Wealth & Finance August 2014

August 2014

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Global Macro Managers

HNWIs Are Keeping the Taxman Smiling

Why aren’t they making any money?

A positive approach to the UK’s wealthy is bringing rewards for the economy

IP Rights: Over the Fence How firms can guard against foreign brand hijacking

The Laws of Fund Management Hedge fund legend Ian Morley gives us a few home truths

COOK UP BUSINESS Plus...

Hotel review: Return to colonial times in Burma

MAGIC

Building a valuable company is more alchemy than science...

Wealth & Finance | August 2014 |

August 2014 | Contents

3 4-9 News & Appointments Funds

Editor’s comment

10 The Laws of Fund Management In an extract from his new book, Ian Morley takes on the arrogance of the investment business and gives us his four common sense home truths, or “laws”, for fund managers

12 Trend Following: CTA Funds Assessed Karim Taleb, Principal at New York-based global investment management firm Robust Methods, asks: Why aren’t CTA and Global Macro Managers making any money?

Wealth Corner 14 HNWIs: Keeping the Taxman Smiling HMRC’s positive approach to high net worth individuals is yielding rewards for the UK economy, says Nataliya Makhonina-Byrdan from Oracle Capital Group

Markets Matters 18 Gold: A Shanghai Discount?

Adrian Ash, head of research at BullionVault, the physical gold and silver exchange for private investors online, says Chinese stockpiling presents a rising threat to the London bullion market

Risk Management 20

IP Rights: Over the Fence Companies can guard against international brand hijacking by putting suitable protection in place early, says Alison Hague, partner at patent and trademark law firm Dehns

22 Preparing for Rising Interest Rates Andrew Dalton, Deputy Chief Investment Officer at SGPB Hambros, says the economic recovery appears more subdued than during previous business cycles

Taxing Times 24 Keeping on Top of Tax HMRC has recently changed its stance on loans taken out

by UK-resident non-doms. Withersworldwide looks at how individuals can avoid paying more tax due to the changes

Finance Focus 26 Cook up Some Business Magic John Rosling tells us how to conjure up success in an extract from his new book, The Secrets of the Seven Alchemists

30 Brand Valuations: Helping Seal the Deal Understanding the value from IP and intangible assets is vital in M&A negotiations, says John Illsley of Intangible Business

Hello, and welcome to August’s packed issue of Wealth & Finance.

It’s often businesses in everyday industries that are finding the formula to transform a good business to a really great one. John Rosling, author of a new book, The Secrets of the Seven Alchemists, knows that formula – and it’s more magic than science (p.26).

It’s estimated that more than 6,000 ultra high net worth individuals now live in London -- that’s more than twice the number in Paris. And, says Nataliya Makhonina-Byrdan from Oracle Capital Group, they’re putting a big smile on HMRC’s face (p.14).

Adrian Ash, from gold and silver exchange BullionVault, tells us why China presents a rising threat to the London bullion market (p.18).

Companies rely on intellectual property rights to protect their big ideas from rival firms in their jurisdiction. But what happens when a foreign business tries to hijack their brand? Alison Hague, from IP law firm Dehns, tells us the key is to get protection in place early (p.20).

In our luxury lifestyle section, Relax, we journey back to colonial times at the iconic Governor’s Residence hotel in Rangoon, Burma (p. 32).

And of course there’s our regular round-up of the news affecting the major regions and markets from around the world.

I hope you enjoy the issue.

Mark Toon, Editor mark.toon@ai-globalmedia.com

Relax 32 An Exceedingly Good Stay Walk in Kipling’s footsteps and take a trip back to colonial times at Rangoon’s iconic Governor’s Residence

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Wealth & Finance | August 2014 |

August 2014 | News & Appointments

News & Appointments | August 2014

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News in brief UK Music Exports Hit a High Note British music companies behind some of the UK’s most hotly-tipped artists are to receive government funding to support the promotion of the nation’s music around the world.

Award-winning multi-instrumentalist, Imogen Heap, and Belfast’s The Answer are amongst the 15 artists signed to independent labels who will benefit from funding being made available through the Music Export Growth Scheme.

The Music Export Growth Scheme has been established by UK Trade and Investment (UKTI) and the BPI (British Recorded Music Industry) to help small and medium-sized independent music companies increase international sales.

Jamieson expands into Europe with Spanish JV

World’s Oldest Bank Reports Heavy Losses Monte dei Paschi di Siena’s losses in second quarter were three times the level analysts expected for the period Monte dei Paschi di Siena (MPS), the oldest surviving bank in the world, has reported heavy losses. The news has come as a big surprise to many industry commentators who were expecting far smaller losses.

First founded in 1472, as a pawn agency to help the underprivileged, the Italian bank reported second quarter losses of ¤179m (£142m). The loss is three times the level that analysts expected for the period.

It is also the bank’s ninth quarterly loss in succession and comes a year after it was bailed by the Italian Government. In June of this year the firm managed to raise ¤5bn through the stock market to repay the debt.

The remaining funds were used to bolster its working capital at the time. In just three weeks the firm sold 99.85% of new shares and raised a reported total of ¤4.992bn.

At the time the capital increase round was closed the Chief Executive Fabrizio Viola said in a statement

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that it was “A positive result for Monte dei Paschi and for the state.”

The bank, the third largest in Italy, has blamed bad debt - citing the increasing costs associated with bad loans as being responsible for its latest series of problems, despite the injection of cash just a few weeks ago.

It also comes on top on what have been a wretched few years for MPS. As well as having to be rescued by the state, the firm’s ¤10bn acquisition of banking rival Antonveneta stretched the coffers to their limit.

That deal was completed in 2007/8, at the height of the financial industry boom, with the following global economic collapse almost resulting in the bank’s own liquidation.

The announcement from Monte dei Paschi di Siena saw shares in the company slide to 8.4% on the morning of 8 August.

Jamieson Corporate Finance, the global management advisory firm, has announced the opening of its Spanish joint venture, to be called Jamieson & Basabe S.L. The new business will be headed up by José Basabe, who will be responsible for sourcing and executing management advisory mandates in the Spanish market.

Basabe is a seasoned financier with more than 20 years’ experience in private equity and investment banking. Since 2010, he has been working as an independent consultant advising on corporate strategy and restructuring.

Optimism Falling in UK Offshore Oil and Gas The Q2 2014 Oil & Gas UK Business Sentiment Index reveals that while industry optimism continues its decline, it remains positive, at two points above zero on the -50 to +50 index.

The index captures a snapshot of the industry mood and gauges a number of economic indicators, including business confidence, activity levels, business revenue, investment and employment with a higher rating (above zero) indicating a more positive outlook and a lower rating (below zero) expressing a more negative opinion.

Ken Cruickshank, Oil & Gas UK’s operations manager, commented on the decline: “Incentives are required to encourage further investment in the basin to turn around low levels of drilling as the reduction in activity levels is adversely affecting the outlook of contractor, service and companies in the wider supply chain.”

Many Firms Falling into Summer Selling Malaise, Says Sales Agency Holding back on the decision to launch new or innovative sales drives over the summer period can let competition creep in, says Sales Commando A “depressingly high” number of companies fall into the “summer selling malaise trap” which could have a negative, long-term impact on firms’ market share and bottom line.

According to a leading international sales training agency, holding back on the decision to launch new and/or innovative sales drives over summer can let competition creep in to hard won territory, leaving businesses with a fight to regain their market share or worst still having to start again from scratch.

The observations from Sales Commando are based on decades of experience working with SMEs and multinationals around the world and revolve around the common summer misconception that “Everyone’s on holiday so there’s no point trying to sell too hard”.

Based purely on feedback from real world examples, Sales Commando has identified that the summer holiday period presents a dichotomy for business. Do we sell hard or don’t we?

But holding back, even for the fact that some of your salespeople may be taking a holiday can break a business, as Doug Tucker, Sales Commando’s Managing Director, explains: “The notion that sales always dip in the summer months as clients and employees are on holiday is not only complete bunkum but leads to a missed and potentially lucrative opportunity – which competitors may very well turn to their advantage.”

The figures support Mr Tucker’s observation. In the UK, with a 29.59 million strong workforce just 34% take summer holidays. In the US the figures are comparable with 37% taking summer vacations out of a workforce of some 210 million.

These statistics are reflected around the Gulf, Europe and Australasia.

He continues: “These figures show that over 60% of clients and employees do not holiday during the summer so you’ve already got a greater percentage of your sales targets in work and available to sell to.”

What’s more, his experience shows that those who are holidaying present two of the best “chat up lines” of the selling year – “Where are you going on holiday?” and “How was your holiday?”

