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Brief: Warren Buffett, with more than $146 billion of cash on hand, has been struggling to find attractively priced assets at home in the U.S. Now, he’s looking abroad. The announcement late Sunday by Buffett’s Berkshire Hathaway Inc. that it bought stakes in five of Japan’s biggest trading companies marks one of his largest-ever forays into Asia’s second-largest economy. The wagers show that Berkshire’s chief executive officer, who turned 90 over the weekend, is willing to expand the company’s horizons in his search for ways to supercharge the Omaha, Nebraska-based conglomerate’s growth. “I think this is a definite signal that Berkshire is more likely to examine and pursue potential investments internationally,” David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business, said. “This could be the beginning of the tip of an iceberg. There could be many more investments such as this.” The investments into commodity-centric Japanese conglomerates known as “sogo shosha,” disclosed in a statement from Berkshire, underscore Buffett’s willingness to bet on economically sensitive companies despite the pandemic. The five Japanese companies also have interests in businesses ranging from home-shopping networks to convenience-store chains, offering Berkshire exposure to a wide swath of the Japanese economy.
Brief: Mutual funds managed by women are outperforming those managed by men this year as higher relative exposure to technology names drives performance, according to new research from Goldman Sachs. The firm found that 43% of women-managed funds — as defined by those with at least one third of portfolio manager positions held by women — have outperformed their benchmark this year, compared with just 41% of those managed by men. Adjusting for volatility, the median fund with all women portfolio managers has returned more than double that of the typical all-male managed fund. “Female-managed funds withstood many of the market swings, with the median fund outperforming its benchmark by 50 [basis points] from the start of the year to March 23rd. On the other hand, the typical fund with no women managers lagged its benchmark by 20 [basis points] during that period,” Goldman strategists led by David Kostin wrote in a note to clients. “Since the market trough, 48% of female-managed funds have generated alpha, compared with only 37% of all-male funds.”
Brief: Exclusivity is like fiat currency: It only works if everyone believes it’s real. For decades that wasn’t a problem for Seth Klarman’s $29.5 billion Baupost Group. The only way to get money into its famed hedge funds was to already have some invested, and everyone knew it. Even for that coterie, Klarman would periodically slide some of their capital back, a potent reminder that Baupost didn’t need more — or your — money. But doubts have begun to percolate within the elite investor class, an investigation by Institutional Investor reveals. “We’re walking away,” says one capital allocator. It’s not clear whether or not Baupost knows this yet. The firm declined to comment for the story. “Seth is running Baupost more like a wealthy person might run their personal money than like the aggressive hedge fund manager that he’s been over the years,” the investor says. “He has pretty considerable net worth and all of his money invested in that firm. Other people’s fees are paying for him to run his personal money. If you want to come along, come along.” But that allocator won’t. “Even though we have terribly high regard for Seth,” the investor went on, “this isn’t what we want. Performance is slipping; the strategy changed. It’s not the consistent, thoughtful type of process and results that they had for a couple of decades.” Baupost’s best days have passed — at least for the firm’s clients, the investor asserts.
Brief: The coronavirus pandemic has truly been a watershed event — not just for the financial industry but for the world at large. Many had plans and goals that they wanted to achieve before the year ran out but had to stop. Companies had to file for bankruptcy, and people lost their jobs. Like every sector of the global economy, the financial sector has also suffered significantly from the effect of the pandemic. Countries have been scrambling to keep their economies afloat, while people have been looking for means to stay solvent. It goes without saying that stock markets and financial institutions across the world are uniquely vulnerable at this point. This is a level of danger that the world has never seen before. Even the global financial crisis of 2008 wasn’t able to prepare us for the impact COVID-19 would have on the world economy. However, one aspect that has so far managed to weather the storm has been the crypto market. While Bitcoin (BTC) dropped to $3,800 in March, the top cryptocurrency’s value managed to surge and consolidate faster than any other investment vehicle in the world. The stock market has just begun to rebound, and alternative assets are still in their everlasting state of volatility. Cryptocurrencies, however, have been going strong.
Brief: GTCR is seeking to raise $6.75 billion for a buyout fund that would be its biggest yet, according to a person with knowledge of the matter. The firm has begun preliminary discussions with prospective investors, said the person, who requested anonymity because the talks are private. A spokeswoman for GTCR declined to comment. The Chicago-based firm raised $5.25 billion for its 12th buyout fund, which closed in October 2017 and marked GTCR's largest fundraising to date. "We have the organizational capacity to pursue more and potentially larger-scale investment opportunities," Craig Bondy, a managing director, said at the time. The firm has traditionally focused on five sectors: technology, business services, media and telecommunications, health care and financial services and technology. It announced this month an agreement to acquire Xermelo, an oral therapy for carcinoid syndrome diarrhea. In July, GTCR agreed to sell Optimal Blue, a digital marketplace for mortgages, and in June announced the purchase of software maker Citra Health Solutions.
Brief: Warburg Pincus is seeking to raise $2.5 billion for its second fund dedicated to financial sector deals, according to a person with knowledge of the matter. The private equity firm has begun preliminary discussions with investors about the WP Financial Sector II fund, which will invest alongside its flagship vehicle in areas such as payments and financial technology, said the person, who asked not to be named because the information isn’t public. It plans to formally launch capital-raising efforts in November, with a first close targeted for mid-2021, the person said. Former Treasury Secretary Tim Geithner, Warburg Pincus’s president, will oversee the fund, the person said. The firm gathered $2.3 billion for its first financial sector fund, which closed in December 2017. A spokeswoman for New York-based Warburg Pincus declined to comment. Warburg Pincus, which has more than $53 billion in assets under management, made a $400 million investment in financial technology service provider Wex Inc. in June, and last year acquired an 80% equity stake in Indian education finance company Avanse Financial Services Ltd.
Brief: Hedge funds and other short sellers are beginning to set their sights on a U.S. credit-derivatives index with outsized exposure to hotel debt as the pandemic sinks the hospitality industry into distress. The firms are starting to build up wagers against the synthetic index, known as CMBX 9, shifting attention from a high-profile bet against America’s challenged malls. The shift, which market participants say is beginning to show up in some trading flows, comes as delinquencies on hospitality property loans surge and even begin to exceed those in retail. “In the last month there has been more selling pressure on the CMBX 9 than any of the other CMBS indices,” said Dan McNamara, a principal at MP Securitized Credit Partners, a hedge fund focused on shorting commercial mortgage bonds. “That’s because some hedge funds are actively looking to play the short side on the Series 9 index due to its significant hotel exposure.” Retail debt has been a lucrative bearish bet this year as people stayed home amid lockdowns and shopped online, exacerbating an existing threat to brick-and-mortar stores. Traders have been taking positions on retail through a 2012 version of the commercial mortgage index called CMBX 6, which has a high concentration of debt tied to shopping malls.
Brief: At the height of the coronavirus pandemic last spring, the heads of U.S. banks including Morgan Stanley, Bank of America Corp and others pledged not to cut any jobs in 2020 because it was the wrong thing to do. However, as executives prepare for an extended recession and loan losses that come with it, layoffs are back on the table, said consultants, industry insiders and compensation analysts. Compared with April projections, bank economists and executives expect the U.S. economy to take longer to recover, with high unemployment into 2021 and interest rates staying near zero for the foreseeable future. On top of that, working from home has shown some managers that they need fewer employees to do the same amount of work. “No question, layoffs (will) come across the board for all the banks,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, which invests in JPMorgan Chase and other large Canadian banks. Banks have to cut costs because of expected credit issues, as well as low interest rates and regulatory pressure to trim dividends, he said.
Brief: Funds recommended equity holdings be trimmed to the lowest in over four years in August, despite record-breaking gains by world stocks, as the pandemic drags on and new data suggest the nascent economic rebound is stalling, Reuters polls found. The August 17-27 poll of 35 fund managers and chief investment officers in the U.S., Europe, Britain and Japan was largely taken before Federal Reserve Chairman Jerome Powell announced a new policy framework promoting higher inflation to spur economic recovery and job creation on Thursday. The Fed’s new strategy sent U.S. Treasury yields higher, which gave a lift to interest rate-sensitive financials and in turn boosted the S&P 500 index to a new record high and pushed the MSCI’s all-country world index to surge past its pre-COVID-19 high reached in February. While world stocks have risen as much as nearly 60% since March troughs, the poll showed average recommended exposure for equities in August in the model global portfolio was the lowest since July 2016, down to 43.1% from 43.9% the previous month. Overall equity exposure is down 6.6 percentage points from the beginning of the year, down from 49.7% in January.
Brief: Active managers have long claimed that they needed volatility to beat the market. Yet many of them still failed to outperform the average passive fund during the “once-in-a-decade” volatility at the beginning of the Covid-19 pandemic. According to research from Morningstar, only about half of active stock funds and one third of active fixed-income funds bested their average passive peer during the first six months of 2020. The twice-yearly Morningstar Active/Passive Barometer measures the performance of Europe-domiciled active funds against their passive peers. It covers almost 22,600 funds managing €3.7tn of assets. Morningstar’s research is unusual because it compares the performance of stock pickers with fee-charging passive funds, instead of against a cost-free index. It found that 35% of UK large-cap managers have beaten their passive counterparts over the last 10 years. However, Europe-based US large-cap, Japan large-cap, France large-cap, Germany large-cap and Switzerland large-cap have done less well. Between 5.6% and 28.3% of managers in those sectors have outperformed the average passive fund.
Brief: Hedge funds seeking to take advantage of turbulence in the global aviation industry have lost almost EUR800 million in August, according to data from Ortex Analytics. Analysis of short positions against the world's 10 largest airlines throughout 2020 shows hedge funds lost EUR791.6 million in August. The losses reduced total returns YTD from the group by over a third, however hedge funds remain EUR1.4 billion in profit. A large proportion of this (EUR1.2 billion) came from short positions in March as international travel restrictions came into effect as a result of the Covid-19 pandemic. Peter Hillerberg, co-founder of Ortex Analytics, says: “This year has no doubt been the most difficult on record for the aviation industry. Hedge funds were quick to capitalise on the impact of travel restrictions and made significant profit as a result. However, what we’ve seen in recent months is a reversal of fortunes as short sellers made substantial losses in June and August. Although there is still much uncertainty about the reopening of international travel, when it comes to short profits, hedge funds should remember something airline pilots know for certain, what goes up must come down.”
Brief: Private-equity giant The Blackstone Group is gearing up for US employees to return to the office after Labor Day, according to memos seen by Business Insider.
Blackstone is partnering with Vault Health to provide COVID home testing kits to US employees before they return to the office, according to the memo written by HR director Paige Ross. All investment professionals and asset managers will have a test sent to their home by Aug. 31. One person with direct knowledge of the return-to-office plans said calls within the firm were strongly encouraging investment teams to come to the office, unless they had a “valid reason” to remain remote. A Blackstone spokesman said in a statement that the health and safety of employees is the firm’s top priority.
Brief: Izzy Englander’s Millennium Management plans to return at least $5 billion to investors at year-end as part of an effort to create a more stable capital base. The money will come from a share class that can be redeemed in full after a year, people familiar with the matter said. The share class represents about $37 billion of the firm’s $45.4 billion in assets. In a new twist, any additional money raised will now be deemed committed capital, with the firm having three years to call the pledged money from investors, who learned of the change in a letter Wednesday. Once that happens, clients will be able to withdraw only 5% each quarter, meaning it would take five years to cash out completely. A spokesman for New York-based Millennium declined to comment. Englander’s firm has sought to lock up capital for longer ever since the 2008 financial crisis, when investors in need of cash pulled money, cutting Millennium’s assets in half. Other hedge funds had halted redemptions. Millennium, which climbed 12% this year through July, has produced steady returns over its three-decade history, making the new structure an easier sell. Two years ago, the firm started a 5%-a-quarter share class that now accounts for about $8.5 billion of assets.
Brief: Blackstone Group Inc., which led Wall Street’s initial foray into the single-family rental business, is making a new investment in suburban houses at a time when the Covid-19 pandemic is pressuring traditional commercial real estate. The private equity giant, which exited its stake in landlord Invitation Homes Inc. last year, is leading a group of investors in a $300 million minority investment in Tricon Residential Inc., which owns and manages more than 30,000 single-family rental homes and multifamily units in North America… The suburbs are in high demand as city-dwellers seek quarantine comforts such as backyards and room for home offices. At the same time, with more than 16 million Americans out of work, many renters have said they lack confidence in their ability to pay for housing, and experts are warning that the country is headed for a massive wave of evictions. Shares of single-family landlords have been rewarded during the pandemic as their rent collections have held up better than those of multifamily landlords. Tricon’s stock has surged 91% since March 23, compared with a 24% gain for a Bloomberg index of apartment REITs.
Brief: Emerging Markets and Asian hedge funds surged in Q2 2020, recovering from steep losses experienced in late 1Q, with many indices posting gains for YTD 2020 through July. The HFRI China Index gained 6.8 per cent in July, which followed a 14.5 per cent gain in Q2, the best quarterly performance since Q1 2019, to bring YTD performance to +13.1 per cent, as reported in the HFR Asian Hedge Fund Industry Report and the HFR Emerging Markets Hedge Fund Industry Report. Hedge fund capital invested in Emerging Markets also surged concurrent with the record performance gains, ending Q2 at USD244.4 billion (CNY1.55 trillion, BRL1.24 trillion, INR16.6 trillion, RUB16.9 trillion, SAR842 billion), an increase of nearly USD13 billion from the prior quarter. Hedge fund capital invested in Asian markets also increased to USD115.5 billion (CNY798 billion, INR8.57 trillion, JPY12.28 trillion, KRW1.09 trillion).
