the focus has been on environmental issues, the UN Sustainable Development Goals also encouraged momentum behind the social aspects of ESG. Several new organisations, such as the Business and Sustainable Development Commission, have formed to plan practical steps to achieving these goals. Increasingly, major asset owners and investment managers are getting involved.

“Poor share price performance and mediocre company results have rallied shareholders into action. Investors have showed a renewed willingness to administer stinging rebukes over top management pay. In the UK, oil giant BP, miner Anglo American, engineering company Weir Group and Irish building materials group CRH all suffered major votes against pay policies. Even major US corporates have not been immune. In April, over a third of voting Citigroup shareholders cast their ballots against the bank’s pay package for top executives.” Investec points out.

The firm also notes that shareholder activism has not just been about executive pay. Investors are also looking more closely at the composition of company boards. There was some disquiet over Warren Buffett’s Berkshire Hathaway and Coca-Cola, as both of these US companies have three board directors that have served for over 15 years, which has contributed to a lack of board diversity and independent thinking. In Europe, auto manufacturer Volkswagen (VW) has been subject to intense scrutiny over its unusual governance structure in the wake of the emissions scandal. VW’s shareholders are beginning to ask whether, after three scandals in 20 years, the company’s supervisory board has the authority and independence to hold management to account. The company’s three largest shareholders, the Porsche-Piëch family, the German state of Lower Saxony and Qatar’s sovereign wealth fund, currently dominate the board. In June this year, Norway’s giant sovereign wealth fund (the fourth-largest shareholder in VW) joined the California State Teachers’ Retirement System (CalSTRS) and around 800 other institutional investors in suing the company over the failure of oversight that led to the emissions scandal.

How will these trends evolve in the years to come? “We expect that shareholders will become increasingly frustrated with boards if performance continually fails to meet expectations. We believe that can only be a force for good. Investment in low-carbon and energy saving technologies will also become an important consideration in the portfolio construction process as governments strive to meet the 2°C target set out in Paris. Even in the oft-neglected social aspects of ESG, we believe there will be momentum as investors seek less-crowded, high-growth areas to drive future returns. Our appointment as manager of the Emerging Africa Infrastructure Fund (EAIF), a public-private partnership created to mobilise capital into private sector infrastructure projects across sub-Saharan Africa, is testament to our belief that social benefits are not incompatible with healthy long-term returns.” Investec oncludes.

 

China: A Transition Well Underway

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La búsqueda de rendimiento de los inversores favorece a los emergentes
CC-BY-SA-2.0, FlickrPhoto: Jean-Pierre Dalbéra . China: A Transition Well Underway

China’s first half macroeconomic data supports our view that the country is in the midst of a successful transition from a high-speed, heavy industry-based economy to a consumer and services-based economy, which, while decelerating, will remain the most important driver of global growth. We believe the challenges of continuing this transition will result in gradually slower growth rates and increased volatility, but the risks of a hard landing remain very low.

Winners and Losers in the Transition
To understand the trajectory of the Chinese economy, it is important to recognize that this economic transition is creating winners and losers. The services and consumption (tertiary) part of the economy, for example, remains robust and is now the largest part of the economy. This mitigates the weakness of the industrial (secondary) part of the economy, which is shrinking as a share of GDP.2016 will almost certainly be the fifth consecutive year in which the tertiary part of China’s economy will be larger than the secondary part, and the tertiary part is driving an increasingly larger share of economic growth. In the first half of this year, final consumption contributed about 73% of China’s GDP growth, up from a roughly 60% share in the first half of last year, and a 42% share for the full year of 2006.

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A Healthy Chinese Consumer
The most important actor in this ongoing transition is the Chinese consumer, and we are keeping a careful watch over her health. In the first half of this year, her vital signs were excellent, but we are aware that as she matures, she is slowing down a bit.

China remains, in my view, the world’s best consumer story, with inflation-adjusted (real) retail sales rising 9.7% year-over-year (YoY) in 1H16, compared to a 1.6% pace in the U.S. in June. But that does reflect a modest deceleration, from 10.5% a year ago, because income growth, while still quite fast, is moderating.

