Wealth & Finance September 2015 by AI Global Media

Wealth & Finance International | September 2015

Investing with Impact: Finance as a Force for Good

Hedge Fund Manager of the Month We got in touch with Tony Bremness, Managing Director at Laureola Advisors, to talk about how life settlements are allowing investors to sleep well through turbulent times

Assessing the Hidden Costs of Data Management Find out how the desire to pursue new, sophisticated investment strategies is leading to conflicting objectives

It Makes Sense to Share We investigate why the Sharing Economy continues to grow at an astounding pace

Here Come the Robot Advisors We learn how software automation can empower traditional financial advisers to give better advice

Strategic Governance for Family Offices Why do it and how to approach it

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Also in This Issue: Taxing Times to Hold Assets Abroad and for Accidental Evaders LCJ Investments The Increasing Investment in Fast-Growth Hybrid Businesses

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Copperstone Capital is an investment management firm founded in 2009 with offices in Moscow, Russia and London, United Kingdom. We manage wealth for high net worth individuals and institutions through various hedge fund strategies. 16 Sadovnicheskaya Street, Moscow, 115035, Russia T +7 495 988 0010 F +7 495 951 1410 www.copperstonecapital.com

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Welcome to the September Issue of Wealth & Finance. This month, Kay Aylott explores how changes to legislation in the UK tax sector are leading to tougher penalties for those evading paying their taxes. Turning to the world of technology, we ask: can automated software help the financial advisors of the future provide better advice? Elsewhere, Tony Virdi delves into the exciting world of financial software robotics and Simon Leech demonstrates exactly how technology is revolutionising the accounting industry. This issue also sees us examining the hidden costs of data management in an asset management firm, and we get the lowdown on how increasing numbers of investors are using their money for good while still providing enticing returns. This month, we also profile LCJ Investments, taking a closer look at their FX Macro Strategy and David Rogers talks us through why a sharing economy is a wise idea. We hope you enjoy this issue.

Contents 4. News

14. Hedge Fund Manager of the Month 18. The Challenger Bank Revolution 22. Why Low Volatility Absolute Return Funds May Not Be Worth Paying For 24. Investment Management 26. Taxing Times to Hold Assets Abroad and for Accidental Evaders 30. Here Come the Robot Advisors 32. Investing with Impact: Finance as a Force for Good 36. LCJ Investments 38. The Increasing Investment in Fast-Growth Hybrid Businesses 42. It Makes Sense to Share 44. Qatar: A Haven for Emerging Markets Investors? 46. Assessing the Hidden Costs of Data Management in an Asset Management Firm 50. Are You Doing Your #duediligence? 52. Strategic Governance for Family Offices: Why Do It and How to Approach It 56. Transforming Accounting: The Role of Tech in Innovating the Industry 3

Wealth & Finance International | September 2015

News

Green Key Technologies Adds Chicago Trading Firms DRW and Eagle Seven as Equity Owners DRW Founder and CEO Donald R. Wilson, Jr. Joins Green Key Advisory Board. Green Key Technologies, winner of the 2015 most promising sell-side start up award and maker of patented voice software designed specifically for traders and brokers, today announced that Chicago-based trading firms DRW and Eagle Seven have become equity owners.

As part of the advisory board, Wilson will provide guidance to company management, assist in forming strategic partnerships, and spearhead ongoing investment discussions with top banks, brokerages, trading firms, and exchanges across the globe.

“Green Key is building the next generation in trader voice capabilities,” said Donald R. Wilson, Jr., Chief Executive Officer of DRW. “Their voice software removes barriers for traders, lowers costs for brokers and increases compliance within the financial markets.”

“Don has consistently been on the right side of financial market innovation,” said Anthony Tassone. “We see his involvement as a strong endorsement of our long-term goals.” Green Key’s VoIP network has grown steadily since its launch in 2014, and now includes over 225 of the world’s largest banks, brokerages and trading firms.

“Green Key has changed the way our traders interact with the marketplace,” said Chris Lorenzen, Chief Executive Officer of Eagle Seven. “With advanced technology, mobility, greater functionality and much lower costs, the Green Key system has proven to be a huge winner within our organization.” The patented Green Key cloud-based “software turret” completely replicates the functionality of legacy hardware turrets and lines, but at a fraction of the cost. Traders and brokers simply download the voice software onto their PCs, establish connections to counterparties and “push-to-talk” in real time with an unlimited number of users. Communication is encrypted and recorded and can be transcribed for real-time compliance capabilities. “Don and Chris run outstanding organizations heavily involved in voice trading,” said Anthony Tassone, Chief Executive Officer of Green Key Technologies. “Both firms have been instrumental in the design and use of our software turret. We are extremely fortunate to have them as equity partners, committed to our continued success.” Green Key also announced that Don Wilson has agreed to serve on the company’s advisory board. Wilson will join former CFTC commissioner Jill Sommers, former CEO of ICAP Electronic Broking David Rutter, and former General Counsel of ICE Exchange Jim Falvey.

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News

Mijin to Reduce Banking System Costs by up to 1,000% by End of 2018 Tech Bureau, whose CEO is Takao Asayama, announces Mijin, a lowcost solution for creating permissioned blockchains. The goal of Mijin, is to allow financial institutions to reduce infrastructure costs by up to 1000% by 2018.

2.0 project, NEM, Makoto Takemiya, added that, “NEM has been in development from scratch for 18 months and the NEM team has the expertise and experience to make Mijin the best private blockchain system in the world.”

The father of Bitcoin, Satoshi Nakamoto, bestowed blockchain technology on the world. Mijin is the platform to let anyone set up a blockchain on a peer-to-peer network easily.

Starting in 2016, Mijin will start a private beta testing phase with partner companies, with the goal of releasing an open source version of the project in the Spring.

Within a single company or between partners, a permissioned blockchain is often desired, not only to realize zero downtime, but also to improve security and performance, at low cost.

Also, within 2016, it is planned to be able to execute smart contracts across Mijin blockchains, by communicating via the main NEM chain.

Mijin blockchains can replace traditional databases to easily create point systems, payment services, online games, airline mile programs, logistics, insurance, financial systems, and even governance systems. CEO Takao Asayama commented that, “If a Mijin blockchain is used, security can increase and at the same time the need for redundant, durable, and explicitly backed-up systems, will be removed. Our mission is to allow financial institutions to reduce infrastructure costs to 10% of the current costs by the end of 2018.” The legal adviser to Tech Bureau from Mori, Hamada Matsumoto Legal Office, Masujima said that, “A key difference compared to Bitcoin is that Mijin will allow private blockchains. This is profoundly interesting because of the potential to completely change financial, logistics, and governance systems.” Mijin will provide an initial capacity of up to 25 tx/sec by the end of 2015 with geographically distributed nodes, with the goal to improve throughput up to 100 tx/sec by the end of 2016. Within a private network, Mijin will provide a robust capacity of up to several thousand tx/sec. This will put performance on par with what credit card processors require, while keeping infrastructure costs low. Chief Blockchain Officer at Tech Bureau and core developer of Bitcoin

Wealth & Finance International | September 2015

ARK Invest Becomes First Publ Manager to Invest in Bitcoin ARK Investment Management LLC, an active manager of thematic exchange-traded funds (ETFs), is pleased to announce that the ARK Web x.0 ETF has become the first ETF to invest in bitcoin. ARK has made its investment for ARK Web x.0 ETF through the purchase of publicly traded shares of Grayscaleâ&#x20AC;&#x2122;s Bitcoin Investment Trust.

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News

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ARK believes that bitcoin, a digital currency, could disrupt the $500 billion intermediary payment platform industry which includes credit cards, electronic payments and remittances, and might empower the creation of a new group of companies and industries. As a burgeoning form of payment, it has received acceptance from major companies such as Dell, Overstock and Expedia.

“We’re believers in bitcoin, the currency, and Bitcoin, the technology platform. We also believe that current prices present an attractive entry point for our investors,” said ARK’s Founder and Chief Investment Officer Cathie Wood.

“Bitcoin is a disruptive innovation and while still in its infancy, interest has been growing rapidly in Silicon Valley, Wall Street and Washington, D.C.” The ARK Web x.0 ETF invests in disruptive companies transforming all sectors of the economy. These changes are accelerating thanks to Internet-enabled mobile and local technological breakthroughs, which are revolutionizing consumer and business behaviour. “We’re excited to receive an investment into the Bitcoin Investment Trust from an innovative firm like ARK,” said Grayscale Founder Barry Silbert. “ARK, a pioneer in the investment community, is in good company. Recent news has highlighted Goldman Sachs, UBS and Citi for their initiatives in the digital currency space.” ARK Web x.0 ETF is the first ETF on a U.S. exchange to invest in bitcoin. ARK’s investment in publicly traded shares of the Bitcoin Investment Trust (OTCQX: GBTC) will be valued each day at 4:00 PM ET at their then current daily market price. “Grayscale is a leader in the bitcoin ecosystem, bridging the gap between digital currency and the broader investment community,” said ARK’s Chief Operations Officer Jane Kanter. “Our investment philosophy is to invest in innovative companies, and we’re glad to be making our own innovative mark within the ETF community.”

Wealth & Finance International | September 2015 News

KSL Capital Partners Closes $2.677 Billion Private Equity Fund KSL Capital Partners, announces that it has completed the final closing of its latest travel and leisure focused private equity fund. Fund IV took less than a year to raise, with demand from both existing and new investors significantly surpassing the Fund’s original target amount of $2.25 billion. Investors in KSL IV include a diverse group of state pension funds, corporate pension funds, sovereign wealth funds, endowments, foundations, insurance companies and family offices.

KSL was founded by Eric Resnick and firm Chairman Mike Shannon in 2005. Since the firm’s inception, KSL has raised in excess of $7 billion in equity and debt commitments. In addition to the founding partners, KSL’s investment committee members include Coley Brenan, John Ege, Craig Henrich, Peter McDermott, Martin Newburger, Dan Rohan, Bernard Siegel, Steven Siegel, Bryan Traficanti and Richard Weissmann.

“Similar to our prior private equity and credit funds, KSL IV will target investments exclusively in the travel and leisure sector globally” “Similar to our prior private equity and credit funds, KSL IV will target investments exclusively in the travel and leisure sector globally,” said Eric Resnick, CEO of KSL Capital Partners. “KSL IV garnered significant interest from our existing investor base and accepted commitments from a select group of new investors. We are grateful for the support shown by all of our limited partners.”

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Strong Growth Expected in European ETF Market One in three (34%) IFAs expect clients to increase their exposure to ETFs over the next year. Source, one of the largest providers of Exchange Traded Products (ETPs) in Europe, has launched a multi-million pound advertising and marketing campaign to help raise its profile, as new research reveals financial advisers are set to increase their clients’ exposure to these investment products.

101 new ETFs and 25 new ETPs listed on the LSE. Total on-exchange value traded for ETFs this year is up 61% compared to the same period last year.”

Source is already capitalising on this market growth as it reveals today that it has attracted US$3.4 billion of assets so far this year (as of 15 September 2015), equivalent to 20% of the firm’s assets under management at the beginning of the year. Just over half of this (US$1.8bn) has been into fixed income ETFs, with US$1.3 billion into equity ETFs and US$0.3 billion into commodity products. Most of the European investment in ETFs comes from institutional investors, but Source is forecasting that there will be a significant increase in demand from retail investors, primarily through their advisers. New research from Source reveals that over the past 12 months, nearly one in five (18%) financial advisers say their clients have increased their exposure to ETFs as opposed to 3% who have seen clients reduce it. Over the next year, one in three (34%) IFAs expect clients to increase their exposure to these investment products compared to 4% of IFAs who anticipate exposure will fall. Some 59% of IFAs say that lower charges give ETFs an advantage over other investment funds, and this was followed by 21% who said it was about innovation, and 13% who cited the wide choice of ETFs available. These findings are supported by new data from the London Stock Exchange (LSE), which reveals there are currently more than 1,200 ETFs and ETPs listed on its main exchange and that the total value of ETFs traded on-exchange this year is £175.7 billion. Gillian Walmsley, Head of Listed Products at the LSE, said: “London has long been seen as the capital of the ETF industry in Europe, with deep liquidity and a strong emphasis on promoting transparency. In 2015,

Wealth & Finance International | September 2015

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News

Currencies Raising Latin American Infrastructure Risk The current weakness in Latin American currencies versus the U.S. dollar is placing pressure on infrastructure projects in Latin America that have direct or indirect foreign exchange exposure according to Fitch Ratings.

