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The Need For Portfolio Resilience

At the end of 2015, investors were confronted by a world that appeared to be full of potential pitfalls. To preserve and grow the value of their assets, they needed robust portfolios that could outperform the market in challenging environments and deliver resilient returns in the face of unforeseen events.

The investment environment in 2016 has been no easier. A slowing Chinese economy, the Bank of Japan’s surprise move to introduce negative interest rates, political and economic uncertainty in the US and the UK’s momentous decision to leave the European Union have all played their part in increasing global financial instability and volatility.

Investec’s approach to building portfolios that are resilient in the face of such tumultuous events requires a strong understanding of investment risks, beyond estimates of volatility. For them, portfolio construction should balance the trade-offs between potential returns and individual assets’ contribution to overall risk exposure. But also they need to be diversified and to avoid those parts of the market that could be vulnerable to sudden liquidity squeezes. According to them, investors should also have strategies to cope with periods of market stress.

Diverging monetary policies
Six months ago, they believed the US dollar would reach new cyclical highs, as US monetary policy slowly normalized. Then, Europe had only just started to run down private-sector debt and seemed at least three years behind the US. Asia, and China in particular, were further behind Europe. These markets’ debt to gross domestic product ratio were still high, suggesting that monetary easing would need to continue for several years.

Since then, global economic headwinds and a weaker domestic backdrop has prompted a more dovish tone from the US Federal Reserve in the first quarter of 2016, which has slowed the pace of monetary policy normalization. “This means that the phenomenon of diverging monetary policy is less pronounced than it was at the beginning of the year.”

Selectivity needed in emerging markets
“Our belief that the emerging market universe is disparate, and offers a wide range of investment opportunities still holds true. We continue to favour economies that are natural extensions of developed markets, such as Hungary or Romania are for the European Union. Nevertheless, we believe we need to continue to be selective in emerging markets, partly due to different sensitivities to demand for Chinese commodities and the US dollar.” They note.

Finding bottom-up opportunities
“We continue to believe that a bottom-up approach to choosing investments can help penetrate the short-term macroeconomic noise. Emerging market equities and resource stocks led global stock markets higher from mid-January, at a time when Chinese data remained negative and many analysts were forecasting a US recession. However, we still acknowledge that the environment has, even if temporarily, become marginally less supportive for stock picking.”

ESG going mainstream
Investec’s experts believe that 2016 is when many investors will be focused on taking account of environmental, social and governance (ESG) issues. Integrating ESG assessment into investment processes is increasingly being seen as a way of driving long-term value creation. “German auto manufacturer Volkswagen could be seen as a game changer triggering increased attention on corporate behavior and practices. The Paris Agreement on Climate Change in December 2015 has also focused investors’ minds on the environmental challenges surrounding global warming.” They conclude

Andre Suaid Joins BTIG in New York

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BTIG, a global financial services firm specializing in institutional trading, investment banking, research and related brokerage services, announced that Andre Suaid has joined the firm as a Managing Director within its International Equities Group in New York.

Suaid will focus on U.S. and Latin American-based institutional clients, navigating developed, emerging and frontier markets throughout Latin America. He joins an established, global team of professionals throughout BTIG’s nine U.S. offices, and affiliate office locations in London, Edinburgh, Hong Kong, Singapore and Sydney. The move comes in response to increasing client demand and heightened focus in the region. Previously, Suaid was Head of Latin America Global Prime Finance and Head of International Equity Trading for the Americas at Deutsche Bank Securities. He was responsible for the execution of Deutsche Bank’s international products for global clients, overseeing the risk for Latin America Cash, Delta One, and Program and Synthetic Trading. Suaid was also part of the leadership team responsible for building out the Latin America Synthetic Platform at Deutsche Bank. Earlier in his career, he spent several years in similar roles at Credit Suisse, First Boston and FC Stone.

“Specializing in Latin American markets throughout his 25-year career, Andre will be instrumental in expanding the firm’s offering for our high-touch clients conducting business in the region,” said Richard Jacklin, Managing Director and Head of International Equities at BTIG. “His extensive network of local relationships, understanding of regional trading nuances and client-first approach will be important as we look to unlock valuable pockets of liquidity for clients.”

