LIPPER: Performance fees and apologies
As Britain’s Deputy Prime Minister is finding, apologising when you have let people down is no simple matter. The worry for some absolute return funds must be that they are heading for a similar fate to Nick Clegg (even if they’re unlikely to suffer the same level of autotuned mockery).
One of the reasons for the rise of absolute return funds – those seeking to deliver positive returns in all market conditions – is that the industry has been trying to deal directly with client expectations left shattered by the financial crisis.
On top of their investment objectives, one way that absolute return funds say they have tried to better align investor and fund manager interests is by the use of performance-related fees, paid as a proportion of a fund’s returns, not a fixed percentage of assets (although pretty much all funds will charge the latter fee too). But do performance fees actually help to deliver more consistently positive returns, and do they do this for lower levels of risk? Or, much like making ill-advised promises about tuition fees, do performance fees actually make it more likely that a fund manager will have to say sorry down the line?
In the IMA’s Absolute Return sector (established in April 2008), 63.5 percent of funds have a performance fee structure in place. That contrasts with about 3 percent for all UK-domiciled funds.
Because funds in this sector are managed with the aim of delivering above zero returns on a rolling 12 month basis, it is this that has been used to compare their performance. Each fund’s performance was calculated at monthly intervals, looking at a 12-month period for each interval (up to the end of July 2012.
As a result, the data does not reflect a simple snapshot of how absolute return funds have performed over any one period, but instead gives a more detailed view of their ongoing performance since the inception of the sector (or since a fund’s launch, if later).
Using this measure, we can show that funds with performance fees delivered positive returns 62.1 percent of the time, while their peers with a more traditional fee structure managed it 63.5 percent of the time.
Ed Moisson wonders whether absolute return managers have been making promises they're unable to keep Join DiscussionThis week in EM, expect more doves
With the U.S. Fed having cranked up its printing presses, there seems little to stop emerging central banks from extending their own rate cut campaigns this week.
The most interesting meeting promises to be in the Czech Republic. We saw some extraordinary verbal intervention last week from Governor Miroslav Singer, implying not only a rate cut but also recourse to “unconventional” monetary loosening tools. Of the 21 analysts polled by Reuters, 18 are expecting a rate cut on Thursday to a record low 0.25 percent. Indeed, in a world of currency wars, a rate cut could be just what the recession-mired Czech economy needs. But Singer’s deputy, Moimir Hampl, has muddled the waters by refuting the need for any unusual policies or even rate cuts. Expect a heated debate (forward markets are siding with Singer and pricing a rate cut).
Hungary is a closer call, with 16 out of 21 analysts in a Reuters poll predicting an on-hold decision. The central bank board (MPC) is split too. Analysts at investment bank SEB point out that last month’s somewhat surprising rate cut was down to the four central bank board members appointed by the government. These four outvoted Governor Andras Simor and his two deputies who had favoured holding rates steady, given rising inflation. (Inflation is running at 6 percent, double the target). That could happen again, given the government just last week reiterated the need for “lower interest rates and ample credit. So SEB analysts write:
The 4-3 majority of the MPC has shown their appetite for cuts which according to the minutes could continue as long as “the perception of the economy continue to improve”. The current 282 level of the euro/forint would not in our view stand in the way of another cut.
Elsewhere in the region, Israel and Romania are expected to make no change to interest rates, with both banks swayed by recent spikes in inflation.
In Latin America, investors’ eyes will be on Colombia which has delivered back-to-back interest rate cuts and may provide another on Friday. Sure, Colombia’s economy was robust in the second quarter but since then economic data has been hinting at some weakness ahead. Inflation is well-behaved. Most importantly, Bogota cannot afford to let its peso appreciate even as its neighbours and trade partners weaken their currencies. The central bank has already been intervening to buy dollars — a rate cut would take some of the pressure off, say Goldman Sachs analysts:
The Czech Republic, Hungary and Colombia may all cut interest rates this week. Join DiscussionThe authorities, particularly the Treasury, remain every concerned with the exchange rate dynamics and the peso’s overvaluation. Hence, another 25bp rate cut also helps the authorities’ to contain/mitigate the pressure on the COP to appreciate.
Obama better bet for US stocks?
The wealthy in the United States have a reputation for being firmly on the side of the Republican Party, but maybe they shouldn’t be for the November presidential election.
