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The Approval of the Pension Reform in Brazil Opens the Door to Lower Rates and Foreign Inflows

La aprobación de la reforma previsional en Brasil abre la vía para bajar los tipos y atraer flujos extranjeros — 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.

Vishal Hindocha (MFS IM): “The Active Management Skill Is Probably the Best Diversifying Asset that Investors Can Buy Today”

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The current US equity market cycle is the longest bullish market on record, with 9 and a half years of history, with a small correction in the fourth quarter of last year, but already back on track in the first semester of the year. In terms of compounded wealth, is the second highest market cycle on record, with a compounded return over 330%. According to Vishal Hindocha, Director of the Investment Solutions Group at MFS Investment Management, this is an enormous volume of return that probably will not be seen again going forward.

Valuations in equity market are telling investors that we are about to enter to a more recessionary environment. Observing the forward annualized returns based on historical Shiller P/E ratios for the S&P 500 Index for one, three, five and ten years, it could be stated that valuation will play a key role in future equity returns.

“When the Shiller P/E ratio is less than 10, equity markets are cheap, and returns are pretty strong. But, when the Shiller P/E ratio is in a range greater than 40, then the forward annualized returns in equity markets are bearish from that point onward, particularly in in the five and ten-years return. Just think about the compounded impact of that in the client’s portfolios. The current Shiller P/E for the S&P 500 is around 32,5x. We are currently in the 30 to 40 times range, if the history is sort of guiding us, the 5 or 10-years returns expectations on equity are not looking attractive from this point onward,” explained Hindocha.

Valuations in bonds are also not promising. In bond markets, current yield to worst tends to be a good predictor of what returns should investors expect over the next five years. A starting yield to worst a little bit lower than 2% communicates that investors should expect a subsequent 5-year annualized return between 2% and 4% above the mentioned yield, which again is lower than expected returns in previous periods in history.

“Returns expectations of the most major asset classes are going to be lower going forward. In MFS IM, we think that alpha is going to need to play a much more important role in investors’ portfolios from today onward. The 100 or 200 bps that you can get from alpha are going to be disproportionally more valuable to investors than they have ever been in the past,” he added.

Leverage in the system

Ten years after the global financial crisis and the level of corporate indebtedness is in fact higher than the pre-crisis levels. The net debt to EBITDA ratios of the MSCI World Index, the MSCI AC World Index and the S&P 500 are well above the 1.6 x level of 2008.

“Leverage itself is not necessary a bad thing. But what it means is that investors need to be extremely careful about what they own. These higher levels of leverage can turn a good business into a stressed business very quickly. That’s the reason why selectivity is going to be much more important in the future. If the default cycle changes, leverage its going to hurt lower quality companies. The same trend repeats itself at the government level. Global government debt to GDP ratio is also generally higher than at the pre-crisis levels. Debt levels are continuing to climb again, and this fact, combined with a decline in the quality of the global corporate index and a decline in the liquidity, is embedding more risk into the system,” said Hindocha.

What can investors do in this environment?

In the last three decades, investing has become an increasingly complex puzzle. According to a model developed by Callan Associates in the US, 30 years ago, in 1989, to earn a 7.5% expected return, investors needed a portfolio that could be 75% invested in cash and 25% in US fixed income, only supporting a risk level of 3.1%.

15 years later, in 2004, to earn the same 7.5% expected return, investors needed to increase the complexity of the risk budget introducing new asset classes: 26% in large caps US equity, 6% in small caps, 18% in non-US equity and 50% in US fixed income, would nearly triple the portfolio volatility to 8.9%.

Fast forwarding to 2019, the pie chart is a lot of more complicated, the expected returns are the same, but now the risk level is six times higher than 30 years ago. Investors are now required to invest 96% of the portfolio in growth assets (34% large cap US equity, 8% small-mid caps, 24% non-US equity, 14% real estate and 16% private equity) and 4% in US fixed income to obtain a 7,5% expected return with a level of volatility of 18%.

“Investors, trustees and advisors are now beginning to question whether the amount of complexity added to the portfolios over the last 15 years has been paying off or if it has only increased the risk,” he argued.

Does diversification work?

In addition, there are clear evidences that diversification is not working as it used to. The paper “When diversification fails”, published by Sebastien Page and Robert A. Panariello in the Financial Analyst Journal in the third quarter of 2018, concludes that diversification seems to disappear when investors need it most. The paper distinguishes between the left tail scenario, where equity is performing extremely bad, and the right tail scenario, where equity is performing extremely well.

On the left tail, the correlation between equity and the major types of asset classes increase over 50%. The benefits of diversification, which are really resting on low correlation between the asset classes, disappear when investors really need them. If equities are performing negatively, all the other asset classes are also falling at the same time.

