October 2014
www.wealthandfinance-intl.com
Wealth
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MINT: A Year On
Have the boom countries lived up to the hype?
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An Attractive Premium? A view on equities as an asset class
Old-Fashioned Banking How alternative lenders
Social Change Are we doing enough?
are helping SMEs
Preserving Wealth Across Generations Plus... Step into ancient history in Xi’an
As it nears its two hundredth birthday, New York-based Brown Brothers Harriman remains America’s only true private bank
Wealth & Finance | August 2014 |
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October 2014 | Contents
3 4-9 News & Appointments Funds 12 CTA & Global Macro Managers Vs Banks’ HFT Desks Karim Taleb returns with the third and final article in a series on CTA and Global Macro Managers
Banking Zone 16 A Return to Old-Fashioned Banking The recovery has not brought the fresh capital that SMEs need to grow. But alternative lenders, like Brevet Capital, are filling the void left by banks and other large institutions
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Preserving Wealth Across Generations Brown Brothers Harriman & Co.’s banking practice remains America’s only truly private bank. We take a look at the business’s continuing success
Wealth Corner 24
Equities: An Attractive Premium? Keith Wade, Chief Economist and Strategist at Schroders, gives his views on equities as an asset class in the current economic environment
Markets Matters 26 Mexico: An Important Moment Gilberto Alfaro from KPMG in Mexico tells us how the nation, as well as foreign investors, stands to benefit from the major reform to its energy sector
Taxing Times
Editor’s comment Hello, and welcome to another issue of Wealth & Finance. This month, we take an in-depth look at Brown Brothers Harriman’s Private Banking practice, which has been helping its clients preserve their wealth for nearly two centuries (p.18). Elsewhere in this issue, Karim Taleb, from Robust methods, is back with another detailed look at CTA and Global Macro Managers (p.12). Brevet Capital, the New York-based institutional investment manager dedicated to principal finance, is on hand to tell us how, with the economic recovery having failed to bring the fresh capital needed by SMEs, alternative lenders are filling the void left by the big banks (p.16). Are equities an attractive premium? Keith Wade, Chief Economist and Strategist at Schroders, offers us his views (p.24). We all want to make a difference to the world. But how can we do more to instigate social change? A new study by Walden University offers some new insights (p.30).
30 Embracing Social Change People feel they could be doing more for positive social change, and there is more work to be done, according to a new study by Walden University
Finance Focus 32 A Year on from MINT Simon Featherstone, Global Chief Executive of Bibby Financial Services, asks whether Mexico, Indonesia, Nigeria and Turkey have lived up to their potential
Relax 36 Ancient Luxury The Sofitel People’s Grand Hotel Xi’an offers a rare and thrilling sensation of time and place, within one of China’s most culturally-rich cities
A year ago, Mexico, Indonesia, Nigeria and Turkey were touted as the next boom nations. But, asks Simon Featherstone, Global Chief Executive of Bibby Financial Services, have they delivered? (p.32). And of course there’s all the usual financial news from around the world. I hope you enjoy the issue. Ollie John Editor ollie.john@ai-globalmedia.com
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News & Appointments | October 2014
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News in brief Atlantica Hotels Recapitalised with Equity Capital Atlantica Hotels International Ltd., the holding company for Atlantica Hotels International (Brasil) Ltda, a leading hotel company in Brazil and largest privately held hospitality company in South America, announced that it has been recapitalised with equity capital from Quantum Strategic Partners Ltd., a private investment fund managed by Soros Fund Management LLC, Tao Invest LLC, a private investment fund managed by Tao Capital Partners, and management. Paul Sistare, founder and CEO of Atlantica, said: “This is a positive move for our clients, employees and business. We are delighted to partner with Soros and Tao, all long-term focused investors with strong track records of supporting growth companies. Our plans for growth remain in place.”
Cadens Medical Imaging Inc. Strikes Key Deal
New Tech Will Kill off Many of World’s Largest Firms, New Book Claims Authors of a new book, iDisrupted, claim that new technologies will continue to change the world, leaving some of the world’s biggest firms behind A new book entitled iDisrupted by John Straw and Michael Baxter claims that only 19 of the world’s 100 largest companies in 2012 will still be in that list in 2042. However, it says that even this bold claim may be understating how things will pan out. Throughout history, new technologies have had a disruptive effect on businesses and the economy, proving fatal to some well-known companies. In the new book, iDisrupted, the authors claim that the rate of fatality is set to increase. Of the top 100 global companies identified in 1912, 29 companies had experienced bankruptcy or similar; and 48 had disappeared by 1995. Eastman Kodak was one of just 19 companies that stayed in the list during these years, yet at the start of the 21st century, with the onset of digital cameras, home printing and photo sharing websites, it too fell victim to the rise of new technologies. In iDisrupted, co-authors John Straw and Michael Baxter claim that many of the industries we cur-
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rently see as strong, such as oil, car manufacturers, banks and energy companies, could also be heading for the corporate graveyard within the next few decades. They say that only 19 of the world’s 100 largest companies in 2012 will be in that list in 2042. However, even this may be an understatement. Straw states: “The big corporate success story of the 20 century related to oil companies, but just because they flourished in the 20th century, this does not necessarily mean they will flourish in the 21st century.” The rise in electric cars, self-driving cars and advances in solar power and energy storage, will all play a part in the energy industry as we currently understand it. Baxter adds: “In our book, we try to explain why it is that technology is set to change the world like it has never been changed before. This is exciting, but it is also scary. There will be winners and losers, and some of the world’s largest companies will be amongst the losers.”
Cadens Medical Imaging Inc. a Montreal-based startup company, has announced the conclusion of a multimillion dollar licensing and technological collaboration with Chinese multinational Hisense Medical Co. The announcement was made in Shanghai during a ceremony presided over by Quebec’s Prime Minister, Philippe Couillard, who is conducting an Economic Mission in China on behalf of the Province of Quebec. Under provisions of the agreement, Cadens Medical Imaging will be partnering with Hisense Medical Co. to introduce a unique 2D/3D Univiewer software platform to the Chinese market. This innovative technology is designed to provide universal image viewing across a hospital setting, delivering simplicity and productivity to medical experts during cancer-screening procedures.
Kurita To Acquire Businesses From ICL Kurita Water Industries Ltd., Japan’s leading water treatment company in the industrial field, has announced that it has entered into an asset purchase agreement for Kurita’s acquisition of ICL’s Performance Products segment’s APW business units based in Ludwigshafen and Dusseldorf, Germany, as well as at additional ICL PP venues in Europe and China. The transaction will be for consideration of approximately ¤250 million. The closing of the transaction is expected to occur at the end of 2014, subject to the completion of certain conditions precedent, including receipt of approvals by authorities, as well as the agreement of a minimum number of APW employees to become employees of Kurita.
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UK Businesses Condemn Level of Funding Support The annual SME Trends Index, which questioned business owners and finance directors on a range of issues surrounding their funding, found that 16% had seen at least one funding application rejected in the past 12 months Exactly half of the UK’s businesses believe that the level of funding support that’s currently available is inadequate, according to new research conducted by independent commercial finance broker, Hilton-Baird Financial Solutions. Only 27% say that the backing from lenders and the government is sufficient. The annual SME Trends Index questioned business owners and finance directors on a range of issues surrounding their funding, and additionally found that 16% had seen at least one funding application rejected in the past 12 months. However this figure is as high as 26% amongst businesses with an annual turnover of less than £500,000, as the country’s smallest companies continue to struggle to access the funding they require to grow. When questioned on current funding methods, figures showed that those relying on bank overdrafts may not be accessing adequate working capital to meet their needs, with 61% of overdraft users also using business credit cards. There remains a worryingly high reliance on credit cards overall. The use of business credit cards was up 2% annually to 47%, while personal credit cards are used by 12% of respondents. This figure is as high as 20% amongst firms turning over less than £500,000. Meanwhile, 50% of respondents said their bank manager is their first port of call when searching for new funding. A further 26% rely on their in-house expertise and 23% research their options online. Interestingly, less than one in five (19%) speak to an accountant, with even fewer contacting an independent finance broker (13%). Asked what they are looking for when reviewing their business’s funding, cost was very much the key driver (57%). Almost a third said that they were seeking additional levels of funding, with 23%
stating that greater flexibility was required. Evette Orams, Managing Director of Hilton-Baird Financial Solutions, said: “It is worrying that SMEs aren’t accessing the funding support they need. As the lifeblood of the economy, they are key to its recovery. “In addition to SMEs feeling that adequate support is not available, it would appear that they are resorting to using financing methods that are inflexible, potentially costly and only suited to the short term. “Funding remains available to businesses of all sizes if they explore the right avenues, but it isn’t a one size fits all offering so care must be taken to ensure the right facility is secured. “Solutions that provide the right level of service and support, plus the flexibility and headroom to grow in line with the business, can give SMEs the freedom to reach their potential. Whilst cost is of obvious importance, focusing instead on the value the facility would drive to the business is key.” Phil Orford MBE, Chief Executive of the Forum of Private Business, said: “The research supports other recent data that suggests many small businesses feel they do not have the support they need to take advantage of the growth opportunities available. “Businesses need to have access to more information about the current finance support schemes, and to more comprehensive advice on the alternatives available. Lenders, and banks in particular, need to convince small business owners that they are here to provide support for those looking to grow and employ. Without clearer support and positive action, this could remain a significant obstacle to business confidence and securing a sustainable recovery.