As Mr Tucker says: “The thought that “everyone’s on holiday so there is no point in selling” is so obviously wrong. The fact is customers and clients are often more receptive to your sales pitch if you open that sales pitch with what’s on their mind.

Their holiday.

Another common sales misconception is that before their holiday people want to clear their desk and afterwards struggle to come back up to speed in their jobs. So really, why bother talking to them until early Autumn?

For Mr Tucker this is wrong on many counts: “You can help a soon-to-holiday client clear his desk and enjoy a stress free break by closing that deal before they go.

“Or, you can help the holiday making customer settle back into their job by taking away worry – and closing that deal you’ve been working on while they were away.

“All around the holiday period there are sales opportunities and these opportunities can be golden eggs. It just takes a little lateral thinking and a few carefully worded questions .”

Doug Tucker’s key message is: “Do not succumb to the summer selling malaise. If you do, then the more savvy of your competitors will muscle in – and your long-term market share and bottom line could well be shot through.”

Appointments BP Appoints New Group Chief Economist BP has announced the appointment of Spencer Dale as its new Group Chief Economist with effect from the end of October.

Dale joins BP from the Bank of England where he is currently Executive Director for Financial Stability Strategy and Risk. He is also a member of the Bank’s Financial Policy Committee. In his previous capacity as the Bank’s Chief Economist, Dale served for six years on the Monetary Policy Committee.

In his new role at BP, Dale will be responsible for advising BP’s board and executive team on economic drivers and trends in global energy. He will lead an international team of senior economists whose responsibilities include overseeing the preparation and presentation of the annual BP Statistical Review of World Energy and the BP Energy Outlook.

Dev Sanyal, BP’s Executive Vice President Strategy and Regions, said: “Spencer’s deep experience in central banking and his communications and financial markets background will be invaluable as we look to understand the future of energy markets globally.”

UBS Hires Lin-yun Chang to Lead New Business Unit in Taiwan UBS has announced that it has appointed Lin-yun Chang to the newly established role of the Head of UBS ADVICE, a new business under UBS Wealth Management, effective 1 August 2014.

Dennis Chen, CEO of UBS Wealth Management Taiwan said: “UBS is optimistic about the growth potential of high-end wealth management market in Taiwan, and we will soon introduce UBS ADVICE, the ‘Non-trust’ service to Taiwan”. Lin-yun Chang will spearhead the new business unit.

“Chang will bring over his wealthy management expertise in the investment trust industry, and his extensive market experience to his new role to help expand the business of UBS Wealth Management,” added Chen.

Previously, Lin-yun Chang had led the retail business of Blackrock Asia ex-Japan and Merrill Lynch Investment Managers in Taiwan. He has extensive experience in the field of asset management to help UBS ADVICE build a strong team, according to the company, and, in turn, help UBS Wealth Management to have a more diversified and promising future.

Wealth & Finance | August 2014 |

News & Appointments | August 2014

August 2014 | News & Appointments

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Family Ties: UK Becomes Top Investor in US Economy New CBI figures show to the end of 2012 the UK invested US$487bn in the US, with nearly one million American jobs supported by Britain The latest figures released by the Confederation of British Industry (CBI) have shown that the UK is the biggest overseas investor in the United States.

In its most recent Sterling Assets report, the business lobbying body has shown that nearly one million US jobs are supported by the UK. The report says that to the end of 2012 the UK invested US$487bn in the US. That is just under US$200bn more than the next biggest investor, Japan. With other large investors in the country being the Netherlands, Canada and France, the CBI said that UK investment is significantly higher than them all.

The CBI continued, saying: “By comparison, investments from India and China are tiny, “They don’t come close to reaching one per cent of all FDI in the United States for a combined total of US$10.3bn by end of 2012.”

Breaking down the figures the CBI report said the level of investment represents 18% of the total

level of foreign direct investment (FDI) in America.

Presently, the level of FDI in the US is US$2.7tn.

There are 943,500 jobs in the US which are supported by British firms. Almost 25% of these are in the manufacturing sector. Other big sectors were finance and insurance, retail and information. In all three sectors, there were over 65,000 Americans working in the period.

The CBI also said that within the chemicals sector, most jobs existed within the pharmaceutical and medical segment, with most positions being senior level and other high wage earners. Meanwhile, the cumulative total of compensation paid to workers by British firms was more than any other investor.

Trade in the other direction meanwhile saw the US sell services amounting to more than US$60bn last year. That is more than the US made from selling items it manufactured to the UK and accounts for nine per cent of the US’ total global service exports for the year.

Appointments Business Development Hire at Microsoft Microsoft Corp. has announced that Margaret L. (Peggy) Johnson has been named Executive Vice President of Business Development reporting to Microsoft Chief Executive Officer Satya Nadella.

Johnson joins Microsoft from Qualcomm where she most recently served as Executive Vice President of Qualcomm Technologies and President of Global Market Development.

“Peggy shares our worldview and knows what it takes to drive new growth in mobility and the cloud,” Nadella said. “Her experience uniquely positions her to lead Microsoft’s business development efforts, and she will be a great addition to our senior leadership team.”

Mark Schneider Joins DuPont Board DuPont thas announced the election of Ulf M. “Mark” Schneider, President and CEO of Fresenius SE & Co. KGaA to its board of directors, effective 22 October.

“Mark leads a significant global healthcare business and brings strong operating and international experience, including valuable perspective in emerging markets,” said DuPont Chair and Chief Executive Officer Ellen Kullman. “He will be a strong asset to DuPont as we continue to advance our strategy and bring the strength of our science to bear on some of the world’s most pressing challenges.”

Schneider, 48, has served since 2003 as President and CEO for Fresenius SE & Co. KGaA, a diversified global health care group, with US$27.0bn in revenue in 2013.

New President and COO at Vulcan Inc Vulcan Inc., the investment and project management company founded by investor and philanthropist Paul G. Allen, has hired Barbara Bennett to fill the newly created position of President and Chief Operating Officer. Bennett, who brings more than 30 years of experience to Vulcan’s Executive Committee, has built a career in operational and finance-related positions in the public and private sectors.

“I am incredibly pleased to have Barb join our team,” said Paul Allen. “The unique combination of her environmental protection, media industry and operations background make her the ideal choice to help Vulcan achieve its vision.”

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Women Find Being Responsible with Money More Attractive than Good Looks or Education, Study Says

Survey of British women shows only a good sense of humour is rated as more attractive than financial prudence Forget a six pack, a bulging pay packet or an Oxbridge degree – British women believe being responsible with money makes a partner more attractive.

between the sexes in their view of the importance of life goals (45% - 14 points lower) and family plans (36% - 28 points lower), which could be a potential cause of friction.

partner’s credit score. And additional Experian research has shown that 17% of Britons have seen their or their partner’s credit score harmed through their relationships.

According to research from Experian, the global information services company, three quarters of British women (75%) say financial responsibility is an attractive quality in a partner – on a par with their intelligence (74%) and more important than appearance (65%), education (47%) and background (26%). Only a good sense of humour (87%) is rated as more attractive.

Financial prudence is of even greater importance across the pond. 95% of married couples surveyed in the US said that being financially savvy was a key factor for them in choosing their spouse, compared to 66% of married Britons.

When couples’ finances become linked through joint financial agreements – such as a mortgage – their credit reports become linked. If one partner has a less than perfect history of managing money and repaying debt, it therefore could affect the other’s chances of getting credit in the future and at the best rates. Among those couples whose credit scores had been affected by their relationship:

But the research should not be interpreted as suggesting women are only interested in the size of a partner’s pay packet. On the contrary, women ranked wealth (21%), salary (34%) and occupation (32%) far lower in importance than sharing the same life goals (59%) or family plans (64%) when choosing a partner.

British menfolk may not prioritise a sense of financial responsibility to the same degree (55% 20 points lower) – and lean slightly more towards appearances (67% - two points higher) – but being responsible with money is nevertheless considered more important than a partner’s education (41%) or background (21%).

Men also put less importance on a potential partner’s wealth (18% - three points lower), salary (25% - nine points lower) and occupation (19% - 12 points lower) than their female counterparts – although there is a notable discrepancy

One in two (50%) also said that credit scores were important to them, compared to just 14% of UK counterparts. Yet US couples also put far greater stock in their partner’s physical attractiveness – 86% rated this as important, compared to 64% of Brits.

The importance of financial compatibility when it comes to playing Cupid is evident in British couples’ approach to their joint finances. 70% claim they make all big financial decisions together, and won’t spend more than an average of £313.46 without their other half’s approval.

Where financial harmony is lacking, the consequences are no laughing matter. 60% of respondents admitting to having had arguments with their partner over money (6% regularly), with over-spending accounting for half of all rows (51%).