These exposures may lead to reductions in cash flows through increased dollar-linked operating expenses and lifecycle costs. Latin American currencies have already declined versus the dollar across the board. The drop in commodity prices and pressures in key markets (including Brazil) has pushed many exchange rates down. Since July of 2014, the Brazilian real has fallen by almost 76%, the Colombian peso by approximately 60%, and the Chilean peso by 23% versus the U.S. dollar. For Latin American infrastructure projects, the benefits of foreign currency borrowing are compelling. They often result in better interest rates and attractive financing terms relative to local capital markets. For countries such as Colombia, borrowing in foreign currency may be critical as the local economy cannot support the size and scale of planned infrastructure investments. Typically, FX risk is mitigated through creditworthy counterparties who assume a significant portion of that risk. These mechanisms may include inflation- and currency-indexed revenue streams or grantor true-up payments in availability-based projects. Fitch generally views these mitigants as sufficient in all but the most extreme devaluation scenarios. However, despite these mitigants, expenses linked to foreign manufactured replacement parts for energy projects or other U.S. dollar-denominated commodities or labour can increase operating expenses and stress project cash flows. Currency conditions may make these hedges more expensive or more difficult to engage if the counterparties view the currency dislocation as a long-term condition. In the coming weeks, Fitch will publish a complete report detailing the impact on FX risks in Latin America infrastructure and project finance transactions. Additional information is available on www.fitchratings.com

Wealth & Finance International | September 2015 News

European Real Estate Market Presents Sustainable Investment Opportunities Catella finds that €850m will have been invested in sustainable real estate funds in Europe by mid-2016. Sustainability has become much more prominent in Europe’s real estate sector over the past decade, and green issues are today an integral part of the business. It should therefore come as no surprise that green funds are growing in importance in the property investment market.

“We anticipate a volume in Europe of some EUR 850mn by mid-2016 finding its way into newly-designed sustainable real estate funds. A key factor is that many existing properties have potential for optimisation, and a large part of the portfolio properties are in exposed locations. It will be crucial for funds relying on sustainability to structure their investments well, especially because not all sustainable investments can provide returns in the short term. In addition, there is the risk of over-investment in sustainability from regulatory policy incentives, such as for solar, the latest to join the segment,” says Dr. Beyerle.

In its Market Tracker for September, entitled Sustainable Real Estate Funds, Catella addresses the question of why these particular investments have grown slowly in recent years. “The sustainable investments segment is booming worldwide, and European volume in 2014 was EUR 5.2tn. In the same period, sustainably designed and managed real estate funds achieved just EUR 49 mn,” says Dr. Thomas Beyerle, Head of Group Research at Catella. Why is this, when investors are increasingly seeking out responsible investments and when corporate governance rules and reporting requirements have tightened significantly? “This is partly due to the almost granular number of new builds in Europe in recent years. The mass of buildings is simply missing. On the other hand for refurbishments of the existing stock more questions occur than answers can be given. Another problem is a lack of uniform standards in building assessment and certification; there is neither a universal seal of approval for sustainable real estate funds nor a benchmark for peer-group comparisons, which are absolute prerequisites to kindle the competition,” says Dr. Beyerle. In spite of these shortcomings on the structural side, Catella expects positive developments in the next three quarters. Pressure is increasing significantly from institutional investors for sustainably designed and managed real estate funds, and the process of transformation from conventional buildings towards a reorganised energy-efficient portfolio is a billion-dollar business in Europe alone. Furthermore, sustainable review criteria have been introduced into due diligence processes and transaction standards. A detailed comparison of the pros and cons can be found in the attached report.

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Blockbuster Year for Mixed Asset Funds In European Investment Inflows Mid-year report uncovers key investment trends in European fund and ETF market; Broadridge partners with MackayWilliams for data analysis and research. Mixed asset mutual funds drove the bulk of long-term net inflows from European investors through July 31, 2015, according to new data released in two reports from Broadridge Financial Solutions, Inc. The European Fund Market Mid-Year Review and July 2015 FundFlash Monthly Snapshot reports both detail continued momentum in mixed asset products - those that invest in equities, bonds, cash and other funds - and strengthening equity investments following June’s market correction.

Thomson Reuters’ Lipper division,” said Frank Polefrone, senior vice president of Broadridge’s data and analytics business. “Together, these investments demonstrate our ongoing commitment to providing our clients with innovative data, analytics and insights to enhance their sales efforts.”

Broadridge’s European Fund Market Mid-Year Review and FundFlash – formerly published by Thomson Reuters Lipper – offer a high-level overview of European fund and ETF investment trends. The reports include commentary and insight based upon a new partnership between Broadridge and MackayWilliams LLP, a leading mutual fund market analysis and research company firm for the domestic pan-European and cross-border fund markets. Additional findings from Broadridge’s reports include: • Investors pumped €55bn into European investment funds including €31bn into long term funds in July • Mixed asset products accounted for 55 percent (€124bn) of total inflows in the first half and 23 percent (€7bn) in July • The top three markets by estimate net sales in July were Italy, Germany, and the United Kingdom • The top fund firms by sales in July were BlackRock, DeAWM, GAM Holding, Intesa and Vanguard “It’s been a challenging year for asset managers in Europe with some periods of intense market volatility and increasing competition coming from the banks,” said Diana Mackay, chief executive officer of MackayWilliams, “But low interest rates continue to drive flows into retail funds and mixed asset funds, in particular, are having a blockbuster year.” “Our new partnership with MackayWilliams follows our recent acquisition of the Fiduciary Services and Competitive Intelligence unit from

Wealth & Finance International | September 2015

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Hedge Fund Manager of the Month

Laureola Advisors - Tony Bremness

Laureola Advisors was established to provide conservative investors easy access to the opportunities inherent in the alternative asset class of life settlements. We got in touch with Tony Bremness, Managing Director at Laureola Advisors, on how life settlements allow investors to sleep well through turbulent markets. Stock market corrections have a nasty habit of surprising both investors and their advisors, usually when they are least prepared. The worst corrections can take years if not decades to recover, causing investors loss of sleep in the short term and significant loss of capital in the long term.

sold by senior citizens (aged 65+), and the senior receives an immediate cash payment from the investor. This payment on average is between three and four times what the insurance company would pay. Moreover, the senior no longer has to pay the premiums, and therefore frees up future cash flow. Together these enable the senior to have a more comfortable and enjoyable retirement, and, in some cases, pay for necessary medical treatments which the senior could not otherwise afford.

The Laureola Investment Fund has been a steady performer through recent market turbulence in the global stock markets. It has proven its credentials as a genuine alternative strategy, and is capable of delivering positive returns in all market conditions.

The best feature of the asset class is the genuine non-correlation with stocks, bonds, real estate, or hedge funds. Consequentially, life settlement investors will make money when others canâ&#x20AC;&#x2122;t.

This fund invests in the asset class of life settlements in the USA. In the United States, it is both legal and encouraged for an individual to sell his life insurance policy to an investor. The insurance policy then becomes a financial asset called a life settlement.

The fund is structural, and can be confirmed with a straightforward qualitative analysis. For a well structured portfolio of life settlements to make money, the insureds have to die, and the insurance company has to pay. The former is (unfortunately) beyond question, the latter has been universally true for over 150 years.

Probably the most impressive aspect about this type of investment is that life insurance companies in the USA have never missed paying the death benefit on a valid life insurance policy since 1864. This is a track record unmatched in investment and banking.

Both of these factors provide reliable foundations on which to build an investment strategy.

Life Settlements currently trade at an average Yield (IRR) of 16%, with a range of 12% to 25%. As such, the safety, predictability, and double digit returns are an attractive combination, and are not available in other asset classes.

Neither has any dependency on or connection with stock prices, interest rates, commodity prices, or the economy. Nor is there any connection to general levels of confidence in the capital markets. Perhaps best of all, the asset class generates its own liquidity internally and does not require other investors to come in and buy the assets at a higher price.

In terms of its history, the legal basis for life settlements in the USA was established in 1911, in the Supreme Court decision delivered by Justice Oliver Wendell Jones. Today, the Government encourages insureds to consider selling unwanted policies by not including the proceeds in calculations to determine eligibility for government funded health care.

A properly structured life settlement portfolio delivers double digit returns even in the absence of price increases, and can do it in all environments. As a result, the asset class boasts some very powerful economics.

With over $17 trillion of life insurance outstanding in the USA, the source of policies available for a possible settlement is not an issue. So far less than 1% have been sold to investors.

However, even the best strategies in the best asset classes require proper implementation. This is especially true in less transparent and less liquid asset classes such as life settlements. Life settlement investing requires a unique set of skills including: knowledge of life insurance, life

Furthermore, a stable and growing supply is also ensured because the seller benefits from the transaction in several ways. Most policies are

Wealth & Finance International | September 2015

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settlement experience, legal and portfolio management expertise, fund structuring and design capabilities, and access to the deal flow.

Like all investment strategies, life settlements do have some risks. The most important are longevity risk (individuals living longer than expected) and cash flow risk (there must be money to pay the premiums).

We provide our clients with a wealth of experience that ensures that the best strategy is properly implemented. Our CIO, Christopher Erwin, is a member of both the Orange County Bar Association and the Life Insurance Settlement Association. He has over 10 years’ experience in all aspects of evaluating and transacting life settlements, and has built a successful business in these fields. He has sourced and serviced nine figure life settlement portfolios in the past, and now brings this expertise to the Laureola Fund as Chief Investment Officer and as an investor.

Longevity risk must be assumed in any investment based on longevity, including life settlements. This risk is manageable by competent portfolio managers, and can be further reduced using the competitive advantages of Laureola Advisors. From our experience in the life insurance industry, the widely held assumption that everybody is living longer is not actually supported by a detailed analysis of the statistics. The reality is that some are living longer, while some are not.

Chris is supported by a group of nine life settlement professionals at his two life settlement related businesses in California. Through his network built up over the past decade and through the life settlement brokerage he owns, Chris ensures that the Laureola Fund has access to the best policies at the best prices. One of our main differentiating factors is that many of the policies purchased by the fund since inception were never shown to the rest of the life settlement market.

Advances in medical treatments can now cure or manage many ailments that people used to die from 25-50 years ago, extending the life expectancies of individuals aged 50-70. However, the life expectancy of individuals aged 85+ has not budged in many decades, and in some years has actually decreased, and nature simply takes its course.

Personally, I have over 30 years’ experience in portfolio management and fund design and structure. I graduated with an MBA and have been accredited the CFA designation. My responsibilities mainly include the day to day operations of the Laureola Fund.

Statistics also show that life expectancies have been routinely overestimated for individual with certain ailments, and for certain segments of the population. This knowledge has been particularly useful in the management of the Laureola Fund.

This fund has been designed with multiple layers of protection for the investors, and is much more than most other offshore funds. Moreover, the fund suppliers are globally recognised and leaders in their respective fields. They include: Apex (Fund Administration), Lewis & Ellis (Actuarial Consultant and Valuation Agent), Bank of Utah (Custodian), Bermuda Monetary Authority (Regulator), and Deloitte (auditor). Furthermore, the fund is on a fund platform in Bermuda with an EAM (an affiliate of Apex) as the platform manager. EAM oversees the fund’s activities on a daily basis.

