FundForward 2015 - International edition

International Edition

2015

The Magazine of FundForum International on the People & Ideas Shaping the Future of Asset Management

NEW STANDARDS FOR RFPS ALBERT REITER GETTING SMARTER ABOUT TALKING RETAIL CUSTOMERS’ LANGUAGE HOLLY MACKAY THE SOCIAL PHYSICS OF TRADING SANDY PENTLAND

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Content Title

Author

WELCOME

JENNY ADAMS FundForum International

5

TIME TO RETIRE THE PENSION

ANDY MASTERS KPMG

6

SHOULD ASSET MANAGERS LOOK TOWARDS ABU DHABI?

STEVE BARNETT Abu Dhabi Global Market

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THEME 1 - RE-ENGINEERING MANAGER SELECTION

Page

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NEW STANDARDS FOR RFPS

ALBERT REITER e-fundresearch.com Data GmbH

10

INTERVIEW WITH A MULTIASSET PORTFOLIO MANAGER

MANUELA THIES AllianzGI

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RE-APPRAISING THE MANAGER SELECTION PROCESS - A FOND LOOK BACK IN TIME…

CLIVE HALE FundCalibre Ltd

13

PRIVATE DEBT IN 2015: THINKING OUTSIDE THE BOX

CHRIS MCCHESNEY Brown Brothers Harriman

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THEME 2 - THE NEW DISTRIBUTION

17

5 WAYS DISTRIBUTION CHANNELS WILL CHANGE IN THE NEXT 2 YEARS

GEORG REDELBACHER MBMs

18

DIGITISATION COMING INTO ASSET MANAGEMENT

AMIN RAJAN CREATE–Research

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GETTING SMARTER ABOUT TALKING RETAIL CUSTOMERS’ LANGUAGE

HOLLY MACKAY Boring Money

21

DON’T LET THE TAIL WAG THE DOG

PETER FITZGERALD Aviva Investors

22

UNLOCKING ADVANCED INNOVATION

JONATHAN MACDONALD Thought Expansion Network

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THEME 3 - FINTECH FOR ASSET MANAGEMENT

25

THE SOCIAL PHYSICS OF TRADING

SANDY PENTLAND MIT Media Lab

26

AN ANTHROPOLOGY OF CYBERCRIME

MISHA GLENNY Author and Journalist

27

THE ROLE OF TECHNOLOGY IN THE FUTURE OF ADVICE

CHRIS WILLIAMS Wealth Horizon

29

EQUITY CROWDFUNDING MODELS: WHAT ARE THE POTENTIAL ICEBERGS?

DR CHRISTOPHER SIER FiNexus

30

CROWDFUNDING GROWS UP

GONÇALO DE VASCONCELOS. Synidcate Room & NICOLA HORLICK, Money&Co

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UNLOCKING THE TRUE VALUE OF DATA

FURIO PIETRIBIASI Mediolanum Asset Management Ltd

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THE SWISS FINANCIAL CENTRE TODAY AND TOMORROW

FRANCO CITTERIO Ticino for Finance

36

THREE REASONS STRATEGISTS GET SCENARIOS CATASTROPHICALLY WRONG

DR. JOHN C. HULSMAN John C. Hulsman Enterprises

38

A MESSAGE ABOUT FUND MANAGEMENT IN THE UK

KARTHIK IYER UK Trade & Investment

40

MONEY LAUNDERERS STAY ONE STEP AHEAD

CLAUDIO FOGLINI Scalaris Economic Crime Intelligence AG

42

THE “LOIM WAY”

THÉODORE ECONOMOU & AURÈLE STORNO Lombard Odier Investment Managers

44

FUNDFORUM INTERNATIONAL CALENDAR

45

THANKING OUR SPONSORS

47

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KPMG AD

Investment Managers where the financial services industry meets the customers

To discuss the big issues facing the industry speak to KPMG at stand 26.

Tom Brown, Global Head of Investment Management, KPMG

kpmg.com

Email: tom.brown@kpmg.co.uk Call: +44 20 7694 2011 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

4

© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

OLIVER for KPMG | OM037661A | June 2015.

FUNDFORUM INTERNATIONAL 2015

WELCOME Dear Colleagues,

The future of Fund Management is being shaped by mega trends beyond the control of any company. Customer-focussed regulation, new technologies driven by more insightful designs for the enduser, to customers’ deepening experiences of personalisation or easy trusted networks in their daily life - all set new expectations for the industry.

FundForum is dedicated to surfacing the positive disruption, the new opportunities hidden within the risk. We are unashamedly the catalyst for shifting one mode of thinking into another, forging new ways of thinking about solving our customers’ challenges in the age of global financial independence.

We are also being reshaped to enable you to make the right judgements. How do you decide how to respond to these challenges? No longer just a series of events, FundForum represents an all year round platform gathering focussed communities around the globe. With over 300 speakers and multiple sessions at Fund Forum International, no-one can attend everything so we have created new channels to keep the dialogues and the creativity evolving throughout the year.

In this Fund Forward magazine we have focussed our content into core themes that echo the main storylines running through Fund Forum 2015: • • • •

The New Distribution Manager Selection Re-Engineered Positive Disruption, Transformation & FinTech For Asset Management Investment Strategy and Scenario Planning

In addition, our social content site WWW.FUNDFORUMLIVE.COM captures the key points on 100’s of captured quick-video insights, memes and highlights. Here you will find the key take-aways of the content that can’t be Googled, the kernels of the conversations that you cannot have online and the combined wisdom of the crowd attending the world’s most influential global asset management event.

So adieu Monaco and thank you! As we prepare to move to the contemporary, creative, trusted and transformed city of Berlin in 2016 there has never been a better time to look hard at industry transformation.

Enjoy FundForum!

Best wishes JENNY ADAMS

Editor in Chief FundForum International jadams@icbi.co.uk | @jenloewiadams 5 FOLLOW US ON TWITTER @FUNDFORUM

SPONSORED ARTICLE

TIME TO RETIRE THE PENSION AND WELCOME THE BRAVE NEW WORLD OF LONG-TERM SAVINGS. Demographic changes, inadequate personal savings, new pan-European regulation aimed at improving transparency and the rise of technology mean that instead of being the last link in the long term savings value chain, investment managers must now think of themselves as being at the start – the point at which the industry meets the customer.

According to KPMG, the experience of each country varies, depending on economics and customs but, following major pension reforms, the UK can been seen as a test lab for many long term savings innovations.

These developments offer exciting new opportunities for forward thinking investment managers who are willing to become customer-centric.

The pensions industry is still all about the Baby Boomers – the generation that saved all their lives, got married once and retired at 60 or 65, living another 10 or 15 years.

Today’s consumers are very different. They have less to invest.

They move jobs more frequently, might get married more than once, they’ll move into a retirement phase, rather than finishing work abruptly, and they’ll live longer than any previous generation.

They’re more demanding.

They enjoy greater choice and they’re more likely to consult social networks before buying

than listen to a so-called expert.

Most importantly, they’ll have a suite of investment products rather than the traditional pension.

This means that instead of segmenting their customers in terms of wealth, customerfocussed investment managers will have to think of them in more sophisticated ways, based on their behaviour and preferences, as retailers do.

managers will have to improve customers’ financial literacy.

As we retire the pension, these changes will be far reaching and long lasting, offering an exciting new way of working - but only for investment managers who are willing to radically rethink the way they operate and become truly customer-focussed.

As a result investment managers will have to look at product development from the opposite end than they do now. Putting together investment products based on asset classes may no longer work.

Instead “mass personalised” products will be marketed to customers in a way that meets their particular circumstances or life stage. US Small Cap Equity, for instance, may make way for the Get on the Property Ladder or Baby Starter Pack investments.

As well as creating more transparent products and rethinking the advice and guidance they offer, these new customer-centric investment

ANDY MASTERS Leader in Life, Wealth & Long Term Savings KPMG explores these themes in more detail at their stand, location 26.

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SPONSORED ARTICLE

SHOULD ASSET MANAGERS

LOOK TOWARDS ABU DHABI? Steve Barnett, Director of Strategy at Abu Dhabi Global Market discusses the benefits that Abu Dhabi Global Market will provide to asset managers looking to do business in the Middle East.

1. WHY IS ABU DHABI AN ATTRACTIVE LOCATION FOR ASSET MANAGERS? Abu Dhabi has developed as a sophisticated international centre of finance over the past 40 years and has a portfolio of investible assets in excess of US$1 trillion. It is this, combined with the ease of access to the economies of Asia, the Middle East and Africa that has prompted the establishment of a broadbased financial centre that will attract local and international companies to establish operations in Abu Dhabi Global Market (ADGM).

Abu Dhabi is the economically and politically stable hub for the MENA region. ADGM’s location in Abu Dhabi provides a business friendly legal framework based on Common Law and in line with international regulatory standards. This provides an ideal platform for funds as well as for traditional and alternative asset managers.

At ADGM Asset managers will have proximity to the concentrated sovereign, institutional and private wealth in Abu Dhabi and the wider GCC. We will enable managers to provide a full range of international products to attract regional flows from MENA and Asia which are driven primarily by investment opportunities and a stable regime. Managers will also have an environment which enables them to build manufacturing capabilities to serve the growing global demand for emerging market assets.

In addition to the Asset Management strengths of Abu Dhabi, it is a fantastic place to live and work. Abu Dhabi is rapidly becoming a centre for culture and the arts with the Louvre and the Guggenheim soon to open their doors. It is also a major centre for sports and entertainment. Abu Dhabi is a true global city that is enjoyed by employees and their families who take advantage of the leading educational facilities, healthcare facilities and overall safe, family friendly and welcoming lifestyle.

2. WHAT CHANGES HAVE YOU SEEN IN ABU DHABI SINCE THE UNITED ARAB EMIRATES WAS RE-CLASSIFIED BY THE MSCI AS AN EMERGING MARKET? The upgrade was seen as an endorsement for the UAE financial markets and with it came a renewed sense of confidence from investors; a result of better operational efficiency over the last year in both markets (DFM and ADX).

That was definitely a driver for more steady sources of capital to local equities.

The developments in ADGM combined with recent talks about changes in the cap on foreign ownership and listing requirements (expected imminently) and the upgraded status will help spur the primary market and attract more foreign investors into the UAE. Many fund managers have in fact been broadly bullish since the upgrade due to economic restructuring post financial crisis, low valuations and high dividend yields – particularly in the banking and real estate sectors. This sentiment has translated into high returns as both UAE exchanges have been delivering solid performances in the past year.

sector in the UAE as well as the region as a whole will be beneficial for all. We will complement each other, increase the total market volume and value and attract even more investors.

4. WHAT IS ON THE HORIZON FOR ABU DHABI IN THE NEXT TEN YEARS? Abu Dhabi Global Market is the reflection of Abu Dhabi and the United Arab Emirates.

It will continue its legacy of building trust, building relationships and building partnerships. It aims to continue being a good global citizen bringing further prosperity to the country and the region and contributing tangible value to our wold.

In ten years, our ambition at ADGM is to have become a leading international financial centre with a broad spectrum of financial services operating from our jurisdiction and making a tangible difference to the GDP of Abu Dhabi, improving the lives of the people of the UAE and the world around us.

3. HOW WILL ABU DHABI GLOBAL MARKET DIFFERENTIATE FROM DUBAI INTERNATIONAL FINANCIAL CENTRE? Abu Dhabi already has a sophisticated financial services sector that it developed over the past 45 years and has a portfolio of investible assets in excess of US$1 trillion.

