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Rothman: No hard landing for China
Asset Management
<p>While half of the world debates the veracity of China’s GDP growth data, Matthews Asia’s strategist Andy Rothman would rather that people focus on something much more important – the nation’s apparent shift from exports to consumption:<br /> “The figure is just a tad below the 7% pace of GDP growth for the first two quarters of this year, and is 0.3 percentage points slower than the 3Q14 pace of 7.2%—which was 0.6 percentage points slower than the 7.9% rate in 3Q13. This is the inevitable deceleration of China’s growth due to changes in demographics, slower growth in construction activity and the base effect. The financial media will likely be able to write headlines about the slowest GDP growth rates since the Tang Dynasty for many quarters to come. But is that really the most important part of the story?</p> <p>We are pleased to see that the rebalancing of China’s economy toward consumption and away from exports and investments continues to make significant progress. This rebalancing is key to our investment strategy. For the first time ever, services and consumption (the tertiary* part of the economy) accounted for more than half of China’s GDP, at 51.4%, up from 41.4% a decade ago. This mitigates weakness in manufacturing and construction (the secondary* part), and, if this rebalancing continues, it should mean that macro deceleration will be gradual.”<br /> That would be great, but unfortunately, his argument does have a few holes in it. For one thing, there was just no way services put on a good show in the third quarter. As the always astute Christopher Balding pointed out following the GDP release:<br /> “Service growth was boosted enormously in Q2 by the enormous increase in financial services from the stock market bubble. Given the collapse in the Chinese stock market in Q3, by almost any measure such as price level, margin lending, or trading volume, it seems shall we say puzzling that service growth remained so robust.”<br /> Consumer data meanwhile seems to be a little murky. Clothing and electronic outputs have not been great, which doesn’t seem simpatico with the supposed 10.9% climb in retail sales.</p> <p>Nevertheless, given how Matthews’ funds are doing – the Matthews China Dividend Fund returned 8.45% YTD compared to the MSCI China’s negative 3.44% – chances are these guys know a thing or two about what they're doing. Stay tuned.<br /> Photo: Jim Winstead</p>
Charles Schwab continues ETF ascent
Asset Management
<p>Charles Schwab Corp. (NYSE: SCHW) was a late entrant to the exchange traded funds business, debuting its first ETFs six years ago, but the California-based brokerage giant is making up for lost time.</p> <p>At the end of the third quarter, ETF assets custodied at Schwab climbed 10 percent on a year-over-year basis to $237 billion, according to Schwab Third-Quarter Snapshot. Bond funds have been prolific asset gatherers this year with fixed income ETFs listed around the world now home to combined $500 billion in assets under management. Schwab is getting a piece of that action as more than half of the company's third-quarter ETF inflows went into bond funds with a third going into U.S. equity products, according to Schwab data.</p> <p>“RIA Clients captured 49% of the 12-month ETF flows, up from ...</p> <p>Full story available on<br /> Photo: Got Credit</p>
Fidelity ramps up expansion efforts in Shanghai
Asset Management
<p>Continuing its drive to expand in the mainland, Boston-based Fidelity announced the establishment of its wholly foreign-owned enterprise (WFOE) in Shanghai.</p> <p>The enterprise, according to Pionline, is meant to “facilitate future expansion plans in the world's second-largest economy,” adding that Mark Talbot, the firm’s Asia-Pacific ex-Japan managing director, said that “the WFOE could open the door for Fidelity to offer domestic investment capabilities to local institutional investors the firm already serves for their offshore investment needs.”<br /> “[It] provides us with another channel should we gain approval to offer additional capabilities in the future.”<br /> Fido already has a sizable presence in the region. Aside from its office in Beijing, the investment leviathan also has equity and bond analysts stationed in Shanghai, not to mention an over 350-strong ops team based in Dalian.<br /> Photo: David Almeida</p>
Knight in shining armour: Alibaba's $3.5B bid for Youku Tudou
Venture Capital
<p>It looks like Alibaba could add another string to its bow with a bid to buy US-listed Youku Tudou. For the ailing Chinese video site the timing could not be better.</p> <p>Alibaba says it's offering to pay $26.60 per American depositary share to acquire the 82% it doesn't already own. The offer represents about a 30% premium on Youku Tudou's last closing price prior to the bid going public and values the company at $5.1 billion. Tech Crunch reports that total offering is worth $3.5 billion, when taking the cash already on Youku's book already into account.</p> <p>Its a welcome development for the one-time venture capital-backed Youku which, despite its dominance as China's answer to YouTube, has had a miserable loss-making run on US public markets. Its chairman and CEO Victor Koo has already pledged his shares in support of the deal.</p> <p>Alibaba already holds an 18% stake having made a strategic investment in May 2014. The decision to gobble up the rest may be fairly opportunistic but it's a large leap for Alibaba as it looks to spread its e-commerce empire to include digital content. Daniel Zhang, chief executive officer of Alibaba Group, said this:</p> <p>"We believe that the proposed transaction, with tighter integration of our resources, will help Youku achieve exciting growth in the years ahead by leveraging Alibaba's assets in living-room entertainment, e-commerce, advertising and data analytics. Digital products, especially video, are just as important as physical goods in e-commerce."</p> <p>With Baidu’s iQiyi and Tencent’s QQ video services already operating in this space its is yet another front on which the China's internet giants are battling fiercely for dominance.<br /> Photo: Hans Splinter</p> <p>&nbsp;</p>