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 The Top Concern: Weak Private Investment
First half macro data suggests that the Chinese economy is stabilizing at a healthy pace, led once again by strong consumer spending and a hot (albeit somewhat cooler) housing market. My top concern is anemic investment spending by private firms: they are relatively profitable but are clearly not yet prepared to expand capacity or invest in more automation.

In 14 of the last 16 months, fixed asset investment by private firms—which account for about two-thirds of all fixed asset investment—rose more slowly than investment by SOEs. That trend, driven both by strong government spending on public infrastructure, which is channeled largely through SOEs, and by concerns about industrial overcapacity, reversed an earlier trend: prior to March 2015, investment by private firms rose faster than that of SOEs in 59 of the 60 previous months.

As the property market continues to cool and return to a more sustainable pace, a pickup in private sector capital expenditure will be important to preventing macro growth from decelerating too sharply. Overall, the Chinese economy is likely to continue on the same path as the last 10 years: gradually slower year-on-year growth with greater volatility, but there are no signs of a hard landing on the horizon.

Last year, China accounted for 35% of global economic growth, and if Brexit results in slower growth in the U.K. and anxiety in the developed West and in emerging Europe, the Chinese share of global growth could rise even higher. China—and the rest of the Asia region that Matthews Asia invests in, which (combined with China) accounted for about 60% of global growth last year—is likely to be considered a safe haven for investors, especially relative to European emerging markets.

Column by Matthews Asia written by Andy Rothman

AXA IM’s Nicolas Moreau Takes Over at Deutsche Asset Management

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Nicolas Moreau: nuevo responsable del negocio de gestión de activos de Deutsche Bank
Nicolas Moreau. AXA IM's Nicolas Moreau Takes Over at Deutsche Asset Management

Nicolas Moreau will join the Management Board of Deutsche Bank, effective October 1, where he will be responsible for Deutsche Asset Management. This decision was reached by the bank’s Supervisory Board at its meeting on Thursday. Moreau is joining from the French insurance company Axa, where the 51 year old has worked for 25 years in a variety of roles, including as Chief Executive Officer of Axa Investment Managers. Most recently he was in charge of the insurance company’s activities in France and served as a member of the Group Management Committee.

At Deutsche Bank Moreau will be based in London and will initially receive a three-year contract. He will succeed Quintin Price, who stepped down in June for health reasons. “Nicolas Moreau has a deep knowledge of the asset management industry, both from a supplier and a client perspective,” Supervisory Board Chairman Paul Achleitner said. “In addition he possesses a wealth of experience as a member of the management board of a complex, global financial institution, providing the ideal basis for further developing Deutsche Asset Management.”

The Supervisory Board also decided to appoint Kim Hammonds and Werner Steinmüller to the Management Board of Deutsche Bank with effect from August 1. Their terms will also initially be limited to three years.

As a result of the addition of Hammonds and Steinmüller, the Management Board of Deutsche Bank will comprise 11 members in future. “With Werner Steinmüller, we have entrusted a highly experienced and well-regarded banker with further expanding our business in Asia,” Supervisory Board Chairman Achleitner said. “He is a long-standing expert in this key growth region.” Achleitner said that Kim Hammonds has succeeded in getting fundamental changes to the bank’s IT systems off the ground in recent years. “She is responsible for a division that is essential for the transformation of Deutsche Bank.”

John Cryan, Chief Executive Officer of Deutsche Bank, welcomed the expansion of the Management Board: “Each of the three new members of the Management Board brings unique experience that strengthens us as a team. I’m pleased that Nicolas will add long-standing asset management experience to our board and that we are able to welcome Kim and Werner, who are both proven experts in their respective areas, to the board.”

Hammonds (49) has been employed by Deutsche Bank since November 2013. Under her leadership Deutsche Bank is executing a fundamental overhaul of its IT systems. Since the beginning of 2016, Hammonds has been responsible for the bank’s entire technology and operations, including digital transformation, information security, data management and corporate services. She will retain her role as Group Chief Operating Officer.

Steinmüller (62) joined Deutsche Bank in 1991. Since 2004, he has been in charge of transaction banking. He will be the first Management Board member in the history of Deutsche Bank to be based in the Asia-Pacific region. Steinmüller will manage business in this growth region from Hong Kong. He will remain in his role as Chairman of the Supervisory Board of Postbank.