Asset Managers Set Their Sights on UK Wealth Managers

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The UK retail advisory channel is increasingly divided between large multiservice advisor and wealth management companies and small, traditional independent advisors. Smaller players are more likely to have to outsource investment allocation, Cerulli Associates‘ Asset Management in the United Kingdom 2016: A Guide to Retail and Institutional Market Opportunities report finds. Cerulli conducted two surveys in partnership with Incisive Media, one targeting IFAs and the other targeting DFMs. This research found that nearly 65% of UK IFAs currently outsource investment assets to DFMs, which are also a growing target for asset managers.

In turn, nearly one-third of DFMs invest more than 80% of their assets in third-party funds; 24% invest 100% in third-party funds. Fewer than 10% invest in no third-party funds at all.

In addition, every DFM that responded to Cerulli’s 2016 survey reported at least some level of investment in passive strategies. Some 80% of DFMs reported some allocation to exchange-traded funds, 55% stated that they invest in index-tracking funds, and only 30% indicated that they invest in smart beta funds. “Although few DFMs expect their allocation to passive investments to decrease, the majority do not plan to increase allocations either,” says Laura D’Ippolito, lead author of the report. “This is good news for active managers targeting this segment, but asset managers can expect fee pressure from DFMs.”

DFMs are increasingly institutional in the way they approach fund selection, having increased their levels of due diligence on asset managers and funds. This is contributing to the continued fee pressure felt by asset managers, as is the use of passive strategies.

Whereas IFAs are reducing the number of funds on their buy lists because of increasingly rigorous due diligence oversight, Cerulli’s survey indicates that it is business as usual for UK DFMs. “The majority of DFMs reported having between 20 and 50 managers and funds on their buy lists,” says Cerulli senior analyst Tony Griffiths, another of the report’s authors. “Around 80% expect the number of managers and funds on their buy lists to stay the same over the next 12-24 months.”

Attaining a “best of breed” rating from DFMs is every manager’s goal. Cerulli’s research shows that Invesco Perpetual and Standard Life have not only achieved this-in alternatives and multi-asset respectively-but won topfive rankings across two asset classes.

“The key to success in a competitive and increasingly challenging investment environment is to have a well diversified model. This lesson has not been lost on a number of managers that relied too heavily on their success in just one asset class,” Griffiths adds.

Chinese Nominal GDP Rebounds, Money Signal Still Positive

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Stronger Chinese monetary trends late last year suggested that economic growth would recover during the first half of 2016, contrary to consensus expectations of a further slowdown. Key indicators firmed through the spring but by less than had been expected here. Second-quarter GDP and June activity numbers released today were, on balance, more encouraging, while the monetary signal remains positive.

Annual growth of GDP in volume terms was unchanged at 6.7% last quarter but the more significant news was that nominal GDP expansion rose for a second successive quarter to 8.2%, the strongest since the third quarter of 2014. A rebound had been signalled by a pick-up in money growth from mid-2015. Annual increases in narrow and broad money (as measured by “true” M1 and M2 excluding financial sector deposits) were little changed in June, with recent growth the fastest since 2010 and 2013 respectively.

June activity numbers were mixed. Annual growth of industrial output and retail sales value rose to 6.2% and 10.6% respectively in June, beating consensus expectations. Fixed asset investment, however, slowed further, with an annual value rise of 7.3%, close to a September 2015 low of 6.8%.

Capex weakness reflects the private sector component, which stagnated in the year to June.

Prospects for private investment, however, are judged here to have improved. Industrial profits lead private capex and are rebounding on the back of stronger nominal GDP growth. A pick-up in growth of deposits of non-financial enterprises over the past year is a further positive signal.

An investment revival coupled with continued solid consumer spending expansion and an export pick-up driven partly by recent exchange rate depreciation may result in stronger volume as well as value growth of GDP during the second half, despite some reduction in fiscal stimulus.

*”True” M1 includes household demand deposits, which are excluded from the official M1 measure. Financial sector deposits are excluded from M2 because they are volatile and less relevant for assessing spending prospects.

Column by Henderson’s Simon Ward. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

Manny Roman will Join PIMCO as its New CEO

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PIMCO, a leading global investment management firm, announced on Wednesday that the firm’s Managing Directors have appointed Emmanuel (Manny) Roman as PIMCO’s next Chief Executive Officer. PIMCO’s current CEO Douglas Hodge will assume a new role as Managing Director and Senior Advisor when Roman joins PIMCO November 1st.