Globally it has the financial heritage, relationships and expertise in wealth and asset management and private banking.

Therefore, for its first phase, it will focus on its natural strength of Private Banking, Wealth Management and Asset Management.

STEVE BARNETT Director of Strategy at Abu Dhabi Global Market

Having two successful financial centres in close proximity is not unusual and if you look to Asia and Europe you will see that this approach has reaped benefits to their regions as a whole. Growing the financial services

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THEME 1:

RE-ENGINEERING THE MANAGER SELECTION

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RE-ENGINEERING THE MANAGER SELECTION

NEW STANDARDS FOR RFPS Selecting asset managers and funds is one of the key activities for investors.

Requests for Proposals (RFPs) are established instruments to facilitate the search process.

Investors seek unbiased access to a broad universe of asset managers, funds and strategies. It is natural and common that investors prefer to work with fund managers they know well. But staying too long with a pre-defined universe of managers is a risk as the asset manager landscape is evolving over time.

Organisational changes and fund manager moves are key events to be monitored closely within the wider peer-group.

Traditional processes might not be efficient enough to facilitate frequent searches and checks.

New RFP standards and platform solutions speed up the process without losing the benefits of full customization of the search.

COST PRESSURE ON BOTH SIDES Cost and time allocated to RFP based search processes can be

considerable on both sides – for the investor and the asset manager.

Therefore all parties seek to apply the best tools available. To offer real value-added platforms must improve the process substantially for both sides and make more frequent searches an integrated activity of the investment team.

UNBIASED ACCESS TO MANAGER INFORMATION New platforms also improve the data quality of the search.

Databases are one way to offer investors access to information but might not give investors the full picture. Asset managers might not show up in database searches if their strategies could not be properly classified or if their data set is imcomplete or even slightly out-of-date.

Asset management companies might not have the ressources to continuously update databases and therefore lose out. This applies to small boutique managers in particular.

In an ideal set-up the asset manager should gain direct access to investor requests at no cost and be able to evaluate the request on a single platform. Investors should

be given the opportunity to stay anonymous throughout the whole process at their discretion.

BIG POINTS FOR THE RIGHT QUESTIONS Understanding the structural biases of an asset manager is one of the key points for the investor. Being able to explain the sources and reasons for out- and underperformance to investors is the basis for separating skill from luck in asset management Personal and cultural biases of the manager might also play an important role and can be analysed within a behavioural finance framework to assess the potential impact in the future.

Asking the right questions in RFPs is the first step for investors to gain the necessary insights. In a perfect set-up investors have those crucial standard RFP questions available for all major asset classes and strategies on a single platform.

“Investors seek unbiased access to a broad universe of asset managers, funds and strategies.”

10 FUNDFORUM INTERNATIONAL 2015

Innovative platform solutions support investors in their manager selection process and offer unbiased access to funds and managers. They combine the credibility of industry standard RFP templates with the flexibility of an extensive RFP questions library. This gives investors the best of both worlds, writes Albert Reiter, CFA, MBA (UCT), founder of investRFP.com.

STANDARDS FOR PERFORMANCE REPORTING One area where standards are well developed is performance reporting with GIPS representing the gold-standard. Developed

by CFA Institute these Global Performance Standards have evolved over the past 15 years but even today some RFPs have not been updated.

We still find AIMR-PPS in RFPs which is very outdated, an RFP writer from a UK asset management company recently noted at a manager selection conference. To improve the quality of RFPs investors should have easy access to current and relevant standard RFP templates which give guidance and clarity as well as credibility.

“New RFP standards and platform solutions speed up the process without losing the benefits of full customisation of the search.�

investRFP.com, an independent platform for sovereign wealth funds, institutional investors, fund selectors and family offices provides free access to a number of standard templates of industry associations and also hosts an extensive library of RFP questions.

CREATING THE MOST SUITABLE INVESTOR REQUEST Each investor request is unique in a way and standardisation has its limits but integrated platforms like investRFP.com offer standard RFP tools as well as proprietory questions, analysis, selection and feedback options.

The most suitable investor request combines custom selection criteria, standard RFP building blocks and questions from an extensive library as offered by investRFP.com to enhance the selection process for the benefit of the investor and the overall asset management industry.

ALBERT REITER Managing Director of e-fundresearch.com Data GmbH Albert Reiter will be presenting Re-engineering Manager Selection; Standardising the RFP Selection Process on the Smart Business stage on Tuesday 30th June.

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RE-ENGINEERING THE MANAGER SELECTION

INTERVIEW WITH A MULTIASSET PORTFOLIO MANAGER

Manuela Thies We sat down with Manuela Thies, Head of the AllianzGI Multi Asset MultiManagement business in Germany and Senior Portfolio Manager of MultiManagement products, to find out more about a day in the life of a multi-asset portfolio manager.

1. WHAT’S THE FIRST CHALLENGE YOU FACE IN THE MORNING? My first challenge in the morning, before I arrive in the office, is convince my son to get ready for kindergarten while checking market movements in Asia and catching up with latest investmentrelated news.

2. WHAT TOOLS DO YOU WISH YOU HAD AT YOUR DISPOSAL (THAT YOU DON’T CURRENTLY HAVE)?

A tool I wish I had at my disposal is a standard fund data base which contains all relevant information on target funds and which covers all regulatory requirements we face in Germany/Europe.

We profit from our long-term relationships with more than 150 investment companies all over the world and have created a proprietary data base, which has grown significantly over the past 15 years. While this is what

I would call our “edge” in fund selection, I have not found a standardised tool yet which meets all our requirements and needs.

3. WHAT’S THE ONE THING YOU USE EVERY DAY THAT MAKES A DIFFERENCE TO WHAT YOU DO? The fitness tracker I wear counts every single step I take a day. It supports my physical condition and reminds me every day that we need to go the extra mile in order to be excellent and do the best for our clients.

4. WHAT’S YOUR FAVOURITE RESEARCH SITE? For fund selection research, I read Citywire and alike in order to get the latest asset management news.

5. WHAT WOULD YOU BE DOING IF YOU WEREN’T A MULTI-ASSET PORTFOLIO MANAGER?

This job would be totally different, but would still have some similarities like “constructing something”. Here I think of PFConstruction vs. construction of a building, incorporating and coordinating specialists of various trades or asset classes, and the requirement of high quality management from first scratch to final “building”.

The major difference would be optics and haptics of the final product, which are not comparable at all. While I enjoy my job as a multi asset portfolio manager very much, I come from a family with strong engineering roots and I sometimes miss the ability of actually seeing and touching the final product.

Hear more from Manuela about the challenges of being a multi-asset manager in the Expert Discussion with Four Multi-Asset MultiManagers taking place on Tuesday afternoon.

I would be an architect.

12 FUNDFORUM INTERNATIONAL 2015

RE-APPRAISING THE MANAGER SELECTION PROCESS -

A FOND LOOK BACK IN TIME… Back in the day (and being long in the tooth and silver of hair I am talking the 1980s) fund manager selection happened over lunch or dinner at Lords, Epsom or Glyndebourne - and very agreeable it was too. Before the vagaries of regulation were introduced into the UK in 1986 and the now seemingly irrelevant crash of 1987, markets were on a tear and customer satisfaction was “guaranteed”. We didn’t use benchmarks, but if the portfolio had gone up since that last review (which it nearly always had) then that was cause for celebration, usually down at the pub.

Today, in the clinically austere regulated world, pretty much devoid of the distraction of “entertainment”, we pride ourselves in our professionalism and adherence to the principles of process, performance and price. We expect the fund manager to elucidate the investment process as if he were manufacturing widgets, forgetting that investment is more art than science and cannot be described in linear fashion. Performance is an attribute of process and, good or bad, we should be able to understand how the fund manager got where he did. Value managers don’t enjoy the water when valuations are inexplicably stretched so don’t be surprised

if he “underperforms” on what is often an arbitrary benchmark.

Price; never has so much nonsense been talked by so many about a subject of very little consequence.

If your fund is run by a machine - trackers et al - then you don’t pay much but you don’t get much either in the long run and the unintended consequences of trackers have not yet been observed. If your manager has the right philosophy and he can execute it (in other words his behavioural traits don’t get in his way) then expect to pay a lot more.

The additional principle is people.

We speak with the fund manager usually in his office, with members of his team and the inevitable salesman.

“We expect the fund manager to elucidate the investment process as if he were manufacturing widgets, forgetting that investment is more art than science and cannot be described in linear fashion.”

We have our agendas, (mainly because presentations rarely do justice to the investment process) and the fund managers do their best to answer diligently. A worrying trend is the increase in the use of product managers who are alleged investment specialists tasked with explaining the investment process.

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RE-ENGINEERING THE MANAGER SELECTION

The rationale is that the fund manager should concentrate on what he is good at and the product manager does the “marketing”. The issue with this approach is that marketers will tell you what they think you want to hear, and you will leave the meeting having no idea whether the fund manager actually follows this process, and all the subtle nuances of a face-toface meeting are lost.

The art in investing is all about passion, and you won’t get that from a sterile presentation from someone at best once removed from the process. And meetings in offices give you little clue about what makes the manager tick. To some this will seem strange; why do I want to know which football team he supports or where he went on holiday? It’s all about passion; being there when the team got promoted or lost the relegation struggle is little different to the ups and down in our business, but the passion the manager displays about these seemingly irrelevant events speaks volumes about his ability to cope in his day job. Controlling emotions and guiding the passion brings success to all ventures, and without that exposure to managers how will we be able to tell if we are backing the right horse? Can the manager deal with the irrationalities that are a daily feature of investment management without being swayed by emotional attachments?

Paul Tudor Jones, an exceptional futures trader, taught new recruits every trick he knew, including a step by step trading programme to follow, yet the vast majority of them failed as their personal biases and emotions got in the way.

“Controlling emotions and guiding the passion brings success to all ventures, and without that exposure to managers how will we be able to tell if we are backing the right horse?”

Perhaps a degree in psychology should be a requisite for a fund analyst? Observation is the key, dear Watson, but if you can’t get access to the quarry then you will have nothing to observe...

CLIVE HALE Director of FundCalibre Ltd Clive will be taking part in the Too Hot to Handle!

Session taking place on the smart business stage on Wednesday 1st July discussing the topic Conflicts in Portfolio Construction & Manager Selection.

14 FUNDFORUM INTERNATIONAL 2015

SPONSORED ARTICLE

PRIVATE DEBT IN 2015:

THINKING OUTSIDE THE BOX Chris McChesney, Head of Alternative Fund Services at Brown Brothers Harriman (BBH), discusses new opportunities for asset managers in the private debt market.

Regulation has forced banks to scale back on traditional lending and shrink balance sheets. How has this impacted the private debt market?

Although banks are paring back lending, the demand for capital remains. The liquidity to fuel European and American businesses is now increasingly coming from alternative investment funds and fixed income managers who have entered the private debt market to fill the incremental lending vacuum left by bank disintermediation.

Why is private debt an interesting asset class in the current market environment?

Private debt is an interesting asset class for a number of reasons. It offers relatively predictable yields that are known up front and unlikely to vary significantly over the life of the loan. Given the nature of senior lending and debt activity, private debt generally has a lower correlation to equities than traditional fixed income. When collateralized by real assets, private debt offers downside protection.

expertise. Direct real estate specialists have the pipeline, connections, and expertise to find the right debt opportunities. The same is true for managers who have teams focused on infrastructure, mid-market corporates, emerging markets, etc.

Do you see the increased interest in private debt as a fundamental shift or a temporary yield play?

