Month: July 2015

What happens when brands rebrand?

Posted on by Ashton Wenborn

Building a recognisable, trusted brand is often exceptionally hard, but can be the difference between lasting success and quick failure. However, when established brands feel they need to freshen up their images, implementing changes can be fraught with difficulty. A fine line between alienating a loyal customer base and capturing new supporters means a great deal of thought needs to go into any rebranding.

A number of firms have changed their images in the last year – including Airbnb and Hootsuite – with varying success. Now, 2015 has been touted as the year of the rebrand, in particular for small- and medium-sized enterprises (SMEs). This year it seems many marketing agencies could be set for windfalls as a result of a shift towards simplifying brands and updating images, but it doesn’t always make sense to bring in expensive branding agencies.

While it can prove hugely beneficial to update a company image, history has shown many established firms have made catastrophic errors when tinkering with their brand. These can include paying for flashy new logos that get quickly ditched after poor receptions, to making changes to a popular product and enraging previously loyal customers. At the same time, many rebrands have had significant benefits for companies, reinvigorating staid profiles and updating an image for a modern audience.

Logo price tags:

$211m

BP, 2008

$100m

Accenture, 2000

$1.8m

BBC, 1997

$1m

Pepsi, 2008

$625,000

London 2012, 2007

$35

Nike, 1971

$15

Twitter, 2009

£0

Coca Cola, 1886

Why rebrand?
The reasons for rebranding are varied, but usually stem from a need to grab the attention of a stagnant market, stem the tide of departing customers, or to distance a business from a particularly disastrous reputation. One of the more recent company rebrands to hit the news is that of online property rental site Airbnb. The company has already been a hugely successful new entrant into the tourism industry, upsetting the traditional hotel industry by allowing people to easily make money from letting out their properties. Nonetheless, as it rapidly expanded, Airbnb’s management was starting to worry that it did not have a recognisable brand or logo that would cement the company into the minds of users. Therefore it hired a brand design company – San Francisco-based DesignStudio – to come up with a new logo that would be both instantly recognisable and reflect the company itself.

Writing in The Guardian last September, DesignStudio’s Executive Creative Director James Greenfield explained how his team worked out the new logo. “For Airbnb, the first step was to understand the brand on a global scale and specifically the community that underpins the ethos of the brand itself. We sent four team members to 13 cities, staying with 18 varied hosts across four continents over four days. Armed with a basic video camera, they captured their journeys. This combined with more than 120 interviews helped us to understand the spirit of Airbnb and the emotional connection that their community has with the company.”

However, when they did unveil the new logo, many observers thought it had been a terrible mistake. Likened to, among other things, both male and female sexual organs, the logo was widely spread across social media. However, the attention created for Airbnb has led a stronger recognition of the company and to it growing its user base even further, which now sits at around 15 million.

Not just image
A successful rebrand does not necessarily involve just a change in logo or name, but often requires a complete overhaul of the company’s goals, message and culture, as well as their product offerings.

One example is Harley-Davidson. While it has been synonymous with the iconic image of leather-clad motorcyclists, the company was seriously struggling with its finances during the 1980s. With mounting debts and a poor reputation for reliability, the company realised it needed to improve its product if it was going to survive. While the brand has always remained strong, Harley-Davidson’s had become renowned for being faulty at the time. Addressing the situation, management invested heavily in ensuring the bikes were a far better quality, catapulting the brand into becoming the most reliable motorcycle manufacturer in the world.

Although McDonald’s had grown to near global dominance of the fast food industry, the turn of the century brought about a sudden health-conscious trend among many people. Whereas the company had been seen as a staple of many people’s diets, customers were turning their backs on the greasy, cheap burgers for healthier options with fresher ingredients. Realising it needed to do something to stem the flow of departing customers, McDonald’s set about offering healthier options like salads, while trumpeting the supposedly fresh ingredients it was using for many of its products. While not quite as popular as it once was, McDonalds has seen customers return in recent years.

Marketing mistakes
There have been many other rebranding missteps made by overly creative marketing departments throughout the years. US retail store Radio Shack attempted a redesign in 2009 to capture a more youthful clientele, and jettisoning its 90-year history and strong brand image for a simplified name. Renaming itself ‘The Shack’, the attempt at appearing cool was widely lampooned by observers, with branding expert Rob Frankel telling Business Insider in a 2011 article, “Why would anyone throw away decades of brand value, which actually shows up on the balance sheet as an intangible asset, just to try to be cool for a few minutes?”

Even though Radio Shack reversed its decision to rename, it hasn’t stopped the company from haemorrhaging customers and losing money. Things came to a head in February when it finally filed for Chapter 11 protection under US bankruptcy laws, having suffered 11 consecutive quarters of losses.

Other reasons for rebranding can include legal disputes, where trademarks might have been infringed upon, or a changing audience that requires a fresh image. In 2009 another company, US cable television channel SciFi, attempted to change its image and appeal to a younger crowd by changing its name. SciFi also had to find a new name that it could trademark, as the original name could not be bought. Choosing the way young people would supposedly text the name – SyFy – the company failed to realise that this name was also a slang term for a particularly unpleasant sexually transmitted disease. Despite much derision, the channel stuck with its new name.

Bad press
There could be a sudden incident that causes a once admired brand to be tarnished with bad publicity. A company that successfully altered its image is fashion label Burberry. For years, the 150-year old British clothing company had become known as the designer-of-choice for English football hooligans and gang members. The trademarked black, beige and red check pattern adorned caps, bags, scarves and other clothes that many of society’s less-friendly members were proud to be seen in. Things got particularly bad for the brand’s image when two English pubs banned anyone wearing Burberry clothes from their premises.

Recognising the need to distance itself from such a crowd, Burberry’s management decided to overhaul its image with a series of new products, using iconic celebrities like Kate Moss and Emma Watson to promote them.

Christopher Bailey, then the company’s creative director (and CEO as of May 2014), said in a 2009 interview with The Times that the new image was about updating Burberry’s heritage and making it “relevant for today”. He added, “You have to make sure what you do is right for the moment you live in. What makes things relevant?”

Bad publicity can also be caused by unforeseen circumstances. Following last years tragic lost aircrafts, Malaysia Airlines was said to be considering a brand overhaul and change of name to stop people from associating the company with air disasters, with customer numbers plummeting after the crashes. However, such a change has yet to materialise.

Another firm in the news recently for the wrong reasons is payday loan company Wonga. The British company lost considerable amounts of money in recent months because of a series of scandals and fines resulted in losses of £37m ($58.04m). To distance itself from the negative publicity – which included being singled out by the Church of England as being “morally wrong” – Wonga’s management has been rumoured to be looking at a complete rebrand.

Coca-Cola products on display. The iconic brand was brought back as Coca-Cola Classic, after New Coke flopped
Coca-Cola products on display. The iconic brand was brought back as Coca-Cola Classic, after New Coke flopped

Publicity stunts
There have even been some suggestions that rebranding exercises have been done to strengthen the original brand. By announcing a total overhaul of a well-known brand, howls of outrage cause media attention and sentimental feelings to swell around the original brand, therefore bolstering the existing company. While some marketing departments reversing a rebrand after protests may claim that it was their clever idea to drum up support, it seems doubtful that many are really that strategically insightful.

Perhaps one of the most famous examples of a rebranding exercise gone spectacularly wrong is Coca-Cola’s 1985 relaunch. Changing the original formula of the extremely popular drink, the company released New Coke after a number of years of steady decline in market share to rival Pepsi – a company that would also make its own calamitous rebranding mistakes years later. This came after Pepsi launched its highly successful ‘Pepsi Challenge’ ad campaign that claimed to show how people tended to prefer the taste of their drink over Coke. Conducting their own tasting tests, they discovered that people seemingly did like Pepsi more than Coke.

New Coke was developed to be closer in taste to Pepsi, and subsequent tests proved it to be much more popular than the rival drink. The fateful decision to discontinue the original Coke in favour of New Coke was made, announcing the move well in advance of the actual launch. The reaction, however, was not what the company expected. Howls of protest by millions of Americans came in the run up to the eventual release in April 1985, and when it was finally available to buy, the poor publicity meant many refused to buy it in protest.

Realising the colossal mistake it had made, the company decided to launch the old product as Coca-Cola Classic just 77 days later. The company would try to put a positive spin on the debacle, hinting that it was all part of a marketing plan. Trumpeting the return of the original Coca-Cola, the firm released a statement declaring that, “April 23, 1985, was a day that will live in marketing infamy…spawning consumer angst the likes of which no business has ever seen.”

Then company President and Chief Operating Officer Donald Keough announced the return of the original drink, while claiming that customers’ loyalty to old Coke was not something any marketing expert could have predicted. “There is a twist to this story which will please every humanist and will probably keep Harvard professors puzzled for years. The simple fact is that all the time and money and skill poured into consumer research on the new Coca-Cola could not measure or reveal the deep and abiding emotional attachment to original Coca-Cola felt by so many people.” He added, “The passion for original Coca-Cola – and that is the word for it, passion – was something that caught us by surprise.”

