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Not All Emerging Markets Are Created Equal: Turkey, Doves, Hawks and Owls

It’s tough to keep your head at times when the financial markets are behaving like they are. It may be especially tough when you are the governor of the central bank of a country with a 4% current account deficit and 6% inflation. In emerging markets especially, this is exactly the kind of mix that speculators are targeting right now. And yet, amidst all the swings in sentiment and the “risk-on, risk-off” trading, Reserve Bank of India Governor Raghuram Rajan expressed concern over following “the flock,” saying: “We are neither hawks nor doves. We are actually owls.”

The most recent events to roil markets have been those in Turkey. With pressure on countries that rely on external funding, it was surely not going to be too long before Turkey attracted the attention of traders. After all, it runs a current account deficit of over 7% of GDP and its inflation rate is also above 7%. Its policymakers decided to try to head off currency speculation by dramatically hiking interest rates from 5% to 10% in an effort to make shorting the lira uncomfortably expensive. But such high interest rates do put a strain on the domestic economy. How long can they conceivably keep rates so high before they sacrifice domestic growth for the sake of protecting the currency?

Feathers have been flying in Latin America, too, where most major nations are in external deficit. Argentina—whose international credibility has never really recovered from the debt default at the end of 2001—is being treated as the canary in the coal mine for the whole of the emerging market universe, including Asia. One need not be a scavenger these days to find opportunities to short emerging markets. Traders have been casting around for other targets like Turkey and Argentina.

However, emerging markets are not a homogenous block, either culturally or economically, as many countries in Asia have proven by their ability to close the gap in living standards with the West over the past 30 years. Asian economies continue to enjoy high savings rates and robust productivity growth. Most of Asia remains unruffled as the region runs healthy current account surpluses. Only Australia, Thailand, Indonesia and the Indian subcontinent run external deficits and perhaps only the latter two are really prey to currency speculators. And even here, India has already been restraining credit growth for some time in an attempt to squeeze any short-term excesses out of the economy. In Indonesia, despite short-term migration of capital, the government has been taking steps to remove supply-side obstacles to more efficient growth; China too remains an interesting potential source of long-term foreign direct investment to keep the economy investing in new capacity.

Not that currency speculators are going to pay much attention to Governor Rajan—they love to “take on” central banks. However, whilst their options in other parts of the emerging market universe may keep the speculators circling, opportunities in Asia are less widespread. After all, in Asia, current account surpluses abound: Japan (1.0% of GDP), China/Hong Kong (2.0%), Philippines (4.2%), Malaysia (4.5%), Vietnam (5.5%), South Korea (6%), Taiwan (11.5%) and Singapore (17.5%). Private U.S. dollar debt is manageable as a percentage of GDP and, unlike Latin America, bond issuers have increasingly relied on domestic lenders rather than the international markets. Outside of the Indian subcontinent, inflation rates remain manageable too—averaging about 2% in North Asia and a little above 3% in Southeast Asia, excluding Indonesia. In addition, Asia’s largest economy, China, is also in a relatively strong position. Its nearly US$4 trillion foreign exchange reserves and closed capital account make an externally forced currency crisis extremely unlikely.

So, the current market sentiment is something of an albatross around Asian economic and market performance. Whilst it is never safe to assume the currency speculators have “gone away,” the region’s economies have put in enough hard work over the previous decades, it seems, to earn some goodwill. Not all emerging markets are created equal. We don’t want to count any chickens, but the fact that Indonesia (+4.6%) has outperformed the U.S. (-1.6%) thus far this year* does suggest that a bit of owlishness is creeping back into the markets.

*Year-to-date performance in local currency terms, as of February 11, 2014.

Opinion Column by Robert Horrocks, PhD, Chief Investment Officer – Matthews Asia

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.

Swiss Re Acquires a Majority Stake in Colombia’s Insurer Confianza

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Swiss Re adquiere el 51% de la firma de seguros colombiana Confianza — . Swiss Re Acquires a Majority Stake in Colombia's Insurer Confianza

Swiss Re Corporate Solutions and owners of Compañía Aseguradora de Fianzas S.A. Confianza (“Confianza“) have signed an agreement under which Corporate Solutions will acquire a 51% stake in Confianza. This arrangement will provide Colombian corporate clients local access to Swiss Re’s commercial insurance products and services.

Confianza, established in 1979 and based in Bogotá, offers a broad range of surety insurance products, third-party liability and all-risk construction insurance solutions.

