Global Investment – The Ideal Portfolio

By M. Isi Eromosele

In a world of unprecedented uncertainty, it is no longer possible to optimize investment portfolios on an asset class by asset class basis, nor are naïve asset allocation strategies acceptable.

One should never assume that the future will resemble the past, unless there is strong reason to believe so. The experience of the stable 1980s and 1990s has caused many lazy investment habits to get institutionalized as conventional and acceptable practice as market participants are learning to their cost.

More focused investment strategies are required.

All investors should strive for a multi-asset portfolio, designed to deliver profits in as many of the scenarios that can be anticipated over the next year – from outright market

crisis to sustained recovery.

The portfolio should be liquid and, for all intents and purposes, unlevered (with the exception of some relative value positions and some substantial long volatility or option positions).

The portfolio should be divided into five main parts:

Strategic assets

Emerging markets equities and bonds, EMFX overlays, gold and commodities. These are assets considered to have the biggest positively-biased asymmetric pay-off profile, on an option-adjusted valuation basis, across multiple scenarios.

This involves an assessment of the nature and intensity of each scenario against the volatility adjusted valuation of the asset in question.

Defensive assets

These are principally long regulated utility positions in Europe. These are assets that have historically outperformed during periods of high volatility.

Defensive hedges

These include equity variance swaps and a number of short dated currency and rate option positions. These are positions that statistical analysis reveals to perform well in dislocated markets and market crises.

A relative value book

A book in which one of the largest trades is a short position in non-financial European equities versus selling protection on the iTraxx Crossover index.

A currency overlay

This overlay should consist of long emerging market foreign exchange versus EUR

and GBP.

There is currently no excess cash recommended but there are large cash positions available against the face amount of derivative positions.

The rationale behind this mix of asset selections is as follows: There is recognition that the unstable world we live in will not last forever. Indeed, it is expected that by the end of the decade, we will enter a world of lower real growth, of emerging market currency appreciation and of possible higher inflation.

In such a world, owning the longest duration, highest real-yielding assets available is a good strategy. Ideally, these should be denominated in emerging market currencies (e.g. Brazilian inflation-linked bonds); or should be assets capable of being hedged back to emerging market currencies (e.g. Western European regulated utilities); or assets that mirror the behavior of emerging market currencies (e.g. agricultural commodities, gold).

Each of these asset classes should be bought whenever they are attractively priced, using capital accumulated by astutely navigating the current treacherous markets.

We are overweight equities versus rates because our analysis indicates that the equity risk premium for equities is now at unprecedented levels versus rates, even on an option adjusted basis.

In credit, focus on crossover paper because they have cheapened as much as equities (when you compare equity risk premia against volatility adjusted credit spreads).

The rationale behind the defensive hedge selections is as follows: there is recognition that in the short-term, there is a very considerable risk of systemic market failures with about a 40 percent chance of negative shocks ranging from a prolonged bear market in sovereign bonds to a market crisis.

The defensive positions are selected using option-based analytical tools that identify asymmetric pay-offs: trades that should perform well overall in highly volatile markets and also when strategic assets under-perform.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2013 Oseme Group

Foreign Direct Investment - Global Trends By Region

By M. Isi Eromosele

Compared with assets of nearly $5 trillion under management, FDI by sovereign wealth funds (SWFs) is still relatively small. By 2011, their cumulative FDI reached an estimated $125 billion, with more than a quarter of that in developing countries.

However, with their long-term and strategically oriented investment outlook, SWFs appear well placed to invest in productive sectors in developing countries, particularly the LDCs.

They offer the scale to be able to invest in infrastructure development and the upgrading of agricultural productivity - key to economic development in many LDCs – as well as in industrial development, including the build-up of green growth industries.

To increase their investment in these areas, SWFs can work in partnership with host-country governments, development finance institutions or other private sector investors that can bring technical and managerial competencies to projects.

FDI to Africa Continues To Decline, But Prospects Are Brightening

FDI inflows to Africa as a whole declined for the third successive year, to $42.7 billion. However, the decline in FDI inflows to the continent in 2011 was caused largely by the fall in North Africa; in particular, inflows to Egypt and Libya, which had been major recipients of FDI, came to a halt owing to their protracted political instability.

In contrast, inflows to sub-Saharan Africa recovered from $29 billion in 2010 to $37 billion in 2011, a level comparable with the peak in 2008. A rebound of FDI to South Africa accentuated the recovery.

The continuing rise in commodity prices and a relatively positive economic outlook for sub-Saharan Africa are among the factors contributing to the turnaround. In addition to traditional patterns of FDI to the extractive industries, the emergence of a middle class is fostering the growth of FDI in services such as banking, retail and telecommunications, as witnessed by an increase in the share of services FDI in 2011.

The overall fall in FDI to Africa was due principally to a reduction in flows from developed countries, leaving developing countries to increase their share in inward FDI to the continent (from 45 per cent in 2010 to 53 per cent in 2011 in Greenfield investment projects).

South-East Asia Is Catching Up With East Asia

In the developing regions of East Asia and South-East Asia, FDI inflows reached new records, with total inflows amounting to $336 billion, accounting for 22 per cent of global inflows. South-East Asia, with inflows of $117 billion, up 26 per cent, continued to experience faster FDI growth than East Asia, although the latter was still dominant at $219 billion, up 9 per cent.

Four economies of the Association of South-East Asian Nations (ASEAN) - Brunei Darussalam, Indonesia, Malaysia and Singapore saw a considerable rise.

FDI flows to China also reached a record level of $124 billion and flows to the services sector surpassed those to manufacturing for the first time. China continued to be in the top spot as investors’ preferred destination for FDI.

However, the rankings of South-East Asian economies such as Indonesia and Thailand have risen markedly. Overall, as China continues to experience rising wages and production costs, the relative competitiveness of ASEAN countries in manufacturing is increasing.

FDI outflows from East Asia dropped by 9 per cent to $180 billion, while those from South-East Asia rose 36 per cent to $60 billion. Outflows from China dropped by 5 per cent, while those from Hong Kong, China, declined by 15 per cent. By contrast, outflows from Singapore registered a 19 per cent increase and outflows from Indonesia and Thailand surged.

Rising Extractive Industry M&As Boost FDI In South Asia

In South Asia, FDI inflows have turned around after a slide in 2009-2010, reaching $39 billion, mainly as a result of rising inflows in India, which accounted for more than four fifths of the region’s FDI.