Brief: Even before Covid-19 crushed the economy, the Fed was worried about low inflation and was working on ways to let it run slightly hotter temporarily in order avoid the trap of long-term sluggish growth and weak pricing power. Chairman Jerome Powell, in a much-anticipated speech Thursday, is expected to discuss the Fed’s policy framework and specifically how it will alter its posture on inflation. The Fed has had a 2% inflation target, but in the decade since the financial crisis it has more often than not seen inflation fall below its target… The Fed has taken extraordinary actions to fight the impact of the coronavirus. It has vowed to keep rates at zero for a long time; it also has provided more liquidity, purchased assets and inserted itself in different markets to assure they run smoothly. The Fed already had been reviewing its policy framework, and inflation was part of it. Even before the virus, Fed officials had said they would allow inflation to overshoot their 2% target but they didn’t formalize it. “This is longer running than just Covid. If they had wrapped this up last year, Powell would have to signal this policy shift with rates above zero, ” said Jon Hill, senior fixed income strategist at BMO. “Since we’re already at zero, it means we’ll be at zero even longer and the central bank is going to be even more aggressive about trying to meet its inflation mandate. In the past they pre-emptively hiked to get ahead of inflation pressures. What they’ve shifted to is actually waiting until they get sustained inflation.”
Brief: The email, formal and foreboding, landed at 9:38 a.m. on Monday, March 2. “Can you please call me when you have a second to talk?” the Bridgewater Associates employee asked. The call, the email’s recipient knew, would not be good: Karen Karniol-Tambour, the hedge fund’s head of investment research, was scheduled to be a lunchtime speaker at an investment conference at Washington, D.C.’s Watergate Hotel just over 24 hours later. But at that moment, on March 2, a man in Westchester County — a mere 30 miles from Bridgewater’s two main campuses in Westport, Connecticut — was undergoing treatment as the first Eastern Seaboard case of Covid-19 with an unknown origin. Karniol-Tambour wasn’t going to make it, the conference organizer feared. Bridgewater had been on high alert all weekend. The firm’s health security “posture” was the subject of ongoing discussions. Already, anyone who had traveled to certain areas — including the West Coast of the U.S., where Covid-19 had already killed individuals in Washington state — or lived with someone who had traveled, was barred from the offices.
Brief: Sixty-three percent of investors in alternatives do not anticipate changes to their investment plans in response to the COVID-19 crisis, the results of a Preqin survey show. And 29% expect to invest more in alternative investments in the long term than they would have prior to the pandemic, the survey indicated. Meanwhile, 72% of private equity investors surveyed indicated that returns have met their expectations. Seventy-four percent of private debt investors, 72% of infrastructure investors and 66% of real estate investors said that returns have met their expectations. Forty-seven percent of hedge fund and 58% of natural resources investors said that returns are below expectations, according to the survey. However, 42% expect returns to decline due to the COVID-19 crisis, the survey indicated.
Brief: The World Economic Forum announced Wednesday that it decided to postpone its upcoming annual meeting in Davos, Switzerland, due to safety concerns and in an effort to slow the spread of Covid-19. The meeting, originally scheduled for January, will be rescheduled to “early next summer,” according to Adrian Monck, managing director of public engagement at the Forum. “The decision was not taken easily, since the need for global leaders to come together to design a common recovery path and shape the ‘Great Reset’ in the post-COVID-19 era is so urgent,” Monck said in a statement. “However, the advice from experts is that we cannot do so safely in January.” The World Economic Forum’s annual summit in Davos is routinely one of the globe’s largest collections of world leaders and corporate executives. This year’s gathering, which took place over four days starting Jan. 21, featured commentary from President Donald Trump, European Central Bank President Christine Lagarde and climate activist Greta Thunberg. The 2020 conference also included Wall Street and finance bigwigs, and counted among its ranks billionaire George Soros, hedge-fund manager Paul Tudor Jones, JPMorgan Chase CEO Jamie Dimon, and Bridgewater Associates founder Ray Dalio.
Brief: Global equities climbed to a record high on Wednesday, as progress in U.S.-China trade talks and hopes for the development of a vaccine against the novel coronavirus fueled investor appetite for stocks. The MSCI All-Country World Index, which includes both emerging and developed world markets, climbed 0.4% to 581.11, topping a previous high from February. While tensions between the U.S. and China have been rising recently, risk assets rallied after the two countries this week reiterated their commitment to a phase-one trade deal in a biannual review. Massive stimulus injections to boost pandemic-ravaged economies in the U.S., Europe and other major regions are fueling a rally as stocks rebound from the global sell-off through March. Covid-19 cases are rising in some parts of Europe and the U.S. and U.S.-China trade tensions persist, but investors in search of returns have few alternatives to equities. With investors focused on vaccine progress, Moderna Inc. said it’s near a deal to supply at least 80 million vaccine doses to the European Union.
Brief: While private equity firms’ fundraising activities have been hit by the economic fallout of Covid-19, those in the industry say the pandemic has created opportunities for companies with deep pockets – particularly in Southeast Asia. Singapore-based Ascent Capital Partners has its sights set on Myanmar, where it is looking for investments in tech, education and health care start-ups. The country of 53.7 million has gone from SIM cards costing more than US$2,000 on the black market during the military dictatorship’s rule until 2011, to 80 per cent of the population owning smartphones as of 2018. Having worked with partners to invest a combined US$26 million in local internet service provider Frontiir in June, Ascent Capital has another US$70 million in its pockets. Founder and managing partner Lim Chong Chong said that as the adoption of technology in Myanmar was likely to accelerate, the company wanted to make another investment this year, and two to three more in the next 18 to 24 months – each of at least US$10 million. “Education and health care … are the sectors where our discussions are the most advanced,” Lim said. Private equity firms’ Asia-focused fundraising slumped 44 per cent year on year to US$13 billion in the first quarter of 2020 due to the pandemic, the lowest since the third quarter of 2013, according to a recent Reuters report referencing data from Preqin.
Brief: Private equity and credit are set to outperform publicly-traded assets in the aftermath of the Covid-19 pandemic as investors looking to take advantage of market dislocations pile in, according to $68 billion alternative investment manager Hamilton Lane. “Investors have recognized that the greatest periods of outperformance in the private markets relative to public markets are as you’re going through and coming out of a downturn,” Andrew Schardt, the firm’s head of direct credit, said in an interview. Private credit vehicles raised $57 billion in the first half of the year, buoyed by appetite for distressed strategies, according to research firm Preqin. Still, the opportunities has been limited thus far, in part due to the Federal Reserve’s unprecedented efforts to shore up liquidity. Second half earnings may shed light on whether there will be more deterioration that could lead to attractive investments, according to Schardt. “One of the challenges on the distressed side has been that if you’re too early, you’re wrong,” he said. “So it’s a fine line of balancing how you’re going to approach the market and the opportunity recognizing you need to have the capital ready to go, but be patient.” Uncertainty caused by the coronavirus outbreak may end up pushing private-debt dynamics in favor of lenders going forward, Schardt said. The asset class’s longer-term investment approach relative to public debt may also help boost returns as companies struggle to bounce back.
Brief: The coronavirus pandemic and ensuing capital markets volatility present a crisis of magnitude on par with prior historic events that have reshaped economies in lasting ways. As we begin to process the impact and reorient to the ongoing market turbulence, this uncertain period provides a valuable opportunity to evolve our ways of thinking and doing business. For investors and CIOs with exposure to venture capital, it means rethinking whether pre-COVID-19 allocation strategies continue to fit this precarious new environment. Heading into 2020, venture capital had never been better capitalized. The size of the industry quintupled in the last decade, according to Crunchbase projections, to $294.8 billion in 2019 from $53 billion of capital deployed into startups in 2008. For good reason, venture capital has provided access to investment opportunities in game-changing companies that have disrupted entire industries. Venture funds have distributed more capital to investors than called since 2012, breaking a prior 11-year streak. But with colossal market participants such as Softbank Group fueling an investment frenzy, capital oversupply led to inflated environments with significant pockets of dislocation supporting valuations that are often not based on a company's fundamentals or ability to drive true equity value.
Brief: York Capital Management is looking to cut about 40% of its Fifth Avenue office space as the pandemic prompts companies to rethink the need to occupy expensive skyscrapers. The hedge fund firm is seeking to sublet about 20,000 square feet of its space at the General Motors Building, according to people familiar with the matter. It currently rents about 50,000 square feet at the trophy property, which sits across from the Plaza Hotel and offers sweeping views of Central Park and beyond. A spokesman for York declined to comment. Wall Street banks and asset managers, among the largest employers in New York City, have been taking stock of their office space as it becomes clearer that many employees will work remotely for the foreseeable future. Commercial landlords, already hard hit by the economic impact of the coronavirus, have seen a slump in demand and lost revenue as some tenants have stopped paying rent. Many firms across industries are looking at reducing their occupancies. Sublease space in the city jumped to 13.6 million square feet in the second quarter, almost 40% higher than last year, according to Savills US. Financial services and insurance firms account for about 15% of new and expected sublets. York Capital, which runs about $18 billion, has about 150 employees over a few floors at the GM Building. The 50-story tower at 767 Fifth Ave. is owned by Boston Properties Inc. It has about 2 million square feet and its front plaza is occupied by an Apple store, adding to the skyscraper’s luster.
Brief: Spinning records on that sultry night in the Hamptons: DJ D-Sol, better known as David Solomon of Goldman Sachs. Among the thousands paying up to $25,000 to attend the outdoor concert: the Winklevoss twins, Cameron and Tyler, and the hedge fund mogul Kenneth Griffin. The payoff for the charities that were promised to benefit: all of $152,000. Safe & Sound, as the July event was called, has gone down as the most tone-deaf musical moment of the Hamptons’ Summer of Covid. State health officials launched an investigation after Governor Andrew Cuomo excoriated the organizers and well-heeled revelers for “egregious social-distancing violations.” But the night’s real surprise turns out to be the sums that were raised for charity. To some, $152,000 is very un-Hamptons-esque. This, after all, is where a beachfront estate originally built for the Ford family was recently listed for $145 million. “I never would have gone if I knew how little it would be,” said Daniel Tannebaum, one of the Manhattan residents who’s been spending more time at the beach since lockdown, working remotely for a management-consulting firm. Others find $152,000 a fair amount considering the expenses of putting on such an event, and the scrutiny that has created legal and crisis-management issues as well as potential government fines. “I feel a little sense of relief,” said Southampton Town Supervisor Jay Schneiderman, who was born in Montauk and has lived on the East End full-time for more than 30 years. “I had the fear it would be zero.”
Brief: With Wall Street preparing for more of its traders and bankers to return to offices next month, a shift underway at JPMorgan Chase may have lasting implications for the entire industry. Workers in the firm’s corporate and investment bank, an industry heavyweight with 60,950 employees, will cycle between days at the office and at home, keeping the ability to work remotely on a part-time basis, according to Daniel Pinto, head of the massive division and co-president of the banking giant. “We are going to start implementing the model that I believe will be more or less permanent, which is this rotational model,” Pinto told CNBC in a Zoom call from London, where he is based. “Depending on the type of business, you may be working one week a month from home, or two days a week from home, or two weeks a month.” The coronavirus pandemic forced Wall Street to send most of its employees home in March, and apart from skeleton crews that never left the trading floor, that is where most of them stayed. Now, banks are preparing for more people to return after Labor Day, according to executives at lenders and technology vendors. At Citigroup, some managers have begun sign-up sheets to gauge demand for a September return, according to people with knowledge of the situation.
Brief: U.S. bank profits were down 70% from a year prior in the second quarter of 2020 on continued economic uncertainty driven by the coronavirus pandemic, a regulator reported Tuesday. Bank profits remained small as firms build up cushions to guard against future losses and business and consumer activity dropped, according to the Federal Deposit Insurance Corporation. Bank deposits climbed by over $1 trillion for the second straight quarter, and the regulator said the industry has “very strong” capital and liquidity levels. Tuesday’s report marks the second straight quarter that banks have seen their profits reduced to a fraction of record levels they experienced in 2019. The FDIC similarly reported a 70% decline in profits in the first quarter of 2020, although industry profits were actually up slightly in the second quarter. Banks continued to set aside huge amounts of cash to guard against future loan losses — in the second quarter firms reported a 382% increase from a year prior in how much they had reserved for potential credit losses.
Brief: Mega alternative investment managers' ever-expanding roster of client types comes at a time when overall alternative investment fundraising has slowed as a result of the pandemic, but has not reduced the percentage of capital committed to the largest funds. Despite the slowdown, the largest managers continue to get bigger. The percentage of capital raised by the largest managers in the first half of 2020 increased. In real estate alone, megamanagers accumulated 75% of the total capital raised in the second quarter and 45% of the aggregate capital raised in the six months ended June 30, Preqin data shows. The pandemic is proving to benefit megamanagers' accumulation of assets at the risk of newer and smaller managers, said David Conrod, co-founder and CEO of placement agent firm FocusPoint International Inc. Managers with existing limited partner relationships are getting capital commitments, he said. It's harder to raise capital with new limited partners during the current pandemic, he said. "Creating new relationships without seeing people in person will take longer," Mr. Conrod said. Meanwhile, investors see their managers seeking capital from new sources.
Brief: Central Europe’s private equity (PE) firms’ confidence hits lowest level since the global financial crisis, as a result of the COVID-19 impact, but deal-doers are more optimistic than during the 2008 crisis, according to the latest Deloitte CE Private Equity Confidence Survey. The confidence index, which has been decreasing since the end of 2017, is now at 62, the second historical lowest after October 2008, when it reached 48. Seven in ten professionals in Central Europe private equity houses forecast a decline in market activity and worsening economic conditions, given that the regional economies, which are largely consumer-driven, are expecting significant GDP contraction in 2020 amid demand shrink caused by unemployment rise. The survey results also indicate a noteworthy proportion of believers in a quick economic recovery, as 13% of respondents actually expect conditions to improve.
Brief: Having been cast as the chief villains of the global financial crisis, the banks have so far avoided serious further damage to their reputations during the pandemic. Instead it is private equity firms that are in danger of sinking lower in the public’s estimation (if that were possible). The industry has scored a spectacular own goal over the issue of government-backed coronavirus bailout loans. Given the level of public suspicion of the industry you might think it was obvious that private equity firms should steer clear of anything that could be viewed as a taxpayer subsidy. It would be asking to be pilloried by the Daily Mail if firms that had piled debt onto their investments in order to minimise their tax bills and maximise their returns then came crying to the government when the going got tough. But that is just what some firms are doing. Worse, the industry is working with the government to find ways around EU state aid rules that would seem to disqualify some heavily-indebted companies from accessing the loans. The predictable result is an outcry in the media including a hostile editorial in the FT and a thundering commentary in the Daily Mail that concluded: “The idea that some morally bankrupt private equity companies — which have for so long made themselves rich at everyone else’s expense — should now benefit from that government largesse is abhorrent.”
