News > Asset Management

For the Fed, it's a small world after all
Asset Management
<p>The Federal Reserve looked at the data in the U.S. And China. And Europe. And decided: Now is not the time to lift rates, even symbolically, from their historically low levels.</p> <p>The world is getting smaller by the minute.</p> <p>The Fed's mandate to manage employment rates in the U.S. has become greatly tied to the health of global economies.</p> <p>"It's hard to think about jobs without thinking about where you sit around the planet," says says Jeff Moore, portfolio manager at Fidelity. The U.S. job market has been steadily if slowly improving over the past few years. Unemployment stands at 5.1%. Not good enough to lift rates, the Fed basically said in its statement. Weakness overseas threatens the recovery in the U.S. Higher rates will keep the dollar strong, which will make our goods pricey for our trading partners and hurt business. "It's all connected to the jobs piece," says Moore (who says he is not speaking on behalf of Fidelity).</p> <p>China and the global market volatility in August played a large role in the Fed's decision, says Lee Ferridge, head of North American macro strategy at State Street Global Markets. The strong dollar has tied the Fed's hands. It's "the doorway" between the global and domestic economies, says Ferridge. He's not convinced that a rate rise is in the cards this year.</p> <p>Caution comes naturally to a central banker. The Fed would rather err on the side of raising rates too slowly than too quickly, says Moore. The delay in a rate rise "give(s) some breathing room to emerging market countries," he says. "Even the Chinese story; it gives it more time."</p> <p>The hesitation can backfire. "(It) is bound to prompt uncertainty,” says Nigel Green, founder of deVere Group. "By not raising interest rates, the Fed is, in effect, sending out a clear message that it is nervous about China, and the impact a potential hard landing could have on U.S. and global growth," he says.</p> <p>Legg Mason agrees. "Until it actually moves on rates, lingering uncertainty about the timing of a increase could be a source of volatility in the markets – and perpetuate concerns about distortions in market pricing that result from years of zero-rate policy," the firm wrote in a statement.</p> <p>Photo: charamelody </p> <p>&nbsp;</p> <p>&nbsp;</p>
Vanguard says the Fed risks 'being held captive to the markets' by inaction
Asset Management
<p>Editor's note: This is a statement from Vanguard's senior economist, Roger Aliaga-Diaz on the decision by the Federal Reserve to keep interest rates at zero.<br /> The Fed's decision to hold off on a rate increase is a clear indication to the markets that this rate cycle will be different, with international conditions and US dollar strength weighing more on the decision than in the past. We are concerned with the Fed's acknowledgement of recent market volatility in its decision. The Fed runs the risk of being held captive to the markets, as, paradoxically, much of that volatility is due to the anticipation and uncertainty around when the Fed will move.</p> <p>Vanguard believes that focus should remain on how the Fed proceeds after the initial increase in rates. Given current conditions, we believe a take-off in 2015 is warranted and continue to stress our view of low and slow. The US economy remains strong relative to global peers, and we expect that resiliency to remain.<br /> Photo: Brookings Institute</p>
Don’t sweat the Fed
Asset Management
<p>This should be short. There are a lot of good reasons not to worry about the FOMC raising Fed funds or not. If they raise Fed funds:</p> <p> First, savers deserve a return. Economies work better when savers get rewarded.<br /> Second, investors do better on the whole when there is a risk free asset earning something to allocate money to, because otherwise investors take too much risk in an effort to generate income.<br /> Third, the FOMC should never have let Fed funds rates go below 1% anyway — the marginal stimulus is limited once the yield curve gets slope enough for the banks to lend. They don't really need more than that.<br /> Fourth, it's not as if monetary policy has been doing that much. Outside of the government and corporations, most entities have not shown a lot of desire to lever up after the financial crisis.<br /> Fifth, long Treasury yields will do what they want to do — they won't necessarily go up… it all depends on how strong the economy is.</p> <p>But if the the Fed doesn't raise Fed funds, no big deal. We wait a little longer. What's the difference between having zero interest rates for 6.5 years and 7.5 years? Either one would build up enough leverage if the economy had the oomph to absorb it.