We see the increased interest in private debt as a fundamental market shift. According to 59% of global asset managers surveyed in the 2014 Preqin Brown Brothers Harriman Global Asset Manager Survey, the movement to alternative lending is here to stay. In fact, over 50% of survey respondents have increased their private debt holdings in response to their clients’ growing appetite for private debt funds.

In addition to bank disintermediation, continued economic recovery, and a low interest rate environment, there are additional factors likely to reinforce the growth in private lending. First, AIFMD and DoddFrank have increased investor confidence in funds. Second, nonbanks are able to offer more attractive The combination of bank regulation, loan terms to borrowers including low yields on traditional fixed less restrictive loan covenants and income, and a strong supply of potential US and European borrowers creative payment structures. Finally, has convinced more fund managers to corporates and other borrowers are enter the private debt space than ever becoming more comfortable with this new funding channel. before. For managers moving into this space, private debt provides the opportunity to leverage their existing

This article is provided by Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This does not constitute investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA

by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. © Brown Brothers Harriman & Co. 2015. All rights reserved. May 2015. BBH is not affiliated with FundForward magazine. IS-2015-05-19-0969

CHRIS MCCHESNEY Head of Alternative Fund Services at BBH Chris will be moderating a panel at FundForum International on Day 1 at 14.20 on the topic of New Opportunities For Mainstream Asset Managers & Distributors: Creating Uncorrelated Yield in New Non-Bank Financing Products.

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STRONGER TOGETHER. Today’s interconnected world means that investors require a global investment capability. That’s why we’ve joined forces as Columbia Threadneedle Investments so you can benefit from global investment perspectives which harness the resources, experience and scale of one of the world’s largest asset management groups. Together we are 2,000 professionals, located across 18 countries and responsible for more than US$500 billion in assets.

Our global investment framework generates richer insights and shared ideas across our team. Because we are better informed, we can make better investment decisions.

Whatever outcome you’re investing for, your success is our priority.

columbiathreadneedle.com Past performance is not a guide to future performance. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

The Columbia and Threadneedle companies are owned by leading U.S. financial services firm Ameriprise Financial, Inc. and together form the 30th largest global asset management group as of December 31, 2013. Source: Pensions & Investments/Towers Watson Global 500 Ranking – Year End 2013. AUM of US$500bn : Includes the combined assets under management of the Columbia and Threadneedle group of companies as of December 31, 2014. Source: Ameriprise Financial Q4 2014 earnings release.

This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. Warning: your capital is at risk, prices may fluctuate and you may not receive back your original investment. Issued by Threadneedle Investment Services Limited (No. 3701768). Threadneedle Asset Management Limited (No. 573204). Registered in England and Wales. Authorised and Regulated in the UK by the Financial Conduct Authority.

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FUNDFORUM INTERNATIONAL 2015

THEME 2:

THE NEW DISTRIBUTION

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THE NEW DISTRIBUTION

5 WAYS DISTRIBUTION CHANNELS WILL CHANGE

IN THE NEXT 2 YEARS

There are quite a number of relevant “moving parts� that will have an impact on distribution in Europe:

1. Regulation on Distribution The implementation of both MiFID I and II (into national law by January 2017) will have a continued impact on both distribution and distribution agreements. MiFID II has an impact on actual distribution efforts: execution-only purchases through fund platforms have become more regulated; the co-existence of fee-based advice and commission-based advice has been determined to a certain extent in some European countries such as Germany. Distribution agreements so far have been largely updated for details about fund corporate actions and safe-keeping of relevant documents. The introduction of RDR in the UK and the Netherlands and the effect on Switzerland has and will continue to change the distribution channels used. Some fund platforms are in the process of changing their pricing structure and in some cases their business model. The introduction of new share classes has and will change advisor and investor behavior.

2. Regulation on Product Structures With the introduction of AIFM two distribution regimes were developed.

There is a difference between distributing a UCIT-fund and an AIFproduct with different requirements to regulation both within the EU as well as in non-EU countries such as Switzerland. This means that the decision on product structure will have a significant impact on the way such a product can be distributed.

3. Hunt for Yield and Product Innovation Both the financial crisis and current interest rate levels have spawned lots of product innovation. AlternativeUCITs and multi-asset class funds are being considered by an increasing number of professional fund buyers.

Therefore, target groups for any product category will change and

shift. This will have implications on both the respective sales strategies and distribution channels.

4. Positioning of Distributors and Buyers Looking across both bank and nonbank buyers, the type of instruments selected has shifted among all relevant product categories: stocks / bonds, ETFs / ETCs, actively managed funds, alternative-UCITs / multi-asset class funds. These buyers typically buy stocks and ETFs through other channels than funds. Also, small advisors are subject to regulation which changes their buying paths as well. They are more likely to join larger groups or broker pools which in turn maintain investment accounts at certain fund platforms and banks.

Asset managers have to ensure that they have their funds present on all relevant distribution platforms.

GEORG REDELBACHER Managing Partner at MBMs, a third-party marketer based in Luxembourg Georg will be moderating the panel discussion taking place on Tuesday afternoon, How to increase access to distribution agreements with banks, insurance & fund platforms?

5. Transparency and Client Service Last but definitely not least is what an asset manager should know about his investors. In most cases that is little more than an account number with a settlement entity. This is where reporting from banks and platforms come into play. If they report to the product provider on a monthly or quarterly basis which advisors, fundof-funds or other clients have made fund purchases through them, the asset manager will actually know a lot more about his investors. This is the basis for high quality client service and hopefully become state-of-the-art in the near future.

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DIGITISATION COMING INTO ASSET MANAGEMENT Starting as an information tool, the internet is morphing into a hybrid innovation that permits convenience buying as well as relationship building via enhanced transparency around costs and benefits.

Specifically, a new generation of digital-based DIY tools enables end-investors to engage directly in a variety of activities in the investment value chain: e.g. needs analysis, portfolio construction, periodic rebalancing and performance monitoring via user-friendly dashboards.

In a parallel track, the rise of passive investing is also enabling product simplification that appeals to a new generation of clients with well-honed digital instincts.

Together, these drivers aim to attract under-served client segments at the outset at a price they can afford. But over time they may well potentially disrupt existing business models.

On a less grand scale, the so-called robo advisors in America and Europe are also spearheading the digitisation of asset management.

“This raises the obvious question: who will dominate the asset industry dynamics as digitisation progresses apace?”

As internet start-ups, these newcomers are creating tools that deliver needs analysis, portfolio recommendations, fund aggregation and client dash boards.

Currently, their AuM amounts to $14bn, with most of it in America. This is likely to mushroom to $255bn within five years.

This raises the obvious question: who will dominate asset industry dynamics as digitisation progresses apace?

There are three plausible scenarios: Barbarians at the gate This envisages that the digital disrupters will take the fight to the incumbents’ front doors by carving out a special niche at the commoditised end of the market especially amenable to DIY digital tools.

Unencumbered by either legacy systems or legacy thinking, they are likely to be especially successful in blending automation with passive investing to shape investor behaviours.

The empire strikes back This envisages asset managers adopting digitisation for a part of their business, in much the same way as most flag carriers have emulated the low-cost airlines.

In the face of rising competition and fee compression, the incumbents will recalibrate their business models to meet the unmet needs. Necessity will be the mother of invention.

Peaceful co-existence This envisages that, as the asset management pie continues to grow worldwide, diversity will characterise the prevailing business models. Within that diversity, competition and cooperation will prevail. If the newcomers are especially successful, they are likely to seek new alliances with incumbents to scale up their businesses or risk getting taken over by them. ‘If you can’t beat them, join them’ will be the main theme.

The first scenario is least likely.

Investors will be wary of trusting their money to an organisation that lacks investment DNA and the associated brand.

AMIN RAJAN founder CEO of CREATE–Research Professor Amin Rajan will be discussing the different competitive business strategies to challenge customer centric disintermediation on Thursday 2nd July in the session New Research on Critical Innovation Issues that Asset Managers need to Confront this Decade.

Similarly, the second scenario is also unlikely, while asset managers continue to suffer from the time-honoured innovators dilemma: namely, why change your business model when you already have a steady revenue stream from the legacy book of business?

“Asset managers will remain in the driving seat for a simple reason: they have better risk instincts than the newcomers.”

The third scenario is the more likely one, except in one crucial respect: asset managers will remain in the driving seat for a simple reason: they have better risk instincts than the newcomers.

The tipping point will occur when one or more of the incumbents enter the fray with mega long-term investments in technology, or strategic alliances or acquisitions or a combination of them.

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Calling all Asset Management Superheroes!

Your mission is to help customers, the world, the community!

Tell us your tale, large or small…how are you making an impact? #AssetManagementSuperHero @FundForum

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2015 FUNDFORUM INTERNATIONAL 2015

THE NEW DISTRIBUTION

GETTING SMARTER

ABOUT TALKING RETAIL CUSTOMERS’ LANGUAGE How can we serve retail customers better?

I’ve become a bit obsessive about how we talk to customers about money. Taxi drivers, people on trains and the mums at the school gates all get asked about their savings and investment habits. I’m a nightmare.

I think it’s pretty obvious that we are managing money for people that we collectively never talk to. Our explanations and client communications are lazy, navy blue and male.

“We should educate the customer”, is the received wisdom. Really? Shouldn’t we just make simpler products and explain them better?

Let’s look at the behaviour of the retail customer.

I recently spent a day with a financial adviser, sitting in on about 4 client meetings.

About one minute of a one hour session with a small business owner client was spent talking about individual and specific funds. The adviser started to review the portfolio of the small company pension. He got as far as explaining why they were switching out of the Aberdeen Emerging Markets fund (alphabetically first – not the only casualty!) and the client looked bored. He wanted to talk about cashflow, about pension contributions, about retirement and income. Not products. And not fund managers. “I’m not really interested in the funds, I’ll leave it to you. All that is a bit of a black art as far as I’m concerned.” The problem? Lack of interest.

My brother-in-law contacted me recently asking for some “super safe funds” to save for school fees. He wanted passive funds because of the “rip off merchants”. We discussed the risk of seering anything as supersafe, the benefits of these passive ‘autopilot’ funds and suggestions of some active satellite stuff fell on deaf ears. The problem? Trust and price.

Structurally, there is also a huge problem with how funds are constructed and how they are used. Let’s take a relatively high conviction manager like Old Mutual’s Buxton. He will sweat about getting the right 30 stocks in his fund and blended to perfection, overweight here and underweight there. Then Mrs Jones buys a bit of his fund in her portfolio - but has been told to diversify so also chucks in a bit of Nigel Thomas at AXA, a bit of Woodford, a bit of Invesco. Et voila. These perfectly blended boxes of stocks and shares end up as a slightly chaotic jumble of shares. The problem?

Overlaying institutional structures on DIY retail behaviour.

I’d be very interested to take a fund manager on a tour of the UK’s sitting rooms, seeing how people invest in practice, and then ask them if they’d still run retail money the same way. It does point to multi-asset solutions as a natural solution for most ‘normal’ customers.

about volatility and standard deviation. Or we can think about explaining it differently.

Here’s how I give a quick visual illustration of risk for funds in my new business. In a curry-loving nation, people understand the chilli concept. Is this fund a Korma or a Vindaloo? How ‘spicy’ will it be? Is this a more effective way to communicate risk to a disinterested retail audience than a lecture about volatility? Discuss.

THIS ONE’S A SPICY FUND Costs are always in the spotlight. The traditional AMC, shared with platforms in % rebate deals, has stayed largely static as Other Expenses have crept north. These have traditionally not been well disclosed. Portfolio Turnover rates are not readily available.