Brief: Some of the largest real estate investors are walking away from debt on bad property deals, even as they raise billions of dollars for new opportunities borne of the pandemic. The willingness of Brookfield Property Partners LP, Starwood Capital Group, Colony Capital Inc. and Blackstone Group Inc. to skip payments on commercial mortgage-backed securities backed by hotels and malls illustrates how the economic fallout from the coronavirus has devalued some real estate while also creating new targets for these cash-loaded investors. “Just because a prior investment didn’t work out doesn’t necessarily mean that should tarnish the reputation for future endeavors,” said Alan Todd, head of U.S. CMBS research for Bank of America Securities. “It’s not like something was done in bad faith.” While cutting losers to buy winners is an age-old investment proposition, the Covid-19 pandemic may create even more openings than the past crises that became bonanzas for real estate investors. The mass exodus of Americans from public spaces has hammered already-weak retailers and their landlords, crippled business travel, crushed restaurants unable to fill all of their tables, and sown chaos for office towers whose tenants may never need as much space again.
Brief: Stocks may be back up, but revenue is down at publicly traded asset managers, according to analysis by Casey Quirk. The Deloitte-owned asset management consultant reported that median revenue fell 6.4 percent in the second quarter among listed traditional asset management firms. Compared with this time last year, median revenue slid 7.1 percent. According to Casey Quirk, this decline was driven in part by investors moving assets to cheaper bond and cash funds amid continued uncertainty about how the Covid-19 pandemic would impact the economy. Fee discounting also contributed, with average realized fees declining 2.2 percent in the second quarter and 3.7 percent year-over-year. “Capital markets are mostly returning to pre-pandemic crisis levels, yet asset manager financials are still feeling the impact from the brief and severe slump earlier in 2020,” the consulting firm said in a statement Monday. Operating margins also continued a “a mostly downward trend” for listed asset managers, according to Casey Quirk. The consultant reported that median margins in the second quarter were 27 percent, compared with 29 percent in 2019.
Brief: The Financial Conduct Authority (FCA) is investigating more than 150 Coronavirus-related scams since the outbreak began, according to official figures. The data, obtained under the Freedom of Information (FOI) Act by the Parliament Street think tank’s cyber research team, reveals the extent to which financial services organisations and banks have been targeted by financial criminals during the pandemic. The total number of suspected scams reported to the FCA over the last five months is 165. The types of scams that have been circulated during this time include email, phone calls, text messages, letters, and social media. In one of the scams, fraudsters pretended to be from HM Revenue and Customs (HMRC) and targeted company owners seeking Covid-19 relief grants to help manage their finances throughout the crisis. Other scams included a targeted effort to steal the log-in credentials of HSBC customers with business accounts, and seeking to obtain the passport details of financial services workers. Experts have warned that the rise in sophisticated Covid-19 related scams could leave financial services firms open to the risk of financial crime, especially with increasingly stringent Anti-Money Laundering (AML) legislation in the pipeline.
Brief: Japan’s biggest lender is planning to raise funds from individual investors to help smaller companies and hospitals tackle the Covid-19 pandemic. Mitsubishi UFJ Financial Group Inc. intends to issue sustainability bonds totaling as much as 150 billion yen ($1.42 billion) in September, after receiving requests from retail investors, according to Isamu Murofushi, a spokesman. The pandemic is boosting global sales of notes that aim to help governments, companies and other institutions get through the pandemic. Proceeds of MUFG’s debt sale will be used to help small-to-mid sized companies and hospitals fight the virus impact, as well as drugmakers developing vaccines and medicines, Murofushi said.
Brief: The rehiring of temporarily laid-off workers will continue to bolster the U.S. labor market’s recovery in the months ahead, but Goldman Sachs Group Inc. expects almost a quarter of those layoffs to become permanent. In the early months of the pandemic, employers shed more than 22 million people from their payrolls. The staggering figure had a small silver lining: the majority of those layoffs were billed as temporary. More than 18 million people were classified as temporarily unemployed in April, the most on record. When state economies began to reopen, the rehiring of many of those workers helped drive the labor market’s rebound in May, June and July. And with more than 9.2 million unemployed still on temporary layoff, “the labor market seems poised for additional large job gains later this year,” Joseph Briggs, an economist at Goldman Sachs, wrote in a research note on Friday. In some ways, the staggering number of temporarily laid off workers could be a tailwind for the recovery. These workers tend to face better hiring prospects, and transitions to permanent unemployment remain relatively low. In fact, Goldman expects rehires to account for most of the 5.6 million net job gains they anticipate later this year.
Brief: Last week, Institutional Investor held a virtual roundtable for healthcare funds. As always, we polled the audience on business practices, portfolio moves, and their expectations for the future. One question focused on the article of dogma that I’ve encountered nearly every day since the East Coast locked down March 12: Allocators will not place capital with managers they had not physically met. Here’s what we asked: “In terms of allocating assets to new managers, what best describes your expectations for an extended Covid-19 travel lockdown?... Contrary to conventional wisdom — and, the data show, the pre-Covid reality — nearly 60 percent of healthcare investors believe that we are about to enter a time where mandates will flow to managers that allocators and consultants have not met in person.
Brief: The Federal Reserve has used only a fraction of the $600 billion in an emergency lending program for small and medium businesses struggling with the Covid pandemic, according to a congressional watchdog report. Eligible lenders participating in the Main Street program have issued $496.8 million in loans, of which $472 million is Federal Reserve money, or about 0.07% of the central bank’s lending capacity as of Wednesday, according to the report issued Friday. “The Main Street Lending Program has seen modest initial activity thus far,” according to a monthly report from the Congressional Oversight Commission, the panel in charge of overseeing the Treasury Department and Federal Reserve responses to the coronavirus pandemic. “Some of the Main Street Lending Program’s modest activity may be because some businesses accessed the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), while others are able to rely on existing credit lines or other sources of liquidity,” the report said. The watchdog panel noted several other reasons why businesses may not be seeking the funding: only 160 of the 522 lenders registered with the program have publicized that they are accepting loan applications with new customers; businesses are unfamiliar with the program; and that the eligibility rules are complex and may exclude some businesses that wish to participate.
Brief: Wells Fargo & Co resumed job cuts in early August after it paused layoffs in March because of the COVID-19 pandemic, a spokeswoman said on Friday. The lender said in July it would launch a broad cost-cutting initiative this year as the bank braces for massive loan losses caused by the pandemic and continues to work through expensive regulatory and operational problems tied to a long-running sales scandal. Layoffs, branch closures and cuts to third-party spending are on the table, the bank’s executives had then said. “We expect to reduce the size of our workforce through a combination of attrition, the elimination of open roles, and job displacements,” a spokeswoman said in an email, adding that Wells Fargo was working to bring its expenses more in line with its peers and create a company that is more “nimble”. The bank will provide severance and career assistance to affected staff. Big U.S. banks had postponed decisions about staff cuts when the virus outbreak first began to take hold, with executives saying they are unsure how long the outbreak would hurt the economy and worried about being unprepared if business suddenly snaps back.
Brief: The skyscrapers are mostly empty, the tourists are home and talk of New York’s decay is back. For the city’s real-estate barons, it’s time to put an end to it. A loose coalition of New York’s top property owners and managers is busily working the phones, pressing many of the city’s biggest employers -- including powerhouses like Goldman Sachs, Blackstone and BlackRock -- to speed up the return of workers. Their argument: It’s safe, and the eateries and shops that make Manhattan special can’t hold out much longer. Some are calling it the patriotic thing to do. “I’ve been really pushing the CEOs to bring people back into the office,” said Jeff Blau, the head of Related Cos., the developer behind the Hudson Yards project. “I’ve been using a little bit of guilt trip and a little bit of coaxing.” The reaction for now has been lukewarm. Behind the desperation lies fear of a vicious spiral. The longer commuters stay home, the more local businesses will disappear, and the less reason there is for anyone to return. Executives and firms who’ve made a fortune developing and owning the city’s towers are facing the prospect of a significant slump in demand and prices for offices and residential units. But the ramifications extend to all New Yorkers, Blau said. “I am watching the city decay as nobody is here,” he said. “Now is not the time to abandon the city and expect it to be in the same way you wanted it when you get back in a year from now.”
Brief: The pandemic has battered real estate investment trusts that focus on retail stores, with Bank of America Corp. analysts calling the second quarter the toughest ever for landlords in the modern era of REITs. Before the outbreak of Covid-19, store closings had been running at a slower pace than in 2019 — but now they’ve almost eclipsed last year’s total with still more than four months to go in 2020, the analysts said Thursday in a research report. The 9,544 of closures that Bank of America has tallied this year compares with 9,670 in all of 2019. The jump in shuttered stores is weighing on real estate investments tied to malls and strip centers. Even with rent collections ticking up last month, mall REITs lost 11.6 percent in the third quarter through August 19, the report shows, while strip REITs tumbled 10.3 percent. “Accelerated bankruptcies and store closings will still push occupancy lower into 2021,” the Bank of America analysts said in the report. “While near term investor focus is on rent collection, we look to leasing activity as a signpost of normalizing conditions.”
Brief: In the aftermath of March’s coronavirus crash, numerous fund managers and data providers determined that companies with high ESG scores outperformed during the rapid sell-off — and a surge of money followed into funds focused on environmental, social, and governance issues. A new academic study, however, raises questions about the link between ESG considerations and stock performance during crises. Researchers from Canada’s University of Waterloo, Tilburg University in the Netherlands, and New York University’s Stern School of Business challenged the “widespread claims by fund managers, ESG data purveyors, and the financial press” that companies with high ESG scores were better situated in the pandemic. In particular, the authors — Elizabeth Demers, Jurian Hendrikse, Philip Joos, and Bauch Lev — cited reports from BlackRock, Morningstar, and MSCI, which all found that ESG funds outperformed during the crash. BlackRock, for instance, reported its sustainable funds achieved better risk-adjusted returns during the first quarter, while 24 of 26 ESG-tilted index funds tracked by Morningstar also outperformedtheir “closest conventional counterparts,” according to the analytics firm.
Brief: That is Jeffrey Talpins, the founder of Element Capital, in an Aug. 18 letter to his clients, cited by the Financial Times (paywall), explaining his decision to reposition his $16 billion hedge fund for a potential downturn in the market after an unprecedented rebound in equities in the U.S. and Europe since March. Talpins wrote that “less aggressive fiscal and monetary support” will eventually help lead to a slump from the stratospheric moves that stock benchmarks have enjoyed thus far since March. Bearish investors have pointed to a lack of political will for additional coronavirus relief for embattled American workers and a market that has gotten well ahead of its skis, in terms of equity valuations set against expectations for corporate earnings in the coming months and years. On Thursday, U.S. initial weekly jobless benefit claims rose in mid-August and topped 1 million again, potentially pointing to an increase in layoffs after a summer surge in the coronavirus epidemic or perhaps to more people applying for benefits after President Trump temporarily added $300 in extra federal payouts through a controversial executive order. Despite signs of weakness in the economy, the stock market has been primarily led higher by a handful of technology and e-commerce-related stocks that have enjoyed a boost from the COVID-19 pandemic, helping the broader market defy gravity.
Brief: Some of the biggest money managers are vexed by the same paradox troubling everyone else: U.S. stocks are near an all-time high, but the world still seems to be falling apart. Any number of looming threats could bring the historic rally in U.S. equities to a screeching halt, top hedge fund and mutual fund managers said. They include uncertainty over school re-openings, the November elections, tensions with China and the effect of monetary policy on inflation. While the S&P 500 has surged more than 50% from its March low, that happened with unemployment in double digits and the federal government struggling to contain Covid-19. The equity rally also has lifted the index’s price-to-earnings ratio to 26, compared with an average of 18 over the past decade. All of this leaves some market insiders wary of calling this a recovery. “There’s this massive disconnect between fundamentals and markets,” said Brian Payne, investment officer at the Teachers’ Retirement System of Illinois. “There’s just too much capital chasing investments, the Fed is flooding markets and that leverage isn’t going to the real economy. As we approach the election and concerns over a ‘blue sweep’ grow, that could be the inflection point where people’s bullish sentiment turns bearish.” Chris Rokos’s multibillion-dollar hedge fund is modestly bullish in the short-term but sees volatility ahead, as the market underestimates the potential for bigger moves over the next couple of months.
Brief: UBS Group AG is overhauling the legal structure at its key wealth management unit in a move that will cut costs and free up billions of dollars for lending in higher-growth markets. The project -- known as Rigi after a famous Swiss peak -- will see the bank transfer large customer deposits out of its Swiss entity into the bank’s main UBS AG legal unit, people familiar with the matter said, asking not to be identified as the plans are private. The change will allow the bank to boost loans outside Switzerland, the people said. Rigi partially rolls back measures from the 2008 financial crisis, when Switzerland told UBS to create separate legal entities that would be insulated in the event of a surprise bankruptcy. Moving the deposits would help the bank toward its target of lending between $20 billion and $30 billion a year to wealthy clients outside its home market, the people said. “We are making changes to our legal entity structure in order to improve the overall efficiency of the Group,” a UBS spokesperson said in an emailed statement… In the aftermath of the financial crisis, UBS wealth-management clients who held their money in Switzerland, even if they lived elsewhere, had their funds placed at the bank’s ringfenced local entity. Most international clients with deposits in Switzerland will now be under UBS AG. That will spread deposits more evenly throughout the group and is said to satisfy regulators, one of the people said.
Brief: For the first time in years, the plurality of investors plan to put more money in hedge funds, not less. Forty-four percent of hedge fund investors surveyed by Preqin in June said they intended to increase their commitments to hedge funds over the next year — nearly double the proportion from a year ago. This group far outweighs the 28 percent intending to downsize their hedge fund allocations. These findings mark a sharp change from the last four years, when investors were more likely to lower their hedge fund allocations than raise them. “Volatile markets have increased appetite for hedge funds,” Preqin said in its mid-year report on alternative assets. But nearly half of surveyed investors were disappointed by their hedge fund managers’ performance over the last year. Forty-seven percent said their portfolios had performed worse than expected, while just 6 percent reported exceeding them. Despite this, investors were more optimistic about hedge funds than they were about any other alternative asset class. Thirty-nine percent predicted that hedge funds would perform better over the next year, compared to 28 percent who thought hedge funds would perform worse.