This transaction supports Swiss Re Corporate Solutions’ growth strategy and will enable it to expand business in Latin America through local representation. Agostino Galvagni, CEO of Swiss Re Corporate Solutions and a member of Swiss Re Group’s Executive Committee, comments: “We are very pleased to join forces with Confianza, a firm with an excellent reputation and understanding of the local market. The combination of our capabilities and expertise will create a strong commercial insurer for corporate clients in Colombia.”

For Confianza, this transaction marks an important development in their history. Through this agreement, the company will broaden its range of products with an initial emphasis on solutions for clients in the country’s growing infrastructure sector.

Luis Alejandro Rueda Rodríguez, CEO of Confianza, says: “This investment, underpinned by Swiss Re Corporate Solutions’ financial strength and innovation capabilities, will reinforce our leading position in the market. Together we will be able to offer clients large capacity and technical expertise to support Colombia’s growing economy and the new government infrastructure projects.”

The transaction is subject to approval by the relevant authorities and is expected to close in the second half of 2014.

Private Equity and Venture Capital Investments in Latin America Exceed Previous Record by US$1b

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México, Perú y Colombia siguen ganando atractivo para los inversores de private equity — Photo: JLPC. Private Equity and Venture Capital Investments in Latin America Exceed Previous Record by US$1b

Private equity and venture capital firms committed US$8.9b through 233 investments in Latin America in 2013, representing a six-year high and a 13% increase over 2012, according to data released by the Latin American Private Equity and Venture Capital Association (LAVCA). Activity in the last six months has been accelerated by major buyout deals in Brazil, Chile, and Colombia.

In both Mexico and the Andean countries, local GPs were able to capitalize on growing investor interest by securing new commitments from international investors and local pension funds. More than US$1b of new capital was raised in Mexico through six funds while US$1.4b was raised via Andean region funds and Peru and Colombia country-specific funds.

Overall, fundraising in 2013 was again dominated by smaller funds with 49 managers reporting 52 partial or final closings, totaling US$5.5b (versus 42 partial or final closings from 40 firms in 2012). Exits in 2013 were consistent with 2012 figures (US$3.8b), generating US$3.7b in proceeds.

“The private equity and venture capital community in Latin America has been quietly building a foundation that is capable of withstanding existing and future market complexities,” said Cate Ambrose, President and Executive Director, LAVCA. “The region continues to experience regular milestones in the face of emerging market volatility, such as this year’s record in investments, however, it will be important to see how global LPs respond once some of the billion dollar plus funds reenter the market.”

Investments in the oil & gas sector dominated in 2013, including major deals in oil & gas infrastructure. Overall oil & gas captured 18% of the US$8.9b total. It was also the sector with the highest average ticket size. Twelve deals deployed roughly US$1.6b in new capital.

Additional findings include:

Private equity managers continued to market funds that reflect the mid-market opportunity (closings below US$600m).
Brazil again dominated in fundraising and investments for the region, capturing 43% of the total amount raised during the period and 68% of the total amount invested.
Capital raised by Mexican managers will allow them to target new opportunities generated by reforms.
In Colombia, managers invested US$1.1b through 20 deals, a record figure for that market. Activity in the country was driven by four oil & gas deals that contributed 72% of the capital deployed.
Continuing a 5-year growth trend, nearly half of all deals were in IT-related sectors, supported by VC activity in the region.
Consumer/retail continued to be a relevant theme among private equity investors, both in terms of dollars and deals.
There were eight PE-backed IPOs in three key markets (Brazil, Mexico, and Chile) via four different stock exchanges.

The full report will be made available free to LAVCA Members in March.

Creating Real Value: Strategy and Entrepreneurship

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Valor compartido; creando valor real — Wikimedia CommonsPhoto: WorldIsland, Flickr, Creative Commons.. Creating Real Value: Strategy and Entrepreneurship

For decades, businesses have been involved in creating value; and many think of value as maximizing profits and minimizing costs. There are all sorts of models and matrices to help organizations create this sort of value. But, there is a limit to which a business can maximize profit and minimize cost, and that leads to the question: what do we do next?

Focusing just on profits and costs is unsustainable value creation, purely because of its limitations. It’s not enough to create long-term value. Let’s take pharmaceutical companies as an example. These companies spend months in closed rooms working on probabilities that mostly come down to, based on estimates of future sales, which projects to continue, which to shelve, and so on. These discussions are usually also surrounded by the notion of building a patent that creates maximum value in terms of profit.