Although Portfolio Turnover is not a perfect metric, it gives a good idea. Customers should know if they’re buying into a gas guzzler or a Smart Car. It is OK to guide and steer. We don’t need to get anxious about citing specifics for future behaviour – undoubtedly a tricky task.

THE EFFICIENT SMART CAR – the low portfolio turnover.

Now let’s get to the communication bit.

GAS GUZZLER

We are pompous and opaque. We can either (lazily) say that we should educate people

– that busy and expensive fund with tax, currency costs and high spreads.

HOLLY MACKAY Founder and MD of Boring Money Holly MacKay will be moderating a panel discussion How to create an infrastructure of customercentricity across the savings ecosystem on Tuesday 30th June.

MiFID 2 will force this agenda. In the interim, here’s how I’m disclosing the transaction costs or ‘Running Costs’ of funds on my consumer site. We all understand the concept of efficiency ratings for appliances – why can’t we learn from this?

AN EXPENSIVE FUND TO RUN Visual, Quick to grasp. Illustrative.

We all know that we are a long way from solving the conundrum of how to explain investments to ‘normal people. Problems include trust, price, engagement and the structure of retail products. Our disclosure is boring and too long.

This brings us back to a key debate being held in more transparent markets’ commission- free worlds, with expensive advice under pressure. Is it better for us to be approximately right or precisely wrong?

Can we give responsible rules of thumb?

Constructive guidance.

Fear of communicating something which is illustrative and not precise should not prevent us from testing new ideas when it comes to our retail customers. They’re just not that interested in us, and the sooner we realise that and adapt accordingly, the better.

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SPONSORED ARTICLE

DON’T LET THE TAIL

WAG THE DOG With both the cost and the efficacy of ‘tail-risk’ hedging now being questioned by European investors, Peter Fitzgerald explains that the best way to effectively manage downside risks is to have a range of different strategies embedded in your portfolio.

Many European institutional investors have come to regard tail-risk hedging as being costly, of limited effectiveness and, frustratingly, rarely in place when it’s most needed. It’s difficult to deny these shortcomings.

Buying a hedge can be expensive. It’s much like any other type of insurance.

So long as the risk remains remote, the cost of the premium is relatively low, but as the likelihood of that risk increases, so does the cost of insuring against it. For portfolio managers, this makes tail-risk hedging a difficult call as while it should provide protection in a worst-case scenario, the likely cost of the exercise represents a serious performance challenge to benchmark-conscious investors.

The right tools for the job The effectiveness of the exercise has also been questioned due to the mismatch between how physical securities – such as equities and bonds – and their derivative equivalents respond to a liquidity crisis. This was illustrated in 2009 when credit-default swap pricing was driven by liquidity and not market fundamentals. Similarly, because bouts of market volatility come and go quickly, conventional portfolio managers rely on their market-timing skills to place the hedges they might

need. Inevitably, this presents the risk that they overpay for protection and become trapped in trades that can’t deliver any subsequent market upside.

Moving to multi-strategy We think a more effective approach is to implement downside protection through a range of standalone, medium-term strategies that are built into a portfolio and so don’t rely on market timing. As multi-strategy fund managers we can structure risk-reducing strategies that provide low-cost insurance in the event

22 FUNDFORUM INTERNATIONAL 2015

of a major downturn, but which deliver a positive return so long as our central investment case proves correct. We structure trades across a wide range of markets from equity and credit through to volatility, duration and currencies.

“We structure trades across a wide range of markets from equity and credit through to volatility, duration and currencies.”

likely to perform still better in the event of a major crisis. Elsewhere, we are long the S&P 500 and short the Russell 2000 index, again for the downside protection it will deliver in the case of a downturn.

Such trades must be made in the context of the broader portfolio but by incorporating them from the outset we can build a multi-strategy portfolio that is diversified across the broadest range of potential risks and which, consequently, should generate consistent stable returns whichever way the wind might blow.

IMPORTANT INFORMATION:

Good examples of this approach include our position in Australian government bond forwards. We initiated the trade as we didn’t believe that Australian interest rates would rise as high as financial markets expected. While the trade delivered a positive carry it has benefited greatly from the subsequent falls in commodity prices that have impacted interest rate expectations in recent months. Our ‘long’ position on the US dollar is another example of a trade that has already delivered a healthy positive return, but which is

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 07th May 2015. Unless stated otherwise any opinions expressed are those of Aviva Investors [and based on Aviva Investors internal forecasts]. They should not be viewed as indicating any guarantee of return from an investment managed

by Aviva Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

PETER FITZGERALD Head of Multi-Asset Investment at Aviva Investors Peter Fitzgerald will be taking part in the expert discussion on the topic of The MultiAsset Portfolio taking place on Tuesday 30th June.

Issued By Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R 8EJ. Authorised and regulated by the Financial Conduct Authority and a member of the Investment Management Association.

Contact us at Aviva Investors Global Services Limited, No. 1 Poultry, London EC2R 8EJ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes.

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UNLOCKING ADVANCED INNOVATION:

UNDERSTANDING THE IMPORTANCE OF DISRUPTION WHEN IT COMES TO SUCCESS Jonathan MacDonald, innovation expert and strategist, explains the need for organisations to break the mould in order to un-level the playing field for their competitors.

“This is innovation in areas that the competition simply does not see.”

Over the last few decades in business I’ve seen many companies come and go. I’ve been on the frontline of hugely disruptive innovations and I’ve also been the founder of several innovative startups, most of which were spectacularly (, and sometimes painfully), unsuccessful.

Throughout all this experience, when it comes to innovation, there is a common trait that separates those who compete normally and those who appear to have an unfair competitive advantage. That trait is the ability to elevate their perspective of the business they are actually in and then innovate like crazy within this broadened view.

business of manipulating the effect that light has on material. That was their main thing. This opened up a massive field of opportunity in any area where light affects material - and they launched the market leading antiwrinkle skin care cream brand AstaLift.

What Fujifilm did was unlock advanced innovation. This isn’t “me too” or incremental innovation, which basically competes in the same context as everyone else. This is innovation in areas that the competition simply does not see. Why? Because of their limited perspective of the business they are actually in.

“Everything becomes idea fuel.”

From observation I’d say that the primary opportunities for innovation within any market are limited by the business you perceive yourself to be in. For example, Nokia had the slogan “Connecting People”, but perceived that intention as being “via mobile phones”.

If they had elevated their perspective I wonder whether they would have actually created Facebook. I doubt that the iPhone would have disrupted them if they had this type of broader view.

Something unique happens when you are able to elevate perspective and that is the wonderful ability to view everything around you as idea fuel, regardless of industry. For example, you could distil what Airbnb are doing down to linking surplus to demand through accessibility and ask “how could we enable our main thing by doing that?”. The same with applies to Kickstarter, which, once distilled, is purely linking belief to production through investment. Everything becomes idea fuel.

Kodak had a fixed view of the business they were in, opening themselves up for eventual disruption by the camera phone industry. Whereas By contrast Fujifilm, theoretically in the same industry, elevated their perspective to realise they were actually in the

I run a series of retreats all over the world called The Unlock Sessions (http://theunlocksessions.net) for small groups of people who are eager to unlock advanced innovation.

Participants arrive with an existing business challenge or opportunity,

and leave with an unfair competitive advantage. Participants arrive with an existing business challenge or opportunity, and leave with a totally unfair competitive advantage. Within these sessions I’ve noticed that even the most elevated perspective is still able to be expanded further. I’ve found that ideas can always be supercharged through a method I call “Even better if...”. It turns out the biggest challenge in place is primarily in terms one of mindset, including whether it is even worth investing into unlocking advanced innovation in the first place.

One thing is for sure though; it is far more risky to compete on a level playing field, especially when there’s a significant chance that your competitors are not.

JONATHAN MACDONALD Founder of the Thought Expansion Network Hear more about Cross Industry Innovation with Jonathan on Tuesday 30th June.

24 FUNDFORUM INTERNATIONAL 2015

THEME 3:

FINTECH FOR ASSET MANAGEMENT BROUGHT TO YOU BY

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FINTECH FOR ASSET MANAGEMENT

THE SOCIAL PHYSICS OF TRADING “In our data we find that traders who pay close attention to what the other guys are doing can improve their ROI by as much as 30%.”

Do financial bubbles and busts come from, and how can we build a trading organization to avoid being caught by them? This is a critical problem for asset management, but unfortunately the need for secrecy in financial dealings has always made it impossible to do more than guess at the origin and character of bubbles. With the arrival of social network trading platforms such as eToro (principally FX and blue chip) and our ‘sociometric badges’ that measure the details of trader behavior, we suddenly have records of when traders talk to each other, who they pay attention to, and how those factors influence how they actually trade. As a consequence we can analyze in great detail how people make decisions, and determine the conditions that foster bubbles, and see where they get their start.

The conclusion we have reached is that traders are not really thinking as individuals, because we are intrinsically social beings…we almost never think by ourselves.

Surprisingly, social thinking is normally a great thing: in our data we find that traders who pay close attention to what the other guys are doing can improve their ROI by as much as 30%.

What they are doing is using the other traders to estimate the prior probabilities that a particular type of

trade will be profitable. This estimate of prior probability is then combined with estimates of the quality of the trade (typically recent performance and intrinsic properties) to determine whether to invest and how much to invest. This strategy seems to be the normal methodology of decision making for humans across a wide variety of situations. The advantage of this strategy is that it brings greater expected returns, but the danger is that it also brings greater variation caused by occasional bubbles.

So how can a company construct a trading team that reaps the rewards of social learning but avoids the pitfalls? By paying attention to where your information comes from, and to the connections between traders.

When your traders aren’t sharing enough different ideas, or your information sources stop sufficiently diverse, then you are in danger territory. These insights are not completely new, of course, but what is new is that there are now analysis and management tools that make it possible to measure these ‘idea flow’ problems quantitatively, and to alter communication patterns in order to ‘tune’ for better performance.

SANDY PENTLAND Professor of Social Physics at MIT Media Lab and Director of Human Dynamics Laboratory Don’t miss Sandy’s future-view session on Wednesday morning, What Financial Services will look like in 2020.

performance — driving alpha as well as managing beta. By extending these examples further, we believe that we can craft a “moneyball for investment management”. Much like how Bill James’ Sabremetrics has transformed professional sports by quantifying what was previously guesswork and loose collections of empirical observations, our work suggests a strong theory of quantitative behavioral finance.

We believe we can further develop measurement tools for information asymmetries and tune the performance of traders to create improved, and more reliable, financial performance.

Using these new tools we can identify clusters of ‘herding’ behavior, and have been able to successfully change the behavior of traders in order to measurably improve their

26 FUNDFORUM INTERNATIONAL 2015

AN ANTHROPOLOGY OF CYBERCRIME “As a hacker you can plan your attack in Rio de Janeiro against a target in Melbourne and then distribute the cash or the data in Jo’burg” I met Recka in a cafe in Stockholm airport. He did not have a classic Swedish look, dark-haired, perhaps Middle Eastern. His English was broken but direct and comprehensible. But none of that surprised me - it took me a few minutes to realise what was so odd about him: he was the first criminal hacker I had come across who was also comfortable talking about the milieu of traditional organized crime.

Recka knew from the inside about protection rackets, about how and when to use violence in order to protect your market whether it was a legal one like the provision of groceries, or an illegal one, like the provision of drugs.

