Schroders fund managers ring alarm bells on emerging markets

first_imgPortfolio managers at UK asset manager Schroders have warned of imminent crises in China and other emerging markets, and their impact on popular investments themes such as emerging market debt and the emerging consumer.Making the case for European high-yield bonds at Schroders’ International Media Conference on 14 November, senior portfolio manager Konstantin Leidman contrasted Europe’s lack of loan growth through the crisis and recession, which is keeping a lid on both yields and defaults, with China’s annual credit expansion of 30-40% over recent years, to levels approaching three-times GDP.“I don’t have the words to describe the situation in China, really,” he said. “It is in the emerging markets we see real deterioration, already evident in places as diverse as Brazilian mining, Slovenian banks and the over-extension in Turkey.”He added: “The next episode of defaults will be in the emerging markets, and the casualty will be the emerging consumer because the rescue will destroy their savings and, of course, the companies that depend on that consumer.” Leidman’s critique might be dismissed as a European bonds manager talking his own book, were it not for the fact Geoff Blanning, head of emerging market debt and manager of the (long-only) Schroders Emerging Market Debt Absolute Return fund, gave an even gloomier assessment of his asset class in a later session at the conference.Blanning also likes Europe, where he feels risk has declined “dramatically”.His fund has been an owner of Greek government bonds since last year – a move that he admitted led to significant assets heading for the door.He points to its newly achieved current account surplus and the extent to which its stock of traded debt has shrunk thanks to the 2012 restructuring.He also pointed out that the country is already discussing a return to the bond markets.By contrast, Blanning sees the long period of underperformance by emerging market equities as the canary in the coal mine for emerging market debt, which he argued, held up until this year only because of investors’ desperate search for yield.Despite relatively tight spreads, Schroders’ quantitative scoring model, covering 80 countries, has seen its average score deteriorate since 2006, to the extent it is now about as low as it was immediately before the Russian debt crisis of 1998.“The current valuations are not justified,” he said. “The risk is much greater than many people think.”He singled-out Turkey’s vulnerability after years of domestic credit expansion and capital pouring in from overseas.“The worst country in the world today is Turkey,” he said. “Its current score is the worst any country has ever had in our model.”However, if Turkey is in bad shape, China’s score is deteriorating the fastest.Like Leidman, Blanning points to the massive bank credit expansion China embarked upon in response to the global financial crisis.“I was positive on China until as recently as two years ago,” he said. “But now I am persuaded it is going to see a major, major banking crisis. The Chinese authorities have ruined their banking system – people just haven’t accepted it yet.”When IPE asked what China could do to avoid his predictions from becoming reality, Blanning said the idea that China’s economy is growing at 7-8% is “fanciful” (he put it at more like 3-4%), and that the only solution would be for the authorities to print money to buy-up huge amounts of its banks’ equity.However, he pointed out that this would be highly inflationary, causing the renminbi to decline sharply and a consequent capital flight.“The best thing China can do is implement really aggressive reforms to open up its economy,” he said, “but, given the economic metrics we see, I can’t imagine how a crisis can be avoided.”last_img read more

Dutch ministry to present framework for ‘fundamental’ debate on pensions

first_imgJetta Klijnsma, state secretary for Social Affairs in the Netherlands, has said she expects to present Parliament with a framework for a “fundamental political discussion” on updating the pensions system in early 2015. Earlier this week at a Netspar conference in Rotterdam, Klijnsma said a new website would be created to encourage “open dialogue”, in which “no subject would be considered off-limits”.According to the state secretary, discussions with citizens, social partners, pensions providers, academics and representative organisations for young workers and the elderly would start after this summer.She said the talks would need to address whether and to what extent participants should be allowed to choose their own pensions provider, the pension level they expect to receive and the premium level they are prepared to pay to achieve this. She said she also wanted to know more about which investment risks participants were willing to accept and “how far solidarity with their fellow participants should stretch”.The dialogue must also provide an answer to the question of who is to participate in pensions accrual, she said, and through which collective entity.The state secretary said she wanted to gather more information on the possible demarcation of future responsibilities, predicting that the relationship between the social partners, the government and indivuals would change.In addition, Klijnsma said she aimed to find an answer as to how pension funds could contribute more to the local economy, while underlining the importance of an increased labour participation among older workers, “as pensions rights need to be earned, after all”.The state secretary reiterated that she expected that the long overdue bill for the financial assessment framework (FTK) could be presented to Parliament before the summer.She said she expected Parliament to review the new legislation for pensions communication later this year.last_img read more