More seriously, one in 10 couples (11%) has had to postpone taking out a joint credit agreement, such as their first mortgage, because of one

•20% found getting a mortgage more difficult or more expensive •8% were unable to secure one at all •23% were unable to get a credit card •21% were unable to take out store credit Julie Doleman, Managing Director, Experian Consumer Services, said: “Talking about money and especially debt can be difficult for some, but if you and your partner have hopes and aspirations together for the future, understanding your financial history, is a really good starting point in realising your dreams for the future.

“Financial compatibility can be an important part of a successful relationship. Using the information in your credit report and your score can help you plan a future together, be it buying your family home or starting a family.”

Wealth & Finance | August 2014 |

News & Appointments | August 2014

August 2014 | News & Appointments

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News Corp Sees Drop in Advertising Revenue

Germany “Playing Russian Roulette” with Q2

Publishing network reported to the NYSE that two key areas of revenue for the firm fell in Q2 Times newspaper owner News Corp, (formerly News Corporation), has reported a 3% fall in sales between April and June.

in circulation in the UK was offset thanks, in part, to the introduction of a higher cover price.

The firm also said much the same was true of its native Australian market.

The publishing network, which also owns The Wall Street Journal, reported to the New York Stock Exchange that its revenue for the second quarter of the year was US$2.2bn (£1.3bn).

The firm also announced a net income came of US$12m (£7.1m).

The impact in the US was also mitigated by an increase in the price of subscribing to The Wall Street Journal and the newspaper’s website, WSJ. com.

The report showed that two key areas of revenue for the firm fell. The quarter saw a decline in both its advertising and subscription income streams.

The losses could have been worse. News Corp said that the decline of revenue caused by a drop

There was better news in regards to the company’s book publishing operations. The owner of Harlequin Enterprises and HarperCollins, the publishing division actually saw revenue increase by 10%. A large factor in the increase in sales was linked to the success of Victoria Roth’s successful science fiction series Divergent.

A statement by News Corp Chief Executive Robert Thomson, released at the same time as the financial announcement was made, said: “While we are operating in a challenging advertising environment, our results highlight the diversification of our portfolio and our cost discipline, leading to improved free cash flow and a firm foundation for sustained growth.”

News Corp also reported that legal fees and costs associated with the hacking scandal at its UK titles amounted to a further US$32m (£19m). That brings the total legal bill for the firm to US$169m (£100m) in the last financial year.

Despite imports and exports rebounding throughout June, commentators believe the economy will contract, with rising tide warning of increasing issues over Russian political situation There are growing concerns in Germany that the country is facing up to a Q2 contraction, despite both its imports and exports rebounding throughout June. The news does indicate that the biggest economy in Europe is not being adversely affected by the ongoing situation with Russia and Ukraine, however.

The latest figures from the Federal Statistics Office (FSO) have revealed that imports increased by 4.5% and exports by 0.9%. The figures have been seasonally adjusted, but still represent Germany’s strongest successive monthly increase since November 2010.

It is also representative of a strong bounceback following a sharp drop in both sets of figures throughout May. For the whole of Q2, the FSO figures showed that exports are still slow to grow relative to the

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Q1 results. However, the increase in June of just under 1% was nearly double what many German economy commentators were expecting.

Despite this though, many of them still believe there is a chance that the economy will contract.

The results of Q2 will be released on 15 August.

There is also a rising tide warning of increasing issues over Russia, with the situation escalating and the country introducing restrictions on European goods imports.

The head of the BGA trade association, Anton Boerner, said: “Despite the positive result in the first half of the year we are alarmed by the escalation of the trade conflict with Russia,” Boerner, who heads the body representing some 120,000 workers, continued: “Conflicts in the Middle East are also overshadowing the global economy and therefore weighing on German exports.”

There was more bad news for Germany too, with the country seeing orders in industrials falling at the sharpest rate in just under three years. A weak demand in the eurozone is largely responsible, though poorer than average bulk order levels are also culpable. Forecasts predicting greater output than that realised have also had a damaging effect.

The demand elsewhere is also weak, according to many German firms. Nivea parent company Beiersdorf cited stuttering growth in many emerging markets as being problematic for example. Meanwhile, truck manufacturer MAN reported falling order levels from its South American operation.

If the predictions and fears are true, it will be the first time the German economy has contracted since the latter part of 2012. The view is supported

by Reuters too. The news agency says that in one of its recent polls there were signs that the GDP will show a stagnating economy.

Wealth & Finance | August 2014 |

Funds | The Laws of Fund Management

The Laws of Fund Management | Funds

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The Laws of Fund Mangement In a new book, hedge fund legend Ian Morley takes on the arrogance and falsehoods of the investment business with a collection of insightful home truths, or “laws”.

Ian let W&F in on his four common sense laws for fund managers...

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The Hindsight Law of Fund Management Simulated systems with 20-20 hindsight never seem to have the same foresight Only God and Fox News commentators know exactly what the future holds. Mere mortals have to rely on the past. And so we try and predict the future by what we think we have learned from the past. Hence the expression, “There is no such thing as history, merely historians.” In theory, patterns in history can somehow help us to predict what will happen in the future. In Funds Management, some people have taken this a step – or rather a mile - further down the road.

The theory goes something like this. Opinion is free, but facts (i.e. statistics) are sacred. Everything worth knowing (apart from the results of next week’s EuroMillions numbers, dog and horse winners and football results) is hidden in past statistics and numbers. These numbers form patterns that identify trends. All you need is a better model than the next person, and you too can interpret the future from the past. Opinion can be left to the idle chatter of economists and other morons.

Just read the tea leaves, charts, candlesticks, heat spots, trends or algorithms properly -and you too will have the key to future riches.

This explains the proliferation of investment models that use past statistics. All these models have amazing hindsight predictive capabilities.

Few, unfortunately have the same good outcomes when they are applied to the real world with our money. 20-20 Hindsight regrettably is always better than the foresight of such models. The exceptions to this rule (you know who you are) are of course immensely rich!

The Differential Law of Fund Management Systems don’t know why they make money. Discretionary managers know why they lose money This law represents one of the interminable debates in funds management. The question is: are humans better at managing money than machines? Of course, the machines are also made by humans, so in some respects the argument is self-defeating.

As Descartes said to me only the other day: Cognito ergo sum. I think, therefore I am. This excludes a large majority of the human race, including – and maybe in particular – Arsenal fans.

To those to whom the dictum does apply, it means that those whose investment decisions are based on the human mind and its ability to interpret

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what is going on in markets, are able to explain both why they made money and why they lost it.

Strangely, amnesia always seems to set in when people are asked to explain the losses. Amazingly, verbosity sets in when people are asked to explain the gains.

Machines, black boxes, mathematical models, algorithms and other non-human investment approaches, tend to follow market data or patterns.

Based on past experience, they try and predict the future. Some smart machines and models even claim to be able to learn from current activity so as to not repeat mistakes of the past. These mechanical approaches may not be capable of being in a state of Cognito ergo sum. They do think, but they are not yet what some philosophers would call conscious of themselves. Sometimes these machines make money and sometimes they lose money. They don’t talk about it. Only humans do that. Unless of course you believe in Hal from 2001: A Space Odyssey, or machines from Star Wars. In which case my poor sister in Nigeria needs your money...

The Ultimate Law for Fund Managers There’s always an index your track record can beat When I originally wrote these laws some time back in ancient history, I stopped at Law No. 13.

I naively imagined that I had created a sort of 13 principles of faith. But after observing the absurd behaviour of financial markets and its participants, I decided to add a few more.

All fund managers compare themselves to some index or other. The Law of Simulated Returns states every fund manager can comfortably beat this index when not actually investing real money. Some fund managers even beat the index when investing real money. All of them, like the rest of humanity, need something to beat most of the time. That is why when the track record vacillates, they need to change the index against which they are measuring themselves. After all, why would anyone want to invest with a manager who can’t beat an index?

I would go further, and boldly state that most managers do not beat their indices over time. In other words, most people are actually investing with sub-par managers most of the time. However, it makes us all feel better if we are with the winners. So losers often change the index so they look like winners. If you then stay with them, they are winners - and guess who the loser is!

The Contrarian Law of Fund Management Good opinion is not influenced by the view of lemmings It’s not that the crowd gets it wrong. They just get carried away by the mass of other lemmings doing the same thing. Ergo, they must be right.

Blind enthusiasm is no substitute for brains. The psychology of the crowd overtakes the reality, and takes markets both too high and too low.

One of the smartest managers I know (let’s call him Hugh Hendry of Eclectica to safeguard his anonymity) never follows the herd, and never reads the views of juvenile scribblers. He takes his own counsel from his own observations, and draws his own conclusions. This is true contrarian thinking. Hugh is one of the very few great managers out there who operate this way. It’s not easy. It can be lonely going in the opposite direction of the lemmings.

