To mark the launch of Last Word’s new brand Fund Selector Middle East, we hosted a roundtable for nine experienced investment professionals working in the region. They discussed some of the most pressing issues the industry is facing today.
Tom Porter, managing director, Asia, International Adviser
It was with great pleasure that we hosted our first Fund Selector Middle East roundtable in Dubai, during which nine leading investment professionals discussed the themes most affecting their portfolio construction and asset-allocation decisions.
Markets saw a sharp sell-off in February, with the Dow Jones registering the biggest one-day points drop in its 122-year history. We asked our delegates whether they thought this new volatility was the beginning of something more worrying.
In light of increased volatility, and following a conversation about how best to guard against this, we wanted to know what worried our delegates most about the current economic climate, and the panel’s answers were strikingly different.
Kashif Arbab, senior investment adviser, Mashreq Bank
Sean Daykin, CIO, Sabban Holdings
Gary Dugan, CIO, Namara Wealth Advisers
Szymon Idzikowski, multi-asset portfolio manager, Abu Dhabi Commercial Bank
Appul Jaisinghani, head of funds and structured products, Emirates NBD
Oliver Kettlewell, senior portfolio manager, Mashreq Capital
Jesse Motion, director, Middle East, BlackRock
Charlotte Solomon, CFA, BlackRock Multi-Asset Strategies group, BlackRock
Ross Teverson, head of strategy – emerging markets, Jupiter Asset Management
Following a period of flat volatility last year, the Vix saw several dramatic spikes last month. The attendees discussed whether they thought this was the beginning of a new, more lengthy, high-volatility phase.
Oliver Kettlewell, portfolio manager at Mashreq Capital, explained that he thought the volatility was a knee-jerk reaction: “Markets were spooked by the decent wage growth numbers in the US and acted on this.”
Ross Teverson, head of strategy global – emerging markets for Jupiter, said it was difficult for him to make general volatility predictions when there were such extremes of valuations in emerging markets today.
“By way of example, Tencent, the largest holding in the index, is trading at 43 times future earnings, while Hynix in Korea is trading at only 2.4 times EV/EBITDA and four times PE. EV/EBITDA is lower than PE because it’s got cash sitting on the balance sheet,” he said.
Szymon Idzikowski, fund analyst, Abu Dhabi Commercial Bank, said he remains positive on the market: “I don’t see a catalyst that would end the synchronised growth of recent times. Historically, the precursor to a recession has been an inverted relationship between the short and long-term yield curve and we’re still not seeing that, so we remain positive.”
Source: FE Analytics
In light of the increase in volatility, the roundtable attendees provided their insights into the best defensive position to take over an extended period.
Idzikowski explained that he was duty-bound in his position at the Abu Dhabi Commercial Bank to pay careful attention to the “appropriate level of risk for his client’s profile”. He added: “We have quite a conservative approach.”
Sean Daykin, chief investment officer, Sabban Holdings, declared: “I’m glad I don’t have to buy public equities and debt because if you only do those two asset classes, you’re kind of stuffed.”
Kashif Arbab, senior investment adviser at Mashreq Bank, added that given asset allocation should be 60/40 on a global level, the best defensive position is careful geographical allocation and sector positioning: “On a tactical basis, we prefer European markets.”
Charlotte Solomon, product strategist, multi-asset, BlackRock, explained that rising interest rates were an issue that required defence. “We’ve been managing our portfolios with a relatively conservative amount of duration for some time now [to combat rising rates]… but have used the recent pickup in yields to add some select duration exposure, which can give us more ballast in periods of equity market sell-offs.”
A central area of debate for the delegates is how best to marry return expectations with a client’s risk tolerance, and Appul Jaisinghani, business profile as head of funds and structured products at Emirates NBD, said this was one of the issues they faced.
“It is not unusual to meet clients with a stated risk tolerance that is different from the return they want to target. Another complication is that sometimes, unfortunately, clients with a strong income objective are unable to differentiate between a fund’s distributions versus the potential return of the underlying asset class.
