CC-BY-SA-2.0, FlickrPhoto: Rick Harris. How to Keep Today's Wealth Management Client Happy?
The wealth management industry has continued to change dramatically in the past several years. To stay competitive and meet new client expectations, successful wealth managers must develop strategies to engage with an increasingly digitally savvy client base.
According to Thomson Reuters‘ Digitalization of Wealth Management report 2018, made in collaboration with Forbes Insights, key factors defining today’s wealth management industry include keeping up with new technology, staying relevant to the next generation of investors and finding ways to integrate artificial intelligence (AI) into investment decision making as well as into the client-service process.
In order to better understand how wealth managers are using data and technology to adapt to changing client expectations, Thomson Reuters and Forbes Insights surveyed 200 wealth managers from North America, Europe and Asia Pacific. Key findings of the survey include:
68% say learning about and keeping up with new technology is the top challenge they face
69% are concerned about staying relevant to a younger generation of investors
41% say advanced analytics and cognitive technologies will have the greatest impact on the wealth management industry over the next three years
Only 27% currently have and are happy with their mobile platform, even though they believe this is the digital capability that clients value most
65% spend most of their time on client acquisition and onboarding, followed closely by providing advice, and client objectives and risk tolerance. Many believe technology can help them become more efficient with each of these tasks
72% see AI as an opportunity
“There is no doubt that wealth management firms and their advisors are now at a turning point, and have a great opportunity to reinvent themselves in order to both deliver an exceptional digital experience for the digital natives as well as to define a new generation of high touch services,” said David Akellian, managing director and global head of Wealth Management at Thomson Reuters. “The industry challenge and the opportunity, is helping ensure that wealth firms and their advisors are better equipped with the AI, advanced analytics, insight and technology necessary to meet their clients rapidly evolving investment and service needs.”
The report further notes that the role of the financial advisor could change dramatically in the next few years. Not only will many clients expect better tools of engagement, but advisors will likely be serving even more clients and for lower fees. They will want to “know” their clients with the speed and precision of machine learning. With trillions of dollars’ worth of managed assets at stake, advisors are clear about what they need from their technology going forward: Access to client information on one screen, prioritized for current events; Meaningful personalized advice at their fingertips or for their clients directly; Automation to free advisors to spend more time with clients; Communication tools for the next generation; and augmented decision-making capabilities for advisors and their clients.
Read and download the full Digitalization of Wealth Management report here.
Pixabay CC0 Public DomainWalkerssk. China’s Risks on the Road to a Modern Economy
At present, there are three different world powers that dominate their respective regions in terms of trade and growth: the United States, the Eurozone and China. The first two, the United States and the Eurozone, are clear, but the last, China, arouses some uncertainty among investors and management companies, who are monitoring its economy.
Due to the size of its economy, China continues to be a key economy globally, and not just for emerging markets. According to market consensus, China will be fundamental player in the current synchronized global growth, although analysts warn that it could slow it down.
Among its main risks is its high level of indebtedness, both public and private. State companies combine high leverage levels and low productivity in sectors where excess capacity is extreme. “In the wake of the global financial crisis, credit to non-financial entities has gone from 100% of GDP to 165% at present. This government – driven massive injection of credit has stimulated the economy and explains to a large extent the solid economic performance of the last ten years. The high level of indebtedness and low productivity are currently considered a risk,” explains Yves Longchamp, Head of Research at Ethenea Independent Investors.
And its main challenge is to make the leap to a modern economy, a path that has already begun, after the National Congress of the Communist Party of China in October 2017. “The implementation of the structural reforms program once again became a priority. The objective of the Chinese authorities is to direct growth towards quality and not only towards quantity. This will imply a rebalancing that is expected to reduce traditional industries such as steel in favor of new activities such as electric cars and high technology. In the coming months, this strategic adjustment is expected to lead to a slight economic slowdown, as suggested by the recent slowdown in public spending and the tightening of monetary conditions. Should the deceleration become too marked, public authorities have the necessary resources to quickly adjust the approach,” explain sources from Banque de Luxembourg Investments.
Risks and Opportunities
In Longchamp‘s opinion, China lives in perpetual transition. Among reforms proposed by the country there are three that are very interesting for investors, according to Longchamp: “The restructuring and strengthening of state enterprises, the deleveraging of the financial system and the slowdown in inflation of housing prices ; and the eradication of poverty and the improvement of the quality of growth “. These three are national objectives and aim to determine the main economic weaknesses and the fragility of the financial system, as well as to improve the welfare of Chinese citizens. In addition, there is the Chinese government’s desire to control and reorganize some sectors, such as the industrial sector and real estate. Therefore, they are reforms that could open opportunities in very specific sectors, such as financial, industrial or real estate.
However, the management companies are cautious about China. The company Flossbach von Storch identifies the Asian giant as one of the potential risk factors within the equity market, given the country’s rate of indebtedness. “Despite this, we are confident that China’s central government has the muscle to counteract the effects in the case of a recession or crisis,” explainedsources from the management company.
