The Markets December 15, 2022

Investment Service and Product Launches

John Hancock launches equity income portfolios; RBC launches U.S. mutual funds with exposure to global markets; FundFront unveils third liquid alternative investment product; and more.

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John Hancock Launches Equity Income Portfolios

John Hancock Investment Management announced new asset class models focused on U.S. equities, international equities and the broader fixed-income markets available to investors.

The firm, which is part of Manulife Investment Management, made the announcement on the three-year anniversary of launching its multi-asset model portfolios. The portfolios are offered on Manulife open architecture, backed by research from John Hancock.

John Hancock is offering the new equity and fixed-income models to meet demand for portfolio implementation from clients, Steve Deroian, co-head of John Hancock’s retail product, said in a release.

“We are also seeing increased demand for both home-office and third-party models as advisers realize the efficiency and flexibility offered by model portfolios,” Katie Baker, John Hancock’s head of model distribution, said in the release. “We believe our core value proposition is the access to a tenured, experienced asset allocation team and its capability to go beyond affiliated investment managers.”

RBC Launches U.S. Mutual Funds with Exposure to Emerging and Developed Markets

RBC Global Asset Management has launched two new mutual funds providing exposure to international markets: the RBC International Equity Fund and the RBC International Small Cap Equity Fund. The funds provide U.S. investors with equity exposure across emerging markets and developed markets.

The RBC International Equity Fund invests primarily in mid-cap and large-cap companies located throughout the world, excluding the United States. The fund sources its decisions from RBC GAM’s European and Asian equity investment professionals who seek to uncover strong companies that display high and sustainable levels of profitability, the firm said.

The RBC International Small Cap Equity Fund adopts the same investment philosophy and process as its mid/large-cap counterpart, the RBC International Equity Fund, and leverages investment insights generated by RBC GAM’s investment teams in London and Hong Kong. The fund provides investors with exposure to smaller companies located in emerging and developed markets outside of the United States.

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FundFront Brings to Market Third Liquid Alternative Investment Product

FundFront, a London-based alternative investment platform, is launching its third liquid alternative investment product.

The investment product was launched in partnership with California-based Dipsea Capital and goes by the name DIPC. The product is designed to produce the returns of a low-volatility income fund while also capturing large market moves. In practice, DIPC offers exposure to Dipsea Capital’s tactical relative value strategy by trading a basket of short-dated U.S. equity options along with momentum stocks.

“Investors are looking for ways to access alternative sources of returns beyond stock-and-bond portfolios for true diversification,” Amin Naj, one of three founding partners in FundFront, said in a press release. “This product offers qualified investors a simple and easy way to access Dipsea’s sophisticated investment strategy, which previously was only available to the ultra-wealthy and institutional investors.”

FundFront DIPC follows the launch of the firm’s IMMS and HACO products earlier this year, in line with FundFront’s objective to bring an elite collection of liquid alternative investments to its platform. FundFront curates from among more than 26,000 private funds and professional managers to give investors the top selection of choices, according to the firm.

Dipsea Capital is led by Christopher Antonio, who founded the firm in 2002.

PGIM Investments to Close Quant Solutions Fund; Start Value and Multi-Asset ETFs

PGIM Investments announced plans to close and liquidate the PGIM Quant Solutions Strategic Alpha International Equity ETF (PQIN), which had been designed for long-term capital growth by picking stocks based on value, quality and volatility, according to the PGIM’s website.

The exchange-traded fund’s last day of trading will be January 9, 2023, and the final day for creations or redemptions by authorized participants will be January 6, 2023, the firm said. The fund will cease operations, withdraw its assets and distribute the remaining proceeds to shareholders on January 13, 2023.

The ETF is part of PGIM’s quantitative equity specialist designed to leverage the power of technology and data, as well as advanced academic research, according to the firm. PGIM Quant Solutions manages portfolios across equities, multi-asset and liquid alternatives and also offers defined contribution solutions, with about $81 billion in client assets.

Separately, PGIM announced the launch of three actively managed ETFs: the PGIM Jennison Focused Growth ETF (PJFG), the PGIM Jennison Focused Value ETF (PJFV) and the PGIM Portfolio Ballast ETF (PBL).