</p> <p>As it is, corporate borrowing has been the major place of debt expansion through both loans and bonds. Watch the debt of energy firms that are allergic to low crude oil prices. Honorable mention goes to auto, student, and agricultural lending. May as well mention that underwriting standards are slipping in some areas for consumers, but things aren't nuts yet.<br /> I've often said that the FOMC stops tightening rates when something big blows up. Can't see what it will be this time — the energy sector will be hurt, but it isn't big enough to impair financials as a group. Subprime lending is light at present outside of autos.<br /> Watch and see, but in my opinion, it is a sideshow. Watch how the long end behaves, and see if the market reflates. We need more confusion and less concern over what the next crisis is, before any significant crisis comes.</p> <p>This story originally appeared on ValueWalk.<br /> Photo: Maritime Haftek</p>
Liquid alts actually did pretty well last month
Asset Management
<p>Of the asset management industry’s many subsectors, none have been as reviled lately as the burgeoning liquid alts space.</p> <p>They’ve been called “watered down hedge funds” at a time when hedge funds themselves weren’t even doing well, and their promise of daily liquidity seems to stymie any effort to deliver out of the park returns. Even their managers seem to have taken flak as well, with critics asking why would they do it if they were successful hedge fund managers in the first place.</p> <p>Goldman Sachs however, would like to point out how awesome the space did this rocky August:<br /> As Exhibit 1 shows, three of five GSAM Liquid Alternative Investments Peer Groups lost less than 1% over the most volatile stretch of the month, as measured by the S&amp;P 500’s closing price high (Aug. 10) and low (Aug. 25). While the S&amp;P 500 fell a total 11% over this period, the GSAM LAI Relative Value Peer Group, Tactical Trading/Macro Peer Group, and Event Driven Peer Group, lost 0.6%, 0.6% and 1.0%, respectively.</p> <p>Given the steep losses in equity markets, it came as no surprise to us that equity long/short funds were down as well, since, historically, these strategies have been more closely correlated with equity markets than certain other strategies.1 Still, the Equity Long/Short Peer Group lost less than half the S&amp;P 500’s decline (5.2%) – and also beat almost every individual S&amp;P 500 Index sector. (See Exhibit 2). The GSAM LAI Multistrategy Peer Group, meanwhile, comprised of funds incorporating several different alternative investment approaches, fell by less than a quarter the S&amp;P 500’s loss (2.5%).<br /> All five peer groups meanwhile thrashed the traditional “balanced” portfolio’s performance in the same time frame, with the worst-performing group – Equity Long/Short – declining 5.2% in August compared to the 6.59% drop suffered by an “illustrative” 60-40 portfolio.</p> <p>Does this make the case for Liquid Alts then? Goldman seems to think so, especially as drivers in well-diversified investment portfolios. It would’ve been great to see which funds they tracked for the study though.<br /> Photo: Kristian Niemi</p>
BlackRock is setting up a social impact fund. But why Japan?
Asset Management
<p>US asset manager BlackRock is setting up a new social impact fund and has decided to base it in Japan. It will be first fund of its kind in the country.</p> <p>An appetite for social impact funds has been steadily on the rise since the global financial crisis. Investors are seeing the value in seeking long term returns in investments that are based on both social and monetary returns.</p> <p>Many also realize that adopting ESG (environmental, social and governance) standards does not only keep some investors happy, but can also drive value.  </p> <p>In Asia much of this investment activity has, rather unsurprisingly, been focused on emerging economies that stand to benefit the most from ethical investing. Think of microfinance in India, or in agriculture in Indonesia. So it is interesting that BlackRock has decided to set something up in Japan. </p> <p>The so-called Big Impact fund will be offered to retail investors from September 30, reports the Asian Nikkei Review, and BlackRock will use a range of criteria to select 200-800 issues from 3,700 companies in developed economies. </p> <p>When you look at two of the fund’s target industries, pharmaceuticals and energy, the rationale for Japan comes clearer. The country's ageing population, and its ongoing struggle with energy security - born out its unstable dependence on nuclear energy - means the country’s is driving innovation and growth in industries that hold several environmental and social benefits.</p> <p>But its not just that. Corporate Japan's progress on governance and social responsibility is also big factor for BlackRock. The new corporate governance code adopted by the Tokyo Stock Exchange in June aims to strengthen management through outside director appointments and  urges companies to be more pro-active towards ESG value.</p> <p>It's early days, but BlackRock is not alone. Private Equity firm KKR has also eyed ESG opportunities in Japan. This year is inducted its recent healthcare acquisition Panasonic Healthcare Holdings in its Green Portfolio Program (GPP), an operational improvement platform that uses ESG  benchmarks for KKR’s portfolio management activities.<br /> Photo: Mr Hicks46</p>