What’s missing?

In all the talk about profits and costs, only rarely does the idea surface that the foundation of any pharmaceutical company and its products is curing people. If pharmaceutical companies urged their managers to closet themselves and talk about which kinds of new drugs could cure a dangerous disease, the whole idea of value creation would change. Developing a new, effective medicine for a pressing health problem would lead to new vistas for the company as demand for that innovative drug would obviously be very high — which in turn would lead to higher profits.

Too many managers have a myopic and self-centred view of value, and this is where the problem of sustainability arises. Creating only shareholder value is not sustainable. Shareholder value is not real value; it’s only a part of real value.

Real value is about going beyond trade-offs, it’s about creating shared value. Shared value is comprised of a set of different values bundled together, and inarguably shareholder value is one of them. Shared value, in my opinion, has four arms.

Employee value

Most of us know this as human resources. Instead, I like to call it human assets because I think employees are not resources; they are assets. Some company leaders care about this arm because they understand its importance; others do not because they either do not understand its value or discount it so heavily that the human factor in their business becomes marginal (at least, in their minds). In yet other cases, there is an inattentional blindness; but human assets are central to any business model within any industry or sector, anywhere. While technology has changed a lot of things, there is still a tremendous need for human assets.

Achieving employee value requires that companies create value for their employees in material terms — competitive salaries, bonuses, perks and the like. While material value is a key value in this sense, it is important to bear in mind the gaps between these salaries and bonuses. In other words, the structure for compensation should not have a large variation in an organisation. And, beyond material compensation, employee value also includes intangible factors: the corporate culture as well as such things as work/ life balance, promotion, recognition, career development and so on.

And, when it comes to establishing employee value, I would urge you to add one more important ingredient: reason. How many companies do we know today that give reasons to their people about why they are doing what they are doing? Companies must tell their employees why they are in the business they are in and what sort of value that creates for the other three arms of shared value. Shared value must be established, but it must also be explained to everyone. Very often, when I go into companies, I ask random people what they are doing. When their answers are entirely numbers-based, I know immediately that the growth of the company has a built-in limitation.

Consumer value

This arm is concerned with creating value for consumers through the products and services they buy. From a management viewpoint, there is more to it than just manufacturing products and offering services. Look around: there are millions of products and services available that create no real tangible value whatsoever, and yet they exist.

Let’s take an example of a fresh juice-producing company. The real value that company offers to the consumer lies in producing a beverage that isn’t full of unnatural stuff, that contains all the healthful ingredients so marked on the box, that doesn’t make the consumer fall ill and is reasonably priced. If, in this case, the juice product does not have one of those qualities, it doesn’t create real consumer value. Thus, while companies may sell products that help others increase their material wealth (say, computers that enable people to write business plans or novels), any product or service that has a positive impact on the lives of those paying for it should be considered as demonstrating that the company is committed to consumer value.

Shareholder value

While I have said that maximising profits and minimising cost is not all that is required to sustain and grow a company, it is a part of the story that cannot be left out. No matter how you want to define shareholder value, it entirely links to the material side of an organisation and is largely dependent on a good set of top-line and bottom-line numbers. Such numerical performance, being highly dependent on market and economic conditions, naturally becomes highly uncertain and less sustainable.

Consider, for example, the recent ups and downs of Amazon.com. When the company reported its numbers early in 2012, its profits missed expectations, causing the stock — despite enormous sales numbers — to drop 10 per cent or more. Profits and costs, surely, are topics of daily discussion at Amazon, which realises that it must improve those numbers if it is to prevail in its desire to be considered a company that delivers reliable shareholder value. There is a huge body of literature and research available on this particular arm of value. Every business school teaches this, and quite well; yet, as noted, there is so much more that must be taken into account for a company to thrive year after year. Which leads us to the arm that deals with contributing to society.

Social value

Though many talk about this value and discuss it at the highest levels of the company, the real implementation of this arm is still absent from the majority of companies. Why? Because businesses are supposed to create shareholder value, and social value is too often deemed an unnecessary cost, top managers pay the concept lip service while keeping the corporate wallet tightly shut.

Let me emphasise: thinking about social value as a cost is a mistake. It is, rather, a critical arm of shared value as it includes, among other things, whether a company is living up to its Corporate Social Responsibility (CSR). This is an enormous field of study, but Wikipedia’s definition that ties CSR to the adherence to a ‘corporate conscience’ and to the demonstration of ‘corporate citizenship’ carries, to my mind, a great deal of what it means to provide social value.