On the contrary, on the right tail, when equities are performing extremely well, suddenly, diversification works perfectly well. When investors would want unification, correlations remain below the 50% and, in some asset classes, it even becomes negative.

“Diversification is an important part of the tool kit. We just need to recognize the role that it plays and the types of market environments in which it may be more appropriate. Diversification should change the shape of the distribution, it should help on left tail environments, and potentially hold the portfolio a bit on the right tail environments.

Meanwhile, active management, if done correctly, can provide better than average outcomes. It can even change the skew of the return’s distribution. Investors should start viewing good quality active management as a good diversifying asset.

“Active management seems to be providing the trait that investors are expecting from alternative investments. It seems to be protecting investors when markets are down and to being able to keep up when equity markets are going upwards. The active management skill, particularly countercyclical skill, is probably the best diversifying asset that investors can buy today. We as active managers can play a powerful role to help protect client capital when they need it the most”, he concluded.

Mini-Bots: The New Italian Instrument That Causes Controversy In Europe

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Mini-BOTs: el nuevo instrumento italiano que genera polémica en Europa — 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.

Aberdeen Standard Investments: “Our Multi-Asset Strategy Allows Us To Add Value Through Diversification”

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Aberdeen Standard Investments: “Nuestra estrategia multiactivos permite sumar valor a través de la diversificación” — 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.

Monica Mavignier and Alessandro Merjam Join HSBC in Miami

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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.

Katch Investment Group: A Rising Private Debt Boutique

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In the 10 years following the global financial crisis, the liquidity injections of major central banks have inflated traditional asset classes, particularly in the fixed income markets, thus decreasing the profitability of investors. Additionally, new regulations have reduced the willingness and ability of banks to lend to smaller businesses.

In response to those trends, Katch Investment Group, -a dynamic asset management boutique offering innovative tailor-made investment solutions-, focuses on short-term lending and financing opportunities within the private debt universe. In a constantly changing and challenging financial market environment, Katch Investment specializes in areas where capital supply is scarce that offer relatively high and stable returns for investors.

Who is Katch Investment Group?

The group combines in- depth financial market knowhow, asset management experience and strong analytical skills, with a deep understanding of the needs and tastes of private investors, particularly in Latin America. The group focuses on global opportunities, without any restriction, providing greater diversification and allowing greater potential to offer high returns.

The group is owned and managed by Laurent Jeanmart, Chairman, Stephane Prigent, Chief Executive Officer, and Pascal Rohner, Chief Investment Officer. All three hold the Chartered Financial Analyst accreditation, considered one of the most respected credentials within the financial industry.

As the chairman of the group, Laurent is responsible for the sourcing of new ideas, new business initiatives, due diligence of asset managers and the creation of strategic partnerships across the globe. Laurent is based in London, one of the most important financial centers in the world. He has more than 20 years of investment experience in alternative asset management. Laurent’s previous experiences include responsibilities at Fidelis Insurance Holdings Ltd., a London and Bermuda based insurance company where he was Group Chief Investment Officer managing $1.5 billion of assets. Previously, he was Global Head of Investment at Platinum Capital Management Ltd., a global asset management platform, where his responsibilities included overseeing the firm’s actively managed funds (hedge funds, equities, volatility, and commodities).

Stephane is the CEO of the group and therefore responsible for all day-to-day operations and the distribution. He has more than 20 years of experience in asset management in several locations around the world: Paris, Boston, NYC, London, and Panama City. He has worked in several banks, such as BNP Paribas, Lehman Brothers, State Street Capital, and Credit Andorra. His focus has been on the construction and management of portfolios for clients with a focus on alternative investments. In his previous experience at State Street London, Stephane was a Managing Director in his Global Head of Equity Sales Research position. He was a member of the European executive committee and oversaw 25 people located in New York City, London, and Hong Kong.

Finally, as the Chief Investment Officer, Pascal is responsible for the investment strategy, portfolio management, marketing and investment advisory for financial intermediaries. Pascal has more than 16 years of experience in financial market research, portfolio management, and investment advisory. He worked several years as a financial analyst, strategist and investment advisor for Credit Suisse in Zurich, New York and Panama. Before joining Katch Investment Group, he was the Chief Investment Officer of Credit Andorra and its Multi Family Office, Private Investment Management in Panama.

Pascal highlighted: “I have been working with private clients and advisors in Latina America for the last 7 years. Latin Americans tend to have a very conservative investment approach for their family savings, with a focus on wealth preservation and liquidity. However, they tend to take too much risk within their fixed income portfolios, because safe bonds don’t pay enough to cover inflation and the bankers’ commissions. And maybe they do not have enough time to analyze alternative solutions”.