José Viñals Leaves the IMF

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José Viñals, consejero financiero del FMI, deja su cargo y se incorporará a Standard Chartered
José Viñals, - Photo Youtube. José Viñals Leaves the IMF

José Viñals, the Financial Counsellor and Director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF), has notified IMF Managing Director Christine Lagarde of his intention to return to Europe for family reasons after more than seven years at the Fund. He will take up the position as Chairman of the Board of Standard Chartered Bank later this fall.

“I believe José’s selection for such an important position is testimony to the very high regard in which he is held—for his experience, capabilities, and insights on financial issues. I have personally come to rely on his sharp intellect, analytical rigor, and ability to get to the heart of complex matters.” Lagarde said.

“As Financial Counsellor and Director of the Monetary and Capital Markets Department, José has worked tirelessly towards making the IMF a truly macro-financial institution. He has enhanced the Fund’s analytical breadth and depth on a wide range of issues—including monetary policy, macroprudential policy, international banking, and the financial sector. He has also been instrumental in promoting cutting-edge research and raising the profile of the Fund as a thought leader on financial stability,” she added.

Prior to joining the IMF in 2009, José had a distinguished career at the Central Bank of Spain, where he served as the Deputy Governor after holding a number of senior positions and serving on a range of advisory and policy committees at the central bank and within the European Union. A former faculty member in the Economics Department at Stanford University, he holds a Doctoral (Ph.D.) degree in Economics from Harvard University and a Master’s degree in Economics from the London School of Economics.

Viñals has relinquished his responsibilities as Department Director and Financial Counsellor. Ratna Sahay has been named Acting Director for an interim period. The search process to identify a successor to Viñals will begin right away.

MFS expands sales team for Switzerland and Austria

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Midcaps suizas y tecnología disruptiva marcan la diferencia en renta variable
CC-BY-SA-2.0, FlickrFoto: Kecko. Midcaps suizas y tecnología disruptiva marcan la diferencia en renta variable

MFS has announced the appointment of Anton Commissaris as managing director and head of Sales for Switzerland and Austria.

Based in Zürich, he will report to Matthew Weisser, managing director and head of European Wholesale Distribution at MFS.

He joins from Credit Suisse Asset Management, where he was in charge of fund distribution to the EMEA region, distributing to banks, insurances, external asset management firms and family offices.

Matthew Weisser comments on his appointment: “Anton’s appointment reinforces our commitment to expanding our distribution footprint in the Swiss and Austrian markets. He is a highly experienced sales director with over 24 years of expertise covering the Swiss wholesale market. I am confident that his in-depth knowledge — not just of the global banks, but also of the local markets will prove invaluable as we move forward.”

Investec and its Five Key Investment Themes

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¿Cómo evolucionan los mercados de bonos tras el Brexit?
CC-BY-SA-2.0, FlickrFoto: Thomas Leuthardc. ¿Cómo evolucionan los mercados de bonos tras el Brexit?

At the half-way point of 2016, Investec‘s Multi-Asset team revisit their key investment themes for the year to see how they have fared over the past six months. Most played out as they expected, but in some cases the markets have moved in unexpected ways…

The need for portfolio resilience
At the end of 2015, investors were confronted by a world that appeared to be full of potential pitfalls. To preserve and grow the value of their assets, they needed robust portfolios that could outperform the market in challenging environments and deliver resilient returns in the face of unforeseen events.

The investment environment in 2016 has been no easier. A slowing Chinese economy, the Bank of Japan’s surprise move to introduce negative interest rates, political and economic uncertainty in the US and the UK’s momentous decision to leave the European Union have all played their part in increasing global financial instability and volatility.

Investec’s approach to building portfolios that are resilient in the face of such tumultuous events requires a strong understanding of investment risks, beyond estimates of volatility. Portfolio construction should balance the trade-offs between potential returns and individual assets’ contribution to overall risk exposure. But they also believe that portfolios need to be diversified and to avoid those parts of the market that could be vulnerable to sudden liquidity squeezes. Investors should also have strategies to cope with periods of market stress.

