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Key investment themes revealed at CAMRADATA’s annual Pension Conference ‘Managing Objectives, Maximising Opportunity’

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Key investment themes revealed at CAMRADATA’s annual Pension Conference ‘Managing Objectives, Maximising Opportunity’

Speakers at CAMRADATA’s annual investment conference for the pension fund industry held in the City of London on 19th April revealed five asset classes and solutions that could help pension fund managers protect assets and generate returns this year.

These included real estate income, the opportunities in the Asian markets, the growing interest in real assets and late cycle opportunities in fixed income, plus how a better understanding of behavioural finance could lead to a more acute awareness of market trends.

Natasha Silva, Director, Client Relations at CAMRADATA said, “The roles of all those involved in the management and maintenance of pension funds are expanding continuously against a backdrop of changes to the political landscape and regulation and the need for sustainability.

“The challenge of building genuinely diversified portfolios that deliver growth and income efficiently and on an attractive risk-adjusted basis is like finding the Holy Grail. Our speakers from five leading investment companies presented their views and highlighted exciting opportunities in the traditional and alternative space.”

The five key themes of the conference were:

The Changing Role of Real Estate

Ian Mason, Director and Portfolio Manager of the Real Return Fund at AEW opened the conference discussing the changing role of real estate income in cashflow matching strategies.

He suggested that pension funds seeking cash flow matching strategies could do a lot worse than consider real estate income. He said, “Property is a very simple asset class; if you focus on property fundamentals and buy quality buildings in areas where there is strong occupier demand, then if the market rent goes up, the value goes up.”

The AEW UK Real Return Fund was launched two years ago and as at 31st December 2017 was distributing a 5.3% yield from a portfolio of 35 properties, with a weighted average lease length of over 17 years and 77% of income linked to inflation.

Mr Mason adds, “The strategy offers clear alignment between the Fund and the needs of investors, as well as a foot inside both equity and bond camps: a real asset growth strategy with relatively high-levels of sustainable income, as the hunt for yield continues.”

Behavioural Finance

Stacey Nutt, PhD, Principal, Lead Portfolio Manager, CEO and CIO at ClariVest Asset Management LLC discussed behavioural finance and how their distinctive investment approach is best defined as behavioural.

He said most managers evaluate investment opportunities through one of a number of perspectives, often referred to as their style (value, growth, quant etc) and that decision making is tainted with behavioural bias which can prevent objectivity. This can make diversification in a portfolio difficult as investors are pulled towards scenarios they are comfortable with rather than pushing for alternatives.

Investor behaviour provides an alternative approach. This is a focus on identifying optimal entry and exit points within companies’ fundamental cycles as investors are faced with changing fundamentals, yet heuristically anchor expectations to historical or cross-sectional stereotypes or norms. He also highlighted the importance of self-awareness of bias to help prevent the decision-making process being corrupted.

Understanding how investors behave is key to the firm’s approach. Mr Nutt said, “Across capital markets we can count on the fact that everything changes as fundamentals cycle through time. We can also count on investors reacting inefficiently to this change. There are multiple reasons for this, both incentive based and behavioural.”

Mr Nutt added, “We integrate quantitative tools throughout our investment process to nudge our qualitative decision making towards objectivity and away from our own behavioural biases.”

The Rise of the Asian Consumer

Natalia Mu, Client Portfolio Manager at Mirae Asset Global Investments talked about the opportunities in Asia and the rise of the Asian consumer is the most important opportunity in Asia over the next few decades.

Ms Mu highlighted that main factors encouraging the long-term consumption trend in Asia are demographics, wage growth and government policy.  China is the key growth driver in the region and government policy is underway for transforming the economy to a more consumption led economy.

Ms Mu said Asia can be a game changer in a portfolio to maximise opportunities, despite some investors being wary of the volatility in this region. She highlighted that China has quickly become the world’s largest e-commerce market with more than US$750 billion sales in 2016.

Ms Mu said, “The Asian consumer opportunity is wide ranging and the best way to capture and benefit from this theme involves identifying the nascent developments early on. To do this well, it is important to have a presence in the local market.”

When asked about the risks for the upcoming six to twelve months that may occur to the fund and the Asia consumer market, Ms Mu said, “Our overall outlook is fairly positive as fundamentals continue to show signs of further strengthening. Underlying demand in major markets, such as China and India, appear resilient.

“The main risks would be related to a meaningful deterioration in the current global macro environment such as excessive government/central bank tightening and global geopolitical risks. Given this, we expect 2018 will be a more volatile year; however, we believe the impact on company earnings should be limited for the consumption theme.”