According to Tom Stevenson, investment director at asset manager Fidelity Worldwide Investments, past evidence points to Democrat Barack Obama as possibly the more lucrative bet for equity investors. He says:
Looking at stock market performance following the last 12 elections suggests that investors should, in the short term at least, be rooting for an Obama victory. History shows that markets tend to rally after a win for the incumbent party by more than 10% on average, but fall modestly if the challenger is successful.
The graphic below provides the comparitive returns after Democrat and Republican presidential election victories.
But there’s more. U.S. Big Business tends to support the Republican Party which supports lower taxes and less government involvement in the economy. But Fidelity says this stance has not delivered stock market returns; in fact the S&P 500 has delivered an average annual return of over more than 10% under the Democrats in the past half century, compared with around 5% under the Republicans, Fidelity says.
Should equity investors be rooting for Obama? Fidelity's analysis of 50 years of U.S. stock market performance shows a victory for the incumbent has delivered better returns while stocks have also performed better during Democratic presidential terms. Join DiscussionFed re-ignites currency war (or currency skirmish)
The currency war is back.
Since last week when the Fed started its third round of money-printing (QE3), policymakers in emerging markets have been busily talking down their own currencies or acting to curb their rise. These efforts may gather pace now that Japan has also increased its asset-buying programme, with expectations that the extra liquidity unleashed by developed central banks will eventually find its way into the developing world.
The alarm over rising currencies was reflected in an unusual verbal intervention this week by the Czech central bank, with governor Miroslav Singer hinting at more policy loosening ahead, possibly with the help of unconventional policy tools. Prague is not generally known for currency interventions — analysts at Societe Generale point out its last direct interventions were conducted as far back as 2001-2002. Even verbal intervention is quite rate — it last resorted to this on a concerted basis in 2009, SoGen notes. Singer’s words had a strong impact — the Czech crown fell almost 1 percent against the euro.
The stakes are high — the Czech economy is a small, open one, heavily reliant on exports which make up 75 percent of its GDP. But Singer is certainly not alone in his efforts to tamp down his currency. Turkey’s 100 basis point cut to its overnight lending rate on Tuesday (and hints of more to come) was essentially a currency-weakening move. And Poland has hinted at entering its own bond market in case of “market turmoil”
What of Latin America and Asia, the main battlegrounds for currency wars of the past? As may be expected, Brazil has been the most vocal in its criticism of the Fed — its finance minister Guido Mantega (who first came up with the currency wars phrase) has threatened more measures to keep a “devalued real” . The central bank has already sold billions of dollars worth of reverse currency swaps to weaken the real this week. Neighbouring Peru on Tuesday waded into currency markets to weaken the sol, saying the central bank was trying to get in ahead of an expected wave of inflows. In Asia, central banks from the Philippines and Taiwan have been spotted buying dollars to weaken their currencies while Korea will almost certainly cut interest rate to curb its won which is near six-month highs to the dollar.
All that sounds pretty familiar. But are emerging economies really that worried? And should they be?
A competitive currency looks even more desirable now than two years back, given that global trade and exports are in the doldrums. But it’s pretty clear to all that no matter how much QE the Fed does, emerging currencies — and economies — do not look as attractive a bet as they did back in 2010 (see here for an article on this). Already the post-Fed currency rally has run into trouble as new worries surface over the euro zone. China’s reluctance to emulate the Fed with its own stimulus programme is also dampening sentiment.
The Fed's QE3 move and Japan's decision to start yet another round of asset buying may have re-ignited another round of the global currency wars. Emerging policymakers are already ramping up the rhetoric. Join DiscussionCarry currencies to tempt central banks
Central bankers as carry traders? Why not.
As we wrote here yesterday, FX reserves at global central banks may be starting to rise again. That’s a consequence of a pick up in portfolio investment flows in recent weeks and is likely to continue after the U.S. Fed’s announcement of its QE3 money-printing programme.
According to analysts at ING, the Fed’s decision to restart its printing presses will first of all increase liquidity (some of which will find its way into central bank coffers). Second, it also tends to depress volatility and lower volatility encourages the carry trade. Over the next 12 months these two themes will combine as global reserve managers twin their efforts to keep their money safe and still try to make a return, ING predicts, dubbing it a positive carry story.
