Thursday, 24 December 2009

QROPS ADVICE: Investment News: Spotlight on Emerging Market Debt Funds

Lipper, the Thompson Reuters company, last week announced that a relatively new fund concept to the retail investment market has quickly become one of the most popular over recent months. Emerging Market Debt funds dethroned Corporate Bond funds as the most popular type of fixed income fund available, Corporate Bonds having held the top spot for the majority of 2009. Lipper's monthly figures for November revealed that total sales of approximately euro 28 billion were split between equity and fixed income-focussed assets, although it was Emerging Market Debt funds that stole the lions share of the latter.
Put simply, Emerging Market Debt funds (also referred to as "Emerging Market Bond" funds) can be considered as fixed interest funds with a geographic focus specific to one of the world's many emerging economies. Such funds vary in their specific mandate, although the majority hold assets in the form of local corporate bonds and/or local government gilts. Additionally, such assets are held in the local currency of the emerging market, so providing potential for returns on both bonds and currencies. This gives an element of hedging within a fund as bonds and currencies tend to react differently to changes in the economic cycle. In the year 2008, for example, many local bonds posted positive returns due to their favourable reaction to lower inflation, slower growth and central bank rate cuts, yet currencies struggled in the risk-averse environment.
The reason for the recent rise in popularity of such funds is best explained at a micro-economic level. The fall-out of the global economic crisis has meant that fewer banks have been willing to provide funding for corporate expenditure or in other words, loans. As a direct result of this, more and more corporations have been forced to raise funds through bond issues, issues which, owing to a drop in global investor sentiment, come with attractive returns. Likewise, many governments have also been forced to release attractive gilt issues in a bid to raise capital for economic expenditure, as a result of the usual income that they would normally collect by way of taxes, reducing. On the basis that emerging market economies are, as their name would suggest, the fastest growing, the ready-supply of opportunities for fund managers to invest is regularly replenished. It is these opportunities that Emerging Market Debt fund managers have been quick to seize upon. Furthermore, the likes of Asia, the Middle East and Latin America share similar characteristics in common with what many would regard as a "safe haven" economies: large trade surpluses, relatively small government debts, large export sectors and high domestic savings rates, providing firmer foundations for long-term growth.
Over the 16 years from 1993 to 30 November 2009, local emerging markets debt has returned 11.0% per annum to investors, yet with a volatility of only 9.4%. This compares to global emerging markets equities returning 6.1% with a volatility of 24.8% (source: JP Morgan/Investec Asset Management). It is no surprise therefore that the world's biggest fund managers are moving money into emerging market bonds, as they seek higher yields than the near zero interest rates of developed countries while trying to avoid volatility in other markets. A report by HSBC, released on Wednesday last week, shows the 13 largest global fund managers moved a large amount of money into high-yield or emerging market bonds during the third quarter of 2009. The fund managers, including names such as Allianz, Fidelity and Franklin Templeton, increased their emerging market bond holdings by an average of 19.4%.
"The low interest rate environment has diminished appetite for cash this quarter as investors seek stable growth in still volatile market conditions," HSBC's Australian head of global investments Charles Genocchio said. "Investors sought yield from bonds in a near zero interest environment, while selectively pursuing growth in equities in markets like Asia, which is emerging from the financial crisis faster."

Tuesday, 22 December 2009


The Organisation of Russian stocks, the world's best performing in 2009, may gain another 50% next year as commodity prices rise, fuelling a recovery from the country's worst financial crisis in a decade, Otkritie Financial Co. said. The dollar-measured RTS Index of 50 stocks, which has risen 125% this year to about 1,420, will probably reach 2,100 by the end of 2010, Vladimir Savov, head of research at Moscow-based Otkritie, said in a report. "Russia's domestic recovery has not been fully priced in yet, as evidence for it has been sparse," Savov said. This year's gains are due more to "external drivers" such as the growth in global money supply and higher commodity prices than gains in the domestic economy, he said. Russia is emerging from its first economic contraction in more than a decade after the price of Urals crude, its main export earner, more than doubled in a year. Standard & Poor's raised the country's outlook to stable from negative yesterday, saying the government may be able to achieve a narrower budget deficit than previously estimated. Companies from Russia are valued at 7.2 times projected 2010 earnings, less than half the 16.6 ratio for stocks in other emerging markets traced in the MSCI Index, according to Otkritie. The Russian multiple will rise if oil stays above USD 70 a barrel, according to the brokerage.