The ability of the Laureola Fund to acquire quality assets at below market value is also useful in longevity risk management - it provides a margin for error that other investors won’t have. The fund will typically generate a profit on every policy it buys even if the individual lives twice as long as expected, which is very rare. As for cash flow risk, this is entirely in the control of the portfolio manager and can be virtually eliminated, simply by keeping the necessary liquidity reserves on hand. The risks in life settlements are clearly identifiable and easily managed, and in some cases they can be eliminated. Compared to the increasing turbulence in capital markets and the growing appetite of all governments for market manipulation, the risks in life settlements are moderate. The asset class has a risk level between that of equities and government bonds, perhaps closest to that of the real estate markets.

Laureola Advisors was founded in 2013 by myself and Chris to take advantage of the opportunities in this asset class. The Principals invested their own capital, and other interested investors are invited to join. Despite currency crises and share price shocks, the fund has delivered. Annual returns for Laureola investors since inception can be seen below:

Despite this low level of risk, the returns are significantly better than any of these traditional asset classes and also has the important benefit of having no correlation with any of them, making them a genuine alternative. As a result, experienced investors who require both growth and diversification are increasingly allocating to life settlements. We assure them that they will sleep better through the next round of market turmoil.

• 2013: 24.8% • 2014: 18.5% • 2015 (to 31 July): 15.6%

For further information please contact: Tony Bremness Tony.Bremness@LaureolaAdvisors.com www.LaureolaAdvisors.com

Wealth & Finance International | September 2015

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The Challenger Bank Revolution By Bhanu Choudhrie, Founder of C&C Alpha Group

WHEN Vernon Hill’s Metro Bank opened its doors in 2010 it became the UK’s first new high street bank in 150 years.

How have we successfully disrupted the market? Technology is the answer. After ten months of testing we launched an entirely new brand this year, Bank Mobile, a virtual bank targeted at millenials.

Fast forward to 2015, however, and there are 26 challengers applying for banking licences in a bid to transform a staid landscape dominated by the “Big Four” – Barclays, Lloyds Banking Group, HSBC and Royal Bank of Scotland – which control 77 per cent of the current account market and 85 per cent of small business banking. Fidor, the German community-based bank, which crowd-sources ideas for financial products, became the latest UK entrant when it launched in September.

It takes just five minutes to open an account – you simply photograph your ID - there are no fees and the Bank Mobile app, powered by Malauzai software, contains a number of innovations designed to make customers’ lives easier. To pay a bill, you can just photograph it; you can turn your debit card on and off for security reasons, and when you make a direct deposit you get free access to our financial advisors. We have already created an app for the Apple Watch.

Not all these challengers will make it to the start line – just eight banking licences were granted by regulators between 2010 and 2015 and a mere 20 have been granted in the last 40 years. However, in the last 18 months, five challengers have listed on the London Stock Exchange, raising more than £350m of new capital.

We encourage our customers to drive innovation. “Build your own bank”, we call it. Our aim is to rewrite the banking business model by simplifying the mobile experience; we think of ourselves not as a bank but as a tech company with a banking charter. We want to be the Uber of banking. “We are getting back to be a bank people can love,” is the way our CEO Jay Sidhu puts it.

Chancellor George Osborne says he wants to see at least 15 licences approved during the lifetime of this Parliament. The Competition and Markets Authority is currently investigating the banking sector and its study of the current account and small business banking markets could lead to a shake-up, loosening the stranglehold of the UK’s banking giants.

We are targeting recent college graduates, a generation which expects a straightforward, convenient customer experience. We aim to sign up 250,000 in five years.

However, the flip side is the Chancellor’s 8% corporation tax surcharge on bank profits and parallel scaling back of the bank levy, which was announced in July’s Budget and is due to take effect in 2016. Challenger banks are lobbying fiercely against the move, claiming it will make it harder to take on their bigger rivals.

The UK’s banking sector is still dominated by legacy institutions with creaking infrastructure designed for a pre-electronic age. Earlier this year, RBS suffered its latest IT meltdown when 600,000 customer payments and direct debits disappeared, with all the chaos that entailed. In the twenty-first century, customers do not expect to be told it will take three days to put that right. But archaic technology systems mean this won’t be the last IT disaster to inflict the industry.

So, how realistic is the challenge from the new generation of challengers? Can they succeed where their predecessors have failed? Are they worth backing?

Many of the UK’s challenger banks are promising digital-only propositions. Anne Boden, chief executive of Starling Bank, which is seeking to launch in 2016, has been in the industry for more than 30 years – most recently as Chief Operating Officer at Allied Irish Bank – and she is specifically targeting the current account market. A computer science graduate, she is promising to create a banking app aimed at customers aged 20 to 40 who will be given a unique personalised insight into their finances – how much they are spending on clothes every month, for example – and an experience every bit as efficient as that delivered by Apple or Amazon.

I have an unusual perspective on this. I live in London, where my private equity business C & C Alpha Group is headquartered, but sit on the board of two American banks, Atlantic Coast Bank and Customers Bank. It has always surprised me that the UK market has been so resistant to change. Customers Bank has enjoyed six years of stellar growth; back in 2009, it had assets of $250m; four years later, it was welcomed on to the NASDAQ stock market; today, it’s quoted on the New York Stock Exchange and has assets of $7.1bn.

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Rivals, such as Mondo – whose founders defected from Starling – and Open Bank, the brainchild of Ricky Knox, co-founder of money transfer service Azimo, are also promising digital-only propositions. Atom, which has already received a licence and will launch next year, will be primarily digital, using the Post Office to deliver physical services.

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They have all received substantial backing. Atom, which is raising tens of millions, has attracted star investor Neil Woodford. Among Mondo’s supporters is Eileen Burbridge, of Passion Capital, the queen of the fin tech investment sector. Open Bank raised £10m in its initial funding round and has a target of £100m. Starling is announcing a second round of funding. Not all will get regulatory approval, let alone succeed if they do. But the experience of recent entrants is broadly positive. In 2014, the challenger bank sector as a whole achieved an average return on equity of 3.8% compared to 2.8% amongst the five biggest banks. Breaking the figures down further, the smaller challengers, such as Metro Bank, One Savings Bank and Shawbrook, achieved 18.2% but the bigger challengers, personified by Virgin Money and TSB, achieved just 2.1%. The cost to income ratio among the smaller challengers was 53% in 2014 compared to 64% for the larger challengers. Warren Mead, head of challenger banking at KPMG, expects challengers to outperform the market in terms of pure financial results. He cites their lack of legacy as an advantage, enabling them to build a distinctive brand identity. Delivering simplicity, transparency and a niche offering are the keys to success. Lending to small and medium-sized enterprises is a £160bn market, but certain areas are under-served. In some of the sectors where C & C Alpha Group has a wealth of experience - such as healthcare, real estate and agriculture – smaller businesses have specific needs which are not always addressed. By contrast, in the US, smaller banks are encouraged to commit to small businesses, which are the backbone of the US economy – more than 50% of Americans either own or work for a small company. I have met American businessman Vernon Hill and discussed his dreams and aspirations for Metro Bank. It has 36 branches and aims eventually to grow to 200, but its customer base of 360,000 pales in comparison with Barclays’ 16.7 million. That indicates the scale of the challenge. Customers in the UK remain staunchly conservative; even after the introduction of new rules in 2013, allowing customers to change banks within seven days, take-up has been slow, with 1.2m customers using the service last year. But there is no doubt a banking revolution is under way and establishing a high street presence is no longer a necessary route to success. The number of customers going into branches has fallen by 30% in three years. Customers will use mobile devices to check their current accounts 895 million times in 2015 while there will be just 705 million interactions with their bank branches. They will move £32.9 billion a week using banking apps. The message I can deliver from my experience in the United States is not simply that the future of banking is mobile. The future is already here. Challenger banks, which are daring, disruptive and digital can transform our banking landscape but only if they put innovation at the heart of their story.

Wealth & Finance International | September 2015

by Barry Norris, manager of the Argonaut Absolute Return Fund

Why Low Volatility Absolute Return Funds May Not Be Worth Paying For The argument for investing in absolute return should be relatively simple: a consistent delivery of attractive returns, combined with a risk profile offering diversification from traditional long only funds.

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Source: Argonaut, Lipper, Bloomberg, August 2015

However, much of the investor attention surrounding absolute return strategies overly focuses on those funds displaying low volatility characteristics, which we argue by itself has no portfolio diversification benefits. We are concerned the emphasis on low volatility in isolation often leads too many funds to only deliver mediocre ‘cash plus’ returns – without the actual safety of cash. With approximately half of the sector displaying a standard deviation of less than 4%, are these ‘cash plus’ returns worth the extra bother? Cash is the ultimate low volatility investment. Unlike low volatility funds, cash never delivers a negative absolute return – unless in the unlikely event of the bank becoming insolvent. Therefore, the risk/return analysis of cash as an asset class is always consistently strong, simply due to the absence of risk.

Focus on low correlation and delivering returns The most attractive risk characteristic of an absolute return fund in our view is not low volatility, but achieving low correlation to risk assets and delivering returns in all market environments. After all, the least difficult skill in investing is providing a positive return at the same time as the market and everyone else.

But by far the biggest limitation of ‘cash plus’ low volatility funds is the absence of clear diversification benefits. An investor may believe they are achieving diversification by selecting a range of low volatility funds, only to find all of the strategies selected are highly correlated to the stock market and/or each other. The investor could likely replicate the same return profile by splitting assets between cash and the market index, which would probably be cheaper to replicate after fees.

It is clearly more difficult to deliver positive returns at different times to the market and peers, while still displaying an attractive return profile overall – given the tendency of stock markets to deliver positive returns over market cycles. This requires investment in a non-correlated asset – which for us at Argonaut is a short book of equities – and demonstrating skill in generating alpha on both the short and long side of the book. It also requires a net exposure to never get too aggressive.

Source: Argonaut, Lipper, August 2015

Range of fund volatility characteristics (Standard Deviation) in Targeted Absolute Return sector

Our analysis of the IA Targeted Absolute Return sector found only three funds had a negative correlation to the European stock market. However, the overall return record of these funds is poor. By contrast, over half of the funds in the sector had a correlation of more than 0.5 with the European stock market – which suggests limited diversification benefits. The sweet spot is in the combination of an attractive return profile and a low correlation to the European stock market – something we are proud to have been able to achieve at Argonaut.

Source: Argonaut, Lipper, August 2015 (peer group composed of all of the funds in IMA TAR sector with at least same length of track record)

IA Targeted Absolute Return fund returns vs. correlation to risk assets – annualised returns vs. correlation with MSCI Pan Euro (since 2009)

Are low volatility funds worth paying for? While cash does not charge an annual management fee, or performance fee, this is not the case with the universe of low volatility funds. In fact, it is questionable whether it is appropriate for many low volatility funds to even apply the commonplace annual management charge (AMC). For example, if a fund has a standard deviation of 2%, is it really appropriate for it to apply 75bp AMC? Even in a year where the fund manager has demonstrated skill in converting risk into return, with the delivery of an admirable Sharpe ratio of 1, the AMC would likely consume nearly 40% of the targeted return. Our analysis of the IA Targeted Return sector reveals approximately one quarter of funds have an AMC of at least half of the standard deviation. Even in a good year, this suggests fees will eat away at least half of the implied return.

The IA Targeted Absolute Return sector is filled with a variety of different fund types: such as multi asset strategies, or long/short bond or equity vehicles. While this clearly results in different risk and return profiles, the framework for analysing the attractiveness of these strategies is the same. Investors must take a closer look at this heterogeneous to identify those funds that can truly offer diversification, as well as still provide value for money.