Late Cycle Opportunities

Dan Roberts, Executive Managing Director, Head of the Global Fixed Income Group at MacKay Shields and Steve Cianci, Senior Managing Director at MacKay Shields then discussed late cycle opportunities.

They highlighted that the USA was the first to emerge from the financial crisis and, subsequently, has experienced the longest expansion among major industrial countries. As such they say the US economy is showing signs that are usually toward the latter stages of a normal economic cycle.

However, MacKay Shields does not see an imminent downturn and while risks are increasing, so are opportunities. Its approach is to focus on investment themes that reflect both the maturity and outlook for the economic cycle, as well as the opportunities in sectors and security.

Dan Roberts said, “Our process focuses on identifying and avoiding uncompensated risks that exists in the markets and in individual securities. The key risks we see include technological disruption across a range of industries from energy to retail, together with idiosyncratic risks.

“Portfolio construction can mitigate and manage these risks while identifying pockets of value. Diligent security selection and asset allocation can then exploit these pockets of value in the market that has seen spreads tighten in concert across all asset classes and spectrums.”

The Case for Diversified Real Assets

Finally, Vince Childers, Senior Vice President and Portfolio Manager at Cohen & Steers discussed how listed real assets can potentially combat today’s investment challenges. He highlighted that many investors are focusing on alternatives to diversify beyond traditional equities and fixed income.

However, despite the wide range of real asset exposures available, investors have tended to focus on just one or two categories of real assets – most commonly, real estate and infrastructure – but this approach has its drawbacks.

Mr Childers highlighted the case for blending real assets to smooth out volatility of individual real assets. Also, by focusing only on real estate and/or infrastructure, investors stand to miss out on the prospective complementary attributes of natural resources and the broader commodities complex.

Mr Childers said, “By treating real assets as an asset class and establishing a diversified exposure to all four core categories of real assets – global real estate, commodities, natural resource equities and global infrastructure – investors stand to benefit from the full potential this asset class has to offer.”

Cohen & Steers’ analysis of nearly half a century of data shows that an equal-weighted blend of the four core real assets exhibited three valuable characteristics – diversification, inflation sensitivity and return potential.

Mr Childers added, “While each real asset category has unique fundamental merit, historically no one type of real asset has excelled equally across all three criteria of diversification, inflation protection and returns.

“This absence of a “silver bullet” solution suggests that a diversified portfolio of real assets may help investors better navigate the tradeoffs of individual categories and provide an optimal approach to a real assets allocation.”

The annual ‘Pension Conference, Managing Objectives and Maximising Opportunity’ took place on Thursday 19th April 2018 at Pewterers’ Hall, London EC2V 7DE.

For details of upcoming CAMRADATA events and conferences visit www.camradata.com.

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Cannon Wealth Solutions Discusses The Need to Rebalance  Portfolios and  Monitor Risk

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Risking a repeat of 2008

By Robert Cannon, the CEO of Cannon Wealth Solutions.

  • The world in 2021 is significantly different after a year of pandemic-related changes in how people live, work, and consume. This has a profound effect on S&P 500 companies and the performance of various asset classes.
  • When you do your annual portfolio checkup, you might find that you need to rebalance. Rebalancing your portfolio – buying or selling asset classes to reimpose your portfolio to your original target allocation – is a vital step in controlling and monitoring risk.
  • Buying investments in the asset class which is currently out of favor will require you to sell investments from the asset class that is performing well, and will furthermore represent an increased percentage of your portfolio’s overall value.

Robert Cannon, from Cannon Wealth Solutions, will be discussing the need to rebalance portfolios and monitor risk; and although it may seem counterintuitive, you are in fact taking profits from winning asset classes that may have reached their peak and buying other asset classes that have performance potential – in effect, you’re selling high and buying low.

Rebalancing for the Future

Determining your rebalancing strategy will ultimately result in a more consistent level of portfolio risk by buying low and selling high. The purpose of this is to create sustainable long-term value and consistency will help with setting more effective risk and return expectations – a key to maintaining patience under challenging markets. Cannon states that “it is important to rebalance your portfolio because it is essential for matching your tolerance risk as well as your sector concentration which is a form of Credit Risk Concentration”. So, if you are wondering how often you should rebalance your portfolio in order to minimize your risk, then Cannons’ advice would be to do it when your asset class is over 5% or every six months which has also been confirmed by UBS who have also “recommended a fairly simple 5% deviation rule-of-thumb for rebalancing: If the stock/bond component of your portfolio has shifted more than 5% from your target, then rebalance”.