He came from a family engaged in organised crime which is why he was so peculiar among hackers. Historically mafia syndicates which emerged around the world from the middle of the 19th century have to be able to wield or credibly threaten the decisive use of violence. If you can’t boast that capacity then crime is the wrong business for you.

Or at least it was until cyber came along.

As a hacker you can plan your attack in Rio de Janeiro against a target in Melbourne and then distribute the cash or the data in Jo’burg. You could say that cyber crime represents progress because people don’t get physically hurt.

But the most important thing this means is that cyber crime attracts people with very different skills than

traditional organized crime. In my experience of criminal hackers, they are generally notably better educated than those involved in traditional organised crime. Among those I have interviewed, over 50% demonstrated advanced ability in maths and or sciences, especially physics.

“Most hackers start engaging in criminal activity, often unwittingly, aged between 12 and 14.”

find themselves deeply locked into a criminal environment from which it is very hard to escape.

The last five years have witnessed major changes in the nature of cyber crime.

The two most disturbing are without doubt the ever greater involvement of states in cyber crime, and the emergence of a fusion between cyber criminals and traditional organised criminal syndicates. The need to engage with hackers and understand them has never been greater.

Their most striking characteristic is their gender - 96% are male according to remarkable research undertaken by the Hackers Profiling Project under the auspices of the United Nations in Turin.

Search though I have done in the cyber underworld, I never came across a female hacker (in traditional organized crime women make up some 15% of syndicate members).

But perhaps the most troubling aspect of criminal hacking relates to age. Most hackers start engaging in criminal activity, often unwittingly, aged between 12 and 14. There are older hackers and criminals actively scanning the web for these youngsters with the aim of luring them into criminal activity.

This, of course, at a time when these adolescents have yet to develop a clear moral code. By the time they start to question whether their hacking is morally acceptable, they already

MISHA GLENNY A distinguished Fulbright scholar and former BBC Central Europe Correspondent, is also an award winning author and journalist on cybercrime and its consequences.

Misha will be presenting on Tuesday 30th June on the topic Know your Enemy: Psychology & Motivation of Cybercriminals.

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FINTECH FOR ASSET MANAGEMENT

THE ROLE OF TECHNOLOGY

IN THE FUTURE OF ADVICE The dynamic of financial advice is undoubtedly changing. The industry needs to evolve, and is being forced to do so. Thus far, regulation has perhaps played the biggest role in pushing change.

External influence of this nature often happens because a market can’t or won’t adapt by itself. The advice industry has stood still too long, essentially. Stagnating and resting on its laurels.

“It is technology that bridges the current supply and demand mismatch within the financial advice industry.”

But in a dynamic industry change happens organically. It’s driven from demand. Clients dictate the services that are provided and across any sector they want lower costs, more choice, and less hassle. They want services on their terms and that fit into their lives. It is technology that bridges the current supply and demand mismatch within the financial advice industry.

Broadly speaking, traditional advice and wealth management models are designed to serve high net worth individuals. Providing personal, bespoke, holistic services is a costly exercise, requiring a fee that’s reflective of the amount of work being undertaken and affordable only for a few.

But financial advice shouldn’t just be the preserve of the wealthy. If financial advice is to be provided to all potential clients, regardless of wealth, there needs to be a way to do so that is cost effective for both the client and the adviser. Integrating technology into the process of providing advice ticks the box in respect to cost reduction, but it has benefits beyond this too. It can and should change the level and scope of services being provided.

With more and more people living busy lives, we need to provide a service that compliments rather than hinders. Financial advice should be provided in the least possible amount of time, not the most. Of course, service and quality standards should never reduce as well, but whether it’s checking your bank balance on your phone rather than in branch, or using a satnav instead of a roadmap, successful services evolve and adapt to meet the needs of their clients.

There’s a large segment of the UK population that aren’t being adequately served – those within the ‘advice gap’ – and digital technology will be the way in which the large majority of these people are reached.

It’s the only way if a service is to be provided in a manner that’s beneficial for all parties.

Too often industries and services over complicate themselves in the pursuit of validation and justification.

This has led advice and wealth management services down a much more time consuming and costly path than they need to be. But technology is turning the corner.

Speed and efficiency are generally synonymous with new technology but they are words that can seldom be used when describing financial advice. To describe the current approach as arduous may be unfair – but laboured, certainly.

CHRIS WILLIAMS Founder & CEO of Wealth Horizon

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FINTECH FOR ASSET MANAGEMENT

EQUITY CROWDFUNDING MODELS:

WHAT ARE THE POTENTIAL ICEBERGS? The wind is certainly blowing fair for the equity crowdfunding industry in the UK at the moment. New platforms are emerging almost every day covering every sort of investment or asset class; the Government is supporting the industry with tax-incentivised schemes for retail investors and comparatively gentle regulation; and new retail investors are jumping on board to pump increasing amounts of money into increasing numbers of start-ups who are using the model to raise finance.

“If a platform takes some or all of its money from the shareholder returns as and when they arrive, then it is more likely to have its interests aligned with investors.”

And I can understand why this enthusiasm exists: • • •

The Government likes equity crowdfunding because it seems to fill the funding hole left by the Banks SME’s like it because they can gain access to finance through a new model And the public likes it because it can access a new market and possibly, just possibly, pick the new big winner and end up on the Rich List.

What’s not to like?

Well, lots of things when one starts to kick the tyres. Please don’t get me wrong.

I like equity – you can’t have an equity risk premium without equity – and I like the sex and violence end of the equity spectrum even more (albeit only as part of a balanced portfolio; I feel I have to say this as a champion of pension funds and financial inclusion). So what is it that bothers me about equity crowdfunding as the model currently stands?

Firstly, unlike debt crowdfunding and other P2P debt mechanisms, it will take a long time for consumers to realise

that things have gone wrong. You could be sitting around for years wondering how your investment is performing and looking forward to that big pay-out and know nothing right up to the point that your investment folds. At least with the debt markets you will know next month, because your borrowers will miss a payment. I would far rather know quickly of failure, and take some form of responsive action, than not know for years and keep holding out hope.

Secondly, the single most important thing you will need if you invest in equity is a robust shareholder agreement. This is the legal document on which you will depend to ensure your rights as a shareholder are upheld. So the agreement had better be good because success in SME terms is for the company, or part of the company, to be bought by Private Equity or, if not Private Equity, then a bigger company. It doesn’t matter really, the point being that success means expensive and extremely talented lawyers (supported by a big bankroll) stepping in and giving the extant shareholder agreements a proper kicking. The intent? To maximise the utility of the acquiring company by minimising the utility of the minority

DR CHRISTOPHER SIER Director of FiNexus Dr Sier will be moderating discussions about disruptive asset management on the smart business stage on Wednesday 1st July.

shareholders…or the consumer investors as they are known. What’s more, not only does the shareholder agreement need to be extremely robust, crowdfunded investors are, individually, tiny. If a small company has just released £200k of equity in exchange for 20% of the company, and a shareholder owns £1000 of equity, this means that shareholder owns 0.1% of the company. And have these shareholder agreements, created by the legal experts of tiny crowdfunding platforms, crossed swords with the scary legal teams working for the Private Equity world? Not really, so the agreements have yet to be tested in real life.

Now, there are equity crowdfunding models that are better than others. There are those that keep you in isolation as a shareholder and leave you to fight your own battles in the event of a challenge to your rights. And there are those who offer you equity via nominee structure or equivalent and will therefore negotiate collectively in the event of a challenge to your rights. Negotiating with 20% in your back pocket will get you further than if you have 0.1%.

30 FUNDFORUM INTERNATIONAL 2015

“I do see a future for Equity Crowdfunding, but the model needs to change” So RULE 1 in my ‘playing with equity crowdfunding’ rulebook: “Pick platforms that offer you a nominee structure (or similar) for your shares”. The weak position of small equity crowdfunders was amply demonstrated recently by the Crowdcube-funded Camden Brewery Company, which accepted a single offer from a large investor that undervalued the company when compared to the equity crowdfunded valuation. The result was some very disappointed small investors.

Thirdly, there is a tendency for platforms to minimise their workload by making the invested company responsible for documentation. Think about this from the small company perspective. There you are, you’ve got 3 or 4 shareholders who own most of the company, and corporate governance and administration is easy: It’s a chat with your matey co-investors and/or employees every so often, nothing really onerous. You decide to raise money via crowdfunding and suddenly you don’t just have four shareholders, all personal buddies. Suddenly you have 204 shareholders, 200 of whom will require reports and updates and TAX CERTIFICATES… You could easily spend all of the £200k you raised sending out share certificates, tax certificates and quarterly and annual reports, and never have the money to spend on the important stuff, like growing your business. So here’s RULE 2: “Only pick platforms that do the heavy lifting of corporate governance and reporting for the companies on the platform.”

In fact you can tell the motivation of the platform from its business model.

If it takes its money from the money raised, then it favours the start up (a ‘management fee’ in traditional parlance).

In other words its interests are NOT aligned with the investor/shareholders.

Conversely, if it takes some or all of its money from the shareholder returns (a ‘performance fee’), as and when they arrive, then it is more likely to have its interests aligned with investors. So if you, as a retail investor, want to maximise the chances of your success then “Pick a platform that takes most of its returns

only when investors succeed and get a return. Avoid platforms that take all their money upfront”. And that was RULE 3.

Now how about this for a couple of dodgy practices? I have had some robust discussions with various industry players on these two topics, but I’m going to stick to my guns though and say they are just plain wrong.

Raising money for yourself across your own platform.

Why is this wrong? Well, one of the key roles a platform fulfils is due diligence of a sort on the companies placed on the platform. How big is the moral hazard if you are following a due diligence procedure on yourself to raise money for yourself on your own platform? Who’s to say if you have been a little, er, relaxed in the due diligence of your own documents because, hey, you need the money right?

Overfunding.

Money is requested by SMEs on the platform for projects to help the SME grow. The SME states what it needs and, presumably, this is on the basis of a project plan of sorts. So if the SME gets more money than was requested it probably doesn’t need it for the intended project. What does it do with it, and who decides? Well, excess funding will go on the balance sheet and a combination of company executives, the Board and shareholders will decide what to do with this overfunding. The trouble is… the majority shareholders are likely to be also the Board members (if the company even has a Board) AND they will be the employees. This is moral hazard in extremis and poor corporate governance of almost epic proportions.

The majority shareholders, who are the same as the Board and Employees, get to decide how they can spend someone else’s money on themselves?! What is even worse is that SOME crowdfunding platforms are actually encouraging this practice. Especially those platforms that take money upfront – of course they want more money to be raised as this is how they get paid.

So, time for RULE 4: “Do not pick platforms that have raised money for themselves unless there are strong controls around the due diligence process”.

And RULE 5: “Do not pick platforms that encourage overfunding”.

Here’s a more general rule I have learned to live by after some tough lessons: If it has even a whiff of dodgy about it then don’t do it. I apply this one to taxation.

Always play tax with a straight bat, as you really, really don’t want the hassle and danger of an audit. Here’s another: If it looks too good to be true, it probably is too good to be true.

How does this apply to crowdfunding?

Well one of the phrases I have heard repeated over the past 5 years - often to explain why the PE/VC/Angel market has contracted - is that there are “not enough interesting opportunities out there”. Well, if the experts can’t find them, what makes the crowdfunding platforms think they can? The simple truth is this: Crowdfunding brings unsophisticated and non-expert investors into contact with SMEs and startups looking for money, through a technology model that democratises the search process…and only the search process. Consider the following questions and ask yourself how a crowdfunding platform would answer them: Does the technology model properly democratise the legal documentation due diligence?

Not really (see my comments above on shareholder agreements).