Brief: Financial advisors have been more involved in managing client portfolios since the spread of the Covid-19 pandemic, according to a new report, even though most probably shouldn’t be. The average team potentially capable of creating custom portfolios for clients has an average of nine people and those practices are often supported by a centralized investment group, according to Cerulli. The majority of wealth management practices lack the personnel to properly manage investment portfolios. More than half of all practices, or 55%, rely on their own investment research and portfolio or model construction. But only an estimated 7% are capable of doing that effectively, according to Cerulli Associates, a Boston-based research and consulting firm. TAMPs, or turnkey asset management platforms, which help wealth managers outsource some or all of their investment management responsibilities, have been (albeit, self-servingly) railing against ill-equipped advisors managing portfolios. “That is not where the business is going. And TAMPs are here to really make the advisors way more valuable to the end client, to the investor,” AssetMark CEO Charles Goldman told RIA Intel about the busy but little-known corner of financial services. But a new survey published Wednesday suggests that advisors are generally not heeding the recommendations of researchers and others. Some are relying even less on third-party model portfolios this year.
Brief: Giant fund house Baillie Gifford saw its highest ever monthly inflows last month as investors piled nearly £1bn into its funds. Morningstar data, published yesterday (August 18), showed £991m was funnelled into Baillie Gifford throughout July in a sign its growth oriented house-style remained in favour with investors. Within their respective categories, many Baillie Gifford funds were among the very top sellers in the month too, as the asset manager’s popularity continued to grow. Philip Milton, chartered wealth manager at Philip J Milton & Company, said the firm’s popularity stemmed from the fact it had called the performance of US tech investments “so right”. He said: “It’s quite easy really. They are to be congratulated, though they are riding the ever extending index and it becomes more dangerous with every point.” Baillie Gifford was an early investor in US technology companies, backing the likes of Tesla, Amazon, Netflix and Alphabet (Google’s parent company) through a number of its funds. Such companies have boomed in the past few years and, more recently, thrived during the coronavirus-induced lockdown while other companies took a beating.
Brief: The convertible bond market is “quietly thriving” in the aftermath of the market shock brought about by the coronavirus crisis, says Man GLG, the long-running discretionary hedge fund management unit of Man Group. Convertibles’ primary market has seen record levels of new issuance this year – particularly in the US - with many first-time issuers entering the fray, while at the same time the asset has cheapened to levels not seen for some years, Man GLG said in a commentary this week. This flurry of activity offers investors “a potentially attractive entry point” into the market, boosting convertible bonds and broadening the opportunity set, according to Danilo Rippa, Man GLG’s head of multi-strategy credit and convertibles, and analyst Chris Smith. After the coronavirus crisis tore through global financial markets, converts are now seen to offer downside risk mitigation, a cheap entry point and improving liquidity, they said. Man GLG’s research noted that during the Q1 market meltdown, global convertibles fell 15.6 per cent, while global equities plummeted 33.6 per cent, with the decline in global convertibles equating to 46.5 per cent the fall in global equities. The subsequent market rally in Q2 saw global convertibles advance 17.5 per cent, as global equities surged 37.5 per cent. As a result, global convertibles were able to capture 46.7 per cent of the move higher in equities.
Brief: A stock market hitting record highs in a pandemic might seem out of touch, but St. Louis Federal Reserve President James Bullard says Wall Street has got it right and he expects the United States to do better than many forecasters anticipate as businesses and households learn to manage coronavirus risks. Though the situation seems chaotic, with federal, state and local officials laying out competing ideas about what activities are safe and under what conditions, Bullard said that shows adaptation in process, and will allow the country to fine-tune behavior and economic activity to what a “persistent” health threat allows. “I think Wall Street has called this about right so far,” he said, noting how firms like Wal-Mart, with its mandatory masking and other rules, have found ways to operate that others will copy. “There is a lot of ability to mitigate and proceed and most of the data has surprised to the upside...So I think we are going to do somewhat better,” Bullard said in an interview with Reuters. “I expect more businesses to be able to operate and more of the economy to be able to run...successfully in the second half of 2020.”
Brief: Canada’s largest pension fund says some of the “radical changes” in consumer behaviors enforced during the pandemic lockdown are here to stay. The Canada Pension Plan Investment Board’s thought leadership lab sees permanent changes to consumer behavior as a result of the global pandemic. The era after Covid-19 will be defined by wider adoption of e-commerce among older consumers, as well as by long-term impacts on health-care and privacy policy, all of which will impact investment portfolios, it says. “The world will be different after Covid-19. For long-term investors, this will mean both new risks and new opportunities as we transition to recovery,” CPPIB portfolio managers Caitlin Walsh and Ruby Grewal wrote in the report. Gains in adoption of e-commerce have been patchy, according to the report. While the U.S. and Europe appear to be rapidly catching up to China, not all merchants are reaping the benefits with big players like Amazon.com Inc. and Walmart Inc. having enormous advantages over smaller retailers with more limited selections and unscalable infrastructure, Walsh and Grewal said.
Brief: The world’s biggest exchange-traded fund tracking oil is facing U.S. regulatory action after it took a series of extreme steps to survive the historic crude selloff earlier this year. The Securities and Exchange Commission has issued the United States Oil Fund ETF, known as USO, with a Wells Notice about the intended measures, according to a filing on Wednesday. The fund was being probed over whether it had adequately disclosed risks to investors after it was forced to dramatically reshuffle the mix of futures contracts it tracked during the market turmoil. That helped protect the ETF, but meant deviating from its past investment strategy. The notice states that the SEC has made a preliminary decision to recommend an enforcement action against the ETF, its Chief Executive Officer John Love and United States Commodity Funds, the company which manages USO. The decision relates to disclosures made in late April and early May. USCF, USO and Love said they intend to vigorously contest any allegations. Judy Burns, an SEC spokesperson, declined to comment. It’s the latest dramatic twist in the story of USO, which was at the center of the storm as crude prices plunged earlier this year. As volatility swept the market, it issued six disclosures in less than two months announcing changes to the fund’s investment strategy, and temporarily halted new share creations -- potentially untethering itself from the contracts it was tracking.
Brief: Oaktree Capital Management is being more conservative than usual with its credit portfolio — particularly after investors piled back into debt and equity following the government’s emergency support for markets during the pandemic. “We see reason to be cautious,” Armen Panossian, Oaktree’s head of performing credit, and Danielle Poli, who leads the product specialist group, said in the asset manager’s credit report for the second quarter. “It is easy to envision a panic scenario in which these investors are shaken by bad news around economic performance and therefore choose to quickly exit the markets.” Some countries and U.S. states are seeing alarming increases in Covid-19 cases after reopening their economies — with some regions reverting to lockdown, Oaktree pointed out. The firm worries that these “fits and starts” have caused companies to file for bankruptcy and said it expects many industries to see several years of stress as they reassess costs such as real estate. “Liquidity injected into the markets by central banks has allowed investors to look past the ‘valley’ of lost output during the pandemic,” Panossian and Poli wrote. “Today’s pricing of risk assets indicates an expectation for a quick economic recovery.” Oaktree, the Los Angeles-based investment firm cofounded by Howard Marks, is protecting capital in anticipation of market volatility while seeking to reserve capital should buying opportunities suddenly emerge, according to the report. In public markets, that means rotating out of companies and sectors that have outperformed.
Brief: The pile of the murkiest trades at global banks, long the bane of regulators, got much bigger during Covid-19. Lenders including Barclays Plc, Citigroup Inc., BNP Paribas SA and Societe Generale SA reported a surge of more than 20% in their most opaque assets during the chaotic first half of 2020, Bloomberg calculations show. The banks are now sitting on hard-to-value trades that they say are worth about $250 billion, including categories that gained notoriety during the financial crisis, such as complex debt securities. There’s no single, clear-cut explanation for the jump in these so-called Level 3 assets. For some, the surge was a natural consequence of pandemic turmoil: safer assets became difficult to price as markets froze, and risk managers had to shunt them into a different category, according to analysts and people familiar with the situation. Others are likely to have added to their riskiest bets after seeing the potential for a windfall in the chaos, said Jerome Legras, managing partner at Axiom Alternative Investments. “Banks need a little bit of complexity to actually make a lot of money,” said Legras, who oversees about 1.6 billion euros ($1.9 billion) at Paris-based Axiom, including bank debts. “Clearly, there is a link with record profits.” Either way, for many of the lenders, the increase since the end of December was the biggest in half a decade. As European banks don’t report quarterly Level 3 figures, Bloomberg News used six-month figures for comparison.
Brief: Employees at global asset manager Carlyle Group have been told to avoid public transport when offices reopen around the world. They must avoid public transport on their commute, and if they use public transport over weekends, they should work from home for 14 days, according to one report. Staff are expected to walk, bike or drive to the company’s offices, including in New York and Washington, D.C. as it looks to control the spread of the coronavirus and avoid staff outbreaks. Carlyle Group CG, -0.13% said that returning to its 31 offices globally would be “entirely voluntary” and the measures around public transport were to protect its staff. “Our global policy, which includes encouraging workers not to use public transportation, is designed to protect the health and well-being of every colleague,” it said. “As the situation continues to evolve, we are asking everyone to take an approach that works for their personal situation,” it added. Offices at many of the world’s biggest financial institutions have been near empty throughout the coronavirus outbreak, and many firms are looking at ways to permanently keep staff working remotely to some extent.
Brief: Brigade Capital Management LP told a federal judge it can’t return $175 million that Citigroup Inc. says it paid as part of a $900 million error because the money went to other funds, while the bank says Brigade is the only one of dozens of lenders that has “flat out” refused to return the money. Citigroup, which sued the money manager on Monday, wired payments to about 40 funds that use Brigade as their investment or collateral manager, and knows Brigade itself isn’t one of the lenders and doesn’t have the money it’s seeking, Brigade said in a legal filing Tuesday. The bank has asked the court to order the firm to return its share of the $900 million it inadvertently wired to Revlon Inc. lenders, some of which are locked in a bitter fight with the struggling cosmetics giant. Citigroup has recouped less than half of the money, which it blamed on a clerical error, and some lenders are refusing to pay, saying Revlon was in default on a loan and should have repaid them anyway, according to people with knowledge of the matter. But at a hearing on Tuesday before U.S. District Judge Jesse Furman, a lawyer for the bank said Brigade is the only lender that has declined outright, while others have given the payments back and Citigroup is in talks with still others.
Brief: The S&P 500 index hit an all-time high on Tuesday, completing its recovery from the stock market crash after the onset of the coronavirus crisis in February. The index was up at 3,394.99 points at 09:48 a.m. ET, topping the high of 3,393.52 hit on Feb. 19 and further underlining the disconnect between a rally driven by trillions in official stimulus and a recession-hit U.S. economy. The tech-heavy Nasdaq Composite in June was the first of the three major U.S. stock indexes to reclaim record highs as investors gravitated to stocks including Amazon.com and Netflix seen as stay-at-home winners from COVID-19 lockdowns. It has taken the benchmark S&P 500 about two months longer as surging COVID-19 cases sparked fears of another round of shutdowns that would again cripple business activity. On the day, the S&P 500 gained 0.4% putting it up about 55% from March’s lows. The Nasdaq gained 0.6% to hit a record high and the Dow Jones Industrials, which is still about 6% off its February highs, added 0.1%.
Brief: Managers from Pacific Investment Management Co., Amundi SA and BlueBay Asset Management LLP are sticking with, or even adding to, bets on banks’ CoCos, after prices of the bond-stock hybrid whipsawed during the pandemic. Initial fears about the economic wreckage wrought by the coronavirus sent prices into free-fall in March, pushing yields close to a record 15%, according to a Bloomberg Barclays index. Since then the bonds, which are also known as Additional Tier 1 debt, have recovered to about 5.6%, rewarding portfolio managers that bought more of them during the market volatility. The securities’ appeal lies in their higher-than-average interest to compensate investors for the risk of holding notes that stand first in line for losses if the issuer goes bust. In an era of central bankers keeping growth on life support with base rates at, or even below, zero, more investors are prepared to consider buying them. At the same time, they’re not as risky as they once were. A decade-long drive by banks to build up capital buffers to absorb losses after the 2008-2009 financial crisis, has also attracted investors. “AT1s of European banks still look incredibly cheap,” said James MacDonald, a co-manager of BlueBay’s $1.16 billion Financial Capital Bond Fund, which invests in the bonds. “Banks have become much safer since the previous crisis, and that’s not fully reflected in spreads yet.”
Brief: Jeff Smith has become the latest activist investor to go on the hunt for a mystery company to acquire Smith’s Starboard Value launched a blank-check company Tuesday, and said it plans raise as much as $345 million to buy and fix up a company, leveraging its experience as an activist investor. Starboard Value Acquisition Corp. will seek to raise $300 million by issuing 30 million units at $10 apiece, according to a filing. The value may increase by $45 million if underwriters exercise an over-allotment option, the filing shows. The firm is following at least two other activist investors into the space. In July, Bill Ackman’s Pershing Square Capital Management raised $4 billion for a blank-check company. Dan Loeb’s Third Point launched one in 2018 and agreed to acquire payment provider Global Blue -- despite revising the terms of the deal in the wake of the Covid-19 crisis. Blank check companies, also known as special purpose acquisition companies, or SPACs, raise money on the public markets to make a purchase within a set period of time, usually about two years. They don’t identify a target until shares are trading.
Brief: Even as hedge funds have increasingly invested in large vaccine developers since Covid-19 shut global economies in March, they’ve mostly sat on the sidelines as the stocks of small and mid-cap companies working on a vaccine rallied by more than 1,000 percent this year. Although hedge funds clearly missed out on a big opportunity, their lack of exposure to these stocks may also be a healthy show of restraint, according to Jon Caplis, CEO of hedge fund research and analytics firm PivotalPath. The research firm’s index of small and mid-cap vaccine developers has increased 1,191.1 percent this year through July. Hedge fund managers told PivotalPath that valuations of these stocks have been too high given that in the end there will be very few companies that win the vaccine race. Caplis said the intelligence he’s gotten from hedge funds has been consistent. Back in April and May, they said that the stocks had rallied so much that there was a lot of downside risk in betting on any one company’s success. PivotalPath’s quantitative analysis also showed that hedge funds held a negligible amount of these stocks.
