Wikimedia Commons. The Approval of the Pension Reform in Brazil Opens the Door to Lower Rates and Foreign Inflows
With the broad vote obtained in Congress, the pension reform in Brazil seems to have entered a safe path, opening the possibility of a reduction in interest rates and new reforms, says Luiz Ribeiro, CFA Managing Director Head of Latin American DWS Equities, in an exclusive interview to Funds Society.
Interest rate cuts
In the opinion of the expert, the fact that the reform was approved so widely is very positive because it implies that opposition congressmen voted in favor.
One of the most remarkable aspects of the reform is the volume of expected savings that, according to his estimates, could be around 850,000-900,000 million reais in ten years. Thus, Ribeiro believes that this important volume will allow the Brazilian Central Bank to reduce interest rates by 100 bp before the end of the year. “We expect the central bank to cut rates by 50 bp at its next meeting to 6% and another 50 bp in the next. This reduction will have a very positive impact on the equity markets “, Ribeiro points out.
Regarding the next steps in the parliamentary approval process, Ribeiro is confident and does not expect big surprises: “This first vote has been the most important, and we do not foresee that there will be problems in the Senate voting. It is a done deal and we hope that the reform will be voted on in the Senate at the end of August. “
Door opened for further reforms and foreign investors inflows
In relation to how much of these positive reforms have already been priced in, Ribeiro states that while the Sao Paolo stock exchange is trading at PER of 12.2 times above the 7-year historical average (11 times), there is potential for further upside as the market has not yet priced in the next reforms that will came into place after to the approval of the pension reform.”The next reform to be addressed will be the tax reform and the market seems to start to discounting it for next year.”
Ribeiro also highlights the fall in country risk premium, resulting in 5 yrs CDS levels similar to the ones Brazil was when its rating was investment grade. This lower perception of risk may drive foreign investors back to the Brazilian equity market, although Ribeiro believes that they will wait until the parliamentary process is in a more advanced state.
In this regard, he points out: “The recent inflows that we have seen in Brazilian stock market come from a change in the asset allocation of local funds from fixed income markets equities. I think this trend will continue, but we will begin to see foreign investors in the coming to the market in a few months. “
After this important step in Guedes economic agenda, the manager states that the main risks that may affect Brazil come from the external sector and are basically: “Increase tensions in the trade war or the situation in Italy.” Consequently, in their portfolios they overweight sectors linked to the domestic economy such as the consumer sector and certain smaller financial companies.
Pixabay CC0 Public Domain. Mini-Bots: The New Italian Instrument That Causes Controversy In Europe
The Italian authorities are looking to launch the new mini-BOTs. What is this financial instrument? Why are European Central Bank (ECB) officials so upset by this monetary development?
Mini-BOTs are new Italian Government ‘I Owe You’ (IOU) issued in settlement for its outstanding expenditure contracted with the private sector, according to ASG Capital. These instruments will have legal tender status, can be exchanged between different private and public entities and used for payment of taxation. In sum, mini-BOTs would function as a local currency issued by the Italian government beyond the pale of the Euro system, outside the ECB’s monetary control.As ASG Capital points out in a recent analysis, naturally, European officials in Frankfurt and Brussels are not at all ‘amused’ by this monetary initiative coming from Rome. Faced with this new development, Jacques Sapir, French economist, describes how the ECB is standing between ‘a rock and a hard place’:
1. As it did with Greece, the ECB could apply funding pressure on the Italian banking sector for example, to make its government comply with Frankfurt’s monetary hegemony. However, there is a risk this policy could back fire. As Europe’s third largest economy and a fundamental keystone to the construction of the European project, Italy may use this kind of action as an excuse to extend a wider spread use of the mini-BOT, or ultimately leave the Union all together. In such circumstances, it is uncertain the Euro would even survive the exit of this important founding member.
2. On the other hand, the ECB could tolerate the issue of Mini BOTs as an exceptional monetary phenomenon. In this case, Frankfurt would be setting a precedent, which other nation member states may introduce in turn at some future date.
Ever since the launch of the Euro, Italy’s growth has been very weak. Its banking sector is subject to severe financial strain under the weight of significant non-performing loans. Rome has no choice but to do something….
