Key wealth markets are set to experience a surge of new business models and further industry consolidation akin to that of broker consolidators in the UK insurance market, as the independent financial advisor (IFA) workforce ages and new technology and capital is introduced, according to financial services research and insight firm Verdict Financial.
The company’s latest report states that one of the more optimistic predictions for the future involves the aging, predominantly baby boomer advisor base in places such as Australia, Canada, the UK and the US, and posits a novel exit strategy based on robo-advisors looking for new clients. This prediction is modeled on the broker consolidation trend in the UK, but substitutes cashed-up robo-advisors for the traditional broker-consolidator.
Robo-advisors are online wealth management services that provide automated, algorithm-based portfolio management without the need for human financial planners. With many offering largely exchange-traded fund (ETF)-based portfolios, their hallmark is very low fees. Robo-advisors were arguably the hottest fintech trend in wealth management in 2016, with dozens launched around the world.
Andrew Haslip, Verdict Financial’s Head of Content for Asia-Pacific, says that with their rock-bottom fee structures, independent robo-advisors only break even with pools of client assets well above industry averages, something even the most successful companies, such as Bettermint and Wealthfront, will struggle to achieve this year even in the US, the world’s largest wealth market.
Haslip explains: “Inflows to robo-advisors, while positive, have slowed and smaller robo-advisors or those in smaller markets such as Australia will remain well below the necessary volume based on current trends. For robo-advisors looking to scale up their client assets quickly, the wave of retiring advisors, along with the current low cost of capital, offers a once-in-a-lifetime opportunity, provided they pay for it.”
Verdict Financial believes high profile robo-advisors in 2017 could tap the market for the capital necessary to buy the client books of retiring financial advisors, whose generally affluent older customers tend not to have considered a robo-advisor.
Haslip adds: “The clients will benefit from cheaper ETF-based portfolios, while robo-advisors boost their client assets. So keep your eye out for the wealth industry’s newest trend, the robo-consolidator.”
Wikimedia CommonsFoto: Garrett A. Wollman. Allianz Global Investors aumenta su mandato con State Street
State Street Corporation ha sido elegida por Allianz Global Investors para proporcionar una amplia gama de servicios de inversión. El acuerdo amplía una relación ya existente, que parte de una asociación estratégica global con State Street para ofrecer un amplio espectro de soluciones de servicios de inversión para más de 450.000 millones de euros en activos bajo administración.
State Street proporcionará soluciones de middle office y back office incluyendo administración de fondos, servicios de depositario y fiduciario, custodia global, agencia de transferencia, cobertura de clase de acciones y servicios de consolidación de datos. El mandato sigue estando sujeto a las aprobaciones de los consejos de fondos aplicables, así como a las aprobaciones reglamentarias habituales.
«Estamos encantados de expandir nuestra relación con Allianz Global Investors y esperamos la próxima fase de esta asociación estratégica, que define un nuevo modelo de servicio para los principales gestores de activos. Las capacidades de consolidación y análisis de datos de State Street son una pieza clave para crear un modelo operativo que servirá a Allianz GI en todas las clases de activos y jurisdicciones y apoyará su crecimiento futuro», explicó Jeff Conway, director ejecutivo de EMEA en State Street.
Foto: Santi Villamarín
. Aumenta el interés entre los inversores institucionales estadounidenses por el liability-driven investment
«Los inversores institucionales se han enfrentado a una variedad de presiones a lo largo del año pasado que han hecho muy difícil lograr sus objetivos de inversión«, afirma Chris Mason, analista senior de Cerulli con respecto a la edición de enero de The Cerulli Edge – U.S. Institutional Edition. «Los desfavorables resultados que se esperan en varias clases de activos y los cambios recientes en los tipos de interés han creado incertidumbre adicional».
«El difícil entorno del mercado, incluyendo los tipos de interés en niveles históricamente bajos, ha causado estragos en los patrocinadores de planes corporativos de beneficios definidos«, continúa Mason. «Sin embargo, el reciente aumento de los tipos de interés que siguió a las elecciones ha generado un renovado interés por el derisking en las pensiones y el liability-driven investing (LDI) entre los inversores institucionales».