Appointments
New Corporate Finance and M&A Heads at KPMG in the UK KPMG in the UK has announced the appointment of Neill Thomas as head of Corporate Finance and Andrew Nicholson as head of M&A. Both will replace Richard Clarke, who held both roles before recently being appointed to take up a new position as head of investment management within the firm’s Financial Services practice. In addition, Jonathan White becomes KPMG’s UK Head of Valuations, taking over from Doug McPhee, who continues as Global Head of Valuations. Neill Thomas will continue as KPMG’s Global Head of Capital Advisory and Chair of the KPMG Makinson Cowell management board, responsible for a network of over 200 capital advisory practitioners located in centres of excellence covering all the world’s major capital markets. He was previously head of KPMG’s UK Debt Advisory business, where he acted as lead advisor to major companies including Britvic, InterContinental Hotels and William Hill.
Denver Maddux Appointed CEO of Megaport Megaport has announced the appointment of Denver Maddux as Chief Executive Officer. This appointment comes as Megaport, which provides on-demand, elastic connectivity to over 100 network and cloud services providers, gears for global expansion driven by growing demand for scalable cloud interconnectivity services. Bevan Slattery will remain as Executive Chairman, supporting the company’s vision and strategy. Maddux joins Megaport from Microsoft where he was Senior Director, Global Network Services responsible for the company’s global network strategy. Prior to his role at Microsoft, Maddux was Vice President of Network Technology and Architecture with Limelight Networks, a global leader in digital content delivery; and held senior leadership positions at Global Crossing, a global backbone network provider acquired by Level 3 Communications in 2011.
“A focus on stimulating further economic activity and growth is needed. It is vital that lenders take further steps to be more proactive in providing the liquidity businesses need rather than seeing further increases in the use of credit card finance.”
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71% of US Executives Plan 2015 Salary Increases, 90% Plan Year-End Bonus for Staff Nearly three quarters of executives expect business to expand in 2015, with increased consumer demand the no. 1 reason execs would accelerate hiring Seventy-four percent of US executives say their businesses will expand in 2015, according to a survey conducted by leadership and talent consulting services firm Korn Ferry. Anticipating this growth, 71% of executives plan to increase staff salaries in 2015. In addition, executives indicate that 2014 will end on a positive note, with 90% planning to give year-end bonuses and 36% expecting to increase bonuses this year (2014) versus the previous year (2013). “Bonuses and salary increases underscore that there is a huge cost to replacing great people. Executives know this and there is incredible competition for talent,” said Nels Olson, Vice Chairman and Co-leader of Korn Ferry’s Board and CEO Services Practice. “The bottom line for most companies is in top line growth. Executives indicate that the number one reason they would increase hiring is an increase in consumer demand. In this environment, those who are driving sales and revenue are in a much stronger position to secure bigger bonuses and increases.” From September 17 to October 20, Korn Ferry surveyed 518 executives. Results are as follows: Q: Are you planning on 2015 salary increases for your staff/what are your plans for salaries next year? Stable – no increase or decrease 27% Increasing from 2014 71% Decreasing from 2014 2%
Q: Are you planning to give year-end bonuses/ what are your plans for 2014 year-end bonuses for your staff? No bonuses 10% Increasing from last year 36% Decreasing from last year 15% No change from last year 39% Q: In 2014, compared to 2013, did base salaries for your staff increase, decrease, or remain at the same levels? Increased in 2014 66% Same level in 2013 as 2014 28% Decreased in 2014 compared to 2013 6% Q: Do you expect your business to expand or contract in 2015? Expand 74% Contract 8% Stable – no increase or decrease 18% Q: What “outside factor” would make you most apt to increase hiring in 2015? Executives have responded as follows: Increasing consumer demand worldwide 59% EU economic stability 20% U.S. lowering its corporate tax rate 14% Stability in the Middle East 6% Geopolitical stability in Russia 1%
Appointments Rio Tinto Extends Tenure of Senior Exec Team The Rio Tinto board has extended the tenure of chief executive Sam Walsh and chief financial officer Chris Lynch, providing a strong endorsement of their leadership, the Group’s strategy and its focus on driving shareholder value. Rio Tinto chairman Jan du Plessis said “For quite some time, Sam has made no secret of the fact that he loves his job and would like to continue well beyond next year. Given his performance and his enthusiasm to continue in the role, the decision to extend his tenure has been an easy one for the board. In addition, over the past 18 months, Chris has played a crucial role working with Sam and I am therefore pleased that we have agreed with both of them to replace their fixed term retirement dates with long-term, open-ended commitments to the company. “Since their appointments early last year, Sam and Chris have led a transformation of the business and established a track record of delivering on their promises. Rio Tinto has increased cash flows from operations, achieved significant operating cash cost improvements, reduced net debt and refocused capital expenditure on projects with the most compelling returns.”
Sascha Becker Will Join Grünenthal Group as new CFO Sascha Becker will be appointed to the Executive Board of the pharmaceutical company Grünenthal – an independent, family-owned, international research-based pharmaceutical company headquartered in Aachen, Germany, with an objective to become the most patient-centric company in the field of pain and thus to be a leader in therapy innovation – and take over the finance unit as Group Chief Financial Officer in the first quarter of 2015. Since 2003, Sascha Becker (43) has been working for Merck and is currently CFO of the biopharmaceutical division of Merck Serono with an annual turnover of 6.3 billion Euros and is responsible for 10,000 employees. At Grünenthal, he will succeed Stefan Genten whose contract terminates at the end of 2014.
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AEC 2015 Set to Further Boost Bullish ASEAN Markets
Markets such as Indonesia, Vietnam and the Philippines are exhibiting strong economic growth which indicates a very positive outlook for the ASEAN region, believes Barings The roll-out of the ASEAN Economic Community (AEC) in 2015 will boost economic activity across the ASEAN region and support already strong growth in markets such as Indonesia, Vietnam and the Philippines. The AEC, whose aims include a single market for trade as well as full integration into the global economy, will form a bloc of 600 million consumers and help the ASEAN region deliver superior risk-adjusted returns for investors compared to other emerging markets, believes Baring Asset Management (“Barings”). The ASEAN region has recovered sharply from the macro and political turbulence seen in 2013 and widespread structural reforms have heightened the medium term growth outlook. In particular, macro headwinds are past their worst, believes Barings, and corporate earnings are expected to re-accelerate after demonstrating strong resilience. In an indication of this strength, Foreign Direct Investment (FDI) into the ASEAN-5 (Indonesia, Singapore, Thailand, Malaysia and the Philippines) has surpassed FDI into China for the past two years1. SooHai Lim, Investment Manager of the Baring ASEAN Frontiers Fund, comments: “The ASEAN
market’s cyclical recovery from the 2013 and early 2014 volatility has had a tangible impact on investor sentiment across the region, with momentum fully supported by the start of the AEC in 2015. The continued rise of a consumer class is having a very positive influence on economic development and growth: for instance, the percentage of middle class households in Indonesia is forecast to grow from 27% in 2014 to 45% by 20202.” In terms of sectors, the Barings ASEAN Frontiers Fund is currently overweight Consumer Discretionaries and Financials, reflecting the rise and impact of consumer spending across the region. In terms of markets, the Fund is overweight Vietnam, Indonesia and the Philippines. Barings believes Vietnam will continue to attract FDI due to its attractive demographics and competitive labour force which has helped diversify its export base from being focused on agriculture and textiles five to ten years ago, to now having electronics and communications as one of the country’s biggest export drivers. Samsung’s second plant in Vietnam, for instance, will be its largest globally and account for half its smartphone capacity when ready in 2015.
Indonesia is also a favoured market, particularly in light of the election of Joko Widodo as President in July. A significant increase in government infrastructure spending, forecast to rise from 1.6% of GDP in 2014 to 3.7% in 20173, will have a positive impact on the country’s economic growth, believes Barings, while the rise of the country’s middle class will also play a central role. Indonesia’s GDP is forecast to increase from 5.8% in 2013 to 6% in 2015, with EPS growth up from 7.5% in 2013 to 13.5% in 20154. SooHai Lim comments: “One of the main risks to the ASEAN region has been political risk, but this has subsided over the past six months in the two most affected countries, Indonesia and Thailand. We are encouraged by the political developments in Thailand and the stated aims to restore the country to a stable government quickly and efficiently, and have continued to see Thailand as a core constituent in the Baring ASEAN Frontiers Fund. The country not only has a strong relationship with neighbouring Myanmar, which has become a major participant in the ASEAN region, Thailand is also at the centre of the exciting new AEC trade bloc.”
