As rates have risen, investors have, once again, started asking the perennial question: Is the bond bull market over and are rates normalizing? In thinking about bond yields, it is important to keep longer-term factors in mind that have nothing to do with central bank policy. Low yields have correlated with two, related longer-term trends: low nominal GDP (NGDP) and an aging population. The reason they’re related is that an aging population means slower growth in the workforce, and in turn, slower economic growth.
An aging population impacts rates through a second mechanism. As consumers age, their borrowing and investing patterns shift. Older households tend to borrow less and demonstrate a preference for income, in the process raising the demand and lowering the supply of bonds. The net result is that older populations tend to be associated with lower real, or inflation-adjused interest rates. This dynamic has been at work for decades and helps explain why low yields predated the financial crisis.
Because the population will not get younger any time soon, what would need to change to push rates back to “normal”? In terms of the real economy, the simple answer is faster nominal growth. Looking back over the past 60 years, the level of nominal growth has been the key to understanding the level of rates. During this period, a smoothed average of nominal growth explains almost 60% of the variation in long-term rates (see the chart below).
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“Owning shares in a mutual fund or ETF has never been cheaper. According to Morningstar’s annual fund fee study, the asset-weighted fee for roughly 25,000 funds and ETFs averaged 0.518% in 2017, down from 0.562% in 2016. The 8% drop was the biggest year-over-year decline since 2000, when Morningstar began tracking the data, and represents more than $4 billion in savings for investors, according to Morningstar. Driving the decline were investor preference for low-cost funds — flows into the cheapest 20% of funds within different categories surged 60% — and fee reductions by active funds.
“The cheapest 20% of funds raked in nearly $1 trillion last year while the rest of the industry saw net outflows of approximately $250 billion,” said Patricia Oey, senior manager research analyst at Morningstar, in a statement. “The message investors are sending is crystal clear — cost counts.” Passive funds were the biggest beneficiaries of these flows, accounting for 70% of new inflows; lower cost actively managed funds accounted for the rest.
The average asset-weighted expense ratio for passive funds fell from 0.16% in 2016 to 0.15% in 2017, while the asset-weighted expense ratio for actively managed funds dropped from 0.75% to 0.72%, as investors moved funds out of costlier funds into cheaper ones. Read more »
Yields on the 10-year Treasury are up 50 basis points (bps, or 0.50%) since the U.S. presidential election on Nov. 8, 2016 and nearly 100 bps from the July lows, as bonds sold off. This marks the fastest rise since the so-called “taper tantrum” in 2013, when expectations of an increase in interest rates by the Federal Reserve triggered a bond selloff.
Whether the new administration’s policies lead to faster economic real growth (after inflation) is an open question. But they are almost certain to lead to faster nominal growth, which includes inflation. This is important because over the long term it is nominal growth that drives rates. Going back to 1962, nominal growth has explained roughly 35% of the variation in U.S. 10-year Treasury yields (see the accompanying chart). Roughly speaking, 10-year yields increase 50 bps for every one percentage point increase in nominal growth.
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Assets under management by the world’s 500 biggest managers totaled $76.7 trillion at the end of 2015, down by 1.7% from a year earlier. North American firms’ assets decreased by 1.1% to $44 trillion, those managed by European firms, including managers in the U.K., fell by 3.3% to $25 trillion, and assets of Asian managers and rest of the world were down by 4% to $3.6 trillion. Only Japanese managers enjoyed an increase in assets last year, up 3.1% to $4 trillion.
Willis Towers Watson conducted the research in conjunction with Pensions & Investments. According to the study, the 78.3% of total assets that were actively managed declined by 2.8% in 2015, while passively managed assets fell by 5.5%. In 2014, passive assets grew by 28.1%. Traditional asset classes, which held the lion’s share of total assets last year, decreased by 7.1%. Equity accounted for 45.4% of the total 78.2%, and fixed income 32.8%.
Top 20 Managers
The study showed the top 20 managers’ share of total assets increased to 41.9% in 2015 from 41.6% even as their assets fell from $32.5 trillion to $32.1 trillion. Assets of the bottom 250 managers fell to 5.8% from 6% in 2014, and stood at $4.4 trillion. Twelve U.S. managers and eight based in Europe made up the top 20 list. The highest-ranking Japanese manager was Sumitomo Mitsui Trust Holdings, in the 33rd spot. Independent asset managers held nine of the top 20 spots, followed by banks with eight and insurers with three. Developing country managers’ share of total assets fell from 3.4% in 2014 to 3.2% last year, with assets under management amounting to some $2.5 trillion.