Another manager like this is Richard Edwards.

Richard has applied chaos theory to markets, which allows him to observe the lemmings in action. By following the behaviour of the crowd, he is often able to accurately see where markets are getting compressed and may soon break out.

He predicts when and what to buy, and has been remarkably accurate in his predictions. He writes a narrative, but only in order to put the findings into an economic context for those of us that like reading stories. This should not be seen in itself as an explanation of market behaviour. Richard is telling us what will happen, not why?

In Morley’s Laws of Business and Fund Management, Ian Morley draws upon his thirty-five years of experience within the various financial sectors to expose the falsehoods and arrogances of the world of financial business and fund management. Tackling questions like, “Do you know why transparency is a bit like virginity?” Morley provides insightful home truths with humour, honesty and a heavy dose of all-too-uncommon common sense.

Wealth & Finance | August 2014 |

Funds | Trend Following: CTA Funds Assessed

Trend Following: CTA Funds Assessed | Funds

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In the first of a series of articles, Karim Taleb, Principal at New Yorkbased global investment management firm Robust Methods, asks: Why aren’t CTA and Global Macro Managers making any money?

H

olding one of the longest verifiable track records, trend-following strategies have developed a respectable performance reputation over time. Their tendency to provide uncorrelated returns and a positive performance in times of market distress – a period during which most other hedge fund strategies typically break down – made their proposition truly unique and differentiated, and a must- have in every portfolio.

At a recent Commodity Trading Advisors (CTA) & Hedge Fund Managers Summit which took place in New York, the mood was not particularly cheerful nonetheless, and with the CTA’s and their nearest relatives in the Global Macro space traversing one of their longest and most challenging periods; they are living the ironic adage of “you’re as good as your last trade” – at least in the eyes of their clients.

At the investors roundtables, institutions who had come in droves to allocate to CTA managers back in 2009, and after noticing their robust gains in the crashing markets of 2008, find themselves today sitting in the house of pain pondering some double digits portfolio losses.

So what happened to these global managers, who only very recently were held in high esteem?

One of the well-documented characteristics of the financial markets is their endogenous propensity to develop big and small price trends, and as part of a free interaction between buyers and sellers. These trends that arise here and there, and now and then, are at the core of price volatility.

This observation does not come as a surprise, and nor is it limited to markets; it is found in most natural phenomena and provided they’re characterised by a minimum degree of mobility or dimensional freedom.

The success of the CTA managers had stemmed from their intimate market experience navigating

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Against most other hedge funds strategies, and especially the credit and fixed-income short-volatility type... the CTA proposition stood in positively stark contrast

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Trend Following: CTA Funds Assessed the risk of transgressing on professional ethics by asking detailed questions related to the intricacies of the proprietary nature of the various strategies.

“spread traders” or “volatility trading”, but these fall outside the generally accepted profile of a CTA.

The low correlation to both equity and bond indexes made their returns profile an ideal component to include in any portfolio, and a perfect complement to a traditional one comprised of stocks and bonds.

Given such a growing demand for the strategy, the advent of algorithmic market modelling and trading tools opened the door to a further refinement of the original proposition of the “turtles” (the long-term trend followers): A new breed of a short-term and quantitatively oriented managers started to emerge and which aimed at capturing the short and mid-term trends instead, and some started trading ETFs and equities to expand the opportunity set.

The representative indexes are in negative territory over the past five years, and despite their significant survivorship bias, their initial self-selection construction bias, or the regular reshuffling and re-weighting with the benefit of hindsight.

Compared to their closest peers in the Global Macro strategy, they scored quite favourably; while both strategies delivered comparable returns over time, the CTA’s performance, as a group, tended to be more consistent and predictable versus the one of the global macro managers, and whose performance exhibited a much wider degree of dispersion.

With the original turtles being notorious for deep and long drawdowns that few investors had the stomach or patience to sustain, the short-term CTAs promised to fill that gap by attenuating drawdowns while delivering better risk-adjusted returns. The approach remained conceptually close, and inclusive of the benefit of using an objective and historically validated trading model.

Against most other hedge funds strategies, and especially the credit and fixed-income short-volatility type, notorious for rewarding investors in an apparently consistent manner just to experience a swift and severe loss, the CTA proposition also stood in positively stark contrast.

Both the Global Macro and CTA strategies worked within their expected range for some time, but then a noticeable change started to occur in the past few years when some programs started exhibiting signs of fatigue. Other programs experienced deep drawdowns that raised doubts about their ability to recover.

the ups and downs of volatility, and graduated from the proverbial school of hard knocks. From a philosophical viewpoint, they wore a humble demeanour, and impressed investors in being quick to adapt to market conditions, and by not holding obstinate opinions related to their positions. They kept their focus on a disciplined execution and a seasoned respect for risk.

For the cash-watchful investors wanting to buy optionality on markets but without committing the entire amount otherwise required in the physical market, the CTA proposition also proved very convenient; CTAs provided a mimicking portfolio by using forward contracts and spared investors the full funding.

The increased mystique and desire to know how CTA’s operated prompted some Fund of Funds to make appointments and show up at CTA shops with a long list of prepared questions – and a notepad.

Some, underestimating the value of research or knowing too well what it means, would even take

Those that made money over the past few years did so mainly being long the global bonds and equity markets and going short the Japanese yen after the shocking announcement of plans to double the money supply. All these trades were clearly driven by unprecedented and insane monetary policies which skewed the markets to create extreme and unusual trends. Buying into such artificial trends also embedded a serious dose of systemic risk.

Other CTA programs that made money were some niche strategies such as “contrarians”,

The main point of this general assessment described above is that it reveals something unusual, if not contradictory; how come these proven and well versed managers have not made any money in five years? Did the CTA and Global Macro managers lose their skills rather abruptly, or has the fabric of the markets been seriously compromised?

About the author...

Karim Taleb, PhD is the Principal of Robust Methods LLC, a global investment management firm specialising in absolute returns strategies for private and institutional investors.

Possessing state of the art quantitative expertise, Robust Methods draws from deep market insight and theoretical and computational methods to design and produce superior trading strategies for the financial & commodities markets.

Wealth & Finance | August 2014 |

Wealth Corner | HNWIs: Keeping the Taxman Smiling

HNWIs: Keeping the Taxman Smiling | Wealth Corner

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HNWIs:

Keeping the Taxman Smiling A positive approach to high net worth individuals by HMRC is yielding rewards for the UK economy, says Nataliya Makhonina-Byrdan from multi-family office Oracle Capital Group

But a statistic just released by the UK’s HM Revenue and Customs (HMRC) has raised a smile on the faces of the taxman and the Treasury: in the last five years high net worth individuals (HNWIs) have contributed an extra £1bn to the UK economy.

In 2009, HMRC launched a “high net worth unit” to deal with the tax affairs of people with a net worth of over £20m. Specialists in the unit work with HNWIs to ensure they voluntarily pay the right taxes.

HMRC takes the approach that most people are ready and willing to pay tax that is due, and that it is only a minority who try to avoid their responsibilities. They accept, too, that individuals may not always be aware of what is expected of them, hence the cooperative, rather than confrontational approach.

Clearly, this is working. In the first year of the HNW unit’s existence, an extra £85m was raised in tax revenue. In 2013-14, this rose to £268m.

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The target for the first five years was £894m. The fact that already £1bn has been raised is seen as a notable success by the taxman and a vindication of the positive approach.

HMRC had good reason to create the HNW unit in the first place, as Britain is home to many of the world’s wealthiest people. Indeed, earlier this year the global property consultants, Knight Frank, concluded in their annual Wealth Report that London has overtaken New York as the most desirable city to live for the wealthy.

It’s estimated that almost 6,000 ultra high net worth individuals live in London; not only more than in New York but more than twice the number in Paris. The UK is seen as having great advantages from both the professional and the personal point of view.

Business-wise, London is in a favourable timezone for connecting with just about anyone, anywhere in the world. The economy is stable, making it worthwhile complying with tax legislation, which, in any case, is seen as flexible.

The legal system works well and is fair. Financial institutions are strong.

The UK is seen as a comfortable place to live.

The streets are safe. The schools the wealthy send their children to provide a sound education, which can be continued at some of the best universities in the world. Cultural life is of a high standard. And English is the most widely-spoken language in the world.

It seems that in the UK both the HNWI and the taxman have good reason to be smiling.

About the author...

Nataliya Makhonina-Byrdan is head of business development at multi-family office Oracle Capital Group, and is responsible for building long-term relationships with clients and partners, promoting the company to new and existing markets. She has more than nine years of experience in the financial services sector, five of those within business development roles.