The announcement of Roman as PIMCO’s CEO is the culmination of a process undertaken by the firm to hire a senior executive who would add leadership and strategic insights combined with a deep appreciation of PIMCO’s diversified global businesses, investment process and focus on superior investment performance and client-service. Roman’s appointment has the full support of the firm’s leadership including Hodge, PIMCO’s President Jay Jacobs, the firm’s Executive Committee and its Managing Directors.

Roman has nearly 30 years of experience in the investment industry, with expertise in fixed income and proven executive leadership, most recently as CEO of Man Group, one of the world’s largest publicly-traded alternative asset managers and leader in liquid, high-alpha investment strategies. Roman worked for more than 18 years at Goldman Sachs, where he was Co-Head of Worldwide Global Securities and Co-Head of the European Services Division. He became Co-Chief Executive Officer at GLG Partners in 2005 and Chief Operating Officer of Man Group in 2010 following the firm’s acquisition of GLG. He was named Man Group’s CEO in 2013. He will help drive PIMCO’s continued evolution as a provider of investment solutions built on the firm’s active management expertise in areas such as core bonds, non-traditional strategies, private credit, distressed debt, equities and real estate, among others. Roman will be based in PIMCO’s headquarters in Newport Beach, California.

“Manny’s deep understanding of global markets, unique skills in investment management and appreciation of PIMCO’s macro-based investment process make him the ideal executive to position the firm for long-term success,” said Daniel Ivascyn, Managing Director and PIMCO’s Group Chief Investment Officer. “Manny’s skills and experience include all of the attributes that are key to delivering value to PIMCO’s clients – investment acumen, intellectual capacity and thought leadership, broad industry experience, executive leadership and an excellent fit with PIMCO’s cultural values.”

Roman said: “It is an honor to be chosen as CEO of PIMCO, a firm which embodies the finest principles of asset management – innovative investment strategies, excellent client service and a deep bench of global talent – which have consistently delivered value to clients over the long-term. I look forward to working with the firm’s talented team to continue to build on PIMCO’s success in what is a rapidly changing industry.”

In his new role as Senior Advisor, Hodge will work with Roman to ensure a smooth transition of executive responsibilities providing continuity for PIMCO’s clients, employees and parent company Allianz SE.

Ivascyn said: “Doug has made a significant contribution to PIMCO with his leadership and professionalism. We are pleased he will remain with PIMCO to provide counsel to the firm and the Managing Directors, leverage his global relationships with our clients and ensure continuity throughout the transition of executive leadership to Manny.”

Hodge said: “PIMCO has become the global leader in active management of fixed income by seeking to provide investors with innovative solutions as the global markets change. As the asset management industry continues to evolve, Manny will bring new perspectives to PIMCO’s leadership team and add his unique talents to our already successful firm and I look forward to working with him.”

The Bond Segment Still Offers Opportunities that Combine Capital Protection, Return and Reduced Volatility

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Jean-Philippe Donge, manager of the BL-Bond Emerging Markets Euro fund talks about the opportunities in bond investments.

Jean-Philippe, do bonds still offer investment opportunities, even at these low interest rates?
Jean-Philippe Donge (JPD): Certainly, although that depends above all on each investor’s specific expectations. Investors looking for quality and wanting to protect themselves against deflationary trends will find protection in paper issued by the most creditworthy borrowers such as Germany and the United States. Investors looking for a better return, and therefore willing to accept higher risk, should look at other markets. Many emerging countries have made enormous progress in terms of growth in recent decades, as is confirmed by various indicators such as rising per capita income and a decline in poverty. That is the case for example of South Korea, where per capita GDP has risen from less than USD 1,000 in 1960 to almost USD 25,000 today, and also Mexico and Indonesia. Much depends therefore on the investor’s particular profile. The fact remains that the bond segment still offers opportunities that combine capital protection, return and reduced volatility.

A cautious investor might nevertheless argue that many countries are facing significant problems and political crises, in spite of relatively interesting returns. How are these countries supposed to manage?
JPD: It is true that some of them are in a precarious position, but these countries have learnt from the crises of recent decades. Take for example the depreciation of the Thai baht and Argentina’s sovereign default. In the wake of these events, the two countries involved reviewed their economic policies and in particular the exchange rate system applied to their economies.

