Tyndall Investment Management (Tyndall AM), a Nikko AM company, has formalised its team management and strategic functions to provide further depth and breadth to its fixed income capabilities.

The move follows the success of new hire, Mr James Alexander, who was appointed in June 2013 to manage the fixed income team. His appointment has enabled Mr Roger Bridges, to continue to focus his strength and expertise in macro economic and strategic investment research for Tyndall’s Australian Fixed Income funds and insurance asset management solutions.

Mr Alexander will become head of fixed income and Mr Bridges will become head of fixed income strategy.

Managing Director, Mike Davis, says since the appointment of Mr Alexander the roles of the two fixed income team leaders have evolved as expected, and the new titles are a formalisation of the existing team management and strategic functions.

“The investment team has been reporting to James since his appointment when he was given the responsibility for the team, process, products and performance,” Mr Davis says.

“There will be no fundamental change in the Tyndall AM fixed income investment process, philosophy or strategy, and the fixed income team will continue to focus daily on managing downside risk and maintaining low volatility for clients.

“Roger has been with Tyndall for 15 years, and has a wealth of experience in fixed income strategy with a strong focus on insurance investment strategies. He has become increasingly focused on strategic investment at a macro level, and working with our global investment team to bring greater recognition of our broader investment views and capabilities to prospective and current clients.

“This team structure allows Roger to further enhance his macro focus, while the day to day running of the fixed income team and its product diversification strategies will continue under James’ leadership.”

Global CIO, Mr Yu-Ming Wang, said the move is in line with the recent announcement of a management structure that is being introduced globally, that allows local market needs to be met with products based on the highest global standards.

“The formalisation of function titles recognises the success of Mr Alexander’s appointment, and acknowledges Mr Bridges’ expertise and experience in macro assessment, and contribution as part of the Nikko AM’s Global Investment Committee,” Mr Wang says.

Both Mr Alexander and Mr Bridges will report to Mr Wang for investments and Mr Davis for local management issues.

The fixed income team is continually working to improve and refine its investment process and offerings to both the insurance markets as well as local and regional institutional and retail investors, Mr Davis says.

“The Tyndall fixed income team put in a very strong performance in 2013 and these changes will help ensure the strong long term performance record of the team continues. We strongly believe that the focus on fixed income and associated product will grow with both demographic trends and outcomes based investing preferences,” he concludes.

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“Super-Abenomics” on the horizon: Nikko AM

Nikko AM uses the expression ‘Super-Abenomics’ to describe our expectation that Japan will exceed its own targets, as well as consensus expectations, for its new economic plans and reforms. 

Of course, not every improvement desired in Japan will occur, and those who are looking for wide-open immigration, headline corporate tax cuts, or aggressive labour reform are likely to be disappointed. However, in our view:

• The amount of monetary stimulus in the first arrow has exceeded expectations;
• Due to the Olympics, the fiscal stimulus will be larger than targeted; and
• Economic and regulatory reforms of the third arrow will exceed consensus expectations, with the Trans-Pacific Partnership (TPP) negotiations (and the associated farm tariff reduction and other reforms) being the most closely watched imminent item.

We believe that Japan is already ‘different this time’ and change will continue accelerating as Prime Minister Abe has more power than any other Prime Minister in the last few decades and resistance to his strong ‘all-in’ beliefs is dissipating from other factions. For instance, even though previous Prime Minister Koizumi was popular with the people, he had strong resistance from his political rivals and the bureaucracy and despite some successes, his long reign did not achieve much reform. Conversely, Abenomics is not just one man’s belief, but a shift in the view of the large majority of the citizenry. In our view, it is durable and also supported by major global geopolitical re-alignments.

The Abenomics Wealth Effect

One area that is not highlighted enough is the role of the wealth effect. Inflating asset prices, while keeping interest rates down, has been the hallmark of the US economic recovery (and a trend for past three decades, along with higher leverage ratios).  The wealth effect is hardly covered in most economics text books, mostly because equity and housing prices are so difficult to predict and because they are reflexive with the economy (higher risk asset prices equal a better economy and vice versa). While simplistic (and dangerous, if carried too far), the underlying logic is similar to our knowledge that consumer and business confidence is key to economic growth.

When asset prices are rising, as they are in the US with nearly USD 4.5 trillion (27% of GDP) of household net worth being created in H1 2013, consumer confidence clearly rises, as does the economy via consumption, residential capex, etc. This leads to higher income taxes and higher business capex. Coupled with tax hikes and the US sequester, this has cut the US fiscal deficit by almost half in the past two years.

