i-invest magazine July 2015

i-invest i-invest

From Alternative to Mainstream New Survey by Towers Watson shows total global alternative assets under management hit $6.3 trillion.

ESGs Define Responsible Investing

Many firms which advertise their services as responsible investors do so by highlighting their analysis of Environmental, Social, and Governance factors.

Goldman Sachs Enhances Investment in ESGs with Imprint Takeover Goldman Sachs Asset Management has announced their acquisition of Imprint Capital, a leading institutional impact investing firm specialising in environmental, social, and effective governance. .

i-invest July 2015

1 i-invest July 2015

Retirement Plans. Endowments. Foundations.

We’ll help you manage the future, so you can focus on the present.

Easy Institutional Consulting

monetagroup.com/InstitutionalConsulting

i-invest

Contents News Page 4.

Keills Page 14.

Diversifying Tail Risk Page 16.

In Support of Funds of Hedge Funds Page 18.

Fed Chair Janet Yellen Anticipates Imminent Rate Hike Page 22.

Building a Comprehensive Investment Policy Page 24.

Mediterrania Capital Partners Page 28.

The Benefits of a Disciplined Portfolio Rebalancing Strategy Page 30.

The Economic Benefits of a Managed Data Service for Asset Managers Page 32.

Copperstone Capital Page 34.

How Flawed Index Construction is Distorting Perceptions of the Asset Class Page 36.

How Gamechangers Are Redefining the Wealth Management Industry in the New Digital Economy Page 44.

Eight Reasons to Adopt a Centralised, Industry-Specific Multi-Asset Management System Page 48.

Presidium Capital Page 52.

Risk in Frontier Markets: Overcoming the Misperceptions Page 54.

Post 2008: Why the Confusion About “Institutional-Quality”? Page 60.

Langham Hall - AIFMD Support for Fundraising in Europe by Non EU Based Funds Page 64.

Active Engagement Page 66.

Higher Multiples and More “Shadow Banking” Page 68.

ESGs Define Responsible Investing Page 70.

ESGs Key to Fixed Income Investments Page 72.

Budget Boosts Crowds Page 74.

ClearBridge Sustainability Leaders Fund Page 76.

From Alternative to Mainstream Page 78.

Goldman Sachs Enhances Investment in ESGs with Imprint Takeover Page 80.

Can Hedge Fund Managers Really Change the World? Page 82.

City Asset Management PLC Page 84.

The New World of Operational Due Diligence Page 88.

Region with the largest upcoming growth in Europe! Page 92.

3 i-invest July 2015

i-invest

Goal Group Expands Global Network with the Opening of an Office in New York City Its Third in the US Goal Group, a leading global provider of withholding tax reclamation and securities class action recovery services, is expanding its operations in the United States with the opening of a third US office, on State Street in New York City.

Goal’s new presence in New York, the world’s largest investment location, will enable the company to meet rising demand for its international services from custodian banks, fund managers and the cross-border investment community.

Goal estimates that 24% of all withholding tax deducted on cross-border investment income remains unclaimed by investors. In 2013 this amounted to global losses of £13.2 billion.

The expansion within the US market comes off the back of Goal’s best year to date, with significant growth across the US, Canada, Latin America, APAC and Europe. Headquartered in London, the company has an expanding global footprint, with a recently created APAC operations centre in Melbourne, Australia and an established network of offices in San Francisco, Philadelphia and Hong Kong.

and the increasing demand for withholding tax reclamation and securities class action recoveries globally. This is a significant step forward for the business and further underlines our ability and commitment to deliver safe and secure services, which help maximise shareholder returns worldwide. We look forward to further developments in the US and remain committed to our clients both locally and globally.”

Goal delivers end-to-end withholding tax reclaim and reporting solutions, covering all client types, jurisdictions and stock types including ADRs. On the class actions side, the

Noah R. Wortman, Chief Operating Officer, Americas at Goal Group commented: “We are delighted to open our first office in New York, and third in the US, which reflects the company’s commitment to further growing our North American client base. Reclaiming the over-withheld tax that is levied on cross-border income has become a vital area of fiduciary duty, in light of the substantial difference that reclaims can make to fund returns. The New York office will handle the complete reclamation process and create new jobs locally, all of which will be supported by our worldclass global research and technical teams and ISO-accredited technology systems.”

Stephen Everard, Chief Executive Officer at Goal Group, said: “This is a very exciting time for Goal Group. The expansion of our North American offering is a result of the Company’s significant growth this past year

4 i-invest July 2015

company is at the forefront of the evolving industry as increasing numbers of legislatures around the world develop legal frameworks that allow investors to bring class actions.

Goal has already won compensation for clients in 37 jurisdictions and is working with fiduciaries and global investors to help them monitor and take advantage of emerging international opportunities.

Goal’s clients include five of the top ten global custodians and six of the top ten global fund managers, and the company monitors in excess of $14 trillion (£8 trillion) in client assets worldwide.

i-invest

American Independence Large Cap Growth Fund Brings Louis Navellier’s Flagship Equity Strategy to Mutual Fund Investors American Independence Financial Services, LLC has launched the American Independence Large Cap Growth Fund, which will be subadvised by noted portfolio manager Louis Navellier.

The new fund will offer the active management strategy that Mr. Navellier has used in a separately managed account (SMA) portfolio since 1998 in a mutual fund format.

“We are delighted to further expand our relationship with Navellier & Associates with the launch of this Fund,” said John Pileggi, Managing Partner of American Independence. “In market environments such as the current one, advisors have shown a marked preference for actively managed strategies because in our view, they give their clients the potential to outperform the indexes in ways that a passive approach just can’t. Louis has an impressive track record and is one of the most respected managers working in this space. We are honored to be his exclusive mutual fund partner.”

The American Independence Large Cap Growth Fund will use Navellier’s highly disciplined, quantitative and fundamental processes to identify inefficiently priced large cap growth stocks with superior fundamentals relative to the underlying market and the potential for long-term capital appreciation.

In addition to identifying stocks with superior reward/risk (risk-adjusted return) characteristics, the investment process seeks to identify stocks that have superior earnings, revenue and profit margin expansion relative to the general market.

er & Associates. “I could not be more pleased to be working exclusively in this regard with American Independence and Risk X Investments, which is just one of the reasons we are seeding this Fund with family money.”

A merger between American Independence Financial Services and FolioMetrix was announced earlier this year. Its completion, formed new company, RiskX Investments, LLC, which will offer a broad array of risk-intelligent investment solutions. RiskX Investments will manage, post-merger, approximately $1.1 billion in funds and separately managed accounts, comprised of the American Independence Funds (single-manager sub-advised funds and separately managed accounts) and the FolioMetrix Rx Fund Series (multi-strategy tactical mutual funds).

The roster will include, in addition to the American Independence Large Cap Growth Fund, two other funds subadvised by Navellier -- the Rx Fundamental Growth Fund (FMFGX) and the American Independence International Alpha Strategies Fund (IMSSX).

“I’m proud of the absolute return and especially the risk-adjusted returns we have been able to achieve for our investors by implementing this strategy over the last 16 years.

We believe our investment process takes the emotions out of buying and selling stocks and we are glad to continue providing this opportunity to investors who prefer the transparency and liquidity of mutual funds,” said Louis Navellier, Chief Investment Officer of Navelli-

Award Winning HedgeCoVest Platform Unveils New Products for Advisors & Investors HedgeCoVest, a real-time hedge fund replication platform, unveiled the HedgeCoVest Composite Models.

Derived from actual hedge fund manager trades, these 15 sector-specific investment products encompass long and short positions, enabling investors to access the highest conviction investment ideas from the investment firms signed on to the HedgeCoVest platform.

“HedgeCoVest is in a unique position to access hedge fund portfolios in real time and create new investment products composed of their largest positions, which are typically the portfolios’ main alpha drivers,” notes Evan Rapoport, CEO of HedgeCoVest. “Our platform extracts the highest conviction and most widely held positions based on information from all the hedge funds on our platform, and assembles them into sector specific investment products including Biotechnology, Basic Materials, Industrials, REITS, Financials, and Technology.”

HedgeCoVest’s proprietary platform connects directly into each hedge fund’s prime broker and trading systems, ensuring immediate information flow to its proprietary technology, the Replicazor. This flow creates a pool of securities that HedgeCoVest is able to reconstruct based on the size of the holding in any given portfolio and the frequency of a specific security to ascertain the most relevant investment ideas for the HedgeCoVest Composite Models. The technology in place ensures that these Composites are inherently fluid and dynamic, adjusting to any change in the view of a given security and re-balancing accordingly.

The Composites’ minimum investment size ranges from $5,000-$20,000 per product and currently ranges from 10 positions to 145 positions in any given investment option. This provides investors the opportunity to supplement their existing alternative portfolio with a sector-specific investment that caters explicitly to their investment objectives.

“Investors will often seek to supplement their core alternative portfolio with managers who trade securities in a specific industry like Basic Materials or Biotech,” says Rapoport.

“These investors can now accomplish the same objective by accessing hedge fund managers’ ‘best ideas,’ but in a liquid, transparent, low cost structure.”

5 i-invest July 2015

2014 Copperstone Capital.

All rights reserved.

winner

Copperstone Capital is an investment management firm founded in 2009 with offices in Moscow, Russia and London, United Kingdom.

We manage wealth for high net worth individuals and institutions through various hedge fund strategies.

16 Sadovnicheskaya Street, Moscow, 115035, Russia T +7 495 988 0010 F +7 495 951 1410 www.copperstonecapital.com

HEDGEfund awards2015 Best Russian Fund (Since Inception)

GLOBAL CONSISTENT

CONFIDENT

STRATEGIC LASTING INDEPENDENT

i-invest

New Zealand Pension Fund Committed to ESGs The Guardians of the New Zealand Superannuation (pensions) fund have announced their continued partnership with Northern Trust to provide the fund with ESG investment.

The Guardians of the fund have appointed Northern Trust’s international asset management arm, a leading provider of index, active and multi-manager solutions, to manage a Barclays Global Aggregate fixed income mandate, incorporating the Fund’s environmental, social and governance (ESG) exclusions.

The new agreement adds to the four passive global equity mandates awarded by the Guardians to Northern Trust in 2013. Northern Trust has also had a custodial relationship with the Guardians and the Fund since 2007.

‘We are delighted to have the opportunity to further our relationship with New Zealand Superannuation Fund and look forward to helping them obtain efficient market exposure to their designated index, whilst supporting their goals for socially responsible investing.’

Bert Rebelo, Head of Asset Management Institutional Business for Australia and New Zealand, echoed this.

‘With a strong ethos of client service, Northern Trust continues to evolve and listen to client needs, offering solutions that best meet their unique investment requirements wherever they are in the world.’

The appointment follows Northern Trust’s recent announcement that they are extending their operations into Australia. The firm has recently established an asset management sales and relationship management presence in Melbourne, Australia, in line with its strategy to service its clients as close to their home market as possible.

ICG Shows Successful Second Quarter Results Closure of ICG Europe Fund VI major contributing factor to successful second quarter for firm.

Intermediate Capital Group (ICG) the specialist asset manager, has announced the final closing of ICG Europe Fund VI, one of its leading European investment strategies with a flexible mandate to invest in a range of sub-ordinated debt and equity instruments into European mid-market companies. The fund completed its fundraising in record time, achieving its €3bn hard cap in just seven months.

The funds quick turnaround and increased size enabled ICG to further diversify the investor base which includes pension funds 40%, sovereign wealth funds 29%, insurance companies 25% and asset managers 9%. The investors come from a wide geographical spread including Asia Pacific, Europe, North America, Middle East and Latin America. Fund VI was launched and raised 18 months earlier than anticipated, due to Fund V completing its investment period well ahead of schedule. This reflects strong demand from mid-market companies for larger tailored investment solutions as well as the strength of our origination capabilities in each local market.

The fund closure will have contributed to the firm’s successful financial results, with ICG reporting that their fundraising momentum has continued with €2.8 billion of new third party money raised in the quarter to 30 June 2015.

The company’s CEO Christophe Evain commented that ICG was pleased with the results despite market issues.

‘We are pleased to grow our existing partnership with Northern Trust. The appointment is consistent with our desire to have fewer, deeper manager relationships, helping us manage the Fund’s portfolio as efficiently as possible,’ stated Matt Whineray, Chief Investment Officer, New Zealand Superannuation Fund.

‘I am very pleased to report that our strong full year performance continued into the first quarter of the new financial year. Long term market conditions remain favourable for alternative investments; although economic volatility and the current uncertainty in the Eurozone may have some short term impacts on our business. Our fundraising focus turns to first time funds, which always take more time to gain traction, means that we expect the pace of fundraising to slow for the rest of the financial year.’

Wayne Bowers, chief investment officer for Northern Trust Asset Management for Europe, Middle East, Africa and Asia Pacific, made it clear that the firm was active in securing responsible investments for the fund using ESG analysis.

7 i-invest July 2015

i-invest

Inflation Expectations Deserve Consideration from Investors At a recent conference in London to discuss prospects for unpredictable global financial markets, portfolio managers from Legg Mason’s affiliates were asked, “What risks do you think are not fully appreciated by investors now?”

For three based in the UK, the biggest issue on the horizon was potential inflation. With Europe in the early stages of recovery, it may not be an immediate risk, but the combination of aggressive central bank policies with economies on the mend may give rise to fears of inflation.

al growth outlook,” he said. “Actual inflation and inflation expectations remain very well anchored but perhaps we are missing something. Perhaps we are not being as optimistic as we should about the global outlook, given the huge amount of policy accommodation we’ve seen, particularly from developed market central banks.”

“Central banks around the world have been engaging in extraordinary monetary policy,” said Mike Zelouf, Director of London Operations for Western Asset. “The latest central bank to join that was the European Central Bank (ECB), with its decision to expand monetary asset purchases earlier this year. The key risk clearly is that central banks are successful in reflating economies.”

“It is quite possible we are not being optimistic enough on global growth,” Mr. Brown advised. “With perhaps not factoring in central banks’ abilities to generate inflation and get the broad level of prices back, closer to their targets, that is certainly an eventuality that the current level of global government bond yields is not discounting. That is something as investors at Western Asset that we are thinking about and looking to develop to protect us should that scenario play out.”

“We don’t believe inflation is likely to pick up very sharply, but what can happen is that inflationary expectations can increase much, much quicker than actual inflation.”

That view was echoed by Michael Browne, a portfolio manager at Martin Currie. He observed that, “We are in a very benign economic phase at this moment in time – the early stage of recovery from a European perspective – but there are always going to be certain risks.”

“The first risk out there, one that people will talk about as this recovery starts to take hold, will be inflation,” Mr. Browne said. “We’ll start to have to see a rise in interest rates across Europe and indeed globally over the next two to three years. In Europe there is no risk of interest rate rise until 2017, when the QE from the ECB will finish, but after that, will we start to see tighter labour markets? Will we start to see the necessity to raise rates? I am not sure we will. I think the European recovery is going to be based around labour and the increase in utilisation of labour at lower wages, rather than seeing big increases in wages – which could be inflationary.”

To Gordon Brown, co-head of the Global Portfolios team at Western Asset Management, the financial market risk foremost in his mind was “the potential threat of global inflation.”

“The market’s pricing in a very subdued glob-

Mr. Zelouf sees this as a potential opportunity for investors in the fixed income markets.

“Government bond yields in that kind of environment could rise quite sharply over a short period of time,” he observed. “Although initially spread product credit markets could also follow suit, as they did in 2013, we believe the stronger growth environment underlying this scenario will help spread product credit markets. Unconstrained strategies, which allow managers to flexibly manage their duration and interest rate sensitivity, would do particularly well.”

Yet Mr. Zelouf also foresees a second and what he considers more concerning scenario.

“If central banks are unsuccessful in reflating economies, expectations (could) drift towards a more recessionary or deflationary environment,” he warned. “That is a concern because of the high levels of public sector and private sector debt that have accumulated, not just in the developed world but also in the developing economies around the world. If we slip into an environment where inflation slips lower, the more critically inflation expectations go down, central banks have very few tools they have not already used to address that.”

8 i-invest July 2015

What will happen under such a scenario? Mr. Zelouf believes some sectors will perform well.

“Government bond markets will do very well.

There will be a very sharp flight to safety.

Corporate bonds and other risk assets will be negatively impacted as a result of deflationary expectations. There will be a shift to fixed income and, once again, unconstrained flexible fixed income strategies will do well, as they will have the best exposure to hedge deflationary risk.”

How likely any of these forecasts are to come to fruition will continue to be debated. The Legg Mason managers believe the greatest risk lies in ignoring these potential pitfalls.

“The risk from a European perspective is in fact undershooting some of the demand estimates that people see in 2017 and 2018,” Mr. Browne of Martin Currie observed. “The risk is a slower recovery based around non-inflationary impulses and non-inflationary growth. If that does not occur, then of course there is no European recovery and there will be none going forward.

“As investors, we will see a risk from 2016 onwards of having to say: When is the right time to retreat from real assets? Looking at the corporate balance sheets; looking at the opportunity set; looking at return on equity; and looking at the cash flows – I think that is unlikely.

“What we really have to do is think about the risk as not being any inflation in 2017 and 2018.”

i-invest

Arcapita Buys Part of Saadiyat Residential Complex in Abu Dhabi for $200m Arcapita, the global investment management firm, announced today that it has acquired phase one of Saadiyat Beach Residences, a premium residential apartment complex located on Saadiyat, Abu Dhabi, from Mubadala Development Company.

The size of the purchase was not disclosed in the statement but a source close to the deal said it was around $200 million.

tablished economies in the Middle East. We are actively developing our global deal pipeline and expect to complete additional investments during 2015.”

The residential complex is composed of three low-rise buildings within a gated community and is under a three-year master lease to the Tourism Development & Investment Company (TDIC). Developed by TDIC in 2013 to high-quality standards, the residential complex is composed of 285 one to three-bedroom apartments and is designed to foster a close-knit community in addition to providing high-end facilities and amenities.

Saadiyat is a 27 square kilometer multi-faceted island destination featuring a wide range of luxurious hotels and resorts, a beach club, a world-class golf course and a variety of leisure and retail offerings, while also providing world-renowned educational opportunities.

The island’s cultural district will encompass high profile museums including the Louvre Abu Dhabi, Guggenheim Abu Dhabi and Zayed National Museum. The New York University Abu Dhabi campus is also located on Saadiyat, which is located five minutes from downtown Abu Dhabi.

Martin Tan, Arcapita’s Chief Investment Officer, said, “Abu Dhabi provides real estate investors with exposure to the GCC region, while offering steady and stable growth prospects.

We believe that the our investment in Saadiyat offers a unique access to the residential real estate sector in Abu Dhabi, which is driven by significant government-led development projects and a growing population coupled with limited high-quality residential supply. We are acquiring a high-end residential complex which provides residents with a luxury home experience and a strategic location close to Abu Dhabi’s central business district.”

The transaction was partly funded by a Sharia’ah-compliant financing facility provided by Abu Dhabi Commercial Bank.

Vontobel Asset Management Launches Institutional Mutual Funds Vontobel Asset Management, Inc. has expanded its product offering to institutional U.S. clients with the launch of two SEC-registered institutional mutual funds: Vontobel International Equity Institutional Fund (VTIIX) and Vontobel Global Equity Institutional Fund (VTEIX).

These funds join the firm’s mutual fund roster alongside the Vontobel Global Emerging Markets Equity Institutional Fund (VTGIX), which commenced operations in May 2013 and has more than $1 billion in assets as of June 30, 2015.

“Launching these institutional mutual funds is a significant initiative for Vontobel. We are delighted to broaden investor access to our investment strategies through these vehicles by providing quality portfolio management at a reasonable fee,” said Dr. Philipp Hensler, Co-Chief Executive Officer of New Yorkbased Vontobel Asset Management, Inc. The launch of these funds reflects Vontobel’s commitment to U.S. institutional markets by making some of its strategies accessible to institutional investors who prefer a pooled vehicle, with a minimum investment size of $1 million. The funds replicate the investment strategy of Vontobel’s long-only equity strategies, which have a 20+ year track record and seek above average risk-adjusted returns.

These mutual funds complement Vontobel’s existing investment vehicles, including separately managed accounts and collective investment trusts, allowing investors to access the team’s consistent investment style by selecting the product solution appropriate to their investment needs.

“Our strategy is built on identifying high-quality companies: those with solid business economics, stable operating margins, high returns on invested capital, consistent returns, and strong franchises,” said Vontobel’s Chief Investment Officer and Co-Chief Executive Officer Rajiv Jain. “We take a long-term view, and our portfolios aspire to enjoy consistent compounded earnings growth.”

Atif A. Abdulmalik, Arcapita’s Chief Executive Officer, commented, “We are pursuing investments in sectors where Arcapita’s management team has built a significant track record and capabilities, such as residential real estate. We are pleased to announce our first investment in Abu Dhabi, one of the most es9 i-invest July 2015

i-invest

New Investment is a Turkish Delight Finansinvest implementation of SunGard technology offers the financial services firm opportunity to expand into Turkey.

Finansinvest, based in Istanbul, Turkey, has adopted SunGard’s Front Arena trading solution, which will help the firm source and trade liquidity at the right price in multiple asset classes.

SunGard’s multi-asset trading solution will help Finansinvest gain a competitive edge in pricing and risk management, market making on the Turkish stock exchange, trade and execution management, cross-asset trading, over-the-counter (OTC) electronic trading, and order management.

Finansinvest’s implementation of SunGard’s Front Arena trading solution is the first in Turkey. SunGard is one of the world’s leading financial software companies, with revenue in 2014 of $2.8bn. The company has also established an office in Istanbul and is set to add new hires to the local team as part of their expansion into the country, reflected by this new deal with Finansinvest.

Turkey has seen intense growth over the last few years and their economy is now the 18th largest in the world. Foreign direct investment has gone from around $1bn ten years ago to an average of $13bn over the past five years.