Diverging monetary policies
Six months ago, Investec believed the US dollar would reach new cyclical highs, as US monetary policy slowly normalised. Then, Europe had only just started to run down private-sector debt and seemed at least three years behind the US. Asia, and China in particular, were further behind Europe. These markets’ debt to gross domestic product ratio were still high, suggesting that monetary easing would need to continue for several years.

Since then, global economic headwinds and a weaker domestic backdrop has prompted a more dovish tone from the US Federal Reserve in the first quarter of 2016, which has slowed the pace of monetary policy normalisation. This means that the phenomenon of diverging monetary policy is less pronounced than it was at the beginning of the year.

Selectivity needed in emerging markets
Their belief that the emerging market universe is disparate, and offers a wide range of investment opportunities still holds true. They continue to favour economies that are natural extensions of developed markets, such as Hungary or Romania are for the European Union. Nevertheless, Investec believes they need to continue to be selective in emerging markets, partly due to different sensitivities to demand for Chinese commodities and the US dollar.

Finding bottom-up opportunities
Investec continues to believe that a bottom-up approach to choosing investments can help penetrate the short-term macroeconomic noise. Emerging market equities and resource stocks led global stock markets higher from mid-January, at a time when Chinese data remained negative and many analysts were forecasting a US recession. However, they still acknowledge that the environment has, even if temporarily, become marginally less supportive for stock picking.

ESG going mainstream
As they predicted, 2016 is the year that many investors focused on taking account of environmental, social and governance (ESG) issues. Integrating ESG assessment into investment processes is increasingly being seen as a way of driving long-term value creation. German auto manufacturer Volkswagen could be seen as a game changer triggering increased attention on corporate behaviour and practices. The Paris Agreement on Climate Change in December 2015 has also focused investors’ minds on the environmental challenges surrounding global warming.

Pioneer Investments and Santander Asset Management Will Not Merge

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Santander y UniCredit rompen el acuerdo para fusionar sus gestoras
Photo: NicolaCorboy, Flickr, Creative Commons. Pioneer Investments and Santander Asset Management Will Not Merge

After 20 months in negotiations, UniCredit announced on Wednesday that it has agreed with Banco Santander and Sherbrooke Acquisition to terminate the agreements entered into on 11 November 2015 to combine Pioneer Investments and Santander Asset Management. The merger would have created one Europe’s leading asset managers with around 370 billion euros (almost $400 billion) in assets under management.

According to a press release by Unicredit, “The parties held detailed discussions to identify viable solutions to meet all regulatory requirements to complete the transaction, but in the absence of any workable solution within a reasonable time horizon, the parties have concluded that ending the talks was the most appropriate course of action.”

Further to UniCredit’s announcement on 11 July 2016 of a Group-wide strategic review, the results of which will be communicated to the market before the end of 2016, Pioneer will now be included in the scope of the strategic review to explore the best alternatives for all Pioneer stakeholders including a potential IPO. “This is to ensure the company has the adequate resources to accelerate growth and continue to further develop best-in-class solutions and products to offer its clients and partners.”

Meanwhile in Spain, and during Santander’s earnings release presentation, José Antonio Álvarez, Santander’s CEO commented that “we will cancel the transaction. We will develop Santander AM along with our partners and strive to build an asset management business that excels in serving our clients.”

Pioneer has presence in 28 countries and an experienced team of over 2,000 employees, including more than 350 investment professionals. It manages €225 billion in assets and is known internationally as one of the leading fixed income managers across all strategies. It also offers strong capabilities in European, US and global equities, as well as multi-asset and outcome-oriented, non-traditional products.. Meanwhile, Santander Asset Management has presence in 11 countries, and assets of €172 billion across all types of investment vehicles. Santander Asset Management has over 755 employees worldwide, of which around 220 are investment professionals.
 