Yet, social value goes beyond CSR. It is also about creating value for society through good products and services; being ethical; creating jobs and opportunities; making lives better; cooperating, sharing, and uplifting society — and caring about all the elements of society that are required to sustain any business. For example, those still easy-to-find news stories about companies dumping toxic wastes into rivers are sad not only because of the inherent dangers involved when a company wrecks the environment in which its customers must live. It’s also sad because it reveals a corporate leadership so nearsighted (in terms of social value) that it seems all too willing to undercut the likelihood that it will be able to be profitable in the years ahead. A company with low social value has, in every case I can think of, low strategic value as well.

Think of shared value and its four parts as a diagram. The organisation is in the centre, with employee value to the north, consumer value to the east, social value to the south and shareholder value to the west. All the values are interconnected and share value among each other as well.

The enemy is…

The current global economic climate is evidence that there has been too much focus on one single arm of value, shareholder value; and this has led us into the dark economic times that we face today. Over the recent decades, too many of us in the business world have become self-centred and materialistic.

We, as individuals, should shoulder the bulk of any blame for the current state of the economic world because we run those organisations that do not create real value. We have created many high value creators but few shared value creators. If we build our tomorrow on all four arms of value, we will move away from dark economic times and build a sustainable world. It may sound naïve, but creating shared value is the best way to ensure shareholder value while also prudently managing the other elements of the business value chain that have an impact on the profitability and sustainability of your organisation.

Article by Inam Ul Haq, Managing Director of LAM, a global consulting company based in Mexico City. This article was first published on Business Strategy Review, London Business School

Erik Bethel (SinLatin Capital) and Julie Neitzel (WE Family Offices) Join MFF’s Board of Directors

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Bethel de SinoLatin Capital y Neitzel de WE Family Offices, nuevos directores de MFF — Wikimedia CommonsJulie Neitzel, WE Family Offices. Erik Bethel (SinLatin Capital) and Julie Neitzel (WE Family Offices) Join MFF’s Board of Directors

Erik Bethel, Partner and Co-Founder of SinoLatin Capital (SLC), and Julie Neitzel, Partner at WE Family Offices, have been elected to join the Board of Directors of The Miami Finance Forum (MFF), South Florida’s leading financial services networking organization.

“Julie and Erik are top-notch business leaders with world-class experience,” said MFF Board Chairman Carlos Deupi. He added, “we are excited to welcome Erik to our Board of Directors and grateful to have Julie’s continued involvement at MFF in her new role. Erik and Julie are key additions to our team and we know that they will bring unique perspectives and significant value to our board.”

Erik Bethel brings an extensive business portfolio to MFF with 18 years worth of experience in private equity and investment banking in the natural resources and infrastructure sectors of China and Latin America. Before joining SLC, Mr. Bethel worked for ChinaVest, the oldest private equity fund in Mainland China. Previously, he worked in the Latin American private equity, mergers and acquisitions and corporate finance groups at Morgan Stanley, J.P. Morgan Partners, Emerging Markets Partnership, and Compass Point Capital Partners. His transaction experience spans the infrastructure, agribusiness and mining sectors. Mr. Bethel graduated with distinction from the United States Naval Academy, Annapolis with a B.S. in Economics and a B.S. in Political Science. He also received an MBA from The Wharton School of Business.

“I am delighted to join the Miami Finance Forum’s Board of Directors this year, and I look forward to contributing to an organization that provides unique business and networking opportunities for finance and investment professionals both locally and throughout the region,” said Erik Bethel, who also serves on the Board of Directors of Rio Cristal Resources, a Peruvian zinc mining company.

Julie Neitzel has worked extensively with entrepreneurs and high net worth families in all areas of investment capital management and multi-generational planning, helping them solve complex wealth issues for more than 25 years. Ms. Neitzel joined MFF’s Advisory Board in late 2013, and has now been elected to join the Board of Directors. Prior to her current position as Partner at WE Family Offices, Ms. Neitzel was the President of Miami for GenSpring Family Offices. She has held many leadership roles at not-for-profit organizations by supporting education, the arts and public service areas. She has been a guest lecturer and speaker on topics including women and investing, entrepreneurship, private equity investing, real estate investing and wealth challenges. Ms. Neitzel earned her MBA in Finance from American Graduate School of International Management and her Bachelor of Arts degree in International Studies from Bradley University, graduating magna cum laude.