The first problem is that yields are abysmal on traditional reserve currencies. That means any reserve managers keen to boost returns will try to diversify from the dollar, euro, sterling and yen that constitute 90 percent of global reserves. Back in the spring of 2009 when the Fed scaled up QE1, its move depressed the dollar and drove reserve managers towards the euro, which was the most liquid alternative at the time. ING writes:
This time, however, we are not looking for the same kind of euro pick-up that we saw in 2009. FX reserve managers typically invest in securities rated AA or higher. Even if they extend durations out to the 5-year area of sovereign curves, an average of AA/AAA Eurozone yields only pays 0.75% – exactly the same as Treasuries.5-year UK gilts are not much better at 0.9 % while Japan pays a measly 0.2% on 5-year bonds.
Instead ING analysts reckon FX reserve managers will go for currencies such as the Australian and Canadian dollars. Thanks to slightly better yields, and large, liquid bond markets, a carry basket invested in the Australian, Canadian, Norwegian and Swedish currencies and funded out of the dollar, euro, sterling and yen will have an annualised carry pick up of 1.6%, the analysts say. That sounds pretty modest but according to ING, FX outperformance can deliver returns of over 10% on this basket. They write:
If a major new bout of FX reserve accumulation is to take place, we’re convinced that 90-95% concentration in core currencies has to fall.
International reserve managers are likely to opt in greater numbers for higher-yielding currencies such as the Australian dollar in their bid to diversify their holdings. Join DiscussionEmerging market FX reserves again on rise
One of the big stories of the past decade, that of staggering reserve accummulation by emerging market central banks, appeared to have ground to a halt as global trade and economic growth slumped. But according to Bank of America/Merrill Lynch, reserves are starting to grow again for the first time since mid-2011.
The bank calculates that reserve accumulation by the top-50 emerging central banks should top $108 billion in September after strong inflows of around $13 billion in each of the first two weeks. Look at the graphic below.
So what is the source of these inflows? As BoA/ML points out global trade balances are at their cyclical lows and that is reflected in the dwindling current account surpluses in the developing world. But as risk sentiment has improved in the past six weeks, there has been a pick up in fixed income and equity investment flows to emerging markets, compared to the developed world.
These portfolio flows are likely to increase even more following the Fed’s announcement of an open-ended $40 billion-a-month money-printing programme. BoA/ML writes:
After a gap, emerging markets may again be seeing a rise in central bank reserves. Join DiscussionThe data show that investment capital is being rotated out of developed markets to EM, supporting our view that the financial account has been increasing, even if the current account has not…..Real money flows explain a large share of the recent growth in reserves.
No BRIC without China
Jim O’ Neill, creator of the BRIC investment concept, has been exasperated by repeated calls in the past to exclude one or another country from the quartet, based on either economic growth rates, equity performance or market structure. In the early years, Brazil’s eligibility for BRIC was often questioned due to its anaemic growth; then it was the turn of oil-dependent Russia. Over the past couple of years many turned their sights on India due to its reform stupor. They have suggested removing it and including Indonesia in its place.
All these detractors should focus on China.
China’s validity in BRIC has never been questioned. Aside from the fact that BRI does not really have a ring, that’s not surprising. China’s growth rates plus undoubted political and economic clout on the international stage put it head and shoulders above the other three. And after all, it is Chinese demand which drives a large part of the Russian and Brazilian economies.
But its equity markets have not performed for years.
This year, Russian and Indian stocks are up around 20 percent in dollar terms while China has gained 9 percent and Brazil 3 percent. In local currency terms however China is among the worst performing emerging markets, down 5 percent. Brazil has risen 9 percent.
Over the past five years, MSCI China. which makes up 40 percent of the BRIC index, has lost 18 percent, Thomson Reuters data shows. That has pushed the broader BRIC into a negative return of almost 10 percent in this period.
The BRIC equity losses and BRIC funds’ poor returns are now causing many to question the validity of the BRIC concept itself, a topic we explored in this recent article. But clearly the problem with BRIC equities lies with China and as the economy slows, more losses are likely in the short-term. The Shanghai market has taken little cheer from the Fed’s money printing-announcement, focusing instead on falling property prices locally and potential problems at Chinese banks.
BRIC equities have fared poorly as a bloc in recent years but the worst performing member of the quartet has been China which makes up 40 percent of the BRIC index. But there is no need to rule China out just yet. Join DiscussionCompetitive, moi? Turkey jumps up the league
Switzerland tops the World Economic Forum’s competitiveness league for the fourth year running, according to the latest survey out today, while the United States is slipping down the table because of political and economic problems.