Brief: London-based asset manager Schroders has permanently embraced flexible working across its business. In a statement issued today, Schroder said that the move will allow employees to adopt working practices that “best meet client responsibilities, business requirements and their individual working patterns, while also ensuring that we still have face-to-face interaction to maintain our culture of collaboration, innovation and strong productivity”. The statement added that Schroders continues to see many benefits in people coming to the office and “this will remain an important part of our approach to flexible working”. Emma Holden, Schroders’ global head of human resources, said: “Schroders embraced flexible working long before lockdown and the investments we have made in remote-working technology over the years meant our business has not missed a beat since March. "But in the space of a few months, we have made 20 years progress in attitudes towards flexible working, and we are going to continue with this momentum.
Brief: The coronavirus crisis has hurt earnings, spending, and caused never-before-seen unemployment levels in the U.S. But a new survey from advisory firm Willis Towers Watson finds that most companies are planning to give employees raises and bonuses next year. Willis Towers Watson surveyed U.S. industries about their 2021 compensation plans and found that companies are projecting salary increases of 2.8% on average — across all levels of employees, hourly and salaried. According to the survey, this year saw a 2.7% increase, slightly below the projected 3%. The standard over the past decade has been around 3%. This year 14% of companies elected not to plan pay increases, and many industries are tightening their belts this year. The financial services industry, Reuters reports, expects to see bonuses slashed and job cuts with only investment bankers doing well as companies scramble to raise money. However, Willis Towers Watson's findings indicate that only 7% of companies plan to forgo raises next year, which the company calls "an indication that many organizations are projecting a turn toward normalcy in 2021…
Brief: A Joe Biden and Kamala Harris victory in the US presidential election will be “disastrous”, veteran investor Mark Mobius has warned. Mobius, who left Franklin Templeton after more than 30 years in 2018 to set up Mobius Capital Partners, told Financial News that US President Donald Trump’s stance of lifting coronavirus lockdowns will kickstart economic recovery. “It [a Biden-Harris win] would be disastrous,” said Mobius. When asked whether a Trump win would boost the stock market, Mobius said: “Yes, definitely. His goal is to get people back to work, reduce unemployment and generally boost the economy.” Trump is somewhat losing ground to Biden, the former US vice president. Fifty per cent of US registered voters say they would vote for Biden if the election were held now, while 41% back Trump, according to the latest Wall Street Journal/NBC News poll. The coronavirus crisis has battered the world’s largest economies that froze into lockdown over the past couple of months. Last week, the UK stumbled into the “largest recession on record” because of the pandemic, which has killed nearly 47,000 people in the country. “Unless they [Britain] are able to end the shutdown policies and also end the erratic policy moves, the recession will continue and economic recovery will be difficult,” Mobius said. Meanwhile, the US economy shrank at a 32.9% annual rate between April and June — the country’s deepest decline since the government began keeping records in 1947.
Brief: Jim Momtazee, a former dealmaker at U.S. buyout firm KKR & Co Inc (KKR.N), has launched his own firm to pursue private equity deals in the healthcare sector. Momtazee, who spent 21 years at KKR and led its Americas healthcare team for a decade, said in a statement he formed Patient Square Capital together with Maria Walker, a former partner at consulting firm KPMG. The move comes as the outbreak of the novel coronavirus has strained some healthcare providers, while spurring growth in some sectors such as telemedicine and vaccine production. Patient Square Capital plans to look for deals across the healthcare industry, including technology-enabled services, biopharmaceuticals, the pharmaceutical value chain, medical devices, diagnostics, providers, digital health and consumer health, the statement said. “We’re going to be broad-based in our focus on all aspects of healthcare, bringing depth of knowledge, scale, expertise, and long-term view to our investments,” Momtazee told Reuters in an interview. Prior to leaving KKR last year, Momtazee worked on some of the buyout firm’s biggest healthcare deals, including the $33 billion take-private of U.S. hospital operator HCA Healthcare Inc (HCA.N), as well as the acquisition of contract research firm PRA International for $1.3 billion in 2013.
Brief: In mid-July, investors representing nearly $1 trillion in assets joined with a bipartisan group of former legislators, regulatory agency heads, investors and other leaders to call on the Federal Reserve and other financial regulators to address and act on climate change as a systemic risk. They wrote: "We call on you to immediately consider whether decisions being made right now could inadvertently exacerbate the climate crisis. Additionally, we ask you to implement a broader range of actions to explicitly integrate climate change across your mandates. Such actions are needed to protect the economy from any further disruptive shocks." The ongoing response to the COVID-19 pandemic has underscored the critical importance of financial regulators — particularly the Fed — in keeping the economy stable and resilient in the face of systemic disruptions. Yet, as the Fed has pumped trillions of dollars into keeping our markets afloat through efforts like the Main Street Lending Program and by broadening the tent of corporate bond purchases, there are growing questions about the climate impacts of these decisions and the embedded financial risks that they expose our markets to.
Brief: America is in bad shape. While the rest of the world seems to be moving past the Coronavirus, the US is still experiencing record deaths nationwide. Americans continue to struggle just to get bills paid, while Washington debates semantics surrounding mail-in voting. The disconnect between Main Street and Wall Street continues to grow larger, to the point that when (not if!) the stock market bubble pops, it will be nothing short of disastrous for the large majority of the population. Let’s start with what we know. President Trump recently signed four executive orders aimed at Coronavirus-related economic relief. Most notable are the orders that extend unemployment benefits and the federal eviction moratorium. Firstly, Trump’s unemployment order specifies USD44 billion in funding to extend enhanced unemployment benefits to a USD400 weekly payment for those already collecting state benefits. How soon this will be implemented or how many people stand to benefit remains unclear, as states must both request the assistance and have a system in place to deliver it. There are a myriad of issues concerning this requirement, most important being the fact that state systems are objectively not prepared for the volume that such benefit distribution would entail. Associations representing states have estimated that it will take at least five months to enact changes of this scale.
Brief: The U.S. stock market looks like “Wile E. Coyote, running off the edge of a cliff,” according to asset manager GMO’s James Montier. According to Montier, the U.S. stock market has priced in all the good news it possibly can, which suggests little upside for value investors right now. This is a reversal from his and colleagues’ previously bullish position on the markets in March. “There is no margin of safety in the pricing of U.S. stocks today,” Montier, who works in asset allocation at GMO, wrote in a new white paper, adding that the U.S. stock market “appears to be absurd.” The rally narrative is that investors are linking the Federal Reserve’s balance sheet expansion and the equity markets, Montier wrote. By performing quantitative easing, the Federal Reserve would lower the bond yield, and as a result, drive up the stock market, as the thinking goes. Montier is skeptical, however, of a “clear link” between bond yields and equity valuations. Quantitative easing hasn’t previously lowered bond yields. He pointed to 10-year bond yields during three recent quantitative easing programs: January 2009 to August 2010, November 2010 to June 2011, and September 2012 through October 2014. During each of those time frames, yields rose.
Brief: All UK companies should test staff for coronavirus every week in order to bring more people back to their offices, according to the boss of one of the UK’s most influential business lobby groups. Karan Bilimoria, the president of the Confederation of British Industry - the body which represents 190,000 businesses, together employing nearly seven million employees - told Financial News that the government should offer free Covid-19 testing to the UK’s entire population. The move would encourage more people back to the workplace, and help spur a recovery in the UK economy which plunged into its largest recession on record this week. “Even if the government offered free testing to every member of the population of a country of 66 million people every two weeks, that would be a fraction of what we're spending on all these other [coronavirus] measures,” Bilimoria, who is also the founder and chairman of Cobra Beer, told FN. The UK government has so far spent nearly £190bn to deal with repercussions of the coronavirus crisis, according to Treasury figures from July.
Brief: Saudi Arabia’s sovereign wealth fund has paid back a $10 billion bridge loan two months ahead of schedule, according to people familiar with the matter. The Public Investment Fund has fully repaid the loan, which was due in October, the people said, asking not to be identified because the information is private. It had signed the loan last year to raise funds while it waited for the proceeds of the sale of its nearly $70 billion stake in Saudi Basic Industries Corp., which closed in June. Saudi Arabia has been pushed into a deep budget deficit by the coronavirus pandemic and oil-price slump, forcing the kingdom to hike taxes and increase the government debt ceiling to 50% of economic output. The PIF is a key part of a plan by Crown Prince Mohammed bin Salman to transform the economy and wean it off a reliance on petroleum revenues. A group of 10 banks provided the loan: Bank of America Corp., BNP Paribas SA, Citigroup Inc., Credit Agricole SA, HSBC Holdings Plc, JPMorgan Chase & Co., Mizuho Financial Group Inc., Mitsubishi UFJ Financial Group Inc., Standard Chartered Plc and Sumitomo Mitsui Banking Corp. A spokesman for the PIF confirmed it had been repaid ahead of schedule, without providing further details.
Brief: U.S. corporate defined benefit plans face higher liabilities in the coming months as the impact of the COVID-19 pandemic becomes apparent, according to a report from Moody's. The report released Thursday is one of a series of in-depth sector reports from the credit agency and says rising pension liabilities will put more pressure on cash flow in sectors hardest hit by the pandemic, particularly in the airline and auto industries. With discount rates plummeting to what Moody's said is an all-time low of 2.26% as of July 31, the 50 companies with DB plans sampled by Moody's will see their adjusted debts rise by $120 billion. The report also said that while the CARES Act provides some short-term relief for corporations with DB plans, the help is limited. The Coronavirus Aid, Relief and Economic Security Act, signed by President Donald Trump on March 27, provides companies the option of a one-year holiday from making 2020 pension contributions, with interest accrued, until Jan. 1, 2021.
Brief: Private equity deals saw a late-July surge and whether this is part of a recovery or due to a backlog of deals that were impossible to close in April, May or June, EY Global is advising funds to make adjustments for the post-COVID world now to capitalize on the moment. To that end, Andres Saenz, private equity leader on EY Global’s markets leadership team, said the need to carry out a full-swing overhaul to step up digital transformation and rethink investments under the “new normal” are now part of nearly every conversation held with investors. Currently, there is US$2.6tn in “dry powder” private equity capital globally ready to release and a pool of private limited partners eager to the pull the trigger on investment as economies begin to exit the pandemic’s initial shock. Saenz was speaking Wednesday during Mexico’s annual private equity event, hosted virtually by Amexcap, which groups 120 member private equity funds with total committed resources of US$60bn, of which 54% has already been invested in projects and companies in sectors such as energy, infrastructure and real estate.
Brief: In the immediate wake of COVID-19, Global 2000 companies moved to slash funding for emerging technologies, such as automation, artificial intelligence (AI), blockchain, and 5G, according to new KPMG International research. However, many executives are optimistic emerging technology spending will likely increase in the next 12 months, as enterprises recognize COVID-19 creates a burning platform to accelerate digital transformation and stimulate long-term growth. Enterprise reboot, a new report from KPMG International and HFS Research, surveyed 900 technology executives* to explore the current and future state of emerging technologies and demonstrates a dramatic shift in how businesses are approaching emerging technology now versus just a few months ago before the onset of COVID-19. “This crisis isn’t affecting all industries equally, but for many of the industries facing crisis, managing the transition to a digital business model is imperative. However, doing so is made more complicated in a time where investments are critical, but cash must be preserved,” said Cliff Justice, KPMG global lead for Intelligent Automation and US lead for Digital Capabilities. Specifically, 59 percent of executives surveyed say that COVID-19 has created an impetus to accelerate their digital transformation initiatives, yet approximately four in 10 say they will halt investment in emerging technology altogether as a result of COVID-19.
Brief: Amid one of the greatest credit booms ever, a key player in the financial world has been conspicuously absent. Private equity firms that would usually jump at the chance to go on a debt-fueled buying spree are only just tip-toeing back to the market. In theory, business should be flourishing. Borrowing rates are close to record lows and investors are gorging on everything from rescue loans to shareholder payouts due in large part to historic support from the Federal Reserve. Banks are also ready to open the checkbooks after selling billions of dollars of debt for buyouts and acquisitions they feared they’d be stuck with as credit markets froze in March. Yet sponsors that slammed the brakes on deals, citing too much uncertainty on how long the coronavirus outbreak will last, have been sitting it out until now. “Two months ago, most of our clients who would have been thinking about acquisition financings, whether they’re corporate or sponsor, were tending to their own existing portfolios,” said John McAuley, head of North American leveraged finance at Citigroup Inc. “Now these companies and sponsors are looking at the opportunity set and being more proactive.”
Brief: Brookfield Asset Management Inc. said it raised a record $23 billion during the second quarter and expects to accelerate the pace of investments after the disruption caused by Covid-19. The Toronto-based alternative asset manager said it has $77 billion in cash, securities and other available capital, including uncalled capital commitments from clients. That figure includes $12 billion raised in its latest distressed debt fund by its Oaktree Capital Management unit. When that fund is closed, it should be the largest ever raised for distressed debt investing, Brookfield Chief Executive Officer Bruce Flatt said in a letter to shareholders. “While we do not expect full recovery of the global economy until well into 2021, we believe the worst is over, and our own businesses are slowly recovering,” said Flatt. “We have been keeping our powder dry, waiting for opportunities we believe will come.” Flatt said that while the quarter was busy for raising capital, its three flagship funds are now 50% committed and that the firm expects to start raising money again for their next vintages in 2021. “We are being patient with our capital, but we expect the pace of investment to increase over the next 12 months as opportunities present themselves,” Flatt said.
Brief: Some of Britain’s biggest financial and legal firms have stepped up support for staff and customers suffering domestic abuse after the coronavirus lockdown shed new light on the scale of a problem affecting millions nationwide. Legislation now progressing through parliament suggests this is costing Britain 66 billion pounds ($86 billion) a year, with official figures estimating around 2 million people, mainly women aged 16 to 74, suffer some form of domestic abuse. The Domestic Abuse Bill will introduce a statutory definition that includes physical violence but also emotional, coercive and economic abuse, after extensive lobbying by the charity Surviving Economic Abuse and the financial sector. As the coronavirus pandemic forces millions to work from home and calls to helplines surge, Lloyds Banking Group (LLOY.L) and NatWest Group NWG.L have teamed up with charities SafeLives and Surviving Economic Abuse to offer financial as well as practical aid to victims. And with remote working increasing social isolation, some firms are also striving to help staff.