The global financial system has been extremely fragile since the collapse of Lehman Brothers. In this context, international central banks have been set the challenge of saving their respective economies. The resulting measures, at times unconventional, have shored up all asset classes, including emerging market bonds. Some of these countries – more than others – have adopted rescue measures: unpegging their currencies, stockpiling currency reserves and setting inflation targets to name just a few. However, others have opted for the opposite direction, for example Brazil whose interest rate rises are struggling to deal with the fiscal slippage and curb inflationary pressures. As a result, the countries that took these sometimes brave and unpopular decisions are those that have best withstood the shocks.

What does your fund’s investment method involve?
JPD: In the past, managing bond investments was primarily a matter of managing duration, but this approach is less relevant today. Our methodology is determined by a variety of both macroeconomic and geopolitical factors. My principal challenge as a fund manager consists in identifying top quality issuers, as well as the instruments and bond issues available for each of them. As a result we now base our investment decisions on three criteria, namely duration, the currency and the interest rate differential which reflects credit quality. Our analyses are based on the information sent to us by our external analysts, which include ratings agencies and international research organisations. We compare this information with our own convictions and the current situation. We do not track any indices.

BLI’s fund managers always talk of “high quality stocks”. What sort of companies are these exactly? Which sectors do you favour?
JPD: The BL-Bond Emerging Markets Euro fund does not use a benchmark. It tends to adopt an opportunistic approach and tries to fulfil our clients’ expectations. Our preference is for government bonds, followed by corporate bonds. The political environment and the economic context affect our investment choices. We therefore tend to underweight countries such as Brazil and avoid the likes of Venezuela, preferring Romania, Vietnam and Namibia, for example. The countries chosen must meet our expectations and offer a positive outlook.

Has your investment method changed?
JPD: As previously mentioned, our investment management approach has changed to look beyond duration alone and more actively incorporate two new criteria: credit risk and exchange rates. Until about 15 years ago, very little distinction was made between issuers belonging to the same sector or “type”. For example, Greece was on an equal economic footing with Germany, because both countries belonged to the same monetary zone. Although, I admit that may be a bit of an exaggeration. The same was also true for Argentina and Mexico, because we treated emerging countries as a bloc, making no other distinction between them. However, 2001 and 2008 changed things. In 2001, we witnessed the biggest default until that time, namely that of Argentina. A distinction was made within the asset class for the first time and contagion remained limited. In 2008, one more event linked to another player deemed “too big to fail” took place: the Lehman Brothers collapse. Around these two events and over the course of time, significant differences emerged within both the sovereign and corporate bond segments. For example, post-Lehman crisis, the markets understood that General Motors and Ford were not one and the same. The former was declared bankrupt and then nationalised in 2009. Our investment method has incorporated this reality by pursuing further discernment between the various issuers, whatever the sector or economic region under consideration.

You just mentioned corporate debt. Tell us more about this segment and its contribution to your investment management.
JPD: Nowadays the differences are more marked than in the past. Regardless of the quality of the companies identified, it is equally important to focus on issuers that are capable of swimming against the tide during economic cycles when these are in a downturn. I have in mind in particular the telecommunications sector, where certain companies in emerging countries have succeeded in joining the ranks of multinationals. That is the case for example of Hutchison Whampoa in Hong Kong, Singapore Telecommunications in Singapore, Bharti Airtel in India and América Móvil in Mexico. These companies are generally better placed to offer a higher return than the average of their developed country counterparts, which are in some cases highly leveraged. However, I wouldn’t rule out any sector from the outset. In other words, because we include more credit risk, it is fair to say that our investment approach is flexible, opportunistic and responsive.

Do you also invest in currencies other than the portfolio’s reference currency?
JPD: Yes, we do. We have been investing in debt securities denominated in local currencies for over ten years. The local debt market generates better returns than those of most eurozone countries. The challenge lies in identifying markets and currencies that offer a degree of stability over an indefinite period, in addition to a higher return. This approach is obviously opportunistic, even when our decisions are based on firm convictions. That was true for the Brazilian real in the 2000s, and is true today for the Indian rupee. We have suffered a few disappointments, though, especially with the Mexican peso. In all cases our decisions are based on in-depth analysis of the economic and political environment.