 

Hong Kong Tops the List of Most Expensive Cities for Expatriates

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BNY Mellon Launches Comprehensive Discretionary Investment and Wealth Management Services in Hong Kong
Hong Kong. Foto: TreyRatclif, Flickr, Creative Commons.. BNY Mellon WM lleva su negocio de gestión de patrimonios a Hong Kong y refuerza su presencia en Asia – Pacífico

According to Mercer’s 2016 Cost of Living Survey, Hong Kong tops the list of most expensive cities for expatriates, pushing Luanda, Angola to second position. Zurich and Singapore remain in third and fourth positions, respectively, whereas Tokyo is in fifth, up six places from last year. Kinshasa, ranked sixth, appears for the first time in the top 10, moving up from thirteenth place.

Other cities appearing in the top 10 of Mercer’s costliest cities for expatriates are Shanghai (7), Geneva (8), N’Djamena (9), and Beijing (10). The world’s least expensive cities for expatriates, according to Mercer’s survey, are Windhoek (209), Cape Town (208), and Bishkek (207).

Mercer’s widely recognized survey is one of the world’s most comprehensive, and is designed to help multinational companies and governments determine compensation strategies for their expatriate employees. New York City is used as the base city for all comparisons and currency movements are measured against the US dollar. The survey includes over 375 cities throughout the world; this year’s ranking includes 209 cities across five continents and measures the comparative cost of more than 200 items in each location, including housing, transportation, food, clothing, household goods, and entertainment.

Despite volatile global markets and growing security issues, organizations continue to leverage global expansion strategies to remain competitive and to grow. Mercer’s 22nd annual Cost of Living Survey finds that factors including currency fluctuations, cost inflation for goods and services, and instability of accommodation prices, contribute to the cost of expatriate packages for employees on international assignments.

“Despite technology advances and the rise of a globally connected workforce, deploying expatriateemployees remains an increasingly important aspect of a competitive multinational company’s business strategy,” said Ilya Bonic, Senior Partner and President of Mercer’s Talent business. “However, with volatile markets and stunted economic growth in many parts of the world, a keen eye on cost efficiency is essential, including a focus on expatriate remuneration packages. As organizations’ appetite to rapidly grow and scale globally continues, it is necessary to have accurate and transparent data to compensate fairly for all types of assignments, including short-term and local plus status.”

The Americas

Cities in the United States have climbed in the ranking due to the strength of the US dollar against other major currencies, in addition to the significant drop of cities in other regions which resulted in US cities being pushed up the list. New York is up five places to rank 11, the highest-ranked city in the region. San Francisco (26) and Los Angeles (27) climbed eleven and nine places, respectively, from last year while Seattle (83) jumped twenty-three places. Among other major US cities, Honolulu (37) is up fifteen places, Washington, DC (38) is up twelve places, and Boston (47) is up seventeen spots. Portland (117) and Winston Salem, North Carolina (147) remain the least expensive US cities surveyed for expatriates.

In Latin America, Buenos Aires (41) ranked as the costliest city despite a twenty-two place drop from last year. San Juan, Puerto Rico (67) follows as the second most expensive location in the region, climbing twenty-two spots. The majority of other cities in the region fell as a result of weakening currencies against the US dollar despite price increases on goods and services in countries, such as Brazil, Argentina, or Uruguay. In particular, São Paolo (128) and Rio de Janeiro (156) plummeted eighty-eight and eighty-nine places, respectively, despite a strong increase for goods and services. Lima (141) dropped nineteen places while Bogota (190) fell forty-two places. Managua (192) is the least expensive city in Latin America. Caracas in Venezuela has been excluded from the ranking due to the complex currency situation; its ranking would have varied greatly depending on the official exchange rate selected.

Canadian cities continued to drop in this year’s ranking mainly due to the weak Canadian dollar. The country’s highest-ranked city, Vancouver (142), fell twenty-three places. Toronto (143) dropped seventeen spots, while Montreal (155) and Calgary (162) fell fifteen and sixteen spots, respectively.

Europe, the Middle East, and Africa

Two European cities are among the top 10 list of most expensive cities. At number three in the global ranking, Zurich remains the most costly European city, followed by Geneva (8), down three spots from last year. The next European city in the ranking, Bern (13), is down four places from last year following the weakening of the Swiss franc against the US dollar. 