Cross-border M&A sales in extractive industries surged to $9 billion, while M&A sales in manufacturing declined by about two thirds and those in services remained much below the annual amounts witnessed during 2006–2009.

Countries in the region face different challenges, such as political risks and obstacles to FDI that need to be tackled in order to build an attractive investment climate. Nevertheless, recent developments such as the improving relationship between India and Pakistan highlight new opportunities.

FDI outflows from India rose by 12 per cent to $15 billion. A drop in cross-border M&As across all three sectors was compensated by a rise in overseas Greenfield projects, particularly in extractive industries, metal and metal products, and business services.

Regional And Global Crises Still Weigh On FDI in West Asia

FDI inflows to West Asia declined for the third consecutive year, to $49 billion in 2011. Inflows to the Gulf Cooperation Council (GCC) countries continued to suffer from the effects of the cancellation of large-scale investment projects, especially in construction, when project finance dried up in the wake of the global financial crisis and were further affected by the unrest across the region during 2011. Among non-GCC countries the growth of FDI flows was uneven.

In Turkey, they were driven by a more than three-fold increase in cross-border M&A sales. Spreading political and social unrest has directly and indirectly affected FDI inflows to the other countries in the region.

FDI outflows recovered in 2011 after reaching a five-year low in 2010, indicating a return to overseas acquisitions by investors based in the region (after a period of divestments). It was driven largely by an increase in overseas Greenfield projects in the manufacturing sector.

Latin America And The Caribbean: Shift Towards Industrial Policy

FDI inflows to Latin America and the Caribbean increased by 16 per cent to $217 billion, driven mainly by higher flows to South America (up 34 per cent). Inflows to Central America and the Caribbean, excluding offshore financial centers, increased by 4 per cent, while those to the offshore financial centers registered a 4 per cent decrease. High FDI growth in South America was mainly due to its expanding consumer markets, high growth rates and natural-resource endowments.

Outflows from the region have become volatile since the beginning of the global financial crisis. They decreased by 17 per cent in 2011, after a 121 per cent increase in 2010, which followed a 44 per cent decline in 2009.

This volatility is due to the growing importance of flows that are not necessarily related to investment in productive activity abroad, as reflected by the high share of offshore financial centers in total FDI from the region and the increasing repatriation of intra-company loans by Brazilian outward investors ($21 billion in 2011).

A shift towards a greater use of industrial policy is occurring in some countries in the region, with a series of measures designed to build productive capacities and boost the manufacturing sector.

These measures include higher tariff barriers, more stringent criteria for licenses and increased preference for domestic production in public procurement. These policies may induce barrier hopping FDI into the region and appear to have had an effect on firms’ investment plans.

TNCs in the automobile, computer and agriculture-machinery industries have announced investment plans in the region. These investments are by traditional European and North American investors in the region, as well as TNCs from developing countries and Japan.

FDI Prospects For Transition Economies Helped By the Russian Federation’s WTO

Accession

In economies in transition in South-East Europe, the Commonwealth of Independent States (CIS) and Georgia, FDI recovered some lost ground after two years of stagnant flows, reaching $92 billion, driven in large part by cross-border M&A deals.

In South-East Europe, manufacturing FDI increased, buoyed by competitive production costs and open access to EU markets. In the CIS, resource-based economies benefited from continued natural-resource-seeking FDI.

The Russian Federation continued to account for the greater share of inward FDI to the region and saw FDI flows grow to the third highest level ever. Developed countries, mainly EU members, remained the most important source of FDI, with the highest share of projects (comprising cross-border M&As and Greenfield investments), although projects by investors from developing and transition economies gained importance.

The services sector still plays only a small part in inward FDI in the region, but its importance may increase with the accession to the World Trade Organization (WTO) of the Russian Federation.

Through WTO accession, the country has committed to reduce restrictions on foreign investment in a number of services industries (including banking, insurance, business services, telecommunications and distribution). The accession may also boost foreign investors’ confidence and improve the overall investment environment.

Oseme Finance projects continued growth of FDI flows to transition economies, reflecting a more investor-friendly environment, WTO accession by the Russian Federation and new privatization programs in extractive industries, utilities, banking and telecommunications.

Developed Countries: Signs Of Slowdown In 2012

Inflows to developed countries, which bottomed out in 2009, accelerated their recovery in 2011 to reach $748 billion, up 21 per cent from the previous year. The recovery since 2010 has nonetheless made up only one fifth of the ground lost during the financial crisis in 2008-2009.

Inflows remained at 77 per cent of the pre-crisis three-year average (2005-2007). Inflows to Europe, which had declined until 2010, showed a turnaround while robust recovery of flows to the United States continued. Australia and New Zealand attracted significant volumes. Japan saw a net divestment for the second successive year.

Developed countries rich in natural resources, notably Australia, Canada and the United States attracted FDI in oil and gas, particularly for unconventional fossil fuels and in minerals such as coal, copper and iron ore.

Financial institutions continued offloading overseas assets to repay the State aid they received during the financial crisis and to strengthen their capital base so as to meet the requirements of Basel III.

The recovery of FDI in developed regions is being tested severely in 2012 by the Eurozone crisis and the apparent fragility of the recovery in most major economies.

M&A data indicate that cross-border acquisitions of firms in developed countries in the first three months of 2012 were down 45 per cent compared with the same period in 2011.

Announcement-based Greenfield data show the same tendency (down 24 percent). While Oseme Finance’s 2012 projections suggest inflows holding steady in North America and managing a modest increase in Europe, there are significant downside risks to these forecasts.

LDCs In FDI Recession For The Third Consecutive Year

In the Low Developing Countries, large divestments and repayments of intra-company loans by investors in a single country, Angola, reduced total group inflows to the lowest level in five years, to $15 billion. More significantly, Greenfield investments in the group as a whole declined and large-scale FDI projects remain concentrated in a few resource-rich LDCs.

Investments in mining, quarrying and petroleum remained the dominant form of FDI in LDCs, although investments in the services sector are increasing, especially in utilities, transport and storage, and telecommunication.

About half of Greenfield investments came from other developing economies, although neither the share nor the value of investments from these and transition economies recovered to the levels of 2008-2009. India remained the largest investor in LDCs from developing and transition economies, followed by China and South Africa.

In landlocked developing countries (LLDCs), FDI grew to a record high of $34.8 billion. Kazakhstan continued to be the driving force of FDI inflows. In Mongolia, inflows more than doubled because of large-scale projects in extractive industries.