“It was a pleasure to have participated in the Advisory Board last year, and I am now thrilled to assume a new role as part of MFF’s Board of Directors,” said Juile Neitzel. “The Miami Finance Forum has made great strides to poise itself for a successful year, and I look forward to working with a diverse and qualified team to drive this momentum forward,” she added.

Global Dividends Hit Record $1.03 trillion According to the New Henderson Global Dividend Index

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Dividends paid by the world’s listed companies burst through the $1 trillion mark for the first time ever in 2013, according to the Henderson Global Dividend Index, a new quarterly report analyzing equity income from around the world.

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Investors harvested $1.027 trillion of dividends during the year, an increase of $310bn since 2009. In that year, which marked a post-financial crisis low point for equity income, firms delivered $717bn to their shareholders. This dramatic growth means the Henderson Global Dividend Index (HGDI) reached 143.2 by the end of 2013 (100 marks the beginning of the series at the end of 2009).

Andrew Formica, CEO of Henderson said: “We have undertaken this research because we are seeing increasing calls from our clients for our range of international equity income products. The trillion dollar dividend is a huge milestone for equity investors and illustrates that dividends are now a vital component of investors’ returns. The search for income is more than just a response to rock bottom interest rates in recent years. It marks a generational shift as ageing populations must increasingly rely less on state pensions and more on their own savings to provide for retirement. Not only that, but they will need to stay invested in equities much longer than in the past too. This demand for equity income is a trend we see continuing through 2014 and beyond.”

Different parts of the world are producing very different results. By far the fastest growth initially came from Emerging Markets. Collectively, dividends from these countries have more than doubled since 2009 (+107%), up from $60.9bn to $125.9bn, an average annual growth rate of almost 20%.

The BRIC (Brazil, Russia, India and China) countries, which between them make up 55% of all Emerging Markets dividends, have grown a third faster than their peers in the last five years. However, after 2011, growth from Emerging Markets slowed to a crawl as the commodity cycle ended and currencies fell. Asia-Pacific grew its dividends 79% over the five year period.

By contrast, dividends from Europe ex UK moved ahead 8% since 2009 reaching $199.8bn in 2013. It is still comfortably the second most important region in the world for income, after North America. Within Europe, Scandinavian countries have seen a dividend boom, while those worst hit by the euro crisis are returning far less to their shareholders than they did five years ago. France is the most significant country, contributing a quarter of the region’s dividends ($50.5bn), though in dollar terms, its total payouts are flat since 2009. Germany contributes less than its economic power would suggest, owing to a less developed equity culture, but its growth rate is double the region’s average over five years.

The US has increased its payouts 49% over five years, and is by far the largest source of dividend income ($301.9bn), accounting for one third of the global pie. The UK’s share (at 11%) is disproportionately large compared to the size of its economy. UK payouts have grown in line with the global average (+39%) since 2009. Japan is up 29%, though the devaluation of the yen has pushed the 2013 total ($46.4bn) below the 2012 level.

From an industry perspective, the fastest growth in payout has come from the technology sector, more than doubling since 2009 (+109%) thanks in particular to Apple, which paid almost one sixth of global tech dividends last year from a standing start in 2012. For dividends technology is a relatively small sector overall, however. Financials pay the most, $218bn in 2013, almost a quarter of the global pie (24%) and have risen 76% since the post-crisis nadir. The oil industry, which has grown steadily, if unspectacularly, is a global dividend stalwart, providing $1 in every $7 of dividends in 2013. The mining sector, whose dividends doubled during the commodity boom, has slipped back over the last two years as that bubble deflated.

The top ten dividend payers, dominated by oil companies, banks and telcos, accounted for $97.1bn in 2013, equivalent to $1 in every $11 (9.4%) of the global total.

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Despite the total payout reaching a new record, growth slowed to a crawl in 2013. Dividends inched ahead just 2.8%. In Q4, they actually fell year on year, dragged down by Japan, but also a drop in the US, where big special dividends paid in the last quarter of 2012 were not repeated. The strong US dollar against many currencies also reduced the translated value of dividends in 2013. The Henderson Global Dividend Index peaked at 143.9 at the end of September.

For 2014, Henderson Global Investors expects dividend growth to accelerate after the slower pace of 2013, with developed markets delivering better income growth than developing ones.