CC-BY-SA-2.0, FlickrRafael Valera and Julián Pascual, courtesy photo. Buy & Hold Compared to Other Value Managers: The Six Differences
In recent years, various management projects based on value investing have emerged in Spain. However, in a meeting with journalists this morning, Rafael Valera, CEO of Buy & Hold, pointed out the six points that distinguish their entity from the competition.
Consequently, he spoke of the application of that investment philosophy, not just to equities, but also to fixed income; the fact of being open to any investor (from 10 Euros); their low commissions (even in their class A funds they refund their commission if the investor loses money); its profitability objectives (unlike other managers seeking 15% -20%, the idea is to beat the Eurostoxx index by 2-3 points); the refusal to launch any other products beyond their three funds (fixed income, flexible mixed, and European equities, strategies that are also reflected in their 9 sicavs and in their pension fund), with the idea of channeling greater volumes of investment , as other management companies are doing – although Valera admits that when they reach levels they cannot manage, they will close the funds; and the firm commitment not to charge the cost of the analysis to investors under MiFID II.
This last decision is firm, even though regulations pertaining to this matter have not yet been transposed and the costs of the analysis are as yet unknown; and this differentiates them from other entities, such as azValor, Bankinter Gestión de Activos or Bankia Fondos, which in the past few days have announced an opposite decision. In fact, Valera explains that in recent times brokering and execution fees have been reduced to one third of their previous cost, which is something that can help achieve profitability objectives more easily. “If previously they charged 20-30 basis points for the execution and now they charge 4-5, with a portfolio rotation of 30%, the annual savings can be 12-15 basis points in the portfolio,” he explains.
But, in his opinion, even though the above does count, more than this decision on the analysis or the reduction of the execution fees, the key to achieving profitability is to invest in funds with low commissions, and they boast of having the lowest fees in Spanish value management… and even in active management (from 0.65 to 0.95 in management and a success rate of between 3% and 7%).
The entity, which has 1,200 clients, a figure they intend to “double and triple”, as with its assets (around 171 million Euros), explains that it does not seek to be a company managing billions of Euros, and that it will close the funds when the time comes and the management is complicated: although as yet they don’t have a clear figure, its president Julián Pascual pointed to 1 billion as being a high figure. All in all, Valera acknowledged that a management company like theirs “has a hard time becoming trendy”, because investors are very short-term minded and the Buy & Hold philosophy looks to the long term, to 2028, and the idea is to make money, but “with tranquility ” and without big oscillations.
Along this line of beating the indexes by 2-3 points a year (if at 10 years the index has managed to earn 259% at compound interest, the Rex Royal Blue sicav has risen 81 points higher, with dividends), Valera explains that, unlike those who seek returns of 20% and greatly concentrate their portfolios in order to do so, they are committed to diversification: “We don’t see 80% of opportunities as being very clear, we’re navigating the haze, and that is why diversification is key,” he adds.
Changes in the portfolio
For example, they don’t see the opportunities in commodities as clear, in that journey through the markets in which clear differences with other value competitors also arise. “A lot of the demand comes from China and we don’t see it clearly. In addition, the price has recovered, it’s no longer at minimums,” says Pascual. Where they do see opportunities that they have recently taken advantage of is in renewable energy and the financial and advertising sectors: in light of this, they have taken advantage of recent movements in the stock market to make changes in its portfolio, composed of 40 national and international companies. Among the most significant investments of the firm, which analyzes the entire capital structure of a company, is the purchase of shares of the Italian investment fund manager Azimut, which has very high returns on capital, a double-digit annual dividend, and a very consolidated business in Italy; with growth opportunities in emerging countries. “There are three types of managers: those of ETFs, those that provide added value (few are quoted) and a third group, in which Azimut belongs, with an average product but a large distribution capacity through a strong agency channel that receives half of the funds’ commissions – which are on average 2%, which explains their sales incentives – and opens offices in niche places, such as Turkey, Miami or Monaco.”
In addition, Buy & Hold has raised positions in the digital advertising sector (Alphabet and Facebook), as well as in agencies (Publicis and WPP). “We believe that at these prices companies have lived through all the worst predictions in the sector,” explains Pascual. He predicts similar opportunities are in wind power, where it has taken positions in Vestas and Siemens-Gamesa for its funds BH Acciones (equities) and BH Flexible (mixed fixed income and equities). “Both companies have suffered in recent months, with drops of 50%, remaining at attractive prices. In the case of Siemens-Gamesa, we see synergies not only in costs, but also in their capacity to win large tenders”, adds Pascual, who has obtained annual returns of more than 10% in the vehicles he has managed during the last 13 years.
Winning with the Catalan bond
In the fixed income part, the firm has also shown movements in the portfolio. The most prominent is the sale of subordinated bonds and CoCos of large-cap financial entities, “where we consider that prices have risen excessively,” says Valera. They have increased positions in subordinated debt of smaller banks, such as bonds issued by Cajamar, the largest Spanish rural bank. In the same way, it has bought bonds from the Galician construction company Copasa and the Portuguese Mota Engil.
