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Economy

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Currencies

Asia markets tentative ahead of Opec meeting

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

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Banks

Barclays: life in the old dog yet

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Categorized | Capital Markets, Financial

US funds compare notes on torrid August


Posted on August 27, 2015

Investors gather to check share prices in Shanghai©AFP

Investors gather to check share prices in Shanghai

The US mutual fund industry’s most famous emerging markets specialists have suffered an August Horribilis, as wild currency swings wiped billions of dollars off the value of their funds.

Michael Hasenstab, manager of the $65bn Templeton Global Bond Fund, is down 6 per cent since the start of August, as the tumbling peso hit the value of Mexican government debt, his largest single holding, and other currency bets also faltered.

    Meanwhile, widely owned EM equity mutual funds from OppenheimerFunds and Lazard have posted losses of more than 12 per cent this month. Managers are urging their investors to look through the current turmoil and telling them they see opportunities to pick up new emerging markets securities at lower prices.

    “There were clear forced sellers, panic sellers, and fear on Monday,” says Justin Leverenz, manager of the $30bn Oppenheimer Developing Markets fund, arguing that created buying opportunities. “I got very excited.”

    The moves in emerging markets have been fierce. The FTSE Emerging Equity index has lost more than 10 per cent so far in August, its worst monthly performance since May 2012. JPMorgan’s EM currency index has dropped 3.6 per cent to its lowest level on record, led by tumbles by the Russian rouble, Malaysian ringgit and Colombian peso.

    Local currency-denominated bonds in the developing world have also suffered as a result, with the Barclays index measuring the performance of these securities sliding more than 6 per cent since the start of the month.

    With global markets rebounding yesterday, there has been some relief in recent days, but fund managers are still working hard to reassure investors, fearing they could pull some of their money. Mr Hasenstab has produced both a video and a blog post for his investors, telling them he sees a “once in a decade” opportunity in currencies such as the Mexican peso.

    A deal to restructure Ukrainian government debt, which was more favourable to bondholders than feared, helped his fund. It had 2.2 per cent of its assets invested in Ukraine as of the end of June, and bond prices there soared by one quarter yesterday.

    As of Wednesday night, Mr Hasenstab’s fund was 96th out of 100 among global bond funds, in terms of performance over the previous month, according to Morningstar data, reflecting his bias towards less developed markets.

    As well as exposure to the Mexican peso and Brazilian real, the fund has also placed bets for the euro and the Japanese yen to weaken against the dollar, a winning trade that reversed this month.

    Karin Anderson, analyst at Morningstar, says the Templeton fund is operated more like a global macro hedge fund than a traditional global bond fund. “It is able to make dramatic currency bets, and these will always be a pretty big swing factor,” she says.

    Losses at stock funds have been even more dramatic. The $11bn Lazard Emerging Markets Equity fund run by James Donald was down 12 per cent at the close of business on Wednesday.

    According to Morningstar, all the top performing large mutual funds this month are conservative bond funds, mostly those that focus only on the US and are not exposed to currency swings.

    Doubleline’s $48bn Total Return Fund, run by Jeffrey Gundlach, has notched up a 0.2 per cent gain this month, taking its year-to-date returns to 2.1 per cent. That is only bettered by a handful of equity vehicles that target the healthcare sector, and this month by a few US municipal bond funds.

    “August has been a differentiator,” Mr Gundlach says. “We weren’t very optimistic on the bond market at the start of the year and January was very strong so we underperformed. But our defensiveness turned out to be the right decision.”

    Doubleline’s Total Return Fund benefited in particular from avoiding riskier junk bonds that have been beaten up this summer, and from bets on US Treasuries and mortgage-backed securities. The latter have benefited from oil’s slide as it has improved the finances of households, Mr Gundlach points out. “It’s been a safe haven in credit.”

    The $30bn JPMorgan Core Bond Select fund, managed by Douglas Swanson since 1991, has also held up well in the turmoil and gained 0.9 per cent this year, thanks to avoiding corporate bonds and favouring structured debt and Treasuries. “We don’t want to take large macro risks,” Mr Swanson says. “We’re still going to have a lot of volatility.”