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It’s estimated that almost 6,000 ultra high net worth individuals live in London – more than twice the number in Paris

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ax officials do not have a reputation for being happy, smiling people.

Wealth & Finance | August 2014 |

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Wealth & Finance | August 2014 |

Gold: A Shanghai Discount | Markets Matters

Markets Matters | Gold: A Shanghai Discount

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Gold:

A Shanghai Discount?

Adrian Ash, head of research at BullionVault, the physical gold and silver exchange for private investors online, says Chinese stockpiling presents a rising threat to the London bullion market

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welve months on from gold’s sharpest price drop in three decades, the effects of spring 2013’s crash continue to shuffle the world’s available stockpile of bullion.

Contrary to what some internet pundits will tell you, Chinese wholesalers have plenty of bullion stockpiled today, ready for when consumer demand picks up again after the seasonal summer lull. That’s visible in Switzerland too, where dealer-level premia being asked by Swiss refiners for kilobars and other retail units have fallen. Prices have come down since the new year, suggesting ample supply.

US warehouses are in the meantime accumulating more metal as well, thanks in the main to China’s lower imports of gold bars since the pre-new year surge. That leaves US miners and refiners needing somewhere to park their output until demand turns higher.

Only here in London, in contrast, has metal been looking a bit tight. Only a little, and only according to the gold borrowing rates quoted by the biggest bullion banks. However, London, heart of the world’s bullion trade, saw more than 1,700 tonnes of gold exported from the UK thanks to 2013’s price crash.

That metal is now stacked up elsewhere, much nearer the refiners and end consumers they serve.

So, given that China is also the number one mine producer, as well as the number one importer and consumer, last year’s shake-up has tilted the gold market on its axis.

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Indeed, rather than a Shanghai premium, the gold market saw a London premium – over and above Chinese prices – for three months this spring.

This might prove an aberration. Nor was it the first such Shanghai discount to London prices.

But the gold market has grown accustomed to Chinese wholesalers paying up to receive metal, and it was the Shanghai premium which pulled metal into China from London vaults in 2013, as importers were incentivised to book shipments by a wildly extended “buy in London, ship for sale in Shanghai” arbitrage.

But does the more usual Chinese premium in fact represent a “London discount”, as one analyst suggests? Any big buyer wanting 400-ounce (12.5kg) wholesale gold bars – that warranted quality metal which BullionVault enables private investors to trade at low cost online in “retail” quantities – will still find London offers the world’s central market and terminus for vaulting, dealing and shipping.

It has enjoyed that dominance for more than 200 years, surviving a Swiss challenge in the 1960s, lobbying government to retain VAT-free trading after Britain’s 1973 entry to Europe, and holding its ground against US futures contracts after Big Bang.

But London’s primacy in physical gold is clearly at risk today, both politically from regulatory and reputational challenges, but also structurally.

China is now the number one miner, consumer and importer of gold. The UK barely registers.

Shanghai is actively preparing an international bourse, inviting foreign banks to start importing metal to its free trade zone. London is on the

cusp of losing its global benchmark, the Gold Fix, as the biggest bullion banks slash or close their commodity divisions entirely.

Either way, China isn’t a one-way street for higher prices, as its record-high demand in 2013 proved.

Because as western funds cut their allocations, Chinese households failed to reverse gold’s 30% price drop. Consumer markets tend to like low prices, after all. And here in summer 2014, amid a seasonally quiet patch for Chinese demand, the heaviest consumers of gold still seem to find current prices uninspiring.

Should a Shanghai discount return, traders won’t yet find a “buy Shanghai, sell London” arbitrage available to them. Unlike Chinese gold imports, which are very closely controlled, Chinese gold exports are effectively banned. For now.

About the author...

Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online.

BullionVault gives private investors around the world access to the professional bullion markets.

Part-owned by the World Gold Council, BullionVault is the world’s largest online investment gold service, taking care of US$2bn for more than 50,000 users. For more information, visit www.bullionvault.com.

Wealth & Finance | August 2014 |

IP Rights: Over the Fence | Risk Management

Risk Management | IP Rights: Over the Fence

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IP Rights: Over the Fence

Companies’ big ideas are constantly at risk from foreign brand hijacking. But with early protection, says Alison Hague, from trademark law firm Dehns, they can stack the odds in their favour

Big ideas have to start somewhere and spotting the next successful product is not easy. However, companies need to think about realistic territorial protection for their IP at the very earliest stage.

Most people know that patents, to protect technical aspects of new products, have to be filed before the invention has been disclosed.

This puts companies in the awkward position of having to decide whether to invest in patent applications before their products have been brought to market. Companies whose territorial aspirations are too limited initially, may lose the right to exclusive exploitation of their invention in valuable markets.

Fortunately, the European patent and Patent Co-operation Treaty (PCT) systems provide useful routes for those wishing to keep their patenting options open territorially, whilst putting off some of the cost to a later date.

The same issue applies to registered designs for protecting the new appearance of a product.

However, all may not be lost if an unprotected design unexpectedly takes off. In the UK and the European Union, grace periods mean that designs can still be validly protected up to one year after disclosure by the designer. If your design becomes the new “must-have” accessory, there may still be time to protect it before the cheap copies start to arrive.

Brand managers need to think equally far ahead.

It is extremely common for companies who develop a marketable brand in one territory to find

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that they are unable to use the same trade mark in another country because someone else has conflicting rights. This can be through deliberate brand-hijacking or independent development of a conflicting brand on a collision course.

The risk of this happening to your business can be managed by checking the availability of a new brand across a realistic range of countries initially and registering your trade mark in those countries early on.

In Europe, the Community trade mark (“CTM”) is a cost-effective tool for protecting trademarks across a wide territory. One drawback is the possibility of opposition to registration from the owner of a prior right in another EU member state, which may be far away in terms of actual trade. The Madrid Protocol, which allows applicants to designate up to 91 member states, is also

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It is extremely common for companies who develop a marketable brand in one territory to find that they are unable to use the same trademark in another country because someone else has conflicting rights

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ost forms of intellectual property are, by nature, territorial. Obtaining the grant of a patent, trade mark or design in a particular country enables the rights owner to put up a fence around his borders. Why then should IP owners be worried about what is happening over the fence?

useful for trade mark owners who like to think on a global scale.

Companies who are too greedy territorially may run into problems with their trade mark registrations being challenged for non-use. It is advisable to update and refresh brand protection periodically for this reason.

Patent owners may encounter similar problems with patents for inventions which are not exploited becoming subject to compulsory licences.

Owners of all types of IP are well advised to try to anticipate where unwelcome imitations of their products or brands are likely to come from so that they can obtain protection in the manufacturer or internet retailer’s own country.

It is equally important for companies to protect their brands in their own manufacturing locations.

In many manufacturing bases, including China and India, trade mark registrations can be infringed by applying a trade mark to goods to be exported.

Registration of IP with Customs Authorities can be an easy way of stopping at least a proportion of counterfeits as they cross borders. This is good where you are the rights holder, but not so welcome if a Chinese trade mark hijacker has enlisted the assistance of Chinese Customs to block the export of your latest creations for the coming season.

In Europe, owners of EU-wide rights such as Community designs and trademarks can file an annual Application for Customs Action requesting Customs Authorities across Europe to look out for and detain suspected counterfeits. National Customs Applications can be filed by the owners of national rights such as patents and copyright.

Certain undertakings to indemnify Customs have to be given. When rights holders are notified by

Customs in the EU of the interception of suspected counterfeits, they can request Customs to destroy the counterfeits without the need for court action.

Even with the best forward thinking, some disputes are inevitable, and when that happens, it is increasingly likely that multiple territories will be involved. This can create opportunities for forum shopping. In infringement cases, cross-border injunctions within the EU are more likely to be given if action is brought in the country where the defendant is domiciled. However action can also be brought in the territory where an infringement occurs. Companies may prefer to bring proceedings in countries where the courts and the lawyers speak their language and where they are familiar with the way that the courts work. The degree of specialism of the courts and experience of the judges may be important, as well as cost and speed. Applicable law and procedures can also differ.

A potential defendant who senses infringement proceedings may file pre-emptively for a declaration of non-infringement in a court which he regards more favourably, forcing other courts in Europe to stay their proceedings.

IP owners can try to stack the odds in their favour by paying careful attention in any agreements to clauses dealing with governing law and jurisdiction, and by thinking about their strategy as a dispute looms.

Looking ahead, when the new Unitary Patent arrives in Europe, patent applicants will have more decisions to take about whether to continue to seek the grant of a European patent which splits into a basket of national patents after grant, or whether to put all of their eggs into one basket and opt for a Unitary Patent which will come under the jurisdiction of a single court able to injunct or revoke with effect in most of the European Union.

About the author...