Ozgur Guneri, CEO of Finansinvest, stated that this was an exciting opportunity for the firm.

na, we are well-poised for growth and look forward to a long and rewarding association with SunGard.’

The managing director for SunGard in the Middle East & Africa, Wissam Khoury, made it clear that SunGard’s growth in Turkey was greatly boosted by the partnership.

‘We are very happy to be working with Finansinvest. Opportunities in the growing Turkish market are plentiful and we are now actively pursuing further expansion in the country by investing locally and hiring new people on the ground. Our investment is bringing customers added value by utilizing our solutions to help them compete more effectively.

Recent regulatory changes in Turkey gave investment banks the opportunity to provide OTC derivative products to their clients more easily. We were able to provide Finansinvest with a smooth transition process to enable them to cope with these regulatory changes.’

‘There is a gap in the market for the type of solutions we offer, allowing SunGard to become a trusted, long-term technology provider of Turkish financial institutions and to contribute to the development of Turkish capital markets. It is an exciting time for us to be active in Turkey’ he added.

‘At FinansInvest, our mission is to offer sophisticated and integrated solutions to our clients along with high quality and dedicated financial advisors. On this mission, we aim to explore the highest level of technology and innovation which enables us to offer a trusted, transparent and convenient investment platform. We believe that our cooperation with SunGard will be a key milestone in helping us gain a competitive advantage on this front. By implementing SunGard’s Front Are-

Wine Market Maturing Aranca Analysis Shows that Wine is a long-term alternative investment that yields high returns and has low correlation with other assets.

The global research and analytics company has released a report outlining the wine investment landscape, following Robert Parker’s 10-year retrospective of the 2005 Bordeaux vintage.

‘Pouring wine to your portfolio’ identifies not only why Fine wine investment offers portfolio diversification at high returns and low correlation, but also the “10 things the investor needs to know before pouring wine to his investment portfolio”. Five of these are key advantages and five are concerns of wine as asset class.

Ankit Goel, Investment Research, Aranca, indicated that wine could soon be a key commodity in the collecting to invest market.

‘Investment-grade wine is an alternative asset class similar to gold, fine art, rare coins. In the last decade (July 2005 to June 2015), investment in fine wine provided higher returns vis-à-vis traditional asset classes (e.g., equity, bond, real estate, or commodity), owing to limited production and increased demand from emerging markets, especially China. Also, during the period, fine wine investment had a low correlation with other asset classes (less than 0.4). High returns and low correlation make fine wine an attractive investment asset class.

Moreover, after staying in the negative territory for almost four years owing to poor vintage quality, fine wine prices rebounded in August 2014 on positive investor sentiment and economic recoveries. Furthermore, the release of Robert Parker’s 10-year retrospective of the 2005 Bordeaux resulted in a positive movement in fine wine indices. Overall, fine wine is emerging as an attractive investment alternative for long-term investors based on high returns and low correlation with other asset classes.

Investment returns on fine wine are expected to increase in the second half of 2015, due to the improved ratings of Bordeaux wines, and anticipated growth in demand from Asia and the US. Moreover, improved vintage harvest in 2015 and 2016, following the good vintage of 2014, would support the increase in fine wine prices.’

11 i-invest July 2015

i-invest

US Drastically Behind Europe in AIFMD Compliancy Preqin study shows only 15% of US hedge fund managers are now AIFMD compliant, compared to 82% of European managers.

The latest study from the leading source of information for the alternative assets industry shows that whilst most UK and Europe based hedge fund managers are AIFMD compliant, the uptake has been slower beyond the EU’s borders.

Many managers based outside the EU are relying on investors to approach them through reverse solicitation. Even so, 38% of US managers have chosen to avoid the EU completely, with most citing compliance costs and the risks arising from uncertainty and lack of guidance surrounding the directive.

Just a quarter of hedge fund managers based across Asia and Rest of World currently comply, and only 15% of firms based in the US.

However the study also saw a drop in negative attitudes towards the regulations, with negativity surrounding the AIFMD reducing over the past six months. 45% of the respondents to Preqin’s June 2015 survey believed the directive will change the hedge fund landscape for the worse, compared to 58% as of December 2014.

The AIFMD, or Alternative Investment Fund Managers Directive, is a set of financial regulations introduced by the European Commission designed to regulate financial services following the global financial crisis. The measures are due to be implemented on 22nd July this year.

42% of fund managers based outside the EU do not plan to raise capital from EU investors in the near future; of this group, 59% are deliberately avoiding the region due to concerns about the AIFMD.

Amy Bensted. the Head of Hedge Fund Products, Preqin, stated that the new measures were having a mixed effect on the industry.

‘As we approach the 22nd July anniversary of its implementation, the AIFMD has had a varied effect on the hedge fund industry.

While general negativity towards the regula-

12 i-invest July 2015

tion has fallen over the past six months, 45% of fund managers still believe the AIFMD will change the industry for the worse, and only 23% feel it will have a positive impact.

Although in Europe most hedge funds are AIFMD-compliant, only a relatively small number of fund managers from beyond the EU’s borders have acquired compliance status. Despite having one of the highest levels of compliance (90%), not a single UK-based fund manager felt the directive will have a positive impact on their business.

Many non-EU fund managers are choosing to avoid investment from the region completely, which may result in a reduced choice of funds available for investment for EU-based investors. The leading concern hedge fund managers have about the new regulation is the increased costs of complying with the EU directive, with two thirds of those managers that have acquired the passport stating the costs have been higher than they originally expected.’

When you

invest

in your team you invest in

your company

The Workplace Savings & Retirement Plan is a new solution in the Gulf region that provides employers and their employees access to world-class investments in a simple, structured and secure way.

The plan is easy to administer via a state-of-the-art web platform and gives you access to a wide range of investment funds with low and transparent charges.

By investing in the growth of your sta with a joint contribution plan, you improve employee retention, attract the best personnel, and most importantly, build a company that thrives to its full potential.

For more info call +971 4 233 7777 or visit our website www.tameen.ae

Workplace Savings &

Retirement plan

i-invest

Keills

Keills is an independent property fund manager, owned and managed by its founding directors, each with over 25 years of real estate experience serving private and institutional clients in the UK and European markets.

Based in Scotland, we serve clients throughout the UK. Our strength is our independence and we are not constrained in terms of strategy. We form our own unique view, sometimes at the periphery of current thinking and often followed by others. Over the years, we have learned to differentiate between what is important and what is noise in the market. We follow the axioms of some of the best investment managers and importantly, only buy things we understand.

Time and again, we are witness to the folly of investors doing otherwise.

The investment world has changed dominated, as we see it, by 3 elephants in the room, being global debt levels, escalating healthcare costs, and the forthcoming pensions crisis will ensure that future returns will differ significantly from the past. Keills positions its strategy to deliver in this new world and we regularly comment on the effect of Global and UK economic strategies on UK real estate market and our strategy through our website blog. www.keills.com.

We believe that real estate is different from other sectors and that experience really does count. Long term property investment performance is driven by rents, just like long term equity performance is about dividends. Quite simply, we think that the drivers of average rental growth have gone and that investors should concentrate more on income security, alternative uses and of course, location. Rental growth is still present in some sub-markets but difficult to capture, without ‘betting the farm’.

Our approach, is to seek long term value, together with secure, real (after inflation) income. For this strategy, we coined the term “RPI Property”, being properties where rents are linked to the Retail Prices Index, the Consumer Prices Index or contracted to known fixed uplifts. In addition, we insist on tenants with the best credit rating covenant.

The fundamental principles of property location and occupational covenants cannot be divorced from the investment decision. Sim-

ply buying a deal which ticks the boxes makes no sense. We seek out properties which we deem to be the “natural home” of the occupier, increasing the likelihood of continued occupation and thus reducing risk as the term of the lease reduces.

Many pension fund clients, with an indefinite liability horizon, take a longer term view where liquidity is less important and this, along with our long established market contacts, enables us to get in early on up and coming locations. In addition, our market contacts established over the years, along with our bespoke database of active deals, allows us to analyse in depth the considerable deal flow available to us.

Keills Property Trust is our flagship fund. A winner of the Wealth and Money Management “Best UK Tax Efficient” award 2014.

Keills Property Trust is open to investment

by UK Pension Fund investors and seeks to make distributions of income to investors every six months. We believe that investors are best served by providing a cost effective service and as such management fees on assets under management of less than £1bn are charged at 25bps. Institutional clients have been receptive to our approach of combining a focussed strategy with a control of costs and, as a result, our funds under management are expected to grow.

Keills is registered under AIFMD and as well as our principal fund, Keills Property Trust, we offer a range of investment and asset management services to clients of all sizes.

For more information please contact Alan Howie at alan.howie@keills.com

14 i-invest July 2015

i-invest

15 i-invest July 2015

i-invest

Diversifying Tail Risk Much discussion has taken place during the post-crisis years about the importance of hedging a portfolio’s tail risk. There are even fund products whose strategy it is to provide a specific tail risk hedge. In many ways these work as an insurance policy, usually against the equity portion of a portfolio. They are not usually designed to perform during more ‘normal’ market conditions.

While these have their uses in a portfolio, they do not negate the need for other practical solutions to overall portfolio diversification. CEO of Sequoia Capital, Douglas Garistina, tells us more...

It is fairly safe to say that most, if not all, institutional investors employ teams of experts to construct balanced, diversified portfolios. However, when it is time to allocate the hedge fund portion of the portfolio, it is often the case that a ‘safe’ decision is made to allocate to one or more of the hedge fund giants, without substantial further consideration of these hedge funds’ correlations to each other, to CTA trend or to other principle components of the institution’s portfolio. Even if these hedge funds offer a relatively low correlation to the institution’s overall portfolio in normal conditions, during fat tail events, the correlations often shoot up, leaving the institution with losses that have been amplified by their hedge fund allocation.

In order to truly diversify one’s portfolio, it is good practice to analyse the portfolio’s returns at a granular (daily) level (as well as longer periods) and isolate the days/weeks/ months where large standard deviation moves in portfolio valuation occurred. Then, using daily returns for each diversifying fund strategy under consideration, measure the correlations of returns during these large standard deviation events as well as during more normal times. Ideally, the strategies included in an institution’s portfolio for diversification purposes should maintain a low correlation even during times of high market stress.

ning strategies that focus on different trade holding periods or have certain capacity constraints, can often differentiate themselves. It is more likely for a smaller manager to generate real Alpha that is not available to the behemoths. And in doing so, due to the orthogonal nature of Alpha to Beta, provide the true diversification that a portfolio requires.

By focusing on short-term opportunities, we are able to produce a very diversifying returns streams for our institutional investors’ portfolios. In a forthcoming white paper, we will discuss in detail how the returns from our strategy remain low to all major benchmarks in both normal market environments as well as during times of high market stress.

At Sequoia Capital Fund Management LLP, we aim to do just that. We run quantitative, systematically-driven strategies in highly liquid markets. Our focus is on short-term opportunities that exist for a few hours to a few days as this is where we see genuine Alpha opportunities existing. The models that we develop are tested over several years of outof-sample data to build an empirically derived picture of their performance characteristics through many different trading environments with a reasonable level of granularity. By running a quantitative, systematic strategy we are able to identify and capture statistically meaningful and repeatable Alpha events.

For further information on Sequoia’s award-winning short-term systematic strategy please contact: investor.relations@sequoiacapfm.com

We would argue that such diversification is hard to achieve when a fund is managing tens of billions in assets as it becomes exceedingly difficult to put assets to work in ways that are meaningfully different to the competition.

This is where smaller managers, often run-

16 i-invest July 2015

Sequoia Capital Fund Management LLP www.sequoiacapfm.com

i-invest

17 i-invest July 2015

i-invest

In Support of Funds of Hedge Funds

by Patrick Ghali, CEO, Sussex Partners

18 i-invest July 2015

i-invest

19 i-invest July 2015

i-invest

20 i-invest July 2015

i-invest

Funds of hedge funds have been much maligned in recent years. The list of criticisms is long: over diversification which erodes any chance to outperform, the inability to move quickly enough to avoid drawdowns or take advantage of short term opportunities, liquidity mismatches with the underlying investments, and of course the despised double layer of fees which is often touted as the final nail in the coffin. The simple truth is these criticisms, whilst fair in large part, tell only half the story, and though many funds of hedge funds have added limited value for investors, the same can be said of most hedge funds, mutual funds or unit trusts, and generalization can be dangerous and quite detrimental to an investor’s returns.

The fund of hedge fund model has certainly changed over the past decade, and especially so since 2009. Gone are the days where a manager can simply collect assets along with sizeable fees by providing access to a portfolio of closed managers, effectively acting as little more than a “concierge” to a group of investors, with minimal real risk management, due diligence or portfolio construction. Some of the old fund of funds also packed in highly leveraged, model based strategies which performed well, delivering high Sharpe ratios (and attractive performance fees) so long as volatility remained within a certain range - until it all ended in tears. This old model clearly lacks a coherent and sustainable value proposition and many of the ‘old school’ underperforming funds of hedge funds have had to shut down in the past few years as a result.

The survivors are a group of managers that have always approached things differently.

They have often made a point of avoiding many of the low volatility, high leverage strategies precisely because they felt that the inherent risks could not be properly measured and therefore could expose them and their investors to unquantifiable potential losses.

These groups also have extensive operational due diligence teams in place to safe guard their investors’ assets, and to ensure operational issues don’t create unnecessary additional risks.

They also realized from the beginning that simply being an access play was of limited value, especially to the more sophisticated investors. Some are sector specialists, for example in distressed opportunities, or geographic as in the case of Asian or Latin America focused groups. Others are specialized in highly customized and bespoke solutions for individual clients. All of them however, regardless of their focus, are tactical and dynamic in their asset allocations, constantly refining and tailoring their portfolios to suit different macroeconomic environments.

Few would disagree that the central bank liquidity driven environment that we have seen in recent years requires a different approach to investing than that of the pre-crisis markets, yet too many managers have found themselves unable to adapt to this new reality. Successful fund of fund managers understand their underlying funds in great detail and in some cases act as if these were ‘offsite proprietary traders’ rather than external asset managers. They speak to managers almost daily and deploy capital to them dynamically as opportunities arise. In some cases they ask hedge funds to run targeted portfolios for them which are solely focused on one or two trades. Thus, their overall funds of hedge fund portfolios are unlike their competitors’, generating superior risk adjusted returns over several market cycles with the added benefit of generally being uncorrelated to other parts of the investor’s portfolio, thereby also enhancing overall stability. These managers have little or nothing in common with ‘old school’ fund of hedge funds, neither in their structure nor in their return patterns, and few investors would argue that these funds haven’t added significant value to their portfolios.

Most importantly – these superior results are achieved net of all fees.

Some investors have felt they can replicate this cheaper in-house only to realize some years later that the costs associated with creating the internal expertise to credibly invest in hedge funds are considerable. Not only is a team of analysts and a portfolio manager required but operational due diligence experts as well. All of this adds up to significant overheads and will take time and effort to unwind should it turn out that the internal team isn’t able to generate the hoped for returns. Then, there’s the ultimate question: Having made this investment, is the expensively acquired internal team able to outperform or at least match the performance of the best fund of hedge funds managers? Far too often the truthful answer to this question is “No.”

21 i-invest July 2015

In essence, the best fund of hedge funds managers are simply portfolio managers who would rather sit in their own offices instead of yours. That has been a respected truth for money managers, both traditional and hedge fund. So why should we not accept the same from a talented fund of hedge fund manager?

As far as the old bug bear of ‘the double layer of fees’ phobia, what is often overlooked in the debate is that many of the larger fund of hedge funds have negotiated substantial fee discounts or other material improvements in terms with their underlying hedge funds, owing to the size of their investments, and it is therefore not uncommon that the fees charged by these fund of funds managers is substantially covered by the improved fee terms. Therefore, in most cases, though not fashionable to say so, investing with a few exceptional funds of hedge fund managers will not only be less expensive, but likely result in far superior returns (and fewer headaches) versus trying to create the same in-house.

Few would disagree that the central bank liquidity driven environment that we have seen in recent years requires a different approach to investing than that of the pre-crisis markets, yet too many managers have found themselves unable to adapt to this new reality.

i-invest

Fed Chair, Janet Yellen Anticipates an Imminent Rate Hike That Is Set to Start to Normalize Rates While the fate of Greece’s financial future distracts the world, the elephant in the room remains – the imminent rise in interest rates. For years the Federal Reserve has been reluctant to raise rates but now seems prepared to take the plunge. And yet many pundits remain unconcerned as they sidestep the unforgiving truth about what a rise in interest rates will do to the multi trillion dollar bond market.

Prudent investors hold a variety of investments including U.S. Treasury, corporate and sovereign bonds. Portfolios of the most riskaverse investors often hold 60%, 70% or even more in bonds. And since bond prices fall when interest rates rise, these conservative investors could get crushed when the inevitable happens. In other words, investors who can least stomach portfolio losses could be the ones most hurt when interest rates rise.

What can be done?

One strategy is to short U.S. Treasury bonds.

Shorting securities that are expected to fall in price is a strategy that sophisticated and institutional investors have used for years. Shorting treasury bonds creates negative duration which can be used to lower a portfolio’s interest rate risk when interest rates rise.

Shorting securities directly, however, is beyond the comfort level of many investors, but they can achieve the same result by investing in an ETF which utilizes these defensive strategies. Using an ETF provides advisors and investors access to an institutional strategy as a means to protect the value of their portfolios.

European investors may want to consider using U.S. denominated ETFs to manage interest rate duration and currency exchange rate risk. Several global financial institutions are forecasting parity in the exchange rate of the Euro and the U.S. Dollar in the next 6 to 12 months. One of the key drivers contributing to the tailwind for the U.S. Dollar appreciation is the potential rise in the U.S. Treasury interest rates. The U.S. Dollar appreciation may not occur if competing global interest rates in other markets attract capital from U. S. Treasury bonds.

The Fed is expected to raise rates this year which will spook bond investors. Advisors wishing to protect their most sensitive clients’ portfolios should be implementing a defensive strategy now before the stampede begins. In other words, buy your collision insurance before your accident happens!

22 i-invest July 2015

i-invest

Disclaimer: The author of this article, Sit Investment Associates, Inc., does manage an ETF that utilizes the strategy recommended in the article.

23 i-invest July 2015

i-invest

Building a Comprehensive Investment Policy

By Bill Dickens, CFP速, Professional Consultant at Moneta Group

24 i-invest July 2015

i-invest

25 i-invest July 2015

i-invest

For those who are involved as committee members and/or trustees in charitable foundations, endowments and other institutional endeavors like pension and retirement plans, you likely complete an annual review of your organization’s Investment Policy Statement. As fiduciaries, you and those providing advice have an obligation to periodically review the Investment Policy Statement to ensure its appropriateness and consistency with the institution’s needs and long-term objectives.

The Association of Small Foundations estimates that over 30% of its constituents do not have an Investment Policy Statement and even more do not regularly review their existing policies.

A well crafted Investment Policy is critical to the long-term success of an investment strategy and acts as a guidepost for all parties involved. It mitigates the impact of emotions and subjectivity, and addresses conflicts of interest. In fact, having an Investment Policy Statement is generally considered a “best practice” for qualified retirement plans, certain trusts, foundations and endowments.

The following is a brief overview of the components of a comprehensive Investment Policy Statement. Many institutions and organizations will have their own unique styles and approaches to their statement; however, the following are components that every policy should address: • Investment objectives o Return - Here the desired or expected rate of return is addressed. Each institution will have its own unique set of circumstances and needs. A common place to start in determining the return objective for many institutions is:

Return Objective = Spending Rate +Inflation Rate + Professional Fees

The return objective will drive the entire investment design process and should be considered carefully. Variables such as projected short and longterm cash inflows and outflows, market expectations and asset allocation should all be considered when determining the return objective.

In investing, there are few variables one can control outside of the spending policy. An annual review of an institution’s spending policy is critical to its return objectives and overall long-term success. Many adopt a simple approach of 5% of plan assets, or more, when markets are rising. Of course, markets do not always rise and higher spending levels during a market decline may trigger a spending down of principal. It is critical that the short and long-term capital needs of the institution remain consistent with its return objectives and a contingency plan be considered for the inevitable market declines.

o Risk – Understanding and clearly defining risk tolerance and capacity are just as important as defining the return objectives of the institution. The degree of risk that is deemed acceptable by the fiduciaries of the institution generally correlates to the return expectations. It is important that the personal biases of the individuals entrusted to manage the institution’s assets do not influence risk and return decisions.

Education is a key tenet when determining risk tolerance and capacity. Modeling portfolio asset allocations using current capital market assumptions and past performance can be useful tools in setting future expectations as well as quantifying risk. The more clear an institution is when discussing risk (e.g. volatility ranges, allowable asset classes, deviation ranges within target asset classes, etc.) the more effective a committee or third party advisor will be in caring for the institution’s assets.

• Portfolio Constraints o Liquidity – This is the recognition of expected cash outflows and inflows from the institution’s investment portfolio by all parties entrusted to care for it. In many situations, it is prudent for all Investment Policy Statements to include some allocation of the institution’s assets to cash and money market reserves for near-term and extraordinary needs. These liquid funds can act as insulation against short-term volatility and as a reserve for potential investment opportunities outside of the traditional investment portfolio.

In addition, liquidity may be required over multiple time periods. An understanding of this is important in portfolio design and risk and return objectives should be taken into consideration in an institution’s Investment Policy Statement, as well.

o Time Horizon – The investment time horizon should be clearly stated as many linkages exist between it and the risk objectives of an institution. Different from personal financial planning, where there may be a finite time period, an institution will often invest in perpetuity.