Looking back on the debacle, Marketing Vice-President Sergio Zyman, who alongside then-President of the company’s US business Brian Dyson, had led the rebranding, said, “Yes, it infuriated the public, cost a ton of money and lasted only 77 days before we reintroduced Coca-Cola Classic. Still, New Coke was a success because it revitalised the brand and reattached the public to Coke.”

Such was the furore around the decision to change the formula of Coke that many have speculated whether it was an intentional move to cause a surge in sales of the original drink and grab the attention of the world’s media. However, dispelling such rumours, Keough maintained it was no marketing ploy. “Some critics will say Coca-Cola made a marketing mistake. Some cynics will say that we planned the whole thing. The truth is we are not that dumb, and we are not that smart.”

In 1992, a decision was made to rename the new drink Coca-Cola II. It was discontinued a decade later, after years of neglect from the marketing side of the business. Coca-Cola Classic, by contrast, has been the main focus of the firm ever since, and has gradually seen the ‘Classic’ label withdrawn, emphasising it is now considered the one true Coke.

A McDonald’s in Times Square. A healthier approach has helped bring customers back to the fast-food chain
A McDonald’s in Times Square. A healthier approach has helped bring customers back to the fast-food chain

Shaking it up
Coca-Cola’s long-term rival has become notorious for constantly changing its logo and undergoing rebranding exercises, doing so nearly each decade over its 122-year history. While it was seeing considerable success during the 1970s and 1980s, thanks in large part to its series of blind tests that saw people favour its drink over Coke, Pepsi has since struggled against its rivals’ stronger brand identity. Over the years it has overhauled its logo, but the most criticised rebranding came in 2008. Taking the traditional ‘wave’ design for the logo and turning it into an unbalanced, smirk-like smile, it was panned by both designers and customers alike.

The company hired to do the rebranding – The Arnell Group – were rewarded handsomely for their design, receiving $1m. However, the cost to the company is thought to have been far higher, and some speculate that the entire rebranding effort cost $1.2bn over the three years it took to implement.

PepsiCo, Pepsi’s parent company, has also tinkered with other brands it owns. In 2009 it changed the design of its hugely popular and recognisable Tropicana juice drink. Changing from the old carton design that featured an orange with a straw in it, to a cleaner and more minimal design, the company received many complaints from disgruntled orange juice fans. After sales fell by 20 percent, the company quickly reinstated the old carton.

While many of these examples have shown that freshening up a company image can bring in a new wave of customers, there have clearly been examples – certainly in the case of Coca-Cola and Pepsi – where tinkering with a well-known product or logo can seriously damage the bottom line of a business. Whereas marketing departments might be tempted to constantly update a company’s brand – perhaps as a way of finding something to justify their large salaries – it can often be the case that if a business is already doing well, there’s really no need for changing a winning formula.

Azure Wealth: get ready for a new generation of investors

Posted on by Ashton Wenborn

In a recent KPMG report it was noted that “Nobody can predict the future”, but that has not stopped the company contemplating what the investment management industry will look like in 2030. In its report, the professional services company contends that the rapid change the industry is experiencing is driven by a number of deeply rooted forces, or ‘megatrends’.

Over the next 15 years, these megatrends are meant to impact the investment management industry in a number of ways (see Fig. 1). For starters, over the past 30 years the industry has been driven by the baby boomer generation, which has provided strong levels of investment, underpinning solid market growth. But it is important to remember that these markets have also been buoyed by rapid globalisation and a massive rise in international capital flows.

As that generation begins to reach retirement, however, the focus of investment managers shifts to a younger group of investors, but one that is not accompanied by such a favourable socioeconomic environment as the generation that preceded it.

In the wake of the financial crisis, many of the world’s major economies are still struggling; putting a cap on growth. The crisis has also played a big role in eroding trust between investors and financials service providers – adding to a challenging path ahead for investment managers to navigate, but one they plan to meet head on.

Digitisation is pervasive in all industry sectors and can be difficult to keep ahead of

“Investment management has become more and more sophisticated with the tools that are available nowadays and with easy access to information”, says Pedro Pinto Coelho, CEO of Azure Wealth in Switzerland. “The main driving forces behind this evolution include, on the quantitative side, more sophisticated tools to manage risk and models that allow us to digest large chunks of data and, on the qualitative side, the ability to reach out to the local expertise on the ground. However, the distinction between good and bad performance still lies in the human factor and the ability to make sense of the data analysis to try to forecast the expected outcome.”

Investor circa 2030
In the future, Azure Wealth and other investment management firm’s will need to find new ways to meet the ever-evolving demands of their clients as the profile of the typical investor continues to evolve over time and become harder to pin down.

KPMG suggests there are likely to be far fewer ‘typical’ investors. Instead, the industry will benefit from being able to draw from a larger pool of investors, but will have to tailor their services to a investor class with a far more diverse set of needs, attitudes and income patterns.

The financial services firm believes that in the coming years, investors are going to expect the organisations to provide bespoke service models in order to better suit the individuals needs of this increasingly diverse group of investors. Not only that, but because financial literacy remains low around the world, investment managers may be expected to provide better advice, information, education and support for investors.

“In an industry currently suffering from high levels of consumer mistrust, investors are likely to assign increased value to trusted brands, particularly as awareness of issues such as data security, confidentiality and privacy increases”, writes the author of the report and global head of investment management at KPMG, Tom Brown. “In tomorrow’s world, simplicity, transparency, honesty and integrity are likely to be regarded as more important buying criteria.”

This is going to require investment management firms to change the manner in which they provide many of their services to clients. No longer will the fund factsheet be enough to satisfy the new 2030 investor that KPMG speaks of. Instead, investors will expect the type of access to information that they have become accustomed to and, which is provided by other industries. It will require the implementation of interactive service models that will allow investors to obtain up-to-date market information through a variety of platforms.

Brown and his colleagues believe that as a result, future investors are going to want better solutions to their individual needs and will want to ‘lock down’ value earlier in a product lifecycle. In order to track value and lock it down earlier, it is important that investment managers implement effective data analytics in order to provide investors with consistent returns.

“[Azure Wealth] has proprietary forecasting models that represent the different components of an integrated platform to be able to make a top down and bottom up analysis”, says Coelho. “This platform allows us to adjust our investment allocation and spot new investment opportunities in a consistent way. We believe in long-term objectives and by analysing the market trends we define an investment strategy based on fundamentals and not on market swings. We analyse carefully the risk associated with each component of our portfolio to allow us to have a combination that has consistent returns with reduced capital erosion.”

Core megatrend factors

Keeping pace
Digitisation is pervasive in all industry sectors and can be difficult to keep ahead of, but if used properly it can help firms offer alternative service models and better cater to the needs of their clients. Investment management is an industry that takes pride in cultivating strong, personal relationships, but is facing both challenges and new opportunities as technology shapes the expectation of individual and institutional investors.

While there will always be demand for face-to-face interaction between clients and those tasked with managing their capital, the growth and success of mobile applications, video and social media platforms means that they are becoming the preferred method for investors to stay abreast with market information.

Therefore, the application of digital technologies is essential if firms want to be successful. They must be willing to adopt, evolve and grow their use of these platforms and incorporate these systems into the very heart of how they do business if they hope to cater to their new, technologically savvy client base.

However, it is important to remember that real people with the right expertise should compliment new technologies in order to help investors makes sense of all the data that they will soon have at their finger tips if trends continue in their current trajectory.

“Although technology has evolved significantly, we still believe the human assessment plays a far more significant role to provide clients the risk-adjusted returns they expect”, explains Coelho. “Today we live in a world of high swings between high and low volatility periods.

We believe in long-term returns and believe these swings can generate good opportunities to make investments with strong fundamentals.” Over-spending by governments around the globe has created high levels of debt, which has led to the implementation of harsh austerity programmes in a bid to balance the budget.

As a result, more and more people are realising that their state and even private pensions are not going to be enough to support them later in life. This trend has and will continue to force people to look for viable investment alternatives that are capable of providing the financial security that people desire.

According to KPMG, this new generation of investors, as a result of the economic climate that they have grown up in, will be more likely and willing to consider non-traditional alternatives to ‘traditional’ savings and retirement products.

Furthermore, the financial services firm contends that investors’ decisions are not only going to be influenced by the current economic situation that they find themselves in, but also the choices they make are likely to be influenced their peers, friends and colleagues.

This provides investment managers with a massive opportunity to attract a new generation of investors with a very different set of motivations and needs. But in order to make the most out of this opportunity, investment managers will need to adapt their business practices in accordance to the demands of their clients.

