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.
CC-BY-SA-2.0, FlickrPhoto: d26b73. A Sigh of Relief
After a run of bad news, we are seeing more signs that growth trends are re- synchronizing among the major economies. Markets have responded in kind, with help from more policy stimulus around the world.
The widely anticipated acceleration in US economic growth seems not completely abandoned, just postponed. Following a stunningly weak second-quarter US GDP report, most economic reports point to a significant improvement over the summer. In Japan, the announcement of a massive fiscal stimulus program may not lift the mediocre growth rate right away, but it should boost business and consumer confidence and start adding to GDP growth in the fall. Meanwhile, business sentiment in China has improved to the highest level in a year and a half, highlighting the durability of its recent growth rebound.
Only the eurozone doesn’t fit the bill. The same surveys that track China’s improvement point to a modest European slowdown in the months ahead. Part of that is Brexit, but the bigger issue is its shaky banking system.
Financial markets get a sentiment boost Global equities posted solid gains last month, led by strong performance in Europe (rebounding from the June Brexit selloff) and Japan (in anticipation of more policy stimulus). Fixed income markets also made a good showing: Government bond yields declined marginally, but corporate bond spreads rallied, contributing to the overall gains. Not surprisingly, the US dollar lost some ground against the major developed world currencies in the initial phase of the risk-on market rally. But it also weakened vis-a-vis emerging market currencies, particularly the South African rand and the Korean won.
The Fed lays low in the US The weak second-quarter US GDP report has all but shut the door on further Federal Reserve rate hikes in the US this year. And a downgrade in future policy rate expectations at the next Federal Open Market Committee (FOMC) meeting in September looks likely. In June, the median of the FOMC members’ policy rate forecasts showed expectations of two more rate hikes this year. But that meeting also revealed how little conviction the Fed has in forecasts – both its own and the market’s. So, while most members may still be leaning toward raising rates further, we suspect the Fed will wait for stronger growth and, more importantly, evidence that it’s sustainable before acting again.
That is especially likely as long as inflation remains below target. With only three more meetings on the calendar this year and an increasingly contentious US presidential election campaign ahead, staying on the sidelines seems the best risk management strategy for the Fed. That alone should further support risk assets, as will the coming cuts in future policy rates.
The UK joins Europe with more QE While the European Central Bank (ECB) has not announced any additional easing measures since March, some programs were only just implemented. The €20 billion increase in the bank’s quantitative easing (QE) program added corporate bonds to the list of eligible assets, the purchase of which started in June. This has already significantly compressed eurozone corporate spreads, indicating another noticeable easing in financial conditions. Adding to that, July saw the first auction of the ECB’s latest Targeted Long-Term Refinancing Operation (TLTRO) program, which is designed to ease the pass-through from easier financial conditions to more bank lending.
Almost immediately after the Brexit vote, the Bank of England (BOE) hinted at rate cuts over the summer. This came as no surprise to central bank watchers, but something else did: The BOE restarted its asset purchase program and included corporate bonds for the first time and, similar to the ECB, also announced a lending scheme. That won’t be enough to offset a sharp slowdown in the UK in the second half of 2016, but it should contribute to the easing of global financial conditions and may help avoid an outright recession.
Japan makes a fiscal push Japan’s government announced a new massive fiscal stimulus program designed to boost aggregate demand– something monetary policy has failed to achieve in the past few years. At ¥28 trillion, or nearly 6% of GDP, it’s the biggest package since 2009. However, only ¥7.5 trillion represents new government expenditures that will directly contribute to GDP in the next two years, suggesting growth forecasts will only rise by 0.5% this year and 0.75% next year. The rest is harder to score and is likely to have a much smaller multiplier effect on the economy. Still, on the margin, the package will provide a much- needed stimulus to pull Japan away from the recession danger zone. And, if combined with more monetary policy easing in the next few months, the impact could be stronger.
China picks up the pace China’s growth surprise in the second half and its apparent sustainability through the summer quarter also has a lot to do with more policy stimulus. The underlying trend in aggregate social financing (the proxy for credit supply) started to re-accelerate last summer. While it started slowly, the pace picked up in November, indicating another round of monetary policy stimulus.
The government has also increased outright fiscal spending, indicated by a significant increase in the budget deficit to boost growth. Finally, the nearly 7% depreciation in China’s yuan since last August is starting to affect export revenues. Measured in US dollars, exports were still down 4.8% from a year ago in June, whereas local currency denominated exports values increased 1.3%. The combined effect of monetary, fiscal, and currency stimulus should keep the quarterly GDP growth trend between 6.5% and 7% for the rest of the year.