The BL-Bond Emerging Markets Euro fund has been in existence for just over two years and has delivered a performance of over 11% since its inception. How do you see its future development?
JPD: The BL-Bond Emerging Markets Euro fund does not represent the 20 best European economies. What it does is exploit the potential offered by over a hundred economies worldwide. As these economies and their political systems have nothing in common, we are talking about a diverse universe that throws up numerous opportunities. Our principal challenge consists in juggling endogenous and exogenous factors, including regional influences.

Are you not concerned that the fund could be hit by a new emerging market crisis? How can you protect the fund from this?
JPD: Not all countries are going to go bankrupt or declare war. Likewise, they are not all oil exporters and often have very different levels of debt and currency reserves. I have therefore set myself the task of relentlessly seeking out any investment opportunities that may come up. What sets us apart from the competition is our consistent interpretation and processing of information relating to each individual country, and the convictions and opinions that we forge for the management of our fund. I believe that this characteristic enables the BL-Bond Emerging Markets Euro fund to stand out in any circumstances.

What is the outlook and how do you expect the fund to develop?
JPD: I am optimistic going forward. There will always be corrections, and no sector is immune. That is why the fund is intended in particular for investors with a medium to long-term investment horizon. Peru, Chile, Vietnam and Senegal are countries that didn’t even appear on the radar of our clients 15 years ago. But they are an integral part of the portfolio now, because they all boast positive growth indices, falling poverty levels and improving education systems, among other indicators. I therefore believe that the BL-Bond Emerging Markets Euro fund, like its twin the BL-Bond Emerging Markets Dollar fund, successfully covers this broad spectrum and is the best adapted to this type of investment. There are nevertheless certain differences between these two portfolios. The first invests in both euro-denominated and local currency issues, whereas the second, launched six months ago, targets a broader basket of sovereign issuers while limiting itself almost exclusively to dollar-denominated debt.

Beamonte Investments’ Venture Academy Fund has its First Closing

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Beamonte Investments a leading private investment firm in Boston, announced the first close of its venture fund, Venture Academy Fund, ( “VAF”) in June 2016 with close to US$6 million in total capital commitments. The fund is looking to raise a similar amount from international LPs with the aim to hold a second close prior to the end of December 2016 and an additional close before the end of February 2017. The current investor base includes family offices from the United States and the region.

VAF will target high-growth startups and ventures that take advantage of market opportunities through online platforms, mobile applications, technology, and others. The fund will focus on Series A investments, as competition is lower in this section of the VC market. “The VC market is at a growth stage were VAF can enter and take advantage of the favorable entrepreneurial ecosystem in Mexico and Colombia to generate returns for investors.” They mention on a press release.

Beamonte Investments is a single-family office located in Boston, Massachusetts. Beamonte has been a pioneer in direct venture capital and private equity investments, credit alternatives, and activist investment campaigns, as well as a pioneer in cross border transactions with Latin America. Since its inception, the firm has executed over $5 billion USD in transactions.

Puerto Rico’s Broken Promise

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According to Philip Villaluz, Head of Municipal Credit Research at Schroders, Puerto Rico’s recent default does not pose a broader contagion risk to the municipal bonds market, but it marks the beginning of a long process to repair the country’s economy.

Puerto Rico defaulted on roughly US$ 900 million in principal and interest due on 1 July, most of which was general obligation (GO) bonds and Commonwealth-guaranteed debt.

Despite this historic default, which is the first state or US territory to default since the State of Arkansas in 1933, the municipal market has taken it in its stride. In fact, prices of Puerto Rico bonds are generally flat (increasing by 3.4% since introduction of legislation in the US House; declining by 2.8% following the default).

While the default had been expected by the market for quite some time and risk premium priced in, Schroders thinks this event marks only the beginning of a long process to restructure debt and repair Puerto Rico’s (also known as the Commonwealth) economy and fiscal house.

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A deteriorating situation has led to a shift in investor base

Puerto Rico has suffered from a recession since 2006; where current unemployment is close to 20%, roughly 50% of the population lives in poverty and hundreds of thousands who have the means have already left the island.