“The future trend of the industry will take into account the aggregate value of each expert. In other words, we will see more cooperation between the different asset managers where each one will provide its knowledge and will rely on others for specialised knowledge on areas they will require support. There will be a new world of aggregate knowledge”, continues the KPMG report.

“Azure Wealth is built on the strong conviction of wealth preservation in the long term. Therefore, we see that more clients require the necessary support in a world of constant uncertainty and conflicting information. Azure Wealth is expected to have a strong growth as more and more clients recognise our added value”, says Coelho.

Kaiser Partner Vaduz on securing family finances

Posted on by Ashton Wenborn

There are numerous situations that can endanger your fortune as a wealthy family or entrepreneur. Some are exogenous and cannot be prevented, but can at least be mitigated. For example, this concerns the area of government influence, from taxation to deprivation and inflation. There is also the vast range of disruptions that can affect society, such as revolutions and changes to the current form of government, and subsequent loss of property and income streams.

Similarly, fraud and embezzlement can be committed by virtually anyone advising the entrepreneur, family or someone employed by the family. Bad business development can be the cause of external factors, as well as not having adapted the business model to the current environment. This ties in closely with advisors, who could have a conflict of interest and therefore misadvise the family and follow their own agenda.

Preventing unwanted wealth attrition requires diligent planning and coordination across many areas, including family mission, wealth advisory, tax and legal

The best resolution
Another internal field is the area of divorce and family conflict, which can cause years of lost effort and resources being mis-allocated. Family governance is also relevant, where we have seen families that did not have a common vision – and therefore a mutually agreed world-view – losing sight of the objective and see that their assets would dwindle. In our practice we observe that entrepreneurs who have a family – following strong intrinsic values – will be more successful in keeping the assets together.

The question is, what should happen to my assets after I am gone? It is common for entrepreneurs to ask themselves this question at a particular stage in their life, usually when nearing their preferred retirement age, which can be as early as 45 or as late as 85. To name just two of the many possible options for wealth succession, should an entrepreneur go for dynasty or charity? Either way, preventing unwanted wealth attrition requires diligent planning and coordination across many areas, including family mission, wealth advisory, tax and legal.

One effective way of addressing this emotive issue is to conduct an off-site meeting with all the family stakeholders under expert guidance. Such ‘wealth seminars’ are often used as a platform to clarify entrepreneur and family aspirations, motivations, and future plans. It is a useful tool for understanding what an entrepreneur has in mind, where the family as a whole currently stand, what the environment looks like now and how it might develop in the future. This can help address questions that are delicate and often raised too late.

Structuring debates
These seminars can also provide essential education for family members who have not so far been exposed to wealth management issues. In an open discussion led by experts, various themes can be addressed and appropriate solutions made. Themes that are typically covered include succession and estate planning, wealth planning and charitable work, and identifying intrinsic family values. These values are the very foundations on which dynasties are built.

Options and their consequences are discussed openly, sometimes with the entrepreneur alone, sometimes together with their spouse, children, and partners or even with the family as a whole. A modular approach can help adjust planning to specific needs and ensure no options are excluded. An open but structured discussion will result in a plan for the development of the family’s wealth, together with a list of open issues and viable courses of action. If the fundamentals can be agreed, the threats to a family’s wealth can be mitigated.

Could tax breaks be on the agenda for big oil companies?

Posted on by Ashton Wenborn

Reaching lows not seen since the 1970s, North Sea oil production has shown no signs of picking up since the late 90s, with some analysts going so far as to suggest that the field is on a knife edge of terminal decline. Blighted by the twin spectre of job cuts and early decommissioning works, those on the sour side of the Brent price slump have been calling on governments to expand their tax breaks and, in doing so, arrest the slide.

“The plummeting oil price has eaten into the margins of large oil and gas companies, and all around the world they are demanding a reduction in overall tax burden, especially on new projects”, says Ivetta Gerasimchuk, Senior Researcher for the International Institute for Sustainable Development. Generous tax cuts would hand struggling firms the impetus they so desperately need, or so say those affected. And for much the same reasons that minimal relief was deemed fit for an industry on the receiving end of rising prices, the opposite should stand for the other side of the coin.

Over the course of the last century, the US Government alone has exempted the fossil fuels business from over $470bn in tax

The announcement in March, therefore, that North Sea oil producers would benefit from additional tax cuts worth £1.3m ($2.02m) was greeted positively by an industry in need of a pick-me-up. With the costs rising and prospects worsening, the move has been received warmly by an industry for which a price shock has squeezed margins.

“Today’s announcement lays the foundations for the regeneration of the UK North Sea. The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness”, Malcolm Webb, Oil and Gas UK’s CEO, said of the news. “Along with substantial industry efforts to address its high-cost base and the regulatory changes now in train to provide more robust stewardship, the foresight shown by the Chancellor in introducing these measures, will, we believe pay real long-term dividends for the UK economy.”

Introduced on the basis that tax breaks have a major part to play in keeping the fossil fuels business afloat; by adding to the hundreds of billions shelled out already, the Chancellor has appeased producers though also rattled those who say the oil sector relies too heavily on government hand-outs. “It’s all so tiresome and predictable”, according to Nicholas Shaxton of the Tax Justice Network, and many critics of the same voice have taken pains recently to highlight the ways in which government tax subsidies are founded on a false premise.

Splashing the cash
Over the course of the last century, the US Government alone has exempted the fossil fuels business from over $470bn in tax, and the concessions granted to North Sea operators recently serve to underline the enduring influence of big oil in government policy. Introduced on the basis that a lesser tax burden will keep major names sweet and state contributions regular, the case of the North Sea serves to illustrate that tax relief does not necessarily dictate whether affected parties will stay the course, or indeed whether they’ll stay at all.

Going back to the beginning of the year, Royal Dutch Shell became the first major firm to toy with the idea of early decommissioning works when it started the consultation process in February. Likewise, Fairfield Energy announced in May that it was to begin decommissioning works of its own, “…taking into account the asset’s lifecycle, the depressed oil price and challenging operational conditions in the North Sea”, according to the firm’s CEO David Peattie.

The reasons for further tax cuts are that greater relief will offset, at least in part, a depressed oil price and difficult operational environment, though not all parties are convinced of the policy’s effectiveness. Feeding into a longstanding tradition whereby subsidies have sweetened the deal for struggling firms, the latest North Sea oil tax breaks have handed resident firms reason to continue with expensive projects, though at what cost is uncertain.

Making an appearance first in 1916 as a means of fuelling America’s budding romance with the automobile, much the same subsidies as those handed to the North Sea industry averaged at around $1.9bn (real terms) every year for the next 15 and set an expensive precedent for the decades to come. Since then the industry has changed immeasurably, though similarly generous tax breaks remain very much a constant for an industry struggling to reach the heights of old.

The big five, in BP, Chevron, Conoco-Phillips, ExxonMobil and Shell, are each in and among the most profitable firms on the planet (see Fig. 1), though continue to enjoy billions of dollars in tax breaks each year. One report published by Taxpayers for Common Sense (TCS) shows that in the period from 2009 through 2013, America’s 20 largest oil and gas companies paid a federal effective tax rate of only 24 percent. This is despite claims that the industry pays more than its fair share of the statutory rate of 35 percent, though only when factoring in both foreign and deferred taxes. According to the TCS study: “The American Petroleum Institute cites an industry-wide effective tax rate of 44.3 percent. In reality, the amount oil and gas companies pay in federal income tax is considerably less than the statutory rate of 35 percent, thanks to the convoluted system of tax provisions allowing them to avoid and defer federal income taxes.”

Criticisms of big oil’s special treatment have increased, though the fear holds that major names will simply up sticks and leave without the same concessions. The fact of the matter is still that the industry is one of the biggest contributors to not just US tax revenues, but to state coffers across the globe, and for as long as this is the case action on the point will be muted.

The big five's net profits

Handicapped no more
Many governments are loath to reconsider tax breaks, for fear of an industry backlash, though claims to this effect are increasingly falling on deaf ears. Saudi Arabia, Angola and a host of other such high-tax jurisdictions, are proof enough that excessive rates do not necessarily deter companies from drilling. Yet this point appears to have escaped those in mature economies, who are as yet unwilling to do the same, despite real and growing pressure to reconsider the century-old policy stance.

Nicholas Shaxson of the Tax Justice Network writes that tax cuts for big oil are a “truly silly idea”, namely because “this is about national policy. A tax is not a cost to a nation. It is a transfer within it. Let’s say there is a tax cut worth $5bn. That is a transfer from ordinary UK taxpayers (who will then have to suffer higher personal taxes, or higher deficits, or reduced public services) towards the mostly wealthy shareholders and executives of large oil firms. A large proportion of those shareholders are foreigners. So it’s a net transfer of wealth upwards, and out of the country.” Shaxson argues also that oil majors rarely relocate in search of a more accommodating tax environment, and emphasises that firms need only pay tax on profits, which in itself guarantees they are in good enough nick to take the hit.