Brief: State Street Global Advisors thinks that the economy can only outlast and outwit the new SARS coronavirus for so long. It’s going to take agreed-upon medical treatments greenlit by the FDA, or a vaccine, to put this pandemic to bed. “It will be challenging to sustain investor confidence through the end of the year unless (there is successful) development of a vaccine or an effective, scalable medical treatment...so that the most vulnerable populations can benefit by the end of 2020 or early 2021,” says State Street Global Advisors global CIO Richard Lacaille. “There will be no complete recovery without a medical solution to Covid-19.” He defines the recovery stages in three phases, with the first two all backstopped by unprecedented global stimulus from Treasury and central banks everywhere. We are now in phase two. For phase two to be successful, lockdowns have to be lifted, meaning restrictions have to be removed. The longer restrictions remain, the longer doubts remain; and the longer doubts remain, the less likely it is that businesses will rehire and reinvest. Foreign investors in the U.S. would also cash out if this continues.
Brief: An outdoor lunch meeting felt like a major event recently for venture capitalist and former endowment chief Carrie Thome, even though, as she joked, their only exposure was eye contact. Months in the pandemic, institutional asset management remains in effective lockdown. Consultants — perhaps the top road warriors of all — were banned from work travel by company edict as of mid-July, a sampling told Institutional Investor recently in a private poll. Two-thirds of pension funds, endowments, foundations, and other allocators’ offices remained totally closed. Even among those allowing some staff in, all but a handful had strict capacity restrictions in place. A few executives — those with keys and young families at home — have guilty confessed to sneaking into their officially shuttered offices, just to get some work done in the peace and quiet. “No one else is here… I had to get away from my kids,” one pension chief told II. “Plus my desk has multiple monitors set up, which really helps productivity.” And visits from outsiders? Forget about it. Just a single respondent — an allocator in the already-distanced state of Hawaii — said their office is open and, pending a temperature check, conducting in-person meetings. But nearly 90 percent of the 57 respondents couldn’t visit anyway: organizations banned work travel.
Brief: Covid-19 hasn’t dampened investors’ return expectations over the next five years, according to a global survey from New York–based Schroder Investment Management Ltd. The survey found that investors were expecting an average return of 10.9% over the next five years. Investors in the Americas had the highest expectations, predicting returns of 13.2%. Europeans were less optimistic, predicting returns of 9.4%. By country, investors in the U.S. were the most optimistic, expecting an average return of 15.4%, followed by investors in Indonesia (14.8%) and Argentina (14.6%). Japanese investors were the least optimistic, expecting an average return of 6%, followed by Swiss (7%) and Italian (7.9%) investors. Globally, investors didn’t appear particularly concerned about the lasting economic effects of Covid-19. Only 6% expected the economic impact of the virus to persist for more than four years, while 21% expected the impact to last more than two years. The pandemic did, however, cause many investors to make changes to their portfolios. Twenty-eight per cent said they made substantial changes, while 25% said they made some changes.
Brief: The coronavirus pandemic has led to an unprecedented slowdown in the global economy. The U.S. gross domestic product (GDP) fell by 33% on an annual basis in the second quarter, more than triple its previous worst quarter. The eurozone fared even worse: Its GDP contracted by 40% on an annual basis during the second quarter. In the midst of this global slowdown and ongoing geopolitical uncertainty, the alternative assets industry remains healthy. Yield-hungry investors are continuing to pour capital into alternatives with assets under management now exceeding $10 trillion according to Preqin, the alternative assets industry's foremost provider of financial data and analytics. In a survey conducted last November by Preqin, the majority of alternative asset investors said they were satisfied with their portfolio’s performance last year. Nine out of 10 (87%) private equity (PE) investors said their investments met or exceeded their return expectations last year. About the same percentage (86%) of PE investors said they intend to commit at least the same amount of capital to PE this year as they did last year.
Brief: Venture capital firm Amadeus Capital Partners is planning to raise three funds with a combined target of about $400 million for tech investments in industries including enterprise software, artificial intelligence and cybersecurity, people with knowledge of the matter said. The two largest funds have targets of $150 million each, said two people familiar with the plans, who asked not to be identified because the fundraising isn’t yet public. They are in the pre-marketing stage and the British firm will start raising money in the autumn, one of the people said. The pan-European Scale Fund, led by managing partner Andrea Traversone, will look for investments in cybersecurity, enterprise software, health tech and artificial intelligence, with a particular focus on companies using AI to uncover new types of materials, one of the people said. Amadeus has a track record in these areas, including its recent exit from an early investment in cybersecurity company ForeScout Technologies Inc., now listed on the Nasdaq with a market value of $1.44 billion. The Latam Sustainable Growth fund will focus on Latin American companies in the fintech, edtech and software-as-a-service sectors, the person said. The fund will be headed by Pat Burtis and newly hired partner Kai Schmitz. The firm already has an office in Bogota and portfolio companies, Creditas and Descomplica, in Brazil.
Brief: The COVID-19 pandemic has hit Black Americans especially hard after decades of social and economic injustices, but it also presents an opportunity for systemic change, said financier Robert Smith, the wealthiest African-American according to Forbes. In a video interview with Reuters, the CEO of private equity firm Vista Equity Partners said companies that profited from the Transatlantic slave trade should consider making reparations to African-Americans. “I think that’s going to be a political decision that’s going to have to be made and decided upon. But I think corporations have to also think about, well, what is the right thing to do?” Smith said in a video interview. Corporations “can bring their expertise and capital to repair the communities that they are directly associated with in the industries in which they cover,” he added. “I think that has to be a very, a very thoughtful approach. But I think action needs to be taken.”
Brief: The pandemic has created an unexpected boom in one corner of finance: surveillance. As traders continue to work from home, banks are beefing up their efforts to monitor staff and root out any misconduct, according to NICE Actimize, which makes compliance, risk and financial-crime software. There’s been a surge of interest in advanced technology, such as machine learning, that can help employers catch unusual employee behavior, said Chris Wooten, an executive vice president at the company. “With employees shifting to remote work, there was an increase in both the types of communications to be monitored and the types of behavior that could raise concerns,” he said in an email. “We saw communications channels expand from what was traditionally just office phones and trading turrets, to include personal mobile phones and unified communications platforms such as Microsoft Teams.” Of 140 financial institutions surveyed by NICE Actimize, 76% of respondents said they expect monitoring and surveillance will increase over the next three years. Almost 20% said those measures would apply to all employees. “Clearly this reflects the investments that financial institutions are making now, or will be making in the future,” Wooten said.
Brief: Jeffrey Gundlach said he thinks Donald Trump will win re-election because polls showing otherwise don’t reflect the true support for the president.
“Will Joe Biden beat Donald Trump in November? I don’t think so,” Gundlach said during a webcast Tuesday for his company’s closed-end funds. “I’d bet against that. I think the polls are very, very squishy because of the highly toxic political environment in which we live.” On Biden’s choice of Senator Kamala Harris as his running mate, Gundlach said she is “a little too charismatic.” “I don’t think it’s a good pick,” he said. “She might be a little bit dominant with her personality.” Gundlach said much can happen between now and Election Day. “I think there’s a lot of time here, there’s going to be a lot of twists and turns,” he said. Gundlach, who predicted Trump’s win in 2016, has criticized Biden’s electoral chances -- and that of other Democratic candidates. In January, he said he didn’t think Biden would win the Democratic nomination and in March he called him “unelectable.”
Brief: Impax Asset Management says there will be “winners and losers” in the economic transition to a more sustainable economy, as trends continue to be accelerated in the post-pandemic rebuilding process. In a new report, the asset management firm notes that policy makers are unlikely to return to the “old normal” as they move from lockdown to rebuilding. As a result, Impax says that investment opportunities will open up in industrial automation advances, digitalisation acceleration and health, safety and well-being. Risks associated with human capital management, diversity, climate change and biodiversity are “becoming relevant to fundamental analysis across sectors”. The report also identifies four structural changes that will continue to disrupt business as we know it. These include a heightened awareness of systems-level risks; the exposure of supply chain vulnerabilities; social distancing measures changing behaviour; and an acceleration towards a digital economy.
Brief: Employees in the asset management industry can thank the broad market recovery for saving their compensation from the deepest cuts, but there still will be plenty of paycheck pain. Year-end incentive pay at traditional asset managers and hedge funds is expected to fall between 10 percent and 15 percent compared to 2019, according to consultant Johnson Associates’ second-quarter analysis, Private equity staffers will fare better, especially at the large brand-name firms, which benefit from economies of scale. Bonuses for such employees is expected to decline 5 percent to 10 percent relative to last year. But the smaller and mid-sized PE firms will likely make deeper cuts in comp, lopping 15 percent or more from year-end bonuses. While traditional managers have suffered as investors move to lower-fee products like bond funds, hedge funds are still reeling from net outflows on the back of disappointing performance. The largest private equity funds have enormous amounts of cash to invest, but face portfolio company defaults. Alan Johnson, head of the compensation and consulting firm, said PE outfits benefit from leverage when markets are up. “Now they’re on the other side of leverage and it hurts,” Johnson told Institutional Investor.
Brief: SVB Financial Group (NASDAQ: SIVB), the parent company of Silicon Valley Bank, today released the "Family Offices Investing in Venture Capital - Global Trends & Insights Report" in partnership with Campden Wealth Research. The report looks at family offices' investment levels, performance, expectations, barriers toward venture investments, and their expectations for how the market will evolve amid COVID-19. "In the last decade, family offices have emerged as a significant source of capital fueling innovation globally. They are increasingly more open and active in venture, particularly in early-stage companies through direct investments and funds," said John China, President of SVB Capital. "Our research with Campden Wealth shows that family offices are seeing favorable returns in the asset class, and they are acting as strategic advisors and champions to the startups they invest in. We expect to see more family office investors in the venture ecosystem, collaborating and syndicating with like-minded investors and providing a differentiated pool of capital to founders." "We are facing uncertain times due to COVID-19 and an encroaching global recession. In response, family offices are showing their strength as nimble, responsive, and patient investors, often with cash reserves to carry them through turbulent times," said Dr. Rebecca Gooch, Director of Research at Campden Wealth.
Brief: From the historic stock market sell-off and volatility surge that wreaked havoc on investment portfolios during March to the continued working-from-home practices which have thrown up various operational obstacles spanning technology, cybersecurity and infrastructure, the coronavirus crisis has upended all corners of the hedge fund industry. For hedge fund chief operating officers, the pandemic has brought its own unique set of challenges. Managers of all sizes and strategies implemented extensive business contingency plans for home working in order to continue operations. But as firms slowly begin to return to the office following more than four months of lockdown, the concept of a “new normal” continues to be somewhat vague and undefined.
Brief: During the depths of the coronavirus crisis in Europe in late March, Sergio Ermotti remembers sitting in his home study in Lugano, Switzerland, reflecting on the latest financial meltdown to engulf his career as a banker. “If I go through my last eight years, we had a lot of mini-earthquakes, but never of the magnitude of what we are seeing now,” the 60-year-old UBS Group AG chief executive says. “This is a crisis that is driven by fear in a different way…this time it’s not just about people losing their assets or savings, it’s about their life, it’s about their families. It’s so profound, so different.” Switzerland’s largest bank is weathering the crisis relatively well, considering its share price is down only 10 per cent this year, a more modest fall than any other global lender apart from Wall Street’s Morgan Stanley. This is no accident. Both have built wealth management arms that boast more than US$2 trillion of client assets, generating consistent fees from the wealthy and super-rich desperate for advice on how to trade the pandemic.
Brief: While the amount raised and invested by private equity funds capped six years of unprecedented growth in 2019, the health and financial crisis brought about by Covid-19 has put paid to the idea that the good times might continue into the new decade. Certain trends – such as increasingly picky LPs and the incorporation of ESG, P2P, buy and build and extension of share ownership – should intensify in the aftermath of the pandemic, while others – the surge in the value of multiples, jumbo funds, increase in leverage – are likely to fade or disappear completely. It might seem like an age ago, but back before the coronavirus – and its attendant consequences for the world of investment – hit, the PE industry seemed to be in decent shape. But while capital amassed remained at a high level, a plateau had, in fact, been reached and the industry was almost certainly entering the end of a cycle.
Brief: Rhenman & Partners Asset Management, a Stockholm-based hedge fund firm which invests in global healthcare stocks, is optimistic about a post-US election market bounce, and points to “intense activity” among vaccine developers working on a treatment for Covid-19. The firm’s Rhenman Healthcare Equity Long/Short Fund – which trades a range of small, medium and large pharmaceuticals, biotechnology, medical technology and service company stocks – was down in July. But Henrik Rhenman, founding partner and chief investment officer, believes the traditional uncertainty that typically looms over the healthcare sector ahead of every US presidential election will give way to a strong uptick in November and December. Rhenman Healthcare Equity Long/Short slipped 3.7 per cent in July in its euro-denominated class and is down roughly 0.5 per cent for the year so far, while its dollar share class was up 1.1 per cent last month.
Brief: Trading the Covid-19 curve can prove challenging. With global case counts still rising, investors should consider buying into countries that have gotten a better handle on the virus than others, ETF Trends CEO Tom Lydon told CNBC’s “ETF Edge” on Monday. “Take Europe,” Lydon said. “Areas like Italy are not doing well with the coronavirus and their markets aren’t doing well. [In] contrast, northern Europe, the Nordic regions, are actually doing really well.” The iShares MSCI Denmark ETF (EDEN), for one, is up nearly 18% year to date. That fund is heavily weighted toward health-care and industrial stocks, with pharmaceutical play Novo Nordisk accounting for more than 18% of the portfolio.