Several cities across Europe remained relatively steady due to the stability of the euro against the US dollar. Paris (44), Milan (50), Vienna (54), and Rome (58) are relatively unchanged compared to last year, while Copenhagen (24) and St. Petersburg (152) stayed in the same place. In Spain, Madrid is up from 115 to 105, and Barcelona from 124 to 110.

Other cities, including Oslo (59) and Moscow (67), plummeted twenty-one and seventeen places, respectively, as a result of local currencies losing significant value against the US dollar. London (17) and Birmingham, UK (96) dropped five and sixteen places, respectively, while the German cities of Munich (77), Frankfurt (88), and Dusseldorf (107) climbed in the ranking.

A few cities in Eastern and Central Europe climbed in the ranking as well, including Kiev (176) and Tirana (186) rising eight and twelve spots, respectively.

Tel Aviv (19) continues to be the most expensive city in the Middle East for expatriates, followed by Dubai (21), Abu Dhabi (25), and Beirut (50). Jeddah (121) remains the least expensive city in the region despite rising thirty places. “Several cities in the Middle East experienced a jump in the ranking, as they are being pushed up by other locations’ decline, as well as the strong increase for expatriate rental accommodation costs, particularly in Abu Dhabi and Jeddah,” said Ms. Constantin-Métral.

Despite dropping off the top spot on the global list, Luanda, Angola (2) remains the highest ranking city in Africa. Kinshasa (6) follows, rising seven places since 2015. Moving up one spot, N’Djamena (9) is the next African city on the list, followed by Lagos, Nigeria (13) which is up seven places. Dropping three spots, Windhoek (209) in Namibia ranks as the least expensive city in the region and globally.

Asia Pacific

This year, Hong Kong (1) emerged as the most expensive city for expatriates both in Asia and globally as a consequence of Luanda’s drop in the ranking due to the weakening of its local currency. Singapore (4) remained steady while Tokyo (5) climbed six places. Shanghai (7) and Beijing (10) follow. Shenzhen (12) is up two places while Seoul (15) and Guangzhou, China (18) dropped seven and three spots, respectively.

Mumbai (82) is India’s most expensive city, followed by New Delhi (130) and Chennai (158). Kolkata (194) and Bangalore (180) are the least expensive Indian cities ranked. Elsewhere in Asia, Bangkok (74), Kuala Lumpur (151) and Hanoi (106) plummeted twenty-nine, thirty-eight, and twenty places, respectively. Baku (172) had the most drastic fall in the ranking, plummeting more than one hundred places. The city of Ashkhabad in Turkmenistan climbed sixty-one spots to rank 66 globally.

Australian cities have witnessed some of the most dramatic falls in the ranking this year as the local currency has depreciated against the US dollar. Brisbane (96) and Canberra (98) dropped thirty and thirty-three spots, respectively, while Sydney (42), Australia’s most expensive ranked city for expatriates, experienced a relatively moderate drop of eleven places. Melbourne fell twenty-four spots to rank 71.

Will Erdogan Overplay his Hand in Turkey?

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Emergentes: ¿se le está pasando la mano a Erdogan en Turquía?
CC-BY-SA-2.0, FlickrPhoto: Jorge Gobbi . Will Erdogan Overplay his Hand in Turkey?

The dramatic events of the failed coup in Turkey and its aftermath has weighed heavily on all of the country’s asset sectors – equity, debt and currency. For the Eaton Vance Global Income Team this is not an unreasonable reaction, given many uncertainties of the political landscape. A member of the Global Income team is visiting Ankara now to assess the situation.

Turkish President Recep Erdogan announced a three-month extension of the state of emergency, following days of rounding up thousands of perceived political adversaries in the military, police and universities. As the situation evolves, Eaton Vance’s team will be focusing on two broad issues:

  1. The U.S./Turkey relationship. It was strained before the coup, and is under even more stress now. Planes involved in the coup flew from the NATO airbase in which the U.S. military operates, and Turkey subsequently cut the power to the facility. Turkey is also seeking extradition from the U.S. of Fethullah Gulen, an Islamic cleric accused by Erdogan of being behind the coup.
  2. Possible fissures in Turkish society. The relevant factions in Turkish society can be broadly divided into Erdogan and his ruling AKP party; the opposition, dominated by secular Turks; and Gulenists – followers of the exiled cleric. Erdogan’s opposition came out against the coup, despite the misgivings many have about his authoritarian style of rule.