More than any of these points, Shaxson notes that the prevailing low price environment presents an unparalleled opportunity for governments to funnel any proceeds towards renewables in place of fossil fuels. Governments from around the world offloaded $550bn on subsidising the production and consumption of fossil fuels last year, according to figures cited by The Economist, and the recent downturn serves as an opportunity to roll back any added incentive to invest in unviable finds.

Changing circumstances
“In our extensive work on energy subsidies, every time the Global Subsidies Initiative has looked at tax breaks and other subsidies to the oil and gas industry, we have found that they are by far not the best way to meet the stated policy objectives”, says Gerasimchuk. “Why create jobs, local contracts and rely on taxes from such a volatile industry? Why go through boom and bust all the time? Renewable energy can meet the same objectives more steadily and help ensure energy security, too. All that without the devastating externalities of oil spills and climate change.”

Having fallen foul of falling oil prices and the looming prospect of stranded assets recently, generous tax breaks for big oil do little to reflect the changed circumstances facing the industry. Higher taxes could prove beneficial both for recipient governments and oil majors, given that the contribution to state coffers would be greater and the inclination to invest in risky assets less. True, oil companies must improve efficiencies where they can in a climate where profits will understandably be less, though the burden should fall on them and not on governments to find the funds.

US Fed tells Santander: shape up, or get fined

Posted on by Ashton Wenborn

In a fierce warning to Santander, the US Federal Reserve has issued an enforcement act against its US arm. The action highlights faults and “deficiencies” in Santander’s practices, and outlines what it must do to rectify these areas. Santander has 60 days to submit details that consider, include and address a number of aspects – such as board oversight, risk management, capital planning, liquidity risk management and legal and regulatory compliance.

If Santander fails to comply with the enforcement action, the Fed reserves the right to levy a fine on the bank

In terms of meeting the Fed’s board oversight requirements, Santander must detail the different committee and officer roles as well as the duties of each and the responsibility of the bank’s board to ensure legal compliance by management. The bank must designate a specific individual as well as create a “formal project plan, including milestones, timetables, success measures, and adequate funding for personnel and other resources” to ensure compliance with the Fed’s conditions.

For risk management, the Fed is insisting that Santander:

  • provides an assessment of the effectiveness of the firm’s risk management programme;
  • creates risk tolerance guideline limits;
  • outlines clearly defined roles to deal with risk; and
  • keeps to “the implementation of incentives that are consistent with risk management objectives and standards.”

Capital and liquidity stress test reports are also to be submitted to the reserve bank, as well as general progress reports every “30 days after the end of each calendar quarter.”

The enforcement action is said to be “unusually broad in scope for a bank of Santander’s size”. It is part of a massive crackdown by US regulators into the risk management of the country’s largest banks.

If Santander fails to comply with the enforcement action, the Fed reserves the right to levy a fine on the bank. Speaking about the action, a Santander spokesman said that there would be much work to do to meet the Fed’s “standards of excellence” and “regulators’ expectations”, adding that it would take a “comprehensive, multiyear transformation project” within the US bank.

Regulatory revolution

Posted on by Ashton Wenborn

The global investment management industry has come up against its fair share of difficulties recently. Shrinking investment opportunities, seismic technological shifts and emboldened regulatory restrictions are among the latest hurdles to have hit margins. However, the changed circumstances under which industry figures are expected to work have forced enterprising firms to rethink old strategies, and turn these challenges into opportunities.

For those hit hardest by this changed operating environment, survival is difficult enough an ambition, yet, as far as clients are concerned, growth remains the expectation. As a result, many firms have struggled to stay competitive, and only those with a firm handle on the market have been able to survive the storm. “Since the financial crisis began in 2008, stock markets have enjoyed a considerable bull run, GDP growth is again robust in many markets, and assets under management are on the upswing around the globe. But these gains have not translated into the amount of top and bottom line growth that wealth managers would expect based on past recoveries”, according to the latest Strategy& wealth management outlook.

Acclimatising to change
Much has been made of the extent by which investment management firms have been handicapped recently by regulation. Both governance and disclosure are more closely monitored today than they ever have been, and compliance costs are far greater today than they were prior to the financial crisis. The main difference, however, is that broad-based reforms in the immediate aftermath of the crisis are today more targeted, and the success of a great many firms depends on their ability to adapt accordingly.

investment-management-awards

World Finance Investment Management Awards 2015

“The asset management industry is struggling to cope with the regulatory reform that followed the global economic crisis. The number of rules emanating from multiple regulatory bodies is not the only obstacle managers need to surmount, dealing with the uncertainty resulting from ever-changing regulations is remarkably demanding. In addition to the multi-jurisdictional challenge, national bodies are enacting rules with extra-territorial effects”, according to a Grant Thornton report on the issue of regulation in asset management.

Regulatory pressures have done much to limit the ability of firms to realise broad-based and sustainable gains, particularly among smaller firms, for whom the costs associated with compliance have often proven too great to bear. There are others, however, whose commitment to align their strategy with regulatory reform has done much to differentiate their services from those offered by competitors, and in doing so, they have created a distinct market advantage.

“Regulators internationally are clearly pursuing certain shared agendas in their efforts to create a more stable financial system and better protect investors”, says Martin Engdal, Market Strategist at Advent Software in his predictions and outlook for 2015. “But regulation is fast moving and often ambiguous, and we should never under estimate the propensity of regulators and governments, to surprise. It is impossible to predict exactly which new rules or amendments will be coming down the line as regimes continue to evolve over the coming decades.”

The sheer volume of new regulation published in the past few years has given rise to confusion about how best to meet these requirements and how firms might benefit as a result. Yet the example shown by the winners of this year’s World Finance Investment Management Awards show that compliance can play an active role in building relationships, with both regulatory bodies and clients.

Despite the challenges associated with similar post-crisis developments, assets under management have grown by quite extraordinary degrees and the pool of global savers has grown far larger in previous years. True, this new regulatory landscape has done much to obscure some of the better opportunities lying in wait, and the transfer of wealth from the last generation to the next, alongside a string of technological advancements, has done much to raise hopes about a brighter future.

Fast-paced tech advances
The age at which wealth is created is far lower than it has been historically, and although this new generation of HNWIs is more tech-savvy than before, there is still a need for expert advise when it comes to matters of investment management. On the one hand, technology means that wealthy individuals can be both more involved and informed, however, the developments have also handed firms an advantage when it comes to streamlining their offerings.

“Asset managers have increased their technology spend year on year since the financial crisis as they have dealt tactically with the technological challenges new regulation has thrown their way, but now, in 2015 we expect to see the start of the next wave of technology spend”, said Dean Brown, Executive Director of Wealth and Asset Management in an interview with Wealth Advisor. “Legacy systems are starting to constrain managers’ growth ambitions. Managers’ creaking systems also now often represent an unacceptable level of risk. As the industry enters the next phase of the growth cycle and managers look to expand their business into new products and geographies, we expect to see much more focus in strategic spend on front office platforms and operations.”

With face-to-face interactions no longer the go-to method of contact for institutional and private clients, firms have been quick to commit to a digital agenda, so as to lower costs, strengthen ties with partners and tighten their grip on the market. Also, in an age where transparency and disclosure are more valued than ever, digital solutions have handed firms a new means of reaching, and in some instances, surpassing market expectations.

“Success in the post-crisis era will depend on offering new, more customised products to meet the needs of investors increasingly focused on capital preservation”, according to EY’s industry outlook. “Distribution channels must be more aggressively leveraged to specifically target a whole new class of tech-savvy investors, many of whom command unlimited access to more financial information and advice from their mobile devices than they could ever obtain from most financial advisors.”

The investment management industry no longer has the monopoly on market information, and technological gains mean that firms must demonstrate that their expertise is great enough to warrant the fees they ask of clients. In this new climate, more attention must be paid to the education of clients, and on realising their investment ambitions.

In place of standalone products, firms in the here and now have tended towards customised solutions, as they seek to satisfy the whims of the individual and not simply chase returns. Constant feedback from clients is therefore important, as they focus more on cementing strong relationships, and on employing technology to this end. As a consequence, industry names have grown more selective about who they choose to conduct business with, as the less wealthy among them are without the capital to warrant this highly customised approach.

The World Finance Investment Management Awards highlight the best parts of the industry and shine a light on those responsible for the most impressive developments. Though the obstacles number in the many, the winners of this year’s awards show that there are still opportunities for the taking, and, should firms mirror their contributions, clients and the industry at large stand to benefit as a result.

The firms selected by the judging panel and listed here have been analysed for their continual drive toward bettering client relations, diversity, and ability to lead and direct the industry. Some of the firms are new and have carved a niche in the industry, others such as AmInvest, who return for the fourth year in a row, have become industry stalwarts. While the industry regularly brings new entrants, those leading the way are clear for all to see – a fact not lost on our judges and those who voted in this year’s Investment Management Awards.

