Wednesday, June 24, 2020

COVID-19 and the critical role of pervasive tech

By ANITA KILLIAN/Wellington Management

The coronavirus pandemic has had a startling impact on global investment markets and has drastically affected daily life. But one positive trend that may be being overlooked is the way pervasive tech is helping countries weather the crisis. China was the first to experience the virus and it implemented some of the most extreme measures to help limit the spread. Crucially, it had the technology to adjust. 

Work-from-home (WFH) capabilities, streaming entertainment, and online food delivery are among the many tactical changes that could fuel long-term structural opportunities. In our view, the countries, sectors and companies with the strongest technological infrastructure will be best able to adapt. For example, China’s advanced digital solutions were vital to its rapid medical-supply response to affected areas.[1] 

The broad impact of 5G

We believe the proliferation of these changes will accelerate trends that were already creating a massive amount of new data. Fortunately, despite vast increases in data quantity, bandwidth-intensive apps, and video streaming, technologies can now communicate with each other better than ever.

For many, 5G brings to mind faster download speeds. But in a crisis like this, it is important to note it also offers a tenfold increase in the potential density of connected devices, enabling advancements like smart cities and pervasive tech. So, although the development of 5G is simply another step forward in communication speed, its ability to meet the exponential growth of data demand by both companies and consumers makes it a relevant innovation for every industry amid this pandemic.

Over a longer horizon, 5G also offers an opportunity for both the industries leveraging the innovation to improve their products and expand their addressable markets as well as the Asia tech companies producing the components necessary for the technology. 

For example, we’re particularly intrigued by two Taiwanese fabless semiconductor companies that we think will supply key hardware building blocks enabling the connection speeds that will prove to be essential in both the current crisis and in future industry revolutions. Notably, China plans to roll out a massive investment in 5G infrastructure over the next few years. 

Will the crisis create permanent shifts?

The ubiquity of tech offers unprecedented levels of connectivity, mobility, and resource/service access to new populations. This could have a hugely meaningful impact for countries trying to adapt to the coronavirus and could also be a long-term opportunity. We believe the pandemic is accelerating the penetration of many digital solutions, furthering trends and potentially breaking old habits. 

Out of necessity, new users are experimenting with grocery delivery, online education, streaming entertainment, and WFH. These solutions are proving particularly effective in China. In some countries, rapidly increasing user bases could challenge the number of customers companies can accommodate at one time. Streaming entertainment, online education, and WFH solutions are likely the most scalable beneficiaries of this crisis. The growth of ecommerce and food delivery is potentially more constrained due to their physical limitations. 

Though these are positive trends, it remains to be seen whether companies will retain customers when the pandemic subsides. Importantly, we think companies and consumers alike will then look to tech to help future-proof their lives. We believe many innovative providers will grow user bases, and old-economy companies could therefore face challenges to market share. 

Industry example: the growth of mobile gaming 

Mobile gaming is one industry that could see its already-compelling trend accelerate. We believe 5G offers the potential to revolutionize cloud-based gaming with much quicker download speeds, lower latency, and vastly greater potential connections. We think advanced mobile gaming will greatly increase the number of gamers, as the startup cost will no longer be prohibitively expensive (typically US$500 for a console and over US$1,000 for a PC). This could be as simple as subscribing to a gaming service like those currently available for movies and music. 

We believe the current environment’s impact on daily life further highlights the appeal of this opportunity set. In fact, in China, app downloads had a 40% increase in the first two weeks of February compared to 2019 averages, and gaming apps were more than triple the next most downloaded category (education).[2] Notably, traditional console makers did not seem to benefit as much from this increase.

In addition, we think demographic trends support the industry’s growth. Currently, 64% of the US population are gamers[3] with an average age in the mid-30s.[4] In our view, the next generation could nearly all be gamers, and the opportunity will further increase as gamers’ wealth rises with age.

The future of pervasive tech

In the next five years, we believe the pervasiveness of Asia tech will continue to broaden far beyond the industries traditionally thought of as “high-tech”. Beyond helping to weather this pandemic, Asia tech offers solutions like autonomous cars, predictive train-track maintenance, factory automation 3.0, and improved medical imaging. From leading-edge computer chips and image sensors to simple components like capacitors and compound chemicals, Asia tech is supplying the building blocks of innovation that enable everyday objects to be upgraded to “smart” tech. 