The new funds bring PGIM’s active ETF lineup to eight, the firm said, with the goal of providing PGIM’s investment strategies with increased transparency and greater tax-efficiency, Stuart Parker, president and CEO of PGIM Investments, said in a press release.

The funds’ investment strategies are substantially similar to those of their respective mutual fund and institutional strategy counterparts, PGIM said. The PGIM Jennison Focused Growth ETF (PJFG) looks for long-term growth of capital by investing in a focused portfolio of primarily mid- and large-capitalization stocks believed to have strong capital appreciation potential. The PGIM Jennison Focused Value ETF (PJFV) seeks long-term growth of capital by investing in a focused portfolio of predominantly large-capitalization companies believed to be undervalued compared to their perceived worth.

The PGIM Portfolio Ballast ETF (PBL) seeks long-term capital growth with reduced volatility compared to the equity market, the company said. PBL’s long-term goal is to capture 60% of the performance of the S&P 500 on average in appreciating equity markets and to capture 30% of the performance of the S&P 500 on average in declining equity markets over a market cycle.

Northern Trust Partners with Solactive on Global Bond ESG Climate Index Funds

Northern Trust Asset Management is expanding its sustainable investment options by launching two global bond ESG funds and corresponding indices, built in partnership with German index provider Solactive.

The NT Global Bond ESG Climate Index Fund and the NT Global 1-5 Years Bond ESG Climate Index Funds target issuers that the portfolio managers believe are positioned to better manage environmental, social and governance (ESG) risks, as well as transition to a low-carbon economy.

To improve the ESG profile and reduce the carbon intensity of a fixed income portfolio, the funds apply distinct ESG approaches, with one aimed at corporate bonds and the other at government bonds, the company said. The strategies leverage the same investment process but have different duration targets, with the goal of giving investors flexibility to manage bond portfolios in a rising-interest-rate environment.

“We believe investors should be compensated for the risks they take—in all market environments—and, as we see investors increasingly look to integrate sustainability characteristics into their bond portfolios, we have partnered with Solactive to offer strategies that we believe are a compelling solution,” Marie Dzanis, Northern Trust’s head of asset management in EMEA, said in a press release.

The NT Global Bond ESG Climate Index Fund and the NT Global 1-5 Years Bond ESG Climate Index Funds, used as benchmarks for the strategies, measure the performance of a global investment-grade bond universe and integrate ESG scores and climate data into the government and corporate bonds within the index. The indices cover about 25,000 bonds issued by central governments, government-related issuers and corporations, as well as securitized debt instruments, issued by both developed and emerging markets.

The index funds are only available in Ireland, Denmark, Finland, Luxembourg, Sweden, UK and Netherlands.

MSCI to Offer Investment Tools to Screen Companies Hurting Biological Diversity

MSCI Inc. is launching investing tools in early 2023 to track companies at risk of contributing to biodiversity loss and deforestation.

The new screening tools use thousands of environmental and climate data points along with MSCI’s existing technology to locate a company’s physical operations, the company said.

The offerings include the MSCI Biodiversity-Sensitive Areas Screening Metrics, which track companies that have physical assets located in areas of high biodiversity relevance, such as forests, deforestation hot spots or species-rich areas. It will also launch the MSCI Deforestation Screening Metrics to indicate companies that may be contributing to deforestation through their supply chains. This could arise from direct operations in areas of risk, or by the production or reliance on commodities considered key drivers of deforestation, including palm oil, soy, beef and timber.

“Global biodiversity challenges, such as the spread of invasive species, land-use change and pollution, will have very tangible impacts on the way in which companies function in the near- and long-term future,” Nadia Laine, executive director and head of ESG products at MSCI, said in a press release. “MSCI aims to help institutional investors understand those risks on the portfolio level.”

Emerging financial regulations—such as the European Union Biodiversity Strategy 2023 or recent EU legislation banning imported goods connected to deforestation—are bringing companies under more scrutiny for contributing to nature loss, MSCI said. Recent research the firm has done, the ESG and Climate Trends to Watch for 2023 report, noted that companies’ level of preparation for these types of regulation is low.

Compliance December 15, 2022

SEC Votes to Advance Trading Proposals

The four proposals aim to improve competition and transparency in securities trading.

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The Securities and Exchange Commission proposed four rules on Thursday that would influence securities trading if approved.