Japan is well advanced in this process too, with more than Yen 71 trillion (USD 720 billion) of household financial net worth (excluding real estate) created in the 12 months to June 2013, totalling Yen 1.2 quadrillion of net financial assets. Many analysts will likely be surprised to see that it is at a record high. The data including all household net assets is frustratingly lagging (only 2011 full year data is available), but total net assets are nearly twice the size of financial net worth.

Total household net assets have been nearly flat since 1993. Indeed, assuming that real estate was the vast portion of the non-financial net assets, this would imply that since 1997, its Yen 1.4 quadrillion level has declined to Yen 1.0 quadrillion. This is a 28% decline in non-financial net assets since 1997, with the Yen 0.4 quadrillion increase in net financial assets mostly offsetting it.

2012 likely showed a moderate rebound in net assets, but in 2013, with land prices rising along with equity prices, one can expect that the wealth effect has started to play a key role and will have an even stronger positive effect on Japan’s economy and tax revenue in future.

 Tyndall AM – part of the Nikko Asset Management group (Nikko AM , a leading independent asset manager in Asia – has access to on-the-ground insights and research from the global Nikko AM offices. This paper has been compiled from interviews and papers developed by the Nikko AM investment experts.

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This document was prepared and issued by Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No: 237563 (“Tyndall AM”). The information contained in this document is of a general nature only and does not constitute personal advice. It is for the use of researchers, licensed financial advisers and their authorised representatives. It does not take into account the objectives, financial situation or needs of any individual. Tyndall AM is a owned by Nikko Asset Management Co. Limited.

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Click to open the White Paper on Domestic Covered Bonds

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The suggestion to introduce domestic Covered Bonds was contained in the Federal Government’s proposals for a “Competitive and Sustainable Banking System”.

The Federal Government then released an Exposure Draft on Covered Bonds legislation in March 2011.

Comments on the draft are due by 22 April 2011 before the Bill in its final form is tabled in Parliament.

Introducing Covered Bonds form part of a strategy to: create an additional AAA-rated funding source; lower bank funding costs; create competition in the bank lending market; and address the issue of the liquid assets requirement in Basel III.

A Covered Bond is a security issued by a bank with assets (usually mortgages, but sometimes other loans) assigned to provide security for the debt. Typically the size of the asset pool (or ‘cover pool’) is larger than the bond issue.

As the Tyndall paper, co-authored by John Sorrell, head of credit at Tyndall Investments, and senior credit analyst Ileria Chan, explains, unlike a residential mortgage-backed security (RMBS), Covered Bond cashflows are funded by the financial institution and not by the cashflows of the pool of assets.
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Thus a Covered Bond has regular payments and no prepayment, so that it resembles a traditional bond issue.
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Dr Sorrell says that it is possible we could see domestic Covered Bonds traded before the end of 2011.
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“They offer investors further high-quality credit investments but investors must remember that they are still bank debt and not a direct substitute for government-guaranteed bank debt.

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“Indeed, despite the government’s intention, while the introduction of Covered Bonds in Australia is a strong positive for the major banks, they may weaken, rather than enhance, competition in the banking sector and could further widen the funding access gap between the major and the second tier banks.
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“Covered Bonds may also cause consequences for senior debt holders and bank depositors leading to potential conflicts and regulatory risk,” he said.
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The Tyndall paper notes that the size of the Australian Covered Bond market will be constrained by investors’ existing senior debt exposures, so for most Australian portfolios, offshore issues of Covered Bonds available domestically will probably still be of more interest.
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Nevertheless, Dr Sorrell said that the Tyndall fixed interest team will itself consider Covered Bonds as a potential sector for investment, depending upon pricing and liquidity, and adding Covered Bonds to the total fund exposure to each issuer.
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The Tyndall White Paper points out that Australia is one of the last developed countries to introduce Covered Bonds, and considers why they are now being introduced, who will buy them, and what the risks are.
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Co-author Ileria Chan says that unless controlled, Covered Bonds could lead to conflict and regulatory risk for senior debt and depositors.