26 i-invest July 2015

In some instances, multi-stage planning may be necessary where an institution may have short, intermediate and longterm needs. The asset allocation decision should consider these various time horizons as longer time horizons will generally afford the institution an ability to take greater risk, while shorter time horizons will generally dictate that the institution be exposed to less risk.

o Legal and Regulatory Factors – These are often external constraints that can include specifying asset classes that are not allowed or placing limitations on the percentage of the overall portfolio that can be invested in a single security. o Tax Considerations – Pension funds, retirement plans, endowments and charitable foundations are tax-exempt thus special attention to the tax implication of particular investments and/or investment strategies is unnecessary. Trusts or for profit institutions are taxable and the Investment Policy should acknowledge the taxability of investments and contain a discussion the institution’s approach to its investments’ taxability. o Unique Circumstances – These represent an organization’s special concerns and biases. A faith based institution or university may place restrictions on certain investment holdings such as tobacco, alcohol or defense products. An investment committee may state its preference for using index funds over actively managed funds or individual stocks. This section of the Investment Policy should state those special concerns and preferences of the committee and institution.

A clear and concise Investment Policy Statement is critical to removing the subjectivity of portfolio management and ensures a consistent direction for future committee members and fiduciaries alike. A comprehensive Investment Policy Statement is the cornerstone to a successful investment process and also displays good stewardship to those who support the organization’s cause.

i-invest

Š 2015, Moneta Group Investment Advisors, LLC. all rights reserved. These materials were developed for informational purposes only and do not take into account your individual needs, financial or otherwise, and should not be relied upon by you when making any particular financial related decisions. The information herein was derived from sources deemed to be reliable but have not been independently verified, and no representations or warranties are made with respect thereto.

27 i-invest July 2015

i-invest

Mediterrania Capital Partners Mediterrania Capital Partners is a dedicated private equity firm focused on small and medium sized enterprises (SMEs) and mid-cap companies in North Africa with total assets under management of more than US$200 million.

With offices in Barcelona, Casablanca, Tunisia, Algiers, and Valletta, Mediterrania Capital Partners takes a very intense hands-on and proactive approach to implementing its growth strategy, by leading the governance of the companies and driving the key internal value creation process. The partners of Mediterrania Capital have extensive experience in managing companies including commercial experience, strategy formulation, finance and operations.

Who are Mediterrania’s clients?

We have several types of clients. The principal clients are the investors of our funds which could be institutional investors or private investors. To all of them, we are providing superior returns in the asset class, with full transparency in processes and performance of the portfolio companies.

Secondly, we are providing investors with a number of KPIs (Key Performance Indicators) that relate to Impact Investing. Impact Investing aims to provide investors with great returns in the “right” way and demonstrate the impact that we create in the Region in relation to social, environmental and governance aspects.

Additionally our portfolio companies are also our clients. The assets where we invest in are a critical part of our value creation model as we help these companies move up to the next level in terms of business growth and performance. As Mediterrania Capital Partners, one of our main tasks is to focus on our portfolio companies and support them on their growth plans.

What makes your company unique?

Since the start of our operations we have implemented a unique and rigorous Value Creation model that allows us to deliver on average more than 20% growth on revenues and 30% growth on EBITDA in our portfolio companies on a yearly basis.

Our Value Creation model resides on the following fundamentals: • Defining a Social Operating System -or governance- with monthly boards, management meetings, audit committees and strategic sessions

• Ensuring to have the right person in the right job • Implementing the 3 Wide Enterprise processes that are essential for a strong and efficient operation (the strategic process, the HR process and the budgeting process) • Identifying each company’s Key Performance Indicators and putting the right elements in place to ensure all the KPIs are achieved on a consistent basis • Diligent and comprehensive follow-up At the same time, we focus on making an impact with our investments and creating a positive influence on the partners of portfolio companies. It’s our contribution to making this world a better place to live in, doing our modest bit to support the African continent in its continued development.

A few facts: • So far we have invested in several companies in North and Sub-Saharan Africa, which have grown by more than 20% year on year • Our capital injections have made it possible to create more 1,000 new jobs. The companies in our portfolio now employ more than 5,000 people, a number that keeps rising as businesses continue to expand and with that, the need for increased workforce • As a result of our investments, the number of female employees in the portfolio companies has grown by more than 20% • All our portfolio companies offer benefits such as health insurance, vacation pay and pension plans and abide by an official equal opportunity employment policy • In terms of environmental policies, all our portfolio companies pursue at least one environmental objective • Two thirds of the companies have pollution prevention and waste management strategies • Fifty per cent of them have energy and fuel efficiency • Others focus on water resource management, natural resource conservation and sustainable land use • Finally, all our portfolio companies actively verify financial statements and they are all audited by global auditing firms

28 i-invest July 2015

Environmental impact, social impact and Governance aspects are crucial elements of our Value Creation Model. We strive to offer investors strong financial returns while creating positive outcomes for communities and for the environment.

What’s your biggest challenge facing you at present?

Our biggest opportunity, and challenge at the same time, is to ensure we continue to invest in high performing companies and expand into new geographies and industry segments, while putting all the elements in place to retain talent and effective processes.

What’s the aim for your business?

Our goal is to achieve superior returns by creating world-class companies, implementing highly progressive business strategies and operating according to excellent business, ethical, social and environmental standards.

What’s your company’s biggest challenge?

The biggest challenge we are facing right now is to be able to establish a business discipline and achieve operational excellence in our portfolio companies. Both key to ensure a good performance and thus, higher returns for our investors.

i-invest

29 i-invest July 2015

i-invest

The Benefits of a Disciplined Portfolio Rebalancing Strategy Peter Higgs (Executive Chairman, TGM) and Stephen Goode (Executive Director, TGM) www.tgm-global.com An often overlooked but extremely important component of managing a portfolio of investment assets is controlling the inevitable deviation in the weight of those assets from their target or strategic positions. This is known as portfolio drift and results in unintended risk arising in the portfolio as any deviation in the weight of an asset from its target weight is effectively an active tilt within the portfolio.

The deviation in the weight of an asset from its target weight can occur for a number of reasons, with the most likely cause due to market movements. Assets with the highest relative return over a period will increase in weight in a portfolio whilst those assets with lower relative returns will decrease in weight.

The overall effect of the deviation in weights of the portfolio will be a change in the risk and return characteristics of the portfolio relative to the target portfolio.

To maintain the desired risk and return characteristics requires a process of portfolio rebalancing. There are many decisions involved in this process such as how frequently the portfolio should be rebalanced, should it be based on a periodic or deviation-based approach, and how much of the deviation should be corrected. Each of these questions impacts upon the two objectives of any rebalancing policy, which are to reduce tracking error relative to the target portfolio and to limit the transaction cost associated with rebalancing transactions. However these two objectives are competing in the sense that to further reduce tracking error will require

smaller allowed deviations from the target portfolio resulting in increased rebalancing transactions and therefore increased transactions costs. To reduce transaction costs will result in allowing a greater deviation and hence higher tracking error.

In our experience of running rebalancing programs for funds since 1997 the key is to design a rebalancing program that looks at the unique circumstances of each client and portfolio and design a tailored rebalancing approach that matches the needs and requirement of the client.

The implementation of the rebalancing program is usually done via a derivative overlay.

The overlay takes out effective exposures by asset class such that the value of the physical assets plus the effective exposures return the fund to its benchmark. This can be done either in-house or outsourced to a specialist manager. The benefits of an overlay as opposed to rebalancing via just physical transactions include significantly lower transaction costs and greater flexibility as regards the management and timing of any physical transactions. The overlay infrastructure can also be used to assist funds involved in transitions, portable alpha strategies plus provide a number of other benefits.

Finally a disciplined process of rebalancing involves systematically buying assets when they have underperformed and selling assets that have outperformed. This not only reduces risk but over many periods the process will add to returns by effectively buying low and selling high.

30 i-invest July 2015

i-invest

31 i-invest July 2015

i-invest

32 i-invest July 2015

i-invest

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

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

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

As data management becomes more strategic, it has moved up the corporate agenda and is receiving close attention at executive level.

But, firms need to understand the potential economic benefits of any course of action before committing to a significant investment.

In our experience, RIMES clients report both quantifiable and qualitative benefits.

• • • •

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

A recent study, commissioned by RIMES and conducted by Forrester confirms these benefits but goes further to establish the potential return on investment (ROI) that an individual firm could achieve on a managed data service.

The study adopted Forrester’s proven methodology to asses the Total Economic ImpactTM (TEI) of a managed service. It offers a robust framework and recognizes that all benefits have a positive impact on the business even though qualitative benefits may be hard to enumerate in the short term. Quantitative benefits will be discussed in more detail in a subsequent paper.

Flexibility is also central to the TEI framework. Forrester defines flexibility as an investment in additional capacity or capability that can be turned into a business benefit for some future additional investment. In effect this provides an organization with the right or ability to engage in future initiatives but not the obligation to do so.

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

These include: Quantifiable • Improved productivity and operational efficiency • IT resource savings with improved data feed and delivery maintenance • Improved ability to scale without additional headcount • Faster time to market • Reduction in third-party legacy vendor fees.

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

Qualitative 33 i-invest July 2015

Flexibility may also generate additional benefits, for example facilitating business change, winning new mandates, and simplifying regulatory compliance. Increased flexibility also facilitates expansion into new areas beyond the RIMES Benchmark Data Service, for example: • The savings that are available by transitioning from internal processing to RIMES for additional data types, for example RIMES Reference Data Service • Cost savings and improved risk mitigation may also be gained from using the RIMES Data Governance Service and the RIMES Private Database Service.

The exact value of flexibility will vary according to each organization but in most cases RIMES clients report it as significant.

Risk – the Forrester TEI framework also accommodates the inclusion of risk metrics that include ‘implementation risk’ and ‘impact risk.’ The greater the uncertainty the wider the potential range of outcomes for cost and benefit estimates so the model remains firmly rooted in practical reality.

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

To find out more and to receive a copy of the Forrester TEI study please contact ferrari@rimes.com

i-invest

Copperstone Capital It is by no means an easy job to preserve and create wealth for your clients amid current global economic conditions.

Investment committee meetings at Copperstone Capital have been very active lately, despite a “summermode” on the native Russian market. In the last few weeks alone Greece went through rounds and rounds of negotiations with the creditors and an agreement was finally reached. PM Tsipras surrendered to European demands to qualify for EUR86bn of aid, Grexit was avoided but the measures requested by the EU will push Greece deeper into a recession. Simultaneously Chinese equity market was a bit of a roller coaster, losing over 30% in less than a month and wiping off almost $4trillion of value, over a thousand stocks were halted from trading (nearly a half of overall listings on main exchanges) and then rebounding sharply after unprecedented government intervention. To add to all of that, Iran nuclear talks have resulted in a deal. The talks in Vienna have lasted more than 2 weeks this time, sending oil down over 10% to below $60/bbl as the market expects Iran to increase oil exports when the sanctions are lifted and create additional pressure on the oil price.

The long implementation lag of the deal means that there is still a probability that the deal could fail and it means that the oil price volatility is likely to stay until there is more clarity. In Russia, the economic sanctions were extended by the EU until end of January 2016; Russia retaliated with counter sanctions of import restrictions. At the same time the Central Bank of Russia announced that it intends to rebuild official reserves to $500bn starting immediately with up to $200mn daily FX purchases, the move of course triggered volatility in the local currency.

All of the above events have an effect on the global equity markets, currencies, bonds, commodities. How do you navigate through it as an institutional investor and create returns for your clients? Copperstone Capital’s Alpha Fund is an absolute return long-short has returned +63.5% since inception vs -34.12% for the Russian USD-denominated RTS Index and +67.57% for the S&P 500. Copperstone Capital is an independent investment management firm

and it gives the Fund its main advantage ability to act quickly and react to changing market environment in a prompt manner, if The Investment Committee took a decision to build/close a position, it will be executed immediately and almost certainly on the same day with the exception of less-liquid stocks (which make up a small proportion of the overall portfolio). Such freedom to act cannot be underestimated when the world is a different place every day, there could be no EU in the format that we know it tomorrow, they could be another currency on the radar or a new big oil exporter on the market tomorrow – all of these issues are much easier to deal with when the decision can be made quickly.

Rigorous risk control systems provide another buffer which is meant to shield individual investors from unnecessary risk, be it liquidity risk, currency risk, country risk etc. Institutional investment in current day and age is a sophisticated process and every investment decision is a result of skilled team work by a number of professionals: analysts, portfolio manager, risk manager, back office. For example, Copperstone research team’s in-house investment database comprises of 200+ companies globally and it continues to expand, models are updated regularly and management meetings/field trips are an essential part of the team’s ongoing bottom-up research, which constitutes only a part of the overall investment process and is complemented by top-down investment decisions.

One of the advantages of the on-going company research is the ability to detect early signs of directional changes in the stock price. For example, X5 Russia’s leading food retailer, suffered a few years of inadequate management due to very frequent management changes which, coupled with increasingly aggressive competitive environment, left the company far behind its peers on every possible metric: EBITDA margin, traffic and like-for-like sales numbers etc. The stock ended up losing 80% of its value (for comparison, the stock of Magnit, its closest competitor, went up in value by more than 4x during the same time period of 2010-2015), losing many of its core long-term long-only investors along the way.

However, management team stabilized last year and rigorous restructuring procedures 34 i-invest July 2015

kicked in, the company even managed to beat Magnit’s sales growth in June 2015 and its stock has increased in value by over 55% YTD (vs. +18% gain for Magnit). The changes are difficult to track to a retail investor as X5 does not report monthly trading updates and only quarterly numbers are available, by the time retail investors see any tangible proof that the situation has reversed, the stock has already priced in that change. Copperstone research team attended numerous meetings with X5 new management and was able to correctly identify turnaround timing and take advantage of the positive momentum in the stock price. Copperstone Alpha Fund had a position in X5 a few times this year.

Finally, Copperstone Alpha Fund does not have a geographical restriction, while preference is given to the home market of Russia and CIS, in theory, if Iranian stock market opens up to the outside investors when the sanctions are lifted and there is an interesting investment opportunity following the historical nuclear deal, there is no reason why the Fund’s research team and the Portfolio manager would not consider it. At the end of 1st quarter of 2015 Copperstone Alpha Fund had positions in 25 stocks in five markets globally.

It would be a very complicated process for an individual investor to monitor global investment universe for interesting market opportunities and even more difficult to be able to act on these opportunities in different markets due to a number of constraints (mostly regulatory hurdles), however institutional investment opens doors for nearly everyone to participate in potential market upside, depending on the capital available. At Copperstone Capital we offer our clients, high networth individuals and institutions, a variety of investment solutions.

Please contact us for more information: Company: Copperstone Capital Email: info@copperstonecapital.com Web Address: www.copperstonecapital.com

i-invest

35 i-invest July 2015

i-invest

How Flawed Index Construction is Distorting Perceptions of the Asset Class Sean Wilson, CFA, Brent Clayton, CFA Ha Ta

36 i-invest July 2015

i-invest

37 i-invest July 2015

i-invest

A common complaint heard from Frontier Markets investment managers is the poor quality of the major indices that are designed to track Frontier Markets equities. Poor index construction is not a new issue for the global investment community. The primary underlying cause of the problem has been, and continues to be, the use of market capitalization as the construction weighting methodology.1 This can contribute to lopsided geographic and sector weightings, which distort the risk and return characteristics of the equity market segment being considered. Frontier Market indices suffer from additional weaknesses due to varying degrees of capital market development in constituent countries, which can magnify the distortions caused by market capitalization-based weighting methodologies. As Frontier Markets indices are used to formulate asset allocators’ return and risk expectations for the asset class and as benchmarks to measure and evaluate Frontier Markets investment managers, it is important that the nuances and flaws of these indices are identified and understood.

Déjà Vu… Over the past century, indices have risen in importance from rough barometers of equity market performance to structural components of passive investment strategies with allocations worth hundreds of billions of dollars. However, some of the most prominent indices have been distorted by the common practice of employing market capitalization to determine the weight of their respective constituents. With this approach, the larger a company’s market capitalization, the larger its weighting in the index will be. This approach is particularly sensitive to distortions from market bubbles because it exaggerates the weightings of those areas in the index which have been inflated. One of the most extreme examples of this occurred in the late 1980s and early 1990s in the MSCI EAFE Index, then the most popular benchmark for international equities. Japan grew from approximately 10% of the index in 1970 to over 60% of the index by the late 1980s.2 Investors in the US market saw a similar phenomenon appear in the S&P 500 when the technology sector grew six-fold to over a 30% weighting during the tech bubble at the turn of the century. Both events created indices that were less diversified and more precarious with concentrations in areas of the market that were most overvalued. Investment managers benchmarked to these indices faced a binary decision with respect to their weighting in these extreme concentrations, putting commonsense portfolio diversification at odds with the business risk of deviating substantially from the primary measuring stick of their performance. An investment manager’s singular call on Japan or the technology sector often, for better or worse, became the primary determinant of fund performance. With

the retreat of the Japanese stock market and the bursting of the technology bubble, the distortions dissipated, but the underlying methodology issues remained.

Today, Frontier Markets indices suffer from a lack of diversification with historically high concentrations in a few countries and an abnormally large weighting in the financials sector. This can be seen in the following charts of the historical concentrations of the two most prominent Frontier Markets indices, the MSCI Frontier Markets Index (“MSCI FM Index”) and the S&P Frontier Broad Market Index (“S&P Frontier BMI”): Chart 1: see below On August 31st, 2008, the eve of the collapse of Lehman Brothers and the ensuing Global Financial Crisis, the MSCI FM Index and the S&P Frontier BMI held a whopping 65% and 58%, respectively, in the financials sector. Likewise, two countries, Kuwait and the United Arab Emirates, together accounted for 51% and 53% of the MSCI FM Index and the S&P Frontier BMI, respectively. One single country, Kuwait, with a population and land mass that are approximately one third and three fifths that of Belgium, accounted for 35% of the MSCI FM Index and 39% of the S&P Frontier BMI. These concentrations are slightly less disproportional today, but there remains a roughly 50% concentration in the financials sector in both indices and 38% and 32% weightings in the top two countries of each, respectively. As discussed further below, the ramifications of such uneven weightings are significant.

38 i-invest July 2015

The root causes of such lopsided concentrations are twofold. First, a market capitalization-based weighting methodology makes these indices susceptible to market bubbles, which reward stocks and markets that go up with greater and greater index weights. Second, differences in development stages among countries can skew index sector weightings.

Financial institutions are generally first to list on nascent stock exchanges. Banks are the foundation of any economy and are relatively more established than other industries in Frontier economies. They have business models that rely on shareholder funding due to international regulatory requirements, so it is not surprising that Frontier Markets indices have an overly large weighting to the financials sector. In addition, more developed Frontier Markets with large index weightings such as Kuwait that are held back from being upgraded to “Emerging Markets” status for technical reasons (foreign ownership restrictions, liquidity and size requirements) can skew overall index exposures due to the idiosyncratic nature of their underlying stock markets (e.g. a disproportionately large publicly-listed banking industry, a lack of energy and materials sector listings due to state ownership, a small consumer sector due to a smaller population). These two issues together serve to magnify the distortions in sector and country weightings.

i-invest

39 i-invest July 2015

i-invest

Implications for Return Expectations in Frontier Markets Analyzing historical returns of indices is a logical starting point for investors wishing to understand an asset class. Typically, historical returns are used as guideposts for setting investor expectations about potential future returns. With Frontier Markets, however, the lopsided concentrations in certain countries and the financials sector have dominated the historical performance of these indices and continue to mask the true underlying diversity of opportunities available in the over 50 countries with liquid Frontier Markets stocks. 3

of the index in August 2008) also languished for several years. However, the economy and market began a recovery in 2012, which shot the MSCI UAE Index up 276% from the end of 2011 to the country’s exit from the MSCI FM Index at the end of May 2014. Viewing the broader index’s performance from this perspective suggests that the tail may be wagging the dog much more than a superficial view would suggest. Trying to estimate an expected return for the entire asset class based on the historical returns of such a lopsided index is largely an analysis of its largest three country components - one of which is no longer even classified as a Frontier Market!

An argument sometimes voiced against allocating to Frontier Markets is the lower relative performance of Frontier Markets compared to traditional Emerging Markets following the Global Financial Crisis. Looking at the MSCI indices in Chart 2, while Emerging Markets appear to have quickly snapped back, Frontier Markets appear to have languished for several years and only recently have begun to experience a modest recovery. As of May 31st, 2015, the MSCI FM Index was still more than 18% below its August 31st, 2008 pre-Lehman value while the MSCI Emerging Markets Index was up 23%.

While the demographic-led growth potential of these early-stage markets is one of the primary allures of Frontier Markets investing, these concentrations mask that case. The underlying drivers of Frontier Market index returns have not necessarily been the consumption growth stories that compel investors into the asset class. Take, for example, the case of Kuwait and Bangladesh as shown in Table 1:

Chart 2: see below Looking at the three largest country weightings in the MSCI FM Index on August 31st, 2008 (collectively representing 66% of the index), however, reveals how greatly these index concentrations can influence index performance.

Chart 3: see below The MSCI Kuwait Index (Kuwait was 35% of the MSCI FM Index in August 2008) has, in fact, languished since the Global Financial Crisis. Plagued by low growth, high valuations, regional instability with the Arab Spring, and political gridlock domestically, Kuwait has not been a hallmark of the investment case for Frontier Markets in recent years. It remains 45% below its pre-crisis value. The United Arab Emirates market (16%

Table 1:4 see right Kuwait enjoys a 14-20% higher weighting in the MSCI FM Index and the S&P Frontier BMI than Bangladesh. Both markets have similar total GDP, a similar number of liquid listed stocks and similar market liquidity. Which of these two markets, however, appears to have more room for future growth and development? Bangladesh stands out with its massive population, low per capita GDP, and a lower market capitalization to GDP ratio. While these metrics simplify the nuanced growth stories for both countries, it is our view that Bangladesh has far more desirable “Frontier Markets” characteristics than does Kuwait. Nonetheless, the returns of the MSCI FM Index have been far more influenced by underlying drivers of the Kuwaiti market than those of the Bangladeshi market due to the index’s market capitalization-based weighting methodology.