We are still optimistic It was a dissonant first half of 2016 for global GDP growth. The US experienced disappointingly weak economic activity in all six months. The eurozone and Japan surprised with stronger-than-expected growth in the first three months, but reverted to a weaker trend in the spring. It was the opposite in China, where growth in the first three months of the year slowed to the weakest pace in more than six years, only to rebound strongly in the second quarter.
After some excessive macro volatility, the second half of the year could deliver a more harmonious performance. China and the US are leading the growth acceleration, and more monetary and fiscal policy support in Japan and Europe should contribute to an easing of global financial conditions.
Yes, a few risks remain: Europe’s latest banking crisis hasn’t been resolved, a key constitutional referendum in Italy could trigger new elections, and the US will decide who will be its next president. But we think the year is likely to end on a more positive note, setting the stage for a stronger 2017.
Markus Schomer is managing director and chief economist at PineBridge Investments.
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CC-BY-SA-2.0, FlickrPhoto: Dying Regime. Desjardins Global Asset Management chooses Mirova for Delegated Management of a Green Bond Fund
Mirova, an asset management company dedicated to responsible investment, got selected by Desjardins Global Asset Management to provide delegated management of an international green bond fund, the Desjardins SocieTerra Environmental Bond Fund, for a total of 100 million Canadian dollars.
The Desjardins SocieTerra Environmental Bond Fund puts the Global Green Bond strategy managed by Mirova into action. This fund will receive the recognized expertise of Mirova’s bond specialist teams, which are leaders in the area of green bonds.
Like Mirova’s Global Green Bond strategy, the Desjardins SocieTerra Environmental Bond Fund will be steered with active management and conviction management. The fund’s main performance driver will be investment in debt securities that support the environmental and energy transition, described as green bonds by Mirova’s responsible investment research team. As such, the management approach will combine financial and non-financial tactics: specific analysis of each project financed, Environmental Social Governance (ESG) analysis of the issuer, and fundamental analysis to determine the bond’s financial attractiveness. The fund will try to benefit from different international economic cycles by diversifying in terms of geography, economic sector, and credit rating.
The Desjardins SocieTerra Environmental Bond fund will be managed by Christopher Wigley, with Marc Briand, co-manager and head of fixed-Income at Mirova who will particularly rely on Mirova’s responsible investment research team of 12 analysts.
Philippe Zaouati, CEO of Mirova, commented on the announcement: “We are proud to have received this management mandate from Desjardins Global Asset Management. It is proof that our expertise in green-bond management is recognized on the market. Additionally, this mandate is part of our international growth strategy at Mirova, a strategy that is clearly beginning to pay off.”
Michel Lessard, Vice President of Desjardins Global Asset Management added: “By financing tangible assets, green bonds fill direct, concrete needs: they enable issuers to diversify their investor base and investors to actively participate in financing the energy transition. We are delighted, alongside Mirova, to commit to this energy transition by launching the Desjardins SocieTerra Environmental Bond Fund, the first green bond fund on the Canadian market.”
CC-BY-SA-2.0, FlickrPhoto: TreyRaatcliff, Flickr, Creative Commons. China Allows for Mutual Stock Market Access Between Shenzhen and Hong Kong
The China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) have approved the establishment of mutual stock market access between Shenzhen and Hong Kong (Shenzhen-Hong Kong Stock Connect) in order to promote the development of capital markets in both the Mainland China and Hong Kong. The organisms have also agreed to abolish the aggregate quota under Shanghai-Hong Kong Stock Connect.
The key features of Shenzhen-Hong Kong Stock Connect, including the shares eligible to be traded under the scheme, eligible investors and daily quotas, are set out in the joint announcement. HKEX expects it should take approximately four months from today to complete the preparations for the launch of the Shenzhen-Hong Kong Stock Connect.
“We are excited about Shenzhen-Hong Kong Stock Connect, which will open up another Mainland market for international investors and strengthen the Mainland’s links with Hong Kong,” said HKEX Chairman C K Chow.
“Under ‘One Country, Two Systems’, Hong Kong is in a unique position to build important connectivity with the Mainland markets and to facilitate the gradual opening of China’s capital account,” Mr Chow said. “This will further enhance Hong Kong as an international financial centre.”
“We look forward to launching Shenzhen-Hong Kong Stock Connect, which will be an extension of our successful mutual market access programme with Shanghai, so investors in our market and the Mainland market will have an additional secure, reliable channel for investment in the other market in an environment that they’re familiar with,” said HKEX Chief Executive Charles Li. “We also look forward to enhancing Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect with additional products in the future.