The vast majority of inward flows continued to be Greenfield investments in mining, quarrying and petroleum. The share of investments from transition economies soared owing to a single large-scale investment from the Russian Federation to Uzbekistan. Together with developing economies, their share in Greenfield projects reached 60 per cent in 2011.

In small island developing States (SIDS), FDI inflows fell for the third year in a row and dipped to their lowest level in six years at $4.1 billion. The distribution of flows to the group remained highly skewed towards tax-friendly jurisdictions, with three economies (the Bahamas, Trinidad and Tobago and Barbados) receiving the bulk. 

In the absence of mega deals in mining, quarrying and petroleum, the total value of cross-border M&A sales in SIDS dropped significantly in 2011. In contrast, total Greenfield investments reached a record high, with South Africa becoming the largest source. Three quarters of Greenfield projects originated in developing and transition economies.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Global Investment - Moving Toward New Investment Policies

By M. Isi Eromosele

Prospects for foreign direct investment (FDI) continue to be fraught with risks and uncertainties. At $1.5 trillion, flows of global FDI exceeded pre-financial crisis levels in 2011, but the recovery is expected to level off in 2012 at an estimated $1.6 trillion.

Despite record cash holdings, transnational corporations have yet to convert available cash into new and sustained FDI and are unlikely to do so while instability remains in international financial markets.

Even so, half of the global total will flow to developing and transition economies, underlining the important development role that FDI can play, including in least developed countries.

A broader development policy agenda is emerging that has inclusive and sustainable development goals at its core. For investment policy, this new paradigm poses specific challenges.

At the national level they include integrating investment policy into development strategy, incorporating sustainable development objectives and ensuring relevance and effectiveness.

At the international level it is necessary to strengthen the development dimension of international investment agreements, manage their complexity and balance the rights and obligations of States and investors.

Global foreign direct investment (FDI) flows exceeded the pre-crisis average in 2011, reaching $1.5 trillion despite turmoil in the global economy. However, they still remained some 23 per cent below their 2007 peak.

Oseme Finance predicts slower FDI growth in 2012, with flows leveling off at about $1.6 trillion. Leading indicators - the value of cross-border mergers and acquisitions (M&As) and Greenfield investments retreated in the first six months of 2012 but fundamentals, high earnings and cash holdings support moderate growth.

Longer-term projections show a moderate but steady rise, with global FDI reaching $1.8 trillion in 2013 and $1.9 trillion in 2014, barring any macroeconomic shocks.

FDI inflows increased across all major economic groupings in 2011. Flows to developed countries increased by 21 per cent, to $748 billion. In developing countries FDI increased by 11 per cent, reaching a record $684 billion.

FDI in the transition economies increased by 25 per cent to $92 billion. Developing and transition economies respectively accounted for 45 per cent and 6 per cent of global FDI. Oseme Finance’s projections show these countries maintaining their high levels of investment over the next three years.

Africa and the least developed countries (LDCs) saw a third year of declining FDI inflows. But prospects in Africa are brightening. The 2011 decline in flows to the continent was due largely to divestments from North Africa. In contrast, inflows to sub-Saharan Africa recovered to $37 billion, close to their historic peak.

Sovereign wealth funds (SWFs) show significant potential for investment in development. FDI by SWFs is still relatively small. Their cumulative FDI reached an estimated $125 billion in 2011, with about a quarter in developing countries. SWFs can work in partnership with host-country governments, development finance institutions or other private sector investors to invest in infrastructure, agriculture and industrial

development, including the build-up of green growth industries.

The international production of transnational corporations (TNCs) advanced, but they are still holding back from investing their record cash holdings. In 2011, foreign affiliates of TNCs employed an estimated 69 million workers, who generated $28 trillion in sales and $7 trillion in value added, some 9 per cent up from 2010. TNCs are holding record levels of cash, which so far have not been translated into sustained growth in investment. The current cash overhang may fuel a future surge in FDI.

Investment Policy Trends

Many countries continued to liberalize and promote foreign investment in various industries to stimulate growth in 2011. At the same time, new regulatory and restrictive measures continued to be introduced, including for industrial policy reasons.

They became manifest primarily in the adjustment of entry policies for foreign investors (in e.g. agriculture, pharmaceuticals); in extractive industries, including through nationalization and divestment requirements; and in a more critical approach towards outward FDI.

Global investment policymaking is in flux. The annual number of new bilateral investment treaties (BITs) continues to decline, while regional investment policymaking is intensifying.

Sustainable development is gaining prominence in international investment policymaking. Numerous ideas for reform of investor–State dispute settlement have emerged, but few have been put into action.

Suppliers need support for compliance with corporate social responsibility (CSR) codes. The CSR codes of TNCs often pose challenges for suppliers in developing countries (particularly small and medium-sized enterprises), which have to comply with and report under multiple, fragmented standards.

Policymakers can alleviate these challenges and create new opportunities for suppliers by incorporating CSR into enterprise development and capacity-building programs. TNCs can also harmonize standards and reporting requirements at the industry level.

Investment Policy For Sustainable Development

Mobilizing investment and ensuring that it contributes to sustainable development is a priority for all countries. A new generation of investment policies is emerging, as governments pursue a broader and more intricate development policy agenda while building or maintaining a generally favorable investment climate.

New generation investment policies place inclusive growth and sustainable development at the heart of efforts to attract and benefit from investment. This leads to specific investment policy challenges at the national and international levels.

At the national level, these include integrating investment policy into development strategy, incorporating sustainable development objectives in investment policy and ensuring investment policy relevance and effectiveness.

At the international level, there is a need to strengthen the development dimension of international investment agreements (IIAs), balance the rights and obligations of States and investors and manage the systemic complexity of the IIA regimes.

Foreign Direct Investment Trends And Prospects

Global foreign direct investment (FDI) inflows rose 16 per cent in 2011, surpassing the 2005-2007 pre-crisis level for the first time, despite the continuing effects of the global financial and economic crisis of 2008-2009 and the ongoing sovereign debt crises.

This increase occurred against a background of higher profits for transnational corporations (TNCs) and relatively high economic growth in developing countries during the year.

A resurgence in economic uncertainty and the possibility of lower growth rates in major emerging markets risks undercutting this favorable trend in 2012. UNCTAD predicts the growth rate of FDI will slow in 2012, with flows leveling off at about $1.6 trillion, the midpoint of a range.