If mini-BOTs are perceived as a potential ‘spanner in the works’ by successful northern member states, it could be considered as a cry for help from the Italian perspective. For the Eurozone to hold together and address its financial and economic imbalances, its banking sector needs to be cleaned up once and for all.
By moving pan Eurozone non-performing loans onto the ECB’s balance sheet for example, many of the region’s banking problems could be solved at the stroke of a ‘Quantitative Easing’ pen. This would be a far simpler way to manage the future of the single currency rather than watch a disorderly breakup of the Eurozone, because of the advent of the mini-BOT.
Pixabay CC0 Public Domain. Aberdeen Standard Investments: “Our Multi-Asset Strategy Allows Us To Add Value Through Diversification”
Given the current valuations, investors in traditional asset classes face a challenging environment for medium-term returns and available profitability. In addition, the most likely scenario is that volatility and the periods of stress experienced by the market in 2018 will continue this year. This is the vision of Aberdeen Standard Investments (ASI), which, in this situation, is committed to a flexible multi-asset solution that “adds value” through diversification.
This strategy is structured through the Aberdeen Standard SICAV I – Diversified Income Fund, a fund that invests in emerging debt (27.5%), listed equity (20%), infrastructure (11.2%) property (9.2%), high yield bonds, loans and litigation, among other asset classes. “The breadth of this universe allows us to fully harness the benefits of diversification and provides a solid foundation for delivering the strategy’s objectives,” says Becky Nichols, Multi Asset Specialist of ASI, in an interview with Funds Society.
By not being tied to a specific index nor forced to hold investments that they regard unattractive, the fund allows for “unconstrained and flexible” asset allocation. And it’s that flexibility which allows them to “add value by rotating asset allocation”, increasing the exposure of those offering better returns and reducing or selling those that are less attractively valued. This also enables them to provide some downside protection in times of stress.
The fund’s approach is to seek fundamentally attractive long-term investments through exposure to a wide variety of products, as, while the attractiveness of an asset may vary depending on the moment of the market cycle, the attraction of diversification “persists.”
With this in mind, the management company uses five-year return and risk estimates, they then refine them with the fund’s specific holdings and, finally, combine them with the volatility and correlation estimates.
All this incorporates qualitative judgement that includes capturing prospective risks and pragmatic issues that the process cannot incorporate (such as liquidity risk) and assessment of niche opportunities. “At the end of the process, we have a basic vision of where we believe the world is going, the implications for investment returns for the broad range of assets, and the indicative portfolios that result to achieve the fund’s objective,” says Nichols.
Their core belief is that there are several asset classes with attractive return prospects, but different return drivers, so that by combining them, returns can be more attractive than those of an isolated asset class. “It’s a robust approach in differing market conditions,” she adds before pointing out that a key aspect of this philosophy is the asset manager’s ability to “identify and access a broad range of asset classes in a liquid form.”
All in all, it’s a multi-asset solution for long-term investors looking to obtain a high, but sustainable, annual return combined with capital growth. The objective is to obtain volatility well below that of equities and a return of 4.5% per annum, which was reached in 2018.
The portfolio is fully global, but they are currently finding opportunities in emerging market bonds in local currency, mainly due to the attractive nominal and real yields they offer compared to developed countries. This is supported by cheap valuations of currencies and “decent” underlying fundamentals.
According to Nichols, the overall economic outlook for emerging markets is positive, as most are growing at a solid although unspectacular pace and inflation is under control, which supports investors’ optimism. She maintains that one of the risks is that the Chinese economy “will slow down significantly in the coming years, which would generate stress for those emerging governments which are more China-exposed”.
Another potential source of risk is, in his opinion, Donald Trump’s administration and economic policy, due to both possible protectionist measures and the fact that his fiscal and migratory policies may result in a stronger dollar, which would lead to a depreciation of the emerging currency.
Photo: Jimmy Baikovicius. How Does Reg BI Affect the Cross-Border Private Wealth Business?
Since 2010 and the passing of Dodd-Frank, the SEC and the industry have wrestled with how to minimize the inherent conflict between commission sales and a client’s right to obtain “disinterested” advice. Now, nearly a decade later, Regulation Best Interest is here and will fundamentally impact our industry in its attempt to mitigate that conflict. The question of whether a cross-border broker-dealer has acted in a client’s “best interest” will no longer be a matter of individual subjective discretion. Instead, that determination will be made subject to strict, disciplined guidelines by the SEC.
