Nikko AM Pulse

November 2012 Monthly Comment from the Investment Team of Nikko AM’s World Series Fund Platform®.

This edition is appearing slightly later than usual, as we wanted to include a note on our recent Asian trip and the inaugural Skybridge Alternatives (SALT) conference in Singapore, in addition to digesting the impact of hurricane Sandy on markets. We also explore the sustained appeal of Emerging Market Debt and why a blended approach may present an interesting risk reward in this area.

Most managers know the positions held by their competition, which leads to an inevitable squeezing effect when one becomes a forced seller. It is also a landscape of few Goliaths and many Davids, who like other onlookers have observed the lacklustre performance of some of the Goliaths with no small amount of schadenfreude. The Asian hedge fund market is down approximately 50% from its 2007 peak of US$170 Bn, although only a handful of funds run over US$1 Bn. A lower cost base seems to make the impossible possible for longer (it is still the land of the US$10 or US$20 Mn launch), but naturally not forever. Managers spoke of compelling valuations, as the Chinese market skirted multi-year lows, as well as the increasing depth and breadth of the regional markets. However, the still patchy status of regulation forces pan-regional players to face up to 60 sets of regulators, in some instances. When compared to the size of the US market, with its centralised regulatory system, this fragmentation was blamed for the region failing to achieve its potential. There was also discussion at the SALT conference, of the paralysing effect that the “dead hand of risk aversion” has had on the region, as it seems caught in the crossfire of both concerns about Europe and caution in the US (especially regarding the pending fiscal cliff). With a starstudded roster of speakers and the glittering backdrop of the Marina Bay Sands Convention Centre, the event spoke to the prominence of Asia on the world investment stage, even if many of the sessions focused on global topics such as the presidential election and mortgage backed securities opportunities in the US, as well as the commodity bull run. Much of the local talk was of Singapore’s stunning and swift rise to become the prominent wealth management centre in the region, although Hong Kong retains the financial services crown. The asset management giants of the region remain the Australian superfunds (as discussed in last month’s Pulse) and a presentation by representatives of the Australian industry underscored the sizeable growth still to come in this area.

September and October saw unprecedented levels of market intervention, initially in the form of governmental stimulus and then by Mother Nature. During September there was an embarrassment of riches in the form of governmental stimulus; the US Federal Reserve committed to purchasing US$40 Bn per month of existing mortgage bonds, whilst the European Central Bank announced its own bond buying programme. Investors shook off some of their caution and responded favourably, contributing to a bounce in markets, particularly in Asia. October started out as a month with more embarrassment than riches, as earnings disappointments abounded and buzz mounted regarding a tightening US election. Geopolitical tensions, whether in Asian waters or Beirut streets, continue to create a stir and markets failed to find much traction, with tech stocks in particular selling off sharply. These distractions were soon eclipsed by the widescale shutdown and devastation wrought by Sandy, the “Frankenstorm” which paralysed US markets and choked infrastructure throughout New York and New Jersey. Markets at first reacted positively following the two day closure, as rebuild efforts seem poised to inject some stimulus.

Asian Voices and a Pinch of SALT
Our week in Asia started in Hong Kong which remains a cosy and compact “small world” of hedge funds. With few operators all centralised around a dense geographic area, there is essentially nowhere to hide one’s trading mistakes or the struggle behind the scenes of a start-up.

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1 Bn). or a solicitation of an offer. Corporate debt represents only 7% of the asset class in this area. the lion’s share of which (80%) will be allocated to hard currency. Many managers offer blended strategies. Watch this space for further details. please contact us – we may be interested in appointing you as sub-advisor to a new product launch for our 300 intermediaries across Asia. but one surprise has been the outperformance of US dollar denominated debt during the year to date (15% to 30 September). The asset class has seen very strong YTD flows (US$60. prospective investors must rely on their own examination of the merits and risks involved. E: worldseriesfundplatform-managers@nikkoam. but others also blend corporate debt into the mix. This document has been prepared and issued by Nikko Asset Management Europe (Nikko AME).com Important Information This document is for information purposes only and is not intended to be an offer. As we begin November all eyes are on the US election and the US media is still filled news of with the human toll wrought by Sandy. internally developed data and other sources believed to be reliable. than single strategy groups. often 50/50 USD and LCD debt. neither Nikko AME. It will be a gripping few weeks ahead which may set the tone for the end of what has been a year filled with drama. but as in other segments of fixed income currently. representation or warranty of and be responsible for the accuracy or completeness of this document. on the basis of publicly available information. 1803699. The Investment Team Nikko AM World Series Fund Platform® November 2012 Further Information Fund Managers If you are a fund manager that can add value with specialist expertise in strategies which Nikko AM does not have inhouse. as well as the case for a blended multi-manager approach that achieves the same risk/reward characteristics of single manager blended portfolio. Registered address: 1 London Wall. with the goal of driving efficiencies and cost savings.com E: worldseriesfundplatform-distributors@nikkoam. please contact us about our world-wide third party fund manager research. EC2Y 5AD.nikkoam. This information is for professional investors only. The average allocation to emerging market debt by institutional investors remains in low single digits (below 5%) and despite its perhaps “richness” is currently expected to see ongoing inflows. Emerging Market Debt Emerging market debt continues to have enduring appeal in the global hunt for yield. to buy or sell any investments and should not be regarded as investment advice. Any opinions expressed in this document may be subject to change without notice. Not for redistribution. London. shall in any way make guarantee. For more information. but with less idiosyncratic manager risk. The World Series team is actively researching this area. at approximately the same size as the US high yield market (although due to periodic liquidity constraints market size estimates should often be read with caution). neither of which are particularly good news for managers hoping for rich pickings from this sector.Nikko AM Pulse November 2012 The industry is likely to cope with growth pressures through mass consolidation.com/worldseriesfundplatform . officer or employee thereof. Distributors If you are a distributor and are looking for a specialist investment solution for your clients. Nikko AME is authorised and regulated by the Financial Services Authority and is registered in England No. with the most upside. It is also a sizeable segment of the asset class. whilst local currency debt and corporate debt delivered 12% over the same period. visit http://en. These blended strategies often show a greater breadth of return drivers and more attractive risk/reward characteristics. nor any director. Whilst reasonable care has been taken to ensure that the information is accurate and any assumptions made or simulations used are fair and reasonable. it is deemed to be relatively more attractive. In making any investment decision. As always we welcome your comments and feedback.

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