Investment Management Awards 2015

Posted on by Ashton Wenborn

Argentina
Schröders

Australia
Pinnacle Investment Management

Austria (equities)
Pioneer Investments

Austria (fixed income)
Erste Asset Management

Bahrain
PineBridge Investments

Bangladesh
ICB Asset Management

Belgium (fixed income)
Petercam

Belgium (equities)
Capfi Delen Asset Management

Brazil
HSBC Global Asset Management

Bulgaria
TBI Asset Management

Canada (fixed income)
JP Morgan

Canada (equities)
Edgepoint Wealth Management

Caribbean
Santander Peurto Rico

Chile (fixed income)
BTG Pactual

Chile (equities)
Bci Asset Management

China China
Universal Asset Management

Colombia BBVA
Asset Management

Croatia
ZB Invest

Cyprus
Byron Capital Partners

Czech Republic
Conseq

Denmark
Danske Capital

France
Lyxor International Asset Management

Finland
FIM Asset Management

Germany (equities)
Allianz Global Investors

Germany (fixed income)
Helaba Invest

Egypt (equities)
EFG Hermes

Egypt (fixed income)
Rasmala Egypt Asset Management

Greece
Alpha Trust

Hong Kong
BOCI-Prudential Asset Management

Hungary
OTP Investment Fund Management

Iceland
MP banki

India
ICICI Prudential

Indonesia
BNP Paribas Partners

Italy
ARCA SGR

Ireland
Kleinwort Benson Investors

Jordan
AWRAQ

Kazakhstan
Resmi Finance & Investment House

Kenya
Old Mutual Kenya

Kuwait
KAMCO

Latvia
Finasta

Lebanon
Ahli Investment Group

Luxembourg
KBL European Private Bankers

Liechtenstein
IFOS

Malaysia
AmInvest

Mauritius
MCB Investment Management

Mexico (equities)
SURA Investment Management

Mexico (fixed income)
Impulsora de Fondos Banamex

Netherlands
ING Investment Management

Monaco
Monaco Asset Management

Nigeria
FBN Capital

Norway
Skagen Funds

Oman
Oman Investment Corporation

Pakistan
Al Meezan Investment Management

Peru (equities)
SURA

Peru (fixed income)
Credicorp Capital

Philippines
BDO Trust and Investment Group

Poland
Ipopema Asset Management

Portugal
Banif Investment Bank

Qatar
QNB Asset Management

Russia
Kapital Asset Management

Saudi Arabia
NCB Capital

Serbia
Novaston Asset Management

Singapore
Eastspring Investments

Slovak Republic
VÚB Asset Management

Slovenia
KD Funds

South Africa
Argon Asset Management

Spain (equities)
Bestinver Gestion

Spain (fixed income)
Santander Asset Management

Sri Lanka
NDB Wealth Management

Sweden
AXA Investment Management

Switzerland
Azure Wealth Management

South Korea
Shinhan BNP Paribas

Taiwan
Cathay Securities Corporation

Thailand
UOB Asset Management (Thailand)

Turkey
AK Asset Management

UAE Emirates
Emirates NBD Asset Management

UK (fixed income)
Blue Bay Asset Management

UK (equities)
Baillie Gifford

US (equities)
MFS

US (fixed income)
Western Asset Management

Vietnam
SSI Asset Management

Kleinwort Benson Investors helps clients obtain green profits

Posted on by Ashton Wenborn

Interest in environmental, social and corporate governance investing (ESG) is growing very rapidly in the market. Clients and prospective clients who in the past may have shown less interest in the topic have become more engaged on these issues from a number of different perspectives. Some asset owners see their investments as having dual objectives: maximising (risk-adjusted) financial returns while also achieving ‘societal gain’ via better governance, environmental impact and similar factors, for instance. At the other end of the spectrum are investors who do not believe that ESG investing will definitely enhance returns, or that it should be used to achieve specific societal goals, but who do wish to avoid investment in certain sectors or stocks because of ESG-related risks, including reputational risk. In-between those two ends of the spectrum are many other shades of opinion, of course.

At Kleinwort Benson Investors, it certainly seems to us that, wherever investors were on the spectrum one or two years ago, they have been moving towards the more ‘progressive’ end of the spectrum, to a greater or lesser extent.

A growing market
With that in mind we began a programme of enhancements to our ESG offerings, internal procedures and our investment processes. We do not, incidentally, believe that this is a static process. The only certain thing that we know about ESG investing is that it will continue to evolve and change in the years ahead, and probably very quickly. We continue to enhance our ESG offering in an effort to match our client needs. For quite some time we have excluded, as a matter of company policy, investments in companies that manufacture landmines or cluster munitions. We have not changed that policy.

The only certain thing that we know about ESG investing is that it will continue to evolve and change in the years ahead, and probably very quickly

One key step in this enhancement programme of our products was to review our external service providers. Following extensive review, we appointed MSCI ESG Research as our primary provider of ESG research and ratings, and continue to use Institutional Shareholders Services (ISS) as our proxy voting research partner. The case for outsourcing such a specialised and labour intensive function is strong and we felt that internal ESG research should be completely independent, and not be influenced by the fact that we might hold the stock. MSCI ESG Research is of course one of the largest and most credible ESG research and ratings providers, and we believe that they are the right service provider for us to work with as we significantly expand our ESG activity.

We have also adopted a more comprehensive and nuanced set of negative screens that are used for the ESG-specific versions of our global equity strategies. These negative screens are based, in part on the socially responsible investing guidelines of the United States Conference of Catholic Bishops and exclude investments in certain controversial sectors such as tobacco, adult entertainment, coal and others.

To be clear, these negative screens are only used in the ESG versions of our global equity strategies. This gives investors in our global equity strategies the option of applying those screens, or not, depending on which version of our products they invest in. We also continue to offer bespoke custom screening as directed by specific clients.

New products
We have recently launched a new emerging markets equity ESG strategy. This strategy employs our core investment process used by all our global equity strategies, but in addition: applies negative screening to exclude investments in certain controversial sectors, as weapons and coal; excludes stocks, regardless of sector, with the lowest ESG rating as determined by MSCI ESG Research; and positively integrates ESG factors into the investment process by creating a portfolio which aims to have an overall ESG rating substantially higher than the benchmark.

This strategy was launched in the fourth quarter of 2014 and is already attracting much interest given its innovative features. We also have an existing global and eurozone version of the fund.

Within our environmental strategies we have significantly enhanced the ESG integration within our investment process (essentially formalising an existing less formal process). We now explicitly use ESG ‘scores’ for two of the four pillars which comprise our key proprietary valuation model. We believe that companies whose products and services enhance social or environmental goals deserve a higher valuation. Such companies are more likely to have long, durable, sustainable business models.

The wealth management industry: changes and opportunities

Posted on by Ashton Wenborn

Although not directly part of the crisis, the wealth management industry was still impacted with the tarnish that came to the financial sector. It faced the same challenges around client trust and the need to adapt in a new world.

As the financial markets worldwide bounced back, growth was linked to firms reviewing their operational strategies and priorities. Many altered their business models or merged with or acquired other businesses. While there may be further consolidation, wealth management firms also find themselves in a highly challenging environment with rapid technological advancement, political uncertainty and excessive regulation.

One particular change has been adapting to the increased influence of the European regulatory system. Following the Lisbon treaty, the UK ceded a great deal of power to the EU and is now in a position where regulations agreed in Brussels can come into direct force in the state without any input or influence at a national regulator level. Directives still allow national discretion by the UK’s FCA but – at least in the immediate period after crisis – a huge raft of regulation was passed to send a strong message globally that the situation was being taken in hand.

There are many ways the Government could help to further encourage retail investment in shares

One example of legislation coming from Europe, that will have significant implications for the sector, is the second version of the Markets in Financial Instruments Directive/Regulation – MiFID II/MiFIR. The WMA has been in continuous engagement with key influencers in Europe, as well as the FCA, to ensure the legislation is as appropriate as possible to the UK wealth management industry. The organisation is still campaigning for a number of changes to the rules, including that investment trusts should not be defined as “complex”, as this may deter retail investors from purchasing shares in the asset and will mean that firms have to complete an appropriateness test every time a client wishes to purchase an investment trust on a non-advised basis. Their major concern now is the timescale to implement MiFID II – firms will have to implement a number of system changes to meet the requirements and many details of the legislation have not yet been confirmed. This means that the deadline for implementation of January 3 2017 will be extremely difficult to meet.

Despite the fact that a lot of financial services regulation in the UK comes from Europe, there has also been recent legislation originating further afield, namely in the US. The Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions (FFIs) to report information about financial accounts held by US. taxpayers, is now in operation. Following in the US’s footsteps, the OECD created the Common Reporting Standard (CRS), which will be implemented from January 1 2016 and will require firms to identify and report the tax residency and related information of individuals and entities in over 100 jurisdictions.