“They do have some attractive risk features – perhaps the most important for investors is the dual recourse to the bank and to the collateral, while senior bank investors can only claim on the bank and RMBS investors can only claim on the collateral. This is an important risk enhancement but comes at a price in yield to investors.
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“Also, as the assets used to provide the cover must be assigned unambiguously to the Covered Bond issue it does result in a reduction to the amount of assets available to other unsecured lenders, including depositors.
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“In addition, risks are not completely removed since the assets are correlated with the issuer and are long-dated illiquid assets,” Ms Chan said.
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Dr Sorrell added that being able to issue Covered Bonds does provide an attractive alternative funding option in a bank’s funding mix – but perhaps not as attractive as might at first appear and they may impact on lower-rated entities’ ability to compete.

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“In Europe Covered Bonds form a deep and mature market. The European experience showed that they were one of the first asset classes to recover and provide liquidity during the credit crisis.
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“Canadian investors have preferred senior debt to Covered Bonds for their banks and Canadian banks have issued their Covered Bonds outside their borders.
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“Australian banks may, likewise, find more acceptance for their Covered Bond issues offshore than they will domestically, as they could cannibalise their Australian dollar senior debt programs,” he says.
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Ms Chan believes that overall they have a place for investors, but the risks need to be understood and priced appropriately.
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“Covered Bonds are well suited to the needs of investors who can only invest in AAA-rated securities (i.e. sovereign funds) or have a minimum allocation to AAA-rated assets. They potentially also offer an alternative to supras or government guaranteed debt.
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“For investors who are able to invest in senior bank paper and have comfort with the issuer’s name, Covered Bonds may be less appealing since they can use up limits on exposures to these names with lower yielding investments,” she said.

Click to open a full copy of the report

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The appointment follows the promotion last year of Mr Andrew Julius, who previously held the position, to Tyndall’s head of retail.

Mr Russell has over 13 years financial services experience in both Australia and the UK, most recently with Vanguard Investments as business development manager.

He started his career in England as a financial adviser with Loring Walls Financial Services, and worked as an equities investments specialist with Charles Schwab Stockbrokers before moving into business development roles with Jupiter Unit Trust Managers and MLC Investments in the UK.

Mr Russell holds an honours degree in economics and business studies from the University of Lincolnshire and Humberside.

Mr Julius said that Mr Russell’s appointment contributes to the depth and range of experience in the team.

“Aaron’s well-established relationships with a number of dealer groups, and his broad experience in the financial services industry, will be key to further developing our retail business.

“In particular, Aaron’s knowledge of markets will enable him to help advisers develop suitable portfolio and asset allocation strategies in a changing economic and regulatory environment,” Mr Julius said.

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“The acquisition of Tyndall Investments by Nikko AM further strengthens a leading asset management operation in Australia and New Zealand that has over AU$25 billion in combined funds under management, keeping the business and team intact and retaining the highly-regarded Tyndall Investments brand and investment approaches.

“The Tyndall Investments management team in Australia has participated in the strategic review process, and fully endorses the outcome.

“Throughout the process, the Tyndall investment teams have remained focused on managing client portfolios and continue to be highly rated by the research community for their approach, process and performance track record.

“We look forward to building on the momentum the acquisition generates and the opportunities created from a major international asset management parent which has a strong pan-Asian presence and an aligned business capability and focus,” Mr Hobart said.

Nikko AM is one of the largest asset managers in Japan with US$120bn in mutual funds and institutional accounts, is owned by the Sumitomo Trust & Banking Co. Ltd and Nikko AM employees, and is recognised as a strong and stable company.

Tyndall Investments offers Australian and international equity, Australian and international equity fixed interest and global premia funds in Australia, and has AUS$22 billion in funds under management.

Mr Bob Van Munster, Head of Tyndall Australian Equities, said that the equity team couldn’t be more pleased with the outcome.

“It allows us to retain our highly regarded approach and investment style and we are looking forward to a future with a partner that is focused on asset management.

“Having Nikko AM as our new parent provides us with direct investment insights into one of the fastest growing regions in the world, which is increasingly considered the major economic influence on Australian investment markets.”

Mr Roger Bridges, Head of Fixed Income, added that it is an outstanding result for the Tyndall fixed income team.

“Despite a difficult environment for fixed income managers over the last 12 months, we have continued to generate consistent returns for investors through a measured approach that helps manage risk.

“We have a strong track record in fixed income management that has proven itself throughout different market cycles and economic conditions, and with Nikko AM as our new parent we can build on this strength while continuing to provide the benefits of our capabilities to Suncorp as our cornerstone client.”

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