Brief: Real estate investment trust GPT Group has bled $519.1 million after tax for the first half of the year, pointing to COVID-19 related negative property movements for the heavy losses. All properties in the trust were independently valued during the period, resulting in a devaluation of $711.3 million, GPT said. "We have had all our assets revalued during the period with our retail assets revalued by independent valuers in May and again at the end of June as the effects of the pandemic were becoming more apparent," GPT chief executive Bob Johnston said. "The independent valuers have made allowances for both the near-term impacts of the pandemic and also the effects that it is expected to have on the broader economy." Government imposed lockdowns also saw rental collections drop sharply during the first half of the year, with GPT providing relief to both tenants impacted by the government's commercial tenancy Code of Conduct as well as those not eligible for assistance.
Brief: Legal & General Retirement Institutional has announced that despite COVID-19, 2020 is expected to be the second largest year on record for the pension risk transfer (PRT) market. Longevity imageUK PRT is expected to transact £20bn to £25bn, which demonstrates the resilience of this marketplace. Since L&G’s market entry in 2015, their US business has written more than $3.9bn of PRT with 56 clients, which includes four transactions being made in H1, 2020. The success of L&G’s half year results could be down to them being the only insurer who provides PRT directly to pension plans globally. In May, during the height of the UK lockdown, they undertook the first international PRT transaction for IHS Markit. This transaction secured benefits for both their UK and US pension plans.
Brief: During the height of the pandemic-induced market turmoil in March, currencies performed mostly according to how they moved with equities - their equity beta, or how risk-on or risk-off they were. That is now changing. Increasingly, currencies will start to reflect how well countries are dealing with the coronavirus pandemic. We look at which currencies could benefit from that dynamic. Each currency can be placed on the spectrum between risk-on (cyclical) and risk off (defensive). Risk-on currencies do well when equity markets rise. The opposite is true for risk-off currencies. During 2020, this equity beta explained the fate of developed and emerging-market currencies very well. The traditional safe havens of the Japanese yen, Swiss franc and U.S. dollar were the big winners during the height of the coronavirus-induced market turmoil in March.
Brief: Berkshire Hathaway Inc on Saturday announced a $9.8 billion writedown and 10,000 job losses at its Precision Castparts aircraft parts unit, as the coronavirus pandemic caused widespread pain at Warren Buffett's conglomerate. Despite the writedown, Berkshire said second-quarter net income surged 87% because of gains in stock investments such as Apple Inc as markets rebounded. Operating profit fell 10%, cushioned by a temporary bump at the Geico auto insurer, as the pandemic caused "relatively minor to severe" damage to most of Berkshire's more than 90 operating businesses. "The writedown was prudent," said Cathy Seifert, an equity analyst at CFRA Research. "It's a recognition of what the market has long believed, that the purchase price was rich, and the integration not as smooth as many would have hoped."
Brief: Working from home has become the norm during the coronavirus pandemic, and Morgan Stanley predicts that office tenants across Asia will permanently give up between 3% and 9% of their existing office space. That will result in rent declining between 10% and 15% over the next three years, a recent report by the investment bank estimated. Big tenants from the financial and IT industries, which have well established business continuity plans or work-from-home infrastructure, could give up even more office space — at 10% over the next three years, said the report. Below is the projected rental impact from June 2020 to December 2022, according to the report which assessed the rental impact on key financial centers in Asia Pacific.
Brief: Davidson Kempner Capital Management LP doesn’t usually conduct activism in public by itself. Its attempt to kill the $12 billion takeover of Qiagen NV, a European company that makes instruments that detect Covid-19, was a high-profile place to start. The hedge fund says a bid from U.S. diagnostics group Thermo Fisher Scientific Inc. is too low given the testing business will become stronger due to the pandemic. Its campaign has helped secure a justified 10% bump on the opening bid, to 43 euros ($50.71) per share. It still wants more. Judged on near-term valuation multiples, the deal can be seen as cheap despite the sweetener. It’s worth 22 times the $2.28 earnings per share Berenberg reckons the company will make this year. (Qiagen says it will make “at least” $2 per share.) That’s substantially lower than the earnings multiples on which diagnostics peers trade. It’s also at the bottom of Qiagen’s trading range prior to a shock sales warning in October that pummeled the shares and led to the sudden replacement of its chief executive officer.
Brief: KKR & Co. is betting on Brooklyn apartments as the pandemic rattles the housing market in New York City. The New York-based alternative asset manager is in contract to purchase a portfolio of newly developed rental buildings in Brooklyn from Bruman Realty in a deal that’s worth about $860 million including debt, according to people familiar with the matter. KKR is partnering with apartment operator Dalan Management on the deal and will provide the bulk of the equity, the people said, asking not to be named because the matter is private. Representatives for KKR and Bruman declined to comment. Dalan didn’t immediately respond to a request for comment. The deal would be one of the biggest commercial real estate acquisitions in New York this year. The market has largely been frozen as the pandemic roils the economy. Second-quarter apartment transactions dropped 70% in the U.S. from last year, according to Real Capital Analytics. Rental apartments have historically been considered recession-proof, performing well in times of economic turbulence as more people are priced out of owning homes. That thesis could best tested in the Covid-19 era with high unemployment and a sluggish recovery landing hard on renters.
Brief: In April, GSO and Blackstone’s Life Sciences division said they would provide $2 billion to Alnylam Pharmaceuticals to acquire drug royalties, develop new programs for the company, purchase common stock, and provide $750 million in financing from GSO. The transaction was one of the largest financings ever of a biotech company. Dwight Scott, global head of GSO, said the deal originated with Nicholas Galakatos, global head of Blackstone Life Sciences, but ultimately evolved into a comprehensive deal that included GSO, Blackstone Alternative Asset Management, Blackstone’s Tactical Opportunities Fund. “One of my core areas of focus for GSO over the last few years has been to establish tighter integration between liquid and private strategies and across Blackstone. In this quarter, we showed exactly why this has been valuable,” said Scott, speaking in his first interview since the Covid-19 crisis began. In the first half of the year almost 40 percent of the private originations that the firm did were related in some form to the rest of Blackstone’s business. It’s easy to see how GSO would benefit from doing more with colleagues in private equity, real estate, or BAAM, the largest hedge fund business in the world. In the second quarter, assets under management in credit were up by about 6 percent to $129 billion, with inflows of $6.5 billion.
Brief: Oaktree Capital Group Co-Founder Howard Marks says the Federal Reserve’s intervention at the peak of the pandemic was necessary to keep companies afloat and avoid a potential economic shutdown, even if that’s giving his firm fewer distressed-debt targets. “If they had not done the things they did, we would be talking about a much more serious economic event, we may even be using the word depression,” or perhaps global recession, Marks said during an interview with Bloomberg TV Thursday. Global credit and equity markets have staged a dramatic rebound since March, when the Fed first took unprecedented steps to steady the economy. But the central bank has fueled such a rally that distressed debt, which approached $1 trillion outstanding at the height of the pandemic, has since fallen dramatically, presenting fewer options for firms like Oaktree to put billions of dollars to work. Distressed-debt specialists have raised record amounts of cash through the coronavirus outbreak as companies falter and bankruptcies mount. But for many corporations, additional liquidity spurred by the Fed has pushed borrowing costs to near record lows, taking the lowest-rated junk bonds out of distressed territory this week for the first time since late February. Los Angeles-based Oaktree is one of the largest distressed-debt investors in the world, with more than $19 billion committed to credit from troubled companies. The fund has thrived most in times of economic stress, when prices on bonds of companies in danger of defaulting fall to deep discounts.
Brief: The pandemic has certainly not dampened enthusiasm for sustainable investing. In the US, for example, Morningstar reported almost $10bn (€8.5bn) of inflows to sustainable open-end mutual funds and exchange-traded funds in Q1 2020 – over half the total for the whole of 2019.Of course there is always an argument that money follows transitory themes and because ESG portfolios avoid the oil/energy sector – then relative strong performance (as we have seen in recent months) is a given. But is there more to the story than ESG funds simply doing better (and attracting greater interest) because they conveniently don’t invest in hard-hit sectors? Philippe Zaouati, chief executive at Mirova, an asset manager specialising in sustainable finance, insists there is. “We have seen outperformance against the benchmark for several years – with last year a particularly good year. There is a Covid impact – but we were well positioned anyway.” Since the beginning of the year, the pandemic has led to oil price slumps and Zaouati does not see this a short-term pricing anomaly with ‘normalisation’ – so to speak – soon reversing this trend. “I think we are witnessing a cultural change. Covid is a long-term crisis and it is a crisis that is happening at a time when we need to decarbonise the economy. Oil companies’ capex in the near future is going to be low and the sector at a global level is already at a plateau – it won’t go up strongly again.” Which begs the question will we ever see a return to a high demand for oil? After all, the EU Green Deal is spearheading a lot of the recovery efforts and it is prioritising infrastructure and investments that don’t target oil and gas sectors.
Brief: French insurer AXA said on Thursday the planned 1 billion euro ($1.2 billion) sale of its AXA Life Europe unit to Cinven had collapsed, and that it would make no fourth-quarter shareholder payouts after net income fell 40% in the first half. AXA, led by chief executive Thomas Buberl since 2016, also dropped 2020 earnings target following a hike in COVID-19 related claims. The second-largest European insurer after Allianz said first-half net profit fell to 1.43 billion euros from 2.33 billion a year before. Overall revenues fell by 10% to 52.4 billion euros. Underlying earnings at the property and casualty business were down 72% to 544 million euros, largely due to COVID-19-related claims stemming from business interruption contracts and event cancellations. “In the context of the material estimated impact from Covid-19 on underlying earnings in 2020, AXA’s management has withdrawn its Ambition 2020 underlying earnings per share and adjusted return on equity targets,” the insurer said. AXA said its board of directors had decided it would not propose an exceptional distribution of reserves to shareholders in the fourth quarter, following discussions with regulators.
Brief: Aviva Investors, the asset manager owned by insurer Aviva plc, saw its operating profit tumble in the first half of the year to £35 million from £60 million in the same period of 2019. The firm said this was due to capital market weakness, de-risking of asset strategies by internal clients and lower levels of private assets investments. But Aviva Investors said it had diversified its third-party client list and “maintained the positive customer momentum” seen in the second half of last year. Flows from external clients were £1.3 billion compared to outflows in the first half of 2019 and were driven by the UK and North America. At the group level, financial performance was described as “solid”, with an operating profit of £1.25 billion, which was down from £1.39 billion in the same period last year. Amanda Blanc, who has been CEO of Aviva plc for a month, said “we must transform our business” and that this would focus on the UK, Ireland and Canada, places where Aviva has the size and “brilliant customer service”. “I have been CEO for one month and I am confident we have many of the ingredients to make Aviva a winner. From this moment on, we must deliver. Nothing else will do. My focus is making sure it happens and at pace”.
Brief: BlackRock's 16,000 employees may continue to work remotely for the remainder of the year wherever they are located, even as the firm reopens offices around the world in the midst of the COVID-19 pandemic. "Given the uncertainty in many of our locations and to help you plan ahead, we will continue providing all employees the option of working from home for the rest of 2020. When your office is available for use, you can decide to work from the office, work from home or split your time between the two," said an Aug. 3 employee memo obtained by Pensions & Investments. Where BlackRock reopens offices based on local conditions and government guidelines, it will use a split-team model for the time being to "ensure social distancing," said the joint memo from Robert S. Kapito, director, co-founder and president; Lawrence Knafo, managing director and chief security officer; and Manish Mehta, managing director and global head of human resources. Going forward, BlackRock will increase office occupancy in areas where COVID-19 conditions have improved or reduce an office's in-person head count if pandemic conditions worsen.
Brief: BlackRock Inc. has joined a growing chorus of investors and analysts warning of resurgent inflation risks, as the global battle against the coronavirus crisis creates a convergence of ultra-easy monetary policy and expansionary budgets. The world’s largest asset manager pointed Thursday to a potential pickup in U.K. price pressures after the Bank of England held record-low interest rates and maintained its asset-purchase program. Last week, Goldman Sachs Group Inc. highlighted growing concerns over the U.S. inflation outlook, which the bank said could even threaten the dollar’s reserve-currency status. While the world’s nations are unleashing unprecedented spending to counter the economic shock from the pandemic, central banks are maintaining ultra-loose monetary conditions to cap the costs of such fiscal largess. This policy combination is now fueling fears of a spike in consumer prices down the line as more money chases fewer goods. Market-implied price expectations have climbed globally in recent months, fueling a rally in gold, and Wall Street’s heavyweights from Pacific Investment Management Co. to AllianceBernstein Holding LP have cautioned in recent months that inflation is a problem that’s bound to return.
Brief: Approvals for a potential COVID-19 vaccine later this year could threaten the recent surge in speculative investment in big U.S. technology companies and pull investors back towards more traditional growth-linked cyclical stocks, according to analysts at Goldman Sachs. Seen as "stay-at-home" winners in the coronavirus lockdowns, shares in Apple Inc (AAPL.O), Facebook Inc (FB.O), Amazon.com (AMZN.O) and Alphabet (GOOGL.O) have surged this year and now account for nearly a fifth of the S&P 500's .SPX stock market value. Bumper results from the iPhone maker last week pushed it past Saudi Aramco (2222.SE) to become the world’s most valuable publicly listed company and heading towards a $2 trillion valuation. In a global markets research note sent to clients, Goldman analysts said the current rally could last until Labor Day in early September, but would be threatened by updates on vaccines. “Approval could ... prompt the kind of rotation that started and petered out in May and early June, supporting traditional cyclicals, steeper curves and banks, and challenging tech leadership,” they argued.
Brief: The fund management sector looks set to swoop on the topic of social inequality once markets emerge from Covid-19. By now you may have read ample articles (like this) that say not only is ESG (environmental, social, governance) investing not dead, but that Covid-19 will reinforce it and, importantly, give more impetus to the ‘social’ dimension. “Whereas climate change put environmental issues front and centre, the pandemic has elevated urgency on social issues,” says Thomas Kuh (pictured below), head of ESG at Truvalue Labs in San Francisco. “Covid-19 has exposed serious, systems-level problems like inequalities of income and wealth that need to be addressed,” he says. After analysing data on information flows between January and April, Truvalue found ESG issues such as access and affordability were prominent in the context of the pandemic. Maarten Bloemen of Franklin Templeton Investments’ global equity group, echoes the finding, saying: “The coronavirus has brought a spotlight on several issues in the ‘S’ category of ESG, including social stability, employment, infrastructure, data security and keeping employees and customers safe – whether they are physically interacting or not.”