Although the amount of legislation coming from Europe and the rest of the world can be daunting for the wealth management sector, it can also create excellent opportunities for the industry and its clients. The European Commission’s recent proposals for a Capital Markets Union (CMU) is an opportunity to boost economic growth and employment in the EU by helping businesses to “tap into diverse sources of capital from anywhere within the EU and offer investors and savers additional opportunities to put their money to work”. The WMA continues to feed into discussions around the building of a CMU, with the aim of ensuring that individuals and their families are at the core objective of the CMU, and that concern for the retail investor is therefore its central focus.

So regulation is undeniably a key factor in the wealth management industry, but there are other changes and challenges as well. For example, firms have to ensure they keep up-to-date with technological change and systems upgrades, continue to recruit talented staff and obtain new clients, and protect their business against the ever-present threat of financial crime and cybercrime. WMA member firms are increasingly citing financial crime, especially the threat of cyber attacks, as one of their key concerns. The organisation holds an annual financial crime conference to inform member firms of the latest financial crime legislation and recent advancements in cybercrime and cyber security.

The wealth management industry is extremely important to the UK, growing the wealth of individuals and families, which should in turn boost economic growth and living standards for all. The WMA strongly believes that retail investment should be encouraged for all UK citizens and that the government should help to promote a cultural shift towards long-term investment in any way it can.

There are many ways the Government could help to further encourage retail investment in shares, for example by ensuring that individual investors are allowed to participate in Initial Public Offerings (IPOs) whenever it is appropriate. The best way of achieving stronger and more accountable organisations is to ensure the widest possible range of shareholders. Giving priority to institutions or sovereign wealth funds ignores those who have a vital stake in these companies in the first place and the Government has a duty to ensure ordinary retail investors have an opportunity to own shares in such companies. Individual shareholders are typically investors, not speculators – they look to the long term and many take an active interest in the performance of the companies they own. What’s more, investors do not pay stamp duty on IPOs but will in the secondary market. The Government could definitely do more to promote retail involvement in IPOs – not only should they encourage private companies to include a retail tranche when listing but ensure that sales of government-owned companies are open to individuals. The WMA was disappointed that retail investors were not given the opportunity to participate at all in the second part of the Royal Mail share sale recently.

The Government has taken steps recently to promote investment by individuals, for example by abolishing stamp duty on exchange traded funds (ETFs) from April 2014, which is a strong incentive for investment into the UK, and also benefits retail investors. However, the Government could and should go further, for example by also abolishing stamp duty on stocks in ISAs and SIPPs, in order to further encourage investment that could not only give new opportunities to ordinary investors, but contribute to wider economic growth.

Individual Savings Accounts (ISAs), and multiple modifications to them in recent years, have helped to promote long term saving and investment by individuals in the UK. Recent important developments from the Government have included the creation of increased flexibility between Cash ISAs and Stocks and Shares ISAs; the introduction of Junior ISAs to encourage saving from an early age and help teach children about financial planning; the allowance of investment in AIM-listed shares within Stocks and Shares ISAs; and the creation of the Help-to-Buy ISA.

George Osborne announced in his pre-election Budget that the Government was committed to a “savings revolution” – with many looking forward to seeing further policies announced that will truly contribute to a culture of long term savings and investment in the UK.

The wealth management industry and the prospects for retail investors have seen some significant changes in recent years, creating both challenges and opportunities. Lord Hill, the British European Commissioner for Financial Services, is committed to reducing the amount of regulation coming from Europe so there are potentially blue skies ahead in this area. The current UK Government seem to be dedicated to encouraging retail saving and investment, which should also create opportunities for the sector. However, the threat of cybercrime is not diminishing and the pace of technological change does not appear to be slowing. Nobody can be sure of what the future of the wealth management industry will hold– but it will no doubt evolve and grow through the continuous pace of change that characterises today’s financial landscape.

Banks prepare for another crisis

Posted on by Ashton Wenborn

The 12 largest financial institutions in the US have submitted to the Federal Reserve the public parts of “living wills.” These living wills for banks, similar to those of humans, are contingency plans outlining what should happen should a financial institution face an unforeseen liquidity crisis. According to the Federal Reserve, in a press release concerning the positing of these plans, “[e]ach plan must describe the company’s strategy for rapid and orderly resolution under the US Bankruptcy Code in the event of material financial distress or failure of the company.”

[I]nstitutions such as JPMorgan and Bank of America said that they would be able to weather such a crisis

In the hypothetical crisis of the plans, Goldman Sachs, Citigroup and Morgan Stanley all said that in the case of an unforeseen crisis and bankruptcy, they would no longer exist, needing to sell their assets and operations. Other institutions such as JPMorgan and Bank of America said that they would be able to weather such a crisis, continuing to exist and operate, albeit in a reduced capacity.

The twelve firms that were required to submit their plans were:  Bank of America Corporation, Bank of New York Mellon Corporation, Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, JPMorgan Chase & Co., Morgan Stanley, State Street Corporation, UBS AG, and Wells Fargo & Company.

According to the American Banker, the public part of these plans (there are confidential parts available only to regulators) include “information about how subsidiaries would be resolved in addition to the parent company’s unwinding, how legal entities are interconnected, what the stripped-down banks would look like and banks’ current efforts to simplify themselves.”

The need for banks to draw up these living will plans is a result of a piece of legislation called the Dodd–Frank Wall Street Reform and Consumer Protection Act, created by US lawmakers in 2010, following the 2008 crisis. According to the Federal Reserve, this law “requires that bank holding companies with total consolidated assets of $50bn or more and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) as systemically important periodically submit resolution plans to the FDIC and the Federal Reserve.” The aim is to ensure that financial institutions are able to deal with distress or failure without bringing down the entire financial system as Lehman Brothers nearly did seven years ago.

The living wills of 11 banks last year were rejected by US regulators as inadequate. The Federal Reserve is expected to decide upon the validity of this year’s submissions later in the year.

After 167 years, Chicago futures pit rings its last bell

Posted on by Ashton Wenborn

On July 6, Chicago-based CME Group Inc closed its historic trading pits – once used to trade in commodities like cattle, gold and corn – giving in to the modern methods and efficient machinery that now dominate the industry. On the final day of trading, a group of Chicago brokers sported their trademark jackets for the last time as they dealt in European futures and soybean in the traditional way in the city where it all started.

[A] group of traders requested the US Commodity Futures Trading Commission (CFTC) to review the potential repercussions to the market

In opposition of CME’s plans to end the 167-year old practice, a group of traders requested the US Commodity Futures Trading Commission (CFTC) to review the potential repercussions to the market. Despite the resistance, the CFTC has brought the investigation to a close.

Following CME’s announcement in February that it would close open-outcry futures trading in both Chicago and New York, crowds of traders flocked in to the famous pit in Chicago to bid farewell. “It felt like saying goodbye to an old friend, someone who’d been with you most of your adult life,” John Pietrzak, a corn broker for more than three decades told Reuters.

Pit trading reached its pinnacle in the late 1990s, when as many as 10,000 boisterous, and often aggressive, brokers would gather on the world’s largest trading floor in Chicago. Soon after this peak, the sharp demise of the practice began as computer technology was introduced to the industry.

Although many are saddened to let the tradition go, CME has held onto it far longer than many other big players in the industry who have already switched over to more efficient and organised electronic systems. The London International Financial Futures Exchange was the first to close over a decade ago, while in 2012 IntercontinentalExchange Inc terminated its open-outcry trading in New York. The end of the tradition in its birthplace is certainly poignant, particularly to those who witnessed the mayhem in its heyday, but it was inevitable given the benefits of electronic trading and the shift of the entire industry.

Breaking boundaries: a history of immigration

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1790

With its wide-open spaces, America encouraged all-comers in its earliest years. Practically anybody – including criminals escaping the English hangman – could step ashore and start again. Approaching the end of the 17th century, no less than 75 percent of the population was foreign-born. Then in 1790, in a complete reversal, Congress banned anybody not European or of Caucasian stock. And nearly 100 years after that, the Chinese were specifically excluded.

1948

After 150 years of racist immigration laws, America opened its borders again, this time to European refugees of the Second World War. The Displaced Persons Act recognised what was happening – one of the biggest legal immigration floods in history. Over one million refugees poured into the US between 1941 and 1950. Designed as a symbol of freedom, the Statue of Liberty was the first landmark many immigrants saw when nearing US soil.

1993

Across the pond, the first Colombians began arriving in Spain to escape years of armed conflict in a drug-ridden nation. Numbers were estimated at just 7,000 – but it was the start of a flood. Shortly after 2000, there were about 250,000 Colombians in Spain, the first choice for many as a safe haven. As in other overrun countries, many Spanish people complained that poor illegal – and legal – migrants drove down wages because they took any job going.