Does it democratise the complex process of company audit carried out by real experts who are so thorough that really only 1 in 50 companies that approach these PE/VC/Angel experts are actually funded?

No. The primitive due diligence frameworks of the crowdfunding platforms are so poor they even allow themselves through the net, which is why the paradigm currently is raising money for yourself across your own platform. Again see my comments above.

(Here’s another rule: Don’t buy through a platform, own the platform. That’s where the real value lies. The same goes for PE, VC and Hedge funds: Be the operator of the fund, don’t own part of it. Sadly I have broken this rule regularly and nearly always regretted it).

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FINTECH FOR ASSET MANAGEMENT

Does it democratise the sensitive process of key person due diligence?

No. Questions like “Have the senior employees any criminal convictions?

County Court judgements? Are they bankrupt? Where else are they working?

Will they take their eye off the ball or are their interests aligned with the owners?” are not answered.

Does it democratise the process of learning about other shareholders: Who are you really getting into bed with as a possible co-owner?

No. Does it democratise the process of opportunity assessment?

Where do the IP rights lie? Is the opportunity unique? Who are the competitors?

The technology platforms do none of these things, preferring a process of caveat emptor.

So, all you get with a platform is a menu of start-ups that have passed some very basic criteria to be on the platform.

Trouble is that it’s a menu without the benefit of having an English translation, accompanied by helpful pictures or a website to give you accurate reviews. To my mind it’s like going to a street market in Asia and finding that the glistening delicious-looking, honey-coated morsel you bought is actually a fried tarantula.

And, here’s the really icky part, even though you worry about the crunchiness filled with goo on the first bite, it takes you a while, a long while, to figure out that what you have actually eaten was a big hairy spider. So long in fact that you’ve probably finished before someone lets you know. So it is with equity crowdfunding.

Here’s the ‘too good to be true’ part: If the professionals are struggling to find opportunities what sort of opportunities will there be on the platforms? The best opportunities want professional help and find it. The help might be expensive in terms of equity, but only the PE/VC/ Angel world can offer you assistance with management expertise, collaboration, portfolio opportunities, and a market.

Crowdfunders cannot. So the thing on the crowdfunding platform has got there because probably it has not been funded by experts and for good reason, has not

THE PLAYING WITH EQUITY CROWDFUNDING RULEBOOK Rule 1: Pick platforms that offer you a nominee structure (or similar) for your shares Rule 2: Only pick platforms that do the heavy lifting of corporate governance and reporting for the companies on the platform.

Rule 3: Pick a platform that takes most of its returns only when investors succeed and get a return. undergone really thorough due diligence and is willing to accept non-expert help cheaply. Are you sure that’s what you want to buy it?

You may be surprised to hear that I do see a future for Equity Crowdfunding, but the model needs to change. I’ll start with a slightly philosophical thought: is equity crowdfunding a new asset class, or at least the democratisation of a familiar asset class? I ask this question because it leads me to consider how to blend equity crowdfunding into a portfolio of different asset classes. This is a good thing. It also raises the possibility that institutional money might take an interest in investing via crowdfunding platforms, and that’s a game changer.

In the UK there are approximately £4-5 trillion assets in life, pension and retail funds. If only a fraction of this institutional money were invested via equity crowdfunding, say 0.1%, it would pump £5billion into SMEs and start-ups.

How can we make this happen? By using data. What an institutional investor needs is a way of comparing opportunities across platforms, and then doing some proper due diligence on opportunities in a way that is not currently possible or enabled by platforms. In other words, if you want to compare opportunities in, say, mobile wallet technology seeking funding via the crowd, then accessing and comparing these opportunities is key. Fortunately, there are some new companies out there that are starting to attack this space, and I’ll mention one, largely because it looks pretty good but also because it is Estonian. I’m married to an Estonian and rate the home of Skype highly as an innovator in technology. The company is called Funderbeam

Avoid platforms that take all their money upfront Rule 4: DO NOT pick platforms that have raised money for themselves unless there are strong controls around the due diligence process Rule 5: Do not pick platforms that encourage overfunding

(http://funderbeam.com) and it describes itself as “Startup intelligence to wealthy individuals and professional investors”: Pretty-much perfect. I am now on a campaign to leverage my institutional contacts to turn their gaze to the opportunities in the equity crowdfunding space. My arguments will include things like ‘it’s tiny money’, ‘you can use familiar techniques of opportunity assessment in a niche market using some cool new technology’, ‘it’s socially useful’, ‘you could make your investments regional and derive huge CSR benefits from such investments’,…and so on. I’ll let you know how it goes.

Aside from the above loosely-phrased benefits to the institutional market of equity crowdfunding as a model, there is one thing larger companies can, and indeed must, learn from the industry, and that is how to engage with the consumer.

This is something that the equity crowdfunding industry has managed in spades; it has made investing FUN. So, I’ve pretty down on equity crowdfunding until all of the above were resolved. Happily there is perhaps one equity crowdfunding company that has taken great strides in addressing each of these challenges, and you will get to listen to and question the CEO at Fund Forum.

I’m talking about Syndicate Room and its CEO Goncalo de Vasconcelos.

Syndicate Room not only covers off all of the risks discussed in RULES 1-5, it also has a model that compensates for the other issues (company selection), whilst maintaining the zeitgeist of the model. Ask him lots of questions; he is the future.

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CROWDFUNDING

GROWS UP DEBT CROWDFUNDING There is a revolution going on in lending.

Individuals and companies don’t have to rely on banks anymore if they want to borrow money. They can go to platforms like Money&Co. (business lending) or Zopa (personal lending). The money is being lent by individuals looking for a better rate of return on their cash. Money&Co.’s loan book is currently yielding 9% gross and 8% after our lender fee of 1% is deducted. With inflation at zero, this looks like a very attractive return.

In the US, Lending Club, which primarily lends to individuals, has lent over $9 billion since it started in 2007, with much of that money being lent in the last two years.

Individuals are normally seeking to refinance credit card debt. In the UK, Funding Circle started lending to companies in 2010 and has now surpassed £600 million of lending since it started. Again, the lenders are generally

CO-INVESTING WITH PROFESSIONALS Investing into early stage companies using an equity crowdfunding platform is becoming more and more mainstream as the industry grows up. In its early days, crowdfunding was for unsophisticated investors investing in what nobody else wanted to invest in. A plethora of the early platforms still operate along the same lines, but in the past 18 months the space has been taken by storm by sophisticated platforms taking an investor-led approach. These platforms allow individual online investors to co-invest with business angels, family offices, venture capitalists and other professional investors. This approach is a game-changer for the industry; now operations cater for sophisticated individual investors to co-invest in the deals the professionals also want to invest in.

The first obvious impact is the sectors that are attracting funding. Crowdfunding used to comprise almost exclusively of lifestyle businesses, restaurants and consumer oriented businesses. This has changed dramatically with the arrival of investor-led platforms.

A model that is gaining more and more traction every year, it looks like the crowdfunding model is here to stay.

But where do the key opportunities for crowdfunding lie?

We asked two crowdfunding experts, Conçalo de Vasconcelos, CEO of the Syndicate Room, and Nicola Horlick, CEO of Money & Co., to give us an overview of their opinion and experiences of crowdfunding models.

individuals looking for a better rate of return on their cash Institutional investors have looked on as the lending platforms have begun to experience explosive growth and they are looking for ways to get exposure to what is fast becoming an attractive asset class. A number of companies have set up listed vehicles (Victory Park and Marshall Wace), with backing from institutional investors. Others have invested directly through the platforms and have managed accounts. The main question is how scalable the space really is.

Lending platforms have initially focused on person-to-person lending, SME senior debt and invoice discounting, but there are many other areas that they can expand into.

Leasing, car finance, student loans, residential bridging loans and other areas of consumer credit are but a few examples. My prediction is that the lending platforms will continue to

SyndicateRoom, one of the leading platforms in the United Kingdom, reports that a third of the deals funded via the platform have been in life sciences with another 25% in engineering and 25% in business-to-business - all sectors that were previously absent from crowdfunding.

The impact the investor-led approach has had so far in the industry is, by any measure, astonishing. Interestingly, a similar disparity in growth is observed on both sides of the Atlantic. SyndicateRoom has helped companies raising over £20m in its first 18 months - over 4 times more than Crowdcube, currently the largest platform in the UK, did in their first 18 months. A similar trend is observed in the United States: according to three leading researchers from MIT, Sloan School of Management and University of Toronto (Agrawal, Catalini and Goldfarb) AngelList investor-led syndicated deals have raised over 5 times more than company-led non-syndicated deals in the same period of time.

As crowdfunding grows up and muscles in, the early stage finance industry will have

grow at a very rapid rate and that the loans that they originate will result in the creation in a new asset class, which will be accessed by individuals and institutions directly and through listed vehicles. The lending landscape has changed forever.

NICOLA HORLICK CEO of Money&Co Nicola will be taking part in the panel discussion How to address the rise of customercentric disintermediation in asset management taking place on Tuesday 30th June. to adjust and adapt. Early stage venture capitalists will move into later deals but will have a larger number of deals to choose from thanks to crowdfunding. Fund managers and individual investors will be able to diversify their portfolio across all levels – geography, sectors and networks of contacts (i.e. lead investors) – and companies will benefit from the larger pool of capital available to finance their growth across all stages of the curve.

GONÇALO DE VASCONCELOS CEO of the Synidcate Room Gonçalo will be taking part in a discussion on Disruptive Asset Management taking place on the Smart Business Stage on Wednesday 1st July

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FINTECH FOR ASSET MANAGEMENT

UNLOCKING THE

TRUE VALUE OF DATA

There has been no shortage of commentary of late from respected institutions such as the International Monetary Fund with regards to the growing significance of the contribution the asset management industry to the real economy and of the critical role for the retirement industry sustainability.

However similar reports also warn of seismic shifts ahead for the industry. Demographic changes, together with technological advancement and social transformation will inevitably change the needs and requirements of investors. The question is – as an industry, are we ready for such monumental changes?

To ensure that we are ready, we need to be more forward thinking and innovative in our approach.

Data analytics can lead to significant improvements in human capital management, financial & risk management and operations.

Marketing capabilities can be improved to address customer acquisition and retention.

The generation of alpha and investment returns, rightly or wrongly, will always remain crucial to an asset managers’ value proposition. However there is more to it.

An investment process that is simple to understand, the availability of asset classes, understanding a client’s individual needs when designing product solutions are all factors that cannot be overlooked. The value proposition needs to be widened.

Data is a corporate asset and as such must be treated and guarded as such. To take advantage of such an asset, it is critical to have in place an effective data strategy in place that can not only provide value to customers and end users, but can adapt to new and ever-changing data requirements.

Asset managers have been generally focussing on data supporting investment decisions, but they hold significant amounts of customer data, aswell as financial, reporting, compliance and investment data. Managing such large quantities of data presents a significant strategic challenge. Looking at data for reporting purposes only and maintaining data in silos across different departments and systems can be both counterintuitive and counterproductive for any discovery exercise.

To extract the most value, data needs to be centralised into one location, across one platform. This would allow data from multiple sources to be combined and interpreted by individuals with the relevant analytical skills, who can use predictive analytics that are becoming more sophisticated to draw out unique insights.

Customers expect organisations to understand them and as such treat them as individuals.

They also expect products and service models to be customised and tailored to their individual needs. Insights derived from analysing data can support an increasing level of engagement with clients and intermediaries alike. The strategic value in data is the insights that it can present into what may happen in the future, based on an analysis of past behaviours and events. Predicting how your customers’ as well as those of your competitors may behave and how that behaviour may change is critical to tailoring and pricing products.

