Global Investing

LIPPER: Aux armes, millionaires!

(This post has been corrected to reflect a change in the information supplied by Cantab Capital Partners in the fourth paragraph. The Core Macro Fund management fee does not cover back office fees, while the fund does carry a high water mark)

So far the impact of the financial crisis has not hit the wealthy as hard as many protesters would like. Even French millionaires have a found an escape from the modern-day guillotine that is a 75 percent tax rate, in the shape of Russian president Vladimir Putin.

But what about the level of charges that high net worth individuals have to pay for investing in hedge funds? Even though there has been some downward pressure on the annual management fees charged, the most common model remains “2 and 20” — 2 percent of the fund’s assets and 20 percent of its performance every year.

In real terms, for a 50 million pound hedge fund that returned 8 percent this could mean an annual fee of 1.8 million pound. The equivalent mutual fund in the UK would typically charge less than half this amount. Perhaps this should be a reason to consider switching to a different fund manager. But European investors have traditionally been more persuaded by the argument that you have to “pay more to get more” than by the notion that a fund manager should minimize costs in order to maximise returns. (Having said this, institutional investors are clearly more savvy when it comes to fees; it helps that they have the clout, through the volume of investable assets, to negotiate).

Yet perhaps the winds of change are blowing. Cantab Capital Partners has launched its Core Macro Fund with a “1/2 and 10” fee structure. The management fee of 0.5 percent (which does not cover back office costs – hedge funds do not typically quote total expense ratios) applies to those investing at least $50 million. Those investing less money will pay more, but still enjoy the 10 percent performance fee. It is hard to argue with Cantab Capital Partners’s assertion that this is “exceptionally low cost” for institutional investors, not least when considering that the fund has daily liquidity and there are neither redemption penalties nor gating clauses. But for performance fee savvy investors, the fact that there is no hurdle rate cannot be ignored. And for those looking for signs of a revolution, Cantab’s other funds have not changed their fees to move in line with the new fund.

A (costly) balancing act in Hungary

A bond trader in London is still marvelling at the market’s willingness to snap up a Eurobond from Hungary, calling it a country with “a policy mix so unorthodox even Aunty Christine won’t lend to them”.  But Hungary’s probable glee at bypassing the IMF and “Aunty Christine”  with $3.25 billion in two bonds that were almost four times oversubscribed, is probably short-sighted.

Hungary needs to raise the equivalent of $23.4 billion this year to repay maturing debt. The bond placement will enable Hungary to easily meet the hard currency component of this, and it has been enormously successful in luring buyers to domestic debt markets.  Such has been the demand for Hungarian bonds in recent months that foreigners’ holdings of forint-denominated government debt are at a record high of over 45 percent.

The success does not necessarily represent a thumbs-up for Prime Minister Viktor Orban’s policies but is more likely due to the yield Hungary paid — well over 5 percent for five and 10-year cash. In dollar terms that is not to be sneezed at, especially at a time when liquidity is abundant and the yield on mainstream dollar assets is low. The same reason is behind the demand for forint bonds, where Hungary pays over 5 percent on one-year paper. An IMF loan would have been far cheaper. (The rate for a standby loan of the kind Hungary had is tied to the IMF’s Special Drawing Rights (SDR) interest rate. Very large loans carry a surcharge of 200 basis points)

Of snakes, dragons and fund managers

The Year of the Snake is considered one of the less auspicious in the 12-year Chinese zodiac cycle. And 2013 is the year of the Black Water Snake, which comes around once every 60 years and is seen as the least fortuitous. How China’s stock markets turn out after years of poor performance remains to be seen but the snake is providing banks and asset managers with plenty of food for thought. Many of them have been gazing into the crystal ball to see what 2013 may hold for Chinese markets.