Leading indicators are suggestive of this trend, with the value of both cross-border mergers and acquisitions (M&As) and Greenfield investments retreating in the first six months of 2012. Weak levels of M&A announcements also suggest sluggish FDI flows in the later part of the year.

Medium Term Prospects

Oseme Finance projections for the medium term based on macroeconomic fundamentals continue to show FDI flows increasing at a moderate but steady pace, reaching $1.8 trillion and $1.9 trillion in 2013 and 2014, respectively.

Investor uncertainty about the course of economic events for this period is still high. Results from Oseme Finance’s World Investment Prospects Survey(WIPS), which polls TNC executives on their investment plans, reveal that while respondents who are pessimistic about the global investment climate for 2012 outnumber those who are optimistic by 10 percentage points, the largest single group of respondents – roughly half – are either neutral or undecided.

Responses for the medium term, after 2012, paint a gradually more optimistic picture. When asked about their planned future FDI expenditures, more than half of respondents foresee an increase between 2012 and 2014, compared with 2011 levels.

FDI Inflows Across All Major Economic Groups

FDI flows to developed countries grew robustly in 2011, reaching $748 billion, up 21 per cent from 2010. Nevertheless, the level of their inflows was still a quarter below the level of the pre-crisis three-year average.

Despite this increase, developing and transition economies together continued to account for more than half of global FDI (45 per cent and 6 per cent, respectively) for the year as their combined inflows reached a new record high, rising 12 per cent to $777 billion.

Reaching high level of global FDI flows during the economic and financial crisis it speaks to the economic dynamism and strong role of these countries in future FDI flows that they maintained this share as developed economies rebounded in 2011.

Rising FDI to developing countries was driven by a 10 per cent increase in Asia and a 16 per cent increase in Latin America and the Caribbean. FDI to the transition economies increased by 25 per cent to $92 billion.

Flows to Africa, in contrast, continued their downward trend for a third consecutive year, but the decline was marginal. The poorest countries remained in FDI recession, with flows to the least developed countries (LDCs) retreating 11 per cent to $15 billion.

Indications suggest that developing and transition economies will continue to keep up with the pace of growth in global FDI in the medium term. TNC executives responding to this year’s WIPS ranked 6 developing and transition economies among their top 10 prospective destinations for the period ending in 2014, with Indonesia rising two places to enter the top five destinations for the first time. 

The growth of FDI inflows in 2012 will be moderate in all three groups - developed, developing and transition economies. In developing regions, Africa is noteworthy as inflows are expected to recover.

Growth in FDI is expected to be temperate in Asia (including East and South-East Asia, South Asia and West Asia) and Latin America. FDI flows to transition economies are expected to grow further in 2012 and exceed the 2007 peak in 2014.

Rising Global FDI Outflows

FDI from developed countries rose sharply in 2011, by 25 per cent, to reach $1.24 trillion. While all three major developed-economy investor blocs - the European Union (EU), North America and Japan contributed to this increase, the driving factors differed for each.

FDI from the United States was driven by a record level of reinvested earnings (82 per cent of total FDI outflows), in part driven by TNCs building on their foreign cash holdings. The rise of FDI outflows from the EU was driven by cross-border M&As.

An appreciating Yen improved the purchasing power of Japanese TNCs, resulting in a doubling of their FDI outflows, with net M&A purchases in North America and Europe rising 132 per cent.

Outward FDI from developing economies declined by 4 per cent to $384 billion in 2011, although their share in global outflows remained high at 23 per cent. Flows from Latin America and the Caribbean fell 17 per cent, largely owing to the repatriation of capital to the region (counted as negative outflows) motivated in part by financial considerations (exchange rates, interest rate differentials).

Flows from East and South-East Asia were largely stagnant (with an 9 per cent decline in those from East Asia), while outward FDI from West Asia increased significantly, to $25 billion.

M&As Picking Up but Greenfield Investment Dominates

Cross-border M&As rose 53 per cent in 2011 to $526 billion, spurred by a rise in the number of megadeals (those with a value over $3 billion), to 62 in 2011, up from 44 in 2010.

This reflects both the growing value of assets on stock markets and the increased financial capacity of buyers to carry out such operations. Greenfield investment projects, which had declined in value terms for two straight years, held steady in 2011 at $904 billion. Developing and transition economies continued to host more than two thirds of the total value of Greenfield investments in 2011.

Although the growth in global FDI flows in 2011 was driven in large part by cross-border M&As, the total project value of Greenfield investments remains significantly higher than that of cross-border M&As, as has been the case since the financial crisis.

Turnaround In Primary And Services-sector FDI

FDI flows rose in all three sectors of production (primary, manufacturing and services), according to FDI projects data (comprising cross-border M&As and Greenfield investments). Services-sector FDI rebounded in 2011 after falling sharply in 2009 and 2010, to reach some $570 billion.

Primary sector investment also reversed the negative trend of the previous two years, at $200 billion. The share of both sectors rose slightly at the expense of manufacturing.

Overall, the top five industries contributing to the rise in FDI projects were extractive industries (mining, quarrying and petroleum), chemicals, utilities (electricity, gas and water), transportation and communications, and other services (largely driven by oil and gas field services).

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Investment Industry Of The Future

By M. Isi Eromosele

The pace of change in the investment industry is more rapid than ever before, creating enormous challenges for institutional investors, investment managers and intermediaries such as consultants.

In this more complex investment world, not all organizations will be agile enough to exploit the new opportunities on offer. Those that make the attempt will need to match the strategies they follow with the skills they possess.

If there is one word that captures the expected flavor of the next few years in the financial industry, it is complexity. The ordered sequential way of anticipating change will be challenged because of the more complex world.

The future will be buffeted by unknowable extreme events, ‘black swans’ and the industry will react in jumps, not smooth transitions from one state of the landscape to the another.

With such a change, it is critical to stay with this clear big picture: that the investment industry has a core purpose, which is turning today’s workplace savings into tomorrow’s retirement income in which success is critical.

Key Industry Issues

There are a number of significant issues facing the investment industry:

• There are fault lines with the investment management value proposition, in that the vast majority of investment products carry too much cost for the value they deliver
• There is little long-term in thinking about investments
• The industry is prone to crises because of poorly structured incentives and other excesses.

The main problem resides in excessive competition, complexity and compensation. The rewards and sanctions facing industry participants are not always appropriate; resulting in participants being lured to act in ways that will ensure the system remains prone to periodic crises.