Reg BI will now require significant review of both broker-dealer and advisory offerings for an expanded level of conflict disclosure, and, in certain SEC-urged circumstances, mitigation or elimination of those conflicts. In addition, it will require a fundamentally new, disciplined and documented methodology for individual recommendations that has led some to openly question whether the commission model can survive under it.
Regulation Best Interest Generally
Under Reg BI, broker-dealers and investment advisers must provide layered disclosures and diligence at the firm, broker and product levels. Each of those obligations arise for broker- dealers at the time they “recommend” to a “retail customer” a securities transaction or investment strategy involving securities. Recommendations also extend to what type of account to open.
On its face, Reg BI’s mandate is not remarkable. It simply requires broker-dealers to act in the “best interest” of their retail customers when making recommendations about particular securities or investment strategies. The context of this “best interest” determination centers almost exclusively on prohibiting the broker-dealer from placing its financial interest ahead of the customer’s, and disclosing any information which may lead the customer to believe that the broker-dealer is not consciously or unconsciously “disinterested.” The difference is that now the SEC is requiring specific measures to document and confirm the methodology of reaching that determination.
Cross-Border Application
Because of the way the cross-border private wealth business delivers many of its services, satisfying those obligations could have a uniquely disadvantageous impact on our industry. Unlike the domestic investor, non-U.S. resident investment into U.S. accounts is often driven by non-economic factors including dollarization of currency risk, family security and risk, geographic diversification, and the international tax considerations tied to those. Further, non- U.S. resident investors often operate in languages other than English. Also, brokers who service non-U.S. resident clients often travel to meet their clients in countries that present additional layers of law and regulation and may legally constrain the in-country performance of certain service activities.
Smaller Shops
Many cross-border service providers are smaller broker-dealers or advisers that have limited offerings and platforms. In its mandate to fully disclose the scope and terms of the relationship with its customer, the SEC newly emphasizes the disclosure of any material limitations a broker-dealer may operate under, including limited licensing consequences, proprietary or limited product range, and limited strategy availability. Smaller firms may well bear a disproportionate amount of the compliance burden and cost in implementation. It is clear, however, that the availability of only a limited range of product will not protect a firm or broker from Reg BI non-compliance.
An Expanded Duty of Care
While many cross-border brokers operate under FINRA Rule 2111 (suitability), Reg BI’s enhanced suitability requirements will force greater and deeper knowledge of a client’s investment profile —specifically, tax status — in order to formulate a compliant recommendation. The obligation not only requires “diligence, care and skill” in making disinterested recommendations, but will now require that the methodology used in considering alternatives, costs, and consequences of the recommendation be thoroughly documented. Those variables must then be analyzed in application to a particular customer’s investment profile before a compliant recommendation can be made. Importantly, a customer’s investment profile must include a documented analysis of the customer’s tax status and the impact of any recommendation under that status. Under this “show your work” methodology, the ability to minimize the importance of client tax status will be largely lost.
Broker Compensation
Because the SEC views certain bonuses as too pernicious to be merely disclosed or mitigated, benchmark and target-laden packages under which many now work, may need to be revised or eliminated. In a marked departure from its disclosure-oriented philosophy, the SEC has now determined that certain types of conflict are so harmful that only eliminating them will suffice. While some, like sales contests, and sales quotas, have largely been abandoned by a self-policing industry, the application of that elimination strategy to other modes of compensation remains unclear. Accordingly, the viability of benchmark-laden revenue goals is now in substantial question.
Non-Economic Investment Considerations
At its core, Reg BI is heavily premised on “objectively verifiable” performance indicators that disregard some of the main drivers to cross-border investment—such as geographic diversity, dollarization of assets, privacy and security, and complex structures for tax and succession planning. While the SEC has also noted that these “highly personalized non-economic” drivers may also factor into the best interests inquiry, how those factors will be weighed remains unclear.
Document Delivery and Prospects
Reg BI is triggered when a recommendation is made. That trigger could well create obligations upon a broker regardless of whether the recipient has an account that may actually execute the trade. While much uncertainty remains as to when Reg BI applies, it is important to note that the SEC is urging heightened consideration in making recommendations to prospects. “[A] broker-dealer should carefully consider the extent to which it can make a recommendation to prospective retail customers, including having gathered sufficient information that would enable them to comply with Regulation Best Interest… should the prospective retail customer use the recommendation.”