AMC vs. Volatility in IA Targeted Absolute Return sector - AMC as % of Standard Deviation

Wealth & Finance International | September 2015

Shifting the Risk Landscape By Matthew Hughes, Divisional Director, Arthur J. Gallagher

Despite market fluctuations occasionally drawing deep breaths from investors as global economies endeavour to move on from the global financial crisis, investment managers have generally enjoyed returning stability and significantly improved trading conditions in recent years. However, new and emerging challenges are shifting the risk landscape for investment managers, notably the growing threat of cyber-attacks — with cyber criminals finding ever more inventive ways to compromise systems — and increasing regulatory investigations. This poses a challenge not only for investment managers but also their insurer partners in finding ways to address the complexities as they arise and to mitigate the associated risks. From a regulatory perspective, there is now far greater scrutiny of Financial Institutions across the US, UK and Europe. In the United Kingdom there has been an increase in the number of private warnings issued in recent years. These are a low-touch way of addressing less serious issues, as opposed to a full investigation for more serious and obvious regulatory breaches. While these, in effect, serve as a warning, usually with no lasting implications for the firm, any individuals implicated will likely see this recorded on their employment file, which could affect their prospects. Private warnings can affect people within an organisation who may not be at the most senior levels, such as anti-money laundering officers or compliance managers. The only way they can challenge a private warning after it has been issued is via a judicial review, which is time consuming and costly. While insurance cannot fund the costs of a Judicial Review, it can provide funding to affected individuals to contest a potential action at the point where the regulator declares its intention to issue a private warning by way of a ‘minded to’ letter. This assistance can be extremely valuable for investment manager clients and is one example of how innovative insurance brokers and insurers are developing insurance products capable of meeting their needs in complex situations such as this. Part of the issue for investment managers with much of modern-day regulation globally is that it is not prescriptive and therefore can often be difficult to interpret – or be confident you have interpreted it correctly. This has prompted many to voice the concern that it is not a question of if they have a regulatory issue but when. There has also been an increase in more visible regulatory enforcement action, with numerous examples of investigations or fines being made against FCA-regulated entities. To date, most of the regulatory scrutiny has fallen on the banking sector and not in the investment management space. However, there are organisations within the insurance industry that are making provisions to assist investment managers as it is far better to help clients be prepared, rather than respond after regulatory action has been initiated. Regulatory investigations can take up con-

siderable time and resources and insurance can be an effective tool to offset those costs while supporting investment managers in assisting the regulator with an investigation. Mitigation cover, which allows costs to be incurred under the policy prior to the insurer being notified, is a further development designed to help reduce or mitigate a third party claim, which is clearly valuable for both the insured and insurer. The other issue of particular concern for many investment managers is the growing risk of a cyber breach and subsequent loss of data. This threat has also long been testing the minds of legislators as to how best to counter the threats. The EU Data Protection Directive, which will lead to specific legislation in the UK, will set out guidelines and penalties in the event that data is lost. Investors too are concerned by the threat of a cyber-attack and, in the same way that potential investors will ask if an investment manager has professional indemnity (PI) insurance, we expect investors will begin to routinely question if adequate cyber cover is in place in order to have the confidence to invest. Part of the problem here is that while the insurance market provides a broad variety of cyber cover, through the traditional PI, crime and computer crime policies, the introduction of Cyber as a standalone product (available since the late 1990’s but something that has really come into focus in recent years) – which covers, for example, the specific costs relating to a data breach or non-damage business interruption, has caused confusion to insurance buyers. It is not uncommon therefore to discover that clients don’t fully understand the level of cyber cover they already have and so it is for their broker to not only explain but identify any gaps. Following a broker’s assessment, some clients may say they do not want a standalone policy but it is still the broker’s job to identify the potential issues to ensure the client can make an informed choice. Currently insurance market conditions are hugely favourable for investment managers due to the competition arising from ample capacity within the market. Investment management firms are very attractive to insurers — with a relatively benign recent claims history many insurers are keen to underwrite more business in this segment. This is also an attractive area to those insurers that used to underwrite tier-one banks and which are looking to diversify their portfolios. All of which spells good news for investment managers. Demand for standalone cyber products is likely to increase and, given the availability of insurance capacity and the appetite of insurers to gain market share, so too will the availability of multi-year premiums with a locked in discount, which some clients have obtained this year.

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Given these conditions, there is great potential for insurance to build its relationship with, and be of greater assistance to, investment management firms. The mature specialty insurance markets in London have a long history of innovation, which is a fundamental reason why London has remained a leading market for complex commercial risks globally. Brokers and insurers that are willing to identify where the exposures are for individual clients, and take a proactive approach to understanding the shifting complexities, will continue to produce innovative insurance solutions that can assist investment managers with these emerging issues, as they seek to grow their standing in this appealing area of financial services.

Wealth & Finance International | September 2015

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Taxing Times to Hold Assets Abroad and for Accidental Evaders By Kay Aylott

The Taxman Cometh Chancellor George Osborne, has made tackling tax avoidance a signature issue throughout his tenure at the Treasury. The political climate also suggests something harsher, with a crack down on offshore tax avoidance a valuable buttress to continuing domestic austerity.

Whilst it has never been acceptable to evade tax, the UK has been allowing people to regularise their affairs with favourable amnesty terms. That toleration is about to change. As has been observed: a ticking time bomb now exists under tax dispensations. The most generous of these reprieves, the Liechtenstein Disclosure Facility (LDF), ends in December, marking the start of a much tougher regime from Her Majesty’s Revenue & Customs (HMRC).

Almost all Osborne Budgets have added something to make ‘aggressive’ avoidance harder, with one HMRC official noting that the first purely Conservative Budget in a generation this summer was no exception, unleashing what he described as a ‘tsunami’ of proposals, including new powers for HMRC.

The LDF has been a valued way for non-compliant individuals to regularise their financial affairs. It is ending several months earlier than originally announced, a sign itself of Government impatience with what is deemed unacceptable avoidance.

As if to underline his determination, Mr Osborne, unfettered by coalition politics, also gave the revenue service a further £750 million to spend tackling evasion. The money will be used to triple the number of people who can be investigated, and target offshore trusts.

It has been a particularly useful device, not least for the Treasury which has recouped more than £1 billion from nearly 6,000 disclosures since it began in 2009.

Against this backdrop, experts believe the penalty rate for what replaces the LDF will be punishing, perhaps as high as 30 per cent; and that the 10 year limit on liability may also disappear. Crucially, there will be no guarantee against prosecution.

But the LDF has also been good for individuals looking to get their financial house in order, even generous. Anyone making a disclosure under its terms is only liable for back taxes to 1999, as opposed to the usual 20 years.

The terms of entry are also likely to narrow. For example, it may no longer be possible to use the replacement as a funnel through which to declare a wider portfolio.

The scheme sets a composite rate of 40 per cent for the tax years up to and including 2008/9, with 50 per cent generally applicable thereafter.

If that were not enough incentive for individuals to bring their financial affairs into order, there is more on the horizon.

The penalty is also relatively low, at 10 per cent of money owed up to an including the tax year 2008/9, with a higher rate for liabilities in subsequent years.

Further pressure will come from growing co-operation between 94 tax authorities around the developed world. These will share information about people from 2017, making it much harder to find shadows in which to hide assets.

Under the LDF, only a portion of assets need to be held in the Principality of Liechtenstein for those held elsewhere also to be disclosed. There is no risk of prosecution either, unless a crime is evident or a fraud investigation has begun.

The Accidental Evader But in fact the process of shining light on hidden wealth begins faster sooner: Data collaboration will begin in earnest with Guernsey, Jersey and the Isle of Man from next year.

Although it will be replaced, no details have been given yet. But nobody is expecting anything as generous.

Wealth & Finance International | September 2015

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The Government has also made clear its intention to make the non-disclosure of overseas assets a criminal offence. There will be no exceptional circumstances allowed. This raises the risk for some, perhaps beneficiaries of trusts established abroad, that they could be unwitting evaders, unaware that liability always fall on the beneficiary, not the settlor, as far as HMRC is concerned There are also people who have historic liabilities, but of which they are utterly unaware. Issues arise when money from offshore trusts filters down through the generations, with understanding of the original trust by those benefiting from it dimmed over time. It is not just the very rich who face being caught out either. Many offshore trusts were created in the 1970s and 1980s involving relatively modest sums removed abroad to avoid Capital Gains liabilities, perhaps the equivalent to £250,000 today. Experience also suggests that individuals benefiting from offshore trusts are often unaware of their strict liability to declare, even when they do know about them. Some believe, incorrectly, that a capital distribution, for example, does not incur a tax liability. They also assume that trustees will have alerted them to any tax issue. But there is no obligation on them to do so, and frequently no expertise on tax matters anyway. What is often forgotten is that trusts can be highly complex in their structure and require considerable expertise to understand, particularly in relation to tax owed. No Ifs, No Buts A further discomforting threat that HMRC has made to encourage people forward with irregularities now is, under the new regime, ‘naming and shaming’ those it investigates and finds in breach. Furthermore, it intends to be unforgiving about ignorance. Tax advisers will soon be subject to much tougher rules, essentially requiring them to make their clients aware of opportunities to disclose irregularities, and the penalties for failing to do so. The intention is to ensure that nobody can say they were not warned. When all these steps and undercurrents are taken together it is clear that something quite fundamental is changing if not altogether clearly. Tax avoidance was once understood and applied as the legal counter to tax evasion. That distinction has now blurred. What began as a moral crusade against ‘aggressive tax avoidance’ after the financial crisis of 2007/8 has become, certainly for those with UK reporting liabilities, an increasingly legal one. The prospect of greater collaboration between tax authorities worldwide signals that the UK is not alone in its tougher approach. The window of opportunity to deal with difficulties favourably is shutting very fast. Kay Aylott is Director of Private Client and Trusts at accountancy firm Kreston Reeves www.krestonreeves.com

Wealth & Finance International | September 2015

Here Come the Robot Advisors

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How Software Automation Can Empower Traditional Financial Advisers to Give Better Advice By Tony Virdi, VP of Banking and Financial Services in the UK & Ireland, Cognizant While the discussion around the benefits of automating some jobs continues, numerous businesses such as banks are already using software automation to improve operational processes and efficiency. The power of smart robots, which we at Cognizant refer to as Intelligent Process Automation (IPA), may in fact enhance today’s knowledge-based jobs and even create entirely new job categories. But how do companies view automation and how wide-spread is it already?

and Generation X. This influx of Millennials is dramatically shaping bank customer expectations. When it comes to wealth advice, Millennials do not place as much emphasis on person-to-person interaction and instead, they are much more comfortable making choices and decisions regarding their asset allocations online. As a result of changing demographics, the competitive landscape for banks as traditional wealth managers is evolving rapidly and financial institutions are now closely monitoring robot advisor start-ups and are considering selective investments in similar digital capabilities.

In our recent survey of more than 500 senior executives across the US and Europe , we found that, companies are currently automating, on average, between 25-40 percent of their workflows, which includes simple procedures and tasks with manual input. We also found that half of them see IPA as significantly improving their business processes over the next three to five years; nearly one fifth reported to have achieved cost savings of greater than 15 percent from IPA in just the past year alone.

Software robots and the evolving role of wealth managers Globalization has led to more variables for wealth managers to consider, requiring analysts to monitor an increasing number of factors that influence risk. These include not just global interest and currency exchange rates but also election outcomes, policy decisions, geopolitical events and more. However, instead of having to spend even more time closely watching information flow, wealth managers are turning to robots to develop their abilities to monitor risk for customers. In essence, they are using software automation for continuous monitoring of risk based on a variety of factors and are thus able to offer existing clients increased real-time intelligence as an added value service.