Alison Hague joined Dehns in 1987. She graduated from Oxford University with an honours degree in Engineering Science. She has the Certificate in Intellectual Property Law from Queen Mary College, University of London. She worked from 1983-1984 with the AERE at Harwell in the Engineering Sciences Division.

Alison handles patent work mainly in the mechanical engineering field, and trade marks and designs.

For more information on Dehns, please visit www.dehns.com.

Wealth & Finance | August 2014 |

Preparing for Rising Interest Rates | Risk Management

Risk Management | Preparing for Rising Interest Rates

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Preparing for Rising Interest Rates Andrew Dalton, Deputy Chief Investment Officer at SGPB Hambros, says despite lower economic growth and tamer inflation than before the crisis being here to stay, the recovery still appears more subdued than during previous business cycles

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few years ago, it was not a foregone conclusion that deflation would be the most prominent risk in the aftermath of the global financial crisis. Widespread deleveraging has acted as a brake on the recovery. Bank lending has only recently started to pick up in the US, while outstanding Eurozone credit continues to contract. In the UK, credit has expanded. This is driven by government schemes such as “funding for lending” and this seems to be steering growth upward after a prolonged period of stagnation.

Although it is probably too early to conclude that the “new normal” of lower economic growth and tamer inflation than before the crisis is here to stay, the recovery still appears more subdued than during previous business cycles.

In developed markets, central banks are maintaining a very accommodative stance, delaying the withdrawal of extraordinary stimulus measures as they fear a repetition of the Japanese “lost decades” of the 1990s and 2000s.

The European Central Bank (ECB) had been lagging its developed market counterparts, but it has now been forced to introduce credit easing measures and is about to embark on fully fledged quantita-

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tive easing as deflation risk appears increasingly entrenched.

However, 2014 is set to be a transitional year for the US Federal Reserve (Fed), which leads the global recovery. The Fed’s asset purchase programme is due to be phased out before year end, but the reduction of its balance sheet will take years and no asset sales are on the cards for the moment. There now seems to be a real possibility of rising central bank rates both in the US and the UK within a year.

Forward guidance on interest rates has become a common tool for central bankers as a way to anchor yields at low levels and to influence investors’ expectations. Until early 2014, the market consensus had been more aggressive, with expectations of a significant pickup in US yields reflecting a sanguine view of US economic momentum.

US yields are set to be a key indicator of monetary policymaking, nominal growth prospects and asset price trends. As already observed when Bernanke, the Fed Chairman at the time, hinted at a gradual winding down of the asset-buying programme in May 2013, the US housing market

is highly sensitive to a run-up in yields. Additionally, under-employment persists, with figures for long-term unemployment and part-time workers willing to work full time well above historical averages. All this means that the Fed is in no rush to hike rates, although investors will try to anticipate the first move.

Asset performance has presented a puzzling picture year to date, with only Japanese equities and oil in negative territory. Most asset classes, both safe havens and risky ones, have performed well.

This unusual outcome reflects both the decline in US bond yields, which supported developed market fixed income assets, and the positive dynamics for equity markets sustained by loose monetary policy and portfolio reallocation in favour of equities.

Moreover, within asset classes dispersion has started to increase. Asset correlation shot up in the wake of the Great Recession (the sharp decline in economic activity in the late 2000s). This increase was largely due to the surge in macro volatility in the post-Lehman period. Concerns about a major macro crisis have receded to such an extent that the interdependence between assets is now back to pre-crisis levels, generating

opportunities for talented asset managers to reap higher returns. This high-diversity environment means that different specific factors are now the main drivers of asset classes.

From an asset allocation perspective we keep a pro-risk stance on developed market assets, as abundant liquidity, easy monetary policy and the recovery are set to continue. However, with the steady rise in valuations, it is increasingly difficult to find attractive opportunities and even more challenging to find value within markets.

Concerning the key features of our asset allocation: • We conclude that yields will rise, reflecting the improving outlook and gradual normalisation of monetary policies in the US and in the UK, where we prefer short-duration exposure. In the Eurozone, where recovery remains patchy, we maintain durations at 3-5 years, in the UK we have slightly shorter duration exposures. Within the fixed income universe, we still like Eurozone peripheral bonds and some bank debt. While spread compression has run its course, we still favour the high yield universe, which remains more appealing from a risk-adjusted standpoint than

sovereign or investment grade bonds.

• We continue to find some value in equities, but much of the developed market is now fairly valued after strong recent performance. Peripheral Europe is the latest area where valuations have caught up with events. We consider the best remaining value in Europe is Germany, which is on lower valuations and is more linked to global growth through its strong exports.

• We are also now more constructive on Asia-Pacific stocks, where we see the biggest potential for the months ahead. Japan, Australia, Singapore, South Korea and Taiwan offer the best mix of sound macro fundamentals, growth and positive earnings momentum.

• Within emerging markets, we also see more value than last quarter. We see Chinese stocks as undervalued, but we prefer to keep a neutral stance as slowing growth will drive policy intervention to engineer a soft landing. Regarding India, the new government offers bright prospects for structural reforms, but we prefer to adopt a wait-and-see attitude after the impressive performance of the equity market.

• Alternatives which depend on managers asset selection, such as merger arbitrage and longshort equity funds, can provide a good source of diversification. Many are now available in liquid UCITS (Undertakings for the Collective Investment of Transferable Securities) vehicles. We think the environment is now favourable for such funds.

About the author...

Andrew Dalton is Deputy Chief Investment Officer at private bank SGPB Hambros.

The firm offers “restricted advice”, meaning it advises on a selective range of investment and wealth planning solutions.

With a network of offices in the UK, Jersey, Guernsey and Gibraltar, the firm has a range of teams offering its services to clients around the world. For more information, visit www.privatebanking.societegenerale.co.uk

Wealth & Finance | August 2014 |

Taxing Times | Keeping on Top of Tax

Keeping on Top of Tax | Taxing Times | Taxing Times

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Keeping on Top of Tax HMRC has recently changed its stance on loans taken out by UK resident non-doms. Law firm Withersworldwide takes a look at how individuals can avoid paying additional tax as a result of the changes

When a UK-resident but non-domiciled individual taxed on the remittance basis takes out a loan, either in the UK or overseas, which is secured on foreign income and gains and brings the funds borrowed into the UK, there are two aspects of the loan which may result in a remittance to the UK. The first is the use of the foreign income and gains as security, and the second is the use of foreign income and gains to pay interest due on the loan or repay the principal borrowed. Such loans have commonly been used by taxpayers seeking to buy property or invest in businesses in the UK or access funds to satisfy visa requirements.

On 14 August 2009, against a background of uncertainty as to the HMRC treatment of debts secured against foreign income or gains, HMRC introduced a statement in their guidance on the remittance basis (subsequently incorporated in the Residence, Domicile and Remittance Basis Manual) which provided that if, such a loan was made in a commercial situation, foreign income and gains used as security would not be treated as remitted and subject to tax. Any foreign income and gains used to service the debt would still be treated as a taxable remittance. HMRC have termed their change of position a “with-

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drawal of concessional treatment”, but it is rather a reinterpretation of the remittance basis rules introduced in 2008.

Example: In 2013 Amelia, a UK resident and non-domiciled individual took out a loan of £5m from a Swiss bank using her £5m of foreign income and gains (or assets bought using them) as security. Amelia used the £5m she had borrowed to buy a residential property in London. When Amelia entered into the arrangement she would only have been treated as remitting foreign income and gains if she used these to service the loan. If she used UK funds or clean capital to service the loan, there would have been no remittance. However, if Amelia entered into the arrangement today she would be treated as remitting the security (i.e. the foreign income and gains against which the loan is secured) and any foreign income and gains she used to service the loan would also be treated as a remittance.

This creates a significantly higher tax liability for Amelia.

Whether or not HMRC’s new guidance reflects the correct interpretation of the law is open to debate, but their announcement suggests that HMRC will challenge a taxpayer who takes a different view regardless.

What should I do now?

Taxpayers with loans secured on foreign income and gains will need to review their current arrangements and take advice on the appropriate

steps to take. Equally any arrangements, whether or not formal security is in place, that envisage foreign income and gains being used in support of borrowing should be reviewed. Taxpayers contemplating putting such arrangements in place would be advised to refrain from doing so until matters are clarified.

For existing loans, HMRC have stated that a taxpayer will not be treated as having remitted the foreign income and gains used as security if the loan met the conditions of the “concession” and the taxpayer provides details of the amount of the loan remitted to the UK and the foreign income and gains used as security. The taxpayer must also either give a written undertaking that the security will be replaced by non-foreign income or gains before 5 April 2016; or repay the loan before 5 April 2016.