“We aim to build Hong Kong into a mature, comprehensive financial centre that can serve as an offshore wealth management centre for Mainland investors, an offshore pricing centre for the Renminbi and global asset classes for the Mainland, and an offshore comprehensive risk management centre for Mainland investors.”
CC-BY-SA-2.0, Flickr. Can Brazil Win a Gold Medal as an Investment?
With the Olympic Games underway, many eyes are on Rio. Coincidentally, investors this year are similarly directing more attention to Brazil, although it is developments in the capitol, Brasilia, that are likely of greater importance.
Brazil has had one of the best performing stock markets in the world this year. This may come as a surprise given the headlines we’ve seen this year coming from the country on everything from a presidential impeachment to the Zika virus. But according to Bloomberg data, the MSCI Brazil 25/50 Index is up more than 50% this year, while the MSCI Brazil Small Cap Index has risen over 60%.
The question now is, can the rally continue? My take is that it could potentially, but investors need to be willing to accept significant risk. Some economic bright spots
First the good news: After two years of a deep recession, the economic fundamentals of Brazil are showing signs of bottoming out. Industrial production has started to turn, and so have sentiment indicators, with business confidence indexes leading the way (source: Bloomberg). Particularly encouraging are the improvements in the inflation trend. Prices have been easing since early 2016 (source: Bloomberg), and the new central bank committee’s focus on bringing down inflation has also helped lower inflation expectations for the year ahead. This ongoing adjustment has raised expectations of monetary policy easing, namely interest rate cuts in the fourth quarter, which will be supportive of a recovery in economic activity.
Brazilian stocks climb as perception of risk declines
Political vulnerability and stalling reforms
That said, Brazil remains in a fragile situation. Economic imbalances such as weak fiscal accounts, high levels of debt and unemployment need to be addressed. The reforms needed to fix the Brazilian economy are complex and in many instances very unpopular with the public, making this a significant challenge for any government.
But it is political developments that continue to be the main variable in assessing the outlook for Brazil. Most important of these is the pending final vote on President Dilma Rousseff’s impeachment, which will likely happen in late August or early September.
In May, Interim President Michel Temer took office, after Rousseff stepped down to face an impeachment trial. Since then, Temer has had a few successes. In particular, his cabinet appointments were well received by both investors and politicians, which helped strengthen the relationship with Congress. This relationship has been and will be key for the cabinet ability to pass policy measures.
A vote to impeach Rousseff is likely to prompt an acceleration of much-needed reforms, such as cutting fiscal spending and revamping the pension system. Progress on policy changes, in turn, may go a long way towards restoring confidence of both consumers and investors. Nevertheless, while many believe the Senate would follow through with Rousseff’s impeachment, we cannot rule out the opposite outcome, which would likely be adverse for risk assets especially given high market expectations. Adding to the already high political uncertainty: the ongoing corruption and money laundering investigations surrounding the country’s largest oil and gas company.
And there’s the rub: Given the sharp rise in the markets this year it seems that investors are making a bet on the best case scenario. Should that fall through, markets are likely to correct, perhaps sharply.
Things to look for
In short, investors in Brazil have already won a gold medal of sorts this year. Winning another medal will likely require a more prosaic path: a recovery of earnings on the back of the economic turnaround and effective execution on the reform front.
Investors interested in Brazil may want to consider the iShares MSCI Brazil Capped ETF (EWZ) or the iShares MSCI Brazil Small-Cap ETF (EWZS).
Build on Insight, by BlackRock written by Heidi Richardson.
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CC-BY-SA-2.0, FlickrPhoto: _TC Photography_
. Hedge Fund Managers See Opportunities in Europe
Preqin’s Q2 update on the hedge fund industry finds that economic uncertainty following the UK vote to leave the EU has created potential opportunities for hedge fund managers and, as a result, many more funds have launched focused on the region. Europe-focused hedge funds saw a large increase in the proportion of overall fund launches, rising from 1% of funds launched in Q1 to 16% of those incepted in Q2.
At the same time, UCITS-compliant funds accounted for 18% of overall fund inceptions through Q2, the highest quarterly proportion tracked by Preqin since the directive came into force. Given that UCITS funds are a key way for non-European firms to raise capital from Europe-based investors, it is a further sign of the growing interest that industry participants are taking in the region.
While long/short equity hedge funds remain the most common hedge fund vehicles in terms of both investor searches and new fund launches, CTA funds are being increasingly sought-after by investors. The proportion of fund searches issued in Q2 that specified CTA or managed futures funds was 22%, twice the proportion of fund searches issued in Q1. Despite this growing appetite among investors for the fund type, just 3% of new hedge fund launches through the quarter were for CTA vehicles, less than the proportion seen for UCITS vehicles (18%) or funds of hedge funds (7%).