Conclusion
At first blush, Reg BI appears to be the SEC’s innocuous response to the mandates of Dodd-Frank. But when applied to the cross-border banking industry, Reg BI will significantly impact the ways that broker-dealers interact with their international customers. Many are questioning the viability of the brokerage model given the increased compliance costs. Others are advocating a limiting of recommended stocks or clients eligible for recommendations. All these options themselves would require conflict disclosure under Reg BI!
We will all look expectantly to how the industry responds.
Column by Sergio Alvarez-Mena, Partner, Financial Institutions Litigation and Regulation Practice, Jones Day Miami, and Lance Maynard, University of Miami School of Law (JD/MBA 2020)
Alessandro Merjam, photo Linkedin. Monica Mavignier and Alessandro Merjam Join HSBC in Miami
HSBC Private Banking continues to strengthen its team serving Latin American clients from the United States. As confirmed to Funds Society, Monica Mavignier and Alessandro Merjam have joined the team led by George Moscoso.
“We are strongly committed to our clients based in Brazil, one of our four core markets in Latin America. As a key part of our growth strategy, we are investing in this team and are excited to welcome Alessandro Merjam and Monica Mavignier. We are focused on adding talent and building the best team to serve ultra-high net worth individuals and family offices based in Brazil.”
Moscoso, who last April became the leader of HSBC Private Banking for Latin America and the Southeast of the US, is tasked with growing the bank in LatAm, focusing its efforts in their four main markets: Brazil, Mexico, Argentina and Chile, as well as the southeastern United States.
Since his appointment, he has hired Samir Ahmad to serve Mexican clients from the New York office, as well as Mavignier and Merjam to serve Brazilian clients from Miami.
According to Joe Abruzzo, Regional Head of HSBC Global Private Banking, Americas: “We have been investing in professionals with the unique talent to serve ultra-high net worth families from our core Latin American markets. Samir complements this team well and is a good example of the talent we will continue to add.”
Merjam comes from Itaú Private Bank in Miami and has more than 20 years of experience in asset management. Mavignier worked for a month at Morgan Stanley before joining HSBC, previously she was with Wells Fargo and has more than 10 years of experience in the asset management industry. Ahmad who before joining HSBC was at JPMorgan has more than 22 years of private banking and wealth management experience.
Pixabay CC0 Public DomainCourtesy photo. Facebook: The New Central Bank?
Facebook has become an essential part of our social, cultural, economic and political spheres. Now it is looking to become our new global payment system. This was the announcement that came last week from the Libra Association (led by Facebook) along with a whitepaper about the creation of a new cryptocurrency called Libra and its accompanying digital wallet, Calibra.
The first digital currency, Bitcoin, was followed by many others: Ethereum, Dodgecoin, Litecoin, Ripple, XEM, Dash, Monero, Petro, etc. Apparently, we will now have one more as early as the first half of 2020. However, this is not going to be just “one more” as Libra looks more like a fiat currency than a cryptocurrency. In other words, with the gold standard consigned to the history books, along comes the all-powerful Facebook to create a digital currency backed by a basket of financial assets.
Facebook is not alone in this endeavour. Companies like Visa, Mastercard, PayPal, Spotify, eBay, Vodafone, Booking, Mercado Pago and Thrive Capital are among the 28 founding members of the Libra Association that will govern Libra. The goal is to reach 100 members before the official launch of the digital currency. Besides the sheer weight of the consortium of businesses backing the currency, if we add into the equation the 2.32 billion active users enjoyed by Facebook each month (one third of the world’s population), it is not hard to image the potential reach of this new cryptocurrency.
In many respects, the use of blockchain technology for Libra is quite different from the other digital currencies we know about today. Quite the opposite, in fact. The Libra whitepaper rejects the idea of anonymity and secrecy in transactions and the Libra Association has already confirmed its collaboration with financial regulators to prevent money laundering and tax avoidance.
