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Nikko AM PulseNovember 2012
This information is for professional investors only. Not for
redistribution.For more information,
visithttp://en.nikkoam.com/worldseriesfundplatform
Monthly Comment from the Investment Team of Nikko AMsWorld
Series Fund Platform
.
This edition is appearing slightly later than usual, as wewanted
to include a note on our recent Asian trip and theinaugural
Skybridge Alternatives (SALT) conference inSingapore, in addition
to digesting the impact of hurricane
Sandy on markets. We also explore the sustained appeal
ofEmerging Market Debt and why a blended approach maypresent an
interesting risk reward in this area.
September and October saw unprecedented levels ofmarket
intervention, initially in the form of governmentalstimulus and
then by Mother Nature.
During September there was an embarrassment of richesin the form
of governmental stimulus; the US FederalReserve committed to
purchasing US$40 Bn per month ofexisting mortgage bonds, whilst the
European Central
Bank announced its own bond buying programme.Investors shook off
some of their caution and respondedfavourably, contributing to a
bounce in markets,particularly in Asia.
October started out as a month with more embarrassmentthan
riches, as earnings disappointments abounded andbuzz mounted
regarding a tightening US election.Geopolitical tensions, whether
in Asian waters or Beirutstreets, continue to create a stir and
markets failed to findmuch traction, with tech stocks in particular
selling offsharply. These distractions were soon eclipsed by
thewidescale shutdown and devastation wrought by Sandy,the
Frankenstorm which paralysed US markets andchoked infrastructure
throughout New York and New
J ersey. Markets at first reacted positively following thetwo
day closure, as rebuild efforts seem poised to injectsome
stimulus.
Asian Voices and a Pinch of SALT
Our week in Asia started in Hong Kong which remains acosy and
compact small world of hedge funds.
With few operators all centralised around a densegeographic
area, there is essentially nowhere to hide
ones trading mistakes or the struggle behind the scenesof a
start-up.
Most managers know the positions held by theircompetition, which
leads to an inevitable squeezing effectwhen one becomes a forced
seller. It is also a landscapeof few Goliaths and many Davids, who
like other
onlookers have observed the lacklustre performance ofsome of the
Goliaths with no small amount ofschadenfreude.
The Asian hedge fund market is down approximately 50%from its
2007 peak of US$170 Bn, although only a handfulof funds run over
US$1 Bn. A lower cost base seems tomake the impossible possible for
longer (it is still the landof the US$10 or US$20 Mn launch), but
naturally notforever.
Managers spoke of compelling valuations, as the Chinesemarket
skirted multi-year lows, as well as the increasingdepth and breadth
of the regional markets. However, thestill patchy status of
regulation forces pan-regionalplayers to face up to 60 sets of
regulators, in someinstances. When compared to the size of the US
market,with its centralised regulatory system, this
fragmentationwas blamed for the region failing to achieve its
potential.
There was also discussion at the SALT conference, of
theparalysing effect that the dead hand of risk aversion hashad on
the region, as it seems caught in the crossfire ofboth concerns
about Europe and caution in the US(especially regarding the pending
fiscal cliff). With a star-studded roster of speakers and the
glittering backdrop ofthe Marina Bay Sands Convention Centre, the
event
spoke to the prominence of Asia on the world investmentstage,
even if many of the sessions focused on globaltopics such as the
presidential election and mortgagebacked securities opportunities
in the US, as well as thecommodity bull run.
Much of the local talk was of Singapores stunning andswift rise
to become the prominent wealth managementcentre in the region,
although Hong Kong retains thefinancial services crown.
The asset management giants of the region remain theAustralian
superfunds (as discussed in last monthsPulse) and a presentation by
representatives of the
Australian industry underscored the sizeable growth stillto come
in this area.
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Nikko AM PulseNovember 2012
This information is for professional investors only. Not for
redistribution.For more information,
visithttp://en.nikkoam.com/worldseriesfundplatform
The industry is likely to cope with growth pressuresthrough mass
consolidation, with the goal of drivingefficiencies and cost
savings; neither of which areparticularly good news for managers
hoping for richpickings from this sector.
Emerging Market Debt
Emerging market debt continues to have enduring appealin the
global hunt for yield, but one surprise has been the
outperformance of US dollar denominated debt during theyear to
date (15% to 30 September), whilst local currencydebt and corporate
debt delivered 12% over the sameperiod. The asset class has seen
very strong YTD flows(US$60.1 Bn), the lions share of which (80%)
will beallocated to hard currency. Corporate debt representsonly 7%
of the asset class in this area, but as in othersegments of fixed
income currently, it is deemed to berelatively more attractive,
with the most upside. It is alsoa sizeable segment of the asset
class, at approximatelythe same size as the US high yield market
(although dueto periodic liquidity constraints market size
estimatesshould often be read with caution).
The average allocation to emerging market debt byinstitutional
investors remains in low single digits (below5%) and despite its
perhaps richness is currentlyexpected to see ongoing inflows.
Many managers offer blended strategies, often 50/50USD and LCD
debt, but others also blend corporate debtinto the mix. These
blended strategies often show agreater breadth of return drivers
and more attractiverisk/reward characteristics, than single
strategy groups.
The World Series team is actively researching this area,as well
as the case for a blended multi-managerapproach that achieves the
same risk/rewardcharacteristics of single manager blended
portfolio, butwith less idiosyncratic manager risk. Watch this
space for
further details.
As we begin November all eyes are on the US electionand the US
media is still filled news of with the human tollwrought by Sandy.
It will be a gripping few weeks aheadwhich may set the tone for the
end of what has been ayear filled with drama.
As always we welcome your comments and feedback.
The Investment TeamNikko AM World Series Fund PlatformNovember
2012
Further Information
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intended to be an offer, or a solicitation of an offer, to buy or
sell any investments andshould not be regarded as investment
advice. In making any investment decision, prospective investors
must rely on their own examination of themerits and risks
involved.
This document has been prepared and issued by Nikko Asset
Management Europe (Nikko AME), on the basis of publicly available
information,internally developed data and other sources believed to
be reliable. Whilst reasonable care has been taken to ensure that
the information isaccurate and any assumptions made or simulations
used are fair and reasonable, neither Nikko AME, nor any director,
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subject to change without notice. Nikko AME is authorised and
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