Global Investing

This week might just have seen a marked shift in how British investors think about their role as owners of companies.

First up we had three of our largest unions teaming up behind a set of governance guidelines which they will wave noisily in the air at AGMs, but more significantly, Tuesday morning saw the first steps towards building the kind of collaborative architecture for investors envisioned by the Kay Review.

As first steps go, it’s fairly tentative (as was the first, first step). In a sparse announcement, the Association of British Insurers, the National Association of Pension Funds and Investment Management Association said they will set up a working group to report back on how collective engagement “might be enhanced to make a positive difference.” It is a response to Economist John Kay’s government-backed report from last July, which argued funds could improve returns to savers by presenting a united front to company boards.

We’ve looked before at how difficult this will be given the diversity of outlook and motivation among investors. Significantly, Tuesday’s statement makes explicit reference to drawing in “overseas investors” who at the last count were heading towards ownership of half the UK stock market, though quite how that might work is hard to see. IMA chief executive Daniel Godfrey told Reuters he has already spent some time sounding out some of those foreign share owners, and encountered a “range of views and a range of enthusiasms.” The next step, he says, is to work out whether there’s a way to navigate past the obstacles.

The members of the working group tasked with this will be named by the end of next month and will be expected to deliver an answer in the autumn. The hope will be that they can avoid some of the issues which have hampered the ABI, NAPF and IMA’s last effort to join forces.

“Abenomics” is the buzzword in Japan these days — it refers to Prime Minister Shinzo Abe’s aggressive reflationary fiscal and monetary policies that triggered the yen’s 10 percent decline against the dollar and 17 percent rally in Tokyo stocks this year.

So it’s no wonder that the Japanese mutual fund market, the second largest in Asia-Pacific, enjoyed the largest monthly inflows in almost six years last month, raking in as much as $11 billion.

With all that new money coming in, will you be late to the game if you haven’t gone in already?

Overseas investors, many of whom are creditors to the highly-indebted U.S. government, reckon a re-election of President Barack Obama would be best for world markets even if U.S. counterparts say otherwise.

For the second month in a row, Reuters’ monthly survey of top fund managers around the world was evenly split when asked whether a win for incumbent Democrat Obama or Republican hopeful Mitt Romney in the Nov. 6 presidential poll would be good for global markets.

The split was clearly dependant on whether the asset manager was based in the United States or not. Domestic funds, by and large, tend to favour Romney; overseas investors Obama.

Easy come, easy go. A choppy October prepares to exit on a downer – just like it arrived. World equities lost about 3 percent over the past seven, mostly on Tuesday, and reversed the previous week’s surge to slither back to early September levels. Just for the record, Tuesday was a poor imitation of the lunge this week 25 years ago – it only the worst single-day percentage loss since July and only the 10th biggest drop of the past year alone. But it was a reminder how fragile sentiment remains despite an unusually bullish, if policy-driven year.

Why the wobble? t’s hard to square the still fairly rum, or at best equivocal, incoming macro data and earnings numbers alongside year-to-date western stock market gains of 10-25%. There’s more than enough room to pare back some more of that and still leave a fairly decent year given the macro activity backdrop and we now only have about 6 full trading weeks left of 2012. So it will likely remain bumpy – not least with U.S. and Chinese leadership changes into the mix as mood music. The sheer weight of a gloomy Q3 earnings season seems to have hit home this week, with revenue declines or downgraded outlooks  – particularly in “real economy” firms such as Caterpillar, Dupont,  Intel and IBM etc – worrying many despite more decent bottom line earnings. As some investors pointed out, earnings can’t continue to beat expectations if revenues continue to wither and there are still precious few signs of an convincing economic turnaround worldwide to draw a line under the latter.

The policy-driven equity boom of the past couple of months has also been suspect to many strategists given the lack of rotation from defensive stocks to cyclicals, showing little conviction in central bank reflation policies succeeding soon even though ever more ZIRP/QE has seen something of an indiscriminate dash to any fixed income yields you care to mention – from junk to ailing sovs and now even CLOs! The bond rush has swept up an awful lot of odd stuff –  not least 10-year dollar debt from countries such as Bolivia and Zambia, whatever about Spain, and corporate junk with CCC ratings and current default rates of almost 30%! As some other funds have pointed out, another weird aspect of this has been the appetite for long duration – which doesn’t fit with any belief that reflationary policies will work on a reasonable timeframe. So, is that it? Central banks will continue to wrap everything in cotton wool for the next decade without ever succeeding in boosting growth or even inflation? Hmmm. The various U.S. growth signals are not ultra-convincing, not yet at least, but they’re not to be ignored either. Thursday’s news of a bounceback in the UK economy in Q3 also shows the prevailing stagnation narrative is not without question. And everyone seems convinced Chinese growth has troughed in Q3 –and  just look at the 66% rise in Baltic Freight prices in little over a month. The rebound in super-low equity volatility in the U.S. and Europe this week is also worth watching – though it has to be said, these gauges remain historically low about 20%.

“Wouldn’t you rather your donations achieve a lot rather than a little? Then you’ll need to get serious and proactive. If you do it wrong, you can easily waste your entire donation.”

Caroline Fiennes is not one to pull her punches when talking about charitable giving, but the more I talk to her, or read her new book – ‘It Ain’t What You Give It’s The Way That You Give It’ – the more it becomes apparent that her philosophy is not all that different from that of a professional fund manager.

No self-respecting fund manager would invest in a company just because they were asked to. A fund manager will choose to invest (or disinvest) because they believe it will help their fund perform well and that the investment fits within their investment objectives. Fiennes, who advises companies and individuals on their giving, advocates a similar approach for any donor: be clear about your objective and find organisations that have done a good job of achieving this, not just the ones that market themselves well.

Despite concerns about contagion from the euro zone, investors injected fresh funds into U.S. mutual funds, including money market funds, latest weekly flow data from Lipper shows.

The week ended Nov 16 saw a net $10 billion inflow into mutual funds, including ETFs, while investors were net buyers of equity funds with flows at $2.8 billion. Equity funds, including ETFs, witnessed their fifth consecutive week of net inflows.

Reflecting jitters over the debt crisis however, investors injected $2.8 billion into taxable fixed income funds and for the second week in a row bought into money market funds to the tune of $2.9 billion.

Last week was one of the worst for global equities in a long time. MSCI’s benchmark all-country index fell 4.3 percent, the most it has lost since the week ending March 8, just before this year’s stunning rally began. Emerging market stocks, meanwhile, dropped 5.6 percent in the week, the largest fall since mid- to late-February.

As if that was not enough, volatility soared. The VIX fear gauge leapt 37.8 percent in the week, nearly 30 percent alone on Friday. Cross-sectional volatility — volatility between stocks as opposed to just the index — is also rising as can be seen  (black line) in the graph to the right.

But might it all simply be a matter of timing? Credit Suisse estimates that 22 percent of mutual funds end their fiscal year at the end of October. So the big sell off could at least in part be due to managers ensuring their end of year profits look good.

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

U.S. investors have started to go shopping abroad for assets for the first time year.

According to UBS, the proportion of mutual funds’ portfolios held in foreign assets rose to 24.5 percent in May from the 23 percent level they kept until then.

From 2002-2008 U.S. mutual funds sharply increased their exposure to  overseas assets, going as high as 26 percent in mid-2008 from 12.5 percent. After the collapse of Lehman Brothers they have cut back to 23 percent.