But quite a few emerging market countries are jumping up the league.
Charles Robertson at Renaissance Capital highlights Turkey and Nigeria as some of the best performers in the last year, rising 16 and 12 places respectively in the index, which is based on 12 measures, including infrastructure, macro-economic environment, and market size.
Turkey has moved into 43rd place, above Brazil and India. Nigeria has only reached 115th, but it trumps other sub-Saharan African countries like Mozambique and Uganda.
Turkey’s stockmarket has risen a staggering 32 percent this year (where broader emerging markets are only up 2 percent), despite well-documented troubles within the euro zone, the country’s main trading partner, and a civil war in neighbouring Syria.
“From a top-down view, Turkey does not look very good,” says Xavier Hovasse, fund manager at Carmignac. But Hovasse adds that the country has been quick to shift some of its export sector away from the euro zone and towards the more buoyant Middle East, and has successfully competed there with exporters from countries like South Korea.
Turkey scores well in the league on its large market and intense local competition, but has an inefficient labour market.
Turkey and Nigeria are among emerging market countries jumping up the world competitiveness league table. Join DiscussionNo policy easing this week in Turkey and Chile
More and more emerging central banks have been embarking on the policy easing path in recent weeks. But Chile and Turkey which hold rate-setting meetings this Thursday are not expected to emulate them. Both are expected to hold interest rates steady for now.
In Chile, the interest rate futures market is pricing in that the central bank will keep interest rates steady at 5 percent for the seventh month in a row. Most local analysts surveyed by Reuters share that view. Chile’s economy, like most of its emerging peers is slowing, hit by a potential slowdown in its copper exports to Asia but it is still expected at a solid 4.6 percent in the third quarter. Inflation is running at 2.5 percent, close to the lower end of the central bank’s percent target band.
Turkey is a bit more tricky. Here too, most analysts surveyed by Reuters expect no change to any of the central bank rates though some expect it to allow banks to hold more of their reserves in gold or hard currency. The Turkish policy rate has in fact become largely irrelevant as the central bank now tightens or loosens policy at will via daily liquidity auctions for banks. And for all its novelty, the policy appears to have worked — Turkey’s monstrous current account deficit has contracted sharply and data this week showed the June deficit was the smallest since last August. Inflation too is well off its double-digit highs.
But Turkey’s economy too faces headwinds, most of all from the euro zone where it sends most of its exports. Growth is slowing and there are signs the central bank as well as exporters are getting a bit restless about the currency (the lira is up 5 percent this year versus the dollar). UBS strategist Manik Narain says:
Turkey and Chile, the two emerging market central banks holding policy meetings this week, are expected to leave interest rates unchanged. Join DiscussionThe bias is for looser policy but there is no real need to cut the policy rate. They may reduce the ceiling of their overnight rates corridor to indicate they are starting to feel discomfort with the lira’s strength but for the time being their policy tools are doing their job for them.
Pay votes update… Spring takes a fall?
A few months ago, at the height of the British AGM season, we ran some numbers on shareholder protest votes over executive pay.
It seemed striking at the time that despite all the talk of revolution, the average vote against FTSE 100 companies’ remuneration reports had only edged higher, to 8.2% from 8.0% in 2011.
This week I’ve been catching up on the AGMs which have taken place since May, giving us a decent quorum of 92 companies, and the results are even more startling.
The average protest vote in 2012 now stands at 7.6% — less than it was last year. Abstentions (or ‘witheld’ votes, in the language of the proxy form) were also down, at 2.5% against 3.6% in 2011.
As we noted previously, this doesn’t blow out of the water the idea of proactive, emboldened investors. Aviva’s Andrew Moss and WPP’s Martin Sorrell would take issue with that, and it’s worth noting that the 2012 number would likely have been higher without some scrambling by Boards to placate grumbling investors as it became clear that revolution was in the air.
It does, however, help tell a more level-headed story about the nature and extent of any uprising by the grey-suited fund managers of the City.
For the completists, you can get in touch with me on Twitter via @reutersJoelD to receive a spreadsheet full of deeply exciting data.
Updated numbers on pay revolts at UK company AGMs are a further challenge to the 'shareholder spring' narrative. Join Discussion