Cerulli cree que para atender más eficazmente a sus clientes, es necesario que los gestores entiendan cómo estos desafíos específicos afectan a las instituciones en su conjunto. A medida que los tipos aumenten, los gestores deben centrarse en destacar sus soluciones LDI. Los gestores proactivos que educan a los patrocinadores del plan sobre los beneficios del derisking serán los mejor posicionados en el mercado.
After two years of serving a select group of leading real estate investment managers, Juniper Square announced the launch and general availability of its market-leading investment management software.
Clients such as Beacon Capital, The Reliant Group, and Cortland Partners rely on Juniper Square to help them manage nearly 20,000 investment positions and over $25B in capital. More than 8,000 investors use Juniper Square to access reporting on nearly 1,000 investments, and Juniper Square customers are currently raising capital for more than 130 offerings using its software.
Juniper Square’s technology integrates many capabilities into a single capital markets software system: a CRM designed for real estate; a secure data room and automated subscription process to streamline fundraising; a powerful investment accounting system that can scale to the most complex funds; and an automated, best-in-class investor reporting capability designed to meet the needs of even the most sophisticated investors.
«Moving from our previous system to Juniper Square was like night and day. Having a common source for our latest fund and investor data has enabled our accounting, investor relations, and fundraising teams to work together more efficiently. In addition, our investors value having self-service access to comprehensive investment data through Juniper Square’s easy-to-use portal,» said Dane Rasmussen, Managing Director and Head of Investor Relations, Beacon Capital.
«Real estate managers today are buried under mountains of spreadsheets and struggle with antiquated systems that are hard-to-use and don’t talk to each other. Juniper Square puts an end to that with an easy-to-use, integrated system that supports the entirety of the capital markets operation, from front office to back. Whether they have ten investors or thousands, our software frees up managers to focus on what they do best: buying, selling, and leasing real estate, while providing an unparalleled experience for their investors,» said Alex Robinson, Co-Founder and CEO of Juniper Square.
Confirming this trend, in its 2016 Global Private Equity Fund and Investor Survey, EY found a «seismic shift» in the importance of reporting when investors select a manager, stating, «In just one year, we see a 400% increase in investors that now rank a private equity firm’s ability to handle reporting requirements as the most important when selecting a firm.»
Juniper Square’s modern, easy-to-use software helps real estate sponsors of all sizes respond to the growing demands of the industry. Whether the challenge is seamlessly managing relationships with thousands of individual investors, or meeting sophisticated institutional reporting needs, Juniper Square enables real estate firms to focus on the real estate instead of the back office.
The European Fund and Asset Management Association (EFAMA) published itin January is latest Investment Funds Industry Fact Sheet, which provides net sales of UCITS and non-UCITS for October 2016. 28 associations representing more than 99 percent of total UCITS and AIF assets provided with net sales data.
Bernard Delbecque, Senior director for Economics and Research at EFAMA commented: “Despite anemic net sales of equity funds since January 2016, UCITS continued to attract robust new investment in October thanks to net inflows into bond, money market and multi-assets funds”.
The main developments in October 2016 can be summarized as follows:
Net inflows into UCITS and AIF totaled EUR 62 billion, compared to EUR 51 billion in September.
UCITS registered net inflows of EUR 47 billion, up from EUR 30 billion in September.
AIF recorded net inflows of EUR 15 billion, down from EUR 21 billion in September.
Total net assets of European investment funds stood at EUR 13,756 billion at end October, compared to EUR 13,836 in September and EUR 13,320 billion at end 2015.
Going into further detail:
Long-term UCITS (UCITS excluding money market funds) recorded net inflows of EUR 22 billion, compared to EUR 28 billion in September.
Equity funds recorded net outflows of EUR 1 billion, compared to net inflows of EUR 2 billion in September.
Net sales of bond funds increased slightly from EUR 16 billion in September to EUR 17 billion in October.
Net sales of multi-asset funds decreased slightly from EUR 7 billion in September to EUR 6 billion in October.
UCITS money market funds recorded net sales of EUR 25 billion, compared to EUR 2 billion in September.
Secure growth companies could be forced out of the limelight by turnaround stories in US equity markets following a period of significant gains for online retailers and other internet stocks, according to Legg Mason affiliate ClearBridge Investments.
Margaret Vitrano, a manager with ClearBridge, says the dearth of economic growth in the US in recent years has caused investors to focus on ‘secure growth’ names.