As competition within the asset management industry intensifies, it is key, but not enough to have the best talent, the information available to support the decision making process generates the key difference. More and more individuals are entering the industry. These individuals are more highly skilled and educated than their peers of 10 years ago. All of these individuals have access to the same information. Therefore ‘identifying the edge’ in terms of extracting valuable insights can become more difficult.

The paradox of skill here is that relative skill, as opposed to absolute skill, is often more important in shaping the end result.

Enter the importance of ‘data’ and the significant competitive advantages that this could bring to the asset management industry as a whole.

Using data effectively is all about analysing structured and unstructured data, from multiple sources that can provide an organisation with previously unattainable insights that lead to a competitive advantage.

In other words, in a competitive market regardless of how technically proficient todays professionals are, luck still plays an important part in the final result. As such, to maintain a competitive advantage, it remains essential that an organisation hires the right individuals and commits to develop their talent, but it would be as important keeping pace with and utilising the most advanced analytical tools and IT infrastructure to ‘Identify the edge’ which would lead eventually to business success.

When used as a strategic asset, data can drive continuous business model innovation. But more importantly, it provides the flexibility to predict and adapt quicker to changes in our environment.

FURIO PIETRIBIASI

Managing Director of Mediolanum Asset Management Ltd

Furio will be taking part in the Transform Or Be Transformed

By Customer–Centric Disintermediation session taking place in the morning of Thursday 2nd July.

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SPONSORED ARTICLE

THE SWISS FINANCIAL CENTRE TODAY AND TOMORROW The Swiss financial centre has often been in the spotlight

The scale of the changes under way has led analysts and observers of the financial community and the all over the world to reflect on the future role and appeal for operators specialist media in recent years, of the Swiss financial centre. receiving much greater attention Although the Swiss financial centre than Switzerland’s small size might is faced with a substantial paradigm appear to justify. However, it is shift, I think it is and will remain fair to say that historic changes an attractive location for many are under way. On one hand, Switzerland’s proposed participation different types of financial operator.

Among these, I would include in the automatic exchange of asset managers, who will continue information will contribute to to benefit from Switzerland’s making the Swiss financial centre traditional strengths: first and even more integrated with the foremost, what’s known as the rest of the world, although it will “country system”, meaning a context inevitably mean an end to banking of political, economic, social and secrecy, one of the country’s legal stability, alongside a modest traditional strengths. On the tax burden for both individuals and other, the recent currency issues experienced by the Swiss franc have legal entities. Operating in a market of private bankers and institutional led to international fallout, turmoil investors is also important as that has once again underlined the importance of the financial centre in it makes access to seed capital relatively straightforward. Finally, the international arena. Alongside these macro-level dynamics, various it is a very multicultural setting (nearly 1 in 4 citizens are foreign), developments have had a more as well as being multilingual – direct effect on the fund industry, German, French and Italian are the such as the entry into force of the country’s official languages, while new CISA (Collective Investment English is the language of business.

Schemes Act), a provision similar These are important factors for to the Europe-wide AIFMD, anyone operating in global markets. and the stream of relocations from London to Switzerland by While the underlying conditions managers (primarily alternative fund managers), which was initially remain attractive, regulation plays a significant role, especially in the depicted as a real exodus before post-financial crisis era. On this being scaled down somewhat. point, the new CISA is the key

text for the fund industry. The new developments, primarily concerning distribution and the need to obtain a licence for operation from FINMA, are in line with the legislator’s main objective with the introduction of the new law: ensuring full harmonisation with European and US regulations while supporting access to international markets, an essential condition for the development of the fund industry in Switzerland.

New rules, consolidated assets and critical challenges: what, then, is the future of the Swiss fund industry?

Many observers see Switzerland as occupying a niche position. Faced with the difficulty of competing with the major world financial centres in the development and marketing of approved products for mass consumption, the country is very well placed – in political, economic and geographical terms – to understand the needs of specific categories of investors, especially high net worth individuals in search of both a personal touch and cutting-edge investment solutions. It is worth remembering that Switzerland now has some 5,000 resident UHNW individuals, according to Research and Markets estimates, and this figure is expected to grow by 24% by 2018. As a result, the Swiss financial centre’s future

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“The scale of the changes under way has led analysts and observers all over the world to reflect on the future role and appeal for operators of the Swiss financial centre.”

Panorama altstetten-station-sundown” by Gürkan Sengün. Licensed under CC BY-SA 3.0 via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:Panorama_altstetten-station-sundown.jpg#/media/File:Panorama_altstetten-station-sundown.jpg

may lie in boutiques where clients with very specific needs can find tailor made solutions that would not necessarily suit the majority of international investors.

Talking about the Swiss financial centre as a whole may be misleading, however, given that Switzerland is in the unusual position of having three international-level centres – Zurich, Geneva and Lugano – as well as a couple of satellite hubs in the form of Zug and Pfäffikon. Each of these three areas has a different combination of the advantages described above. The smallest and least known to the general public of the three, Lugano, located in the centre of the Italian-speaking Canton of Ticino, has traditionally been associated with the provision of private banking services to neighbouring Italy. Over time, however, the financial centre of Lugano has diversified, making the most of its geographical and cultural position to open up to other markets, from Eastern Europe to South America and the entire Mediterranean area. It has also seen the development of a substantial community of hedge fund managers and commodity traders. Even more than its “big sisters” Zurich and Geneva, Lugano leverages a factor to support its growth that

is only superficially secondary: the opportunity for a good worklife balance, allowing operators to combine first-rate business infrastructure with an urban and natural environment on a human scale. As they say in Lugano, Swiss quality with a touch of Italian lifestyle.

What we are seeing in Switzerland is therefore an evolution in asset management. While maintaining its complementarity with private banking, the current and future driver of Swiss finance, it is increasingly developing as an industry in its own right.

To support this dynamic, the authorities have launched various initiatives to promote Swiss asset management. The Swiss Asset Management Initiative has been created at national level, run jointly

by SFAMA, the Swiss Banking Association and the Association of Swiss Insurers, with a steering committee that includes chief executives from leading Swiss asset managers. At the same time, local initiatives with the same focus are also afoot: the most active include Ticino for Finance, the association whose main objective is to present the financial centre of Lugano and the surrounding area and make it better known abroad, promoting connections with anyone interested

in operating in the fund industry from and with the Canton of Ticino.

Switzerland is therefore in an excellent position to compete in the race to determine the future of the fund industry, providing one more reason to keep the spotlight on the country for some time yet.

FRANCO CITTERIO Chairman of Ticino for Finance – Director of the Ticino Banking Association For more information, make sure to attend the expert discussion on The Future Swiss Fund Business taking place on Wednesday 1st July.

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LEADERS’ SCENARIO PLANNING

THREE REASONS STRATEGISTS GET SCENARIOS

CATASTROPHICALLY WRONG....

It is a sad fact of life that my profession, foreign policy analysis, has more than its fair share of snake-oil salesman.

system one almost cannot be fired) is secured, if unimportant.

This lack of ambition, more than anything else, dooms much modern foreign policy analysis to irrelevance.

I once made a modest suggestion at a meeting of the great and the good at the prestigious Council on “The key to the game Foreign Relations in Washington, is not what you would one that earned me nothing but scowls around the table. ‘Why do, but what Fidel shouldn’t we analysts be held to Castro is likely to do” the same standards I hold my plumber?’, I mock innocently War games are a wonderful queried, ‘if we are right we are corrective for this. One of the great hired again, but if we are wrong….’ strengths of such simulations is that they force you to make an For all too often foreign policy argument, answer binary questions analysis is wrong, or at least in a ‘yes’ and ‘no’ manner, focusing unhelpful for the business and on the perennial critical analytical the wider worlds, as one runs into question, ‘Why?’ By their very analysts who are afraid to put their nature the games make it very analysis to the predicative test. hard to be bland and boring. And if you are, the offending analyst so That is, the first reason analysts get mars the game that there is actual things so catastrophically wrong pressure in the room for them to has to do with career survival; they say something; war games are a are so frightened of being wrong wonderfully subversive tool. that they will never be right. Far better assess things blandly, not The next reason analysts so often to say much of anything, and to get scenarios so wrong is that they be blessedly forgotten as soon as find it impossible to think out of possible. Such an approach may their own skin. Say we are playing not yield cutting edge analysis, but a game about the prospective one’s career at a think tank (where opening up of Cuba. like the East German labour

A poor analyst says, ‘Well, if I were in Fidel Castro’s position here’s what I’d do,’ neglecting the basic and overriding fact that the key to the game is not what you would do, but what Castro is likely to do.

Chances are the analyst does not share Castro’s background, history, ideology, personal quirks, or sense of self.

Bad analysts (and they are legion) never get beyond this, all playing the game as if they are well-educated members of the advanced capitalist democracies.

To put it mildly, that does not approximate the reality needed to make the game come alive. On the other hand, good analysts relish this chance to try to think beyond themselves, looking at the different pressures and incentives that might drive someone who is not like them. By going through the looking glass like this, a new level of understanding is possible, another invaluable attribute of good scenario playing.

Third, secretly we have all been brainwashed by Hegel; who wrongly thought that for every policy problem there must be a satisfying and rational solution.

38 FUNDFORUM INTERNATIONAL 2015

(AND WHY YOU SHOULD TAKE WAR GAMES SERIOUSLY) As such, most war games (and their participants) skew toward a successful resolution of the problem being looked at. Such an approach makes a mockery of the real world as it is actually lived. History is chock full of examples of countries that didn’t solve their problems: the Romans never figured out how to manage the barbarians, the Spanish Empire never could deal with inflation, and Germany has had a devil of a time delineating its borders; the list is endless.

“War-gaming at its best reveals to investors which political risk problems are manageable, and which are terminal.”

I love it when a game comes apart, when it becomes clear there is no easy, clear, and pain free solution to the problem the game is dealing with. Such a ‘failure’ actually provides investors with an understanding of which political risks out there are dangerous to them in a long-term way;

this actually amounts to a great success. War-gaming at its best reveals to investors which political risk problems are manageable, and which are terminal. I can hardly think of a better analytical service to our clients than this.

Good designers and players of simulations should be very relaxed when things fall apart, as that could well be the real-world ‘answer’ to the problem being looked at!

I look forward to playing our games at FundForum International with you and will do all I can to avoid these three deadly sins, letting the games take us where they may, as we attempt to be truly creative about the world we find ourselves in.

DR. JOHN C. HULSMAN President and Co-Founder of John C. Hulsman Enterprises a successful global political risk consulting firm.

Join in the leaders’ scenario planning war game on Tuesday afternoon to see (and play out!) what the asset management industry can do to protect investors and stakeholders in the face of an international financial crisis on Tuesday 30th June.

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SPONSORED ARTICLE

A MESSAGE ABOUT

FUND MANAGEMENT IN THE UK The events of the last few years have proved that the UK’s place as the world’s leading financial services centre is secure.

London has withstood the credit crisis and the sovereign debt crisis.

Over the past 20 years the UK has not seen globalisation as a threat but has embraced it to ensure we remain the most open economy in the world. Successive governments have all been determined to see the financial sector succeed in an ever-changing world.

The results of this are plain to see: more overseas financial institutions and investors choose to do business in and with the UK than any other country.

The UK is one of the largest markets in the world for fund management and remains Europe’s leading centre for fund management. Assets under management have increased for the fifth successive year to a record £6.2 trillion at the end of 2013. Of the total assets under management some £2.2 trillion are now managed on behalf of foreign clients, making the UK the leading global centre by this measure.