The Current Forces For Change

There are several areas where important changes have occurred (or will occur) in the thinking and the approach of global market players. Each of these is a catalyst for further change in the system:

• The preference for absolute return products - created by the end of the last bear market in 2003
• Fresh governance model thinking  - captured by the Philips Pension Fund’s move to fiduciary management in 2005
• New framing of risk - the financial crisis has precipitated major changes in the modeling and viewing of risk
• New regulation - a future phase of significant regulation which will impact the financial industry on a scale similar to the Sarbanes-Oxley Act effect on US corporations.

These events are defining moments which send development down one path rather than another.

Near-Term Trends

Six major trends have been identified as acting on the institutional investment industry in the near term:

• Pressure for talent: Talent needs to stretch more in both breadth and depth with talent shortage normal; return on talent likely to increase.
• Improvement in governance: Improved recognition of return on governance feeds through in increased attention and new models; more talent attracted to Chief Investment Officer role at funds.
• Product Proliferation: Product specialization leads to major proliferation, with risk, style and scope of mandates all getting broader; particular growth in absolute return and alternative assets.
• Extra financial factors: Environmental, social and governance considerations grow in impact both as indirect sustainable performance influences and as desirable end attributes in their own right.

Pension fund investment governance

To cope with the changes, pension fund governance may need to adapt to complex circumstances in order to secure any competitive advantage. This could include, for example, a step change in organizational design, with more use of non-executive boards, delegated executives and fiduciary management.

Pensions design

A considerable shift from the provision of DB to DC is being driven largely by demographics, the regulatory environment and a shift in social structures from paternalism towards individualism.

Extra-financial factors: sustainability

The pressure for institutional funds to apply responsible investing principles has increased in recent times. Sustainability is moving up the agenda, with climate change the strongest element.

The talent bubble

The demand for talent has grown, with particular competition for leadership talent. Compensation will be a big driver of talent mobility, but there is an increasing emphasis on non-compensation drivers such as culture and associate development.

Product proliferation

Product proliferation is being driven primarily by players seeking to secure an advantage in the marketplace. Particular growth areas are likely to be in diversity of asset classes and derivatives based strategies.

Organizational change

Within all this change, the current trends that have been identified are:

• Convergence between mainstream firms and alternatives firms as their
• competitive fields overlap
• Categorization of active products into two types - relative return mandates and absolute return mandates, with growth particularly in the latter
• Increased specialization, whether by asset class, risk level or investment style
• Consolidation of firms, whether to fill product holes, add capability, address geographical diversification or to augment manufacturing and distribution capabilities.

The Longer-term Trends

A Better Journey Design

Pension fund investment is a journey rather than a destination but interim assessments, such as annual measurement, are necessary.

While this provides scope to adjust strategies, annual scorekeeping can introduce shorter-term thinking and behaviors. The better-governed funds of the future will reconcile the tension between shorter-term scorekeeping and journey planning, but there will be no mechanical formula to follow

Improved DC

There is scope to improve investment efficiency, through strategies with greater exposure to alternative assets and better cost structures. We also expect DC schemes to become pioneers in risk protection strategies. Furthermore, developments in technology will make it easier to enhance glide-path design that turns a member’s age and other life circumstances into an optimal investment strategy.

New Value Chain

Funds will create a more effective value chain, with cost control attracting major attention. The key change will be the introduction of full-time executive investment expertise, which may be out sourced. This approach allows the governing board to concentrate its efforts on issues of strategic importance, while the investment executive translates the strategy into actions.

New investment content

Part of the shift in the value chain will be supported by the emergence of new investment content offering higher efficiency. Beta creep and exotic betas will enable investors to secure cheap market returns.

Some trends are already established, with increased use of short selling, derivatives and leverage. The subsequent phase of transition will be the growth of solutions and outcome-specified mandates, which can be divided between part-fund and whole-fund solutions.

Part-fund solutions are more sophisticated products, such as downside protection funds and multi-asset portfolios, meeting relevant absolute return targets. Success with whole-fund, whole-journey solutions involves the deployment of effective LDI (liability hedging), reliable alpha and cheap, dynamic, efficient beta.

Continuing crisis contagion

The issue of excess competition, complexity and compensation will continue to hover over the industry. There will be attempts by regulators to address some of these difficulties, particularly incentive structures.

Dealing with risk in a more hazardous and unpredictable financial environment

Successful funds will recognize that their mission is a journey in which ideal risk exposure adapts to changing circumstances. The fund of the future will be a more dynamic institution when it comes to strategy and risk taking. 

There will be more attention on the clarity of mission and greater awareness concerning the factors that support risk taking: sponsor covenant, relative wealth and investment opportunity. Furthermore, there is demand for a more sophisticated performance measurement framework which better accounts for risk.

Improving the weak value proposition of many investment products

As fund governance improves, there will be a greater awareness of costs relative to the value proposition. Funds will also be more aware of the misalignment of interests within current fee structures.

The fund of the future will assume more influence over costs through negotiation and will seek a clearer value proposition from investment managers. Funds will make greater use of cheaper beta-based strategies and pay performance fees for true skill.

This is a time of increased concern and anxiety about the effectiveness of the global financial infrastructure. The industry faces certain defining moments in framing these responses.

But this is a world of opportunity for those fit enough to change, where fitness is increasingly defined by the ability to be adaptable and apply new thinking in a highly competitive market place..

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Global Investment Analysis

By M. Isi Eromosele

Some investments can be very successful.

However, the world of investments is plagued by uncertainty and unpredictability. No matter how sophisticated investment tools are, or how much rigorous a research is done into potential investments, it is not possible for an investor to predict the future. And that, in a nutshell, is why investment analysis is vital.

Investment analysis encompasses a methodology for accommodating the fundamental uncertainty of the financial world. It provides the tools that an investor can employ to evaluate the implications of their portfolio decisions and gives guidance on the factors that should be taken into consideration when choosing a portfolio. Investment analysis cannot eliminate uncertainty, but it can show how to reduce it.

The starting point for investment analysis is the market data on the values of securities which describes how they have performed in the past. This market data can be taken as given or it can be studied to form a foundation for how you should invest on the basis of that data. This generates a set of tools which, even if an investor does not apply them literally, provide a powerful framework in which to think rationally about impending investments.

A serious investor will want to go beyond just accepting market data and progress to an understanding of the forces that shaped that data. This is the role of financial theories that investigate explanations for what is observed.