With banks at the forefront of adopting software automation, one area that can be especially beneficial is wealth management, where providing prescient financial advice hinges on the ability to conduct real-time monitoring of risk. Enter robot advisors In recent years, a combination of factors including rapidly developing digital technologies as well as changing customer demographics have led to a number of disruptive start-ups entering the wealth management arena. The rise of new financial vehicles, such as passive Exchange Traded Funds, enable these start-ups to offer automated services that make customers’ asset allocation decisions easier whilst also lowering costs. By providing their wealth management robots with a set of personal preferences and data including income, savings rate, and preferred level of risk aversion, clients get algorithm-generated advice that they may or may not choose to act on.

However, while mapping and forecasting risk and quantifying customer pathways has the potential to yield specific positive outcomes for wealth managers, such as successful cross-selling, it also requires actionable analytics. Companies in the banking and financial sectors indicate that 10 percent of revenue and 10 percent of costs are directly affected by how well they understand and use the business information available to them. Data is the big reward for banks While revenue, speed, efficiency and savings clearly drive banks to adopt software automation processes, the data generated by those same processes is potentially a bigger reward for banks and financial institutions in the long-term. With advances in machine learning, artificial intelligence and big data analytics, a bank’s ability to make predictions and offer tailored customer offerings can be greatly enhanced.

Robotic wealth management start-ups, such as Wealthfront and Betterment, use IPA to provide automatic asset allocation advice and have thus created a new business model that challenges traditional wealth managers. Consequently, the competition from disruptive start-ups have led traditional banks to start looking at possibilities to adopt similar models and technologies to maintain their competitive edge, especially with regard to catering to Millennials.

Across industries, the benefits of automation are obvious and there is a long tail of processes yet to be automated by a new generation of knowledge “robots”. As disruptive robot advisor start-ups transform the wealth management industry, adopting similar software automation services is quickly becoming a necessity for traditional banks. Nonetheless, in wealth management as in nearly every other industry, there are some tasks that robots just can’t do and that‘s where a blended model of automation augmenting talented people can provide extraordinary outcomes.

The changing face of bank customers This year, Millennials’ income is expected to exceed that of Baby Boomers (i.e. people born in the 1940s-1960s). And by 2020, the collective income of Millennials is projected to exceed that of both Baby Boomers

Wealth & Finance International | September 2015

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Investing with Impact: Finance as a Force for Good Using your money to ‘do good while doing well’ was previously perceived to be limited to wealthy individuals who could afford to gift their money to charities or even establish foundations to facilitate their philanthropic efforts. However, the rise of ‘impact investing’ has gained significant momentum in recent years spurred on by an increase in investment managers with dedicated sustainable portfolios. Viable options are now available for all investors, regardless of affluence. Damien Lardoux, Portfolio Manager of five risk-adjusted impact investing model portfolios for EQ Investors (EQ), takes a closer look at this growing global phenomenon. What is impact investing? We all know that there are huge challenges facing the world; climate change, natural resource shortages and aging populations to name just a few. Investment is urgently needed to develop, scale up and market solutions that address these pressing global challenges.

o Recycling o Sustainable agriculture • Negative screening – aims to exclude harmful companies or industries, thereby avoiding certain social or environmental issues such as gambling or resource depletion. Examples include: o Animal testing o Armaments o Gambling o Ozone depleting chemicals o Pornography o Tobacco

Investing in companies that create social, environmental and economic value is a trend that has been increasing worldwide. This investment approach is commonly called impact investing and last year, JPMorgan estimated that the market was worth $60bn globally – and growing. Socially responsible investing is not a recent phenomenon. Early initiatives were based on the exclusion of controversial sectors such as tobacco or armaments, rather than on investing in businesses which have the influence to do good. That’s what impact investing is seeking to achieve and it has begun to take off.

Analysis also takes into account environmental social and governance (ESG) matters relevant to a company’s strategy and operations. Challenges associated with impact investing The rapid growth of impact investing has been countered by concerns about simultaneously achieving social impact and market-rate returns. A recent report published by Cambridge Associates found that impact investing can capitalise on long-term social or environmental trends to compete with, and at times outperform, traditional asset class strategies.

Screening investments The Global Impact Investing Network (GIIN) is an organisation dedicated to increasing the scale and effectiveness of impact investing. Currently there are more than 340 investment products listed in the GIIN ImpactBase database. Each investment opportunity has to quantify its social and/or environmental performance in addition to the anticipated financial returns. There are several funds available that do not meet this criterion, but will still allow investors to potentially receive a financial return whilst also investing to have a positive impact on society and/or the environment.

Socially responsible investing can actually be traced back several centuries. However, with sustainability firmly on the map for an increasing number of global companies, the opportunity of impact investing is now receiving well-deserved attention and scrutiny. Research studies are proliferating as the market seeks to understand the phenomenon, strengthening the market building process currently underway and further demonstrating the business case for investors.

Investments are evaluated using the following processes: • Positive screening – aims to seek out and include companies or industries that are actively involved in creating/generating solutions to social and environmental issues. Examples include: o Clean fuels o Renewable energy o Healthcare

The specialist investment managers, WHEB, have calculated that companies that fit their social investment themes (their investment ‘universe’) have a greater five year historical sales growth (to March 2015) and one year forecasted sales growth when compared to the

Wealth & Finance International | September 2015

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MSCI World Index as detailed in the charts below. This shows that you can have a positive impact without compromising on the return or income received. Is impact investing for everyone? Impact investing can be a great way to add diversification to a standard portfolio. The positive impact approach leads to selecting companies that are generating solutions and run their business in a sustainable manner. Such companies avoid fines and other penalties; they have stronger relationships with their customers, suppliers and staff. Furthermore, they tend to operate in sectors with high growth potential. In a survey undertaken by Tridos Bank in September 2014 it was found that 73% of investors with a net wealth of between £50,000 and £100,000 expressed an interest in social investments. In 2013 $36 billion was committed to impact Investing and this is expected to increase to $1 trillion by 2020. Potential tax advantages of impact investing In 2014, the UK Government became the first in the world to incentivise social investment through the personal tax system. Social Investment Tax Relief (SITR) allows individuals to deduct 30% of the sum invested from their income tax liability for the current or previous tax years. However, the investment must be held for a minimum of three years for the relief to be retained. If investing any gains, the tax liability can be deferred until the investment is sold. The investment is also exempt from Capital Gains Tax (CGT), though income tax is still applicable on any dividends or interest payments received. SITR-qualifying investments have been restricted by the current £290,000 limit on the amount that organisations can raise. The Government has applied to the European Union to increase the amount with a decision expected imminently. How to become an impact investor? Impact Investing is becoming more and more accessible to UK retail investors with close to 90 ethical and sustainable investment funds managing more than £13.5 billion of assets currently available. At EQ Investors, as well as avoiding harmful industries and types of business our Positive Impact Portfolios continually seek to find funds which aim to make a positive contribution, alongside an attractive financial return. These are accessible online through investment platforms such as Novia with further additions due shortly. The Positive Impact Portfolios will also be available via ‘Simply EQ’, our soon to be launched simplified advice solution. The next step Analysis of past performance of the EQ Positive Performance Portfolios suggest that there is no correlation between impact and financial return – the adverse impact of negative screening seems to be compensated by the benefits of the positive impact investments. On that basis there is no reason to expect a positive impact approach to have an adverse reaction on performance. Impact investing is not only about selecting investments that do good, it is just as much about selecting good investments. dlardoux@eqinvestors.co.uk

Wealth & Finance International | September 2015

LCJ Investments The LCJ FX Macro Strategy is a fundamental and discretionary global macro strategy expressed through currencies.

LCJ was launched in 2007 as an independently managed investment boutique by Conor MacManus, Jonathan Tullett and Leonora Kerry Keane. The co-portfolio managers, Conor MacManus and Jonathan Tullett, have between them over 37 years of experience working and trading in FX markets which we believe provides the foundation for success. The LCJ FX Fund Strategy investment universe includes major currency pairs, non-traditional crosses, and emerging market currencies. Employing a diverse range of market data and analysis, and extensive experience of FX Markets, we identify attractive medium-term and long-term opportunities, through which we seek to provide a favorable risk-return profile while protecting capital. Since inception the Strategy has been managed through a variety of different economic and market conditions, and has consistently produced long term class-leading risk-adjusted returns utilizing a robust risk management framework. Looking back at 2014, we are happy to report that despite difficult trading conditions in the first two quarters, we finished the year up 10.80% net, maintaining our consistent long term performance track record during what has been a challenging period for the asset class over the past few years, and we were again nominated for an EuroHedge Award (Commodity & Currency), following our previous nomination in 2012. As we moved into 2015, we anticipated the environment being better suited to our Strategy, with the rising volatility and macro factors in play driving divergence between currencies, which allows the Strategy to further capitalize on medium term trends. This has turned out to be the case, despite a dramatic start to the year in January with the removal of the CHF floor by the Swiss National Bank, and a tumultuous August ignited towards month end by the unexpected mini-devaluation of the Yuan by China, we are pleased to report that we have successfully navigated the LCJ Macro FX Strategy through these events in the year to date, highlighting the strength of our risk management, and have made positive returns in 6 of the 8 months to August, resulting in a net gain of +7.84% YTD.

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Wealth & Finance International | September 2015

The Increasing Investment in Fast-Growth Hybrid Businesses 38

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Hybrid companies which combine a digital platform and a real life in-demand service on the ground are on the rise. Michael Bruce, CEO of Purplebricks.com, looks at how this revolutionary business model offers opportunities for growth and where investors can look to find the next hybrid superstar.

How to Spot Investment Opportunities in Hybrid Businesses With the rise of hybrid companies shaking up a range of different industries, there are increasing opportunities for investment in fastgrowth businesses with potential for rapid expansion. From food delivery services like Deliveroo and collection models, to services previously confined to the high street, the hybrid model offers new avenues for progression and in turn possibilities for investors. For those looking to capitalise on this trend, the most promising hybrid businesses offer one – or more – of the following three distinguishers.

It is the hybrid model that enables each of these new starters to offer a win-win service, a goldmine for investors. The fusion of online and real life services is opening up markets that purely digital or purely physical businesses struggle to tap into, and growing others beyond their traditional limits. Convenience and Customer Service It’s not just reaching new markets that can drive rapid growth in hybrid businesses. Providing a far more sophisticated and convenient service is a key success point for companies that combine online and offline offerings.

Opening Up New Markets Some of the most exciting hybrid businesses don’t just disrupt a market but open up a new one entirely. While takeaway platforms like JustEat connects hungry customers to restaurants which in turn deliver the takeaway, their service is purely digital. Such websites are an online marketplace: an introduction service, a facilitator and a system through which easy card payments can be made. Its employees power the website – they don’t power the deliveries themselves, which are left to the restaurants.

The consumer market across the board is becoming increasingly 24/7. It’s a buyer’s world, with customers demanding instant choices, instant availability and instant delivery. If your service isn’t bending over backwards to accommodate your consumers, you’d better expect to be left behind. Hybrid businesses have the capability to do this thanks to their 24/7 availability and by making convenience a central focus. It is this fear of being left behind that has caused conflicts between traditional and hybrid businesses. The rise of Uber has led to thousands of taxi drivers staging protests across London, Paris, Madrid, Milan and Berlin in opposition to the company. Ironically, last year’s London protest by black cab drivers pushed Uber registrations up 850 per cent. Uber is a far more convenient alternative to a long-standing, dated service. The effort of finding a cab or waiting for a requested taxi to arrive, exacerbated by the nuisance of finding a cash machine before getting into a cab, means that millennials are flocking to Uber for its ability to accommodate customers’ needs.