“Speaking to institutional and private clients in the region, we noticed that there is a huge, unmet demand for relatively safe fixed income alternatives. That’s why we started to explore the whole investment universe to find conservative investment opportunities that can provide liquidity, income and stable returns, that are not correlated to traditional asset classes,” he added.

The backdrop

The investment environment is challenging around the globe, not only in Latin America. Equities are reaching the final phase of the bull market that is characterized by high volatility on the back of trade war and recession fears. And the safer fixed income areas, such as US Treasuries offer protection but little value after the recent drop in yields. Therefore, many investors and advisors have started to focus more on alternative asset classes, an area that has long been little explored by private investors, especially in Latin America.

The problem is that many alternative assets are structurally unattractive. Commercial Real Estate is challenged by a strong trend towards online shopping and the rise of the “sharing” economy with big disruptions coming from innovative companies such as Amazon and Airbnb. Commodities are negatively affected by the trends towards alternative sources of energy, car sharing and China’s transformation from an export- and infrastructure-driven economy towards high-tech and domestic consumption. Finally, many hedge funds still suffer from the lack of transparency, the high complexity and image problems due to investors’ bad experiences in the past. Also, the 7% drop of the HFRI Hedge Fund Index in 2018 illustrates that many hedge funds remain highly correlated to other liquid assets, such as bonds and equities that had a very bad performance too last year.

The good news is that there is a new, emerging asset class that offers the most attractive risk/reward profile for investors, that is called Private Debt. The asset class started to flourish after the Great Financial Crisis. New regulations have reduced the banks’ desire and capability to lend to the real economy, especially to smaller businesses. Instead, banks helped to inflate the government bond market in their effort to accumulate reserves and strengthen their capital base.

The banks’ retreat from the loan market has left a gap that private institutions, such as private equity firms and other asset managers, have been eager to bridge. They have filled the lending vacuum to provide crucial financing to the real economy – and particularly to small and medium-sized enterprises, the backbone of our economies. Newly created investment vehicles have attracted substantial interest from institutional investors hungry for yield.

Following the financial crisis, the massive monetary stimulus has inﬂated the price of liquid assets, especially in fixed income markets, depressing yields for investors. At the same time, the lack of capital provided to smaller companies has kept yields for smaller loans at elevated levels. Typically, private loans pay interest rates between 5% and 15% without leverage, based upon a ﬂoating base rate (LIBOR) with very low market volatility (standard deviations below 2%). In addition, strong collaterals, personal guarantees, and relatively low nominal amounts favor low delinquency.

In summary, private lending funds generate attractive and stable returns for investors, with low volatility and low correlation to traditional asset classes. Katch Investment Group identified these trends and decided to launch open-ended investment vehicles that invest in short-term lending and financing opportunities.

Gregory Johnsen (MFS IM): “Valuation Looks Attractive for Emerging Markets Equity Relative to US Equity Market and Fundamentals Have Considerably Improved”

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The allocation to emerging market equity in global portfolios is becoming more strategic than ever. The MSCI All Country World Index has now around 10% to 12% in weight to the emerging markets. Global equity portfolios should consider having an allocation to emerging markets.

Since the global financial crisis, there has been an increasing gap between the Shiller P/E ratios in the US equity market and the Shiller P/E ratios in the emerging market equity. While the US Shiller P/E is currently about 32,5 x, the EM Shiller P/E is around 11 x. This gap in valuation could be explained by a period of over earnings in US companies and a period of under earnings in EM companies.

While the regular price-earnings (P/E) ratio provides information about the valuation of a company by measuring its current share price relative to its per-share earnings, considering the previous year’s earnings or the forward-looking earnings on next year, the cyclically adjusted P/E or Shiller P/E is defined as current share price divided by the average of ten years of earnings adjusted for inflation.

On the other hand, the free cash flow yield and other indicators of quality in fundamentals have considerably improved in emerging market equity relative to the same metrics in developed markets. “Looking at different periods of time in the last 20 years, we can see that the fundamentals of the emerging market equity have improved. Returns on assets and returns on invested capital are significantly looking better, especially when they are compared with the data of the year 2000, 2015 and more recently 2018. The asset class is getting more attractive levels in its fundamental metrics at good valuations. At this point in time, investors are getting a good dividend yield and the free cash flow yield is also more attractive from a valuation perspective”, explained Gregory Johnsen, Institutional Portfolio Manager at MFS Investment Management.