However, she believes better opportunities to access higher growth rates have emerged in unloved sectors experiencing reversals in their fortunes.
“There is a dearth of growth and this explains why high-flying internet companies performed well in 2015 and 2016,” she said. “There has been a focus on secure return and a very low appetite for turnaround stories because of market nervousness.”
As a result, Vitrano argues that opportunities have arisen in cyclical sectors, with valuations too attractive to ignore. “Energy is a good example, as in a cyclical recovery we think companies in this sector have a lot of earnings growth ahead,” she says. “It has also had less focus recently from investors so you can find value there.”
As well as energy names, Vitrano is unearthing opportunities in the healthcare space, where valuations have lagged the wider market. “We have a very broad definition of growth – it is not just revenue growth, it can be margin expansion, and some of those diamonds in the rough look attractive to us,” she says.
“Healthcare and biotech in particular look really interesting right now. In the case of biotech stocks, they underperformed substantially last year so valuations are attractive.” Looking at broad market levels, Vitrano says that, although indices such as the Dow Jones are close to hitting all-time highs, valuations are only approaching “fair value” given the backdrop of record low rates and quantitative easing.
However, she cautions that financials appear expensive on current valuations, with the risk growing that too many rate hikes have been priced-in to forecasts for the sector. “Yes, rates are probably heading higher, but if there is one thing we have learned about what this Fed is doing, it is incorporating multiple data points – not just here but outside the US,” she says. “So I would caution that between here and 2018 a lot could happen to change the shape of the interest rate curve.”
Vitrano is avoiding large financial stocks such as money centre banks because, as a growth investor, such stocks cannot deliver the requisite rates of growth. However, she does see value in specific companies in the sector.
“We don’t own big financials as we think we can find better growth elsewhere, outside of the large money centre banks, but we are now entering a period where you may have a double whammy of potentially higher interest rates and less regulation, or even a triple whammy if we get tax cuts,” she says.
“The fundamental landscape has improved for the whole financials sector, and we do like Schwab, for example, as we see it as a secular growth opportunity which will also be a beneficiary of higher rates.”
Foto: Craig Sunter
. Betterment lanza un servicio que completa su oferta digital con humanos
Betterment, el mayor asesor digital de inversión independiente, ha anunciado esta mañana el lanzamiento de una nueva oferta que expande la plataforma de la compañía para ofrecer asesoramiento multi-plan con acceso a profesionales CFP y expertos financieros con licencia.
La compañía puede así –explica en su nota- satisfacer las necesidades de sus clientes que quieren invertir o recibir asesoramiento, ya sea a través de la oferta digital existente o trabajando con un equipo de expertos. Estos profesionales ayudarán a los clientes a supervisar sus cuentas, responderán a sus preguntas financieras y les darán consejo.
Los diferentes niveles de servicio que ofrece el roboadvisor son:
Digital: los clientes obtienen acceso a su actual tecnología, con algoritmos de ahorro de impuestos y asesoramiento digital, a un costo muy bajo.
Plus: los clientes reciben una llamada de planificación anual por parte de un equipo de planificadores profesionales acreditados y expertos financieros que también supervisan sus cuentas a lo largo del año.
Premium: los clientes obtienen acceso ilimitado a un equipo de planificadores financieros acreditados (CFP) y expertos financieros con licencia que supervisan sus cuentas y les brindan asesoramiento y planificación financiera durante todo el año.
Los clientes que deseen un consultor financiero independiente pueden ser referidos a un RIA que utiliza la plataforma Betterement for Advisors para gestionar las inversiones de sus clientes a través de la Red de Asesores recientemente anunciada.
La firma cobrará una tarifa plana del 0,25% en su plan Digital, un 0,40% en el Plus y un 0,50% en el Premium. Los saldos mínimos requeridos son 100.000 dólares para el servicio Plus y 250.000 para el Premium. Para los tres planes, los honorarios solo se cobran en los dos primeros millones del saldo.
“En los últimos cinco años en Betterment, he aprendido que mientras que la mayoría de los estadounidenses realmente necesitan asesoramiento financiero, no todo el mundo lo quiere de la misma manera. Quieren hablar con una persona, algunos necesitan ayuda de vez en cuando, y otros necesitan una orientación cuidadosa y continua. Hace aproximadamente un año nos propusimos ampliar nuestra oferta de asesoramiento humanizado, a la vez que la hacíamos más accesible», dice Alex Benke, vicepresidente de asesoría financiera e inversiones.
