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DoF affirms priority status for Sasa Port modernization, Davao-Samal Bridge

DAVAO CITY — Two longstanding proposed projects for Davao — the Sasa Port modernization and the Davao-Samal Bridge — will be pursued under the government’s Build, Build, Build program, Finance Secretary Carlos G. Dominguez said.
“These projects are part of the 75 flagship projects comprising the Build, Build, Build program,” Mr. Dominguez said during last week’s 50th anniversary celebration of the Davao City Chamber of Commerce and Industry Inc.(DCCCII).
The Department of Transportation is currently updating the terms of reference for the Sasa Port project, and Mr. Dominguez said rollout could come within the year.
The project, involving the biggest government-owned seaport in the Davao Region, covers an upgrade of the general cargo berths and construction of a back-up area to accommodate increasing cargo volume.
Based on the previously published bid invitation, Sasa Port has a total area of 18.1 hectares (ha), including a 4.15-ha container yard and an annual capacity of 550,000 20-foot equivalent units.
The Davao-Samal Bridge, meanwhile, is now in the initial stages of a feasibility study and detailed design stge under the Infrastructure Preparation and Innovation Facility (IPIF) funded by the Asian Development Bank (ADB).
The planned bridge has an estimated cost of over P17.8 billion, based on the IPIF Project Administration Manual.
“The Davao-Samal Bridge will link the city with the Island Garden City of Samal. It will reduce travel time between the two cities from 26 to 30 minutes using RoRo (roll-on, roll-off) or ferry operations to only two to five minutes using the link bridge,” Mr. Dominguez said.
Public Works and Highways Secretary Mark A. Villar, during a visit to Davao City in June, said he is optimistic that construction of the 1.2-kilometer bridge, which will cross the Pakiputan Strait, could start by 2019.
Several other big-ticket projects within the Davao Region that are expected to be completed by 2022 are: Phase 1 covering the Digos-Davao-Tagum segment of the Mindanao Railway System; upgrade of the Davao International Airport; the Davao City Coastal Road Project; Mindanao Logistics Infrastructure Network involving the construction or improvement of 2,567 kilometers of roads across the Davao, CARAGA and Northern Mindanao regions; the Davao Public Transport Modernization Project; Davao Expressway Project; the Davao City Bypass Road; and the Asbang Small Reservoir Irrigation Project in Davao del Sur.
“Davao City’s economic prospects can only get even better. The city and its environs will benefit from the massive infrastructure investments over the next few years… The city and the whole Davao region have been gearing up for this growth surge for years,” Mr. Dominguez said.
At the same time, the finance Secretary, who hails from Davao City, told businessmen to be ready for expansion and opening new enterprises by tapping digital tools to improve efficiency.
“Be assured that your government stands squarely behind you. But we can only assist. It is for you to convert opportunities into created wealth. It is for you to do the innovation required for new businesses to prosper. It is for you to catalyze risk into profit,” Mr. Dominguez said. — Maya M. Padillo

PSALM denies blaming ERC for interest costs incurred

POWER Sector Assets and Liabilities Management Corp. (PSALM) said it is not blaming the Energy Regulatory Commission (ERC) for the interest cost it incurred in securing funding to pay maturing debt.
“The computation of PSALM simply presents the cost of contracting loans to supplement the needed funds to pay maturing debts while awaiting approvals of its UC-SCC (universal charge-stranded contract costs) and SD (stranded debts) applications filed with the ERC,” PSALM President and Chief Executive Officer Irene Joy B. Garcia, said in a statement on Thursday night.
PSALM is reacting to statement by a group of electric cooperatives claiming that the agency tasked to privatize government power assets was blaming the ERC for its rising costs. The cooperatives were citing proceedings during a Senate hearing.
On Wednesday, the ERC clarified that some of the applications of PSALM to recover stranded debt and stranded contract costs have yet to complete the legal process or hearings. Other petitions that are up for decision need rulings from the commission sitting en banc.
The ERC needs a vote of three of its five commissioners to decide rate-setting cases. It currently has only its Chairperson Agnes T. Devanadera as two commissioners retired, while the two others were suspended.
PSALM also clarified that it is not accurate to state that it has “ballooning debts.”
It said the total liabilities that PSALM assumed from the National Power Corp. (Napocor) amounted to P1.24 trillion in 2003. It said as of June 30, 2018, the remaining principal debt of PSALM is down to P246.73 billion, while the remaining obligations under its independent power producer (IPP) contracts amount to P202.7 billion.
PSALM said it had cut down the financial obligations to P449.4 billion or equivalent to a 64.35% reduction.
“PSALM adheres to full transparency. Its records show that privatization proceeds are utilized to pay its financial obligations. The Commission on Audit validates PSALM’s books,” Ms. Garcia said.
PSALM said it had generated privatization proceeds from assets amounting to P918.5 billion, of which it had collected P545.2 billion. The the balance is based on a payment schedule.
The agency said it had recently privatized more than 900 hectares of real estate power assets. It has also sold Power Barge 104 and the decommissioned Sucat Thermal Power Plant.
The privatization process of the Manila Thermal Power Plant will start this month, while the privatization of the Malaya Thermal Power Plant will also start before the end of the year, PSALM said. — Victor V. Saulon

