Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “investment management” Tag

China Small Caps Crash To Lowest Since 2015 Amid Deleveraging “Selling Panic”

Despite China reporting solid economic data on Monday, with beats across the board in everything from retail sales, fixed asset investment, industrial production and GDP printing at 6.9% and on track for its first annual increase since 2010…


… despite the biggest net liquidity injection by the PBOC since mid June after the central bank injected a net 130 billion yuan, and despite yet another rebound in the Yuan, overnight China’s Shanghai Composite slumped by 1.4%, the most since December as a result of a plunge in the small-cap ChiNext index, which tumbled by 5.1%, and is now down 16% in 2017 to levels not seen since January 2015 following a fresh round of broad deleveraging amid concerns about tougher regulations and more IPOs following a high-level conference over the weekend attended by President Xi Jinping in which China hinted at the formation of a “super-regulator”.

Full text of the G20 statement from Baden-Baden

The full G20 communique released on March 18, 2017 from Baden-Baden, Germany

G20 Finance Ministers and Central Bank Governors
March 18, 2017, Baden Baden

  1. We met at a time when the global economic recovery is progressing. But the pace of growth is still weaker than desirable and downside risks for the global economy remain. We reaffirm our commitment to international economic and financial cooperation. We reiterate our determination to use all policy tools – monetary, fiscal and structural – individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth, while enhancing economic and financial resilience. Monetary policy will continue to support economic activity and ensure price stability, consistent with central banks’ mandate, but monetary policy alone cannot lead to balanced growth. Fiscal policy should be used flexibly and be growth-friendly, prioritise high- quality investment, and support reforms that would provide opportunities and promote inclusiveness, while ensuring debt as a share of GDP is on a sustainable path. We emphasise that our structural reform and fiscal strategies are important components to supporting our common growth objectives and will continue to explore policy options tailored to country circumstances in line with the Enhanced Structural Reform Agenda. We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimise negative spillovers and promote transparency. We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth. We agree on a set of principles to foster economic resilience which provides an indicative menu to be considered in the update of G20 countries growth strategies under the Hamburg Action Plan. We take note of the work on inclusive growth within the Framework Working Group.
  2. We will deepen as well as broaden international economic and financial cooperation with African countries to foster sustainable and inclusive growth in line with the African Union’s (AU) Agenda 2063. We launched the initiative “Compact with Africa” aimed at fostering private investment including in infrastructure. The initiative is demand-driven and respects country-specific circumstances and priorities. The initiative provides modules of good practices and instruments that could be applied in tailor-made investment compacts being implemented through the commitment of multiple stakeholders, such as individual African countries, International Financial Institutions (IFIs) and bilateral partners. We welcome the report by the African Development Bank (AfDB), International Monetary Fund (IMF) and World Bank Group (WBG) and other contributors for the Compact. We support the intention of Côte d’Ivoire, Morocco, Rwanda, Senegal, Tunisia, the AfDB, IMF and WBG, and interested bilateral partners to work on investment compacts and develop strong investment climates. We encourage the private sector to take advantage of the investment opportunities provided and invite other African countries, IOs and interested bilateral partners to join the investment compacts. We will support continuity of this work and its coherence with other initiatives.

Berkshire Letter Highlights: Buffett Hates Hedge Funds, Likes Immigrants And The US Outlook

In its latest annual letter, released at 8am on Saturday, Warren Buffett’s Berkshire Hathaway said Q4 profit rose 15% on a rise in gains from investment. Net income rose to $6.29 billion, or $3,823 a share, from $5.48 billion, or $3,333 the previous year, while operating earnings, which exclude some investment results, were $2,665 a share, a slight miss to the $2,717 consensus estimate. In 2016, the 86-year-old billionaire added new companies to his assorted conglomerate portfolio, and completed the purchases of battery giant Duracell and aerospace supplier Precision Castparts,  which helped to boost profit in his company’s manufacturing segment.

Among other notably operational highlights, Berkshire said it had booked a $1.2 billion gain from converting its preferred stake in Dow Chemical to common stock, and that it had sold all of the Dow common it converted by Dec. 31. Berkshire also revealed that its massive holdings of Apple stock, which as of December 31, had risen to 61.2 million shares making Berkshire one of the Top 10 holders of Apple, was acquired last year for $6.747 billion, or an average of roughly $110 per share. The stake was valued at more than $8.3 billion as of Friday’s $136.66 closing price, leading to a $1.6 billion unbooked gain. In addition to apple, Berkshire’s other Top 15 investments are laid out below:

Ironically, even though Berkshire – along with Goldman and JPM – has been among the biggest beneficiaries of the “Trump rally”, with Berkshire Class A shares climibg 15% since Nov. 8, bringing the company’s market capitalization above $400 billion for the first time, beating the S&P’s 11% increase, there were no explicit mentions of Donald Trump’s name anywhere in the letter. There were, however, various veiled references to the new president.