The returns of Frontier Markets equity indices are also affected by the annual reclassification of countries by market development status.

40 i-invest July 2015

As countries develop, they are reclassified as Emerging Markets, and as new Frontier stock markets open, they can attain “Frontier Markets” status. Countries can also be “demoted” from Emerging to Frontier Markets status, as was the case in MSCI FM Index with Morocco (2013), Argentina (2009), and Jordan (2008).5 Since its launch on December 18th, 2007, the MSCI FM Index has seen eight new countries join and three exit the index.

The effects of country reclassifications on Frontier Markets index returns are most pronounced when countries are upgraded to “Emerging Markets” status. This can most recently be seen during the time period between MSCI’s June 10th, 2013 announcement that the UAE and Qatar would be promoted to its Emerging Market index effective June 1, 2014 and their exit, one year later, from its Frontier Markets index. At the time of MSCI’s announcement, both countries collectively accounted for almost one third of the entire MSCI FM Index. During this 12-month time period, the MSCI UAE Index and the MSCI Qatar Index rose 97% and 55%, respectively, before declining 24% and 22%, respectively, during the month of June 2014. As a result, the MSCI FM Index was up 20% during the first six months of 2014 with the UAE and Qatar accounting for a staggering 72% of that total return.6 An analysis of the historical returns of an index that has changed its composition so drastically and is constructed without diversification considerations masks the underlying opportunities in Frontier Markets and is a dangerous starting point for extrapolating future returns.

Pick an Index any Index…

To demonstrate how returns can vary depending upon the index and the weighting methodology it employs, we have constructed four custom indices using the same constituents as the S&P Frontier BMI (see Table 2). We also show the MSCI FM Index, which uses a different country universe than the S&P Frontier BMI. However, because it is less diversified with only 127 stock constituents versus 579 in the S&P Frontier BMI,

i-invest

41 i-invest July 2015

i-invest

the S&P Frontier BMI constituents were chosen to construct the custom indices. The equal-weighted index shown is derived by assigning each constituent of the S&P Frontier BMI an equal weight in the index. We also weighted the countries by population and by total GDP. For these two indices, we weighted the companies within each country by market capitalization. Lastly, we weighted each company by its size using annual sales instead of market capitalization. The point of this exercise is not to promote one Frontier Markets index over another since most have large concentrations, as Table 3 shows, but rather to demonstrate the variability of returns from reasonable indices constructed from the same constituents.7 Table 2:8 see below Table 3:9 see below As Table 2 shows, yearly comparisons between the indices vary greatly with the biggest difference between the highest and lowest annual return of 24% occurring in 2009, where a sales-weighted index outperformed the MSCI FM Index by the largest amount. Likewise, the boost the MSCI index received from the removal of UAE and Qatar in 2014 can be seen in its outperformance in 2014.10 As the table shows, while there is a broad range of historical returns from which an investor can choose to help formulate future return expectations, each index comes with different biases and shortcomings. In addition, given the limited amount of historical data (under a decade of “live” index results), it is hard to argue that any of these indices can be used to anchor future return expectations.11

Implications for Manager Evaluation Flawed indices also obfuscate manager evaluation when used as benchmarks. For example, it is common for investors to separate an investment manager’s return attribution between stock selection and allocation versus the benchmark. This attribution analysis is an attempt to better understand the source of the manager’s returns and validate the consistency of the manager’s professed style. If returns are mostly coming from geographic and/or sector allocation, then a top-down style of investing is assumed. If returns are being generated from individual stock selection, a bottom-up style is inferred. In the case of Frontier Markets indices where there is a huge weight to financials, however, it is highly likely that Frontier Markets managers will never be overweight this sector and will most likely underweight financials in the interest of common sense diversification. Any underweight in one sector by definition implies an overweight in another sector or sectors. Does this mean the Frontier Markets manager is making top down strategic decisions to sector allocation or simply employing common sense diversification? An all too familiar binary decision is forced upon managers with regard to how closely to match the concentrated index exposures.

Implications for Risk Expectations in Frontier Markets Just as return expectations in Frontier Markets are clouded by the flawed Frontier Markets indices, so too are the risk expectations for the asset class. With the birth of Modern Portfolio Theory in 1952 (Markowitz), investment risk became defined as the standard

deviation, or volatility, of returns. If the historical returns are sampled from a flawed index such as one of the major Frontier Markets indices, this risk measure is also distorted.

In a previous LR Global white paper (“Risk in Frontier Markets: Overcoming the Misperceptions.” May 2014) we examined the riskiness of Frontier Markets. Using the Modern Portfolio Theory definition of volatility, we analyzed Frontier Markets risk by calculating the standard deviation of individual Frontier Market country returns. Using ten years of rolling three-year weekly US dollar returns, we found that the median standard deviation of the Frontier Market country returns were consistently less volatile than Emerging Markets country returns and surprisingly less volatile than Developed Markets in six out of ten years (see Chart 4).

Chart 4: see right However, it is also worth considering a different mindset of risk that does not assume investors are perfectly rational and that markets are efficient, as Modern Portfolio Theory requires. The booms and busts of individual Frontier Markets, the relative lack of institutional investors and research coverage as well as the opaque nature of these immature markets suggest that Frontier Markets are inefficient. Thus, a different notion of risk may be needed.

Warren Buffet, a disciple of Benjamin Graham, explained why volatility is a poor measure of investment risk in a 1994 Berkshire Hathaway Annual Meeting: “For owners of a business - and that’s the way we think of shareholders - the academics’ definition of risk is far off the mark, so much so that it produces absurdities. For example, under beta-based theory, a stock that has dropped very sharply compared to the market - as had Washington Post when we bought it in 1973 - becomes ‘riskier’ at the lower price than it was at the higher price. Would that description have then made any sense to someone who was offered the entire company at a vastly-reduced price?” 13 In Frontier Markets, we also see volatility in individual markets and sectors as a potential source of opportunity and not risk. Fortunately, there are over 50 countries that comprise the broader Frontier Markets universe, and some of the biggest opportunities we have identified and exploited have been the result of extreme volatility in one or more countries.

Would the Real “Benchmark Risk” Please Stand Up Thanks again to Modern Portfolio Theory, a new sub-category of risk was born. “Benchmark risk,” or, as it is more commonly known, “active risk” measures the amount of “risk” an investment manager takes by constructing a portfolio that is different than the benchmark

42 i-invest July 2015

i-invest

kets indices with at least one stock with a 3-month average daily traded value of over $100,000 and a median daily traded value of over $25,000. This universe includes companies that are either listed on local Frontier Markets stock exchanges or that have more than 50% of their sales or assets in Frontier Markets, but are listed on Developed Markets or Emerging Markets stock exchanges. The list of Frontier Markets countries is even larger when considering less-liquid stocks and pre-production natural resource companies, which are excluded from the above.

4 IMF World Economic Outlook; Bloomberg.

Economic data from the IMF is for calendar year 2014. Market data is as of May 31st, 2015.

“Liquid listed companies” is defined as locally-listed stocks with a 3-month average daily traded value over $100,000 and median daily traded value over $25,000.

it seeks to outperform. Studies conducted by academics and consultants over the past five years show that active managers who deviate significantly from their benchmarks have outperformed their more benchmark-like peers.14 According to researchers at Yale University, managers with an Active Share, one measure of active risk, of greater than 80% beat their benchmarks by 2.0% to 2.7% before fees.15 If, however, the benchmark is not diversified properly and constructed sub-optimally as current Frontier Markets indices are, then benchmark risk should really be literally thought of as just that, benchmark risk. In an asset class often assumed to be highly risky and not for the faint of heart, one might assume that managers should seek to minimize active risk. In light of these studies and the aforementioned flaws of Frontier Markets benchmarks, however, Frontier Markets managers should really be encouraged to seek out active risk.

Conclusion Since Farida Khambata of the International Finance Corporation coined the term “Frontier Markets” in 1992, Frontier Markets have grown into a market segment distinct from traditional Emerging Markets with growing interest from investors and asset allocators.

Much of this interest has occurred only over the past decade, which has accounted for the lion’s share of asset growth. It is important that investors interested in Frontier Markets understand the shortcomings of the major indices when considering an allocation or monitoring an existing allocation. In our next paper, we will offer an alternative solution to existing Frontier Markets indices that will provide a better tool for monitoring and understanding the asset class.

About LR Global LR Global is an award winning Frontier Markets specialist boutique founded in 1997 as part of the Rockefeller family office. LR Global leveraged its nearly two decades of Frontier Markets experience to design an investment process, proprietary information processing architecture and proprietary risk management tools to overcome the challenges in Frontier Markets investing. LR Global’s infrastructure, tailored specifically to Frontier Markets, forms the foundation of its distinct informational edge versus its peers. LR Global is employee-owned and has a team of 19 Frontier Markets specialists dedicated to our flagship LR Global Frontier Fund. LR Global is headquartered in New York with a global research and analytics center in Vietnam.

For additional information on LR Global, please contact: Michael St. Germain ms@lrglobal.com 430 Park Avenue, New York, New York, 10022 Telephone: 212-821-1412 / Fax: 212-821-1406

5 Argentina is also in the S&P Frontier BMI and currently accounts for 15% of the index.

Astonishingly, unlike the MSCI FM Index, the S&P Frontier BMI includes local Argentinian shares that are impractical for foreigners to own due to capital controls.

6 Choppin, A. (2014). “Arabian Nights: Mysteries on the Frontier.” FIS Group research.

URL: http://fisgroup.com/images/pdf/FIS_ Group_Arabian_Nights_Mysteries_on_the_ Frontier.pdf 7 Excluding, of course, the MSCI FM Index, which has its own constituent universe.

8 Data from MSCI Barra, S&P Dow Jones, Business Monitor International, Bloomberg, LR Global 9 Data from MSCI Barra, S&P Dow Jones, Business Monitor International, Bloomberg, LR Global 10 The S&P Frontier BMI also removed these two countries in 2014, but not until September after both markets had fallen from their peaks at the end of May. Other weighting differences also influenced the variant returns.

11 S&P Frontier BMI inception is 10/31/2008 and the MSCI Frontier Markets Index inception was on 12/18/2007.

1 Some indices use free-float adjusted market capitalization weighting methodologies, which suffer from the same issues.

12 Sean Wilson, Brent Clayton, & Ha Ta (2014). “Risk in Frontier Markets: Overcoming the Misperceptions.” LR Global White Paper.

2 Leahy, Peter and Chris Pope. “Weighting the World.” April 1, 2000. URL: http://www. etf.com/publications/journalofindexes/joi-articles/1151.html

13 Berkshire Hathaway Annual Meeting 1994, URL: http://www.thebuffett.com, May 1994

3 As of June 2015, LR Global’s investable Frontier Markets stock universe included 56 different Frontier Markets countries not included in MSCI and S&P’s Emerging Mar43 i-invest July 2015

14 Cambridge Associates, “Hallmarks of Successful Active Equity Managers.” (2014) 15 Cremers and Petajist, “How Active is Your Fund Manager? A New Measure That Predicts Performance.” (2006)

i-invest

How Gamechangers Are Redefining The Wealth Management Industry In The New Digital Economy

By Christiana Vasiadou, Head of Fund Management, JFD Wealth and Anthony Lesoismier, Head of Financial Market Advisory, JFD Wealth

SURVIVING IN THE NEW DIGITAL ERA The emerging technology over the past decade has set the path to a new digital age, where coded information around us coupled with the internet of things, is beginning to revolutionise the way we function both in our personal and professional lives. Multiple technology trends, such as social media, mobility, analytics and cloud computing (SMAC) will set the platform through which organisations will be able to build new business models. These multiple digital sources are offering clients an array of information through which they will be able to make informed buying decisions. Businesses that will reshape their operating models around SMAC technologies, will have a clear competitive advantage.

This recent wave of digitalisation across industries also impacts distribution models.

Low entry barriers bring new competitors, revamping old distribution models and forcing financial service providers to reshape their strategies.

In the near future, the asset management industry will go through disruptive changes and transformation. In the past, as investors would visit a financial firm’s office in order to purchase financial products, the asset management industry heavily invested in technology to strengthen back-office support.

These days, however, it is moving towards enhancing front-end tools and adopting online, mobile and social media channels to promote products and brand awareness. While digital services can address clients’ needs in a more

convenient and efficient manner than that of traditional financial service providers, building trust is becoming an extremely significant and challenging task.

Asset management is at a turning point, challenging the status quo of the industry. Regulatory agenda (MiFID II in particular) as well as a shift in the investor base expectations and recent technological developments, are all factors contributing to the acceleration of the metamorphosis. Moreover, the change in demographics questions the balance of power within the asset management industry. At the global level, the middle class is projected to grow by 180 percent between 2010 and 2040 with the highest proportion currently living in Asia rather than Europe (according to a recent study by PwC), while more than one billion additional middle-class consumers will be emerging globally in the period from 2010 to 2020.

Furthermore, one of the consequences of the last financial crisis has been a wave of new regulations imposed on the asset management industry, aiming at increased investor protection. In particular, mass affluent investors have become increasingly cost-sensitive, due to negative experiences as well as lower portfolio returns. The number of mass affluent investors currently stands at 373 million and they are defined as the segment of investors owning a global wealth between 0.1 and 1.0 million US Dollars, according to the same source.

TECHNOLOGY, SOCIAL MEDIA, REGULATION & BEHAVIOURAL FINANCE AT CENTER STAGE 44 i-invest July 2015

Creating online, mobile and social media channels to promote products, brand awareness and trust is becoming mainstream in the industry. The increasing use of social media as a source to compare financial products and to register opinions on services, companies and products, is also changing the rules of the game. A recent report released by the Financial Conduct Authority (FCA) shows that 61 percent of investors in the UK want to connect with their advisors on social media and 87 percent of the investors surveyed have at least one social network account. The same study indicates that 46 percent of clients who do not already hold a social media account, would be more likely to start using these networks if they could communicate in real-time with their advisors through emailing or texting.

Evolving powerful, low-cost analytical tools and computer technology are extremely important for companies towards developing unique insights that can translate into superior, faster, smarter business decisions and engineering of innovative products with a competitive edge. Furthermore, new tools and communication channels enable them to analyse and handle customer relationship management (CRM) data more efficiently, providing brilliant insights about sales leads, with social media data becoming a crucial tool for delivering opinions on product offerings as well as customers’ investment profile, experience and expectations, and consequently unveiling new and innovative product ideas.

A new breed of global managers is emerging, with highly streamlined platforms, targeted solutions for clients that will help building stronger and more trusted branding.

i-invest

45 i-invest July 2015

i-invest

NEW CHALLENGES AHEAD IN A CONTINUOUSLY EVOLVING ENVIRONMENT The average investor profile is gradually changing and will even change more dramatically with baby boomer generation aging. At the same time, generation X (born from the early 1960s to the early 1980s) as well as generation Y (born in the 1980s to the early 1990s - the so called millennials - primarily the children of the baby boomers and perceived as increasingly familiar with digital and electronic technology) are assuming more significant roles in the global economy. Millennials represent the next big wave of investors that will be transforming client demographics as well as behaviours, and consequently investment expectations. In this new era of digital economy, it is important for wealth managers to offer investors transparency, simplicity, convenience, personalisation, product performance, cost and security, in order to gain their trust and loyalty, but in a very different manner from what they offered so far to baby boomers. Furthermore, they need to enhance brand awareness and develop new product ideas and models of distribution.

Moreover, wealth managers will also need to shift their focus with regards to addressing baby boomers’ needs; rather than dealing with accumulation of wealth as they have done so far, they will now have to assist these clients in managing their retirement lifestyles, as well as transferring their wealth to the younger generation.

Technological developments are radically altering the way people communicate and interact with each other and, as a consequence, the way people do business today. The distribution of investment products is being transformed with new technology, as interactions with advisors are becoming increasingly virtualised and computerised. Digital platforms represent a new private banking delivery model offering continuous, yet personalised service to clients with regards to their accounts, market insights and trading tools. The wealth management industry is moving toward strengthening front-end tools, for both advisors and end-clients, in order to create a new value-added offering, which provides clients with an online bridge to the market.

Furthermore, recent regulatory changes around investor protection are forcing asset managers and product developers as well as distributors to strengthen levels of transparency for end-customers. In order to survive in the industry, both groups need to adopt winning strategies and tactics.

Another challenge faced by wealth managers are fees earned, as they will continue to be under pressure amid the ongoing push for greater transparency and comparability from investors as well as scrutiny from policymakers. New regulations are focused on avoiding conflicts of interest for clients and asset man-

agers must clearly outline their value proposition to clients while being fully transparent over fees and costs.

THE INDUSTRY MUST REINVENT ITSELF IN ORDER TO EMBRACE FUTURE DISRUPTIVE CHANGES Generally speaking, the asset management industry needs to get closer to the end-investors to re-build trust, especially during times of financial crisis and thereafter. In light of restoring trust, the various social networks and internet service providers entering the asset management space will most probably have a key role to play.

In Europe, only 8.5 percent of household wealth is currently placed in investment funds, which would suggest a significant lack of knowledge in financial products, industry jargon and the latest market updates, based on a study prepared by Deloitte Luxemburg.

Consequently, industry players should understand that online publications, educational materials, and articles covering the most recent industry trends could play a central role in engaging clients’ attention and promoting brand visibility. Based on the same source, 41 percent of European household wealth is currently held in cash accounts, which offers very important upselling opportunities in a continuing low interest rates environment.

The new generation of digital natives will have a completely different approach towards their investments and retirement planning, to which asset managers will have to adapt.

Digitalisation does not only mean sending account statements electronically, on the contrary, it goes far beyond that. Millennials have a greater appetite for information, therefore standardised quarterly reporting will not be sufficient to satisfy their desire for minute-by-minute information. They also fully embrace digital solutions and demand multiple touch points, especially through fast increasing usage of mobile technologies in their daily life.

to financial products as well as insights and updates on market developments through creating investors’ support areas with audio/ visual learning material such as webinars and media centres.

Furthermore, customers are increasingly looking for a high degree of personalisation and tailoring of products and services. They expect solutions to be customised upon request, to meet their individual needs and habits through multiple channels, as well as simple products and services supported by user-friendly web and mobile based applications, all delivered with security that prevents electronic fraud.

The new breed of wealth managers will therefore need to continuously inform clients regarding existing products and solutions, as well as and show them how to combine them in a portfolio. Equally important, tailoring effective and profitable solutions to their specific needs will be key to maintaining their trust. In short, asset managers must create a positive social impact as well as deliver the message that they are a force for good to investors and policymakers.

In terms of transparency and comparability, clients are becoming increasingly proactive when it comes to a range of product offerings among different providers in order to find the most appropriate solution that fits their needs, demanding strong performance at an attractive cost. They look for a high degree of efficiency in financial services, products and operations, delivered with speed, convenience and ease. The biggest challenge for the next ten years will be how to manage the transition in the investor base between baby boomers and millennials in an efficient manner. The winners are likely to be specialist firms that attract both market segments and large scale asset managers/investment advisors by providing a full range of solutions.

WINNING STRATEGIES FOR WEALTH MANAGERS The increasing use of social media as a source of comparing financial products and registering clients’ opinions on companies, products and services, is also altering the rules of the game. Social media is steadily becoming part of the marketing strategy of asset management companies and financial advisors that aim to better understand their clients’ needs and fine tune their product offerings accordingly. Coupled with this, market analytics and cloud technologies are becoming fundamental tools in order to integrate insights coming from different structured and unstructured sources into marketing efforts and product development initiatives.

CONCLUSION Technology as well as shifts in investors’ behaviour will definitely pose significant challenges but at the same time they will present great opportunities, which will identify the winners and losers in the industry. In our view, those firms that will focus on smart business strategies, data informed decision making, transparency, cost efficiency, ubiquity and diversity through an open architecture in terms of their investment product offering, will emerge as the winners. Future leaders in the next decade and beyond, will build successful and trusted brands through reinventing their business and infrastructure by developing transparent and efficient investment platforms and acting with integrity towards their clients.

Innovative wealth managers engage and retain their clients by offering them easy access

Website: www.jfdwealth.com

46 i-invest July 2015

i-invest

47 i-invest July 2015

i-invest

48 i-invest July 2015

i-invest

Eight Reasons to Adopt a Centralized, Industry-Specific Multi-Asset Management System

By Jason Doring, Netage Solutions Marketing Content Manager

Alternative asset investment requires navigating highly specific regulations, obligations to stakeholders, and operational processes, but the keys to success are shared with any other business model. Successful, sustainable investment firms deliver return on investment and achieve solid reputations through exceptional organization, responsible cost management, and compelling communication with all stakeholders and clients. As the industry continues to grow, and its complexity fluctuates, vertical-specific technology that consolidates ongoing operations becomes an invaluable tool for facilitating long-term, intuitively adopted best practices to maintain continuity in your workflow.

Netage Solutions, a premier provider of Cloud-based CRM and online reporting software for alternative asset investment firms since 1998, has identified eight key reasons to streamline firm’s asset management by utilizing a single, industry-specific technology solution.

Minimize Manual Error: Daniel Rheault, Netage’s Director of Product Marketing, recently noted that general and limited partners too often rely on Excel to perform complex tasks such as ongoing portfolio management, performance reporting, capitals calls, and distributions. The problem with this approach, according to Rheault, is that “manual error is intrinsic to human nature…two extra digits [in a cell] create hundreds of millions/billions in financial discrepancies.” Guillaume

Fiastre, the CEO of portfolio analytics provider Taliance, echoes Rheault’s conclusion in a FinancialIT editorial, commenting that “spreadsheet-centric organisations are heavily dependent on highly-skilled employees.

But today, the level of complexity, the number of parameters to consider and the intricacy of global economies mean these deals can’t be managed solely by an individual.” Entrusting these tasks to an automated industry-specific system eliminates this potential for embarrassing – or even crippling – error, while expediting task completion.