«Estamos comprometidos con la capacitación de los clientes para que ellos hagan lo mejor por su dinero, para que puedan vivir mejor”, añade Jon Stein, fundador y CEO de la firma. «En Betterment, nos comprometemos a actuar siempre en el mejor interés de nuestros clientes. Desde el principio, hemos construido lo que nuestros clientes nos han pedido priorizar, y lo que tendría el mayor impacto para ellos. Ahora con los planes Plus y Premium podemos ofrecer a los clientes lo mejor de ambos mundos: nuestra tecnología más inteligente y acceso a expertos financieros”.
Betterment gestiona más de 7.000 millones de dólares en activos para más de 210.000 clientes.
Mark Mobius, Foto cedida. Mark Mobius: "Somos optimistas, México se ve muy bien"
En su última visita a México, Mark Mobius, presidente ejecutivo de Templeton Emerging Markets Group, habló sobre el presidente Trump, el dólar, los mercados emergentes y las razones por las que cree que México es una buena inversión.
El gurú de los mercados emergentes, que celebra su 30 aniversario con Templeton Emerging Markets Group este mes, dice que, sobre todo, Donald Trump es un negociador y, como tal, es consciente de que para considerar a cualquier acuerdo como un éxito, ambas partes deben beneficiarse, por lo que no está preocupado por lo que le sucederá a México con Trump en el gobierno estadounidense.
En su opinión, el presidente de los Estados Unidos está usando twitter como una cortina de humo y manipulando los medios de comunicación. Mobius cree que Trump está interesado en tener una relación bilateral con México, así como con otros países, pero que los acuerdos multilaterales como el TLCAN serán cosa del pasado. «Trump fue el único candidato que visitó México», recuerda antes de señalar que «un mayor crecimiento económico en Estados Unidos será bueno para todos, incluyendo a México … y una vez que los estadounidenses sientan seguridad económica, el sentimiento anti-inmigración disminuirá». Mobius también espera que Trump busque una caída del dólar para impulsar sus exportaciones.
El especialista en ME cree que la recuperación en los mercados emergentes continuará apoyada por valoraciones baratas – frente a Estados Unidos, Japón y Europa, una mejora en el sentimiento – ya que los inversores se están dando cuenta de que están infraponderados en ME, la tecnología y una demografía favorable.
En América Latina al especialista le gustan Brasil, Argentina y México. Hablando de México, Mobius dijo que está optimista y que el país se ve muy bien. Según él, la inflación creciente se compensa con un aumento aún más rápido en los salarios «por lo que el consumidor va a gastar -y tal vez más- como resultado de la inflación». Mientras tanto, cree que el peso, desde el punto de vista del poder adquisitivo está infravalorado en entre 15 y 20% por lo que, después de otra caída -que será mandada por el sentimiento del mercado, se debe apreciar.
«México ha sido bombardeado, la moneda y el mercado han sido golpeados y todo el mundo espera que venga lo peor, pero la realidad es muy diferente … La recuperación podría ser sorprendente para mucha gente. Esperamos un gran salto en el mercado mexicano «, señala. Los sectores en México que más le gustan a Mobius y su equipo son el consumo y el minero, principalmente en lo referente al oro (considerando que espera una devaluación del dólar). En la actualidad no cuentan con exposición a empresas tecnológicas.
Otra área de oportunidad que identifica es el sector de la Energía. Mientras que en la mayoría de los países la energía y las utilities representan una parte importante del índice, la participación de la energía en el mercado de valores mexicano es todavía incipiente. Además, Mobius espera que los EEUU y México trabajen juntos en sectores relacionados a la energía, como el comercio de equipo de extracción petrolera. «Esto podría ser enorme», concluye.
Faced with a Tweeter-in-chief, how are investors to navigate what’s ahead? Is there a strategy behind President Trump’s outbursts; and if so, how shall investors position themselves to protect their portfolios or profit from it?
With all the outrage about Trump’s style, we have all seen equity markets rally in the aftermath of the election. Is the rally due to investors loving the policies proposed in Trumps’ tweets? We argue no, if only because one can hardly call most of his tweet storms policy proposals.