The month of February ended with an annual return of 2.5% for the company’s pure fixed income fund, BH Renta Fija, when other debt funds are in losses. Among the success stories, he pointed out the purchase of bonds from the Generalitat de Catalunya in October, with which they have earned 20% in just five months, even though they represented only 5% of the portfolio. The position is not yet sold, but neither have they bought more for lack of paper. Another success story is Provident, the leading financial institution in loans and credit cards to subprime clients in the United Kingdom, of which the management company holds both bonds and shares. “We bought the bonds with yields higher than 10%, and they are currently in environments of 4% with a maturity of two years,” explains Valera. “This has meant a revaluation of more than 13% only in fixed income, while the revaluation of the shares has been 70%,” he adds. The firm still sees potential in value so it continues to maintain both positions in the portfolio.
Forum to improve investments
The management company also informed of the birth of the Buy & Hold forum, an encounter with ‘influencers’ from the financial sector that seeks to contribute to improving the investment decisions of Spanish families. The investment firm plans to hold two meetings a year in this forum to share ideas, practices or success stories of value investment. The objective is “to ensure that Spanish families are able to invest increasingly better,” said Valera.
For this, in a first meeting, the Spanish management company brought together 13 leaders in the field. “This first forum gave us the opportunity to meet personally. We are all connected and we read each other in different blogs and social networks, but we have never had the opportunity to meet in a place to talk about what we are passionate about: the world of investment,” Pascual points out. The forum is a measure adopted by the management company in order to be close to Spanish families, and adds to the financial training courses that Antonio Aspas, partner of Buy & Hold, has begun to teach. The dynamics of the forums will be an informal meeting in which the guests can share their experience, their point of view, or some success stories in order to understand other perspectives. “We have realized that many of the ideas that are shared are those that our management company tries to transmit, such as how to consistently beat the European stock indexes with dividends,” adds Aspas.
The firm’s partners agree that it’s a way to know the opinions of those people with a passion for saving, and what they think of this type of investment. “Thanks to these meetings, we know what’s on their mind, what worries them, what companies they have found interesting, and we get to know them better in order to help them. We don’t want to be a management company which isolates itself in its figures or research,” says the company’s CEO.
CC-BY-SA-2.0, FlickrSid Choraria, courtesy photo. Value Investing in Asia: "The Best Value Opportunities are When You Buy Growth Without Paying for It"
Amiral Gestion applies its value investing philosophy to investments around the world, including Asia. Sid Choraria, head of Analysis of Amiral Research in Singapore, explains in this interview with Funds Society the peculiarities of the Asian market, in which the importance of analysis is key to reduce the information gap that exists with respect to companies in other markets. The company recently opened an office in Singapore, with a local team of seven analysts, tasked with exploring the many opportunities of a heterogeneous market, and in which the universe of listed companies will multiply in the coming years, without forgetting that the potential sources of volatility, such as China or North Korea, can be a value investor’s best friend.
When investing in Asia with a “value” approach, what particularities do you find against other regions?
The specific pecularities that global investors must appreciate are differences in corporate governance, accounting standards, market regulations, liquidity, language and culture across Asia which can create some barriers to entry for far-away foreign investors. In Asia, for instance, relying overly on reported financial statements or secondary research like sell side analysts can be a pitfall. The importance of scuttlebutt research and doing your own work is even more important in Asia. By this we mean, learning as much about a company’s ecosystem – its competitors, customers, suppliers, distributors, products, hiring processes, technology, etc which helps to bridge the information gap. The quality of people behind the Asian company is paramount – in developed markets perhaps you can go by the reported financials, but in Asia, appreciating where the incentives lie is of paramount importance as many small mid caps are majority owned by families. I like to very clearly understand what it will take for a company to go from where they are today to where they want to be.
Even within Asia, one cannot paint all markets with the same brush. There are many differences between each market which value investors must appreciate. In China, 80% of investors are retail investors who focus on anything but fundamentals, and this leads to speculation and short-term trading. Even institutions in China have very high portfolio turnover which means stocks will deviate far more often from intrinsic value of the business. This is a advantage for the long-term investor. As China transforms itself it is important to appreciate the nuances of state policies and government reforms, as it can make or break an investment. In parts of Asia, there is still information assymetry unlike the West – for example companies in Japan, sometimes IR documents are not available real-time in English on the website, and visiting small mid cap companies in person can help bridge this gap. India tends to be more of a GARP (growth at a reasonable price) market and investors looking for “deep value” are likely going to miss out on great businesses and compounding stories. Of course, such opportunities can emerge during periods of financial crisis. Countries like South Korea and Taiwan offer value in the traditional sense, but it´s very important to pay attention to minority shareholder friendliness, cross shareholdings, capital allocation, etc as they can differ significantly from company to company.
Are there undervalued companies to a greater extent than in other markets?