In fact, the connected device market could nearly triple in volume from 1.2 devices per person in 2018 to 3.4 devices per person in 2025. Notably, this growth is not restricted to consumer devices.

Asia at the forefront

Asia is a global leader at integrating this pervasive tech into society and leveraging the data it produces. The above examples merely scratch the surface of the many component-producing and technology-leveraging companies that we believe will ride the wave of Asia tech’s growth. The sector is driving abundant progress that offers long-term investment and access opportunities across industries and borders. The current pandemic further highlights the critical nature of this persistent trend.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.


[1] Harvard Business Review, “Delivery Technology Is Keeping Chinese Cities Afloat Through Coronavirus”, March 2020. 

[2] Financial Times, “China app downloads surge due to coronavirus outbreak”. As of 19 February 2020. 

[3] Nielsen, 2017. 

[4] Entertainment Software Association, 2017.

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How COVID-19's deflation shock may spawn inflation outbreak

Coronavirus has sent economies swooning, toppling consumer price indices. Rebounds in stock and bond markets on policy stimulus don’t mean market volatility is over, or that inflation is dead.


In the month to mid-March, COVID-19 drove the S&P 500 Index into bear market territory and corporate bond spreads up by several multiples. Less than a month later, U.S. blue-chip stocks, along with most global equities, rebounded into bull territory while credit spreads tightened by more than a third, as fiscal and monetary authorities open the stimulus floodgates to buoy fast-sinking economies.


Investors cheered by the waves of liquidity should keep in mind that many industries are operating far from capacity. While lockdowns to “flatten infection curves” help hospitals from being overwhelmed, they have sharply depressed demand for, and supply of, goods and services, as businesses retrench and unemployment skyrockets. Near term, this is deflationary, as economic growth collapses, bringing down prices with it.


Longer-term, though, investors shouldn’t ignore the risks of artificially fueled asset prices divorced from their underlying business fundamentals, and, at the macro level, the risk that long-lost inflation returns. Such risks simply can’t be discounted because “ZIRP” (zero interest rate policy), “NIRP” (negative interest rate policy) and “QE” (quantitative easing) didn’t produce inflation after the 2008/09 Global Financial Crisis.


This Time Is Different: Much More Severe Crisis, and Far Bigger Policy Response


The scale of the stimulus this time around is at least an order of magnitude greater, because fiscal stimulus is now complementing monetary stimulus, and banks, rather than seeing regulation and capital requirements sharply rise, are being used as conduits to get government aid to people and companies. Roughly half of the more-than $16 trillion in global stimulus is fiscal, much of which is central bank-financed debt monetization. The U.S. is leading the way, with combined monetary and fiscal stimulus of $7.62 trillion, equivalent to more than a third of national GDP. The eurozone and Japan are throwing more than 20% of their respective GDPs at their thawing if not frozen economies.


The U.S. Federal Reserve has certainly kept the financial-market plumbing from seizing up, preventing a liquidity crisis from turning into a solvency crisis and, in turn, impacting the banking system.


But as ugly economic and earnings data roll in, more volatility shouldn’t surprise. The International Monetary Fund has just chopped its global growth forecast for 2020 to -3% from +3.3%, which would be a far deeper decline than the -0.6% world-wide recession registered in 2009.


The IMF expects global growth to rebound 5.8% next year, with both the U.S. and eurozone jumping 4.7% and China soaring 9.2%. At the same time, it’s predicting consumer price rises of 1.5% in advanced economies and 4.5% in emerging markets. Bloomberg consensus sees U.S. CPI for 2021 at 1.7%, up from 1.0% this year, and China’s at 2.1% next year, down from 3.3% this year.


The assumptions built into those economic growth forecasts seem to incorporate second-quarter lifting of stay-home and business closure orders in the U.S., Europe and elsewhere, much as China’s labor force has largely returned to work since it shut down roughly three months ago.


Portfolios That Can Survive and Thrive in Adverse Environments


Whatever the assumed recovery timeline, though, the longer economies are hobbled by social distancing to constrain COVID-19’s spread, the longer the current damage to them, and the deflationary overhang, will linger. Elected officials in the U.S. are already suggesting that more government stimulus is necessary, and doubtless took note of Fed Chairman Jerome Powell’s statement in March that the Fed’s firepower is limitless. But money creation to finance budget deficits is usually inflationary, as Latin America learned in years past.