Greek exit would create ‘euro-zone game of Jenga’, Natixis warns

first_imgHe added that the dissolution of the single currency zone could lead to a “very weak” Europe.“At the moment, we are in a situation where the European institution is viewed negatively, and if you push one country out of the framework, what will happen for others?” he asked. “There could be temptation for other countries to exit. We do not know exactly what could happen. It is like [a game of] Jenga, and you have 19 pieces of wood and you don’t know where the risk is.“There will be an agreement, we need to have an agreement, but we do not know how it will be done.”Waechter also warned of other possible ramifications, including the classification of government debt.He said most public debt issued by euro-zone countries was owned by other euro-zone investors, but rarely national ones.This means, unlike the US, the UK and Japan, in the event of a euro-zone breakup, many countries would find the majority of their issued debt held by international investors with no mechanism in place to organise interest rates.“It will become hard to manage because we do not know what will be the interest rate parity in a new framework,” he said.Waechter said Europe as a whole needed to build more internal momentum behind its recovery since globalisation and other economic powerhouses were not going to rescue the Continent from its economic slump.“There is need for a long-lasting monetary policy [from the ECB] to change the current euro-zone framework of zero growth, zero inflation and zero interest rates,” he said.“Monetary policy needs to increase one of these zeros.”For more on the challenges facing the euro-zone, see the most recent issue of IPE,WebsitesWe are not responsible for the content of external sitesWikipedia – What is Jenga? The euro-zone could face a dangerous game of Jenga should Greece leave the currency bloc, with too many unknowns as to where future risk lies, Natixis Asset Management has warned.The French asset manager said it expected a political solution to Greece’s financial woes, as it was in no party’s interest to see the Southern European country leave the bloc and expose the many unknown risks to stability.Global chief economist Philippe Waechter said there was a strong risk of a euro-zone breakup if Greece were to leave the union.“No one wants to take [on] the risk of a breakup because we do not know what could happen,” Waechter said.last_img read more

ICI fund agrees buy-ins worth £1.8bn with Legal & General, Prudential

first_imgThe ICI Pension Fund has insured a further £1.8bn (€2.4bn) of its liabilities, following a 2014 buy-in worth £3.6bn.Combined with the 2014 deal that saw a £3bn buy-in agreed with Legal & General (L&G) and a £600m agreement struck with Prudential – to date the largest buy-ins conducted in the UK – the £9.5bn fund for workers of Imperial Chemical Industries has now insured more than half its liabilities.The £1.8bn insured since the initial deal was announced were transferred to L&G and Prudential in four separate transactions – bringing the number of transactions agreed with each insurer to three, according to a letter sent to the fund’s members earlier this year.Consultancy LCP said scheme trustees had agreed the transfer as part of a so-called umbrella contract, likening the approach to one taken when using swaps and derivatives. Clive Wellsteed – who, as head of LCP’s de-risking practice, led on the transactions – said: “The key advantage of the ‘umbrella and schedule’ approach is that the trustee can move quickly to insure additional tranches of liabilities when competitive pricing becomes available, as the execution process is limited to documentation of the key ‘tranche-specific’ parameters.”Wellsteed said the parameters that needed to be agreed included how the policy’s premium would be paid, and the timescale for the cleansing of any scheme membership data.Heath Mottram, chief executive of the scheme, said he had no doubt the approach pursued by the fund had improved the pricing achieved.According to the fund’s latest funding statement, its coverage ratio stood at 93% in March, a marginal improvement of 2 percentage points over 2014.However, in a letter to members explaining the additional bulk annuity deals agreed since 2014, the chairman of the fund, David Gee, credited the improvement to a deficit-reduction payment made by sponsor AkzoNobel in January.The letter added that a revised deficit-reduction plan would see the Dutch parent company pay £978m into the fund by 2021.The UK has to date been the single-largest market for de-risking transactions, such as ICI’s acquisition of bulk annuities.According to a paper by Prudential, the transactions across the UK, Canada and the US were worth $260bn (€231bn) between 2007 and the end of June – with the UK accounting for nearly 70% of deals, and the US one-quarter.The insurer said 40 pension funds had completed deals worth $1bn or more during the period.last_img read more

