Rethinking Risk: Changing the Mind-Set from Market to Function

ThinkstockPhotos-185953030Thinking about investments in terms of beating a specific market benchmark has served many very well in the past, but that does not mean such an approach will be appropriate in the future.

‘We are all very wedded to the benchmark and the way that things have been done,’ said Hugh Prendergast, Head of Strategic Product and Marketing, Western Europe and International, at Pioneer Investments. ‘But we believe the future of the active industry is increasingly going to be about delivering function, not relative return.’

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3 Things the European Investment-Grade Fixed Income Team Talked About Last Week

1002824061. Greece – Cassandra’s and Pollyanna’s
In mythology, Cassandra was referred to someone who could see the future but no-one believed her because she was so pessimistic. By contrast, Pollyanna is used to describe someone who is hopelessly optimistic about the future. Continue reading

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3 Things the European Investment-Grade Fixed Income Team Talked About Last Week

1848989881. G7 – All Talk, No Action?

The 42nd summit meeting of the G7 group takes place this week in Sendai, north-eastern Japan on May 26-27. As is usual, much of the real work happens ahead of this meeting, with various sub-committees and side meetings taking place in advance of the main meeting. One such meeting was held on the weekend recently past, as the G7 finance ministers and central bankers gathered in Sendai. Unfortunately, as is often the case at these meetings, the participants were unable to agree on anything of note. Calls were made for countries to adopt a mix of monetary, fiscal and structural policies to boost demand, but there’s nothing new in this call – its standard G7-speak. Instead of agreeing on one specific course of action (Japan wanted countries to agree to more aggressive joint fiscal action), the statement left room for each country to adopt its own preferred course of action. That left Germany defending criticism of its own budgetary policy of running a balanced budget (“Schwarze null”) and arguing, as it has consistently done, that structural reforms are the key to unlocking future growth potential. But the highlight of the meeting was a spat between Japan and the U.S. over recent foreign exchange movements. Japanese Finance Minister Taro Aso noted that recent currency movements involving the Yen were “one-sided, speculative and disorderly”. That comment drew a quick and sharp response from U.S. Treasury Secretary Jack Lew, who reiterated that he did not consider the current Yen movements as “disorderly”. Lew told reporters “it’s important that the G7 has an agreement not only to refrain from competitive devaluations, but to communicate so that we don’t surprise each other.” That stance was backed by other G7 members, who refused to commit to intervention in the foreign exchange markets to limit the Yen’s movement. Whilst Japan’s Aso noted that it was natural for countries to differ on how they perceived exchange rate movements, he did leave the door open for Japanese intervention if the Yen continued to appreciate too quickly. With the increased hawkish comments from U.S. Federal Reserve Presidents about the near-term direction of .U.S rates, it would appear that a long U.S. Dollar stance could be appropriate in the coming weeks.

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Quest for Income: Q1 Fund Flows Favour Alternative Sources

Finding the solution

Fund flows in the global mutual fund industry have been telling an interesting story regarding changing investor appetites. Here, Gabriel Altbach, Pioneer’s Head of Global Strategy and Marketing, shares his perspectives on recent trends in the industry and what it might mean for investors and money managers during the balance of 2016.

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3 Things the European Investment-Grade Fixed Income Team Talked About Last Week

5188306171. BREXIT – Now the Bank of England Takes Sides

We wrote last week about how the upcoming BREXIT referendum was having an impact on UK economic performance, with Purchasing Managers Indices falling more than expected. Last Thursday, the Bank of England (BoE) finally nailed their colours to the mast, following their interest rate meting and the publication of their quarterly Inflation Report. The word “referendum” appears 96 times in the May Inflation Report, compared to 2 times in February, highlighting the concern of the BoE’s Monetary Policy Committee (MPC) about the effect the 23rd June referendum is having on activity. The problem for the MPC is that it is finding it difficult to decide how much of the recent slowing in activity is directly related to the referendum, and how much is a genuine loss of momentum that is reflecting what is happening in the worldwide economy (the BoE did revise down its growth forecasts for the UK economy). Nevertheless, the picture that BoE Governor Carney painted was stark – BREXIT could cause a significant slow-down in the UK economy, potentially even leading to a temporary recession. Sterling could fall sharply, which could lead to a pick-up in inflation just as the economy was nose-diving – a central banker’s worst nightmare. What would be the appropriate course of action for the MPC to take if such an outcome occurred? Higher inflation argues for higher interest rates, which would also support the currency, but an economy that is heading into recession needs lower rates, not higher rates. Governor Carney seemed to imply that the MPC’s reaction function would be driven more by the downside shock to the economy than the upside to inflation from the lower currency. But then earlier last week, the MPC’s newest member, ex-Citibank economist Michael Saunders, seemed to suggest that higher rates would be the appropriate response to higher inflation. All in all, a tricky situation, but we still believe in a short duration position in short-dated UK gilts as a potential hedge against a “LEAVE” outcome.

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