Autumn 2013

CAPITAL MARKETS: The case for risk

LombardoPioneer Investments argued the case for a ‘renaissance of risk’ at its annual client investment conference, where Funds Europe was the media partner. Fund selectors from Asia and other parts of the world believe investors are on the verge of allocating a greater amount of money to equity investments and away from bonds. Forty-four per cent of fund buyers, who were at an investment conference hosted by Pioneer Investments in Dublin, Ireland, in June, said they believed the “Great Rotation” out of bonds and into equities was about to happen. Giordano Lombardo, group chief investment officer at Pioneer, also said that a large Asian institutional investor he had spoken to was even interested in buying European equities - an asset class that was severely hit by the eurozone crisis. Meanwhile, Diego Franzin, Pioneer’s head of equity – Europe, added that valuations of equities compared with bonds had not been as cheap since the 1950s. Lombardo told the conference, which was entiteld The Renaissance of Risk: “It’s absolutely right to consider risky assets, particularly equities. They offer better value than any other alternatives, especially bonds, and they have a better risk-reward profile in the longer run.” Pioneer Investments, owned by Italy’s UniCredit banking group, has €165 billion ($211 billion) of assets under management, as at March 31. Its Asian offices are in China, India, Japan, Singapore and Taiwan. Pioneer increased its allocation to European equities in June last year. Asked for their favourite asset class over the next three to five years, 31% of Pioneer’s audience said European equities. US equities were favoured by 27% of the audience, and 24% said emerging markets. Much lower, in fourth position, the next highest preference was for emerging market bonds, favoured by 7.1%. A major theme in capital markets - the tapering of quantitative easing by the US Federal Reserve - was also considered at the conference. Tanguey Le Saout, head of European fixed income at Pioneer, said a reduction in this form of economic support by central banks would reveal to what extent investors felt markets had genuinely begun to recover. “The partial withdrawal of quantitative easing is good for markets in that it will show how good the fundamentals are.” Quantitative easing has lowered interest rates on many quality sovereign bonds in recent years, and with equities deemed as too risky, high yield bonds have been a highly sought asset class by investors hunting for yield. Matteo Germano, Pioneer’s global head of multi-asset investments, says his team is monitoring the asset class and has a small, selective exposure. He expects a deterioration in high yield bonds, particularly emerging market corporates, which he believes will be hit by slower growth in Europe. Exposure to emerging market bonds has reduced and Germano is looking to buy more equities. Equity income funds, which seek income flows from dividends, have also been in favour with yield hunters. Pioneer Investments uses options to enhance the income from its European and World Equity Target Income funds. It seeks to turn equity volatility to an investor’s advantage by selling a short-dated call option on selected stocks, says Hugh Prendergast, head of international products. “You have to be selective and not systematically apply this to all stocks,” he says, adding that the preference is for stocks that are thought to be fully valued, because the seller of the option – Pioneer – would lose if the stock rose. Lombardo says Europe still faces difficult challenges, but there is support for Europe’s macroeconomic case. “A lot of ground has been covered in terms of austerity.” Lombardo added that 75% of fiscal reform in the eurozone has happened, while most eurozone countries are close to balancing current accounts. The eurozone as a whole is running a trade surplus. ©2013 funds global asia

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