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October 2014 | News & Appointments
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Next Step Taken in Stamping Out International Tax Evasion Unprecedented levels of information will be shared with the UK from countries across the world The UK, alongside 50 other countries and jurisdictions from across the globe, is taking the next step in stamping out tax evasion by signing a new agreement at the Global Forum in Berlin to automatically exchange information. Under the agreement, unprecedented levels of information, including account balances, interest payments and beneficial ownership, will be shared with the UK from countries across the world in an international clampdown on tax evasion. This will increase the ability of HMRC to clamp down on tax evaders, providing HMRC with the details of billions of pounds of assets held overseas by UK taxpayers.
Speaking ahead of the signing ceremony in Berlin the Chancellor of the Exchequer, George Osborne, said: “Today marks a negotiating triumph for Britain, and our close ally Germany, in the fight against tax evasion.” “It was three years ago when, with my German colleague Wolfgang Schäuble, I launched a campaign for a new international deal to catch people who evade their taxes by hiding their money overseas.” “I never expected that within such a relatively short period we would succeed in getting 51 countries to sign up to this agreement.”
“Today we strike a blow on behalf of hardwork ing taxpayers who are cheated when rich people don’t pay their taxes.” “Today we send a clear message to those who still think they can escape making a fair contribution to our public services and to reducing our deficit: you can hide no more; we are coming to get you.” The UK has been leading the international fight against tax evasion, including through its G8 Presidency, and has played a crucial role in driving both the development and the early implementation of the new global standard adopted by the OECD in July this year.
IL&FS Trust Company Limited (‘ITCL’), a subsidiary of Infrastructure Leasing & Financial Services Limited is one of the largest integrated Trust service providers in India. As of June 30, 2014, ITCL serviced approximately USD 77 billion in assets under administration. Established in 1995, ITCL is regulated by Indian Capital Market Regulator ‘Securities and Exchange Board of India’. ITCL provides fiduciary, trusteeship and allied services for an extensive range of transactions in the economy including debt issuances and loans, Securitisation & Structured Finance, Private Equity, Venture Capital Funds, Alternative Investment Funds, Philanthropic objectives, Employee Welfare Programmes and other Special Purpose Vehicles. ITCL acts as a market intermediary and caters to the needs of Corporates, Financial Institutions, Banks, Governments and High Net worth Individuals. ITCL is accredited with ISO 9001: 2008 certification for its strong internal systems for Debenture Trustee and Private Equity/ Venture Capital services. The IL&FS Financial Center Plot No. C–22, G Block, Bandra Kurla Complex Bandra(E), Mumbai 400051 Tel: +91 22 2659 3612 www.itclindia.com
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Nature-Starved Offices “Affecting the Health and Productivity of Employees”
Working in environments with natural elements lead to an 8% increase in productivity and 13% higher level of well-being, says EMEA study The Human Spaces Report, commissioned by global modular flooring experts, Interface, and led by Organisational Psychologist Professor Sir Cary Cooper, has revealed EMEA employees who work in environments with natural elements (such as greenery and sunlight) report a 13% higher level of well-being and are 8% more productive overall.
Interaction with nature is becoming increasingly limited - 63% of office workers are now based in a town or city centre and spend on average 34 hours per week in the office. Yet, the research found workers have an inherent affinity to elements that reflect nature. Office Workers Design Wish List
The academic study of 3600 EMEA office workers found: •
42% have no natural light in their workspace
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55% don’t have access to any greenery
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7% have no window in their workspace
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15% of Spanish workers had no window and were the most stressed workforce
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Germany and Denmark reported the least number of workers with no windows (2% and 3% respectively), and had the happiest workforces
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The top five natural elements on EMEA office work ers’ wish-lists: •
Natural light
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Quiet working space
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A view of the sea
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Live indoor plants
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Bright colours
Commenting on the research findings, Professor Sir Cary Cooper said: “The work environment has always been recognised as essential to employee well-being and performance but often purely as a ‘hygiene factor’. The Human Spaces report clearly illustrates the connection between the impact of working environments and productivity. It’s no coincidence that the most modern employers now take a new view, designing environments to help people thrive, collaborate and be creative. Being connected to nature and the outside world, biophilic design, to give it its real name, is a big part of that.” Commenting on office design, Mandy Leeming, Design and Development Manager (UK) at Interface, said: “When it comes to creating office spaces that positively impact health, performance and concentration, it’s about interpreting the nuances of nature that we subconsciously respond to, such as colours and textures. Ultimately improving the wellbeing, productivity and creativity of the workforce is key to the success of market leading organisations.”
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Efficiency Under Threat for IP Teams as Workload Pressures Continue to Increase 77% of corporate IP professionals and 64% of law firm practitioners highlight volume of work as a major obstacle, industry survey shows Intellectual property (IP) professionals around the world are facing growing threats to their efficiency as the increasing awareness of IP’s strategic value drives a continued upsurge in work. At the same time, corporate IP teams are struggling to cope with ongoing budget and resource pressures, while, for law firms, attracting new clients and growing profitability are seen as major challenges.
Reflecting greater global recognition of the value of IP and a trend towards more strategic IP management, corporate respondents report that (other than budget/resource pressures) the factors that are having the most impact on their work include the need for greater alignment of IP with business strategy (59%) and increased pressure to optimise/monetise IP portfolios (49%).
These are some of the key findings in CPA Global’s 2014 State of the IP Industry Survey. More than 1,600 IP professionals from corporates and law firms responded to the survey, which was commissioned by CPA Global, the world’s leading IP management software and services company.
The importance of aligning IP coverage with a company’s broader business strategy is reinforced by the fact that 52% of corporate respondents cite failure to achieve such alignment as a main risk to their company’s IP assets. Other main risks identified by corporate respondents include litigation from competitors (50%) and limited budget (48%).
The survey reveals that 77% of corporate IP professionals and 64% of law firm practitioners see increasing volumes of work as a key threat to the efficiency of their IP team. The other challenges to efficiency most frequently cited are ‘too much administration’ (64% corporates; 47% law firms) and ‘ability to scale up or down’ (58% corporates; 55% law firms). Meanwhile, 63% of corporate respondents report that increased pressure on budgets and resources is one of the factors most impacting the work of their IP team. This is echoed by law firm respondents, with 62% highlighting such pressures as a major influence on their clients’ IP needs.
In terms of the challenges facing IP practices, those most frequently cited by law firm respondents are attracting new clients (75%), growing profitability (67%) and pressure for fixed-fee billing (53%). The thorny issue of fixed-fee billing featured prominently in law firm responses. When asked to identify the services where clients were seeking fixed fees, law firm respondents highlighted several areas, with domestic patent filing and prosecution (58%), overseas (inbound) patent filing and prosecution (54%), trademark renewals (53%) and patent renewals (51%) being most prominent.
IP work is increasing in a number of different areas. For corporate respondents, the three areas of growing activity most frequently cited are patent searching (52%), patent prosecution (45%), and domestic patent filing (44%); whereas for law firm respondents they are patent prosecution (48%), domestic patent filing (46%), and litigation (42%).
Simon Webster, Chief Business Development Officer at CPA Global, said: “The IP market continues to heat up, with the year-on-year increase in global patent filings showing no sign of slowing down. In such a highly competitive market, IP professionals are increasingly being called upon to operate at a more strategic level, helping their companies or clients to realise the full value of their IP portfolio and ensure alignment with the organisation’s broader business strategy.
“The growth in patent searching activity for corporate IP teams suggests that this is increasingly being seen as a key component of strategic IP management and an essential step in developing a quality patent portfolio. Patent search helps businesses better understand the technology landscape in which they are operating and, therefore, to determine how best to develop and deploy their IP assets.” “However,” Webster added, “the survey also shows that resourcing remains a major issue, with greater pressure to do more with less. Respondents working in law firms report pressure from all sides as they seek to differentiate themselves from their competitors in order to attract and retain clients. The solution in many cases is to move up the value chain, taking on a more strategic advisory role and providing clients with greater insights into portfolio management and optimisation. This is important, both in terms of strengthening client relationships and increasing income for the law firms. “The ability of IP professionals to focus on higher-level and higher-value work is being facilitated to a large extent by third-party IP management service and software providers, such as CPA Global, who help free up internal resources by handling many of the important, but more administrative, time-consuming tasks. We are increasingly supporting corporate and law firm clients, not just in terms of increasing cost efficiency and reducing risk, but also in helping them make more informed decisions through the data and market intelligence that is provided through our tailored IP software solutions and specialist IP services such as patent search and analytics.”