The Commonwealth’s pension fund stands at a less than 1% funded rate, with thousands of retirees who rely on the payments to make ends meet.

Due to a decade of economic and fiscal woes, the Commonwealth amassed US$ 70 billion in debt which was bought by islanders and US municipal bond investors who benefit from triple tax-exemption (income is exempt from federal, state and local taxes).

As Puerto Rico credits drifted into junk bond territory over the past few years, mutual funds sold most of their Puerto Rico bonds; only 125 mutual funds actually hold the bonds, and seven of those funds have more than 50%, according to Morningstar. Opportunistic hedge funds are now the largest holders of Puerto Rico debt.

Decision to break its promise

With liquidity nearly exhausted, Puerto Rico Governor Alejandro Garcia-Padilla announced the Commonwealth’s intention to default on its obligations. He successfully pushed through legislation earlier this year to allow the government to decide whether to make payments on its debt—specifically, its general obligation debt which carries a constitutional guarantee—in order to conserve cash. Puerto Rico itself – like states of the US – does not have the legal authority to declare bankruptcy.

Congress acts

On 30 June, Federal legislation called PROMESA (Spanish for “promise”) was passed, creating an Oversight Board consisting of seven appointed officials, with the “exclusive control” to enact and enforce fiscal plans, so the island attains fiscal solvency and access to the capital markets.

The Board would have ultimate control over all economic and fiscal matters for the government and would have the authority to restructure its debts. It would also have the authority to prevent the execution of legislative acts, executive orders, regulations, rules and contracts that undercut economic growth initiatives or violate the Act, in addition to other powers.

The seven members—appointed by the President with recommendations from leaders in the House and Senate—will likely consist of four Republicans and three Democrats with experience in municipal bond markets, finance, or government operations who cannot be a former or current elected official or candidate for office, among other restrictions.

PROMESA states that any debt restructuring must respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered instrumentality in effect prior to the date of enactment of the Act.

To impose a voluntary restructuring agreement on a specific pool of creditors (i.e., GO bondholders, COFINA bondholders, etc.), a two-thirds vote with at least 50% of the creditor pool voting is needed (based on amount outstanding). This would effectively allow one-third of bondholders to bind the entire group. However, if no agreement is possible, the Oversight Board could then petition a court to force an involuntary restructuring.

It also establishes a firewall between creditors and pensions in the development of fiscal plans. The Board will be terminated when the Commonwealth government: (i) has adequate access to short- and long-term credit markets at reasonable rates; (ii) has four consecutive years’ worth of budgets in accordance with modified accrual accounting standards; and (iii) balances its budget.

Helped to default

According to Schroders, the passage of PROMESA may have facilitated the GO default, because it initiated a stay of litigation against the Commonwealth through February 15, 2017. Hence, PROMESA wouldn’t excuse a default, but gives Puerto Rico cover.

Insured bondholders protected

Investors who hold insured Puerto Rico bonds will be paid their amount owed in full, with bond insurance policies making up the shortfall. Schroders also remains confident that the two bond insurers, Assured Guaranty and MBIA (through National Public Finance), with the largest insured exposures to Puerto Rico will continue to pay as expected.

This is not the end

PROMESA is more the start than the conclusion of the process that will determine outcomes for creditors. The restructuring process is contentious and time-consuming. Furthermore, it forces courts to opine over the power of Puerto Rico’s Constitution and the definition of government resources in determining priority of claims between different bondholders (i.e. GO and COFINA) across a very complex debt structure. Creditors may also challenge the constitutionality of PROMESA, which could delay the process even more.

For comparison, the municipal market has recently witnessed other restructurings, albeit on much smaller scales. These include the City of Detroit’s restructuring which took nearly a year and a half; Jefferson County, Alabama took over two years and San Bernardino, California remains ongoing after almost four years.

Philip Villaluz thinks that the situation remains fluid and not enough is known, particularly with regard to private negotiations and formation of the Oversight Board, to make any confident predictions or take a more constructive view on Puerto Rico’s bonds. However, he emphasizes his belief that Puerto Rico’s crisis does not pose a contagion risk to the broader municipal market.

Brexit’s Impact on Financial Services

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Financial services are possibly the policy area where Brexit will have the strongest impact. The City of London is the largest financial centre in Europe; many financial firms offer their services from their London base, making use of “passporting” rights granted through European legislation, which are now clearly at risk.