Alex Crooke, head of global equity income at Henderson Global Investors said: “Over the five year period of our research, dividends provide a clear picture of the major global economic events and trends. The rise of emerging markets, and their cooling, the inflation of the commodity bubble and its subsequent deflation, the Eurozone crisis, and the US resurgence from the recession are all there to be seen. The research also shows just how divergent the fortunes of different countries and different industries are. It also shows how areas that rank low in free float terms, especially emerging markets, are actually generating large amounts of income, often because governments with big stakes mandate generous payouts. The reliance on a few big stocks, though significant, is less at a global level than it can be in some countries, especially the UK. This means that a global approach to income investing can bring real diversification benefits. A disciplined, research-driven approach to stock picking can maximize the income investors earn from their savings.”

Table: Annual Dividends

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Brazil: Coping With The Challenges of Wealth Transfer

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Brasil: haciendo frente a los desafíos de transmitir riqueza — Photo: Surajhaveri. Brazil: Coping With The Challenges of Wealth Transfer

Complex planning challenges require sophisticated wealth transfer strategies.

Despite a recent economic slowdown, Brazil remains firmly entrenched as an economic superpower thanks in large part to its vast natural resource wealth. The country’s enviable growth during the last decade led to the creation of great fortunes as entrepreneurs seized on the China-led global commodity boom to mint, according to Credit Suisse, nearly 230,000 millionaires. With a GDP of $2.2 trillion, Brazil’s economy is larger than India’s and is nearly twice the size of Mexico. Brazil is positioned to remain a critical market for wealth managers and other service providers focusing on the high net worth segment.

According to Wealth-X, Brazil is home to more than 4,000 ultra-high net worth individuals, holding $770 billion of wealth – the highest in Latin America. Unlike many other markets, especially those of developed economies, Brazil’s high net worth population has some unique characteristics that create interesting dynamics, challenges and opportunities. According to Forbes, only 6% of Brazil’s ultra-high net worth individuals have inherited their wealth, which indicates the overwhelming majority amassed their own fortunes or have shrewdly invested their nominal inheritances.

Being a continent-sized country, Brazil’s high net worth population has distinct regional differences that demand customized approaches. On the one hand, a significant amount of Brazil’s millionaires remain concentrated in the country’s two main cities – São Paulo and Rio de Janeiro. High net worth individuals in these cosmopolitan urban centers often operate globally-connected conglomerates that require highly-sophisticated financial and legal strategies to manage both domestic and international operations.

However, because the country’s natural resource driven wealth creation has largely occurred in the more rural areas, the industrious entrepreneurs emerging from these parts tend to be more nationalistic in their business, travel and outlook. These individuals typically operate businesses only in Brazil, and by and large maintain a strictly local business structure. In fact, many of these individuals fuel Brazil’s luxury market, as they are less inclined to travel overseas to make purchases and prefer to shop within Brazil’s notoriously high-priced borders, making the country a top performer for fashion powerhouses like Gucci and Louis Vuitton.

Regardless of where in the country they reside, wealthy Brazil residents are exposed to the legal and regulatory limitations of a country that only three decades ago was emerging from a military dictatorship. Brazil has generally not had the time to create sophisticated frameworks capable of properly addressing the complexities involved in managing and transferring large fortunes. Having succeeded in building their wealth, many of these individuals now face their greatest challenge – preserving that wealth, and ensuring its smooth and efficient transfer to the next generation.

The challenges of wealth transfer in Brazil

While the proper transfer of significant wealth in Brazil certainly requires the execution of well prepared legal documents, this also requires a patriarch or matriarch develop a clear vision for their financial legacy, which entails the careful management of emotions, personalities and complex family dynamics.

As most wealthy Brazilians attribute the majority of their wealth to the value of a closely held business, business-related planning challenges abound. Wealthy Brazilians have to determine if and how their business will suffer upon their death, perhaps because they hold key customer, vendor or governmental relationships. They also must determine how business equity should be transferred to heirs, especially in cases where some heirs are actively involved in management and others are not. Further, they must determine if their heirs have the necessary skills and desire to partner with existing shareholders, and whether doing so would add new challenges to the business. Finally, business owners need to evaluate whether the value of their business relative to their overall portfolio creates a significant diversification risk.