Other Key Q2 Hedge Fund Launches and Searches Facts:
Launches by Strategy: Equity strategies remained the most common approach among new funds launched in Q2, representing 53%. The proportion of funds using a credit strategy rose from 10% of Q1 launches to 18% in Q2, while multi-strategy launches fell from 19% to 6% in the same period.
Fund Manager Location: North America-based fund managers launched two-thirds of all new hedge funds in Q2. There was also an increase in the proportion of vehicles launched by Europe-based firms, representing 28% of all launches, while Asia-Pacific-based managers represented 3% of fund launches.
Investor Type: Fund of hedge fund managers issued the largest proportion (18%) of fund searches in Q2, while wealth managers (17%) and private sector pension funds (12%) also accounted for notable proportions. After some high-profile redemptions, public pension funds comprised 6% of fund searches in Q2.
Searches by Region: Geographically, the proportion of fund searches has remained similar to Q1. Investors in the more developed markets of North America (40%) and Europe (45%) represented the majority of fund searches, while Asia-Pacific based investors comprised 7% of searches.
According to Amy Bensted, Head of Hedge Fund Products at Preqin, “the run-up to and aftermath of the UK’s decision to leave the EU caused volatility across several markets within Europe and beyond. Hedge fund managers have seen increased opportunities to capitalise on this turbulence, and more Europe-focused hedge funds have been launched by managers both in and outside the region. Although Europe-focused funds did not make the same gains as North America-or Asia-Pacific-focused vehicles in Q2, the ongoing volatility arising out of the uncertainty within Europe may provide opportunities for hedge funds focusing on the region to deliver some upside gains. More broadly, the appetite among investors for managed futures continues to grow, as investors seek products which can diversify their portfolio and add some downside protection over the coming months. Although these funds have seen some volatility in their returns over recent months, CTAs have performed more consistently in Q2 2016, and fund managers will be keen to show investors that they can offer uncorrelated returns and capital protection.”
CC-BY-SA-2.0, FlickrPhoto: Ainhoa Sanchez . Hedge Funds and Private Equity Managers Show a Growing Interest in ESG
Unigestion, a boutique asset manager with scale that focuses on guiding its clients with risk-managed investment solutions, has again surveyed the hedge fund and private equity managers it invests in to track their attitudes to ESG.
The survey showed that more hedge funds are considering the value of ESG, as last year 60% of hedge fund managers were ‘reluctant’ to consider ESG as part of their strategies, whilst this year only 53% of hedge fund managers were in the ‘no interest’ category1. 30% of hedge funds managers surveyed were actively incorporating ESG into their strategies.
Whilst there were a number of strategies represented in this sample, the clear leaders in ESG adoption were Arbitrage managers – 67% of which had an active ESG strategy. Tactical traders (including commodities, managed futures and global macro strategies) find it the most difficult to implement ESG into their investment processes because of the nature of the strategy
One of the managers surveyed, Winton Capital, explained that its approach to ESG encompasses broad initiatives such as sponsoring research prizes. In addition, its headquarters are a certified Low Carbon Workplace, one of only 8 in the UK.
Small and large firms also diverged in their approach to ESG. Whilst the survey showed that large firms are more likely to have in place a formal ESG policy than smaller firms, there are again exceptions. Arrowgrass Capital Partners has USD 5.9bn under management and has a strong ESG policy having partnered with an ESG data provider and a responsible investment consultant, and having its CEO and other members of the senior executive sitting on its ESG committee.
The survey also showed more hedge funds are becoming signatories to the PRI. Last year only 13% of hedge funds surveyed were signed up to the principles, whilst this year 20% had signed up.
As the practicalities of incorporating ESG into investment strategies is still a stumbling block for many managers, the PRI is spearheading a working group to create a standard ESG due diligence questionnaire for hedge funds.
Private equity managers are on the whole more advanced than their hedge fund counterparts in ESG adoption, and Unigestion has also seen a larger year on year improvement in this asset class. This year, 42% of private equity managers achieved ‘advanced’ or ‘leader’ status (up from 29% last year) and the proportion of ‘reluctant’ managers fell from 27% to 21%.
Eric Cockshutt, Responsible Investment Coordinator at Unigestion, said: “We are still seeing too many hedge fund and private equity managers dismissing ESG as a cost burden, incompatible with their strategies, or a mere marketing exercise. The experience of many managers however is that ESG adoption is both feasible and beneficial to clients and the company’s overall reputation for taking seriously its environmental and social responsibilities.
