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Asset Allocation

Deutsche CROCI: The Future of Equities is Low Yielding (and Not Cheap)

Buyer beware when approaching equities, especially in emerging markets, a leading bank has said.

(July 29, 2013) — Investors looking to make a quick buck out of rises in equity markets should be aware that the ship offering cheap stocks has probably sailed, analysts at Deutsche Bank have warned.

In the latest note from the European bank’s Cash Return on Capital Invested (CROCI) team, investors are warned to “assess the implications of a prolonged period of subdued economic growth and specifically: The implications of NO top-line growth for companies”.

The team said listed company performance across the board would come under pressure in the short-to-medium term, and although dividends would make up a significant part of equity returns, growth stocks were likely to do better than value-stamped names.

“The foreseeable future is one of low equity returns, in our opinion, and investors should be well served by investment strategies focussing on: Dividends; Sustainable growth (or Survival of the Fittest growth); Selective Distressed Value; Defensive Value; Healthcare and Consumer.”

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The outcomes needed by investors should fuel their choices, however. “Regional positioning will be dictated by investment styles,” the team said. “A growth-driven investment style should find the best opportunities in Europe and the US. In turn, we believe Japan would surprisingly be an overweight at the expense of Europe and emerging markets for income investors.”

The team, which has seldom flown the flag for emerging markets in recent times, has also this week told investors that an emerging market “offers no real alternative” to a developed one. The team continues to avoid these growing economies, even proffering red flags over Korea and Brazil.

“Investors may be tempted to buy back emerging markets, but the data clearly show that real earnings growth is no higher than that of either the US or Europe, but capital growth is.” The team asked investors to consider which valuation ratio to use. “The price-to-earnings ratio will tend to over-estimate their real value, as what matters to investors is the cash conversion of those earnings and the free cash flow yield shows precisely that, i.e. that for similar real earnings growth, emerging markets [are] at a significant premium to both US or Europe.”

Related content: The Equity Risk Premium (and How We’ve Been Getting It Wrong)

Home > News > Newsmakers > Texas Teachers’ Strategic Partners Beating Benchmark with 2.8% Alpha
Newsmakers

Texas Teachers’ Strategic Partners Beating Benchmark with 2.8% Alpha

The $118 billion pension fund is rather pleased with its five public market partners.

(July 26, 2013) – All five of the Teacher Retirement System of Texas‘ public market strategic partners are surpassing their net 2% alpha benchmark for the year, according to a July 26 board of trustees meeting.

Morgan Stanley, JP Morgan, BlackRock, Neuberger Berman, and Barclays Funds & Advisory are together averaging 280 basis points above public markets.

The program marked Texas Teachers’ first major foray into external management for public market assets. It launched in July 2008, with the fund allocating $1 billion to each of the first four partners. Barclays Funds & Advisory joined in 2011.  

“I’m still on the journey of trying to understand how the strategic partnerships work and how they benefit our members,” said one trustee, recounting a recent meeting with the asset managers and CIO Britt Harris.

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“It wasn’t until I sat in a room with the heads of those investment organizations that I understood how Britt and his team had brought all of that horsepower to bear together for our members,” the trustee said. “No other pension system—from what they tell me—has ever brought that to bear.”

During the meeting, another trustee described the positioning behind much of the fund’s public market successes.

“We went into this year with a significant overweight to equities,” he said. “In stable value and fixed income, we also had an overweight to high yield and corporates over US treasuries.”  

He went on to address the unusual regional distribution of equity market gains of late. 

“If you would have told someone that you can take it as a given that S&P 500 is going to be up 17% in next six onths, then asked them: ‘What is going to be the result in emerging markets?’ they’re down about 10%,” the trustee explained. “This spread is not unprecedented, but it’s rare. It’s got everyone thinking whether this is a structural shift or anomaly—it’s probably somewhere in between.”

He did, however, express bullishness in global equities as a whole, spare one region: China. 

Correction: An earlier version of this article listed Barclays Global Investors (BGI) as the fifth strategic partner. BlackRock purchased BGI in 2009. The fifth partner is in fact Barclays Funds & Advisory. 

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