Being the most open, market in the world not only attracts companies, it encourages them to see the UK as a unique hub of global connections; a place where they can invest and then in turn invest in other areas of the world by taking advantage of the market knowledge, business experience and skills of the international workforce here. Emerging markets are strongly represented here. Businesses and funds from these emerging markets know they can invest here, and seek investment. UK-based firms are well positioned to gain new international business, particularly in emerging markets where growth prospects look strongest.

All this is possible because the UK has worked hard to create the conditions for growth. We have a transparent legal system and a highly skilled and educated workforce. Financial business in the UK is overseen by a wellrespected securities market regulator – the Financial Conduct Authority – so investors can have confidence in the strength and impartiality of our regulatory system. The UK’s ambition is to make the UK a global centre for investment management.

We have already reduced fund authorisation times by the Financial Conduct Authority by around 50 per cent following the launch of the government’s Investment Management Strategy in 2013.

People who want to set up in the UK have a unique, and bespoke, Government service to help them. UK Trade & Investment’s Financial Services Organisation assists fund managers seeking to establish a presence in the UK and to make sure those already here can make the most of the opportunities that exist in this important, thriving sector.

Our service does not stop once a fund or financial business is established. We, and our partners, go on working with them to make sure they are thriving in their new business environment. The City of London is quite rightly famous but funds who establish here are also drawn to other centres of excellence such as Edinburgh.

All over the country you can find skilled workers in finance and IT, at lower cost than in London.

The UK’s fintech sector is lively and growing, not only with large

40 FUNDFORUM INTERNATIONAL 2015

“The UK is one of the largest markets in the world for fund management and remains Europe’s leading centre for fund management.”

IT companies but it is also full of small firms producing the IT services that firms want to purchase as well as invest in.

Over the past few years there has been substantial restructuring among UK fund managers, strengthening their international links. There is likely to be further restructuring globally among the main fund management firms, geared to expanding the pool of resources available, developing sophisticated distribution systems and improving quality of service.

UK-based firms have a wellestablished track record in the measurement of returns, a record they should be able to use to their advantage in marketing their products in emerging economies as the market for those develops.

Working with colleagues across UKTI’s overseas network the UKTI Financial Services Organisation offers a One Stop Shop Concierge Service for fund managers wishing to set up in the UK, bringing together access to all of the service providers required to establish a presence in the UK from accountants and legal advisers to recruitment firms and premises providers, the regulator and government, to provide a comprehensive package of assistance. If you are thinking of setting up in the UK, or simply want to know more about what the UK can offer you, UKTI is on hand to provide guidance and practical assistance

To find out more about investing or locating your business in the UK, visit UKTI at stand 62/63.

UK Trade & Investment Also come and see Karthik Iyer (UKTI) is the UK government on the afternoon of Monday 29th department that offers support and June as well as late morning on independent advice to overseas Tuesday 30th June on the Smart companies looking to invest or Business Stage. locate in the UK. The UKTI Financial Services Organisation (FSO) offers full support for asset managers wishing to establish a presence in the UK. It acts as a single body for companies to engage with as they plan to grow in and from the UK.

KARTHIK IYER Asset Management Sector Lead, UK Trade & Investment To find out more about investing or locating your business in the UK, visit UKTI at stand 62/63.

Also come and see Karthik Iyer on the afternoon of Monday 29th June as well as late morning on Tuesday 30th June on the Smart Business Stage.

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MONEY LAUNDERERS STAY ONE STEP AHEAD Companies and their controlling bodies have both the legal and moral obligation to monitor the use of their resources. The task is becoming more complex as methods of illegally extracting a company’s wealth get ever more sophisticated.

While regulation varies widely from country to country, national legislation is often inadequate to fight global phenomena like money-laundering or corruption.

Anglo-Saxon countries are vigorously defending new rules (FCPA, UK Bribery Act) with extra-territorial scope, but only rarely enforcing them, and mostly on foreign entities, while their financial centers, London on top, are the biggest safe havens for organized (economic) crime syndicates.

In fact, we observe that light touch regulation is as much of a boon to criminal syndicates as for companies seeking to minimise their taxes.

GEOGRAPHICAL FLOWS In geographical terms, three blocs have emerged. The developed markets are chronically plagued by debt, stagnation and strong regulatory pressure. The emerging markets, including the Indian subcontinent, China, and neighboring regions, are growing strongly, helped by a lax regulatory environment and significant capital to invest. The “Third World”, African countries in the lead, is rich in natural resources, but plagued

by plutocracies, or rather kleptocracies, whose wealth is often fueled by international corruption and traffic in arms and drugs.

Criminal organizations have also become international in their quest to find new markets, diversify activities and manage legal risks.

New organizations have honed their financial acumen as they pull back from the more traditional activities, which often involve struggling with local security forces for the control of an area. The financial arena is less risky, since international financial crime has only recently become a focus for governments, and they are often reluctant to invest substantial resources to combat it. The economic and financial flows that are observed between these three worlds are the focus of large transnational criminal organisations.

The first flow, in red, is from Developed Economies towards the Third World, in payment for the control of natural resources and access to new markets.

The second, in yellow, affects the large, fast-growing economies like China and India which invest heavily in both the developed markets and emerging ones like South America and Africa.

The Third World is at the crossroads of these two main streams, and in turn produces an outward flow of commodities and people towards their richer partners.

The large criminal organizations of the future are likely to develop in this area.

“Transnational crime is gradually outsourcing the integration of laundered money into the legal economy” WHEN THE STATE MUSCLES IN In Africa large scale arms and drug trafficking are still controlled by organizations of the first and second world, although this picture is changing as local operators begin to move in.

In our investigations, which relate to criminal activity in Second and Third World countries, we record two trends that confirm this scenario.

The first is the direct participation of the state in corrupt activity, not as a passive observer but as the main actor – for example, the mining sector in West Africa. Autocratic regimes organize corrupt and criminal activities via the direct management of the companies supplying equipment or logistics, enabling them to divert funds to corrupt beneficiaries.

This activity is extremely lucrative, as a single mining company can generate tens of millions of dollars in fictitious revenue thanks to the extremely high costs of mining. In more than one country, criminal activities such as drug trafficking that present legal and operational risks are managed in tandem alongside companies that can be used to launder the proceeds and reduce the risk. It is the state itself which pilots this transition to a more mature, largely economic crime.

A second, related trend is that of former

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“Criminal organizations have become international in their quest to find new markets, diversify activities and manage legal risk”

drugs or arms traffickers transitioning to the role of mining company executives. Organized criminals can thrive as accomplices of the State. This phenomenon a new type of risk for international businesses – their witting or unwitting complicity in organized criminal activities.

CORRUPTION SUPPORT Any organized criminal activity must provide for the recycling of its profits in order to shield the beneficiaries from legal consequences. In effect, a corruption support industry is developing, taking on a life of its own: transnational crime is gradually outsourcing the integration of laundered money into the legal economy.

In one case where an American chemical company was the injured party, we discovered a vast network of companies belonging to a deceased, and therefore silent, Latvian national that was used to launder the proceeds of corruption.

The stringent anti-money laundering guidelines now in force in all major financial centers oblige the criminal economy to look for: • •

Alternatives to bank secrecy that allow actors to maintain complete, undocumented anonymity Financial channels to control legal activities in which laundered money is invested

The demands for anonymity are met by offshore companies with corporate owners. A few company formation groups control this market niche: they are found in the Caribbean, Switzerland or Luxembourg, but especially in the United Kingdom and the United States,

and can create company structures that allow complete anonymity. A recent investigation into front companies found that several company formation businesses required no formal identification, meaning that beneficial owners could completely distance themselves from their companies.

So while numerous governments in developed economies have targeted transnational crime, it is often these governments themselves that have provided the mechanisms used by transnational criminals to sidestep the law.

activities and laundering capabilities.

Some UN estimates put the volume of economic crime at one trillion euro per year. Laundering activities “cost” between 5% and 10%, which means that the “professional economic crime support” market is worth around 50 billion euro.

This is comparable to the illegal drug market, but margins are much easier to defend, and risks much lower.

Moreover, transnational criminals have anticipated the trend towards more transparency in developed nations. For example, knowing Swiss banking secrecy would soon disappear, they emptied the coffers in Lugano and Geneva, and transferred the bank deposits into shell companies in London, Singapore or Delaware, in order to invest these funds in the “real economy”.

One side effect of the shift has been a wave of private banking consolidation and closures in Switzerland.

Why should a Mexican drug dealer bring dirty money in a suitcase to Geneva, when he can comfortably use electronic money transfer systems of the bank he owns? He could even sell his precious laundering competencies to his competitors.

If is relatively easy to anticipate that, in the near future, emerging countries will become more willing and able to launder their illegal monies in house, concentrating in one place criminal

CLAUDIO FOGLINI Corporate Intelligence expert at Scalaris Economic Crime Intelligence AG, a Swiss company serving large industrial and financial corporations.

Claudio will be appearing in the Cybercrime, KYC & Oursourcing panel discussion, taking place on Tuesday afternoon in the Cross Border Operations Forum.

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SPONSORED ARTICLE

THE “LOIM WAY” TO SOLVE TODAY’S INVESTMENT CHALLENGES Investor demand for multi-asset solutions has grown significantly over the last few years and this is likely to continue. This rising popularity has gone hand-inhand with a proliferation of product offerings, but how far have we come from the traditional 60/40 balanced investments? Largely investors’ return targets remain unchanged from previously, and in today’s low yield environment a traditional multi-asset strategy may not be sufficient to meet these targets. The desirable solution for investors is therefore to boost returns without unduly increasing risk.

So what tools do multi-asset solution providers have at their disposal in order to improve returns? To put it in context, let’s start from the aforementioned traditional portfolio, which historically has delivered a return of cash +3%; there are three ways of increasing returns: 1.

2.

3.

By taking CONCENTRATED risk bets (1) By increasing DIVERSIFICATION (2) Through LEVERAGE (3)

Fig. 1 Three ways of increasing returns

In our opinion, investors should be very careful when choosing the first option, based on views. This can lead to excessive risk within a portfolio. We believe there is a better way.

The “LOIM way” LOIM’s Multi-Asset philosophy is to primarily focus on improving DIVERSIFICATION (2) (see Fig. 2). We go further than most MultiAsset solutions. We extend diversification by adding sets of highly transparent and liquid alternative risk premia - for instance, the systematic implementation of carry trades. We also take advantage of new investment technologies such as smart beta strategies.

THÉODORE ECONOMOU Chief Investment Officer Multi-Asset at Lombard Odier Investment Managers

AURÈLE STORNO Senior Portfolio Manager, Head of Multi-Asset Research at Lombard Odier Investment Managers

Finally, we use moderate LEVERAGE (3) to enhance the overall exposure of this highly diversified portfolio with the aim to improve returns using the full risk budget. We do this using the same transparent and liquid instruments, enabling a constant control of the total portfolio risk while ensuring to maintain its Sharpe ratio high.

Fig. 2 The “LOIM way” seeks to increase returns without increasing risk

‘Source: LOIM, May 2015’ In our view, combining a highly-diversified approach together with the controlled use of leverage helps to produce better risk-adjusted returns.

The end result is a smoother return over the entire market cycle, a philosophy that, for us, has delivered over time.

This article does not contain personalised recommendations or advice and is not intended to substitute any professional advice on investment in financial products.

Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This article contains the opinions of LOIM, as at the date of issue.

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