1996

Alarmed by the large amount of Mexicans finding their way through porous borders, America made an effort to get tough again. The number of border control agencies was doubled, fences were erected in the most trafficked areas, and hefty penalties were applied to anybody harbouring or aiding illegal immigrants. Yet still these ‘border bandits’ got through, usually guided by people smugglers that helped in return for hefty fees.

2000

With perhaps 50 million illegal immigrants, India has one of the biggest global immigration problems. It’s estimated that at least 10 million Bangladeshis alone crossed the border during their country’s so-called Liberation War. The price of illegal entry is cheap, around $30 for the round trip into Bengal, and as low as $3 for false identities. In desperation India started building a 2,500-mile long, nearly 12-feet high fence along the border to keep Bangladeshis out.

2007

There’s nothing new about illegal immigration in sub-Saharan Africa. Some 44,000 Congolese were kicked out of Angola along with 400,000 other unofficial residents who had fled civil war in the Democratic Republic of Congo. In this as in other wholesale expulsions, Angola was only exercising its rights – most countries claim the freedom to decide if an illegal immigrant can stay or not. If the latter, it’s usually because they are judged to be genuine refugees.

2012

America faced a more complex immigration problem as Central Americans fled the most corrupt nations in droves. At least 90,000 non-Mexicans were caught in 2012 alone. Since then however, the number of Mexicans arrested by the US Border Patrol has been dropping rapidly from an average of around one million a year. A concern remains as there has been an increase in the discovery of unaccompanied alien children making their way from Central America.

2015

As the thousands of Rohingyan people crossing the Andaman Sea near Malaysia in early May would attest, the lure of a better life elsewhere is a powerful incentive to risk one’s life. They are some of the roughly 750,000 systematically oppressed, ghetto-ised Muslims trapped in Buddhist Myanmar with virtually no legal rights. According to the UN, at least 100,000 Rohingyans fled the country by sea in the last three years.

Bureau van Dijk on the power of information

Posted on by Ashton Wenborn

Much focus has recently fallen on the issue of tax avoidance, as research on the subject has increasingly shown that the global economy is losing out on billions of dollars to a byzantine system. One paper published by the Congressional Research Service shows that the US federal government loses as much as $100bn a year to offshore tax abuses, whereas Global Financial Integrity estimates that the price for developing nations is just as great.

Responding to growing pressure from all quarters to enforce tighter and more consistent controls, policymakers across the globe have taken pains recently to level the playing field and consider how new laws might serve to mitigate spiralling losses. Published in July 2013 with a view to addressing perceived flaws in the international tax system, the OECD’s base erosion and profit sharing (BEPS) action plan is nearing completion (see Fig. 1), and promises to bring with it a greater degree of uniformity and responsibility to proceedings.

Most of the associated actions have been completed already, and on occasion; select companies have been forced into making dramatic changes in a bid to meet the requirements. However, the finer points of the plan will take time to implement, and the part played by outside experts is crucial in what will likely prove a difficult adoption process.

Forthcoming refinements mean that companies must reassess their operating models and ask whether they suffice in this
new climate

World Finance spoke to Luis Carrillo, Director of Transfer Pricing Solutions at Bureau van Dijk (BvD) to discuss further how BEPS will change legislation in the future. “The OECD is on target to complete the BEPS project, and many of the action items are already completed”, says Carrillo. “The remaining question is how quickly countries around the world will take to implement the BEPS recommendations into their legislation.”

Forthcoming refinements mean that companies must reassess their operating models and ask whether they suffice in this new climate. However, the impact of this evolving environment will likely vary from country-to-country with inconsistencies possibly undermining the credibility of the reforms. Carrillo says: “One key danger is the fact that certain countries have moved ahead of the OECD’s completion of the BEPS project, and their requirements may not be in line with OECD. All this said, it looks like companies will have to be ready for BEPS as early as 2016.”

Getting BEPS ready
BvD plays a pivotal role in the process with its global database of company information and business intelligence, meaning that affected Multinational Enterprises (MNE) can more easily come to terms with how BEPS might impact their operations. “BvD works with a network of 120 specialist information providers locally, to source and adds value to information on millions of companies worldwide. BvD regularly reviews the quality of the data from the information providers to ensure its quality and integrity; to the extent the data comes from official filings, providing access to original filings that can be used to corroborate the veracity of the financial data in our products”, says Carrillo. With a database (Orbis) containing information from over 120 sources and spanning almost 150 million companies, any person drawing on BvD’s data set has access to unrivalled company coverage on a regional and international scale.

“BvD’s expertise in company and business information provides MNEs with the necessary tools to quantify arm’s length results. MNEs can rely on BvD to establish policies that are compliant with arm’s-length requirements based on the new international framework evolving from the BEPS project”, Carrillo continues. The company can also help MNEs monitor their global operations and assess areas of risk, where their existing policies may be inadequate – particularly under the new BEPS regime. There is now more than ever a need for financial information on a global scale, with BvD providing the scope and reliability that can best help MNEs.

As company and business information specialists, BvD differs from competitors by providing reliable financial information for a wide range of analytical functions – from M&A to credit and supplier risk to transfer pricing. The scope of coverage – over 18 million companies with detailed financials and 150 million in all – and the level of descriptive information (business overviews, corporate ownership links, news) in the company’s products make financial risk management and transfer pricing analysis with solutions more reliable, robust and simple to implement. BvD’s software solutions, like TP Catalyst, streamline the workflow around transfer pricing analysis, documentation and reporting.

“Moreover, our local presence in 35 offices around the world provides a level of service and support for our customers that goes beyond what competitors offer in the area of transfer pricing”, Carrillo attests. However, such a comprehensive database brings its own set of challenges, and BvD has been investing continually in technology to ensure that the data set is both usable and updated on a constant basis. “Technology is essential to the compliance and reporting process, especially as the reporting burden on tax payers increases as a result of BEPS”, says Carrillo.

“BvD’s technology solutions can help MNEs create Master File and Local File documentation in a streamlined manner, help MNEs periodically monitor their global operations against their arm’s length benchmarks for risk assessment and planning, and streamline country by country (CbyC) reporting.

“Furthermore, through its customised solutions team, BvD can help automate the transfer pricing management process from a day-to-day operational perspective by developing bespoke data warehouses that are directly linked to MNEs’ accounting systems and BvD databases, to automatically produce transfer pricing calculations and reports for documentation.”

Fig 1

Complying to the action plan
A number of elements come together to maintain the company’s successful track record. From standardising financials and ratios, linking data sources, creating unique identifiers, linking directors and contacts, adding bespoke research, appending and linking corporate structures, integrating information on M&A rumours to applying data verification, cleansing and quality control, BvD metrics add value to the information.

Considering any complications that may arise as a result of changes such as the BEPS action plan, its content has an important role to play in ensuring companies are complying with relevant reporting criteria.

For example, “CbyC reporting is extremely data intensive. To the extent that the financial data of a high percentage of MNEs operations already exist in BvD’s databases, BvD can automatically fill a large number of the CbyC reports directly from Orbis”, Carrillo adds.

“MNEs can also upload customised Excel templates with the necessary information to automatically produce the CbyC reports in TP Catalyst. Also, our customised solutions team can further automate the CbyC reporting process by mapping the relevant data from any custom-built data warehouse directly into the necessary CbyC reports, adding an additional layer of automation to the process.”

Speaking on the biggest challenges facing BvD clients currently, Carrillo says that increasingly stringent regulatory ties are problematic for multinationals, whose everyday operations have been interrupted by compliance demands. “The biggest challenges MNEs are facing include the additional reporting burden, the anticipated increase in tax enquiries, and the apparent divergence from the Arm’s Length Principle, which is likely to result in greater double taxation”, continues Carrillo. “This last point, in our view, is particularly concerning. As experts in business information, we find that there is sufficient information in the public domain to establish arm’s length policies – including in emerging markets. However, we worry that the OECD and many taxing authorities are pushing more and more for the use of profit split methodologies, which given the available data may, not yield reliable arm’s length results.

“With the degree of disclosure required under BEPS, the insistence by tax authorities to use profit-split methodologies is likely to increase. This will be to the detriment of the arm’s length principle where more reliable market-based methodologies – like the Comparable Profits Method or the TNMM – can produce more reliable measures of an arm’s length standard.”

It appears that the tax landscape is evolving in much the same way that the OECD has envisaged in the BEPS proposals, and with the issue of tax avoidance ranking high on the political agenda, particularly in mature economies, some contest whether the rules are at all necessary. Tax authorities are taking pains to recoup lost revenues, though the BEPS agreement still represents something of a paradigm shift for an international tax system that has for too long fallen foul of changing corporate behaviour.

With the public pushing for greater transparency on tax issues and reforms on the subject gathering momentum, the importance of companies like BvD has never been greater. As multinationals around the globe take their vital first steps toward the implementation of BEPS reforms, arriving at a fitting operating model depends significantly on the ability of affected companies to partner with firms who can make sense of data on the subject.