Boaz Weinstein is on the warpath
Hedge Funds
<p>In the latest twist on the Saba Capital vs. Public Sector Pension Investment Board (PSP) saga, Saba’s Boaz Weinstein essentially told Forbes that he’d rather slash his wrists than give PSP a single cent:<br /> “PSP recklessly and maliciously attacked me and my firm. Read our motion to dismiss – it shows that we did absolutely nothing wrong and that is why we will not settle this suit for 1 cent.”<br /> The man has a point though. Taking a quick gander at PSP’s complaint, it seems that the Canadian pension may be making something out of nothing here:<br /> “to calculate the NAV of the Class A shares of the Fund in satisfaction of the pending requests to redeem those shares as of March 31, 2015, defendants deviated from their past practice by using for the first time a different method for valuing the MNI bonds in the Master Fund's portfolio, namely, they used a bids-wanted-in-competition ("BWIC") process that purportedly produced materially depressed bids reflecting a significant liquidity/blockage discount from the values previously assigned by defendants to the Master Fund's holdings of MNI Bonds.”<br /> Given that a) PSP’s supposedly one of Saba’s largest clients (and thus a large chunk of capital) and that b) Saba’s would be selling a big block of bonds into a depressed market, doesn’t this method sound – at least – a rational thing to do?</p> <p>Also, there’s this little nugget from Saba’s motion to dismiss which, if true, might prove to be more than just a pebble in the shoe for PSP:<br /> “the valuation process PSP describes in its complaint is entirely consistent with the governing documents—indeed, they required it under the circumstances. The Investment Manager was not obligated to continue using a valuation methodology under conditions in which it did not generate reasonable, reliable and accurate valuations for the bonds at issue. Saba turned to a methodology that did achieve such valuations. In any event, PSP cannot sue the Fund itself for breach of contract, because the governing documents demonstrate that the Fund plays no role whatsoever in the determination of the NAV.”<br /> This thing could go a long way though, so stay tuned.<br /> Photo: Andy Maguire</p>
What are the credit markets telling asset allocators?
Asset Management
<p>What Are The Credit Markets Telling Asset Allocators? by Toby Nangle, Columbia Threadneedle Investments</p> <p> Credit spreads can contain important information about investors’ expectations regarding risks to corporate solvency, and the economic cycle more generally.<br /> Rising credit spreads can also reveal strains in the financial system that are only later reflected in equity market valuations.<br /> We explain what the signals in the recent sell-off tell investors and what we are doing with this information in portfolio construction decisions.</p> <p>Credit spreads – the additional yield promised to investors over and above the yield offered by similar maturity government bonds – can contain important information about investors’ expectations regarding risks to corporate solvency, and the economic cycle more generally. Rising credit spreads can also reveal strains in the financial system that are only later reflected in equity market valuations. As such, it is worth asking what the substantial rise in Investment Grade and High Yield credit spreads over the past 18 months (figures 1 and 2) means for investors.</p> <p>Credit spreads compensate investors for a combination of underlying corporate credit risk and illiquidity risk. We have written before about a technique that is used by our investment team and the Bank of England to split credit spreads into these two components. Our analysis suggests that there has been neither an increase in theoretical liquidity risk premia embedded in credit spreads, nor an increase in empirical measures of illiquidity over the past 18 months.1 As such it would seem by process of elimination that the increase in credit spreads really is about an increase in perceived credit risk.</p> <p>The increase in credit spreads has come at a time when many energy companies have experienced a very marked deterioration in their prospects. Energy is an important part of the US high yield market, accounting for around 16% of the face value of the market.</p> <p>Figure 3 compares the distribution of spreads for US high yield non-energy company bonds at the end of July 2014 when the oil price stood at $98 a barrel and September 2015 by which time the oil price had fallen to c$45. We can see that substantial distress has been priced into energy company debt when we repeat the exercise for energy companies, the results of which are shown in Figure 4. This shows that we have moved from a situation where virtually no US energy company bonds traded with an option-adjusted spread above 1,500 basis points to one in which more than 15% of energy company bonds (by face value) traded with this risk premium.</p> <p>Importantly, the centre of gravity for both energy and non-energy high yield bonds has also shifted higher over the period, reflecting the fact that almost every sector of the market has been repriced (downwards). And interestingly, we find that the European high yield market has also been largely repriced despite its much lower exposure to energy (as shown in figure 2). It appears to be a victim of contagion in credit markets, and while we expect the default rate to spike higher in the US market,</p>