Asia is a fertile fishing ground for long-term, disciplined investors as markets and companies in the Asian region are still at more nascent stages than developed markets in the US and Europe. This creates inefficiency that value investors in Asia can systematically uncover. The size of the opportunity set is also huge, for instance below the 2 billion market cap there are an astounding 16,000 Asian companies, many of which are not actively covered in a serious manner. This universe will only multiply over the next 15-20 years, as companies go public for the first time in growth economies like China and India. So, by definition, this should afford more mispriced stocks than other regions and we see this with the valuations too on a global context. Currently our global equity fund, Sextant Autour du Monde, has a 40% exposure in Asia. Some of our best ideas come by meeting companies and competitors in the Asian small mid cap space. To build a local team, we recently opened a research office in Singapore and grown to 6-7 analysts in Asia. With Singapore being 2-4 hours by plane to most companies, we are able to kick the tyres in real-time.
For example, in Japan there are lots of undervalued companies to a greater extent than other markets, with more than 50% of companies with net cash balance sheets! We like companies like Toyota Industries and Daiwa Industries. In Korea, the preferred stocks trade at a significant discount, not justified relative to the common and here we like for example LG H&H. In India, there are companies that we find that present both asset value plus earnings growth, for example NESCO, which runs India’s largest private exhibition business in Mumbai. In Hong Kong, there are many cheap companies, but one needs to know the players, their reputations etc. We like HK listed companies like JNBY which is a niche fashion brand in China with strong management. Finally, Taiwan offers some of the highest dividends in the region and companies with reasonable valuations. Here we like companies like Taiwan Sakura, HiM International Music.
Many times, when investing in emerging markets (as the Asians), “growth” is the keyword and investors look for a “growth” approach. What can a “value approach” provide when investing in Asia?
The best value opportunities are when you buy growth without paying for the growth. What we mean is identifying a company that is able to reliably grow earnings and cash flow, without deploying much capital, so its returns are attractive, but yet is not yet fully recognized by the market. So, this is the twin engines which is growth in earnings as well as Mr. Market re-rating the multiple. Value investing is not just buying cigar butts – but identifying misunderstood stories, where the stock market has overlooked the earnings growth potential of a company.
Moreover, our value investment process is heavily dependent on having interaction with the company particularly when it comes to small and mid caps. We have met with over 150 Asian companies in the last 12 months.Here, the key aspect is being able to meet management who can illustrate to us in a 45-minute meeting their business model and why are they good at it. To clearly understand what differentiates companies, whether price, cost structure, management, etc is key. We look for companies that are able to elucidate in a logical fashion what it would take for the company to double their sales and operating profits in a 3 year period. So, we want to understand simply what are the building blocks that need to be put in place to achieve those goals – in a clear and simple manner. As Asian economies are growing, infact, we like companies that can predictably grow earnings, but where we are paying bargain prices, i.e. not paying much at all for the growth. In general, we emphasize cash flow and balance sheet analysis in valuing a business and study at least 10 years or longer if possible to understand where the value lies. Management can produce the set of accounting earnings that they want you to see. Price to earnings ratio is probably the most abused metric in valuation.
In Europe, some “value” experts talk about opportunities in the banking and in the energy sectors. In what other sectors do you find opportunities in Asia?
Our ideas come from the bottom-up and not thematic. Therefore, we are flexible and unconstrained on the type of industries we invest in. There are some industries that just do not lead to prudent public markets investing, so I can discuss what we like to avoid. These are, generally speaking, i) industries requiring high capital intensity, ii) industries where the barriers of entry are low and iii) where there is a high degree of government regulations, since emerging markets are fraught with political risk.
Regarding Asian markets in general, ¿are you worried about the risk that China poses? ¿Are you worried about North Korea? What is the main risk you see in Asia?
In general, we do not attempt to forecast macro-economic direction or interest rates, as at least the stock market may perform very differently to what the macro suggests. This being said, countries are like companies too and we may try our best to learn as much as we can about the key factors that impact businesses we invest in. As value investors, we see volatility as a friend of a long-term investor, and indeed short-term price fluctuations allow us better opportunities, as long as the fundamentals of the company and thesis in question do not change.
Is Asia vulnerable to the normalization of the monetary policies in the USA and Europe?
Sure. There are some areas of the market that are more expensive, and this has had to do with low interest rates, so investors have justified taking more risk in certain areas of the market to chase yield.
Do you think that markets will face higher volatility this year than in 2017?
We think so. Volatility is the best friend of value investors, and this is where some of the best opportunities arise from.
The AMCS Group, the recently established, Miami-based third-party distribution firm, is pleased to announce the appointment of Fabiola Peñaloza as regional vice president. She joins the firm at an exciting time, just weeks after its launch announcement and confirmation of a new distribution relationship with Old Mutual Global Investors (OMGI).
Fabiola will report to Andres Munho, managing director and co-founder, who is also based in Miami. She will initially be tasked with supporting Andres in continuing to strengthen the firm’s position with private banks and wirehouses in Miami, as well as helping to develop a number of new and growing relationships in Colombia, a country where she has previously worked.