A further crucial difference with Libra is the backing of a reserve of low volatility assets including bank deposits and short-term government debt in stable currencies like the dollar, euro, Swiss franc and yen. That said, we will need to have faith that the Libra Association will maintain these assets, record transactions and that Libra itself will be fungible, etc. Ultimately, this is the same faith we currently have in the central banks, except for a couple of important distinctions: Facebook is a private entity but it will hold some underlying assets, whereas central banks are public bodies but they do not hold assets that fully support currency issuance.
Of course, misgivings and controversies are already springing up regarding matters like data protection and the use of information in such a high-profile project. Let us not forget that Facebook possesses a vast archive of personal data from its users, about whom it knows practically everything. Many of us have not forgotten about the fines imposed on Facebook by the European Union for controversies like this and the scandal surrounding Cambridge Analytica, the consulting firm that unlawfully used information gathered from 87 million Facebook users.
Following the announcement of Libra’s creation, it is inevitable that the reflections that have been floating around for some time regarding cryptocurrencies come to the forefront once again. For example, questions are being asked about the implications for central banks and monetary policy in the event of the widespread use of a payment system like Libra, which employs blockchain technology although with a different objective to other digital currencies like Bitcoin. At first glance, it may look like an attempt to undermine the power of central banks. But curiously, as one analyst has already pointed out, in the context of a financial crisis, it could reinforce the impact of negative interest rates as it would eliminate the possibility of hoarding physical currency and other means of avoiding negative rates.
According to the whitepaper on the creation of Libra, it is “a simple global currency and financial infrastructure that empowers billions of people”. For now it is just a fledgling project, but it is certainly an interesting one.
Margaret Franklin, courtesy photo. Margaret Franklin Becomes First Woman to Lead the CFA Institute
CFA Institute, the global association of investment professionals, has appointed Margaret Franklin, CFA, as its new CEO and President, the first woman to hold the position in its 73-year history. She will assume the role on September 2, 2019, taking over from Paul Smith.
Marg Franklin has been a leader in the investment management industry for 28 years, most recently as President of BNY Mellon Wealth Management in Canada and head of International Wealth Management in North America. Her deep practitioner experience has been gained at firms ranging from large, global asset managers to start ups, including Marret Private Wealth, State Street Global Advisors and Barclays Global Investors. Her work has included advising individuals, families, pension plans, endowments, foundations and government agencies.
Marg’s experience with CFA Institute also runs deep. In 2011, Ms. Franklin was chair of the Board of Governors of CFA Institute, which is a volunteer position, and is a member of CFA Society Toronto, where she has also served on its board. She is a founding member of the CFA Institute Women in Investment Initiative, a past recipient of its Alfred C. Morley Distinguished Service Award in 2014, and a member of its Future of Finance Content Council.
Franklin said: “I am honored to assume the leadership of CFA Institute whose mission to promote the highest standards of ethics, education, and professional excellence is more important than ever as our industry faces disruption from many quarters. I look forward to applying my wide-ranging experience as a practitioner and extensive knowledge of the organization in the service of its mission and members.”
“Marg joins CFA Institute at a time when candidate growth and our global society network are at all-time highs,” said Heather Brilliant, CFA, chair of the board of governors of CFA Institute. “We thank Paul for his work to promote the CFA charter and fair and functioning markets all over the world. He leaves a strong organization ready to address the challenges of markets and economies in flux, passing the baton to Marg Franklin, a proven leader.”
Franklin will join the organization on September 2. Smith, who previously announced his departure at the end of 2019, will remain in an advisory capacity to the CEO until December 31, 2019.
Pixabay CC0 Public DomainPhoto: Actinver. Legg Mason and Actinver Announce Strategic Alliance in Mexico
Legg Mason and Corporación Actinver announced the signing of a strategic alliance agreement that will allow Actinver to manage and make available to its clients in Mexico funds using investment advice provided by Legg Mason-affiliated asset managers.
Based in Mexico City, Actinver is a fully integrated financial services firm providing private and wealth banking, asset management, wealth management and investment banking services. It’s Mexico’s largest private bank in terms of number of clients and the second largest in terms of number of branches.
“This exclusive agreement provides Mexican investors with a robust lineup of funds featuring investment strategies designed and maintained by world-class investment managers,” said Alonso Madero, CEO of Actinver’s Asset Management Unit. “By expanding access to international markets, we’re enhancing opportunities for diversification.”