Mandate roundup: Towers Watson, LGIM, Merchant Navy Officers

first_imgThe master trust market is coming under increased scrutiny due to the funds’ perceived importance to the success of auto-enrolment in the UK. The chief executive of the Pensions Regulator, Lesley Titcomb, has indicated that the currently voluntary master trust assessment framework could be made mandatory. In other news, Ensign Pensions is to terminate its contract providing trustee support to the Merchant Navy Ratings Pension Fund (MNRPF).Ensign said it would stop working with the MNRPF by the end of March next year over concerns its continued employment risked a conflict of interest over its work with the Merchant Navy Officers Pension Fund (MNOPF).In a statement, it said: “As the MNRPF moves into a new stage in its journey with a strong emphasis on the collection of deficit contributions, Ensign Pensions is very aware of the potential for conflicts of interest where it is already responsible for the collection of deficit contributions from many of the same employers on behalf of the MNOPF.”Andrew Waring, the MNOPF and Ensign’s chief executive, added: “Ensign Pensions has worked hard on the delivery of services to the MNRPF Trustee, seeking to place the best interests of the client at the heart of our work and approach.“The decision to withdraw from the provision of service is not one we have taken lightly, but we feel it is the correct decision to avoid any future conflict concerns.” Towers Watson has hired Legal & General Investment Management (LGIM) to provide the investment funds for its UK master trust.LifeSight, the consultancy’s defined contribution (DC) fund, aims to gain a “significant” share of the master trust market over the coming years, Towers Watson said.Fiona Matthews, managing director at LifeSight, commented on the appointment.“Part of our overall vision,” she said, “is to provide members with great value investment options that can deliver superior risk-adjusted returns.”last_img read more

Norwegian unions, companies propose individual accounts for pensions

first_imgTrade unions and employers in Norway have come up with a proposal for occupational pensions to take the form of individual accounts that will allow employees to choose their own pension provider.The Norwegian United Federation of Trade Unions (Fellesforbundet) and the Federation of Norwegian Industries (Norsk Industri) published a joint statement formed on the basis of reports from consultancies Gabler and Deloitte concerning the occupational pensions.The reports had been commissioned by the two organisations following labour negotiations in 2014. Jørn Eggum, the leader of Fellesforbundet, and Norsk Industri’s chief executive Stein Lier-Hansen said jointly: “With the help of reports from Deloitte and Gabler, we have arrived at solutions we think are robust and good, with the possibility of individual customisation.” They said they had agreed on a form of defined contribution pension scheme that made pensions safer through job changes, yet did not lead to increased pension costs for companies.“Our proposal is that the employee creates a personal pension account where you are given the right to choose supplier,” they said.The employer would pay into the employee’s pension account based on the agreed corporate contribution level.On top of this, the staff member could then contribute themselves, up to the maximum allowable rate.Financial industry organisation Finans Norge welcomed the proposal for individual accounts, saying it was something the life insurance industry should help to find good solutions for.Stefi Kierulf Prytz, director for life insurance and pensions at Finans Norge, said occupational pensions were a key element in the pension reform and that there had been good experiences with an effective system based on good and healthy competition. “Meanwhile, it is, of course, possible for improvements to be made to the system and individual elements that can make pensions simpler and more accessible,” she said.“We totally agree we should look at changes that might develop the occupational system and provide better opportunities for individual pension savings.”The organisation also agreed there should be changes to make sure pensions are safeguarded as people change jobs, by employees taking part in the placing and management of those pensions, and by making it easier for them to make extra savings towards retirement.“In this respect, the proposal to introduce an individual retirement account is interesting and exciting,” said Kierulf Prytz.last_img read more