Before I expand further, I need to point out that discussing portfolio allocation in the context of politics is bizarre, as, in my experience, today’s breed of investors – and this may well include you – are looking for an «investment experience.» In an era where stocks have gone up and up for years, where buying the dips has been a profitable strategy, does it really matter what you invest in? So, it appears to me, many invest in what appears warm and fuzzy to them. The days are gone where investors bought shares of tobacco companies because they were good value; instead, they buy solar energy companies if they want to save the planet. Similarly, my own anecdotal research suggests investment portfolios of Clinton supporters look distinctly different from those of Trump supporters. It’s incredibly difficult for investors to put emotions aside. That said, I have no problem with an environmentally conscious investor specifically avoiding coal companies because they don’t want to support it even if it might churn out more profits in a Trump administration – as long as he or she does it with open eyes. Such investing, in my humble opinion, means gathering the facts, then making a conscious decision. To gather facts in a politically charged investment environment, here are some of the steps you might want to consider when you hear stories that might affect your investment decision:
Get multiple perspectives. That means, embrace news outlets that disagree with your political views. If that’s too unbearable, at least follow journalists of those outlets on Twitter that write coherently, even if you disagree with their views. Get an outside perspective by reading (or listening to) foreign news services from the UK, Europe (I mention Europe separately from the UK, as news coverage is different on the continent), the Middle East and Asia. What does German chancellor Merkel think of Trump’s recent assault on Germany? Look it up to gauge how the dynamics might unfold.
Go to the sources. In our office, we listened to hours of confirmation hearings to get a better handle of what policies the new administration might pursue. We listen to or read speeches of central bankers, policy makers and influencers around the world; News breaks on Twitter. With a Tweeter-in-chief, it’s not a matter of political preference, but one of staying on top of the news to follow @realDonaldTrump (he now tweets under the handle @POTUS as well; Obama’s Twitter handle has been moved to @POTUS44). Following policy makers allows you to stay on top of breaking news. Following influencers allows you to receive close to instantaneous interpretation of the news. On that note, please ensure you follow @AxelMerk.
So what have we learned from our Tweeter-in-Chief?
Trump likes to take credit, but does not like to own problems There’s method to what appears to some as madness New policies may be hiding in plain sight
Not owning problems
Trump says he is a «winner.» To defend this brand, he disavows any potential problems. He throws Schwarzenegger under the bus for not-so-great ratings on his first appearance on the Apprentice, so any decline on the program doesn’t reflect badly on him. He cautions Republicans to be careful not to own «Obamacare» when it’s pretty obvious that Trump himself might be «owning» it; the cost of healthcare will continue to rise independent of the healthcare system we will have; as a result, odds are high than there will be lots of unhappy folks. He publicly denounces Paul Ryan’s tax reform proposal as being too complicated (he singled out the concept of a ‘border adjustment tax’), even as his nominee for Treasury Secretary Mnuchin all but admitted that Trump’s tax proposal was written on the back of an envelope (he didn’t quite say that, but he did say that they had a very small staff and that it would take substantially more work).
There’s method to what appears to some as madness
All Presidents have the bully pulpit at their disposal, even as Trump’s use of it may elevate it to new highs (lower it to new lows?). Trump’s nominee for Commerce Secretary stated it succinctly in his nomination hearings: «When you start out with your adversary understanding that he or she is going to have to make concessions, that’s a pretty good background to begin.» The Financial Times recently published an OpEd that discusses how Mr. Ross thrived in his career employing this principle. From the article: «The first step in such negotiations is to get everyone to admit to the problem, perhaps even to create an exaggerated sense of it, so that no one thinks it can be ignored until tomorrow.»
In reality, keep in mind that it is the House that initiates new tax legislation, not the President. Would President Trump really veto a tax bill with a border adjustment tax? To a significant degree, Trump’s success in implementing his agenda may well be directly dependent on how seasoned the politicians are at the other side of the negotiating table.
In my view it is no co-incidence that German Chancellor Merkel shrugged off Trump’s recent assault on German trade policies suggesting to wait and see what the actual policies of the new administration will be. She is a battle-proven politician who has dealt with rather eccentric partners in the Eurozone debt crisis (remember Greek finance minister Varoufakis?).