Further, as the miracle of wealth creation dictates many members of the next generation will not have the same level of success as their ascendants, patriarchs and matriarchs should consider how to preserve their wealth over time. This means they need to determine if wealth should earmarked not just for their spouse and children, but also their grandchildren and great-grandchildren. Decisions need to be made about whether wealth should be transferred to both bloodline and non-bloodline family members, and if estate funds should be used to repay outstanding debt obligations, meet philanthropic giving desires and/or fund education or retirement plans for their heirs. It also requires the patriarch or matriarch assess the various currency, sovereign and liquidity risks associated with their asset profile.

These are not often easy issues to tackle when the discussion of wealth transfer commonly surrounds the uncomfortable subject of death and the accompanying concerns about privacy and confidentiality. According to Barclays Wealth Insights, 34% of global high net worth individuals do not trust their children to protect their inheritance, 20% believe assets should be allocated differently between children and 40% have experienced wealth as a source of conflict within the family.

These challenges create an unprecedented need for high net worth Brazil residents to plan for their wealth transfer. Solutions that create liquidity, provide flexibility and offer peace of mind should be sought.

Fostering a planning culture

As Brazil’s current wealth is a recent phenomenon, the process of recognizing and addressing these challenges have not been practiced by multiple generations and a culture of planning has only recently begun to develop.

Wealth management advisors to high net worth Brazil residents typically focus on helping clients grow their assets. However, aiding them to preserve, structure and transfer their wealth is important to providing complete wealth management services.

Advisors who fail to address these issues not only impact their clients, but also jeopardize their own businesses in the long term. The Institute for Preparing Heirs suggests 90% of inheritors will change advisors upon receiving their inheritance, generally because the heirs have limited relationships with their parent’s advisors and have not been engaged in the wealth transfer planning process.

Alternatively, properly initiated and managed wealth transfer discussions help advisors solidify relationships with heirs and build new relationships with business partners and extended family members, while aiding them in identifying new assets and complementary business opportunities.

Life insurance as a solution

While Brazil residents have a variety of solutions available to aid them in meeting their wealth transfer needs, there is one highly attractive solution that can inject liquidity to an estate when needed most: life insurance.

Life insurance is often an ideal planning solution due to its ability to offer a death benefit that is a multiple of the premium, cash value in the event an early surrender is required, flexible premium schedules, attractive policy provisions and guarantees from highly rated entities.

As the domestic Brazil life insurance market is not highly developed and offers coverage amounts that are often insufficient to meet the needs of the growing high net worth population, more sophisticated strategies need to be considered in order to bridge the liquidity gap faced by affluent Brazilian families.

The taxation of life insurance in Brazil

Due to the social and economic benefits of life insurance, the tax laws of many countries have evolved to exempt life insurance death benefits proceeds from income taxation.

Eduardo Avila de Castro, partner of Machado, Meyer, Sendacz e Opice Advogados in São Paulo says, “Brazil tax law generally exempts death benefits proceeds of life insurance from income tax. Any life insurance based planning solutions should be evaluated and implemented with careful consideration for the relevant laws and planning objectives. Due to the changing international tax landscape, I suspect an increasingly growing number of advisors will consider the use of life insurance based solutions to meet the changing needs of their clients.”

The result

The widespread planning and liquidity needs of Brazil residents, combined with the attractiveness of available life insurance offerings, creates the most attractive opportunity in Latin America to serve high net worth clients. Practitioners who become educated on how to address and solve these complex needs, will surely reap the brand, monetary and associated benefits of highly satisfied clients.

By Diego Polenghi, Managing Director, International Planning Group

La Française and TAGES Capital Sign Strategic Partnership

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Foto: Dalbera, Flickr, Creative Commons. Una combinación ganadora

La Française, a leading European asset manager, and TAGES Capital, an alternative multi-management solutions provider part of the TAGES Group, have announced the signing of a strategic partnership. Under the terms of the partnership, La Française will acquire a 40 per cent stake in TAGES Capital and delegate the management of its existing range of funds of hedge funds and UCITS funds with approximately $1 billion of AUM to TAGES Capital. Pascale Auclair, Chief Executive Officer of La Française des Placements, and two other La Française executives will be appointed to the management committee of TAGES Capital. The transaction is subject to the customary regulatory approval processes.

As part of the agreement, two La Française fund managers will join the investment team of TAGES Capital in London, the hub of alternative fund management. The enlarged team will manage the existing La Française fund of hedge funds product range and ensure the continuity of services for existing French investors. La Française will be the exclusive distributor of La Française and TAGES alternative multi-manager funds in France. Outside of France, the two groups will collaborate on international development opportunities.

