• 07/09/2017

At Home in the Land of the Rising Sun

At Home in the Land of the Rising Sun


Michael Kelly, Global Head of Multi-Asset – PineBridge Investments Asia Limited

Winner of Investment Manager of the Year – Aggressive Allocation, PineBridge manages the PineBridge Global Dynamic Asset Allocation Fund, and is the manager for a dynamic asset allocation MPF fund on Hong Kong’s third largest pension fund provider’s platform, according to Gadbury Group’s MPF Market Share Report in 2015.  While the MPF Fund mandate must comply with Hong Kong MPFA’s asset allocation requirements, it hasn’t deterred the manager from delivering extraordinary results.  BENCHMARK finds out how the global multi-asset team adds value to Hong Kong investors.

BENCHMARK: Can you explain how you integrate strategic and tactical approach when building your portfolio?

Michael Kelly: Our approach is based on an intermediate-term (9-18 months), forward-looking fundamental perspective on asset allocation. This intermediate time frame sits between a purely tactical approach (short-term) and a strategic approach (long-term). Tactical Asset Allocation is typically too short-term for prices to connect well with fundamentals. A Strategic Asset Allocation time frame is too long , over ten years for investors. Being intermediate-term enables prices to converge towards our fundamental view, and also enables us to be nimble and opportunistic across asset classes.

BM: How do you measure against your performance without a clear-cut benchmark?

MK: We do not have an official benchmark or target return, per se, however we position ourselves between the conservative Towers Watson 20%-40% equity and aggressive Towers Watson 80%-100% equity benchmark. The MPF Fund, for example, is total return focused which seeks to beat an aggressive benchmark in stable markets and a conservative benchmark in challenging markets; in other words, performing across market cycle. Our performance measurement is consequently tied to our risk positioning across market cycles, where we believe our fundamental-driven views anticipate pro-growth or low-risk scenario. We believe this is aligned with the industry trend of seeking strategies and managers that can perform across market cycles.

BM: How are assets being allocated to different asset classes?

MK: We believe that fundamentals over the intermediate term guide the relative attractiveness of asset classes. Our portfolio allocations reflect our convictions on an asset class level. We seek to be dynamic and opportunistic to reflect our convictions, yet operating within the investment guidelines of portfolios. As an indication, our allocations may vary between 3%-95% in equity and between 3%-80% in fixed income, hence showing the wide ranges that are key to our dynamic approach.

Managing the Risks

BM: How do you look at risk and how is risk managed during the selection process?

MK: We believe risk must be proactively managed. Our team of 18 members implement a three-step process with one member chairing each step.  The first step includes debates about fundamentals among PineBridge’s 19 bottom-up asset class specialists. This first step determines expected risks and returns using over 100 fundamental metrics. The second step is our monthly multi-asset strategy, where the team discuss the Risk Dial Score (RDS) and our 9-18 month convictions for each asset class.  Finally, we use portfolio-specific efficient frontiers to construct portfolios weekly and assess risk through industry-leading systems like Sungard APT

BM: What is your allocation between buckets of asset classes and what is your biggest risk allocation at the moment? 

MK: Current, we are pro-risk and our expectations are for a global growth bounce as even as growth expectations have drafted lower driven by emotionally-driven, short-term downdrafts, we believe the fundamental backdrop remains intact across selective asset classes.  Growing consumer confidence across developed markets which we believe will pull industrial activity, continued ease in monetary policies, fiscal policy easing coming in play and commodity supply-demand (driven by technicals) on track to moderate over time – all provide us continued confidence in our positioning and convictions.

Within equities, we continue to favor Japan and Europe. In Europe (which is our biggest risk allocation at the moment), cyclical recovery is broadening, unemployment is falling, and consumer confidence is high. We believe Japanese equities are well positioned to benefit from a confluence of positive macro (continuing stimulus from the BoJ) and microeconomic drivers (major corporate shareholder-friendly governance changes). Valuations for both of these developed markets remain attractive, with our assessment of improving fundamentals over the intermediate-term.