Ms. Peñaloza has more than 15 years of experience in the financial services industry in the United States and Latin America. She recently moved to Miami from Colombia, where she worked for six years in Credicorp Capital Colombia S.A in Bogotá, leading the UHNW segment of the company from the Asset Management division. Previously, she worked in both investments and trading for some of the leading private banks in Miami and New York, including Standard Chartered Bank International, Credit Agricole Private Bank, Bank Boston International and Morgan Stanley.
Andres Munho, managing director, the AMCS Group, comments: “We are delighted to have Fabiola join the Miami team here at the AMCS Group. Her experience in the industry, including portfolio management as well as sales, will fit perfectly with our investment centric approach to client development and servicing. We all look forward to her contributions to our ambitious growth plans.”
Fabiola Peñaloza, regional vice president, the AMCS Group, comments: “I have known Andres and the team for several years as a client and have always admired the quality of their service. During their tenure at Old Mutual, the team established a great reputation and strong position in the industry for OMGI and I look forward to helping continue this growth trajectory as part of the AMCS Group.”
The AMCS Group team details:
Chris Stapleton, co-founder and managing director, manages global key account relationships across the region, as well as advisor relationships in the Northeast and West Coast.
Andres Munho, co-founder and managing director, oversees all advisory and private banking relationships in Miami, as well as firms located in the Northern Cone of LatAm, including Mexico.
Santiago Sacias, senior vice president and partner in the firm, based in Montevideo, leads sales efforts in the Southern Cone region, which includes Argentina, Uruguay, Chile, Brazil and Peru.
Fabiola Peñaloza, newly appointed regional vice president, is responsible for select advisory and private banking relationships in Miami, as well as firms located in Colombia.
Francisco Rubio, regional vice president, is responsible for the Southwest region of the US, as well as independent advisory firms in South Florida and Panama.
The team is supported by Virginia Gabilondo, customer service manager.
During the last twenty years, four technological giants, have been able to generate an unprecedented source of wealth for their shareholders, creating products and services that have transformed society and which are deeply rooted in the daily life of billions of people. But, could the time have come to consider how much power in the business world we want to continue to give these innovation leaders? Scott Galloway, Professor of Marketing at NYU Stern University and author of the book “The Four: The Hidden DNA of Amazon, Apple, Facebook and Google”, argued for it during the celebration of an event organized by BigSur Partners, the multi-family office founded in 2007 by Ignacio Pakciarz, in collaboration with the NYU Stern University.
The event, which took place in Miami in early February, was the first of a series of presentations in which BigSur Partners aims to have leaders, experts, and academics across different sectors and industries participating in order to offer their clients the best investment ideas. “We are honored to be co-hosts of this event with NYU Stern given our commitment to collaborate with the best minds in our network. Internally, we created the “BigSur Intelligence Unit” in which we strive to find the best ideas in academia, industry experts, leading family offices and other counterparts interested in financial markets. We also believe that it is important to always look at the world from different angles and to listen carefully to innovative thinkers,” said Ignacio Pakciarz, economist, founder and CEO of BigSur Partners.
According to Galloway, Amazon, Apple, Facebook and Google target the most primitive human instincts, which are then reflected as a body organ: Google channels its efforts towards the brain, Facebook represents the heart, Amazon targets our digestive system and Apple would be the company that champions sexual attractiveness. As a result of their respective strategies, they have created enormous value for their shareholders.
Since the great recession, its stock market capitalization has grown exponentially and currently only four nations, the United States, China, Germany and Japan have a GDP higher than the capitalization accumulated by these four companies, which is close to 3 trillion dollars. “
After studying these companies for ten years and examining them thoroughly during the last 24 months, Galloway came to the conclusion that the four big technology companies have to be regulated because they have reached a scale that could stiffen the economy.
Facebook is the largest social network in the world with 2.07 billion active users, who connect at least once a month, and 1.4 billion people connecting daily and also owns 6 of the 10 most downloaded mobile applications. With applications WhatsApp, Facebook Messenger, Instagram, Facebook and Facebook Lite, any smartphone becomes a distribution vehicle for Facebook.
In turn, Amazon represents 44% of the electronic commerce in the United States -the fastest growing distribution channel in the world-. “55% of sales made on Black Friday were made through the firm. 62% of American households provide a recurring income to Amazon through their Amazon Prime service. As if this were not enough, Amazon also owns 70% of the market share of the voice business, through Amazon Echo, the new appliance that will transform society.”
Likewise, the revenues obtained by Google in advertising as of December 2017, of approximately 90.9 billion dollars, represent 92% of the totality of the advertising market in the United States.
After presenting his argument about the monopolies created by the four largest technology companies, Galloway suggested that the introduction of regulation does not necessarily restrict capitalism, but that it could actually revitalize the market.
Galloway concluded by mentioning the need to break these monopolies, not because of tax avoidance or the destruction of employment they incur, but by the need to increase the number of innovators in order to avoid that the only competitors of these four companies be themselves, or that when a potential competitor appears, it is acquired by one of the four at a price that fewer and fewer companies can afford. It is about creating an ecosystem with a greater participation of venture capital companies, with a more diversified source of employment, a broader tax base and greater competition among companies.
