Every quarter we publish the current opinions of the Sendero Investment Committee on various asset classes used or considered for client portfolios versus their strategic allocation. These comments reflect opinions as of the specific date listed and can change rapidly based on market conditions. Sendero prepares this analysis as one of the tools used to grow wealth responsibly through a well-designed investment strategy with a tilt towards opportunistic asset allocation: Tactical Asset Allocation – June 2017
Last October, London-based Henderson Group announced its merger with Denver-based money manager Janus Capital Group. This past March, two big British firms, Standard Life and Aberdeen Asset Management, agreed to join forces.
Several formidable trends are leading this activity in the asset management business. First, the growth of indexing, or passive, and quantitative strategies have been the recipient of massive and consistent inflows. Second, returns for active managers have been disappointing as few managers have been able to beat their benchmark net of fees and taxes. Third, technological disruptions such as robo-advisors, have impacted firms’ access to distribution channels for their products and services. Fourth, record-low interest rates and controversial monetary policies have sparked a roaring stock market where investors just want exposure.
While this conversation is not focused on the merits of active versus passive investing, the trends mentioned above have long-lasting implications for the financial industry and ultimately for investors.
Competition with index funds is ferocious, but clients want more than just performance. Fees are under scrutiny and few understand the value delivered by their advisors. Clients demand more transparency, easier access to their information, and a greater depth to not just what they are invested in, but how and why! Benchmarks are not goals.
We would argue advice has been commoditized, for now, until it matters again.
Recognizable and legacy money managers may disappear, new names will emerge. The technology will surely continue to change and investors may even realize that active managers can offer some value when the next recession comes around.
All this means we must continue to improve and adapt our processes, our thinking, and our attitude about finding the next “great” investor. This requires a healthy balance of honest conversations and qualitative data. A lot of money may go to one manager, but that does not necessarily mean a better manager. Or more specifically, a better investment.
These recent two mergers are relevant for us wealth managers, as we believe in the value of finding good and smart managers that have a differentiated edge to investing and have a history of providing our investors above average risk-adjusted returns. Due diligence of such firms now requires another layer of deep investment and operational research given the industry will most likely evolve and look different over the next twenty years.
Reacting to headlines and short-term trends are great for cocktail parties, but bad for long-term success.
What is not going to change is the value of trust and your relationship with your advisor.
WOAI came calling on our very own Amaury Conti to talk about the recent market activity: Click here to see the interview.
Just three months in, Greece’s newly elected government is standing firm on the anti-austerity platform that brought it to power in the first place. Its creditors are not wanting to give in to the persistent Greek demands and offer another new bailout deal. If progress is not made soon, Greece will have to make a decision on whether or not they will stay or leave the European Union. Let’s take a look at both scenarios.
What it would mean if Greece leaves the European Union
If Greece were to abandon the EU, the new government would have to immediately circulate a new currency. This new currency would quickly depreciate against the Euro, put Greek banks in danger of closing and cause interest rates to shoot up. Some are saying that a Grexit may be best for both Greece and Europe in the long term. Greece would have the opportunity to allocate more funds to areas that they feel are important for progress. Jobs could be created to address the 20% unemployment rate in the country, and banks would be better able to loan money to consumers. If Greece hopes to once again be a contributing and thriving economy, the best course of action might well be to leave the EU –but it won’t come quickly, and it won’t be painless.
So, how will this affect the markets? In the short-term, we could see an increase in volatility, but European banks have been reducing exposure to Greece, and investor confidence in the Eurozone is much higher than it has been in recent years. Long-term, structural risk could be a concern due to the potential precedent such a move would set for other European countries like Spain, Portugal and Italy – all of which are carrying large amounts of debt. The fallout of an exit remains largely unknown, though as no country has ever left the EU.
What it would take to keep Greece in the European Union
Greece and its creditors will have to find a common ground if they hope to stay in the EU. Since the beginning, the two sides have taken a tough stance in negotiations but recent progress has led to optimism (albeit cautious) that a deal will get done. To access rescue funds, Greece will need to win over its counterparts of the Brussels Group which consists of the International Monetary Fund, the European Commission and the European Central Bank. If Prime Minister Alexis Tsipras is able to strike a deal with the creditors’ group, it will pave the way for euro-area finance ministers to consider making a payment.