“This can lead to client flows into funds that seem to pay high distributions that are not based on the portfolio’s natural underlying income. It would be great if some of the top asset managers in the region restricted distributions to natural income. It is would also be excellent if promoters began to educate their clients on the real sources of these funds distributions.”
Gary Dugan, CIO Namara Wealth Advisers, also felt strongly that clients weren’t made aware of risk in the bonds markets: “Every bond that’s sold in the region comes with an immediate loan-to-value ratio of 60-80%, and clients don’t understand that although they’re multiplying return they are also multiplying risk.”
Kettlewell gave a different perspective. He argued that the leverage challenge for people in the wealth management industry was complicated by competition from property: “By its definition, property is leveraged from the moment you buy your condo.” He explained that without leverage, financial products have historically struggled to compete with the returns from property – though a maturing real estate market is helping to recalibrate the trend towards funds.
Source: Schroders global investor study 2017
Conversations about alternatives within the Middle East asset management community are increasingly frequent. Like their peers in the west, they realise that a closer correlation between equities and bonds has made finding different investment types a more pressing concern.
One way of assessing the appetite for alternatives is by looking at big institutional vehicles such as sovereign wealth funds (SWFs). Although Middle East Sovereign Wealth Funds still lag the rest of the world in their allocation to alternatives, they have been increasing both their weight and their targets (see charts, right) in recent years.
Idzikowski said: “We have seen a trend of increasing allocation to alternatives in the institutional space, but not in a private wealth. Our model portfolios retain a neutral allocation of 15%. It could be a market neutral product, even gold for those that aren’t able to go semi liquid.”
Solomon gave her take on the subject: “We are not managing alternative strategies per se, but some of our products are used in the alternatives part of clients’ portfolios. For example, we’ve just launched in a Luxembourg wrapper, a dynamic high-income fund made up of non-traditional assets such as mortgage-backed securities, CLOs and institutional preferred stocks. It is targeting a yield of 6-8%.”
In line with previous comments, Daykin said that despite the rhetoric around alternative allocation, he hadn’t seen a penetration in the market. The panelists largely concurred with this.
Jaisinghani explained: “Many of our individual clients have a preference for daily dealing structures and hence might not be able to benefit from some of the alternatives such as private debt.”
Kettlewell expanded on this point: “Bank clients can’t always get access to alternatives, especially if it’s a monthly dealing.”
Daykin concluded that one of the reasons for slow uptake of alternatives in the region was the widespread belief that performance hasn’t been very good. “For example, hedge fund performance over the past five years, relative to the S&P index, has been abysmal. It’s like comparing apples and oranges but people don’t necessarily understand that.”
*These funds are government-owned, helping to show that institutional investors have moved in the alternatives space, even if retail investors are yet to catch up.
Source: PWC research. Data as at Feb ‘18.
In this more volatile climate, and with many commentators predicting the end of the bull market, we wanted to know what was worrying these experienced professionals. The responses were surprisingly different.
Teverson explained that although levels of debt in China was an underlying concern, many emerging market companies benefited from conservative balance sheet management, with a significant number of companies held in the fund having net cash on their balance sheets. “I am relatively positive on the market,” he said.
Idzikowski explained that his worry was that the perceived catalysts for volatility were often not the real ones. “There are a lot of ‘disgruntled trades’ building up and I expect the catalyst will be something we’re not thinking of,” he said.
Daykin was less worried about the event itself but was concerned about the reaction to it when it came. “When we do wake up to a crisis of some kind, I don’t know who will be able to fix it. The credibility of both governments and central banks is completely shot to pieces. They have used up all the tools available and don’t have the capacity to increase debt further.”
He added: “I think the voices of people who have been marginalised over the past 10 years have been subdued because we’ve had some economic growth, but they will come back with a vengeance. Then you’ve got something more destructive.”
Despite the wide range of experts at our first Fund Selector Middle East event there was much agreement on key points such as problems managing high-returns expectations and the lack of appetite for alternatives in the retail space.
However, the positions held and the fears expressed were different and enlightening, and lead us to believe that in general, the industry expects to soon see a shift in market conditions.
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