Fidelity Worldwide investments highlights the ‘Snakes and Ladders’ that could influence Chinese equities this year. (They have a great accompanying illustration)

Fidelity’s Raymond Ma reckons  there are six ‘R’s’ that could act as ‘ladders’ to buoy Chinese equity markets this year: recovery, reverse, reform, reflation, re-rating and rally. Under snakes he names inflation, a continued depreciation of the Japanese yen, excessive corporate debt/equity issuance,  a prolonged euro zone crisis and an earlier-than-expected end to quantitative easing in the United States.

Russia’s consumers — a promise for the stock market

As we wrote here last week, Russian bond markets are bracing for a flood of foreign capital. But there appears to be a surprising lack of interest in Russian equities.

Russia’s stock market trades on average at 5 times forward earnings, less than half the valuation for broader emerging markets. That’s cheaper than unstable countries such as Pakistan or those in dire economic straits such as Greece. But here’s the rub. Look within the market and here are some of the most expensive companies in emerging markets — mostly consumer-facing names. Retailers such as Dixy and Magnit and internet provider Yandex trade at up to 25 times forward earnings. These compare to some of the turbo-charged valuations in typically expensive markets such as India.

A recent note from Russia’s Sberbank has some interesting numbers on Russia’s consumer potential. Sberbank tracks a hypothetical Russian middle class family, the Ivanovs, to see how consumer confidence is shaping up (According to SB their data are broader in scope than the government’s official consumer confidence survey).

EM dollar bond investors feeling Treasuries heat

The recent, steady upward creep in U.S. Treasury yields is starting to have an effect on appetite for high-yield credit, investors’ favourite for over a year.

Emerging dollar bond funds have suffered capital outflows for the first time since June 2012, waving goodbye to around $300 million in the week to Feb 6, according to EPFR Global, the Boston-based fund tracker.  Global  high-yield bond funds saw net outflows of $1.33 billion, and according to another set of data from JPMorgan, emerging market hard currency ETFs (exchange traded funds)  saw net outflows of $550 million.  JPMorgan notes:

Amid U.S. Treasury volatility, EM credit has suffered both on total returns as well as fund flows.

Waking up to sustainability karma

By Dasha Afanasieva

Management consultants often urge their clients to view setbacks or difficulties as opportunities. The cost of reducing environmental impacts are often cited as one such “opportunity”.

But a global study from consultancy BCG and MIT Sloan Management Review has shown that companies are increasingly putting this advice into practice and succeeding in getting the returns.

The study is based on a survey of 2,600 executives and managers from companies around the world and found that the number of companies achieving a profit from introducing changes aimed at making their business more sustainable rose 23 percent last year, to 37 percent of the total.

Weekly Radar: Currency warriors meet in Moscow

G20/EUROGROUP/EURO Q4 GDP/STATE OF THE UNION/BOJ/UST, GILT AND ITALY BOND AUCTIONS/EUROPEAN EARNINGS

Hiccup. February has so far certainly brought a more sober, if healthier, perspective to world markets. Global stocks are off about half a percent this week, letting the air out gently from January’s over-inflated 5 percent surge. The focus is back on Europe, where the threat of a euro FX overshoot (in the face of LTRO paybacks and rising euro interest rates alongside stepped-up “global currency wars”) has fused with a plethora of unresolved national debt conundrums and a stream of ‘event risks’ on the region’s calendar. Euro stocks have retreated to December levels as the currency move and fresh political angst has taken the wind out of earnings and growth projections after such a steep rally over the past six months. Name anything you want – the tightening race for this month’s Italian elections and Monte di Paschi scnadal there, a delayed Cyprus bailout and elections there this month, the Irish promissory note standoff with the ECB etc etc – when things turn, they all these get amplified again even if none really are likely to be systemic threats in the way we’d become used to over the past two years. The slight backup in Italian/Spanish yields to December levels shows sentiment turns still pack a punch, the European earnings season has been mixed so far, there are political murmurs about capping the euro and the political calendar over the next six weeks is a bit of a minefield for nervy markets. All the issues still look resolvable – the tricky Irish bank debt rejig looks on the verge of a resolution; few still believe Berlusconi be the next Italian PM (only 5 percent on betting website Intrade think so, for example); and Cyprus is expected by most to get bailed out eventually. Today’s ECB will be critical to most of those issues, but next week’s euro group gets a chance to update everyone on its role in them aswell). The issue likely to gnaw deepest at investors is the regional growth outlook  and,  in that respect, the euro surge is about as welcome as a kick in the teeth at this juncture. (Euro Q4 GDPs out next week). The French clearly want to rein in the currency but don’t have the tools or the German backing. Draghi and the ECB will likely have to come to rescue again, though he will not admit to euro targeting and so may drag his feet on this one until the move starts to burn. Interesting times ahead and interesting G20 finance meeting in Moscow next week as a result.