QROPS ADVICE: Investment News: Spotlight on 'real asset' inflation hedging

During the recent, unprecedented times, governments worldwide have been called upon to utilise a range of financial and economic theories in a bid to alleviate the impact of what is now commonly referred to as a truly global recession. Whether packaged as 'Quantitative Easing' from the UK government, or the 'Troubled Asset Relief Programme' from the US, financial stimulus packages around the globe have been introduced to keep the flow and availability of finance constant. It is still far too early to gauge the success of such measures, however the Bank of England is currently revising its original suggestion that it will need "at least three months" to determine Quantitative Easing a success or not.
Whilst there is consensus that the need for such measures were absolutely necessary given the circumstances, history and many financial commentators point to a potential side-effect of introducing artificial financial injections to an economy; inflation. Inflation is a by-product of acceleration in economic growth of any market, brought about by sharp increases in the demand and subsequent price of local assets, goods and services. Such increases are particularly susceptible during times when interest rates are particularly low, given that more money is borrowed and spent as opposed to saved.
The Bank of England Chief Economist, Spencer Dale recently played down any risk of such a spike commenting "the BoE needed to be alert to the risk that quantitative easing could drive up asset prices but there is no evidence that is happening yet", although he went on to say that he felt that the local economy should expand "a little less rapidly" to avoid the possibility that quantitative easing might lead to an unwarranted increase in asset prices. Given that many of the world's economies have adopted similar measures to that of the UK (i.e. low interest rates and financial stimulus measures), the concerns of the BoE are shared globally.
Fundamental to the workings of most asset classes, inflation is something that fund managers cannot control, and as a result spend much of their time trying to predict. The reason for this is the intrinsic relationship between inflation and its effect on the 'true' value of any movement of an investment fund. If inflation is high or rising, assets held by fund managers will more likely be more difficult to attain and may deter from any added value that a fund manager creates, hence the reference to inflation as being a 'stealth tax' in investment management circles.
Many investors who share concerns for rising inflation revert to an investment practice that, in theory, is immune from the threat of inflation; inflation hedging. An inflation hedge is an asset that loses little value in periods of rising prices. Thus, it holds its value and its purchasing power during inflation. The types of instruments that fall into this category are often referred to as 'real assets', so-called owing to their intrinsic value, i.e. they have a value of their own and people value them for their direct or indirect usefulness, examples include gold, property, wheat, land etc. Real assets are the opposite to what many refer to as 'financial assets', which could be defined as something who's value is determined as a direct result of the fortunes of a related or un-related entity, e.g. stocks, shares, government gilts. The school of thought being that by definition, real assets have a value of their own, inflation does not erode their value. Thus, real assets are all considered to be inflation hedges.
There are a wealth of funds available that trade solely in 'real assets' and purposely avoid instruments that can be affected by the movement of inflation. It is for this reason that funds such as these are particularly well-regarded as being part of a diversified portfolio. The varied range of such funds is ever-changing, the most popular being commodity-focussed (e.g. precious metals, natural resources or agricultural), although there are some funds that will hold highly specialist assets such as fine art, fine wine or antiques.
Patrick Koupland of Castlestone Management, managers of the Hansard Aliquot Gold Bullion and Hansard Aliquot Agriculture fund commented "Many investors are looking to diversify their portfolios with exposure to gold and other commodities. Gold in particular can be used as a hedge against inflation, and with the recent global stimulus packages taking hold, a rise in inflation levels is widely considered as inevitable. However, this diversification cannot be achieved from a gold equities fund, which buys not the metal itself, but stocks in related companies such as gold mines. Direct exposure to such commodities is the only way to truly diversify. This has been proven over the past five years where gold bullion and precious metals have given a better return to investors than gold equity funds - and with less risk.
These assets are one of the best hedges against the devaluation of money while silver and platinum have the economic sensitivity to rise with the improving economy. A strong validation of this is the fact we have seen the Chinese, Indian and other governments piling in to gold and stockpiling other commodities."