With the European Central Bank recently approving a €1.2 billion increase in emergency funds to Greek lenders, negotiators seem to be making a little bit of progress. Hopefully this is the case, as Greece has said that it fails to secure more funding from its creditors it may be forced to seek funding from other countries. Tsipras, recently met with Vladimir Putin to discuss a possible exchange of cash for Greek assets. With the EU and Russia already at odds over Ukraine, many see the meeting as no more than politicking. But if a Greek/Russian partnership were to happen, it would be interesting to see how the Russians leverage the agreement, as Russia is in a recession of its own.
Unlike 2010, the EU is in a much stronger position now to handle a Greek departure. German Chancellor Angela Merkel remains optimistic that an agreement will be reached and that a Grexit will be avoided.
Greece looks to be on the verge of an exit from the EU. It’s only been two years since the country was the recipient of a German-led bailout effort that saw the ECB buy Greek government bonds under the pretense that Greece adhere to fiscal reforms (otherwise known as austerity). After a few years of living with financial restraint, Greece’s economy is still faltering and its debt to GDP ratio is the highest that it has ever been. Simply put, Greece is no better off today than it was back in 2010.
The country’s fate could be decided at the snap elections that are being held on January 25th and the debt crisis is once again front and center in the news. The political party that looks favored to take control of the Greek parliament is the left-winged Syriza, and the party has already made it clear that they no longer want to live in austerity. Many expect Greece to leave the euro zone if Syriza wins the elections, as Greece’s creditors don’t seem interested in offering loan forgiveness that Syriza will be seeking. This election is also being viewed as a test case for countries like Spain, where another left-winged party is quickly growing in popularity and could also challenge the current government in place. If Spain were to move in the same direction as Greece, then the euro zone would have a much larger problem on their hands.
Greek meltdown from 2010?
Though the situation seems similar, this time around it’s a much different ball game. Despite slow economic growth throughout most of Europe, euro zone countries are now in a much more stable situation to handle a key country’s departure from the euro zone. In 2012, the possibility of a Greek default threatened to incite widespread panic and damage to the European financial system. Now, European bankers and investors aren’t strapped to Greece after unloading a lot of Greek debt with the majority of it going to euro zone governments. With a 500 billion euro backstop, these governments are much better protected from a Greek default than they were back in 2012. While no one is hoping for a Greek exit from the Euro, the situation surrounding the current Greek crisis is much different than it was back in 2010 and euro zone countries will not be as reluctant to let Greek abandon the Euro.
What to pay attention to
The European economic landscape could drastically change in the next few weeks with the ECB meeting on January 22nd to determine QE measures, and Greece’s elections on January 25th. With the Euro at its weakest value against the dollar since 2006, there isn’t much room for error and the ECB knows this. A fleeing Greece could put the Euro in to doubt for many investors. One thing is for sure; by the end of January we should all have a better idea of whether or not economic stability in Europe is on the horizon for 2015.
Protesters are angry that the Chinese government is reneging on a de facto agreement guaranteeing democratic voting for Hong Kong for 50 years since the UK handed over its sovereignty to China in 1997. Last month, Beijing officials announced that Hong Kongers would be voting on new candidates that would be hand selected by the Chinese government.Residents’ anger at the announcement has led to masses of people flooding the streets of downtown Hong Kong.
Many are drawing a comparison between the current protests in Hong Kong and the 1989 Tiananmen Square protests. But with the advent of social media and the internet, protesters are able to organize and broadcast better than ever before, leaving them in a much stronger position to unite than before. Like the Arab Spring protests in the Middle East in 2011, social media has played a crucial role in alerting the world of the civil unrest in Hong Kong. Pictures, videos, and live streaming of the event are allowing people from all over the world to stay involved and informed about what is really happening.
Beijing officials are in a position where a harsh response to the protests could further disrupt investor confidence in Hong Kong, but relenting to the protests could potentially embolden other cities in the mainland to protest as well. Taiwan, a China owned province, is keeping a close eye on developments. Like Hong Kong, Taiwan operates an independent democracy free of Chinese government interference. With a lot of Taiwanese already opposed to Chinese rule, disruption in Taiwan could prove to be a larger headache for the Chinese government than the Hong Kong protesters. The Taiwanese are concerned that today’s Hong Kong could become tomorrow’s Taiwan, and that their own democracy could be what the Chinese government challenges next.