Alternergy seeks ERC approval for transmission line

By Victor V. Saulon, Sub-editor
ALTERNERGY Sembrano Wind Corp. (ASWC) is seeking regulatory approval for its plan to build a point-to-point transmission facility to connect its 81-megawatt (MW) wind power plant to the power line of the Manila Electric Co. (Meralco).
ASWC holds a wind energy service contract granting it the exclusive right to explore, develop and utilize wind resources within an area in the provinces of Rizal and Laguna.
“Pursuant to the Service Contract, ASWC is developing the Sembrano Wind Farm, which is targeted to commence operations in the second half of 2019,” the company said.
ASWC, an expansion of the 54-MW wind farm under Alternergy Wind One Corp., will build the transmission line within the vicinity of Mt. Sembrano and span across the town of Pililla in Rizal province, and the towns of Mabitac and Pakil in Laguna.
Alternergy is led by former Energy Secretary Vicente S. Perez Jr.
In its application with the Energy Regulatory Commission (ERC), ASWC placed the cost of the transmission line at around P715.2 million. It will connect the Sembrano wind farm to the Luzon grid through Meralco’s 115-kilovolt (kV) Malaya-Teresa line.
ASWC said under Republic Act No. 9513, or the Renewable Energy Act of 2008, it enjoys the benefit of priority dispatch as a generating unit utilizing an intermittent renewable energy resource.
“Given the RE Law’s objective to accelerate the development of the country’s renewable energy resources and increase the utilization of renewable energy, it is in the interest of the government to help RE developers such as ASWC achieve commerciality and commence operations at the soonest practicable time,” ASWC said.
The interconnection of the Sembrano wind farm to the Luzon grid involves the construction along the public road of a three phase 115-kV line. The line is around 10.2 kilometers and spans the high voltage substation of the project to the proposed Pililla switching station.
The dedicated facility will be owned, operated, maintained and used exclusively by ASWC for the connection of the wind farm to the grid. Meralco and ASWC have an interconnection agreement dated March 23, 2017.
“A provisional authority is needed to enable ASWC to achieve the target commercial operations date . . . in the second half 2019 and avoid adverse consequences to [the company],” ASWC said.
The ERC is set to tackle ASWC’s application next month.