Here are some frequently asked questions about the rebalancing of portfolios, answered by Robert Cannon:

Does portfolio rebalancing actually improve returns?

The rebalancing of portfolios can lower risk and often lower returns.

Is auto rebalancing a good idea?

Yes, auto rebalancing can help reduce risk and can potentially also enhance your returns.

How do you manage rebalancing in a recession and when conducting your simulations, do you also test your model in extreme market conditions?

During a market sell-off, it is usually not a good idea. For example, during extreme market volatility, retirement accounts and taxable investments accounts can quickly drift from the original target allocation as the value of the holdings increases or decreases sharply relative to the rest of your account. Because of this we always test each model in every market condition.

Monitoring Risk for the Future

In order to understand how your investment has performed, you should compare its results to an appropriate benchmark. Cannon reiterates that portfolio risk is measured by checking for the stock standard deviation of the variance of actual returns of the portfolio over time and will then proceed to implement a tactical asset allocation, thus avoiding portfolio volatility. Credit Suisse has also said in conjunction with Robert’s claim that “if the portfolio risk exceeds the risk ability, it can have a far-reaching impact on the assets of those beneficiaries or insured.” The report continues, saying “with a stricter rebalancing approach, investors can better estimate in advance whether their investment strategy will also enable them to survive difficult crises”.

Here are some frequently asked questions about monitoring risk, answered by Robert Cannon:

If rebalancing happens on a regular basis, do you monitor the funds’ performance in between?

Yes, all the time. By practicing a strict approach, investors can better estimate in advance whether their investment strategy will survive tough economic times. With consistent monitoring of funds and a solid rebalancing strategy, it is easier to determine the right size of a reserve or buffer for such negative events than it is using a buy-and-hold strategy. This ultimately will reduce the risk of having to make adjustments in asset allocation in unfavorable markets.

Final Take

The global pandemic of 2020 has caused investors to adhere and refocus their strategies by consistently their rebalancing portfolios, which have most likely paid off. The key to being successful is by planning for the future, regardless of the fluctuating economic market. Navigating the current investment climate can be very challenging, yet the process of rebalancing is a natural opportunity to switch up your asset allocation if you have not been confident in your original strategy and it is in the hands of your investors to think a few steps ahead to ensure proper action can be taken when current conditions change.

About the contributors:

By Robert Cannon is the CEO of Cannon Wealth Solutions. He has more than a decade of experience in wealth management.

 

This is a Sponsored Feature.

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France announces loan plan to spur post-COVID business investment

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France announces loan plan to spur post-COVID business investment 1

By Leigh Thomas

PARIS (Reuters) – The French government on Thursday launched a new programme to relieve small and mid-sized firms’ strained balance sheets with quasi-equity debt partially guaranteed by the state.

After months of tough negotiations between the finance ministry and EU state aid regulators, firms will be able to tap up to 20 billion euros ($24 billion) in loans and subordinate bonds from early next month, Finance Minister Bruno Le Maire said.

“This will be an unprecedented raising of capital for investment in Europe and it should be a model for other European countries,” he said during a presentation of the programme.

French firms went into the COVID-19 crisis last year already with a record level of debt, and they took out an additional 130 billion euros in state-guaranteed loans from their banks as cashflow collapsed during France’s worst post-war recession.

Under the new programme, the debt will be junior to all claims other than a firm’s equity, it will have a longer maturity of eight years and must be used specifically for investment rather than refinancing existing debt.

The new debt is also more flexible, with a four-year grace period on principal repayments, but will also carry higher interest rates of 4-5.5% to cover the greater risk.

The scheme is innovative as banks will extend the loans to firms and then sell them on to institutional investors such as insurers through private investment vehicles, whose potential losses will be covered up to 30% by the state.

HELPING SMALLER FIRMS

While bigger companies have long had access to the high-yield debt markets, smaller firms in Europe have until now had to rely on shorter-term financing largely from banks, unlike in the United States where more flexible options have long existed.

France has in the past struggled to get a market off the ground for small-firm financing and hopes are high that this time the state guarantee will give an extra boost.

European firms’ heavy debt burden has fuelled concerns among economists and policymakers that they will not have the financial strength to carry out the investments needed for a strong recovery from the coronavirus crisis.

EU competition enforcers cleared the scheme on Thursday after lengthy negotiations to get the right risk-reward balance while not giving French firms an unfair advantage over their European rivals.

The onus will fall on banks to ensure through their client relationships that the loans are extended to firms strong enough to make good use of the funds.