To keep this week’s market wobble  in Europe in perspective, however Wall St still continues to hover close to record highs as the Q4 GDP shock was probably correctly dismissed as a red herring; Japan’s TOPIX is now up 35% in three months (well, about 15% in euro terms), and Shanghai is up 18% in just two months. It’s curious to note that Shanghai was the top pick of the year when Reuters polled global forecasters in December and average gains for the whole of 2013 were expected to be… 17 percent. So, stick with the growth and the currency printing regions for now it seems – even if you do get whacked on the exchange rate.

Clearing a way to Russian bonds

Russian debt finally became Euroclearable today.

What that means is foreign investors buying Russian domestic rouble bonds will be able to process them through Belgian clearing house Euroclear, which transfers securities from the seller’s securities account to the securities account of the buyer, while transferring cash from the account of the buyer to the account of the seller. Euroclear’s links with correspondent banks in more than 40 countries means buying Russian bonds suddenly becomes easier.And safer too in theory because the title to the security receives asset protection under Belgian law. That should bring a massive torrent of cash into the OFZs, as Russian rouble government bonds are known.

In a wide-ranging note entitled “License to Clear” sent yesterday, Barclays reckons previous predictions of some $20 billion in inflows from overseas to OFZ could be understated — it now estimates that $25 to $40 billion could flow into Russian OFZs during 2013-2o14. Around $9 billion already came last year ahead of the actual move, Barclays analysts say, but more conservative asset managers will have waited for the Euroclear signal before actually committing cash.

Foreigners’  increased interest will have several consequences.  Their share of Russian local bond markets, currently only 14 percent, should go up. The inflows are also likely to significantly drive down yields, cutting borrowing costs for the sovereign, and ultimately corporates. Already, falling OFZ yields have been driving local bank investment out of that market and into corporate bonds (Barclays estimates their share of the OFZ market has dropped more than 15 percentage points since early-2011).  And the increased foreign inflows should act as a catalyst for rouble appreciation.

No Czech intervention but watch the crown

The Czech central bank surprised many this week after its policy meeting. Widely expected to announce the timing and extent of FX market interventions, Governor Miroslav Singer not only failed to do so, he effectively signalled that intervention was no longer on the cards — at least in the short term  In his words, looser monetary conditions were now “less urgent”.

What changed Singer’s mind? After all, data just hours earlier showed Czech industrial production plunging  12 percent year-on-year in December. The economy has not grown since mid-2011 and is likely to have contracted by more than 1 percent last year. Singer in fact predicts a second full year of recession. But some slightly upbeat-looking forward indicators could be cause for cheer. According to William Jackson at Capital Economics:

We think that the need for further policy loosening was tempered by the tentative pick-up in the most recent survey data as well as the fall in the crown (versus the euro) since the start of the year.

How contagious is the Malian conflict?

By Dasha Afanasieva

Security risks, shoddy governance and black markets have propelled West African countries up the risk rankings of consultancy Maplecroft’s annual Global Risks Atlas, released today.

As the French continue to battle Mali rebels in the Sahara, how big is the risk of the trouble spreading to Mali’s already fragile neighbours?

According to Maplecroft, Mali is an example of how

the security situation in one country can significantly increase the risk of violence and instability in the surrounding region, with implications for the operations of foreign firms