As a result of being the financial heart of Europe, the UK has historically been deeply involved in shaping financial markets policies and pushing further financial markets integration, due to their great interest, expertise and resources devoted to this particular area. This is the case in terms of the European legislative work, where the responsible European Commissioner for financial services was the British Commissioner Lord Hill.

The strong British influence is also felt at the regulatory level. The European Supervisory Authorities (European Securities and Markets Authority, European Banking Authority, European Insurance and Occupational Pensions Authority) define the finer details of financial legislation and have grown in relevance since their inception in 2010. The UK plays a strong role in these authorities in terms of their technical input, physical resources and market expertise. Decreasing UK influence in the ESAs as a result of Brexit could have significant effects on the final content of legislation as well as on the way European supervisors agree to apply the rules.

I. Institutional impact

a) Lord Hill resignation: The most immediate institutional impact of Brexit was the resignation of Lord Hill as Commissioner for Financial Services, along with his Cabinet (political advisers), who will be replaced by Vice-President Valdis Dombrovskis, the former Latvian Prime Minister, Finance Minister and MEP.

b) European Supervisory Authorities:

Funding:

The three European Supervisory Authorities (ESAs) are funded through the EU budget and contributions from Member States, in accordance with their size. The UK leaving the EU means that a significant contribution to the budgets of the ESAs will disappear.

This could accelerate ongoing discussions on ESA funding in the context of the ESA review. The UK was one of the fiercest opponents of increasing the proportion of funding from the EU budget (as it would lead to a greater grip of the European Commission (EC) on the activities of the ESAs). Without UK opposition, this shift towards greater EC influence could become areality.

Negotiations:

Within the ESAs, Member State authorities negotiate policy and draft implementing legislation just like Member States do in the EU Council. Although the UK will remain a full member of the ESAs for at least the next two years, the UK NCAs could refrain from active participation which will mean that ESA outcomes will inevitably change as although all Member States have equal voting in the ESAs, members with larger financial markets are far more active and influential.

European Banking Authority (EBA):

The EBA, currently based in London, will need to be relocated to another Member State. Italy, Germany, Netherlands and Poland have already expressed interest in hosting the EBA and other Member States might follow.

Of more importance than the physical location of EBA is that Brexit could reduce the EBA’s influence. The EBA’s current role as a bridge between Eurozone and non-Eurozone banks risks being significantly diminished when the UK leaves. The European Central Bank (ECB) is the single supervisor for the Eurozone banks. The main counterweight to the ECB is the Bank of England.

With the UK exiting the EU, the ECB will progressively become more important for the entire banking sector and the EBA’s role in adopting technical standards for the single rulebook will be reduced.

A further post-Brexit supervisory effect is likely to impact those banks of EU Member States not in the Eurozone, and therefore not supervised by the ECB. These will face greater scrutiny as international investors might consider their supervision less strong and therefore the banks less stable. Brexit could lead to non-Eurozone member states opting in to the Banking Union at a faster pace than previously expected.

European Securities and Markets Authority (ESMA):

The UK has been a driving force in ESMA, which has been active in implementing legislation and coordination of supervision for capital markets and the UK expertise is undeniable. Staff at the UK’s Financial Conduct Authority (FCA) have been seconded to ESMA, and task forces and standing committees have regularly been chaired by FCA personnel. This has contributed greatly to the reputation of ESMA as a knowledgeable and credible supervisor at international level. Without UK membership, ESMA could lose considerable expertise.

ESMA’s powers might well increase; the UK, supported by Germany, was a fierce opponent of more direct supervisory powers for ESMA. For example, CCPs are now still supervised by colleges of national competent authorities instead of by ESMA directly; this might change. In the context of Capital Markets Union, the European Commission did not go as far as to propose a European supervisory mandate for the capital markets for ESMA.This, too, might change.

European Insurance and Occupational PensionsAuthority (EIOPA):

EIOPA is currently leading the joint committee of the ESAs, which devotes much attention to consumer protection and product governance standards. In this area, the UK is clearly ahead of the curve in Europe. This has meant the UK has been very much involved in developing European standards from within EIOPA.