The deeper understanding of the market encouraged by theory can benefit an investor by, at the very least, preventing costly mistakes. The latter is especially true in the world of derivative securities.

But a theory remains just that until it has been shown to unequivocally fit the data, and the wise investor should never forget the limitations of theoretical explanations in finances.

Investment Analysis

There are the institutional facts about financial securities: how to trade and what assets there are to trade. Secondly, there are analytical issues involved in studying these securities: the calculation of risks and returns and the relationship between the two.

Then there is the question of what success means for an investor and the investment strategies that ensure the choices made are successful. Finally, there are the financial theories that are necessary to try to understand how the markets work and how the prices of assets are determined.

A knowledge of investment analysis can be valuable in two different ways. It can be beneficial from a personal level. The modern economy is characterized by ever increasing financial complexity and extension of the range of available securities.

Moreover, personal wealth is increasing, leading to more funds that private individuals must invest. There is also a continuing trend towards greater reliance on individual provision for retirement. The wealth required for retirement must be accumulated whilst working and be efficiently invested.

Securities

From an investor’s perspective, the two most crucial characteristics of a security are the return it promises and the risk inherent in the return. An informal description of return is that it is the gain made from an investment and of risk that it is the variability in the return.

The return on a security is the fundamental reason for wishing to hold it. The return is determined by the payments made during the lifetime of the security plus the increase in the security’s value.

The importance of risk comes from the fact that the return on most securities (if not all) is not known with certainty when the security is purchased. This is because the future value of a security is unknown and its flow of payments may not be certain. The risk of a security is a measure of the size of the variability or uncertainty of its return.

It is a fundamental assumption of investment analysis that investors wish to have more return but do not like risk. Therefore to be encouraged to invest in assets with higher risks, they must be compensated with greater return. This fact, that increased return and increased risk go together, is one of the fundamental features of assets.

Anticipated Returns

When a risky asset is purchased, the return it will deliver over the next holding period is unknown. What is known, or can at least be assessed by an investor, are the possible values that the return can take and their chances of occurrence.

The underlying risk is represented by the future states of the world and the probability assigned to the occurrence of each state. The question then arises as to what guides portfolio selection when the investment decision is made in this environment of risk.

The first step that must be taken is to provide a precise description of the decision problem in order to clarify the relevant issues. The description that is given reduces the decision problem to its simplest form by stripping it of all but the bare essentials.

Consider an investor with a given level of initial wealth. The initial wealth must be invested in a portfolio for a holding period of one unit of time. At the time the portfolio is chosen, the returns on the assets over the next holding period are not known. The investor identifies the future states of the world, the return on each asset in each state of the world, and assigns a probability to the occurrence of each state.

At the end of the holding period, the returns of the assets are realized and the portfolio is liquidated. This determines the final level of wealth. The investor cares only about the success of the investment over the holding period, as measured by their final level of wealth, and does not look any further into the future.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Value Investing - A Disciplined Approach

By M. Isi Eromosele


Value investors make a nice living for their clients and themselves by thoughtfully betting against those who say that it is difficult, if not impossible, to make money on stocks that are out of favor. The astute investor can adapt and profit from changes in the market.

At its roots, value investing is based upon the premise that it is possible to consistently find stocks that can be purchased at a discount to their true worth. The notion of value investing is made possible due to reliable valuation benchmarks that can be used to determine the true worth of any security, and the belief that these benchmarks remain relatively stable despite fluctuations in a stock’s price.

In any form of investing, discipline is imperative. Discipline helps to anchor an investor by taking the emotion out of the buy or sell decision. A well-conceived investment discipline focuses investors in areas they would otherwise avoid if they were following the Wall Street herd mentality. Likewise, a properly formulated investment discipline should provide clear and well-defined sell signals.

This is particularly important in a market prone to cyclical changes, which can cause managers to doubt their investment processes and become victims of their own emotions. Investment approaches come in and out of favor, and when the discipline followed is not in favor, it can be tempting to shift with the changes in market sentiment.

Traditional dividend-driven value investing need to be paired with a fresh approach that would allow investors to take advantage of the changes in the market while still not changing or compromising the underlying fundamentals of value investing. It was important to find a way to apply the disciplines inherent in value investing to a dynamic stock market.

Broadly speaking, value investing can be thought of as a disciplined process for identifying and investing in undervalued stocks with strong upside potential. Today there is a broad spectrum of disciplines that fall under the value umbrella, each attributable to investment managers attempting to respond to current market conditions. Well-known value investors ranging from Warren Buffet to Michael Price each take a unique approach to value investing.

Building a value-driven portfolio using Relative Dividend Yield (RDY) and Relative Price-to-Sales Ratio (RPSR) is essential to achieving successful value investing. Your portfolio construction should be driven by the desire to build a portfolio of the highest quality, most attractively valued companies.
In addition, you want to selectively diversify a portfolio to minimize longer-term volatility and outperform the market over the long term. Essentially, the RDY and RPSR methodologies should drive you into taking a growth-at-a-reasonable-price approach to investing.

Assemble a portfolio out of those stocks that have the best current potential to generate above-market returns over the long term. This can only be achieved by creating a disciplined, systematic approach to portfolio construction that is dedicated to optimizing potential return while managing risk.

To realize this goal, five key proprietary factors have been identified:

1. Concentration
2. Selecting only the “best” companies
3. Use of both RDY and RPSR stocks
4. Covariance
5. Weightings/Diversification

Concentration

The first principle of concentration is especially significant. It’s best to limit oneself to between twenty-five and thirty-five stocks. Additional holdings do not reduce portfolio standard deviation in any meaningful
way. A portfolio of twenty-five to thirty-five stocks results in an optimal blend to maximize performance without over diversifying, while maintaining reasonable levels of risk.

Selecting Only The Best Companies

In the investing industry, it is not uncommon to see a manager with fifty stocks, including perhaps twenty great stocks and thirty other stocks that are not so great, but that are required in order to meet the portfolio’s guidelines. The "only invest in the best rule" is particularly important when investing in fallen angel growth stocks, which require a high degree of selectivity via fundamental research.

Use Of Both RDY and RPSR Stocks


A portfolio that combines RDY and RPSR stocks offers several advantages: The RPSR stocks allow you to find situations where a return to a former growth curve, even at a more mod-est rate of climb, will fuel a company’s share price, providing a capital gains kicker. The RDY stocks provide the added leverage that dividends give to the portfolio, as well as exposure to some of the less-volatile sectors of the market.