Hybrid businesses, however, are now taking cities by storm. Deliveroo, Meals.co.uk and Dinein are all fusion models which bring takeaway to the doors of consumers, but these businesses actually use their own couriers to collect and drop off the food. This hybrid model means that customers can access some more upmarket restaurants and smaller independent eateries that wouldn’t usually deliver. This ‘intermediary’ model is powering huge expansion outside of the capital, with some of these start-ups now operating in cities across the country. The incredibly fast growth of such a business has clear potential for investors. Deliveroo, for example, rounded up $25 million in Series B funding in January.

Customer service is an important part of making sure that the interests of the consumer are at the very centre of all your operations. People place more trust in a company when they can deal with a representative face-to-face, a difficulty for purely digital services. A hybrid model, however, combines their online convenience with people on the ground who can interact with consumers day to day. Giving your business this human face goes a long way in building customer loyalty.

Hybrid companies are often also intermediaries – they sit between the customer and the service or product. Businesses like JustEat and Deliveroo don’t just own the customer’s card details and the transaction platform to make life easy for their users. They also own the customer relationship, having slotted themselves neatly between the manufacturer or service provider and the customer. The relationship between the intermediary and each party is stronger than that between the customer and the company creating the product or service itself, so that the intermediary is always the ‘go to’ and front of mind of the customer.

One start-up offering sophisticated customer service is on-demand shipping provider Weengs, an app which will dispatch one of their couriers to you within 15 minutes of you sending them a photo of the item you want shipping. They’ll package your item up for you, take it to their central warehouse and then calculate the most affordable shipping option. The digital platform works in tandem with Weengs’ couriers to ensure that the customer experience is seamless and as convenient as possible. Speed and availability are key, and hybrid businesses have the capabilities to offer both.

As well as creating new markets, hybrid businesses often have the power to grow existing markets beyond their traditional limits. In San Francisco, Uber has caused the same people to take more taxi rides than previously, because of the convenience they offer. The brand now makes over three times the revenue of the taxi industry in the region.

Wealth & Finance International | September 2015

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It is constant availability that a hybrid model facilitates so well, while still ensuring consumers receive a ‘real-life’ service from people on the ground. Speed and availability are key, and hybrid businesses have the capabilities to offer both. Undercutting On Price One of the clearest ways in which the combination of on and offline services is disrupting the market is in these companies’ ability to drastically undercut costs. A hybrid model can often provide all the vital services of their traditional competitors, but without some of the biggest overheads usually involved. With the combination of ‘on the ground’ and digital resources, many of the costs of the service provided can be eliminated by moving some operations online. For example, expensive high street premises, favoured by restaurants, shops and estate agents, can be avoided altogether. Moving bricks and mortar operations online is especially profitable for those aspects of services which are in any case more convenient, effective or efficient for customers when offered online. Passing this cost saving on to the consumer means that many hybrid companies are disrupting long established markets by offering a service that traditional competitors cannot beat on price. An alternative to getting rid of expensive premises is to utilise your necessary premises to cut costs in other ways. For example, removing the delivery element of certain consumer shops can save money, instead offering convenient click-and-collect solutions. The delivery process is easier for the company, it can be a convenient option for consumers who don’t want to wait in all day for a package, and the cost saving can also be passed on. Combining digital and physical services can in this way be create double or triple benefits for all involved. Investing in a digital-based business that can flex its cost base when it needs to is a great advantage – especially in cyclical markets – compared to investing into a bricks and mortar operation where a business can be locked into expensive leases for a long period. What can your business do? To summarise, the businesses which will likely attract investment are those which are opening up new markets, offering next-level convenience and customer service and drastically undercutting competitors on price - just three indicators that a hybrid business may be heading for the stars. Businesses hungry for recognition in crowded markets should take a step back, look at the wider industry and consider, what needs improving? What could be made simpler or more consumer-friendly? If you look hard enough, existing models will lend themselves to the latest technology, and can be fused together to form revolutionary concepts. But at the same time, people remain key, and the winners will be those companies who successfully adopt the latest technologies without disrupting the vital human element, to ensure customer service remains top of the priority list. As these hybrid companies develop and more enter the arena, the opportunities for investment are only set to grow.

Wealth & Finance International | September 2015

“It Makes Sense to Share”

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David Rogers, Founding Director, Rocksure Property. The reason why the Sharing Economy is growing apace is that it makes sense. Such is the proliferation of the sharing concept that millennials often don’t realise that they are even participating. Not so much a choice, it has become a right and a way of life that is so common it has infiltrated into every aspect of our day-to-day lives. Over 8 million people now use Uber1, a taxi service which essentially allows passengers to rent time in drivers’ personal cars and has transformed the way we travel across cities. Similarly, Airbnb has taken the travel world by storm by cutting out the middle man and allowing individuals to list, find and rent from a choice of 1,500,000 dwellings in 34,000 cities across 190 countries. Both Uber and Airbnb rely on enhanced technology to operate efficiently and it is this technology that helps reduce transaction costs and exposes the offering to a tailored yet wide-reaching audience.

Given the high net worth’s proclivity for travel, flexibility and variety has always been an important tenet of our philosophy and we wanted to ensure that this geographical reach was extended as far as possible. As such, Rocksure’s sharing formula goes even beyond the investors in a single Fund and the wider company. Through hand-picked reciprocal arrangements with similar companies in the United States and Canada, there is a ripple effect which enables Rocksure investors to share the use of literally hundreds of similar properties around the world, thus adding a new and greatly enlarged dimension to the sharing of property assets. Another notable benefit of the Rocksure model is that it spreads investment risk across a range of markets rather than exposing a lump capital sum to a single destination. This means that the potential for Capital Gain is more robust given the fact that there are stakes in between 6 and 10 different locations rather than just one.

Other examples of common sharing models include Parkonmydrive. com, allowing those with empty driveways and garages to rent them out to motorists, Zipcar, a car sharing alternative to rental and ownership and DogBuddy, an online community connecting dog owners with local and experienced pet lovers.

I think that, for this kind of sharing to be really appealing, the value of the asset has to be substantial enough – I am not sure that it would work as well with a £160,000 car as with a £1.6million house – and, obviously, a spread of risk and a chance of capital gain are attractive too.

Whilst the sharing economy undoubtedly appeals to the mass market, it also makes sense to the higher net worth individual. The first notable example of this really ‘taking off’ is Netjets which offers investors shares in an aircraft, based on the flying hours that they actually need. Before this of course there were also racehorse syndicates which gave people a chance to own a share of previously inaccessible prized assets.

The ‘downside’ of sharing, of course, can be getting out of the arrangement and it is vital that this is anticipated. A ‘matched bargain’ is all very well provided there is a match. Rocksure’s solution for this is for each Fund to have a limited life roughly equal to the desired hold period of the investment and, at the end of that life, to have a compulsory redemption after all the properties in the portfolio have been sold and the Fund is ready to be liquidated. At this point, the proceeds (including any capital gain) are distributed to the investors, who are then responsible for their own Capital Gains Tax.

So, when Rocksure introduced its pioneering concept and model for second (and third) home ownership in 2006, we were applying common sense to a sector in which, until then, it had been noticeably lacking. For a hundred and fifty years or so before that, wealthy individuals from the UK, the USA and other countries had been buying holiday homes in, for example, Tuscany and Provence when they knew very well that they would only be spending a few weeks a year there. Even so, they were willing to lock up the capital, pay the huge expenses, accept the responsibilities of remote ownership, and put up with the hassle from time to time.

It is interesting to note that no one has ever asked to exit from a Rocksure Fund early, even after the financial collapse of 2008/9. I think there are two main reasons for this: one is that Rocksure takes a lot of trouble to make sure that the investment is a ‘fit’ for the family at the outset, and the other is the mandatory redemption at the end. The only difficulty we have encountered has been a few divorces but, even then, we have been successful in persuading them to share the use of the assets.

Things had moved on somewhat by 2005, when Rocksure’s programme was being planned, but the choices were only between buying a whole house, or a timeshare which usually involved no equity ownership of real estate at all and considerable risk.

Something else that may deter potential shareholders is concerns about how the usage of the assets will be managed. At Rocksure, we have constructed sophisticated bookings software that guarantees fair allocation of nights and ensures that during busy periods there are no clashes or monopolisation of properties and dates.

The benefits of sharing the assets, sharing the running costs, having no remote landlord responsibilities, and being extremely well looked after (with a full staff at the villas, including a Cook, so that every member of the family gets a real holiday) are pretty clear; but there is another huge benefit from Rocksure’s sharing formula: Instead of owning one property in a single destination to which one feels obliged to return several times a year in order to get any kind of return, an investor will co-own, say, 6 magnificent million-pound plus villas in different destinations, cultures and climate zones and offering different activities to the family. What is more, shareholders will be able to use their Rocksure ‘pounds’ to contribute to stays across the entire company portfolio, beyond those properties within their specific Fund.

But don’t take my word for it; take a look at the community that surrounds us, at our day-to-day lives and how we assimilate the sharing formula into our existence and then everything starts to make sense. Sharing, as far as we are concerned, is the future of second home ownership allowing for optimum lifestyle benefits in the 21st Century. www.rocksure.com / 01993 823809 1

http://expandedramblings.com/index.php/uber-statistics/

Wealth & Finance International | September 2015

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Qatar: A Haven for Emerging Markets Investors? Nick Wilson is Chairman of the London-listed Qatar Investment Fund Plc.

Qatar might not be the first emerging market that springs to an investor’s mind - or even the first in the Gulf region - but recent months have shown that its economy boasts a combination of significant advantages: a long-term investment plan and a level of resilience to external economic shocks and commodity price fluctuations.

This is encouraging not just for construction and related firms, but for financial services companies, as well as for the tourism, transport and leisure sectors. Take the consumer and retail market in Qatar which is transforming, with over 1 million sq m of retail space set to open in the next two years. Consumer sentiment is the highest in the MENA region and as a result the retail sector is forecast to grow at an average 9.8% annually between 2013 and 2018, compared to 6-7% in the rest of the region. High-end hospitality is booming too, catering for a population forecast to rise by 7% by the end of 2015, as well as an increasing number of international visitors. 125 hotels are under construction and are expected to bring the number of hotel rooms in the country to 35,000, with 85% of hotels rated 4* or above.

Once known predominantly for being the wealthiest country in the world by per capita income, Qatar has found itself in the news recently with uncertainty surrounding its hosting of the football World Cup in 2022 and has faced the new normal of lower oil prices and emerging market volatility. However, look beyond the headlines and you will see a country where growth remains on-track and is increasingly opening up to international investors. Undoubtedly Gulf markets have faltered in recent months as a result of the volatility in emerging markets. Investor concern about the slowing growth of the Chinese economy is contagious and sustained low oil prices are adding to fears that other emerging economies might follow. The MSCI Emerging Markets Index fell 6.0% between 14 August and 21 August 2015 and over the same period the Bloomberg GCC Index was down over 11%. However, whilst easy to group markets in the Gulf region together, it is important not to overlook the variance in how the economies are faring. For example, for the quarter to date the performance of the Qatari market has outperformed its GCC peers, with the Qatar index falling 11.9%, against a decline of 17.9% and 15.5% for Saudi Arabia and Dubai, respectively.

This certainly creates a much more sophisticated investment prospect than any you could find in the emerging sub-Saharan African region, for example, where inefficiencies in governance and insufficient investment in infrastructure impose limits to the sustainability of growth. What is more, the sophistication of Qatar’s stock market is developing rapidly and whilst European investors often hear of the Qatar Investment Authority – the country’s sovereign wealth fund - making high profile property investments overseas, the country is taking measures to encourage foreign investment domestically. Just last year index provider MSCI upgraded Qatar from frontier to emerging status, as liberalisation of the market in the country gathers pace. The Qatar Exchange (QE) has also relaxed companies’ foreign ownership limits, recently increasing the limit from 25% to 49%. Furthermore, investors from elsewhere in the Gulf have been re-designated as non-foreign, further encouraging liquidity in Qatari shares, to the benefit of international investors.