If the conditions are not met or the arrangements are not unwound before 5 April 2016, HMRC state that they will raise a charge by reference to the foreign income and gains used as security.

There remain a number of unanswered questions in relation to the new guidance. In particular it is not clear how HMRC will charge the remittance when the amount borrowed was brought to the UK in an earlier tax year when the concession was in place. It is to be hoped that further clarification will become available shortly.

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Whether or not HMRC’s new guidance reflects the correct interpretation of the law is open to debate, but their announcement suggests that HMRC will challenge a taxpayer who takes a different view regardless

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ith effect from 4 August 2014, HMRC have changed, without notice, their stated position with respect to the treatment of commercial loans to UK resident and non-domiciled individuals. Action is required if individuals wish to avoid paying additional tax as a result of their existing arrangements.

For more information on Withersworldwide, visit www.withersworldwide.com.

Wealth & Finance | August 2014 |

Finance Focus | Cook up Some Business Magic Wealth Corner | Profit From Your Passion

Cook up Some Business Magic | Finance Focus

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Cook up Some

Business Magic

Building a valuable business is more an alchemy than a science, says John Rosling in an extract from his new book, The Secrets of the Seven Alchemists

“Measuring the value of our business is about driving our strategic direction. Too many people concentrate on what they are earning but we wanted to build something that has the ability to grow and grow. We see our business as an asset.”

will become increasingly independent of you, whether that independence looks like a sale or just more time for you to spend on the beach, or with the kids.

Consider how much time you and your staff spend on increasing revenue and reducing cost. Consider how many pages of your business plan were devoted to revenue and profits. And now consider how much time you spend thinking about and creating strategies to drive the multiple.

Russell Stinson, Alchemist and founder of ACT Clean, sums all of this up:

-Russell Stinson, CEO, ACT Ltd

Not much? That’s a pity because driving the multiple can be easier and a lot more fun.

here are many critical formulas in the world. E=mc² is fairly useful if you want to build an atomic bomb. t=√2h/ g is handy when your parachute doesn’t open and you want to know how long you have before you hit the ground. But if you want to know how much your business is worth now and how to build towards your vision, the formula you need to know is:

At this point those running businesses will often say, “But the market controls the multiple.” They are, of course, correct. In the same way the market controls what your house is worth. But if you had two years before you were planning to sell your house, might you make some changes to increase its value? Might you upgrade the property, build an extension, put in a new bathroom? You’d presumably do more than just flick the breadmaker on a few minutes before a prospective buyer came round? In other words you would strategically invest in the assets of your property over time to try to increase its value.

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V=PxM That is, the value of your business M is a function of current profit (P) times a multiple (M).

OK, that’s hardly rocket science I admit. But it is how you use this formula that is critical.

So, let me ask you this: 1. Can you tell me, to within a few quid, what your BBIT (or however you measure profit) was last year?

2. And now can you tell me the current and precise multiplier of that profit that determines the value of your business? Let me guess, you’ve answered “Yes” to (1) and “mmmmm” to (2)?

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Both sides of this equation – the P and the M – are equally valid in determining the future value of your business and yet many businesses focus all of their energy on only one side.

Your business is no different. You control the multiple just as much as you control your profit.

If you want to build a truly valuable business that will give you wealth, freedom and fulfilment, then you need to start seeing your business as a set of defined assets and investing in these.

At this point I have to make one thing clear: it doesn’t matter if you have no intention of selling your business. Building your business from an asset perspective is simply the best way to build a great business that is easy to run and a joy to own. It is the best way to build a business which

“Measuring the value of our business is about driving our strategic direction. We want to make sure that there is something else in our business aside from products. It is important because we’re not looking to do something just from a monthly financial return. We’re a people business. We’re building something that we want to be proud of. Too many people concentrate on what they’re earning but we wanted to build something that has real foundations, that has the ability to grow and grow and not be based on any individual running it.

We see our business as an asset.”

The Seven Layers of Valuation It’s no coincidence that Russell and his partners have built, from a standing start, a business employing 1300 people in seven years. So, what are these assets and how do you use them to build a high-value business? That is of course the BIG question.

For now let’s just accept that what I call assets are a set of specific, intangible things that your business contains, the combination of which defines its value. Investing in these assets and folly implementing appropriate strategies in a particular order is the secret to building a high-value and truly great business.

The reason these assets drive your multiple is no great mystery. It is, of course, because they determine the future profitability of your business, or because someone else will see value in them and look to acquire these assets to drive the future

Wealth & Finance | August 2014 |

Finance Focus | Cook up Some Business Magic

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Building a business that is worth many times the average in your sector is more an alchemy than a science... To build a fantastic, asset-rich, wealth-generative business you need to build in the right mixture of people, innovation and brand

profitability of their own business. Building the things in your business today that will drive incremental, sustainable profit tomorrow increases the present-day value of the business.

However, building and strengthening these assets in your business also creates the kind of business you want to own, your customers want to buy from and your team wants to spend their time in.

At this point I want to introduce you to the seven layers of valuation:

This is a deceptively simple model but one that, in my experience, has the power to transform how you run your business and the wealth and freedom that you generate. What this model reveals are the specific intangible assets I referred to above and the specific order that will most effectively drive the multiple and therefore the value of the business.

To understand the anatomy of this framework,

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you need to accept the idea that there is an average multiple in every business sector. This is the average multiple of earnings achieved upon sale of a business within that sector. That is referred to in the model as the benchmark.

Clearly, as this is an average, some businesses will have achieved a multiple below this number and others above it, sometimes well above it. Building a business that is worth many times the average in your sector is more an alchemy than a science.

It all comes back to the formula contained in this simple diagram. To build a fantastic, asset-rich, wealth-generative business you simply need to build in the right mixture of people (talent, capability and culture), innovation (of product, system and channel) and brand.

Understanding this mixture, what each of the ingredients are for your business at each point in its lifecycle, and how and when to blend these, is the secret to creating the scale of business and the kind of life you want.

That’s all you need to know about it for now.

The number of high growth businesses turning over between £2.5m and £100m in the UK increased by 30% last year, but rather than relying on revolutionary technology or ground-breaking inventions, it is often businesses in everyday industries that are finding the formula to transform a merely good business to a really great one.

John Rosling’s new book, The Secrets of the Seven Alchemists reveals for the first time a step-by-step methodology for this business success, brought to life through startlingly candid interviews with seven truly inspirational entrepreneurs.

John Rosling is a highly sought-after speaker, lecturing on entrepreneurship at some of the world’s leading business schools. His career began working for Unilever and Diageo, but he left the corporate world to establish and run numerous small, successful businesses, and write his popular guide for CEOs, More Money, More Time, Less Stress.

Visit www.harriman-house.com for more.

Wealth & Finance | August 2014 |

Brand Valuations: Helping Seal the Deal | Finance Focus

Finance Focus | Brand Valuations: Helping Seal the Deal

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hen faced with the decision between an iPhone or a Samsung smartphone, everybody will have a preference, whether it is for style or functionality. What is often overlooked is the branding that has influenced your decision and the way that the brand has evoked customer loyalty and recognition for the product. Brands are arguably the most valuable assets held by a company, and realising this value is imperative when considering its purchase or sale.

Brand Valuations: Helping Seal the Deal John Illsley, Valuation Director at Intangible Business, says having a comprehensive understanding of the value derived from your IP and intangible assets is vital in negotiating an appropriate M&A deal

Market share, brands and synergies are three key motivations for acquisitions; this is typified by the recent flurry of technology deals. Microsoft’s US$7.2bn (£4.5bn) procurement of Nokia’s mobile phone business and an intellectual property (IP) license for Nokia’s extensive patent portfolio exemplifies a deal where the value of IP contributed a large sum to the purchase price. Microsoft CEO Satya Nadella highlighted Nokia’s mobile capabilities and assets as the driving force behind the acquisition, demonstrating an awareness of the value held by Nokia’s IP. Having a comprehensive understanding of the value derived from your IP and intangible assets is therefore vital in negotiating an appropriate deal.

Benefits of Valuing IP prior to the acquisition Brand valuations are required for compliance with International Financial Reporting Standards (IFRS) and US Financial Accounting Standards Board (FASB), however this is undertaken post-acquisition to report the Fair Value of assets and liabilities acquired in their financial statements.

It is also arguably a useful tool to both the sellers and acquirers prior to acquisition.

For the seller, hard numbers, in the form of profits, cash and tangible assets, are a sound guide to use when arriving at a desired sale price.

Intangible assets, however, are murkier entities that require more consideration and can radically alter the pricing of an enterprise. They are key to a company’s ability to generate future profits and cash. Therefore, by assessing the value of the brand and attached IP prior to the sale of a company, the seller will have a more informed and accurate guide as to the value of their business, and the value it will hold to interested parties.

