In this role, Mr Levin will be responsible for overseeing the Firm’s regional investment management business with a focus on new market and product opportunities. He will be based in Hong Kong.

Mr Levin has over 25 years of asset management experience, most recently as a Managing Director at Goldman Sachs Asset Management. Previously, he spent a decade with Credit Suisse in various senior roles including Head of Asset Management for both Asia Pacific and the Americas. Mr Levin was also a Co-Founder of AsiaCrest Capital and Metropolitan Venture Partners, and began his career at the Man Group.

Commenting on the appointment, Dan Simkowitz, Head of Investment Management at Morgan Stanley, said: “We are pleased to welcome Michael to MSIM. His appointment reflects our positive outlook on the Asia asset management opportunity and our commitment to continuing to build out our MSIM platform in the region. Michael will lead our strong Asia team and we look forward to leveraging his deep experience and relationships to further grow our presence.”

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Patrick Reid, Alternatives Specialist at Morgan Stanley Investment Management adds: “Leverage’s contribution comprised roughly one-quarter of total Multiple on Invested Capital (MOIC), only slightly behind multiple expansion.

“Higher borrowing costs and less buoyant IPO and strategic buyer demand are hindering multiples.

“Monetary tightening, fiscal retrenchment and supply-side disruptions are shrinking global demand. The economic slowdown, coupled with higher inflation and rising interest rates, has pushed global equity markets into bear market territory. Rising interest rates may trigger reduced leverage and lower multiple expansion, limiting the contribution to performance from these key return levers.”

He notes: “At Morgan Stanley Investment management we emphasise capturing value at entry in transactions because in an environment of rising interest rates, we don’t expect multiple expansion to drive returns as much as it has over the past 20 years.

“Buy-and-build strategies are key to unlocking stronger revenue growth and maximising operational efficiencies, as they help to grow scale and capture synergies. This investment approach is repeatable and often enables add-on acquisitions at below headline valuation multiples.

“We are staying the course as PE absorbs market dislocations and capitalises on interesting entry points. PE is showing the most growth potential among private asset classes and is on track to account for nearly 70% of alternatives AUM by 2025, according to Preqin.^[1]

“We continue to build on PE’s exceptionally robust performance over the past decade. We focus on profitability-enhancing operational improvements and strategies that capture synergies best placed to generate alpha.

“General partners (GPs) must implement best-in-class operations and capture synergies and scale through strategies such as buy-and build.”

Fundraising may slow, but dry powder remains at record levels of $3.6 trillion, which should sustain high transaction volumes.

Reid adds: “Amid continued competition for quality assets, deal origination at attractive value-at-entry levels is not a given, and GPs must remain selective and disciplined to create value.

“Earnings become increasingly important as a source of value creation due to multiple compression and rising debt costs. Investors continue to increase their allocations to alternatives to meet their long-term investment objectives.

“Partnering with founders in the midmarket — particularly those seeking support from financial investors for the first time — and reducing operational vulnerabilities may make businesses less sensitive to economic headwinds.”

——–

[1] “The Future of Alternatives 2025,” Preqin, August 2020.

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Andrew Harmstone

Investment experts from Morgan Stanley Investment Management, the asset management division of Morgan Stanley, Andrew Harmstone and Eric Zhang, share their insights across three current market themes.

1. Rates on the rise

Whilst quantitative tightening puts further upward pressure on US rates, pension fund and foreign demand may limit the upside for nominal rates, as we move past recent highs.

2. The “Real” threat for equities

Despite slower growth in the global economy as stimulus and reopening booms fade, the major equity regions are expected to offer healthy earnings per share (EPS) growth this year, with the IT sector and US equities most at risk from rising real yields, given high valuations and a greater sensitivity to real yields.

3. Omicron may prolong supply chain disruptions

Port congestions and supplier delivery times have improved, causing shipping prices to roll over. However, the impact of the Omicron variant, especially in Asia, may prolong the disruption. This could lead to inflationary pressure from higher shipping costs and continued supply constraints through the first half of 2022.

Andrew Harmstone, Senior Portfolio Manager, Global Multi-Asset and Head of Global Balanced Risk Control, Morgan Stanley Investment Management, said: “There has been growing demand for US Treasuries, and in particular from US pension funds which are shifting their exposure to more fixed income assets as they become fully funded and do not need as much equities in their portfolios. Foreign demand for US Treasuries has also been strong, as the prospect of rising interest rates in other markets, such as Asia, are lower than that of the US.