Create a Culture of Accountability: Working within multiple spreadsheets and multiple systems creates the opportunity for data to be lost or mishandled within large email chains.

Fiastre states that, “It’s no longer enough that information is held in people’s heads and in thousands of spreadsheets; people leave the company and spreadsheets remain hidden or lost on hard drives. “Placing this information in a centralized system ensures that the proper data remains present and easily accessible.” CRM platforms can be used to assign specific documents and tasks to the relevant internal parties, driving efficient communication across the firm.

Integrate All of Your Data: Deloitte’s 2015 Alternative Investment Outlook emphasized that data gathering and organization has been a significant challenge for alternative asset investors and allocators, largely due to the data often being held across multiple systems. The report also states that “leading alternative asset managers were customizing reporting

49 i-invest July 2015

i-invest

50 i-invest July 2015

i-invest

based on client demand.” Centralized asset management solutions have taken significant steps in eliminating the need for data to be held across multiple systems. Leading third-party data providers such as PitchBook, Bloomberg, Preqin, and BarclayHedge should be directly integrated alongside performance data and proprietary information, empowering firms to deliver the customized reports associated with premier asset managers.

Build a Fluid, Targeted Communications Program: Firms with a large, engaged investor base deliver immense amounts of recurring reporting and correspondence, and these tasks occupy significant time that could be better devoted to higher-level portfolio analysis. Adopting a CRM system delivers the dual benefits of centralized contact information, and direct integration with Microsoft Office tools such as Outlook and Excel. Reports can be generated using the integrated data within the system, while specific contacts can be added to “Mailing Lists” to instantly deliver targeted reports to specific contacts through versatile Mail Merge functionality. Managing communications through a consolidated CRM system also saves monetary expense by eliminating the need for paper mailings.

Optimize Productivity through Configurability: When selecting a centralized asset management system, an industry-specific solution platform enables the software to evolve alongside the firm’s operations. “Customizable” systems, such as Salesforce or Microsoft Dynamics, are designed to be out-of-the-box, standardized products. Any customer-specific changes to the software have to be hard-coded, and these changes can be incompatible with later product updates and create significant challenges to the platform’s viability.

Industry-specific asset management systems should boast an open architecture and flexible configurability, empowering the customer to seamlessly update the platform and retain the needed presentation of all feature sets.

Optimize Compliance Projects: Regulations in the alternative asset industry are constantly evolving, and require ongoing, timely cooperation between fund managers and investors. Industry-specific centralized software providers integrate with online investor portals, and this integration empowers investors to directly post fund manager-required documentation online for instant storage and categorization within the CRM system.

Industry-specific asset management software providers are also offering dedicated modules that not only track the status of document collection for individual investors, but the continued validity of submitted documents.

ken integrations between applications are subject to malfunction when different vendors update their products. Vendors that provide a comprehensive solution deliver the same services at a cost comparable to one function-specific provider, and ensure data integration continuity amongst all modules and partners.

Consolidate User and Vendor Relationships: Firms that leverage multiple industry-specific technology solutions are subject to different problems than the firms that rely on Microsoft Office tools. Employing multiple software platforms for specific processes can inhibit productivity because new users need a longer amount of time to learn these disparate systems, as opposed to a single centralized solution. Onboarding and operations can also be constrained due to the need to work with multiple service representatives to train new users and troubleshoot support inquiries, who may be unfamiliar with the other platforms the firm is using. Firms leveraging a unified asset management platform benefit from a shorter learning curve for the firm’s operations, and a dedicated service representative with in-depth knowledge of the system.

Jason Doring is the Marketing Content Manager at Netage Solutions and is responsible for developing the strategy and execution of Netage’s digital marketing communications.

Netage Solutions, Inc. has been a leading provider of industry-specific relationship management software and online reporting systems for the alternative assets investment firms since 1998, including endowments, pensions, foundations, family offices, private equity and venture capital funds, real estate investment firms, hedge funds, funds of funds, and prime brokers. Intuitive and highly configurable, the Dynamo™ platform has improved the productivity of deal, research, and investor relationship teams worldwide.

Collectively, our 300+ clients manage over $1 trillion in assets.

All sales-related inquiries can be directed to +1 866.4.DYNAMO, or by completing the contact form at www.NetageSolutions.com.

Save on Expenses: The ongoing costs associated with maintaining licenses to multiple platforms typically add up to a larger cost than a single system, unnecessarily taxing your yearly expenses. Furthermore, bespo51 i-invest July 2015

i-invest

Presidium Capital Private capital as a stand-alone asset class is attracting the attention of sophisticated investors. As an asset class, it is often confused or lumped together with private equity or the much broader but uncertain general designation as an “alternative investment.” By alternative investment, do we mean venture capital, private equity, real estate, or structured notes--or are we speaking of something entirely differnt? For this reason, it is often misunderstood and subsequently underutilized by investors--but this is slowly changing. Recently, given equity valuations and market uncertainty, not to mention low fixed-income yields, it is becoming harder and harder to ignore the steady and robust income streams provided by private capital.

These returns, coupled with a low risk level, have led to high risk-adjusted returns.

While sophisticated investors and a few family offices have participated in the private capital space for years, the general thought has been to leave this lending space to the banks.

After all, assessing lending risk is their business. However, starting with the sub-prime debacle and continuing through to today, we have not only seen a tightening of lending standards but also a general exodus of banks from certain sectors of the business--such as lending to small business. This has caused a dearth of capital and has created an opportunity for alternative private lenders to enter the market. And given the amount of pain inflicted on many banks, not to mention the off balance sheet derivative exposure still remaining, banks are not likely to reenter the space any time soon.

The primary distinction of private capital from most alternative investments is that it is principally a debt instrument. Unlike private equity or venture capital where returns are conditioned on the growth in equity values, returns are primarily driven by the return on debt. In broad terms, the investor lends capital in return for a stated interest rate. The investor essentially becomes the banker. Often this type of investing broadly involves real estate lending, corporate credit, consumer finance and other debt based lending. In some cases, these investments involve direct loans, typically senior secured, with a stated interest rate and a claim on some form of underlying collateral; for example, the underlying real estate or a stream of cash flows. Real estate lending often includes bridge loans, mezzanine debt, discounted distressed purchases or other financing. Corporate credit involves

loan pool purchases, equipment leasing, receivables factoring and other corporate credit activities. Consumer lending may involve auto loans, peer- to-peer or small-business lending.

Over the past several years, with banks exiting the business, we have seen a rise in private lending companies, especially in the consumer finance space such as peer-to-peer consumer lending, small-business lending, automobile finance and other credit facilities. Recently these lending institutions have packaged and are selling their loans to underlying fund managers, who in turn are marketing their funds as a non-correlated asset class directly to individual and institutional investors. The appeal is that this asset class competes directly with the public equity and fixed-income markets and complements private equity and venture capital. Investors are looking at these investments to complement their private equity or to replace their longer dated fixed-income.

In addition, there are other benefits to private capital--the primary benefit being that the asset class is typically non-correlated or has a very low correlation to the public equity markets. Returns tend to be in the 8-15% range with standard deviations much lower in the 2-5% range, giving investors an equity-like return with low volatility. Investors are motivated additionally by the short lock-up periods associated with these investments--many under two years.

Other benefits include such things as the investment being backed by valuable collateral such as real estate, receivables or a stream of cash flows. Most of the notes are structured so that the investor has claim on a contractual stream of cash flows that are not subject to market movements. In some cases, the loans are paid back automatically through an ACH transfer between the borrower’s operating account and the lender (investor). In addition to collateral and a steady stream of cash flows, many of the investments self-liquidate so that cash is returned automatically and periodically, versus having to sell into the public markets to exit an investment. This forms the basis of a steady stream of income payments--something investors are searching for in the current market. These cash flows returns can either be levered or unlevered depending on the amount of risk one is willing to bear.

To give one example of the power of private capital as an asset class consider the following: one manager has creatively entered the secondary life insurance market and is buying from major insurers seasoned policies that the

52 i-invest July 2015

insured has let lapse for a variety of reasons: 1) they no longer need the insurance coverage given their higher net worth; 2) the estate does not need the tax benefit given the change in estate tax laws or 3) the insured simply cannot afford the policy anymore. In this scenario, the manager (and ultimately the investor entering the fund) is buying seasoned policies from 83-85 year olds paying above cash surrender value, so the current policy holder benefits (versus letting the policy lapse they receive a higher-than-value cash payment). In return, the fund collects the insurance upon death (the buyer/manager continues to pay the premiums and collects the death benefit at some point in the future). Given the current demographics of the baby boom generation, supply is outstripping demand, so the fund has the additional advantage of being able to be discriminating on the policies purchased.

The yield/return for this fund is somewhere in the 11-14% range with a very low standard deviation of 2-3% range--yielding a very high risk-adjusted return (as measured by the Sharp ratio in the 3-4% range).

The primary risk, which is well defined, is life expectancy. If the insured lives longer than expected, the IRR goes down on the investment. But given the sophistication of actuarial science, life expectancy is fairly well defined, especially among those in their mid eighties. This certainty of death, coupled with the ability to pick specific, seasoned policies and owning multiple policies/lives in the fund gives broad diversification. It also gives the investor predictability--something hard to achieve in the public equity markets.

This is just one example of how private capital can enhance and diversify an investors portfolio. As with any investment, this space requires significant due diligence as many opportunities will not have appropriate risk/ reward metrics. On balance though, and relative to other asset classes, private capital currently provides the cautious investor with favorable returns and mitigated risk. The merits of being a lender are pretty powerful and can enhance an investor’s portfolio.

Given equity market valuations and continued market uncertainty and the low yields found in short duration fixed-income, private capital becomes a valuable addition to a well-diversified portfolio. As one considers adding private equity to a portfolio or alternative investments, this type of investment can give a solid double-digit return with low, well defined risk and, if elected an annual income stream.

i-invest

53 i-invest July 2015

i-invest

Risk in Frontier Markets: Overcoming the Misperceptions Sean Wilson, CFA, Brent Clayton, CFA Ha Ta

54 i-invest July 2015

i-invest

How can an asset class of equities that includes the likes of Pakistan, Nigeria, and Vietnam possibly not be a highly risky investment proposition reserved for only those with the strongest of stomachs?

small capitalization stocks, each manager must take great care to balance portfolio liquidity with the level of assets under management.

The risk is a valid one where not properly addressed, but it is less of an asset class risk than a manager risk. We elaborate on our analysis of Frontier Markets liquidity below.

While asset allocators and investors have increasingly come to recognize Frontier Markets as a distinct and viable asset class from traditional Emerging Markets, their excitement is often tempered by a lingering perception that the asset class is “riskier” than Developed Markets or Emerging Markets. Indeed, it is rare to see commentators discuss the Frontier Markets opportunity except in the context of an enhanced risk tolerance.

According to a recent article in The Economist on Frontier Markets, “money is leaving emerging markets for riskier bets at the investment frontier.”1 Likewise, BlackRock’s Chief Investment Strategist recently described Frontier Markets as “traditionally the riskiest areas of the emerging world.”2 Such depictions of Frontier Markets are often met with nodding heads. If Emerging Markets are more risky than Developed Markets, it would seem logical that Frontier Markets, the next generation of developing markets, must, therefore, be riskier than Emerging Markets.

Utilizing the last ten years of data for primary indices in 80 countries, we examined risk across two key metrics: standard deviation and value at risk.3 For both metrics we found that Frontier Markets have actually been less risky as a group than Emerging Markets and have exhibited comparable or lower risk to Developed Markets. We acknowledge that individual Frontier Markets can be volatile just as individual Emerging Markets and individual Developed Markets can be. Investing 100% of one’s capital in a single country, whether Pakistan (a Frontier Market), Russia (an Emerging Market), or Portugal (a Developed Market) poses much higher risk than can be found in a geographically well-diversified portfolio. However, even if one were to construct a portfolio of 100% exposure to a single country’s primary index for each market category, the median Frontier Market’s single country portfolio would have displayed lower risk than that of the median Emerging Market country and comparable or lower risk to the median Developed Market. Whether looking at an aggregation of countries by market category as found in MSCI indices or looking at the median market in each market category, Frontier Markets have simply not shown the risk attributes that have been cavalierly projected onto them as a foregone conclusion.

We at LR Global, an asset manager with a 17-year history investing in Frontier Markets, have become long-accustomed to the biased commentary and sensationalist media coverage of these nascent markets. We assessed the validity of this claim using empirical data from country indices of 80 Developed, Emerging, and Frontier Markets over the last 10 years. Our analysis suggests that Frontier Markets are not only less risky than traditional Emerging Markets, but also less risky than Developed Markets over most periods. While it is natural to fear the unknown or unfamiliar, the prevailing perceptions about risk in equities in Frontier Markets appear to be unfounded.

Below we detail our examination of each measure of risk in turn. We also examine correlation coefficients as a key part of Frontier Markets’ lower risk profile as well as the risks that liquidity can pose to asset managers in Frontier Markets.

Risk, defined as the probability of loss of capital, can stem from a variety of sources. In the case of Frontier Markets, commonly perceived sources of additional risk are attributed to greater political instability, weaker corporate governance, unstable currencies, and an over-dependence on commodities. Based on these factors, the presumption is that Frontier Markets will lend themselves to greater market risk. As the below empirical analysis of common risk metrics suggests, such perceptions of increased market risk appear to be unsubstantiated.

Low liquidity is another risk often cited as a warning for investing in Frontier Markets.

While liquidity is clearly much lower for Frontier Markets than Emerging Markets or Developed Markets, we view this risk as lying primarily at the fund manager level no different than in any asset class. Whether investing in less liquid stocks in Frontier Markets or less liquid US 55 i-invest July 2015

Standard Deviation: We used the standard deviation of each market as our measure of volatility. Frontier Markets have a median annualized standard deviation of 25% over the past ten years—the same as Developed Markets and lower than the 29% for Emerging Markets. Individually, only four of the top ten riskiest markets in the world came from the Frontier Markets group, while eight of the ten least risky markets were Frontier Markets.4 For volatility over time, we constructed a time series of each country’s standard deviation of rolling three year weekly US dollar returns during the last ten years.5 Again, to calculate the category series we used the median of the constituent’s standard deviation. Frontier Markets were consistently less volatile than Emerging Markets and less volatile than Developed Markets six out of ten years.

Graph 1: see below This volatility profile is consistent when looking at the MSCI Frontier Markets, Emerging Markets and World indices. In the 10 years ending December 2013, the MSCI Frontier Markets Index has had a lower annualized volatility (at 17.2%) than the MSCI Emerging Markets Index (at 23.6%), and even slighter lower than MSCI’s Developed Markets index, the MSCI World Index (at 17.5%).6 This is even more impressive when considering the consequences of the MSCI Frontier Markets Index’s market capitalization-weighted structure, which results in a 52% weighting for the top three countries. These three countries, Kuwait, UAE, and Qatar happen to be some of the most developed and correlated frontier countries to each other within the Frontier Markets group. As two of these countries (UAE and Qatar) will soon join the ranks of the MSCI Emerging Market Index, we would expect the rebalanced MSCI

i-invest

Frontier Markets Index to experience lower correlation to the MSCI World Index given higher expected weightings to lower correlation markets (a large index weighting to Kuwait, notwithstanding).

Value at Risk: Admittedly, standard deviation is a not a perfect measure of risk in that stock market returns are not normally distributed, so we also calculated the value at risk, or VaR, of each market over the same ten-year period.7 Statistically, skewness and leptokurtosis are inherent in the distribution of historical stock market returns and impair the accuracy of the standard deviation. Perhaps Frontier Markets have fatter left-hand tails or their returns are more skewed to the left (in other words, when Frontier Markets decline, they decline by a greater degree or happen more frequently).

It is therefore statistically possible that this riskier characteristic is not being identified by the calculation of a standard deviation.

To address this, we calculated an annualized VaR, or what the worst annual loss would be for each market (with 95% confidence). For example, if a market’s VaR was -33%, then we could say with 95% confidence that the worst annual loss would not exceed -33%.

Conversely, it could be specified that 5% of the time, the annual market loss could exceed -33%. Obviously, a higher (i.e., less negative) value for VaR is more desirable.

Looking at the median annualized VaR of Frontier, Emerging and Developed Markets, we found similar results to our risk assessment using standard deviation. During the past ten years, Frontier Markets as a group have had a lower average annualized VaR than Developed and Emerging Markets. Individually, only three of the riskiest ten markets in the world were Frontier Markets, while nine of the ten least risky markets came from the Frontier Markets category.

The historical time series of VaR during the past ten years follows a pattern similar to our standard deviation analysis. Frontier Markets as a group had the least risky VaR of all groups except during 2006, 2007, and 2008 where it was slightly riskier than Developed Markets, but still not as risky as Emerging Markets.

Graph 2: see below This analysis is again confirmed when looking at the annualized VaR for the major MSCI indices for Frontier, Emerging, and Developed Markets. Over the same 10 year time-period, the MSCI Frontier Markets Index has had an annualized VaR of -27.0%, making it a less risky option than the MSCI Emerging Markets Index and the MSCI World Index at -38.5% and -28.5%, respectively. Despite the inherent structural flaws of the MSCI Frontier Markets Index due to its market capitalization weighting scheme (where approximately 50% of the index’s geographic exposure is in three Middle Eastern countries), it still shows that Frontier Markets have not been as risky as Emerging Markets or Developed Markets in terms of historical Value at Risk.

Correlations: Inquiries into standard deviation and VaR reveal that the perception of Frontier Market risk is more myth than reality, possibly a function of the collective fear of the unknown and less familiar. While some individual Frontier Markets were riskier than others (just as some individual Emerging Markets and Developed Markets countries were), given the lower correlation of Frontier Markets to each other and to more developed markets, portfolio risk can be reduced when multiple Frontier countries are invested in as a group.

Unlike Developed and Emerging Markets, Frontier Markets have a very low correlation to each other. The average correlation coefficient between Frontier Markets was a mere 0.20 over the last 10 years.8 Emerging and Developed Markets

had average correlation coefficients of 0.50 and 0.68, respectively. Similarly, the correlation of the average Frontier Market to the MSCI World Index (representing Developed Markets) was 0.30 compared to the average Emerging Market’s correlation of 0.62 to the MSCI World Index over this period. Even, when looking at the MSCI indices, Frontier Markets stand out with the MSCI Frontier Markets Index having a correlation of 0.45 to the MSCI World compared to a 0.86 correlation of the MSCI Emerging Markets Index to the MSCI World Index.9 Table 1: see right Liquidity Risk: Liquidity risk, or the inability to buy or sell without adversely moving security prices, is a real Frontier Markets risk that, if managed improperly, can substantially increase overall risk or reduce diversification benefits of the asset class.

The total USD average trailing 100-day daily traded value of all Frontier Markets is approximately $3.2 billion, which is a fraction of the $22 billion and $100 billion traded in Emerging and Developed Markets, respectively.10 To make matters worse, the bulk of the liquidity in Frontier Markets is concentrated in only a handful of markets. This is more apparent when looking at median traded daily values of the different market groups. The median traded value of Frontier Markets is only $2.1 million, which is one-hundredth the median value for Emerging Markets and less than one thousandth that of Developed Markets. More sobering is the relationship between liquidity and volatility; generally, the lower the liquidity available, the lower the volatility.

Intuitively this makes sense, as the less liquid markets have lower foreign participation and, therefore, are less exposed to the whims of foreign investors’ ephemeral risk appetites.

Those Frontier Markets with below average volatility relative to the 34 Frontier Markets in our study have a total daily traded value of just $400 million over the trailing three months to April 30th, 2014.

The lack of liquidity in the lower volatility Frontier Markets presents a challenge for investors who wish to exploit the lower volatility of the Frontier Markets asset class. The only way for a manager to exploit the lower volatility and related diversification benefits is to limit fund size and to adhere to strict portfolio liquidity policies. If the fund size is too large, the portfolio manager will either be prohibited from investing in the smaller, less correlated Frontier Markets, or take on enormous liquidity risk.

We have analyzed this dilemma by looking at the time it would take to liquidate a given portfolio in Frontier Markets and concluded that a portfolio greater than $600 million begins to erode the lower risk benefits of the asset class. We base this on a series of assumptions, as calculated in the following table:

56 i-invest July 2015

i-invest

57 i-invest July 2015

i-invest

Table 2: below

First, we set the maximum number of portfolio names at 60, as we feel that it represents the maximum number of companies a 2-4 person portfolio management team can research and monitor intimately. We use an average daily liquidity of the portfolio holdings of $500,000 over the trailing 3 months. This liquidity is small enough to allow for holdings in all of the Frontier Markets analyzed in our risk studies. Finally, we assumed that the portfolio could be liquidated in one calendar quarter using one-third of the average threemonth daily traded value of each position.

We encourage any asset allocator or investor considering an allocation or currently invested with a Frontier Markets fund manager to analyze the fund’s portfolio holdings in this manner. Given the temptation some managers have faced in aggregating assets beyond the capacity of the space, there may be hidden liquidity risks with some managers that only an outflow of capital will reveal. Having invested in Frontier Markets for 17 years, we at LR Global believe such ebbs and flows of capital are inevitable and, accordingly, monitor the stocks in our Frontier Markets investment universe where liquidity risks may be lurking by some of our peers who have amassed assets beyond the liquidity profile of their underlying portfolio positions. While it may be easy to build a position in a less liquid stock through negotiated blocks, it is precisely in those times when liquidity is needed most when such blocks dry up leading to trades at fire sale prices or increasingly large positions in illiquid names as capital leaves the fund.

Conclusion The purpose of our analysis was to address the misperceptions of risk in Frontier Markets. We hope that this paper will act as a catalyst in orienting investors to the actual risk characteristics of a global Frontier Markets equity allocation. Our study shows that Frontier Markets have not been as risky as commonly perceived. Individually, they have been less risky than Emerging Markets and even lower risk than Developed Markets over most periods. As an asset class, Frontier Markets have a distinct advantage due to their lack of correlation between each other.