For the buyer, valuing the IP prior to purchase will have numerous advantages. It would serve to

| Wealth & Finance | August 2014

verify the robustness of the acquisition and aid in predicting the benefits of the synergies between the two merging firms. Most significantly it would help to justify the acquisition to shareholders and allow the company to assess the impact the acquisition will have on the firm’s balance sheet and profit and loss accounts post-acquisition.

is also a significant value that originates from the goodwill of a business. Relationships built up with customers, internal corporate culture, staff relationships and the potential synergies between the two firms are all important intangible assets.

When taken into account, these aspects can help leverage a better price.

Ultimately, valuing brands pre-acquisition helps management determine how much to pay as well as help finance the deal, prepare the team for integration and identify opportunities for the brand.

The Nokia mobile brand possessed consumer confidence and an element of nostalgia, as Nokia was the first brand of mobile phone that many people owned. The numerous synergies between the two firms, allowing Microsoft to gain a foothold in the increasing competitive smartphone market, would also contribute highly to Nokia’s sale price.

IP Valuation Methods Brand and IP valuation can be a complex process, and it is advisable to take on a valuation expert to help accountants and other advisors to broker the best possible deal for their clients. This process will take into account a company’s trademark, copyright and design rights, recipes and formulations and require the ability to measure and evaluate the value earned purely from these assets.

Brand valuation is conducted in accordance with both IFRS and US Generally Accepted Accounting Principles accounting standards. Like other assets, brands are valued through three core approaches: income, market and cost. Calculating the income involves a deep understanding of how brands drive value and discounting future revenue to a current day value. To evaluate the market, comparable transactions are taken into account looking into similar brands and competitors actions in the market. Finally the cost approach considers the cost of replacing or recreating the brand.

Each of these approaches produces a range of values for each intangible asset, which can be used in conjunction with value of the tangible assets to arrive at a value for the business as a whole. In the case of Microsoft and Nokia, the deal included a sum of US$1.65bn for its licensing agreement providing exclusive access for a ten year period to 8,500 design patents and over 30,000 utility patents. Nokia strategically retained ownership of the IP, which explains the relatively low value of the IP portfolio.

Goodwill in M&A In practice, trademarks and patents are legally enforceable intangible assets and should therefore be used to underpin pricing; however there

IP and intangible asset valuations allow for more accurate representations of business value from the outset, exposing strengths and weaknesses and helping the buyer to capitalise on future opportunities within the market. As the economy picks up and M&A activity increases, why not consider reaping the benefits of intangible asset valuations from the beginning of the sale or purchase process, rather than using it solely for financial statements post-acquisition?

About the author...

John Illsley qualified as a chartered accountant in 1981. He is an experienced finance director with blue chip and private equity backed organisations. He specialises in corporate turnarounds with a track record of leading and building businesses and managing the exit process.

Having held positions at companies including Shell, Loseley Dairy Products (part of Booker plc), GEC plc subsidiary AB Dick-Itek, John joined Intangible Business in 2009 and has been involved in consulting on M&A activity, purchase price allocations and dispute resolution.

For more information on Intangible Business, please visit www.intangiblebusiness.com.

Wealth & Finance | August 2014 |

Relax | An Exceedingly Good Stay

An Exceedingly Good Stay | Relax

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An Exceedingly Good Stay

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Walk in Kipling’s footsteps and take a trip back to colonial times at Rangoon’s iconic Governor’s Residence

Wealth & Finance | August 2014 |

An Exceedingly Good Stay | Relax

Relax | An Exceedingly Good Stay

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The hotel is located in the Embassy Quarter of Rangoon, taking its place among the many diplomatic missions that call the former Burmese capital home.

It is also ideally positioned within walking distance of the city’s most famous historical landmark. Over 2,500 years old, 100 metres tall and rising in gilded magnificence from the surrounding landscape, the Shwedagon Pagoda is a must see for anyone visiting Burma for the first time.

Upon arrival you are greeted by an imposing teakwood colonial residence lovingly restored in the 1990s by French designer Patrick Robert. Now owned by Orient Express Hotels, the former British Governor’s mansion is laid out over two floors and offers guests a chance to step back to the Victorian age to a chorus of Southeast Asia’s wildlife, and relax in this oasis in the country’s largest city.

With 46 rooms and two suites, the Governor’s Residence is, in many ways, Rangoon personified. From the fine and delicate filigree woodwork that is evident throughout the building, to the soft cotton and silk furnishings and low tables, it is all decadently designed for relaxing and whiling away the hours between excursions. It’s such a sanctuary, in fact, that you may want to think about completing all of your trips before you settle here. It could be hard to leave.

The carved teak woodwork and opulent silks carry on throughout the hotel, with every room appointed to a timeless and elegant, yet contemporary, décor.

comfortable seating area, a writing desk for those notes home if you really want to get into the colonial spirit.

Every room in the hotel also features free wireless internet access – ideal for those not quite wanting to get too colonial.

For an extra special treat, the hotel’s Governor’s Rooms can truly cast you back to the time of the hotel’s construction in the 1920s. Able to accommodate two adults and combining Burmese tradition with contemporary boutique hotels, they offer hardwood floors and more of those delightful intricate wood carvings.

The real showstopper here, though, is the hand-carved canopy above the king- or queen-sized bed, which elegantly dominates the locally decorated room. A walk-in shower in the silk-panel-hidden bathroom will allow you to reinvigorate yourself at the end or start of another exciting day in Rangoon.

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You may want to think about completing all of your trips before you settle here. It could be hard to leave

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ith an unparalleled location nestled amongst verdant gardens, The Governor’s Residence in Rangoon, Burma, is steeped with colonial history and tradition. A 5-star boutique hotel, its facilities are very much in the modern world, however, much as its home country is becoming to the delight of the world’s jetsetters.

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The ultimate sanctuary amongst the urbanity, the Junior Suites offer a private view of the lotus garden in addition to the standard luxurious amenities. It could be time to get another G&T on the go!

Spacious, with double or twin beds, all Deluxe Rooms offer a captivating view of the hotel’s outer courtyard.

Deluxe Garden Rooms offer a panoramic view across the private lotus garden. Dotted with ceramic pools and with trees towering over the greenery to offer some shaded solace from the heat of the midday sun, it would be rude not to settle down with a long, cool gin and tonic, with a lime twist of course!

Able to accommodate two or four adults, the two-bedroom Junior Suite is ideal for families or groups of friends looking to treat themselves. Complete with connecting bedrooms and a shared bathroom, it is certainly the ideal space for parents and their children. The suites are, understandably, popular though – so you may need to make that booking soon! The staff are lovely, so will be able to help meet your every need wherever they can.

Both room types feature a fantastically well-apportioned bathroom with a large, kidney-shaped terrazzo bath. The living area meanwhile is complete with a very

The rooms are just the place to rest and relax and start the day of course. You will probably want to dive into the beautiful fan-shaped pool as soon as you arrive.

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Or maybe you will want to really relax and head to the Governor’s Oasis for a foot, hand or full-body massage with oils, stones or herbs. Having a preference for the 75-minute Rainforest Rejuvenation Face Therapy treatment would not be a bad thing though, while many other facial therapies, massages, manicures and pedicures are available.

For those arriving a little later in the day, perhaps you’d prefer to take a cool long drink outside in the shaded calm of the hotel’s garden bar, the Mindon Lounge. With the light from the surrounding lantern’s crafting playful shadows among the orchid speckled scenery, it is a joyful place to be.

It would be remiss not to mention the hotel’s restaurants of course and here, guests are able to revel in the delicate, fiery and altogether exotic flavours of the local cuisine at the Mandalay Restaurant.

Alternatively, you can enjoy a seat at the Burmese Curry Table which, as the name would suggest, is home to a host of fragrantly wonderful local curries buffet-served over charcoal burners. Complimented by fresh salads and fruit, it is all rather marvellous being washed down with an ice-cold beer.

If a nightcap is just the thing after the curry too, the Kipling Bar, named after famed Jungle Book author Rudyard Kipling, will present you with an array of fine wines, lists of classic and hotel-invented cocktails and a selection of spirits. Alternatively, the world’s best teas and coffees are also available.

Breakfast can be taken in the Mandalay Restaurant, where there is a tempting and refreshing selection of tropical Southeast Asian fruits, ready to fuel your foray into the sights and sounds of Yangon and Myanmar.

However, as Kipling might have said, the hotel is so exceedingly delightful, the question of leaving could be less a case of when, and more a case of, If.

For more info and reservations...

Tel: +95 1 229860 Email: reservations.tgr@belmond.com Web: www.belmond.com

Wealth & Finance | August 2014 |

| Wealth & Finance | August 2014