“When you have a growing environment, growing interest rates, EPS growth is likely to be strong as well. Unfortunately, one of the consequences of strong growth is upward pressure on real yields, and that in turn has a negative impact on equity valuations. What we are also seeing since the end of 2021 is a change in investor willingness to take on risk. The last month has highlighted that equities can be volatile, and it is now changing investors’ risk tolerance.

“With the Omicron variant, supply chain disruptions may last a bit longer than we would hope. Whilst the cost of shipping has started to roll over and reflecting improvements in supply chains, the consumer price index tends to react with a lag, which means the impact on inflation related data is likely to be prolonged. This makes it a difficult environment for central banks not to tighten because of inflationary pressures, which will be visible for some time and creates the risk of rising real rates as central banks respond to the inflation data.

“The investment implication right now is to be a little bit cautious while these issues work their way through and to look for opportunities amid market weakness. It also suggests to have an underweight in duration because of the rising rate environment. Broadly speaking, we want to avoid asset classes that are more exposed to rising real rates and also favor those tend to benefit from that. Obviously, valuations are becoming more important now given the change in investor risk tolerance.”

“Overall, developed markets will likely perform better than emerging markets in the first half of 2022. That is because emerging markets as a whole experienced slower growth in 2021 versus developed markets. The expectation is that emerging markets growth will gradually pick up in 2022, but the pace of that increase is likely to be moderate. Inflation remains a challenge for regions such as Latin America and EMEA, which will put pressure on central banks to tighten. That in turn drags on growth of emerging markets as a whole in the first half of 2022, but if inflation stablises, we may see growth pick up in the second half of the year.”

Eric Zhang, Portfolio Manager, Asia and Head of Tactical Positioning, Global Balanced Risk Control, Morgan Stanley Investment Management, said: “Within emerging markets, we think Asia will do better in 2022. One reason is that restriction measures due to the pandemic have continued to decline, paving the way for gradual reopening and recovery of economies. This is because Asian markets have a larger population that is vaccinated compared to Latin America and  EMEA. In addition, Asia has a decent growth backdrop, as governments in the region have the ability to implement policies to support growth where needed.

“As we progress to the latter part of the year and when we pass through the Omicron variant wave, the global economy will continue to recover and that will have varying impact on emerging markets. For example, slowing commodity growth and inflationary pressures are likely to impact emerging markets that are closely linked to commodities, such as Latin America. Asia, on the other hand, tends to be a commodity importer, and the region consists of more diverse sectors, meaning it will likely benefit as the world begins to normalise.”

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The investment reports for both the hedged and unhedged versions of the funds cite the highly experienced investment teams and successful track record in implementing the respective investment philosophies.

The Global Quality Fund focuses on high-quality, well managed companies with the aim of compounding shareholder wealth at attractive rates over the long term.

The Lonsec investment report said: “Underpinning the rating is Lonsec’s conviction in the investment team…Lonsec has a positive regard for the senior members of the team and highlights their considerable tenure at the manager, while noting the strong investment culture and collaborative research process. Lonsec also considers the investment approach to be well-devised and structured.”

Similarly, Lonsec also noted the strength of the investment team in the report for the Global Sustain Fund, which invests in high quality companies at reasonable valuations that can sustain their high returns on operating capital over the long term. Its fundamental point of difference is its superior approach to environmental, social and governance (ESG) investing with a clearly defined process.

“The Fund explicitly excludes eight controversial sectors and the underlying companies as assessed by the manager, and avoids carbon-intensive industries,” said the report.

“The manager has articulated a commitment to the integration of ESG within their investment process with evidence of a policy framework and public positioning. The level of disclosure with respect to the manager’s proxy voting policy and voting outcomes is considered better than peers supported by an industry leading policy framework.

“…furthermore, the manager has a well-structured approach to the collection and use of ESG specific data, including the use of a proprietary data collection model. Overall, Lonsec considers the level of ESG integration within the Fund to be moderate to high on a peer relative basis,” it read.

Late last year, Melbourne-based boutique fund manager SG Hiscock & Company entered into a partnership arrangement to exclusively distribute both funds in Australia.

According to its chairman and managing director, Stephen Hiscock, the ratings provide further validation of the partnership, with both the Global Quality and Global Sustain funds continuing to draw strong interest from local investors.

“Despite the level of uncertainty over the past year, the funds have performed well during the relatively unusual nature of trading conditions.

“Investors continue to be attracted to investment products with a strong track record of delivering above-market returns, and these two funds deliver on that.

“The ability for local investors to access global equities capabilities in such a way will see the partnership strengthen even further over time, and we’re pleased to see the Lonsec rating support our business strategy,” he said.

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