Once the event concluded, Ignacio Pakciarz showed his enthusiasm for the concepts expressed by Professor Galloway. “They are very interesting, and perhaps even radical for a technologist and defender of free markets. His idea of regulation as the only means by which to protect innovation is an interesting stand on the argument. As investors in the creative economy, we believe that this event is valuable to understand the cultures of these technological giants and how they operate, as well as the implications that regulation can have on the stock and venture capital markets,” he concluded.
In his speech during the celebration of the “2018 Kick-Off Masterclass Seminar” in Palm Beach, Henk Grootveld, Head of Trends Investing at Robeco, compared two photographs of New York to explain the next wave of digitalization. The first one, was taken in the year 1901, at Fifth Avenue, and only one car was driving among a vast amount of horse carriages. The first internal combustion engine had been invented 20 years ago by Mr. Benz and his nephew, and the use of cars was far from extended. However, in twelve years’ time, in the same street and city, horse carriages became the exception and the first car models dominated the streets. New York went from one scenario to the other quite fast, simply because cars were cheaper than horses and easier to maintain.
In the same way, consumers went digital when Apple introduced its first iPhone in June 2007. The world has changed, and smartphones are a vital part of daily activities, a third of relationships between people and half of purchases are made through smartphones.
Today, the digitalization of the world has led to the introduction of collaborative robots. Rethink Robotics has created Sawyer and Baxter, ‘smart’ robots that can be taught new skills rather than being programmed and that can work together with humans, as they are full of sensors. Most of collaborative robots are used in the car’s industry, which is experimenting a high degree of transformation.
“In Germany, this process of transformation has been called the Industry 4.0, because it is the fourth attempt to become more efficient. The first industrial revolution started with the use of steam, the second one, brought manufacturing processes, the third, introduced computers and simple robots, and in the fourth revolution, robots can be connected and communicate with people through the internet of things. This new phase will radically change production in the next 10 years, in the same way as the smartphone introduced a change on how we think about consumption”, he said.
The rise in robot use is particularly pronounced in Asia, specifically in the countries that have a problem of demographic aging, like South Korea and Japan, whose working population has been shrinking in the last 6 years.
“China’s working population is also diminishing, there will be a huge need to replace labor for robots. Specifically, they are expecting to go from the current rate of 68 robots per 10.000 employees to 150 robots. It is possible that they could get this target sooner or that they overshoot it. It is my belief, that by 2022, China will be somewhere around 200 hundred robots per 10.000 employees, while in the United States, the current number of installed industrial robots per 10.000 employees is 190”, he added.
Automatization and digitalization are transforming all different sectors in the world and will definitively change the way people is related to reality. The Economist magazine has a very positive view, about robots, production of food and the idea that everything comes cheaper and is locally produced. However, The New Yorker, has a gloomier view, depicting a world in which robots will take all the jobs, showing two sides of the same coin. “Some estimates foretell that more than 50% of the known jobs in the world will disappear in the next 15 years. People will start to work in new companies”.
According to the World Economic Forum, advanced technologies will increase efficiency and reduce costs by up to 30%. Moreover, they forecast that factories can shorten their production times by 20% to 50%. They believe that globalization will become a trend of the past, production will become more local, transforming manufacturing into specialized and flexible production hubs able to be adjusted to the needs of consumer. “Adidas has already moved their manufacturing line from Thailand to Germany, where they are producing all their expensive running shoes as customers order them. They measure clients’ feet, in the shop or online, and within 24 hours, they produce the shoe and send it to customer’s door using smart manufacturing and 3D printing. Another example is Maserati, the Italian exclusive automaker, that has introduced a software in designing and production that has reduced the time-to-market by 50%, from 12 years to 6 years, by implementing technology related to the internet of things. At the same time, 3D printing technology is allowing huge advances and positive effects to the needs of every individual, for example, the technique of making 3D printed prosthetic limbs is very valuable in building prostheses for children, which are normally more complex due to their small size and constant growth”.
The electric self-driving car
At the same time, the artificial intelligent co-bots will change our society and the car industry. The introduction of electric self-driving cars will reduce accidents by roughly a 90% and will erase the need for repair shops or car insurance.
“Electric cars will eliminate all nitrogen oxide fumes and fine particulate matter, as well as it will reduce smog. China has become one of the largest advocates of electric vehicles, Beijing will replace all its buses with electric engines in one year. Breathing Beijing’s air reduces 10 years the expected life of its population versus any other city in China”.
The digital content per car will increase by 450% and will turn the car from hardware to software. “Two Swedish companies, Ericsson and Volvo, are working together to develop intelligent media streaming for self-driving cars. The idea is to adjust the journey to reduce the time in the car, but maximizing the time to watch content, allowing customers to choose routes and select content tailored to the length of their commute”.
Additionally, the introduction of robot taxi’s will improve mileage per car, dissolve traffic jams and make most parking spaces useless. “We normally only use a 5% of the time of our cars, and the other 95% is not used, while robo-taxis use the 43% of the time, gaining a huge efficiency and avoiding the need of parking lots. Waymo, Robo Taxi and Smart Nation Singapore are the leaders”.