ABS-CBN, GMA clash over TV ratings in July

ABS-CBN Corp. and GMA Network, Inc. both claimed to lead in TV ratings in July, citing different audience management providers.
In a statement released on Friday, ABS-CBN said it recorded an average audience share of 44% versus GMA’s 33%, based on data from Kantar Media.
“ABS-CBN was also the TV network of choice for households in Metro Manila, where it scored an average audience share of 42% against GMA’s 28%, in Total Luzon, where it got 39% against GMA’s 37%, in Total Visayas where it garnered 51% against GMA’s 26%, and in Total Mindanao where it hit 53% against GMA’s 26%,” the Lopez-led media giant said.
Kantar Media data showed “FPJ’s Ang Probinsyano” was the most watched program in the country, with an average national TV rating of 42.8%.
ABS-CBN said it garnered an average audience share of 47% in the primetime block (6 p.m. to 12 midnight), compared to GMA’s 33%.
In the morning block (6 a.m. to 12 noon), ABS-CBN recorded a 39% share versus GMA’s 30%, while in the noontime block (12 noon to 3 p.m.) it posted a 43% share against GMA’s 33%. In the afternoon block (3 p.m. to 6 p.m.), the media giant said it got 42% versus GMA’s 36%.
Kantar Media uses a nationwide panel size of 2,610 urban and rural homes, which it says represent 100% of the total Philippine TV viewing population. Local current subscribers include Peoples Television Network Inc., Viva Communications Inc., and Solar Entertainment Corporation, while international subscribers include Turner Broadcasting System Asia, Google Asia Pacific Pte Ltd, Home Box Office (Singapore) Pte Ltd, MTV Asia, and Fox International Channels.
Meanwhile, GMA said on Thursday it recorded an average total day people audience share of 41.8% in the National Urban Television Audience Measurement (NUTAM) in July against ABS-CBN’s 36.7%, citing data from Nielsen TV Audience Measurement.
“GMA’s solid ratings performance was a result of the Network’s continued leadership across all dayparts. The Kapuso Network strengthened its lead in the morning block, registering 38.6% people audience share as against ABS-CBN’s 34.9%,” the company said in a statement.
GMA noted its average total day people audience share stood at 46.1% in Urban Luzon, versus ABS-CBN’s 31.3%. In Mega Manila (with official data from July 1 to 21), the comapny said its average total day people audience share stood at 47.2% against ABS-CBN’s 29.5%.
GMA said Urban Luzon and Mega Manila account for 72% and 59% of all urban viewers in the Philippines.
The listed media company noted the Nielsen survey covered 900 more homes in the Total Urban and Rural Philippines compared to Kantar Media. Its clients include TV5, Aksyon TV, CNN Philippines, and Viva Communications. — with Denise A. Valdez

Slovak firm to build hospital in Cagayan ecozone

THE Cagayan Economic Zone Authority (CEZA) said a Slovakia-based company will set up a first-class hospital within the economic zone.
In a statement released on Friday, the investment promotion agency said it recently signed a memorandum of understanding with Commerce Slovakia Corp. for the development of a hospital.
CEZA did not disclose the amount of investment for the hospital, but assured it “will be done in record time as opposed to the average of five to ten years to set up and build a traditional hospital.”
Commerce Slovakia was quoted as saying the hospital’s operations will be up to par with global standards.
It added hospital will “radically improve the quality of service and infrastructure for patients, workers, tourists and all the people in the region in the years to come.”
CEZA Secretary Raul L. Lambino said the Slovak firm is now in the “process of project development in relation to the services it shall provide immediately and will provide in the future.”
Mr. Lambino expects the hospital to generate jobs as well as attract medical tourists to the region.
“This is the beginning of a new era of health care in our region. With it, we can attract new investors and spark tourism activities,” he said. — J.C.Lim

