As Santa Claus sprinkles down bow-tied gifts on U.S. stock market investors, not all was well for investors in 2014. The equity capital markets laid traps for institutional investors. At times, even the “smartest minds” in investing make serious errors when allocating assets. For example, the AllianceBernstein All Market Real Return Portfolio, which actively shifts in an array of real assets, posted a -11.66% year-to-date return from December 26th. The real return fund, having a high exposure to the energy sector, is managed by John Ruff who has co-authored articles in finance publications and holds pedigrees from top finance schools. No matter how much research is consumed, consultants and advisors hired, there are going to be times when institutional investors make lousy calls. Some investment strategies have performed abominably this year, costing investors significant losses.
Below, the SWFI editorial staff highlighted some really bad investments for 2014.
#4 Small-Cap Energy Funds
A large number of small-cap energy funds performed horribly in 2014, especially the funds heavily allocated to debt-laden junior energy companies. The shale boom opened up the credit valve for many of these junior energy companies. Some funds that suffered lousy performance were Fidelity Select Energy Service Portfolio, which if an investor allocated US$ 10,000 on January 1, 2014, they would have US$ 7,810 on December 21th. Another example is Schroder International Selection Fund. This fund invests in equity and equity-related securities in junior energy firms, posted a -33.1% year-to-date return from November 28, 2014. This is in a year where in six months, oil went from US$ 111 per barrel to US$ 59 per barrel.
Yet despite the bad news, energy private equity funds are raising massive amounts of money from institutional investors. Private equity firms like Warburg Pincus, KKR and the Carlyle Group raised energy-focused private equity funds attracting pension and sovereign wealth dollars.
#3 Crude Oil
For most of 2014, the price of crude oil has been slipping, being a boon for U.S. consumers. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
U.S. Treasury Secretary Mnuchin revealed the United States is preparing more Turkey sanctions. This stems over the issues with an American pastor in Turkey. Turkey’s lira, has fallen to record lows recently.
The week before, U.S. President Trump announced the doubling of tariffs on Turkish steel and aluminium to 50 and 20 percent, respectively. Turkish president Recep Tayyip Erdoğan has called for a boycott of electronics products of the United States, which includes iPhones (a smartphone product of Apple).
Scott Keller returns to T. Rowe Price as head of global investment management services for Europe, the Middle East and Africa from January 1, 2019. Keller is currently at UBS Global Asset Management, working in the Asia Pacific region, heading efforts in the bank’s institutional and intermediary distribution. Keller joined UBS in 2014. Before UBS, Keller was at T. Rowe Price.
Scott Keller is replacing Peter Preisler at T. Rowe Price. Preisler exited T. Rowe Price in August 2017.
At UBS, Nick Trueman will replace Scott Keller.
Sovereign wealth funds are paying closer attention to the U.S. Federal Reserve as it enters fresh territory under Jay Powell. Powell’s decisions are impacting foreign exchange holdings globally, as central bankers adjust to a newer environment of policy normalization. The United States is not the only country raising interest rates. The Philippines, Argentina, Indonesia, India, Czech Republic, Ukraine and Pakistan are just some emerging market countries that have raise interest rates.
Global institutional investors like BlackRock are concerned that the U.S. dollar could grind higher. In times of increased geopolitical or financial tensions, the greenback is seen as a safe haven by many central banks, sovereign funds and foreign public funds. July marks the 110th month of expansion, a streak that is one year away from becoming the longest in U.S. history. Stronger economic data – with U.S. gross domestic product hitting 4.1% for the second quarter of 2018, rising interest rates, and bids to lower U.S. trade deficits, are making sovereign funds rethink asset allocation or at least shift more assets out of markets like Turkey, South Africa and Brazil. The Turkish lira fell further in August, prompting the country’s central bank to take drastic action. The fallen lira sent jitters across emerging markets and to banks in Southern Europe who have exposure to Turkey. What are sovereign wealth funds doing now?
On the fixed income front, sovereign funds are paying much closer attention to their government bond holdings, keeping a close eye on countries that rely heavily on external funding. Shorter duration bonds and inflation-linked debt can act as a safeguard against rising rates and inflation. Sovereign funds, like Singapore’s GIC Private Limited, are recognizing that global equity returns are less synchronized, thus there is a move to identify select countries and regions being conducted for strategic asset allocation for 2019 and beyond. A stronger greenback, positive U.S. corporate earnings, and rising trade tensions between the U.S. and China are becoming a boon for active equity managers and smart beta funds, as public funds are requesting enhanced levels of skills in navigating stock selection. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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