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Funds | CTA & Global Macro Managers Vs Banks’ HFT Desks
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CTA & Global Macro Managers Vs Banks’ HFT Desks P
art 1 of this series of articles discussed the lagging performance of CTA and Global Macro managers, and raised the possibility that the financial markets have been fundamentally compromised. Part 2 showed how the change in market structure and available technological means increased the possibility of market abuse by HFT firms, and particularly the large banks. Part 3 herein explains why HFT desks have an interest in creating a specific volatility pattern in the market, and which they can exploit in a recurrent fashion. Coincidentally, such manufactured volatility patterns collide headon with many global macro and CTA strategies. Spiking the Volatility Among the first lessons taught to new bank hires is the one of “volatility is your friend”. The ups and downs of markets regularly leave some clients with gains and others with losses, prompting them to send more trade orders than they’d do otherwise. The indirect effect of volatility results in added brokerage fees and makes this monkey a banker’s best friend. With the large banks having both the scale and the HFT technology to shock markets and individual securities, they can easily knock the price up or down abruptly, and produce on-demand price volatility to exploit. Once a market or security is spiked, the bid-ask spread automatically widens, options premiums explode, and it becomes more lucrative to trade around such spreads.
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This unexpected increase in volatility confuses the rest of the market and prompts many traders to exit or reduce their positions, while scrambling for news and explanations. On the other side, the trading desk that spiked the price is at an informational advantage, expecting the effect, and already positioned to profit from its deed.
urally without an excessive or exogenous volatility. Capturing such natural trends and market moves have produced a decent profitability record in the past as a trading approach, but apparently failed to maximise commissions for brokers and banks, and whence the attempts at picking on their position and shaking them out as often as possible.
Would it be a stretch of the imagination to assume that some large HFT banks or firms could engage in such market behaviour?
Erratic volatility has always been the Achilles’ heel of directional traders in fact, and especially for CTA managers. The reason is that a CTA strategy promises to deliver risk-adjusted returns, and hence, positions are constantly adjusted to match the prevailing volatility. Therefore, nothing could be more harmful to a CTA than a high variability in the volatility level, and CTA positions are often first in line to buffer and stem the HFT market attacks.
When independent counsel Kenneth Starr asked Bill Clinton why he had an affair with Monica Lewinsky, the answer was: “Because I could.” Good for Banks, Bad for Trading Managers If excessive intraday volatility is desirable for the banks to generate account activity, it is usually harmful for directional strategies typically employed by CTA and Global Macro (GM) managers. Unlike strategies such as long-short equity or classic fixed-income trades which are to some extent market-neutral and impervious to small market dislocations, this is not the case for both these global managers that often seek specific market moves and typically apply leverage. CTA’s & GM’s often place directional trades with preset risk limits and objectives, and they both aim at making money from market trends that develop nat-
Global Macro portfolios are less affected perhaps, but certainly not immune, and given that they tend to cling more to their positions as a group, and that their investors are willing to sustain a higher level of volatility. In both cases, directional managers are prime candidates for HFT predatory trading that aim at pushing the price in both directions during a single market session and triggering reactions to be monetised. By being first to scan the order book, being closest to posted liquidity, and in a first position to make a trade, low-latency algos make the entire difference in the final trading outcome. A CTA or GM manager
CTA & Global Macro Managers Vs Banks’ HFT Desks | Funds
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In the third and final part of his focused look at CTA and Global Macro Managers, Karim Taleb explains why HFT desks have an interest in creating a specific volatility pattern in the market, and which they can exploit in a recurrent fashion
The discussion of the specific technical abuses and predatory trading types is outside the scope of this article, but the point is that the algorithms which are co-located to the matching engines at the exchanges have placed all non-HFT traders at a structural disadvantage by creating a two-tier market of quoting and trading. When an HFT prop desk is scalping profits with a high trading advantage, odds are that its trading counterparty which does not benefit from the same level of access and speed is taking an almost guaranteed loss, and added to the extra commissions and slippage entailed. Betting Against the Client While spiking the intraday volatility is a mild form of predatory trading meant to widen the spreads and generate short-term trading activity, predatory trading in its full form aims at frying a bigger fish, and pushing the prices in a more sustained fashion. Betting against the client is not a new issue. It is a basic conflict of interest which took centre stage in the aftermath of the housing market crash of 2008, and which led the SEC to sue Goldman Sachs for fraud.
The case of the CTA and Global Macro managers is particularly interesting, and as their positions are often in competition, sequential, or complementary. So, by simply watching the trading activity of both groups, very valuable information is revealed to the banks related to these managers’ positions and positioning, expectations and intentions in the market.
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Clients often turn a blind eye to the access that banks have into their order flow, and while one would expect such information to be held in strict confidentiality, this may not always be the case and is difficult to ensure
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could very well see its position stopped out at first, and then shortly afterwards see the price reverse back to the level where it started in some sort of a rapid price U-turn.
Such privileged access into the clients’ order flows could be used against those clients in the form of specific predatory trading tactics. To make the situation even worse, some inexperienced managers would even use the “execution algo” of their bank to work large trades, not suspecting or knowing who sees this precious information and how it could be used. While there are rules and regulations such as a “Chinese Wall” to theoretically prevent internal conflicts from arising, or rules against trading on insider corporate information, banks remain in a distinct insider position from which they can watch a hedge fund’s trading activity, and there remains room for abuse and conflicts in the order handling area. The point here is that clients often turn a blind eye to the access that banks have into their order flow, and while one would expect such information to be held in strict confidentiality, this may not always be the case and is difficult to ensure. Worse, some banks could be using a client’s information to gain a
Wealth & Finance | August 2014 |
Funds | CTA & Global Macro Managers Vs Banks’ HFT Desks
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trading advantage, be it knowingly or unknowingly, over that same client. Such privileged information gleaned from the CTA and Global Macro managers could be fed into an anonymous HFT algo or other, and in due time, favor the trading positions of the banks at the expense of their clients. Guaranteed vs. Non-Guaranteed Trades One of the interesting attributes of some HFT Trades is that they are structured at the outset to generate an almost risk-free return. A good and typical HFT trade has the quality of making money in the best case, or breaking even in the worst case. The net effect is a quasi-guaranteed profit for the bank. The corollary of this result is a guaranteed loss to the bank’s counterparties, such as for a client interfacing with HFT flow. From that angle, many CTA and directional managers could have been played like yo-yos by HFT algos which inflicted higher slippage, higher turnover cost, and higher trading losses. Many institutions are now asking to have their orders executed off-exchange on dark pools, to make sure they’re not interfacing with the HFT algos. What is rather clear is that the structure of the market in its current form gives an unfair trading advantage to a low-latency HFT trading firm, and where, for instance, speed essentially provides a free ‘right of first refusal’, a free option, on order flow. When one party has guaranteed profits as a function of flow, the remaining non-HFT players will sure have guaranteed losses, or at the very least, higher execution costs. Following the Money Trail “In the quarter ended March 31, of 2010, Goldman made money on every single trading day, and made over $100 millions a day on 35 days.” (Bloomberg News.) Shocked analysts noted that the trading profits represented over 75% of the bank’s revenue,
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and in a business where one would expect the bulk of a bank’s profits to derive from investment banking, underwriting, and advisory, like with most banks. Is the public supposed to conclude that Goldman employs such amazing traders who consistently outwit everybody else?
employees to say what they need to say on a witness stand to maximise the possibility of sending him to prison? Why exploit the ignorance of both the general public and the legal system about complex financial matters to punish this one little guy?” Conclusion
“Clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent…” (Bloomberg News.)
With directional managers like CTA and Global Macro being the most sensitive to volatility, it is not a surprise that their performance as a group has deteriorated noticeably over the past 5 years.
With such an extreme divergence, it seems clear that the bank’s own trading returns are too abnormal to be the result of research or staff competence. Further, and around that same period in 2011, Goldman decided to close its flagship Global Alpha quant fund, and after posting a string of big losses and significantly lagging its peers .
Proprietary trading desks of the large banks using HFT and low-latency technologies may have seriously disrupted the market’s integrity and stability. At a minimum, the increase in intraday volatility has undermined the price quality of some markets and securities, and rendered them less desirable by investors.
Research and trading skills apart, we mention the striking case of Serge Aleynikov, the former Goldman Sachs junior employee who was sent to jail within days under official mention that the computer code he had could be used to manipulate markets. According to an excellent article by Michael Lewis, the most interesting part of this case is not whether the claims made had any merit, but that there was no due process; the man was indicted based on a mere allegation and apparently was not given a chance to defend himself . We may not know all the details of this money trail, or to what extent the trading results of the bank are attributed to HFT vs. non-HFT, but what we do know is that there is no smoke without a fire, and that something looks fishy in this mosaic. Quoting Lewis: “The real mystery, to the insiders, wasn’t why Serge had done what he had done. It was why Goldman Sachs had done what it had done. Why on earth call the FBI? Why coach your
This could be a warning message about something being fundamentally wrong in the current market structure and the deployment of HFT.