We understand part of the hesitation some asset allocators and investors may have with Frontier Markets stems from a lack of familiarity to the eccentricities and challenges of

the asset class. While the market risk in investing in Frontier Markets may be lower than perceived, there are still some unique aspects to Frontier Markets that need to be considered when selecting a Frontier Markets manager. One must scrutinize closely how a manager balances the liquidity constraints of the asset class with overall fund size. The lower risk advantages of Frontier Markets erode quickly in portfolios that are excessively large or offer overly frequent redemption terms. Therefore, to fully exploit the lower risk characteristics of Frontier Markets, an investor should choose a manager who fully understands the risk characteristics of these markets, has a liquidity discipline, and caps the fund size at approximately $600 million.

Other challenges unique to Frontier Markets relate to how a manager handles the informational challenges of investing in such a diverse set of opaque markets, each driven by its own economic, political, regulatory, and market dynamics. The first-movers to Frontier Markets are not necessarily the household Wall Street names that have popped up with Frontier funds over the past 2-3 years. As a result, the Frontier Markets experience, infrastructure, and relationships of a manager may matter more than what might feel comfortable when selecting an Emerging or Developed Markets manager.

However, for those who come to understand the Frontier Markets space and all its nuances lies the Holy Grail of investing: a diverse set of lowly correlated markets, driven by secular growth trends that appear to still be in their earlier stages of development. While fund capacities of seasoned Frontier Markets fund managers still exist, now is the time to act.

1 “Frontier markets: Wedge beyond the edge”, The Economist, April 5 2014, Print.

2 Russ Koesterich, CFA, “Three Reasons Frontier & EM Equities Are Not Created Equal,” BlackRock The Blog, February 21, 2014. Available at: http://www.blackrockblog. com/2014/02/21/reasons-frontier-em-equities-created-equal/?utm_source=rss&utm_ medium=rss&utm_campaign=reasons-frontier-em-equities-created-equal&c=DW0&cmp=emaildigest&chn=EMC. 3 For a market to qualify in our study, it must currently trade at least $500,000 per day and have at least five years of history. The markets were grouped according to current S&P or MSCI classifications, with the more mature category awarded to countries where the two providers were not in agreement. Frontiers Markets not covered by either S&P or MSCI were included as long as they met the liquidity and historical data requirements. The study covered the greater of ten years or from when the market’s index history began to the end of 58 i-invest July 2015

December 2013. Only one market, Zimbabwe, did not have a full 10 years of return data, but had at least 5 years and sufficient liquidity.

There were 7 other markets that had 10 years of data, but not the additional full 3 years to calculate rolling 3-year figures. These markets included Serbia, Bahrain, Croatia, Dubai, Slovenia, Bangladesh and Ghana. These markets were excluded from calculations of medians where data was not available.

4 Market standard deviations were calculated by using weekly index US dollar logarithmic returns over the past 10 years to December 2013 per the above methodology. The standard deviation for each category (Developed, Emerging, and Frontier) was calculated by taking the median of each constituent’s standard deviation. These figures represent the average of 10 years of 3-year rolling periods. Using a simple annualized standard deviation over the 10 year period yields a very similar outcome with the median Frontier Market having an annualized standard deviation of 25.0% compared to the median Developed Market at 25.5% and the median Emerging Market at 29.5%.

5 As is common practice for such analyses, logarithmic returns were used since they are more normally distributed than simple returns. Regardless of whether logarithmic or simple returns are used, Frontier Markets remain less risky than Emerging and Developed Markets by these measures of risk.

6 Based on the average of 10 years of 3-year rolling periods. Using a simple annualized standard deviation over the 10 year period yields a very similar outcome with the MSCI Frontier Markets Index having an annualized standard deviation of 16.6% compared to the MSCI World Index at 18.1% and the MSCI Emerging Markets Index at 23.9%.

7 VaR is a more robust measure of risk than standard deviation. It measures the potential loss over a defined period of time for a given confidence interval. Unfortunately, there is no standard for calculating VaR and there are various methodologies. Some require making assumptions about future return distributions or running hypothetical Monte Carlo simulations. The aim of our analysis was not to derive and defend the most accurate calculation of VaR, but to apply our methodology consistently so that we can compare the relative differences among the markets and groups. For our analysis, we chose the historical method, which is the simplest method of calculating VaR. Similar to our standard deviation analysis, we used ten years (if available) of US dollar logarithmic weekly market returns and calculated a rolling three year weekly VaR for each country. The VaR of each country was calculated by averaging the rolling periods and the median of the constituent countries of each category was computed for the VaR of each category. The same methodology was applied to the calculation of VaR for the MSCI indices.

i-invest

8 Based on the trailing 10 years of weekly logarithmic USD returns to December 2013.

9 Due to its market capitalization weighting scheme, the MSCI indices tend to be constructed of the largest stocks in each market and, as a result, tend to have higher correlations to the MSCI World Index than do underlying country indices.

10 Based on LR Global research and estimates as of April 30th, 2014.

59 i-invest July 2015

i-invest

60 i-invest July 2015

i-invest

Post 2008: Why the Confusion About “Institutional-Quality”?

When fund managers discuss the topic of raising or retaining assets or investors share their requirements for investing, there is no prerequisite that comes up more often than whether a fund is deemed to be “institutional-quality.” “Given that there is universal agreement among fund managers and service providers alike that in order for a fund to grow, prosper and attract institutional investors a fund must meet the institutional quality litmus test, then why is it that what it means to be institutional quality is so misunderstood? And, why is there such a large disparity in the definition of what it takes to be institutional quality?”

In general, before the 2008 financial crisis, a fund could be considered institutional-quality by simply having good pedigree and brand name service providers, such as their administrator, prime broker and auditor. However, in the aftermath of the financial crisis, pedigree and brand name service providers alone are not enough to be deemed “institutional-quality.”

Most institutional investors have now materially enhanced their requirements and due diligence standards for what they consider to be institutional quality.

From our experience, institutional investors and allocators have started to focus greater attention on ascertaining whether or not a fund has sound, sustainable and repeatable risk and investment management. As part of this focus, they expect to see well-functioning operations and back office departments that have the appropriate systems and processes to support both the business aspects of the fund manager as well as the investment management operations of the fund manager.

Specifically, institutional investors are now putting the onus on funds to prove that they have effective processes, controls and governance. For example, in the most recent release of Alternative Investment Management Association’s (“AIMA’s”) newly updated Due Diligence Questionnaire, funds are required to demonstrate the “effectiveness of the investment manager’s controls and processes for managing and controlling market, liquidity and operational risk.” If a fund cannot demonstrate the “effectiveness” of their risk

management, your chances of receiving a check from investors becomes very low.

For the purposes of this piece, I will focus largely on demystifying what it means to be institutional quality with regards to risk management in the post 2008 environment.

Impact from Regulations on the “New” Institutional Quality The “new” definition for institutional quality has been significantly shaped by the spate of new regulations and reporting requirements passed in the aftermath of the financial crisis.

For example, regulatory reporting requirements for alternative investment funds such as Form PF, CPO/PQR and Annex IV, have had a tremendous impact on the breadth and depth of transparency many funds now feel obliged to report to provide institutional quality risk transparency. Furthermore, regulations, such as AIFMD, have raised the bar for what qualifies as institutional quality risk management.

For example, to be in compliance with AIFMD, funds must be able to demonstrate that their risk management function is truly substantive and goes beyond window dressing risk measurement. Specifically, the Directive requires that the fund manager have an independent and permanent risk management function. In addition, the fund manager must have in place well functioning processes, controls and governance for risk measurement, risk monitoring and risk management. They are required to have comprehensive and documented risk management policies that governs the firm and, should there be any mate-

61 i-invest July 2015

i-invest i-invest

62 i-invest July 2015

i-invest

rial changes to their risk management policy or risk measurement and management processes, the manager is then required to notify the national regulator. Lastly, and significantly, under the AIFMD Directive, funds are required to have an independent and periodic review of the risk management function.

Key Elements for Institutional Quality Risk Management Today, in order to pass institutional quality muster with both investors and regulators requires a fund to have in place a sound risk management framework that includes some of the following key elements with regards to infrastructure, processes, controls and governance for risk management: • Risk Management Governance: as part of good governance, a fund manager should have a formal Risk Management Committee that is responsible for setting risk management policies and procedures and overseeing the regular reporting of investment risks and escalation of issues, should there be a breach in risk management policies.

• Risk Management Processes and Controls: it is expected that a fund manager have comprehensive and documented risk management policies and procedures for governing its funds. In addition, the fund manager should have in place risk limit guidelines that are appropriate to the underlying risk factors in the portfolio and that are being measured and monitored.

• Risk Measurement, Monitoring and Reporting/Transparency: given that most funds must now report a number of key risk statistics to both regulators and investors on a periodic basis, fund managers would be wise to ensure that the risk information that they convey externally is an accurate portrayal of their risk profile.

Otherwise, funds have significant regulatory and legal risk if their risk profile is not accurate and/or consistent with the representations in fund disclosure such as PPMs or marketing documents. Funds should not confuse simple statistics that are “slices and dices” of long, short, gross and net exposure that they obtain from portfolio management systems or OMS software as being risk metrics or sufficient for regulatory, investor or internal risk monitoring and reporting.

to measure, monitor and manage all major investment risks such as market, credit and liquidity risk.

Why be Institutional Quality for Risk Management?

The climate for attracting and retaining assets continues to be extremely competitive and arguably more difficult than ever before because investors have many funds to choose from and have become more informed and better able to due diligence managers. These new institutional quality requirements might at first blush seem onerous to fund managers. However, in the long run, being institutional-quality will help funds have better “shelf attractiveness” and longevity. Ultimately, it will further legitimize the alternative asset managers and the asset class as a whole. Therefore, we strongly believe and recommend that it is clearly in every fund manager’s best interest to fully meet, if not exceed, the “new institutional quality standards,” especially with regards to risk management if they hope to attract and retain capital from institutional investors in the new post 2008 environment.

About the Author: Samuel K. Won is the Founder and Managing Director of Global Risk Management Advisors, Inc., the leading independent risk management advisory and implementation firm that provides institutional-quality risk management services to asset managers and institutional investors. He has over 25 years of experience in risk analysis and reporting, risk infrastructure implementation, risk strategy, capital markets, trading and portfolio management at major global financial institutions, asset management firms and the government.

He has advised major hedge funds, private equity funds, other asset managers, institutional investors and regulatory agencies, such as the SEC, CFTC, the Federal Reserve Bank, the OCC, FHLB and the FCA, on major risk management, trading and capital markets issues and policies.

• Risk Management Infrastructure: a fund manager must have qualified and experienced in-house risk management staff or, alternatively, have external risk management assistance from qualified experts to fully execute the risk management function. The risk team must have the means

63 i-invest July 2015

i-invest

Langham Hall AIFMD Support for Fundraising in Europe

by Non-EU based funds 64 i-invest July 2015

i-invest

Rachael Lyon, Head of depositary at Langham Hall discusses the difficulties facing Non-EU funds marketing to Europe.

The beginning of 2015 has seen a number of international fund managers come to the European market from as far afield as Asia and the US. Those fund managers who have decided to tackle AIFMD head on are getting to grips with what needs to be done before they can market to Europe. Non-EU funds, marketed by non-EU managers, are still in a blackout period where they are excluded from applying for a cross border marketing licence in Europe. Instead they have to apply separately to each country where they hope to secure investors. Known as the private placement regime each country has its own rules which increases the amount of work involved.

Two countries where there are extra steps to obtain licences are Denmark and Germany.

Regulators there have decided that, unlike the rest of Europe, non-EU managers of alternative investment funds (AIFs) need to appoint a depositary before starting marketing in these countries. However, this is most likely a short-term difference. Within the next 12 months it is expected that, if a non-EU fund manager is allowed to apply for an EU-wide passport, then having a depositary is likely to be needed before marketing to investors in the rest of Europe as well.

A depositary performs certain functions designed to protect investors, including monitoring cash flows of a fund, verifying if a fund actually owns a named asset and monitoring the fund manager and fund to ensure it is running in accordance with key documentation and in the way in which it was sold to investors. It is not a custodian role but very much a lighter touch monitoring role.

Given that there is significant available capital outside Europe, it is easy to see why nonEU fund managers might ignore countries within Europe. Many of them view an overall commitment of less than 5% to Denmark and Germany as not worth the effort or the cost to existing investors. In many cases they are right, however if a fund manager genuinely thinks there is an opportunity it is difficult to ignore the prospect accessing new capital.

For those deciding to market to Germany or Denmark, the timing of these applications needs to be thought through carefully. Recently, one firm launching a non-EU fund wanted to target European investors, but was under enormous pressure to start and complete fundraising quickly. Having registered in various European countries under the normal private placement regime the

placement agent pushed hard to target German and Danish investors, traditionally major investors into private funds. However, the problem faced by the fund manager was the time required for Denmark and Germany’s regulators to approve an application. This can take up to 8 to 12 weeks to determine and the regulators insist on seeing a depositary agreement at the time the application is submitted.

The fund manager considered reverse solicitation but the perception within the market was that this is becoming rarer because the German regulator is apparently monitoring German LPs’ commitments to funds.

To delay Danish and German LPs to a second close is unfair as this excludes them from preferential first close terms offered to domestic investors. The only way to side step this and allow everybody an opportunity to secure incentives for coming into a fund early is to run the marketing applications and depositary selection process right at the beginning.

On the face of it, this doesn’t sounds too difficult; however, the global market is not used to providing this service at the required cost and in a light touch way. A fund manager might consider appointing a bank that can act as a depositary. However, banks often have a rigid way of dealing with the funds which seek their services due to them having up to US$1tr or more liquid assets in custody and therefore not wanting to introduce a less expensive and more flexible business model. As such banks’ processes can be intrusive, perhaps insisting on pre-approval of investment transactions, or being unable to accept information after the event – this is not unexpected when most of a bank’s assets are held in custody.

One can understand that this is not attractive to non-EU firms that have to move very quickly to complete a deal. This is why some are now talking to the small number of fund administrators who provide these services to explore a more user-friendly way of working.

Langham Hall is one such depositary; from London it provides services to private equity and real estate fund managers both in Europe and more recently outside Europe for Cayman or Delaware funds or “non-EU AIFs” as they are known. It operates quietly behind the scenes and provides a non-intrusive monitoring role which uses the fund managers’ existing procedures and internally generated information. Managers have been reassured that, once over the initial set up of securing their marketing licences and appointing 65 i-invest July 2015

depositaries, the ongoing operation has not been as time consuming as anticipated.

It appears that the non-EU market has moved forward significantly in the past 12 months towards accepting the proposed changes to doing business in Europe. Once up and running, Annex IV reporting for each of the countries they register in is another area where fund managers will need assistance. It will be of no surprise that the formats differ from country to country; it has been a sharp learning curve for the whole industry.

It may be that the decision is not just about whether or not to pitch to Denmark and Germany but whether to pitch to Europe, as it is likely the rest of the market will go in that direction. Even non depositary requirement countries are asking if funds have depositaries in place. It is still possible to defer the need to comply but ultimately the need to embrace it feels somewhat inevitable.

Langham Hall would be delighted to explore your options for future or existing AIFMD requirements. For more information or an informal discussion, please do not hesitate to contact: Rachael Lyon Head of depositary Langham Hall UK Depositary LLP t: +44 20 3597 7934 e: rachael.lyon@langhamhall.com Further details on Langham Hall Group can be found on our website, www.langhamhall. com

i-invest

Active Engagement…

A cursory glance through a selection of headlines from recent months, and it’s clear that the “active versus passive” battle continues to rage unabated across the landscape of the UK investment industry.

2014 witnessed record advances in terms of new fund flows for passive investments while proving to be the site of many a bruising encounter for active managers globally. This was evident most notably in the hard-fought territory of the US equity market, where relative returns were amongst the worst for many years, putting pressure upon an active camp already under siege in many quarters.

Putting to one side the military metaphors that so often accompany this polarising topic, a number of active managers cite mitigating factors that they believe have recently skewed the figures in favour of the passive argument. Indeed, their rebuttal has sought to undermine what is seen as an ‘overly-simplistic’ claim by some indexing proponents that with the ‘average’ actively managed fund underperforming its benchmark after fees, ‘the only way is passive’. These factors include the impact on stock correlations and bond yields of the various quantitative easing (QE) programmes that have been implemented, with effective stock-picking a difficult discipline to follow while the monetary tide continues to lift all boats. Also highlighted is the perceived drag on headline sector performance figures caused by the inclusion of ‘closet trackers’ in any analysis of the active space, a distortive influence accused of blurring the true merits (and performance) of genuinely active managers.

Elsewhere, the argument has also been made that there are many passive funds that have deviated considerably from the returns of their chosen index, so much so that they have themselves significantly underperformed the oft-criticised ‘average’ active UK equity manager. This may be the result of a number of factors: eye-wateringly high charges, for instance, or a poor implementation of index changes or individual corporate actions.

What is therefore viewed as a panacea, in simply capturing market returns without the fear of significant deviation has, it is claimed, often proved to be anything but.

With this in mind, what conclusions can be drawn by investment managers? Certainly, each of these points has relevance, though fails to shine a light across the whole pic-

ture. Of course, not every manager has underperformed simply due to high stock correlations, with a host of other considerations influential in dragging down returns the wrong side of the benchmark for managers.

Not least amongst these remains the thorny issue of cost, to which there continues to be an ever-increasing focus. At the same time, not every manager with a high Active Share (a measure of the degree to which a manager’s portfolio differs from its benchmark index) has generated significant alpha. And finally, there are passive funds that have done exactly what is expected of them, tracking their index consistently, at a reasonable cost and in an efficient manner, with an increasingly large array of choice enabling greater granularity in one’s allocation. The reality, as always, is more complicated than the headlines would suggest.

With this argument raging on, our view remains unchanged – to seek to drown out the noisy clash of pens and focus on the nuances of this subject that can often be overlooked.

Our approach to portfolio construction is a simple one, with no magic bullet and no substitute for hard work. Through the application of a well-resourced research process, performance is sought at both the asset allocation and fund selection levels, with the belief that portfolio returns can be enhanced by intelligent rebalancing to exploit opportunities and anomalies when they arise.

Through extensive due diligence and ongoing analysis, we also believe it is possible to identify active managers that can outperform over the longer-term, with a concurrent acknowledgement that, as was apparent last year, this will not always be the case. And while metrics such as Active Share may prove useful, they form just one part of the toolbox used to fashion the building blocks of a fundof-funds portfolio, with each constituent ultimately chosen to reflect the investment view that we are seeking to express. It is for this reason that our portfolios, quite rightly we feel, have for many years also incorporated passive investments where deemed appropriate – at different times, across different asset classes and in differing quantities.

While the active versus passive debate will continue to rumble on, our role as custodians 66 i-invest July 2015

of clients’ wealth is to remain unblinkered in our analysis of investment opportunities, irrespective of which camp they fall within. Short term victories will occur on both sides, but both can be exploited by the open-minded investor. Pragmatism, scepticism and considered thinking, while they may not win every battle, are in our opinion central to being victorious in the long run.

Simon Doherty – Quilter Cheviot Investment Manager Quilter Cheviot has built a strong reputation over several hundred years as a respected firm of investment managers. We are fast becoming one of the largest providers of bespoke investment management with more than £17.2 billion of assets under management as at 30 June 2015 and over 160 investment managers based across the UK, Jersey and Ireland.

Quilter Cheviot focuses on structuring and managing bespoke portfolios for private clients, professional intermediaries, charities, trusts and pension funds. Throughout our history, our standards and values have remained consistent.

Our impartial approach, high standards in personal service, drive to build and preserve the wealth of our clients and belief in the importance of a robust investment and underlying processes have remained unchanged.

The investment professionals on Quilter Cheviot’s teams have worked together for many years and bring a variety of strengths to our collective investment process. We believe that this differentiates us from many of our competitors who adopt a centralised investment model, drawing on a limited number of opinions and views to create their investment strategies. The standards we have set have been recognised with the award of a Defaqto 5 star rating for our Discretionary Portfolio Service (DPS) and Managed Portfolio Service (MPS) in 2012, 2013, 2014 and 2015.

Quilter Cheviot Limited is registered in England with number 01923571, registered office at One Kingsway, London, WC2B 6AN. Quilter Cheviot Limited is a member of the London Stock Exchange and authorised and regulated by the UK Financial Conduct Authority.

i-invest

67 i-invest July 2015

i-invest

Higher Multiples and More “Shadow Banking” Rising Valuations Many private equity asset managers would agree that 2015 has started off strong. Even with the rising valuations, deal closings and fund raising has had great momentum and is poised to continue during the second half of the year. There has been tremendous growth in the debt markets as well.

As private equity sponsors close more deals, they are knocking on lenders’ doors to provide debt (now comprising 60% of purchase price, on average). Traditionally this debt market has been dominated by the largest banks.

The market is estimated to be in excess of $850 billion with the banks controlling over 95% of it, according to Business Insider. The other 5% and growing share is being controlled by non-bank lenders, including private credit funds, Business Development Companies (BDC), hedge funds, and financing companies.

Unlike the private equity funds and nonbank lenders, if you poll US commercial banks about how 2015 started off, you will likely hear a different tune. As they dominate the leverage loan market, the banks are the main focus of regulators working to limit excess risk. The Federal Reserve and US Treasury Department have guided banks to keep these loans less than 6x leverage. As a result banks have been significantly scaling down the amount of leverage, and in many cases have lost their competitive edge working with private equity sponsors. However, the demand from sponsors is still high, allowing much smaller non-bank lenders to swoop into the leveraged loan market. Most of these non-bank lenders do not fall under the same guidelines as the banks and face less regulatory restrictions.