Manulife Asset positive on markets, sees inflation as temporary

THE asset management and trust arm of Manufacturers Life Insurance Co. (Phils.), Inc. (Manulife) said it is bullish on the domestic capital markets on the back of sustained economic growth despite headwinds, which it called “transitory.”
In a briefing, Manulife Asset Management and Trust Corp. (MAMTC) President and Chief Executive Officer Aira Gaspar said the firm continues to be optimistic about the equity and bond markets due to sustained economic growth.
“Actually, despite the headwinds over the last five years, the Philippine economy has consistently delivered at least 6% GDP (gross domestic product) growth, and this year the economy expects GDP growth of 6.8%,” Ms. Gaspar told reporters Friday.
She added that the elevated inflation, although temporary, remains a “key headwind.”
“The elevated inflation is a key headwind… We see this as transitory, and we think that the Philippine economy will remain buoyant and is actually in a better position now to weather these headwinds.”
Socioeconomic Planning Secretary Ernesto M. Pernia said Tuesday that the economic outlook was “upbeat” with the GDP growth target at 7-8% annually until 2022, amid risks such as rising inflation and delays in infrastructure projects.
Headline inflation picked up to a new five-year high of 5.2% in June, against 4.6% in the previous month and exceeding government estimates.
Meanwhile, Ms. Gaspar expects monetary policy tightening from the Bangko Sentral ng Pilipinas (BSP) next week as the central bank tries to temper inflation expectations.
“Given that the balance of risk for inflation is actually skewed to the upside, I think the BSP will hike rates to stem pressure,” she said.
MAMTC added that a 25-basis-point hike during the Monetary Board meeting next week would signal an “active” central bank, although a 50-basis-point hike is more consistent with the previous pronouncements of the BSP.
The BSP said it is “ready” to follow through the two previous rate hikes it implemented in the previous months.
“In the face of rising threats to inflation, we hiked policy rates last May and June. We are ready to follow through to secure our inflation target,” BSP Governor Nestor A. Espenilla, Jr. said last week, adding that the monetary authority remains firmly committed to its primary mandate of price stability.
Ms. Gaspar added that the ongoing trade war between the United States and China will have a minimal effect on the country as the Philippine economy is “domestically-oriented.”
“Actually if you look at the correlation of [Southeast Asian] markets to China, in relation to China’s exports to the US, we’ve actually seen lower correlation. This means the impact would be less,” Ms. Gaspar said.
Beijing and Washington has been imposing tariffs on each other’s products this year. On Thursday, China promised to retaliate if the US decided to pursue its threat to increase tariffs on $200 billion worth of Chinese imports to 25% from the initial 10%.
“The Philippines is a highly domestic-oriented economy with very limited exposure to eternal financing. This reduces our vulnerability to external headwinds,” Ms. Gaspar added.
MAMTC started operations in September, providing investment products and solutions to retail and corporate clients. Its parent company, Manulife Philippines, is the fourth-largest life insurer in the country in terms of networth with P14.1 billion as of end-2017, according to data from the Insurance Commission. — Karl Angelo N. Vidal

Peso weakens ahead of data, monetary policy decision

THE peso declined against the dollar on Friday with market participants awaiting jobs data from the US as well as a slew of Philippine economic data next week.
The peso ended Friday’s session at P53.15 against the dollar, compared with the P53.09 finish on Thursday.
The peso opened the session weaker at P53.15, slipping to as low as P53.195 intraday. It best showing for the day was P53.085.
Dollar trading volume fell to $595.15 million from $849.2 million that changed hands the previous day.
Traders on Friday said the peso weakened ahead of the non-farm payroll data in the US.
“The peso weakened ahead of the release of the US non-farm payrolls data which reflect the condition of the US labor market,” a trader said in an e-mail Friday.
Another trader said that the US is expected to yield “good” numbers.
“That’s one of the reasons why the dollar-peso moved weaker towards the close,” he added, although adding that it is still uncertain whether the data will cause market sentiment on the dollar to strengthen.
UnionBank chief economist Ruben Carlo O. Asuncion said that investors are “just waiting for next week’s flurry of relevant economic data.” He added that he is expecting the Bangko Sentral ng Pilipinas (BSP) to hike its benchmark rates by 50 basis points.
The central bank has been signaling an interest rate hike during its monetary policy meeting on Thursday to quell inflation expectations.
Last week, BSP Governor Nestor A. Espenilla said the monetary authority is “ready to follow through” on the two rate hikes it implemented in May and June to secure its inflation targets.
“We consolidated [on Friday] after a few days of peso strength,” the second trader said. “Given the [possible rate hike], we’re seeing some of the players trying to reduce their long dollar-peso positions ahead of the meeting.”
Aside from the central bank’s policy decision on Thursday, market players are also waiting for the July inflation print on Tuesday as well as the gross domestic product growth rate on Thursday. — Karl Angelo N. Vidal