Funds that are managed by Actinver using investment models provided by three Legg Mason affiliates — ClearBridge Investments, Martin Currie and Western Asset — are now available to retail investors in Mexico.
“With the population of Mexico as well as the number of people accessing banking services expected to increase over the next 20 years, we see substantial growth potential in the country,” said Lars Jensen, Legg Mason’s Head of Americas International. “We’re thrilled to partner with Actinver, and we’ll continue to develop additional solutions for the Mexican investor together.”
The funds available via Actinver are as follows:
SALUD, which is designed to deliver long-term capital appreciation through investments in companies involved in all aspects of healthcare and the life sciences. In managing the fund, Actinver is advised by New York-based ClearBridge Investments. With a legacy dating back over 50 years, ClearBridge is a leading global equity manager committed to delivering differentiated long-term results through authentic active management.
ESFERA, which seeks to achieve long-term capital appreciation through the active management of a portfolio of global companies, taking a long-term, unconstrained investment approach, with an expected low portfolio turnover and investment horizon of five years or more. In managing the fund, Actinver is advised by Martin Currie of Edinburgh, Scotland. Martin Currie builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships.
ESCALA, which is designed to preserve capital and reduce interest-rate risk while delivering income opportunities by investing in laddered, short-term, U.S. dollar-denominated, investment-grade corporate bonds. In managing the fund, Actinver is advised by Western Asset, one of the world’s leading global fixed-income managers. Founded in 1971, Western Asset has been recognized for its team-based approach, intensive proprietary research and robust risk management.
“We are delighted with the Actinver partnership which we are entering into with Legg Mason,” said Julian Ide, Chief Executive Officer of Martin Currie. “This is a strong validation of the power of Martin Currie’s investment capabilities and Legg Mason’s distribution relationships.”
“The Mexican asset management industry is still under-developed compared to those in other countries so the opportunities are enormous,” added Actinver’s Madero. “By working together, Actinver and Legg Mason are encouraging the development of the market and, by extension, helping with the economic development of the country.”
Pixabay CC0 Public Domain. Funds Society Presents its 2019 Asset Manager’s Guide NRI
Funds Society is proud to present the third edition of its Asset Manager’s Guide NRI, a comprehensive list of asset management firms providing UCITS investment solutions to investment professionals in the wealth management non resident industry.
During the last twelve months we have seen more stability than in previous years, when we saw several mega mergers. The movement of sales professionals from one firm to another has, nevertheless, continued. Additionally, several investment firms have upgraded their office space in Miami, and others have recently decided to establish themselves here, showing the strength of this city as an offshore hub for the Americas.
To help you keep track of all these changes we have put together a thorough list of almost 60 international asset management firms who do business in the NRI market through their UCITS range of products, and their contacts.
We are also presenting additional information from 15 of these firms stating their business proposal for the Americas region.
You can access the 52 pages of the guide using this link.
Pixabay CC0 Public DomainPhoto: Petr Kratochvil CC0. Bolton Expands NYC Presence with Morgan Stanley Hires
Bolton Global Capital is pleased to announce that Michel Palacci has joined the firm’s Manhattan office. Palacci was formerly with Morgan Stanley where he managed assets of $125 million. His international high net worth clientele is based in Europe, Latin America and the US. He joined Morgan Stanley in 2009 after 10 year career at Citigroup Global Markets.
Last month, Bolton recruited Daniel Geller, also from Morgan Stanley in New York City with $430 million in client assets. He is affiliating with a team of former Morgan Stanley advisors Ruben Lerner and Manual Uranga who joined Bolton in 2017 and manage over $250 million in client assets. The firm also recruited Nicholas Schreiber from Morgan Stanley in 2018 who is located at Bolton’s Fifth Avenue office where Michel Palacci will operate his business.
Since opening offices in Miami and New York City, Bolton has recruited more than two dozen international teams from the major US banks and wirehouses. The firm offers turnkey office space and a full suite of global wealth management capabilities to allow teams to easily transition to the independent business model where they can achieve higher compensation and greater ownership of their business. This model is the fastest growing segment of the US wealth management industry and Bolton has sustained a 20 percent annual growth rate over the last 5 years by focusing on teams at the major banks and wirehouses that specialize in international business.