In the last two decades, the investment in infrastructure and property, plant and equipment in emerging markets relative to sales, the CAPEX/Sales ex-Financials ratio, has been higher in emerging market equity than the average in developed markets, ranging from 5% to 8%. However, in the last two years, the CAPEX to sales ratio in emerging markets has started to decline, this fact can be explained by an upward trend in net profit margin. “Once the CAPEX has been made, then the cost of goods sold starts to decline, allowing for greater profit margins, all things been equal. That is the sort of trend that is occurring in general in the emerging market index. From that perspective, there are some attractive metrics in the asset class”, he added.

Long-term capital market expectations

According to MFS IM, the 10-year expected annualized return in emerging market equity is about 9,2%, that compares to roughly a 4,8% in global equity, showing one of the higher perspectives in terms of returns among asset classes. These higher expected returns are backed by a real sales growth estimate of 3,4%, based on the investment theme that consumer spending power is growing in emerging markets and brings the potential for sales growth.

“There is a discussion in the market about whether profit margin is peaking in the US equity market or in the global equity markets. Maybe, there is a chance that there would be a reversion to the mean in these markets. Different consultant groups that do their own capital market assumptions see a similar type of outcome in emerging market equity, where this asset class tends to be higher in return, but obviously higher in risk than the other asset classes”, said Johnsen.

Emerging market fundamentals

Emerging market public finances remain relatively strong despite fiscal weakening in some countries. Historically, public debt as a percentage of GDP has been in most emerging countries lower than in developed markets, operating in the 40% to 50% range versus the range over 100% in which developed markets operate.

Another way to look at the improvement of fundamentals in emerging markets is to analyze the real interest rate and the current account balances of the “fragile five” countries. The fragile five refers to Brazil, Indonesia, India, Turkey and South Africa, countries which produced weak economic and currency data back in 2013, when there was the “taper tantrum” episode.

“The Federal Reserve started talking about bringing interest rates up in the US on the second quarter of 2013, when the countries with the higher current account deficit conditions were highlighted to be potentially susceptible to higher interest rates in the US. Today, these countries have lower current account deficits and offer higher real interest rates, they are in better shape in terms of that metrics that back in 2013” he added.

Margaret Franklin Becomes First Woman to Lead the CFA Institute

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Margaret Franklin se convierte en la primera mujer en liderar el CFA Institute — 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.

Nations and Corporations can Address Climate Change by Transferring Weather Risks to Investors

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A new report examines how public and private entities, including those in developing nations, are mitigating the financial impacts of extreme weather events and supporting climate change adaptation by transferring risk to private insurance and capital markets.

“Using Risk Transfer to Achieve Climate Change Resilience” is one of the first reports to comprehensively examine how governments, water utilities, transit agencies, corporations and small farmers are using risk transfer instruments—such as catastrophe bonds and weather risk transfer contracts—to adapt to climate change. The report discusses opportunities to expand the use of risk transfer for adaptation and details key challenges in this still emergent market.

The report provides three key takeaways:

With support from development banks and donor countries, many developing nations are incorporating risk transfer into their adaptation strategies. Buyers range from sovereign governments such as Mexico and the Philippines that have secured hundreds of millions of dollars in protection annually, to small farmers in Kenya, Senegal and other African countries who are becoming more resilient to climate risks by purchasing small insurance policies. Yet, the report finds that many public and private entities still require subsidies from donor countries, and that the use of risk transfer is constrained in some regions by lack of weather data. The report explores solutions including new business models for risk transfer, cost-sharing strategies and advances in remote sensing and weather data analytics.
More infrastructure managers are using risk transfer. Public infrastructure organizations, such as water utilities and transit agencies, are particularly susceptible to extreme weather events such as droughts, wildfires, severe storms and floods. As a result, some are on the leading edge of using catastrophe and weather risk transfer instruments to reduce their risk exposure. For example, since Hurricane Sandy, Amtrak and the New York Metropolitan Transit Agency have purchased hundreds of millions of dollars in catastrophe protection to mitigate their risks from flooding. This report examines the opportunities and challenges to transit agencies and water utilities seeking to use risk transfer to improve their resilience to extreme weather and climate change.
Many corporations are considering risk transfer for climate change adaptation. Many publicly held corporations are being asked by regulators and investors to assess, disclose and mitigate the climate change risks that could negatively impact their earnings and long-term growth. The report explores how corporations in a wide range of industry sectors could mitigate their climate risks with weather risk transfer contracts—a strategy already in use by corporations in highly weather-sensitive industries such as energy and agriculture. A recent example occurred in Australia, where agribusiness GrainCorp announced in April 2019 that it would transfer weather risks to reinsurance investors in order to reduce the impacts of volatile weather on earnings.