PSEi closes higher for a 4th straight week

THE local stock market on Friday closed on a positive note, rising for a fourth straight week.
The bellwether Philippine Stock Exchange added 0.77% or 59.84 points to close at 7,819.39. The broader all-shares index rose 0.51% or 23.61 points to end the day at 4,668.29.
“Our index tracked the positive performance in the Western markets as earnings of many stocks beat estimates and the upbeat statement from the US Fed buoyed US market sentiment about the country’s strong economy,” Timson Securities, Inc. trader Jervin S. De Celis said in a mobile message yesterday.
On Wednesday, the Federal Reserve left interest rates unchanged, saying “the (United States) labor market has continued to strengthen and economic activity has been rising at a strong rate.”
Harry G. Liu, Summit Securities, Inc. president, said the stock market may soon enter the consolidation phase.
“Economic fundamentals are finally falling into place with government’s positive projections this year and next year,” Mr. Liu said in a phone interview.
However, investors may find the upward trend difficult to sustain as trading activity usually thins out in August, known as the “ghost month.”
For Mr. Liu, support is at 7,200 while resistance is at 7,800.
All sectoral indices, except for property, ended in the green.
Financials were up 1.40% or 26.07 points to close at 1,885.01, while holding firms rose 1.34% or 103.82 points to 7,849.96.
Mining and oil jumped 1.19% or 120.97 points to 10,298.05 points; services went up 0.40% or 5.92 points to 1,504.86 points; and industrial edged higher by 0.16% or 17.04 points to 10,919.13.
Property ended in negative territory, dropping 0.55% or 20.70 points to 3,769.21.
Value turnover rose P5.72 billion from Thursday’s P4.93 billion after some 1.72 billion issues switched hands.
Advancers outpaced decliners, 120 to 76, while 46 issues remained unchanged. — Janina C. Lim

Asian markets swing after bruising week with trade centre stage

Hong Kong, China — Asian equities were mixed on Friday after another painful week as fears of an all-out trade war between Beijing and Washington keep investors on edge, while China’s stock market was toppled by Japan as the world’s number two.
While Apple provided a boost for Wall Street after hitting the $1 trillion market capitalisation mark, the prospect of the world’s top two economies exchanging painful tariffs on hundreds of billions of dollars of goods is stunting optimism.
Shares, which have been on the slide for several weeks owing to the increasingly heated trade row, took another hit this week when the White House said it was considering more than doubling threatened tariffs on $200 billion of Chinese imports.
Beijing responded by saying it would not give in to “blackmail”.
“There are genuine concerns about this trade war underlying markets, which makes any genuine retaliation from China, rather than the current rhetorical approach, an issue for markets,” said Greg McKenna, chief market strategist at AxiTrader.
However, while he warned “the risks of escalation remain high”, he added that “the market still thinks (the latest US threat) is just a negotiating tactic”.
Hong Kong lost 0.1 percent and Shanghai sank one percent, after both swung in and out of positive territory through the day, while traders on the mainland largely brushed off promises of government support to the struggling economy.
China ranking drop
Adding to the pain of recent losses, China’s stock market was overtaken as the world’s second-biggest by Japan’s Friday, having been hit by trade war fears and slowing economic growth.
Bloomberg News figures showed Chinese stocks were worth $6.09 trillion, compared with $6.17 trillion in Japan. The US market is worth $31 trillion.
“Investors are paying attention to government policies as the US-China trade war will remain uncertain for now,” Yoshihiro Okumura, general manager at Chibagin Asset Management, told AFP in Tokyo.
“On the other hand, Japanese companies are showing strong results in general, sustaining share prices on the Tokyo Stock Exchange.”
The yuan also extended losses on trade war worries and concerns about growth. However, Ian Hui, global market strategist at JP Morgan Asset Management, said in a note: “Chinese officials will remain wary of letting the yuan weaken too much, as that may risk issues for capital flight and financial stability.”
Tokyo ended up 0.1 percent, while Sydney edged down 0.1 percent and Singapore slipped 0.2 percent.
Seoul, Wellington, Taipei, Mumbai and Manila were all higher.
In early trade London and Paris each rose 0.3 percent, while Frankfurt added 0.2 percent.
Attention now shifts to the release later Friday of US jobs data, which will provide the latest snapshot of the US economy and give an idea about the Federal Reserve’s plans for future interest rate hikes.
The pound struggled to break back against the dollar after Thursday’s drop that came as the Bank of England’s hike in interest rates to a nine-year high was offset by its tepid outlook for further increases in the near term owing to Brexit uncertainty. — AFP