But do not under-estimate the power of the bully pulpit: we all «know» that the banks are responsible for the financial crisis, right? While I don’t want to downplay the role financial institutions played, where is the ire at the politicians that put rules and regulations in place that incentivized bad behavior? Politicians own the bully pulpit, not bank CEOs. In that context, it is in my view no coincidence that Facebook CEO Mark Zuckerberg has as this year’s project to travel the country to get to know the people better. With pictures of him with firefighters, farmers and other «regular» people, he either sets the stage for running for President, or he is taking steps to fight the image that Facebook is responsible for fake news, the rise of terrorism or other ills of the world, a perception that might be promoted by the Tweeter-in-chief. The bully pulpit is effective when there’s an overlap of perception and reality.
New policies may be hiding in plain sight
So are Trump’s tweets merely an opening salvo to negotiations? In some ways yes, as we see Trump more like a third party President. Trump may well need to reach across the isle if he wants to have a substantial infrastructure spending program, as there are more than a few budget hawks amongst Republicans that scoff at a trillion dollar infrastructure spending program. Although divided over a ten-year horizon as stipulated, $100 billion a year ain’t what it used to be. More than a few people are scratching their heads about how Trump wants to succeed in replacing Obamacare, as any new rules will require a sixty person majority in the Senate.
What is striking to us is the juxtaposition between what at times appears to be off-the-hip shooting by Trump on Twitter and the clear policy path his cabinet nominees have presented in their hearings. Be careful, by the way, not to confuse «clear path» with agreement or disagreement: as an investor, understanding the proposed policy takes priority over one’s own conviction as to what the better policy ought to be. To me, it means Trump delegates. I don’t think he could have built his sprawling empire if he micro-managed. Whereas former President Jimmy Carter at some point managed the schedule for the White House tennis court, Trump is at the other extreme. So much so that he has time to tweet, so much so that he doesn’t listen to each and every security briefing.
A common theme in the nomination hearings I listened to has been the importance of clear policies; the importance of consistent policies; and the importance of adhering to agreements. If you aren’t scratching your head on how to reconcile this with Trump’s comments, you aren’t paying attention.
So what does it all mean for investors?
To gauge what it all means for investors, keep in mind the backdrop: stocks have appreciated for years, including a post-election rally. Bond yields not long ago reached historic lows. And the dollar index was up four calendar years in a row. So if you are bullish on stocks, keep in mind that stocks might be expensive. If you are bearish on stocks, will bonds provide the refuge even if inflation ticks up? And that dollar, will the greenback really soar?
With regards to stocks, we don’t have a crystal ball, but are concerned about high valuations. Without giving a specific investment recommendation, we would not be surprised if small caps (as expressed in the Russell 2000) outperform large caps (as expressed in the Nasdaq). The reasons include:
Just as larger firms tend to relatively benefit from more regulation as they have more economies of scale, a reduction in regulation may well benefit smaller firms disproportionally.
The Nasdaq companies tend to be more internationally active and, as such, be more vulnerable to retaliation on any policies by other governments. Historically, in the stock market declines we have studied, the Russell 2000 has outperformed the Nasdaq. The reason may be that the Nasdaq has the more popular (and thus pricier) firms. While I believe this may well apply, a caution to this theory: in 2016, the Russell outperformed the Nasdaq already. To protect against a general decline in stocks, one may need to look further. In that context, cash is an option that is often not mentioned. As investors ponder ways to diversify – or even just a rebalancing of portfolios as equities have outperformed other asset classes – keep in mind that equities tend to be more volatile than some alternatives; as such, to be protected in a downturn, one might need to load up quite substantially on alternatives. As an extreme example: to protect a 100% stock portfolio against a broad market downturn, it would really need to go to almost 100% cash if one wanted to avoid the risk of losing any money. As most investors don’t want to do that, investors are looking for diversification, i.e. for investments that have a low correlation. To the extent that one finds such investments, a similar test should be performed though: how much does one need to add to attain the desired diversification?
Bonds should prove interesting in 2017. My personal opinion is that we saw historic lows in 2016. However, if stocks were to tumble, wouldn’t bonds rally? Possibly. What I’m concerned about is that bonds will fall for different reasons than in 2016: in late 2016, more real growth was priced in; I happen to believe that some of those higher real growth expectations will be replaced with higher inflation expectations.