Opportunity with emerging Asia ETFs
Asset Management
<p>With the MSCI Emerging Markets Index down about 14 percent this year, positioning the widely followed emerging markets benchmark for its third consecutive annual loss and fourth in five years, getting excited about developing world equities and exchange traded funds is increasingly difficult.</p> <p>Focusing on various regions of the developing world can cloud investors' mood even more. For example, the iShares S&amp;P Latin America 40 Index (ETF) (NYSE: ILF), thanks in large part to struggling Brazilian stocks, has tumbled about 25 percent year-to-date.<br /> Emerging Asian Markets<br /> ILF's Asia equivalent, the iShares MSCI Emerging Markets Asia ETF (iShares Inc. (NYSE:EEMA)), has been less bad with a year-to-date loss of 13 percent. No investor should be excited by a 13 percent slide in less than nine months, but Emerging Asia could be the one corner of ...</p> <p>Full story available on Benzinga.com</p> <p>Photo:<br /> Photo: AK Rockefeller<br /> &nbsp;</p>
Gundlach on Donald Trump, China and Fed Policy
Asset Management
<p>&nbsp;</p> <p>Despite grabbing most of the headlines and leading in many of the polls, Donald Trump is not expected to win the Republican nomination. But Jeffrey Gundlach said that Trump has done the electorate a “big favor by bringing up issues that have been conveniently buried for quite some time.”</p> <p>Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on September 8. Slides from that presentation are available here . The focus of his talk was DoubleLine’s flagship Total Return Fund (DBLTX) and its related exchange-traded fund.</p> <p>According to Gundlach, Trump is right when he asserts that China’s infrastructure is better than that of the U.S. Quoting Trump, Gundlach said that China’s “130 shiny new airports” and “cities with glistening buildings” outclass the “collapsing bridges” and “airports that are a joke” here in the U.S. And, ironically, according to Trump, the U.S. owes China more than $1.4 trillion.</p> <p>“There seems to be something really weird about this picture,” Gundlach said. “I’m glad to see Mr. Trump is talking about these things simply because these are facts that have been there for all to see but getting very little reporting.”</p> <p>But Gundlach also criticized Trump, calling him a “full-on protectionist.”</p> <p>“We all learned in high school that it was a bad idea in the wake of flagging global growth to go to protectionist steps,” Gundlach said. Gundlach called out Trump’s plans to “build walls to keep people out and put tariffs and taxes on other countries.” Those steps might help our country’s competitiveness, but they would not increase global economic growth, Gundlach said.</p> <p>Gundlach’s comments about Trump were a sidelight to his main message – the assertion that the Fed should not raise rates and his prediction that it will not. I’ll discuss the reasoning behind that thesis along with Gundlach’s assessment of relative valuations in the bond market.</p> <p>What the Fed should – and will – do</p> <p>Economic weakness, market vulnerabilities and a lack of inflation argue against an increase in interest rates, and Gundlach cited numerous examples of each.</p> <p>“I don’t think the Fed will be able to raise interest rates this month, and I don’t really think they’re going to raise them this year,” he said. “And if they do, I think it will be a real problem.”</p> <p>Gundlach harkened to the 1970 cult-movie classic, The Rock Horror Picture Show, which included the song “Dammit Janet.” The data, Gundlach said, is “screaming ‘Dammit Janet’ don’t raise rates.”</p> <p>According to Gundlach, the World Bank and the IMF also advised the Fed against raising rates, which could risk global turmoil in the financial markets and in the emerging markets in particular.</p> <p>Indeed, the odds of a rate increase in September are only 30%, Gundlach said, based on pricing in the Treasury market.</p> <p>One key reason, according to Gundlach, is lack of growth in nominal GDP, which is growing at only 4.1% annually. That’s less than the rate of 3.7% in September 2012 when the Fed began its third quantitative easing program (QE3). Gundlach said his team at DoubleLine has shifted its focus to nominal (instead of real) GDP because “we don’t live in an inflation-adjusted world.”</p> <p>This article is an excerpt from a piece originally published by Advisor Perspectives. <br /> Photo: </p>