“Most believe the purge is the right course of action for now, and believe the Gulenists are the problem – society is not fractured on this issue. On the other hand, we hear estimates that some 50,000 people are affected by the purges, so the impact is widespread – a scenario in which Erdogan goes too far would be worrisome.” The team explains.

For the team, the bottom line is: Turkey’s reputation as a democracy capable of reasonable growth and holding to tight budgets is obviously overshadowed by the latest developments. “We believe the U.S./Turkey relationship will survive this episode because it continues to serve the interests of both countries. We are watching very carefully to see if Erdogan overplays his hand and threatens the cohesiveness in Turkish society that currently works in his favor.”

Allianz Global Investors: Institutional Risk Management Strategies Need Urgent Overhaul

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Allianz Global Investors: las estrategias de gestión del riesgo de los inversores institucionales necesitan cambios urgentes
CC-BY-SA-2.0, FlickrPhoto: Ennor, Flickr, Creative Commons. Allianz Global Investors: Institutional Risk Management Strategies Need Urgent Overhaul

Institutional risk management strategies are in need of urgent overhaul, according to a study of institutional investors conducted by Allianz Global Investors.

Conducted in the first quarter of 2016, AllianzGI’s 2016 RiskMonitor asked 755 institutional investors about their attitudes to risk, portfolio construction and asset allocation. The firms surveyed represent over $26 trillion USD of assets under management in 23 countries across North America, Europe and Asia-Pacific.

The Risk Monitor report found that since the 2008 global financial crisis, risk management practices have changed very little. Pre-crisis, investors’ top three strategies were diversification by asset class (57%), geographic diversification (53%) or duration management (44%). Despite the fact that 62% of respondents admit these strategies didn’t provide adequate downside protection, their use has actually increased post-crisis, with 58% of investors reliant on diversification by asset class, 56% using geographic diversification and 54% embracing duration management.

As a result, two-thirds of institutions are calling for innovative new strategies to help balance risk-return trade-offs, provide greater downside protection and replace traditional approaches to risk management. In fact, 48% say their organization is willing to pay more if it means access to better risk management strategies and 54% say their organization has set aside additional resources to improve risk management.

Commenting on the findings, Neil Dwane, Global Strategist AllianzGI, said:

“Investors are facing a world where average market returns continue to be lower and volatility is higher. In this environment, fulfilling investment objectives will require taking risk and applying truly active portfolio management,which needs to go hand in hand with an adequate strategy for managing that risk. Unfortunately, our RiskMonitor results show that a considerable number of investors do not show much confidence in their ability to manage risks effectively in both up- and down markets.”

“Encouragingly, institutional investors do seem to recognize the need for more effective risk management solutions. However, it is time for asset managers to innovate and offer solutions and products that will help clients to navigate the low yield environment without exposing them to inappropriate levels of volatility. This can take different forms, but the next few months and years will certainly be a litmus test for the growing offering in sophisticated multi asset solutions.”

Main investment concerns and allocation trends

There are countless risks lurking on the horizon, but a few are on the top of many investors’ minds as they navigate the markets in 2016 and try to meet their return objectives. Globally, 42% of those surveyed say market volatility is their main investment concern. Add to that the other big concerns this year – low yields (24%) and uncertain monetary policy (16%) and there is little doubt that investors may be in for an even bumpier ride compared to the last few years.

In light of the choppy markets at the start of this year, 77% of investors are apprehensive about equity-market risk, citing it as the top threat to portfolio performance this year. Also high on the list of threats that those surveyed believe could derail the performance of portfolios were interest rate risk (75%), event risk (75%) and foreign-exchange risk (74%).

Despite the concerns around market turbulence and equity market risk by institutional investors, many have not been persuaded to take a wide-spread defensive attitude. Institutional investors report their primary investment goal for 2016 is to maximize their risk-adjusted returns. Further, their inclination towards equities suggests their risk appetite has not been completely dampened by the market volatility. In particular, with 29% and 28% respectively, US equities and European equities garner the top spots among the investments earmarked for long exposure again this year.