So what distinguishes Qatar from its neighbours? Certainly, Qatar is a small country with very large natural resource reserves, mostly natural gas, and so solid GDP growth is to be expected. But the economy is seeing the benefits of the government’s long-term economic planning to diversify, with over 60% of its GDP now derived from non-hydrocarbon industries. In fact, these industries are growing faster than hydrocarbons – rising 11.5% last year. This is the reason that, despite the oil price plunge, Qatar’s growth remains stable at between 6% and 7%.The focus on infrastructure development is continuing – the sound logic being that if robust infrastructure is provided, economic development will follow.

This all sounds like it is moving in the right direction, but how do returns and valuations compare? Fortunately for UK investors, Qatar provides attractive dividends. The Qatar market yields 4.7% and is forecast to pay 5.2% for 2015. Compare that to the 2015 forecast yields of 3.54% for the UK FTSE All Share and 2.04% for the US S&P 500. Despite this, Qatari stocks are continuing to trade on attractive valuations, with a forward P/E ratio of only 10.6x – compared with 11.6x in Saudi Arabia.

Spending on infrastructure of $240 billion is expected ahead of the FIFA World Cup 2022 - $182 billion in the next 5 years alone. While the World Cup was a catalyst and is a deadline for some of these developments, the lion’s share of infrastructure spending is aimed at continuing long-term development which was planned or underway long before Qatar won the right to host the event.

With the economy increasingly diversifying, investment in Qatar is becoming an attractive option for those looking for exposure to a high-growth emerging market, which has proved itself more resistant to the market volatility felt by mainstream asset classes and less sophisticated emerging markets. It is comforting for investors in Qatari shares to know that even if the oil price bounces back, future returns are not reliant on the commodities cycle.

Wealth & Finance International | September 2015

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Assessing the Hidden Costs of Data Management in an Asset Management Firm The desire to pursue new, sophisticated investment strategies generates conflicting objectives. All firms wish to increase their business agility and shorten time to market. This must be weighed against the need to manage a growing body of complex data that is also growing in complexity. On top of this there is a stringent requirement to demonstrate good data governance to stakeholders and the regulator. All of this must be achieved without increasing costs, or at lower costs.

Hidden costs exposed Asset management firms incur hidden costs throughout the data management process. Although these are not new, they are exacerbated by the need for tighter data governance and increased regulatory oversight. Sources of hidden costs include:

Feedback from the market suggests there are many elements of data management costs. Visible costs, such as license fees, increase in line with use and are normally predictable. But, in our experience, rising external data licensing costs have often diverted attention from the escalating internal challenge of getting data fit for purpose to suit specific business processes, such as portfolio management, risk management or performance measurement. Across the industry and within all firms, many more people perform data management tasks than those in data management teams.

People. In most firms, many people have to perform data management tasks is addition to their own job, such as a portfolio manager or risk analyst. Market data systems. Some firms have implemented systems to support the data management process, including reference data management systems, data warehouses, ETL tools and hubs.

Often, heavy costs begin to accrue once the data is on board. This is especially true for specialist data types, such as index data and benchmarks that are complex and difficult to manage. Such costs relate as much to governance and management of the data as to data validation and quality assurance and can add up to a multiple of the visible data costs.

Service providers. Asset management firms often enlist help with data management from third party providers, including custodians, back-office outsourcers and managed service providers. Other systems. Many firms use additional systems, add-on tools and services to acquire, cleanse and deliver market data.

In our experience, many firms struggle to identify precisely where costs occur, as they are hidden elsewhere in the organization, such as the front or middle office. In practice, additional data management is performed out of sight, and therefore not understood or quantified. Business users often regard data management as an unavoidable part of their job, even if it is low value adding. Firms that fail to manage data effectively incur hidden costs but also significant opportunity costs reflected in impaired business agility and weakened competitiveness.

The above costs are confirmed by an independent study1 that measures these in terms of Full Time Equivalents (FTEs). Asset managers in the survey sampled had, on average, 7.5 FTEs in IT and Data Management dedicated to â&#x20AC;&#x2DC;business as usualâ&#x20AC;&#x2122; activities. However, this figure doubles to 15 FTEs when staff from other departments, such as the front and middle office who also perform data management are included.

At RIMES, we believe that a managed data service offers a fresh approach to data management that helps firms identify and reduce hidden costs and prepare for strategic growth.

In practice, the 15 FTEs doubles to 30 FTEs, when staff involved in periodic implementations of systems and solutions for managing market data are included, for example to comply with new regulations. So, the actual number of FTEs involved in data management is four times

Wealth & Finance International | September 2015

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greater than those in dedicated data management functions. This figure is confirmed by our own interactions with the industry.

For example, a managed service equips a firm to implement new projects, such as launch new funds or support a more complex investment strategy with little or no incremental capital expenditure. A revenue expenditure model means that costs can be aligned with business success.

The economic benefits of a managed data service for asset managers As the investment environment has changed, drivers of data management have evolved accordingly. In the pre-2008 environment, data management within asset management firms comprised centralized operational teams, focusing on: • Data timeliness for key business processes • Data quality and accuracy • Cost management – both visible and hidden costs.

One organization noted that as it rolled out new projects in the future, it would continue to see the faster time-to-market benefits and project cost savings from RIMES. Organizations interviewed were also confident in the ability of RIMES to partner with them on future product offerings and additional services.

While these drivers remain relevant today, feedback from the RIMES outreach program reveals new strategic drivers that increase the data management burden.

Flexibility may also generate additional benefits, for example facilitating business change, winning new mandates, and simplifying regulatory compliance.

All firms face additional data management challenges that include: • Improving transparency and control to support data governance and evidence regulatory compliance • Enabling and facilitating strategic business change • Shortening time to market by increasing business agility and responsiveness.

The exact value of flexibility will vary according to each organization but in most cases RIMES clients report it as significant. Risk – the Forrester TEI framework also accommodates the inclusion of risk metrics that include ‘implementation risk’ and ‘impact risk.’ The greater the uncertainty the wider the potential range of outcomes for cost and benefit estimates so the model remains firmly rooted in practical reality.

As data management becomes more strategic, it has moved up the corporate agenda and is receiving close attention at executive level. But, firms need to understand the potential economic benefits of any course of action before committing to a significant investment.

Next steps The Forrester TEI framework has been designed to calculate the potential benefits of managed data services for any asset management firm. We are encouraged by its power and flexibility and would like to help you measure the potential benefits for your own organization.

In our experience, RIMES clients report both quantifiable and qualitative benefits. These include: Quantifiable • Improved productivity and operational efficiency • IT resource savings with improved data feed and delivery maintenance • Improved ability to scale without additional headcount • Faster time to market • Reduction in third-party legacy vendor fees.

The RIMES Managed Data Service (RIMES MDS) RIMES MDS provides our clients with the means to address their key buy-side data management challenges. It can improve service levels, ensure quality data for disparate business functions consuming data, manage the TCO (Total Cost of Ownership) of the full data management workflow and provide the business intelligence required to implement effective data governance processes and procedures.

Qualitative • Improved data quality and accuracy • Increased agility and responsiveness • Better risk management and risk mitigation • Access to expertise.

Read more at www.rimes.com/forrester and http://www.rimes.com/what-we-do Cutter Associates, The True Cost of Market Data: Operational Impacts, June 2014

A recent study, commissioned by RIMES and conducted by Forrester confirms these benefits but goes further to establish the potential return on investment (ROI) that an individual firm could achieve on a managed data service. The study adopted Forrester’s proven methodology to asses the Total Economic ImpactTM (TEI) of a managed service. It offers a robust framework and recognizes that all benefits have a positive impact on the business even though qualitative benefits may be hard to enumerate in the short term. Quantitative benefits will be discussed in more detail in a subsequent paper. Flexibility is also central to the TEI framework. Forrester defines flexibility as an investment in additional capacity or capability that can be turned into a business benefit for some future additional investment. In effect this provides an organization with the right or ability to engage in future initiatives but not the obligation to do so.

Wealth & Finance International | September 2015

Are You Doing Your #duediligence? Siobhán Langwade and Kate Schmit – Stevens & Bolton LLP

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When acquiring a target company or business, the due diligence (“DD”) exercise is a core part of the acquisition process. This gives the buyer the opportunity to delve into the business from a legal, financial and commercial perspective while providing insights into how the deal should be structured and priced. The aim of DD is to really get to know the business, unearthing issues giving rise to potential liabilities or otherwise undermining the value of the target.

Although the procedure of raising DD enquiries of the sellers is the tried and tested method when starting a DD exercise, Brandle’s Roberson queries if the traditional DD format can be so easily applied to assessing the social presence of a target company or group. He comments that “it will be a natural evolution to see social media presence forming part of the DD exercise in an M&A transaction however the issue is that target companies themselves are ill-equipped to know the extent of their own social presence and often are only aware of 50-60% of where the company is being represented in the social eco-system”.

The three traditional limbs of DD are commercial, financial and legal with clients, lawyers and accountants all understanding their part in the process. The responsibility for these elements tends to break down along traditional lines; • the client undertakes commercial DD to get to know the business, • the accountants look at the financial and tax aspects of DD; and • the lawyers deal with reviewing contracts, employment issues and real estate etc.

In the UK there is currently little to no formal guidance on how companies should and shouldn’t be using and policing their social media accounts. This makes it difficult to know what constitutes standard market practices on social media. In the US this is beginning to change, particularly in the financial industry. The Federal Financial Institutions Examination Council (FFIEC) issued guidance in 2013 to educate US financial institutions (particularly the mortgage industry), on their use of social media and compliance obligations. The guidance sets the finance industry standard on how a company’s social media platforms should be utilised and promotes: • identifying all applicable laws that govern a company’s online activity and putting this into a social median policy so that all members of staff will be sensitive to reputation risk; • using social media monitoring tools that can identify anything that may cause a negative reaction and respond to complaints; and • training employees to use social media professionally.

In our experience, amongst all of this activity, the social media presence and activity of the target often fails to come under the same scrutiny and social media is still not included as a standard part of the DD process. Chip Roberson, founder and CEO of Brandle Inc., a California-based software company specialising in the inventory of a company’s social presence comments that “at Brandle, companies approach us postM&A transaction to carry out a tidy-up exercise of the target’s social media. The acquiring company would benefit far more from requiring the sellers to carry out this exercise pre-closing. Not only does this save on costs but will also give the acquiring company insight into how disciplined the target is and the strength of its governance procedures”.

In considering a social media due diligence exercise a good starting point may be to look to some of the very public cautionary tales where social media has bitten back. Salutary lessons can be learned from Googling “social media fail”, returning a catalogue of slips and trips. The majority of these are drawn from companies’ corporate social media accounts rather than the personal accounts of employees. Certain factors are common - poor judgement or taste, staff inexperience or lack of proper internal procedures. We see a myriad of examples of brands ill-advisedly linking posts to anniversaries (e.g. sales promotions linked to 9/11), natural disasters or other trending hashtags without fully understanding or thinking through the context. Some other notable examples include: • American Apparel marking 4th July with a picture of fireworks posted on Tumblr. The image chosen was not of fireworks at all, but the 1986 Challenger Shuttle disaster - cue it being rapidly taken down and an apology forthcoming. • During the HMV administration job losses were being announced. Staff members used the official HMV Twitter account to provide a running commentary on proceedings. One even provided the sage advice “Never fire the social media people until you’ve changed the passwords: @hmvtweets has gone rogue”

Social media is a key form of business communication, influencing the way businesses market, advertise and communicate with the world. In some markets Facebook is now the single largest media platform (outperforming print and TV). Its power is the ability to directly reach customers and business peers, any time, no matter where they are. Through a brand’s social media presence customers, competitors and other online users see the opinions of the organisation, who it follows, what it stands for and how it responds to its customers. In addition to looking at the internal social media procedures and policies of a target, a buyer may also want to audit its wider social media presence and the ‘voice of the customer’ reflected in the interactions that the target and others have through social media channels. The social media footprint of an organisation is potentially huge. Clearly the target’s official social media accounts should be included in a tailored DD exercise, but what about the personal LinkedIn or Facebook activity of employees that identifies a link to the target? Some careful thought should therefore be given to the scope of any social media DD exercise.