Colleges opt for independent investment companies in-house
Asset Management
<p>The University of Washington has joined the growing trend of U.S. universities creating investment management companies.</p> <p>Many university endowments hold enough assets to manage some, or all, investments in-house, but competition for staff is fierce. UW's $3 billion endowment says it wants better access to "best-in-class" money managers, reports the Seattle Times. Right now UW has a staff of 19 led by Keith Ferguson, formerly of Fidelity Investments.</p> <p>The University of Texas and the University of Virginia have also created more formal investment companies from their in-house investment teams, giving them more power and putting up barriers between the investments and campus politics. Harvard University established an early management company in 1974. Allowing the companies more control over compensation separate from the university can make them more attractive to skilled portfolio managers and analysts.</p> <p>&nbsp;<br /> “It’s partly to signal that we’re a mature, sophisticated operation and we function like any other investment company,” said UW spokesman Norm Arkans.<br /> UW earned 6.8% returns for the year ending June 30, a bit above the median of 3.6% for endowments over $500 million. UW's annual rate of return for the last decade is 7.5%.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;<br /> Photo: Ming-yen Hsu</p>
Transferring wealth to the next generation
Asset Management
<p>Succession planning and achieving a smooth transition of wealth from one generation to the next can be a messy process. Feuding siblings in the shadow of a controlling (usually) father make for fun soap opera but can quickly dissipate hard-earned riches and forge lasting enmities.</p> <p>HSBC Private Bank is one of several wealth managers who recognize that their role extends beyond portfolio management or simply finding the best investment returns.</p> <p>The UK-based bank recently hosted events entitled “Exploring the Future of Wealth as part of its Next Generation Programme” in London and Miami where opportunities and obstacles faced by the children of family business owners were discussed.</p> <p>Topics on the agenda included the latest entrepreneurial trends, leadership best-practices, sophisticated investment strategies, philanthropy and social awareness, explained Gerry Joyce, US head of private wealth solutions at HSBC Private Bank in an interview.</p> <p>“Equally important, they were a chance for young people to share their experiences with their peers,” he said.</p> <p>Managing inevitable conflicts, especially when business and family interest overlap, and creating and communicating a clear framework for succession that is then committed to by all parties is critical, he added.</p> <p>“The transference of control is the acid-test for a wealthy business family,” he stressed.</p> <p>But, the big challenge for HSBC and other banks will surely be Asia. Here, maneuvering and scheming for position as an octogenarian patriarch’s powers decline is as much a staple of tabloid coverage as are the daily dramas of the Kardashian clan in the US.<br /> Photo: Tom Brandt</p>
Delayed birth of Asia Region Funds Passport Scheme
Asset Management
<p>The Asia Region Funds Passport scheme has been gestating for about five years. Workshops among the thirteen APEC economies (excluding China) were followed by a statement of intent in 2013. Four days ago, finance ministers from seven of the region’s leading nations met at Cebu in the Philippines to announce that its birth was on schedule for early next year.</p> <p>Except, they didn’t. Singapore declined to add its signature because the statement of understanding failed to address the crucial issue of equal taxation, a Monetary Authority of Singapore spokesperson told AsianInvestor today.</p> <p>The passport scheme would allow asset managers from countries within the region access to each other’s retail investor markets through the distribution of their products. According to the APEC Policy Support Unit, it could save the investors $20 billion a year annually in fund management costs, offer higher investment returns at the same or lower degree of risk, and encourage the establishment of locally domiciled funds which could create 170,000 jobs in APEC economies within five years.</p> <p>But, clearly the scheme will be still-born if the tax issue is unresolved. South Korea and Australia, especially, have unequal tax regimes for domestic and overseas fund providers – and basically shut foreign interlopers out.</p> <p>Singapore, with its highly sophisticated fund management industry, would be a likely winner if taxation is neutralized across the region. It’s just as likely that the rest of APEC know this – and are fearful.<br /> Photo: Chris Guillebeau</p>