In sum, the rules represent what would be the biggest reforms to equity markets in the U.S. since SEC rule changes made in 2005. They have also raised questions among industry associations, who all agree the proposals would bring major changes to how stocks are bought and sold but have differing to no opinions yet on whether to support the changes.

The first, known as the “best execution” rule, would require broker/dealers to use reasonable diligence to identify the best market and price for their customer under current market conditions during securities trading. Broker/dealers also must maintain or institute policies to ensure they are executing trades on the most favorable terms for their clients.

Under this rule, broker/dealers must also document their compliance with the best-execution standard for “conflicted transactions,” in which a broker/dealer executes an order as principal; routes or receives an order from an affiliate; or provides or receives payment for order flow.

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The second proposal seeks to enhance disclosure of order execution. The proposal would expand the number of entities that must produce monthly quality-of-execution reports to include “broker/dealers with a larger number of customers.” It would also require new measures of execution quality, such as “average effective over quoted spread” and “a size improvement benchmark.”

The third proposal would change minimum price increments for National Market System (NMS) stocks from a full cent to sub-penny increments.

The last proposal requires that certain retail orders must be exposed to a fair auction process before being executed. Retail orders normally go to wholesalers, who typically do not have a competitive pricing process and simply execute at the best available price at the moment, according to the SEC.

The proposal would require restricted competition trading centers, such as wholesalers, to auction orders for a period of time from 100 to 300 milliseconds before executing the trade. This process is designed to find a better price for the retail investor by allowing institutional investors to bid on the order. It could also potentially increase trades between retail and institutional investors, since the current market structure limits their contact, according to the SEC factsheet. The SEC estimates this could provide $1.5 billion in price benefits to retail investors.

Ken Bentsen, the president and CEO of the Securities Industry and Financial Markets Association, said in a statement that the proposed rules are very complex and the industry will need a significant comment period to adequately consider the proposals.

A spokesperson for the Investment Company Institute said in an emailed statement: “A reduced tick size could present a sensible first step toward relieving tick-constrained stocks and promoting competition. We will review the proposal to assess whether the proposed pricing increments present the most efficient way to achieve these goals. These are significant proposals with far-reaching implications for the securities markets and investors. ICI looks forward to reviewing the proposals, including the interplay between—and cumulative impact of—the four proposals.”

Adoption

The SEC also adopted one new rule at the hearing regulating insider trading, by a unanimous vote. The new rule requires a “cooling-off” period for Rule 10b5-1 plans.

Some insiders use 10b5-1 plans, which allow executives and directors to trade in their own company’s stock with liability protection against insider trading. Since executives typically have access to non-public information about their company, the trades they execute on that stock might therefore be suspect.

10b5-1 plans allow an insider to pre-define parameters, such as price and date, in which company stock is to be bought or sold, so that the trades are put on auto-pilot. Since the parameters are set ahead of time, the plan can be used as a defense against the charge of insider trading, since the executive did not possess material non-public knowledge at the time the parameters were set and therefore could not have informed the trades in question.

The previous rules did not have a “cooling-off” period, however, meaning an insider could set the parameters just before they intended to trade stock anyway, though many firms require a cooling-off period.

The new rules now require a period of three months to pass before trades can take place under a 10b5-1 plan for executives and directors, to be sure that the plan itself was not informed by insider information and ideally to prevent abusive and suspiciously timed trades.

10b5-1 plans are not required for insiders in order to trade company stock, but they can provide an affirmative defense against insider trading. Employees who are not a director or executive would only have to wait 30 days before trading under a 10b5-1 plan.

 “The SEC amendments will better protect public investors from the misuse of these plans and strengthen confidence in corporate management teams and the capital markets generally,” said Amy Borrus, executive director of the Council of Institutional Investors, in an emailed statement.

The DC-based Investment Adviser Association, which represents fiduciary investment advisers, did not take a firm stance one way or the other on the proposals.

“The SEC issued a package of extremely complicated equity market structure rule proposals under the Exchange Act that, if adopted, will change the landscape for how retail orders are quoted, priced, routed, and filled,” Gail Bernstein, IAA General Counsel, said in a statement. “The Investment Adviser Association will review these proposals carefully to assess their potential implications for investment advisers.”

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