When it comes to digital finance, emerging markets are in the lead. “During the Chinese New Year celebrations of 2017, about CNY 462 billion (approximately U$D 68 billion) were exchanged in online payments, representing 343 million transactions, a 48% year on year increase, and 760,000 hongbao’s per second – hongbaos are red envelopes with cash as a monetary gift, a Chinese tradition during Chinese New Year believed to symbolize good luck and ward off evil spirits-. China and India are set to become larger in listed FinTech than the rest of the world combined.
In the next ten years, cash will become an exception and online payment methods will become mainstream. Digital finance will open the way to 2 billion people who currently do not manage their financial affairs.
Finally, the lack of cybersecurity is the biggest threat to digitalization. In July 2017, global companies like Maersk, WPP, FedEx and Merck struggled to continue with their normal operations after being victims of a huge cyber-attack that compromised hundreds of computers, equipment and other technology. Some months before, the malware Wanacry had hit around 150 countries around the world, demanding ransom payments in the Bitcoin cryptocurrency. But far from being addressed, the problem will get worse in the future with the increase of cloud computing, which intensifies its vulnerability.
Pixabay CC0 Public DomainFoto cedida. El #10YChallenge de los activos bajo administración de las Afores
Miguel Barbosa, Alfonso Barros, Juan Calderón , Ricardo Mendez, and Carlos Rodriguez-Aspirichaga have joined UBS Wealth Management’s international unit in a push to strengthen the firm’s business in Mexico.
The experienced ultra-high-net worth advisors used to work at JP Morgan Private Bank, and will be based out of UBS’ New York, Miami and Houston offices.
Sources familiar with the matter told Funds Society that this is a very good example of UBS’ appeal to UHNW advisors. “We recently aligned our wealth management business to be unified under a global wealth management umbrella… and one aspect of that too is to establish a much more aligned and direct focus on Latin America under the leadership of Sylvia Coutinho in Brazil.” Adding that the team of new hires “is a very talented team with an impressive client roster in Mexico. They represent some of the most sophisticated and wealthy investors in Mexico and that’s a very good fit for UBS. I think they will find this a very good move for them and their clients.”
UBS private banking and wealth advisors serve clients in 65 markets and work with approximately half of all billionaires in the world.
María Dolores Benavente, and Bjorn Forfagn. UniónCapital AFAP Becomes First Pension Fund in South America to Comply with the CFA Code
CFA Institute, the global association of investment professionals that sets the standard for professional excellence, has added UnionCapital AFAP to the growing list of asset owners that claim compliance with its Asset Manager Code (AMC). UnionCapital AFAP, a pension fund in Uruguay with $2.7 billion in assets under management – equating to 5% of the GDP of Uruguay – is now one of the more than 1,400 companies around the world that claim compliance with the code.
The AMC clearly outlines the ethical and professional responsibilities of pension funds or firms that manage assets on behalf of their clients. For investors, the code provides a benchmark for the behavior that should be expected from asset managers and offers a higher level of confidence in the firms that adopt the code.
UnionCapital is the first firm in Uruguay to comply with the code and shows leadership commitment to strengthening the capital markets and investment industry in the country by upholding investor-centric values and behaviors. It is also the first pension fund in South America and the second one in Latin America to comply with the code.
“Our investors expect and deserve the best governance and management practices when it comes to their retirement savings,” said Ignacio Azpiroz, CFA, CIO of UnionCapital AFAP. “UnionCapital is recognized in the industry for our high standards, ethics and professionalism, and we’re proud to reinforce this through our adoption of the Asset Manager Code.”
The Asset Manager Code is grounded in the ethical principles of CFA Institute and the CFA® Program, and requires that managers commit to the following professional standards:
To act in a professional and ethical manner at all times
To act for the benefit of clients
To act with independence and objectivity
To act with skill, competence, and diligence
To communicate with clients in a timely and accurate manner
To uphold the rules governing capital markets
“Building trust in the investment profession is at the core of the CFA Institute mission, as well as strengthening and ensuring the future vitality of the global financial system,” said Bjorn Forfang, deputy CEO at CFA Institute. “Compliance with the Asset Manager Code demonstrates dedication to raising standards in the financial system in Latin America, and we commend Union Capital, and all firms that have adopted the code, for displaying a resolute and tangible commitment to professional ethics and helping to build a better world for investors.”
UnionCapital serves 293,000 clients across Uruguay, and joins more than 1,400 other firms around the world claiming compliance with the Code. The pension fund also complies with the CFA Institute Pension Trustee Code of Conduct.
Of the three secular trends pursued by the Robeco Global ConsumerTrends strategy, the digitization of consumption was by far the strongest in 2017. Consumption through technology and consumption in emerging markets exceeded the consumption of famous brands. In his speech during the celebration of the ‘2018 Kick-Off Masterclass Seminar’ in Palm Beach, Ed Verstappen, Client Portfolio Manager, explained how end-of-year profits confirmed the strength of the digital consumer: “Technology companies such as PayPal, Amazon and MercadoLibre showed strong profits, while the US retail sector shows a general weakening. The commodity consumption sector was weakened in both the US and the European Union, but benefited from the start of new opportunities for mergers and acquisitions. In addition, there was an attractive recovery at the operating level in most companies in the luxury sector. We believe that much of what we have seen in 2017 will be developed in the same way in 2018.”
