This content is from: Portfolio

Daily Agenda: CalPERS to Cull Asset Managers

Canada Pension Plan Investment Board moves to acquire GE division; Erdogan denied majority in Turkish elections; Japan’s GDP revised higher.

The California Public Employees’ Retirement System (CalPERS) is announcing today that it will slash the number of asset managers overseeing invested assets by half, divesting from segments such as real estate and private equity. The move by the $305 billion retirement system, the largest pension fund in the U.S., will reduce fees paid out to outside managers by hundreds of millions of dollars in the coming five years, according to industry analysts. It might also signal the beginning of an sector-wide shift among large pensions to move away from fee-heavy alternative managers. The increasing demands for fee compression among institutional investors in recent years has had a dramatic impact on asset management firms as the largest pensions reconsider increasing allocations to low-cost passive investment strategies.

Turkish president’s party falls short of majority. The national election in Turkey yesterday was a disappointment for President Recep Tayyip Erdogan’s Justice and Development Party (AKP), as it fell short of holding a dominant majority by over 15 parliamentary seats, necessitating a coalition government. The results end 13 years of uncontested power under the conservative, Islamist-leaning AKP. It also puts a roadblock in the increasingly authoritarian Erdogan’s push to alter Turkey’s constitution to create a presidential government rather than a parliamentary one. The liberal secularist, pro-Kurdish People’s Democratic Party (HDP) took roughly 10 percent of seats in parliament, a major advance for the group. The already weak Turkish lira slid by as much as 4 percent versus G-10 currencies in early trading on Monday.

Japanese GDP revised higher. Fresh data released today from Japan’s Cabinet Office indicates that the world’s third-largest economy expanded at a rate faster than initially reported, with the headline gross domestic product index rising to an annualized 3.9 percent. The positive revision was largely driven by a surge in corporate investment levels, a huge relief for Bank of Japan policymakers hoping that quantitative easing would ultimately drive business leaders to deploy more capital reserves.

Antagonistic rhetoric intensifies between Greece and creditors. Over the weekend European Commission President Jean-Claude Juncker called on the government in Athens to cease inflammatory language while Greek Finance minister Yanis Varoufakis made a blog entry calling on German Chancellor Angela Merkel to give his country a “Speech of Hope.” Yields on Greek ten-year sovereign bonds rose above 11.4 percent in trading on Friday, as markets factored the decision by Athens to delay payments to the International Monetary Fund until the end of the month.

Deutsche Bank gets new CEO. On Sunday it was announced that former UBS senior executive John Cryan will assume the role of chief executive officer for Deutsche Bank, after co-CEO Anshu Jain steps down on June 30. According to the financial institution, Germany’s largest, Co-CEO Juergen Fitschen will remain on board until May 2016 to ensure an orderly transfer of power. The shift in management was decided at a special board meeting following a period of shareholder criticism and regulatory scrutiny.

Canadian pension fund to acquire GE financing arm.The Wall Street Journal reported today that General Electric has reached a tentative agreement to sell its leveraged buyout financing division to the Canada Pension Plan Investment Board, Canada’s largest retirement manager, after discussions with multiple private equity firms that resulted in no action. The total assets held by the division exceed $15 billion.

German industrial production rises in April. Germany’s Federal Statistical Office today announced industrial production data for April that provides further evidence of a pickup in factory activity in the European Union’s largest economy. The headline output index rose by 0.9 percent for the month, following a modest contraction in March. Separately, trade data for April also released today saw the surplus expand, as rising exports offset a pullback in incoming shipments.

China’s exports fall sharply. Trade data for May indicated that Chinese exports contracted for the third consecutive month. Shipments abroad registered at a shortfall of 2.5 percent versus the same month in 2014 while imports declined by nearly 18 percent year-over-year as raw material demand remains weak.

Former Quicksilver boss becomes frontman at Fender guitars. Electric guitar manufacturer Fender Musical Instruments Corp. announced last week that Andrew Mooney has been appointed chief executive officer. The appointment of Mooney raised some eyebrows within the industry as he joins the firm after leaving surfing apparel company Quiksilver, Inc. Mooney joined Quicksilver in 2013 in an attempt to turn around sales. During his tenure, the company’s stock fell dramatically after the company launched an internal investigation into its revenue accounting methodology.

Portfolio Perspective: The Credit Boom Appears Likely To Intensify Yet AgainBrian Reynolds, New Albion Partners

Our nation’s public pensions have made it clear they are going to continue to bring in more money from their cities and states and allocate it to credit. After the panic crests, expect to see stock prices return to their prior highs as debt-fueled buybacks and mergers accelerate.

It’s looked likely in recent weeks that the outcome of the Greek drama would be a binary event that would likely determine this summer’s outlook for equities. The first Greek default didn’t impact our nation’s public pensions’ determination to put money to work in credit in an attempt to earn their 7.5 percent bogies and another Greek default shouldn’t stop the credit boom either — especially since more of the debt is now held at the sovereign level. The Greek saga thus shouldn’t be of much concern to stock investors. Nonetheless, stock traders seem to feel that the Greek situation is significant.

If there is a positive resolution for Greece, that should prompt enough short covering to propel equities higher over the summer until traders begin to focus on the prospects for Federal Reserve tightening later this year. If Greece defaults, we think it would be likely that stocks break down through in a repeat of the pattern seen this past January and February pattern: selling off in an initial bout of panic and then recovering on an increase in credit-fueled buybacks and mergers.

Brian Reynolds is the chief market strategist for New Albion Partners, a an institutional agency equity and equity derivative brokerage firm.

Related Content