Within fixed income, we continue to favor low-duration, floating-rate assets like bank loans positioned for rising rates. We have also started to build conviction in High Yield. We believe that the overall high-yield default rate is unlikely to spike as much as the market fears because the proportion of energy credit that is directly exposed to commodity prices (less than 8% of the high yield universe) is simply not sufficient to justify the spreads today.

What to expect in 2016

BM: How is the world responding to what’s happening in China? Have we overreacted?

MK: Plunging oil prices and China’s devaluation of the yuan have led markets to infer a lower Chinese and thus global growth. Central banks are worried, and they shifted to a dovish extension of an extraordinary monetary support. Those who think central banks are out of ammunition may start to change their minds when central banks begin to push back. We believe growth fears are misplaced. The combination of growth and liquidity is what determines how markets will behave over the intermediate term.

BM: Are you concerned about the continuous slowing of China’s economy?

MK: After China turns in its policy cycle in 2014, and the liquidity cycle, then a bottoming of its credit cycle in 2015, we are now witnessing an upturn in credit, confirmed by the strengthening Total Social Financing (TSF). Since industrial production is highly correlated to TSF with a lag of three to six months, a bounce in China’s economy lies ahead. With the People’s Bank of China having closed its capital account once again over the fear of another downward adjustment of the yuan, it seems more fashion than finance to me.

BM: What implications are there for commodities?

MK: Flat prices for copper, aluminum and zinc suggest that plunging oil prices are due to supply increases, not global demand shortfalls. We reiterate our conviction that disconnect between weak global manufacturing and strong consumption will be resolved through a recovery of the former, not a collapse of the latter. Even within manufacturing, most sectors are in expansion. Only oil, mining, machinery and apparel are contracting.

BM:  Why do you have such conviction for Japan?

MK: Extraordinarily expansive monetary policy and a focus on shareholder returns will continue to benefit Japanese equities. With the advent of an Abe government, we began gaining a conviction in Japan in early 2013.  Preceding Abe, Japan spent two decades fixing a broken banking system. However, BOJ’s Governor, Shirakawa, also simultaneously pursued a tight money policy to offset a loose fiscal policy, driving up the value of the yen to levels that almost collapsed Japan’s export sector.  This has now been reversed, and accompanied by change in management culture in tandem with strengthening fiscal policy.

BM: More doubts have been cast on Abenomics whether it can save Japan.  Will it?

MK: With the Abe government in charge, Bank of Japan has been committed to growing its balance sheet and weakening the yen to restore trade growth and fight against deflationary pressures. The public policy that focuses on Japan is close to breaking the deflationary spiral, which has put Japan in two decades of muted growth and outright deflation while hurting consumer spending. We understand some of the execution concerns, yet believe that the combination of aggressive monetary policy, strengthening fiscal policy and corporate governance reform will all result in improving fundamentals over the intermediate-term.

BM:  Your portfolio is slightly tilted towards financial stocks.  Do you see any interest rates going backward in Japan hurting the sector?

MK: We do not typically establish industry tilts as part of asset allocation per se. However, these can be created via underlying strategies which will never have a permanent position in our portfolios. That said, negative interest rates along with positive inflation expectations imply that Japan’s real rates are now negative, which should have a profound impact on consumer behavior, in contrast to previous unsuccessful attempts to rejuvenate consumption. Consumption does drive a significant portion of Japan GDP growth, and we believe that over the intermediate-term, these rates are going to be accretive for improving consumption as well as profitability across the manufacturing and services sectors, supported by a weakening yen.

BM: Have you seen improvement in Japan’s corporate governance and have shareholders seen their benefits?

MK: We believe that corporate governance and shareholder-value-oriented management would gradually improve even though in its infancy stage.  Having seen the introduction of the British style “Corporate Stewardship Code” to improving corporate profitability, and seeing initiatives such as the ROE-focused JPX 400 Index, the conviction in Japanese equities is gradually rising. Investor activism through increasing proxy voting by foreign ownership is further influencing the focus on portfitability, which has been missing for last two decades. Even without seeing material growth, we expect the ROE would rise off its long bottoming process of 6-7% to low double digits; a period where earnings could outgrow Japan’s economy for an extended period. BM