Predatory trading practices such as shocking individual markets or securities give an unfair advantage to the large banks to the detriment of most other participants. Such practices fall outside the market rules understood by most, and require serious restrictions and scrutiny.
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.
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Wealth & Finance | August 2014 |
Banking Zone | A Return to Old-Fashioned Banking
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A Return to OldFashioned Banking The recovery has benefitted large corporations but has not brought the fresh capital that mid-sized and small businesses need to grow. But alternative lenders, like Brevet Capital, are filling the void left by banks and other large institutions
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mall and middle market companies that weathered the credit crisis of 2008 have done so without the help of loan financing from traditional banking centers. The recovery has benefitted large corporations but has not brought the fresh capital that mid-sized and small businesses need to grow. The growth of companies with less than $500 million in annual revenue is integral to the economy since they account for the bulk of jobs created. Alternative lenders, like Brevet Capital, are filling the void left by banks and other large institutions. Lack of credit availability for small and mid-sized companies is a market inefficiency. Providing financing to this part of the market is difficult and frequently unprofitable for banks. Crisis fallout has left banks with increased capital requirements
and restrictive regulatory guidelines to follow. As a result lending is down 21% to small businesses since the recession according to banks’ balance sheets.¹ The head of the Small Business Association points out that a $100,000 loan has the same processing costs as a $1 million loan making lending less profitable for banks.² To make matters worse, the number of regional banks has shrunk by half since the 1980s.³ The economy won’t improve if the middle market’s access to the capital markets does not increase significantly. The inability of these firms to grow from only retained earnings means lack of job creation. According to an industry survey, half of the companies responded that lack of financing is preventing growth in his or her business.4 Middle market businesses contribute roughly half of
the GDP and making them stronger is imperative to full economic recovery. 5 There are a variety of alternative lenders narrowing the credit gap of Main Street: private equity, FinTech (financial technology platforms), and private lenders (non-bank fund managers). Until recently these solutions have not been attractive to business owners, but by utilizing old fashioned banking practices to manage lending, solutions like Brevet Capital are changing the game. By providing expansion capital to business owners, growth in these middle market companies is creating new jobs and increasing capital investment. From Brevet Capital’s perspective, it’s a win-win situation for both its investors and its borrowers.
1&2 http://www.inc.com/jeremy-quittner/karen-mills-harvard-business-school-small-business-lending.html 3 http://www.businessweek.com/articles/2014-07-25/expensive-small-business-lenders-are-unregulated-dot-should-they-be 4 http://www.inc.com/jeremy-quittner/restricted-capital-access-restrains-business-growth.html 5 http://www.creativeengineinc.com/assets/ddj_whitepaper.pdf
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A Return to Old-Fashioned Banking | Banking Zone
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Wealth & Finance | August 2014 |
Banking Zone | Preserving Wealth Across Generations
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Preserving Wealth Across Generations
It’s nearing its two hundredth birthday, but Brown Brothers Harriman & Co.’s banking practice remains America’s only truly private bank. We take a look at how the firm’s strong core values have helped drive the business’s continuing success
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any firms lay claim to the business of private banking, but only one bank in the United States remains private in the most literal sense of the word. Founded as a private partnership in 1818, Brown Brothers Harriman & Co. (BBH&Co.) remains a general partnership today as it closes in on its two hundredth birthday. The men and women who own the firm do so outright, and share joint and several liability for the operations of the business. The firm credits that ownership structure not only for its ability to survive and thrive through two centuries of economic and market cycles, but also for the core values that drive the business to this day. In each of its businesses, BBH&Co. desires to earn the role of trusted advisor to its clients, and understands that this objective requires careful stewardship of a small handful of distinctly non-financial assets. Integrity is of paramount importance at the firm, and the partners and employees appreciate the inherent fragility of that asset. Indeed, the financial crisis of 2008-09 laid bare the conflicts of interest that lie at the foundation of many financial institutions. The
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alignment of interests that naturally arises when a firm’s owners and managers are the same group of individuals ensures that integrity remain a non-negotiable value at BBH&Co., and one that defines daily interaction with clients. As befits a partnership organisation, collaboration is a defining competence of BBH&Co. as well. There are no corporate silos or fiefdoms, and colleagues routinely reach out across lines of business to build customised solutions to clients’ challenges. Indeed, other than for privacy sensitive areas such as human resources, the firm’s 17 locations worldwide have very few true offices. Most professionals – all the way up to the managing partner – prefer to work in an open office environment. BBH&Co.’s culture of teamwork and openness is reflected in the very architecture of its physical space. BBH&Co. has no desire to be a financial services supermarket, offering a wide array of services to a wide array of clients. The firm instead prefers to focus on three core businesses where it can develop and deliver world class solutions to a
discerning base of clients. In its Investor Services business, BBH&Co. offers a suite of services to leading global asset gatherers and financial intermediaries. The firm’s Investment Management business provides differentiated investment approaches in the areas of public equity and fixed income. Private Banking works with individuals and families with substantial financial or business wealth to help them manage, protect, grow and transition that wealth. Brown Brothers Harriman’s Private Banking practice focuses on individuals and families with at least $10 million of investable wealth, and among the firm’s clients are some of the wealthiest families in the Unites States and abroad. The firm’s clients tend to be philanthropically minded, which has led to the introduction of a number of endowments and foundations to the client base over time. Whether institutions or individuals, a common thread of the firm’s clients is an appreciation for an investment approach that is predicated on the belief that the ultimate objective of investing is the preservation and growth of wealth.
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The core philosophy of the firm’s investment approach is that capital is sacrosanct, and that the first and highest goal is to preserve that capital
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Although not the case throughout the practice, many of the firm’s clients have built their wealth over time through the ownership of a private business, and welcome the opportunity to engage with a privately-owned bank to manage that wealth. The alignment of interest embedded in the firm’s ownership structure is important to all of its clients, but those clients who have owned and managed a business especially appreciate the benefits of working with an owner managed investment advisor. BBH&Co.’s Private Banking business has built a suite of services that are particularly suited to meet the needs of business owners and families with meaningful wealth. As a bank, the firm is able provide debt capital as and when appropriate for businesses in growth mode. If a client’s business is more in need of intellectual capital than financial capital, the Corporate Advisory Group draws on decades of combined knowledge and experience to help businesses grow, transition ownership, identify leadership and analyse strategies. As a private equity investor, BBH&Co. can also provide equity capital, or advise on the best way to meet that capital need even if the firm itself is not the provider. Finally, the firm’s Investment Advisory and Trust practice helps clients manage the earnings that a principal takes out of a business, or the proceeds of the sale of that business. The firm also offers loans secured by assets under management, allowing clients to borrow with less documentation, more customised terms, at a competitive rate, and without disrupting investment portfolios. The key element of the Private Banking practice is that these services are delivered in an integrated
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Banking Zone | Preserving Wealth Across Generations
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The core philosophy of the firm’s investment approach is that capital is sacrosanct, and that the first and highest goal is to preserve that capital. That isn’t a statement about conservatism for the sake of conservatism, but is instead a recognition that preservation of wealth is an essential first step in enjoying the long-term benefits of compounded investment returns. Stated differently, preservation leads to growth, and falling short on the goal of preservation makes growth impossible to obtain. That investment objective leads the firm’s investment professionals to define risk in a very different way from most other investors. Most institutional investors, and most academic research on investing, define risk as volatility of returns. But BBH&Co. believes that if an investor’s goal is to preserve and grow wealth, then risk is defined as the inability to meet that goal. Given that more robust definition of risk, BBH&Co. finds that the best way to protect against the loss of capital is not through diversification for the sake of diver-
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Asset allocation, portfolio construction and manager implementation are all done in collaboration with wealth planners to ensure that the asset location is optimally designed to minimise taxes, protect assets and ensure that those assets are passed on to future generations or to charitable intent
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fashion, with advisors working collaboratively to craft solutions customised to a client’s particular set of needs.
sification, but by rigorous fundamental research leading to the identification of securities trading at a meaningful discount to the intrinsic value of the business. Indeed, this understanding of risk leads to more concentrated portfolios, as analysts prefer to know a smaller number of investments deeply rather than a large number more superficially. This definition of risk holds implications for asset allocation and portfolio construction as well. Asset allocation for BBH&Co.’s Private Banking clients is driven largely by relationship managers who invest time and energy in understanding what a client needs from their investment portfolio in terms of return, liquidity, yield, etc. A team of dedicated investment analysts identify investment managers to implement those needs, and the firm uses both internal investment solutions from its Investment Management business as well as third-party managers. Importantly, professionals from BBH&Co.’s Investment Management business drive the manager selection process for Private Banking. The firm believes that it is an advantage to have talented investment professionals deeply involved in an effort to identify and engage talented investment managers for the Private Banking platform.