This ETF will work...until it doesn't
Asset Management
<p>First Trust Dorsey Wright International Focus 5 ETF (NASDAQ: IFV) has received arguably the least amount of fanfare among the most successful ETFS. Just 10 months after coming to market, the First Trust Dorsey Wright International Focus 5 ETF is now home to $641.1 million in assets under management.</p> <p>Judging by flows data, IFV got off to a slow start as essentially all of the ETF's current assets under management tally has flowed into the fund this year. Of course, it is worth noting IFV enjoys a big marketing advantage. It is the international equivalent of the wildly popular First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV). FV does not turn two until March and it already has over $4.2 billion in assets.</p> <p>IFV applies the methodology used by FV at the international level. Meaning IFV holds five First Trust single-country or regional funds displaying favorable momentum characteristics. IFV's current lineup includes the First Trust United Kingdom AlphaDEX Fund FKU 0.12%, First Trust Switzerland AlphaDEX Fund FSZ and the First Trust Germany AlphaDEX Fund FGM.</p> <p>Read more at Benzinga. <br /> Photo: Hans Gerwitz</p>
Hong Kong ETFs lack appeal
Asset Management
<p>Exchange-traded funds are struggling to find traction in Hong Kong. Several managers, such as HSBC and Lyxor, have de-listed funds in recent years because of low asset sizes or poor trading volumes.</p> <p>The departure of Mirae Asset Management’s Hong Kong head of ETFs last week highlights the problem. Eight of Mirae AM’s 10 Hong Kong-listed ETFs (under the Horizon brand) are far too small to be profitable, notes AsianInvestor. (paywall)</p> <p>Too much sectoral diversity in Asia is one reason. Different tax regimes and accounting treatments in individual countries means it’s tough to assemble a representative list to fill a regional chemical, energy or financial ETF, for instance.</p> <p>There is another reason too. As this year’s gyrations in local bourses have demonstrated, Asian retail investors like to trade rather than park their cash in a passive fund. They prefer some action.<br /> Photo: Roberto Trombetta<br /> &nbsp;</p> <p>&nbsp;</p>
The state-backed VC fund shaping the future of Japanese tech
Venture Capital
<p>If you have never heard of the Innovation Network Corporation of Japan (INCJ) then you really haven't been paying attention to Japan’s tech industry.</p> <p>INCJ made headlines again last week when shares in Sharp Corp. soared on the news that the state-backed fund was mulling a 200 billion yen ($1.7 billion) bailout for the ailing electronics giant. </p> <p>Such deals are par for the course for INCJ which has spent the last six years spearheading the government’s efforts to restore Japan’s status as a leader in technology and innovation. </p> <p>It has mostly made a name for itself through its private equity and venture capital investment activity. Backed by the biggest names in Japanese tech - including Canon, Panasonic, Hitachi, Sony, Sharp, and Toshiba - and with about 2 trillion yen of investable capital, it has some serious firepower. </p> <p>Sharp is the most recent example of INCJ supporting the country’s embattled electronics giants. It is the largest shareholder of Japan Display, a firm it created  out of the LCD divisions of Hitachi, Toshiba, and Sony. The fund also famously gazumped  U.S. private equity major KKR in 2012 through its acquisition of chipmaker Renesas. </p> <p>Unsurprisingly, INCJ has come in for a lot of flak from its critics for propping up, rather than revitalising, its distressed targets. That said, rescuing giants is only part of INCJ’s strategy. The fund is also a major player when it come to early stage investments. Around three-quarters of the 90 investments made by INCJ since its inception have involved early stage companies. </p> <p>This is likely to be the real area of focus for Toshiyuki Shiga, Nissan’s former COO who took over as chair of INCJ in June, as the Japanese government looks to replicate some of Silicon Valley’s success in Japan rather just revive some of Japan's own past glories.<br /> Photo: Curt Smith</p>
The love affair between VCs and the media is unraveling
Venture Capital
<p>It's tough going from hero to zero. But as the startup craze ages and cracks in the facade of many startups (or at least their valuations) are beginning to appear. Most recently, The Wall Street Journal published a searing story on startup sweetheart Theranos, the lab that takes "nanotainers" of blood from the phlebotimically-challenged.</p> <p>Venture capitalists didn't take too well to the challenge to the private company, valued at $9 billion. Business Insider says this is becoming a bit of a pattern these days: The fawning is mostly over.<br /> Nobody likes to be questioned.</p> <p>But lately, some of Silicon Valley's big tech investors seem to be particularly upset that journalists are questioning some of the valley's hottest startups.</p> <p>There's a fundamental difference in point of view here. The funders see first-hand how hard it is to build something and sympathize with the struggle. The journalists are supposed to be as objective and careful as possible and report what they find — even if some people don't like it.<br /> That's an incredibly nice way of saying that some journalists aren't swallowing startup news releases without questions. Seems like a backhand compliment: The press corps that largely missed both the financial crisis and Bernie Madoff can hardly be called fierce or clairvoyant.</p> <p>And BI also notes that for every upset VC there are also some pretty experienced investors who are also ringing the alarm -- including Marc Andreessen and Mike Mortiz of Sequoia. Not bad company to be in.<br /> Photo: Owlana</p>