TAGES’ unique business model, focused on the delivery of customized solutions to clients, extensive research and robust manager selection has driven significant asset growth. As of December 31, 2013, TAGES Capital had approximately $2bn of assets under management and advisory.

Xavier Lépine, founder of Alteram and Chairman of La Française said: “At La Française, we aim for excellence. This partnership means that La Française will be a benchmark shareholder in a top-tier player in the alternative asset management space in Europe. As founder, some ten years ago, of Alteram, a leading fund of hedge funds manager, I’ve always believed in the value of alternative multi-management, but to achieve excellence, you need the appropriate vehicles, substantial resources and impressive track-records. Together with TAGES, La Française will have all of the above!”

Salvatore Cordaro, founder and Chief Investment Officer of TAGES, said: “We share La Française’s enthusiasm for this alliance, which strengthens our competitive position in Europe. We are excited that such an important asset manager has decided to become our partner and we are confident that La Française’s expertise will make a tangible contribution to our business. TAGES Capital’s unique approach to multi-management investing, through our focus on providing investment solutions rather than products, helped us reach important milestones and grow the business in a challenging market environment.”

This unique partnership aligns the interests of both shareholders (La Française & TAGES) and investors. With combined assets under management and advisory in excess of $3 billion, La Française and TAGES will be well placed to further grow the multi-manager business.

Azimut Completes the Acquisition of FuturaInvest’s 50% Starting Financial Advisory Services in Brazil

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Azimut completa la adquisición del 50% de Futurainvest para dar asesoramiento financiero en Brasil — Photo: Lima Andruška. Azimut Completes the Acquisition of FuturaInvest’s 50% Starting Financial Advisory Services in Brazil

Azimut, an Italian asset manager, through its Brazilian sub-holding, AZ Brasil S.A. and the partners of FuturaInvest Group, have completed the purchase of 50% FuturaInvest financial advisory company and 50% of FuturaInvest asset management company (dedicated to funds of funds and managed accounts). Moreover, subject to the satisfaction of certain conditions precedent and to the approval of the Banco Central do Brasil countersigned by the President of Brazil, the transaction will entail also the acquisition of 50% of FuturaInvest DTVM (Distribuidora de Titulos de Valores Mobiliarios). FuturaInvest DTVM is a regulated financial institution authorized to distribute financial products to local investors.

FuturaInvest, with 35 people and 9 offices around Brazil, is specialized on providing advisory and asset allocation services via funds selection, financial education, and asset management services through funds of funds and managed accounts to around 2,500 clients. As at 23rd January 2014 FuturaInvest has more than R$ 240 million of assets under advisory (equivalent to around 74 million euros).

The Brazilian investment industry has R$ 2.4 trillion in AuM as at December 2013 (730 billon euros) representing the 6th largest market in the world.

The transaction involves mainly the subscription of a capital increase (for a countervalue of around 3.9 million euros) to finance the business plan. The partnership also provide for a potential adjustment to the subscription price in connection with the growth of business over the first three years of operations.

Pietro Giuliani, Azimut’s Chairman and CEO, comments: “This is a very important day. From now on we will be able to start implementing our integrated business model in Brazil. FuturaInvest Consultoria, operating in open architecture model, will be our vector to provide high standard financial advisory services to Brazilian investors.”

Capital Strategies Partners has an agreement with AZ Fund Management to distribute its products in Latin America.

China’s Challenges and Opportunities for Long-Term Investors: Roundtable by Matthews Asia in Miami

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For more than 20 years, Matthews Asia has been providing investors with access to opportunities created by China’s profound economic transformation. And following a decade of export-led growth and huge capital investment, China is now undertaking a rapid and strategic evolution from a model based on high levels of credit and investment to one based more on consumer spending and high-value services.

Today, China’s diverse economy requires a new perspective and a more diversified approach to the opportunities it presents. Matthews Asia invites Miami’s investment community to join the firm for a roundtable discussion with Matthews Asia Senior Research Analyst Winnie Chwang, who will share her insights on:

China’s economic landscape
Challenges facing China and opportunities for long-term investors
Why Matthews Asia believes China is a distinct asset class

The event, for investment professionals only, will take place on Wednesday, March 12, 2014, at the restaurant Area 31, Epic Hotel -270 Biscayne Blvd Way-, from 12:30 p.m. to 2:00 p.m. Lunch will be provided. To attend please RSVP by February 28th to Lindsey Serafin at events@matthewsasia.com or 415.954.4523.