“Using Risk Transfer to Achieve Climate Change Resilience” fills a knowledge gap in the increasingly urgent public dialogue around weather and catastrophe risk in a world with a changing climate. So far, media coverage of this topic has largely missed a key strategic consideration for addressing climate change: risk transfer,” said Barney Schauble, chairman of Nephila Climate. “Innovative weather and catastrophe risk transfer coverage mechanisms have evolved over the last 20 years and are now viable tools for confronting climate change in both developing and mature economies.”

Sponsored by Nephila and written by Jim Hight, an independent environmental journalist and communications consultant, the report draws on published research and interviews from development organizations, insurers and reinsurers, catastrophe risk modelers, weather and climate risk analysts, climate change consultants, transit agencies, water utility associations and others.

Nephila sponsored the report in order to provide a thorough examination of the opportunities and challenges to using weather and catastrophe risk transfer mechanisms to support climate change adaptation. Nephila is a pioneer in creating weather risk transfer vehicles and today is the largest investment manager in that market.

Download the report here.

Block Asset Management Believes Portfolios Should Hold Crypto Assets

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The emergence of the Crypto asset class has been largely driven by the increasing awareness amongst investors that Crypto assets are indeed a credible alternative to fiat currencies, as they allow for more efficient payments at virtually no cost but also create significant operational cost savings and efficiencies for ownership updates and verification purposes.

While doubts clearly arose earlier this year due to the collapse of crypto asset prices, the confirmation that several high profile projects would be implemented by leading banks such as JP Morgan or social network giants such as Facebook (and many others) confirmed the view that cryptos are here to stay, and are going to become the back-bone of the financial and e-commerce sectors, thus favouring a major adoption from market participants over the next couple of years.

The emergence of crypto asset class is not a random event.

It is the result, in Block Asset Management’s opinion, of global imbalances building-up and accelerating since the last financial crisis. Global Private debt has sky-rocketed while the major Central banks have been happy to keep interest rates at generational lows, supporting the expansion of monetary basis aggregates way beyond economic output. Such a behaviour has no precedent, at least at this scale. As a consequence, Global market debt has grown over 250 trillions, setting global debt/GDP ratio at levels above 300%, a threshold which is clearly not sustainable in the long run. “It is therefore likely that existing debts will never be paid back or paid in worthless fiat currency, which in the end is equivalent to a significant loss of value (lower purchasing power). Countries such as Argentina provide a clear roadmap of what follows next: investors are harmed, savings are lost, the economy is disrupted, and capital controls are implemented. In this environment, alternative investments such as Gold or Silver tend to outperform,” they mention.

Do Precious metals really provide an effective hedge in this environment?

Precious metals tend to benefit from market/economic shocks, since they have tangible value and a limited output as well. However, they cannot be used for payments, leaving them highly vulnerable to any lasting liquidity event. Precious metals are not cash. You cannot pay for services in Gold or Silver. The cost of holding Precious Metals is high too. While clearly able to capitalize on a liquidity crisis in its early stages, Precious metals do not prove to be a reliable safe-haven during lasting a liquidity crisis. Indeed, they might be the last investments to be sold to raise cash. This is exactly what happened during the last crisis.

During liquidity crisis, cash is king… but Cash loses real value in the long term or when central banks step in to increase liquidity. And monetization destroys cash value’s in the long run.
That is where Crypto assets are unique and enhance a portfolio risk/return profile. They combine safe haven benefits (like Precious Metals) but also provide its users with liquidity. Contrary to Precious Metals, Crypto assets can be used to purchase real good and services or proceed with transfers of money at laser speed. And Crypto assets’ trend has been positive in the long run (due to crypto assets adoption

Therefore, how to get a smart exposure to Crypto assets?

While some investors might just find it convenient to use crypto exchanges to invest directly in single crypto assets, the amount lost on several platforms (due to cryptos being hacked an stolen) or the disappearance of several cryptos suggests that a single investment is very risky compared to investments in more traditional asset classes. In other words, aiming at reducing tail risk (in case of liquidity crisis) while having its capital at risk does not make sense.

For those reasons, Block Asset Management has created several investment eligible solutions for investors willing to build exposure and diversifying into crypto, but wary of losing their capital (crypto assets being hacked or a single crypto asset/fund manager going bust).

Block Asset Management is now managing several investment products that address those concerns. The flagship Blockchain Strategies Fund offers exposure to the world’ s first fund of funds. The Block Asset Management Actively managed certificate offers simple and direct exposure to the Blockchain Strategies Fund through a note that can be purchased more easily via a brokerage account.