As we move towards 2016, firms across the financial industry will be setting out their budgets and plans for the year ahead – and it seems clear that market infrastructure, new regulations and tax changes will play a bigger role than ever in influencing and shaping that planning process.
BNY Mellon’s current regulatory timeline includes no fewer than 20 changes between 2015 and 2019, with an increased concentration in activity during 2016 and 2017. Our own annual EMEA Tax and Regulatory Forums are an opportunity not only to share our understanding of these changes but also to take a pulse check on the impacts, challenges and priorities that lie ahead.
Based on a survey of delegates attending our recent 2015 Forum in London, many firms are indeed gearing up for a period of increased activity in 2016: 53% of respondents believe they will spend more on managing regulatory change in 2016 than they did in 2015, up from 41% this time last year.
It is clear from the survey that some regulations are deemed to be more of a priority than others, the most important being FATCA/CRS, MiFID II and UCITS V.
FATCA/CRS and UCITS V are perhaps no surprise, given the proximity of their respective compliance deadlines early in 2016. However, MiFID II has raced up the priority order in the past six months though this could again change as the deadline has recently been moved out to 2018.
The second ‘tranche’ of priority regulations include T2S, EMIR, Solvency II, the Financial Transaction Tax, and Money Market Fund regulation. Though viewed as a lower priority, the scale of the associated impact on specific firms should not be understated.
The current lower prioritisation on these regulations may also reflect the fact that some of them are still at the proposal stage, and hence resource and investment are yet to be allocated in 2016.
The third, seemingly lowest-priority tranche includes BEPS, PRIPS, Volcker, CRD4, CSDR, the Shareholders Rights Directive, IORP II and Capital Markets Union.
It is not surprising to see some of these deemed low priorities. In the case of Volcker, for example, the impacts have been largely addressed.
However, others – such as PRIPS and BEPS – are not dissimilar to other changes such as CRS and MiFID II, both in terms of their potential impact and their timing; accordingly, they can be expected to become higher priorities as we move through 2016.
When asked if these regulations would have a material impact on their firm, 85% of delegates polled agreed that this would be the case over the next 12 to 36 months. Immediate impacts are expected to be felt around resourcing, projects and IT, with 42% of respondents delaying product development in favour of other investments due to regulatory related work.
The survey did suggest firms see benefits and potential opportunities arising from regulations, but these are at once ill-defined and some way off, probably beyond 2017, by which time the hope is that the volume of regulatory work will have begun to decline. However, 2016 and 2017 look to be very busy and challenging years.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute investment advice, or any other business, tax or legal advice, and should not be relied upon as such.
In a recent webinar, Funds Europe spoke to Chris Hart, portfolio manager of the Robeco Boston Partners Global Premium Equities Fund, about how he seeks to tap into global opportunities from a value and growth perspective.
‘Buy low, sell high’ is a universally accepted and understood investment doctrine. However, a failure to properly comprehend value means investors can lose out.
Since launch in December 2004, the Global Premium Equities Fund has cemented a reputation for identifying both unacknowledged value and unrecognised overpricing.
This success is reflected in the fund’s consistent outperformance of the MSCI World Index, and its universally high ratings among research firms. Last year, it was the only equity fund to win nine Morningstar awards in Europe.
Fundamental to the fund’s success is its ‘three circles’ philosophy; the three circles being valuation, business fundamentals and business momentum. When Chris Hart took over management of the fund in 2008, he removed constraints that the previous portfolio manager had abided by and shifted the emphasis to finding stocks that fit the three circles philosophy, no matter the region, market capitalisation or sector.
He states the blending of these three characteristics results in a consistent return profile.
“When we assess a company, we ask three questions: does it offer an inexpensive valuation, does it exhibit strong earnings momentum, and does it achieve high levels of return on employed assets?” he says.
“The valuation lens is always the first hurdle for us, and the characteristic we are most sensitive to. We aim to find stocks with share prices which do not reflect the real underlying value of the business.”