Without the UK, it is very possible that this work stream will slow down within the joint committee.

c) EU in international Bodies(FSB, IOSCO, BIS)

The position of the EU in international supervisory bodies has been strengthened by the UK’s contribution to EU policy. Although there was not always full alignment, European cooperation has smoothed over the major differences, strengthening the overall European position. With the UK exiting the EU, the chances increase that the Bank of England (in Basel) and FCA (in IOSCO) will no longer discuss their respective positions ahead of international negotiations, making for increased differences of views within these fora. This will enhance the relative weight of non-European supervisors meaning that European interests could suffer. The UK has stressed the importance of sticking to international agreements, whereas some Member States feel less pressure to apply Basel agreements unaltered. Post Brexit, and without such pressure by the UK, it is more likely that the European Commission could consider deviating from the Basel Committee outcomes to the advantage of European banks.

II. Ongoing financial services policy discussions

The general assumption is that the Capital Markets Union project will suffer due to the departure of two of the powerful drivers of the project, the UK and Commissioner Hill. However, there is a broad consensus amongst Member States on the benefits of CMU.

Perceptions that CMU was purely beneficial to the UK may have hindered progress to date; without the UK, other Member States might feel more inclined to support the project.

There were even concerns that CMU would not go far enough, especially as the EU did not propose creating a Pan-European supervisor for financial markets. Without the UK, this idea to centralize supervision of European financial markets might well return.

III. UK industry and political motivations

A state of inertia between businesses and politics is occurring with both perspectives looking to see what issues the other will prioritize first. Fortune will favor businesses and industries that are able to do their thinking quickly and put it to the UK government and the EU as a priority negotiation position. While financial services may be headquartered in the UK, they are global by nature and therefore have a stake in other European markets. UK policy makers are cognizant of this and will look for businesses to make the case to other European capitals to explain why the UK’s negotiating position for financial services is mutually beneficial for EU Member States.

Financial services will be a priority for the UK negotiation team due to its political status, tax revenue and global interconnectivity. During the negotiation period, UK representatives will try to find a balance between:

1) giving their EU counterparts some appeasement wins (likely to be status orientated);

2) retaining the eminent position in real terms (as opposed to physical locality) of London as the location in Europe for ‘hubbing’ financial transactions;

3) ensuring there is parity of regulation so that transactions can occur seamlessly with Europe, but also;

4) ensuring the UK is able to competitively differentiate itself outside of the EU.

These are important criteria for financial services businesses to consider during Brexit negotiations. Access to the Digital Single Market and CMU will be prioritised by UK policy makers and the financial industry, and the bulk of existing financial services legislation is likely to be grandfathered. However, UK policy makers are looking for financial services to decide, firstly, which of the ongoing EU legislative briefs are a priority and, secondly, which existing legislation can be disregarded. This should be the starting point of any financial services industry dealing with the Brexit hangover. Throughout this process the role of trade bodies will be essential and we are likely to see a renewed interest by UK and EU policy makers in their significance – especially those such as the BBA, ABI, AFME and IMA. During the period of negotiation, trade bodies will be viewed by UK and EU policy makers as providing an element of much needed consensus and it would be wise for financial services industries to stick close to their peers.

TIAA buys the Wealth Management Tech Provider, MyVest

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TIAA has announced that it has acquired MyVest, an holistic wealth management technology company. This acquisition underscores the firm´s commitment to help individuals navigate their financial lives in a clear, simple and efficient way. Terms of the deal were not disclosed.

Headquartered in San Francisco, MyVest provides scalable, customized wealth management services on a single unified platform for financial institutions. It will now operate as a subsidiary of TIAA that focuses on emerging technologies and will report to its Chief Digital Officer, Scott Blandford.

Both companies have collaborated since 2009 to help provide customized discretionary investment and tax management services for individuals. This acquisition will advance TIAA´s efforts to deliver a full suite of digital advice capabilities in addition to its in-person and phone-based services.

Following this acquisition, the firms will continue to work together to deliver simplified advice and planning technology across TIAA’s portfolio of financial services products, from retirement plans to IRAs and banking products.

MyVest employs a team of experienced technology, investment management and services operations professionals and will continue to serve its current client base.

“We remain committed to serving our clients and continuing to provide the tools advisors need to prepare their clients for the future,” said MyVest CEO Anton Honikman.