A massive losing bet on bitcoin futures has investors buzzing

A huge wrong-way bet on Bitcoin has left an unidentified futures trader unable to cover their losses, putting counterparties at risk and threatening to dent confidence in one of the world’s largest cryptocurrency venues.
The more than $400 million long position in Bitcoin futures was amassed on OKEx, a Hong Kong-based exchange that’s ranked No. 4 on Coinmarketcap.com’s list of the biggest crypto platforms, according to a person familiar with the matter, who asked not to be named because he isn’t authorized to speak about the issue with the media. While OKEx has moved to liquidate the position, it has so far been unable to cover the trader’s shortfall amid a down market for Bitcoin this week, the person said.
If the shortfall still exists at the 4 p.m. settlement time in Hong Kong on Friday and exceeds the size of the exchange’s insurance fund, futures traders who have unrealized profits on OKEx may be forced to absorb the losses, in line with a “clawback” policy detailed on OKEx’s website, the person said. OKEx doesn’t expect the issue to affect the exchange’s ability to function, he said.
While clawbacks are not unprecedented at OKEx, the size of the problem wager has attracted attention in crypto circles across Asia. It underscores the risks of trading on lightly policed virtual currency venues, which often allow high levels of leverage and lack the protections investors have come to expect from regulated exchanges. Crypto platforms have been dogged by everything from outages to hacks and market manipulation over the past few years, a period when spectacular swings in Bitcoin and its ilk attracted hordes of new traders from all over the world.
“Everyone is talking about it,” said Jake Smith, a Tokyo-based adviser to Bitcoin.com, in reference to the OKEx trade. Smith said the systemic risks were likely contained, but that the episode could have some ripple effects on the market. “The main question is how will OKEx handle this,” he said.
Lennix Lai, a director at OKEx, said via email that the exchange may issue a statement on Friday. Lai didn’t answer an emailed list of questions from Bloomberg News.
In a statement on its website last month, OKEx outlined planned changes to its margin rules and liquidation procedures that it said would “vastly minimize the size of bankruptcy positions” and make clawbacks less frequent. The exchange, which allows clients to leverage their positions by as much as 20 times, said it would start rolling out the changes in September. Before clients can begin trading futures, they’re required to pass a quiz on OKEx’s rules.
Clawbacks are unique to crypto markets and expose the exchanges who use them to reputational risks when clients are forced to absorb losses, said Tiantian Kullander, a former Morgan Stanley trader who co-founded crypto trading firm Amber AI Group. “It’s a weird mechanism,” Kullander said.
Bitcoin, the biggest cryptocurrency by market value, dropped 3.2 percent to $7,309 at 3:20 p.m. Hong Kong time on Friday, extending its decline this week to 11 percent. It has slumped 49 percent this year. — Bloomberg

Huawei eyes smartphone lead after passing Apple

Shanghai, China — China’s Huawei on Friday said it could replace Samsung as the world’s top smartphone maker by late next year, just days after data showed it surpassed Apple for the number-two spot despite being essentially barred from the key US market.
The chief of Huawei’s consumer division, Richard Yu, made the remark at the release of business results for the first half of 2018, during which unlisted Huawei said it shipped more than 95 million smartphones, an increase of about 30 percent.
“It’s no question that we become the number two next year. In Q4 next year it’s possible we become number one,” Yu said in Shenzhen, the southern Chinese city where Huawei is based.
He added that “the past six months have been incredible”.
Huawei took second place from Apple in a tightening global smartphone market during the second quarter, according to figures released Tuesday by tech-industry trackers International Data Corporation (IDC).
Global Market Share of Top Smartphone Makers
South Korean titan Samsung remained on top in April-June, shipping 71.5 million handsets for a 20.9 percent market share, IDC said.
But Huawei sold 54.2 million phones for a 15.8 percent market share, followed by Apple’s 41.3 million iPhones that gave it 12.1 percent of the market.
It was the first time since early 2010 that Apple was not in the top two.
IDC said 342 million smartphones were shipped during the second quarter, down 1.8 percent from the same period of 2017 and the third consecutive quarter of year-over-year declines.
Market saturation and rising prices are among factors blamed for cooling growth rates.
The leader in global telecommunications equipment, Huawei is essentially blocked from selling phones in the United States on security grounds owing to suspicions of the company’s links to the Chinese government.
Huawei has long disputed any such links.
Frozen out of the US phone market, Huawei has made inroads worldwide largely by shipping high volumes of its cheaper handsets in Europe, Africa and Asia.
Mo Jia, a Shanghai-based smartphone market analyst with Canalys, said achieving Yu’s end-2019 goal would be “very challenging” given the market doldrums and competition.
“After all, it does not have the ability to enter the world’s third-largest market — the US. This is an obvious shortcoming,” Mo said.
“For Huawei to surpass Samsung, it depends on whether it can continue to carry out its current strategy of pursuing low-end product volume.” — AFP