Byron Capital Partners: how to invest in bonds in a low-yield world

Posted on by Ashton Wenborn

Since the last global financial crisis, the sustained suppression of interest rates by global central banks has contributed to broad-based inflation in asset prices, rewarding investors that have participated indiscriminately in the prevailing yield chase in global bond markets. In March, the European Central Bank (ECB) launched a full-blown quantitative easing programme with asset purchases expected to be roughly €60bn ($64.96bn) monthly through September 2016 – adding over €1trn ($1.08trn) to ECB assets – with a concentration on sovereign bonds of eurozone countries.

With 10-year yields on German sovereign bonds trading at around 0.10 percent as of April 22 2015 (with some forecasters predicting yields to go negative) and 30-year yields on German sovereign bonds trading at an astonishing 0.48 percent, the level of duration risk being taken by investors is alarming. Low yields are not simply a ‘core’ European phenomenon, with 10-year yields on Portuguese sovereign bonds yielding 2.07 percent in the same period, having been as high as 18.3 percent in January 2012.

The energy sector in the US High-Yield Bond market serves as a topical example of the repricing of risk that can abruptly occur after credit ‘binges’

At the short end of the curve, we continue to witness unprecedented events, for instance, three month Euribor turned negative for the first time on April 21 2015 (put simply banks are now paying each other to get cash off their balance sheets). Spain also sold treasury bills with similar maturity at a yield of negative (0.029 percent). Also as of April 21 2015, core bond yields in the five-years sector are approaching (0.2 percent). The average yield on eurozone bonds yields was 0.5 percent on the same date and astonishingly €2trn ($2.16trn) of European government debt now trades at negative yields.

Global outlook
Bond market bulls will argue that with 40 countries in deflation and over 20 central banks cutting rates since the start of the year through the end of the first quarter of 2015, globally monetary policy remains on balance towards easing and investors will be continually encouraged to take more duration risk in order to earn some form of return. What’s more, the outlook for global growth remains muted as the global economy continues to deleverage. At the IMF’s biannual World Economic Outlook conference on April 14 2015, the IMF noted that despite slightly improved growth forecasts (2016 forecast was previously 0.1 percent lower at 3.7 percent) the outlook for economic recovery is still ‘moderate and uneven’ with concerns that financial and geopolitical risks have increased in recent months.

Regulatory tailwinds are also in place for bond markets. For example, under the existing regulatory treatment in place, sovereign debt carries a zero-risk weighting meaning banks are permitted to hold little or no capital against sovereign debt. Furthermore incoming legislation such as Solvency II that will regulate the €7trn ($7.59trn) European insurance industry focuses on ‘asset risk’, forcing insurers to evaluate the assets they invest in from a cost and risk budgeting perspective. Under Solvency II, a capital charge of 39 percent will apply for global equities but debt-related instruments are scheduled to be cheaper at 15 percent, forcing insurers to look to debt assets.

Forced hand
The result of yields this low is that investors are being forced to move down the yield curve to find return and secondly invest in more risky assets in pursuit of yield. Although one of the arguments of quantitative easing is that it should stimulate credit growth, many believe negative rates are unlikely to stimulate credit creation. On the contrary, some financial commentators argue that this initiative could actually decrease credit supply as bank profits margins tighten and capital is misallocated to riskier borrowers that in turn could eventually increase non-performing loans.

The energy sector in the US high-yield bond market serves as a topical example of the repricing of risk that can abruptly occur after credit ‘binges’. Of the $121bn of US high-yield principal trading at distressed levels (meaning credit spreads above 1,000 basis points), energy exploration and production companies in April 2015 accounted for $38bn (31 percent), metals, mining and steel corporates account for $24bn (20 percent) and oilfield equipment and services account for $15bn (12 percent). To put this in context the next largest sector after energy is specialty retail that accounted for only five percent. The energy sector has accounted for 15-20 percent of US high-yield bond issuance in recent years growing to over 15 percent of the US high-yield bond index. As a consequence, the decline in the high-yield energy sector in the fourth quarter in 2014 dragged the whole US high yield market with it.

Faced with corporate credit yields continuing to make new lows and credit supply offering inadequate compensation for fundamental credit risks, many traditional bond investors have been forced to turn to equities but the volatility of the asset class for some investors can be problematic. For example, since 1972 the S&P 500 has fallen more than seven percent on 28 occasions. Aside of a strategic shift into equities, investors are looking at unconstrained bond strategies or absolute return fixed income and relative value credit strategies with a view to trying to generate returns historically associated with exposure to global bonds that are no longer available without exposing themselves to excessive interest rate and credit risk.

UCITS structure
Byron Capital Partners launched the Byron Fixed Income Alpha Fund (BFIAF) in November 2010 that focuses on absolute return fixed income and relative value credit. Furthermore the BFIAF operates in a UCITS-compliant structure, domiciled in Ireland that offers investors weekly liquidity. The strategy works well in a UCITS structure, although leverage in UCITS is restricted as well as shorting limitations so the quality of the asset management is truly tested.

During and following the 2008 financial crisis, the comparative advantages of UCITS funds manifested themselves and the structure addresses prominent investor concerns such as liquidity, regulation, custody of assets, transparency and risk management. UCITS IV provided the flexibility for absolute return strategies to be run effectively in a UCITS structure with the scope to offer hedge fund like risk-return profiles in a regulated, liquid and transparent product offering. In Europe (and now outside of Europe), the UCITS directive has evolved into one of the most widely recognised regulatory frameworks of investment funds, allowing investors to access absolute return strategies through UCITS-compliant onshore structures while obtaining increased transparency and liquidity. In addition UCITS funds explicitly lie outside of the alternative investment fund managers directive scope and already possess a European passport allowing distribution across Europe.

The fund has produced an excellent performance over the last three years, with the institutional share class returning 7.43 percent, 3.46 percent and 3.11 percent net of fees in 2012, 2013 and 2014 respectively corresponding to a Sharpe ratio of 2.34, which resulted in a major European performance award.

Risk-adjusted returns of various asset classes

This year has seen a very strong performance by the fund, and indeed risk-adjusted returns against other asset classes have been positive since its inception (see Fig. 1). Duration is tightly managed and stood at approximately 2.55 on April 22 2015 and the manager aims to maintain an average portfolio credit rating of investment grade. As of April 22 2015, the portfolio’s average credit rating was BBB-. High-yield exposure is capped as per the fund’s prospectus at 40 percent.

In terms of their outlook and positing for the fund, the investment management team see no value in European sovereign debt but believe there are still opportunities in some selective European corporate bonds. They also believe some crossover names in the emerging market space offer value. The energy sector is an interesting sector in the bond market given pricing dynamics outlined above, however, the investment management team is particularly conscious of liquidity concerns in this sector. Given the fund offers investors weekly liquidity, liquidity considerations for the asset base of the fund are of significant importance to ensure investor redemptions can be managed in an efficient manner.

With short-term interest rates in the developed world remaining low and even negative for the foreseeable future, particularly in Europe, a premium will be put on the ability to generate positive returns from global fixed income and credit portfolios without exposing investors to excessive duration and credit risk as well as illiquidity. With investors under increasing pressure to produce positive returns from fixed income investments, the prospects for absolute return fixed income and relative value credit, particularly in a regulated structure, look favourable and offer a compelling alternative to a rotation into equities that arguably remain expensive on both a cyclically adjusted and historical basis.

“High-speed” households drive China’s consumer spending

Posted on by Ashton Wenborn

According to a survey by The Boston Consulting Group (BCG), “high-speed” households are helping to bolster consumer spending over the next five years.

The report defines “high-speed” households as middle- to upper-middle-class families, whose average monthly income surpasses 12,000 RMB ($1,900).

Incomes among these high-speed households is set to rise

This demographic is set to generate approximately $3.8trn of the $5.6trn in total urban consumption, according to a summary of the report.

“These high-speed households will power consumer spending in the years ahead,” said Jeff Walters, a BCG partner. “The overall economy may be slowing, but these more affluent consumers are optimistic about the future and their ability to increase their spending.”

Incomes among these high-speed households is set to rise, which the consultancy company believes will only help increase the sense of optimism that is already present within China’s consumer class and increasing overall spending.

According to the report, the “average affluent household” will see its overall income rise by more than 11 percent over the next few years, while the “average aspirant household” will see a rise of just six percent. This differential ends up creating a “20-fold difference” in actual earnings.

In order to reach these consumer, companies must have a strong presence, both online, and in the cities where roughly 80 percent of these families reside.

This new generation of Chinese consumers are “digitally savvy” and are “active online shoppers”, according to the report. In fact, 40 percent of affluent households log-on at least one a week to make a purchase, compared to 20 percent of aspirant households.

“These high-speed households are optimistic, active online shoppers, and will power consumer spending in the years ahead,” said Youchi Kuo, an expert principal at BCG.