Joseph Mariathasan: The pas de deux of private equity and small caps

first_imgIPE contributing editor Joseph Mariathasan compares the merits of private equity with those of small capsSmall-cap companies represent the cutting edge of capitalism as new companies form as private entities, grow and, usually at some stage, are listed on the public markets. The listed and private equity markets cover much of the same space, and the two have engaged in a scintillating pas de deux over many years. Within institutional investor portfolios, private equity has long been regarded as a separate and alternative asset class to the listed markets. But has that left them wrong-footed in their choice of vehicle to tap the small-cap space? The ‘small-cap effect’ is well documented in academic studies, although, like all financial market anomalies, it can be elusive and its possible existence subject to controversy. Proponents of private equity argue that general partners (GPs) can bring expertise and strategy, among other things, to their investee companies, which brings added value. But a significant distinguishing feature of the asset class has been the extent of leverage utilised by private equity firms.Private equity masks price volatility because of the lack of daily valuations. That subterfuge has certainly fooled many commentators into taking valuation data at face value. Even the idea of purchasing secondary deals at a discount to net asset value (NAV) can be very misleading when the figures may be months old. No-one purchasing equities in the listed markets would be claiming a discount because the prices were higher three months ago. But, in comparisons between private equity and listed markets, it is not just the masking of price volatility that is the issue. Critics have argued leveraging up listed small-cap equities provides a better bet than private equity funds. Some academic evidence seems to indicate that, for long periods of time at least, the average buyout fund outperforms the S&P 500. But Ludovic Phalippou at Oxford University’s Said Business School argues such results should be treated with scepticism. He says the S&P 500 has generally underperformed mid caps, while private equity buyout funds mainly invest in mid and small-cap value companies. Phalippou does agree that, overall, the private equity model does make sense in terms of corporate ownership, the focus on cash generation and the lack of the requirement to have continuous trading. Of course, the private industry does have a tendency, he argues, to “game the IRR” figures by adjusting cashflows, analogous to the criticisms of listed companies on their stated earnings.But the most damning criticism Phalippou makes is that, despite the overall strengths of the model and often attractive gross returns, the total fee level – including management fees, performance fees and hidden fees – charged to companies by private equity managers can be upwards of 7% per annum. In a world of low returns, such fees look not only excessive but immoral when a substantial fraction are hidden. Phalippou and others have estimated private equity firms charged $20bn (€17.6bn) in such “hidden fees” to almost 600 companies they owned and hence whose boards are controlled by them in the last two decades.CalPERS used to have a return target of the S&P 500 plus 3% as its private equity benchmark. That benchmark has not been beaten in recent years by the pension fund’s private equity portfolios, Phalippou points out. But while CalPERS looks to establish an alternative benchmark that its private equity portfolios can presumably beat, Phalippou argues that the asset class’s post-fee returns should be compared with a more suitable benchmark than the S&P 500. This can be done by adjusting for the size premium to bring the average buyout fund return in line with small-cap indices and with the oldest small-cap passive mutual fund (DFA micro-cap). If the benchmark is changed to small and value indices, and is levered up, the average buyout fund underperforms by -3.1% per annum, Phalippou finds.Not surprisingly, there has been a great deal of controversy in recent months over the fee structures charged by the private equity industry. Phalippou estimates CalPERS paid around $2.6bn in hidden fees in addition to its bill of $3.4bn for carried interest in the period 1991-2014. The reaction of some investors has been to try to capture the gross returns that may be available within private equity investments by undertaking deals in-house and avoiding the excessive fees structures in the industry. But, as Phalippou points out, the competition for private equity investments is increasing while the returns are becoming less attractive – private equity returns have been going down every year since 2001, while the average fund, since 2005, has underperformed the S&P 500.Private equity may be the wrong vehicle for many investors to tap the small and mid-cap equity space. While top private equity managers may be able to produce historical figures showing they have outperformed the public markets, this does not appear to be generally the case. Even private equity managers’ claim that their investments are not merely leveraged plays on illiquid and hard-to-value companies – that their management expertise creates value – should be treated with caution. Most public companies in the US are well run and have high returns on equity. US small-cap investing can provide an alternative approach to investing many of the same drivers of return investors are seeking in private equity. Yet private equity is attracting huge inflows. Are they justified? They may be, but seeking out exactly how firms are able to add value is critical. Before moving into private equity, examining exactly what the opportunities are in a like-for-like comparison with the listed small cap and mid-cap market may be worthwhile.Joseph Mariathasan is a contributing editor at IPElast_img read more

Wednesday people roundup

first_imgValad Europe – Tomas Beck has joined the pan-European real estate manager as head of Nordics. Beck has previously worked at StorebandFastigheter, and was until last year real estate portfolio manager at Swedish buffer fund AP1.Legal & General – Ali Toutounchi has been named a trustee of the insurer’s UK master trust, joining its independent governance committee. Toutounchi has previously worked at NatWest Securities, UBS Asset Management and has also worked as managing director of Legal & General Investment Management’s global index funds.Kames Capital – Rory Sandilands has been named investment manager within the firm’s fixed income team. He joins from Goldman Sachs, where he was executive director in its credit sales team, and has also worked at Morgan Stanley as vice president of fixed income credit sales. Sandilands will be based in Edinburgh, reporting to investment manager Stephen Snowden. AEIP, USS, Aviva Investors, Valad Europe, AP1, Legal & General, Kames CapitalEuropean Association of Paritarian Institutions – Francesco Briganti is to step down as director of the AEIP, the industry group for pension providers managed by social partners. Briganti has been the organisation’s director since 2009, but joined in 2006 as its legal adviser. Prior to joining the AEIP, he was a member of the Italian region of Veneto’s delegation to the EU. He is currently also a member of the European Insurance and Occupational Pensions Authority’s pensions stakeholder group.Universities Superannuation Scheme – Alan Higham has been named chief pensions strategy and engagement officer at the UK’s second-largest pension fund. Higham, previously a policy adviser at the Department for Work & Pensions, was also retirement director at Fidelity and a partner at PwC. He replaces Brendan Mulkern, who left USS earlier this year after well over a decade in charge of policy.Aviva Investors – Anne Whitaker has joined the asset manager’s board as non-executive director. Whitaker is currently chair of the firm’s audit committee and a member of its risk, remuneration and nomination committees, and has previously spent nearly 30 years at Ernst & Young, where she was a partner within its investment management practice.last_img read more