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Asset allocation, portfolio construction and manager implementation are all done in collaboration with wealth planners to ensure that the asset location is optimally designed to minimise taxes, protect assets and ensure that those assets are passed on to future generations or to charitable intent. Wealth planners in the firm’s Private Banking business are trust and estate attorneys who have stepped out of the practice of law to work more deeply with clients to ensure that investment planning and wealth planning are thoroughly integrated activities. Once again, a focus on preserving wealth weaves its way throughout the Private Banking business at BBH&Co. BBH&Co. attributes its successful longevity in part to a consistency of philosophy, and the partners of the firm believe that consistency is an essential element of success. Accordingly, the firm takes great care in only working with investors who share the belief that investing is a long-term and patient pursuit of capital preservation and growth within a context of prudent risk management. Careful client selection contributes to the firm’s investment and business success, as it enables professionals to focus on meeting the needs of compatible clients rather than be pulled in multiple directions by inconsistent de-
mands. Like-minded clients also form the BBH&Co.’s growth strategy, as the firm relies on referrals from deeply satisfied clients to attract other investors who share the firm’s approach to investing. The biggest challenge and opportunity facing the private banking industry, as well as BBH&Co.’s Private Banking business, is the enormous transition of wealth that is likely to take place over the next generation. Household wealth in America alone topped $80 trillion in 2014, and the wealth being created in emerging economies could easily swamp that figure in a generation or two. As baby boomers in the United States age, so will their investment needs, and so will the necessity of planning for a transfer of that wealth to younger generations or philanthropic entities. Younger generations have different needs, and BBH&Co.’s Private Banking business in investing in the resources to make sure those needs are identified and met. The firm is actively hiring more wealth planners to aid in those transitions, and is adding resources to its Corporate Advisory Group to provide robust advice to those families where wealth takes the form of a business rather than financial assets.
BBH&Co. was gratified to be named Best Overall Private Bank by Wealth & Finance, and there is no doubt that third party recognition such as this is valuable in a crowded marketplace where it can be difficult to differentiate between service providers. Yet the ultimate measure of business success is client retention, and BBH&Co.’s Private Banking business boasts a client retention rate of over 99%. From the date of its founding, the owners of the firm have always believed that if they take care of clients first, profits will follow. The alignment of interest created by the partnership structure ensures that this edict won’t be forgotten. As a matter of fact, partners of the firm not only own and manage the business, they are themselves clients of the same investment solutions offered to the firm’s Private Banking clients. Many of the firm’s clients have done business with Brown Brothers Harriman & Co. for multiple generations, which stands as the ultimate proof statement of the value of the consistency, durability, and integrity that have defined the firm for close to two centuries.
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Wealth & Finance | August 2014 |
Wealth Corner | Equities: An Attractive Premium?
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Equities: An Attractive Premium? Keith Wade, Chief Economist and Strategist at Schroders, gives his views on equities as an asset class in the current economic environment
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quity markets have experienced a setback recently and this has led many strategists to question the longer term case for the asset class. However, we remain positive on shares and believe that equities can still generate an attractive premium for investors. There has been a change in the relationship between the global equity index and sovereign bond yields, from one where both moved in the same direction to one where the two have parted company. Some see this as setting up a battle between bond and equity markets: falling bond yields are often associated with expectations of weaker growth, which is a bad outcome for corporate earnings and thus equity prices. Since global growth expectations have been falling this year, the argument goes that equities will soon start to track bond yields lower, and the correlation between the two will become positive again. While it may well be that bond markets are correct about global activity, we should bear in mind that equity markets also benefit from falling interest rate expectations. Equity prices reflect the discounted value of future profits and so can be boosted by a lower discount rate as bond yields decline. This suggests that the question as to whether it is equity or bond markets that are right is far more nuanced than a straight call on growth. Equity investors may well judge that global growth and earnings prospects are subdued, but still see shares as attractive assets given the low discount rate, or to put it another way, the low returns offered on bonds. Our seven-year return forecasts show equities making single digit returns, but outperforming cash
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and bonds. On this basis, absolute returns may not be as high as in the past, but global equity markets still offer a risk premium over bonds on our projections. Arguably, this risk premium (which ranges from 1% to 6% depending on the market) is too low to compensate for the risks associated with equities, but many investors have been reluctant to cut exposure for several reasons. One is TINA, i.e. ‘There Is No Alternative’: bonds and cash simply do not deliver the returns needed to meet the objectives of savers. Investors have no option but to accept higher risk if they wish to meet their future income requirements. Another important factor supporting equity exposure is that policymakers are committed to economic recovery. Reviving and sustaining economic growth, as well as reducing unemployment, are the priorities. Consequently, in the debate about sustainable growth and corporate earnings, there is a sense that central banks will respond to economic weakness, just as the European Central Bank has recently done. However, the use of central bank forward guidance has created a perception that central banks are underwriting equities, known in the markets as the “Draghi put”, for example. When accompanied by massive liquidity provision, the effect has been to suppress volatility, creating an environment where investors are willing to accept lower returns whilst taking greater risks. Of course, this is a dangerous process as it can, and has, led to the creation of bubbles in asset prices. The concern is that current central bank policy will lead to a massive misallocation of
capital and the same problems which led to the Global Financial Crisis. The bubble would be in a different market but may prove as damaging. However, such concerns have been downplayed by Federal Reserve Chair Janet Yellen. In recent comments to Congress she indicated that she would only be worried if financial market bubbles threatened a systemic crisis and, as the banks are now better capitalised, that risk is low. The question for investors is whether this environment has made equities too expensive. There are certainly pockets of the market which seem frothy, but in aggregate we do not see significant overvaluation. For example, price-to-earnings ratios have risen over the past year and are generally above average but are not extended, with most markets trading well within their historical range. The exception would perhaps be the European markets of Spain, Italy and France which seem to be discounting a significant recovery in earnings. At the other end of the spectrum, Japan and the emerging markets look attractive on this metric. Amidst concerns about an end to the equity bull market and the seemingly conflicting behaviour of bonds we remain positive on shares. There may be an element of ‘TINA’ about this but we still believe that equities can generate a premium for investors. Moreover, policymakers continue to target growth and in doing so offer support to equities.
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There are certainly pockets of the market which seem frothy, but in aggregate we do not see significant overvaluation
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Wealth & Finance | August 2014 |
Markets Matters | Mexico: An Important Moment
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Mexico: An Important Mom Gilberto Alfaro, Energy and Natural Resources Leader at KPMG in Mexico tells us how the nation, as well as foreign investors, stands to benefit from the major reform to its energy sector
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PMG in Mexico has 175 Partners and more than 2,800 professionals in 18 offices strategically located throughout Mexico, and offers audit, tax and advisory services to local, national and multinational clients. The firm’s experience in the energy sector, both in Mexico and abroad, gives it a unique perspective of the needs that its clients face, as well as the solutions to allocate the same in a satisfactory way. “We’re focused on helping businesses to achieve their goals,” says Gilberto Alfaro, Energy and Natural Resources Leader at KPMG in Mexico. Asked what distinguishes KPMG from its competitors in Mexico, Alfaro says, “We have a very different business philosophy. We are designed to help our clients with a comprehensive approach. We design our services with the aim of solving their problems and challenges, and not just selling a product. In doing so, all of our specialists, including those who are living outside of Mexico,
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they participate and deliver their experience and knowledge in a single, multi-disciplined chain. This helps our clients to really achieve their business goals. That is our approach, and we do this with local knowledge, bearing in mind that Mexico has some cultural and infrastructural differences that need a specific approach and knowledge to really customise these solutions and making sure that they will work best for our clients.” Mexico is in the midst of major reform to its energy sector. “In Mexico we are now facing a very important moment,” Alfaro says. “Last year and this year there have been a number of energy reforms and structural reforms. We expect to have significant economic and social development in the coming years, in the medium term. “We are expecting a significant amount of private investment. For sure most of this investment will come from abroad. Basically, in the exploration and exploitation areas, the areas where Pemex our Mexican company does not have enough op-
erational and technological experience to explore those areas in an efficient manner.” Press reports have suggested that the energy reforms, which, for the first time in its 76-year history, will end state energy company Pemex’s monopoly over the country s energy industry and thus open up the sector to competition from foreign oil companies, and which were signed into Mexican law in August, will increase output and give a huge boost to the country s economy. Can the reforms really be that successful? “We think so,” says Alfaro. “However, we will face some challenges. Firstly, we are now seeing a decline in crude oil production. But that is because of the structural approach that for some years has been applied by Pemex. We think that with the energy reform Pemex will do better because they will acquire joint ventures or other schemes, with more investment and access to the latest technology. “Also, foreign companies will come to Mexico and invest in those high-risk areas where Mexico
Mexico: An Important Moment | Markets Matters
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does not have experience. So as a final result we expect an increase in crude oil production. This is not going to be easy because for a number of years we have been facing a trend of low production. But in the next two years we will see more significant production. “And in terms of electricity because the energy reform also takes into account a significant restructuring of our electricity production we will see more offers in the electricity sector basically because now the private sector will be able to generate electricity to be sold on the wholesale market. “Electricity will be produced at more competitive rates. This will encourage companies to relocate their premises to Mexico, not only because they will have access to more competitive energy costs, but also a more stable supply of energy.” From 2014 to 2018, Alfaro says, Mexico expects investment of around US$600bn in infrastructure. “From that figure, around 50% will be dedicated
to the energy sector. This includes a significant proportion of private investment. This means that we will have a lot of business opportunities in terms of infrastructure. And companies that are advanced in terms of technology, best practices, service approach they will be very successful in this new open market.” Challenges for foreign investors lie firstly in understanding Mexican culture, Alfaro says, and adhering to Mexico s regulatory structure, which is different to that in more developed countries. Alfaro expects that, between now and 2018, the energy reform will lead to the creation of half a million new jobs. “Right now we have a lot of deficiencies in our infrastructure and a need for new facilities, and these will support the creation of new jobs,” he says. But this also poses a challenge – namely, a shortage of skilled workers. “We currently do not have enough skilled people,” says Alfaro. “However, what we are seeing is a very quick shift from the
universities and other educational centres to complement their skills. We do for professions related to oil exploration, all the related sciences, as well as in the legal and administrative areas.” It’s an exciting time for Mexico, Alfaro says. “This is a very important moment, from a Mexican perspective. We are doing our best to open this sector, and that really leverages our future economic and social development. That is a key issue for Mexico. If we do this in a good way, we will benefit in the long term. If we fail, it will be terrible. “All businesses which have operated in the energy sector before the reform will need to redesign their business, because they will now face new competitors and they will also face the new reality of this industry. Also, from a foreign perspective, this will trigger opportunities, but they also need to embark on joint ventures. Timing is important, but also knowing the Mexican market is key.”