World’s Largest Actively Managed-Bond Fund Dumps “Excessively Risky” Eurozone Bank Debt

Back in September, Tad Rivelle, Chief Investment Officer for fixed income at LA-based TCW, said in a note that “the time has come to leave the dance floor”, noting that “corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle.” Ominously, he added that “we’ve lived this story before.” Five months later, the FT reports that TCW, which is also the US asset manager that runs the world’s largest actively managed bond fund, has put its money where its bearish mouth is, and has eliminated its exposure to eurozone bank debt over fears these lenders are “excessively risky.”

In an interview with the FT, Rivelle said the company began to reduce its exposure to debt issued by eurozone lenders following the UK’s vote to leave the EU last June. In the first half of last year TCW, which oversees $160bn in fixed income strategies, had around $2bn invested in European bank debt. This has fallen to less than $500m since the Brexit vote, most of it in UK banks.

Rivelle, who previously was a bond fund manager at PIMCO, said his biggest concern was the number of toxic loans held by eurozone lenders, which amount to more than €1 trilion. Last month Andrea Enria, chairman of the European Banking Authority, said the scale of the region’s bad-debt problem had become “urgent and actionable”, and called for the creation of a “bad bank” to help lenders deal with the issue. Rivelle said: “The [eurozone] banking system [has] a bad combination of negative rates, slow growth and lots of problem non-performing loans. It is inherently prone to a potential crisis should global economic conditions, or European economic conditions, worsen. [These are] the preconditions of a potential banking crisis.”

Continuing his bearish bent, Rivelle added that there is a 50% likelihood of another global recession within the next two years, removing any incentive to invest in the eurozone banking sector within that timeframe. The forthcoming French presidential elections in April, which could see Eurosceptic candidate Marine Le Pen come to power, and the problems facing the Italian banking system, are additional risks for eurozone banks this year.

“China’s Carl Icahn” Hedge Fund Billionaire Sentenced To Five And A Half Years In Prison

Back in late 2015, when the Chinese stock bubble had violently burst and was suffering daily moves of 10% in either direction as retail traders scrambled to get out of what until recently was a “sure thing”, Beijing did what it does best, and found a convenient scapegoat on which to blame the market crash – which was function of the country’s relentless debt bubble and lack of trading regulations – in late 2015 it arrested one of the most prominent hedge fund traders, Xu Xiang, also known as “hedge fund brother No. 1” and “China’s Carl Icahn” for his phenomenal, and rigged, winning record in the stock market, who ran the Shanghai-based Zexi Investment.

 Which is not to say that Xu wasn’t engaged in shady activites: while the country’s stock prices plummeted in 2015, Zexi’s investments earned an average 218%, far more than the second-most profitable player, Shen Zhou Mu Fund, which reported a 94% yield, according to market analysis website Licai.com.

19% of large cap fund managers beat benchmark in 2016

Only one in five US mutual fund managers that track the shares of large companies beat their benchmark last year, half of the rate notched in 2015, underscoring the struggles for active managers that face increasing competition from passive funds.

Just 19 per cent of large-cap mutual fund managers clocked returns that exceeded that of their benchmark in 2016, compared with 41 per cent in the previous year, according to data compiled by BofA Merrill Lynch.

Growth funds, which aim to invest in stocks with above-average price increases, had the worst go of it last year, with only 7 per cent beating the Russell 1000 growth index, which pulled in a total return of roughly 7 per cent. Value funds that seek stocks with steadier price performance and heftier dividends performed better, with 22 per cent topping the Russell 1000 value index that returned 17 per cent.

The World’s Largest Trading Floor Is For Sale

Back in September, before the much hoped for Trump “renaissance” of Wall Street, we presented two pictures that summarized the recent transformation of the US financial sector from a trader- to an algo-centric one.

We showed the trading floor in UBS’ Stamford office, once the largest in the world and big enough to hold 23 basketball courts, and which was a symbol of everything that went right on Wall Street. Packed with traders, it was a non-stop cacophony of screaming, constant motion and furious energy – to an outsider sheer chaos, which somehow ended up generating millions in profits for the bank every day. Some time around 2008, just before the financial crisis hit, it looked like this.