Covariance

This fourth principle is managing covariance of return whenever possible, with covariance being a measure of correlation between various industries and sectors. Over time, certain industry groups and/or sectors tend to exhibit a strong negative covariance with each other: when one group is generating excess return, the other is under-performing. By considering covariance in the portfolio construction process, investors have the opportunity to reduce the overall volatility of the portfolio.

Weightings/Diversification

This principle is related to the weighting of both sectors and individual holdings. In terms of sector weightings, you should not, as a rule, allow a sector to reach more than twice the S&P sector weighting. Rarely, you may also choose to deliberately overweight a sector if you believe that the general economic conditions warrant doing so.

When you initially buy a stock, plan to hold it for a long period of time, typically one to three years. However, continually evaluate your current holdings against the universe of stocks meeting the RDY/RPSR and Twelve Fundamental Factors screens.

If a candidate stock is offering more promise than an existing holding, begin to rotate that stock into the portfolio, while rotating out the less attractive holding. These decisions are all based on what the stock looks like in terms of RDY or RPSR and what the Twelve Fundamental Factors analysis has revealed about each stock.

 M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Trends And Characteristics Of Leverage Buyouts (LBO)

By M. Isi Eromosele

Large number of LBO deals first began to occur in the United States in the mid-1980s. A deep market for publicly issued high-yield bonds developed at that time, which made it possible to obtain debt financing for large LBO deals.

European LBO activity gathered steam in the late 1990s and deal volumes are now comparable to the United States market.

Until mid-2008, the growth in LBO activity was largely driven by very favorable macroeconomic conditions, low global risk-free interest rates and abundant market liquidity. This generated a “search for yield” environment that led to low credit spreads, especially for debt with lower credit ratings.

This search for yield phenomenon and the structural changes in debt markets led a compression of credit spreads, particularly for lower rated debt instruments, including high yield bonds and leveraged loans.

Another contributor to low-debt financing costs was a structural demand for leveraged loans created by the development of securitization vehicles for such loans.

The resulting low corporate debt costs, in conjunction with high equity earnings made leveraged acquisitions attractive. This is because LBO deals take advantage of the yield gap between equity investments and debt financing.

In normal market conditions, capital cost tends to rise substantially after reaching an optimal debt ratio, reflecting a higher risk premium enforced by investors. Until mid-2008, capital costs for European corporates remained largely flat or even declined with rising debt ratios, suggesting that incentives to increase leverage existed.

In light of recent market turmoil, global LBO deal volumes have fallen by more than 25 percent. With the appetite for large deals falling considerably since mid-2008, LBO activity in the next few years will likely be driven by mid- to smaller deals.

The riskiness of LBO deals, measured in terms of the debt-to-earnings ratio, has risen in recent years, exhibiting a pattern similar to purchase price multiples. The compensation for risk, measured in terms of the spreads on institutional loan tranches per unit of leverage, has fallen in recent years.

This reinforces the view that growth in the LBO activity has benefited from low levels of risk aversion in the leveraged loan market. Since mid-2008, this trend has reversed and the risk compensation demanded by investors has risen sharply.

The low levels of investor risk aversion that prevailed until mid-2008 encouraged LBO deals to be structured with lower credit quality loans. However, given the varying levels o leveraged loan ratings coverage across geographical areas of the world over time, it is difficult to infer the trend in the overall credit quality of LBO loans.

LBOs versus Aggregate Trends In Firm Credit Risk

The increased risks in LBO transactions are occurring at a time when the aggregate level of corporate credit risk (as measured by ratings) has been trending upwards. The trend is also evident when one tries to control the asset size of the firm or the degree of leverage of the firm.

It is possible that the large increase in LBO debt issuance, in conjunction with a greater proportion of loans being rated, has contributed to the recent deterioration of aggregate firm credit risk.

The long-term downward trend in median issuer rating is a likely sign of structurally greater institutional investor appetite for lower credit quality firms.

Since mid-2008, the number of LBO deals has declined sharply as credit market conditions have deteriorated.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2011 Oseme Group

Change In Investment Industry

By M. Isi Eromosele

The investment industry has experienced a rapid change of pace since the end of the global financial crisis. In this new more complex investment world, it is not certain that all organizations are well equipped to take advantage of new opportunities that exist.

To be successful, investment houses would need to better align the strategies they choose to implement with an ability to adapt to a global financial environment where events are now constantly changing.

The global financial environment of the future will have an overriding element that will be pervasive: complexity. Complex events, including the ongoing sovereign debt crisis in Europe are buffeting the global investment industry, resulting in uneven transitions. In this uncertain environment, it is crucial that the investment industry establish a resolute and clear sense of purpose.

Institutional funds face a set of challenges such as:

• The vast majority of investment products carry too much costs for the value they deliver
• There is little long-term thinking in making investments
• There has been mostly poorly structured incentives and other excesses

There will be six major near-term trends that will impact the institutional investment industry

• To secure competitive advantage, pension fund governance will need to adapt to a step change in organizational structure, with more use of non-executive boards, delegated executives and fiduciary management
• Driven largely by demographics and the regulatory environment, there will be a major shift from the provision of DB to DC
• Increased pressure for institutional funds to practice responsible investing principles
• Product proliferation, primarily driven by players seeking competitive advantage in the marketplace
• Convergence between mainstream firms and alternative firms as their competitive fields overlap
• Categorization of active products into two types: relative return mandates and absolute return mandates
• Increased specialization, whether by asset class, risk level or investment style

Longer-term trends in the institutional investment industry

• There will be a new success measure for funds looking more at the key steps in investment design and measurement of risk
• Improved investment companies’ value propositions on a strong platform foundation, better investment design and technology supported engagement model
• Big moves away from reliance on fiduciary, boards and committees towards management by designated Chief Investment Officers
• Under pressure for better performance, investment organizations will need to develop new relevant competencies

Some trends are already established with increased use of short selling, derivatives and leverage. A key phase of the coming transition will be the growth of solutions and outcome - specified mandates which can be divided into part-fund and whole-fund solutions.

Part-fund solutions are more sophisticated products, such as downside protection funds and multi-asset portfolios. Whole-fund solutions involve the deployment of effective liability hedging, reliable alpha and dynamic and efficient beta. There is demand for a more sophisticated performance measurement framework which better accounts for risk.