“By taking 10% of the loans on our balance sheets without a state guarantee, that implicates us in the quality of these instruments,” said Credit Agricole Chief Executive Philippe Brassac, who also heads the French banking federation.

The state had originally planned to offer a guarantee of only 20% but had to increase that to 30% to attract institutional investors into the new market.

($1 = 0.8294 euros)

(Reporting by Leigh Thomas; additional reporting by Foo Yun Chee in Brussels, Editing by Gareth Jones)

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Bond scares linger, investors look to Powell

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Bond scares linger, investors look to Powell 2

By Tom Arnold and Hideyuki Sano

LONDON (Reuters) – Worries about lofty U.S. bond yields hit global shares on Thursday as investors waited to see if Federal Reserve Chair Jerome Powell would address concerns about a rapid rise in long-term borrowing costs.

The spectre of higher U.S. bond yields also undermined low-yielding, safe-haven assets, such as the yen, the Swiss franc and gold.

Benchmark 10-year U.S. Treasuries slipped to 1.453%. They earlier touched their highest levels since a one-year high of 1.614% set last week on bets on a strong economic recovery aided by government stimulus and progress in vaccination programmes.

“Equities and yields continue to both drive and thwart one another,” said James Athey, investment director at Aberdeen Standard Investments.

“Fed speech continues to express very little concern and certainly is not suggestive of any imminent action to curb the rise in yields. The Powell speech today is hotly anticipated, but I fear more out of hope than rational expectation.”

The Euro STOXX 600 was down 0.5% and London’s FTSE 0.6% lower.

The MSCI world equity index, which tracks shares in 49 countries, lost 0.5%, its third day running of losses.

The MSCI’s ex-Japan Asian-Pacific shares lost 1.8%, while Japan’s Nikkei fell 2.1% to its lowest since Feb. 5.

E-mini S&P futures slipped 0.2%. Futures for the Nasdaq, the leader of the post-pandemic rally, fell 0.1%, earlier hitting a two-month low.

Tech shares are vulnerable because their lofty valuation has been supported by expectations of a prolonged period of low interest rates.

But the market is focused on Powell, who is due to speak at a Wall Street Journal conference at 12:05 p.m. EST (1705 GMT), in what will be his last outing before the Fed’s policy-making committee convenes March 16-17.

Many Fed officials have downplayed the rise in Treasury yields in recent days, although Fed Governor Lael Brainard on Tuesday acknowledged that concerns over the possibility a rapid rise in yields could dampen economic activity.

In addition, anxiety is building over a pending regulatory change in a rule called the supplementary leverage ratio, or SLR, which could make it more costly for banks to hold bonds.

“The market is likely to be unstable until this regulation issue will be sorted out,” said Masahiko Loo, portfolio manager at AllianceBernstein. “There aren’t people who want to catch a falling knife when market volatility is so high.”

The market will also have to grapple with a huge increase in debt sales after rounds of stimulus to deal with a recession triggered by the pandemic.

The issue is not limited to the United States, with the 10-year UK Gilts yield on Wednesday touching 0.796%, near last week’s 11-month high of 0.836%, after the government unveiled much higher borrowing.

On Thursday, Germany’s 10-year yield was down 2 basis points to -0.31% after rising 5 basis points on Wednesday, still moving in tandem with U.S. Treasuries.

Currency investors continued to snap up dollars as they bet on the U.S. economy outperforming its peers in the developed world in coming months. [FRX/] The dollar rose to a roughly seven-month high of 107.33 yen.

“U.S. dollar/yen has been on a one-way trajectory since the start of 2021,” said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia. “The brightening outlook for the world economy is a positive for both U.S. dollar/yen and Australian dollar/yen.”

Other safe-haven currencies were weakened, with the Swiss franc dropping to a five-month low against the dollar and a 20-month trough versus the euro.

Other major currencies were little changed, with the euro flat at $1.2054.

Gold fell to a near nine-month low of $1,702.8 per ounce on Wednesday and last stood at $1,714.

Investor focus on a U.S. economic rebound was unshaken by data released overnight that showed the U.S. labour market struggling in February, when private payrolls rose less than expected.

Oil prices rose for a second straight session on Thursday, as the possibility that OPEC+ producers might decide against increasing output at a key meeting later in the day underpinned a drop in U.S. fuel inventories. [O/R]

U.S. crude rose 0.6% to $61.65 per barrel. Brent crude futures added 0.7% to $64.54 a barrel,

(Additional reporting by Koh Gui Qing in New York; editing by Sam Holmes, Richard Pullin, Simon Cameron-Moore, Larry King)

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