Brief: The relentless rally in American equities is emboldening hedge funds at a time their own clients are getting worried. Professional managers that make both bullish and bearish equity bets last month pushed their long positions on stocks up above their short ones by a ratio of almost 1.9-to-1, the highest reading in more than a decade, according to data compiled by Morgan Stanley’s prime brokerage unit. The S&P 500 rose 5.5% during the period, its best July since 2010, and has rallied in the first three days of August. Meanwhile, the firm’s survey of hedge fund investors showed roughly three quarters of the respondents expect the S&P 500 to finish the year lower than 3,300. The benchmark closed on Wednesday at 3,327.77, about 26 times annual earnings. People are choosing sides in a year like no other, when rebounding shares have pushed valuations to two-decade highs even as a pandemic rages. While investors in the Morgan Stanley survey cited everything from the health crisis to a weak economy and November’s presidential election as the top market risks, the people paid to ride the wave are afraid of missing out. For now, the disagreement hasn’t prompted clients to exit. In fact, interest in investing with long-short hedge funds last quarter increased to the highest level in at least two years, Morgan Stanley data showed. “Investors felt hedge funds performed well in 2Q, despite missing part of the market rally,” the firm wrote in the note to clients last week. About “90% of investors felt HF performance was in-line or better than expectations.”
Brief: COVID-19 and the associated economic crisis are set to cause the first decline in global asset management industry assets under management in a decade, according to Cerulli Associates’ latest report, Global Markets 2020: A Sharper View of the Asset Management Sector. However, moving beyond 2020, the global analytics and consulting firm expects the global asset management industry to recover and grow, fueled by increasing demand in developing countries, particularly Asia. Advances in technology and product will give global asset managers more ways to access growing investor segments. “As the coronavirus pandemic continues to impact the global economy in the second half of 2020 and beyond, asset managers will need to find ways to keep investors in their products and prevent a widespread flight to cash,” says André Schnurrenberger, managing director, Europe at Cerulli Associates. “Managers should dedicate resources to investor education on how to handle a market correction, implementing scenario analysis from the last significant global drawdown in 2008.” These resources will be especially useful in those countries where emerging middle-class investors have entered the market within the past decade and had not experienced a substantial correction before COVID-19.
Brief: Allianz said on Wednesday that it was fielding a request for information from the U.S. Securities and Exchange Commission over a series of funds that suffered sharp losses amid the coronavirus-led market meltdown earlier this year and are the subject of an investor lawsuit. The funds in question are Allianz’s “Structured Alpha” hedge funds managed by Allianz Global Investors. Allianz made the disclosure in its earnings report. In July, the Arkansas Teacher Retirement System filed a lawsuit in a Manhattan court to recover losses of least $774 million in the first quarter of 2020 for the funds. Allianz said the case was “legally and factually flawed”, but that it expects that other investor suits may emerge. Allianz said it was fully cooperating with SEC’s request for information about the Structured Alpha funds.
Brief: A handful of corporate agitators pushing for change at companies scored double-digit returns in the first half of 2020, but panic selling and bargain hunting left the average activist investor nursing big losses. Several experienced activists and newer managers reported a surge in returns even as the coronavirus outbreak led economic production to collapse and sent unemployment rates soaring. William Ackman’s Pershing Square Capital Management gained 35% while Jason Aintabi’s Blackwells Capital climbed 27% and Glenn Welling’s Engaged Capital returned 17% in the first seven months of the year, investors said… Others saw positions in financial, food and retail and industrial conglomerate stocks drop as the pandemic reshaped the world. Legion Partners lost 3.8%, Third Point’s Offshore Fund lost 7.3% and Trian Fund Management lost 13% in the first half, investors said. Trian’s concentrated portfolio includes Sysco, which fell 37% this year. Representatives for the firms declined to comment.
Brief: The US dollar [USD] will suffer as global growth rebounds from the Covid-19 crisis, potentially triggering the end of its bull market run, however any weakness will be muted in comparison to the multi-year downtrend that followed the global financial crisis. This is the view in new research, “COVID-19: The Trigger That Ends the US Bull Market?” published by Insight Investment, a global investment manager with $909bn under management. Francesca Fornasari, author of the research and Head of Currency Solutions at Insight Investment said, “During the global financial crisis, the US dollar surged as investors fled to the deepest and most liquid market. But, as equities bottomed in March 2009, the USD peaked and embarked on a multi-year downtrend. As the global economy faces another severe downturn, caused by Covid-19, so the USD has moved to historic highs. However, this time around the underlying structural support of many currencies is much weaker than 10 years ago. We expect a more muted rebound and greater differentiation amongst currencies with a high beta to the economic cycle.
Brief: Before the coronavirus pandemic hit, investment firm GAM Holding’s turnaround strategy seemed to be working. But its results for the first half of 2020 show that the pandemic — and subsequent market volatility — may have stymied GAM’s immediate comeback efforts after its 2018 bond fund liquidation. During the first half of 2020, the company’s outflows grew while its 2019 profits turned to 2020 losses. Prior to this year, following the implementation of some of its turnaround plan, GAM’s 2019 second-half net outflows had declined and its profits, compared to the first half of 2019, had improved. As for the first half of 2020, GAM’s earnings results, published on its website Tuesday, show that its underlying loss before taxes was CHF 2 billion (US$2.1 billion). This is compared to the first half of 2019, when the firm brought in CHF 2.1 billion, its presentation shows. Meanwhile, GAM reported outflows of CHF 8.5 billion outflows for the first half of the year, driven by its specialist fixed income strategies, which lost CHF 5.7 billion, its half-year 2020 report shows. According to that report, net outflows in the second quarter were lower than those in the first — CHF 2 billion versus CHF 6.5 billion.
Brief: The coronavirus is likely to trigger a tsunami of U.K. fraud cases when courts and law enforcement get back to full strength, accounting firm KPMG warned. Although there have been fewer fraud cases compared to previous years, that will change as the courts get back on their feet, KPMG said in a report released Tuesday. “The Covid-19 environment has led to increased financial pressures on individuals and organizations leading to more opportunities to commit fraud,” Roy Waligora, KPMG’s head of investigations in the U.K., said in an emailed statement. “This is likely to lead to further risk of financial misreporting and of misconduct and fraud in traditional hot spots.” The backlog of criminal cases in England and Wales stood at 37,434 at the end of 2019 and likely has grown considerably during the outbreak, when several courts closed their doors and others scaled back operations. Several cases may stem from the government’s job-retention program, the accounting firm said. KPMG says the U.K. tax authority received as many as 1,900 reports of furlough fraud in May. Last month, revenue and customs officials made their first arrest in relation to the program, which paid 80% of wages up to a cap of 2,500 pounds. “We are likely to see a lot more HMRC activity where government aid schemes have been abused,” Waligora said. “We are likely to see a tsunami of Covid-19 related fraud cases.”
Brief: The Federal Reserve and other central banks are heading for a collision with shadow lenders -- the firms with a sinister nickname that are increasingly dominating global finance. Even as policy makers struggle to reopen their economies in the midst of the coronavirus pandemic, they’ve launched a review of what went wrong with markets in March, when a worldwide dash for cash by investors nearly crashed the financial system and forced unprecedented rescue actions by central banks. Their focus is on loosely regulated money market and hedge funds, mortgage originators and other entities. Already, some watchdogs have pointed to highly leveraged trades involving U.S. Treasuries as one source of the turmoil. “In many cases they have reached systemic importance,” Bank for International Settlements General Manager Agustin Carstens said of the non-banks. He added that it’s time to move toward more regulation. There’s a lot at stake should the scrutiny lead to tougher oversight. The alternative financiers are major providers of credit to households and companies, making their smooth functioning critical to the health of financial markets and the economy. Non-banks are marshalling their lobbyists in Washington to argue that casting blame on the industry is misplaced. A point in their favor is that unlike Wall Street banks a decade ago, shadow lenders didn’t cause the recent meltdown. Instead, the financial-market stress was triggered by a health crisis.
Brief: Cybersecurity companies are warning that they’ve seen an exponential rise in attempted “phishing”, banking-email compromises, and illegal cryptocurrency mining. And it’s hedge funds that may be most vulnerable. “We’ve definitely seen an increase in phishing and crypto-mining, and an uptick in hacking attempts,” Ed Cowen, CEO of Remora, a cyber security consultancy which specialises in hedge fund and asset manager clients, told Financial News. “It’s part of an overall trend that has been accelerated by the digitisation of business and the evolution of crime. ”Soaring cases of cyberattacks have been plaguing every sector of the financial industry as the pandemic-driven lockdown forced workers to scatter beyond the firewalls of secure offices. But it’s an especially acute issue for hedge funds, given that many firms in the sector tend to lack the large-scale, in-house security of bigger firms. The rewards for crime are also high: hedge funds manage billions in assets, making them more exposed. “The real challenge for funds is that many of them are large micro-businesses,” Cowen said. “They have to look, talk and feel like they’re large corporations, but typically they’re between 10 and 20 people ... I don’t think funds and businesses in the UK are fully aware of the scale of cyber fraud. If a bank gets robbed, people talk about it; if the [hedge fund] office gets robbed, no one talks about it.”
Brief: Despite the longest economic expansion in U.S. history, the gap between the present value of liabilities and assets at U.S. state pensions is measured in trillions of dollars. To make matters worse, pensions are now faced with the reality that standard diversification — including extremely low-yielding bonds — may no longer serve as an effective hedge for equity risk. While I was at CalPERS, concerns arose in 2016 about the effectiveness of standard portfolio diversification as prescribed by Modern Portfolio Theory. We began to recognize that management of portfolio risk and equity tail risk, in particular, was the key driver of long-term compound returns. Subsequently, we began to explore alternatives to standard diversification, including tail-risk hedging. At present, the need to rethink basic portfolio construction and risk mitigation is even greater — as rising hope in Modern Monetary Theory to support financial markets is possibly misplaced. At the most recent peak in the U.S. equity market in February 2020, the average funded ratio for state pension funds was only 72 percent (ranging from 33 percent to 108 percent). That status undoubtedly has worsened with the recent turmoil in financial markets due to the global pandemic. How much further will it decline and to what extent pension contributions must be raised — at the worst possible time — remains to be seen if the economy is thrown into a prolonged recession.
Brief:Four among the six shuttered debt schemes of Franklin TempletonMutual fund saw a fall in their Net Asset Values or NAVs after two entities - Nufuture Digital (India) Ltd (NDIL) and Future Ideas Co Ltd (FICL) – defaulted on payments. The net asset value of Franklin India Income Opportunities Fund fell by 4.73% on Friday. The NAV of Franklin India Credit Risk Fund also saw a dip of 2.28%, Franklin India Short Term Income Plan’s NAV dropped by 1.75% and Franklin India Dynamic Accrual dropped saw a fall of of 1.343%. “Due to default in payment, the securities of FICL and NDIL will be valued at zero basis AMFI standard hair cut matrix and interest accrued and due will be fully provided. Securities of RTVPL will continue to be valued at 75% basis recommended valuation,” Franklin Templeton MF said in a note. "This is a bad news for sure. A debt mutual fund investor has capital protection on his/her mind always. A 4.7% dip in NAV is huge. And when you can't pull out your money or do anything, it is worse. I believe this may lead to further fear psychosis in the minds of debt investors. In such situations, debt investors may report to redeeming from other debt schemes as well, which is not good," says Babu Krishnamoorthy, Chief Sherpa, FinSherpa InvestmentServices.
Brief: Australasian sustainable funds attracted inflows worth more than $207 million in the second quarter of 2020, with Australian Ethical and Dimensional reaping the majority of these rewards. Morningstar's latest Global Sustainable Fund Flows report, which examined 3432 sustainable open-end funds and exchange-traded funds (ETFs) across the globe in the second quarter of 2020, found that sustainable funds outperformed following the March market sell-off. Assets in Australasian sustainable funds increased substantially during the second quarter, up 18% from $14.9 billion (US$10.6 billion) at the close of the first quarter to $17.7 billion (US$12.6 billion). At the end of June, sustainable assets recorded one of their highest levels, only outpaced by their peak at December 2019. Morningstar found there are now 108 strategies in the Australasian sustainable fund universe, up from 86 at the close of the first quarter 2020. Interestingly, the Australian sustainable funds market is relatively concentrated, with the top 15 funds accounting for 60% of all assets in the sustainable fund arena.
Brief: Concern is growing over a likely spike in defaults among so-called ‘zombie’ companies that have stayed afloat during the coronavirus pandemic by relying on government stimulus and increasing their debt loads, but will struggle to keep servicing loans as government schemes roll back. ‘Zombie companies’ are indebted businesses that only generate enough cash to cover operational costs and interest payments on their loans, but not the debt itself. In the UK, financial services industry body The City UK estimates that businesses may build up GBP100 billion of debt by next March which they would be unable to repay, with 780,000 SMEs in danger of insolvency. A global forecast by fund manager Janus Henderson for overall corporate debt predicts a jump to a record USD9.3 trillion in 2020. Jub Hurren, senior portfolio manager of AIMS Fixed Income at Aviva Investors, says that many companies won’t fail immediately, thanks to supportive monetary policy: “The fact that interest rates are going to stay at extremely low levels means that even companies with low earnings can probably survive longer than they would otherwise because of the reduced burden in terms of servicing debt.”
Brief: Investors in property funds should wait up to six months before they can get their money back to avoid a stampede for the exit leading to widespread suspensions in rocky markets, Britain’s Financial Conduct Authority proposed on Monday. UK-regulated open-ended property funds offer daily redemptions to entice investors, but nearly all those targeted by Monday’s proposal are suspended following market volatility in March due to the pandemic, trapping more than $7.5 billion in assets. Policymakers have warned that property funds should not be viewed like a bank account that can be tapped at will, given they contain “illiquid” assets such as commercial real estate that can take several months to sell even in normal market conditions. Concerns over daily redemptions began when several property funds were suspended after Britain voted in June 2016 to leave the European Union, as investors pulled out money. The Financial Conduct Authority (FCA) proposes that property funds publish a “notice period” or irrevocable pre-agreed gap of between 90 and 180 days from the request for a redemption to the return of cash. It would affect new and existing customers, but also mean that property funds don’t have to hold as much cash as they do now, the FCA said.