Undoubtedly these are extreme examples, but given the potential reach and impact of a company’s social media footprint, why does this not form a standard part of DD? Business use of social media continues to grow apace and the incidence of spectacular social media fails demonstrates that a number are still learning and adapting to the new normal. In undertaking transactions the market is only just beginning to see DD processes and procedures adapt to address the impact of social media. No market standard has developed in the UK yet as to what is an appropriate regulatory system for a company to apply to its social media eco-system, nor who is responsible for assessing this as part of the DD review. What is clear is that, on a deal, thought should be given to how any social media DD is to be undertaken and by whom.

So where do you start? It is perhaps the corporate social media profile which is easiest to subject to DD. Initial enquiries could include requesting details of: • All social media accounts • Who is responsible for managing the social media output and who else has access • The procedures and policies around what is posted • Whether employees are obliged to manage their personal social media accounts in a way which does not bring their employer into disrepute • All postings in the last 6 months including deleted postings

Wealth & Finance International | September 2015

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Strategic Governance for Family Offices: Why Do It and How to Approach It Amelia Renkert-Thomas, Co-founder of family business consultancy Withers Consulting Group, outlines the need for governance and the different approaches family offices can take to it, in partnership with the Family Office Association.

Governance, at its most basic, is a system for decision making. Every organisation, from single family offices to multinational businesses, needs some level of governance. For a family office, effective governance has the following benefits: - It promotes the shared purpose of the family and helps the office to achieve the family’s vision of success while acting in accordance with the family’s values; - It can be scaled up or down in line with the complexity of the family, the assets, the clients and the services; - It creates accountability and so ensures that the family office abides by relevant laws and regulations; - The governance structure helps to manage risk and complexity while promoting efficient decision-making and transparency; - The structure operates as designed even in times of extreme stress and conflict.

Members of the management group, who run the family office on a day-to-day basis, have much the same interests as other senior executives. They seek appropriate compensation with upside bonus potential, a safe, efficient and comfortable working environment, the right staff, equipment, third-party relationships and the budget to accomplish the work, the right balance of responsibility and authority, and opportunities for job and personal advancement

Family members expect the family office to provide services in a way which supports, not hinders, the family’s shared purpose and promoted family legacy and values. They want the family office to make their lives simpler and to enable them to reach their own individual goals

There are simply not enough resources in family offices to satisfy all the wants and needs of each group. As a result, conflict at some stage or other is highly likely.

Many single family offices work effectively with natural governance, where informal decisions are made as and when they are needed. A family office without formal structures, written policies and procedures for making decisions does not lack governance. It simply uses the system of “the way we do things around here”.

It doesn’t have to be damaging, though. The different perspectives, needs and objectives of each group can create the energy that, properly harnessed, will make the single family office more successful. The point is to design a decision-making or governance system that will promote optimal intra-group or inter-group decision-making to resolve conflicts effectively and achieve the strategic objectives of the family office.

Other family offices, particularly those which are more complex or change in a way that makes decision-making more difficult, require a more formal method to ensure that they operate effectively. The respective rights and responsibilities of three separate and distinct groups will need to be clarified. Each will see the family office from a different perspective, having its own needs and objectives: -

Natural governance Natural governance can be efficient and effective, particularly when a small group with common background, values and objectives work together. It is particularly common in smaller family offices where a charismatic individual founded the venture and controls it. But as the family grows and its structures become more complex, it can be very difficult to maintain a natural governance system. New employees, spouses and next gen family members don’t have the background, experience or tacit knowledge to understand ‘the way we do things around here’.

Clients look for the family office to provide appropriate investments and/or financial, reporting, tax and admin services. They are concerned about return on investment, timeliness, accuracy, compliance, privacy and risk management. Clients want to make sure that the cost of delivering these services is reasonable and fairly allocated among the various clients

While nimble and adaptable, natural governance can be prone to catastrophic failure when circumstances change. Generally speaking, natural

Wealth & Finance International | September 2015

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governance will fall short and a more formal governance system will be needed when a larger, more diverse group seeks to exercise joint control and decision-making over the family office. This situation typically arises as the family and the family office grow more complex over time. Formal governance Designing a more effective governance system for family offices is a four-step process: 1. Understand the Shared Purpose of the family The Shared Purpose of a family is a combination of the family’s vision for the future, it’s plans for achieving that vision, and the individual life aspirations of family members, all shaped by the family’s values. No two families have the same Shared Purpose, hence the saying “If you’ve seen one family office, you’ve seen one family office”. 2. Understand the complexity of the family office The more complex the family office, the more important formal governance will be. This is because the nuanced and unspoken rules that make up a natural governance system, will tend break down as multiple decision-makers try to make complex interlocking decisions. Decisions such as ‘how much liquidity should be maintained at all times?’ implicate management, clients and family; to be made effectively, will require balancing the short and long-term needs and interests of all three groups. 3. Determine appropriate governance structures and policies that suit the shared purpose and complexity Governance structures and practices need to be formal enough to allow the family office, clients and family to make effective decisions about the assets being managed, but not so formal that decision-making bogs down. Generally, the more complex the family and its assets are, the more structure will be necessary. 4. Implement the new system, including feedback systems to ensure organised accountability In an effort to design better governance, more than one single family office has adopted a handful of so-called ‘best practices’, written them up in a manual and thrown the manual on a shelf. Those family offices that follow this path are often surprised when conflict resurfaces and everyone in the system reverts to their old patterns instead of following the practices in the manual. ‘Best practices’ are a good starting point, but they are rarely specific or targeted enough to handle the particular circumstances that a family office finds itself in. If instead, family, clients and management have worked together to design a governance system that will fit the family’s Shared Purpose and the complexity of the family office system, the odds of success will increase. For appropriately situated families seeking greater control and co-ordination over the management of their affairs, a family office can be a valuable tool. However, establishing a family office is only the first step of what should be viewed as an ongoing process, rather than a permanent fix. Much as you would never expect a ten-year-old child to fit into the shoes he wore when he was five, governance that was sufficient in a family office’s earlier years, can’t be expected to function effectively as it evolves and becomes more complex. Reassessing the suitability of the family office’s governance over time, based on its ability to satisfy a family’s shared purpose and degree of complexity, is key to ensuring that a family office’s benefits are optimised. Designing effective governance requires an understanding of each family’s unique and changing circumstances, and a departure from the notion that ‘best practices’ are always best.

Wealth & Finance International | September 2015

Transforming Accounting: The Role of Tech in Innovating the Industry By Simon Leech, CEO of Validis

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Accounting is an industry full of paradoxes. Traditionally a very riskaverse market, characterised by slow decision making, it’s also an industry where technology has always played an important role. After all, the introduction of Microsoft Excel and the electronic spreadsheet made accounting faster, less error-prone and more efficient and the advent of basic accounting software made forecasting and number crunching easier and less time consuming than ever before.

tancy services means that what used to be the core offering only 10 years ago is now often understated by many consultancies, devaluing the skill set of this once thriving industry. But it doesn’t have to be this way. The renewed interest in SME services, and the shift towards paperless systems driven by scalable, software-based technology solutions are making auditing easier and giving auditors the opportunity to become digital champions – driving transformation across their organisations. The question remains, are auditors ready to take on that new role?

So why then, in the 21st century, are some accounting firms finding it so hard to innovate and adapt to technologies such as Cloud Computing and Big Data? Two years ago only 11% of accounting firms were using cloud solutions1. Today that figure stands at a mere 19%2. Given that Goldman Sachs predicts spending on cloud computing in the IT industry in general is set to grow at a rate of at least 30% until 20183, accounting truly seems to be falling behind.

Awaiting the fate of dodo Much remains to be done if attitudes towards tech are to change. As accounting professionals worry about the emergence of new technologies threatening their very existence, a lot of them think that embracing new software solutions equals unemployment caused by technology.

Disrupting from the bottom up Yet, financial services is often cited as an industry with innovation at its heart. A lot has been said recently about start-ups shaking up the finance stage and big players having to play catch-up. That is certainly true for banking, with smaller challenger banks such as Metro and Atom Bank gaining traction. It is also the case for payments, where a number of alternative payment providers such as Square, Zapp and Intuit are stealing a large portion of the market. Yet disruption in finance does not always come from the bottom up and for areas such as accounting, the attitudes towards technology vary greatly.

And the current focus on automation isn’t helping. A recent project undertaken by the BBC, “Intelligent Machines”, shows that chartered and certified accountants have a 95% risk of losing jobs to automation. This places them just outside the top quartile for the UK when it comes to jobs at most risk of being replaced by robots in the future. The news is even worse for financial account managers (top 4th job in terms of highest risk of being replaced by automation), book-keepers (top 8th) and taxation experts (top 26th). So are accountants really destined for extinction? Certainly not. Yes, technology can automate certain tasks, and take human error out of the equation. Yes, it can help accountants do their job more effectively and with less time wasted for manual, mundane tasks. Yes, it can completely replace some accounting responsibilities. But that’s precisely why the attitudes towards tech in the industry need to change. Accountants are facing a massive opportunity to play a more crucial role for their clients – upskill, become more strategic and create a new market for themselves, where they no longer work behind the scenes but play an active and important role in driving business forward.

The biggest disparities, when it comes to the use of technology in accounting, can be seen between the high street accountancy practices and the Big Four (Ernst & Young, Deloitte, PricewaterhouseCoopers and KPMG). Small auditing firms are often completely uninterested in new technologies – they worry that by fixing the main pain point in accountancy and tackling manual paper-based methods of auditing, new cloud-based solutions are going to put them out of jobs. On the contrary, large companies like the Big Four see the potential of the new tech immediately and are keen to adopt it in order to explore new revenue streams and market opportunities.

Whether they are going to act on this opportunity – only time will tell.

Taking on the SME market This disparity in approach to technology is very much driven by a renewed interest in small and medium enterprise (SME) services, which is where we see a lot of the growth opportunities. Traditionally, SMEs were not able to take advantage of the same services large organisations could offer to their biggest clients, since they could not afford the high fees and time commitment associated with full-scale audit services. As a result, they would often miss out on high-end services offered by the Big Four, such as business consulting.

About Simon Leech and Validis Simon Leech is CEO of Validis, a fintech start-up and data transmission company developing software that allows global accountancy firms and financial institutions to perform audits on their customers in four simple steps – dramatically reducing the time of an average audit from 3 days to 4 to 8 minutes. 1 http://www.cloudpro.co.uk/accounting/3043/accountants-slow-toadopt-cloud-based-software 2 http://www.cimaglobal.com/About-us/Press-office/Press-releases/2015/Accountants-missing-out-on-cloud-technology-revolution-due-to-unfounded-security-fears/ 3 http://www.forbes.com/sites/louiscolumbus/2015/01/24/roundup-of-cloud-computing-forecasts-and-market-estimates-2015/

But technology has changed that market too. Nowadays SMEs expect the same sort of reliable, fast and accurate service as larger clients. On demand, and per-usage subscription options, offered by the latest cloud-based accounting software, mean that smaller firms can now take advantage of the same benefits as large clients. Changing the face of audit All of this opens up an opportunity to shift perceptions of audit as a loss leader. “Vanilla services” such as audit have long been facing a great pressure on margins – to the point that audit is considered a loss leader by many accountancy firms. The focus on upselling non-audit consul-

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