PFZW, PWRI resume merger talks despite economic climate

first_imgAccording to PWRI, the schemes have used the break to gain clarity on the consequences of present financial circumstances.PWRI said this period of reflection had yielded “a positive outcome”, and, consequently, the schemes are now continuing their efforts to merge by 1 January 2018.PWRI has been compelled to pursue a merger due to changes in the Dutch Participation Act, which regulates employment of disabled workers.The changes effectively ended the influx of new participants to the scheme.PWRI’s annual report cites undisclosed disagreements as another reason why merger talks were suspended.The supervisory board has called on the board of trustees to keep the break in the talks as brief as possible and to use the time to “review the issues that have arisen with PFZW”.“If these can be resolved, the obstacle of the deteriorated financial position of the schemes can be resolved as well,” the supervisory board said.In PWRI’s most recent annual report, trustee Marco Kastelein states that merger talks can be held only if the financial position of both schemes is sufficiently strong.Since February, the financial position of both schemes has deteriorated further.PWRI’s policy funding declined from 105.4% as at the end of January to 101.1% as at the end of June.PFZW’s policy rate, meanwhile, fell from 97% to 92.5% over the same period.The difference between the funding rates of the two schemes has remained virtually the same.In PWRI’s annual report, the schemes accountability board stresses that “PWRI’s funding rate is higher than PFZW’s, and the board of trustees should capitalise on that”.PWRI declined to comment on the resumption of merger talks. PWRI, the €7.5bn Dutch pension scheme for disabled workers, and PFZW, the €179.4bn healthcare scheme, have resumed talks on a possible merger.According to a statement published on the PWRI website, the schemes aim for a possible closing date of 1 January 2018.Last February, the pension funds suspended merger talks after six months of negotiation, citing the poor financial and economic environment and falling funding rates.Although financial and economic circumstances have not improved fundamentally, and funding rates have declined even further, the two schemes resumed their talks last month.last_img read more

Oslo pension fund sees infrastructure returns dampen equity losses

first_imgOslo Pensjonsforsikring (OPF), Norway’s largest municipal pension fund improved returns in the second quarter to produce a 1.6% value-adjusted profit on customer funds in the first half of the year, and reported an increase its real assets allocation.In its interim report, the pension fund said its assets under management rose to NOK79.7bn (€8.6bn) at the end of June from NOK79.5bn at the end of December 2015.The first half profit of 1.6% is less than half of the level produced in the same period last year, when the return was 3.5%, but was up from the narrow first quarter return of 0.3%.“The decline is due to a lower return on equities,” OPF said in its report. Premium income rose to NOK711m in the second quarter from NOK609m in the first. Within the collective portfolio, OPF noted that the allocation to real assets had grown strongly over the second quarter, with property reaching a 19% allocation of the total portfolio.At the end of December, property had made up 17.8% of OPF’s assets.Real assets together — including property, infrastructure and inflation-linked bonds — grew to represent 24.2% of the portfolio from 22.8%.Infrastructure returned 9.5% in the first half of the year.However, the equities portfolios made a 1.9% loss in the period, with quoted shares losing 2.4%, hedge funds down 1.8% and private equity making a 0.2% profit.In 2015, infrastructure and private equity were OPF’s highest-performing asset classes, returning 13.2% and 16.2% respectively.Between 2010 and 2015, OPF has been increasing its real estate and private equity allocations, as part of its strategy to take more risk with certain asset classes.The pension fund has been making larger investments in infrastructure and real estate in order to benefit from the fact that it is a very long-term investor and does not require liquidity, the fund’s chief executive said earlier this year.Last year, OPF invested more than NOK950m buying a large hangar at Oslo’s Gardemoen airport and acquired an area of industrial land from Norsk Hydro coupled with a land-lease contract.last_img read more