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Wealth & Finance | August 2014 |
Taxing Times | Embracing Social Change
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Embracing Social Change People feel they could be doing more for positive social change, and there is more work to be done, according to a new study by Walden University
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ven in a world of instant gratification, adults across the globe are working toward longterm positive social change. According to Walden University’s 2014 Social Change Impact Report, more people believe it is important to contribute to long-term changes than say it is important to contribute to immediate changes. They are also more likely to say their efforts today contribute to positive social change in the future compared with immediate changes. However, while 77% of social change agents, on average, believe they are confident their level of involvement is making a difference, adults are less likely to believe they are impacting systemic change, such as changing social structures and systems that often impact long-term change. Commissioned by Walden and conducted online by Harris Poll June 1–17 2014, the fourth annual survey about the state of social change around the world includes the perspectives of more than 9,000 adults in Brazil, Canada, China, Germany, India, Jordan, Mexico and the United States. This year’s report builds on the findings from the 2011–2013 reports and was designed to examine people’s perceptions of the impact of their engagement in positive social change. “The 2014 Social Change Impact Report provides insight as to where social change agents believe they are having the most impact and how that varies with different levels of engagement in positive social change,” said Dr. Cynthia Baum, president of Walden University. “This year’s findings tell us that engage-
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ment in social change is highly valued, but that the majority of us feel that we–and others–could be doing more to create an enduring impact.”
trast, an average of 61% of adults say it is extremely or very important to contribute to immediate changes that improve people’s lives now.
The State of Social Change Today
Adults also believe it’s more likely their involvement today contributes to long-term change. Six in 10 adults who have ever engaged in positive social change (58%, on average) say it is extremely or very likely that their involvement with positive social change today contributes to long-term changes that will improve people’s lives in the future compared with slightly less than half (46%, on average) who say their involvement today contributes to immediate changes that improve people’s lives now.
Overall, a majority of adults (79%, on average) agree they can make the world a better place by their actions, and half of adults feel they are having a major or moderate impact on improving the lives of individuals in their community (53%, on average) and on creating a better world for everyone to live in (49%, on average). People also report they are influencing the actions and attitudes of others to improve people’s lives. Half of adults feel they are having a major or moderate impact on changing behaviors of others (53%, on average) and changing attitudes and beliefs of others (52%, on average). However, people believe they are having less of an impact on systemic changes, where only 40%, on average, feel they are having a major or moderate impact on changing social structures and systems. Adults in Brazil (70%), India (63%) and Mexico (63%) are most likely to feel this way. Social Change Agents Focus on the Long Term An average of 73% of adults who have ever engaged in positive social change say it is extremely or very important that a person’s involvement with positive social change today contributes to long-term changes that will improve people’s lives in the future. In con-
People Feel There Is More Work to be Done Even though levels of engagement in social change remain steady overall and confidence levels are high, people around the world feel they could be doing more. More than three-quarters of social change agents (77%, on average) say they are confident their involvement is making a difference. Adults in Brazil (85%), India (85%) and China (84%) are the most likely to agree. Only 27% of adults overall are extremely or very satisfied with how much the lives of individuals are improving, and a similar number (24%, on average) are not at all satisfied.
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On average, only 36% of adults are extremely or very satisfied with the frequency they are engaged in positive social change activities and also with how much they are helping to improve the lives of individuals and communities. Adults in Brazil and India are the most likely to be extremely or very satisfied with the frequency they are engaged (51% and 47%, respectively) and with how much they are helping (53% and 51%, respectively). Adults in Jordan, Canada and Germany are the least likely to be satisfied with the frequency they are engaged (25%, 27% and 29%, respectively) and with how much they are helping improve the lives of individuals and communities (24%, 25% and 26%, respectively). Even fewer adults are highly satisfied with how much people in their country are involved in positive social change activities or with the availability of opportunities for engagement. One-quarter of adults (25%, on average) say they are extremely or very satisfied with how much people in their country are involved in positive social change activities. Fewer than four in 10 adults (36%, on average) say they are extremely or very satisfied with the availability of opportunities to be involved. Satisfaction with their fellow countrymen’s involvement in positive social change activities (40%) and the availability of opportunities is highest in India (50%). Involvement in Positive Social Change Remains Widespread and Diverse As they did in 2013, most adults (82%, on average) in 2014 report they have done something to engage in positive social change in the past six months. Adults in Brazil (90%), India (87%) and Mexico (87%) are most likely to have engaged during that time while those in Germany (68%) are least likely to have done so. While nearly three in 10 adults (28%, on average) do something at least once a month, adults most likely to engage monthly live in Brazil (39%), Mexico (34%) and Jordan (33%) whereas adults living in China (17%) and Germany (21%) are least likely to engage this frequently. The most common way adults across the globe engage in social change is using digital technology (48%, on average), which includes those who post a comment on a positive social change issue on a website, text messages related to a positive social change issue or participate in a social networking site dedicated to a positive social change issue. Using digital technology is the top social change activity in Brazil (63%), India (61%), Mexico (60%), China (59%) and Jordan (53%). Donating money, goods or services is the top social change activity in Canada (51%), Germany (38%) and the U.S. (51%).
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Finance Focus | A Year on from MINT
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A Year on from MINT It’s a year since Mexico, Indonesia, Nigeria and Turkey were dubbed the new generation of market-leading economies. Simon Featherstone, Global Chief Executive of Bibby Financial Services, asks whether the four nations have lived up to their potential
Perhaps thanks to its grouping of emerging countries into a convenient, memorable name, or following the noise created around BRIC, the MINT acronym took firm hold at the end of 2013. But what has this second economic prediction done for small businesses around the globe? Has it lived up to its promise of singling out the MINT countries as those to focus on for business? If the MINT economies are to follow in the strides of the BRICs, it is safe to say they will rise up the ranking of world economies, but it will take time
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and require ongoing re-evaluation. The World Bank estimates that by 2050 the BRIC nations will all lie within the world’s top ten economies, with MINT countries also considerably higher up the chain than they are now.
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If you are planning to enter a new market, don’t just rely on the latest buzz term, do your research and make decisions based on what’s best for your business
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welve months ago, the term “MINT economies” was the second acronym to be championed by economist Jim O’Neill, following his “BRIC” prediction of 2001. Both terms identify the potential global economic powers of the future, with Mexico, Indonesia, Nigeria and Turkey being dubbed the second-generation of market-leading countries that could succeed the BRIC nations – Brazil, Russia, India and China.
However this does not necessarily mean that these are the ideal growth countries for every business. If you are planning to enter a new market, don’t just rely on the latest buzz term, do your research and make decisions based on what’s best for your business. Have the MINT economies achieved their potential? In global economic terms, one year is by no means enough time to evaluate an economic prediction, yet it is a good starting point to see how the first few months have gone for the MINT countries and whether they appear to still be on track.