Whether a quick V-shaped rebound or drawn out U-shaped recovery, one thing is clear: a lot more money will ultimately be chasing fewer goods and services. That should not just juice risk asset prices, but also prices on those remaining goods and services available, once the economy starts to mend and consumers, after so much pent-up demand, begin spending again. That’s particularly so as more stimulus this time around is going straight to consumers and Main Street rather than Wall Street.


Moreover, if populism continues to gain steam and drives deglobalization in the form of trade tariffs and supply-chain re-alignment, which seems probable with respect to medical equipment and pharmaceuticals, production costs will also rise.


“Suppressed demand will come back and surge, which could trigger a shortfall of supplies as consumption should rebound before production normalizes,” says Portfolio Manager Lei “Rocky” Wang, who runs Thornburg’s international equity strategies.


While the pandemic may depress consumer and business sentiment for a while, restraining spending and investment, notes Wang, who early in his career worked at China’s central bank and a New York-based hedge fund trading currencies, “once the virus is under control, what will remain are very elevated public debt levels and political pressure on central banks to maintain low benchmark interest rates.” Sea-level interest rates amid an ocean of monetary and fiscal liquidity, less efficient supply chains and normalizing economic activity could together create a powerful inflationary impetus.


We’ll see if central bankers are disciplined enough to raise interest rates in a timely fashion. They tend to take the elevator down, and the escalator up, as the market saying goes.


Fundamental investors with an eye on the bigger picture can take advantage of continued market volatility to upgrade and position their portfolios to perform in a variety of market climates. Thornburg strategies have been targeting attractively priced securities of highly select companies with strong business models and balance sheets, visibility into future cash flows, as well as quality management. “In our experience,” Wang says, “these are the kinds of portfolios that can survive and thrive in adverse macroeconomic and volatile market environments.”

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

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Managed futures: An all-weather investment

By TIM RUDDEROW/Mount Lucas Management

When most people hear the word “futures,” they associate them with commodities like corn, oil and precious metals. In reality, the futures market is incredibly complex, with contracts encompassing both physical goods as well as financial instruments such as currencies, stocks and bonds.

Managed futures are portfolios of futures contracts that are bought and sold by investment professionals. Managers employ hedging strategies to take advantage of upward or downward pricing trends identified through quantitative technical analysis. As an asset class, their main purpose is to manage risk within a portfolio by delivering uncorrelated returns, although historically they have often outperformed the broad market in times of economic duress.

Hedgers and Speculators

Futures investors generally fall into three categories. Buy-side hedgers, such as oil refineries and food manufacturers, who use futures to lock in future purchasing prices for the raw materials they use. Sell-side hedgers, such as farmers, shale oil producers and mining companies, use futures to lock in higher future selling prices for the commodities they produce to offset potentially lower prices in the physical markets. Speculators attempt to profit by taking on the risk premium both buy-side and sell-side hedgers are willing to pay to reduce their own price risks.

A Trend-Based Strategy

Managed futures is a general description of an asset class comprised of a professionally managed portfolio of futures contracts. Their overall purpose is to improve the risk/return profile of a portfolio by delivering returns with low correlation to those of the equity and bond markets. They also offer the additional benefit of generating strong returns during periods of market stress, such as we’re going through right now.

Nearly all managed futures investors employ trend following strategies. Trend following is a quantitative trading method used to capture risk premiums that occur during periods of market volatility and price dislocation. Professional trend followers use patented algorithms that signal the beginning of potential large pricing trends, and then take short and long positions to capture the returns.

While managers may consider current economic and market conditions when looking for certain sectors, currencies or countries to focus their analysis, their actual trading decisions are based primarily on pricing trends. Fundamental factors are not considered.

Non-Correlated Returns Plus Outperformance in Times of Stress

Managed futures are most commonly used to deliver non-correlated results under most market conditions, serving as a risk mediator within the alternative investments allocation of an institutional portfolio. Generally, they deliver lower relative returns during periods of price stability. But during periods of market stress, managed futures often outperform the broad market, as illustrated in the following chart. 

This chart represents all declines of more than 10% in the S&P 500 since 2010. Past performance is not indicative of future results. No investor has achieved the exact performance results presented herein. The performance shown for the MLM Index™ EV (15V) and MLM Global Index EV (15V) is based upon a historical index and is gross of any fees and expenses. There is no guarantee that performance results in the future will be similar to those shown herein. The S&P 500 index is an unmanaged index consisting of 500 stocks chosen by the Index Committee of the Standard and Poor's Corporation that generally represents the Large Cap sector of the U.S. stock market. Returns for the S&P 500 index reflect the reinvestment of all dividends.