    Mr Leverenz says he topped up holdings of his favourite stocks during Monday’s market maelstrom, but has kept about 5 per cent of the fund in cash and is prepared for further volatility. While global investors may have suddenly woken up to weakness in parts of the Chinese economy, the larger story remains unchanged. “The Chinese economy is the single largest growth story the world has,” says Mr Leverenz, “and it will persist in being so.”

    Top 10 actively-managed overall mutual funds, with $10bn or more in AUM, by MTD return

    Name Type of fund MTD return (%) YTD return (%) Current fund size ($)
    Nuveen High Yield Municipal Bond High yield municipal debt 0.23 1.39 10,575,617,651
    American Funds Tax-Exempt Bond US municipal debt 0.23 0.95 10,235,617,509
    Franklin CA Tax-Free Income Californian municipal debt 0.20 0.63 13,649,148,275
    Vanguard Interm-Term Tx-Ex Inv US municipal debt 0.19 0.76 43,610,756,277
    DoubleLine Total Return Bond Broad bond fund 0.18 2.12 48,098,515,397
    Franklin Federal Tax-Free Income A US municipal debt 0.15 0.55 11,216,686,212
    Vanguard Ltd-Term Tx-Ex US municipal debt 0.10 0.62 20,912,691,547
    DFA Five-Year Global Fixed-Income Broad bond fund 0.09 1.42 10,976,841,801
    Vanguard Short-Term Tx-Ex US municipal debt 0.05 0.27 12,505,863,763
    JPMorgan Core Bond Select Broad bond fund 0 0.85 29,821,260,876
    Bottom 10 actively managed US equity funds, with $10bn or more in AUM, by MTD return

    Name Type of fund MTD return (%) YTD return (%) Current fund size ($)
    Oppenheimer Developing Markets A Emerging market equity fund -13.08 -17.68 30,694,299,662
    DFA Emerging Markets Value Emerging market equity fund -12.23 -18.06 14,081,901,900
    Lazard Emerging Markets Equity Instl Emerging market equity fund -12.06 -17.58 11,226,532,228
    Vanguard Emerging Mkts Stock Idx Inv Emerging market equity fund -12.05 -14.95 61,177,183,757
    Fidelity® Select Biotechnology Portfolio US healthcare stock fund -11.62 14.03 17,392,581,242
    DFA Emerging Markets Core Equity I Emerging market equity fund -11.28 -15.29 13,674,870,527
    Fidelity® Series Emerging Markets Emerging market equity fund -10.49 -13.93 11,407,707,360
    Dodge & Cox International Stock Global equities fund -10.13 -8.17 68,597,293,891
    Invesco Comstock A US equity fund -10.06 -9.04 12,127,276,706
    Artisan International Investor Global equities fund -9.3 -6.54 20,161,482,049
    Bottom 10 actively managed US fixed-income funds, with $10bn or more in AUM, by MTD return

    Name Type of fund MTD return (%) YTD return (%) Current fund size ($)
    Templeton Global Bond A Broad bond fund -5.62 -6.63 65,311,680,115
    Loomis Sayles Strategic Income A Broad bond fund -3.64 -6.62 15,688,501,406
    Fidelity® Capital & Income High yield bond fund -3.1 0.93 11,138,465,414
    T Rowe Price High Yield High yield bond fund -3.03 -0.23 10,161,697,976
    American Funds American Hi-Inc Tr A High yield bond fund -3.01 -2.13 17,722,923,789
    BlackRock High Yield Bond Inv A High yield bond fund -2.47 -0.31 17,200,255,085
    PIMCO Real Return A Inflation-linked bond fund -2.35 1.92 13,008,128,617
    Loomis Sayles Bond Instl Broad bond fund -2.25 -5.38 20,448,941,793
    Vanguard High-Yield Corporate Inv High yield bond fund -1.67 0.44 18,114,169,276
    Vanguard Inflation-Protected Secs Inv Inflation-linked bond fund -1.51 -1.11 24,423,404,704