If that happens, bonds can lose money even if stocks fall. More so, the dollar might not be so shiny after all, if higher inflation is priced in. Fed Chair Yellen recently (at Stanford on January 19) gave a speech in which I interpreted her argument as to suggesting «this time is different» as rising inflationary pressures e.g. in wages are really not as strong as some say.
That’s not to say other currencies can’t suffer in a trade war – the Mexican Peso has been particularly vulnerable as the Mexican economy is particularly dependent on exports to the U.S.; China’s currency may also be vulnerable as speculators could increase their attack on the currency should China be pushed into a corner. That said, I am more optimistic on how major currencies will perform versus the greenback, as we may have seen the low in interest rates in much of the world. Last week, European Central Bank President Draghi fought against that perception, but it was a fight in words only which I characterized as «huffing and puffing» to pressure the currency lower – a strategy that worked for a few hours that day.
What about gold? As we have indicated in the past, gold may be the «easiest» diversifier. Easy because it’s easier to understand than other investments that might be able to perform well when both stocks and bonds are vulnerable (e.g. a long/short equity or long/short currency strategy). We believe gold is a good diversifier over the medium to long-term, as its long-term correlation to equities, in our analysis, is near zero; that said, the price of gold can have an elevated correlation to either stocks or bonds over shorter periods. If I am right that inflationary pressures will increase, then gold may benefit. If, however, Trump’s policies will foremost boost real growth, gold might suffer. One reason why I am optimistic on gold is that I haven’t seen any proposal to get long term entitlement spending under control which is, in my view, key to long-term fiscal sustainability. The link to gold is that a lack of long-term fiscal sustainability may lead to negative long-term real rates which, in turn, would be a positive for gold which has a cost of holding and doesn’t pay interest.
According to a press release, EFAMA welcomes the FSB Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities on 12 January 2017, which come as the result of an extended consultation process in which EFAMA has participated very actively.
Peter De Proft, EFAMA Director General, commented: “EFAMA particularly welcomes the fact that the FSB recommendations reflect a more balanced view of the asset management industry, and acknowledge the risk mitigants already in place under the current EU regulatory framework and in market-based best practices. We also welcome the mandate given to IOSCO to lead the work in the identified fields and look forward to continue engaging with IOSCO in the months ahead”.
The document sets out 14 final policy recommendations to address four “alleged” structural vulnerabilities from asset management activities that could potentially present financial stability risks:
Liquidity mismatch between fund investments and redemption terms and conditions for open-ended fund units;
Leverage within investment funds;
Operational risks and challenges for asset managers in stressed conditions, particularly with regard to the transfer of client mandates;
Securities lending activities and related indemnification programmes offered by certain asset managers.
From a preliminary assessment, EFAMA believes that the final recommendations go in the right direction, in the sense that they do not identify a need for any substantial regulatory reviews of existing standards, and recommend that IOSCO develops additional and more detailed guidance to be carried out by end-2017 and end-2018.
Additionally, below are some general remarks on issues raised in the FSB Report.
Despite the fact that some of the speculative narrative around potential risks stemming from liquidity mismatches in open-end funds has been retained in the final report, we welcome that fact that several of the risk-mitigants highlighted by EFAMA in our responses have been acknowledged by the FSB in its final Report.
EFAMA views it as positive that the first nine liquidity management-related recommendations call on IOSCO to review/enhance its existing guidance by end-2017, as well as develop a set of harmonised data points for authorities to monitor the build-up to liquidity risks in funds.
Also positive is that certain recommendations introduce sufficient flexibility for national authorities to take action only «where appropriate» or «where relevant», including the possible consideration of system-wide stress-testing judging on the relative systemic importance of actors in each jurisdiction and once better data become available;
Regarding leverage, EFAMA welcomes that the FSB recommendations on data on leverage in funds be aggregated and made consistent across the global jurisdictions. We support the work to be undertaken by IOSCO in collaboration with national authorities by the end of 2018.
As to operational risks, EFAMA believes that these remain overstated. In this regard, EFAMA stresses that the current EU regulatory framework as well as industry best practices largely already address the FSB’s concerns.
Finally, EFAMA believes that the potential risks with regard to securities lending as a potential source of systemic risks, via the indemnification of clients where asset managers are also agent-lenders, are overstated.