Over the past decade, when global economic and market events have spurred a selloff in the broad market, managed futures, as represented by the MLM Index, a recognized benchmark of the returns available to managed futures investors, often delivered exceptional non-correlated returns during these periods.

A Frequent Chart-Topper

When included in a diversified asset allocation strategy, managed futures not only can mitigate risk but often outperform all other asset classes, particularly during recessionary periods, as illustrated in the following table of periodic returns spanning the past 20 years.

Past performance is not indicative of future results. This is not an offer to sell or a solicitation to buy any security. Any such offer will only made by the Confidential Offering Memorandum of the Fund. No investor has achieved the exact performance results presented herein. The performance shown for the MLM Index™ EV (15V) is based upon a historical index and is gross of any fees and expenses. There is no guarantee that performance results in the future will be similar to those shown herein. * 2020 results represent YTD results through 4/30/2020.

As we see, the MLM Index was the top-performing asset class in four of those years and in the top three in five other years. More impressively, in 11 of those years the MLM Index outperformed the S&P 500. As of this writing, the MLM Index is the top-performing asset class index in 2020.

Because managed futures investors employ trend following strategies to capitalize on pricing spikes, they tend to perform best during periods of high market volatility such as those that occur during market downturns. Thus, we see that the MLM Index was a top performer in the wake of the burst of the high-tech bubble in 2000 and in the post 9/11 recession of 2001 and 2002, as well as during the collapse of the markets in 2008 that marked the start of the Great Recession.

Conversely, managed futures tend to underperform in years when domestic and international equity markets grow at a steady pace with low levels of volatility. In fact, over the past 20 years, returns have historically correlated most closely with those of investment-grade bonds, a reason why many institutional investors use them as risk mitigators.

Managed Futures in the COVID-19 Era

The current Coronavirus-driven bear market has provided numerous opportunities for managed futures investors to exploit pricing opportunities in various categories.

One example: When the global economic contraction began in March, savvy investors took short positions in oil and natural gas futures, a strategy that paid off handsomely when fossil fuel prices collapsed in April.

Another example: When the extent of the economic damage in the U.S. became apparent, many investors, anticipating a global stampede to safety, went long on U.S. Treasury futures, which rallied strongly in spite of interest rate cuts that have driven yields to near-microscopic levels.

With the growing uncertainty of the long-term global economic impact of the pandemic, the markets are likely to experience periods of high volatility for the immediate future, creating a wealth of opportunities for managed futures investors to exploit.

How Much Should Investors Invest in Managed Funds?

In an institutional portfolio, managed futures usually comprise a portion of an allocation to alternative investments. Typically, we see managed futures allocations ranging between 10%-20% of the portfolio as whole, depending on the institution’s risk-return profile.

Managed futures can play a variety of roles within an institutional portfolio. The uncorrelated returns they generate can help reduce risk in times of market volatility. When markets are falling, they can often deliver positive returns through effective use of shorting. And when markets begin to recover, savvy managers can get in on the ground floor of upside momentum before the rest of the market catches on. Thus, for many institutions, managed futures can be an attractive all-weather investment.

This article is intended for informational purposes only. This material contains the opinions of the manager and such opinions are subject to change without notice. This commentary does not constitute an offer to sell or a solicitation of an offer to buy securities and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Any offer for an interest in a fund sponsored by Mount Lucas Management LP (“Mount Lucas”) will be made only pursuant to an offering memorandum of such fund.


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The evolution of institutional investment structures: Revisiting managed accounts and the fund-of-one

By James Perry & Mark Weir/Maples Group

With the dawn of the global financial crisis of 2008 now over a decade behind us, it is important to look back and understand the evolution of institutional investment structures that has taken place. Manager-led products of the past are now often ignored in favor of more bespoke investment structures and customised, investor-driven solutions.

During the financial crisis, as redemption pressures led to the imposition of gating provisions and compromised liquidity terms, many institutional investors reconsidered their traditional approach of investing in commingled funds. As a result, there has been a surge in alternative structures, including managed accounts and the fund-of-one, that have provided investors with a greater degree of oversight and flexibility not typically found with more traditional commingled funds.

According to a recent AIMA survey[1] of 118 hedge fund managers globally representing approximately US$440 billion in assets under management, 53 percent of respondents agreed that offering customised solutions to asset owners is an important factor in aligning their interests with the investors. This is a significant increase from 2016 where only 14 percent of managers indicated the importance of customisation and an indication that this will continue to be a top priority as investment structures further evolve.