Growth stocks dominated the markets. Both the FANG, (Facebook, Amazon, Netflix and Google), and its emerging version, the BAT (Baidu, Alibaba and Tencent), are the drivers for a relevant part of the market. Some of the risks that these stocks entail are valuation levels: “Shareholders tend to like companies that offer high levels of profitability, but they also ask themselves, ‘what will come next? Should I take my profits and leave the position, or do I feel that it will continue to grow later? In that case we take a strategic approach, even if it is our favorite company, with a correct trend, we make sure to sell what is showing a false growth, at least partially its exposure. An example would be Facebook; we have reduced its beta in the portfolio, replacing it with Chinese technology companies, which have provided the portfolio with greater benefits than its US counterparts. Facebook, which for a long time was among the top positions of the fund, may be affected by the increase in regulations. The benefits obtained in advertising were especially good, but we can see the problems that the current use that is being given to the Facebook platform can lead to. In contrast, Instagram, one of its subsidiaries, is in our opinion much more promising than the Facebook platform.”
The fundamentals of the largest internet platforms are very solid; in fact, Facebook has experienced 18 consecutive quarters with a profit growth of over 50% Google has reached 31 quarters with organic revenue growth of 20%, its stocks have risen, but the good news is that they are supported at a fundamental level by strong profits and a boost in revenue. Likewise, Microsoft has achieved a growth of its cloud computing business of more than 90% for ten consecutive quarters. “The ‘winner-takes-all’ effect is increasingly felt in the technological platform segment.The dominant companies in the internet sector take the entire market share. But to be honest, this is something that also happens in the luxury sector, where large companies have a good position and weaker companies do not have such a good position.”
The strategy’s investment process is based on finding secular trends that change the world in a disruptive way, but from the macroeconomic point of view, the current environment serves as support: a low unemployment rate, high consumer confidence, and potentially higher interest rates. The US leads in terms of consumption, something logical, as its economy has a greater consumption base. Although consumer confidence is strong, spending has been somewhat depressed, so there is still room for improvement, especially if wages start to rise.
Within the digital consumer trend, Robeco’s strategy focuses less on advertising on mobile devices and more on the video game industry. Historically, the video game business had not had a continuity in profit flow, it was more a matter of hit-or-miss with games’ acceptance, but developers are now focusing on building franchises in the long term. Digital downloads have made the intermediary disappear, which has increased productivity in the industry. “There are new opportunities for monetization in the videogame industry, in which revenues from sales of virtual products or accessories for games, such as new levels, can be increased through micro-transactions. Mobile games offer developers a good opportunity to attract high margins in advertising. In addition, the so-called e-Sports are gaining followers; the retransmission of some finals has reached 36 million viewers. The platforms that distribute these events have seen their number of followers double. Specifically, Twitch.TV, the platform that Amazon owns, has registered more daily viewers than CNN.”
The second trend within digital consumption is retransmissions of online video and through mobile devices. The competition for video diffusion has increased, with a greater number of competitors: YouTube, Facebook, Amazon Prime, etc., while the tendency is that Internet advertising exceeds television advertising. Search engines such as Google or Bing and social networks like Facebook, Instagram and Snapchat obtain more than 70% of their profits through online advertising.
In addition, the third trend in digital consumption, the means-of-payment trend, shows that there is still a long way to go. Cash is still the dominant form of payment, but more and more forms of online payment are gaining ground. PayPal is currently the most used platform in e-commerce transactions. Meanwhile, small and medium enterprises benefit from their innovative payment offerings such as Square, a company that was founded by the creator of Twitter, or Apple Pay; however, the three main payment platforms continue to use the current payment infrastructure, which is why Visa and MasterCard continue to maintain a strong position.
As for the emerging consumer trend, it is expected that, by the end of 2018, China’s retail distribution business will reach domestic sales of $5.8 trillion, the same figure expected for the US. The change in the behavior of the emerging consumer is determined mainly by the increase in the living standards of the Chinese population, which increases their spending on leisure, travel, and luxury goods. The anticorruption campaign carried out by the Chinese government led to a substantial decrease in the growth of the luxury sector, but little by little the sector is experiencing a rebound. The growth of China’s middle class should continue to drive growth in luxury purchases, along with a recovery in consumer confidence in mature markets.
The adoption of online commerce in China is much more advanced than in Western markets. The lack of a well-established physical infrastructure has accelerated the transition to online commerce. Alibaba broke its sales record on Singles Day with sales figures that exceeded those of 2016 by 42%.
Finally, within well-known brands’ trends, companies that have a strong brand presence tend to outperform their competitors throughout the cycle. They usually enjoy a better perception of product performance, greater consumer loyalty, and a more inelastic consumer response in relation to price changes and higher profit margins.