The hidden reason why hedge-fund returns are at risk

Smart money is blindsided by a flaw of its own making hiding in plain sight — an investing maxim quants have known for an age.
Blame bets on volatility.
Research from Robeco Asset Management’s David Blitz concludes hedge funds have hitched their wagon to stocks with large equity-price swings — a misguided strategy over the long haul.
Not only have high-volatility shares massively underperformed low-vol peers, this outsized exposure to the high-octane cohort is one of the strongest explanations for hedge-fund performance, according to Blitz.
The sweeping study crunched industry returns from 2000 to 2016, and concluded funds overall have negative exposure to a long-short version of low volatility.
“The fact that hedge funds are positioned like investors in high-volatility stocks, this does not contribute positively to their returns,” the Rotterdam-based head of quantitative equity research said in an interview. “They would likely have been better off if they had chosen not to bet against the low-volatility anomaly.”
A tilt away from the low-volatility factor ranks among the top three drivers of fast-money performance, alongside the broader index itself and emerging-market exposures, according to Blitz.
Efforts to deconstruct active-manager returns are in part the founding principle behind factor investing, one of the most popular quantitative strategies — with Blitz a key proponent of the low-vol variety.
Academics have long discovered that most equity alpha is extracted from sources other than bets on the prospects of an individual company. Rather, successful managers pick stocks that share common factors, like momentum or earnings growth, that reliably beat the market over time.
From there, the low-volatility factor was born. Today, it’s a booming industry. Along with its inclusion in factor funds offered by Robeco and other quant giants like AQR Capital Management, smart beta exchange-traded funds focused on the investing style have $53 billion in assets.
Sure, there are periods where low-vol underperforms. This year, a calmer version of the S&P 500 has lagged the broader benchmark by about 3 percentage points. Yet quants point to its long-term success. Since 2000, the factor has bested the S&P 500 by a whopping 118 percentage points.
Hedge funds, it would seem, have missed the memo. Maybe it’s for good reason.
Managers succeed by locating overlooked companies, that while unpredictable and volatile, may eventually turn out large gains, said Benjamin Dunn, president of the portfolio-consulting practice at Alpha Theory.
“You need earnings variable to really drive alpha and have an edge over other investors,” Dunn said. “You’re not going to pay someone 2 and 20 to be long General Mills.”
Low-Vol Risk
Explicitly tracking the low-vol factor also comes with its own challenges, especially overcrowding. In 2016, a volatility blow-up was blamed on investors who piled into the strategy and then rushed for the exits. More recently, JPMorgan Chase & Co.’s 2018 outlook flagged richly priced low-volatility stocks as a source of equity-market risk.
“We’ve had a lot of questions from clients asking if this low-volatility factor was being arbitraged away, because you’d expect it to disappear if more people are exploiting it,” Blitz said. “But on the other side of the trade seems to be $3 trillion in hedge-fund assets.”
Since Robeco’s study looked at aggregate returns and not individual holdings, it is possible that some funds do track low volatility. But not enough to sway the total bias.
As for why hedge funds gravitate toward stocks with large swings, Blitz blames performance fees that incentivize managers to take riskier bets.
It’s a tad ironic. More so than most other active managers, hedge funds are in a prime position to take advantage of the low-vol anomaly. For example, they have fewer leverage constraints, so can buy the boring stocks, deploy debt, and post higher returns.
“If someone is trying to exploit it, it should be hedge funds,” Blitz said. “At least some positive exposure to low volatility, and not the other way around.” — Bloomberg

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