Managed Accounts

Historically, managed accounts have been the preferred structure for large, sophisticated institutional investors to create investment vehicles for the sole benefit of their participants or clients. This has enabled greater control of expenses, provides greater insight into the underlying portfolio of investments and overall performance, allows access to their own portfolio’s liquidity without impact from fund liquidity provisions, and mitigates risks from other investors.

An off-balance sheet managed account, in particular, can be a prudent structuring option and offers a number of benefits over on-balance sheet managed accounts that may lack overall structure and governance and pose greater risks. These off-balance sheet managed account structures ensure that there is a blocker entity which mitigates against contagion risk including the risk of excess losses through the use of derivatives. In addition, an off-balance sheet managed account often benefits from a higher degree of oversight with regard to its operations. It also typically includes independence of net asset value calculations, investment valuation verification, independent management fee and performance calculations, as well as expense processing and monitoring of expenses for compliance with the investment management agreement.

Overall assets among the top nine managed account platform providers stood at US$85 billion as of October 2019, a 13 percent increase compared to US$75 billion at the start of the year.[2] This growth is expected to continue as there has been increasing interest from a number of large allocators looking to build their own managed accounts platforms. However, there are a number of considerations that institutional investors should be aware of before building their own platforms.

With the increased flexibility that a managed account affords there comes significant additional operational requirements and burden for investors. Frequently, assets are held in the name of the investor which means that the investor may be directly responsible for all losses incurred on an investment. Additionally, because the institutional investor owns and controls the full infrastructure, they are responsible for ensuring smooth operations and contracting with the various service providers needed, a task that is often quite onerous and requires significant additional coordination and support.

Those who create managed account platforms directly often end up building out additional internal capabilities to oversee their platform’s operations. Institutions who do not have sufficient internal resources to manage the contracting and legal requirements will often hire a full service platform provider who will coordinate all aspects of the managed account platform. Larger institutions with greater internal due diligence and contracting capabilities similarly will often choose to work with a specialist service provider who can provide platform specific services such as legal entity structuring, operational set-up, service provider coordination and oversight, manager on-boarding, day-to-day operational coordination, daily risk and performance reporting as well as guideline monitoring.

The Fund-of-One Alternative

Increasingly, many investors who want to replicate the features of managed accounts without the operational and contracting burden have turned their attention to the more simplified fund-of-one structure. The fund-of-one is typically discussed in a similar context as managed accounts structures given that it is set-up to cater for the specific needs of an investor. However, the key difference lies in the fact that the fund-of-one structure is set up specifically for the investor with the underlying assets owned by the fund.

With the fund-of-one essentially being a single investor fund, the investment mandate and overall investment decision making process can be customised to specific requirements. In addition, these investment parameters can be incorporated into the governing terms which can be beneficial. In addition, the fund-of-one affords investors greater transparency and oversight with investors specifically able to obtain position-level information and more frequent and more detailed reporting. Investors may also have greater insight with respect to valuations and the calculation of fees.

The fund-of-one structure also offers an attractive combination of potentially improved performance along with reduced fees since they can be negotiated between the investment manager and investors on a standalone basis. Furthermore, the fund-of-one truly fosters better alignment, collaboration and consultation between investors and managers, ensuring there is a constructive dialogue taking place that clearly outlines the goals and objectives of the engagement to determine what solutions are most appropriate. Perhaps most importantly, the fund-of-one allows investors to capture almost all of the benefits of the managed account structure, including transparency, liquidity, increased control, and enhanced risk management. The institutional investor is still able to customise the mandate and segregate its assets from other investors without the associated operational burden and contracting responsibility.

Outsourced Support: The Maples Group Solution

The Maples Group combines industry leading capabilities in legal and structuring, fiduciary services, operations, reporting and technology to provide highly customised, cost-efficient solutions to help both managers and investors looking to establish managed account platforms or fund-of-one structures. Given the increase of investor-driven structures and the expectation that this trend will continue, the Maples Group is uniquely positioned to support institutional investors in establishing the optimal operational infrastructure.

Please visit the Maples Group’s website for more insights into the evolution of institutional investment structures.


[1] “In Harmony.” The Alternative Investment Management Association. 2019.

[2] “Top Managed Account Platforms 2019.” HFMWeek. 9 October 2019.

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