Capital With growing demand from Limited Partners (LPs) to put capital to work, they are actively providing additional capital to performing funds. This supply has fueled a cycle of increasing valuations and deal activity. While many banks are either not able or willing to support the leverage demands for these deals, the deal activity for the non-bank lenders has proportionally grown. Even at significantly higher interest rates, the non-bank lenders are adding to their loan portfolios due to

their willingness to act very quickly and take on more risk.

Creativity While the asset managers (both equity and debt) are well funded and anxious to write checks, the supply of deals is not proportionally as strong. Due to this mismatch, other strategies have grown including co-investments and secondary purchases. Many funds are working side-by-side, rather than directly competing, to put capital to work. A few of the reason these strategies have been attractive are: 1. Ability for smaller funds to compete for larger deals by pooling their capital from the start or selling off chunks of the deal after the fact 2. Diversification of risk by spreading capital to a larger portfolio of investments 3. Providing LPs an opportunity to directly invest and hopefully entice them to commit more capital during the next fund raise 4. Create liquidity for other investments prior to next fund raise Complexity With the strong growth and increasing deal complexity, how are funds coping with this changing environment? From a business perspective, this growth is welcomed with open arms! The increased complexity, on the other hand, has caused the general partners, limited partners, Board of Directors (BOD) and auditors to be cautious of the risks associated, and the potential for increasing regulatory oversight from the Securities and Exchange Commission (SEC). While asset managers do not have the same regulatory oversight as banks, many agree that there will be an increase in oversight in the future. With that in mind, many asset managers have been expanding compliance and finance infrastructures to handle growth, effectively manage risk and facilitate any external reviews. The recent news that a large part of the Q2 hires by Goldman Sachs were in compliance roles is an example.

Valuation Among the topics the SEC focuses on with asset managers, major ones include leverage, valuation, cost allocation, and cyber security.

As an independent valuation firm working with many of the largest funds in the world, we are seeing firsthand how some of these topics are taking shape, especially valuation.

68 i-invest July 2015

It’s no secret there is more pressure for transparent and accurate accounting. Quickly disappearing are the days when illiquid investments would be held on the books at original cost. These days many assets must be reported accurately at fair value.

Historically, most of our clients would ask us for valuation support when it came to post-acquisition accounting (PPA), impairment testing, solvency and fairness opinions, and tax reporting. However, over the last decade we have seen a rise in the request for portfolio valuations. This is a process where an external valuation firm determines fair value for the assets, generally illiquid, which an asset manager has invested in. Initially we saw the demand with debt vehicles, as credit funds, financing companies and BDCs grew, the demand for portfolio valuations also grew. More recently however, we are seeing the request for portfolio valuations from many private equity and hedge funds as well. In addition to the valuation reports and support we provide, many clients have requested us to meet with their BOD’s valuation committee to discuss the valuations more frequently.

The market has created many new opportunities for asset managers and capital is not of short supply. However, the wounds from the Great Recession are still fresh and prudent management of risk and reporting is more important than ever.

i-invest

69 i-invest July 2015

i-invest

ESGs Define Responsible Investing Many firms which advertise their services as responsible investors do so by highlighting their analysis of Environmental, Social, and Governance factors.

ESGs, which take into account far reaching variants including corruption and political issues, are fast becoming a byword for responsible investing as firms use them to show their responsible approach to investing.

AXA states that: ‘Our Responsible Investment team conducts ESG research that informs investment decision-making and active stewardship practices in order to increase our clients’ long-term financial returns and ESG performance—such as reduced CO2 emissions or improved human capital management.’

The global investment institution’s deliberate focus on their ESG research when defining the approach of their responsible investment group shows how important these factors are to responsible investing.

ESGs work by analysing these various factors which are not financial, such as ethical, governmental and sustainable issues around a company to determine their corporate behaviour and allow investors to make informed decisions about the firm’s future performance. They can also be used to determine credit ratings, with investors using these factors to see whether a firm will have any external influences on their credit worthiness in the future.

Companies engaging in responsible investing often avoid sectors where there is a negative social impact, for example fossil fuels, which does shut them out of certain markets, but ultimately the use of ESGs in investing can enable finical institutions and fund managers to ensure the continued success of their portfolios.

Mercer also defines its responsible investments around ESGs. ‘Responsible Investment (RI) integrates environmental, social, and corporate governance (ESG) risks and opportunities, along with the exercise of active ownership (voting and engagement), given these can have a material impact on long-term risks and returns.’

Responsible investment has become a fashionable faction in investment services following decades of banking and financial scandals and an increase in customer awareness about various factors, including the environment.

The advent of the internet has allowed customers greater access to information, exposing them to more information about situations around the world.

70 i-invest July 2015

i-invest

71 i-invest July 2015

i-invest

ESGs Key to Fixed Income Investments PRIs guide to ESGs shows that they are vital tools for fixed income investors.

The guide, originally published in 2014, offers a key insight into fixed income investments with the main analysis focusing on ESGs and their impact on the market.

The study shows that an analysis of Environmental, Social and Governance (ESG) issues such as corruption and climate change should be considered as a natural fit for fixed income investors as it can help to manage risk and identify credit strength.

The report was published as a guide for fixed income investment managers and their clients on how to incorporate ESG into their investment strategies to gain the available information advantage. It was based on interviews with major fixed income investors and support from an investor working group.

Fiona Reynolds, managing director of PRI, stated that despite the increase in awareness about ESG in recent years, there was still ignorance on the subject.

‘We have seen considerable interest in incorporating ESG into fixed income investment decision making. The process has highlighted how ESG factors manifest themselves as material risks. But there remain challenges such as bondholders being relatively unfamiliar with engaging issuers on ESG matters.’

ESG factors are also incorporated into establishing credit ratings by analysing various external factors to an investment to determine whether that investment is at potential risk. Jens Wilhelm, Member of the Executive Board of Union Investment who co-sponsored the report, highlighted this in his statement on the findings.

There are numerous contributors to the guide, which includes two sponsors; KfW Bankengruppe and Union Investment, as well as BlueBay Asset Management, Crédit Agricole CIB, Deutsche Asset & Wealth Management, Zurich Insurance Group and Rathbone Investment Management. The report explores a range of issuer types, such as governments, corporations and financial institutions, and touches on different (listed and private) instruments, including asset-backed securities.

‘Analysing traditional key performance indicators is no longer enough for determining issuers’ creditworthiness. Considering ESG factors helps us make a more comprehensive assessment of the investment merits of an issuer.’

ESG is also cited in the report as a vital tool for responsible investments, with ESG factors being used to ensure the long-term health and stability of the market by pointing investors towards the most sustainable investment options.

‘As a responsible investor we have already implemented key approaches outlined in this guidance document within our own portfolio. Now, our goal is to foster discussions that will help the PRI establish best practices and set standards for responsible investment across the industry.’

Dr.Günther Bräunig, Member of the Executive Board of KfW Bankengruppe, the report’s other co-sponsor, added that ESG had far reaching implications for the investment environment.

72 i-invest July 2015

i-invest

73 i-invest July 2015

i-invest

74 i-invest July 2015

i-invest

Budget Boosts Crowds The announcement of the Innovative Finance ISA in this years’ budget offers potential for peer to peer funding firms and extending this to crowd funding will offer significant benefits.

The new ISA, due to be fully launched in 2016, offers tax breaks for peer to peer lenders to businesses.

Peer to peer lending has become popular in recent years, as has crowd funding, where various people chip in to help fund projects.

Although crowd funding has often been the remit of students trying to fund their directorial debut, in recent years it has encroached further and further into the business market.

Stuart Lunn, CEO Edinburgh-based peerto-business crowd lending platform LendingCrowd welcomes the introduction of the Innovative Finance ISA.

Karen Kerrigan, Legal and Financial Director at Seedrs, the largest crowdfunding platform in Europe to focus solely on equity investments, says that the Chancellor needs to involve firms in negotiations about what businesses will be eligible to use the ISA. ‘It is encouraging that the UK Government is supporting individual choice to invest in non-traditional financial products, by introducing the Innovate Finance ISA. We look forward to participating in the consultation of whether equity crowdfunding will be eligible for inclusion in this ISA alongside its peerto-peer cousins.’

‘The Chancellor’s plans to introduce the Innovative Finance ISA next year indicates just how rapidly the alternative finance market is evolving. From 6 April 2016 the Innovative Finance ISA will allow people to invest their annual ISA allowance through peer-to-peer platforms without being taxed on any interest they may earn. At a stroke, this budget announcement opens up this retail investment product to the mass market by offering ISA investors more choice while also providing British businesses with greater access to funding. This is good news for the peer-tobusiness crowdlending sector of the market.’

75 i-invest July 2015

i-invest

76 i-invest July 2015

i-invest

ClearBridge Sustainability Leaders Fund The global investment manager has announced the launch of their first ClearBridge ESG equity strategy to be offered in a mutual fund format.

The firm, which is a leader in Environmental, Social and Governance investment, launched the fund in April of this year to appeal to customers with specialist needs in this area of investment.

The ClearBridge Sustainability Leaders Fund takes a multi-cap approach that seeks financially attractive companies with demonstrated ESG leadership, as well as emerging opportunities. Reflecting ClearBridge’s position on the forefront of ESG investing and commitment to long-term results through active management, the fund aims to provide a comprehensive view of sustainability, without relying on exclusionary screens.

Terrence Murphy, Chief Executive Officer of ClearBridge Investments, stated that the new fund was a useful addition to the firm’s fund portfolio and a vital product for customers.

‘The ClearBridge Sustainability Leaders Fund actively looks for companies with quality attributes that can positively impact future shareholder value. More investors each day are coming to believe that focusing on ESG principles can help deliver attractive, risk-adjusted performance over the long term. We’re excited to offer shareholders a vehicle to invest in this discipline.’

Derek Deutsch, have 35 years of combined experience in ESG and U.S. equity investing. McQuillen stated that the new fund was a sign of the company’s commitment to the ESG market.

‘Both Derek and I are very proud to launch the ClearBridge Sustainability Leaders Fund.

We take ESG principles seriously. It is not merely a screen or an overlay; it is part of how we conduct fundamental research on all of the stocks we consider and it defines how we think about all companies considered for investment in all client portfolios.’

ClearBridge is a signatory to the Principles of Responsible Investing (“PRI”), which is an investor initiative in partnership with the UNEP Finance Initiative and the UN Global Compact. ClearBridge’s ESG Program applies ESG integration, active company engagement and shareholder advocacy to its investment strategy. The firm’s proprietary ESG evaluation process is integrated into stock selection as part of a bottom-up approach to investing that seeks “best-in-class” or emerging names within each industry.

ClearBridge has a legacy of specialized ESG expertise dating back to 1987 and is considered a pioneer in the space. The fund’s co-managers, Mary Jane McQuillen and 77 i-invest July 2015

i-invest

From Alternative to Mainstream New Survey by Towers Watson shows total global alternative assets under management hit $6.3 trillion.

The Top 100 alternative investment managers around the globe managed $3.5 trillion in total in 2014, according to a new report by Towers Watson.

The Global Alternatives Survey, which covers nine asset classes and seven investor types, shows that of the Top 100 alternative investment managers, real estate managers have the largest share of assets (33% and over $1 trillion), followed by hedge funds (23% and $791bn), private equity fund managers (22% and $767bn), private equity funds of funds (10% and $342bn), funds of hedge funds (5% and $214bn), infrastructure (4%) and illiquid credit (3%).

‘Institutional investors continue to plough billions of dollars annually into investment opportunities other than bonds and equities, which are now increasingly seen as ‘bread and butter’ assets, rather than alternative assets. At the same time, lines are blurring between individual ‘asset classes’ within this group, as investors focus more on underlying return drivers rather than ‘asset classes’.

While we believe that many asset managers in this area will continue to attract capital, those that acknowledge this increasing sophistication of institutional buyers’ approach, and change accordingly, will truly flourish.’

The research also lists the top-ranked managers, by assets under management, in each area. Data from the broader survey (all 623 entries) shows that total global alternative AuM is now $6.3 trillion ($5.7 trillion in 2013) and is split between the asset classes in broadly similar proportions to the Top 100 alternative investment managers, with the exception of real estate, which falls to 23%, and hedge funds which increases to 27% of the total.

Luba Nikulina, global head of investment manager research at Towers Watson, highlighted that altering their approach to the market could have a big effect on investors.

78 i-invest July 2015

i-invest

79 i-invest July 2015

i-invest

Goldman Sachs Enhances Investment in ESGs with Imprint Takeover Goldman Sachs Asset Management has announced their acquisition of Imprint Capital, a leading institutional impact investing firm specialising in environmental, social, and effective governance.

The acquisition will strengthen the banking firm’s ability to deliver market-leading ESG and impact investment opportunities, advice and portfolio analytics to clients.

Imprint is an internationally renowned impact investing firm which operates a team of investors collectively brings decades of ESG and impact investing experience across public and private markets on a global basis.

The partnership enables both companies to offer a uniquely comprehensive set of services, products, and solutions – across both ESG and impact – to a growing group of clients globally.

As part of this transaction, the Imprint team will join GSAM, with no relocation of the company planned, with Imprint continuing to be based in San Francisco and maintain a presence in New York. Subject to certain conditions, the transaction is expected to close in the next few months.

John Goldstein and Taylor Jordan, co-founders of Imprint, believe that the takeover could considerably raise their firm’s profile.

‘We are pleased to be joining Goldman Sachs Asset Management. Their commitment to ESG investing, global reach, and strong investment and risk management culture will be valued by our clients and are a natural fit with how we work with investors today. Impact investing is a key area of innovation that is moving from being a niche area of the market to a core approach on a total portfolio basis. Combining our expertise with GSAM’s broader investment and risk management resources we believe makes for a market leading offering.’

Endowed private foundations have been an important part of Imprint’s client group, which will extend to Goldman Sachs once the takeover is complete, allowing the banking firm to expand their customer base, with institutional and individual investors currently their asset management arm’s key clients.

Key clients of Imprint include W.K. Kellogg Foundation. Joel Wittenberg, Chief investment officer of the foundation, testified that Imprint had provided them with a reliable service.

‘Imprint has been a trusted partner to the Kellogg Foundation since inception of the Foundation’s $100 million mission investment program. We anticipate the acquisition will prove valuable to our work on behalf of vulnerable children and those who seek change through targeted impact investments.’

Kate Wolford, President of the $2 billion Minneapolis-based McKnight Foundation, added her testimonial of Impact’s good service.

‘Imprint has been a great partner for McKnight with our impact investing initiative, and we are excited to see this support for the firm’s growth. We hope the acquisition will accelerate activity among families and institutions to use growing portions of their portfolios to drive social and environmental impact.’

The move will open up a relatively new market to Goldman Sachs. Timothy J. O’Neill and Eric S. Lane, co-heads of the Investment Management Division at Goldman Sachs, made it clear that the firm was committed to developing its investment in ESGs. ‘GSAM’s acquisition of Imprint’s business affirms our strong commitment to ESG and im-

80 i-invest July 2015

pact investing and providing our clients with innovative investment solutions. The holistic ESG and impact investing portfolio advisory capabilities that we gain from this acquisition are a strong complement to the existing ESG offerings within GSAM.’ Hugh Lawson, global head of ESG Investing for the Investment Management Division echoed this in his statement on the takeover.

‘The further development of our ESG and impact investing platform through the acquisition of Imprint’s business is critical to address the needs of our clients. Our investing clients are interested in deploying their assets in a way that amplifies their broader values while generating investment returns in a rigorous and risk aware manner. Imprint’s expertise will allow our clients to access a wider array of thoughtfully designed ESG and impact investments in all major public and private markets.’

This high profile acquisition brings ESGs to the fore and indicates that impact investments will become a hot topic for financial institutions in the future.

i-invest

81 i-invest July 2015

i-invest

Can Hedge Fund Managers Really Change the World?

Odyssey Green Planet Fund is an alternative investment vehicle registered as a Professional Investor Fund in the jurisdiction of Malta. President at Odyssey Analytic SA, Alexandros Tselentis told us more about the fund and what managers should be doing to help improve the wider world.

The Odyssey Green Planet Fund’s primary objective is to give investors access to the long term growth prospects of the clean technology sector, whilst controlling the risks and volatility associated with growth industries via a long/ short equity vehicle that invests in publicly traded securities.

We firmly believe that clean technologies are enabling technologies that have a positive impact on the wider economy. Their use is driven by global demographic megatrends, both in terms of population increases and the movement of these populations from rural to urban centres. This demographic phenomenon means that demand for energy and clean water will increase over the coming decades, and clean technologies will enable this transformation to take place.

However, it is not enough to offer a good risk/ reward profile or an interesting investment.

The fund also has a clearly defined Socially Responsible Investment mandate, and in this respect we apply stringent criteria of a higher standard than some of the largest public institutions globally.

Our product clearly adds value to existing SRI portfolios by being innovative and taking a fresh look at investing in this manner, something that can be clearly seen in our outperformance of the theme’s passive indexes. Our success can also be gauged by the numerous accolades and awards we have received from the industry and beyond, including being named ‘Best Socially Responsible Investment

Vehicle’ in the 2015 Acquisition International Hedge Fund Awards.

When it comes to doing their bit to improver wider society, first and foremost, managers have a responsibility first to their investors.

However, managers and investors do not live in a vacuum but within society, and responsible and transparent deployment of capital in an accountable manner whilst returning equal or better results than non-SRI investments is a win-win. There is no one uniform solution for achieving this, however. One of the most challenging aspects of being a manager lies in understanding the different value systems of our investors. Socially Responsible Investing (SRI) is inevitably a longer process subject to much more variation and customisation, as managers must first understand the investor’s values in order to be able to build a suitable portfolio.

Odyssey Analytic offers a unique quantitative approach in the SRI investment arena, a sector which is dominated by purely qualitatively-focused managers. Thus we offer SRI investors a unique alpha stream to enhance and stabilise their portfolios. In absolute terms, we offer long/short equity investors a unique and uncorrelated product compared to our peers, so this is not just a product for SRI portfolios. To quantify this, our fund offers 30% better performance than the theme’s passive index product with half the volatility and risk over the past year.

Hedge fund managers have traditionally been viewed, by people outside the industry, in a less than favourable light, and this has

82 i-invest July 2015

changed little in recent years. In fact, if they have changed at all, it has not been for the better. Popular perceptions of hedge fund managers reflect how the hedge fund industry as a whole is perceived. At best, this can be described as ambivalence – at worst, hostility. This is not a good outlook going forward. I believe this is an unfortunate result of people outside the industry having little direct exposure to hedge funds in general beyond their coverage in the media, often for all the wrong reasons (fraud, insider-trading, and manipulation).

Such reports become a background noise which taints even the positive aspects of the industry such as SRI and other success stories.

Regional challenges facing the firm in the near term are mostly regulatory compliance burdens. Northern Europe, where there is a strong and growing tend towards SRI, is obviously an opportunity for investment advisory boutiques. It is important that in the broader context of the hedge fund industry that innovation is recognised to be alive and well, and that investor demands are being met and exceeded.

i-invest

83 i-invest July 2015

i-invest

84 i-invest July 2015

i-invest

City Asset Management City Asset Management’s (CAM) Sales Director, Helen Angove, discusses how CAM invests for Institutions and Private Clients.

As a discretionary investment Manager, City Asset Management PLC (CAM) was formed in 1988 to manage money for a variety of investors. The company has a long established track record managing circa £450m for Corporate Bodies such as Unions and Pension Funds, Charities and Private Clients with the objective of preserving their wealth.

The company has been built upon a more personalised and flexible service-led approach. We take the time to understand a client’s attitude to risk and the purpose of any investment. This information is then used to create a multi-asset portfolio to provide diversification and give the client a ‘real return’ with lower volatility than the market over an economic cycle. A ’real return’ is what you make over and above the rate of inflation. As a reference point we use the Consumer Price Index (CPI), the UK Government’s preferred measure of inflation. Why is this important? Inflation presents the genuine possibility that even with moderate growth; the buying power of your money is eroded in real terms. However a real return will increase your spending power, enabling you to maintain / improve your standard of living.

It is possible to create portfolios which participate in some of the upside in rising equity markets yet also limit the downside when markets are falling. To this end, we utilise a wide range of different asset classes including alternatives which we think of as being hedge and absolute return funds, commodities, property and

institutional structured products, as well as the more traditional cash, equities and bonds.

Our in house research forms the cornerstone of our investment process, and the Investment Management team has daily meetings to discuss things like the current economic environment and/or the relative merits of different asset classes, geographical regions, investment opportunities or portfolio construction. At CAM, we are large enough to use assets and services at institutional rates, but small enough to access niche opportunities usually overlooked by larger managers.

Presently, in an environment where equity valuations look stretched and fixed income is acting as a source of volatility, the alternative return sector plays a critical role within our multi asset real return portfolios. We are particularly conscious that in the future, as unconventional policy is withdrawn, there is a possibility of interest rate increases coupled with a fall in equity markets.

Although the notion of increasing alternative return allocations in this scenario conceptually makes sense, implementation is more difficult.

Many funds that claim to derive their return from alternative assets are in reality low Beta products, and consequently provide higher correlations and lower diversification benefits to a portfolio than one might expect. Therefore, it is crucial to differentiate accordingly and understand the market risk across entire portfolios.

A further instrument that investors can use in portfolios is structured products, which ena-

85 i-invest July 2015

i-invest

86 i-invest July 2015

i-invest

ble the implementation of more specific views about financial markets than standard long only exposure. At CAM we often use range accrual strategies, which have been very successful in generating returns as the FTSE 100 has traded sideways and more importantly, with a lower volatility.

A driver to returns in many investments is currency, and in particular the US Dollar. In 2014, virtually all hedge funds were over-weight USD as the trade became attractive on fundamental grounds as well as exhibiting a negative correlation with risk assets. However, when trades become overcrowded they often become correlated to risk assets, understanding such inflection points is vital when considering the optimal FX exposure within a portfolio.