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MINT countries share common features, such as young and expanding populations that will help their economies continue to grow, all are strategically positioned between larger economies and, with the exception of Turkey, they are all commodity producers. These factors certainly point towards a future of growth, especially if the World Bank projection is to be taken into account. Goldman Sachs has predicted that these factors, along with many others, will make Mexico the 8th wealthiest country by 2050; Indonesia is predicted to be the 9th wealthiest country; Turkey will be 14th; and Nigeria, which is currently 39th, is expected to be 13th. In a convenient geographical location for trade with both the US and South America, Mexico has a lot of opportunity, especially as the US’s workforce ages and the young Mexican population is able to fill the widening gap. The country is looking to achieve year on year growth by 2015 and it is on course to achieve this albeit only by a small margin. A GDP growth rate of 1.1% in 2013 was not dissimilar to many more developed nations, and whilst it is at least maintaining this growth, there hasn’t been a significant increase in the last 12 months. In August 2014, Indonesia’s economic growth eased to the slowest rate since 2009 as exports and government spending fell, indicating that even though GDP growth was up 5.2% from the previous year, the country has a struggle ahead if it is to meet the MINT potential. As for Nigeria, the country’s finance minister recently said she is confident that the country’s growth in 2014 will be around the government’s latest forecast of 6.5%, and Turkey has seen GDP rise by more than 45% in real terms since 2002. It is certainly a mixed picture – and that’s understandable given that 12 months is a very short amount of time in economic terms. That said, these economies are still producing GDP figures that reflect growth and there was no overnight success for the BRIC nations either. Simply put, solid and sustainable economic growth takes time and is a complicated picture. Some sectors will be thriving, others will be suffering and others will be in their early stages of development. What has the MINT prediction done for small businesses? By nature, small businesses tend to be agile – fewer processes make it easier to adjust to changes in practice – which enables them to react to economic news far more quickly than larger corporations. This allows for huge potential when it comes to exporting and the MINT prediction has trained exporters’ eyes on these emerging markets.
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It is too soon to say whether MINT has proved a viable export option for small businesses globally, but it has certainly drawn attention to the prospect of trading with up and coming markets where it may well not have been before. Small businesses do need to have the confidence to export to successfully seize the MINT opportunity. A lack of confidence can be caused by practical and cultural barriers, particularly in emerging markets, and is one of the main problems we see that holds small businesses back from expanding their export horizons. Take the time to understand which markets are best for your business and get to know the barriers you will need to overcome to trade successfully before beginning any export operation. This should be an ongoing process of gathering and monitoring information. Should you avoid the bandwagon? The MINT acronym is a neat and tidy way of bringing together a group of countries that have huge future potential due to a number of factors. However the prediction is by no means a guarantee that these markets will reach their potential. The MINT nations offer opportunities for businesses of every size, from exporting raw materials to retail ecommerce and the market is certainly open for smaller companies to enter; however there are many things that can de-rail a growth plan – natural disasters, terrorism and political insecurity are a few that come to mind. All of these are very real risk factors that must considered by any business looking to enter these markets. Utilise the guidance and expertise that is available both in the domestic market and also in your target markets. Seek out similar businesses and com-
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petitors and find out as much as you can about their operations – where are they trading? How did they enter the market? What practical, legal and financial barriers did they need to overcome? When conducting your research, make sure you take time to understand the trading cycle. We find that it can be overlooked by SMEs entering a new market, particularly if a business is not well versed in the process of trading internationally. Negotiating at which point the purchaser takes responsibility for the seller’s goods is critical, as responsibility for insurance and transportation costs can jeopardise the protection of the goods and dramatically increase the overall costs of sale. Businesses can sometimes get caught up with the excitement of new orders from abroad and then find they are liable for the delivery of the goods, all the way to the buyer’s door. Without checking the terms, they can also find themselves responsible if something happens to the goods during the exporting process. Funding a move into a new market and managing cashflow are also key concerns for many businesses at this critical time. Cashflow in particular can come under considerable pressure due to the investment required, payment terms lengthening and orders picking up pace. The good news is that there is a wealth of flexible funding products beyond bank loans and overdrafts that are ideally suited to supporting highgrowth exporters experiencing cashflow pressure. Ultimately, there are endless opportunities around the world, particularly as many emerging economies are reaching a critical stage in their growth and development, and there is ample room for
businesses of all sizes in all sectors to seize these opportunities and grow. My advice is to take a targeted and considered approach; pick your strongest product, service or sector and select an export country that represents the best opportunity for you. Understand the pitfalls and make plans to negate these if you hit them. Economists and analysts will always be looking for the next big thing, the next memorable acronym and new global trends. Whilst it is useful to keep abreast of this information, remember that every business is different, each opportunity is unique and there will never be a one-size-fits-all approach.
About the Author... Simon Featherstone is Global Chief Executive of Bibby Financial Services, the UK’s leading independent invoice finance specialist and a trusted provider of cashflow funding solutions to 7,000 businesses, handling annual client turnover of £4.9bn and advancing in the region of £388m. Bibby Financial Services is a member of the Asset Based Finance Association and supports businesses in both the UK and overseas, utilising expert knowledge from more than 28 years’ experience, helping companies regardless of size across a broad range of industry sectors.
At Smythe & Walter we provide high quality financial planning advice to our clients by delivering a clearly-defined service, transparent fee structure and effective investment proposition. Professionalism & Expertise • Transparency • Honesty & Integrity • Independence • Accountability These core values inspire us to act at all times with the utmost degree of integrity and professionalism and to be open and ethical in everything we do, putting our clients’ best interests at the heart of the business.
Smythe & Walter, 2 Grafton Mews, London W1T 5JD Tel: 020 3544 3087
Email: lee@smytheandwalter.co.uk Web: www.smytheandwalter.co.uk
Smythe & Walter is a trading name of Lee Smythe & Associates Limited who are authorised and regulated by the Financial Conduct Authority
All great relationships are based on commitment. A relationship with a wealth advisor should be no different. Kurka, Vanover, & Associates, a financial advisory practice of Ameriprise Financial Services, Inc., has a commitment not just to clients, but to excellence and integrity in everything it does. Kurka, Vanover, & Associates understands that every day it must earn the right to maintain client relationships. It strives to provide clients with so much value they consider the practice to be an integral part of their lives, creating clients not just for the short term, but for life.
Kurka, Vanover, & Associates 1428 W Alabama St Houston, TX 77006-4071 Tel: +1 713 521 0300 www.ameripriseadvisors.com/team/kurka-vanover Wealth & Finance | August 2014 |
Relax | Ancient Luxury
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Ancient Luxury
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Ancient Luxury | Relax
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The Sofitel People’s Grand Hotel Xi’an conveys a rare feeling of time and place
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Xi’an is one of the Four Great Ancient Capitals of China, having held the position under several of the most important dynasties in Chinese history, including Zhou, Qin, Han, Sui, and Tang. The starting point of the Silk Road, and home to the famous Terracotta Army of Emperor Qin Shi Huang, Xi’an is an essential cultural stop for anyone visiting China. Opened in 1953, as the State Guesthouse, the Sofitel People’s Grand Hotel Xi’an was designed by Hong Qing, Chief Architect of the Northwest Institute of Architectural Design. He skilfully sited the building in an extensive garden, formerly part of the grounds of an imperial palace. Hong Qing used a number of French touches, including fleur-de-lis (stylized lily) as a recurring motif. “As the first Legend hotel in Accor China’s portfolio and only the fifth in the group’s world map, we feel this beautiful property strikes the perfect note of French elegance in the heart of this timeless city, with its long history as a cultural crossroads at the start of the Silk Road,” said Paul Richardson, Accor Greater China Chief Operating Officer. Lofty ceilings and generous proportions in the 71 rooms and suites convey a rare feeling of time and place.
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Guests will enjoy all the sophisticated French pampering touches associated with Sofitel such as Hermes toiletries and French-designed floral arrangements. Additional features include personalized butler service, private health club, swimming pool and spa, an authentic Italian restaurant, an exclusive top-floor Louis XIII Bar and a private museum.
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Lofty ceilings and generous proportions in the 71 rooms and suites convey a rare feeling of time and place. Guests will enjoy all the sophisticated French pampering touches associated with Sofitel such as Hermes toiletries and French-designed floral arrangements
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he city of Xi’an is the capital of Shaanxi province, located in the northwest of the People’s Republic of China, in the centre of the Guanzhong Plain. It is one of the oldest cities in China, and, before the Ming dynasty, the city city was known as Chang’an.
The hotel extensive garden is the perfect setting for enjoyment of Chinese tea or English-style afternoon tea. Some VIP guests have left permanent souvenirs in the form of special trees that continue to flourish, most notably 12 stately olive trees grown from seeds presented to the first premier Zhou Enlai during an official visit to Albania. It is also the Tai Chi Class venue for in-house guests from Monday to Friday. The hotel’s unique private museum features memorabilia from the early years. The most precious items include a gold serving platter and matching cloche, used only for VVIPs in times past when this was Xian’s only hotel licensed to accommodate foreigners.
Sofitel People’s Grand Hotel Xi’an 319 Dong Xin Street 710004 Xi’an, China Tel: +86 029/87928888 Email: sofitel@renminsquare.com
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Wealth & Finance | August 2014 |
| Wealth & Finance | August 2014