 Fast forward 8 years later, when all that’s left of the UBS trading floor, and the legacy of that version of Wall Street, is this:

Gundlach: “We Got The Bearish Signal; Stocks Are Going Down – You Can Feel It”

After nearly three consecutive years of inflows, an unheard of feat, Jeff Gundlach’s $61.6 billion DoubleLine Total Return Bond Fund finally experienced its first outflow since January 2014, as investors took out $33 million from the California fund. With that the streak of 33 consecutive months of inflows was broken Reuters reports.

Repeating a position he has held for several months, Gundlach told Reuters that “bonds are headed toward outflow territory … rising rates mean negative returns are developing. Even DoubleLine is having ‘day  in’ and ‘day out’ flows. It is not an inflow day every day.” Unless, of course, the market suffers a long-loverdue equity selloff, in which case the flow will be in the other direction as debt of any kind will be immediately is seen as a “flight to safety” and the cycle will begin from scratch.

According to the new bond king, a few advisers in October made allocation and model changes away from the intermediate-term sector of the bond market, resulting in a few large redemptions in the DoubleLine TRBFwhich however moved into DoubleLine’s Flexible Income, Low Duration Bond and Core Fixed Income funds.

Gundlach remains skeptical on rates, and in what was – how should one put it – a humblebrag, the bond manager indirectly accused himself of causing his fund’s first outflow in just under three years:  “I have been vocally bearish on Treasuries for months, and, being one of the most influential in the industry, it should not be a surprise that investor behavior is influenced by me,” Gundlach said modestly.

“Lastly, we have had terrific performance in DBLTX since rates bottomed: we are up in a meaningfully down market.”

While the TRBF saw modest redemptions, other of the firm’s investment vehicles continued to soak up cash with the $7.7 billion DoubleLine Core Fixed Income Fund enjoying inflows of $166.5 million in October, bringing its year-to-date net inflows to $2.1 billion. DoubleLine’s largest equities mutual fund, the $1.4 billion DoubleLine Shiller Enhanced CAPE fund, had net inflows of $77.3 million in October, bringing the year-to-date net inflows to $671.9 million and doubling its assets from year-end 2015.

Commodities attract record $54bn of inflows

Is the sun shining again on commodity investments? With inflows of $54bn during January and August, investment flows into the asset class are at an all-time high for the first eight months of any year, according to Barclays.

In its latest report on investment flows into commodities, the bank says investments into commodities are supported by three factors: Worries about global economic growth have fuelled money into gold, the desire of investors to benefit from volatility in individual commodities, and lastly, the revival of commodities as a diversification and inflation hedging tool

Gold, especially, has regained its sparkle among investors says Barclays. As the report noted:

Indeed, gold has been by far the single most popular commodity investment in 2016, with flows into physically backed ETPs at a net $27bn, accounting for half of all flows into commodities. This year’s inflow comes after three consecutive years of net outflows from gold ETPs and is already far ahead of the previous record set in 2009, which saw a total net inflow of $19bn.

This year could see the first year of net inflows to commodities indices linked investments for the first time since 2012, says the report. Pension funds and other long-term investors typically buy exposure to the sector through swaps on commodity indices that cover oil, agriculture and metals. That allows them to get broad exposure in one stroke. One of the most popular is the Bloomberg Commodity Index.

The report is optimistic that investment flows will continue “for some years to come”.
It explains:

Robo-advisers coming for Japanese investors

The computerized portfolio management wave is hitting Japan, with a total of nearly 20 companies here and abroad to offer the algorithm-based solutions to retail investors by next spring.

On demand 

A robo-adviser automatically puts together a portfolio in line with the individual investor’s wishes. After answering such simple questions as age and investment experience, the user is presented with an asset mix such as “developed-market stocks,” “emerging-market bonds” and “gold.” The entire process takes only minutes and can be handled on a personal computer or a smartphone. Roughly $40 billion alone in outstanding assets are managed by big U.S. investment firms through this method.

The biggest advantage of robo-advising is the low costs for investors. Commissions amount to just 0.2% to 1% of the investment capital. This is cheaper than the fees that private banking services offer to the affluent, or the roughly 2-3% commissions charged by existing wrap accounts overseen by financial institutions.

Direct comparisons of performance are difficult, owing to the vast diversity of portfolios that robo-advisers generate. But robo-advised investors very likely enjoy an edge in returns simply by virtue of the low commissions.

Gold rush