Over the last few years, CAM has won several awards for its investment management and has consistently been rated 5 stars by Defaqto. We are also one of the founding firms of the ARC Charity Index and our Socially Responsible Investment solution has also been heralded by investors with an ethical bias.

Ethical investment means different things to different investors and can have a range of outcomes based on how ethical a client might wish to be. An ethical approach can range from ’dark green’ to ‘light green’ where dark green investors tend to narrow their investment approach because of the strictness of their ethical criteria. They might only invest in funds which select companies that proactively work towards improving the environment and operate a vigorous screening process, avoiding companies which do not conform to their rigorous requirements.

An investment is considered to be socially responsible because of the nature of the business the company conducts. A Socially Responsible Investment (SRI) can be defined as: “An investment process that considers the social and environmental consequences of investments, both positive and negative, within rigorous financial analysis. It is a process of identifying and investing in companies that meet certain standards of Corporate Social Responsibility” (Social Investment Forum, “2003 Report on Socially Responsible Investing Trends in the United States” 2003) The definition of SRI is extremely subjective and as a consequence, the opportunity set is subject to variation. In recent years, SRI has gained traction with investors making decisions on the basis of environment, social and corporate governance issues measuring the sustainability and ethical impact of an underlying investment.

ria and will engage with a company to ensure that they meet the required goals. The more traditional Dark Green/ Light Green approach has been increasingly replaced by stock picking based on defined themes relating to the environment such as renewable energy resources and sustainable development. Other themes are animal testing, environmental impact, equal opportunities, human rights, intensive farming, genetic engineering, nuclear power, sustainable timber and military involvement.

At CAM we define our approach to ethical investing as ‘SRI Light’; we will seek out managers who have an SRI approach, but might not be strict Dark Green investors. The ethical approach is also more difficult in certain sectors for example alternative return and property, and in order to build appropriate investment strategies it might be that we turn to more traditional managers in these sectors.

It is important to highlight that by taking a SRI approach there can be performance implications, especially in more challenging market environments. If entire sectors are excluded this can produce significant deviations from the client’s CPI benchmark.

Investments are held in our stand alone nominee account. Control of our own administration means that we are accountable for all dividend collection. This enables us to provide a full tax report at the fiscal year end. Depending on client needs, income can be reinvested or paid out and dividend payments can be aggregated within a year to arrange regular periodic payments. We provide capital gains tax reporting and manage portfolios to utilise annual tax allowances if they are available. Daily valuations and past reports and investment commentary can also be accessed online.

For private clients, we hold investments within the tax-free environment of ISAs and manage these alongside main portfolios on an aggregated investment approach. Where appropriate, these wrappers provide a tax-free source of income or shelter capital gains. As well as ISAs, portfolios can be created in a wide variety of tax structures to facilitate tax planning including Pension Funds, AIM portfolios, Offshore bonds and Trusts.

For further information contact: Helen Angove Mobile: 07904977521

Email: Helen.angove@city-asset.co.uk

Funds at the Lighter Green end of the spectrum utilise a “preference and engagement” strategy. Instead of excluding a sector or company, they invest in companies which adhere to various social, environmental and ethical crite87 i-invest July 2015

i-invest

The New World of Operational Due Diligence Responding to a Regulated and Institutional Alternative Asset Industry.

By Christopher Addy, CPA, CA, FCA, CFA速

88 i-invest July 2015

i-invest

Alternative assets are now mainstream investments.

Whether held through employee pension funds, accessed directly through traditional private partnerships, or increasingly offered through “liquid alts” mutual funds, virtually every investor has access to hedge funds, private equity funds, and other alternative strategies.

As the alternative asset industry has grown and matured, the discipline of operational due diligence (“ODD”) has become more prominent. Alternative asset investors no longer make decisions based on investment performance alone: allocators are focused equally on the risk of operational failure— be it through honest error or, in the worst case, through dishonesty and fraud.

Investors also recognize that weak business infrastructure creates an unavoidable drag on performance. An asset manager with weak controls will not have the data, technology, and operational efficiency to ensure optimal implementation of the investment strategy. For hedge funds in particular, operational effectiveness is paramount, given the high trading volumes and complex instruments included in many hedge fund portfolios.

Against this background, ODD, often an optional luxury before 2008, has become a mandatory component of alternative asset investing. Hedge funds and PE managers are no longer “different”, and institutional investors, often subject to fiduciary obligations, cannot accept lower operational standards simply because they are allocating to an alternative manager. As a result, it is becoming a baseline assumption that an alternative asset manager will match the operating standards and mitigate business risks in the same way as established, long-only money managers. ODD is the tool deployed by investors to ensure that alternative investment managers meet these evolving and more demanding requirements.

Enhancing the ODD Process In the context of a more sophisticated, institutional ODD agenda, investors continue to seek guidance as to implementation of a best practice operational due diligence program. Investors can consider a number of areas when enhancing their ODD programs.

Establish a Due Diligence Policy Managers and investors are familiar with compliance manuals, valuation policies, and disaster recovery plans, but the ODD policy as an additional governance document is a relatively new concept. However, a policy document should be the foundation of the ODD process, outlining clear procedures

for initial operational diligence on new allocations and, thereafter, policies for the conduct of ongoing diligence on invested positions. A well drafted ODD policy will outline a risk-based approach, recognizing the different operational risk profiles of different types of investments (from long-only managed accounts, public and private pooled funds, hedge funds, private equity vehicles, etc.), and also take account of investment materiality. As a core concept, however, a threshold level of operational diligence should be completed on all third party asset managers, both when new managers are onboarded and then as part of an effective ongoing monitoring program.

Establish Responsibility for ODD as Part of Governance, Risk, and Compliance One of the key elements of the due diligence policy is to establish which functional area within an organization has responsibility for ODD. As ODD has gained importance and adoption, it has become firmly entrenched in the governance, risk, and compliance (GRC) agenda. Placing ODD in the protective, risk-mitigating framework of GRC highlights, in particular, the need for segregation of duties between front and back office diligence. Given the evident conflict between market and business risk—what happens when a hedge fund has attractive returns but weak operational controls— ODD should not be performed by investment teams that are compensated for portfolio performance. The same conflict also impedes the ability of external investment consultants, who are equally focused on investment returns, to conduct effective operational diligence. ODD should instead be performed by risk specialists and report directly to GRC functional areas such as compliance, internal audit, and risk management.

Identify Operational Due Diligence Risk Areas ODD seeks to identify, manage, and mitigate non-market risk. In the world of alternative investments, this focuses on three primary categories: • the business risk of the management company (the entity responsible for investment decision making); • the legal risk of the fund entity (the product owned by the investor); and • the operational risk of the control environment (the controls and procedures in place to prevent fraud, theft of assets, and ensure that investment transactions are accurately recorded).

Specific areas that should be included in each operational diligence review include the following: • Security over the existence of assets.

Diligence should identify and verify custodians, prime brokers, and deriva89 i-invest July 2015

•

•

•

•

•

tive counterparties. Additional procedures are required for noncustodied assets such as private equity holdings and direct loans.

Controls over cash movements. Investors should require asset managers to implement robust controls around transfers of client money held in funds and other client accounts. A single professional within the asset manager should not, for example, be able to disburse fund assets on his or her sole signature; rather client money controls should require dual signatories and a segregated prepare/approve/release procedure.

Controls around asset valuation. Diligence should evaluate the fund’s valuation policy, the role of the valuation committee, and procedures adopted to ensure accurate valuation adopted by the investment manager, the fund administrator, and third-party valuation agents, if any. Extensive diligence attention should be given to illiquid, hard to value securities. The risk of deliberate misvaluation is clearly far greater with respect to assets that lack an active trading market and have no transparent, independent pricing sources. It is, however, typically these assets – which are precisely the securities most susceptible to deliberate mismarking – where administrators are typically ready to accept manager originated, rather than independently sourced, prices.

Controls around trade capture and accounting. Internal to the manager organization, each asset manager should implement appropriate controls around trade execution, confirmation, settlement, and reconciliation. To the extent that mid- or back-office functions have been outsourced, investors should gain a thorough understanding of the responsibilities of external vendors and evaluate their resources, systems, and overall effectiveness.

Service providers. Alternative asset funds may use external fund administrators, valuation agents, information technology providers, and compliance consultants. Appointments should be verified, and the function and capability of each vendor evaluated. Issues such as legal and contractual liability should be considered. A recent trend, for example, is for fund administrators to seek to limit their liability even in the event of a loss to investors caused by their gross negligence.

Governance. The role of external fund directors should be examined using the “6 Cs” of governance—director and board competence, capacity, composition, choice, compensation, and control.

Recent changes in the Cayman Islands have, for example, focused more attention on the role of external directors.

i-invest

90 i-invest July 2015

i-invest

This has resulted in positive trends for more-frequent board meetings and enhanced governance oversight.

• Compliance procedures. Given the new compliance paradigm faced by alternative asset managers, investors expect to see hedge and private equity managers appoint an experienced chief compliance officer (CCO), maintain robust compliance documentation, conduct frequent compliance training, and create an overall culture of compliance across the firm. The CCO often will be supported by a compliance consultant able to assist the asset manager with documentation, training, and services such as mock regulatory inspections.

Develop an Effective Reporting Process Even if the ODD process is effective in terms of gathering information and conducting diligence interviews with managers and service providers, findings and action points arising from the ODD process also must be documented. A consistent weakness of many ODD programs is poor documentation, with investors often struggling to keep reports up to date, or preparing only brief ODD documentation in the form of annotated questionnaires. Effective reporting should, firstly, be consistent across all funds in a portfolio; thereafter, it should provide an overall assessment, highlight strengths and weaknesses, and identify action points and follow ups. Quality reporting evidences the investor’s diligence process (vital if the investor is itself subject to regulatory oversight) and supports ODD as an ongoing process of engagement and monitoring with each invested manager.

Develop an Effective Ongoing Monitoring Process ODD is not only a process conducted before investment. Post-investment diligence will, over the lifetime of an investment, require significantly more resources than the initial review when the manager is onboarded. Certain ongoing monitoring procedures likely will be annual, starting with annual updates to each diligence report and detailed review of annual fund financial statements. Intra year, many investors schedule diligence updates with invested managers, focused on issues such as changes in assets under management and product range, staff turnover, and any regulatory or other legal events. Investors typically monitor changes in counterparty composition and valuation profile intra year, with administrator transparency reports being an excellent tool to support monthly and quarterly oversight over these metrics. Investors should also complete real time monitoring to identify regulatory, news media (and increasingly social media) commentary with respect to their asset managers.

The Way Forward: Embracing Operational Alpha Operational diligence is a challenging discipline. ODD requires significant resources, working within a well-defined process and methodology. In addition, investors increasingly will need to make investments in new technology solutions to streamline data-gathering and enable systematic identification and monitoring of operational risks.

Looking forward, investor ODD programs will continue to be driven by two motivations. Firstly, many investors that are increasing allocations to alternative assets, such as corporate and public pension funds, operate within stringent fiduciary standards and are exposed to significant regulatory, business, and political risk. For this class of investor, the reputational and governance impact of investing in a hedge or private equity fund that suffers a loss due to operational failure likely will far exceed the impact of a loss solely due to investment underperformance.

More positively, as we have already discussed, investors recognize that operational quality will support investment outperformance, a concept that has been referred to as “operational alpha.” Other things being equal, it is reasonable to assume that, of two equivalently skilled investment professionals, the one supported by the more robust operational infrastructure will, over time, generate higher performance. This is the central value add of operational diligence, and it illustrates why more and more investors aspire toward top tier ODD. Christopher Addy, CPA, CA, FCA, CFA®, is president and chief executive officer of operational due diligence firm Castle Hall Alternatives. Castle Hall has been recognized as the “Best Global Due Diligence Firm” in both the 2015 and 2014 Alternative Investment Awards.

In addition to his work at Castle Hall, Chris is chair of the CFA Institute Capital Markets Policy Council and a founding member of the Executive Committee of the Fund Governance Association. Contact him at caddy@castlehallalternatives.com.

1

Castle Hall Alternatives. 2013. Redefining Corporate Governance: Towards a New Framework for Hedge Fund Directors. https://castlehallalternatives.com/wp-content/ uploads/2013/12/201304-Redefining-Corp-GovernanceWeb.pdf.

91 i-invest July 2015

i-invest

Region with the largest upcoming growth in Europe!

The stock markets in the Western Balkans region in general still remain subdued and are lagging behind most of the world with stock indices still at only around 10-15% of their 2007 value! On the other side, large global stock markets have been advancing (though some with minor intermediate corrections) since March 2009, i.e. for more than 6 years already and have risen heavily since (comparison in the attached file)! We thus want stress that “success stories� of large stock exchanges already took place, while the strong growth in the former Yugoslavia region is just ahead. If you currently invest or intend to invest in stock shares of major global markets, it is perhaps reasonable to ask why you are doing it (only) now, when they are on record heights for some time now. Moreover, would it be better to invest in the region where growth is just outside the door?

View from upper town on Zagreb buildings silhouettes during sunset 92 i-invest July 2015

i-invest

We firmly believe that very strong growth of stock prices is coming to Western Balkan region. Until recently, the general belief in the region was quite the opposite. Now the “shifts in people’s minds” have finally started. If anyone still doubts the fact that we are heading for a massive growth of Balkan stock exchanges, let us remind them of ubiquitous cries about the end of the world and the breakdown of the financial system six years ago. Quite a few stocks from the region of former Yugoslavia are currently quoted at prices similar or even lower (!) than at the beginning of privatisation. Once again, we now have a total sale at starting or even lower prices, and once again, only a small handful is investing. And when we will again achieve great earnings, many people will say that they missed their opportunity. But, at that point, it will be too late!

One of the key factors of expected growth in the investment region of BEF fund is the global framework. Large global stock exchanges have been growing since March 2009 with intermediate corrections, despite all the panic and pessimism, i.e. for seventh year in a row now. And for some time now, stocks values have been showing significant growth on increasing number of smaller European stock exchanges. E.g. Baltic stock exchanges have grown by 120% from the bottom, while the Romanian grew by 285%! Even though regional investors can list differences between these in Balkan stock exchanges, from a global perspective, they are very similar (based on numerous personal discussions, we can reliably state that most financiers from e.g. London, Geneva or New York include all these under “Eastern Europe”). Due to exceptional and long growth of large markets, investors look for other investment opportunities, following the principle “what hasn’t yet increased in price” or “what is still cheap”. BEF Fund investment region is one of the very few in world that still fulfils both criteria. Even though these markets suffered the greatest declines in the world since 2007, in all this time they still have not experienced a major quotation recovery. There is thus increasing number of global stock indices that have increased above their former maximums, while some stock indices of former Yugoslavia countries are still at about 15% of their past maximums.

Lately, there have been some fears due to reduced monetary incentives in the US (the end of so-called tapering). We think that these fears are unnecessary in BEF Fund investment region for multiple reasons: (1) Despite the end of the quantitative easing in the US, from the historical perspective, current levels of interest rates are still at record low levels. (2) Most developed markets react to monetary policy changes on average in 3 to 6 months, whereas smaller markets react much, much later. (3) Mentioned reactions on

smaller so-called frontier markets, like BEF Fund investment region is, may be significantly delayed. In the region of former Yugoslavia, the effect of low interest rate or the flood of global liquidity has only been slightly felt so far. The last larger wave of stock value growth in the region also began significantly after large central banks had been enforcing a stricter monetary policy and the interest rates were significantly higher than now. (4) Expansionist monetary policy was launched just recently in Europe and other economic superpowers. Until now among larger central banks only US, Japanese, British and the Swiss Central Banks printed money with no restraint. Due to German influence, the European Central Bank long resisted this solution, but considering the economic circumstances ECB has started using this measure. Japan also implemented this measure last year, and after many years of deflation crisis, positive effects quickly became evident in the economy. Financial markets experienced even greater positive effects – funds investing in Japanese stocks were one of the most profitable in 2013 and 2014 and still have good returns this year. The Japanese stock market, after 22 years of crisis, represents the best evidence of monetary policy effects. Additionally, they adopted an even more important decision that will have a strong positive effect not only on the Tokyo but also on other global stock exchanges. The Japanese public sector pension fund, the largest pension fund in the world in regards to its assets, will purchase US 150 billion of Japanese and USD 195 billion of foreign stock.

Monetary incentives in Europe were the main reason for the aforementioned growth of larger neighbouring stock exchanges, and will soon have a positive effect also on smaller Balkan stock exchanges, where growth will be even greater due to lower liquidity! It is very important that we can now finally expect huge fiscal incentives, both on global and European level. The latter will have an especially positive effect on Balkan countries due to their exceptionally high economic dependency on the EU (exports of products and services, credits, remittances from immigrants, investments, etc.).

Recovery of Slovenian banks is also very important for future growth, since it significantly reduced the uncertainty and strengthened the financial stability of the Slovenian bank sector. This is reflected in decreasing deposit interest rates in banks. Considering the extraordinary effect of interest rate level and liquidity, explained in our previous newsletters, this has had a high positive effect on the Slovenian capital market, and will soon have an effect on all stock exchanges in the region. With low returns on savings in banks,increasing amount of money will flow into stock markets, either directly or through investment funds. The value of Slovenian stock has already increased significantly, and

93 i-invest July 2015

i-invest

Serbia

94 i-invest July 2015

i-invest

investors will therefore again look for opportunities elsewhere in the region, following the principle “what hasn’t yet increased in value?” As already explained, increases in southern countries will be much higher than in Slovenia and Croatia. Croatia already has highest valued stocks in the region for some years now due to the Croatian pension system, which, as the only one from the territory of the former Yugoslavia, provides an inflow of small but constant part of pension savings to the Zagreb Stock Exchange. At the same this provides an important long-term capital support to Croatian companies, that are also for this reason acquiring companies in Slovenia and elsewhere in the region.

Countries south of Croatia are becoming extremely interesting investment locations for foreign investors. Labour costs and taxes are very favourable, and countries are offering high benefits and incentives to employers. We must also not forget the geographic vicinity of European and Near East markets, as well as markets of the former Soviet Union. In Bosnia and Herzegovina, Serbia and Macedonia, production costs are already lower than in, for example, China (where salaries and other expenses increase with each year). If we consider lower transportation costs, increased adaptability (smaller production batches and quicker delivery) and higher quality of production, the advantages of the Balkans become even more obvious. It is therefore not surprising that, all countries of the former Yugoslavia are no longer in recession and note positive economic growth.

It is essential that the whole BEF fund investment region draw nearer to full EU membership. European integration will bring abundant European funds and foreign capital.

This will stimulate not only numerous investments into infrastructure but also economic growth, mergers and acquisitions of companies, and increases of domestic and foreign investments into securities from the region.

Harmonisation with the European legislation will also improve the legal certainty and institutional framework for businesses and investments. All this will contribute to significantly higher values of companies and higher market quotations of securities. Considering the increasingly overt competition between the west and Russia, we can expect a significant speed up of EU accession process of southern Balkan states. Just remember how the EU quickened the accession of Romania and Bulgaria a few years ago, for similar reasons and with significantly more lenient criteria than for other new member states.

For some time already, we have been forecasting beginning of sales of companies in Slovenia and the region. In Slovenia, it has been initiated very quickly, since the Slovenian government, as well as banks full of forfeited stocks, simply need the money. Sales are thus inevitable. The situation in other countries of

the former Yugoslavia is similar. There were indeed not as many failed MBO loans in other countries of former Yugoslavia during the last stock market boom as in Slovenia; however these governments are in even greater need for additional resources than the Slovenian government. We are convinced that privatisation will continue. International Monetary Fund that helps most countries with loans, now demands reforms to take place and debts to be repaid (privatisation of government assets). The European Bank for Reconstruction and Development (EBRD), World Bank (WB) and the European Investment Bank (EIB) will support the economic recovery in the region, which will only increase the influence of international financial institutions compared to regional governments. We should not forget that a bit more than a decade ago, in 2001, takeover of pharmaceutical company Lek (part of Sandoz/Novartis group now) from Slovenia caused a high growth on Ljubljana Stock Exchange. Growth has also followed on other stock exchanges in the region, even though the world was facing a sever crisis (dot.com bubble). A similar scenario occurred after the acquisition of the Croatian company Pliva in 2006. We are certain that privatisation process will continue. has also started in other countries of former Yugoslavia. As the number of acquisitions on a global level is at its highest since the crisis year of 2007 – due to cheap financing and large cash amount on bank accounts of multinational companies – it is reasonable to expect increasing numbers of acquisitions of companies from Western Balkans Considering all above stated we are convinced there is start of high growth of Balkan stock markets ahead.

Low regional stock indices and consequently undervaluation of stocks in the region is obvious and huge (comparison in the attached file)! When these indices increase from 15% to half of their former values, the growth will be 233%! And when they return to their peak values from 2007 that would represent 566% growth! According to our experience, it will soon be too late to catch this train. Due to low liquidity, markets will grow by more than 100% before most investors will take note, and probably even more before they can react. The longer the duration of market stagnation, the stronger the growth when it occurs.

History of stock exchanges clearly shows numerous examples – the longer the market is depressed, the stronger its growth when the tide turns.

Time for investing is quickly running out!

When Balkan will be once again on newspapers’ headlines, it will be too late! Until then, we will already made you excellent profits!

Web: www.bef-fund.com Email: investment.manager@bef-fund.com

95 i-invest July 2015

WHERE THINKING DIFFERENTLY IS THE NORM

UNCONSTRAINED INVESTMENT EXPERTISE, EVERY DAY TEL. 020 7150 4005 OR VISIT WWW.QUILTERCHEVIOT.COM

Investors should remember that the value of investments, and the income from them, can go down as well as up. Quilter Cheviot Limited is registered in England with number 01923571. Quilter Cheviot Limited is a member of the London Stock Exchange and authorised and regulated by the UK Financial Conduct Authority.