The investment industry faces certain defining events in the future. This a world of opportunities for organizations well equipped to change, where success is increasingly being defined by the capability of companies to adapt and effectively apply innovative thinking.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2011 Oseme Group

Institutional Investors And The Leveraged Loan Market

By M. Isi Eromosele

Two concurrent developments have facilitated the increase in institutional investors’ share of the leveraged loan market: the evolution of bank business models from “buy and hold” to “originate to distribute" and a rising demand for securitized products, some of which include leveraged loans as collateral assets.

Shift In Investor Base

The evolution of bank business models and the growth in structured finance products that satisfy the risk-return preferences of diverse investors are key structural factors behind the shift in the investor base for leveraged loans. Additional, there are also important cyclical factors, which include low default rates and low interest rates.

Structural Factors

In the primary market, banks share of leveraged loans have declined sharply during the few years. This has occurred as a result of banks transitioning to an OTD business model so that loan syndications are primarily seen as fee-generating activities. The change in business model was also driven by economic capital allocation decisions as well as Basel II rules, which provide an incentive for banks to transfer non-investment grade exposures to other investors, who may interpret the risk-reward benefits differently.

Innovation that has taken place in the market for structured finance products has also contributed to a broadening of the investor base for leveraged loans. Since institutional investors like pension funds, insurance companies and asset managers face investment restrictions on exposure to non-investment grade credits, leveraged loans were usually not part of their investment strategies. However, structured finance has facilitated the creation of marketable securities from an asset pool through a process called tranching. As such, investors with widely varying risk-return objectives can buy claims to cash flows linked to the same collateral pools of assets but with different priorities.

Role Of Investment Vehicles

Securitized financial vehicles have played a major role in the growth of the leveraged loan market. Collaterized loan obligations (CLO) funds accounted for nearly two-thirds of institutional leveraged loan purchases in Europe in 2009 – 2010. Although bank shares of leveraged loan holdings in the primary market have declined, they still have considerable exposure to the senior tranches of CLOs, perhaps driven by regulatory capital considerations. Meanwhile, asset managers and hedge funds hold more of the equity and mezzanine tranches of CLOs because of their greater focus on returns.

Insurance firms tend to hold a more balanced exposure across various tranches of the CLOs. In contrast, hedge fund holdings of structured products are characterized by a lower proportion of CLOs, as hedge funds display a more notable preference for synthetic collateral debt obligations (CDOs).

Do CLOs Influence Leveraged Loan Characteristics?

Loan characteristics are likely to be influenced by the preferences of asset managers, given the large share of leveraged loans being used as collateral assets in CLOs. CLO managers favor longer-term bullet loans because of their more predictable maturities and interest income streams. The average maturity of term loans has been lengthening. This could be attributed to CLO managers favoring longer-term loan (five to seven years). Managers of CLOs and other investment vehicles usually pay floating rates on their liabilities. This will likely provide incentives to buy leveraged loans that pay floating rates for their collateral assets rather than high-yield bonds, which pay fixed rate coupons.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2011 Oseme Group

Global Investment Perspectives

By M. Isi Eromosele

As the calendar moves towards 2012, The Oseme Investment Management Team has been monitoring the global investment management macro landscape. The global financial markets are heading into 2012 in a challenging macro investment environment, with very high instability across most asset classes. We see positive risk/reward opportunities for fixed income investors in U.S. high quality investment grade corporate bonds. Fundamentally, funding, liquidity and transparency issues for most credit related issues demand a premium yield, with high quality investment grade securities trading at particularly attractive level points.

At Oseme Finance, we have been closely monitoring four factors that may foretell stabilization in the fixed income market. First,  the rate at which large financial institutions are lending to one another and the abatement of fears of counterparty failure. Second, bank deleveraging is progressing, with decline in bank asset-to-tangible equity ratios. Third, financial markets tend to work through the downturn in U.S. corporate earnings. Fourth, the U.S. housing market, one of the major causes of the global financial downturn, may be the last aspect to show signs of bottoming out.

Inflation-Indexed Securities

In spite of investors’ fears over the dramatic increases in the price of crude oil in the early part of 2011, feeding thoughts of inflation, it has been deflationary fears that are paramount as we approach the latter part of the year. The severe deflation relation related displacement in Treasury Inflation Protected Securities (TIPS) has made this market especially inexpensive. As a background information, TIPS are securities whose coupon rate is fixed but whose principal is indexed to the U.S. headline CPI index, as inflation rises and falls, the principal of the bond fluctuates. At final maturity, the bond id redeemed at the inflation adjusted principal, or original issue principal, whichever is greater.

Pre-Refunded Municipal Bonds

Many of the credit related income markets were under strong selling pressure in 2010 and a prolonged flight-to-quality situation developed in which investors avoided virtually all non-U.S. Treasury fixed income securities. Municipal bonds also faced intense selling pressure during 2010. Prices fell on Municipal Bonds, pushing yields above the yields of comparable U.S. Treasuries for almost all maturities, which was relatively unusual. The Municipal Bond market is in the process of a fundamental pricing shift to an environment driven by credit sensitivity as the primary influence, followed secondarily by interest rate sensitivity. This is due to two factors: (a) credit rating downgrades of the monoline bond insurers which backed many municipal bond issues and (b) financial stresses inflicted by the economic recession on state and local municipalities’ credit ratings.

We are recommending Pre-Refunded Municipal Bonds as part of the Municipal Bond market that appears attractive. Pre-Refunded Municipal Bonds are previously issued Municipal Bonds which generally carry coupon rates that are above prevailing interest rates; such bonds have been determined by the municipality to be secured by an escrow fund sufficient to pay off the entire bond issue on a specific call date in the future. Pre-Refunded Municipal Bonds yields have historically approximated an average 80 percent of the yield on U.S. Treasuries, due to the Federal Income tax exemption on coupon income.

Dividend Growers

The U.S. equity market has become deeply oversold and it is a sign of valuation support for the markets. Secondly, the equity market has suffered a permanent de-rating and equity investors has been demanding a premium of risk-free U.S. Treasury Note yields as compensation to assume the risk of owning equities.

However, not all dividend paying equities are created equal. For investors focused on dividends, it is imperative for them to look for companies that not only pay dividends but also consistently grow their dividends. Historically, during periods of financial market turbulence, companies that have increased their dividends customarily outperform those that have reduced their dividends.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2011 Oseme Group