Following are the world top 20 largest asset managers as of the end of 2015, according to the report.
20. Northern Trust Asset Management, U.S.: $875 billion Read more »
“Getting the inflation call right is one of the most important decisions an investor can make today. Inflation expectations are quite soft, and it’s important to consider such market-based inflation measures in any inflation outlook. The two charts below may be of help as well.
We have seen an incredibly robust period of hiring in the United States, and even if payroll growth is likely to slow somewhat going forward, job gains have greatly outpaced total labor force growth over the past several years. As a result, there are numerous signs that firming wages are on the way, if not here already. Average hourly earnings rose last month at a year-over-year growth rate of 2.6%. Other recent wage growth indicators have also increased solidly, meaning an extended period of fairly anemic wage growth may have come to an end amid increasing labor market tightness. One implication of stronger wage growth: a changing U.S. inflation picture. The chart below shows how stronger wage growth has supported core inflation lately.
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The BlackRock Investment Institute publishes capital market assumptions and asset class return every quarter. Five-year and long-term equilibrium annualised return assumptions are in geometric terms. There are long-term volatility and correlation assumptions. Global equities are represented by the MSCI World ex USA Index in the correlation assumptions; global treasuries by the Barclays Global Aggregate Treasury Index ex US. We break down each asset class into factor exposures and analyse those factors’ historical volatilities and correlations over the past 15 years. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted.
Source: BlackRock Investment Institute, July 2016.
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Prior to the Brexit vote, there was a wide range of valuations but few cheap assets globally, as shown in the chart below. With most asset valuations still looking fair to expensive, it’s important to focus on relative valuations.
Modest economic growth, low inflation expectations and easy central bank policies have sent yield lower, intensifying flows into income-oriented assets. This partly explains extreme valuation differences between equities and government bonds. Valuations tell us little about short-term returns but can potentially shed light on medium-term returns. Starting valuations explain roughly 10% of U.S. equity market returns over the following year but 87% of returns over the next 10 years, according to the analysis back to 1988.
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Investors are waking up to the significance of sovereign credit risk in global debt markets, but quantifying the appropriate premium remains difficult. In response, BlackRock introduced a transparent and disciplined approach to assessing credit risk for sovereign debt issuers. The BlackRock Sovereign Risk Index numerically ranks issuing countries using a comprehensive list of relevant fiscal, financial and institutional metrics.The results contain several interesting insights for debt investors, and some very distinct groupings of countries emerge. The top countries are fiscally responsible and institutionally robust Northern European states, and the bottom ones include the European periphery as well as some emerging markets.
Drawing on a pool of more than 30 quantitative measures spanning financial data, surveys and political insights, the BlackRock Sovereign Risk Index (BSRI) provides investors with a framework for tracking sovereign credit risk in 50 countries.
The BSRI breaks down the data into four main categories that each count toward a country’s final BSRI score and ranking: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%).
To use the tool go to:
https://www.blackrockblog.com/blackrock-sovereign-risk-indicator/# Read more »
The world’s 50 largest asset managers accounted for more than $38 trillion in assets under management at the end of 2012, $4 trillion more than the year before, as the biggest firms in the industry continued to get even bigger, says a Cerulli Associates report released Wednesday. Eleven money managers have assets over $1 trillion versus nine a year ago, and twice as many firms have more than $2 trillion in assets, at four versus two, Cerulli reported.
The world’s largest money manager, BlackRock, is still the only global asset manager with assets in excess of $3 trillion, according to the Cerulli report, “Global Markets 2013.” While the trend for consolidation in the asset management industry is not a new one, “there has definitely been a quickening of pace since the financial crisis,” said Shiv Taneja, the firm’s London-based managing director for international research, in a statement, noting that the global financial crisis took $10 trillion off the table within a few months in 2008, leading to a consolidation of the industry as brand and balance sheet took center stage.
This benefited the bigger, better capitalized managers, Taneja said, which has created some concerns. “Big firms can do many good — and not so good — things. Regulators have a huge role to play here, and in their desire to boost investor protection, a good thing, should ensure they do not make it tough on smaller firms.”
The top 10 asset managers by global assets under management (AUM) as of December 2012 are: Read more »