Another key consideration is the momentum of the business: simply put, is it getting better, staying the same or getting worse? This piece of the philosophy, Hart comments, helps prevent investments in value traps – good businesses with low valuations and no reason to appreciate. Instead, “we want companies that are performing well quarter to quarter and have an identifiable catalyst to help it reach the target price we set for it,” he says.
“If the price of a stock you hold gets cut in half, you’ll need a 100% return to recoup that lost capital – a company needs to be capable of achieving this, or it doesn’t make it into our portfolio.”
Having a sustainable cash flow is an important element – and also important is what a company does with its cash. Hart favours stocks that use capital in a shareholder-friendly manner – such as buying back shares and increasing dividends – and to positively grow their business, whether organically or through acquisition.
The fund’s portfolio is generally comprised of around 100 stocks to ensure diversification.
Stocks from any sector, industry, region or country can be considered for investment. There are some conditions in respect of capitalisation, but the fund is even malleable in this regard.
“Names $1 billion and upwards are our real sweet spot from a liquidity perspective, but we will look at small-caps down to a few $100 million in size,” Hart explains.
He is keen to stress that no macro overlay of any kind figures in the fund’s analyses. The selection process is resolutely bottom-up and unconstrained – its sole raison d’être is to find and purchase undervalued quality stocks, identify the point at which they reach their full market value, and sell when that time comes.
The truly dispassionate nature of the fund’s selection method is evidenced in its regional weightings over time. Since launch, US exposure has ranged from 40% to 61%, Europe 12% to 40%, the UK 8% to 22%. These weightings have frequently deviated from the MSCI World Index’s own.
Currently, Hart sees little missed value in Europe, contrary to growing investor interest in the continent. Spain and Italy may be slowly recovering, but the fund makes no differentiation between countries, only stocks.
“[Europe’s] largest companies look fully priced, but there are opportunities in the small to mid-cap area. We currently have some exposure to insurance companies there, as they continue to deliver capital.
“There was an expectation the rising tide of QE [quantitative easing] would raise all boats, but this hasn’t happened – and the recent announcement of more is an indication the policy isn’t working as they expected. There have been individual stock-level improvements, but overall little progress.”
Despite this, some areas of the world map are off-limits, at least for the time being – Russian stocks, for instance, are currently “uninvestable” from the ‘three circles’ perspective.
Contrarian, or contrary?
The three circles approach has produced a portfolio some may find surprising. For instance, Apple is the fund’s largest holding, which might seem at odds with Hart’s stated aim of only purchasing inexpensive stocks.
“When we piece the three circles together, Apple really exemplifies an area of mispricing – it exhibits strong underlying fundamentals, with expanding and stable margins, supportive free cash flow levels, and growth rates vary from high single to low double digits,” Hart says.
“Its free cash flows and growth rates are higher than the market, so we see a disconnect between the company’s valuation and its fundamentals.”
When Apple will reach its target price remains to be seen.
An example of a recently jettisoned stock cited by Hart is Japanese commercial kitchen equipment manufacturer Hoshizaki. “We purchased the stock in Q4 of 2014 and it took a sizeable position in our portfolio. It performed extremely well and we sold when it hit full value in Q3 this year,” Hart says.
A look at the fund’s portfolio on a sector basis demonstrates the fund’s ability to deliver significant returns from contrarian plays. Comparing the fund’s returns from sector areas with the MSCI World Index show sizeable disparities. (See table for examples).
“It’s a hallmark of mispriced securities. When a sector’s out of favour, often there are many well-run companies painted in a very broad-brush manner, which produces that valuation disconnect we look for,” Hart says.
The fund had assets under management of €2.2 billion (at the end of November 2015 ) and has consistently outperformed its benchmark over the last five years through a range of market environments.
The Unlocking the potential of global opportunities webinar is available on Funds Europe’s Webinar Channel.
Disclaimer: Important information - This statement is intended for professional investors. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFs from the Netherlands Authority for the Financial Markets in Amsterdam. This document is intended to provide general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products. The prospectus and the Key Investor Information Document for the Robeco Funds can all be obtained free of charge at www.robeco.com.
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